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Cyber Security of Consumers’ Financial Information

With the rapid growth of the use of technology in business comes great risk to consumers private information, and a concomitant risk to many of the businesses that are charged with the protection of that private information.  In recent years, the Federal Government has enacted regulations, albeit vague in form, in an attempt to manage these risks.  One such act, entitled the Gramm-Leach-Bliley Act (GLBA), or the Financial Services Modernization Act, was enacted by Congress in 1999 in an effort to provide a forward-looking framework within which “financial institutions” must proactively protect consumers’ nonpublic financial information.1

Financial institutions are required by the GLBA to “establish appropriate standards” to safeguard customer’s personal financial information, in order: “(1) to insure the security and confidentiality of customer records and information; (2) to protect against any anticipated threats or hazards to the security or integrity of such records; and (3) to protect against unauthorized access to or use of such records or information which could result in substantial harm or inconvenience to any customer.”2

In response to this directive, the Federal Trade Commission (FTC) promulgated the Safeguards Rule, which requires financial institutions subject to FTC jurisdiction to adopt safeguards against disclosure of customers’ personal information.3 The FTC’s Safeguards Rule is intentionally broad to allow flexibility for the broad range of businesses covered by the Rule.  It provides a “framework for developing, implementing, and maintaining the required safeguards, but leaves each financial institution discretion to tailor its information security program to its own circumstances.”4 The Rule requires each covered financial institution to implement steps including, but not limited to, designating employees to coordinate the safeguards in order to ensure accountability; identifying and assessing the risks to customer information in each relevant area of the company’s operation; and designing and implement information safeguards.5

CAUSES OF ACTION

Plaintiffs have attempted to bring suit under the GLBA for businesses’ alleged violations of the GLBA.  However, it has been consistently held that the GLBA does not provide for a private right of action.6 In fact, by its very terms, the GLBA can only be enforced by “the Federal functional regulators, the State insurance authorities, and the Federal Trade Commission.”7 Courts have held that, although the GLBA does not provide for a private cause of action, it does set forth identifiable standards, the breach of which may be used to satisfy an element of a common law negligence per se cause of action.8

Although case law indicates that a Plaintiff may bring an action in negligence per se based upon an alleged violation of the GLBA, defense counsel may defend against such a claim by utilizing a Motion for Summary Judgment establishing that the covered financial institution had written security policies in place to protect consumers’ financial information.  In Guin v. Brazos Higher Educ. Serv. Corp., Inc., No. CIV. 05-668 RHK/JSM, 2006 WL 288483 (D. Minn. Feb. 7 2006), Plaintiff alleged that Defendant owed a duty under the GLBA to secure Plaintiff’s private information, and the duty was breached by allowing an employee to keep nonencrypted private data on his laptop.  The court found that Plaintiff did not present sufficient evidence to support the claim that Defendant had breached a duty established by the GLBA, based upon the fact that Defendant had “written security policies, current risk assessment reports, and proper safeguards for its customers’ personal information as required by the GLB Act.”9

A negligence per se claim may also be defended against through a Motion to Dismiss based upon the Economic Loss Rule, which states that purely economic losses are not recoverable in negligence absent personal injury or property damage. A recent landmark case involving corporate giant TJ Maxx involved claims of negligence, which the court dismissed based upon the economic loss rule.10 In that case, TJ Maxx issued credit cards to consumers, who then used those cards to purchase goods at TJ Maxx stores. TJ Maxx discovered that hackers had stolen personal and financial information of consumers who used the credit cards.  The Plaintiffs formed a class action lawsuit against TJ Maxx to recover their costs and alleged various counts, including negligence.11

The Plaintiffs argued that their claims were not barred by the economic loss rule because they experienced property damage in that the compromised credit cards could no longer be used and that card verification codes were lost.  The court disagreed with Plaintiffs’ position on the basis that the cost of replacement cards is an economic loss, and dismissed the negligence count.12 Thus, to the extent the state recognizes the economic loss doctrine, actions based upon the theory of negligence per se may be disposed of at the Motion to Dismiss stage.

DAMAGES/EXPOSURE

The GLBA does not specify fines to be imposed upon violation of the Act.  However, potential exposure for businesses can be significant, as evidenced by the multimillion dollar settlement resulting from the TJ Maxx case.  The Plaintiffs settled with TJ Maxx for compensation to those injured, agreeing to implement a credit monitoring plan, institute identity theft insurance, and providing $6.5 million in attorneys’ fees and costs. TJ Maxx settled with 41 state Attorneys General for $9.75 Million and an agreement to fund state data protection and prosecution efforts.  The details of the information security program adopted by TJ Maxx are stringent, and require detailed levels of security. 13

In 2005, the first two instances of the FTC’s enforcement of the Safeguards Rule resulted in non-monetary settlements.  In these cases, the FTC issued a Complaint charging two mortgage companies with violation of the FTC’s Safeguards Rule for not having reasonable protections for consumers’ private information. The parties thereafter executed an Agreement Containing Consent Order, where the companies agreed to implement an assessment and report from a third-party professional, using procedures and standards that set forth security program safeguards appropriate for the businesses’ size and function.14

Thus, potential exposure for businesses in failing to implement security measures could entail significant monetary settlements/damages, as well as significant costs in implementing security plans that are likely more stringent than if implemented without the intervention of lawsuits and settlements.  The aforementioned discussion demonstrates the potential exposure to lawsuits, damages, and settlements under the emerging cyber security laws, and highlights the importance of proactively implementing security measures to protect not only consumer nonpublic information, but the time and resources of all involved.

1              Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (1999) (codified in scattered sections of 12 and 15 U.S.C.). The GLBA applies to “customers,” including “any person (or authorized representative of a person) to whom the financial institution provides a product or service, including that of acting as a fiduciary.” The “financial institutions” consist of “any institution engaged in the business of providing financial services to customers who maintain a credit, deposit, trust, or other financial account or relationship with the institution.”

2              15 U.S.C. §6801(b).

3              16 C.F.R. §314, Standards for Safeguarding Customer Information; Final Rule.

4              16 C.F.R. §314.4.

5              Id.

6              See 15 U.S.C. §6805; Dunmire v. Morgan Stanley DW, Inc., 475 F.3d 956, 960 (8th Cir. 2007) (“[n]o private right of action exists for an alleged violation of the GLBA”); Lentz v. Bureau of Med. Econ. (In re Lentz), 405 B.R. 893, 899 (Bankr.N.D.Ohio 2009) (“courts have consistently held there is no private right of action created by Congress in the GLBA”); French v. Am. Gen. Fin. Servs. (In re French), 401 B.R. 295, 310 (Bankr.E.D.Tenn.2009) (“[by its very terms, the Gramm-Leach-Bliley Act does not provide a private right of action”).

7              15 U.S.C. § 6805(a).

8              See Nicholas Homes, Inc. v. M & I Marshall & Ilsley Bank, N.A., 2010 WL 1759453 (D.Ariz., Apr. 30, 2010) (“The Court agrees that, although the GLBA does not provide for a private cause of action, it also does not preclude a common law cause of action.”), and Basham v. Pacific Funding Group, 2010 WL 2902368 (E. D.Cal., July 22, 2010) (“[T]he violation of a statute can be used to satisfy an element of a negligence cause of action.”).

9              Guin v. Brazos Higher Educ. Serv. Corp., Inc., No. CIV. 05-668 RHK/JSM, 2006 WL 288483, at *4 (D. Minn., Feb. 7, 2006).

10           In re TJX Companies Retail Security Breach Litigation, Civil Action No. 07-10162-WGY (D. Mass., Dec. 18, 2007).

11           Id.

12           Id.

13           Tara M. Desautels and John L. Nicholson, Pillsbury Winthrop Shaw Pittman LLP, TJ Maxx Settlement Requires Creation of Information Security Program and Funding of State Data Protection and Prosecution Efforts (2009), http://www.pillsburylaw.com/siteFiles/Publications/7F4F43B367B5276B0CFA6D13CFF4044C.pdf.

14           http://www.ftc.gov/opa/2004/11/ns.shtm.

Publicly Traded Companies Beware of Potential New Suits Per the SEC’s Cyber Risk Disclosure Recommendations

By:  Sherry Schwartz

On October 13, 2011, the Security Exchange Commission, Division of Corporations, released “new guidance” to the shareholder disclosure requirements of publicly traded companies.  Specifically, the SEC noted the significance of “cyber risks” in the scheme of assessing the overall risks and liabilities of a business.  The rationale for recommending the inclusion of cyber risks relied heavily upon the breadth of exposure they can entail, including:

Remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused. Remediation costs may also include incentives offered to customers or other business partners in an effort to maintain the business relationships after an attack; Increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; Lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; Litigation; and Reputational damage adversely affecting customer or investor confidence.[1]

What is the effect of this new guidance?  If nothing else, it certainly demonstrates near codification/recognition of the substantial impact any cyber security breach can have on the financial operation of a company.  Only time will tell if alleged failures to adequately disclose cyber risk or cyber incidents in accord with these recommendations will open the door to new investor/shareholder claims of insufficient and/or misleading disclosures.



[1] http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm

What is Private on Facebook?

Largent v. Reed, No. 2009-1823, slip op. (Pa. C.P. Franklin Co. Nov. 8, 2011).  Trial courts continue to allow discovery of social network (specifically Facebook) user profiles, and to deflect the privacy arguments offered to limit such discovery.  In Largent, a personal injury Plaintiff refused to provide access to her Facebook account as part of civil discovery.  In granting the Defendant’s Motion to Compel, the court provided an excellent synopsis of the overall state of the law in this area, a useful primer on the security and privacy setting available in Facebook, and illustrates the trend that courts throughout the country are refusing to view Facebook postings as “private.”  In fact, the court in Largent says:

“There is no reasonable expectation of privacy in material posted on Facebook. Almost all information on Facebook is shared with third parties, and there is no reasonable privacy expectation in such information.”  Id at 9 (internal citations omitted).

In response to the Plaintiff’s argument that she had modified the default account settings to provide more “privacy” on her account, the court further held:

[M]aking a Facebook page “private” does not shield it from discovery. This is so because, as explained above, even “private” Facebook posts are shared with others.  Id at 10 (internal citations omitted).

The Largent court closes its discussion of the fact that subpoenas served directly upon Facebook are improper, per the Stored Communications Act, see 18 U.S.C. §§ 2702-03, and that a request for Facebook access must have some good faith basis, and not be a mere fishing expedition.

Largent illustrates what appears to be the emerging majority rule on social networking discovery: if you can demonstrate a good faith basis for seeking the material, and make the request upon the person with the account (rather than the social network itself), the discovery will likely be permitted.  Whether the reasoning of Largent may apply to a social network or similar site with greater user privacy and less ubiquity, however, remains to be seen.

Appellate Rights for Arbitration Litigants

As those in the industry are aware, the standard AIA documents – as well many of the other form contracts in construction – include arbitration provisions, the result of which is that many construction matters are litigated in arbitration fora. While arbitration is theoretically not as expensive a means of dispute resolution as the court system, the concern is that, absent very limited circumstances, parties have virtually no appellate rights after a final ruling.  AFloridatrial court recently dealt with this issue and in doing so reminded us that there is, indeed, a modicum of appellate rights for parties in arbitration.  We thought our readers would benefit from the education of that court’s ruling. 

 

            The trial court has limited jurisdiction and power over decisions rendered by arbitrators, and is similarly limited in reviewing those decisions.  In Yeary v. Superior Pools, Spas, & Waterfalls, Inc., 19 Fla. L. Weekly Supp. 418a, the 17th Judicial Circuit in and for Broward County, in its appellate capacity, determined that the county court had no authority to modify an arbitration award to designate a contractor as the prevailing party and award attorney’s fees.  Specifically, in Yeary, a contractor brought an action in county court against owners of real property to recover damages for an alleged breach of contract and to foreclose on a construction lien, and the owners counterclaimed for breach of contract.  Pursuant to an arbitration provision in the contract, the contractor elected to transfer all claims to binding arbitration. 

 

            The arbitrators awarded more money to the contractor than to the owners, but the award did not identify a prevailing party and denied the contractor’s request for attorney’s fees.  The contractor then moved the county court to modify and correct the award, arguing that the arbitrator’s decision not to award attorney’s fees was contrary to established law because it was the prevailing party.  The trial court remanded the claims to the arbitrators and asked for clarification as to the basis for the award and as to why attorney’s fees had been denied.  The arbitrators responded that the award was “based only in equity, not on contract or lien.”  Following the clarification from the arbitrators, the trial court agreed with the contractor, and designated the contractor the prevailing party and awarded entitlement to attorney’s fees.  The owner appealed. 

 

            The circuit court, serving in its appellate capacity, overturned the order designating the contractor as the prevailing party, and the award of attorney’s fees.  The appellate court determined that trial court did not have the authority to designate the contractor as the prevailing party and to award it attorney’s fees.  Under the Florida Arbitration Code, an arbitrator has no authority to award attorney’s fees unless the parties by agreement expressly waive their statutory right to have the issue of attorney’s fees decided in court.  See Fla. Stat. § 682.11.  The court explained that by the contractor submitting the prevailing party issues to the arbitrators, initially, as a matter of law, the contractor waived its entitlement to have the prevailing party (along with a potential award of attorney’s fees) determined by the trial court. 

 

            The law inFloridais well-settled that attorney’s fees cannot be awarded as a matter of equity.  As mentioned above, the arbitrators responded, in clarifying the initial decision, that the award was based only in equity.  Thus, there was no basis to award fees.           

 

            The decision in Yeary cautions those individuals and/or entities wishing to reserve their rights to have a trial court retain jurisdiction to determine attorney’s fees.  Per this opinion, they must be careful at the contracting stage not to draft language that subsequently will be interpreted by a court to expressly waive such right.

Preserving Coverage Defenses – The Latest Word

For an insurer, numerous obligations are triggered upon notification of the existence of a claim.  One of these is when a coverage defense can be asserted.  The United States Court of Appeals for the Eleventh Circuit recently clarified that in order to raise valid coverage defenses and steer clear of preventable pitfalls, insurers must be cognizant of the timing provisions required under Florida Statute 627.426, also known as the Florida Claims Administration Statute (FCAS).  The Eleventh Circuit has jurisdiction over federal cases originating in the States of Alabama, Georgia, and Florida.  Under the FCAS, the term “coverage defense” means “a defense to coverage that otherwise exists.”  In other words, even though the insured’s loss does not fall outside the scope of its coverage, other factors justify relieving the insurer of its obligation to cover a particular loss.

The FCAS places two clearly-defined time requirements upon an insurer and the failure to strictly comply with those requirements can result in the failure of an otherwise valid coverage defense.  The operative portion of the FCAS states that a liability insurer may not deny coverage based on a coverage defense unless:

(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and

(b) Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:

(1) gives written notice to the named insured by registered or certified mail of its refusal to defend the insured;

(2) obtains from the insured a non-waiver agreement following full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation; or

(3) retains independent counsel which is mutually agreeable to the parties.

Fla. Stat. § 627.426(2).

In Mid-Continent Cas. Co. v. Basdeo, 11-12938, 2012 WL 2094376 (11th Cir. June 12, 2012), the U.S. Court of Appeals for the Eleventh Circuit held that “failure to comply with both requirements [of 627.426(2)] results in waiver of the coverage defense.”  That case involved Hurricane Wilma-related property damage in 2005.  The owner of the property, Southgate, hired First State, a contractor insured by Mid-Continent, to perform roof replacements.  During the repair work, tarps that First State installed were poorly secured and caused water damage to one of the resident’s units.  On September 11, 2006, the unit owner made a claim for damages stemming from First State’s work to its insurer, Mid-Continent.  On July 18, 2007, Basdeo and other residents filed suit against First State, but First State never notified Mid-Continent of the lawsuit, did not request that Mid-Continent provide a defense, and was uncooperative and generally unresponsive to Mid-Continent’s attempts to contact First State.

On or about August 8, 2007, Mid-Continent requested that First State provide further information and reiterated that First State was contractually obligated to cooperate.  On September 19, 2007, the Association also filed suit against First State.  On October 3, 2007, Mid-Continent received a copy of the Basdeo lawsuit from Basdeo’s attorney.  By April 2008, a default had been entered against First State in both lawsuits.  It was not until April 17, 2008, that Mid-Continent formally denied coverage to First State.

The Court addressed two issues that are important to the construction industry.  The first issue was whether coverage could be denied due to the insured’s failure to request a defense.  The Court held that Mid-Continent was estopped from asserting this coverage defense because it failed to comply with the FCAS.   The Court stated that “having received no response to its August 8, 2007 letter and having learned that a motion for default had already been granted against First State, Mid–Continent ‘should have known’ of its coverage defense relating to First State’s failure to request a defense on or shortly after October 3, 2007. At that point, Mid-Continent was obligated to comply with both conditions.”

The Court then addressed a second issue – whether Mid-Continent could deny coverage based on First State’s failure to cooperate pursuant to the terms of the insuring agreement.  The Court reached the same conclusion that it reached in relation to First State’s failure to request a defense: that the failure to cooperate is also a coverage defense and that Mid-Continent “should have known” of that defense by or shortly after October 3, 2007 when it first received a copy of the subject lawsuit.  That, in turn, triggered its obligation under the FCAS to notify First State within thirty days of its reservation of rights to assert the failure-to-cooperate coverage defense.

In other words, the time requirements under the FCAS begin to run as soon as the insurer knew or should have known of any potential coverage defense and it cannot raise a coverage defense, such as the failure to request a defense or the failure to cooperate, if it does not strictly comply with the FCAS.  Insurers should take note of this decision and be mindful of the strict time requirements the FCAS imposes so that all available coverage defenses are preserved.

 

Subpoenas in Arbitration: Not as Easy as One Would Think

Numerous construction contracts and subcontracts include provisions requiring the parties to arbitrate their disputes, either in lieu of litigation or as a condition precedent to trial.  Arbitration is a preferred means of alternative dispute resolution as it minimizes the time and expense of litigation and, in some cases, a jury trial.  One example of costs saving is discovery in arbitration proceedings.  Discovery in arbitration is typically limited in comparison to litigation in either the State or Federal court systems.  However, parties occasionally need information from non-parties to support their defenses or claims, which gives rise to the need to issue subpoenas. Florida’s Arbitration statute allows the arbitrator to issue subpoenas to non-party witnesses and to compel them to bring documents to the proceedings.

As a practical matter, the parties typically move the arbitrator to issue the subpoenas.  The Arbitration rule, in Florida, that controls the subpoena process, in large part, mirrors the rule in the State court system, which is found in Florida Rule of Civil Procedure 1.410.  The Federal rule, codified in the Federal Arbitration Act, Section 7, is unclear as to whether the arbitrator or parties have the ability to compel non-party witnesses to produce documents prior to arbitration.  This article discusses the problems inherent in this process and the best approach, in our view, of dealing with it when your case is in Federal Court.

There is currently a split among the Federal Appellate Circuits’ interpretation of Section 7 of the Federal Arbitration Act.  Section 7 defines an arbitral panel’s power to compel the appearance of a witness and production of documents of a non-party in a Federal arbitration hearing.  Section 7 states that “[t]he arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.”  Federal Arbitration Act, 9 U.S.C. § 7.  The phrase that is at the center of the split in the Circuits is “bring with him” as it relates to any documents that the non-party witness produces based on the subpoena.

The Second Circuit, comprised of Connecticut, New York, and Vermont, and Third Circuit, comprised of Delaware, New Jersey, and Pennsylvania, have held that Section 7 gives an arbitrator the power to issue a subpoena to a non-party for the production of documents and compel his or her appearance at the final hearing, but not to compel the production of documents prior to his or her appearance at the final hearing.  These courts interpret the phrase “bring with him” to mean that the non-party witness does not need to produce the documents until he brings them with him to the final hearing.

The Sixth Circuit, comprised of Kentucky, Michigan, Ohio, and Tennessee, and Eighth Circuit, comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, South Dakota, and North Dakota, have held that if an arbitrator can subpoena the production of documents on a non-party witness, then the arbitrator should be able to decide when the documents should be produced, which allows for the production of documents prior to the final hearing.  The Sixth and Eight Circuits have reasoned that arbitration exists and is successful due to its efficiency, and that it would be prudent to allow the arbitrator to determine how and when documents are produced by non-parties to help achieve maximum efficiency in the proceeding.

The Fourth Circuit, comprised ofMaryland, North Carolina, South Carolina, Virginia, and West Virginia, has taken a hybrid approach.  The Fourth Circuit has held that an arbitrator can force the production of documents from a non-party witness prior to the arbitration only under special circumstances, in a purported effort to aid efficiency, noting, however, that non-party witnesses only need to produce documents upon their appearance at the arbitration.  “Special circumstances” are not defined.  However, the Fourth Circuit did state that to minimally qualify as “special circumstances,” the documents would need to be unavailable to the parties through any other means.

To date, the United States Supreme Court has not addressed this issue, thus preventing a uniform interpretation in the Federal Circuit Courts.  Moreover, several of the Circuit Courts have yet to rule on the issue, including the Eleventh Circuit, comprised of Alabama, Georgia, and Florida.  As arbitration remains a potentially efficient and cost-effective means of alternative dispute resolution, it is important to understand the important potential limitations on discovery in arbitration.  Given the current state of the law, when arbitrating a claim, the key is to have the arbitrators authorize the subpoenas.  In the event that the non-party fails to respond to the subpoena, it is wise to seek court intervention for the limited purpose of addressing the failure to respond, as would be the case in litigation.  However, the non-party or opposing counsel may argue that the court has no jurisdiction to adjudicate the issue, which may be an area in which the law is equally unclear.

Bid Shopping Still in Vogue, Ask the Subcontractor

            The crude reality for most construction subcontractors is that after expending much time, effort and resources in preparing the lowest bid for a general contractor that is, itself, bidding a construction project, the general contractor will take the lowest subcontractor bid and go bid shopping after it is awarded the contract. A subcontractor’s conditional bid, which is when the subcontractor warns the general contractor that if its bid is used for bid shopping it shall constitute an acceptance of the bid that would create a binding contract, is unenforceable. And that is, of course, problematic for subcontractors.

In West Construction, Inc. v. Florida Blacktop, Inc., 37 Fla. L. Weekly D959, (FLA. 4th DCA 2012), the Court reversed a final judgment in favor of an asphalt subcontractor and against a general contractor. In West Construction, the subcontractor claimed that an enforceable contract was created when the general contractor went bid shopping with the subcontractor’s bid. The subcontractor, Florida Blacktop, Inc., had submitted a bid for asphalt paving in response to a request from West, who used the subcontractor’s bid in its own bid of a general construction project. The bid proposal from the subcontractor included a fine print statement that was basically intended to create a binding contract with the general contractor if the bid was the lowest bid and the general contractor was awarded the project.

West was awarded the project and a letter to the project’s owner listed Blacktop as its paving asphalt subcontractor. Blacktop thought it had the job, even sending a thank you note to West. As is not uncommon in the industry, West did not contract with Blacktop and contracted with another paving subcontractor, one which was likely willing to meet or beat Blacktop’s offer. Blacktop argued that there was an understanding with West that amounted to an enforceable verbal contract. The 4th District disagreed. The court reasoned that in the absence of evidence of the existence of a previous agreement by West to the conditions in Blacktop’s bid proposal, the mere use of Blacktop’s bid in submitting its bid did not constitute acceptance.

If a subcontractor doesn’t want its bid to be used for bid shipping without an assurance it will get the job, a prior (separate) agreement needs to be in place with the general contractor.

Is the Futility Doctrine Futile?

The construction industry is not only riddled with a web of technical rules, regulations, and contractual scenarios, the lawyers in this industry often rely on such technicalities to prevail in litigation on behalf of their clients – occasionally contrary to what appears just and fair.  However, from time to time, the courts step up and say “enough! We must be governed by the spirit, not just the letter, of the law.”  This brief article discusses the United States District Court for the Middle District of Florida’s (Tampa Division) recent application of the futility doctrine in the context of a Miller Act claim in U.S. f/u/o Cemex v. EPB, 2012 WL 831610 (M.D. Fla. March 12, 2012).

In EPB, subcontractor, EPB, sub-subcontracted with John Carlo, Inc., to complete a portion of a government project for the United States Air Force.  John Carlo purchased materials from Cemex in connection with its sub-subcontract.  EPB and John Carlo’s contract provided that John Carlo was to supply EPB “with sworn statement(s), lien waiver(s), guarantee(s) and other reasonably requested documents,” as a condition precedent to final payment.  “EPB withheld Carlo’s payment because Carlo had not provided the lien waivers and all of the releases required” per their contract.  However, Cemex (John Carlo’s assignee) argued it had met the conditions precedent because it provided John Carlo with a lien waiver, conditioned upon EPB’s payment.  EPB argued the letter of the law; that John Carlo and other sub-subcontractors of John Carlo had not provided the required documentation and therefore John Carlo (and by extension)
Cemex were not entitled to payment.

Cemex argued it was entitled to summary judgment because the “lien” period had expired under the Miller Act and therefore providing lien waivers would be futile.  The Middle District noted that “[u]nder the doctrine of futility, a party may be excused from performing a condition precedent to enforcement of the contract, if performance of the condition would be futile.” Alvarez v. Rendon, 953 So. 2d 702, 708-709 (Fla. 5th DCA 2007).  However, the court held that genuine issues of material fact remained as to “whether there were other effectual purposes for the [subject] documents.”  The court further held that EPB could require John Carlo and its other sub-subs to provide general releases of liability.

While the Middle District denied Cemex’s motion for summary judgment, it recognized the futility doctrine in the Miller Act context and implicitly held that the futility issues could be addressed by the trier of fact and, ultimately, prove dispositive at trial.  Thus, the futility doctrine in this context is seemingly not futile.

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