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Speaker 1: This is Bloomberg Law with June Bresso from Bloomberg Radio.

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Speaker 1: Sarais founder Elizabeth Holmes was convicted of defrauding investors in

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Speaker 1: her failed blood testing startup, but the jury acquitted homes

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Speaker 1: of defrauding patients. Juror Wayne Katz told ABC News the

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Speaker 1: jury believed Holmes was one step removed from those actions.

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Speaker 1: I don't believe the actions intended to hurt patients. That's

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Speaker 1: the one hurdle I could not get passed on that.

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Speaker 1: Now prosecutors are trying to close that gap in their

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Speaker 1: case against former then as president Ramesh Sonny bell Wanni.

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Speaker 1: Joining me is Joel Rosenblatt Bloomberg Legal reporter Joel explain

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Speaker 1: why Holmes got off on the patient fraud charges. So

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Speaker 1: I spoke to a juror and she made the point

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Speaker 1: that they followed the jury instructions explicitly as instructed, and

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Speaker 1: they found that the prosecution just failed to connect Elizabeth Holmes,

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Speaker 1: you know, all the way down to the patients. An

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Speaker 1: important piece of that is that in order to be

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Speaker 1: convicted of criminal fraud, you have to deprive somebody of

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Speaker 1: property or money. And so the charge here is that

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Speaker 1: Elizabeth Holmes deliberately, intentionally sought to deceive patients in order

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Speaker 1: to get their money, and it was just too much

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Speaker 1: of a reach. This juror explained, Elizabeth Holmes was operating

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Speaker 1: at such a high level, and it's too much of

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Speaker 1: a reach to connect her to the patients investors. That's

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Speaker 1: something else. We saw a lot of evidence in her

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Speaker 1: trial of her speaking with you know, deliberately bringing investors

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Speaker 1: in and had a lot of interaction with them, not

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Speaker 1: so with patients. The prosecution is bringing those same charges

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Speaker 1: against Belwannie. Do the same people testify? Is their presentation

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Speaker 1: the same? The presentation is slightly tweaked, and it's different

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Speaker 1: in a couple of important ways. I think. One, there's

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Speaker 1: a lab director who did not testify at Elizabeth Holmes's trial.

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Speaker 1: There's also a regulator. This is a regulatory body that

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Speaker 1: regulates laboratories and she testified. And there's also a patient

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Speaker 1: who was supposed to testify at Elizabeth Holmes trial who

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Speaker 1: testified last week. He wasn't as compelling as I thought

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Speaker 1: he might be. This is a patient who suffered from

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Speaker 1: kind of a varied blood platelet production and was relying

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Speaker 1: on their nous to get an accurate blood platelet count

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Speaker 1: in order to then get the medication or take medication

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Speaker 1: required to adjust that, and consistently four to four times

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Speaker 1: his test from thar Nos was wrong. That may sound

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Speaker 1: kind of severe, but the consequences weren't luckily for him

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Speaker 1: and for the aness. But his testimony he was kind

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Speaker 1: of shaking on the facts. His understanding and memory of

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Speaker 1: dates was not so good, and he just didn't come

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Speaker 1: across as that compelling as far as the patients are concerned.

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Speaker 1: Is the case against bell Wanni's stronger on the acts

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Speaker 1: because he was in charge of lab operations. I think

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Speaker 1: that's exactly when I think you hit the nail on

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Speaker 1: the head as to why something. Balt is more vulnerable

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Speaker 1: on these counts. He is inherently more vulnerable because he

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Speaker 1: oversaw the laboratories, and that's just a fact. And so

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Speaker 1: as a result of that role, he was more aware

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Speaker 1: of not only the faulty farness, blood ted results, but

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Speaker 1: all the problems that employees were pointing out about those results.

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Speaker 1: So he was the first high level executive to be

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Speaker 1: dealing with those complaints. The prosecution rested its case less Thursday.

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Speaker 1: Tell us how the case mirrored its case against Holmes,

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Speaker 1: and how it differed. Well, many of the witnesses are

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Speaker 1: the same, so I would say, you know, by and

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Speaker 1: large it's the same case. There's some differences though, I

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Speaker 1: mean one big difference was the prosecution this time around

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Speaker 1: was all set to present the former CEO of Wells

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Speaker 1: Fargo who served as a director, and just because of scheduling,

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Speaker 1: really he didn't testify. Now in the Balwani trial, he

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Speaker 1: would serve the role that Jim Mattis, the former Secretary

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Speaker 1: of Defense, played at the Holmes trial, even if his

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Speaker 1: testimony wasn't so compelling in terms of explaining Elizabeth Holmes's culpability.

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Speaker 1: It's still just kind of riveting to have somebody of

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Speaker 1: that level testifying, And here they don't have that. The

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Speaker 1: schedule you didn't work out, and it seems that the

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Speaker 1: government feels confident enough to just go without that, that

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Speaker 1: they've presented the case they need without somebody at that level.

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Speaker 1: Let's talk about his defense that prosecutors are cherry picking

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Speaker 1: the bad results and ignoring millions of tests that work.

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Speaker 1: Are they trying to show the machine worked. They're not

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Speaker 1: trying to show the machine work. They can't really do

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Speaker 1: that because it didn't. But it's kind of the inversion

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Speaker 1: is that it worked maybe well enough, or worked as

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Speaker 1: well as other laboratories. And so this is a real thing.

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Speaker 1: It's called the List. It's a giant database that stored

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Speaker 1: the blood setting results of millions of patients and it's gone.

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Speaker 1: It's just gone. And so the government says they're most

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Speaker 1: intentionally destroyed it. And Sonning Baltwani argues that the government

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Speaker 1: sat on the database for a long time without kind

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Speaker 1: of figuring out how to revive it and let it

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Speaker 1: go defunct. And so this is being litigated. To what

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Speaker 1: extent Sonning Baltwani can present this defense is still not

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Speaker 1: completely resolved, and we're going to find out shortly explain

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Speaker 1: his defense based on the database. The database contains millions

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Speaker 1: of patient results, and what Sonning Botwani is saying is

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Speaker 1: many of them very good, all good results by and large.

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Speaker 1: So something Botwani is arguing, well, the government has picked,

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Speaker 1: you know, has found really through I think through journalism.

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Speaker 1: The government has found these patients who had bad test

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Speaker 1: results and they're presenting some of them as witnesses. But

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Speaker 1: what Sonny is saying is there are millions more that

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Speaker 1: had perfectly good test results, but we can't present that

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Speaker 1: defense and the government doesn't have it, and so they're

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Speaker 1: just cherry picking. They're just picking the thinnest margin of

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Speaker 1: bad results to make this criminal case. We'll just never

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Speaker 1: really know. As part of that, alongside that, he's also

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Speaker 1: arguing that all laboratories have some mistakes. All laboratories present

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Speaker 1: errors in their testing, and their NOS isn't different that way.

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Speaker 1: There was a very good line of defense last week

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Speaker 1: in which Sunny bal Wannis lawyer Jeffrey Cooper Smith cross

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Speaker 1: examined the doctor who had testified about a bad result,

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Speaker 1: and he, under cross examination got the doctor to acknowledge

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Speaker 1: that for a year leading up to this bad result,

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Speaker 1: he had used their nose with no detectable problems or

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Speaker 1: bad results. That was that was an effective piece of

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Speaker 1: cross examination. That kind of points to this defense we're

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Speaker 1: talking about. Elizabeth Holmes blamed bell Wanni. Is Bella any

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Speaker 1: blaming Holmes? Well, so Elizabeth Holmes blamed him in kind

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Speaker 1: of a more logistical way, pointing to Sunny Balwani being

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Speaker 1: in charge of fundraising and finances infens responsible for the

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Speaker 1: financial statements that which were false and also pointed to

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Speaker 1: his role in the laboratory, but in a moment much

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Speaker 1: more sensational way. Of course, she pointed to him as

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Speaker 1: as abusive, sexually and psychologically abusive. Sonny Batwani is blaming

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Speaker 1: Elizabeth Holmes for being the person who founded the company

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Speaker 1: and started it and got it going. She was the

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Speaker 1: chief executive and founder of the company long before he

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Speaker 1: came on as president. That's a fact, that's true. So

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Speaker 1: he is pointing to her, not in this sensational way

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Speaker 1: that she did, but as the person who's was the

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Speaker 1: CEO and in charge. He is doing that but more subtly.

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Speaker 1: And it's a difficult argument to make because all the

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Speaker 1: emails show how cooperative they were, how closely they worked together.

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Speaker 1: They were, of course intimately involved, but they were working

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Speaker 1: side by side for years, and really during the years

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Speaker 1: where all the money started coming in. So it's difficult

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Speaker 1: for him to do. Is there any chance that he'll testify, Yes,

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Speaker 1: there is. You know, it's unusual for a white car

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Speaker 1: criminal defendants to testify, but Elizabeth Holmes did, of course

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Speaker 1: in a sensational way. Sunny Bowani, we don't know yet,

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Speaker 1: but he testified in a civil suit by the Security

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Speaker 1: and Exchange Commission, and he could have pleaded the fifth

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Speaker 1: I've just seen over the years, from depositions, from his

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Speaker 1: demeanor in court, from his aggressive legal defense. He's somebody

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Speaker 1: who you could imagine wants to present his side of

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Speaker 1: the story. That of course comes with enormous risk, not

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Speaker 1: the least of which is that existing testimony to the SEC.

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Speaker 1: But if he deviates even a little bit from that testimony,

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Speaker 1: you know, prosecutors are going to jump on that. But

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Speaker 1: he may just be that kind of defendant who, despite

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Speaker 1: the advice of his lawyers, even will take the stand.

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Speaker 1: What's happening with Elizabeth Holmes. Well, so Elizabeth Holmes is

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Speaker 1: just beginning to file her arguments for sentencing. She will

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Speaker 1: be sentenced in September, so that's really what we're waiting for.

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Speaker 1: We will see arguments in court filings before then, but

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Speaker 1: the judge needs to evaluate kind of what happened here

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Speaker 1: with Sunny Balwani. He's gonna want that information even for

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Speaker 1: sentencing Elizabeth Holmes. So he's gonna want to get have

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Speaker 1: the whole picture before he sentences Elizabeth Holmes. What is

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Speaker 1: she facing under the investor fraud counts that she was

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Speaker 1: convicted of. She faces, you know, up to twenty years

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Speaker 1: in prison. She's likely to get about half of that,

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Speaker 1: which is still really significant. The reporting initially kind of

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Speaker 1: widely initially after the verdict was that she will end

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Speaker 1: up getting a few years. That's not true because of

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Speaker 1: the size of the investor fraud. The amounts of money

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Speaker 1: that investors were defrauded of really kicks her sentence up significantly.

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Speaker 1: I don't think that she's going to get less than

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Speaker 1: seven years, and maybe as much as ten or even more.

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Speaker 1: We will find out. Thanks Joel. That's Bloomberg Legal reporter

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Speaker 1: Joe Rosenblatt coming up next. The Supreme Court finds most

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Speaker 1: circuit courts have been making this up. You're listening to Bloomberg.

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Speaker 1: The Supreme Court said that nine out of the eleven

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Speaker 1: circuit courts have been imposing a rule in arbitration that

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Speaker 1: they basically made up. A worker's class action overtime suit

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Speaker 1: against a Taco Bell franchise was going ahead in federal

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Speaker 1: court for nearly eight months when the company suddenly changed

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Speaker 1: tactics and moved to compel arbitration. The Eighth Circuit ruled

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Speaker 1: that the fast food worker had to show that she

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Speaker 1: was prejudiced or harmed by that change in tactics in

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Speaker 1: order to avoid arbitration. But any unanimous decision the Supreme

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Speaker 1: Court said that was wrong, and that prejudice is not

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Speaker 1: a requirement for a waiver of arbitration. In fact, justice

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Speaker 1: is Elena Kagan and Neil Gorsuch addressed that point at

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Speaker 1: the oral arguments seems a bit made up with this

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Speaker 1: definition of default that you have. I mean, you say

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Speaker 1: that there are certain things that count is default, missing

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Speaker 1: and explicit deadline um and and but you know, where

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Speaker 1: are we getting this from. We're not getting it from

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Speaker 1: Section four. We're not getting it from any other part

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Speaker 1: of the f a A. Where does this federal common

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Speaker 1: law rule come from? But one thing I do know

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Speaker 1: is federal procedural law, which is governed and seems to

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Speaker 1: control under Section six. And it seems to be what

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Speaker 1: the Eighth Circuit was relying on. Federal procedural law. It

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Speaker 1: seems to be with all the other federal courts of

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Speaker 1: Appeals are relying on too. And I can say I

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Speaker 1: think with some degree of certainty that waiver whatever else

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Speaker 1: it requires in federal court and our normal procedure with

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Speaker 1: respect emotions doesn't require proof a prejudice. My guest is

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Speaker 1: Richard Silberberg, a partner with Dorosey and Whitney and a

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Speaker 1: director of the New York International Arbitration Center. Start by

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Speaker 1: telling us about the case itself, the accent what happened

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Speaker 1: in the courts below. Sure, So, the case involves an

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Speaker 1: employee of a Taco bell franchise who signed an agreement

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Speaker 1: to arbitration claim when she applied for work, and at

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Speaker 1: some point during her employment, she concluded that the employer

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Speaker 1: had violated certain federal wage and our laws, and she

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Speaker 1: commenced the lawsuit against the franchise in federal court. The employer,

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Speaker 1: rather than demanding that her claim be arbitrated, as they

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Speaker 1: had a right to do under the employment agrant, litigated

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Speaker 1: the matter in federal court for about eight months, and

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Speaker 1: when it decided that that was not productive or that

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Speaker 1: it was not getting the results that it had hoped,

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Speaker 1: it only then moved to compel arbitration. So the employee

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Speaker 1: argued that the employer had waived the right to arbitrate

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Speaker 1: by participating in the lawsuits for the preceding eight months,

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Speaker 1: and the employer are responded by saying that it not

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Speaker 1: waives its right to arbitrate because the employee could not

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Speaker 1: show that it was harmed, and in this case, the

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Speaker 1: word harmed is being equated with the legal concepts of

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Speaker 1: prejudice by the employer's delay in moving the case from

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Speaker 1: the court to arbitration. The lower court in this case,

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Speaker 1: consistent with the prevailing view in lower courts around the country,

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Speaker 1: agreed with the employer that the employee had to show

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Speaker 1: harm that is prejudice to show that the employer waived

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Speaker 1: its right to arbitrate, and in doing that, the lower

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Speaker 1: court in effect applied a bespoke no harm, no foul

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Speaker 1: rule for waivers to arbitrate, even though that no harm

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Speaker 1: no foul rule does not apply in ordinary commercial contracts

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Speaker 1: that do not involve arbitration. So that's what the case

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Speaker 1: was about. Is it surprised saying that this was a

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Speaker 1: unanimous decision because the court is often divided in arbitration cases.

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Speaker 1: I don't think it was surprising because I actually think

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Speaker 1: the ruling is fairly narrow and it's not very controversial.

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Speaker 1: What the Court held in an opinion that was written

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Speaker 1: by Justice Kagan is that there is no requirement to

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Speaker 1: show harm in order to establish that a party waved

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Speaker 1: a contractual right to arbitrary And I should point out

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Speaker 1: that although this arose in an employment situation, the ruling

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Speaker 1: applies in all commercial litigation cases filed in federal court. Now,

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Speaker 1: that last piece is important because what the Supreme Court

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Speaker 1: held does not necessarily apply in state court cases that

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Speaker 1: are not covered by the Federal Arbitration Act. But going

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Speaker 1: back to your question, June, it is not that surprising,

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Speaker 1: cause what the lower federal courts had been doing was

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Speaker 1: creating a special rule of contract interpretation that only applied

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Speaker 1: to arbitration. And what the courts pointed out is that

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Speaker 1: the lower federal courts generally had misapplied prior Supreme Court president,

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Speaker 1: which had held that there is a strong federal policy

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Speaker 1: favoring arbitration. Justice Kagan wrote that nine of the circuits

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Speaker 1: decided to create variations of the federal procedural rules for arbitration,

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Speaker 1: starting with a decision in ninety eight by the Second

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Speaker 1: Circuit in Manhattan, which handles a lot of business cases.

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Speaker 1: Flush that out a little more for us. So for

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Speaker 1: the last decade at least, and probably going back further

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Speaker 1: than that, there has been an unbroken series of cases

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Speaker 1: recognizing that there is a strong federal policy favoring arbitration

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Speaker 1: and that that stems on the Federal Arbitration Act. What

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Speaker 1: the Supreme Court did in this case is it reminded

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Speaker 1: the lower federal court that when it said there was

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Speaker 1: a strong federal policy favoring arbitration, it did not mean

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Speaker 1: that the lower federal courts should adopt and this is

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Speaker 1: Justice Kagan's language arbitration preferring procedural rule. In other words,

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Speaker 1: the fact that there's a strong federal policy favoring arbitration

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Speaker 1: does not mean that the court should adopt rules that

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Speaker 1: favor arbitration litigation. On the contrary, what it said that

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Speaker 1: the Federal Court should do is treat arbitration agreements the

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Speaker 1: same way that it treats other commercial contract And the

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Speaker 1: reason that it felt the need to do that is

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Speaker 1: because years ago there was a hostility to the enforcements

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Speaker 1: of arbitration agreement, and the Court in these unbroken areas

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Speaker 1: of cases pointed out that, no, there is no hostility

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Speaker 1: to arbitration agreements. They're entitled to be enforced under the

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Speaker 1: Federal Arbitration Act. And therefore, courts you should enforce arbitration

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Speaker 1: agreements the same way you would enforce any other contract.

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Speaker 1: What the Supreme Court said is that the lower courts

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Speaker 1: went too far in creating arbitration, preferring procedural rules. To

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Speaker 1: put it in layman's terms, where the circuit courts basically

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Speaker 1: bending over backwards to facilitate arbitration, you know, to push

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Speaker 1: arbitration forward. Yes, that's what the Supreme Court, in Justice

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Speaker 1: Cagan's opinion, pointed out that the lower federal courts had

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Speaker 1: in effect sent over backwards to enforce an arbitration agreement

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Speaker 1: by creating this requirement that in order to show a

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Speaker 1: waiver of arbitration, the other side had to have been

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Speaker 1: harmed or prejudiced by the delay in enforcing the arbitration right.

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Speaker 1: And what Justice Cagan said is that that should not

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Speaker 1: have been permitted. There should have been no special requirement

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Speaker 1: that the employee in this case needed to show in

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Speaker 1: order to establish waivers. Usually employers want to arbitrate, and

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Speaker 1: employees want to go to court. So it surprised me

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Speaker 1: that professional organizations for both trial lawyers and arbitrators supported

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Speaker 1: the employees position here. I am not surprised in the

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Speaker 1: least because particularly employment sector employers very much want to

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Speaker 1: protect their right to arbitrate in order, for example, to

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Speaker 1: head off class claims class action, and they have for example,

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Speaker 1: inserted into agreements class action waivers so that employees cannot

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Speaker 1: ban together in order to bring a class claim against

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Speaker 1: an employer. So here I believe that the various amicus

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Speaker 1: submissions on the part of the industry were designed to

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Speaker 1: encourage the Supreme Court to make arbitration easier and not

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Speaker 1: to find circumstances in which arbitration had been waived by

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Speaker 1: the employers litigating the case for in this case about

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Speaker 1: eight months. Yeah, and it's amicas brief. The National Academy

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Speaker 1: of Arbitrators said it was concerned about the integrity of

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Speaker 1: the arbitration process if the Eighth Circuit's decision stood, calling

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Speaker 1: it a tactical device. Now you mentioned before there's been

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Speaker 1: this line of Supreme Court decisions favoring arbitration. Does this

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Speaker 1: decision break that line or is it sort of on

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Speaker 1: another track. I don't think it breaks the line. I

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Speaker 1: think what it does is two things. I think there's

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Speaker 1: the narrow holding and then there's the broader holding. The

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Speaker 1: narrow holding is telling parties to arbitration agreement that you

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Speaker 1: had better not sit around and let time go by

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Speaker 1: if you really want to arbitrate a claim that has

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Speaker 1: been brought against you in court. It's a cautionary tale

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Speaker 1: for employers and other defendants who are sued in court.

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Speaker 1: They need to move promptly in order to compel arbitration

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Speaker 1: if that's what they want to do. Arbitration is not

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Speaker 1: going to be a fallback option if they decide they're

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Speaker 1: going to try their hand at litigation in court before

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Speaker 1: speaking arbitration. I think the broader holding is, as a

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Speaker 1: Supreme Court, we are not going to endorse a rule

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Speaker 1: that prefers arbitration over litigation. When the right to arbitrate

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Speaker 1: is contained in an ordinary commercial agreement. Principles of contract

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Speaker 1: interpretation like waiver needs to be applied uniformly whether or

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Speaker 1: not there's an arbitration clause in the agreement. So, in

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Speaker 1: response to your question, I don't think it's a deviation

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Speaker 1: from what the last ten years or so have shown

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Speaker 1: with respect to support for arbitration in the Supreme Court.

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Speaker 1: But I think it is a little bit of a

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Speaker 1: break on the notion that the Court is referring arbitration.

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Speaker 1: The Court is emphasizing in this case that it is

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Speaker 1: not and that the same rules should apply to arbitration

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Speaker 1: agreements as other commercial agreements. This goes back to the

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Speaker 1: Eighth Circuit. What's the question the Eighth Circuit is going

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Speaker 1: to be considering in this case? The Eighth Circuit has

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Speaker 1: now been given the task of determining whether Taco Bell

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Speaker 1: did in fact wave the right to arbitrate by participating

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Speaker 1: for eight months in the litigation before they moved to

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Speaker 1: switch the venue to arbitration, and in deciding that issue,

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Speaker 1: the Circuit shall not consider whether the employee was harmed

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Speaker 1: or prejudice by the eight months delay in in trying

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Speaker 1: to move the case to arbitration. So it's hard to

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Speaker 1: predict what the Eighth Circuit would do, but I think

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Speaker 1: that it's going to be harder for the employer to

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Speaker 1: establish that it did not waive the right to arbitrate

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Speaker 1: by participating in litigation for eight months. I know this

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Speaker 1: is this is not your case, but what kind of

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Speaker 1: arguments can Tackle Bell bring up? The litigation was going

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Speaker 1: forward until it I guess there was a mediation and

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Speaker 1: it didn't like what happened. How can it say they

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Speaker 1: didn't waive the right to arbitrate. Well, I think they've

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Speaker 1: got a tough always came into ahead of them. But

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Speaker 1: if if I had to predict what their arguments would be,

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Speaker 1: it would be the following number One. They made a

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Speaker 1: motion to dismiss the case in federal court because they

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Speaker 1: said it was duplicative of a prior case that had

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Speaker 1: already been filed. So I think they would argue that

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Speaker 1: they were not seeking to substantively litigate the case in

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Speaker 1: court on the merits. What they were doing is trying

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Speaker 1: to engage in some judicial economy by not letting a

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Speaker 1: case proceed that had for which a duplicative case was

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Speaker 1: already pending. And then I think they would further argue

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Speaker 1: that the only other thing that they did in the case,

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Speaker 1: other than moved to dismiss on that procedural ground, was

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Speaker 1: to engage in mediation. And I think they would argue

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Speaker 1: that mediating a case is not consistent with a notion

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Speaker 1: that they had waived the right to arbitrate. They were

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Speaker 1: just trying to see if the entire case to be resolved.

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Speaker 1: Thanks so much for being the Bloomberg Law Show. That's

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Speaker 1: Richard Silberberg a partner with Dorsey and Whitney. And that's

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Speaker 1: it for this edition of the Bloomberg Law Show. Remember

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Speaker 1: you can always get the latest legal news on our

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Speaker 1: Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify,

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Speaker 1: and at www dot bloomberg dot com, slash podcast slash Law.

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Speaker 1: I'm joom Brasso, and you're listening to Bloomberg