CLE Program: Commercial Litigation Academy 2014

On June 5, 2014, Schlam Stone & Dolan partner Jeffrey Eilender will co-chair a CLE program about discovery in the Commercial Division. Among the panelists will be Commercial Division Justice Jeffrey Oing. This event is part of a two-day program hosted by the New York State Bar Association to focus on federal and state-court commercial litigation.

Sentencing Issues

In Halloway v. United States, No. 01-CV-1017 (E.D.N.Y. May 14, 2014), Judge John Gleeson pressured the government to agree to reopen the sentencing of a defendant who had rejected a plea bargain of 130-147 months for stealing three cars at gunpoint and after losing at trial was sentenced to 57 years in prison. The disparity in the terms offered by the plea bargain and the post-conviction sentencing resulted from a practice known as “stacking,” whereby the defendant received the consecutive mandatory minimum penalties for all three violations of 18 U.S.C. § 924(c) for gun possession. As noted in the opinion, the Sentencing Commission has asked Congress to amend Section 924(c) to eliminate the practice of stacking, so that increased mandatory minimums apply only to prior convictions as opposed to multiple violations of the same statute in the same indictment.

Judge Gleeson noted that this almost 20-year-old case illustrates some of the problems that have “plagued” the federal criminal justice system: “(1) the excessive severity of sentences, (2) racial disparity in sentencing, and (3) prosecutors’ use of ultraharsh mandatory minimum provisions to annihilate a defendant who dare to go to trial.” Slip op. 1. Judge Gleeson cited statistical studies finding that black men like defendant have long been disproportionately subjected to stacking of Section 924(c) counts. Turning to the defendant in this case, Judge Gleeson noted that during his 19-year imprisonment in Florida (which has kept him from seeing his five children and eight grandchildren whom he’s never seen), defendant has tried to better himself by completing numerous wellness and educational programs.

A year earlier, Judge Gleeson had requested the United States Attorney to consider exercising discretion and agree to an order vacating two or more of defendant’s Section 924(c) convictions so that he could be resentenced. The government declined, but suggested that defendant might be eligible for a presidential pardon. In response, Judge Gleeson noted that DOJ policy regarding clemency applications disqualifies inmates who have committed crimes of violence, which made it unlikely that defendant could receive executive clemency.

In conclusion, Judge Gleeson renewed his request to the United States Attorney to reconsider its decision not to agree to vacate two or more of defendant’s convictions. Should the government again refuse to agree to reopen the sentencing, Judge Gleeson indicated that he may take matters into his own hands by addressing defendant’s pending application to reopen his collateral challenge to his conviction as the “extraordinary” penalty in this case “may warrant further briefing on the constitutional issues raised by such a use of prosecutorial power.” Slip op. 5. Judge Gleeson also noted that although he had earlier rejected a claim of ineffective assistance of counsel, he “may direct a closer inspection of that issue as well” should the government not reconsider its decision not to reopen defendant’s sentencing. Id.

Judge Garaufis Denies Defendants’ Summary Judgment Motion In Government’s Antitrust Case Against American Express Based On Government’s Theories Concerning The Significance Of Undisputed Facts

In a May 7, 2014 order in United States v. American Express Co, No. 10-CV-4496 (NGG) (RER), Judge Nicholas G. Garaufis denied summary judgment to defendant American Express in the government’s antitrust action against Amex arising out of the company’s “anti-steering” rules. These rules impose certain restrictions on merchants that accept American Express cards, which, generally speaking, prohibit merchants from expressing to customers a preference for other cards or imposing conditions on use of the Amex card that are not also imposed on users of other cards.

The United States and the attorneys general of 17 states allege that the anti-steering rules are anti-competitive in violation of Section 1 of the Sherman Act. Under Second Circuit precedents, to prove anti-competitive effect plaintiffs had to establish either an actual adverse effect on competition or market power in the relevant market. See Slip Op. 9, 12. The government’s theory of “actual adverse effect” on competition rested largely on the higher fees Amex charged merchants compared to Visa and Mastercard. Id. at 13. The government contended that absent the anti-steering rules, Visa and Mastercard could have competed with Amex to urge merchants to convey to customers a preference among cards, as was done in the 1990s with merchants’ displays of signs such as “We Prefer Visa,” and that this would have driven down prices across the industry.

Based on these conceptual arguments, the Court concluded that material issues of fact existed as to whether the anti-steering rules had an actual adverse effect on competition. The Court’s ruling that material issues of fact existed as to whether Amex had market power was also based arguments that were conceptual rather than evidence-based. The Court found that “the basic facts relating to Amex’s market share are not in dispute.” Id. at 18. But the government had a “customer insistence theory,” under which cardmember brand loyalty allegedly gave Amex control over how much merchants would use the Amex card, which allegedly enhanced Amex’s market power. Id. at 18. The Court’s approach, in short, was closer to a motion to dismiss than to a summary judgment analysis, with the court assessing the plausibility of the government’s theories of anti-competitive effect and market power, rather than whether it had presented sufficient evidence to suggest that Amex’s anti-steering rules have an actual anti-competitive effect or that Amex has market power.

Second Circuit Affirms EDNY Interpretation Of Child Pornography Statute

On May 15, 2014, the Second Circuit issued a decision in United States v. Lockhart, Docket No. 13-602-CR, applying several canons of statutory interpretation to a child pornography statute.

In Lockhart, the EDNY sentenced the defendant to a minimum term of ten years for possessing child pornography, following “18 U.S.C. § 2252(b)(2), which requires a minimum term of imprisonment of ten years . . . when a defendant is found guilty of possessing child pornography and was previously convicted under state law of a crime ‘relating to aggravated sexual abuse, sexual abuse, or abusive sexual conduct involving a minor or ward.'” The defendant appealed on the ground that his previous conviction did not involve a minor or ward. The Second Circuit affirmed the EDNY, in a lengthy but well-worth-reading discussion of the applicable canons of statutory interpretation: Continue reading

New York Insurance Law Does Not Require Arbitration Of Insurer’s Claim To Recover Payments On Fraudulent Claims

On May 6, 2014, the Second Circuit issued a decision in Allstate Insurance Co. v. Mun, Docket No. 13-1424-CV, holding that while the New York Insurance Law gives a medical provider the right to demand arbitration of a refusal to pay a claim, that right does not extend to a claim by an insurer to recover from the provider already-made payments.

In Allstate Insurance, the plaintiff sued the defendants in the EDNY to recover payments the plaintiff had made to the defendants on no-fault insurance claims that, the plaintiff alleged, were fraudulent. The defendants moved to compel arbitration of the plaintiff’s claims. The EDNY denied the motion, holding “that medical providers have a right to arbitrate as-yet unpaid claims, but not claims that were timely paid.” The Second Circuit affirmed, explaining:

Section 5106 of the New York Insurance Law provides, in relevant part:

(a) Payments of first party benefits and additional first party benefits shall be made as the loss is incurred. Such benefits are overdue if not paid within thirty days after the claimant supplies proof of the fact and amount of loss sustained. . . .
(b) Every insurer shall provide a claimant with the option of submitting any dispute involving the insurer’s liability to pay first party benefits, or additional first party benefits, the amount thereof or any other matter which may arise pursuant to subsection (a) of this section to arbitration pursuant to simplified procedures to be promulgated or approved by the superintendent. Such simplified procedures shall include an expedited eligibility hearing option, when required, to designate the insurer for first party benefits . . . .

N.Y. Ins. Law § 5106(a)‐(b) (emphases added). . . .

Defendants rely on citations to the FAA; but the real question is: do Allstate’s policies, which implement requirements imposed by New York law and which must be construed to satisfy those requirements, grant Defendants the right to arbitrate Allstate’s fraud claims?

The arbitration provision in the Allstate policies appears quite broad. It contemplates arbitration if the claimant and insurance company do not agree regarding any matter relating to the claim. But it is not as broad as it may seem. An arbitrable dispute is one between the insurance company and a person making a claim for first-party benefits. Defendants are no longer making a claim. They made a claim; they made many claims. And those claims were promptly paid by Allstate. Allstate’s fraud suit therefore does not raise a dispute between it and a person making a claim for first-party benefits. The arbitration provision does not apply.

(Internal quotations and citations omitted).

This decision illustrates that notwithstanding case-law favoring arbitration and the rights of health care providers vis-à-vis insurers, at the end of the day, it is the law and applicable contracts that define the scope of the right to demand arbitration.

Two Claims Revived Upon Reconsideration In HSBC Bank Overdraft Fee Litigation

In In re: HSBC Bank, USA, N.A. Debit Card Overdraft Fee Litigation, 13 MD 2451 (E.D.N.Y. April 21, 2014), Judge Arthur D. Spatt took the rare step of granting a motion for reconsideration in a class action involving allegations that HSBC customers were improperly charged “overdraft fees” on debit card transactions. Plaintiffs claimed that the bank posted debits in a “largest to smallest” order instead of chronologically in order to maximize overdraft fees for itself, allegedly in violation of the bank’s agreements with customers.

The Court had originally dismissed plaintiffs’ claims for violation of New York General Business Law (“GBL”) § 349 and breach of contract. The GBL claim was dismissed as untimely because the federal class action was filed more than three years after the conduct at issue. Upon reconsideration, the Court held that because the plaintiffs had originally filed their claim in New York state court and received a dismissal without prejudice, they should have been entitled to the benefit of tolling under the U.S. Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). Further, the Court recognized that the state court action provided HSBC with timely notice of the GBL claim, and so “HSBC cannot be heard to complain about lack of notice or prejudice in having to defend against this claim.” Id. at 13.

The breach of contract claim had been dismissed for failure to allege a breach of a specific term of the contracts at issue. Upon reconsideration, the Court acknowledged that it “overlooked” some of the provisions in the debit card agreements, in particular a provision stating that debit card transactions would be treated as a “simultaneous withdrawal” from customers’ checking accounts. Id. at 14.