Justia U.S. 3rd Circuit Court of Appeals Opinion Summaries

Articles Posted in Corporate Compliance
by
Devon, a Pennsylvania corporation, sells computer products; Bennett and DiRocco, a married couple, jointly own 100 percent of Devon’s shares as tenants by the entirety. In 2010, Devon obtained a contract from Dell. Devon contracted with Clientron, a Taiwanese company, to manufacture Dell's computers. Clientron shipped them directly to Dell; Dell paid Devon. Devon stopped paying Clientron entirely in 2012, owing over $6 million. Dell terminated its relationship with Devon, paying Devon $2 million, none of which reached Clientron. Pursuant to their contract, Clientron requested arbitration in Taiwan; arbitrators awarded Clientron $6.5 million. Clientron then sued Devon, Bennett, and DiRocco in Pennsylvania to enforce the award and seeking $14.3 million in damages for fraud and breach of contract. Clientron alleged that Devon was the alter ego of the couple. During discovery, the defendants continually failed to meet their obligations under the Federal Rules. The court entered sanctions, and instructed the jury that it was permitted, but not required, to make an adverse inference due to Devon' discovery conduct; the instruction did not reference Bennett or DiRocco. The jury found Devon liable for breach of contract and awarded Clientron an additional $737,018 in damages but rejected Clientron’s fraud claim and declined to pierce Devon’s corporate veil. Post-trial, the court pierced the veil to reach Bennett but not DiRocco, holding Bennett personally liable for the $737,018 damages award and the $44,320 monetary sanction earlier imposed on Devon; it did not make Bennett personally liable for the Taiwanese arbitration award. Devon is insolvent The Third Circuit vacated; the court committed legal error in piercing Devon’s veil to reach only Bennett and in holding Bennett personally liable for only part of the judgment. View "Clientron Corp. v. Devon IT Inc" on Justia Law

by
Accredo delivers clotting medication and provides nursing assistance for hemophilia patients. Accredo makes donations to charities concerned with hemophilia, including HSI and HANJ, which allegedly recommended Accredo as an approved provider for hemophilia patients. Greenfield, a former Accredo area vice president, sued, alleging violations of the Anti-Kickback Statute, 42 U.S.C. 1320a-7b(b), and the False Claims Act, 31 U.S.C. 3729(a)(1)(A)-(B). If Greenfield prevailed, he would get at least 25% of any civil penalty or damages award. The government did not intervene. The district court, following discovery, granted Accredo summary judgment, finding that Greenfield failed to provide evidence of even a single federal claim for reimbursement that was linked to the alleged kickback scheme. The Third Circuit affirmed. The Anti-Kickback Statute prohibits kickbacks regardless of their effect on patients’ medical decisions. Because any kickback violation is not eligible for reimbursement, to certify otherwise violates the False Claims Act but there must be some connection between a kickback and the reimbursement claim. It is not enough to show temporal proximity. Greenfield was required to show that at least one of the 24 federally-insured patients for whom Accredo provided services and submitted reimbursement claims was exposed to a referral or recommendation by HSI/HANJ in violation of the Anti-Kickback Statute. View "Greenfield v. Medco Health Solutions Inc" on Justia Law

by
Globus, a publicly-traded medical device company, terminated its relationship with one of its distributors, Vortex, in keeping with a policy of moving toward in-house sales. Several months later, in August 2014, Globus executives alerted shareholders that sales growth had slowed, attributed the decline in part to the decision to terminate its contract with Vortex, and revised Globus’s revenue guidance downward for fiscal year 2014. The price of Globus shares fell by approximately 18% the following day. Globus shareholders contend the company and its executives violated the Securities Exchange Act, 15 U.S.C. 78j(b) and Rule 10b-5 and defrauded investors by failing to disclose the company’s decision to terminate the distributor contract and by issuing revenue projections that failed to account for this decision. The Third Circuit affirmed dismissal of the case. Globus had no duty to disclose either its decision to terminate its relationship with Vortex or the completed termination of that relationship. Plaintiffs did not sufficiently plead that a drop in sales was inevitable; that the revenue projections were false when made; nor that that Globus incorporated anticipated revenue from Vortex in its projections. View "Williams v. Globus Medical, Inc." on Justia Law

by
Norman and Elkin were the only shareholders of USM, a company that acquired and sold rights to radio frequencies. Norman held a minority interest and sought legal relief after he discovered that Elkin had transferred to another company the ownership of several frequencies purchased by USM, that Elkin had treated capital contributions as loans, and that Elkin had paid himself from USM funds without giving Norman any return on his minority investment. Despite two juries agreeing with Norman, verdicts in his favor were overturned. Most of his claims were held to be time-barred after the district court rejected his argument that a state court case he had brought to inspect USM’s books and records under the Delaware Code tolled the statute of limitations. Other claims were eliminated for insufficient evidence. The Third Circuit vacated in part. The district court erred in concluding that tolling of the statute of limitations is categorically inappropriate when a plaintiff has inquiry notice before initiating a books and records action in the Delaware courts and erred in vacating the jury’s award of nominal damages for one of Norman’s breach of contract claims. Norman’s fraud claim was not supported by sufficient proof of damages. View "Norman v. Elkin" on Justia Law

by
Wiest, formerly a Tyco employee, claimed that Tyco unlawfully terminated his employment for reporting suspected securities fraud violations pertaining to the accounting treatment of two Tyco events, in violation of the anti-retaliation provision of the Sarbanes-Oxley Act, 18 U.S.C. 1514A. Wiest claims that for six months, he refused, as an accountant, to process payments allegedly due from Tyco that related to two Tyco employee and dealer meetings in resort settings. Tyco contends that Wiest’s involvement with the events at issue was minimal and he did not frustrate, or even inconvenience, Tyco’s management, and that ,more than eight months later, Tyco’s human resources director—who had no knowledge of, Wiest’s alleged protected activity— investigated complaints that Wiest made inappropriate sexual comments to several female Tyco employees, and that he had inappropriate sexual relationships with two subordinates, resulting in Wiest’s termination. The Third Circuit affirmed summary judgment for Tyco. Wiest failed to offer any evidence to establish that his protected activity was a contributing factor to any adverse employment action; Tyco established that it would have taken the same actions with respect to Wiest in the absence of Wiest’s accounting activity given the thoroughly documented, investigation conducted by its human resources director. View "Wiest v. Tyco Elec. Corp" on Justia Law

by
Kivisto, co-founder and former President and CEO of SemCrude, an Oklahoma-based oil and gas company, allegedly drove SemCrude into bankruptcy through his self-dealing and speculative trading strategies. SemCrude’s Litigation Trust sued Kivisto, and the parties reached a settlement agreement and granted a mutual release of all claims. A month later, a group of SemCrude’s former limited partners (Oklahoma Plaintiffs) sued Kivisto in state court, alleging breach of fiduciary duty, negligent misrepresentation, and fraud. The Bankruptcy Court for the District of Delaware granted Kivisto’s emergency motion to enjoin the state action, finding that the Oklahoma Plaintiffs’ claims derived from the Litigation Trust’s claims. The district court reversed, concluding that the claims were possibly direct and remanded. The Third Circuit concluded that the claims are derivative and reversed. Even if Kivisto owed the Oklahoma Plaintiffs unique, individual fiduciary duties in addition to the duties owed to them as unitholders, they could show neither that they were injured separately from the company or all other unitholders on the basis of that misconduct, nor that they were entitled to recovery of the units they allegedly would not have contributed or would have sold but for Kivisto’s misconduct. View "In re: Semcrude L.P." on Justia Law

by
Trinity, a New York Episcopal parish, owns Wal-Mart stock and requested that Wal-Mart include its shareholder proposal in Wal-Mart’s proxy materials. Trinity’s proposal, linked to Wal-Mart’s sale of high-capacity firearms at about one-third of its 3,000 stores, asked Board of Directors to develop and implement standards for use in deciding whether to sell a product that “especially endangers public safety,” “has the substantial potential to impair the reputation of Wal-Mart,” and/or “would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.” The Securities and Exchange Commission’s “ordinary business” exclusion lets a company omit a shareholder proposal from proxy materials if the proposal relates to ordinary business operations. Wal-Mart obtained a “no-action letter” from the SEC, indicating that there would be no recommendation of an enforcement action against Wal-Mart if it omitted the proposal from its proxy materials. Trinity filed suit. The district court held that, because the proposal concerned the company’s Board (rather than management) and focused principally on governance (rather than how Wal-Mart decides what to sell), it was outside ordinary business operations. The Third Circuit reversed. “Stripped to its essence, Trinity’s proposal goes to the heart of Wal-Mart’s business: what it sells on its shelves.” View "Trinity Wall Street v. Wal-Mart Stores, Inc" on Justia Law

by
In 1973, Doe organized his medical practice as a “professional association,” a type of corporation doctors are permitted to form under New Jersey law. Since its creation, Doe has operated his practice through that entity. As of 2011, the entity employed six people. The government alleges that Doe entered into an illicit agreement with OTE, a blood laboratory, whereby it paid him monetary bribes for referring patients to it for blood testing. A grand jury subpoena was served on the entity’s custodian of records, directing it to turn over documents, including records of patients referred to OTE, lease and consulting agreements, checks received by it for reasons other than patient treatment, correspondence regarding its use of OTE, correspondence with specified individuals and entities, and basic corporate records. The district court denied Doe’s motion to quash. Doe persistently refused to let the entity comply; the court found it in civil contempt. Meanwhile, the entity fired its employees and hired independent contractors, tasked with “[m]aint[aining] accurate and complete medical records, kept in accordance with HIPAA and Patient Privacy standards,” and assisting with billing practices. The Third Circuit affirmed, agreeing that Supreme Court precedent indicated that corporations may not assert a Fifth Amendment privilege, and that the subpoena was not overbroad in violation of the Fourth Amendment. View "In Re: The Matter Of The Grand Jury" on Justia Law

by
Between 2008 and 2011, Viacom Inc. paid three senior executives more than $100 million in bonus or incentive compensation. Compensation exceeding $1 million paid by a corporation to senior executives is not normally deductible under federal tax law, but a corporate taxpayer may deduct an executive’s otherwise nondeductible compensation over $1 million if an independent committee its board of directors approves the compensation on the basis of objective performance standards and the compensation is “approved by a majority of the vote in a separate shareholder vote” before being paid. In 2007, a majority of Viacom’s voting shareholders approved such a plan. Shareholder Freedman sued, claiming that Viacom’s Board failed to comply with the terms of the Plan and that, instead of using quantitative performance measures, the Board partially based its awards on qualitative, subjective factors, destroying the basis for their tax deductibility. Freedman claimed that this caused the Board to award executives more than $36 million of excess compensation. The plan was reauthorized in 2012. The district court dismissed. The Third Circuit affirmed. With respect to his derivative claim, Freedman did not make a pre-suit demand to the Board or present sufficient allegations explaining why a demand would have been futile. With respect to his direct claim regarding participation by stockholders without voting rights, federal law does not confer voting rights on shareholders not otherwise authorized to vote or affect Delaware law permit ting corporations to issue shares without voting rights. View "Freedman v. Redstone" on Justia Law

by
Aleynikov is a computer programmer who worked as a vice president at GSCo in 2007 through 2009. After accepting an employment offer from another company, Aleynikov copied source code developed at GSCo into computer files and transferred them out of GSCo. He was convicted of violations of the National Stolen Property Act, 18 U.S.C. 2314, and the Economic Espionage Act, 18 U.S.C. 1832. The Second Circuit reversed the conviction. He was then indicted by a New York grand jury and that case remains pending. Aleynikov filed a federal suit, seeking indemnification and advancement for his attorney’s fees from Goldman Sachs. He claims his right to indemnification and advancement under a portion of Goldman Sachs Group’s By-Laws that applies to non-corporate subsidiaries like GSCo, providing for indemnification and advancement to, among others, officers of GSCo. The district court granted summary judgment in Aleynikov’s favor on his claim for advancement but denied it on his claim for indemnification. The Third Circuit vacated with respect to advancement. The meaning of the term “officer" in GS Group’s By-Laws is ambiguous and the relevant extrinsic evidence raises genuine issues of material fact precluding summary judgment. The court otherwise affirmed. View "Aleynikov v. Goldman Sachs Grp., Inc" on Justia Law