Harkness v. C-Bass Diamond, LLC (Maryland U.S.D.C.)

Filed: March 16, 2010
Opinion by Judge Catherine C. Blake

Held: The Plaintiff, the general counsel of the defendant's predecessor, Fieldstone, did not suffer retaliation under the Sarbanes-Oxley Act of 2002 because her activities failed to qualify as protected activity under the Act because of (i) her limited research regarding violations of the Act and (ii) her failure to specify which federal securities laws or regulations were violated by the corporation.

Facts and Analysis: On March 1, 2004, at the invitation of the company's CEO, Michael Sonnenfeld, Cynthia Harkness began working as general gounsel to manage the company's s legal department as the company moved from being a private company to a publicly-traded company. Harkness' duties were extended by Sonnenfeld a few months later to include the management of Fieldstone's Quality Control and Human Resources Departments. Harkness subsequently hired Sally LaFond, an attorney that previously worked for the law firm that served as the company's outside securities counsel, to serve as Assistant General Counsel.

In April of 2004, Fieldstone submitted its application to become a publicly-traded company with the Securities and Exchange Commission ("SEC") and adopted an internal Code of Business Conduct that closely followed the rules and regulations to which publicly-traded companies are subject in anticipation of the approval of its application to be a publicly-traded company. The adopted Code of Business Conduct required that Fieldstone create an Audit Committee that would be comprised of independent directors and prohibited Fieldstone employees from disclosing material, non-public information about the corporation to third parties.

Prior to the SEC's approval of the company's application, LaFond informed Harkness that she had received reports that Sonnenfeld disclosed to an outside investor material, non-public information regarding the company's restatement of its earnings and that the informants believed the disclosures would constitute a violation of Regulation FD if the company were a publicly-traded company. Following further discussions with the informants, Harkness informed the Chair of the company's Audit Committee of Sonnenfeld's disclosure and stated that it might constitute a violation of Regulation FD.

In response to Harkness' report, the Chair of the Audit Committee requested that Harkness interview Sonnenfeld and then provide the Audit Committee with her legal opinion regarding the violation of Regulation FD. In the interview, Sonnenfeld confirmed his disclosure to the outside investor and stated that he told the investor that he could not trade based on the information. Prior to Harkness delivering her legal opinion, the Chair of the Audit Committee informed her that it was the opinion of the outside securities counsel that Sonnenfeld's disclosure did not violate Regulation FD because the company was not yet a publicly-traded company and because Sonnenfeld told the outside investor that he could not trade based on the disclosed information and asked Harkness to prepare a report for the Audit Committee regarding whether the company's Code of Business Conduct or Regulation FD had been violated by Sonnenfeld. After asking LaFond to review Regulation FD in preparation for the report, Harkness reported to the Audit Committee that Sonnenfeld's disclosure would likely be deemed a violation of Regulation FD if the company was subject to Regulation FD due to its shares being publicly registered. (Emphasis added.)

Following Harkness' report to the Audit Committee, the relationship between Sonnenfeld and Harkness deteriorated. As evidence of the deterioration, Harkness alleged that Sonnenfeld removed her from leading the Quality Control and Human Resource Departments, markedly changed the tone of his comments in her annual review, prohibited her from attending senior management meetings, and refused to inform her of Fieldstone's significant transactions. In response to her routine exclusion from Fieldstone's important meetings and events, Harkness reported to external auditors, and later to Fieldstone's Audit Committee, that she could not ensure Fieldstone's legal compliance with SEC laws and regulations due to her isolation within the corporation.

Harkness later met with Fieldstone executives to discuss the possibility of her resignation and to negotiate a severance package and then took a planned vacation. Upon Harkness' return, Fieldstone presented her with a termination letter and a proposed severance package that Harkness believed to be insufficient. Prior to leaving Fieldstone, Harkness completed a disclosure questionnaire in which she stated that she believed Fieldstone to have violated Title VII and the Sarbanes-Oxley Act of 2002 (the "Act") by terminating her based on sex discrimination or retaliation.

Following her separation from Fieldstone, Harkness filed a complaint against Fieldstone with the Department of Labor, Occupational Safety and Health Administration which alleged retaliation by Fieldstone under the Act. After waiting 180 days for the Secretary of the Department of Labor, Occupational Safety and Health Administration to issue a final decision, Harkness filed suit with the United States District Court for the District of Maryland against C-Bass Diamond, LLC, the named defendant and successor of Fieldstone. C-Bass immediately moved for summary judgment arguing that Harkness failed to establish a prima facie case of retaliation under the Act because she did not engage in protected activity under the Act and can not prove causation.

Noting that the Act does provide protection against retaliation to whistle-blowing employees of publicly-traded companies that report potentially unlawful conduct if the employee is able to establish that "(1) the employee engaged in protected activity; (2) the employer knew, actually or constructively, of the protected activity; (3) the employee suffered an unfavorable personnel action; and (4) the circumstances raise an inference that the protected activity was a contributing factor in the personnel action," the Court first examined Harkness' first report to the Audit Committee to determine whether Harkness' first report represented a protected activity under the Act. Acknowledging precedent, the Court stated that in order for Harkness to establish that her report regarding Sonnenfeld's disclosure was protected activity, she must demonstrate that she had a subjective and objectively reasonable belief that Sonnenfeld's disclosure constituted a violation of Regulation FD.

After reviewing all steps taken by Harkness in connection with the investigation and research of Sonnenfeld's disclosure and its possible violation of Regulation FD, the Court found that Harkness failed to demonstrate that she had an objectively reasonable belief that Sonnenfeld's disclosure constituted a violation of Regulation FD because, prior to talking with the Chair of the Audit Committee, she failed to do any research on whether Regulation FD even applied to Sonnenfeld's disclosure, to request that LaFond, who was experienced in securities laws, do any research, or seek the opinion of the corporation's outside securities counsel with respect to the possible violation of Regulation FD and only requested that LaFond research Regulation FD upon the Chair of the Audit Committee's statement that outside securities counsel did not believe Sonnenfeld's actions to violate Regulation FD. With Harkness having over 20 years of legal experience, the Court found that such routes of investigation and research should have been readily ascertainable when Harkness was deciding the applicability of Regulation FD to Sonnenfeld's disclosure and that because of her failure to utilize the resources that were available to her to determine whether Regulation FD was applicable, she failed to establish that a reasonable person in her position would have believed that Sonnenfeld's disclosure violated Regulation FD.

The Court next went on to determine whether Harkness' second report to the Audit Committee regarding her inability to ensure Fieldstone's compliance with SEC laws and regulations because of her continued exclusion from Fieldstone's important meetings and events was actionable protected activity under the Act. Citing precedent again, the Court found that Harkness' second report to the Audit Committee would need to identify the specific conduct that Harkness believed to be a violation of the law to qualify as protected activity under the Act. Because Harkness failed to specifically allege which SEC laws or regulations she believed Fieldstone to have violated by excluding her from important meetings and events, but only alleged that her exclusion put Fieldstone at an increased risk of legal violations of SEC laws, the Court concluded that Harkness' second report to the Audit Committee did not constitute protected activity. Finding that Harkness failed to meet her burden of establishing that either of her acts were protected activity under the Act, the Court granted C-Bass' motion for summary judgment.

The full opinion is available in PDF. This opinion has not been recommended for publication.

Maryland Reclamation Associates, Inc. v. Harford County, Maryland (Ct. of Appeals)

Filed: March 11, 2010.

Opinion by Judge Sally D. Adkins.

Holding: The expenditure of over a million dollars to purchase property and obtain state permits does not, by itself, grant a vested right to a landowner or permit a landowner to succeed in an equitable estoppel claim against a government which has revised its zoning code in a manner that precludes a landowner's intended use of the property.

Facts: Landowner sought to construct a landfill in Harford County. After being included in the County's solid waste management plan, Landowner purchased property for proposed landfill. While the Maryland Department of Environment processed its permit (and just four days after settlement), a new Harford County Council passed a resolution to remove the property from its plan. With litigation pending, the County revised its zoning code in a manner that resulted in the property being disqualified for its Landowner's intended use as a landfill.

Analysis: Landowner argued, among other theories, that it had obtained a vested right in the zoning use and that County should be estopped from applying its new zoning regulation based on equitable and zoning estoppel.

"In order to obtain a vested right in an existing zoning use that will be protected against a subsequent change in a zoning ordinance prohibiting that use, the owner must initially obtain a permit" and must make a substantial beginning in construction to commit the land to its permitted use before the zoning ordinance has been changed. Landowner asserted a substantial change in relation to the land had been made as it purchased the land, made over a million dollars in expenditures (acquisition, engineering and legal fees) and incurred obligations in proceeding with the the engineering development plans for the State's permitting process. The Court rejected Landowner's argument holding that neither the purchase of property nor expenditure of funds in preparation for development is sufficient to grant a vested right in an existing zoning use.

The Court denied Landowner's theory of equitable estoppel because a court must first make a finding that plaintiff had a vested right. While declining the opportunity to adopt the doctrine of zoning estoppel, the Court discussed the theory in length and recognized "as zoning and permitting processes become more complex, the need for such a doctrine grows." Yet, the Court opined that even if zoning estoppel was recognized, Landowner would not succeed because it could not prove it relied in good faith on an act or omission by the government that caused Landowner to make a substantial change because Landowner "knew of facts that should have given it notice that it should not rely on the government action in question."

Dissent: Judge Glenn T. Harrell, Jr., provided a dissenting opinion, which Chief Judge Robert M. Bell joined. Judge Harrell contended that the Court of Appeals had "again wimp[ed]-out on adopting the doctrine of zoning estoppel." He would have held "that [Harford County] is estopped from applying the provisions of Bill 91-10 to the [Landowner's] proposed rubble landfill, based on [County's] prior approvals of the . . . Site Plan, its inclusion of [the Landowner's] rubble landfill in the [County’s] Solid Waste Management Plan (“SWMP”), the official assurances it gave to [the Landowner] that construction could proceed, and [Landowner's] substantial expenditures made in good faith reliance upon such assurances."

The opinion is available in pdf.

St. Paul Mercury Insurance Company v. American Bank Holdings, Inc., et al. (Maryland U.S.D.C.)

Filed: March 5, 2010.
Opinion by Judge Roger Titus.

Held: The U.S. District Court of Maryland may exercise personal jurisdiction over a non-resident defendant who enrolled foreign default judgments in Maryland.

Facts: The plaintiff initially sued American Bank Holdings, Inc., a Delaware corporation with its principal place of business in Maryland, in Illinois. On July 23, 2008, the Illinois court entered three default judgments against American. The plaintiff then enrolled the foreign default judgments in Maryland.

American notified its insurance carrier of the default judgments and moved to set aside the default judgments in Illinois. The motion was denied. The insurance carrier denied American's request for coverage and commenced a declaratory judgment action against American and the plaintiff. The plaintiff filed a motion to dismiss for lack of personal jurisdiction, contending he had insufficient contacts with the state.

Analysis: A federal court may exercise personal jurisdiction over a non-resident defendant if (1) the requirements of the forum state's long-arm statute are satisfied and (2) the exercise of jurisdiction comports with the Due Process Clause of the 14th Amendment.

Under Maryland's long-arm statute a court may exercise personal jurisdiction over a person that "transacts any business or performs any character of work in the State." There must be some act by which the defendant purposefully avails itself of the privilege of conducting activities in the State. Based on the similarities between the purposeful availment when a judgment creditor enrolls a foreign default judgment and when a litigant files a lawsuit, the Court found that the plaintiff transacted business and engaged in purposeful activity in Maryland. The plaintiff expressly invoked the "benefits and protections of Maryland's laws" by enrolling the foreign judgments. Therefore, the Court found it could exercise personal jurisdiction under Maryland's long-arm statute.

Due process allows personal jurisdiction over a non-resident defendant when the defendant has minimum contacts with Maryland, "such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." According to the Court, jurisdiction was permitted because (1) the plaintiff could not reasonably argue that litigating in Maryland is burdensome when he enrolled the foreign judgments, (2) Maryland has an interest in adjudicating a matter involving a Maryland policy holder, (3) no other identifiable forum exists for the insurance company, (4) states have an interest in adjudicating claims in a single action, and (5) the only social policies involved in the action concerned a Maryland policyholder and its insurance company.

The opinion is available in pdf.

Weichert Co. of Maryland, Inc.. v. Faust (Md. Ct. of Special Appeals)

Opinion by Judge Albert Matricianni

Held

Pursuant to the narrow scope of the fee provision in the employment agreement, the Court of Special Appeals affirmed the trial court’s decision on awarding attorney fees to an employee who prevailed against the employer's breach of contract claim and denied the employer’s claim for attorney fees even though the employer was successful with its breach of duty of loyalty claim.

Brief Facts:

This suit arises from an employment dispute whereby the employer initiated an action against the employee alleging breach of contract, employee piracy, breach of fiduciary duty, and unfair competition. The employee counterclaimed for breach of contract, fraud, negligent misrepresentation, and violation of the Maryland Wage and Payment Act. At trial, the jury found the employee liable for breach of her duty of loyalty and awarded the employer $250,000 in damages and the employer liable for violation of the Maryland Wage and Payment Act and awarded the employee $116,000 in damages.

At the conclusion of trial, both parties (employee - $1,485,500 and employer $2,203,037) petitioned for an award for attorney’s fees pursuant to the employment agreement between the parties. The trial court granted the employee’s petition for attorney’s fees that were reduced to $946,014 but denied the employer’s petition. The employer appealed.

The contested fee provision provided as follows:

If employer brings any action(s) (including seeking injunctive relief) to enforce its rights hereunder and a judgment is entered in employer’s favor, then the employee shall reimburse the employer for the amount of employer’s attorney fees incurred in pursuing and obtaining the judgment. If the employee prevails in such a suit, then the employer shall reimburse the employee for the amount of the employee’s fees incurred in same.

Analysis:

On appeal, the employer challenged the trial court’s award of attorney’s fees to the employee and the lower court’s denial of the employer’s claim to attorney fees. The employer argued the following:

(i) The employee did not “prevail” under the agreement because the employer obtained a verdict on its claim for breach of the duty of loyalty;

(ii) The employee did not incur the fees and expenses;

(iii) The fee award to the employee should be denied since the employee was in breach of the duty of loyalty and the breach should excuse the employer of its performance; and

(iv) The fee award was not reasonable nor supported by the evidence.

The Court rejected the employer’s claim that the lower court erred in denying the employer its legal fees and the Court rejected the employer’s claim that the employee did not “prevail” as required under the fee provision. The employer argued on appeal that the term “hereunder” encompasses all rights and duties under the agreement including the duty of loyalty. The Court, however, interpreted the term “hereunder” in the fee-shifting provision narrowly, to apply exclusively to non-solicitation claims since the fee provision was an appurtenance to the non-solicitation paragraph. Because the employee prevailed against the employer's breach of contract claim and the employer's breach of duty of loyalty claim was not due to a breach of the non-solicitation paragraph of the agreement, the Court affirmed the trial court's grant of attorney's fees to the employee and the denial of the same to the employer.

Relying on the meaning of the term "incurred" as specified by the Dutta v. State Farm Ins. Co., 363 Md. 540 (2001), the Court rejected the employer’s argument that the employee did not “incur” the fees and expenses but rather her current employer which agreed to indemnify her from any damages arising in the case because the fee provision does not specify “by whom” the fees must have been incurred. The Court reasoned that the employee, in effect, incurred the attorney’s fees since her compensation at her new employment reflected the indemnification arrangement.

The Court rejected the employer’s claim that the employee’s breach of the agreement excuses it from paying the employee’s legal fees on the grounds that the employee’s duty of loyalty was not a condition precedent to the employer paying the employee’s legal fees and expenses.

The Court also rejected the employer’s argument on the amount of the legal fees since the court found that the lower court properly applied the “common core of fact” doctrine and that the employee was able to reasonably document the amount of the fees.

Practitioner’s Tip

Parties drafting fee provisions should be careful of its location and concise and unambiguity in the language used in the provision.

The full opinion is available here.

Maryland Court of Appeals to Consider Mandatory CLE

Stepping outside our usual precincts of judicial opinions, this posting reports on two related developments: the proposal by the Professionalism Commission set up by the Court of Appeals to establish rules for mandatory continuing legal education and the demise of The Maryland Institute for Continuing Professional Education of Lawyers, Inc. (MICPEL).

The press release by the Court of Appeals on the proposed rule change states that:

The Professionalism Commission, which was set up by the Court of Appeals, is asking the Court to set a minimum annual requirement of 10 hours of continuing legal education (CLE) for attorneys practicing in the state. The Commission, headed by Court of Appeals Judge Lynne A. Battaglia, also proposes that a Commission on Mandatory Continuing Legal Education be set up to oversee the requirement.

Both of these developments have been the subject of a great deal of discussion on the various MSBA listserves. However, the discussions have been taking place in isolation from one another. That is, there's a business law section discussion, a small and solo section discussion, a litigation section discussion, and so on.

We have posted the news about both the proposed rule change and the demise of MICPEL with the hope that the discussions on the various listserves will be conducted through the comment section of this posting. In other words, the comment section will become a venue for an integrated discussion among lawyers in every practice area.

Update: Paul Carlin, executive director of the MSBA, has released a memorandum on rebuilding the CLE function. In the memorandum, he reports that the MSBA Board of Governors "wants the MSBA to facilitate the provision of quality, cost effective CLE through its Sections." The memorandum also states that the MSBA is attempting to place many MICPEL publications online with free access.

Hertz Corp. v. Friend (U.S. Supreme Ct.)

Filed: February 23, 2010

Opinion by Justice Stephen G. Breyer

Held: In a unanimous decision, the Court held that for purposes of determining whether diversity jurisdiction is present, a corporation’s "principal place of business" is the place where a corporation's high level officers direct, control and coordinate the corporation's activities, which is typically referred to as the "nerve center" of the corporation.

Facts: In September of 2007, Melinda Friend and John Nhieu, both citizens of California, filed a class-action suit in California state court against Hertz Corporation seeking damages for alleged violations of California's wage and hour laws. Hertz filed a notice seeking removal of the case from California state court to federal court on the grounds of diversity jurisdiction.

In support of removal to federal court, Hertz submitted a declaration by one of its employee relations managers stating that its "principal place of business" was in New Jersey. Hertz's employee relations manager's declaration went on to allege that the leadership of Hertz and its domestic subsidiaries and the corporate headquarters was located in New Jersey and that Hertz's core executive and administrative functions were carried out mostly from its headquarters in New Jersey. With regard to its operations and revenues, the declaration also stated that out of all of its facilities, which are operated in 44 States, California only accounted for 273 of Hertz's 1,606 car rental locations, 2,300 of its 11,230 full-time employees, $811 million of its $4.371 billion in annual revenue and 3.8 million of its 21 million annual transactions.

The District Court held that Hertz was a citizen of California. In determining Hertz's citizenship for purposes of diversity jurisdiction, the District Court applied the precedent of the Ninth Circuit by using the "business activity" test, which instructed courts to identify a corporation's "principal place of business" by first determining the amount of a corporation's business activity state by state. Under the "business activity" test, if the amount of activity of a corporation in one state was significantly larger or substantially predominant than in other states, then that state was considered the corporation’s "principal place of business." If, however, if the business activity in one state did not predominate over its activities in other states, then the principal place of business for the corporation would be the corporation's "nerve center." Applying this test, the District Court noted that while Hertz's corporate headquarters were in New Jersey, because California led all other states significantly in the amount of Hertz's car rental locations, full-time employees, revenue and transactions, California was Hertz's principal place of business. The District Court's ruling was affirmed by the Ninth Circuit Court.

Analysis: The Supreme Court vacated the ruling and remanded the case back to the District Court for further proceedings consistent with the Supreme Court's conclusion that the proper test to use when determining a corporation's principal place of business required a court to determine the location of the corporation's "nerve center." According to the Supreme Court, a corporation's "principal place of business" is best read as "the place where the corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's "nerve center." And in practice it should normally be the place where the corporation maintains its headquarters -- provided that the headquarters is the actual center of direction, control and coordination."

In comparing and contrasting the "business activities" test used by the two courts below and the "nerve center" test, the Supreme Court explained that the "business activities" test had proved "unusually difficult to apply" due to the courts having to weigh the numerous factors, such as location of facilities and service centers, sales, transactions, employee location, payrolls, and revenue generation, while the "nerve center" test was a comparatively simpler jurisdictional rule that would provide easier judicial administration and predictability to corporations and plaintiffs. The Supreme Court also noted that having complex jurisdictional rules, such as the "business activities" test, only served to waste court resources and to "complicate a case, eating up time and money as the parties litigate, not the merits of their claims, but which court is the right court to decide those claims." Acknowledging that the "nerve center" test would not be easily applied in all cases, the Supreme Court stated that the "nerve center" test would serve to point courts in a single direction and provide a sensible test that would be comparatively easier to apply.

The full opinion is available in PDF.

Penson Financial Services, Inc. v. Holland (Maryland U.S.D.C.)

Filed: February 18, 2010

Opinion by Judge Catherine C. Blake

Held: Objections to the qualifications of arbitrators or the procedure of an arbitration hearing must be raised prior to or during the arbitration hearing or are deemed to have been waived.

Facts and Analysis: Aaron Holland set up a customer account with Penson Financial Services, Inc. in 2007 by signing a Combined Customer Account Agreement. The Combined Customer Account Agreement contained several provisions in large type that provided that the parties were agreeing to a pre-dispute arbitration clause by signing the agreement and explained that all parties to the agreement were waiving their right to a court trial and to have a jury trial.

When a dispute arose regarding Holland's failure to pay a debit balance in his account with Penson, the parties proceeded to have a hearing before three arbitrators in Baltimore, Maryland. In the arbitration hearing, Penson sought $214,661.10 in compensatory damages as well as interest, attorneys' fees, and costs. After the final arbitration hearing on September 30, 2009, Penson was awarded the full amount of compensatory damages sought, but did not receive the requested interest, attorneys' fees or costs.

When, on November 12, 2009, Penson filed an application to confirm the arbitration award, Holland served a Statement of Answer on Penson's counsel, which was later submitted to the Court, requesting the denial of the arbitration award based on (i) the alleged mental competency of one of the arbitrators, (ii) the replacement of one of the arbitrators a day before the hearing without giving him an option to choose the replacement and (iii) Holland's preference for a jury trial.

In addressing Holland's opposition, the Court found that Holland had waived his objection to the arbitration award by not raising his arguments prior to or during the arbitration hearing. The Court also found that the qualifications of the arbitrator whose competency was questioned by Holland and the replacement of an arbitrator a day before the hearing were all in accordance with the Federal Arbitration Act and the arbitration rules established by the Financial Industry Regulatory Authority. With regard to Holland's preference for a jury trial, the Court found that Holland had waived his right to a jury trial by signing the Combined Customer Account Agreement.

The full opinion is available in PDF. The opinion has not been recommended for publication.