Supporting Parties' Right to Control the Scope of Commercial Relationships

The Massachusetts Appeals Court also agreed with NELF’s position in the case of Fronk v. Fowler, involving clarification of the business opportunity doctrine.  Under that doctrine, corporate executives, partners, and other fiduciaries must disclose business opportunities to the corporation or partnership rather than pursue them for their own benefit.  Here the parties’ limited partnership was devoted to ownership and management of a single piece of real estate and expressly permitted the general partners, who were real estate developers, to pursue other real estate opportunities on their own behalf. The appellant limited partners nonetheless argued that the general partners had to bring to the partnership an opportunity that arose to purchase another parcel in the same vicinity, a position that called into question the very ability of parties to maintain single-purpose or special-purpose entities.  

In its decision, the Appeals Court, relying in part on a number of the authorities cited in NELF’s amicus brief in support of the general partners, agreed with NELF that where parties have by agreement expressly limited the scope of a business enterprise, an opportunity beyond its scope cannot properly be considered a business opportunity triggering fiduciary disclosure obligations. The court further found that this partnership agreement expressly allowed the challenged actions by the general partners and that, in such circumstances, “ ‘the obligations of the parties are determined by reference to contract law, and not by the fiduciary principles that would otherwise govern.’ ”   The decision is of considerable importance, given the prevalence and role of limited-purpose entities in the real estate industry and the negative impact on commercial activity that could be expected if parties were unable to control the scope of their commercial relationships.

Opposing Consumer Protection Claims When the Consumer Suffers No Injury

In Kwaak v. Pfizer, Inc., the Massachusetts Appeals Court, agreeing with NELF and AIM, upheld the requirement of class-wide injury in consumer class actions.  The court held that consumers of Listerine mouthwash, which had been advertised to be “as effective as floss,” did not suffer similar injuries, as required for class certification under the Massachusetts Consumer Protection Act, G. L. c. 93A.  The court found that “the facts underlying the claims of the purported class are too diverse,” and on that basis reversed an order of the Superior Court granting class certification.  Distinguishing the case factually from others in which class certification has been upheld, the court determined that there was “insufficient information in the record to identify any such similarity of exposure, deception, and causation.”  With respect to the injury component in particular, the court explained: “[U]nclear is whether those exposed to the deceptive aspects of the advertising campaign purchased Listerine for reasons unrelated to the advertising, such as to freshen their breath or as an adjunct to flossing. … Whether a causal connection exists between a deceptive act and a loss is not just difficult to identify but appears to vary widely depending on the customer.”  In these circumstances, the court agreed with amici that there was no showing that the putative class consisted of consumers “similarly situated and similarly injured by a common deceptive act or practice,” as required for class certification under G. L. c. 93A.

Opposing Inequitable Tax Treatment of Mobile Telephone Companies

This case, recently decided by the Massachusetts Supreme Judicial Court, raised the question whether providers of wireless telephone services qualify as “telephone companies” entitled to uniform, statewide valuation of personal property for purposes of Massachusetts property taxes. The alternative is to consider mobile phones more like radios such that mobile carriers are subject to local property tax valuations everywhere their taxable personal property is located.  

The issue arose because the relevant statutory provisions do not define “telephone company.” Concerned that a contrary view could chill the development and availability of new telecommunications technologies in the state, NELF and AIM argued in support of the taxpayer that it should be the nature of the service provided rather than the technology employed that determines a company’s entitlement to centralized, uniform valuation. The SJC disagreed, however, adopting statutory construction arguments of the Appellate Tax Board, which focused on the technology in use when the statutes were originally passed in the early 20th century.  The Court’s decision thus gives favorable tax treatment to old, land-line technology over newer technologies, concluding that the entitlement to central valuation is a function of the physical interconnectedness of the land-line telephone system infrastructure. While acknowledging that its decision may chill technological innovation, the Court considered that a policy matter to be addressed to the Legislature.

Opposing Inappropriate Class Actions

The Massachusetts Supreme Judicial Court, in a decision rendered in this case on May 22, 2008, agreed with NELF and its co-amicus AIM that the trial court had properly denied certification of both national and state classes.  The case was an attempted nationwide (or, if not, statewide) consumer class action involving allegedly deceptive illustrations developed by Berkshire Life for use by its agents throughout the country in selling so-called “disappearing premium” policies, under which policyholders could choose to use policy dividends to pay future premiums such that premium payments would eventually “disappear.”  NELF had argued in support of Berkshire that the trial court properly denied certification of a national class because the decision of the U.S. Supreme Court in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), does not permit a jurisdiction such as Massachusetts, which has no provision allowing class members to opt out of the action, to certify a nationwide class.  NELF further argued that, even if Shutts were read to allow non-opt-out jurisdictions to certify national classes provided there is personal jurisdiction over all nonresident class members, class certification was still properly denied because no basis existed in this case for the exercise of jurisdiction under the Massachusetts long-arm statute, G. L. c. 223A.  Finally, NELF argued that there were numerous individual issues presented with respect to whether putative class members in fact misunderstood the operation of these policies and purchased them due to that misunderstanding such that there was no showing that class members were injured at all, let alone “similarly injured,” as required for certification of a state class under the Massachusetts Consumer Protection Act, G. L. c. 93A, § 9(2).  By agreeing with NELF and upholding the trial court’s denial of class certification, the SJC provided important confirmation that Massachusetts courts must have personal jurisdiction over every nonresident member of a putative plaintiff class in order to certify that class.  A contrary determination could have significantly increased the number of nationwide class actions filed in Massachusetts courts.  The Court appears to adopt the alternative reading of the Shutts decision permitting the exercise of jurisdiction over nonresidents despite the absence of any opt-out opportunity provided all nonresident class members have “minimum contacts” with Massachusetts.  Because the Court found that this constitutional standard was not met here, it did not reach NELF’s argument about the need for satisfaction of the state’s long-arm statute.  Similarly, it did not reach NELF’s argument about the absence of “similar injury” for purposes of state class certification because it agreed with the trial court that individual issues with regard to Berkshire’s statute of limitations defenses made class certification inappropriate.  These issues, as well as the argument that theShutts decision actually precludes Massachusetts courts from ever certifying a nationwide plaintiff class, remain for another day.

Opposing Expansion of the Doctrine of Piercing the Corporate Veil

In its March 7, 2008 decision in this case, the Massachusetts Supreme Judicial Court agreed with NELF and the Associated Industries of Massachusetts (“AIM”) that a parent corporation, having first acquired an ownership interest in a subsidiary decades after the subsidiary had allegedly caused pollution and sold the contaminated site, cannot be held derivatively liable under the state Superfund law, G. L. c. 21E.  

Superior Court Judge Allan van Gestel had granted summary judgment in favor of the defendant companies, but the Massachusetts Appeals Court vacated the judgment for NG US 1, concluding that there existed a genuine issue of material fact as to whether the corporate veil of New England Electric System (NG US 1’s corporate predecessor) could be pierced to impose liability.  NELF supported the defendants’ petition for further appellate review and, after the SJC granted that application, joined with AIM in filing an amicus brief.  

In its unanimous opinion, authored by Chief Justice Marshall, the SJC first agreed with NELF’s and AIM’s assertion that federal and state Superfund statutes do not disturb the common law with respect to the criteria for piercing the corporate veil.  The Court then provided a virtual primer on the common law doctrine and concluded that “the corporate form may not be pierced to impose liability for actions taken (or not taken) by another entity long before the formation of a corporate relationship.”  The Court rejected the Appeals Court’s interpretation of Attorney Gen. v. M.C.K., Inc., 432 Mass. 546 (2000), as authorizing the disregard of corporate form based purely on general statutory goals.  To the contrary the SJC confirmed, as amici had argued, that there can be no basis for piercing the parent’s veil unless an agency or similar relationship existed between the two corporate entities at the time of the events giving rise to liability.   The case is a welcome reaffirmation of the principles articulated by the SJC forty years ago in My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614 (1968).

Supporting Parties' Freedom to Contract for Judicial Review of the Merits of Arbitral Decisions

In its decision in this case, rendered on March 25, 2008, the United States Supreme Court addressed the scope of judicial review of arbitral awards under the Federal Arbitration Act, 9 U.S.C. §§ 9 – 11, (“FAA”).  The case involved interpretation of Section 10(a) of the FAA, which provides only narrow bases on which a federal court may vacate an arbitration award, all having to do with flaws in the arbitral process rather than the merits of the arbitral decision.  

The question presented was whether Section 10(a) is an exclusive standard of judicial review or, as NELF argued, a minimum default standard that parties are free to supplement in their arbitration agreements.  As the Court noted in its opinion, NELF presented for the Court’s consideration studies indicating that many businesses, concerned about irrational and excessive arbitral awards, “will flee from arbitration if expanded review is not open to them.”  NELF further argued, for itself and co-amicus National Federation of Independent Business Legal Foundation, that an interpretation of Section 10(a) as a minimum default standard is more consistent with the intention behind the FAA, which was to uphold parties’ arbitration agreements in the face of judicial hostility.  

While Justice Stevens, in a dissenting opinion joined by Justice Kennedy, agreed with NELF’s position, the majority of the Court decided that Section 10(a) is an exclusive standard for judicial review under the FAA.  However, Justice Souter, writing for the majority, carefully limited the Court’s holding to cases where parties have invoked what he characterized as the “expedited” review process, or “shortcut,” available under the FAA for confirmation, vacatur, or modification of arbitration awards.  The Court suggested that there may be alternative means, under court rules, state statutes, and/or the common law, to obtain more expansive federal judicial review of arbitration decisions apart from the FAA.