Opinion

Alison Frankel

The misguided attack on incentive awards in class actions

Alison Frankel
May 13, 2014 20:28 UTC

U.S. District Judge Colleen McMahon of Manhattan included a highly unusual warning in her recent opinion approving the $15 million settlement of a securities class action against the clothing retailer Aeropostale: She’s no longer following the standard operating procedure of awarding extra fees to plaintiffs who lead class actions. “This opinion should serve notice that this court, at least, will not routinely decide to ‘tip’ lead plaintiffs simply because their names appear in the caption,” she wrote, “and will view with some skepticism conclusory arguments that they actually made a meaningful substantive contribution to the lawsuit.”

The award of incentive fees is apparently something of a bugaboo for McMahon, who said she has “always been troubled by the practice,” though she’s previously approved the payments. Unprompted by Aeropostale or objectors to the settlement, the judge raised doubts at a hearing last week about a request by the City of Providence for $11,000 in reimbursement for the 150 hours its legal department expended on the case. McMahon reluctantly approved the request, but only “after much soul searching” and assurances from class counsel at Labaton Sucharow that it received legitimate help from the city’s legal staff. Going forward, McMahon said, she’s not going to be so amenable. Lead plaintiffs, she said, ought to know what is expected of them in class action litigation and shouldn’t sign up for the job if they expect to be paid for it.

“For the most part, I fail to see why a party who chooses to bring a lawsuit should be compensated for time expended in appearing at a deposition taken in order to insure that he is actually capable of fulfilling his statutory obligations, or responding to document requests, or performing what are essentially duplicative reviews of pleadings and motions that his lawyers are perfectly capable of reviewing for him,” McMahon wrote.

I’ll be curious to see if the judge actually follows through with her threat and disallows an incentive award to the lead plaintiff in a future class action (assuming that any future lead plaintiff decides that recovering a few thousand bucks is worth the risk of a tart opinion denying the request). With all due regard to Judge McMahon, I hope she reconsiders before she refuses to reimburse a lead plaintiff for the time and effort of representing a class that obtains a successful result. As a matter of policy, judges ought to be encouraging class representatives to take an active role in suits brought in their name, not suggesting that their contributions are worthless.

Law professors Theodore Eisenberg of Cornell and Geoffrey Miller of New York University conducted the only major study of incentive awards in class actions — a 2006 paper in the UCLA Law Review. According to their article, federal judges began approving fees to compensate lead plaintiffs for their efforts almost 25 years ago, and by 2000, such payments were considered routine. Even when Congress passed the 1995 law reforming private securities class actions, it left open the prospect of extra compensation for lead plaintiffs. Though the 1995 law was generally “unfriendly to routine incentive payments,” the professors noted, it nonetheless included statutory language indicating that lead plaintiffs may receive “the award of reasonable costs and expenses (including lost wages).”

College application process violates antitrust law: new suit

Alison Frankel
May 12, 2014 21:19 UTC

Revenue at the Common Application is practically infinitesimal by the standards of big business: $13 million in 2011, the last year for which its tax returns are public. But if you’re the parent of a kid who has applied or will be applying to college, you know Common App’s importance bears little relationship to its revenue. The non-profit completely dominates the college application process. More than 550 institutions in the United States are members of Common App, whose online application services permit students to prepare a single application that can be distributed to multiple schools, along with transcripts and teacher recommendations that are also uploaded to Common App’s site. These days, just about every kid applying to a selective college — one that judges applicants on more than just grades and test scores — is doing it through Common App.

Is that a violation of the Sherman Act?

One of Common App’s for-profit competitors claims it is. In a new antitrust complaint, filed Thursday in federal court in Portland, Oregon, CollegeNET alleges that over the last 10 years, Common App has stealthily changed its agreements with member colleges to impede competition from other application processing companies. Selective colleges, according to the suit, are all desperate to increase the number of applicants for admission, not just for the application fee revenue they receive but more importantly, to boost their selectivity, a key metric in rankings by U.S. News & World Report. By pioneering online applications more than 15 years ago, Common App positioned itself to bestow colleges with hordes of applicants they need in order to slash admission rates. Since then, CollegeNET claims, Common App has used its leverage to impose ever-expanding rules to punish members for using other services.

Common App’s fee structure, for instance, gives members a discount if they agree to use only its services, according to the suit. The non-profit also supposedly requires members to use official Common App forms for teacher evaluations and transcripts, extra submissions from art students, early decision agreements and even processing of application fees. According to CollegeNet, the non-profit “aggressively enforces its policies to ensure compliance and, not coincidentally, exclude competitors.” The complaint offers one concrete example of such supposed ruthlessness: After Tulane tried to stanch a drop in applications after Hurricane Katrina by waiving application fees and allowing fast-track admission, Common App expelled Tulane from membership. When Tulane tried to re-join, Common App allegedly demanded that it sign a multi-year agreement to use the service exclusively.

A smoking gun in debate over consumer class actions?

Alison Frankel
May 9, 2014 22:12 UTC

The biggest obstacle in evaluating class actions involving inexpensive consumer products is the frustrating lack of empirical data. Sure, we can compile statistics on case filings, dismissals, settlements and attorneys’ fees, but publicly available evidence about whether these cases actually benefit the people who bought the supposedly flawed products is scant indeed.

You may remember the tit-for-tat “studies” on consumer class action outcomes issued last December by Mayer Brown (at the behest of the U.S. Chamber of Commerce) and the Consumer Financial Protection Bureau. Not surprisingly, given that Mayer Brown undertook its research to counter, pre-emptively, the CFPB’s preliminary report on mandatory arbitration clauses, the two studies reached opposite conclusions about whether class actions deliver real value to class members.

Both analyses, however, had to extrapolate aggressively to reach their predictable outcomes. There have been thousands of consumer class action settlements, but Mayer Brown based its conclusions about class members’ claim rates on data from a whopping six cases. The CFPB looked at eight. I’m not blaming either of them. They looked hard for data, but it’s just not available in public records.

How ‘Company Doe’ – now revealed as ErgoBaby – triggered 1st Amendment case

Alison Frankel
May 8, 2014 21:33 UTC

In September 2011, ErgoBaby — a small California-based maker of baby products – received potentially ruinous news. The Consumer Product Safety Commission intended to post a report on its public database of an incident in which a month-old baby in Maryland died while he was in an ErgoBaby carrier. The baby’s mom had been strawberry picking in hot weather with her infant strapped to the front of her body. The carrier’s coverlet was up, and, according to the initial autopsy report, “rebreathing in a hot environmental condition could have contributed to death.”

ErgoBaby brought in lawyers from Gibson, Dunn & Crutcher, who quickly protested that the CPSC’s proposed report contained materially inaccurate information. There was simply no link, ErgoBaby argued, between its carrier and the baby’s death because the autopsy’s note about rebreathing was sheer speculation. The CPSC revised the incident report twice, eventually removing a reference to the possibility that the baby’s death was related to recirculated hot air and stating that the cause of death was undetermined.

ErgoBaby believed that even the revised report would have a devastating impact on its business — and, moreover, according to CEO Margaret Hardin, that the CPSC public database was not intended to include such vague and unsubstantiated reports. In October 2011, the company’s lawyers filed a suit in federal court in Greenbelt, Maryland, to block the CPSC from publishing the stripped-down incident report. But ErgoBaby didn’t sue in its own name. That would have defeated the whole purpose of the litigation by exposing ErgoBaby’s fight with the CPSC over the incident report — exactly what the company was trying to avoid. So, in what Gibson partner Baruch Fellner called “an historic first,” ErgoBaby was identified in the complaint only as “Company Doe.” It asked the court to allow it to proceed under that pseudonym and to seal the entire docket of the case.

Bully tactics aside – is it finally time to exonerate Chevron?

Alison Frankel
May 7, 2014 22:40 UTC

Chevron is a litigation bully that has employed relentless tactics in 20 years of litigation against villagers in the Ecuadorean rainforest, where the oil giant’s predecessor Texaco once drilled for oil. The Ecuadoreans deserve to live in better conditions, without fear that oil waste continues to pollute their soil and water. I believe both of these assertions to be truth. I do not believe they are causally connected. Chevron’s pattern of exploiting the weaknesses of its adversaries — especially in its recent and overwhelmingly successful campaign in U.S. courts to discredit the villagers’ $9 billion Ecuadorean judgment against the oil company — does not necessarily mean Chevron is responsible for cleaning up the Lago Agrio oil field.

As recently as last year, I didn’t think the fundamental question in the Ecuadoreans’ case would ever be answered. No one would ever know for sure, I thought, whether Chevron had contaminated the land and injured the people of the Lago Agrio. Chevron’s bulldog lawyers at Gibson, Dunn & Crutcher had amassed copious evidence that the verdict in Ecuador was hopelessly tainted by fraud. U.S. District Judge Lewis Kaplan of Manhattan recounted that evidence in a 497-page ruling in March that concluded the Ecuadorean verdict was “obtained by corrupt means.” But even Kaplan acknowledged the tragedy that misconduct by the villagers’ lawyers would forever obscure the truth or falsity of their claims. We’ll never know, Kaplan said, whether the villagers might have been able to prosecute a legitimate case against Chevron.

I am increasingly convinced that they could not have.

On Wednesday, their lawyers at the Washington, D.C., firm Patton Boggs surrendered to Chevron in abject fashion. Patton Boggs, which entered the Lago Agrio case in 2010 and was quickly ensnared in its own litigation with Chevron, agreed to pay the oil company $15 million and to assign its interest in the Ecuadorean judgment to Chevron. The firm said that its two lead partners in the Lago Agrio case, James Tyrrell and Eric Westenberger, would submit to depositions by Chevron lawyers at Gibson Dunn, and that it would turn over discovery materials to Chevron, under the supervision of Judge Kaplan.

In new Gawker infringement complaint, Tarantino shifts strategy

Alison Frankel
May 6, 2014 21:24 UTC

I had high hopes that the case of Tarantino v. Gawker would go down in legal history for establishing precedent on whether a news site is liable for inducing infringement by linking to copyrighted material. But based on the amended complaint filed last week, the film auteur’s suit against the snarky website will hinge on plain old direct infringement — if it survives at all.

In case you’ve forgotten, Tarantino originally sued Gawker and a file uploading service called AnonFiles in January, after a Gawker site linked to AnonFiles’ version of his script for The Hateful Eight, a Western in early production. Gawker said it was just reporting the news: Hollywood was already buzzing about the script because Tarantino had abruptly canceled filming when he discovered it had been leaked to a couple people. Tarantino’s suit claimed that Gawker induced a reader to upload The Hateful Eight script to AnonFiles (and, subsequently, to Scribd), then induced additional acts of infringement by exhorting its millions of readers to click on the links.

That was an untested theory. Contributory infringement in the digital age has mostly been associated with websites that facilitate file sharing, not with online news organizations that routinely link to copyrighted content posted elsewhere. From the beginning of this flap, Gawker has vehemently denied any connection with the anonymous uploader who created a link to Tarantino’s script at AnonFiles and Scribd, so, assuming those statements were true, it looked as if Tarantino’s contributory infringement suit would live or die based on his ability to show that Gawker readers directly violated his rights by clicking on the site’s links to his script. Unless Tarantino could show direct infringement, he couldn’t prove the site had induced any violation of his rights.

Sotheby’s lesson: Poison pills not panacea for embattled boards

Alison Frankel
May 5, 2014 22:27 UTC

Sotheby’s may have won its litigation battle with activist investor Dan Loeb of Third Point, but Loeb won his war with the auction house.

On Friday, Vice-Chancellor Donald Parsons of Delaware Chancery Court denied motions by Loeb and pension fund investors to block Sotheby’s from convening its annual shareholder meeting on May 6. Parsons held that the auction house’s board legitimately perceived a takeover threat last October, when it adopted a poison pill designed to fend off activist hedge funds, including Third Point, that were snapping up Sotheby’s stock. Parsons said he has policy concerns about a pill that discriminates against activist investors. But because the board’s primary intention was takeover defense, not to interfere with shareholder voting rights, directors are entitled to deference under Delaware’s 1985 precedent in Unocal v. Mesa Petroleum. Parson’s ruling is a vindication of the controversial Sotheby’s pill, which was set to trigger when an activist investor acquired 10 percent of the company’s shares but permitted a passive investor to amass 20 percent.

Nevertheless, in a settlement announced on Monday, Sotheby’s gave Loeb most of what he wanted in the proxy contest and the pill litigation. Faced with the prospect of losing to the activist investor in shareholder voting for three board seats, the auction house agreed to expand its board to include Loeb and the two other board candidates he had proposed. Sotheby’s also said it would terminate the troublesome poison pill. In exchange, Loeb conceded only that he would drop the proxy contest and the litigation and that he would cap his fund’s ownership of Sotheby’s shares at 15 percent.

  •