Alison Frankel

3rd Circuit is trying to kill consumer class actions: new en banc brief

Alison Frankel
Sep 30, 2013 20:18 UTC

There’s an ideological battle under way in the federal courts of America that will determine the future viability of class actions.

The conservative wing of the U.S. Supreme Court is leading a camp that believes the rules governing class actions establish high barriers for class certification, even if those obstacles are sometimes so high that legitimate claims can’t be asserted. (The exception to this general rule is securities class actions, which the justices have so far treated with relative gentleness.)Opposing the Supreme Court are a few federal circuits – most notably, the 7th Circuit Court of Appeals, in opinions by the wise and contrarian Judge Richard Posner – that continue to believe class actions are an efficient vehicle to determine whether defendants are responsible for wronging large groups of people, no matter how small their individual damages might be. You can bet that cert petitions in October by Sears and Whirlpool in the infamous moldy washer class action litigation are going to be a flashpoint in this debate, focusing on whether alleged victims with disparate damages claims can litigate as a class. But in the meantime, a three-judge panel of the 3rd Circuit Court of Appeals has provoked a new controversy with a holding in August that classes may not be certified unless individual class members can be ascertained. According to a motion for reconsideration filed Friday, the 3rd Circuit’s “unprecedented” theory has the potential to eliminate corporate accountability to private consumers who buy their products.

The new motion asks the 3rd Circuit for en banc reconsideration of an Aug. 21 opinion in Carrera v. Bayer by Judges Anthony Scirica, Brooks Smith and Michael Chagares, who decertified a class of Florida purchasers of Bayer’s One-A-Day WeightSmart diet supplement. The consumers claimed they were deceived by Bayer’s representation that green tea extract in the supplement would boost their metabolism. U.S. District Judge Jose Linares of Newark, New Jersey, refused to approve a nationwide class asserting claims under New Jersey consumer laws, but granted the name plaintiff’s subsequent motion for certification of a class of Florida purchasers under that state’s consumer-friendly trade practices statute.

On appeal at the 3rd Circuit, Bayer’s lawyers at Bartlit Beck Herman Palenchar & Scott revived an argument that failed to sway Judge Linares: The class shouldn’t have been certified because it’s impossible to figure out who actually bought the product. Ascertainability of the class is a requirement for certification under the civil procedure rules governing class actions, Bayer said. But in a case involving a widely distributed over-the-counter product that consumers are unlikely to have a record of buying, the drugmaker said, membership cannot be ascertained so the class may not be certified.

The class, represented at the 3rd Circuit by Whatley Drake & Kallas and Carella, Byrne, Cecchi, Olstein, Brody & Agnello, countered with two methods of identifying class members, through pharmacy membership programs that track their purchases and through screening of affidavits from consumers who claim to have bought One-A-Day WeightSmart. Class lawyers also argued that because Florida’s consumer law doesn’t require a showing of individual reliance, Bayer’s potential $14 million exposure isn’t affected by the size or composition of a class defined as all Florida purchasers of One-A-Day WeightSmart. According to the class, either the company misrepresented its product and must refund all of its sales to Florida consumers or it’s off the hook. (Bayer, by the way, claims that, at most, it’s responsible for the differential value of the weight loss feature.)

Judge approves stock-for-class securities settlement, with tweaks

Alison Frankel
Sep 27, 2013 18:28 UTC

U.S. District Judge William Alsup of San Francisco has the instincts of a really great reporter. He is a skeptic who pushes for answers, even if that means hauling the CEOs of Google and Oracle into settlement talks or demanding that state pension funds disclose their lead counsel selection process. So when shareholders proposed an unusual settlement of their securities class action against Diamond Foods, in which nearly 90 percent of the class recovery would come in the form of new stock in the company, I was really curious to see what Alsup would make of the deal. If the judge thought class members were being rooked in this peculiarly structured settlement, he’d say so.

He doesn’t think that. On Thursday, Alsup granted preliminary approval of the settlement, in which class members will receive $11 million in cash – according to the brief in support of the deal, that’s pretty much everything left of the company’s D&O insurance coverage – and 4.45 million shares of newly-issued Diamond common stock, worth $85 million as of the date plaintiffs moved for approval of the settlement. Alsup said an all-cash deal would have been preferable, but that he’s convinced Diamond’s perilous finances preclude it. (For good measure, he refused to permit shareholders to file their expert witness report on Diamond’s balance sheet under seal, so you can see for yourself how very little cash the debt-laden company has.) “Given Diamond’s strained financial state and the uncertainty (over) lead plaintiff’s ability to collect on any judgment,” the judge wrote, the class’s decision to settle for a mostly stock deal is justified.

The judge did insist that Diamond and the Mississippi public pension fund leading the shareholders’ case narrow the scope of the release of class claims, which originally exceeded the class certification ruling. He also called for changes in the notice to class members. But as you can see from the supplemental brief on the amended deal filed by class counsel from Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein, these are minor tweaks. On the big question of whether it’s OK to compensate allegedly deceived shareholders with more stock in the company that supposedly lied to them, Alsup answered with a reluctant yes.

Dish Network’s corporate governance problem

Alison Frankel
Sep 26, 2013 20:57 UTC

In a board meeting on July 21, the satellite television company Dish Network disbanded a two-member independent committee that had been established in May to vet Dish’s $2.2 billion bid for the spectrum licenses of the bankrupt company LightSquared. A few days later, one of the directors on the committee, Gary Howard, resigned from the board in what The Wall Street Journal has reported to be a protest over the abrupt end of the special committee, whose members expected to have an ongoing role in the bidding process for LightSquared’s licenses. Dish’s directors – including majority shareholder Charles Ergen – have said that the independent committee’s work ended when the company finalized its stalking-horse offer in LightSquared’s Chapter 11. But shareholders in a derivative suit in state court in Las Vegas say that’s not why Ergen and his allies on Dish’s board ditched the independent committee. They claim that Ergen was looking out for his own conflicting interest as the holder of $1 billion in LightSquared debt. According to the shareholders, Dish’s “fundamental corporate governance breakdown” has endangered the company’s bid for LightSquared’s licenses and exposed Dish to liability for interfering with LightSquared bankruptcy.

At a hearing last Thursday on shareholders’ motion for a preliminary injunction barring Ergen from participating in the LightSquared bidding process, lawyers for the company told Clark County District Court Judge Elizabeth Gonzalez that Ergen and the board have the exact same interests as outside shareholders. They also said, however, that Dish has formed another independent committee, this one to weigh the outside shareholders’ allegations. Meanwhile, at least three other shareholders filed their own derivative suits last week, one also in state court in Nevada, where Dish is incorporated, and two in federal district court in Colorado, where the company is headquartered. At the very least, Dish’s impetuous disbanding of the original independent committee is going to cost the company a fortune in director time and legal fees (in addition to Las Vegas firms, the company and board are represented by Sullivan & Cromwell and Ergen by Willkie Farr & Gallagher). And if shareholders’ direst predictions come true, Ergen’s supposedly untoward influence on the company could cost Dish the LightSquared spectrum licenses it so badly wants.

Ergen began acquiring LightSquared debt after the wireless networking company, which is backed by Philip Falcone and his Harbinger Capital hedge fund, entered Chapter 11 in May 2012. The Dish chairman is now LightSquared’s biggest creditor, holding more than $1 billion in secured debt. He’s also involved in bitter litigation with Harbinger, which sued Dish and Ergen in August, claiming manipulation of the bankruptcy process. Harbinger wants to hold onto LightSquared’s valuable licenses in the company’s reorganization, so it is trying to block Ergen and Dish from acquiring them. LightSquared, moreover, wants to disallow Ergen’s debt, claiming he acquired it improperly.

In 8th Circuit liquor case, 21st Amendment beats Commerce Clause

Alison Frankel
Sep 25, 2013 20:54 UTC

The 21st Amendment of the U.S. Constitution, which repealed Prohibition but also gave states the right to enact laws regulating the import and distribution of liquor within their borders, was ratified in December 1933. Within three years, the U.S. Supreme Court was confronted for the first time with a constitutional dilemma that courts are still trying to resolve a full 80 years after the amendment took effect: Since the Commerce Clause prohibits discrimination against out-of-state businesses, how can the 21st Amendment permit states to treat in-state liquor companies differently from those outside of their borders? On Wednesday, the 8th Circuit Court of Appeals issued the latest installment in this long-running saga, upholding the constitutionality of Missouri’s requirement that officers and directors of licensed liquor wholesalers reside in Missouri.

That’s the second big federal circuit win for state liquor regulators since the Supreme Court last considered the intersection of the Commerce Clause and the 21st Amendment, in the 2005 case of Granholm v. Heald. Ironically, the high court’s Granholm opinion held that New York and Michigan restrictions on sales by out-of-state wineries violate the Commerce Clause because they distinguish between in-state and out-of-state alcohol producers. But the court also said in dicta that the states’ tiered systems of regulation, which separately address alcohol producers, importers and wholesalers, are not unconstitutional. The court drew a distinction between state laws involving alcohol production and those involving alcohol distribution, concluding that problems arise when state policies enacted under the 21st Amendment interfere with out-of-state alcohol producers protected by the Commerce Clause. “State policies are protected under the 21st Amendment when they treat liquor produced out of state the same as its domestic equivalent,” the Supreme Court said. “In contrast, the instant cases involve straightforward attempts to discriminate in favor of local producers.”

In 2009, the 2nd Circuit Court of Appeals underlined Granholm’s language on states’ rights to regulate alcohol distribution when it ruled in Arnold’s Wine v. Boyle that New York may bar out-of-state wine distributors from selling directly to New York residents. The appeals court said that New York’s system includes no favoritism for alcohol produced in New York over alcohol produced in other states – all liquor can be distributed only by licensed sellers – so it complies with the Supreme Court ruling. “Granholm validates evenhanded state policies regulating the importation and distribution of alcoholic beverages under the 21st Amendment,” the appeals court said. “It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause.”

In new Libor case, credit union agency bets on antitrust revival

Alison Frankel
Sep 24, 2013 19:15 UTC

On Monday, the National Credit Union Administration filed the latest blockbuster complaint based on banks’ manipulation of the benchmark London Interbank Offered Rate. On behalf of five failed corporate credit unions that held tens of billions of dollars of financial instruments with Libor-pegged interest rates, the federal agency – like so many duped investors before it – claims that Libor panel banks conspired to suppress their reported borrowing costs to the British Bankers’ Association, which supervised the benchmark average of reported rates. NCUA contends that because traders at Libor banks schemed to depress rate reports, the credit unions received less interest income than they were entitled to. The agency also raises the familiar accusation that as a result of artificial Libor suppression, the panel banks appeared healthier than they really were. NCUA asserts the same cause of action for this alleged (and in some cases admitted) misbehavior that we’ve seen in the big over-the-counter investors’ Libor class action and a host of suits by cities and counties that claim to be victims of Libor rate-rigging: antitrust violations under the Sherman Act and related state laws.

That’s quite an interesting calculation by NCUA and its lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Korein Tillery; and Stueve Siegel Hanson. As you surely recall, the judge overseeing the consolidated Libor multidistrict litigation, U.S. District Judge Naomi Reice Buchwald of Manhattan, does not believe that the alleged conspiracy to suppress Libor constitutes an antitrust violation. In a shocker of a ruling last March, Buchwald dismissed class action antitrust claims, finding that investors couldn’t show any antitrust injury from Libor manipulation because the supposed rate-rigging was not designed to impede competition amongst the banks. After Buchwald’s ruling, some alleged Libor victims, particularly those represented by Quinn Emanuel Urquhart & Sullivan, opted to emphasize securities claims over antitrust violations. Others, most notably the municipalities represented by Cotchett, Pitrie & McCarthy, are still pushing antitrust as their first cause of action. NCUA and its lawyers have had a lot of success in pioneering mortgage-backed securities litigation, so it’s notable that the agency has chosen the latter route. (I should note that NCUA filed its complaint in federal court in Kansas, but the suit is almost certain to consolidated in the Libor MDL and transferred to Buchwald for pre-trial rulings.)

Clearly, the agency is hoping that Judge Buchwald will change her mind about Libor antitrust claims – a dim prospect, as I’ll explain – or that the 2nd Circuit Court of Appeals has a different view of antitrust injury than she does. Either way, NCUA is apparently so confident that antitrust will be restored as a cause of action for Libor rate-rigging that it is only asserting antitrust claims, eschewing alternative fraud or securities causes of action.

For file-sharing sites, old songs are big new problem

Alison Frankel
Sep 23, 2013 20:17 UTC

Off the top of your head, do you know whether the Jim Croce hit “Bad, Bad Leroy Brown” was recorded before February 15, 1972? How about Don McLean’s “American Pie”? Thankfully, most of us don’t need to clog our brains with the knowledge that Croce’s song was third on Billboard’s year-end chart in 1973 and McLean’s, recorded in late 1971, was third on the 1972 chart. But then, most of us aren’t Internet service providers that rely upon the safe harbor protections of the Digital Millennium Copyright Act of 1998. For Internet sites engaged in any kind of file-sharing, there’s now a deep gulch of potential liability dividing songs that came out before and after February 1972, when Congress passed the Copyright Act. And unless Congress acts to fill in the gap, video-sharing sites have to be very concerned about permitting users to upload files containing any old songs at all, for fear that they predate the Copyright Act.

That’s the consequence of a summary judgment ruling last week by U.S. District Judge Ronnie Abrams of Manhattan, in a case brought by recording companies against the video-sharing site Vimeo. Abrams ruled that although Vimeo is broadly entitled to DMCA safe harbor protection, the music companies may proceed with claims based on 55 potentially infringing videos either uploaded or otherwise publicly acknowledged by Vimeo staffers. The recording companies didn’t alert Vimeo that any of the videos breached copyrights, but the judge said that Vimeo staff may have known the IP was infringed or else disregarded red-flag warnings about misuse of copyrighted material. Judge Abrams also said that regardless of Vimeo’s anti-infringement policies and actions, there simply is no safe harbor under the DMCA when it comes to common-law copyright misappropriation claims based on songs that predate the federal Copyright Act. In combination, Abrams’ findings mean that Internet sites have no easy escape from litigation over files containing old songs, even when copyright owners don’t provide notice of infringement. If the ruling holds up, it would make more sense for sites simply to ban potentially actionable files rather than try to figure out whether songs in user-uploaded files were recorded before or after February 1972.

As Abrams explained in her decision, she is not the first court to consider the DMCA’s safe harbor protection for pre-1972 songs. In October 2011, her Manhattan federal court colleague William Pauley reached a different conclusion from Abrams in Capitol Records v. MP3tunes. The recording companies in the MP3 case, like those in the Vimeo case, argued that the DMCA can only protect defendants from federal copyright claims, not state or common-law claims, because the Copyright Act specified that it does not annul or limit IP rights that existed before its passage in 1972. Judge Pauley found that to be too cramped a reading of the Copyright Act. In context, he said, it’s clear that the Copyright Act wasn’t intended to prohibit all regulation of pre-1972 recordings; the law’s language on “infringement of copyrights” is meant to encompass violations of both federal and state protections, Pauley wrote. So the DMCA’s safe harbor, according to Pauley, similarly extends to alleged state and federal violations.

New worry for patent infringement defendants: antitrust claims

Alison Frankel
Sep 20, 2013 17:49 UTC

Patents are by their very nature anticompetitive. Patent holders, after all, enjoy a limited-time monopoly on their products, during which they and they alone are legally permitted to profit from their innovation. When antitrust claims rear up in the context of patent law, they’re almost always brought against patent holders that supposedly abused their monopoly power to stifle competition, whether by falsely asserting patents to scare off rivals or by refusing to license their technology. But a counterintuitive $113 million (before trebling) verdict Thursday by federal-court jurors in Marshall, Texas, shows that patent holders can successfully wield allegations of infringement to bolster their own antitrust claims.

The verdict came in an antitrust and false advertising case that Retractable Technologies brought against Becton Dickinson, its much-larger rival in the market for syringes, catheters and other disposable medical products. For more than a decade, Retractable has asserted that BD engaged in illegal tactics to squelch demand for Retractable’s superior products. The two companies reached an antitrust settlement in 2004, but a few years later Retractable returned to court with a new set of accusations. In addition to antitrust claims, the new suit included allegations that BD infringed Retractable’s patents on a safety syringe. The case tied the two sets of claims together with an argument that one of BD’s anticompetitive tactics was to flood the market with a cheaper knockoff of Retractable’s syringe.

The patent infringement and antitrust cases were eventually severed, which gave BD’s lead counsel at Paul, Weiss, Rifkind, Wharton & Garrison an opportunity to argue in a motion for partial summary judgment in the antitrust case that no federal court has ever countenanced antitrust claims based on patent infringement – which, by definition, increases competition by introducing additional products to the market. (Unfortunately, all of the briefing directly addressing this point is sealed, but you can get a flavor for BD’s argument in a motion for leave to file the summary judgment brief.) “To permit the jury to consider patent infringement as a form of anticompetitive conduct under the Sherman Act would break from precedent and directly contradict 5th Circuit law,” BD asserted. “No court in any jurisdiction has ever found that patent infringement is anticompetitive conduct for purposes of the antitrust laws. Rather, every court to have considered whether patent infringement can harm competition for antitrust purposes has rejected that claim as a matter of law.” In particular, BD pointed to the 5th Circuit’s 1978 ruling in Northwest Power Products v. Omark, which quoted an even older 5th Circuit holding that “patent infringement is not an injury cognizable under the Sherman Act precedent.”

Don’t get too excited about JPMorgan’s admissions to the SEC

Alison Frankel
Sep 19, 2013 19:18 UTC

The Securities and Exchange Commission was pretty darn pumped about its $200 million settlement Thursday with JPMorgan Chase, part of the bank’s $920 million resolution of regulatory claims stemming from losses in the notorious “London Whale” proprietary trading. And why not? As George Cannellos, the co-director of enforcement, said in a statement, JPMorgan’s $200 million civil penalty is one of the largest in SEC history. The agency also showed that it’s serious about its new policy of demanding admissions of liability from some defendants. For those of us accustomed to the SEC’s “neither admit nor deny” boilerplate, it’s startling to see the words “publicly acknowledging that it violated the federal securities laws” in an SEC settlement announcement. So let’s permit Cannellos some chest-thumping: “The SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.”

Until the SEC changed its policy in June, enforcement officials had insisted that defendants wouldn’t settle with the agency if they had to admit liability because they feared the collateral consequences of their admissions in private shareholder class actions. JPMorgan is in the midst of fierce litigation with its shareholders, who claim the bank lied about its Chief Investment Office in public filings dating back to 2010. So you might assume that the bank’s SEC admissions seal their win, and now it’s just a matter of how big a check JPMorgan will have to write to settle the case.

But if you look closely at what JPMorgan actually admitted, you’ll see that the SEC settlement won’t be of much use to shareholders in the class action. Don’t misunderstand me: JPMorgan is extremely unlikely to escape from the private shareholder case without paying a lot of money. That’s not because of the SEC settlement, however. As I’ll explain, the bank’s lawyers did a very good job of tailoring JPMorgan’s admissions to the SEC to minimize their impact in the class action. In fact, I suspect that future SEC defendants are going to look at the JPMorgan settlement as a model for how to quench regulators’ thirst for blood without spilling a drop in parallel shareholder litigation.

N.Y. state appeals ruling opens courthouse door to foreign victims

Alison Frankel
Sep 18, 2013 20:06 UTC

In the last few months, the victims of supposed overseas human rights atrocities have begun to feel the impact of the U.S. Supreme Court’s ruling last April in Kiobel v. Royal Dutch Petroleum. As you know, the Supreme Court held that Alien Tort Statute cases cannot proceed in U.S. courts unless they have a significant connection to the United States. As a result, ATS claims by foreign citizens accusing international corporations of abetting torture and murder on foreign soil have since been dismissed against Daimler, Arab Bank, Rio Tinto and KBR. Some ATS cases have survived post-Kiobel scrutiny, as my friend Michael Goldhaber reported for The American Lawyer in August, and alleged victims can still assert claims under Other U.S. laws that specifically apply to conduct abroad. But without a doubt, Kiobel has extinguished the jurisdiction of U.S. courts over a wide swath of human rights litigation.

New York state courts, on the other hand, are ready and willing to hear the cases. Or, at least, that’s the implication of a comprehensive decision Tuesday by the state Appellate Division, First Department, that permits 50 Israeli citizens to proceed with claims that Bank of China is liable under Israeli law for facilitating bombings and rocket attacks in Israel by Hamas and Palestine Islamic Jihad. The state appeals court expressly broke with the 2nd Circuit Court of Appeals in holding that Israeli law should apply to the alleged victims’ claims because that’s where they were injured, rejecting the 2nd Circuit’s 2012 decision in a parallel terror-finance case that the laws of the defendant’s home jurisdiction should apply because those courts have the greatest interest in regulating the defendant’s conduct.

According to Robert Tolchin of The Berkman Law Office, who represents the plaintiffs in both the 2nd Circuit and New York state-court cases, the Appellate Division’s ruling opens the door to claims in New York courts by foreigners asserting the laws of their own countries against international defendants. “The Supreme Court in Kiobel knocked out the Alien Tort Statute, but here comes New York negligence law,” he said.

Want to ward off class actions? Follow Starbucks’ lead on class fees

Alison Frankel
Sep 17, 2013 19:31 UTC

This much is uncontested: In December 2008, Initiative Legal Group filed a wage-and-hour class action against Starbucks in federal court in Los Angeles. Lawyers at Initiative and, later, Capstone Law dedicated more than 8,000 hours to the case, which settled in May 2013 for $3 million. About 13,000 current and former Starbucks employees in California have made claims in the case, which resolves the coffee chain’s alleged failure to provide adequate meal breaks to workers when only two employees were on duty, as well as class assertions that Starbucks didn’t publish overtime rates on workers’ pay statements.

Lead class counsel Matthew Theriault and his colleagues believe they’re entitled to $4.2 million – roughly 90 percent of their total hourly billings for the effort they sank into the long-running case and the successful result they obtained for the class. Starbucks and its lawyers at Akin Gump Strauss Hauer & Feld are of quite a different mind. They contend that the $4.2 million request is “breathtakingly inflated,” considering that class counsel managed to win certification of only one of 13 alleged subclasses. Indeed, according to Starbucks, when you compare the $860 million valuation that plaintiffs lawyers initially put on their claims with the $3 million they ultimately recovered for the class, U.S. District Judge Gary Feess would be justified in awarding them absolutely nothing.

We can safely assume that a fair fee award to class counsel – which will be paid by Starbucks on top of the $3 million class settlement – lies somewhere between the extremes of zero and $4.2 million. But what’s much more interesting than the specific dollar amount Feess ultimately awards, and even more interesting than the arguments in support of and in opposition to class counsel’s fee request, is the mere existence of the fee dispute. As Theriault noted in class counsel’s brief, defendants in the vast majority of settled class actions do not contest fee requests by lawyers on the other side of the case. Instead, they agree in “clear sailing” provisions not to say anything when plaintiffs ask to be paid.