Business Litigation Session Year in Review, 2016

In 2016, Judge Janet L. Sanders continued to lead the Massachusetts Business Litigation Session as administrative judge and shared the BLS-2 Session with Judge Kenneth W. Salinger. Judges Mitchell H. Kaplan and Edward P. Leibensperger oversaw the BLS-1 session.

In the first half of 2017, Judges Kaplan and Salinger will hear cases in the BLS-1 and BLS-2, respectively.

Few cases have had the complicated — some might say tortuous — history of Geanacopoulos v. Philip Morris USA Inc. (Mass. Super. Ct. Feb. 19, 2016) (commonly referred to as Aspinall). Over 17 years in the making (including two trips to the Supreme Judicial Court), the BLS ultimately found after trial that Philip Morris violated Chapter 93A in promoting so-called “light” cigarettes.

The plaintiffs, however, were unable to prove actual damages as the BLS rejected their experts’ testimony, noting that the testimony did not pass the “common sense” test.

Because the plaintiffs could not prove with reasonable certainty that the class members suffered a specific measure of damages, the BLS reaffirmed its holding that the plaintiffs were not entitled to treble damages and limited the damages to the statutory minimum of $25 per class member, for a total of $4,942,500 (not including approximately 17 years of pre-judgment interest at the statutory rate of 12 percent), as well as reasonable attorneys’ fees and costs.

The BLS also decided several other issues in 2016 with broad legal implications:

• Gillette Co. v. Provost, 33 Mass. L. Rptr. 327 (Mass. Super. Ct. May 5, 2016) (an in-house attorney is not barred from subsequently working for a competitor unless the representation is adverse to the interests of the former client and the work is substantially related to the work the attorney did for the former client)

Chester Cekala worked as a patent lawyer for the Gillette Co. from 1987 to 1990, and again from 1992 through May 2006.  In 2012, he was hired by ShaveLogic, LLC to work on patent matters.

Upon learning that Cekala was working for a competitor, Gillette brought a breach of fiduciary duty claim against Cekala, arguing that he represented ShaveLogic in matters substantially related to those in which he represented Gillette; that he had done so without Gillette’s consent; and that as a result, Cekala breached his continuing fiduciary duty to Gillette. (It also brought charges against ShaveLogic executives, arguing that they were aiders and abettors.)

Cekala and the other executives filed a motion to dismiss, which the BLS granted. In doing so, the BLS examined the duties that an attorney owes to former clients and noted that while Cekala owed a continuing fiduciary duty to Gillette, its scope was narrower than the broad duty of undivided loyalty that an attorney owes to current clients.

It first explained that Mass. R. Prof. Conduct 1.7 was inapplicable in the case. That rule provides that a lawyer may not (without both clients’ written consent) simultaneously represent two clients where the representation of one is “directly adverse” to the other, or if the representation of one “will be materially limited” by the need to avoid a conflict with the other.

Instead, the BLS held that, pursuant to Mass. R. Prof. Conduct 1.9(a), representation of a current client conflicts with an attorney’s duty to a former client only when the matter for the new client is both “‘adverse’ to the interests of the former client” and also “substantially related” to the work the attorney had done for the former client.

Turning to Gillette’s claims against Cekala, the BLS refused to hold that Cekala’s representation of ShaveLogic was improper merely because ShaveLogic and Gillette compete economically.

It also noted that Gillette’s allegations that Cekala was advising ShaveLogic on how to avoid infringing the patents that Cekala worked on were equally insufficient because Gillette did not identify any patent or describe any technology that Cekala was currently working on for ShaveLogic that he had worked on while at Gillette.

Thus, the BLS concluded that Gillette’s claims failed as matter of law because it could not show that Cekala’s representation of ShaveLogic was “substantially related” to his representation of Gillette.

• Kelleher v. Squires, 2016 WL 377037 (Mass. Super. Ct. Jan. 26, 2016) (party seeking appointment of independent panel to decide whether to allow derivative suit to proceed must rebut presumption that shareholders should not be trusted to exercise business judgment on behalf of the corporation or make a prima facie case that suit is against corporation’s best interests)

The Kellehers, half-owners of a closely held Massachusetts corporation, filed a derivative action on behalf of the company, asserting claims against the other half-owner, Squires, who was the company’s sole officer and director.

Squires filed a motion pursuant to G.L.c. 156D, §7.44(f), to appoint an independent panel (not consisting of company directors) to decide whether to let the derivative suit proceed. The BLS denied the motion.

Noting that Section 7.44(f) is permissive and does not contain any standards for determining when the appointment of an independent panel is appropriate, the BLS held that such an appointment was neither justified nor warranted here. It noted that in the two instances nationwide in which a court had appointed an independent panel, it did so with the consent of all the parties.

Turning to the case at hand, the BLS concluded that appointing an independent panel would mean “taking away power to exercise business judgment that is normally reserved to the board of directors and shareholders and giving it to strangers.”

It acknowledged that Squires would not be able to participate in the shareholder vote on moving forward with the derivative suit because he was its target. But the BLS held that he had not rebutted the presumption that the Kellehers, the remaining shareholders, should be trusted to exercise their business judgment on behalf of the company and had made no prima facie case that the suit was against the company’s best interests.

• Sgarzi v. Sharkansky & Co. LLP, 33 Mass. L. Rptr. 478 (Mass. Super. Ct. June 15, 2016) (auditor can face Chapter 93A liability to non-client investors)

The plaintiffs were investors who lost millions of dollars investing in a car loan company, Inofin, Inc. They alleged that they relied on false representations made by Sharkansky & Co. during its audit of Inofin’s 2005 financial statements, and brought suit against Sharkansky and one of its partners.

The plaintiffs asserted a Chapter 93A claim, as well as other claims, and the defendants moved for summary judgment. (This article summarizes only the Chapter 93A claim, as it was the only novel issue that the BLS examined.)

The BLS denied summary judgment as to the Chapter 93A claim, holding that since there was evidence that could support a finding that the defendants aided and abetted securities fraud by Inofin, the same evidence could support a finding that the defendants violated Chapter 93A.

The BLS rejected the defendants’ argument that they could not be held liable under Chapter 93A because they did not have a direct commercial relationship with any of the plaintiffs. The BLS explained that, for the case to proceed, the plaintiffs could prove that the defendants’ conduct took place in a business context by “showing either that the defendants had a commercial relationship with the plaintiffs or that the defendants’ actions interfered with trade or commerce in some other way.”

The BLS held, for instance, that knowingly or recklessly conveying false information to help a client bring about a commercial transaction with a third party would violate Chapter 93A. Although there was evidence that showed that Sharkansky anticipated that investors would rely on Inofin’s 2005 audited financial statements, the BLS held that such evidence was in any event not a requirement, because when an accounting firm certifies an annual report as being free from material misstatements, it has reason to expect that investors will rely on its work.

Note: The Appeals Court recently reversed the BLS’s holding in Beninati v. Borghi, 2014 WL 4639447 (Mass. Super. July 9, 2014), that, because employer/employee disputes fall outside Chapter 93A, a defendant found liable for aiding and abetting the employee’s breach of fiduciary duties is also not covered by Chapter 93A. Beninati v. Borghi, 61 N.E.3d 476 (Mass. App. Ct. 2016).

The BLS is expected to take up the issue on remand in 2017.

• Rogier v. Chambers, 33 Mass. L. Rptr. 523 (Mass. Super. Ct. Sept. 1, 2016) (Employees have standing to bring Massachusetts Wage Act and Massachusetts minimum wage and overtime law claims only against their direct employers and must pierce the corporate veil to bring such claims against parties affiliated with their direct employers)

Employees brought a putative class action against the Herb Chambers car dealerships that employed them (“direct employers”), additional Herb Chambers car dealerships that did not employ them (“non-employers”), and two Herb Chambers executives, alleging violations of the Massachusetts Wage Act (G.L.c. 149, §148), as well as minimum wage (G.L.c. 151, §1) and overtime (G.L.c. 151, §§1A, 1B) laws.

The defendants moved for summary judgment, and the BLS granted the motion as to the non-employers, holding that the statutes the plaintiffs sued under do not allow employees to bring an action against non-employers.

First, the BLS compared Massachusetts state wage laws to the federal Fair Labor Standards Act and concluded that unlike the FLSA, which defines “employer” broadly to include certain “non-employers,” the Massachusetts statutes under which the plaintiffs sought recovery do not define “employer” at all.

The BLS noted that where the Massachusetts Legislature intended to expand liability to a non-employer, it had done so explicitly. The BLS explained, for example, that while G.L.c. 149, §1 provides a definition of “employer” similar to the FLSA, that definition is expressly not applicable to the Massachusetts Wage Act or Massachusetts minimum wage and overtime laws. For purposes of those laws, the BLS instead adopted the definition of “employer” found in Black’s Law Dictionary.

The BLS next turned to Massachusetts common law to determine whether the employees had recourse against the non-employers and concluded that, in order to sue a non-employer, the plaintiffs needed to satisfy the standard Massachusetts corporate veil piercing analysis, which they had not done.

Michael J. Tuteur is a litigation partner at Foley & Lardner in Boston. Noah G. Brown, an associate at the firm, is a member of the business litigation and dispute resolution practice.