Last week the First Circuit Court of Appeals reversed a trial court’s dismissal of a contract suit against a foreign corporation that had no physical presence in the United States.  The contract between the plaintiff, an investment bank based in Massachusetts, and the defendant, a Canadian corporation that produces nutritional supplements, provided that the plaintiff would serve as the defendant’s exclusive financial advisor for the sale of defendant’s corporate assets.  The parties never had an in-person meeting and all of their communications took place through mail, telephone, and electronic means.  Moreover, no representative of the defendant was ever present in the U.S. in connection with the contractual relationship.  When the alleged breach of contract took place – the defendant was sold without the involvement of the plaintiff and no transaction fee was paid – the plaintiff initially filed suit in Massachusetts state court, and the defendant later removed the action to federal court.  The application of Massachusetts’ long-arm statute to provide grounds for jurisdiction over the case was analyzed by the district court, and later de novo by the First Circuit, for its constitutionality under the Due Process clause.

The questions at issue were whether the claim arose from the defendant’s activities in Massachusetts, whether the defendant’s contacts with Massachusetts “represent a purposeful availment of the privilege of conducting activities in the forum state, thereby invoking the benefits and protections of that state’s laws and making the defendant’s involuntary presence before the state’s courts foreseeable,” and whether the exercise of jurisdiction is reasonable.  It is this last prong – reasonableness – that the First Circuit focused on after holding that the other two prongs were clearly met given the specific and intentional nature of the defendant’s contractual relationship with the Massachusetts-based plaintiff.  (It should be noted, though, that the district court – despite a great deal of evidence and case-law to the contrary, including the defendant’s decision not to even contest the first prong at the district court level – found all three prongs to be lacking.)

The First Circuit considered five factors in determining the reasonableness of finding jurisdiction in this case, as have been outline by the Supreme Court: 1) the burden on the defendant, 2) the forum state’s interest in adjudicating the case, 3) the plaintiff’s interest in litigating in the forum state, 4) whether the forum provides the most effect resolution of the controversy, and 5) overriding social policy.  The First Circuit held that the fact that the defendant corporation was based in a foreign nation, and not just in another state, was not in and of itself a critical factor; though, the court did consider how – if at all – this fact might impact the burden on the defendant of litigating in the U.S.  In this instance, the Court found the effect on the defendant’s burden to be nominal because the area of Canada where the defendant is located is not a great distance from Massachusetts geographically, there were no language or cultural barriers, and there were no other international policies implicated since Canadian law can be applied to the substantive issues even in the Massachusetts forum.  In this way, the First Circuit held that this case is very different from the seminal Supreme Court case Asahi Metal Industry Co. v. Superior Court, 480 U.S. 102 (1987), where jurisdiction over a Japanese company was denied given the unreasonableness of forcing the defendant to travel to California and litigate in English a dispute that arose primarily from transactions that took place in Asia, where most of the witnesses and evidence were located.

Finding that the burden on the defendant was low, coupled with its finding that Massachusetts has a strong interest in adjudicating a claim that arises entirely from business conducted with a resident bank, the First Circuit held that jurisdiction over the defendant was reasonable and not in violation of Due Process.  The precedential case-law on personal jurisdiction over foreign defendants has generated as many questions as it has answered, and courts continually grapple with the reach of the authority of U.S. forums.  While in many ways this case was more clear-cut than others since it involved an intimate transaction between two parties with limited evidence overseas, perhaps rendering the outcome not surprising, what is interesting about this opinion is that it did not grant much weight, if any, to the defendant’s alien status as a de facto policy consideration.  This suggests that while there are clearly limits on the scope of U.S. jurisdiction, there are also limits on the significance of a defense based on nationality alone.  Defendants seeking to avoid the jurisdiction of a U.S. forum need to focus primarily on the facts of the case that render jurisdiction unreasonable or otherwise unconstitutional, and not rest on the fact of foreign citizenship alone, particularly where – as here – other factors weigh in favor of extending jurisdiction.  In addition, foreign defendants seeking to avoid American courts should also consider choice of venue – in addition to choice of law – provisions in their contracts with U.S. entities as a means to bolster their arguments that they should not be subject to personal jurisdiction in the United States.

On November 10, 2014, the Supreme Court granted the motion of the Solicitor General for leave to participate in oral argument as amicus curiae in Kellogg Brown & Root Services, Inc., et al. v. United States ex rel. Carter, No. 12-1497, a case we have been watching.  To review, Kellogg Brown is the first case specifically addressing the False Claims Act (“FCA”) that the Court has accepted since its 2011 decision in Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S. Ct. 1885 (2011).  The case asks the Court to decide two questions:  first, whether the Wartime Suspension Limitations Act (“WSLA”) applies to toll the statute of limitations for a civil fraud claim when there is no formal declaration of war; and second, whether the FCA’s “first-to-file bar” allows relators to file duplicative claims so long as no prior claim is pending at the time of filing.

Characterizing the FCA as the “primary tool by which the federal government combats fraud” and the WSLA as being enacted to “improve the government’s ability to recover for frauds during wartime,” the United States in its amicus brief expressed its “substantial interest in the proper interpretation of both statutes.”  With respect to the first question before the Court, the United States argued that the WSLA suspends the statute of limitations during times of war for “any offense,” which is not limited to crimes but rather includes civil violations of the FCA.  The United States partially relied on legislative history in crafting its argument and explained that the fact that Congress removed language from the WSLA that applied the WSLA to offenses “now indictable under any existing statutes” demonstrates that Congress did not mean to limit the WSLA to criminal offenses.   The United States’ brief further asserted that fraud during wartime threatens the public fisc whether prosecuted civilly or criminally.

With respect to the second question before the Supreme Court, the United States pointed to the statutory language prohibiting a person other than the government to intervene or bring a related action based on facts underlying a “pending action.”  The inclusion of the word “pending,” argued the United States, shows that the “first-to-file bar” was not meant to apply to prevent related actions from being brought once the initial action is dismissed.  The United States further stated that the “first-to-file bar” is meant to ensure that a relator in a pending action does not have his recovery diluted and that defendants do not face two or more simultaneous suits based on the same allegations; neither purposes are served by utilizing the bar to prevent a relator from filing a claim when the prior claim has been dismissed.  To read the “first-to-file bar” in the manner urged by Petitioners would “treat[] the first-to-file bar as a draconian version of the public-disclosure bar[, which prevents parasitic suits based on public information], forever barring an FCA suit based on the same facts (even one brought by an original source) once the first suit has been dismissed.”

The Solicitor General’s participation in oral arguments before the Supreme Court has been shown to understandably influence the Court’s opinions in the past, leaving one to wonder if the same will be true in this pivotal case.

We’d like to call your attention to a recent development in expert issues.  In September, SQM North America Corporation (SQMNA) petitioned SCOTUS to reverse the Ninth Circuit’s decision in SQM N. Am. Corp. v. City of Pomona, 750 F.3d 1036 (9th Cir. 2014), in which the appeals court held that “only a faulty methodology or theory, as opposed to imperfect execution of laboratory techniques, is a valid basis to exclude expert testimony.”  SQMNA’s petition, which has been bolstered by four amicus briefs, raises issues significant to corporate defendants in expert-heavy disputes.  Regardless of whether SCOTUS decides to hear the case, the petition highlights the circuit split over the interpretation of FRE 702 and Daubert, and the gatekeeping role of trial courts in screening unreliable expert testimony.

Let’s start with a brief discussion of the underlying facts and case history.  The City of Pomona, California sued SQMNA in 2011 seeking to hold it liable for costs associated with investigating and remediating groundwater contamination allegedly caused by perchlorate.  The suit hinged on a “stable isotope analysis” performed by Pomona’s causation expert purporting to show that the perchlorate in its groundwater had the same distinctive isotopic “fingerprint” as the perchlorate imported into southern California by SQMNA between 1927 and the 1950s.  After a pre-trial Daubert hearing, the district court conducted an FRE 702 analysis and excluded the expert’s opinions as unreliable because, inter alia,  they were subject to future methodological revisions and were not yet certified by EPA, the procedures used by the expert had not been tested and were not subject to retesting, and the reference database relied on by the expert was too small.  The Ninth Circuit, however, reversed the trial court, and in particular rejected SQMNA’s argument that the causation expert’s opinions were unreliable because the expert did not adhere to testing protocols set forth in a guidance manual that the expert claimed to rely on.  See SQM N. Am. Corp. v. City of Pomona, 750 F.3d 1036 (9th Cir. 2014).

The Ninth Circuit dismissed SQMNA’s argument as “relat[ing] to adherence to protocol, which typically is an issue for the jury,” and declined SQMNA’s entreaty to follow the Third Circuit’s holding in In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717 (3d. Cir. 1994), that “any step that renders the analysis unreliable under the Daubert factors renders the expert’s testimony inadmissible, *** whether the step completely changes a reliable methodology or merely misstates that methodology.”  Id. at 745 (emphasis added).  In rejecting the Third Circuit approach, the Ninth Circuit stated that “only a faulty methodology or theory, as opposed to imperfect execution of laboratory techniques, is a valid basis to exclude expert testimony.”  The Ninth Circuit further distinguished its rule by describing it as a “more measured approach to an expert’s adherence with the spirit of Daubert and the Federal Rules of Evidence.”  The Ninth Circuit’s position is all the more remarkable given that the Second, Sixth and Tenth Circuits have embraced the approach enunciated in Paoli R.R. Yard PCB Litigation.

So what does it all mean?  The Ninth Circuit’s ruling in SQMNA creates an undeniable circuit split over FRE 702, Daubert, and the gatekeeping role of a trial court.  While the Ninth Circuit asserts that its “faulty methodology” rule takes a more measured approach to expert issues, in reality the rule creates a rigid distinction between the “methodology” an expert uses and the “conclusions” that the expert draws, urging courts to consider the two factors separately.  This distinction conflicts with the plain language of FRE 702, which on its face requires a trial court to consider the methodology and conclusions when evaluating proffered expert testimony.  The net effect of the Ninth Circuit’s “more measured” rule is that the critical gatekeeping role of the trial court — namely, ruling on challenges to an expert’s application of his or her methods, and challenges to the factual underpinnings of the expert’s testimony — is delegated to the jury.  In practical terms, this means that experts face a lower level of scrutiny in the Ninth Circuit under FRE 702 and Daubert when compared to the more exacting “any step” rule followed by the Second, Third, Sixth and Tenth Circuits.

Finally, to be fair, the Ninth Circuit is not alone in construing FRE 702 and Daubert as calling for the “liberal admission” of expert testimony.  In Johnson v. Mead Johnson & Co., 754 F.3d 557 (8th Cir. 2014) and Manpower, Inc. v. Ins. Co. of Penn., 732 F.3d 796 (7th Cir. 2013), the Eighth and Seventh Circuits reversed trial court decisions excluding expert testimony, reasoning that challenges to the experts’ assumptions and extrapolations were matters for cross-examination, not issues that reached questions of reliability under FRE 702 and Daubert.  These disparate rulings demonstrate that there is not a uniform rule when it comes to analyzing expert issues in the federal courts of the United States.   While SCOTUS may step in and resolve this conflict, if it does not, corporate defendants need to know that the interpretation and application of FRE 702 and Daubert can, and does, vary significantly from circuit to circuit.

Ascertainability Challenge Remains a Viable Weapon in Defendants’ Arsenals

November 11, 2014

The district court for the Northern District of Illinois recently denied plaintiff’s motion for class certification in Langendorf v. Skinnygirl Cocktails (2014 WL 5487670), calling attention to the ascertainability requirement that plaintiffs must meet in order to certify a class. My colleague Isabella Lacayo has previously written on ascertainability, explaining that while it is not a requirement that’s explicitly discussed in […]

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UPDATED! – Outcome of Fracking Fight Could Have Texas-Size Implications

November 4, 2014

As reported in The Wall Street Journal, there is a fight brewing today in Denton, Texas — a fight over fracking.  Yes, voters in this City of about 123,000 people at the north end of the Dallas–Fort Worth metroplex — which sits on top of the Barnett Shale — are heading to the polls today to vote […]

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