US v. Kilpatrick; CENTRA, INC., a Delaware Corporation and DETROIT INTERNATIONAL BRIDGE COMPANY, a Michigan Corporation; ROBERT LEONHARDT, et. al. v. ARVINMERITOR, INC., et. al.; Green Party Of Michigan V. Michigan Secretary Of State; HONORABLE JOHN CONYERS, JR., ET v. GEORGE W. BUSH, ET AL.; In re

=== US v. Kilpatrick ===

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION UNITED STATES OF AMERICA, Plaintiff, v. KWAME KILPATRICK, ET AL., Defendants. / Case No. 10-20403 Honorable Nancy G. Edmunds OPINION AND ORDER REGARDING POTENTIAL CONFLICT OF INTEREST RAISED BY DEFENDANT KWAME KILPATRICK Defendant Kwame Kilpatrick and Co-Defendants have been charged in a 46-count Indictment that includes a RICO conspiracy count, as well as several other counts involving bribery, extortion, obstruction of justice, and fraud. A joint trial is set to begin on September 6, 2012, and jury selection has already started. At a hearing held on August 14, 2012, this matter came before the Court regarding a potential conflict of interest raised by Defendant Kwame Kilpatrick on Tuesday, August 7, 2012. Kilpatrick is requesting that two of his appointed counsel, Jim Thomas and Michael Naughton, be disqualified and that new counsel be appointed because (1) Thomas previously represented Gasper Fiore, who is the “Towing Contractor” described in paragraphs 306-312 of Count 1 and Count 12 of the Fourth Superseding Indictment, and (2) Thomas and Naughton have an “of counsel” relationship with O’Reilly Rancilio P.C., the law firm that currently represents the plaintiffs in a civil suit against Defendant Kilpatrick and others. See Macomb Interceptor Drain Drainage District v. Kwame M. Kilpatrick, et al., Civil Case No. 2:11-cv-13101 (Cleland, J.). For the reasons stated on the record at the August 14, 2012 hearing and below, Defendant Kwame Kilpatrick’s request for new appointed counsel is DENIED, and the trial in this matter will not be delayed. A. Analysis 1. The Government’s Decision to Dismiss All Allegations Related to Gasper Fiore in Counts 1 and 12 of the Fourth Superseding Indictment Resolves Any Conflict of Interest Despite Defendant Kwame Kilpatrick’s objections, this Court agrees with the government on the Gasper Fiore conflict. First, any actual or potential conflict of interest arising out of defense counsel Jim Thomas’s successive representation of Mr. Fiore and Kwame Kilpatrick is eliminated by the government’s commitment to dismiss all allegations related to Gasper Fiore – specifically, paragraphs 306-312 of Count 1 and all of Count 12 of the Fourth Superseding Indictment, and their representation that they will not call him as a witness in their case. See United States v. Taylor, No. 07-3151, 2012 WL 2819270, at *7 (6th Cir. July 10, 2012); United States v. Perry, 94 F. App’x 481, 483-84 (9th Cir. 2004). No waiver is necessary. Second, even though Defendant Kilpatrick insists that he still wants to call Fiore as a witness or to cross-examine other witnesses about Fiore, he has not persuasively explained how this testimony will be relevant or otherwise admissible to support his defense. Mr. Kilpatrick acknowledges that “evidentiary and Fifth Amendment roadblocks” may “prohibit [him] from utilizing Mr. Fiore as a witness” (Kilpatrick Conflict Br. at 22-23) and has not convincingly shown how, in light of the government’s decision to dismiss the Fiore allegations, he is being denied his Sixth Amendment right to conflict-free counsel if 2 Mr. Thomas continues to represent him as appointed counsel. The government’s decision to dismiss the Fiore allegations resolves any conflict that might have implicated Mr. Kilpatrick’s Sixth Amendment rights. As the Sixth Circuit explained in Moss v. United States, 323 F.3d 445, 464 (6th Cir. 2003), if a conflict involves “a matter that is irrelevant or the conflict is merely hypothetical, there is no constitutional violation.”1 As the Court explained at the August 14, 2012 hearing, if Defendant’s argument were accepted, then any defendant in any criminal case could disqualify his attorney by simply claiming that he wanted to call one of his attorney’s former clients as a witness. The law does not permit that sort of manipulation. Unless that witness’s testimony satisfies the Federal Rules of Evidence, then the district court’s decision to exclude it does not violate the defendant’s rights. A defendant’s right to “a complete defense does not imply a right to offer evidence that is otherwise inadmissible under the standard rules of evidence.” United States v. Lucas, 357 F.3d 599, 606 (6th Cir. 2004). Finally, any concerns Defendant Kilpatrick may have that Mr. Thomas’s prior representation of Fiore will create a conflict during jury selection are adequately resolved by the government assurance to the Court that it will abide by its commitment to dismiss all allegations in the Fourth Superseding Indictment related to Mr. Fiore and by the fact that the jury questionnaires completed by prospective jurors do not mention Fiore. For all these reasons, the government’s decision to dismiss all allegations related to Gasper Fiore – specifically, paragraphs 306-312 of Count 1 and all of Count 12 of the Fourth Superseding Indictment – resolves any actual or potential conflict of interest. 1The Court also has the option, if necessary, to appoint independent counsel if Mr. Fiore is called as a defense witness. 3 2. Under Facts Presented Here Any Potential Conflict of Interest Arising From Defense Counsels’ “Of Counsel” Affiliation with O’Reilly Rancilio Firm Does Not Require Disqualification Defendant Kwame Kilpatrick also argues that two of his appointed counsel, Jim Thomas and Michael Naughton, should be disqualified because a potential conflict of interest arises out of their “of counsel” relationship with the O’Reilly firm. Kilpatrick’s argument is one of imputed disqualification – members of the O’Reilly firm would be disqualified from representing Kilpatrick in this case because they represent the opposing party in the civil Macomb Interceptor case and thus this Court should impute their disqualification upon “of counsel” attorneys Jim Thomas and Michael Naughton and preclude them from continuing to serve as appointed counsel in this criminal action. For the reasons discussed below, this Court rejects Defendant Kilpatrick’s arguments for disqualification. Defendant Kilpatrick’s brief provides background facts. Mr. Thomas became affiliated with the firm of Plunkett Cooney in 2007. While maintaining separate offices, Mr. Thomas and Mr. Naughton continued their relationship with Plunkett Cooney up until April 1, 2012 when they became affiliated with the Macomb County law firm of O’Reilly Rancilio, P.C. – long after this criminal case had begun and long after the O’Reilly firm had started representing the plaintiffs in the civil Macomb Interceptor case. The Macomb Interceptor case was filed on July 18, 2011. Attorneys Thomas and Naughton were never retained to represent Mr. Kilpatrick in the Macomb Interceptor case, but filed an Answer so as to preserve Mr. Kilpatrick from being defaulted and premised on the understanding that they would soon be replaced with other counsel. The Answer was filed by James C. Thomas, P.C. on September 15, 2011. With no replacement counsel yet 4 named, and with Mr. Kilpatrick’s consent, Mr. Thomas moved to withdraw as Kilpatrick’s counsel on February 16, 2012, but the court, in a March 12, 2012 Order, held the motion in abeyance for 30 days in order to allow Kilpatrick sufficient time to secure substitute counsel. The Macomb Interceptor court did, however, grant the motion to withdraw on March 28, 2012, after being informed by Mr. Thomas that, as of April 1, 2012, he would become “of counsel” to the O’Reilly firm. (Kilpatrick Conflict Br., Ex. 1, 3/28/12 Order of Withdrawal.) Prior to withdrawal in that civil case, Mr. Thomas had no substantive discussions with Kilpatrick, did not participate in any depositions, did not interview any witnesses, and performed no legal research – in essence, the Answer was filed and nothing more was done. (Kilpatrick Conflict Br. at 5). More importantly, with the exception of discussions that privileges would be preserved and that protections would be maintained to avoid any potential or inadvertent sharing of information, neither Thomas nor Naughton had any substantive discussions relating to the Macomb Interceptor case with any member of the O’Reilly firm. (Id.) Since April 1, 2012, when they became “of counsel” to the Macomb County law firm of O’Reilly Rancilio, P.C., Thomas and Naughton have maintained a thick ethical wall between themselves and the O’Reilly firm’s work on the Macomb Interceptor case. All of their client files – including Kilpatrick’s – remain in their own Detroit office, separate from the O’Reilly firm’s office in Sterling Heights. (Id. at 2.) Thomas and Naughton store all of their electronic files – and the electronic files of their staff and calendars – on a separate password-protected server, which no one from the O’Reilly firm can access. (Id.) As stated above, they assure the Court that there have been no substantive discussions with anyone from the O’Reilly firm about the Macomb Interceptor case. (Id. at 5.) Also, if the 5 O’Reilly firm is successful in that litigation, Thomas and Naughton will not share in any legal fees because they have “no financial connection whatsoever” with that case. These precautions adequately protect against any actual or potential conflict of interest, and the O’Reilly firm’s representation of the plaintiffs in the Macomb Interceptor case does not provide a sufficient reason to disqualify attorneys Thomas or Naughton here. See Hempstead Video, Inc. v. Valley Stream, 409 F.3d 127, 135-39 (2d Cir. 2005) (affirming lower court’s decision denying a motion to disqualify an attorney in a similar “of counsel” relationship where sufficient screening was established, and holding that “any presumption of shared confidences that may arise by operation of law [have] been sufficiently rebutted,” and “continued representation . . . should be viewed as free of disqualifying taint”); Gray v. Mem’l Med. Ctr., 855 F. Supp. 377, 379-80 (S.D. Ga. 1994) (observing that “the level of an individual attorney’s involvement within a firm” is an “important factor in a decision to impute disqualification” and denying motion to disqualify “of counsel” attorney). See also In re County of Los Angeles, 223 F.3d. 990, 996-97 (9th Cir. 2000) (observing that “[a] motion to disqualify a law firm can be a powerful litigation tactic,” that “[a] client’s confidences can also be kept inviolate by adopting measures to quarantine the tainted lawyer,” and that “[a]n ethical wall, when implemented in a timely and effective way, can rebut the presumption that a lawyer has contaminated the entire firm” and finding client confidences adequately protected by “appropriate screening measures” and declarations that “the pending case” was not discussed and that the conflicted attorney did “not have access to the case file.”); Manning v. Waring, Cox, James, Sklar and Allen, 849 F.2d 222, 224-225 (6th Cir. 1988) (observing that “[o]ne method of rebutting the presumption [of shared confidences] is by demonstrating that specific institutional screening 6 mechanisms have been implemented to effectively insulate against any flow of confidential information”). Defendant Kilpatrick’s reliance on Shaw v. London Carrier, Inc., No. 1:08-cv-401, 2009 WL 4261168 (W.D. Mich. Nov. 24, 2009), aff’d, 2010 WL 748217 (W.D. Mich. Mar. 1, 2010), for a contrary result is misplaced. First, as the magistrate judge observed, “[a] violation of the rules of professional ethics . . . does not automatically necessitate disqualification of an attorney.” 2009 WL 4261168 at *3 (citation omitted). Second, and more importantly, the facts in Shaw are distinguishable from those presented here. In Shaw, the disqualified attorney was originally counsel for one of the defendants in Shaw and had conducted discovery, filed motions and had “engaged in internal strategy discussions.” Id. at 2. He subsequently joined the plaintiffs’ law firm while the Shaw case was ongoing, and his former client sought to disqualify his new law firm from continuing to represent the plaintiffs based on the imputed disqualification rule embodied in Rule 1.10(b) of the Michigan Rules of Professional Conduct. Under those facts, the magistrate judge found that the plaintiffs’ law firm should have timely notified the Shaw court about the potential conflict so it could confirm that the plaintiff law firm complied with Rule 1.10(b) by putting appropriate screening measures in place and by entering into an arrangement that precluded the screened attorney from sharing in any legal fees the plaintiffs law firm may obtain in that matter. Unlike the plaintiff firm in Shaw, Mr. Thomas immediately informed Judge Cleland in the Macomb Interceptor case why he wanted to withdraw before he joined the O’Reilly firm. Moreover, as discussed above, Mr. Thomas and Mr. Naughton have taken the appropriate steps to be ethically screened from any participation in the Macomb Interceptor civil case 7 and will have no part of legal fees that may be awarded in that case. Their conduct complies with Rule 1.10(b) and rebuts any presumption of shared confidences between them and the O’Reilly firm. Given these facts, Thomas’s and Naughton’s “of counsel” affiliation with the O’Reilly firm does not disqualify them as Defendant Kilpatrick’s appointed counsel in this criminal case. To further protect against any potential conflict, however, this Court will appoint a fourth attorney to cross-examine all government witnesses connected to the Macomb Interceptor Drainage District litigation. The government does not plan to call any of those witnesses until October, so a new attorney will have plenty of time to learn the case, coordinate strategy with Kilpatrick’s three other appointed counsel, and adequately prepare for cross-examination. 3. There Are No Other Conflicts That Would Merit Disqualification of Counsel The Court has inquired about any other actual or potential conflicts with regard to each Defendant and his respective counsel and is satisfied that none exist that would justify disqualifying any of Defendants’ current attorneys in this case. First, as the government explained, it does not plan to call either Robert Schumake or Dante DeMiro (the two other individuals identified in the waiver Defendant Kwame Kilpatrick signed in this case regarding potential conflicts) as a witness in this case, and informs the Court that neither of them has relevant or otherwise admissible evidence that can be introduced at trial. Thomas’s prior representation of Schumake or DeMiro thus will not create a conflict. (Gov’t Conflict Br. at 5; Kilpatrick Conflict Br. at 5, n.3.) Second, although Defendant Kilpatrick references a number of potential witnesses previously represented by attorney Martin Crandall, who is now representing Defendant 8 Victor Mercado, none of those witnesses will create a conflict here. (See Kilpatrick Conflict Br. at 2, n.2.) The government informed the Court that it will call, at most, three of those witnesses during its case-in-chief or rebuttal: Bernard Parker, Lucius Vassar, and Barry Clay, and Mr. Crandall informs the Court that each has provided a conflict waiver, as has his client, Defendant Mercado. (8/13/12 Crandall letter; 8/14/12 Hrg. Tr.) Third, Defendant Ferguson’s attorney, Gerald Evelyn, informed the Court that he formerly represented one witness on the government’s witness list, Johnny Hardiman; that Evelyn represented Hardiman in a state case in the Wayne County Circuit Court Criminal Division in 2005 on an assault charge that was completely unrelated to any of the allegations in this criminal case, and that Mr. Hardiman is willing to waive any potential conflict of interest, as will Evelyn’s client, Defendant Ferguson. (8/14/12 Evelyn letter; 8/14/12 Hrg. Tr.) Fourth, Defendant Bernard Kilpatrick’s attorney, John Shea, informed the Court that he had previously been appointed to represent one person related to this criminal matter, but never contacted the person or performed any substantive work and that appointment was withdrawn because, in the interim, Shea was appointed to represent his current client, Defendant Bernard Kilpatrick. Shea also informed that Court that this person is not on the government’s witness list, is not someone he intends to call as a witness, and, to his knowledge, is not someone any other Defendant would call. Mr. Shea discussed this matter with his client, Defendant Bernard Kilpatrick, who agrees that there is no conflict of interest. (8/14/12 Hrg. Tr.) Having found that no actual or potential conflict of interest justifies the disqualification of any defense counsel, this Court now addresses Defendant Kwame Kilpatrick’s request 9 that substitute counsel be appointed for him because there has been a complete and total breakdown in his relationship with his current appointed counsel. 4. Kilpatrick’s Request to Delay Trial and to Appoint Substitute Counsel is Denied Defendant Kilpatrick has also requested “that the Court allow [him] the opportunity to obtain new counsel.” (8/14/12 Hrg. Ex. A, Kilpatrick Aff. ¶ 24.) To do so, the Court would have to delay trial, probably for at least six months. The Court denies Defendant’s request for new appointed counsel on the eve of trial. The Sixth Amendment right to counsel of choice “does not extend to defendants who require counsel to be appointed for them.” United States v. Gonzalez-Lopez, 548 U.S. 140, 151 (2006). “An indigent defendant has no right to have a particular attorney represent him and therefore must demonstrate ‘good cause’ to warrant substitution of counsel.” United States v. Iles, 906 F.2d 1122, 1130 (6th Cir. 1990). “An inquiry into whether the substitution of counsel is warranted serves several important goals. This procedural protection not only aids in determining whether ‘good cause’ has been shown, but serves to ease the defendant’s distrust, to preserve the integrity of the trial process, and to foster confidence in the jury verdict.” Id. at 1131. The Supreme Court has thus “recognized a trial court’s wide latitude in balancing the right to counsel of choice against the needs of fairness, and against the demands of its calendar.” Gonzalez-Lopez, 548 U.S. at 152 (internal citations omitted). “A litigant cannot play a ‘cat and mouse game’ with the court in order to preserve an issue for appeal or to delay proceedings.” United States v. Krzyske, 836 F.2d 1013, 1017 (6th Cir. 1988). As the Sixth Circuit observed in United States v. Trujillo, 376 F.3d 593, 606 (6th Cir. 10 2004), “[a] motion for new court-appointed counsel based upon defendant’s dissatisfaction with his counsel previously appointed is addressed to the sound discretion of the court,” and is reviewed “for an abuse of discretion.” Factors considered in that review include: “(1) the timeliness of the motion, (2) the adequacy of the court’s inquiry into the matter, (3) the extent of the conflict between the attorney and client and whether it was so great that it resulted in a total lack of communication preventing an adequate defense, and (4) the balancing of these factors with the public’s interest in the prompt and efficient administration of justice.” United States v. Mack, 258 F.3d 548, 556 (6th Cir. 2001); Williams, 176 F.3d at 314; United States v. Jennings, 83 F.3d 145, 148 (6th Cir. 1996). Id. The second factor – the adequacy of the court’s inquiry into the matter – is demonstrated by examining the details in Defendant Kilpatrick’s Conflict Brief and his Affidavit, along with this Court’s inquiry at the August 7th and August 14th hearings. The remaining factors are discussed below. As to the first factor, Kilpatrick’s request is untimely. Thomas has represented Kilpatrick for almost four and a half years in a number of state and federal cases, both civil and criminal. He was first retained in March 2008. (Kilpatrick Conflict Br. at 1, 2-4.) More importantly, Thomas has represented Kilpatrick in this case from the very beginning, starting in June 2010 when Kilpatrick was first indicted and he chose and retained Thomas to represent him. In July 2010, when Kilpatrick could no longer afford to pay Thomas, Kilpatrick successfully requested that Thomas remain on the case as his appointed attorney. (Doc. # 8, CJA Appointment.) As recently as last Tuesday’s hearing, Kilpatrick confirmed to the Court that he had no “separate reason apart from the [Fiore] conflict” to request that Thomas withdraw. (8/07/12 Hrg. Tr. at 24-26.) Kilpatrick told the Court that he “love[d]” Thomas, and had been “trying to figure out some other way [to get rid of the Fiore conflict] without getting rid of [Thomas] and not having an independent counsel.” 11 (8/07/12 Hrg. Tr. at 7, 11.) Now, only six days later – and after 400 potential jurors have already filled out their questionnaires – Kilpatrick claims that his “love” for Thomas has spiraled into an irreconcilable dispute. Such an abrupt change is not credible – particularly given that Kilpatrick has “awaited trial for months without any complaints regarding his representation.” United States v. Marrero, 651 F.3d 453, 465 (6th Cir. 2011), cert. denied, 132 S. Ct. 1042 (2012). Thus, the timing weighs heavily against allowing him to substitute new appointed counsel. Further, Kilpatrick’s professed explanation for the delay lacks credibility. In his affidavit, Kilpatrick claims that he did not fully appreciate the significance of the Fiore conflict until last week (Kilpatrick Aff. ¶¶ 17-18), but concedes that he signed a conflict waiver in this case in January 2011 acknowledging that he was “aware of the potential for conflict” arising from Thomas’s prior representation of Fiore. (Kilpatrick Conflict Br. at 7, Ex. 3, waiver; Kilpatrick Aff. ¶¶ 11-12.) He also concedes that he reviewed a copy of the Fourth Superseding Indictment, filed on February 15, 2012; that he received discovery documents from the government on April 5, 2012, including a Form 302 describing Fiore’s specific involvement in this case; and on June 2, 2012 was provided with a witness list that included Fiore. (8/07/12 Hrg. Tr.; 8/14/12 Hrg. Tr.) Given the above, Kilpatrick’s attempt to turn Fiore into a recent revelation that has created a complete breakdown of the attorney/client relationship lacks credibility. The Court understands Kilpatrick’s argument that it was Thomas’s responsibility to explain Fiore’s significance and to once again raise the conflict issue. This may be so – and it is not trivial – but it is not sufficient to justify saying there is a complete breakdown 12 of his relationship with Thomas that precludes an adequate defense by his well-prepared and well-qualified appointed counsel. The Court cannot accept that their attorney/client relationship is now suspect, especially considering the timing of Kilpatrick’s complaint, in light of the four-and-a-half-year attorney/client relationship between Kilpatrick and Thomas in both civil and criminal, federal and state litigation, including this case. Neither Kilpatrick nor Thomas has demonstrated that any dispute here is “so great that it [has] resulted in a total lack of communication preventing an adequate defense.” Marrero, 651 F.3d at 466 (internal quotation marks and citation omitted). Thomas has confirmed that he is “ready” and “willing” to proceed as Kilpatrick’s appointed counsel. (8/07/12 Hrg. Tr. at 4.) Thomas also informed the Court that “Kilpatrick has become very, very engaged in preparation in the last month,” and Kilpatrick acknowledged that Thomas had provided him with access to the government’s discovery materials and that he had gone through FBI 302s and grand jury testimony. (Id. at 6-7.) Kilpatrick’s Conflict Brief further demonstrates that Kilpatrick and Thomas are capable of collaborating on Kilpatrick’s legal defense. A “shouting conversation” and lingering ill will about the Fiore conflict do not rise to the level of the sort of impasse that would justify appointment of substitute counsel. Rather, the incidents described in Kilpatrick’s affidavit describe bickering and disagreements over Thomas’s handling of the Fiore conflict rather than a “total lack of communication preventing an adequate defense.” Marrero, 651 F.3d at 466. More importantly, now that the government has agreed to dismiss the Fiore allegations in their entirety, Kilpatrick’s inability to put that issue behind him suggests that he is manufacturing a wedge issue in an effort to delay trial. Finally, the Court addresses the fourth factor – the public’s interest in the prompt and 13 efficient administration of justice. The public’s interest in the prompt and efficient administration of justice outweighs Kilpatrick’s interest in substituting new appointed counsel on the eve of trial. This case is one of the biggest criminal cases currently pending in this district. It is already consuming the resources of 400 potential jurors, at least 10 defense attorneys, almost 200 witnesses, and much of the Court’s staff. The trial date has been set for over six months, and the Court has set aside four months of its calendar to try this case. Moving such a resource-intensive trial at the last minute would be a logistical nightmare for all parties. Under similar circumstances, the Sixth Circuit has rejected a last minute request to substitute counsel. For example, in United States v. Mooneyham, 473 F.3d 280, 291 (6th Cir. 2007), the Sixth Circuit affirmed the trial court’s denial of the defendant’s request for a continuance four days before trial so that he could substitute two retained counsel for his appointed counsel. The defendant expressed a number of complaints with his appointed counsel, including his belief “that [appointed counsel]’s resistence” to the defendant’s desire to “interview[ ] a possible defense witness” in his previous trial was the result of his appointed counsel’s conflict of interest arising from his prior representation of that witness and because appointed counsel did not share all of the discovery materials with him. Id. at 291-92. The district court denied the defendant’s request, finding that (1) appointed counsel was well-prepared and well-qualified; (2) the defendant had not shown “a total lack of communication between attorney and client, preventing an adequate defense;” and (3) the defendant’s “motion was an attempt to manipulate the trial, that a continuance would cause prejudice to the prosecution and create difficulties for the trial court based on its other scheduling needs, and that it would frustrate the public interest in the prompt and 14 efficient administration of justice.” Id. at 292. On appeal, the defendant raised the same arguments rejected by the district court. The Sixth Circuit affirmed the district court’s decision, finding that “the district court heard full argument on the issue and considered all factors relevant to the ‘good cause’ analysis as mandated by the law of this circuit” and did not abuse its discretion. Id. at 292-93. See also United States v. Griffin, No. 10-1810, 2011 WL 6355214, **3-4 (6th Cir. Dec. 20, 2011) (affirming district court’s decision denying continuance to allow defendant to substitute retained counsel for court-appointed counsel presented to the court on the first day of trial); United States v. Alkazoff, No. 90-2006, 1992 WL 180179, *4 (6th Cir. July 29, 1992) (same; observing that “[b]ecause defendant had three months prior to trial to obtain counsel of his choice, and in view of his claim of indigency, the timing of his request for a continuance raises the suspicion that it was merely a delaying tactic.”); and Lockett v. Arn, 740 F.2d 407, 413 (6th Cir. 1984) (holding, on habeas review, that the trial court did not abuse its discretion in denying a request the day before trial to replace appointed counsel with retained counsel). After a thorough inquiry and consideration of all the above factors, the Court denies Defendant Kwame Kilpatrick’s request for the appointment of substitute counsel. B. Conclusion For the above-stated reasons and those stated on the record at the August 14, 2012 hearing, Defendant Kwame Kilpatrick’s request for new appointed counsel is DENIED, and the trial in this matter will not be delayed. s/Nancy G. Edmunds Nancy G. Edmunds United States District Judge Dated: August 15, 2012 15 I hereby certify that a copy of the foregoing document was served upon counsel of record on August 15, 2012, by electronic and/or ordinary mail. s/Carol A. Hemeyer Case Manager 16

=== CENTRA, INC., a Delaware Corporation and DETROIT INTERNATIONAL BRIDGE COMPANY, a Michigan Corporation ===

Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 1 of 50 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION CENTRA, INC., a Delaware Corporation and DETROIT INTERNATIONAL BRIDGE COMPANY, a Michigan Corporation Case No. 06-15185 Plaintiffs, Honorable Nancy G. Edmunds v. DAVID ESTRIN, Individually, and GOWLING LAFLEUR HENDERSON LLP, a Canadian Limited Liability Partnership, Defendants. / ORDER DENYING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION [46] The Ambassador Bridge arches gracefully across the Detroit River, a familiar landmark to those who live or work in Detroit or Windsor. Sadly, the last decade has shown that the lovely bridge, now eighty years old, may no longer be up to the demands of North America’s busiest border crossing. The increased security demands of 9-11, the volume of truck traffic, the advent of casino traffic in both directions, and the stress on the infrastructure itself, all have contributed to the pressure to expand capacity at the border, most likely through building another bridge. CenTra, Inc. the private company which owns the Ambassador Bridge has actively pursued a plan to build a second span adjacent to the existing bridge, a project sometimes referred to as “twinning.” Another group known as DRIC (Detroit River International Crossing) is also developing and pursuing plans for a new bridge down river from CenTra's proposed second span. The City of Windsor, in the meantime, has had an ongoing battle Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 2 of 50 with the bridge developers over traffic, inadequate roads and infrastructure, land use and zoning, and environmental issues. CenTra and its owner, Matty Maroun, have moved forward aggressively with plans for a second span, despite opposition from the City of Windsor, which has been a persistent thorn in their side. The instant case is a small part of the antagonism between CenTra and Windsor, arising out of a legal conflict which occurred when the law firm of Gowling Lafleur Henderson, LLP (“Gowlings”) inadvertently represented both Windsor and CenTra for 16 months in 2005-06. Claiming they had been unaware of Gowlings’ work on behalf of Windsor, CenTra seeks a preliminary injunction, which would rid them of one of their ablest adversaries, David Estrin of Gowlings, Windsor’s counsel. For the reasons set forth below, the Court denies the motion for preliminary injunction. I. FINDINGS REGARDING BACKGROUND FACTS AND PROCEDURAL HISTORY A. Parties and Key Individuals 1. Plaintiffs CenTra, Inc. and Detroit International Bridge Company (“DIBC”), together with their non-party affiliate, Canadian Transit Company (“CTC”), own the Ambassador Bridge (collectively, “CenTra” unless there is a reason to refer to them individually). Since 1990, Dan Stamper has been the president of DIBC and CTC, where he began working in 1986. (Prelim. Inj. Hr'g Tr., Stamper, 1/29/09, 8-11, 131).1 Manuel “Matty” Moroun is the primary owner of CenTra. Fred Calderone is a vice-president of CenTra, Inc., a certified public accountant and attorney, and his office is next to Stamper’s. (Calderone, 1/13/09, 22, 25, 99-100). 1All citations to individuals are to the preliminary injunction hearing transcript. 2 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 3 of 50 2. Defendant Gowling Lafleur Henderson LLP (“Gowlings”) is a Canadian law firm, with approximately 750 lawyers and nine offices in Canada, as well as offices in Moscow and London. Gowlings has no offices in the United States. None of Gowlings’ attorneys are licensed to practice law in Michigan. (Jolliffe, 2/20/09, 3-6). 3. Defendant David Estrin is a Gowlings partner who, since 1971, has specialized in environmental and related planning matters. Estrin is an attorney licensed by the Law Society of Upper Canada, and is not licensed in the United States. (Estrin, 2/3/09, 42-45). 4. The City of Windsor (not a party to this action) is a Canadian city of approximately 216,000 residents, located in Southeastern Ontario, on the Detroit River, at the Canadian access point of the Ambassador Bridge. 5. CenTra contends that Defendants breached contractual and fiduciary duties owed to CenTra and committed malpractice. To support those claims, CenTra presented evidence that Defendants violated certain ethical obligations concerning the representation of clients with adverse interests. B. Basic Contentions of the Parties 6. CenTra has an interest in building a second span across the Detroit River, adjacent to the existing Ambassador Bridge (“the Second Span”). This project is occasionally referred to as “twinning” the existing bridge. CenTra contends that in 2005 and 2006 Estrin was representing Windsor against the Second Span adverse to CenTra’s interest, at the same time Dale Hill and Tim Wach (Gowlings professionals) were representing CenTra and assisting CenTra to obtain financing to build the Second Span. CenTra contends that this was a current client conflict of interest to which it did not consent, and, as a result, Gowlings should now be enjoined from representing Windsor adverse to 3 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 4 of 50 the Second Span. CenTra sued Gowlings and Estrin in November 2006, after which Gowlings withdrew from representing CenTra but continued and continues to represent Windsor. 7. CenTra also contends that Gowlings represented it in the 1980’s and early 1990’s on matters substantially related to Estrin’s current representation of Windsor. CenTra contends that this earlier work creates a conflict with Estrin’s present representation of Windsor, to which it did not consent. CenTra contends that even if the Hill and Wach representations of CenTra are analyzed under the former client standards, such representations are substantially related to Estrin’s representation of Windsor, and, as a result, Gowlings should be enjoined from representing Windsor adverse to the Second Span. 8. Gowlings contends that CenTra impliedly consented to Gowlings’ representation of Windsor, and CenTra cannot now seek to enjoin Gowlings from representing Windsor adverse to the Second Span or otherwise. More specifically, Gowlings contends that when CenTra hired Hill and Wach in 2005, CenTra did so knowing that Estrin and Gowlings already represented Windsor adverse to CenTra on the Second Span and on other related border crossing traffic issues. In addition, Defendants contend that even before CenTra hired Gowlings in 2005, CenTra’s lack of any objection to Estrin’s representation of Windsor adverse to CenTra on the Second Span (which was known to CenTra) is also implied consent and waiver to the alleged former client conflicts arising out of Gowlings’ representation of CenTra in the 1980’s and 1990’s. Gowlings contends that CenTra’s consent was fully informed and that any conflict was in fact consentable. 4 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 5 of 50 9. Gowlings also contends that even absent consent, under a former-client conflict analysis, neither Gowlings’ representation of CenTra in the 1980’s and 1990’s, nor the Hill and Wach representations of CenTra in 2005-2006, is sufficiently related to Estrin’s representation of Windsor to constitute a conflict. Nor have any confidences of CenTra ever been compromised, and there is no danger they ever will. Gowlings also contends that, even if an ethics violation were found, CenTra has made no showing of irreparable harm nor met any of the other injunction factors. C. Procedural History of the Dispute 10. The Complaint in this matter was filed on November 20, 2006. Gowlings immediately moved for summary judgment, which was granted by the Court on April 30, 2007. Plaintiffs appealed and prevailed, and that case was remanded to the District Court on August 15, 2008. 11. On September 25, 2008, Plaintiffs filed a motion for preliminary injunction seeking to enjoin Gowlings from continuing to represent Windsor in matters related to the building of a Second Span at the Ambassador Bridge. 12. The Court held a hearing on Plaintiffs’ preliminary injunction motion from January 12, 2009 to February 27, 2009, involving 14 days of testimony, 15 witnesses, and hundreds of exhibits. In the course of that hearing, the Court sought to address the issues raised by the Sixth Circuit in its opinion and order of remand. 5 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 6 of 50 II. FINDINGS REGARDING BASES OF PLAINTIFFS’ PRELIMINARY INJUNCTION MOTION D. Early Chronology 13. In the late 1970’s, CenTra (DIBC and CTC) consolidated its ownership of the Ambassador Bridge. (Moran, 2/12/09, 187-189). The government of Canada, having been informed of CenTra’s ownership aspirations in 1972, had passed the Foreign Investment Review Act (FIRA) (Moran, 2/12/09, 187), which ultimately provided that any private entity which bought the bridge would have to give it back to Canada, without payment (Moran, 2/12/09, 194). 14. In response to the Foreign Investment Review Act, CenTra initiated litigation in both Canada and the United States to enforce its ownership rights to the bridge. (Moran, 2/12/09, 192-194). The Canadian lawsuit was known as the FIRA litigation. CenTra initially engaged the firm of Goodman & Goodman to represent it in the FIRA litigation. (Moran, 2/12/09, 190). That firm withdrew in 1980, and CenTra retained Gowlings as successor counsel. (Moran, 2/12/09, 197). 15. As part of its work representing CenTra, Goodman & Goodman is alleged to have prepared a memorandum (The Goodman memorandum), which “collected in one spot the rights and privileges that one would have as the owner of DIBC, CTC, and Ambassador Bridge, and its adjoining lands.” (Moran, 2/12/09, 197). Although Pat Moran (CenTra’s counsel from 1973 to 1990, and from 2007 to the present) testified as to the existence and contents of the Goodman memorandum, the document itself could not be located and was not produced at the hearing (for in camera inspection or otherwise). Mr. Moran testified 6 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 7 of 50 that the Goodman memorandum and its supporting documents were used by Gowlings in its representation of CenTra. (Moran, 2/12/09, 198). 16. The Gowlings lawyers involved in the FIRA litigation were Gordon Henderson, who died in 1994, Emilio Binavince, who left Gowlings in 1990, and Ron Lunau, who was an associate during the FIRA matter and is now a Gowlings partner. (Moran, 2/12/09, 198). 17. The FIRA litigation was essentially resolved in 1990. Final settlement papers were signed in 1992. Mr. Binavince, who had left Gowlings in 1990, handled the final phases of the settlement. 18. Following the conclusion of the FIRA litigation, documents were retained in an offsite storage facility by Gowlings and ultimately copied and sent to CenTra. (Binavince, 2/12/09, 160-61, 169-70). 19. In addition to the FIRA Litigation, Gowlings represented CenTra in the 1980’s and early 1990’s on other matters relating to the existing Ambassador Bridge. (Stamper, 1/29/09, 16-20; 2/2/09, 8-9). Pat Moran also represented CenTra and interacted with Gowlings in the 1980’s until 1990, through his firm Simpson & Moran. Moran testified that Gowlings, principally through Gordon Henderson, provided oral opinions on 79 different topics during this period. (Moran, 2/12/09, 186-187, 194; 2/17/09, 14-17, 36-44, 91-99). Attorneys who worked with Henderson testified that Henderson was not one to issue major or important opinions to clients orally, but would reduce them to writing. (Jolliffe, 2/20/09, 26-28; Lunau, 2/26/09, 12-13). Moran did not testify as to the substance of any such oral opinions. Moran was discharged by CenTra in 1990 and subsequently rehired as general counsel in 2007, after CenTra filed this lawsuit. (Moran, 2/12/09, 185, 200). From 1992- 2006, Moran had no interaction with Gowlings on CenTra’s behalf. (Moran, 2/17/09, 81). 7 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 8 of 50 20. Stamper’s and Moran’s testimony implied that the written and oral opinions provided by Gowlings, and the confidential information provided to Gowlings by CenTra, in the 1980’s and 1990’s, were related and relevant to the Second Span and Estrin’s work for Windsor adverse to the Second Span. (Stamper, 1/29/09, 21-24, 129-130, 139-141; 1/30/09, 146, 148; Moran, 2/17/09, 11, 45-50, 81, 105-106). However, with the exception of one written opinion and the FIRA settlement agreements, no specific evidence was presented as to the content of any such opinions or confidential information.2 From the evidence presented by CenTra, the matters Gowlings worked on for CenTra in the 1980’s and 1990’s do not have any relationship with the Second Span or Estrin’s representation of Windsor concerning the Second Span. The 1990 and 1992 FIRA settlement agreements, with which Gowlings was not involved, merely require CenTra to provide and maintain adequate customs facilities to handle traffic from the Ambassador Bridge. (Defs.’ Exs. 586, 587; Binavince, 2/12/09, 158; Moran, 2/12/09, 195-196; 2/17/09, 4, 7, 81, 84; Lunau, 2/26/09, 14, 18). Those agreements have no relationship whatsoever to the Second Span or to Estrin’s work for Windsor. The same is true for the one written opinion, Pls.’ Exhibit 141 from 1986, introduced by CenTra. 2 CenTra argued that the purpose for seeking injunctive relief was largely to protect the disclosure of confidential information. The Court, recognizing Plaintiffs' legitimate interest in protecting confidential information, offered the options of in camera review, protective orders, and any other appropriate procedure Plaintiffs wished to utilize to be sure their confidential information was not compromised. Plaintiffs nevertheless did not produce or describe with particularity any document or confidential information they sought to protect (or which they believed had been inappropriately disclosed or utilized), other than the Goodman memorandum (not produced), the FIRA settlement documents and one written opinion. (Pls.’ Ex. 141). 8 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 9 of 50 21. This finding is fully supported by Stamper’s testimony that the Second Span was not even conceived of as an idea until after Gowlings stopped representing CenTra in the 1990’s, and after Moran ceased representing CenTra in 1990. (Stamper, 1/29/09, 22-23, 42, 44, 138; 1/30/09, 145; Binavince, 1/12/09, 173). Stamper testified that there was no plan to build any type of second span until 1995 or after, and that the decision to locate a twin Second Span next to the existing Ambassador Bridge was not made until 2004. (Stamper, 1/29/09, 23, 42-43, 138; 1/30/09, 145). Binavince, who was called as a witness by and who is currently a consultant for CenTra, also testified that before he left Gowlings in 1990 he gave no opinions or advice relating to the Second Span or any second span of the Ambassador Bridge. (Binavince, 2/12/09, 121-122, 157, 164-165, 173-174, 177). Likewise, Lunau testified that the FIRA Litigation and the matters he worked on in the 1980’s and 1990’s had nothing to do with the Second Span. (Lunau, 2/26/09, 9-10, 14-15). Lunau has virtually no recollection of the specifics of any documents he may have seen in the 1980’s and 1990’s regarding CenTra, has not seen any such documents for almost 20 years, and had not spoken about any of these matters until this lawsuit was filed. (Lunau, 2/26/09, 9-11, 14, 18, 67, 69). The matters on which Gowlings represented CenTra in the 1980’s and 1990’s are not related to the Second Span or Estrin’s work for Windsor.3 3 Plaintiffs have argued that the matters are related because they both involve issues concerning the scope of Canadian governmental authority in border and bridge matters. One aspect of this dispute is whether Windsor should have control over decisions of zoning, roads, and approaches related to the border under the International Bridges and Tunnels Act. Although Mr. Moran testified that in the course of the 2005-06 representation of CenTra Gowlings advanced a position adverse to Windsor on Centra’s behalf (in connection with proposed legislation known as Bill C3), it is clear from the testimony of Tim Wach that he took no active position on CenTra’s behalf and merely reported back to Calderone on the status of the Canadian legislation. (Wach, 2/24/09, 42). In addition, Mr. Moran testified that Gowlings had opined in the 1980’s that CTC (one of the CenTra 9 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 10 of 50 E. Gowlings’ Retention By Windsor and the Peace Bridge in Opposition to CenTra 22. By May 2003, Estrin and Gowlings had been retained by the Peace Bridge Authority concerning the bridge in Fort Erie near Niagara Falls. At that time, CenTra was considering building a bridge near the Niagara Falls border crossing which would have competed with the existing Peace Bridge. On May 22, 2003 and September 9, 2004, Estrin sent letters on Gowlings letterhead to Stamper and the “Ambassador Bridge,” which Stamper testified that he received and understood, in which Estrin threatened legal action against them on behalf of the Peace Bridge. (Stamper, 1/30/09, 172-173; Pls.’ Exs. 125, 126; Estrin, 2/12/09, 57). When he began his work on behalf of the Peace Bridge, Estrin did a conflict check and discovered that Ambassador Bridge had been a Gowlings client in the past, but he did not explore the substance of that representation which was reflected in Gowlings’ computer client base as a closed administrative matter. (Estrin, 2/3/09, 29-30, 35). Estrin did not list CenTra or Ambassador Bridge as an adverse party when he opened the Peace Bridge file. Notwithstanding their receipt of the Estrin and Gowlings letters threatening suit on behalf of the Peace Bridge, CenTra and Stamper did not object to Gowlings’ representation of that adverse client. component companies) is a federal undertaking. (Moran, 2/17/09, 24-28). This characterization would suggest limitations on Windsor’s ability to act on bridge and border matters. Mr. Moran testified that Mr. Estrin had taken a contrary position on this issue on behalf of Windsor. (Moran, 2/17/09, 28). In support of Mr. Moran’s testimony, however, the only exhibit offered was Pls.’ Ex. 141, which did not purport to examine the scope of authority which could be exercised by the City of Windsor on anything other than actual bridge operations of the existing Ambassador Bridge. Nor has Mr. Estrin’s work for Windsor focused on whether or not CTC is a federal undertaking. Moreover CenTra’s active involvement concerning opposition to OPA 43, legislation which CenTra thought would impact the authority of Windsor in relation to the Second Span, suggests that CenTra did not believe that the governmental authority issues had been finally resolved even as recently as 2006. 10 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 11 of 50 23. In late 2002, Windsor retained Estrin and Gowlings to represent it concerning general border crossing issues. (Defs.’ Ex. 576A; Wilkki, 1/14/09, 9, 19, 30; Estrin, 2/3/09, 13-14). At the time he began his work for Windsor, Estrin ran a conflict check but did not name CenTra or any of the bridge companies as adverse parties. He considered that the only potential adverse parties at that time were the federal and provincial governments. (Estrin, 2/3/09, 14-15). When the Windsor engagement later became actively adverse to CenTra, Estrin did not do a follow-up conflict check. Although he became aware in 2003 that Gowlings had previously represented the Ambassador Bridge, he did not inquire as to the scope and substance of that earlier representation, which he understood to have ended some eleven years earlier. (Estrin, 2/2/09, 29-35; MacKenzie, 2/18/09, 56; Wolfram, 2/20/09, 102-03). 24. Since late 2002, Estrin has continuously represented Windsor on numerous border crossing issues, many of which were highly publicized in Windsor. Those matters include the recommendations of the 60-Day Committee, Essex-Windsor Master Plan, Nine- Point Plan, Sam Schwartz study, DRIC, CenTra’s proposal to build the Second Span, CenTra’s site plan and related agreement with Windsor, and OPA 43 Windsor Bylaw litigation. (Wilkki, 1/14/09, 20-23, 125). These matters are very complex and intertwined, some in small and others in very significant ways. (Wilkki, 1/14/09, 15). All of these matters address in some fashion CenTra’s positions concerning its ability to direct traffic to and from the Ambassador Bridge and generally Windsor’s opposition to CenTra, including with respect to the Second Span. (Stamper, 1/30/09, 35, 107; Estrin, 2/3/09, 46- 56, 60-71, 73-91; Pls.’ Exs. 129, 150; Defs. Exs.’ 585, 575, 570A-M, O, 572, 574, 576A-H, 577, 501, 502; Estrin, 2/12/09, 3-11, 31-42, 77-86). 11 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 12 of 50 25. Although Mr. Stamper testified that he was not really aware of the adverse positions being advanced by Windsor and its counsel, Estrin, that testimony is hard to credit given that Stamper is president of CenTra, whose primary asset is the Ambassador Bridge, and that CenTra had people working on its behalf or in its interests (Mr. Arditti; Mr. Paroian) whose responsibility appeared to include keeping CenTra informed of the oppositional activities of the City of Windsor. (Stamper, 1/30/09, 75, 130-32, 138-39). 26. Windsor has spent millions of public dollars on Estrin and Gowlings since 2002 on these matters. (Wilkki, 1/14/09, 9, 18-19). Estrin has taken the lead on all of these matters for Windsor, and he is essential to Windsor’s interests with respect to all of them. These border issues are vitally important to Windsor, and Windsor takes no action with respect to them without consulting Estrin. Estrin is not interchangeable with other lawyers. He has an exceptional level of expertise and knowledge in environmental law and process and is well recognized at senior levels of local, federal and provincial governments. (Wilkki, 1/14/09, 8-11, 40; Estrin 2/3/09, 46-52; Pls.’ Ex. 150; Defs.’ Ex. 585). There are only a handful of attorneys in Canada who could represent Windsor as Estrin has, and none that have the more than six-year history with Windsor coordinating all aspects of Windsor’s strategy and its expert consultants on these complex and intertwined matters. Windsor considers Estrin to be irreplaceable, and it would be in an untenable situation for a lengthy and crucial time period if Estrin is prevented from representing Windsor on these matters, including the matters relating to the Second Span. (Wilkki, 1/14/09, 8, 11-13, 37, 125; Defs.’ Ex. 514). 27. As Estrin’s representation of Windsor progressed, Windsor became adverse to CenTra on a number of matters. Stamper acknowledged that he was aware of this both 12 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 13 of 50 from his own personal knowledge and from the news media in Windsor, which publicly reported Estrin’s adversity to CenTra. (Defs.’ Exs. 570A-M, O). CenTra specifically monitors newspaper, media coverage, and governmental actions concerning the Ambassador Bridge. (Defs.’ Ex. 542, p. 24; Stamper, 1/29/09, 135-136; 1/30/09, 16). Stamper was aware, in early 2004, through news articles or Windsor City Council Minutes that Estrin was representing Windsor on disputes over the routes for international truck traffic leading to the border. (Stamper, 1/30/09, 31, 128, 130; Defs.’ Ex. 570G; Pls.’ Ex. 149). 28. In September 2004, Stamper had several heated, adverse exchanges with Estrin and Gowlings. First, Stamper received Estrin’s letter on Gowlings’ letterhead dated September 9, 2004, in which Estrin threatened to sue on behalf of the Peace Bridge. (Pls.’ Ex. 126). 29. Estrin also sent a draft “Site Plan Agreement” to Stamper on September 14, 2004, concerning the plaza on the Canadian side of the Ambassador Bridge. (Pls.’ Ex. 503; Stamper, 1/29/09, 87; 1/30/09, 72-74). Estrin’s cover letter on Gowlings’ letterhead stated: In essence, the City wishes to ensure that by processing your application it is clear that doing so is not considered an endorsement by the City of your proposal to twin the existing bridge as proposed in the July 14, 2004 Preliminary Review Permit Application nor considered to be any acknowledgement or acquiescence by the City that you have a statutory or other right to build a second bridge from Windsor to Detroit. . . . We believe this . . . serves to ensure that the interests of the City with respect to your future intentions regarding a second span are not in any way prejudiced. (Pls.’ Ex. 127; Defs.’ Ex. 503) (emphasis added). 13 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 14 of 50 30. The July 14, 2004 Preliminary Review Permit Application referred to in Estrin’s letter to Stamper is CenTra’s application to the U.S. Coast Guard for a permit for the Second Span (“Second Span Permit Application”). (Defs.’ Ex. 502). The draft agreement Estrin drafted and enclosed with that letter stated in pertinent part: f) the CTC and the DIBC on July 14, 2004 made a “Preliminary Review Permit Application” for twinning of the Ambassador Bridge which application indicates the second bridge would be served by an expanded plaza on the Canadian side . . . which is the subject of the site plan approval application; and g) City Council has previously expressed its concern about the twinning of the Ambassador Bridge at the location proposed because it will exacerbate the substantial pollution and safety problems being caused by international truck traffic infiltrating core residential, institutional and business areas of the City; and 1. The developers will . . . submit a . . . modified application . . . [that] (i) eliminates from the proposed development the north-western portion of the area now labelled “Bridge Deck Extension”, i.e., that area which would only be required in connection with a second bridge crossing; 3. The developers (a) (c) acknowledge their expenditure of money in connection with this development is at their risk having regard to the current position of the City as opposed to a second bridge at this location; * * * agree that should [they] in [sic] future proceed with an application to construct a second or twinned bridge in this location they will provide an environmental impact assessment which consider the project to be assessed as the proposed bridge and any associated road, road widenings, closings, approaches, buildings, plaza, inspection or other facilities and structures required for the working of traffic to from and over the bridge. (Pls.’ Ex. 127; Defs.’ Ex. 503 (emphasis added); Estrin, 2/3/09, 104-106). 31. Stamper received and understood this draft agreement in September 2004: Q. Okay. If you look down at Number 3(a) on Page 3, and 3(a) of Mr. Estrin’s draft agreement says: “The developers (a) acknowledge their expenditure of money in connection with this development is at their risk having regard 14 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 15 of 50 to the current position of the City as opposed to a second bridge at this location.” A. That’s what it says, yes. Q. Okay. Certainly when you read 3(a) you understood that the City was opposed to the second span, correct? A. I understand the language that he used says that, yes. * * * Q. Mr. Estrin of the Gowling firm was representing the City of Windsor in connection with its opposition to the second span of the Ambassador Bridge, correct? A. I would read that into the paragraph you are talking about, yes. (Stamper, 1/30/09, 79-80). 32. Estrin’s letter and draft agreement led Stamper to contact the office of the Mayor of Windsor to complain about it. (Defs.’ Ex. 519). This resulted in a face-to-face meeting between Estrin and Stamper at CenTra’s office on September 30, 2004. At the meeting, Estrin expressly reiterated that Windsor was opposed to CenTra’s plan to build the Second Span. (Estrin, 2/3/09, 112-14). Stamper admits that Estrin said Windsor was opposed to the Bridge Deck Extension and that Windsor did not want its actions to be construed in any way as an approval by Windsor of the Second Span. (Stamper, 1/30/09, 87-88). The meeting with Estrin then became so heated that the CenTra representatives, including Stamper, temporarily left the conference room. (Stamper, 1/30/09, 89; Estrin, 2/3/09, 112-14). 33. The meeting ended without an agreement, but negotiations between Estrin and CenTra’s lawyers continued. (Stamper, 1/30/09, 89; Estrin, 2/3/09, 114, 116). The final Site Plan Agreement, completed in February 2005, expressly reserves Windsor’s rights to object to CenTra’s plan to twin the bridge as proposed in the Second Span Permit Application. (Defs.’ Ex. 504, ¶S-21; Estrin, 2/12/09, 14-15). 15 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 16 of 50 34. Neither Stamper nor CenTra objected at any point in this process that Gowlings had any conflict of interest because Gowlings had represented CenTra in the 1980’s and 1990’s on any related matters. (Stamper, 1/30/09, 75-76; Estrin, 2/3/09, 108, 115-16). 35. The combination of CenTra’s Second Span Permit Application and the site plan caused Estrin and Windsor to conclude, rightly or wrongly, that a portion of the site plan improvements, referred to as the Bridge Deck Extension, had no other purpose but to connect to and receive the Second Span. In Windsor’s view, the two were entirely entangled. (Wilkki, 1/14/09, 104, 120-124; Estrin, 2/3/09, 90-98, 100-02; Defs.’ Exs. 518, p. 26; 522A; 584, pp. 10, 11, 13, 14, 23; Stamper, 1/30/09, 54-56, 64, 69-70; Estrin, 2/12/09, 16-24; 2/3/09, 90-102). In CenTra’s view, CenTra did not seek Windsor’s endorsement for the Second Span, and the two were not related. (Stamper, 1/29/09, 77, 89; 1/30/09, 9, 11). 36. Whether Windsor was right or wrong makes no difference to the issues in this case. What matters is that the Second Span Permit Application and the site plan caused Windsor and Estrin to raise in writing and orally to CenTra, and to Stamper specifically, an objection and opposition to CenTra’s plan to build the Second Span, and specifically to the Second Span Permit Application and environmental impact assessment issues. (Tr., 1/14/09, 104-05; Pls.’ Ex. 127; Defs.’ Ex. 503). 37. In addition, Stamper’s and CenTra’s adversity to Estrin and Gowlings, on Windsor’s behalf, continued before, during and after CenTra hired Hill (June 2005) and Wach (November 2005) of Gowlings. For instance, the OPA 43 proceeding was litigation in which Windsor, represented by Estrin, was adverse to CenTra concerning the expansion of the Ambassador Bridge. This proceeding began in 2004 and continued through 2007. 16 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 17 of 50 (Estrin, 2/3/09, 85-91). Stamper was receiving reports and input from CenTra’s lawyer, Paroian, on the matter throughout. (Defs.’ Ex. 507, pp. 34, 37, 41, 45, 48-50). During the OPA proceeding, in July 2006, and during the period Hill and Wach were also working for CenTra, Paroian testified on CenTra’s behalf that Windsor was publicly on record as opposing the expansion or twinning of the Ambassador Bridge and that Windsor was a competitor of the bridge. (Defs.’ Ex. 507, p. 11, ¶¶ 24, 25). Paroian's testimony on CenTra’s behalf was at the same time that Estrin and Gowlings were representing Windsor. (Defs.’ Ex. 507, pp. 5-13, Paroian Affidavit). On Windsor’s behalf, Estrin had also sent a letter to the U.S. Coast Guard on November 11, 2004, opposing the Second Span Permit Application, which generally raised the same issues that Estrin again raised in his September 2006 letter to the Coast Guard. (Defs.’ Ex. 571; Estrin, 2/3/09, 107). F. CenTra’s Retention of Hill and Wach 38. From 1989 to 2005, Dale Hill worked as a tax professional (not a lawyer) for the Canadian Revenue Agency, the Canadian equivalent of the I.R.S. (Hill, 2/17/09, 113- 117). Mr. Hill’s expertise is in an area called “transfer pricing,” which involves the allocation of revenues to U.S. and Canadian taxing authorities. (Hill, 2/17/09; 116). In the case of CenTra, transfer pricing concerns revenues generated by tolls on the Ambassador Bridge, and how much of those tolls should be allocated to U.S. and Canadian business respectively. (Hill, 2/17/09, 116). 39. By all accounts, Mr. Hill is Canada’s leading expert on transfer pricing issues. (Calderone, 1/13/09, 39-40). Prior to 2005, he was the Canadian Revenue Authority (“CRA”) representative assigned to CenTra Ambassador Bridge matters. (Hill, 2/17/09; 117- 118). His primary contact at CenTra was Fred Calderone. (Hill, 2/17/09; 118). 17 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 18 of 50 40. In May of 2005, Mr. Hill informed Mr. Calderone that he was leaving the CRA to join the Gowlings firm in private practice. (Hill, 2/17/09; 118). Mr. Hill and Mr. Calderone then discussed whether Mr. Hill might be able to represent CenTra in transfer pricing matters after joining Gowlings. (Hill, 2/17/09; 119-120). 41. In June, 2005, CenTra engaged Gowlings for transfer pricing work. Stamper mentioned to Hill that CenTra had previously retained Gowlings many years earlier. (Hill, 2/17/09, 121-122). Calderone discussed the retention of Hill with Stamper, and Matty Moroun approved Hill’s retention. (Calderone, 1/13/09, 36-37; Stamper, 1/30/09, 93-94). At the time of the initial discussions with Hill, Stamper admits knowing that Estrin was representing Windsor adverse to CTC on the OPA 43 matter. (Stamper, 1/30/09, 95). This did not bother Stamper because he believed it would be a real coup to retain Hill since Hill had just been working for the CRA on CenTra’s matter. (Stamper, 1/30/09, 97-98; Hill, 2/17/09, 113-17). As Calderone testified, “[T]here are other good [transfer pricing] professionals out there, but I don’t think I found anybody that I would compare to Dale Hill.” (Calderone, 1/13/09, 40). These discussions of hiring Hill occurred only 3-4 months after CenTra and Estrin completed the Site Plan Agreement in which Windsor again noted its objection to the Second Span. (Defs.’ Ex. 504, ¶S-21). 42. Hill prepared and himself hand delivered a draft Gowlings’ engagement letter addressed to Stamper, with whom Hill at that time had specific discussions about the letter’s payment arrangements. (Pls.’ Ex. 130; Hill, 2/17/09, 122-23, 129-30; 2/18/09, 10- 11). Stamper could not recall his involvement with the terms of the engagement letter (Stamper, 1/29/09, 102-21), although Hill contradicts this. Hill testified that he had specific telephone conversations and face-to-face meetings with Stamper and Calderone about 18 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 19 of 50 being engaged and about the terms of the engagement of Gowlings. (Hill, 2/17/09, 122-31; 2/18/09, 10-11). 43. In July 2005, Calderone requested from Hill three changes to the draft engagement letter. Hill could agree to two of the changes, which involved payment arrangements. Hill could not agree to Calderone’s third request, which involved changes to the waiver of Gowlings’ conflict of interest provisions in the engagement letter. The letter provided: Conflicts of Interest We wish to avoid any circumstance in which you would regard our representation of another client to be inconsistent with our duties to and understandings with you. Because we represent a large number of clients in a wide variety of matters around the world, it is possible that we will be asked to represent a client whose interests are directly adverse to your immediate interests on other matters. In that event, we will not undertake any representation directly adverse to your immediate interests if the subject of the other representation is related to the matter in which we currently represent you. However, if the subject of the other representation is unrelated to the matter in which we currently represent you, we will be free to undertake such an unrelated adverse representation without obtaining further consent from you at that time provided that: (a) (b) (c) we do not have any information that is confidential from you from this engagement that could be used to your disadvantage in the unrelated matter; those in this Firm acting on the other matter are effectively screened from involvement in your matter, and our other client has consented to our continued representation of you. By accepting these terms of engagement, you are consenting to, and waiving any right you may have to object to, our representation of another client whose interests are directly adverse to your immediate interests in a matter unrelated to this engagement. 19 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 20 of 50 (Pls.’ Ex. 130, p. 3). Hill had no authority from Gowlings to alter those conflict provisions, and he communicated that to Calderone. (Calderone, 1/13/09, 47-50; Hill, 2/17/09, 127). CenTra still retained Hill and Gowlings knowing that. (Hill, 2/17/09, 125-31; 2/18/09, 10-13; Pls.’ Ex. 130A). The draft engagement letter was never revised or signed by the parties, although Stamper received it. (Stamper, 1/29/09, 120-21; Hill, 2/17/09, 124-28; Pls.’ Exs. 130, 130A). 44. Hill undertook private work on transfer pricing matters for CenTra in the summer of 2005, culminating in a final submission to the CRA on September 26, 2006, for the years 2001-2003. (Defs.’ Ex. 535). 45. It is undisputed that the work of Hill and Gowlings concerning the transfer pricing matters is not related to the Second Span or to Estrin’s work for Windsor concerning the Second Span. (Calderone, 1/13/09, 103, 149-50; Hill, 2/17/09, 138, 142-43, 204). 46. At around the same time that CenTra engaged Dale Hill, Calderone and Stamper became aware that an opportunity existed for leveraging existing assets for infrastructure projects. (Calderone, 1/13/09, 52-56). To take advantage of this opportunity, it was necessary for CenTra to undertake some corporate restructuring. In November 2005, Stamper and Calderone asked Hill if there was someone at Gowlings who could assist with tax issues pertaining to CenTra’s corporate reorganization. (Hill, 2/17/09, 154). Calderone discussed with Stamper using Gowlings for this work. (Calderone, 1/13/09, 106). An initial meeting then occurred at CenTra attended by Hill, Calderone, CenTra’s accountants from Deloitte, and Gowlings attorney Tim Wach. Stamper was briefly at the meeting. (Hill, 2/17/09, 154-55). Calderone’s notes of the meeting indicate that a potential bond financing was discussed, although the specific use of the bond proceeds was not 20 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 21 of 50 mentioned other than for capital improvements generally. (Calderone, 1/13/09, 114-16, 164-67). 47. The reorganization involved one of CenTra’s entities needing to be bankruptcy remote. That means the entity would only own the existing Ambassador Bridge and not other assets. So, if and when borrowing ever occurred, the security for the borrowing would only be the assets of this bankruptcy-remote entity, and none of the extraneous assets, such as land near the bridge, would be impacted by or could impact the borrowing. This reorganization process would require assets to be transferred from one CenTra entity to another. Ordinarily, a transfer of an asset between related entities triggers a tax liability. Wach was retained by CenTra to minimize Canadian tax liability and defer Canadian tax gains as a result of these transfers by obtaining favorable tax revenue rulings from the CRA for the proposed transfers. (Wach, 2/24/09, 12-18; Calderone, 1/13/09, 113). Gowlings was not bond counsel for CenTra. (Hill, 2/17/09, 158; Wach, 2/24/09, 15-16). Bond work, which was intended to raise money for various capital improvements, was undertaken by the Canadian law firm Lang Michener, whereas Wach’s responsibility was for the tax consequences of the corporate restructuring. (Wach, 2/24/09, 58-59). 48. To draft the revenue ruling requests and obtain this positive tax treatment for CenTra, Wach needed to advise the CRA that the proceeds of the borrowing would be used for a business purpose. The particular business purpose was irrelevant to Wach’s work. (Hill, 2/17/09, 162-63; Wach, 2/24/09, 18-25). Wach worked on the tax matters from November 2005 into late April 2006, when he sent a draft of one of the revenue rulings to Calderone. In the draft, Wach stated that: “DIBC and CTC require funds for capital expenditures and related projects in connection with the Ambassador Bridge as well as for 21 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 22 of 50 general corporate purposes within the CenTra Group [expand on non-tax reasons for the borrowing]”; and “[DIBC will use the funds received for general corporate purposes and we need good, strong business uses for the funds to support our interest deductibility arguments—do we have a detailed plan for the use of the funds?]” (Defs.’ Ex. 534, 5,8; GLHCTC 533, 536 (emphasis in original); Wach, 2/24/09, 18-25). 49. The actual terms or process of pursuing any bonds was also at that time not known by anyone. Calderone expressed concern to Wach about CenTra’s inability to convey even basic details concerning the terms of the bonds to the CRA and whether that would impact the revenue ruling request. (Defs.’ Ex. 534, cover e-mail; Wach, 2/24/09, 78- 80). 50. As for the potential business purposes for which the proceeds of these potential bonds might be used, in May 2006, Calderone provided several possibilities: general corporate purposes, capital improvements, more competitive toll structures, building a bridge in Buffalo/Fort Erie, building a bridge to Harsens Island, and building a companion or replacement for the Ambassador Bridge. (Defs.’ Ex. 534, pp. 14-15; GLHCTC 542-43; Hill, 2/17/09, 161-62; Wach, 2/24/09, 18-25). While there may have been some discussion with Wach prior to May 2006 about potentially replacing the Ambassador Bridge, this particular use or any of the particular uses of the funds proposed by Calderone were irrelevant to Wach and his tax work as long as they were for business purposes—which they all were, and any one of which would have sufficed. (Hill, 2/17/09, 161-62; Wach, 2/24/09, 18-25, 62-64, 69, 71). Calderone testified that there was significant uncertainty as to what use the funds might be put. (Calderone, 1/13/09, 153, 158). 22 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 23 of 50 51. The final revenue ruling requests submitted in October and November 2006 by Wach to the CRA listed the following potential uses for the funds: capital expenditures and related projects in connection with the Ambassador Bridge as well as for general corporate purposes within the CenTra Group; building a second span, or alternatively building an additional international crossing in the Detroit-Windsor area; building a bridge in Buffalo/Fort Erie; and building a bridge to Harsens Island. (Hill, 2/17/09, 151, 164-66; Wach, 2/24/09, 25-31). 52. If the Second Span was never built or approved, it would not have made any difference to Wach or to the work he and Gowlings were doing for CenTra. (Hill, 2/17/09, 151-53, 162-68; Wach, 2/24/09, 25-31). Calderone concedes that Wach’s tax work on the restructuring was required regardless of the use of the proceeds because the bankruptcy- remote structure was required to facilitate any proposed borrowing by CenTra. (Calderone, 1/13/09, 123). None of the work of Hill or Wach had anything to do with Windsor or the U.S. Coast Guard. (Calderone, 1/13/09, 150, 154, 158; Wach, 2/24/09, 28; Hill, 2/17/09, 132, 142-43). 53. None of the substantive work done by Wach, Hill, and Gowlings for CenTra related to: the Second Span; whether the approvals for the Second Span would ever be obtained; whether the Second Span would ever be built; or the work Estrin was doing for Windsor adverse to the Second Span or otherwise. (Hill, 2/17/09, 151-53, 162-68; Wach, 2/24/09, 32, 34, 49-51). 54. Moreover, the record here shows that none of the information provided to Hill or Wach by CenTra would be relevant or useful to Estrin in his and Gowlings’ representation of Windsor adverse to the Second Span or otherwise. (Calderone, 1/13/09, 23 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 24 of 50 150, 154, 158). Calderone did not see any information in Estrin’s September 14, 2006 letter to the Coast Guard that had been provided to Hill or Wach. (Calderone, 1/13/09, 161). Stamper testified that he was “not aware that any [confidential] information did or did not go to Mr. Estrin.” (Stamper, 1/30/09, 152). 55. At no time was Gowlings’ work or the independence and judgment of Hill and Wach for CenTra impacted by Estrin’s work for Windsor, or vice-versa. (Calderone, 1/13/09, 160-61; Hill, 2/17/09, 147, 175, 189-90; Wach, 2/24/09, 34-35). Calderone, in particular, and CenTra were very pleased with Gowlings’ work on CenTra’s behalf throughout. (Calderone, 1/13/09, 160-61). 56. In addition, it is undisputed that Hill’s and Wach’s ultimate letters to the CRA on the transfer pricing and reorganization matters were approved by CenTra and sent in September, October and November 2006, after CenTra complained about Estrin’s representation of Windsor adverse to the Second Span. (Stamper, 1/30/09, 152-53; Calderone, 1/13/09, 147-56; Hill, 2/17/09, 143; Wach, 2/24/09, 25-31). If Gowlings’ representation of Windsor adverse to the Second Span was harmful to CenTra in connection with Gowlings’ work for CenTra on the transfer pricing and reorganization matters, then CenTra would and should have stopped sharing information with Hill and Wach and not authorized them to send those letters to the CRA. There was no deadline for sending the letters, and someone other than Gowlings could have signed and sent the letters to the CRA. (Calderone, 1/13/09, 159; Hill, 2/17/09, 147-53, 164-66; Wach, 2/24/09, 25-31). G. Estrin’s Letter to the Coast Guard 24 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 25 of 50 57. On September 14, 2006, Estrin submitted a letter on Windsor’s behalf to the U.S. Coast Guard detailing numerous reasons why Windsor believed the U.S. Coast Guard should require an environmental assessment in connection with CenTra’s Second Span Permit Application. This is the same position and subject that Estrin wrote to Stamper about in September 2004, in the draft Site Plan Agreement. (Pls.’ Ex. 127; Defs.’ Ex. 503, ¶f, 3c). The historical records relating to the existing Ambassador Bridge attached to Estrin’s 2006 letter were obtained by Estrin through an independent research archivist. (Defs.’ Ex. 512; Estrin, 2/12/09, 57-60). 58. Within approximately one week of September 14, 2006, CenTra obtained a copy of Estrin’s letter and raised with Hill and Wach a complaint that Gowlings had a conflict of interest since it was already representing CenTra. At that time, Estrin was unaware that Hill and Wach were representing CenTra. (Estrin, 2/3/09, 34-39). Likewise, Hill and Wach were unaware that Estrin was representing Windsor adverse to CenTra. (Wach, 2/24/09, 32-38). Hill had never even heard of Estrin and had not met him. Wach knew Estrin was a partner at Gowlings but had had no professional contact with him. (Hill, 2/17/09, 170-77; Wach, 2/24/09, 34-38). 59. None of the testimony or exhibits suggested that Estrin, Hill or Wach (or any other Gowlings professionals) exchanged confidential information. To the contrary, the witnesses all testified that they were unaware of the work being done for the other party; in essence, this created a de facto screen. (Wach, 2/17/09, 170-77). Shortly after CenTra raised its complaint of an alleged conflict, Gowlings put in place a formal screen implementing numerous physical, computerized and other measures to prevent disclosure or use of any of CenTra’s confidential information to Windsor and vice-versa. (Defs.’ Exs. 25 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 26 of 50 513, 532, 533). There is no evidence that the de facto or later formal screen has ever been violated by anyone at Gowlings. 60. CenTra filed this lawsuit on November 21, 2006, after which Gowlings withdrew from representing CenTra and orderly and timely transferred its active file to new counsel retained by CenTra. (Jolliffe, 2/20/09, 23; Wach, 2/24/09, 34-35). Gowlings continued and continues today to represent Windsor adverse to CenTra on the Second Span. After this case was filed by CenTra, summary judgment was granted in favor of Gowlings. After the case had been dismissed and pending its appeal, Estrin, on Windsor’s behalf, sent a letter on June 6, 2007 to the Michigan Strategic Fund (“MSF”) detailing the approvals still required by CenTra, in Windsor’s view, for the Second Span. (Pls.’ Ex. 10). Estrin’s letter essentially repeats the same position and bases asserted in a June 1, 2007 letter sent by Transport Canada to the MSF before Estrin sent his letter. (Defs.’ Ex. 579; Estrin, 2/12/09, 45-48; Moran, 2/17/09, 103-04). 61. The U.S. Coast Guard ultimately required CenTra to provide the environmental assessment that Estrin had requested. CenTra concedes, however, that the environmental assessment was not required due to Estrin, but rather for other reasons unrelated to Estrin. (Defs.’ Ex. 526; Stamper, 1/30/09, 158-59, 166-68). 62. CenTra did not seek to disqualify, or to enjoin, Gowlings from representing Windsor until April 2007, five months after CenTra filed suit and seven months after it first raised Estrin’s representation of Windsor. III. CONCLUSIONS OF LAW In deciding whether to grant a preliminary injunction, a district court must consider: “(i) whether the movant is likely to succeed on the merits; (ii) whether the movant will suffer 26 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 27 of 50 irreparable injury in the absence of an injunction; (iii) whether the injunction will cause substantial harm to others; and (iv) whether the injunction would serve the public interest.” Capobianco v. Summers, 377 F.3d 559, 561 (6th Cir. 2004). “‘[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.’” Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (internal citations omitted) (emphasis in original); Stenberg v. Cheker Oil Co., 573 F.2d 921, 925 (6th Cir. 1978). A. Choice of Law CenTra alleges that Gowlings breached its contractual obligations by failing to represent CenTra zealously and by its use of CenTra’s confidential information. (First Am. Compl. ¶¶ 41, 43, 44). CenTra further alleges that Gowlings breached its fiduciary duties and committed legal malpractice. These claims are “factually premised upon a conflict of interest” between Gowlings’ representation of CenTra and its representation of Windsor and upon Gowlings’ “failure ‘to act as a reasonable attorney would have acted.’” CenTra, Inc. v. Estrin, 538 F.3d 402, 411 (6th Cir. 2008) (quoting First Am. Compl. ¶ 56). The applicable rules of professional responsibility provide evidence of the standard of care and, as such, are “probative and instructive for the instant case.” Id. at 410. Thus, as a threshold matter, the Court must determine whether The Law Society of Upper Canada’s (“Ontario’s”) Rules of Professional Conduct or Michigan Rules of Professional Conduct provide evidence of the standard of care applicable to Gowlings’ conduct. As a federal court sitting in diversity, the Court applies the choice-of-law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Michigan's choice-of-law rules dictates that the Court “apply Michigan law unless a ‘rational 27 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 28 of 50 reason’ to do otherwise exists.” Sutherland v. Kennington Truck Serv., Inc., 562 N.W.2d 466, 286 (Mich. 1997). We undertake a two-step inquiry to determine whether there is a rational reason to displace Michigan law in this case: First, we must determine if any foreign state has an interest in having its law applied. If no state has such an interest, the presumption that Michigan law will apply cannot be overcome. If a foreign state does have an interest in having its law applied, we must then determine if Michigan’s interests mandate that Michigan law be applied, despite the foreign interests. Id. While this analysis “most frequently favors the forum (Michigan’s) law, Michigan courts nonetheless use another state’s law where the other state has a significant interest and Michigan has only a minimal interest in the matter.” Hall v. Gen. Motors, Corp., 582 N.W.2d 866, 585 (Mich. Ct. App. 1998).4 Canada has a significant interest in having this Court apply its rules of professional responsibility, which outweighs Michigan’s minimal interest. Estrin is licensed to practice law by The Law Society of Upper Canada, and not by the state of Michigan. (Estrin, 2/3/09, 45). In fact, Gowlings has no offices in the United States, and none of Gowlings’ attorneys are licensed to practice law in Michigan. (Estrin, 2/3/09, 44; Jolliffe, 2/20/09, 6). The draft engagement letter between Gowlings and CTC was limited to dealing with CTC’s tax issues, and the Wach retainer was to obtain advance tax rulings from the CRA. (Pls.’ Ex. 103). Both of these retainers involved Canadian law and taxpayers. Similarly, the FIRA litigation involved litigation in Canadian courts opposing the Canadian government under 4 Both parties have applied Michigan’s tort choice-of-law rule even though CenTra has also alleged a breach of contract. Because there is nothing to suggest that application of Michigan’s contract choice-of-law rule would yield a different result, the Court applies the rule applicable to tort claims. 28 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 29 of 50 Canadian law. Moreover, CenTra seeks to enjoin a Canadian lawyer and law firm from representing a Canadian city on a matter affecting Canadian citizens. Michigan’s only connection to this suit is Plaintiff’s residency and the fact that David Estrin sent one letter to the Michigan Strategic Fund after this Court granted summary judgment. (Pls.’ Ex. 10).5 That CenTra is a Michigan corporation does not mandate the application of Michigan rules of professional conduct. See Sutherland, 562 N.W.2d at 287 (noting that “the plaintiff’s residence, with nothing more, is insufficient to support the choice of a state’s law”). And the one letter sent to a Michigan agency by a Canadian attorney representing a Canadian city pales in comparison to Canada’s significant connections to the lawsuit. Federal courts that have conducted choice-of-law analysis under similar circumstances have also applied the professional-conduct standards of the state in which the attorney defendant is licensed to practice. See, e.g., Huber v. Taylor, 469 F.3d 67, 79 (3d Cir. 2006); Daynard v. Ness, Motley, Loadholt, Richardson & Poole, P.A., 178 F.Supp.2d 9, 18-19 (D. Mass. 2001); White Consol. Indus., Inc. v. Island Kitchens, 884 F.Supp. 176, 179-80 (E.D. Pa. 1995); Glenwood Farms, Inc. v. Ivey, No. 03-CV-217-P-S, 2006 WL 521852, *1 (D. Me Mar. 2, 2006); see also MacKenzie, 2/18/09, 35-36, 42-43, 165 (testifying that Canadian rules of professional conduct apply to Gowlings’ representation 5 Estrin’s letter to the Coast Guard in Cleveland, Ohio does not establish a contact with Michigan. 29 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 30 of 50 of CenTra); Wolfram, 2/20/09, 90, 124 (same).6 To the extent there is a conflict, Canadian rules of professional conduct provide evidence of the standard of care.7 B. Likelihood of Success on the Merits The Court begins by assessing whether CenTra has shown that it is likely to prevail at trial on its breach of contract, breach of fiduciary duty, and legal malpractice claims. In order to determine whether CenTra has met its burden on this factor, the Court addresses CenTra’s four specific allegations. 1. Claim that Defendants Breached Fiduciary and Contractual Obligations by Conducting Faulty Conflict Checks CenTra argues that it will prevail at trial because Gowlings did not perform proper conflict checks prior to accepting retainers involving border-crossing issues. In support, CenTra presented evidence of David Estrin’s lapses. For example, when Estrin began work for Windsor on border crossing issues in late 2002, he failed to include “CenTra,” “DIBC,” or “CTC” in his conflict search. (Estrin, 2/2/09, 25). And when Estrin began work on the Peace Bridge matter in May of 2003, he discovered that the Ambassador Bridge had been a former client of Gowlings but did not inquire further as to the nature or scope of the earlier representation. (Estrin, 2/2/09, 29-35). CenTra may be able to convince a jury that 6 Plaintiffs rely on the Sixth Circuit’s statement that “[u]nder similar circumstances we have applied the forum state’s professional-conduct standards in a diversity-based malpractice action.” Centra, 538 F.3d at 409. But the Sixth Circuit relied for that proposition on Woodruff v. Tomlin, 616 F.2d 924, 935-36 (6th Cir. 1980) (en banc), which was a diversity-based malpractice case in which the forum state was also the state in which the attorney defendant was licensed to practice. See id. at 931 (explaining that plaintiffs were from out of state). 7 The outcome of this preliminary injunction proceeding would be the same under both Michigan and Canadian rules. The Court cites cases interpreting both sets of rules when they do not conflict. 30 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 31 of 50 oversights such as these constitute an actionable breach of fiduciary duty or contract. (Mackenzie, 2/18/2009, 99-102). 2. Claim that Defendants Breached Duty Not to Attack Own Work CenTra alleges that Gowlings breached its fiduciary obligations by undercutting the legal opinions it provided CenTra in the 1980’s. Specifically, CenTra contends that Gowlings opined to Plaintiffs that CTC was a “federal undertaking,” not subject to Canadian provincial and municipal regulation, but now argues to the United States Coast Guard that CTC may not build the Second Span without Windsor’s approval. CenTra is unlikely to prevail on this claim. First, the only evidence offered to support CenTra's claim is a letter sent by Emilio Binavince of Gowlings to CenTra in December of 1986. (Pls.’ Ex. 141). While the letter opines that CTC is not subject to regulation by Windsor as a result of its operation of the Canadian portion of the Ambassador Bridge or collection of tolls, it does not address Windsor's authority over a second span. (Pls.’ Ex. 141; Binavince, 1/12/09, 173). In fact, CenTra was not contemplating a second span of the Ambassador Bridge in 1986. (Stamper, 1/29/09, 22-23, 42, 44, 138; 1/30/09, 145). Second, even if Gowlings were now advocating a legal position that differs from an opinion it gave CenTra in the 1980’s, this would not constitute a breach of loyalty. (Wolfram, 2/20/09, 96-97). In In Re Credit Suisse First Boston Can., Inc., [2004] 2 B.L.R. 109, a firm was found to have breached its duty of loyalty to its former client, the Toronto Stock Exchange, for whom it had created a new regulatory entity, when it later challenged the authority of that entity. Id. at ¶¶ 7, 70, 136. But attacking the very legitimacy of an entity that an attorney helped create is "very different from a law firm giving opinions that 31 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 32 of 50 are different from each other many years apart." (Mackenzie, 2/18/09, 106-07; see also Wolfram, 2/20/09, 96-98). 3. Claim that Defendants Breached Fiduciary and Contractual Obligations by Engaging in Representation that Violated Current Client Conflict Rules Under the Ontario and Michigan Rules of Professional Conduct, a lawyer may not, absent consent, represent two current clients with adverse interests, even if the clients’ matters are unrelated. R. v. Neil, [2002] 3 S.C.R. 631, at ¶29; Mich. R. Prof’l Conduct R. 1.7 & Comment ¶3; MacKenzie, 2/18/09, 44-46; Wolfram, 2/20/09, 102; Hay, 1/12/09, 84- 85; see also Neil, at ¶17 (“[T]he duty of loyalty to current clients includes a much broader principle of avoidance of conflicts of interest, in which confidential information may or may not play a role.”). From June 2005 until December 2006, Gowlings represented both Plaintiffs and Windsor. (Hill, 2/17/09, 125; Estrin, 2/3/09, 13). Dale Hill and Timothy Wach of Gowlings provided transfer pricing and tax services to CenTra while David Estrin represented Windsor in its opposition to the Second Span. Although it does not appear that Wach's corporate restructuring work was specific to the twinning of the Ambassador Bridge, Estrin's work was directly adverse to Plaintiffs’ interests, and Plaintiffs never expressly consented. (Estrin, 2/12/09, 108; Mackenzie, 2/18/09, 112). Therefore, Plaintiffs will likely prevail on this claim at trial absent a finding of implied consent.8 8 Plaintiffs argue that because the matters for which Gowlings was retained by CenTra and Windsor were diametrically opposed, it was a nonconsentable conflict. But under the Ontario and Michigan rules, almost all conflicts are consentable, and Plaintiffs’ and Defendants’ experts agreed that this was no exception. (Hay, 1/12/09, 85-86; MacKenzie, 2/18/09, 44-48; Wolfram, 2/20/09, 105-06). 32 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 33 of 50 “In exceptional cases, consent of the client may be inferred” by a client’s failure to object despite knowledge of the dual representation. Neil, at ¶ 28; Mackenzie, 2/18/09, 133. A client may only give implied consent to a current client conflict after being provided “information sufficient to allow the client to determine whether or not to consent.” Wolfram, 2/20/09, 109; see also Restatement (Third) of the Law Governing Law. §122(1) (2000) (“[i]nformed consent requires that the client or former client have reasonably adequate information about the material risks” of the conflicted representation). “The more sophisticated the client, the more readily the inference of implied consent may be drawn.” Canada, Inc. v. Strother, [2007] 2 S.C.R. 177, at ¶55; see also ABA Model Rules of Prof’l Conduct R. 1.7, Comment 22; Model R. 1.0(e); Hay, 1/12/09, 65-66, 82-83; MacKenzie, 2/18/09, 48-49, 127-30; Wolfram, 2/20/09, 105-10; cf. Alberta Union of Provincial Employees v. United Nurses of Alberta Local 168, 2009 ABCA 33, ¶36. Whether implied consent is found varies greatly with the facts and circumstances of each case. (Hay, 1/12/09, 77; MacKenzie, 2/18/09, 48, 52, 56, 109-15; Wolfram, 2/20/09, 90-93, 102-10), and has been found in non-litigation settings. See, e.g., Famous Players Dev. Corp. v. Capitol Life Ins., [1996] 17 O.T.C. 362, at ¶¶ 87-89 (finding implied consent when client knew of attorney’s representation of competitor; “should have appreciated the risk”; but did not object); In re Ferrante, 126 B.R. 642, 649 (Bankr. D. Me. 1991) (finding implied consent to attorney’s work on transaction for creditor against debtor where debtor had "been in a position to be aware of the conflict, to appreciate it and to invoke the rules for his protection" for two years). There is much evidence from which a jury may conclude that CenTra’s retention of Hill and Wach constituted implied consent to the current client conflict. See supra ¶¶'s 22- 33 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 34 of 50 38, 42. This is because many of the facts found above suggest that, in 2005, CenTra was aware that Estrin represented Windsor in opposition to the Second Span. These facts include: Estrin’s representation of Windsor since 2002 on many highly publicized border crossing issues; media reports of Estrin’s representation of Windsor coupled with CenTra’s monitoring of news concerning the Ambassador Bridge; Stamper’s awareness in 2004 of Windsor’s adversity to CenTra and Estrin’s representation of Windsor on various international trucking disputes; the draft site plan agreement for the plaza on the Canadian side of the Ambassador Bridge that Estrin sent to Stamper in September 2004, in which he refers to Windsor’s opposition to the twinning of the Ambassador Bridge; the face-to-face meeting between Estrin and Stamper at CenTra’s office a few weeks later in which Estrin explicitly stated Windsor’s opposition to the Second Span; Estrin’s November 2004 letter to the U.S. Coast Guard on Windsor’s behalf opposing the Second Span; and Stamper’s knowledge in 2005 that Estrin was representing Windsor adverse to CTC on the OPA 43 matter. Moreover, there is no question but that CenTra — a corporation employing attorneys throughout the United States and Canada — is a sophisticated client, capable of giving implied consent. See Famous Players, at ¶¶88, 90 (finding implied consent where “sophisticated” client “should have appreciated the risk of [attorney] acting for [competitor]”); cf. Fisons Corp. v. Atochem N. Am., Inc., No. 90 Civ. 1080, 1990 WL 180551, *5-6 (S.D.N.Y. Nov. 14, 1990) (finding law firm’s disclosure to “knowledgeable and sophisticated client” that it represented another client with adverse interests “adequate”). Despite the evidence suggesting CenTra’s awareness of the conflict, the Court declines to find implied consent as a matter of law. The “affirmative duty” of identifying a 34 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 35 of 50 conflict “rests not with [the clients] but with [the attorneys],” and genuine issues of material fact remain as to whether CenTra and Stamper's knowledge of the underlying facts are sufficient to satisfy this duty. Ransburg Corp. v. Champion Spark Plug Co., 648 F.Supp.1040, 1046 (N.D. Ill. 1986) (finding no implied consent based on allusions to dual representation in “passing conversations at cocktail parties and in hallways”); see also Unified Sewerage Agency v. Jelcro, Inc., 646 F.2d 1339, 1345-46, 1352 (9th Cir. 1981) (finding informed consent because client continued representation after being twice alerted of conflict by attorney); IBM Corp. v. Levin, 579 F.2d 271, 282 (2d Cir. 1978) (noting that “[f]ull and effective disclosure of all the relevant facts must be made [by the attorney] and brought home to the prospective client”). 4. Claim that Defendants Breached Fiduciary Duty by Engaging in Representation that Violated Former Client Conflict Rules CenTra alleges that Gowlings has breached its fiduciary obligations to CenTra, as its former counsel. Specifically, CenTra contends that because it retained Gowlings in connection with the FIRA litigation in the 1980’s and 1990’s and for transfer pricing and tax work in 2005-2006, Gowlings was prohibited from subsequently representing Windsor in opposition to the Second Span. For the reasons set forth below, CenTra has failed to show a strong likelihood of success on this claim. a. Former Client Conflict Rule Absent the former client’s consent, an attorney generally may not represent a client in a case against a former client if the two matters are sufficiently or substantially related or if confidential information was received by the attorney from the former client that would be relevant to the new matter. Ontario Rules of Prof’l Conduct R. 2.04(4); Mich. Rule of 35 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 36 of 50 Prof’l Conduct R. 1.9(a); ABA Model Rule of Prof’l Conduct R. 1.9(a) & Comment 3; MacKenzie, 2/18/09, 45-48; Wolfram, 2/20/09, 91-92; Hay, 1/12/09, 54. Whether matters are substantially related is a fact-intensive inquiry. (Wolfram, 2/20/09, 95). “[T]here should be compelling and cogent evidence which provides a sufficient connectiveness between the retainers.” Moffat v. Wetstein, [1996] 29 O.R. (3d) 371, ¶101. For the retainers to be sufficiently related, it also must be "reasonably possible that the lawyer acquired confidential information pursuant to the first retainer that could be relevant to the current matter.” Chapters Inc. v. Davies, Ward & Beck LLP, [2001], 52 O.R. (3d) 566, ¶30; Alberta Union, at ¶15, n. 42; Wolfram, 2/20/09, 93-94, Mackenzie, 2/18/09, 59-61, 158. The onus of proving that the two retainers are sufficiently related rests with the client asserting the conflict of interest. Chapters, at ¶29, Moffat, at ¶¶84, 101. Under Ontario Rules of Professional Conduct, once the former client demonstrates a sufficient relationship between the former and current matters, “the court should infer that confidential information was imparted [by the former client] unless the [attorney] satisfies the court that no information was imparted which could be relevant [to the current representation].” MacDonald Estate v. Martin, [1991] 3 S.C.R. 1235, ¶49; Moffat, ¶84. The attorney bears “a heavy burden” in making this showing. MacDonald Estate, at ¶49; see also Moffat, ¶84. The traditional American rule has been that once the client establishes a substantial relationship between the two matters, there is an irrebuttable presumption that relevant confidential information was imparted by the former client to his attorney. MacDonald Estate, at ¶¶25-26. The Sixth Circuit has suggested, however, that this presumption may be rebutted by “substantial probative, material evidence affirmatively showing that no 36 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 37 of 50 confidential disclosure in fact occurred.” City of Cleveland v. Cleveland Elec. Iluminating Comp., 440 F.Supp. 193, 209 (6th Cir. 1977) (attorney rebutted presumption that bond counsel received confidential information by showing that “the document composite of any proposed City bond issue is, by law, a matter of public record”). But see In re Marks & Goergens, Inc., 199 B.R. 922, 925 (Bankr. E.D. Mich. 1996); Anchor Packing Comp. v. Pro- Seal, Inc., 688 F.Supp. 1215, 1225 (E.D. Mich. 1988) (noting that “presumption should not be rebutted” “absent exceptional circumstances”). Under Ontario rules, if the former and current matters are substantially related and an attorney received confidential information from a former client that would be relevant in representing the current client, there is “a strong inference” that the attorneys who represented the former client share the confidential information with attorneys representing the current client. MacDonald Estate, at ¶50. This inference may be rebutted, however, “by clear and convincing evidence, that all reasonable measures have been taken to ensure that no disclosure will occur by the ‘tainted’ lawyer to the member or members of the firm who are engaged against the former client” and that the attorneys did not in fact share confidences. Id. at ¶51; Alberta Union, ¶41; Mackenzie, 2/18/09, 63-66, 70. Under American rules, “where courts have found disclosure of information by the client to one member of a law firm, such knowledge has traditionally been imputed to all members of his firm.” City of Cleveland, 440 F.Supp. at 209-10. But “recent prevailing legal precedent has rejected the harsh hard-line approach of irrebuttably imputing confidential disclosures, actual or presumed, received by one member of a law firm to all members of that law firm in favor of a more realistically equitable logic, attuned to contemporary legal practices common to emerging law firms of substantial size.” Id. at 37 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 38 of 50 210; see also Manning v. Waring, et. al., 849 F.2d 222, 225 (6th Cir. 1988) (firm may avoid disqualification by demonstrating that, due to effective screening measures, confidences have not been disclosed to other attorneys at firm); Onebeacon Am. Ins. Co. v. Safeco Ins. Co., No. C-1-07-358, 2008 WL 4059836, *7 (S.D. Ohio Aug. 25, 2008). b. Alleged Violation of Former Client Conflict Rule CenTra has failed to demonstrate that Henderson, Binavince, and Lunau's work for CenTra in the 1980’s and 1990’s is substantially related to Estrin’s representation of Windsor in opposition to the Second Span. (MacKenzie, 2/18/09, 62, 174; Wolfram, 2/20/09, 96, 98). Neither the FIRA litigation nor the legal opinions that Gowlings provided related to the twinning of the Ambassador Bridge, which was not conceived as an idea until decades later. (Lunau, 2/26/09, 9-10, 14-15; Binavince, 2/12/09, 157, 164-165, 173-174, 177; Stamper, 1/29/09, 22-23, 42, 44, 138; 1/30/09, 145). That the FIRA litigation and legal opinions may have concerned the existing Ambassador Bridge does not establish "sufficient connectiveness" to Estrin's work on behalf of Windsor. Moffat, ¶101; see Quicken Loans v. Jolly, No. 07-CV-13143, 2008 WL 2566373, *4 (E.D. Mich. June 24, 2008) (finding no substantial relationship between matters even though involved same piece of property); S.D. Warren Co. v. Duff-Norton, 302 F. Supp. 2d 762, 774 (W.D. Mich. 2004) (finding no substantial relationship between product liability suits against same manufacturer for fires caused by same type of equipment where factual circumstances surrounding incidents differed). And while CenTra has implied that it imparted relevant confidential information to Henderson, Binavince, and Lunau, it has failed to show that this was “reasonably possible” and “not just theoretical.” Chapters, at ¶30; see Satelitte Fin. Planning Corp. v. First Nat’l 38 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 39 of 50 Bank of Wilmington, 652 F.Supp. 1281, 1284 (D. Del. 1987) (internal citation omitted) (“‘court should not allow its imagination to run free with a view to hypothesizing conceivable but unlikely situations in which confidential information ‘might’ have been disclosed which would be relevant to the present suit.’”). CenTra alludes to the Goodman memorandum but did not produce it or adequately demonstrate that it was likely to have contained relevant confidential information. See Moffat, ¶102 (noting that while a former client need not “disclose the exact specifics of the confidential information it seeks to protect,” “some particulars are warranted, given the remedy sought”). CenTra has also failed to demonstrate a substantial relationship between Estrin’s representation of Windsor in opposition to the Second Span and Hill and Wach’s transfer pricing and tax work. (MacKenzie, 2/18/09, 62, 174; Wolfram, 2/20/09, 96, 98). “When considering the nature and scope of the prior [retainer], courts ‘should focus upon the reasons for the retention of counsel and the tasks which the attorney [or firm] was employed to perform.’” Integrated Health Servs. v. THCI Co. LLC, 327 B.R. 200, 207 (D. Del. 2005) (internal citations omitted). Hill's work concerned the allocation of revenues from the existing Ambassador Bridge to U.S. and Canadian taxing authorities and bore no relation to the Second Span. Wach’s retainer was similarly narrow: to obtain favorable tax rulings from the CRA for proposed transfers of assets from one CenTra entity to another. That Wach learned that one of several possible purposes of these transfers was bond financing for a Second Span does not render the work sufficiently related to Estrin’s representation of Windsor. See Integrated Health Servs., 327 B.R. at 207, 209 (finding no substantial relationship between regulatory work and subsequent unrelated litigation, even though regulatory filings for former client required submission of general corporate 39 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 40 of 50 information); Chapters, ¶¶32-36 (finding matters sufficiently related because attorney “acquired a very significant amount of confidential information” about former client’s strategic plans “likely to be part of the factual context directly informing” attorney’s advice to current client). Moreover, Wach’s queries to Calderone in his draft revenue ruling, see supra ¶48, demonstrate that rather than Wach “hav[ing] free and unlimited access to all of the information surrounding [CenTra's] business,” CenTra “controlled the flow of information to [him],” and only “provided [it] on an ‘as needed’ basis.” Moffat, ¶102 (examining “dynamic of the past relationship” to find no substantial relationship based on attorney’s limited retainer, giving him access to company’s insurance policies, partnership agreements, and litigation philosophy).9 Finally, even if these matters were deemed sufficiently related and confidential information was assumed to have been imparted by CenTra, Defendants have rebutted the presumption that this information was or will be shared with other Gowlings attorneys. (MacKenzie, 2/18/09, 66, 70-71.) Despite weeks of testimony, no evidence was presented that CenTra's confidential information was shared with Estrin or any other Gowlings attorney representing Windsor. This was due, in large part, to the multi-layered, de facto screen between the matters. See Manning, 849 F.2d at 225-26 (noting that courts should consider “the size and structural divisions of the law firm involved” and “the likelihood of 9Even if the matters were deemed substantially related, Defendants have arguably presented sufficient evidence to rebut the presumption that CenTra imparted relevant confidential information to Gowlings attorneys. Lunau, Binavince, and Hill all testified that their work for CenTra was unrelated to the Second Span. (Lunau, 2/26/09, 9-10, 14-15; Binavince, 2/12/09, 157, 164-165, 173-174, 177; Hill, 2/17/09, 138, 142-43, 204). Similarly, Wach testified that the proposed Second Span was largely irrelevant to his work for CenTra. (Wach, 2/24/09, 18-25, 62-64, 69, 71). And no evidence of any confidential information was ever produced, for in camera inspection or otherwise. 40 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 41 of 50 contact between the ‘infected’ attorney and the specific attorneys responsible for the present representation” when assessing whether presumption was rebutted). Ron Lunau — the only FIRA litigation attorney still at Gowlings when Estrin began to represent Windsor — has no recollection of the contents of any documents he may have seen in the 1980’s and 1990’s regarding CenTra, has not seen such documents for almost 20 years, and, prior to the lawsuit, had not spoken about any of these matters. (Lunau, 2/26/09, 9- 11, 14, 18-19, 67, 69). Since the conclusion of the FIRA litigation, documents have been retained in an offsite facility, and the Goodman memorandum has never been located. (Binavince, 2/12/09, 160-61, 169-70). Estrin was unaware until CenTra’s complaint that Hill and Wach were representing CenTra. And Hill and Wach were unaware that Estrin was representing Windsor adverse to CenTra. In fact, Hill had never even heard of Estrin, while Wach has never had any professional contact with him. (Hill, 2/17/09, 170-77; Wach, 2/24/09, 34-38). Most importantly, as soon as Gowlings became aware of the alleged conflict, it implemented a formal screen, including physical, computerized and other measures to prevent disclosure or use of CenTra’s confidential information in the Windsor matter. (Defs.’ Exs. 513, 532, 533); see Macdonald Estate, at ¶51 (noting that presumption may be rebutted by showing that “reasonable measures” such as “[ethical] walls and cones of silence” were taken to prevent disclosure); see also id. at ¶55 (presumption not rebutted where “there [wa]s nothing . . . to indicate that any independently verifiable steps were 41 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 42 of 50 taken by the firm to implement any kind of screening.”). There is no evidence that the de facto or formal screen has ever been violated by anyone at Gowlings.10 “While it is clearly desirable that conflicts be identified and security measures be put in place [at the time the conflict arises], we do not accept that ex post facto measures will, in every case imaginable, be inadequate.” Can. S. Petroleum v. Amoco Can. Petroleum Co., [1997] 144 D.L.R. (4th) 30, ¶¶42-44 (finding presumption rebutted despite one-and-a- half years without screen where there was no evidence of shared information and firm appropriately dealt with conflict once it was discovered). Gowlings did not become aware of the alleged conflict until CenTra raised the issue in 2006, and took steps immediately thereafter to implement extensive, formal screening measures. Moreover, Gowlings has demonstrated that an effective de facto screen existed at all times during the alleged conflict. Finally, even if the former client conflict rule were implicated by Gowlings’ representation of Windsor in opposition to the Second Span, there would be no violation if CenTra gave implied consent. There is evidence to suggest that this was the case. For example, during the entire time that Stamper negotiated with Estrin regarding the Site Plan 10CenTra argues that Defendants have not rebutted the presumption of shared confidences because Gowlings failed to implement a formal screen as soon as the conflict arose. CenTra relies on Skye Prop. Ltd. v. Wu, [2001] 21 B.L.R. (3d) 125, which disqualified attorneys on opposite sides of litigation because their law firms waited a month after their merger to institute an ethical wall. Skye is a trial court decision, however, and more authoritative case law from Canadian courts of appeal hold that screens do not have to be erected immediately in order to be sufficient. And of course Gowlings was unaware of the conflict at the time it arose and so had no impetus for erecting a screen at that time. See MacKenzie, 2/18/09, 65-66, 70; Robertson v. Slater Vecchio, [2008] 81 B.C.L.R. (4th) 46, ¶¶1-5, 14-20, 24-27. 42 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 43 of 50 Agreement in 2004-2005, CenTra never complained that Gowlings’ representation of Windsor conflicted with its representation of CenTra in the 1980’s and 1990’s.11 CenTra has presented evidence of Estrin’s incomplete conflict check and has, at least, raised questions regarding whether it was sufficiently informed of the conflict to give implied consent. Defendants have presented evidence suggesting the existence of implied consent to the alleged current and former client conflicts and the lack of a ‘substantial relationship’ giving rise to a former client conflict. The Court finds that the ‘likelihood of success’ factor weighs in favor of neither party. C. Irreparable Harm “A showing of ‘probable irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction,’” and the Court must next consider whether CenTra will be irreparably harmed absent issuance of an injunction. Lucero v. Detroit Pub. Schs., 11 Moreover, under Ontario Rule of Professional Conduct 2.04(5): Where a lawyer has acted for a former client and obtained confidential information relevant to a new matter, the lawyer’s partner or associate may act in the new matter against the former client if . . . (b) the law firm establishes that it is in the interests of justice that it act in the new matter, having regard to all relevant circumstances, including (i) the adequacy and timing of the measures taken to ensure that no disclosure of the former client’s confidential information to the partner or associate having carriage of the new matter will occur, (ii) the extent of prejudice to any party, (iii) the good faith of the parties, (iv) the availability of suitable alternative counsel, and (v) issues affecting the public interest. Given Gowlings’ implementation of adequate screening measures, Windsor’s longstanding relationship with Gowlings, the harm to Windsor and its citizens from having to forfeit their choice of counsel, and Gowlings’ good faith, Gowlings has arguably also met these requirements. (MacKenzie, 2/18/09, 68-72). 43 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 44 of 50 160 F.Supp. 2d 767, 801 (E.D. Mich. 2001) (quoting Reuters Ltd v. United Press Int’l, Inc., 903 F.2d 904, 907 (2d Cir. 1990 . In order to warrant injunctive relief, there must be a “substantial threat of impending injury.” Romantics v. Activision Publishing, Inc., 532 F. Supp. 2d 884, 890 (E.D. Mich. 2008) (internal citations omitted). The alleged “potential harm ‘must be ‘actual and imminent,’ and not merely remote or speculative.’” Id. (internal citations omitted). “Preliminary injunctive relief is thus inappropriate where monetary relief is sufficient.” Id. While CenTra contends that it will suffer four irreparable injuries if the Court does not immediately enjoin Gowlings from representing Windsor in opposition to the Second Span, none suffices to meet its heavy burden for this extraordinary remedy. Centra argues, first and foremost, that Gowlings possesses CenTra’s confidential information, which it could share with Windsor to CenTra’s detriment. Even if the Court assumes that the matters were substantially related and that CenTra imparted relevant confidential information, Defendants have rebutted the presumption of shared confidences between the relevant Gowlings attorneys. See supra, Part III.B.4.b. That is, Defendants have squarely demonstrated that a de facto and extensive, formal screen prevent the very harm that CenTra alleges. See supra, Part III.B.4.b. Moreover, that a formal screen has not been in place since the conflict arose (because Gowlings was not aware of the conflict at that time) does not render an injunction necessary. See Can. S. Petroleum, at ¶¶42-44; Robertson, at ¶¶1-5, 14-20, 24-27; Mackenzie, 2/18/09, 65-66. No evidence has been presented that either the de facto or formal screen has been ineffective in the past, and any contention about future violations of the screen is purely speculative. The comprehensive screening measures now in place 44 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 45 of 50 at Gowlings belie any suggestion of actual, imminent harm from the sharing of confidential information with Windsor. (Defs.’ Exs. 513, 532, 533). CenTra next argues that, absent an injunction, Gowlings will continue to attack the legal opinions it provided CenTra. CenTra has identified only one example of such an “attack”: Estrin currently argues on Windsor’s behalf that the Second Span is subject to the regulatory authority of Windsor and Ontario, while Emilio Binavince provided CenTra with a 1986 legal opinion that the Canadian portion of the Ambassador Bridge was not subject to Canadian regulatory authority. Even if the Court assumes that Estrin’s current claims regarding the Second Span undermine Binavince’s advice regarding the existing Ambassador Bridge, CenTra has failed to demonstrate that it will suffer actual, imminent harm from the diminished efficacy of 23-year old legal advice. In fact, CenTra's opposition to OPA 43, legislation it believed could affect Windsor’s authority over the Second Span, suggests that CenTra did not believe that the governmental authority issues had been finally resolved as recently as 2006. Centra also argues that Gowlings’ continued representation of Windsor in opposition to the Second Span will irreparably harm CenTra’s relationship with government officials. CenTra bases this allegation on Estrin’s 2006 letter to the U.S. Coast Guard, in which Estrin accuses CenTra of submitting misleading information to the Coast Guard. (Calderone, 1/13/09, 84-89). But Estrin’s letter to the Coast Guard was not the cause of CenTra losing its financing or having to perform an environmental assessment. (Defs.’ Ex. 526; Stamper, 1/30/09, 158-59, 166-68). And any claims about possible future harms from the letter are purely speculative. More importantly, CenTra has failed to show how this alleged harm has resulted from Gowlings’ breach of fiduciary or contractual obligations. 45 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 46 of 50 Calderone did not see any information in Estrin’s letter that had been provided to Hill or Wach. (Calderone, 1/13/09, 161). CenTra may not enjoin Gowlings from representing Windsor simply because Gowlings’ zealous advocacy renders Windsor a more formidable opponent. CenTra’s final claim is that it will be harmed by having to divulge confidential information to Estrin and Gowlings during this litigation, while they are representing Windsor. CenTra has failed, however, to demonstrate actual, imminent harm absent an injunction. See Robertson, at ¶19 (noting that given “the hardship and injustice” to the innocent client of depriving it of his chosen counsel, “an injunction should be granted only to relieve the applicant of the risk of ‘real mischief,’ not a mere perception.”) This Court made every effort to prevent the disclosure of confidential information during the preliminary injunction hearing by curbing the admission of confidential documents, policing testimony regarding confidential matters, and offering parties the option of in camera review, or a protective order, or both, for confidential materials. Despite these protections, CenTra submitted no alleged confidential materials, save one opinion letter. Moreover, CenTra has failed to show why a protective order would not suffice to prevent the transmission of relevant confidential information to Windsor or to attorneys representing Windsor. CenTra did not seek to disqualify Gowlings from representing Windsor until seven months after first raising the issue of Estrin’s representation of Windsor, and five months after filing suit. And even after CenTra became aware of the alleged conflict, it still authorized Hill and Wach to send letters to the CRA on its behalf for another two months. (Stamper, 1/30/09, 153; Calderone, 1/13/09, 147-156; Hill, 2/17/09, 143; Wach, 2/24/09, 46 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 47 of 50 25-31.) This delay is “incompatible with [CenTra’s] claim of irreparable injury” absent an injunction. Sequa Corp. v. Gelmin, No. 91-8675, 1995 WL 404726, *9 (S.D.N.Y. July 7, 1995); see also Moffat, at ¶¶119-30 (considering delay in seeking disqualification in assessing whether to remove attorney). CenTra has not demonstrated that it will suffer irreparable harm absent an injunction. The Court finds that this factor weighs against granting an injunction. D. Harm to Others The third factor the Court must consider is the degree of harm that the adverse party or third parties would suffer if a preliminary injunction is granted. See Washington v. Reno, 35 F.3d 1093, 1099 (6th Cir. 1994). In contrast to the speculative harms claimed by CenTra, Defendants presented ample evidence that enjoining Gowlings from representing Windsor on matters concerning the Second Span would cause actual, substantial harm to the City of Windsor. George Wilkki, Windsor’s city solicitor, testified to the detrimental impact of depriving Windsor of David Estrin's representation. (Wilkki, 1/14/09, 8-13; Ex. 514.) Estrin has been Windsor’s counsel for more than six years, and Windsor has spent over five million public dollars on Estrin and the experts he has retained. (Wilkki, 1/14/09, 9, 18-19). During that time, Windsor has depended on Estrin’s representation on all border crossing matters — matters that are deeply important to Windsor and its citizens. (Defs.’ Ex. 514). Moreover, Estrin is not interchangeable with other lawyers. He is one of very few lawyers in Canada with his level of expertise and knowledge of environmental law. In addition, he is recognized at the senior levels of Canadian government. (Wilkki, 1/14/09, 8-11, 40; Estrin 2/3/09, 46-52; Pls.’ Ex. 150; Defs.’ Ex. 585). Even if another attorney could be found with 47 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 48 of 50 sufficient expertise, the new attorney would lack the six-year history with Windsor, coordinating all aspects of its strategy on these complex and intertwined issues. For these reasons, Windsor considers Estrin to be irreplaceable, and it would be “in a panic situation” if Estrin is prevented from representing Windsor on matters relating to the Second Span. (Wilkki, 1/14/09, 8, 11-13, 37, 125; Defs.’ Ex. 514). Courts have recognized that “an order depriving a litigant of the services of the lawyers it ha[s] chosen and who might have represented it for years, [i]s a drastic measure that in many cases could work an injustice on the innocent client.” Robertson, at ¶19; see also In re Valley-Vulcan Mold Co., 237 B.R. 322, 337 (B.A.P. 6th Cir. 1999), aff’d 5 F. App’x 396 (6th Cir. 2001) (internal citations omitted) (noting that “‘a party’s choice of counsel is entitled to substantial deference’”); Capachione v. Charlotte-Mecklenburg Bd. of Educ., 9 F.Supp. 2d 572, 582 (W.D.N.C. 1998) (noting that “disqualifying a party’s chosen representative is a very serious matter”). Moreover, any harm is compounded for Windsor because of the complexity and history of the border crossing issues. See e.g., Strother, at ¶62 (client’s access to counsel of choice on complex matter “important consideration” where attorneys’ “special expertise was available from few other firms” and “[client] had worked successfully with [the attorneys] for years”); Capachione, 9 F.Supp. 2d at 582 (describing prejudice to client if deprived of attorney with “enhanced ability to be [client’s] zealous advocate” given attorney’s past involvement with the intertwined matters); SST Castings, Inc. v. Amana Appliances, Inc., 250 F.Supp.2d 863, 869 (S.D. Ohio 2002) (denying disqualification motion because it would be “patently unfair” to deprive client of attorney of three years). 48 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 49 of 50 The harm to Windsor would be severe if Gowlings is enjoined from representing it, compared with no actual and imminent harm to CenTra absent an injunction. Moreover, harm to Windsor, as a public entity, has the potential to affect hundreds of thousands of people. See Charter Twp. of Huron, Mich. v. Richards, 997 F.2d 1168, 1175 (6th Cir. 1993) (noting that when “balanc[ing] the interests of the parties” a court should “giv[e] particular attention to the public consequences of a decree”); Winter v. NRDC, Inc., 129 S. Ct. 365, 376 (2008) (internal citations omitted) (“‘In exercising their sound discretion, courts of equity should pay particular regard for the public consequences in employing the extraordinary remedy of injunction.’”). The Court finds that this factor weighs against granting an injunction. E. The Public Interest The final factor the Court must consider is whether a preliminary injunction would serve the public interest. See Washington, 35 F.3d at 1099. The Court recognizes that the public has an interest in “maintaining the highest standards of professional conduct” and in “[t]he preservation of public trust” “in the integrity of the bar.” Hull v. Celanese Corp., 513 F.2d 568, 569, 572 (2d Cir. 1975); see also Kitchen v. Aristech Chem., 769 F.Supp. 254, 256-57 (S.D. Ohio 1991). At the same time, however, “there is a clear public interest in permitting attorneys to practice law without unreasonable restrictions,” Earnings Performance Group, Inc. v. Quigley, 2003 U.S. Dist. LEXIS 26294, *28 (E.D. Mich.), aff’d 124 F. App’x. 350 (6th Cir. 2005), as well as a public interest in protecting the right to choose one’s counsel. See, e.g., Alberta Union, ¶33 (noting that “[c]hoice of counsel is itself a value to be protected”); Moffat, at ¶123 (noting that “[t]he right of a party to be represented by counsel of his or her 49 Case 2:06-cv-15185-NGE-RSW Document 115 Filed 06/03/2009 Page 50 of 50 choice is one which is fundamental to the adversarial process”); Alexander v. Primerica Holdings, Inc., 822 F.Supp. 1099, 1114 (D. N.J. 1993) (same); Kitchen, 769 F.Supp. at 256-57 (same). Given these competing public interests, the Court finds that this factor weighs in favor of neither party.12 IV. CONCLUSION The Court holds that the balance of the relevant factors weighs in favor of Defendants. Whatever its ultimate remedy might be should CenTra prevail at trial, it has not demonstrated that the immediate disqualification of Gowlings is warranted.13 Accordingly, CenTra’s motion for a preliminary injunction is DENIED. s/Nancy G. Edmunds Nancy G. Edmunds United States District Judge Dated: June 3, 2009 I hereby certify that a copy of the foregoing document was served upon the parties and/or counsel of record on June 3, 2009, by electronic and/or ordinary mail. s/Carol A. Hemeyer Case Manager 12 The Court does note that Gowlings’ implementation of extensive screening measures arguably mitigates any harmful effects on public confidence in the bar absent an injunction. 13It should be noted that even if Gowlings is found at trial to have breached its contractual or fiduciary obligations, disqualification would not necessarily be the remedy. See, e.g., Alberta Union, at ¶50 (“even if a conflict had been found, the remedy is not necessarily a disqualification”); Neil, at ¶36 (“It is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy.”); Quicken Loans, 2008 WL 2566373, at *3 (“[E]ven if a violation is found, the Court may choose a remedy other than disqualification.”). 50

=== ROBERT LEONHARDT, et. al. v. ARVINMERITOR, INC., et. al. ===

Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 1 of 39 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION ROBERT LEONHARDT, LAWRENCE M. FIRMANI, and SAM CARUSO, for themselves and others similarly situated, and UNITED STEELWORKERS OF AMERICA, AFL-CIO-CLC, v. Plaintiffs, Case No. 04-CV-72845 U.S. District Judge Nancy G. Edmunds ARVINMERITOR, INC.; NORTH AMERICAN ROCKWELL CORPORATION; ROCKWELL INTERNATIONAL CORPORATION; and ROCKWELL AUTOMATION, __________________________________________/ Defendants. MEMORANDUM OPINION STATING FINDINGS OF FACT AND CONCLUSIONS OF LAW AND GRANTING JOINT MOTION FOR APPROVAL OF CLASS ACTION SETTLEMENT [50] Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 2 of 39 I. FINDINGS OF FACT ...................................................................................................... 1 TABLE OF CONTENTS A. B. C. D. E. F. G. H. I. The Parties and the Class. .................................................................................... 1 The Claims and Defenses. .................................................................................... 3 The Settlement. .................................................................................................... 4 The Settlement Negotiations ................................................................................ 4 The Settlement Agreement. ................................................................................. 7 Class Counsel's Assessment .................................................................................10 Defense Counsel's Assessment ............................................................................14 Notice to the Class. ..............................................................................................15 Objection and the Approval Process. ...................................................................16 II. CONCLUSIONS OF LAW .............................................................................................17 A. B. The Legal Standards. ...........................................................................................17 The Legal Standards Applied ..............................................................................21 1. Assessing the dispute and weighing continued litigation against settlement. ....................................................................................................21 2. The risk/delay/expense factor. ........................................................................28 3. The judgment of counsel. ................................................................................29 4. The discovery/evidence factor. .......................................................................31 5. The fairness factor. .........................................................................................32 6. The "arm's length" factor. ...............................................................................32 7. The public interest factor. ...............................................................................34 C. The Objection ......................................................................................................34 III. CONCLUSION ................................................................................................................36 i Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 3 of 39 Plaintiffs Robert Leonhardt, Lawrence M. Firmani, and Sam Caruso, for themselves and on behalf of the certified class; plaintiff United Steelworkers of America, AFL-CIO-CLC, now called United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC; and defendants ArvinMeritor, Inc., North American Rockwell Corporation, Rockwell International Corporation, and Rockwell Automation, pursuant to Fed. R. Civ. P. 23(e), moved for approval of the parties' Settlement Agreement (Docket 46, Ex. 1) to fully and finally resolve this class action. (Docket 50). The Court preliminarily approved the Settlement Agreement on August 6, 2008, and approved a notice to class members which described the settlement, set an objection deadline, and scheduled a fairness hearing. (Docket 46 and 47). The notice and settlement documents were sent to class members on August 13, 2008. The Court conducted a fairness hearing on October 7, 2008. Based on the hearing and on submissions to the Court, the Court makes the following findings of fact and conclusions of law. I. FINDINGS OF FACT 1. This class action addresses the reduction and cancellation of retiree health benefits. A. The Parties and the Class. 2. The individual plaintiffs and class representatives are retirees Robert Leonhardt, Lawrence M. Firmani, and Sam Caruso. The union plaintiff is the United Steelworkers of America, AFL-CIO-CLC, now called the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC ("USW"). 3. The defendants are ArvinMeritor, Inc.; North American Rockwell Corporation; Rockwell International; and Rockwell Automation. 1 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 4 of 39 4. Rockwell International Corporation was formed in 1973 in a merger between North American Rockwell and Rockwell Manufacturing. Rockwell International was a conglomerate of multiple divisions which owned and operated industrial plants throughout the United States, including plants supplying the automotive industry. Rockwell's automotive division employed hourly workers represented by USW at plants in Logansport and Gary, Indiana; New Castle, Pennsylvania; and Newton Falls, Ohio. Over the years, these plants closed or were sold. In October 1997, Rockwell "spun-off" its automotive division which became Meritor Automotive, Inc. In July 2000, Meritor merged with Arvin Industries to form ArvinMeritor, Inc. In 2003, Rockwell International changed its name to Rockwell Automation. See Cole v. ArvinMeritor, 515 F.Supp.2d 791, 794 (E.D. Mich. 2006). 5. The Court certified the class, approved the individual plaintiffs as class representatives, and approved class counsel on February 9, 2006. (Docket 39). The certified class "consists of approximately 1,000 retirees who retired from USW-represented collective bargaining units at defendants' plants in Indiana, Ohio and Pennsylvania who receive or who have received health benefits from or through one or more defendants and, in addition, the retirees' spouses, other eligible dependents, and surviving spouses who receive or who have received health benefits from or through one or more defendants." (Docket 39, ¶2). 6. The retirees in the class worked in USW-represented collective bargaining units at the plants in Logansport and Gary, Indiana; New Castle, Pennsylvania; and Newton Falls, Ohio. Plaintiffs and class representatives Leonhardt and Caruso worked in New Castle. Plaintiff and class representative Firmani worked in Logansport. The class members are or were participants 2 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 5 of 39 and beneficiaries in ERISA-regulated welfare benefit plans created, sponsored and operated by defendants to provide health benefits for retirees and eligible dependents. B. The Claims and Defenses. 7. Beginning in 2003, ArvinMeritor, administrator of the health benefits, increased co-pays, deductibles, and out-of-pocket maximums, shifted costs to class members and, effective January 1, 2006, cancelled health benefits for class members age 65 or over and declared the intention to make further reductions and cancellations and to discontinue permanently health benefits for all class members as each attains the age of 65. The Leonhardt lawsuit, filed on July 15, 2004, challenged these actions. 8. The individual plaintiffs sued for themselves and the class under Section 301 of the Labor-Management Relations Act (LMRA), 29 U.S.C. §185, and Section 502(a) of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §1132(a). USW sued under LMRA Section 301. Plaintiffs claimed that defendants are obligated to keep promises made in collective bargaining agreements to provide hourly retirees and dependents with lifetime health benefits. Plaintiffs claimed that defendants broke these promises beginning in 2003, and continue to do so, by reducing and cancelling health benefits for class members. Plaintiffs asked the Court to direct defendants to reinstate and continue health benefits for class members and to otherwise meet contractual and legal obligations under the agreements and ERISA. (See Docket 1). 9. Defendants responded that they did not promise lifetime health benefits, that their obligations to provide retiree health benefits ended with the expiration of each collective bargaining agreement, that the plants closed or were sold and there are no current agreements providing for continued retiree health benefits, that defendants have the legal right to reduce and 3 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 6 of 39 cancel retiree health benefits and properly did so in 2003 and later, and that they have the right to do so into the future. Defendants contended that they have no obligation under any agreement or ERISA or any other law to provide any retiree health benefits. Defendants asked the Court to dismiss the lawsuit. (See Docket 5 and 6). C. The Settlement. 10. Because the stakes are high and the litigation risks and uncertainties for all parties and class members are great, the parties engaged in settlement negotiations. Ultimately, the parties reached the mutually-acceptable compromise described in the Settlement Agreement. (Docket 46, Ex. 1). Under the Settlement Agreement, if given final approval by the Court, ArvinMeritor will pay $28,391,954.50 to resolve the lawsuit. Settlement funds will be used to form and fund a Voluntary Employees' Beneficiary Association ("VEBA") to provide health benefits for class members into the future. D. The Settlement Negotiations. 11. As the Leonhardt litigation progressed, the parties addressed defendants' motion to change venue and cross-motions addressing discovery disputes, engaged in discovery, including defendants' depositions of the individual plaintiffs, addressed class certification, and participated in an information exchange seeking to develop a comprehensive joint collection of relevant documents, including collective bargaining agreements, summary plan descriptions, and other documents spanning the decades going back to the 1960s. Despite the parties' efforts, there remained gaps in the joint document collection. The parties' review of the document collection did not resolve their core dispute over whether the retiree health benefits were vested and lifetime 4 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 7 of 39 benefits or were not, and so were subject to unilateral reduction and cancellation by defendants. In this context, the parties began settlement discussions in 2006. 12. The settlement discussions involved the parties' counsel and other professionals in face-to-face meetings, telephone conversations and written communications. The parties exchanged and evaluated information and exchanged and debated proposals and counterproposals as the settlement negotiations continued in 2006 and through 2007 and, finally, culminated in the parties' Settlement Agreement and the related documents filed with the Court on August 1, 2008. (Docket 46, Ex. 1-4). 13. In the course of the negotiations, the parties exchanged and discussed information about class members and health benefits. In particular, the parties discussed the plans and benefits that defendants provided at various times to retirees from the plants in Pennsylvania, Indiana, and Ohio, and to the retirees' eligible dependents, and ArvinMeritor provided information about benefits costs and about the ages and locations of class members. The parties discussed various approaches to settlement, ultimately focusing on payment by defendants of an amount to fund a VEBA trust to provide health benefits to class members into the future. 14. The parties began discussions about the appropriate amount of settlement funds with foundational information, beginning with ArvinMeritor's FAS 106 valuation of accumulated post-retirement health benefit obligations for class members based on a 2001 report prepared by PriceWaterhouseCoopers. That report was the most complete valuation available predating the 2003 changes. Using that report as a starting point, the parties discussed -- and negotiated over -- adjustments to the valuation to account for actual expenditures since 2001 and anticipated future costs. These adjustments included deductions from and additions to the 2001 FAS 106 number, 5 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 8 of 39 adjusting for projected earnings, called the "discount rate," for actual benefits paid and administrative costs expended since June 30, 2001, for anticipated administrative and professional costs to be incurred by the VEBA in the future, for a reimbursement procedure anticipated by the VEBA to in part compensate for the 2006 termination of benefits affecting the vast majority of class members, for anticipated medical cost inflation, for attorney fees and expenses related to the litigation, and for what the parties called "litigation risk." 15. The parties debated appropriate adjustment levels, at times differing considerably, particularly about discount rate and medical cost inflation projections and litigation risk. Eventually the parties exchanged settlement proposals, continued their discussions over time, refined their proposals and counterproposals, and ultimately, agreed on a settlement number: $28,391,954.50. During the course of the settlement discussions, class counsel regularly reported to the individual plaintiffs and class representatives and obtained their authority for settlement within defined boundaries. The $28,391,954.50 settlement amount was agreed upon with the authority of all plaintiffs and the approval of class counsel. 16. Once the settlement amount was agreed upon, the parties began work on a letter agreement to confirm the principal terms of the settlement -- the amount, the process for seeking a judgment from the Court, the VEBA structure, payment terms, and other matters. Drafting the letter agreement was time-consuming and involved additional negotiations. Ultimately, the letter agreement was signed for plaintiffs on September 5, 2007 and for defendants on September 7, 2007. It included the following: "The parties recognize that there are numerous details to work out regarding the specific terms of the settlement. The parties will undertake to work out those 6 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 9 of 39 terms and memorialize them in a written settlement agreement. The parties commit to doing so promptly and cooperatively." 17. The drafting of the Settlement Agreement and related documents proved time-consuming, too, and engendered additional negotiations and the need to address potential issues under ERISA and other legal authority affecting the structure of the VEBA and the content of the Settlement Agreement. Ultimately, the parties reach full agreement on the necessary documents and, on August 1, 2008, filed them with the Court with a joint motion seeking preliminary approval of the settlement and the Settlement Agreement and seeking approval of a proposed notice to class members describing the settlement and setting a Rule 23(e)(2) fairness hearing. (Docket 46). The documents included the Settlement Agreement, the Trust Agreement, grids describing six healthcare programs that were planned to be offered to class members through the VEBA after final approval of the settlement, the proposed class notice, and a proposed cover letter from the USW general counsel briefly summarizing and endorsing the settlement. (Docket 46, Ex. 1-4). The Court preliminarily approved the settlement and the Settlement Agreement and approved the class notice and the other settlement-related documents on August 6, 2008. (Docket 47). E. The Settlement Agreement. 18. Under the Settlement Agreement (Docket 46, Ex. 1), if approved by the Court, ArvinMeritor will pay $28,391,954.50 to resolve the lawsuit. Settlement funds will be used to form a trust that will constitute a VEBA under Section 501(c)(9) of the United States Internal Revenue Code to provide health benefits for class members into the future. (Docket 46, Ex. 1, ¶¶4, 12). The VEBA will be governed by the Trust Agreement. (Id., Ex. 4). The VEBA will be 7 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 10 of 39 operated and managed by an independent Committee and by an institutional Trustee according to the terms of the Trust Agreement. (Docket 46, Ex. 1, ¶6). Defendants ultimately will be released from retiree healthcare responsibilities, subject to their funding obligations specified in the Settlement Agreement and their obligations to cooperate with USW, the other plaintiffs, and the VEBA Committee "to facilitate the formation of the VEBA and the VEBA's formative efforts to commence providing health benefits to class members." (Id., ¶8). Once formed, the VEBA will be governed pursuant to the Trust Agreement by the Committee and the Trustee. 19. Under the Settlement Agreement, ArvinMeritor is to pay the full settlement amount no later than three business days after the entry of judgment approving the settlement and exhaustion of any appellate proceedings. (Docket 46, Ex. 1, ¶12(b . Payment of the full settlement amount and compliance with the Settlement Agreement "will satisfy all claims made in the lawsuit, including all alleged damages incurred by Plaintiffs and class members related to health benefits claimed in the lawsuit, and all attorney fees for Plaintiffs' counsel and costs incurred by Plaintiffs in connection with the lawsuit." (Id., ¶12; see also ¶14(b . Defendants are to bear their own fees and expenses; the settlement amount is not be used to cover fees or expenses incurred by defendants or defendants' fees or expenses related to defendants' obligations under the Settlement Agreement. (Id., ¶12). Once the Settlement Agreement is approved and fully implemented, defendants are to be released from all health benefit obligations to class members and future health benefits will be provided only by or through the VEBA. (Id., ¶14). 20. The initial VEBA Committee is to consist of chair Jeanette Stump, a health benefits specialist with the USW Pension and Insurance Department; John Sellers, a retired USW Executive Vice President who was in charge of the Rubber/Plastics Industry Conference; and 8 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 11 of 39 Thomas J. Clancy, a retired Assistant Director of the USW Office, Technical and Professional Department and Coordinator of Public Employee Services. The Committee is to select a banking institution to serve as the initial Trustee. (Docket 46, Ex. 1, ¶6). The Committee has been operating informally at the request of plaintiffs in anticipation of approval of the Settlement Agreement. 21. The Committee, in anticipation of the settlement being approved, reviewed available health benefits programs and selected various healthcare program options that the Committee anticipates can be made available to class members promptly after final approval of the settlement. These programs all are insured healthcare plans. All provide comprehensive benefits, including doctor and hospital services and prescription drugs coverage. Medicare-eligible class members initially are to have five programs to chose from depending on individual preference and geographic location. Approximately 85% of class members are currently Medicare-eligible. Class members not yet Medicare-eligible are to have one initial program option; when they become age 65, they will be able to choose among the available programs for Medicare-eligible class members. VEBA funds are to pay 70% of the premium for each of these initial programs, with the 30% balance of the premium to be paid by covered individuals. The initial programs expected to be implemented by the Committee are detailed in the class notice and on the grids accompanying the class notice. (Docket 46, Ex. 2). 22. The initial programs were selected by the Committee based on cost, benefits, assessment of the insurers/providers, and geographic availability. The Committee plans that VEBA funds initially will pay 70% of the premium cost, selecting that percentage as prudent for the first year, subject to later adjustment as the VEBA develops experience and assesses actual 9 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 12 of 39 costs, medical cost inflation, and earnings on VEBA funds. It is anticipated that the Committee periodically will review the healthcare programs provided through the VEBA and available alternatives, and will consider input from the retiree advisory group contemplated by the Trust Agreement (Docket 46, Ex. 4, §10.14), and that the Committee will change the programs or add or substitute other programs from time to time as consistent with the purposes of the Trust Agreement and the prudent use of VEBA funds in the interest of class members into the future. F. Class Counsel's Assessment. 23. In the course of the settlement negotiations and the preparation of the documents related to the settlement, class counsel consulted two VEBA and ERISA benefits lawyers and relied on the expertise and advice of others with VEBA and health benefits experience, including Jeanette Stump and USW Pension and Benefits Department Director Thomas Duzak. In particular, class counsel drew on research and analysis provided by Mrs. Stump, who aided in the formulation of plaintiffs' settlement proposals and in the assessment of defendants' proposals and information, and who directly participated in settlement discussions and in direct communications with defense counterparts. Throughout the settlement process, too, class counsel reported to and consulted with the individual plaintiffs and class representatives and also drew on the experience and expertise of USW staff counsel. All on plaintiffs' side concluded that settlement was in the best interests of the class and all concur that the settlement terms embodied in the Settlement Agreement are fair, reasonable, and adequate. 24. Counsel for both sides filed a joint motion for approval of class settlement, and concur in the settlement. (Docket 50). Class counsel identified a number of factors that led them to the conclusion that the settlement is fair, reasonable, and adequate. 10 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 13 of 39 25. Class counsel considered the risk and uncertainty involved in continued litigation. They analyzed the law, the governing collective bargaining agreements and other documents, and the potential extrinsic evidence available to support plaintiffs' case and available to support defendants' resistance to plaintiffs' case. While class counsel believed that plaintiffs had a substantial case, they also recognized that the defendants, too, had substantial arguments, that continued litigation would likely be vigorously contested by defendants, that there were gaps in the collective bargaining and document histories, that plaintiffs had the burden of proof, and that the outcome of the litigation was uncertain. 26. Class counsel considered the high stakes, recognizing that continued litigation was a "zero sum" undertaking in which the likely outcome would be that one side achieved total victory while the other side experienced total defeat. They considered that if plaintiffs did not prevail, the outcome would be disastrous. The post-Medicare class members -- whose benefits were discontinued on January 1, 2006 -- would recover nothing. The pre-Medicare class members -- about 15% of the class, a dwindling group as class members age -- would have continued benefits only so long as ArvinMeritor chose to continue those benefits and could lose all benefits at any time during continued litigation. In any event, like the other class members, the pre-Medicare class members would lose all benefits at age 65, and, if plaintiffs did not prevail, also would end up with nothing. 27. Class counsel also considered the delay attendant to continued litigation. They concluded that litigating to a final resolution would likely take years, including adjudication in the district court and, whatever the outcome in the district court, likely appeal to the Sixth Circuit. They considered that delay itself worked a substantial hardship. The majority of class members -- 11 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 14 of 39 approximately 85% -- had been without company-paid benefits, as company-paid health coverage ended for Medicare-eligible class members on January 1, 2006. Settlement would provide prompt and certain relief for these class members. In addition, likely mortality rates meant that many class members, particularly many in their 80s and 90s, likely would not benefit from even the most favorable resolution of the litigation if that favorable resolution did not come until more years had passed. 28. Based on these factors -- risk, uncertainty, delay, the disaster of loss, ongoing hardship, and the post-Medicare status of the majority of class members -- class counsel, in consultation with plaintiffs, concluded that it made sense to pursue the possibility of settlement. During early discussions, as noted, the parties focused on a settlement structure that would remove defendants from retiree healthcare and that would fund an independent VEBA to provide class members with health benefits under the auspices of fiduciaries charged with the responsibility to act in the best interests of the class. 29. In the settlement negotiations, plaintiffs sought an amount that would permit the formation and operation of a VEBA to provide comprehensive, insured medical, hospital, and prescription drug benefits. Jeanette Stump surveyed the market and developed a number of healthcare plan options, considering cost, benefits levels, and geographic availability. Eventually her research and efforts resulted in the six initial programs described in the class notice and grids. (Docket 46, Ex. 2) Plaintiffs also sought a settlement amount that would permit the VEBA to provide comprehensive benefits under any likely scenarios for a reasonable period into the future, at least into the 2020s. To set their monetary "bottom line," plaintiffs estimated the present costs of lifetime benefits and adjusted those costs by various factors, including estimated mortality rates, 12 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 15 of 39 medical cost inflation rates, and discount rates. They also adjusted their "bottom line" by factoring in litigation risk, which, they concluded, warranted -- and would require -- compromise. In consultation with class counsel and the other individuals proposed as VEBA Committee members, Jeanette Stump made projections about administrative and benefits costs, longevity/mortality, medical cost inflation, and discount rates and she assisted plaintiffs in setting settlement objectives, formulating plaintiffs' proposals, and assessing defendants' proposals, and she directly participated in the negotiations and in communications with defense counterparts. 30. Class counsel and Mrs. Stump developed their settlement objectives and strategy in consultation with the individual plaintiffs and class representatives. The parties ultimately reached agreement on the $28,391,954.50 settlement amount. This amount was consistent with plaintiffs' criteria and objectives and within the authority given class counsel by the individual class representatives. Again, class counsel concluded that this settlement was fair, reasonable, and adequate, and in the best interests of class members, and that it was the best available alternative and provided a resolution far more favorable than continued litigation with its attendant risks, uncertainties, delay, and continued hardships. 31. As noted, in consultation with the other two individuals expected to be VEBA Committee members, and based on her survey of the market and consultation with insurers, class counsel and the individual plaintiffs, Jeanette Stump recommended the six healthcare programs described in the grids to be initially available to class members through the VEBA. It is anticipated that these plans can be offered through the VEBA promptly, after an expeditious enrollment period. If judgment is entered in October 2008 and becomes final in November 2008, 13 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 16 of 39 the Committee anticipates that enrollment can take place in November and December 2008 and that these plans can be provided through the VEBA beginning on January 1, 2009. 32. In sum, class counsel concluded that the settlement will bring final resolution to the litigation, end uncertainty, eliminate the risk of disastrous loss, and stop the hardship attendant to further delay. The settlement provides for a payment of $28,391,954.50 which will permit the creation of the VEBA to provide class members with health benefits into the future, will pay the attorney fees and expenses incurred in the course of this litigation, with fees based on work hours at reasonable rates subject to Court approval, and will put future benefits in the hands of a VEBA Committee responsible to act in the best interest of the class, able to do so unaffected by company preferences and finances and any other company-related vicissitudes. Class counsel concluded that the settlement is the best available alternative, is fair, reasonable and adequate under Rule 23, and is a highly successful and positive result of significant benefit to the class. G. Defense Counsel's Assessment. 33. Defense counsel concur that the settlement is fair, reasonable, and adequate and is a mutually-beneficial and positive resolution of the parties' dispute, bringing certainty, avoiding more delay, and eliminating the risk of loss, and providing salutary and valuable benefits to defendants' retirees and the retirees' eligible dependents. 34. As addressed ahead, the Court concurs with the parties and counsel and finds that the settlement is fair, reasonable, and adequate under Rule 23(e)(2). 14 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 17 of 39 H. Notice to the Class. 35. The class notice -- titled "Important Notice About Health Benefits For Steelworkers/Rockwell Retirees And Their Families" (Docket 46, Ex. 2) -- was approved by the Court on August 6, 2008. (Docket 47). ArvinMeritor sent the notice by first class mail to class members on August 13, 2008. 36. The class notice summarized the litigation and the settlement negotiations, the settlement, and the approval process. The notice mailed to class members was accompanied by complete copies of the Settlement Agreement (Docket 46, Ex. 1) and the Trust Agreement (Id., Ex. 4), a letter from USW General Counsel Paul Whitehead briefly explaining and endorsing the settlement (Id., Ex. 3), and the grids detailing the six healthcare plan options that the VEBA Committee intends to offer to class members initially, once a judgment approving the settlement is final. (Id., Ex. 2). 37. The class notice outlined its purpose and summarized the lawsuit, identifying the parties and the lawyers, defining the certified class, and outlining the parties' claims and defenses. (Docket 46, Ex. 2, ¶¶1-3). The notice described the settlement negotiations and summarized the settlement terms -- the settlement amount and payment deadline, the VEBA to be governed by the three-person Committee and the banking institution to serve as Trustee, the contemplated limited reimbursement payments to be available to certain class members, the anticipated fee and expense requests to be filed with the Court by class counsel, the fact that the settlement would release defendants from all health benefits obligations to class members and that future health benefits would be provided only by or through the VEBA, and other matters governed by the Settlement Agreement and the Trust Agreement. (Id. ¶¶3, 4, and 6). The notice identified the three members 15 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 18 of 39 of the initial VEBA Committee, addressed the fiduciary responsibilities of the Committee and the Trustee, and described the retiree advisory group which is to consult with the Committee into the future regarding health benefits, costs, and related matters. (Id. at ¶¶4(b), (f) , and (g . The class notice summarized the six initial healthcare plans selected by the Committee and anticipated to be made available to class members promptly after finality of a judgment approving the settlement. (Id. at ¶5). 38. The class notice outlined the parties' reasons for settlement, specified that it represented compromise, described the procedure for objecting to the settlement, set a September 15, 2008 postmark deadline for class member objections, and provided notice of the time and location of the October 7, 2008 fairness hearing. (Docket 46, Ex. 2, ¶¶6-7; Docket 50, Ex.6). 39. The class notice advised class members of access to all court filings at the courthouse and through PACER and invited class members to request additional information about the litigation, the settlement, or the procedure from class counsel by mail or e-mail. (Docket 46, Ex. 2, ¶8). 40. The class notice reiterated and summarized salient points at the end, and again called attention to the objection procedure and to the opportunity for class members to request additional information from class counsel. (Docket 46, Ex. 2, ¶9). I. Objection and the Approval Process. 41. One class member out of the approximately 1,000 class members filed an objection to the settlement. He objected to the amount of the premium cost that he and his wife would pay under two of the healthcare plans that initially will be available to class members if the settlement 16 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 19 of 39 is approved, questioning whether the settlement benefitted him or his wife. (Docket 50, Ex. 4). His objection is addressed in more detail ahead. 42. Pursuant to the Court's August 6, 2008 order (Docket 47), the parties filed a Joint Motion For Approval of Class Settlement on September 25, 2008. (Docket 50). 43. The Court held a fairness hearing on October 7, 2008. No class members appeared at the hearing to present an objection. 44. As discussed next, the Court concludes that the parties' settlement, concurred in by counsel for both sides, is the product of reasoned, informed "arm's length" negotiations which produced a mutually-beneficial settlement that eliminates risk, ends uncertainty, avoids further delay, promptly alleviates hardship, and is consistent with the public interest, and, in all these circumstances, is fair, reasonable, and adequate under Rule 23(e)(2). II. CONCLUSIONS OF LAW This Court has jurisdiction under LMRA Section 301, 29 U.S.C. §185, and ERISA Sections 502(3)(1) and (f), 29 U.S.C. §§1132(e)(1) and (f). This is a certified class action under Fed.R.Civ.P. 23(a) and (b)(1) and (2) and (g) as decided by the Court on February 9, 2006 in the order certifying this class action and approving class representatives Leonhardt, Firmani and Caruso and class counsel. (Docket 39). A. The Legal Standards. The law favors the settlement of class action litigation. See UAW v. General Motors Corp., 497 F.3d 615, 632 (6th Cir. 2007) (noting "the federal policy favoring settlement of class actions"); IUE-CWA v. General Motors Corp., 238 F.R.D. 583, 593 (E.D. Mich. 2006) (noting "the general federal policy favoring the settlement of class actions"); and Steiner v. Fruehauf corp., 121 F.R.D. 17 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 20 of 39 304, 305 (E.D. Mich. 1988) aff'd sub nom Priddy v. Edelman, 883 F.2d 438, 447 (6th Cir. 1989) ("case law favors the voluntary settlement of class actions"). "The claims, issues, or defenses of a certified class may be settled ... only with the court's approval." Fed. R. Civ. P. 23(e). To warrant district court approval, a class action settlement must be "fair, reasonable, and adequate." Fed. R. Civ. P. 23(e)(2); UAW v. General Motors, 497 F.3d at 631 ("Before approving a settlement, the district court must conclude that it is 'fair, reasonable, and adequate.'"); In re Cardizem CD Antitrust Litigation, 218 F.R.D. 508, 522 (E.D. Mich. 2003) (citations omitted), appeal dismissed 391 F.3d 812 (6th Cir. 2004), cert. denied 544 U.S. 1049 (2005) ("In deciding whether to grant final approval of the Proposed Settlement, this Court must determine, after holding a fairness hearing, whether the settlement is 'fair, adequate and reasonable'"). "The evaluation and approval of a class settlement is committed to the sound discretion of the district court." IUE-CWA, 238 F.R.D. at 594, citing inter alia, Clark Equip. Co. v Allied Industrial Workers, 803 F.2d 878, 880 (6th Cir. 1986), cert. denied 480 U.S. 934 (1987). The district court "should approve a class settlement if, following a hearing, the court determines that the settlement 'is fair, reasonable, and adequate.'" IUE-CWA, 238 F.R.D. at 593. The district court's "role in passing upon the propriety of a class action settlement is limited to a determination of whether the terms proposed are fair and reasonable to those affected." Steiner, 121 F.R.D. at 305, citing, inter alia, Williams v. Vukovich, 720 F.2d 909 (6th Cir. 1983). The district court's evaluation of a class action settlement "must be limited to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties and that the settlement, taken as a whole, is fair, 18 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 21 of 39 reasonable and adequate to all concerned." Clark Equip. Co., 803 F.2d at 880 (citation omitted); IUE-CWA, 238 F.R.D. at 594 (same). In assessing a class action settlement, the district court is to assess the settlement with regard to a "range of reasonableness " which "recognizes the uncertainties of law and fact in any particular case and the concomitant risks and costs necessarily inherent in taking any litigation to completion." IUE-CWA, 238 F.R.D. at 594 (citations omitted). See also Cardizem, 218 F.R.D. at 523 (applying a "range of reasonableness" measure). The district court is to consider "whether the interests of the class as a whole are better served if the litigation is resolved by the settlement rather than pursued." Cardizem, 218 F.R.D. at 522 (citation omitted). In assessing a proposed settlement, the district court "should not substitute its judgment for that of the parties." Steiner, 121 F.R.D. at 306. See also IUE-CWA, 238 F.R.D. at 594 (citations and quotations marks omitted) (the court "must respect the parties' compromise" and "may not substitute his or her judgment for that of the litigants and their counsel"). Before conducting a fairness hearing, a district court must "direct notice in a reasonable manner to all class members who would be bound" by the settlement. Fed. R.Civ. P. 23(e)(1). The notice should be "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." UAW v. General Motors, 497 F.3d at 629, citing, inter alia, Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). The Court finds that the class notice and related documents approved by the Court on August 6, 2008 (Docket 46, Ex. 1-4 and Docket 47), sent by ArvinMeritor by first class U.S. mail on August 13, 2008 to all class members, satisfied Rule 23(e)(1) notice requirements. In particular, 19 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 22 of 39 the notice explained the settlement in detail, advised class members that it would release defendants from all health benefits obligations to them and that future health benefits would be provided only by or through the VEBA, clearly set out the objection procedure and deadline, provided a mechanism for class members to seek further information, and was accompanied by the salient source documents -- the Settlement Agreement and the Trust Agreement as well as grids detailing the initial healthcare programs that are anticipated to be made available through the VEBA. See UAW v. General Motors, 497 F.3d at 630 (upholding notice which "clearly explained its purpose, discussed the nature of the pending suit and proposed class and accurately summarized the 76-page settlement agreement and incorporated exhibits" and which also enclosed a "copy of the settlement agreement, ensuring that retirees would have full access to the very document the district court would examine at the fairness hearing"). The purpose of the fairness hearing is to provide "procedural safeguards" giving class members the opportunity to present objections on the record and giving the parties the opportunity to present "sufficient evidence to allow the district court to review the terms and legitimacy of the settlement." UAW v. General Motors, 497 F.3d at 635. "In satisfying these requirements, a district court has wide latitude." Id. The court may "limit the fairness hearing to whatever is necessary to aid it in reaching an informed, just and reasoned decision." Id. (citations omitted). The fairness hearing need not "entail the entire panoply of protections afforded by a full-blown trial on the merits." Rather, the district court has "the discretion to limit the fairness hearing" to whatever is "consistent with the ultimate goal of determining whether the proposed settlement is fair, adequate and reasonable." Tennessee Assoc. of HMOs, Inc., 262 F.3d 559, 567 (6th Cir. 2001). 20 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 23 of 39 The Sixth Circuit identified seven "factors" that "guide the inquiry" undertaken by the district court: "(1) the risk of fraud or collusion; (2) the complexity, expense and likely duration of the litigation; (3) the amount of discovery engaged in by the parties; (4) the likelihood of success on the merits; (5) the opinions of class counsel and class representatives; (6) the reaction of absent class members; and (7) the public interest." UAW v. General Motors, 497 F.3d at 631, citing Granada Invs., Inc. v. DWG Corp., 962 F.2d 1203, 1205 (6th Cir. 1992) and Williams v. Vukovich, 720 F.2d 909, 922-923 (6th Cir. 1983). See also IUE-CWA, 238 F.R.D. at 594; Cardizem, 218 F.R.D. at 522; and Steiner, 121 F.R.D. at 305-306. In considering the seven factors, the district court may choose to "consider only factors that are relevant to the settlement and may weigh particular factors according to the demands of the case." IUE-CWA, 238 F.R.D. at 594-595, citing, inter alia, Granada, 962 F.2d at 1205-1206. B. The Legal Standards Applied. Here, as detailed ahead, considering the pertinent factors, the Court concludes settlement is fair, reasonable and adequate under Rule 23(e)(2). 1. Assessing the dispute and weighing continued litigation against settlement. The fairness of a class action settlement "turns in large part on the bona fides of the parties' legal dispute." UAW v. General Motors, 497 F.3d at 631. In assessing the parties' legal dispute, the district court's task "is not to decide whether one side is right or even whether one side has the better of these arguments....The question rather is whether the parties are using settlement to resolve a legitimate legal and factual legal dispute." Id. at 632 (finding a legitimate dispute over whether "collective bargaining agreements vest former union workers with their healthcare benefits upon retirement"). Id. at 631. 21 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 24 of 39 In assessing the parties' dispute and weighing the likelihood of plaintiffs' success on the merits if the litigation continues against the benefits to plaintiffs of the settlement, the ultimate question for the district court is only whether the interests of the class as a whole are better served if the litigation is resolved by the settlement rather than pursued. IUE-CWA, 238 F.R.D. at 595, citing, inter alia, Cardizem, 218 F.R.D. at 522. It is neither required nor is it possible for a district court to determine that the proposed settlement is the fairest possible resolution of the claims of every individual class member; rather, the court need only determine whether the settlement taken as a whole, is fair, adequate and reasonable. IUE-CWA, 238 F.R.D. at 595, citing, inter alia, Clark Equip., 803 F.2d at 878. Although assessing this factor requires some evaluation of the merits of the dispute, the district court need not resolve the dispute and must refrain from reaching conclusions on issues which have not been fully litigated. IUE-CWA, 238 F.R.D. at 595 (citation omitted). Here, consideration of this factor leads to the conclusion that there is indeed a legitimate dispute and that resolution of this lawsuit by the settlement better serves the class than continued litigation. The core of the parties' dispute is whether retiree health benefits are, under the series of collective bargaining agreements extending back to the 1960s, vested, unalterable, lifetime benefits or whether they are not, and so may be unilaterally reduced or terminated at defendants' discretion. The parties' views on this question are diametrically opposed. Resolution of this core question would involve adjudication of sharply-contested disagreements based on decades of collective bargaining agreements and possibly other documents and evidence -- including summary plan descriptions, correspondence, collective bargaining history, and other extrinsic 22 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 25 of 39 evidence. The parties recognize that the pertinent history is both incomplete and susceptible to conflicting interpretations, and that it provides the foundation for substantial and good-faith arguments that may be advanced in favor of each side. In addition, the parties recognize, and the Court concurs, that continued litigation would be a high stakes "zero sum" undertaking, in which one party is likely to achieve complete victory while the opposing party experiences complete defeat because the parties' core positions on whether or not retiree health benefits are vested are irreconcilable. History confirms the parties' assessment that litigating retiree health benefits disputes entails risk and uncertainty, and typically produces a "zero sum" result. For example, plaintiffs invoke authorities such as UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), cert denied, 465 U.S. 1007 (1984); McCoy v. Meridian Automotive Sys., 390 F.3d 417 (6th Cir. 2004); and Cole v. ArvinMeritor, 515 F.Supp.2d 791 (E.D. Mich. 2006) (appeal pending) (decided by this Court, involving some of the same counsel and the same defendants, but addressing a different union, different retirees, and different collective bargaining agreements and history). In those cases retiree claims to lifetime benefits were upheld based on contracts and were supported by extrinsic evidence. At the same time, defendants invoke authorities such as Sprague v. General Motors Corp., 133 F.3d 388 (6th Cir 1998) and Adams v. Avondale Indus., 905 F.2d 943 (6th Cir. 1990). Those cases found no contractual promises of lifetime retiree benefits. Indeed, the Court recognizes that retiree benefits litigation is fact-specific and often requires detailed analysis of extensive documentation and distant collective bargaining history, and that retiree benefits litigation is typically complex, labor-intensive, time-consuming and protracted and, often, in doubt until the end of years of litigation. 23 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 26 of 39 Moreover, recent litigation addressing similar disputes ended in resolutions similar to the settlement reached by the parties here, reflecting the judgment of district courts and similarly-situated litigants that reasonable compromise is preferable to the risks and other detriments of sharply-contested litigation. Those resolutions, providing for the formation and funding of VEBAs to continue contested retiree health benefits, were approved by courts as appropriate settlements of similar high stakes class action lawsuits over whether retiree health benefits were vested. See, e.g., UAW v. General Motors Corp., 497 F.3d 615, 632 (6th Cir. 2007) (emphasis in original): What makes these settlements particularly sensible, moreover, is that even if this merits question favored one party over the other, the retirees still would have had ample reason to control the resolution of this dispute through negotiation today rather than litigation tomorrow. If we decided for the sake of argument that the retirees were likely to lose the Yard-Man/Sprague debate, little would stand in the way of the car companies reducing or even eliminating the retirees' healthcare benefits in the future. If we decided for the sake of argument that the retirees were likely to win the debate, any such victory would run the risk of being a Pyrrhic one ... [I]t is well to remember that the Federal Government's Pension Benefit Guaranty Corporation, which provides pension guarantees for the employees and retirees of financially distressed companies, has no sister agency that provides the same guarantees for retiree healthcare benefits. See also IUE-CWA v. General Motors Corp., 238 F.R.D. 583 (E.D. Mich. 2006) (findings of fact and conclusions of law approving class action settlement providing for the VEBA to resolve retiree healthcare benefits litigation); UAW v. Chrysler LLC, 2008 WL 2980046 (E.D. Mich., July 31, 2008) (same); UAW v. General Motors Corp., 2008 WL 2968408 (E. D. Mich., July 31, 2008) (same); and UAW v. Ford Motor Co., 2008 WL 4104329 (E. D. Mich., August 29, 2008) (same). Here, the Court finds that the parties' dispute is genuine, that the outcome of continued litigation is uncertain, and that continued litigation would carry substantial risks for both sides, and 24 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 27 of 39 that, in particular, class members would bear the risk that continued litigation will leave them with nothing because of loss and, in some cases, also because of delay. These circumstances, the Court finds, militate in favor of a settlement that ends uncertainty, avoids further delay, eliminates risk, promptly ameliorates hardship, and provides significant benefit to each side and to the class as a whole. Again, in this context the Court need not and should not decide the merits of the case or resolve the unsettled legal questions it presents. IUE-CWA, 238 F.R.D. at 595. It is sufficient to warrant approval of the settlement to determine that the Settlement Agreement is a rational and salutary resolution of contested, uncertain, protracted, and risky litigation. The Court makes that determination here. Here, if defendants were to prevail, all class members would end up with absolutely nothing. Indeed, defendants already eliminated retiree health coverage for all Medicare-eligible class members who make up approximately 85% of the class. If the defendants were to prevail, it is impossible to imagine that lost benefits ever would be reinstated or that any benefits would be continued or provided in the future for Medicare-eligible class members. Defendants have reduced, but not eliminated, health benefits for pre-Medicare class members, a group that is dwindling as pre-Medicare class members reach age 65. Defendants have continued benefits for pre-Medicare class members during the litigation and settlement process, so far. However, defendants have asserted the right to discontinue these benefits and all other continued benefits at any time, solely in defendants' discretion. Moreover, even if defendants were to continue pre-Medicare benefits during continued litigation, if defendants were to prevail at the end they would be free to immediately discontinue all benefits for all class members, and likely would do 25 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 28 of 39 so, leaving the entire class with no company-supported health benefits. In short, if plaintiffs did not prevail, sooner or later, in defendants' sole discretion, all class members assuredly would have no health benefits through defendants, ending up with absolutely nothing. On the other hand, if plaintiffs were to prevail, that would entail significant consequences for defendants, affecting their finances and operations and creating long-term liability in a difficult and competitive economy, tying the fate of the benefits to defendants' long-term financial health. And, as counsel note, even if plaintiffs were to prevail at the end of continued litigation, it is likely that for many class members victory would come too late. Considering these stakes, "it is entirely responsible and appropriate for the parties to resolve, rather than litigate, their dispute." IUE-CWA, 238 F.R.D. at 595-596. While the parties have not agreed on the precise mathematical percentage of the "best case/worst case" litigation result represented by their $28,391,954.50 settlement figure, they agree that the figure represents a substantial portion of the value of the disputed benefits and they agree that the settlement will permit the VEBA to make benefits available to class members for years into the future, expected to extend at least into the 2020s. They agree, too, that the settlement amount represents an informed compromise, with plaintiffs receiving something less than the fully-paid lifetime benefits claimed and with defendants paying a substantial sum for benefits which they claim they are not obligated to pay for at all. Compromise is necessary and appropriate in these circumstances. All settlements involve compromise, and courts "routinely recognize that settlements never equal the full value of the loss claimed by the plaintiffs." IUE-GM, 238 F.R.D. at 596 (citations omitted). The question for this Court is whether the settlement falls within a 26 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 29 of 39 "range of reasonableness" and "not whether it is the most favorable possible result in the litigation." Id. at 596, citations omitted. Here, the benefit to the class of the settlement is substantial. It will establish the VEBA and enable the VEBA to provide comprehensive, insured medical, hospital, and prescription drug coverage to class members at modest cost. (The Advantra PPO plan initially available to Medicare-eligible class members in Pennsylvania, for example, will require a class member to pay a $32.03 monthly premium, see Docket 46, Ex.2). The settlement will provide substantial funds to accomplish this purpose years into the future and it will place responsibility for administering those funds in the hands of the independent Committee and the Trustee whose sole responsibility will be to serve the interests of class members enrolled in the health plans provided through the VEBA, unaffected by defendants' interests and unfettered by defendants' preferences or future business operations or financial performance. In addition, as noted, the settlement will allow for the VEBA to promptly make substantial health benefits available to the approximately 85% of class members whose coverage was cancelled by ArvinMeritor on January 1, 2006. As noted, the VEBA Committee made preliminary decisions on the initial benefits programs to be available to class members. Again, these programs provide comprehensive insured plans at modest cost to class members, with the VEBA covering 70% of premiums. As in IUE-CWA, a "decision to accept modest cost increases in order to obtain assured relief for the Class is reasonable and appropriate." 238 F.R.D. at 596. Here, at most, only about 15% of class members are expected to incur cost increases, and only temporarily. In addition, as noted, the VEBA Committee, with the assistance of a retiree advisory group, will have the flexibility to make changes in the healthcare plans provided through the VEBA, or may add or 27 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 30 of 39 eliminate plans or benefits coverage, or may make other substantive changes from time to time based on earnings on VEBA assets and healthcare market rates and other factors, according to what the Committee determines to be in the best interest of class members in the exercise of the Committee's fiduciary responsibilities. In short, the settlement resolves uncertain, risky, protracted litigation in which the legal merits are the subject of a vigorous, genuine, good faith dispute. The settlement provides substantial funding for a VEBA to make available comprehensive health benefits into the future for all class members, and provides for the administration of those funds by a Committee and Trustee with fiduciary responsibilities to act in the best interests of class members. Accordingly, the Court concludes that settlement is informed, prudent, and rational, within an appropriate "range of reasonableness" and beneficial to all parties, and that the Settlement Agreement is fair, reasonable, and adequate under Rule 23(e)(2). 2. The risk/delay/expense factor. Whatever the relative merits of the parties' legal positions, there is no risk-free, expense-free litigation. IUE-CWA, 238 F.R.D. at 596. In IUE-CWA, Judge Hood noted the protracted litigation in two retiree health benefits cases finally decided by the Sixth Circuit: Sprague v. General Motors Corp., 133 F.3d 388 (6th Cir. 1998), which after nine years of litigation upheld the employer's right to modify salaried retirees' benefits, and Bittinger v. Tecumseh Products, 201 F.3d 440 (6th Cir. 1999), which after eight years of litigation affirmed the employer's right to modify retiree health benefits. See also UAW v. General Motors, 2006 WL 891151 (E.D. Mich.) at *17 ("The obvious costs and uncertainty of such lengthy and complex litigation weigh in favor of settlement"), consol. and aff'd. UAW v. General Motors, 497 F.3d 615 28 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 31 of 39 (6th Cir. 2007), and In re Cincinnati Policing, 209 F.R.D. 395, 400 (S.D. Ohio 2002) (internal quotation marks and citations omitted) ("the trial of this class action would be a long, arduous process requiring great expenditures of time and money on behalf of both the parties and the court.... The prospect of such a massive undertaking clearly counsels in favor of settlement."). In addition, in retiree benefits litigation delay, at the least diminishes -- and for some class members eliminates -- the value of possible victory at some point in the distant future. Here, in particular, 85% of class members are over 65, some are in their 80s and 90s, and most of these Medicare-eligible class members have been without company-paid health coverage since January 1, 2006, receiving only a limited Medicare premium subsidy. These class members suffer hardship that has continued during the litigation and settlement process and many of them might not benefit at all from a victory that comes only after more years of litigation. And, again, absent settlement, all class members would be subject to the uncertainty, risk, hardship and delay attendant to continued litigation which ultimately might leave them with absolutely nothing. The "risk/delay" factor, too, warrants approval of the settlement, which will provide prompt support for comprehensive health benefits for all class members. 3. The judgment of counsel. The judgment of the parties' counsel that the settlement is in the best interest of the settling parties "is entitled to significant weight, and supports the fairness of the class settlement." IUE-CWA, 238 F.R.D. at 597. See also Cardizem, 218 F.R.D. at 525 ("in approving a proposed settlement, the court also considers the opinion of experienced counsel as to the merits of the settlement"). Here, as discussed, the parties' counsel and the class representatives share the view that the settlement is fair, reasonable, and adequate. 29 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 32 of 39 The Court is familiar with counsel for both sides from this litigation and from similar litigation -- see Cole v. ArvinMeritor 515 F. Supp.2d 791(E. D. Mich. 2006) -- and, in particular, from counsel's periodic reports on their settlement discussions. The Court recognizes their experience and diligence and concludes that their endorsement of the settlement "is entitled to significant weight." IUE-CWA, 238 F.R.D. at 597. Class counsel represented parties in IUE-CWA where Judge Hood remarked: "Counsel for the parties in this case are reputable practitioners and trial counsel experienced in complex class action litigation who have adequately assessed the strengths of their respective claims and positions." 238 F.R.D. at 597. One class counsel was recognized by the Sixth Circuit for his extensive experience and expertise in retiree benefits cases. UAW v. General Motors, 497 F.3d at 622, 626. Indeed, counsel on both sides have considerable experience and accomplishments as is demonstrated by their professional resumes. See Docket 48, Ex. 8, 9, 12, 13, and 15-17. Their efforts and analysis in the settlement process, already summarized, displayed an informed, reasoned, practical, and productive approach to the litigation and the settlement process. Their universal assessment that the settlement is in the interest of all parties and is fair, reasonable, and adequate is well-supported and is consistent with the Court's views. See IUE-CWA, 238 F.R.D. at 597 (citations omitted): "the Court must rely upon the judgment of experienced counsel and, absent fraud, 'should be hesitant to substitute its own judgment for that of counsel.'" This factor, too, supports approval of the Settlement Agreement. 30 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 33 of 39 4. The discovery/evidence factor. The parties exchanged documents and information and jointly created a collection of governing collective bargaining agreements and other documents relevant to their dispute over the nature of retiree health benefits. In addition, defendants provided detailed information about the history and status of the health benefits, including the names and locations of retirees, eligible dependents and surviving spouses, benefits cost calculations and experience data, and other information pertinent to both the litigation and the settlement discussions. Also, in addition to their own internal investigation and information gathering, the parties participated in discovery, including class representatives' depositions, to inform their litigation risk assessment, and had direct communications between their respective benefits professionals to enhance their information exchange and analysis and to inform their settlement discussions. As noted, the parties recognized that the governing documents and pertinent history extend decades into the past, back to the 1960s, and are incomplete and susceptible to conflicting interpretations, creating risks and uncertainties for both sides in continued litigation. The Court finds that through discovery and cooperative information exchange the parties developed a body of documents and information sufficient to permit their informed assessment of the litigation and settlement, sufficient to inform the Court that their dispute is genuine and based on good-faith, albeit diametrically-opposed, legal positions, and sufficient to support the conclusion that the settlement is reasonable and desirable from all perspectives. The Court concludes that the parties and the Court have sufficient information to conclude that the settlement is a fair, reasonable, and adequate resolution of the parties' dispute. The discovery/evidence factor, too, warrants approval of the settlement under Rule 23(e)(2). 31 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 34 of 39 5. The fairness factor. District courts may scrutinize settlements to ensure that absent class members have not "lost out in favor of attorneys and named class members." IUE-CWA, 238 F.R.D. at 598 (citations omitted). There is nothing in the parties' Settlement Agreement that improperly benefits attorneys or favors the class representatives. To the contrary, the Court finds that the Settlement Agreement is even-handed in its treatment of class members, does not favor the class representatives, and reasonably provides for class counsel fees and expenses. The named class representatives are given no special consideration or advantage under the Settlement Agreement. Rather, they are treated the same as all other class members. In addition, the Settlement Agreement provides for class counsel fees based solely on hours worked at reasonable hourly rates, subject to Court approval. There is no provision for a premium "multiplier" to enhance fees or for fees computed as a percentage of the substantial settlement amount. Indeed, the attorney fees requested through June 30, 2008 (see Docket 48) represent about 2.27% of the settlement amount and are subject to Court approval. Fees and expenses sought for work after that date also will be subject to Court approval. Again, the treatment of the class members and the class representatives and class counsel under the Settlement Agreement is fair, reasonable, and adequate. This factor, too, favors settlement. 6. The "arm's length" factor. Courts presume the absence of fraud or collusion in class action settlements unless there is evidence to the contrary. IUE-CWA, 238 F.R.D. at 598. Here, there is no suggestion of fraud or collusion. Indeed, in the years of this litigation since 2004, the parties and their counsel have displayed civil but pronounced and vigorous 32 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 35 of 39 disagreement over core questions as well as over other issues in dispute, both in the litigation and in settlement discussions. Counsel for the parties have regularly reported to the Court on their struggles over the substance of the settlement and, until the end, on their struggles over the details of the Settlement Agreement and the other documents relating to the settlement. Like in IUE-CWA, the Court concludes that the "process was entirely at arm's length, with each party representing and pursuing its own interests, and exercising independent judgment." 238 F.R.D. at 599. Moreover, the terms of the Settlement Agreement confirm the absence of collusion. See IUE-CWA, 238 F.R.D. at 599 (citations omitted): "The authorities hold that if the settlement agreement itself is fair, reasonable and adequate, then the court may assume that the negotiations were proper and free of collusion." As noted, the Court concludes that the terms of the Settlement Agreement are fair, reasonable, and adequate and, therefore, the Court concludes that the settlement negotiations were, as the parties attest and as all the circumstances indicate, conducted at "arm's length," properly and free of collusion. The even-handed treatment of class members and the absence of any special or inappropriate treatment of class representatives and class counsel in the Settlement Agreement also demonstrate the absence of collusion. See IUE-CWA, 238 F.R.D. at 599, considering that the settlement "provides no preference" for class representatives whose claims are "treated no differently than the claims of" other class members and that class counsel "only seeks fees for hours worked at a reasonable rate ... in accordance with current market rates." IUE-CWA cited authority noting that "such an arrangement" for attorney fees was "remarkably modest for litigation of this nature." 238 F.R.D. at 599. The "arm's length" factor also supports approval of the settlement. 33 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 36 of 39 7. The public interest factor. The settlement of what likely would otherwise be protracted and sharply-contested "zero sum" litigation, the Court finds, is indeed in the public interest. The settlement benefits the parties and simultaneously serves the public interest in the availability of healthcare and in achieving certainty for retirees and for productive businesses that provide employment in this area and elsewhere. It also serves the public interest in resolving disputes in federal courts with the maximum possible expediency and efficiency. See Cardizem, 218 F.R.D. at 530 ("[T]here is a strong public interest in encouraging settlement of complex litigation and class action suits because they are 'notoriously difficult and unpredictable' and settlement conserves judicial resources"). The "public interest" factor, too, favors approval of the settlement. C. The Objection. As discussed, the seven factors identified by the Sixth Circuit as relevant to district court assessments of proposed settlements of class action litigation all support the conclusion that the parties' Settlement Agreement is fair, reasonable, and adequate under Rule 23(e)(2). The objection filed by a single class member does not alter this conclusion. Only one of the approximately 1,000 class members filed an objection to the settlement. He objected to the amount of the premium cost that he and his wife would be obligated to pay to enroll in two of the initial healthcare programs planned to be offered through the VEBA promptly after approval of the settlement. His objection addresses personal economic considerations, suggesting that he and his wife would be financially better off with regard to premium cost obligations if approval of the settlement was denied and the status quo were to continue for several years. (Docket 50, Ex. 4). This objection does not justify disapproval of the settlement. 34 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 37 of 39 First, the fact that only one objection was filed indicates that the settlement is fair, reasonable, and adequate. The single objection represents 1/10 of one percent (.001) of the class. Counting the objector's wife, although she did not file her own objection, the objection represents 1/5 of one percent (.002) of the class. This minimal level of opposition indicates broad support for the settlement among class members. See IUE-CWA, 238 F.R.D. at 600, collecting citations holding that "a relative small number of class members who object is an indication of a settlement's fairness," that "minimal opposition suggests that the class as a whole is in favor of the agreements," and that in "the class action context, silence may be construed as consent." See also Cardizem, 218 F.R.D. at 527 (a small number of objections is "indicative of the adequacy of the settlement"). Second, the objection is based on flawed premises, as addressed in class counsel's letter to the objector addressing the objection. (Docket 50, Ex. 5). Among other things, the objector's apparent comparison between one of the initial healthcare PPO programs to be provided in 2009 through the VEBA and a 2008 HMO plan with less comprehensive coverage is flawed. Also, the objector's certain assumption that the status quo for his wife would continue for the period before she becomes Medicare-eligible is unwarranted. Nevertheless, even if the objector's assessment were entirely accurate, his particular situation is insufficient to alter the fact that the settlement benefits the class as a whole and is far better than the alternative of continued litigation. See IUE-CWA, 238 F.R.D. at 600, collecting citations holding that a "court should not withhold approval of a settlement merely because some class members object," that "the fact that there is opposition does not necessitate disapproval of the settlement," and that the district court "has an obligation to protect the interests of the silent class majority, despite vociferous opposition by a 35 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 38 of 39 vocal minority to the settlement." Here, there is neither "vociferous opposition" nor a "vocal minority" against the settlement. Indeed, even the lone objector does not contest the fairness or reasonableness or adequacy of the settlement as a whole. Rather, his objection is personal, limited to his own and his wife's circumstances over the next few years, and while doubtlessly genuine, is based on flawed premises and reflects a limited short-term focus. In any event, whether or not the lone objection is flawed, its content does not alter the conclusion that the settlement rationally resolves a genuine legal dispute, eliminates risk and uncertainty for all sides, avoids further delay and promptly eliminates hardship, was the product of informed "arm's length" negotiations, serves the interests of the class as a whole, presents a better option than continued litigation, conserves judicial resources and is consistent with the public interest, has the parties' and counsel's endorsement, is within an acceptable "range of reasonableness" and, for all these reasons, is fair, reasonable, and adequate under Rule 23(e)(2). III. CONCLUSION The Court finds that the Settlement Agreement resolves a genuine legal dispute between the union and retirees on one hand, and defendants on the other, is the product of informed "arm's length" negotiations, achieves a mutually-beneficial settlement in the absence of fraud and duress, eliminates risk and uncertainty for all sides, avoids further delay and promptly eliminates hardship, serves the interests of the class as a whole, presents a better option that continued litigation, and therefore is in compliance with the requirements of Section 302(c)(2) of the Labor-Management Relations Act, 29 U.S.C. §186(c)(2). See U.S. v. Mabry, 518 F.3d 442, 447 (6th Cir. 2008). In addition, the Court finds that the Settlement Agreement conserves judicial resources, is consistent with the public interest, has the parties' and counsel's endorsement, is within an acceptable "range 36 Case 2:04-cv-72845-NGE-DAS Document 51 Filed 10/07/2008 Page 39 of 39 of reasonableness" and, considering all the circumstances, is fair, reasonable, and adequate under Rule 23(e)(2). For the foregoing reasons, the Court approves the parties' settlement and the Settlement Agreement in all respects and as to all parties. The Joint Motion for Order Granting Final Approval of Class Action Settlement (Docket 50) is GRANTED. The Court will issue a judgment accordingly. Dated: October 7, 2008 _s/ Nancy G. Edmunds____________ U.S. District Court Judge Nancy G. Edmunds 37

=== Green Party Of Michigan V. Michigan Secretary Of State ===

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION GREEN PARTY OF MICHIGAN, LIBERTARIAN PARTY OF MICHIGAN, REFORM PARTY OF MICHIGAN, METRO TIMES, INC., and DAVID FORSMARK d/b/a WINNING STRATEGIES, Case No. 08-10149 Honorable Nancy G. Edmunds Plaintiff(s), v. MICHIGAN SECRETARY OF STATE TERRI LYNN LAND, Defendant(s). / OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT [4] Plaintiffs Green Party of Michigan, Libertarian Party of Michigan, Reform Party of Michigan, Metro Times, Inc., and David Forsmark d/b/a Winning Strategies filed this action pursuant to 42 U.S.C. § 1983. Plaintiffs challenge the constitutionality of Mich. Comp. Laws § 168.615c, which requires the Michigan Secretary of State to provide to the chairpersons of the two major political parties, but to no one else, a file containing all of the political party preference declarations of the persons who voted in the January 15, 2008 Michigan Presidential Primary. Specifically, Plaintiffs argue that the Statute violates their First Amendment right to access and to report on information of public interest, and their Fourteenth Amendment right to equal protection of the laws. This matter comes before the Court on Plaintiffs’ motion for summary judgment. For the reasons set forth below, Plaintiffs’ motion is GRANTED. I. Facts In 2007, the Michigan Legislature enacted Public Act 52 (“PA 52"), which took effect September 4, 2007. The Act includes Mich. Comp. Laws § 168.615c (“the Statute”), which establishes certain procedures for the Michigan Presidential Primary. Pursuant to PA 52, only “participating political parties” could take part in the primary. Mich. Comp. Laws § 168.613a. To qualify, a party must have received more than 20% of the total presidential vote cast in Michigan in the last presidential election.1 Id. Under this criterion, only the Democratic and Republican parties were eligible to participate in the Michigan primary. (Pl.’s Mot. at 1.) No candidate from a party other than Democratic or Republican has earned more than 20% of the presidential vote in Michigan since 1912. See http://uselectionatlas.org. The Statute requires each primary voter to “indicate in writing . . . which participating political party ballot he or she wishes to vote.” Mich. Comp. Laws § 168.615c(1). Michigan voters do not record a party preference when they register to vote. See Mich. Comp. Laws § 168.495. As a result, the party preference designations from the primary election are the best source of information about the party affiliation of a large group of Michigan voters. (Pl.’s Mot., Ex. B at ¶ 6.) This party preference information is kept in a separate record, along with each voter’s name, address, and voter file number. Mich. Comp. Laws § 168.615c(3). These records are generally confidential, are exempt from disclosure under the Freedom of Information 1Prior to PA 52, a party qualified if it received more than 5% of the total vote cast nationwide for the Office of President in the last presidential election. See Pl.’s Mot., Ex. D at 2. 2 Act, and “shall not be disclosed to any person for any reason.” Id. at (4). Pursuant to the Statute, however, the Secretary of State is required to provide these records to the chairperson of each participating political party. Id. at (5). As stated above, only the Democratic and Republican parties qualified as participating political parties. Accordingly, pursuant to the Statute, they are entitled to the voter party preference information. The participating political parties may use the information: to support political party activities by that participating political party, including, but not limited to, support for or opposition to candidates and ballot proposals. A participating political party may release the information transmitted to the participating political party under subsection (6) to another person, organization, or vendor for the purpose of supporting political party activities by that participating political party, including, but not limited to, support for or opposition to candidates or ballot proposals. Id. at (8). Any person who uses the political preference information for a purpose not authorized by the Statute is subject to criminal penalties. Id. at (11). Plaintiffs Green Party of Michigan, Libertarian Party of Michigan, and Reform Party of Michigan (“Plaintiff Third Parties”) are political parties that did not qualify as participating political parties; consequently, they are not entitled to the party preference information pursuant to the Statute. Plaintiff Metro Times, Inc. has published a number of articles regarding the structure and rules governing the primary and the use of the party preference information. (Pl.’s Mot. at 3.) It intends to publish additional articles regarding the conduct of and participation in the primary. (Id. at 4.) Plaintiff Forsmark is a political consultant whose services include providing information to his clients regarding the likely party preference of voters. (Id.) The Michigan Primary was held on January 15, 2008. The Statute requires the Secretary of State to provide the party preference information within 71 days of the 3 presidential primary. Mich. Comp. Laws § 168.615c(6). This puts the deadline at March 26, 2008.2 This matter is now before the Court on Plaintiffs’ motion for summary judgment. II. Summary Judgment Standard Summary judgment is appropriate only when there is “no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The central inquiry is “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to the party’s case and on which that party bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The moving party bears the initial burden of showing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. Once the moving party meets this burden, the non-movant must come forward with specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). The non-moving party may not rest upon its mere allegations, however, but rather “must set forth specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e). The mere existence of a scintilla of evidence in support of the non-moving party’s position 2The Court previously granted Plaintiffs’ motion for temporary restraining order and enjoined Defendant from distributing the party preference information until further order of the Court. (Docket Text # 10.) 4 will not suffice. Rather, there must be evidence on which the jury could reasonably find for the non-moving party. Hopson v. DaimlerChrysler Corp., 306 F.3d 427, 432 (6th Cir. 2002). III. Analysis The United States Supreme Court has set forth the process by which the Court assesses the constitutionality of a state election law: It must first consider the character and magnitude of the asserted injury to the rights protected by the First and Fourteenth Amendments that the plaintiff seeks to vindicate. It then must identify and evaluate the precise interests put forward by the State as justifications for the burden imposed by its rule. In passing judgment, the Court must not only determine the legitimacy and strength of each of those interests; it also must consider the extent to which those interests make it necessary to burden the plaintiff's rights. Anderson v. Celebrezze, 460 U.S. 780, 789 (1983). Under this standard, the level of scrutiny the Court will apply depends upon the extent to which the Statute burdens Plaintiffs’ constitutional rights. “[W]hen a state election law provision imposes only reasonable, nondiscriminatory restrictions upon the First and Fourteenth Amendment rights of voters, the State’s important regulatory interests are generally sufficient to justify the restrictions.” Burdick v. Takushi, 504 U.S. 428, 434 (1992) (citation and internal quotation marks omitted). When, however, “those rights are subjected to ‘severe’ restrictions, the regulation must be narrowly drawn to advance a state interest of compelling importance.” Id. (citation and internal quotation marks omitted). Plaintiffs argue that the Statute violates their First and Fourteenth Amendment rights. The Court will address the Fourteenth Amendment claim first, as it is dispositive.3 3Defendant argues that Plaintiffs’ claims are barred by the doctrine of laches. Laches consists of two elements: “(1) unreasonable delay in asserting one's rights; and (2) a resulting prejudice to the defending party.” Brown-Graves Co. v. Central States, Southeast and Southwest Areas Pension Fund, 206 F.3d 680, 684 (6th Cir. 2000). Because 5 Plaintiffs contend that the Statute violates the Equal Protection Clause of the Fourteenth Amendment, which commands that no State shall “deny to any person within its jurisdiction the equal protection of the laws.” U.S. Const. amend. XIV, § 1. The clause “is essentially a direction that all persons similarly situated should be treated alike.” City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432, 439 (1985). Plaintiffs claim “that it is a denial of equal protection for the two major political parties to receive a state- generated resource of great value for general election campaigns, while all other parties are denied access to and use of that resource.” (Pl.’s Reply at 1.) At the outset, before the Court applies the Anderson standard, it must address Defendant’s assertion that Plaintiffs’ Equal Protection claim must fail because Plaintiffs are not similarly situated with the Democratic and Republican parties. Defendant points out that “section 615c creates a classification”: those parties that met the 20% threshold and those that did not. (Def.’s Resp. at 5.) Because Plaintiff Third Parties did not meet the threshold, Defendant argues, they “simply are not similarly situated to the participating political parties that have met” the threshold. (Id.) Defendant’s proposed approach to the Equal Protection Clause would strip the clause of all meaning. Any statute could avoid running afoul of the clause simply by creating an arbitrary classification to divide those whom the statute intends to protect from those it does not. This would strike at the very heart of the clause, the basic concern of which is “with state legislation whose purpose or effect is to create discrete and objectively identifiable classes.” San Antonio Indep. School Dist. v. Rodriguez, 411 U.S. 1, 60 (1973). Defendant offers no evidence of prejudice, Plaintiffs' claims are not barred by the doctrine of laches. 6 Furthermore, as Plaintiffs point out, because political parties do not compete with each other in the primary process, they have little interest in how other parties nominate candidates. (Pl.’s Reply at 1.) In a general election, in contrast, the parties do compete directly with each other, and “they have the same interest in having resources which assist them in competing.” (Id.) As a result, all “political parties are similarly situated with regard to their need for and potential use of valuable party preference information for the general election.” (Id.) The classification drawn by the statute and the 20% threshold is wholly arbitrary, and the Court determines that Plaintiff Third Parties are similarly situated to the Democratic and Republican parties for purposes of Equal Protection analysis. Accordingly, the Court will examine Plaintiffs’ Equal Protection claims under the standard set forth in Anderson. A. Character of Plaintiffs’ Asserted Injury Plaintiffs argue that the Statute burdens a number of their constitutional rights. First, they suggest it implicates “two different, although overlapping kinds of rights - [1] the right of individuals to associate for the advancement of political beliefs, and [2] the right of qualified voters, regardless of their political persuasion, to cast their votes effectively.” Williams v. Rhodes, 393 U.S. 23, 30 (1968). The statutes at issue in Williams “made it virtually impossible for a new political party . . . to be placed on the state ballot” for a presidential election. Id. at 24. Because the Statute at issue in this case does not affect the Plaintiff Third Parties’ ability to earn a place on the ballot, the Statute does not burden voters’ rights to cast their votes effectively. The Supreme Court has recognized, however, that “[a] burden that falls unequally on new or small political parties or on independent candidates impinges, by its very nature, on 7 associational choices protected by the First Amendment. It discriminates against those candidates and-of particular importance-against those voters whose political preferences lie outside the existing political parties.” Anderson, 460 U.S. at 793-94. Here, because the Statute provides the voter preference information only to the major political parties, it creates “a burden that falls unequally on new or small political parties.” Consequently, the Statute burdens Plaintiffs’ First Amendment right to association. The Court is also convinced that the Statute denies Plaintiff Third Parties an equal opportunity to win the votes of the electorate. Plaintiffs argue that “[o]ne of the most valuable kinds of information for use in campaigns is the party affiliation of individual voters.” (Pl.’s Mot., Ex. B at ¶ 3.) Indeed, the Michigan Supreme Court has recognized that such information is “part of the market research” for political parties. Grebner v. State, 744 N.W.2d 123, 127 (Mich. 2007). Defendant does not dispute the valuable nature of the party affiliation information or that, pursuant to the Statute, the information will be provided only to the major political parties. Defendant does, however, challenge Plaintiffs’ contention that the Statute impedes their ability to have an equal opportunity to win votes. Defendant argues that the classification is neutral and that the Statute does not prevent anyone but the major parties from obtaining or using the information. (Pl.’s Resp. at 6.) This argument fails to appreciate that when the Statute was passed in 2007, only the Democratic and Republican parties had met the 20% threshold in the previous presidential election. Thus, the Statute does limit the potential recipients of the information to the major parties. Accordingly, while at first blush the Statute may appear neutral on its face, further inquiry reveals that the Statute, by its own terms, benefits the major political parties to the detriment of all others. 8 The Supreme Court has recognized the potential hazards inherent in this kind of law and has cautioned that “because the interests of minor parties . . . are not well represented in state legislatures, the risk that the First Amendment rights of those groups will be ignored in legislative decisionmaking may warrant more careful judicial scrutiny.” Anderson, 460 U.S. at 793 n.16. See also Clingman v. Beaver, 544 U.S. 581, 603 (2005) (O’Connor, J., concurring) (noting that “the State is itself controlled by the political party or parties in power, which presumably have an incentive to shape the rules of the electoral game to their own benefit” and that when regulations “have discriminatory effects, there is increasing cause for concern that those in power may be using electoral rules to erect barriers to electoral competition”). In sum, the Court finds that the Statute burdens Plaintiffs’ First Amendment right to association as well as their right to an equal opportunity to win the votes of the electorate. The Court now will address the magnitude of these burdens. B. Magnitude of Plaintiffs’ Asserted Injury Plaintiffs assert that the burdens imposed by the Statute are “quite heavy.” First, Plaintiffs note that because Michigan voters do not record a party preference when they register to vote, the party preference information required by the Statute is the “single-most reliable source of party affiliation data for a great number of Michigan voters.” (Pl.’s Mot. at 7.) Defendant’s argument that the burden is light because minor parties have access to a list of voters who voted in the primary is thus to no avail, for it is the party preference information, and not simply the list of voters, that “enables a campaign to target campaign efforts at voters most likely to be responsive, to identify possible campaign contributors, and aids in election-day get-out-the-vote efforts.” (Pl.’s Mot., Ex. B at ¶ 3.) And while voter 9 lists may be generally available to all parties, the party preference information is available only to the major parties. As Defendant does not dispute the value of the party preference information, this constitutes a heavy burden. Plaintiffs also point to cases in which statutes similar to that at issue here were found to violate the Equal Protection Clause, even though the burdens imposed by those statutes were less than the burdens imposed in this case. In Socialist Workers Party v. Rockefeller, 314 F. Supp. 984 (S.D.N.Y.), for example, the court considered a statute that required lists of registered voters to be sent free of charge to parties that earned more than 50,000 votes in the last gubernatorial election. Id. at 995. Other parties could purchase the lists for the cost of reproduction, and the lists also were available for public inspection at the office of the board of elections. Id. Nonetheless, the court held that “the effect of these provisions . . . is to deny independent or minority parties . . . an equal opportunity to win the votes of the electorate.” Id. The court noted that “[t]he state is not required to provide such lists free of charge, but when it does so it may not provide them only for the large political parties and deny them to those parties which can least afford to purchase them.” Id. at 996. Thus, even though minor parties could purchase the lists or view the lists in a public place, the court held that the statute was unconstitutional. Id. at 997. The law that was struck down in Socialist Workers Party was re-enacted in “all material, unlawful respects.” Schulz v. Williams, 44 F.3d 48, 60 (2d Cir. 1994). The Schulz court struck down the statute on the same basis as did the Socialist Workers Party court. Id. Another provision of the statute at issue in Schulz required voter party preference information to be sent to the major political parties only. Id. at n.11. The court declined to review the constitutionality of the provision, as the district court had not specifically 10 considered it. Nonetheless, the court did note that “we see no reason why the patent constitutional infirmity of section 5-602 [voter registration lists at issue in Socialist Workers Party] would not apply to section 5-604 [party preference information].” Id. The court in Libertarian Party of Indiana v. Marion County Board of Voter Registration, 778 F. Supp. 1458 (S.D. Ind. 1991), addressed a statute that required a list of registered voters to be provided only to “the major political parties.” Id. at 1459. Additional copies of the list were open to public inspection at the office of the board of registration. Id. The court stated: Like a restriction on access to the ballot, restrictions on the ability of some political parties to use Registration Lists impinges upon both the members’ freedom to associate to express their views to the voters and the voters’ ability to express preference in light of the political views being advanced. Although the plaintiffs have access to the Registration List, their undisputed contention is that they would have to expend significant amounts of labor and money to have the list in a usable form, a burden not imposed on the major political parties. Id. at 1463. The court concluded that the statute violated the Equal Protection Clause because “no important state interest has been established which justifies a refusal to distribute copies of the Registration List to [minor parties] in the same way that the lists are distributed to the major political parties.” Id. at 1464. Defendant seeks to distinguish these cases “because here the information is not available to the public.” (Def.’s Resp. at 13.) While this certainly is a distinguishing characteristic, it is not one that works to Defendant’s benefit. In the above-mentioned cases, the courts found the statutes to be unconstitutional even though the information at issue was otherwise available to the plaintiffs. Here, in contrast, Plaintiffs cannot obtain the 11 party preference information any other way. Thus, the Statute at issue here creates much greater burdens than did similar statutes that were held to be unconstitutional. Defendant argues that, even if Plaintiffs’ constitutional rights are implicated, any burden is “minor, indirect, and remote.” (Def.’s Resp. at 7.) Defendant offers no evidence to support its claim, but instead baldly asserts that the Statute “does not interfere with minor party Plaintiffs’ freedom to associate, to express their views to voters, or to continue to garner political support.” (Id. at 8.) In fact, this is precisely what the Statute does, as “[a]ccess to the party preference information would enable a third party to direct its campaign efforts, including such activities as mailing campaign literature, door-to-door canvassing and phone banks to voters who are more likely to be responsive to its issue positions and candidates.” (Pl.’s Mot., Ex. B at ¶ 4.) In any event, Defendant argues, the burdens at issue here are surely less severe than those imposed when a small political party is denied access to the ballot. And as Defendant correctly points out, “the Supreme Court has routinely upheld such schemes as constitutional.” (Def.’s Resp. at 9.) In three of the cases cited by Defendant, however, the Supreme Court upheld such schemes only after finding that they furthered a compelling state interest. See Ill. State Bd. of Elections v. Socialist Workers Party, 440 U.S. 173, 184 (1979) (“When such vital individual rights are at stake, a State must establish that its classification is necessary to serve a compelling interest.”); Storer v. Brown, 415 U.S. 724, 736 (1974) (“We also consider that interest as not only permissible, but compelling and as outweighing the interest the candidate and his supporters may have in making a late rather than an early decision to seek independent ballot status.”); Am. Party of Texas v. White, 415 U.S. 767, 780 (1974) (holding that validity of statute depends on whether burdens “are 12 necessary to further compelling state interests”). In the fourth case cited by Defendant, the Court concluded that the statute did not impose a burden on minor parties. Jenness v. Fortson, 403 U.S. 431, 440-41 (1971) (“We cannot see how Georgia has violated the Equal Protection Clause of the Fourteenth Amendment by making available these two alternative paths, neither of which can be assumed to be inherently more burdensome than the other.”) Thus, because the Supreme Court upheld the statutes in the cases cited by Defendant only after applying strict scrutiny or after determining that no burden was imposed, the cases are inapposite to the issue of the magnitude of the burden imposed by the Statute at issue in this case.4 As the burdens involved here are greater than the burdens involved in other cases in which courts found similar statutes to be unconstitutional, and as Defendant has offered no evidence to counter Plaintiffs’ characterization of the burdens as “quite heavy,” the Court finds that the burdens imposed by the Statute are severe. Moreover, the restrictions imposed are not “nondiscriminatory.” As a result, to pass constitutional muster, the Statute “must be narrowly drawn to advance a state interest of compelling importance.” Burdick, 504 U.S. at 434. C. State’s Interests Defendant has put forward a number of State interests to justify the burdens imposed by the Statute. In assessing these purported interests, “the Court must not only determine the legitimacy and strength of each of those interests; it also must consider the extent to which those interests make it necessary to burden the plaintiff's rights.” Anderson, 460 4The cases are relevant to the question of the State’s interests and are discussed more fully below in that context. 13 U.S. at 789. For the sake of clarity, the Court will address each proposed interest in turn. First, though, the Court will address Defendant’s overarching contention that any burdens imposed by the Statute are justified by the State’s power to regulate its own elections; this includes the power to regulate the time, place, and manner of elections, as well as the power to structure and monitor the election process. (Def.’s Resp. at 3.) (citing Clingman, 544 U.S. at 581; Burdick, 504 U.S. at 433). Michigan’s power to regulate the time, place, and manner of its elections is not at issue here. The process of the primary election itself is not related to who receives the party preference information after the election has occurred. Moreover, notwithstanding the State’s broad power to regulate elections, “[r]egulations that impose severe burdens on associational rights must be narrowly tailored to serve a compelling state interest.” Clingman, 544 U.S. at 586. Accordingly, because the Statute imposes severe burdens, it must pass strict scrutiny if it is to survive. 1. Notify Major Parties that Primary Occurred The first State interest put forward by Defendant is that the Statute “satisfies the [participating political] parties that the primary actually occurred.” (Def.’s Resp. at 8.) This may be a legitimate State interest, but it hardly rises to the level of compelling. Moreover, it is not necessary to burden Plaintiffs’ rights in pursuit of this interest. While providing the major parties with party preference information may help to establish that the primary took place, Defendant does not explain how this goal would be undercut by providing the same information to Plaintiff Third Parties as well. Because this State objective could be “served equally well in significantly less burdensome ways,” Am. Party, 415 U.S. at 781, the asserted interest does not justify the burdens placed on Plaintiffs. 2. Ensure Compliance with Party Rules 14 The Statute’s asserted justification, one echoed by Defendant in her brief, is “to ensure compliance with the state and national political party rules of each participating political party.” Mich. Comp. Laws § 168.615c(5). This is a legitimate and strong State interest, but it is not served by the Statute. The Democratic Party Delegate Selection Rules for the 2008 Democratic National Convention provide: A. Participation in the delegate selection process shall be open to all voters who wish to participate as Democrats. 1. Democratic voters shall be those persons who publicly declare their Party preference and have that preference publicly recorded. (Pl.’s Mot., Ex. E at 3.) The Republican Party does not have a similar rule.5 Thus, providing the party preference information to the major parties ensures compliance only with the national rules of the Democratic Party; and even this is questionable, as the limited access to party preference information imposed by the Statute hardly constitutes a “publicly recorded” declaration. Moreover, Defendant has not addressed how providing the party preference information to Plaintiff Third Parties would interfere with this aim. More importantly, another provision of PA 52 moved the date of the 2008 Michigan Presidential Primary from the fourth Tuesday in February to January 15, 2008. Mich. Comp. Laws § 168.613a. This is directly at odds with the major parties’ rules. The Democratic Rules state that no primaries “may be held prior to the first Tuesday in 5See Def.’s Mot., Ex. D at 1: “In recent elections, Republicans selected their delegates in the Michigan presidential primary, which [prior to the passage of PA 52 in 2007 was] an ‘open’ primary (one in which any elector may vote). . . . [A]n open primary is contrary to national Democratic Party rules.” 15 February.”6 (Def.’s Mot., Ex. E at 12, ¶ 11A.) Because the Michigan Primary violated Democratic Party rules, the Democratic National Committee decided that no delegates chosen as a result of the Primary will be seated at the 2008 Democratic National Convention. (Def.’s Mot. at 12.) The Primary also violated Republican National Committee rules and, as a result, Michigan Republicans will be deprived of half of their convention delegates. (Id.) The Statute caused the Primary to be held in direct contravention of party rules, and both major political parties have suffered serious consequences as a result. The Court therefore rejects the notion that the Statute “ensure[s] compliance with the state and national political party rules of each participating political party.” 3. Voter Privacy Defendant suggests that the State’s interest in “limiting access to and use of voter preference information collected in the primary is sufficient to justify” the Statute’s restrictions. (Def.’s Resp. at 10.) In support, Defendant notes that Michigan law has evolved over the years to provide greater confidentiality to voter preference. (Id. at 13 n.51.) Defendant views PA 52 as the culmination of that evolution and concludes that “PA 52 assures Michigan voters that if they declare the party they want, the information will not be made available to the general public.” (Id.) The weakness in Defendant’s position is that PA 52 makes no such assurances. Instead, the Statute allows the major political parties to use the party preference information in any way, so long as it is “to support political party activities.” Mich. Comp. 6The rules exempt from this requirement Iowa, New Hampshire, Nevada, and South Carolina. (Id.) 16 Laws § 168.615c(8). Indeed, the Statute specifically authorizes the major parties to “release the information . . . to another person, organization, or vendor.” Id. Thus, while the Statute limits who receives the party preference information in the first instance, the Statute places no meaningful restriction on how the information may be disseminated subsequently. Accordingly, while the State’s asserted interest in protecting voter privacy is compelling, that interest is not served by the Statute. 4. Prevent Fraud and Corruption Defendant also asserts that the Statute is justified based on the State’s interest to prevent fraud and corruption. (Def.’s Resp. at 11.) Defendant never actually explains how releasing the party preference information to Plaintiff Third Parties would increase the likelihood of fraudulent behavior. Moreover, the Court agrees that the “desire to weed out fraudulently registered voters suggests that more political parties should have access to the [party preference information] rather than fewer.” Libertarian Party of Ind., 778 F. Supp. at 1464. As a result, the State’s desire to prevent fraud and corruption does not justify the burdens imposed by the Statute. 5. Stability of Political System Defendant’s final contention is that the Statute protects the State’s “strong interest in the stability of [its] political systems.” Timmons, 520 U.S. at 366. Defendant cites numerous cases to support its position. All of these cases, however, involved situations and state interests not implicated here. As a result, the cases are not relevant to the issue before the Court. A number of the cases cited by Defendant, for example, involve a minor party’s access to the ballot. See Am. Party, 415 U.S. at 781 (upholding validity of statute that 17 requires minor parties to nominate candidates by convention but allows major parties to use primaries); Jenness, 402 U.S. at 440 (upholding statute that requires minor party candidate to procure signatures of 5% of electorate in order to be placed on ballot); Munro v. Socialist Workers Party, 479 U.S. 189, 190-91 (1986) (upholding statute that requires minor party candidate to receive at least 1% of votes cast in primary election before name will be placed on general election ballot); Miller v. Lorain County Bd. of Elections, 141 F.3d 252, 254 (6th Cir. 1998) (upholding statute that requires independent congressional candidate to obtain signatures of 1% of voters in prior gubernatorial election to gain access to ballot).7 In these types of cases, “[t]here is surely an important state interest in requiring some preliminary showing of a significant modicum of support before printing the name of a political organization's candidate on the ballot – the interest, if no other, in avoiding confusion, deception, and even frustration of the democratic process at the general election.” Jenness, 402 U.S. at 442. No such interests are implicated here, for “Plaintiffs have never suggested that states may not have different nominating procedures for major or minor parties, even to the extent of excluding minor parties from state-run primaries.” (Pl.’s Reply at 1.) Moreover, in each of the cases cited by Defendant, independent candidates had a route to the ballot. Here, in contrast, Plaintiff Third Parties have no other way to obtain the party preference information. Accordingly, the precedents cited by Defendant that involve access to the ballot are not relevant to this case. 7Contrary to Defendant’s assertion, Bullock v. Carter, 405 U.S. 134 (1972), did not uphold the constitutional validity of the statute in question. Rather, the Court held that the statute “results in a denial of equal protection of the laws.” Id. at 149. 18 Similarly not on point are the cases cited by Defendant that address the constitutional validity of statutes that govern how a candidate’s name appears on the ballot. See Timmons, 520 U.S. at 354 (upholding the validity of a statute that prohibits a candidate from appearing on the ballot as the candidate of more than one party); Schrader v. Blackwell, 241 F.3d 783, 784 (6th Cir. 2001) (upholding statute that prohibits candidates from listing on the ballot their affiliation with minor political parties). The courts in those cases recognized that the burdens imposed were not severe. Timmons, 520 U.S. at 364; Schrader, 241 F.3d at 791. Moreover, the burdens that were imposed were justified by the states’ interests “in avoiding voter confusion and overcrowded ballots.” Timmons, 520 U.S. at 364. Plaintiffs’ challenge to the Statute in this case does not involve access to the ballot, and providing the party preference information to Plaintiff Third Parties would not lead to voter confusion or overcrowded ballots. Thus, Timmons and Schrader are not on point. Finally, Defendant cites to cases that tested the constitutional validity of closed primaries. See Clingman, 544 at 584 (upholding the constitutional validity of a semiclosed primary system, in which a political party may invite only its own party members and voters registered as Independents to vote in the party's primary); Rosario v. Rockefeller, 410 U.S. 752, 760 (1973) (upholding statute that requires a voter to register as a party member 30 days before the general election in order to vote in a subsequent closed primary election). In these cases, the Court noted the purpose of a closed primary election: “to inhibit party ‘raiding,’ whereby voters in sympathy with one party designate themselves as voters of another party so as to influence or determine the results of the other party's primary.” Rosario, 410 U.S. at 760. Because the Statute in this case involves the dissemination of information after the primary has occurred, there is no risk of cross-over voting. The state 19 interests involved in Rosario and Clingman are therefore not present in this case. As a result, those cases do not support the constitutional validity of the Statute. Defendant, in an effort to show the State’s interest in the stability of its political systems, cites to cases that involved access to the ballot, how a candidate’s name appears on the ballot, and the constitutionality of closed primaries. These issues are not before the Court in this case; thus, the states’ interests considered in those cases, and the courts’ analysis of those interests, have no bearing here. Further, Defendant has failed to establish that the State’s asserted interests would be implicated if the party preference information were to be released to Plaintiff Third Parties, or were not released to any party. Accordingly, the State’s purported interest in political stability does not “make it necessary to burden the plaintiff[s’] rights.” Anderson, 460 U.S. at 789. The State’s asserted interests do not justify the burdens imposed by the Statute on Plaintiffs’ First Amendment right to association and on their right to an equal opportunity to win the votes of the electorate. The State is not required to provide the party preference information to any party. When it chooses to do so, however, it may not provide the information only to the major political parties. The Court holds that Mich. Comp. Laws § 168.615c deprives Plaintiffs of equal protection of the laws in violation of the Fourteenth Amendment. The Statute is therefore constitutionally invalid, and Plaintiffs’ motion for summary judgment is GRANTED. This result makes it unnecessary for the Court to address Plaintiffs’ First Amendment claims. D. Severability PA 52 contains a nonseverability clause: 20 If any portion of this amendatory act or the application of this amendatory act to any person or circumstances is found invalid by a court, it is the intent of the legislature that the provisions of this amendatory act are nonseverable and that the remainder of the amendatory act shall be invalid, inoperable, and without effect. See Mich. Comp. Laws § 168.19 “Historical and Statutory Notes.” Both parties assert that the Court’s ruling does not require the Court to address the issue of severability. (Def.’s Resp. at 22; Pl.’s Reply at 4.) The Court agrees that the issue of severability is beyond the scope of the claims raised by Plaintiffs in this motion. Accordingly, the Court makes no ruling regarding the constitutional validity of the remainder of PA 52. IV. Conclusion For the above-stated reasons, Plaintiff’s motion for summary judgment is GRANTED. Mich Comp. Laws § 168.615c is declared unconstitutional, and Defendant is enjoined from carrying out the responsibilities imposed by subsections (5) and (6) of the Statute. s/Nancy G. Edmunds Nancy G. Edmunds United States District Judge Dated: March 26, 2008 I hereby certify that a copy of the foregoing document was served upon the parties and/or counsel of record on March 26, 2008, by electronic and/or ordinary mail. s/Carol A. Hemeyer Case Manager 21

=== HONORABLE JOHN CONYERS, JR., ET v. GEORGE W. BUSH, ET AL. ===

Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 1 of 9(cid:10) UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION HONORABLE JOHN CONYERS, JR., ET AL., Case No. 06-11972 Plaintiffs, Honorable Nancy G. Edmunds v. GEORGE W. BUSH, ET AL., Defendants. / ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS [17, 18] This matter comes before the Court on Defendants’ motions to dismiss, brought pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendants' motions argue that Plaintiffs do not have standing to bring this lawsuit; and, even if they did, the "enrolled bill rule" announced in Marshall Field & Co. v. Clark, 143 U.S. 649 (1892), forecloses Plaintiffs' from stating a claim for the relief they seek. For the reasons discussed below, Defendants’ motions are GRANTED. I. Facts Plaintiffs are eleven members of the United States House of Representatives. (Compl. ¶¶ 9-19.) Plaintiffs claim that the Deficit Reduction Act of 2005 (“the Act” or “the Deficit Reduction Act”), Pub. L. No. 109-171, § 10001, 120 Stat. 4, § 183, is invalid and did not comply with Article I, Section 7 of the United States Constitution because it did not pass the House in the form in which it was passed by the Senate, signed by the President, and enrolled as a Public Law. (Compl. ¶¶ 1, 40.) Specifically, Plaintiffs allege one section of Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 2 of 9(cid:10) the Act, Section 5101: (1) as passed by the Senate, set the duration of Medicare payments to rent certain durable medical equipment at 13 months (Compl. ¶ 32); (2) as passed by the House, set the duration of rent payments at 36 months (Compl. ¶ 33); (3) that the Speaker of the House and President pro tempore of the Senate signed an attestation that the bill with the Senate’s 13-month provision had passed both houses (Compl. ¶ 38); and (4) that the bill so attested was presented to and signed by the President (Compl. ¶¶ 38-40, 43). Plaintiffs allege that, because the version of the Deficit Reduction Act signed by the President was never passed by the House, the Act did not meet the requirements of Article I, Section 7 of the Constitution and is thus invalid. (Compl. ¶¶ 49-50). Plaintiffs further allege that, as members of the House, they have been irreparably injured by being: “disenfranchised” in terms of their ability to engage in the deliberative legislative process, to persuade other members of the House, and to represent the interests of their constituents by voting on legislation signed by the President. (Compl. ¶¶ 2, 45-47). II. Motion to Dismiss Standard A Rule 12 (b) (6) motion to dismiss tests the sufficiency of a complaint. In a light most favorable to the plaintiff, the court must assume that the plaintiff’s factual allegations are true and determine whether the complaint states a valid claim for relief. See Albright v. Oliver, 510 U.S. 266 (1994); Bower v. Fed. Exp. Corp., 96 F.3d 200, 203 (6th Cir. 1996); Forest v. United States Postal Serv., 97 F.3d 137, 139 (6th Cir. 1996). This standard of review “‘requires more than the bare assertion of legal conclusions.’” In re Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th Cir. 1997) (quoting Columbia Natural Res., Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995 . The complaint must include direct or indirect 2 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 3 of 9(cid:10) allegations "respecting all the material elements to sustain a recovery under some viable legal theory." See In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993) (citations omitted). A court should not grant a 12(b)(6) motion unless the movant shows “beyond doubt that the plaintiff can prove no set of facts in support of his claim." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The Court’s function “is not to weigh the evidence or assess the credibility of witnesses but rather to examine the complaint and determine whether the plaintiff has pleaded a cognizable claim.” Marks v. Newcourt Credit Group, Inc., 342 F.3d 444, 452 (6th Cir. 2003) (internal citations omitted). III. Analysis Defendants' motions argue that Plaintiffs do not have standing to bring this lawsuit; and, even if they did, the "enrolled bill rule" announced in Marshall Field & Co. v. Clark, 143 U.S. 649 (1892), forecloses Plaintiffs from stating a claim for the relief they seek. The Court first addresses Defendants' standing argument. A. Standing Defendants first argue that Plaintiffs lack standing to bring this action. This Court agrees. As the Supreme Court observed in Raines v. Byrd, 521 U.S. 811, 818 (1997), "the federal courts have jurisdiction" over matters "only if it is a 'case" or 'controversy.'" (citing Article III, § 2, United States Constitution). "One element of the case-or-controversy requirement" is that the plaintiff has standing to sue. Id. "To meet the standing requirements of Article III, '[a] plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief.'" 3 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 4 of 9(cid:10) Id. (quoting Allen v. Wright, 468 U.S. 737, 751 (1984) (emphasis added . The standing requirement has three elements: First, the plaintiff must have suffered an injury in fact -- an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical. Second, there must be a causal connection between the injury and the conduct complained of -- the injury has to be fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court. Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (internal citations and quotations omitted). The United States District Court for the Southern District of New York recently addressed standing in a case that raised the same argument Plaintiffs raise here about the constitutionality of the Deficit Reduction Act. OneSimpleLoan v. U.S. Sec'y of Educ., No. 06 Civ. 2979(RMB), 2006 WL 1596768, *8-9 (S.D. N.Y. June 9, 2006). There, the district court determined that the plaintiffs did not have standing. It first assumed, without deciding, that the plaintiffs satisfied the first element; i.e., that they "may have suffered 'an injury in fact.'" Id. at *9. It then observed that, even if plaintiffs suffered an injury in fact, "it does not necessarily follow that Plaintiffs' 'injury will be redressed by a favorable decision.'" Id. (quoting Lujan, 504 U.S. at 561). This is true because, "[i]f the [Deficit Reduction Act] were held unconstitutional, Congress might . . . . resolve the Medicare equipment discrepancy (i.e., 13 versus 36 months) and pass an otherwise identical bill." Id. The "no standing" determination in Onesimpleloan is supported by a recent decision from the Sixth Circuit Court of Appeals. 4 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 5 of 9(cid:10) In Baird v. Norton, 266 F.3d 408 (6th Cir. 2001), the Sixth Circuit discussed key Supreme Court decisions on standing and observed, "[f]or legislators to have standing as legislators . . . they must possess votes sufficient to have either defeated or approved the measure at issue." Id. at 412 (discussing Raines v. Byrd, 521 U.S. 811 (1997) and Coleman v. Miller, 307 U.S. 433 (1939 . Similar to the plaintiff in Baird, Plaintiffs here lack standing because they cannot show that their votes were sufficient to defeat a bill with the 13 month provision. See Baird, 266 F.3d at 413. Like the plaintiff in Baird, Plaintiffs here do not argue that the substantive provisions of the Deficit Reduction Act are unconstitutional. Rather, their complaint alleges that the Medicare equipment discrepancy (13 versus 36 months) could have been resolved to their liking (36 as opposed to 13 months) had the constitutionally required procedures been followed, and thus their vote (for a 36 month period) was effectively nullified. See id. Plaintiffs' attempt to distinguish Baird is not persuasive, and their reliance on Coleman is misplaced. As the Supreme Court clarified in Raines, "our holding in Coleman stands (at most . . . ) for the proposition that legislators whose votes would have been sufficient to defeat (or enact) a specific legislative Act have standing to sue if that legislative action goes into effect (or does not go into effect), on the ground that their votes have been completely nullified." Raines, 521 U.S. at 823. B. Enrolled Bill Rule Even if Plaintiffs did have standing, this Court agrees with Defendants that their claims are subject to dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure. This lawsuit focuses on a discrepancy in the House and Senate versions of the Deficit Reduction Act. Plaintiffs argue that, because a different version of the Act was passed by 5 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 6 of 9(cid:10) the House and the Senate, the Act violates the bicameral requirement of the United States Constitution, Article I, Section 7, and is thus invalid and unenforceable. Defendants, in their motions to dismiss, argue that the "enrolled bill rule" announced in Marshall Field forecloses Plaintiffs from asserting a claim for relief on the undisputed facts of this case. This Court agrees with Defendants. In their Response to Defendants' motion to dismiss, Plaintiffs provide some detail explaining how a bill becomes a law. "When one chamber of Congress passes a bill, the bill is then printed, signed by the Clerk of the House or the Secretary of the Senate (depending on which chamber passed the bill), and sent to the other chamber. The printed version of the bill passed by a single chamber is called the 'engrossed bill.' 1 U.S.C. § 106. If the other chamber passes the engrossed bill without amendment, the Clerk or Secretary signs the bill and returns it to the originating chamber. Id. The bill is then printed again and, at this point, is called the 'enrolled bill.' Id. The presiding officers of both the House and the Senate sign the enrolled bill to attest that it passed each chamber. Id. The enrolled bill is then sent to the President. Id." (Pls.' Resp. at 1-2.) The basic facts alleged in Plaintiffs' complaint concerning how the Deficit Reduction Act was passed have been observed by a number of courts addressing the same or similar concerns that Plaintiffs raise here. See Public Citizen v. Clerk, United States District Court for the District of Columbia, ___ F. Supp. 2d ___, 2006 WL 2329329, *2 (D. D.C. Aug. 11, 2006); Cal. Dep't of Soc. Servs. v. Leavitt, 444 F. Supp. 2d 1088, 1096 (E.D. Cal. 2006); OneSimpleLoan v. U.S. Sec'y of Educ., No. 06 Civ. 2979(RMB), 2006 WL 1596768, *4 (S.D. N.Y. June 9, 2006). Those facts are as follows: 6 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 7 of 9(cid:10) In the Fall of 2005, the House and the Senate passed different versions of a budget bill. To reconcile the differences between the two bills, the legislation was sent to a House-Senate Conference Committee, where it was modified. On December 19, 2005, the House passed the bill as agreed upon by conference report. On December 21, 2005, the Senate passed an amended version of the conference report. In the course of transmitting the amended version of the bill to the House, a change was made to section 5101 of the bill, altering the duration of the Medicare payments for certain durable medical equipment from 13 months to 36 months. On February 1, 2006, the House passed the amended bill, with the 36 month duration on Medicare payments. Subsequently, the legislation passed by the House was altered to reflect the 13 month duration on Medicare payments, as passed in the Senate. On February 8, 2006, President Bush signed the bill that was passed by the Senate, but not by the House. Therefore, the Senate passed and the President signed a bill reflecting a 13 month duration on Medicare payments, and the House passed a bill reflecting a 36 month duration on Medicare payments. * * * [I]n approving the Deficit Reduction Act, the President signed the bill that had been duly enrolled and authenticated by both the Speaker of the House, Dennis Hastert, and the President Pro Tempore of the Senate, Theodore F. Stevens. Cal. Dep't Soc. Servs., 444 F. Supp. 2d at 1096. Each of the courts that have addressed the identical issue presented here have held that enrolled bill rule announced in Marshall Field still applies today. Thus a claim of unconstitutionality for violation of Article I, Section 7, "is not legally cognizable where an enrolled bill has been signed by the presiding officers of the House and Senate as well as the President. . . ." Public Citizen, ___ F. Supp. 2d at ___, 2006 WL 2329329 at **4, 16. "On its face, the 'enrolled bill rule' of Marshall Field requires the Court to accept the signatures of the Speaker of the House and the President pro tempore of the Senate on the enrolled bill as 'complete and unimpeachable' evidence that the bill has been passed by both chambers of Congress." Id. at *5. Accord, OneSimpleLoan, 2006 WL 1596768 at *9; Cal. Dep't of Soc. Servs., 444 F. Supp. 2d at 1096. 7 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 8 of 9(cid:10) These courts have uniformly rejected the arguments Plaintiffs raise here. The decision in Marshall Field has not been limited to "the use of legislative journals as evidence and the requirements of the Journal Clause" thus precluding its application in a case where "a statute is challenged as violating the Constitution." Public Citizen, ___ F. Supp. 2d at ___, 2006 WL 2329329 at **10-12. Despite Plaintiffs' claims to the contrary, this Court agrees that the decision in United States v. Munoz-Flores, 495 U.S. 385 (1990), "does not overrule or limit the holding of Marshall Field, but rather only declines to extend it to Origination Clause cases." Id. at *11. It likewise agrees that "this Court does not have the discretion to find that a Supreme Court case has been overruled by implication." Id. at *12 (citing Agostini v. Felton, 521 U.S. 203, 237 (1997 . Accord, OneSimpleLoan, 2006 WL 1596768 at *9 (quoting Rodriguez de Quijas v. Shearson/American Exp., Inc., 490 U.S. 477, 484 (1989) for the principle that the Court must "leave to the Supreme Court the prerogative of overruling its own decisions."). Plaintiffs here, like the plaintiff in Public Citizen, allege that "the Speaker of the House and President pro tempore of the Senate signed S.1932 as enrolled and that this bill was then signed by the President of the United States." Public Citizen, ___ F. Supp. 2d at ___, 2006 WL 2329329 at *12. Accordingly, these undisputed facts require the same result here as in Public Citizen: "dismissal of plaintiff's claim that the Deficit Reduction Act of 2005 fails to pass constitutional muster because it was not passed by the House in the same form as the Senate, under controlling precedent of Marshall Field." Id. at *12. Plaintiffs claims are hereby dismissed.1 1In light of this ruling, there is no need to address Defendants' additional arguments for dismissal. 8 Case 2:06-cv-11972-NGE-WC Document 23 Filed 11/06/2006 Page 9 of 9(cid:10) IV. Conclusion For the above-stated reasons, Defendants' motions to dismiss are GRANTED. s/Nancy G. Edmunds Nancy G. Edmunds United States District Judge Dated: November 6, 2006 I hereby certify that a copy of the foregoing document was served upon counsel of record on November 6, 2006, by electronic and/or ordinary mail. s/Carol A. Hemeyer Case Manager 9

=== In re General Motors ERISA Litigation ===

Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 1 of 38(cid:10) UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re General Motors ERISA Litigation Case No. 05-71085 / Honorable Nancy G. Edmunds ORDER DENYING GENERAL MOTORS DEFENDANTS’ MOTION TO DISMISS [21] AND GRANTING DEFENDANT STATE STREET’S MOTION TO DISMISS [23] The General Motors Defendants (“GM Defendants” or “GM”) and Defendant State Street Bank and Trust (“State Street”) have filed separate Motions to Dismiss in this breach of fiduciary duty case brought under Section 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132. For the reasons that follow, the Court DENIES the GM Defendants’ Motion to Dismiss and GRANTS Defendant State Street’s Motion to Dismiss. I. Complaint The following facts are drawn from the Consolidated Class Action Complaint for Violations of the Employee Retirement Income Security Act (“the Complaint”). For purposes of these Motions to Dismiss, all alleged facts are presumed true. A. The GM Plans This case centers around two employee benefit plans established by GM: the General Motors Savings-Stock Purchase Program for Salaried Employees in the United States (“the Salaried Plan”) and the General Motors Personal Savings Plan for Hourly-Rate Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 2 of 38(cid:10) Employees in the United States (“the Hourly Plan”). (¶ 107.)1 Plaintiffs describe both as “defined contribution plans, with a 401(k) feature, with separate accounts maintained for each participant.” (¶ 107.)2 The Salaried Plan is a defined contribution plan described to employees as a way “to help you accumulate savings, while at the same time providing you with an opportunity to acquire an equity investment in GM.” (¶ 108-09.) Participant and GM contributions are made in the form of both after-tax savings and tax-deferred savings. (¶ 115.) Investment options include GM stock, mutual funds, and Promark funds. (¶ 124.)3 Six percent of a Salaried Plan participant’s eligible base monthly salary is called “Basic Savings.” (¶ 116.) One-half of Basic Savings must be invested in GM stock throughout the “required retention period,” which lasts until December 31 of the year in which the funds were invested. (¶ 118, 124.) Participants have discretion to invest the remaining one-half of Basic Savings, or their entire Basic Savings after the required retention period, in GM stock, mutual funds, or Promark funds. (¶ 122, 124.) 1Unless otherwise noted, citations refer to the Complaint. 2GM quotes Paragraph 107 of the Complaint somewhat differently: “Both Plans are ‘defined contribution plans, with a 401(k) feature and an employee stock ownership feature, with separate accounts maintained for each participant.’ (Id. ¶ 107).” (Br. of GM at 3 (emphasis added).) Whether the Plans are “employee stock ownership plans” (“ESOPs”) is a material issue in this case, and one about which the parties disagree. Far from admitting the existence of an “employee stock ownership feature,” Plaintiffs vigorously argue that any such description is inaccurate. 3Previously, some funds were invested in Electronic Data Systems common stock, DIRECTV Group common stock, and News Corporation Preferred ADSs Fund. While some funds remain in these investments, “no further contributions or exchanges” may be made. (¶ 133.) 2 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 3 of 38(cid:10) GM matches Salaried Plan participants’ Basic Savings at varying levels. GM’s contributions reached as high as eighty percent of participant savings in 2000, but are currently set at twenty percent. (¶ 116-17.) GM’s contributions are invested initially in GM stock, but may be moved into other investment options after the required retention period. (¶ 118, 122.) The text of the Salaried Plan states that the portion of funds invested in GM stock “is an employee stock ownership plan [“ESOP”] under Section 4975(e)(7) of the [Internal Revenue] Code.” (¶ 129.) Of those funds, a small amount is invested in short-term fixed income investments. (¶ 126-27.) The Hourly Plan is similar to the Salaried Plan. It is defined contribution plan described as a way “to save part of your earnings by investing for retirement through convenient and tax-effective payroll deductions.” (¶ 135-36.) Participant and GM contributions (described in the Complaint as “profit sharing”) are made in the form of both after-tax savings and tax-deferred savings. (¶ 142-44.) The amount of GM contributions is unclear from the Complaint. Hourly Plan participants may contribute up to sixty percent of their weekly earnings to the Plan, thought this limit varies over time. (¶ 142, 144.) Participants must direct where they wish their contributions to be invested. (¶ 148.) Options include GM stock, mutual funds, or Promark funds. (¶ 149, 156.) B. The Parties The four plaintiffs named in the Complaint are former GM employees. Al Balnius and Michael Birmingham are participants in the Hourly Plan; Jerry Canter and Bryan Moore are participants in the Salaried Plan. Through their participation in the Plans, each held 3 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 4 of 38(cid:10) shares of GM stock. (¶ 15-18.) Plaintiffs bring this lawsuit on behalf of a proposed class, which they define as follows: All persons who were participants in or beneficiaries of the Plans at any time between March 18, 1999 and the present (the “Class Period”) and whose accounts included investments in the GM $1-2/3 Par Value Common Stock Fund, and/or the GM Class H Common Stock Fund. (¶ 28.) The GM Defendants include GM itself, GM’s President, CEO, and Board Chairman Richard Wagoner, Jr., GM’s Investment Management Corporation (“GMIMCo”), the Investment Funds Committee of GM’s Board of Directors and its eleven individual members (“the Funds Committee Defendants”), and the seven individual members of GM’s Employee Benefits Plans Committee (“the Plans Committee Defendants”). Plaintiffs claim that each of the GM Defendants is a fiduciary of the Plans, with the exception of the members of the Plans Committee Defendants, who had discretionary authority to oversee only the Salaried Plan. (¶ 19-25, 27.) Defendant State Street is Trustee and Investment Manager of all GM common stock held in the Plans. (¶ 26.) State Street has been Trustee throughout the class period, but did not become Investment Manager until May 28, 1999. (¶ 4.) C. The Claims Plaintiffs allege five causes of action. Although they vary slightly in form, the thrust of Plaintiffs’ argument is that the Plan fiduciaries breached their duties under ERISA by investing in GM stock, which, for reasons known to the fiduciaries, was not in the best interest of the Plan participants. 4 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 5 of 38(cid:10) Plaintiffs’ Count I, against all Defendants, alleges a failure to manage the Plans’ assets prudently and loyally: for Defendants knew or should have known that General Motors Stock was not a suitable and appropriate investment for the Plans . . . . Investment in General Motors Stock . . . did not serve the Plans’ purposes of helping fact caused significant participants save losses/deprivation to participants’ savings. Despite all of this, these fiduciaries continued to offer General Motors Stock as an investment option for the Plans and to direct and approve the investment of General Motors Common Stock Fund in General Motors Stock, instead of cash or other investments. Similarly . . . , these fiduciaries permitted Company matching contributions to be made in General Motors Stock. retirement, and in (¶ 173.) Count II, against the GM Defendants with the exception of the Plans Committee Defendants, alleges failure “to provide complete and accurate information” to Participants and Beneficiaries of the Plans: The Defendants . . . breached their duty to inform participants by failing to provide complete and accurate information regarding General Motors Stock, making material misrepresentations about the Company’s financial condition, and, generally, by conveying inaccurate information regarding the soundness of General Motors Stock and the prudence of investing retirement contributions in the stock. (¶ 185.) Count III, against the GM Defendants with the exception of the Plans Committee Defendants, alleges a failure to monitor appointed Plan fiduciaries and provide them with accurate information: Defendants . . . breached their fiduciary monitoring duties by, among other things: failing to ensure that the monitored fiduciaries had access to knowledge about the Company’s business problems . . . , which made Company Stock an imprudent retirement investment; and failing to ensure that the monitored fiduciaries completely appreciated the huge risk of significant investment by rank and file employees in an undiversified employer stock fund which was made up primarily of Company Stock, an 5 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 6 of 38(cid:10) investment that was imprudent and inherently subject to significant downward movements . . . . Defendants . . . knew or should have known that the fiduciaries they were responsible for monitoring were (i) imprudently allowing the Plans to continue offering the GM Common Stock Fund as an investment alternative for the Plans; (ii) continuing to invest the assets of the Plans in General Motors Stock; and (iii) imprudently failing to diversify the GM Common Stock Fund. Despite this knowledge, . . . Defendants . . . failed to take action to protect the Plans, and concomitantly the Plans’ participants, from the consequences of these fiduciaries’ failures. (¶ 196.) Count IV of the Complaint, against GM, Wagoner, and the Funds Committee Defendants, alleges a breach of the duty to avoid conflicts of interest and to resolve them promptly: Defendants breached their duty . . . by, inter alia: (i) failing to engage independent fiduciaries to make independent judgments concerning the Plans’ investment in the General Motors Stock; (ii) failing to notify appropriate federal agencies, including the SEC and the Department of Labor, of the facts and transactions which made General Motors Stock and unsuitable investment for the Plans; (iii) failing to take such other steps as were necessary to ensure that participants’ interests were loyally and prudently served; (iv) with respect to each of the above failures, doing so in order to prevent drawing attention to the Company’s inappropriate practices; and (v) by otherwise placing the interests of the Company and themselves above the interests of the participants with respect to the Plans’ investment in Company Stock. (¶ 205.) In Count V, against the GM Defendants with the exception of the Plans Committee Defendants, Plaintiffs allege co-fiduciary liability. Essentially, this Count states that Defendants failed to remedy their co-defendants’ breaches of fiduciary duty. (See ¶ 207- 15.) In Count VI, against Defendant State Street, Plaintiffs allege failure to diversify the GM Common Stock Accounts in violation of the Investment Management Agreement. (See 6 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 7 of 38(cid:10) ¶ 216-25.) Plaintiffs state, “Pursuant to the Investment Management Agreement, State Street was obligated to ‘discharge its duties . . . by diversifying the investments in the Investment Accounts so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so . . . .’” (¶ 221.) II. Standard of Review A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of a Complaint. In a light most favorable to Plaintiffs, the court must assume that Plaintiffs’ factual allegations are true and determine whether the Complaint states a valid claim for relief. See Albright v. Oliver, 510 U.S. 266 (1994); Bower v. Federal Express Corp., 96 F.3d 200, 203 (6th Cir. 1996); Forest v. United States Postal Serv., 97 F.3d 137, 139 (6th Cir. 1996). This standard of review “‘requires more than the bare assertion of legal conclusions.’” In re Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th Cir. 1997) (quoting Columbia Natural Resources, Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995 . The Complaint must include direct or indirect allegations “respecting all the material elements to sustain a recovery under some viable legal theory.” In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993) (citations omitted) (emphasis in original). III. Discussion A. GM Defendants 1. Statute of Limitations The GM Defendants first argue that Plaintiffs’ claims are barred by ERISA’s statute of limitations.4 The parties agree that the relevant limitations period for Plaintiffs’ lawsuit 4Of course, Defendant State Street would also benefit from such a finding, and therefore adopts the GM Defendants’ argument. (Br. of State Street at 1.) 7 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 8 of 38(cid:10) is “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” 29 U.S.C. § 1113(2). The Sixth Circuit recently defined “actual knowledge” under this statute as “knowledge of the facts or transaction that constituted the alleged violation; it is not necessary that the plaintiff also have actual knowledge that the facts establish a cognizable legal claim under ERISA in order to trigger the running of the statute.” Wright v. Heyne, 349 F.3d 321, 330 (6th Cir. 2003). Central to GM’s argument is its assertion that “Plaintiffs have not only admitted that the facts central to their claims existed during the class period, but also that they had knowledge of them more than three years prior to filing their Complaint.” (Br. of GM at 11 (quoting Compl. ¶ 106).) The apparent source of this assertion is Paragraph 106 of the Complaint, which states, During the Class Period, Defendants’ direct and indirect communications with the Plans’ participants included statements regarding investments in Company Stock. Upon information and belief, these communications included, but were not limited to, SEC filings, annual reports, press releases, Company presentations made available to the Plans’ participants via the Company’s website and Plan-related documents which incorporated and/or reiterated these statements. Defendants also acted as fiduciaries to the extent of this activity. (¶ 106.) This language does not establish that Plaintiffs had “actual knowledge” of the crucial facts; it merely states that GM made certain information public. As the Sixth Circuit noted in Wright, however, “‘[a]ctual knowledge must be distinguished from constructive knowledge.’” 349 F.3d at 329 (quoting Martin v. Consultants & Administrators, Inc., 966 F.2d 1078, 1086 (7th Cir. 1992 . Paragraph 106 is therefore not an admission of actual knowledge. At oral argument, GM also quoted Paragraph 186 of the Complaint, which states, 8 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 9 of 38(cid:10) With respect to the Company and certain other fiduciary Defendants, upon information and belief, such communications were disseminated directly to all participants, including prospectuses that incorporated by reference the Company’s materially misleading and inaccurate SEC filings and reports. In addition, upon information and belief, the Company communicated directly with all participants regarding the merits of investing in General Motors Stock in company-wide and uniform communications, and, yet , in the context of such communications, failed to provide complete and accurate information regarding General Motors Stock as required by ERISA. (¶ 186 (emphasis in original).) To be sure, this language leans closer toward “actual knowledge.” But actual knowledge of what? Plaintiffs’ use of “such representations” here is shorthand for “failing to provide complete and accurate information . . . , making misrepresentations . . . , and . . . conveying inaccurate information . . . .” (¶ 185.) GM argues that the statute of limitations clock started ticking as soon as the relevant statements were made to Plaintiffs. But GM’s statements themselves did not provide knowledge of the alleged violations because those statements were allegedly misleading. Rather, the essential knowledge was provided only when Plaintiffs learned of the inaccuracy of the statements. To put it another way, Plaintiffs did not at first realize that they were being misled, and therefore did not yet have “knowledge of the facts or transaction that constituted the alleged violation . . . .” Wright, 349 F.3d at 330. Indeed, as Plaintiffs point out, if GM’s statements were false and misleading as alleged, they did not put Plaintiffs on notice of anything. (Br. of Pls. at 16.) GM discounts the fact that Wright was decided on a motion for summary judgment, as opposed to a motion to dismiss. (Repl. Br. of GM at 8.) But this distinction is crucial. In Wright, the court rested its decision on an abundance of evidence about the process by which the plaintiffs discovered the defendant’s wrongdoing--evidence no doubt developed during the discovery process. See 349 F.3d at 324-25. In the present case, there has 9 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 10 of 38(cid:10) been no discovery, and thus there are no facts to support GM’s contention that Plaintiffs had “actual knowledge” of the facts giving rise to their claims. GM may have a valid argument as to ERISA’s statute of limitations, but it is too soon to know. Because the Complaint contains no admission of “actual knowledge” of GM’s wrongdoing more than three years before the Complaint was filed, ERISA’s statute of limitations provides no basis to dismiss the Complaint at this time. 2. Plaintiffs’ Count I In Count I, Plaintiffs allege that Defendants violated ERISA’s requirement that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the plan participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use . . . .” 29 U.S.C. § 1104(a)(1). GM5 contends that the Plans are Employee Stock Ownership Plans (“ESOPs”) subject to a presumption of reasonableness, and that Plaintiffs have failed to allege sufficient facts to overcome that presumption. Plaintiffs counter that whether the Plans are ESOPs is a question of fact not appropriately before this Court at this stage in the litigation. Plaintiffs further argue that if the Court opts to resolve the ESOP question, it should find that the Plans are not ESOPs, but even if it finds otherwise, it should find that Plaintiffs have alleged sufficient facts to overcome the presumption of reasonableness. a. The ESOP Presumption of Reasonableness 5The GM Defendants take the lead in arguing this issue, though Plaintiffs’ allegation reaches all Defendants here. 10 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 11 of 38(cid:10) “In drafting the ESOP provisions of ERISA, Congress intended to encourage employees’ ownership of their employer company. In order to promote this goal, Congress carved out specific exceptions to certain fiduciary duties in the case of an ESOP.” Kuper v. Iovenko, 66 F.3d 1447, 1458 (6th Cir. 1995). Thus, while ERISA ordinarily imposes high fiduciary duties of loyalty and prudence and an exclusive purpose requirement, “as a general rule, ESOP fiduciaries cannot be held liable for failing to diversify investments, regardless of whether diversification would be prudent under the terms of an ordinary non-ESOP pension plan.” Id. Moreover, an ESOP is exempted from ERISA’s otherwise strict rules against self-dealing. Id. (citing Martin v. Feilen, 965 F.2d 660, 665 (8th Cir. 1992 . This is not to say that ESOP fiduciaries are not subject to ERISA’s general fiduciary responsibilities, but that ESOP status must be considered when determining whether they have violated those responsibilities. In the Sixth Circuit, a proper balance between the purpose of ERISA and the nature of ESOPs requires . . . review [of] an ESOP fiduciary’s decision to invest in employer securities for an abuse of discretion. In this regard, we will presume that a fiduciary’s decision to remain invested in employer securities was reasonable. A plaintiff may then rebut this presumption of reasonableness by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision. Id. at 1459. Under this standard, a plaintiff asserting a prudence claim must show that the ESOP fiduciaries’ decision to invest in company stock was an abuse of discretion. Id. Further, “in attempting to rebut the presumption, the plaintiff must show that the ERISA fiduciary could not have reasonably believed that the plan’s drafters would have intended under the circumstances that he continue to comply with the ESOP’s direction that he 11 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 12 of 38(cid:10) invest exclusively in employer securities.” Id. (citing Moench v. Robertson, 62 F.3d 553, 1995 U.S. App. LEXIS 21546, *56 (3d Cir. 1995 . b. The Plans are ESOPs ERISA defines an ESOP as an individual account plan “which is designed to invest primarily in qualifying employer securities . . . .” 29 U.S.C. § 1107(d)(6)(A). ESOPs must be qualified under the Internal Revenue Code and any other requirements that the Secretary of the Treasury deems appropriate. Id. Plaintiffs assert that “the facts in this case will demonstrate that the Plans are not ESOPs . . . .” (Br. of Pls. at 24 n. 10.) But whether the Plans are ESOPs depends entirely upon whether they invest primarily in qualifying GM stock and meet the guidelines set by the Internal Revenue Code and the Secretary of the Treasury. 29 U.S.C. § 1107(d)(6). These questions are not, as Plaintiffs contend, factual questions requiring expert testimony. They are purely legal questions requiring application of the relevant law to the text of the Plans, a task well within the province of this Court.6 Pointing to the text of the Plans, GM contends that “[t]here is no genuine dispute that the portions of the Plans designed to invest in the GM stock funds meet the threshold requirement of an ESOP.” (Reply Br. of GM at 12.) Specifically, the Preface to Article III of the Salaried Plan states, 6In support of its Motion to Dismiss, Defendant State Street provides the texts of the Salaried Plan and the Hourly Plan. These documents are appropriately before the Court, since Plaintiffs refer to and quote from them at length. Weiner v. Klais & Co., 108 F.3d 86, 89 (6th Cir. 1997) (“‘documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff’s complaint and are central to her claim.’”) (quoting Venture Assoc. v. Zenith Data Sys., 987 F.2d 429, 431 (7th Cir. 1993 . 12 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 13 of 38(cid:10) The portion of the Program assets invested in the General Motors . . . Common Stock . . . is designed to invest primarily in qualifying employer securities as defined by Section 4975(e)(8) of the [Internal Revenue] Code and is an employee stock ownership plan under Section 4975(e)(7) of the Code. This Article III applies to this ESOP portion of the program. (Salaried Plan at 24.) Article IX of the Hourly Plan begins, The portion of the Plan that consists of Deferred Assets and After-Tax Assets that are invested in the Corporation’s Common Stock Funds, including any dividends, earnings or gains thereon (the “ESOP portion” or “ESOP”), is designed to invest primarily in qualifying securities as defined by Section 4975(e)(8) of the Code, and is an employee stock ownership plan under Section 4975(e)(7) of the Code. This Article IX applies to this ESOP portion of the Plan. (Hourly Plan at 74.) These provisions satisfy the principal requirement that an ESOP “must be formally designated as such” and must “specifically state[] that it is designed to invest primarily in qualifying employer securities . . . .” 26 C.F.R. § 54.4975-11(a)(2), (b). Plaintiffs offer two legal arguments why the Plans are not ESOPs. First, they contend that “each plan states that it is a § 404(c) plan, which is inconsistent with Defendants’ current argument that the plans are ESOPs.” (Br. of Pls. at 26.) Plaintiffs quote In re Enron Corp. Securities, Derivative & ERISA Litigation, 284 F. Supp.2d 511 (S.D. Tex. 2003) (“Enron ERISA”), in which the court stated, “The Secretary of Labor has interpreted [Section 404(c)] as inapplicable to ESOPs because it applies only to plans that give the participants a wide range of investments from which to select.” Id. at 575 n.75 (citing 29 C.F.R. § 2550.404c-1). But contrary to Plaintiffs’ assertion, neither of the Plans “states that it is a § 404(c) plan.”7 Indeed, Section 404(c) is merely a means for defendants 7The Court is aware of only one reference to Section 404(c) in the text of the Plans, which does not support Plaintiffs’ assertion: Any Participant or beneficiary, who makes an investment election permitted 13 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 14 of 38(cid:10) to avoid fiduciary liability in the case of “a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over the assets in his account . . . .” 29 U.S.C. § 1104(c) (emphasis added). See also Meinhardt v. Unisys Corp. (In re Unisys Sav. Plan Litig.), 74 F.3d 420, 446 (3d Cir. 1996) (“Unisys Erisa”) (“section 1104(c) is akin to an exemption from or a defense to ERISA’s general rule, relieving fiduciaries in the appropriate circumstances of the liability to which they would otherwise be exposed”). Thus, a number of circumstances must take place before a defendant has the benefit of Section 404(c). At best, Enron ERISA supports the proposition that Defendants may not have the benefit of Section 404(c) in defending this action.8 It does not, however, resolve whether the Plans are ESOPs. Second, Plaintiffs rely on the “Summary Plan Descriptions” that GM sent them, which state that the purpose of the Salaried Plan is “to help [participants] accumulate savings, while at the same time providing [them] with an opportunity to acquire an equity investment in GM stock.” (¶ 109.) The purpose of the Hourly Plan is “to allow [participants] to save part of [their] earnings by investing for retirement through convenient and tax- effective payroll deductions.” (¶ 136.) Plaintiffs note that “[n]either Plan states that its under the Plan or otherwise exercises control permitted under the Plan over the assets in the account, shall be deemed the named fiduciary under ERISA responsible for such decisions to the extent that such designation is permissible under applicable law and that the investment election or other exercise of control is not protected by Section 404(c) of ERISA, as amended. (Salaried Plan at 40; Hourly Plan at 71.) 8The Parties do not address this specific issue. 14 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 15 of 38(cid:10) purpose is to allow Plan participants to invest primarily in GM stock” (Br. of Pls. at 26), and that the Plans “offer their participants a wide array of investment choices, among them a Company stock fund, but the Plans are not designed in such a way that Company stock is the primary Plan investment.” (Id. at 25.) Contrary to Plaintiffs’ assertion, however, both Plans state that they are “designed to invest primarily in qualifying securities as defined by Section 4975(e)(8) of the [Internal Revenue] Code, and [are] employee stock ownership plan[s] under Section 4975(e)(7) of the Code.” (Salaried Plan at 24; Hourly Plan at 74.) Further, “[a]n ESOP may form a portion of a plan the balance of which includes a qualified pension, profit-sharing, or stock bonus plan which is not an ESOP. A reference to an ESOP includes an ESOP that forms a portion of another plan.” 29 C.F.R. § 2550.407d- 6(a)(4). Thus, the fact that the Plans serve more than one purpose does not defeat ESOP applicability. The Plans were very clearly designed as ESOPs to invest primarily in GM stock. Based on a review of the Plans and the parties’ arguments, it is clear to the Court that as a matter of law, the Plans at issue are indeed ESOPs. Plaintiffs have provided no sound basis to hold otherwise, and have cited nothing in the text of the Plans inconsistent with an ESOP. c. The ESOP Presumption of Reasonableness May Apply to a Motion to Dismiss Pursuant to Rule 12(b)(6). Based on Kuper, GM argues that Plaintiffs must allege facts sufficient to overcome the “presumption of reasonableness.” Unlike the present case, however, Kuper went to trial in the district court, and therefore presented a fully developed record upon which to 15 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 16 of 38(cid:10) apply the presumption. Id. at 1459. The Sixth Circuit has not ruled on how Kuper applies to a motion to dismiss. Plaintiffs cite a number of cases, including two from this district, supporting their argument that the presumption of reasonableness is an evidentiary issue which is inconsistent with the simple notice pleading requirement of Federal Rule of Civil Procedure 8(a), and therefore is not appropriate for consideration on a motion to dismiss. For example, in In re CMS Energy ERISA Litigation, 312 F. Supp. 2d 898 (E.D. Mich. 2004) (“CMS ERISA”), the court “note[d] its agreement that [the ESOP presumption of reasonableness] can be overcome by a showing that a prudent fiduciary would have made a different investment decision, and that this argument cannot carry a motion to dismiss made under Fed. R. Civ. P. 12(b)(6).” Id. at 914 n.10 (internal citation omitted) (emphasis added). And in Rankin v. Rots, 278 F. Supp. 2d 853 (E.D. Mich. 2003), a case arising out of the Kmart bankruptcy, the court read Kuper as standing for two important propositions: First, the fact that the Plan requires investment in Kmart stock will not ipso facto relieve the [defendants] of their fiduciary obligations to prudently invest or to diversity. Second, whether or not they have breached their fiduciary duties requires development of the facts of the case. The result of these two points is that [the plaintiff] has stated a claim against them; whether or not she will prevail is another matter to be determined later. Id. at 879. See also In re AEP ERISA Litig., 327 F. Supp. 2d 812, 828 (S.D. Ohio 2004) (“it is neither necessary nor appropriate for the Court, at this juncture, to make a determination of whether the Plan or the Fund qualifies as an ESOP.”); In re Elec. Data Sys. Corp. “ERISA” Litig., 305 F. Supp. 2d 658, 670 (E.D. Tex. 2004) (“EDS ERISA”) 16 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 17 of 38(cid:10) (“requiring Plaintiffs to affirmatively plead facts overcoming the ESOP presumption violates Rule 8(a)’s notice pleading requirement”).9 GM, however, cites several cases in which other courts have granted motions to dismiss based on the presumption of reasonableness. In Wright v. Oregon Metallurgical Corp., 360 F.3d 1090 (9th Cir. 2004), the Ninth Circuit held that the district court’s dismissal of the plaintiffs’ claim with prejudice was appropriate because the “alleged facts effectively preclude[d] a claim . . . , eliminating the need for further discovery.” Id. at 1098-99. The court noted that the materials attached to the complaint demonstrated that the company at issue “was far from the sort of deteriorating financial circumstances” of companies subject to similar actions, “and was, in fact, profitable and paying substantial dividends throughout [the class] period.” Id. at 1099 (comparing facts of Moench, 62 F.3d at 572). Similarly, in In re Duke Energy ERISA Litigation, 281 F. Supp. 2d 786 (W.D.N.C. 2003), the court followed the Ninth Circuit’s decision in Wright by finding that the plaintiffs had failed 9In EDS ERISA, the district court rested its holding on Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002), a recent case in which the U.S. Supreme Court held that in a Title VII discrimination case, a plaintiff need not plead facts sufficient to establish a prima facie case under the McDonnell Douglas evidentiary framework. The Supreme Court had reasoned in part that the McDonnell Douglas framework does not apply to all Title VII cases, but only where a plaintiff can present no direct evidence of discrimination. Id. at 511-12. Thus, at the pleading stage, a plaintiff still has two possible theories. The district court in EDS ERISA applied this reasoning to the ESOP presumption of reasonableness context, finding that it would be similarly inappropriate to determine at the pleading stage which of two alternate theories--the Plan is an ESOP, or it is not--the facts would ultimately support. 305 F. Supp. 2d at 670. Necessary to the court’s holding, however, was its initial decision not to resolve whether the plans at issue were ESOPs. Id. This Court does not disagree with the reasoning of EDS ERISA, and if Plaintiffs had given the Court any reason to doubt that the Plans are indeed ESOPs, the Court would be inclined to follow that case. But given that this Court has already held that the Plans are ESOPs as a matter of law, and that Plaintiffs therefore have no alternative but to overcome the presumption of reasonableness, Swierkiewicz does not further Plaintiffs’ argument. 17 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 18 of 38(cid:10) to “allege that Duke Energy was anything other than a viable, strong company with substantial assets. In fact, . . . Duke Energy is a solid, viable company, far from ‘impending collapse,’ and not in ‘dire circumstances.’” Id. at 795. And in In re Calpine Corp. ERISA Litigation, 2005 U.S. Dist. LEXIS 9719 (N.D. Cal. Mar. 31, 2005) (“Calpine ERISA”), the court held that based on the facts before it, the plaintiffs “have not and cannot allege facts that could rebut the presumption of prudence.” Id. at *17.10 Upon close inspection, most of the cases cited by Plaintiffs and by GM can be reconciled. The importance of the cases cited by GM is not that the plaintiffs did not allege facts sufficient to overcome the presumption of reasonableness, but that the plaintiffs could not allege such facts--they pled themselves out of court, as their complaints and the supporting documentation precluded relief. The Court agrees with the cases on this point; here as well, if Plaintiffs’ alleged facts preclude their ability to overcome the presumption of reasonableness, the Court will dismiss the Complaint. But the Court also agrees with the cases cited by Plaintiffs, including cases from this district, holding that to impose on Plaintiffs an affirmative burden to plead the specific facts necessary to overcome the presumption of reasonableness would be inconsistent with Rule 8(a)’s notice pleading requirement. 10GM also points out that in other contexts, courts have required plaintiffs to plead facts sufficient to overcome legal presumptions. See, e.g., De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996) (“To overcome ‘the ‘presumption of separateness’ afforded to related corporations,’ Plaintiffs must come forward with ‘the showing of actual domination required to pierce the corporate veil.’”) (citations omitted); Wroblewski v. Washburn, 965 F.2d 452, 460 (7th Cir. 1992) (“To survive a motion to dismiss for failure to state a claim [for discrimination], a plaintiff must allege facts sufficient to overcome the presumption of rationality that applies to government classifications.”). 18 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 19 of 38(cid:10) In sum, Defendants are entitled to a presumption of reasonableness in this case. At this early stage of litigation, however, Plaintiffs’ burden is only to put Defendants on notice of a viable claim for relief, and they need not allege every specific fact that must be proven in furtherance of their claim. Count I will be dismissed if, in light of the presumption of reasonableness, Plaintiffs’ alleged facts preclude relief. d. Plaintiffs’ Alleged Facts Support a Finding that Defendants Violated their Fiduciary Duties. Plaintiffs’ primary allegation, which recurs throughout the Complaint in various contexts, is that Defendants “ignored serious red flags that should have alerted them to the fact that General Motors Stock was not a prudent investment for the Plans.” (¶ 36.) To be sure, this language suggests a theory based on general ERISA-imposed fiduciary duties, rather than the duties specific to ESOPs.11 But this alone is not does not necessarily preclude recovery. The Court must determine whether the facts alleged in the complaint and in the referenced documents are inconsistent with a finding in Plaintiffs’ favor. An analysis of the facts that Plaintiffs will eventually need to prove begins with Kuper, in which the defendant’s stock declined from more than $50 per share to about $10 per share in an eighteen-month period. The court noted that the “plaintiffs merely 11Plaintiffs’ synopsis of Count I reads, Specifically, Plaintiffs allege in Count I that Defendants breached their fiduciary duties in violation of ERISA by failing to prudently and loyally manage the Plans’ investment in General Motors Stock, continuing to offer General Motors Stock as an investment option, making the Company Contribution in General Motors Stock, and holding virtually all assts of the General Motors Common Stock Fund in General Motors Stock when the stock no longer was a prudent investment for participants’ retirement savings. (¶ 7.) 19 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 20 of 38(cid:10) assert[ed] that defendants’ decision to continue to hold [company] stock was unreasonable because defendants were aware of events that would continue to cause [a] decline in value.” 66 F.3d at 1460. The court found that because “a prudent fiduciary acting under similar circumstances” would not necessarily have acted differently, this conduct alone was insufficient to overcome the presumption of reasonableness. Id. at 1459. In Wright, the Ninth Circuit echoed this reasoning, stating that “[m]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the [ESOP] presumption.” 360 F.3d at 1099. In a footnote, the court distinguished cases reaching the opposite result, including one from this district: Plaintiffs point to two decisions that are allegedly counter to this analysis, Stein v. Smith, 270 F. Supp. 2d 157 (D. Mass. 2003), and Rankin v. Rots, 278 F. Supp. 2d 853 (E.D. Mich. 2003). Although in both cases the courts . . . denied 12(b)(6) motions to dismiss, each case is readily distinguishable. In Smith, the complaint specifically alleged that the company’s “financial collapse,” including “an accumulation of large, undisclosed losses on major projects as well as an impending liquidity crisis that was not adequately disclosed to the public,” played a pivotal role in the administrators’ breach of their fiduciary duties. 270 F. Supp. 2d at 164. Moreover, the complaint alleged that “defendant Smith was integrally involved in making decisions about bidding and disclosure of S & W’s finances, and that the other defendants either were aware or should have been aware of the mounting problems.” Id. Unlike the present case . . . , in which the only allegations involved downward fluctuations in stock price, the allegations in Smith clearly implicated the company’s viability as an ongoing concern. Similarly, in Rankin, the company at issue (Kmart), went bankrupt. The complaint specifically alleged that the plan administrators “failed to give Plan participants accurate, complete, non-misleading and adequate information about the compositions of the Plans’ portfolios and accurate information about Kmart and its true financial condition.” Rankin, 278 F. Supp. 2d at 863. 360 F.3d at 1099 n.5. Another recent case adds to this analysis. In Lalonde v. Textron, Inc., 270 F. Supp. 2d 272 (D.R.I. 2003), a federal district court held, in an often-cited opinion, that the 20 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 21 of 38(cid:10) presumption of reasonableness “may be overcome when a precipitous decline in the employer’s stock is combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement.” Id. at 280. Applying this standard, the district court found that the plaintiffs had failed to overcome the presumption, because “at no time was Textron stock unsuitable for investment.” Id. When Textron reached the First Circuit, it was vacated in part. 369 F.3d 1, 7-8 (1st Cir. 2004). The appellate court did not disagree with the district court’s articulation of the applicable standard, but took issue with the finding that the plaintiffs had failed to meet their burden under Rule 12(b)(6): [T]he district court’s analysis, while perhaps convincing on its own terms, failed to take account of plaintiffs’ allegation that, during the period identified in the complaint, Textron artificially inflated its stock price by concealing “the disparate problems throughout Textron’s segments and their adverse effect on Textron which are the subject of a federal securities lawsuit by shareholders against Textron and certain of its officers and directors.” While this allegation is not terribly specific, Textron surely is aware of the nature of the charges it faces in the separate lawsuit. The allegation is thus sufficient to play its part in effectuating the purposes of Fed. R. Civ. P. 8(a): to give Textron “fair notice of what [the plaintiffs’] claim is and the grounds upon which it rests.” And, when combined with the other allegations, it is sufficient to clear the Rule 12(b)(6) hurdle. . . . The odds of plaintiffs succeeding on their breach of fiduciary duty claims against the Textron defendants might be very long, but “that is not the test.” Id. at 6-7 (internal citations omitted). These authorities provide a map for the evidence that Plaintiffs will eventually need to produce in furtherance of their claim. It will not be enough for Plaintiffs to prove that GM stock was an unwise investment or that Defendants ignored a decline in stock price. Rather, to overcome the presumption of reasonableness, Plaintiffs must show that the circumstances would have prompted a reasonable fiduciary in the same ESOP 21 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 22 of 38(cid:10) circumstances to make different investment decisions. Specifically, Plaintiffs must prove that Defendants were aware of facts showing that GM’s “viability as an ongoing concern” was in jeopardy. Or, as articulated in the district court opinion in Textron, Plaintiffs must show “a precipitous decline in the employer’s stock . . . combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement.” 270 F. Supp. 2d at 280. Turning to the facts of the present case, Plaintiffs make numerous detailed allegations that, in sum, amount to nothing short of a financial crisis for GM. Plaintiffs summarize GM’s problems as follows: Throughout the Class Period, a major issue for General Motors Corporation . . . has been massive, under-funded healthcare and defined- benefit pension obligations for tens of thousands of employees, retirees and their beneficiaries through defined-benefit pension plans and healthcare plans. Because many of the fiduciaries of the Plans are also fiduciaries of the defined-benefit pension and healthcare plans, these fiduciaries have been keenly aware of the burgeoning crisis facing the Company going forward. As the market began to become aware of the scope of GM’s problems earlier this year, the Company’s stock price dropped precipitously, analysts began making “sell” recommendations, and the Company’s unsecured debt was reduced to “junk” status--all based on information that has long been known to the fiduciaries. (¶ 5.) While conceding that “GM’s stock price has declined overall during the class period” (Br. of GM at 21), GM also cites some very strong facts of its own, which unquestionably counter Plaintiffs’ allegations: GM’s annual reports filed with the SEC . . . establish that throughout the six- year class period GM has been a solvent and profitable business enterprise. These public filings, which are referred to and thus incorporated by the Complaint, show that GM’s total assets increased from $273 billion in 1999 to $480 billion in 2004, and stockholder’s [sic] equity during that period increased from $20 billion to nearly $28 billion. GM’s revenues increased 22 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 23 of 38(cid:10) from $176 to $193 billion, and GM was profitable every full year during the class period. Moreover, despite allegations of recent adverse developments in GM’s business, plaintiffs do not allege GM has ever reduced or failed to pay its regular $2.00 per share dividend for any quarter . . . . (Br. of GM at 20-21 (citing GM 2004 Form 10-K at 2, 6, 22, 38, 56, 71, 84, 86).) These facts might resolve the matter in favor of GM under other circumstances. Here, however, Plaintiffs allege that the numbers are misleading--and purposefully so. It is GM’s hidden financial liabilities, Plaintiffs argue, that threaten the long term viability of the company. Plaintiffs allege, among other things, that GM’s “accounting slight of hand” regarding the funding of its pensions has “artificially inflated GM’s earnings.” (¶ 57-59.) This allegedly fuzzy math, Plaintiffs contend, “provides the critical elements for ‘a perfect storm’- -especially when one takes into account GM’s declining fortunes in the marketplace and its massive, under-funded healthcare obligations.” (¶ 60.) Plaintiffs state that GM has “no plan whatsoever for meeting the $65 billion or more in unfunded healthcare costs.” (¶ 67.) And Plaintiffs quote several publications and investors questioning GM’s ability to stay afloat, including one business magazine article stating, “Private equity investors seem to believe that the company’s global cost handicap will eventually force it into bankruptcy court . . . .” (¶ 79.)12 In Count I specifically, Plaintiffs allege that “at least some of the Defendants had actual knowledge of the Company’s corporate malfeasance and questionable reporting 12GM takes issue with Plaintiffs’ adoption of several critical articles and analyses or GM’s finances. But as the First Circuit noted in Textron, GM must “surely [be] aware of the nature of the charges” raised in the quoted publications. 369 F.3d at 6. Plaintiffs’ allegations, including those adopted from other sources, are “sufficient to play [their] part in effectuating the purposes of Fed. R. Civ. P. 8(a): to give [Defendants] ‘fair notice of what [Plaintiffs’] claim is and the grounds upon which it rests.’” Id. at 7. 23 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 24 of 38(cid:10) and business practices,” and that the Investment Funds Committee Defendants in particular “were keenly aware of GM’s crippling legacy costs and the accounting methods to mask this issue.” (¶ 177.) This is not a case in which Plaintiffs “merely assert that defendants’ decision to continue to hold [GM] stock was unreasonable because defendants were aware of events that would continue to cause [a] decline in value.” Kuper, 66 F.3d at 1460. Rather, Plaintiffs contend that as bad as they are, the numbers are misleading because GM has “artificially inflated” its earnings. Plaintiffs also fervently contend that GM’s dire financial straits and its serious mismanagement have put it at risk of collapse. Whether Plaintiffs can provide proof of their allegations is an issue for another day, after discovery has developed a factual record. But as the above discussion demonstrates, Plaintiffs have alleged facts that would support a finding that a “prudent fiduciary acting under similar circumstances” would have acted differently. Because none of the facts here preclude relief--indeed, these are exactly the facts that Plaintiffs will need to prove--and because Defendants have been given fair notice of the claims against them, Plaintiffs’ Count I sufficiently states a claim for relief. 3. Plaintiffs’ Count II In Count II, Plaintiffs allege that certain GM Defendants breached their duty to inform participants by failing to provide complete and accurate information regarding General Motors Stock, making material misrepresentations about the Company’s financial condition, and, generally, by conveying inaccurate information regarding the soundness of General Motors Stock and the prudence of investing retirement contributions in the stock. (¶ 185.) 24 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 25 of 38(cid:10) GM asks the Court to dismiss Count II because Plaintiffs “have failed to plead detrimental reliance,” and because Plaintiffs “have not identified any material misrepresentations or omissions.” GM further argues that it had no duty to provide complete and accurate information to Plaintiffs. (Br. of GM at 25.) a. Plaintiffs have Alleged Detrimental Reliance GM argues that Plaintiffs have failed to allege the element of detrimental reliance. GM quotes Horvath v. Keystone Health Plan East, Inc., 333 F.3d 450 (3rd Cir. 2003), in which the court concluded that “there is no reasonable reading of [the plaintiff’s] complaint--even under the liberal pleading requirements contained in Rule 8 of the Federal Rules of Civil Procedure--pursuant to which [she] can be said to have alleged a material misrepresentation . . . upon which she relied to her detriment.” Id. at 459-60.13 The same cannot be said of the Complaint in this case. Plaintiffs allege, As a consequence of the failure of the Defendants . . . to satisfy their disclosure obligations under ERISA, participants lacked sufficient information to make informed choices regarding investment of their retirement savings in General Motors Stock, or to appreciate that under the circumstances known to the fiduciaries, but not known by participants, that General Motors Stock was an inherently unsuitable and inappropriate investment option for their Plan accounts. . . . [A]s a direct and proximate result of the breaches of fiduciary and co-fiduciary duties alleged herein, the Plans, and indirectly Plaintiffs and the other Class members, lost millions of dollars of retirement savings. (¶ 190-91.) 13Horvath does not discuss whether Rule 9(b) applies to ERISA claims sounding in fraud. 25 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 26 of 38(cid:10) This plain statement suffices to put GM on notice of the claim against it.14 Plaintiffs have therefore alleged detrimental reliance to the Court’s satisfaction. b. Allegations “Sounding in Fraud” Must Satisfy Rule 9(b) GM argues that Count II “sounds in fraud,” and that Plaintiffs’ generalized allegations fail to satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b). Plaintiffs do not argue that their claim satisfies Rule 9(b); they contend simply that Rule 9(b) does not apply to ERISA actions based on a breach of fiduciary duty. Under the liberal pleading standard of Federal Rule of Civil Procedure 8(a), a complaint needs only to set forth “a short and plain statement of the claim,” sufficient to put the defendant on notice. “In all averments of fraud or mistake,” however, Rule 9(b) requires that “the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). Count II complains of GM’s “failing to provide complete and accurate information,” “making material misrepresentations,” and “conveying inaccurate information.” (¶ 185.) To be sure, this contains familiar fraud language, but as Plaintiffs point out, several courts insist that where ERISA provides the underlying claim, Rule 8(a) applies. In Rankin, for example, when faced with the same issue, the Court held, While some of the allegations in support of their claim are similar to fraud allegations, i.e. that they provided false and misleading information, the gravamen of [the plaintiff’s] claim is grounded in ERISA. The heightened pleading requirement under Rule 9(b) will not be imposed where the claim is 14As discussed below, the heightened pleading requirements of Rule 9(b) may apply to parts of this Count II. Rule 9(b) states that “the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b) (emphasis added). Thus, the detrimental reliance element need not be pled with particularity. 26 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 27 of 38(cid:10) for a breach of fiduciary duty under ERISA. [The plaintiff’s] ERISA claims . . . are not disguised fraud claims; they are ERISA claims. 278 F. Supp. 2d at 866. Similarly, the court in CMS ERISA noted, the claims. . . sounding in fraud have to do with the communication of inaccurate information, and the failure to disclose transactions which “rendered the financial statements of CMS materially false.” These general allegations are asserting a breach of fiduciary duty, not an intent to deceive, as plaintiffs contend. The court is not persuaded that plaintiffs have made any claims sounding in fraud. 312 F. Supp. 2d at 909. See also In re Xcel Energy, Inc., 312 F. Supp. 2d 1165, 1179 (D. Minn. 2004) (“In cases where a fraud, misrepresentation or omission is alleged to have occurred but is not itself the basis of the alleged breach, Rule 9(b) is not applied.”) Rankin and CMS ERISA, both of which were decided in this district, followed a Ninth Circuit precedent, Concha v. London, 62 F.3d 1493 (9th Cir. 1995), which highlighted the differences between a fraud claim and a fiduciary duty claim: The reasons for requiring compliance with Rule 9(b) in fraud claims, but not in breach of fiduciary duty claims generally, can be understood by considering the differences between the respective causes of action. Fraud arises from the plaintiff’s reliance on the defendant’s false representations of material fact, made with knowledge of falsity and the intent to deceive. Plaintiffs may fairly be expected to identify with specificity the defendant’s alleged misrepresentations, though they are not expected to plead with specificity the defendant’s state of mind. Rule 9(b) thus requires that plaintiffs specifically plead those facts surrounding alleged acts of fraud to which they can reasonably be expected to have access. In contrast, the circumstances surrounding alleged breaches of fiduciary duty may frequently defy particularized identification at the pleading stage. Where a fiduciary exercises discretionary control over a plan, and assumes the responsibilities that this control entails, the victim of his misconduct often will not, at the time he files his complaint, be in a position to describe with particularity the events constituting the alleged misconduct. These facts will frequently be in the exclusive possession of the breaching fiduciary. Even in cases where fraud is alleged, we relax pleading requirements where the relevant facts are known only to the defendant. 27 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 28 of 38(cid:10) Id. at 1503 (internal citations omitted). GM cites a number of cases explicitly applying Rule 9(b) to ERISA claims. In fact, a post-Concha line of cases out of the Ninth Circuit, beginning with Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003),15 supports GM’s position that where claims “necessarily describe fraudulent conduct,” they are subject to Rule 9(b) analysis. In Calpine ERISA, the court explains: Ninth Circuit precedent requires district courts to apply the heightened pleading requirements of Rule 9(b) to all averments of fraud regardless of whether fraud is an essential element of the underlying cause of action. See Vess, 317 F.3d at 1103-1105, 1108 (“Where, as here, the averments in the complaint necessarily describe fraudulent conduct, Rule 9(b) applies to those averments”). In fact, as stated in Vess, since “[f]raud allegations may damage a defendant’s reputation regardless of the cause of action in which they appear, . . . [they] are therefore properly subject to Rule 9(b) in every case.” Id. at 1104 (emphasis added). When fraud is not an essential element of a claim, and the claim includes non-fraud allegations, only the non-fraud allegations are exempt from the pleading requirements of Rule 9(b). Id. When particular averments of fraud are insufficiently pled under Rule 9(b), a district court must strip those averments from the claim and examine the remaining allegations to determine whether they state a claim. Id. at 1105. Here, while Plaintiff is correct that the sole cause of action alleged in the Amended Complaint is “breach of fiduciary duty,” it is equally true that the Amended Complaint is specifically premised on averments of fraud. In fact, the gravamen of Plaintiff’s Amended Complaint is that Calpine and the Committee Defendants “breached [their] fiduciary duties to the Plan by disseminating misleading and incomplete information to Plan participants, and failing to inform participants . . . of material information regarding participants’ investments in Company stock.” As such, under Vess, this Court must review Plaintiff’s Amended Complaint under the Rule 9(b) pleading standard. 2005 U.S. Dist. LEXIS 34452 at *17-19 (some internal citations omitted). 15Interestingly, the Ninth Circuit in Vess does not discuss or even mention Concha. 28 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 29 of 38(cid:10) Several federal courts have been persuaded by Vess, and a number of cases have followed its approach. In fact, two non-ERISA cases in this district have quoted Vess at length and adopted its reasoning. See Brege v. Lakes Shipping Co., 225 F.R.D. 546, 549 (E.D. Mich. 2004) (“if an allegation in a pleading contains ‘an averment of fraud,’ whether as part of a fraud claim or an element of a non-fraud claim, the ‘averment of fraud’ must be stated with the requisite particularity.”); Tramontana v. May, 2004 U.S. Dist. LEXIS 4557, *18 (E.D. Mich. March 16, 2004) (same). This Court finds Vess persuasive as well,16 and agrees that the rationale behind Rule 9(b) applies where a plaintiff alleges that a defendant has lied, albeit in the context of a fiduciary duty claim, and albeit without use of the word “fraud.” Plaintiffs therefore may not rely on the allegations that “sound in fraud”--e.g., that the GM Defendants “ma[de] material misrepresentations” and “convey[ed] inaccurate information”--unless they amend the complaint to conform with Rule 9(b). 16The Court recognizes an important distinction between the complaint at issue in Vess and the complaint in the present case. In Vess, the Ninth Circuit stated, The complaint alleges that the APA, as part of the conspiracy with Novartis and CHADD, “fraudulently and falsely” represented that the diagnostic criteria for ADD in the DSM were scientifically reliable; that “[i]n an effort to cover up this fraud,” the APA improperly clustered data from tests of diagnostic criteria for ADD with data from tests of diagnostic criteria for different and unrelated medical conditions; and that the APA “purposefully and fraudulently” failed to use objective criteria in the creation and promulgation of diagnostic criteria. The complaint further alleges that the APA has “fraudulently failed to disclose . . . .” 317 F.3d at 1101. Thus, the complaint in Vess actually alleged “fraud”--albeit in furtherance of a non-fraud cause of action--and unquestionably “sounded in fraud.” Here, Plaintiffs have used no such language. Nevertheless, the Court finds the reasoning of Vess equally applicable in this case. 29 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 30 of 38(cid:10) c. The GM Defendants had a Duty to Convey Complete and Accurate Information to Plaintiffs GM argues that “ERISA imposes no affirmative duty to disclose information beyond that expressly required under ERISA’s express disclosure provisions.” (Id. at 26.) GM quotes a 1998 Sixth Circuit case, in which the court noted, “It would be strange indeed if ERISA’s fiduciary standards could be used to imply a duty to disclose information that ERISA’s detailed disclosure provisions do not require to be disclosed.” Sprague v. Gen. Motors Corp., 133 F.3d 388, 405 (6th Cir. 1998). But more recently, the Sixth Circuit has recognized that “the basic concept of a fiduciary duty . . . ‘entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful.’” James v. Pirelli Armstrong Tire Corp., 305 F.3d 439, 455 (6th Cir. 2002) (quoting Krohn v. Huron Mem’l Hosp., 173 F.3d 542, 548 (6th Cir. 1999 . See also Unisys Erisa, 74 F.3d at 441 (“an ERISA fiduciary has a duty under section 1104(a) to convey complete and accurate information when it speaks to participants and beneficiaries regarding plan benefits”). Thus, ERISA not only prohibits GM from conveying false information, it also requires GM to provide complete information when speaking to Plan participants, when it knows that silence may be harmful. Thus, Plaintiffs’ allegation that the GM Defendants “fail[ed] to provide complete and accurate information” states a viable claim for relief. Moreover, this allegation is sufficiently specific, since it does not “sound in fraud.” Plaintiffs may pursue this theory under Count II without amending the Complaint. 4. Plaintiffs’ Count III 30 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 31 of 38(cid:10) GM briefly argues that Plaintiffs’ Count III, which alleges “failure to monitor appointed plan fiduciaries and provide them with accurate information,” is “completely derivative of the[] prudence claim” in Count I of the Complaint, and therefore should be dismissed. (Br. of GM at 32.) GM further argues that Plaintiffs “do not allege any more specific actions take--or not taken--by the defendants with regard to their duty to ‘monitor.’” (Id. at 31.) If one fiduciary is legally prohibited from investing in GM stock because of his knowledge of certain facts, he should not be permitted to employ another fiduciary to do so without providing necessary information and monitoring the proxy’s decisions. Because the Court has ruled that Plaintiffs state a prudence claim in Count I, and because Count III is sufficiently specific to satisfy Rule 8(a)’s notice pleading requirement, Plaintiffs’ Count III states a viable claim for relief.17 5. Plaintiffs’ Count IV In Count IV, Plaintiffs allege that GM breached its duty to avoid conflicts of interest by, among other things, failing to appoint independent fiduciaries to make investment decisions. (¶ 205.) In particular, “Defendants named in this Count clearly placed the interests of themselves and the Company, as evidenced by the longstanding artificial inflation of Company Stock, before the interests of the Plans and their participants.” (¶ 204.) 17Plaintiffs do not specify the “appointed plan fiduciaries” at issue in this claim. If discovery shows that Plaintiffs’ claims refer only to Defendant State Street, however, then the Court has doubts about whether Plaintiffs can prevail on this issue. As discussed below, State Street had very little discretion, so it would appear inconsequential whether-- and to what extent--the GM Defendants named in this claim monitored or provided accurate information to State Street. The Court leaves this particular issue for resolution at a later date. 31 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 32 of 38(cid:10) GM argues that “[t]here is no explanation--much less any specific allegations--as to how the [artificial] inflation of the price of GM stock (assuming it occurred), is ‘evidence’ of a ‘conflict’ between the defendants and Plan participants.” (Br. of GM at 33.) But the Court finds this to be a narrow reading of the Complaint. Taking Plaintiffs’ specific allegations as true and drawing all reasonable inferences in Plaintiffs’ favor, the Court finds support for the claim that certain of the GM Defendants had impermissible conflicts of interest with regard to the GM Plans. As discussed above, to state a valid claim, Plaintiffs need not identify all of the evidence necessary to prove their case. GM also argues that “[t]his aspect of plaintiffs’ claim . . . fails for the same reason their basic produce [sic] claim fails.” Because the Court has found Count I to state a valid claim for relief, however, GM’s argument here must fail as well. Plaintiffs’ Count IV therefore states a viable claim for relief. 6. Plaintiffs’ Count V GM’s only argument as to Plaintiffs’ Count V, which alleges co-fiduciary liability for failing to remedy co-defendants’ conduct, is that it is “entirely derivative of Counts I-IV.” (Br. of GM at 34.) As the Court has ruled against GM on each of the above Counts, it also rules against them as to Count V. B. State Street Bank Defendants Defendant State Street argues that Plaintiffs’ Counts I and VI should be dismissed for two reasons. First, State Street argues that because it is a directed trustee, without discretion to divest the Plans of GM stock, it cannot be held liable for breach of a fiduciary duty. Second, State Street contends that because it did not have reliable non-public information of GM’s financial woes, and because the public information was insufficient to 32 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 33 of 38(cid:10) give State Street notice of the severity of GM’s alleged problems, it should not be held liable for investing Plan funds in GM stock. Because State Street is correct as to the first of these, the Court need not address the second. ERISA’s definition of a fiduciary encompasses those who “exercise[] any discretionary authority or discretionary control respecting management or disposition of [a plan’s] assets,” or “ha[ve] any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A). For obvious reasons, fiduciary responsibility cannot extend to areas over which the alleged fiduciary has no discretion. There are two principle documents governing State Street’s responsibilities and authority as a fiduciary. The first is the Master Trust Agreement (“Trust”), into which State Street and GM entered in 1994. The Trust establishes State Street’s status as trustee of the Plans, albeit with limited authority regarding where to invest: “The Trustee shall maintain separate Investment Funds for each class of common stock of the Company . . . . Each such Investment Fund shall consist of the applicable class of common stock of the Company and cash or short term U.S. Treasury securities or investments . . . .” (Trust at 11.)18 The Trust further establishes that State Street had a duty to act as a prudent fiduciary for the purpose of providing benefits to Plaintiffs: The Trustee shall discharge its duties hereunder solely in the interest of the participants in the Plans and their beneficiaries and (i) for the exclusive purpose of providing benefits to such participants and beneficiaries, (ii) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims by diversifying, unless clearly not prudent to do so, the investments 18Due to a filing error, the Trust is attached to a supplemental filing (Doc. 36); Exhibit 5 to State Street’s Brief, which purports to be the Trust, is an unrelated document. 33 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 34 of 38(cid:10) of the Plans subject to its management and control to the extent required to minimize the risk of large losses to the Plans, and (iii) in accordance with the provisions of this Agreement insofar as they are consistent with the provisions of ERISA, but the duties and obligations of the Trustee shall be limited to those imposed upon it by this Agreement. (Id. at 52-53.)19 The Trust gives some discretion to the Plans’ investment manager, a role eventually occupied by State Street as well.20 This includes the discretion “to direct the time and manner in which purchases and sales of securities and other property to be made.” (Id. at 22.) Moreover, the Trust states that “[t]he Investment Manager of an Investment Account shall have the power and authority to be exercised in its sole discretion at any time and from time to time to issue orders for the purchase or sale of securities . . . .” (Id. at 23.) State Street’s discretion to divest the Plans of GM stock is limited, however, to meeting “cash flow requirements”: The Investment Manager designated by GMIMCo shall determine the applicable amount of Company common stock and cash or short term fixed income securities for a Company Common Stock Fund, from time to time, based on its estimates of the cash flow requirements of such Company Common Stock Fund and the investment guidelines of the company stock fund. (Id. at 11-12.) In 1998, when State Street was named investment manager, it entered into an Investment Management Agreement (“Agreement”). The Agreement contains language similar to the Trust: “SUBJECT TO THE TRUST AGREEMENT AND THE WRITTEN FUND 19Plaintiffs’ Brief omits Clause (iii) of this paragraph, which limits trustee responsibilities. (Br. of Pls. at 4.) 20As discussed above, State Street was not named Investment Manager under the Trust immediately, but became Investment Manager later, during the class period. (¶ 4.) 34 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 35 of 38(cid:10) POLICY FOR EACH INVESTMENT ACCOUNT . . . the Investment Manager shall be responsible in its sole judgment and discretion for the management and investment of the Investment Accounts.” (Agreement at 2.) Section I of the agreement states that “[t]he investment manager shall determine the applicable amount of common stock . . . and cash or short term fixed income securities for each Investment Account, from time to time, based on its estimates of the cash flow requirements of such Investment Account and the Fund Policy . . . .” (Id.) Under these terms, and under a general understanding of the Trust and Agreement, State Street has the discretion, as trustee and investment manager, to determine how much to invest in GM stock versus other liquid assets. As State Street points out, the only purpose of the other liquid assets is to meet the cash flow demands of the Plans, and State Street has no discretion to divest GM stock simply to save money or avoid risk. This is consistent with the Trust’s description of the Funds as ESOPs. (See id. at 12-14.) State Street argues that because it only has discretion to decide how much to invest in GM stock versus other liquid assets for cash-flow purposes--the amount of which is intended to be extremely limited--it is a “directed trustee,” and thereby absolved of fiduciary liability when they follow the appropriate directions of named fiduciaries. See 29 U.S.C. § 1103(a); Grindstaff v. Green, 133 F.3d 416, 426 (6th Cir. 1998) (“directed trustee . . . is not a fiduciary to the extent it does not control the ‘management or disposition’ of the ESOP stock it holds in trust.”). Plaintiffs attempt to show that language in the Agreement contradicts State Street’s position, including the following: 35 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 36 of 38(cid:10) The Investment Manager acknowledges that it is a fiduciary, within the meaning of ERISA, with respect to the Programs . . . . The Investment Manager shall discharge its duties under this Agreement solely in the interest of the participants of the Programs and their beneficiaries . . . (iii) by diversifying the investments in the Investment Accounts so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (iv) in accordance with the documents and instruments governing the Programs and the provisions of this Agreement insofar as they are consistent with the provisions of ERISA . . . . (Id. at 7.)21 The “documents and instruments” governing the Plans include their prospectuses, both of which contain the following clause: Investment Strategy: Invests solely in the shares of GM . . . , except for a small portion ordinarily targeted at 1%, dedicated to short-term fixed income investments and money market instruments. These latter groups of securities provide liquidity for loans, withdrawals, and exchanges by participants in this Fund. (Salaried Plan Prospectus at 20; Hourly Plan Prospectus at 9.) To be sure, the language in these documents is somewhat conflicting, perhaps on account of poor draftsmanship. Plaintiffs are correct that the Plans appear to direct State Street to diversify the Plans’ funds, but they seem to ignore that if State Street was to diversify, it would be inconsistent with other terms and conditions of the plans as well as the general policy of the Plans as ESOPs. State Street points out the flaw of Plaintiffs’ reasoning: Plaintiffs are asking the Court to ignore all of the critical language in the Agreement that is inconsistent with their argument. To begin with, it would defeat the plainly stated purpose of the Agreement for the Court to read the 21Plaintiffs only quote the helpful portion of the this excerpt, omitting Clause (iv), which requires consistency with “the documents and instruments” governing the Programs.” (See Br. of Pls. at 13.) 36 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 37 of 38(cid:10) contracts to say that [GM] has: (i) established GM Stock Funds for the very purpose of investing in GM stock as required by the Plan, (ii) limited the Investment Manager to holding assets other than GM stock only as necessary for liquidity needs, but (iii) then required the Investment Manager to generally diversify the investment accounts. (Reply Br. of State Street at 6.) The Court agrees with State Street that it did not have authority to diversify the Plans’ funds generally, among various different investments. Moreover, the Court agrees that State Street did nto have the authority to diversify much or all of the Plans’ funds into cash or other liquid instruments. In DiFelice v. US Airways, Inc., 397 F. Supp. 2d 735 (E.D. Va. 2005), the plaintiff presented a similar argument under very similar facts. The court there held, Plaintiff’s argument . . . misunderstands the purpose of the cash component in the Company Stock Fund and the trustee’s role in selecting the cash target range. The cash component of the Company Stock Fund was plainly not intended as an alternative investment or hedge against the performance of the [corporate defendant], but rather as a means “to satisfy the Fund’s cash needs for transfers and payments.” . . . Contrary to plaintiff’s assertions, [the trustee defendant] did not have the authority to alter the ratio of cash to stock in the Company Stock Fund for investment purposes. Id. at 745-746. DiFelice represents a logical resolution of the issue now before the Court. In this case as well, Plaintiffs fail to account for the fact that State Street did not have discretion to divest the Plans of GM stock in lieu of other more favorable investments. State Street’s authority was strictly limited to investing a very small portion of the Plans’ assets in liquid instruments. Otherwise, it was required to invest in GM. Plaintiffs also argue that State Street cannot be both a “directed trustee” and an “investment manager” because the former takes its directions from the latter. Plaintiffs rely on 29 U.S.C. § 1002(38), which provides, “The term ‘investment manager’ means any fiduciary (other than a trustee . . . ) . . . who has the power to manage, acquire, or dispose 37 Case 2:05-cv-71085-NGE-RSW Document 51 Filed 04/06/2006 Page 38 of 38(cid:10) of any asset of a plan . . . .” The Court finds Plaintiffs’ argument too formalistic and inapplicable to the facts presented here. State Street’s discretion as both a directed trustee and as an investment manager was extremely limited. Under the Plans, the Trust, and the Agreement, State Street simply had no discretion to act in the way that Plaintiff suggests it should have. For the reasons discussed above, the Court hereby GRANTS Defendant State Street’s Motion to Dismiss. IV. Conclusion Being fully advised in the premises, having read the pleadings, and for the reasons set forth above and on the record, the Court hereby DENIES the GM Defendants’ Motion to Dismiss and GRANTS Defendant State Street’s Motion to Dismiss. s/Nancy G. Edmunds Nancy G. Edmunds United States District Judge Dated: April 6, 2006 I hereby certify that a copy of the foregoing document was served upon counsel of record on April 6, 2006, by electronic and/or ordinary mail. s/Carol A. Hemeyer Case Manager 38

=== City of Sterling Heights, et al. v. United National Insurance Company, et al. ===

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION CITY OF STERLING HEIGHTS, ET AL., Plaintiffs, v. UNITED NATIONAL INSURANCE COMPANY, ET AL., Defendants. / Case No. 03-72773 Honorable Nancy G. Edmunds MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT; GRANTING IN PART AND DENYING IN PART DEFENDANT GENERAL STAR INDEMNITY COMPANY’S MOTION FOR PARTIAL SUMMARY JUDGMENT; AND GRANTING UNITED NATIONAL INSURANCE COMPANY’S MOTION FOR PARTIAL SUMMARY JUDGMENT This insurance dispute comes before the Court on the following motions: (1) Plaintiffs’ motion for partial summary judgment regarding Defendant insurance companies’ duty to defend and/or duty to indemnify for defense costs and/or damages arising from claims asserted against the City and Duchane in the underlying State and Federal Actions; (2) Defendant General Star Indemnity Company’s cross motion for summary judgment arguing that it owes no duty to indemnify for any of the underlying claims; and (3) Defendant Specialty National Insurance Company’s opposition to Plaintiffs’ motion for partial summary judgment likewise arguing that it owes no duty to indemnify; and (4) Defendant United National Insurance Company’s cross motion for summary judgment arguing that while there is a duty to indemnify defense costs for covered claims, there is no duty to defend, and, with the possible exception of the libel/slander/defamation claims asserted in the underlying State Action, it has no duty to indemnify the claims asserted in the underlying actions. For the reasons stated below, Plaintiffs motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART; Defendant General Star’s motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART; and Defendant United National’s motion for partial summary judgment is GRANTED. I. Background The underlying State Action asserts claims alleging substantive and due process violations, business libel and slander, detrimental reliance, breach of contract, breach of implied contract, and breach of implied covenant of good faith and fair dealing. The underlying Federal Action asserts claims alleging substantive and procedural due process violations, equal protection violations, and violations of the federal civil rights statute, 42 U.S.C. § 1983. Plaintiffs filed this action against the Defendant insurance companies in July 2003 seeking a judgment declaring that Defendants owe it a duty to defend and to indemnify in the underlying State and Federal Actions and asserting breach of contract claims. This Court has diversity jurisdiction. 2 A. Relevant Facts The following is a brief sketch of the facts relevant to the pending insurance issues. . 1/01 City tells Hillside it will need SALU . 2/28/01 SALU approved . 06/01 Administrative Enforcement Hearing re: noise/nuisance; Duchane takes matter under advisement . 8/06/01 Hillside files State Action seeking inter alia to have Duchane render decision . 8/07/01 State Court orders Duchane to make decision within 7 days . 8/15/01 Duchane decision - Freedom Hill is a nuisance because violating City noise ordinance . 1/4/02 City Planner notifies Hillside of SALU violations . 6/02 Preliminary Injunction hearing in Federal Court re: charity liquor licenses (case settled without prejudice) . 6/21/02 State Judge decides City cannot enforce noise ordinance if Freedom Hill noise within noise level stated in SALU (currently on appeal and case stayed) . 9/02 City Planner Birr recommends to Planning Commission to hold hearing on SALU revocation . 9/10/02 Federal Action filed (new claims include constitutional claims alleging retaliation and related to revocation of SALU) . 9/26/02 SALU revocation process begins . 12/16/02 SALU revocation process ends 3 B. Insurance Contracts 1. General Star Indemnity Policies (Claims-Made Policies) (a) Policy # 1YA602491B - Primary Insurance Public Officials and Employment Practices Liability Policy Policy Period: Named Insured: 9/1/00 to 9/1/01 City and officials (Duchane) (b) Policy #1YA602491C - Primary Insurance Public Officials and Employment Practices Liability Policy Policy Period Named Insured: 9/1/01 to 9/1/02 City and officials (Duchane) (c) Policy #1XG 900294B - Excess Insurance Public Officials Liability Policy Period: Follows Form of Underlying Insurance 9/1/00 to 9/1/01 (d) Policy #1XG 900294C - Public Officials Liability Policy Period: Follows Form Excess Insurance 9/1/01 to 9/1/02 2. Specialty National Insurance (Kemper) Policies (Claims-Made) (a) Policy No. 3 XZ 181159-00 - Primary Insurance Public Entity Commercial General Liability Public Officials Liability Coverage Policy Period: Policy Cancelled Named Insured: 9/1/02 to 9/1/03 May 14, 2003 (at City’s request) City and Officials (Duchane) (b) Policy No. 3XZ18115900 Policy Period: Named Insureds: Umbrella Policy - 9/1/02 to 9/1/03 City and Officials (Duchane) 4 3. United National Insurance Policies (a) Policy No. CP 65070 CGL (Section II) Public Officials Error & Omissions (Sec. IV) Policy Period: - Premier Public Entity Package - Occurrence Policy - Claims-Made Policy 9/1/99 to 9/1/02 (b) Policy No. XTP 58908 Excess 3d Pty Liability Insurance 9/1/99 to 9/1/02 $19 million in excess of $1 million (primary) Policy Period: Policy Limits: II. Summary Judgment Standard Summary judgment is appropriate when there are no genuine issues of material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The central inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). After adequate time for discovery and upon motion, Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to that party's case and on which that party bears the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In deciding a motion for summary judgment, the court must view the evidence and draw "all justifiable inferences" in favor of the non-moving party. Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The movant has an initial burden of showing "the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. Once this burden is met, the non-moving party must come forward with specific facts showing that there is a genuine issue for trial. Matsushita, 475 U.S. at 587. To demonstrate a 5 genuine issue, the non-moving party must present sufficient evidence upon which a jury could reasonably find for the non-movant; a "scintilla of evidence" is insufficient. See Liberty Lobby, 477 U.S. at 252. III. Analysis A. Michigan Contract Construction Principles The rules of construction for insurance contracts are the same as those for any other written contract. Comerica Bank v. Lexington Ins. Co., 3 F.3d 939, 942 (6th Cir. 1993). First, the court must determine whether the contract language at issue is ambiguous or unambiguous. Second, the court must construe the contract. The question of whether a contract is ambiguous is a question of law for the court. Mayer v. Auto-Owners Ins. Co., 338 N.W.2d 407, 409 (Mich. Ct. App. 1983). Construction of a contract, whether it is ambiguous or unambiguous, also is a question of law for the court. Fragner v. American Community Mut. Ins. Co., 502 N.W.2d 350, 352 (Mich. Ct. App. 1993). The function of the court is to determine and give effect to the parties' intent as discerned from the policy's language, looking at the policy as a whole. Auto-Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich. 1992). A contract which admits of but one interpretation is unambiguous. Fragner, 502 N.W.2d at 352. In contrast, a contract provision is ambiguous if it is capable of two or more constructions, both of which are reasonable. Petovello v. Murray, 362 N.W.2d 857, 858 (Mich. Ct. App. 1984). If a contract is clear and unambiguous, the court must enforce the contract as written, according to its plain meaning, Clevenger v. Allstate Ins. Co., 505 N.W.2d 553, 557 (Mich. 1993), without looking to extrinsic evidence. Upjohn Co. v. New Hampshire Ins. Co., 476 6 N.W.2d 392, 396 n. 6 (Mich. 1991). It is improper for the court to ignore the plain meaning of the policy's language in favor of a technical or strained construction. Arco Indus. Corp. v. Travelers Ins. Co., 730 F. Supp. 59, 66 (W.D. Mich. 1989). If the contract is ambiguous, the court must determine the intent of the parties. To do so, the court may look to extrinsic evidence such as custom and usage. Michigan Millers Mut. Ins. Co v. Bronson Plating Co., 496 N.W.2d 373, 379 (Mich. Ct. App. 1992), aff’d, 519 N.W.2d 864 (Mich. 1994). "Perhaps the most common of extrinsic aids to the construction of an insurance policy or other contract is usage and custom." Allstate Ins. Co v. Freeman, 443 N.W.2d 734, 760 (Mich. 1989) (Boyle, J.). In addition, certain rules of construction apply. Ambiguous terms in an insurance policy are construed in favor of the insured. Arco Indus. Corp. v. Am. Motorists Ins., 531 N.W.2d 168, 172 (Mich. 1995). Accord Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 786-87 (Mich. 2003) (holding that “[t]he rule of reasonable expectations clearly has no application to unambiguous contracts. That is, one’s alleged ‘reasonable expectations’ cannot supersede the clear language of a contract. . . . [Moreover], if a contract is ambiguous and the parties’ intent cannot be discerned from extrinsic evidence, the contract should be interpreted against the insurer. In other words, when its application is limited to ambiguous contracts, the rule of reasonable expectations is just a surrogate for the rule of construing against the drafter.”). It is the insurer's responsibility to clearly express limits on coverage. Auto Club Ins. Ass'n v. DeLaGarza, 444 N.W.2d 803, 806 (Mich. 1989). Thus, insurance exclusion clauses are construed strictly and narrowly. Auto-Owners v. Churchman, 489 N.W.2d at 435; Farm Bureau Mut. Ins. Co. v. Stark, 468 N.W.2d 498, 501 (Mich. 1991). 7 B. Cross Motions for Partial Summary Judgment 1. Duty to Defend - General Star and Specialty National Plaintiffs argue that Defendants General Star and Specialty National have a duty to defend. Defendants are providing a defense, and thus argue that this issue is moot and does not present a justiciable controversy. Plaintiffs disagree. They respond that, although Defendants are providing a defense, they are doing so under a reservation of rights and under the threat of seeking reimbursement for defense costs at a later date. In light of Defendants’ reservation of rights on the duty to defend and the threat to seek reimbursement for defense costs, Plaintiffs are correct. The issue is not moot and does present a justiciable controversy. See Northland Ins. Co. v. Stewart Title Guar. Co., 327 F.3d 448, 453-54 (6th Cir. 2003) (observing that while a declaratory judgment in an insurance dispute would not end the dispute, “it would settle the controversy regarding the scope of insurance coverage issued by the [insurer] to [insured] and whether [insurer] had a duty to defend the insureds.”). The Court now addresses the duty to defend issue. Under Michigan law, it is well-established that the insurance company's "duty to defend and [its] duty to provide coverage are not synonymous." Illinois Employers Ins. of Wausau v. Dragovich, 362 N.W.2d 767, 769 (Mich. Ct. App. 1984). "The duty to defend is broader than the duty to pay." Pattison v. Employers Reinsurance Corp., 900 F.2d 986, 989 (6th Cir. 1990). It extends to allegations which are groundless, false, or fraudulent; it extends to allegations that even arguably come within the policy coverage. Id. at 989-90. Accord Capitol Reproduction, Inc. v. Hartford Ins. Co., 800 F.2d 617, 620 (6th Cir. 1986). Michigan law further recognizes that when an insurer fails to fulfill its duty to defend, "it becomes liable for all foreseeable damages flowing from the breach," including amounts 8 paid in settlement. Capitol Reproduction, 800 F.2d at 624. An insurer's duty to defend is determined by examining the allegations of the underlying complaint against the insured. Detroit Edison Co. v. Michigan Mut. Ins. Co., 301 N.W.2d 832 (Mich. Ct. App. 1980). The duty, however, is not limited by the precise language of the complaint; the insurer is required to look behind the allegations "to analyze whether coverage is possible. In a case of doubt . . . , the doubt must be resolved in the insured's favor." Capitol Reproduction, 800 F.2d at 620 (quoting Western Cas. & Sur. Group v. Coloma Twp., 364 N.W.2d 367, 369 (Mich. Ct. App. 1985 . "An insurer has a duty to defend, despite theories of liability asserted against any insured which are not covered under the policy, if there are any theories of recovery that fall within the policy." Detroit Edison, 301 N.W.2d at 835 (emphasis added). Applying the above principles here, this Court concludes that Defendants General Star and Specialty National owe Plaintiffs a duty to defend. Upon review of the underlying State and Federal Action complaints and the respective policies, this Court concludes that the allegations arguably come within the subject policies’ coverage. 2. Duty to Indemnify Plaintiffs also argue that each Defendant owes it a duty to indemnify. Defendant General Star has filed a cross-motion for partial summary judgment arguing that it owes no such duty. Defendant United National has also filed a cross-motion for partial summary judgment arguing that, with the possible exception of the slander/libel/defamation claims asserted in the underlying State Action, it owes no duty to indemnify. Defendant Specialty National opposes Plaintiffs’ motion arguing that it too owes no duty to indemnify. The Court first addresses General Star’s no-indemnity arguments. 9 a. General Star Policies i. Coverage for Claims Asserted in the Underlying Federal Action General Star first argues that it has no obligation to indemnify any damages that may be awarded in the Federal Action for procedural and substantive due process violations because General Star’s policies do not apply to wrongful acts that occurred after Policy No. 1YA602491C’s policy period, which expired on September 1, 2002. General Star relies on the following policy language: To the extent that any terms or conditions of this Endorsement conflict with the terms and conditions of this policy or any other endorsement, it is understood and agreed that the terms and conditions of this endorsement control. Except as changed by this endorsement, all other terms and conditions of this policy remain in force. I. SECTION 1 - COVERAGE - INSURING AGREEMENT is deleted and replaced by the following: (A) We will pay those sums in excess of the retained limit, that the Insured becomes legally obligated to pay as damages resulting from claims, to which this insurance applies, against the insured by reason of “wrongful act(s)” rendered in discharging duties on behalf of the public entity named in the Declarations. . . . This insurance does not apply to “wrongful act(s)” which occurred before the Retroactive Date, if any shown in the Declarations or which occur after the policy period. We will have the right and duty to defend any “suit” seeking those damages.” But: * * * (D) This insurance applies only if a claim for damages because of the “wrongful act” is first made against any insured during the policy period. (1) (2) A claim by a person or organization seeking damages will be deemed to have been made when notice of such claim is received and recorded by any insured or by us, whichever comes first. All claims for damages causing loss to the same person or organization as a result of “wrongful act(s)” will be deemed to have 10 been made at the time the first of those claims is made against any insured. (Gen. Star Mot., Ex. 1, Self-Insured Retention Endorsement, Section 1.(D), GSI-PO-SIR at p. 1.) (emphasis added). PUBLIC OFFICIAL WRONGFUL ACT(S) are defined as: any alleged or actual breach of duty, or violation of any federal, state or local civil rights, by an insured while acting within the scope of his/her duties as a public official for the public entity named in the Declarations. PUBLIC OFFICIAL WRONGFUL ACT does not include any EMPLOYMENT WRONGFUL ACTS. (General Star Policy, Section VI - Definitions, ¶ 5, p. 12 of 12.) General Star further argues that, although the Basic Extended Reporting Period under its second policy extends coverage for claims made after that policy’s expiration date if filed within 60 days, coverage is not available if coverage is provided under any subsequent insurance purchased by Plaintiffs. (Gen. Star Reply at 2.) General Star thus argues that there is no coverage under its second policy if coverage for claims asserted in the Federal Action are covered by Specialty National’s policy. (Id.) General Star’s primary policies are “claims made” policies. This fact impacts on the Court’s interpretation of policy language. Accordingly, before addressing General Star’s no-coverage arguments, the Court discusses the difference between claims made and occurrence policies. “Coverage under a ‘claims made’ policy is available for wrongful acts occurring prior to the policy period, as long as the potential claim was discovered and noticed during the period.” Sigma Fin. v. Am. Int’l Specialty Lines Ins. Co., 200 F. Supp.2d 710, 716 (E.D. Mich. 2002). Occurrence policies insure against the occurrence itself. Thus, coverage attaches when the occurrence happens “even though the claim may not be made for some 11 time thereafter. While in the ‘claims made’ policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.” Id. (internal quotes and citations omitted). “Thus, a claims made policy, as it name suggests, covers claims (or occurrences which reasonably may give rise to a claim) discovered by the insured during the policy period, assuming sufficient notice is given to the insurer.” Id. (footnote omitted.) General Star reasons that, because Policy No. 1YA602491C expired on 9/1/02, it cannot provide coverage for wrongful acts that occurred after that date; i.e., everything alleged in the Federal Action complaint regarding the SALU revocation hearing and result. General Star’s argument is rejected. General Star erroneously asserts that “the Court’s finding of liability against the City of Sterling Heights and Mr. Duchane was expressly predicated on conduct which indisputably arose after the expiration” of Policy No. 1YA602491C. (Gen. Star Br. at 13.) Even if all of the City’s procedural due process violations in connection with the SALU revocation hearing flowed from wrongful acts that occurred after 9/1/02, General Star cannot avoid coverage for wrongful acts that occurred before 9/1/02. Many of the wrongful acts giving rise to the Court’s determination that Hillside’s substantive property and liberty interests were violated took place before expiration of the 9/1/02 policy period. For example: (1) on June 12, 2001, just five days after the beginning of the concert season, Duchane informed Hillside that he would conduct an Administrative Enforcement Hearing to hear evidence as to whether Hillside constituted a nuisance, and that he would use the information obtained from the hearing to determine “the advisability of recommending 12 various formal actions, such as reconsideration of the Special Land Use” (Specialty National’s Resp., Appendix, Ex. 5); (2) during the June 20, 2001 administrative hearing, the City Attorney advised that the Planning Commission could review and determine whether the SALU should be revoked (id., Ex. 6 at 6); (3) on July 17, 2001, the City approved a motion directing the City’s attorney to outline possible legal actions to close Hillside (id., Ex. 7); (4) on August 7, 2001, the City’s attorney issued a letter advising the City Council that one of its options was to terminate the SALU (id., Ex. 8); (5) in early January 2002, Sterling Heights City Planner Norman Birr notified Hillside of the alleged SALU violations later addressed in the revocation hearing (evidence that the City was gearing up for revocation); (6) following the State Court’s order issued on June 21, 2002, requiring the City to cease enforcing noise ordinances when Hillside was operating within the SALU, the City Planner began to look for some violation of the SALU (Specialty National Req. for Judicial Notice, Ex. E at 184-185); (7) in July or August 2002, Duchane informed City Councilman Rice that he wanted to revoke the SALU and had directed the City Planner to formalize the process for revocation (Specialty National Resp., Appendix, Ex. 10 at 56-57); and (8) the City Planner also testified that prior to September 24, 2002, Duchane advised him that the City had collected sufficient information to consider revoking Hillside’s SALU (id., Ex. 9 at 193-94). 13 That the culmination of these wrongful acts; i.e., the actual revocation of Hillside’s SALU, took place after 9/1/02 does not serve to absolve General Star of the duty to indemnify for wrongful acts occurring before 9/1/02. General Star does not provide the Court with any policy language or legal authority that supports its all-or-nothing argument. ii. Coverage Under General Star Policy No. 1YA602491C (9/1/01 to 9/1/02 Policy Period) Construing the contract as a whole, General Star argues that coverage, if any, arises under General Star Policy No. 1YA602491B (policy period 9/1/00 to 9/1/01) and not Policy No. 1YA602491C (policy period 9/1/01 to 9/1/02). It reasons that, because all the claims in the State and Federal Actions are claims asserting losses to the same person or organization as a result of wrongful acts, they are all deemed under United’s policy to have been made at the time the first of them was made. (SIR Endorsement §1.(D)(2).)1 The first claim was made in August 2001 when the State Action was filed. General Star further argues that, because all claims asserted in the Federal and State Actions are deemed to have been first made during the policy period of Policy No. 1YA602491B, which has a term that expired before the inception date of Policy No. 1The deemer clause provides that: (2) All claims for damages causing loss to the same person or organization as a result of “wrongful act(s)” will be deemed to have been made at the time the first of those claims is made against any insured. (General Star Mot. Ex. 1(B), Policy No. 1YA602491C, Self-Insured Retention Endorsement, § 1.(D)(2), GSI-PO-SIR at p. 1 of 5.) (emphasis added). 14 1YA602491C, Exclusion (h) applies and limits coverage to that available under Policy 1YA602491B.2 This Court agrees with General Star. Plaintiffs’ contrary arguments ignore the plain language of the General Star policies. Their arguments that the State and Federal Actions state several claims against Duchane and the City miss the point. There is no dispute that Plaintiffs were aware of and gave notice of circumstances that might give rise to claims against Duchane and the City during the 9/1/00 to 9/1/01 policy period of General Star Policy No. 1YA602491B. In light of the deemer clause in General Star’s later policy, covering the period 9/1/01 to 9/1/02, all claims asserted by the Hillside Plaintiffs are to be deemed first made during the earlier 9/1/00 to 9/1/01 policy period. Because Duchane and the City are entitled to indemnity under the earlier policy period, Exclusion (h) applies to preclude coverage under the latter policy period. See Sigma Fin. Corp., 200 F. Supp.2d at 717-723; Comerica Bank v. Lexington Ins. Co., 3 F.3d 939 (6th Cir. 1993); Farmington Cas. Co. v. United Educators Ins. Risk Retention Group, 117 F. Supp.2d 1022, 1025-26 (D. Colo. 1999) (reaching a similar conclusion when interpreting similar contract language despite the fact that a second lawsuit referenced “ongoing discriminatory acts” that ultimately led to the challenged employment termination). Moreover, because Exclusion (h) applies, this Court need not consider Plaintiffs’ arguments concerning the correct 2Exclusion (h) provides that the “insurance does not apply to any CLAIM made against the insured” “[f]or which the insured is entitled to indemnity or payment by reason of having given notice of any circumstances which might give rise to a CLAIM under any policy or policies the term of which has expired prior to the inception date of this policy.” (Gen. Star Mot., Ex. 1(B), Policy No. 1YA602491C, § I, Coverage A Public Officials Liability, ¶ 2.h. at p. 2 of 12.) (emphasis added). 15 interpretation of § III - Limits of Liability, ¶ 3, providing that “CLAIMS based on and arising out of the same act or interrelated acts of one or more Insureds shall be considered to be a single CLAIM.” Plaintiffs’ reliance on cases discussing interpretation of “occurrence” policies is also misplaced. (Pls.’ Reply at 12-14.) The policies at issue here are claims- made policies; not occurrence policies. In sum, General Star is liable for indemnity coverage under its primary Policy No. 1YA602491B and under its excess Policy No. 1XG900294B, which General Star admits follows form with the primary policy in effect for the 9/1/00 to 9/1/01 policy period. iii. Coverage for “Employment Wrongful Acts” General Star argues that the libel, slander, and/or defamation claims asserted against the City and Duchane in the underlying State Action do not fall within their policy’s definition of “employment wrongful acts.” Plaintiffs argue otherwise. “Employment Wrongful Act(s)” are defined under the policy as: actions involving refusal to employ, termination of employment, false arrest, false imprisonment, coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, libel, slander, invasion of privacy, wrongful eviction, malicious prosecution, abuse of process, discrimination or other employment-related practices, policies, acts or omissions. EMPLOYMENT WRONGFUL ACT(S) does not include any PUBLIC OFFICIAL WRONGFUL ACT(S). (General Star Mot., Ex. A, Policy No. 1YA602491B, §VI.2, at p. 12 of 12.) (emphasis added). General Star first argues that coverage for wrongful acts under the Public Officials Liability section of its policies (Coverage A) cannot, by definition, also provide coverage for wrongful acts under the Employment Practices Liability section (Coverage B). General Star correctly interprets policy language providing that “EMPLOYMENT PUBLIC ACT(S) does 16 not include any PUBLIC OFFICIAL WRONGFUL ACT(S).” (General Star Appendix, Ex. A, General Star Policy No. 1YA602491B, § VI.2, at p. 12 of 12.)3 The fact that a public official’s civil rights violations are excluded from the definition of “employment wrongful acts” does not support General Star’s argument that the slander, libel and defamation claims asserted against Duchane in the underlying State Action cannot fall within this definition. General Star next argues that the definition includes only employment-related conduct. This argument ignores the fact that, in the underlying State Action, it is alleged that Duchane committed the slander, libel and/or defamation while employed as the City’s Manager. That fact distinguishes this case from the facts presented in Claredon Nat’l Ins. Co. v. City of York, 290 F. Supp.2d 500, 506 (M.D. Pa. 2003) (observing that “none of the defendants in the underlying action were ever employees of the City” and thus concluding that the insurer was correct in presuming that “the employment liability practices coverage was not applicable”). The Court is not persuaded that the underlying libel and slander claims fall outside this definition. d. Coverage for Equal Protection Claims Alleged in the Federal Action In the Federal Action, it is alleged that the City and Duchane engaged in conduct intended to punish the Hillside Plaintiffs for filing the State Action and for insisting on their rights under the SALU. (Fed. Ct. Am. Compl. at ¶ 54.) This Court denied the Hillside 3General Star’s primary policies define Public Official Wrongful Acts as “any alleged or actual breach of duty, or violation of any federal, state or local civil rights, by an insured while acting within the scope of his/her duties as a public official for the public entity named in the Declarations.” (General Star Appendix, Ex. A, General Star Policy No. 1YA602491B, § VI.4, at p. 12 of 12.) This definition likewise excludes acts defined as employment wrongful acts. (Id.) 17 Plaintiffs’ motion for summary judgment on their equal protection retaliation claims finding questions of fact as to the City’s and Mr. Duchane’s motivation existed for trial. (10/30/03 Order Granting in part and Denying in part Pls.’ mot. for summary judgment, at 24.) It also denied Duchane’s motion for summary judgment on this same claim. (12/22/03 Order Granting in part and Denying in part Defs.’ mot. for summary judgment, at 23.) General Star argues here that there is no indemnity coverage for damages arising from the Hillside Plaintiffs’ equal protection claims because its policy excludes coverage for damage claims “arising out of the willful violation of any federal, state, or local statute, ordinance, rule or regulation committed by or with the knowledge and consent of any insured. . . .” (General Star Policy No. 1YA602491B, § I, Coverage A (Public Officials Liability), ¶¶ 2.c, p. 2 of 12.) To succeed on the underlying equal protection claim, the Hillside Plaintiffs must prove that Duchane’s and the City’s challenged conduct was motivated, at least in part, as a response to the exercise of their constitutional rights. Bloch v. Ribar, 156 F.3d 673, 681-82 (6th Cir. 1998). Despite its contention that Policy Exclusion (c) “is not triggered on an ‘intentional’ act, but upon a ‘willful violation’ of a federal statute” (Reply at 6), General Star nonetheless argues that the Hillside Plaintiffs’ proof of intentional retaliation will likewise prove a willful violation of the Hillside Plaintiffs’ civil rights. General Star’s reliance on Claredon to support this argument is misplaced. In Claredon, the United States District Court for the Middle District of Pennsylvania concluded that a policy exclusion for claims “[a]rising out of the deliberate violation” of any federal statute preclude claims alleging a “knowing and intentional deprivation” of civil rights. Claredon, 290 F. Supp.2d at 506-07. There is no similar allegation in the underlying Federal Action. General 18 Star has not presented the Court with authority supporting its position and thus is not entitled to summary judgment on this exclusion issue. iv. Coverage for Damages Re: Diminution of Value or Loss of Use of Hillside’s Property General Star further argues that it owes no duty to indemnify the City and Duchane for any damages relating to the diminution in value or loss of use of Hillside’s property. It supports this argument with policy language excluding claims made against the insured: 2. Exclusions. This insurance does not apply to any CLAIM made against the insured: * * * d. For . . . damage to or destruction of any property, including diminution of value or loss of use. (General Star Policy No. No. 1YA602491B, § I, Coverage A (Public Officials Liability), ¶ 2.d, p. 2 of 12; Coverage B (Employment Practices Liability), ¶ 2.d, p. 4 of 12.) General Star argues that the bulk of the Hillside Plaintiffs’ damages relate to alleged economic lost profits arising from their inability to operate Freedom Hill in an “unfettered manner” and thus are damages relating to the “loss of use of the property” that is not covered under the policy. Plaintiffs respond that the Hillside Plaintiffs are seeking economic damages resulting from constitutional harms; i.e., deprivation of and/or interference with constitutionally protected property and liberty rights, that do not fall within the policy exclusion for damage to or destruction of physical property. Plaintiffs’ arguments find support in Michigan law, which governs interpretation of the subject insurance contracts. See Krueger Seed Farms, Inc. v. Szlarczyk, No. 200249, 200250, 1999 WL 33453867 (Mich. Ct. App. Mar. 9, 1999) 19 (construing a substantially similar property damage exclusion in a commercial liability policy and holding that, because the economic damages (lost profits) at issue did not flow from damage to physical property, the property damage exclusion in the insurance policy did not preclude coverage). Cf Fitch v. State Farm Fire & Cas. Co., 536 N.W.2d 273 (Mich. Ct. App. 1995) (holding that coverage for property damage in a homeowner’s policy was not available because the economic damages at issue did not involve damage to or destruction of tangible, physical property). General Star has not met its burden by showing that Exclusion (c) precludes the Hillside Plaintiffs’ damage claims. b. Specialty National Insurance Policies Plaintiffs argue that Specialty National owes a duty to indemnify it for damages arising from claims asserted during its policy period. Specialty raises several arguments why coverage is not available. Because questions of fact exist regarding Specialty National’s indemnity coverage, Plaintiffs’ motion for partial summary judgment on this issue is denied.4 Specialty National issued Policy No. 3 XZ 181159-00 to the City of Sterling Heights, covering the period of September 1, 2002 to September 1, 2003. The policy contains commercial general liability, public officials errors and omissions liability, and umbrella coverage. The policy was cancelled at the request of the City of Sterling Heights, effective May 14, 2003. (Specialty National Resp., Cowan Aff. ¶¶ 3-4.) Specialty National raises several arguments why it owes no duty to indemnify Plaintiffs under this insurance contract. i. Application of the Fortuity/Known Loss Doctrine 4Because Plaintiffs’ motion for partial summary judgment is being denied concerning primary coverage under Specialty National’s policy, it is premature for this Court to address Specialty National’s arguments concerning application of its umbrella policy. 20 Specialty National first argues that there is no duty to indemnify because, when the City purchased the subject policy, the conduct which ultimately became the subject of the Federal Action had been ongoing since 2000. Accordingly, Specialty National argues, Plaintiffs claims are precluded from coverage under the known loss doctrine. As this Court has previously observed, “[t]he known loss doctrine is a common law concept that derives from the fundamental requirement of fortuity in insurance law. Its basic premise is that insurance policies are intended to protect insureds against risks of loss; not losses that have already taken place or are substantially certain to occur. Accordingly, the doctrine is properly invoked when the insured ‘knows’ about the claimed loss before the policy is purchased. The loss in progress doctrine, as a variant of the known loss doctrine, has its roots in the prevention of fraud. Because insurance policies . . . are designed to insure against fortuities, a fraud is worked when they are misused to insure a certainty.” Aetna Cas. & Sur. Co. v. Dow Chemical Co., 10 F. Supp.2d 771, 789 (E.D. Mich. 1998) (internal quotes and citations omitted). These fortuity-based doctrines “must be judged using a subjective standard because requiring this knowledge element best serves the overall principle of insurance law. A subjective standard also protects against the misuse of hindsight to avoid indemnification coverage.” Id. (internal quotes and citations omitted). The crucial issue is whether the insured was aware of an immediate threat of the injury for which it was ultimately held responsible and for which it now seeks coverage, not the insured’s awareness of its legal liability for that injury. Id. at 790. Despite Plaintiffs’ arguments to the contrary, this Court continues to predict that the Michigan Supreme Court would adopt the known loss doctrine as described above. See Aetna, 10 F. Supp.2d at 788-790. 21 Specialty National argues that the City and Duchane were subjectively aware of the injury for which they were ultimately held responsible in the Federal Action. It argues that the City’s and Duchane’s continuing misconduct that occurred during the Specialty National policy period was simply part of the ongoing scheme that began before the policy’s inception date (9/1/02). Specialty National contends that the notice of the Administrative Enforcement Hearing, and the hearing itself, demonstrate that Duchane and the City formulated a plan to revoke the SALU as early as June of 2001. It further argues that, in July 2001, the City’s attorney advised the City Council of possible legal actions to close Hillside; and in August 2001, Duchane directed the City Planner to pull Hillside’s previously approved site plan and other submissions and to look for problems and possible legal issues. Moreover, Specialty National asserts, in July or August of 2002, Duchane informed Councilman Rice of his desire and plan to revoke the SALU and further informed Councilman Rice that he had already directed the City Planner to move ahead to have the Planning Commission consider revoking the SALU. Specialty National argues that, because the entire scheme to put Hillside out of business, culminating in the revocation of the SALU, was already in progress, having begun long before the date the policy took effect, and because the City and Duchane knew of the risk of Hillside’s claims prior to the policy period, there is no indemnity coverage. Plaintiffs respond that Specialty National has not met its burden of establishing that no genuine issue of material fact exists concerning whether the known loss doctrine should apply to exclude coverage here. This Court agrees with Plaintiffs. There is a subjective component to the known loss doctrine that typically precludes summary judgment. Plaintiffs present evidence refuting Specialty National’s argument that at the time the policy 22 was purchased Plaintiffs either knew or were aware of the threat of litigation over civil rights violations flowing from SALU revocation proceedings that did not take place until after that policy was purchased. ii. Claims First Made During Specialty National’s Policy Period Specialty next argues that, although the Federal Action was filed during its policy period, the procedural and substantive SALU-related due process claims asserted in that Action are not claims first made during the policy period.5 Rather, Specialty National argues, these claims were first made when the State Action was filed in August 2001 (more than a year before Specialty’s policy was issued) because: (1) the SALU revocation in December 2002 (during its policy period) was merely the culmination of a pattern of harassing behavior that began with conduct described in the State Action; and (2) before Specialty National’s policy took effect, Duchane and the City were aware of circumstances that could reasonably be expected to give rise to these claims. Plaintiffs argue otherwise. The Court agrees with Plaintiffs. First, Specialty National does not point to policy language deeming all claims for damages causing loss to the same person or organization as being made when the first of those claims is made. Accordingly, arguments that worked for General Star do not work here. Claims-made policies like Specialty National’s provide 5The policy provides that CLAIM means: written demand from any party intending to hold an INSURED responsible for damages resulting from a WRONGFUL ACT covered by this POLICY. CLAIM also means an INSURED’s knowledge of circumstances that could reasonably be expected to give rise to such notice. (Cowan Aff., Ex. A at Pub. Off. Liab., § I, “Definitions,” at 1 of 11.) (emphasis added). 23 coverage for claims that are actually made during the policy period. Unlike occurrence policies, the date the claim is made matters more than the dates wrongful acts giving rise to that claim occurred. Westport Ins. Corp. v. Atchley, Russell, Waldrop & Hlavinka, L.L.P., 267 F. Supp.2d 601 (E.D. Tex. 2003). Second, the argument that Plaintiffs could reasonably expect future litigation from the Hillside Plaintiffs for continued behavior of the type described in the State Action does not necessarily require the conclusion that Plaintiffs could reasonably expect the SALU revocation-related claims asserted in the Federal Action. The decisions Specialty National relies on to support its arguments are distinguishable for this very reason. See Farmington, 117 F. Supp. 2d at 1026 (holding that second lawsuit against insured for wrongful termination, filed during policy period of “claims made” policy, was part of ongoing discriminatory acts alleged in first lawsuit filed before inception of policy, and therefor, the second lawsuit should not be treated as a new and independent action giving rise to a new claim during the policy period); Ameriwood Indus. Int’l Corp. v. Am. Cas. Co. of Reading, 840 F. Supp. 1143, 1153 (W.D. Mich. 1993) (holding that insurer was not required to indemnify insured for claims made in second lawsuit filed during policy period of “claims made” insurance policy because the latter suit “[arose] out of the facts or circumstances underlying or alleged in” the prior suit). Despite Specialty National’s argument to the contrary, the revocation of Hillside’s SALU in December 2002, during its policy period, is not like the continued discrimination and termination of the employee in Farmington. Whether Plaintiffs had knowledge of circumstances that could reasonably be expected to give rise to the SALU revocation-related claims asserted in the Federal Action remains a disputed issue of material fact. 24 iii. Known Loss Policy Exclusion Specialty National also argues that the following exclusion precludes coverage for Public Officials Liability Coverage: Exclusion - Knowledge of Wrongful Acts Prior to the Policy Period The following EXCLUSION is added to SECTION II - COVERAGES, EXCLUSIONS: This insurance does not apply to and WE shall not be obligated either to make any payment or to defend any SUIT in connection with any CLAIM or SUIT made against the INSURED arising out of: 1. Any WRONGFUL ACT(S) that takes place prior to the POLICY PERIOD if the INSURED had knowledge of circumstances which could reasonably be expected to give rise to a CLAIM; (Specialty National Mot., Cowan Aff., Ex. A at Endorsement to Public Officials Liability Coverage, Exclusion - Knowledge of Wrongful Acts Prior to the Policy Period (POF 70a).) (emphasis added). Specialty National once again argues that Plaintiffs had knowledge of circumstances which could reasonably be expected to give rise to the SALU revocation- related claims asserted in the Federal Action. Plaintiffs once again respond that disputed questions of material fact remain on this issue. The Court agrees. Plaintiffs persuasively argue that, although the State and Federal Actions have some facts in common, the Federal Action alleges SALU related wrongful acts that occurred during Specialty National’s policy period, and Plaintiffs asserted a claim for those wrongful acts during that policy period. iv. The Bad Faith Exclusion 25 Specialty National also argues that its policy excludes public official liability coverage for claims or suits against the insured that are “[b]rought about or contributed to by fraud, dishonesty, or bad faith of an Insured.” (Cowan Aff., Ex. A at Pub. Off. Liab., § II, “Exclusions,” 2, at 4 of 11.) The Michigan Supreme Court has observed that “bad faith” defines “a state of mind.” Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 393 N.W.2d 161, 164 (Mich. 1986). In Commercial Union, where an excess insurer sued the primary insurer for failing to settle a claim in good faith, the Court defined “bad faith” as “arbitrary, reckless, indifferent, or intentional disregard of the interests of the person owed a duty.” Id. Specialty National wants to use that definition here to exclude public officials liability coverage. It argues that Duchane’s conduct, allegedly assuring City Council members that “[w]e will put [Hillside] out of business,” and instructing the City Planner to look for reasons allowing the City to revoke Hillside’s SALU, constitutes bad faith. Plaintiffs respond that disputed issues of material fact exist regarding Duchane’s state of mind. This Court agrees. v. General Liability Coverage for “Personal Injury” Specialty National argues that there has been no “invasion of the right of private occupancy” and thus no “personal injury” as defined under the policy. The policy defines coverage for “personal injury” as including violations of federal civil rights statutes. (Cowan Aff., Ex. A., at CGL, § V, ¶¶ 10.i.) The underlying Federal Action alleges violations of the federal civil rights statute. Accordingly, Specialty National’s argument is rejected. c. United National Insurance Policies i. Duty to Indemnify for Defense Costs 26 United National’s Policy No. CP 65070 covers the period from September 1, 1999 to September 1, 2002 and provides for occurrence-based comprehensive general liability (CGL) coverage (with a $100,000 ultimate net loss Self-Insured Retention (SIR) and then $900,000 ultimate net loss of Specific Excess Coverage) and claims-made public officials errors and omissions coverage (with a $100,000 ultimate net loss Self-Insured Retention and no Specific Excess Coverage). (Pls.’ Mot., Ex. E, United Policy at pp. 3, 5.) United’s policy also provides Multiple Lines Loss Protection “when two (2) or more coverage sections apply to a covered loss” with limits of $900,000 ultimate net loss in excess of a $100,000 ultimate net loss SIR per covered loss. (Id. at 6.) United has informed the City that, because of the “Multiple Lines Loss” provisions of the policy, the City will be liable for a single $100,000 SIR instead of a $100,000 SIR under both the CGL and public officials errors and omissions coverage sections. (United Resp., Ex. E.) Plaintiffs’ motion for partial summary judgment argues that United National owes it a duty to indemnify or reimburse defense costs incurred in excess of the $100,000 SIR as provided in the policy because claims asserted in the State and Federal Actions are for covered occurrences and defense costs exceed the SIR. Both Plaintiffs and United agree that United does not owe a duty to defend. Rather, their dispute centers on United’s duty to indemnify for defense costs. As to that duty, United National admits that, if coverage applies, it owes such a duty. The policy’s definition of “Ultimate Net Loss” includes “expenses of lawyers . . . for litigation, settlement, . . . of claims and suits which are paid as a consequence of any occurrence covered hereunder.” (Id. at 17 (emphasis added).) United further argues that, pursuant to this policy language, its duty to indemnify for defense costs is triggered only if and when 27 its liability for excess coverage has been established. This Court agrees with United. Michigan courts have observed that a contractual duty to defend is broader than a contractual duty to indemnify for defense costs. Busch v. Holmes, 662 N.W.2d 64, 67 (Mich. Ct. App. 2003) (citing cases). The Busch court, construing language substantially similar to that at issue here, concluded that the insurer owed a more narrow duty-to- indemnify for defense costs. Id. Accordingly, the court concluded, “the doctrine that an insurer has a duty to defend arguable claims is not involved.” Id. Likewise, because United’s policy provides for indemnification of defense costs paid as a consequence of a covered occurrence, the duty to indemnify is triggered once coverage is established.6 ii. Covered Claims United also argues that, with the possible exception of the slander/libel/defamation claims asserted in the underlying State Action, there is no coverage for the claims asserted in the State and Federal Actions and thus argues that these other coverage claims should be dismissed.7 Specifically, United argues that, as to the CGL coverage, only the libel/slander/defamation claims asserted in the State Action fall within the definition of a covered “Personal Injury.” United further argues that, as to the Public Officials coverage, although civil rights violations fall within the definition of covered “Wrongful Act(s)”, there 6Because the duty to indemnify defense costs applies only to “covered” losses and coverage questions remain unanswered, it is premature for this Court to decide issues raised concerning the apportionment of defense costs. 7In the State Action, the alleged defamatory statements were made on June 21, 2001, August 12, 2001, August 15, 2001, November 28, 2001, and December 27, 2001. (State Action 2nd Am. Compl. at ¶¶ 65a-f.) It is further alleged that the City and Duchane acted “negligently and knowingly. . . in the publication of these false and defamatory statements.” (Id. at ¶ 68.) 28 is no excess coverage for such wrongful acts under the policy. Accordingly, United argues, its Public Officials coverage is equal to the City’s $100,000 SIR. Plaintiffs do not dispute United’s interpretation of its Public Officials coverage. Plaintiffs do, however, argue that there is also coverage for the civil rights claims asserted in the State and Federal Actions under the CGL definitions of covered “Property Damage” and/or “Personal Injury.” Plaintiffs have the burden of proving that a loss falls within the coverage provisions of an insurance policy. See Harrow Products, Inc. v. Liberty Mut. Ins. Co., 64 F.3d 1015, 1020 (6th Cir. 1995). As discussed below, this Court concludes that Plaintiffs have not met that burden with respect to CGL coverage for the underlying civil rights claims. (a) The Underlying Claims Do Not Allege “Property Damage” Plaintiffs first argue that the underlying civil rights claims fall within the policy’s definition for covered “Property Damage” because they allege that, as a result of Plaintiffs’ civil rights violations, the Hillside Plaintiffs lost the use of their property. This argument ignores the plain language of United’s policy. United’s policy unambiguously defines “Property Damage” as “direct damage to or destruction or loss of property, including all resulting loss of use of property, excluding, however, damage to the PROPERTY OF THE ASSURED.” (United Mot., Ex. D, Policy at p. 16.) Given its plain meaning, Property Damage includes claims for: (1) direct damage to property, including all resulting loss of use of that property; (2) destruction of property, including all resulting loss of use of that property; and (3) loss of property, including all resulting loss of use of that property. It is clear from this definition that “loss of use” is 29 covered so long as it is the result of direct damage to, destruction of, or the loss of physical property. The underlying civil rights claims do not allege any such damage to, destruction of, or loss of physical property and thus do not fall within this definition. (b) The Underlying Civil Rights Claims Do Not Allege “Personal Injuries” Plaintiffs next argue that the underlying civil rights claims fall within the definition of a covered “Physical Injury” because they allege “Infringement of . . . Property,” “Wrongful Entry,” “Wrongful Eviction,” and “Malicious Prosecution.” Plaintiffs are mistaken. United’s policy defines “Personal Injury” as: PERSONAL INJURY means any injury other than BODILY INJURY or PROPERTY DAMAGE arising out of the following: Mental Anguish, Shock, Sickness, Disease, Disability or Death not arising from Physical Injury. It also means Wrongful Entry, Wrongful Eviction, Wrongful Detention, Malicious Prosecution, Humiliation, Misappropriation of Advertising Ideas, Invasion of Rights of Privacy, Libel, Slander or Defamation of Character, Piracy and any Infringement of Copyright or of Property, Erroneous Service of Civil Papers, Assault and Disparagement of Property. . . . (United Mot., Ex. D, Policy at p. 16.) Plaintiffs argument that the underlying civil rights claims constitute “infringement of . . . property” within the meaning of “personal injury” is not persuasive. The Colorado Court of Appeals recently interpreted the phrase “piracy and infringement of copyright or of property” within the context of the definition of “personal injury” and construed the “infringement of property” phrase to include claims alleging the infringement of intellectual property rights like a patent or trademark, not claims alleging the breach of a tenant’s leasehold interest in real property. City of Arvada v. Colorado Intergovernmental Risk Sharing Agency, 988 P.2d 184, 187 (Colo. Ct. App. 1999), aff’d, 19 P.3d 10 (Colo. 2001). 30 This Court agrees with that interpretation. The underlying civil rights claims at issue here do not involve the infringement of intellectual property rights. Defining “infringement,” as Plaintiffs urge; i.e., as “an encroachment or trespass on a right or privilege,” Webster’s Ninth New Collegiate Dictionary at 621 (1991), does nothing to advance Plaintiffs’ argument. Furthermore, Plaintiffs’ reliance on decisions construing different contract language; i.e., “invasion of the right of private occupancy,” is misplaced. Plaintiffs’ arguments that these civil rights claims constitute claims of “wrongful entry” or “wrongful eviction” within the definition of Personal Injury similarly fail. There are no allegations in the underlying complaints that the City or Duchane wrongfully entered the Freedom Hill property or wrongfully evicted the Hillside Plaintiffs from that property. The underlying claims acknowledge that the Hillside Plaintiffs have a landlord/tenant relationship with Macomb County, not the City of Sterling Heights. Finally, Plaintiffs argue that the underlying equal protection civil rights claim in the Federal Action “potentially” fits the elements of a “malicious prosecution” claim under Michigan law8 and thus falls within the definition of “Personal Injury.” Plaintiffs misconstrue the Hillside Plaintiffs’ equal protection claims which allege that the City and Duchane selectively enforced the laws so as to punish or retaliate against the Hillside Plaintiffs for exercising their constitutional rights when they filed the State Action and insisted on their 8“To establish a prima facie case of malicious prosecution, [a Michigan] plaintiff must prove 1) that there was a civil or criminal proceeding instituted or continued against the plaintiff, 2) that the termination of the proceeding was in favor of the accused, 3) that there was an absence of probable cause for the proceeding, and 4) malice or a primary purpose other than that of bringing the offender to justice.” McGuffin v. Sturdevant, No. 240661, 2003 WL 22301054, *2 (Mich. Ct. App. Oct. 7, 2003) (citing MCL 600.2907; Rivers v. Ex- Cell-O Corp., 100 Mich. App. 824, 832, 300 N.W.2d 420 (Mich. Ct. App. 1980 . 31 rights under the SALU. (Federal Action Am. Compl. at ¶¶ 54, 101.) The underlying Federal Action does not allege a claim for malicious prosecution, and Plaintiffs are not entitled to coverage for claims that could have but were not asserted in the underlying action. To hold otherwise, would do violence to the plain language of United’s policy. Furthermore, because the underlying Federal Action alleges a civil rights claim that falls within the definition of covered “wrongful acts” under United’s Public Officials coverage section, (United Policy at 17), it is expressly excluded from coverage under CGL Exclusion (h). (United Policy at 27.)9 (c) Coverage for Remaining Contract-Related Claims Finally, United argues that it has no duty to indemnify for the contract-related claims alleged in the underlying State Action because its policy does not provide for any such coverage. Under its comprehensive general liability coverage provisions, United’s policy provides that it will indemnify for all sums the assured is “legally obligated to pay by reason of liability imposed” on the assured “for damage” as defined by the term “ULTIMATE NET LOSS, on account of PERSONAL INJURY, BODILY INJURY . . . and/or PROPERTY DAMAGE . . . arising out of any OCCURRENCE . . . happening during the PERIOD OF INSURANCE.” (United Policy at 26.) Plaintiffs do not argue that the policy definitions of “personal injury,” “bodily injury,” “property damage,” or “occurrence” include any of the contract-related claims asserted in the underlying State Action. As observed by the Sixth Circuit Court of Appeals in Lenning v. Commercial Union Ins. Co., “courts have held that a breach of contract claim cannot constitute an ‘occurrence’ under liability policies triggered 9In light of this ruling, it is not necessary for the Court to address United’s arguments that additional exclusions apply to preclude coverage of this civil rights claim. 32 by an accident or an occurrence.” 260 F.3d 574, 582-83 (6th Cir. 2001) (citing cases). Contrary to Plaintiffs’ arguments, United is not arguing that a policy exclusion applies to preclude coverage. Rather, United is arguing that coverage is not available under its policy. Plaintiffs have the burden of proving that a loss falls within the coverage provisions of an insurance policy. See Harrow Products, 64 F.3d at 1020. Plaintiffs have not met that burden here with respect to CGL coverage for the underlying contract-related claims asserted in the State Action. Accordingly, United is entitled to summary judgment on this issue, and Plaintiffs claims alleging indemnity coverage for the underlying contract-related claims asserted in the State Action are hereby dismissed. IV. Conclusion For the above stated reasons, Plaintiffs motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART; Defendant General Star’s motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART; and Defendant United National’s motion for partial summary judgment is GRANTED. s/ Nancy G. Edmunds Nancy G. Edmunds U.S. District Judge Dated: February 11, 2004 33

=== Wells Fargo & Co., et. al. v. WhenU.com, Inc. ===

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION Wells Fargo & Co., et. al., Plaintiffs, v. WhenU.com, Inc., Defendant ________________________________/ Case No. 03-71906 Hon. Nancy G. Edmunds MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION INTRODUCTION Almost everyone who has surfed the Internet on his or her computer has encountered advertisements that pop-up from time to time. While the average Internet user may find the advertisements annoying, the question before the Court is whether they violate trademark or copyright law. Plaintiffs Wells Fargo & Co. and Quicken Loans, Inc. have asked the Court for a preliminary injunction against Defendant WhenU.com, Inc., whose business is Internet contextual advertising. For the reasons stated in this opinion, plaintiffs’ motion for preliminary injunction is DENIED. The Parties FINDINGS OF FACT 1. Plaintiff WFC Holdings Corporation is a corporation incorporated in Delaware with its principal place of business in San Francisco, California. Complaint ¶ 6. 2. Plaintiff Wells Fargo & Company (collectively with WFC Holdings Corporation, “Wells Fargo”) is a corporation incorporated in Delaware with its principal place of business 1 in San Francisco, California, and is the parent company of WFC Holdings Corporation. Complaint ¶ 7. 3. Plaintiff Quicken Loans Inc. (“Quicken Loans”) is a corporation incorporated in Michigan with its principal place of business in Livonia, Michigan. Complaint ¶ 9. 4. Plaintiffs Wells Fargo and Quicken Loans operate websites through which certain financial services are offered. Complaint ¶¶ 8, 10. 5. Defendant WhenU.com, Inc. (“WhenU”) is a corporation incorporated in Delaware with its principal place of business in New York, New York. Answer ¶ 11. Plaintiffs’ Trademarks and Copyrights 6. The term “Wells Fargo” is a registered trademark of plaintiff Wells Fargo. PX 115. Wells Fargo has also received trademark registration for the logo it uses on its website. PX 117. 7. “QUICKEN LOANS” is a federally registered trademark, U.S. Reg. No. 2,528,282, owned by Intuit Inc. Tr. I (Tazelaar) 77. Intuit granted Quicken Loans an exclusive, nontransferable, non-assignable, perpetual license to the “QUICKEN LOANS” mark. Tr. I (Tazelaar) 77. See also PX 120.1 8. Both Wells Fargo and Quicken Loans filed for copyright registration of their websites earlier this year. PX 114; PX 119. The copyright office granted registrations to the website “computer program.” PX 192; PX 193. 1 Quicken Loans is authorized to bring this lawsuit by virtue of agreement with Intuit Inc., which gave Quicken Loans the right to bring this suit against unauthorized uses of the licensed Quicken Loans Marks. PX 104, ¶ 11. 2 Plaintiffs’ Businesses 9. The business of Quicken Loans consists of offering mortgages to customers. Tr. I (Stapp) 71:1-3. Quicken Loans services customer transactions through the Internet via the Quicken Loans website. Tr. I (Stapp) 68:10-15. 10. Quicken Loans customers appear to have some sophistication concerning mortgages. Currently, 85% to 90% of the Quicken Loans business consists of customers seeking to refinance prior mortgages, as opposed to first time home buyers. Tr. I (Stapp) 82:25-83:2,140:17-141:3. Approximately 40% of these individuals are repeat customers who are already familiar with Quicken Loans, and the process of obtaining mortgages online. Tr. I (Stapp) 83:3-5. 11. Wells Fargo is a financial services company offering customers online access to various financial services and products. Tr. I (Tazelaar) 162: 9-15. Many of these services and products are the sort that would likely be used by relatively sophisticated consumers, such as business services, brokerage services, wealth management services, and estate planning. PX 103, ¶ 5. Wells Fargo has offered financial products through the Internet since 1995. Tr. I (Tazelaar) 164:5-7. 12. Wells Fargo has made extensive use of its name and marks in interstate commerce in the United States and throughout the world. See Pls.’ Proposed Findings of Fact ¶ 18. The Wells Fargo marks have been associated with the Wells Fargo business since its founding in 1852 and they are distinctive designations of the corporation, its services, and its website. See id. Quicken Loans also has made extensive use of its name and mark in interstate commerce in the United States; and its mark now is associated with the corporation and is a distinctive designation of the corporation, its services and its website. See id. ¶ 23. Wells Fargo and Quicken Loans have expended substantial resources to advertise their products and services, including advertisement on the World Wide Web. See 3 id. ¶¶ 21 & 24. Both entities are widely recognized as industry leaders in their respective areas of service. See id. ¶¶ 19 & 22. The Business of When U 13. WhenU delivers online “contextual marketing” to computers via its proprietary software product, “SaveNow.”2 Tr. VII (Naider) 19:25-20:5. 14. Contextual marketing technology endeavors to market products and services to consumers who have a demonstrable interest in those products and services. Tr. VII (Naider) 22:23-24:20. Traditionally, contextual marketing has been conducted by assembling large databases containing a wide variety of personal information about individual potential customers and their past purchasing behavior. Tr. VII (Naider) 23:24-24:20, 27:9-18; DX 501, ¶ 23.3 15. WhenU’s proprietary software allows WhenU to deliver contextually relevant advertising at the moment the consumer demonstrates an interest in the product or service, without any knowledge of the consumer’s past history or personal characteristics. Tr. VII (Naider) 27:19-28:9. 16. WhenU’s participating consumers receive contextually relevant advertisements, delivered to their computer screens (also known as “desktops”). These advertisements are selected by SaveNow, based on a proprietary analysis of the consumer’s immediate interests, 2 Except as specifically indicated, references to SaveNow refer to both WhenU’s proprietary Save and SaveNow software programs. 3 DX 501 is Mr. Naider’s Affidavit in Opposition to Plaintiffs’ Motion for a Preliminary Injunction, and DX 502-DX 518 are the exhibits to that Affidavit. Mr. Naider’s Affidavit together with the exhibits thereto were also received in evidence as PX 506. 4 as reflected by the consumer’s Internet browsing activity. Tr. VII (Naider) 19:25-20:5; DX 501, ¶¶ 29-36.4 17. Since launching its service in approximately early 2001, WhenU has delivered online marketing for more than four hundred advertisers, including such well-known companies as Bank of America, Citibank, Verizon, JPMorgan Chase, Panasonic, Cingular Wireless, Merck, and ING Bank. Tr. VII (Naider) 32:22-33:8; Tr. VIII (Naider) 47:16-18. 4 SaveNow also makes available to participating consumers “dollars off,” “percentage off” and other savings coupons for products and services at hundreds of online retail merchants. Such a coupon might remind a consumer, for example, of a free shipping offer that is available by using a particular product code when purchasing the product. A team of WhenU content researchers tests and updates these offers on a daily basis. The coupons offered by SaveNow afford participating consumers the opportunity to make significant savings while shopping online. Tr. VII (Naider) 21:4-22:22; DX 501, ¶ 27; DX 507. 5 How WhenU Distributes Its Software 18. WhenU offers its software under two brand names: “Save” and “SaveNow.” The two applications are identical in function; they differ only in their identifying descriptions and method of distribution. Tr. VII (Naider) 33:18-35:13. 19. Consumers typically download the “Save” and “SaveNow” software in return for obtaining a free software application. Tr. VII (Naider) 54:7-14. In some cases, consumers are offered a choice between paying for a “premium” version of the desired application, or obtaining the desired application for free, but bundled with Save. Tr. VII (Naider) 55:11-20. For example, the Bearshare software application is marketed to consumers in two forms: a premium version that costs $19.95 to download, and a free version that comes bundled with Save. Tr. VII (Naider) 34:8-14. WhenU has also developed its own freeware applications, including an application called “Weathercast,” which are bundled with Save software. Tr. VII (Naider) 20:16-18, 30:6-31:4. 20. The SaveNow software is also typically obtained as part of a “bundle” with another software program, such as the popular Living Coral or Living Waterfall screen savers, but the user is not obligated to keep SaveNow in order to use the free software. Tr. VII (Naider) 34:15-22, 54:7-12. 21. WhenU shares the revenue generated from its bundled software with its bundling partners. Tr. VII (Naider) 54:18-24. The bundling of revenue-generating, advertising software (“adware”) with free software programs (“freeware”) is a common practice. Many software companies rely on the revenue generated by advertising software in order to offer freeware for free and to provide service and support for their freeware programs. DX 501, ¶37; DX 523, ¶¶ 74-75. 6 22. SaveNow is also available for download at WhenU’s website (DX 501, ¶ 40), at the websites of WhenU’s free applications such as www.getweathercast.com (DX 501, ¶ 39), and at certain third-party websites via a software download prompt screen that offers a user surfing the Internet the opportunity to download, for example, Weathercast and Save. Tr. VII (Naider) 53:7-16; DX 538, ¶ 13; DX 539. Although many users claim not to be aware that SaveNow has been loaded on to their computer, the Court finds that some user assent is required before SaveNow is downloaded. The fact that assent may be in the form of a reflexive agreement required for some other bundled program does not negate the fact that the computer user must affirmatively ask for or agree to the download. The Download Process and the SaveNow License Agreement 23. Although there are variations in the SaveNow download process, depending upon the other applications that the computer user is installing, certain key features of the download remain constant. For example, during the installation process, the consumer always receives a notice stating that SaveNow is part of the download, and explaining how SaveNow functions. Tr. VII (Naider) 57:18-58:22; DX 501, ¶ 38. 24. Regardless of the method of distribution, to proceed with the installation of SaveNow, the consumer must affirmatively accept a license agreement for SaveNow (the “License Agreement”). Tr. VII (Naider) 61:13-15; DX 501, ¶ 38; DX 510. The License Agreement is presented to the user in a text box with a scroll bar. DX 510. This is the standard way in which license agreements are incorporated into software installations. Tr. VII (Naider) 57:1-17. 25. The License Agreement explains that the software generates contextually relevant advertisements and coupons, utilizing “pop-up” and various other formats. Tr. VII (Naider) 57:19-58:23; DX 510. It also explains that WhenU reserves the right to update or 7 upgrade the software at its discretion.5 Tr. VII (Naider) 60:5-10; DX 510. The software cannot be installed unless the consumer affirmatively accepts the terms of the License Agreement. Tr. VII (Naider) 60:13-15. 26. Plaintiffs’ computer expert Benjamin Edelman testified about how he obtained WhenU’s software via a software download prompt screen at a website called Lyricsdownload.com, using the phrase “drive by download” to describe this method of distribution. On cross-examination, Mr. Edelman conceded that the software download prompt screen offers the user the opportunity to read the License Agreement and tells the user that accepting the software is deemed to be an assent to its terms. Tr. VI (Edelman) 100:4- 24. See also DX 538, ¶ 13; DX 539. Mr. Edelman also conceded that the distribution of software via a download prompt screen is a common practice, and is used by a variety of distributors for a variety of different purposes. Tr. VI (Edelman) 98:25-99:9.6 Uninstalling WhenU’s Software 27. Consumers can uninstall WhenU’s software from their computers if they no longer wish to have it. Tr. IX (Reinhold) 33:5-17; Tr. VII (Naider) 52:5-7. Once uninstalled, the software will cease to operate or show advertisements or coupons on the consumer’s computer. DX 501, ¶ 41. 28. When a user removes or “uninstalls” a program bundled with Save, the Save software is automatically uninstalled along with it. Tr. VII (Naider) 33:21-34:2. The Save 5 Mr. Edelman was apparently not thinking of the License Agreement when he testified that WhenU does not obtain user consent to update the Directory. Tr. V (Edelman) 81:14- 82:6. 6 For a brief period of time, consumers whose Internet browser security settings had been set below the levels recommended by Microsoft could receive Save through software download prompts without being required to agree to the License Agreement. Tr. VII (Naider) 61:19-62:14; DX 538, ¶¶ 14-15. This problem affected only a tiny percentage of users. Tr. VII (Naider) 65:23-66:24. Currently, even users with browsers set to the lowest security settings instead of the “medium” security setting recommended by Microsoft cannot download Save without indicating their assent to the License Agreement. Tr. VII (Naider) 61:15-24. 8 software supports the associated program and cannot be uninstalled without also uninstalling that associated program. Tr. VII (Naider) 49:15-50:16. SaveNow can be uninstalled separately from any freeware program with which it was downloaded. The World Wide Web 29. Since 1996, millions of computer users have become regular users of the Internet and the World Wide Web. Tr. IV (Edelman) 111-12. The Internet is a network of millions of interconnected computers, through which text, images and sounds are transported and displayed by an application called the World Wide Web (the "Web"). Tr. IV (Edelman) 106-07. 30. Much of the information on the Web is stored in the form of "web pages," which can be accessed through a computer connected to the Internet (available through commercial Internet service providers or "ISPs"), and viewed on a PC user's computer screen using a computer program called a "browser," such as Microsoft Internet Explorer or Netscape Navigator. Tr. IV (Edelman) 107-09. 31. Web pages are only perceivable by the user by viewing them on the computer screen through the use of a browser. Tr. IV (Edelman) 109; Tr. VI (Naider) 28. 32. A web page is identified by its own unique Uniform Resource Locator ("URL") (e.g., http://www.wellsfargo.com), which ordinarily incorporates its name or the trademark of the website operator (e.g., Wells Fargo). Tr. I (Tazelaar) 165. 33. "Websites" are locations on the World Wide Web containing a collection of web pages, much like pages of a book. Tr. IV (Edelman) 108. The 3-dimensional metaphor of the computer screen as a "desktop" is often used to discuss the display of text and images on a user's computer screen. Tr. IV (Edelman) 116-17. 34. The computer screen is composed of a series of picture elements (called "pixels"). Tr. IV (Edelman) 117-19. 9 35. Pixels are arranged in a single layer of horizontal and vertical rows that form a grid on the computer screen. Tr. IV (Edelman) 117-18; Tr. IX (Reinhold) 44. The particular color of each individual pixel which, taken together, make up the image displayed on the 2- dimensional computer screen, is determined by instructions received from the underlying computer program. Tr. IV (Edelman) 117-19. 36. A series of events must transpire in order for a user to view a web page via an Internet browser on his or her computer screen. Tr. IV (Edelman) 119-20. 37. First, the remote server on which the computer code for a particular website is maintained sends the code to the user's web browser. Tr. IV (Edelman) 120. 3 8 . Second, the PC's browser then reads the code to determine how each pixel that makes up the computer screen should illuminate in order to create the specific on-screen display for that particular website. Tr. IV (Edelman) 120. 39. Third, the PC's browser then conveys specific instructions to the Windows operating system, which, in turn, will send these instructions to the PC's video card. Tr. IV (Edelman) 120. These instructions are stored in the video memory frame buffer portion of the PC's video card. Tr. IV (Edelman) 121-22. 40. Finally, the video card, thereupon, causes each pixel on the computer screen to illuminate so as to create the specific 2-dimensional on-screen display of the website. Tr. IV (Edelman) 120. The Windows Environment in Which WhenU Operates 41. WhenU’s software is designed to operate within the Windows computer operating system, popularized by Microsoft. DX 501, ¶ 11. Windows is the most widely 10 distributed software application ever written, currently in use by roughly 95% of computer users. Tr. IX (Reinhold) 36:13-14. 42. In the Windows operating system, the computer “desktop” functions as a multi- tasking environment in which numerous software “applications,” such as spreadsheets, word processing programs, Internet browsing software, e-mail software and instant messaging software, may all run simultaneously. DX 523, ¶¶ 28-36; DX 501, ¶ 12. 43. This graphical computer “desktop” was intentionally designed to represent what a user would experience when using an actual physical desktop, with virtual replicas of file folders, text, files, spreadsheets, calendars, rolodexes, and so on. Tr. VIII (Reinhold) 127:22- 128:7. The computer desktop thus gives the user the impression of operating in a three dimensional space in which items can be moved on top of and underneath each other. Tr. VIII (Reinhold) 128:8-129:9. Accordingly, while a display on a computer screen is literally two dimensional, it can properly be viewed as a three dimensional presentation as a matter of user perception. Tr. VIII (Reinhold) 127:15-20. 44. When a user opens a software application, it is launched in what is known as a “window,” a box on the user’s desktop within which all of the functions of that application are displayed and operate. Tr. IV (Edelman) 110:3-13; DX 501, ¶ 13. An application is simultaneously represented by a button on the “task bar,” the strip that typically runs along the bottom of the desktop. DX 501, ¶ 13. A window can be enlarged or “maximized” to fill the entire computer screen, or reduced to take up a smaller area. Tr. IV (Edelman) 112:9-19; DX 501, ¶ 13. 45. Over the past two decades, operating a computer by manipulating overlapping windows has become a familiar process to personal computer users everywhere. Tr. IX 16:1- 11; DX 523, ¶ 35. 11 Connecting to the Internet in the Windows Environment 12 46. To access the Internet in the Windows environment, a user must establish a connection to the Internet, either over a telephone modem or some other form of Internet connection. Once such a connection has been established, the user will typically launch a software application known as a “browser,” such as Internet Explorer or Netscape. Tr. IV (Edelman) 108:16-22; DX 501, ¶ 15. A user can have multiple browser windows open simultaneously. Tr. I (Stapp) 116:20-117:8. 47. When launched by the user, the browser, like any other Windows-based software application, opens in a new window. Tr. IV (Edelman) 112:11-12. Within this window, the user interacts with the browser to access various websites on the Internet. Tr. IV (Edelman) 107:18-108:22; DX 501, ¶ 15. 48. The user can directly access data contained in a particular website by entering the website’s address (or “URL”) into the address box in any such open browser window. Alternatively, the user may search for websites of interest by utilizing a search engine, such as Yahoo! or Google, and then access those websites by clicking on the resulting links displayed as listings. A user may also reach a particular website by clicking on a “hyperlink” embedded in the text or graphics of a webpage. Tr. VIII (Reinhold) 129:10-24; DX 523, ¶ 21. 49. When a user attempts to access a webpage, the server hosting the webpage sends information in the form of a file back to the user’s browser program. Tr. VIII (Reinhold) 130:8-15. That file consists simply of lines of text written in Hypertext Markup Language or “HTML.” Tr. VIII (Reinhold) 131:6-13, 132:5-25; DX 523, ¶¶ 16, 22; DX 570. 50. The browser then interprets the HTML code file, and taking that information in conjunction with the user’s own browser settings, requests that the Microsoft Windows operating system open a window to display the webpage. The operating system, in turn, takes all that information from the browser, combines it with information concerning the user’s hardware configuration and the competing claims of other software programs, and then displays content in a window. Tr. VIII 130:16-23; DX 523, ¶¶ 37-40. 13 51. The HTML code identifies various elements that help determine how the webpage will ultimately be rendered on a computer user’s screen, but it does not provide an actual pixel-by-pixel mapping for rendering the webpage. Tr. VIII (Reinhold) 131:25-132:4; Tr. IX (Reinhold) 4:10-14. A wide variety of other factors will have a significant effect on the ultimate appearance of the webpage on the user’s screen, including the user’s ability to customize the browser’s settings. Tr. IX (Reinhold) 7:13-8:14; Tr. VI (Edelman) 58:8-21. Windows Permits the Display of Multiple Websites in Multiple Ways 52. The Windows environment permits a user to have multiple browser windows open simultaneously, each displaying a different webpage. Tr. I (Stapp) 116:20-117:8. As with other applications open on a user’s desktop, each separate browser window can be opened or closed, minimized or maximized, and moved around the screen. Tr. VI (Edelman) 62:1-13. The user can select which window appears in front of which other windows at any given time, in much the same way as a person can re-order a stack of papers on his or her desk. DX 523, ¶ 36; Tr. VIII (Reinhold) 125:7-23, 128:25-129:9; DX 501, ¶¶ 11-12. 53. There are many applications that a user can run while browsing the Internet that cause additional windows to appear automatically in front of an open browser window. For example, a user may be viewing a webpage (e.g., cnn.com), when the user’s electronic mail or instant-messaging software (e.g., Microsoft Outlook or AOL Instant Messenger) launches a message in front of the browser window that the user is viewing. Tr. VI (Edelman) 62:21- 63:3; DX 523, ¶ 40; DX 501, ¶ 18; DX 505. 54. Users have ultimate control over what programs run on their computers, when they are run, and what they are commanded to do. The user owns and controls the computer and the computer display, including the pixels that generate that display. DX 523, ¶ 25; Tr. VI (Edelman) 79:10-25. 14 How WhenU Delivers Advertisements to Participating Consumers 15 55. Advertisements shown by WhenU software are set up by WhenU’s Advertising Operations team. Tr. VIII (Naider) 5:24-6:3. The Advertising Operations Team receives creative copy from an advertiser, places the ad on a WhenU server, then “maps” the advertisement using an ad set-up table. Tr. VIII (Naider) 6:4-15, 18:6-19. Each advertisement is assigned a name and a variety of parameters such as size, priority, and frequency. Tr. VIII (Naider) 6:4-15. 56. The Advertising Operations Team “maps” the ad by determining the various categories in the Directory (such as “Air Travel”) and keyword algorithms that will trigger the appearance of the advertisement, subject to priority and frequency limitations. Tr. VIII (Naider) 7:12-10:8. 57. When the Advertisement Operations Team is done, the data is automatically recorded into the proprietary WhenU Directory (the “Directory”). Tr. VIII (Naider) 17:21-18:14. The Directory is delivered to and saved on the consumer’s desktop when the consumer installs the software, and optimized and updated on a daily basis. DX 501, ¶ 28. 58. As of July 1, 2003, the Directory contained approximately 32,000 URLs and URL fragments, 29,000 search terms and 1,200 keyword algorithms. Tr. VII (Naider) 98:10- 99:6. The Directory categorizes these elements into various categories in much the same way as a local Yellow Pages indexes businesses into categories. These categories are the “heart” of WhenU’s system for delivering advertisements. Tr. VIII (Naider) 8:19-9:4, 27:25- 28:5; DX 501, ¶ 28. 59. As a participating consumer browses the Internet, the SaveNow software studies the user’s browsing activity and compares it against the elements contained in the Directory. Simultaneously, the SaveNow software determines whether: (a) any of those elements are associated with a category in the Directory, and (b) whether those categories are associated with particular advertisements. If the software finds a match, it identifies the associated product or service category, determines whether appropriate ads are available 16 to be displayed, and, if so, selects an ad based on the system’s priority rules, subject to internal frequency limitations. Tr. VIII (Naider) 13:21-14:25; DX 501, ¶¶ 30-31. 60. Web addresses and search terms are included in the WhenU Directory solely as an indicator of a consumer’s interest. DX 501, ¶ 32. For example, the www.wellsfargo.com web address is included in the “finance.mortgage” category of the WhenU Directory in order to identify consumers who are potentially interested in mortgages. Thus, if a consumer were to enter into the address box in an open browser window or conduct a search using a search engine by typing in the words “Wells Fargo,” SaveNow would detect that activity and scan the proprietary directory for a match to a WhenU category such as “finance.mortgage.” DX 501, ¶ 31. 61. The SaveNow software might also determine that the consumer is interested in a particular category of products or services if it found certain combinations of words (“keyword algorithms”) in the content of the webpage visited. For example, if a participating consumer accessed a webpage that contained two occurrences of the word “buying,” two occurrences of the word “home” and four occurrences of the word “mortgage,” the SaveNow software might determine that the consumer was interested in the “finance.mortgage” category. Tr. VIII (Naider) 9:5-20; DX 501, ¶ 33.7 62. Under WhenU’s category system, any given ad will ultimately be mapped to scores of discrete elements (i.e., URLs, search terms, key word algorithms) that are related topically. Tr. VIII (Naider) 7:21-9:4. Thus, WhenU advertisements do not specifically target individual websites such as Wells Fargo and Quicken Loans. For example, Mr. Edelman 7 Most of the terms in the directory are related to the delivery of SaveNow advertisements; however, some terms do not trigger ads but are in the database for administrative purposes. Thus, Mr. Edelman was mistaken in his belief that WhenU targets secured websites (Tr. V (Edelman) 61:23-65:2; Tr. VI (Edelman) 21:11-22:8) or uses its keyword system to target specific websites. Tr. V (Edelman) 61:23-69:7; PX 109, ¶ 31. The elements of the WhenU Directory Mr. Edelman cited in his testimony are not used to trigger advertisements. Tr. VI (Edelman) 116:6-117:25; Tr. VII (Naider) 102:1-12:8. 17 implied in his original declaration that an advertisement for “GetSmart” was specifically targeted at the Quicken Loans homepage. PX 109, ¶ 26. In fact, the complete mapping of that ad in the Directory reveals that it is mapped to 13 separate categories, each of which represents many URLs and search terms. DX 569; Tr. VIII (Naider) 19:7-19. The URL for the Quicken Loans homepage is only one of over hundreds, if not thousands, of URLs that could trigger this ad via the category system. Tr. VIII (Naider) 21:2-11.8 WhenU Sells Advertising On a Category Basis 63. WhenU sells advertising to advertisers on the basis of sales categories, which are grouped into certain product and service categories. Tr. VIII (Naider) 4:12-23, 63:21-64:5. These sales categories are broader than the categories used for mapping advertisements. Tr. VIII (Naider) 7:21-8:6. Although the sales categories are made public for marketing purposes, the categories used to map ads are known only to the WhenU Advertising Operations Team, and are not disclosed or in any way promoted to WhenU’s advertisers, in- house sales team, or independent sales agents. Tr. (Naider) 34:13-18. 64. WhenU does not guarantee advertisers that their advertisements will appear when participating consumers access content from a particular website. WhenU guarantees 8 Indeed, initially Mr. Edelman contended that SaveNow lacked any functionality for mapping advertisements to categories. PX 109, ¶ 30 (“Avi Naider’s declaration alleges that . . . websites are grouped into substantive categories with which WhenU staff then associate multiple advertisements . . . . If WhenU’s software . . . has such a functionality, I could not locate it . . .”). See generally PX 109, ¶¶ 26-30; Tr. IV (Edelman) 134:15- 136:16. Ultimately, Mr. Edelman conceded he had been mistaken. Tr. VI (Edelman) 140:13-141:24; Tr. IX (Edelman) 84:3-6, 87:15-88:1. Because the Court finds that Mr. Edelman’s understanding of the complex SaveNow software is incomplete and imperfect, and because Mr. Naider has a much better understanding of the software, the Court has credited Mr. Naider’s testimony on the subject of the operation of SaveNow to the extent it conflicts with Mr. Edelman’s testimony. Tr. IX (Edelman) 87:15-88:1; Tr. VIII (Naider) 44:17- 23. On cross-examination of Mr. Naider, plaintiffs’ counsel elicited that Mr. Naider does not have a degree in computer science. Tr. VIII (Naider) 43:13-17. Interestingly, neither of the parties’ computer experts has a degree in computer science. PX 109; DX 523. 18 only that advertisements will be shown to consumers who appear interested in a particular product or service sales category. Tr. VIII (Naider) 34:1-18; DX 501, ¶ 35. 65. WhenU does not allow its own advertisers to be excluded from any category as a condition of purchasing advertising from WhenU. Tr. VII (Naider) 45:25-46:11. Thus, WhenU can and does show ads for its advertisers’ competitors -- ads that may well appear when a user has accessed the advertiser’s website. Id. 66. In sum, WhenU does not target specific websites either in its software or in selling its services to advertisers. Rather, WhenU’s advertisements are displayed according to the product category in which the consumer is interested and limited by factors such as the number of advertisements the consumer has already seen. Thus, it is the user’s actions on his or her desktop that ultimately determine whether that consumer will see a particular advertisement. DX 501, ¶¶ 31, 36, 46. 19 WhenU Ads Are Displayed in Separate, Conspicuously Branded Windows, and Specifically Advise Participating Consumers That They Are From WhenU, and Are Not Sponsored by Any Website the User May Be Viewing 67. The advertisements and coupons that SaveNow delivers to a participating consumer’s desktop appear in a window (the “WhenU Window”) which is separate and distinct from any other window already open on the desktop. Tr. VI (Edelman) 63:4-16; Tr. VII (Naider) 46:19-47:11; DX 523, ¶ 49; DX 501, ¶ 43. 68. SaveNow advertisements take various formats, such as: (1) a small format “pop-up” window that typically appears flush to the bottom right-hand corner of the consumer’s desktop; (2) a larger “pop-under” window that appears behind some or all of the browser windows that the consumer is viewing; (3) a horizontal “panoramic” window that runs along the bottom of the user’s computer screen. Regardless of the format used, the WhenU Window is a distinct, separate window unique to the SaveNow application and represented by its own button on the user’s task bar. Tr. VII (Naider) 43:16-45:20; DX 501, ¶ 44. 69. Many SaveNow advertisements – approximately 50% of the total – are pop- under ads. Tr. VII (Naider) 45:16-20. WhenU’s pop-under ads are designed not to be displayed to the user until after the user closes or minimizes the browser window containing the webpage that the user was viewing when the ad was triggered by the SaveNow software. Tr. VII (Naider) 44:15-23, 45:10-12. Thus, unless manipulated by the user, a SaveNow pop- under ad triggered by a Wells Fargo or Quicken Loans URL will not be displayed on the user’s screen at the same time as the webpage with that URL. DX 501, ¶ 49; Tr. VI (Edelman) 68:12-16; Tr. VII (Naider) 44:11-23. 70. SaveNow pop-up ads appear as a small box in the bottom right hand corner of the user’s computer screen. Tr. VII (Naider) 43:20-44:1; DX 501, ¶ 45. Depending on the site visited, the browser size, and the user’s screen resolution configuration, a SaveNow pop-up ad may or may not appear in front of content in the underlying website. Tr. VI (Edelman) 65:15-24. 20 71. If the underlying webpage (or any other underlying windows, such as a Word document) is clicked on after the pop-up format advertisement is displayed, the pop-up will no longer appear at the front of the screen, although it will still be present in the user’s task bar at the bottom of the screen. DX 501, ¶ 54.9 72. At any time a user may make any form of SaveNow advertisement disappear permanently by clicking on the “X” box at the top right hand corner of the ad. Tr. VII (Naider) 43:9-15. The “X” box is a standard feature of the Windows operating system and Internet users are generally familiar with its function. Tr. VII (Naider) 43:14-15; DX 501, ¶ 53; Tr. IX (Reinhold) 16:14-23. 73. The WhenU Window is labeled as such. SaveNow ads display a green “$” symbol in the corner of the window and the SaveNow designation. Tr. VII (Naider) 36:17-19. Save ads contain a bull’s eye and the “SAVE!” designation. Tr. VII (Naider) 46:14-18.10 74. All SaveNow advertisements contain a notice stating: “This is a WhenU offer and is not sponsored or displayed by the website you are visiting. More....” Tr. VII (Naider) 36:19-23. When the consumer clicks on the word “More...,” a dialog box opens that contains information about SaveNow and a direct link to the “Frequently Asked Questions” page of WhenU’s website. Tr. VII (Naider) 38:2-39:7; DX 501, ¶ 48. 75. SaveNow advertisements also contain a “?” symbol in the corner, which is also a typical feature of a window in the Microsoft Windows operating system. Clicking on the “?” symbol opens the same window as when consumers click on the “More...” link described above. Tr. VII (Naider) 37:22-38:10; DX 501, ¶ 48. 9 WhenU’s pop-up advertisements have a “refresh” function that may cause them to come back to the front of the screen one time after retreating behind the window the user has activated. This feature operates only once. Tr. VII (Naider) 41:3-12. 10 Although all WhenU ads are branded by WhenU, WhenU has distributed at least some ads without the advertiser’s name. However, in September 2003, WhenU implemented a policy requiring that all graphic advertisements display the name of the advertiser. Tr. VII (Naider) 52:17-19. 21 76. SaveNow does not automatically cause any advertiser’s webpage to be displayed on a user’s desktop. After the WhenU advertisement is displayed, the user can elect to access the advertiser’s website by clicking on the WhenU Window. Tr. VII (Naider) 39:10-20. The user also can elect not to access the advertiser’s webpage, and can easily close the WhenU window or minimize it for later viewing. Tr. VII (Naider) 42:24-43:15; DX 501, ¶¶ 52-54. 77. A user who clicks on a SaveNow advertisement is taken to the advertiser’s webpage. Tr. VII (Naider) 39:10-20; DX 501, ¶ 52. A consumer who has accessed the advertiser’s webpage can return to the webpage that was previously on the user’s screen by clicking on the Internet browser’s “Back” button. Tr. V (Edelman) 12:16-21; Tr. VII (Naider) 39:21-40:6; DX 501, ¶ 52. This function will work even if the user is accessing a secure webpage at the time the advertisement is clicked. Tr. IX (Reinhold) 27:10-28:16. WhenU Advertisements Do Not Use Plaintiffs’ Trademarks 78. WhenU’s advertisements do not use the words “WELLS FARGO,” “WELLS FARGO ONLINE,” “QUICKEN LOANS,” or any other trademark registered to plaintiffs, in the advertisements themselves. DX 501, ¶ 32. 79. As discussed above, URLs are included in the Directory only to identify the website itself for the purpose of determining the interests of participating consumers. DX 501, ¶ 32. WhenU does not use any of plaintiffs’ trademarks to identify goods or services, to indicate any sponsorship or affiliation with the goods or services advertised by WhenU, or to identify the source or origin of any goods or services advertised by WhenU. 80. The use of keyword terms in connection with the delivery of advertisements is a common practice on the Internet, and is a source of revenue for search engines such as Google, and other Internet companies. DX 523, ¶¶ 54-56. WhenU Advertisements Do Not Appear “On” Plaintiffs’ Websites 81. Plaintiffs take the position that SaveNow advertisements appear “on” the plaintiffs’ websites. Such usage misconstrues the technical reality of the Internet. 22 82. A “website” is a series of related webpages, whose program code is located in separate, distinct servers controlled by the owners of the website. DX 523, ¶ 43; Tr. IV (Edelman) 108:8-11. When a user accesses a website, the website is not transferred to the user’s desktop. All that exists on the computer screen is an image generated by the user’s web browser based on instructions received from the text-based HTML code of the webpage. Tr. VIII (Reinhold) 130:8-23, 132:5-24; DX 523, ¶ 44. At that point, there is no connection between the individual user’s computer and the website. Tr. IX (Reinhold) 6:3-10. 83. Having caused the computer to display a page from one website, the user may request the computer to simultaneously display a page from a different website. The user will then have pages from two different websites on his desktop. If the user has called the second website page up in a new browser window, it will appear in front of the page from the first website and the only indication that the first website has been accessed will be the button on the user’s task bar. However, as discussed above, the user can easily size his browser windows to cause pages from both websites to appear on his screen, in windows that overlap or not, as the user chooses. Nothing that an individual does in the window displaying one website interferes with data transmitted to or from another website. Likewise, nothing that an individual does in a window displaying a different application (e.g., a word processing or instant messenger program) interferes with data transmitted to or from a website which the user has accessed. A website resides on its own servers where it is protected from tampering by “firewalls” and other Internet security procedures. DX 523, ¶¶ 42-43. 84. SaveNow interacts only with the web servers of WhenU or WhenU’s advertisers. Tr. VI (Edelman) 77:11-78:4; Tr. VII (Naider) 99:7-12. It has nothing to do with plaintiffs’ web servers. Tr. VIII (Naider) 13:21-14:25. As plaintiffs’ own expert acknowledged, SaveNow cannot and does not access the servers where plaintiffs’ websites are physically located. Tr. VI (Edelman) 77:11-78:4. 85. Defendant’s SaveNow software has no physical relationship to any other software application that may be open on a user’s desktop, including, but not limited to, 23 windows in which images associated with plaintiffs’ websites are displayed. The fact that a window containing a SaveNow ad and the windows in which plaintiffs’ websites may be displayed may be visually stacked on top of each other on the user’s screen is purely a function of a computer’s graphical interface which is designed to make a computer “desktop” look and act like a real desk. Tr. IX (Reinhold) 15:15-21, 16:1-17:5; DX 523, ¶¶ 41-47. WhenU Advertisements Do Not “Modify” Plaintiffs’ Websites 86. SaveNow does not transmit, display or reproduce images of plaintiffs’ websites. Tr. VII (Naider) 82:4-5. All SaveNow does is display an image of an advertisement which contains a link to a site designated by the advertiser. The participating consumer may access that site, if the consumer chooses, by clicking on the link embedded in the advertisement. Tr. VII (Naider) 39:10-20. 87. Plaintiffs contend that because the appearance of a SaveNow advertisement alters the current content of video memory, plaintiffs’ webpages are “modified” whenever a SaveNow ad appears while a user is also displaying one of their webpages. The Court rejects this contention. 88. Once a computer browser renders a webpage on a window, a copy of the HTML code file associated with that webpage is saved into the computer’s general random access memory or “RAM.” Tr. IX (Reinhold) 11:17-22. The RAM copy of the HTML file is used to help the computer instantly redisplay the webpage image in the event that some other window has subsequently obscured all or part of the webpage image. Tr. IX (Reinhold) 12:7-13:5. The appearance of a SaveNow ad does not interfere with the storage of another webpage’s HTML code in RAM memory or erase another webpage’s HTML code. Tr. VI (Edelman) 76:15-77:8, 80:22-81:3; Tr. IX (Reinhold) 15:15-21, 27:3-9. 89. In addition to ordinary RAM memory, a computer maintains a temporary form of memory called video memory that forms part of the computer’s display system. Tr. IX (Reinhold) 13:6-12. The video memory simply contains a pixel-by-pixel “snapshot” of whatever 24 happens to be displayed on a computer screen at any given instant. Tr. IX (Reinhold) 13:17- 25. 90. Plaintiffs contend that because the appearance of a SaveNow advertisement alters the current content of video memory, plaintiffs’ webpages are “modified” every time a SaveNow ad appears while a user is also displaying one of their webpages. However, these pixels are part of the user’s physical computer, and are not part of any webpage that the user might happen to be viewing at the time. Tr. VI (Edelman) 79:10-25. 91. Further, because the pixel display is the means by which any image on a computer screen is generated, whenever the display changes, there is a corresponding change in the content of video memory. Tr. IX (Reinhold) 14:1-10. Video memory is modified when a user opens a new application, receives an instant message, or uses his mouse to move the cursor across the screen. Tr. VI (Edelman) 78:5-79:9; Tr. IX (Reinhold) 14:21-15:9. As long as a user is actively using the computer, the content of video memory is altered and updated every 1/70th of a second. Tr. IX (Reinhold) 14:21-15:9. Accordingly, the alteration of video memory is an ephemeral occurrence, and does not constitute a modification of the plaintiffs’ webpages. WhenU Advertisements Do Not “Frame” Plaintiffs’ Websites 92. The Court rejects the contention that SaveNow “frames” plaintiffs’ websites. 93. Framing occurs when one webpage displays the content of another webpage within its own borders. If the outer window is moved, the framed page moves with it simultaneously; if the outer window is closed or minimized, the framed page closes or minimizes as well. Tr. IX (Reinhold) 29:1-17. The purpose of framing is to create a single seamless presentation that integrates the content of the two webpages into what appears to be single webpage. Tr. IX (Reinhold) 29:1-31:3. 25 94. SaveNow ads appear in entirely separate windows that can be moved independently without moving any other webpage, and can be closed without closing or in any way affecting any other webpage. Tr. IX (Reinhold) 29:18-30:21. Hence, SaveNow ads do not “frame” and are not “framed by” any other window, such as the window in which one of plaintiffs’ webpages might be displayed. WhenU Protects the Privacy and Security of Its Users 95. WhenU collects only the information necessary to run its system and to be able to compensate its partners and invoice its advertisers. Tr. VII (Naider) 76:4-11. This information consists of the URL, search term or keyword of the webpages that triggered the delivery of a WhenU advertisement, and whether the user clicked on the advertisement. Tr. VII (Naider) 75:19-76:3. This information is collected by WhenU on an aggregate basis and is not associated with an individual user or individual profile. Tr. VII (Naider) 76:17-77:20. WhenU does not collect a user’s “click stream data,” i.e., information concerning the history of webpages visited by the user. Tr. VII (Naider) 76:12-16, 83:18-84:23. Nor does WhenU use cookies to track the activities of SaveNow users. DX 547; Tr. VII (Naider) 87:3-15; DX 547. 96. Like most entities that operate on the Internet, including Wells Fargo and Quicken Loans, WhenU uses the IP address of its users. The sole purpose of using the IP address is so that SaveNow can use the Internet to send ad display information to the WhenU servers. Tr. VII (Naider) 79:15-19. WhenU does not use IP addresses to identify individual users. Tr. VII (Naider) 80:21-23. 97. The Court additionally finds no support in the record for plaintiffs’ contention that WhenU somehow specifically targets “secure” webpages. Tr. VII (Naider) 102:1-18. Although it is possible to view a SaveNow advertisement while accessing a secure webpage, this does not disrupt the security of that webpage. A consumer who clicks on a SaveNow ad can easily return to the secure webpage that was previously on the user’s screen by clicking on the 26 Internet browser’s “Back” button. Tr. IX (Reinhold) 27:10-28:16. It is also a standard feature of the Microsoft Windows operating system to provide a warning to users if they do something that would cause them to leave a secured webpage, giving the user the opportunity to cancel that decision. Tr. IX (Reinhold) 27:22-25; 28:10-16. Plaintiffs Have Failed To Submit Competent Evidence of Likelihood of Confusion from SaveNow Advertisements 98. Plaintiffs assert that a WhenU ad displayed on a computer screen at the same time as a consumer is viewing a page from one of their websites is inherently confusing to the consumer who, according to plaintiffs, believes it emanates from the plaintiffs’ websites. Memorandum in Support of Plaintiffs' Motion for Preliminary Injunction (“Plaintiffs’ P.I. Mem.”), pp. 6-7. However, plaintiffs have not presented any evidence of actual consumer confusion. 99. By contrast, there is good reason to believe that the typical SaveNow user would not perceive a WhenU advertisement as sponsored by or affiliated with the plaintiffs’ websites. First, SaveNow users are accustomed to receiving offers from WhenU while surfing the Web. DX 501, ¶ 46. For example, a SaveNow user shopping for a financial services online would be exposed to SaveNow ads for obvious competitors such as Ameriquest Mortgage (PX 125), Brown & Company (PX 130), and LowerMyBills.com (PX 135). It is therefore unlikely that they would suddenly think that a SaveNow Ameriquest Mortgage ad comes from Wells Fargo or Quicken Loans. DX 523, ¶ 50. Second, SaveNow ads are identified by WhenU, and bear a prominent notice and disclaimer stating that they come from “WhenU” and are “not sponsored or displayed by the website you are visiting.”11 Tr. IX (Reinhold) 25:5-20; 45:22- 46:1. Third, SaveNow ads appear in a distinct window, bear all of the indicia of a distinct software application, and do not relate in any way to any other window on the user’s screen. 11 Plaintiffs attempted to show through Dr. Jacoby that disclaimers do not work. However, Dr. Jacoby testified that disclaimers can be effective. Tr. IV (Jacoby) 84:22-85:24. The fact that Dr. Jacoby authored articles about empirical research he did on two disclaimers which had not been prominently displayed and which he determined to be ineffective is therefore irrelevant. Tr. IV (Jacoby) 83:7-87:4. 27 Tr. IX (Reinhold) 16:12-17:5, 29:18-30:21. Internet users understand that different software applications run in different windows. Tr. IX (Reinhold) 16:1-11. 100. Plaintiffs argue that their customers are especially likely to be confused because they are “not particularly sophisticated.” Plaintiffs’ P.I. Mem., p. 14. However, plaintiffs have not supported that contention with evidence. To the contrary, Mr. Neal acknowledged that people who decide to obtain a mortgage online may be more knowledgeable about the Internet than ordinary users. Tr. III (Neal) 12:18-13:1. 101. In addition, consumers are likely to be attentive when attending to their financial affairs (Tr. II (Neal) 141:16-142:4; Tr. IV (Jacoby) 21:7-19), and are especially attentive when obtaining a mortgage which is “for most people the largest financial decision they make.” Tr. I (Stapp) 141:16-19. See also Tr. I (Stapp) 141:23-142:14 (decision to obtain a mortgage involves study and research); Tr. III (Neal) 12:18-13:1 (the decision to obtain a mortgage is more significant in the life of a consumer than the decision to buy contact lenses). 102. The only evidence of potential consumer confusion presented by plaintiffs was the testimony of William Neal, whom plaintiffs offered as an expert in “consumer surveys [and] marketing research.” Tr. II (Neal) 86:24-87:1. Mr. Neal’s testimony was based on surveys he conducted for the plaintiff in: (a) Washingtonpost.Newsweek Interactive Co. (“Washington Post”) v. The Gator Corp. (the “Gator Survey”), an action not involving WhenU, and (b) 1-800 Contacts, Inc. (“1-800”) v. WhenU, a lawsuit pending in the Southern District of New York (the “1-800 Survey”). See Tr. II (Neal) 88:3-8; PX158; PX 159. These plaintiffs were also represented by the Gibson, Dunn & Crutcher attorneys who represent plaintiffs in this case. Tr. II (Neal) 130:3-22. 103. Plaintiffs did not explain why Mr. Neal did not prepare a new survey for this matter. The Gator Survey was conducted in early June 2002. Tr. II (Neal) 123:4-21. The 1-800 28 Survey, which was modeled on the Gator Survey, took all of 14 days to complete.12 Research involving the Internet may become obsolete in a matter of months. Tr. IV (Edelman) 100:1-12. See also Tr. VIII (Reinhold), 121:3-9 (Internet changes very rapidly). Mr. Neal’s testimony that the surveys’ results would not differ substantially if the data were collected today is based on speculation. Tr. III (Neal) 21:4-7. Indeed, Mr. Neal admitted that consumer perceptions of Internet advertising might have changed since he conducted the surveys, and that the only way to know for sure would have been by testing, which he did not do. Tr. III (Neal) 133:6-134:3.13 104. Mr. Neal’s methodology was severely criticized by defendant’s witness, Dr. Jacob Jacoby, an extremely well qualified expert in consumer behavior and research methodology.14 12 It took ten days to administer and collect the data. Tr. II (Neal) 123:25-124:15, 132:7- 11. Mr. Neal took another four days to analyze the data and write his report. Tr. III (Neal) 46:14-47; 11; PX 159. 13 Mr. Neal acknowledged that consumers who see WhenU ads over and over again with their specific format might come to recognize those ads as coming from a particular source Tr. II (Neal) 146:25-147-11. On re-direct, counsel elicited from Mr. Neal that some WhenU ads are branded “Save,” and some are branded “SaveNow.” Tr. III (Neal) 23:2-6. However, a user who downloads SaveNow sees ads with the SaveNow brand; a user who downloads Save sees ads with the Save brand. Tr. VII (Naider) 46:14-18. 14 During the hearing, plaintiffs’ counsel suggested that unlike Mr. Neal, Dr. Jacoby is a “professional witness.” Tr. IV (Jacoby) 75:12-15. However, Mr. Neal is being compensated by the plaintiffs, and has been retained by plaintiffs’ counsel on at least four occasions. Tr. II (Neal) 130:3-22. Counsel also cross-examined Dr. Jacoby on the handful of cases in which his findings had been criticized (Tr. IV (Jacoby) 70:16-75:4), suggesting that Dr. Jacoby had intentionally “rigged a survey to get a particular result.” Tr. IV (Jacoby) 74:21-75:4. I have read those cases, and I have also read cases that laud Dr. Jacoby’s credentials and research. See, e.g., Indianapolis Colts v. Metropolitan Baltimore Football Club Ltd. Partnership, 34 F.3d 410, 415 (7th Cir. 1994) (Judge Posner characterizing Dr. Jacoby's survey evidence and related testimony as having "all the trappings of social scientific rigor"); Hill's Pet Nutrition v. Nutro Products, 258 F. Supp. 2d 1197, 1210 (D. Kan. 2003) (finding “credentials and testimony of Dr. Jacoby to be impeccable, and his rationale thoroughly persuasive”); Beacon Mutual Ins. Co., v. OneBeacon Ins. Group, 253 F.Supp. 2d 221, 225-26 (D.R.I. 2003). I do not find it surprising that a witness who has testified in over 100 cases (Tr. IV (Jacoby) 8:24-9:2) has been criticized from time to time, and find that Dr. Jacoby is a highly qualified and well- recognized expert in consumer confusion and survey evidence. 29 Mr. Neal Did Not Show the Survey Respondents Any WhenU Pop-Up Ads or Other Stimuli 105. One flaw in Mr. Neal’s methodology was his failure to show the respondents any demonstrative stimulus. Tr. II (Neal) 134:15-19; PX 158; PX 159. Mr. Neal did not show the 1-800 respondents an exemplar of a WhenU ad, nor did he ensure that the respondents had WhenU ads in mind -- as opposed to pop-up ads generated by Gator, or a search engine or a commercial website. Mr. Neal did not do anything to find out whether his respondents were even familiar with SaveNow ads. Tr. II (Neal) 138:20-141:2. Indeed, Mr. Neal conceded that he did not know with any degree of scientific certainty whether any of the respondents had ever seen a SaveNow ad. Tr. II (Neal) 139:7-10. 106. In lieu of showing any actual ads, Mr. Neal provided a generic description of a pop-up ad at the beginning of the surveys. PX 158, Tab C; Tr. II (Neal) 136:8-10, 138:9-19. This description explained that pop-up advertisements (a) usually appear in the middle of the user’s screen, (b) partially block out the content of the underlying web page, (c) may automatically take the user to another web site, and (d) may not close when the user clicks the “x” in the upper right-hand corner. PX 158, Tab C & PX 159. The survey instructed respondents to use this description in answering the questions in the survey (PX 158, Ex. C, p. 31), and Mr. Neal conceded he intended respondents to think of pop-up ads in the manner that he described them for purposes of responding to the survey. Tr. Vol. II (Neal) 138:9-19. 107. As Mr. Neal conceded (Tr. II (Neal) 156:4-9), his definition does not describe the defendant’s advertisements.15 WhenU pop-up, or small format, advertisements appear 15 These inaccuracies were likely due to the fact that Mr. Neal knew almost nothing about SaveNow ads when he designed the 1-800 Survey, never having seen SaveNow in operation. Tr. II (Neal) 45:10-46:12. In formulating the definition, Mr. Neal relied on information he received from 1-800’s attorneys and a perusal of WhenU’s website. Tr. II (Neal) 128:6-129:7. While Mr. Neal testified on his re-direct examination that he had seen SaveNow ads in operation prior to conducting the 1-800 survey (Tr. III (Neal) 22:10-18), this testimony is inconsistent with Mr. Neal’s prior testimony in the 1-800 case and on cross-examination. Tr. II (Neal) 128:16-19; Tr. III (Neal) 43:4-45:19. 30 in the bottom right-hand corner of the screen (Tr. VI (Naider) 35:18-36:12) and do not necessarily block any webpage content. See, e.g., PX 128. More than half of WhenU advertisements are pop-under ads which do not appear on the user’s screen until after the browser window has been closed.16 Tr. VII (Naider) 44:11-45:17. WhenU ads do not take the user to another website without an affirmative click by the user (Tr. VIII (Naider) 108:3-5) and can always be closed by a click on the “x”. Tr. VI (Naider) 35:8-17. Mr. Neal conceded that a consumer might feel differently about a pop-up ad that automatically takes a consumer to another website (as he described) versus an ad that does not. Tr. II (Neal) 158:7-12. 108. The Court also rejects Mr. Neal’s effort to determine whether respondents were confused about the source of the ads based on their general recollection of pop-up ads they might have seen. Tr. II (Neal) 134:15-19, 135:24-136:10. As Dr. Jacoby testified, recall is used where the material issue is what the consumer remembers. The recall technique is not used to test confusion. Tr. IV (Jacoby) 31:19-34:4. 109. The Court also rejects Mr. Neal’s testimony that the sheer number of different SaveNow ads made it impossible to conduct a survey using actual SaveNow advertisements. Tr. III (Neal) 25:22-23:10. Mr. Neal could have used a sampling methodology to test a representative sample of WhenU advertisements, using any one of a variety of accepted scientific techniques. Tr. IV (Jacoby) 28:8-31:3. Mr. Neal’s explanation is further undercut by his concession that he would likely have used SaveNow ads in the 1-800 Survey had they been available to him. See PX 191 at 6.17 110. Because Mr. Neal did not show the survey respondents WhenU ads, there is no way for anyone to know whether the respondents had WhenU ads in mind when they answered 16 Mr. Neal testified that he had limited his survey to the pop-up format because he believed (erroneously) that it was the predominant format. Tr. II (Neal) 156:16-21. 17 This testimony is perplexing as Mr. Neal testified that plaintiffs’ counsel provided him with some screen shots of SaveNow ads. Tr. II (Neal) 128:20-25. 31 his questions. As Dr. Jacoby testified: “There’s absolutely no scientific defensible foundation for concluding any WhenU advertising caused any of the data . . . . you can’t connect the dots. . . .” Tr. IV (Jacoby) 34:5-11. The Survey’s Results Cannot Be Applied in This Case Because the Surveys Tested Universes of Respondents That Are Not Inclusive of the Relevant Universe in This Case 111. The surveys also do not provide reliable evidence of confusion because they did not sample the relevant universe of people who obtain mortgages or conduct banking services online (i.e., people who use or are likely to use plaintiffs’ websites). The results of a survey of contact lens users or a survey of readers of online periodicals cannot be extrapolated with accuracy to people who use or are likely to use plaintiffs’ online financial services.18 Tr. IV (Jacoby) 26:11-18. This is so even if all these people share similar demographic data. Tr. IV (Jacoby) 18:1-19:6. Of the approximately 156 million people who use the Internet, only 28 million shop for mortgages online. Tr. IV (Jacoby) 22:11-15. Furthermore, only 12 -13% of consumers wear contact lenses. Tr. IV (Jacoby) 25:21-26:3. Given these statistics, there is no way to conclude that the contact lens wearing 1-800 respondents were also persons interested in obtaining mortgages online. Tr. IV (Jacoby) 19:7-12, 20:24 - 23:10, 25:19-17, 26:11-18. 112. Moreover, people conducting banking transactions or purchasing mortgages are more likely to pay careful attention than people buying contact lenses or perusing a periodical. Tr. II (Neal) 141:16-142:4; Tr. IV (Jacoby) 21:7-19. A meaningful survey must take into account not only the respondents’ demographic characteristics, but also what they are 18 The Gator Survey used a sample of people who reported that they had accessed an online newspaper or magazine within the last two months. PX 159, Ex. 4, p.19. The 1-800 Survey relied on a sample of people who reported that they were contact lens users or anticipated getting contact lenses within the next year and would “consider using the Internet to shop for or purchase contact lenses.” PX 158, Ex. B (S7, S11, S12). There were no questions in either survey concerning the use or likely use of online financial services. PX 158; PX 159. 32 doing at the time because consumers make decisions of different import with different mindsets. Tr. IV (Jacoby) 20:24-21:19. 113. Mr. Neal’s opinion that he could extrapolate the results of his previous surveys to users of online financial services does not appear to be well founded. Indeed, Mr. Neal acknowledged that there was no empirical evidence that supports his conclusion that the Wells Fargo and Quicken Loans website user populations are the same as the populations he developed for the 1-800 and Gator Surveys. Tr. III (Neal) 14:12-18. Mr. Neal’s Survey Questions Were Biased 114. Mr. Neal’s surveys also are unreliable because he used leading questions that may have skewed the survey results. Tr. IV (Jacoby) 34:12-24. 115. For example, Mr. Neal improperly told respondents that pop up ads appear “on” a website, thus suggesting the association he was trying to establish. Moreover, Mr. Neal admitted that some of his questions were biased. For example, Mr. Neal admitted that Question 10 (“Do you believe that WhenU.com was honest in informing you about what SaveNow software did?”) was a “loaded question” because of the suggestive nature of the word “honest.” PX 191 at p. 30; Tr. II (Neal) 166:8-167:7. Mr. Neal further admitted that, when he prepared the questionnaire, he was aware that his use of the word “honest” violated the standard rules of framing survey questionnaires. Tr. II (Neal) 167:3-12. See also Tr. II (Neal) 165:20-25. Mr. Neal Did Not Rule Out Obvious Alternative Explanations and Made Unsupported Analytical Leaps 116. Mr. Neal’s analysis of the survey data was flawed in other respects. For example, Mr. Neal concluded that 60% of respondents believed “pop-up ads are placed on the website on which they appear by the owners of that web site” (PX 110, ¶ 6(e , relying on Question 4-1, which required respondents to agree, disagree or state no opinion as to the statement: “I believe that pop-up advertisements are placed on the website on which they appear by the owners of the website.” PX 158, Tab C, p. 32; Tr. II (Neal) 168:3-5. If the 33 respondent indicated that he or she agreed, Mr. Neal interpreted that to mean the respondent believed that pop-up ads are always placed “on the website … by the owners of that website”. Tr. II (Neal) 167:14-169:24. Mr. Neal testified that respondents who believed that pop-up ads were sometimes displayed by website owners and sometimes not displayed by the website owners would not have answered “Agree,” but rather said they had “no opinion.” Tr. II (Neal) 168:6-169:19. He also failed to consider obvious alternative explanations for his results. 117. Mr. Neal’s testimony is counter-intuitive. A respondent who believed that some pop-up ads are displayed by website owners clearly had an opinion with respect to Q4.1. Moreover, the only evidence related to Mr. Neal’s assumption that “Agree” meant “always agree” demonstrates that the assumption is wrong. In response to Question 4-4 of the Gator Survey (“I believe that ‘Pop-Up’ advertisements are sponsored by the website on which they appear”) more than 66% “Agreed.” Under Mr. Neal’s interpretation, this meant that 66% of the Gator respondents thought that pop-up ads are always sponsored by “the website on which they appear.” However, in the next question of that survey, Mr. Neal posed the opposite question, “I believe that ‘Pop-up’ advertisements are sometimes not sponsored by or authorized by the website on which they appear.” If, as Mr. Neal believes, the 66% who agreed with Question 4-4 believed that pop-up ads are always “placed on the website … by the owners of that website,” then a maximum of 34% of these respondents could possibly have agreed with Question 4-5, that pop-up ads are only sometimes not sponsored by the website owner. Tr. II (Neal) 172:9-173:14. However, 47% of respondents agreed with Q 4-5. This data indicates an error in Mr. Neal’s reasoning. 118. By failing to consider and account for these and other alternative explanations for his results, Mr. Neal violated basic standards of scientific practice and rendered his results unreliable. Tr. IV (Jacoby) 42:1-43:4. The Survey Was Not Properly Administered, Did Not Contain Control Questions to Generate an Error Rate, and Employed a Design that Rendered the Results Uninterpretable 34 119. Mr. Neal failed to employ an experimental design that established causation. As Dr. Jacoby testified, unless a control group is used to account for the effects of “noise,” i.e., extrinsic factors such as pre-existing beliefs other than the stimulus at issue that could contribute to a survey’s results, the survey’s results are uninterpretable. Mr. Neal acknowledged that he did not use a true control group (Tr. II (Neal) 92:17-21) and that, as a result, his conclusions only had a 51% certainty level. Tr. III (Neal) 24:6-25:8. While Mr. Neal asserted that a certainty level of 51% is all that can be achieved in the social sciences (Tr. III (Neal) 23:13-24), his testimony is contradicted by Dr. Jacoby, who testified that the certainty level required in the social sciences is at least 95% (Tr. IV (Jacoby) 52:25-54:14), and who provided an example of the kind of survey design that could have been employed to establish causation. Tr. IV (Jacoby) 52:25-54:14. 120. Other problems with Mr. Neal’s survey include: (a) the use of an Internet panel (Tr. IV (Jacoby) 45:13-47:7); (b) the failure to use standard procedures to avoid yea saying (Tr. IV (Jacoby) 36:24-39:20); (c) the use of compound questions (Tr. IV (Jacoby) 37:5-6); (d) the failure to correct for possible error through the use of control or filter questions (for example, by testing response rates to questions about fictional computer programs) (Tr. IV (Jacoby) 43:8-44:21); and (e) the failure to provide an independent check on respondents’ understanding of the questions through the use of an in-person interviewer or administrator. Tr. IV (Jacoby) 43:25-44:3, 45:17-46:4. Plaintiffs Have Not Shown Irreparable Harm 121. Plaintiffs assert that WhenU advertisements cause them irreparable harm by imposing non-compensable reputational injury on their marks. However, plaintiffs have failed to come forward with concrete evidence of even a single customer or potential customer who failed to purchase products or services from them because of WhenU. 122. Quicken Loans knew everything it needed to know to commence an action against WhenU by November 2002, and Wells Fargo knew everything it needed to know by 35 December 2002. Indeed, Wells Fargo had prepared screen shots of SaveNow for use in litigation as early as November 2002 (Complaint, ¶ 2); Quicken Loans prepared similar screen shots as early as September 2002. PX 136. Nonetheless, this motion was not filed until May 20, 2003. The dilatory behavior of the plaintiffs in prosecuting their claims, and their strategic decision to defer a trademark case while they fulfilled the jurisdictional requirements for a copyright claim, are inconsistent with a finding that WhenU’s ads are causing the plaintiffs’ irreparable injury. WhenU Does Not Link to Plaintiffs’ Websites 123. Plaintiffs further contend that WhenU’s advertising injures them because it puts them at risk with their regulators. Specifically, plaintiffs have proffered certain federal banking regulations relating to weblinking, and suggested that these regulations apply to WhenU’s advertisements. However, plaintiffs have offered no competent testimony to that effect and a simple reading of the alleged regulations on which plaintiffs rely shows that they are concerned only with federal banks which employ “weblinking” with various websites and with which they have “joint marketing relationships.” See, e.g., Electronic Activities, 67 F. Reg. 34, 992 at 35,002 (May 17, 2002). 124. The SaveNow software does not link to any website other than the websites of WhenU and WhenU’s advertisers and WhenU has no co-branding relationships with any banks. Tr. VIII (Naider) 107:19-108:2. No regulatory agency has ever approached WhenU to express concerns about the effects of WhenU software on the regulation of banks or financial services companies. Tr. VIII (Naider) 108:6-13. Indeed, plaintiffs have failed to proffer any evidence that federal regulators have ever inquired about or expressed concerns about WhenU or WhenU advertising. Plaintiff Quicken Loans Has Actually Benefitted from SaveNow 125. Although plaintiffs both assert having been harmed by SaveNow, Quicken Loans has actually benefitted from WhenU advertising. 36 126. The Quicken Loans website is part of the overall Quicken.com website. The Quicken.com website is owned by Intuit, which owns TurboTax and other entities. DX 554; Tr. I (Stapp) 76:22-25, 109:5-24. Quicken Loans relies heavily on Intuit’s “Quicken” brand to attract its customers. Tr. I (Stapp) 89:3-6. 127. As part of the Quicken.com website, Quicken Loans benefits from any increase in the traffic to the Quicken.com home page or any other component of the Quicken.com website, including Turbo Tax. Tr. I (Stapp) 135:2-10. In recognition of this synergy, Quicken Loans has conducted joint marketing campaigns with Turbo Tax and other Intuit entities to drive traffic to the Quicken website. DX 557; Tr. I (Stapp) 134:5-13. 128. Turbo Tax uses WhenU to advertise its products. DX 558-560; Tr. I (Stapp) 137:2-5; Tr. VII (Naider) 92:2-93:12. WhenU’s Turbo Tax advertising campaign has been very effective in bringing visitors to the joint Turbo Tax/Quicken website. DX 559. Accordingly, the Court finds that Quicken Loans has benefitted from the use of WhenU software by Turbo Tax to drive traffic to the Quicken family of entities. Tr. I (Stapp) 135:11-15. 129. In contrast, the only harm alleged by Quicken Loans stems from the possibility that a recipient of a SaveNow ad may conclude the SaveNow advertiser has a superior offer and thereby be “diverted” from the Quicken Loans webpage. Quicken Loans has not demonstrated that even a single customer, who would have otherwise purchased services from Quicken Loans, did not do so because of “diversion” by a WhenU advertisement. Indeed, Mr. Stapp admitted that only 3-5 percent of people who access the Quicken Loans site even bother to fill out an application form, much less procure services from Quicken Loans. Tr. I (Stapp) 84:12-16. An Injunction Will Harm WhenU and the Public 130. Entry of a preliminary injunction would seriously harm WhenU. A court opinion casting doubt on the legality of WhenU’s core business model would result in the loss of many of WhenU’s largest advertisers, costing WhenU millions of dollars in lost revenue. Tr. VIII 37 (Naider) 36:23-37:9. Because of the long planning cycles involved in the advertising business, this damage could not be recouped even if WhenU eventually prevailed on the merits. Tr. VIII (Naider) 37:10-19. 131. A number of advertisers, including American Express, Bank of America and General Motors, have already discontinued their campaigns with WhenU out of concern that further use of WhenU’s advertising services will embroil them in litigation. In the opinion of WhenU’s CEO, WhenU would lose key advertisers should this Court issue a preliminary injunction. DX 501, ¶ 58; Tr. VIII (Naider) 36:25-37:9. 132. WhenU employs the services of 50 individuals to maintain its operations, and relies on the efforts of some 60 or 70 independent sales representatives, many of whom derive most of their revenue from sales generated on behalf of WhenU. Tr. VII (Naider) 32:2- 16. WhenU’s business success depends heavily on attracting and recruiting talented personnel. The effect of an injunction and the associated financial losses would be to prevent WhenU from recruiting talented people and to increase the likelihood that present employees would leave the company. Tr. VIII (Naider) 37:20-38:5. 133. The issuance of a preliminary injunction would have an adverse effect on WhenU’s ability and incentive to improve its contextual advertising technology to deliver more specific real-time advertising. WhenU is a start-up company, and its technology is constantly evolving. Tr. VII (Naider) 28:18-19. 134. Harm to WhenU would harm the public as well. WhenU benefits participating consumers by improving access to relevant, useful and money-saving information about products and services that interest them. WhenU’s advertisements increase the choices available to consumers and thereby promote competition. DX 501, ¶¶ 35, 55. 135. A preliminary injunction could also chill the efforts of other companies seeking to develop forms of “push technology” -- technology that delivers information to the desktop 38 without need for consumers to make an active request each time they see the information. Tr. VII (Naider) 29:22-31:20. CONCLUSIONS OF LAW I. Preliminary Injunction Standard In considering whether to issue a preliminary injunction, the court must consider four factors: “(1) whether the movant has shown a strong likelihood of success on the merits; (2) whether the movant will suffer irreparable harm if the injunction is not issued; (3) whether the issuance of the injunction would cause substantial harm to others; and (4) whether the public interest would be served by issuing the injunction.” Overstreet v. Lexington-Fayette Urban County Gov’t, 305 F.3d 566, 573 (6th Cir. 2002). See also Rock and Roll Hall of Fame Museum, Inc. v. Gentile Prods., 134 F.3d 749, 753 (6th Cir. 1998) (noting that first factor is whether movants have shown a “strong likelihood” of success on the merits). A movant must also demonstrate that “failure to issue the injunction is likely to result in irreparable harm” to him. United States v. Miami Univ., 294 F.3d 797, 816 (6th Cir. 2002) (quoting Kallstrom v. City of Columbus, 136 F.3d 1055, 1068 (6th Cir. 1998 . A preliminary injunction is “an extraordinary remedy involving the exercise of a very far-reaching power.” Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000) (quoting Direx Israel, Ltd. v. Breakthrough Med. Corp., 952 F.2d 802, 811 (4th Cir. 1991 . It is because preliminary injunctive relief is such a “drastic” remedy that plaintiffs must show circumstances clearly demand its entry. Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (quoting 11A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure §2948 (2d ed. 1995 . II. Plaintiffs Have Not Demonstrated A Strong Likelihood of Success on the Merits of Their Trademark Claims Plaintiffs contend that WhenU infringes on their trademarks in violation of Section 32(l) of the Lanham Act. That section provides in relevant part: 39 Any person who shall, without the consent of the registrant- (a) use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; . . . 15 U.S.C. § 1114(1)(a). To establish a claim for trademark infringement, plaintiffs must prove: (1) ownership of a valid mark that is entitled to protection under the Lanham Act, and (2) that WhenU’s use of the mark is likely to cause confusion within the consuming public. See Champions Golf Club, Inc. v. The Champions Golf Club, Inc., 78 F.3d 1111, 1114 (6th Cir. 1996). It is established that plaintiffs own valid marks entitled to protection. The only issue is whether plaintiffs can establish the second element of their trademark infringement claim. A. Defendant Does Not “Use” the Plaintiffs’ Marks “in Commerce” The Lanham Act only forbids the “use in commerce…of a registered mark in connection with the sale, offering for sale, distribution or advertising’’ of goods or services. 15 U.S.C. § 1114(1)(a). See also 15 U.S.C. § 1127 (a trademark is deemed to be used in commerce only “when it is used or displayed in the sale or advertising of services”). There can be no liability under the Lanham Act absent the use of a trademark in a way that identifies the products and services being advertised by the defendant. See, e.g., DaimlerChrysler AG v. Bloom, 315 F.3d 932, 936 (8th Cir. 2003); Holiday Inns, Inc. v. 800 Reservation, Inc., 86 F.3d 619, 623-25 (6th Cir. 1996). Plaintiffs’ trademarks do not appear in WhenU ads or coupons. The only trademarks that appear in a WhenU ad are WhenU’s own marks and the marks of its advertisers. FF ¶¶ 78-91. Thus, this is not the “usual trademark case” where “the defendant is using a mark to identify its goods that is similar to the plaintiff’s trademark.” Interactive Prods. Corp. v. a2z Mobile Office Solutions, Inc., 326 F.3d 687, 695 (6th Cir. 2003). 40 The Lanham Act defines “use in commerce” as “the bona fide use of a mark in the ordinary course of trade.” 15 U.S.C. § 1127. With respect to services, a mark is used in commerce “when it is used or displayed in the sale or advertising of services and the services are rendered in commerce . . .” Id. “If [a defendant is] using [a plaintiff’s] trademark in a ‘non- trademark’ way– that is, in a way that does not identify the source of a product– then trademark infringement and false designation of origin laws do not apply.” Interactive Prods. Corp., 326 F.3d at 695 (finding that defendant’s use of plaintiff’s mark in post-domain path name of defendant’s website did not constitute “use in commerce” as it did not identify source of goods and was not used with intent to confuse or mislead consumers). Plaintiffs argue that WhenU uses their marks in at least three ways. First, WhenU hinders Internet users from accessing plaintiff’s websites. Second, WhenU deliberately positions its “pop-up” advertisements in close proximity to plaintiffs’ trademarks. And third, WhenU uses plaintiffs’ marks to trigger delivery of advertisements. 1. Defendant Does Not Hinder Access to Plaintiffs’ Sites Plaintiffs contend that when consumers attempt to access plaintiffs’ websites and WhenU advertisements “pop-up,” users may mistakenly be diverted to the advertisers’ websites or may become so frustrated, angry, or confused by the advertisements that they stop visiting plaintiffs’ sites or fail to continue searching for the types of services that seem to trigger such advertisements. Plaintiffs cite two cases to demonstrate that this is “use” under the Act: People for Ethical Treatment of Animals [PETA] v. Doughney, 263 F.3d 359, 365 (4th Cir. 2001), and Planned Parenthood Fed’n of America, Inc. [Planned Parenthood] v. Bucci, No. 97 Civ. 0629 (KMW), 1997 WL 133313 at *4 (S.D.N.Y. 1997). The conduct in neither case, however, is analogous to WhenU’s conduct. In PETA, the Fourth Circuit Court of Appeals held that the defendant used the plaintiff’s mark “in connection with” goods or services when he registered the domain name “peta.org,” used the name to 41 establish a website for the purported organization “People Eating Tasty Animals,” and provided links on the website to various sources for meat, fur, leather, hunting, animal research, and other organizations with views generally antithetical to PETA’s views. PETA, 263 F.3d at 365. The court concluded that the defendant did not actually have to sell or advertise goods or services on his www.peta.org website to use PETA’s mark in commerce. Id. Rather he only had to prevent users from obtaining or using PETA’s goods or services or had to link his website to other’s goods or services. Id. In reaching this conclusion, the PETA court primarily relied on the reasoning of the District Court for the Southern District of New York in Planned Parenthood v. Bucci, a factually similar case. The defendant in Planned Parenthood registered the domain name “plannedparenthood.com” and created a website using that name which contained information antithetical to Planned Parenthood’s views. Id. at 365 (summarizing Planned Parenthood). The district court reasoned that the defendant used the plaintiff’s mark “in connection with” the distribution of services for the following reason: . . . it is likely to prevent some Internet users from reaching plaintiff’s own Internet web site. Prospective users of plaintiff’s services who mistakenly access defendant’s web site may fail to continue to search for plaintiff’s own home page, due to anger, frustration, or the belief that plaintiff’s home page does not exist. Id. The PETA court relied on the Planned Parenthood court’s reasoning, even though the defendant’s website, unlike the deceptive Planned Parenthood site, contained a hyperlink to PETA’s official site. Id. at 363. WhenU’s “use” of plaintiffs’ marks is not analogous to the defendants’ use in PETA and Planned Parenthood. WhenU only uses plaintiffs’ marks in its directory, to which the typical consumer does not have access, in order to determine what advertisements to direct to consumers. Unlike PETA and Planned Parenthood, a consumer entering the domain name or URL address for either Wells Fargo or Quicken Loans in fact accesses the Wells Fargo or 42 Quicken Loans websites. Plaintiffs present no evidence to suggest that consumers are unable to reach their sites as a result of the simultaneous appearance of WhenU’s advertisements on their computer screens. To view plaintiffs’ websites in full, consumers only need to move, minimize, or close the advertisement windows. Thus, this Court finds PETA and Planned Parenthood unpersuasive in that defendant does not hinder access to plaintiffs’ sites. 2. The Fact that Some WhenU Advertisements Appear on a Computer Screen at the Same Time Plaintiffs’ Webpages are Visible in a Separate Window Does Not Constitute a Use in Commerce of the Plaintiffs’ Marks a. The Positioning of Defendant’s Advertisements Does Not Constitute “Framing” Plaintiffs argue that WhenU positions its “pop-up” advertisements in such a way that consumers see one display containing WhenU’s advertisements and plaintiffs’ websites and trademarks. This positioning, plaintiffs contend, gives consumers the “impression that the pop-up is affiliated with or approved by [p]laintiffs.” Plaintiffs complain that WhenU therefore is relying on, and thus using, plaintiffs’ marks and their associated reputation. To support their claim that this constitutes “use in commerce,” plaintiffs rely on Hard Rock Café International (USA), Inc. v. Morton, No. 97 Civ. 9483 (RPP), 1999 WL 717995 (S.D.N.Y. 1999). Peter Morton (“Morton”), one of the defendants in Hard Rock Café, co-founded the first Hard Rock Café in London, England in 1971 with Isaac Tigrett (“Tigrett”). Id. at *2. Morton and Tigrett owned and operated a number of Hard Rock Cafés until a dispute between them in 1985 resulted in the division of their properties. Id. Tigrett subsequently sold his Hard Rock Café interests. Id. By 1990, the Rank Group PLC (“Rank”) had acquired those interests. Id. 43 The plaintiff in Hard Rock Café, Hard Rock Café International (USA) Inc. (HRCI), is a subsidiary of Rank. Id. at *1. In 1995, Morton opened The Hard Rock Hotel and Casino in Las Vegas, Nevada. Id. at *2. The following year, Morton sold his interests in the Hard Rock Café business to Rank, although he retained ownership of the Hard Rock Hotel and Casino in Las Vegas and the rights to develop Hard Rock Hotels and Casinos in certain defined territories. Id. at *1. Morton also sold Rank “all of the assets of and utilized in the conduct of the Business,” including certain intellectual property rights; although by a separate agreement entered into on the same date (the “License Agreement”), he obtained a license to use certain service marks and trademarks. Id. More specifically, the License Agreement granted Morton permission to operate a website and to make certain uses of the Hard Rock Hotel mark. Morton was restricted, however, from using or exploiting the mark outside the Morton Territories in connection with the sale of merchandise. Id. at * 24. In 1997, HRCI commenced a six count lawsuit against Morton claiming that he breached the License Agreement through his operation of an Internet website for the Las Vegas Hard Rock Hotel and Casino (the “Hard Rock Hotel site”). Id. at *1. Relevant to the pending matter is HRCI’s claim that Morton’s site contained a link that opened the website of a third party, Tunes Network, Inc. (“Tunes”), which sold compact disk recordings of music (“CDS”). Id. at *2. A visitor to Morton’s site accessed the Tunes’ site in the following way: When the computer user clicks on the “Shop” icon on the first page of the Hard Rock Hotel web site, a page appears that includes an icon reading “record store.” As of December 1997, clicking on this icon took the user to a Tunes page “framed” by a border on the left and a border on the top, each of which contained a Hard Rock Hotel logo. In the Tunes portion of the page, the computer user can listen to portions of various music CDS and/or purchase music CDS. The CDS are sold by Tunes, not by Hard Rock Hotel. No Hard Rock Hotel logo is shown on the CD packaging but Hard Rock Hotel receives a 5% commission for each of these sales. 44 Id. at *15. Morton argued that the CDS were sold by Tunes, not Hard Rock Hotel, and that the hyperlinks on his website did not involve further “use” of HRCI’s marks because hyperlinks “are merely technical connections between two independent sources of content.” Id. at *25. The District Court for the Southern District of New York concluded otherwise. The court held that Morton used HRCI’s marks in violation of the Licensing Agreement because through the framing mechanism described above, “the Hard Rock Hotel logo appears around the border of a computer screen otherwise filled by the Tunes web page.” Id. at *24-25. The court explained: Framing is far more than a “technical connection between two independent sources of material.” Through framing, the Hard Rock Hotel Mark and the Tunes site are combined together into a single visual presentation and the Hard Rock Hotel Mark is used to promote the sale of CDS by Tunes. Because the Tunes material appears as a window within the original linking page, it is not clear to the computer user that she or he has left the Hard Rock Hotel web site. The domain name appearing at the top of the computer screen . . . continues to indicate the domain name of Hard Rock Hotel, not that of Tunes. The Tunes web page is reached in the same fashion as any other section of the Hard Rock Hotel web site, by clicking on a button labeled “record store” which resembles the other buttons leading to web pages maintained by Hard Rock Hotel. The spinning globe, Hard Rock Hotel’s logo, appears not only to the side of the framed Tunes web page, but also within the Tunes menu bar, on the Tunes page itself. The Hard Rock Hotel web site and the Tunes web page are thus smoothly integrated. In light of this seamless presentation of the Tunes web page within the Hard Rock Hotel web site, the only possible conclusion is that the Hard Rock Hotel Mark is used or exploited to advertise and sell CDS. Id. (internal citations to record omitted). The court further noted that “[f]raming is a flexible device, and in other cases the distinction between the two sources of material appearing on the screen might be clear to the computer user. Such was not the case here.” Id. at *25 n.16. 45 In contrast, in the instant case, when WhenU’s advertisements pop-up and partially overlap plaintiffs’ sites on the computer screen, it seems apparent to the user that what is appearing on his or her screen are two distinct sources of material. Unlike the framing mechanism in Hard Rock Café, the windows containing WhenU’s advertisements are not situated over plaintiffs’ websites in such a way that plaintiffs’ marks appear to be part of the WhenU window. In other words, the presentation of the two windows is not “seamless.” Hard Rock Hotel’s logo, the spinning globe, actually appeared “to the side of the framed Tunes web page” and “within the Tunes menu bar, on the Tune’s page itself.” Id. at *24-25. Plaintiffs’ marks are neither displayed or appear to be displayed on WhenU’s windows, and the fact that WhenU advertisements appear on a computer screen at the same time plaintiffs’ webpages are visible in a separate window does not constitute a use in commerce of plaintiffs’ mark. b. WhenU is Engaged In Legitimate Comparative Advertising The juxtaposition of WhenU’s advertisements with plaintiffs’ websites in separate windows on a participating consumer’s computer screen is a form of comparative advertising. U-Haul Int’l, Inc. v. WhenU.com, Inc., 279 F. Supp. 2d 723, 728 (E.D. Va., 2003) (even if mere simultaneous appearance of defendant’s ad and plaintiffs’ marks constituted a “use” within the meaning of the Lanham Act, it is still immune from liability as a form of legitimate comparative advertising). Comparative advertising rests on the premise that a competitor’s trademark may appear at the same time as the trademark owner’s. 3 J. Thomas McCarthy, McCarthy on Trademarks & Unfair Competition § 25:52 (4th ed. 2003) (hereinafter “__ McCarthy”). See, e.g., G.D. Searle & Co. v. Hudson Pharm. Corp., 715 F.2d 837, 841 (3rd Cir. 1983) (inclusion of Metamucil mark on competitor’s product not a prohibited use under Lanham Act); Diversified Mktg., Inc. v. Estee Lauder, Inc., 705 F. Supp. 128, 132 (S.D.N.Y. 1988) (finding phrase “If You Like ESTEE LAUDER…You’ll Love BEAUTY USA” lawful comparative advertising). 46 In accusing WhenU of “free riding” on their trademarks, plaintiffs ignore the fact that trademark laws are concerned with source identification. They are not meant to protect “consumer good will (sic) created through extensive, skillful, and costly advertising.” Smith v. Chanel, Inc., 402 F.2d 562, 566 (9th Cir. 1968). The rule favoring comparative advertising “rests upon the traditionally accepted premise that the only legally relevant function of a trademark is to impart information as to the source or sponsorship of the product.” Id. Comparative advertisements may therefore make use of competitors’ trademarks even if the advertiser reaps the benefit of “the product recognition engendered by the owner’s popularization, through expensive advertising, of the mark.” Anti-Monopoly, Inc. v. Gen. Mills Fun Group, 611 F.2d 296, 301 n.2 (9th Cir. 1979). The so-called comparative advertising cases cited by plaintiffs do not hold otherwise. (Reply Memorandum in Support of Plaintiffs’ Motion for Preliminary Injunction (“Plaintiffs’ Reply Mem.”) at p. 2.) Oral-B Labs., Inc. v. Mi-Lor Corp., 810 F.2d 20 (2d Cir. 1987), did not involve comparative advertising. August Storck K.G. v. Nabisco, Inc., 59 F.3d 616 (7th Cir. 1995), ruled that the simultaneous presentation of the plaintiff’s trademarks on the defendant’s packaging was lawful competitive advertising, despite the finding of the district court that the packaging created a possibility of confusion. Id. at 618. Noting that “some [consumers] are bound to misunderstand no matter how careful a producer is,” the Storck court criticized the district court’s overstatement of the plaintiff’s “private injury” and its relative disregard of the higher “public interest in competition.” Id. at 618-619. c. The Inclusion of URLs that Include Portions of Plaintiffs’ Trademarked Names in the Scrambled WhenU Directory is Not a Use in Commerce Plaintiffs also argue that WhenU’s inclusion of their marks in the WhenU Directory constitutes “use in commerce.” The inclusion of web addresses in WhenU’s proprietary Directory is done to identify the category the participating consumer is interested in, such as mortgages, and to dispatch a contextually relevant advertisement to that consumer. The 47 advertisement that is displayed does not bear the plaintiffs’ trademarks. To the contrary, it bears WhenU’s marks and branding as well as those of the advertiser. Thus, the SaveNow software only uses URLs to identify the website itself, just like one would have to use the word “Macy’s” to describe the Macy’s department store. This does not constitute the “use” of any trademark belonging to plaintiffs, as that term is used in the Lanham Act, because WhenU does not use any of the plaintiffs’ trademarks to indicate anything about the source of the products and services it advertises. Bird v. Parsons, 289 F.3d 865, 877-78 (6th Cir. 2002) (when a domain name is used to indicate an address on the Internet, and not to identify the source of goods and services, it is not functioning as a trademark); U-Haul, 279 F.Supp. 2d at 727-28. The cases cited by plaintiffs (Plaintiffs’ Reply Mem. pp. 1-2) do not support their argument that the inclusion of URLs in the WhenU directory constitutes the use of a trademark under the Lanham Act. In Eli Lilly & Co. v Natural Answers, Inc., 233 F.3d 456, 465 (7th Cir. 2000), and New York State Society of Certified Public Accountants v. Eric Louis Assoc., Inc., 79 F. Supp. 2d. 331, 342 (S.D.N.Y.1999), the courts considered whether a defendant’s use of a plaintiff’s trademark as metatags in its website constitutes trademark infringement. Only a handful of courts have addressed this issue. Most of those courts hold that such use is “use in commerce” and violates the Lanham Act if such use also causes customer confusion or initial interest confusion and is not a “fair use” of the plaintiff’s mark.19 See, e.g., id.; 19“Metatags are HTML code intended to describe the contents of the web site.” Brookfield, 174 F.3d at 1045. It is interesting to note that in many of the cases involving metatags, the defendant’s use of the plaintiff’s mark was not limited to use as a metatag on the defendant’s website. For example, in New York State Society of Certified Public Accountants, the defendant also used plaintiff’s Internet domain name NYSSCPA to establish his Website at NYSSCPA.com (“.org” was the top-level domain of plaintiff’s site). New York State Society of Certified Public Accts., 79 F. Supp. 2d. at 338-39. In Brookfield, the defendant used plaintiff’s mark as the domain name for its Website. Brookfield, 174 F.3d at 1043-44. And in Eli Lilly, the court focused on the defendant’s use of the plaintiff’s mark “Prozac” in the name of its herbal alternative “Herbrozac,” in deciding that defendant infringed upon plaintiff’s mark, rather than defendant’s inclusion of the mark (continued...) 48 Brookfield, 174 F.3d at 1064-65 (concluding that use of metatags constitutes “use in commerce” and violates trademark laws because it created “initial interest confusion”); Niton Corp. v. Radiation Monitoring Devices, Inc., 27 F. Supp. 2d 102 (D. Mass. 1998)(holding that direct copying of plaintiff’s metatags and HTML code constituted trademark infringement); Trans Union L.L.C. v. Credit Research, Inc., 142 F. Supp. 2d 1029 (N.D. Ill. 2001)(holding that use of plaintiff’s trade name as metatag in defendant’s website was a permissible fair use as metatag simply described defendants and the content of their website); Bihari v. Gross, 119 F. Supp. 2d 309, 322-23 (S.D.N.Y. 2000)(holding that use of metatags constitutes “use in commerce” but finding no trademark violation because defendants only used mark in metatag to fairly identify the content of his websites and did so in good faith– that is, without the intention of capitalizing on the plaintiff’s reputation and goodwill). The Brookfield court offered the following analogy to explain its holding: Using another’s trademark in one’s metatags is much like posting a sign with another’s trademark in front of one’s store. Suppose West Coast’s competitor (let’s call it “Blockbuster”) puts up a billboard on a highway reading– “West Coast Video: 2 miles ahead at Exit 7"– where West Coast is really located at Exit 8 but Blockbuster is located at Exit 7. Customer’s looking for West Coast’s store will pull off at Exit 7 and drive around looking for it. Unable to locate West Coast, but seeing the Blockbuster store right by the highway entrance, they may simply rent there. Brookfield, 174 F.3d at 1063. But, as the only court to address whether “keying” a plaintiff’s trademark is “use in commerce” stated, “keying” (a process which is more analogous to WhenU’s method of triggering ads than using metatags), is not analogous to the “devious placement of a road sign bearing false information.” See Playboy Enters., Inc. v. Netscape 19(...continued) as metatags on its website. Eli Lilly, 233 F.3d at 462-64. 49 Communications Corp., 55 F. Supp. 2d. 1070, 1076 (C.D. Cal.), aff’d, 202 F.3d 278 (9th Cir. 1999). In Playboy, Playboy Enterprises filed a trademark infringement action against two Internet search engine operators, Netscape Communications Corp. (“Netscape”) and Excite, Inc. (“Excite”). Id. at 1071. Playboy challenged Netscape’s and Excite’s sale of its trademarks “playboy” and “playmate” as keyword search terms to prompt banner advertisements for competitors’ adult entertainment sites. Id. at 1072. Netscape and Excite keyed hundreds of additional terms to trigger these particular advertisements. Id. In holding that defendants were not using Playboy’s trademarks in commerce, the district court primarily focused on the fact that Internet users only could enter the generic word “playboy” or playmate” as search terms, which the court concluded were English words in their own right. Id. at 1073. But the court also concluded that Netscape’s and Excite’s use of Playboy’s trademarks was distinguishable from the defendant’s use of the plaintiff’s mark in Brookfield. Id. The Playboy court therefore offered this analogy as a more appropriate comparison to the defendants’ conduct: This case presents a scenario more akin to a driver pulling off the freeway in response to a sign that reads “Fast Food Burgers” to find a well-known fast food burger restaurant, next to which stands a billboard that reads: “Better Burgers: 1 Block Further.” The driver, previously enticed by the prospect of a burger from the well-known restaurant, now decides she wants to explore other options. Assuming that the same entity owns the land on which both the burger restaurant and the competitor’s billboard stand, should that entity be liable to the burger restaurant for diverting the driver? Id. at 1075. While the court did not answer this question explicitly, the analogy itself and the court’s ultimate holding indicate that the answer would be no. The Playboy court’s analogy presents a closer scenario to the present case than that used in Brookfield, and it supports 50 the conclusion that the inclusion of plaintiffs’ marks in defendant’s Directory is not a use in commerce. B. Plaintiffs Have Not Demonstrated Likelihood of Confusion 1. The Legal Standard Although the Court’s holding that defendant has not impermissibly used plaintiffs’ marks makes it unnecessary to reach the issue of likelihood of confusion, plaintiffs’ failure to establish this element of their claim further weakens their request for injunctive relief. In typical trademark cases, courts determine whether a likelihood of confusion exists by examining and weighing the following factors: (1) the strength of the senior mark; (2) relatedness of the goods and services; (3) the similarity of the marks; (4) evidence of actual confusion; (5) the marketing channels used; (6) likely degree of purchaser care; (7) the intent of the defendant in selecting the mark; and (8) the likelihood of expansion of the product lines. Holiday Inns, 86 F.3d at 623 (citing Frisch’s Rest., Inc. v. Elby’s Big Boy, Inc., 670 F.2d 642, 648 (6th Cir. 1982 . These factors are not exhaustive and courts may consider some or none of them, or expand upon them. As the Sixth Circuit cautioned, “‘[e]ach case presents its own complex set of circumstances and not all of these factors may be particularly helpful in any given case.’” Interactive Prods., 326 F.3d at 694 (quoting Homeowners Group, Inc. v. Home Mktg. Specialists, Inc., 931 F.2d 1100, 1107 (6th Cir. 1991 . In the Internet setting in particular, courts have begun to realize that consumer confusion can occur even though the consumer is not actually confused as to the source of goods or services at the point of sale or upon reaching the website to which he or she was “hijacked.” See, e.g., Brookfield, 174 F.3d at 1062; Eli Lilly, 233 F.3d at 465; N.Y. State Society of Certified Public Accts., 79 F. Supp. 2d. at 342. This doctrine, referred to as “initial interest confusion,” has been recognized by a handful of courts as actionable under the Lanham Act. See id. In Playboy, the district court explained this doctrine as follows: 51 Initial interest confusion, as coined by the Ninth Circuit, is a brand of confusion particularly applicable to the Internet. Generally speaking, initial interest confusion may result when a user conducts a search using a trademark term and the results of the search include web sites not sponsored by the holder of the trademark search term, but rather of competitors. The Ninth Circuit reasoned that the user may be diverted to an un- sponsored site, and only realize that she has been diverted upon arriving at the competitor’s site. Once there, however, even though the user knows she is not in the site initially sought, she may stay. In that way, the competitor has captured the trademark holder’s potential visitors or customers. Playboy, 55 F. Supp. 2d. at 1074 (citing Brookfield, 174 F.3d at 1062-64). The Sixth Circuit Court of Appeals, however, has not adopted the initial interest confusion doctrine and has not even acknowledged the doctrine in recent Internet trademark cases. See, e.g., Taubman Co. v. Webfeats, 319 F.3d 770 (6th Cir. 2003); Interactive Prods., 326 F.3d at 694. The Sixth Circuit has stated on several occasions that “the only important question [in a trademark infringement action] is whether there is a likelihood of confusion between the parties’ goods or services,” that is regarding the origin of the goods offered by the parties. Taubman Co., 319 F.3d at 776 (citing Bird, 289 F.3d at 877)(emphasis in original); Interactive Prods., 326 F.3d at 694. The Taubman court wrote, “[u]nder Lanham Act jurisprudence, it is irrelevant whether customers would be confused as to the origin of the web sites, unless there is confusion as to the origin of the respective products.” Taubman Co., 319 F.3d at 776. Thus, this Court must apply the Frisch factors to determine whether a likelihood of confusion exists in the present case. The factors in dispute are evidence of actual confusion, marketing channels used, and likely degree of purchaser care. For each of those factors, plaintiffs rely on the survey evidence presented by their expert William Neal. For the reasons set forth above and below, the Court finds Mr. Neal’s testimony is not persuasive on this critical issue. 2. Plaintiffs’ Survey Evidence is Unpersuasive a. The Legal Standard 52 Under Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), the Court must ensure that expert testimony “is not only relevant, but reliable.” See also Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999). Daubert and Kumho are codified in Federal Rule of Evidence 702. The Daubert standard applies to survey evidence. See, e.g., The Sports Authority, Inc. v. Abercrombie & Fitch, Inc., 965 F. Supp. 925, 933 (E.D. Mich. 1997) (holding that “[t]he proponent of a consumer survey has the burden of establishing that it was conducted in accordance with accepted principles of survey research”) (citation omitted). Defendant’s expert, Dr. Jacoby, testified that Mr. Neal failed to satisfy fundamental principles of survey research in seven major ways: (a) (b) (c) (d) (e) (f) (g) The surveys did not sample the appropriate universe of respondents; The surveys did not use any demonstrative stimuli or otherwise replicate actual market conditions; The survey questionnaires were biased and leading; Mr. Neal drew unwarranted inferences and failed to take into account obvious alternative explanations; The surveys did not ask the kind of control questions needed to generate an error rate; The surveys were not administered properly, including the use of a panel of regular survey respondents; The surveys did not employ a design that established causation, rendering the surveys results uninterpretable. See FF ¶¶ 102-120; DX 566. These seven items roughly correspond to the factors recommended by the Federal Judicial Center’s Manual for Complex Litigation, (3rd Ed. 1995) (hereafter “MCL”) for assessing the validity of a survey. See MCL § 21.493. See also Sports Authority, 965 F. Supp. at 933 (applying the MCL factors). These factors also reflect the considerations specifically mentioned in Daubert and in the advisory committee’s notes to Rule 702 of the Federal Rules of Evidence. See Fed. R. Evid. 702, advisory committee’s notes, 2000 Amendments (hereafter “Rule 702 Advisory Committee Notes”). 53 It is not necessary for the Court to review the parties’ arguments as to all of these factors. It is clear from a review of several of the most critical factors that Mr. Neal’s surveys do not provide reliable evidence of likelihood of confusion. See, e.g., Simon Property Group, L.P. v. mySimon, Inc., 104 F. Supp. 2d 1033 (S.D. Ind. 2000) ; Winning Ways v. Holloway Sportswear, 913 F. Supp. 1454 (D. Kan. 1996). b. The Neal Surveys Lack Probative Value Because They Do Not Remotely Approximate Actual Market Conditions “To have substantial probative value, a survey . . . must . . . be designed to examine the impression presented to the consumer by the accused product. Therefore, a survey must use the proper stimulus, one that tests for confusion by replicating marketplace conditions.” Conopco, Inc. v. Cosmair, Inc., 49 F. Supp. 2d 242, 253 (S.D.N.Y. 1999) (citation omitted). A survey that fails to adequately replicate market conditions is entitled to little weight, if any. See, e.g., We Media, Inc. v. Gen. Elec. Co., 218 F. Supp. 2d 463, 474 (S.D. N.Y. 2002); Nat’l Distillers Prod. Co. v. Refreshment Brands, Inc.; 198 F. Supp. 2d 474, 484 (S.D.N.Y. 2002); Cumberland Packing v. Monsanto Co., 32 F. Supp. 2d 561, 575 (E.D. N.Y. 1999); Coherent, Inc. v. Coherent Tech., Inc., 935 F.2d 1122, 1126 (10th Cir. 1991). Mr. Neal’s survey did not replicate market conditions, and therefore has little probative value in establishing likelihood of confusion. See, e.g., Tr. III (Neal) 25:22-24. The Court cannot conclude that consumers are confused about the source of WhenU ads absent testing of WhenU ads. There are many kinds of ads on the Internet (e.g., pop-up ads, pop-under ads, panoramic ads, animated ads) and they come from many different sources. For example, there are pop-up ads generated by software applications that a user downloads on his computer, such as SaveNow; there are pop-up ads generated by internet portals like America Online (Tr. VIII (Naider) 59:16-21); and there are pop-up ads generated by commercial websites. Tr. IV (Edelman) 110:22-111:2. Given the many kinds of Internet ads, and the many different entities who generate them, the Court cannot conclude that the kind of people who 54 use plaintiffs’ websites are confused about the origin of WhenU’s ads without evidence of how those individuals perceive WhenU ads. The Court finds that, at a minimum, survey respondents should have been shown the item that is said to be infringing or confusing.20 Mr. Neal did not make any attempt to replicate the respondents’ experiences in encountering a WhenU ad. Mr. Neal did not show respondents WhenU pop-up ads, screen shots or other demonstrative stimuli. FF ¶¶ 105- 110, and did not take any measures to ensure that the respondents had WhenU ads in mind when responding to the survey. Id. To the contrary, Mr. Neal virtually ensured that his respondents did not have WhenU ads in mind in prefacing his questions with a definition that describes WhenU pop-up (or small format) ads inaccurately, and completely excludes WhenU pop-under ads, panoramic ads and coupons. FF ¶¶ 106-107.21 c. Plaintiffs' Surveys Lack Probative Value Because They Do Not Survey the Appropriate Population Identification of the proper universe is recognized as a critical element in the development of a survey. See, e.g., Federal Judicial Center, Reference Manual on Scientific 20 Plaintiffs’ expert William Neal erroneously alleged that an article by defendant’s expert (PX 163) discussed testing for confusion without showing a stimulus. PX 190 at 8. In fact, Dr. Jacoby was testing materiality, not confusion. PX 163 at 2. (“Reflecting different theories of the case, [the FTC’s and Jacoby’s surveys] focused on differing components … The FTC’s survey (Stewart 1987) addressed the question: Were the representations likely to mislead? In contrast, Kraft’s survey (Jacoby 1988) addressed the question: Were the representations material?”). 21 In Pharmacia & Upjohn Co. v. Generation Health, 1997 WL 750605, 44 U.S.P.Q. 2d (BNA) 1091 (W.D. Mich. July 15, 1997), the court encountered a survey with a similar defect, in a case involving two anti-cholesterol products with similar names. Plaintiff, the maker of Colestid, obtained a survey to measure the confusion caused by the similarity of the Colestid name to the name of defendant’s product Cholestin. Consumers were played a radio advertisement for one of the brands, and then asked to identify the product which they had just heard advertised. Since plaintiff did not advertise Colestid on the radio, the respondents who heard the Colestid “advertisement” actually heard Cholestin’s radio advertisement, with references to Cholestin replaced with Colestid. As a consequence, the Colestid “advertisement” did not accurately describe Colestid (e.g., it stated incorrectly that Colestid was available “over-the-counter” at “local food, drug, and discount stores,” that Colestid “works naturally” to reduce cholesterol and that Colestid helped raise “good” cholesterol). The court found that “by exposing some participants to a highly unrealistic situation, the survey says little about the likelihood of confusion of the marks …” Id. at *15 n.6. 55 Evidence (2d Ed. 2000) (hereafter “MSE”), p.239 n.41 (citations omitted); MCL § 21.493; Amstar Corp. v. Domino’s Pizza, Inc., 615 F.2d 252, 264 (5th Cir. 1980); Conopco, 49 F. Supp. 2d at 253. Selection of a proper universe is so critical that “even if the proper questions are asked in a proper manner, if the wrong persons are asked, the results are likely to be irrelevant.” 5 McCarthy, § 32:159 at 32-250.3. See also 5 McCarthy, §§ 32.160-61 at 32-251- 57; Jordache Enterp., Inc. v. Levi Strauss & Co., 841 F. Supp. 506, 518 (S.D.N.Y. 1993); Am. Footwear Corp. v. Gen. Footwear Co., 609 F.2d 655, 660-61, n. 4 (2d Cir. 1979); Richard J. Leighton, Using Daubert-Kumho Gatekeeping to Admit and Exclude Surveys in Lanham Act Advertising and Trademark Cases, 92 TMR 743, 763 and n. 98 (July/August 2002) (hereafter “Leighton”). A survey must use respondents from the appropriate universe because “there may be systemic differences in the responses given…by persons [with a particular] characteristic or preference and the responses given to those same questions…by persons who do not have that … characteristic or preference.” Federal Evidence Practice Guide (Matthew Bender 2003) § [4][6][i]. In this case, the relevant universe consists of people who are likely to bank or look for a mortgage online. Because of the rapidity with which the Internet changes, the relevant universe is also current Internet users, i.e., persons familiar with Internet advertising as it exists today and with today’s comfort level in using the Internet. As plaintiffs’ own witnesses acknowledged, the Internet changes rapidly (Tr. II (Neal) 132:22-133:4; Tr. IV (Edelman) 99:25 (“the internet changes awfully quickly” , and users develop greater understanding of Internet content with exposure to it. Tr. I (Stapp) 128:8-129:15 (discussing user understanding of sponsored search results). Because Mr. Neal failed to survey the appropriate universe of people, the results of his 1-800 and Gator Surveys cannot be extrapolated to this case, regardless of whether those respondents were demographically representative of the general population of Internet users, as Mr. Neal contends. Tr. II (Neal) 96:7-15. Only a fraction of Internet users bank and obtain mortgages online; therefore, there is no way to know whether any of the Gator and 1-800 56 respondents were users or potential users of plaintiffs’ websites. FF ¶ 111-113. Furthermore, there are obvious differences between conducting financial transactions online and buying contact lenses online or reading an online periodical. FF ¶ 111-113. Indeed, the record suggests a relatively high degree of sophistication on the part of plaintiffs’ customers, both with respect to the Internet and financial services. FF ¶¶ 112. d. The Survey Questionnaires Were Unclear and Leading A survey is not reliable if it suggests to the respondents an answer that would not otherwise have occurred to them. More specifically, “[i]t is improper to suggest a business relationship where the respondent may previously have had no thought of any such connection.” 5 McCarthy 32:172.22 The 1-800 Survey was ostensibly designed to determine whether respondents believed – incorrectly – that there was a relationship between WhenU ads and plaintiffs’ websites. FF ¶ 114-118. The Court cannot find Mr. Neal’s conclusions on this subject reliable, because the survey questionnaire repeatedly suggested to respondents a link between pop-up ads and websites. FF ¶ 115. As set forth in detail in the Court’s Findings of Fact, the questions in Mr. Neal’s survey were flawed in numerous other respects. See FF ¶¶ 114-120. Accordingly, the Court cannot place any weight on the data they produced. It was also incumbent on Mr. Neal to “adequately account for obvious alternative explanations” for his survey data. Fed. R. Evid. 702, advisory committee’s notes (citing, Claar v. Burlington Northern R.R., 29 F.3d 499, 502- 22 For example in Simon Property Group v. mySimon, the survey’s questions “implicitly suggest[ed] to the respondent the possibility of a business connection between the SPG and mySimon home pages that the respondent may not have made on his or her own.” 104 F. Supp. 2d at 1048. See also Universal City Studios, Inc. v. Nintendo Co., 746 F.2d 112, 118 (2d Cir. 1984) (“To the best of your knowledge, was the Donkey Kong game made with the approval or under the authority of the people who produce the King Kong movies?” improperly suggested a connection to respondents); Beneficial Corp. v. Beneficial Capital Corp., 529 F. Supp. 445 (S.D.N.Y. 1982) (rejecting the question, “Do you think there may or may not be a business connection between Beneficial Capital Corp. and the Beneficial Finance System Companies?” on the grounds that it was a leading question “not well suited to eliciting an uninfluenced reaction”). 57 504 (9th Cir. 1994 . As set forth above, Mr. Neal failed to rule out alternative explanations for his surveys’ results. e. The Survey Was Not Properly Administered, Contained No Control Questions to Generate an Error Rate, and Employed a Design that Rendered the Results Uninterpretable Mr. Neal’s surveys suffered from numerous other flaws, including the use of an Internet Panel (see FF ¶ 120) and the failure to use control questions to generate an error rate. (see FF ¶ 120). Of even greater significance, Mr. Neal failed to employ an experimental design that established causation. FF ¶ 119. See, e.g., Cumberland Packing, 32 F. Supp. 2d at 574 (“In a test of a causal proposition the appropriate use of controls is crucial.”). Courts have widely recognized the need for consumer surveys to adjust for so-called “background noise,” i.e., extrinsic factors, pre-existing beliefs, general confusion or other factors, other than the stimulus at issue, that contribute to a survey’s results. See, e.g., Greenpoint Fin. Corp. v. The Sperry & Hutchinson Co., Inc., 116 F. Supp. 2d 405, 409 (S.D.N.Y. 2000); Winning Ways, 913 F. Supp. at 1475-76. See also Sm ithKline Beecham Consumer Healthcare L.P. v. Johnson & Johnson-Merck Consumer Pharm. Co., 2001 U.S. Dist. LEXIS 7061 at **38-39 (S.D.N.Y. June 1, 2001). As Dr. Jacoby testified, a survey design must include a control group in order to account for the effects of “noise.” FF ¶ 119. The control group “functions as a baseline and provides a measure of the degree to which respondents are likely to give an answer … not as a result of the [thing at issue], but because of other factors, such as the survey’s questions, the survey’s procedures … or some other potential influence on a respondent’s answer such as pre-existing beliefs.” Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharms. Co., 129 F. Supp. 2d 351, 365 n.10 (D.N.J. 2000). “By adding an appropriate control group, the survey expert can test exactly the influence of the stimulus.” 5 58 McCarthy §32:187 (quoting MSE, p.250). Had Mr. Neal used a control group, he might have been able to make a “causal inference” that was “clear and unambiguous.” Id. Thus, the Court finds that plaintiffs have failed to show that they are likely to prevail on the merits of their trademark infringement claim. Plaintiffs have not established that defendant used their work in commerce within the meaning of federal trademark law, and have not established any likelihood of confusion in defendant’s “use” of their marks.23 III. Plaintiffs Have Not Shown Strong Likelihood of Success on the Merits of Their Copyright Claims A. Plaintiffs Have Not Shown Any Infringement of Their Right to Prepare Derivative Works Plaintiffs claim that WhenU violates their exclusive right to prepare “derivative works.” Complaint ¶128. To prevail on this claim, plaintiffs would have to show that WhenU has incorporated the plaintiffs’ websites into a new work. 17 U.S.C. § 101 (defining derivative work as “[a] work based on one or more preexisting works” that is “recast, transformed or adopted”). Plaintiffs have not made the necessary showing as to WhenU because WhenU merely provides a software product to computer users. The SaveNow software does not access plaintiffs’ websites; therefore, it does not incorporate them into a new work. FF ¶¶ 84-94. Accordingly, plaintiffs’ claim that the defendant violates their right to create derivative works can only be understood as a contributory copyright theory. Moreover, SaveNow users do not infringe plaintiffs’ right to prepare derivative works because consumers who cause the display of WhenU advertisements or coupons on their 23 The fact that WhenU advertisements are conspicuously branded, and state on their face, “This is a WhenU offer and is not sponsored or displayed by the website you are visiting. More . . .” further dispels any likelihood of confusion. See FF ¶ 74. In this Circuit, courts have found disclaimers such as the ones employed by WhenU to be “very informative” and have relied on them in declining to find confusion. Taubman Co. v. Webfeats, 319 F.3d 770, 776 (6th Cir. 2003) (citing Holiday Inns, Inc. v. 800 Reservation, Inc., 86 F.3d 619 (6th Cir. 1996 . 59 screens do not alter plaintiffs’ websites. Plaintiffs’ websites reside on separate servers. The WhenU Window has no physical relationship to plaintiffs’ websites, and does not modify the content displayed in any other open window. FF ¶¶ 84-94. Even if the presence of an overlapping window could be said to change the appearance of the underlying window on a computer screen, the mere alteration of the manner in which an individual consumer’s computer displays the content sent by plaintiffs’ websites does not create a “derivative work.” Lewis Galoob Toys v. Nintendo of Am., 780 F. Supp. 1283, 1291 (N.D. Cal. 1991)(indicating that “the consumer may experiment with the product and create new variations of play, for personal enjoyment, without creating a derivative work”), aff’d, 964 F.2d 965 (9th Cir. 1992). New York Times Co., Inc. v. Tasini, 533 U.S. 483 (2001), does not hold to the contrary. Unlike the publisher in Tasini, WhenU is not copying or making additions to or deletions from plaintiffs’ actual copyrighted works. Contrary to plaintiffs’ claim, WhenU has not added anything to plaintiffs’ web pages. If one were able to look at the HTML code of plaintiffs’ sites, one would not see any changes as a result of WhenU’s advertisements. In this respect, the effect of WhenU’s advertisements on plaintiffs’ sites is more akin to the affect of a video game accessory in Lewis Galoob Toys. See also U-Haul, 279 F. Supp. 2d at 730 (Tasini not applicable where no reproduction of plaintiff’s work occurs). In Lewis Galoob Toys, the seller of a video game accessory known as the “Game Genie Video Game Enhancer” (“Game Genie”) filed an action seeking a declaratory judgment that it was not violating or contributing to the violation of the defendant’s video game copyrights. The defendant, Nintendo of America (“Nintendo”), markets and sells a home video games hardware system known as the Nintendo Entertainment System (“NES”) and compatible video game cartridges. Id. at 1285. The plaintiff markets and sells the Game Genie, which fits between the NES control desk and compatible video game cartridges and allows players to temporarily alter certain attributes of video games. Id. at 1286, 1288. 60 Nintendo argued that the attachment of the Game Genie to its copyrighted works created a derivative work. The district court rejected Nintendo’s argument, finding that a consumer utilizing the Game Genie for noncommercial, private enjoyment “neither generates a fixed transferable copy of the work, nor exhibits or performs the work for commercial gain.” Id. at 1291. The court explained, [I]inherent in the concept of a “derivative work” is the ability for that work to exist on its own, fixed and transferable from the original work . . . [o]nce the Game Genie and its attached game cartridge are disconnected from the NES, or the power is turned off, those changes disappear and the video game reverts to its original form. Id. WhenU’s conduct affects plaintiffs’ sites in a comparable manner. It only temporarily changes the way the sites are viewed by consumers. As soon as the advertisements are “disconnected”– that is closed or minimized– plaintiffs’ sites revert to their original form. If anything, WhenU’s advertisements modify their sites far less that the Game Genie altered users’ NES video game experience. The Court also finds irrelevant a series of cases cited by plaintiffs in which copyrighted material was not merely altered, but also publicly re-transmitted in the altered form. See, e.g., WGN Cont’l Broad. Co. v. United Video, Inc., 693 F.2d 622 (7th Cir. 1982) (re-broadcast of television program with integrated text deleted); Gilliam v. Am. Broadcasting Cos., Inc., 538 F.2d 14 (2d Cir. 1976) (public television broadcast of edited work); Nat’l Bank of Commerce v. Shaklee Corp., 503 F. Supp. 533 (W.D. Tex. 1980) (distribution of books with addition of unauthorized advertising materials). In marked contrast, plaintiffs here do not allege any general or public re-transmission of the alleged derivative work by computer users. Plaintiffs base their allegations of copyright violation on the assertion that, because WhenU ads modify the pixels on a computer user’s on-screen display, this modification creates a “derivative work.” The Court finds this argument unpersuasive in light of plaintiffs’ expert’s admission that pixels form part of the hardware of a computer and are owned and 61 controlled by the computer user who chooses what to display on the screen. Plaintiffs do not have any property interest in the content of a user’s pixels, much less a copyright interest. FF ¶¶ 90-91. Further, in order for a work to qualify as a derivative work, it must be independently copyrightable. Woods v. Bourne Co., 60 F.3d 978, 990 (2d Cir. 1995). To be independently copyrightable, it must be “fixed” – that is, it must be “sufficiently permanent or stable to permit it to be . . . reproduced.” See 17 U.S.C. §§ 101, 102; Medforms, Inc. v. Healthcare Mgmt. Solutions, Inc., 290 F.3d 98, 107 (2d Cir. 2002). See also Lewis Galoob Toys, 964 F.2d at 967 (noting that “[a] derivative work must incorporate a protected work in some concrete or permanent ‘form’”); Micro Star v. Formgen, Inc., 154 F.3d 1107, 1111 n.4 (9th Cir. 1998) (noting, by way of example, that covering a television screen with pink cellophane, while modifying the appearance of the copyrighted programs, would not create a derivative work “because it does not incorporate the modified image in any permanent or concrete form”). The pixels on a computer screen are updated every 1/70th of a second. FF ¶ 91. The alteration of pixels is therefore far too transitory an occurrence to form a basis for a copyright violation. The appearance of a WhenU advertisement on a consumer’s computer screen at the same time as one of the plaintiffs’ web pages is also a transitory occurrence that might never be duplicated exactly on that or another person’s computer screen. U-Haul, 279 F. Supp. 2d at 731. Accordingly, the WhenU advertisement does not create a work that is sufficiently permanent to be independently copyrightable, and hence does not create a derivative work. Since SaveNow users do not infringe the plaintiffs’ right to prepare derivative works, WhenU is not liable for contributory infringement. See Matthew Bender & Co. v. West Pub., 158 F. 3d 693, 706-07 (2d Cir. 1998). IV. Plaintiffs Have Not Suffered Irreparable Harm A finding of irreparable harm is “the single most important prerequisite that the Court must examine when ruling upon a motion for a preliminary injunction.” MetroBanc v. Fed. Home Loan Bank Bd., 666 F. Supp. 981, 984 (E.D. Mich. 1987). Irreparable harm means 62 more than merely “substantial” harm. Ramik v. Darling Int’l, Inc., 161 F. Supp. 2d 772, 778 (E.D. Mich. 2001). In this matter, plaintiffs have not demonstrated irreparable or even substantial injury. Although they argue that WhenU is “free-riding” on their reputation and goodwill, to the extent plaintiffs could demonstrate that WhenU took advantage of their marks to benefit itself without compensation, plaintiffs’ injury would be purely monetary in nature, and compensable by paying damages for the alleged unjust enrichment. Because the Court finds that plaintiffs’ copyright claims are without merit, plaintiffs are not entitled to any presumption of irreparable harm. Ronald Mayotte & Assocs. v. MGC Bldg. Co., 885 F. Supp. 148, 153 (E.D. Mich. 1994). However, even if plaintiffs had a valid copyright claim, the presumption is rebutted in this case by plaintiffs’ own conduct, which is inconsistent with their assertion of irreparable injury. A. Plaintiffs’ Delay in Asserting Their Rights Rebuts Any Claim of Irreparable Injury Although plaintiffs were aware of the alleged effects of SaveNow on their businesses as early as August, 2002, they delayed nine months before bringing a motion for injunctive relief. Plaintiffs’ delay in seeking a preliminary injunction undermines their allegation of irreparable harm. Citibank, N.A. v. Citytrust, 756 F.2d 273, 276 (2d Cir. 1985) (“Significant delay in applying for injunctive relief in a trademark case tends to neutralize any presumption that infringement alone will cause irreparable harm pending trial, and such delay alone may justify denial of a preliminary injunction for trademark infringement.”). See also Ramik, 161 F. Supp. 2d at 778. B. WhenU Poses No Threat to Plaintiffs’ Relationship with Their Banking Regulators At the preliminary injunction hearing, plaintiffs raised allegations concerning alleged violations of federal banking law in an effort to bolster their showing of injury. These allegations, which plaintiffs failed to assert in their complaint or motion for preliminary injunction, do not appear to have merit. The apparent legal basis for plaintiffs’ concern is a 63 regulation issued by the Office of the Comptroller Currency (“OCC”).24 Electronic Activities, 67 Fed. Reg. 34,992 (May 17, 2002) (codified at 12 C.F.R. pt. 7). That regulation prescribes rules concerning the practice of national banks who “enter into joint marketing relationships with third-parties through the Internet.” Electronic Activities, 67 Fed. Reg. at 35,002. These rules place certain regulatory obligations on banks that “share electronic space, including a co-branded web site” with others. Shared Electronic Space, 12 C.F.R. § 7.5010 (2003). WhenU is not involved in a joint marketing relationship with any bank and does not share a co- branded website with any bank. Accordingly, this regulation has no bearing on this case. The Court notes that despite spending many days entering evidence into the record, plaintiffs did not introduce any evidence suggesting that bank regulators are concerned about the effects of WhenU software. The Court finds plaintiffs’ suggestions concerning the regulatory impact of WhenU to be unsubstantiated. V. Issuance Of A Preliminary Injunction Would Harm WhenU and Others Issuance of a preliminary injunction would significantly harm WhenU’s business. Injunctive relief would disrupt WhenU’s established relationships with advertisers and harm WhenU’s ability to obtain new advertisers. Tr. (Naider) VIII, 36:23 – 37:19. Moreover, the harm to WhenU would not only include the loss of client business that would take years to regain, but also the potential, permanent loss of talented and specially trained staff. Tr. (Naider) Vol. VIII, 37:23-38:5. Issuance of a preliminary injunction would also cause harm to WhenU advertisers, who would lose the ability to have their competitive offers delivered to potential customers by SaveNow simply because those customers view content from the plaintiffs’ websites. DX 501, ¶¶ 55-59. 24 Plaintiff Quicken Loans is not a national bank and hence not subject to regulation by the OCC. Although Quicken Loans has applied for a banking license, its application is for a license as a federal savings bank, which is subject to regulation by Office of Thrift Supervision, not the OCC. 64 Granting an injunction to protect plaintiffs from the rigors of competition also threatens the integrity of the competitive process. Plaintiffs’ objection to WhenU’s advertising is that it presents customers with alternative choices for procuring the services offered by plaintiffs, increasing the chance that prospective customers will entertain more attractive offers. Federal policy has long favored such comparative advertising and disfavored restrictions on such advertising. See, e.g., In Regard to Comparative Advertising, 16 C.F.R. § 14.15(c) (2003).25 The Court concludes that, based on the evidence presented, a preliminary injunction will cause significant harm to defendant, defendant’s clients and users, and the general public. Denying the motion will not damage plaintiffs other than in a manner compensable by an award of monetary damages in the event plaintiffs eventually prevail on the merits. Accordingly, the Court finds that the balance of the equities weighs against granting plaintiffs’ motion. 25 Finally, as a technical matter, the Court does not agree with plaintiffs’ contention that the issuance of injunctive relief can be narrowly tailored by simply ordering WhenU to place all of plaintiffs’ URLs on a “suppress list.” Tr. VI (Edelman) 34:4-10. Putting plaintiffs’ URLs on a suppress list might not satisfy the host of concerns raised by plaintiffs in this lawsuit. Tr. VIII (Naider) 106:8-107:18; Tr. VI (Edelman) 161:14-162:13. More importantly, the Court finds this argument rather disingenuous, because were the Court to create a precedent because this partial remedy might be relatively easy to implement (by addition to the suppress list), thousands of new plaintiffs could simply follow the lead of Wells Fargo and Quicken Loans, leaving WhenU without a business. 65 CONCLUSION Based on all of the foregoing, Plaintiffs’ motion for preliminary injunction is DENIED. /S/ Nancy G. Edmunds U.S. District Judge Dated: November 19, 2003 66

=== Hillside Productions, Inc., et al v. Steve Duchane, et al ===

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION Case No. 02-73618 Honorable Nancy G. Edmunds Hillside Productions, Inc., a Michigan corporation, Roncelli, Inc., a Michigan corporation, L.V. Management, Inc., a Michigan corporation, d/b/a Andiamo, Gary Roncelli, and Joseph Vicari, Plaintiffs, v. Steve Duchane, Jeffrey A. Bahorski, Paul J. O’Reilly, City of Sterling Heights, Michigan, and O’Reilly, Rancilio, Nitz, Andrews, Turnbull & Scott, P.C., individually and in their official capacities, jointly and severally, Defendants. / OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION This matter is before the Court on Plaintiffs’ motion for preliminary injunction. Plaintiffs Hillside Production, Inc. and others argue that Defendants’ decision to revoke the Special Approval Land Use under which they have operated Freedom Hill Amphitheater involves constitutional, statutory, and contractual violations; that they will be irreparably harmed by the revocation, and that they are likely to succeed on the merits of their claims. Plaintiffs seek an injunction requiring Defendants to reinstate the Special Approval Land Use, to desist from their campaign of harassment and interference, and to permit Plaintiffs to move forward with their bookings, sponsorships, ticket sales and other arrangements for the 2003 concert season. The Court conducted a hearing over the course of three days, March 4-6, 2003. Based on the evidence and argument submitted in open Court, the Court finds in favor of Plaintiffs and GRANTS the motion for preliminary injunction. I. Findings of Fact Plaintiff Hillside Productions, Inc. (“Hillside”) is a Michigan corporation organized and existing under the laws of Michigan, with its principal office and place of business located in Macomb County, Michigan.1 Defendant City of Sterling Heights is a municipal corporation organized under Michigan law and existing in Macomb County, and at all times pertinent to this matter employed Defendant Steve Duchane as City Manager. The property that is the subject of Plaintiffs’ motion is commonly known as Freedom Hill Park, located at 15000 Metropolitan Parkway, in the City of Sterling Heights. Hillside is the sublessee of a portion of Freedom Hill Park under a sublease made May 19,1999 between Hillside and the County of Macomb. Macomb County is the lessee of Freedom Hill Park under a lease made on June 5, 1973, between the County of Macomb and the Huron-Clinton Metropolitan Authority. The stated intent of the Macomb County lease from HCMA was to develop the premises as a public park and recreational area in accordance with the Outdoor Recreation and Open Space Plan for Macomb County. The Macomb County Lease provided that substantial progress had to be made within two years from the date of the lease in the implementation of the development of the Freedom Hill property, in accordance with the conceptual plans attached to the lease, which included an amphitheater. In furthering its intent as expressed under the Macomb County Lease, on May 19, 1999, 1These foundational facts are set forth in Plaintiffs’ First Amended Complaint and are not in dispute. 2 Macomb County entered into a ten-year sublease with Hillside, under which Hillside would manage and operate an entertainment facility in and around the Freedom Hill Amphitheater. On February 19, 2000, Hillside and Macomb County amended the sublease in part to extend it for a period of twelve years, with renewal options, and to require Hillside to provide Macomb County with a set of plans, specifications, and schedule of costs with regard to any proposed above-ground improvements. On March 29, 2001, Hillside and Macomb County again amended the sublease and acknowledged that Hillside had performed substantial development and underground improvements to the Freedom Hill Amphitheater area, in accordance with the Freedom Hill Amphitheater Master Plan. Hillside received all necessary approvals from Macomb County and the HCMA before beginning work on Freedom Hill Amphitheater. Hillside initially constructed part of the project, investing approximately $3.5 million, and held nine concerts at Freedom Hill in the summer of 2000. As of this date, Hillside has completed improvements under the Freedom Hill Amphitheater Master Plan and has invested in excess of fifteen million dollars in improvements to the area.2 During the first nine months of 2000, which included the summer concert season, Defendant Duchane and other representatives of Defendant Sterling Heights deliberately and actively encouraged Hillside to proceed with the Freedom Hill Amphitheater project. (Hr’g Tr. Vol. I at 19-20, 29-33, Pollard testimony.) Duchane apparently interacted with Hillside representatives and granted local permits without consulting or informing the Sterling Heights 2The exact amount of the investment to date is in dispute, but Defendants do not contest that it is substantial. 3 City Council, which was led to believe all through this time period that the City had no jurisdiction to negotiate with or limit the activities of Hillside in any way. (Id.; Hr’g Tr. Vol. I at 58-60, 66-68, Fachini testimony; Pls.’ Ex. PX 169.) In the fall of 2000, after Hillside had already invested $3.5 million in Freedom Hill and successfully undertaken a summer concert season, Duchane and the City of Sterling Heights began a series of escalating demands. (Pls.’ Ex. PX 169 at 14-30.) Defendants demanded payment for “services” provided in the park (despite the fact that public safety services were handled by the Macomb County Sheriff’s Department), then demanded site plan approval, then demanded that Hillside apply for a Special Approval Land Use (“SALU”). (Id. at 29-30, 48.) These demands were justified by Defendants on the basis of Hillside’s proposed additional improvements at Freedom Hill; for the first time, the City Council was made aware of the previously issued local building permits and involvement of the City with the Freedom Hill enterprise. (Hr’g Tr. Vol. I at 34-37, 58-61, Pollard and Fachini testimony.) The City Attorneys, who had been actively involved with Freedom Hill from the beginning of the project, also led Council members to believe that they had been “left out of the loop” as the project developed. (Hr’g Tr. Vol. I at 39, Pollard testimony.) Feeling coerced by their need to obtain building permits and their desire to obtain a liquor license, Hillside did apply for a SALU on February 9, 2001. (Pls.’ Exs. PX 114, 109, 110, 111.) In preparation for this hearing, City Planner Norman Birr and an attorney from the City Attorney’s office drafted a list of SALU conditions, many of which would have been operationally impossible to comply with. (Pls.’.’ Ex. PX 182.) At a meeting of the Planning Commission of Defendant Sterling Heights on February 28,2001, at which neither City 4 Planner Norman Birr nor Defendant Duchane was present, the Planning Commission approved the grant of a SALU to Hillside, but changed the proposed conditions. (Pls.’ Ex. PX 110.) During that meeting, after an extended discussion as to the nature and extent of the sound limitations to be included, Commissioner Johns asked a member of the City Attorney’s office “if the Planning Commission passed the approval with the 100-decibel sound limit, and this was part of the record, what would happen if the sound were too loud for the residents to the south? What would be the Planning Commission’s ability to change the requirement?” As the minutes reflect, “Ms. Davis stated that the City would not be able to change the specific decibel level if it is already allowed in the ordinance.” (Pls.’ Ex. PX 101,109; Hr’g Tr. Vol. II at 116-17, Mende testimony.) Condition No. 5 of the SALU was amended to allow Hillside to have sound levels of up to 100 decibels from the top of the hill, and this condition was specifically approved as part of the SALU. (Id.) Other pertinent conditions included: (2) (3) (4) (5) That the petitioner and County of Macomb shall construct, maintain and operate the facility in compliance with all pertinent codes, ordinances and the standards of the City of Sterling Heights, County of Macomb and the State of Michigan; That the petitioner and the County of Macomb comply with the requirements of the City of Sterling Heights, and Sterling Heights Police Department with respect to traffic and parking considerations, including, but not limited to, being responsible for establishing and providing for the posting of “no parking” areas designated by the City. The Petitioner must also provide satisfactory reimbursement to the City of Sterling Heights for additional law enforcement staffing associated with this use and the accompanying traffic generated by this use; That all events, performances and other activities held at the amphitheater will end at a time not later than 11:00 p.m.; That all devices used to electronically amplify voices and/or music shall be directed or muffled to prevent any noise from exceeding 100 decibels, 5 measured from the top of the hill. The petitioner will continually monitor noise levels during Hillside Productions events and make available all recorded decibel readings; (Pls.’ Ex. PX 110.) Having complied with Defendants’ conditions for the SALU, and additional demands imposed during the 2001 construction process, Hillside opened its 2001 concert season on June 7, 2001. Hillside did not receive a citation for violation of any ordinance after opening to the public on June 7, 2001. Nonetheless, on June 12, 2001, Defendant Duchane, having first received advice from the City Attorney’s office, issued an Official Notice which stated that an “Administrative Enforcement Hearing – Freedom Hill” – had been scheduled for June 20, 2001. (Pls.’ Ex. PX 169 at 129.) At the hearing, the evidence focused on whether Hillside had fully complied with local zoning ordinances and conditions, rather than the express conditions of its Special Approval Land Use, including the condition relating to the 100 decibel limit on noise. (Pls.’ Ex. PX 169 at 152; Pls.’ Exs. PX 131, 189, 190.) At the conclusion of the hearing, Defendant Duchane indicated that he would issue a decision concerning ordinance violations by the end of June, 2001. (Pls.’ Ex. PX 131.) Over the next eight weeks, however, despite prompting by Plaintiffs, Duchane failed to make any decision concerning whether Hillside had committed any ordinance violations. The failure to resolve this issue made operations difficult for Hillside because it created an ongoing uncertainty about the status of its operations. Finally, on August 6, 2001, Hillside filed a complaint in Macomb County Circuit Court for superintending control and declaratory judgment, seeking the court’s assistance in obtaining a decision from Duchane. The court promptly ordered him to issue a decision, and he did so on August 15, 2001. (O’Reilly Defs.’ 6 Ex. DX 515.) This decision found that Hillside had created a nuisance by noise at Freedom Hill Amphitheater, despite the uncontradicted evidence at the Administrative Enforcement Hearing that Hillside had not in fact exceeded the 100 decibel condition of the SALU. The nuisance determination was eventually overturned by the State Circuit Court, in two decisions dated June 21 and July 29, 2002, in which Judge Montgomery held that the express and specific terms of the SALU pre-empted other general zoning and land use restrictions; i.e., that the City could not enforce more restrictive conditions which conflicted with the express terms of the SALU. (Pls.’ Exs. PX 189, 190.) In the meantime, however, apparently furious over having been sued, Defendant Duchane began a campaign of harassment and retaliation against Hillside which continues to the present day.3 City Council Members Jay Pollard and Roger Fachini, and City Planner Norman Birr, all testified that Duchane had vowed to put Hillside out of business, and, in the testimony of Birr, that Duchane directed City employees to go back and reexamine the Freedom Hill Amphitheater site plan for any possible problems related to off-street parking, legal description, or other possible legal issues. (Hr’g Tr. Vol. I at 42-43, Pollard testimony; at 70-72, Fachini testimony; at 138-142, Birr testimony.) Both the parking issue and the legal description had been examined thoroughly at the time the site plan was filed, and no problems were found at the time. Indeed, no parking problems were identified even after Birr was directed to take another look. For the first time, however, the City began complaining about 3For some reason, Defendant Duchane was not called to testify in this case and therefore offered no alternative explanation for the actions and motivations ascribed to him by City Council members Pollard and Fachini, by City Planner Birr, and by representatives of Hillside. 7 a parcel of land included in the legal description, at first arguing that the legal description was over-inclusive, then changing its mind to say that the description was under-inclusive. (Hr’g Tr. Vol. I at 143-151, Birr testimony; Pls.’ Ex. PX 188.) City Council members Pollard and Fachini both testified that Duchane had taken similar retaliatory action against another entity, a night club, which Duchane harassed with unwarranted violations and investigations after the club had filed suit against the City. (Hr’g Tr. Vol. I at 43-45, Pollard testimony; at 71-73, Fachini testimony.) Throughout the fall and winter of 2001-2002, the tension continued to mount between Hillside and the City. Testimony introduced at the hearing establishes that Defendant Duchane was directing Mr. Birr to comb the record of Hillside’s submissions to try to find anything which might be characterized as a “false representation.” (Hr’g Tr. Vol. I at 149-151, Birr testimony.) In addition, immediately prior to the 2002 concert season, the City suddenly decided to deny Hillside’s applications for Special Licenses for the sale of alcoholic beverages at the Freedom Hill Amphitheater, despite there having been no changes in conditions since the preceding concert year. That action triggered litigation in this Court, which was settled in time for the licenses to be issued in due course. Following receipt of the State Court Order prohibiting the City from enforcing a lower decibel level than the one established in the SALU (essentially overturning the City’s determination of nuisance), the City appears to have set upon a course of creating contrived violations of Hillside’s SALU, to use as the basis to seek revocation of that SALU, again as part of their pattern of harassment and retaliation and with the ultimate aim of renegotiating much more favorable terms for the City or putting Hillside out of business altogether. These 8 included: issuing six criminal zoning violations against Hillside in connection with a haunted house being operated on the Freedom Hill property by another entity (Xanthus) after the City had already approved everything related to the Xanthus application and despite the fact that Hillside had nothing whatsoever to do with the haunted house operation (Hr’g Tr. Vol. II at 118- 122, Mende testimony); changing the measuring system by which noise was monitored at the amphitheater (discarding the “a-weighted” scale which had been used the two prior years and which is identified in the City ordinances as the proper scale for measuring decibel level violations, in favor of the “c-weighted” scale, which had never been previously applied); deploying police in unwarranted numbers; invoicing Hillside for undocumented security expenses (and incidentally sending the invoices to the Roncelli, Inc. rather than to Hillside itself); and refusing to issue permits to complete the roof and dressing rooms at the amphitheater. (Hr’g Tr. Vol. I at 186-192, 214-221, Vol. II at 35-46, Birr testimony.) This matter finally came to a head when Defendant Duchane and City Planner Norman Birr decided to convene a hearing on the revocation of Hillside’s SALU in late September 2002. (Defs.’ Exs. DX 632 and 624.) The revocation hearing notice sent to Hillside listed four conditions which Hillside had allegedly violated: (2) (3) That the petitioner and County of Macomb shall construct, maintain and operate the facility in compliance with all pertinent codes, ordinances and the standards of the City of Sterling Heights, County of Macomb and the State of Michigan; That the petitioner and the County of Macomb comply with the requirements of the City of Sterling Heights, and Sterling Heights Police Department with respect to traffic and parking considerations, including, but not limited to, being responsible for establishing and providing for the posting of “no parking” areas designated by the City. The Petitioner must also provide satisfactory reimbursement to the City of Sterling Heights for additional law 9 (4) (5) enforcement staffing associated with this use and the accompanying traffic generated by this use; That all events, performances and other activities held at the amphitheater will end at a time not later than 11:00 p.m.; That all devices used to electronically amplify voices and/or music shall be directed or muffled to prevent any noise from exceeding 100 decibels, measured from the top of the hill. The petitioner will continually monitor noise levels during Hillside Productions events and make available all recorded decibel readings; (Pls.’ Ex. PX 110.) Despite the ongoing contact between Hillside and the City over the summer of 2002, much of which included accusations by the City that Hillside was violating ordinances, or conditions of its SALU, or simply doing something the City did not like, Hillside was never issued any complaints or tickets about noise, decibel levels, curfew violations, or unpaid invoices. Instead, Defendants summarily convened a revocation hearing. This was completely contrary to the standard procedure utilized by the City to resolve land use complaints, as testified to by Zoning and Planning Manager Donald Mende. (Hr’g Tr. Vol. II at 106-110.) The revocation hearing was spread out over four sessions: October 23, November 13, December 4, and December 16, 2002. With respect to the procedures established for the revocation hearing, Hillside was advised at the beginning of the hearing that they could not cross examine any of the witnesses presented by the City. They were permitted to offer responsive evidence, but they could not respond to any of the new evidence raised by the City in its “rebuttal” to their response. They were not permitted to show video tape evidence because of a City policy (of which they were not previously informed) which required them to 10 submit all video evidence to the City’s public information office five days in advance of the hearing. They were not permitted to respond at all to any of the public comments and submissions. The City was permitted to submit its own video tape without having it preapproved. (Hr’g Tr. Vol. II at 59-63, Vol. I at 197-203, Birr testimony.) The first condition the City alleged that Hillside violated was the condition which limited noise from “devices used to electronically amplify voices and/or music” to 100 decibels at the top of the hill. Mr. Birr testified that he knew Hillside had come to rely on the “a-weighted” scale for measuring decibel levels, since that is the scale which the City had used in the previous two years. (Hr’g Tr. Vol. I at 215, Birr testimony.) Notwithstanding this reliance, the City submitted evidence from its experts, Kalono and Sala, based on a “c-weighted” scale, rather than “a-weighted.” (Hr’g Tr. Vol. I at 214-220, Birr testimony.) The City refused to provide the underlying data for the Kalono testimony despite numerous requests from Hillside. (Hr’g Tr. Vol. I at 213-14, Birr testimony.) When Hillside objected to the use of the “c- weighted” scale in their response, the City argued for an “unweighted” scale, despite testimony that no one uses an unweighted scale for this type of measurement because it is just linear and mechanical. (Hr’g Tr. Vol. I at 220-221, Birr testimony.) Although Mr. Kalono testified at the preliminary injunction hearing that Hillside violated the 100 decibel limit using the “a-weighted” scale, the City continues to deny Hillside access to the underlying data relied upon for this conclusion (and in any event, this was not what the planning commission was presented with and relied on in revoking the SALU). The City also claimed that Hillside violated the condition requiring them to observe an 11:00 p.m. curfew at the amphitheater. It is clear from the evidence presented by the City that 11 Hillside’s concert performances at the amphitheater were all finished before 11:00 p.m. as required (Hr’g Tr. Vol. II at 11, Birr testimony), but that music continued in the VIP pavilion and concession area after that time (Id. at 12). Despite Mr. Birr’s memo to the planning commission and his testimony at the hearing that the “plain language” of the SALU controls, the City took the position that the words “at the amphitheater” encompasses all of Freedom Hill, and that the 11:00 p.m. curfew meant that all music had to stop by that time. (Hr’g Tr. Vol. II at 12-14, Birr testimony.) It appears that the City began taking this position when it was clear that they were going to be limited by the terms of the SALU; i.e., after Judge Montgomery’s decision reaching that conclusion, and they had to find a way to sustain violations of the SALU conditions. No tickets or violations were issued for the 2001 or June/July portion of the 2002 season based on curfew violations (that is, before Judge Montgomery issued his opinion limiting the City to the terms of the SALU), even though there were afterglows which included music past 11:00 p.m. at all events. (Hr’g Tr. Vol. II at 15-17, Birr testimony.) The curfew issue appears to have developed when a police sergeant (Anderson) who was sent out to document liquor and noise violations could not find any liquor violations, but mentioned that soft music could still be heard coming from the VIP tent after 11:00 p.m. (Defs.’ Exs. DX 521, 522, 523; Hr’g Tr. Vol. II at 18-21, 27-28, 30-32, Birr testimony.) Despite these alleged violations, no action was taken by the police department and no officer from the planning commission was sent out concerning code enforcement – until the City sent Hillside the notice of the revocation hearing. (Hr’g Tr. Vol. II at 21-22, 33-35, Birr testimony.) The City also claimed that Hillside violated the condition involving traffic and parking – arguing that Hillside had to reimburse the City for additional law enforcement related to those 12 items. Birr provided the planning commission with a summary of invoices which he claims were unpaid, but the City again declined to provide any of the underlying data or invoices to Hillside, despite Hillside’s requests for the information. (Hr’g Tr. Vol. II at 39, Birr testimony.) Birr acknowledges that the police services in question were not inside the park, but were outside the park on surrounding streets, and that the original invoices were for “investigative services” in addition to traffic. (Id. at 39-41, Birr testimony.) Even though the invoices had been sent to Roncelli, Inc. rather than Hillside, and even though Hillside disputed its responsibility to pay them, Hillside offered to pay the full amount in escrow to eliminate this as an issue of contention, but the City declined the payment. (Pls.’ Exs. PX 200, 224; Hr’g Tr. Vol. II at 45-46, Birr testimony.) The final condition on which the planning commission voted to revoke the SALU was Hillside’s failure to file a new site plan and new master plan as a result of the resolution of a dispute over the legal description in the Hillside lease. That dispute had been the subject of a settlement in this Court in June, 2002; and pursuant to that settlement, Hillside had agreed to the metes and bounds description requested by the City, had provided a surveyor, had prepared a new dimensional drawing (Pls.’. Ex. PX 208), and had assumed the issue was resolved. Nothing in the federal court settlement required Hillside to file a new site plan or master plan, no one ever asked them to do so, and the planning commission was never even informed that the legal description had been part of the earlier settlement. (Hr’g Tr. Vol. II at 50-58, Birr testimony.) This alleged violation had originally been submitted to the planning commission as a zoning variance violation, but the zoning commission declined to revoke the variance in its meeting of October 24, 2002; a fact which Mr. Birr did not even mention to the 13 planning commission until Hillside’s counsel raised it at the second of the four revocation hearing sessions, held on November 13, 2002. (Hr’g Tr. Vol. II at 48-49, Birr testimony.) At the conclusion of the revocation hearing, the planning commission voted to revoke Hillside’s SALU, following the recommendation of Mr. Birr. The City has taken the position that the revocation of the SALU means that Hillside cannot operate the amphitheater and is closed for good. Both Michael Novak and Kevin Cassidy, Plaintiffs’ witnesses, testified that the City’s position on the revocation of the SALU and the closure of the amphitheater is causing irreparable harm. The summer entertainment market in the Detroit area is extremely competitive. (Hr’g Tr. Vol. III at 13-15, Cassidy testimony.) Managers and performers are cautious and conservative about choosing venues – they do not want to take a chance that a booking will be cancelled. (Hr’g Tr. Vol. II at 154-55, Novak testimony.) Three major agencies represent about eighty percent of the talent, so if an agent has a problem with a venue that will also affect other performers in the agency. (Id. at 155, Novak testimony.) Also, there is a small number of trade magazines read by virtually everyone in the industry, including Pollstar, which has published three articles about Hillside’s problems. (Id.; Hr’g Tr. Vol. III at 9, Cassidy testimony.) Thus, if the 2003 season is cancelled, Hillside will find it virtually impossible to reestablish itself for a new season, even if one were to become possible in a subsequent year. (Hr’g Tr. Vol. II at 153, Novak testimony.) There are also problems with sponsors and with season ticket holders. Sponsors are looking for a reliable positive experience with increasing traffic at a facility – if their experience is negative, they won’t renew their sponsorship. (Hr’g Tr. Vol. II at 157-58, Novak testimony.) 14 And again, there is a lot of competition for sponsorship dollars; many sponsors are already lined up or are being lined up now for the 2003 season. With season ticket holders, most of whom are corporations using the venue for entertaining clients, reliability is a key issue. Season ticket programs are heavily dependent on renewals, and most other venues are already advertising their summer season to potential season ticket purchasers. (Id. at 159, Novak testimony.) Mr. Cassidy indicated that bookings start immediately after the preceding season, and that booking is a year-long process. (Hr’g Tr. Vol. III at 14-15, Cassidy testimony.) At this point, it would already be difficult to book a full season for 2003 because entertainers have made other commitments. (Id.) Although around seven performers have agreed to hold dates on the possibility that Hillside will be back in business for 2003, those decisions have to be finalized relatively soon; virtually every day is critical if Hillside is going to be able to put together a schedule for the 2003 season. (Id. at 24, Cassidy testimony.) With respect to sponsorships, Hillside relies on sponsors to cover the cost of the talent, as well as corporate parties and other functions. (Id. at 17, Cassidy testimony.) Sponsors are concerned with the image of a venue as well as its reliability, and if Hillside is closed for the 203 season, it will have a tremendous negative impact on sponsorship – dollars will be relocated and may never be recouped. (Id. at 17-20, Cassidy testimony.) Hillside has already lost one of the premier events it has had for the last several years; the Smooth Jazz Festival decided to commit elsewhere for the season. (Id. at 20, Cassidy testimony.) II. Standard of Review 15 When determining whether to issue a preliminary injunction, a district court must consider four factors: “(1) whether the movant has a ‘strong’ likelihood of success on the merits; (2) whether the movant would otherwise suffer irreparable injury; (3) whether issuance of a preliminary injunction would cause substantial harm to others; and (4) whether the public interest would be served by issuance of a preliminary injunction.” Leary v. Daeschner, 228 F.3d 729, 736 (6th Cir. 2000) (citation omitted). The Court’s determination as to the requested injunctive relief is reached by balancing these factors against each other. United Food & Commercial Workers Union, Local 1099 v. Southwest Ohio Reg’l Transit Auth., 163 F.3d 341, 347 (6th Cir. 1998) (citation omitted). III. Analysis A. Likelihood of Success on the Merits 1. 42 U.S.C. § 1983 Section 1983 of 42 U.S.C. protects against the deprivation “of any rights, privileges, or immunities secured by the Constitution and laws” as a result “of any statute, ordinance, regulation, custom, or usage, of any State.” To prevail, Plaintiffs must show that: (1) Plaintiffs were deprived of rights secured by the U.S. Constitution or laws of the United States; and (2) the deprivation was caused by a person acting under color of state law. Upsher v. Grosse Pointe Pub. Sch. Sys., 285 F.3d 448, 452 (6th Cir.), cert. denied, 123 S. Ct. 88 (2002) (citing Flagg Bros. v. Brooks, 436 U.S. 149, 155-57 (1978 . To establish municipal liability, Plaintiffs must show “execution of a government’s policy or custom which results in a constitutional tort. . . . The ‘policy’ requirement is not meant to 16 distinguish isolated incidents from general rules of conduct promulgated by city officials. Instead, the ‘policy’ requirement is meant to distinguish those injuries for which [the municipality] is responsible under § 1983, from those injuries for which the [municipality] should not be held accountable.” Gregory v. Shelby County, Tenn., 220 F.3d 433, 441 (6th Cir. 2000). “A court’s task is to identify those who speak with final policymaking authority for the local governmental actor concerning the action alleged to have caused the violation at issue.” Id. (internal quotes and citations omitted). “In addition, a plaintiff must demonstrate that . . . the municipal action was taken with the requisite degree of culpability and must demonstrate a direct causal link between the municipal action and the deprivation of federal rights.” Id. at 442 (internal quotes and citations omitted). Under Monell v. Dep’t of Soc. Servs., 436 U.S. 658 (1978), a single decision of a properly constituted legislative body “unquestionably constitutes an act of official government policy,” and thus can serve as the basis of municipal liability under 42 U.S.C. § 1983. Pembaur v. City of Cincinnati, 475 U.S. 469, 479-80 (1986). Plaintiffs in this case have satisfied their burden under Monell, claiming that the City Planning Commission’s decision to revoke its Special Approval Land Use was an act of official government policy that violated their constitutional rights. Given this, Defendant City may be liable for damages under 42 U.S.C. § 1983. Because it is uncontested that Defendants Duchane and the City were acting under color of state law, the proper inquiry is Plaintiffs’ ability to show a likelihood of success on the merits of their claim that Defendants deprived them of rights secured by the Fourteenth and First 17 Amendments to the U.S. Constitution. The O’Reilly Defendants claim that they are not state actors; rather, they claim that they acted as City Attorneys and merely provided the City with legal advice and thus cannot be considered state actors for purposes of § 1983 liability.4 a. Fourteenth Amendment Due Process Rights (i) Constitutionally Protected Property Interest Plaintiffs allege that Defendants deprived Plaintiffs of a valuable property right without due process when Defendants revoked Hillside’s Special Approval Land Use. See Reed v. Village of Shorewood, 704 F.2d 943 (7th Cir. 1983). The Due Process Clause prevents the government from depriving a citizen of “property” without due process of the law. To prevail on their claim that Defendants deprived them of their Special Approval Land Use (SALU) without due process, Plaintiffs must show: (1) that they have a . . . property interest protected by the Due Process Clause of the Fourteenth Amendment; (2) that they were deprived of this protected interest within the meaning of the Due Process Clause; and (3) that the state did not afford them adequate procedural rights prior to depriving them of their protected interest. Med Corp., Inc. v. City of Lima, 296 F.3d 404, 409 (6th Cir. 2002). Protected property interests do not arise from the Constitution, but rather from an independent source such as state law. See Leis v. Flynt, 439 U.S. 438, 441 (1979). 4That issue need not be decided in this hearing. 18 Plaintiffs’ property interest is based on their already approved Special Approval Land Use, not on a permit or an expectation of approval. A permit constitutes “property” only when the landowner has a right to it and a municipal decision-maker lacks the discretion to deny it. See Bd. of Regents of State Colleges v. Roth, 408 U.S. 564, 576 (1972) (observing that the Due Process Clause protects property interests including government benefits to which the plaintiff has a legitimate claim of entitlement). See also Silver v. Franklin Twp. Bd. of Zoning Appeals, 966 F.2d 1031, 1036 (6th Cir. 1992); Triomphe Investors v. City of Northwood, 49 F.3d 198, 202 (6th Cir. 1995); Richardson v. Twp. of Brady, 218 F.3d 508, 517-18 (6th Cir. 2000). Entitlements to permits are rare. In this case, however, Defendants had already exercised their discretion to grant a Special Approval Land Use, and Plaintiffs’ claim of entitlement is based on the express terms of the SALU itself, as well as related state statutes and local ordinances. Defendants Duchane and the City contend that the municipal decision-makers had discretion to deny the SALU at issue here and that Hillside’s SALU was revoked because Hillside failed to abide by its conditions. The issue is not, however, whether Plaintiffs had a right to the SALU in the first instance. Rather, the issue is whether the City, which had already granted Hillside the SALU, had the authority to revoke that valuable property interest and whether Defendants deprived Plaintiffs of a property interest without procedural due process. It is apparent that the City Planning Commission lacked the authority to revoke Hillside’s Special Approval Land Use once it was granted. Under Michigan law, absent a specific grant 19 of authority in either the Sterling Heights Zoning Ordinance or the enabling state statute which gives the City the right to create "Special Land Uses," the Planning Commission is powerless to revoke a previously approved Special Land Use. See McVeigh v. City of Battle Creek, 86 N.W.2d 279, 280 (Mich. 1957) (holding that zoning boards of appeal “do not have the inherent power to grant a rehearing”); Kethman v. Oceola Twp., 276 N.W.2d 529, 532 (Mich. Ct. App. 1979) (observing that the McVeigh Court’s holding also applies to “the authority of a township board to grant a rehearing”). In McVeigh, the Michigan Supreme Court affirmed a lower court decision holding that the Zoning Board of Appeals for the City of Battle Creek did not have the authority to grant a rehearing on a previously granted variance beyond five days after the grant. The lower court found that, pursuant to the language of the governing zoning ordinance which provided that board decisions do not become final until five days after its entry date, “if the Board does have the right of rehearing the same right must, as a matter of law, be exercised within the five days specified, unless it be shown that there has been fraud or mistake.” Id. (quoting lower court decision). The McVeigh Court rejected the defendant City’s argument that “a zoning board of appeals has inherent power to grant a rehearing where no rights have intervened between entry of the original order and the order granting a rehearing.” Id. It further observed that: neither the statute nor the zoning ordinance grants or authorizes a rehearing. We are not unmindful of the fact that zoning appeal boards are not courts, nor are they possessed of the powers of a court. Such boards are limited to the statute and the ordinance. It is our opinion that such boards do not have the inherent power to grant a rehearing. Id. 20 In Kethman, the Michigan Court of Appeals reversed a township board's reconsideration of a previously granted "land use" (which the court found to be in the nature of a variance), observing that: The [Michigan Supreme Court]’s admonition [in McVeigh, 86 N.W.2d at 280, that a zoning board of appeal does not have the inherent power to grant a rehearing] is also relevant to a consideration of the authority of a township board to grant a rehearing. Here, also, neither the enabling act nor the defendant's ordinance provides for the rehearing of a granted variance. Here, also the appeal board is imbued with no inherent powers, and thus possesses only those powers expressly invested in it by statute or ordinance. (See 3 Anderson, American Law of Zoning (2d ed), § 20.50, p 568.) For this reason we hold that the defendant township acted beyond authority in ordering reconsideration of the validity of the plaintiff’s variance several months after the original hearing. This power, not granted by statute, will not be implied. . . . 276 N.W.2d at 532 (emphasis added). Under Chapter 25 of the Sterling Heights Zoning Ordinance, the Sterling Heights Planning Commission is given the power to approve or deny the granting of a Special Approval Land Use. Section 25.01, "Authority", states as follows: The City of Sterling Heights Planning Commission shall have the sole power to approve or disapprove all special land uses. In consideration of all applications for special land use, the planning commission shall review each case individually as to its appropriateness and consider the following standards as it relates to the proposed land use. Such uses shall be subject to conditions, restrictions, and safeguards deemed necessary to the interest of public health, safety and welfare. The Ordinance then sets forth in Section 25.03(B) what shall occur upon "Approval," and in Section 25.03(C) what shall occur upon "Denial." Nowhere in the Zoning Ordinance is the Planning Commission designated or empowered to institute or conduct a "revocation" hearing with respect to an established Special Approval Land Use or to revoke or terminate a Special Approval Land Use once granted. The only reference to revocation of any Special Approval 21 Land Use which can be found in the Zoning Ordinance is in Section 25.03(B), where it states: In all cases where a particular special land use has been granted as provided herein, application for a building permit in pursuance thereof must be made and received by the city not later than one (1) year thereafter, or such approval shall automatically be revoked, provided, however, the planning department may grant an extension thereof for good cause shown under such terms and conditions and for such period of time not exceeding six (6) months as it shall determine to be necessary and appropriate. Any special land use that is discontinued or abandoned for a period exceeding one (1) year shall have its approval revoked. The Michigan Enabling Act, MCLA 125.584(a), which grants to cities the authority to provide for Special Land Uses in their Zoning Ordinances, is equally devoid of any grant of authority to the official body designated to handle Special Land Uses, beyond the authority to approve or deny the same. As the Enabling Act specifically states: (4) Power of designated official or body. The body or official designated in the zoning ordinance to review and approve special land uses may deny, approve, or approve with conditions, requests for special land use approval. The decision on a special land use shall be incorporated in a statement of conclusions relative to the special land use under consideration. The decision shall specify the basis for the decision, and any conditions imposed. It is well-established that governmental bodies such as Zoning Boards of Appeal and City Boards are creations of the legislature and have only those powers granted to them in the enabling statutes and ordinances in which they find their origin. In the case at bar, Defendants have not provided this Court with any statute or ordinance which gives the Planning Commission the authority to revoke a previously granted Special Approval Land Use. Likewise, Defendants' argument that the language of condition ten5 of the Special 5Condition 10 of the SALU provides as follows: That the decision of the Planning Commission will remain valid and in force 22 Approval Land Use somehow gives the Planning Commission authority to revoke the Special Approval Land Use is not supported by precedent or the plain language of condition 10. The language in condition ten refers to the validity of representations made in the application to and at the hearing before the Planning Commission on February 28, 2001. It does not give any notice that should there be any violation of any of the conditions of the Special Approval Land Use, knowingly or unknowingly, the Special Approval Land Use will be automatically revoked. This interpretation is supported by the fact that the Planning Commission has never revoked any other previously granted Special Approval Land Use. Rather than use established enforcement procedures; i.e., ordinance violations, citations, and state court appeals, that would provide Plaintiffs with the procedural due process rights to which they were entitled, Defendants Duchane and the City, without adequate notice or opportunity to respond, built a contrived case of noncompliance with the conditions of Hillside’s SALU and presented it in a revocation proceeding they had no authority to conduct. Plaintiffs are not required to exhaust their administrative remedies when alleging procedural due process claims. See Nasierowski Bros. Inv. Co. v. City of Sterling Heights, 949 F.2d 890, 893-94 (6th Cir. 1991) (observing that “Sixth Circuit precedent reflects that this circuit adheres to the view. . . [that] a procedural due process claim is instantly cognizable in federal court without requiring a final decision on a proposed development from the only as long as the facts and information presented to the Commission in public hearing are found to be correct and the conditions upon which this motion is based are forever maintained as presented to the Commission. Pls.’ Ex. PX 110. 23 responsible municipal agency.”). Therefore, it is not relevant that Defendants offered Plaintiffs the opportunity to reapply for a new SALU. Even if the City had the authority to conduct a revocation hearing, the record before this Court is also replete with evidence that Hillside was not afforded its right to due process at the revocation hearing, as set forth by this Court in its Findings of Fact. A fundament tenet of procedural due process is that hearings be conducted before an impartial tribunal. Ward v. Village of Monroeville, Ohio, 409 U.S. 57, 59-60 (1972). This requirement of neutrality and fairness ensures “that no person will be deprived of his interests in the absence of a proceeding in which he may present his case with assurance the arbiter is not predisposed to find against him.” Marshall v. Jerrico, Inc., 446 U.S. 238, 242 (1980). Plaintiffs have established that the revocation proceedings before the City Planning Commission lacked the requisite neutrality and impartiality. The City Planner, Norman Birr, acted as an advocate for revocation. (Defs.’ Ex. DX 623; Hr’g Tr. Vol. I at 198-99.) He met with Planning Commission members outside the hearing to review the evidence with them. (Hr’g Tr. Vol. I at 206-07.) Thus, not only were procedural safeguards completely lacking in the revocation hearing, but all pretense of neutrality was abandoned as the City Planner became the prosecutor. (Hr’g Tr. Vol. I at 198.) Accordingly, Plaintiffs have shown to this Court that they have a likelihood of success on the merits of their claim of denial of due process. (ii) Constitutionally Protected Liberty Interest Plaintiffs also allege that they have liberty interests; i.e., the freedom to engage in their chosen business and fund-raising activities, protected by the Fourteenth Amendment and that Defendants’ interference with their right to engage in that business is arbitrary and thus 24 unconstitutional. Plaintiffs further allege that Defendants deprived them of their liberty interests without due process. To prevail on their procedural due process claim in this § 1983 action, Plaintiffs must show: (1) that they have a life, liberty, or property interest protected by the Due Process Clause of the Fourteenth Amendment; (2) that they were deprived of this protected interest within the meaning of the Due Process Clause; and (3) that the state did not afford them adequate procedural rights prior to depriving them of their protected interest. Med Corp., Inc. v. City of Lima, 296 F.3d 404, 409 (6th Cir. 2002). “[I]t is well established that the freedom to choose and pursue a career, to engage in any of the common occupations of life, qualifies as a liberty interest which may not be arbitrarily denied by the State.” R.S.S.W., Inc. v. City of Keego Harbor, 18 F. Supp.2d 738 (E.D. Mich. 1998) (internal quotes and citations omitted). See also Parate v. Isibor, 868 F.2d 821 (6th Cir. 1989); Sanderson v. Village of Greenhills, 726 F.2d 284, 286-87 (6th Cir. 1984) (holding that the plaintiff owner of a billiards parlor had stated a claim for deprivation of his liberty interest to engage in “whatever legal business he elects to pursue” and holding that the defendant City’s interference with the plaintiff’s business was arbitrary and thus unconstitutional); Wilkerson v. Johnson, 699 F.2d 325 (6th Cir. 1983) (holding that harassment and delay in plaintiffs’ attempt to obtain a barber’s license constitutes a due process violation of the plaintiffs’ liberty interest in the pursuit of that occupation); Benigni v. City of Hemet, 879 F.2d 473 (9th Cir. 1988) (holding that the plaintiff, owner of a restaurant/bar, stated a cause of action for deprivation of a liberty interest by alleging that the 25 defendant City engaged in a campaign of harassment that infringed on the plaintiff’s constitutional right to pursue an occupation). The evidence presented by Hillside establishes that they are likely to prevail on the merits of their claim that its principals have a liberty interest in the continued operation of Freedom Hill Amphitheater. They have devoted considerable time, energy and money to this venture, and the fact that it may not be the only component of their livelihood does not diminish its importance. b. Fourteenth Amendment Equal Protection Rights Plaintiffs also allege that Defendants violated the Fourteenth Amendment’s equal protection clause when they selectively enforced the law by denying Plaintiffs’ applications for special licenses for alcoholic beverage sales. Plaintiffs further allege that Defendants revoked Hillside’s Special Approval Land Use and took other regulatory action against them both to punish them and to inhibit the exercise of their protected liberty and property interests and their First Amendment rights. The Equal Protection Clause requires that those similarly situated should be treated alike. Under the Equal Protection Clause, an individual can bring a claim for the selective enforcement of an otherwise valid law or regulation. There are three types of selective enforcement claims: (1) those brought by members of a protected class alleging the government arbitrarily discriminated against them based on class membership; (2) those brought by individuals who claim they were punished for exercising a constitutionally protected right, see Futernick v. Sumpter Twp., 78 F.3d 1051, 1056 (6th Cir. 1996); and (3) those brought by individuals who are not members of a protected class and are not alleging an 26 infringement of a constitutionally protected right but rather claim to be a “class of one” and allege that the government intentionally treated them “differently from others similarly situated and that there [was] no rational basis for the difference in treatment.” Village of Willowbrook v. Olech, 528 U.S. 562, 564 (2000). It is the second type of selective enforcement which is at issue here. To prevail on the second type of selective enforcement claim, also known as vindictive enforcement claims, Plaintiffs must show: (1) exercise of a protected right; (2) the enforcer’s “stake” in the exercise of that right; (3) the unreasonableness of the enforcer’s conduct; and (4) that the enforcement was initiated with the intent to punish Plaintiffs for the exercise of the protected right. Futernick, 78 F.3d at 1056 n.7. As the Sixth Circuit explained, “selective enforcement intended to discourage or punish the exercise of a constitutional right, especially the right to criticize the government, is sufficient basis for § 1983 relief.” Id. at 1057. Plaintiffs claim that Defendants’ intentionally punished them, by selectively enforcing land use and liquor license regulations or laws, because of the exercise of Plaintiffs’ constitutional rights; i.e., access to the courts and the right to petition the government. Accordingly, Plaintiffs’ Fourteenth Amendment vindictive enforcement claims dovetail into their First Amendment claims (discussed below). 6 c. First Amendment Rights Plaintiffs allege that Defendants’ campaign of harassment was in retaliation for Plaintiffs’ 6Plaintiffs also claim that the government intentionally treated them differently from others similarly situated and that there was no rational basis for the difference in treatment. That issue need not be decided in this hearing. 27 exercise of their First Amendment rights; i.e., the August 6, 2001 lawsuit against the City of Sterling Heights and the City Manager and the May 29, 2002 lawsuit against the O’Reilly firm, City Attorneys. “[I]t is well established that ‘[t]he right to petition the government for redress of grievances is grounded in the [F]irst [A]mendment, and generally includes the right of every citizen to access to the courts.’” R.S.S.W., Inc. v. City of Keego Harbor, 18 F. Supp.2d at 747 (quoting Gillard v. Norris, 857 F.2d 1095, 1101 (6th Cir. 1988 . Likewise, it is well established that “retaliation by public officials against the exercise of First Amendment rights is itself a violation of the First Amendment.” Zilich v. Longo, 34 F.3d 359, 364 (6th Cir. 1994). To prevail on their First Amendment retaliation claim, Plaintiffs must show: (1) that [Plaintiffs were] engaged in a constitutionally protected activity; (2) that [Defendants’] adverse action caused [Plaintiffs] to suffer an injury that would likely chill a person of ordinary firmness from continuing to engage in that activity; and (3) that the adverse action was motivated at least in part as a response to the exercise of [Plaintiffs’] constitutional rights. Bloch v. Ribar, 156 F.3d 673, 678 (6th Cir. 1998). As to the third element, Plaintiffs “must allege a ‘chronology of events from which retaliation may plausibly be inferred.’” Spruytte v. Govorchin, 961 F. Supp. 1094, 1103 (W.D. Mich. 1997) (quoting El-Amin v. Tirey, 817 F. Supp. 694, 699 (W.D. Tenn. 1993), aff’d, 35 F.3d 565 (6th Cir. 1994 . Based on the evidence presented, this Court finds that Plaintiffs are likely to succeed on the merits of the selective enforcement and First Amendment retaliation claims. Rarely does one hear such compelling and unrebutted evidence of the vindictive retaliatory action 28 such as that taken by Defendant Duchane and the City of Sterling Heights as set forth above. The facts in this case establish a relentless pattern of harassment and vindictiveness, starting with the ratcheting up of demands in 2001, the unjustified administrative enforcement hearing and nuisance determination which had to be vacated by the State Circuit Court, the denial of the special liquor licenses for the 2002 season, the search for irregularities or “false representations” in Hillside’s documentation, the denial of building permits to complete the roof and dressing rooms, the excessive police presence during concerts, the refusal to provide backup documentation for alleged noise and invoice violations, and the deliberate distortion of the terms and conditions of the SALU itself and the terms of the settlement of previous litigation in this Court. Every time Hillside attempted to protect its operations, the City turned the pressure up higher. It is clear that some residents of Sterling Heights were unhappy about Hillside’s operation and were vocal about it. It is obvious that Hillside’s operation was a thorn in the side of the City Manager. And, it is equally clear and obvious that Plaintiffs are likely to succeed on their claims that the City engaged in selective enforcement and vindictive retaliation. d. Substantive Due Process Substantive due process is “the doctrine that governmental deprivations of life, liberty or property are subject to limitations regardless of the adequacy of the procedures employed.” Buckeye Comm. Hope Found. v. City of Cuyahoga Falls, 263 F.3d 627, 641 (6th Cir. 2001), cert. granted in part, 122 S. Ct. 2618 (2002) (internal quotes and citations omitted). Stated otherwise, substantive due process concerns “the right not to be subject to arbitrary and capricious action.” Id. 29 To prevail on their substantive due process claims, Plaintiffs must first identify a constitutionally protected property or liberty interest. Silver, 966 F.2d at 1036. As discussed above, Plaintiffs have demonstrated a protected property interest in the continuation of the SALU. Plaintiffs must also show that the Defendants’ actions were arbitrary and capricious “in the strict sense, meaning that there is no rational basis” for the decision. Pearson v. City of Grand Blanc, 961 F.2d 1211, 1221 (6th Cir. 1992) (internal quotes and citations omitted) (emphasis in original). In this case, Defendants’ revocation of the SALU as part of a campaign of harassment and retaliation constitutes an arbitrary and capricious deprivation of Plaintiffs’ property right in that SALU. Thus, Plaintiffs are likely to succeed on the merits of a substantive due process claim, in addition to those already discussed. B. Irreparable Harm Plaintiffs allege that Defendants’ revocation of their Special Approval Land Use results in the permanent loss of Hillside’s right to engage in its established business and confiscates liberty and property rights that cannot be adequately compensated with money and thus warrants injunctive relief. Defendants counter that Plaintiffs do have a complete and adequate remedy at law; i.e., they can reapply for a Special Approval Land Use on an expedited basis and could have timely appealed the revocation of their SALU to the Macomb County Circuit Court. Defendants further argue that lost profits and financial hardship do not satisfy the requirement of irreparable harm. See Nagel v. Thomas, 666 F. Supp. 1002 (W.D. Mich. 1987); 30 Teamsters Local Union 299 v. U.S. Truck Co. Holdings, Inc., 87 F. Supp.2d 726 (E.D. Mich. 2000). Rather, Defendants contend, Plaintiffs must show that Hillside’s losses cannot be quantified or that they are not compensable by a monetary award. Defendants also argue that Plaintiffs’ inactivity has contributed to its losses; i.e., in December 2002 Hillside was assured of an expedited hearing if it reapplied for a SALU but it failed to do so, and denial of injunctive relief is appropriate in such circumstances. Defendants’ arguments are to no avail. It is well-established that a plaintiff can demonstrate irreparable harm “if the claim is based upon a violation of the plaintiff’s constitutional rights.” Overstreet v. Lexington-Fayette Urban County Gov’t, 305 F.3d 566, 578 (6th Cir. 2002). “[W]hen reviewing a motion for a preliminary injunction, if it is found that a constitutional right is being threatened or impaired, a finding of irreparable injury is mandated.” Bonnell v. Lorenzo, 241 F.3d 800, 809 (6th Cir.), cert. denied, 534 U.S. 951 (2001) (citing Elrod v. Burns, 427 U.S. 347, 373 (1976 . Moreover, the testimony of Messrs. Novack and Cassidy clearly establishes irreparable harm as a factual matter. Defendants’ actions have put Plaintiffs in jeopardy of losing their entire operation and investment at Freedom Hill. An injunction which enables Plaintiffs to go forward with the 2003 concert season may salvage the business as an ongoing concern, as opposed to the permanent loss Plaintiffs would surely suffer if the injunction were denied. Furthermore, Defendants are essentially arguing that Plaintiffs must give up their constitutionally protected interests and renegotiate a lesser deal that is more acceptable to the City. Defendants cannot argue that Plaintiffs are at fault for their own irreparable harm because they choose to fight for the rights they negotiated in the first instance. 31 C. Harm to Others and Public Interest Finally, Plaintiffs contend that the injunctive relief they seek will not cause harm to others and will serve the public interest because it will enforce the constitutional principle that laws be equally enforced and equally applied. Defendants counter that local residents have commented extensively about their distress over Hillside’s operation at Freedom Hill, that the permit was revoked after 16 hours of public hearings, and that reinstatement of the SALU will undermine the validity of the City’s Planning Commission rather than serve the public interest. Defendants urge the Court not to substitute its judgment for that of the Planning Commission and to require Plaintiffs to pursue other alternatives made available to them by the Planning Commission (reapply for SALU) or state law (appeal). With respect to all of these issues, the Court finds that the balance of harms weighs heavily in favor of the injunction. The revocation puts Plaintiffs out of business and risks the loss of their entire investment of over $15 million. The residents will not be happy that Freedom Hill is still in business, but that issue should have been addressed years ago, when Hillside was first obtaining building permits from the City Manager despite his dissembling to the residents and the City Council. Defendants seem to believe that, because they do not like the deal they struck originally, they can force Plaintiffs into accepting other terms by manipulating the administrative process and exercising their municipal muscle as they see fit. That is not the way the law works. IV. Conclusion Based upon the foregoing, the Court GRANTS Plaintiffs’ motion for a preliminary injunction as follows: 32 1. The SALU is reinstated and Defendants are enjoined from initiating revocation proceedings, or other proceedings which might interfere with Plaintiffs’ operations, unless expressly authorized by state statute or local ordinance; 2. Defendants are enjoined from interference with Plaintiffs’ preparations for the 2003 concert season, including but not limited to, booking, sponsorship, advertising, ticket sales, licenses, permits or other operational approvals and arrangements; 3. Defendants are enjoined from using any noise measurement other than the “a- weighted” decibel scale to monitor noise at the Freedom Hill amphitheater; 4. Defendants are enjoined from interfering with afterglows in the VIP pavilion or concession area after 11:00 p.m., so long as the music is unamplified and confined to a reasonable time period following any concert, not to exceed one hour; 5. Defendants are enjoined from invoicing Plaintiffs for police or other traffic or parking services without providing all underlying documentation; 6. Defendants are enjoined from imposing any further requirements related to the legal description of Hillside’s property; and 7. Based on the pervasive evidence of harassment and retaliation by Defendant Duchane and the City, Defendants are enjoined from unlawful interference with any of Plaintiffs’ other businesses. This Court retains jurisdiction to resolve any matter which might arise out of a dispute related to the parties, their businesses, or the operation of the Freedom Hill Amphitheater. SO ORDERED. 33 /s/ Nancy G. Edmunds U.S. District Judge Dated: March 14, 2003 34