Management Chapter 3 The Enterprise Furthered Must Legal One The

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Chapter Three

Sources of Law, Courts, and Dispute

Resolution

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

The Propriety of Confidential Settlements

Issue Presented: What factors should a manager consider when deciding whether or not to

require a confidentiality agreement as a condition to settling a case?

Requiring confidentiality agreements as a condition of settlement is a common practice.

Confidentiality agreements can enable a company to stave off frivolous me-too claims. A

manager has a business obligation to settle claims as quickly and reasonably as possible, and

Defective products were responsible for deaths and injuries to more than 65,000 babies

and small children in 1999, both before and after products had been recalled. In response to

injuries, companies often negotiated press releases that made their product sound less

dangerous than it really was and thereby avoided extensive press coverage. While the

Consumer Product Safety Commission, the federal agency in charge of ensuring the safety of

consumer products, strives to get the word out about such dangers, it often does not have the

funding or will to force companies to respond appropriately.

If prohibiting secret agreements saves lives and prevents other harmful effects, then

other lawmakers may enact legislation barring secret settlements. On the other hand,

confidentiality agreements tend to make companies feel more comfortable releasing sensitive

information that otherwise would not come to light. For example, Harvard Law School

Professor Arthur Miller responded to Chief Judge Anderson by stating that “the ban on secret

settlements would discourage people from filing suits and settling them, and threaten personal

privacy and trade secrets.” Liptak, Judges Seek to Ban. Responsible managerial restraint, rather

than one-size-fits-all regulation, may be the best course of action.

QUESTIONS AND CASE PROBLEMS

Issue Presented: How does one read a case citation?

Question 1

(a) The case was decided in the year 2000. The year appears at the end of the citation in

parentheses.

Question 2

Issues Presented: Should the class be certified? Why would defendant manufacturers want

the class to be certified?

The asbestos manufacturers petitioned the U.S. Supreme Court for review after the U.S.

Court of Appeals for the Third Circuit found that the class failed to satisfy the requirements of

Class members were exposed to different asbestos-containing products, for

different amounts of time, in different ways, and over different periods. Some

class members suffer no physical injury or have only asymptomatic pleural

changes, while others suffer from lung cancer, disabling asbestosis, or from

mesothelioma. . . . Each has a different history of cigarette smoking, a factor that

complicates the causation inquiry. The [exposure-only] plaintiffs especially share

little in common, either with each other or with the presently injured class

members. It is unclear whether they will contract asbestos-related disease and, if

so, what disease each will suffer. They will also incur different medical expenses

because their monitoring and treatment will depend on singular circumstances

and individual medical histories.

The asbestos manufacturers wanted the class of potentially millions of people to be

certified for several reasons. First, a class settlement would resolve all or almost all possible

claims in one agreement. Second, the agreement precluded class members from asserting

certain claims; it fixed the amount claimants could claim without adjusting for inflation; it

Question 3

Issues Presented: May an Ethiopian national sue a firm based in Louisiana in federal court in

Louisiana? If so, what substantive law will apply?

Endrias may sue Schaffer in federal court under diversity of citizenship jurisdiction

Question 4

Issues Presented: Does an Ohio court have personal jurisdiction over a defendant who has no

connection with the state other than the transmission of e-mails into the state?

The Ohio court concluded that it had personal jurisdiction over the defendant. ODA v.

FC Schaffer & Associates, Inc., 204 F.3d 639 (5th Cir. 2000). Ohio’s long arm statute subjects a

person to the jurisdiction of that state if that person causes tortious injury in Ohio by an act or

Suit in Ohio did not violate the defendant’s due process rights. In order to satisfy due

process, “[F]irst, the defendant must purposefully avail himself of the privilege of acting in the

forum state of causing a consequence in the forum state. Second, the cause of action must arise

from the defendant’s activities there. Finally, the acts of the defendant or consequences caused

by the defendant must have a substantial enough connection with the forum state to make the

exercise of jurisdiction over the defendant reasonable.”

Question 5

Issues Presented: Did disclosure of confidential documents to a merger partner’s investment

banker waive the attorney-client privilege been waived or does the common interest rule

preserve the privilege?

The court began by noting, that “any voluntary disclosure by the holder of the attorney-

client privilege is inconsistent with the attorney-client confidential relationship and thus waives

Question 6

Issues Presented: Do individuals have standing to challenge a warrantless international

wiretapping program when they cannot prove that their conversations were intercepted?

Should it matter that the defendant invoked privilege to make such information

unavailable?

The court concluded that none of the plaintiffs had standing. Because the NSA invoked

the state secrets doctrine, the plaintiffs could not prove that any of them specifically had been

targeted by TSA operations. American Civil Liberties Union v. National Security Agency, 493 F.3d

644 (6th Cir. 2007).

Question 7

Issues Presented: Is a provision in an arbitration agreement limiting the arbitrator’s authority

enforceable?

The Texas Supreme Court held in Nafta Tradus, Inc. v. Quinn, 339 S.W. 3d 84 (Tex. 2011),

that the arbitration agreement is enforceable under the Texas Arbitration Act (TAA). An

arbitration award may be vacated where the arbitrator exceeds his or her powers, because an

arbitrator derives his or her authority from the parties’ agreement to submit to arbitration.

Therefore, courts and arbitrators must give effect to the parties’ intentions and expectations. In

Quinn argued that, in interpreting the Federal Arbitration Act (FAA), the Supreme

Court held in Hall Street Associates, LLC v. Mattel, Inc. 552 U.S. 576 (2008), that the parties’

agreement to “enter judgment upon any award” unless “the arbitrator’s findings of facts are not

supported by substantial evidence, or . . . the arbitrator’s conclusions of law are erroneous”

impermissibly enlarged the grounds for vacating or modifying an arbitration award under the

However, in interpreting section 171.088(a)(3)(A) of the TAA, which, like section 10 of

the FAA, provides for vacatur “where the arbitrators exceeded their powers,” the Texas

Supreme Court determined that when parties have agreed that an arbitrator should not have

authority to reach a decision based on reversible error then a motion to vacate for such error is

Question 8

Issues Presented: When are the attorney-client privileged communications discoverable

under the crime-fraud exception?

In attempt to gain discovery of attorney-client communications, the plaintiffs claimed

the crime-fraud exception to the attorney-client privilege under two different theories of fraud.

The first is a “sham loan” theory of fraud, in which the plaintiffs alleged that Bertelsmann’s loan

to Napster was not in fact a loan, but was, rather, cash tendered in exchange for an equity stake

in the company. The plaintiffs claimed that Bertelsmann used its lawyers to create sham loan

documents that were designed to disguise the purchase. These sham documents could then be

used by Bertelsmann to deceive the courts into concluding that it was not an equity owner and

therefore was not liable for the actions of Napster.

The court explained that the “crime–fraud exception” to the privilege protects against

abuse of the attorney-client relationship. In re Napster, Inc. Copyright Litigation, 479 F.3d 1078 (9th

Cir. 2007). A party seeking to vitiate the attorney-client privilege under the crime-fraud

exception must satisfy a two-part test. First, the party must show by a preponderance of the

evidence that “the client was engaged in or planning a criminal or fraudulent scheme when it

The court considered what evidence may be considered in determining whether the

crime-fraud exception applies. Should the court only consider sources independent of the

The Supreme Court held in U.S. v. Zolin 491 U.S. 554 (1989), that Rule 104(a) did not bar

in camera inspection of the attorney-client communications by the district court and because in

camera review “does not have the legal effect of terminating the privilege,” and is thus “a

smaller intrusion” on the attorney-client privilege than outright disclosure, a “lesser evidentiary

Looking at the evidence presented in this case under the preponderance standard, even

if all of the evidence proffered by the plaintiffs is believed, the court found an insufficient basis

to hold that the attorney-client privilege may be vitiated under the crime-fraud exception. The

strongest evidence that the plaintiffs had that Bertelsmann sought to purchase an equity stake

in Napster is the right of Bertelsmann to convert the loan to equity once the licensed music

distribution system was launched. But that right could hardly have been fraudulently procured,

given that it was stated expressly. It does not tend to prove that the entire loan was a sham.