word of art

From 1946 through 1967, Ernst & Ernst, an accounting firm, was retained by First Securities Company of Chicago, a small brokerage firm and member of the Midwest Stock Exchange and the National Association of Securities Dealers, to perform periodic audits of the firm's books and records. Ernst & Ernst prepared for filing with the Securities and Exchange Commission the annual reports required of First Securities under § 17(a) of the 1934 Act. It also prepared responses to the financial questionnaires of the Midwest Stock Exchange. Respondents were customers of First Securities who invested funds in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. From 1942 through 1966, with the majority of the transactions occurring in the 1950s, Nay induced respondents to invest in escrow accounts that he represented would yield a high rate of return. In fact, there were no escrow accounts, as Nay converted respondents' funds to his own use immediately upon receipt. These transactions were not in the customary form of dealings between First Securities and its customers. They were not reflected on the books and records of First Securities. They were not shown on its periodic accounting to respondents or included in First Securities' filings with the Commission or the Exchange. The fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as spurious. Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under § 10(b) of the 1934 Act. The complaint charged that Nay's escrow scheme violated § 10(b) and Rule 10b-5. It also charged that Ernst & Ernst had aided and abetted Nay's violations by its failure to conduct proper audits of First Securities. As revealed through discovery, respondents' cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize appropriate auditing procedures in its audits of First Securities. This failure prevented discovery of internal practices of the firm said to prevent an effective audit. The practice principally relied on was Nay's rule that only he could open mail addressed to him at First Securities or addressed to First Securities to his attention. Respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst. After extensive discovery the District Court granted Ernst & Ernst's motion for summary judgment and dismissed the action. The Court of Appeals for the Seventh Circuit reversed and remanded. The Supreme Court granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of scienter.

Around 2:30 a.m. on June 20, 2007, neighbors reported a fire that had erupted at the home of the Tinchers in Downingtown, Pennsylvania. Investigators concluded that a lightning strike near the Tinchers’ home caused a small puncture in the corrugated stainless steel tubing transporting natural gas to a fireplace. The CSST was part of the TracPipe System manufactured and sold by Omega Flex. The resulting fire burned for over an hour and caused significant damage to the home and belongings. Following the fire, the Tinchers reported the incident to their insurer, United Services Automobile Association. USAA compensated the Tinchers for their loss up to the limit of their policy and received an assignment of liability claims. The Tinchers suffered an additional out-of-pocket loss because a portion of their claimed loss exceeded the limits of the USAA policy. In January 2008, the Tinchers filed a complaint against Omega Flex in the Chester County Court of Common Pleas. They asserted claims premised upon theories of strict liability, negligence, and breach of warranty, with the strict liability claim based on Section 402A of the Second Restatement. The case proceeded to a jury trial in October 2010 before Judge Ronald C. Nagle. The Tinchers offered expert testimony that the CSST walls were only one-hundredth of an inch thick and therefore inherently defective because lightning-generated currents were highly likely to perforate them. Omega Flex presented its own experts who testified that the TracPipe System met all applicable industry standards. They also stated that the lightning strike lacked sufficient energy to cause the puncture and that an attempted bonding clamp found disconnected after the fire may have prevented the incident if properly installed. After the close of evidence, the trial court denied Omega Flex’s motions for nonsuit and directed verdict. On October 20, 2010, the jury returned a verdict in favor of the Tinchers on the strict liability claim. The jury awarded compensatory damages totaling $958,895.85 plus delay damages. The jury found for Omega Flex on the negligence claim. Omega Flex filed post-trial motions that the trial court denied, leading to entry of judgment. The Superior Court affirmed the judgment in September 2012. The Supreme Court granted Omega Flex’s petition for allowance of appeal limited to the question of whether to replace the strict liability analysis of the Second Restatement with that of the Third Restatement.

In 1990 petitioner C. Elvin Feltner, through his company Krypton International Corporation, acquired three television stations in the southeastern United States. Respondent Columbia Pictures Television, Inc., had licensed several television series including “Who’s the Boss,” “Silver Spoons,” “Hart to Hart,” and “T. J. Hooker” to these stations. The stations became delinquent in royalty payments to Columbia. Negotiations to restructure the stations’ debt proved unavailing, and Columbia terminated the license agreements in October 1991. Despite the termination the stations continued broadcasting the programs. Columbia sued Feltner, Krypton, the stations, Krypton subsidiaries, and certain Krypton officers in federal district court alleging copyright infringement among other claims. Columbia sought a permanent injunction, impoundment of all copies of the programs, actual damages or alternatively statutory damages, and costs and attorney’s fees. On Columbia’s motion the district court entered partial summary judgment as to liability on the copyright infringement claims. Columbia exercised its option under Section 504(c) to recover statutory damages in lieu of actual damages. Feltner requested a jury trial on statutory damages but the district court denied the request and held a bench trial. After two days of trial the judge found 440 separate acts of infringement, determined that the infringement was willful, and fixed statutory damages at $20,000 per act for a total award of $8,800,000 plus costs and attorney’s fees. The Ninth Circuit affirmed the district court’s judgment in all relevant respects. The Supreme Court granted certiorari.

Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents told Reed that a woman and her four children were murdered there 10 years earlier. However, King and his real estate agent knew about the murders and knew the event materially affected the market value of the house when they listed it for sale. They represented to Reed the premises were in good condition and fit for an “elderly lady” living alone but did not disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in purchasing the house because of the stigma. Reed paid $76,000, but the house is only worth $65,000 because of its past. Reed sues seeking rescission and damages. King and the real estate agent defendants successfully demurred to her first amended complaint for failure to state a cause of action. Reed appeals the ensuing judgment of dismissal.