As the 2013/4 Term came to a close, the Court of Appeals addressed a miscellaneous panoply of issues – both interesting and mundane – involving criminal law procedure, civil litigation practice and contract disputes.
Do lost profits constitute general or consequential damages? Answer: General damages (under the facts of the case).
Biotronik A.G. v. Conor Medystems Ireland, Ltd., 2014 NY Slip Op 02101 (decided March 27, 2014) arose out “of a breach of contract action, [in which] plaintiff sought lost profits from an exclusive distribution agreement as general damages.” The contract, relating to the resale of “a drug-eluting coronary stent” known as “CoStar”, was governed by New York law, and provided that:
Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damage with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason.
Conor terminated the agreement after it was acquired by Johnson & Johnson. J&J “marketed another drug-eluting stent[.]” Conor terminated the agreement after withdrawing its application to the Food & Drug Administration for approval of the sale of CoStar in the United States. Biotronik “sued [Conor] for breach of contract and sought damages for lost profits related to its resale of the stents [asserting that] “its claim for lost profits on the resale of CoStar constituted general damages, falling outside the scope of the agreement’s limitation on damages.”
Supreme Court “concluded that the lost profits sought by [Biotronik] were consequential damages and subject to the agreement’s damages limitation provision[.]” The Appellate Division affirmed. The Court of Appeals reversed and “[a]greed with [Biotronik] that damages must be evaluated within the context of the agreement, and that, under the parties’ exclusive distribution agreement, the lost profits constitute general, not consequential damages.”
The Court of Appeals noted that:
The agreement was not a simple resale contract, where one party buys a product at a set price to sell at whatever the market may bear. Rather, the price plaintiff paid defendant reflected the actual sales, and sales price, of CoStar stents. The agreement required plaintiff to pay defendant a transfer price calculated as a percentage of plaintiff’s net sales of Costar: 61% for direct sales and 75% for indirect sales. Each quarter, the parties would calculate a minimum price based on net sales during the preceding quarter. Plaintiff remained obligated to pay defendant the full transfer price for its sales, even when the actual sales price exceeded the minimum price. Thus, the contract would only operate if plaintiff sold stents, and the payment defendant received bore a direct relationship to the market price plaintiff could obtain.
And explained the distinction between general and consequential damages:
General damages “are the natural and probable consequence of the breach” of a contract…They include “money that the breaching party agreed to pay under the contract”…By contrast, consequential, or special, damages do not “directly flow from the breach”.
The Court acknowledged what many lawyers know:
The distinction between general and special contract damages is well defined, but its application to specific contracts and controversies is usually more elusive”…Lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are “the direct and immediate fruits of the contract”…Otherwise, where the damages reflect a “loss of profits on collateral business arrangements,” they are only recoverable when “(1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties”…
Lost profits from the breach of a distribution contract are subject to these principles, and we have recognized such profits as general damages where the nature of the agreement supported a conclusion that they flowed directly from the breach.
The distinction at the heart of these cases is whether the lost profits flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty…
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Here, the agreement used plaintiff’s resale price as a benchmark for the transfer price. The contract clearly contemplated that plaintiff would resell defendant’s stents. That was the very essence of the contract. Any lost profits resulting from a breach would be the “natural and probable consequence” of that breach…
What are the burdens with respect to service by a party to a litigation of a subpoena on a non-party to the suit? Answer: The party serving the subpoena must give notice of the circumstances or reasons underlying the subpoena. The objectant must then establish that the discovery sought is “utterly irrelevant” or an exercise in futility. And to overcome the objection, the subpoenaing party must then demonstrate that the discovery sought is “material and necessary” (i.e. relevant) to the prosecution or defense of the proceeding.
Matter of Kapon v. Koch, 2014 NY Slip Op 02327 (decided April 3, 2014), arose from the following set of facts:
Petitioner John Kapon is a New York resident and Chief Executive Officer of Acker, Merrall & Condit Company (AMC), a New York corporation with a principal place of business in New York City. AMC is a retailer and auctioneer of fine and rare wines, and is the employer of petitioner Justin Christoph. In 2009, respondent William Koch, a wine collector, commenced a fraud action in California (California action) against Rudy Kurniawan alleging that Kurniawan had sold Koch 149 bottles of counterfeit wine through AMC’s auctions and private sales. Neither AMC nor petitioners are parties to the California action. However, in 2008, Koch had commenced an action against AMC in Supreme Court, New York County (New York action) concerning five bottles of alleged counterfeit wine that Kurniawan had consigned to AMC and that AMC had sold to Koch.
In early 2012, Koch, purportedly seeking disclosure in the California action, served subpoenas on petitioners pursuant to CPLR 3119. That section, known as the “Uniform Interstate Depositions and Discovery Act,” provides a streamlined mechanism for disclosure in New York for use in an action that is pending in another state or territory within the United States (see CPLR 3119 [a] ; [b]; [c]).
The Court of Appeals summarized the prior proceedings:
Petitioners commenced this special proceeding to quash the subpoenas pursuant to CPLR 2304. The petition also alternatively sought, among other relief, the imposition of a protective order pursuant to CPLR 3103 staying the deposition until both parties in the California action had been deposed, limiting the scope of the deposition questioning to matters material and necessary to that action, and limiting the use of the deposition transcripts to the California action. Petitioners asserted that the subpoenas were defective because they were served before Koch had taken defendant Kurniawan’s deposition, failed to state with particularity the reasons why disclosure was sought, and constituted an “end-run” around the discovery deadline in the` New York action. Koch countered that petitioners possessed information that was relevant to the California action.
Supreme Court denied the motions to quash and for a protective order; it did, however, permit petitioners to object to, and decline to answer, deposition questions to the extent that the answers would divulge AMC’s confidential information and trade secrets. The Appellate Division unanimously affirmed, holding that Supreme Court “providently exercised its discretion in denying petitioners’ motion, since petitioners failed to show that the requested deposition testimony [was] irrelevant to the prosecution of the California action”…It also concluded that petitioners failed to meet their burden of articulating “a sufficient, nonspeculative basis for postponing their depositions or imposing restrictions on the scope and use of the deposition testimony” (id.). This Court granted petitioners leave to appeal and we now affirm.
With respect to the subpoenaing party, the Court of Appeals held that:
Although the nonparty bears the initial burden of proof on a motion to quash, section 3101 (a) (4)’s notice requirement nonetheless obligates the subpoenaing party to state, either on the face of the subpoena or in a notice accompanying it, “the circumstances or reasons such disclosure is sought or required.” The subpoenaing party must include that information in the notice in the first instance…lest it be subject to a challenge for facial insufficiency. Contrary to petitioners’ contention, however, the subpoenaing party’s notice obligation was never intended by the Legislature to shift the burden of proof on a motion to quash from a nonparty to the subpoenaing party, but, rather, was meant to apprise a stranger to the litigation the “circumstances or reasons” why the requested disclosure was sought or required.
As to the objecting party, the Court of Appeals wrote:
An application to quash a subpoena should be granted [o]nly where the futility of the process to uncover anything legitimate is inevitable or obvious or where the information sought is “utterly irrelevant to any proper inquiry”…It is the one moving to vacate the subpoena who has the burden of establishing that the subpoena should be vacated under such circumstances…
And finally, as to the subpoenaing party, the Court of Appeals held that:
We conclude that the “material and necessary” standard…is the appropriate one and is in keeping with this State’s policy of liberal discovery. The words “material and necessary” as used in section 3101 must “be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity”. Section 3101 (a) (4) imposes no requirement that the subpoenaing party demonstrate that it cannot obtain the requested disclosure from any other source. Thus, so long as the disclosure sought is relevant to the prosecution or defense of an action, it must be provided by the nonparty.
The Court’s decision rested on CPLR 3101 and, therefore applies all subpoena.
Do a bankrupt law firm’s pending hourly fees matters constitute partnership “property” or “unfinished business” within the meaning of New York’s Partnership Law? Answer: No.
In Re Thelen, 2014 NY Slip Op 04879 (decided July 1, 2014), arose from two cases in which the United States Court of Appeals for the Second Circuit certified questions to the New York Court of Appeals. Those cases arose out of the following facts:
On October 28, 2008, the partners of the law firm Thelen LLP (Thelen) voted to dissolve the firm, which was insolvent. In carrying out the dissolution, Thelen’s partners adopted the Fourth Amended and Restated Limited Liability Partnership Agreement (“Fourth Partnership Agreement”) and a written Plan of Dissolution. The Fourth Partnership Agreement provided that it was governed by California law and, unlike its predecessor agreements, included an “Unfinished Business Waiver.” The waiver recited that “[n]either the Partners nor the Partnership shall have any claim or entitlement to clients, cases or matters ongoing at the time of the dissolution of the Partnership other than the entitlement for collection of amounts due for work performed by the Partners and other Partnership personnel prior to their departure from the Partnership. The provisions of this [section] are intended to expressly waive, opt out of and be in lieu of any rights any Partner of the Partnership may have to “unfinished business” of the Partnership, as the term is defined in Jewel v Boxer, 156 Cal. App.3d 171 [203 Cal. Rptr. 13] (Cal. App. 1 Dist. 1984), or as otherwise might be provided in the absence of this provision through the interpretation of the [California Uniform Partnership Act of 1994, as amended].” This kind of waiver is referred to as a “Jewel Waiver,” after Jewel v Boxer (156 Cal App 3d 171 [Cal Ct App 1984]), the intermediate appellate court case that inspired it. Applying the Uniform Partnership Act (UPA), the Jewel court held that, absent an agreement to the contrary, profits derived from a law firm’s unfinished business are owed to the former partners in proportion to their partnership interests. The Thelen partnership adopted the waiver with the “hope that, [it would] serve as an inducement to encourage partners to move their clients to other law firms and to move Associates and Staff with them, the effect of which will be to reduce expenses to the Partnership, and to assure that client matters are attended to in the most efficient and effective manner possible, and to help ensure collection of existing accounts receivable and unbilled time with respect to such clients.” Following Thelen’s dissolution, 11 Thelen partners joined Seyfarth Shaw LLP (Seyfarth) 10 in its New York office and one in California. The former Thelen partners transferred unfinished matters to Seyfarth, which billed clients for their services.
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On August 16, 2005, the law firm Coudert Brothers LLP (Coudert) dissolved in accordance with the terms of its partnership agreement. That same day, the equity partners adopted a “Special Authorization,” whereby the equity partners authorized “the Executive Board . . . to take such actions as it may deem necessary and appropriate, including, without limitation, the granting of waivers, notwithstanding any provisions to the contrary in the Partnership Agreement . . . , in order to: “a. . . . sell all or substantially all of the assets of . . . the Firm to other firms or service providers, in order to maximize the value of the Firm’s assets and business; “b. wind down the business of the Firm with a view to continuing the provision of legal services to clients and the orderly transition of client matters to other firms or service providers, in order to maximize the value of the Firm’s assets and business to the extent practicable.” Coudert partners were subsequently hired by several different firms. As of the date of the firm’s dissolution, there remained between Coudert and its clients partly performed contracts for the provision of legal services. When former Coudert partners joined other firms, those firms were retained by Coudert’s former clients to conclude these unfinished legal matters. The client matters were completed by the new firms on an hourly basis, with only two exceptions.
And prior proceedings:
On September 18, 2009, Thelen filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. After his appointment as the Chapter 7 trustee of Thelen’s bankruptcy estate, Yann Geron (Geron) commenced an adversary proceeding against Seyfarth in the United States District Court for the Southern District of New York. Geron sought to avoid the “Unfinished Business Waiver” as a constructive fraudulent transfer under 11 USC §§ 544 and 548 (a) (1) (B) and California state law, and to recover the value of Thelen’s unfinished business for the benefit of the estate’s creditors. On the assumption that pending hourly matters were among a law firm’s assets, Geron argued that Thelen’s partners fraudulently transferred those assets to individual partners without consideration when they adopted the “Unfinished Business Waiver” on the eve of dissolution. Seyfarth moved for judgment on the pleadings, arguing that New York rather than California law defined whether it received any “property interest.” In a decision dated September 4, 2012, the District Court Judge first agreed with Seyfarth that New York law governed. He then concluded that under New York law, the “unfinished business doctrine” does not apply to a dissolving law firm’s pending hourly fee matters, and that a partnership does not retain any property interest in such matters upon the firm’s dissolution. In the Judge’s view, to rule otherwise would “conflict with New York’s strong public policy in favor of client autonomy and attorney mobility”…and “result in an unjust windfall for the Thelen estate, as ‘compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.’”…He further observed that “[s]uch an expansion of the [unfinished business] doctrine would violate New York’s public policy against restrictions on the practice of law” and “clash directly with New York’s Rules of Professional Conduct”; specifically, the rule generally forbidding fee splitting…Accordingly, the Judge granted Seyfarth’s motion for judgment on the pleadings. The Judge sua sponte certified his order for interlocutory appeal…By decision dated November 15, 2013, the Second Circuit agreed with the District Court that New York law governed the parties’ dispute, and asked us to answer two unresolved questions of New York law regarding the applicability and scope of the “unfinished business doctrine”.
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In September 2006, Coudert filed for protection from its creditors pursuant to Chapter 11 of the Bankruptcy Code. Developmental Specialists, Inc. (DSI), as administrator of Coudert’s bankruptcy estate, brought 13 separate adversary proceedings against the firms that had hired the former Coudert partners. These lawsuits were premised on the unfinished business doctrine. More specifically, DSI argued that the defendant firms were liable to Coudert for any profits derived from completing the client matters that the former Coudert partners brought to those firms. The firms moved for summary judgment, arguing that the unfinished business doctrine did not apply to matters billed on an hourly basis. DSI cross-moved for a declaration that the unfinished client matters were Coudert’s property on the day it dissolved. In a decision dated May 24, 2012, the District Court denied the firms’ motion for summary judgment and granted DSI’s cross-motion. The Judge agreed with DSI that “[u]nder the Partnership Law, the Client Matters are presumed to be Coudert’s assets on the Dissolution Date. While the Coudert Partnership Agreement could have provided otherwise, it does not; on the contrary, it confirms the statutory presumption, as does the text of the Special Authorization adopted by the partners who voted to dissolve the firm. In the absence of any evidence that Coudert’s partners intended to exclude pending but uncompleted client representations from the firm’s assets, DSI is entitled to a declaration that the Client Matters were Coudert assets on the Dissolution Date. Because they are Coudert assets, the Former Coudert Partners are obligated to account for any profits they earned while winding the Client Matters up at the Firms…”
The District Court certified the questions presented to the United States Court of Appeals for the Second Circuit which, in turn certified two questions to the New York Court of Appeals: specifically, “Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm? “If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?”
The New York Court of Appeals concluded that:
Treating a dissolved firm’s pending hourly fee matters as partnership property, as the trustees urge, would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct. By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees’ approach creates an “unjust windfall,” as remarked upon by the District Court Judge in Geron…Next, because the trustees disclaim any basis for recovery of profits from the pending client matters of a former partner who leaves a troubled law firm before dissolution, their approach would encourage partners to get out the door, with clients in tow, before it is too late, rather than remain and work to bolster the firm’s prospects. Obviously, this run-on-the-bank mentality makes the turnaround of a struggling firm less likely. And attorneys who wait too long are placed in a very difficult position. They might advise their clients that they can no longer afford to represent them, a major inconvenience for the clients and a practical restriction on a client’s right to choose counsel. Or, more likely, these attorneys would simply find it difficult to secure a position in a new law firm because any profits from their work for existing clients would be due their old law firms, not their new employers. The trustees answer that clients do not care whether they pay one law firm or another, so long as their legal affairs are handled properly, and that requiring law firms to forfeit the fees earned by their lawyers’ efforts has no impact on attorneys or clients. We disagree for the reasons already mentioned. Additionally, clients might worry that their hourly fee matters are not getting as much attention as they deserve if the law firm is prevented from profiting from its work on them. The notion that law firms will hire departing partners or accept client engagements without the promise of compensation ignores commonsense and marketplace realities. Followed to its logical conclusion, the trustees’ approach would cause clients, lawyers and law firms to suffer, all without producing the sought-after financial rewards for the estates of bankrupt firms. Ultimately, what the trustees ask us to endorse conflicts with New York’s strong public policy encouraging client choice and, concomitantly, attorney mobility.
In Morpheus Capital Advisors LLC v. USB AG, 2014 NY Slip Op 04112 (decided June 10, 2014), the Court of Appeals “[was] asked to decide…whether a financial brokerage agreement gave plaintiff-broker the right to a commission when defendant-owner transferred certain distressed assets to a fund created by the Swiss National Bank as part of a 2008 bailout.” The Court concluded that “the contract gave plaintiff a standard exclusive agency, not an exclusive right to sell the assets, and therefore no commission was due on the transaction at issue.”
The brokerage agreement provided that:
In a section entitled “Scope of Engagement”, the agreement set forth 10 services that Morpheus would provide during the contract term. These included identifying, introducing and assessing potential investors, negotiating terms, and providing advice regarding valuation of the assets and the development of “alternative transaction structures”. In addition, UBSRE agreed that Morpheus “shall have the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement.” The contract would automatically expire, unless renewed, on December 31, 2008. The term “Transaction” was left undefined. However, in a provision dealing with Morpheus’ commission called a “Success Fee” the contract defined a related term “Transaction Amount” as “the agreed value of the Student Loan Assets which are transferred or sold to a third party, or in respect to which the risk of first loss is assumed by a third party, in one or a series of transactions.” Morpheus’ Success Fee was to be calculated as a percentage of the Transaction Amount according to certain formulas. In addition, the contract required UBSRE to pay Morpheus a $150,000 signing fee and a retainer of $50,000 per month, neither of which is at issue here.
Finally, section five of the contract, entitled “Termination of Engagement Exclusivity”, provided as follows:
It is expressly agreed that following the expiration or termination of this Agreement, [Morpheus] will continue to be entitled to receive fees as described above that have accrued prior to such expiration or termination but are unpaid. It is also expressly agreed that if [UBSRE] completes any Transaction with a party or parties (“Investor”) (1) introduced to [UBSRE] by [Morpheus], (2) introduced to [UBSRE] by another party other than [Morpheus], but [Morpheus] performed substantially all the services set forth herein in Section 1 prior to the termination of this Agreement, then [Morpheus] shall be entitled to its full fees as described above, until March 31, 2009.
The Court of Appeals noted that the Appellate Division had established the applicable law:
The general rule is that where an exclusive right of sale is given a broker, the principal cannot make a sale [herself] without becoming liable for the commissions. But where the contract is merely to make the broker the sole agent, the principal may make a sale [herself] without the broker’s aid, if such sale is made in good faith and to some purchaser not procured by the broker…Put differently, “[a] broker is entitled to a commission upon the sale of the property by the owner only where the broker has been given the exclusive right to sell; an exclusive agency merely precludes the owner from retaining another broker in the making of the sale”…
The Court of Appeals endorsed the dichotomy established by the Appellate Division; and adopted:
The case law of the lower courts holding that a contract giving rise to an exclusive right of sale must “clearly and expressly provide that a commission is due upon sale by the owner or exclude the owner from independently negotiating a sale”… Requiring an affirmative and unequivocal statement to establish a broker’s exclusive right to sell is consistent with the general principle that an owner’s freedom to dispose of her own property should not be infringed upon by mere implication.
The Court rejected the argument that these principles should be limited to real estate brokerage agreements.
Are parties who agree to negotiate required to negotiate forever? Answer: No (under the facts of this case).
IDT Corp. v. Tyco Group, S.A.R.I, 2014 NY Slip Op 04044 (decided June 5, 2014), arose out of a case where, over a period of 15 years, “ the parties…ha[d] alternately negotiated and litigated over the development and use of a telecommunications system.”
The Court of Appeals recited the “back story”:
The relationship between the parties goes back at least to 1999, when IDT and Tyco…signed a memorandum of understanding relating to a joint venture that would develop an undersea fiber optic telecommunications system. Three lawsuits arising out of this proposed transaction were brought in 2000, and were settled by a Settlement Agreement dated October 10, 2000. Two later lawsuits, the one we decided in 2009 and the one we decide today, arose out of the Settlement Agreement.
The Court’s 2009 decision:
The settlement agreement, among other things…called for Tyco to provide IDT with an “indefeasible right of use” (IRU) of certain fiber optic capacity free of charge for a 15-year period. The capacity was to be on Tyco’s TyCom Global Network (TGN), a subsea cable system planned to connect North America, Asia and Europe. At the time of the settlement, the TGN was not yet constructed. The agreement states that “[t]he IRU shall be documented pursuant to definitive agreements to be mutually agreed upon and, in any event, containing terms and conditions consistent with those described herein.” These further definitive agreements, and the IRU, were to be in writing and consistent with Tyco’s standard agreements with similarly situated customers. Tyco’s standard agreements were not in existence at the time the settlement was made.
The subsequent developments:
Five weeks after our decision, counsel for IDT sent a letter to Tyco demanding that Tyco “immediately comply with [its] obligations” under the 2000 Settlement Agreement by providing fiber optic capacity to IDT. Tyco replied that it had no further obligations under the Settlement Agreement — a position that it reaffirmed several times in the following months — but nevertheless agreed to negotiate. This round of negotiations was no more successful than the previous one, and IDT brought the present case in November of 2010, asserting separate causes of action for breach of contract and for breach of Tyco’s duty to negotiate in good faith.
The pending litigation:
IDT’s new complaint recounts a series of written and oral communications between IDT and Tyco in 2009 and 2010. This narrative concludes with the allegation that in an October 13, 2010 telephone conversation:
Tyco continued to insist on terms that conflicted with the Settlement Agreement and made a definite and final communication to IDT of Tyco’s intent to forgo its obligations under the Settlement Agreement, including its obligation to provide to IDT the use of the Wavelengths described in the Settlement Agreement for fifteen years and in a manner fully consistent with that described in the Settlement Agreement.
The proceedings below:
On Tyco’s motion pursuant to CPLR 3211, Supreme Court, interpreting our previous decision to mean “that Tyco has no further obligations under the Settlement Agreement”, dismissed IDT’s 2010 complaint for failure to state a cause of action. The Appellate Division reversed, concluding that Tyco’s “obligations…did not have an expiration date” and that “the parties were obligated to continue to negotiate until either side insisted that the open terms be as set forth in [Tyco’s] standard agreements” (IDT Corp. v. Tyco Group, S.A.R.L., 104 AD3d 170, 176 [1st Dept 2012]). The Appellate Division also held that “the defendants’ statements that they had no further obligations to negotiate” were “an anticipatory breach of the contract” (id. at 176-177), and that the result of the previous action did not bar IDT’s present claims under the doctrine of res judicata or collateral estoppel (id. at 178). Two Justices concurred in the result, agreeing that our decision in the previous action did not bar the present one and finding IDT’s allegation, quoted above, that Tyco had insisted on terms in conflict with the Settlement Agreement to be sufficient “at this pre-discovery stage of the proceeding” to withstand a motion to dismiss (id. at 179 [concurring op of Friedman, J.]).
And, in dismissing the complaint, the Court concluded that:
As our 2009 decision makes clear, parties may enter into a binding contract under which the obligations of the parties are conditioned on the negotiation of future agreements. In such a case, the parties are obliged to negotiate in good faith. But that obligation can come to an end without a breach by either party. There is such a thing as a good faith impasse; not every good faith negotiation bears fruit. As then-District Judge Leval explained in Teachers Ins. and Annuity Assoc. v. Tribune Co. (670 F Supp 491, 505 [SD NY 1987]):
“[I]f, through no fault of either party, no final contract were reached, either because the parties in good faith failed to agree on the open secondary terms, or because, as often happens in business, the parties simply lost interest in the transaction and by mutual tacit consent abandoned it without having reached final contract documents, no enforceable rights would survive based on the preliminary commitment.”
May towns ban oil and gas production activities, including hydrofracking, within municipal boundaries, by the adoption of local zoning laws? Answer: Yes.
Matter of Wallach v. Town of Dryden, 2014 NY Slip Op 04875 (decided June 30, 2014), involved two different appeals from the Third Department and arose out of the following sets of facts:
In 2006, petitioner Norse Energy Corp. USA (Norse), through its predecessors, began acquiring oil and gas leases from landowners in Dryden for the purpose of exploring and developing natural gas resources. The Town Board took the position that gas extraction activities were prohibited in Dryden because such operations fell within the catch-all provision of its zoning ordinance that precluded any uses not specifically allowed. Nevertheless, the Town Board decided to engage in a “clarification” of the issue. After holding a public hearing and reviewing a number of relevant scientific studies, the Town Board unanimously voted to amend the zoning ordinance in August 2011 to specify that all oil and gas exploration, extraction and storage activities were not permitted in Dryden. The amendment also purported to invalidate any oil and gas permit issued by a state or federal agency. In adopting the amendment, the Town Board declared that the industrial use of land in the “rural environment of Dryden” for natural gas purposes “would endanger the health, safety and general welfare of the community through the deposit of toxins into the air, soil, water, environment, and in the bodies of residents.”
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Respondent Town of Middlefield, which includes a portion of the Village of Cooperstown, is located in Otsego County, New York, and its principal industries are agriculture and tourism. Its land use is regulated by a master plan and zoning ordinance. Similar to Dryden, there has been no oil or gas presence in Middlefield until 2007, when plaintiff Cooperstown Holstein Corporation (CHC) executed two leases with a landowner to explore the possibility of developing natural gas resources through hydrofracking.
Although the Town claimed that its zoning ordinance already prohibited natural gas exploration on the basis that it was not listed as a permissible land use, it undertook a lengthy and detailed review of the issue in 2011. After commissioning a study to weigh the impacts that hydrofracking would have on Middlefield and conducting public meetings, the Town Board, by a unanimous vote, amended its master plan to adopt a zoning provision classifying a range of heavy industrial uses, including oil, gas and solution mining and drilling, as prohibited uses. The Town Board reasoned that the “Cooperstown area is known worldwide for its clean air, clean water, farms, forests, hills, trout streams, scenic viewsheds, historic sites, quaint village and hamlets, rural lifestyle, recreational activities, sense of history, and history of landscape conservation,” and concluded that industrialization, such as hydrofracking, would “eliminate many of these features” and “irreversibly overwhelm the rural character of the Town.”
As a result:
Norse commenced [a] hybrid CPLR article 78 proceeding and declaratory judgment action to challenge the validity of the zoning amendment. Norse asserted that Dryden lacked the authority to prohibit natural gas exploration and extraction activities because section 23-0303 (2) of the Environmental Conservation Law (ECL) the supersession clause in the Oil, Gas and Solution Mining Law (OGSML) demonstrated that the State Legislature intended to preempt local zoning laws that curtailed energy production. In response, Dryden moved for summary judgment, seeking a declaration that the zoning amendment was a valid exercise of its home rule powers.
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CHC promptly brought [an] action to set aside the zoning law, contending that it was preempted by the supersession provision in the OGSML. CHC and Middlefield each moved for summary judgment. Supreme Court denied CHC’s motion and granted Middlefield’s cross-motion to dismiss the complaint, upholding the legality of the zoning law…The Appellate Division affirmed, and we granted CHC leave to appeal…
The Court of Appeals summarized the applicable law:
Our analysis begins with a review of the source of municipal authority to regulate land use and the limits the State may impose on this power. Article IX, the “home rule” provision of the New York Constitution, states that “every local government shall have power to adopt and amend local laws not inconsistent with the provisions of this constitution or any general law…except to the extent that the legislature shall restrict the adoption of such a local law.”…To implement this constitutional mandate, the State Legislature enacted the Municipal Home Rule Law, which empowers local governments to pass laws both for the “protection and enhancement of [their] physical and visual environment” and for the “government, protection, order, conduct, safety, health and well-being of persons or property therein”…The Legislature likewise authorized towns to enact zoning laws for the purpose of fostering “the health, safety, morals, or the general welfare of the community”…As a fundamental precept, the Legislature has recognized that the local regulation of land use is “[a]mong the most significant powers and duties granted…to a town government”…
We, too, have designated the regulation of land use through the adoption of zoning ordinances as one of the core powers of local governance…Without question, municipalities may “enact land-use restrictions or controls to enhance the quality of life by preserving the character and desirable aesthetic features of [the community]…” And we have repeatedly highlighted the breadth of a municipality’s zoning powers to “provide for the development of a balanced, cohesive community” in consideration of “regional needs and requirements…”
With the following caveat:
That being said, as a political subdivision of the State, a town may not enact ordinances that conflict with the State Constitution or any general law…Under the preemption doctrine, a local law promulgated under a municipality’s home rule authority must yield to an inconsistent state law as a consequence of “the untrammeled primacy of the Legislature to act with respect to matters of State concern”…But we do not lightly presume preemption where the preeminent power of a locality to regulate land use is at stake. Rather, we will invalidate a zoning law only where there is a “clear expression of legislative intent to preempt local control over land use…”
Aware of these principles, Norse and CHC do not dispute that, absent a state legislative directive to the contrary, municipalities would ordinarily possess the home rule authority to restrict the use of land for oil and gas activities in furtherance of local interests. They claim, however, that the State Legislature has clearly expressed its intent to preempt zoning laws of local governments through the OGSML’s “supersession clause,” which reads:
“The provisions of [the OGSML] shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law…”
And concluded that:
Manifestly, Dryden and Middlefield engaged in a reasonable exercise of their zoning authority as contemplated in Gernatt when they adopted local laws clarifying that oil and gas extraction and production were not permissible uses in any zoning districts. The Towns both studied the issue and acted within their home rule powers in determining that gas drilling would permanently alter and adversely affect the deliberately-cultivated, small-town character of their communities. And contrary to the dissent’s posture, there is no meaningful distinction between the zoning ordinance we upheld in Gernatt, which “eliminate[d] mining as a permitted use” in Sardinia…, and the zoning laws here classifying oil and gas drilling as prohibited land uses in Dryden and Middlefield. Hence, Norse’s and CHC’s position that the town-wide nature of the hydrofracking bans rendered them unlawful is without merit, as are their remaining contentions.
At the heart of these cases lies the relationship between the State and its local government subdivisions, and their respective exercise of legislative power. These appeals are not about whether hydrofracking is beneficial or detrimental to the economy, environment or energy needs of New York, and we pass no judgment on its merits. These are major policy questions for the coordinate branches of government to resolve. The discrete issue before us, and the only one we resolve today, is whether the State Legislature eliminated the home rule capacity of municipalities to pass zoning laws that exclude oil, gas and hydrofracking activities in order to preserve the existing character of their communities. There is no dispute that the State Legislature has this right if it chooses to exercise it. But in light of ECL 23-0303 (2)’s plain language, its place within the OGSML’s framework and the legislative background, we cannot say that the supersession clause added long before the current debate over high-volume hydrofracking and horizontal drilling ignited evinces a clear expression of preemptive intent. The zoning laws of Dryden and Middlefield are therefore valid.
Did the New York City Board of Health exceed its regulatory authority, engage in improper law making and infringe upon the legislative jurisdiction of the City Council in adopting the “Sugary Drinks Portion Cap Rule”? Answer: Yes
Matter of New York Statewide Coalition of Hispanic Chambers of Commerce, 2014 NY Slip Op 04804 (decided June 26, 2014), arose out of the following facts:
The New York City Board of Health is part of the City’s Department of Health and Mental Hygiene and consists of the Commissioner of that Department, the Chairperson of the Department’s Mental Hygiene Advisory Board, and nine other members, appointed by the Mayor. In June 2012, as part of its effort to combat obesity among City residents, the Department proposed that the Board amend Article 81 of the City Health Code so as to restrict the size of cups and containers used by food service establishments for the provision of sugary beverages. After a preliminary vote by the Board, a Notice of Public Hearing was published, seeking comments from the public. The substantial number of comments both before and during the July hearing indicated a groundswell of public interest and concern. On September 13, 2012, the Board voted, with one abstention, to adopt the Department’s proposed rule — referred to as the “Portion Cap Rule” — to go into effect in March 2013.
The Portion Cap Rule provides in relevant part that “[a] food service establishment may not sell, offer, or provide a sugary drink in a cup or container that is able to contain more than 16 fluid ounces” and “may not sell, offer or provide to any customer a self-service cup or container that is able to contain more than 16 fluid ounces…” A “sugary drink” is defined as a non-alcoholic beverage that “is sweetened by the manufacturer or establishment with sugar or another calorie sweetener; . . . has greater than 25 calories per 8 fluid ounces of beverage; . . . [and] does not contain more than 50 percent of milk or milk substitute by volume as an ingredient…” The Portion Cap Rule does not apply to establishments, such as supermarkets and convenience stores, that are subject to regulation and inspection by the New York State Department of Agriculture and Markets.
And subsequent legal proceedings:
In October 2012, petitioners, six national or statewide not-for-profit and labor organizations, commenced this hybrid article 78 proceeding and declaratory judgment action seeking to invalidate the Portion Cap Rule. In addition to the Board of Health, the Department of Health and Mental Hygiene and its Commissioner are named as respondents.
On March 11, 2013, Supreme Court, New York County granted the petition, declared the Portion Cap Rule invalid, and permanently enjoined respondents from implementing or enforcing it. Supreme Court addressed two arguments raised by petitioners — first, whether the Board of Health had exceeded its regulatory authority “and impermissibly trespassed on legislative jurisdiction”…and second, whether the Portion Cap Rule is “arbitrary and capricious.” The court ruled in favor of petitioners on both contentions.
The Court of Appeals summarized Boreali v. Axelrod:
With respect to the first issue, the court surveyed the history of the New York City Charter and reached the conclusion that the elective New York City Council is the sole legislative body in the City, rejecting respondents’ contention that the Board of Health has inherent law-making authority. Supreme Court applied our decision in Boreali v Axelrod (71 NY2d 1 ), in which we held that the New York State Public Health Council overstepped its regulatory authority when it adopted regulations prohibiting smoking in a wide variety of indoor areas open to the public that had previously been considered, but not adopted, by the State Legislature. Supreme Court addressed the four considerations that we had identified in Boreali, and concluded that each of those factors weighed in favor of invalidating the Portion Cap Rule…Finally, Supreme Court found the Portion Cap Rule…arbitrary and capricious, noting that “it applies to some but not all food establishments in the City, [and] it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories…”
Reviewed the Appellate Division’s application of Boreali to the facts:
With respect to the first Boreali factor, relating to whether the agency engaged in the balancing of competing concerns of public health and economic cost, thus acting on its own idea of sound public policy, the Appellate Division reasoned that the Board did not act solely with a view toward public health considerations but engaged in policy-making when it adopted the Portion Cap Rule. The court observed that the Portion Cap Rule is “especially suited for legislative determination as it involves ‘difficult social problems,’ which must be resolved by ‘making choices among competing ends…’”
With regard to the second Boreali factor, whether the agency created its own comprehensive set of rules without benefit of legislative guidance, the Appellate Division concluded that the Board illicitly created the Portion Cap Rule on a “clean slate”, and was not merely conducting permissible interstitial rule-making. The court noted that “the Board of Health does not dispute that neither the state legislature nor the City Council has ever promulgated a statute defining a policy with respect to excessive soda consumption”.
Turning to the third Boreali factor, which relates to whether the challenged rule governs an area in which the Legislature has repeatedly tried to reach agreement in the face of substantial public debate and vigorous lobbying by interested factions, the Appellate Division noted that “[o]ver the past few years, both the City and State legislatures have attempted, albeit unsuccessfully, to target sugar sweetened beverages. For instance, the City Council has rejected several resolutions targeting sugar sweetened beverages (warning labels, prohibiting food stamp use for purchase, and taxes on such beverages). Moreover, the State Assembly introduced, but has not passed, bills prohibiting the sale of sugary drinks on government property and prohibiting stores with 10 or more employees from displaying candy or sugary drinks at the check out counter or aisle. While the Portion Cap Rule employs different means of targeting the sale of certain beverages than those considered by the legislative bodies, it pursues the same end, and thus addresses the same policy areas as the proposals rejected by the State and City legislatures. This is a strong indication that the legislature remains unsure of how best to approach the issue of excessive sugary beverage consumption…”
Finally, with respect to the fourth Boreali factor, whether the development of the rule required expertise in the field of health, the Appellate Division concluded that the Board had not “exercised any special expertise or technical competence in developing the Portion Cap Rule…”
Followed by the Court’s own Boreali analysis:
In light of Boreali’s central theme that an administrative agency exceeds its authority when it makes difficult choices between public policy ends, rather than finds means to an end chosen by the Legislature, we need not, in this appeal, address the fourth Boreali factor: whether special expertise or technical competence was involved in the development of the rule. We do not mean to imply that the fourth factor will always lack significance. A court might be alerted to the broad, policy-making intent of a regulation, and the absence of any perceived need for agency expertise, by the fact that the rule was adopted with very little technical discussion. Here, regardless of who or which arm of government first proposed or drafted the Portion Cap Rule, and regardless of whether the Board exercised its considerable professional expertise or merely rubber-stamped a rule drafted outside the agency, the Portion Cap Rule is invalid under Boreali.
Under what circumstances may a Court impose the sanction of striking a party’s pleading for conduct that constitutes a fraud on the Court? Answer: Sanctions may be imposed where a court finds, by clear and convincing evidence, conduct knowingly designed to hinder fair adjudication of the case.
CDR Creances S.A.S. v. Cohen, 2014 NY Slip Op 03294 (decided May 8, 2014), “[arose] from fraudulent conduct by defendants during the course of litigation by [CDR] to recover wrongfully diverted and concealed proceeds of a loan agreement.”
Litigation filed in 2003 and 2006 charged Maurice and Leon Cohen with “an extensive and intricate conspiracy orchestrated to conceal stock transfers and other transaction[.]” The Cohens were subsequently arrested in Florida “and charged…with tax evasion [and] a conspiracy to commit fraud on the New York court by forging documents and suborning perjury.” After a jury trial, the Cohens were convicted of tax evasion and sentenced to ten years in federal prison.
After the conviction and sentencing:
[CDR] again moved pursuant to CPLR 3126 to strike defendants’ pleadings and for a default judgment in the consolidated 2003 and 2006 actions, alleging all of the defendants perpetrated fraud on the court. Supreme Court held a full evidentiary hearing at which [co-defendants] the Habibs testified to the Cohens’ carefully orchestrated scheme of lies and evidence fabrication. Repeating much of their federal testimony, they recounted a meeting held prior to their depositions in New York, attended by defendants Maurice Cohen, Leon Cohen, Robert Maraboeuf and Allegria Aich, during which the Cohens instructed them and the other defendants to provide false and misleading testimony. At the meeting the Cohens provided the Habibs with a written “script”, which plaintiff introduced into evidence at the hearing, which was intended to provide the Habibs with false answers to be given to their attorney and at their depositions. The Cohens told the Habibs to deny knowing both Maurice and Leon, to present themselves as representatives of the entities the Cohens’ denied controlling, and to give false testimony at their depositions that would corroborate false testimony of defendants Aich and Maraboeuf. According to the Habibs, the Cohens also created fictitious characters, Francis Lavalle and Jim Cox, to further the Cohens’ lies and conceal their actions. Joelle Habib was instructed to testify that Francis Lavalle hired her and that Jim Cox controlled another entity the Cohens denied ownership of. Aich had also falsely testified that Lavalle controlled the New York Flatotel and Cox controlled Blue Ocean. The Habibs further testified that Aich and Maraboeuf repeatedly perjured themselves in their depositions in an effort to conceal Maurice and Leon Cohen’s involvement in the conversion of proceeds from the loan agreement and the sale of the New York Flatotel.
Based upon the testimony:
…Supreme Court determined, by clear and convincing evidence, that defendants had perpetrated a fraud on the court and granted plaintiff’s motion, basing its authority on the court’s inherent power to take action to preserve the integrity of the judicial process. Supreme Court found, inter alia, Maurice and Leon Cohen had suborned perjury by providing the Habibs with a “script” containing false answers to be given to their attorneys and at their depositions; created Francis Lavalle and Jim Cox wholly fictitious individuals and intentionally implicated them as controlling the defendant corporations; forged the affidavits of others in an effort to disclaim ownership of the defendant corporations; secretly paid each of their co-defendants legal fees through corporate entities in an effort to financially coerce their false testimony; and intentionally and pervasively ignored court ordered discovery obligations. Supreme Court also found that defendants Maraboeuf and Aich intentionally lied at their depositions, denying a relationship with Maurice and Leon Cohen. Moreover, defendant Aich urged Maraboeuf and the Habibs to lie in accordance with the scripts they were given, and to falsely state that they paid their own legal fees. Supreme Court struck defendants’ answers and entered default judgment.
The Appellate Division affirmed. Upon appeal to the Court of Appeals, the parties disputed whether the evidentiary standard was proof by “clear and convincing evidence” of fraud, as CDR asserted, or the higher burden “conclusively demonstration” of such wrongdoing, as the Cohens contended.
The Court of Appeals adopted the “clear and convincing evidence “standard utilized by the federal courts:
The evidentiary standard applied by the federal courts is sufficient to protect the integrity of our judicial system, and discourage the type of egregious and purposeful conduct designed to undermine the truth-seeking function of the courts, and impede a party’s efforts to pursue a claim or defense. We adopt this standard and conclude that in order to demonstrate fraud on the court, the non-offending party must establish by clear and convincing evidence that the offending “party has acted knowingly in an attempt to hinder the fact finder’s fair adjudication of the case and his adversary’s defense of the action…A court must be persuaded that the fraudulent conduct, which may include proof of fabrication of evidence, perjury, and falsification of documents concerns “issues that are central to the truth-finding process…” Essentially, fraud upon the court requires a showing that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense…A finding of fraud on the court may warrant termination of the proceedings in the non-offending party’s favor…For “when a party lies to the court and [its] adversary intentionally, repeatedly, and about issues central to the truth-finding process, it can fairly be said that [the party] has forfeited [the] right to have [the] claim decided on the merits.” Therefore, once a court concludes that clear and convincing evidence establishes fraud on the court, it may strike a pleading and enter a default judgment.
And admonished that:
We caution that dismissal is an extreme remedy that “must be exercised with restraint and discretion”…Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the nonoffending party; where the conduct is perpetrated repeatedly and wilfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here. Dismissal is inappropriate where the fraud is not “central to the substantive issues in the case”…or where the court is presented with “an isolated instance of perjury, standing alone, [which fails to] constitute a fraud upon the court”…In such instances, the court may impose other remedies including awarding attorney fees,…awarding other reasonable costs incurred…or precluding testimony…In the rare case where a court finds that a party has committed fraud on the court warranting dismissal, the court should note why lesser sanctions would not suffice to correct the offending behavior…
Are the police required to advise a drunk-driving suspect, before processing a blood test to determine alcohol content, that the suspect’s attorney was pursuing contact with law enforcement personnel? Answer: Yes
In People v. Washington, 2014 NY Slip Op 03190 (decided May 6, 2014), “Washington was driving an automobile in Nassau County at approximately 2:00 A.M. when she struck and killed a pedestrian.” Washington, who told police that “she had consumed four beers ‘a little while ago’…“failed [a] field sobriety tests and was arrested for driving while intoxicated at 2:40 A.M.
Following Washington’s arrest and after she was transported to Nassau County police headquarters:
[D]efendant’s family contacted an attorney to arrange for him to represent her. The lawyer telephoned the Sheriff’s Department at 3:29 A.M. and, shortly thereafter, an operator at police headquarters transferred his call at 3:32 A.M. to a sergeant. Counsel explained that he represented defendant, requested information about her status and asked the sergeant to instruct police officers not to question or test his client. The attorney was informed that he would be contacted by the arresting officer and the conversation ended at 3:39 A.M.
At the same time that the attorney was pursuing telephone contact with law enforcement personnel, the police were processing defendant and advising her about the need for a chemical test to determine her blood alcohol content. The police read a standard chemical test authorization to defendant at 3:30 A.M. and she then signed the form, indicating her consent to take the breathalyzer test. Defendant was not informed about the attorney’s communication before initiation of the breathalyzer test at 3:39 A.M.
Washington, who was indicted for manslaughter, vehicular manslaughter, and…driving while intoxicated,” moved to suppress the results of the breathalyzer test. Supreme Court suppressed the chemical test results. The Appellate Division affirmed, “concluding that the police violated [Washington’] constitutional rights because she was not alerted to the lawyer’s intervention before the breath test occurred and the People failed to establish that such notification would have unduly interfered with the administration of the breathalyzer[.]”
The Court of Appeals discussed the legislative and policy considerations:
Driving while intoxicated is “a very serious crime”…that has long posed a “menace” to highway safety…and has caused many tragic consequences…In the effort to combat alcohol-related driving offenses, law enforcement agencies have been granted statutory authority…to use an important investigative tool chemical tests to determine blood alcohol content…Since alcohol metabolically dissipates from the bloodstream…the use of these tests:
“is a time-sensitive proposition; to maximize the probative value of BAC evidence, the police endeavor to administer chemical tests as close in time as possible to the motor vehicle infraction, typically within two hours of an arrest…”
To promote this objective, operators of motor vehicles in New York are deemed to have issued consent to chemical testing under Vehicle & Traffic Law § 1194 (2) (a). The statute is designed to encourage those suspected of alcohol-related driving offenses to comply with requests to submit to chemical tests in order to obviate the need for securing court orders authorizing blood tests…Section 1194 “grants a motorist a qualified right to decline to voluntarily take a chemical test” after being warned that a refusal “will result in the immediate suspension and ultimate revocation of the motorist’s driver’s license for one year,” along with evidence of the refusal being admissible at any subsequent criminal trial…In general, “an uncounseled waiver of the statutory right to refuse the test provides no basis for suppressing the results…”
The Court summarized the state of the law:
In People v. Gursey (22 NY2d 224 ), however, we recognized a limited right of the accused to seek legal assistance in alcohol-related driving cases. We held that, based on the warning procedure set forth in section 1194 (2) (b), “if a defendant arrested for driving while under the influence of alcohol asks to contact an attorney before responding to a request to take a chemical test, the police ‘may not, without justification, prevent access between the criminal accused and his lawyer, available in person or by immediate telephone communication’”…Violation of this right to legal consultation generally requires suppression of the scientific evidence…Because time is of the essence in obtaining accurate chemical test evidence…we further observed in Gursey that a suspect’s communication with a lawyer regarding “the exercise of legal rights should not extend so far as to palpably impair or nullify the statutory procedure requiring drivers to choose between taking the test or losing their licenses…”
It is therefore well established that “there is no absolute right to refuse to take the test until an attorney is actually consulted, nor can a defendant use a request for legal consultation to significantly postpone testing”…In other words, conferring with counsel is permissible only if “’such access does not interfere unduly’” with timely administration of the test…
And concluded that:
In our view, the statutory right to legal consultation applies when an attorney contacts the police before a chemical test for alcohol is performed and the police must alert the subject to the presence of counsel, whether the contact is made in person or telephonically…The fact that defendant consented to the breathalyzer about the same time that the attorney was communicating with the police is not dispositive since defendant, after conferring with counsel, could have revoked her consent prior to administration of the test…The police therefore must advise the accused that a lawyer has made contact on the accused’s behalf. Once so informed, the accused may choose to consult with counsel or forego that option and proceed with the chemical test.
In this case, when the attorney telephoned the police to intervene on defendant’s behalf, the police should have informed defendant of this development since breathalyzer testing had not yet begun. Defendant could then have decided if she wished to discuss her situation with counsel. Since the police officers here made no effort to advise defendant about the lawyer’s communication and the People did not demonstrate that a notification of this nature would have been unreasonable under the circumstances, we hold that the chemical test was administered in violation of the statutorily-based Gursey right to counsel. Consequently, the courts below correctly concluded that defendant is entitled to suppression of the test results.
Does criminal prosecution under a local law addressing “cyberbullying” comport with the Free Speech Clause of the First Amendment to the United States Constitution? Answer: No.
People v. Marquan M., 2014 NY Slip Op 04881 (decided July 1, 2014), arose because the 15-year old high school student was prosecuted for “cyberbullying, under an Albany County law after he “anonymously posted sexual information about fellow classmates on a publicly-accessible internet website.”
The Court of Appeal summarized the history of the Albany County legislation:
Before the addition [by the State] of the 2012 amendments to the Dignity for All Students Act, elected officials in Albany County decided to tackle the problem of cyberbullying. They determined there was a need to criminalize such conduct because the “State Legislature ha[d] failed to address th[e] problem” of “non-physical bullying behaviors transmitted by electronic means…” In 2010, the Albany County Legislature adopted a new crime the offense of cyberbullying which was defined as “any act of communicating or causing a communication to be sent by mechanical or electronic means, including posting statements on the internet or through a computer or email network, disseminating embarrassing or sexually explicit photographs; disseminating private, personal, false or sexual information, or sending hate mail, with no legitimate private, personal, or public purpose, with the intent to harass, annoy, threaten, abuse, taunt, intimidate, torment, humiliate, or otherwise inflict significant emotional harm on another person…”
The provision outlawed cyberbullying against “any minor or person” situated in the county…Knowingly engaging in this activity was deemed to be a misdemeanor offense punishable by up to one year in jail and a $1,000 fine…The statute, which included a severability clause…became effective in November 2010.
The facts of the case:
[In December, 2010], defendant Marquan M., a student attending Cohoes High School in Albany County, used the social networking website “Facebook” to create a page bearing the pseudonym “Cohoes Flame.” He anonymously posted photographs of high-school classmates and other adolescents, with detailed descriptions of their alleged sexual practices and predilections, sexual partners and other types of personal information. The descriptive captions, which were vulgar and offensive, prompted responsive electronic messages that threatened the creator of the website with physical harm.
A police investigation revealed that defendant was the author of the Cohoes Flame postings. He admitted his involvement and was charged with cyberbullying under Albany County’s local law. Defendant moved to dismiss, arguing that the statute violated his right to free speech under the First Amendment. After City Court denied defendant’s motion, he pleaded guilty to one count of cyberbullying but reserved his right to raise his constitutional arguments on appeal. County Court affirmed, concluding that the local law was constitutional to the extent it outlawed such activities directed at minors, and held that the application of the provision to defendant’s Facebook posts did not contravene his First Amendment rights…
The contentions of the parties:
Defendant contends that Albany County’s cyberbullying law violates the Free Speech Clause of the First Amendment because it is overbroad in that it includes a wide array of protected expression, and is unlawfully vague since it does not give fair notice to the public of the proscribed conduct. The County concedes that certain aspects of the cyberbullying law are invalid but maintains that those portions are severable, rendering the remainder of the act constitutional if construed in accordance with the legislative purpose of the enactment. Interpreted in this restrictive manner, the County asserts that the cyberbullying law covers only particular types of electronic communications containing information of a sexual nature pertaining to minors and only if the sender intends to inflict emotional harm on a child or children.
And the First Amendment analysis:
A First Amendment analysis begins with an examination of the text of the challenged legislation since “it is impossible to determine whether a statute reaches too far without first knowing what the statute covers”…In this regard, fundamental principles of statutory interpretation are controlling. Chief among them is the precept that “clear and unequivocal statutory language is presumptively entitled to authoritative effect…”
Based on the text of the statute at issue, it is evident that Albany County “create[d] a criminal prohibition of alarming breadth…” The language of the local law embraces a wide array of applications that prohibit types of protected speech far beyond the cyberbullying of children…As written, the Albany County law in its broadest sense criminalizes “any act of communicating . . . by mechanical or electronic means . . . with no legitimate . . . personal . . . purpose, with the intent to harass [or] annoy. . . another person.” On its face, the law covers communications aimed at adults, and fictitious or corporate entities, even though the county legislature justified passage of the provision based on the detrimental effects that cyberbullying has on school-aged children. The county law also lists particular examples of covered communications, such as “posting statements on the internet or through a computer or email network, disseminating embarrassing or sexually explicit photographs; disseminating private, personal, false or sexual information, or sending hate mail.” But such methods of expression are not limited to instances of cyberbullying the law includes every conceivable form of electronic communication, such as telephone conversations, a ham radio transmission or even a telegram. In addition, the provision pertains to electronic communications that are meant to “harass, annoy . . . taunt . . . [or] humiliate” any person or entity, not just those that are intended to “threaten, abuse . . . intimidate, torment…or otherwise inflict significant emotional harm on” a child. In considering the facial implications, it appears that the provision would criminalize a broad spectrum of speech outside the popular understanding of cyberbullying, including, for example: an email disclosing private information about a corporation or a telephone conversation meant to annoy an adult.
The concession by the County:
The County admits that the text of the statute is too broad and that certain aspects of its contents encroach on recognized areas of protected free speech. Because the law “imposes a restriction on the content of protected speech, it is invalid unless” the County “can demonstrate that it passes strict scrutiny that is, unless it is justified by a compelling government interest and is narrowly drawn to serve that interest…” For this reason, the County asks us to sever the offending portions and declare that the remainder of the law survives strict scrutiny. What remains, in the County’s view, is a tightly circumscribed cyberbullying law that includes only three types of electronic communications sent with the intent to inflict emotional harm on a child: (1) sexually explicit photographs; (2) private or personal sexual information; and (3) false sexual information with no legitimate public, personal or private purpose.
And the conclusion by the Court of Appeals that the Albany County law could not survive the “strict scrutiny” test:
We conclude that it is not a permissible use of judicial authority for us to employ the severance doctrine to the extent suggested by the County or the dissent. It is possible to sever the portion of the cyberbullying law that applies to adults and other entities because this would require a simple deletion of the phrase “or person” from the definition of the offense. But doing so would not cure all of the law’s constitutional ills. As we have recently made clear, the First Amendment protects annoying and embarrassing speech…so those references would also need to be excised from the definitional section. And, the First Amendment forbids the government from deciding whether protected speech qualifies as “legitimate,” as Albany County has attempted to do…It is undisputed that the Albany County statute was motivated by the laudable public purpose of shielding children from cyberbullying. The text of the cyberbullying law, however, does not adequately reflect an intent to restrict its reach to the three discrete types of electronic bullying of a sexual nature designed to cause emotional harm to children. Hence, to accept the County’s proposed interpretation, we would need to significantly modify the applications of the county law, resulting in the amended scope bearing little resemblance to the actual language of the law. Such a judicial rewrite encroaches on the authority of the legislative body that crafted the provision and enters the realm of vagueness because any person who reads it would lack fair notice of what is legal and what constitutes a crime. Even if the First Amendment allows a cyberbullying statute of the limited nature proposed by Albany County, the local law here was not drafted in that manner. Albany County therefore has not met its burden of proving that the restrictions on speech contained in its cyberbullying law survive strict scrutiny.
With the admonition that:
There is undoubtedly general consensus that defendant’s Facebook communications were repulsive and harmful to the subjects of his rants, and potentially created a risk of physical or emotional injury based on the private nature of the comments. He identified specific adolescents with photographs, described their purported sexual practices and posted the information on a website accessible world-wide. Unlike traditional bullying, which usually takes place by a face-to-face encounter, defendant used the advantages of the internet to attack his victims from a safe distance, twenty-four hours a day, while cloaked in anonymity. Although the First Amendment may not give defendant the right to engage in these activities, the text of Albany County’s law envelops far more than acts of cyberbullying against children by criminalizing a variety of constitutionally-protected modes of expression. We therefore hold that Albany County’s Local Law No. 11 of 2010 as drafted is overbroad and facially invalid under the Free Speech Clause of the First Amendment.
May the police install a global positioning system (GPS) device on a suspect’s vehicle without first obtaining a warrant? Answer: No.
People v. Lewis, 2014 NY Slip Op 02969 (decided May 1, 2014), arose out of the following facts:
In January 2007, investigators from the New York County District Attorney’s Office obtained an eavesdropping warrant allowing them to wiretap two of defendant’s cell phones. Via the wiretaps, investigators heard defendant discussing his purchase of the reader/writer machine and his attempts to purchase blank plastic cards for use in creating fake credit cards. Investigators also conducted visual surveillance of defendant, but they found that to be difficult because of Manhattan’s traffic congestion. As a result, investigators, without first securing a warrant, placed a battery-operated GPS device on defendant’s vehicle. Between March 5 and March 16, 2007, defendant and his codefendants visited various stores and utilized forged credit cards to either purchase or attempt to purchase items with the illegally obtained credit card numbers belonging to individuals from out of state, that had been issued by, among other institutions, HSBC, MasterCard, and Chase Bank. Investigators interviewed store employees and recovered store receipts and surveillance video relative to the transactions.
Lewis was indicted on various charges, including grand larceny and criminal possession of a forged instrument, stolen property, and forgery devices. After a jury trial, in which evidence concerning the GPS device was admitted into evidence, Lewis was convicted on 26 counts of a 61-count indictment.
Lewis made a post-trial motion “asserting, among other things, the trial court erred in permitting evidence concerning the GPS device placed on [his] car[.]” Supreme Court denied the motion. And the Appellate Division affirmed, “holding that the investigators’ ‘limited use’ of the GPS device was permissible under [the Court of Appeals] holding in People v. Weaver and, to the extent that it violated state or federal constitutional law, any error was harmless.”
The Court of Appeals examined Weaver and other applicable precedents and found that a warrant was required:
Under Weaver and the United States Supreme Court’s subsequent holding in United States v. Jones, the use of the GPS device to monitor a vehicle’s movements constitutes a search under our State and Federal Constitutions…The Appellate Division sought to distinguish Weaver by pointing out that the device was attached to the car for only three weeks (and functional for only two), and that investigators accessed the GPS device on only two days. We do not need to consider whether these facts suffice to distinguish Weaver, because under the Supreme Court’s holding in Jones the attachment of the GPS device to defendant’s vehicle was unquestionably a search within the meaning of the Fourth Amendment. Although Jones and Weaver had not yet been decided at the time of defendant’s trial, “cases on direct appeal are generally decided in accordance with the law as it exists at the time the appellate decision is made…” When the police want to place a GPS device on a suspect’s automobile, they must obtain a warrant first.
However, the Court of Appeals also found that:
[T]his violation of defendant’s constitutional right was harmless beyond a reasonable doubt because “there is no reasonable possibility that the error might have contributed to defendant’s conviction…” There was one date on which the use of the GPS device allegedly led to evidence of defendant’s criminal activity. Although the GPS device was attached to the car on that date, investigators learned from another source — wiretapped phone calls obtained through an eavesdropping warrant – that defendants were heading toward a Best Buy store at 86th Street and Lexington Avenue in Manhattan. Once investigators located defendant and his cohorts at this store, they conducted visual surveillance as defendant and/or his codefendants made purchases at a jewelry store and another Best Buy at 44th Street and 5th Avenue, which was near the jewelry store. Given the information investigators obtained from the wiretap, the use of the GPS device, although amounting to a constitutional violation, was nonetheless harmless because it provided information redundant to that which investigators had already obtained legally. The People also presented overwhelming evidence of defendant’s guilt in the form of surveillance video, sales receipts, visual observations by investigators of codefendants making purchases at the named stores, interviews of store employees conducted by investigators, and recorded conversations obtained via the eavesdropping warrant.