Bernstein Shur Business and Commercial Litigation Newsletter #54
August 2015 | Issue 54
We are pleased to present the 54th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight recent cases that address management-led buyouts, copyright protections, and other news that will have an impact on business and litigation. We hope you enjoy the newsletter.
In the News:
A Delaware Court orders senior executives of Dole Food Company, Inc. to pay $148.2 million in damages to former shareholders based on fraud tied to a management-led buyout of the company. In 2013, Dole’s chief executive officer and largest shareholder, David Murdock, led the effort to take the company private, proposing to pay $12.00 per share to acquire all of its publicly held shares. A slim majority of shareholders ultimately approved the buyout, structured as a merger, at a price of $13.50 per share. Shareholders who objected to the buyout commenced a judicial appraisal action, challenging the transaction based on the entire fairness doctrine. Under this standard, a controlling shareholder in a self-interested transaction must demonstrate the entire fairness of the transaction as it pertains to fair dealing and fair price. The Delaware Court of Chancery determined that Murdock and his associates engaged in fraud to artificially depress the price of Dole’s shares, including providing lowball financial projections, thwarting repurchase programs, and utilizing misinformation and market timing to drive down the company’s stock price in advance of the buyout. The court concluded that Dole was undervalued by 17 percent, ordering the defendants to pay damages to shareholders based on what it determined to be a fair buyout value of $16.24 per share. The case underscores the heightened risks and scrutiny involved in self-interested transactions, such as management-led buyouts.
The First Circuit affirms a trial court’s ruling that a chicken sandwich is not entitled to copyright protection. In the underlying case, a Puerto Rico-based franchisee of Church’s Chicken alleged that the franchisor misappropriated his recipe and name for the “Pechu Sandwich.” The sandwich, which was introduced across the Church’s franchise, is made with a fried chicken, lettuce, tomato, cheese and garlic mayonnaise. At issue in the case is whether the name “Pechu Sandwich” and its recipe could be subject to copyright protection. Affirming the trial court’s determination below, the First Circuit Court of Appeals held that recipes, short names, and phrases were not subject to such protections. The Copyright Act, 17 U.S.C. § 102(a), contains several categories of works entitled to protection, including literary works, sound recordings, and pictorial, graphic, and sculptural works. In addition to determining that the name and recipe did not fall under any of the enumerated categories under the Copyright Act, the court also noted that agency regulations were fatal to Plaintiff’s claim based on copyright. See 37 C.F.R. § 202.1(a) (providing that the mere listing of ingredients is not subject to copyright protection). The court also affirmed dismissal of claims based on Lanham Act, which provides for recovery based on false or fraudulent declarations in relation to registrations obtained from the U.S. Patent and Trademark Office.
The California Supreme Court rejects a consumer challenge to a class action waiver and arbitration clause based on unconscionability. The unconscionability doctrine refers to contracts of adhesion where terms are unduly oppressive, overly harsh, or so one-sided as to shock the conscience of the court. In this case, the plaintiff purchased a used vehicle from an automobile dealer and executed a purchase agreement that contained class action waiver and arbitration clauses. After the plaintiff pursued a class action addressed to financing charges, the defendant invoked the class action waiver and arbitration clauses contained in the agreement. Notwithstanding the plaintiffs’ claim of unconscionability, the California Supreme Court concluded that the provisions were not unconscionable. Rendering the decision, the court underscored that unconscionability must be shown as to both the substance and process for the transaction, and that the doctrine provides no relief to a “simple old-fashioned bad bargain.” Because the plaintiffs were unable to meet their burden to establish unconscionability, the class action waiver and arbitration clause was given effect. The Court’s decision represents a departure from a recent string of cases that seemingly called for heightened scrutiny of such clauses in a consumer context.
Access the opinion here.