ADR News from Jim Reiman
Summer has somehow flown by and the weather is getting cooler. With the passing of Labor Day has come a seemingly endless stream of decisions, reports, cases and other matters potentially of interest to the readers of this newsletter. So too have come greater demands on my time, hence the late arrival of September’s issue of this newsletter.
For those who are new to this newsletter, each month I compile a collection of three or four 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. I focus on three principal topics: i) corporate governance; ii) legal and business issues concerning alternative dispute resolution, primarily mediation and arbitration, and iii) e-Documents, or more specifically, corporate governance policies regarding their management and security, and litigation issues regarding their discovery.
This Month’s Articles
For corporate governance, this month’s articles address proxy advisory firms and the economic consequences of institutional investors, as the article puts it, “outsourcing research and voting decisions in public company elections” to these firms. Also included is a description of a new Delaware corporate law prohibiting fee-shifting bylaws and validating exclusive forum selection by-law provisions, and a September Department of Justice memorandum which puts emphasis on identifying culpable individuals in corporate internal investigations. In the ADR arena, this month’s articles address the rights of non-signatories to an arbitration agreement, and a description of the new Atlanta Center for International Arbitration and Mediation. This month’s issue also includes a March, 2015 case addressing the reasonableness standard in e-discovery and an Interesting Case Of The Month, which finds that a doctor has a duty to advise a non-patient of a likely health risk, and the doctor’s liability for his failure to provide medical advice to a person he never saw nor treated.
More specifically, this month’s articles and cases are:
- Proxy Firms: Outsourcing Research And Voting Decisions. The Rock Center for Corporate Governance at Stanford University and Stanford’s Graduate School of Business jointly published a study which concludes: “These results suggest that the outsourcing of voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.”
- Delaware Corporate Law Amendments: In August, the Delaware corporation law was amended in 2 significant ways. First, Delaware now prohibits fee-shifting provisions related to “internal corporate claims” (for example, breaches of fiduciary duties). Second, the Law now expressly permits charter and bylaw provisions that require any or all “internal corporate claims” to be brought solely and exclusively in Delaware (State or Federal) courts.
- Corporate Investigations, Department of Justice Guidance: The Department of Justice, by Deputy Attorney General Sally Yates, this month issued guidance to all Department attorneys regarding “individual accountability for corporate wrongdoing.” The memo articulates several changes to Department of Justice policy, particularly with regard to the ability to protect privileged information.
Alternative Dispute Resolution
- Compelling Arbitration: An analysis of two recent cases, one compelling non-signatories to an arbitration agreement to arbitrate, and one wherein non-signatories to an arbitration agreement compel parties to arbitrate per their agreement.
- Atlanta Arbitration Center: Information about the new Atlanta Arbitration Center and its facilities.
- Malone v. Kantner Ingredients, Inc., a March, 2015 Nebraska court decision discussing and applying the “reasonableness” standard in e-discovery.
Interesting Case of the Month – Cosby Privacy Issues
Polaski v. Whitson, a June, 2015 Pennsylvania case which finds that a physician had a duty to advise a person who was not the physician’s patient of a medical condition, and then held that the physician could be found liable for the death of a person he never treated nor saw.
I hope you find the below discussion and “linked” articles of interest.
Warm regards –
Articles / Corporate Governance
Stanford University’s David Larcker and Allan L. McCall together with IESE Business School’s Gaizka Ormazabal examine, as they put it, “the economic consequences of institutional investor voting [caused by] the outsourcing of voting to cost-effective third parties such as proxy advisory firms.” The article is of note because of their premise that institutional investors have “outsourced” their voting decisions, and their conclusion that as a result “boards of directors are induced to make choices that decrease shareholder value.”
Beginning with their initial conclusion and the study’s underlying assumption: that institutional investors have “outsourced” their voting decision-making function, the authors focus on the fact that “institutional investors have a fiduciary obligation to cast votes on virtually all shareholder ballots” and the practical difficulties of fulfilling that obligation. They next note the SEC issued interpretation “that the use of proxy voting policies developed by an independent third party (i.e., proxy advisors) would be deemed free of a conflict of interest and would meet mutual funds’ proxy voting obligations” and reach, in the judgment of this author, the very reasonable conclusion that “the least costly way to satisfy an investors’ regulatory responsibility to cast shareholder votes [is to] outsource voting to Institutional Shareholder Services (ISS) or Glass Lewis (GL).”
The authors next focus on the economic consequences of this practice. Their conclusions: “We find three primary results: proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes; a substantial number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms in an effort to avoid a negative voting recommendation; and the stock market reaction to these compensation program changes is statistically negative. These results suggest that the outsourcing of voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.”
One note by this author: I just returned from the National Association of Corporate Directors annual conference in DC during which governance managers/directors of several large funds spoke formally or shared their thoughts in private during “hallway” conversations. Virtually all said that they used their “say on pay” vote as a means to “tweak” the Board and let them know that they’d like a conversation about a matter of concern, not necessarily because they objected to the Board’s compensation scheme. Thus, the data reviewed by researchers such as the authors of the article described is compromised. Nonetheless, the article is a worthy read and its conclusions merit one’s thought.
The article may be viewed at : Full Article & Download
Note: there is a link to an abstract at the bottom of the download page.
Effective on August 1, 2015, the Delaware General Corporation Law (DGCL) was amended in three significant ways.
First, fee-shifting provisions in the charters and bylaws of Delaware corporations related to “internal corporate claims” are now expressly prohibited. Internal corporate claims are defined by the new statute to be claims such as those for breaches of fiduciary duties. That said, it should be noted that, per an analysis of the new laws by Jeff Dodd and James Maloney, “the amendments do not invalidate fee-shifting provisions in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced (for example, stock purchase agreements).”
Second, the amendments prohibit clauses designating only courts outside of Delaware as the exclusive forum for internal corporate claims.
Lastly, the new amendments provide statutory validation of charter and bylaw provisions that require all “internal corporate claims” to be brought solely and exclusively in Delaware state and federal courts. Per Dodd and Maloney,
“Despite being legislatively validated, the ultimate enforceability of forum selection provisions in charters and bylaws of Delaware corporations will rely on the ‘internal affairs’ doctrine, which generally requires courts to respect the laws of the state of incorporation as to a company’s internal affairs (for example, governance matters). However, the internal affairs doctrine is not immutable. Although most courts outside of Delaware considering forum selection bylaws adopted by Delaware corporations designating Delaware as the exclusive forum have enforced such bylaws, the risk remains that courts outside of Delaware will not enforce the forum selection provisions.
The statute is intended to protect Delaware’s strong market position as the state of choice for incorporation of companies, and its courts as the forum of choice for the adjudication of disputes relating to corporate matters. As noted in this newsletter in May, earlier this year Delaware adopted its “Rapid Arbitration Act,” a statute which streamlines the process for initiating arbitrations, sets tight deadlines for completion, automatically confirms awards without court intervention, and endeavors to ensure quick completion of the process by imposing financial penalties on arbitrators if an award is not issued within 120 days of commencement. When one views the new Corporation Law amendments together with the recent Rapid Arbitration Act (discussed in the May issue of this Newsletter), it is clear that Delaware is working hard to preserve its well deserved reputation as the leader in corporate governance and corporate dispute resolution.
An article published in the American Bar Association’s Business Law Today by Jeff Dodd and James Maloney describing the new statutory provisions and their impact.
Additionally, a synopsis and description of the amendments may be found in Sidley Austin’s excellent monthly newsletter Sidley Perspectives
The full text of the new statutory provisions (statute)
On September 17th, the Department of Justice, by Deputy Attorney General Sally Yates, issued guidance to all Department attorneys with the subject: “Individual Accountability for Corporate Wrongdoing.” The memo reports the recommendations of a working group convened by the Department to examine “how the Department approaches corporate investigations, and identifies areas in which it can amend its policies and practices in order to most effectively pursue the individuals responsible for corporate wrongs.”
The memo sets forth “six key steps to strengthen [the Department’s] pursuit of individual corporate wrongdoing.” Those steps are:
- “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.”
- “Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
- “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.”
- “Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.”
- “Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.”
- “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.”
An excellent analysis of the memo and its impact on corporate policy and new or on-going internal investigations may be found in an article/update published by Sidley Austin.
Articles / Alternative Dispute Resolution
All those with any understanding of arbitration know well that arbitration is a creature of contract, and that both the right/obligation to resolve a dispute by arbitration and the scope of the arbitration itself is governed by the agreement of the parties. It would follow, therefore, that persons not a party to an arbitration agreement can neither be compelled to arbitrate nor compel others to arbitrate. Not so!
Two recent cases shatter the conclusion that persons who are not parties to an arbitration agreement cannot be compelled to arbitrate, and cannot compel others to arbitrate. The first case is McKenna Long & Aldridge v. Ironshore Specialty Insurance, 1:14-cv-06633, No. 39 (S.D.N.Y. Jan. 12, 2015), and the second is Moss v. BMO Harris Bank, 24 F. Supp. 3rd 281 (E.D. N.Y. 2014). Both cases are discussed at length in an excellent two-part article by Abraham J. Gafni in the The Legal Intelligencer.
While practitioners (the author included) may be initially surprised or even shocked by the conclusions of these cases, in fact neither is an “outlier.” Both cases make great sense, and both follow a long line of similarly decided cases. That said, these cases are fact specific and make clear that their holdings and principles require very specific fact scenarios.
The first case, McKenna, holds that under certain circumstances a party who is not a signatory to an arbitration agreement may nonetheless be compelled to arbitrate. McKenna, upon prior Second Circuit precedent, describes five such circumstances:
- Incorporation by Reference: When the party who has not signed the arbitration agreement has incorporated the arbitration agreement “by reference” into a second contract
- Assumption: Where there is strong evidence that the person not a party to the arbitration agreement “is assuming the obligation to arbitrate.” (Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1105 (2d Cir.))
- Agency: Where there is evidence that the party who did not sign the arbitration agreement “clearly and explicitly intended to be subject to the [agreement].”
- Veil piercing/alter ego: A non-signatory “may be bound to arbitrate where it exercised complete control over a signatory and employed that domination to injure another signatory to the agreement.”
- Estoppel: A non-signatory to an arbitration agreement may be estopped to object to arbitration when s/he “received a direct benefit from the transaction.”
Consistent with the line of cases holding that a non-signatory to an arbitration agreement may be compelled to arbitrate, there exists a similar line of cases holding that a non-signatory to an arbitration agreement may compel the signatories to arbitrate. A 2014 case out of the Eastern District of New York addresses this scenario.
The case, Moss v. BMO Harris Bank, 24 F. Supp. 3rd 281(E.D. N.Y. 2014), concerns a class action suit arising out of payday loans which bore very high interest rates (interest rates that were illegal in some states). The loan agreements contained arbitration clauses. The bank defendants whom plaintiffs sought to be compelled to arbitrate were not signatories to the loan agreements. However, “the agreements reflect[ed defendants’] involvement in the loans in two ways.” First, each loan agreement contained “a provision describing the function that defendants ultimately performed” and “the arbitration provisions in each agreement state that plaintiffs must arbitrate not only with the lenders, but also with the lenders’ “agents” and “servicers.”
The court, held that “under principles of estoppel, a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review of the relationship among the parties, the contracts they signed . . . , and the issues that had arisen among them discloses that the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.” Based upon that holding and the specific facts of its case, the court concluded that a non-signatory to an arbitration agreement could compel arbitration by the signatory.
The McKenna case
The Moss case
A two part article discussing these cases by Abraham J. Gafni in the The Legal Intelligencer may be found at
Article Part I
Article Part II
The complete survey, and its analysis, may be found here.
A brand new center for domestic and international arbitration and mediation has opened in Atlanta this month. The center, named “The Atlanta Center for International Arbitration and Mediation,” was established in 2014 as an affiliate of the Georgia State University College of Law. Housed in the brand new, $82.5 million GSU College of Law building, the Center is the result of a collaboration between the GSU College of Law and the Atlanta International Arbitration Society (“AtlAS”). AtlAS is made up of Atlanta lawyers working with various groups interested in seeing Atlanta “realize its potential as a venue for international dispute resolution,” including the Metropolitan Atlanta Chamber of Commerce, the City of Atlanta, the Georgia Department of Economic Development, the World Affairs Council of Atlanta, and representatives of the law faculties of Emory Law School and the University of Georgia Law School.
The Center boasts a world class hearing facility, and Atlanta prides itself as a city offering all of the professional support and conveniences of a leading international business center along with great food, hotels and culture.
For more information about the Center and why one should consider Atlanta and the Center as a venue to resolve one’s disputes, give Shelby Grubbs, the Center’s executor director, a call. He’s one of the warmest and knowledgeable ADR guys around. His contact information, and more information about the Center, may be found at http://atlciam.org/contact/
Articles / e-Documents
It is axiomatic that the discovery standard is generally “reasonableness.” Just what that simple word means, however, is the subject of intense debate in most cases. A Nebraska court addressed the issue in March of this year in the case Malone v. Kantner Ingredients, Inc., 2015 WL 1470334 (D. Neb. Mar. 31, 2015), in the context of an e-discovery challenge.
In Malone, plaintiffs sought an order directing defendants to produce certain documents which plaintiffs claimed were intentionally withheld, and also to pay for their forensic review of the documents they sought. The court denied plaintiff’s motion.
The court noted that discrepancies did indeed exist between the data and documents initially provided by defendants and the totality of documents and data available. However, the court found no evidence of malfeasance, holding that “At most, the plaintiffs offered evidence of mistakes made during defense counsel’s . . . manual review of the electronic files.” The court then held “The fact that defense counsel may have made mistakes does not warrant imposing sanctions –particularly where the plaintiffs now have full access to the server imaging.” Significantly, and the reason the decision has received the attention it has, the court concluded: “The discovery standard is, after all, reasonableness, not perfection.”
The full decision may be viewed here.
This month’s Interesting Case concerns a physician who was found to have a duty to advise a person who was not a patient that such non-patient may have a life-threatening medical condition, and then found the physician could be held liable for the non-patient’s death caused by such condition. The case was heard in Lehigh, PA and arose from the death of Joseph Polaski in 2010 from a condition known as HCM (Hypertrophic Cardiomyopathy).
Joseph’s father, Raymond Polaski, was a patient of the defendant physician. In 2008, Defendant ordered a 12-lead electrocardiogram as part of a comprehensive physical of Raymond. The electrocardiogram revealed results which should have caused the defendant to order more tests. No additional tests were conducted, however, and apparently the defendant failed to recommend to Raymond that he undergo additional testing. Had such testing been done, Raymond claims the tests would have revealed that Raymond suffered from HCM. Raymond further contends that since HCM is a genetic condition, Raymond’s diagnosis would have resulted in his son, Joseph, also being tested for HCM. No HCM testing of either Raymond or Joseph occurred, and Joseph’s undiagnosed and untreated HCM resulted in Joseph’s death. The case is unusual and (to this author) of interest because the malpractice claim asserts liability for injury suffered not by the patient, but by a third person who was not a patient of the defendant physician.
The case addressed only the issue of whether the defendant physician could be held liable for the death of a non-patient, or in legal-speak, whether the physician owed Joseph (a person the physician never treated) a duty under Pennsylvania law because Joseph was a “reasonably foreseeable beneficiary” of the appropriate treatment of Raymond (the physician’s patient). For the purposes of deciding the legal question, the court assumed that the physician was negligent and should have ordered more testing of Raymond which would have revealed Raymond’s and eventually Joseph’s HCM condition.
The court reviewed Pennsylvania’s case law and statutes and found that while “courts clearly do not expect physicians and health care providers to act for the protection of the public at large,” multiple circumstances exist wherein a physician owes a duty to persons who are not the physician’s patients. The duty arises when there is a risk to non-patients, a classic example being the Pennsylvania statutory requirement that a “therapist warn her patient’s intended victim of the patient’s stated intent to kill the victim.” The court found that 5 factors must be reviewed and weighed in order to find a duty to non-patients, and after weighing those factors found that in the case of Joseph Polaski, the duty existed and the physician could be held liable for his patient’s son’s death.
The case, Polaski v. Whitson, PICS Case No. 15-1353 (C.P. Lehigh June 30, 2015), may be found here.