Blawgletter®

New Barnett's Notes on Commercial Litigation

Have a look at the latest issue of Barnett's Notes on Commercial Litigation.  You'll find there:

1. Uniform (Contingent Fee) Rates -- Bah!  Refuting humbug.

2. Did You Know?   An associate knocks another one out of the park.

3. The Value of Class Actions.  The Second Circuit reverses to affirm class litigation as a social good.

4.  Should Public Entities Hire Contingent Fee Lawyers?  The debate rages.

5.  Whither Cy Pres?  Nudging an explicitly imperfect remedy closer to the ideal.

6.  Hot Lunch.  When the Texas Supreme Court lost balance, it squandered influence too.

7.  Taking Unfair Advantage.  Cartoon.

8.  Links & Info.

Have a terrific weekend -- and remember your Mom on Sunday.

Those Activist Federal Judges: "Common and Systematic Abuse"

A presidential candidate spoke yesterday about the federal judiciary: 

In America, the constitutional restraint on power is as fundamental as the exercise of power, and often more so. Yet the framers knew that these restraints would not always be observed. They were idealists, but they were worldly men as well, and they knew that abuses of power would arise and need to be firmly checked. Their design for democracy was drawn from their experience with tyranny. A suspicion of power is ingrained in both the letter and spirit of the American Constitution.

In the end, of course, their grand solution was to allocate federal power three ways, reserving all other powers and rights to the states and to the people themselves. The executive, legislative, and judicial branches are often wary of one another's excesses, and they should be. They seek to keep each other within bounds, and they are supposed to. And though you wouldn't always know it from watching the day-to-day affairs of modern Washington, the framers knew exactly what they were doing, and the system of checks and balances rarely disappoints.

So far so good.  But then:

There is one great exception in our day, however, and that is the common and systematic abuse of our federal courts by the people we entrust with judicial power. For decades now, some federal judges have taken it upon themselves to pronounce and rule on matters that were never intended to be heard in courts or decided by judges. With a presumption that would have amazed the framers of our Constitution, and legal reasoning that would have mystified them, federal judges today issue rulings and opinions on policy questions that should be decided democratically. Assured of lifetime tenures, these judges show little regard for the authority of the president, the Congress, and the states. They display even less interest in the will of the people. And the only remedy available to any of us is to find, nominate, and confirm better judges.

Did we read that right?  Did the candidate actually say "common and systematic abuse of our federal courts by the people we entrust with judicial power"?

The candidate continued.  The first criticism related to a Supreme Court justice's concurring opinion, in which he (a Republican appointee) mentioned that "my own experience" supported the view (of a Democratic appointee decades ago) "that the imposition of the death penalty represents 'the pointless and needless extinction of life with only marginal contributions to any discernible social or public purposes.  A penalty with such negligible returns to the State [is] patently excessive and cruel and unusual punishment violative of the Eighth Amendment.'" Baze v. Rees, No. 07-5439 (U.S. Apr. 16, 2008) (Stevens, J., concurring in judgment).

The candidate said that the justice's "conclusion found no support in the Constitution, or in applicable statutes, or in the record of the case in front of him."

The example suggests, to Blawgletter, the legitimate point that judicial officers ought to interpret the Bill of Rights as a static document, which means the same thing now as it did at ratification in 1789.  But to attribute "common and systematic abuse" to the current federal judiciary -- in the guise of a concurrence upholding the death penalty -- strikes us as more than a stretch.

The second complaint concerns Roper v. Simmons, 543 U.S. 551 (2005), in which the Court held that the eighth amendment prohibition against cruel and unusual punishment bars execution of a 17 year-old murderer.  The problem with the majority opinion?  It "left posterity with a lengthy discourse on international law, the constitutions of other nations, the meaning of life, and 'evolving standards of decency.'"  And thus "reduce[d] the penalty, disregard[ed] our Constitution, and brush[ed] off the standards of the people themselves and their elected representatives."

The third instance of "common and systematic abuse" arises from Connecticut's payment to private landowners for taking their property under its condemnation authority.  The Supreme Court upheld the state's right to condemn and take the land upon payment of just compensation in Kelo v. New London, 545 U.S. 469 (2005).  The candidate said the Court "gave that property away to a private developer" but didn't mention that the petitioners got just compensation.  The persuasive complaint -- that Connecticut's desire to redevelop New London didn't amount to a "public use" -- gets lost in the candidate's simplification.

And the final gripe relates to the Ninth Circuit's 2-1 ruling, in Newdow v. United States Congress, 292 F.3d 597 (9th Cir. 2002), that requiring public school students to recite "under God" in the Pledge of Allegiance every morning violates students' first amendment rights.  The candidate doesn't add that the Supreme Court overturned the decision on the ground that Mr. Newdow lacked standing.  Thus ended the case.

So we have two death penalty cases, one in which the condemnee lost and the other in which the teenager won life in prison; a "takings" case where the landowners received just compensation; and a Pledge of Allegiance ruling that the Supreme Court tossed on procedural grounds.

"Common and systematic abuse" of "judicial power"?  Puh-leeze.

We know -- politics.  But still.

Guest Blawg: Is the ABA Stance on Email Encryption Correct?

Today we welcome a guest blawger -- the Senior Vice President & General Counsel of Zix Corporation (NASDAQ:ZIXI), Ronald A. Woessner. 

Ron knows a thing or two about data encryption.  As Zix's homepage says:

Zix Corporation is the leading provider of services that Connect entities to Protect and Deliver sensitive information. ZixCorp's hosted Email Encryption Service provides an easy and cost-effective way to ensure customer privacy and regulatory compliance for corporate email. Its PocketScript^® e-prescribing service reduces costs and improves patient care by automating the prescription process between payors, doctors, and pharmacies.

So let's hear from Ron.  Here goes:

 
Zeroes and ones -- joy!

In 1999, the American Bar Association's Standing Committee on Ethics and Professional Responsibility ruled that an attorney may transmit confidential client information via unencrypted email over the Internet without violating the Model Rules of Professional Conduct.  The basis for the ABA's decision was that unencrypted email has a reasonable expectation of privacy from a technological and legal standpoint -- similar to the expectation of privacy for mail, phone and facsimile communications.

The basis for the ABA's decision is no longer valid, given what we know today about the inherent privacy and security vulnerabilities of unencrypted email.  The ABA should revise its decision.

It is now widely known to information technology professionals that unencrypted email messages are as vulnerable as a postcard to a third party's prying eyes.  In recognition of this, the regulations under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Gramm-Leach-Blilely Financial Modernization Act of 1999 ("GLBA") require that email messages containing personal health information and personal financial information be encrypted.  Encryption is required because, according to the regulations, unencrypted "email is not a secure method for sending sensitive data."

The HIPAA and GLBA regulations do not require encryption for regular mail, phone and fax communications.  Since encryption is required for email messages but not for these other forms of communication, the federal regulators clearly believe that unencrypted email is less secure than regular mail, phone and fax communications.

Recent court decisions illustrate the legal risk to attorneys that use unencrypted email.  In Scott v. Beth Israel Medical Center, Inc., the court held that unencrypted email messages sent by a client to his attorney using his employer's computer and via the employer's email system pertaining to the client's legal claim against the employer were not protected from discovery because the client had no reasonable expectation of privacy.

Admittedly, this particular case involved a situation where the attorney-client communications related to a legal claim against the employer whose email system was being used to transmit the email messages.  Nevertheless, the rationale of the decision -- that there is no reasonable expectation of privacy in unencrypted email messages transmitted by an employer's computer network -- could be readily extended to any email communication about a personal legal matter that is transmitted or accessed by the client from his or her place of employment during business hours.

Given the foregoing, the ABA should begin requiring the use of encryption for attorney-client communications.  Attorneys that do not use encryption for sensitive email communications risk legal malpractice claims.  Attorneys that do not use encryption for email communications containing personal information protected by HIPAA or GLBA risk fines and jail time.

Ronald A. Woessner

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Doing Themselves No Favors

Since (again) becoming a one-party bastion in 1999, the Supreme Court of Texas has lost influence with other states' high courts.  It has also drawn accusations of pro-business bias and undue delay.

The Court's 5-4 ruling last Friday in Perry Homes v. Cull, No. 05-0882 (Tex. May 2, 2008), probably won't help.

The case.  The Culls, husband and wife, bought a new dwelling for their retirement years from Perry Homes in 1996.  They discovered foundation problems and other construction defects.  In October 2000, they filed suit in Tarrant County district court.  On December 6, 2001, four days before a trial setting, they persuaded the trial judge to send the dispute to arbitration.  The defendants unsuccessfully petitioned the Fort Worth court of appeals and the Supreme Court to undo the order.  A year later, on December 24, 2002, the arbitrator awarded the Culls $800,000 in actual and punitive damages, fees, and expenses.

Perry Homes asked the district court to vacate the award on the ground, among others, that the Culls waived their right to arbitrate by substantially invoking the judicial process.  The court denied the motion.  The court of appeals affirmed.

Perry Homes petitioned the Texas Supreme Court to grant discretionary review.  Fourteen months later, the Court took the case.  It heard oral argument on March 20, 2007, and rendered its decision reversing the lower courts on May 2, 2008.

Timeline.  The parties

• litigated in court for 14 months (Oct. 2000-Dec. 2001),
• arbitrated 12 months (Dec. 2001-Dec. 2002),
• battled over confirming the award in district court 14 months (Dec. 2002-Feb. 2004),
• fought in the court of appeals 18 months (Feb. 2004-Aug. 2005), and
• spent 31 months before the Supreme Court (Oct. 2005-May 2008).

Decision.  The appeal to the Supreme Court raised two main questions: 

Who decides the "waiver" question -- a court or the arbitrator?

-- and --

Did the district court abuse its discretion in concluding that the Culls didn't waive their right to arbitrate?

The majority held that a court, not an arbitrator, must determine the question of waiver by "litigation conduct" and that the trial judge did abuse his discretion.

Critique.  Blawgletter found the Court's analysis of the first issue the more troubling.  We don't mind so much its gloss on Howsam v. Dean Witter Reynolds, Inc., 531 U.S. 79, 84 (2002), where that Court said "the presumption is that the arbitrator should decide 'allegations of waiver, delay, or a like defense to arbitrability.'"  Federal courts of appeals agree that the Howsam Court didn't mean waiver by "litigation conduct", which the court considering whether to compel arbitration is in a better position to evaluate.  It meant waiver by doing something like waiting too long to request arbitration. 

No.  The trouble comes from the Perry Homes Court's glossing over a possibly key distinction -- that the arbitration had already happened.  Couldn't -- shouldn't -- the defendants have asked the arbitrator to find waiver of the Culls' right to arbitrate?  The arbitration clause covered "all claims, demands, disputes, controversies, and differences that may arise between the parties to this Agreement of whatever kind or nature".  Doesn't that include a dispute over waiver?  And how is the court in a better position to judge waiver if the, um, court has already judged that there was none?  At the least, shouldn't the loser have to show more after losing than before?  The majority (and dissent) leave us to wonder.

As for the abuse of discretion question, it drew four dissenters.  Yes, they conceded, the Culls did wait a long time to ask for arbitration and did do a lot of stuff in the district court.  But:

I conclude the record is not conclusive either that Defendants suffered prejudice as they claimed or that the Culls obtained an unfair advantage by litigation conduct as the Court holds. I also conclude that evidence before the trial court required the court to weigh and draw inferences from it and that some evidence supports the trial court’s determination that Defendants did not prove prejudice to themselves or unfair advantage to the Culls by use of the litigation process. Accordingly, I would hold that the trial court did not abuse its discretion by compelling the parties to arbitrate and I would affirm the judgment of the court of appeals.

We tend to agree with Justice Phil Johnson, who wrote the dissent. 

Observations.  The outcome wouldn't have much bothered us, we think, if it had come out in April 2002, when the Court declined to issue a writ of mandamus.  Even then, it would have stood out among the multiple cases in which the Court gave the back of its hand to plaintiffs who alleged that defendants waived the right to arbitrate.  But we wonder at the wisdom of using the Culls' case, after they won on the merits, to teach a lesson about waiver.  Haven't they suffered enough -- not least by having to wait 31 months for the Court to give them an answer?  Wouldn't the bench and bar have learned more if the Court taught the lesson to a defendant that "substantially invoked" the litigation process before demanding arbitration?

We don't buy the argument that the defendants won because Bob Perry makes lots of big political contributions.  (See The Dallas Morning News article here.)  But we admit to discomfort that the Court:

• reached out to review an order it declined to examine six years ago;
• waited 2.5 years to decide whether or not to uphold the order; and
• stretched to vacate an arbitration award.

We haven't seen a single decision, from any court, that vacated an arbitration award because a party waived the right to arbitrate.  Perry Homes cites none.  It strikes us as harsh and extreme.

Finally, as we have mentioned, the Court swayed more non-Texas courts to "follow" its legal reasoning during the six years between 1993 and 1998 than at any other time since 1940.  We proposed that the "balance" of Republican and Democratic justices in those years likely accounted for the exceptional quality and persuasiveness of the Court's opinions.  We don't have balance any more.

The shift to a one-party Court has coincided with a dip in influence.  Perry Homes may help illustrate why.

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