Proportionality Emphasized In Amendments To The Federal Rules Of Civil Procedure

foster_mannyby Immanuel R. Foster

Heads Up

Significant amendments to the Federal Rules of Civil Procedure became effective on December 1, 2015.  The amendments modify Rules 1, 4, 16, 26, 30, 31, 33, 34, 37, 55, and 84.  The amendments seek to increase the efficiency and speediness of litigation while slowing the rising costs of discovery.  Toward the latter goal, certain of the revisions establish an express guiding principle to limit the scope of discovery:  proportionality.

The application of the proportionality requirement likely will have an immediate and lasting influence on how parties conduct discovery in federal courts and how the courts referee discovery disputes.  Specifically, amended Rule 26(b)(1), which governs the scope of discovery, permits discovery into relevant, non-privileged information “proportional to the needs of the case.”  (Emphasis added.)  Old Rule 26(b)(1) permitted discovery into relevant, non-privileged information “reasonably calculated to lead to the discovery of admissible evidence,” a phrase that was often misconstrued and which is now removed.  Old Rule 26(b)(1) also permitted such discovery into sources of additional discovery, “including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.”  Thus, the new rule:  (i) establishes “proportionality” as a limiting principle (ii) potentially limits “discovery about discovery” and, consequently, (iii) will, it is hoped, add a needed control to the rising costs of discovery.

Proportionality Is The New Standard

The amended rule removes “reasonably calculated” – an ambiguous phrase that sometimes allowed for expansive discovery – and focuses on “proportional.”  And the amended rule specifies the considerations for determining whether discovery is proportional, including “the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.”  Parties now must consider these factors when making or responding to discovery requests.

To be sure, proportionality is not a wholly new concept in federal practice.  For example, before the 2015 amendments, proportionality was implied by Rule 26(b)(2)(C)(iii), which required courts to limit discovery where “the burden or expense of the proposed discovery” would “outweigh[] its likely benefit,” and Rule 26(g) required a party seeking discovery to certify that the discovery was “not . . . unduly burdensome or expensive,” in light of the circumstances of the litigation.  But while parties seeking protective orders pursuant to Rule 26(c) would frequently call the court’s attention to these proportionality considerations, opposing parties would often invoke “reasonably calculated,” which the Advisory Committee Notes on the new rule state “were used by some, incorrectly, to define the scope of discovery.”  The amendments change that.  The Committee Notes also state that “[t]he present amendment restores the proportionality factors to their original place in defining the scope of discovery,” empowering courts to enforce tighter limits on disproportionate discovery.

Proportionality May Restrict Discovery About Discovery

The amendment to Rule 26 deletes language that permitted discovery into information about “the existence, description, nature, custody, condition, and location of any documents . . . and location of persons who know of any discoverable matter.”  However, the Committee Notes suggest that this change is more style than substance.  It states that the long list of examples is so “deeply entrenched” that to include it would only maintain unnecessary “clutter” in an already lengthy rule, and that “[t]he discovery identified in these examples should still be permitted under the revised rule when relevant and proportional to the needs of the case.”

Still, the revision suggests limitations to the scope of this discovery to the extent that it would be at cross purposes with proportionality.  For example, in a recent case, a magistrate judge ruling on a motion for a protective order applied Rule 26(b)(1) and limited a proposed Rule 30(b)(6) deposition topic, noting that “[w]hile Plaintiffs have articulated credible reasons for seeking this information nationwide, its production is not proportional to the needs of the case.”  Cooper v. Charter Commc’ns, Inc., No. 3:12-cv-10530-MGM, 2016 WL 128099, at *2 (D. Mass. Jan. 12, 2016).  One of the credible reasons that Plaintiffs had advanced was that they were entitled to test Defendant’s assertion that they lacked certain relevant records for Massachusetts by inquiring about “how [Defendant] is able to track service losses in other states.”  Pl.’s Opp’n To Charter’s Mot. at 7, Cooper, ECF No. 187.  Thus, although the discovery request might have been permitted under the old rule, it was deemed not proportional under the new rule, and therefore exceeded the scope of discovery now permitted.

Proportionality Considerations Will Likely Contain The Costs Of Discovery

Proportionality figures to slow the ballooning costs of litigation caused by technological advances.  Specifically, widespread use and adoption of electronically stored information (ESI), often over many platforms, has made once-mundane discovery requests exponentially more burdensome.  In the past, responding to a discovery request might have meant collecting the data from a few computers from a few custodians, and each of those computers might have stored only a few gigabytes of data.  Now, discovery sometimes requires searching and reviewing terabytes of data harvested from local computers, from networks, and from the cloud – all of which must be reviewed for relevance and privilege.  This discovery can be similarly onerous for discovery recipients who must review and analyze large productions to determine how the information fits into or modifies their theory of the case or how the information might necessitate additional discovery.

The Committee Notes express the hope that parties and the courts will continue to embrace sophisticated ways to reduce the costs of producing ESI.  For example, to the extent that a discovery request could call for a click-by-click review through thousands or millions of documents, courts should permit parties to use reasonably-tailored search terms to narrow the scope of review.  Proportionality may now require it.  Limiting the scope of e-discovery would certainly make discovery less expensive.  Moreover, as discussed above, if courts become more reluctant to permit discovery into potential sources of additional discovery, that would further contain costs.

Conclusion

At the very least, the amended Rule 26(b)(1) will require parties and federal courts to weigh the proportionality factors and determine, for example, whether the importance of certain discovery in resolving an issue is proportional to the burden or expense of providing that discovery.  The Committee Notes suggest that parties should use Rule 26(f) and other scheduling and pretrial conferences to gain a “full appreciation of the factors that bear on proportionality” to inform their discovery requests and responses.  In discovery motion practice, parties will no longer prevail by arguing that a discovery request is reasonably calculated to lead to admissible evidence; now they must demonstrate that the request is proportional.

Immanuel R. Foster is a litigation associate at Skadden, Arps, Slate, Meagher and Flom LLP, and a member of the Boston Bar Association.


Federal and Massachusetts Exemptions for Securities Crowdfunding

sutcliffe_thomasby John D. Hancock

Legal Analysis

Companies in Massachusetts have two new methods to conduct smaller securities offerings: crowdfunding under a federal regulation adopted in October 2015 and crowdfunding under a Massachusetts regulation adopted earlier in 2015. Both are designed to provide efficient and affordable means of raising capital through the sale of small amounts of securities to a large number of investors.[1]

The SEC’s new Regulation Crowdfunding,[2] which takes effect on May 16, 2016, significantly changes how companies can conduct securities offerings exempt from registration under the Securities Act of 1933. Traditionally, requirements for exempt offerings have imposed significant restrictions on the offering process, such as limits on solicitation and advertising, the number or type of offerees, or the offering’s geographic scope. Under Regulation Crowdfunding, companies may offer and sell up to $1 million of securities to the public anywhere in the United States without registering the offering. The regulation allows companies to reach potential investors who are ordinarily excluded from exempt offerings and may enable companies unable to raise funds through traditional offerings to grow and thrive.

Unfortunately, the regulation imposes some requirements, such as the obligation to provide ongoing public disclosure, that may limit its utility.

The Massachusetts Crowdfunding Exemption[3] was adopted after Regulation Crowdfunding was proposed but before it was adopted. The exemption relies on Section 3(a)(11) of the Securities Act and federal Rule 147, which historically have had limited utility.[4] The state exemption is more flexible than Regulation Crowdfunding, including a higher maximum offering amount, fewer affirmative disclosure requirements and no ongoing reporting requirements.[5]

The new exemptions may be most attractive to newly organized startups with straightforward business plans whose capital needs can be satisfied entirely through crowdfunding. Companies considering crowdfunding should nonetheless anticipate the risks and costs associated with a large shareholder base.

Federal Crowdfunding

Under Regulation Crowdfunding, an issuer may conduct one or more offerings to raise up to $1 million in any twelve-month period.[6] The dollar limit applies to offerings under the regulation by the issuer of the securities, its predecessors, if any, and companies controlled by it or under common control with it.  The securities are generally non-transferable for one year.

Each investor can purchase only a limited dollar amount of crowd-funded securities in any twelve-month period, regardless of the number of issuers involved. If a person’s annual income or net worth is below $100,000, he or she can invest up to $2,000 or, if greater, 5% of the lesser of his or her annual income or net worth. If both a person’s annual income and net worth equal or exceed $100,000, he or she can invest up to 10% of the lesser of his or her annual income or net worth, up to $100,000.

Significantly, offerings under the regulation are eligible for federal preemption of state securities laws under Section 18(b)(4)(C) of the Securities Act, which should reduce compliance costs.

Some companies are ineligible to conduct offerings under Regulation Crowdfunding.[7] The regulation provides an exemption only for the initial issuance of securities and does not expressly extend to a later conversion or exercise of those securities, which could occur months or years after the conclusion of the offering. Accordingly, there may be practical limits on the types of securities that can be included in a crowdfunding offering without introducing excessive complexity or cost.

Intermediary; Online-Only Offerings. Under the regulation, an issuer must engage an intermediary and conduct its offering “exclusively” through that intermediary’s online platform. The intermediary must be either a broker registered under Section 15(b) of the Securities Exchange Act of 1934 or a “funding portal” registered under Regulation Crowdfunding.[8]

Neither an intermediary nor its directors, officers or partners may have or receive an interest in the issuer’s securities, except that an intermediary may receive, as compensation for its services, securities on the same terms and conditions as investors in the offering.

Limited Advertising; Promoters. The regulation prohibits advertising in connection with the offering and prohibits payment of compensation for promoting the offering outside the intermediary’s platform.  An issuer may, however, distribute notices that refer investors to the intermediary’s online platform if the notices contain only certain limited information.[9] The issuer may communicate with potential investors through the online platform, but its founders, employees and promoters must disclose their relationship with the issuer and the receipt of any compensation from the issuer.

Offering Structure. Crowdfunding offerings must remain open for at least 21 days before the issuer may consummate any sale. The issuer must disclose the targeted offering amount, the deadline for reaching that amount and, if greater than the target, the maximum offering amount. Importantly, investors may cancel their offering commitments until 48 hours before the offering deadline.

If funding commitments fall short of the target at the offering deadline, investors’ funds must be returned to them. If the target is reached earlier than the offering deadline, the issuer may, in some circumstances, accelerate the closing.

Offering Statement. The most challenging aspect of an offering under the regulation is the requirement to prepare an offering statement. The SEC has estimated that, on average, preparation of the necessary disclosures will take approximately 100 hours, and experience suggests that the SEC’s estimates of paperwork burdens are often low. The regulation will likely be more attractive to very early-stage enterprises because the disclosure requirements will be less burdensome than for more mature companies.

The offering statement must disclose specific information, including, e.g., descriptions of the issuer’s business, business plan, financial condition (including material changes or trends since the most recent balance sheet), the terms of the offering, the anticipated use of proceeds and risk factors.  The statement must also include information about directors, officers, beneficial owners and related parties. Issuers must provide financial statements prepared in accordance with U.S. generally accepted accounting principles for the two most recently completed fiscal years or, if shorter, the period since inception. For offerings up to $100,000, the issuer’s CEO must certify the financial statements. For offerings between $100,000 and $500,000, or for an issuer’s first offering under Regulation Crowdfunding, an independent accounting firm must “review” the financial statements. For subsequent offerings greater than $500,000, an independent accounting firm must audit the financial statements. These financial statement requirements may significantly increase the cost of a crowdfunding offering.

The offering statement is subject to the anti-fraud provisions of the Securities Act[10] and must be updated to reflect material changes. Because the disclosure is directed at retail investors, SEC staff may expect a level of clarity closer to that found in a public offering prospectus than a private placement memorandum. Many issuers will benefit from the advice of experienced disclosure counsel in satisfying this requirement.

Progress Updates. An issuer must notify investors within five business days after investment commitments reach 50% and 100% of the targeted offering amount.[11]  If the issuer accepts funds above the targeted offering amount, the issuer must also notify investors of the total amount sold.

Filing Requirements. Offering statements, amendments and progress updates must be filed with the SEC, via EDGAR, on new Form C. This information will be publicly available.

Ongoing Reporting. One downside of a crowdfunding offering is that the issuer must file an annual report with the SEC within 120 days after each subsequent fiscal year. The annual report is substantially similar to the offering statement, excluding offering-related information. The financial statements in the annual report must be certified by the issuer’s CEO and need not be reviewed or audited; however, reviewed or audited financial statements must be included, if available.

The obligation to file annual reports terminates if (a) the issuer becomes a public reporting company, (b) after the completion of the offering, the issuer has filed an annual report and has fewer than 300 shareholders or the issuer has filed annual reports for the three most recent years and has assets of $10 million or less, (c) all of the securities issued under the crowdfunding exemption are repurchased or (d) the issuer liquidates.

Exemption from Exchange Act Registration. Ordinarily, companies with more than $10 million of assets and more than 500 shareholders of record that are not “accredited investors” must register under the Exchange Act. However, shares issued in a crowdfunding offering are excluded from this calculation if the issuer has filed all required annual reports, has assets of $25 million or less and has engaged the services of a registered transfer agent.

Investor Management. Given the potentially unlimited number of participants in a crowdfunding offering, issuers should consider how they will manage a company with hundreds or thousands of unfamiliar investors. Investors in early crowdfunding offerings will likely be inexperienced with investing in non-public companies and may not anticipate how little information or access to management they will receive. Issuers should consider how to respond to myriad requests for information and progress reports or to unfavorable or inaccurate public comments by investors. Issuers should anticipate that disappointed investors may assert claims or may file complaints with government regulators. Issuers should consider adding contractual provisions to their offering documents to reduce the costs of investor disputes, such as mandatory arbitration.

Lastly, issuers should consider the impact of a crowdfunding offering on potential exit opportunities. Acquisitions of non-public companies usually involve indemnification by the target’s securityholders, and a large number of unsophisticated securityholders may complicate the target’s ability to consummate a transaction that is attractive to both a buyer and the target’s own larger shareholders, who may be asked to bear a disproportionate share of potential liability. Similarly, a large number of unaccredited investors may limit the buyer’s ability to pay with securities, since the exemptions that buyers customarily rely upon for acquisitions of private companies will be unavailable.

Massachusetts Crowdfunding

In January 2015, Massachusetts adopted its own crowdfunding exemption from state registration requirements. Like Regulation Crowdfunding, the state exemption requires specific written disclosures to investors, imposes dollar limitations on investors’ purchases,[12] is unavailable to disqualified issuers and certain types of issuers, and limits offerings to $1 million in any twelve-month period.[13] Under the state exemption, however, issuers with audited financial statements can offer up to $2 million of securities. The exemption is limited to issuers organized under Massachusetts law with a principal place of business in Massachusetts, and securities may be offered and sold only to investors in Massachusetts. Moreover, the exemption requires issuers to comply with either Section 3(a)(11) or Rule 147.[14]

Notably, the state exemption does not require that the offering be conducted exclusively online, nor does it require an intermediary. However, the exemption prohibits the issuer from remunerating anyone, other than registered broker-dealers, for soliciting prospective purchasers, which may limit the use of funding portals that are not registered broker-dealers.

The state exemption imposes certain requirements absent from the federal exemption. The minimum offering amount must be “sufficient” to implement the business plan described in the offering materials and must be at least 30% of the maximum offering amount. If the minimum offering amount is not met within one year, the issuer must return investors’ funds. The issuer must also file with the Secretary of the Commonwealth a notice of the offering, copies of offering materials and, after the offering, a sales report.

Although the express disclosure requirements of the state exemption are narrower than those of Regulation Crowdfunding, the state exemption requires disclosure of “any additional information material to the offering” and “full and fair disclosure to offerees and investors of all material facts relating to the issuer and the securities being offered, in accordance with Section 101” of the Massachusetts Uniform Securities Act, M.G.L. ch. 110A. Section 101 follows the traditional anti-fraud formulation of Rule 10b-5 under the Exchange Act that the issuer may not “make any untrue statement of a material fact or … omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading,” nor may the issuer otherwise commit fraud.  The potentially open-ended nature of this disclosure requirement may discourage some issuers from using the state exemption.

Conclusion

Both the federal and Massachusetts crowdfunding exemptions offer novel but untested means to raise funds from a broad section of the public. As companies and investors gain experience with the exemptions, regulators should augment their usefulness by eliminating requirements that prove to be burdensome, costly or impractical.

John D. Hancock is a partner at Foley Hoag LLP. He practices in the areas of corporate finance, securities, and mergers and acquisitions. He can be reached at jhancock@foleyhoag.com. The views expressed in this article are his alone and do not necessarily express the views of Foley Hoag.

[1] These regulations apply when a crowdfunding campaign involves the offer or sale of securities; they do not apply to crowdfunding campaigns that offer participants, for example, early access to, or a discount on, a new product or service, such as an album, video game, or software.

[2] 17 C.F.R. Part 227, adopted under Sections 4(a)(6) and 4A of the Securities Act of 1933.

[3] 950 C.M.R. 14.402(B)(13)(o).

[4] Under Section 3(a)(11) and Rule 147, a safe harbor thereunder, an issuer may conduct a crowdfunding offering, but only to investors in the state in which it is organized and operating. When the SEC adopted Regulation Crowdfunding, it proposed to amend Rule 147 to permit offers by out-of-state issuers. However, the amended rule would require that the offering be registered under state law or conducted under a state exemption that limits the offering size to $5 million and imposes an investment limitation on each purchaser. See Securities Act Rel. No. 33-9973, Exemptions to Facilitate Intrastate and Regional Securities Offerings, 80 F.R. 69786 et seq.

[5] All offerings must comply with federal and applicable state securities laws. As explained below, Regulation Crowdfunding generally preempts state law. An offering under the new Massachusetts exemption must also comply with existing federal exemptions under Section 3(a)(11) and Rule 147.

[6] The SEC made clear that its “integration” doctrine – under which multiple offerings may be treated as a single, integrated offering based on factors such as the timing of the offerings, the purpose of the offerings and the types of securities offered – will generally not apply to offerings under the regulation, as long as each offering independently satisfies the requirements of the exemption applicable to it. Nonetheless, an issuer may face difficulty satisfying these requirements simultaneously. For example, advertising permitted under Regulation Crowdfunding may constitute unlawful solicitation under Rule 506(b) of Regulation D, and a general solicitation permitted under Rule 506(c) of Regulation D may constitute illegal advertising under Regulation Crowdfunding.

[7] For example, the regulation is generally unavailable to foreign issuers, public companies, investment companies, special purpose acquisition companies, companies without a specific business plan and issuers disqualified for prior illegal conduct.

[8] A “funding portal” is a limited-purpose broker that acts as an intermediary in a crowdfunding offering but that does not offer investment advice or recommendations, solicit purchases, sales or offers to buy the securities displayed on its platform, compensate employees or others for solicitations or sales on the platform, or handle investor funds or securities.

[9] Permitted information includes the issuer’s name, address, telephone number and website, the terms of the offering and a brief description of the issuer’s business.

[10] Liability is imposed on the issuer and its directors, key executives and others who “offer or sell” the securities, including intermediaries, and extends to any written or oral communication made to an investor in connection with the offering. These individuals should not overlook their exposure to personal liability, particularly for issuers that lack the resources to provide insurance coverage or meaningful indemnification.

[11] The issuer need not provide any progress reports, however, if the intermediary provides “frequent” progress updates to investors through its online platform.

[12] Under the federal exemption, the dollar limits on each investor apply across all issuers whose securities are purchased under the crowdfunding exemption; under the state exemption, the dollar limits apply on an issuer-by-issuer basis.

[13] Interestingly, the dollar limits do not apply to securities offered and sold to the issuer’s directors, officers, partners, trustees and 10% shareholders.

[14] Through incorporation of Section 3(a)(11) and Rule 147, the state exemption effectively prohibits out-of-state offers. In order to comply with this prohibition, an issuer would need to take steps to ensure that information about its offering is available only to investors in Massachusetts.


Zoning for Medical Marijuana: Approaches & Considerations

mchugh_jamesstempeck_justinby Lisa L. Mead and Adam J. Costa

Heads Up 

On November 6, 2012, Massachusetts voters overwhelmingly approved a ballot initiative legalizing the use of marijuana by qualifying patients who have been diagnosed with a debilitating medical condition.  Effective January 1, 2013, the “Act for the Humanitarian Medical Use of Marijuana” presents a number of issues for cities and towns concerning the exercise of their zoning powers.  The Act established a process whereby medical marijuana treatment centers, defined as not-for-profit entities that acquire, cultivate, possess, process, transfer, transport, sell, distribute, dispense, or administer marijuana or products containing marijuana for medical use, may apply to the Department of Public Health (DPH) for registration.  The Act provides for the registration of up to 35 medical marijuana treatment centers initially, with at least one but not more than five centers per county.

Although no reference is made in the Act to municipal zoning control or its applicability to medical marijuana treatment facilities, the DPH regulations promulgated thereunder in mid-2013, see 105 CMR 725.000, address zoning for these facilities, referred to as registered marijuana dispensaries (RMDs):  “The Department does not mandate any involvement by municipalities or local boards of health in the regulation of RMDs, qualifying patients with hardship cultivation requirements or any other aspects of marijuana for medical use.  However, nothing in 105 CMR 725.000 shall be construed so as to prohibit lawful local oversight and regulation. . . that does not conflict or interfere with the operation of 105 CMR 725.000.”  105 CMR 725.600.  Accordingly, per the Home Rule Amendment, Mass. Const., amend. LXXXIX, Massachusetts cities and towns may in their discretion adopt zoning ordinances and bylaws relative to the siting, development, and operation of medical marijuana treatment centers, as long as their provisions are not at odds with the Act or the DPH regulations.

To Zone or Not to Zone

A municipality is under no obligation to zone for RMDs, and many cities and towns either have yet to adopt such zoning or have elected not to do so.  The DPH regulations mandate a buffer zone around certain facilities for children.  Absent a more stringent local requirement, “a RMD shall not be sited within a radius of five hundred feet of a school, daycare center, or any facility in which children commonly congregate.  The 500 foot distance. . . is measured in a straight line from the nearest point of the facility in question to the nearest point of the proposed RMD.”  Municipalities may establish their own buffer zones from these or other facilities, provided they are mindful that, collectively, these zones may not effectively prohibit RMDs city- or town-wide.

The Office of the Attorney General has opined that an outright ban on medical marijuana treatment centers in a municipality frustrates the purposes of the Act and, consequently, is invalid.  “The Act’s legislative purpose could not be served if a municipality could prohibit treatment centers within its borders, for if one municipality could do so, presumably all could do so.”  Letter from the Att’y Gen. to the Town of Wakefield, Mar. 13, 2013, available at http://www.mlu.ago.state.ma.us/.

The Attorney General’s Office has also rejected bylaws prohibiting home cultivation as an accessory use, restricting home cultivation to a particular area of the community, imposing buffer zones around home cultivation sites, and requiring a special permit for home cultivation.  Home cultivation of medical marijuana is authorized by the Act and the DPH regulations for qualifying patients whose access to a RMD is limited by verified financial hardship, a physical incapacity to access reasonable transportation, or the lack of a medical marijuana treatment center within a reasonable distance from the patient’s residence.

For municipalities that choose to zone for medical marijuana by adopting reasonable regulations, the choice is between incorporating RMDs into the zoning already in effect and establishing an overlay district within which RMDs may be sited.

Incorporation into Existing Zoning

Using a more traditional approach to zoning, a municipality may amend its existing zoning ordinance or bylaw to identify and define RMDs and to specify the zoning district or districts where they are permitted.  In doing so, it subjects a RMD to the same dimensional and density requirements and performance standards applicable to other uses in the same district.  Dimensional and density requirements might include area, frontage, and setback constraints, among others. Performance standards might regulate noise, traffic, or other aspects of a use for compatibility with its surroundings.  If a city or town so chooses, it may zone cultivation and processing operations separately from retail facilities.  Although both qualify as RMDs per the DPH regulations, these uses need not be co-located.

A city or town may elect to allow RMDs only by special permit, in some or all of the zoning districts in which they are an available use.  The Attorney General has cautioned municipalities, however, that an ordinance or bylaw must provide adequate standards to guide a board in deciding whether to grant or deny the special permit.  It may not be enough for a municipality to rely on the general requirement of the Zoning Act, at G.L. c. 40A, § 9, that the use be “in harmony with the general purpose and intent of the ordinance or by-law,” nor are a municipality’s special permit criteria for other uses always appropriate for application to RMDs.  Municipalities have been advised “to list specific criteria for. . . consider[ation] when reviewing [an] application.”  Letter from the Att’y Gen. to the Town of Westborough, July 11, 2013, available at http://www.mlu.ago.state.ma.us/.

In its regulation of medical marijuana treatment centers, a municipality must also be cautious not to run afoul of the zoning exemption available to agricultural uses, under G.L. c. 40A, § 3.  To the extent that an RMD’s operations qualify as commercial agriculture thereunder, a municipality cannot require a special permit for, or unreasonably regulate or prohibit, the use.

Creation of an Overlay District

An alternative to incorporating RMDs into an existing zoning ordinance or bylaw is to create an overlay district for medical marijuana treatment centers.  An overlay zone is a district superimposed on one or more established zoning districts which may apply supplemental restrictions on uses in these districts or permit uses otherwise disallowed.  By adopting an overlay district, a municipality gains greater control over where RMDs may be sited.  The limits of acceptable locations need not coincide with the boundaries of the municipality’s existing zoning districts, but may be determined by the city or town in its discretion upon consideration of existing and anticipated land uses and the compatibility of RMDs with these uses.  A municipality may incorporate dimensional requirements and performance standards specific to the overlay district, and may even pair these regulations with buffer zones surrounding schools, daycare centers, or other uses potentially impacted by a RMD.  A special permit may be required for the development and operation of a RMD within the overlay district; or the municipality may choose to permit these facilities as-of-right or subject only to site plan review.

Host Community Agreements

Several Massachusetts municipalities have opted to negotiate host community agreements with potential RMDs to eliminate or mitigate any possible adverse effects of RMDs.  Neither the Act nor the DPH regulations prohibit these agreements.  And while a municipality may not require a RMD to enter into a host community agreement, such an agreement may expedite a RMD’s receipt of a letter of support or non-opposition from the municipality, now a requirement of the DPH licensing process as updated in mid-2015.  A municipality might otherwise choose to issue its letter of support or non-opposition only upon a RMD’s completion of the permitting process, once the city or town is satisfied that the project has been adequately vetted.

Among the most common subjects of host community agreements are financial compensation due the municipality, taxes, and charitable contributions.  Financial assistance to a city or town may help offset community impacts, fund public health and safety initiatives, or otherwise aid the municipality.  The payment of real estate taxes or the making of payments in-lieu-of taxes is also worthy of negotiation; otherwise, because RMDs are required by the Act to be not-for-profit entities, they may qualify as tax-exempt.  Entering into a tax agreement helps to alleviate any questions about the payment of taxes to the municipality.  Finally, a number of Massachusetts municipalities have negotiated charitable contributions by RMDs in exchange for the community’s support of, or non-opposition to, the development of a medical marijuana treatment center.

In summary, Massachusetts cities and towns have a choice about whether to zone for medical marijuana treatment centers and, if they do, of how to approach the rezoning process.  Some municipalities have utilized traditional zoning practices, allowing RMDs in one or more existing zoning districts and often requiring a special permit.  Other municipalities have developed overlay districts, within which RMDs may be sited subject to dimensional requirements, performance standards, and other regulations specific to the use.  Regardless of which approach is chosen, a municipality would be wise to explore negotiation of a host community agreement with a potential RMD and avail itself of the financial incentives that may be offered in exchange for the municipality’s cooperation with the application process.

Lisa L. Mead and Adam J. Costa are partners at Blatman, Bobrowski, Mead & Talerman, LLC. They concentrate their practice in the areas of general municipal, land use and environmental law, representing both municipal and private clients throughout Massachusetts.


The Tip of the Iceberg: Daily Fantasy Sports as a Harbinger of Future Regulatory Challenges

mchugh_jamesstempeck_justinby Hon. James F. McHugh (Ret.) and Justin G. Stempeck

Legal Analysis  

In the fall of 2015, as professional football fans drew up their chairs, turned on their television sets and began another season with their favorite sport, they witnessed a sustained barrage of advertisements promising them the opportunity to win enormous cash prizes for playing daily fantasy football.  The advertisers were two Internet companies, DraftKings, based in Boston, and FanDuel, headquartered in New York, its chief competitor.  Both were young companies, but by that fall they had captured about 85% of the national daily fantasy sports (DFS) market.

In one form or another, fantasy sports have been with us for decades.  In the original model, groups of baseball fans formed a fantasy baseball league, paid an agreed entry fee and then created fantasy teams composed of active major league baseball players.  The success of the fantasy teams depended on the performance of the real players in real games played throughout the season.  The success of those players – the number of hits they made, the number of strikeouts they threw, the number of runs they drove in, etc. – translated into points earned by the fantasy team on which they also “played.”  At the end of the season, the owner of the fantasy team that had the most points collected a cash reward composed of the entry fees all team owners paid when the league was formed.

Available only through the Internet, DFS is built on the same concept but the entry fees are paid to DraftKings or FanDuel and the winners are determined on the basis of player performance on a single day.  The concept has spread far beyond baseball and now includes football, hockey, basketball and a variety of other sports. Indeed, major league sports have embraced the idea and major league baseball has created fantasy programs of its own.

Until the fall of 2015, DraftKings and FanDuel offered their products in a relatively quiet fashion to a relatively small market.  The explosion of advertising in which they began to engage at the opening of the 2015 football season was a dramatic departure from their previous business model and it provoked an immediate reaction that continues today.  That reaction was amplified by published reports that an employee of one of the companies had won over $300,000 using insider information to form and enter a fantasy team on the other company’s website.  Though the reports were vigorously denied, they added to the intensity of the reaction the advertising had provoked.

The reaction produced probing questions about the nature of DFS contests, their legality, fairness and similarity to other forms of regulated gambling.  Previously the industry had relied on certain provisions of the federal Unlawful Internet Gambling and Enforcement Act (UIGEA) to assert that DFS was “100% legal.”  A careful reading of UIGEA demonstrated that, while it did include a carve-out for fantasy sports, it ultimately deferred questions of legality to state law.  As a result, numerous attorneys general began examinations of DFS and concluded that it constitutes illegal gambling under their respective state’s law.[1]  Additional state attorneys general are still reviewing the industry and have yet to render formal opinions on its legality.

The attention on the DFS industry also spurred myriad legislative efforts to legalize the activity although no uniform approach to legalization has yet crystalized.  Proposed legislation is extremely varied in both scope and depth, ranging from simply decriminalizing the activity in a state’s criminal code to creating a detailed licensing scheme for the industry.  A number of gaming commissions also have investigated the topic through hearings and public discussions.  Nevertheless, the main focus of inquiries over the past eight months has been on the legality of the contests as viewed by attorneys general pursuant to state law.

Just as significant as the attorney general opinions has been the reaction of online payment processors.  Because DFS is available exclusively on the Internet, both DraftKings and FanDuel rely on those processors to direct payments made by DFS players to the issuers of the credit cards on which the payments were charged.  Thus, the processors are the foundation for the DFS platforms.  One of the largest processors is a company called Vantiv.  After the New York Attorney General concluded that DFS was illegal under New York law and issued a cease and desist letter to both companies, Vantiv, undoubtedly concerned about the UIGEA’s penalties for processing illegal gambling debts and charges, told its DFS clients that it could not accept payments from players in New York.  In December, the New York State Supreme Court granted the Attorney General’s request for a preliminary injunction stopping DFS operators from doing business in the state; however, later that same day, an appellate judge stayed the decision, allowing the businesses to continue their operations while the appeal was considered.  Concurrently, DraftKings obtained an order from a Massachusetts Superior Court judge obligating Vantiv to continue to process New York player payments.  Vantiv has since initiated its own lawsuit in New York State Supreme Court challenging the conflicting rulings in New York and Massachusetts on its ability to process DFS payments.

The reaction in Massachusetts has been significantly different.  Massachusetts has a long history with gambling, legal and illegal.  On the legal side, from the lottery, now in its fifth decade, to the more recent passage of the 2011 Expanded Gaming Act, M.G.L. c. 23K, Massachusetts has recognized and benefited from regulated gambling.  Despite a familiarity with gambling, Massachusetts, like the nation, was caught flatfooted by the meteoric rise of DFS and its associated legal questions.  During the initial flurry of official responses to DFS, Attorney General Maura Healey opined that the games did not run afoul of any state or federal laws but did constitute gambling.  Her office has since promulgated first-of-their-kind consumer protection regulations specifically applicable to DFS.  The regulations address age and deposit limits, segregation of experienced and novice players and contain a ban on automated computer “scripts,” amongst other topics.

In parallel to General Healey’s development of regulations, the Massachusetts Gaming Commission, at the behest of state legislators, researched and drafted a white paper on DFS.  This white paper addressed the history of DFS, the questions surrounding its legality (both state and federal), the universe of consumer protection issues involved and concluded by positing a regulatory framework flexible enough to address not only the challenges of DFS but also future challenges posed by other online/mobile gaming products.[2]

General Healey’s approach to DFS and the white paper both highlighted gaps in Massachusetts law that produce difficulties when one attempts to determine whether a novel gambling-like activity is legal or illegal.  While Massachusetts does have a statutory definition of “illegal gaming,” the statute, M.G.L. c. 4, § 7(tenth), is definitional only, lacking provisions for criminal or civil consequences.  Instead, those consequences are primarily found in statutes and judicial decisions concerning lotteries and betting pools.

Lotteries, as defined in numerous judicial decisions, encompass a wide range of activities sharing three common elements: “(1) the payment of a price for (2) the possibility of winning a prize, depending upon (3) hazard or chance.”  See Com. v. Stewart-Johnson, 78 Mass. App. Ct. 592, 594 (2011), quoting, Com. v. Lake, 317 Mass. 264, 267 (1944).  Numerous activities have been found to constitute lotteries, including: operation of a toy crane to win prizes, the playing of a version of “Beano” that included a combination of darts and bingo, video poker and the operation of a slot machine that solely awarded free plays.  Further complicating matters is the fact that merely because an activity includes these three elements does not immediately make it an illegal lottery.  Instead the balance of chance versus skill must be weighed by a fact-finder prior to determining whether the activity is legal or illegal.

While nearly every competitive activity includes some element of chance, the issue is highlighted in DFS contests where the DFS players cannot control the performance of the athletes that they “draft.”  DFS has never been evaluated under the skill-versus-chance test but even if it passed such an analysis it still could become entangled in the Massachusetts lottery or betting pool statutes.

A pool has been defined as “a combination of stakes the money derived from which was to go to the winner.  . . .  This does not mean, however, that all the money derived from the combination of stakes must go to the winner.  Commonly the man who runs the pool makes something out of the transaction.”  Com. v. Sullivan, 218 Mass. 281, 283 (1914) (citing the definition articulated by Oliver Wendell Holmes in Com. v. Ferry, 146 Mass. 203, 208 (1888)).  Sullivan further defines a “bet” as “the hazard of money or property upon an incident by which one or both parties stand to lose or win by chance.”  Id.  “For one to have placed a ‘bet,’ he must have taken a risk on the uncertain outcome of a particular event and, depending on the outcome, he must be entitled to receive payment from another.”  Com. v. Sousa, 33 Mass. App. Ct. 433, 437 (1992).  M.G.L. c. 271, § 17 provides that it is a felony for one to possess an “apparatus, books or any device . . . for buying or selling pools, upon the result of a trial or contest of skill, speed or endurance of man, beast, bird or machine, or upon the result of a game. . . .”  Section 16A of the same chapter makes it similarly illegal for one who “organizes, supervises, manages or finances . . . the illegal buying or selling of [such] pools.”

The typical DFS contest involves numerous participants paying their entry fees to a company, the company taking a percentage of the total entry fees and the winner being paid from the company’s coffers.  Such contests bear more than passing resemblance to the betting pools found to be illegal in Sullivan and thus have potential application to DFS operators.  But that conclusion is not certain nor is it certain that either the lottery or pool statutes that originated in the 18th and 19th centuries apply.

The complexities, gaps and uneasy fits just described are largely the product of a regulatory scheme created for a different era and never updated.  In that era, bookmakers kept books, or at least paper records, on which accounts, wagers and payoffs were recorded by hand.  Lotteries were mainly paper affairs in which the winner was determined by drawing a paper ticket out of some sort of container.  Pools typically were tangible collections of cash and chits kept in some identifiable place within the Commonwealth’s borders.

The Internet has changed much of that, just as it has changed so much else.  Now horseracing fans in the United States can place real-time bets on races that occur throughout the nation and the world.  Outside the United States, legalized sports betting over the Internet is a huge business.  It is a huge business inside the United States, too, though most of it is illegal and therefore clandestine.  This year, sports fans will be able to watch live eSports events on ESPN, in the process joining the estimated 100 million international monthly viewers who now watch, and often bet on, Internet broadcasts of those video game contests that are complete with play-by-play announcers and color commentators.  Social gaming, i.e., gambling and other Internet games in which the prizes theoretically cannot be redeemed for tangible benefits, is an industry that now produces annual revenues in the vicinity of $30 billion.  It is likely that those revenues will continue to grow as new games and game concepts are added.  It is also likely that questions about whether the games do or do not produce tangible benefits for the players will become increasingly complex.  Prediction markets, increasingly popular as the election season proceeds, essentially allow participants to bet on the outcome of future events.  Those events are mainly, though not exclusively political in nature, but there is no reason why their reach cannot expand.

Any list of gambling-like activities available on the Internet is likely to require quick revisions, for the Internet environment is highly dynamic.  The rewards for successful innovation can be enormous and launching a new concept requires only a laptop and a new idea.  The low barriers to entry and the speed with which new activities can and will be launched pose significant challenges.  Indeed, under the current regulatory framework, it is entirely possible that gambling or gambling-like activities can be deployed and operating for substantial periods before they attract any regulatory attention.  Moreover, as the current national examination of DFS reveals, many such activities will inevitably raise one or more of a series of questions.  Among them is whether the activity amounts to “gambling” and, if so, whether the activity is illegal.  If it is illegal, why should it be, particularly in Massachusetts, where residents annually spend $700 per capita gambling on the state-sponsored Lottery?  If the activity is not gambling or if it is but it is not illegal, is some form of regulation nevertheless necessary or is the activity so transparent or low risk that no regulation is required?  If regulation is required, what form should the regulation take?

Perhaps the most important question, though, concerns who should answer those questions.  The Legislature is the obvious candidate but the Legislature typically is engaged in deliberative policy-making that by its very nature takes time. There is a real question whether a legislative determination, particularly on an activity-by-activity basis, can keep pace with the issues that will likely require exploration.  State and local law-enforcement agencies could answer at least some of the questions through application of the criminal law, though that approach uses a blunt instrument to deal with what are likely to be nuanced issues.  Moreover, inaction by law enforcement presents at best an ambiguous answer to questions about whether an activity is or should be legal.  The Attorney General and other existing agencies with responsibility for consumer protection could deal with consumer safety through issuance of regulations, as General Healey has done in the case of DFS in Massachusetts, but that process is reactive and may be insufficiently nimble to keep up with the pace of change.  The Massachusetts Gaming Commission has observed that the dynamic nature of the Internet, the desirability of a comprehensive approach to Internet gaming-like activity and the need for right-sized regulations that protect the public without stifling creativity suggest the desirability of a single regulatory body charged with oversight of all such activity.

However those questions are answered, one thing is certain: The issues recently raised by the advent of DFS are going to recur, perhaps at an increasing pace, as we move forward in the Internet age.  With that certainty in mind, now is an opportune time to create a framework for rapid and thoughtful exploration of the questions each new type of activity will inevitably raise.  To be successful, that framework must provide for prompt decisions about whether the activity is legal.  It must also provide for prompt decisions about whether specific regulations are needed to deal with unique issues the activity presents or whether existing regulations of general applicability will suffice.  If specific regulations are needed, the scheme must also provide for prompt deployment of right-sized regulations to deal with unique issues of concern while not unduly discouraging the creative entrepreneurial spirit the Internet demonstrably produces.

James F. McHugh is a retired Massachusetts judge and a retired member of the Massachusetts Gaming Commission.

Justin G. Stempeck is a former civil litigator and current staff attorney with the Massachusetts Gaming Commission.

[1] To date attorneys general in Georgia, Alabama, Tennessee, Michigan, Mississippi, New York, Hawaii, Texas, Vermont, Illinois and South Dakota have all opined that DFS is illegal under their respective state’s law.  Nevada’s attorney general also opined that DFS was gambling under state law, but, like any other gambling, would be legal with the appropriate gaming license.  In contrast, the attorneys general in Rhode Island and Massachusetts have opined that DFS is legal under the law of their respective states.

[2] The full whitepaper is available at: http://massgaming.com/blog-post/blog-post-the-massachusetts-gaming-commission-submits-daily-fantasy-sports-white-paper-to-the-legislature/.

 


Subpoenaing Third Parties in Proceedings before the Massachusetts Securities Division

sutcliffe_thomasby Thomas Sutcliffe

Practice Tips

The Massachusetts Securities Division (“Division”) is the state agency entrusted with protecting investors.  And the scope of its power is considerable, ranging from the authority to order the disgorgement of profits to its ability to issue cease and desist demands.  But parties defending against the Division’s Registration Inspections, Compliance and Examinations (“RICE”) Section are often disadvantaged by a very limited right to discovery.

Respondents in Division proceedings can, however, request to subpoena third parties, which can be valuable considering the paucity of other discovery tools.  But getting the Division to issue a subpoena is not easy or intuitive.  This article, therefore, provides an overview of the subpoena process in adjudicatory proceedings before the Division.

 Discovery in Division Proceedings

Under the Division’s rules, respondents have no right to propound interrogatories or requests for documents.  950 C.M.R. § 10.01 et seq.  Instead, the Division has held that RICE is only required to produce documents it identifies as exhibits in its pre-trial memorandum.  Conversely, RICE may issue subpoenas even before an adjudicatory proceeding has begun.  M.G.L. c. 110A, § 407(b).

Subpoenas can mitigate this imbalance, as there are many scenarios in which third parties will hold key information. For example, in insider trading cases, establishing whether information is material or obtained in violation of a fiduciary duty could depend upon information held by the third-party company whose shares were traded. With third-party subpoenas, respondents can gain advance notice of the evidence upon which RICE may rely at trial while also potentially obtaining exculpatory evidence which RICE would otherwise not be obligated to produce.

Right to Issue of Subpoenas

How do respondents obtain subpoenas in Division proceedings?  At first, the answer may seem straightforward. Under M.G.L. c. 30A, § 12(3):

Any party to an adjudicatory proceeding shall be entitled as of right to the issue of subpoenas in the name of the agency conducting the proceeding. The party may have such subpoenas issued by a notary public or justice of the peace, or he may make written application to the agency, which shall forthwith issue the subpoenas requested.

That is, respondents appear entitled to subpoenas “as of right.”

The Division’s position, however, is that Section 12(3) does not apply to its adjudicatory proceedings because M.G.L. c. 110A, § 407(b) supplants it.  See, e.g., In the Matter of Blinder, Robinson, & Co., Docket No. E-85-27, 1986 Mass. Sec. LEXIS 63 (Mass Sec. Div. April 30, 1986). As the reasoning goes, under Section 407(b), the Division “may” issue subpoenas, but is not required to, and therefore, there is a conflict between Section 12(3) and Section 407(b).  And where Section 407(b) deals specifically with the Division but Section 12(3) is merely a default rule applicable to all agencies, Section 407(b) prevails.  Accordingly, respondents in Division proceedings are subject to 950 C.M.R. § 10.09(l), which requires a respondent to make a “written application” for a subpoena to the Presiding Officer, who “may” grant the application.

No court has yet weighed in on the Division’s interpretation, however, and its position is open to challenge. First, nothing in Section 407(b), which was enacted after Section 12(3), states that it overrides Section 12(3), and there is “a very strong presumption against [the] implied repeal” of a statute, Commonwealth v. Hudson, 404 Mass. 282, 286 (1989) (internal quotation marks omitted), particularly where the statute unequivocally confers a procedural “right.”  Nor is it clear there is a conflict between Section 12(3) and Section 407(b); the former deals with a respondent’s ability to issue subpoenas whereas Section 407(b) refers to the Division’s prerogative to do so.  Moreover, the Division, in a slightly different context, has itself stated that “[a] party to an adjudicatory proceeding before the Division is entitled as a matter of right to the issuance of [a] subpoena.”  In the Matter of Cohmad Sec. Corp., Docket No. E-2009-0015 (Mass Sec. Div. Nov. 17, 2009).  There are, therefore, ample grounds upon which to invoke subpoena rights under Section 12(3).

What should a respondent do if it wishes to issue a subpoena under Section 12(3)?  It could simply ignore Division precedent and serve a notarized subpoena pursuant Section 12(3).  But RICE will almost certainly respond with a motion to quash, which in turn may result in an order to withdraw the subpoena from the Presiding Officer.

The prudent approach would be to file a motion before the Division under both Section 12(3) and 950 C.M.R. § 10.09(l).  This approach affords two advantages.  First, the Division may simply grant the subpoena, in which case the applicability of Section 12(3) is moot.  Second, if the Division denies the subpoena, then the respondent will have preserved the issue for appeal under M.G.L. c. 30A, should the Division ultimately decide unfavorably.  If the respondent believes that it cannot wait until after a final decision, it might also consider interlocutory relief by way of a mandamus action in the Superior Court pursuant to M.G.L. c. 249, § 5.  Mandamus relief will likely be an uphill battle, however, as it is only available where a M.G.L. 30A appeal is an inadequate remedy.  Because a court can always reverse the Division’s judgment and order more discovery, there is usually an adequate remedy.  If there is an immediate need for the subpoena, however, a mandamus action may be an important option to preserve by moving for a subpoena under both Section 12(3) and Section 10.09(l).

Requesting a Subpoena

To request a subpoena from the Presiding Officer under 950 C.M.R. § 10.09(l)(1), the respondent must make a “written application,” which should consist of a copy of the proposed subpoena and a short motion.  The Presiding Officer may deny a request if she determines that the subpoena would be “unreasonable, oppressive, excessive in scope, or unduly burdensome.” Id.

Both the Division’s rules and M.G.L. c. 30A, § 12(3) allow the subpoenaed party, but no one else, to move to quash the subpoena.  Accordingly, the Division has held that only “a party to whom the subpoena is directed may move to vacate or modify the subpoena.”  In the Matter of Cohmad Sec. Corp.  RICE, however, has argued that applications for subpoenas are “motions” under 950 CMR § 10.07(a), entitling it to file an opposition.  Thus far, the Division appears to have rejected RICE’s position, and a respondent should promptly move to strike any opposition RICE files.

RICE has also argued that any subpoena served prior to the exchange of pre-trial memoranda under 950 C.M.R. § 10.09(b) is per se unreasonable because it is inherently inefficient to serve subpoenas that may overlap with the documents that RICE may produce with its memorandum.  RICE’s argument is difficult to square with the language of Section 10.09(l), which imposes no time limitation on requesting subpoenas, and Section 10.09(b), which deals solely with the exchange of documents between parties, not third-party subpoenas.  At least one Presiding Officer has rejected RICE’s position that subpoenas must be filed after the exchange of pre-trial memoranda.  In the Matter of Risk Reward Capital Management Corp., Docket No. E-2010-0057 (Sept. 23, 2014).  Nevertheless, respondents seeking to obtain subpoenas should be ready to field similar objections.

Subpoenas are a valuable tool in proceedings before the Division.  But respondents should anticipate resistance and RICE’s likely objections.  By preparing to do so, respondents can maximize their chances of success, either before the Division or (if necessary) on appeal.

Thomas Sutcliffe is an associate at Prince Lobel Tye LLP. His practice focuses on complex commercial and administrative litigation.


“Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP”: The SJC Addresses the Ethics of Patent Subject Matter Conflicts

solomont_charlespalmer_julieby Charles L. Solomont and Julie Silva Palmer

Case Focus  

In Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336 (2015), the Supreme Judicial Court (“SJC”) ruled that a law firm does not violate the Rules of Professional Conduct per se when it simultaneously represents business competitors. The SJC warned, however, that a conflict of interest could arise where the representation of one competitor impairs the law firm’s ability to fully represent the interests of another. The opinion provides nuanced guidance for all lawyers in Massachusetts, and all patent attorneys throughout the United States.

The Rules of Professional Conduct

Mass. R. Prof. C. 1.7 prohibits a lawyer (with limited exceptions) from representing a client where there exists a “concurrent conflict of interest.” A conflict occurs where either (1) “the representation of one client will be directly adverse to another client;” or (2) “there is a significant risk that the representation of one or more clients will be materially limited” by a lawyer’s other responsibilities.  In Maling, the SJC considered both prongs in the context of “subject matter” conflicts, a special category of conflict that may arise in the patent arena because of “the simultaneous representation of clients competing for patents in the same technology area.” Id. at 337. The SJC addressed whether such situations render the competing interests of two clients “directly adverse” to each other, and whether they “materially limit” a lawyer’s ability to represent either client.

Maling v. Finnegan

The plaintiff, Maling, engaged the defendant law firm (“Finnegan”) to prosecute patents in the screwless eyeglass market.  Finnegan accepted this representation without disclosing to Maling that it also prosecuted patents for Masunaga Optical Manufacturing Co., Ltd. (“Masunaga”), a company in the same market.  During the period that Finnegan’s Boston office successfully obtained four patents for Maling, Finnegan’s Washington D.C. office prosecuted patents on behalf of Masunaga.  When Maling learned that Finnegan represented Masunaga, he brought suit.

Maling claimed that Finnegan’s simultaneous representation of Maling and Masunaga was a conflict of interest that Finnegan had a duty to disclose. Maling alleged that he would not have invested millions of dollars to develop his product if Finnegan had disclosed the alleged conflict.  Maling also claimed that he lost critical financing when Finnegan refused to provide him an opinion letter concerning similarities between the Maling patents and the Masunaga patents.  The trial court granted Finnegan’s motion to dismiss. The SJC, on its own motion, transferred the case and affirmed.

Were the Representations Directly Adverse?

In ruling on whether Finnegan’s simultaneous representation of Maling and Masunaga was directly adverse to Maling’s interests, the SJC relied in part on Curtis v. Radio Representatives, Inc., 696 F. Supp. 729 (D.D.C. 1998),  in which the D.C. District Court held that a law firm’s simultaneous, successful representation of two radio stations applying for broadcast licenses posed no conflict.  That Court further held that “the fact that an attorney is simultaneously representing two companies that are competitors in the same industry does not itself establish an actionable breach of an attorney’s fiduciary duty.”  Id. at 736.  Rather, a breach of the duty would require an actual conflict of interest, such as both clients seeking broadcast licenses where “objectionable electrical interference existed between two stations.”  Id.

Analogizing Curtis to the case at bar, the SJC noted that Finnegan successfully obtained patents for both Maling and Masunaga, and held that, on the facts presented, there was no directly adverse representation.  Quoting the American Bar Association Standing Committee on Ethics and Professional Responsibility (ABA Op. 05-434), the SJC confirmed that “direct adverseness requires a conflict as to the legal rights and duties of the clients, not merely conflicting economic interests.”  Maling, 473 Mass. at 341. For example, the SJC opined, a conflict likely would have occurred had Finnegan provided the opinion letter Maling requested, because such a letter would have involved “the legal rights and duties of the two clients vis-à-vis one another.”  Id. at 344.  But in the absence of an allegation that Finnegan agreed in advance to provide opinion letters, Maling’s complaint for a breach of duty failed to allege an actionable conflict.

Was the Representation Materially Limited?

With respect to whether the simultaneous representation “materially limited” Finnegan’s ability to perform its duties, the SJC reaffirmed its holding in Matter of Driscoll, 447 Mass 676, 686 (2006):  The “critical inquiry” is “whether the lawyer has a competing interest or responsibility that will materially interfere with the lawyer’s independent judgment in considering alternatives or forecloses courses of action that reasonably should be pursued on behalf of the client.”  Maling, 473 Mass. at 345.  The SJC also distinguished Maling from Sentinel Prods. Corp. v. Platt, 2002 WL 1613713 (D. Mass. July 22, 2002), in which a conflict of interest was found to exist when a law firm narrowed the claims in one client’s patent application so as to avoid overlap with the claims in a second client’s patent application.  Maling failed to allege an analogous, actionable conflict because the complaint did not allege “that Finnegan’s judgment was impaired,” that it pursued “a less robust patent,” or that either client gained any advantage because Finnegan’s dual representation “materially limited” its ability to discharge its responsibilities to both clients. Maling, 473 Mass. at 346.

SJC Commentary on the Rules of Professional Conduct

While the holding of Maling v. Finnegan is arguably limited to the specific context of subject matter conflicts arising from patent prosecutions, the SJC’s decision provides some important insights into its interpretation of the Rules of Professional Conduct.  The SJC explained that the “purpose of rule 1.7 is twofold.  It serves as a prophylactic measure to protect confidences that a client may have shared with his or her attorney and safeguards loyalty as a feature of the lawyer-client relationship.”  Maling, 473 Mass. at 340.

The SJC also commented on Mass. R. Prof. C. 1.10, which prohibits a firm from representing a client when any one of its lawyers alone would be prohibited from doing so (except in limited circumstances).  The SJC reiterated that this rule obligates firms to “implement procedures to identify and remedy actual and potential conflicts of interest.”  Maling, 473 Mass. at 348.  While the SJC declined to define a minimum protocol for conflicts checks, it noted that firms must “avail themselves of a robust conflict system adequate to the nature of their practice.”  Id.

Finally, the SJC also emphasized what most attorneys likely view as obvious: “[b]efore engaging a client, a lawyer must determine whether the potential for conflict counsels against undertaking representation.”  The SJC cited Comment 8 to Rule 1.7 for elaboration.  That Comment instructs that “[t]he mere possibility of subsequent harm does not itself require disclosure and consent.  The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer’s independent professional judgment . . . .”

Charles L. Solomont is a partner at Morgan, Lewis & Bockius LLP. He has handled complex litigation, class action, and regulatory matters for 20 years.

Julie Silva Palmer is a senior associate at Morgan, Lewis & Bockius LLP. Her practice focuses on complex business litigation matters.


Helping to Create the “Practice Ready” Lawyer

Burroughs_Allisonby BBA President Lisa Arrowood

President’s Page

In late 2015, I had the honor of speaking at one of the several swearing in ceremonies for new lawyers in Faneuil Hall. It’s one of the things I enjoy most about being an officer of the Boston Bar Association.   It was so nice to speak to a group of enthusiastic young lawyers, as well as their proud family members.

As I welcomed them to the profession – a profession which, I think, is one of the best in the world – I knew that many of them had not yet found jobs that required a J.D. degree and that some of them never would.

There are so many challenges affecting lawyers today that it’s hard to list them all, but I think for many of the people who recently graduated law school the most significant challenge is the reduction in the number of jobs available for new lawyers.

I have always had a great deal of sympathy for anybody who put themselves through the three years of rigorous study that law school requires – not to mention the cost – who then get out and don’t get jobs.  As a hiring partner at two separate firms, I have received countless resumes from incredibly impressive recent graduates for whom we had no openings. It breaks my heart to see people work very hard to do well both in college and law school, and then be unable to find employment.   This is such a contrast to the situation not so very long ago when there were well-paying jobs galore.

Compounding this issue is the fact that these recent graduates don’t yet know how to do much legal work.  For those who will never get hired, they need to learn how to do the cases ordinary people will hire a solo practitioner to do handling a divorce case, drafting a will or handling an eviction.

And so a big part of what I’m focusing on as President of the BBA is finding ways to help those people. Can we get them all jobs? No. But what we can do is help them become “practice ready.” We can help them build practical skills so they can represent regular people with regular legal needs. These are the clients who aren’t eligible for legal aid, but who still can’t afford most lawyers out there.

To that end, I’m so pleased to announce that in January we launched “Friday Fundamentals,” which is a series of short, “how-to” trainings on specific legal issues. These sessions are designed to give new attorneys the practical and technical skills required to represent clients, as well as add some additional knowledge and expertise to their resume.

The BBA is also working hard to ensure that new lawyers who want to go solo are getting top-notch guidance and support.  Later this year, we will offer a comprehensive, hands-on workshop on how to launch a successful solo practice. This, in addition to our existing resources – from offering a place to meet with clients in our new member space rooms to discounts on professional liability insurance through USI Affinity – should help new graduates start their own practices and begin representing clients who now have no legal representation and who are part of the pro se litigant crisis troubling our courts.

With its well-established Professional Development program structure, the BBA is incredibly well suited to teach these skills. When I first learned about the BBA’s brown bag lunches, I went to a few of them.  In 90 minutes over lunch, a young lawyer can learn from the stars of the bar – for free!

Friday Fundamentals is building off this very successful model. From now until June, each of the BBA’s 24 sections – covering all areas of law – will offer CLEs or brown bag lunch programs designed for beginners. I’m thrilled and proud of the effort that these Section leaders have put in toward training the next generation of lawyers.  To those of you with new associates in your ranks: encourage them to take advantage of this series.  For those young lawyers out there: these programs are for you.  Take advantage of them!

Are we going to fix this in a year? No. But it’s a wonderful place to start.

Lisa is a founding partner of Arrowood Peters LLP, whose practice concentrates on business litigation, employment disputes, medical malpractice, personal injury, and legal malpractice. At the BBA, Lisa has served as the President-Elect, Vice President, and Secretary of the Council, the Co-Chair of the BBA Torts Committee, and a member of the Executive Committee, as well as various other committees. She is a Fellow of the American College of Trial Lawyers (ACTL), a Fellow of the International Academy of Trial Lawyers and immediate past Chair of the ACTL Massachusetts State Committee as well as a member of the Boston Bar Foundation’s Society of Fellows. 


The Federal Judicial Selection Process

Burroughs_Allisonby Judge Allison D. Burroughs

Voice of the Judiciary

As the most newly-minted judge in the Federal District of Massachusetts, I have been asked to reflect on my experience through the selection process while it is still relatively fresh in my mind.  At least in this district, in my round (and as I learned at baby judge school, there is a wide variety between districts), the two Massachusetts senators formed a selection committee, headed by Judge Nancy Gertner (ret).  The committee solicited applications.  The application itself was long and detailed.  It collected a lot of information which I am sure was helpful to the committee, but also required me to dig up long forgotten personal information (like addresses, phone numbers and jobs) going back to when I was 18 years old. Harder than it sounds.  This likely served the dual purpose of providing information, but also sorting out who was truly committed to the process.  The names of the approximately 12 committee members and the application itself were publicly available.

The front end of the process moved very quickly. Once the application deadline had passed (late January, 2014), I was asked to interview with the committee (approximately February).  The interview questions were as wide ranging and diverse as the interests of the committee members and included topics such as temperament, role of a judge, reasons for wanting to be a judge, substantive legal questions, experience with various sorts of cases, views on discovery and professional and personal  background.    The next step was an interview with the two senators (approximately March).  In my case, they interviewed me together, but I am not sure that is always the case.  At some point thereafter (approximately April), I was notified that my name was being forwarded to the White House.  This was the single most exciting moment of the process and one that I will always remember.  I was in the lobby of a hotel, on vacation with my family, when my cell phone rang.  I didn’t recognize the number and let it go to voice mail. It turned out to be Senator Warren herself, asking that I return the call.  Needless to say, I returned the call very promptly.  I have kept that voice mail – truly one of those calls you don’t really ever expect and certainly don’t forget.

After that, my primary contact with the process was through the Justice Department Office of Legal Policy rather than the Senators.  My application, resume, background and professional qualifications were vetted by the FBI – which I know only because of the number of calls I got from people who had been contacted. There was an interview in the Old Executive Office Building that included White House Counsel staff and people from the Department of Justice, among others (but not the President).  During this same time frame, I was also vetted by the ABA which traditionally has been given the opportunity to review candidates prior to their nomination and to share with the White House its opinion of an applicant’s qualifications.  The vetting process is an odd thing to experience, in part because it can be awkward to interact with people that you realize are likely being interviewed about you.  It’s also disquieting to know that you are being judged by committees of people whom you have never met and who don’t know you.  At various points, I had the chance to respond generally to things that were said about me and my qualifications.  On the one hand, some people are very generous in their assessment of others.  That being said, there were also comments that seemed unfounded, but that were, in some instances, hard to defend against.  It was also humbling and somewhat surprising to realize that strong endorsements could come from unexpected constituencies, but that the opposite was also true.

In approximately May, I was informed by the Office of the Legal Policy that the President was going to nominate me.  Surprisingly, this moment was much less climactic than learning that my name was going to be forwarded to the President – largely because it was the culmination of a process that I knew was going on, rather than a surprise call.  I was formally nominated on July 31, 2014.  On September 17, I had my confirmation hearing which involved the Senate Judiciary Committee questioning a panel that consisted of me and 3 other nominees from other districts (3 Article III judges and 1 Article II judge).  The hearing was not attended by all of the committee members and was shorter than I anticipated.  The questioning was done by one Senator from each party.  The Senators who attended and the ones that did not then had the opportunity to follow up the hearing with written questions. These were quite substantive and covered topics such as the death penalty, my view of precedent, appropriate judicial temperament, gay marriage, equal protection and the reach of the Commerce Clause.

On November 20, I was voted out of committee (which I learned from the Senate Judiciary website).  This meant that my nomination could proceed to the Senate floor for a vote.  I was given very little information about when the floor vote might happen, if at all.  In my case, the votes for the group of judicial and other presidential nominees in which I was included took place on December 16, 2014, right before the Senate recessed for the year, and in literally the last series of votes before the recess. This was fortuitous given the less hospitable make-up of the new Senate for presidential nominees; I was aware that it was at least possible that my nomination might never be brought forward for a vote if it did not occur before the recess.  I did not know the vote was going to happen beforehand, but I did know it was likely the last night of the session.  I was able to watch the vote only because I had the television set turned on to CSPAN.  Hearing my name called for a Senate vote was one of the other very big thrills of the process.

Once a nomination is voted on by the Senate, the President has to sign your commission which generally takes no more than a couple of days.  At that point you are IN! I took a few weeks to wind up my practice.  I was officially sworn in January 2015 (almost exactly a year after I submitted my application) and then had a more public ceremonial swearing in July – oddly enough a year to the day from my nomination.

Although that largely sums up my active participation in my nomination and confirmation, I am sure there were many machinations behind the scenes – not about me exactly, but more about the challenges of getting a large group of pending nominations (not just judicial) through the Senate as quickly and efficiently as possible.  I appreciated and was repeatedly impressed throughout the process with how generously and selflessly various people worked to make sure that my nomination and confirmation continued to move forward, and I remain grateful for their encouragement and support.

Now that I am on the bench, I continue to feel very honored and lucky to have this job.  I spend a lot of time thinking about how to do it right – in terms of correctly applying law to facts, but also in making sure that I treat litigants and their lawyers with respect and in trying to ensure that people, win or lose, feel like they were heard and their views fairly considered.  A few other random thoughts:

I think about I Love Lucy, even if fleetingly, almost every day. This job is so much like the bon bons on the conveyor belt episode. The paper just keeps coming. For those of you (like my law clerk) too young to understand what I just said – find the episode.  It’s a classic.

As a judge, I have repeatedly offered young associates in court the opportunity to make a brief argument on a motion once the lead attorneys have finished their presentations. Not once has anyone taken me up on this offer.  I suspect that is because the young attorneys are wary of partner or client response. I will keep making the offer and hope that litigants will see it as an opportunity to make their points one more time, rather than as a potential pitfall for the young and unwary.  Just as I would like to see more young lawyers with speaking roles, I have also been struck by the relative paucity of female litigators and would similarly like to see more women in court.

I am aware that the women on the bench, particularly the few of us with younger children, are, to some extent, role models for other women and that we may have a unique perspective on some of the challenges facing women in the legal profession.  I have been experimenting with a 10-4 trial day instead of the more usual 9-1, thinking that this might benefit parents who do school drop off, as well as resulting in fewer trial days for the jurors.  I am also finding that as a judge, rather than a partner in a law firm with client and practice development responsibilities, I have much better control of my schedule (except for those times when I have no control over it at all).  As a result, I am more likely to make it home for dinner with my family.  That being said, the volume of work is huge and unrelenting and I almost always work for several more hour later in the evening.

Finally, for those who have asked, yes, some people treat me differently. Most people treat me the same, which I appreciate.  That being said, the job has required me to give significant thought to personal relationships.   All of the other judges have been incredibly welcoming and generous with their time and advice, but there is the adjustment of thinking of them as peers and the resulting reordering of my prior relationships with many of them.  Similarly, many legal conflicts are easily identified and resolved, but determinations about the appearance of unfairness based on personal and past professional interactions can be much more nuanced.   I believe that a judge should remain a part of the legal community, but there are challenges in maintaining those connections without compromising confidence in the fairness of the process.   I pay a great deal of attention to this obligation, and am becoming more comfortable with the balancing as time goes on.

Judge Burroughs was sworn in as a United States District Court Judge for the District of Massachusetts in January 2015.  Prior to joining the bench, she was a partner in the Boston law firm of Nutter McClennen & Fish.  Before entering private practice, she served for sixteen years as an Assistant United States Attorney in Boston and Philadelphia.  


The Impact of Recent Revisions of the Massachusetts Rules of Professional Conduct on Confidentiality

Newhouse_MartinWoolf_Jeffreyby Martin J. Newhouse and Jeffrey D. Woolf

Heads Up 

The recent revisions by the Massachusetts Supreme Judicial Court (SJC) to the Massachusetts Rules of Professional Conduct effective July 1, 2015 included numerous changes to the rules governing confidentiality of client information, including substantial revisions of rule 1.6 (“Confidentiality of Information”).  The changes, as addressed herein, generally clarify a lawyer’s obligations under the Rules and also offer more helpful guidance on several points than was previously provided.

Rule 1.6:

  • The scope of information covered remains unchanged.  The SJC maintained a major difference between the Massachusetts and the ABA Model Rules, namely by continuing to limit the information covered by rule 1.6 only to “confidential information relating to the representation.”  (The ABA Model Rule covers all “information relating to the representation.”)
  • A clearer definition provided for “confidential information.”  In a very helpful step, the SJC also provided new comments, [3A] and [3B], clarifying what constitutes “confidential information.”  Comment [3A] defines confidential information as information relating to the representation of a client, whatever its source, that is (a) privileged; (b) likely to be embarrassing or detrimental to the client if disclosed; or (c) is information the lawyer has agreed to keep confidential.  Comment [3A] also provides a road map of what types of information would not be “confidential” under the rule.  Comment [3B] further explains the limitation of the rule to “confidential information” and explains how this change has been carried out throughout the Massachusetts Rules of Professional Conduct.
  • Expanding protection of non-confidential information.  In an interesting addition, the SJC warns in comment [4] that the prohibition against disclosing confidential information also prohibits any disclosure of information, while not itself protected under rule 1.6, that “could reasonably lead to the discovery of [protected] information by a third person.”  Included in this are hypotheticals that may lead others to “ascertain the identity of the client or the situation involved.”
  • Enlarging the scope of permissible disclosures. Most notably, the SJC has added two new exceptions to rule 1.6(b).  Rule 1.6(b)(4) expressly permits disclosure “to secure legal advice about the lawyer’s compliance with these Rules.”  Rule 1.8(b)(7) permits limited disclosure “to detect and resolve conflicts” when lawyers change employment or firm ownership changes.  In addition, the new rule 1.6(b)(3), along with revisions to rule 1.6(b)(1) and (2), clarify prior existing exceptions.  Significantly, rule 1.6(b)(1) continues to contain a provision, absent from the Model Rules, which authorizes the disclosure of confidential information “to prevent the wrongful execution or incarceration of another.”  Rule 1.6(b)(2) also continues the prior Massachusetts provision that permits disclosure to “prevent the commission of a criminal or fraudulent act,” without limiting this exception to conduct committed by “the client,” as exists under Model Rule 1.6(b)(2).  Thus the Massachusetts rule permits disclosure to prevent the commission of a crime or fraudulent conduct by a third person.  Also unlike Model Rule 1.6(b)(2), the Massachusetts rule does not require that the lawyer’s services must have been used in furtherance of the crime or fraud in order for disclosure to be permitted.  Permissive disclosure under rule 1.6(b)(2) is also not limited, as previously and under the Model Rules, to preventing conduct likely to cause substantial damage to property and financial interests of another; new rule 1.6(b)(2) additionally permits disclosure where substantial damage is likely to “other significant interests” of another.
  • Enhanced guidance with regard to disclosure exceptions. Comments [5] et seq. have been revised or wholly rewritten to provide more detailed and much needed guidance for lawyers seeking to understand whether disclosure is permitted or required.  For example, comment [12] discusses disclosure that may be required by other law; comment [15] provides guidance on dealing with a court order requiring disclosure; comments [13] and [14] deal in detail with the disclosures when lawyers change employment or firms change ownership.  Finally, comment [17] provides important guidance on how lawyers should exercise their discretion when an exception under rule 1.6(b) authorizes discretionary disclosure.
  • Addition of Rule 1.6(c). This new subsection requires lawyers to make reasonable efforts to prevent inadvertent or unauthorized disclosure of, or access to, confidential information protected under the rule.  New comments [18] and [19] provide, inter alia, that unauthorized access to or disclosure of confidential information “does not constitute a violation of paragraph [1.6](c) if the lawyer has made reasonable efforts to prevent the access or disclosure.” The comments discuss the factors to be considered as to whether reasonable efforts have been made.  Comment [18] cross-references comments [3] and [4] to rule 5.3 with regard to the sharing of information with non-lawyers outside the lawyer’s firm (e.g., an outside document management company).  Comments [18] and [19] confirm an attorney’s obligation to comply with all applicable state and federal privacy laws.  (Practice tip: be aware of your obligations under Mass. G.L. c. 93H (the Massachusetts security breach notification law) and the corresponding regulations, 201 CMR § 17.00 et seq.).

Rule 1.8(b) and 1.9(c)(1):

Although in a number of respects, the SJC’s revisions to the Massachusetts Rules of Professional Conduct have brought our rules into closer conformity with the ABA Model Rules, they have also preserved important distinctions.  As discussed above, the SJC retained our narrower definition of the scope of information covered by rule 1.6.

Similarly, while both rules 1.8(b) and 1.9(c)(1) parallel the ABA Model Rules in prohibiting the use of confidential information relating to the representation to the disadvantage of the client or, in the case of rule 1.9(c)(1), the former client, the SJC has retained in each rule the prohibition against using such information for the benefit of a third party or for the lawyer’s own benefit.  Under rule 1.8(b) such information may be so used if the client gives informed consent or such use is permitted or required by the rules.  Under rule 1.9(c)(1), such use is only allowed if permitted or required under rules 1.6, 3.3, or 4.1 with respect to the former client.  Rule 1.9(c) applies not only to a lawyer who has formerly represented a client in a matter but also if the lawyer’s present or former firm has formerly represented the client in a matter.

New Rule 1.18:

On the other hand, the SJC has not hesitated to adopt aspects of the ABA Model Rules that fill gaps in or represent improvements to the Massachusetts ethics rules.  One such example is the SJC’s adoption of Model Rule 1.18, which defines the duties owed to prospective clients.  The new rule makes it an ethical violation for a lawyer to engage in conduct for which the lawyer  would previously have been liable in tort for violating confidentiality obligations to a prospective client:

  • Under rule 1.18(b), even when no client-lawyer relationship is formed with the prospective client, a lawyer may not use or disclose confidential information learned from the prospective client, except as rule 1.9 would permit in the case of a former client.
  • Under rule 1.18(c), a lawyer who has received confidential information from a prospective client may not take on a representation materially adverse to the prospective client in the same or substantially related matter if the confidential information received could be significantly harmful to the prospective client.  If a lawyer is disqualified under this sub-section, no lawyer in the lawyer’s firm may knowingly undertake or continue the representation adverse to the prospective client.
  • However, rule 1.18(d) provides that, even when the lawyer has received disqualifying information from the prospective client, representation in the adverse matter is permitted if (1) both the affected and the prospective client give written informed consent or the lawyer who received the information took reasonable precautions to limit the information from the prospective client and is timely screened, as defined in rule 1.10(e), and the prospective client is promptly given written notice.

 Rule 1.0 (former Rule 9.1):

“Definitions” in the Massachusetts Rules of Professional Conduct used to be found in rule 9.1.  Consistent with the ABA Model Rules, this has been renamed as “Terminology” and renumbered as rule 1.0.  Three new definitions (and corresponding commentary) have been added:  “informed consent”; “confirmed in writing”; and “writing” (or “written”).  The new Massachusetts definitions are largely consistent with the ABA Model Rules.

New Rule 4.4(b):

The SJC also has added rule 4.4(b), which is identical to the corresponding ABA Model Rule, and for the first time addresses a lawyer’s obligation upon receipt of documents or electronic information that was inadvertently sent by opposing lawyers or parties.  Rule 4.4(b) requires a lawyer receiving such documents or information to notify the sender promptly, in order that (as stated in comment [2]) the sender may take protective measures.  Comments [2] and [3] provide a good discussion of the problem the rule addresses.  Importantly, comment [2] brings metadata in electronic documents within the purview of rule 4.4(b) “only if the receiving lawyer knows or reasonably should know that the metadata was inadvertently sent to the receiving lawyer.”   Comment [3] recognizes a lawyer’s professional discretion to return or delete such documents unread where the law does not require other action.

In conclusion, the reader is directed to the “Report of the Standing Advisory Committee on the Adoption of Revised Rules of Professional Conduct Effective July 1, 2015,” for a further discussion of these and other changes.

Martin J. Newhouse, President of the New England Legal Foundation, is a member of the SJC Clients’ Security Board and BBA Ethics Committee.

Jeffrey D. Woolf is an Assistant General Counsel to the Board of Bar Overseers and is a member of the BBA Ethics Committee.


Seeking Justice for the Erroneously Convicted: Assessing the First Decade of Compensation Claims under Chapter 258D

Hartnagel_Davidby David Hartnagel

Legal Analysis

By the late 1990s and early 2000s, due to increased use of DNA and other scientific evidence, and further scrutiny of eyewitness identification, the number of criminal exonerations in both Massachusetts and the nation grew significantly.  As of 2002, over 100 prisoners nationwide were found to be innocent and released after additional scientific testing of evidence; and between 1997 and 2002, six men in Massachusetts were exonerated after new DNA testing proved they were innocent of the crimes for which they had been convicted.[i]  As attention on wrongful convictions increased, so did interest in providing exonerated individuals with a means to seek relief redress for time served, erroneously, in prison.  As a result, in late 2004, Massachusetts enacted Chapter 258D.  See St. 2004, c. 444; G.L. c. 258D.

This legislation was intended, in part, to meet the Commonwealth’s “moral obligation” to compensate those who had been erroneously convicted.[ii]  Before Chapter 258D was enacted, Massachusetts had compensated only two exonerated men over the prior half-century, both by special legislative action.  In 1958, Santos Rodriguez, who had spent over two years in prison for allegedly killing a woman, received $12,500 after the true killer confessed.  Similarly, in 1992, Bobby Joe Leaster, who had served 15 years of a life sentence for murder, received a $500,000 annuity when new eyewitness testimony exonerated him.[iii]  In contrast, since the enactment of Chapter 258D, approximately 50 people have sought relief, resulting in the Commonwealth paying over $9 million to nearly two dozen individuals whose convictions had been overturned.

This article examines Chapter 258D’s key provisions and looks back at its first decade, analyzing how well the Act has worked in compensating those who were erroneously convicted, and proposing changes to make the Act more effective.

I. Key Provisions of the Erroneous Conviction Statute
A. To Seek Compensation, a Claimant Must First Be Eligible

Chapter 258D sets forth strict threshold criteria for an individual even to be considered eligible for compensation.  A person must have been convicted of a felony and sentenced to not less than one year in a state prison – and served all or part of that sentence.  G.L. c. 258D, § 1(C).  In addition, the individual must have either received a pardon from the Governor or been granted judicial relief by a state court “on grounds which tend to establish the innocence of the individual.”  G.L. c. 258D, § 1(B).[iv]  The term “tend to establish” was offered by then-Governor Romney to “limit[] the class of claimants to those who received judicial relief on grounds that directly implicate innocence.”  Guzman v. Commonwealth, 458 Mass. 354, 358-59 (2010).  The phrase has been further interpreted to mean “grounds resting upon facts and circumstances probative of the proposition that the claimant did not commit the crime.”  Id. at 362 (internal citations and quotations omitted).  But such grounds must tend to do more than merely “assist the defendant’s chances of acquittal.”  Id. at 360.[v]

In the first appellate decisions interpreting the statute, Guzman and Drumgold v. Commonwealth, 458 Mass. 367 (2010), the claimants’ underlying convictions were overturned on grounds that undoubtedly tended to establish their innocence.  In Guzman, the claimant’s defense attorney failed to call two eyewitnesses who would have testified that the claimant was not the person who committed the crime.  458 Mass. at 363-65.  In Drumgold, the Commonwealth failed to disclose exculpatory evidence concerning promises and rewards made to a prosecution witness and newly discovered evidence relating to the credibility of a critical eyewitness.  458 Mass. at 372-76.

More recently, though, courts have considered factual scenarios that are less clear cut, such as where claimants’ convictions were reversed simply due to insufficient evidence.  In the first instance, Renaud v. Commonwealth, 471 Mass. 315 (2015), the Court agreed with the Commonwealth that convictions reversed for insufficient evidence do not “categorically” equate to actual innocence, but the Court concluded that the absence of certain types of evidence may nonetheless tend to show actual innocence.  Id. at 319.  Courts must therefore “follow a case-specific, fact-based approach to determine whether judicial relief based on insufficient evidence tends to establish actual innocence in any given case.”  Santana v. Commonwealth, 88 Mass. App. Ct. 553, 555 (2015).  As it turned out, the courts in Renaud, Santana, and Nguyen v. Commonwealth, 88 Mass. App. Ct. 1111, 2015 WL 6680985 (Nov. 2, 2015) (Rule 1:28 opinion) all held that the claimants were eligible under Chapter 258D.  See Renaud, 471 Mass. at 317 (larceny convictions reversed where the evidence consisted largely of only an EBT card bearing the claimant’s name at the crime scene); Santana, 88 Mass. App. Ct. at 555 (drug conviction reversed because the only evidence of constructive possession was claimant’s presence as a passenger in the car where the drugs were discovered); Commonwealth v. Nguyen, 76 Mass. App. Ct. 1137, 2010 WL 2268933, at *3 (June 28, 2010) (Rule 1:28 opinion) (gun conviction reversed because of insufficient evidence that claimant had knowledge that the firearm was in the vehicle where it was found).  As a result, the more recent appellate trend in these types of cases has been to hold in favor of claimants’ eligibility.

B. To Receive Compensation, a Claimant Has the Burden To Prove His Actual Innocence

If a claimant meets the eligibility requirements, he will face a trial at which he must, by clear and convincing evidence, prove that he did not commit the crime for which he was originally charged, or any other felony arising out of or reasonably connected to the facts supporting the indictment or complaint, or any lesser-included felony.  G.L. c. 258D, § 1(C)(vi).

Chapter 258D, however, also recognizes that an erroneous conviction trial may take place years after the underlying crime occurred.  Evidence and testimony may have been lost, forgotten, damaged, or destroyed, all through no fault of any party.  Thus, Chapter 258D  provides that a court “shall exercise” its discretion “when determining the admissibility and weight of evidence” by considering:  “any difficulties of proof caused by the passage of time, the death or unavailability or witnesses, or other factors not caused by the claimant, or those acting on the claimant’s or the commonwealth’s behalf.”  Id. § 1(F).  Moreover, “[t]he court shall instruct the jury that it may consider the[se] same factors when it weighs the evidence presented at trial.”  Id.  Chapter 258D thus balances the need for the parties to provide the factfinder with as much evidence concerning the allegations and defenses, while acknowledging the limitations on the reliability of such evidence.

C. Types of Relief Available Under Chapter 258D

A successful claimant can receive four potential types of relief:  (1) $500,000[vi]; (2) 50 percent tuition reduction from any public university or college in Massachusetts; (3) services to address physical and emotional deficiencies related to one’s conviction and incarceration; and (4) expungement or sealing of records.  G.L. c. 258D, §§ 5, 7.  However, one who settles with the Commonwealth, where no judgment is entered in his favor, is ineligible to seek expungement or sealing.  See Memo. of Decision and Order, Commonwealth v. Baran, Civil Action No. SUCV2010-00034 (Mass. Super. Dec. 12, 2013).  In addition, a claimant is barred from recovering punitive damages, interest, costs, or attorney’s fees.  See G.L. c. 258D, § 5(A).

II. Actions Under the Erroneous Conviction Statute

Approximately 50 actions have been filed under Chapter 258D and the vast majority have proceeded along one of two paths:  settlement or dismissal due to ineligibility.  The initial cases largely concerned convictions that had been reversed well before 2004[vii] because of scientific testing, perjured or manufactured evidence, or faulty eyewitness testimony.  Due to the uncontroverted evidence of innocence, those cases often ended in settlements at or near the maximum amount of monetary relief.[viii]  The Commonwealth has settled approximately half of all Chapter 258D cases for over $9 million, which cases (except for one) were filed in the statute’s first five years.  After 2010, the Commonwealth has settled few cases and none recently.  Many of the remaining closed cases were often dismissed as the claimants were ineligible, i.e. their convictions were reversed on grounds that did not tend to establish their innocence, their claims were untimely, or they did not otherwise satisfy the statute’s requirements.

Just three cases have gone to trial, and only one – brought by Ulysses Charles – ended with a verdict for the claimant.  But this figure will likely increase in the near future:  as of this article’s publication, around a half dozen cases are pending before the Superior Court and at least two others are pending appeal (with respect to claimants’ eligibility).  Also, a number of these actions, such as Renaud, Santana, and Nguyen, are unlikely to settle.  These cases are largely based on convictions that were reversed due to insufficient evidence, as opposed to newly discovered affirmative evidence of innocence such as DNA evidence, recanted testimony, or police misconduct.  Similar circumstances existed in the two other Chapter 258D actions that went to trial, which ended with verdicts in favor of the Commonwealth.  Ultimately, with the presently pending Chapter 258D cases, the Commonwealth will likely be more inclined to take its chances at trial (with the attendant cap on damages and unavailability of interest and fees) than settle beforehand, in light of the claimants’ high burden at trial and the lack of clear exonerating evidence.

III. Challenges to Fulfilling Chapter 258D’s Goals, and Potential Solutions

With just over a decade’s worth of experience with Chapter 258D, some challenges to its efficacy have come to light.  Certain changes, some small in nature, could greatly improve its workability and help achieve its purpose more fully.

A. Chapter 258D Actions Proceed Slowly, Preventing an Erroneously Convicted Individual From Receiving Timely, Effective Compensation
1. Chapter 258D Actions Are Assigned to the Slowest Schedule in the Superior Court

Because of the pace at which Chapter 258D actions proceed, they place an unnecessary burden on claimants.  This is particularly so when one considers that claimants’ cases typically involve considerable investigation and discovery well before any Chapter 258D action is even contemplated.  One reason for the slow pace is that Chapter 258D actions, as actions against the Commonwealth, are assigned to the most deliberate schedule, Track A, under current Superior Court Standing Orders.  Track A provides for two years of discovery, and targeted resolution in three years.  See Superior Court Standing Order 1-88.

As one example, Bernard Baran served approximately 20 years in prison before his conviction was reversed.  Commonwealth v. Baran, 74 Mass. App. Ct. 256 (2009).  By the time Baran filed his Chapter 258D action in 2010, at least a half dozen substantive and evidentiary proceedings had occurred over the prior two decades.  Yet, Baran was forced to proceed via Track A.  Ultimately, Baran settled for less than the statutory cap in 2012, instead of waiting – possibly even years longer – for greater compensation and a potential judgment of innocence.

Even where claimants had claims that would otherwise exceed $500,000 in damages, if not for the Chapter 258D cap, due to lengthy incarcerations, and presented uncontroverted evidence of innocence, they have at times faced long delays before receiving compensation.  Stephan Cowans, Angel Hernandez, Dennis Maher, Neil Miller, Marvin Mitchell, Anthony Powell, and Eric Sarsfield all had convictions reversed as a result of scientific evidence,[ix] yet each waited from seven months to almost two years after filing their Chapter 258D complaints before settling for the maximum amount of compensation under the statute.

These delays are contrary to the statute’s purpose, particularly when a conviction is reversed as a result of uncontroverted scientific evidence and the claimant’s innocence should not be in question.[x]  As a result, Standing Order 1-88 should be amended to allow for Chapter 258D cases to be brought under an accelerated schedule.  In the alternative, Chapter 258D should be amended to provide a right to a speedy trial, akin to other civil matters.[xi]  Another possible solution is mandatory mediation between a claimant and the Commonwealth in cases where convictions are overturned on the basis of uncontroverted scientific evidence.  This final idea finds further support in light of the newly-enacted Chapter 278A, which provides for post-conviction access to DNA testing for convicted individuals asserting their innocence.  G.L. c. 278A, et seq.

2. The Commonwealth’s Right to Interlocutory Appeal of Eligibility Determinations

Another cause of significant delay in Chapter 258D actions is the Commonwealth’s right to interlocutory appeal of an adverse decision on the issue of a claimant’s eligibility.  The Commonwealth may pursue such an interlocutory appeal pursuant to the doctrine of present execution because Chapter 258D represents a limited waiver of sovereign immunity.  See Irwin v. Commonwealth, 465 Mass. 834, 842 (2013).  The claimant is then faced with a difficult choice:  (a) stay discovery, preserve resources, and wait for a potentially lengthy appeal period to be completed or (b) proceed with discovery, incur expenses, and impose on the claimant’s time and mental health, while running the risk of losing the appeal on the threshold issue of eligibility.[xii]

One possible solution is for the Appeals Court to alter its internal practices, prioritizing Chapter 258D actions when the issue is one of a claimant’s eligibility.  The Appeals Court regularly expedites cases involving custody and adoption issues concerning children; the same could be done for Chapter 258D erroneous conviction claims.  An alternative would be to amend Chapter 258D to impose a fee-shifting measure for any unsuccessful appeal by the Commonwealth on the issue of eligibility.

B. The Statutory Cap on Monetary Relief Prevents Fair Compensation

After a decade in practice, the Chapter 258D damages cap of $500,000 should be increased or modified.  Simply put, an individual who was erroneously convicted and served months, years, or decades in prison is very likely to receive a damages award exponentially lower than one who alleges that the Commonwealth violated his civil rights or discriminated under Chapter 151B, as neither of those claims has a cap on damages.

When the statute was enacted in 2004, capping monetary damages at $500,000 was intended to limit the Commonwealth’s fiscal exposure.  This concern, however, is outweighed by the moral imperative of providing individuals the opportunity to be compensated for years lost in wrongful confinement.  In the initial years after Chapter 258D’s passage, the Commonwealth settled many claims with people exonerated long before the law’s enactment, resulting in millions of dollars of damages awards.  But since 2011, the Commonwealth has paid less than a million dollars in compensation under Chapter 258D to only a few exonerees, and nothing since 2013.

Modifying the damages cap would provide the Commonwealth, courts, and juries with the flexibility to compensate more fairly those individuals most deserving.  For example, Angel Hernandez served 13 years before being cleared through DNA evidence.  He ultimately received a maximum settlement under the statute; however, that amount equaled only around $38,000 for every year he should not have been in prison.

The Commonwealth need not forgo a cap – other jurisdictions with analogous compensation schemes have more flexible forms of relief, some providing limits based on years of incarceration.[xiii]  As a result, claimants could be entitled to a maximum amount of money for every year they erroneously served in prison, for example $100,000 per year, thereby providing greater compensation to those persons who have suffered the greater harm.

The enactment of Chapter 258D filled a critical void – it both acknowledged that mistakes are made in our criminal justice system and that the Commonwealth should compensate the victims of such errors.  After a decade in practice, however, Chapter 258D presents certain obstacles for erroneously convicted individuals to receive compensation for the years they were wrongfully imprisoned.  Consistent with the statute’s goal to address the Commonwealth’s moral obligation to these individuals, Chapter 258D should be amended to advance its original intent: fairly and efficiently compensating erroneously convicted individuals.

 

[i] Fisher, Stanley Z., Convictions of Innocent Persons in Massachusetts: An Overview, 12 B.U. Pub. Int. L.J. 1, 72 n.3 (2002).

[ii] See Testimony of Representative Patricia Jehlen (March 19, 2003), available at http://web.archive.org/web/20040807031601/http://www.patjehlen.org/2506testimony.html (last visited January 2, 2016).

[iii] Wisneski, Ashley H., “‘That’s Just Not Right’:  Monetary Compensation for the Wrongly Convicted in Massachusetts,” 88 Mass. L. Rev. 138, 139 & nn.20-21 (2004).

[iv] Such relief must have vacated or reversed the conviction and either the indictment or complaint was dismissed (or a nolle prosequi entered) or the individual was found not guilty if a new trial was conducted.  G.L. c. 258D, § 1(B)(ii).

[v] The Court in Guzman also provided a non-exhaustive list of procedural, evidentiary, and structural deficiencies that may serve as the basis for the reversal of a defendant’s conviction, but would not satisfy Chapter 258D’s eligibility provision in light of the Governor’s amendment: a violation of a defendant’s Sixth Amendment right to confrontation; a violation of a defendant’s Bruton rights; a prosecutor’s improper closing argument; and an erroneous disallowance of a defendant’s peremptory challenge.  Guzman, 458 Mass. at 358 n.6; see Silva-Santiago v. Commonwealth, 85 Mass. App. Ct. 906, 909 (2014); Riley v. Commonwealth, 82 Mass. App. Ct. 209, 215-16 (2012).

[vi] One concern of legislators prior to Chapter 258D’s enactment was the financial burden it might place on the Commonwealth.  In the end, the payment of the $500,000 annuity to Leaster in 1992 served as a guidepost for the maximum amount of recovery allowable under the statute.  See Note 3 (citing then-Representative Jehlen’s testimony before the House Committee on Public Safety (Mar. 15, 2001)); McCarthy, Brendan, “House passes wrongful conviction bill,” The Boston Globe (Oct. 23, 2003); G.L. c. 258D, § 5.

[vii] Individuals whose convictions had been overturned prior to 2004 had three years after the enactment of Chapter 258D to file suit.  2004 Mass. Acts c. 444, § 3.

[viii] This includes the settlements for, among others, Stephen Cowans, the Estate of Louis Greco, Angel Hernandez, Donnell Johnson, Dennis Maher, Neil Miller, Marvin Mitchell, Marlon Passley, Anthony Powell, Guy Randolph, and Eric Sarsfield.  See http://www.newenglandinnocence.org/category/exonerees/ (last visited January 2, 2016).

[ix] See Note 8.

[x] Certain legislative sponsors of the original statute anticipated that such cases would be handled promptly.  Then-Senator Diane Wilkerson said she “might understand [the Attorney General] scrutinizing a case involving a defendant who was wrongly convicted because of, say, a flawed police investigation” but questioned the delays in compensation for those who filed claims who “were exonerated because of airtight DNA evidence.”  Saltzman, Jonathan, “Reilly accused of funds delay for ex-inmates,” The Boston Globe (June 21, 2005).

[xi] See, e.g., G.L. c. 151B, § 9 (for unlawful discrimination); G.L. c. 231, § 59F (for parties age 65 or older).

[xii] The latter is what occurred in Irwin.  The Commonwealth appealed the denial of its motion to dismiss in August 2011; the claimant did not agree to a stay pending appeal; the parties engaged in full discovery for nearly two years; and in July 2013, the Supreme Judicial Court dismissed the case due to the claimant’s ineligibility.

[xiii] See, e.g., 28 U.S.C. § 2513(e); Ala. Code §29-2-159; Fla. Stat. § 961.06(e); Minn. Stat. § 611.365; N.C. Gen. Stat. § 148-84; Ohio Rev. Code Ann. § 2743.48(E)(2); Tex. Civ. Prac. & Rem. Code Ann. § 103.052; Vt. Stat. Ann. tit. 13, § 5574(b); Wash. Rev. Code § 4.100.060(1)(d)(5).

David Hartnagel is an attorney at Sheehan Phinney Bass + Green P.A. in Boston where he practices complex commercial and employment litigation for both business and individual clients.  Previously, as an Assistant Attorney General, he served as counsel on behalf of the Commonwealth in some of the cases cited in this article.