Texans Score 1998's Top Defense Verdicts
TEXAS LAWYER
MARGARET CRONIN FISK
May 3, 1999
In history and literature, defenders tend to be celebrated for their courage in the face of defeat. Successful aggressors, as opposed to those who stand firm and repel all boarders, seem to capture the imagination more.
In reality, they are equally significant and should both receive their due, which is why The National Law Journal, an affiliate of Texas Lawyer, is presenting its list of the top defense verdicts.
A rare win for the defendant in a false-claims action tops the list as the most successful case of 1998. The defendant, data-processing contractor Texas Data Control, was sued for more than $20 million in damages and penalties amid charges by a whistleblower and the federal government that the company had fraudulently overbilled the Resolution Trust Corp. But, in a unique turnaround, Texas Data repelled the fraud claims and was paid almost $15 million on its breach-of-contract counterclaim.
Texas Data’s victory was certainly stunning, but many of the most significant victories in civil trials were for the defense.
In February, for instance, in a breach-of-contract and fraud case, a Japanese company beat a Texan plaintiff in Texas.
In March, the tobacco industry won the first secondhand-smoke products liability claim to come to trial.
In May, a Massachusetts-based biotechnology company defeated a securities fraud class action originally seeking more than $100 million. The case had been brought by a number of the nation’s top plaintiffs class-action lawyers.
In all, the NLJ list includes the top 15 victories; seven of those involved Texas counsel or courts. As always, the selection is subjective. Plaintiffs victories can be rated by size of win, but the best defense wins involve negatives: no liability and no damages. Nor can they be ranked by the amount of damages requested because demands do not necessarily have any relation to true risk. Some plaintiffs ask for massive damages when, realistically, their cases are worth little or nothing.
To assess the worth of defense wins, the NLJ has set a number of rules:
The list includes only jury verdicts — no summary dismissals and no bench trials.
The amount at risk must be substantial, but the demand for damages has to have some measure of reality.
The plaintiff should have a reasonable chance of winning, as indicated by a settlement by a co-defendant, by a defense offer of a substantial settlement before verdict, by previous plaintiffs’ wins in identical or similar cases, or by the representation for the plaintiff by an attorney who rarely loses.
The win must be complete. Moral victories, as cases where a plaintiff seeks millions or billions of dollars and wins limited damages, do not count.
The jury’s decision must still be valid — no reversals or remands for new trials, though cases that have since been settled are acceptable.
Special consideration is given to defense wins in which the risk to the defendant went beyond damages. PictureTel Corp., for example, was facing a possible $750 million judgment and an injunction that would have shut the company down.
The jurisdiction is also important. An automobile products liability action in Mississippi is much more worrisome for car companies than a similar suit in Michigan. And greater attention is given to cases in which the win appears to buck or set a trend or is the first trial in a scheduled series.
The attorneys for the plaintiffs can’t be pushovers, either. Some of the nation’s best-known and most highly regarded trial lawyers are on the losing side of this year’s list, including such litigation stars as Thomas Barr, of New York’s Cravath, Swaine & Moore; Thomas William Malone, of Atlanta’s Thomas William Malone; and Ronald L. Motley, of Charleston, S.C.’s Ness, Motley, Loadholt, Richardson & Poole.
The outstanding victory for Texas Data Control appears below; the verdicts with Texas connections follow in chronological order.
A Contract Disagreement
case type: False Claims Act, qui tam
case: U.S. ex. rel. Battaglia v. Texas Data Control, CA 395-CV-550-X (N.D. Texas)
plaintiffs’ attorneys: Katherine Savers McGovern, assistant U.S. attorney, Northern District of Texas; Robert M. Clark Jr., of Dallas’ Eddelman, Clark & Rosen; Robert P. Fletcher, of the Washington, D.C., office of Rochester, N.Y.’s Nixon, Hargrave, Devans & Doyle
defense attorneys: Michael P. Lynn and Thomas M. Melsheimer, of Dallas’ Lynn Stodghill Melsheimer & Tillotson; Edward Soto, of the Miami office of New York’s Weil, Gotshal & Manges; Timothy J. Hatch, of Los Angeles’ Gibson, Dunn & Crutcher
date of verdict: Sept. 9, 1998
There are few categories of suits that are more fraught with danger for defendants than qui tam actions brought against government contractors. Most of these cases are settled early on — often as soon as or even before they are filed — "because the defendants can’t afford to lose the right to contract with the federal government," says defense attorney Thomas M. Melsheimer.
When Congress revised the federal False Claims Act in 1986, it expanded the rights of private citizens to sue companies that are allegedly defrauding the government and to recover damages and penalties on the government’s behalf. This change set off a wave of qui tam litigation, and during the past couple of years, the number of successful qui tam suits has exploded.
There is a built-in bias toward the plaintiffs in these whistleblower suits, says Melsheimer. "The whistleblower wraps himself in the flag. He’s out to vindicate the rights of the taxpayer." For the defendant accused of fraud, he adds, "there’s a tremendous burden to overcome, especially when the government intervenes. Then it is almost treated like a criminal case."
Melsheimer and the other defense attorneys in this action against Texas Data Control faced just this burden in 1998. The company was a joint venture of several data-processing and computer-services corporations set up during the savings-and-loancrisis of the early 1990s to bid on a Resolution Trust Corp. (RTC) contract.
Texas Data contracted with the RTC to create reports on the status of loans and assets of various thrifts. But, says Melsheimer, the parties had a major billing dispute because the RTC believed that Texas Data was charging too much for the reports, and the RTC refused to pay.
Under the terms of the contract, Texas Data was allowed to charge $1.60 per report. When submitting its reports to the RTC, however, Texas Data broke up pieces of information into separate reports and charged a fee for each report. The RTC claimed the company overbilled about $7 million through this process.
In March 1995, an employee of the RTC, John D. Battaglia, filed an action against Texas Data under the qui tam provisions of the federal False Claims Act, charging that the company was deliberately overcharging and fraudulently submitting false claims to the RTC. After an investigation by the U.S. Department of Justice, the federal government determined there was enough merit to bring the suit and joined the action in August of that year. The RTC was seeking more than $20 million in damages and civil penalties, Melsheimer says.
A unique provision of false claims suits obliges the losing defendant to pay not only whatever damages the jury sets, but also an additional penalty per violation. In this case, Melsheimer says, had it lost, Texas Data Control would have had to pay $10,000 per violation for about 140 separate violations.
Texas Data filed a breach-of-contract counterclaim against the RTC, seeking payment it had not received for some of the work on the contract. "Texas Data focused on its contentions that the contract allowed us to bill this way," Melsheimer says, "rather than trying to refute each accusation of overbilling."
"The government wants you to talk about each accusation," he says. But if the defendant answers every single charge, some of them might stick. The answer to every charge was the same — the contract allowed this type of billing.
"We tried to use the government’s own documents to show that the government had created this problem by writing a contract it didn’t fully understand," he adds. "The contract gave Texas Data the option to create any number of reports, but the government didn’t realize this until after the company started billing for its services." Because jurors dislike any hint of fraud against the government, Melsheimer says the defense spent a lot of effort on explaining why this was a contract disagreement and not fraud.
On Sept. 9, 1998, a Dallas jury rejected the charges against Texas Data and ordered the RTC to pay the defendant $7 million. There was no appeal. In January, the FDIC paid Texas Data Control just under $15 million, including the jury award, interest and attorneys’ fees.
Goliath vs. Goliath
case type: breach of contract, fraud
case: Kaepa Inc. v. Achilles Corp., SA-94-CA-0627 (W.D. Texas)
plaintiffs’attorneys: Seagal V. Wheatley and J. Frank Onion, of the San Antonio office of Dallas’ Jenkens & Gilchrist
defense attorneys:Gordon M. Shapiro, Retta A. Miller, Carl C. Butzer and Brian A. Kilpatrick, of the Dallas office, and James L. Walker, of the San Antonio office of Dallas’ Jackson Walker
date of verdict: Jan. 15, 1998
Kaepa Inc., a San Antonio designer and manufacturer of athletic shoes, began marketing its shoes in Japan in 1986, says defense attorney Gordon M. Shapiro. At one time, Kaepa was one of the leading sports shoe brands in Japan, but by 1992, its sales there had declined. In early 1993, Kaepa contracted with Achilles Corp., a Japanese manufacturer and distributor of shoes, to become Kaepa’s new distributor in Japan.
The contract established a five-year distribution agreement, but in July 1994, after only 13 months, Kaepa sued Achilles, charging breach of contract and fraud.
According to Kaepa, Achilles had agreed to sell more than 1 million shoes a year, but sales since the agreement were actually lower in Japan than they had been before Achilles took over. Kaepa also claimed that Achilles had breached its agreement to create a separate division to sell Kaepa products and to develop and execute a broad-based marketing plan, says Shapiro.
In early 1996, Kaepa sold its business to Stone Manufacturing Co., maker of the Umbro line of athletic wear. Kaepa’s investors retained the claims against Achilles, contending that Achilles caused Kaepa’s loss of sales in Japan and that this forced the investors to sell the business. Kaepa was seeking $26.63 million in actual damages, plus another $60 million in punitives.
Achilles contended that there had been no guarantee of minimum sales, says Shapiro. "Achilles recognized that this was a turnaround effort," he says, and thus "never would have put a guarantee in the agreement." Achilles produced witnesses who testified that the decline in sales was caused not by Achilles but by various market factors, including increased competition from Nike and Reebok.
"Kaepa didn’t have the resources to compete in a difficult marketplace," Shapiro adds.
For the defense, he notes, the major difficulty was ensuring that the U.S. jury obtained enough understanding of Japanese culture and Japanese business practices. "We spent a lot of time making our presentation jury-friendly, including liberal use of graphics and audiovisual aids," says Shapiro.
The defense team also worked extensively before trial with the planned defense witnesses. "Our witnesses tended to speak in business terms and jargon. We worked with them to make their testimony more understandable to a non-Japanese, nonbusiness person," he adds.
To defuse the local angle, Shapiro says, the defense pointed out that while Kaepa had been owned and operated by Texans, the money behind the company had come from multibillion-dollar, big-time investors. "The plaintiff tried to categorize this as David versus Goliath. We persuaded the jury that this was Goliath versus Goliath."
The trial court dismissed the fraud claims as a matter of law, leaving the breach-of-contract claims. On Feb. 9, 1998, a San Antonio jury rejected the rest of the plaintiffs’ claims. The verdict has been appealed.
Pest and Patent Control
case type: patent infringement
case: Mycogen Plant Science Inc. v. Monsanto Co., 96-505 (D. Del.)
plaintiffs’ attorneys: Robert W. Dickerson, of the Los Angeles office, and Douglas E. Olson, F.T. Alexandra Mahaney and Jeffrey William Guise, of La Jolla, Calif.’s Lyon & Lyon; Gerald Sobel and Joel Katcoff, of New York’s Kaye, Scholer, Fierman, Hays & Handler
defense attorneys: John F. Lynch, of the Menlo Park, Calif., office, and Susan K. Knoll, Melinda L. Patterson, Janelle D. Waack, Michael E. Lee, Steven G. Spears, Connie Flores Jones and Brian K. Buss, of Houston’s Arnold, White & Durkee; Robert N. Sayler, Kurt G. Calia and Adriana S. Luedke, of the Washington, D.C., office, and Sonya D. Winner, of the San Francisco office of D.C.’s Covington & Burling; William H. Baumgartner Jr., of Chicago’s Sidley & Austin
date of verdict: Feb. 3, 1998
During the past decade or so, a number of agribusiness, chemical and biotechnology companies have been seeking to develop and produce genetically engineered plants that are resistant to pests and other harmful agents. The companies all hold patents on different aspects of the technology and are suing one another over the patent, licensing and contract rights for these genes.
The first trial took place in Delaware in early 1998. Mycogen Plant Science Inc. alleged that Monsanto Co., Dekalb Genetics Corp. and Delta & Pineland & Co. infringed on two Mycogen patents for Bacillus thuringiensis-based pest resistant technology. This so-called Bt technology uses DNA engineering "to teach plants like corn and cotton to make their own insecticide," says Robert N. Sayler, Monsanto’s counsel. In 1996, Sayler says, Mycogen was granted two patents on synthetic genes that cause plants to generate their own insecticide. These patents "covered a narrow part of the process, two particular sequences, that Mycogen said were patently distinct," he says.
The same day Mycogen was issued the patents, the company filed patent infringement actions against Monsanto, Dekalb and Delta, contending that seed products marketed by these companies used Mycogen technology. Monsanto denied infringement and claimed that the patent was invalid, Sayler says.
Claiming that a patent is invalid places a high burden of proof on the defendant, says defense attorney John F. Lynch. The defendant can win by proving to be the first inventor, "but the evidence has to be clear and convincing," he adds.
In such cases, defendants frequently maintain that the patent is invalid because of obviousness. "Our thrust was not that it was obvious, but that we did it first. Our position was not only that the patent was invalid, but that Monsanto had empowered the industry with its own technology," Lynch says.
To get this point across, Monsanto’s witnesses detailed the development of its own technology from the beginning, illustrating its claim with internal documents made at every step of the process and comparing them with Mycogen’s records. This evidence showed, says Sayler, that "our people were killing bugs before Mycogen even filed its application. Monsanto conceived of it first; we made it work first."
Mycogen was seeking more than $70 million in damages, as well as an injunction preventing the defendants from selling or licensing the genetic technology in the future. But on Feb. 3, 1998, a Wilmington, Del., jury found no infringement and found the Mycogen patents invalid. Post-trial motions are pending.
Painting a Clear Picture
case type: patent infringement
case: Datapoint Corp. v. PictureTel Corp., 3:93-CV-2381D (N.D. Texas)
plaintiffs’ attorneys: Peter T. Cobrin, of New York’s Cobrin & Gittes; Guy E. Matthews, of Houston’s Matthews, Joseph, Shaddox & Mason
defense attorneys: William F. Lee, Wayne C. Stoner, Daniel P. Tighe and Elizabeth A. Rowe, of Boston’s Hale and Dorr
date of verdict: April 9, 1998
For defendant PictureTel Corp., this was a true bet-your-company suit. Plaintiff Datapoint Corp. was seeking $250 million in damages, to be trebled. Had PictureTel lost, says defense attorney William F. Lee, "it would have shut the company down."
The dispute concerned Datapoint’s patents covering technology the company developed for videoconferencing systems. Datapoint had been issued its first patent for this technology in 1987 and a second in 1989. The following year, PictureTel developed, then began marketing its own videoconferencing product.
In 1993, Datapoint sued PictureTel, charging infringement on its videoconferencing patents. "Datapoint claimed all of PictureTel’s products infringed on Datapoint patents," says Lee.
PictureTel contended, however, that the Datapoint patents "covered only local area network videoconferencing systems," says Lee. The Datapoint system was limited "and couldn’t be used over public telephone lines," he added. "PictureTel got voice and video over normal telephone lines. PictureTel was one of the pioneers in making videoconferencing over public telephone lines a reality." Furthermore, PictureTel contended, the Datapoint patents were invalid.
Before the case went to trial, the court appointed a special master to interpret the meaning of the claims in the Datapoint patent. PictureTel had hoped, says Lee, that the special master’s findings would end the suit before it reached the courts. PictureTel used digital technology and contended "that the claims construction excluded digital technology," he says. But when the special master decided that the claims could include digital as well as analog technology, the judge then adopted this interpretation and rejected PictureTel’s motion for summary judgment.
Once the judge had adopted this claims construction, "we had to convince the jury that we were happy with [it]," says Lee. "Jurors are looking for one objective person in a trial, and that’s usually the judge." By promoting the idea that PictureTel was pleased with the judge’s actions, defense counsel made it appear that the objective arbiter and PictureTel were in agreement.
"We had key parts of the claim construction blown up and used it on posters in our cross-examinations," says Lee. "We pointed out that the special master said the claims could include digital technology, but let us tell you why it doesn’t include our digital."
Since 1990, PictureTel had sold $1.9 billion of its videoconferencing products. Datapoint was seeking a 10 percent royalty on these sales, plus interest, to be trebled for willful infringement, "and an injunction to take PictureTel out of the market," Lee says. But on April 9, 1998, a Dallas jury found no infringement and declared Datapoint’s patents invalid. The verdict has been appealed.
True or False?
case type: psychologist malpractice
case: Jones v. Keraga, 95-039005 (Dist. Ct., Harris Co., Texas)
plaintiffs’attorneys: JohnC.Osborne and Carl Selesky, of Houston’s Law Offices of John C. Osborne defense attorneys: Jay D. Hirsch, of Houston’s Hirsch, Scott, Grossman & Cohn;MarilynKulifay,thenofHouston’sHirschSheiness& Garcia, now in-house at Zurich Insurance Co.; Willie Ben Daw III, of Houston’s Daw & Ray
date of verdict: May 4, 1998
Freeda Jones, now known as Kristi Jones, went to psychotherapist Dr. Dorothy Lurie in 1989, complaining of family problems and work-related stress. She was also seeing other mental health professionals and continued to do so for the more than five years she was in treatment with Lurie.
In 1990, Jones was admitted to the Cottonwood Treatment Center in Bastrop, where she was diagnosed with multiple personality disorder, says defense attorney Jay D. Hirsch. Lurie concurred with this diagnosis and treated Jones with "talk therapy," says Hirsch, during which Jones described incidents of sexual, physical and emotional abuse by members of her family and reported stories of Satanic rituals and the killing of hundreds of babies.
After Jones left the care of Lurie, she and her husband sued Lurie and about 20 other health care professionals, alleging malpractice. Several of these professionals settled before trial, for a total of $480,000; others were dismissed. Lurie was left as the sole defendant at trial.
Jones contended that Lurie had failed to diagnose and treat her condition correctly and had accepted and embraced as valid her false memories of Satanic rituals and baby killings. Jones claimed that, by not informing her that these memories were untrue, Lurie had caused her to suffer from posttraumatic stress disorder. She further contended that she had come to Lurie with a minor malady, originally diagnosed as an adjustment disorder, and that Lurie had made her problems worse.
There has been a recent rash of false-memory suits, Hirsch says, and so far, there have been several notable defeats for the therapists. To win the case for Lurie, the defense attorneys attacked the statistics of the False Memory Syndrome Foundation, says Hirsch, and concentrated on the responsibilities and limitations of therapists. "A therapist is not an investigator," he says. "It is virtually impossible for a therapist to distinguish between true and false memories, true and false flashbacks, or true and false symptoms for multiple personality disorder."
But, adds Hirsch, "my best theme was that there is no such thing as posttraumatic stress disorder from conventional therapy. Psychotherapists in a conventional talk-therapy setting should not be held liable because, as a result of the therapy, a patient experiences dreams, memories and flashbacks."
The plaintiffs sought $10 million, but on May 4, 1998, a Houston jury rejected the claim. There has been no appeal.
Misplaced Zeal
case type: securities fraud
case: Gross v. Weingarten, 3:92CV808 (E.D. Va.)
plaintiffs’ attorneys: Patrick H. Cantilo, of the Austin office, and Jeff Wood, of the Dallas office of Dallas’ Cantilo, Bennett & Wisener; Howard W. Dobbins and Robert D. Perrow, of Richmond, Va.’s Williams, Mullen, Christian & Dobbins
defense attorneys: Terry Christen-sen, Eric Landau and David N. Lake, of Los Angeles’ Christensen, Miller, Fink, Jacobs, Glaser, Weil and Shapiro; W. David Paxton, of Roanoke, Va.’s Gentry, Locke, Rakes & Moore; Helen L. Duncan and Allyson S. Taketa, of the Los Angeles office of New York’s LeBoeuf, Lamb, Greene & MacRae; Douglas M. Palais and Dana J. Finberg, of Richmond, Va.’s Mezzullo & McCandlish
date of verdict: May 19, 1998
In the spring of 1991, California’s insurance commissioner, John Gara-mendi, indicated to the media his belief that First Capital Life Insurance Co. needed an infusion of $15 million in capital.
"This caused a wave of policy surrenders, similar to a run on a bank," says defense attorney Terry Christensen. In May of that year, Garamendi put First Capital Insurance in receivership.
First Capital’s parent, First Capital Holdings Corp., also owned Richmond, Va.’s Fidelity Life Insurance Co. The insurance commissioner of Virginia put Fidelity Bankers into receivership soon afterward. "These seizures destroyed First Capital Holdings; it was forced into bankruptcy within weeks, and an onslaught of lawsuits followed," says Christensen. This included actions against First Capital by shareholders and insurance policy holders. The suits were settled for about $100 million.
The Virginia insurance commissioner filed a securities fraud and breach-of-fiduciary-duty action against three officers of First Capital Holdings — Robert Weingarten, Gerry Ginsberg and Leonard Gubar — and against Shearson Lehman Bros. Holdings Inc., which was the largest shareholder in First Capital Holdings at the time the carriers went into receivership.
The plaintiff claimed, Christensen says, that the defendants had conspired to defraud the public into investing their money in investments backed by risky junk bonds, that their actions pushed Fidelity into insolvency, and that they had misled the directors and officers of Fidelity Bankers in violation of an investment advisory agreement.
The plaintiff tried to link the defendants with other companies that had invested heavily in junk bonds and gone under in the early 1990s, says defense attorney W. David Paxton. To counter this, Paxton says, in the opening statement, the defense attempted "to get the jurors to question the plaintiff’s approach. Whenever an insurance company is put into receivership, it looks like something must be wrong," he says. "But we set our theme — that the insurance commissioners overreacted."
The defendants also stressed the historical context. In the early 1990s, Paxton says, "there had been a number of high-profile insurance problems, with several large carriers going under. The insurance commissioners saw these situations as similar. But there were fundamental differences," he adds. "The defense concentrated on how to distinguish our situation from theirs."
The plaintiff sought more than $300 million in damages, but on May 19, 1998, a Richmond jury returned a complete defense verdict. The case is now on appeal.
A Monopoly Situation
case type: violation of §553 of the Telecommunications Act of 1984
case: Showtime Networks Inc. v. Bears & Bows Inc., A 97 CA 712 SS (W.D. Texas)
plaintiffs’ attorneys: Geoffrey L. Beauchamp and Michael D. Kristofco, of Blue Bell, Pa.’s Wisler, Pearlstine, Talone, Craig, Garrity & Potash; W. Wade Porter, of the Austin office of Dallas’ Haynes and Boone
defense attorneys: Leslie Ware, of Dallas’ Abboud & Ware; Tom C. McCall, of Austin’s McCall & Ritchie
date of verdict: June 30, 1998
Millennium Enterprises Inc. began making cable TV converter boxes in 1989 and marketing them directly to cable subscribers through mail order and later, over the Internet, says defense counsel Leslie Ware. Millennium sold, along with the box, a decoder that allowed buyers to unscramble the signals of premium cable channels.
Showtime Networks Inc. and Viacom International Inc. sued Millennium, charging that the company violated §553 of the Telecommuni-cations Act of 1984, which bars the unauthorized interception of a cable signal. The plaintiffs obtained a temporary restraining order enjoining Millennium from operating pending the outcome of the trial.
Numerous §553 cases have been filed against cable box makers across the nation, says Ware. The manufacturers have invariably lost these cases — usually on summary judgment.
To turn this trend around, Millennium went on the offensive. It argued that the cable companies had an unfair monopoly on the cable converter business and would not "sell us the software to prevent piracy," says Ware.
"Cable companies denied access to the software as a way of keeping us out of the business," he adds. "Our defense was that while the box can be used in an illegal manner, we make it as safe as we can." The cable companies would not license the software, he says, "because they want a monopoly."
The plaintiffs were seeking $3.4 million in actual damages and more than $1 billion in statutory damages, he notes. Under the provisions of the Telecommunications Act, if Millennium had lost, it would have had to pay a per-box penalty for each of the 40,000 boxes sold.
On June 30, 1998, an Austin jury returned a complete defense verdict. The TRO was lifted immediately.
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