Litigation Blog Washington Business Law Christina Haring-Larson

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This blog does not offer legal advice or form an attorney-client relationship. It is a collection of legal information that may or may not be relevant to a particular client, legal dispute or active case. Because the nature of the law is always changing, the cases and law cited in this blog may change over time. For further questions, please call (206) 632-4242 or email christina@eagleharborlaw.com

"LET THE BUYER BEWARE"

A recent decision by the Washington Court of Appeals in Douglas v. Visser, on February 25, 2013, held that a buyer of a home has a strict duty to make further inquiries of a seller and a buyer cannot recover when a buyer has constructive notice of a defect through an inspection report.

Although the buyer had an inspection done which revealed the presence of some rot, the buyer did not make further inquiry of the seller or show that a further inquiry would be “fruitless.” Thus, although the seller had actively concealed the extent of the rot prior to the sale, the buyer could not recover because the buyer was put on notice of the defect by the inspection report.

The take away for a buyer is that the buyer must follow-up with the seller if there is any potential defect to determine the extent of the problem.

UNITED STATES SUPREME COURT MAKES THE LEGAL STANDARD FOR DISCRIMINATION RETALIATION CLAIMS MORE DIFFICULT TO PROVE BY CHANGING TO A "BUT FOR" CAUSATION TEST

On June 24, 2013, the United States Supreme Court issued a landmark decision changing the legal standard of proof for discrimination retaliation claims. In University of Texas Southwestern Medical Center v. Nassar, 133 S.Ct. 2517 (2013), the majority decision concluded that Title VII retaliation claims must be proved according to traditional principles of but-for causation, not the lessened causation test for “motivating factor” set forth for status-based discrimination claims. The antiretaliation provision states, in relevant part: “It shall be an unlawful employment practice for an employer to discriminate against any of his employees ... because he has opposed any practice made an unlawful employment practice by this subchapter, or because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter.”

Going forward, for purposes of a discrimination retaliation claim alleging termination or constructive discharge in response to complaints of discriminatory conduct, the plaintiff must prove that such conduct was the “but for” cause of the termination or constructive discharge. The prior motivating factor test has been rejected for Title VII retaliation claims and will likely make it more difficult for employees to establish retaliation claims.

This change in the causation standard for federal law may also affect Washington state law based discrimination charges. Washington has adopted a statutory regime that provides broader protection than the protected classes for discrimination under federal law. The Washington Law Against Discrimination, RCW 49.60.180(1), prohibits refusing to hire someone based on “age, sex, marital status, sexual orientation, race, creed, color, national origin, honorably discharged veteran or military status, or the presence of any sensory, mental, or physical disability . . . . , unless based upon a bona fide occupational qualification.” In construing the state law against discrimination, Washington courts have sometimes looked for guidance from cases interpreting equivalent federal law under Title VII. Marquis v. City of Spokane, 130 Wn. 2d 97, 109, 922 P.2d 43, 50 (1996). However, where the express language of the Washington statute differs from that of Title VII, the Washington courts take that distinction into effect and may interpret Washington law differently than federal law. Id. In practice, it is not always clear whether the Washington courts will follow federal case law, such as Nassar, because the language of the statute is different in many respects.

Because the Nassar decision was based on a statutory interpretation of how Title VII’s federal discrimination and retaliation provisions are written, it is possible the outcome in Washington may be different under an interpretation of the Washington Law Against Discrimination. In any case, there is little doubt the issue will be percolating through the Washington courts as the impact of Nassar begins to have effect in ongoing pending cases.

Is Facebook Information Discoverable in Litigation?

Ever wonder if your information on Facebook can really be discovered by the other side in litigation? The answer is yes, provided the information is relevant to the case. See Patterson v. Turner Constr. Co., 88 A.D. 3d 617 (2011) (relevant postings were not shielded from discovery because plaintiff used service's privacy settings). An adverse inference instruction to the jury is also appropriate where someone deletes the Facebook account. Gatto v. United Air Lines (D. N.J. March 25, 2013). Although Washington courts have yet to weigh in, it seems likely they will follow suit.

Can an Employer Terminate an Employee for Use of Marijuana Where it is Legal in Washington?

The Colorado Court of Appeals recently found that there is no employment protection for medical marijuana users in the state since the drug remains barred by the federal government. Thus, even though Colorado (like Washington) has legalized recreational use of marijuana, the court held employers can lawfully terminate employees who test positive for the drug, even if the drug was used off duty. The Washington Supreme Court has previously held that use of marijuana is not protected under the medical marijuana statute. Thus, although Washington has not yet addressed this precise issue, it is likely that an employer can terminate an employee who uses marijuana where there is anti-substance abuse policy in effect.

CPA Extends to Nonresident Plaintiffs and Defendants by Washington Supreme Court

The Washington Supreme Court recently held that a nonresident of the State of Washington can bring a claim under the Consumer Protection Act, a creation of Washington statutory law under RCW 19.86, even if the defendant is a not a Washington corporation. Thornell v. Seattle Serv. Bureau, Inc. (Dec. 10, 2015).

The federal court certified the question to the Washington Supreme Court based on a class action filed against State Farm and its collection agency, SSB. Previously, in Schnall v. AT&T Wireless Services, Inc., 171 Wn.2d 260, 259 P.3d 129 (2011), the issue was presented and resolved in favor of supporting a claim brought by nonresident plaintiffs against AT&T. However, in that case, reconsideration was granted and the original majority opinion was withdrawn and revised to delete the discussion on this point. The issue was left open as various corporate interest groups argued that this deletion in the modified opinion somehow meant that a majority of the Court did not support a CPA claim against out of state corporations.

The Washington Supreme Court has now weighed in definitely, holding that the liberal construction of the statute supported a claim by a nonresident plaintiff against both a nonresident defendant corporation and a resident corporation. The reasoning of the Court cited that to hold otherwise would allow “unscrupulous entities” to escape liability if out-of-state citizens could not bring such actions against Washington entities that direct unfair and deceptive practices only to out-of-state residents. Also, the Court explained that “Washington businesses engaging in unfair and deceptive practices that indirectly affect others do not advance the purpose of fair and honest competition. Honest businesses could be placed at a competitive disadvantage competing against a business that generates revenue from unlawful acts that violate the statute.” The effect of this ruling may be to open up Washington courts to further litigation, either based on a nationwide class action or nonresident plaintiffs seeking relief against Washington corporations based on the CPA.

Washington Limited Liability Act - One Member One Vote

Effective January 2016, the Washington LLC Act was amended with a significant change to the default voting provisions under the law. This change effects both pre-existing and new LLCs. The LLC Act provides that the default rule for voting rights of members is “one member, one vote.” Specifically, RCW 25.15.121(1) provides that “[e]xcept as otherwise provided by this chapter, the affirmative vote, approval, or consent of a majority of the members is necessary for actions requiring member approval.” While LLC members can change this default rule in their Operating Agreements under RCW 25.15.121(3), many such Operating Agreements simply do not specify the method of voting rights, such that the LLC Act’s default rule applies. Members of LLCs would be wise to revisit existing Operating Agreements entered before January 2016 to ensure it matches with the members current wishes, such as voting by percentage interests or otherwise on certain LLC decisions. Recent litigation has proven that all too often the LLC Operating Agreements are silent as to the provision for voting and, therefore, the default "one member, one vote" under the LLC Act would apply.

HOW CAN AN INVESTMENT BE CONSIDERED A "SECURITY," WHAT IS "RESCISSION," AND WHAT IS "CONTROL PERSON" LIABILITY UNDER THE WASHINGTON STATE SECURITIES ACT

Plaintiffs are increasingly adding a claim for an alleged violation of the Washington State Securities Act, RCW 21.20 et seq. based on an investment in a business opportunity, even if the investment is not obviously a “security.”

The WSSA makes it unlawful for any person, in connection with the “offer, sale or purchase” of any security, directly or indirectly, to make “any untrue statement of material fact or to omit a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.” RCW 21.20.010(2). There are two essential elements to a WSSA claim: “(1) a fraudulent or deceitful act committed (2) in ‘connection with the offer, sale or purchase of any security.’” Kinney v. Cook, 159 Wn.2d 837, 154 P.3d 206, 209-10 (2007) (quoting RCW 21.20.010). It provides a plaintiff with the right to recover attorneys’ fees if successful on the merits.

Washington courts apply a modified federal test and define a security as “(1) an investment of money (2) in a common enterprise, and (3) the efforts of promoter or third party must have been fundamentally significant ones that affected [the] investment's success or failure.” Ultimate Timing, L.L.C. v. Simms, 715 F.Supp.2d 1195, 1208 (W.D. Wash. 2010) affirming on reconsideration dismissal of WSSA claim 2010 WL 2650705 (W.D. Wash. June 29, 2010); see also Ito Intern. Corp. v. Prescott, Inc., 83 Wn. App. 282, 921 P.2d 566 (1996). Washington courts apply a modification of the test under federal securities law first adopted in SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946).

But, not every payment on every contract constitutes a “security” actionable under the WSSA. In Kinney v. Cook, the Washington Supreme Court held that a payment on a note secured by stock was not a “security” under the WSSA. 159 Wn.2d 837, 841, 154 P.3d 206 (2007) (reversing trial court’s finding that “note was not a security.”). Under the somewhat unique facts presented of a judicial dissolution coupled with rescission of the stock securing a note, the Washington Supreme Court held that the plaintiffs’ payment on the note was “not in the nature of a purchase of stock” and, therefore, the WSSA did not apply. Id. at 845. “To hold otherwise would be to conclude that every payment on a note secured by a security or interest in a security for value would trigger duties by the payee under RCW 21.20.010.” Id.

More importantly, even though limited partnership interests may be considered “securities” under some circumstances, the protections of the WSSA only apply where there is “passive investment.” Ultimate Timing, 715 F.Supp.2d at 1208, citing State v. Argo, 81 Wn. App. 552, 564–65, 915 P.2d 1103 (1996) (emphasis added). “The essential attribute of a security is an investment ‘premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.’” Firth v. Lu, 103 Wn. App. 267, 273, 12 P. 3d 618, 623 (2000) (finding transfer of shares of stock in housing cooperative were not “securities” under the WSSA); see also Aventa Learning v. K.12, Inc., 830 F.Supp. 2d 1083 (W. D. Wa. 2011).

1. Rescission, or Putting the Parties Back to Where They Were Before the Transaction, is the Basic Remedy Provided Under the WSSA.

Civil liability under the WSSA is spelled out under three discrete subsections of RCW 21.20.430, but the statute expressly provides a defrauded “buyer” who offered to purchase securities the remedy of, first, rescission – the return of the amount paid for the stock as consideration – or, in the alternative, if the return of the stock is not an available remedy since it was sold to a third party, then monetary damages, which are defined as the “tender” of the stock less “the value of the security when the buyer disposed of it” and interest.

The underlying rationale for providing rescission is that the WSSA is a “remedial statute,” and a “plaintiff’s civil remedy under the WSSA is different and in some ways more restrictive than a plaintiff’s choice of remedies at common law.” Helenius v. Chelius, 131 Wn. App. 421, 432, 120 P.3d 954 (2005) (citing Kittilson v. Ford, 23 Wn.App. 402, 207, 595 P. 2d 944 (1979)). “For example, unlike common law remedies for fraud, under the WSSA, a defrauded purchaser is not allowed to keep the security and recover damages.” Id. at n. 12. Thus, the defrauded buyer must either return the stock and recover what he paid for it or, alternatively, if recovery of what he paid is an unavailable remedy, the buyer can “tender” it for sale to the seller (or potentially others) and then recover the difference between the value of the securities when purchased and what he or she recovered by selling those shares.

2. Who is a Control Person Subject to Liability?

A control person who is not a seller of fraudulent securities can be found liable under RCW 21.20.430(3), but who qualifies as a “control person” is a murky, ill-defined area of the law.

A control person is defined broadly as someone who “materially aid[ed] in the transaction.” Controlling persons such as officers, directors, partners and persons who materially “aid” a defrauding seller are exposed to vicarious liability for the “seller’s” misconduct under RCW 21.20.430(3). Hines v. Data Line Systems, Inc. , 114 Wn.2d 127, 135, 787 P.2d 8 (1990). Such control persons can avoid liability based on an affirmative defense that they did not know, and in the exercise of reasonable care could not have known, of the facts leading to the seller’s liability. Id.

The Washington Supreme Court has applied the two-part federal test to determine control liability, requiring that the plaintiff show that the defendant exercised “control” over the operations of the seller allegedly in violation of the WSSA, and that the defendant had the “actual power” to control the relevant transaction. Id. at 136. “Control” is defined by the Washington Supreme Court as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Id. (quoting 17 C.F.R. §230.405(f). In Hines, the Court found outside officers and directors could potentially be liable for securities fraud if they had actual power to control the statements or omissions concerning the CEO’s serious health condition in a private placement memorandum. However, the outside attorneys were found not liable as “control” persons, presumably based the Court’s conclusion that such attorneys were unable to change the outcome of the Board’s decision. Id.

Washington Supreme Court Develops New Case Law Standards for Insurance Claims Handling

On February 2, 2017, the Washington Supreme Court issued a new decision interpreting the Insurance Fair Conduct Act, or “IFCA.” The Supreme Court held that IFCA’s statutory regime did not create an independent cause of action for alleged regulatory violations in the absence of any unreasonable denial of coverage or payment of benefits. This decision, Perez-Crisantos v. State Farm Fire and Casualty Co., 187 Wn.2d 669, 389 P.3d 476 (2017) is one of the few decisions to favor insurance companies issued by the Washington Supreme Court in many years.

The case involved State Farm’s failure to pay uninsured motorist (UIM) benefits to its insured because State Farm, claimed there was a “reasonable disagreement about the value of the claim” and the delay in the ultimate payment made was not a “denial of payment under IFCA.” State Farm had paid PIP benefits but not UIM benefits under the policy and the trial court dismissed the insured’s claims based on IFCA on summary judgment. Affirming the dismissal, the Supreme Court held there was no “independent cause of action for regulatory violations” in the absence of an unreasonable denial of coverage or payment of benefits. In other words, a regulatory Washington Administrative Code violation, standing alone, was not enough to state a claim. The Supreme Court rationalized that “There has to be something more.” Id. at 685.

Since then, at least one federal court has struggled to apply the Perez-Crisantos analysis to IFCA claims handling type cases. Because most cases against insurance companies are litigated in federal court due to removal by insurance companies headquartered outside of Washington, the federal courts located in Washington must now apply this Washington Supreme Court case. In Bauman v. American Commerce Insurance Company, 2017 WL 635777 (W. Dist. Wa. Feb. 16, 2017), Judge Rothstein of the Western District of Washington distinguished the decision in Perez-Crisantos on the basis of expert testimony. Judge Rothstein held that the “holding of Perez-Crisantos” was a “narrow one.” Id. at *2. And, since there the insured had an expert “prepared to offer testimony that their insurance company’s conduct fell below national standards and failed to handle the [insured’s] claim in good faith,” the Court concluded it was not bound by the result in the Perez-Cristanos case. Id.

How other courts will apply IFCA going forward will likely be further litigated both in federal and state courts.

Why is there a 21-Day Provision in a Severance or Settlement Agreement?

Many employees and employers ask why a 21 day period is provided for review of a severance or settlement agreement. Employees often want any monetary payment more quickly and employers are interested in putting employment disputes to a quick end to limit costs and attorney’s fees. Many employees and employers wonder why these provisions are there when other contracts do not have the same verbiage.

In reality, most severance or settlement agreements have a 21 day period for an employee to consider the agreement and then a 7 day period to revoke any such agreement. The reason is based on a federal law known as the Age Discrimination in Employment Act ("ADEA").

In 1990, Congress amended the ADEA by adding the Older Worker Benefit Protection Act (“OWBPA”). Employees over the age of 40 are protected by additional protections to guarantee that such an employee has an opportunity to make an informed choice whether or not to sign the agreement and to ensure that employees over 40 are not unduly pressured to sign these types of agreements. The law requires that such agreements contain a 21 day period to review the agreement and a 7 day period to revoke any consent to an agreement. If material changes to the final offer are made, the 21-day period starts over. The clause has become standard in many employment agreements, regardless of the age of the employee, to ensure a waiver or release of claims is effective.

Even if the above time frames are provided for, a waiver of age claims, like waivers of Title VII and other discrimination claims, will be invalid and unenforceable if an employer used fraud, undue influence, or other improper conduct to coerce the employee to sign it, or if it contains a material mistake, omission, or misstatement. These are largely questions driven by an individual’s facts surrounding the employment relationship.

WASHINGTON COURT OF APPEALS SETS FORTH THE INSURANCE COMPANY'S DUTY TO PAY DEFENSE COSTS WHILE A COVERAGE CASE IS UNDERWAY.

In a January 29, 2018 decision, the Washington Court of Appeals (Division I) clarified that an insurance company is responsible for all reasonable defense costs while an insurance company's claim of "no coverage" is in the process of being adjudicated. See National Surety Corporation v. Immunex Corp., 2018 WL 582450, Div. 1 (January 29, 2018) (unpublished decision).

National Surety insured Immunex under a policy spanning years of 1998 to 2002. When Immunex was sued for unlawful drug pricing claims, National Surety first denied coverage. Then, under a "reservation of rights" letter issued to Immunex, National Surety agreed to defend until a court could determine whether or not there was coverage. National Surety next filed a declaratory relief action in federal court arguing that Immunex's claims were not covered under the insurance policy and, therefore, that it had no duty to defend.

As a general rule, if an insurance company is uncertain of whether or not there is a duty to defend, the insurance company may decide to defend its insured with a "reservation of rights" letter and, simultaneously seek a declaratory judgment that it has no coverage and, thus, no duty to defend. By defending under a "reservation of rights" and seeking a declaratory judgment in a new coverage lawsuit, the insurance company may avoid breaching its duty to defend and incurring the potentially greater expense of defending itself from a claim of breach of contract claim brought by its insured for all costs incurred in litigation. But, where the insurance company seeks to take advantage of this procedure, the insurance company remains liable for defense fees and costs incurred while the coverage issue is being litigated.

In the Immunex case, the trial court denied Natural Surety's motion filed in the declaratory relief lawsuit that it should be completely relieved from paying any of Immunex's defense fees of over $15 million since it had issued a "reservation of rights" letter to its insured and also then filed a coverage lawsuit. Even though Immunex had provided its insurer with late notice of the claims, the Court of Appeals held Immunex may be entitled to recover some of its attorneys' fees that it had incurred while the coverage action was still pending. The Court of Appeals reiterated its prior holdings that an insurer's reservation of rights defense while simultaneously seeking a declaratory judgment of no coverage is a "means by which the insurer avoids breaching its duty to defend while seeking to avoid waiver and estoppel." However, the Court of Appeals added that "after obtaining a declaration of noncoverage, an insurer will not be obligated from that point forward." Thus, the Court of Appeals allowed Immunex to recover its defense costs incurred while the reservation of rights defense was asserted, but before the coverage determination had been issued by the federal court. The Court of Appeals remanded for the trial court to determine the reasonableness of the fees and costs sought by Immunex and cut its recoverable costs down from over $15 million dollars to just $670,000 because of Immunex's late tender of its claims to the insurance company.

This case serves as a good reminder to businesses. Businesses should timely tender a claim for coverage, even where coverage may be uncertain. Under some circumstances, a late tender may be excused if there is no prejudice to the insurance company. But, an insurance company cannot avoid payment of its insured's defense costs incurred while a coverage action is pending for adjudication.

Washington LLC Lacks Standing to Sue if Corporate Formalities Are Not Up to Date with Washington Secretary of State

Washington courts will not allow a company to sue if the company has failed to keep up to date on corporate formalities with the Washington Secretary of State. In Chadwick Farms Owners Association v. FHC, LLC, 166 Wn. 2d 178, 297 P. 3d 1251 (February 6, 2009), the Washington Supreme Court held a company that had been canceled by the Washington Secretary of State could not seek recovery from the court. The dissolved LLC had failed to seek reinstatement within the two-year winding up period provided by the LLC statute and, therefore, the ability of the LLC to sue ended upon cancellation of its certificate of formation. Subsequent cases have interpreted this decision to mean a canceled LLC could neither be sued nor maintain a lawsuit. See Sherron Associates Loan Fund V (Mars Hotel) v. Saucier, 157 Wash. App. 357, 237 P. 3d 338 (2010) (Dissolved, but not yet canceled, LLC could sue and be sued within the time limits of the statute).