Featured

Advertising Injury Coverage

by Kevin Lamasney

What is Advertising Injury?

Advertising injury means injury committed by a business in the course of advertising its products or services.

The injury may be committed against an individual or another business. The injured party typically suffers a financial loss. For example, a business publishes an ad that disparages another company, damaging its reputation. The ad causes the injured party to lose customers. It sues the other business for compensatory damages to recoup the income it has lost.

Advertising injury involves acts (offenses) committed by a business in the course of advertising its goods, products or services. The offenses cause injury to another party. Advertising injury is one of two types of injury covered by a Standard Commercial General Liability (“CGL”) policy.  The other is personal injury. Personal injury means offenses committed by a business while performing activities other than advertising. Examples of personal injury are false arrest and malicious prosecution.  These coverages are provided as a single coverage called Personal and Advertising Injury Liability.

The insured must fulfill three elements in order to establish coverage:

(1) the insured must have engaged in “advertising activity”;

(2) the underlying action must fit into one of the enumerated offenses of “advertising injury”; and

(3) the “advertising injury” to the underlying plaintiff must have arisen solely out of the insured’s “advertising activities.”

In turn, the insurer has the burden on any policy exclusions.

What is an Advertisement?

In the past, disputes have arisen between insurers and policyholders as to what constitutes advertising. Some policyholders have argued that communication between a business and a single customer qualifies as advertising. Insurers have disagreed, contending that advertising means communication with many customers, not just one. To clarify the policy’s intent, ISO added a definition of advertisement. Nowadays, many policies include the definition that appears below:

A notice that is broadcast or published to the general public or specific market segment about your goods, products or services for the purpose of attracting customers or supporters. 

Covered Offenses

Whether a court finds coverage for a particular offense depends in large part upon the policy language.  While there is much standardization among policies, revisions in policy forms from time to time have altered, among other things, the definition of advertising injury and what injuries are expressly excluded.

A liability policy covers claims or suits that arise from offenses that are committed while advertising a business. For a claim to be covered, it must result from an offense that falls within the definition of  personal and advertising injury.

The definition includes seven types of offenses, four of which relate to advertising activities. These are listed below:

  • Libel, Slander, or product disparagement
  • Violation of the right of privacy
  • Use of someone else’ advertising idea in your advertisement
  • Infringement of copyright, trade dress or slogan in your advertisement

For an advertising injury claim to be covered under a policy, the claimant must seek compensation for a type of offense cited above. If the claimant demands damages for some other type of offense, such as patent infringement, the claim will not be covered. 

Exclusions

CGL policies that provide coverage for advertising injury liability routinely also include terms that exclude advertising injury liability from coverage in certain circumstances.

Here are some key exclusions that apply to CGL policies. This is not a complete list of exclusions.

  • Knowledge of Falsity: No coverage applies for advertising injury arising out of libel or slander or the publication or utterance of defamatory or disparaging material made by or at the direction of the insured with knowledge of the falsity thereof.
  • Knowing Violations:  No coverage applies for acts committed if the insured knows those acts will violate someone’s rights. For example, the use of a customer’s photo in an ad without his or her permission even though you know your actions will violate his or her privacy.
  • Criminal Acts:  Claims alleging criminal acts are not covered.
  • Breach of Contract:  No coverage applies to claims alleging that the insured failed to fulfill the terms of a contract.
  • Contractual Liability:  No coverage is provided for advertising injury for which the insured is liable solely because of a contract they signed.
  • Price, Quality, and Performance:  Modern policies also exclude coverage for advertising injury arising out of the failure of goods, products or services to conform with any statement of quality or performance made in the insured’s advertisement.

Websites, Bulletin Boards, and Forums

Advertising injury coverage does not apply to the types of businesses listed below. These businesses need specialized insurance called media liability coverage.

  • Internet Service Providers
  • Website Designers
  • Publishing Companies
  • Advertising Agencies
  • Broadcasting Companies

If you have created a website for the purpose of promoting your business, are you considered an advertising or publishing company under your liability policy? The answer is no. Your company is insured for advertising injury unless you are in the business of designing websites for others, publishing other people’s content, or developing advertisements for other companies.

Featured

Avoid False Hopes for True Colors

By Todd Green

Applying for a trademark is an important step towards protecting a company’s brand so it can gain and maintain market share and profitability.  However, too many companies make the common mistake of believing that they have something protectable even though their competitors know – and the United States Patent and Trademark Office (USPTO) will find – otherwise.  A case in point is In re General Mills IP Holdings II, LLC, which was recently decided by the USPTO’s Trademark Trial and Appeal Board (TTAB).  The TTAB rejected General Mills’ application for a trademark on the color yellow in conjunction with Cheerios cereal boxes.

In its application, General Mills (also referred to as the Applicant) stated: “The mark consists of the color yellow appearing as the predominant uniform background color on product packaging for the goods” and further stated that “consumers have come to identify the color yellow, when used in connection with the goods…from not only a single source, but specifically the Cheerios brand.”  Administrative Trademark Judge Anthony R. Masiello, who wrote the opinion for the TTAB, was not convinced and indicated that while it is “clear that Applicant has worked assiduously to create an association between the color yellow and its “regular” CHEERIOS brand cereal,” a review of competitors’ cereals demonstrated “that Applicant is not alone in offering oat-based cereal, or even toroidal-shaped, oat-based cereal, in a yellow package.”  Id. at 8 and 16.  The TTAB also noted that “[c]ereals of many different brands and varieties are offered side-by-side in stores and compete directly for the same customers…Such customers, accustomed to seeing numerous brands from different sources offered in yellow packaging, are unlikely to be conditioned to perceive yellow packaging as an indicator of a unique source. Rather, they are more likely to view yellow packaging simply as eye-catching ornamentation customarily used for the packaging of breakfast cereals generally.”  Id. at 17.  To illustrate its point, the TTAB posed the following hypothetical survey question using another context: “If you think you know, what university has TIGERS as its mascot?” Even if most respondents said LSU, that would not have proved that LSU had the exclusive right to TIGERS as a source indicator to the exclusion of Clemson, Auburn, Missouri, Princeton, Towson, Memphis, or many other schools.”  In re General Mills IP Holdings II, LLC at 25.

The TTAB therefore decided: “Applicant has proven that relevant customers are familiar with the yellow color of the CHEERIOS box; but the record also indicates that the color yellow is only one aspect of a more complex trade dress that includes many other features that perform a distinguishing and source-indicating function.  When we consider the industry practice of ornamenting breakfast cereal boxes with bright colors, bold graphic designs, and prominent word marks, and the fact that customers have been exposed to directly competing products (toroidal oat cereals) and closely related products (other forms of breakfast cereal) in packages that are predominantly yellow, we are not persuaded that customers perceive Applicant’s proposed mark, the color yellow alone, as indicating the source of Applicant’s goods.  We find that Applicant has not demonstrated that its yellow background has acquired distinctiveness within the meaning of Section 2(f) and, accordingly, that Applicant has not shown that this device functions as a trademark.”  Id. at 27-28.

What does this mean for our clients who want to protect something that they are sure is unique to them?  Simply put, they and we need to take an objective look at whether a reasonable person would identify them as the single source of their proposed mark or instead view it as mere “ornamentation.”  If it is the latter, it will not warrant trademark protection.  The TTAB, citing the statement in In re Owens-Corning Fiberglas Corp., 774 F.2d 1116 (Fed. Cir. 1985) that “[b]y their nature color marks carry a difficult burden in demonstrating distinctiveness and trademark character” (Id. at 1127) and reiterating that principle in its decision in In re General Mills IP Holdings II, LLC, has sent a clear notice to applicants that such a burden will continue to be an onerous one to carry for the foreseeable future.  Owens-Corning was able to carry its burden since it was able to show “a syndetic relationship between the color “pink” and Owens-Corning Fiberglas in the minds of a significant part of the purchasing public.”  Id. at 1127.  Companies should be advised that such a “syndetic relationship” necessarily evolves over an extended period of time in a marketplace devoid of competitors who utilize the same or substantially similar design elements.  Per Section 2(f) of the Lanham Act, the USPTO “may accept as prima facie evidence that the mark has become distinctive, as used on or in connection with the applicant’s goods in commerce, proof of substantially exclusive and continuous use thereof as a mark by the applicant in commerce for the five years before the date on which the claim of distinctiveness is made.”  15 U.S. Code § 1052(f).  We therefore encourage our clients to work with our firm’s team so we can advise you regarding the intellectual property aspects of creating elements that are unique to what you offer, continuously impress that upon your customers for several years, and consistently conduct market research that you can use as compelling evidence of acquired distinctiveness before the USPTO and/or the TTAB.

Featured

Is Loan-by-Loan Proof of Breaches Really Required for all RMBS Claims?

By Dee Price

Does the “sole remedy” provision set forth in PSAs require loan-by-loan proof of breaches and preclude the use of loan sampling for all RMBS claims?  While case law has for some time been pointing in that direction, a recent holding from the United States District Court for Connecticut signals that the tide may be turning on the use of loan sampling, at least in the case of breach claims separate from strict repurchase claims.

In Law Debenture Trust Co. of New York v. WMC Mort., LLC, No. 3:12-cv-1538 (CSH), 2017 WL 3401254 (D. Conn. Aug. 8, 2017), an RMBS Trustee, Law Debenture Trust Company of New York (“Law Debenture”), sued the loan originator, WMC Mortgage, LLC (“WMC”), claiming that: (1) WMC breached its contractual obligation to cure or repurchase defective loans; and (2) “WMC knew or should have known” of the breaches of reps and warranties but failed to notify the parties to the PSA. Id. at *9.  Law Debenture planned to use loan sampling to prove its claims that, at the time of loan origination, WMC failed to exercise due diligence “to so grossly negligent and reckless a degree that the pool of loans in the Trust is afflicted by a pervasive number of loans whose material breaches of representations and warranties destroy or reduce the loans’ value.”  Id. at *20.  In what the court treated as a motion in limine, WMC argued that the “sole remedy” provision of the PSA “provides that WMC’s obligation to repurchase a materially defective breaching loan is not triggered unless WMC receives notice of the alleged breach, or itself discovers the breach” and that sampling, even if allowed, must be limited to loans for which WMC was given notice or discovered a breach.  In a lengthy analysis, the district court denied WMC’s attemp to preclude the use of loan sampling, stating, “I decline to hold in limine that Law Debenture could prove every aspect of its worst-possible-scenario of WMC’s conduct, and still be precluded from establishing loan pool-wide liability and damages by means of statistical sampling.” Id. at 39.

            The Law Debenture court distinguished the “strongly persuasive” ruling on summary judgment of Judge Castel in U.S. Bank, NA v. UBS Real Estate Secs., 205 F. Supp. 3d 386 (S.D.N.Y. 2016), that trusts could not recover under a “pervasive breach” theory because “the PSAs expressly provide that cure or repurchase are the ‘sole remedies’ and thus they foreclose the ‘pervasive breach’ theory.”  U.S. Bank, NA v. UBS Real Estate Secs., 2015 WL 764665, at *10 (S.D.N.Y. Jan. 9, 2015).  The court in Law Debenture noted that, among other differences, Judge Castel was dealing only with a repurchase claim and did not address the effect of the sole remedies provision upon a trustee’s claim of an originator’s failure to notify other PSA parties of multiple and pervasive breaches of reps and warranties.  Law Debenture, 2017 WL 3401254, at *15.

In allowing the use of loan sampling, the Law Debenture court reasoned that the PSA’s “sole remedy clause was the linchpin of WMC’s loan-by-loan repurchase protocol,” but that New York’s First Department had stated that “the contractual obligation to notify was independent of the warranty obligations and that the claims for failure to notify were not claims respecting a warranty breach subject to the sole remedy clause.” Id. at *20 (quoting Bank of N.Y. Mellon v. WMC Mort., LLC, 151 A.D.3d 72, 81 (1st Dept. 2017) (emphasis in original)).  The court thus found it unlikely that the New York appellate division would bar the use of statistical sampling to prove a claim for failure to notify.  In support of its ruling, the court reviewed prior holdings of the New York courts favoring loan sampling and rejecting the contention that the “sole remedy” provision requires “loan-specific inquiries, which are incompatible with sampling as a method of proof.”  Id. at 21, n.15.  The court noted the limited nature of its in limine ruling which “allows Law Debenture to try to prove its case at trial by statistical sampling, and rejects WMC’s efforts to prevent Law Debenture from making that effort or limiting the number of loans that may be sampled.”  Id. at 21.

The ruling in Law Debenture is significant in that it bucks the trend established in Ret. Bd. of the Policemen’s Annuity & Ben. Fund of the City of Chi. v. Bank of N.Y. Mellon, 775 F.3d 154, 162 (2d Cir. 2014), and other rulings that appeared to require loan-by-loan proof in breach of contract claims in RMBS cases.  Following their reasoning, courts have continued to state, largely in dicta in ruling on motions to dismiss that, while it “is not a pleading requirement,” “[t]o prevail ultimately on the breach of contract claim, a plaintiff does have to demonstrate breach on a ‘loan-by-loan and trust-by-trust basis.’” Phoenix Light SF Ltd. v. Deutsche Bank Nat’l Tr. Co., 172 F. Supp. 3d 700, 713 (S.D.N.Y. 2016); Royal Park Inv., SA/NV v. Deutsche Bank Nat’l Tr. Co., 14-CV-4394 (AJN), 2016 WL 439020, at *6 (S.D.N.Y. Feb. 3, 2016)(quoting Ret. Bd. of the Policemen’s Annuity, 775 F.3d at 162).  Indeed, an Ohio state court, in ruling in favor of an RMBS trustee following trial, recently expressly extended the prohibition on loan sampling to trial, stating, “[b]ecause plaintiffs must prove their case ‘loan by loan,’ the use of sampling to prove breaches in this case is impermissible: a breach in one loan says nothing about a breach in another, much less whether that breach has a ‘material and adverse effect’ on Certificateholders.” W. and S. Life Ins. Co. v. Bank of N. Y. Mellon, No. A1302490, 2017 WL 3392855, *10 (Ohio Com. Pl., Aug. 4, 2017) (citing BlackRock Allocation Target Shares v. Wells Fargo Bank, NA, 2017 WL 953550, at *5 (S.D.N.Y. Mar.10, 2017)).  This reasoning was echoed in the District Court’s opinion in BlackRock Allocation Target Shares v. Wells Fargo Bank, NA, 14 Civ. 9371 (S.D.N.Y. Aug. 21, 2017), affirming the denial of a loan sampling motion and the reasoning of the Magistrate Judge “that sampling could not help the Consolidated Plaintiffs identify the loans in breach, demonstrate that any breaches materially adversely affected particular loans, or ascertain the loan-specific cure and repurchase remedy.” (Opinion and Order, at 27)

While the circumstances in which loan sampling is allowed may be an open question, the holding of the Connecticut District Court in Law Debenture indicates that the question may, at least for certain claims, be answered in the affirmative.

Featured

How Can a College Athlete Protect His/Her Brand?

…by Sarah Green

In June of 2017, the University of Virginia signed a contract with its Division I athletes, which affords the athletes specific written assurances from he university regarding medical expenses, scholarships, transfer releases, and degree completion.  This contract was signed in conjunction with the athlete signing his/her letter of intent.  Thus, the student athlete is being given more valuable consideration in exchange for their eligibility.

The question then becomes can an athlete now request a contract with their university that guarantees protection of their image?

In 2015 in O’Bannon v. NCAA, the 9th Circuit held that the NCAA violated anti-trust laws with its rules on amateur status of athletes.  The athletes hoped that the Court would hold that if such anti-trust violations existed they could then be compensated for the use of their likeness in video games and other media.  The Court held however that the anti-trust wrongs were righted when the colleges offered up to a full-scholarship to the athletes in exchange for their playing for the school.  Both O’Bannon and the NCAA petitioned for the case to be heard by the Supreme Court, and the Supreme Court denied both petitioners.

Thusly, if college athletes want more control over the use of their own image they should insist on signing contracts with their universities that offer them protection of their own personal brand.

Featured

Computer fraud coverage and email spoofing

Medidata Solutions, Inc. v Federal Insurance Co. illustrates the importance of ensuring that businesses have computer fraud coverage, establish and update regularly processes to thwart fraud, and train employees on both those processes and the latest fraudulent schemes.

In a world where technology is constantly changing, thieves keep finding new and better ways to defraud companies. In Medidata Solutions, Inc. v. Federal Insurance Co., No. 15-CV-907 (ALC), — F. Supp. 3d — (S.D.N.Y. July 21, 2017), the United States District Court for the Southern District of New York addressed the availability of computer fraud coverage for losses resulting from one such scheme. In the process, the court gave an expansive reading to the policy’s computer fraud coverage provision and distinguished its ruling from the New York Court of Appeals’ recent decision in Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 37 N.E.3d 78 (N.Y. 2015), and other decisions.

Medidata illustrates the importance of ensuring that businesses have computer fraud coverage, establish and update regularly processes to thwart fraud, and train employees on both those processes and the latest fraudulent schemes.

The fraudulent scheme involving Medidata Solutions worked as follows: An accounts payable employee received an email message purportedly sent from the company’s president stating that Medidata was close to finalizing an acquisition, an attorney named Michael Meyer would contact her, and the acquisition was confidential before instructing her to devote her attention to Mr. Meyer’s request. The email contained the President’s name, email address, and picture in the “From” field.

Later that day a man holding himself out to be Mr. Meyer called the employee and asked her to process a wire transfer. The employee told “Mr. Meyer” that she would need a request from the company’s president and approval from a company vice president and a company director to accomplish the transfer. Shortly thereafter, the employee received the requested email, again purportedly from the company’s president, instructing her to process the request and copying the vice president and director and instructing them to approve it. All did as requested. Two days later “Mr. Meyer” tried again, but the vice president became suspicious because of a strange address in the “Reply To” field and halted the transaction.

Medidata made an insurance claim for its loss from the completed wire transfer, which its insurer Federal Insurance Company denied. Medidata had a $5 million “Federal Executive Protection” policy that included “Computer Fraud Coverage.” The Computer Fraud Coverage protected the organization from “direct loss … resulting from Computer Fraud committed by a Third Party.” The policy defined “Computer Fraud” as “the unlawful taking or the fraudulently induced transfer of Money, Securities or Property resulting from a Computer Violation.” The policy in turn defined “Computer Violation” as “the fraudulent: (a) entry of Data into … a Computer System; [and] (b) change to Data elements or program logic of a Computer System, which is kept in machine readable format … directed against an Organization.” Finally, the policy defined “Data” to include any representation of information” and “Computer System” as “a computer and all input, output, processing, storage, off-line media library and communication facilities which are connected to such computer, provided that such computer and facilities are: (a) owned and operated by an Organization; (b) leased and operated by an Organization; or (c)  tilized by an Organization.”

The district court granted summary judgment for Medidata Solutions and against Federal Insurance. In doing so, the district court rejected Federal Insurance’s argument that the insurance claim was properly denied because the emails did not require access to Medidata’s computer system, a manipulation of those computers, or input of fraudulent information. The court instead found that the email spoofing scheme here was unambiguously covered because it involved the fraudulent entry of data into a computer system through manipulation of an SMTP email envelope to make it appear that the email (through Google) was from a person within Medidata even if that person did not hack into Medidata’s computer system to do it.

The district court distinguished the fraudulent scheme in this case with the fraudulent scheme addressed by the New York Court of Appeals in Universal where the insured was attempting to collect for false claims submitted electronically and then paid out through the insured’s computer system. The district court concluded that Universal did not stand for the proposition that computer hacking was the only type of conduct for which computer fraud coverage was available despite the court’s use of hacking as an example of a type of conduct covered.

The district court also distinguished the Fifth Circuit’s decision in Apache Corp. v. Great Am. Ins. Co., 662 F. Appx. 252 (5th Cir. 2016), because the thieves in that case were invited in through that insured’s vendor payment system, while Medidata employees did not invite the spoofed emails and only facilitated the wire transfer as a result of the uninvited spoofing. The district court found Apache unpersuasive to the extent the facts in Medidata fit within it.

The district court also held that Medidata Solutions should not have been denied “Funds Transfer Fraud Coverage” because the employee did not act knowingly in facilitating the fraud. “Larceny by trick,” according to the court, “is still larceny.” Finally, the district court held that “Forgery Coverage” was properly denied because there was no forgery or alteration of a financial instrument as required by the policy.

As important as it is for a business to stay one step ahead of thieves who exploit technology to defraud through effective policies, procedures, and training, it is equally important that a business maintain comprehensive computer fraud coverage to protect itself against losses resulting from tricksters who thwart the most secure of computer systems and that insurers who sell such policies be held to the promises, as the Medidata court seems to make clear.

Featured

Shannon W. Conway Becomes Managing Shareholder at Talcott Franklin P.C.

Talcott Franklin P.C. has elevated Shannon W. Conway to Managing Shareholder of the firm.  Prior to joining Talcott Franklin P.C., Shannon spent her entire career with Patton Boggs LLP, first joining the firm as a Secretary, attending law school at night, and working her way up the ladder to Paralegal, Law Clerk, Staff Attorney, Associate and, finally, Partner.

“Shannon is the perfect person to manage our firm into the future,” said Talcott Franklin, the firm’s founder.  “She exemplifies the characteristics that clients value: integrity, hard work, perseverance, and intelligence.”

The move also results in the firm becoming a female majority-owned firm.  Previously, the firm had a noted gender studies professor review the firm’s practices, procedures, pay, and structure.  Her conclusion?  The firm is “a field leader in gender equality.”

“The best thing about the firm is the collegiality,” said Conway.  “We’re a firm of many different people with very different backgrounds and points of view, but there is a strong culture of respect for each other that is one of our core values. It also fosters collaboration so that we really are able to provide our clients with the benefit of our collective knowledge and experience which, in my mind, translates to outstanding client service.”

One of Conway’s points of emphasis will be expanding the firm’s flat rate “general counsel” services to growing businesses.

“It’s an important evolution and innovation in legal services,” said Conway.  “The idea is making sophisticated counsel available to a growing business at an affordable and predictable rate.  The critical thing is that we add value to the bottom line of the business through legal strategies that would otherwise be cost-prohibitive.”

Please join us in congratulating Shannon Conway!

Featured

“Promptly” Get Up On Your Roof!

images

This may come as a surprise to some, but Texans take note: if there is a hailstorm in your area, it is apparently your duty to “promptly” climb up on your roof – or hire someone to do it for you – to check for hail damage. Not physically fit to do so? Can’t afford to hire someone to do so? Well, too bad. Because if you don’t learn of that hail damage until too far down the line and you therefore don’t “promptly” make a claim under your applicable insurance policy, then you don’t have coverage. At least that’s what the U.S. District Court for the Northern District of Texas held in the decision issued this week in Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC, Case No. 16-CV-0465-B, Memorandum Opinion & Order (N.D. Tex. July 21, 2017) (read it here).

Quick summary: Unbeknownst to the Insured, a hail storm occurred in June 2012; Insured realizes hail damage on hotel’s roof in November 2014, during the course of a property evaluation and is informed by both Insured’s roof inspector and Insurer’s adjuster that roof is significantly damaged as a result of the June 2012 hail storm.

Moral of the story: 30 months between a hail storm and an insured’s submission of a claim is too long to secure the coverage paid for under an occurrence policy. It does not matter that: (1) the Insured is unaware that a hail storm occurred; (2) the hail damage caused no interior leaks to the hotel which would have put the Insured on notice of the hail damage; or (3) the Insured does not conduct routine roof inspections because it can only be accessed by a crane.

In Lowen Valley View, the Insureds owned the Hilton Garden Inn in Irving, Texas and, in November 2014, evaluated the property for potential capital improvement projects. During the course of that evaluation, the Insureds noticed that the hotel’s roof shingles looked bad. So they hired a roofing contractor, who inspected the property and found evidence of “significant hail damage.” The most recent hailstorm that could have caused this damage was in June 2012, so the Insureds immediately made a claim under their property policy that was in place in June 2012. Lloyd’s then sent its chosen adjuster to inspect the property and that report concluded that the hotel suffered significant hail damage that would require that the roof be replaced rather than repaired.

The decision doesn’t indicate how much the replacement of the roof was estimated to be, but rather than pay to replace the hotel’s roof, here is what Lloyd’s did instead: (1) issued a reservation of rights letter; (2) hired outside counsel to file a lawsuit against the Insured, seeking a declaratory judgment that there is no coverage under the Policy because of the Insured’s failure to “promptly” notify Lloyd’s of the damage; (3) hired yet another engineering firm to examine when the hail damage occurred; (4) required the Insured to provide testimony in an Examination Under Oath; and then (5) spent the next 15 months conducting expert discovery, engaging in mediation, and motions briefing. And Lloyd’s won. So perhaps it was all worth it.

Featured

Racial Slur Incident Proves the Value of Social Media in Brand Protection

I’ll be the first to admit that I was slow to recognize the value of social media.  I’m now a convert, for a variety of reasons, but a recent story drove home the necessity of a social media presence for a brand in today’s world.

According to USA Today, Walmart “featured an ad on its website early Monday offering a wig cap for sale in which the color was described as ‘n—r brown.’ The ad has since been removed and Walmart told the Huffington Post that it has determined that the product was sold by a third-party seller posing as a company out of the United Kingdom.”

Walmart was quick to respond on social media, and the company from the United Kingdom, Jagazi Naturals, also quickly posted the following statement:

We woke up this morning to the news that someone has used our name Jagazi to list an item.  Please beware that we are reporting this to as many people as we can and trying to get all the listings pulled down. The real Jagazi is a 100% black company for black people. People have often used our brand name to try and sell their fake products. Please be aware. Very sorry for all the distress this has caused. We are feeling the pain here as well. Most shocking!

They’ll probably never find the piece of human garbage that abused Jagazi Naturals’ brand in such an ugly manner, and even if they found the culprit, legal remedies such as a trademark infringement suit or even a preliminary injunction obtained a few days later would have been cold and expensive comfort if Jagazi hadn’t used social media to immediately get its message out.

Jagazi probably never dreamed someone would do something so horrible, but in the digital age, we can expect the unexpected.  The more robust your social media presence, the more effectively and inexpensively you can defend your brand against tarnishment by some anonymous internet abuser.

Talcott J. Franklin maintains a dual practice in intellectual asset protection and securitization litigation. He is the author of several legal treatises, including Protecting the Brand (Barricade Books 2003)He is the principal of Talcott Franklin P.C., a national law firm with attorneys licensed in DC, GA, KS, MD, MI, MO, NC, NY, TX, VA, and WV.
Featured

Investors Seek Class Certification in RMBS Lawsuits

Investors seeking recovery on RMBS claims have had mixed results pursuing their claims in class actions. Recently, an investor in two trusts involving Wells Fargo Bank N.A. as trustee requested class certification in a suit against the bank. Royal Park Invs. SA/NV v. Wells Fargo Bank NA, No. 1:14-cv-09764 (S.D.N.Y. June 29, 2017). Royal Park claimed in the lawsuit Wells Fargo knew or should have known about widespread problems with the underlying mortgages in the two trusts (ABFC 2006-OPT1 and SASCO 2007-BC1) as well as misconduct by loan servicers. As a result, Royal Park alleged that certificates in the two trusts “are now near or total losses, having been written down to the point that they are worthless or virtually worthless.”

In support of its request for class certification, Royal Park stated: “Plaintiff’s allegations present a predominant question of liability that is susceptible to common proof — whether Wells Fargo’s course of conduct breached the governing agreements, . . . The predominance of common issues, and the impracticability of bringing individual actions to redress Wells Fargo’s wrongful conduct, renders this case ideally suited for class certification.”

The proposed class would cover approximately 185 investors whose holdings in the trusts range from less than $10,000 to more than $10 million. Wells Fargo is expected to oppose the request for class certification.

In a similar case also involving Royal Park, but involving a different trustee, a New York federal judge recently denied Royal Park’s motion to certify the case because the proposed class, as defined, failed to satisfy the “implied” ascertainability requirement. See Royal Park Invs. SA/NV v. Deutsche Bank Nat’l Trust Co., No. 14-CV-4394 (AJN), 2017 WL 1331288 (S.D.N.Y. Apr. 4, 2017).  Royal Park is continuing to attempt to certify that case as a class action, and briefing on its latest motion to certify was completed on May 30, 2017.

These cases, as well as others, highlight the challenges in utilizing the class action vehicle to assert RMBS claims. Investors with holdings in trusts that are at issue in class actions, and who receive notices that their claims have been asserted in a pending class action, should not automatically assume the class action is the best vehicle for recovering their RMBS damages. Such investors should consider seeking legal advice from law firms with securitization litigation experience to help evaluate whether a given class action is adequately protecting the investor’s interests, and whether the better course might be to opt out of the class action.

New guidance on proof required in RMBS cases

Few RMBS cases have gone to trial. As a result, there is little clear guidance concerning the level of proof required to reach or avoid reaching a jury in an RMBS case, especially when the defendant is a trustee.

A recent decision by Judge Valerie Caponi in the U.S. District Court for the Southern District of New York offers insights into the proof required, particularly as it relates to the issues of trustee “discovery,” the “material and adverse” trigger for the “notice” requirement, and a trustee’s failure to act because it has “reasonable grounds” for believing an indemnity is not “reasonably assured.”

In the case – Phoenix Light SF Ltd. et al. v. The Bank of New York Mellon, No. 14-CV-10104 (VEC) (S.D.N.Y. Sept. 7, 2017) – Judge Caproni addressed cross motions for summary judgment in an RMBS case involving twenty-one trusts and four categories of claims: (1) violations of the Trust Indenture Act; (2) breach of contract; (3) negligence, gross negligence, and negligent misrepresentation; and (4) breach of the covenant of good faith and fair dealing. Judge Caproni’s opinion addresses all claims, but the greatest insights concerning the proof required to reach a jury are contained in her discussion of the contract claims.

The first important issue the Court addressed was the meaning of the term “discovery” in the context of the trustee BNYM’s duty to notify the other parties of breaches of representations and warranties. Under the governing agreements, BNYM’s duties are triggered only “[u]pon discovery … of a breach of representation or warranty.” The Court noted a split of authority concerning whether “discovery” means inquiry notice, with a concomitant duty to investigate, or actual knowledge of a breach, but concluded that it did not have to reach that issue because the plaintiffs’ evidence was sufficient to reach a jury for four trusts, but insufficient for eight other trusts, under either standard.

The key difference between the two groups of trusts: For the former group, BNYM had received notices that identified specific loans and specific breaches, while for the latter group, the plaintiffs were relying on evidence of “pervasive breaches” or systemic misconduct to argue that BNYM had knowledge. As to the former group of four trusts, the Court characterized the plaintiffs’ proof as “scant,” but found it sufficient to reach a jury. The Court wrote:

Under the inquiry notice standard, a reasonable juror could find that the … [l]etters provided BNYM with notice of potential breaches that BNYM should have investigated; had it investigated, the investigation would have confirmed that there were breaches triggering BNYM’s obligation to provide prompt notice to the other parties to the [governing agreements]. Under the actual knowledge standard, when viewing the letters in the light most favorable to Plaintiffs, a reasonable juror could find that the letters identified loan-specific breaches of representations and warranties and that, because BNYM received those letters, it had actual knowledge of those breaches.

The second significant issue the Court addressed was what constitutes a breach that “materially and adversely” affects certificateholders, which is another contractual condition precedent to the requirement that a trustee provide notice. The Court adopted the definitions offered by Judge Castel in MASTR Adjustable Rate Mortgages Tr. 2006-OA2 v. UBS Real Estate Sec. Inc., No. 12-cv-7322 (PKC), 2015 WL 797972, at *3 (S.D.N.Y. Feb. 25, 2015) and Judge Rakoff in Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 892 F. Supp. 2d 596, 603 (S.D.N.Y. 2012): that there must be evidence of a “significant increase in the risk of loss.” The Court ultimately concluded that a reasonable juror could find that breaches of representations or warranties related to loan-to-value ratios, appraisal values, occupancy status, and lien priority all produced a significant increase in the risk of loss.

The third significant issue the Court addressed was certificateholder direction and reasonable indemnity as a trigger to the trustee’s obligation to perform both pre-event-of-default and post-event-of-default duties. The Court noted that BNYM had two potential sources of indemnity: from the trust fund and from the sponsor, seller or servicer. In rejecting “BNYM’s bare allegations that indemnity was not reasonably assured” the Court observed that those arguments “appear[ed] to be little more than post-hoc justifications crafted in the context of litigation.” In the process, the Court implicitly rejected the argument that a trustee may use the absence of certificateholder direction and an indemnity as an excuse to sit back and do nothing.