CURRENT MONTH (December 2019)
Dispute Resolution
New York Federal Court Holds Arbitration Panel Was Not Functus Officio
By Leslie A. Berkoff, Moritt Hock & Hamroff LLP
In a recent decision by the Southern District of New York in the case of Chicago Ins. Co. v. General Reins. Corp., 18-CV-10450 (JPO), 2019 U.S. Dist. LEXIS 182764 (S.D.N.Y. Oct. 22, 2019), the Court considered whether a dispute arising after an arbitration of a billing dispute between a cedent and a reinsurer was covered by a specific reservation of jurisdiction by an original arbitration panel and whether the subsequent dispute was one arising out of that final award. The issues presented required the Court to determine if the original panel was functus officio or whether it was the appropriate panel to hear the current dispute.
In resolving the dispute in favor of the reinsurer, the Court found that the cedent’s argument that the original panel was functus officio failed as this panel had reserved jurisdiction to hear any subsequent disputes and as such under Section 4 of the Federal Arbitration Act (“FAA”) the aggrieved party (i.e. the reinsurer) had appropriately sought to compel arbitration under an existing agreement. The Court found the question of arbitrability to be the primary focal point here. In fact, the Court found that the argument of functus officio raised by the cedent was not appropriate, as clearly the original panel’s role had not terminated in light of the reservation of jurisdiction clause. Moreover, the Court noted that the cedent had already consented to such continuing jurisdiction in the initial arbitration.
The court further noted that the most appropriate party to determine what was meant by the final award and the billing protocols proscribed therein was the original panel which determined the same. The Court also looked to cedent’s own statements that the final bill in question was predicated upon those protocols as further acknowledgment that the current dispute was indeed a dispute flowing from the original arbitration. As such, the Court concluded the first panel was not functus officio and denied the cedent’s petition to compel arbitration and instead granted the reinsurer’s cross–petition to stay arbitration and for declaratory relief.
Equal Employment Opportunity Commission Changes Its Position on Arbitration Agreements
By Leslie A. Berkoff, Moritt Hock & Hamroff LLP
On December 17, 2019, the Equal Employment Opportunity Commission (“EEOC”) issued its Rescission of Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment, thereby rescinding its 1997 Policy Statement in which it had deemed mandatory arbitration of employment-related disputes inconsistent with Title VII and other federal civil rights laws. While a policy statement does not have the same impact as a law, many had viewed the initial 1997 Policy Statement as support for the EEOC’s position that it would closely scrutinize charges of discrimination involving arbitration agreements where those agreements had been entered into as a condition of employment and might have been secured by “coercive circumstances.” The EEOC rescinded the 1997 Policy, recognizing that it was at odds with numerous Supreme Court decisions holding that employment-related arbitration agreements are generally enforceable under the Federal Arbitration Act; the EEOC pointed to recent Supreme Court decisions, including Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) and Lamps Plus Inc. v. Varela, 139 S. Ct. 1407 (2019). However, the EEOC stated that the rescission of the Policy does not limit the ability for an employee to challenge a particular agreement. The EEOC also did not address the impact of this on any of the recently enacted state laws restricting mandatory arbitration of sexual harassment or other discrimination claims in various states including California, New York, and New Jersey.
Business Litigation
In re Oracle Corp. Derivative Litigation: Delaware Court of Chancery Holds that Committee’s Decision to Cede Control of Lawsuit Entitles Lead Plaintiff to Materials Relied Upon–Including Oracle’s Privileged Documents
By K. Tyler O’Connell
In In re Oracle Corp. Deriv. Litig., 2019 WL 6522297 (Del. Ch. Dec. 4, 2019), the Delaware Court of Chancery addressed the implications of a rare occurrence: a special litigation committee’s decision that control over derivative claims should be ceded to a stockholder-plaintiff.
The litigation arose out of Oracle Corporation’s acquisition of NetSuite Inc. – a company more than 40% owned by Oracle’s largest stockholder and board Chairman, Lawrence J. Ellison, and his family members. Oracle stockholders filed suit alleging that Oracle overpaid and that the transaction unfairly benefitted Netsuite’s stockholders at Oracle’s expense. After the lead stockholder-plaintiff overcame a motion to dismiss, Oracle formed a special litigation committee (the “SLC”) of putatively independent directors to consider, pursuant to Zapata v. Maldanado and its progeny, whether continued pursuit of the litigation was in Oracle’s best interests. After the litigation was stayed pending the SLC’s investigation, the SLC concluded that it was in Oracle’s best interests to allow the lead plaintiff to continue to prosecute the action on Oracle’s behalf. The plaintiff then subpoenaed the SLC for all of the information it received in its investigation and its work product, arguing that it should not be forced to start discovery “from scratch.” The SLC, Oracle and the individual defendant directors and officers objected. They indicated that, because the SLC members were Oracle directors, the SLC was provided with greater access than a stockholder-plaintiff normally would have in discovery; they claimed not to have done a responsiveness or privilege review before Oracle’s documents were provided to the SLC’s counsel. They also argued that a ruling requiring that the information be turned over to a stockholder-plaintiff may chill future information exchanges with special litigation committees, which would be undesirable as a policy matter.
Vice Chancellor Sam Glasscock III noted the lack of any precedent addressing the situation at hand: a SLC’s decision to cede control of derivative litigation to a particular stockholder-plaintiff. The Court emphasized “it would be, at least in part, against Oracle’s best interests to allow the Lead Plaintiff to proceed with the litigation asset” without the benefit of the added value created by the SLC’s efforts. To address the concern over chilling candor, the Court focused on what documents would be most relevant to the issue at hand. Rather than turning over all of the documents the SLC obtained, the Court held the production to the lead plaintiff should include “all documents and communications actually reviewed and relied upon by the SLC or its counsel in forming its conclusions that (i) it would not be in Oracle’s best interests to seek to dismiss the derivative claims and (ii) it was in Oracle’s best interests to allow the Lead Plaintiff (rather than the SLC) to proceed with the litigation on behalf of Oracle.”
In addition, the Court reasoned, to the extent the SLC actually reviewed and relied upon Oracle’s privileged information, it also must be produced. The Court explained that Oracle had thought it proper to provide potentially privileged information to the SLC to decide how Oracle should proceed with respect to the litigation. But Oracle had not “advanced a single reason why, in its business judgment, the corporate interest in non-disclosure” of potentially privileged information to the Lead Plaintiff of documents already disclosed to the SLC “outweighs [Oracle’s] interest in vindication of the [litigation] asset.”
In response to concerns that the documents in the SLC’s possession may include individual defendants’ attorney-client privileged communications with their personal counsel, the Court permitted the defendants to review the SLC’s production before it went to the Lead Plaintiff and produce a privilege log for any documents so withheld, reserving decision on whether a waiver resulted from communicating in a way such that Oracle would have the communications. The Court also permitted the SLC to assert its own attorney-client privilege and work product claims, reasoning that the SLC itself was distinct from Oracle.