ADR News from Jim Reiman
This eMail newsletter is a monthly piece that I send to friends and colleagues. In it I identify, link, and briefly describe three to five articles, court decisions, or news items that I’ve come across that I hope readers will find of interest concerning the subjects that occupy my time and thoughts.
Previously, I’ve focused on just two principal topics: i) legal and business issues concerning alternative dispute resolution, and in particular mediation and arbitration, and ii) corporate governance, with a focus on executive compensation. This month I’ve added a third topic: e-Documents. I’ve become increasingly intrigued by and interested in the rapidly growing importance of electronic documents in today’s business and legal worlds. This interest covers both cyber-security and risk, and also document production and discovery in dispute resolution. Thus, I’ll try to include an article on the subject in each month’s Newsletter.
This month’s articles are a bit of a hodge-podge. They include mediation in estate planning, what board directors are thinking about most in 2015 (no surprises here – its’ cyber-security and risk), technology assisted review (TAR) of documents in litigation, the conclusion of the derivative shareholder action against the Lululemon board regarding the board’s alleged breach of fiduciary duty relating to Lululemon’s product quality issues and claimed insider trading by the Board’s then chairman, and another installment of my unintended series of interesting cases concerning sex (this one addressing the question of consent).
Alternative Dispute Resolution
- Mediation clauses in estate planning documents
- Use of predictive coding and technology assisted review (TAR) of documents in e-discovery
- Spencer Stuart’s Corporate Board Member’s 12th Annual Director Survey – 55% of the directors surveyed don’t believe it’s reasonable to expect that a public company board can ever fully get its arms around all the different aspects of risk
- Lululemon’s board cleared in derivative shareholder action in alleged breach of fiduciary duty case
April’s “Interesting Case of the Month”
- A 78 year-old Iowa widower is being tried for third-degree sexual abuse for having sex with his wife prior to her death. The deceased was suffering from dementia and Alzheimer’s, and the claim is that she was “no longer mentally capable of consenting.”
Warm regards –
Articles / Alternative Dispute Resolution
Increasingly, courts are referring probate disputes to mediation, and mediation or arbitration clauses are becoming more and more prevalent in estate plan documents. Lela Love and Stewart Sterk wrote a compelling article in 2007 regarding the then nascent trend. It still bears reading – both by ADR practitioners and those who are considering reviewing or updating their estate plans.
Briefly, the piece sets out the issues and advantages / disadvantages of including mediation or other alternative dispute resolution provisions in estate plan documents. As set forth in an abstract of the article published by Washington & Lee University School of Law,
“When a will mandates mediation, the will provides a dispute resolution mechanism designed to preserve family harmony, conserve estate assets, and avoid airing the family’s “dirty laundry,” objectives common to many testators [persons who have made a will or given a legacy]. Mediation clauses in wills are no panacea. They are of little value to testators who exalt control over estate assets above all other concerns, and they are unlikely to bind disappointed family members whose primary claim is “against the will” rather than “under the will.” Nevertheless, compared to other alternatives frequently employed by estates lawyers (including “no contest” clauses), mediation clauses present significant potential for reducing estates litigation, with its attendant financial and emotional costs.
Articles / Corporate Governance
Annually, the NYSE’s Corporate Board Member and the search firm Spencer Stuart conduct a survey of leading corporations’ directors to learn “what they think” and the issues that concern them the most. Not surprisingly, the big issue this year is risk and cyber-security. As Charles Rossotti, nonexecutive chairman at AES Corp., is put it: “At the board level, risks are a focus of every meeting and, in fact, every committee. In the last few years, focus on risk has been elevated to adopt a more strategic focus that looks across the whole portfolio for themes and correlations.”
No surprises there. What was surprising (at least to this reader), however, was that 55% of directors who answered the survey said that they cannot “fully get their arms around all aspects of corporate risk.”
Other topics in the forefront of directors’ minds: shareholder engagement and strategy. Interestingly, though, only 35% of directors responded that social media has been on their agenda.
The full study and article may be found at https://www.nyse.com/WDT2015 and https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/what%20directors%20think%20201503mar2015.pdf%20target
Lululemon’s Derivative Shareholder Suit
The Second Circuit Court of Appeals (New York) ruled in early April that the derivative shareholder suit against Lululemon Athletica’s board be dismissed. The case is of interest because of the facts which underlie the dispute, and because it affirms definitively and without equivocation the hurdles plaintiffs must overcome before they may bring a derivative shareholder action against a company’s board.
Those in the yoga world or who read the financial and business papers will likely recall the brouhaha back in 2013 concerning the apparel company Lululemon Athletica. Briefly, Lululemon recalled one of their most popular line of yoga pants because they became “sheer” when worn and the wearer perspired. The Company’s founder and then Chairman, Dennis “Chip” Wilson, initially brushed off the customer complaints and then in one of the great PR gaffes of all time said that some people “just shouldn’t” wear skin tight yoga pants. Shortly thereafter the company’s CEO resigned, however three days before her resignation was publicly announced but after the Board was informed of her resignation Board Chairman Wilson, allegedly with the knowledge and passive consent of the rest of the Board and in particular the Board’s audit committee, sold shares whose proceeds were approximately $50 million. Moreover, the day after the company’s CEO resignation was announced (3 days after Wilson’s $50 million share sale), the company’s shares dropped 18% and continued to drop over the next 3 days by a total of 22%.
While plaintiffs alleged multiple wrong-doing by the Board and the individual directors, their complaint asserted two main claims. First, plaintiffs argued that Lululemon’s board breached their fiduciary duty for “failure to maintain internal [product quality] controls” and “willfully ignored the obvious and pervasive problems with Lululemon’s internal control practices and procedures. . .” which resulted in the recall and related poor company earnings. Second, plaintiffs argued that Wilson’s share sales constituted “insider” trading, and that the board failed to prevent insider trading by Wilson. All claims were dismissed by the lower court and the Court of Appeals affirmed in early April.
Both the lower and Appellate Court’s rulings turned on technical legal rules related to the specificity of the allegations required for a derivative shareholder suit of the type pursued by plaintiffs. Directors may take comfort in knowing that those rules require specific, detailed allegations against each director named in the complaint. Moreover, the rules’ requirements are “stringent,” and intended to be “a difficult feat.” Bottom line: plaintiffs have high hurdles to overcome before they may successfully plead a derivative shareholders’ complaint against a Delaware corporation. Moreover, once pled, plaintiffs must then overcome the business judgment rule and Delaware and Federal law giving deference to board’s reasonable exercise of their judgment. For those interested in reading the opinions, they may be viewed at: US District Court’s opinion: http://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2013cv05629/416168/53/; Second Circuit Court of Appeals opinion: http://www.ca2.uscourts.gov/decisions/isysquery/99843192-7c70-4037-b462-fc07fe24b09c/3/doc/14-1631_so.pdf
Articles / e-Documents
Rio Tinto PLC v Vales S.A – The Current State of the Law of TAR and ESI
In March, the US Magistrate in the case Rio Tinto PLC v Vales S.A. issued an Opinion and Order providing an excellent review of the case law and current “state of the law” of technology assisted review (TAR) of electronically stored information (ESI). Indeed, the parties in the case had agreed to the terms of the order to be entered by the Court, but the judge nonetheless issued the Opinion “because of the interest within the ediscovery community about TAR cases and protocols.”
The Opinion reviews the case law since the seminal 2012 decision in the Da Silva Moore case, which was one of the first to recognize that “computer assisted review [TAR] is an acceptable was to search for ESI [electronically stored information].” and notes that “it is now black letter law that where the producing party wants to utilize TAR for document review, courts will permit it.” That said, the Opinion also notes that “where the requesting party has sought to force the producing party to use TAR, the courts have refused.”
The Opinion also discusses the issue of transparency and attaches to the Opinion the actual order entered, which practitioners may find to be a helpful template when drafting their own orders or e-discovery agreements.
For those interested in the subject, the Opinion is a must read. It may be found at:
Articles / Interesting “Case of the Month”
The Trial of Henry Rayhons
The accused, 78 year-old Henry Rayhons, is charged with third-degree sexual abuse (a felony). The facts: he is alleged to have had sex with his wife (now deceased). His wife suffered dementia and Alzheimer’s and was in a nursing home at the time the sexual act is alleged to have occurred. The State’s claim: his wife lacked the mental capacity to consent, hence the alleged sex was non-consensual and therefore criminal. They further assert that the nursing home staff told Rayhons that they believed his wife would not be able to consent to sex and that Rayhons nonetheless had sex with his wife after being so told.
Most sexual consent cases concern teenagers or those under the influence of alcohol or other substances. This one is unusual if not unique, and is being watched closely by the elder rights groups. At the time of this writing, the case is still proceeding. For those interested in learning how it concludes, check the articles at: