Bernstein Shur Business and Commercial Litigation Newsletter #53
July 2015 | Issue 53
We are pleased to present the 53rd edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight recent cases regarding compelled turnover of Facebook data, a revived securities class action, and other news that will have an impact on business and litigation. We hope you enjoy the newsletter.
In the News:
A New York appeals court has ordered Facebook to turn over private data for 381 users under investigation by the Manhattan district attorney’s office. In 2013, Facebook was served with dozens of warrants in relation to an investigation regarding alleged disability fraud. In support of the requests, prosecutors argued that the Facebook entries showed individuals who had claimed disability participating in martial arts events, playing golf, and enjoying aquatic sports. Facebook moved to quash the warrants, asserting that they were defective and also violated Facebook users’ rights under the Fourth Amendment, which prohibits unreasonable searches and seizures. The trial court denied Facebook’s motion to quash, holding that Facebook lacked standing to assert constitutional rights on behalf of its users and could not challenge defects in the warrants before execution. Facebook simultaneously complied with the warrants and appealed the trial court’s decision. The decision was affirmed on appeal to the Appellate Division of the New York Supreme Court. Although the appellate court acknowledged Facebook’s concerns regarding access to user’s data, it noted that warrant issuance is subject to careful review by judges. It also noted that only 62 of the 381 targeted individuals ultimately were indicted. Facebook and other Silicon Valley companies have expressed concerns over prosecutors’ easy access to the digital information that forms the backbone of their businesses.
The Second Circuit Court of Appeals has revived a securities fraud class action against Keurig Green Mountain, Inc. In the case, shareholders alleged that the company misstated its income and future prospects at the same time that it was concealing a large inventory spike of $255 million in products. The U.S. District Court for the District of Vermont dismissed the action, holding that the plaintiffs failed to meet their burden of sufficiently alleging fraud and scienter, or wrongful intent. Under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(2)(A), a plaintiff is required to plead these elements with particularity and must identify the specific statements at issue and the reasons why they are misleading. At the trial court level, the court concluded that plaintiffs failed to meet these requirements, resulting in dismissal of the class action. On appeal, the Second Circuit reversed the trial court, holding that the existence of mounting inventories and dismissive statements made by executives during investor calls were sufficient to allege material misstatements made with scienter. During such calls, executives stated that the company was struggling to meet demand and had no excess inventory. Such statements allegedly were made at the same time that massive amounts of inventory were unsold, hidden in warehouses and offices, and expiring in storage. Keurig, which manufactures the ubiquitous K-pod brewing system, sells its coffee pods for the equivalent of $30 per pound of coffee in the United States.
Yelp, the online review site that increasingly has had to fend off defamation lawsuits, has backed a proposed federal statute that would make it more difficult for plaintiffs to bring claims against online commenters. The legislation, the Speak Free Act, essentially seeks to federalize so-called “Anti-SLAPP” statutes that exist in many states and allow for early dismissal of claims aimed at constitutionally protected petitioning activity. The term “SLAPP,” an acronym for Strategic Lawsuit Against Public Participation, refers to lawsuits brought for purposes of punishing or dissuading a party from exercising speech rights. Anti-SLAPP statutes provide a mechanism for early dismissal of suits that are directed at protected petitioning activity. In Maine, such activity includes statements made to government bodies, as well as statements made to encourage review of issues by such bodies. See 14 M.R.S. § 556. The proposed federal legislation would federalize such procedures, while also expanding the scope of protected speech to include, among other things, statements related to a “good, product, or service in the marketplace.” Under the act, a claimant would have to show a likelihood of success in order to proceed further with any claims.