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FDIC Obtains Jury Verdict and Settlement in Separate Actions in California District Court Against Former Bank Officers and Prohibition Order Against Bank CEO
On December 7, the FDIC, as receiver of a failed bank, obtained a jury verdict in its favor in the U.S. District Court for the Central District of California against a group of former bank officers. FDIC v. Van Dellen, No. 10-CV-04915, Doc. 596 (C.D. Cal. Dec. 7, 2012). On December 12, the former chief executive officer of the same bank settled a separate FDIC civil action and consented to an order of prohibition from further participation in the banking industry. FDIC v. Perry, No. CV 11-5561 (C.D. Cal. Dec. 12, 2012); In re Perry, No. FDIC-12-642e. In the first case, the FDIC sued the group of former officers, alleging that, in pursuit of bonuses for high loan origination volumes, the officers approved homebuilder loans to unqualified borrowers. The jury found that the former officers breached their duty of care and acted negligently in approving 23 loans and awarded approximately $169 million in damages to the FDIC. In a separate action against the former CEO of the same bank, the FDIC alleged that the CEO was negligent in allowing the bank to generate mortgage loans in 2007 which the bank was then unable to sell, allegedly resulting in $600 million in losses to the bank. The CEO settled the FDIC’s claims for $12 million, $1 million of which is to be paid from personal funds and the remainder from insurance funds. In addition, the CEO consented to an FDIC order prohibiting him from further participation in the conduct of any financial institution or organization.
Fifth Circuit Holds Data on Personal Cell Phone Not Protected by Stored Communications Act
On December 12, the U.S. Court of Appeals for the Fifth Circuit held that the Stored Communications Act (SCA) does not apply to data stored in a personal cell phone and affirmed a district court’s grant of summary judgment to the defendants. Garcia v. City of Laredo, Texas, No. 11-41118, 2012 WL 6176479 (5th Cir. Dec. 12, 2012). In this case, after being terminated from her employment based on evidence downloaded by her employer from her cell phone, a former police dispatcher sued the City of Laredo for violating the SCA by accessing the contents of her cell phone without permission. The appeals court agreed with the district court that the cell phone data was not protected by the SCA. Consistent with decisions by the Eleventh Circuit and several district courts that the SCA does not apply to data stored on a personal computer, the court reasoned that an individual’s cell phone is analogous to an individual’s computer hard drive – it only enables, and does not provide an electronic communication service. Therefore, the court held, the contents of the device are outside the scope of the “facilities” covered by the SCA. The court affirmed summary judgment in favor of the City of Laredo.
South Carolina Supreme Court Holds Web-Based Emails Not Protected Under The Stored Communications Act
On October 10, the South Carolina Supreme Court held that emails opened and retained by the recipient in a web-based email system are not protected under the Stored Communications Act (SCA), because they are not stored for the purposes of backup protection. Jennings v. Jennings, No. 27177, 2012 WL 4808545 (S.C. Oct. 10, 2012). The plaintiff sued an individual that gained unauthorized access to the plaintiff’s web-based email system, alleging, among other things, that the hacker violated the SCA. The SCA proscribes the unauthorized accessing of an electronic communication while it is in “electronic storage,” which in relevant part means that it is stored by an electronic communication service for the purpose of backup protection. The state supreme court noted that the plaintiff had opened the emails and retained them, but had not made any other copy of them. The court held that such emails, therefore, were not in “electronic storage” for the purposes of “backup” protection, reasoning that the plain meaning of “backup” does not apply to a single copy of a communication, i.e. web-based emails that are not downloaded to a computer or stored elsewhere.
Seventh Circuit Holds TCPA Prohibits Automated Calls to Cell Phones without Consent from Current Subscriber
On May 11, the U.S. Court of Appeals for the Seventh Circuit held that the Telephone Consumer Protection Act (TCPA) requires consent from a current cell phone subscriber to receive automated calls – even if a former subscriber to the same number had previously given consent to be contacted. Soppet v. Enhanced Recovery Company, LLC, No. 11-3819, 2012 WL 1650485 (7th Cir. May 11, 2012). The court affirmed a district court decision certifying a class of consumers who alleged that their cell phones were automatically dialed in violation of TCPA. The defendant debt collectors argued that it was not a violation of the TCPA to call a cell phone number if a previous subscriber to that number had given the consent required by the TCPA because the previous subscriber was the “intended recipient” of the call. The court rejected this argument because, even though the TCPA does not define who the “called party” is that must consent to be contacted, its use throughout the TCPA indicates that “called party" refers to the currently subscribed cell phone user, and not to any previous user.
Nevada Supreme Court Rules on Admissibility of Text Messages
On April 5, the Nevada Supreme Court held that a lower court abused its discretion when it admitted text messages absent sufficient evidence corroborating the identity of the sender. Rodriguez v. Nevada, No. 56413, 2012 WL 1136437 (Nev. Apr. 5, 2012). The defendant was found guilty in trial court of multiple counts related to an attack on a woman in her home. On appeal he argued that the trial court erred in overruling an objection to the admission of 12 text messages because the state failed to authenticate the messages and the messages constituted inadmissible hearsay. The Nevada Supreme Court held that it is essential that the identity of the author of the text message be established through the use of corroborating evidence. In this case, although the state established that the victims cell phone was stolen during the attack, and that the defendant was in possession of the cell phone prior to being arrested, the state did not offer any evidence that the defendant authored 10 of the 12 messages. Two messages were admissible and were not hearsay because in those instances, the state was able to offer bus surveillance video of the defendant using the phone at the time the two messages were sent. Despite the erroneous admission of the other 10 text messages, however, the Nevada Supreme Court held that the error was harmless.
Supreme Court Holds Only Pecuniary Damages Available Under Federal Privacy Act
On March 28, the U.S. Supreme Court ruled 5-3 that the Privacy Act of 1974, which regulates how federal agencies handle personal information, does not unequivocally authorize damages for mental or emotional distress. Cooper v. FAA, No. 10-1024, 2012 WL 1019969 (U.S. Mar. 28, 2012). In this case, an airline pilot sued the Federal Aviation Administration (FAA) and other federal agencies for impermissibly exchanging information about his HIV status in connection with a criminal investigation. The pilot claimed to suffer emotional and mental distress due to the disclosure. The U.S. Court of Appeals for the Ninth Circuit held that the term actual damages in the Privacy Act is not ambiguous and includes damages for mental and emotional distress. The Supreme Court reversed, holding, as the district court originally held, that the term is ambiguous and therefore does not waive the governments sovereign immunity from liability for nonpecuniary damages. The narrow ruling only directly impacts actions under the Privacy Act, and the court notes that actual damages can mean different things in different contexts. As such, the holding does not invalidate prior lower court rulings that actual damages under other statutes, including the Fair Credit Reporting Act and the Fair Housing Act, can include damages for emotional or mental distress.
DOJ Obtains Guilty Verdict in Haitian Money Laundering and FCPA Case
On March 12, the Department of Justice announced a guilty verdict in the case of a foreign official accused of laundering bribes paid to him by two Miami-based telecommunications companies. Following a week-long trial, the jury convicted the former director of Haiti’s state-owned telecommunications company on all counts, including nineteen counts of money laundering and two counts of conspiracy to commit money laundering. The laundered funds were alleged to be proceeds of bribes paid by U.S. companies to the defendant to obtain a preference in telecommunications rates and other favorable treatment in violation of the Foreign Corrupt Practices Act. The jury found that the defendant concealed the payments through subsequent transactions and by falsely characterizing the nature of the payments as “commissions” and “payroll.”
Federal Court Approves for First Time Computer-Assisted Document Review
On February 24, a Southern District of New York Magistrate Judge held that computer-assisted review is an acceptable way to search for electronically stored information. Da Silva Moore v. Publicis Groupe, No. 11-1279, 2012 WL 607412 (S.D.N.Y. Feb. 24, 2012). The court explained that computer-assisted coding is the use of sophisticated algorithms to enable the computer to determine relevance, based on interaction with a human reviewer. The court then described traditional e-discovery keyword searches and manual review as, in some cases, “over-inclusive,” “quite costly,” and “not very effective.” In certain cases, the court concluded, computer-assisted review is the better approach. The judge then detailed the factors that favored computer-assisted predictive coding in this case: (i) the parties' agreement to use predictive coding; (ii) the size of the entire data set (more than 3 million documents); (iii) the accuracy of predictive coding compared to traditional methods; (iv) the need for cost effectiveness and proportionality under Rule 26(b)(2)(C); and (v) the “transparent” review process proposed by the defendant.
U.S. Supreme Court Upholds Pre-Emptive Power of the Federal Arbitration Act
On February 21, the U.S. Supreme Court upheld the Federal Arbitration Act’s (FAA) pre-emptive power over conflicting state laws and vacated a West Virginia Supreme Court of Appeals decision in which the West Virginia court found that arbitration clauses in nursing home contracts were unenforceable if adopted prior to an occurrence of negligence that resulted in personal injury or wrongful death. Marmet Health Care Center, Inc. v. Brown, 565 U.S. __ (2012) (per curiam). The three plaintiffs—family members of patients who had died in nursing homes—sued the homes in state court alleging negligence. The trial court dismissed two of the suits based on agreements to arbitrate that were found in the contracts. The Supreme Court of Appeals of West Virginia consolidated all three cases, and held that the arbitration clauses in the contracts were unenforceable “as a matter of public policy.” The U.S. Supreme Court, citing recent decisions in which the FAA pre-emptive power was reinforced, reversed the West Virginia court, stating, “[t]he West Virginia court’s interpretation of the FAA was both incorrect and inconsistent with clear instruction in the precedents of this Court.” The Court explained that whenever a state law prohibits outright the arbitration of a particular type of claim, the conflicting rule is displaced by the FAA. Because West Virginia’s prohibition against predispute agreements to arbitrate negligence claims in nursing home suits was a categorical rule prohibiting arbitration, the rule was contrary to the terms and coverage of the FAA and could not be used to avoid arbitration.
Nineteen States Settle With Debt Collector Over Collection Practices
On February 6, nineteen state attorneys general announced a multi-state settlement with NCO Financial Systems, a debt collection company, to resolve allegations of misleading and deceptive debt collection practices. Under the agreement, the company must set aside $950,000 ($50,000 for each state) for consumer restitution, and will pay $575,000 for state consumer protection enforcement efforts. Restitution will go to consumers who paid the company for debts the consumers did not owe, who overpaid interest, or who overpaid a debt beyond what the company had agreed to settle an account. The company also agreed to (i) comply with the Fair Debt Collection Practices Act, the federal Fair Credit Reporting Act, and all applicable state laws, (ii) notify credit reporting agencies within 30 days of consumer disputes and results of investigations into disputes, (iii) provide notice to consumers about their debt collection rights under federal and state law, and (iv) monitor compliance, create written policies and procedures for handling consumer complaints, and submit periodic compliance reports.