September 2018 Newsletter

David Peim would not be the face you would imagine when picturing a diversity champion in the legal profession. To look at him, the 60-year California transplant does not seem to fit into any protected class, but appearances, as they say, can be deceiving. This makes Peim living proof of one bedrock principle of diversity and inclusion: do not judge people based on external factors.  For the past two years, Peim has been not so quietly helping his employer, Honda North America, lead the charge for diversity and inclusion in the outside counsel they retain.

Peim’s story started in Brooklyn, New York where he grew up in a poor and ethnically diverse neighborhood. His sensitivity to diversity may have started when, as a Caucasian student, he was subject to the busing requirements mandated by the 1954 ruling in Brown v. Board of Education, which ended official segregation in public schools.  Peim enjoyed school very much, particularly art, math and science. After getting an undergraduate degree in biology/biochemistry and a PhD in molecular biology, he decided to go to law school.

Peim started his legal career at a Los Angeles civil litigation firm where his experience included products liability, class action work, intellectual property, and labor and employment. In 2003, he decided to move in-house and joined the Honda North America’s legal team. About six years ago, Peim was promoted to Deputy General Counsel and assigned to American Honda Finance Company, where he works with a diverse staff and clients.

Honda North America’s senior management’s commitment to diversity and inclusion stems from Honda’s overall diversity directive handed down by the CEO and President of American Honda Motor Co. and the desire to make Honda a company that society wants to exist.  The legal division has championed this commitment and recently won an award from the Association of Corporate Council for its diversity and inclusion activities within the legal department.  The legal management team, however, recognized that it could do more to further inclusion and diversity particularly with the outside counsel that it hired. Peim was tasked with leading the Law Division’s efforts to enhance the diversity of Honda’s outside counsel. He immediately formed a committee consisting of attorneys and staff from Honda’s legal offices around the country to work together on this critical priority.

From there, the committee was off to the races. They began benchmarking with other companies both in and outside of the auto industry. Not every company wanted to share what they were doing, but Peim says others were very generous with their experience: “Rick Hammond at Walmart and Mel Walker at Wells Fargo were very helpful in this process.”

Peim says the Committee has been guided by several fundamental principles beyond the concept that it is the right thing to do.  Diversity and inclusion is consistent with Honda’s philosophy and values. Therefore, it’s important for Honda’s outside counsel to reflect Honda’s customers and communities.  A policy and practice of diversity and inclusion is critical to the Company’s success and will provide the best results for Honda. 

Armed with research, Peim and the Diversity and Inclusion committee developed a mission statement as well as policies and procedures. In addition, a “Legal Rooney Rule” was created at Honda that resembles the rule implemented in the NFL. Certainly, it is nuanced and not easily summed up in a neat sentence, but simply: For legal matters under a certain dollar amount, Honda’s in-house attorney must consider a diverse outside legal candidate. The word “consider” is used broadly to include talking to, communicating with or general consideration – Peim says there needs to be some reasonable effort to identify and consider a diverse candidate. The attorney’s supervisor acts as the gatekeeper in the approval process.

For larger legal matters, more is required to ensure that diverse candidates are considered and developed.  For matters over a certain dollar amount, the in-house attorney will still have to consider diverse candidates, but if they find a diverse candidate does not exist for a particular legal issue or location, then a discussion or process must occur to create a diverse candidate in the future.  It could include succession planning, training, mentoring, teaming up firms, whatever is necessary to reach the long-term goal that a diverse candidate is available in the future. Additionally, if interviewing firms, there must be one diverse firm interviewed for every non-diverse firm interviewed.  Just put into practice recently, this new rule resulted in the retention of a diverse firm for a major area of work, when prior to this initiative, this firm would not have been considered for the business.  Peim noted, “It is important to point out that the firm’s retention was not because they were a diverse firm; they were the best firm for the job. However, prior to this new matter, we did not know the firm. Our new approach led us to the firm.”

The initiative also includes personal requirements. Honda North America in-house attorneys and paralegals must attend or participate in at least one diversity event or CLE each year and each attorney is evaluated on his or her efforts to broaden diversity of our outside counsel. According to Peim, everyone has skin in the game and accountability is key: “If we are not meeting our goals, we now have to explain why.”

Peim’s desire to learn more about what other companies were doing took him to New York City last September where he attended the NAMWOLF Annual Meeting. That is where NAMWOLF CEO, Joel Stern first met Peim. “David came to the meeting and right from the beginning, he became engaged,” recalls Stern. “He attended the CLEs and sought out CLE panelists who impressed him, he attended the in-house only sessions to understand how other legal groups engage NAMWOLF firms, he walked the expo and interviewed firms, and he found me to talk about what he liked about our organization and what he wanted to see from the organization.” Peim says his impression of NAMWOLF was reminiscent of a kid being in a candy store.  NAMWOLF provided everything Honda’s Law Division Diversity and Inclusion committee was looking for in one convenient place.  Stern says what differentiated Peim from others was his immediate contact with NAMWOLF firms following the Annual Meeting. “[Honda North America] started interviewing our firms, hiring our firms, and looking for more opportunities to use our firms. They are avid users of our solicitation process and use our website to find firms.  He became a PAC in-house liaison, joined the in-house Advisory Council and proselytized our messages with his legal team and others outside of his company. I could not ask for a better advocate for NAMWOLF’s mission and vision than David.”  

Honda’s initiative is working. Last year, Honda North America added eleven new firms/attorneys in the finance area to its pool of outside counsel.  Of those new firms, nine were women and minority owned firms and one was a minority woman at majority firm. Most importantly, Peim believes that the Committee’s work has created a structure that is building a lasting foundation for inclusion and diversity to be an even deeper part of the Law Division at Honda. Stern believes Peim’s personal commitment to diversity and inclusion will be his legacy: “David and Honda ‘walk the talk’ and with David, it’s so much more than words – it’s actions.  At first glance, David Peim might not look like a diversity champion, but his diversity legacy is secure.

In 2016, the Financial Crimes Enforcement Network (FinCEN) issued its final rule on customer due diligence and beneficial ownership requirements (the “CDD Rule,” 31 CFR Parts 1010, 1020, 1023, et al.), promulgated under the Currency and Foreign Transactions Reporting Act of 1970, as amended by the USA PATRIOT Act of 2001 and other legislation, which legislative framework is commonly referred to as the ‘‘Bank Secrecy Act.” Notably, the Bank Secrecy Act lacks a requirement that financial institutions know the identity of the beneficial owners of their accounts – i.e., the individuals who control legal entity customers – which therefore allow a shield of anonymity for the beneficial owners. To address this perceived weakness and the limit the money laundering that it enabled, FinCEN issued the CDD Rule on May 11, 2016, and it became effective on July 11, 2016; however, covered financial institutions—including federally regulated banks, federally insured credit unions, mutual funds, brokers and dealers in securities, futures commission merchants, and introducing brokers in commodities—had until May 11, 2018, to come into full compliance with the CDD Rule.

The CDD Rule establishes four core requirements:

1. To identify and verify the identity of customers;
2. To identify and verify the identity of the beneficial owners of companies opening accounts;
3. To understand the nature and purpose of customer relationships to develop customer risk profiles;
4. To conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

Covered financial institutions are not required to retroactively identify and verify existing customers’ beneficial ownership information, but any new account (even for an existing customer) and all product renewals require CDD Rule compliance.  The CDD Rule, however, did not provide specific account-opening procedures.  Instead, covered financial institutions can retain existing procedures and modify them in a way that accommodates for compliance with the CDD Rule.   Financial institutions must implement risk-based procedures for conducting customer due diligence, focused on the nature of the customer relationship which allows the financial institution to develop a customer risk profile.  The draft rule circulated for comment included a Certification Regarding Beneficial Owners of Legal Entity Customers (the “Certification Form”) to be completed by customers to identify beneficial owners but, after comments were received, FinCEN determined that the use of the Certification Form should be permissive, such that covered financial institutions can satisfy the requirement through (1) the use of FinCEN’s Certification Form; (2) the use of the financial institution’s own forms, so long as they meet the requirements of 31 CFR §1010.230(b)(1); or (3) any other means that satisfy the substantive requirements of §1010.230(b)(1). 

Covered financial institutions are not required to retroactively identify and verify existing customers’ beneficial ownership information, but any new account (even for an existing customer) and all product renewals require CDD Rule compliance.  The CDD Rule, however, did not provide specific account-opening procedures.  Instead, covered financial institutions can retain existing procedures and modify them in a way that accommodates for compliance with the CDD Rule.   Financial institutions must implement risk-based procedures for conducting customer due diligence, focused on the nature of the customer relationship which allows the financial institution to develop a customer risk profile.  The draft rule circulated for comment included a Certification Regarding Beneficial Owners of Legal Entity Customers (the “Certification Form”) to be completed by customers to identify beneficial owners but, after comments were received, FinCEN determined that the use of the Certification Form should be permissive, such that covered financial institutions can satisfy the requirement through (1) the use of FinCEN’s Certification Form; (2) the use of the financial institution’s own forms, so long as they meet the requirements of 31 CFR §1010.230(b)(1); or (3) any other means that satisfy the substantive requirements of §1010.230(b)(1). 

The Certification Form (found at Appendix A to § 1010.230) requires that each individual who directly or indirectly owns twenty-five percent (25%) or more of the equity interests of a legal entity and wishes to open or renew an account, provide their name, date of birth, address, and social security or, if foreign, passport number and country of issuance or something equivalent. The same information is required for one individual with significant responsibility for managing the legal entity. Unless the covered financial institution has reason to believe the information is false, it may rely on the information provided by the customer in the Certification Form.

Covered financial institutions are not, however, required to identify beneficial ownership (direct or indirect) at a lower threshold (that is, below 25%) but FinCEN recommends, as stated in its April 3, 2018 Guidance Memorandum re: Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, that “collection and verification of beneficial ownership information at a lower threshold may be warranted, based on the financial institution’s own assessment of its risk relating to its customer [and] … any additional heightened risk could be mitigated by other reasonable means, such as enhanced monitoring or collecting other information…”  Financial institutions should use beneficial ownership information as they use other information they gather regarding customers (e.g., through compliance with CIP requirements), including for compliance with the Office of Foreign Assets Control regulations, and the currency transaction reporting (CTR) aggregation requirements. 

The CDD Rule will require financial institutions to invest significant time and money to revamp customer due diligence. FinCEN estimates that compliance with the CDD Rule will increase the time to open new business accounts by 15 to 30 minutes per account. Time spent monitoring accounts will also increase to comply with the rule. Hopefully, if a bank’s CDD Rule compliance is implemented alongside new technologies and improvements to existing procedures, reduction in loss due to fraud could counteract the new regulatory burden imposed by this rule.

While the CDD Rule will undoubtedly cause some degree of hardship for banks, if the rule performs as intended, it will enable both law enforcement and banks to more easily identify illicit money flows that previously may have gone unnoticed under the Bank Secrecy Act.

Market share liability—a controversial method of awarding damages created by the California Supreme Court in Sindell v. Abbott Laboratories—has only been successfully applied in limited situations, most notably in cases involving diethylstilbesterol (“DES”), a drug previously used to prevent miscarriages but later found to cause cancerous growths in daughters exposed to DES prior to birth.[1]  Market share liability allows a plaintiff to establish a cause of action against a group of manufacturers rather than requiring the plaintiff to identify the specific manufacturer of the product consumed by the plaintiff that caused the alleged harm.[2]  

For market share liability to be applied to a claim, all manufacturers in the action must have produced the product from an identical formula and a substantial share of the manufacturers in the market must be a part of the action.[3]  The justification for this doctrine is similar to that advanced by strict liability—product manufacturers are better able to bear the cost of injury resulting from defective product manufacturing.[4]

Courts have declined to apply market share liability to cases involving lead paint,[5] asbestos,[6] and handguns,[7] among other products.  The current opioid epidemic and the pending cases filed against opioid manufacturers may, however, lead the plaintiffs in those actions to pursue the application of this doctrine to their cases in an effort to hold opioid manufacturers liable for damages equal to their share of the opioid market.  Such a pursuit faces an uphill battle, however, as courts are generally disinclined to apply market share liability and plaintiffs may not be able to establish the factors for applying the doctrine to their cases. 

The opioid epidemic began in the late 1990s when pharmaceutical companies reassured the medical community that patients would not become addicted to opioid pain relievers.[8]  Healthcare providers began prescribing opioid pain relievers at greater rates, resulting in widespread misuse and an increase in opioid-involved deaths.[9]  The epidemic ultimately resulted in over 40 lawsuits being filed by cities, counties, and Native American tribes against various drug manufacturers, drug distributors, physicians, and pharmacies alleging improper marketing and distribution of various prescription opiate medications.[10]   

The United States Judicial Panel on Multidistrict Litigation centralized these lawsuits in the Northern District of Ohio before Judge Polster.[11]  According to the order establishing the MDL, the lawsuits contain common questions of fact including the plaintiffs’ allegations that (1) manufacturers of prescription opioid medications overstated the benefits and downplayed the risks of the use of their opioids and aggressively marketed these drugs to physicians, and/or (2) distributors failed to monitor, detect, investigate, refuse and report suspicious orders of prescription opioids.[12] 

With settlement negotiations already moving forward in the MDL[13], the parties may be looking towards creative resolutions to this complicated issue, including apportionment of damages based on market share liability.  However, the uniqueness of the MDL poses some problems.  First, unlike in Sindell, the defendants in the opioid lawsuits include not only manufacturers of the drugs but also distributors, pharmacies, and physicians.  Unlike most product liability lawsuits where plaintiffs simply allege a defective product caused them harm, plaintiffs in the opioid lawsuits are asserting the drug manufacturers deceptively marketed opioids and downplayed additional risks[14]; the drug distributors sold large quantities of opioids and failed to monitor and report suspicious opioid orders[15]; and the physicians promoted opioids in exchange for profit from the drug manufacturers.[16]  Apportionment of fault is therefore difficult given the varying claims against the defendants.  The parties would likely have to agree on the degree of fault for each type of defendant (manufacturers, distributers, pharmacies, or physicians) and then apportion liability based on their market share.

Second, assuming the cases were solely against the drug manufacturers, market share liability requires the products to be fungible, i.e., they must be interchangeable or of the same composition.[17]  If the drugs produced by the manufacturing defendants contained different chemical formulations, market share liability may need to be creatively utilized or expanded in order for it to be applied to these claims.  Furthermore, the opioid epidemic and resulting lawsuits center around several types of opioid pain relievers, both generic and name-brand, including oxycodone, hydrocodone, and fentanyl.[18]  Consequently, application of market share liability to these claims would involve determining the market share of each manufacturing defendant for multiple types of opioid pain relievers.

While the application of market share liability to these claims seems unlikely, one thing is clear—litigating these claims will be no easy feat.  The complexity of this litigation poses new and interesting legal challenges that we will continue tracking as they develop.  Stay tuned.

[1] Sindell v. Abbott Laboratories, 26 Cal. 3d 588, 593-594 (1980).

[2] Id.

[3] Id. at p. 611-612.

[4] Id. at 611.

[5] Santiago v. Sherwin-Williams Co., 782 F.Supp. 186, 192-195 (1992).

[6] Sholtis v. American Cyanamid Co., 568 A.2d 1196, 1204-1205 (N.J. 1989).

[7] Hamilton v. Beretta U.S.A. Corp., 750 N.E.2d 1055, 1067-1068 (N.Y. 2001).

[8] What is the U.S. Opioid Epidemic? https://www.hhs.gov/opioids/about-the-epidemic/index.html (last viewed July 16, 2018).

[9] Id.; Overdoes Deaths Involving Opioids, by Type of Opioid, United States, 2000-2016, available at https://www.cdc.gov/drugoverdose/data/index.html (last viewed July 16, 2018).

[10] Transfer Order at Schedule A, In re: National Prescription Opiate Litigation, 1:17-md-02804-DAP (2017) (MDL No. 2804), available at http://www.ohnd.uscourts.gov/sites/ohnd/files/2804TransferOrder.pdf.

[11] Id.

[12] Id.

[13] Minutes of 1-31-18 Settlement Conference and Scheduling Order, In re: National Prescription Opiate Litigation, 1:17-md-02804-DAP (2017) (MDL No. 2804), available at http://www.ohnd.uscourts.gov/sites/ohnd/files/mdl2804-111.pdf

[14] State of Ohio ex rel. Mike DeWine, Ohio Attorney General v. Purdue Pharma L.P.,  et al., available at https://www.ohioattorneygeneral.gov/Files/Briefing-Room/News-Releases/Consumer-Protection/2017-05-31-Final-Complaint-with-Sig-Page.aspx

[15] State of New Mexico ex rel. Hector Balderas, Attorney General v. Purdue Pharma L.P., et al., No. D-101-CV-2017-02541 available at https://www.nmag.gov/uploads/PressRelease/48737699ae174b30ac51a7eb286e661f/Attorney_General_Balderas_Adds_New_Defendants___Claims_to_Opioid_Lawsuit.pdf

[16] Salt Lake County v. Purdue Pharma L.P., et al., available at https://slco.org/uploadedFiles/depot/fDistrictAttorney/press_release/Opioid%20Litigation.pdf

[17] Skipworth v. Lead Industries Association, 690 A.2d 169 (Pa. 1997)

[18] National Institute on Drug Abuse – Opioids, available at https://www.drugabuse.gov/drugs-abuse/opioids.

Insurance companies have seen a recent rise in class actions involving claims based on the cost-of-insurance component of universal life insurance policies. Plaintiffs’ theories include contract, quasi-contract, consumer protection, and even elder abuse.

Universal Life Insurance Policies

Unlike term and whole life insurance, universal life policies are a hybrid of term life insurance and an investment account. For the life insurance component, the insurer charges a cost to cover the risk of the insured’s death (the cost of insurance or “COI”). The contract then gives the policyholder discretion to pay more than the cost of insurance; excess premiums accumulate with interest.

Insurers Face Cost-of-Insurance Class Actions

Historically, individual life insurance has not been an obvious area for class actions. To represent a class, a plaintiff must demonstrate that the proposed class is sufficiently large to make joinder impractical (numerosity), that the representatives’ claims are similar to those of the putative class members (typicality), and that the representatives and their counsel are non-conflicted and motivated to represent all class members (adequacy). See Fed. R. Civ. P. 23(a). If the class seeks money damages, the named plaintiffs must also prove that legal or factual questions that will drive the resolution can be answered with evidence common to all class members, that resolving those common questions will predominate over questions affecting individual members, and that a class action is superior to other methods for resolving the controversy. See Fed. R. Civ. P. 23(b)(3).

Recently, plaintiffs have convinced courts that claims arising from cost-of-insurance changes in universal life insurance policies are appropriate for class treatment because they involve form contracts and life insurance companies generally make decisions on a uniform basis.

Feller v. Transamerica.

In December, the Central District of California certified nationwide and California classes in a COI action against Transamerica Life Insurance Company. Feller v, Transamerica Life Ins. Co., No. 2:16-cv-01378, 2017 WL 6496803 (C.D. Cal. Dec. 11, 2017).

The Feller plaintiffs challenge Transamerica’s 2015 increase in cost-of-insurance rates on universal life insurance policies issued between 1981 and 2003. They claim Transamerica improperly raised the COI on these policies to recoup past losses and induce “shock lapses” among elderly policyholders. They asserted claims for breach of contract and injunctive relief, on behalf of a national class of policyholders, and additional claims, including elder abuse, on behalf of California and California senior subclasses.

The Feller plaintiffs won certification of all three proposed classes. The court found commonality, predominance, and superiority satisfied because plaintiffs’ claims involve form language and turn on the “common course of Transamerica’s alleged breach in increasing” the cost of insurances. The court rejected Transamerica’s arguments that it should interpret the policies subjectively and differently under the laws of the fifty states, finding breach of contract law did not vary greatly across the country, and ambiguity was resolvable through common methods of proof. The court also found the proposed class definitions ascertainable, with objective characteristics allowing prospective class members to self-identify using Transamerica’s own business records.

Transamerica has appealed.

Larson v. John Hancock

The John Hancock Life Insurance Company is also facing cost-of-insurance class actions. The most advanced is Larson v. John Hancock Life Insurance Company, a nationwide class action pending in California Superior Court involving breach of contract claims related to a single policy form. Larson, No. RG16 813803, slip op. at 6 (Cal. Super. Mar. 23, 2017).  (Twenty-two other policy forms are at issue in another action, 37 Besen Parkway, No. 15-cv-9924 (S.D.N.Y.).) The Hancock class actions allege not only an illegal increase, but also that Hancock failed to review and decrease cost-of-insurance, as required by the contract.

The court certified a nationwide class. As in Feller, the Larson court found that the policies’ form nature and the lack of material difference in state law regarding breach of contract made a nationwide class superior and manageable. The court rejected Hancock’s arguments that state law variations regarding extrinsic evidence undermined commonality and that varying statute-of-limitations defenses and related doctrines would swamp common issues, and found that could be calculated systematically.

The parties reached a nearly $60 million settlement. The Besen Park action also has a pending settlement.

Lessons for Defendants:

Consider Personal Jurisdiction

Recent Supreme Court precedent may provide grounds to dismiss claims where a defendant has no connection with the forum as to the particular plaintiff. In Bristol-Myers Squibb Co. v. Superior Court of California, 137 S. Ct. 1773 (2017) (BMS), the Court held that the fact that some plaintiffs could bring claims against the defendant in a specific forum did not support personal jurisdiction over the claims of other plaintiffs insufficiently connected to the forum.  In Wenokur v. AXA Equitable Life Insurance Company, the Arizona district court granted AXA’s motion to transfer venue to the Southern District of New York, in part because the Arizona court lacked personal jurisdiction over the claims of some putative class members and could not certify a nationwide class. 2017 WL 4357916, at *4 (D. Ariz. Oct. 2, 2017). The Feller court though, rejected Transamerica’s argument that, under BMS, the California court lacked personal jurisdiction over the claims of non-California residents. Feller, 2017 WL 6496803, at *16.

Differences Between State and Federal Courts

Defendants should also consider whether state-court actions can (or should) be removed to federal court. When related suits are pending in different states, state courts are limited to retaining or dismissing their own actions; federal courts, however, can transfer the litigation to a sister court, as the Arizona court did in Wenokur.  Federal-court defendants may also benefit from federal multidistrict litigation, which permits consolidation of litigation throughout the country in a single forum.

Cross-Case Defense Strategy

Besen Parkway’s class-certification motion should remind insurers to think about all cases, all the time. The Besen Parkway plaintiffs’ class certification motion relied heavily on the certification of a “virtually identical class case against Hancock” in Larson. They also used Hancock’s litigation conduct in Larson to support certification in Besen Parkway, arguing that Hancock had treated its contract as a form document in Larson, and suggested there that the Besen Parkway action would be a superior method of adjudicating the Besen Parkway insureds’ claims. See Besen Parkway, Doc. 122.

Premiums

When reviewing rates and making changes, insurers should carefully review their policies and document their actions. As Larson demonstrates, even an alleged failure to reduce the cost of insurance can support class allegations.  Policies should specify the permissible grounds and methods of cost-of-insurance modifications. Insurers should vet any statements on cost-of-insurance decisions.  See, e.g., In re Lincoln National COI Litigation, 269 F. Supp. 3d 622, 633-34 (E.D. Pa. 2017) (denying motion to dismiss, in part based on press releases and comments by the defendant’s president).

Conclusion

Cost of insurance, and insurers’ decision to increase (or not decrease) monthly deductions, is likely to continue to be a focus for class actions. Careful policy review and actions can minimize insurers’ exposure to suit and potentially avoid costly litigation and settlements.

The Marketing Best Practices (MBP) Committee is excited to announce that Practice Growth & Marketing Consultant, Lynn Fasi, will be our guest speaker at the NAMWOLF Annual Meeting. Lynn will present Unlocking the Secrets of Communication: How to read other people, focusing on key elements to improve your communication skills, including how to reinforce or undermine your verbal message with body language, read hands and feet, and foster multi-generational communication. Lynn will also cover the 7%-38%-55% Communications Rule and differences in the ways men and women communicate. Lynn brings 25 years of extensive experience working with top law firms, CPA firms and professional services companies to help them develop growth strategies to achieve their goals.  She has worked in-house as a Growth & Marketing Leader at a variety of firms, ranging from boutique firms to AmLaw 100 firms with over 500 attorneys and multiple offices across the nation. So if you need to figure out if a witness is telling the truth, or just brush up on your poker skills, join Lynn on Friday, Sept. 28, from 4:05-5:05 p.m. for a presentation that will leave you with a winning hand.