Opinion

Alison Frankel

Big business, class actions and the Supreme Court: It’s complicated

Alison Frankel
Sep 16, 2013 19:40 UTC

It’s no secret that one of the most active and successful friend-of-the-court participants at the U.S. Supreme Court in recent years has been the U.S. Chamber of Commerce, otherwise known as the lobbying arm of corporate America. Last term, according to the website of the National Chamber Litigation Center (the U.S. Chamber’s legal wing), the group filed amicus briefs addressing the merits of 22 business-related cases before the Supreme Court. The Chamber was in the fray in all of the big cases involving class actions against businesses, including American Express v. Italian Colors, Amgen v. Connecticut Retirement, Comcast v. Behrend and, of course, Standard Fire v. Knowles. In all of those cases, the Chamber advocated positions that would make it tougher for claimants to file and litigate class actions; in three of them – Italian Colors, Comcast and Standard Fire – the Chamber and pro-business interests prevailed.

Given that record, I was surprised to see from the Supreme Court docket that the Chamber is sitting out one of this term’s major business cases, Mississippi v. AU Optronics, which will determine whether actions by state attorneys general to enforce state laws may proceed in state court or can be removed by defendants to federal court as mass actions under the Class Action Fairness Act. As you probably recall, last year the 5th Circuit Court of Appeals broke with the 2nd, 4th, 7th and 9th Circuits and held that the Mississippi AG’s antitrust suit against the LCD maker is a mass action because even though the AG is the only plaintiff, he’s actually seeking money damages on behalf of thousands of Mississippi residents. Mississippi’s AG, Jim Hood, successfully petitioned the Supreme Court to resolve the circuit split. AU Optronics wants to make Hood rue the court’s grant of certiorari. Its merits brief, filed earlier this month, argues that this case is the Supreme Court’s opportunity to unmask state AG parens patriae cases for what they really are: mass actions in all but name.

Last week, many of the usual suspects joined that argument in amicus briefs. The defense lawyers’ association DRI, as well as the American Bankers Association and Big Pharma’s trade group, told the justices that AG parens patriae cases permit those ever-wily plaintiffs lawyers to team up with state officials to evade Congress’s intention of forcing them to litigate contingency-fee class actions in federal court. (Allstate, which was the defendant in the case on which the 5th Circuit premised its AU Optronics holding, made a similar point in its amicus brief.) The Washington Legal Foundation and the National Association of Manufacturers, meanwhile, asserted that under constitutional protections for out-of-state defendants, Mississippi’s case should be litigated in federal court regardless of whether it’s a mass action. AG actions, as I’ve reported, are increasingly likely to be consumers’ only means of holding defendants accountable through litigation. If the Supreme Court decides that these cases must be heard in federal court, that’s a boon for big business.

Or is it? And if the answer were entirely straightforward, why didn’t the Chamber file an amicus brief?

I want to say at the outset that I don’t know for sure why the U.S. Chamber isn’t involved in the Mississippi case. I contacted representatives at the U.S. Chamber and at the National Chamber Litigation Center as well as an NCLC lawyer and didn’t hear back. I asked the Center back in July, when Mississippi filed its merits brief at the Supreme Court, whether the Chamber planned to appear as an amicus and was told (after my story ran) that the group declined to comment. Maybe the NCLC is busy with other cases or feels that the Chamber’s position is adequately represented by the other amici.

Boards dodge bullet: Dela. justices retain limits on derivative suits

Alison Frankel
Sep 12, 2013 22:37 UTC

In July, the justices of the Delaware Supreme Court entertained oral arguments on a question the 9th Circuit Court of Appeals asked them to answer: Can shareholders maintain post-merger derivative claims against officers and directors whose alleged misconduct drove their company into a disadvantageous deal? In ordinary circumstances, shareholders lose the right to assert derivative breach-of-duty claims on behalf of the corporation when a merger ends their stock ownership. There’s only one exception to that rule of continuous ownership, under 30-year-old Delaware precedent, for sham mergers undertaken specifically to end the threat of liability against the board. But shareholders in a Los Angeles federal court case against Countrywide persuaded the 9th Circuit that the Delaware Supreme Court, in dicta in a separate but related Countrywide case, may have widened the exception. The federal appeals court asked the state court to clarify its position.

For corporate boards, there was considerable danger in this seemingly technical question. Corporate directors have duties to the companies they serve, but it’s exceedingly rare for companies to sue their own board members for breaching those duties. Shareholders are far, far more likely to bring breach-of-duty cases against directors, acting derivatively on behalf of the corporation. Merger announcements, for instance, are almost always followed by shareholder derivative suits asserting that the target company’s board didn’t get a good enough price. Derivative suits are very tough for shareholders to win, given Delaware’s deference to the business judgment of corporate boards, but they can be useful for leverage in settlement talks, especially when companies are eager to resolve M&A litigation and wrap up their deals. Corporations have leverage, too, however: If shareholders don’t settle derivative claims before deals go through, their cases are over because they no longer have standing to sue on behalf of the acquired corporation.

That delicate balance of power would shift if shareholders could continue to press their derivative cases after mergers go through, boosting the value of their cases and almost certainly guaranteeing more breach-of-duty complaints. Certainly, if the Delaware Supreme Court expanded the narrow exception permitting shareholders to maintain post-merger derivative claims, shareholders and corporate defendants would spend years in Chancery Court litigation to define the new borders of breach-of-duty litigation.

Posner on class actions: Minuscule damages shouldn’t doom cases

Alison Frankel
Sep 11, 2013 20:20 UTC

Reading opinions by Judge Richard Posner of the 7th Circuit Court of Appeals is like jumping waves in a calm ocean. You bob along in the buoyancy of Posner’s ideas until you turn around to face shore and wonder how you drifted so far from where you started. So it is in an 11-page ruling Tuesday, addressing whether a class of ATM users may be certified to seek statutory damages under the Electronic Funds Transfer Act for a tiny defendant’s failure to post stickers notifying users of ATM fees. As you know, these are more turbulent waters than they first appear, roiled by uncertainty about constitutional standing and appropriate classwide relief. Posner’s prose nevertheless carries you along so forcefully that you don’t even notice until you’re done that he has deposited you in a land where all the rules are Posner-made.

Okay, I’m exaggerating. But once again, the iconoclastic appellate judge has issued an important opinion on consumer class actions that reflects his vision, as an economic rationalist, of the potential efficiencies of resolving hundreds or thousands of individual claims with a single proceeding. He did it last month when, on remand from the U.S. Supreme Court, he and two 7th Circuit colleagues recertified a class of Sears washing-machine purchasers for the purposes of determining whether Sears is liable for a design that supposedly results in a moldy odor. Sears has called the ruling “judicial fiat.” In the new opinion, Posner and his fellow 7th Circuit panelists Daniel Manion and Diane Wood urge trial judges to use common sense in deciding whether to certify a consumer class seeking statutory damages, focusing on realistic solutions and not hypothetical problems.

The case is another in the spate of class actions filed against banks that supposedly failed to comply with the ATM law’s requirement that they not only notify users of add-on charges with an on-screen alert after users have begun their transactions but also provide advance warning of fees on the ATM machine itself. (That requirement has since been dropped in an amendment to the law.) Congress called for individual damages of between $100 and $1,000, but also anticipated class actions in which total damages could amount to $500,000 or 1 percent of the defendant’s net worth, whichever is less. In the class action before Posner, a class brought claims against the ATM operator Kore, which owned ATMs in two Indianapolis bars frequented by college students. U.S. District Judge Jane Magnus-Stinson of Indianapolis first certified the class based on 2,800 transactions at the two ATMs but later changed her mind for two reasons. With maximum classwide damages of $10,000 because of Kore’s small net worth, she said, class members might be better off suing individually for at least $100. She was also concerned that potential class members couldn’t be properly notified about a $10,000 settlement because it would cost so much to figure out who they were based on banking records.

Freeh corruption report reveals a way forward for BP oil spill deal

Alison Frankel
Sep 10, 2013 22:08 UTC

I’m on record as a skeptic of BP’s doomsday predictions about the impact of ballooning claims in its settlement with alleged victims of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. I still don’t buy BP’s argument that future mass disaster defendants will shy away from group settlements because BP’s agreement was open to what the oil company contends is misinterpretation by claims administrator Patrick Juneau. Nor do I think the 5th Circuit Court of Appeals should permit BP to argue that the settlement it once asked U.S. District Judge Carl Barbier of New Orleans to approve should now be undone. BP is a sophisticated defendant ably represented by Kirkland & Ellis in the long negotiations that produced the settlement agreement proposed to Barbier in March 2012. The oil company says the deal has been warped by Barbier’s endorsement of Juneau’s overly expansive reading of the terms for business and economic losses. But it bargained hard for the language in the settlement agreement and should have to abide by the deal it struck.

Nevertheless, I’m troubled by the 98-page report on corruption within Juneau’s Claims Administration Office by former FBI director Louis Freeh. Anyone who believes in mass settlements should be. Freeh conducted a two-month investigation spurred by the resignation of a lawyer on Juneau’s staff. His report, released Friday, goes out of its way to exonerate Juneau, whom Freeh praised for setting a clear ethical tone and implementing written policies on ethics and conflicts. Freeh also recommended that the claims approval process continue under Juneau’s direction. That’s the good news for Juneau and the plaintiffs lawyers defending the settlement against BP’s attacks. The bad news: Freeh found copious evidence that corruption and conflicts have tarred some former members of Juneau’s staff.

The alleged wrongdoing detailed in the report ranges from venality – such as an attempt by Juneau’s self-described “general counsel,” Christine Reitano, to secure her husband a job with a company doing work for Juneau and an attempt by two other Juneau staff lawyers to capitalize on their work (and Juneau’s name) to win additional claims administration assignments for their outside company – all the way to the supposed crimes of fraud and money laundering. According to Freeh, a lawyer on Juneau’s staff named Lionel “Tiger” Sutton appears to have conspired with two outside lawyers, Jon Andry and Glen Lerner, to hide about $40,000 in referral fees routed through various vehicles from Andry and Lerner to Sutton. Freeh asserted that Sutton improperly “facilitated” claims by other clients of Andry and Lerner and expedited an $8 million award to one of Andry’s other law firms. The report also said that Sutton – who is married to Reitano – never bothered to tell Juneau that during his employment at the Claims Administration Office he was also receiving $10,000 a month as Lerner’s partner in a water reclamation company nor that Sutton is the co-owner of an oil rig services company with an active claim before Juneau’s staff. (Defense counsel for Sutton and Andry told the Associated Press that Freeh had made unfounded allegations about their clients.)

The unexpected afterlife of a Supreme Court wiretapping opinion

Alison Frankel
Sep 9, 2013 19:05 UTC

What do human rights advocates have in common with Barnes & Noble credit and debit card customers?

There’s no punchline response to that question (or at least none that I could think of). The answer instead lies in the U.S. Constitution’s strictures on who may bring a claim in federal court – and in the collateral consequences of the U.S. Supreme Court’s latest interpretation of standing, in a 2013 case called Clapper v. Amnesty International.

As you’ve probably guessed, that’s where the human rights advocates come in. After Congress passed amendments to the Foreign Intelligence Surveillance Act in 2008, the American Civil Liberties Union and outside lawyers from Proskauer Rose sued James Clapper, the Director of National Intelligence, on behalf of a group of U.S. lawyers, journalists and human rights groups who alleged that the FISA amendments violated their First and Fourth Amendment rights. The new law made it easier for the government to obtain permission to wiretap intelligence targets outside of the United States. The plaintiffs said their work required them to engage in international phone and Internet communications with likely targets of the stepped-up surveillance, and that the FISA amendments would permit the National Security Agency to access their communications illegally. They sought a declaration that the sweeping, warrantless wiretapping permitted under the new law was a breach of their constitutional free speech and privacy rights.

Sears, Whirlpool ask SCOTUS to eviscerate consumer class actions

Alison Frankel
Sep 6, 2013 20:57 UTC

Millions of American consumers over the last decade purchased high-end, front-loading washing machines with an unfortunate propensity to develop a moldy odor. The vast majority of those machines didn’t end up emitting the objectionable scent, or, at least, not noticeably enough to prompt their owners to register complaints with manufacturers and sellers of the machines. Nevertheless, lawyers representing washing machine buyers all over the country sued Whirlpool and other manufacturers in dozens of class actions claiming violations of various state consumer statutes. One of those consolidated cases, involving 10 class actions comprising about 4 million purchasers of Whirlpool washing machines, is one of the biggest class proceedings in American history. Consumers say – and appellate judges in two federal circuits agree – that they’re entitled to a classwide determination of whether the washing machines were defectively designed. Manufacturers, on the other hand, contend it’s impossible to lump consumers into classes because their individual experiences with the machines vary too widely.

When the U.S. Supreme Court opens its next term in October, one of the justices’ critical decisions will be whether to grant review of one or more of the three defective-washer cases that will be before them. Two of those cases have already attracted the high court’s attention. Last spring, it vacated class certification rulings from the 6th and 7th Circuit Courts of Appeal, asking the appellate judges to reconsider their rulings in light of the Supreme Court’s holding in Comcast v. Behrend. Over the summer, both the 6th and 7th Circuits recertified consumer classes, despite Comcast. Now, in an amicus brief in a third moldy-washer case before the Supreme Court, Sears and Whirlpool are arguing that under the reasoning the 6th and 7th Circuits used in those recertification opinions, there are virtually no limits on product liability class actions. Unless the justices take action, according to Sears and Whirlpool, American businesses face enormous new exposure to claims by consumers, including buyers who haven’t even suffered any ill effects.

The primary purpose of the amicus brief, which was filed last Friday by Mayer Brown as counsel of record for both Sears and Whirlpool, is to ask the Supreme Court to delay acting on a petition for certiorari by BSH Home Appliances, which sells Bosch and Siemens washers with an alleged mold problem similar to that of Whirlpool’s machines. In the BSH case, the 9th Circuit declined to review the trial court’s grant of certification to four statewide consumer classes. BSH’s lawyers at Jones Day want the Supreme Court to take up their case to determine not just whether a class can be certified without a classwide showing of injury but also whether the trial court erred in curtailing BSH’s challenge to the theories of the consumers’ experts. In their amicus brief, Sears and Whirlpool argue that their cases present a more appropriate vehicle for deciding the first (and more sweeping) question because they have detailed appellate records, including the 6th and 7th Circuit consideration of the impact of last spring’s Comcast ruling on consumer class certification.

Canada as litigation haven for U.S. shareholders? Not so fast…

Alison Frankel
Sep 5, 2013 19:38 UTC

The high point, at least so far, of securities class action filings in Canada was in 2011, when, according to NERA Economic Consulting, shareholder lawyers filed 15 new class actions. In 2012, the number of new filings declined to nine. And unless there’s a surge in class action complaints in the next few months, 2013 will show a steep decline even from last year’s total, NERA’s Bradley Heys told me Thursday.

That’s a very different trend from what we saw from 2005 through 2011, and it’s a bit of a surprise. Canadian securities class actions are, in certain critical ways, easier on investors than litigation in the United States. Shareholders are entitled to discovery earlier in Canadian cases than those in the United States, for instance. And petitioners (as plaintiffs are known in Canada) needn’t show that a defendant intended to deceive shareholders or that investors relied on the supposed misstatements. Non-Canadian investors, moreover, are welcome to bring global shareholder class actions in at least some Canadian provinces. In the peak year of 2011, when I reported on new class actions stemming from fraud at Sino-Forest, the Chinese lumber company traded on the Toronto stock exchange, I quoted a Canadian shareholders’ lawyer who called his country’s court system “a dream jurisdiction for securities class action lawyers.” (Sino-Forest investors went on to obtain a record $117 million settlement last December with Sino-Forest auditor Ernst & Young.)

So why the fall-off in filings? Heys told me NERA isn’t exactly sure, though one explanation could be that petitioners’ firms in Canada are simply too busy with the class actions they’ve already filed to bring new ones. In its report on 2012 class actions, the Canadian defense firm Osler, Hoskin & Harcourt discussed setbacks for class action petitioners at the pleading stage in cases in Ontario and British Columbia, including an Ontario appellate ruling that established a defense-friendly interpretation of the time bar for class actions.

SCOTUS’s next big privacy issue: Can police seize smartphones?

Alison Frankel
Sep 4, 2013 21:20 UTC

David Riley was already in deep trouble when the San Diego Police Department got hold of his Samsung smartphone in August 2009. Riley had been driving around the neighborhood in a Lexus with expired tags, and when he was pulled over police discovered that his license had been suspended. They searched his car and found guns hidden under the hood. Riley was arrested for carrying concealed and loaded weapons.

But it was the smartphone that sank him. At the arrest site, police scrolled through Riley’s text messages and contacts, finding what they considered to be indications that Riley was a member of the Bloods gang. Hours later, when he was under interrogation at the police station, a gang expert conducted a second search of Riley’s phone. He found photos and videos that, according to police, tied Riley to a gang-related drive-by shooting. Despite defense arguments that the smartphone seizure violated Fourth Amendment strictures on warrantless searches, prosecutors later used a photo and videos taken from Riley’s phone at his trial, which ended with his conviction for shooting at an occupied vehicle and two other charges. And because the smartphone supposedly linked Riley to gang activity, he was subject to an enhanced sentence. Instead of a maximum of seven years, he was sentenced to a prison term of 15 years to life.

The California Supreme Court declined to hear Riley’s Fourth Amendment appeal earlier this year, presumably because the state high court had already determined, in a 2011 case called Diaz v. California, that police may conduct warrantless searches of cellphones when the phones are seized from a person under arrest. On July 30, Riley’s lawyers at Stanford’s Supreme Court Litigation Clinic and Goldstein & Russell petitioned the U.S. Supreme Court to take his case. “This is the leading privacy issue, the next big technology and Fourth Amendment issue everyone is watching,” said Riley’s lead appellate counsel, Jeffrey Fisher of Stanford. “Now it has come to a crescendo.”

BP plays Twister in latest Deepwater Horizon appellate brief

Alison Frankel
Sep 3, 2013 20:20 UTC

Last year, when BP agreed to a historic multibillion-dollar class action settlement with people and businesses harmed by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the company pledged to defend the deal against objections and appeals. As is customary, lawyers for the claimants actually filed the motion to certify the settlement class, but BP told the court it fully supported the settlement agreement. The company and class counsel submitted joint expert declarations attesting to the fairness of the proposed deal, including a jointly filed report by Columbia Law School professor John Coffee, who said that although he’s skeptical of broad mass tort class actions, the agreement in this case did such a good job of defining class membership that the settlement class should be certified. When U.S. District Judge Carl Barbier of New Orleans certified the settlement class in December 2012, the case seemed to be on a typical track for a mass tort, with both sides benefiting from use of the class action vehicle. Defendants settle these cases because they want the certainty that comes from a classwide release of claims. They can’t get classwide releases without class certification.

But on Friday, BP swerved drastically off-course, filing a startling brief at the 5th Circuit Court of Appeals in a case first brought by objectors to the class action settlement. Unless the 5th Circuit undoes the trial court’s interpretation of settlement terms, BP now argues, class certification cannot stand. The oil company contends that the class is fatally flawed under both the rules for federal class actions and the U.S. Supreme Court’s 2013 holding in Comcast v. Behrend because the claims administrator’s supposedly erroneous reading of deal terms has permitted improper claims by uninjured businesses alongside legitimate claims by injured class members. “Federal class action rules,” the company said in an email statement, “do not permit class action settlements where such conflicts exist.”

BP, in other words, is doing something apparently unprecedented in class action history: siding with objectors in an attempt to scotch its own deal. That’s a contorted position, one that New York University law professor Samuel Issacharoff – who, admittedly, represents class counsel in a BP appeal at the 5th Circuit – said BP may not even have the right to assert because the company didn’t object to class certification at the trial court level and didn’t appeal Judge Barbier’s class certification ruling. BP’s brief is all the more head-scratching because, according to class counsel, even if BP and the objectors succeed in overturning class certification, the settlement agreement requires the oil company to still pay claims already in the pipeline.

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