TEXAS SUPREME COURT TAKES THE SPOLIATION DECISION AWAY FROM THE JURY AND PROVIDES A WAY TO “GUT” THE SPOLIATION REMEDY IN OTHER COURTS AROUND THE COUNTRY

The loss or destruction of evidence―from physical evidence to e-mails and surveillance videos―often results in claims of spoliation of evidence against defendants. Based upon an allegation of spoliation, courts routinely allow the jury to decide whether a defendant engaged in the spoliation of relevant evidence by instructing the jury it can draw an adverse or negative inference against the defendant because it may have lost or destroyed “missing” evidence in the case.

An adverse inference jury instruction can be fatal to a defendant’s case on the merits of litigation against it. Juries presented with an allegation of spoliation by a defendant often focus on the defendant’s alleged wrongful conduct in failing to preserve evidence―not the merits of the defendant’s case. Smart plaintiff’s counsel with weak cases on liability “play the spoliation card” to distract, prejudice and inflame the jury against a defendant who allegedly spoliated evidence.

The Texas Supreme Court in Brookshire Bros. Ltd. v. Aldridge, et al., 438 S.W. 3d 9 (Tex. 2014), restricted the availability of the “adverse inference” instruction for spoliation of evidence by requiring the judge, not jury, to decide in a pre-trial hearing whether spoliation occurred and to impose the adverse jury instruction as a discovery sanction by the court. Under this procedure, the jury hears no evidence of whether spoliation, in fact, occurred, and focuses on the merits case without being prejudiced by conduct involving the alleged spoliation of evidence.

The Brookshire case involved a slip-and-fall injury in the defendant’s grocery store. Plaintiff’s fall was recorded on video surveillance. The store manager preserved video of one minute before and seven minutes after plaintiff’s fall, but plaintiff claimed two hours of video before and after the fall was relevant and should have been preserved. Plaintiff argued that the defendant grocery store, therefore, spoliated this “missing” evidence, and asked the jury to draw an adverse inference against defendant for spoliation of the “missing” surveillance tape.

The trial court gave the “adverse inference” instruction on spoliation of evidence, and let the jury decide if spoliation had, in fact, occurred. The jury verdict was in favor of plaintiff, and affirmed on appeal. The Texas Supreme Court reversed and remanded.

In its decision, the Court explained that the purpose of the adverse inference instruction is “. . . to compensate for the absence of the evidence that a party had a duty to preserve, [and] its very purpose is to ‘nudge’ or ‘tilt’ the jury toward a finding adverse to the alleged spoliator . . . . Thus, an unfortunate consequence of submitting a spoliation instruction is that it ‘often ends litigation’ because ‘it is too difficult a hurdle for the spoliator to overcome.”

The Texas Supreme Court then fashioned a remedy to “neutralize” or “gut” the harm to the alleged spoliator with the jury deciding if spoliation occurred. The Court held:

• Spoliation of evidence is a pre-trial discovery abuse that deprives a party of relevant evidence at trial;
• The trial court, not jury, must make a pre-trial fact determination in an evidentiary hearing if a party spoliated evidence, and treat spoliation as a discovery sanction;
• The party claiming spoliation has the burden of proving that the spoliating party had a duty to preserve certain evidence and breached the duty to preserve that evidence;
• To prove intentional spoliation, there must be proof that the spoliating party was in bad faith (similar to the burden of proof in a federal “death penalty” discovery sanction) and had a subjective intent to conceal or destroy the evidence; and
• In rare circumstances, a court may allow an adverse inference instruction for negligent spoliation by a party if the non-spoliating party is irreparably deprived of any meaningful ability to present a claim or defense by the absence of the “missing”

With this ruling, the Texas Supreme Court has helped level the playing field in spoliation disputes by eliminating the potential jury prejudice from the jury deciding at trial whether spoliation occurred and distracting them from the merits of a case. Other states should follow the lead of the Texas Supreme Court in the Brookshire decision based upon the road map laid out by the court using general principles of discovery and evidence currently available in federal and state courts throughout the country.

DO YOU THINK YOU HAVE NO LIABILITY FOR SOMEONE WHO IS YOUR “INDEPENDENT CONTRACTOR”? THINK AGAIN

A U.S. Ninth Circuit decision, along with administrative positions taken by the United States Department of Labor and the National Labor Relations Board, may change the way you look at whether a person is your “employee” or “independent contractor.” Determination of whether a person is a company’s employee can have a dramatic impact on the company’s liability in employment disputes, franchisor-franchisee relations, and vicarious liability in tort.

In Alexander v. FedEx Ground Package System, Inc., 765 F.3d 981 (9th Cir. 2014), the U.S. Ninth Circuit Court of Appeals reversed a summary judgment in favor of defendant FedEx Ground Package System, Inc. (“FedEx”) in a class action by FedEx delivery drivers. The Court held thousands of FedEx delivery drivers were, as a matter of law, employees of FedEx―not its independent contractors. These drivers owned their own trucks, were paid per delivery, had to buy their own fuel and maintain their trucks, and had contracts with FedEx that defined their relationship as an independent contractor to FedEx, using standard contract language that provided:

          No officer, agent, or employee of FedEx . . . shall have the authority to direct the [plaintiff-          driver] as to the manner and means employed [by driver]. . . . The manner and means
of [driver] reaching [his] results are within the discretion of the [driver].

Based upon the provisions of the contract, and policy and procedures of FedEx, the district court ruled that FedEx drivers were independent contractors based primarily upon the “entrepreneurial opportunities” FedEx afforded to the FedEx drivers, and the “. . . drivers’ class-wide ability to own and operate distinct businesses, own multiple routes and profit accordingly.”

The Ninth Circuit reached the opposite conclusion based on the same undisputed facts and held that FedEx was the employer of all of its delivery drivers in the litigation.

In its ruling, the FedEx court applied the California test for independent contractor status, a test similar to that in most states. The test looks to the right of the principal, FedEx, to control the manner and means of persons in accomplishing the result desired, along with several other factors. FedEx, 765 F.3d at 988. FedEx and the class of delivery drivers agreed that the standard contract between them and FedEx’s policies and procedures were undisputed facts governing the details of the delivery drivers’ performance of their jobs. The Ninth Circuit placed little weight on the standard contract provision about FedEx lacking the right to control the drivers and found FedEx had a “great deal of control over the manner in which the drivers do their job . . . ,” based on the following policies and procedures:

• FedEx controlled the details of the appearance of the delivery drivers and that of each delivery truck;
• FedEx controlled the time its drivers could work, and how and when the packages were delivered; and
• FedEx had absolute discretion whether to grant or withhold its consent for the FedEx delivery drivers to do any work other than for FedEx.

Id. at 989-90. After comparing the FedEx drivers to “sharecroppers,” the Court rejected the argument by FedEx that its delivery drivers were independent contractors because they had “entrepreneurial opportunities” to operate their own delivery services (as the D.C. Circuit had ruled in favor of FedEx, in FedEx Home Delivery v. National Labor Relations Board, 563 F.3d 492 (D.C. Cir. 2009)).

One can write-off the recent FedEx decision to the liberal tendencies of the U.S. Ninth Circuit. But, the reality is that the majority of federal court judges on nine of thirteen U.S. Courts of Appeal have been appointed by Democratic administrations. See “Building Legacy, Obama Reshapes Appellate Bench,” New York Times, September 13, 2014. These more liberal federal court judges may follow the analysis in the FedEx decision to treat “independent contractors” as employees under the law of your state.

To compound matters, the Obama Administration and the National Labor Relations Board have challenged franchisors, like McDonalds, on “independent contractor” status, and argued that a franchisor has “joint responsibility” with the franchisee for the franchisor’s employees if the “industrial realities” are that the franchisor and franchisee are essentially the same company. See “Who’s the Boss,” The Economist, September 6, 2014, p. 33.

Companies relying on “independent contractor” status in labor, franchisor-franchisee, and litigation matters would be wise to re-examine their contracts and policies and procedures involved in these relationships in light of the FedEx decision and the “new wave” of administrative decisions on who is an “employee.” Changes in contracts and policies and procedures may be needed to avoid your “independent contractors” becoming “employees” for whom you are liable.

COURTS REFINE THE LIMITS OF ATTORNEY-CLIENT PRIVILEGE FOR COMMUNICATIONS WITH IN-HOUSE COUNSEL

Many clients believe that if an attorney is part of an internal communication that communication becomes privileged. Recent court decisions dispel this notion and remind us that for the attorney-client privilege to apply to communications with an in-house attorney, she must do more than receive and review a communication―the attorney must perform legal services with respect to the communication for the privilege to apply. In Re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014); ExxonMobil Corp. v. Hill, 751 F.3d 379 (5th Cir. 2014); but see Hamdan v. Indiana Univ. Health North, LLC, No. 1:13-cv-00195-WTL-MJD, 2014 WL 2881551 (S.D. Ind. June 24, 2014).

The District of Columbia Circuit decision in Brown & Root involved an internal investigation conducted by in-house counsel for Kellogg, Brown & Root (“Brown & Root”) to determine if his client had violated the federal False Claims Act. Plaintiff, a whistleblower, filed a False Claims Act complaint against Brown & Root, asserting that Brown & Root had defrauded the U.S. Government by inflating costs and accepting kickbacks while administering military contracts in war-time Iraq. The whistleblower sought documents related to Brown & Root’s internal investigation of alleged misconduct that was the subject of his lawsuit.

Brown & Root argued that the internal investigation had been conducted for the purpose of obtaining legal advice and that communications incidental to its internal investigation were protected by the attorney-client privilege. The whistleblower argued that the documents were simple business records of an internal investigation required by law and unprivileged.

After reviewing the disputed documents in camera, the district court ruled that the internal investigation of Brown & Root was not protected by the attorney-client privilege. In arriving at this conclusion, the district court gave a very narrow interpretation to the “primary purpose” doctrine used to protect attorney-client communications of in-house counsel from disclosure. The district court said that for the attorney-client privilege to apply to a communication involving in-house counsel, the “primary purpose” of the communication must be solely to obtain or provide legal advice. If there was any other purpose behind the communication, the attorney-client privilege did not apply. Because the “primary purpose” of Brown & Root’s internal investigation was to comply with its obligations to report improper conduct to the Department of Defense, the district court held that the “primary purpose” of the internal investigation was to comply with federal contractor regulations, not to secure legal advice.

In reversing the district court, the D.C. Circuit ruled that so long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies to communications with in-house counsel, even if there were other purposes for the communication and even if the investigation was mandated by government regulation rather than simply an exercise of company discretion. The court rejected the district court’s application of the ‘primary purpose” test that required the sole purpose of a communication be to obtain or provide legal advice. The appellate court explained the proper application of the “primary purpose” test to protect in-house counsel’s attorney-client communications:

It is thus not correct for a court to presume that a communication can have only one primary purpose. It is likewise not correct for a court to try to find the one primary purpose in cases where a given communication plainly has multiple purposes. Rather, it is clear, more precise and more predictable to articulate the test as follows: was obtaining or providing legal advice (a) the primary purpose of the communication, meaning one of the significant purposes of the communication?

Applying its “primary purpose” test, the D.C. Circuit concluded that there was no serious dispute that the internal investigation of Brown & Root by its in-house counsel was protected by the attorney-client privilege.

The U.S. Fifth Circuit recently ruled that a memorandum prepared by Exxon Mobil’s in-house counsel in contract negotiations was subject to the attorney-client privilege and vacated a contrary ruling by the district court. Exxon Mobil Corp v. Hill, 751 F.3d 379 (5th Cir. 2014). The memo was prepared during negotiations between Exxon Mobil and a contractor that cleaned oilfield tubulars for it. These tubulars contained “naturally occurring radioactive material” or NORM, and the cleaning contractor claimed it had a new device that would clean NORM from the tubulars.

During contract negotiations, Exxon Mobil had an industrial hygienist conduct tests to see if the cleaning device worked to clean NORM as the contractor represented and wrote a confidential report of the test results for the NORM-cleaning device. Exxon Mobil’s in-house counsel reviewed the test results during the contract negotiations and recommended a partial disclosure of the test results done by Exxon Mobil, a disclaimer of any warranty as to the data’s accuracy, and a statement that the data was created solely for Exxon Mobil’s internal use.

In-house counsel’s advice to his client was recorded in a memorandum that became known as the “Stine Memo.” It was inadvertently produced in litigation involving NORM exposures in which Exxon Mobil was sued. Exxon Mobil sought an appellate ruling that the Stine Memo was a privileged attorney-client communication.

Instead of applying the “primary purpose” test, the Fifth Circuit looked to the context in which the Stine Memo was prepared and held it was privileged:

The document was prepared during contract negotiations in which both sides were assisted by legal counsel. The negotiations, according to the record, involved a number of legal issues, including indemnity for down-stream tort claims, storage and handling of nuclear residue, licensure, trade secrets and other issues. . . . All of this is to say that the context in which the Stine memo was produced―even before we say anything of the memorandum itself―strongly suggests that ExxonMobil was approaching its in-house counsel for just the sort of lawyerly thing one would expect of an in-house lawyer: advice on transactional matters.

Id. at 382.

The court concluded that the obvious reason Exxon Mobil sought its lawyer’s advice was to deal with any potential legal liability, disclosure of data, and to hedge against any liability from warranties, and, therefore, the attorney-client privilege applied.

NOTE: In Hamdan v. Indiana Univ. Health North, LLC, No. 1:13-cv-00195-WTL-MJD, 2014 WL 2881551 (S.D. Ind. June 24, 2014), a magistrate judge recently held that communications that were simply copied to an in-house counsel were not privileged because:

• There was no request for legal advice in any of the e-mails;
• The e-mails merely communicated facts about the business matter on which in-house counsel was copied; and
• There was no indication the e-mails were created for the purpose of seeking advice from attorneys.

Based upon application of the seminal Supreme Court decision, Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981), the court held simply communicating the underlying facts to an attorney by copying the attorney on an e-mail does not transform the e-mail into a privileged communication as no legal advice was sought by the e-mails nor were they related to the purpose of seeking legal advice.

THE “NO PAY, NO PLAY” STATUTORY LIMITS WERE INCREASED BY THE LOUISIANA LEGISLATURE EFFECTIVE AUGUST 1, 2014

About 1 of 4 drivers in Louisiana is uninsured. To enforce the compulsory auto insurance law, Louisiana has a “no pay, no play” statute that bars the owner or operator of an uninsured motor vehicle from recovering the first $15,000 of bodily injury damage and the first $25,000 of property damage in a tort claim. Defendants facing automobile liability claims in Louisiana should always confirm that an owner-operator plaintiff has valid, minimum statutory liability insurance in effect for the automobile he owned or operated that was involved in an accident. The owner-operator plaintiff without mandatory auto insurance takes nothing until he has incurred $15,000 in bodily injury and $25,000 in property damages losses.

We knew this was coming. The Federal False Claims Act (FCA) 31 U.S.C. §§ 3729-3733 has long been discussed as a way for the Justice Department and qui tam plaintiffs to enforce the Medicare Secondary Payer (MSP) 42 U.S.C 1395y(b), et seq. statutes. What we didn’t expect was that the first big FCA suits would be brought against the payers and not plaintiff’s counsel.

Well, we were wrong about that.

In two recently unsealed matters, United States of America, ex rel J. Michael Hayes, v. Allstate Insurance Company, et al, 1:12-cv-01015, USDC WD NY and United States of America, ex rel Dr. Kent Takemoto, 1:11-cv-00613, USDC WD NY, the plaintiffs allege that virtually every major general casualty insurer in the United States engaged in “Fraudulent Avoidance of Remitting Monies Owed to Medicare Under the Medicare Secondary Payer Act” all in purported violation of the FCA (The United States declined to intervene in either case).

The gist of the Hayes complaint is the allegation that the defendants/payers avoided reimbursing Medicare’s conditional payments by paying settlements to the plaintiffs and entering “general releases that shifted the responsibility to the claimants to fully reimburse Medicare, thus completely avoiding their statutory obligations under the Medicare Secondary Payer Act.” That is, by funding settlements and expecting the plaintiffs’ to reimburse Medicare as required by the MSP the defendants somehow intentionally defrauded Medicare.

That same allegation appears in the Takemoto complaint, with a diabolical twist: Relator Takemoto was an MSP/Sec. 111 compliance consultant who systematically offered his services to each of the defendants. He named by his company “COMPsultation”. His complaint alleges that “COMPsultation offered each of the defendants a presentation advising them on the current structure of the MSP program, the potential impact of the MMSEA Sec.111 reporting requirements, and their potential liability under the FCA.” The complaint also alleges that the defendants declined to retain COMPsultation and presumes that, for that reason alone, the defendants did not have MSP compliance programs and, therefore, violated the FCA. In essence, Takemoto leaps to the conclusion that any payer company which did not retain COMPsultation as its MSP compliance consultants was not MSP or Sec. 111 complaint and was actively defrauding Medicare. (Many of us who provide MSP compliance consulting to payers or who work with the very many well trained MSP specialists within the insurance industry know Takemoto is wrong).

The defendants will file motions to dismiss these claims and will, likely, be successful. But, the message is clear: The FCA is a real threat in the MSP world. Failure to comply with the MSP and Sec. 111—and the failure to carefully document compliance—could result in FCA exposure.

Payers can now add potential MSP/FCA claims by qui tam plaintiffs to the risk of exposure to Medicare and the Department of Justice. To be sure, Medicare will enforce the MSP and will be assessing fines for Sec. 111 violations in the near future. So, we continue to counsel our payer clients to do the following simple things:

1. Have a documented MSP/Sec. 111 compliance program in place and train all of your claims professionals and counsel (inside and outside);
2. Ensure that EVERY claim is checked for MSP exposure. The Medicare beneficiary status of every plaintiff should always be checked at the start and end of every case and Sec. 111 reports must be timely made;
3. Make sure that repayment of Medicare’s Final Demand is an enforceable term of every settlement, documented in the release, and that no funds are distributed to any plaintiffs by their counsel until Medicare is reimbursed and proof of claim satisfaction is provided.
4. Document how the claimant will protect Medicare in the future in the release.

Frilot LLC provides MSP/Sec. 111 compliance training, protocol development and settlement consulting to payers and defense interests. Our clients include Fortune 500 companies, major insurers and national healthcare systems. Please call Bruce A. Cranner, Esq. to discuss your MSP compliance needs.

When a person knowingly puts his hand in a flame or steps in a hole he dug, isn’t the hazard posed by the flame or hole “open and obvious” to the claimant?  According to the Louisiana Supreme Court, a jury always needs to decide what an “open and obvious” hazard is. See Broussard v. State ex rel. Office of State Buildings, 2012-1238 (La. 4/5/13); 113 So. 3d 175, (the issue of whether a hazard is open and obvious is a question of fact for the jury). In moderate to conservative venues in Louisiana, state judges previously granted summary judgments in cases where they found a hazard was “open and obvious.”  There was a fairly well-developed body of law that defined what “open and obvious” conditions were that generally absolved defendants of liability to warn a plaintiff about such a hazard. In the future, summary judgments on the “open and obvious” hazard defense will be very difficult, if not impossible, to obtain in state courts in Louisiana as the Louisiana Supreme Court in Broussard has now defined such a hazard as an issue of fact for resolution by the jury.  As a result, defendants may be paying to settle “open and obvious” hazard cases they used to be dismissed from on summary judgment.

For years, insurers and corporate defendants have claimed they have been victimized by plaintiffs who stipulate that their damages in a BI suit do not exceed $50,000.  With such a stipulation, the defendants are barred from a trial by jury and exposed to judge trials in hostile forums with unsympathetic judges that are reportedly prone to finding liability when proof is very weak and awarding excessive damages―close to $50,000―in these cases.

To address this problem, defense groups proposed tort reform legislation in the 2014 session of the Louisiana Legislature to guarantee a defendant the right to trial by jury in all matters, regardless of the amount of controversy.  On April 15, 2014, the Louisiana House of Representatives narrowly rejected the bill by a vote of 51-49, with five members abstaining.

If the bill had passed, defendants who found themselves in “small claims” court would have had the ability to force the plaintiff to try his case to a jury that may provide a more impartial fact finder on liability and damages in “small” cases―under $50,000.  Therefore, these “small cases” may still add up to a lot of exposure for insurers and corporate defendants in Louisiana who are hit with multiple judgments in these cases.  Unsuspecting defendants should be wary of plaintiffs who do not ask for a jury trial in Louisiana—whether it is for damages for $50,000 or higher.  It is always best to ask for a jury as a defendant in Louisiana state courts and waive a jury trial later if appropriate.

The Louisiana legislature will not revisit the $50,000 jury trial limit until 2016, and it appears there is a good chance it will pass then.

An Orleans Parish jury recently awarded plaintiffs $85,000,000 in a multiple death and multiple burn case and absolved plaintiffs of any fault in driving a disabled car at 5 m.p.h. in traffic on I-10.

Near midnight on Christmas Eve, a woman and her daughter had a flat tire on I-10 near Laplace, Louisiana.  They drove into a state weigh station and called AAA and some friends to help her with her flat tire.  The driver of the car canceled AAA road service (even though they were 5 minutes away), and had two friends with 2 children meet her in the weigh station to try to fix her flat tire.  The friends did not have the right equipment or spare tire to fix the flat.  The group decided to drive the disabled car on the paved, unobstructed shoulder of the interstate to the nearest exit about a mile away.

While driving on the shoulder, plaintiffs decided to drive in the right lane of traffic on I-10.  The defendant 18-wheeler travelling at the speed limit came upon plaintiffs’ 5-m.p.h. “convoy,” could not stop and slammed into the rear of the two plaintiff vehicles.

The defendants argued that the plaintiff drivers were at least 50% at fault in causing the collision by driving at 5 m.p.h. in the right lane of traffic, even though the shoulder was paved and unobstructed.  Based on Louisiana’s comparative fault principles, such an assessment of fault would have resulted in a 50% reduction of any recovery by the plaintiffs.  The jury found zero comparative fault of the plaintiff drivers.

Damage awards for two severely burned plaintiffs were extraordinary:

• A severely burned adult was awarded $37,000,000;
• A child who was severely burned was awarded $44,000,000.

In Louisiana, a damage award may generally not be overturned on appeal, unless the amount of the awards “shock the conscience” , and the damage awards in the case may well meet the high standard of proof.