Third Circuit Rejects News Corp.-Related Hacking Case

Third Circuit Rejects News Corp.-Related Hacking Case Maksim Kabakou/Fotolia

A New Jersey marketing company has lost its appeal of a decision that barred it from pursuing claims that a company owned by Rupert Murdoch’s News Corp. hacked its computers to gain a competitive advantage and then falsely denied it in a prior lawsuit.

The U.S Court of Appeals for the Third Circuit affirmed a ruling by U.S. District Judge William Martini of the District of New Jersey in News America Marketing In-Store Services v. Floorgraphics on Aug. 13 in an opinion by Ninth Circuit Judge A. Wallace Tashima, joined by Third Circuit judges D. Michael Fisher and Robert Cowen.

Floorgraphics’ accusation that News America Marketing In-Store Services illegally accessed its computers resembles claims that Murdoch-owned news companies in England hacked into voicemails of celebrities, royals and others seeking scoops. The claims in England resulted in the shutdown of News of the World, at one time the world’s largest-selling English-language newspaper, and criminal convictions for several editors and reporters.

Floorgraphics, which was located in Princeton, N.J., and rival News America, based in New York, have been litigating against each other for a decade in a series of lawsuits in New Jersey federal court.

The first, filed by Floorgraphics in 2004, alleged that News America violated the Computer Fraud and Abuse Act and the Lanham Act and engaged in unfair competition by invading its password-protected computer system to access information about its contracts on at least 11 occasions between October 2003 and January 2004.

The case settled in 2009 during trial before U.S. District Judge Anne Thompson in Trenton, and News America agreed to buy Floorgraphics’ assets, mainly contracts and goodwill, for $29.5 million.

One year later, in March 2010, Floorgraphics sought relief from the judgment based on new evidence that had come to light in an unfair competition action against News America by another of its rivals in Michigan.

Floorgraphics alleged the new evidence should have been produced in the New Jersey suit but wasn’t and included videos of News America CEO Paul Carlucci saying things that contradicted his deposition testimony in the New Jersey matter, as well as financial data.

Thompson denied the motion and the Third Circuit affirmed in 2011, saying that it saw no direct contradiction of Carlucci’s deposition testimony by the videos and that Floorgraphics could not show that it would have been unable to obtain the new evidence earlier through reasonable diligence.

In the interim, News America had sued Floorgraphics and its principals in December 2009 for breach of contract and fraud in connection with the asset purchase agreement.

In a suit filed in federal court in Newark, it claimed that some of the contracts it thought it had purchased did not exist or could not be assigned.

The defendants initially asserted counterclaims for breach of the consulting agreements that were part of the asset purchase deal, but they later asked for permission to add counterclaims for fraud, fraudulent inducement and civil conspiracy.

Their motion, filed in January 2012, said that more recently revealed evidence supported a claim that a News America employee named Gary Henderson had lied under oath in his deposition and at trial before Thompson.

That and other efforts to conceal the hacking had prevented Floorgraphics from knowing the true value of its claim against New America, the company alleged, claiming it was fraudulently induced to settle for zero dollars and sell its assets.

The new counterclaims were largely based on an article published in New York Magazine on Sept. 28, 2011, titled “Floored by News Corp.: Who Hacked a Rival’s Computer System?”

The article “exposed Henderson as the hacker of [Floorgraphics'] computers and quoted sources as saying that Henderson said he had the approval for the hacking from his management superiors,” Floorgraphics said in its motion papers.

Prior to the article, Floorgraphics did not have evidence to prove that Henderson hacked its computers and that News America participated or approved, Floorgraphics contended.

It referred to Henderson’s denials at deposition and said that he repeated them at the 2009 trial, where News America and its attorneys “participated in the deception by, among other things, denying knowledge of the identity of the hacker” in the opening statement to the jury.

U.S. Magistrate Judge Mark Falk of the District of New Jersey refused to allow the new counterclaims but stated that Floorgraphics had a right to bring them in a separate action.

That same day, April 2, 2012, News America filed a preemptive action seeking a declaratory judgment stating that it committed no fraud in procuring the 2009 settlement and that Floorgraphics was barred from suing over it.

News America said it relied on the mutual release signed by the parties, which discharged all claims “known and unknown,” and stated they were not relying on any representations beyond what was in the four corners of the document.

News America’s complaint also pointed out that, when Floorgraphics signed the release, it was represented by “the prominent law firm” of Boies, Schiller & Flexner.

Martini’s Sept. 10, 2013, order, just upheld on appeal, granted summary judgment for News America.

He based his decision on what he termed the “incredibly broad” and “seemingly unequivocal” release language and he pointed out that Floorgraphics was aware of Henderson’s testimony when it signed the release.

Martini also said he had not been presented with any facts showing that Henderson committed perjury.

In affirming, the Third Circuit said that Floorgraphics’ “current contention — that it reasonably relied on the truth of Henderson’s testimony –rings hollow” given that it had deposed Henderson and cross-examined him extensively at trial and that News America had conceded that someone used a computer in its Connecticut offices to access Floorgraphics’ website without authorization.

Further, Floorgraphics conceded that Henderson’s testimony was crucial to its decision to settle because even though it did not believe his denials and thought it had a viable claim, it lacked evidence to prove it, said the court.

News America’s lawyer, Lee Abrams of Mayer Brown in Chicago, declined to comment and said he deferred to the client’s in-house counsel, Eugenie Gavenchak. A call to Gavenchak was returned by a News American spokesman, who declined to comment.

Thomas Biemer of Dilworth Paxson in Philadelphia, representing Floorgraphics, also did not return a call.

The second of the three lawsuits, involving News America’s breach of contract claims against Floorgraphics, is ongoing, with cross-motions for summary judgment filed in July now pending before Martini.

Contact the reporter at mgallagher@alm.com.

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