Bernstein Shur Business and Commercial Litigation Newsletter #70

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February 2017 | Issue 70

Our February recap highlights a new SEC policy concerning investigations, a False Claims Act case involving cyclist Lance Armstrong, waiver of the attorney-client privilege through use of an insecure website, and other news that will have an impact on business and litigation.

The acting chair of the SEC has instituted a new policy limiting the authority of its associate directors to commence investigations and issue subpoenas.

The acting head, Michael Piwowar, unveiled a new policy by which associate directors in the SEC’s Enforcement Division no longer will have the power to initiate enforcement investigations or directly issue investigatory subpoenas. The new policy represents a departure from practices that were previously adopted in response to the Madoff scandal in order to enhance the agency’s responsiveness. Under that approach, approximately twenty Enforcement Division associate directors exercised delegated authority to commence enforcement actions and issue subpoenas. The acting chair previously had criticized these practices as undermining uniformity and undercutting the oversight of SEC commissioners. Now, only the acting chief of the SEC’s Enforcement Division will have the power to grant such requests.

A federal court has ruled that a $100 Million False Claims Act lawsuit filed against cyclist Lance Armstrong may proceed to a jury trial.

The suit, which was brought by Armstrong’s former teammate Floyd Landis and was joined by the U.S. Government, alleges that Armstrong defrauded the government by accepting millions of dollars in sponsorship fees from the U.S. Postal Service under false pretenses. Armstrong was since stripped of his cycling titles following revelations that he used performance-enhancing drugs in competition. The False Claims Act, 31 U.S.C. §§ 3729-33, allows third party whistleblowers to bring suit on behalf of the government to recover amounts obtained through fraud. Among other things, the Act provides for treble damages and an award of up to 25 percent of the total recovery to the whistleblower.

A federal court has held that an insurance company waived attorney-client privilege protections by uploading materials onto a file-sharing website that lacked sufficient password protection.

In the case, the Harleysville Insurance Company uploaded its entire claim file to share with defense counsel and send to the National Insurance Crime Bureau, a non-profit insurance industry investigatory body. In discovery, plaintiff’s counsel learned that the file had been shared without sufficient password protection such that any party that knew the name of URL link could directly access the entire file on the internet. Criticizing these practices as the functional equivalent of leaving a client file on a park bench, U.S. Magistrate Judge Pamela Meade Sargent held that the failure to maintain confidentiality vitiated any claim of attorney-client privilege that could have attached to the materials. In general, the attorney-client privilege protects confidential communications between attorneys and clients made for purposes of obtaining or providing legal assistance. Failure to meet any one of these requirements, including maintaining confidentiality, can be fatal to any claim of privilege. Similarly, disclosure to third parties generally results in waiver, destroying the privilege.

A Massachusetts federal court adopts a plausibility standard for pleading for patent infringement claims.

Until recently, direct patent infringement claims could be pleaded through the use of federal Form 18 in the Appendix to the Federal Rule of Civil Procedure, which had been viewed by some courts as an exception to heightened plausibility pleading standards under Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly. However, the U.S. District Court for the District of Massachusetts has held that use of federal forms cannot eliminate the need to comply with heightened pleading standards. In the underlying case, plaintiff Rampage LLC sued the defendants for directly infringing on a patent held by Rampage for an inkjet printing system. In response, the defendants filed a motion to dismiss on the basis that Rampage’s complaint failed to meet the heightened Twombly/Iqbal standards. Although Rampage defended based on its use of federal Form 18, Judge Allison Burroughs rejected the argument, concluding that the heightened pleading standard of Twombly/Iqbal, and not Form 18, applied to direct infringement claims.