Why do FLSA cases cost employers so much?

"An employer’s liability under the FLSA can be high even in the most average of cases. There are a number of reasons why. First, FLSA cases – almost invariably – involve multiple employees and/or plaintiffs. If one employee says that she has had to work through meal breaks, then you can bet that several more probably have too. Second, FLSA cases often cover extended periods of time. Typically, employees don’t complain that they have worked through lunch once; they complain that they have worked through lunch on a weekly basis for a number of years. Third, unpaid meal break time will be paid at the employees’ overtime rate if it came during a week in which the employees had already worked 40 hours or more.  Fourth, employees are typically awarded “liquidated damages” in FLSA cases equal to the amount of unpaid wages. In other words, employees receive twice what they say they were owed.  Fifth, punitive damages can be awarded at the discretion of the court. And, sixth, employers are commonly required to reimburse employees for the legal fees and costs that they incur in bringing FLSA suit."


How the Second Circuit overrules its decisions

Prior to 1891, there were no courts of appeals in the federal system.  In the decades following the Civil War, however, Congress increased federal jurisdiction and litigation began to overload the federal courts. 

In 1891, Congress created courts of appeals between the trial courts and the Supreme Court with the Evarts Act, an act named after its primary sponsor Senator William Evarts of New York.  The Act created nine new courts, originally known as the “United States circuit courts of appeals.”  (The name was changed to its current form in 1948.  Today, for example, the Second Circuit is officially “The Court of Appeals for the Second Circuit”).

The Evarts Act provided that the new appellate courts “shall consist of three judges.”  Consistent with this tradition, and now pursuant to 28 U.S.C. § 46(c), the appellate courts continue to hear cases with three-judge panels.[1] 

Each panel of the court is considered to be the court of appeals, and a decision of a three-judge panel carries the full weight of the court.  Every federal appellate court has held that a three-judge panel is bound by the opinions of prior panels until the decision is overruled either by the Supreme Court or that court sitting en banc.[2]  “En banc” is a hearing in which all the active judges of the court participate.  In Textile Mills Securities Corp. v. Conmissioner, the Supreme Court held that a court of appeals has the inherent power to sit en banc.[3] 

In addition, in 1978, Congress passed the Omnibus Judgeship Act, and authorized federal circuit courts consisting of more than fifteen judges to delegate en banc authority to a division of the full court, referred to “limited en banc court.”  Only Ninth Circuit has exercised this option formally, where an en banc court consists of eleven judges.

Unlike other circuits, however, the Second Circuit, however, has a “tradition of hearing virtually no cases” en banc.”[4]  Because of this fact, lawyers should be aware of the two primary ways that the Second Circuit will decide that one of its prior decisions should be reconsidered. 

“[I]f there has been an intervening Supreme Court decision that casts doubt on our controlling precedent, one panel of this Court may overrule a prior decision of another panel even if the intervening decision does “not address the precise issue decided by the panel.”  The second is a frequently referred to as “mini en banc.”

In broad terms, mini-en banc review works as follows: A three-judge panel tentatively decides that a precedent should be overruled. One of the judges on the panel writes a draft opinion on behalf of the panel overruling the precedent. The draft opinion is then circulated to all of the Second Circuit’s active judges, together with a note stating that the panel proposes to overrule a precedent. The panel then proceeds with overruling the precedent, presumably on the assumption that en banc review, while technically necessary, would have been a waste of time and resources in light of the views expressed by the active judges in response to the draft opinion.

Steven M. Witzel & Samuel P. Groner, Mini-En Banc Review In the Second Circuit, January 7, 2016, New York Law Journal.

[1] See Western Pac. R.R. Corp. v. Western Pac. R.R., 345 U.S. 247, 254 (1953).  The three-judge panel goes back to the Judiciary Act of 1869, ch. 22, § 2, 16 Stat. 44, 44, which provided a circuit would be composed of two Supreme Court justices and one district court judge from the district in which the case was pending.  See Roscoe Pound, Organization of Courts 103–04 (1940).

[2] The term “in banc” appeared in earlier versions of Federal Rule of Appellate Procedure 35. See FED. R. APP. P. 35 (1967).

[3] 314 U.S. 326 (1941). See generally Note, The Power of a Circuit Court of Appeals to Sit

En Banc, 55 Harv. L. Rev. 663 (1942). 

[4] See Ricci v. DeStefano, 530 F.3d 88, 92 (2d Cir. 2008) (Jacobs, C.J., dissenting from the denial of rehearing en banc); see also id. at 89-90 (Katzmann, J., concurring in the denial of rehearing en banc) (“Throughout our history, we have proceeded to a full hearing en banc only in rare and exceptional circumstances.”); see also Wilfred Feinberg, Unique Customs and Practices of the Second Circuit, 14 Hofstra L. Rev. 297, 311 (1986)

District Courts should "look through" to the underlying complaint when deciding if they have jurisdiction over an arbitration petition

Section 2 of the Federal Arbitration Act makes agreements to arbitrate “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (2012).   However, as Justice Brennan once wrote, the Federal Arbitration Act “is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.”  Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983) (citation omitted)).

This is true because under Section 4, a court has jurisdiction to hear a motion to compel arbitration when “save for such [arbitration] agreement, [the court] would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.”  The substantive protections of Section 2 are “equally binding on state and federal courts,” but the federal courts must have independent federal jurisdiction.

In 2009, in Vaden v. Discover Bank, theSupreme Court applied the “well-pleaded complaint rule,” and interpreted the word “controversy” in Section 4 to mean the underlying state court litigation.  Under this interpretation, courts can “look through” the four corners of the arbitration petition filed in federal court to consider any underlying state court complaint. 

However, the Supreme Court found that federal jurisdiction was lacking because Discover Bank’s original complaint did not invoke a federal claim.  The majority rejected a broader “look through” to the controversy subject to arbitration, which would have included the federal law counterclaims.  (The dissent argued that Section 4 encompassed the entire arbitral controversy.)

In Doscher v. Sea Port, No. 15 Civ. 2814 (2d Cir. Aug. 11, 2016) (Wesley, J.), the Second Circuit held that Vaden overruled a previous decision from the Second Circuit that precluded it from using the look-through approach in determining whether federal question jurisdiction exists over an arbitration petition, Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000).  While the District Court correctly applied Greenberg, we conclude that the Supreme Court’s subsequent decision in [Vaden] casts doubt upon Greenberg’s continued vitality. Upon reconsideration of Greenberg, therefore, we conclude that the reasoning of Vaden and the nature of the Act require overruling Greenberg.” 

Thus, in the Second Circuit, District Courts will now apply the look-through approach when deciding if the court has jurisdiction over a petitioner to enforce or vacate an arbitration petition. 

Antitrust laws “protect competition, not competitors”​

Plaintiff failed to prove that the challenged conduct harmed competitionAmong other things, the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.”  Some restraints on trade are unlawful per se.  For example, most price fixing agreements are illegal.  Other restrainged are evaluated under the so-called “rule of reason,” which distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.

In MacDermid Printing Sols. LLC v. Cortron Corp., No. 15-589 (2d Cir. Aug. 10, 2016) (Cabranes, J.), the Second Circuit held “there is really only one way to prove an adverse effect on competition under the rule of reason: by showing actual harm to consumers in the relevant market.”  In a paragraph that will be often cited in antitrust cases, the Second Circuit explained:

How “actual harm” is shown determines whether proof of market power is also required. If a plaintiff proves that consumers have already experienced harm from the challenged behavior because of higher prices, reduced output, or lower quality, then proof of market power is not required. Otherwise, it is.

In fact, “in no precedential opinion in this Circuit has a plaintiff successfully proved an adverse effect on competition without offering evidence of changed prices, output, or quality. “[P]roving an adverse effect on competition without showing increased price, reduced output, or reduced quality in the market has remained possible in theory but elusive in practice.

For this reason, the Second Circuit overturned a jury verdict that found defunct manufacturer Cortron Corp. liable for harming MacDermid Printing Solutions LLC’s ability to compete in the thermal flexographic printing market.  Cortron had issued a press release after settling a patent infringement suit that E. I. du Pont de Nemours and Co. had brought against it.  Under the settlement, Cortron stopped building printing plate machines that Cortron had previously manufactured for MacDermid.

The plaintiff had argued that the news release harmed competition by pushing demand away from it in the market for thermal flexographic printing, which is a narrow segment where MacDermid was the sole rival to the dominant DuPont.  “It is certainly possible that the purported Cortron-DuPont conspiracy, including DuPont’s press release, led some consumers to buy DuPont machines instead of MacDermid ones.”  But “a plaintiff must show that more than its own business suffered; it must ultimately show that the challenged action harmed consumers. MacDermid has not done so here,” the Second Circuit concluded.  Antitrust laws “protect competition, not competitors.”

Strictly interpreting the terms of a standby letter of credit

A standby letter of credit, or SLOC, “is an agreement by a bank to pay a beneficiary on behalf of a customer who obtains the letter, if the customer defaults on an obligation to the beneficiary.”  SLOCs are used to reduce the risk when  a party extends credit “to strangers in distant places.” 

Courts strictly interpret the terms of a standby letter of credit so that the banks, which are dealing only in documents when deciding whether to pay on the standby letter of credit, will be able to act quickly.  Literal compliance with the credit is also essential so as not to impose an obligation upon the bank that it did not undertake or jeopardize the bank’s right to indemnity from its customer. 

At the same time, the requirements in letters of credit must be explicit and all ambiguities are construed against the bank.  Because the beneficiary must comply strictly with the requirements of the SLOC, “it must know precisely and unequivocally what those requirements are.”  

Mago Int’l, LLC v. LHB AG, No. 15 Civ. 2776 (2d Cir. 2016) (Wesley, J.) involved Mago International, a New York company, that had entered into a contract to sell chicken, beef, and other meat products to a company based in Kosovo.  The company default on four invoices from Mago.

The question was whether Mago strictly complied with the terms of the SLOC that required it to submit a “photocopy of B/L evidencing shipment of the goods to the applicant.”  The beneficiary presented unsigned copies of bills of lading to the bank, LHB AG, but these dcouments were not sufficient to quality as “evidencing shipment of the goods” because they lacked a signature.   Because of the strict terms of the SLOC, they were not evidence of shipment even though copies of bills of lading do not generally require signatures in international transactions.[1] 

The Second Circuit thus affirmed the District Court's grant of summary judgment to bank, which had refused to pay, on the basis of the beneficiary’s failure to comply strictly with the terms of a standby letter of credit.

[1] The beneficiary later tendered a set of documents containing signed bills of lading for each invoice but these were untimely under the terms of the standby letter of credit.

Rule 60(b)(5) does not apply to reconsideration of an order dismissing a request for injunctive relief

Rule 60(b)(5):  In 2011, in Ognibene v. Parkes,[1] the Second Circuit upheld New York City’s law limiting political contributions by companies “doing business with” the City that are commonly known as “pay to play” rules and denied injunctive relief. Three years later, the Supreme Court issued its decision in McCutcheon v. FEC,[2] and held that Congress may not limit the aggregate amounts that donors can contribute to candidates and political committees during an election cycle.  Plaintiffs moved under Rule 60(b)(5) for relief from final judgment in light of McCutcheon.  While Rule 60(b)(5) does apply to orders that provide for ongoing injunctive relief, it does not apply to reconsideration of an order dismissing a request for injunctive relief. “Even assuming arguendo that McCutcheon uprooted the legal foundation of Ognibene I and II such that those decisions are wrong and the “pay to play” rules are unconstitutional, plaintiffs are barred from using Rule 60(b)(5) as a vehicle for seeking relief from the February 2009 order because that order does not have prospective application.”  (Plaintiffs also moved for relief under (b)(6) but did not assert different reasons than those asserted under subsection (5) and did not otherwise set forth “extraordinary circumstances” justifying relief from the previous order.) Tapper v Hearn, No. 15 Civ. 2249 (2d Cir. Aug. 10, 2016) (Hall, J.).


[1] 671 F.3d 174 (2d Cir. 2011); see also Green Party of Conn. v. Garfield, 616 F.3d 213, 219 (2d Cir. 2010) (upholding Connecticut’s ban on campaign contributions by government contractors).

[2] 134 S. Ct. 1434 (2014).

Antitrust plaintiffs must be participants in the market that is directly restrained

In Illinois Brick Co. v. Illinois, the Supreme Court held that only companies or people that purchased goods or services directly from alleged antitrust violators may bring an action. “Indirect purchasers” – consumers or business entities downstream in the chain of distribution – lack standing under federal law. In Blue Shield of Virginia v. McCready, the Supreme Court made a narrow exception to the direct purchaser requirement that applies when a party’s injuries are “inextricably intertwined” with the injuries of market participants. McCready involved a patient who alleged that a health insurance provider and a group of psychiatrists colluded to exclude psychologists from receiving compensation under the health insurance plan, thereby harming the psychologists and their patients

 In re Aluminum Warehousing Antitrust Litigation, No. 14-3574 (2d Cir. Aug. 9, 2016) (Jacobs, J.) involved a complicated set of facts involving the aluminum market but a simple holding that reflects Illinois Brick, McCready and subsequent lower court case law: “to suffer antitrust injury, the putative plaintiff must be a participant in the very market that is directly restrained.” 

Usually, that market is the one in which the defendant operates, such as when the plaintiff is a competitor or consumer of the defendant, but sometimes the defendant will corrupt a separate market in order to achieve its illegal ends, in which case the injury suffered can be said to be “inextricably intertwined” with the injury of the ultimate target. Regardless, antitrust injury is suffered by participants in the restrained market (or markets).

At the center of Aluminum Warehousing are widely covered allegations that several investment banks and traders conspired to create delays in the loading aluminum out of certain warehouses in the Detroit Metro area. For example, in mid-2011, it took six months to get the metal out of the warehouses.  Two years later, the time had increased to more than sixteen months.

The Second Circuit held that purchasers of semi‐fabricated and fabricated aluminum do not have standing to assert an antitrust violation under these allegations because they do not participate in the market in which defendants operate and the injury they suffer (higher prices) is not “inextricably intertwined” with whatever injury the defendants intended to inflict.  “Unless the market dynamics force conspirators to corrupt a separate market to achieve their illegal ends, potential McCready plaintiffs do not arise.”  

Confirmation of Arbitration Award Nullified in Mexico

Up to 90% of international contracts provide that disputes with be arbitrated. Moreover, most parties to such contracts honor the arbitration award once it is rendered. Some studies have shown that once an arbitrator or panel issues the award, the non-prevailing party satisfies the award voluntarily more than 90% of time.  

When the party does not honor the award, and the parties continue into litigation, the non-prevailing party usually seeks to set aside the award while the prevailing party seeks to enforce it in one or more places.  In the United States, the two treaties that govern the domestic enforcement of foreign arbitral awards are commonly referred to as the “Panama Convention” and the “New York Convention.”

Both conventions, which largely replicate each other, give courts the discretion to enforce an arbitration award that has been vacated in the country.  For example, article V of the Panama Convention states: “The recognition and execution of the decision may be refused, at the request of the party against which it is made, only if such party is able to prove to the competent authority of the State in which recognition and execution are requested” one of seven defenses. 

As one might expect, a court enforcing a vacated award is a rare event. Prior to 2014, the only reported case in the United States to enforce a vacated arbitration award was In Re Chromalloy Aeroservices and the Arab Republic of Egypt.  In Chromalloy, a United States District Court enforced the award even though it had been vacated in Egypt.  Two subsequent cases, however, distinguished Chromaloy when honoring a decision from a foreign court that set aside the arbitration award.

Corporacion Mexicana De Mantenimiento Integral v. Pemex-Exploracion, No. 13 Civ. 4022 (2d Cir. Aug. 2, 2016) (Jacobs, J.) is thus noteworthy because it is now one of the few times a U.S. court has enforced a vacated arbitration award and the first time a court of appeals has done so.

Petróleos Mexicanos, better known as Pemex, is a petroleum company owned by Mexico (all petroleum and hydrocarbons in Mexico belongs to the state).  Pemex has four subsidiaries including PemexExploración Y Producción (“PEP”). In 1997, PEP entered into an agreement with COMMISA, a Mexican subsidiary KBR, Inc. (formerly Kellogg Brown & Root), to build two natural gas platforms in the southern part of the Gulf of Mexico. 

Pemex and Pep agreed to arbitrate any disputes under Mexican law.  A second contract was agreed to in 2003 after the parties disagreed over whether the oil platforms would be fully constructed before being put into place in the Gulf of Mexico.  The second contract had a virtuallyidentical arbitration clause.  After PEP indicated that it was going to rescind the contract (over the issue of the platforms), COMMISA demanded arbitration and PEP rescinded the contract.

After a number of twists and turns, the arbitration tribunal found that it had jurisdiction and entered a $300 million award in favor of COMMISA. But while the arbitration was proceeding, Mexico enacted a new law under which a special court was made the exclusive forum for administrative rescission disputes and such disputes were made non-arbitrable.  The law also shorted the statute of limitations to forty-five days from 10-years.  One of the arbitrators dissented from the tribunal’s award given the new law.

After COMMISA filed an action in the Southern District of New York, PEP filed an action in Mexico, “which eventually made its way to the Eleventh Collegiate Court, the analog of the United States Court of Appeals for the District of Columbia Circuit.”  The Eleventh Collegiate held that PEP’s rescission was not arbitrable and ordered that the award be annulled; its analysis repeatedly referenced the newlyenacted law. 

After receiving new briefs on the effect of the Eleventh Collegiate Court’s decision, the Southern District conducted a threeday evidentiary hearing chiefly focused on the meaning of applicable Mexican legal provisions.  The Southern District enforced the awarded and added $106 million to the judgment including $59 million of interest.

The Second Circuit held that the Southern District’s decision should be reviewed for an abuse of discretion.  Although a “high hurdle” must be overcome when a court from the situs of the arbitration nullifies an award in that country, the Southern District did not abuse its discretion in so holding  because it vindicated fundamental notions of what is decent and just in the United States for four considerations. 

First, enforcement vindicated the contract and the waiver of sovereign immunity by the government-owned company.  Second, it countered the repugnancy of retroactive legislation that disrupts contractual expectations.  Third, it ensured that legal claims find a forum because given the new statute of limitations, COMMISA would have no remedy in the courts.  Fourth, enforcement of the award served to prohibit government expropriation without compensation. 

Because Article 5(e) of the Panama Convention is substantially similar to Article V(1)(e) of the New York Convention, the decision will impact how courts interpret both conventions.  Yet, such impact would seem to be limited to the egregious situations such as when a government breaches a contract, seizes the nearly complete oil platforms and passes a new law in an attempt to retroactively avoid arbitration.


Appellate Jurisdiction over Magistrate Judge's Award of Attorney's Fees

One of the men convicted of the 1989 rape of a jogger in New York City's Central Park was exonerated after DNA testing and sued, among others, the City of New York. After the lawsuit had progressed, he switched to a new law firm and consented to have a magistrate judge conduct the proceedings under        28 U.S.C. § 636(c).  The case settled and the first law firm sought legal fees.  The magistrate judge awarded the first law firm fees but, not as much as they wanted, so the first law firm appealed.  The second law firm argued that that the Second Circuit did not have jurisdiction over the appeal because the first law firm did not consent to the magistrate judge.  The Second Circuit rejected this argument and held that the magistrate judge’s order on the fees was a final judgment and the appellate court had jurisdiction In re McCray, Richardson, Santana, Wise, and Salaam Litigation because the parties consented to the magistrate judge.  See, No. 15 Civ. 1887 (Aug. 3, 2016) (Kearse, J.).

A jury should decide if Jack Urbont's Iron Man song was a "work for hire"

In Urbont v. Sony Music Entertainment,[1] the Second Circuit held that, based on the evidence, a reasonable jury could find that a cartoon theme song written for Marvel Comics in the 1960s was not a “work for hire” and the composer, Jack Urbont, was the owner of the copyright. In reaching this conclusion, Urbont also held that a third-party has standing to raise a work for hire defense when accused of copyright infringement.

Federal copyright law gives the “author” of a work initial ownership of the copyright in that work. The general rule is that the author is the party who actually creates the work – that is, the person who translates an idea into a fixed, tangible expression.[2] The exception to this general rule is a “work for hire” in which case the hiring party, not the creator, is the copyright owner. For example, if a company hires local newspaper to create advertisements, the company the copyright.[3]

Congress first incorporated the work for hire doctrine into the Copyright Act of 1909.[4] The 1909 Act provides that the word “author” shall include an “employer” in the case of works made for hire.[5] The 1909 Act was repealed and superseded by the Copyright Act of 1976, but it remains effective for copyrighted works created before the Copyright Act of 1976 went into effect on January 1, 1978.

The 1909 Act does not define “employer” or “works made for hire,” so courts have giving meaning to the phrases.[6] Since 1966, the Second Circuit has held that the copyright is owned by “the person at whose instance and expense the work is done.”[7] Put another way, a work is made for hire when the “motivating factor in producing the work was the employer who induced the creation.”[8] The Second Circuit applies the “instance and expense” test when applying the 1909 Act regardless of whether the party creating the work was a traditional employee or an independent contractor.

The instance and expense test is much maligned. One criticism is that the Second Circuit misinterpreted implied assignment cases as work for hire cases – that is, cases where the freelance authors initially owned the copyright and then implicitly assigned it to the hiring party. Another criticism is the test violates the cardinal rule of statutory construction that if words in a statute have a well-known meaning at common law then the words are presumed to have been used in that sense (unless the statute indicates otherwise). Under this approach, “employer” should be interpreted under the common law of agency, and works by freelance authors or independent contractors should not qualify as a work for hire.

The issue over how to determine a work for hire and who owns various works associated with Marvel Comics has been fiercely litigated for at least two reasons. First, the comics now involve multi-billion dollar franchises including X-Men, Thor, The Avengers, Captain America, Iron Man, and Hulk. Second, former producer and editor-in-chief Stan Lee used what became known as the “Marvel Method” to have the works created. Stan Lee would go to the artist with an idea, they would confer, and Stan Lee would leave it up to that person to create the product, which he would then accept or reject. “While the Marvel Method had its problems, it did have one major benefit: producing lots and lots of comic books.”[9]

In 2014, many people hoped the Supreme Court would consider the validity of Second circuit’s instance and experience test when the Supreme Court was set to consider a case between Marvel Entertainment and Jack Kirby’s estate. Kirby was legendary comic book artist and writer who helped created X-Men, Thor, the Hulk, and the Fantastic Four. However, the case settled and petition was dismissed.[10] The dismissal of the case was generally viewed as a disappointment to freelancers because Second Circuit’s instance and expense test remained controlling in the circuit for pre-1978 work.

Urbont is the latest copyright case to apply the instance and expense test and, perhaps surprisingly, favored the creator, Jack Urbont. In 1966, Urbont created a number of theme songs for a television series called Marvel Super Heroes including “Iron Man Theme.” In February 2000, rapper and Wu-Tang Clan member Ghostface Killah released his second studio album, Supreme Clientele, which used parts of the theme song in the album’s opener “Intro” and closer “Iron’s Theme – Conclusion” (Ghostface had debuted his solo career with Ghostface Killah debuted his solo-career with an album entitled Ironman in 1996.)

In 2011, Urbont sued Ghostface, Razor Sharp Records, and Sony Music Entertainment for copyright infringement under federal law.[11] The District Court granted summary judgment against Urbont on the ground that Marvel was the copyright owner because the theme song was a “work for hire” as a matter of law.

The Second Circuit reversed. The court initially noted that a copyright registration from 1966 listed him as “author” of the song and a renewal registration from 1995 that listed him as owner. A certificate of registration made before or within five years after first publication of the work is prima facie evidence of the validity of the copyright.[12] As a result, Sony had the burden to disprove the registration.

The follow evidence favored Urbont’s position that the song was not a work-for-hire. First, Urbont testified that he retained all of the creative control over the project. Lee was not permitted to modify the work and could only accept or reject the songs he composed. Second, Urbont approached Stan Lee, not the other way around, and he wrote the songs speculating or hoping that Marvel would use them. In other words, there was no prior working relationship between Urbont and Marvel, nor was there was any guarantee. Third, Urbont independently recorded and produced the Iron Man theme song with his own tools and resources, including a recording studio he rented. Urbont claimed he was essentially paid only to cover his costs, not to profit from the project. Fourth, Urbont received royalties although he not have a written royalty agreement.

These factors were enough for a jury to find that Urbont’s composition of the song was not made at the instance and expense” of Marvel even though Marvel (1) determined the subject matter and scope of Urbont’s compositions, (2) had the right to accept or reject his songs, and (3) gave him a fixed sum of $3,000 in return for the bundle of theme songs. Moreover, the fact that Urbont wrote the songs on the speculation or hope, rather than a guarantee or prior arrangement, distinguished the case from the Second Circuit’s decision in Kirby where “Marvel and Kirby had a standing engagement whereby Kirby would produce drawings designed to fit within specific Marvel universes.”[13]

Finally, the Second Circuit reversed the District Court’s holding that if it was work for hire, Urbont had failed to produce evidence of an oral agreement that he would retain the rights to the song. Urbont had offered his deposition testimony that Marvel shared Urbont’s understanding that he would own the rights to the Iron Man composition and, on summary judgment, the district court was required to accept this testimony as credible.


[1] No. 15-1778 (2d Cir. July 29, 2016).

[2] See Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989).

[3] See Brattleboro Publ‘g Co. v. Winmill Publ’g Corp., 369 F.2d 565 (2d Cir. 1966);

[4] See generally Catherine L. Fisk, Authors at Work: The Origins of the Work-For-Hire Doctrine, 15 Yale J.L. & Human. 1 (2003).

[5] 17 U. S. C. § 26 (repealed).

[6] In contrast, the 1976 Act defines “work made for hire.” See 17 U.S.C. § 101 (2012).

[7] Brattleboro Publ‘g Co. v. Winmill Publ’g Corp., 369 F.2d 565 (2d Cir. 1966); see also Picture Music, Inc. v. Bourne, Inc., 457 F.2d 1213 (2d Cir. 1972)

[8] Siegel v. Nat'l Periodical Publs., Inc., 508 F.2d 909, 914 (2d Cir. 1974).

[9] Alex S. Romagnoli & Gian S. Pagnucci, American Values, Culture, and the Canon of Superhero Literature at 103 (Rowman & Littlefield 2013).

[10] See Marvel Worldwide, Inc. v. Kirby, 777 F. Supp. 2d 720, 737 (S.D.N.Y. 2011), aff’d in part, vacated in part sub nom, Marvel Characters, Inc. v. Kirby, 726 F.3d 119 (2d Cir. 2013), cert. dismissed, 135 S. Ct. 42 (2014).

[11] Urbont also sued for copyright infringement, unfair competition, and misappropriation under state law. Ghostface (whose real name is Dennis Coles) failed to participate in discovery and, as a result, the district court entered judgment against and imposed sanctions on him. Only Sony and Razor Sharp Records appealed.

[12] See 17 U.S.C. § 410(c).

[13] Kirby, 726 F.3d at 142.

Claims of discrimination only need to plead facts supporting a “minimal plausible inference” of discriminatory intent

         In Doe v. Columbia University, No. 15 Civ. 01661 (July 29, 2016), the Second Circuit held that allegations supporting a “minimal plausible inference” of discriminatory intent are sufficient to plead that element because, under McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), such allegations entitle the plaintiff to a temporary presumption of discrimination until the defendant give its reasons for the adverse action against the plaintiff.  Under this standard, a Columbia University student who had been suspended by the school for sexual misconduct alleged facts sufficient to support a claim sex discrimination under Title IX, 20 U.S.C. §§ 1681-1688.  In a footnote, the Second Circuit emphasized that the Second Circuit has “often vacated 12(b)(6) and 12(c) dismissals of complaints alleging discrimination” because of the temporary presumption to plaintiffs under McDonnell Douglas and its progeny.

         The last five years have seen an increasing number of lawsuits by men who have been disciplined for sexual misconduct in university proceedings.  The lawsuits have come about in the aftermath of the Department of Education’s Office for Civil Rights issuing a “Dear Colleague Letter” in 2011 stating that sexual violence in schools is a form of sexual harassment prohibited by Title IX along with additional guidance issued in 2014. This guidance focuses on the issue of student-on-student sexual harassment.

         As a result of the federal government pushing universities and colleges to change how they handle sexual assault, an increasing number of male students have being disciplined for sexual misconduct.  In turn, those men have alleged that they were discriminated against on the basis of their sex in violation of Title IX.  For example, as the Second Circuit noted in Doe, on April 24, 2014, twenty-three students filed complaints with the United States Department of Education for violations of Title IX and other laws, alleging that Columbia University mishandled incidents of sexual assault and misconduct on campus.

         After the District Court dismissed Doe’s complaint, Alison Frankel noted in an article that in only one case, Wells v. Xavier University (S.D. Ohio 2014), had a male student’s complaint not been dismissed.  Prior to the Second Circuit’s decision, the general perception has been that men faced a difficult path in pleading sex discrimination as made evident by the Title of Frankel’s article, “Men face high bar to claim discrimination by campus sex assault tribunals.” 

         Thus, the Second Circuit’s decision to vacate the dismissal is of national significance.  It is the first Court of Appeal’s decision to address the pleading requirements for men who allege sex discrimination in a university or college’s internal disciplinary process.  It is also significant that the Second Circuit emphasized the “minimal plausible inference” that plaintiff must satisfy as a result of the burden-shifting framework established in a McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973) and followed by Tex. Dep’t of Cmty. Affairs v. Burdine, 450 U.S. 248 (1981), St. Mary’s Honor Ctr. v. Hicks, 509 U.S. 502 (1993),  and Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133 (2000);

         These Supreme Court cases hold that, in actions alleging employment discrimination in violation of Title VII, the plaintiff needs to present only minimal evidence supporting an inference of discrimination in order to prevail unless the defendant furnishes a nondiscriminatory reason for the adverse action. Once the employer presents evidence of non-discriminatory reasons for the adverse action, the plaintiff must demonstrate that the proffered reason was not the true reason or the sole reason for the employment decision.  Plaintiff must then prove the defendant intentionally discriminated against her. In the employment context, an example of the minimal evidence supporting an inference of discriminatory motivation (sufficient to support a jury verdict) is that a job applied for by the plaintiff remained open after plaintiff’s rejection and that the employer continued to seek applicants from persons of plaintiff’s qualifications.  

         In Doe, the allegations the inference of bias against Doe (which were accepted as true because it was a motion to dismiss) supporting included that the university’s investigator and the panel (1) declined to seek out potential witnesses that Plaintiff had identified as sources of information favorable to him, (2) failed to act in accordance with university’s procedures designed to protect accused students, and (3), along with the reviewing Dean, reached conclusions that were incorrect and contrary to the weight of the evidence. 

         Other allegations gave “ample plausible support” to a bias with respect to sex.  In particular, Doe's complaint alleged that, prior to Doe’s disciplinary hearing, there was substantial criticism of the University in the student body and in the public media asserting that the university did not seriously take complaints of female students alleging sexual assault by male students.  The administration was aware of, and sensitive to, these criticisms so much that the President of the university called a University-wide open meeting with the Dean to discuss the issue.  “Against this factual background, it is entirely plausible that the University’s decision-makers and its investigator were motivated to favor the accusing female over the accused male, so as to protect themselves and the University from accusations that they had failed to protect female students from sexual assault.”

Terms of an indenture are clear, says Second Circuit

Orchard Hill Master Fund v. SBAC Corp., No. 15-3462 (2d Cir. July 21, 2016) (Hall, J.):  An indenture is merely a contract between a bond issuer (i.e., the company that issues the bond) and the bondholders. The term comes from the phrase an "indenture of retainer," which was a contract written in duplicate on the same sheet with the copies separated by cutting along a jagged (toothed, hence the term "indenture") line so that the teeth of the two parts could later be refitted to confirm authenticity of the contract.

Orchard Hill Master Fund involved a dispute over an indenture.  Bondholders who had converted their bonds into equity or cash alleged that the issuer still owed them a final interest payment.  The district court dismissed the claim with prejudice on the ground that there was no reasonable interpretation of the underlying contract that entitled the plaintiffs to both the benefits of the conversion and the final interest payment.

There isn't much more to say about the Second Circuit's decision to affirm except that if the bondholders were willing to sue and then appeal, someone misunderstand what the contract said and it costs the bondholders a good deal of money.  All I can say is that every lawyer who drafts or reviews a contract should have a copy of A Manual of Style for Contract Drafting by Ken Adams.  Following Ken's blog is a very good idea too.

Decision here:  http://cases.justia.com/federal/appellate-courts/ca2/15-3462/15-3462-2016-07-21.pdf?ts=1469111406

Ken Adam's book here:  https://www.amazon.com/Manual-Style-Contract-Drafting/dp/1614388032

Ken Adam's blog here:  http://www.adamsdrafting.com/blog/

A district court may decertify a class action even if a jury has returned a verdict

Mazzei v. Money Store, No. 15-2054 (2d Cir. July 15, 2016):

Lawyers often tell clients and younger attorneys:  "It's not what you know, it's what you can prove."  In fact, a lawyer's first question during an interview is often:  How do you know that? 

There is a corollary to this rule:  "Don't forget to prove your case."

This is actually harder for lawyers to remember than one might think.  Lawyers live with a case day-after-day.  They file or oppose motions; they talk strategy with people at the firm; they have conversations and disagreements with opposing counsel.  Everything about the case becomes familiar over the course of years.  After a while, the lawyers begin to assume the things that they know are facts.  And often the case  settles, at which point the facts or evidence of the case do not matter -- at least for the purposes of resolving the case.

So, lawyers sometimes forget that what they know to be true doesn't become a fact until a judge or jury says it is a fact and even that conclusion must be supported by evidence presented in court.

In federal court, Rule 50 permits a court to override a jury's verdict and enter judgment against a party where "there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue. . . ." Fed. R. Civ. P. 50(a).  In making this determination, a court is required to consider the evidence in the light most favorable to the party against whom the motion was made and to give that party the benefit of all reasonable inferences that the jury might have drawn in his favor from the evidence.  But there are certainly reported cases where a judge has overturned a jury's verdict as lacking evidence. 

The federal rules also allow for a new trial under Rule 59.  A party making such a motion sets out specific issues that occurred at trial and that have previously been grounds for a new trial “in an action at law in federal court.” Fed. R. Civ. P. 59(a).  That is, the federal rules limit the grounds for a new trial to the common law. The following grounds are commonly raised:

• excessive or insufficient verdict
• newly discovered evidence
• conduct of counsel that tainted the case
• jury misconduct
• verdict based on false testimony
• unfair surprise
• substantial errors in the admission/rejection of evidence
• giving or failure to give jury instructions

We wrote about a District Judge granting a Rule 59 motion earlier this month (where the judge found the jury's award was too low):  http://www.lehmanlawgroup.com/blog/2016/7/4/judge-woods-orders-new-trial-on-plaintiffs-damages

The consequences and standards for Rule 50 and Rule 59 are different.  If a party wins its Rule 50 motion, the case comes to an end.  If a party wins its Rule 59 motion, the court has a new trial.

The difference in standards is that, under Rule 50, the question is whether a reasonable jury could have reached that conclusion based on the admitted evidence.  Under Rule 59, the standard is far more mushy as the courts ask whether allowing the verdict would be “seriously erroneous,” a “miscarriage of justice,” or “egregious” under the "weight of the evidence."  Rule 50 is consider more stringent and certainly has a harsher result.  In fact, a court may find that, although the grant of judgment as a matter of law (Rule 50) may be inappropriate because the jury's verdict is supported by sufficient evidence, the verdict should still be set aside because it is against the weight of the evidence. 

All of this provides the background for what will be one of the leading cases of the next year from the Second Circuit:  Mazzei v. Money Store, No. 15-2054 (2d Cir. July 15, 2016).  In Mazzei, the Second Circuit held that a district court may decertify a class action before it enters final judgment even if a jury has returned a verdict.  In considering decertification, or modification, of a class after a jury verdict, the district court should use the standard that a district court applies to a Rule 59 motion.  The Second Circuit rejected the argument that the more stringent Rule 50 standard should apply.  As to questions of fact that are not necessarily decided by the jury’s verdict, the court may make its factual findings based on the preponderance of the evidence.

The appeal arose after Joseph Mazzei had filed a class action against The Money Store and its servicing operator TMS Mortgage Inc. (The Money Store became HomEq Servicing Corp. in 1999 and all three companies were collectively referred to as “The Money Store” by the Second Circuit.)  Mazzei alleged that The Money Store had overcharged him and other similarly situated people. 

In particular, after Mazzei defaulted on his loan, the sum of the principal and interest became due under the terms of the contract – that is, the loan was “accelerated.”  Mazzei declared bankruptcy and later paid the balance of the loan including interest and various default fees.  The fees, however, included five late fees charged after the loan acceleration for a total of $133.80.

Mazzei alleged that, under the agreement, Money Store could only charge him late fees prior the loan acceleration – hence, the class was called the “Post Acceleration Late Fee Class.” The District Court (Judge John G. Koeltl) certified the class so as include all borrowers who signed the Fannie Mae form agreements on loans that were either (1) owned or (2) serviced by the Money Store.

A jury returned a verdict in favor of Mazzei and the class awarded $133.80 to Mazzei for the five post-acceleration fees.  The jury also awarded the class approximately $32 million along with prejudgment interest. 

After the jury’s verdict, the Money Store moved to have the class decertified on the ground that Mazzei failed to prove class-wide privity of contract between The Money Store and borrowers whose loans the company serviced but did not own.  The district court agreed and held that two elements needed to satisfy a class under Rule 23 were missing – typicality and predominance.  See Mazzei v. Money Store, 308 F.R.D. 92 (S.D.N.Y. May 29, 2015).

The Second Circuit agreed and set forth the standards outlined above.  In considering decertification, or modification, of a class after a jury verdict, the district court should use the Rule 59 standard.  As to questions of fact that are not necessarily decided by the jury’s verdict, the court may make its factual findings based on the preponderance of the evidence.





Decision here:  http://cases.justia.com/federal/appellate-courts/ca2/15-2054/15-2054-2016-07-15.pdf?ts=1468593009

Fascinating petition for the Supreme Court to rehear the immigration case it split 4-4 on

"The Obama administration on Monday asked the Supreme Court to take the unusual step of reconsidering a major immigration decision once a full nine-member court can hear the case."


The petition is here:  https://www.documentcloud.org/documents/2995148-15-674-Texas-Rehearing-Petition.html

Supreme Court likely to consider recent Second Circuit case on whether class actions toll statutes of repose for securities violations

SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., No. 14 Civ. 507 (2d Cir. July  14, 2016) (Lohier, J.):

Over two years ago, the Supreme Court was ready to consider whether the filing of a putative class action tolls the time in which a class member may file a claim on its own behalf under the Securities Act of 1933 when it granted the petition for certiorari in Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc.  But then the lead plaintiffs in the case, Wyoming Retirement System and Wyoming State Treasurer, reached a $340 million settlement agreement with the six investment firms that had acted as underwriters in the issuance of mortgage-backed securities prior to the 2008 financial crisis.  

In preparing for oral argument, the Supreme Court came across the settlement and ordered the parties to answer:  “What should be the effect, if any, of the proposed settlement agreement now pending before the district court on the matter pending before this Court?” The lawyers on all sides answered that the case could go forward in the Court because claims against one of the underwriting firms sued in the case (Goldman Sachs & Co.) would have remained, but the Court dismissed the case as “improvidently granted.”  Among other things, the lead plaintiffs had stated in their answer that they were not seeking to collect anything from IndyMac and would dismiss any claims against that firm if the judge approved the settlement.

The Second Circuit’s recent decision in SRM Global Master Fund v. Bear Stearns, No. 14 Civ. 507 (2d Cir. July 14, 2016) was to be expected given that Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), remains binding in the circuit.  The court held that statutes of repose may not be tolled.  While it may be true the Supreme Court had previously held in American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974) that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class, this holding does not apply to a statute of repose because a statute of repose “is not a limitation of a plaintiff’s remedy, but rather defines the right involved in terms of the time allowed to bring suit.”  P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 102, 104 (2d Cir. 2004).

It would be shocking if the Supreme Court doesn't grant certiorari in this case, assuming that the plaintiffs file the petition.

Second Circuit's decision here:  http://cases.justia.com/federal/appellate-courts/ca2/14-507/14-507-2016-07-14.pdf?ts=1468508410

Argument preview on the IndyMac case here:  http://www.scotusblog.com/2014/09/argument-preview-able-opponents-trade-arguments-in-high-stakes-dispute-over-deadlines-for-filing-class-actions/

The extensive briefing on the IndyMac case here:  http://www.scotusblog.com/2014/09/argument-preview-able-opponents-trade-arguments-in-high-stakes-dispute-over-deadlines-for-filing-class-actions/ 

The Harvard Law Review Note criticizing IndyMac's reasoning (Note, Second Circuit Holds That American Pipe Class Action Tolling Doctrine Does Not Apply to Statute of Repose in Securities Act of 1933, 127 Harv. L. Rev. 1501 (2014)) is her:  

Posts from D&O Diary here:  http://www.dandodiary.com/2014/09/articles/securities-litigation/supreme-court-will-not-consider-the-securities-act-statute-of-repose-issue-in-the-indy-mac-case-after-all/

and here:  http://www.dandodiary.com/2014/07/articles/securities-litigation/guest-post-class-certification-timing-and-the-indymac-mbs-case-in-the-supreme-court/

Sweetheart Lease of Chocolate Factory is Void, but Integration Clause Still Precludes Oral Agreement

Alphonse Hotel Corp. v. Tran, No. 14 Civ. 3447 (2d Cir. July 11, 2016) (Hall, J.):

Alphonse Hotel Corporation is a New York corporation that owns various assets including the former Franklin Chocolate Factory, a rundown property in Philadelphia.  Eighty percent of the company was owned by Truong Dinh Tran.  The other twenty percent was owned by four women, all mothers of Truong's children.  Truong served as president of the closely held corporation until the autumn of 2010 when one of his sons became president.

In 2012, Truong died without a will and a New York court appointed a temporary administrator of the estate.  The administrator took control of Truong’s share of the company and assumed the roles of president and the company's only director. The company then filed an action in state court against Truong's eldest son, Nam T. Tran, who removed the case to federal court based on diversity of citizenship.  

The underlying facts of the complaint against Nam are that five years before his death, in 2007, the company (through Truong) allegedly entered into a Joint Venture Agreement with Nam to develop the property.  The company also agreed to a lease of the property for twenty years in exchange for twenty dollars.   The company (through the administrator) sought damages for Nam’s use and occupancy of the property and a judgment declaring that the lease and Joint Venture Agreement were void. 

The District Court granted summary judgment in favor of the company.  In affirming, the Second Circuit made several straightforward holdings.  

First, the District Court did not abuse its discretion in denying Nam’s request for additional discovery prior to summary judgment because nothing in the affidavit submitted by Nam under Fed. R. Civ. P. 56(d) was relevant to the issues on summary judgment.  For example, Nam requested documents about the temporary administrator's investigation, various drawings of the property, and documents concerning the value the property and its condition, but these documents would not make a difference in determining if the agreements were void.

Second, while the actions of corporate directors such as Truong are usually protected by the business judgment rule, and thus “subject to judicial review only upon a showing of fraud or bad faith,” Stern v. Gen. Elec. Co., 924 F.2d 472, 476 (2d Cir.  1991) (applying New York law), this rule does not apply where a corporate director has an interest in the decision.  As Nam conceded, Truong ran the company for the benefit of his family and frequently used corporate assets to help family members. Since Nam conceded that the lease was  similar to other transactions that Truong executed to give financial security to his family and to provide for his children, the lease lacked a legitimate business purpose or was tainted by a conflict of interest. Since the business judgment rule did not apply, Nam had to show that the lease was objectively fair and served the best interests of the corporation and its shareholders. 

Third, the lease of the property for twenty years in return for twenty dollars was not a fair or reasonable business decision.  Under New York law, a gift or waste of corporate assets are void acts and cannot be ratified by a majority of stockholders.  "The essence of a claim of gift is lack of consideration and the essence of waste is the diversion of corporate assets for improper or unnecessary purposes.”   Aronoff v. Albanese, 446 N.Y.S.2d 368, 370 17 (2d Dept. 1982).

Nam argued he had also put in the “sweat equity” to develop the property under the Joint Venture Agreement, but this did not constitute consideration for the lease since it was contributed prior to the execution of the lease and could only count as consideration if the lease explicitly expressed that intention.

Fourth, the Joint Venture Agreement was unenforceable under Pennsylvania law by operation of the parol evidence rule because the fully integrated lease discharged any prior‐in‐time oral agreement relative to the property. Nam argued that if the Lease is void as a gift or for lack of consideration, then the lease's terms cannot bar evidence of the Joint Venture Agreement because a void contract has no preclusive effect.

The Restatement (Second) of Contracts (1981) supported the opposite conclusion -- that is, an integration clause in a contract that is void for lack of consideration may still preclude evidence of prior agreements within the scope of the contract's integration clause.  "An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated."  Id. § 213(3). The Second Circuit also noted that one of the Restatement’s illustrations was analogous to the contract at issue in that case.  See id. cmt. d, illus. 6.

Pennsylvania courts, however, had not adopted this provision of the Restatement and the issue would be one of first impression the state. The Second Circuit decided not to exercise its discretion to certify the question to the Pennsylvania Supreme Court.  Based on its analyses of other courts that have certified questions  and on its reading of Pennsylvania’s codified standards, the Second Circuit concluded that the Pennsylvania Supreme Court had a stringent standard for accepting certification petitions.  For instances, 210 Pa. Code § 3341(c) states:  “The Supreme Court may accept certification . . . only where there are special and important reasons therefor. . . ."  

The Second Circuit decided not to certify the question as it might never arise again in Pennsylvania courts, and if it did it would be rare.  Moreover, the Second Circuit  predicted that the Pennsylvania Supreme Court would have reached the same result if presented with the parol evidence issue.  Finally, the Second Circuit explained that its conclusion was bolstered by the fact that the Pennsylvania Supreme Court generally adopts the principles of the Restatement of Contracts.  

Second Circuit's decision here:  http://cases.justia.com/federal/appellate-courts/ca2/14-3447/14-3447-2016-07-11.pdf?ts=1468247407