For The Defense, March 2013 - DRI Today
For The Defense, March 2013 - DRI Today
For The Defense, March 2013 - DRI Today
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Scientific Expert Analysis<br />
© <strong>2013</strong>
On <strong>The</strong> Record<br />
Addressing Economic Realities to Help <strong>DRI</strong> Members Achieve <strong>The</strong>ir Goals<br />
Practice “Angst”<br />
By J. Michael Weston, <strong>DRI</strong> President Elect<br />
I have increasingly become a fan of the Urban Dictionary.<br />
Some of the definitions are humorous, some topical,<br />
and many more accurate than more established lexicons.<br />
A good example is the Urban Dictionary definition of<br />
“angst.” It says, “Angst, often confused with anxiety, is<br />
a transcendent emotion in that it combines the unbearable<br />
anguish of life with the hopes of overcoming this<br />
seemingly impossible situation. Without the important<br />
element of hope, then the emotion is anxiety, not angst.”<br />
As I travel the country in my year as <strong>DRI</strong> President<br />
Elect, I meet more and more of our members who are<br />
experiencing “angst” in their daily lives and practices.<br />
<strong>The</strong>re have been tremendous changes in the relationship<br />
between our members in private practice and our clients<br />
over the past decade. <strong>The</strong> economic slowdown of 2008<br />
has caused all businesses to look carefully at how they<br />
produce goods and services. <strong>For</strong> our corporate clients,<br />
the economic reality caused them to seek efficiencies<br />
at every level. Six Sigma and lean processing exercises<br />
abounded. Functions were combined, waste cut, and<br />
businesses emerged leaner and more focused.<br />
And the change was and is being felt by our private<br />
practitioners. We have seen rather dramatic changes in<br />
relationships with clients that we had worked with for<br />
many years. Many insurance carriers left markets that<br />
they had been in for years. Others consolidated their work<br />
in fewer firms within the state or went to a regional or<br />
national approach, taking all of the defense work outside<br />
the state. In an effort to control costs, carriers and corporations<br />
carefully scrutinized our rates and the staffing<br />
of cases that we were defending. <strong>The</strong>y questioned the<br />
efficacy of our tactics and whether a motion or deposition<br />
reduced the risk or improved the chances for success.<br />
<strong>The</strong>y demanded more from us at less cost. In effect,<br />
they were asking us to do what they themselves had done.<br />
As small business owners, we have to assimilate this<br />
change in the context of our own organizations. We<br />
are typically not as hierarchical as our corporate clients.<br />
Change comes more slowly. We tend to vote on<br />
things and do not like close votes. We want unanimity<br />
or as close to it as we can get. We are not good at testing<br />
things before we try something new, so we tend to<br />
be risk averse. So at the end of the day we feel stuck—or<br />
(new word) angstful<br />
So what is <strong>DRI</strong> doing about our members’ plight We<br />
are increasing our efforts to make certain that our private<br />
practitioner members can set their aspiration goals<br />
and achieve them. First, we have convened a task force<br />
to focus on the needed skills of the twenty- first century<br />
lawyer, a process that <strong>DRI</strong> President Mary Massaron<br />
Ross initiated with her 2012 Annual Meeting theme.<br />
Task force chair Chrys Martin and vice chair Craig Mayfield<br />
expect to make specific recommendations in early<br />
summer for new and innovative programming to assist<br />
you in developing skills necessary to resolve disputes<br />
both today and in the future.<br />
Second, under the leadership of <strong>DRI</strong> Immediate Past<br />
President Henry Sneath, <strong>DRI</strong> Law Practice Management<br />
Committee Chair Jay Courie, and <strong>DRI</strong> Law Practice<br />
Management Committee Vice Chair John Trimble,<br />
we are developing programs to help you manage your<br />
practices and law firms more efficiently, helping you<br />
become more financially successful. <strong>The</strong> LPM Committee<br />
will help you frame the business issues you face so<br />
that you can make decisions more quickly and effectively,<br />
understanding the legal environment and having<br />
practice development assets at hand.<br />
Third, we are producing a law practice management<br />
book specifically geared to the defense practice of the<br />
twenty- first century. Under the leadership of the <strong>DRI</strong><br />
Publications Board led by its chair, Tom Segalla, and vice<br />
chair, Lise Spacapan, and with the able assistance of our<br />
project editor, Stephen Acker, we will provide you with<br />
a living volume that will give you practical solutions to<br />
the business challenges that you face each day.<br />
Fourth, our <strong>DRI</strong> <strong>For</strong> Life Task <strong>For</strong>ce conceived by <strong>DRI</strong><br />
First Vice President John Parker Sweeney and chaired by<br />
James Holland is working to bring value to your career<br />
across its breadth and provide programming and opportunities<br />
so you will always be ascending.<br />
Finally, the <strong>2013</strong> Annual Meeting in Chicago, October<br />
16–20, will focus on energizing your life and your<br />
career. We expect to have an array of nationally known<br />
speakers to provide you with powerful practice development<br />
skills that you can take back to your offices and put<br />
to use. <strong>DRI</strong> Annual Meeting Chair Lori Berke and <strong>DRI</strong><br />
Annual Meeting Vice Chair John Kuppens are putting<br />
together an outstanding program.<br />
In closing, know that the leadership of <strong>DRI</strong> is committed<br />
to having all of our members follow and maintain a<br />
successful career path, doing what we can to lessen the<br />
angst and increase the hope and reality. We look forward<br />
to working with you and hearing your thoughts and comments<br />
as to what would benefit you going forward.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 1
<strong>DRI</strong>—<strong>The</strong> Voice<br />
of the <strong>Defense</strong> Bar<br />
Vol. 55, No. 3 <strong>March</strong> <strong>2013</strong><br />
President<br />
Mary Massaron Ross<br />
Bloomfield Hills, Michigan<br />
Immediate Past President Henry M. Sneath<br />
Pittsburgh, Pennsylvania<br />
In This Issue<br />
1 On <strong>The</strong> Record<br />
Addressing Economic Realities to Help <strong>DRI</strong> Members Achieve <strong>The</strong>ir Goals: Practice “Angst”<br />
By J. Michael Weston, <strong>DRI</strong> President Elect<br />
4 <strong>DRI</strong> News<br />
Members on the Move • <strong>DRI</strong> Calendar<br />
6 <strong>DRI</strong> Center for Law and Public Policy<br />
<strong>The</strong> Uniform Asset Freezing Orders Act: A Cause for Concern<br />
President-Elect<br />
1st Vice President<br />
J. Michael Weston<br />
Cedar Rapids, Iowa<br />
John Parker Sweeney<br />
Baltimore, Maryland<br />
Employment and Labor Law<br />
8 Big Bang <strong>The</strong>ory<br />
Will the NFL’s Concussion Policy Expose the League to Massive Liability<br />
By Joseph M. Hanna<br />
2nd Vice President<br />
Secretary-Treasurer<br />
Executive Director<br />
Laura E. Proctor<br />
Nashville, Tennessee<br />
John E. Cuttino<br />
Columbia, South Carolina<br />
John R. Kouris<br />
Deputy Executive Director Tyler Howes<br />
Lawyers’ Professionalism and Ethics<br />
18 Protecting Against Waiver<br />
Reconciling Federal Rule of Evidence 502 with Model Rule 1.6<br />
By Steven M. Puiszis<br />
Toxic Torts and Environmental Law<br />
26 An Asbestos Parallel<br />
Diesel Exhaust—Recent Developments<br />
By David N. Lutz<br />
Director of Publications<br />
Editor<br />
Production Manager<br />
Contributing Editor<br />
Advertising<br />
Representative<br />
Jay Ludlam<br />
Michelle Parrini<br />
Julia Bergerud<br />
Marge Motluck<br />
Laurie P. Mokry<br />
Premises Liability<br />
34 Watch Where You’re Going!<br />
<strong>The</strong> New <strong>Defense</strong> of Texting and Tweeting in Personal Injury Lawsuits<br />
By Robert D. Lang<br />
Insurance Law<br />
38 Ending Duty to Defend<br />
Exhausting Policy Limits When Settling Less than All Lawsuits<br />
By Thomas R. Newman<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong>, <strong>March</strong> <strong>2013</strong>, Vol. 55, No. 3 (ISSN 0015-<br />
6884). Copyright ©<strong>2013</strong>, <strong>DRI</strong>. All rights reserved.<br />
Published monthly by <strong>DRI</strong>, 55 West Monroe Street ~<br />
Suite 2000, Chicago, Illinois 60603. Telephone: (312)<br />
795-1101. Fax: (312) 795-0747.<br />
Periodicals postage paid at Chicago, Illinois, and at<br />
additional mailing offices. Subscription price is $65.00<br />
per year, and, for <strong>DRI</strong> members, is included in the membership<br />
dues. Individual copies are $7.00 for <strong>DRI</strong> members<br />
and $12.00 for non-members, plus postage and<br />
handling.<br />
POSTMASTER: Send address changes to <strong>For</strong> <strong>The</strong><br />
<strong>Defense</strong>, <strong>DRI</strong>, 55 West Monroe Street ~ Suite 2000, Chicago,<br />
Illinois 60603.<br />
Correspondence and manuscripts should be sent to<br />
the Editor.<br />
All views, opinions and conclusions expressed in this<br />
magazine are those of the authors, and do not necessarily<br />
reflect the opinion and/or policy of <strong>DRI</strong> and its<br />
leadership.<br />
Fidelity and Surety<br />
44 From the Chair<br />
Choose Your Path—<br />
Enjoy the Experience<br />
By Jerome M. Joseph<br />
46 Contract Surety vs. Insurance<br />
Functional Differences and Why <strong>The</strong>y Matter<br />
By Laurence P. Jortner<br />
50 Payment Bond Sureties Have a Viable <strong>Defense</strong><br />
Labor Management Relations<br />
Act Preemption<br />
By James A. Knox<br />
57 Payment Bond Claims<br />
When Does the Statute<br />
of Limitations Run<br />
By Cynthia E. Rodgers-Waire<br />
63 Navigating the Quagmire<br />
<strong>The</strong> Computer Crime<br />
Coverage Conundrum<br />
By John R. Felice<br />
68 It’s Not Just About Priority<br />
Subrogation Rights Against a Bank<br />
By Carlos H. Garcia<br />
73 Think Globally<br />
A New Test: Update on Assumption of Jurisdiction by Canadian Courts<br />
By Margaret A. Ross<br />
74 <strong>Defense</strong> Ethics and Professionalism<br />
Twenty-first Century Obligations: Ethics for the Tech<br />
Savvy (and Not So Tech Savvy) Lawyer<br />
By David L. Campbell<br />
80 Advocates and New Members<br />
2 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong>
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<strong>DRI</strong> Services<br />
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Phone (312) 795-1101<br />
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<strong>DRI</strong> Staff Contacts (direct-dial<br />
numbers in area code 312).<br />
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e-mail: membership@dri.org<br />
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4 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Members on the Move<br />
Tucker Ellis LLP attorneys Clifford Mendelsohn<br />
and Sanford Watson have been elected to the firm’s<br />
partnership effective January 1, <strong>2013</strong>. Mr. Mendelsohn,<br />
a member of the firm’s trial group, focuses<br />
his practice on defending pharmaceutical, medical<br />
device, chemical, automobile, and consumer products<br />
manufacturers in a wide range of product liability<br />
matters, including toxic torts, mass torts,<br />
class actions, multidistrict litigation, and product<br />
recalls. Mr. Watson practices primarily in the areas<br />
of pharmaceutical and medical device defense and<br />
business litigation. A former director of public<br />
safety for the City of Cleveland, he has experience<br />
in the areas of commercial litigation, criminal law,<br />
government contracts, and municipal law.<br />
National law firm Wilson Elser is pleased to<br />
announce their joining with Houston law firm Powers<br />
& Frost LLP, nearly doubling the number of<br />
attorneys in Wilson Elser’s Houston office. Sharla<br />
J. Frost, one of the founding partners of Powers<br />
& Frost, has been named the regional managing<br />
partner of the newly combined office. On January<br />
1, <strong>2013</strong>, eight Powers & Frost attorneys and staff<br />
started working under the Wilson Elser moniker,<br />
creating a litigation powerhouse in Texas that now<br />
includes 20 attorneys in Houston and 35 in Dallas.<br />
In addition to Ms. Frost, <strong>DRI</strong> member attorneys<br />
who have joined Wilson Elser include James<br />
H. Powers, Gwendolyn S. Frost, Shawn David<br />
Golden, R. Clive Markland, and Linda P. Wills.<br />
Indianapolis law firm Lewis Wagner is pleased<br />
to announce that Robert M. Baker IV has been<br />
elected partner. Since joining the firm as an associate<br />
2007, Mr. Baker has been a member of the<br />
firm’s litigation group. He concentrates his practice<br />
in complex litigation, handling individual and<br />
class action lawsuits in federal and state court at<br />
the trial and appellate level. Mr. Baker represents<br />
clients from several industries, including insurance,<br />
telecommunications, real estate develop-<br />
ment, and construction, as well as members of the<br />
legal profession.<br />
Bullivant Houser Bailey PC, a nationally recognized<br />
law firm with offices in Washington, Oregon,<br />
and California, is pleased to announce that<br />
Norm Ronnerberg has been awarded designation<br />
as a Certified Specialist in Admiralty and Maritime<br />
Law by the State Bar of California Board of Legal<br />
Specialization. <strong>The</strong> legal certification program is<br />
the first for admiralty and maritime lawyers west<br />
of the Mississippi. To earn the certification, the<br />
bar imposes a rigorous application process based<br />
on experience handling maritime cases (e.g., trials,<br />
transactions, etc.) and 45 hours of legal education<br />
or teaching experience.<br />
Roerig, Oliveira & Fisher L.L.P., located in South<br />
Texas with offices in Brownsville and McAllen, is<br />
pleased to announce the addition of Zuleida Lopez-<br />
Habbouche as a partner. Ms. Lopez- Habbouche<br />
joined the firm in 2005. She is admitted to practice<br />
before all courts in the State of Texas, the United<br />
States District Court for the Southern District of<br />
Texas, the United States Court of Appeals for the<br />
Fifth Circuit, and the United States Supreme Court.<br />
Ms. Lopez- Habbouche’s practice is centered on personal<br />
injury defense, first-party litigation, commercial<br />
litigation, product liability, premises liability,<br />
and civil litigation.<br />
<strong>The</strong> Providence, Rhode Island, law firm of Hanson<br />
Curran announced that two of its associates,<br />
Sara Fontes and Nicholas R Mancini, have been<br />
named as partners of the firm as of January 1, <strong>2013</strong>.<br />
Ms. Fontes is an experienced civil litigator, focusing<br />
her practice on the defense of a variety of civil litigation<br />
matters, including personal injury defense,<br />
toxic torts, professional liability, and product liability.<br />
She has particular expertise in providing<br />
counsel for insurance coverage issues, premises<br />
liability actions, and psychological injuries. Mr.<br />
Mancini concentrates his practice in civil litiga-<br />
Diversity and Inclusion in <strong>DRI</strong>: A Statement of Principle<br />
<strong>DRI</strong> is the largest international membership organization of attorneys defending the<br />
interests of business and individuals in civil litigation.<br />
Diversity is a core value at <strong>DRI</strong>. Indeed, diversity is fundamental to the success of<br />
the organization, and we seek out and embrace the innumerable benefits and contributions<br />
that the perspectives, backgrounds, cultures, and life experiences a diverse membership provides.<br />
Inclusiveness is the chief means to increase the diversity of <strong>DRI</strong>’s membership and leadership positions.<br />
<strong>DRI</strong>’s members and potential leaders are often also members and leaders of other defense organizations.<br />
Accordingly, <strong>DRI</strong> encourages all national, state, and local defense organizations to promote diversity and<br />
inclusion in their membership and leadership.
Calendar<br />
Upcoming events<br />
of interest to<br />
<strong>DRI</strong> members and<br />
other defense lawyers<br />
<strong>For</strong> more information<br />
about any of these events,<br />
call <strong>DRI</strong> Customer Service<br />
at (312) 795-1101,<br />
or visit our website at<br />
www.dri.org.<br />
<strong>March</strong> 13–15 Women in the Law Seminar Miami Beach<br />
<strong>March</strong> 20–22 Trial Tactics Seminar Las Vegas<br />
<strong>March</strong> 21–22 Medical Liability and Health Care Law Seminar Miami Beach<br />
<strong>March</strong> 26 Catastrophe Cleanup: Regulatory and Legal<br />
Webcast<br />
Challenges After Hurricane Sandy<br />
April 3–5 Product Liability Conference National Harbor, MD<br />
April 10–12 Insurance Coverage and Claims Institute Chicago<br />
April 24–26 Life, Health, Disability and ERISA Claims Seminar Boston<br />
May 1–3 Employment and Labor Law Seminar Phoenix<br />
May 3 Fidelity and Surety Roundtable Chicago<br />
May 9–10 Business Litigation Seminar Chicago<br />
May 9–10 Intellectual Property Seminar Chicago<br />
May 16–17 Drug and Medical Device Seminar New York City<br />
May 16–17 Retail and Hospitality Litigation and Claims Management Seminar Chicago<br />
May 30–31 Diversity for Success Seminar Chicago<br />
June 6–7 Insurance Bad Faith and Extra-Contractual Liability Seminar Boston<br />
June 13–14 <strong>DRI</strong> International Seminar Prague, Czech<br />
Republic<br />
June 20–21 Young Lawyers Seminar Las Vegas<br />
June 27–28 Government Enforcement and Corporate Compliance Seminar Washington, DC<br />
September 19–20 Nursing Home/ALF Litigation Seminar Scottsdale, AZ<br />
September 19–20 Strictly Automotive Seminar Dearborn, MI<br />
September 26–27 Construction Law Seminar Las Vegas<br />
<strong>DRI</strong> Calendar<br />
tion, with an emphasis on personal injury,<br />
professional liability and workers’ compensation<br />
defense. He regularly appears<br />
before the Rhode Island Superior Court,<br />
the Rhode Island Workers’ Compensation<br />
Court, and the United States District Court<br />
for the District of Rhode Island.<br />
Whiteford Taylor & Preston LLP is very<br />
gratified to announce that the firm’s product<br />
liability group has been ranked in the<br />
top tier nationally by U.S. News & World<br />
Report’s ranking of law firms. Only 32<br />
firms nationwide received this recognition.<br />
To be ranked at the very highest level<br />
by U.S. News is a testament to the quality<br />
of the lawyers in the firm’s product liability<br />
group. What makes this especially gratifying<br />
is that the group is also one of the most<br />
diverse in the nation. It includes Harry S.<br />
Johnson, the first (and so far only) African<br />
American president of the Maryland<br />
State Bar Association, and Thurman W.<br />
Zollicoffer, Jr., a former city solicitor for<br />
Baltimore. <strong>The</strong> group’s co-chair is Warren<br />
Weaver, a member of the board of directors<br />
of the Maryland General Health Systems,<br />
Maryland General Hospital, and the Maryland<br />
General Community Health Foundation.<br />
Hearty congratulations are extended<br />
to the entire team.<br />
Butler, Snow, O’Mara, Stevens & Cannada<br />
PLLC attorney Adam J. Spicer has<br />
been appointed co-chair of the Pharmaceutical<br />
and Medical Subcommittee of the<br />
American Bar Association’s Section of Litigation<br />
Mass Torts committee for <strong>2013</strong>–14.<br />
Mr. Spicer is a member of the firm’s pharmaceutical,<br />
medical device, and health<br />
care group. He focuses his practice on<br />
mass torts and multidistrict litigation,<br />
product liability law, personal injury law,<br />
and drug and medical device litigation.<br />
Mr. Spicer served his country as an active<br />
duty member of the U.S. Navy from 1998–<br />
2002, receiving the Navy and Marine Corps<br />
Achievement Medals and a Navy Letter of<br />
Commendation.<br />
Congratulations to Joseph M. Hanna,<br />
chair of Goldberg Segalla LLP’s Sports and<br />
Entertainment Practice Group and founder<br />
of the nonprofit Bunkers in Baghdad, for<br />
collecting and shipping over four million<br />
golf balls and 75,000 golf clubs to U.S. soldiers<br />
and wounded warriors across the<br />
world. His story recounting the inspiration<br />
that drove him to launch and lead the charity<br />
has been featured in Golf Digest’s “Golf<br />
Saved My Life” column, February <strong>2013</strong>.<br />
Marge Motluck<br />
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your profile today.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 5
<strong>DRI</strong> Center for Law and Public Policy<br />
<strong>The</strong> Uniform Asset Freezing Orders Act:<br />
A Cause for Concern<br />
By Steven M. Puiszis<br />
<strong>The</strong> <strong>DRI</strong> Center for Law and Public Policy,<br />
through scholarship, legal expertise, and advocacy,<br />
provides a meaningful voice for the<br />
defense bar in the national discussion on issues<br />
of substantive law. <strong>The</strong> center’s mission<br />
is to intervene on those occasions when it determines<br />
that a development may jeopardize<br />
the fairness and the balance of the judicial<br />
system. <strong>The</strong> Uniform Asset Freezing Orders<br />
Act drafted by the National Conference of<br />
Commissioners on Uniform State Laws (NC-<br />
CUSL) presents such an issue.<br />
<strong>The</strong> NCCUSL recently completed drafting<br />
a Uniform Asset Freezing Orders Act.<br />
In <strong>2013</strong> sponsors will place the act on the<br />
legislative agendas of eight states (Colorado,<br />
Indiana, Kentucky, Nevada, New<br />
York, North Dakota, Tennessee, and Utah)<br />
and the District of Columbia. <strong>The</strong> act has<br />
already been introduced in bills pending<br />
in Colorado and North Dakota.<br />
Breathtaking in Scope<br />
<strong>The</strong> act is breathtaking in scope. It would<br />
authorize the issuance of an asset freezing<br />
order in any type of action “in which monetary<br />
damages are sought.” <strong>The</strong> only exemptions<br />
from the act’s coverage are claims<br />
against an individual for a consumer debt,<br />
defined as a debt incurred primarily for<br />
personal, family, or household purposes,<br />
and actions arising under a state’s family<br />
or domestic relations law.<br />
<strong>The</strong> act would allow a plaintiff potentially<br />
to freeze a defendant’s assets, which are not<br />
exempt from execution under state law, long<br />
before a court enters a judgment against a<br />
defendant or a jury makes a determination<br />
of fault. An asset freezing order can be entered<br />
even before any discovery occurs.<br />
<strong>The</strong> act broadly defines “assets” to<br />
include “anything that may be subject of<br />
ownership, whether real or personal, tangible<br />
or intangible, legal or equitable, or<br />
any interest therein.” It would even allow a<br />
plaintiff to freeze assets in which an innocent<br />
coowner has an interest.<br />
Draconian in Nature<br />
<strong>The</strong> draconian nature of the act is reflected<br />
by the requirement that a party that is subjected<br />
to an asset freezing order must apply<br />
for a court order permitting the payment of<br />
the party’s “ordinary living expenses, business<br />
expenses, and legal representation.”<br />
And, the act provides that the party subjected<br />
to the freezing order “bears the burden<br />
of establishing the amount of those<br />
expenses.”<br />
■■<br />
Steven M. Puiszis is a partner in the Chicago office of Hinshaw & Culbertson<br />
LLP. He serves on the <strong>DRI</strong> Board of Directors, is the chair of the <strong>DRI</strong><br />
Judicial Task <strong>For</strong>ce, and is the board liaison to the <strong>DRI</strong> Lawyers’ Professionalism<br />
and Ethics Committee. Mr. Puiszis is a past president of the Illinois<br />
Association of <strong>Defense</strong> Counsel. He is a member of the ADTA and the IADC<br />
and is a fellow of the American Bar Foundation.<br />
<strong>The</strong> act is modeled on a preliminary<br />
injunction platform. To grant an asset<br />
freezing order, a court must find that (1) a<br />
substantial likelihood exists that the plaintiff<br />
will prevail on the merits of the underlying<br />
claim; (2) a substantial likelihood<br />
exists that the assets of the defendant will<br />
be “dissipated” so that the moving party<br />
will be unable to receive satisfaction of a<br />
judgment; (3) the harm caused by an asset<br />
freezing order is “clearly outweighed” by the<br />
harm to the moving party if the court did<br />
not issue the order; and (4) the order would<br />
not be adverse to the public interest. “Dissipate”<br />
is defined to include any action “with<br />
regard to the asset to defeat satisfaction of<br />
an existing or future judgment, including<br />
“selling removing, alienating, transferring,<br />
assigning, encumbering or similarly dealing<br />
with an asset.” <strong>The</strong> act would allow an<br />
asset freezing order to be entered without<br />
notice to the defendant for a defined period.<br />
Nonparties and Extraterritoriality<br />
<strong>The</strong> act authorizes the service of an asset<br />
freezing order on a nonparty that has “custody<br />
or control” of an asset subject to the<br />
order. It provides that once served, a nonparty<br />
“shall freeze” the assets of the party<br />
“until further order of the court.” A nonparty<br />
can be held in contempt for failing to<br />
comply with an asset freezing order.<br />
<strong>The</strong> act would require a court to recognize<br />
an asset freezing order issued by a<br />
court in another state unless such recognition<br />
would violate the forum state’s public<br />
policy, the order was issued without notice,<br />
or the issuing court did not employ procedures<br />
substantially similar to those in the<br />
act. It would also require a court to recognize<br />
an asset freezing order issued by a<br />
court outside the United States unless certain<br />
grounds for nonrecognition of the order<br />
are established. However, the act places<br />
the burden of proving a ground for nonrecognition<br />
on the party resisting the order.<br />
Section 10 of the act literally provides<br />
that an asset freezing order is entitled to<br />
full faith and credit in the same manner as<br />
a judgment.<br />
6 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong>
<strong>DRI</strong> Center for Law and Public Policy<br />
Many Causes for Concern<br />
<strong>DRI</strong> and the <strong>DRI</strong> Center for Law and Public<br />
Policy oppose the act for a number of<br />
reasons.<br />
• No fraudulent intent or attempt to hide<br />
assets is required to obtain an asset<br />
freezing order. <strong>The</strong> act potentially can<br />
be applied to anyone with insufficient<br />
assets to satisfy a future verdict.<br />
• A party’s assets should not be frozen<br />
based on a court’s best guess about the<br />
potential value of a cause of action. How<br />
will the value of a tort claim be established,<br />
and how can a court possibly<br />
address the impact of comparative fault<br />
or contributory fault principles on the<br />
value of a claim before any discovery has<br />
occurred<br />
• <strong>The</strong> term “ordinary business expenses”<br />
is undefined. Many types of critical<br />
business transactions needed to keep a<br />
company solvent in today’s tough economy<br />
may be blocked by the act. <strong>The</strong> act<br />
will limit a company’s ability to sell or<br />
transfer its assets in the ordinary course<br />
of its business.<br />
• Will a company under a freeze order be<br />
allowed to raise capital, enter into transactions,<br />
or incur expenses that might<br />
expand its business <strong>The</strong> comment to<br />
Section 3 of the act states that once an order<br />
is in place, “any person with notice of<br />
the order could not cooperate… to place<br />
a new mortgage on the asset or enter into<br />
a new contract containing rights of setoff.”<br />
<strong>The</strong> cost of running a small business<br />
could skyrocket if a court must be consulted<br />
every time a company seeks to acquire<br />
or convey an asset.<br />
• <strong>The</strong> term “ordinary living expenses” is<br />
also undefined. Will the act preclude a<br />
family from buying a new car, putting a<br />
new roof on the house, taking a vacation,<br />
or paying for a child’s college education<br />
<strong>The</strong> head of a household who is subject of<br />
an asset freezing order may need to seek<br />
a court approval to pay for these type of<br />
expenses.<br />
• In some jurisdictions it can take four to<br />
five years before a lawsuit receives a verdict.<br />
It is unfair to permit a defendant’s<br />
assets be frozen before the merits of a<br />
claim against it is resolved.<br />
• Generally, a defendant’s assets are not<br />
subject to discovery. <strong>The</strong> act may require<br />
a defendant to disclose assets in an<br />
attempt to defeat or to dissolve an asset<br />
freezing order.<br />
• <strong>The</strong> value of an insurance policy meets<br />
the definition of an asset. If a claim’s<br />
potential value exceeds the insurance<br />
policy limits, the plaintiff can freeze the<br />
assets of an individual or business. Thus,<br />
the act may create new conflicts of interest<br />
between an insured, perhaps wanting<br />
to settle for the policy limits to get<br />
out from under a freezing order, and a<br />
carrier that believes that the case should<br />
be defended.<br />
• Imposing an asset freezing order will<br />
likely cause defendants to settle more<br />
cases for reasons having nothing to do<br />
with the merits of the claims.<br />
<strong>The</strong> act can be found at http://www.uniformlaws.org/shared/docs/asset_freezing_<br />
orders/2012_afo_final.pdf.<br />
<strong>The</strong> <strong>DRI</strong> Center for Law and Public Policy<br />
has formed a Task <strong>For</strong>ce on Asset Freezing<br />
Orders to work with state and local<br />
defense organizations and other interested<br />
groups where the act has been or will be<br />
introduced. <strong>The</strong> task force is composed<br />
of Steven Puiszis, Sky Woodward, John<br />
Cuttino, Jill Rice, Julie Walker, and Neva<br />
Lusk. If you have questions or would like<br />
additional information about the Uniform<br />
Asset Freezing Orders Act or the <strong>DRI</strong> Task<br />
<strong>For</strong>ce on Asset Freezing Orders, please contact<br />
<strong>DRI</strong> Director of Communications Tim<br />
Kolly at tkolly@dri.org.<br />
<strong>DRI</strong>’s amicus efforts<br />
increase year after<br />
year. As a member,<br />
your interests are<br />
protected. <strong>DRI</strong> is<br />
your advocate.<br />
dri.org<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 7
Employment and Labor Law<br />
Big Bang <strong>The</strong>ory<br />
By Joseph M. Hanna<br />
<strong>The</strong> survival of the<br />
National Football League<br />
could very well depend<br />
on the outcome of<br />
litigation to determine<br />
the league’s ultimate<br />
liability for its actions.<br />
Will the NFL’s<br />
Concussion Policy<br />
Expose the League<br />
to Massive<br />
Liability<br />
8 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ Joseph M. Hanna is a partner of Goldberg Segalla LLP practicing from the Buffalo, New York, office. He leads the firm’s<br />
Sports and Entertainment Practice Group and is the marketing chair for the <strong>DRI</strong> <strong>2013</strong> Annual Meeting. Mr. Hanna represents<br />
professional athletes, along with management, ownership, and companies that serve the sports and entertainment industries, in<br />
commercial and litigation matters. He is the founder of Bunkers in Baghdad, a nonprofit that collects and ships golf equipment to<br />
U.S. soldiers and Wounded Warriors across the world.
<strong>The</strong> plight of National Football League (NFL) players suffering<br />
from concussion- related injuries has long been the<br />
subject of widespread media coverage, scientific debate,<br />
and fan interest. Jeanne Marie Laskas, Game Brain, GQ<br />
(Oct. 2009); Malcolm Gladwell, Offensive<br />
Play: How Different are Dogfighting and<br />
Football, <strong>The</strong> New Yorker (Oct. 19, 2009);<br />
Bob Simon, A Blow to the Brain, 60 Minutes<br />
(Oct. 11, 2009). Still, recent events, such as<br />
the suicides of several NFL alumni, groundbreaking<br />
clinical studies, and a giant class<br />
action lawsuit that threatens the financial<br />
livelihood of the league, have once again<br />
brought the topic to the forefront of national<br />
attention. What is the question<br />
on everyone’s mind Whether<br />
the NFL will face<br />
liability for its<br />
arguably deficient<br />
eff<br />
o r t s t o<br />
inform players<br />
of the risks<br />
associated with<br />
football- induced<br />
head trauma.<br />
While the league is<br />
not without defenses to<br />
liability, it will still be interesting to see how<br />
the lawsuit unfolds in the months to come.<br />
Game-Changing Science<br />
In 2005, clinical studies performed by independent<br />
scientists determined that multiple<br />
NFL- derived concussions cause problems<br />
such as depression and early- onset dementia.<br />
Dr. Bennett Omalu and Dr. Robert<br />
Cantu examined the brain tissue of three<br />
deceased NFL players Mike Webster, Terry<br />
Long, and Andre Waters, who had suffered<br />
multiple concussions throughout their NFL<br />
careers. See Bennet I. Omalu et al., Chronic<br />
Traumatic Encephalopathy in a National<br />
Football League Player, 57 Neurosurgery<br />
128 (2005); Bennet I. Omalu et al., Chronic<br />
Traumatic Encephalopathy in a National<br />
Football League Player: Part II, 59 Neurosurgery<br />
1086 (2006); Robert C. Cantu,<br />
Chronic Traumatic Encephalopathy in the<br />
National Football League Player, 61 Neurosurgery<br />
223 (2007). Before their premature<br />
deaths, all three had presented symptoms<br />
of sharply deteriorated cognitive functioning<br />
and psychiatric symptoms<br />
such as paranoia, panic attacks, and<br />
major depression. Cantu, supra, at<br />
223. Noting that the brain tissue<br />
of all three presented with neurofibrillary<br />
tangles, neurotrophil<br />
threads, and cell dropout,<br />
Omalu concluded that chronic<br />
traumatic encephalopathy<br />
(CTE) triggered by multiple<br />
NFL- derived concussions<br />
represented a partial cause<br />
of their deaths. Id.<br />
CTE is a neurological<br />
disorder first discovered in<br />
athletes such as boxers who sustained<br />
multiple blows to the head. Initially,<br />
CTE presents through symptoms<br />
such as poor concentration or memory, dizziness,<br />
and headaches, but it can result in<br />
increased irritability, outbursts of violent<br />
behavior, and general confusion. Michael<br />
Saulle & Brian D. Greenwald, Chronic Trau-<br />
matic Encephalopathy: A Review, Rehabilitation<br />
Review and Practice 3–4 (2012).<br />
Later, the disorder may progress into<br />
dementia or Parkinsonism with symptoms<br />
such as a general slowing in muscle movement,<br />
hesitancy in speech, and tremors of<br />
the hands. Cantu, supra, at 223.<br />
In response, the internal NFL concussion<br />
committee, at that time called the “mild<br />
traumatic brain injury committee,” denied<br />
a link between concussions and cognitive<br />
decline, claimed that more research was<br />
needed to reach a definitive conclusion, and<br />
asked the editor of Neurosurgery to retract<br />
Omalu’s article in July 2005. Jeanne Marie<br />
Laskas, Game Brain, GQ (Oct. 2009). <strong>The</strong><br />
NFL concussion committee’s stance on the<br />
issue was clear: “We own this field. We are<br />
not going to bow to some no-name Nigerian<br />
with some bullshit theory.” Id. Noting that<br />
ironically none of the committee members<br />
were neuropathologists, Omalu questioned<br />
the integrity of the NFL concussion committee,<br />
quipping “[h]ow can doctors who<br />
are not neuropathologists interpret neuropathological<br />
findings better than neuropathologists”<br />
Id.<br />
Another 2005 clinical study conducted<br />
by Dr. Kevin Guskiewicz surveyed over<br />
2,550 former NFL athletes and found that<br />
retired NFL players who had sustained<br />
three or more concussions in the league<br />
had a fivefold prevalence of mild cognitive<br />
impairment diagnosis compared to<br />
NFL alumni without concussion histories.<br />
Kevin M. Guskiewicz et al., Association<br />
between Recurrent Concussion and Late-<br />
Life Cognitive Impairment in Retired Professional<br />
Football Players, 57 Neurosurgery<br />
722 (2005). <strong>The</strong> NFL concussion committee<br />
did not address this study. Alan Schwarz,<br />
Expert Ties Ex- Player’s Suicide to Brain<br />
Damage from Football, N.Y. Times (Jan. 18,<br />
2007), at A1.<br />
Later, mounting media pressure compelled<br />
the NFL to address the long-term effects<br />
of player concussions, prompting the<br />
league’s first “Concussion Summit” in June<br />
of 2007. Independent scientists were invited<br />
to represent their findings to team medical<br />
staffs and NFL Players Association representatives.<br />
Still, the league remained largely<br />
unresponsive: the concussion pamphlet that<br />
it issued to players in August 2007 merely<br />
stated that “there is no magic number for<br />
how many concussions is too many.” Press<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 9
Employment and Labor Law<br />
Arguably… resolvingthe<br />
state law claims requires<br />
interpreting a collective<br />
bargaining agreement, so<br />
this is a labor dispute.<br />
Release, National Football League, NFL<br />
Outlines for Players Steps Taken to Address<br />
Concussions (Aug. 14, 2007).<br />
Later, in 2008, Dr. Ann McKee of Boston<br />
University studied the brain tissue of<br />
deceased NFL alumni John Grimsely and<br />
Tom McHale, finding that both exhibited<br />
distinct signs of CTE. Ann McKee et al.,<br />
Chronic Traumatic Encephalopathy in Athletes:<br />
Progressive Tauopathy After Repetitive<br />
Head Injury, 68 J Neuropathology Exp<br />
Neurol. 709, 732 (2009). McKee believed<br />
that decreasing the number of concussions<br />
would decrease the incidence of athlete<br />
CTE, stating “[t]here is overwhelming<br />
evidence that [CTE] is the result of repeated<br />
sublethal brain trauma.” Id. (emphasis<br />
added). Even after the results of this study<br />
were published in 2009, Dr. Ira Casson,<br />
the former NFL concussion committee’s<br />
cochair, maintained that “there is not<br />
enough valid, reliable or objective scientific<br />
evidence at present to determine whether…<br />
repeat head impacts in professional football<br />
result in long[-]term brain damage.”<br />
Legal Issues Relating to Football Head Injuries<br />
(Part II): Hearing Before the H. Comm.<br />
on the Judiciary, 111th Cong. 334–36 (2010)<br />
(statement of Dr. Ira R. Casson).<br />
Watershed Congressional Hearing<br />
<strong>The</strong> debate over the long-term effects of<br />
NFL- derived concussions reached a boiling<br />
point in September 2009 when an<br />
NFL- commissioned University of Michigan<br />
study found that NFL alumni are diagnosed<br />
with Alzheimer’s disease or other<br />
similar memory- related disorders vastly<br />
more often than the national population—<br />
a rate of 19 times the normal rate for men<br />
ages 30 through 49! Alan Schwarz, Dementia<br />
Risk Seen in Players in N.F.L. Study, N.Y.<br />
10 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Times (Sept. 30, 2009), at A1. Shortly after,<br />
Congress announced that it would hold a<br />
hearing to discuss “legal issues relating to<br />
football head injuries.” Alan Schwarz, Congress<br />
to Hold Hearing on N.F.L. Head Injuries,<br />
N.Y. Times (Oct. 3, 2009), at D2; Legal<br />
Issues Relating to Football Head Injuries<br />
(Part I): Hearing Before the H. Comm. on<br />
the Judiciary, 111th Cong. (2010).<br />
On October 28, 2009, members of the<br />
House Judiciary Committee sharply criticized<br />
the NFL’s concussion policy. NFL<br />
Commissioner Roger Goodell was directly<br />
asked whether multiple NFL concussions<br />
contributed to the early onset of cognitive<br />
decline, but he wisely deferred to medical<br />
judgment on the issue. Legal Issues Relating<br />
to Football Head Injuries (Part I): Hearing<br />
Before the H. Comm. on the Judiciary, 111th<br />
Cong. 86 (2010) (inquiry of Rep. Conyers,<br />
Chair, House Comm. on the Judiciary).<br />
Though the NFL’s leading medical voice<br />
on the subject, Casson, was not present to<br />
answer this critical query, the committee<br />
played an HBO Real Sports recording of<br />
Casson denying all potential links between<br />
multiple head injuries and later- life cognitive<br />
decline. Legal Issues Relating to Football<br />
Head Injuries (Part I): Hearing Before<br />
the H. Comm. on the Judiciary, 111th Cong.<br />
113 (2010) (statement of Rep. Sanchez,<br />
Member, House Comm. on the Judiciary);<br />
Toni Monkovic, Concussions and Congress<br />
and the Future Game, N.Y. Times 5th down<br />
blog (Nov. 1, 2009) (providing video footage<br />
of Rep. Sanchez).<br />
<strong>The</strong> most poignant moment of the hearing<br />
occurred when Representative Linda<br />
Sanchez of California analogized the NFL’s<br />
denial of a causal link between NFL- derived<br />
concussions and cognitive decline to the tobacco<br />
industry’s denial of the link between<br />
cigarette consumption and ill health effects.<br />
Id. Sanchez encouraged Goodell to<br />
get “ahead on this issue, if only to cover<br />
[the NFL] legally,” suggesting that the NFL<br />
might avoid liability if it simply issued adequate<br />
warning to NFL players. Id.<br />
Remedial Measures in NFL<br />
Concussion Policy<br />
<strong>The</strong> NFL took several remedial measures<br />
after the 2009 House Judiciary Committee<br />
hearing. First, Casson and fellow cochair<br />
Dr. David Viano both resigned from their<br />
NFL concussion committee positions. Alan<br />
Schwarz, Concussion Expert’s Removal is<br />
Sought, N.Y. Times (Nov. 20, 2009); Alan<br />
Schwarz, N.F.L. Head Injury Study Leaders<br />
Quit, N.Y. Times (Nov. 25, 2009), at<br />
B11. NFL Commissioner Goodell replaced<br />
Casson and Viano with well- credentialed<br />
neurologists Dr. H. Hunt Batjer and Dr.<br />
Richard G. Ellenbogen. Alan Schwarz, NFL<br />
Picks New Chairmen for Panel on Concussions,<br />
N.Y. Times (Mar. 17, 2010), at B1.<br />
Second, the NFL partnered with the Center<br />
for the Study of Traumatic Encephalopathy<br />
by pledging to donate $1 million to<br />
support its research. Alan Schwarz, N.F.L.<br />
Gives $1 Million to Brain Researchers, N.Y.<br />
Times (Apr. 21, 2009), at B14. Third, NFL<br />
spokesperson Greg Aiello made the following<br />
admission: “[i]t’s quite obvious from the<br />
medical research that’s been done that concussions…<br />
lead to long-term problems[.]”<br />
Id. Fourth, each team was required to make<br />
an independent doctor available to examine<br />
players and determine whether a player<br />
should return to play after sustaining a concussion.<br />
Bruce Klopfleisch, NFL Announces<br />
New Concussion Policies, SUITE 101.COM.<br />
Legal Implications of<br />
Previous NFL Policies<br />
Since at least 2005, the NFL has known<br />
of multiple medical studies linking NFLderived<br />
head injuries to later- life cognitive<br />
decline. Still, in 2007, the NFL released the<br />
following statement: “Current research…<br />
has not shown that having more than one or<br />
two concussions leads to permanent problems.”<br />
National Football League, Press Release,<br />
supra. (emphasis added). While it<br />
eventually reversed its stance, it now faces<br />
huge potential liabilities for its previous<br />
statement. Recently, over 3,000 NFL alumni<br />
joined a single, class action lawsuit, arguing<br />
that the league should be liable to them for<br />
failing to provide adequate warning about<br />
the causal link between multiple NFLderived<br />
concussions and later- life cognitive<br />
decline. Sam Farmer, <strong>For</strong>mer NFL Players<br />
to Consolidate Concussion Lawsuits Against<br />
NFL, L.A. Times (June 6, 2012). However,<br />
because the NFL has several defenses at its<br />
disposal, predictions regarding the disposition<br />
of this litigation are speculative at best.<br />
Preemption<br />
Initially, the NFL has sought the dismissal<br />
of the concussion litigation on the grounds
that it is preempted by §301 of the federal<br />
Labor Management Relations Act<br />
under the NFL players’ collective bargaining<br />
agreement and the NFL Constitution<br />
and bylaws. Mot. to Dismiss, Nov. 11, 2011.<br />
Arguably, because the plaintiffs allege that<br />
the league has breached its duty to minimize<br />
the risk of concussion- related harm<br />
to NFL players, and since the NFL players’<br />
collective bargaining agreement and<br />
the NFL Constitution and bylaws outline<br />
the obligations of the NFL regarding issuing<br />
warnings and player safety, resolving<br />
the state law claims requires interpreting<br />
a collective bargaining agreement, so this<br />
is a labor dispute. 48B Am. Jur. 2d Labor<br />
and Labor Relations §2428. <strong>The</strong>refore, federal<br />
labor law principles preempt the state<br />
law principles, and because the NFL players’<br />
collective bargaining agreement and<br />
the NFL Constitution and bylaws stipulated<br />
to arbitration proceedings in the event of<br />
a dispute, the league has argued that the<br />
plaintiffs must arbitrate. Id. See, e.g., Singh<br />
v. Estate of Lunalilo, 779 F. Supp. 1265, 1269<br />
(D. Haw. 1991).<br />
<strong>The</strong> league’s motion to dismiss stated,<br />
“[t]he claims here are fundamentally about<br />
workplace safety in a unionized setting in<br />
which workplace safety issues loom large<br />
and have long been the subject of bargaining.”<br />
Greg Ryan, NFL Taps Clement for Concussion<br />
MDL, LAW360.com (Dec. 20, 2012).<br />
Based on previous lawsuits against the NFL,<br />
it appears that the NFL has support for this<br />
defense. See, e.g., Givens v. Tennessee Football,<br />
Inc., 684 F. Supp. 2d 985, 990–91 (M.D.<br />
Tenn. 2010) (holding that a lawsuit by a<br />
player alleging that team withheld medical<br />
scan information about his injured knee<br />
was preempted by Labor Management Relations<br />
Act §301); Stringer v. National Football<br />
League, 474 F. Supp. 2d 894, 909–11 (S.D.<br />
Ohio 2007) (holding that a wrongful death<br />
lawsuit brought by the wife of a player who<br />
died due to heat stroke during NFL practice<br />
was preempted by Labor Management<br />
Relations Act §301); Sherwin v. Indianapolis<br />
Colts, Inc., 752 F. Supp. 1172, 1177–79<br />
(N.D. N.Y. 1990) (holding that a lawsuit of<br />
a former player alleging that the team as an<br />
employer failed to provide adequate medical<br />
care and withheld medical information<br />
was preempted by Labor Management Relations<br />
Act §301). Still, the success of this request<br />
for arbitration will hinge on whether<br />
or not the court accepts that premise that<br />
the plaintiffs’ claims “arise under” the NFL<br />
players’ collective bargaining agreement<br />
and the NFL Constitution and bylaws.<br />
Failure to Warn<br />
A duty to warn arises when someone should<br />
realize through special facts known to that<br />
person or due to a special relationship that<br />
an act or omission exposes another to an<br />
unreasonable risk of harm through the<br />
conduct of a third party. Restatement (Second)<br />
of Torts §302B (1965). <strong>The</strong> NFL has<br />
had constructive notice of medical studies<br />
linking multiple head injuries with laterlife<br />
cognitive decline since at least 2005.<br />
Further, evidence from NFL retirement<br />
and disability plan board hearings indicate<br />
that the league had some level of knowledge<br />
regarding the harmful effects of head<br />
trauma as early as 1999 when it concluded<br />
that Hall of Fame center Mike Webster<br />
had brain damage from the time that he<br />
spent playing in the league. Steve Fainaru,<br />
Mixed Messages on Brain Injuries, EPSN.<br />
com (Nov. 16, 2012). Unfortunately, this<br />
knowledge can cut both ways. Because the<br />
NFL retirement and disability plan board,<br />
which reviews disability requests, contains<br />
members from the NFL Players Association,<br />
the league could argue that the players<br />
had this knowledge as well, vitiating any<br />
failure to warn claim. Ken Belson, Brain<br />
Injuries Drew Millions from N.F.L., Report<br />
Says, N.Y. Times (Nov. 17, 2012), at D4.<br />
Still, by fostering a misconception in the<br />
minds of players that “there is no magic<br />
number for how many concussions is too<br />
many,” the league arguably encouraged<br />
players to treat their concussive conditions<br />
with less than due care. National Football<br />
League, Press Release, supra. (emphasis<br />
added). Thus, several players might have<br />
aggravated their concussive injuries by<br />
returning to play because they relied on the<br />
NFL’s arguably inadequate warning.<br />
Duty<br />
<strong>The</strong> NFL might argue that the NFL concussion<br />
committee’s mere awareness of independent<br />
studies did not by itself impose a<br />
legal duty to warn players about the studies.<br />
Restatement (Second) of Torts §314 (1965).<br />
Since it did not have some special relationship<br />
or special duty, the NFL will argue that<br />
it did not have an affirmative duty to warn<br />
Several playersmight<br />
have aggravated their<br />
concussive injuries<br />
by returning to play<br />
because they relied<br />
on the NFL’s arguably<br />
inadequate warning.<br />
league players about the cognitive consequences<br />
of concussions such as chronic<br />
traumatic encephalopathy, dementia, and<br />
depression. Courts have suggested that the<br />
respective NFL teams employ the NFL players,<br />
not the league. See, e.g., N. Am. Soccer<br />
League v. NFL, 670 F.2d 1249, 1252 (2d Cir.<br />
1982). Consequently, the NFL might argue<br />
that the league does not have a special relationship<br />
stemming from employment that<br />
would generate an affirmative duty to warn<br />
NFL players about the long-term risks associated<br />
with NFL- derived concussions.<br />
<strong>The</strong> players might argue that the NFL’s<br />
voluntary creation of an internal concussion<br />
committee created a duty on the part<br />
of the NFL to exercise reasonable care. Once<br />
an actor begins voluntarily to render assistance<br />
to a third party, the actor undertakes<br />
a duty to proceed with reasonable care<br />
when the third party relies on the actor’s<br />
assistance. Restatement (Third) of Torts<br />
§42 (2005). Arguably, the NFL assumed a<br />
duty to proceed with reasonable care in its<br />
dealings with league players when it voluntarily<br />
created the internal committee<br />
on concussions. Players relied on the information<br />
contained in the NFL’s August 14,<br />
2007, concussion pamphlet to represent a<br />
complete and accurate synopsis of “current<br />
research” on the topic: “[w]e want<br />
to make sure all NFL players… are fully<br />
informed and take advantage of the most<br />
up-to-date information and resources as<br />
we continue to study the long-term impact<br />
of concussions.” National Football League,<br />
Press Release, supra. (emphasis added).<br />
If the NFL wanted to make players “fully<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 11
Employment and Labor Law<br />
informed” about the “long-term impact of<br />
concussions,” players may argue, why did<br />
it withhold from players the findings of<br />
Guskiewicz, Cantu, and Omalu indicating<br />
a causal link existed between multiple concussions<br />
and later- life cognitive decline<br />
Arguably, the NFL<br />
assumed a duty to proceed<br />
with reasonable care in<br />
its dealings with league<br />
players when it voluntarily<br />
created the internal<br />
committee on concussions.<br />
Cause<br />
An actor’s tortious conduct must be a factual<br />
cause of another’s physical harm to<br />
impose liability on that actor. Restatement<br />
(Third) of Torts §26 (2002). Conduct<br />
is a factual cause of harm when the<br />
harm would not have occurred “but for”<br />
the tortious conduct. Id. <strong>The</strong> NFL might<br />
point to any number of causes that could<br />
have contributed to an injured NFL players’<br />
cognitive decline. <strong>For</strong> example, Pittsburgh<br />
Steelers’ trainer and NFL concussion<br />
summit and committee member Dr. Joseph<br />
Maroon argued that steroids, drug abuse,<br />
and other substances caused the damaged<br />
brain tissue of former NFL players Webster,<br />
Long, and Waters. Les Carpenter, Compromise<br />
Reigns at Summit on Concussions,<br />
Wash. Post (June 20, 2007), at E1.<br />
Players might rebut this causation defense<br />
by arguing that the NFL’s failure to<br />
warn does not need to be the sole cause of<br />
their cognitive injuries. See Restatement<br />
(Third) of Torts §26, cmt. c. (2002) (emphasis<br />
added). See, e.g., Alaska v. Abbott,<br />
498 P.2d 712, 726 (Alaska 1972); Peterson v.<br />
Gray, 628 A.2d 244, 246 (N.H. 1993) (holding<br />
that a defendant’s tortious conduct must<br />
be a cause of harm, not “the” cause); Dedes<br />
v. Asch, 521 N.W.2d 488, 490–92 (Mich.<br />
1994) (rejecting the argument that statutory<br />
12 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
language, “the proximate cause,” meant<br />
that defendant’s conduct must be the only<br />
cause of harm). When multiple actions or<br />
sources can cause harm, each of which is<br />
sufficient to cause a plaintiff harm, a court<br />
appropriately can supplement the “but-for”<br />
standard. Restatement (Third) of Torts §27<br />
(2005). <strong>The</strong> NFL players may concede that<br />
they sustained concussions “swimming” or<br />
in a variety of other contexts. However, if<br />
the players can prove that the NFL’s failure<br />
to warn aggravated their cognitive injuries,<br />
then a court appropriately can supplement<br />
the “but-for” standard. Again, by relying on<br />
the statement that “there is no magic number<br />
for how many concussions is too many,”<br />
players likely returned to play after sustaining<br />
two or more concussions in one NFL<br />
season. In other words, the NFL concussion<br />
committee’s concussion management likely<br />
caused players to aggravate their cognitive<br />
injuries. See National Football League, Press<br />
Release, supra. (emphasis added).<br />
Assumption of Risk<br />
<strong>The</strong> NFL could argue that the players<br />
assumed the risk of all injuries inherent<br />
in football. Generally, athletes assume the<br />
risks of injuries normally associated with<br />
the sport. See, e.g., Niemcyzk v. Burleson,<br />
538 S.W.2d 737, 740 (Mo. Ct. App. 1976).<br />
However, plaintiffs must have actual knowledge—not<br />
constructive notice—of the<br />
specific risk at issue to invoke the assumption<br />
of risk doctrine. Prosser, Law of Torts<br />
3d. See also Restatement (Second) of Torts<br />
§466 (1965).<br />
NFL alumni concede that they knew of<br />
the risks normally associated with professional<br />
football, which ranged from broken<br />
bones to torn ligaments and even concussions.<br />
However, the players lacked actual<br />
knowledge of the long-term cognitive consequences<br />
of sustaining multiple NFLderived<br />
concussions. Still, a court could<br />
conclude that this general knowledge of<br />
inherent danger, coupled with the fact<br />
that the players arguably received notice<br />
of potential cognitive effects following the<br />
disability hearings mentioned above, were<br />
sufficient to put the NFL alumni on notice<br />
of the risk posed by playing football.<br />
Contributory Negligence<br />
Contributory negligence—the defense that<br />
an injured person cannot recover damages<br />
for negligence if the injured person,<br />
by his or her own negligence, proximately<br />
contributed to the injury—is the strongest<br />
argument at the NFL’s disposal in this<br />
litigation. See 38 Am. Jur. 2d Negligence<br />
§174. <strong>The</strong> NFL could argue that the players<br />
negligently contributed to their own<br />
injuries by (1) failing to report their concussive<br />
conditions to team doctors; and<br />
(2) returning to play before their concussion<br />
symptoms completely disappeared.<br />
<strong>The</strong> NFL’s August 14, 2007, informational<br />
pamphlet instructs players to self- report<br />
their concussion symptoms, indicating that<br />
they should report concussion symptoms<br />
immediately to team medical personnel<br />
and that the players should be asymptomatic<br />
before returning to play. See National<br />
Football League, Press Release, supra.<br />
Thirty of 160 NFL players surveyed by<br />
the Associated Press (AP) in November of<br />
2009 replied that they either failed to report<br />
or underreported concussion symptoms.<br />
Howard Fendrich, AP Impact: NFL Players<br />
Hide, Fear Concussions, ABC News; Associated<br />
Press, Survey: Concussions Inevitable,<br />
ESPN.COM. Further, some players admitted<br />
that they returned to play despite “feeling<br />
‘dazed’ or ‘woozy’ or having blurred<br />
vision.” Id. <strong>The</strong> NFL could argue that the<br />
players negligently contributed to their<br />
own cognitive injuries by failing to report<br />
these concussion symptoms and returning<br />
to play before becoming symptom free. Id.<br />
<strong>The</strong> players could respond by arguing<br />
that the NFL’s contractual scheme incentivizes<br />
them to withhold their concussion<br />
symptoms from team managers. NFL<br />
player contracts do not guarantee player<br />
payment beyond the season in which an<br />
injury occurs. National Football League<br />
Collective Bargaining Agreement (2006)<br />
app. c, §9 at 251. This contractual structure<br />
maximizes the risk that players will incur<br />
permanent cognitive problems because it<br />
incentivizes the players to withhold their<br />
concussion symptoms and to play through<br />
multiple head injuries.<br />
Even if the players are found contributorily<br />
negligent, they could still recover<br />
damages in jurisdictions that adhere to<br />
comparative negligence principles. While<br />
traditionally a plaintiff’s contributory negligence<br />
served to bar him or her totally from<br />
recovering damages, most jurisdictions<br />
adhere to a fairer comparative negligence
mandate. Under a “pure comparative negligence”<br />
approach, damages are apportioned<br />
between a negligent defendant and a contributorily<br />
negligent plaintiff, regardless<br />
of the extent to which either party’s negligence<br />
contributed to the plaintiff’s harm.<br />
Thus, if a jury finds a player contributorily<br />
negligent for withholding symptoms and<br />
returning to play before becoming asymptomatic<br />
but also finds the NFL at least one<br />
percent to blame for a player’s cognitive<br />
injuries, the player can recover damages in<br />
an amount that represents that one percent.<br />
“88 Benefit” and Indemnification<br />
<strong>The</strong> “88 Benefit” amended to the 2006 NFL<br />
collective bargaining agreement provided<br />
that NFL alumni could receive payment<br />
of up to $88,000 per year for their medical<br />
claims specifically “related to dementia.”<br />
National Football League Collective Bargaining<br />
Agreement, art. XLVIII-D (2006)<br />
(“88 Benefit”). <strong>The</strong> “88 Plan,” as it is called,<br />
is funded by the various NFL clubs and<br />
“jointly administer[ed]” by the NFL Players<br />
Association and the NFL. Id. <strong>Defense</strong><br />
attorneys might argue that a player’s acceptance<br />
of “88 Benefit” funds indemnifies<br />
the league against future civil liability.<br />
However, this defense is not persuasive<br />
given that the section in the NFL collective<br />
bargaining agreement delineating the<br />
“88 Benefit” does not contain indemnification<br />
language. League attorneys have confirmed<br />
this point.<br />
Statute of Limitations—<br />
“Discovery Rule”<br />
Football-related head trauma can be likened<br />
to asbestos exposure in that damage<br />
caused by both can take years to manifest.<br />
One study noted that while the average age<br />
of onset for CTE symptoms was 42.8 (on<br />
average, approximately eight years after<br />
an athlete had retired), CTE symptoms<br />
were first exhibited in patients as young<br />
as 25, and as old as 76 years of age. Brandon<br />
E. Gavett et al., Chronic Traumatic<br />
Encephalopathy: A Potential Late Effect of<br />
Sport- Related Concussive and Subconcussive<br />
Head Trauma, Clinical Sports medicine<br />
(Jan. 2011).<br />
This indeterminate “gestation” period<br />
appears problematic. Normally, a cause of<br />
action for personal injury will accrue at<br />
the time of injury, and a plaintiff will have<br />
only two to four years to file a claim based<br />
in tort. However, to be fair to people with<br />
latent injuries, most states have adopted<br />
what is known as the “discovery rule.”<br />
Under the discovery rule a cause of action<br />
does not accrue until a plaintiff knows or<br />
reasonably should have known that he or<br />
she was injured as a result of a defendant’s<br />
conduct. See, e.g., Cornell v. E.I. Du Pont<br />
de Nemours & Co., 841 F.2d 23, 24 (1st Cir.<br />
1988). NFL alumni should be able to invoke<br />
the discovery rule here because cognitive<br />
illnesses caused by multiple concussions,<br />
such as CTE or dementia, represent exactly<br />
the type of latent injuries that the rule was<br />
intended to address.<br />
Recent Developments<br />
On December 17, 2009, Cincinnati Bengals<br />
receiver Chris Henry, 26, died after<br />
falling or jumping out of the back of a<br />
pickup truck. Alan Schwarz, <strong>For</strong>mer Bengal<br />
Henry Found to Have Had Brain Damage,<br />
N.Y. Times (June 29, 2010), at B10. When<br />
Omalu and Dr. Julian Bailes performed a<br />
postmortem study on Henry’s brain tissue,<br />
they discovered trademark signs of CTE.<br />
Id. Madison Park, Young Player Had Brain<br />
Damage More Often Seen in NFL Veterans,<br />
CNN.COM. Notably, the accident did not<br />
cause these signs as signs of CTE develop<br />
slowly over time. Id. This finding was significant:<br />
Henry, the twenty- second professional<br />
football player diagnosed with CTE,<br />
died while still active in the NFL, developed<br />
it by his mid-20s. Id. This raises the<br />
question of how many current NFL players<br />
might have the condition without knowing<br />
it.<br />
Shortly after, the NFL selected prominent<br />
neurologists Batjer and Ellenbogen as<br />
cochairs of a new NFL committee: the NFL<br />
head, neck and spine medical committee,<br />
which replaced the previous concussion<br />
committee, the mild traumatic brain injury<br />
committee. Alan Schwarz, N.F.L. Picks New<br />
Chairmen for Panel on Concussions, N.Y.<br />
Times (Mar. 17, 2010), at B11. To eliminate<br />
the potential conflicts of interest that jeopardized<br />
the integrity of the previous committee’s<br />
findings, the NFL chose Batjer and<br />
Ellenbogen because they had no ties to any<br />
NFL teams, and they did not receive compensation<br />
other than their expenses. Id.<br />
Both Batjer and Ellenbogen were zealously<br />
committed to distancing themselves from<br />
the old NFL concussion committee. At one<br />
point Batjers stated:<br />
We all had issues with some of the methodologies…,<br />
the inherent conflict of<br />
interest… that was not acceptable by<br />
any modern standards or not acceptable<br />
to us… we don’t want our professional<br />
reputations damaged by conflicts that<br />
were put upon us.<br />
A court could conclude<br />
that this general knowledge<br />
of inherent danger,<br />
coupled with the fact<br />
that the players arguably<br />
received notice of potential<br />
cognitive effects following<br />
the disability hearings<br />
mentioned above, were<br />
sufficient to put the NFL<br />
alumni on notice of the risk<br />
posed by playing football.<br />
Alan Schwarz, Concussion Committee<br />
Breaks with Predecessor, N.Y. Times (June 2,<br />
2010), at B12. During a May 2010 Congressional<br />
hearing, Representative Anthony<br />
Weiner (New York) addressed Batjer and<br />
Ellenbogen with the following comment:<br />
“[y]ou have years of an infected system here,<br />
[and] your job is… to mop [it] up.” Alan<br />
Schwarz, House Panel Criticizes New N.F.L.<br />
Doctors, N.Y. Times (May 25, 2010), at B10.<br />
A Step in the Right Direction<br />
In June of 2010, the New York Times hinted<br />
that the NFL was working with the NFL<br />
Players Association and the Centers for<br />
Disease Control and Prevention (CDC) on<br />
a concussion brochure worded far more<br />
strongly than the one given to players since<br />
2007. Alan Schwarz, <strong>For</strong>mer Bengal Henry<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 13
Employment and Labor Law<br />
Found to Have Had Brain Damage, N.Y.<br />
Times (June 29, 2010), at B10. Later, the<br />
NFL shocked the concussion study community<br />
by conceding for the first time that<br />
multiple NFL- derived head injuries can<br />
cause severe cognitive health problems:<br />
[T]raumatic brain injury can cause a<br />
wide range of short- or long-term changes<br />
affecting thinking, sensation, language,<br />
<strong>The</strong> NFL could argue<br />
that the players negligently<br />
contributed to their own<br />
injuries by (1) failing to<br />
report their concussive<br />
conditions to team<br />
doctors; and (2) returning<br />
to play before their<br />
concussion symptoms<br />
completely disappeared.<br />
or emotions.’ <strong>The</strong>se changes may lead to<br />
problems with memory and communication,<br />
personality changes, as well as depression<br />
and the early onset of dementia.<br />
Concussions and conditions resulting<br />
from repeated brain injury can change<br />
your life and your family’s life forever.<br />
Press Release, National Football League,<br />
Concussion: A Must Read for NFL Players<br />
(July 26, 2010) (emphasis added); Alan<br />
Schwarz, N.F.L. Asserts Greater Risks of<br />
Head Injury, N.Y. Times (July 27, 2010), at<br />
A1. While this warning was overdue, the<br />
NFL deserves credit for finally embracing<br />
the findings of independent scientists.<br />
<strong>The</strong> NFL has since taken several measures<br />
to prevent concussion- related injuries.<br />
In February 2011, the successor NFL<br />
concussion committee announced that<br />
team medical personnel would implement<br />
a standardized sideline concussion assessment<br />
protocol consisting of a limited neurological<br />
cognitive examination and a<br />
14 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
balance assessment. See NFL Announces<br />
New Sideline Concussion Assessment Protocol,<br />
NFL.COM. Following an incident in<br />
December of 2011, when Cleveland Browns<br />
quarterback Colt McCoy suffered a concussion<br />
after an illegal hit but was returned to<br />
the game after two plays, the NFL issued<br />
a memo stating that third-party athletic<br />
trainers would be placed in each stadium<br />
to help monitor player concussions. Jason<br />
La Confora, NFL Stationing Trainers in Stadiums<br />
to Monitor Concussions, NFL.COM.<br />
In July of 2012, NFL Commissioner Goodell<br />
hinted that the league was developing a<br />
test for a tablet and an iPad, which, when<br />
used on the sidelines, could help determine<br />
whether or not a player had suffered<br />
a concussion. Peter King, Goodell Focused<br />
on Helping Players During and After <strong>The</strong>ir<br />
Careers, Sports Illustrated.<br />
Still, the NFL took these measures after<br />
the players filed the class action lawsuits<br />
against the NFL, and not everyone is truly<br />
convinced of the league’s commitment<br />
to protecting its players. Recently, Terry<br />
Bradshaw noted that “[t]hey’re forced to<br />
care now because it’s politically correct to<br />
care. Lawsuits make you care. I think the<br />
PR makes you care.” Cindy Boren, Terry<br />
Bradshaw: “In the next decade, we will<br />
not see football as it is,” <strong>The</strong> Early Lead,<br />
WASH.POST.COM (June 14, 2012) (reporting<br />
on Bradshaw appearance on the Jay<br />
Leno show).<br />
Further, evidence has surfaced that may<br />
prevent the NFL from claiming ignorance<br />
regarding the long-term health effects of<br />
multiple concussions. One recent investigation<br />
revealed that the NFL’s retirement<br />
and disability board had, as early as the<br />
1999, awarded at least $2 million in disability<br />
payments to several former players<br />
after concluding that their mental impairments<br />
were caused by “repetitive trauma<br />
to the head or brain from League football<br />
activities.” Steve Fainaru, Mixed Messages<br />
on Brain Injuries, ESPN.COM (Nov.<br />
16, 2012). <strong>The</strong>se awards resulted from the<br />
findings of Dr. Edward L. Westbrook, the<br />
neurologist retained by the NFL retirement<br />
and disability board to evaluate the<br />
disability claims brought by at least six<br />
players alleging football- related traumatic<br />
brain injuries from 1999 to the early 2000s.<br />
Westbrook was quoted as being “horrified<br />
by… the degree of injury” in the players<br />
that he evaluated, and he insisted that<br />
the injuries were caused by “multiple hits”<br />
endured throughout the course of their<br />
football careers. Id.<br />
In fact, the cases described by Westbrook<br />
may not have been the only instances<br />
when the NFL learned that footballinduced<br />
head injuries could lead to laterlife<br />
cognitive decline. In a 2005 lawsuit<br />
brought by Webster’s estate, which sought<br />
to recover wrongfully withheld disability<br />
benefits, the Fourth Circuit Court of<br />
Appeals mentioned “eight other cases of<br />
[total and permanent] disability due to<br />
brain damage” confirmed by examining<br />
physicians reviewing disability claims for<br />
the NFL retirement and disability board.<br />
Id. Although the identities of these mystery<br />
players has not surfaced yet, one can safely<br />
assume that the NFL retirement and disability<br />
board records will make prime targets<br />
for discovery should the former NFL<br />
players’ class action lawsuit survive the<br />
pleading stage.<br />
<strong>The</strong> Tragedy Continues<br />
Sadly, Henry’s death and subsequent diagnosis<br />
with chronic traumatic encephalopathy<br />
was not an isolated incident. In<br />
February 2011, former Chicago Bears defenseman<br />
Dave Duerson shot himself fatally in<br />
the chest after experiencing deteriorating<br />
cognitive symptoms that he believed were<br />
linked to CTE. Alan Schwarz, Before Suicide,<br />
Duerson Said he Wanted Brain Study,<br />
N.Y. Times (Feb. 19, 2011), SP1. Before his<br />
death, Duerson left specific instructions<br />
to his family: “Please, see that my brain is<br />
given to the N.F.L.’s brain bank,” presumably<br />
to confirm his self- diagnosed suspicions.<br />
Id. In May 2011, the Center for the<br />
Study of Traumatic Encephalopathy confirmed<br />
that Duerson had “indisputable”<br />
evidence of CTE in his brain tissue samples,<br />
also noting that there was “no evidence<br />
of any other disorder.” Alan Schwarz,<br />
Duerson’s Brain Trauma Diagnosed, N.Y.<br />
Times (May 3, 2011), at B11.<br />
Later, in April of 2012, NFL alumnus<br />
Ray Easterling, a former Atlanta Falcons<br />
safety, also committed suicide, dying of a<br />
self- inflicted gunshot wound at his home in<br />
Virginia. Ray Easterling, of Atlanta’s Grits<br />
Blitz, Dies at 62, N.Y. Times (Apr. 22, 2012),<br />
at A22. Before his death, Easterling had<br />
experienced a variety of classic CTE symp-
toms and suffered from memory loss, hand<br />
tremors, personality changes, and eventually<br />
dementia. Mike Tearney, <strong>For</strong>mer Player’s<br />
Suicide Won’t End His Widows Fight,<br />
N.Y. Times (May 4, 2012), at B9. Notably,<br />
Easterling had been the lead plaintiff in<br />
the ongoing concussion- related class action<br />
filed against the NFL. Gary Mihoces, Hearing<br />
Signals Start of Fight Between Players,<br />
NFL, USA TODAY (Apr. 24, 2012).<br />
Just two weeks after Easterling’s death,<br />
in an incident frighteningly reminiscent of<br />
Duerson’s suicide, Junior Seau, a 20-year<br />
veteran of the NFL and the San Diego<br />
Chargers, also committed suicide by a selfinflicted<br />
gunshot wound to the chest. Mary<br />
Pilon, Family of Seau Decides to Give Brain<br />
for Study, N.Y. Times (May 5, 2012), at<br />
D3. Before his death, Seau had struggled<br />
with depression and other personal problems,<br />
going as far as driving his car off<br />
a cliff following an argument with his<br />
girlfriend. Marty Graham, <strong>For</strong>mer NFL<br />
Linebacker Junior Seau Dies in Apparent<br />
Suicide, Chicago Tribune (May 2, 2012).<br />
After Seau’s family agreed to donate his<br />
brain to researchers to look for signs of<br />
trauma and CTE, researchers from the<br />
National Institutes of Health confirmed<br />
that Seau did in fact suffer from the disease<br />
before his untimely death. Sean Gregory,<br />
Will Junior Seau’s Diagnosis Cause More<br />
Ex- Players to Sue the NFL, Time Sports<br />
(Jan. 11, <strong>2013</strong>). Seau’s family filed a lengthy<br />
and detailed wrongful death complaint<br />
against the NFL in the California state<br />
courts earlier this year, a lawsuit that the<br />
NFL will likely remove to the federal courts<br />
and which will become combined with the<br />
ongoing class action. Gary Mihoces, Junior<br />
Seau’s Family Sues NFL Over Brain Injuries,<br />
USA TODAY Sports (Jan. 23, 2012).<br />
Unfortunately, the concussion problem<br />
probably extends further than the<br />
current media hype. Though the suicides<br />
and ongoing litigation have brought the<br />
issue to the forefront of national attention,<br />
the progressive nature of the disease<br />
and the unstated societal stigma toward<br />
mental illness has undoubtedly resulted<br />
in the under- reporting of concussionrelated<br />
afflictions. One study of 34 retired<br />
NFL players conducted by the Center for<br />
Brain Health at the University of Texas<br />
revealed that these individuals suffered<br />
higher instances of cognitive defects and<br />
depression compared to the control subjects.<br />
Robert Wilonsky, UT Dallas Brain<br />
Prof Discovers Some Ex-NFL Players living<br />
in North Texas Are Depressed —and Didn’t<br />
Even Know It, <strong>The</strong> Scoop Blog, DALLAS-<br />
NEWS.COM (June 30, 2012). While this<br />
is not surprising in light of Omalu’s findings,<br />
it is significant because many of the<br />
players were clinically depressed—exhibiting<br />
symptoms such as difficulty sleeping,<br />
weight gain or loss, decreased energy<br />
levels—and had no idea. Id. Interestingly,<br />
“because concussion- associated depression<br />
has no mood component,” affected<br />
players wouldn’t necessarily experience<br />
the emotional volatility traditionally associated<br />
with the disorder. Id. In effect, many<br />
CTE sufferers may not know that a problem<br />
exists until the disease has progressed into<br />
more advanced stages.<br />
Scientific Research Takes Off<br />
Still, all of the hype and media attention<br />
surrounding concussions garnered significant<br />
attention for CTE in the scientific community.<br />
One study of over 100 active and<br />
retired NFL players indicated that these athletes<br />
face a significantly higher risk of incurring<br />
permanent brain damage, including<br />
a susceptibility to dementia much higher<br />
than the national average. Daniel G. Amen,<br />
Impact of Playing American Professional<br />
Football on Long-Term Brain Function, 23<br />
J. Neuropsychiatry & Clinical Neuroscience<br />
98–106 (Winter 2011).<br />
In contrast, a different study conducted<br />
at the University of Texas at Dallas—which<br />
sought to “assess cognitive impairment and<br />
depression in aging former [NFL] players<br />
and to identify neuroimaging correlates<br />
of these dysfunctions”—achieved different<br />
results. John Hart, et al, Neuroimaging<br />
of Cognitive Dysfunction and Depression<br />
in Aging Retired National Football League<br />
Players: A Cross Sectional Study, JAMA<br />
Neurology (Jan. 7, <strong>2013</strong>). Among the NFL<br />
retirees studied, it found that “the number<br />
of individuals with dementia was not different<br />
than expected in the general population<br />
at [the study group’s] age.” Id. Still, the<br />
study indicated that the NFL retirees did<br />
experience depression- related symptoms<br />
at a higher incidence rate than normal and<br />
noted that these same individuals “may be<br />
more likely to develop cognitive impairments<br />
(problems with memory, naming,<br />
and word finding)… as they age compared<br />
with the general population.” Id. Further,<br />
researchers opined that the lower incidence<br />
of dementia could have been due to<br />
the small sample size or the relatively high<br />
IQ of the study group. Id.<br />
A third study conducted by Boston University<br />
researchers discovered 28 new cases<br />
of brain damage and CTE in dead football<br />
Football-relatedhead<br />
trauma can be likened to<br />
asbestos exposure in that<br />
damage caused by both<br />
can take years to manifest.<br />
players. McKee et al., <strong>The</strong> Spectrum of Disease<br />
in Chronic Traumatic Encephalopathy,<br />
Brain (Dec. 2012); Steve Fainaru and<br />
Mark Fainare-Wada, Researchers Discover<br />
28 New Cases of Brain Damage in Deceased<br />
Football Players, PBS.ORG (Dec. 3, 2012).<br />
Of the 85 individuals exposed to repetitive<br />
head trauma studied in all—a group that<br />
included military veterans, boxers, and<br />
football players—68 were found to have<br />
CTE. Incredibly, when coupled with the<br />
findings of other studies, this experiment<br />
indicated that, of the 34 brains of former<br />
NFL players that have been examined in<br />
all, 33 were found to have CTE. Id. Commenting<br />
on the results, Robert C. Cantu,<br />
a director at the Center for the Study of<br />
Traumatic Encephalopathy and NFL advisor,<br />
noted, “[t]he sheer volume of cases [ ]<br />
is going to just overwhelm anybody that<br />
wants to be in denial about the existence<br />
of this problem.” Id.<br />
Elsewhere, the NFL has supported the<br />
scientific push to understand better the<br />
causes, effects, symptoms, and possible<br />
treatments of CTE. In the fall of 2011,<br />
with league support, the Center for the<br />
Study of Traumatic Encephalopathy began<br />
recruiting participants for the Diagnosing<br />
and Evaluating Traumatic Encephalopathy<br />
Using Clinical Tests (DETECT) study,<br />
an experiment that will include 150 former<br />
NFL players and hopes to develop methods<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 15
Employment and Labor Law<br />
for diagnosing CTE during life through a<br />
variety of medical procedures. Clinical<br />
Studies, Boston University Center for the<br />
Study of Traumatic Encephalopathy.<br />
Another study conducted by researchers<br />
at the Albert Einstein College of Medicine<br />
of Yeshiva University has made<br />
progress in the area of diagnosing CTErelated<br />
conditions. Michael L. Lipton, et<br />
In the coming years,<br />
the issue will be not<br />
whether concussions<br />
are linked to footballinduced<br />
head trauma,<br />
but what, if anything, can<br />
be done to reduce player<br />
susceptibility to CTE and<br />
related conditions.<br />
al., Robust Detection of Traumatic Axonal<br />
Injury in Individual Mild Traumatic<br />
Brain Injury Patients: Intersubject Variation,<br />
Change Over Time and Bidirectional<br />
Changes in Anisotropy, 6 Brain Imaging<br />
and Behavior 329–42 (2012). Using a new<br />
technology known as diffuse tensor imaging<br />
(DTI), researchers were able to detect<br />
unique abnormalities in the brains of those<br />
who had a concussion when other methods<br />
of detection—CT scans or MRIs—<br />
had failed to do so. Id. Unfortunately, the<br />
study also revealed that damaged regions<br />
of brain tissue could retain a reduced level<br />
of structural integrity for up to an entire<br />
year following a concussive injury. Concussion<br />
Victims Have Unique Spatial Patterns<br />
of Brain Abnormalities that Change Over<br />
Time, News Medical (June 8, 2012).<br />
Other researchers have made progress<br />
on the diagnostic front as well. Recently,<br />
scientists at UCLA used positron emission<br />
tomography (PET) scans to identify<br />
pathological deposits of tau proteins in<br />
the brains—a condition that has thus far<br />
16 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
been diagnosed only post- mortem through<br />
autopsy and has been linked to numerous<br />
cognitive ailments such as CTE—in five<br />
NFL retirees. Gary W. Small, et al, PET<br />
Scanning of Brain Tau in Retired National<br />
Football League Players: Preliminary Findings,<br />
21 Am. J. Geriatr. Psychiatry 138–44<br />
(<strong>2013</strong>). Though the small sample size of the<br />
study warrants additional research, the<br />
results demonstrated that researchers may<br />
soon be able to diagnose those living with<br />
traumatic brain injuries before the associated<br />
life- altering symptoms present themselves.<br />
Id.<br />
All in all, current research appears to<br />
support the initial findings of Omalu and<br />
has bolstered the effort to raise awareness<br />
for effects of CTE. However, because much<br />
of the definitive research linking footballrelated<br />
head trauma to CTE was released<br />
after the NFL began taking affirmative<br />
steps to address the issue, it seems doubtful<br />
that these studies will be used against<br />
the league in the ongoing litigation. Further,<br />
current research doesn’t necessarily<br />
propose a solution so much as it defines a<br />
problem. In the coming years, the issue will<br />
be not whether concussions are linked to<br />
football- induced head trauma, but what, if<br />
anything, can be done to reduce player susceptibility<br />
to CTE and related conditions.<br />
One recent story suggests that certain<br />
experimental treatments may provide former<br />
players with some relief from the symptoms<br />
of football- induced head trauma. In<br />
early January of <strong>2013</strong>, ex- Cleveland Browns<br />
quarterback Bernie Kosar gave his personal<br />
endorsement to the treatment that he<br />
received from Dr. Rick Sponaugle, a Florida<br />
physician specializing in experimental<br />
brain therapies. Press, Kosar Happy<br />
to Find Treatment, ESPN.COM (Jan. 11,<br />
<strong>2013</strong>). Before his treatment with Sponaugle,<br />
Kosar suffered from various cognitive<br />
symptoms including persistent inner ear<br />
ringing, slurred speech, and poor memory<br />
recall, conditions that he attributes to<br />
the multiple concussions that he sustained<br />
throughout his career. After Dr. Sponaugle’s<br />
treatment, which included intravenous<br />
therapies to improve blood flow to the<br />
brain and a dietary supplement regimen,<br />
Kosar noted, “I feel 20 years younger…. It<br />
was a gift from God to find this and feel like<br />
this… I see all the symptoms go away.” Id.<br />
Kosar, who had been friends with Duerson<br />
and Seau, later promoted Sponaugle’s treatment<br />
to NFL Commissioner Goodell, stating,<br />
“I hope if there are people and players<br />
out there suffering, they have an option and<br />
something that can genuinely help them<br />
get better in a short amount of time.” Id.<br />
NFL Players Class Action Lawsuit<br />
Recently, thousands of former NFL<br />
alumni have taken legal action, filing lawsuits<br />
against the NFL in several locations<br />
throughout the country, alleging in part<br />
that the league “deliberately and fraudulently<br />
concealed from its players the link<br />
between football- related head impacts<br />
and long-term neurological injuries.” Sam<br />
Farmer, <strong>For</strong>mer NFL Players to Consolidate<br />
Concussion Lawsuits Against NFL, L.A.<br />
Times (June 6, 2012). <strong>The</strong> football helmet<br />
manufacturer Riddell, Inc. is also named<br />
as a defendant in the action, likely due to<br />
certain advertisements stating that Riddell<br />
football helmets reduced the risk of<br />
concussions. Darren Heitner, Why Football<br />
Helmet Manufacturer Riddell Should<br />
Be Very Concerned About Concussion Litigation,<br />
<strong>For</strong>bes. Eventually, these lawsuits<br />
were collapsed into one “master complaint”<br />
filed in the U.S. District Court, Eastern District<br />
of Pennsylvania. Id.<br />
Given the legal complexities of the case<br />
and the growing size of this litigation,<br />
it seems likely that the NFL and Riddell<br />
would be inclined to settle the case to avoid<br />
Big Tobacco- like liabilities, if, of course,<br />
the lawsuit survives the motion to dismiss.<br />
Still, not everyone is convinced that drawing<br />
comparisons to the Big Tobacco cases<br />
is necessarily an accurate read of the situation.<br />
<strong>For</strong> one thing, unlike tobacco use, the<br />
effect of individual concussions on a football<br />
player remains unclear. Concussion<br />
Lawsuits Are Next Big U.S. Litigation, USA<br />
TODAY (July 1, 2012). Further, the NFL<br />
retains trainers and medical personnel on<br />
the sideline who are employed specifically<br />
to detect and to prevent player injuries,<br />
whereas smoker plaintiffs received no such<br />
attention. Id. Lastly, because the NFL players<br />
could have sustained permanent mental<br />
injuries at any point throughout their<br />
careers, such as during pee-wee league or<br />
high school, college, or professional play,<br />
the causal chain—the NFL’s failure to warn<br />
resulting in injury—is weak, and muddy<br />
Concussion, continued on page 78
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Lawyers’ Professionalism and Ethics<br />
Protecting Against<br />
Waiver<br />
By Steven M. Puiszis<br />
Reconciling Federal<br />
Rule of Evidence 502<br />
with Model Rule 1.6<br />
Practice points to<br />
help you avoid not<br />
only professional<br />
embarrassment, but<br />
also loss of clients, a<br />
disciplinary complaint, or<br />
even a malpractice claim.<br />
18 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ Steven M. Puiszis is a partner in the Chicago office of Hinshaw & Culbertson LLP. He is on the <strong>DRI</strong> Board of Directors, is the<br />
chair of the <strong>DRI</strong> Judicial Task <strong>For</strong>ce, and is the board liaison to the Lawyers’ Professionalism and Ethics Committee. Mr. Puiszis<br />
is a past president of the Illinois Association of <strong>Defense</strong> Counsel. He is a member of the ADTA, the IADC and is a fellow of the<br />
American Bar Foundation.
Federal Rule of Evidence 502 provides lawyers with several<br />
tools to protect against a waiver of attorney- client privilege<br />
or work product immunity. From a risk management perspective,<br />
using Federal Rule of Evidence 502(d) nonwaiver<br />
orders and Rule 502(e) nonwaiver agreements<br />
makes sense for clients, lawyers, and<br />
their firms. However, ethical issues surround<br />
the use of Federal Rule 502’s nonwaiver<br />
tools.<br />
Judges and commentators have suggested,<br />
based on statements in the advisory committee<br />
note to Federal Rule of Evidence 502,<br />
that the rule’s nonwaiver tools provide a vehicle<br />
to reduce discovery costs by eliminating<br />
the need to review information for privilege<br />
before producing it. Those suggestions,<br />
however, fail to consider the duty of confidentiality<br />
found in Rule 1.6(a) of the Model<br />
Rules of Professional Conduct. Model Rule<br />
1.6 was amended in 2012 to add a new subsection<br />
(c), which specifically requires “reasonable<br />
efforts to prevent the inadvertent or<br />
unauthorized disclosure of, or unauthorized<br />
access to, information relating to the representation<br />
of the client.” See Model Rules of<br />
Prof’l Conduct R. 1.6(c) (2012).<br />
This article explains that using Federal<br />
Rule of Evidence 502(d) nonwaiver orders<br />
and Federal Rule 502(e) nonwaiver agreements<br />
to avoid the cost of pre- production<br />
screening for privilege may run afoul of<br />
Model Rule 1.6’s mandate and could trigger<br />
an ethical problem for the attorney who<br />
employs that strategy. An attorney always<br />
should obtain informed consent from a client<br />
before engaging in the type of strategy<br />
suggested in the advisory committee note<br />
to Federal Rule of Evidence 502.<br />
Federal Rule of Evidence 502 Combats<br />
Waiver in the E-discovery World<br />
Federal Rule of Evidence 502 was enacted<br />
in response to the concern that protecting<br />
against waiver of attorney- client privilege<br />
or work product immunity in today’s digital<br />
age had become cost prohibitive. As two<br />
respected authorities observed:<br />
<strong>The</strong> volume of information produced by<br />
electronic discovery has made the process<br />
of reviewing that information, to<br />
ascertain whether any of it is privileged<br />
from disclosure, so expensive that the<br />
result of the lawsuit may be a function<br />
of who can afford it. <strong>The</strong> volume also<br />
threatens the ability to accurately identify<br />
and describe relevant and privileged<br />
documents so that the system of claims<br />
and adjudication teeters on the brink of<br />
effective failure.<br />
Hon. John M. Facciola & Jonathan M. Redgrave,<br />
Asserting and Challenging Privilege<br />
Claims in Modern Litigation: <strong>The</strong> Facciola-<br />
Redgrave Framework, 2009. Fed. Cts. L.<br />
Rev. 4, 19 (Nov. 2009), available at http://<br />
www.fclr.org/fclr/articles/. Hopson v. Mayor<br />
of Baltimore, 232 F.R.D. 228, 244 (D. Md.<br />
2005), similarly noted that “insist[ing]<br />
in every case upon ‘old world’ record- byrecord<br />
pre- production privilege review,<br />
on pain of subject matter waiver, would<br />
impose upon parties costs of production<br />
that bear no proportionality to what is at<br />
stake in the litigation.”<br />
Federal Rule 502 attacks the problem<br />
in two ways. <strong>The</strong> advisory committee note<br />
to Federal Rule of Evidence 502 explains<br />
that subdivisions (a) and (b) first resolved<br />
several “longstanding disputes in the<br />
courts… involving inadvertent disclosure<br />
and subject- matter waiver.” Federal Rule of<br />
Evidence 502(a) specifically limits subjectmatter<br />
waiver to “intentional” disclosures<br />
when “the disclosed and undisclosed communications<br />
or information concern the<br />
same subject matter” and fairness dictates<br />
that they ought to be considered together.<br />
<strong>The</strong> advisory committee note explains that<br />
subject- matter waiver under Federal Rule<br />
of Evidence 502(a) “is limited to situations<br />
in which a party intentionally puts protected<br />
information into the litigation in a<br />
selective, misleading and unfair manner.”<br />
<strong>The</strong> advisory committee note further elaborates:<br />
“It follows that an inadvertent disclosure<br />
of protected information can never<br />
result in a subject matter waiver.”<br />
Federal Rule of Evidence 502(b) provides<br />
that the inadvertent disclosure of information<br />
“in a federal proceeding or to a<br />
federal office or agency” does not constitute<br />
a waiver of attorney- client privilege or<br />
work product protection when the holder<br />
of the privilege “took reasonable steps to<br />
prevent disclosure” before it occurred and<br />
“promptly took reasonable steps to rectify<br />
the error” after it occurred, including when<br />
applicable, the use of Federal Rule of Civil<br />
Procedure 26(b)(5)(B). <strong>The</strong> advisory committee<br />
note indicates that Federal Rule of<br />
Evidence 502(b) “does not require the producing<br />
party to engage in a post- production<br />
review” to determine if any privileged or<br />
protected information “has been produced<br />
by mistake,” but the note states that the<br />
producing party is required “to follow up<br />
on any obvious indications” that protected<br />
information was inadvertently produced.<br />
Second, Federal Rule of Evidence 502<br />
provides attorneys with several nonwaiver<br />
tools. Subdivisions (d) and (e) of Federal<br />
Rule 502 authorize the use of court orders<br />
and party agreements to protect against<br />
waivers of attorney- client privilege or work<br />
product immunity resulting from the disclosure<br />
of privileged or protected information<br />
in discovery. Federal Rule of Evidence<br />
502(d) empowers a federal court to enter a<br />
“nonwaiver” order and provides that following<br />
the entry of such an order, any<br />
disclosure of privileged or protected information<br />
in that proceeding will not constitute<br />
a waiver of attorney- client privilege or<br />
work product in that matter or in any other<br />
state or federal proceeding.<br />
While Federal Rule of Evidence 502(e)<br />
recognizes the enforceability of nonwaiver<br />
agreements, it provides that an agreement<br />
binds only the parties to the agreement. One<br />
of the benefits of a Federal Rule of Evidence<br />
502(d) nonwaiver order is that it does not<br />
require agreement of the parties. See Rajala<br />
v. McGuire Woods, LLP, 2010 WL 2949582,<br />
at *4 (D. Kan. July 22, 2010) (quoting Fed.<br />
R. Evid. 502(d)’s advisory committee note).<br />
Another benefit is that a court can enforce a<br />
nonwaiver order against third parties. Federal<br />
Rule 502’s advisory committee note to<br />
subdivision (e) clarifies that “if parties want<br />
protection against non- parties from a finding<br />
of waiver by disclosure, the agreement<br />
must be made part of a court order.”<br />
Federal Rules of Evidence 502(d)<br />
and (e) Do Not Require Taking<br />
“Reasonable Precaution”<br />
<strong>The</strong> advisory committee note to Federal<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 19
Lawyers’ Professionalism and Ethics<br />
Rule of Evidence 502 suggests that a nonwaiver<br />
order under Federal Rule 502(d)<br />
“may provide for return of documents<br />
without waiver irrespective of the care<br />
taken by the disclosing party.” <strong>The</strong> note<br />
cites Zubulake v. UBS Warburg LLC, 216<br />
F.R.D. 280, 290 (S.D. N.Y. 2003), in which<br />
the court observed that parties could enter<br />
into “so-called ‘claw-back’ agreements<br />
<strong>The</strong> advisory committee<br />
note… states that the<br />
producing party is required<br />
“to follow up on any<br />
obvious indications” that<br />
protected information was<br />
inadvertently produced.<br />
that allow the parties to forego privilege<br />
review altogether in favor of an agreement<br />
to return inadvertently produced privileged<br />
documents.” Additionally, a member<br />
of the Federal Advisory Committee on Civil<br />
Rules has written:<br />
[N]othing in the text of either Rule 502(e)<br />
or Rule 16(b) or 26(f) requires parties to<br />
undertake ‘reasonable’ precautions to<br />
avoid disclosure of privileged or protected<br />
information as part of a clawback,<br />
quick peek or other non- waiver<br />
agreement. To the contrary, these rules<br />
would permit the parties to agree that<br />
discovery material could be produced<br />
without any pre- production screening<br />
at all, but be ‘clawed’ back upon demand<br />
after production.<br />
Paul W. Grimm, Lisa Yurwit Bergstrom &<br />
Matthew P. Kraeuter, Federal Rule of Evidence<br />
502: Has It Lived UP to Its Potential<br />
17 Rich. J.L. & Tech. 8, 62–3 (2011).<br />
Some commentators have suggested that<br />
Federal Rule of Evidence 502 has “not lived<br />
up to its promise” of reducing the cost associated<br />
with protecting against privilege<br />
waivers. Id. at 2. <strong>The</strong>y have advanced two<br />
reasons for that conclusion. One is “that a<br />
disappointingly small number of lawyers<br />
20 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
seem to be aware of the rule and its potential.”<br />
<strong>The</strong> other is that “courts have not<br />
interpreted Rule 502 with sufficient consistency…<br />
to enable practitioners and their<br />
clients to predict how they will fare if they<br />
attempt to take advantage of the rule.” Id.<br />
While those suggestions certainly have<br />
merit, there is a third more likely reason<br />
why lawyers have not used Federal Rule of<br />
Evidence 502 as frequently or enthusiastically<br />
as its drafters had envisioned. It is the<br />
duty of confidentiality imposed by Model<br />
Rule 1.6(a), which potentially encompasses<br />
any information relating to a lawyer’s representation<br />
of a client unless an exception<br />
recognized in the Model Rules can<br />
be invoked. See Geoffrey C. Hazard Jr., W.<br />
William Hodes, & Peter R. Jarvis, <strong>The</strong> Law<br />
of Lawyering 9–64 (3d ed. 2012) (“Model<br />
Rule 1.6(a) expresses the basic principle<br />
of professional ethics that all information<br />
‘relating to’ a lawyer’s professional relationship<br />
with a client is presumptively confidential<br />
and therefore must not be disclosed<br />
unless an exception applies”).<br />
While the Model Rule 1.6(a) duty of<br />
confidentiality is closely related to the<br />
attorney- client privilege, it is broader in<br />
scope than the attorney- client privilege,<br />
“which is a rule of evidence,” or “the work<br />
product immunity, which is a rule of procedure.”<br />
Thus, one treatise has noted: “Confusion<br />
over the relationship between these<br />
doctrines is not limited to lay persons; it<br />
frequently confounds lawyers and judges<br />
as well.” Id. at 9–6.<br />
Model Rule 1.6 Limits the Use of<br />
Federal Rule of Evidence 502<br />
Rule 1.6(a) of the Model Rules of Professional<br />
Conduct imposes an ethical duty to<br />
maintain the confidentiality of all information<br />
relating to the representation of a<br />
client. Unless the client provides informed<br />
consent to its release, the disclosure is<br />
“impliedly authorized” because it is necessary<br />
to carry out the representation, or<br />
an exception found in Model Rule 1.6(b)<br />
applies. While in most instances an attorney<br />
should have a client’s implied authorization<br />
to produce relevant, nonprivileged<br />
information in discovery under Model Rule<br />
1.6, producing privileged or confidential<br />
information is another matter.<br />
<strong>The</strong> duty of confidentiality imposed by<br />
Model Rule 1.6 reaches far beyond the<br />
written or oral communications protected<br />
by the attorney- client privilege. Hazard,<br />
Hodes, & Jarvis, supra, at 9–7 (observing<br />
that “the ethical rule of confidentiality is<br />
more protective than the attorney- client<br />
privilege, because the latter only protects<br />
against compelled disclosure, and only<br />
against disclosure of information communicated<br />
between client and lawyer”). Comment<br />
3 to Model Rule 1.6 explains that the<br />
duty of confidentiality generally extends<br />
to any information in an attorney’s possession<br />
relating to the representation of a<br />
client, irrespective of its source, its format,<br />
or how the attorney came into its possession.<br />
<strong>For</strong> years, comment 16 to Model Rule<br />
1.6 has explained that an attorney’s ethical<br />
responsibility to provide competent representation<br />
includes the obligation to protect<br />
against the inadvertent or unauthorized<br />
disclosure of client information.<br />
In August 2012, the ABA amended several<br />
provisions of the Model Rules “to provide<br />
guidance regarding lawyers’ use of<br />
technology and confidentiality.” See A.B.A.<br />
Resolution 105A Revised. Model Rule 1.6<br />
was amended to add a new paragraph (c):<br />
“A lawyer shall make reasonable efforts<br />
to prevent the inadvertent or unauthorized<br />
disclosure of, or unauthorized access<br />
to, information relating to the representation<br />
of the client.” Comment 16 was also<br />
expanded and now explains:<br />
Paragraph (c) requires a lawyer to act<br />
competently to safeguard information<br />
relating to the representation of a client<br />
against unauthorized access by third<br />
parties and against inadvertent or unauthorized<br />
disclosure by the lawyer or<br />
other persons who are participating in<br />
the representation of the client or who<br />
are subject to the lawyer’s supervision….<br />
<strong>The</strong> unauthorized access to, or the inadvertent<br />
or unauthorized disclosure of,<br />
information relating to the representation<br />
of a client does not constitute a<br />
violation of paragraph (c) if the lawyer<br />
has made reasonable efforts to prevent<br />
the access or disclosure. Factors to be<br />
considered in determining the reasonableness<br />
of the lawyer’s efforts include,<br />
but are not limited to, the sensitivity of<br />
the information, the likelihood of disclosure<br />
if additional safeguards are not<br />
employed, the cost of employing additional<br />
safeguards, the difficulty imple-
menting the safeguards, and the extent<br />
to which the safeguards adversely affect<br />
the lawyer’s ability to represent clients<br />
(e.g., by making the device or important<br />
piece of software excessively difficult<br />
to use). A client may require the lawyer<br />
to implement special security measures<br />
not required by this Rule or may<br />
give informed consent to forego security<br />
measures that would otherwise be<br />
required by the Rule.<br />
Model Rules of Prof’l Conduct R. 1.6(c)<br />
(2012).<br />
Thus, while Federal Rules of Evidence<br />
502(d) and (e) may not require an attorney<br />
to take reasonable precautions before producing<br />
a client’s information covered by a<br />
Federal Rule 502(d) nonwaiver order or a<br />
Federal Rule 502(e) nonwaiver agreement,<br />
Model Rule 1.6(c) requires “reasonable efforts”<br />
to prevent an unauthorized or inadvertent<br />
disclosure from occurring. Even<br />
before the 2012 amendment to Model Rule<br />
1.6, comment 16 explained that an attorney<br />
had an ethical obligation to act competently<br />
to safeguard a client’s information.<br />
While the entry of a Federal Rule of Evidence<br />
502(d) nonwaiver order or a Federal<br />
Rule 502(e) nonwaiver agreement may allow<br />
an attorney to recover privileged or protected<br />
information produced in discovery,<br />
an unauthorized disclosure has nonetheless<br />
occurred. Model Rule 1.6(c) requires an<br />
attorney to make reasonable efforts to prevent<br />
an unauthorized or inadvertent disclosure<br />
of a client’s information. Accordingly,<br />
a disciplinary tribunal could conclude that<br />
the mere entry of a nonwaiver order does<br />
not qualify as a reasonable attempt to prevent<br />
disclosure as required by Model Rule<br />
1.6(c). See Spieker v. Quest Cherokee, LLC,<br />
2009 WL 2168892, at *3 (D. Kan. July 21,<br />
2009) (“Simply turning over all the ESI materials<br />
does not show that a party has taken<br />
‘the reasonable steps’ to prevent disclosure<br />
of its privileged materials”); Grimm, Bergstrom,<br />
& Kraeuter, supra, at 69 (observing<br />
that while parties could enter into a<br />
nonwaiver agreement permitting production<br />
without any pre- production review<br />
for privilege, “[t]his procedure would not<br />
pass muster under Rule 502(b)(2) because<br />
it cannot be seriously argued that doing no<br />
pre- production review at all meets the requirement<br />
of Rule 502(b) to take ‘reasonable<br />
steps to prevent disclosure’”).<br />
Model Rule 1.6 and Federal Rule of Evidence<br />
502 operate in different playing<br />
fields, one legal and the other disciplinary.<br />
<strong>The</strong> problem for practitioners is that permissible<br />
strategies in the legal arena could<br />
potentially trigger an ethical complaint in<br />
the disciplinary arena. <strong>The</strong> aims of Model<br />
Rule 1.6 and Federal Rule of Evidence 502<br />
are different. Model Rule 1.6 seeks to prevent<br />
an inadvertent or unauthorized disclosure<br />
from occurring, whereas Federal<br />
Rules of Evidence 502(d) and (e) permit the<br />
disclosure of client information and only<br />
protect against a waiver of privilege resulting<br />
from the disclosure.<br />
<strong>The</strong> protection of attorney- client privilege<br />
is obviously encompassed by Model<br />
Rule 1.6, but the scope of the obligation imposed<br />
by Model Rule 1.6 is not limited to<br />
merely protecting against waivers of privileged<br />
communications. See Hazard, Hodes,<br />
& Jarvis, supra, at 9–6 (“Rule 1.6 applies<br />
most insistently to prevent lawyers from<br />
volunteering information about a client (to<br />
anyone)”). As a result, the ethical duty imposed<br />
by Model Rule 1.6 appears to diverge<br />
from what Federal Rules of Evidence 502(d)<br />
and (e) will permit. Thus, the obligation imposed<br />
by Model Rule 1.6 may constrict the<br />
ability to use Federal Rule of Evidence 502<br />
to limit the cost of privilege reviews.<br />
Obtain Informed Consent Before Using<br />
502(d) and (e) to Reduce Review Costs<br />
An attorney can ethically accomplish<br />
avoiding the costs associated with the preproduction<br />
review of e-mails, electronic<br />
information, and paper documents for<br />
privilege, as contemplated by the advisory<br />
committee note to Federal Rule of Evidence<br />
502, by obtaining a client’s “informed consent”<br />
to that strategy. Comment 16 to<br />
Model Rule 1.6(c) recognizes that a client<br />
can forego security measures that the<br />
Model Rule would otherwise require. However,<br />
it requires that an attorney first obtain<br />
a client’s informed consent. While the communication<br />
necessary to obtain a client’s<br />
informed consent will vary depending on<br />
the client, the issue, and the circumstances<br />
presented, a lawyer is obliged to explain a<br />
matter to the extent reasonably necessary<br />
to permit the client to make an informed<br />
decision on the issue.<br />
Obviously, an attorney should discuss<br />
these types of strategy issues with a client.<br />
Informed consent, however, requires more<br />
than merely discussing how the attorney<br />
can use Federal Rule of Evidence 502(d) or<br />
(e) strategically. Informed consent requires<br />
explaining the circumstances that underlie<br />
using one of these evidentiary tools and<br />
explaining the material risks of the proposed<br />
strategy and reasonable alternatives.<br />
See Mode Rules of Prof’l Conduct R. 1.0(e)<br />
While the Model Rule<br />
1.6(a) duty of confidentiality<br />
is closely related to the<br />
attorney-client privilege,<br />
it is broader in scope<br />
than the attorney- client<br />
privilege, “which is a rule<br />
of evidence,” or “the work<br />
product immunity, which<br />
is a rule of procedure.”<br />
(2012). In other words, an attorney should<br />
discuss the pros and cons of the proposed<br />
strategy and the available alternatives with<br />
a client. In this setting, that would include<br />
discussing the costs associated with alternative<br />
approaches to screening a client’s<br />
information for privilege.<br />
In some instances, protecting the substance<br />
of privileged or protected communications<br />
may not be of much concern to<br />
a client, or reducing the costs associated<br />
with e- discovery privilege reviews may<br />
outweigh that concern. Some clients may<br />
be more risk tolerant than others. A client’s<br />
record- keeping system may provide<br />
an adequate internal screening mechanism<br />
for privileged communications and confidential<br />
information. However, producing<br />
electronic information or paper documents<br />
without completing any review at all after<br />
a court enters a Federal Rule 502(d) nonwaiver<br />
order or the parties reach a clawback<br />
or quick peek agreement may result in<br />
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Lawyers’ Professionalism and Ethics<br />
the disclosure of information that the client<br />
would prefer to keep confidential. Moreover,<br />
because a Federal Rule 502(e) nonwaiver<br />
agreement binds only the parties to<br />
the agreement, a stranger to the agreement<br />
who may have a similar claim against a client<br />
could claim entitlement to the inadvertently<br />
produced documents by arguing the<br />
privilege was waived by the failure to take<br />
<strong>The</strong> problem for<br />
practitioners is that<br />
permissible strategies in the<br />
legal arena could potentially<br />
trigger an ethical complaint<br />
in the disciplinary arena.<br />
22 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
“reasonable steps” to prevent the disclosure<br />
from occurring.<br />
While a Federal Rule of Evidence 502(d)<br />
nonwaiver order may preserve a claim of<br />
privilege or work product and reduce the<br />
cost of privilege reviews, opposing counsel<br />
may learn the substance of a client’s<br />
privileged or protected communications<br />
before returning the information. Even if<br />
an opponent returns a privileged or a confidential<br />
document, the knowledge gained<br />
from its review will provide the opponent<br />
with an opportunity to formulate discovery<br />
and trial strategies based on the disclosed<br />
information. Additionally, an opponent<br />
can more easily challenge whether a document<br />
is in fact privileged after reviewing it.<br />
Once a disclosure has occurred, “confidentiality<br />
cannot be restored.” Mt. Hawley<br />
Ins. Co. v. Felman Production, Inc., 271<br />
F.R.D. 125, 136 (S.D. W.Va. 2010). A court<br />
order requiring the return of confidential<br />
documents “at best, can only attempt<br />
to restrain further erosion.” MSP Real<br />
Estate Inc. v. City of New Berlin, 2011 WL<br />
3047687, at *5 (E.D. Wis. July 22, 2011). An<br />
attorney should explain these issues and<br />
risks, preferably in writing, when seeking<br />
the client’s informed consent to use a<br />
Federal Rule 502(d) nonwaiver order or<br />
a 502(e) nonwaiver agreement to strategically<br />
reduce the cost of pre- production<br />
privilege reviews.<br />
Deliberate Production Without<br />
Review May Eliminate the Model<br />
Rule 4.4(b) Notification Obligation<br />
Model Rule 4.4(b) provides: “A lawyer who<br />
receives a document relating to the representation<br />
of the lawyer’s client and knows<br />
the document was inadvertently sent shall<br />
promptly notify the sender.” By its express<br />
terms, Model Rule 4.4(b) only applies to<br />
information that someone inadvertently<br />
produces.<br />
<strong>The</strong> ABA Committee on Ethics and Professional<br />
Responsibility has taken the position<br />
in a formal ethics opinion that Model<br />
Rule 4.4(b) “does not require refraining<br />
from reviewing the materials or abiding by<br />
instructions of the sender.” Additionally,<br />
that ethics opinion indicates that when the<br />
provision of documents:<br />
is not the result of the sender’s inadvertence,<br />
Rule 4.4(b) does not apply…<br />
[and]… [the] lawyer receiving materials<br />
under such circumstances is therefore<br />
not required to notify another party or<br />
that party’s lawyer of receipt as a matter<br />
of compliance with the Model Rules.<br />
See ABA Comm. on Ethics & Prof’l Responsibility,<br />
<strong>For</strong>mal Op. 06-440 (2006).<br />
As a result, when a lawyer makes a conscious<br />
decision to produce a client’s information<br />
with a nonwaiver agreement or<br />
nonwaiver order under Federal Rules of<br />
Evidence 502(d) or (e) without any review<br />
for privilege or work product and opposing<br />
counsel knows of that strategy, the opponent<br />
arguably does not need to observe the Model<br />
Rule 4.4(b) obligation to notify the producing<br />
party about the production of privileged<br />
or protected information. See Mt. Hawley,<br />
271 F.R.D. at 131 (refusing to rule that the<br />
defendants misused an allegedly privileged<br />
email by failing to notify the opposing party<br />
about its production before using it). An attorney<br />
can preserve the obligation by including<br />
a notification requirement similar<br />
to Model Rule 4.4(b) in a Federal Rule 502<br />
nonwaiver order or agreement.<br />
Might Inadvertent Waivers of Attorney-<br />
Client Privilege Breach Model Rule 1.6(c)<br />
<strong>The</strong> 2012 amendment to Model Rule 1.6(c),<br />
has raised another potential consequence<br />
that could result from the inadvertent<br />
waiver of attorney- client privilege. <strong>The</strong> advisory<br />
committee note to Federal Rule of<br />
Evidence 502(b) explains that the rule applies<br />
an intermediate balancing approach<br />
to claims of inadvertent waiver of privilege<br />
or work product under the rule. See also<br />
United States v. Sensient Colors, Inc., 2009<br />
WL 2905474, at *3 (D.N.J. Sept. 9, 2009) (explaining<br />
that “FRE 502(b) opts for a middle<br />
ground approach to determine if an inadvertent<br />
disclosure operates as a waiver”).<br />
Many states employ a similar balancing approach<br />
to the issue of inadvertent waiver.<br />
One of the factors that courts consider<br />
under an intermediate balancing approach<br />
and under Federal Rule of Evidence 502(b)<br />
(2) is whether “reasonable steps were taken<br />
to prevent disclosure” of privileged information.<br />
Model Rule 1.6(c) asks whether an<br />
attorney took “reasonable efforts” to prevent<br />
an inadvertent or unauthorized disclosure.<br />
<strong>The</strong>se standards are substantially<br />
similar. Accordingly, when a court finds<br />
that a client has waived the attorney- client<br />
privilege because the client’s attorney failed<br />
to take reasonable steps to prevent the<br />
inadvertent disclosure of protected information,<br />
the client may complain that the<br />
attorney failed to meet the Model Rule<br />
1.6(c) reasonable efforts standard.<br />
What Constitutes Reasonable Steps to<br />
Prevent an Inadvertent Disclosure<br />
<strong>The</strong> advisory committee note to Federal<br />
Rule of Evidence 502(b) recognizes that<br />
before the rule was enacted federal decisions<br />
addressing the inadvertent waiver of<br />
attorney- client privilege employed a multifactor<br />
test for determining when an inadvertent<br />
disclosure resulted in a waiver of<br />
privilege. <strong>The</strong>se factors, none of which were<br />
individually dispositive, addressed “the<br />
reasonableness of [the] precautions taken,<br />
the time to rectify the error, the scope of<br />
the discovery, the extent of the disclosure<br />
and the overriding issue of fairness.” <strong>The</strong><br />
advisory committee note further explains<br />
that Federal Rule of Evidence 502(b):<br />
does not explicitly codify that [multifactor]<br />
test, because it is really a set of<br />
non- determinative guidelines that vary<br />
from case to case. <strong>The</strong> rule is flexible<br />
enough to accommodate any of those<br />
listed factors. Other considerations<br />
bearing on the reasonableness of a producing<br />
party’s efforts include the num-
er of documents to be reviewed and the<br />
time constraints for production.<br />
Echoing this point, Judge Paul Grimm<br />
observed that the:<br />
pre-502 case law that adopted a multifactor<br />
test for determining whether<br />
inadvertent production of privileged<br />
or protected information constituted<br />
a waiver is not automatically incorporated<br />
into Rule 502(b). Rather, the rule<br />
is intended to allow additional factors<br />
to be considered. Thus, the prior case<br />
law is relevant, but not dispositive, and<br />
courts should feel free to adopt a flexible<br />
approach that considers all facts relevant<br />
to determining the reasonableness of the<br />
producing party’s efforts to avoid disclosure<br />
of privileged or work product protected<br />
information.<br />
Grimm, Bergstrom, & Kraeuter, supra, at 35.<br />
<strong>The</strong> scope of a discovery request “is a<br />
logical starting point” for a court’s analysis<br />
under Federal Rule of Evidence 502(b)<br />
(2). Coburn Group LLC v. Whitecap Advisors<br />
LLC, 640 F. Supp. 2d 1032, 1039 (N.D.<br />
Ill. 2009). <strong>The</strong> Seventh Circuit has recognized<br />
that “[w]here discovery is extensive,<br />
mistakes are inevitable and claims of inadvertence<br />
are properly honored so long as<br />
appropriate precautions are taken.” Judson<br />
Atkinson Candies, Inc. v. Latini- Hohberger<br />
Dhimantec, 529 F.3d 371, 388 (7th Cir.<br />
2008); Sensient Colors, 2009 WL 2905474,<br />
at *4 (addressing production of 45,000 documents<br />
and observing that “[g]iven this<br />
volume mistakes were bound to occur”).<br />
Conversely, the smaller the scope of<br />
the required discovery response, the more<br />
likely a court will find a waiver. Sidney<br />
I v. Focused Retail Property I, LLC, 274<br />
F.R.D. 212, 217 (N.D. Ill. 2011) (addressing<br />
the production of 588 documents and<br />
concluding that “this small size weighs<br />
in favor of waiver”). In other words, “the<br />
broader the scope of discovery, the more<br />
extensive a party’s disclosure of confidential<br />
materials may be without waiving the<br />
privilege and vice versa.” Kmart Corp. v.<br />
Footstar, Inc., 2010 WL 4512337, at *4 (N.D.<br />
Ill. Nov. 2, 2010). As one court wrote, “This<br />
approach reflects the undeniable truth that<br />
the greater the possibility of errors, the<br />
more likely errors will occur.” Heriot v.<br />
Byrne, 257 F.R.D. 645, 659 (N.D. Ill. 2009).<br />
When evaluating waiver of attorneyclient<br />
privilege courts consider how many<br />
privileged documents an attorney mistakenly<br />
produced relative to both how many<br />
total documents he or she produced in discovery<br />
and the overall number of privileged<br />
documents. Kmart Corp., 2010 WL<br />
4512337, at *4 (characterizing the disclosure<br />
of 130 pages of privileged documents,<br />
which constituted less than three percent<br />
of the total production, as not a “significant<br />
mistake”); Heriot, 257 F.R.D. at 660 (noting<br />
that while 13 percent of the privileged<br />
documents were mistakenly produced “the<br />
weight of the factors tips the balance in<br />
favor of inadvertent disclosure”).<br />
Courts will also consider the “obviousness”<br />
of the privileged nature of the<br />
documents. Sidney I, 274 F.R.D. at 217<br />
(observing “the number of privileged documents<br />
disclosed suggests waiver, especially<br />
since they were obviously privileged”); Victor<br />
Stanley, Inc. v. Creative Pipe, Inc., 250<br />
F.R.D. 251, 263 (D. Md. 2008) (observing<br />
that many inadvertently produced documents<br />
were communications between defendants<br />
and their counsel).<br />
Courts will also consider the time constraints<br />
placed on a party when evaluating<br />
the process used to screen a production for<br />
privilege. Kmart Corp., 2010 WL 4512337, at<br />
*4. When a time constraint is self- imposed,<br />
however, a court will assign little weight to<br />
that argument. Id. at *5; Rhoads Industries,<br />
Inc. v. Building Materials Corp. of America.<br />
254 F.R.D. 216, 225 (E.D. Pa. 2008) (noting<br />
the time crunch resulted from the “plaintiff<br />
not providing adequate resources to the<br />
privileged communication issue”). Additionally,<br />
“the relevant time constraints are<br />
those relating to [the] discovery, not an<br />
attorney’s schedule.” Sidney I, 274 F.R.D.<br />
at 217.<br />
<strong>The</strong> nature and extent of procedures<br />
that an attorney uses to screen for privilege<br />
will play a critical part in any court’s<br />
analysis. Failing to use either “an organized<br />
screening procedure” when an attorney<br />
initially reviewed the documents, or failing<br />
to review the production before sending<br />
it to an opposing counsel suggests that<br />
the attorney did not take reasonable steps<br />
to protect against inadvertently producing<br />
privileged information. Id. Developing protocols<br />
for reviewing and screening for privilege<br />
has received favorable reviews from<br />
courts. See Coburn Group, 640 F. Supp. 2d<br />
at 1039 (addressing a six-step document<br />
review protocol to identify responsive documents<br />
and segregate for attorney review<br />
potentially privileged documents); Heriot,<br />
257 F.R.D. at 651, 661 (concluding that a<br />
multistep process of reviewing and coding<br />
documents in a database “entailed reasonable<br />
precautions”).<br />
A court will carefully consider whether<br />
or not an attorney was involved in the<br />
Developing protocols<br />
for reviewing and<br />
screening for privilege<br />
has received favorable<br />
reviews from courts.<br />
review process, or supervised trained<br />
reviewers. Compare MSP Real Estate, 2011<br />
WL 3047687, at *7 (noting that “the absence<br />
of attorney involvement and supervision in<br />
the initial review process supports a finding<br />
the precautions were not reasonable”),<br />
with Coburn Group, 640 F. Supp. 2d at 1039<br />
(concluding that “use of experienced paralegals<br />
who were given specific direction<br />
and supervision” by the lead counsel was<br />
reasonable).<br />
Equally important, however, is providing<br />
a court with a clear and detailed explanation<br />
of the procedures used and how an<br />
inadvertent production occurred. Amobi v.<br />
District of Columbia Dept. of Corrections,<br />
262 F.R.D. 45, 54–55 (D.D.C. 2009) (ruling<br />
that privilege was waived because there<br />
was “no indication of what specific efforts<br />
were taken to prevent disclosure, let alone<br />
any explanation of why these efforts were…<br />
reasonable in the context of the demands<br />
made”). Victor Stanley, 250 F.R.D. at 259–<br />
60 (noting that the defendants failed to<br />
identify the keywords used, the rationale<br />
for their selection, the qualifications of the<br />
person who designed the keyword search,<br />
whether Boolean proximity operators were<br />
used, and whether the results were analyzed<br />
to assess the reliability of the keywords<br />
for that task).<br />
Courts have found a waiver occurred<br />
when the party claiming privilege either<br />
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Lawyers’ Professionalism and Ethics<br />
failed to provide a detailed description of<br />
how the process used to screen for privilege<br />
was supposed to work or how the mistake<br />
occurred. Kmart Corp., 2010 WL 4512337, at<br />
*4 (finding an explanation that an attorney<br />
reviewed documents “‘with an eye toward<br />
identifying any ‘attorney- client’ or ‘work<br />
product’ privilege issues’” provided “insufficient<br />
facts” to conclude the steps taken<br />
Courts have found a<br />
waiver occurred when the<br />
party claiming privilege<br />
either failed to provide<br />
a detailed description of<br />
how the process used to<br />
screen for privilege was<br />
supposed to work or how<br />
the mistake occurred.<br />
“were reasonable”) (quoting attorney affidavit);<br />
Thorncreek Apartments III, LLC v. Village<br />
of Park <strong>For</strong>est, 2011 WL 3489828, at *7<br />
(N.D. Ill. Aug. 9, 2011) (ruling a description<br />
that “countless hours” were spent reviewing<br />
documents marking them responsive, nonresponsive,<br />
or privileged fell “well short of<br />
what we expect for an adequate account of<br />
the review procedure”).<br />
Several decisions suggest that the simple<br />
use of keyword searches to screen for<br />
privilege, without more, will not meet Federal<br />
Rule 502(b)(2)’s “reasonable steps”<br />
threshold. See Mt. Hawley, 271 F.R.D. at<br />
136 (concluding that “the failure to test the<br />
reliability of keyword searches [for privilege]<br />
by appropriate sampling is imprudent”);<br />
Victor Stanley, 250 F.R.D. at 257<br />
(observing that “[t]he only prudent way to<br />
test the reliability of the keyword search is<br />
to perform some appropriate sampling of<br />
the documents determined to be privileged<br />
and those not to be in order to arrive at a<br />
comfort level that the categories are neither<br />
over-inclusive nor under-inclusive”).<br />
24 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Addressing the use of technology to<br />
screen for privilege, the advisory committee<br />
note to Federal Rule of Evidence 502<br />
attempts to provide some guidance:<br />
Depending on the circumstances, a<br />
party that uses advance analytical software<br />
applications and linguistic tools in<br />
screening for privilege and work product<br />
may be found to have taken ‘reasonable<br />
steps’ to prevent inadvertent disclosure.<br />
<strong>The</strong> implementation of an efficient system<br />
of records management may also<br />
be relevant.<br />
While a court may be willing to forgive a<br />
mistake that results from using technology<br />
to screen for privilege in light of the<br />
advisory committee note, an attorney will<br />
want to consider using quality assurance<br />
sampling to convince a court, if necessary,<br />
that the attorney took reasonable measures<br />
to prevent the disclosure of privileged<br />
information.<br />
Does Model Rule 1.6(c) Take<br />
“Proportionality” into Account<br />
<strong>The</strong> recently amended comment 16 to<br />
Model Rule 1.6(c) includes a nonexclusive<br />
list of factors for disciplinary bodies to<br />
consider when assessing if attorneys took<br />
reasonable measures to prevent the inadvertent<br />
disclosure of information. Because<br />
comment 16 indicates that the potentially<br />
relevant factors are not limited to those<br />
outlined in the comment, disciplinary tribunals<br />
addressing purported Model Rule<br />
1.6(c) violations likely will consider the<br />
factors that courts have considered when<br />
assessing if attorneys took reasonable steps<br />
to prevent inadvertent disclosures under<br />
Federal Rule of Evidence 502(b)(2).<br />
<strong>The</strong> factors listed in comment 16 as relevant<br />
considerations to a Model Rule 1.6(c)<br />
analysis include the sensitivity of the information,<br />
the cost of additional safeguards,<br />
the likelihood that an inadvertent disclosure<br />
might occur without additional safeguards,<br />
the difficulty of implementing those<br />
safeguards, and the impact those safeguards<br />
have on a lawyer’s ability to represent<br />
his or her clients. In other words, the<br />
duty of confidentiality under the Model<br />
Rule 1.6(c) reasonable effort standard includes<br />
a cost- benefit analysis of procedures<br />
used to screen for privilege. This disciplinary<br />
approach is similar to the proportionality<br />
analysis applicable to discovery issues<br />
under Federal Rule of Civil Procedure 26(b)<br />
(2)(C)(iii), which mandates limiting discovery<br />
when “the burden or expense of the<br />
proposed discovery outweighs its likely<br />
benefit, considering the needs of the case,<br />
the amount in controversy, the parties resources,<br />
the importance of the issues at<br />
stake in the action and the importance of<br />
the discovery in resolving the issues.”<br />
This point underscores the importance<br />
of discussing with a client the various options<br />
available to screen for privilege and<br />
providing a reasonable estimate of the cost<br />
of those options so that the client can decide<br />
the appropriate option to select. And, it affirms<br />
that obtaining the informed consent<br />
of a client is key to harmonizing the Model<br />
Rule 1.6(c) requirements with the nonwaiver<br />
tools of Federal Rule of Evidence 502.<br />
Practice Points<br />
Inadvertently waiving privilege can have<br />
disastrous results for lawyers and their<br />
firms. Not only is it professionally embarrassing,<br />
it can lead to the loss of a valued<br />
client, a disciplinary complaint, and even<br />
a malpractice claim. Accordingly, bear in<br />
mind seven practice points.<br />
Point 1: Seek a Nonwaiver<br />
Order or Agreement<br />
Seek a Federal Rule of Evidence 502(d) nonwaiver<br />
order or a 502(e) nonwaiver agreement<br />
whenever possible to minimize the<br />
risk of waiving the attorney- client privilege<br />
or work product immunity. From a law<br />
firm risk management perspective, they<br />
are indispensable. A Federal Rule of 502(d)<br />
nonwaiver order is preferable to a 502(e)<br />
nonwaiver agreement due to the additional<br />
protection it provides.<br />
Point 2: Carefully Draft the<br />
Order or Agreement<br />
Use care in drafting a nonwaiver order<br />
or a nonwaiver agreement. Some courts<br />
have strictly construed a nonwaiver agreement<br />
and applied Federal Rule of Evidence<br />
502(b) rather than the terms of an agreement<br />
when a dispute between the parties<br />
arose because the agreement was ambiguous,<br />
failed to address what pre- production<br />
review parties would undertake, or did not<br />
include what steps would be taken if a disclosure<br />
of privileged information occurred.<br />
See Grim, Bergstrom, & Kraeuter, supra, at
63–79 (discussing cases); Maxtena, Inc. v.<br />
Marks, 2012 WL 6190298, at *14 n.16 (D.<br />
Md. Dec. 11. 2012) (noting that “the Confidentiality<br />
Order does not define ‘inadvertence’<br />
and is silent as to either the parties<br />
precautionary or post- production responsibilities<br />
to avoid waiver. Hence, all three<br />
prongs of Rule 502(b) govern this dispute”).<br />
Point 3: Seek a Nonwaiver Agreement<br />
Over an Opponent’s Objection<br />
Seek to incorporate any nonwaiver agreement<br />
into a court order even when opposing<br />
counsel does not agree to it. Agreement<br />
of the parties is not a prerequisite to the<br />
entry of a nonwaiver order according to<br />
Federal Rule 502’s advisory committee<br />
note. If an agreement is incorporated into<br />
an order, it will strengthen a client’s protection<br />
against waiver. Even if a court rejects<br />
the motion for an order, a client may benefit<br />
because the court will have an opportunity<br />
to review the agreement and flag concerns<br />
that it has with the terms.<br />
Point 4: Remember the Ethical Obligation<br />
to Protect Client Information<br />
Never forget the ethical obligation to safeguard<br />
a client’s information competently<br />
when reviewing it for privilege and producing<br />
it in discovery. <strong>The</strong> options can range<br />
between doing an “old- fashioned” review of<br />
every document to using advanced analytical<br />
software with mathematical algorithms<br />
or linguistic tools that screen for privilege.<br />
<strong>The</strong> size of the production, as well as a client’s<br />
records management and information<br />
systems will affect the method selection, so<br />
it is important to learn the client’s systems.<br />
Point 5: Discuss the Available<br />
Options with a Client<br />
Discuss with a client available options for<br />
reviewing, screening, and producing information<br />
in discovery and attempt to provide<br />
a reasonable estimate of the costs and<br />
benefits of those options. <strong>The</strong>n obtain the<br />
client’s informed consent on the selected<br />
methods.<br />
Point 6: Document a Client’s<br />
Options in Writing<br />
Whenever possible, document a client’s<br />
options and confirm the client’s choice in<br />
writing. Memories fade and personnel may<br />
change over time. Having the agreed upon<br />
approach and the supporting reasons documented<br />
will help to prevent a messy disagreement<br />
over why a particular option<br />
was selected and minimize the potential<br />
of a conflict of interest developing between<br />
an attorney and the client if an opponent<br />
claims that a waiver occurred or moves for<br />
sanctions months or years later.<br />
Point 7: Seek Legal Advice When a Vendor<br />
or a Client Reviews Discovery Documents<br />
Some clients now do the document review<br />
“in house” or employ a third-party vendor<br />
to review information for responsiveness<br />
and privilege in an attempt to reduce the<br />
cost of e- discovery. <strong>The</strong> disaggregation of<br />
legal services complicates the ability of outside<br />
counsel to sign a discovery response<br />
and ethically certify under Federal Rule<br />
of Civil Procedure 26(g) that the response<br />
is complete. When this situation occurs,<br />
the attorney should consult with his or her<br />
firm’s general counsel or ethics counsel<br />
about how to proceed. <strong>The</strong>re are options to<br />
consider, all of which will require discussion<br />
with a client.<br />
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<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 25
Toxic Torts and Environmental Law<br />
An Asbestos Parallel<br />
By David N. Lutz<br />
Diesel Exhaust—<br />
Recent<br />
Developments<br />
To attempt to find<br />
ways around existing<br />
precedent, mass tort<br />
plaintiffs’ lawyers will<br />
no doubt take a closer<br />
look at diesel exhaust<br />
after the DEMS and the<br />
IARC proclamation.<br />
26 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ David N. Lutz is a partner in the Minneapolis office of Bowman and Brooke LLP. He is national counsel for three equipment<br />
manufacturers in asbestos litigation and regional or local counsel for over a dozen asbestos defendants. Mr. Lutz is a member of<br />
the <strong>DRI</strong> Product Liability Committee and the webcast vice chair for the <strong>DRI</strong> Toxic Torts and Environmental Law Committee. <strong>The</strong><br />
author would like to thank his colleague, Anne M. Dwyer, for her assistance in researching and writing this article.
On June 12, 2012, the World Health Organization’s International<br />
Agency for Research on Cancer (IARC) declared<br />
diesel exhaust a Group 1 “known carcinogen.” See World<br />
Health Org., Int’l Agency for Res. on Cancer, IARC: Diesel<br />
Engine Exhaust Carcinogenic (2012). It did<br />
so based in part on the latest installment of<br />
the Diesel Exhaust in Miners Study (DEMS),<br />
published on June 6, 2012, by the National<br />
Institute for Occupational Safety (NIOSH)<br />
and the National Cancer Institute (NCI),<br />
which found an elevated risk of lung cancer<br />
in miners. IARC found “inadequate” evidence<br />
that gasoline engine exhaust is carcinogenic<br />
and it retains a Group 2B (“possibly<br />
carcinogenic”) classification.<br />
This pronouncement comes as the filing<br />
of asbestos cases has peaked and mass<br />
tort plaintiffs’ lawyers are no doubt looking<br />
for the next toxic mass tort. <strong>The</strong> IARC pronouncement<br />
and the DEMS may prompt a<br />
reevaluation of diesel exhaust by the plaintiffs’<br />
bar. As a follow up to an article published<br />
here in November 2005, this article<br />
will summarize the recent developments.<br />
What Is in Diesel Exhaust<br />
and Who Is Exposed<br />
<strong>The</strong> diesel engine, which Rudolph Diesel<br />
patented in Germany in 1892, revolutionized<br />
transportation. Well known for its<br />
excellent fuel economy, the diesel engine is<br />
used in trucks, buses, agricultural equipment,<br />
off-road heavy equipment, railroad<br />
locomotives, farm equipment, and ships.<br />
NIOSH has estimated that 1.35 million<br />
workers in the United States are exposed<br />
to diesel exhaust. Given the prevalence of<br />
cancer in our society and the frequency<br />
of smoking, many of these workers will<br />
develop lung cancer.<br />
<strong>The</strong> emissions from diesel exhaust<br />
include gas constituents and particulate<br />
matter. Gas constituents include carbon<br />
monoxide, carbon dioxide, nitric oxide,<br />
nitrogen oxides, sulfur dioxides, aldehydes<br />
(formaldehyde), and hydrocarbons, including<br />
benzene, toluene, and polynuclear<br />
aromatic hydrocarbons (PAHs). Particulate<br />
matter consists primarily of carbon, but it<br />
also includes organic compounds adsorbed<br />
from fuel and oil, sulfates from fuel sulfur,<br />
and trace metals. Particulate matter results<br />
mostly from incomplete combustion of fuel<br />
hydrocarbons. <strong>The</strong> focus on diesel exhaust<br />
has concerned this particulate matter, not<br />
the gas constituents, which have not been<br />
shown to be carcinogenic.<br />
<strong>The</strong> IARC Pronouncement<br />
and the DEMS<br />
After summarizing various epidemiologic<br />
studies in a June 2012 meeting, IARC concluded<br />
that “[t]hese epidemiological studies<br />
support a causal association between<br />
exposure to diesel- engine exhaust and<br />
lung cancer.” Lamia Benbrahim- Tallaa et<br />
al., Carcinogenicity of Diesel- Engine and<br />
Gasoline- Engine Exhausts and Some Nitroarenes,<br />
13 Lancet 663, 663 (2012).<br />
Before 2012, a meta- analysis of epidemiological<br />
studies found a relative risk for<br />
lung cancer of 1.47 for those most likely to<br />
have been exposed to diesel exhaust and<br />
1.64 among those with more than 10 years<br />
of exposure to diesel exhaust. See M. Lipsett<br />
& S. Campleman, Occupational Exposure<br />
to Diesel Exhaust and Lung Cancer: A<br />
Meta- Analysis, 89 Am. J. Pub. Health 1009,<br />
1009–17 (1999). <strong>The</strong> EPA concluded that a<br />
relative risk of 1.4 was a reasonable estimate<br />
of occupational lung cancer risk. In<br />
June 2012, however, the DEMS provided<br />
additional data concerning exposures and<br />
incidence of disease.<br />
Summary of the DEMS<br />
<strong>The</strong> DEMS analyzed historical diesel<br />
exhaust exposure and lung cancer effects<br />
from diesel exhaust in a cohort of 12,315<br />
workers in non- metal mining facilities. <strong>The</strong><br />
study, published June 6, 2012, in the Journal<br />
of the National Cancer Institute, was<br />
carried out by the National Cancer Institute<br />
and NIOSH. Debra T. Silverman et<br />
al., <strong>The</strong> Diesel Exhaust in Miners Study: A<br />
Nested Case- Control Study of Lung Cancer<br />
and Diesel Exhaust, 104 J. Nat’l Cancer Inst.<br />
855, 857 (2012).<br />
<strong>The</strong> DEMS dates back to 1992–1995,<br />
when NIOSH and the NCI, both part of the<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 27
Toxic Torts and Environmental Law<br />
U.S. Department of Health and Human<br />
Services, (DHHS), began developing the<br />
protocol for the study. See Akzo Nobel Inc.<br />
v. United States, No. 11-30812, 2012 WL<br />
1889419, at * 2–8 (5th Cir. May 24, 2012)<br />
(summarizing the history of the DEMS and<br />
litigation over whether the DHHS properly<br />
provided required materials to interested<br />
parties and for peer review).<br />
As to the admissibility<br />
of expert testimony that<br />
diesel exhaust causes<br />
multiple myeloma, a<br />
cancer originating in bone<br />
marrow plasma cells, there<br />
is a split of authority.<br />
<strong>The</strong> DEMS began with a series of published<br />
articles in 2010 that quantified exposure<br />
to diesel exhaust in eight mines—three<br />
potash, three trona, one limestone, and one<br />
salt mine. <strong>The</strong> study found "a strong and<br />
consistent relation between quantitative<br />
exposure to diesel exhaust and increased<br />
risk of dying from lung cancer." Silverman,<br />
supra, at 863. It also found a doseresponse<br />
relationship, noting that “[a]mong<br />
heavily exposed workers, the risk of dying<br />
from lung cancer was approximately three<br />
times greater than that among workers in<br />
the lowest quartile of exposure.” Id. at 865.<br />
<strong>The</strong> study confirmed that a link between<br />
smoking and an exponentially greater<br />
risk of lung cancer: the risk of lung cancer<br />
among smokers smoking two or more<br />
packs of cigarettes per day was 12.41 times<br />
higher than the risk of lung cancer among<br />
people who never smoked. Id. at 860.<br />
After controlling for smoking the study<br />
found a consistent increase in relative risk<br />
based on intensity, duration, and cumulative<br />
respirable elemental carbon (REC),<br />
a surrogate for diesel exhaust exposure.<br />
Individuals falling in the highest quartile<br />
of diesel exhaust exposure intensity were<br />
2.28–2.40 times more likely to develop lung<br />
28 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
cancer than in the quartile with the least<br />
intensity of exposure. Id. at 862. <strong>The</strong> quartile<br />
with the most cumulative exposure had<br />
relative risks of 1.75–2.83 times more lung<br />
cancer risk than the quartile with the least<br />
cumulative exposure. Id. <strong>The</strong> quartile with<br />
the longest duration of diesel exhaust exposure<br />
had a 2.09 times higher risk of lung<br />
cancer than the group with the least exposure.<br />
Id. Among underground workers, the<br />
comparable relative risks were 3.69–5.43,<br />
1.93–5.10, and 2.08. Id. at 864.<br />
Weaknesses of the DEMS<br />
<strong>The</strong> principal anomaly of the study was<br />
that the higher incidence of lung cancer<br />
occurred in the surface miners who experienced<br />
less diesel exhaust exposure than<br />
underground miners. Overall deaths from<br />
any cause were lower in the cohort than<br />
the general population, with underground<br />
workers having an even lower overall death<br />
rate than surface workers. Matthew D. Attfield<br />
et al., <strong>The</strong> Diesel Exhaust in Miners<br />
Study: A Cohort Mortality Study With Emphasis<br />
on Lung Cancer, 104 J. Nat’l Cancer<br />
Inst. 869, 870 (2012). <strong>The</strong>re were, however,<br />
elevated rates of lung cancer in the overall<br />
cohort (Standardized Mortality Ratio<br />
(SMR) = 1.26) and in both the underground<br />
workers (SMR = 1.21) and the surface workers<br />
(SMR = 1.33). Id. at 874. <strong>The</strong> lower end<br />
of the confidence interval was above 1.0 for<br />
all three groups. Although the lower rate for<br />
underground workers initially obscured a<br />
relationship, further review found a doseresponse<br />
within each group.<br />
<strong>The</strong> DEMS measured much higher diesel<br />
exhaust exposures in the underground<br />
mines since they are enclosed areas with<br />
worse ventilation than the surface. <strong>The</strong><br />
underground group had nearly an order of<br />
magnitude higher REC exposure than the<br />
surface. Id. at 876–78, Tables 4, 5. Yet, the<br />
overall incidence of lung cancer was lower<br />
in the underground workers than in the<br />
surface workers despite higher and more<br />
intense REC exposure. When looking at the<br />
entire cohort, there was only a weak correlation<br />
for average REC intensity and no<br />
association for cumulative REC. In longterm<br />
workers, there was some correlation,<br />
but it was not completely linear.<br />
<strong>The</strong> study did not explain why the rate of<br />
lung cancer was higher in the surface workers<br />
than in the underground workers with<br />
substantially higher exposure rates. <strong>The</strong><br />
study speculated that the anomaly “may be<br />
attributable to aging and transformation of<br />
DE by sunlight, ozone, and other factors,”<br />
which can make some exhaust components<br />
more toxic. Id. at 880. That the higher exposure<br />
group had less lung cancer is a major<br />
anomaly.<br />
Another anomaly between the underground<br />
workers and surface workers relates<br />
to the nature of the apparent association<br />
between REC and lung cancer. Among<br />
underground workers, the association is<br />
with cumulative REC exposure, but not<br />
with average REC intensity. Among surface<br />
workers, however, the association is with<br />
average REC intensity, but not with cumulative<br />
REC exposure. Id. at 876–78, Tables<br />
4, 5. <strong>The</strong> study has flaws that will no doubt<br />
be debated in expert depositions.<br />
Occupations at Increased Risk<br />
Increased incidence of lung cancer has been<br />
reported in several groups that work around<br />
diesel engines. A study of railroad workers<br />
found that their relative risk of lung cancer<br />
varied from 1.3 to 1.77. Francine Laden et<br />
al., Historical Estimation of Diesel Exhaust<br />
Exposure in a Cohort Study of U.S. Railroad<br />
Workers and Lung Cancer, 17 Cancer Causes<br />
Control 911, 911–19 (2006). A cohort of<br />
5,862 German potash miners had an overall<br />
relative of lung cancer of less than 1, but<br />
internal comparison of subcohorts showed<br />
a relative risk of up to 2.47 for groups with<br />
more exposure, although the trend is not<br />
fully linear. Angela Neumeyer- Gromen et<br />
al., Diesel Motor Emissions and Lung Cancer<br />
Mortality—Results of the Second Followup<br />
of a Cohort Study in Potash Miners, 124<br />
Int’l J. Cancer 1990, 1900–06 (2009). Other<br />
studies found increased risks of lung cancer<br />
in miners, heavy equipment operators,<br />
dock workers, forklift operators, port workers,<br />
railroad workers, and bus garage workers.<br />
Id. at 1904.<br />
A meta- analysis of 11 case- control studies<br />
in Canada and Europe found that the<br />
highest group of diesel exhaust exposure<br />
had an odds ratio (OR) of 1.31 compared<br />
with the lowest group of exposure.<br />
Ann C. Olsson et al., Exposure to Diesel<br />
Motor Exhaust and Lung Cancer Risk in a<br />
Pooled Analysis from Case- Control Studies<br />
in Europe and Canada, 183 Am. J. Respir.<br />
Crit. Care Med. 941 941–48 (2011). It was
only in the top quartile of exposure, however,<br />
that the lower end of the confidence<br />
interval was above 1.0. Id. at 944, Table 3.<br />
<strong>The</strong> Olsson study pooled analysis did not<br />
demonstrate a clear linear relationship, and<br />
the confidence interval range included 1.0<br />
for all exposure levels. Id. As the authors<br />
noted, there was a “small consistent association”<br />
between diesel exhaust exposure<br />
and lung cancer. Id. at 947.<br />
A cohort of 31,135 workers in the trucking<br />
industry did not demonstrate increased<br />
risk of lung cancer in mechanics or hostlers.<br />
Eric Garshick et al., Lung Cancer and<br />
Vehicle Exhaust in Trucking Industry Workers,<br />
116 Envtl. Health Perspectives 1327,<br />
1327, 1331 (2008). <strong>The</strong> likely explanation<br />
was that when mechanics are near trucks<br />
and equipment, the engines are off. Id. at<br />
1331. <strong>The</strong> occupations found to be at highest<br />
risk were dock workers (Hazard Ratio<br />
(HR) = 1.30) and workers who did a combination<br />
of dock work and pickup and delivery<br />
work (HR = 1.40). Id. at 1329.<br />
Diseases Other than Lung Cancer<br />
<strong>The</strong>re has been discussion of other studies<br />
and cases about whether other cancers<br />
or diseases are linked to diesel exhaust,<br />
and there are opportunities for Daubert<br />
motions.<br />
Bladder Cancer<br />
Studies have shown an increase in bladder<br />
cancer among truck drivers and suspected<br />
causes include smoking and drinking coffee.<br />
<strong>For</strong> one, “[a]n increased risk for bladder<br />
cancer was… noted in many but not<br />
all available case- control studies. However,<br />
such risks were not observed in cohort<br />
studies.” World Health Org., IARC, supra,<br />
at 1. In the DEMS, the SMRs for bladder<br />
cancer were 1.09 in the overall cohort but<br />
.69 in the underground workers who had<br />
the highest exposure to diesel exhaust. <strong>The</strong><br />
study found no association between diesel<br />
exhaust and bladder cancer. Attfield,<br />
supra, at 874.<br />
In Seaman v. Seacor Marine LLC, 326<br />
F. App’x 721 (5th Cir. 2009), a ship captain<br />
alleged that his bladder cancer was caused<br />
by diesel exhaust exposure. <strong>The</strong> trial court<br />
granted a motion to exclude expert testimony<br />
and then granted a summary judgment.<br />
<strong>The</strong> plaintiff’s medical expert relied<br />
on two articles to support her opinions<br />
that diesel exhaust exposure causes bladder<br />
cancer. One of those studies found that<br />
smoking is the main risk for bladder cancer<br />
and that it is difficult to separate smokingcaused<br />
from exposure- caused bladder cancer.<br />
Id. <strong>The</strong> court found that the expert did<br />
not demonstrate general causation and<br />
affirmed the testimony exclusion and the<br />
summary judgment. Id. at 730.<br />
Multiple Myeloma<br />
As to the admissibility of expert testimony<br />
that diesel exhaust causes multiple<br />
myeloma, a cancer originating in bone<br />
marrow plasma cells, there is a split of<br />
authority. In King v. Burlington Northern<br />
Santa Fe Ry. Co., 16 Neb. App. 544 (Neb.<br />
2008), the trial court excluded testimony<br />
by the plaintiff’s medical expert that the<br />
decedent’s multiple myeloma was caused<br />
by 28 years of exposure to diesel exhaust.<br />
Id. at 546–58. <strong>The</strong> trial court granted the<br />
defense motion to exclude the expert and<br />
then granted a summary judgment, and<br />
the court of appeals affirmed both rulings.<br />
Id. at 558. But the Nebraska Supreme Court<br />
reversed. See King v. Burlington Northern<br />
Santa Fe Ry. Co., 277 Neb. 203, 239 (Neb.<br />
2009). After an extensive discussion of<br />
epidemiology, general and specific causation,<br />
and the Sir Bradford Hill criteria, the<br />
court, applying Daubert, held that requiring<br />
a study to show a relative risk of 2.0 or<br />
higher was too restrictive when the expert<br />
relied on a study to support general causation.<br />
<strong>The</strong> court noted that a study need only<br />
show a relative risk of greater than 1.0. Id. at<br />
215–33.<strong>The</strong> court held that the weakness of<br />
the association goes to weight, not admissibility,<br />
and an expert may rely on studies<br />
to support causation even if an underlying<br />
study itself did not reach a definitive causation<br />
conclusion. Id. at 224. In determining<br />
specific causation, the expert must perform<br />
a reliable differential etiology by first<br />
“ruling in” potential causes to consider and<br />
then reliably ruling out potential causes to<br />
reach the most likely cause. Id. at 238.<br />
In Arkansas, however, expert testimony<br />
linking diesel exhaust to multiple myeloma<br />
is not scientifically reliable. In Richardson<br />
v. Union Pacific R.R. Co., No. CA 10-591,<br />
2011 WL 4477791 (Ark. Ct. App. Sept. 28,<br />
2011), the Federal Employers Liability Act<br />
(FELA) plaintiff alleged that his multiple<br />
myeloma resulted from exposure to various<br />
toxins, including diesel exhaust, creosote,<br />
and pesticides. Id. at *1. <strong>The</strong> trial court excluded<br />
the plaintiff’s industrial hygiene and<br />
medical testimony and granted a summary<br />
judgment. <strong>The</strong> court of appeals affirmed<br />
these rulings. <strong>The</strong> court analyzed various<br />
studies evaluating multiple myeloma and<br />
concluded that it had not been confirmed<br />
to be an established health risk for railroad<br />
workers. Id. at *13–15. <strong>The</strong> court held<br />
that the experts’ opinions did not meet the<br />
Daubert standards because their literature<br />
citations were selective and misconstrued,<br />
they failed to consider contrary studies or<br />
explain why they did not consider such<br />
studies, and they relied on studies whose<br />
authors themselves qualified their conclusions.<br />
Id. at* 18. <strong>The</strong> court also noted that<br />
the experts could not estimate the plaintiff’s<br />
actual exposure levels. Id. <strong>The</strong> court held<br />
that “[t]he fact that some studies showed<br />
that higher levels of benzene could cause<br />
multiple myeloma does not prove that the<br />
lower levels of that chemical found in diesel<br />
exhaust and fuel played a role in causing<br />
appellant’s disease.” Id. at *34. <strong>The</strong> court<br />
held that the experts’ opinions were “nothing<br />
more than guesswork” and were unreliable<br />
and unhelpful. Id. at *19.<br />
In Aurand v. Norfolk Southern Ry. Co.,<br />
802 F. Supp. 2d 950 (N.D. Ind. 2011), two<br />
plaintiffs had multiple myeloma and one<br />
had leukemia. <strong>The</strong> plaintiffs’ expert opined<br />
that the diseases were caused by chemical<br />
exposures, including several constituents<br />
of diesel exhaust, including PAHs, benzene,<br />
and carbon tetrachloride. Id. at 955.<br />
<strong>The</strong> court found that the expert could not<br />
identify any studies showing that railroad<br />
workers had an increased risk of developing<br />
multiple myeloma and the expert could<br />
not quantify the plaintiffs’ exposures. Id. at<br />
957, 960. <strong>The</strong> court excluded the expert testimony<br />
and granted a summary judgment.<br />
Id. at 964–65.<br />
Other Diseases<br />
<strong>The</strong>re have been a few cases alleging nonmalignant<br />
disease. In Shiver v. Georgia<br />
& Florida Railnet, Inc., 287 Ga. App. 828<br />
(Ga. Ct. App. 2007), the Georgia Court of<br />
Appeals affirmed the exclusion of expert<br />
testimony that diesel exhaust caused reactive<br />
airways disease and affirmed a summary<br />
judgment, finding that the expert<br />
did not adequately investigate the exposure<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 29
Toxic Torts and Environmental Law<br />
history and did not fully consider other<br />
potential causes. Id. at 831.<br />
Government Regulation<br />
<strong>The</strong> government has established various<br />
regulations relevant to diesel exhaust.<br />
Although the Clean Air<br />
Actallows California to<br />
adopt its own regulations<br />
that are more stringent than<br />
the federal regulations…<br />
California may do so only<br />
with EPA approval.<br />
Regulation of Employer Air Quality<br />
Occupational Safety and Health Administration<br />
(OSHA) permissible exposure limits,<br />
NIOSH recommended exposure limits,<br />
and American Conference of Government<br />
Industrial Hygienists (ACGIH) threshold<br />
limit values apply to an employer, and<br />
they exist for certain constituents of diesel<br />
exhaust, such as carbon monoxide, carbon<br />
dioxide, nitrogen dioxide, nitric oxide,<br />
formaldehyde, and sulfur dioxide, though<br />
not for “diesel exhaust” per se.<br />
<strong>The</strong> Mine Safety and Health Administration<br />
first published diesel regulations<br />
for underground non-coal mines in 2001,<br />
implementing an interim limit for diesel<br />
exhaust particulate of 400 mg/m 3 effective<br />
July 2002 and a final 160 mg/m 3 as of<br />
January 2006. Particulate was measured<br />
as total carbon (TC), which includes both<br />
elemental carbon (EC) and organic carbon<br />
(OC). In rulemaking completed in 2005,<br />
the Mine Safety and Health Administration<br />
converted the diesel particulate matter<br />
limit of 400 mg/m 3 of TC to 308 mg/<br />
m 3 for EC, effective January 2007. <strong>The</strong> May<br />
2006 Mine Safety and Health Administration<br />
final rule changed the interim limit to<br />
350 mg/m 3 EC, effective January 2007, and<br />
extended the effective date of the 160 mg/<br />
m 3 TC standard to May 2008. Courts have<br />
30 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
since upheld the Mine Safety and Health<br />
Administration regulations of particulate<br />
as valid. Kennecott Greens Creek Mining<br />
Co. v. Mine Safety and Health Admin., 476<br />
F.3d 946, 961 (D.C. Cir. 2007); Nat’l Mining<br />
Ass’n v. Mine Safety and Health Admin., 599<br />
F.3d 662, 673 (D.C. Cir. 2010).<br />
Regulation of Emissions<br />
from Diesel Engines<br />
<strong>The</strong> U.S. Environmental Protection Agency<br />
(EPA) has implemented regulations of certain<br />
emissions from diesel engines under<br />
authority of the Clean Air Act, which<br />
was passed by Congress in 1963 and was<br />
amended by the Motor Vehicle Air Pollution<br />
Control Act of 1965 and other subsequent<br />
amendments. <strong>The</strong>se standards vary<br />
depending on the type of vehicle or equipment<br />
and engine size.<br />
With respect to on-road engines, regulation<br />
began with the EPA smoke standard<br />
applicable to 1970s vehicles. <strong>The</strong> EPA added<br />
a carbon monoxide standard and a nitrogen<br />
oxides (NO X ) standard in 1974. <strong>The</strong> EPA first<br />
regulated particulate from on-road diesel<br />
engines in 1988, and regulations were tightened<br />
in 1991 and 1994 for truck and bus engines,<br />
in 1996 for bus engines, and again in<br />
1998 for all on-road diesel engines. In 2004,<br />
the EPA further regulated non- methane hydrocarbons<br />
and No x .<br />
<strong>For</strong> off-road diesel engines, regulation<br />
first began after Congress amended the<br />
Clean Air Act in 1990. See Pacific Merchant<br />
Shipping Ass’n v. Goldstone, 517 F.3d<br />
1108, 1110 (9th Cir. 2008). Regulations followed<br />
in the 1990s, including, depending<br />
on engine size, limits on hydrocarbons,<br />
carbon monoxide, and No x . Additional regulations<br />
limited emissions of CO and particulate<br />
and hydrocarbons and applied to<br />
engines of larger than 175 horsepower. By<br />
1998, the EPA regulated carbon monoxide,<br />
particulate, and the combination of NO x<br />
and non- methane hydrocarbons.<br />
<strong>The</strong> first standards for railroad locomotive<br />
engines were adopted in 1997 and<br />
became effective in 2000. <strong>The</strong> 2008 regulation<br />
required that locomotives meet Tier<br />
3 standards by 2011–2012 and meet Tier 4<br />
standards effective in 2015. <strong>The</strong> EPA first<br />
regulated marine engines in 1999, and in<br />
2003 the EPA developed No x emission limits<br />
for Category 3 engines. In 2008, the<br />
EPA introduced Tier 3 and 4 emissions<br />
standards for marine diesel engines that<br />
are modeled on the Tier 4 on-road and offroad<br />
standards.<br />
Regulation of Diesel Fuel<br />
Section 7545 of the Clean Air Act regulates<br />
the sulfur content of diesel fuel. As of October<br />
1, 1993, it prohibited the sale, manufacture,<br />
supply, or transport of motor vehicle<br />
diesel fuel “which contains a concentration<br />
of sulfur in excess of 0.05 percent (by<br />
weight) or which fails to meet a cetane index<br />
minimum of 40.” 42 U.S.C. §7545(i)(1).<br />
<strong>The</strong> cetane index measures the ignition<br />
quality of diesel fuel; a higher number indicates<br />
easier starting and less initial smoking<br />
and knocking from the engine. “Cetane Index,”<br />
Glossary, BP.COM, http://www.bp.com/<br />
glossarylinks.docontentId=6000459&alphabetId<br />
=3&categoryId=6126007 (last visited Feb. 7,<br />
<strong>2013</strong>). Heavy- duty diesel vehicles and engines<br />
from model years 1991 through 1993<br />
require a sulfur content of 0.10 percent (by<br />
weight). 42 U.S.C. §7545(i)(3). Alaska and<br />
Hawaii may be exempted from these requirements<br />
with the approval of the administrator<br />
of the EPA. Id. at §7545(i)(4).<br />
Section 7545 also requires the EPA to<br />
issue its own regulations regarding sulfur<br />
content requirements for motor vehicle<br />
diesel fuel, which can be found at 40<br />
C.F.R. §80, subpart I. Under those regulations,<br />
motor vehicle diesel fuel must<br />
not have a sulfur content in excess of 15<br />
parts per million (ppm). Sulfur content of<br />
500 ppm is allowed, however, under the<br />
limited circumstances listed in sections<br />
80.530–80.532, 80.552(a), 80.560–80.561,<br />
and 80.620. Id. at §80.520(c).<br />
<strong>The</strong> EPA regulations further provide<br />
that motor vehicle diesel fuel must either<br />
have a minimum cetane index of 40 or<br />
a maximum aromatic content of 35 volume<br />
percent and must be free of certain<br />
red and yellow dye solvents, with limited<br />
exceptions listed in section 80.520(b). Id.<br />
at §80.520(a),(b). Additional provisions<br />
regarding small refineries, non-road- and<br />
nonhighway- use diesel, kerosene blenders,<br />
labeling requirements, and the EPA’s diesel<br />
fuel credit program can be found throughout<br />
40 C.F.R. §80, Subpart I and accessed at<br />
http://www.ecfr.gov/cgi-bin/text-idxc=ecfr&sid=<br />
f4a7603e124963d6b62b453c42cb6492&rgn=div6<br />
&view=text&node=40:17.0.1.1.9.9&idno=40 (last<br />
visited Feb. 7, <strong>2013</strong>).
Preemption<br />
<strong>The</strong> successful defense of diesel exhaust litigation<br />
begins with preemption.<br />
Off-road Equipment<br />
If an engine is smaller than 175 horsepower,<br />
or if the equipment is a railroad<br />
locomotive, Clean Air Act §209(e)(1) provides<br />
that no state “shall adopt or attempt<br />
to enforce any standard or other requirement<br />
relating to the control of emissions<br />
from either of the following new nonroad<br />
engines or nonroad vehicles subject to<br />
regulation under this chapter.” 42 U.S.C.<br />
§7543(e)(1). Thus, federal law expressly preempts<br />
state law.<br />
<strong>For</strong> off-road equipment that §209(e)(1)<br />
does not encompass because it is larger<br />
than 175 horsepower and not a railroad<br />
locomotive, §209(e)(2) of the Clean Air Act<br />
provides that the EPA “shall” allow California<br />
to adopt more stringent regulations<br />
as long as it is not done arbitrarily, subject<br />
to EPA approval. 42 U.S.C. §7543(e)(2).<br />
Other states are allowed to adopt California’s<br />
more stringent emissions standards.<br />
42 U.S.C. §7543(e)(2)(B). <strong>The</strong> fact that California<br />
cannot regulate in this area without<br />
the EPA’s authorization confirms that preemption<br />
applies. See Engine Mfrs. Ass’n v.<br />
U.S. Envt’l Protection Agency, 88 F.3d 1075,<br />
1087 (D.C. Cir. 1996).<br />
Courts have also found preemption<br />
under §209(e)(2) of the Clean Air Act in<br />
cases alleging diesel exhaust exposure from<br />
railroad locomotives. In Middlesex Cnty.<br />
Health Dep’t v. Consolidated Rail Corp.,<br />
No. 08-4547, 2009 WL 62444 (D. N.J. Jan.<br />
9, 2009), the plaintiff alleged that Conrail<br />
violated New Jersey health laws by allowing<br />
locomotives to idle in a yard. Id. at *1.<br />
<strong>The</strong> court granted the defense motion to<br />
dismiss, finding that federal law preempted<br />
the claims in the case. Id. at *3.<br />
Although these provisions apply to<br />
“new” vehicles and equipment, the court in<br />
Engine Mfrs. Ass’n found that the implied<br />
preemption of §209(e)(2) applies not only to<br />
new vehicles and engines but also to existing<br />
vehicles and engines that were not new.<br />
Id. at 1087–93.<br />
In Ctr. for Cmty. Action and Envt’l Justice<br />
v. Union Pacific Corp., No. CV 11-08608,<br />
2012 WL 2086603 (C.D. Cal. May 29, 2012),<br />
the plaintiffs alleged that the rail yard was<br />
a source of diesel particulate and alleged<br />
violation of the federal Resource Conservation<br />
and Recovery Act. Id. at *2. Since the<br />
Clean Air Act was not amended until 1990<br />
to include locomotive emissions expressly<br />
and since the “locomotive rule” regulations<br />
did not pass until 1998, the plaintiff<br />
argued that if the Resource Conservation<br />
and Recovery Act did not apply, a “regulatory<br />
gap” would leave pre- regulation locomotives<br />
unregulated. <strong>The</strong> court granted<br />
the motion to dismiss, finding that the<br />
claims pertaining to both new and existing<br />
locomotives were preempted. <strong>The</strong> court<br />
rejected the plaintiff’s argument that the<br />
emissions standards did not apply to locomotives<br />
already in service, finding that<br />
“[i]t is fanciful to suggest that, because<br />
Congress directed EPA to regulate emissions<br />
only from ‘new’ locomotives, it must<br />
have silently intended to authorize courts<br />
to impose additional regulation of all locomotives<br />
through RCRA [Resource Conservation<br />
and Recovery Act] citizen suits.” Id.<br />
at *5 (internal quotation marks omitted).<br />
A California court also struck down<br />
regulation of diesel exhaust from ships. In<br />
Pacific Merchant Shipping Ass’n v. Cackette,<br />
ocean shippers challenged California<br />
Air Resources Board regulations of particulate,<br />
nitrogen oxide, and sulfur oxide.<br />
No. Civ. S-06-2791, 2007 WL 2492681 (E.D.<br />
Cal. Aug. 30, 2007), aff’d, Pacific Merchant<br />
Shipping Ass’n v. Goldstene, 517 F.3d 1108,<br />
1113 (9th Cir. 2008). <strong>The</strong> court examined<br />
the issue under Clean Air Act §209(e)(2),<br />
which the court concluded impliedly preempted<br />
state action. Id. at *7. <strong>The</strong> court<br />
reiterated that the implied preemption of<br />
§209(e)(2) applied both to new and existing<br />
engines that pre-dated the regulations.<br />
Id. *7–8. Although the Clean Air Act allows<br />
California to adopt its own regulations that<br />
are more stringent than the federal regulations,<br />
as mentioned, California may do so<br />
only with EPA approval. <strong>The</strong> court found<br />
that these regulations did not have EPA<br />
approval. <strong>The</strong>refore, on the basis of preemption,<br />
the court enjoined enforcement of<br />
the regulations. <strong>The</strong> Ninth Circuit affirmed<br />
the holding, finding that §209(e)(2) preemption<br />
applied both to new and existing<br />
ship engines. Goldstene, 517 F.3d at 1115.<br />
On-road Vehicles<br />
On-road trucks are governed by §209(a)<br />
of the Clean Air Act, which provides that<br />
Presumably because of<br />
the preemption problems<br />
that the plaintiffs’ bar<br />
faces in claims against<br />
manufacturers, plaintiffs<br />
have sought to assert claims<br />
in a way that might skirt<br />
Clean Air Act preemption.<br />
no state “shall adopt or attempt to enforce<br />
any standard relating to the control of<br />
emissions from new motor vehicles or<br />
new motor vehicle engines….” 42 U.S.C.<br />
§7543(a). <strong>The</strong> regulations took effect in<br />
1970. However, Congress preempted such<br />
claims as of 1967. See Green Mountain<br />
Chrysler v. Crombie, 508 F. Supp. 2d 295,<br />
304 (D. Vt. 2007); Pacific Merchant Shipping<br />
Ass’n, 2007 WL 2492681, at *3.<br />
In Engine Mfrs. Ass’n v. South Coast Air<br />
Quality Mgmt. Dist., 541 U.S. 246 (2004),<br />
the U.S. Supreme Court evaluated air quality<br />
district rules that required local fleet<br />
operators including cars, trucks, public<br />
transit busses, garbage trucks, taxis, and<br />
heavy-duty on-road trucks to buy or lease<br />
only vehicles that met state motor vehicle<br />
pollution standards. <strong>The</strong> U.S. Supreme<br />
Court held that §209(a) of the Clean Air<br />
Act preempted the rules. Id. at 257–59. <strong>The</strong><br />
U.S. Supreme Court specifically noted that<br />
it was not determining whether applying<br />
such rules to existing vehicles, “e.g., to lease<br />
arrangements or to the purchase of used<br />
vehicles,” was preempted under §209(a).<br />
Id. at 259. On remand, the district court<br />
found that the Clean Air Act did not preempt<br />
the rules because they fell within the<br />
market participant doctrine and therefore<br />
§209(a) did not cover them. Engine Mfrs.<br />
Ass’n v. South Coast Air Quality Mgmt.<br />
Dist., No. CV00-09065, 2005 WL 1163437,<br />
at *11 (C.D. Cal. May 5, 2005). <strong>The</strong> court<br />
specifically noted that it was not addressing<br />
whether the rules were preempted to<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 31
Toxic Torts and Environmental Law<br />
Unfortunately,it appears,<br />
at least on the surface,<br />
to the plaintiffs’ bar, that<br />
asbestos and diesel exhaust<br />
litigation have some parallel.<br />
the extent that they applied to existing,<br />
used vehicles. In addition, “CAA [Clean Air<br />
Act] §209(a), which while very similar in<br />
its language, only preempts new road vehicles<br />
and engines. <strong>The</strong> [Supreme Court’s]<br />
concern that regulations have effects on<br />
manufacturers in order to be preempted is<br />
understandable given the more limited preemptive<br />
effect of CAA §209(a).” Pacific Merchant<br />
Shipping Ass’n, 2007 WL 2492681, at<br />
*10 (citation omitted).<br />
In In re Jackson v. General Motors Corp.,<br />
770 F. Supp. 2d. 570 (S.D. N.Y. 2011), city<br />
transit workers alleged injuries from diesel<br />
exhaust and sued various manufacturers<br />
of buses and diesel engines contained<br />
in them. <strong>The</strong> defendants brought a motion<br />
for judgment on the pleadings on the basis<br />
of preemption. Id. at 571. <strong>The</strong> plaintiffs<br />
abandoned claims of defectively designed<br />
engines, but they alleged that the defendants<br />
were negligent because their products<br />
did not meet the Clean Air Act standards<br />
and that the defendants negligently<br />
failed to warn about the dangers of diesel<br />
exhaust. <strong>The</strong> court granted the motion to<br />
dismiss. Id. at 579.<br />
<strong>The</strong> Jackson court first noted that the<br />
Clean Air Act does not allow a private<br />
right of action for damages. Id. at 574. <strong>The</strong><br />
court also found that a state common law<br />
claim that a manufacturer did not comply<br />
with the Clean Air Act is a state attempt<br />
to enforce the federal act, so the Clean Air<br />
Act preempts such a state claim. Id. at 574.<br />
<strong>The</strong> court found that §209(a) of the Clean<br />
Air Act preempted the plaintiffs’ failure to<br />
warn claims as those claims “related to” the<br />
control of emissions. Id. at 577. Although<br />
Clean Air Act §209(d) allows states to regulate<br />
the use of motor vehicles, the court<br />
rejected the plaintiffs’ argument that this<br />
32 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
provision allows lawsuits concerning emissions,<br />
distinguishing these claims from the<br />
states’ rights to regulate the use of vehicles.<br />
Id. at 577. <strong>The</strong> court dismissed the case<br />
in its entirety and did not carve out any<br />
claims based on the vintage of the engine<br />
or the vehicle. <strong>The</strong> Second Circuit affirmed<br />
this district court decision on July 11, 2012.<br />
See Butnick v. General Motors Corp., No.<br />
11-1068, 2012 WL 2819330, at *2 (2d Cir.<br />
July 11, 2012).<br />
Daubert Challenges to Experts<br />
Under Daubert, a trial court provides a<br />
gate- keeping function to ensure that expert<br />
testimony is reliable and relevant and that<br />
the underlying reasoning or methodology<br />
is scientifically valid. Even the risks identified<br />
in the DEMS are relatively modest<br />
and occur only in the most highly exposed<br />
groups. By the time the studies divided the<br />
miners into such small subgroups, the bottom<br />
range of the confidence interval typically<br />
was below 1.0, and, therefore, it was<br />
statistically suspect. Attorneys may have<br />
opportunities to strike an expert testifying<br />
on general causation who proposes<br />
that diesel exhaust can cause a disease, and<br />
certainly on specific causation when the<br />
expert proposes that diesel exhaust caused<br />
a specific plaintiff’s disease.<br />
In Brooks v. Ingram Barge Co., No.<br />
4:07CV62, 2008 WL 5070243 (N.D. Miss.<br />
Nov 21, 2008), the lung cancer plaintiff had<br />
worked on Mississippi River vessels for 28<br />
years. <strong>The</strong> defense moved to exclude the<br />
plaintiff’s expert under Daubert. <strong>The</strong> court<br />
first examined the issue of general causation<br />
and took note of the various epidemiologic<br />
studies showing a relative of generally<br />
1.3 to 1.7. Id. at *2. <strong>The</strong> court concluded<br />
that evidence that diesel exhaust can cause<br />
lung cancer was sufficient under Daubert.<br />
Id. at *4. <strong>The</strong> court noted, however, that the<br />
expert could not quantify the precise dose<br />
response or quantify the plaintiff’s exposure.<br />
Id. at *5–6. Since the plaintiff had<br />
smoked for 50 years, the plaintiff’s expert<br />
had to admit that smoking was a cause, but<br />
he opined that diesel exhaust and smoking<br />
have a synergistic effect—that the combined<br />
effect was more than just the sum of<br />
each risk separately. <strong>The</strong> expert based his<br />
opinion on one study, but the court noted<br />
concerns with the validity of that study and<br />
held that the theory that diesel exhaust and<br />
cigarette smoke have a synergistic effect on<br />
lung cancer did not pass the Daubert criteria.<br />
<strong>The</strong> court held that “[n]o reliable science<br />
has been presented to this court to<br />
support an opinion that an individual in<br />
the highest risk category was exposed to<br />
some unknown amount of a moderate carcinogen<br />
and to then find that the moderate<br />
carcinogen caused his cancer is simply<br />
unreliable.” Id. at *6. <strong>The</strong> court held that the<br />
expert could “not bridge the gap between<br />
general and specific causation.” Id. at *7.<br />
Smoking and Attribution<br />
<strong>The</strong> primary cause of lung cancer is<br />
smoking. It is unusual to find a lung cancer<br />
patient who did not smoke. In the Olsson<br />
study, which pooled the results of 11<br />
case- control studies in Canada, only six<br />
percent of the 13,304 individuals with lung<br />
cancer had never smoked, compared with<br />
over 29 percent of the individuals in the<br />
control group. Olsson, supra, at 943. In the<br />
cohort of German potash miners, only two<br />
of 61 lung cancer cases occurred in individuals<br />
who did not smoke. Neumeyer-<br />
Gromen, supra, at 1902. In the DEMS, only<br />
14 of the 198 lung cancer cases consisted of<br />
individuals who had never smoked, compared<br />
with 178 of the 666 individuals in<br />
the control group. Silverman, supra, at 861,<br />
Table 2.<br />
If plaintiffs allege a synergistic effect<br />
between diesel exhaust exposure and<br />
smoking, defendants should cite Brooks,<br />
2008 WL 5070243 (N.D. Miss. Nov 21,<br />
2008). In addition, in the German potash<br />
miner cohort, scientists saw no synergistic<br />
effect, finding an overall relative<br />
risk for high exposure and smoking combined<br />
of 22.25, with the individual effects<br />
of 21.09 relative risk for smoking and 4.21<br />
relative risk for diesel exhaust exposure.<br />
Neumeyer-Gromen, supra, at 1903.<br />
<strong>The</strong> DEMS does not support synergism,<br />
either. In the category of greatest diesel<br />
exhaust exposure and the greatest smoking<br />
history, the diesel exhaust exposure raised<br />
the relative risk to 7.3 in individuals who<br />
never smoked, and smoking two packs<br />
per day among the group with least diesel<br />
exhaust exposure involved a relative<br />
risk of 26.79. Silverman, supra, at 865. <strong>The</strong><br />
combined risk of the highest exposure to<br />
diesel exhaust and cigarettes, however,<br />
was 17.38, which is less than additive and
does not indicate synergism. Id. Review of<br />
the six combinations of smoking history<br />
and diesel exhaust exposure in the DEMS<br />
reveals that two of the categories actually<br />
would have a lower combined risk than the<br />
sum of the individual relative risk of each.<br />
In two categories the numbers were virtually<br />
identical, indicating no synergism,<br />
and only in two categories did the combined<br />
risk exceed the sum of the individual<br />
risk of each. <strong>For</strong> those two categories, the<br />
confidence intervals showed that the combined<br />
effect could be less than the sum of<br />
the individual exposures.<br />
Current Status of Litigation<br />
and the Effect of the DEMS<br />
Presumably because of the preemption<br />
problems that the plaintiffs’ bar faces in<br />
claims against manufacturers, plaintiffs<br />
have sought to assert claims in a way that<br />
might skirt Clean Air Act preemption.<br />
Plaintiffs have alleged Federal Employers<br />
Liability Act (FELA) claims against<br />
railroads for failure to provide safe workplaces.<br />
On June 13, 2012, within a week of<br />
the IARC finding release, plaintiffs filed<br />
a lawsuit in California against refiners<br />
and sellers of diesel fuel, citing the IARC<br />
pronouncement.<br />
Plaintiffs have also attempted to create<br />
a diesel exhaust class action, and anyone<br />
defending a client against such an effort<br />
should review Taylor v. CSX Transp., Inc.,<br />
264 F.R.D. 281 (N.D. Ohio 2007). In that<br />
Federal Employers Liability Act case, plaintiff<br />
railroad employees moved for class certification<br />
to include over 40 engineers and<br />
conductors who had been diagnosed with<br />
asthma, chronic obstructive pulmonary<br />
disease, or emphysema. Id. at 286. Applying<br />
the Federal Rule of Civil Procedure<br />
23(a) prerequisites for class certification,<br />
the court found that the plaintiffs met the<br />
requirements of numerosity, commonality,<br />
and typicality and that the lead plaintiff<br />
adequately represented the class. Id. at<br />
288–92. <strong>The</strong> court found, however, class<br />
certification was not appropriate under<br />
Federal Rule of Civil Procedure 23(b)<br />
because the predominant relief sought was<br />
money damages, and resolving the claims<br />
would involve many plaintiff- specific<br />
issues of injury, causation, and comparative<br />
fault, among others. Id. at 294. <strong>The</strong>se<br />
issues that were unique to each plaintiff<br />
Construction Expertise<br />
Mark E. Williams, AIA, NCARB<br />
mwilliams@robsonforensic.com<br />
“overwhelm[ed] the common questions”<br />
that the plaintiffs sought to certify. Id.<br />
Although the courts have shut down diesel<br />
exhaust litigation concerning certain<br />
categories of defendants, mass tort plaintiffs’<br />
lawyers will no doubt take a closer<br />
look at diesel exhaust after the DEMS and<br />
the IARC proclamation to attempt to find<br />
ways around existing precedent. Unfortunately,<br />
it appears, at least on the surface,<br />
to the plaintiffs’ bar, that asbestos<br />
and diesel exhaust litigation have some<br />
parallel. Both involve airborne inhalants<br />
that have become increasingly regulated.<br />
Both involve the opportunity for revisionist<br />
“historians” to find evidence that someone,<br />
somewhere, long ago recognized a possible<br />
hazard and, therefore, everyone should<br />
have foreseen a hazard long ago. Through<br />
continued motion practice and further<br />
evaluation of DEMS weaknesses, however,<br />
diesel exhaust litigation should not become<br />
the next mass tort.<br />
This article was submitted for publication<br />
several months ago, but was in the<br />
queue behind other articles. In the six<br />
months since these two important developments<br />
in diesel exhaust litigation, there<br />
has been little activity in case filings and<br />
court rules. <strong>The</strong>re have been only a handful<br />
of case filings, most of them FELA railroad<br />
cases. <strong>The</strong>re have also been few cases<br />
decided with respect to the issues discussed<br />
in this article. See Lukesh v. Illinois Workers’<br />
Compensation Commission, 2012 WL<br />
6862927 (Ill Ct. App. 1st Dist. Dec. 28, 2012)<br />
(upholding the denial of workers compensation<br />
benefits where insufficient evidence<br />
linking lung cancer to diesel exhaust); Hillsdale<br />
Environmental Loss Prevention, Inc. v.<br />
United States Army Corps of Engineers, 702<br />
F.3d 1156 (10th Cir. Nov. 28, 2012) (Army<br />
Corps methodology in assessing cancer<br />
risk from diesel exhaust had a rational<br />
basis, Corps was not required to use the<br />
methodology it had used in assessing a<br />
California permit and affirming decision<br />
to issue a dredge/fill permit).<br />
Mark Williams heads the Construction Claims practice at Robson <strong>For</strong>ensic.<br />
He is a broadly experienced architect with a diverse career that included<br />
new construction, adaptive-reuse, and renovation projects on a wide range<br />
of building types and occupancies. Contact Mark directly to discuss your<br />
case and how Construction Experts at Robson <strong>For</strong>ensic can assist.<br />
Architecture . Structural Engineering<br />
Civil Engineering . Fire Protection<br />
Plumbing . HVAC . Electrical Engineering<br />
Land Development . Cost Estimating<br />
Engineers, Architects, Scientists & Fire Investigators<br />
Professional Liability . CPM Scheduling<br />
Geology . Hydrology . Water Resources<br />
www.robsonforensic.com | 866.235.2370<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 33
Premises Liability<br />
Watch Where<br />
You’re Going!<br />
By Robert D. Lang<br />
As the number of<br />
accidents caused by<br />
inattentiveness due<br />
to hand-held device<br />
use increases, so will<br />
reported cases, which<br />
thus far indicate that<br />
both judges and juries<br />
recognize questions of<br />
comparative fault and<br />
material fact issues.<br />
<strong>The</strong> New <strong>Defense</strong> of<br />
Texting and<br />
Tweeting in<br />
Personal<br />
Injury<br />
Lawsuits<br />
34 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
We have all seen them and perhaps have been ourselves<br />
among them: people walking but not looking. <strong>The</strong>ir gait,<br />
unlike those who have overstayed at happy hour, is steady.<br />
<strong>The</strong>ir eyes are not wander-<br />
■ Robert D. (Bob) Lang is a member of the firm of D’Amato & Lynch LLP in<br />
New York City, where he is the head of the Casualty Department. He is an<br />
active member of <strong>DRI</strong> and its Alternative Dispute Resolution, Retail and Hospitality,<br />
Product Liability, and Toxic Torts and Environmental Law Committees.<br />
He claims not to text or e-mail while walking to and from court.<br />
ing but are fixed on a small, hand-held<br />
device. As opposed to those using cell<br />
phones, they are not loud or even speaking.<br />
Instead, they are focused on the mobile
device that they hold, often furiously tapping<br />
away to send a message that is of<br />
such great importance that they do not see<br />
where they are going. In this quasi- zombie<br />
state, it is not surprising that they do not<br />
pay close attention to their surroundings,<br />
which includes motor vehicles, pedestrians,<br />
and shoppers, to say nothing of cracks or<br />
holes in the sidewalks, barriers, and other<br />
people and things over which they can<br />
trip, slip, bump, and fall. When someone<br />
is so preoccupied with texting, tweeting,<br />
and e- mailing, he or she may not appreciate<br />
or even see any of the many conditions<br />
that may cause accidents, to say nothing of<br />
“open and obvious” conditions.<br />
Considerable attention has already<br />
focused on the dangers and problems arising<br />
from cell phone usage while driving a<br />
car. <strong>The</strong>se same problems arise when shoppers<br />
and pedestrians occupy their hands<br />
with a whole host of other mobile device<br />
diversions of every grade and order. <strong>The</strong><br />
case law has started to address this new<br />
area of law. Court decisions indicate that<br />
with more frequency defendants argue the<br />
defense that plaintiffs were preoccupied<br />
with mobile technology.<br />
It is startling to consider the statistics<br />
about distracted drivers of motor vehicles<br />
because, similar to inattention that<br />
produces injuries on the road, pedestrian<br />
mobile device use can result in accidents<br />
in the workplace, in stores, and simply<br />
walking down the street. <strong>The</strong> United States<br />
Department of Transportation, in September<br />
2010, issued a report, “Distracted Driving<br />
2009,” which found that over 450,000<br />
people were injured in 2009 in motor vehicle<br />
crashes that involved distracted driving,<br />
and 18 percent of the fatalities involved cell<br />
phones as distractions. <strong>The</strong> age group with<br />
the greatest proportion of distracted drivers<br />
was the under- 20 age group. Cell phone<br />
using 30- to 39-year-old drivers fell into<br />
the group with the highest proportion of<br />
crashes resulting in fatalities. And the percentage<br />
of people using cell phones, smart<br />
phones, and other mobile devices has<br />
increased in people of all age groups since<br />
2009. <strong>The</strong> National Safety Council issued a<br />
report in <strong>March</strong> 2010, “Understanding the<br />
Distracted Brain,” referencing more than<br />
30 scientific studies and reports describing<br />
how a cell phone, whether hands-free<br />
or handheld, requires the brain to multitask,<br />
a process that it cannot do safely while<br />
driving. <strong>The</strong> same multitasking, of course,<br />
applies when e- mailing or texting. A driver<br />
using a hands-free cell phone at least looks<br />
at the road while speaking to another. However,<br />
to e-mail or to text, someone looks<br />
down at the mobile device rather than at<br />
the road or surroundings, whether in a car<br />
or on foot, increasing the danger. <strong>The</strong> brain<br />
multitasking difficulty applies as equally to<br />
walking while using mobile devices as to<br />
driving while using them.<br />
In April 2012, the National Safety Council<br />
issued another report, “Understanding<br />
the Distracted Brain,” pointing out<br />
that when drivers use cell phones, even<br />
hands-free, they have a tendency to “look<br />
at” but not “see” objects. Distracted drivers<br />
experience what researchers refer to as<br />
“inattention blindness” similar to that of<br />
tunnel vision. Smart people using smart<br />
phones while they walk can become considerably<br />
less than smart when they look<br />
down at their devices rather than at their<br />
surroundings.<br />
<strong>The</strong> type and variety of accidents that<br />
happen vary as much as people do. <strong>For</strong><br />
example, Boston Red Sox Manager Bobby<br />
Valentine, while in New York during the<br />
final days of this past painful season for<br />
the Red Sox, was injured while riding his<br />
bicycle near the New York Central Park<br />
Reservoir and reading a text from his second<br />
baseman Dustin Pedroia. Valentine<br />
admitted, “I shouldn’t have been reading<br />
a text while I was riding. That’s the wrong<br />
thing to do, but at least I was wearing my<br />
helmet.” N.Y. Times, Oct. 3, 2012, at B13. A<br />
few days later, Bobby Valentine was fired<br />
as manager of the Red Sox. As a long-time<br />
Yankee fan, I defer further comment.<br />
<strong>The</strong> number of fatalities involving drivers,<br />
bikers, and walkers on New York City<br />
streets rose 23 percent through July 2012<br />
compared with the previous one-year<br />
period. N.Y. Times, Sept. 27, 2012, at A22.<br />
New York City Public Transportation Commissioner<br />
Janette Sadik-Kahn stated that<br />
the rise may have been caused, at least in<br />
part, by an increase in distractive driving<br />
and distractive walking, “I don’t think that<br />
the IPhone has invented an App yet that<br />
would ping you when you hit a crosswalk.<br />
That breakup text can wait.” Id.<br />
To help reduce the more than 11,000<br />
pedestrian motor vehicle accidents each<br />
year, New York City has partnered with the<br />
design firm Pentagram to create LOOKERS<br />
followed by exclamation signs inside the<br />
stripes of busy crosswalks. N.Y. Mag., Oct.<br />
1, 2012, at 12. <strong>The</strong>se stenciled warnings will<br />
appear at more than 100 of New York City’s<br />
most dangerous intersections.<br />
Luxury car manufacturers advertise that<br />
“[i]t brings the Internet to your dashboard.<br />
<strong>The</strong> brain multitasking<br />
difficulty applies as equally<br />
to walking while using<br />
mobile devices as to<br />
driving while using them.<br />
Connects you to your car from smart phone<br />
or computer.” Quite true—however, it also<br />
brings a host of distractions to the driving<br />
experience and connects smart phones and<br />
computers to litigation claims and defenses.<br />
Some automakers now have and others<br />
plan to introduce connected, in-car systems<br />
that bring apps to the dashboard to<br />
provide drivers with the entertainment and<br />
communication features of a phone while<br />
avoiding the distraction of picking it up<br />
behind the wheel. Motoring in the Age of<br />
the Smartphone, N.Y. Times, Oct. 12, 2012,<br />
at F8. Decidedly a mixed blessing, both in<br />
personal life and in litigation, their use,<br />
or misuse, can form a persuasive basis for<br />
establishing or denying liability in litigation<br />
by savvy defense counsel.<br />
Among other questions, defense counsel<br />
will need to decide which type of juror<br />
will be most receptive to the “text” defense.<br />
Those who text and e-mail frequently<br />
while waiting for a traffic control signal<br />
to change, while walking aimlessly down<br />
streets, while shopping in retail stores,<br />
tend to be forgiving since they themselves<br />
similarly subscribe to the lure of “I am so<br />
important,” “This is so important,” or “It<br />
cannot wait” type of thinking. A better profile<br />
for the defense would be a juror who<br />
frowns when people talk, in their opinion,<br />
too loudly when entering elevators, in<br />
buses, in waiting rooms, or in restaurants.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 35
Premises Liability<br />
Some individuals shake their heads from<br />
side to side when people sit down in restaurants<br />
and take out their mobile devices and<br />
place them on the table so that they are at<br />
the ready. Those individuals will likely be<br />
receptive to the “text” defense.<br />
A Look at Some Recent Cases<br />
<strong>The</strong> reported cases indicate that both<br />
When a plaintiff has used<br />
his or her cell phone to his<br />
or her advantage, defense<br />
counsel should press for<br />
evidence that could show<br />
that the plaintiff had used<br />
the cell phone before an<br />
incident, not just afterwards.<br />
36 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
judges and juries recognize that inattentiveness<br />
due to mobile device use by injured<br />
parties raises questions of comparative<br />
fault and material fact issues, and courts<br />
will deny summary judgments on liability<br />
to plaintiffs.<br />
In Glen v. Murphy, 4 Misc. 3d 970, 781<br />
N.Y.S.2d 230 (N.Y. Sup. Ct. Nassau Co.<br />
2004), a motor vehicle personal injury case,<br />
the defendant claimed that the plaintiff did<br />
not see the car that hit her because she was<br />
talking on her cell phone, which she held to<br />
her ear with her left hand. Judge Palmieri<br />
felt that the plaintiff could be held comparatively<br />
negligent and denied the plaintiff’s<br />
motion for a summary judgment.<br />
In Goppel v. Chiarella, 2009 NI Misc.<br />
Lexis 6212, 2009 N.I. Slip Op. 32357U (N.Y.<br />
Sup. Ct. N.Y. Co. 2009), the plaintiff was<br />
injured while crossing a Manhattan street<br />
within the crosswalk. Following the completion<br />
of discovery, the plaintiff moved for<br />
a summary judgment on the issue of liability.<br />
Among others, the defendant alleged<br />
the triable issue of material fact that the<br />
plaintiff was crossing the street while using<br />
a cell phone and, therefore, was not attentive<br />
to the traffic conditions, including<br />
that the traffic control signal was flashing<br />
“do not cross.” <strong>The</strong> plaintiff denied using<br />
her cell phone at the time of the accident<br />
although she did admit that she used her<br />
cell phone to call her friend shortly after<br />
the accident. <strong>The</strong> court denied the motion<br />
for a summary judgment.<br />
In Matthews v. Vlad Restoration Ltd.,<br />
74 A.D.3d 692, 904 N.I.S.2d 391 (N.Y. App.<br />
Div. 2010), the plaintiff was talking on her<br />
cell phone while hurrying across a scaffold<br />
to catch a bus when she tripped and<br />
fell on a lower horizontal brace. <strong>The</strong> court<br />
granted the defendants’ motion for a summary<br />
judgment. Although the court did<br />
not rely on the cell phone use to support<br />
the decision, the fact that the plaintiff was<br />
on her cell phone supported the defendants’<br />
position that the scaffold was open<br />
and obvious, and the plaintiff should have<br />
recognized it had she exercised due care.<br />
In Prego v. Falcioni, 2006 Conn. Super.<br />
Lexis 471 (Conn. Superior Ct. 2006), the<br />
court found that defendant to be 90 percent<br />
responsible for an automobile accident and<br />
that the plaintiff’s 10 percent comparative<br />
negligence was due to “her failure to maintain<br />
a proper lookout,” citing the fact that<br />
“[s]he was operating her cell phone within<br />
seconds of the collision.”<br />
In Rhoney v. United States, 2010 U.S.<br />
Dist. Lexis 14303 (W.D. N.Y. 2010), the<br />
plaintiff moved for a summary judgment<br />
on liability in an automobile personal<br />
injury lawsuit. In opposition, the defendant<br />
stated that he observed the plaintiff talking<br />
on her telephone while driving and,<br />
in fact, following the incident, he waited<br />
approximately 10–15 seconds for the plaintiff<br />
to finish her telephone call after he<br />
approached the plaintiff’s vehicle after the<br />
collision. U.S. Magistrate Judge Schroeder<br />
denied the plaintiff’s motion for a summary<br />
judgment, finding that the allegation<br />
that the plaintiff may have been talking<br />
on a cell phone at the time of the accident<br />
raised a triable issue of fact whether the<br />
plaintiff’s inattentiveness contributed to<br />
the accident.<br />
In Sapsai v. Timar Construction Co., 2007<br />
U.S. Dist. Lexis 101504 (M.D. Pa. 2007), the<br />
plaintiff sustained personal injury when<br />
she fell into a trench while walking on the<br />
defendant’s property. <strong>The</strong> plaintiff filed a<br />
motion in limine requesting that the court<br />
preclude the defendant from alleging that<br />
the plaintiff was comparatively negligent.<br />
One of the points that the defendant sought<br />
to raise was that evidence from a neighbor<br />
suggested that the plaintiff was on her cell<br />
phone at the time of the incident. <strong>The</strong> court<br />
denied the plaintiff’s motion in limine because<br />
if the evidence established that the<br />
plaintiff knowingly choose “a path through<br />
the construction site while in the dark and<br />
on her cell phone,” the jury should decide<br />
whether she was comparatively negligent.<br />
In Wilkerson v. Kansas City Southern<br />
Railway, 772 So. 2d 268 (La. Ct. App. 2000),<br />
a personal injury lawsuit resulting from a<br />
fatality when a car was struck by a train,<br />
the decedent was observed talking and<br />
laughing on her cell phone. Before the accident,<br />
the decedent never slowed, looked, or<br />
stopped before she drove onto the tracks<br />
in front of the train. In the opinion of the<br />
train engineer who was driving the train,<br />
the driver was not trying to “beat” the<br />
train. She just did not see the train. She was<br />
engrossed in her cell phone call.<br />
<strong>The</strong> jury found the driver 60 percent at<br />
fault and the railway 40 percent responsible.<br />
<strong>The</strong> appellate court reversed and found<br />
that the railway was not liable and that<br />
the primary cause of the accident was the<br />
plaintiff’s inattention. Using the cell phone,<br />
which diminished or prohibited her ability<br />
to proceed and react to the approaching<br />
train, contributed. <strong>The</strong> court concluded:<br />
Although Wilkerson was proceeding<br />
slowly, she was distracted by her<br />
cell phone conversation and did not<br />
approach the crossing with heightened<br />
caution. Tragically for herself and her<br />
loved ones, she did not see what she<br />
could have seen, nor heard what she<br />
could have heard, had she looked and<br />
listened. Wilkerson’s sad and untimely<br />
death was caused by her own inattention<br />
and not by any actions or inactions<br />
on the part of the railway or the engineer,<br />
Lewis.<br />
772 So. 2d at 280.<br />
In Mathew v. A.J. Richard & Sons, 84<br />
A.D.3d 1038, 923 N.Y.S.2d 218 (N.Y. App.<br />
Div. 2011), the plaintiff sued for personal<br />
injuries sustained when the lid of a barbeque<br />
grill, which was on display on the<br />
showroom floor, closed and struck her<br />
on the back as she leaned against the grill<br />
while making a cell phone call. <strong>The</strong> de-
fendants moved for a summary judgment,<br />
which the Supreme Court, Kings County,<br />
denied. On appeal, the appeal court unanimously<br />
reversed, finding that the open lid<br />
of the barbeque was an open and obvious<br />
condition and not inherently dangerous.<br />
<strong>The</strong> fact that the plaintiff was making a cell<br />
phone call, and leaning against the grill<br />
while doing so, was noted as pointing to<br />
the conclusion that the plaintiff had failed<br />
to observe the open and obvious condition.<br />
In Deljanin v. St. Nicholas Cathedral of<br />
Russian Orthodox Church in North America,<br />
12 Misc. 3d 1158A, 819 N.Y.S.2d 209<br />
(N.Y. Sup. Ct. N.Y. Co. 2006), the plaintiff<br />
sustained personal injury when, while<br />
walking on a sidewalk in Manhattan, she<br />
was struck in the forehead by the arm of a<br />
large cherry picker. It was undisputed that<br />
at the time of the accident the plaintiff was<br />
searching for her cell phone. After discovery<br />
was complete, the defendants moved<br />
for a summary judgment. <strong>The</strong> court held<br />
that the jury would decide whether the<br />
plaintiff had walked down the street inattentively<br />
and apportion liability under an<br />
implied assumption of risk.<br />
In Dessasore v. New York City Housing<br />
Authority, 70 A.D.3d 440, 895 N.Y.S.2d 44<br />
(N.Y. App. Div. 2010), the plaintiff recovered<br />
$5 million in a trial after he fell down<br />
a stairway in the defendant’s building, having<br />
tripped on a handrail that had partially<br />
loosened from the wall that was resting at<br />
the top of the steps. Some evidence had<br />
indicated that the plaintiff may have been<br />
talking on his cell phone at the time of<br />
the accident. <strong>The</strong> jury found that both the<br />
plaintiff and the defendant were negligent<br />
but that the plaintiff’s comparative negligence<br />
was not a substantial factor in causing<br />
his injuries.<br />
On appeal, the appellate division court<br />
found that the jury’s finding of liability<br />
was “irreconcilably inconsistent” because<br />
the evidence indicated that the plaintiff<br />
did not look down before he proceeded to<br />
descend the stairs, did not pay attention<br />
to his surroundings, and talked on his cell<br />
phone just before he fell. In these circumstances,<br />
the appellate division court found<br />
that “the issues of negligence and approximate<br />
causation were so inextricably interwoven<br />
as to make it largely impossible to<br />
find negligence without also finding proximate<br />
cause.” Two judges dissented, finding<br />
that the jury had enough evidence to conclude<br />
rationally that although the plaintiff<br />
was negligent in talking on the cell phone<br />
and not looking down as he approached the<br />
stairs, his negligence was not a proximate<br />
cause of his accident and that the sole proximate<br />
cause of the accident was the handrail<br />
on the floor. 70 A.D.3d at 442.<br />
<strong>The</strong>se cases point out the significance<br />
of obtaining cell phone and e-mail records<br />
of those who claim injury when crafting a<br />
defense. In some instances, including those<br />
involving retail establishments, CCTV film<br />
of an incident may show a plaintiff using a<br />
mobile device at the time of an accident,<br />
which will allow defense counsel to argue<br />
that the plaintiff failed to notice the condition<br />
that caused the injury because using<br />
a cell phone made him or her inattentive.<br />
Some plaintiffs now quickly snap photos<br />
with their cell phone cameras of conditions<br />
that they state caused accidents. Cell phone<br />
evidence is fair play. When a plaintiff has<br />
used his or her cell phone to his or her<br />
advantage, defense counsel should press for<br />
evidence that could show that the plaintiff<br />
had used the cell phone before an incident,<br />
not just afterwards, to prove comparative<br />
negligence on the part of the plaintiff.<br />
As the accidents caused by inattentiveness<br />
due to hand-held device use increase,<br />
the reported cases will increase as well.<br />
Like it or not, texts, e-mails, and cell<br />
phones are here to stay.<br />
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May 16–17, <strong>2013</strong><br />
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Chicago, Illinois<br />
Visit http://dri.org/<br />
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or call 312.795.1101<br />
to register or for<br />
more information.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 37
Insurance Law<br />
Ending Duty to Defend<br />
By Thomas R. Newman<br />
Exhausting Policy<br />
Limits When<br />
Settling Less than<br />
All Lawsuits<br />
When dealing with<br />
multiple claims and<br />
insufficient limits to<br />
cover an insured’s total<br />
potential exposure, the<br />
insurer must be extremely<br />
cautious in settling less<br />
than all of the claims.<br />
38 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ Thomas R. Newman is of counsel for Duane Morris LLP in New York City. He practices in the areas of insurance and reinsurance<br />
law, including coverage, claims handling, contract drafting, arbitration, and litigation. Mr. Newman has served as lead<br />
counsel in more than 55 reinsurance arbitrations, representing both cedents and reinsurers. He is often called on to act as an<br />
expert witness in insurance cases in the United States and in London. Mr. Newman has been a member of <strong>DRI</strong> since 1976.
A liability insurer’s duty to defend its insured against covered<br />
lawsuits seeking damages is purely contractual. <strong>The</strong>re<br />
is no common law duty to defend. All-Star Ins. Corp. v.<br />
Steel Bar, Inc., 324 F. Supp. 160, 163 (N.D. Ind. 1971).<br />
Accordingly, courts will look to the language<br />
of the policy at issue to determine<br />
whether an insurer has a defense obligation<br />
and, if so, the extent of that obligation.<br />
Since 1986 the present Insurance Services<br />
Office (ISO) standard form Commercial<br />
General Liability policy (CGL) expressly<br />
states that<br />
[o]ur right and duty to defend ends when<br />
we have used up the applicable limit<br />
of insurance in the payment of judgments<br />
or settlements under Coverages<br />
A [bodily injury and property damage]<br />
or B [personal injury and advertising liability]<br />
or medical expenses under Coverage<br />
C [<strong>For</strong>m CG 00 01 12 07].<br />
<strong>The</strong> ISO 1966 and 1973 CGL policies<br />
achieved the same result by using somewhat<br />
different wording “the company shall<br />
not be obligated to pay any claim or judgment<br />
or to defend any suit after the applicable<br />
limit of the company’s liability has been<br />
exhausted by the payment of judgments or<br />
settlements.” <strong>For</strong>m GL 00 02 01 73.<br />
<strong>The</strong> previous ISO wording made the<br />
underwriting intent clear and unambiguous:<br />
an insurer does not have a duty to<br />
defend after paying judgments or settlements<br />
that exhaust the policy limits. See,<br />
e.g., American States Ins. Co. v. Arnold,<br />
930 S.W.2d 196, 201 (Tex. App. 1996). But<br />
several important issues remained for the<br />
courts to weigh in on.<br />
Is an insurer’s duty to defend terminated<br />
by settlements that, while exhausting<br />
the applicable policy limits, do not settle<br />
all outstanding lawsuits, or claims within<br />
a lawsuit, against the insured May an<br />
insurer terminate its duty to defend by paying<br />
its policy limits to get one insured out<br />
of an action, to the detriment of another insured<br />
who remains in the action<br />
Must an insurer wait until all potential<br />
claimants have filed all potential claims<br />
against one or more insureds before settling<br />
with a particular claimant<br />
Would a non- settling claimant have a<br />
cause for complaint because a settlement<br />
would deplete or exhaust coverage otherwise<br />
available for his or her injuries<br />
What constitutes an insurer’s good faith<br />
when it settles some but not all of the lawsuits<br />
or claims against the insured<br />
“First in Time, First in Right”<br />
When multiple claimants bring lawsuits<br />
against one or more insured defendants<br />
seeking damages for bodily injuries or<br />
death arising from a single occurrence<br />
and, based on a reasonable evaluation,<br />
the policy limits are plainly insufficient to<br />
cover the insured’s total potential exposure,<br />
courts generally apply the rule “first<br />
in time, first in right.” Voccio v. Reliance<br />
Ins. Cos., 703 F.2d 1, 3 (1st Cir. 1983). This<br />
principle “applies regardless of whether the<br />
priority is by way of judgment or by way of<br />
settlement.” World Trade Ctr. Props. LLC v.<br />
Certain Underwriters at Lloyd’s of London,<br />
650 F.3d 145, 151 (2d Cir. 2011); Allstate Ins.<br />
Co. v. Russell, 13 A.D.3d 617, 788 N.Y.S.2d<br />
401, 402 (N.Y. App. Div. 2004); Castoreno v.<br />
Western Indemnity Co., 213 Kan. 103, 110,<br />
515 P.2d 789, 794 (Kan. 1973).<br />
A liability insurer “has discretion to<br />
settle whenever and with whomever it<br />
chooses, provided it does not act in bad<br />
faith.” World Trade Ctr. Props. LLC v. Certain<br />
Underwriters at Lloyd’s of London,<br />
650 F.3d 145, 151 (2d Cir. 2011); Allstate<br />
Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App.<br />
Div. 2004). Unless someone alleges bad<br />
faith with respect to settlement negotiations,<br />
an insurer can agree to a settlement<br />
that will release some but not all of the<br />
insureds. Anglo- American Ins. Co. v. Molin,<br />
670 A.2d 194, 198 (Pa. Commw. Ct. 1995).<br />
<strong>The</strong> insurer “has no duty to pay out claims<br />
ratably and/or consolidate them.” Allstate<br />
Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App.<br />
Div. 2004). It can settle less than all claims<br />
even if a settlement exhausts policy limits<br />
so that the insured and other claimants<br />
are left without coverage under the policy.<br />
Liquori v. Allstate Ins. Co., 76 N.J. Super.<br />
204, 208, 184 A.2d 12, 17 (N.J. Super. Ct.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 39
Insurance Law<br />
1962). When an insurer “has paid the full<br />
monetary limits set forth in the policy,<br />
its duties under the contract of insurance<br />
cease.” Boris v. Flaherty, 242 A.D.2d 9, 12,<br />
672 N.Y.S.2d 177, 180 (N.Y. App. Div. 1998).<br />
When a covered occurrence gives rise to<br />
multiple claims, the insurer does not need<br />
to wait until all of the claimants have filed<br />
all potential claims against its insureds<br />
When a covered<br />
occurrence gives rise<br />
to multiple claims, the<br />
insurer does not need<br />
to wait until all of the<br />
claimants have filed all<br />
potential claims against<br />
its insureds before settling<br />
with a particular claimant.<br />
before settling with a particular claimant.<br />
Hartford Casualty Ins. Co. v. Dodd, 416 F.<br />
Supp. 1216, 1219 (D. Md. 1976); State Farm<br />
Mutual Auto Ins. Co. v. Hamilton, 326 F.<br />
Supp. 931, 934 (D. S.C. 1971). As one court<br />
explained, “[w]hether multiple claims are<br />
to be treated one at a time or collected and<br />
evaluated together, is a choice solely within<br />
the discretion of the insurer.” Liquori v. Allstate<br />
Ins. Co., 184 A.2d 12, 17 (N.J. Super.<br />
Ct. 1962).<br />
As long as an insurer does not act in bad<br />
faith, it does not need to notify non- settling<br />
third-parties of a proposed settlement.<br />
Arrow Exterminators, Inc. v. Zurich American<br />
Ins. Co., 136 F. Supp. 2d 1340, 1355<br />
(N.D. Ga. 2001). When “a presumptively<br />
valid and adequate award has been made<br />
to one of several claimants, the fact that the<br />
remaining claimants, or any one of them,<br />
have not been taken into the confidence of<br />
the settling parties falls far short of establishing<br />
an adequate ground for equitable<br />
relief.” Liquori v. Allstate Ins. Co., 184 A.2d<br />
12, 17 (N.J. Super. Ct. 1962). If an insurer<br />
40 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
cannot obtain a global settlement and settles<br />
less than all of the claims, it would face<br />
a bad faith lawsuit only if it did not undertake<br />
the settlement in good faith.<br />
<strong>The</strong> strong public policy encouraging<br />
speedy settlements supports the “first in<br />
time, first in right” rule. Harmon v. State<br />
Farm Mut. Auto. Ins. Co., 232 So. 2d 206,<br />
208 (Fla. Dist. Ct. App. 1970); Richard v.<br />
Southern Farm Bureau Cas. Ins. Co., 212<br />
So. 2d 471, 479 (La. Ct. App. 1968), aff’d,<br />
223 So. 2d 858 (La. 1969). If insurers were<br />
required to know of and evaluate all potential<br />
claims against their insureds before<br />
settling any individual claim, then insurers<br />
could only settle if they were willing to<br />
assume the risk that the remaining coverage<br />
would not be sufficient to cover a future<br />
claim arising from the same occurrence.<br />
Such a rule would discourage insurers from<br />
accepting reasonable settlement offers at an<br />
early litigation stage. As the Texas Supreme<br />
Court wrote,<br />
when faced with a settlement demand<br />
arising out of multiple claims and inadequate<br />
proceeds, an insurer may enter<br />
into a reasonable settlement with one of<br />
the several claimants even though such<br />
settlement exhausts or diminishes the<br />
proceeds available to satisfy other claims.<br />
Such an approach, we believe, promotes<br />
settlement of lawsuits and encourages<br />
claimants to make their claims promptly.<br />
Texas Farmers Ins. Co. v. Soriano, 881<br />
S.W.2d 312 (Tex. 1994).<br />
As a general rule, non- settling thirdparty<br />
claimants do not have grounds for<br />
complaining that a settlement depleted<br />
or exhausted policy proceeds that otherwise<br />
would have been available to them<br />
and left them without recourse against the<br />
insurer. An insurer’s duty “is to its insured.<br />
It owes no correlative contractual duty to<br />
third-party claimants.” Peckham v. Continental<br />
Cas. Ins. Co., 895 F.2d 830, 835 (1st<br />
Cir. 1990). As the Supreme Court of Kansas<br />
explained:<br />
<strong>The</strong> insurer certainly could not be<br />
enjoined by plaintiffs from settling with<br />
other persons injured in the same accident<br />
and thereby exhausting the fund to<br />
the exclusion of plaintiffs…. If we were<br />
to follow plaintiffs’ theory it could lead<br />
us to a result where one injured person<br />
could enjoin the compromise and settlement<br />
by an insurer of the claim of<br />
another injured person in the same accident.<br />
This would be in direct conflict<br />
with what has just been stated. <strong>The</strong> better<br />
rule is that where, as here, an insurer<br />
settles two of five claims arising out<br />
of an automobile accident, such settlement<br />
is not contrary to public policy as<br />
against the remaining three claimants<br />
who reduced their claims to judgment.<br />
Bennett v. Conrady, 180 Kan. 485, 491–92,<br />
305 P.2d 823, 828 (Kan. 1957).<br />
Similarly, a liability insurer may settle<br />
claims against one insured under a<br />
particular policy even if the settlement<br />
exhausts the policy proceeds to the detriment<br />
of another named insured or an<br />
additional insured. An insurer is “free to<br />
settle suits against one of its insureds without<br />
being hindered by potential liability to<br />
co- insured parties who have not yet been<br />
sued.” Travelers Indem. Co. v. Citgo Petroleum<br />
Corp., 166 F.3d 761, 764–65 (5th Cir.<br />
1999) (interpreting Texas law).<br />
<strong>The</strong> New York Supreme Court, Appellate<br />
Division took a contrary position, followed<br />
by a minority of courts, without<br />
passing on the merits, upholding as legally<br />
sufficient a complaint alleging that the defendant<br />
insurer<br />
attempted to force and coerce the plaintiff<br />
to accept an offer of settlement in<br />
the amount of $6,250… combined with<br />
an allegation of a threat that if the offer<br />
should be rejected by the plaintiff, the<br />
defendant would conduct individual settlement<br />
negotiations with other claimants<br />
and “thereby reduce the amount<br />
of money which would have otherwise<br />
been available for the payment of any<br />
judgment, which the said plaintiff herein<br />
might recover against the [insureds].”<br />
Obad v. Allstate Ins. Co., 27 A.D.2d 795, 279<br />
N.Y.S.2d 128 (N.Y. App. Div. 1967).<br />
A Texas Court of Appeals was presented<br />
with a case in which a primary insurer,<br />
having settled up to its policy limits and<br />
obtained a release on behalf of its named<br />
insured, refused to defend an additional<br />
insured in a separate action arising from<br />
the same accident. <strong>The</strong> additional insured’s<br />
excess insurer assumed the defense and<br />
then sued the primary insurer to recover<br />
its costs. <strong>The</strong> Texas Court of Appeals found<br />
that the primary insurer had not breached<br />
a duty in obtaining the settlement for<br />
its named insured, and its duties to the
additional insured terminated when that<br />
settlement exhausted the policy limits.<br />
American States Ins. Co. of Texas v. Arnold,<br />
930 S.W.2d at 202–203.<br />
Good Faith<br />
An insurer has a duty to act in good faith<br />
when dispersing the proceeds of a liability<br />
insurance policy, and the insurer’s<br />
“termination of its duty to defend, like all<br />
transactions between insurer and insured,<br />
requires the insurer to have acted in good<br />
faith.” NIA Learning Center, Inc. v. Empire<br />
Fire & Marine Ins. Cos., 2009 U.S. Dist.<br />
Lexis 92991, at *19 (E.D. Pa. 2009). When<br />
an insured has surrendered all control over<br />
the handling of a claim to the insurer, the<br />
insurer assumes “a duty to exercise such<br />
control and make such decisions in good<br />
faith and with due regard for the interests<br />
of the insured.” Boston Old Colony Ins. Co.<br />
v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980).<br />
<strong>The</strong> duty of good faith requires one of two<br />
things of an insurer. An insurer must give<br />
“the interest of the insured” consideration<br />
“equal to that consideration given its own<br />
interest,” Voccio v. Reliance Ins. Cos., 703<br />
F.2d 1, 3 (1st Cir. 1983); Liberty Mut. Ins. Co.<br />
v. Davis, 412 F.2d 475, 483 [5th Cir. 1969]).<br />
Or the insurer must “ treat the claim as if<br />
it were alone liable for the entire amount.”<br />
Bell v. Commercial Ins. Co. of Newark, 280<br />
F.2d 514, 515 (3d Cir. 1960); Brown v. United<br />
States Fid. & Guar. Co., 314 F.2d 675, 678<br />
(2d Cir. 1963). When the policy limits are<br />
less than an insured’s potential exposure,<br />
“the insurer cannot put its own interests<br />
first, but must negotiate as it would if its<br />
liability limits were unbounded.” Peckham<br />
v. Continental Cas. Ins. Co., 895 F.2d 830,<br />
834–35 (1st Cir. 1990).<br />
In Peckham, the court summarized the<br />
insurer’s obligation in a multiclaim, limited<br />
coverage situation as follows:<br />
<strong>The</strong> insurer has both the right and the<br />
duty to exercise its professional judgment<br />
in settling, or refusing to settle,<br />
such claims—but it must do so mindful<br />
of the insured’s best interests and in<br />
good faith. <strong>The</strong> insurer’s goal should be<br />
to try to effect settlement of all or some<br />
of the multiple claims so as to relieve its<br />
insured of so much of his potential liability<br />
as is reasonably possible, considering<br />
the paucity of the policy limits…. So<br />
long as it acts in good faith, the insurer<br />
is not held to standards of omniscience<br />
or perfection; it has leeway to use, and<br />
should consistently employ, its honest<br />
business judgment…. <strong>The</strong> carrier, in<br />
fine, “will not be held to prophesy.”<br />
Peckham, 895 F.2d at 835.<br />
An insurer may not “dump its limits”<br />
by settling a claim for more than it is reasonably<br />
worth simply to avoid or terminate<br />
its duty to defend. In re East 51st St.<br />
Crane Collapse Litigation, 2010 N.Y. Misc.<br />
Lexis 6310, at *10 (Sup. Ct. N.Y. Co. 2010),<br />
aff’d, 84 A.D.3d 512, 923 N.Y.S.2d 64 (N.Y.<br />
App. Div. 2011); Maguire v. Ohio Cas. Co.,<br />
412 Pa. Super. 59, 65–66, 602 A.2d 893,<br />
896 (Pa. Super. 1992), appeal denied, 532<br />
Pa. 656, 615 A.2d 1312 (Pa. 1992). As one<br />
court wrote,<br />
<strong>The</strong> exercise of good faith prevents an<br />
insurer from entering into a dubious<br />
release in order to quickly exhaust the<br />
limit of its liability to the insured. “An<br />
insurer which hastily enters a questionable<br />
settlement simply to avoid further<br />
defense obligations under the policy<br />
clearly is not acting in good faith and<br />
may be held liable for damages caused<br />
to its insured.”<br />
Maguire v. Ohio Cas. Co., 412 Pa. Super.<br />
at 65, 602 A.2d at 896. See also, Shuster<br />
v. South Broward Hosp. Dist. Physicians’<br />
Prof’l Liab. Ins. Trust, 591 So. 2d 174,<br />
177 (Fla. 1992) (“Clearly, the intent of the<br />
parties would not have been to allow the<br />
insurer to escape its primary duty to defend<br />
and indemnify the insured merely by paying<br />
out the full sum of the policy limits in<br />
bad faith.”).<br />
Illustrative Cases<br />
In Farinas v. Florida Farm Bureau Gen.<br />
Ins. Co., 850 So. 2d 555, 561 (Fla. Dist. Ct.<br />
App. 2003), Farm Bureau’s insured, Copertino,<br />
lost control of his car, crossed a<br />
median, and hit an oncoming car, causing<br />
the deaths of five teenagers and severe injuries<br />
to seven others, including a 14-year-old<br />
girl who was rendered a quadriplegic. <strong>The</strong><br />
policy limits were $100,000 per claim and<br />
$300,000 per accident.<br />
Within two weeks of the accident, Farm<br />
Bureau settled for the policy limits with<br />
the driver of the other car and in two of<br />
the death actions. It then filed a declaratory<br />
judgment action against the insured<br />
to determine whether it had any further<br />
duty to defend after having paid the policy<br />
limits. <strong>The</strong> remaining claimants intervened<br />
and ultimately filed third-party bad-faith<br />
actions alleging that Farm Bureau entered<br />
into settlements without due regard for the<br />
interests of the insured.<br />
While the trial court granted a summary<br />
judgment to Farm Bureau concerning<br />
all the appellants, the Florida District<br />
An insurer may not<br />
“dump its limits” by settling<br />
a claim for more than it is<br />
reasonably worth simply<br />
to avoid or terminate<br />
its duty to defend.<br />
Court of Appeal reversed the decision and<br />
remanded the case for a jury trial to decide<br />
whether the insurer had met its goodfaith<br />
duty and had undertaken a reasonable<br />
claims settlement strategy. <strong>The</strong> court<br />
stated:<br />
Farm Bureau’s good faith duty to the insured<br />
requires it to fully investigate all<br />
claims arising from a multiple claim<br />
accident, keep the insured informed of<br />
the claim resolution process, and minimize<br />
the magnitude of possible excess<br />
judgments against the insured by reasoned<br />
claim settlement. This does not<br />
mean that Farm Bureau has no discretion<br />
in how it elects to settle claims, and<br />
may even choose to settle certain claims<br />
to the exclusion of others, provided this<br />
decision is reasonable and in keeping<br />
with its good faith duty.<br />
Id.<br />
<strong>The</strong> Florida District Court of Appeal<br />
held that a jury needed to decide whether<br />
Farm Bureau had met its good-faith duty<br />
and undertook a reasonable claims settlement<br />
strategy.<br />
[T]here are many factual issues for the<br />
jury to resolve, including whether Farm<br />
Bureau’s quick settlement with three<br />
of the possible claimants was reasonable,<br />
whether Farm Bureau’s rejection<br />
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Insurance Law<br />
of global and other settlement options<br />
contemplated the best interests of the<br />
insured, whether Farm Bureau adequately<br />
investigated the facts of all of<br />
the claims, and whether Farm Bureau<br />
properly rejected advice of legal counsel<br />
and suggested settlement strategies proposed<br />
by Farm Bureau employees.<br />
Id.<br />
Even if the insurerknows<br />
that it will exhaust its policy<br />
limits, it must still conduct<br />
a thorough investigation,<br />
retaining whatever experts<br />
may be necessary.<br />
42 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
This is a very questionable decision. <strong>The</strong><br />
insurer paid its $300,000 per accident limit<br />
to settle three claims against its insured in<br />
a case that in the end could have had a verdict<br />
potentially far in excess of that limit<br />
and the insurer could not have settled a<br />
quadriplegic case for the policy’s $100,000<br />
per claim limit.<br />
In re East 51st St. Crane Collapse Litigation<br />
involved multiple, consolidated<br />
wrongful death, personal injury, and property<br />
damage claims arising from a construction<br />
crane collapse. 2010 N.Y. Misc.<br />
Lexis 6310, at *10 (Sup. Ct. N.Y. Co. 2010),<br />
aff’d, 84 A.D.3d 512, 923 N.Y.S.2d 64 (N.Y.<br />
App. Div. 2011). Lincoln, primary insurer<br />
of the project’s construction manager, Joy,<br />
sought to intervene in the action to settle<br />
the claim of Rite Aid, a store in the vicinity<br />
of the accident that was damaged when<br />
the crane collapsed, for $1,000,000, or to<br />
deposit $1,000,000 with the court. That<br />
sum represented the full amount of coverage<br />
provided by Lincoln to Joy and to<br />
the owner of the property as well as to the<br />
developer of the property and the general<br />
contractor as additional named insureds.<br />
Lincoln also moved for a declaration that<br />
upon paying its full policy limits, either in<br />
settling Rite Aid’s claims or by depositing<br />
the limits with the court, Lincoln’s obligation<br />
to pay the defense costs of its insured<br />
and additional named insureds was completed<br />
according to the terms of the applicable<br />
insurance policy.<br />
<strong>The</strong> insured defendants opposed Lincoln’s<br />
motion, arguing that the proposed<br />
settlement with Rite Aid was not in good<br />
faith but only undertaken to relieve Lincoln<br />
of its obligation to defend the actions<br />
against the insureds and additional<br />
insureds and that, in any case, neither the<br />
settlement, nor a deposit with the court,<br />
relieved Lincoln of its continuing obligation<br />
to defend.<br />
<strong>The</strong> court found nothing in the terms of<br />
the contract permitting Lincoln to deposit<br />
the full amount of its coverage with the<br />
court without the consent of the named insured.<br />
Rather, the insurance policy clearly<br />
predicated extinguishment of Lincoln’s<br />
obligation to defend on payment by Lincoln<br />
of the full amount of the policy coverage<br />
solely in satisfaction of a judgment<br />
or a settlement. Because the court did not<br />
find a New York case directly on point, the<br />
court considered cases in other jurisdictions<br />
where the courts had allowed insurers<br />
to do what Lincoln sought to do, while<br />
emphasizing that for the insurer to be<br />
relieved of its duty to defend, based on full<br />
payment of the insurance proceeds in settlement,<br />
the insurer must have acted in<br />
“good faith” and “not attempted to ‘artificially<br />
exhaust’ its obligations by tendering<br />
its policy during the litigation.” Id. at *7.<br />
<strong>The</strong> court found Lincoln’s policy language<br />
terminating its duty to defend was<br />
unambiguous and that<br />
[t]here is no provision that such payment<br />
must cover all judgments or settlements<br />
in a multi- party litigation, nor<br />
can the policy language be construed<br />
in that manner. Absent an allegation of<br />
bad faith, or a claim that a settlement is<br />
unreasonable, an insurer who pays the<br />
entire proceeds of its policy in settlement<br />
of a claim in multi- party litigation,<br />
can be released from the continuing<br />
obligation to defend where the policy’s<br />
language clearly and unambiguously<br />
provides for such result.<br />
Id. at *8–*9<br />
<strong>The</strong> court rejected Lincoln’s proposed<br />
settlement with Rite-Aid, finding that<br />
where a substantial portion of discovery<br />
involving questions of liability has yet<br />
to be completed, such a large settlement<br />
that would deplete the entire primary<br />
insurance at this stage of the litigation<br />
without the settlement of even one of<br />
the personal injury plaintiffs, is not in<br />
the best interests of the insureds, nor the<br />
litigation as a whole.<br />
Id. at *11.<br />
Lincoln then proposed another settlement:<br />
it would pay its $1,000,000 policy<br />
limit to the estate of a deceased construction<br />
worker, who was unmarried and had<br />
no children, solely based on the estate’s<br />
claim for pre- impact terror. <strong>The</strong> estate had<br />
not presented evidence at that point to<br />
demonstrate whether and, if so, for how<br />
long, the construction worker had suffered<br />
pre- impact terror. After the court rejected<br />
that proposed settlement as far in excess<br />
of amounts awarded in similar cases, Lincoln<br />
proposed yet another settlement: the<br />
settlement would divide Lincoln’s policy<br />
limit between Rite Aid ($450,000), and a<br />
severely injured construction worker, Perez<br />
($550,000), who underwent three separate<br />
surgeries to repair multiple fractures and<br />
had incurred $160,000 in medical expenses<br />
and a $189,000 Worker’s Compensation lien.<br />
This time the court found the settlement<br />
was fair and reasonable and made by Lincoln<br />
in good faith. It granted Lincoln’s application<br />
to intervene and declared that on<br />
paying the full amount of the settlement,<br />
Lincoln was released from its obligation to<br />
provide any further defense to the defendants.<br />
Id. at *15. In a subsequent appeal in<br />
the same case, the Appellate Division noted<br />
that, “<strong>The</strong> motion court found no indication<br />
that the settlement had been entered into as<br />
a means to inappropriately exhaust the policy.”<br />
Slip op. 7–8 (Feb. 5, <strong>2013</strong>).<br />
In Liberty Mut. Ins. Co. v. Davis, 412 F.2d<br />
475 (5th Cir. 1969), Liberty’s insured driver,<br />
Bess, a penniless, itinerant fruit picker,<br />
struck the rear end of a car occupied by Mr.<br />
and Mrs. Rawls. Bess’ car then careened<br />
head-on into a car occupied by plaintiffs,<br />
Mr. and Mrs. Davis and their three children.<br />
<strong>The</strong> double collision resulted in serious injury<br />
to the five Davises and the two Rawlses.<br />
It was soon evident to all concerned<br />
that the injuries to two Davises alone would<br />
exceed Liberty’s $20,000 per accident policy<br />
limit, and the Rawls’ claim also would<br />
exceed $20,000. <strong>The</strong> Davises’ attorney offered<br />
to compromise for $20,000.
Although Liberty recognized that<br />
it would have to pay the policy limit, it<br />
refused the offer to compromise for fear<br />
that it would be liable to the Rawls if it<br />
depleted the entire amount of the insurance<br />
proceeds by settling with the Davises.<br />
House counsel for Liberty offered<br />
the practical suggestion that all potential<br />
claimants involved in the 10 P.M.<br />
episode, or their attorneys, be notified<br />
that the value of claims will doubtless<br />
exceed limits, and that these people be<br />
invited to participate jointly in efforts<br />
to reach agreement as to disposition<br />
of available funds. If agreement cannot<br />
be reached after expenditure of reasonable<br />
effort, then I can see no present<br />
reason why individual claims could not<br />
thereafter be disposed of individually<br />
on the basis of fair value, first come,<br />
first served.<br />
Id. at 478.<br />
Liberty ignored this advice and filed an<br />
interpleader action. Meanwhile, state court<br />
proceedings resulted in an affirmed default<br />
judgment in favor of Mr. and Mrs. Davis for<br />
$48,500 against Bess, which Liberty could<br />
have settled for the policy limits, but it did<br />
not because of its concern about the Rawlses’<br />
claims. Eventually, Liberty paid a garnishment<br />
judgment of $27,526.85, its policy<br />
limits, plus interest and expenses. <strong>The</strong><br />
Davises then obtained an assignment from<br />
Bess, who was in prison, of any claim that<br />
Bess might have against Liberty for damage<br />
to Bess resulting from the company’s<br />
refusal to settle the Davises’ claim. In consideration<br />
of this assignment, the Davises<br />
released their claim to the unpaid portion<br />
of Bess’ judgment debt.<br />
When the assignees sued based on a<br />
refusal- to- settle claim, Liberty removed<br />
the case to the U.S. District Court for the<br />
Middle District of Florida. After reviewing<br />
all of the evidence, the district court denied<br />
the insurer’s motion for a directed verdict<br />
on the issue of bad faith in the refusal to<br />
settle. <strong>The</strong> jury returned a verdict in favor<br />
of the Davises for $27,593, plus interest, and<br />
the court added $10,000 for attorneys’ fees.<br />
<strong>The</strong> United States Court of Appeals for<br />
the Fifth Circuit affirmed the judgment,<br />
finding that while, undoubtedly, Liberty’s<br />
concerns about having to pay more than<br />
its policy limits were relevant to the ultimate<br />
jury question of bad faith, they did<br />
not, as a matter of law, justify the trial<br />
court’s directing a verdict for the insurer.<br />
It was for the jury to decide whether Liberty’s<br />
refusal to settle was primarily in its<br />
own interests and with too little regard for<br />
its insured’s interests.<br />
When several claimants are involved,<br />
and liability is evident, rejection of a single<br />
offer to compromise within policy<br />
limits does not necessarily conflict with<br />
the interest of the insured. He hopes to<br />
see the insurance fund used to compromise<br />
as much of his potential liability as<br />
possible. Of course, if the fund is needlessly<br />
exhausted on one claim, when it<br />
might cancel out others as well, the insured<br />
suffers from the company’s readiness<br />
to settle. To put the point another<br />
way, even if liability be conceded, plaintiffs<br />
will usually settle for less than they<br />
would ultimately recover after trial, if<br />
only to save time and attorney’s fees.<br />
Each settlement dollar will thus cancel<br />
out more than a dollar’s worth of<br />
potential liability. Insured defendants<br />
will want their policy funds to blot out<br />
as large a share of the potential claim<br />
against them as possible. It follows that,<br />
insofar as the insureds’ interest governs,<br />
the fund should not be exhausted without<br />
an attempt to settle as many claims<br />
as possible. But where the insurance<br />
proceeds are so slight compared with<br />
the totality of claims as to preclude any<br />
chance of comprehensive settlement,<br />
the insurer’s insistence upon such a settlement<br />
profits the insured nothing. He<br />
would do better to have the leverage of<br />
his insurance money applied to at least<br />
some of the claims, to the end of reducing<br />
his ultimate judgment debt.<br />
Id. at 480–481.<br />
<strong>The</strong> Fifth Circuit concluded that<br />
efforts to achieve a prorated, comprehensive<br />
settlement may excuse an insurer’s<br />
reluctance to settle with less than all<br />
of the claimants, but need not do so. <strong>The</strong><br />
question is for the jury to decide. As this<br />
Court put it in Springer v. Citizens Casualty<br />
Company, 5 Cir. 1957, 246 F.2d 123,<br />
128–129, it is “a question for jury decision<br />
whether the insurer had not acted<br />
too much for its own protection and with<br />
too little regard for the rights of the insured<br />
in refusing to settle within the policy<br />
limits”. [sic] Here, bearing in mind<br />
the existence of multiple claims and the<br />
insured’s exposure to heavy damages,<br />
did the insurer act in good faith in managing<br />
the proceeds in a manner reasonably<br />
calculated to protect the insured by<br />
minimizing his total liability In many<br />
cases, efforts to achieve an overall agreement,<br />
even though entailing a refusal<br />
to settle immediately with one or more<br />
An insurer always should<br />
consult an insured and the<br />
insured’s counsel about<br />
the priority of claims for<br />
settlement purposes.<br />
parties, will accord with the insurer’s<br />
duty. In other cases, use of the whole<br />
fund to cancel out a single claim will<br />
best serve to minimize the defendant’s<br />
liability. Considerable leeway, of course,<br />
must be made for the insurer’s honest<br />
business judgment, short of mismanagement<br />
tantamount to bad faith.<br />
Id. at 481.<br />
Practical Considerations<br />
As shown above, when a liability insurer<br />
with a duty to defend deals with multiple<br />
claims arising from a single covered<br />
occurrence, and a reasonable assessment of<br />
the injuries suffered by one or more of the<br />
claimants indicates that the total value of<br />
the claims will exceed the aggregate policy<br />
limits, the insurer must treat the claims as<br />
if its policy was unlimited. In practice, this<br />
means the following.<br />
First, an insurer must not skimp on the<br />
defense that it provides to its insureds. Even<br />
if the insurer knows that it will exhaust its<br />
policy limits, it must still conduct a thorough<br />
investigation, retaining whatever<br />
experts may be necessary.<br />
Second, an insurer must provide an insured<br />
with experienced defense counsel,<br />
qualified to handle the particular type of<br />
case, and it must pay the prevailing rate<br />
in the community for the counsel’s serv-<br />
Policy Limits, continued on page 76<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 43
Fidelity and Surety<br />
From the Chair<br />
By Jerome M. Joseph<br />
Choose Your<br />
Path—<br />
Enjoy the<br />
Experience<br />
Events like the Fidelity<br />
and Surety Roundtable<br />
and our Annual Meeting<br />
programming—<br />
along with a bounty<br />
of networking<br />
and publication<br />
opportunities—<br />
demonstrate how<br />
our committee, like<br />
<strong>DRI</strong> in general, has<br />
a place for you.<br />
44 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ Jerome M. “Jerry” Joseph is a principal of Godin & Baity LLC in Denver. He has expertise in construction litigation and surety<br />
bonds. He has handled large cases involving construction and design defects, claims against performance and payment bonds,<br />
delay damages, cost overruns, incomplete projects, failure to pay for materials or services, and mechanics liens. He has advised<br />
clients on commercial, residential, industrial, office, senior living and mining projects.
In October 2012, I attended the <strong>DRI</strong> Annual Meeting<br />
Awards Luncheon and heard journalist- scholar Roy<br />
Blount, Jr., discuss a Mississippi criminal case where a<br />
man was charged with disorderly conduct for throwing a<br />
pig over a hotel reception counter. In January<br />
<strong>2013</strong>, I attended the <strong>DRI</strong> Leadership<br />
Conference where Dr. Gene Griessman, an<br />
Abraham Lincoln enthusiast, reminded us<br />
about the toil and sacrifice that gave birth<br />
to the words “government of the people, by<br />
the people, for the people.” Conclusion: <strong>DRI</strong><br />
has a place for everyone—those who aspire<br />
to lofty goals; and those who think kicking<br />
up your heels a little doesn’t hurt. <strong>The</strong>re is<br />
a place for you here. Join <strong>DRI</strong>. Choose your<br />
path. Enjoy the experience.<br />
<strong>The</strong> <strong>DRI</strong> Fidelity and Surety Committee<br />
entered <strong>2013</strong> with the great momentum<br />
and vigor created by the past chairs<br />
of the committee. I thank immediate past<br />
chair Denise Puente for her excellent example,<br />
along with past chairs Larry Moelman,<br />
Steve Strawbridge, Jim Knox, Shannon Briglia,<br />
Mark Aronson, Kevin Russell, and<br />
Rich Pledger, for their countless hours<br />
of hard work. I also welcome Vice Chair<br />
Harry McKee and the energy he brings to<br />
the task.<br />
I invite all surety practitioners to the<br />
annual Fidelity and Surety Roundtable<br />
to be held in Chicago on May 3, <strong>2013</strong>, at<br />
the Conrad Hotel. See http://www.dri.org/<br />
Event/<strong>2013</strong>SURETY for registration information.<br />
You can also contact <strong>DRI</strong> Director of<br />
Education Jennifer Cout (jcout@dri.org) to<br />
obtain the seminar brochure and registration<br />
materials. Certain large conventions<br />
are being held in Chicago during the first<br />
week of May, so I urge you to reserve your<br />
hotel space as soon as possible. As always,<br />
the roundtable will involve a lively discussion<br />
of issues relevant to surety law. We<br />
have committed to avoid lengthy lecturestyle<br />
presentations, and will draw on the<br />
vast experience of the committee members.<br />
Roundtable Program Chair Jeff Grossman<br />
and I have identified developments that we<br />
need to discuss to keep our members on the<br />
leading edge of the law. <strong>The</strong> roundtable tradition<br />
is one of cordial, healthy debate. See<br />
you in Chicago.<br />
In the pages that follow, our <strong>2013</strong> committee<br />
authors begin our preparation for<br />
the roundtable. <strong>The</strong>y address a variety of<br />
topics providing practical guidance, principled<br />
analysis, and surety law fundamentals.<br />
Larry Jortner provides us with the<br />
functional differences between contract<br />
suretyship and insurance, distinctions that<br />
are not always fully appreciated by decision<br />
makers. We are also able to feature two<br />
articles on payment bonds. James Knox<br />
analyzes the use of preemption theory<br />
under the Labor Management Relations<br />
Act in response to payment bond claims<br />
by unions. Cynthia Rodgers- Waire digs<br />
into the question, “When Does the Statute<br />
of Limitations Run on Payment Bond<br />
Claims” Never afraid of advancing technology,<br />
John Felice enlightens us about<br />
what constitutes the use of a computer<br />
under commercial crime and computer<br />
fraud coverages. Carlos Garcia contributes<br />
a fine article entitled, “It’s Not Just<br />
About Priority: Subrogation Rights Against<br />
a Bank.” <strong>For</strong> the presentation of these fine<br />
articles, we owe a great deal of thanks to<br />
surety practitioner Ralph J. Kooy, a partner<br />
of Tressler LLP in Chicago, who serves<br />
as our articles editor.<br />
Please also note that the <strong>DRI</strong> Annual<br />
Meeting will be held October 16–20, <strong>2013</strong>,<br />
at the Sheraton Chicago Hotel & Towers in<br />
the heart of downtown Chicago, near Lake<br />
Shore Drive. Stay tuned for more information<br />
about surety events at the Annual<br />
Meeting. I urge you to consider attending.<br />
You will be refreshed by the tremendous<br />
speakers, and Chicago is beautiful in mid-<br />
October. You might even learn something<br />
about throwing pigs over a counter.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 45
Fidelity and Surety<br />
Contract Surety<br />
vs. Insurance<br />
By Laurence P. Jortner<br />
Functional<br />
Differences and<br />
Why <strong>The</strong>y Matter<br />
<strong>The</strong> functional differences<br />
between surety and<br />
insurance and the<br />
personalized, symbiotic<br />
relationship between the<br />
surety and construction<br />
industries need to be<br />
appreciated properly by all<br />
the involved communities.<br />
Michigan Judge Michael Warren said that “Perhaps as<br />
important as our past achievements is our everlasting<br />
desire to improve our society.” <strong>For</strong> the last 125 years, largescale<br />
construction projects ranging from roads, buildings,<br />
and bridges to canals and space exploration<br />
has not only fueled the most ambitious<br />
imaginations but also represented an<br />
important segment of the U.S. economy<br />
by traditionally generating more than five<br />
percent of both domestic product and jobs.<br />
However, the grand rewards of construction<br />
come with inherent and substantial<br />
risks. <strong>For</strong> example, the legendary<br />
Panama Canal was built at the cost of<br />
5,600 construction- related deaths and the<br />
economic ruin of many, and public construction<br />
projects left the U.S. government<br />
holding some $35 million in bad debt before<br />
the dawn of the twentieth century. <strong>The</strong>refore,<br />
to safeguard large-scale and especially<br />
public financing of these projects,<br />
both insurance policies and surety bonding<br />
became legally mandatory. This article<br />
will discuss the important functional<br />
differences between insurance and surety<br />
and argue that these differences need to<br />
be maintained and in some cases rescued<br />
from historical, administrative, and judicial<br />
muddling of surety with insurance.<br />
Perhaps the best way to understand<br />
how surety is functionally different from<br />
insurance is to consider that surety’s very<br />
purpose is to cover risks that are not only<br />
uninsurable but that have defied insurability<br />
before recorded time. Insurance<br />
protects through indemnification against<br />
injury to the insured and other persons<br />
and property. However, insurance cannot<br />
protect through indemnification against<br />
self- induced damage to someone’s own<br />
construction work or for not paying subcontractors<br />
hired to help perform contracts.<br />
To do so would be a moral hazard<br />
because it would make it advantageous for<br />
someone not to keep his or her work and<br />
monetary commitments. <strong>The</strong>refore, filling<br />
this gap requires a guarantee instrument<br />
under which the contractor remains liable.<br />
However, the contractor’s commitments<br />
are secured by a third party with greater<br />
financial resources than the contractor.<br />
However, there are two problems with<br />
guarantees. First, many require collateral<br />
or, if they can be underwritten to a contrac-<br />
46 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ Laurence P. Jortner has 23 years of insurance and surety claims experience with major carriers and currently is at CNA in Chicago<br />
as a senior surety claims counsel. He earned his JD from St. John’s University and L.L.M. with Honors in Insurance Law<br />
from the University of Connecticut. <strong>For</strong> further reading, a Kindle version of Mr. Jortner’s thesis: “<strong>The</strong> Treatment of the Construction<br />
Contract Surety as Insurer and Why It Matters” is available at amazon.com.
tor existing on limited margins at all, are<br />
prohibitively expensive. Second, the person<br />
or business taking the guarantee, whether<br />
an owner- obligee wanting its project down<br />
according to specification, or a subcontractor<br />
or supplier waiting for payment, first<br />
has to sue the contractor before getting to<br />
a traditional guarantor.<br />
A surety bond tailors itself neatly to the<br />
needs of large construction by taking a<br />
percentage of the contract as a service fee<br />
or premium along with equitable rights to<br />
any remaining contract balance left after<br />
default of the contractor, who is called a<br />
principal on the bond, and is jointly and<br />
severally answerable with its principal.<br />
This second characteristic prompted Professor<br />
Barlow Burke to describe sureties as<br />
“super guarantors” as follows:<br />
the guarantor says, ‘Sue the principal<br />
first, and if the judgment from this suit<br />
is not satisfied, I will pay.’ A guarantor<br />
cannot in this sense be sued jointly and<br />
severally as a defendant with the principal.<br />
A surety can be so joined because it<br />
says and does more. A surety joins with<br />
the principal in…contract and becomes<br />
immediately more than a guarantor, but<br />
undertakes absolutely the principal’s<br />
obligation, whether or not the latter can<br />
pay or perform or is solvent.<br />
<strong>The</strong>se qualities make surety bonds able<br />
to respond to contractor defaults by completing<br />
projects. And, in fact, sureties often<br />
agree to complete projects in default. However,<br />
unlike an insurance policy, which is a<br />
bilateral contract between an insurer and<br />
an insured, a surety is one of three parties<br />
in a tripartite contract: the surety is<br />
between an owner claiming default and<br />
wanting action from the surety, and also<br />
between a principal who may deny the<br />
default allegation and want the surety to<br />
resist the claim. <strong>The</strong> stakes are high as the<br />
owner- obligee needs a project completed,<br />
and the contractor- principal faces loss of<br />
bonding capacity—if not its business—if it<br />
defaults on a contract and the bond. <strong>The</strong>refore,<br />
emotionally there is inherent pressure<br />
and temptation to expect a surety to act as<br />
a type of insurer and not as a specialized<br />
guarantor by the owner.<br />
However, if it does act, a surety is often<br />
accused of having acted as a volunteer by<br />
its bond principal, and the bond principal<br />
may refuse to indemnify the surety. This<br />
attitude is complicated because while the<br />
bond obligee pays the bond premium either<br />
directly or indirectly as part of a line item<br />
within the principal’s bid price, the contractor<br />
is personally underwritten as a client<br />
of the surety and expects his or her<br />
surety to stand behind its word, let him or<br />
her fight his or her own battles, and generally<br />
take note of a personalized relationship<br />
that often developed over many years.<br />
Another contributor to creating a mindset<br />
that surety is insurance rather than<br />
guaranty is the fact that regulation of sureties<br />
has historically somewhat mirrored<br />
regulation of insurance, and it is most<br />
often classified and administered within<br />
state statutory schemes as the business<br />
of insurance. However, this has little to<br />
do with the way that a surety bond actually<br />
functions. <strong>The</strong> initial genesis for this<br />
was the enthusiasm embracing ambitious<br />
public works coupled with the federal government’s<br />
angst over being stuck with a tremendous<br />
amount of bad debt on defaulting<br />
surety bonds guaranteed by individuals.<br />
After the Panic of 1893, the U.S. government<br />
essentially created the modern<br />
commercial surety industry by requiring<br />
performance bonds from a U.S. Treasury<br />
list of approved sureties by the Heard<br />
Act, which was replaced by the Miller Act<br />
in 1935, which added a requirement for<br />
coverage by a separate payment bond of<br />
entities furnishing labor and materials to<br />
contractors and their direct subcontractors.<br />
<strong>The</strong> Miller Act governs all federal<br />
jobs of substantial size to this day. States<br />
quickly followed suit with their own “little<br />
Miller Acts” and other bond laws and<br />
requirements.<br />
This did several things. First, commercial<br />
surety demand grew because bonds were legally<br />
mandatory. Second, federal and state<br />
governments became active in calling for<br />
regulation aimed at insuring solvency of the<br />
fledgling industry and creating state uniformity.<br />
This led to the surety industry voluntarily<br />
instituting its own rating industry.<br />
Third, the inclusion of payment bonds on<br />
federal projects made for easy credit and favorable<br />
pricing by subcontractors and suppliers.<br />
However, it also made these entities<br />
a publicly protected class by federal statute,<br />
making their status seem in certain respects<br />
analogous to that of third-party insurance<br />
policy beneficiaries.<br />
However, two factors probably led most<br />
directly to surety being administered as<br />
part of insurance statutory schemes. First,<br />
the commercial sureties that dominated<br />
the early market gave way to sureties that<br />
were primarily insurers and looked at<br />
surety, from a marketing perspective, as a<br />
specialized line, although recognizing that<br />
it functioned as a type of guaranty. Second,<br />
<strong>The</strong> stakes are high as<br />
the owner- obligee needs<br />
a project completed, and<br />
the contractor-principal<br />
faces loss of bonding<br />
capacity—if not its<br />
business—if it defaults on<br />
a contract and the bond.<br />
after a joint effort by sureties, insurers, and<br />
state regulators in the form of the National<br />
Association of Insurance Commissioners<br />
(NAIC), the McCarran- Ferguson Act was<br />
passed in 1945, which essentially made the<br />
business of insurance subject to state law.<br />
This left the surety industry with<br />
a choice. Sureties could either fend for<br />
themselves in defending antitrust lawsuits<br />
attacking their rating bureau methodology<br />
or seek protection with the insurers, which<br />
were often their affiliated and parent companies,<br />
within state statutory insurance<br />
statutory schemes. Not surprisingly, the<br />
surety industry chose the latter and supported<br />
the NAIC’s Model Rule language including<br />
surety as a subset of the “business<br />
of insurance.” <strong>The</strong> NAIC Model Rules were<br />
subsequently accepted, in some form, by<br />
virtually every state.<br />
<strong>The</strong>refore, surety found its way into<br />
insurance statutory schemes, not because<br />
of any review of its functioning, but as a<br />
marriage of convenience. Since the 1980s,<br />
the surety industry has struggled with litigation<br />
seeking extension of bad faith to<br />
surety based upon perceptions of com-<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 47
Fidelity and Surety<br />
monality with insurance that does not<br />
exist. This litigation damages the profitability<br />
of both the surety and construction<br />
industries by straining the personalized<br />
underwriting mechanism unique to surety<br />
and effecting the leverage and profitability<br />
of contractors in dealing with disputes<br />
between both owners and their subcontractors<br />
and suppliers.<br />
Another contributor<br />
to creating a mindset<br />
that surety is insurance<br />
rather than guaranty is<br />
the fact that regulation of<br />
sureties has historically<br />
somewhat mirrored<br />
regulation of insurance.<br />
One example involves the handling of<br />
performance bond disputes between project<br />
owners and sureties. Starting in the<br />
1980s, courts began to find the common<br />
law tort of bad faith against construction<br />
sureties with the cases Dodge v. Fidelity<br />
& Deposit Co. of Maryland, 161 Ariz. 344,<br />
778 P.2d 1240 (Ariz. 1989), and Transamerica<br />
Premier Ins. v. Brighton School Dist.,<br />
940 P.2d 348 (Col. 1997), arguing, among<br />
other things, that inclusion in the insurance<br />
codes of their respective states suggested<br />
a legislative intent to regulate surety<br />
as a type of insurance and that the functional<br />
differences of surety from insurance<br />
were insufficient to prevent sureties from<br />
being deemed to have a special or fiduciary<br />
relationship with performance bond obligees<br />
and payment bond claimants in the<br />
same way that insurance has with its firstor<br />
third-party insureds.<br />
This tide of extending bad-faith tort<br />
against contract surety has been somewhat<br />
reversed by other courts refusing to<br />
extend the tort, and in some cases, through<br />
specific state legislation excluding sureties<br />
from common law bad faith. Probably<br />
48 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
the most influential case with this position<br />
is Cates Constr., Inc. v. Talbot Partners, 21<br />
Cal. 4th 28, 45, 980 P.2d 407 (Cal. 2001).<br />
Cates found that while surety is within<br />
California’s insurance code, substantive<br />
aspects unique to surety are treated differently<br />
by California statutes as well. More<br />
importantly, Cates challenged the Dodge<br />
and Transamerica analysis that surety was<br />
similar enough to insurance, and instead<br />
analyzed the functional differences. Later<br />
cases, including Masterclean, Inc. v. Star<br />
Ins. Co., 347 S.C. 405, 410–11, 556 S.E.2d<br />
371, 374 (S.C. 2001), also challenge the legislative<br />
intent argument on the theory that<br />
remedies against a misbehaving surety<br />
were meant by a legislature to be administrative<br />
and not to subject sureties to the<br />
tort of bad faith.<br />
A key difference cited by Cates was that<br />
insurance contracts are generally contracts<br />
of adhesion, while surety bonds are clearly<br />
not. Surety bond forms, if imposed by<br />
anyone, are generally imposed by project<br />
owners and are often specified in the<br />
bid documents. Furthermore, almost all<br />
performance bonds also incorporate the<br />
underlying construction contracts, which<br />
are again often part of the bid packages<br />
and negotiated between the owners and the<br />
contractors. <strong>The</strong> surety primarily underwrites<br />
bonds based upon the merits of the<br />
contractor account. <strong>The</strong> accuracy of this<br />
can easily be established by any number<br />
of quite onerous bond forms accepted by<br />
sureties from public owners throughout the<br />
country. As for payment bonds, the same is<br />
generally true and, in any event, on public<br />
jobs, sureties generally cannot enforce coverage<br />
requirements that restrict a claimant<br />
class or claim conditions beyond those<br />
mandated in public bond statutes on public<br />
projects.<br />
Another more subjective disagreement<br />
between the Cates decision and both the<br />
Dodge and Transamerica courts deals with<br />
whether refusal of a surety to pay a claim<br />
constitutes a calamitous event equivalent<br />
to that of an insurer refusing to pay a claim<br />
to its insured. <strong>The</strong> Dodge and Transamerica<br />
courts argue that it is and has large scale<br />
ramifications for an owner, particularly<br />
when public money is at stake. Cates distinguishes<br />
this from an insurance situation<br />
because the loss to an owner is mitigated by<br />
not only the unused contract balance, but<br />
also the extra five or 10 percent retainage<br />
held by the owner throughout most of the<br />
life of the construction process.<br />
Cates also observed that an obligee can<br />
go into the marketplace to find a completion<br />
contractor and can pursue both the<br />
contractor- principal and surety for its loss<br />
and that a surety, unlike an insurer, does<br />
not write bonds with an expectation of<br />
loss. Another point to consider is that the<br />
owner is in the best position to protect the<br />
work and mitigate damage and that if these<br />
duties are transferred to the surety, then<br />
this might create a moral hazard to owner<br />
accountability in administering the contract<br />
properly.<br />
Another area where bad faith takes<br />
center stage is when a surety pays claims<br />
over the objections of its principal and<br />
seeks indemnification. Since the principalcontractor<br />
is often a poor source of reimbursement,<br />
and to promote accountability<br />
of its bonded accounts, a surety has the<br />
key people involved with the contracting<br />
business—and often their spouses, other<br />
business affiliates, and other family members—personally<br />
guarantee that a surety<br />
will not suffer loss through a document<br />
known as a “general indemnity agreement”<br />
or “GIA.” However, bad faith here is based<br />
upon contract, not upon common law tort<br />
theory. <strong>The</strong> GIA is generally a “take it or<br />
leave it” document of adhesion required by<br />
the surety in exchange for issuing bonds to<br />
a given bond principal. A GIA gives a surety<br />
broad powers to settle claims independently<br />
and bind the signing indemnitors to<br />
pay for all monetary expenses incurred by<br />
the surety as the result of writing any bond.<br />
Some of a surety’s major purposes for<br />
requiring this document include making<br />
clear that the surety is to be reimbursed<br />
for all monetary expenditures that it incurs<br />
and to ensure that it can pay claims that<br />
it considers valid without being secondguessed<br />
and having to litigate with the<br />
principal the merits of the claims that it<br />
paid. Due to the comprehensive nature of<br />
a GIA, usually the only practical defense<br />
for indemnitors to use to avoid liability to<br />
the surety is to allege that the surety violated<br />
the duty of good faith and fair dealing<br />
implied in all contracts, meaning that<br />
the surety acted in bad faith, and the GIA<br />
should not be enforced against the indemnitors<br />
as a result. Generally, courts reject
attempts by indemnitors to obtain damages<br />
against a surety suing the indemnitors<br />
under the GIA based upon common<br />
law tort theory.<br />
Recent state case law—with the exception<br />
of that of Rhode Island, where the<br />
courts will enforce a GIA absolutely unless<br />
the surety has committed actual fraud or<br />
collusion—has imposed two basic standards<br />
to ascertain whether a surety has<br />
acted in good faith and fair dealing under a<br />
GIA. One standard requires an affirmative<br />
showing by the indemnitors of “improper<br />
motive” by the surety in the payment of<br />
claims, enforcement of the GIA, or both.<br />
If no improper motive is proved, the GIA<br />
is enforceable against the indemnitors<br />
regardless of whether the claim or the claim<br />
amount paid by the surety was correctly<br />
paid. In other words, the surety’s actions do<br />
not have to be necessarily right under this<br />
analysis. <strong>The</strong>y merely have to not be the<br />
product of “improper motive.” <strong>The</strong> other<br />
standard holds that bad faith under a GIA<br />
is mere negligence by the surety in paying<br />
a claim. <strong>The</strong> objection of the surety industry<br />
to this standard is that it essentially<br />
eviscerates the GIA’s standard “settlements<br />
clause,” allowing the surety to settle as it,<br />
and not its principal, deems best based<br />
upon its own independent review and judgment.<br />
This standard also serves as a disincentive<br />
for a surety to settle claims when a<br />
principal objects, even if the surety thinks<br />
that the principal’s position is unfair or<br />
impractical, because the surety will need to<br />
litigate the underlying merits of the claims<br />
with the indemnitors even if it settles with<br />
the party making the bond claims. In other<br />
words, if a surety is “damned if it does, and<br />
damned if it doesn’t,” it probably won’t settle<br />
a claim over its principal’s objections.<br />
<strong>The</strong>refore, the “bad faith equals negligence”<br />
standard not only promotes tighter<br />
underwriting of contractors seeking bonds,<br />
it also hurts a surety’s independence in<br />
paying claims that should be paid. Further,<br />
underlying this analysis is the mistaken<br />
notion that a surety is supposed to protect<br />
the principal in the same manner that an<br />
insurer is required to protect the insured.<br />
However, in fact, the bond is in place to<br />
protect others—whether the construction<br />
project’s owner or the subcontractors and<br />
suppliers furnishing labor and materials—<br />
from the defalcations of the bond principal.<br />
Conclusion<br />
While surety and insurance are administratively<br />
governed within insurance codes,<br />
surety is functionally different from insurance<br />
and is best understood and classified<br />
as a specialized guarantee instrument. It<br />
provides security for activities that have<br />
been uninsurable throughout recorded history<br />
and shall remain uninsurable. Unlike<br />
insurance, a surety expects its contractorprincipal<br />
not to cause a loss.<br />
Furthermore, because liability of a surety<br />
and its principal is, with limited exceptions,<br />
coextensive, surety bonding circumstances<br />
affect the construction industry,<br />
including the pool of bondable contractors<br />
and the pricing of public works. In effect,<br />
approximately six sureties write approximately<br />
60 percent of contract surety bonds<br />
at this writing, and consolidation and occasional<br />
insolvency of sureties, both large<br />
and small, has been a trend for roughly<br />
the last quarter century. <strong>For</strong> the economic<br />
health of both the construction industry<br />
and the commercial surety industry that<br />
supports large construction improvements,<br />
the functional differences between surety<br />
and insurance and the personalized, symbiotic<br />
relationship between the surety and<br />
construction industries needs to be appreciated<br />
properly by all the involved communities.<br />
Fidelity and Surety<br />
Roundtable<br />
May 3, <strong>2013</strong> | Conrad Chicago<br />
A majority of past attendees<br />
agree that our Roundtable is the<br />
most informative and interactive<br />
surety program that they have<br />
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<strong>The</strong> <strong>2013</strong> Roundtable will focus on<br />
current issues facing surety and<br />
fidelity claims counsel and claims<br />
professionals, including:<br />
the surety’s<br />
response to a<br />
default/cure<br />
notice;<br />
discovery of<br />
mobile device<br />
data and other<br />
social media in<br />
claims litigation;<br />
the current<br />
law on policy<br />
stacking in<br />
<strong>For</strong> more information visit dri.org.<br />
fidelity claims<br />
and related<br />
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and an<br />
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tips to<br />
maximize surety<br />
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<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 49
Fidelity and Surety<br />
Payment Bond Sureties<br />
Have a Viable <strong>Defense</strong><br />
By James A. Knox<br />
Labor Management<br />
Relations Act<br />
Preemption<br />
Unions should not be<br />
permitted to bypass<br />
federal law regulating<br />
resolution of collective<br />
bargaining agreement<br />
disputes by going<br />
after sureties.<br />
Unions and their trust funds traditionally obtained some<br />
protection against contractors failing to make wage and<br />
fringe benefit contributions by requiring the contractors to<br />
post bonds specifically covering the risk. As specified by<br />
the collective bargaining agreement, the<br />
size of the bond typically would be very<br />
small, $10,000. <strong>The</strong> union would need to<br />
keep a close watch on whether a contractor<br />
was meeting its obligations and move<br />
quickly if it did not want its members to<br />
suffer losses in excess of the bond penalty.<br />
Usually these bonds by their own terms<br />
require the union or trust funds to exhaust<br />
their remedies under the collective bargaining<br />
agreement before any claim on the<br />
bond can even be made.<br />
Lately, however, unions have tried to<br />
score much higher by making claims on<br />
behalf of their members against sureties<br />
of the ordinary payment bonds that contractors<br />
are required by state law to post<br />
on specific public projects. <strong>The</strong> penal sum<br />
is much higher under these bonds, and<br />
it almost seems that unions deliberately<br />
have attempted to take advantage of sureties.<br />
Union employees are allowed to go on<br />
working month after month for contractors<br />
that fail to pay them in full, or slack<br />
off on benefit contributions, racking up<br />
large past due amounts. <strong>The</strong> unions sit back<br />
while these sums pile up. <strong>The</strong>n they try to<br />
recover the grand totals from the payment<br />
bond sureties.<br />
A surety may have various legitimate<br />
defenses to these claims, including standing,<br />
notice, and failure to mitigate. Unions<br />
do not have standing to make wage claims.<br />
U.S. ex rel. United Brotherhood of Carpenters<br />
& Joiners Local Union v. Woerfel, 541<br />
F.2d 1148 (8th Cir. 1976); United Union<br />
of Roofers, Waterproofers & Allied Trades<br />
v. Ins. Co. of Am., 919 F.2d 1398 (9th Cir.<br />
1990). But courts have allowed fringe benefit<br />
claims. <strong>For</strong>sberg v. Bovis Lend Lease,<br />
Inc., 184 P.3d 610 (Utah App. 2008); Divane<br />
v. Smith, 774 N.E.2d 361 (Ill. App. 2002)<br />
(mechanics lien); U.S. ex rel. Sherman<br />
v. Carter, 353 U.S. 210 (1957). In Central<br />
Laborers Pension Fund v. Nicholas & Assoc.,<br />
956 N.E.2d 609 (Ill. App. 2011), mechanics<br />
lien defendants revived ERISA preemption<br />
as a defense to fringe benefit claims in the<br />
trial court, but the Second District shot this<br />
down on appeal.<br />
50 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
■ James A. Knox is a partner based in the Chicago office of Tressler LLP. He focuses his practice on fidelity, surety, insurance,<br />
commercial, and construction law. He has extensive negotiation, trial, and appellate experience. Mr. Knox is a former chair of the<br />
<strong>DRI</strong> Fidelity and Surety Committee. He frequently lectures on fidelity and surety bond topics and has published more than 35<br />
articles and book chapters.
This article will explain another defense<br />
to claims by unions asserted against state<br />
law payment bonds. Although relatively<br />
untested by sureties, parties have litigated<br />
it in hundreds of analogous cases, and it<br />
should apply both to wage and to fringe<br />
benefit claims. <strong>The</strong> defense is Labor Management<br />
Relations Act preemption. <strong>The</strong><br />
Labor Management Relations Act, is also<br />
known as the Taft- Hartley Act. 29 U.S.C.<br />
§141 et seq. It amended the National Labor<br />
Relations Act, one of the New Deal measures<br />
that began to federalize labor law<br />
back in the 1930s. Passed over President<br />
Truman’s veto in 1947 in a climate of unrest<br />
after World War II, the Labor Management<br />
Relations Act was intended to rein in labor.<br />
Senator Robert Taft, one of its sponsors,<br />
was a conservative. <strong>The</strong> Labor Management<br />
Relations Act imposed restrictions<br />
on strikes, boycotts, picketing, and political<br />
activity by unions. It allowed states to<br />
pass right to work laws and authorized federal<br />
injunctions to break strikes.<br />
But the Labor Management Relations Act<br />
feature that we are concerned with here is<br />
its creation of federal jurisdiction over collective<br />
bargaining agreements. A collective<br />
bargaining agreement is the product of a<br />
negotiation between union and management<br />
representatives. <strong>The</strong> agreement can be<br />
with a whole industry, with a contractors’<br />
association, for example, or with a single<br />
employer. <strong>The</strong> agreement sets forth requirements<br />
that the employers must follow when<br />
hiring labor with respect to wages, benefits,<br />
hours, training, and workplace conditions,<br />
among other things, along with grievance<br />
mechanisms. What the Labor Management<br />
Relations Act did was create a preference for<br />
arbitration, along with recourse to federal<br />
courts, to resolve labor disputes between<br />
unions and employers in a uniform manner<br />
nationwide.<br />
Preemption<br />
State law payment bond statutes such as the<br />
Illinois Public Construction Bond Act, 30<br />
Ill. Comp. Stat. 550/1 et seq., require contractors<br />
and their sureties to pay for labor<br />
and material furnished to bonded projects.<br />
Absent federal preemption, the understanding<br />
generally is that not just subcontractors<br />
but also individual employees of the contractor<br />
can sue the surety on the bond in<br />
state court for wages or other compensation<br />
earned on the bonded job. <strong>The</strong> question<br />
is whether a union or any of its fringe<br />
benefit trust funds can sue on behalf of its<br />
members, assuming for sake of argument it<br />
had standing to do so at all. This article does<br />
not address whether union members themselves<br />
can sue, even if the union cannot, but<br />
some of the cases discussed below do hold<br />
that claims by individual union members<br />
can be preempted as well.<br />
Labor Management Relations Act<br />
§301(a), 29 U.S.C. §185)(a) provides:<br />
Suits for violation of contracts between<br />
an employer and a labor organization<br />
representing employees in an industry<br />
affecting commerce as defined in this<br />
Act, or between any such labor organization,<br />
may be brought in any district<br />
court of the United States having jurisdiction<br />
of the parties, without respect to<br />
the amount in controversy or without<br />
regard to the citizenship of the parties.<br />
<strong>The</strong> United States Supreme Court has<br />
repeatedly made clear that Labor Management<br />
Relations Act §301 preempts all state<br />
law claims alleging violation of a collective<br />
bargaining agreement. All such claims<br />
must instead be resolved through the grievance<br />
and arbitration process or brought<br />
under §301. Allis- Chalmers Corp. v. Lueck,<br />
471 U.S. 202, 219–20 (1985). A collective<br />
bargaining agreement may specify a grievance<br />
or arbitration procedure that unions<br />
or fringe benefit trust funds must exhaust<br />
before they may seek judicial relief. McCoy<br />
v. Maytag Corp., 495 F.3d 515, 524 (7th Cir.<br />
2007). <strong>The</strong> Labor Management Relations<br />
Act preempts a state law claim for breach<br />
of a collective bargaining agreement. Stably<br />
v. Amal. Transit Union, 2012 U.S. Dist.<br />
Lexis 10475 (N.D. Ind. Jan. 27, 2012). <strong>The</strong><br />
act also preempts all claims substantially<br />
dependent on interpretation of collective<br />
bargaining agreements. Caterpillar, Inc. v.<br />
Williams, 482 U.S. 386, 394–95 (1987).<br />
To allow a court to interpret a collective<br />
bargaining agreement under state law could<br />
frustrate the congressional goal of orderly<br />
and consistent labor dispute handling. Lingle<br />
v. Norge Div. of Magic Chef, Inc., 486 U.S.<br />
399, 404 n.3 (1988). Such claims are governed<br />
exclusively by federal labor law, not<br />
by state law, to ensure that courts uniformly<br />
interpret collective bargaining agreements.<br />
Gelb v. Air Con Refrigeration & Heating, Inc.,<br />
356 Ill. App. 3d 686, 700 (Ill. App. Ct. 2005).<br />
<strong>The</strong> scope of Labor Management Relations<br />
Act preemption is broad: “<strong>The</strong><br />
preemptive force of LMRA [Labor Management<br />
Relations Act] §301 is so powerful<br />
as to displace entirely any state cause of<br />
action ‘for violation of contracts between<br />
an employer and a labor organization.’”<br />
Beneficial Nat. Bank v. Anderson, 539 U.S.<br />
1, 7 (2003) (internal citation omitted). <strong>The</strong><br />
To allow a court to<br />
interpret a collective<br />
bargaining agreement under<br />
state law could frustrate<br />
the congressional goal<br />
of orderly and consistent<br />
labor dispute handling.<br />
Labor Management Relations Act “reaches<br />
not only suits on labor contracts, but suits<br />
seeking remedies for violation of such contracts.”<br />
Wilkes-Barre Pub. Co. v. Newspaper<br />
Guild of Wilkes-Barre, 647 F.2d 372, 380<br />
(3d Cir. 1981). As explained by the Third<br />
Circuit, “<strong>The</strong> issue is not the nature of the<br />
remedy sought for the alleged violation, but<br />
whether the remedy sought may require<br />
that the court from which it is sought, state<br />
or federal, interpret a collective bargaining<br />
agreement.” Id.<br />
Again, Labor Management Relations<br />
Act preemption applies not only to claims<br />
founded directly on rights created by a collective<br />
bargaining agreement, but also to<br />
claims that substantially depend on analyzing<br />
a collective bargaining agreement.<br />
Tifft v. Commonwealth Edison Co., 366 F.3d<br />
513, 516 (7th Cir. 2004). If the resolution of<br />
a state law claim will require a “substantive<br />
examination of” a collective bargaining<br />
agreement to determine if an employer<br />
“failed to comply with the terms,” the Labor<br />
Management Relations Act controls. Tifft,<br />
366 F.3d at 519. And “[s]tate law claims that<br />
have their root in a specific clause of a CBA<br />
[collective bargaining agreement] arise under<br />
federal law.” Thigpen v. Ill. Bell Tel. Co.,<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 51
Fidelity and Surety<br />
10 C 5889, 2010 U.S. Dist. Lexis 134979 (Dec.<br />
21, 2010). This is so whether or not the complaint<br />
mentions the Labor Management Relations<br />
Act. IBEW v. Hechler, 481 U.S. 851,<br />
859 n.3 (1987). As Gelb puts it, “[w]here<br />
claims are predicated on rights addressed<br />
by a collective bargaining agreement, and<br />
depend on the meaning of, or require interpretation<br />
of its terms, an action brought<br />
Labor Management<br />
Relations Actpreemption<br />
has greatest force when<br />
the entitlement to or the<br />
amount of wages or other<br />
employee compensation<br />
under a collective bargaining<br />
agreement is at issue.<br />
pursuant to state law will be preempted by<br />
federal labor laws.” 356 Ill. App. 3d at 693.<br />
Labor Management Relations Act preemption<br />
has greatest force when the entitlement<br />
to or the amount of wages or other<br />
employee compensation under a collective<br />
bargaining agreement is at issue. Thigpen,<br />
2010 U.S. Dist. Lexis 134979. Court<br />
decisions have agreed that “it is wellunderstood<br />
that a claim for breach of a<br />
collective bargaining agreement is preempted.”<br />
In re Bentz Metal Prods. Co., Inc.,<br />
253 F.3d 283, 286 (7th Cir. 2001). Interpreting<br />
the collective bargaining agreement is<br />
necessary to resolve such a dispute. Id. This<br />
is so even if the collective bargaining agreement<br />
breach is clear. National Metalcrafters<br />
v. McNeil, 784 F.2d 817, 823 (7th Cir.<br />
1986). In addition, “a determination that<br />
a contract is so clear as to make a breach<br />
willful… is an interpretation of the contract.”<br />
Id. Moreover, “[d]e fenses, as well as<br />
claims, must be considered in determining<br />
whether resolution of a state-law claim<br />
requires construing of the relevant collective<br />
bargaining agreement.” Gelb, 356 Ill.<br />
App. 3d at 693.<br />
52 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
State law requirements that depend on<br />
agreement, such as a contract, are preempted.<br />
Allis- Chalmers Corp. v. Lueck,<br />
471 U.S. 202 (1985). But in addition, a<br />
state could create a remedy that, although<br />
nonnegotiable, nonetheless turned on the<br />
interpretation of a collective bargaining<br />
agreement. Such a remedy would be preempted<br />
by Labor Management Relations<br />
Act §301. Similarly, if a law applied to<br />
all state workers but required, at least in<br />
certain instances, a collective bargaining<br />
agreement interpretation, “the application<br />
of the laws in those instances would be preempted.”<br />
Lingle v. Norge Div. of Magic Chef,<br />
Inc., 486 U.S. 399, 407 n.7 (1988).<br />
<strong>The</strong> Mere Reference<br />
Exception and Bentz<br />
Some outer limits to Labor Management<br />
Relations Act preemption do exist. If a<br />
state law claim requires only “mere reference”<br />
to a collective bargaining agreement,<br />
then federal law will not preempt the claim.<br />
Livadas v. Bradshaw, 512 U.S. 107, 124<br />
(1994) (holding that a wrongful discharge<br />
claim was not preempted when reference<br />
to the collective bargaining agreement was<br />
needed only to calculate damages). As the<br />
Seventh Circuit explained, “for preemption<br />
to exist, resolution of a claim must require<br />
interpretation of a CBA, not a mere glance<br />
at it.” In re Bentz Metal Prod. Co., 253 F.3d<br />
283, 289 (7th Cir. 2001). But “not every dispute<br />
concerning the terms of employment,<br />
or tangentially involving a provision of a<br />
collective bargaining agreement, is preempted<br />
by federal labor laws.” Allis Chalmers,<br />
471 U.S. at 211. A court must examine<br />
the character of the state law claim. A claim<br />
may proceed if and only if it is “entirely<br />
independent” of any understanding of the<br />
terms of the collective bargaining agreement.<br />
Gelb, 356 Ill. App. 3d 686, 700 (Ill.<br />
App. Ct. 2005); Livadas, 512 U.S. at 124–25.<br />
Bentz applied this doctrine to Indiana<br />
mechanics lien claims that had reached a<br />
certain stage without opposition. Twenty<br />
union members filed liens for vacation pay<br />
earned in connection with labor provided to<br />
a project. <strong>The</strong> source for their entitlement to<br />
the vacation pay was a collective bargaining<br />
agreement. <strong>The</strong>ir employer filed bankruptcy,<br />
did not dispute the liens, and stipulated to<br />
the amount due. However, a secured creditor<br />
of the employer raised Labor Management<br />
Relations Act preemption as a means<br />
of obtaining priority. <strong>The</strong> court saw this as<br />
not requiring it to interpret the collective<br />
bargaining agreement. It was a question<br />
strictly of priority among creditors. Had entitlement<br />
to or the amount of employment<br />
compensation been at issue, the court would<br />
have had to analyze the collective bargaining<br />
agreement, and preemption would have<br />
applied. If the parties had not stipulated the<br />
amount due, preemption would have applied<br />
until they resolved the contract issues, either<br />
by arbitration or a Labor Management<br />
Relations Act lawsuit. Only then could the<br />
employees present their separate claims in<br />
bankruptcy court as lien claims with whatever<br />
priority such claims were entitled to.<br />
As the court put it:<br />
In summary, the overriding principle is<br />
that for preemption to apply, interpretation<br />
of the CBA [collective bargaining<br />
agreement] and not simply a reference to<br />
it is required. If the entitlement to wages<br />
(or other employee pay) or the amount<br />
due were at issue, the CBA would control;<br />
almost certainly, interpretation of<br />
the agreement would be necessary and<br />
would be subject to the arbitration procedures<br />
in the contract. So as to that<br />
determination, preemption would apply.<br />
<strong>The</strong> mechanic’s lien, however, is a benefit<br />
provided to workers based on a state<br />
policy protecting workers; it is a separate<br />
claim, not dependent on interpretation<br />
of the agreement for its existence even<br />
though the amount of the pay is dependent<br />
on the CBA. In this situation, the<br />
claim is not preempted.<br />
253 F.3d at 289.<br />
Unfortunately, the court also supposed<br />
that it “perhaps” could have rested its opinion<br />
on the following “dicta in a footnote”<br />
from Lingle v. Norge Div. of Magic Chef,<br />
Inc., 486 U.S. 399, 404 n.3 (1988):<br />
A collective- bargaining agreement may,<br />
of course, contain information such as<br />
rate of pay and other economic benefits<br />
that might be helpful in determining the<br />
damages to which a worker prevailing<br />
in a state-law suit is entitled. Although<br />
federal law would govern the interpretation<br />
of the agreement to determine the<br />
proper damages, the underlying statelaw<br />
claim, not otherwise pre-empted,<br />
would stand. Thus, as a general proposition,<br />
a state-law claim may depend for
its resolution upon both the interpretation<br />
of a collective- bargaining agreement<br />
and a separate state-law analysis<br />
that does not turn on the agreement. In<br />
such a case, federal law would govern the<br />
interpretation of the agreement, but the<br />
separate state-law analysis would not be<br />
thereby pre-empted.<br />
Out of context these remarks could<br />
muddy the waters, but they actually can<br />
be reconciled with the rest of what the Supreme<br />
Court has written by interpreting<br />
them to mean that Labor Management Relations<br />
Act preemption would apply until a<br />
court had resolved disputes about a collective<br />
bargaining agreement interpretation.<br />
Only then could a union employee proceed<br />
with a state law claim. At a minimum, a<br />
court would have to stay a state law claim.<br />
In Wisconsin Central Ltd v. Shannon,<br />
539 F.3d 751 (7th Cir. 2008), the Seventh<br />
Circuit provided some semi- helpful clarification.<br />
<strong>The</strong> court stated that Labor Management<br />
Relations Act preemption was not<br />
warranted when (1) the collective bargaining<br />
term was so clear that it precluded all<br />
possible disputes over its meaning; (2) the<br />
parties did not dispute the interpretation<br />
of the relevant collective bargaining agreement<br />
provisions; or (3) the only reason to<br />
refer to the collective bargaining agreement<br />
was to compute damages. Parties will differ<br />
on whether a case involves a preempted<br />
“determination” of damages or a not preempted<br />
“computation” of damages.<br />
Post-Bentz Developments<br />
<strong>The</strong> question then is a whether a disputed<br />
state law claim against a payment bond<br />
surety by or on behalf of union members<br />
could be resolved without interpreting the<br />
collective bargaining agreement. If not,<br />
then preemption applies. Numerous analogous<br />
post-Bentz cases that do not involve<br />
bonds suggest that the Labor Management<br />
Relations Act will preempt a bond claim as<br />
long as entitlement or damages are genuinely<br />
contested by the principal, the surety,<br />
or both.<br />
<strong>For</strong> instance, in Hoskin v. Premier Security,<br />
10 C 3018, 2011 U.S. Dist. Lexis 79194<br />
(N.D. Ill. July 21, 2011), the Northern District<br />
of Illinois held that a union member’s<br />
claim for underpayment of wages was preempted.<br />
<strong>The</strong> exception to preemption when<br />
referring to the collective bargaining agreement<br />
is needed merely to compute damages<br />
and applies only when the parties do not<br />
dispute the meaning of contract terms in<br />
the lawsuit. Baker v. Kingsley, 387 F.3d 648,<br />
657 (7th Cir. 2004) (holding that the Labor<br />
Management Relations Act preempted<br />
an Illinois Wage Payment Collection Act<br />
claim). If a “defendant’s interpretation is<br />
plausible, and demonstrates a genuine dispute<br />
between the parties that can affect liability,<br />
it is a sufficient basis for preemption.”<br />
Id. at 659. Preemption exists as long as entitlement<br />
is “fairly debatable.” National Metalcrafters<br />
v. McNeil, 784 F.2d 817, 823 (7th<br />
Cir. 1986) (involving vacation benefits).<br />
In Thigpen v. Ill. Bell Tel. Co., 10 C 5889,<br />
2010 U.S. Dist. Lexis 134979 (Dec. 21, 2010),<br />
the court held that the Labor Management<br />
Relations Act preempted a claim asserted<br />
under the Illinois Minimum Wage Law. <strong>The</strong><br />
claim inherently required analyzing and<br />
interpreting a collective bargaining agreement,<br />
not merely glancing at one. To determine<br />
whether the plaintiff was entitled to<br />
overtime required interpreting the collective<br />
bargaining agreement because it governed<br />
“the type of work she perform[ed], her<br />
hours, her compensable work, and her rate<br />
of pay.” <strong>The</strong> defendant disputed her eligibility<br />
and entitlement. Interpreting the collective<br />
bargaining agreement was necessary to<br />
determine the dispute. This involved more<br />
than merely reviewing the collective bargaining<br />
agreement to compute the damages.<br />
In Mitchell v. JCG Indus., 10 CV 6847,<br />
2011 U.S. Dist. Lexis 57933 (N.D. Ill. May<br />
31, 2011), the court dismissed a class action<br />
by union members seeking relief under the<br />
Illinois Minimum Wage Law. <strong>The</strong> Labor<br />
Management Relations Act preempted the<br />
claim and required the class to exhaust<br />
their collective bargaining agreement<br />
grievance and arbitration remedies.<br />
Gelb v. Air Con Refrigeration & Heating,<br />
Inc., 356 Ill. App. 3d 686 (2005), also<br />
involved the Illinois Minimum Wage Law.<br />
Union members alleged underpaid and unpaid<br />
overtime wages. <strong>The</strong>y argued that their<br />
claims were based on the wage law, not the<br />
collective bargaining agreement. <strong>The</strong> court<br />
disagreed. <strong>The</strong> collective bargaining agreement<br />
specified sample wages for various pay<br />
schedules and fringe benefits. Thus, “to determine<br />
whether [the] defendants had violated<br />
the Wage law, a finder of fact would<br />
have no choice but to refer to the collective<br />
bargaining agreement in order to determine<br />
the amount of wages that were due and owing<br />
to the individual plaintiffs and the other<br />
members of the proposed class.” <strong>The</strong> claim<br />
was inextricably bound up with the terms<br />
of the collective bargaining agreement, and<br />
a court would have to interpret the agreement<br />
to resolve the claim if the defendants<br />
asserted compliance as a defense:<br />
A plaintiff is “master”<br />
of his or her claim so when<br />
a plaintiff invokes a right<br />
created by a collective<br />
bargaining agreement,<br />
the plaintiff has chosen<br />
to plead a federal claim.<br />
Where claims are predicated on rights<br />
addressed by a collective bargaining<br />
agreement, and depend on the meaning<br />
of, or require interpretation of its terms,<br />
an action brought pursuant to state law<br />
will be preempted by federal labor laws.<br />
[Citation omitted]. <strong>Defense</strong>s, as well as<br />
claims, must be considered in determining<br />
whether resolution of a state-law<br />
claim requires construing of the relevant<br />
collective bargaining agreement.<br />
Id. at 693. Thus the Labor Management<br />
Relations Act preempted the claims.<br />
In Shales v. Asphalt Maintenance, Inc.,<br />
No. 03 C 8250, 2004 U.S. Dist. Lexis 19394<br />
(N.D. Ill. Sept. 28, 2004), a union’s fringe<br />
benefit trust funds asserted Employee Retirement<br />
Income Security Act (ERISA), the<br />
Labor Management Relations Act, and the<br />
Illinois Wage Payment and Collection Act<br />
claims against a contractor. As an employer<br />
subject to a collective bargaining agreement,<br />
the contractor was obligated to make<br />
monthly contributions to the funds on behalf<br />
of employees identified in monthly remittance<br />
reports. <strong>The</strong> funds alleged failure<br />
to correctly report and pay the contributions.<br />
<strong>The</strong> court observed that the Illinois<br />
Wage Payment and Collection Act requires<br />
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Fidelity and Surety<br />
an employer to honor its contract. This requires<br />
interpreting the contract. In this<br />
case that contract was a collective bargaining<br />
agreement. <strong>The</strong> trust funds’ claims were<br />
predicated on rights created by the collective<br />
bargaining agreement. <strong>The</strong>y depended<br />
on the meaning of the collective bargaining<br />
agreement to determine “whether [the<br />
employer] should have paid money to the<br />
funds, how he should have paid, and to<br />
whom he should have made payment.” Thus<br />
the Labor Management Relations Act preempted<br />
the Illinois Wage Payment and Collection<br />
Act claim.<br />
Of course when a union asserting a<br />
claim itself refers to a collective bargaining<br />
agreement as the basis for the claim, as<br />
it can hardly avoid doing, the Labor Management<br />
Relations Act will govern. A plaintiff<br />
is “master” of his or her claim so when<br />
a plaintiff invokes a right created by a collective<br />
bargaining agreement, the plaintiff<br />
has chosen to plead a federal claim. Caterpillar,<br />
Inc. v. Williams, 482 U.S. 386 (1987).<br />
Treatment to Date of Bond Claims<br />
Several cases dealing with claims asserted<br />
against bonds require understanding.<br />
Sprinkler Fitters Local Union<br />
v. First Indemnity<br />
In Sprinkler Fitters Local Union No. 692 v.<br />
First Indem. Ins. Co., 840 F. Supp. 38 (E.D.<br />
Pa. 1993), the court applied these principles<br />
in favor of payment bond sureties. A<br />
union and its fringe benefit trust funds<br />
sued the sureties on several projects. <strong>The</strong><br />
plaintiffs alleged that the contractor principal<br />
had violated a collective bargaining<br />
agreement. <strong>The</strong> court held that it did not<br />
have jurisdiction because the Labor Management<br />
Relations Act preempted the bond<br />
claims. Labor Management Relations Act<br />
preemption does not depend on whether<br />
the parties to a lawsuit are signatories to<br />
the collective bargaining agreement. Plaintiffs<br />
would have had to prove that the contractor<br />
as the bond principal violated the<br />
terms of the collective bargaining agreement<br />
and that the sureties guaranteed that<br />
obligation. So “resolution of this controversy<br />
necessarily involves interpreting and<br />
applying a contract between an employer<br />
and a labor organization.”<br />
Ample case law supports the observation<br />
in Sprinkler Fitters that a surety may<br />
54 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
assert Labor Management Relations Act<br />
preemption even though it is not a party to<br />
the collective bargaining agreement. <strong>The</strong><br />
Labor Management Relations Act would<br />
preempt a state law claim even if the defendant<br />
is not a signatory to a collective<br />
bargaining agreement as long as the lawsuit<br />
implicates provisions of the agreement.<br />
Cespuglio v. Ward, 2004 U.S. Dist. Lexis<br />
8586 (S.D. N.Y. May 12, 2004) (citing Woodell<br />
v. IBEW, 502 U.S. 93, 100–01 (1991));<br />
Milne Employees Ass’n v. Sun Carriers,<br />
960 F.2d 1401 (9th Cir. 1991). A party cannot<br />
sue another party that has not signed<br />
a labor agreement for a claim preempted<br />
by the Labor Management Relations Act<br />
because the claim would depend substantially<br />
on the terms of the labor agreement.<br />
Brown v. Keystone Consol. Indus., Inc., 680<br />
F. Supp. 1212, 1221 (N.D. Ill. 1989).<br />
Greenblatt v. Delta Plumbing & Heating<br />
In Greenblatt v. Delta Plumbing & Heating<br />
Corp., 68 F.3d 561 (2d Cir. 1995), the Second<br />
Circuit acknowledged that the Labor Management<br />
Relations Act generally preempts<br />
state law remedies for breach of a duty created<br />
by a collective bargaining agreement.<br />
Nevertheless, the court concluded that it<br />
did not have jurisdiction to resolve a claim<br />
on a fringe benefit bond even though a collective<br />
bargaining agreement had required<br />
the bond. <strong>The</strong> court also held that the<br />
Labor Management Relations Act did not<br />
preempt state surety law. Supposedly, a<br />
bond claim for fringe benefits due under<br />
a collective bargaining agreement only<br />
“tangentially” involves the agreement. <strong>The</strong><br />
court further commented that state surety<br />
law “does not affect the interpretation of<br />
a labor contract or provide relief against<br />
a defendant who breaches a duty created<br />
by that contract.” Supposedly, a state law<br />
claim that depends on both a collective<br />
bargaining agreement interpretation and<br />
a separate state law analysis so the Labor<br />
Management Relations Act does not preempt<br />
the claim.<br />
<strong>The</strong> Greenblatt holding is wrong. A surety’s<br />
liability for wages, fringe benefits, or<br />
other compensation due under a collective<br />
bargaining agreement cannot be determined<br />
without ascertaining the bonded<br />
principal’s liability—the employer’s liability—which<br />
makes the collective bargaining<br />
agreement directly involved. <strong>The</strong><br />
Labor Management Relations Act clearly<br />
governs an employer’s liability under a<br />
collective bargaining agreement, and the<br />
federal law preempts any state law remedy<br />
to establish that liability. <strong>The</strong> employer’s<br />
surety, as the surety, is entitled to that<br />
same protection as a fundamental precept<br />
of surety law.<br />
It is well settled that a payment bond<br />
surety is not liable unless its principal, or<br />
whoever is in privity with the claimant, is<br />
liable on the underlying obligation. Premier<br />
Electrical Const. Co. v. Am. Nat. Bank<br />
of Chicago, 276 Ill. App. 816 (Ill. App. Ct.<br />
1995); Painters Local Union No. 171 v. Williams<br />
& Kelly, Inc., 605 F.2d 535, 539 (10th<br />
Cir. 1979); Cinci. Ins. Co. v. Putnam, 335 So.<br />
2d 855, 856 (Fla. Dist. Ct. App. 1976); Mestek,<br />
Inc. v. United Pac. Ins. Co., 667 N.E.2d<br />
292, 294 (Mass. App. Ct. 1996). <strong>The</strong> obligation<br />
of the surety under a payment bond is<br />
coextensive with that of its principal. This<br />
means generally the surety may assert any<br />
contractual or legal defenses that the principal<br />
might have against that underlying<br />
obligation. Premier Electrical, 276 Ill. App.<br />
816 (1995).<br />
In other words, payment bonding is<br />
true suretyship, and the surety’s liability is<br />
strictly derivative:<br />
Because the surety’s obligation is derived<br />
from that of the principal debtor, the liability<br />
of the surety is ordinarily measured<br />
by the liability of the principal. If<br />
the principal is not liable to the claimant,<br />
then the surety is not liable either.<br />
In addition, the surety may normally set<br />
up any defense available to the principal.<br />
Riley Constr. Co. v. Schillmoeller & Krofl<br />
Co., 236 N.W.2d 195, 198 (Wis. 1975).<br />
As another court put it, “It is a fundamental<br />
precept of suretyship law that the<br />
liability of the surety is conditioned on<br />
accrual of some obligation on the part of<br />
the principal; the surety will not be liable<br />
on the surety contract if the principal<br />
has not incurred liability on the primary<br />
contract.” Star Contracting Corp. v. Manway<br />
Constr. Co., 337 A.2d 669, 670 (Conn.<br />
Super. Ct. 1973).<br />
Statutory payment bonds are no<br />
exception:<br />
[C]onstruing the liability of the surety<br />
as coextensive with that of the principal<br />
does not subvert the public policy effected<br />
by [the payment bond statute] because
that statute was not intended to afford<br />
legal recourse against a surety when no<br />
such recourse existed against the principal,<br />
i.e., the statute does not give the<br />
subcontractor something that he is not<br />
entitled to under his primary contract.<br />
Star Contracting, 337 A.2d at 671.<br />
<strong>The</strong> obligation created by the bond is<br />
measured by the underlying contractual<br />
obligation that it secures. That underlying<br />
obligation can only be ascertained by referring<br />
to the subcontract or supply contract<br />
under which the labor or material has been<br />
furnished. U.S. ex rel. Fireman’s Fund. Ins.<br />
Co. v. Frank Briscoe Co., 462 F. Supp. 114,<br />
116–17 (E.D. La. 1978). This incorporation<br />
may be express, implied, or by operation<br />
of law. Frequently, for example, the bond<br />
or bond statute requires payment only of<br />
what is “justly due” to the bond claimant.<br />
See, e.g., the Illinois Public Construction<br />
Bond Act, 30 ILCS 550/1 (requiring principal<br />
and surety on the bond to pay “all just<br />
claims due [to the claimants] under the<br />
provisions of such contractors for labor<br />
performed or materials furnished in the<br />
performance of the contract on account of<br />
which this bond is given….”). This requires<br />
assessing a claimant’s contractual performance.<br />
If the principal has a valid defense to<br />
the claimant’s contractual claim, nothing<br />
is “justly due,” and the surety is not liable.<br />
Riley, 236 N.W.2d at 198. <strong>For</strong> more on this<br />
subject, see James A. Knox and Stacy Hipsak<br />
Goetz, <strong>Defense</strong>s, in <strong>The</strong> Law of Payment<br />
Bonds 556–61 (ABA 2d ed. 2011).<br />
Greenblatt also can be distinguished<br />
from any case in which the contractor or<br />
surety genuinely contests the contractor’s<br />
obligations under a collective bargaining<br />
agreement, which would require a court<br />
to interpret the agreement. In Greenblatt,<br />
“there was no real dispute over [the contractor’s]<br />
liabilities under the collective<br />
bargaining agreement, and certainly none<br />
that required resort to the federal common<br />
law.” 68 F.3d at 571. <strong>The</strong> court even admitted<br />
“that in some circumstances a federal question<br />
might arise” in a suit “on a surety bond<br />
guaranteeing a signatory’s obligation under<br />
a collective bargaining agreement….” Id.<br />
International Union of Bricklayers v. ICW<br />
In International Union of Bricklayers and<br />
Allied Craftworkers v. Ins. Co. of the West,<br />
366 F. Supp. 2d 33 (D.D.C. 2005), the court<br />
refused to allow removal of a fringe benefit<br />
bond claim as subject to the Labor Management<br />
Relations Act even though the bond<br />
had been specified by a collective bargaining<br />
agreement. <strong>The</strong> complaint did not cite<br />
the Labor Management Relations Act. <strong>The</strong><br />
union would have to prove that the contractor<br />
principal “defaulted on its obligations<br />
under the collective bargaining agreement,”<br />
but this was insufficient to confer<br />
jurisdiction. That an element of the union’s<br />
bond claim would require construction of<br />
the collective bargaining agreement did not<br />
create a substantial federal question.<br />
How the court reached this result is difficult<br />
to understand. <strong>The</strong> court acknowledged<br />
that “[t]he preemptive force of [Labor Management<br />
Relations Act] §301 is so powerful<br />
as to displace entirely any state cause of action<br />
‘for violations of contracts between an<br />
employer and a labor organization.” Franchise<br />
Tax Bd. of the State of Cal. v. Contract<br />
Laborers Vacation Trust for S. Cal., 463<br />
U.S. 1, 23 (1983). <strong>The</strong> court also admitted<br />
that when resolving a state law claim depends<br />
substantially on analyzing the terms<br />
of a labor contract, the claim must be either<br />
treated as a §301 claim or dismissed<br />
as preempted. <strong>The</strong> court also professed to<br />
comprehend that state law is preempted if<br />
its application requires the interpretation<br />
of a collective bargaining agreement. At<br />
a minimum federal law would govern the<br />
interpretation of the collective bargaining<br />
agreement. If that interpretation would<br />
have to be resolved before liability under<br />
state law could be established, then the state<br />
law claim should be stayed.<br />
<strong>The</strong> court went astray in finding it significant<br />
that the union was a party to the collective<br />
bargaining agreement but the surety<br />
was not. It also should not have mattered<br />
that the union did not sue the principal. As<br />
explained above, courts have allowed nonparties<br />
to a collective bargaining agreement<br />
to assert Labor Management Relations Act<br />
preemption, as in Woodell v. IBEW, 502<br />
U.S. 93 (1991), but the district court believed<br />
that this extended only to individual<br />
union members as beneficiaries of the<br />
agreement. As an example the court cited<br />
Bush v. Clark Constr. & Concrete Corp., 267<br />
F. Supp. 2d 43 (D.D.C. 2003). In that case, an<br />
employee alleged that his employer failed to<br />
pay his wages under the terms of a collective<br />
bargaining agreement between the employer<br />
and the employee’s union. <strong>The</strong> claim<br />
in that case depended on the collective bargaining<br />
agreement, and the agreement had<br />
to be construed to resolve the claim.<br />
In the case before the court, however,<br />
the collective bargaining agreement did not<br />
refer to the surety or its bond obligations.<br />
<strong>The</strong> surety was not a beneficiary of the collective<br />
bargaining agreement either. <strong>The</strong><br />
court wrote, “<strong>The</strong> bond is… the only document<br />
which establishes the duties and<br />
obligations of [the surety], and it clearly<br />
sets forth the conditions giving rise to [the<br />
surety’s] liability.” <strong>The</strong> bond had a penal<br />
sum so “the extent of the surety’s liability<br />
[was] well defined by the bond,” and “[t]he<br />
argument that it [was] impossible to determine<br />
the appropriate damages from the<br />
bond alone [was] groundless.” <strong>The</strong> contributions<br />
that the employer failed to make<br />
would simply have to be determined.<br />
Somehow the court missed altogether the<br />
simple fact that the most fundamental condition<br />
to any liability of the surety on a bond<br />
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Fidelity and Surety<br />
is that the principal is liable on the underlying<br />
contract, in this case, on the collective<br />
bargaining agreement. Thus, any adjudication<br />
of the surety’s liability would require<br />
interpreting the collective bargaining<br />
agreement. Yes, resolving the case would require<br />
determining the contributions that<br />
the employer did not make, but that is true<br />
under the Labor Management Relations Act<br />
<strong>The</strong> most fundamental<br />
conditionto any liability<br />
of the surety on a bond<br />
is that the principal is<br />
liable on the underlying<br />
contract… on the collective<br />
bargaining agreement.<br />
as well. <strong>The</strong> court, applying the Labor Management<br />
Relations Act correctly, should<br />
have allowed removal, found that federal<br />
law preempted the claim, or both.<br />
56 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Bricklayers of Western Pennsylvania<br />
v. Scott’s Development<br />
Bricklayers of Western Pennsylvania Combined<br />
Funds, Inc. v. Scott’s Development<br />
Co., 2012 PA Super 4 (Pa. Super. Ct. 2012),<br />
did not involve a bond claim, but a union<br />
trust fund asserted a mechanics lien on<br />
a project for fringe benefits due from the<br />
project’s contractor under a collective bargaining<br />
agreement. After concluding that<br />
the union qualified as a “subcontractor”<br />
under the lien statute, the court rejected<br />
the Labor Management Relations Act<br />
preemption argument. <strong>The</strong> lien was not<br />
founded on the collective bargaining agreement.<br />
<strong>The</strong> lien attached to the property and<br />
was only for labor; it would not settle contractual<br />
obligations. Moreover, the employees<br />
on whose behalf the lien was asserted<br />
did not provide their labor under the collective<br />
bargaining agreement. <strong>The</strong>y provided<br />
it under their own contracts with the<br />
employer. Finally, because the court was<br />
reviewing a demurrer, it viewed the allegations<br />
of the complaint as undisputed. <strong>The</strong><br />
“mere glance” exception to Labor Management<br />
Relations Act preemption therefore<br />
supposedly applied. <strong>The</strong> collective bargaining<br />
agreement would not need to be consulted<br />
except to compute damages, and<br />
anyway, the litigants had stipulated the<br />
amount due so the court would not have<br />
needed to interpret the collective bargaining<br />
agreement, at least not “at this stage.”<br />
Bricklayers does not apply if a surety can<br />
assert contractual defenses under the collective<br />
bargaining agreement or if the litigants<br />
dispute the entitlement or amount<br />
due under the agreement. A surety may<br />
assert contractual defenses and dispute<br />
both entitlement and damages under the<br />
collective bargaining agreement. <strong>The</strong> mere<br />
glance exception to Labor Management<br />
Relations Act preemption will not apply if<br />
a surety disputes the principal’s liability,<br />
and thus its own liability, under a collective<br />
bargaining agreement.<br />
As for the Bricklayers’ observation that<br />
union members or a union on their behalf<br />
suing for labor to a specific project do not<br />
sue on the collective bargaining agreement<br />
but on their own contract with the employer,<br />
the simple rejoinder is that the collective<br />
bargaining agreement still controls. It is<br />
incorporated by reference into the contract<br />
between each employee and the employer.<br />
Preemption applies not only to lawsuits<br />
grounded in collective bargaining agreement<br />
disputes but also to those requiring reference<br />
to collective bargaining agreements<br />
for interpretation of the agreement terms.<br />
International Union of Bricklayers v. Acuity<br />
In Illinois Dist. Council No. 1 of the International<br />
Union of Bricklayers & Allied Craftworkers<br />
v. Acuity, 2002 U.S. Dist. Lexis 2733<br />
(N.D. Ill. Feb. 12, 2002), a union and a contractor<br />
were parties to a collective bargaining<br />
agreement under which a fringe benefit<br />
bond had been issued. An arbitration panel<br />
ruled that the contractor was liable for unpaid<br />
fringe benefits. <strong>The</strong> union and the<br />
contractor settled their dispute, but the contractor<br />
breached the settlement. <strong>The</strong> union<br />
obtained a judgment against the contractor<br />
and made a bond claim in federal court under<br />
the Labor Management Relations Act.<br />
<strong>The</strong> surety moved to dismiss the claim on<br />
the basis that the Labor Management Relations<br />
Act did not apply because the surety<br />
was not a party to the collective bargaining<br />
agreement or an employer. <strong>The</strong> court agreed<br />
and dismissed the lawsuit.<br />
<strong>The</strong> court noted that older cases such as<br />
Chicago Dist. Council of Carpenters Pension<br />
Fund v. Safeco Ins. Co., 1995 U.S. Dist. Lexis<br />
14598 (N.D. Ill. Oct. 5, 1995), had relied on<br />
Loss v. Blankenship, 673 F.2d 942 (7th Cir.<br />
1982), to dismiss claims against nonparties,<br />
but in 1985 the U.S. Supreme Court<br />
had commanded in Allis-Chalmers that all<br />
claims that substantially depended on analyzing<br />
a collective bargaining agreement<br />
would be subject to federal jurisdiction. Nevertheless<br />
the court rejected the argument<br />
that the case before it required interpretation<br />
of a collective bargaining agreement.<br />
<strong>The</strong> liability of the contractor had already<br />
been determined. <strong>The</strong> only remaining issue<br />
was whether the surety was also liable. That<br />
issue required interpreting the bond but not<br />
the collective bargaining agreement.<br />
Making a distinction, however, the<br />
court cited Sprinkler Fitters Local Union<br />
No. 692 v. First Indem. Ins. Co., 840 F. Supp.<br />
38 (E.D. Pa. 1993), with no disapproval.<br />
<strong>The</strong> court thus acknowledged indirectly<br />
that a union’s claim against an employer’s<br />
surety, if disputed on the underlying<br />
merits, and disputed against the principal,<br />
too, would require a collective bargaining<br />
agreement interpretation and thus the<br />
Labor Management Relations Act would<br />
apply if the employer’s liability had not yet<br />
been determined.<br />
Conclusion<br />
<strong>Defense</strong> attorneys have neglected Labor<br />
Management Relations Act preemption<br />
too long as a viable defense against contestable<br />
wage and fringe benefit claims by<br />
union members. <strong>The</strong> fact that a few courts<br />
have ruled against sureties in different situations<br />
should not deter attorneys from<br />
asserting premption. <strong>The</strong> Labor Management<br />
Relations Act may not permanently<br />
preempt a completely undisputed and liquidated<br />
claim if the surety has had an<br />
opportunity to contest the claim and Labor<br />
Management Relations Act remedies have<br />
been exhausted. But courts cannot permit<br />
unions to bypass federal law regulating resolution<br />
of collective bargaining agreement<br />
disputes by going after sureties as if everyone<br />
can simply ignore the Labor Management<br />
Relations Act.
Fidelity and Surety<br />
Payment Bond Claims<br />
By Cynthia E. Rodgers-Waire<br />
When Does<br />
the Statute of<br />
Limitations Run<br />
With the right set of facts<br />
and proper preparation,<br />
a successful limitations<br />
defense is still a difficult<br />
challenge, but not an<br />
insurmountable one.<br />
Upon receipt of a payment bond claim, one of a surety’s<br />
primary analysis areas should involve reviewing the factual<br />
information presented by the claimant and the bond<br />
principal, if available, to determine whether the surety has<br />
a legal defense to the claim based upon<br />
the statute of limitations. Whether such a<br />
defense exists often depends on the nature<br />
of the underlying project and the bond<br />
principal’s role in the project. A bond<br />
issued for a public project on behalf of<br />
a general contractor bond principal will<br />
almost always be governed by a specific<br />
statutory limitations provision, whereas a<br />
bond issued for a public project on behalf<br />
of a subcontractor bond principal or a bond<br />
of any type issued on a private contract will<br />
likely be governed by a general state limitations<br />
provision or common law.<br />
<strong>The</strong> most well-known payment bond<br />
is a statutory bond issued pursuant to the<br />
requirements of the federal Miller Act, 40<br />
U.S.C. §§3133–3134, which requires contractors<br />
constructing, altering, or repairing<br />
a federal building under a contract valued<br />
in excess of $100,000 to provide a payment<br />
bond for the protection of those supplying<br />
labor or materials in performance of the<br />
work. Most if not all states have statutory<br />
counterparts known as “Little Miller Acts.”<br />
Statutory bonds typically involve express<br />
limitations provisions, usually found in the<br />
language of the underlying statute rather<br />
than the actual bond form. <strong>For</strong> example,<br />
the Miller Act contains a one-year statute<br />
of limitations provision. Most state “Little<br />
Miller Acts” also contain one-year limitations<br />
provisions, but some have limitations<br />
periods as short as six months, and some<br />
have periods of several years. <strong>The</strong> bonds<br />
for private jobs have the most diverse limitations<br />
periods, as the limitations period<br />
may be governed by a contractual provision<br />
contained in the bond form or a statute,<br />
which may be either a general limitations<br />
statute for contract actions or one specific<br />
to actions on bonds. Comprehensively<br />
reviewing each state’s bond limitations for<br />
public bonds and private bonds is beyond<br />
the scope of this article but is addressed in<br />
detail in Courtney Turnage Walker, Eric H.<br />
Loeffler, & Bradford R. Carver, Suit Limitations,<br />
Chapter 6 in <strong>The</strong> Law of Payment<br />
Bonds, (Kevin L. Lybeck, Wayne D. Lambert,<br />
& John E. Sebastian, eds., 2d ed. 2011).<br />
■ Cynthia E. Rodgers-Waire is a partner in the law firm of Wright, Constable & Skeen in Baltimore, practicing in the areas of<br />
surety, fidelity, and construction law. She is a member of the ABA Tort Trial & Insurance Practice Section Fidelity & Surety Law<br />
Committee and the <strong>For</strong>um on the Construction Industry, the Maryland State Bar Association Construction Law Section, and the<br />
Baltimore Building Congress & Exchange.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 57
Fidelity and Surety<br />
Although the state<br />
Miller Act counterparts<br />
are usually referred to as<br />
“Little Miller Acts,” they<br />
do not necessarily mimic<br />
the federal statute in all<br />
aspects, including the<br />
limitations provisions.<br />
This article will discuss what triggers the<br />
commencement of the limitations period,<br />
regardless of whether the applicable limitations<br />
period is six months or 20 years,<br />
analyze the various arguments raised by<br />
claimants seeking to overcome a surety’s<br />
potential limitations defense, and discuss<br />
practical tips for increasing the surety’s<br />
odds of success in presenting a limitations<br />
defense. Given the highly factual<br />
nature of a limitations defense, a substantial<br />
amount of case law addresses the limitations<br />
defense, and courts have diverged<br />
a good deal in analyzing it.<br />
What Event or Occurrence<br />
Triggers the Commencement<br />
of the Limitations Period<br />
To determine whether a payment bond<br />
claim is time barred, it must first be determined<br />
when the clock begins to run for<br />
limitations purposes. As discussed in detail<br />
below, payment bonds do not have one,<br />
universal trigger that will begin a claim<br />
limitations period. <strong>The</strong> bond may describe<br />
the trigger, or a statute or case law may<br />
dictate it. <strong>The</strong> bond may contain language<br />
that conflicts with an applicable statute,<br />
thereby requiring further analysis to determine<br />
whether a court would enforce the<br />
bond language. Because the trigger will<br />
vary by jurisdiction, analysis requires carefully<br />
reviewing the bond for any contractual<br />
limitations language, recognizing the<br />
type of bond at issue to determine whether<br />
a statute or which statutory provision may<br />
58 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
apply, and determining which law governs,<br />
federal or state, and in the case of a potential<br />
conflict, which state’s law. As with most<br />
commentary addressing surety bonds, a<br />
primary focus of this article will be the<br />
Miller Act. This long- established statute<br />
has a well- developed and fairly uniform<br />
body of case law. In addition, state courts<br />
will often review the Miller Act precedent<br />
for guidance when confronted with a<br />
dearth of state-level case authority.<br />
Completion of a Payment Bond Claimant’s<br />
Work as the Limitations Period Trigger<br />
<strong>The</strong> most common trigger for commencement<br />
of the limitations period is the claimant’s<br />
completion of work on the bonded<br />
project. This is the limitations found in the<br />
Miller Act, which reads, “no such suit shall<br />
be commenced after the expiration of one<br />
year after the day on which the last of the<br />
labor was performed or material was supplied”<br />
by the payment bond claimant. 40<br />
U.S.C. §3133(b)(4). Under most statutory<br />
interpretations, work consists of either providing<br />
labor or furnishing equipment or<br />
materials. Work performed “by the claimant,”<br />
for limitations purposes, also includes<br />
any work performed by the claimant’s subcontractors<br />
and suppliers. See U.S. ex. rel.<br />
H.T. Sweeney & Son, Inc. v. E.J.T. Constr. Co.,<br />
415 F. Supp. 1328, 1332 (D. Del. 1976). <strong>The</strong><br />
period begins the day after the last day that<br />
a claimant provided work, meaning labor,<br />
materials or equipment, on the project, even<br />
if the work performed on the last day is not<br />
work for which the claimant seeks payment<br />
from the surety. Gen. Elec. Co. v. Southern<br />
Constr. Co., 383 F.2d 135, 138–39 (5th Cir.<br />
1967), cert. denied, 390 U.S. 955 (1968).<br />
Although the state Miller Act counterparts<br />
are usually referred to as “Little<br />
Miller Acts,” they do not necessarily mimic<br />
the federal statute in all aspects, including<br />
the limitations provisions. One reason for<br />
this is that an earlier version of the Miller<br />
Act contained a different limitations provision,<br />
and less than half of the states have<br />
amended their statutes to reflect the Miller<br />
Act’s current limitations provision. <strong>For</strong><br />
those states adopting the current Miller<br />
Act limitations provision, recent Miller Act<br />
case law addressing limitations offers very<br />
useful guidance when the applicable state<br />
case authority does not offer it. Courts construing<br />
“Little Miller Acts” that still use the<br />
earlier Miller Act language or similar language<br />
may use older Miller Act case law.<br />
<strong>For</strong> a complete list of the states’ statutory<br />
provisions, see <strong>The</strong> Law of Payment Bonds,<br />
Chapter 6 at 235.<br />
<strong>The</strong> Due Date of Final Payment<br />
to a Payment Bond Claimant as<br />
the Limitations Period Trigger<br />
A few of the state “Little Miller Acts” and<br />
some bond forms provide that the limitations<br />
period begins on the date that the<br />
final payment becomes due to the payment<br />
bond claimant. See Idaho Code Section<br />
54-1927. Courts then need to determine<br />
from the facts of each case when such<br />
payment became due. <strong>For</strong> example, one<br />
court construing New York’s Finance Law<br />
before it was recently amended interpreted<br />
this language to mean when the subcontractor<br />
had submitted an invoice for final<br />
payment or some “functional equivalent<br />
thereof.” Windsor Metal Fabricators, Ltd.<br />
v. Gen. Accident Ins. Co., 722 N.E.2d 58, 61<br />
(N.Y. 1999).<br />
Acts by an Obligee as the<br />
Limitations Period Trigger<br />
A significant number of state “Little Miller<br />
Acts” still follow the previous Miller Act<br />
language that the commencement of the<br />
payment bond limitations period is based<br />
upon an action taken by the public obligeeowner,<br />
using terms such as “final acceptance”<br />
of the prime contractor’s work, “final<br />
settlement” of the prime contract, or “final<br />
payment.” “Final settlement” is usually<br />
defined as the date when the public owner<br />
determines the final contract amount owed<br />
to the prime contractor, which is not necessarily<br />
the same as the final payment date.<br />
See, e.g., Zimmerman’s Elec., Inc. v. Fid. &<br />
Deposit Co. of Md., 231 N.W.2d 342, 345<br />
(Neb. 1975).<br />
As the various terms are often not<br />
defined in the statutes, uncertainty can<br />
arise in applying the limitations defense to<br />
a particular payment bond claim, thereby<br />
spawning litigation. <strong>For</strong> example, the<br />
Maryland “Little Miller Act” provides that<br />
the statute of limitations begins to run<br />
one year after final acceptance. Md. Code<br />
Ann., State Fin. & Proc. §17-109(b) (1988).<br />
In U.S.F.&G. Co. v. Hamilton & Spiegel, Inc.,<br />
215 A.2d 735, 737 (Md. 1966), the Maryland<br />
appellate court held that “final acceptance”
occurred on the project at issue when the<br />
project architect issued a certificate of<br />
final completion even though the architect<br />
issued the certificate more than two years<br />
after the public owner began occupying the<br />
space. A few years later, the same court,<br />
addressing a project for which the underlying<br />
prime contract did not require an<br />
architect’s certification of final completion,<br />
determined that final acceptance occurred<br />
on the date that the public owner approved<br />
the release of final payment. Joseph J. Hock,<br />
Inc. v. Balt. Contractors, Inc., 249 A.2d 135,<br />
140 (Md. 1969).<br />
Given the imprecise definition, different<br />
parties to the same project may reach<br />
different conclusions about when the limitations<br />
period began to run. As a result, it<br />
can be difficult for a surety faced with this<br />
limitations standard to determine whether<br />
it has a viable limitations defense and particularly<br />
so when the surety may need to<br />
obtain information from the obligee, who<br />
may be reluctant to volunteer information<br />
or to provide an affidavit in an ongoing lawsuit<br />
regarding the obligee’s own determination<br />
about when “final acceptance” or “final<br />
settlement” occurred.<br />
<strong>The</strong> Date That a Principal Last Performed<br />
Work as the Limitations Period Trigger<br />
A handful of state “Little Miller Acts” provide<br />
that the limitations period begins<br />
when the bond principal completes all of its<br />
work or provides notice of completion, but<br />
courts have not uniformly interpreted the<br />
meaning of the term “completion.” Some<br />
courts interpret this term to mean what the<br />
construction industry recognizes as “substantial<br />
completion,” which means that<br />
although some “punch list” work remains<br />
incomplete, the bond principal completed<br />
sufficient work so that the owner can use<br />
space for the intended purpose, while other<br />
courts construe the degree of work necessary<br />
to trigger limitations as equivalent<br />
to a “final completion” standard. Compare<br />
Hensel Phelps Constr. Co. v. Gen. Signal<br />
Corp., 460 F.2d 109 (10th Cir. 1972)<br />
(holding that the term “completion” in the<br />
Colorado statute means substantial completion),<br />
and Henry v. Fid. & Dep. Co. of<br />
Md., 1999 WL 258460 (N.D. Ill. April 16,<br />
1999) (discussing receipt of certificates of<br />
acceptance as sufficient evidence of completion<br />
of work).<br />
Limitations Periods Based upon<br />
General Limitations Statutes or<br />
Contractual Limitations Provisions<br />
Some “Little Miller Acts” do not contain<br />
limitations periods and instead rely on<br />
other limitations provisions found in other<br />
statutes such as those applicable to all<br />
breach of contract claims. Montana, for<br />
example, relies on the eight-year statute of<br />
limitations applicable to all written contracts.<br />
See Mont. Code Ann. §27-2-202(1).<br />
Private bond forms may be entirely silent<br />
on the deadlines to bring actions against<br />
the bonds. In such cases, state general limitations<br />
statutes also govern the permissible<br />
time periods for filing lawsuits.<br />
Many bond forms do, however, contain<br />
contractual limitations provisions that<br />
define both the triggers and the limitations<br />
periods. Such bond forms are typically<br />
used for private projects, but they<br />
also may be used for nonfederal public<br />
projects if the particular public obligee<br />
does not have or does not require use of its<br />
own bond form. <strong>The</strong> American Institute of<br />
Architects (AIA), the Associated General<br />
Contractors of America (AGC), and ConsensusDOCS<br />
publish some of the widely<br />
used bond forms. <strong>The</strong> AIA no longer distributes<br />
the AIA A311 bond form, but it<br />
still crops up occasionally. This bond form<br />
requires a claimant to file a lawsuit within<br />
one year after the bond principal last provided<br />
work on the project. <strong>The</strong> purported<br />
replacement for the A311, the AIA A312,<br />
was introduced in 1984 and most recently<br />
revised and rereleased in 2010. This bond<br />
form requires the claimant to file a lawsuit<br />
within one year of whichever occurs first,<br />
the date that the claimant sent notice of its<br />
claim to the surety as required by the bond<br />
terms, or the last date of work performed<br />
by anyone on the project.<br />
<strong>The</strong> ConsensusDOCS bond forms follow<br />
the language of the Miller Act, and<br />
the AGC bond form is similar to the A312<br />
bond form. Parties that choose to use their<br />
own bond forms can create whatever contractual<br />
limitations provisions that they<br />
choose; however, as noted below, this does<br />
not guarantee that the courts will enforce<br />
the contractual limitations periods.<br />
A handful of states<br />
prohibit contractual<br />
limitations provisions of any<br />
kind as contravening public<br />
policy and therefore void.<br />
Conflicts Between Statutory and<br />
Contractual Limitations Provisions<br />
What happens when an applicable statutory<br />
bond limitations provision conflicts<br />
with a contractual limitations provision<br />
<strong>The</strong> federal government has eliminated this<br />
potential problem on federal projects by<br />
requiring that the Miller Act bond form be<br />
used on all projects governed by the statute.<br />
Such a conflict can arise with state or local<br />
public projects governed by “Little Miller<br />
Act” bonds because not all state public entities<br />
have their own bond forms or mandate<br />
the use of a particular bond form. Conflicts<br />
in private bond situations happen more<br />
rarely and only occur in those states where<br />
statutes or case law mandate that a specific<br />
limitations provision applies to private<br />
bonds. A handful of states prohibit contractual<br />
limitations provisions of any kind as<br />
contravening public policy and therefore<br />
void. See, e.g., Mo. Rev. Stat. §431.030. As a<br />
result, most widely used bond forms have a<br />
savings clause that provides that if the contractual<br />
limitations provision is unenforceable,<br />
the minimum period available under<br />
applicable law is the limitations provision.<br />
Absent a blanket statutory prohibition<br />
against enforcement of contractual limitations<br />
provisions, states’ treatment of conflicts<br />
between statutory and contractual<br />
limitations provisions varies. Some state<br />
courts take the position that the statutory<br />
limitations provision found in a “Little<br />
Miller Act” always controls regardless<br />
of the nature of the conflict. See, e.g., E.L.<br />
Burns Co., Inc. v. Cashio, 302 So. 2d 297, 300<br />
(La. 1974); Joseph F. Hughes & Co. v. George<br />
H. Robinson Corp., 175 S.E.2d 413, 415 (Va.<br />
1970). In other states, the courts will honor<br />
a contractual limitations provision that is<br />
longer than that required by the statute, as<br />
in the ruling in A.C. Legnetto Constr. Inc. v.<br />
Hartford Fire Ins. Co.., 702 N.E.2d 830, 830<br />
(N.Y. 1998), but they will prohibit one that<br />
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Fidelity and Surety<br />
Even when a surety<br />
is successful at the trial<br />
court level, that success<br />
can be short-lived.<br />
is shorter than the statutory requirement.<br />
Compare Nat’l Sur. Corp. v. Fischer Steel<br />
Corp., 374 S.W.2d 372, 377 (Tenn. 1964)<br />
(holding parties may extend the limitation<br />
period contractually beyond that required<br />
by the statute), and Pyco Supply Co., Inc. v.<br />
American Centennial Ins. Co., 354 S.E.2d<br />
360, 362 (N.C. Ct. App. 1987), rev’d on other<br />
grounds, 364 S.E.2d 380 (N.C. 1988) (holding<br />
parties may not reduce the limitations<br />
period of a payment bond contractually).<br />
Finally, yet other states allow the parties<br />
to agree contractually to a shorter limitations<br />
period as long as the period is a reasonable<br />
length. Robert F. Simmons Constr.<br />
Co. v. Am. States Ins. Co., 426 S.W.2d 441,<br />
443 (Ky. Ct. App. 1968) (holding that parties<br />
can shorten a limitations period to a<br />
period shorter than the 15-year statutory<br />
limitations period as long as the shorter<br />
period is reasonable).<br />
60 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Frequently Arising Factual<br />
Issues in Limitations Disputes<br />
Given the prevalence of statutorily required<br />
bonds over private bonds, it is not surprising<br />
that the predominant case authority<br />
on the topic of payment bond limitations<br />
is found in Miller Act cases and their state<br />
counterparts. Frequently, these statutory<br />
bonds have shorter limitations periods<br />
than private bonds or general breach<br />
of contract limitations provisions, which<br />
enhances the opportunities to argue limitations<br />
defenses.<br />
At first blush, the Miller Act limitations<br />
standard appears straightforward; however,<br />
it has proved otherwise in practice<br />
when the parties dispute what constitutes<br />
performance of work on a bonded project.<br />
Parties have frequently litigated when<br />
a claimant or principal ceased performing<br />
work on a project, often in the context of<br />
a surety’s dispositive motion on the limitation<br />
period issue. Despite the longevity<br />
of the Miller Act, case law suggests that<br />
the courts have not resolved these issues<br />
over time.<br />
Common themes arise in the litigation:<br />
• Does punch list or other incidental<br />
work constitute performance sufficient<br />
to postpone the commencement of the<br />
limitations period<br />
• Does performance of repairs on defective<br />
work or warranty work restart the<br />
limitations clock<br />
• Does work performed on the bonded<br />
project but at the direction of another<br />
party affect the limitations period, for<br />
instance, if the claimant performs work<br />
for the obligee, or the completion contractor,<br />
among others<br />
Original Contract Work vs.<br />
Corrective or Repair Work<br />
Most construction contracts contain reference<br />
to a substantial completion deadline;<br />
therefore, it should be fairly easy to determine<br />
when a payment bond claimant completed<br />
work on a bonded project. Objective<br />
evidence of substantial completion exists<br />
in the form of such documents as architect<br />
certificates of substantial completion, certificates<br />
of occupancy from public agencies<br />
allowing the project owner to use the project<br />
facilities, and the claimant’s own payment<br />
applications containing the claimant’s<br />
own statement of the percentage of the work<br />
completed. In the case of supplier claims, a<br />
combination of invoices and delivery tickets<br />
provide proof of when materials were<br />
last delivered or when equipment was last<br />
used on the bonded project.<br />
However, what happens when a claimant<br />
performs some small amount of additional<br />
work after the date of substantial completion,<br />
sometimes to complete items on a<br />
punch list Is that work sufficient to suspend<br />
the running of the limitations period<br />
In federal case law, most courts attempt to<br />
resolve the issue by determining whether<br />
the additional punch list work consists of<br />
completing base contract work or repairing<br />
defective work. If it involves contract<br />
work, the courts generally find that the<br />
work will toll the statute of limitations. See<br />
U.S. ex rel. Austin v. Western Elec. Co., 337<br />
F.2d 568 (9th Cir. 1964). In the recent case<br />
of Arch Ins. Co. v. Precision Stone, Inc., 584<br />
F.3d 33, 39–40 (2d Cir. 2009), the appellate<br />
court upheld the trial judge’s decision holding<br />
that the case was timely because the<br />
punch list work performed within one year<br />
of the lawsuit filing involved completion of<br />
previously omitted original contract work<br />
rather than repairs of defective or nonconforming<br />
work. A few of the appellate circuits<br />
make a distinction between whether<br />
the contract work performed is substantial<br />
or not, finding that the statute of limitations<br />
continues to run if the work is insubstantial.<br />
Compare Highland Renov. Corp v.<br />
Hanover Ins. Co., 620 F. Supp. 2d 79, 84–85<br />
(D. D.C. 2009) (holding that the claim was<br />
time barred), and Evco Sound & Electronics,<br />
Inc. v. Seaboard Surety Co., 223 P.3d<br />
740, 746 (2009) (rejecting the surety’s lack<br />
of timely notice defense).<br />
As the Fifth Circuit noted many years<br />
ago, “each case must be judged by its own<br />
facts and… sweeping rules about ‘repairs’<br />
offer little help in the analysis.” Johnson<br />
Service Co. v. Transamerica Ins. Co., 485<br />
F.2d 164, 173 (5th Cir. 1973). It is not surprising,<br />
then, that when confronted with a<br />
motion based upon a limitations defense,<br />
many courts determine that it is a factual<br />
dispute best left in the hands of the trier of<br />
fact. In U.S. ex. rel. Graybar Elec. Co., Inc. v.<br />
Overstreet Elec. Co., Inc., 2005 WL 2431272<br />
(E.D. Wash. October 3, 2005), the claimant<br />
challenged the surety’s limitations defense<br />
by arguing that it had provided contractually<br />
required O & M manuals within the<br />
one-year period preceding the filing of the<br />
lawsuit. <strong>The</strong> court declined to grant summary<br />
judgment to either party, stating that<br />
the issue was a fact dispute.<br />
Even when a surety is successful at the<br />
trial court level, that success can be shortlived.<br />
In Preferred Fire Protection, Inc. v.<br />
Joseph Davis, Inc., 954 A.2d 20 (Pa. Super.<br />
2008), the claimant billed for 100 percent<br />
of its subcontract price. After it received<br />
only a partial payment from the prime contractor,<br />
the claimant wrote to the prime<br />
contractor and surety stating that the balance<br />
was due and the work had been substantially<br />
completed on a certain date.<br />
After the claimant filed a lawsuit more<br />
than one year after the completion date<br />
noted in its own correspondence, the trial<br />
court granted the surety’s motion for summary<br />
judgment on limitations grounds.<br />
<strong>The</strong> claimant appealed, arguing that its attendance<br />
at a re-test of the fire sprinkler
system, which did not uncover defects in<br />
the system so the claimant did not perform<br />
further work, was the actual completion<br />
date. In a split decision, the appellate<br />
court reversed, finding that a genuine issue<br />
of fact existed about when the claimant’s<br />
final work was performed for purposes of<br />
determining when the statute of limitations<br />
period began.<br />
<strong>The</strong> recent case, Hercon Mgmt., Inc. v.<br />
Travelers Cas. & Sur. Co. of Am., 2009<br />
WL 4894472 (Mass. Super. Nov. 20, 2009),<br />
exemplifies the courts’ ongoing struggle<br />
with this issue. In Hercon, the subcontractor<br />
claimant argued that its demobilization<br />
from the job occurred within one year of<br />
the lawsuit filing. <strong>The</strong> court characterized<br />
whether demobilization constituted labor<br />
or materials under the contract to toll the<br />
running of the limitations period as disputed<br />
facts. As a result, the court denied<br />
both parties’ dispositive motions.<br />
Not all surety dispositive motions on<br />
limitations are unsuccessful. In Dunn Constr.,<br />
L.L.C. v. Gray Ins. Co., 2010 WL 231742<br />
(W.D. La. Jan. 13, 2010), the Miller Act<br />
surety presented as evidence the subcontractor’s<br />
payment application showing that<br />
the work was substantially complete, letters<br />
from the claimant and its counsel,<br />
and the owner’s quality assurance reports<br />
and punch list records. After determining<br />
that the punch list work performed by<br />
the claimant during the one-year period<br />
before filing the lawsuit was merely corrective<br />
work that did not extend the time<br />
that the claimant had to file a lawsuit, the<br />
court granted the surety’s summary judgment<br />
motion. Similarly, in U.S. ex. rel.<br />
Miller Proctor Nickolas, Inc. v. Lumbermens<br />
Mut. Cas. Co., 2009 WL 962273 (E.D.<br />
N.Y. Mar. 31, 2009), the court had to decide<br />
whether training the obligee’s personnel<br />
and equipment testing and adjustment<br />
constituted contract work or corrective<br />
work. After reviewing the facts that the<br />
claimant had billed its work as 100 percent<br />
complete and had returned to the job site<br />
only after receiving complaints and did not<br />
charge for the training, testing, and adjustment,<br />
the court determined that the work<br />
was corrective work and granted the surety’s<br />
summary judgment motion. See also<br />
U.S. ex. rel. East Coast Contracting, Inc. v.<br />
United States Fidelity and Guarantee (sic.)<br />
Co., 2004 WL 1686496 (D. Md. July 23,<br />
2004), aff’d, 133 F. App’x 58 (4th Cir. May<br />
26, 2005)(granting summary judgment to<br />
the surety because the claimant’s return to<br />
the project site merely to inspect its work<br />
and advise the completion contractor that<br />
someone else had damaged its work did not<br />
restart the Miller Act limitations period).<br />
In contrast, in Evco Sound & Elec., Inc.<br />
v. Seaboard Sur. Co., 223 P.3d 740, 744–46<br />
(Idaho 2009), the appellate court affirmed<br />
the trial court’s judgment in favor of the<br />
claimant, agreeing with the lower court’s<br />
analysis that training sessions, as-built<br />
drawings, and installation of a part for the<br />
television system were original contract<br />
work, not repair or corrective work.<br />
Work Done for Another Party or<br />
Under a Different Contract<br />
While it would seem that work performed<br />
for someone other than the original principal<br />
would not toll the limitations period,<br />
the recent case law does not reflect consensus<br />
on this issue. In Assemblers, Inc. v. Am.<br />
Mfr. Mut. Ins. Co., 761 N.W.2d 399 (Mich.<br />
App. Ct. 2008), a second tier subcontractor<br />
on a public project sued both the first tier<br />
subcontractor’s and the prime contractor’s<br />
sureties. <strong>The</strong> facts reflected that the claimant<br />
had returned to the project site to perform<br />
work at the public owner’s request<br />
after the prime contractor’s default termination.<br />
<strong>The</strong> lower court granted summary<br />
judgment to both sureties. On appeal, the<br />
appellate court sustained the summary<br />
judgment ruling on limitations grounds<br />
as to the subcontractor’s bond containing<br />
a contractual limitations provision but<br />
reversed as to the public bond, finding a<br />
dispute of fact as to whether the work constituted<br />
performance under the contract<br />
for limitations purposes.<br />
In Casey Indus., Inc. v. Seaboard Sur.<br />
Co., 2006 WL 2850652 (E.D. Va. October<br />
2, 2006), a subcontractor had returned<br />
to the project site following the contractor’s<br />
default termination and performed<br />
some work at the completion contractor’s<br />
request. <strong>The</strong> subcontractor and completion<br />
contractor did not execute a new subcontract<br />
or purchase order. <strong>The</strong> claimant<br />
argued that the work was under its original<br />
subcontract even though the prime<br />
contractor had already been terminated<br />
when the work was performed. <strong>The</strong> surety<br />
argued that the claimant had previously<br />
represented that its work was complete and<br />
that the work was performed under the<br />
takeover agreement. <strong>The</strong> court held that<br />
whether the work that the claimant did on<br />
returning to the job was under the original<br />
subcontract or not involved a genuine<br />
fact issue and denied the surety’s motion<br />
to dismiss.<br />
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<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 61
Fidelity and Surety<br />
In a slightly different twist to the argument,<br />
a claimant acknowledged that more<br />
than one year had passed since it had performed<br />
work on the Miller Act project, but<br />
it argued that it had performed work at the<br />
project site for the principal under a different<br />
contract. <strong>The</strong> surety had not bonded the<br />
other contract. Finding that the Miller Act<br />
bond only covered the one project and that<br />
Proactively seekthe<br />
best limitations period<br />
available under applicable<br />
law, meaning the shortest<br />
period, by attempting to<br />
control the bond form.<br />
none of the work performed during the previous<br />
year was for the bonded project, the<br />
court granted the surety’s motion to dismiss.<br />
Subterranean Constr. Co., Inc. v. W.D.<br />
Curran & Assoc., Inc., 2005 WL 2065231 (D.<br />
Md. Aug. 23, 2005).<br />
Practice Tips for Successful<br />
Limitations Arguments<br />
While any favorable judgment for a surety<br />
on limitations grounds is a victory, the<br />
sooner it happens the better given the costs<br />
of litigation. How does a surety increase its<br />
odds of winning a limitations argument at<br />
an early litigation stage<br />
1. When possible, control the bond form.<br />
2. Be proactive in getting the best (i.e.,<br />
shortest) limitations period available.<br />
3. After a party makes a claim, sufficiently<br />
investigate and gather the necessary<br />
project paperwork to establish the last<br />
date for performance of work and the<br />
specific nature of that work.<br />
4. Take steps to avoid successful estoppel<br />
arguments.<br />
<strong>The</strong>se practice tips are discussed more<br />
below.<br />
Controlling the Bond <strong>For</strong>m<br />
When possible, control the bond form. Proactively<br />
seek the best limitations period<br />
62 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
available under applicable law, meaning<br />
the shortest period, by attempting to control<br />
the bond form. While it is not possible<br />
to do this for projects subject to the Miller<br />
Act or some other public projects, it is possible<br />
in many other instances. When such<br />
an opportunity exists, propose using a<br />
bond form with the most favorable enforceable<br />
contractual limitations provision for<br />
the applicable jurisdiction. Investigate the<br />
applicable statutory provision, and never<br />
use a bond form that contains a longer contractual<br />
limitations period than the applicable<br />
statute.<br />
Reviewing Bond <strong>For</strong>m Provisions and<br />
Underlying Contract Provisions<br />
Review contractual provisions in both the<br />
proposed bond form and underlying contract<br />
that may affect which limitations<br />
period governs. State limitations provisions<br />
applicable to payment bonds vary widely,<br />
with some states having statutory limitations<br />
provisions as long as 15 to 20 years.<br />
Most often, the law of the project location<br />
will govern, but sometimes the parties may<br />
choose contractually which law will apply.<br />
A surety wants to guard against thinking<br />
that a favorable jurisdiction’s limitations<br />
period applies when, in fact, it does<br />
not due to a contractual choice of law provision.<br />
On the flip side, when a surety confronts<br />
a project located in a jurisdiction<br />
with unfavorable statutory limitations provisions,<br />
sometimes it might use a choice of<br />
law provision in the bond or the contract<br />
to avoid the unfavorable statutory limitations<br />
provisions.<br />
Sufficiently Investigating and<br />
Gathering Project Paperwork<br />
After a party makes a claim, sufficiently<br />
investigate and gather the necessary project<br />
paperwork to establish the last date for performance<br />
of work and the specific nature of<br />
that work. A surety should not lose a dispositive<br />
motion due to insufficient evidence<br />
regarding when the claimant or the principal,<br />
depending on the applicable standard,<br />
last performed work on the bonded project<br />
and the nature of the work performed.<br />
Many project records are sources of useful<br />
evidence. <strong>The</strong>se include daily reports and<br />
logs, certified payroll records on public<br />
projects, job cost reports, payment applications,<br />
invoices, delivery tickets, bills of<br />
lading, certificates of substantial and final<br />
completion, punch lists, various obligee<br />
and project lender reports, and job site<br />
progress photographs. Other sources of<br />
information are notice and demand letters<br />
from the claimant to the surety, the principal,<br />
or the owner; the claimant’s affidavit<br />
of the claim; and representations made by<br />
the claimant in pleadings in related litigation<br />
such as mechanic’s lien filings. Unless<br />
the claimant’s lack of timeliness is patently<br />
obvious from the allegations, the surety<br />
will need to obtain and review these documents<br />
to present an effective summary<br />
judgment motion.<br />
Taking Steps to Prevent<br />
Successful Estoppel<br />
Take steps to avoid successful estoppel<br />
arguments. Many claimants, when faced<br />
with notice of an untimely filing, will argue<br />
that estoppel prevents the surety from<br />
arguing limitations as a defense. <strong>The</strong>se<br />
arguments can be easily defeated if the<br />
surety takes certain precautions such as<br />
timely responding to all of the claimant’s<br />
communications and adhering to a reasonable<br />
investigative period. <strong>The</strong> surety<br />
should always include reservation of rights<br />
language in all communications with the<br />
claimant and never make promises or representations<br />
regarding payment or resolution<br />
of the claim particularly while<br />
also asking the claimant to forego filing a<br />
lawsuit.<br />
Conclusion<br />
It is difficult to draw sweeping conclusions<br />
because a unique combination of law<br />
and facts determines every payment bond<br />
limitations case. When possible, a surety<br />
should try to create a situation upfront that<br />
will apply the most favorable limitations<br />
provision legally available to any claims.<br />
On the back end, after claims arise, a surety<br />
must conduct a thorough but prompt investigation<br />
so that it understands how the<br />
courts in that jurisdiction have addressed<br />
limitations so that it can gather all the necessary<br />
facts to present as evidence. While<br />
mounting a successful limitations defense<br />
to a payment bond claim is a difficult challenge,<br />
with the right set of facts and proper<br />
preparation, it is not an insurmountable<br />
task.
Fidelity and Surety<br />
Navigating the<br />
Quagmire<br />
By John R. Felice<br />
<strong>The</strong> Computer<br />
Crime Coverage<br />
Conundrum<br />
<strong>The</strong> scope of coverage<br />
for losses resulting from<br />
“use of a computer”<br />
will remain vague<br />
and complicated until<br />
additional definitions<br />
are established.<br />
Many of you may be reading this article on your handheld<br />
device, your laptop, or your desktop computer. In fact,<br />
most of you would feel lost if you had to go even one hour<br />
without those electronic devices. All of those devices<br />
simplify your lives, yet they complicate<br />
the lives of those in the insurance industry<br />
because, despite how much computerized<br />
devices infiltrate every aspect of<br />
our daily lives, computer crime insurance<br />
policies remain vague and complicated.<br />
Language contained in those policies<br />
has failed to keep pace with technological<br />
advances, leaving insureds and insurers<br />
in a netherworld of determining the scope<br />
of necessary insurance protection and the<br />
protection policies provide. <strong>The</strong> boundless<br />
creativity of individuals seeking to exploit<br />
opportunities made possible by our electronic<br />
freedom leaves financial institutions<br />
and businesses, and the insurers that cover<br />
their losses, significantly burdened by this<br />
ambiguity.<br />
<strong>The</strong>re are several computer- related<br />
insuring agreements, all of which purport<br />
to provide coverage for crimes committed<br />
while using a computer, but none of which<br />
define the term “computer” or the phrase<br />
“use of a computer.” What constitutes a<br />
computer is obvious, you would think. But<br />
does a smartphone fall within the definition<br />
of computer What about a simple cell<br />
phone from which someone could send a<br />
text message to set a chain of events into<br />
action that leads to a loss Is a fax machine<br />
a computer Does the simple act of reading<br />
an e-mail with instructions on how<br />
to perpetrate a crime constitute the use of<br />
a computer This article examines all of<br />
these issues and offers practical solutions<br />
for both policyholders and insurance companies<br />
to navigate their way through this<br />
coverage abyss.<br />
Insuring Agreements<br />
<strong>The</strong> Insurance Services Office (ISO) has two<br />
forms that provide coverage for computer<br />
fraud. Both forms specify that the loss must<br />
result directly from the use of a computer.<br />
See sections of forms ISO CR 00 22 05 06,<br />
“Commercial Crime Policy” and ISO CR 00<br />
07 10 90, “Computer Fraud Coverage <strong>For</strong>m”<br />
on page 64.<br />
■ John R. Felice is a shareholder of Hermes Netburn O’Connor & Spearing PC in Boston. He has substantial experience representing<br />
insurers, insurance claim administrators, and other stakeholders in connection with complex insurance coverage matters.<br />
His experience also includes representing manufacturers and distributors of asbestos and asbestos- containing products in<br />
toxic tort cases pending in multiple jurisdictions; representing clients in product and premises liability claims; and representing<br />
surety companies and contractors in a wide variety of commercial surety and construction- related litigation.<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 63
Fidelity and Surety<br />
<strong>The</strong>se insuring agreements intend to<br />
protect an insured when an individual uses<br />
a computer fraudulently to gain access to<br />
an insured’s internal computer system and<br />
transfers funds from the insured’s premises.<br />
<strong>The</strong>se coverage forms make clear that<br />
the loss or damage must be caused directly<br />
by the use of a computer. As discussed in<br />
greater detail below, the phrase “use of a<br />
computer” is not defined, and the degree<br />
of use required to prompt coverage is open<br />
to interpretation.<br />
Commercial Crime Policy, ISO CR 00 22 05 06<br />
6. Computer Fraud<br />
We will pay for loss of or damage to “money”, “securities” and “other property” resulting<br />
directly from the use of any computer to fraudulently cause a transfer of that property from<br />
inside the “premises” or “banking premises”:<br />
a. To a person (other than a “messenger”) outside those “premises”; or<br />
b. To a place outside those “premises.”<br />
Computer Fraud Coverage <strong>For</strong>m, ISO CR 00 07 10 90<br />
A. COVERAGE—We will pay for loss of, and loss from damage to, Covered Property resulting<br />
directly from the Covered Cause of Loss.<br />
1. Covered Property: “Money,” “Securities” and “Property Other Than Money and<br />
Securities.”<br />
***<br />
D. ADDITIONAL EXCLUSIONS, CONDITIONS AND DEFINITIONS:<br />
3. Additional Definitions<br />
b. “Computer Fraud” means “theft” of property following and directly related to the<br />
use of any computer to fraudulently cause a transfer of that property from inside<br />
the “premises” or “banking premises” to a person (other than a “messenger”) outside<br />
those “premises” or to a place outside those “premises.”<br />
ISO Financial Institution Computer Crime Policy, FI 00 20 09 12<br />
A. Insuring Agreements<br />
1. Computer Fraud<br />
a. We will pay for loss resulting directly from a fraudulent:<br />
(1) Entry of “electronic data” or “computer program” into; or<br />
(2) Change of “electronic data” or “computer program” within; any “computer system”<br />
owned, leased or operated by you or your contracted electronic data processing<br />
firm, provided the fraudulent entry or fraudulent change causes with<br />
regard to Paragraphs 1.a.(1) and 1.a.(2):<br />
(a) “Property” to be transferred, paid or delivered;<br />
(b) An account of yours, or of a “customer” to be added, deleted, debited or<br />
credited; or<br />
(c) An unauthorized account or a fictitious account to be debited or credited.<br />
SSA Computer Crime Policy for Financial Institutions<br />
1. Computer Systems Fraud<br />
Loss resulting directly from a fraudulent<br />
(1) entry of Electronic Data or Computer Program into, or<br />
(2) change of Electronic Data or Computer Program within any Computer System operated<br />
by the Insured, whether owned or leased; or any Computer System identified in the application<br />
for this policy; or a Computer System first used by the Insured during the policy<br />
period, as provided by General Agreement A; provided the entry or change causes<br />
(i) property to be transferred, paid or delivered,<br />
(ii) an account of the Insured, or of its customer, to be added, deleted, debited or credited,<br />
or<br />
(iii) an unauthorized account or a fictitious account to be debited or credited.<br />
ISO and the Surety Association of America<br />
(SAA) have computer crime policies<br />
that are substantially similar. Neither policy<br />
uses the phrase “use of a computer,” but<br />
both provide coverage for losses involving<br />
“computer systems,” and envisioning how<br />
the covered acts would not involve the use<br />
of a computer is hard. Both policies define<br />
the phrase “computer system,” but the definition<br />
in the SAA form is narrower than<br />
that in the ISO form. See sections of forms<br />
FI 00 20 09 12 “ISO Financial Institution<br />
Computer Crime Policy” and “SSA Computer<br />
Crime Policy for Financial Institutions,”<br />
below left.<br />
<strong>The</strong> coverage afforded by these insuring<br />
agreements differs from the computer<br />
fraud coverage provided by a Commercial<br />
Crime Policy or Computer Fraud Coverage<br />
<strong>For</strong>m because the insuring agreements do<br />
not state that the loss has to be caused by<br />
the “use of a computer.” Those seeking coverage<br />
will argue that coverage applies when<br />
a computer is involved to directly cause the<br />
loss, not just when the use of the computer<br />
itself causes the loss. In other words, entering<br />
data into the computer system can be<br />
the first step in a process that directly leads<br />
to a loss, and the financial institution coverage<br />
would apply. Those contesting coverage<br />
will argue that for the loss to result<br />
directly from a fraudulent act involving a<br />
computer system requires “use of a computer”<br />
immediately preceding the loss,<br />
rather than use at some remote time in a<br />
long process leading to a loss.<br />
Computer<br />
Only a few cases analyze computer fraud<br />
coverage, and the majority of those cases<br />
involve the use of a traditional computer.<br />
See, e.g., Methodist Health System Foundation,<br />
Inc. v. Hartford Fire Insurance Company,<br />
834 F. Supp. 2d 493 (E.D. La. 2011)<br />
(involving use of a computer to generate<br />
false documents that misled investors and<br />
gave the appearance of a legitimate investment<br />
operation). As mentioned earlier, a<br />
computer isn’t just an electronic box that<br />
sits on a desk anymore. Computers come in<br />
different shapes, sizes, colors, and capacities.<br />
Someone who commits a crime using<br />
an electronic device is just as likely to use<br />
a handheld device, such as a smartphone,<br />
as a traditional computer. None of the coverage<br />
forms specifically include handheld<br />
64 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong>
devices, such as a smartphone, in the definition<br />
of “computer.”<br />
<strong>The</strong> ISO Financial Institution Computer<br />
Crime Policy defines “computer system”<br />
to mean “computers, including Personal<br />
Digital Assistants (PDAs) and other transportable<br />
or handheld devices, electronic<br />
storage devices and related peripheral components”<br />
by which “‘electronic data’ is collected,<br />
transmitted, processed, stored or<br />
retrieved.” Similarly, the SAA Computer<br />
Crime Policy for Financial Institutions<br />
defines “computer system” to mean “computers<br />
with related peripheral components,<br />
including storage components wherever<br />
located… by which ‘electronic data’ is collected,<br />
transmitted, processed, stored or<br />
retrieved.” <strong>The</strong> major difference is that<br />
the SAA definition does not include PDAs.<br />
<strong>The</strong> ISO Commercial Crime Policy defines<br />
“computer system” to mean “computers<br />
and related peripheral components… by<br />
which ‘electronic data’ is collected, transmitted,<br />
processed, stored and retrieved.”<br />
Even if someone did look outside of the<br />
computer crime coverage realm, the definition<br />
of “computer” would not include<br />
the majority of what most of us consider<br />
a computer to be. <strong>For</strong> example, the United<br />
States Code defines “computer” in connection<br />
with fraud and related activity to mean<br />
an electronic, magnetic, optical, electrochemical,<br />
or other high speed data<br />
processing device performing logical,<br />
arithmetic, or storage functions, and<br />
includes any data storage facility or<br />
communications facility directly related<br />
to or operating in conjunction with such<br />
device, but such term does not include<br />
any automated typewriter or typesetter,<br />
a portable hand held calculator, or other<br />
similar device.<br />
18 U.S.C.A. §1030. Is a smartphone a “data<br />
processing device,” or does it fall into the<br />
“other similar device” category to exclude<br />
it from the definition of computer <strong>The</strong><br />
case law does not examine this issue, and<br />
someone could make a reasonable argument<br />
either way.<br />
So looking back at the questions posed<br />
at the outset, does a smartphone fall within<br />
the definition of computer What about a<br />
traditional cell phone, or a “dumb phone”<br />
as some might call it All of the definitions<br />
mentioned here are ambiguous, and courts<br />
usually resolve ambiguities in favor of an<br />
insured. <strong>The</strong> FICP definition most nearly<br />
includes modern technology because it<br />
includes PDAs and “other transportable or<br />
handheld devices.” But newer technologies,<br />
such as smartphones, basically have rendered<br />
PDAs obsolete. Those seeking coverage<br />
should argue that “other transportable<br />
or handheld devices” is broad and could<br />
include a smartphone or even a cell phone.<br />
Those contesting coverage should argue<br />
that the “other transportable or handheld<br />
devices” refers to devices such as PDAs, and<br />
smartphones are functionally distinct from<br />
those devices.<br />
It is important to read closely the insuring<br />
agreements, definitions, and exclusions<br />
used by a particular insurer because<br />
slight changes or additions to the standard<br />
form language could make a big difference.<br />
<strong>For</strong> example, in Brightpoint, Inc.<br />
v. Zurich American Insurance Company,<br />
2006 WL 693377, at *1 (S.D. Ind. Mar.<br />
10, 2006), the insured experienced a loss<br />
at one of its subsidiaries in the Philippines<br />
as a result of a scam involving prepaid<br />
telephone cards. <strong>The</strong> scam was set<br />
in motion when Brightpoint received, by<br />
fax machine, copies of purchase orders,<br />
post-dated checks, and bank guarantees.<br />
Brightpoint was the insured under a crime<br />
policy issued by Zurich. <strong>The</strong> Zurich policy<br />
followed ISO form CR 00 07 10 90, defining<br />
“computer fraud” as “‘theft’ of property<br />
following and directly related to the<br />
use of any computer to fraudulently cause a<br />
transfer of that property from inside the…<br />
premises’ or ‘banking premises’ to a person<br />
(other than a ‘messenger’) outside those<br />
‘premises’ or to a place outside those ‘premises.’”<br />
<strong>The</strong> Zurich policy added a sentence<br />
to the computer fraud definition, which<br />
stated that the “means by which a fraudulent<br />
transfer is initiated includes: written,<br />
telephonic, telegraphic, telefacsimile,<br />
electronic, cable, or teletype instructions.”<br />
This additional sentence may have caused<br />
the court to accept the insured’s position<br />
that a facsimile machine was a computer<br />
more easily.<br />
Brightpoint argued that “the facsimile<br />
it received (which it alleges constitutes the<br />
use of a computer) of the checks and bank<br />
guarantees caused it to take actions which<br />
eventually led to it being defrauded when<br />
it released the phone cards to the defrauding<br />
party.” Id. at *4. In discussing whether<br />
Despite how much<br />
computerized devices<br />
infiltrate every aspect of our<br />
daily lives, computer crime<br />
insurance policies remain<br />
vague and complicated.<br />
the receipt of the fraudulent checks caused<br />
the loss, the court stated:<br />
<strong>The</strong> fraud in this instance occurred<br />
through the use of the unauthorized<br />
checks and guaranties, not the manipulation<br />
of numbers or events through the<br />
use of a computer, facsimile machine<br />
or other similar device. <strong>The</strong> facsimile<br />
transmission caused Brightpoint to purchase<br />
the cards from its supplier, not to<br />
transfer them to its purchaser, and the<br />
use of the fax thus cannot be viewed as<br />
having directly or proximately caused<br />
the theft.<br />
Id. at *7. In reaching its decision, the<br />
court apparently assumed that a facsimile<br />
machine constituted a computer, perhaps<br />
because the Zurich policy specifically made<br />
reference to a telefacsimile machine in the<br />
definition of computer fraud. Smartphones<br />
are capable of performing many more<br />
functions than a fax machine and, therefore,<br />
an argument could be made that, if a<br />
fax machine is considered a computer, then<br />
a smartphone is too.<br />
Use of a Computer<br />
Which types of electronic equipment the<br />
parties to an insurance contract intended to<br />
be viewed as a “computer” for purposes of<br />
fraud coverage is not always clear. Equally<br />
challenging is determining whether a computer<br />
actually was used in perpetrating the<br />
allegedly fraudulent activity. Does “use”<br />
mean communicating manipulated and<br />
stored electronic information to a third<br />
party at some remote location Or is it simply<br />
a few keystrokes on a keyboard in place<br />
of a typewriter Might it involve exploiting<br />
knowledge about how an entity’s computer<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 65
Fidelity and Surety<br />
system operates <strong>The</strong> answers are not easily<br />
found in this minimally charted territory.<br />
<strong>The</strong> insuring agreement itself serves as<br />
the first source of information about what<br />
the parties meant when they included the<br />
limiting phrase “use of a computer” in the<br />
computer fraud coverage insurance. Clear<br />
expressions of what the parties intended<br />
may end the inquiry there. As noted above,<br />
Only a few cases analyze<br />
computer fraud coverage,<br />
and the majority of those<br />
cases involve the use of<br />
a traditional computer.<br />
however, most policies do not define the<br />
phrase. When the policy language does not<br />
define the phrase’s meaning, insureds and<br />
insurers must turn to judicial interpretation<br />
and legal and professional commentary<br />
for guidance.<br />
Few cases have addressed this issue<br />
directly and none with precision. What<br />
the case law does make clear is that ambiguity<br />
of the often undefined phrase “use of<br />
a computer” is construed against the drafting<br />
insurer consistent with standard rules<br />
of contract interpretation. In Owens, the<br />
plaintiff insured sought indemnity from<br />
its insurer under a crime insurance policy<br />
that covered computer fraud. Owens,<br />
2010 WL 4226958, at *1, 50 Conn. L. Rptr.<br />
at 665. E-mails and electronic wire transfers<br />
were used to perpetrate the fraud. Relying<br />
on the Brightpoint decision, the insurer<br />
moved for a summary judgment arguing,<br />
among other things, that the claim did not<br />
constitute computer fraud under the policy<br />
because “for computer fraud to exist,<br />
the transfer must occur by way of a ‘computer<br />
hacking’ incident, such as the manipulation<br />
of numbers or events through the<br />
use of a computer.” <strong>The</strong> insured in the<br />
Owens case disagreed with the elevated<br />
standard that the insurer sought to impose<br />
and responded that “the only required level<br />
of computer usage to constitute Computer<br />
Fraud under the subject insurance policy is<br />
66 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
‘the use of any computer’ and the word ‘use’<br />
is not further defined or described under<br />
the policy.” Id. at *7. <strong>The</strong> trial court agreed<br />
and held that “the policy is ambiguous as<br />
to the amount of usage necessary to constitute<br />
computer fraud. This ambiguity is<br />
resolved in favor of the plaintiff [insured].”<br />
Id. at *7. <strong>The</strong> trial court in Owens also concluded<br />
that the holding in Brightpoint did<br />
not require a showing of something such<br />
as a “computer hacking incident.” Owens,<br />
2010 WL 4226958, at *7.<br />
It should be noted that, in April, 2012, an<br />
order of vacatur was entered on the docket<br />
indicating that, among other things, the<br />
September 17, 2010, memorandum of decision,<br />
published September 20, 2010, was<br />
vacated by stipulation of the parties. On<br />
May 5, 2012, the judge who wrote the September<br />
17, 2010, memorandum of decision,<br />
Judge Richard E. Arnold, objected to the<br />
order of vacatur, stating, “<strong>The</strong> trial court,<br />
Arnold J., does not consent to the vacating<br />
of its decision denying the defendant’s<br />
Motion for Summary Judgment, said decision<br />
being dated September 17, 2010. It is<br />
the trial court’s position that the court issuing<br />
the Order of Vacatur lacks the authority<br />
to order the vacating of the trial court’s<br />
decision dated Sept. 17, 2010 and has not<br />
presented legal authority for its Order. See<br />
U.S. v. Munsingware, 340 U.S. 36, 40–41<br />
(1950); Private Healthcare Systems, Inc.<br />
v. Torres, 278 Conn 291, 303 (2006); State<br />
v. Singleton, 274 Conn. 426, 439 (2005);<br />
Comm. Motor Vehicles v. DeMilo, 233 Conn.<br />
254, 272–73 (1995).” As of the date of this<br />
article, the Owens docket has not received<br />
further entries.<br />
In Brightpoint, the insured sought coverage<br />
from its insurer under a crime policy<br />
for a multimillion dollar loss occasioned by<br />
a scam involving prepaid telephone cards.<br />
2006 WL 693377, at *1 (S.D. Ind. Mar. 10,<br />
2006). <strong>The</strong> trial court determined that the<br />
insured had not suffered a covered loss,<br />
finding that “there is nothing in the Proof<br />
of Loss that proves that a computer was<br />
used to fraudulently cause a transfer of the<br />
phone cards.” Id. at *3. Although the policy<br />
defined the “means by which a fraudulent<br />
transfer is initiated” to include “telefacsimile,”<br />
the trial court concluded that it was<br />
not the facsimile that caused the fraudulent<br />
transfer; rather, the facsimile simply<br />
alerted the insured that the distributer<br />
“wished to place an order.” Id. at *1, *7.<br />
<strong>The</strong> order would be processed on receiving<br />
the faxed documents in hand, and the<br />
exchange of the cards occurred in person.<br />
It was the release of the phone cards after<br />
receiving the physical documents and the<br />
use of unauthorized checks and guaranties<br />
that caused the loss. <strong>The</strong> trial court concluded<br />
that the fraud in that case did not<br />
occur through “the manipulation of numbers<br />
or events through the use of computer,<br />
facsimile machine or other similar device.”<br />
Id. at *7. <strong>The</strong> fact that a fax machine—an<br />
electronic device apparently viewed by the<br />
court as a computer—was used during one<br />
step in a series of events that culminated in<br />
the fraudulent activity for which coverage<br />
was sought was not enough to bring the<br />
loss within the coverage.<br />
Consider another situation. An employee<br />
uses a bank’s computer as part of his fraudulent<br />
scheme, not by directly accessing data<br />
contained in that computer, but instead by<br />
using the employee’s intimate knowledge<br />
of the way the bank’s computer operates.<br />
Does that constitute “use” that results in<br />
a covered loss See Frank L. Skillern, Jr.,<br />
Recent Developments Under the Bankers<br />
Blanket Bond (Summer 1982) (referencing<br />
the MAPS- Harold Smith/Wells Fargo Bank<br />
transactions). <strong>The</strong> MAPS- Harold Smith/<br />
Wells Fargo Bank transactions involved a<br />
bank manager who manipulated a settlement<br />
account by debiting the account and<br />
then submitting offsetting credits within<br />
the time designated by the computer system<br />
to detect the missing funds and under<br />
a dollar amount that would prompt notice<br />
to another banking department. Id. at<br />
10–11. <strong>The</strong> scheme was detected when the<br />
manager erroneously submitted a credit<br />
instead of a debit. <strong>The</strong> computer was not<br />
used to transmit information to a thirdparty<br />
source, but it was the bank manager’s<br />
knowledge of the computer operating<br />
system that permitted him to commit this<br />
fraud. Id. Under the Brightpoint standard<br />
requiring manipulation of numbers or<br />
events, such a claim arguably involves use<br />
of a computer that may present a covered<br />
loss. However, under policies requiring<br />
computer transmission outside the premises,<br />
such as the ISO CR 00 22 05 06 and 00<br />
07 10 90 forms discussed above, the use of<br />
the computer—though fraudulent—may<br />
Computer Crime, continued on page 77
Fidelity and Surety<br />
It’s Not Just<br />
About Priority<br />
By Carlos H. Garcia<br />
Subrogation<br />
Rights Against<br />
a Bank<br />
A prudent practitioner<br />
should always consider<br />
a surety’s subrogation<br />
rights against a bank<br />
when attempting to<br />
recoup the surety’s losses.<br />
68 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Sureties and banks are often adverse to one another. This<br />
conflict usually arises in the context of priority rights to<br />
outstanding contract funds on a construction project.<br />
Pearlman and its progeny deal with the rights of priority<br />
between a surety, through subrogation,<br />
and other creditors, including banks. However,<br />
a surety’s rights of subrogation are not<br />
always limited to these remaining contract<br />
balances. To the extent that these claims<br />
exist, they typically arise out of a financing<br />
bank’s control and distribution of the<br />
construction project’s funds. Such conduct<br />
may give rise to a number of potential<br />
claims against the financing bank,<br />
including claims for negligent inspection,<br />
negligent disbursement, wrongful setoff, or<br />
general lender liability.<br />
This article seeks to examine a surety’s<br />
potential equitable subrogation rights<br />
against a bank. Although a surety may have<br />
numerous subrogation rights against its<br />
principal’s bank, this article will not focus<br />
on them. <strong>For</strong> a detailed description of these<br />
potential direct claims, refer to Christopher<br />
R. Ward & Nicholas Hyslop, Right of the<br />
Surety to Pursue Claims Against Third Parties,<br />
in <strong>The</strong> Law of Performance Bonds 351–<br />
429 (Lawrence R. Moelmann, Matthew M.<br />
Horowitz, & Kevin L. Lybeck eds., 2d ed.<br />
■ Carlos H. Garcia is an associate in the Dallas law firm of Strasburger &<br />
Price LLP. Mr. Garcia counsels and represents his clients in litigation matters<br />
with an emphasis on surety claims, construction and insurance coverage<br />
matters.<br />
2009); Christopher R. Ward & Ronald F.<br />
Goetsch, Deciding to Litigate: <strong>The</strong> Surety’s<br />
Resource Against Third Parties, in Managing<br />
and Litigating the Complex Surety<br />
Case 173–258 (Philip L. Burner & Tracey<br />
L. Haley eds., 2d ed. 2007); Robert J. Heyne<br />
& Scott O. Reed, Third Party Liability to the<br />
Surety (unpublished paper submitted at the<br />
ABA/TIPS Fid. & Sur. Law Comm. annual<br />
meeting, Aug. 8, 1988).<br />
A Surety’s Subrogation Rights<br />
A payment and performance bond surety<br />
that has responded to the default of its principal<br />
acquires certain equitable rights. <strong>The</strong><br />
leading case on this issue is undoubtedly<br />
Pearlman v. Reliance Ins. Co. In that case,<br />
the United States Supreme Court held that a<br />
“surety who pays the debt of another is entitled<br />
to all the rights of the person he paid to<br />
enforce his right to be reimbursed. This rule<br />
is generally known as the right of subrogation.”<br />
Pearlman v. Reliance Ins. Co., 371 U.S.<br />
132, 137 (1962); Prairie State Bank v. United<br />
States, 164 U.S. 227, 231 (1896). Subrogation<br />
is a common law right that arises independently<br />
of contract. Pearlman, 371 U.S. at<br />
137. In the surety relationship, subrogation<br />
rights arise at the time that the surety makes<br />
payment and relate back to the date that the<br />
surety originally entered into its agreement
with its principal. United Bonding Ins. Co.<br />
v. Catalytic Constr. Co., 533 F.2d 469, 474<br />
(9th Cir. 1976); Trinity Universal Ins. Co. v.<br />
Bellmead State Bank of Waco, 396 S.W.2d<br />
163, 167–69 (Tex. App. 1965); Fed. Ins. Co.<br />
v. Constructora Maza, Inc., 500 F. Supp. 246,<br />
248 (D.P.R. 1979). It is well established that<br />
a compensated surety gains these subrogation<br />
rights by paying its principal’s obligations<br />
under both the relevant contract and<br />
the payment and performance bonds. Pearlman,<br />
371 U.S. at 137; InterFirst Bank Dallas,<br />
N.A. v. U.S. Fidelity and Guaranty Co.,<br />
774 S.W.2d 391, 397 (Tex. App. 1989); McAtee<br />
v. Fidelity & Guar. Co., 401 F. Supp. 11,<br />
14 (N.D. Fla. 1975); Fed. Ins. Co. v. Constructora<br />
Maza, Inc., 500 F. Supp. 246, 248–49<br />
(D.P.R. 1979); United Bonding Ins. Co. v. Catalytic<br />
Constr. Co., 533 F.2d 469, 471 (9th Cir.<br />
1976); In re Monroe County Housing Corp.<br />
v. First Fed. Savings Loan Ass’n, 18 B.R. 741,<br />
744 (S.D. Fla. 1982); Trinity Universal Ins.<br />
Co. v. United States, 382 F.2d 317, 320 (5th<br />
Cir. 1967); Framingham Trust Co. v. Gould-<br />
Nat’l Batteries, Inc., 427 F.2d 856, 857 (1st<br />
Cir. 1970); Am. Fid. Co. v. Nat’l City Bank of<br />
Evansville, 266 F.2d 910, 915 (D.C. Cir. 1959).<br />
A surety’s subrogation rights are threepronged.<br />
First, a surety is subrogated to<br />
the rights of those whose claims it has<br />
paid. Pearlman, 317 U.S. at 137. <strong>The</strong>refore,<br />
it gains the rights of those subcontractors<br />
or material persons who have received payment.<br />
Id. Second, a surety is subrogated<br />
to the right of the obligee to use contract<br />
funds not yet expended to complete a project.<br />
Id. <strong>The</strong>se are the contract funds held<br />
by the owner whose projects the surety has<br />
completed. Finally, a surety is subrogated<br />
to any rights of its principal for payment<br />
under the defaulted contract. Pearlman,<br />
317 U.S. at 137; Transamerica Ins. Co. v.<br />
Barnett Bank of Marion County, N.A., 540<br />
So. 2d 113, 115 (Fla. 1989). <strong>The</strong>se subrogation<br />
rights prevail over competing claims<br />
of other creditors of the principal. See generally<br />
Pearlman, 37 U.S. at 138; Henningsen<br />
v. United States Fidelity and Guaranty<br />
Co., 164 U.S. 227 (1896). It is also clear that<br />
these subrogation rights extend not only to<br />
the remaining contract balances but also to<br />
any claims these parties have against third<br />
parties, including a financing bank. Am.<br />
Fid. Co. v. Nat’l City Bank of Evansville, 266<br />
F.2d 910, 915 (D.C. Cir. 1959). See also Md.<br />
Cas. Co. v. Wash. Nat’l Bank, 159 P. 689,<br />
690 (Wash. 1916); Fed. Ins. Co. v. Fifth Third<br />
Bank, 867 F.2d 330, 331 (6th Cir. 1989);<br />
Nat’l Sur. Corp. v. Fishkill Nat’l. Bank, 306<br />
N.Y.S.2d 122, 130–31 (N.Y. Supp. Ct. 1969).<br />
Although most of the cases interpreting<br />
these subrogation rights are priority<br />
cases, as explained below, many of these<br />
same rights and concepts may also apply<br />
to causes of action, asserted through subrogation,<br />
against a bank.<br />
Potential Subrogation<br />
Claims Against a Bank<br />
<strong>The</strong> potential claims of a surety against a<br />
bank will depend on numerous factors.<br />
<strong>The</strong>se include the relationship with the<br />
debtor, the nature of the defaulted obligation,<br />
and ultimately the bank’s actions.<br />
Furthermore, when a surety asserts its subrogation<br />
rights, it takes them subject to all<br />
potential defenses. Hartford Accident &<br />
Indem. Co. v. First Nat’l Bank & Trust Co.,<br />
287 F.2d 69, 72 (10th Cir. 1961). <strong>The</strong> viability<br />
of these potential claims will depend<br />
largely on the jurisdiction. While a bank’s<br />
potential liability for causes of action arising<br />
from general lender liability is almost<br />
universally recognized, the availability of<br />
a cause of action for negligent inspection,<br />
negligent disbursement, or wrongful setoff<br />
will be specific to the case law and statutes<br />
of the region, as well as to the specific facts.<br />
A surety, therefore, should always consider<br />
the jurisdiction as well as the subrogee’s actions<br />
when contemplating and evaluating<br />
these claims. However, when a surety has<br />
suffered a loss, a bank’s actions against a<br />
third party may provide the surety with an<br />
action against the bank. When these claims<br />
exist, they typically arise from one of three<br />
potential scenarios: (1) when a financing<br />
bank exerts control over the disbursement<br />
of contract funds, (2) when a financing bank<br />
attempts to use its right of setoff on trust<br />
funds, or (3) when a bank wrongly withholds<br />
previously promised funds or otherwise<br />
tortiously treats its customer.<br />
Negligent Inspection or Disbursement<br />
One of the most developed and recognized<br />
subrogation causes of action of a<br />
surety against a bank is negligence due to<br />
a financing bank’s negligent inspection of a<br />
construction project or negligent disbursement<br />
of contract funds. An owner will typically<br />
need a construction loan to fund a<br />
construction project. Financing banks will<br />
often require that the contractors submit<br />
payment applications directly to the bank,<br />
rather than simply disbursing loan proceeds<br />
to the owner of the project. This control<br />
over the project funds helps protect a<br />
bank from potential fraud. When a bank<br />
receives these payment applications, it will<br />
typically visit the project before issuing the<br />
A financing bank’s<br />
exercise of control over<br />
project funds can, in the<br />
proper case, expose the<br />
bank to potential liability.<br />
applicable payment to ensure that the labor<br />
actually was completed or that the material<br />
actually was delivered. Most banks are<br />
not equipped to inspect and monitor a construction<br />
project accurately. <strong>The</strong>y cannot<br />
accurately determine whether the relevant<br />
contractors have adequately performed<br />
their obligations. As a result, a bank may<br />
make payments for inadequate or defective<br />
work. This can result in payment for<br />
defective work, under or over payment of<br />
a contractor, its subcontractor, or both,<br />
and the potential misuse of trust funds. In<br />
short, a financing bank’s exercise of control<br />
over project funds can, in the proper<br />
case, expose the bank to potential liability.<br />
Some jurisdictions impose a duty on a<br />
bank to exercise reasonable care in disbursing<br />
construction funds. Garbish, 17 Pa. D.<br />
& C.3d at 203; Gill v. Mission Sav. & Loan<br />
Ass’n, 46 Cal Rptr. 456, 457–58 (Cal. Ct.<br />
App. 1965); Cambridge Acceptance Corp.<br />
v. Hockstein, 246 A.2d 138, 141 (N.J. Super.<br />
Ct. App. Div. 1968); Fikes v. First Fed. Sav. &<br />
Loan Ass’n, 533 P.2d 251, 261 (Alaska 1975);<br />
Sec. & Inv. Corp. v. Droege, 529 So. 2d 799,<br />
802 (Fla. Dist. Ct. App. 1988); Cook v. Citizens<br />
Sav. & Loan Ass’n, 346 So. 2d 370, 372<br />
(Miss. 1977). In these jurisdictions, a bank<br />
breaches this duty by either negligently<br />
inspecting a construction project or negligently<br />
disbursing the obligee’s funds to<br />
unworthy contractors. In Garbish v. Mal-<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 69
Fidelity and Surety<br />
bern Fed. Sav. & Loan Ass’n, for instance,<br />
the Pennsylvania Court of Common Pleas<br />
held that when a financing bank insisted on<br />
absolute control over the disbursement of<br />
funds that it had already loaned to the borrower,<br />
the bank had a responsibility to the<br />
borrower to disburse these funds reasonably<br />
and accurately. See generally Garbish v.<br />
Malbern Fed. Sav. & Loan Ass’n, 17 Pa. D. &<br />
A bank may open itself to<br />
a claim for wrongful setoff<br />
when it uses its self-help<br />
rights to access money that<br />
it holds for its customer.<br />
70 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
C.3d at 206. <strong>The</strong> court found that the bank<br />
in this case breached this duty by making<br />
unwarranted payments to contractors. Id.<br />
at 207. This court, which acknowledged<br />
that this was a matter of first impression<br />
in Pennsylvania, reasoned that “[i]t is, after<br />
all, the borrower’s money, and yet the realities<br />
of the private residence mortgage market<br />
are such that the borrower is virtually<br />
powerless to alter the situation if the lender<br />
insists on controlling the funds.” Id.<br />
A few jurisdictions have gone even further<br />
to declare that a financing bank in this<br />
scenario is an agent of the borrower owner.<br />
Prudential Ins. Co. v. Executive Estates, Inc.,<br />
369 N.E.2d 1117, 1124–28 (Ind. Ct. App.<br />
1977); Bollinger v. Livingston State Bank &<br />
Trust Co., 187 So. 2d 784, 787 (La. Ct. App.<br />
1966); M.S.M. Corp. v. Knutson Co., 167<br />
N.W.2d 66, 68 (Minn. 1969); Daniels v. Big<br />
Horn Fed. Sav. & Loan Ass’n, 604 P.2d 1046,<br />
1048 (Wyo. 1980). In these jurisdictions, a<br />
financing bank has a heightened standard<br />
of care due to this agency relationship. <strong>The</strong><br />
bank owes a fiduciary duty to these borrowers.<br />
Prudential Ins. Co., 369 N.E.2d at 1126.<br />
Not only does a financing bank have a duty<br />
to apply all of the proceeds appropriately, but<br />
this bank also must account for all the sums<br />
expended and to maintain “adequate proof<br />
of the amount paid and the purpose of the<br />
disbursement.” M.S.M. Corp., 167 N.W.2d at<br />
68. When the bank admits that it has disbursed<br />
proceeds, it “has the burden of proving<br />
by a fair preponderance of the evidence<br />
that the mortgagor ultimately received the<br />
benefit of all the proceeds of the mortgage.”<br />
Id. at 68. While this obviously places a difficult<br />
burden on the bank, the Indianapolis<br />
Court of Appeals in Prudential Ins. Co.<br />
of Am. v. Executive Estates reasoned that a<br />
mortgagee- lender who insists on controlling<br />
disbursement of the loan<br />
proceeds in order to protect its own<br />
interest…, deprives the mortgagor of<br />
the loan proceeds for which he has bargained,<br />
and in doing so must equitably<br />
be considered as the mortgagor’s agent<br />
saddled with a duty to use reasonable<br />
care to protect the principal’s interest.<br />
369 N.E.2d at 1128. In these jurisdictions<br />
a financing bank’s negligent inspection or<br />
disbursement may permit a surety to claim<br />
that the bank breached a fiduciary duty by<br />
subrogating to the rights of the owner.<br />
Certain jurisdictions have also held that a<br />
financing bank is not only an agent but also<br />
a trustee for its borrower when a financing<br />
bank chooses to make these disbursements<br />
on behalf of the borrower. Falls Lumber Co.<br />
v. Heman, 181 N.E.2d 713, 716 (Ohio Ct.<br />
App. 1961). When a bank is an agent for the<br />
borrower, it effectively holds these funds in<br />
trust for the borrower. Id. <strong>The</strong> bank, therefore,<br />
owes the borrowers the same duties as<br />
any other trustee or agent of the borrower:<br />
Just as a trustee who has failed to properly<br />
administer a trust, thereby causing<br />
a loss to the trust, may be charged with<br />
such loss, so should an agent be held liable<br />
to his principal for a loss due to the<br />
neglect of the agent to properly conduct<br />
the business undertaken for his principal.<br />
Id. at 716. In these jurisdictions, a financing<br />
bank may also be liable for negligence<br />
in this trustee capacity.<br />
Not all jurisdictions, however, share<br />
these theories on a financing bank’s liability<br />
for negligent inspection and disbursement.<br />
<strong>The</strong> case law of some jurisdictions may provide<br />
banks with certain defenses for negligent<br />
inspection or wrongful disbursement.<br />
<strong>For</strong> instance, the Kansas Supreme Court has<br />
held that when the loan documents do not<br />
contain a provision requiring inspection before<br />
disbursement, the bank does not have<br />
a duty to inspect the construction to ensure<br />
that a requested disbursement is appropriate.<br />
Daniels v. Army Nat’l Bank, 822<br />
P.2d 39, 42 (Kan. 1991). Other courts have<br />
held that a financing bank’s inspection,<br />
before disbursement, is only a safety precaution<br />
for the bank’s own protection and,<br />
without a contractual provision to the contrary,<br />
the bank does not have a duty to inspect<br />
construction accurately or to ensure<br />
that payments made to contractors were appropriate.<br />
Butts v. Atlanta Fed. Sav. & Loan<br />
Ass’n, 262 S.E.2d 230, 232 (Ga. Ct. App.<br />
1979); Armetta v. Clevetrust Realty Investors,<br />
359 So. 2d 540, 543 (Fla. Dist. Ct. App.<br />
1978); Goff v. Am. Sav. Ass’n, 561 P.2d 897,<br />
900 (Kan. Ct. App. 1977); Parker v. Columbia<br />
Bank, 604 A.2d 521, 531 (Md. Ct. Spec.<br />
App. 1992); Goodner v. Lawson, 232 S.W.2d<br />
587, 591 (Tenn. Ct. App. 1950). In some instances,<br />
a bank may also require that the<br />
borrower owner approve all disbursements.<br />
See generally U.S. Fid. & Guar. Co. v. N. J. B.<br />
Prime Investors, 377 N.E.2d 440, 443 (Mass.<br />
App. Ct. 1978). <strong>The</strong> bank may then allege<br />
that the surety is not entitled to a recovery<br />
because of the owner’s contributory negligence.<br />
Id. It is, therefore, important for a<br />
surety to analyze the facts as well as the law<br />
of the relevant jurisdiction before asserting<br />
these subrogation rights.<br />
Wrongful Setoff<br />
A bank may open itself to a claim for<br />
wrongful setoff when it uses its self-help<br />
rights to access money that it holds for its<br />
customer. When a claim exists due to a<br />
bank’s wrongful setoff it typically will be<br />
because the bank served as either the project<br />
owner’s financing bank or the principal’s<br />
depository bank.<br />
Banks generally have rights of “setoff.”<br />
Prairie State Bank v. United States, 164<br />
U.S. 227, 229 (1896); Anderson Nat’l Bank<br />
v. Luckett, 321 U.S. 233, 241 (1944); Straus v.<br />
Tradesmen’s Nat’l Bank, 25 N.E. 372, 372–<br />
73 (N.Y. 1890). That is, if a bank is holding<br />
the funds of a debtor and that debtor has defaulted<br />
on its obligations owed to the bank,<br />
the bank is empowered to offset its own<br />
debt with the amounts it is holding for this<br />
debtor. Luckett, 321 U.S. at 241; Friedman<br />
v. First Nat’l Bank, 183 N.E.2d 722, 724–25<br />
(Mass. 1962). However, if the funds in the<br />
debtor’s possession are owed to another,<br />
this exercise in self-help may give rise to a<br />
cause of action against the bank and potential<br />
liability. Morrison Steel Co. v. Gurtman,<br />
274 A.2d 306, 311–13 (N.J. Supp. Ct. App.
Div. 1971); Acuity v. Planters Bank, Inc., 362<br />
F. Supp. 2d 885, 890 (W.D. Ky. 2005); Nat’l<br />
City Bank of Evansville, 266 F.2d at 915. See<br />
also In re Constructora Maza, Inc., 93 B.R.<br />
838, 849 (Bankr. D.P.R. 1988); Commercial<br />
Standard Ins. Co. v. Bryce Street Apartments,<br />
Ltd., 703 F.2d 904, 907 (5th Cir. 1983). As<br />
one court explained, “It is everywhere recognized<br />
that where a bank has knowledge<br />
that deposits made by a debtor in his own<br />
name are in fact the property of a third person,<br />
or that some third person has an interest<br />
therein, then no right of setoff may be<br />
properly asserted.” Morrison Steel, 274 A.2d<br />
at 311–13. So, “[i]n that case, the bank may<br />
not offset the trust funds against the depositor’s<br />
individual debt, and the bank becomes<br />
liable for conversion if it does so.” Hodge v.<br />
N. Trust Bank of Tex., 54 S.W.3d 518, 522<br />
(Tex. App. 2001. In the construction context,<br />
a bank may hold funds that are owned<br />
by another when these funds are held in<br />
trust by either the owner or the principal.<br />
An owner’s financing bank may open<br />
itself to this type of liability by exercising<br />
the owner’s right to withhold contractual<br />
retainage. An owner is often permitted to<br />
withhold a portion of the payments due to<br />
its contractors, typically 10 percent, for its<br />
protection in the event that a contractor<br />
fails to fulfill its relevant obligations on the<br />
construction project. However, this withheld<br />
money is held in trust for these contractors.<br />
<strong>The</strong> contractors then receive these<br />
withheld amounts upon completion of the<br />
project. Blair v. Trafco Products, Inc., 369<br />
N.W.2d 900, 903 (Mich. App. 1985). If any<br />
of these amounts are later wrongfully redirected,<br />
it may open the financing bank to<br />
liability in the form of causes of action for<br />
wrongful setoff, conversion, or trust fund violations.<br />
As such, when a bank has knowledge<br />
of the character of these funds, courts<br />
almost universally view these funds as exceptions<br />
to funds for which the bank can lay<br />
claim to as a general right of setoff. Acuity<br />
v. Planters Bank, Inc., 362 F. Supp. 2d 885,<br />
892 (W.D. Ky. 2005). Certain cases have held<br />
that an owner’s bank may be exposed to liability<br />
to claims by a surety through subrogation<br />
to the principal’s or subcontractor’s<br />
rights to this retainage. See In re Constructora<br />
Maza, Inc., 93 B.R. 838, 849 (Bankr.<br />
D.P.R. 1988); Commercial Standard Ins. Co.<br />
v. Bryce Street Apartments, Ltd., 703 F.2d<br />
904, 907 (5th Cir. 1983).<br />
Similarly, a surety may also be able to<br />
subrogate to the rights of either its principal<br />
or a subcontractor against the principal’s<br />
bank when the bank has wrongfully<br />
set off against the banks account of the<br />
principal. Depending on a principal’s role<br />
in a construction project, it may contract<br />
with material persons and subcontractors.<br />
Often the owner or the general contractor<br />
will pay the principal amounts representing<br />
trust funds under the law of the applicable<br />
jurisdiction owed to material persons<br />
and subcontractors. If the bank attempts<br />
to set off amounts held by the principal<br />
on behalf of these parties, with knowledge<br />
of the trust character of these funds,<br />
the surety may be able to subrogate to the<br />
rights of the principal or the subcontractor<br />
to assert a claim for wrongful setoff against<br />
the bank. See Acuity, 362 F. Supp. 2d at 895.<br />
Furthermore, some jurisdictions follow<br />
the “equitable rule,” which provides that a<br />
bank cannot set off any trust funds even<br />
when it does not know of the character of<br />
these funds. Atlanta & St. A.B. Ry. v. Barnes,<br />
95 F.2d 273, 278 (5th Cir. 1938); George D.<br />
Harter Bank v. Inglis, 6 F.2d 841, 843 (6th<br />
Cir. 1925); Nat’l Indem. Co. v. Spring Branch<br />
State Bank, 348 S.W.2d 528 (Tex. 1961); Shotwell<br />
v. Sioux Falls Sav. Bank, 147 N.W. 288,<br />
290–91 (1914). <strong>The</strong> equitable rule does not<br />
require a surety pursuing a claim against a<br />
bank to show that a bank had knowledge of<br />
the character of these funds. Spring Branch,<br />
348 S.W.2d at 529–31. It effectively shifts<br />
this burden to the bank. Under the equitable<br />
rule, the bank can escape liability only<br />
by demonstrating that it changed its position<br />
to its detriment because it did not have<br />
notice about the trust character of these<br />
funds and it relied on the debtor’s apparent<br />
ownership of them. Id. In Federal Ins.<br />
Co. v. Fifth Third Bank, the United States<br />
Court of Appeals for the Sixth Circuit permitted<br />
a surety to recover construction proceeds<br />
set off by its principal’s bank under<br />
the equitable rule. 967 F.2d 330, 336 (6th<br />
Cir. 1989). <strong>The</strong> court recognized the bank’s<br />
general right of offset against its depositor’s<br />
funds, but it recognized that this was not a<br />
universal right when the funds were held<br />
in a fiduciary capacity. Id. at 332–36. <strong>The</strong><br />
court found that the bank was precluded<br />
from offsetting contract progress payments<br />
from the principal’s account because they<br />
were subject to a trust, created by the principal’s<br />
construction contracts with the State<br />
of Ohio. Id. at 334. Because the court found<br />
that the bank had not presented evidence<br />
of any detrimental change in position, the<br />
surety was, therefore, entitled to recover the<br />
offset funds from the bank. Id. at 335–36.<br />
Although Fifth Third Bank involved a surety’s<br />
direct cause of action against a principal’s<br />
bank, these principles also apply<br />
to a potential claim through subrogation<br />
against an owner’s financing bank.<br />
In addition, certain states have enacted<br />
specific construction trust fund acts. <strong>For</strong><br />
example, the legislatures of states such as<br />
Maryland, Michigan, New Jersey, and Texas<br />
have enacted trust fund acts. See generally<br />
Md. Real Prop. Code §9-201 et seq.; N.J. Stat.<br />
Ann. §2A:44-148 et seq.; Mich. Comp. Laws<br />
570.151 et seq.; Tex. Prop. Code §162.001 et<br />
seq. <strong>The</strong>se trust fund acts provide an additional<br />
statutory cause of action in these<br />
wrongful setoff scenarios. Under some of<br />
these statutes, a bank is specifically prohibited<br />
from setting off its own debt with funds<br />
that it actually or constructively knows to<br />
be trust funds. In others, a bank is specifically<br />
excluded from these prohibitions.<br />
See, e.g., Tex. Prop. Code §162.004. However,<br />
even in these jurisdictions, a bank may<br />
still be liable for certain trust funds established<br />
under the agreement of indemnity or<br />
otherwise. Other jurisdictions, which have<br />
not formally enacted trust fund acts, have<br />
enacted individual statutes as part of their<br />
general lien laws that convert construction<br />
proceeds to “trust funds” for payment of<br />
lienable claims. See, e.g., Okla. Stat. tit. 42<br />
§152 (2012). To maintain an action against<br />
a bank, a party need only establish that<br />
“valid lienable claims remain unsatisfied<br />
and that trust funds are either unaccountable<br />
or have been applied to purposes other<br />
than the payment of valid lienable claims.”<br />
Sandpiper N. Apts., Ltd v. Am. Nat’l Bank<br />
& Trust Co., 680 P.2d 983, 992 (Okla. 1984).<br />
In these jurisdictions, banks may be liable<br />
for certain penalties by failing to adhere to<br />
these statutes and acts.<br />
General Lender Liability<br />
When a bank begins to become involved<br />
in the decisions of its customer, it begins<br />
potentially to expose itself to liability. Exercises<br />
of domination and control over a customer<br />
may give rise to claims by a third<br />
party in contract or tort. While it is impos-<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 71
Fidelity and Surety<br />
sible to outline all potential situations that<br />
permit a surety to subrogate to another<br />
party’s rights against a bank for general<br />
lender liability, below are a few examples.<br />
A surety may be able to subrogate to the<br />
rights of the owner or its principal when a<br />
bank wrongly fails to extend loan proceeds<br />
to that party that were previously promised.<br />
<strong>The</strong>re are few relationships more vital<br />
<strong>The</strong> equitable rule<br />
does not require a surety<br />
pursuing a claim against a<br />
bank to show that a bank<br />
had knowledge of the<br />
character of these funds.<br />
to a business than its lender relationship.<br />
This is especially true in the construction<br />
where retainage and other payment delays<br />
may prevent a business from being paid<br />
when it has completed its work. Many of<br />
these businesses cannot meet their operational<br />
obligations without loans from their<br />
banks. When a construction business is<br />
denied these funds, the results can be devastating.<br />
In certain instances this denial<br />
may also give rise to an action against the<br />
bank. If a bank’s failure to advance a loan<br />
to a surety’s principal causes the business<br />
to fail and the surety to pay losses, the<br />
surety should consider whether the bank’s<br />
action was wrongful. If so, the action may<br />
give the surety a potential subrogation<br />
cause of action against the bank.<br />
A bank may be liable for damages if<br />
it refuses to make a loan after formally,<br />
or even informally, agreeing to extend<br />
that loan. Courts often find a lender liable<br />
when a bank breaches its promise to extend<br />
financing to a party. Crystal Springs Trout<br />
Co. v. First State Bank, 732 P.2d 819, 824–<br />
25 (Mont. 1987); Equitable Mortg. Co. v.<br />
Weddington, 21 S.W. 576, 576–78 (Tex. Civ.<br />
App. 1893). When this promise is memorialized<br />
in a formal loan document, a court<br />
will require strict compliance with the loan<br />
document. Alaska State Bank v. Fairco, 674<br />
72 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
P.2d 288 293 (Alaska 1983). In the event<br />
that a bank has deviated from a loan document,<br />
the bank may be liable for damages.<br />
Id. If there is no formal loan document with<br />
dueling signatures, a bank may attempt to<br />
rely upon a statute of frauds defense; however,<br />
the lender may be liable even when<br />
this promise is not in writing if the borrower<br />
can demonstrate that an enforceable<br />
promise was made or that a promise was<br />
established through its course of business<br />
with the bank. See generally Unique Staff<br />
Leasing, LLC v. Onder, cause no. 13-09-<br />
00213-cv, 2010 Tex. App. Lexis 9751, at<br />
*18–21 (Tex. App. 2010); Remainders, Inc.<br />
v. Bartlett, 30 Cal. Rptr. 191, 194 (Cal. Dist.<br />
Ct. App. 1963). Furthermore, when a lender’s<br />
improper denial of these loan proceeds<br />
is unjustified and interferes with a party’s<br />
relationship with a third party, the bank<br />
may be liable for a claim of tortious interference.<br />
See generally Bank One Tex. N.A.<br />
v. Arcadia Fin. Ltd., 219 F.3d 494 (5th Cir.<br />
2000). <strong>For</strong> example, the denial of a loan<br />
may cause a project or a contractor to fail,<br />
generating a potential claim against the<br />
bank if the denial was wrongful.<br />
In addition to the actions stated above, a<br />
surety may also be able to subrogate to the<br />
rights of a subcontractor if the subcontractor<br />
has relied on misrepresentations by a principal’s<br />
or owner’s bank. It is not uncommon<br />
for a bank to be asked to make a representation<br />
concerning its customer’s financial condition.<br />
<strong>For</strong> instance, before contracting with<br />
a principal, a subcontractor may request a<br />
disclosure from the principal’s bank regarding<br />
the principal’s financial condition. <strong>The</strong><br />
subcontractor may ask the bank to represent<br />
that the principal has funds available<br />
to cover the subcontractor’s potential work.<br />
While a bank should not overlook its own direct<br />
causes of action for misrepresentations<br />
made to it during its underwriting process, a<br />
surety should review the potential representations<br />
made by a bank to the parties from<br />
which it has gained its subrogation rights.<br />
If the bank has made an intentional or negligent<br />
misrepresentation to this party, the<br />
surety may be able to maintain a cause of<br />
action against the bank for fraud through<br />
its general surety rights. See generally Gilbert<br />
Cent. Corp. v. Overland Nat’l Bank,<br />
442 N.W.2d 372, 377 (Neb. 1989); Great W.<br />
Sav. Bank v. George W. Easley Co., 778 P.2d<br />
569, 577 (Alaska 1989). In these instances, a<br />
surety must consider the disclosure in light<br />
of the bank’s actual knowledge. In certain<br />
instances, a bank may be liable for a negligent<br />
misrepresentation.<br />
<strong>The</strong> bank’s loan documents typically<br />
contain waivers and exculpatory clauses<br />
that inoculate the bank from liability connected<br />
with its funding of a project and<br />
potential control over the disbursement<br />
of the project’s funds. Even cases that recognize<br />
a duty of a bank to act reasonably<br />
on behalf of its customer acknowledge<br />
the potential existence of these exculpatory<br />
clauses. Garbish v. Malvern Fed. Sav.<br />
& Loan Assoc., 17 Pa. D. & C.3d 202, 207<br />
(Pa. Comm. Pleas 1980). However, in such<br />
instance a bank must follow that jurisdiction’s<br />
requirements for such a clause carefully.<br />
Id. at 208–09. In Garbish, the court<br />
recognized that because a borrower is often<br />
helpless in altering these terms in a meaningful<br />
way, public policy often favors strict<br />
enforcement of the jurisdiction’s requirements<br />
limiting the scope and enforceability<br />
of such claims. Id. at 210. <strong>The</strong> court in that<br />
case stated that when a bank did not follow<br />
these requirements, it would not hesitate<br />
to strike such a clause. Id. <strong>The</strong>refore,<br />
when a bank fails to meet one of the elements<br />
required for an exculpatory clause,<br />
some courts will not hesitate to deny the<br />
bank these protections. Id. at 210–12.<br />
Conclusion<br />
After a surety suffers losses, the surety may<br />
find itself with competing claims with a<br />
financing bank. <strong>The</strong>se competing claims<br />
often make the surety adverse to the bank<br />
regarding remaining contract balances. A<br />
surety, however, may also find itself succeeding<br />
to the rights of other parties that<br />
have claims against the financing bank<br />
because of the relationship of this bank to<br />
the construction project. Although atypical,<br />
it does happen. A prudent practitioner<br />
should always consider a surety’s subrogation<br />
rights against a bank when attempting<br />
to recoup the surety’s losses. In certain<br />
instances a surety may have subrogation<br />
claims against a financing bank for negligent<br />
inspection, negligent disbursement,<br />
wrongful setoff, or general lender liability.<br />
While a bank may have certain defenses to<br />
these causes of action, any surety hoping<br />
to recoup its losses still should investigate<br />
these avenues of potential liability.
Think Globally<br />
A New Test<br />
Update on Assumption of<br />
Jurisdiction by Canadian Courts<br />
By Margaret A. Ross<br />
<strong>The</strong> practice of medicine generally has become less<br />
dependent on traditional geographic borders. At one<br />
time, patients typically would be limited to seeing their<br />
family physicians in their communities. Those requiring<br />
specialized care would have to travel to tertiary care<br />
centers.<br />
Modern medicine and the technological developments<br />
in medicine delivery offer patients greater choice<br />
in medical services and mobility in seeking them,<br />
including having practitioners in other international<br />
jurisdictions perform services. <strong>The</strong> proliferation of telemedicine,<br />
remote surgeries using robotics, and websites<br />
to disseminate information to the public, among other<br />
things, has enabled patients and providers to access<br />
international expertise and super- specialized services<br />
that were previously unavailable.<br />
Health-care professionals increasingly provide care<br />
to nonresident patients due to referrals from colleagues<br />
in other countries, patients seeking elective procedures<br />
only available in other countries, or long wait times in<br />
the patients’ home jurisdictions. Recent studies suggest<br />
that many Canadians travel to obtain private medical<br />
services abroad, bypassing the universal health-care<br />
system in Canada. Angus Reid, Some Canadians Willing<br />
to Pay, Travel for Health Care, Angus Reid Public Opinion<br />
(Feb. 19, 2010).<br />
Offering greater access to specialized services requires<br />
balancing the legal risks to health-care providers practicing<br />
medicine across international borders. <strong>The</strong> most significant<br />
of these risks is that a provider may be named in<br />
a legal proceeding in a foreign jurisdiction for care provided<br />
to a nonresident. In these circumstances a court<br />
will often evaluate complex issues to decide which court<br />
is the proper jurisdiction for a civil tort claim.<br />
Among the factors that Canadian courts will consider<br />
when determining whether to assume jurisdiction<br />
over a negligence claim against a foreign health-care<br />
provider for care of a Canadian resident is whether the<br />
defendant actively marketed to or solicited referrals of<br />
Canadian patients. In the event of a legal claim following<br />
remote surgery or telemedicine performed on a Canadian<br />
patient by a physician practicing outside of Canada,<br />
the Canadian court might also agree to hear the matter<br />
because the tort was committed in Canada even though<br />
the physician was located elsewhere.<br />
In April 2012, the Supreme Court of Canada refined<br />
the Canadian approach for assuming jurisdiction in an<br />
international tort action. <strong>The</strong> decision was discussed in<br />
detail by Sandra L. Corbett and Ryan P. Krushelnitzky in<br />
the July 2012 issue of <strong>For</strong> <strong>The</strong> <strong>Defense</strong>. To recap, the Court<br />
replaced the case-by-case approach, which had led to an<br />
inconsistent application of its “real and substantial connection<br />
test,” with a revised test that requires the plaintiff<br />
to prove that (1) the defendant lives in the Canadian<br />
province, (2) the defendant carries on business in the<br />
province, (3) the tort was committed in the province, or<br />
(4) the contract connected with the dispute was made in<br />
the Canadian province. If a plaintiff establishes one or<br />
more of these factors, then the burden shifts to the defendant<br />
to prove that it would be inappropriate for the<br />
Canadian court to assume jurisdiction.<br />
Although no reported cases to date appear to have<br />
applied the new test to a medical malpractice lawsuit,<br />
some of the recent jurisprudence provides insight into<br />
the circumstances in which a Canadian court might<br />
assume jurisdiction in such a case. While it may be premature<br />
to draw conclusions based only on the handful<br />
of cases that have applied the new test, it appears that<br />
a more predictable and efficient approach will emerge<br />
among Canadian courts assuming jurisdiction of civil<br />
actions with international elements.<br />
Although Canadian courts seem more inclined to<br />
hear a matter if one of the above factors exists, they generally<br />
continue to defer to any applicable governing law<br />
and forum agreement. <strong>The</strong> cases indicate that a Canadian<br />
court will ignore an agreement only when there is<br />
“strong cause” or “exceptional circumstances,” such as<br />
fraud, or an unexpected application of a forum selection<br />
clause.<br />
As to health-care providers with clinical websites containing<br />
health information or advertisements for med-<br />
■■<br />
Margaret A. Ross is a partner of Gowling Lafleur Henderson LLP in Ottawa,<br />
Canada. She has practiced in all areas of civil litigation. In her role as general<br />
counsel for the Canadian Medical Protective Association, her focus is on the areas ical services, the Supreme Court of Canada has stated<br />
of medical litigation, professional discipline matters, and professional negligence. Think Globally, continued on page 78<br />
<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 73
<strong>Defense</strong> Ethics and Professionalism<br />
Twenty-first Century Obligations<br />
Ethics for the Tech Savvy (and<br />
Not So Tech Savvy) Lawyer<br />
By David L. Campbell<br />
to protect your client’s communications and disclosing<br />
any data breach that could affect electronically stored<br />
information.<br />
Misplacing 20 banker boxes can be difficult. <strong>The</strong> same<br />
cannot be said for a tiny flash drive or other storage<br />
media that can store 10 times the data and more. Computers,<br />
smart phones, and tablets contain vast amounts<br />
of client documentation and communications that you<br />
must protect. Model Rule 1.6 requires lawyers to make<br />
“reasonable efforts to prevent the inadvertent or unauthorized<br />
disclosure of… information relating to the representation<br />
of a client.” Model Rules of Prof’l Conduct R.<br />
1.6. <strong>The</strong> comment to Model Rule 1.6 confirms that lawyers<br />
must “act competently to safeguard information<br />
relating to the representation of a client….” Model Rules<br />
of Prof’l Conduct R. 1.6 cmt. 17. This can be challenging<br />
in a mobile world where we carry around dozens if not<br />
hundreds of banker boxes in our pockets and briefcases.<br />
Does your firm use encryption technology Software<br />
is now widely available that will automatically encrypt<br />
any storage drive that is connected to your firm’s network.<br />
Are our mobile devices—laptop, smartphone, or<br />
tablet—password protected This should be mandatory<br />
for all employees with access to client documents and<br />
communications. Unlocking your device after 15 minutes<br />
of temporary disuse may be irritating, but just think<br />
how pleased your clients will feel knowing that their data<br />
is protected should your device disappear during a business<br />
trip. Technology can allow any size IT department<br />
remotely to wipe your device instantly if you lose it or<br />
someone steals it, and you can even set up an automatic<br />
wipe when multiple incorrect passwords are entered.<br />
Password protection should be combined with strong<br />
encryption. If a hacker gets his or her hands on your<br />
laptop, he or she may be able to bypass your password<br />
by simply removing the hard drive and installing it in<br />
another computer.<br />
What happens when you conclude a case, the retention<br />
period has expired, and you’re finally ready to<br />
get rid of those electronic banker boxes of client data<br />
Florida Bar Opinion 10-2, one of many recent opinions<br />
in this arena, specifically addresses a lawyer’s eth-<br />
■■<br />
David L. Campbell is an experienced cross- border trial lawyer with Bowman<br />
and Brooke LLP in Troy, Michigan. Licensed in Michigan and Ontario, Canada, Mr.<br />
Campbell defends national manufacturers and other corporate clients in product<br />
liability and commercial matters across North America. He is an active member of<br />
the <strong>DRI</strong> Lawyers’ Professionalism and Ethics and Alternative Dispute Resolution ical obligations regarding destruction of storage media<br />
Committees, and <strong>DRI</strong> International. Ethics, continued on page 78<br />
74 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Smartphones were introduced 10 years ago, and law<br />
firm use of tablets, cloud storage, and electronic data has<br />
grown exponentially. Some lawyers have wholeheartedly<br />
embraced these changes with paperless offices, while<br />
others continue to prefer typewriters and carbon paper.<br />
Regardless of where you fall in this spectrum, it’s critical<br />
to understand the ethical obligations connected with<br />
embracing or rejecting new technology.<br />
Competent representation uses technology. Model<br />
Rule of Professional Conduct 1.1 states that “[a] lawyer<br />
shall provide competent representation to a client.”<br />
Model Rules of Prof’l Conduct R. 1.1. <strong>The</strong> ABA<br />
recently amended the comments to Model Rule 1.1 to<br />
confirm that competence includes not only practicerelated<br />
knowledge and skills but also understanding<br />
the “benefits and risks associated with relevant technology….”<br />
Model Rules of Prof’l Conduct R. 1.1 cmt. 6. It’s<br />
not enough to be a good lawyer anymore. Even seasoned<br />
practitioners must appreciate necessary technology and<br />
use it. This doesn’t require a computer science degree,<br />
but you must have basic knowledge and surround yourself<br />
with individuals who have a strong competence in<br />
this area. Even if your firm’s technology is limited to<br />
rudimentary e-mail, your cocounsel, opposing lawyers,<br />
clients, and the courts all use and transmit electronic<br />
data. Recognizing the challenges and risks associated<br />
with these technologies is a focus of state bar ethics committees<br />
across the country.<br />
Keeping clients informed is foundational to a lawyer’s<br />
ethical obligations. Model Rule 1.4 requires a lawyer<br />
to communicate with his or her clients “about the<br />
means by which the client’s objectives are to be accomplished.”<br />
Model Rules of Prof’l Conduct R. 1.4. In addition<br />
to promptly responding to client communications,<br />
you must keep your clients apprised of your use of<br />
technology and its impact on the work that you do for<br />
them. This includes having security protocols in place
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Policy Limits, from page 43<br />
ices. It may not minimize its defense costs<br />
by seeking out an inexperienced, newly<br />
minted lawyer eager for clients who is willing<br />
to work for considerably less.<br />
Third, an insurer should not make any<br />
settlement offer whatsoever until it has sufficient<br />
facts about liability and damages,<br />
obtained through discovery or otherwise,<br />
to enable it to understand, evaluate, and<br />
quantify fairly an insured’s exposure and<br />
the likelihood of an adverse trial result.<br />
Fourth, if possible, an insurer should<br />
defer making any settlement decisions<br />
until after all potential claimants have<br />
made all potential claims or until after the<br />
claimants have filed lawsuits against the<br />
insureds. This may not always be possible<br />
if an insurer receives a policy limits settlement<br />
demand that will not settle everything<br />
globally but that the insurer must<br />
respond to or else risk a potential bad-faith<br />
lawsuit in the event of an excess judgment.<br />
In such a case, an insurer’s dilemma is<br />
that it<br />
has a duty to settle claims where it<br />
receives reasonable offers to do so,<br />
although settling may exhaust the policy<br />
limit and expose the non- settling<br />
insureds to personal liability; yet, by<br />
not settling, the insurer may subject<br />
itself to greater liability beyond the policy<br />
limit—an “excess verdict”—if it<br />
loses and is found to have unreasonably<br />
refused settlement.<br />
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Connect today<br />
76 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
NIA Learning Center, Inc. v. Empire Fire<br />
& Marine Ins. Cos., 2009 U.S. Dist. Lexis<br />
92991, at *22 (E.D. Pa. 2009). This is where<br />
the “first in time, first in right” rule protects<br />
an insurer if, in good faith, it has seriously<br />
considered and accepted a reasonable<br />
settlement offer.<br />
Fifth, when claims against an insured<br />
have a total value that amounts to more<br />
than the limits of the policy, and the<br />
insured may be personally liable to others,<br />
the insurer must inform the insured<br />
in writing of its conflicting interests, advise<br />
the insured of its rights, and keep it fully<br />
abreast of all settlement demands and<br />
offers and meaningful developments in<br />
the negotiations. Peckham v. Continental<br />
Cas. Ins. Co., 895 F.2d at 834. Keeping an<br />
insured fully informed of all settlement<br />
demands and offers is especially important<br />
in cases involving multiple claimants<br />
and an insufficient limit “for payment to<br />
one claimant, exhausting or unreasonably<br />
depleting the available fund, may leave the<br />
insured unprotected—or nearly so—in<br />
respect to other claimants.” Id. at 835.<br />
Sixth, an insurer always should consult<br />
an insured and the insured’s counsel<br />
about the priority of claims for settlement<br />
purposes. Which claims present the greatest<br />
excess exposure To which claims do an<br />
insured and the insured’s counsel believe<br />
that the available policy limits should be<br />
allocated While an insurer is not bound<br />
by an insured’s wishes, if it does not follow<br />
them, it should have a well- documented,<br />
sound reason for its decision.<br />
Seventh, if an insurer achieves less than<br />
a global settlement that exhausts the policy<br />
limits, the insurer must take steps to transfer<br />
control of the defense to the insured. ISO<br />
has a standard form endorsement to the<br />
CGL coverage part, “New York Changes—<br />
Transfer of Duties When a Limit of Insurance<br />
Is Used Up,” CG 26 21 10 91, that sets<br />
out what is expected of each of the parties<br />
to facilitate the transfer of the defense<br />
to the insured. <strong>The</strong> steps that an insurer<br />
should take, as outlined in this endorsement,<br />
are good practices that should be followed<br />
throughout the country, not merely<br />
in New York. <strong>The</strong>y include:<br />
An insurer must notify the first named<br />
insured in writing as soon as practicable<br />
that the applicable policy limit has actually<br />
been used up to pay a settlement and that<br />
its duty to defend lawsuits seeking damages<br />
subject to that limit has ended.<br />
<strong>The</strong> insurer then should initiate and<br />
cooperate in the transfer of control to any<br />
appropriate insured of all claims and lawsuits<br />
seeking damages that are subject to<br />
that limit and that were reported to the<br />
insurer before that limit was used up.<br />
<strong>The</strong> insured must cooperate in the transfer<br />
of control of those claims and lawsuits.<br />
<strong>The</strong> insurer must take such steps as it<br />
deems appropriate to avoid a default and<br />
continue the defense of lawsuits until an<br />
orderly transfer is completed, provided that<br />
the insured is cooperating with it in completing<br />
the transfer to new defense counsel.<br />
<strong>The</strong> first named insured and any other<br />
insured involved in a lawsuit seeking damages<br />
subject to the exhausted limit must<br />
arrange for the defense of the lawsuit<br />
within a time period agreed to between the<br />
insured and the insurer. Without such an<br />
agreement, arrangements for the continued<br />
defense of the lawsuit should be made<br />
as soon as practicable.<br />
In Summary<br />
Although courts have found the policy<br />
wording by which an insurer’s duty to<br />
defend is terminated on exhausting its limits<br />
by paying covered claims to be clear and<br />
unambiguous, when dealing with multiple<br />
claims and insufficient limits to cover<br />
an insured’s total potential exposure, the<br />
insurer must be extremely cautious in settling<br />
less than all of the claims. When a<br />
defendant’s policy limits are insufficient,<br />
a plaintiff’s attorney always looks out for<br />
a potential bad-faith claim in an attempt<br />
to take the cap off the policy limits and<br />
increase the amount available to compensate<br />
the injured plaintiff. <strong>The</strong> “first in<br />
time, first in right” rule will protect an<br />
insurer if, in good faith, it has consulted<br />
with the insured on the priority for settling<br />
claims and has carefully considered<br />
and then accepted a reasonable settlement<br />
offer. But until such a settlement is reached<br />
and its policy limits exhausted, the insurer<br />
must not skimp on its investigation or<br />
the defense that it provides to the insured<br />
even when it knows from the outset that<br />
it is only a matter of time before its policy<br />
limits are exhausted and that those limits<br />
are insufficient to settle all of the claims<br />
against its insured.
Computer Crime, from page 66<br />
not constitute a use that gives rise to a covered<br />
loss.<br />
Most recently, the Supreme Court of New<br />
York examined a similar situation and held<br />
that the Computer Systems Fraud policy<br />
did not cover the insured’s losses. In Universal<br />
American Corp. v. National Union<br />
Fire Insurance Company of Pittsburgh, PA,<br />
<strong>2013</strong> WL 69241, Universal American submitted<br />
a proof of loss in which it claimed<br />
that it suffered more than $18 million in<br />
losses from fraudulent claims made against<br />
one of its plans. <strong>The</strong> losses were caused by<br />
providers, who were authorized to use the<br />
Universal American computer system, submitting<br />
fraudulent claims through that<br />
computer system. National Union issued<br />
a Computer Systems ‐Fraud Rider to Universal<br />
American using ISO form FI 00 20<br />
09 12. Universal American relied upon<br />
the Owens case to argue that the clause<br />
in the insuring agreement, “loss resulting<br />
directly from a fraudulent … entry of Electronic<br />
Data… into [Universal’s] proprietary<br />
Computer System…,” was vague and therefore<br />
covered the entry of fraudulent information,<br />
even by an authorized user such as<br />
a provider. <strong>The</strong> Universal American court<br />
refused to adopt the plaintiff’s argument,<br />
finding that the clause at issue in Owens<br />
was much broader because it did not define<br />
how much computer use was required or in<br />
what manner the computer had to be used.<br />
Id. at *3. <strong>The</strong>refore, “Plaintiff’s interpretation<br />
of the policy would expand coverage<br />
to any fraudulent underlying claim that<br />
was entered into its computer system by<br />
any user, even by an authorized user. This<br />
interpretation is not supported by the language<br />
of the Rider.” Id. at *4. Instead, the<br />
court concluded, “Nothing in this clause<br />
indicates that coverage was intended where<br />
an unauthorized user utilized the system as<br />
intended, i.e. to submit claims, but where<br />
the claims themselves were fraudulent.” Id.<br />
<strong>The</strong> case law leaves open the question<br />
whether some manipulation of numbers<br />
or events as the Brightpoint case suggests<br />
or something less as allowed in the Owens<br />
case is necessary to establish a covered loss.<br />
Insurers that want to protect themselves<br />
should incorporate in their crime policies<br />
a definition for “use of a computer” because<br />
the trend remains to construe ambiguities<br />
in an insurance policy against the insurer.<br />
Until such a definition appears, insureds<br />
likely will rely on cases such as Owens to<br />
highlight the ambiguities in the undefined<br />
terms and gain the interpretive benefit<br />
of those ambiguities. Insurers are left<br />
then with the uphill battle of arguing that<br />
the words “use of a computer” cannot simply<br />
mean whatever the inventive insureds<br />
wish them to mean, but instead they logically<br />
require some Brightpoint-like activities<br />
to demonstrate a covered loss.<br />
Direct Cause and Loss<br />
Even more confusing than the question<br />
of what constitutes the use of a computer<br />
is whether the use directly caused the<br />
loss—that is, did the use of a computer or<br />
computer system cause damage to some<br />
tangible property As the Owens judge<br />
wrote, “A direct causation requirement in a<br />
crime policy or fidelity bond requires more<br />
than a ‘but for’ or factual causation alone,<br />
but requires a ‘direct’ causation.” Owens,<br />
2010 WL 4226958, at *7. Additionally, “‘[i]t<br />
is well settled that the words ‘direct cause’<br />
ordinarily are synonymous in legal intendment<br />
with ‘proximate cause,’ a rule applicable<br />
to causes involving the construction<br />
of an insurance policy.” Id. at *7 (quoting<br />
Steiner v. Middlesex Mutual Assurance<br />
Company, 44 Conn. App. 415, 434,<br />
689 A.2d 1154 (1997)). And “proximate<br />
cause” does not mean “that which is last in<br />
time or place, not merely that which was in<br />
activity at the consummation of the injury,<br />
but that which is the procuring, efficient,<br />
and predominant cause.’” Owens, 2010 WL<br />
4226958, at *7 (quoting Frontis v. Milwaukee<br />
Insurance Company, 156 Conn. 492,<br />
497–98, 242 A.2d 749 (1968)).<br />
<strong>The</strong> case law offers very little information<br />
about what constitutes a direct<br />
loss, and it is not the aim of this article<br />
to address the topic in full here. See,<br />
e.g., Linda G. Robinson & Jack P. Gibson,<br />
Commercial Property Insurance (International<br />
Risk Management Institute, Inc.<br />
Dallas, Tex. Feb. 2005) and Skillern, supra<br />
(comprehensively discussing the direct<br />
loss issue). However, the fact that a computer<br />
must be used in bringing about the<br />
fraud cannot be underscored with more<br />
emphasis. Losses due to computer vandalism<br />
through introduction of a computer<br />
virus or theft of trade secrets are not covered<br />
activities under most policies requiring<br />
evidence of a direct loss. See Robinson,<br />
supra, at XII.D.9, and comments on Coverage<br />
for Computer Crime. Indeed, “[m]any,<br />
perhaps most, insurers would argue that<br />
the information stored on a computer cannot<br />
suffer direct physical loss or damage<br />
and therefore does not qualify as tangible<br />
property.” Id.<br />
Conclusion<br />
What constitutes “use of a computer” is not<br />
easily defined. As technology advances, the<br />
potential that newly developed electronic<br />
equipment will be characterized as a “computer”<br />
and that electronic activity will fall<br />
within the “use” penumbra grows exponentially.<br />
Navigating this quagmire will<br />
continue to present challenges that can be<br />
overcome by the addition of definitions<br />
establishing the scope of the coverage provided.<br />
Until such time, the arguments for<br />
and against finding a covered loss resulting<br />
from “use of a computer” remain as broad<br />
as the imagination will allow.<br />
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<strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong> ■ 77
Concussion, from page 16<br />
at best. Id. While unlikely, this scenario<br />
could change should either side run across<br />
a smoking gun in discovery.<br />
What is clear is that the testimony of<br />
physicians will likely play a significant role<br />
in this litigation. Travis Leach, a sports law<br />
attorney from Arizona, commented: “[t]he<br />
crux of these cases is: What did medical<br />
professionals know historically about concussions,<br />
and what was the common medical<br />
practice 10, 20 years ago when these<br />
issues started arising” Alicia Gallegos,<br />
Doctors Key Players in NFL Concussion Litigation,<br />
AMEDNEWS.COM (July 30, 2012).<br />
Conclusion<br />
Unfortunately, cognitive illnesses are significantly<br />
more prevalent among NFL<br />
alumni in comparison to the national population.<br />
Studies performed by the nation’s<br />
scientists confirm a causal link between<br />
multiple NFL- derived concussions and<br />
later- life cognitive decline. Presently,<br />
researchers are actively pursuing diagnostic<br />
techniques in attempts to combat further<br />
injuries caused by athletes who suffer<br />
unnoticed head injuries. Still, the NFL has<br />
known of these causal studies since at least<br />
2005. Despite knowing of such studies, the<br />
NFL failed to issue adequate warning to<br />
league players from 2005 to 2010, and its<br />
current efforts to combat chronic traumatic<br />
encephalopathy cannot rectify the harm<br />
suffered by many of these severely injured<br />
players. As a result, NFL alumni have targeted<br />
the league with tobacco- like failure<br />
to warn claims to recover for their cognitive<br />
injuries. Still, the NFL has a number of<br />
persuasive—and potentially exonerating—<br />
defenses at its disposal. In any event, the<br />
outcome of this litigation will determine<br />
the NFL’s ultimate liability for its actions,<br />
and it could very well determine the survival<br />
or financial failure of the league.<br />
Ethics, from page 74<br />
that contains client information. <strong>The</strong> opinion<br />
requires: (1) identification of potential<br />
threats and the creation of policies to protect<br />
confidentiality; (2) an inventory of firm<br />
storage media; (3) adequate supervision<br />
over nonlawyers; and (4) use of vendors<br />
that can certify sanitation at the time of<br />
destruction. Professional Ethics of the Florida<br />
Bar Opinion 10-2 (September 24, 2010).<br />
In a world where data recovery is commonplace,<br />
simply “deleting” client data from<br />
your storage media is wholly insufficient.<br />
If the ethical challenges associated with<br />
storage media are giving you heartburn,<br />
another option is to store client data in the<br />
cloud. This means no flash drives to lose<br />
and no hard drives to inventory. Instead,<br />
the client data is stored on remote servers<br />
outside a lawyer’s direct control that can be<br />
accessed by the lawyer or the client through<br />
the Internet with a secure password. This<br />
lack of direct control creates its own set of<br />
ethical challenges, with more than a dozen<br />
states having issued formal ethics opinions<br />
on cloud computing. <strong>The</strong> use of the<br />
cloud is generally permitted, subject to<br />
the exercise of reasonable care, which can<br />
include (1) periodically reviewing security<br />
measures; (2) choosing a qualified provider;<br />
(3) knowing how the provider handles<br />
the data; (4) ensuring that the data is<br />
readily available when needed; and (5) following<br />
your client’s express instructions<br />
on storage.<br />
Twenty-first century lawyers face unique<br />
ethical obligations that cannot be discharged<br />
by sticking their heads in the sand.<br />
Regardless of whether you’re tech savvy or<br />
a neophyte, check your local rules, ensure<br />
that you’re taking reasonable efforts to protect<br />
your client’s electronic data, and try<br />
not to lose that critical flash drive.<br />
Think Globally, from page 73<br />
that merely maintaining a website accessible<br />
by individuals in a particular province<br />
does not necessarily amount to “carrying<br />
on business in the province.” However,<br />
when a health-care provider actively solicits<br />
patients or maintains a presence in or<br />
travels to a Canadian jurisdiction regularly,<br />
the Court’s decision suggests that the<br />
health-care provider might be considered<br />
as “carrying on business in the province,”<br />
which may result in the Canadian court<br />
assuming jurisdiction of a lawsuit related<br />
to the provider’s activities in that province<br />
or territory.<br />
<strong>The</strong> Ontario Superior Court of Justice in<br />
Colavecchia v. <strong>The</strong> Berkeley Hotel Ltd., 2012<br />
ONSC 4747, considered jurisdiction over<br />
a lawsuit involving a “virtual” or “online<br />
presence” in Canada when the defendant’s<br />
website was accessible in Canada. In that<br />
case, the Canadian plaintiffs made a reservation<br />
online at the Berkeley Hotel in<br />
England. After checking in, the husband<br />
was injured when he slipped and fell in<br />
the bathroom. He was treated for his injuries<br />
at a local hospital and returned home<br />
the next day for follow- up medical care.<br />
<strong>The</strong> plaintiffs brought a lawsuit in Ontario<br />
against the hotel. <strong>The</strong> hotel successfully had<br />
the action dismissed for lack of jurisdiction.<br />
<strong>The</strong> court found that the hotel did not<br />
carry on business in Ontario, in part based<br />
on the fact that the hotel had no office or<br />
other premises in Ontario, hotel employees<br />
did not regularly visit Ontario, and the<br />
hotel did not engage in a marketing campaign<br />
specifically targeting Ontario residents.<br />
<strong>The</strong> court commented that this was<br />
precisely the type of case that the Supreme<br />
Court of Canada intended to capture by<br />
stating that “mere access to a website is not<br />
sufficient to establish that a defendant carries<br />
on business.”<br />
<strong>The</strong> new and limited list of factors provides<br />
welcome clarification for determining<br />
when a Canadian court will assume<br />
jurisdiction over an international tort.<br />
While the case law to date suggests that<br />
health-care providers must do more than<br />
maintain a website accessible in Canada<br />
to become subject to Canadian laws, precisely<br />
what level of online activity within a<br />
province or a territory might lead a Canadian<br />
court to assume jurisdiction over an<br />
action without a governing law and jurisdiction<br />
agreement still remains unclear.<br />
<strong>The</strong> weight assigned by the courts to such<br />
agreements underscores the importance of<br />
requiring nonresident patients to sign these<br />
agreements before undergoing treatment<br />
whenever possible.<br />
78 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong>
dri.org<br />
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Claims Executives* can attend <strong>DRI</strong> seminars at no cost.<br />
* Any member of <strong>DRI</strong> employed as a claims professional by a corporation or insurance company, who spends a substantial portion<br />
of his or her professional time hiring or supervising outside counsel in the representation of business, insurance companies or their<br />
insureds, associations or governmental entities in civil litigation will be entitled to free attendance at any <strong>DRI</strong> program.<br />
Any nonmember lawyer eligible for free <strong>DRI</strong> programming employed as a claims professional by a corporation or insurance<br />
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Advocates<br />
Charles H. Abbott, New<br />
Orleans, LA<br />
David M. Axelrad, Encino, CA<br />
Veronica M. Bates,<br />
Dallas, TX<br />
P. Ryan Beckett,<br />
Ridgeland, MS<br />
Christopher A. Bottcher,<br />
Birmingham, AL<br />
Lawrence T. Bowman,<br />
Dallas, TX<br />
Brennan Tyler Brooks,<br />
Raleigh, NC<br />
Craig Brown, Manchester, NH<br />
Hugh W. Buyck,<br />
Mount Pleasant, SC<br />
Joseph R. Carnicella,<br />
Pittsburgh, PA<br />
Timothy F. Casey,<br />
Southfield, MI<br />
Timothy E. Congrove,<br />
Kansas City, MO<br />
Thomas C. Cowan,<br />
New Orleans, LA<br />
Daniel K. Cray, Chicago, IL<br />
Greg W. Curry, Dallas, TX<br />
Michael R. Daglio,<br />
Richmond, VA<br />
Thomas Joseph D’Amato,<br />
San Francisco, CA<br />
Michele Hale DeShazo,<br />
New Orleans, LA<br />
Mark A. Dombroff,<br />
McLean, VA<br />
Teresa M. Dufort, Toronto, ON<br />
David E. Dukes, Columbia, SC<br />
Jennifer Eggers,<br />
Minneapolis, MN<br />
Amy R. Folsom,<br />
Colorado Springs, CO<br />
Dana L. Frese,<br />
Jefferson City, MO<br />
Mel J. Garofalo, Charlotte, NC<br />
Karen R. Glickstein,<br />
Kansas City, MO<br />
Tamara B. Goorevitz,<br />
Baltimore, MD<br />
Dena Greenwood, Dallas, TX<br />
Duke Riley Groover,<br />
Macon, GA<br />
John J. Haggerty,<br />
Warrington, PA<br />
James R. Hankle,<br />
Pittsburgh, PA<br />
Jeffrey V. Hill, Portland, OR<br />
Michael D. Hostetter,<br />
Atlanta, GA<br />
Robert L. Jones III,<br />
Fayetteville, AR<br />
80 ■ <strong>For</strong> <strong>The</strong> <strong>Defense</strong> ■ <strong>March</strong> <strong>2013</strong><br />
Advocates and New Members<br />
Each month, <strong>DRI</strong> welcomes new members from the United States and Canada and abroad. Some of these new<br />
members have been recommended by current members actively involved in advancing goals shared by <strong>DRI</strong>. Any<br />
individual who recommends a new member is recognized as an “Advocate” for <strong>DRI</strong>.<br />
Nicholas A. Karacostas,<br />
Jersey City, NJ<br />
Robert David Kaufman,<br />
Jackson, MS<br />
Edward K. Kimball,<br />
Woburn, MA<br />
Taryn B. Kindred,<br />
Philadelphia, PA<br />
Johannes Kingma,<br />
Atlanta, GA<br />
David W. Kloss, Buffalo, NY<br />
Kathleen A. Lang,<br />
Detroit, MI<br />
Terry R. Levy, Jackson, MS<br />
Mark Raleigh Lightfoot,<br />
Washington, DC<br />
Anthony W. Livoti,<br />
Columbia, SC<br />
Daniel M. Long,<br />
Indianapolis, IN<br />
Kara R. Masters, Seattle, WA<br />
Brad McCormick, Miami, FL<br />
Daniel W. McGrath,<br />
Chicago, IL<br />
Robert F. Parker,<br />
Merrillville, IN<br />
Steven W. Quattlebaum,<br />
Little Rock, AR<br />
Michael Scott Rainey,<br />
Raleigh, NC<br />
William F. Ray, Jackson, MS<br />
Clayton L. Riddle,<br />
Milwaukee, WI<br />
Eric A. Riegner,<br />
Indianapolis, IN<br />
Thomas R. Schultz,<br />
Indianapolis, IN<br />
James M. Skelly,<br />
New York, NY<br />
Catherine Verona, Tampa, FL<br />
Jeffrey D. Van Volkenburg,<br />
Clarksburg, WV<br />
Sean P. Wajert,<br />
Philadelphia, PA<br />
Kathleen M. Waters,<br />
Westlake Village, CA<br />
J. Michael Webster,<br />
Los Angeles, CA<br />
Karen Whatley,<br />
Little Rock, AR<br />
Sally Wignall, Indianapolis, IN<br />
Richard T. Woulfe,<br />
<strong>For</strong>t Lauderdale, FL<br />
Bradley A. Wright, Akron, OH<br />
Glenn M. Zakaib,<br />
Toronto, ON<br />
New Members<br />
Alabama<br />
Ellen Presley, Birmingham<br />
Alaska<br />
Linda J. Johnson, Anchorage<br />
Arizona<br />
Robert Hyde, Phoenix<br />
Cristine Boschee, Scottsdale<br />
J. Robert Sonne, Scottsdale<br />
Arkansas<br />
Vicki Bronson, Fayetteville<br />
Jane W. Duke, Little Rock<br />
Sarah Keith-Bolden,<br />
Little Rock<br />
California<br />
Dean A. Bochner, Encino<br />
Jacqueline Pons-Bunney,<br />
Laguna Hills<br />
Carmen Jeannine Cole,<br />
Los Angeles<br />
Michael J. Iafe, Los Angeles<br />
Robert McLay, Redwood City<br />
Matthew Dart, San Diego<br />
Adam M. Koss, San Francisco<br />
Colorado<br />
Diana May, Colorado Springs<br />
Andrea Bronson, Denver<br />
Elizabeth J.M. Howard,<br />
Denver<br />
Kimberly C. Perdue, Denver<br />
J. Lee Gray,<br />
Greenwood Village<br />
Connecticut<br />
Michael Pohorylo, Hartford<br />
District of Columbia<br />
Ramona R. Cotca,<br />
Washington<br />
Rebecca Jayne Fiebig,<br />
Washington<br />
Michael A. Graziano,<br />
Washington<br />
David K. Tochen, Washington<br />
Florida<br />
Ronald W. Warner,<br />
<strong>For</strong>t Lauderdale<br />
Richard B. Akin II, <strong>For</strong>t Myers<br />
Franklin Duke Regan,<br />
Jacksonville<br />
Francesca Alexandra<br />
Ippolito-Craven, Miami<br />
Elizabeth Anne Parsons,<br />
Pensacola<br />
Brian Todd Dunmire,<br />
Tallahassee<br />
Jessica Kirkwood Alley,<br />
Tampa<br />
Robert Maxim Stoler, Tampa<br />
Georgia<br />
Noshay Collins Cancelo,<br />
Atlanta<br />
Shelley A. Driskell, Atlanta<br />
Jeffrey W. Melcher, Atlanta<br />
Scott D. Nader, Atlanta<br />
Brian Spitler, Atlanta<br />
Terri K. Benton, Macon<br />
Corrie Elizabeth Holton,<br />
Macon<br />
Marty K. Senn, Macon<br />
Key A. Wynn, Marietta<br />
Illinois<br />
Jonathan A. Cipriani,<br />
Chicago<br />
Kyle T. Geiger, Chicago<br />
Kelly V. Milam, Chicago<br />
Allison A. Torrence, Chicago<br />
Jonny A. Zajac, Chicago<br />
Jon Steven Faletto, Peoria<br />
Indiana<br />
Izabela Bebekoski, Gary<br />
Anne Hayes, Indianapolis<br />
Brandon M. Kimura,<br />
Indianapolis<br />
Larissa E. Koshatka,<br />
Indianapolis<br />
Tonya Lengar, Indianapolis<br />
Richard W. Castleton,<br />
Merrillville<br />
Iowa<br />
Chris Landherr,<br />
Cedar Rapids<br />
Kansas<br />
Benjamin Winters, Wichita<br />
Kentucky<br />
Christina D. Hajjar, Ashland<br />
Derrick T. Wright, Lexington<br />
Louisiana<br />
Michael H. Abraham,<br />
New Orleans<br />
McGready L. Richeson,<br />
New Orleans<br />
Ryan Christian Wallis,<br />
New Orleans<br />
Maryland<br />
Pamela T. Broache,<br />
Baltimore<br />
Kevin A. Dunne, Baltimore<br />
Michael W. Fox, Baltimore<br />
Sarah N. Koop, Baltimore<br />
Stephen J. Marshall,<br />
Baltimore<br />
Thomas E. Neary, Baltimore<br />
Viktoriya M. Shpigelman,<br />
Baltimore<br />
Mark C. Talty, Baltimore<br />
James X. Crogan, Jr.,<br />
Owings Mills<br />
Matthew J. Pavlides,<br />
Rockville<br />
Douglas W. Biser, Towson<br />
Caroline B. Cathell, Towson<br />
Massachusetts<br />
Jonathan I. Handler, Boston<br />
Andrew R. McConville,<br />
Boston<br />
Mark Heinzelman, Braintree<br />
Andrew Dunning, Sharon<br />
Adam C. Ponte,<br />
Southborough<br />
Edward A. Prisby,<br />
Southborough<br />
Peter Scavongelli, Woburn<br />
Michigan<br />
Stephen A. Lang, Detroit<br />
Kimberly K. Seibert, Detroit<br />
Samantha Murray, Lansing<br />
Patrick D. Crandell,<br />
Southfield<br />
Matthew P. Allen, Troy<br />
Minnesota<br />
James Jorissen, Minneapolis<br />
Mississippi<br />
Nancy Siples Brumbeloe,<br />
Gulfport<br />
Matthew Wade Allen,<br />
Jackson<br />
J. Mitchell Carrington II,<br />
Jackson<br />
Betty Ruth Fox, Jackson<br />
Thomas R. Julian, Jackson<br />
Spencer M. Ritchie, Jackson<br />
John Thomas Rouse,<br />
Jackson<br />
Keith W. Turner, Jackson<br />
Missouri<br />
Rachel H. Baker, Kansas City<br />
Sarah Yehle Fulkerson,<br />
Kansas City<br />
Latrice Nicole McDowell,<br />
Kansas City<br />
New Jersey<br />
Michael P. Beckley, Cranford<br />
John E. Ursin, Florham Park<br />
Paul A. Lisovicz, Morristown<br />
Melissa DeHonney, Newark<br />
Nicole Denise Bearce,<br />
Roseland
New York<br />
Alan J. DePeters, Buffalo<br />
Thomas A. Digati, Buffalo<br />
Melissa A. Foti, Buffalo<br />
Joshua M. Henry, Buffalo<br />
Justin Kloss, Buffalo<br />
Nancy A. Long, Buffalo<br />
Amanda L. Machacek,<br />
Buffalo<br />
Marissa J. Sweet, Buffalo<br />
Cynthia L. Thompson,<br />
Buffalo<br />
Claudia L. Cinardo, New York<br />
Nicoletta Del Vecchio,<br />
New York<br />
Eric M. Falkenberry,<br />
New York<br />
Charles Gura, New York<br />
Laura L. Spring, Syracuse<br />
North Carolina<br />
C. Rob Wilson, Charlotte<br />
Brodie Erwin, Raleigh<br />
Julie Yates, Raleigh<br />
Jason Phillip Luther,<br />
Columbia<br />
Darren Kent Sanders, Mount<br />
Pleasant<br />
Tennessee<br />
Elizabeth R. McClellan,<br />
Murfreesboro<br />
Texas<br />
Stacie Lyn Bennett, Austin<br />
Alissa Kirksey Christopher,<br />
Dallas<br />
Susan O. Martin, Dallas<br />
Dena B. Mastrogiovanni,<br />
Dallas<br />
Alan L. Rucker, Dallas<br />
Matthew Thomas McLain,<br />
<strong>For</strong>t Worth<br />
Sara Katharine Kimbrough,<br />
Houston<br />
Andrew J. Yoder, Houston<br />
Elizabeth G. Hill,<br />
Lubbock<br />
Utah<br />
Kurt M. Frankenburg,<br />
Salt Lake City<br />
Vermont<br />
Molly Reis, Burlington<br />
Virginia<br />
Marcus Smatlak, Arlington<br />
Mitchell Kirks Morris,<br />
Richmond<br />
Jonathan A. Wolfson,<br />
Richmond<br />
Christopher S. Dadak,<br />
Roanoke<br />
Washington<br />
Alan David Schuchman,<br />
Seattle<br />
West Virginia<br />
Allison Suzanne McClure,<br />
Clarksburg<br />
Elizabeth D. Walker,<br />
Morgantown<br />
Wisconsin<br />
Maria Elaina DelPizzo<br />
Sanders, Milwaukee<br />
Brian C. Spahn,<br />
Milwaukee<br />
Wyoming<br />
Susan L. Combs,<br />
Jackson<br />
Canada<br />
Alberta<br />
Andrew Edward Stead,<br />
Calgary<br />
New Brunswick<br />
Howard Allan Spalding,<br />
Saint John<br />
Nova Scotia<br />
Philip Chapman, Halifax<br />
Ontario<br />
Calie Adamson, Toronto<br />
Geoffrey B. Shaw, Toronto<br />
Randy Sutton, Toronto<br />
Prince Edward Island<br />
Shannon Farrell,<br />
Charlottetown<br />
Mexico<br />
Distrito Federal<br />
Ricardo Rios Ferrer,<br />
Col. San Jose Insurgentes<br />
North Dakota<br />
Douglas Wade Gigler, Fargo<br />
Robert J. Hovland, Rugby<br />
Ohio<br />
Tiffany M. Sovik, Akron<br />
Danielle N. Linert, Cleveland<br />
Nina Ilene Webb-Lawton,<br />
Columbus<br />
Oregon<br />
Bryana Blessinger, Portland<br />
Bradford Lamb, Portland<br />
Pennsylvania<br />
Susan Ellis Wild, Allentown<br />
David K. Sheppard, King of<br />
Prussia<br />
Joseph N. Bongiovanni,<br />
Philadelphia<br />
Morgan Sack, Philadelphia<br />
Joanna T. Vassallo,<br />
Philadelphia<br />
Beverly A. Block, Pittsburgh<br />
John B. Cromer, Pittsburgh<br />
Gregory M. Monaco,<br />
Pittsburgh<br />
John Arthur Schwab,<br />
Pittsburgh<br />
Stephanie B. Fineman,<br />
Warrington<br />
Rhode Island<br />
Nicole J. Benjamin,<br />
Providence<br />
Laurel Byerly, Providence<br />
South Carolina<br />
Renee S. Dankner,<br />
Columbia<br />
George V. Hanna IV,<br />
Columbia<br />
You will receive a notification<br />
via email when you have been<br />
recommended by a colleague.<br />
Make sure your member<br />
profile is up-to-date and<br />
complete. Visit the<br />
Membership Directory and<br />
start recommending!<br />
Note: You must be a <strong>DRI</strong> member and<br />
logged in to the website to utilize this feature.<br />
Acknowledge a colleague for his or her<br />
experiences and accomplishments using<br />
the new recommend feature in the <strong>DRI</strong><br />
Membership Directory.<br />
Recommendations<br />
will be highlighted<br />
on your member<br />
profile with a link<br />
to the profile of the<br />
person who<br />
recommended you.
dri.org<br />
In-house<br />
counsel are<br />
eligible for free<br />
registration at <strong>DRI</strong><br />
Seminars.* Call<br />
312.795.1101 for<br />
details.<br />
<strong>The</strong> Key to Success Is Savings on CLE!<br />
In-house counsel* are eligible to register<br />
for <strong>DRI</strong> seminars for free.<br />
*In-house counsel are defined as licensed attorneys, who<br />
are employed exclusively by a corporate or other private<br />
sector organization, for the purpose of providing legal<br />
representation and counsel exclusively to such employer<br />
corporation, its affiliates and subsidiaries. In order to<br />
qualify for free registration, the individual(s) must also<br />
be a <strong>DRI</strong> member(s) and a member(s) of <strong>DRI</strong>’s Corporate<br />
Counsel Committee. Offer excludes <strong>DRI</strong> Annual Meeting.