Review Your CGL Policy's False Advertising Coverage

by Gary Beaver

In Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, et. al., plaintiff insurer filed a declaratory judgment action to determine if it owed coverage and a defense for defendants in a federal lawsuit in which claims were made alleging defendants made false ads. The trial court and NC Court of Appeals held that coverage existed. The N.C. Supreme Court reversed on April 15, 2010.

The defendants made insect-repellent clothing and were sued by a competitor for alleged false ads. The NC Supreme Court reviewed the CGL policies’ language and noted that they provided coverage for injury resulting from some false statements made in ads, but not injury caused by false statements an insured makes about its own products. The court then made a detailed analysis of the complaint in the false advertising lawsuit to determine whether the alleged false ads were covered and held that they were not.

The opinion provides a good application of the “comparison test” by which a court reviews the policies and complaint at issue “side-by-side….to determine whether the events as alleged are covered or excluded.” It is also an example of when defendants probably would have preferred that its competitor had overstated its claims, i.e., stated them more broadly rather than with the detail and specificity actually used so that the court might have found that coverage was at least a possibility which, in turn, would have given rise to the insurer’s duty to defend in the federal lawsuit even if a later determination was made that coverage did not exist.

Fourth Circuit tolls service period for IFP plaintiffs.

by Kirsten E. Small

The Fourth Circuit held today that a magistrate judge's order prohibiting issuance and service of process by the court clerk until instructed otherwise by the court tolls the 120-day service period unter Rule 4(m). Robinson v. Clipse, No. 08-6670 (April 28, 2010).

The issue arose as a result of the court's application of the "relation back" rule of Rule 15(c). Robinson named the wrong defendant (the South Carolina Highway Patrol) in a § 1983 action alleging excessive force by Trooper Joseph Clipse. The magistrate judge directed the district court clerk not to serve the complaint until further order* and recommended to the district court that the complaint be dismissed. Robinson moved to add Clipse as a defendant but the court denied the motion and dismissed the complaint on the basis that Clipse was entitled to qualified immunity.

After the Fourth Circuit reversed, Robinson sought to file an amended complaint naming Clipse. Rule 15(c)(1)(C) allows such amendments provided the new party has knowledge of the complaint "within the period provided by Rule 4(m) for serving the summons and complaint." The district court authorized service on July 3, 2007.

The district court dismissed the complaint, holding that the amended complaint did not relate back because Clipse did not have notice of the complaint "within the limitation period" for Robinson's claim, i.e., by November 14, 2005. As the Fourth Circuit noted in reversing, Rule 15(c)(1)(C) requires that the party have notice within the 120-day service window of 4(m), not within the statute of limitations for the claim.

The Court further held that because IFP plaintiffs are at the mercy of the court for service, entry of an order prohibiting service tolls the 120-day service period. Thus, Rule 15(c)(1)(C) only required Robinson to show that Clipse had notice within 120 days of July 3, 2007, the first time the court authorized service. Because Clipse had actual notice well before the expiration of this period, the amendment related back and dismissal was improper.

Commentary: This seems like a pretty common-sense ruling to me. Magistrate judges routinely forbid service of IFP complaints pending an initial evaluation of the claim. As the Court noted, it is manifestly unfair to place the burden of this pre-service review on the litigant, who has no control over its length. Moreover, the holding is consistent with the federal courts' general policy of leniency to pro se litigants (as IFP filers almost universally are)--it is hardly surprising that Robinson would name Clipse's employer, rather than Clipse himself, as the entity responsible for paying damages. The tolling rule adopted by the Fourth Circuit provides some protection from mistakes like Robinson's.

*Because Robinson was proceeding in forma pauperis, the complaint was to be served by the U.S. Marshals Service.

Fourth Circuit clarifies Carter; Holds escape under SC law is not a per se violent felony.

by Kirsten E. Small

The Fourth Circuit issued two published opinions today, both in criminal cases. In United States v. Hernandez, the rejected (on plain error review) the defendant's argument that the district court inadequately explained the reasons for imposing a sentence at the bottom of the guidelines range. Specifically, Hernandez contended that the explanation was inadequate under the Court's prior decision in United States v. Carter, 564 F.3d 325. Carter held that "Regardless of whether the district court imposes an above, below, or within-Guidelines sentence, it must place on the record an 'individualized assessment' based on the particular facts of the case before it. This individualized assessment need not be elaborate or lengthy, but it must provide a rationale tailored to the particular case at hand and adequate to permit 'meaningful appellate review.'" 564 F.3d at 330. Carter has been the subject of substantial litigation.

Hernandez clarifies (some might say "narrows") Carter by stating that a district court sufficiently explains a within-guidelines sentence by, essentially, recognizing the wisdom and experience embodied in the Sentencing Guidelines and concluding that the case is a typical one.

The second decision, United States v. Bethea, addressed the question of whether escape under South Carolina law is categorically a violent felony for purposes of the Armed Career Criminal Act. The Court concluded that it was not, reasoning that because the statutory term "escape" encompasses a failure to report--a non-violent felony under the ACCA--the decision of the Supreme Court in United States v. Chambers, 129 S. Ct. 687 (2009), required the Fourth Circuit to hold that the South Carolina escape statute did not necessarily constitute a violent felony. The Court further concluded that Bethea's offense could not be considered a violent felony under the modified-categorical approach because the charging documents and sentencing sheet simply identified the offense as "escape." The court therefore vacated Bethea's sentence and remanded for resentencing.

Chapter 75 Does Not Apply to Breaches of Fiduciary Duties Between Partners in N.C.

by Gary Beaver

On April 5, 2010, White v. Thompson, the N.C. Supreme Court held that NCGS §§ 75-1.1 (NC’s unfair and deceptive trade practices act) does not extend to a partner’s breach of his fiduciary duty owed to his partners within a single business. The Court ruled that such misconduct is not “in or affecting commerce.” This holding serves as a reminder that Chapter 75 claims are supposed to be directed at stopping bad business behavior between competing businesses and not designed to regulate purely internal business operations.

Fourth Circuit holds forced medication not appealable after guilty plea.

by Kirsten E. Small

It was a quiet week in the Fourth Circuit--by my count, there were only two published decisions, and only one of them is particularly notable.

That "one" is United States v. Bowles. Bowles was charged on drug and weapons charges but found incompetent and committed for treatment. After four years of treatment for paranoid delusions, the district court granted the government's motion to forcibly medicate Bowles in order to render him competent to stand trial.

Bowles pleaded guilty, then sought to have his conviction vacated on the basis that the forcible medication was improper. The Fourth Circuit today dismissed the appeal, holding that forced medication is a "nonjurisdictional defect" that is waived by a guilty plea. The Court noted that Bowles could have obtained review of the medication order through an interlocutory appeal.

Third Circuit grants ADA protection for side effects of medication; the U.S. Senate has nothing on Ms. Stucky's fourth graders.

by Kirsten E. Small

This morning I visited my son's fourth grade class to talk about the Supreme Court and the process for confirming a new justice. The students had a great time questioning the "nominee" (their teacher, Ms. Stucky), and then had a rigorous debate over her qualifications, ability to be fair, and whether or not she had a hidden agenda (seriously!). In the end, the "Senate" narrowly confirmed Mrs. Stucky to the Supreme Court. Would someone please get the President on the line for me? ...

In other (some would say "actual") news, the Third Circuit on Monday ruled that side effects from a medication can constitute a "disability" under the Americans with Disabilities Act and the Rehabilitation Act, even if the condition for which the medication is prescribed is *not* a disability. The ruling, in Sulima v. Tobyhanna Army Depot, can be accessed here. The Third Circuit joins the Seventh Circuit in explicitly holding that side effects from medication (in this case, gastrointestinal disress from a weight-loss drug, which required the plaintiff to take long bathroom breaks during work hours) can constitute a "disability" under the ADA and the RA. The Eighth Circuit and the Eleventh Circuit have indicated that they, also, would treat side effects from medication as a possible disability.

The Third Circuit adopted the Seventh Circuit's three-part test for determining whether side effects of a medication may constitute a disability: "(1) the treatment is required “in the prudent judgment of the medical profession,” (2) the treatment is not just an “attractive option,” and (3) that the treatment is not required solely in anticipation of an impairment resulting from the plaintiff’s voluntary choices." Applying this test, the court concluded that Sulima was not disabled because his doctor changed the medication after Sulima reported his work problems, indicating that the treatment was not "required."

Which came first, Daubert or class certification? 7th Circuit says Daubert.

by Kirsten E. Small

Class action practitioners will want to take a look at American Honda Motor Co. v. Allen (No. 09-8051), decided by the Seventh Circuit last week.

Richard Allen sued Honda on behalf of a putative class, claiming that a design defect in the company's Gold Wing GL1800 motorcycle made it, and I am not kidding here, too wobbly. Allen's theory was supported by Mark Ezra, whom Allen offered as an expert in motorcycle engineering. Honda challenged Ezra's opinion under Daubert, arguing that his opinion was deficient in a number of respects. Honda further argued that the admissibility of Ezra's opinion had to be decided before class certification because absent the opinion, Allen could not establish that common issues predominated, as required by Rule 23(b)(3).

The district court agreed with Honda, sort of. It concluded that Ezra's opinion was shaky (pun intended), but nevertheless admitted it and certified two classes of consumers who had purchased GL1800s.

The Seventh Circuit accepted Honda's petition for review and reversed in a per curiam opinion that reads very much like something Judge Posner would write. The heart of the ruling is as follows: "[W]hen an expert's report or testimony is critical to class certification ... a district court must conclusively rule on any challenge to the experts qualifications or submissions prior to ruling on a class certification motion." Slip op. at 6. The court did not address when the Daubert analysis might be "critical to class certification," but presumably that is a common-sense determination.

It will be interesting to see what kind of play this decision gets in other design defect cases, particularly the glut of Toyota sudden acceleration claims.

Fourth Circuit Update: April 8, 2010

by Kirsten E. Small

"They" tell you never to do this, but I'm starting with an apology: I've got a brief due in the Fourth Circuit today, so there will be no scintillating analysis of yesterday's Fourth Circuit decisions. Maybe I'll get back to y'all over the weekend, or maybe I'll sleep and play with my kids.

The Fourth Circuit published two decisions yesterday:

In United States v. Ayala, the court affirmed RICO and VICAR convictions against several MS-13 gang members.

Westmoreland Coal Co. v. DOWCP may warrant more comment over the weekend (sorry, kids). The court affirmed an award of black lung benefits (no biggie there) but vacated the award of attorney's fees because--even though the award was "not unreasonable in sum"--the the ALJ failed to identify a specific hourly rate after rejecting the hourly rate proposed by claimant's counsel.

Fourth Circuit holds that authority to hire/fire is not essential to a finding of supervisor status.

by Kirsten E. Small

Employment lawyers should take note of Whitten v. Fred's, Inc. (09-1265) decided yesterday by the Fourth Circuit. The case is chock-full of important rulings. Although the court was addressing state law claims, South Carolina discrimination law mirrors federal law, and the court applied federal case law in its holdings. Therefore, it would seem that these holdings would apply to federal Title VII claims.

Whitten was allegedly sexually harrassed by the store manager (Green) of the Belton store where she worked. The harrassment occurred on Whitten's first two days working at the store, a Friday and Saturday. Whitten informed the district manager, who told Whitten she was "overreacting." Feeling otherwise, Whitten quit.

Whitten subsequently filed a complaint with the EEOC and requested that the complaint also be filed with the South Carolina Human Affairs Commission (SHAC).
The EEOC issued a right-to-sue letter, and Whitten subsequently filed suit. Because her federal claims were time-barred (more on this anon), Whitten pleaded a hostile environment claim only under state law.

The district court granted summary judgment to Fred's, concluding that Green's conduct was not imputable to Fred's because Green was not Whitten's supervisor. This was so, the court reasoned, because Green did not have the authority to hire or fire Whitten.

The Fourth Circuit reversed and remanded in an opinion written by Chief Judge Traxler.

1. Authority to hire/fire is not essential to a finding that an employee is a supervisor. The court held that the test for whether an employee is a supervisor is whether the employee's harrassing conduct is "aided by the agency relation." While this is always the case when an employee has hiring and firing authority, such authority is not a requirement because an employee can be a supervisor even when lacking such authority.

Here, Green was the highest ranking employee in the store, bore the formal title of store manager, and directed Whitten's activities and work schedule. The Court determined that this evidence established that Green was a supervisor.

2. State administrative remedies are exhausted when the EEOC forwards a complaint to a state agency. Fred's argued that Whitten had failed to exhaust administrative remedies because she filed her complaint with the EEOC rather than the SCHAC. The EEOC then forwarded the complaint to the SCHAC, which acknowledged receipt. The Court held this sufficient, reasoning that nothing in the statute requires that a complainant personally file with the SCHAC.

3. Untimeliness under federal law does not establish untimeliness under state law. A federal discrimination complaint must be filed within one year of the discrimination or 120 days of EEOC dismissal, whichever comes first. Whitten's federal claims were time-barred because she failed to file her complaint within 120 days of the EEOC's right-to-sue letter (although she filed within one year of the discrimination). Fred's argued that this time bar was also fatal to Whitten's state claims, which are subject (as a matter of state law) to the same limitations period. The Court disagreed, holding that the state statute refers only to the SCHAC, not to the EEOC. Since the SCHAC never dismissed Whitten's complaint, her federal suit was timely.

NC Court of Appeals Addresses Public Policy Exception To "At-Will" Employment Doctrine

by Gary L. Beaver

Normally, a fired at-will employee in North Carolina has almost no chance of a successful wrongful discharge claim against his or her former employer. An employer can usually terminate an at-will employee for any reason whatsoever or even for no reason at all. However, there is a very narrow public policy exception to the at-will employment doctrine that allows such claim if the termination was done for an unlawful reason or purpose that contravenes public policy. The court applied the exception here. The discharged employee (Combs) claimed he was fired for reporting to the management of his employer, City Electric Supply Company, that the company had engaged in illegal and fraudulent activity by stealing from its customers' accounts. Apparently, there were times when customers overpaid and their accounts would then reflect a negative balance. Combs noted, and City Service admitted at trial, that City Service did not apply the negative account balances against later bills incurred by the customers. After Combs reported to a head supervisor (Smith) that the Combs's immediate supervisor was ordering him to take such actions, Smith denigrated Combs in an employment review and reduced Combs's salary. Then Combs was fired and Smith told him it was for job performance issues. Combs sued, among others, City Electric and Smith, and the trial court granted a directed verdict on the wrongful discharge claim against both City Service and Smith and on a tortious interference with contract claim against Smith.

City Service boldly contended that there was nothing wrong with its handling of the negative balances so the plaintiff had no basis for asserting the public policy exception. On March 16, 2010, the Court of Appeals agreed with Combs that taking the evidence as true and in the light most favorable to Combs, City Electric's withholding of negative balance statements, transfers of the overpayments to a separate account, and sending later statements that did not reflect the negative balances so that the customers paid the new balances without getting any credit for the prior overpayments were evidence of obtaining property by false pretenses. The Court of Appeals reversed the directed verdict as to the wrongful discharge claim. The case opinion is useful to give one a sense of what the courts will look for in applying the public policy exception. The Court also reversed the directed verdict as to Smith's alleged tortious interference with Combs's employment contract because the forecasted evidence of Smith's conduct was enough to defeat a non-outsider's qualified privilege to interfere with a contract.

On a personal note, one of the customers that had been allegedly ripped-off was Wilbur's BBQ & Restaurant. That alone gets my dander up as Wilbur's, located on US 70 in Goldsboro, has the best commercial BBQ and hushpuppies in North Carolina (note that I said commercial as my father makes the best BBQ in NC) and, in my humble opinion, does not deserve to be mistreated by anyone. I would have to drop the hammer on anyone who cheats Wilbur's. Go get 'em Mr. Combs.