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Current decisions. (Decisions).

ATTORNEY'S FEES

$88 Million Fee Cut to $18 Million Maximum

Reviewing an attorney's fee award arising from a constitutional challenge to a state statute, a California Court of Appeal has slashed an arbitration panel's award of $88.5 million in fees to a maximum of $18.19 million. Writing separately, a concurring justice noted that the original fee award amounted to approximately $8,000 per hour for the attorneys involved in Jordan v. California Department of Motor Vehicles, 123 Cal.Rptr.2d 122 (Cal. App. 2002).

In the underlying litigation, the court had held that the statute imposing a smog impact fee of $300 per California-registered vehicle was unconstitutional under both the federal and California constitutions. 89 Cal.Rptr.2d 333 (Cal. App. 1999). That decision also reversed the trial court's determination that all the persons who had paid the fee were entitled to refunds from a common fund of $363 million and held that only the four original plaintiffs, who had moved from out-of-state to California, registered their vehicles, paid the fee and demanded refunds, could receive refunds. In a separate appeal, the state sought to reverse the trial court's award of $18.19 million in fees for the attorneys representing the Jordan plaintiffs, led by the firm of Milberg, Weiss, Bershad, Hynes & Lerach.

California's governor later announced that the state would not appeal the Jordan decision but instead would refund the smog impact fee, plus interest, to all residents who had paid it. The California legislature then enacted a statute that repealed the smog impact fee and declared that all 1.7 million vehicle owners who had paid the fee were entitled to refunds with interest. The legislative measure also added Section 6909 to the California Revenue and Taxation Code to create a $665 million refund account. Section 6909(b) provided for binding arbitration on the questions of court costs, fees and expenses.

Lawyers for the Jordan plaintiffs and the state agreed to arbitrate the fee question before three retired judges. The arbitration agreement allowed the attorneys to argue that they were entitled to any amount of fees on any theory they believed was supported by the facts and circumstances of the case. With the arbitration agreement in place, the state dropped its appeal of the $18.19 million attorney's fee award.

The arbitration panel determined that the dispute was a common fund case and set attorneys' fees at 13.3 percent of the total refund account, thus awarding $88.48 million in fees. On the state's petition to vacate the award as beyond the panel's powers and as violating public policy, the trial court ruled that the award was based on an erroneous conclusion of law. It determined that the arbitrators had erred in applying the common fund doctrine to the case because the gigantic refund account was the result of lobbying, not lawyering.

Affirming, the Court of Appeal held that Section 6909(b) and public policy limited the fee award to $18.19 million. In an opinion by Justice Morrison, the court held that the legislatively created refund account was not a "common fund." When a plaintiff's efforts produce a fund from which many persons may benefit, the court stated, then an equitable rule permits the plaintiff's attorneys to be awarded fees and expenses incurred in establishing the recovery. But the $665 million refund account here did not conform to the equitable underpinnings for a common fund, the court concluded.

The account was established as the legislature's response to the Jordan lawsuit, the court added, but was not required by a ruling in that litigation. It pointed out that the court in the initial Jordan appeal held that only the four plaintiffs in that case were entitled to refunds of the smog impact fee. Reacting to that decision, the legislature enacted a new statute providing that each person with a registered vehicle who paid the smog impact fee would be entitled to a refunded. This conclusion, the court said, was buttressed by the fact that the new statute provided that any unclaimed balance in the refund account after June 30, 2004, would revert to the state's general fund. Thus, the state, not the beneficiaries of the fund, would be paying the attorney's fees, the court determined.

The court also accepted the state's contention that without a cap of $18.19 million being read into Section 6909(b), the statute would allow awards amounting to gifts of public funds prohibited by the California Constitution. The primary question in determining whether an appropriation of public funds is a gift, the court noted, is whether the funds are destined for a public or private purpose. The state's settlement of a good faith dispute with a private party, who relinquishes a colorable legal claim in return for public funds, establishes good consideration and shows the funds are expended for a valid public purpose. Any amount over the state's maximum exposure of $18.19 million in the original appeal would be a gift of public funds. "We see no benefit to the public, only benefit to the attorneys," the court wrote.

Following both the plain language of the statute and the presumption that the legislature intended to enact a constitutional statute, the court ruled that Section 6909(b) set the range of between zero and $18.19 million.

Concurring, Justice Sims harshly criticized the attorneys for asserting they were entitled to an $88 million fee award. That hefty award works out to $8,000 per hour, a rate that is "completely in outer space, totally over the top," he stated. "The fact that attorneys even requested a fee award of that absurd magnitude from the taxpayers is a testament to the unreal world of greed in which some attorneys practice law in this day and age."

Justice Sims, however, also said he wrote separately to point out that the state had breached the arbitration agreement in two respects. First, the state's appeal was beyond the agreement's terms that the arbitrators' award would be binding on all parties, with no right to appeal, collateral attack or other review. The agreement also allowed the attorneys to assert any argument to entitlement of fees at any level they believe valid under the circumstances of the case. While that provision might be said to contemplate any fee award from the arbitrators, he added, there was nothing the attorneys could do about the state's breaches because the state cannot, by contract, authorize an unconstitutional gift of public funds.

AVIATION LAW

Emotional Injuries Limited under Warsaw Convention

A woman injured in an American Airlines plane crash in 1999 will have to accept a significant reduction in her $6.5 million jury verdict or go back to trial, the Eighth Circuit has ruled in a case governed by the Warsaw Convention. Determining that the woman was entitled only to emotional injury damages that flowing from her personal injuries,

the court offered her the option of either accepting a remittitur of $1.5 million or a new trial on damages. In re Air Crash at Little Rock, Arkansas, on June 1, 1999 (Lloyd v. American Airlines Inc.), 291 F.3d 503 (8th Cir. 2002).

In an unusual aspect of the case, the United States filed an amicus curiae brief supporting American Airlines' assertion that it could join the government as a third-party tortfeasor for contribution. While participating as an amicus favoring a position against its own interest, the U.S. argued that it believed it would ultimately prevail on the contribution claim and that it had a greater, interest in the correct interpretation of the Warsaw Convention.

Anna Lloyd was injured when an American Airlines flight crashed on the runway at the Little Rock Airport, with the deaths of the pilot and 10 passengers. The Judicial Panel on Multidistrict Litigation consolidated the cases resulting from the crash and transferred them to the U.S. District Court for the Eastern District of Arkansas. Lloyd was enroute from Austria as an international passenger at the time of the accident, so her action was governed by the Warsaw Convention. She was treated at a hospital for smoke inhalation and minor injuries to her legs and knees, and she was released the same night as the crash.

Prior to trial, the federal district court granted American leave to file a third-party complaint against the United States for contribution in domestic cases arising from the crash, but not in international cases. The trial judge reasoned that because American had signed a series of International Air Transport Association intercarrier agreements, it was liable to international passengers in contract, not in tort, and thus could not be a joint tortfeasor. 109 F.Supp.2d 1022 (E.D. Ark. 2000).

At trial, Lloyd testified that she twice saw a doctor about her leg injuries and underwent physical therapy for a few weeks. She visited friends the summer the accident occurred and returned to college in the fall to continue her studies toward a music education degree. At the time of trial, she said, she continued to suffer flashbacks and panic attacks, and one of her professors testified that she had a low chance of completing college and becoming a music teacher. A psychiatric expert witness opined that she suffered from post traumatic stress disorder (PTSD) and a major depressive disorder. He also testified that she suffered a physical injury to her brain due to her chronic PTSD, but she had not undergone any diagnostic tests to verify that condition. Lloyd's economic expert placed her maximum economic losses at $1,166,875.

At the close of evidence, American moved for judgment as a matter of law to strike Lloyd's claims for mental injuries on the ground that those injuries were not recoverable under the Warsaw Convention. The district court denied this motion. 118 F.Supp.2d 916 (E.D. Ark. 2000).

On appeal, American renewed its argument that mental injuries are either not recoverable under the Warsaw Convention at all or are recoverable only to the extent that they flow from physical injuries. Following what it considered the "more mainstream view" among federal district courts on the issue, the Eighth Circuit, in an opinion by Judge Beam, held that damages for mental injuries must proximately flow from physical injuries caused by the accident. If the emotional damages flow from the physical injuries, the court said the physical injuries would not be fully compensated if it did not allow recovery for this aspect of the harm. On the other hand, the court said that physical manifestations of mental injuries such as weight loss, sleeplessness or physical changes in the brain resulting from chronic PTSD are not compensable under Warsaw.

While the court recognized that the injuries to Lloyd's legs and the smoke inhalation during the crash may have caused some of her emotional problems, it determined that the most of her mental injuries did not result from her physical injuries. "At the bottom line, Lloyd's evidence at trial was simply not sufficient to establish a $6.5 million connection between her relatively insignificant physical injuries and her very significant PTSD and depression," the court stated. It offered Lloyd the choice of a new trial on damages or a remittitur to $1.5 million as her final judgment, which the court determined was fair compensation for the damages she proved at trial.

If the case is tried again, the court added, a hearing on Lloyd's psychiatric expert must be conducted based on the reliability factors laid out in Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993). The trial court would have to determine whether the expert's theories on Lloyd having suffered a brain injury from chronic PTSD should be admitted into evidence.

Addressing American's contention that it should have been able to sue the United States for contribution as a joint tortfeasor, the court reversed the trial court's ruling that American was limited to contractual remedies for international cases under the Warsaw Convention. The causes of action that the 'treaty pre-empts, the Eighth Circuit concluded, are claims the common law normally associates with tort law. The court determined that the intercarrier agreements that American signed do not alter the fundamental nature of the tort remedy in the treaty. The court directed the district court to allow American to file a third-party complaint against the United States for both domestic and international cases arising from the crash.

COPYRIGHTS

Publisher May Assert Fair Use of Beanie Babies' Images

The Seventh Circuit has held that a publisher of books that feature the once wildly popular Beanie Babies has a right to present the fair use defense in the manufacturer's copyright infringement suit. Reversing a permanent injunction against the publisher and a damages award of $1.36 million in favor of Ty Inc., the manufacturer of stuffed toy animals, the court also was critical of Ty's attempts to use licensing agreements to control what is said about its products in collector's guides. Ty Inc. v. Publications International Ltd., 292 F.3d 512 (7th Cir. 2002).

Ty had copyrighted the toys as "sculptured works" under 17 U.S.C. It filed a copyright and trademark infringement action against PIL, which produced a series of books with titles such as For the Love of Beanie Babies and Beanie Babies Collector's Guide. The books contained text and photographs of the small stuffed critters. On Ty's motion for summary judgment, the district court rejected PIL's fair use defense in the copyright aspect of the suit, issued a permanent injunction against the company, awarded the publisher's profits from the sale of the books to Ty, and added more than $200,000 in prejudgment interest. 2000 U.S. Dist. Lexis 15382.

On appeal, the Seventh Circuit agreed with PIL that it was entitled to present the fair use defense. In an opinion by Judge Posner, the court noted that copying portions of a copyrighted work that is complementary to the work, such as a book review or parody that is not a substitute, for the work, is a fair use. If Ty, as the copyright owner, did not hold the right to derivative works, then PIL's books would clearly be considered complementary so that their publication would be sheltered by the fair use defense, Posner stated.

While PIL conceded that the photographs of the Beanies were derivative works of the copyrighted beanbags, the court held that the collector's guides are not derivative works. When PIL's Beanie Babies Collector's Guide was published in 1998, the court said that some Beanies were selling in the secondary market for thousands of dollars, while others fetched little more than their original purchase price. PIL's guides not only pictured the Beanie Babies, but also noted the price differences and provided information on when the particular stuffed animal was released on the market, when it was "retired" from distribution, the estimated value of the Beanie and the prospects of its availability.

A collector's guide to a series of copy righted work is no more a derivative work than a book review, the court determined. "Both the book review and the collectors' guide are critical and evaluative as well as purely informational; and ownership of a copyright does not confer a legal right to control public evaluation of the copyrighted work," the court stated. Some of the text in PIL's collector's guide, Judge Posner noted, is "quite critical, for example, accusing Ty of frequent trademark infringements."

While summary judgment was plainly not warranted for all the books that the district court found infringed Ty's copyright, it may be appropriate for some, the court concluded. For guidance on remand, it added that the district court should apportion PIL's profits between those attributable to the photos and those attributable to the text. All that Ty is entitled to, if it proves infringement on remand, are the profits attributable to the photos, a smaller amount than PIL's actual profits, the court stated.

DISCRIMINATION

Law School May Continue to Consider Race

In a case that drew the input of more than a half dozen amici curiae and was closely watched by law school admission staffs, a very fractured Sixth Circuit, sitting en banc, upheld the University of Michigan Law School's admissions policy that make an applicant's race and ethnicity a factor in the process.

Seven of the nine Sixth Circuit judges who heard the constitutional challenge wrote separate opinions in Grutter v. Bollinger, 288 F.3d 732 (6th Cir. 2002), throwing in a load of the court's dirty laundry surrounding its unusual decision to hear the case en banc initially, rather than after a three-judge panel had rendered a decision. Dissenting Judge Boggs noted that this was the first case in his 16 years on the court to get the express route to en banc review.

Barbara Grutter, an unsuccessful applicant to the University of Michigan's Law School, asserted in her class action that the law school unlawfully discriminated in its admissions policy, which was drafted in 1992 to comply with the U.S. Supreme Court's opinion in Regents of the University of California v. Bakke, 438 U.S. 265 (1978). The policy states that it strives for a mix of students with varying backgrounds and experiences who will respect and learn from each other. The admissions staff not only considers the usual criteria, such as Law School Admissions Test scores and undergraduate grade-point averages, but also looks at a number of "soft variables," including the enthusiasm of those recommending the student and any unique talents or interests the applicant may have.

In administering the policy, the school does not set aside a certain number of seats for minorities, but tries to achieve a critical mass of under-represented minority students. School personnel testified that a critical mass of minorities is a number sufficient to enable those students to contribute to classroom dialogue without feeling isolated. According to the law school's statistical expert, eliminating race as a factor in the admissions process would dramatically lower minority enrollment. The prediction was that if race were not a factor, under-represented minority enrollment would have dropped from approximately 14.5 percent to just 4 percent of the entering class in 2000.

The district court ruled that the law school's consideration of race and ethnicity in its admissions process violated the 14th Amendment's equal protection clause and Title VI of the Civil Rights Act of 1964. The court held that it was not bound by Justice Powell's conclusion in Bakke because that opinion did not enjoy the assent of five justices. In Bakke, Justice Powell, applying the strict scrutiny test, wrote that "the attainment of a diverse student body ... clearly is a constitutionally permissible goal for an institution of higher education."

On appeal, the Sixth Circuit, in a majority opinion by Chief Judge Martin, in which only four members of the en banc court joined, reversed. He stated that the district court erred in not analyzing Bakke under Marks v. United States, 430 U.S. 188 (1977), which provides that the holding of a fragmented U.S. Supreme Court is the position taken by the justices who concurred in the judgment on the narrowest grounds. Applying Marks to the Bakke decision, the Sixth Circuit majority determined that Justice Powell's rationale in Bakke, rather than Justice Brennan's views, offered the narrowest grounds for the court's judgment. Under Justice Brennan's .concurring rationale, the more permissive intermediate scrutiny standard would apply to benign racial classification, while under Justice Powell's rationale, the more limited strict scrutiny would apply to all racial classifications.

Relying on the Powell position, the Sixth Circuit majority determined that the law school's consideration of race serves a compelling state interest in achieving a diverse student body through narrowly tailored means, as required to survive a constitutional challenge under the equal protection clause. Unlike Bakke, in which the California-based medical school used a quota system to achieve diversity within its enrollment, Michigan's law school does not reserve any set number of seats for minorities.

The law school's admissions process also differs from the constitutionally objectionable two-track system in Bakke, in which one track was reserved for minorities, who were insulated from comparison with non-minority applicants on the other track. Michigan's formula considers all students together and strives to reach a critical mass of minority students, which the court determined to be different from the quota system struck down in Bakke.

The majority noted that Justice Powell drew a distinction between a quota system and a program that considers race and ethnicity as a potential "plus" in the admissions matrix. Considering race as a "plus" in evaluating applicants lacks the facial intent to discriminate, according to the court. The law school's selection process should be deemed more akin to the "plus" approach than the unconstitutional quota system used in Bakke, the court concluded.

Reversing the district court, the Sixth Circuit also vacated the injunction prohibiting the law school from considering race and ethnicity in its admissions decisions.

In a strongly worded dissent, Judge Boggs said the case involves a "straightforward instance of racial discrimination by a state institution." He took the position that the school's interest in a diverse student body did not constitute a compelling state interest sufficient to satisfy strict scrutiny. To him, there was no real difference between the law school's efforts to achieve a critical mass of minority students and the "numerical quota" that was held unconstitutional in Bakke.

"By carefully avoiding the pernicious term `quota,' the law school, for the majority, has withstood the constitutional strict scrutiny that we apply to racial preferences," Judge Boggs wrote. "For me, however, the law school's simple avoidance of an explicit numerical target does not meet the constitutional requirements of narrow tailoring."

He also was critical of how the petition for a hearing en banc was handled, stating that the court did not follow its own longstanding rules. The Sixth Circuit accepted the petition to hear the case initially en banc based on the case's significant importance. He was critical of a three-month delay between when the petition was filed and when it was circulated to the court's members. Two members of the court, he noted, took senior status in the intervening time, thus reducing the en banc court to nine members.

Writing a separate dissent, Judge Siler said he concurred in Judge Boggs's dissent, except he questioned the necessity of getting into the procedural workings of the court.

Judge Batchelder also filed a separate dissent, stating that she joined in all aspects of the Boggs dissent, including his exposition of the case's behind-the-scenes tangles. She said the public benefits from knowing when the court fails to follow its established procedures.

Judge Gilman also dissented separately, stating that he disagreed with aspects of both the majority and Boggs opinions. He concluded that the school actually operated a two-track system for evaluating prospective students, effectively insulating minorities from competition with other applicants. In his view, reaching a critical mass of minorities is nothing less than a euphemism for the quota system that Bakke explicitly prohibited.

In a concurring opinion, Judge Moore disapproved of Judge Boggs's inclusion of a "procedural appendix" as part of his opinion and offered her account of how the case came to be argued initially before an en banc court. She claimed that the delay in circulating the petition for an en banc hearing to all members of the court comported with the court's rules requiring petitions to be held in abeyance until all briefing was complete. She strongly chided Judge Boggs and the other court members who joined in his dissent, saying "their conduct in the present case is nothing short of shameful." Bringing public attention to the court's internal machinations was harmful because the dissenters' actions, she wrote, "severely undermine public confidence in this court."

Judge Clay also filed a separate concurring opinion to address what he considered misrepresentations in the Boggs opinion that "unjustifiably distort and seek to cast doubt upon the majority opinion." He declared that diversity within higher education promotes the nation's deep commitment to educational equality and that the law school's admissions process appears to serve that purpose.

FOREIGN PROCEEDINGS

Discovery Allowed in U.S. for Case in EC Tribunal

In a first impression case that asked the Ninth Circuit to decide whether U.S.-domiciled documents may be discovered for use before a European Community tribunal, the court concluded that Advanced Micro Devices could obtain domestic discovery from Intel Corp., both U.S.-based manufacturers of microprocessors, although the EC tribunal is not a conventional court. Advanced Micro Devices Inc. v Intel Corp., 292 F.3d 664 (9th Cir. 2002).

AMD brought the issue before the appeals court, asking for an expansive reading of 28 U.S.C. [section] 1782, which governs assistance to foreign and international tribunals and to litigants before those tribunals. AMD asserted that Section 1782 permits discovery in the United States on its complaint before the Directorate General--Competition of the EC. AMD's complaint alleged that Intel, a competitor in the microprocessor industry, was abusing its dominant market position in the EC, in violation of the treaty establishing the EC. AMD sought access to documents and transcripts from a proceeding pending in U.S. District Court for the North District of Alabama, Intergraph Corp. v. Intel Corp., No. CV 97-N-3023, but the U.S. District Court for the Northern District of. California did not allow the discovery.

Reversing in an opinion by Judge Hawkins, the Ninth Circuit first summarized the workings of the Directorate General--Competition of the EC. He stated that the directorate enforces the antitrust provisions of the EC treaty, conducting the initial investigation of all complaints. Each side gets an additional opportunity for input if the initial decision is against it. Various levels of review follow the investigative and charging stages, including a final review by the Court of Justice for the European Communities, the court of last resort for EC matters.

Independent hearing officers hear evidence and present their conclusions to the directorate, who then makes a recommendation to the EC on how to proceed. If the EC proceeds with a complaint, a preliminary decision is sent to the EC Advisory Committee, composed of representatives of the EC member states. That committee then drafts an opinion to the EC, which, if adopted, becomes a final enforceable decision within the EC.

The Ninth Circuit rejected Intel's assertions that the complaint process before the directorate was purely administrative in nature and preliminary to a non-judicial proceeding. The EC process, the court stated, carefully permits both the complainant and alleged infringer ample opportunity for input in the eventual recommendations and inserts an independent entity, the EC Advisory Committee--between the directorate's recommendation and the EC's decision to file a final enforceable decision. The directorate's investigation, although preliminary, leads to quasi-judicial proceedings and qualifies as a "proceeding before a tribunal" within the broad interpretation of Section 1782, the court declared.

Acknowledging that its decision allows for "liberal discovery," the court said its view is entirely consistent with the twin aims of Section 1782--"providing efficient assistance to participants in international litigation and encouraging foreign countries by example to provide similar assistance to our courts."

MANDAMUS

Auto Makers Win Mandamus and Change of Judges

In an unusual move, the Fifth Circuit granted the petition of three large U.S automobile manufacturers for a mandamus directing that a federal district court not remand cases to a Texas state court, and it also ordered that the asbestosis-related litigation be reassigned to a different district court judge. In In re DaimlerChrysler Corp., 294 F.3d 697 (5th Cir. 2002), the court said it took the extraordinary step of removing the matters from U.S. District Judge Samuel B. Kent because he had shown open hostility to the auto makers and their lawyers.

The plaintiffs had filed two personal injury actions in Texas state court against DaimlerChrysler, Ford Motor Co., General Motors Corp. and others, alleging injuries caused by asbestos contained in the friction products within automobiles. The defendants removed the cases to federal court on the ground that they were related to the bankruptcy proceedings of Federal-Mogul Global Inc., a supplier of automotive parts, including parts that contained asbestos. The Federal-Mogul bankruptcy is being heard by the U.S. District Court for the District of Delaware, In re Federal-Mogul Global Inc., 2001 U.S. Dist. Lexis 23553.

The Delaware court issued orders in December 2001 and January 2002 transferring to itself all friction products claims against auto makers that are related to the bankruptcy proceeding. Later, in February 2002, the bankruptcy court found that the transferred cases were not "related" to the bankruptcy, should not be transferred, and should be remanded to state court. The Third Circuit has stayed that order, but nevertheless the Texas federal district court in May 2002 purported to remand these cases to state court.

Earlier, in March 2002, the Fifth Circuit in five related Cases that it found to be identical to these cases directed the district court to recall its remand orders. DaimlerChrysler I, 2002 U.S. App. Lexis 8756.

The district court here remanded the two cases to state court in reliance on a 2001 Fifth Circuit opinion, Arnold v. Garlock, 278 F.3d 426 (5th Cir. 2001), that predated the Delaware court's transfer order. Since the district court acted after entry of the Delaware court's transfer order, the Fifth Circuit, in a per curiam opinion, stated that the present cases were identical to DaimlerChrysler I and ruled that the district court is bound by the proper orders of another federal court. If the plaintiffs want to challenge the "related to" bankruptcy jurisdiction over these cases, the Fifth Circuit declared, they have to do so in the Delaware bankruptcy court and the Third Circuit.

The Fifth Circuit also vacated the district court's order allowing the plaintiffs to pursue sanctions against the defendants under Rule 11 of the Federal Rules of Civil Procedure. The court said sanctions were not warranted because the defendants' mandamus petition was meritorious.

Finding that the district court had demonstrated hostility toward the auto makers in a response to the petition for a writ of mandamus, the Fifth Circuit also allowed the auto makers' request that all pending and future friction product cases be assigned to a different judge in the Southern District of Texas. Recognizing that it was granting extraordinary relief, the court remarked that, notwithstanding all good faith efforts, "it would be exceedingly difficult for the district court to regain some impartiality in this case."

Judge Stewart concurred in the portion of the decision dealing with the remand and sanctions issues but did not join in the portion addressing the reassignment of the cases.

PRODUCTS LIABILITY

Plaintiff Gains Inference Product Was Defective

In a 2-1 decision, a panel of the 11th Circuit held that a Florida man was entitled to a legal inference in his products liability action that a catheter that burst inside his bladder was defective. Reviewing a summary judgment applying Florida law and ruling in favor of the catheter manufacturer, C.R. Bard Inc., and the distributor, Baxter Healthcare Corp., the court's majority also ruled that the trial court properly excluded an engineering expert's affidavit because it did not have the necessary indicia of reliability. McCorvey v. Baxter Healthcare Corp., 298 F.3d 1253 (2002).

Charles McCorvey's products liability action alleged that a catheter that was inserted into his bladder in February 1995 during prostate surgery and later erupted was defective. To test the balloon device of the catheter before insertion, the manufacturer's instructions stated that it should be filled with no more than 36 cc of saline solution. McCorvey's doctor tested the balloon with 50 cc of saline solution, and once it was inserted into McCorvey's bladder, it was inflated again with the same measure of solution.

Attempting to defeat Bard's and Baxter's motion for summary judgment, McCorvey submitted expert affidavits of an engineer and two doctors, all of whom maintained that the catheter was defectively designed or manufactured and/or was not safe for its intended purpose. The medical expert affidavits established that, despite the manufacturer's instructions, it had become the standard urological practice to fill 30 cc-capacity catheters to the 50 cc level.

Striking the engineering affidavit as lacking reliability, the district court granted summary judgment in favor of Bard and Baxter. It also found that McCorvey was not entitled to a legal inference of product defect as recognized in Florida by Cassisi v. Maytag Co., 396 So.2d 1140 (Fla. App. 1981).

For the majority of the 11th circuit panel, Judge Kravitch, applying Florida law, agreed with the district court's conclusion that McCorvey's engineering expert's affidavit was not sufficiently reliable under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993). The court held that McCorvey did not demonstrate sufficient reliability on the expert's methodology used in reaching his conclusions and that he did not show that the testimony would assist the trier of fact.

Despite these deficiencies, the court held that McCorvey could still defeat summary judgment with the benefit of a Cassisi inference of product defect. That the 30 cc catheters were routinely over-inflated after insertion was sufficient to show that McCorvey's catheter, which also was admittedly over-inflated, erupted during what has become the course of normal operation, the court stated. The catheter's eruption differs either from the manufacturer's intended result or from other units of the same product line, the court observed. These facts were sufficient to the court's majority to show that the catheter malfunctioned during the course of normal operation, so that, under the Cassisi inference, the malfunction itself is evidence of the product's defective condition at both the time of the injury and at the time of sale. With the benefit of the Cassisi inference, McCorvey could proceed to trial without pinpointing the specific cause of the problem or negating other possible causes of the catheter's malfunction.

Dissenting, Judge Hill said the majority's analysis was illogical in allowing an inference that the device was defective when it was admittedly inflated to 166 percent of its stated capacity. In his view, over-inflation, rather than a defect in the product, was more logically the cause of the problem. "It is my experience from childhood that balloons will inherently burst if over-inflated," he remarked, stating that rather than relying on Cassisi, an intermediate appellate court decision, he would certify the question to the Florida Supreme Court for an authoritative interpretation of that state's law.

STRUCTURED SETTLEMENTS

Beneficiaries May Not Assign Future Payments

The Georgia Supreme Court, in a case of first impression in the state, held that recipients of a structured settlement may not sell or assign their right to future payments if the settlement agreement prohibits it. In Singer Asset Finance Co. v. CGU Life Insurance Co. of America, 2002 Ga. Lexis 591, vacating and replacing 2002 Ga. Lexis 484, the court held that a tax-preferred structured settlement agreement may validly preclude the beneficiaries from assigning the future payments.

The structured settlement agreement between CGU Life Insurance Co. of America and Christopher and Jonathan Revill provided for an initial lump sum payment and for future periodic payments. The agreement also contained a clause stating that the future payments may not be "accelerated, deferred or decreased" and that the Revills could not "sell or mortgage or encumber same, or any part thereof, by assignment or otherwise."

Later the Revills, in exchange for a lump sum payment, assigned their right to receive some of their future payments to Singer Asset Finance Co. When CGU learned of the transaction, it filed suit against Singer and the Revills to have the assignment declared unenforceable. On cross-motions for summary judgment, the trial court upheld the assignment as valid, but the Georgia Court of Appeals reversed, holding that the settlement agreement precluded the assignment. 553 S.E.2d 8 (Ga. App. 2001).

Affirming the Court of Appeals, the Georgia high court said that the assignment the Revills made will materially reduce the value of the contract to CGU. The insurer, following terms within the structured settlement agreement, had made a qualified assignment to an annuity service of CGU's obligation to make future payments within the meaning of Section 130(c) of the Internal Revenue Code, which allows the qualified assignee to exclude the qualified funding asset from its gross income.

With a qualified assignment like the one used by CGU, a structured settlement is a tax-neutral transaction when a third party assumes the obligation to make the periodic payments. This type of qualified assignment is permitted under the Internal Revenue Code, unless the periodic payments are "accelerated, deferred, increased or decreased by the recipient." The loss of predictability stemming from the fact that CGU might suffer adverse tax consequences is a material increase in its burden and sufficient reason to preclude the assignment, the court held.

The court also noted that the Victims of Terrorism Relief Act of 2001, which Congress enacted late last year, will eliminate an obligor's concern about potential tax liability in cases like this one. That legislation provides that future payments made under a structured settlement can be assigned without the loss of tax-favored status, if the assignment is approved by a court.

The court added a footnote that its holding was consistent with many jurisdictions that have considered the issue of the non-assignment clauses in structured settlement agreements, citing CGU Life Insurance Co. v. Metropolitan Mortgage & Securities Co., 131 F.Supp.2d 670 (E.D. Pa. 2001); Liberty Life Assurance Co. of Boston v. Stone Street Capital, 93 F.Supp.2d 630 (D. Md. 2000); Grieve v. General American Life Insurance Co., 58 F.Supp.2d 319 (D. Vt. 1999); Johnson v. First Colony Life Insurance Co., 26 F.Supp.2d 1227 (C.D. Cal. 1998); and Piasecki v. Liberty Life Assurance Co. of Boston, 728 N.E.2d 71 (Ill.App. 2000).
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Author:Sanders, Carol McHugh
Publication:Defense Counsel Journal
Date:Oct 1, 2002
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