Opinion

Alison Frankel

4th Circuit throws open courtroom windows in ‘Company Doe’ ruling

Alison Frankel
Apr 16, 2014 19:58 UTC

I plow through a lot of appellate opinions. Few of them make me want to stand up and read aloud in the Reuters newsroom. But a couple of sentences, from a ruling Wednesday by the 4th U.S. Circuit Court of Appeals, just about pushed me out of my chair. “A corporation very well may desire that the allegations lodged against it in the course of litigation be kept from public view to protect its corporate image, but the First Amendment right of access does not yield to such an interest,” the three-judge 4th Circuit panel wrote. “Whether in the context of products liability claims, securities litigation, employment matters or consumer fraud cases, the public and press enjoy a presumptive right of access to civil proceedings and documents filed therein, notwithstanding the negative publicity those documents may shower upon a company.” What an unwavering endorsement of open courts!

It’s all the more appropriate that the 4th Circuit underscored the public’s right to know because the case that prompted its ruling implicates the government’s discretion to protect public safety. In 2011, an unidentified local government agency submitted an incident report to the Consumer Product Safety Commission. The CPSC notified the company that manufactures the supposedly dangerous product, which insisted that the report was materially inaccurate and should not be published on the recently-established CPSC database for reports of unsafe products. The Commission agreed to some concessions, but ultimately said it intended to publish the report. The company sued in federal court in Greenbelt, Maryland, to enjoin the publication. It also moved to seal the litigation and to proceed under the pseudonym “Company Doe.”

Public Citizen, the Consumer Federation of America and the Consumers Union intervened to join the CPSC in opposing the company’s request to litigate in secret, but U.S. District Judge Alexander Williams sided with Company Doe. If the company were forced to reveal its identity in the litigation, the judge reasoned, it would suffer exactly the same reputational harm it was trying to avert through its injunction suit. The only way to protect the company from unwarranted damage, Williams said, was to permit the pseudonym and sealing until he reached a determination.

The judge ended up granting Company Doe summary judgment, barring the CPSC from publishing the dangerous product report and maintaining the seal order on the records of the case. Even his 73-page ruling is heavily redacted to remove any clues about Company Doe’s identity or the allegedly harmful product it makes.

Both the CPSC and the consumer groups appealed the case to the 4th Circuit; the government challenged the injunction, and the public interest groups focused on the seal order. The CPSC dropped the appeal without explanation in December 2012. Company Doe’s lawyers at Gibson, Dunn & Crutcher asked Judge Williams to reconsider the standing of Public Citizen and the other groups. He revoked their intervention, and Gibson Dunn moved to dismiss the 4th Circuit appeal, arguing that the public interest groups don’t have an interest in the underlying litigation and don’t have constitutional standing.

Google friends swamp 9th Circuit in ‘Innocence of Muslims’ case

Alison Frankel
Apr 15, 2014 23:06 UTC

Is there anyone who doesn’t sympathize with the actor Cindy Lee Garcia, who was baldly deceived into appearing in the abhorrent anti-Islam film “Innocence of Muslims”?

The filmmaker, a shadowy character who goes by three different names, told Garcia she’d be appearing in “Desert Warrior,” an adventure movie set in the Middle East. Instead, he overdubbed her lines to make it appear as though the actress was accusing the prophet Mohammed of pedophilia, and included her brief scene in a screed so incendiary that it inspired riots in Egypt and elsewhere in the Muslim world.

Targeted by death threats, Garcia eventually sued Google to force its YouTube unit to block the video. In February, she won a ruling from a divided three-judge panel at the 9th U.S. Court of Appeals, ordering Google to take down the film because Garcia was likely to prevail on her claim that ‘Innocence’ infringes her copyright on her individual performance.

The dubious new high-frequency trading case against the Merc

Alison Frankel
Apr 14, 2014 19:02 UTC

For all of the outrage kicked up by Michael Lewis’s depiction of fundamentally rigged securities exchanges in his book “Flash Boys,” there’s a giant obstacle standing in the way of punishing high-frequency traders or the exchanges that facilitate them: the blessing of federal regulators. As Dealbook’s Peter Henning wrote in his White Collar Crime Watch column on why high-frequency trading is unlikely to result in criminal charges, securities exchanges openly sell access to high-speed data feeds and to physical proximity that increases trading speed by milliseconds. Exchanges are, in the words of Andrew Ross Sorkin, “the real black hats” of high-frequency trading, since they unabashedly profit from differentiating access to trading information.

That may be true, but exchanges do so with the full knowledge of the Securities and Exchange Commission and the Commodity Futures Trading Commission. Georgetown professor James Angel, who specializes in the structure and regulation of financial markets, told me Monday that as long as securities exchanges don’t discriminate in the sale of high-speed access, they’re acting within their regulatory bounds. He compared the system to airlines selling different tiers of service: It’s perfectly fine to sell first-class seats to high-frequency traders as long as people in coach had the same opportunity to sit up front and opted instead for the cheap seats.

I had called Angel to ask his opinion of a new class action against the Chicago Mercantile Exchange. Filed Friday in federal district court in Chicago, the suit claims that the Merc’s parent, CME Group, has defrauded the derivatives market by representing that it’s providing real-time market information when, in fact, it has entered into “clandestine” contracts to provide order information to high-frequency traders before anyone else. Angel’s take? “This is a bogus case,” he said after reading the suit. “This is clearly about somebody who bought a coach ticket and is now complaining that they didn’t get first class service.”

DOJ, FTC on antitrust, cybersecurity: solution in search of problem?

Alison Frankel
Apr 11, 2014 20:30 UTC

Way back in 2000, the Electric Power Research Institute, a non-profit funded by utility companies, asked the Justice Department’s Antitrust Division for guidance on a proposal to help its members pool information to ward off cyber attacks. EPRI told Justice that companies across the energy sector wanted to exchange information about how best to conduct vulnerability assessments, install anti-hacking protections and formulate restoration plans in case of breaches. EPRI asked for the department’s assurance that this kind of industry-wide collaboration would not violate antitrust laws.

In a letter to EPRI, then antitrust chief Joel Klein said it would not, as long as the companies kept EPRI’s promise not to use the information exchange to impede competition. The companies could not, for instance, swap details of negotiations with specific anti-hacking service providers. But as long as they avoided talking specifically about prices or other competition-sensitive topics, they’d be fine. “The proposed interdictions on price, purchasing and future product innovation discussions should be sufficient to avoid any threats to competition,” Klein wrote. “Indeed, to the extent that the proposed information exchanges result in more efficient means of reducing cyber-security costs, and such savings redound to the benefit of consumers, the information exchanges could be procompetitive in effect.”

That perfectly reasonable advice was the Justice Department’s last word on the antitrust consequences (or lack thereof) for companies that collaborate to thwart cyber attacks. There’s a very simple reason for the resounding 14-year silence: No one else asked for guidance. Since EPRI’s request all those years ago, no other company or industry group thought it necessary to get clearance before collaborating across a sector on cybersecurity strategies. In fact, according to comments by Assistant Attorney General William Baer at a press conference Thursday, there shouldn’t really have been any uncertainty about the legality of that sort of information sharing.

Credit card antitrust judge: Client marketing is ‘professional peril’

Alison Frankel
Apr 10, 2014 21:24 UTC

In 1999, a couple of partners at the firm now known as Wilmer Cutler Pickering Hale and Dorr had a fabulous idea. Businesses were just beginning to recognize the potential advantages of imposing mandatory arbitration provisions and class action waivers on their customers. In early 1998, First USA was the first credit card bank issuer to adopt a mandatory arbitration clause, followed by American Express at the end of the year. Wilmer, which had a roster of credit card clients, came up with a marketing strategy to position itself as an expert on the clauses. In May 1999, Wilmer lawyers invited big credit card issuers to attend a conference on arbitration provisions at its Washington offices “to show these folks that this was something on which we were at the leading edge,” one of the partners later testified.

Wilmer was absolutely right about the marketing potential of mandatory arbitration. After that initial meeting at the firm’s offices on May 25, 1999, Wilmer teamed up with another firm, Ballard Spahr, and several in-house credit card lawyers. They dubbed themselves the “Arbitration Coalition” and invited lawyers from other outside firms and from companies in other industries to join the group. The coalition met throughout 1999 and 2000, as credit card issuers rushed to adopt class action waivers and arbitration clauses. Spin-off groups — including a very short-lived cluster called the Class Action Working Group and a loose band of lawyers for credit card issuers, known as the In-house Working Group — also held sessions in 2000 and 2001.

In all, including that initial session Wilmer convened in 1999, members of the credit card industry met 28 times over the course of four years to discuss how to impose and implement mandatory arbitration clauses. By the end of 2001, when Citi adopted the provisions in its agreements with cardholders, mandatory arbitration clauses had become the industry standard.

5th Amendment trumps 1st in prosecution involving unnamed commenters

Alison Frankel
Apr 9, 2014 21:09 UTC

When an anonymous speaker’s First Amendment rights conflict with a criminal defendant’s right to due process under the Fifth Amendment, which constitutional protection prevails?

There’s actually not a lot of precedent on how to balance those competing constitutional protections, according to a ruling Tuesday by the 5th U.S. Circuit Court of Appeals. The U.S. Supreme Court has gone out of its way to protect unnamed speakers, hearkening back — most recently in its 1995 ruling in McIntyre v. Ohio Elections Commission — to this country’s long tradition of anonymous political speech. On the other hand, the trial judge in the case before the 5th Circuit believed there was a reasonable possibility that the unmasking of two pseudonymous commenters to an online news article would reveal misconduct by federal prosecutors. Tuesday’s opinion left the 5th Circuit with a chance to change its position some day, but for now, the court said, it’s sticking with the trial judge: The Fifth Amendment trumps the First when anonymous online comments are possible evidence of due process violations.

The circumstances of the case that prompted the 5th Circuit’s holding were, to quote the opinion, “extraordinary.” Last June, after a years-long investigation, the former director of the non-profit New Orleans Affordable Homeownership was indicted by a federal grand jury for allegedly accepting kickbacks from contractors her group employed to repair houses damaged by Hurricane Katrina. Two months after the director, Stacey Jackson, was charged, U.S. District Judge Kurt Engelhardt of New Orleans issued a stunning opinion in a different Katrina corruption case against several former New Orleans police officials. Engelhardt vacated their convictions, finding rampant misconduct by a former first assistant and senior litigation counsel in the New Orleans U.S. Attorney’s office. Among their misdeeds: anonymous online comments and blog posts about ongoing investigations, prosecutions and even trials. To call the posts intemperate would be to understate drastically their offensiveness.

Can SAC insider trading target Elan force hedge fund to pay legal fees?

Alison Frankel
Apr 8, 2014 20:57 UTC

Elan Pharmaceuticals believes it was victimized twice over by SAC Capital, the notorious hedge fund now called Point72. The first time was when SAC obtained insider information about unsuccessful trials of the Alzheimer’s drug bapineuzumab and dumped $700 million in shares of the Irish drug company and its drug development partner Wyeth. But to add insult to that injury, Elan had to spend a small fortune, about $1.6 million, in legal fees and costs stemming from the government’s investigation of SAC’s insider trading. That is money SAC should have to pay, according to Elan. With the hedge fund due to be sentenced Thursday by U.S. District Judge Laura Taylor Swain of Manhattan, the pharma company’s lawyers at Reed Smith have submitted a letter asking Swain to recognize Elan as a victim of SAC’s crimes and order the hedge fund to pay it $1.6 million in restitution.

It’s a fascinating request. You probably recall that in a couple of high-profile cases in the recent spate of insider-trading prosecutions, Morgan Stanley and Goldman Sachs won rulings that former employees (in a broad sense of that word) were on the hook for legal fees the banks incurred as a result of the employees’ crimes. In February 2013, U.S. District Judge Jed Rakoff held that under the federal victims’ restitution law, former Goldman director Rajat Gupta owes the bank $6.2 million — the money Goldman laid out to Sullivan & Cromwell to investigate Gupta’s conduct internally and to cooperate with government investigators. Last July, the 2nd U.S. Circuit Court of Appeals affirmed a similar ruling by U.S. District Judge Denise Cote. She had concluded in 2012 that Morgan Stanley was the victim of insider trading by FrontPoint hedge fund manager Chip Skowron, so Skowron was responsible not just for repaying the bank the cost of his own defense but also for restitution of the legal fees Morgan Stanley advanced to other FrontPoint employees.

The 2nd Circuit’s ruling in the Skowron case didn’t leave much doubt that employers can receive restitution as victims for the money they spend to cooperate with government investigations of employees who go on to plead guilty or be convicted. Elan, however, didn’t employ SAC or Mathew Martoma, the former SAC trader who was convicted of trading on inside information about the company. On Monday, in a response to Elan’s letter requesting restitution, SAC’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison said Elan’s theory of restitution is “without precedent.”

Mud-flavored yogurt? Chobani founder, ex-wife wage ugly ownership war

Alison Frankel
Apr 7, 2014 21:16 UTC

For a scant two years, from 1997 to 1999, Hamdi Ulukaya, then a young Turkish immigrant with dreams of a business in Turkish-inspired dairy products, and Ayse Giray, a physician in New York with Turkish roots, were married. Giray believed in and supported Ulukaya’s vision, so much so that even after they were divorced, her family loaned him almost $200,000 in 2002 to keep his inchoate cheese-making business afloat. Ulukaya soon thereafter expanded from feta cheese into Greek yogurt, establishing a company called Chobani with a factory in upstate New York. Last month, Reuters revealed that Chobani is in negotiations to sell a minority stake for $2.5 billion. But Giray and Ulukaya are not jointly celebrating the company’s runaway success. Quite the contrary.

In filings last week in Manhattan state court, these once-friendly exes (or, more accurately their lawyers) exchanged allegations as vicious as those you’d see in the most bitter of custody disputes. Of course, in a way that’s what their litigation is: Giray is suing because she claims Chobani is at least partly her baby.

And she seems perfectly willing to undermine the company to prove it. I can’t imagine that it’s to Giray’s benefit to damage Chobani’s value if, as she claims, she owns a big percentage of the yogurt maker. Nevertheless, she’s claiming not only that Ulukaya deceived two different banks and the U.S. Department of Agriculture in order to obtain his start-up loans, but also that he paid a former employee of rival Greek yogurt maker Fage 30,000 Euros to obtain the recipe Chobani now uses.

Kosher hot dog case presents a real constitutional pickle

Alison Frankel
Apr 4, 2014 22:32 UTC

Who would have guessed that a consumer class action accusing ConAgra of deceiving consumers in the labeling of its Hebrew National hot dogs and salami would implicate two meaty constitutional issues? (Sorry, couldn’t resist.)

As the 8th U.S. Circuit Court of Appeals explained in an opinion Friday, the class action, which contends that ConAgra falsely labels Hebrew National products as 100 percent kosher, presents a question that the 8th Circuit has never before answered: whether the Establishment Clause of the First Amendment precludes federal courts from hearing claims against a secular company just because its labels invoke religious rules. That’s a toughie, according to the 8th Circuit panel — Chief Judge William Riley and Judges Roger Wollman and James Loken, who clearly had no appetite to bite off more than they could chew. (Yes, that was intentional. Sorry again.) The judges opened their discussion of the case by quoting from a 1905 case, Burton v. United States, in which the U.S. Supreme Court said, “It is not the habit of the court to decide questions of a constitutional nature unless absolutely necessary.”

That cardinal rule from 1905 has a corollary, though, according to the 8th Circuit: “If a case may be resolved on easy and settled constitutional grounds, the court should do so instead of deciding the case on difficult and novel constitutional grounds.” In the Hebrew National case, the 8th Circuit hit upon what it considered to be a relatively easy constitutional question, at least compared to the First Amendment issue. The panel found that the consumers suing Hebrew National didn’t have standing in federal court under Article III of the U.S. Constitution because they could not show they’d actually been injured.

Can banks force clients to litigate, not arbitrate?

Alison Frankel
Apr 3, 2014 20:38 UTC

If you are a customer of a big bank — let’s say a merchant unhappy about the fees you’re being charged to process credit card transactions — good luck trying to bring claims in federal court when you’re subject to an arbitration provision. As you probably recall, in last term’s opinion in American Express v. Italian Colors, the U.S. Supreme Court continued its genuflection at the altar of the Federal Arbitration Act, holding definitively that if you’ve signed an agreement requiring you to arbitrate your claims, you’re stuck with it even if you can’t afford to vindicate your statutory rights via individual arbitration.

But what if you’re a bank customer who wants to go to arbitration — and, in a weird role-reversal, the bank is insisting that you must instead bring a federal district court suit? Will courts show the same deference to arbitration when a plaintiff, rather than a defendant, is invoking the right to arbitrate and not litigate?

On Friday, the 2nd Circuit Court of Appeals will hear a rare tandem argument in two cases that present the question of whether bank clients have the right to arbitrate their claims even though they’ve signed contracts with forum selection clauses directing disputes to federal court. Believe it or not, the 2nd Circuit will be the third federal appellate court to answer this question, which has divided its predecessors. In January 2013, the 4th Circuit ruled that a UBS client may proceed to arbitration, but on Friday, the 9th Circuit held that a Goldman Sachs customer who agreed to a nearly identical forum selection clause must sue in federal court. To add to the confusion, the 9th Circuit panel was split, which led the majority to call the case “a close question.”

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