South Carolina Court Of Appeals Explores Opinion Testimony In New Fire Damage Case

Whether in the form of anonymous comments to an article written by someone else, reviews of businesses, or drafting blog posts, tweets, musing on Tumblr, Facebook posts,  it often only requires a few keystrokes and hitting “enter.”  With all of this, we have become so desensitized to opinion in our daily lives that we do not ask the proper questions to learn if someone is reporting facts or opinion.  However, the South Carolina Court of Appeals recently reminded us that, during trial, we must be discriminating in an evaluating what constitutes fact and what constitutes an opinion. Fowler v. Nationwide Mut. Fire Ins. Co., No. 2012-213250 (S.C. Ct. App. Aug. 6, 2014) is a breach of contract and bad faith case arising from the denial of insurance coverage on a policy held with Nationwide for a house fire that occurred in 2009 in Oconee County, South Carolina.  The Friendship Fire Department, a volunteer fire department, led by its Chief David Wright, responded first to the fire at the Fowler home and found itself ultimately responsible for putting out the fire.  Following the fire, as required by state regulations, Chief Wright filled out a report about the fire, called a “Truck Report,” listing and explaining certain information about the fire. On the Truck Report, Chief Wright noted as follows: (1) for “Area of Origin,” Wright wrote “Living Room”; (2) for “Cause of Ignition,” Wright wrote “Unintentional”; and (3) for “Equipment involved in Ignition,” Wright wrote “Heater.”  Prior to trial, Nationwide moved to exclude the testimony of Wright regarding the cause and origin of the fire as well as the relevant portions of the Truck Report regarding same.

While Chief Wright was never admitted as an expert at trial—an issue which is the subject of a different appeal—he was permitted to testify about the Truck Report and his conclusions therein.  He testified that he wrote “Living Room” because it was the room that was the most heavily damaged and that he wrote “Unintentional” because he did not see or smell anything that caused him to suspect the use of accelerants or arson.  As to the “Unintentional” answer, Chief Wright testified that it was “just his opinion.” Finally, he testified that he believed the heater was involved because a kerosene heater was located at the base of a V-shaped burn pattern on the wall of the living room.  When asked to explain the V-pattern, Chief Wright testified that when he has been around investigators or inspectors, they call it a “V-pattern” when the fire starts at a point and moves up the wall and spreads out like a “V.”  Thus, Chief Wright testified that he believed the heater had instigated the fire because it was at the base of the V-shape.

The jury returned a Plaintiff’s verdict for over $500,000 on the breach of contract and bad faith claims.   On Nationwide’s motion for new trial, the circuit court found that the statements made by Chief Wright were admissible perceptions under Rule 701 of the South Carolina Rules of Evidence. Rule 701, SCRE, states that “[i]f the witness is not testifying as an expert, the witness’ testimony in the form of opinions or inferences is limited to those opinions or inferences which (a) are rationally based on the perception of the witness, (b) are helpful to a clear understanding of the witness’ testimony or the determination of a fact in issue, and (c) do not require special knowledge, skill, experience or training.”

Despite arguments by the respondents that Chief Wright was merely explaining what he observed, the Court of Appeals held that some of Chief Wright’s testimony was improper opinion testimony because that testimony required “special knowledge, skill, experience or training.” Additionally, the Court of Appeals held that the Truck Report should not have been admitted as a public records hearsay exception under Rule 803(8), SCRE, which includes “reports, . . . of public offices or agencies, setting forth . . . matters observed pursuant to duty imposed by law as to which matters there was a duty to report, . . . ; provided, however, that investigative notes involving opinions, judgments, or conclusions are not admissible.” The Court of Appeals also found that the improper admission of Chief Wright’s testimony and the Truck Report was prejudicial to Nationwide at trial such that a new trial was warranted.

Unlike the unregulated land of Internet reviews, tweets, blog posts, and other social media statements, Fowler makes clearer the delineation of opinion testimony for those who are not admitted as experts.  Going forward, an opinion is something that goes to causation or the underlying issues because it requires “special knowledge, skill, and experience.”

The Wood-Shelving, Aged Cheese Incident

Beaufort. Comté. Reblochon. Abondance. Vacherin Mont d’Or. Salers. Dry Monterrey Jack. Parmigiano Reggiano. Do you know what these names have in common? For those who are not hip to the niche, artisan cheese market, each of them is a type of cheese which is made by, among other things, being aged on a wood-board.  Now, can you imagine salads, sandwiches, grits, crackers, pasta, or wine without these tasty concoctions? While those names are a mouthful in more ways than pronunciation alone, personally, the thought of a world without easy access to Parmigiano Reggiano would not be a place of which I would want to be a part.  However, per a January communication from the Food and Drug Administration (FDA), that contemplation could become a reality. Based on a response to a question from the New York State Department of Agriculture and Markets, the FDA appeared to sound the death knell for wood-board aged cheese crafted in or imported into the United States.  Specifically, the FDA stated that “[t]he porous structure of wood enables it to absorb and retain bacteria, therefore bacteria generally colonize not only the surface but also the inside layers of wood. The shelves or boards used for aging make direct contact with finished products; hence they could be a potential source of pathogenic microorganisms in the finished products.”  This position was based upon an interpretation of 21 C.F.R. 110.40(a), a regulation about food equipment and utensils which states:

(a) All plant equipment and utensils shall be so designed and of such material and workmanship as to be adequately cleanable, and . . . shall preclude the adulteration of food with . . . any other contaminants. . . . Food-contact surfaces shall be maintained to protect food from being contaminated by any source. . . .

Like wheels of cheese aging for months on wood racks, the news of the FDA’s take on wood-board aging spread slowly to the cheese community, but like the pungent aroma of Beaufort, once it did, artisan cheese craftsmen found themselves with worse heartburn than at a habanero cheddar tasting.  However, in an effort to stave off the effects of enforcement by the FDA, the craftsmen’s advocate, the American Cheese Society, released a position statement wherein it stated that wood-board aged cheese meets food safety standards and that the FDA should give proper notification, hold a proper comment period, review scientific data, and include consideration of industry stakeholders before modifying its interpretation or implementation of its regulations. In a quick response, the FDA clarified its interpretation of its official policy to New York State Department of Agriculture and Markets. This “clarification” declared the FDA did not intend the communication to be “an official policy statement,” but instead as “background information on the use of wooden shelving for aging cheeses and as an analysis of related scientific publications.”  However, the FDA did not back away completely from the idea of ending the use of wood shelving.  Instead, it noted it has pursued enforcement actions when it found the presence of Listeria monocytogenes at facilities that used wood shelving.  The FDA claims that since 2010, more than 20 percent of inspections of artisanal cheesemakers have revealed the presence of Listeria monocytogenes. Currently, no FDA enforcement actions directly allege that wood shelving caused contamination, yet it appears the FDA has left that option open. Should the FDA be able to make a case that wood shelving is the direct cause of a harmful contamination, it can still take administrative or judicial action to enforce its regulations.  Administrative actions include product recalls, withdrawals of product approvals, or license revocations. Judicial actions include seizures of violative products, injunctions, criminal prosecutions, and certain civil money penalties.  It is unclear how the FDA would go about enforcement against the artisanal cheese community; however, generally, the FDA looks to administrative remedies first. Therefore, although the FDA has ended the initial uprising over this issue, artisan cheesemakers will need to remain aware of the FDA’s next moves.  Hopefully, the FDA will give the cheesemakers an opportunity to present their generations-old argument that wood shelving, as a porous surface, absorbs excess humidity and prevents unwanted mold as well as adds to the flavor while still remaining healthy. The future of parmesan depends on it.

The Low End of The Tolerance and Coverage Scale – The Yoga Pants Litigation

“Exercise gives you endorphins. Endorphins make you happy. Happy people just don’t [sue their exercise clothing manufacturer], they just don’t.” – Elle Woods, Legally Blonde. Or do they? So, fitness is not usually a hot law topic; rather, lawyers tend to talk about fitness only as something they should do but do not have enough time for or as something that keeps them sane in the crazy world of the billable hour. Fitness is serious business.  Gone are the days of just going to the local YMCA for an aerobics class in a leotard and legwarmers or walking around the block in a big t-shirt and a tattered pair of Umbros.  Now, gyms are no longer one-stop shops; rather entire exercise studios are built around offering only one activity at a premium, and each seems to have its own dress code. But once you start going, you become hooked and find it normal to buy the $12 socks with special traction, the $40 sweatshirts that fall just-so off your shoulders so that you can wear it to and from exercising, the $65 dollar yoga mat that incorporates a towel into the mat itself, and do not forget the $90 pair of pants everyone says makes your backside look like you have never skipped a day of squats and lunges.

For those of you that do not know, Lululemon Athletica, Inc., a Delaware corporation with its principal place of business in Vancouver, British Columbia, is the chic, “it” fitness brand.  The easily distinguishable logo can be spotted all over town while running errands or even at brunch.  In addition to its products, Lululemon gets involved in each community in which it opens a store.  Lululemon’s pants are not your run-of-the-mill cotton exercise pants.  The fabrics are more hi-tech and breathable; the waistband is more flattering; and the cut is just more flattering to a woman’s backside.  However, in recent months, Lululemon has become associated more for what it is covering up in its books and less for what it is covering up for its customers.

In March 2013, the retailer recalled 17 percent of its stock of yoga pants. Specifically, customers that purchased the pants at issue on or after March 1, 2013 noticed and began complaining that the people behind them in their yoga classes were getting more than the “communal energy” created in the room.  Let’s just say that when the class went into downward facing dog—or really any pose that involved bending over, of which there are many, it was more of a peep show than a show of strength and flexibility.  Lululemon offered exchanges and refunds for these pants in addition to pulling the remaining pairs off of the shelves.  In a Form 8-K Securities and Exchange Commission filing on April 3, 2013, Lululemon admitted the fabric used in its black luon products was “on the low end of lululemon’s tolerance scale,” and that the company found that its “testing protocols were incomplete for some of the variables in fabric characteristics.” Although there are those that say—generally men who do not do yoga—that they would actually go to yoga to be behind these translucent pants, those who paid the premium to purchase the high quality product marketed by Lululemon have not been laughing.

Yet it has not been the customers who have provided the biggest backlash over the pants.  To date, there have been no lawsuits alleging a design defect causing injury or a failure to warn.  Instead, Lululemon’s shareholders have felt the most betrayed by the seeming lack of quality control, and their anger has taken shape in the form of two complaints alleging securities violations and breaches of fiduciary duty, Hallandale Beach Police Officers & Firefighters’ Personnel Retirement Fund v. Lululemon Athletica, Inc., No.8522-VCP (Del. Ch. May 3, 2013 & July 1, 2013), and Alkhoury v. Lululemon Athletica, Inc., No. 13-CV-4596 (S.D.N.Y. July 2, 2013).

The Plaintiff in Hallandale claim brought this action as a common stockholder of Lululemon alleging possible breaches of fiduciary duty on the party of officers and directors.  Brought in Delaware, the premise of this complaint is that Lululemon has not allowed Plaintiff to inspect its corporate books and records as provided in Section 220 of Delaware’s General Corporation Law.  Basing its complaint and amended complaint on a New York Times article, “Recall is Expensive Setback for Maker of Yoga Pants” and several of Lululemon’s most recent Form 8-K filings regarding the recall and the termination of the company’s Chief Products Officer, Plaintiff alleges the recall cost approximately $60 million and cost the company a lot of its popularity.  The amended complaint further alleges that in the midst of dealing with the fallout from the recall, the Lululemon board of directors still increased the maximum allowable payout for the executive bonus plan. The amended complaint states a cause of action for breach of fiduciary duty in that Lululemon’s chairman sold $50 million of his own stock on the day that Lululemon’s Chief Executive Officer stepped down, causing the value of the stock to decrease by 22 percent in two days.  Plaintiff claims it sent two demand letters to Lululemon demanding to inspect certain portions of its books but that the retailer did not resopnd to the demands.

Although filed around the same date as the Hallandale amended complaint, the Alkhoury complaint expands upon, in very specific terms, the allegations of the Hallandale litigation.  Notably, it is a class action, including all common stockholders that purchased or held Lululemon stock during the class period of March 21, 2013 through June 10, 2013.  The complaint alleges a violation of two sections of the Securities Exchange Act, Section 10(b), Rule 10b-5, and fraud on the market against Lululemon and Section 20(a) against the founder and Chairman of the Board of Lululemon, Dennis J. Wilson, and CEO, Christine McCormick Day. Specifically, Plaintiff claims that defendants knew Lululemon cut corners to keep profit margins up as competition in Lululemon’s niche market stiffened. Plaintiff further claims that the price of Lululemon stock was artificially inflated by the announcement of the fourth quarter and fiscal 2012 financial report for the period ending February 3, 2013 and other positive statements regarding increased quality-control measures following the recall.  Plaintiff further claims that at that time, defendant Wilson was selling 2 million shares of his personally-owned stock on the open market and receiving more than $163 million in gross proceeds during a very short trading window lasting from May 10, 2013 to June 7, 2013. It is alleged these sales were unusual both in sheer size and timing, as defendant Wilson had not sold Lululemon stock since January, and he was then aware of internal turmoil at Lululemon. Plaintiff claims that as a result of Day’s resignation from her position as CEO, the price of Lululemon stock, which had traded as high as $82.50 per share during the class period, plummeted more than 17.5 percent to close at $67.85 per share on June 11, 2013, erasing more than $1.6 billion in market capitalization. Thus, Plaintiff alleges that during the class period, defendants made false and misleading statements, engaged in a scheme to deceive the market, engaged in a course of conduct that artificially inflated the price of Lululemon common stock, and operated as a fraud or deceit on Plaintiff by misrepresenting the value of the company’s business and prospects by overstating its earnings and concealing the significant defects in its internal controls. Therefore, Plaintiff alleges that as defendants’ misrepresentations and fraudulent conduct became apparent to the market, the price of Lululemon common stock fell precipitously, and as a result of their purchases of Lululemon common stock during the class period, Plaintiff and other members of the class suffered economic loss, i.e., damages, under the federal securities laws.  Alkhoury has been designated a “complex civil case” for purposes of the Southern District of New York’s pilot program on complex civil case management, and as part of that designation and based on a July 8, 2013 Order, all defendants must have been served by July 15, 2013.

Both Complaints allege fraudulent behavior on the part of Lululemon and its officers; however, proving a breach of fiduciary duty can be much easier than proving fraud directly since plaintiffs do not need to prove criminal or fraudulent intent or the other elements of fraud. To prevail on a breach of fiduciary duty, the plaintiff must show only that the defendant occupied a position of trust or fiduciary relationship and that the defendant breached that duty to benefit personally. However, Rule 10b-5 prohibits fraudulent conduct in connection with the purchase or sale of securities; accordingly, it prohibits a person from employing any device, scheme, or artifice to defraud; making any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. To prevail on such a securities fraud claim requires the showing of (1) a misrepresentation or omission of, (2) a material fact; (3) reliance thereon; (4) causation; (5) damages; (6) scienter or fraudulent conduct; (7) in connection with the purchase or sale of a security. Therefore, the way in which the Hallandale complaint is pled may get the desired result for shareholders more easily Alkhoury.

At this time, no answer has been filed in either of these cases.  It will be interesting to see how Lululemon balances these related matters and what is found if and when Lululemon allows its books to be reviewed.  Either way it seems that Lululemon is going to remain in the hot seat for a while even though its stock price has rebounded since these lawsuits were filed.  The stock price went from $82 per share before CEO Day stepped down following the sheer pants drama to as low as $57 per share, but the stock has been steadily climbing back, currently hovering around $72 per share.  Namaste.

The Pennsylvania Golf Cart Litigation

For me, golf carts stir up long ago memories. I remember begging my dad to let me be his caddy just so that I could drive the golf cart.  Golf carts, although initially built in the 1930s as a way to transport disabled golfers from shot to shot on the course while able-bodied individuals walked with a caddy, are no longer used only to carry two golfers and their golf clubs.  Today, golf carts are alternative road vehicles, saving people from using their gas-powered SUVs or even their legs to traverse their gated communities, tailgate spots, business complexes, or school campuses.  Like most things in our highly personalized economy, golf carts no longer only come in a one-size-fits-all style; rather, color and the number of rows for seating passengers are among some of the features which may be customized to fit the needs of the purchaser.  As options have increased, so too have injuries and, in turn, the amount of litigation.

According to one study, the number of golf cart injuries increased an astonishing 132% from 1990-2006. Such injuries usually stemmed from passenger ejection or overturned carts.  In one such case, the parties settled soon after  the court granted summary judgment to defendants on some of the Plaintiff’s claims. That case was Lynn v. Yamaha Golf-Car Company. On August 16, 2012, the parties settled for an undisclosed amount following the Western District of Pennsylvania’s order granting partial summary judgment in favor of the defendants as to Plaintiffs’ post-sale duty to warn and failure to warn claims.  In that case, the thirteen-year-old Plaintiff Lynn was riding as a seated passenger in a Model Year 1999 Yamaha Model G16 golf car.  Plaintiff Lynn’s friend had been operating the G16 for less than one quarter of a mile along a rural and infrequently traveled road at the time of the accident.  The accident occurred when Lynn’s friend made a u-turn, and as she was turning left, Lynn was ejected over the hip restraint of the cart (although the G16 did not tip, rollover, skid, or lose traction).  Lynn sustained serious injuries.

Plaintiffs contended that the G16 was defective in its design as it failed to prevent passenger ejection.  However, Yamaha argued that the G16 was properly was properly designed, properly manufactured, and safe for its intended use because it was never designed, manufactured, or intended to be used as a mode of general transportation.

In addition to finding summary judgment was proper as to Plaintiffs’ warning claims, the Court determined Plaintiffs produced enough evidence to show there was foreseeable risk of ejection when the golf cart was turned sharply at or near maximum speed, particularly when children are passengers, and that there were two reasonable alternative designs available at the time the G16 was constructed.  Finally, the Court was not convinced by Yamaha’s argument that Plaintiffs were using the golf cart for an unintended use.  The Court stated that the intended use of the vehicle could not be limited to cut-turf golf course surfaces.  The Court found, rather, that golf carts are intended to be used to convey persons from one point to another at a relatively low speed and that a jury could reasonably conclude “non-golf-course” uses were entirely foreseeable.

Based on these findings, it appears that at least in the Western District of Pennsylvania, holding onto the original use of a golf cart will not be a winning argument.  However, if the number of injuries keeps increasing as the uses for golf carts are broadened, each case will be factually intensive, and it will be interesting to see how courts treat these claims going forward.