Alison Frankel

The relationship between the U.S. Supreme Court and the Federal Circuit Court of Appeals reminds me of a parent with a recalcitrant teenager. Faced with, say, confusion over patent eligibility – the legal equivalent of a messy room — the Supreme Court tells the Federal Circuit that it won’t tolerate such slovenliness. The appeals court mutters, “You’re not the boss of me,” and slams its door, leaving those empty yet still greasy pizza boxes exactly where they were.

In a case it agreed to hear on Friday, the high court will once again have the chance to discipline the Federal Circuit, this time on the question of federal-court jurisdiction over state-law legal malpractice claims involving patents. The case, Gunn v. Minton, gives the Supreme Court a chance to decide whether the Federal Circuit — in deciding that federal court is the appropriate forum for legal malpractice suits arising from patent cases — misinterpreted the test for federal jurisdiction that the Supreme Court established in its 2005 decision in Grable & Sons v. Darue Engineering.

The background of Gunn v. Minton is a bit twisty, but here’s a condensed version. Minton is a former broker and inventor who developed software that permits investors to trade over a public telecom system. In 1995, he licensed the software to a Nasdaq brokerage before receiving Nasdaq approval for it — and before patenting his technology. More than a year later, Minton applied for a patent, which he was awarded in 2000. He then filed a $100 million infringement suit against Nasdaq. Minton’s case was tossed under the Patent Act’s “on-sale bar,” which holds that a patent is invalid when the invention it covers was sold more than a year before the inventor filed a patent application. Minton subsequently sued the lawyers who represented him in the Nasdaq case, claiming that they committed malpractice when they failed to raise arguments that the on-sale bar doesn’t invalidate his claim because he sold the software for experimental use.

Minton brought the malpractice case in Texas state court. The trial judge dismissed it, finding no evidence that Minton licensed his software on an experimental basis. Minton appealed to the state appellate court in Fort Worth. While that appeal was under way, the Federal Circuit ruled in two cases – Air Measurement v. Akin Gump and Immunocept v. Fulbright – that when a state-law malpractice case arises from a substantive issue of patent law, federal courts have jurisdiction.

Based on that precedent, Minton asked the state appeals court to dismiss his case for lack of subject matter jurisdiction, which would allow him to refile his claims in federal court. The state appeals court refused and instead affirmed the lower court’s finding that Minton had no case. But when Minton appealed to the Texas Supreme Court, the majority of a divided court held that Minton was right: Under the U.S. Supreme Court’s Grable test, as interpreted by the Federal Circuit in Air Measurement and Immunocept, Minton’s malpractice case belonged in federal court.

In a way, it was a no-brainer for the Federal Trade Commission to file a certiorari petition asking the U.S. Supreme Court to review the 11th Circuit Court of Appeals ruling in the FTC’s pay-for-delay case against Watson Pharmaceuticals. After all, the FTC has been screaming for years that pay-for-delay deals — in which brand-name drug manufacturers pay generic drug competitors to drop challenges to the brand-name maker’s patents — violate antitrust laws. So, considering that the Supreme Court has so far ducked an issue that’s been percolating in the federal circuits for more than a decade, why wouldn’t the FTC ask the justices to review an appellate ruling that pay-for-delay deals are not anti-competitive unless they exceed the scope of the brand-name drug maker’s patent or involve sham litigation?

There was zero chance, in other words, the FTC would let the 11th Circuit’s ruling stand without a challenge. But in framing that challenge, the agency had to consider an unprecedented development in pay-for-delay Supreme Court advocacy: There’s already another pay-for-delay cert petition awaiting the justices’ review — and that one involves a 3rd Circuit decision that found pay-for-delay deals to be presumptively anti-competitive. The FTC could simply have filed a petition in Watson that noted the pending petition in the 3rd Circuit In re K-Dur case and asked to be bound by the court’s decision in that litigation. Instead, the commission filed a full-on cert petition, arguing that its case is the preferable vehicle for the Supreme Court to decide, for once and for all, whether pay-for-delay deals violate antitrust laws.

In an unusually naked bid to control the case, the FTC noted first that K-Dur is private litigation. In contrast, the Watson case “is brought by a federal agency charged by Congress with challenging unfair methods of competition,” the FTC said. The commission has litigated several pay-for-delay cases on its own, and has participated as an amicus in several more private suits. “The court,” wrote the Justice Department on behalf of the FTC, “would benefit from the experienced presentation that the FTC, represented by the Solicitor General, would offer as a party.”

I have a bold assertion: Breach of contract suits by mortgage-backed securities trustees are no longer a rarity. In my daily feed of new filings, I’m seeing a fairly regular trickle of cases asserting trustee claims that mortgage originators didn’t live up to their representations and warranties about the loans they sold to MBS trusts. The roster of firms filing cases for trustees has expanded as well. Kasowitz, Benson, Torres & Friedman still seems to be the likeliest to appear on the signature page of MBS trustee complaints, but last week MoloLamken filed a put-back suit in New York State Supreme Court for the trustee of a Morgan Stanley MBS trust, and Holwell Shuster & Goldberg brought a put-back claim in the same court for the trustee of a Deutsche Bank-backed trust.

So, now that put-back filings have become as relatively commonplace as Miguel Cabrera home runs, it’s time to start asking how successful the cases will be. Banks have been disposing of billions of dollars of put-back demands asserted by bond insurers and by Fannie Mae and Freddie Mac for years, but those claims haven’t been resolved through litigation. And Bank of America reached its proposed $8.5 billion global settlement with private investors in Countrywide mortgage-backed securities before the investors’ lawyers at Gibbs & Bruns filed a complaint claiming that Countrywide breached MBS representations and warranties. As far as I’m aware, there has been no publicly disclosed settlement of a put-back case filed by an MBS trustee acting at the behest of private certificate holders.

With that paucity of precedent, a ruling this week in one of the earliest put-back cases on the dockets is bad news for certificate holders. The suit, filed by Kasowitz Benson against the originators of loans in a $555 million Wells Fargo MBS offering, stemmed from an investigation that noteholders demanded back in April 2010. In a sample of 200 of the 3,000 loans in the underlying pool, investors identified material breaches in 150, or 75 percent, of the sample. When the originators EquiFirst and WMC Mortgage refused to accede to put-back demands based on breaches in the sample, the MBS trustee, U.S. Bank, sued on behalf of noteholders.

Over the summer, the justices of the U.S. Supreme Court made one of the most improbable grants of certiorari you will ever see.

The timing alone was unusual. The court granted cert in Standard Fire Insurance v. Knowles on Aug. 31, almost a month before the first conference of the new term on Sept. 24. But that’s just the beginning of this case’s oddities. There’s no split among the federal circuits on the issue presented in Standard Fire: whether a class action plaintiff can defeat removal to federal court under the Class Action Fairness Act by stipulating on behalf of the entire class to seek less than $5 million, the statutory cutoff for a state-court class action. In fact, there couldn’t possibly be a circuit split on that question because only one appellate court, the 8th Circuit Court of Appeals, has addressed it. And though Standard Fire comes out of 8th Circuit turf in Arkansas, it is not even the case in which the 8th Circuit opined on these class action damages stipulations, which have become an oft-used tactic of plaintiffs’ lawyers who want to keep their cases in state court.

Indeed, as name plaintiff Greg Knowles argued in his brief opposing cert, there is no appellate opinion at all in the Standard Fire case. After a federal court in Arkansas remanded Knowles’s class action to state court in Miller County, where it was filed, the 8th Circuit twice declined to review the district court’s remand opinion. Yet the Supreme Court nevertheless agreed to take the case. Standard Fire’s merits brief is due later this month, and oral arguments will take place later in the term.

It would be so easy to be cynical about the suit New York Attorney General Eric Schneiderman brought Monday night against JPMorgan Chase, seeking to hold the bank liable for the alleged mortgage securitization fraud committed by Bear Stearns before JPMorgan acquired Bear in March 2008. I could start with the political expediency of the 31-page complaint, which, on the eve of the first presidential debate, provides the Obama administration with an answer to critics who have accused regulators of going easy on big banks. Indeed, the case is so politically charged that, according to Reuters, Schneiderman’s federal colleagues on the administration’s mortgage fraud task force were peeved that the New York AG filed the suit Monday, ahead of a joint federal-state press conference Tuesday.

Then, of course, there’s the content of the complaint. I’ve been carping for a long time that regulators were years behind lawyers representing bond insurers and private investors in mortgage-backed securities. Beginning in 2008 and 2009, private lawyers marshaled evidence from their own discovery and, later, from Congress’s Financial Crisis Inquiry Commission Report and the Levin-Coburn Report to produce damning, detailed complaints against JPMorgan and the other banks involved in securitization. The New York AG’s new complaint cited the FCIC report and the JPMorgan suit filed in August 2011 by the Federal Housing Finance Agency, but the AG really owes his biggest debt of gratitude to the monolines Ambac, Syncora and Assured Guaranty and their counsel at Patterson Belknap Webb & Tyler. Patterson has been relentless in its pursuit of Bear Stearns and, by extension, JPMorgan. Just look at the amended complaint Ambac filed in New York State Supreme Court in February 2011 against JPMorgan and the Bear mortgage arm, EMC. It’s 160 pages of brutal accusation, documenting the same theories put forth by the New York AG — but in much more detail.

Those colorful quotes in the AG’s suit about Bear’s “sack of shit” and “shit breather” securitizations? They’re in the Ambac complaint. So are the AG’s allegations that PricewaterhouseCoopers, engaged in 2006 to offer an opinion of Bear’s put-back practices, told the bank to stop keeping the money it recovered from the originators of deficient mortgages for itself and to start passing on its put-back recoveries to MBS investors. The AG, in other words, did a lot of piggybacking on other people’s work. I didn’t see anything in Schneiderman’s complaint that I haven’t seen elsewhere in suits against Bear and JPMorgan.

On Friday, U.S. District Judge Robert Wilkins of Washington struck down the Commodity Futures Trading Commission’s 2011 rule setting position limits on derivatives tied to certain physical commodities. The judge found that the CFTC had misinterpreted the Dodd-Frank financial reform law of 2010 when it wrongly concluded that Dodd-Frank required it to impose position limits in order to curb speculative trading. Instead, according to Wilkins, the CFTC should have looked back to the Commodity Exchange Act of 1936 and determined whether such limits are necessary and appropriate before setting them. The judge sent the rule back to the CFTC for reconsideration.

Though CFTC Chairman Gary Gensler told Reuters in a statement issued Friday that he continues to believe position limits are not only necessary but mandated by Congress, Wilkins’s ruling marks the second time in 14 months that industry groups have succeeded in rolling back agency rules required by Dodd-Frank. In July 2011, a three-judge panel of the District of Columbia Circuit Court of Appeals found that the Securities and Exchange Commission had not properly considered the impact on capital markets when it promulgated the Dodd-Frank-mandated “proxy access” rule, which required public companies to provide shareholders with information about shareholder-nominated board candidates. The D.C. Circuit struck down the rule, and the SEC decided not to appeal. That case was brought by the Business Roundtable and the U.S. Chamber of Commerce. The challenge to the CFTC’s position limits rule was brought by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The industry groups in both cases were represented by Eugene Scalia of Gibson, Dunn & Crutcher, who is certainly living up to his reputation as the scourge of federal agency rulemakers.

The specific flaws courts cited in the proxy access and swaps limit rules are different, but there’s a unifying sentiment behind the rulings that struck them down: Agencies cannot point to Dodd-Frank mandates, cite the financial crisis and impose new rules without exercising independent judgment about the need for and the impact of those rules.

Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison and Max Berger of Bernstein Litowitz Berger & Grossmann share an elevator bank at 1285 6th Avenue in New York City. Bernstein Litowitz, a 50-lawyer plaintiffs’ firm, has space on the 36th and 38th floors. Paul Weiss’s 750 lawyers occupy much of the rest of the office building. Karp and Berger are also old frenemies: In 2004, they negotiated Citigroup’s $2.65 billion settlement of shareholder claims in the WorldCom accounting fraud case. Over the last several months, with Karp representing Bank of America and Berger one of the lead counsel for shareholders suing over the bank’s acquisition of Merrill Lynch in 2008, the two have spent a lot of time riding the elevator between Berger’s office on the 36th floor and Karp’s on the 30th, discussing a resolution of the class action.

With an Oct. 22 trial date looming and no sign from U.S. District Judge Kevin Castel that he would end the case by granting summary judgment to either side, those elevator rides (and sessions with mediator Layn Phillips of Irell & Manella) led to the $2.43 billion settlement that Bank of America announced Friday. It’s the fourth-largest-ever securities class action settlement by a single defendant (behind Tyco’s $2.975 billion deal in 2007, Cendant’s $2.83 billion settlement in 1999, and the Citi agreement in 2004) and the largest in a case that involved no accounting fraud or criminal convictions. The settlement is vindication for Richard Cordray of the Consumer Financial Protection Bureau, who launched the litigation on behalf of two Ohio pension funds back in 2009, before he was voted out of office as Ohio’s attorney general, and for the three shareholders’ firms that litigated the case for almost four years: Bernstein Litowitz; Kessler Topaz Meltzer & Check; and Kaplan Fox & Kilsheimer.

The plaintiffs in this case will be asking Castel to approve $150 million in fees, and they’ve earned them. Remember, the SEC was originally willing to settle allegations against BofA for disclosure failures in the Merrill acquisition for $33 million. This settlement reflects the nuanced understanding of Bank of America’s failure to disclose billions of dollars in escalating Merrill Lynch losses that shareholders’ counsel gained through dozens of depositions and millions of pages of discovery. The plaintiffs survived motions to dismiss by the bank and individual defendants, motions to reconsider the denial of their dismissal motions, and opposition to class certification. They clearly persuaded Castel of the value of their claims; his class certification ruling rejected defense arguments that shareholders weren’t injured by the alleged disclosure failures. Bank of America repeated those arguments in its motion for summary judgment, but there’s little chance the judge would have granted the motion. From all indications, Castel had cleared his calendar and planned to try this case, in what would surely have been one of the most celebrated trials stemming from the financial crisis.