Court’s Misreading Of Data Leads To Successful Motion For Reconsideration

In In re Gentiva Securities Litigation, 10 CV 5064 (E.D.N.Y. Dec. 10, 2013), two individual defendants and the defendant corporation moved for reconsideration of Judge Arthur D. Spatt’s order denying their motion to dismiss federal securities claims.  The case is a class action alleging that Gentiva, a health care provider, artificially inflated its stock price through a scheme that involved ordering unnecessary medical care for clients, and then billing the federal government for these illegitimate expenses.  At issue was whether the plaintiff class had properly pleaded scienter.

One of the individuals, Potapchuck, asserted that the claims against him did not meet Section 10(b)’s scienter requirement because he sold his shares pursuant to a “10b5-1 plan,” under which shares are divested at predetermined times.  Potapchuck pointed out that he sold only 12% of his shares, if the 10b5-1 trades were disregarded.  That fact made the difference on reconsideration.  After commenting that “Defendants should have specifically quantified the number of 10b5-1 [trades] in their prior motions to dismiss, rather than relying on the Court to comb through the Defendants’ financial records,” the Court found that the relatively small amounts at issue—just 12% of Potapchuck’s shares, resulting in $300,000 in net profits—did not support an inference of scienter.  The Court reached a different result regarding the other individual defendant, Malone, who sold 99% of his shares during the class period for approximately $2.14 million (and none pursuant to 10b5-1 plans).  Those trades were sufficient to plead scienter against Malone.

The fact that only one corporate insider engaged in allegedly suspicious sales caused the Court to change its mind about the Section 10(b) claim against Gentiva as well, which was dismissed on the ground that an inference of its fraudulent intent could not be shown.  Thus, the Court reversed course on reconsideration and dismissed two of the three defendants, while upholding claims against the third.

Affordable Care Act Violates Non-Profits’ Religious Beliefs

In The Roman Catholic Archdiocese of New York. v. Sebelius, 12 CV 2542 (E.D.N.Y. Dec. 13, 2013), Judge Brian M. Cogan held that the Patient Protection and Affordable Care Act (the “ACA”) violated certain plaintiffs’ core religious beliefs under the Religious Freedom Restoration Act (“RFRA”).   The ACA requires that group health insurance plans cover certain preventative services, including contraception, sterilization and related counseling (the “Mandate”).

Certain religious employers, primarily churches such as plaintiffs the Archdioceses of New York and the Diocese of Rockville Center (the “Diocesan Plaintiffs”), are exempt from the Mandate.  By recent regulation, religious non-profits, including the four other plaintiffs (the “non-exempt Plaintiffs”) who are affiliated with the Roman Catholic Church, were not required to pay for a health plan that covered contraceptive services; instead, an eligible entity must provide its issuer or third party administrator (“TPA”) with a self-certification form stating its objection to the Mandate on religious grounds.  The TPA is then required to provide contraceptive services free of charge to plan participants.  Plaintiffs claimed that, notwithstanding the exemptions that applied to them, the Mandate required them to violate their religious beliefs which prohibited them from providing, facilitating or sponsoring the provision of contraception, sterilization or abortion-inducing services.   Plaintiffs moved for summary judgment on all of their claims under RFRA, the Administrative Procedures Act, and the Establishment, Free Exercise, and Free Speech Clauses of the First Amendment.  Defendants cross-moved for summary judgment.

Since the Diocesan Plaintiffs were exempt from the Mandate, the Court found that they would not have suffered a substantial burden on their religion under the RFRA; and since these claims failed under the more lenient standard of the RFRA, they could not succeed on their remaining constitutional claims.  Accordingly, the Court granted defendants summary judgment with respect to the Diocesan Plaintiffs’ claims.  As described below, the non-exempt plaintiffs were entitled to summary judgment and a permanent injunction against enforcement of the Mandate as to them.  The Court found the remaining constitutional claims moot.

In a bizarre twist, late in the briefing of these motions after almost 18 months of litigation, the government realized that all of the plaintiffs’ health plans were exempt under ERISA, which provided the Department of Labor with authority to enforce the Mandate.  The government belatedly argued that since it had no authority to require the plaintiffs’ TPAs to provide contraceptive coverage, the plaintiffs lacked standing because their TPAs could not be forced to provide coverage for any objectionable services.  While noting that it is unclear how citizens like plaintiffs could know what the ACA requires if the government itself was unsure, the Court found that even if the government had finally come to an accurate understanding of how to apply the ACA and the Mandate, plaintiffs’ alleged an injury-in-fact was sufficient for Article III standing.

Plaintiffs suffered an injury because the Mandate made them complicit in a plan to provide coverage to which they had a religious objection, regardless of whether it provided contraceptive coverage.  The government argued that since all plaintiffs have to do is to complete a form stating their religious objections to contraceptive coverage, completing the form was a de minimis act and placed no burden on their religion.  However, in deciding whether a law imposes a “substantial burden”, the RFRA explicitly states (and the Supreme Court’s Free Exercise cases equally state) that a court may not consider the centrality of a particular religious practice to an adherent’s faith.  Here, the ACA required the non-exempt plaintiffs to complete and submit a self-certification, which authorized a third-party to provide the contraceptive coverage.  According to these plaintiffs, the self-certification was a compelling affirmation of a repugnant belief.  Thus, the Court rejected what it called the government’s “it’s just a form” argument and found that since the monetary fines for non-compliance were substantial the Mandate compelled the non-Diocesan plaintiffs to perform acts that were contrary to their religion.

Because the Court found that the non-exempt plaintiffs had demonstrated a substantial burden on their religious beliefs, the government then had to demonstrate that the Mandate was the least restrictive means of furthering a compelling governmental interest.  The Court first noted that every Circuit court presented with a similar argument in connection with RFRA challenges had held that the Mandate failed the RFRA’s test of strict scrutiny.

The Court rejected the government’s argument that it had a compelling interest in uniform enforcement of the Mandate that would be undermined by granting plaintiffs the exemption they sought.  First, the Mandate was not uniform because tens of millions or people qualified for one of various exemptions.  Second, the government’s belated realization that the ACA did not require plaintiffs’ TPAs to provide contraceptive coverage undermined any claim that imposing the Mandate served a compelling governmental interest, because in this case, the Mandate would force plaintiffs to fill out a form that violated their religious beliefs even though it ultimately had no effect whatsoever.  The Court concluded: “A law that is totally ineffective cannot serve a compelling interest.”  Finally the Court noted that the Mandate was far from the least restrictive means by which the Government could achieve the goals of the ACA and the Mandate to improve public health and equalize women’s access to healthcare.  Among many other options, the government could avoid requiring plaintiffs’ participation by providing the contraceptive services or insurance coverage directly to plaintiffs’ employees.

Deadline For Making Claim For Attorneys’ Fees In FRCP 54 Does Not Apply To Claims For Appellate Fees

In Long Island Head Start Child Development Services, Inc., v. Economic Opportunity Commission, 00 CV 7394 (E.D.N.Y. Dec. 5, 2013), Judge Arthur Spatt held that a claim for appellate attorneys’ fees under ERISA’s fee shifting provisions is not governed by the 14-day deadline set forth in Federal Rule of Civil Procedure 54(d)(2)(B).  Under that Rule, a motion for an award of attorneys’ fees must be brought “no later than 14 days after the entry of judgment.”  The defendant had appealed an adverse judgment to the Second Circuit and lost.  The Circuit issued its mandate on June 10, 2013.  Two and a half months later, on August 29, 2013, the plaintiffs moved under ERISA to recover their appellate attorneys’ fees.

The defendants argued that the motion was out of time under Rule 54(d)(2)(B), and should be denied, because it was made more than 14 days after “the entry of judgment.”  The court examined whether the word “judgment” used in the Rule includes an appellate judgment.  The court noted that Rule 54(a) defines judgment as a “decree and any order from which an appeal lies,” and that, as a Northern District of Texas court had ruled, an appellate judgment could qualify because “a judgment from the Court of Appeals can be appealed to the United States Supreme Court.”  Slip op. at 5.  The court ultimately rejected that view, however, based on an earlier Eastern District case that decided the same question under the fee-shifting provisions of Title VII, and held that since Title VII contained no deadline, and since neither the Federal Rules of Appellate Procedure nor the Second Circuit’s local rules contained a deadline, the fee motion had only to be made within a reasonable period.

Reasoning that ERISA also had no deadline for making a motion for appellate fees, the Court ruled that motions under ERISA’s fee-shifting provisions likewise had only to be made “within a reasonable of time after the circuit’s entry of final judgment.”  Slip op. at 8.  Other fee shifting statutes are unlikely to be far behind.  (As for the two and a half months it took plaintiffs to make their motion, the Court held the time was not unreasonable because it was only two days after the defendants’ right to petition for U.S. Supreme Court review had lapsed.)

Default Judgment Not Vacated Where Failure To Respond Was Willful

In S.E.C. v. MedLink International, Inc., 12 CV 5325 (E.D.N.Y. Nov. 25, 2013), Judge Leonard D. Wexler denied an individual defendant’s motion to vacate a default judgment after he and his counsel apparently played a cat-and-mouse game of engaging with the SEC, only to disappear and fail to respond to communications.  The underlying case involved a year-long investigation by the SEC regarding MedLink’s allegedly false and misleading 10-K:  the 10-K supposedly included the electronic signature of MedLink’s auditor notwithstanding the fact that the auditor had not completed its audit.

Counsel for Defendant Aurelio Vuono originally appeared on his behalf and interacted with the SEC to discuss settlement issues, but failed to respond to the SEC’s subsequent inquiries.  Counsel then reappeared, indicating he would accept service of a complaint on Vuono’s behalf.  Vuono never answered the complaint, however, and the SEC moved for default.  Vuono himself then surfaced and told the SEC he would defend himself pro se.  He then failed to respond to the motion seeking default judgment, which was ultimately entered.

Faced with these facts, the Court denied Vuono’s motion.  First, Wexler held that Vuono had been served with the complaint based on his counsel’s representations to the SEC that he would accept service, rejecting his argument that he had not been served.  Second, Vuono’s failure to respond to the complaint under the circumstances was willful.  Last, Vuono had not established a meritorious defense because his motion “misstate[d] applicable law and raise[d] irrelevant points.”

Court Imposes Spoliation Sanctions Despite Absence Of Showing By Moving Party That Relevant Evidence Was Altered Or Destroyed

A few weeks ago we wrote about a decision by Chief Magistrate Judge Gold, in Rodgers v. Rose Party Functions Corp., 10 CV 4780 (E.D.N.Y. Nov. 12, 2013), concluding that the jury could draw an adverse inference as a sanction for the defendants’ non-bad faith spoliation of a key piece of evidence in a personal injury case, a videotape of the plaintiff’s slip and fall that gave rise to the lawsuit (see our prior blog post here).  Now comes a November 30 order from Judge Arthur Spatt, in Dwyer v. General Motors LLC, No. 11 CV 3057 (E.D.N.Y. Nov. 30, 2013), imposing sanctions for spoliation of evidence, also in a personal injury case involving physical evidence, in a ruling that creates peril for diligent plaintiffs’ lawyers who seek to verify the merit of their client’s claims before filing suit.

Plaintiff, an experienced “automotive technician” employed by a General Motors dealership, was injured when a shock absorber exploded while he was working on a customer’s car.  After the accident, he turned over the offending shock absorber to his lawyers.  The lawyers took photos of the part and gave it to their retained experts, who also took photos of it.  Both sets of photos were later provided to GM in discovery.  To verify whether the defect suspected by plaintiff was present in the shock absorber, the experts removed the outer casing of the part by drilling a hole and making four cuts in it, so as to be able to examine the shock absorber’s interior components, which the court described as “apparently the crucial evidence in this case.”  Slip op. 9.  After the experts had examined the part’s interior, plaintiff filed the action, asserting various products liability theories.

GM moved for summary judgment dismissing the complaint as a sanction for spoliation of evidence, which it claimed occurred when the plaintiff’s experts cut open the exterior casing of the shock absorber to examine the interior components that allegedly caused plaintiff’s injuries.  The court denied summary judgment as too drastic a remedy, since cutting open the casing was “at most” negligent” and “resulted in limited prejudice” to GM.  Slip op. 8.  In fact, the court expressly found that GM did not show that the exterior casing (i) was relevant evidence, (ii) would have been favorable to its case, or (iii) how its removal “destroyed or significantly altered” the interior portion of the shock absorber.  GM’s expert did not say in his report that the absence of the outer casing impaired his ability to reach a conclusion about the cause of the accident.  Despite the absence of a showing on these critical elements, the sanctions imposed by the court would (i) preclude the plaintiff’s experts from testifying as to the condition of the shock absorber before it was cut open; (ii) inform the jury of the plaintiff’s conduct regarding the exterior casing; and (iii) permit the jury to draw an adverse inference from plaintiff’s removal of the casing “if it concludes such an inference is warranted based on the evidence presented.”  Slip op. at 12.

The sanctions may be only minimally biting, but why grant a remedy at all in these circumstances?  What should plaintiff and his lawyers have done differently?  If they had not opened the casing to examine whether a defect existed, one can readily imagine the defendant later arguing lack of a good faith basis to bring the suit if the eventual examination of the shock absorber’s interior did not reveal a defect.  Litigation tactics aside, plaintiff’s lawyers had a duty to investigate the claim before bringing it, and the client and the judicial system benefit from them doing so.  Should counsel have given the part to GM to examine before filing suit so that GM could not later complain of spoliation, thereby giving the defendant control of the timing of the filing and a pre-suit, pre-discovery preview of the plaintiff’s evidence?  The ruling leaves counsel with less than optimal choices.

County Should Have Returned Firearms Despite Gap In State Law

In Dudek v. Nassau County Sheriff’s Department, 12 CV 1193 (E.D.N.Y. Nov. 19, 2013), Judge Pamela Chen was called upon to resolve what one state court had called a “legislative oversight”:  family court judges have statutory authority to confiscate firearms from individuals involved in domestic incidents, but do not have explicit statutory authority to order their return.  As a result, when plaintiff, who had been involved in a domestic incident resulting in the confiscation of his firearms, asked the Nassau County Sheriff to return his weapons after his wife withdrew the petition, the sheriff refused to do so without a court order.  Plaintiff filed suit seeking declaratory, injunctive, and monetary relief.

Faced with defendants’ motion to dismiss, the Court ruled that the apparent legislative oversight did not divest the sheriff’s department, or the New York Supreme Court, of authority to return the firearms.  While permitting claims to go forward against Nassau County and particular officers who were personally involved with plaintiff, it dismissed claims against certain subordinate officers whose personal involvement was not apparent from the record and against the sheriff’s department, which was merely an arm of the County.

The non-dismissed officers were deemed to have qualified immunity, however, because their conduct did not violate “clearly established statutory or constitutional rights of which a reasonable person would have known.”  The Court held it was “incorrect, but not unreasonable” for the officers to have believed that they could not return the weapons absent a court order.  This ruling immunized the officers from monetary claims.  In sum, Judge Chen declined to dismiss declaratory and injunctive claims against the individual officers and allowed discovery on the Monell claim against the County, which was subject to claims for monetary damages.

Claim For Derivative Citizenship Through Father Denied Due To Parents’ Informal Separation

In Moreno v. Holder, No. 13 CV 1285, (E.D.N.Y. Nov. 6, 2013), Judge William Kuntz denied a pro se petitioner’s claim of nationality based on derivative citizenship.  The petitioner was born in Panama to Panamanian parents who later became U.S. citizens and ultimately settled in New York.  The government unsuccessfully initiated removal proceedings against the Petitioner in 2004 following convictions for attempted petit larceny and attempted robbery in the second degree.  The government again initiated removal proceedings against Petitioner in 2010 following his conviction of criminal possession of crack cocaine.

Petitioner defended the latter removal proceeding on the ground that he derived citizenship as a child through his father.  Since Petitioner had not reached age eighteen at the time the Child Citizenship Act of 2000 was enacted, the Court applied the pre-existing immigration statute, 8 U.S.C. § 1432.  Under that statute, the only avenue by which Petitioner could claim derivative citizenship was through “the naturalization of the parent having legal custody of the child when there has been a legal separation of the parents.”

The problem for Petitioner was that his parents had not legally separated, either under New York or Panamanian law, each of which required formal documentation.  As a result, the testimony of Petitioner’s father to the effect that they had separated “between three and nine times over the course of their marriage, sometimes for as long as one-and-a-half or two years” was held insufficient.  Absent a legal separation, there could be no derivative citizenship through Petitioner’s father.