January 2009

In This Issue

• Plaintiff's Preference: A Much Smaller Influence In Venue Determinations
• What Creditors Should Do If a Debtor Declares Bankruptcy During the Pendency of a Lawsuit Against the Debtor
• Federal Agency Waiver Policies: Protecting the Corporation While Exposing its People
• Franklin County Judiciary Proposes to Add Two Judges to the Common Pleas Bench

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Plaintiff's Preference: A Much Smaller Influence In Venue Determinations

By Traci McGuire

At the federal level, two recent court decisions will impact how venue transfer motions are determined.  The most recent was issued by the Federal Circuit in In re TS Tech USA Corp., Mis. Dckt 888, 2008 U.S. App. LEXIS 26409 (Fed. Cir. Dec. 29, 2008) (a patent infringement case), wherein the court held that it is reversible error to maintain venue in the plaintiff's chosen forum solely on the ground that a few units of the accused product happened to be sold there (footnote1). 

When a lawsuit is filed, of primary concern to a defendant is whether the lawsuit is filed in the most appropriate venue.  Venue is the particular county or city in which a court with jurisdiction may hear and determine the case.  The United States Code allows for venue transfers based on "the convenience of the parties and witnesses" and "the interest of justice."  When deciding whether to transfer venue, courts must balance private concerns with public interests. Courts will assess the private concerns of: (1) plaintiffs' choice of forum; (2) convenience of the parties and witnesses; (3) place of the alleged wrong; (4) costs to secure witnesses or compel their testimony; (5) accessibility and location of evidence; and (6) possibility of delay and harm. Courts will also weigh public issues of the: (1) potential for court congestion; (2) local interest; (3) unfairness of burdening citizens in an unrelated forum with jury duty; and (4) avoidance of unnecessary problems in conflict of laws.  Whether a request for transfer of venue is granted falls within the discretion of the district judge and post judgment appellate review is limited and generally ineffective.

On December 29, 2008, the United States Federal Circuit Court of Appeals (footnote2) issued a writ of mandamus in In re TS Tech USA Corp. et al. ("TS Tech USA") (Misc. Dkt. No. 888) ordering the transfer of a patent infringement action from the Eastern District of Texas to the Southern District of Ohio.  In TS Tech USA, the defendants were sued by Lear Corporation for patent infringement over pivoting headrests installed in automobiles.  Defendants moved to transfer venue to the Southern District of Ohio arguing that Ohio was a more convenient forum for litigation because: (1) the evidence was primarily located in Ohio; (2) the key witnesses lived in Ohio, Michigan and Canada; and (3) none of the parties were incorporated in Texas or had offices in the Eastern District of Texas.  Plaintiff opposed the transfer and argued that the Eastern District of Texas was the proper venue because several Honda vehicles containing the infringing headrest had been sold in Texas.

The District Court sided with Plaintiff and denied the transfer finding that the Defendants failed to demonstrate that the inconvenience to the parties and witnesses clearly outweighed the deference entitled to Plaintiff's choice of bringing suit in the Eastern District of Texas; and that several vehicles had been sold in the venue and therefore there was a substantial interest in having the case tried locally.

Defendants sought a writ of mandamus seeking relief from the District Court holdings.  The Court of Appeals for the Federal District, focusing on several key elements, reversed and ordered that the case be transferred to the Southern District of Ohio:

• Distance: Because the witnesses would need to travel over 900 miles to attend trial in Texas rather than in Ohio, the Federal Circuit found clear error in the District Court's refusal to considerably weigh this factor in favor of transfer.
• Location of Evidence: As to the availability of evidence, the Federal Circuit followed Volkswagen in explaining that although technology makes the actual location of certain electronic records less critical, the factor is still important. It held that since the headrests and hard copies of documents were located closer to the court in Ohio, the District Court failed to properly weigh this factor in favor of transfer.
• Local Interest: The Federal Circuit also found error in the District Court's conclusion that the Eastern District of Texas has a "local interest" in the patent dispute because some allegedly infringing products were sold in that district. The Federal Circuit ruled that this reasoning "was unequivocally rejected by the Fifth Circuit" in Volkswagen and held that this factor should not have been weighed against transfer.
• Plaintiff's Choice: The Federal Circuit rejected the District Court's emphasis on the plaintiff's choice of forum.  Rather, the Federal Circuit held that the plaintiff's choice of forum is not a factor to be balanced in the venue analysis, but instead "corresponds to the burden that a moving party must meet in order to demonstrate that the transferee venue is a clearly more convenient venue."

With clear instructions from both the Fifth Circuit and the Federal Circuit, it appears that motions to transfer cases that have no meaningful relationship to a particular venue could have a greater likelihood of success in the future.  Although the case law is currently limited to the Fifth Circuit and the Federal Circuit, we may quickly see changes in case law in other federal jurisdictions.

[1] In reaching its decision, the Federal Circuit relied upon a prior Fifth Circuit decision, In re Volkswagen of America, Inc., 545 F.3d 304 (5th Cir. 2008).
[2] The United States Court of Appeals for the Federal Circuit, located in Washington D.C., is unique among the thirteen Circuit Courts of Appeals. It has nationwide jurisdiction in a variety of subject areas, including international trade, government contracts, patents, trademarks, certain money claims against the United States government, federal personnel, and veterans' benefits.

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What Creditors Should Do If a Debtor Declares Bankruptcy During the Pendency of a Lawsuit Against the Debtor

By Stephanie P. Union and Christy A. Prince

Introduction
In today's tough economic climate, the number of individuals and businesses filing for bankruptcy are on the rise.  Bankruptcy brings its own unique set of rules that impact those who do business with the "debtor," or party filing for bankruptcy.  This is an overview to show creditors how to avoid missteps in the bankruptcy process.

The Automatic Stay
The automatic stay created by 11 U.S.C. § 362 is arguably the most relevant bankruptcy provision for parties who are not in bankruptcy.  The stay is immediately effective upon the filing of the debtor's bankruptcy petition and prohibits:

• the commencement or continuation of a proceeding against a debtor based on claims that arose before the debtor filed for bankruptcy;
• the enforcement of a judgment obtained before the bankruptcy was filed;
• non-litigation conduct such as sending demand letters, garnishing wages, or repossessing the debtor's property; and
• creating, perfecting, or enforcing a lien on the debtor's property.

§ 362 provides serious penalties for willful violation of the automatic stay.  If a creditor willfully violates the stay, the debtor can recover actual damages, punitive damages, and attorneys fees.  In some situations, however, a party can move for relief from stay in the bankruptcy court in order to proceed with a non-bankruptcy case. 

Assert Your Claim in the Bankruptcy
As a creditor, you have the ability to assert certain claims within the bankruptcy.  As mentioned above, you can file a proof of claim to assert your interest.  A proof of claim is the easiest way to obtain some payment from a debtor if there are assets in the case. You can also object to a proposed plan and/or treatment of your claim. 

Creditors also have the ability to object to the discharge of their debt where the debtor obtained the property or services fraudulently or by misrepresenting its solvency.  If the claim is declared non-dischargeable, then creditors could collect the debt from the debtor after the bankruptcy.  The time period to object to the discharge of a debt is very short, and contacting your attorney immediately is critical. 

Conclusion
Creditors have many rights to exercise within the bankruptcy case.  Although there are a lot of nuances within each chapter, filing a proof of claim and asserting any other claims you have within the bankruptcy are important steps for creditors.  Because we anticipate rises in both individual and business bankruptcy filings in the coming years, creditors should take the actions necessary to protect their interests, while avoiding bankruptcy's pitfalls, when their business partners take the plunge into bankruptcy.

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Federal Agency Waiver Policies: Protecting the Corporation While Exposing its People

By Rasheeda Khan

After the United States Supreme Court decision in Bellis v. United States, 417 U.S. 85 (1974), holding that the Fifth Amendment privilege protecting a criminal defendant from compelled testimony applies only to individuals and not corporations, some legal commentators took the position that the lawyer-client privilege likewise should not apply to corporations, at least in the criminal context.  Until recently, the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC) and other federal agencies have endorsed this position by maintaining a policy of requesting corporations to waive lawyer-client privilege and work product protection in exchange for being considered cooperative during criminal investigations.   

Generally, federal agencies encourage all companies to voluntarily self-report wrongdoing and disclose to the government the results of an internal investigation.  In return, the company receives some type of credit or consideration.   For example, the U.S. Sentencing Guidelines offer a mitigation credit for companies that make voluntary disclosures.  This mitigation credit can significantly temper the sentence imposed.  In addition, until recently, the DOJ would instruct federal protectors to take into account a corporation's willingness to turn over privileged information when making decisions about criminal charges against the corporation.  Corporations understood this to mean that it could avoid criminal prosecution (and the stigma and expense that went along with it) so long as it cooperated with prosecutors and allowed unfettered access to its confidential files.

Federal prosecutors also used their power to pressure corporations into firing employees and refusing to pay attorneys fees to cover their defense.  As a result, these employees would often enter into plea bargains because the pressure of fighting both the prosecutors and their own employers without any resources was too much to handle.  According to the National Association of Criminal Defense Lawyers, the DOJ "had this awesome power because the threat to companies of the stigma of prosecution (e.g., KPMG) or of winning the battle only to lose the war (e.g. Arthur Anderson) was grave.  To avoid such dire consequences, companies all too readily opened their confidential files, and in effect, did the prosecutor's job by investigating themselves and giving the government the results."  Failure to cooperate was a "corporate death sentence."    
 
Until recently, these prosecutorial tactics did not stir much controversy because corporate prosecutions were relatively rare.  However, when federal forfeiture laws beefed up and corporate fines increased exponentially, prosecution of corporations became a significant source of income for the DOJ, and prosecution of corporate crimes became a high priority.  Other federal governmental agencies, including the SEC, adopted similar policies for conducting government investigations that undermined legal protections for key employees, the attorney-client privilege and the work product doctrine.

In August 2008, the DOJ's practices came under harsh criticism when the U.S. Court of Appeals for the Second Circuit in United States v. Stein, upheld a federal judge's dismissal of criminal charges against 13 former partners and employees of the accounting firm KPMG, LLP.  "We hold that KPMG's adoption and enforcement of a policy under which it conditions, capped and ultimately ceased advancing legal fees to defendants followed as a direct consequence of the government's overwhelming influence, and that KPMG's conduct therefore amounted to state action.  We further hold that the government thus unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation." 

In support of its decision, the Stein Court described KPMG's actions in response to learning that 20 to 30 of its top partners and employees were subjects of a grand jury investigation of fraudulent tax shelters.  KPMG announced that it would "clean house" and that it would "cooperate fully with the government's investigation."  The prosecutors then informed KPMG's attorney that if KPMG had discretion regarding payment of attorney fees to the defendants, the "government would look at that under a microscope," and considered payment of attorneys fees as rewarding misconduct and was not a sign of cooperation. 

The Stein Court concluded that dismissing the KPMG partners and employees was the only remedy because the government "deprived their right to counsel under the Sixth Amendment by causing KPMG to place conditions on the advancement of legal fees to [Defendants], and to cap the fees and ultimately end them."  Indeed, even though the defendants were indicted "on a fairly novel theory of criminal liability" and faced "extremely complex" litigation involving more than 22 million documents, they were "forced to limit their defenses for economic reasons and they would not have been so constrained if KPMG paid their expenses."  Therefore, the defendants were deprived of their right to counsel under the Sixth Amendment. 

On the same date that the Stein decision came out, the DOJ formally declared that it  abandoned the prosecutorial tactics that were at issue in the case.  Furthermore, the DOJ stated that it would no longer use a corporation's willingness to waive attorney-client privilege and work product protection as a gauge for determining whether the company should be deemed cooperative during a DOJ investigation. 

Even though the DOJ has changed its position on what constitutes cooperation, many still believe that legislation is necessary to ensure that the reforms are permanent and apply to all federal agencies.  Furthermore, even though federal prosecutors are not supposed to consider waiver of attorney-client privilege and work product protection when assessing cooperation, they can still ask the corporation to waive the privilege.  As a result, the significant incentive for corporations to waive the privilege still exists.

Last year, the 110th U.S. Congress reviewed S. 217, better known as the Attorney Client Privilege Protection Act.  The bill was designed to protect the attorney-client privilege without hindering law enforcement efforts.  It specifically barred federal prosecutors and agency attorneys from demanding that corporations waive the attorney-client privilege and work product protection or refuse to pay defense fees for suspected employees in return for more lenient treatment in charging decisions and investigations.  Although the bill was unsuccessful, it is expected to be introduced again before the 111th U.S. Congress. 

Notwithstanding the new position taken by the DOJ, many still believe that corporations that decide to cooperate with a federal investigation minimize the risk of prosecution but maximize the risk to its employees.  According to a recent article from the American Bar Association's Manual on Professional Conduct, "a wise employee should be very cautious these days in talking to a corporation's defense counsel.  And an attorney representing a corporation must now take care to warn employees that even though what they say may be privileged, the privilege belongs to the corporation and the corporation may decide to waive it."

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Franklin County Judiciary Proposes to Add Two Judges to the Common Pleas Bench

By Jennifer L. Mackanos

The judges of the Franklin County Common Pleas Court are currently working on a proposal to add two colleagues to their Bench.  The first step to having the addition of two judges approved consists of compiling and submitting certain information requested by the Supreme Court of Ohio.  The Supreme Court must approve the proposal before it moves along in the process.

The next step, assuming the Supreme Court approves the proposal, is to convince the Franklin County Commissioners to approve the proposal.  Their approval is necessary because,  although the County pays only 10% of each judge's salary, it pays for 100% of the salaries and benefits of all other Court personnel, such as magistrates, bailiffs, court reporters, staff attorneys, and other support staff.  The Legislature will also have to approve the proposal because the state pays for part of each judge's salary. 
The addition of two judges to the Franklin County Common Pleas Bench would help alleviate a crowded docket.  It is hoped it will be approved and the two new judges elected next year to begin serving with the opening of the new courthouse in 2011.  For more information on the new courthouse, including a live webcam of construction of the building, you can go to the website at www.fccourts.org; click on the "Administration" tab, then on the "New Building" tab.

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