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Law Digest — 4th US Circuit — April 28, 2022

U.S. Court of Appeals for the 4th Circuit

Civil Practice; foreign discovery: Where a statute allowing discovery in the United States in aid of proceedings in foreign and international tribunals requires an applicant to show the material is “for use” in the foreign proceeding, the district court erred by not determining which evidence, if any, was “for use” in a South African action. In re: Application of Newbrook Shipping Corporation and Falcon Confidence Shipping Ltd., Case No. 20-2268 (filed April 20, 2022).

Securities; false or misleading statements: Where an investor sued Marriott following the second largest data breach in history, but its complaint did not allege facts plausibly showing that Marriott made statements about its cybersecurity capabilities or systems that were false or misleading when they were made, the lawsuit for alleged securities violations was dismissed. Construction Laborers Pension Trust for Southern California v. Marriott International Inc., Case No. 21-1802 (filed April 21, 2022).

Civil Practice

Foreign discovery

BOTTOM LINE: Where a statute allowing discovery in the United States in aid of proceedings in foreign and international tribunals requires an applicant to show the material is “for use” in the foreign proceeding, the district court erred by not determining which evidence, if any, was “for use” in a South African action.

CASE: In re: Application of Newbrook Shipping Corporation and Falcon Confidence Shipping Ltd., Case No. 20-2268 (filed April 20, 2022) (Judges Motz, Diaz, RICHARDSON).

FACTS: Nadella Corporation bought a ship for scrap from Falcon Carrier Shipping Limited. Unbeknownst to Nadella, the ship was encumbered by debt. To recover that debt, the debt holder “arrested” Nadella’s new ship. Nadella then tried to recover that debt from Falcon Carrier Shipping. These efforts have led to actual or planned legal action in four countries across multiple continents and the arrest of two other ships.

In the latest legal flare up, Newbrook Shipping—the owner of those two ships arrested by Nadella—sued Nadella in South Africa and was considering another lawsuit in Nevis. To support those actions, Newbrook applied in Maryland federal court for an ex parte order under 28 U.S.C. § 1782 authorizing discovery from Nadella’s purported parent company, Global Marketing Systems. The district court seemed to reject discovery for the speculative “proceeding” in Nevis but then granted the full application.

LAW: Section 1782 identifies four mandatory conditions that must be satisfied before an application can be granted: (1) The application must be made to the “district court for the district in which the person resides or is found”; (2) the application must come from “an interested person” or a foreign tribunal; (3) the application must seek evidence, including “testimony” or “a document” and (4) the evidence sought by the application must be “for use in a proceeding in a foreign or international tribunal.”

Although the first three requirements are met here, the last condition—that the evidence sought must be “for use” in a foreign proceeding—is not fully satisfied. The statute refers to each piece of relevant evidence in the singular, stating that a district court may order a person to give “his testimony or statement or to produce a document or other thing for use in a [foreign] proceeding,” so the applicant must show that each thing (or at least each category of things) sought is “for use” in the foreign proceeding.

Merely showing that some evidence sought within the application as a whole has some “use” is not sufficient. That does not mean that each thing or category of things sought must be essential for victory in the foreign proceeding. But the court must find that there is a reasonable possibility that the evidence sought “will be employed with some advantage or serve some use in the proceeding.”

Two foreign proceedings were identified by Newbrook: the ongoing South African action and a proposed action in Nevis. The district court found that the South African action qualified but rejected the Nevis action as too speculative to be a “proceeding,” a decision Newbrook does not challenge. But the Nevis action, Newbrook admitted, was the basis for seeking some of the evidence. And the district court seemed to agree that some evidence sought was for use in Nevis. Yet even after finding the Nevis action did not qualify as a proceeding because it was too speculative, the district court granted the entire § 1782 application, without restricting the evidence sought to what would be “for use” in the South Africa action.

Newbrook suggests that the district court implicitly limited the discovery application to items that would be for use in South Africa. This court does not read the district court’s order as imposing such a limitation. The record’s complexity counsels this court to vacate and remand this issue to the district court, to determine which evidence, if any, is really “for use” in the South African action.

If the district court determines on remand that certain evidence is “for use” in the South Africa action, that would not end the inquiry. For even where these four statutory conditions are satisfied, the district court retains discretion in granting or denying these orders.

Global Marketing also argues that the district court erred in approving service of process. The district court did not address whether an appropriate agent—as identified in Maryland Rule 2-124(d) or Federal Rule 4(h)(2)—was served in this case.

Vacated and remanded.

Securities

False or misleading statements

BOTTOM LINE: Where an investor sued Marriott following the second largest data breach in history, but its complaint did not allege facts plausibly showing that Marriott made statements about its cybersecurity capabilities or systems that were false or misleading when they were made, the lawsuit for alleged securities violations was dismissed.

CASE: Construction Laborers Pension Trust for Southern California v. Marriott International Inc., Case No. 21-1802 (filed April 21, 2022) (Judges Agee, Rushing, HEYTENS).

FACTS: After Marriott learned that malware had impacted approximately 500 million guest records in the Starwood guest reservation database, resulting in the second largest data breach in history, the Construction Laborers Pension Trust for Southern California filed a putative class action against Marriott and nine of its officers and directors, alleging that Marriott’s failure to disclose severe vulnerabilities in Starwood’s IT systems rendered 73 different public statements false or misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The investor also brought a claim for secondary liability against the executives under Section 20(a) of the 1934 Act.

The district court granted Marriott’s motion to dismiss with prejudice, concluding that the complaint “failed to adequately allege a false or misleading statement or omission, a strong inference of scienter, and loss causation,” which doomed the claim under Section 10(b) and Rule 10b-5 as well as the secondary liability claim. The investor appealed, dropping its challenge to 55 of the statements while maintaining its challenge to the other 18.

LAW: The first set of statements the investor challenges involves the importance of data protection to Marriott’s business. For example, in SEC submissions, Marriott repeatedly stated that “the integrity and protection of customer, employee, and company data is critical to us as we use such data for business decisions and to maintain operational efficiency.” By “failing to disclose . . . the vulnerable state of Starwood’s IT systems,” the investor insists, these statements “creat[ed] the misleading impression that Marriott was securing and protecting the customer data acquired from Starwood.”

The “basic problem” with the complaint on this point is that “the facts it alleges do not contradict [Marriott’s] public disclosures.” Indeed, the investor’s whole theory of the case turns on those statements being true—i.e., that data integrity is “critically important to Marriott and its investors.” Reiterating this basic truth is neither misleading nor creates the false impression the investor suggests.

Moreover, as the district court here explained, Marriott’s public statements about the importance of data protection did not “assign a quality to Marriott’s cybersecurity that it did not have.” Nor could a reasonable reader of Marriott’s public statements have understood the company to be overrepresenting the extent to which it was “securing and protecting the customer data,” especially when taken together with the other statements Marriott made in the same SEC filing.

The investor’s arguments about a series of privacy statements Marriott posted on various websites fail for similar reasons. On its own website, Marriott stated that it “seek[s] to use reasonable organizational, technical and administrative measures to protect” personal data, while noting that “no data transmission or storage system can be guaranteed to be 100% secure.” Starwood’s website, in turn, said that the company “recognize[d] the importance of information security”; was “constantly reviewing and enhancing our technical, physical, and logical security rules and procedures”; and that its “web sites and servers have security measures in place to help protect your personal data.” At the same time, the Starwood site cautioned that “‘guaranteed security’ does not exist either on or off the Internet.” Again—even assuming all of the complaint’s factual allegations are true—none demonstrates that the challenged privacy statements were false or misleading.

The court also disagrees with the investor’s assertion that Marriott’s cybersecurity risk disclosures were materially misleading because they “warned of risks that had already materialized.” Although the court construes the complaint’s allegations about the underlying facts in the light most favorable to the investor, it must first “strip[ ] . . . allegations of mischaracterizations and exaggeration, [and] focus on whether the exact statement in its true context constitutes a material representation.” After doing so here, the court concludes the investor has failed to identify any statement that was false or misleading when made.

Affirmed.