Speak Now or Forever Hold Your Peace: A Split on a Fiduciary’s Duty to Speak

Imagine: a member of your trusted investment club approaches you encouraging you to purchase securities in a new company, which you do because your investment club always has the group’s best interests in mind. Later you learn that this member received a commission from your transaction. You feel betrayed, but did he have a duty to tell you about his stake in your investment?

Duty to Speak

In Chiarella v. United States, the Supreme Court held, “When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.” Such a duty is found when a party has information “that the other is entitled to know because of a fiduciary or similar relation of trust and confidence between them.”

This rule, like virtually all legal rules, reflects a balancing of competing interests. On one hand, we want to believe that people are trustworthy, particularly when a person has a fiduciary duty to us. The investment adviser industry depends on people trusting that their investment advisers have their best interests at heart. If an individual recommending the purchase of securities is deriving a commission from the sale, a potential investor would want to be wary of a potential conflict of interest.

On the other hand, is it wise to impose a duty to speak on every individual who may share information about a company offering securities? With the growth of technology, communication and the sharing of information have become constant. If such a duty is imposed on every individual who recommends a security or supplies information about a company, the chain of liability would be unending.

The Split

On whom do we impose a duty to speak? Three circuits have taken different approaches.

The Third Circuit found that a general fiduciary duty does not implicate a duty to speak. In Schiff v. United States the Court held:

“The Government argues that Schiff’s duty to disclose in the SEC filings derives from a general fiduciary obligation of ‘high corporate executives’ to the company’s shareholders . . . This argument reaches too far.”

The Second Circuit held in Securities and Exchange Commission v. Dorozkho that a duty to speak should be found wherever there is a fiduciary duty.

“[These cases] all stand for the proposition that nondisclosure in breach of a fiduciary duty ‘satisfies § 10(b)’s requirement . . . [of] a deceptive device or contrivance’.”

Finally, the Ninth Circuit extends the duty to speak to a much broader class in Paracor Finance, Inc. v. General Electric Capital Corp.

“A number of factors are used to determine whether a party has a duty to disclose: (1) the relationship of the parties, (2) their relative access to information, (3) the benefit that the defendant derives from the relationship, (4) the defendant’s awareness that the plaintiff was relying upon the relationship in making his investment decision, and (5) the defendant’s activity in initiating the transaction.”

Looking Forward

While the Ninth Circuit approach allows a judge to balance factors and find whether a duty to speak exists as a matter of fairness, this approach does not seem practical in a world where people are constantly accruing and sharing information. Thus, it makes the most sense for the court to follow the Second Circuit’s approach of only finding a duty to speak where there is a fiduciary duty, which represents the middle ground of who has a duty to speak and promotes predictability.

Pandora’s Inbox: email and “electronic storage” under the Stored Communications Act

When Congress passed the Stored Communications Act (“SCA”) in 1986, email systems were markedly different. Email systems from the 1970s closely mirrored what we know as instant messaging; both the sender and recipient had to be online to send and receive messages. It was only in the early ‘90s when the current ‘store and forward’ technique became utilized.

Moreover, web-based email (i.e., Gmail and Hotmail) didn’t exist. Instead, email was handled on an intranet, usually within a business, and users would download email messages from a server. The server would typically not backup the message (disk storage space was a luxury back then), and the only copy existed on the user’s computer. Today, we receive emails on our computers, phones, and watches (often simultaneously), and rely on that server to keep those emails in perpetuity.

“Electronic Storage”

The SCA prohibits unauthorized access to email, among other communications, but only if the communication is defined as being in “electronic storage.” See 18 U.S.C. § 2701. The SCA defined “electronic storage” as follows:

(17) “electronic storage” means—

(A) any temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof; and 

(B) any storage of such communication by an electronic communication service for purposes of backup protection of such communication;

18 U.S.C. § 2510(17).

The act also specifies the legal process the government must use to compel disclosure of messages in “electronic storage.” See 18 U.S.C. § 2703. When it was passed, Congress presumed that any emails left on an email server longer than 180 days were “abandoned,” and thus could be obtained by law enforcement without requiring a warrant (or giving notice to the user).

Courts have agreed that unopened emails residing on a server are protected by SCA; the fiction is that an unopened email is considered to be in “temporary, intermediate storage” pending delivery. See Cruz Lopez v. Pena (N.D. Tex. Mar. 5, 2013) (“§ 2510(17) has been clearly established to protect unopened emails.”); Lazette v. Kulmatycki, (N.D. Ohio 2013) (“[P]laintiff cannot prevail to the extent that she seeks to recover based on a claim that [defendant] violated the SCA when he accessed e-mails which she had opened but not deleted.”).

Emails Stored Online & Downloaded to a Personal Device 

In Theofel v. Farey-Jones, the Ninth Circuit held that emails received, read, and left on a server fit within the Act’s definition of being “for purposes of backup protection”:

 [a]n obvious purpose for storing a message on an [internet service provider’s (“ISP”)] server after delivery [from the server to the user] is to provide a second copy of the message in the event that the user needs to download it again–if, for example, the message is accidentally erased from the user’s own computer.

At first glance, the definition seems quite broad, allowing for any email to be protected. Parsing through the opinion (which offers little in information on email configuration) it seems clear that Chief Justice Kozinski relied upon the assumption that the users downloaded the emails to their personal computers, noting that if “remote computing service might be the only place a user stores his messages; in that case, the messages are not stored for backup purposes.” Id. at 1077. Other courts have aligned with the similar view concerning email both downloaded and on a server. See, e.g., Shefts v. Petrakis, (C.D. Ill. Nov. 29, 2011) (finding email copies were protected by SCA when plaintiff downloaded them to Outlook); Cornerstone Consultants Inc. v. Prod. Input Solutions LLC, (N.D. Iowa 2011) (same).

Noted scholar Orin Kerr believes the Ninth Circuit incorrectly interpreted the provision in the context of the user, and argues that “the ‘backup’ language is about backups created by the ISP for the ISP’s purposes.” Kerr also criticized Kozinski’s rationale in an earlier paper, noting that “the apparent test is whether the user or employees of the service provider have reason to believe that they may need to access an additional copy of the file in the future.”

Users v. Servers

In Jennings v. Jennings, the Supreme Court of South Carolina granted cert on a case involving a wife who figured out her husband’s Yahoo! email password, and accessed his account (she was looking for evidence of an affair). When the husband sued under the SCA, the court decided to take a crack at interpreting the statute. Unsurprisingly, the court returned with a 2-2-1 plurality decision:

• Justice Hearn, joined by Justice Kittredge— based on the meaning of the word “backup” according to a Merriam-Webster Dictionary, a substitute copy has to exist for the email to be a “backup.” Since the only copy of the email was read and stored on Yahoo!’s servers, it follows that the emails are not protected under the SCA.

• Chief Justice Toal, joined by Justice Beatty—the justices believed section (A) and (B) were conjunctive. Unread email on Yahoo!’s server is in “transmission” and “backup” until the user reads them, thus protected by the SCA as “electronic storage.” However, once an email is read, it has reached its destination, and is no longer stored under the definition of the SCA.

• Justice Pleicones—while mostly agreeing with Chief Justice Toal, Pleicones believed that the statute was disjunctive, but still failed to find the email satisfied either provision.

Rejecting the reasoning in Theofel, these three decisions all took the approach that the SCA protects emails from the perspective of Yahoo!, not the user. They also assumed the husband never downloaded his Yahoo! mail onto a computer or other device.

Received v. Sent Emails

The Eighth Circuit provided a proper circuit split in Anzaldua v. Northeast Ambulance & Fire Protection District. Here, A jilted ex-girlfriend logged on to the plaintiff’s Gmail account and forwarded two emails to the plaintiff’s superior. The plaintiff was later fired due to “inflammatory” remarks found in his emails. The issue on appeal was whether the two emails (one was in the sent folder, the other in the drafts) were considered protected under SCA. The court held neither email were protected.

The argument centered on whether the user sent or received the email. One of emails forwarded was sent earlier to another person. The second email was still in the draft folder. According to the Eighth Circuit, since neither email was received, neither are within the ambit of the SPA. In rejecting Theofel, it noted “[i]f Theofel has any application here, it would be to protect a copy of the email stored with Holland’s email service, not Anzaldua’s.”

Concerning the sent email, the Eighth Circuit argued that the plaintiff had no reason to access a backup copy of the email because the message had been successfully delivered, “[w]e hold that once Anzaldua successfully sent the email to Holland, as he alleged he did, the copy Gmail retained on its server as a sent message did not perform a backup function.”

As for the email in the draft folder, “because the email had not been sent, its storage on the Gmail server was not ‘temporary, intermediate,’ and ‘incidental to the electronic transmission thereof.’”

Again, the court made no mention if the plaintiff had downloaded those emails onto a separate device. Rather, it mentions n passing that “web-based email users may still download emails to their computers through email client programs, which complicates the picture.”

Looking Forward

Epic.org has proved this helpful table as to what type of law enforcement access is required to read your email:

EPIC Email Guide

You have to wonder how we got here. It would seem judicial opinion goes backwards, creating splits along the way, while technology continues to forge on. It is likely necessary to jettison this act and replace it with something that will properly suit modern technology.

In a somewhat fitting analogy, judicial review and legislative amendments of the SCA is akin to what is known in software development as the “Code and Fix” methodology. Here, a developer writes code and then quickly releases the application without testing it. When a user reports a bug, the developer writes some code to patch it up, then releases it again—this cycle continues, the software becomes bloated, and every subsequent bug takes longer to fix. Suffice it say, the methodology is heavily frowned upon. Sometimes, it’s simply prudent to scrap something and start fresh.


It Seemed like the Reasonable Approach at the Time: A Circuit Split on the Meaning of “Reasonable Belief” in Search and Seizure

How Many Warrants?

Two major Supreme Court decisions are at play here concerning the constitutionality of officers entering residences to execute arrest warrants when residency of the suspect is uncertain.

In the aftermath of the first case, Payton v. New York (S.Ct. 1980), the Courts of Appeals developed a two-prong test to assess the constitutionality of an officer’s entry to execute an arrest warrant: the officer must have a “reasonable belief” that (1) the “arrestee lives in the residence, and that (2) the “arrestee is within the residence.” United States v. Gay (10th Cir. 2001).

One year after Payton, the Supreme Court held that officers may not enter the residence of a third party to execute an arrest warrant unless they first obtain a search warrant based on the belief that the suspect “might be a guest there.” Steagald v. United States (S.Ct. 1981). This created a stricter standard for entering officers if they believe only that the suspect is a common “guest” in the residence rather than a resident or immediately within the residence. Thus, officers would much prefer that the arrestee is a resident and within the residence as opposed to being simply a guest.  The determination of whether officers need only an arrest warrant to enter versus an arrest warrant and a search warrant to enter a residence is entirely dependent on an officer’s “reasonable belief.”

The circuit courts have since been faced with discerning what constitutes a “reasonable belief,” thus determining when both an arrest and a search warrant are necessary for constitutional entry into third party residences as opposed to only an arrest warrant.

Circuit Split

The Third Circuit is the most recent voice to enter the interpretive dispute surrounding the standard of “reasonable belief.” United States v. Vasquez-Algarin (3rd Cir. 2016).

Joining the Fifth, Sixth, Seventh, and Ninth Circuits, the Third Circuit held that reasonable belief should be viewed as the functional equivalent of probable cause, and thus the same standard.  The practical effect of requiring a probable cause standard is that it makes it more difficult to enter only with an arrest warrant. The Third Circuit had two primary reasons for their decision:

  • First, the Supreme Court’s use of the phrase “reason to believe,” when considered in the context of Payton and more generally the Court’s Fourth Amendment jurisprudence, supports a probable cause standard.
  • Second, and more fundamentally, requiring that law enforcement officers have probable cause to believe their suspect resides at and is present within the dwelling before making a forced entry is the only conclusion commensurate with the constitutional protections the Supreme Court has accorded to the home.

Some of Vasquez-Algarin’s reasoning echoes that of the Sixth Circuit, both noting that on several occasions the Supreme Court has used the same “reason to believe” language from Payton “as a stand-in for ‘probable cause.’” (3d Cir. 2016).

The DC Circuit, First, Second, and Tenth Circuits have held that the standard for reasonable belief falls short of the standard for probable cause belief. The DC Circuit reasons that it is “more likely . . . that the Supreme Court in Payton used a phrase other than ‘probable cause’ because it meant something other than ‘probable cause.’” (2005). The Tenth Circuit equates probable cause requirements with calls for “actual knowledge of the suspect’s true residence.” (1999). It believes extending probable cause as the standard for a “reasonable basis” for determining that an individual “lived in the residence and . . . could be found within at the time of entry,” would “effectively make Payton a dead letter.” Valdez v. McPheters (10th Cir. 1999).

The Third Circuit claims that the Supreme Court’s choice of stand-in language undermines the DC Circuit’s conclusion that Payton’s ‘reason to believe’ language should be interpreted loosely. The Third Circuit explains that the Supreme Court’s use of “reason to believe” as a stand-in for “probably cause” indicates the Court’s belief that the standard for the two is the same.

Looking Forward

The incongruence in requirements for only arrest warrants versus arrest and search warrants creates such a fundamental constitutional discrepancy that the Supreme Court should address it soon.

For the last 36 years, courts have been left to grapple with the interpretation of the Court’s language in Payton, and the circuits seem to have pretty evenly split on the meaning of a “reasonable belief.” Until the Court addresses the standard for reasonable belief varying degrees of scrutiny will continue to be imposed on officers, and the degree of protection of an individual’s right to be secure in their home will remain grey.

Now You See Me, Now You Don’t: Due Process and Foreclosures

The Constitution grants us the right to due process where a property interest is at issue. Part-and-parcel of due process is the right to notice and to be heard. With regard to foreclosures of real property, the question becomes whether all owners must be given notice and a reasonable opportunity to be heard, right? Wrong. The due process requirements only apply to state actors. This distinction seems fairly clear when we think of big private banks like J.P. Morgan & Chase, and governmental entities like the the NYAG. But what happens when we enter that blurry area where a so-called governmental entity is hidden under a cloak of private participation?

The Cases

In 1995, in Lebron v. National R.R. Passenger Corp., the Supreme Court addressed this very issue. In determining a First Amendment violation claim, the Supreme Court established a two-prong test to determine whether a federal government corporation was a government actor. The two prongs are:

  1. The extent to which the corporation was formed for the furtherance of governmental objectives.
  2. The extent to which the federal government retains control over the corporation’s efforts to achieve its objectives.

The majority opinion, written by Justice Scalia, held

[W]here, as here, the Government creates a corporation by special law, for the furtherance of government objectives . . . the corporation is part of the Government for purposes of the First Amendment.

We faced a similar issue with Fannie Mae and Ginnie Mac. In 2008, both agencies were placed under the Federal Housing Finance Agency (FHFA) Conservancy. FHFA, although clearly a governmental entity under the first prong, operated in a way that made it difficult to establish control under prong two, since courts have argued its control is “merely the same control that Freddie Mac had before the conservatorship.”

Though many courts follow the Lebron test, others have created exceptions to the state action tests based on the interpretation of “control” in the second prong. For example, in Herron v. Fannie Mae, despite evident government control on behalf of Fannie, the court found that Fannie Mae was not a state actor because under the Lebron framework, permanent government control is required.”

Looking Forward

The lack of clarity regarding which entities can be established as state actors has led to widespread backlash.

In cases involving FHFA alone, mortgagors have begun challenging Fannie Mae and Freddie Mac foreclosures on due process grounds, arguing that these entities, as state actors, should have been enjoined from trying to execute power of sale foreclosures for lack of constitutional procedure.

Until the definition of “state actors,” for purposes of the due process clause, is established, foreclosed upon mortgagors will forever be in a state of limbo in guessing whether they will be given adequate notice and hearing procedures that they arguably should be entitled to.

For further reading, see the Emory Law Journal.

I’ll Be There For You . . . (If I Can Take Off Work): Courts Are Divided Over What “Caring For” Means Under the FMLA

The Family and Medical Leave Act

The Family and Medical Leave Act (FMLA) is a federal act enacted in 1993, ostensibly to encourage a work-family balance.

Under the FMLA, eligible employees are entitled to take up to twelve weeks of unpaid, job-protected leave for various family and medical reasons. Acceptable reasons for leave under the FMLA include: a serious health condition of the employee themselves, the birth of a child and/or to care for a newborn, the adoption of a child, and to care for the employee’s child, spouse, or parent who has a serious health condition.

The issue of what precisely constitutes “caring” for a family member is interpreted differently by various courts and, thus, the subject of this post.

The Split

A Broad Definition of Care

 In 2014, the Seventh Circuit Court was challenged to determine what exactly qualifies as “caring” for a family member under the FMLA. Ballard v. Chi. Park Dist.  (7th Cir. 2014).

In Ballard, the plaintiff-appellee, Beverly Ballard provided daily care of her mother, who suffered from end-stage congestive heart failure.  She received a grant to take her mother on a vacation to Las Vegas, something her mother wanted to do before she died. Ballard requested leave from Park District, her employer, in order to travel with her mother. Her request was denied.  She was later terminated for the absences she accumulated during her trip.

During the trip, Ballard provided basic medical, hygienic, and nutritional needs for her mother. She also took her to the hospital to receive pain medicine and insulin when they suffered a loss of this medicine due a fire at their hotel.

Despite her employer’s protests that routine care was not covered by the FMLA, the court held that:

[A]s the employee attends to a family member’s basic medical, hygienic, or nutritional needs, that employee is caring for the family member, even if that care is not part of ongoing treatment of the condition. Furthermore, none of the cases explain why certain services provided to a family member at home should be considered “care,” but those same services provided away from home should not be. Again, we see no basis for that distinction in either the statute or the regulations.

The Seventh Circuit’s holding, in essence, states the FMLA applies even when the employee accompanies the sick relative out of state—so long as the employee provides basic medical, nutritional, or hygienic care to the sick relative, the FMLA’s protections kick-in.

The Seventh circuit holding in Ballard directly contradicts the holdings of the First and Ninth Circuits, which determined that “care” for a family member had to be related to ongoing medical treatment.

A Strict Definition of Care

In the First Circuit, the court held that an employee who took leave to accompany her sick husband on a “healing pilgrimage” to the Philippines did not take a valid leave under the FMLA.  Tayag v. Lahey Clinic Hosp., Inc., (1st Cir. 2011).

Similarly, the Ninth Circuit held that an employee who flew cross-country to pick up a car and drive it back to his pregnant wife did not constitute valid leave under the FMLA. Because the care did not constitute the requisite  “level of participation in ongoing treatment of that condition,” the leave was invalid. Tellis v. Alaska Airlines, Inc., (9th Cir. 2005).

Looking Forward

This split is especially significant for employers, who should be aware of how the various circuits define “caring for” a family member. If the circuit uses a broad definition of care, in which the court examines the particular actions the employee took, then the employer opens themselves up to liability if they deny leave and take adverse action against an employee that then takes the leave anyway. For employees, the split is important to the extent that rights to unpaid leave under the FMLA depend on the federal circuit in which they work.

For further reading on the topic, see the University of Cincinnati Law Review or the employment law blog of Outten & Golden, LLP.