Opinion

Alison Frankel

Stanford professor: State qui tam actions could be answer to Concepcion

Alison Frankel
May 31, 2013 19:13 UTC

Janet Cooper Alexander, a professor at Stanford Law and a scholar of civil procedure and class actions, is not a fan of the U.S. Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion. In an upcoming paper for the University of Michigan Journal of Law Reform, Alexander discusses why, in her view, the high court majority “fundamentally misread” legislative history and congressional intent when it used the Federal Arbitration Act “to advance an agenda that is hostile to consumer litigation and classwide procedures.” Alexander argues that Concepcion‘s overarching endorsement of mandatory arbitration clauses has had a dire impact on the ability of consumers and employees to litigate small claims, since they’re “subject to unilaterally imposed arbitration provisions that overwhelmingly contain class waivers.”

“(Concepcion) may lead to the virtual death of the class action in employment cases and consumer contracts involving the sale of goods and services – any small-dollar transaction that can be governed by shrinkwrap, clickwrap, claim check, or other form of contract,” Alexander wrote.

Like I said, not a fan of the ruling. The professor thinks it’s highly unlikely that the current Congress will pass federal legislation to roll back Concepcion, and though she believes executive-branch agencies have the power to issue regulations restricting mandatory arbitration clauses, “such regulations, of course, could only govern contracts within the agency’s sphere of authority and could not apply broadly to all consumer contracts,” she wrote. And since Concepcion dealt specifically with a state attempt to preclude a purportedly unconscionable arbitration clause, employees and consumers can’t rely on statewide regulation to reopen the courthouse doors for their claims.

But all hope is not lost for Concepcion detractors. Alexander suggests that state legislatures could use California’s Private Attorneys General Act (PAGA) of 2004 as a model to enact laws that give employees and consumers the right to pursue aggregated small claims on behalf of the state. “Rather than trying to prevent corporations from requiring consumers and employees to resolve their claims for contractual monetary remedies in bilateral arbitration, a state could create an alternative means for private enforcement of the substantive law,” Alexander writes. “That is, rather than looking for a way for consumers and employees to bring their individual claims for compensatory damages in an aggregate proceeding in order to preserve the public benefits of holding violators liable, the state could simply provide a means for private litigants to enforce the substantive law directly, without the necessity to amass individual damages claims. Specifically, a state could enact a statutory penalty for consumer fraud or violation of state labor laws and provide for private enforcement through a qui tam or private attorney general action.”

According to Alexander, if the laws are drafted well, private AG actions would be insulated from mandatory arbitration clauses, even after Concepcion, because the qui tam plaintiff is suing for statutory damages on the state’s behalf, not for individual compensatory damages. “Because the suit does not attempt to adjudicate the legal interests of absent parties, the due process concerns familiar in class action litigation are not implicated,” the professor argues. And even if the case were deemed to require arbitration, she says, it could still be prosecuted on a classwide basis. “Assuming that an arbitration provision could require a relator to pursue the action in arbitration rather than in court, it could not bar the relator from seeking a recovery based on a large number of violations because the suit would not seek to adjudicate individual claims, but rather to enforce the state’s right to penalties for unlawful conduct against a group,” the paper says.

Strine makes new law on going-private deals in Ron Perelman case

Alison Frankel
May 30, 2013 19:47 UTC

Deference to the decisions of corporate boards is a bedrock principle of Delaware law, embodied in the business judgment rule that guides most Chancery Court analysis. But there are exceptions. In particular, the Delaware Supreme Court has made clear that deals in which a controlling shareholder wants to buy out minority stock owners must be evaluated very carefully, lest the controlling shareholder unduly influence the going-private process. In the landmark 1994 case Kahn v. Lynch, the state high court said that the appropriate standard of review for going-private deals is not business judgment but the entire fairness of the transaction, which gives courts discretion to second-guess the board’s decisions.

The Supreme Court did say in Lynch that the burden of showing whether deals are fair to minority shareholders can swing between plaintiffs and defendants depending on whether the company built protections for minority shareholders into the sale process. (Pay attention to this quote; as you’ll see, it’s crucial.) “The initial burden of establishing entire fairness rests upon the party who stands on both sides of the transaction,” the court said. “However, an approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder plaintiff.”

Note the court’s use of the word “or” in describing the protections: Since Lynch, corporate directors and controlling shareholders have known that they could stick plaintiffs with the burden of establishing the unfairness of going-private deals either by vesting approval of the transaction with a legitimately independent committee or by winning the approval of minority shareholders. Their incentive, therefore, was to build in one of those safeguards – but not both. Why take the risk that the deal wouldn’t pass both tests if you only need to pass one?

Illegal download claims tarred by porn copyright troll brush

Alison Frankel
May 29, 2013 22:45 UTC

U.S. District Judge Otis Wright‘s May 6 ruling in Ingenuity 13 v. John Doe is one of those decisions every lawyer should read. It’s only six pages long and sprinkled with Star Trek references, but its value lies in the cautionary tale outlined by the San Francisco judge. Wright was presiding over one of the many, many cases filed in the last few years by copyright owners suing tens of thousands of defendants over the supposedly illegal downloading of their content via online file-sharing sites. The litigation, as you probably know, is a specialty of pornography producers, whose cases benefit significantly from defendants’ understandable reluctance to be outed (even falsely) as consumers of online pornography. Occasionally defendants or their Internet service providers have stood up to porn purveyors. More often, defendants identified through subpoenas of their ISPs chip up a few thousand bucks to make the whole nightmare go away, leading public interest groups such as Public Citizen and the Electronic Frontier Foundation to call these en masse illegal downloading cases a shakedown operation.

Wright is one of the first judges to agree wholeheartedly with that assessment and issue sanctions based on it. “Plaintiffs have outmaneuvered the legal system. They’ve discovered the nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable defense costs,” he wrote. “Copyright laws originally designed to compensate starving artists allow starving attorneys in this electronic-media era to plunder the citizenry.” The judge went considerably further than mere rhetoric, though. In the course of hearing discovery motions by the plaintiff, a copyright holding company called Ingenuity 13, the judge found out a bit about Ingenuity’s counsel, a shadowy firm known as Prenda Law. When Wright’s preliminary inquiries about Prenda revealed what he called a “cloak of shell companies and fraud,” the judge “went to battle stations,” he said in his opinion. He ordered four lawyers associated with Prenda (but not in the Ingenuity case) and two purported principals in holding companies engaged in the business of asserting porn copyrights to appear at a series of hearings in March and April.

Based on testimony and filings, Wright said, he concluded that the lawyers John Steele, Paul Hansmeier andPaul Duffy, who had all previously experienced “shattered law practices,” began copyright trolling as a way to make “easy money.” According to the judge, the attorneys had forged the name of Steele’s former groundskeeper on a copyright assignment and had otherwise engaged in a pattern of deceit and subterfuge, involving shell companies and elusive law firms, to mask the reality that they were the only beneficiaries of the suits they brought. “The principals’ web of disinformation is so vast that the principals cannot keep track – their explanations of their operations, relationships, and financial interests constantly vary,” Wright wrote. “Though plaintiffs boldly probe the outskirts of law, the only enterprise they resemble is RICO.” The judge ordered sanctions of $81,320 against all of the lawyers and firms he found to be part of the copyright scheme. He also referred his ruling to the U.S. Attorney’s office, the Internal Revenue Service and relevant bar associations.

Judge: Kentucky AG can use contingency-fee lawyers in case vs Merck

Alison Frankel
May 28, 2013 20:48 UTC

U.S. District Judge Danny Reeves of Frankfort, Kentucky, has just contributed a new episode to the ongoing saga of whether state attorneys general may hire contingency-fee lawyers to prosecute cases on behalf of consumers. Last Thursday, in a thoughtful 33-page opinion, the judge ruled that Kentucky’s attorney general,Jack Conway, has not violated Merck’s constitutional due process rights by using the private firm Garmer & Prather to litigate consumer claims related to Merck’s marketing of the pain reliever Vioxx. Reeves rejected arguments by Merck’s counsel at Skadden, Arps, Slate, Meagher & Flom that contingency-fee lawyers should not be permitted to represent the AG in a quasi-enforcement action.

As you probably recall, AGs’ use of private law firms is a hot-button policy issue for the U.S. Chamber of Commerce and the American Tort Reform Association, which are generally opposed to the practice. They’ve lobbied hard for state legislatures to enact limits on the use of contingency-fee counsel or, at least, regulations to govern relationships between AGs and outside counsel. So far, according to ATRA president Tiger Joyce, 13 states have enacted such laws. But law professor Amy Widman of Northern Illinois University, who specializes in AGs’ enforcement of consumer protection laws, has testified before Congress that state lawyers need to be able to tap the resources of the private bar or else consumer laws will go unenforced by resource-strapped AGs.

That was the context for Reeves’s ruling, in what I’ve previously called the leading litigation challenge to state use of private lawyers. After Kentucky’s suit bounced between state and federal court, finally alighting in Franklin Circuit Court, Merck filed a declaratory judgment action in federal court, seeking a ruling that Kentucky’s use of contingency-fee lawyers was unconstitutional. The judge denied the pharmaceutical company’s motion for a preliminary injunction but also twice refused the AG’s motion to dismiss the suit. Last week’s ruling came on Merck’s motion for summary judgment.

The 6th Circuit splits with 2nd and 9th, lowers bar for securities claims

Alison Frankel
May 24, 2013 18:53 UTC

Federal courts in Kentucky, Ohio, Tennessee and Michigan may soon be seeing an influx of securities class actions claiming strict liability under Section 11 of the Securities Act of 1933, thanks to a ruling Thursday by the 6th Circuit Court of Appeals in Indiana State District Council of Laborers v. Omnicare. Judge Guy Cole, writing for a panel that also included Judge Richard Griffin and U.S. District Judge James Gwin of Cleveland, found that shareholders asserting Section 11 claims for misrepresentations in offering documents need not show that defendants knew the statements to be false.

“Under Section 11,” Cole wrote, “if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.” The panel explicitly noted that its reasoning is at odds with the 9th Circuit’s ruling in the 2009 case Rubke v. Capitol Bancorp and the 2nd Circuit’s oft-cited 2011 decision in Fait v. Regions Financial.

But the court said it is bound only by the U.S. Supreme Court and insisted that high court precedent in the 1991 case Virginia Bankshares v. Sandberg is consistent with its Omnicare holding. “In the instant case, the plaintiffs have pleaded objective falsity,” Cole wrote. “The Virginia Bankshares court was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim. It therefore does not impact our decision today.”

MBS investors and the ResCap deal: making the best of a bad situation

Alison Frankel
May 23, 2013 21:31 UTC

A little more than a year ago, when the mortgage lender and onetime Ally Financial subsidiary Residential Capital entered Chapter 11, investors in 392 ResCap mortgage-backed securities trusts announced that they’d reached a pre-bankruptcy deal permitting them an allowed claim of $8.7 billion for ResCap’s breaches of representations and warranties. The deal didn’t promise that investors would end up with $8.7 billion, since they’d be in line behind secured creditors and would have to share with other unsecured creditors in whatever meat remained on ResCap’s carcass. But as I reported at the time, the allowed claim deal did appear to make MBS investors represented by Gibbs & Bruns, Ropes & Gray and Talcott Franklin the biggest unsecured creditors in the bankruptcy.

So why, in the ResCap global plan disclosed Thursday, are the MBS trusts projected to recover just $672.3 million of the $2.53 billion that’s expected to be paid out of the estate? Their 28.4 percent recovery is less than the 33.6 percent of the estate (or $796.3 million) that’s projected to go just to the bond insurer MBIA and far less than the total 43 percent ($1.099 billion) of ResCap’s remains that are slated to be paid to monoline insurers.

There’s been tremendous controversy in the bankruptcy about the original $8.7 billion MBS allowed claim deal. Other ResCap unsecured creditors, including junior and senior unsecured noteholders, have asserted that the MBS investors made a backroom deal with Ally, garnering its support for their allowed claim in return for a pledge of support for Ally’s $750 million settlement with its former subsidiary. Creditors subsequently torpedoed that $750 million Ally deal, forcing the multiparty negotiations that produced the global resolution revealed Thursday, which includes a $2.1 billion payout from Ally, almost triple its original settlement. In the new plan, the allowed put-back claim for MBS investors is $7.3 billion, which means that their projected recovery of $672.3 million gives them about nine cents on the dollar.

Is long-running pollution ‘an event’? 3rd Circuit says yes in CAFA case

Alison Frankel
May 22, 2013 18:58 UTC

The doctrine of strict textualism – in which judicial decisions are compelled solely by statutory language – has always reminded me of what my father, an internist, used to say about overeager surgeons: When your only tool is a hammer, every problem is a nail. And when your only judicial philosophy is textualism, every case is a matter of words. Simple enough, right? Wrong. Consider a ruling Friday by a three-judge panel at the 3rd Circuit Court of Appeals that turned on the definition of “an event or occurrence.”

The issue for the 3rd Circuit was removal to federal court of a mass action under the Class Action Fairness Act. As you probably recall, Congress passed CAFA in 2005 with the express intention of steering most class actions out of state court and into the federal system. CAFA also mandated that mass actions involving parallel claims by 100 or more individual plaintiffs be litigated in federal court, with a couple of exceptions. One of the exceptions holds that strictly local controversies may remain in state court, even if more than 100 plaintiffs have sued. To meet CAFA’s criteria for that exception, cases must assert claims that all “arise from an event or occurrence in the state in which the action was filed, and that allegedly resulted in injuries in that state or in states contiguous to that state.”

There’s not much ambiguity in defining state borders, but what about in delineating the time frame of an event? Was, say, the Civil War a single event or a collection of battles and political actions that each represent a unique event? In the case before the 3rd Circuit, more than 400 current and former residents of St. Croix in the U.S. Virgin Islands claimed to have been injured by St. Croix Renaissance Group’s supposed failure to clean up toxic waste piles at a former alumina refinery SCRG purchased in 2002. St. Croix, which is in the business of redeveloping contaminated properties, never operated the refinery and has spent years in cleanup-cost litigation with a former owner of the site and others. But the plaintiffs said in filings in territorial court (the Virgin Islands equivalent of state court) that asbestos and other hazardous chemicals from the abandoned refinery were meanwhile swirling around St. Croix and damaging their health.

Shuttered FrontPoint hedge funds sue Libor banks for $250 mln fraud

Alison Frankel
May 21, 2013 21:45 UTC

Last month, right after U.S. District Judge Naomi Reice Buchwald of Manhattan dismissed class action antitrust and racketeering claims against the global banks that supposedly colluded to manipulate the benchmark London Interbank Offered Rate (Libor), Daniel Brockett of Quinn Emanuel Urquhart & Sullivan politely said, “I told you so.” Brockett had been pushing an alternate theory of liability against the Libor banks, focused on securities and common-law fraud, not on antitrust violations. And even in the Libor litigation wreckage that resulted from Buchwald’s ruling, he said, fraud claims like those filed in March by Freddie Mac’s conservator against a dozen Libor banks were still viable. The only catch was that plaintiffs would have to be able to show that they relied on misrepresentations by panel banks, so cases would probably have to be brought by individual investors with big enough losses in Libor-pegged financial instruments to justify the cost of solo litigation. Nevertheless, Brockett told me he believed those investors were out there.

On Tuesday, one of them surfaced. Brockett filed a 106-page complaint in New York State Supreme Court for Salix Capital, which owns claims belonging to several shuttered hedge funds that once operated under the FrontPoint umbrella. Salix alleges that in 2007 and 2008, the FrontPoint funds engaged in Libor-pegged interest rate swaps with Libor panel banks as part of complex, multi-security deals known as corporate bond basis packages. The swaps were supposed to be a hedge against a global banking crisis, since Libor should have increased as it became more expensive for banks to borrow from one another. Instead, the complaint alleges, the panel banks artificially suppressed Libor, undermining the trading strategy of the FrontPoint funds.

The funds “relied on the integrity of how Libor was set and the truthfulness of defendants’ representations about how Libor was set in entering into these transactions,” the complaint said. “By suppressing Libor, defendants artificially lowered the amount they were contractually obligated to pay to the funds under the interest rate swaps, while still demanding that the funds make the contracted-for (comparatively high) fixed-rate payments. In marketing the basis packages, defendants misrepresented Libor and omitted to disclose their manipulation of Libor.”

Chutzpah redefined? Rating agencies want FHFA to share discovery costs

Alison Frankel
May 20, 2013 18:01 UTC

One of the most salient bits of information in the Justice Department’s civil complaint against Standard & Poor’s and its parent, McGraw-Hill - aside from the revelation that one S&P analyst devised a 2007 dance video riffing on the Talking Heads song “Burning Down the House” – is the amount S&P supposedly earned for rating mortgage-backed securities as banks rushed to squeeze every last dollar from the securitization boom. According to the government, the agency’s Global Asset-Backed Securities Unit was assessing MBS in such a hurry in 2006 and 2007 that S&P rating committees spent less than 15 minutes reviewing analyst evaluations. Yet the agency was rewarded munificently for its efforts. In 2006, S&P was supposedly paid $278 million in fees by the banks whose MBS deals it rated. In 2007 it was paid $243 million for rating MBS.

I’m resurrecting Justice’s report on those fees because last week, S&P’s lawyers at Cahill Gordon & Reindel informed U.S. District Judge Denise Cote of Manhattan that it should not have to bear the entire $180,000 cost of producing in electronic form about 400 MBS files to the Federal Housing Finance Agency, which has served third-party subpoenas on S&P, Moody’s and Fitch in 15 securities suits against MBS issuers and underwriters. Satterlee Stephens Burke & Burke filed a similar letter to Cote on behalf of Moody’s, which claims vendor costs of $46,000 to produce files on 470 MBS deals it rated. Fitch’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison  protested over the agency’s $50,000 in vendor costs on 150 securitizations.

FHFA, let’s remember, is basically bringing its MBS claims on behalf of taxpayers, since it’s the conservator of Fannie Mae and Freddie Mac, the government-sponsored mortgage funders that were the biggest MBS investors in the securitization market. So to reduce the dispute over who should bear the cost of the rating agencies’ compliance with FHFA’s subpoenas to its most basic terms, companies that earned hundreds of millions of dollars by conferring unwarranted blessings on suspect deals are balking at thousands of dollars in costs to help taxpayers determine if they were duped.

Wal-Mart’s whistle-blower problem: Public revelations trump privilege

Alison Frankel
May 17, 2013 20:31 UTC

Attorney-client privilege confers powerful protection over confidential corporate documents. But according to arulingThursday by Chancellor Leo Strine of Delaware Chancery Court, once documents have become public – even if by dubious means – they can be used in litigation.

In May of 2012, shareholder lawyer Stuart Grant of Grant & Eisenhofer opened a thick packet he’d received in the mail. On behalf of clients, Grant had recently sent a demand for information to Wal-Mart, following up on The New York Times’ stunning revelations about the company’s attempt to shut down an internal investigation of alleged bribery of Mexican officials. Wal-Mart lawyers had said they would respond to Grant’s books-and-records demand, and Grant told me in an interview that he at first thought the envelope contained that response. Grant quickly realized that the mailing was not, in fact, official corporate correspondence: He had been sent a 190-page trove of confidential Wal-Mart documents.

“Immediately our reaction was, ‘What are our obligations?’ We did research, we did everything we needed to do,” Grant said. After determining that the return address on the packet was a fake, Grant notified Wal-Mart that he’d received the documents on June 1, 2012.

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