Connecticut Business Litigation Blog : Connecticut Business Lawyer & Attorney : N. Kane Bennett : Raymond & Bennett Law Firm : Hartford, Middletown, Glastonbury

Thank you to Advanced Copy for nominating me for Best Use of Blogs for the Hartford Business Journal's Strateg E Awards for 2010.  Thank you to the Hartford Business Journal for selecting this Blog as a finalist and putting on a great event yesterday. 

Congratulations to Thomas Clifford who won for his Blog, Bringing Brands to Life.  Tom is a big fan of Daniel Pink who has some revolutionary ideas for business management.  I just read Pink's latest book "Drive: The Surprising Truth About What Motivates Us."  Great read. 

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In the recent federal district court decision of Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities (download here) ,  Judge Shira Scheindlin clearly explained  and amplified the obligations to preserve and produce electronically stored evidence in litigation cases.  The case was brought by a group of investors seeking to recover 550 million dollars in losses from a hedge fund liquidation. 

The defendants in the case alleged that the plaintiffs failed to preserve electronically stored documents and filed misleading statements regarding discovery.  In deciding against the plaintiff's on discovery issues, Judge Scheindlin summarized discovery obligations and stated:

the courts have a right to expect that litigants and counsel will take necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records, are collected, reviewed, and produced to the opposing party....when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy...By now, it should be abundantly clear that the duty to preserve means what is says and that a failure to preserve records - paper or electronic - and to search in the right places for those records, will inevitably result in the spoliation of evidence. 

Judge Scheindlin's decision is very lengthy and detailed.  You might ask, why should a company doing business in Connecticut care about what Judge Scheindlin says in a New York federal district court case?  Well, for starters, Judge Scheindlin is perhaps the most quoted and cited trial judge in the United States concerning electronic evidence following her series of decisions in the now famous case of Zubulake v. UBS Warburg.  Another reason is that Connecticut state court rules on obligations to preserve and produce electronically stored information are not well established or defined.  As such, a state court trial judge in Connecticut is very likely to be persuaded by anything Judge Scheindlin says on the issue of electronic discovery and, in particular, on obligations to preserve and produce electronic evidence, sanctions for failure to do so properly, and the cost and expense of producing such evidence.

Anyone facing potential litigation or reasonably anticipating litigation in Connecticut should understand the obligations to preserve and produce evidence.  Although Judge Scheindlin stated that these obligations should be abundantly clear, the fact is, they either are not clear or they are often ignored.  Every week, there are numerous case reports from across the country involving spoliation, destruction, and mishandling of electronic evidence.  Many times, the failure to preserve critical evidence happens well in advance of the litigation because the duty to preserve is overlooked, ignored, or not understood.

The full scope and extent of discovery obligations is too in depth for a blog post.  Nevertheless, Judge Scheindlin's decision provides a framework for understanding some basic obligations and rules.  Here is my summary take away from the case:

•  Any individual or business that reasonably anticipates litigation must issue a "timely" litigation hold in writing.  This means steps must be taken to preserve evidence and to stop its destruction. This also means that the duty to preserve evidence arises before litigation ever happens.  The duty to preserve arises when litigation is "reasonably anticipated."
• Failure to initiate a written litigation hold may constitute gross negligence.
• Failure to properly collect evidence from key players in the dispute is gross negligence or willfulness.  This means that evidence must be collected from the individuals that are most involved in the dispute. This type of conduct is more culpable and likely to lead to sanctions.
• Destruction of emails or backup tapes after the duty to preserve arises may also consitute gross negligence and willful misconduct.
• Failure to obtain evidence from "all" employees, as opposed to key players, is likely ordinary negligence and a lower degree of culpability.
• Failure to take all appropriate measures to preserve electronically stored information is negligence and less culpable.

Failure to follow the above framework may result in sanctions ranging from fines and cost shifting to dismissal, preclusion of evidence, or an adverse inference instruction to the jury at the time of trial.  The sanction will depend on the degree of culpability ranging from negligence to gross negligence to intentional conduct.  The scope of sanctions will also depend on the relevance of the missing evidence and the prejudice to the innocent party.

The obligation to preserve evidence must be taken seriously once litigation is "reasonably anticipated."  The sanctions that can result from failure to abide by these obligations can dramatically impact the result of a lawsuit and can cause a party to lose an otherwise meritorious claim or defense.  Improper handling of electronic discovery can also cause an expensive detour in a litigation case that can be avoided with proper care and attention to discovery obligations.

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Each state generally has some type of consumer protection or trade protection law that seeks to prohibit and punish unfair conduct and deceptive acts in trade or commerce.   Most states, including Connecticut, model their laws after section 5 of the Federal Trade Commission Act.  Section 5 of the FTC Act prohibits unfair or deceptive acts and unfair competition in the marketplace. 

Connecticut's Unfair Trade Practices Act (commonly referred to as CUTPA by attorneys and judges), is codified at Connecticut General Statutes section 42-110b.  CUTPA states, in relevant part, that:

(a) No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.

(b) It is the intent of the legislature that . . . the courts of this state shall be guided by interpretations given by the Federal Trade Commission and the federal courts to Section 5 . . . .

(c) The commissioner may . . .establish by regulation acts, practices or methods which shall be deemed to be unfair or deceptive. . . Such regulations shall not be inconsistent with the rules, regulations and decisions of the federal trade commission and the federal courts . . .

(d) It is the intention of the legislature that this chapter be remedial and be so construed.

CUTPA's provisions can be far reaching for businesses and consumers.  For example, under section 42-110g, attorneys who successfully prove a CUTPA violation in Connecticut business litigation may be able to recover attorneys fees, punitive damages, and costs for their clients.  CUTPA's provisions also provide for the ability of attorneys to bring class action lawsuits in Connecticut for unfair or deceptive acts. Additionally, courts can order injunctive relief or other equitable remedies for CUTPA violations.

CUTPA's provisions may be enforced by the various State's Attorneys and the Attorney General, such as the AG's recent lawsuit against Net Health over its loss or exposure of personal identifiers (date of birth, social security number) of Connecticut residents.  Private citizens and businesses may also bring actions for unfair competition or deceptive acts under CUTPA, including class action lawsuits such as the recent case against AT&T over Internet access.

To establish a violation of CUTPA, attorneys in Connecticut have to prove that their clients suffered "any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110g. . ." Generally speaking, this requirement means Connecticut attorneys have to show that their clients sustained damages as a result of an unfair or deceptive act in trade or commerce. 

To determine what constitutes an unfair or deceptive act, Connecticut courts specifically refer back to the Federal Trade Commission and what is commonly referred to as the "cigarette rule."  The cigarette rule defines what type of conduct may qualify as unfair and deceptive justifying an award of compensatory or punitive damages.   This rule dates back to 1964 and comes from legislative policy making by the Federal Trade Commission concerning requirements for warning labels on cigarette packages. 

 The three prongs of the cigarette rule are as follows:

1. whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise-in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness;
2. whether it is immoral, unethical, oppressive, or unscrupulous;
3. whether it causes substantial injury to consumers, [competitors or other business persons]. . . .

All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.

It is important to note that not every act or conduct that might seem to fit the criteria will be a violation of CUTPA. For example, generally speaking, mere negligent acts or simple breaches of a contract do not constitute unfair or deceptive acts under CUTPA. It is also important to note that some conduct automatically violates CUTPA or is considered a per se violation, such as failure to follow the Home Improvement Act or to register a trade name.

There are many nuances to CUTPA and the above is only a brief summary. Any business or consumer trying to determine whether they were damaged by conduct constituting a violation of CUTPA should contact a business litigation attorney or the Attorney General's office.

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Here are some quick hits on business blogs:

The Wall Street Journal blog reports on two restaurants involved in a lawsuit to determine who is most harmful to your health.  Well, sort of.  The Heart Attack Grill, an Arizona eatery, filed a federal lawsuit against the owners of Heart Stoppers Sports Grill, a Florida restaurant, accusing them of stealing the idea for an unhealthy menu.  

Victoria Pynchon of the Settle It Now blog is trying to decide on a cover for her conflict resolution book entitled "A is for Asshole, the ABC's of Conflict Resolution."  If the cover is anything like the title, it should be a hit seller.

Edward McNally of the Delaware Business Litigation Blog has a helpful post that links to a new Delaware case for anyone looking for ways to calculate money damages or breach of a non-compete agreement.  Many times, these cases are resolved with injunctions or temporary restraining orders.  It is not very common to actually get to the issue of monetary damages for breach of a non-compete agreement.   This new case provides some ideas on how to calculate damages.

Megan Erickson's Social Networking Blog discusses Facebook's concerns over identifying its responsibilities for privacy of its 350 million users.

 Maxwell Kennerly's Litigation and Trial Blog digests recent Third Circuit law in two different cases involving first amendment and privacy rights for students creating fake MySpace pages.

 The Business Law Prof Blog has an interesting post about turning a simple contractual relationship into a fiduciary relationship.  Once a fiduciary relationship is established, it can have significant implications on the outcome of litigation.  A mere contractual relationship is not significant enough to form a fiduciary relationship absent other special factors.  One of my prior posts covers breach of fiduciary duty in Connecticut.

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In a previous post, I linked to a story about a tenant who was sued for libel after posting an allegedly disparaging comment on Twitter about her apartment. The Twitter lawsuit was a hot topic on the internet for some time.   Many commentators believed it was only a matter of time before Twitter resulted in a damage award for libel.  Not so in this case.   A Chicago judge has tossed out the lawsuit.  Reports indicate that the Judge made a specific finding that the "tweet was nonactionable as a matter of law."   

In this case,  the tenant made a Twitter post that her apartment was moldy.  Before bringing the suit, the landlord might have considered how many people actually read the Tweet.  My guess is probably a few hundred at best.  After the lawsuit was filed, millions read about it.  At the time of the lawsuit, the landlord company issued a statement saying "we're a sue first, ask questions later kind of organization."   That is not a wise strategy in general, but in particular when it comes to an Internet defamation case.   Anything involving a lawsuit and social networking has a good chance of being picked up in the media and in various places on the Internet. 

The Chicago court's ruling that the statement on Twitter failed to meet the standard for defamation seems correct if you consider Connecticut's defamation standard, which is similar.  The takeaway here is that not every negative statement qualifies as a defamatory statement.  This does not mean a post on Twitter cannot constitute defamation.  In fact, Twitter postings remain fair game for defamation suits, and we are likely to see more of these claims. 

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As many of us know, the Connecticut Attorney General, Richard Blumenthal, is stepping down and running for Chris Dodd's U.S. Senate seat. Several candidates have stepped forward indicating that they are going to run for Attorney General.   The Connecticut Attorney General has a significant impact on businesses in this state.  For one thing, the Attorney General often brings lawsuits to protect businesses and consumers related to unfair trade practices.  For example, within the last few days,  Attorney General Blumenthal filed a lawsuit on behalf of over 400,000 Connecticut residents related to the Health Net data breach.  The old saying in legal circles is that the Attorney General runs the largest law firm in the state. 

Secretary of State Susan Bysiewicz is one of the candidates running for Attorney General.  Ryan McKeen, at A Connecticut Law Blog, has a very interesting post today about whether Susan Bysiewicz has the legal resume to meet the statutory qualifications to be elected Attorney General based on needing 10 years in "active" law practice.  The media has jumped on his blog post and there are several reports on it already in the news.     The Bysiewicz campaign has responded and claims that she is qualified despite only six years of practice in the state based on her years of "supervising" attorneys at the Secretary of State's office.   Now that the issue has been joined, everyone is waiting for Ryan to respond, including me. 

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On January 11, 2010, a class action lawsuit (download here) was filed against AT&T alleging that it improperly charged sales tax to access the Internet in violation of Connecticut law and the Internet Tax Freedom Act.

The case was brought on behalf of David Rock who subscribed with AT&T for a "wireless data plan that permits access to the Internet by radio device."  The plan permits Internet access remotely by computer or smartphone, such as an iPhone or BlackBerry.

The complaint alleges improper charges from AT&T for state and local sales taxes on internet access on monthly bills.  The complaint is based in part on Connecticut General Statutes 12-407(a)(26)(A) which excludes Internet access from the state's sales tax on telecommunications.  The Internet Tax Freedom Act also prohibits taxes on Internet access.  The complaint alleges thousands of potential members for the class in Connecticut.  The complaint alleges breach of contract and violation of Connecticut's Unfair Trade Practices Act.

Nate Anderson of ars technica reported on several identical lawsuits filed in Georgia, Indiana, and Alabama over the last month.  Mr. Anderson reported that the same lawyers where behind the multiple filings.  In a Hartford Courtant article today by Matthew Sturdevant, the attorney for Mr. Rock,Michael Koskoff, noted that perhaps a dozen similar suits will be filed in various states.

Mr. Anderson made a humorous comment that all the complaints in the Georgia, Indiana, and Alabama cases have the same typo or misuse of the word  "I-Phone" rather than iPhone.  The complaint in the Connecticut case has the same misuse of "I-Phone."  So, either there is some cooperation nationwide on the plaintiff side on the content of the complaints or perhaps none of the lawyers involved own iPhones.   

In any event, these cases will be interesting to track as all of the lawyers involved on the consumer side have significant experience in class action lawsuits, including against telecom providers.  I also agree with Mr. Anderson that the actual definitions of "sales tax" and "Internet access" might seem simple enough, but can actually be quite complicated.  I expect AT&T will make use of those complications. 

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A recently filed class action lawsuit (download complaint) against RockYou highlights the very real threats to businesses related to hackers stealing customer data also known as personally identifiable information (PII).

According to the complaint filed in federal court in San Francisco, RockYou is a publisher and developer of popular online applications and services for use with social networking sites such as Facebook and MySpace.  RockYou allegedly exposed 32 million of its users to identity theft by failing to encrypt or otherwise protect email account information and passwords.  The suit alleges violations of California Civil Code, breach of contract, and negligence.

 Jason Remillard of Web Host Industry Review provided a detailed post on the lawsuit noting that RockYou may face more difficulties than expected because RockYou is a "launchpad type of service, that hold credentials for other services (myspace, facebook, etc)..."  As such,  RockYou may face liability for data exposures across other platforms. 

Mr. Remillard notes that he has been warning site owners about the risks of holding PII information of consumers.  I agree with Mr. Remillard that avoiding storage of such personal data  in the first place is often the best way to prevent liability exposure for both loss of data and a security breach.  If a business must store PII in its systems then a data loss and security plan must be in place to protect the data.  In prior posts, I offer some suggestions and tips for Connecticut business owners that have sensitive data or store PII of its customers.

Dave Kravets of Wired.com offers some more details about RockYou's alleged security failures that apparently resulted from the same common vulnerability exploited by hackers in the cases of Hannaford Brothers, 7-Eleven and Heartland Payment System.  The vulnerability results from RockYou's SQL database,which relates to the actual storage method and management of millions of email accounts and passwords.  The complaint against RockYou alleges that the prior well publicized flaws in SQL should have been addressed with readily available protection measures.

Brennon Slattery of PCworld wrote about the security breach and compared RockYou's security system to storing passwords and emails on sticky notes.  He noted that RockYou stored the information in plain text words.  In other words, once the hacker got inside RockYou's system, the passwords and email accounts were easy to read like sticky notes because there was no encryption of the text. 

RockYou has issued a statement explaining the breach and intends to defend the lawsuit. RockYou also has implemented new steps to avoid future breaches including implementation of encryption for all passwords.  Encryption is the method used to make the passwords unreadable once the hacker gains access to the system. 

The RockYou case is another example of the increasing number of data loss and security lawsuits and should serve as a reminder to any business that stores PII to implement a data loss and security plan. 

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As we head to the new year, here is a round up from some fellow bloggers on contracts, cobra, wage disputes, patents, and oral agreements for limited liability companies. 

The California Business Lawyer Blog offers a very detailed post about contractual relationships  between manufacturers and suppliers.  The focus is on well drafted agreements eliminating the fears and concerns of both sides.

A lot of talk about the AT&T suits in different states for $1 billion dollars for unpaid overtime.  The suits picked up a lot of steam with a recent employee favorable ruling from the federal court in Connecticut allowing the claim to proceed as a class action. Rush on Business covers some tips for businesses to avoid these suits.

Just in time for Christmas, President Obama has extended the COBRA subsidy.  Dan Schwartz's Connecticut Employment Law Blog covers this topic in detail for employers.

Twin Cities Business Litigation Blog has an interesting post on concerns you might have as a shareholder of corporation that fails to follow corporate formalities.  Gavin Craig gives examples of how a shareholder could be exposed to liability.

Anyone who frequently litigates matters involving limited liability companies will tell you that there is not much case law out there in Connecticut.  It is still a developing area of the common law.  Delaware law is often a good option for law in this area because these issues are more frequently litigated by volume in Delaware.  A good resource is the Delaware Corporate and Commercial Litigation Blog.   Two recent posts concerning oral partnerships and LLC agreements are just an example.

PatentlyO hits on some themes for 2010, including an expected increase in patent prosecution and litigation.    They also have a cool picture of heat miser, a childhood classic.

Jeff Mehalic, author of the West Virginia Business Litigation Blog, writes a detailed follow up post to his coverage of the Connecticut dispute between Charter Oak Lending and CTX Mortgage.  Jeff also comments about a post I wrote on the same case.  The case remains significant as it is an example of what can go wrong when a business grows too fast and no written agreements are in place with employees.

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