Alison Frankel http://blogs.reuters.com/alison-frankel On the Case Thu, 27 Oct 2016 19:41:15 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 9th Circuit to corporations: Once you open your mouth, you can’t lie http://blogs.reuters.com/alison-frankel/2016/10/27/9th-circuit-to-corporations-once-you-open-your-mouth-you-cant-lie/ http://blogs.reuters.com/alison-frankel/2016/10/27/9th-circuit-to-corporations-once-you-open-your-mouth-you-cant-lie/#comments Thu, 27 Oct 2016 19:41:15 +0000 http://blogs.reuters.com/alison-frankel/?p=7476 For plaintiffs, one of the hardest parts of winning a securities class action is showing the defendant intended to deceive investors. As the 9th U.S. Circuit Court of Appeals put the matter in an opinion Wednesday, the Federal Rules of Civil Procedure, in combination with the 1995 law toughening the standard for shareholder class actions, “create a significant barrier for private securities plaintiffs.”

But corporate defendants, according to the 9th Circuit, give shareholders a big boost when they use a piece of information to reassure shareholders – and neglect to tell investors the whole story behind the reassurance. The appellate court, in an opinion by Judge Jay Bybee for a unanimous panel that also included Judges Harry Pregerson and Randy Smith, revived a securities class action against the biomedical company Arena Pharmaceuticals, holding that once Arena mentioned good results in animal studies on its weight loss drug lorcaserin, it was obligated to reveal a dispute with the Food and Drug Administration over the results.

The dispute involved cancer testing on rats before the FDA voted on whether to approve lorcaserin. The rats exposed to the weight loss drug developed all sorts of tumors. Arena attributed the tumors to a hormone linked to cancer in rats, minimizing the impact of the rat test results on humans. The FDA did not halt simultaneous clinical testing of lorcaserin on people, but did request more rat tests and monthly updates on the results.

While the tests were under way, Arena officials told investors in various public statements that lorcaserin was safe and likely to be approved by the FDA. Some of the statements specifically referred to animal testing that showed the product was not carcinogenic.

I bet you can guess what happens next in this tale. In 2010, the FDA published on its website briefing documents by Arena and the government on lorcaserin’s approval. The documents disclosed for the first time the rat study and the FDA’s concerns about its results. Aghast investors sold Arena shares so fast that the stock price dropped 40 percent in a single day, allegedly costing shareholders more than $100 million.

Ultimately, in 2012, the FDA approved the drug. But by then, of course, investors who’d lost money in the 2010 stock plunge had sued in federal district court in San Diego. Represented by lead counsel from Kaplan Fox & Kilsheimer, investors claimed they were duped by the company’s assurances that animal tests indicated lorcaserin was safe and would be approved.

Arena’s lawyers at Cooley argued there was nothing deceptive about the company’s statements since Arena officials believed the FDA would eventually agree with its interpretation of the rat cancer results. U.S. District Judge Cathy Bencivengo sided with Arena and dismissed the shareholder class action. She concluded that the company did not intend to deceive shareholders when it did not disclose the rat study or the FDA’s concern about its results.

The 9th Circuit disagreed, though it said this was “a close case.” The problem for Arena, the appeals court said, was that it raised the subject of animal testing. Citing the U.S. Supreme Court’s 2011 ruling in Matrixx v. Siracusano, the panel said corporations do not have an affirmative duty to reveal every piece of information to shareholders. But once they choose to tout good news, the 9th Circuit said, they are bound to disclose any bad news that undercuts it.

“Arena could have remained silent about the dispute or it could have addressed its discussions with the FDA head-on. But it could not represent that there was no controversy here because all the data was favorable,” the 9th Circuit said. “It is the failure to disclose ‘issues’ and ‘concerns’ with the rat study and the FDA’s interest in the outcome of those studies-not who was ultimately right about the underlying science-that matters. And it sure mattered to investors, who were understandably concerned by the information revealed in the FDA’s 2010 briefing documents.”

Stris & Maher, which represented Arena investors at the 9th Circuit, said the panel opinion will apply beyond the narrow category of shareholder class actions against pharma companies. “People had started to believe you couldn’t win cases without a smoking gun” proving fraudulent intent, said Dana Berkowitz of Stris & Maher. “This case shows the bar is high but not insurmountable. Once you speak, you can’t mislead.”

I emailed Arena counsel John Dwyer of Cooley but didn’t hear back.

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In ballot selfie battle, free speech beats fear of voter fraud http://blogs.reuters.com/alison-frankel/2016/10/26/in-ballot-selfie-battle-free-speech-beats-fear-of-voter-fraud/ http://blogs.reuters.com/alison-frankel/2016/10/26/in-ballot-selfie-battle-free-speech-beats-fear-of-voter-fraud/#comments Wed, 26 Oct 2016 20:52:01 +0000 http://blogs.reuters.com/alison-frankel/?p=7464 (Reuters) – Voting is democracy’s most fundamental right and responsibility and recent federal court rulings say you have a constitutional right to post photographs of yourself doing it.

More than a dozen states have laws on the books that bar voters from photographing their ballots or even showing their ballot to another person. In the era of camera-equipped smartphones and social media, states have interpreted those laws to prohibit ballot selfies. Some states have gone a step farther and actually passed laws barring voters from posting photos of themselves at their polling stations.

But in just the past four weeks, a federal appellate court in Boston and a federal trial judge in East Lansing have found laws prohibiting ballot selfies to violate the First Amendment’s protection of free speech.

Pop star Justin Timberlake turned ballot selfies into a sensation on Tuesday, when he posted a photo of himself casting an early ballot at a Memphis polling station on Instagram. Tennessee law bars voters from taking photographs inside polling stations, and the local district attorney’s office initially said it was reviewing the legality of Timberlake’s post before later clarifying that no probe was under way.

That was probably a smart decision by the county prosecutor considering the trouncing ballot-selfie bans have received in federal court.

Last month, the 1st U.S. Circuit Court of Appeals struck down a 2014 New Hampshire law that was enacted specifically to bar voters from photographing themselves in election booths. The case was brought by the American Civil Liberties Union on behalf of three New Hampshire voters who defied the law and posted ballot selfies.

One of those voters, Leon Rideout, is a Republican member of the state legislature who wanted to test the constitutionality of the selfie ban. Another was told he was under investigation for posting a picture of a ballot in which he wrote in the name of his dead dog, Akira, for a U.S. Senate seat.

The ACLU said the appellate ruling should apply to all state ballot-selfie bans in states within the 1st Circuit, including Massachusetts.

The group previously won a challenge to a 2015 Indiana law similar to New Hampshire’s statute. Courts in both the New Hampshire and Indiana cases held selfie bans were unconstitutional because the laws were not narrowly tailored and imposed unreasonable restrictions on voters’ right to express their political views.

Unlike Indiana and New Hampshire, Michigan barred ballot selfies through an old law, not a new one. Michigan’s election law has for decades prohibited voters from showing their ballots to anyone else. In recent years, the state official in charge of overseeing elections has instructed poll workers that the non-sharing provision precludes voters from using cameras, including cellphones, inside polling stations.

Michigan voter Joel Crookston sued in September to block enforcement of that rule, which he admitted he broke when he posted a ballot selfie in 2012, showing his write-in vote for an old college friend. On Monday, a federal judge in East Lansing agreed with Crookston that the Michigan rule likely violates the First Amendment. Michigan has appealed the decision to the 6th Circuit.

“You can’t bar a whole class of speech,” said Stephen Klein of the Pillar of Law Institute, who represents Crookston. Klein is also representing two voters in Colorado, a Republican state legislator and a first-time Democratic voter, in a newly filed suit challenging Colorado’s enforcement of a ban on ballot selfies. “This is a nonpartisan issue,” Klein said.

State officials defending ballot-selfie bans argue that allowing people to photograph completed ballots could facilitate schemes to buy or coerce votes. According to election law expert Richard Hasen, a professor at the University of California, Irvine, this concern dates back to the 1800s, when ballots were generally not secret. In those days, he said, vote-purchasers could be sure they got their money’s worth because they could see the ballots of those they paid to vote for a particular candidate.

Ballot selfies raise the same risk, said Hasen, who supports states’ rights to ban photographs of completed ballots. “People want to post ballot selfies for the best reasons, because they want to express excitement about voting,” he said. “But the issue is not as simple and ridiculous as it first seems.”

Judges who have deemed ballot selfie bans unconstitutional have held that the scant evidence state officials have offered on vote-buying or coercion schemes is not convincing enough to justify the prohibitions. In New Hampshire, for instance, only one state legislator offered any evidence of vote purchasing in the past 120 years of state election history – and that evidence was a third-hand anecdote.

The appellate court that struck down the New Hampshire law ruled that banning ballot selfies in the abstract and highly speculative interest of deterring vote-buying is like “burning down the house to roast the pig.”

“The prohibition on ballot selfies reaches and curtails the speech rights of all voters, not just those motivated to cast a particular vote for illegal reasons,” the court said. “New Hampshire does so in the name of trying to prevent a much smaller hypothetical pool of voters who, New Hampshire fears, may try to sell their votes. New Hampshire admits that no such vote-selling market has in fact emerged. And to the extent that the state hypothesizes this will make intimidation of some voters more likely, that is no reason to infringe on the rights of all voters.”

Election law expert Hasen said there is evidence in some jurisdictions that voters are paid or coerced to vote for particular candidates, but that such misconduct typically occurs with absentee or mail-in ballots.

First Amendment expert Eugene Volokh of UCLA School of Law, who filed a friend-of-the-court brief backing challengers to the New Hampshire ballot selfie ban, said states that allow absentee and mail-in votes despite evidence of abuse cannot turn around and prohibit ballot selfies for fear they will encourage the same sort of misconduct.

“That they allow absentee ballots says they think the risk isn’t that great,” Volokh said. “If the risk isn’t that great, it’s hard to see why to ban ballot selfies.”

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Can former in-house lawyers breach client privilege in whistleblower retaliation suits? http://blogs.reuters.com/alison-frankel/2016/10/25/can-former-in-house-lawyers-breach-client-privilege-in-whistleblower-retaliation-suits/ http://blogs.reuters.com/alison-frankel/2016/10/25/can-former-in-house-lawyers-breach-client-privilege-in-whistleblower-retaliation-suits/#comments Tue, 25 Oct 2016 19:50:47 +0000 http://blogs.reuters.com/alison-frankel/?p=7455 (Reuters) – The life sciences company Bio-Rad filed a fascinating motion last week in its former general counsel’s whistleblower retaliation suit against the company. Bio-Rad’s lawyers at Quinn Emanuel Urquhart & Sullivan and Latham & Watkins contend that the ex-GC, whose case is scheduled for trial in January, cannot disclose any information shielded by attorney-client privilege – which is basically all of the evidence former GC Sanford Wadler is relying on.

If Bio-Rad is right, it will be extraordinarily difficult for in-house lawyers in California to sue former employers for wrongful termination. Or to flip the scenario, employers will have an awful lot of leeway to get rid of whistleblowing lawyers.

The one-time Bio-Rad GC, Sanford Wadler, claims he was fired in 2013 after raising a stink within the company about possible Foreign Corrupt Practices Act (FCPA) violations by Bio-Rad employees in China. Bio-Rad and its outside lawyers from Steptoe & Johnson had already conducted an internal investigation of employees’ improper payments in Vietnam, Thailand and Russia, en route to a $55 million resolution of the U.S. government’s FCPA allegations in 2014. In response to Wadler’s concerns about corruption in China, the company brought Steptoe & Johnson back in for another round of investigation.

Wadler, according to an October 2015 opinion allowing his retaliation case to proceed, was worried that Steptoe had a conflict of interest because the firm didn’t uncover wrongdoing in China in its first engagement. When Steptoe reported to Bio-Rad that it had found no evidence of improper payments by Bio-Rad employees in China, Wadler refused to accept that conclusion. He insisted that he had reviewed documents that showed troubling discrepancies in Bio-Rad’s shipments to China.

Wadler, who had been the company’s general counsel for 25 years, was fired soon after his showdown with Steptoe. Represented by Kerr & Wagstaffe, he sued Bio-Rad and individual board members under Sarbanes-Oxley, Dodd-Frank and the California labor code, claiming that he was fired for blowing the whistle about FCPA violations in China. Bio-Rad has pointed out that its outside counsel from Steptoe and from Davis Polk & Wardwell thoroughly investigated the China allegations and found them meritless, as did the U.S. government, according to Bio-Rad. The company asserts that Wadler’s behavior after he first reported his suspicions about Chinese bribery was so “erratic and abusive” that he left Bio-Rad with no choice but to dump him.

U.S. Magistrate Judge Joseph Spero of San Francisco, who is overseeing the case, managed to delay the issue of whether Wadler can breach attorney client privilege by entering an order last November that permitted the two sides to produce discovery without Bio-Rad waiving its right to assert the privilege.

But Bio-Rad’s motion to exclude privileged evidence – including anticipated testimony from the outside lawyers who investigated Wadler’s claims of Chinese corruption as well as evidence from Wadler himself – said the day of reckoning on the privilege has come now that the case is headed for trial with “a witness list thick with lawyers without whom this story cannot be accurately told, and the need for both plaintiff and defendants to rely on copious confidential information.” According to the company, it may simply be impossible for Judge Spero to allow the case to be tried, given Wadler’s “ethical and statutory duties as a lawyer in California, and Bio-Rad’s right to both preserve the privileged and confidential status of its documents and information and fully defend itself in the litigation.”

Wadler, of course, is not the first in-house lawyer to sue a former employer for whistleblower retaliation. In fact, so many corporate lawyers have brought whistleblower suits that the employment firm Littler Mendelsohn did a whole study just on the cases. According to Littler, the issue of attorney client privilege in lawyers’ wrongful termination suits arises less often than you might think because the American Bar Association’s Model Rules of Professional Conduct allow in-house lawyers to disclose client confidences in order to establish a claim against their former employer. So in states that have adopted the ABA model rule, former in-house lawyers are not ethically barred from breaching client privilege (though, as the Littler study notes, “there is a distinction between the ethical rules and the substantive law regarding use of attorney-client and work-product privileged communications in litigation”).

California, where Bio-Rad is based and where Wadler was employed, has a much stricter restriction on client confidences. California lawyers are barred from breaching client privilege unless the attorney “reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.” As Bio-Rad explains in its motion to exclude privileged evidence in the Wadler case, that is a very high bar.

No reported decision, according to Bio-Rad’s lawyers, specifically addresses how to try a case that requires the disclosure of privileged evidence. The leading California Supreme Court decision, 1994’s General Dynamics v. Superior Court of San Bernardino, establishes an in-house lawyer’s right to sue for wrongful termination, but exhorts lawyers and judges to do whatever they can to preserve client confidentiality in the process. The “array of ad hoc measures” the state justices proposed in General Dynamics includes “the use of sealing and protective orders, limited admissibility of evidence, orders restricting the use of testimony in successive proceedings and, where appropriate, in camera proceedings.”

Bio-Rad, interestingly, did not ask in its motion for specific information to be excluded nor even for Wadler’s lawyers to specify the confidential materials and testimony they plan to elicit. It’s also interesting that the company waited until discovery in the case is pretty much concluded to assert attorney client privilege. Reading between the lines, the exclusion motion may have been a strategy suggested by Quinn Emanuel, which entered the litigation for Bio-Rad in September. Latham has been representing the company from the beginning of the case. I emailed John Potter of Quinn and Linda Inscoe of Latham but neither got back to me.

I’m guessing that Wadler’s lawyers from Kerr & Wagstaffe will argue that Bio-Rad not only waited too long to claim privilege but also that the company waived privilege by disclosing confidential information in its own filings in this case. Bio-Rad put expert witness reports on the merits of Wadler’s claims into the public record, for instance, when it moved to strike one of its former GC’s experts. Judge Spero may have to decide the extent to which Bio-Rad’s defense has compromised its privilege claim.

Wadler’s response to Bio-Rad’s exclusion motion is due in November.

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As deals boom, Delaware judges are leaving shareholders’ bar in the cold http://blogs.reuters.com/alison-frankel/2016/10/24/as-deals-boom-delaware-judges-are-leaving-shareholders-bar-in-the-cold/ http://blogs.reuters.com/alison-frankel/2016/10/24/as-deals-boom-delaware-judges-are-leaving-shareholders-bar-in-the-cold/#comments Mon, 24 Oct 2016 21:39:38 +0000 http://blogs.reuters.com/alison-frankel/?p=7447 Oct 24 (Reuters) – On Monday, Time Warner filed a disclosure at the Securities and Exchange Commission of its $85 billion merger agreement with AT&T. The SEC filing includes a provision notifying investors that Time Warner amended its bylaws over the weekend to direct all shareholder litigation to Delaware Chancery Court.

That forum selection clause, as such provisions are known, is a very good way to restrict scrutiny of the $85 billion deal by the plaintiffs’ bar. Shareholder lawyers I talked to Monday about the Time Warner deal – and the other just-announced mergers buoying the stock market – seemed almost wistful about how difficult it has become to litigate M&A class actions in Delaware Chancery Court.

You can be sure some investor will file a class action challenging AT&T’s takeover of Time Warner. As Fordham law professor Sean Griffith told me Monday, Time Warner’s decision to reach a deal with AT&T without seeking competing bids is an open invitation for plaintiffs’ lawyers to argue that shareholders aren’t getting a fair price.

But according to three top-notch plaintiffs’ lawyers who talked to me on background, a series of recent decisions from the Delaware Supreme Court and Chancery Court has made it much tougher for investors to police corporate boards and advisers, to block shareholder votes on deals involving a single bidder and to recover damages for disclosure violations if shareholders have voted in favor of a merger. The net effect of this recent precedent, they said, is to encourage shareholders to file M&A class actions in federal court, alleging violations of federal disclosure laws, rather than bringing fiduciary duty suits in Delaware.

These lawyers weren’t even talking about Chancery Court’s celebrated 2015 crackdown on “deal tax” settlements. You probably remember that Delaware judges acted in concert to squelch M&A class action settlements in which corporations received broad releases from shareholder claims in exchange for additional, often immaterial, proxy disclosures.

Chancery Court’s refusal to sign off on six- or seven-figure fees for plaintiffs’ lawyers who negotiated disclosure-only settlements has already sharply reduced the number of M&A challenges filed in Delaware. According to a Cornerstone Research study published this summer, nearly two-thirds of all deals valued at more than $100 million still provoked shareholder litigation, but that’s way down from the 2013 peak of 94 percent – and shareholder lawyers are much more likely to file investor suits outside of Delaware. (Thus explaining Time Warner’s new forum selection clause.)

For all of the attention paid to the clampdown on disclosure-only settlements (including by me!), the Delaware Supreme Court’s 2015 opinion in Corwin v. KKR may turn out to have been a more important disincentive for shareholder lawyers to sue in Chancery Court. In the Corwin decision, written by Chief Justice Leo Strine, the state supreme court held that if a deal is approved by “fully informed, uncoerced” shareholders, the board’s actions during the sale process should be reviewed under the extremely forgiving business judgment standard. Effectively, the Corwin ruling spelled the end of post-closing damages claims in deals shareholders voted to approve.

In a much-discussed decision earlier this month, for example, Vice-Chancellor Joseph Slights dismissed a shareholder class action against board members of OM Group, a specialty chemical company bought out by the private equity firm Apollo in 2015. Plaintiffs alleged the board sold the company on the cheap to avoid the “embarrassment and aggravation” of agitation by an activist investor, ignoring the advice of OM’s own financial adviser, who said shareholders would obtain maximum value if the company were broken up and sold in pieces.

The judge said that however “disquieting” the allegations, plaintiffs failed to allege that the board withheld material information from shareholders, 89 percent of whom voted in favor of the buyout. Under Corwin, Vice-Chancellor Slights found, OM directors are in the clear.

In another interpretation of Corwin, Chancellor Andre Bouchard in August dismissed post-closing breach-of-duty claims against board members of C&J Energy Services, acquired by Nabors Industries in 2015. The plaintiffs alleged that C&J didn’t disclose a competing bid (among other supposed disclosure failures) so shareholders were not actually informed at the time they voted to approve the deal. The chancellor held plaintiffs waited too long to allege the disclosure violations, which they should have raised before the shareholder vote.

The message to plaintiffs’ lawyers, in other words, is that the only way to win an M&A challenge in Delaware is to come up with evidence of serious disclosure violations in a short time frame. But plaintiffs’ lawyers say Chancery Court judges are simultaneously tightening the standard for expedited discovery in M&A cases, stripping them of the tools to obtain that evidence.

The answer, they say, may be to stop litigating M&A challenges as fiduciary duty cases in Delaware and instead start asserting violations of federal securities law, which, after all, prohibits corporations from making false or misleading proxy filings.

Cornerstone’s study this summer detected an early move for M&A class actions from Delaware to federal court. Decisions like C&J Energy and OM Group will probably hasten that move.

So look for shareholders to sue Time Warner in federal court, and to argue that a class action asserting only a cause of action under federal law is not subject to the company’s forum selection clause.

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Backpage.com pimping case will turn on what officials knew about escort ads http://blogs.reuters.com/alison-frankel/2016/10/21/backpage-com-pimping-case-will-turn-on-what-officials-knew-about-escort-ads/ http://blogs.reuters.com/alison-frankel/2016/10/21/backpage-com-pimping-case-will-turn-on-what-officials-knew-about-escort-ads/#comments Fri, 21 Oct 2016 19:13:28 +0000 http://blogs.reuters.com/alison-frankel/?p=7440 (Reuters) – Defense lawyers for Backpage.com CEO Carl Ferrer and two former owners of the online ad site, Michael Lacey and James Larkin, moved Thursday to toss felony pimping charges filed earlier this month by California Attorney General Kamala Harris.

As usual, Backpage is counting on the First Amendment and the Communications Decency Act as saviors. Lawyers for the executives facing criminal charges – Davis Wright Tremaine, Arguedas Cassman & Headley, and Henze Cook Murphy – argue that California has offered no evidence to show the CEO and co-owners knew ads placed by escort services were solicitations for sex. According to their brief, the ads were all placed by outsiders acting in accordance with Backpage.com’s rules for advertising. Backpage’s lawyers contend that under U.S. Supreme Court precedent, including 1959’s Smith v. California, publishers cannot be prosecuted for distributing other people’s speech unless they knew the speech was illegal.

Defense lawyers also cited three recent federal court decisions that struck down state laws attempting to impose criminal liability for running ads that sexually exploit children. Judges in Washington, Tennessee and New Jersey concluded the proposed laws likely violated the First Amendment and the Communications Decency Act because the statutes would block protected speech and purported to hold Backpage responsible for the speech of others.

The officials facing charges in California contend that the state AG knew of her colleagues’ failed attempts to legislate against Backpage.com and is using the “frankly outrageous” pimping charges as an alternative. “The Attorney General’s theory of prosecution violates basic principles of First Amendment law,” the brief said. “The AG initiated this prosecution in the face of an unbroken line of cases holding that online forums for classified ads – and specifically Backpage.com – are protected by the First Amendment. Government officials at various levels have attempted to censor such advertising forums in many ways, and each has been held to violate the Constitution.”

I went back to the affidavit underlying the California AG’s charges, filed by special agent Brian Fichtner of the state’s Justice Department. It details his evidence that escort services ads on Backpage.com turned out to be promoting sex services, including prostitution by girls as young as 15. But it’s also true, as Backpage’s dismissal brief argues, that Fichtner’s affidavit does not offer specific allegations that the site or the charged executives knew these particular ads were illegal or that Backpage generally facilitates ads promoting prostitution and sex trafficking.

Those allegations have, of course, been leveled at the site by state and federal officials and anti-trafficking activists. The U.S. Senate Permanent Subcommittee on Investigations, as I’ve reported, is deep into a probe of Backpage.com’s internal processes for screening ads. The Senate contends the site edits the ads to conceal evidence of advertisers’ criminal intent. Backpage.com has repeatedly denied those allegations. The site says that it works with law enforcement and the Center for Missing and Exploited Children to assure that minors are not being trafficked through Backpage.com ads.

Last month the U.S. Supreme Court refused to delay enforcement of a Senate subpoena for the site’s records. Under a subsequent order by the trial judge overseeing the subpoena, Backpage must turn over even privileged documents between its lawyers and corporate officials.

If those records prove the Senate’s theory that Backpage is abetting sex traffickers, Backpage is going to have a much harder time persuading judges that it is a mere conduit for communications by other people. But until and unless opponents can prove Backpage and its executives knew specific ads promoted illegal sex acts, the site’s officials seem to have a good shot at getting the charges against them thrown out.

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The candidates and the Constitution http://blogs.reuters.com/alison-frankel/2016/10/20/the-candidates-and-the-constitution/ http://blogs.reuters.com/alison-frankel/2016/10/20/the-candidates-and-the-constitution/#comments Thu, 20 Oct 2016 20:07:42 +0000 http://blogs.reuters.com/alison-frankel/?p=7436 (Reuters) – Do you remember Saul Steinberg’s famous 1976 New Yorker cover, A View of the World from 9th Avenue? The drawing depicted with great wit the skewed perspective of New Yorkers who see the world beyond the Hudson River as an essentially undifferentiated nowhere land, with scattered markers for Chicago and Los Angeles, dotted lines for the Canadian and Mexican borders and a strip of light blue for the Pacific Ocean.

I thought of the Steinberg map when I heard presidential candidates Donald Trump and Hillary Clinton talk about the U.S. Supreme Court at Wednesday night’s debate. The discussion was dominated by just two issues, guns and abortion rights, as if the rest of the court’s business – now and in history – were no more than a blur in the distance. As depicted by the candidates, the U.S. Constitution exists mainly to protect the rights of gun owners and the Supreme Court’s primary task is to decide whether women ought to be allowed to terminate pregnancies.

Obviously, these debates devote only minutes to issues too complex to reduce to easily digestible arguments. And superficiality is inevitable when you are trying to reach tens of millions of people who couldn’t care less about separation of powers or the intersection of state and federal law. It was still disheartening that when debate moderator Chris Wallace of Fox News offered the candidates a chance to outline their interpretation of the Constitution, we got Trump reveling in Justice Ruth Bader Ginsburg’s apology to him and ranting about babies being ripped from women’s bodies.

Wallace had announced ahead of time that the Supreme Court would be one of the six topic areas of the debate, yet Trump could not speak coherently about the single case he named, 2008’s District of Columbia v. Heller, in which the justices ruled that the 2nd Amendment grants ordinary people a right to own handguns. That’s a simple enough holding on a topic of apparently overwhelming interest to Trump supporters. Here was the candidate’s insight: “Well the D.C. versus Heller decision was very strongly … and she was extremely angry about it. I watched. I mean, she was very, very angry when upheld. And Justice Scalia was so involved and it was a well-crafted decision. But Hillary was extremely upset.”

Clinton was criticized on Twitter for describing the District of Columbia gun control law at issue in the Heller case as a way to protect toddlers from loaded guns in the home, but safe gun storage was, in fact, one of the requirements in the law stricken down by the Supreme Court.

Clinton was not especially inspiring when she talked about the Supreme Court or the Constitution, but she was much better informed than her opponent (as you would expect, since she’s a Yale-trained lawyer and he isn’t). Clinton used Wallace’s broad opening question about constitutional interpretation and the role of the court to endorse civil rights victories at the Supreme Court and to criticize Citizens United, the court’s 2010 ruling on corporate political donations. Clinton also called on the Senate to fulfill its constitutional responsibilities and hold hearings on President Obama’s nominee for the ninth seat on the court. Otherwise, guided by Wallace’s questions, Clinton spent the rest of the time allotted to the topic of the Supreme Court on guns and abortion rights.

Politically, both candidates probably had good reasons to pivot toward the 2nd Amendment and Roe v. Wade. Clinton’s defense of Planned Parenthood, which came during the Supreme Court portion of the debate, scored well, for example, with both men and women, according to post-debate focus groups. I’m sure Trump backers would argue that their candidate scored by emphasizing Clinton’s criticism of the Heller ruling when it came out.

So why am I bothered by the woefully circumscribed boundaries of the candidates’ discussion of the Constitution? Because of what happened later in the debate, when Wallace asked Trump if he would accept the results of the election.

Trump, as everyone knows, refused to commit. He said he would “look at it at the time.” After an incredulous Wallace pointed out this country’s long tradition of peaceful transitions of power, Trump reiterated, “What I’m saying is that I will tell you at the time. I’ll keep you in suspense, okay?”

Clinton called that answer “horrifying” and “not the way our democracy works.” By implying that he will not respect the election results, she said, Trump is “denigrating, he is talking down our democracy. And I, for one, am appalled that somebody who is the nominee of one of our two major parties would take that kind of position.”

I am too, especially because a handful of Trump supporters have been quoted talking about violent rebellion if their candidate is not elected. (The Trump campaign has said it does not support such violence.)

Because of the Constitution, this country is not ruled by mob violence. The rule of law has, for the most part, prevailed in the United States because of the Constitution’s wise decision to divide power among the branches of government.

It’s easy to forget during presidential elections that in our constitutional democracy, the candidates can’t really govern on their own. In this particular election, the system of checks and balances has never seemed wiser or more relevant.

It’s too bad no one said so at the debate.

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If it costs millions to win an appraisal case, are the suits worth it? http://blogs.reuters.com/alison-frankel/2016/10/19/if-it-costs-millions-to-win-an-appraisal-case-are-the-suits-worth-it/ http://blogs.reuters.com/alison-frankel/2016/10/19/if-it-costs-millions-to-win-an-appraisal-case-are-the-suits-worth-it/#comments Wed, 19 Oct 2016 19:21:01 +0000 http://blogs.reuters.com/alison-frankel/?p=7430 (Reuters) – There is a hidden message in a Delaware Chancery Court decision this week to grant the shareholder firm Grant & Eisenhofer about $8 million in fees and expenses for convincing the court that Michael Dell and his private equity partner underpriced their $24.9 billion buyout of Dell in 2013.

The ruling by Vice-Chancellor Travis Laster is obviously a win – and a relief – for Grant & Eisenhofer, which was lead counsel in an expensive and time-consuming challenge to the Dell buyout price by shareholders who asked Chancery Court to determine the fair value of their shares in an appraisal action. Last May, Laster ruled that flaws in the sale process depressed the buyout price by nearly $4 per share, or 22 percent. For the 5.5 million shares in the appraisal class, the vice-chancellor’s decision is worth about $25 million.

Grant & Eisenhofer requested fees that, with interest, come to just over $4 million. Its fee request was protested by two of the big shareholder groups in the appraisal action, Magnetar Capital and Global Continuum Fund, which argued that the request didn’t account for the $4.2 million in fees G&E is slated to receive from a separate settlement between Dell and G&E’s big client in the case, T. Rowe Price.

T. Rowe Price – by far the biggest shareholder to challenge the Dell buyout price – was part of the appraisal class through the trial before Vice-Chancellor Laster. After the trial, the judge bounced T. Rowe Price’s 30 million shares from the class because a fund manager mistakenly voted in favor of the Dell buyout. Dell subsequently agreed to pay the merger price plus $28 million in interest to T. Rowe Price.

Magnetar and Global said Grant & Eisenhofer’s fee request from the appraisal class was based on the firm’s contingency fee agreement with T. Rowe Price – an agreement the other funds never approved. (Straight appraisal cases are not typically litigated on contingency.) Vice-Chancellor Laster, however, said that based on the recovery it obtained for shareholders, Grant & Eisenhofer could actually have been entitled to as much as $7 million under Delaware’s prevailing precedent on contingency fees. Grant & Eisenhofer’s lodestar billings in the case were nearly $7.8 million, the judge noted. Basically, Laster told the protesting funds that they’re lucky to be paying only about $4 million in fees for the more than $20 million Grant & Eisenhofer netted them.

The more interesting discussion in Vice-Chancellor Laster’s opinion, which I first saw reported in The Chancery Daily, involves expenses. Grant & Eisenhofer said it had laid out more than $4 million in costs to litigate the Dell appraisal action, nearly $3.5 million of it in fees for expert witnesses. (The next-highest costs were for copying and e-discovery hosting services.) Those expenses, of course, are in addition to the $7.8 million in lawyer time Grant & Eisenhofer said it had invested in the litigation.

Magnetar and Global said Grant & Eisenhofer had spent too much. (They also protested that T. Rowe Price should bear some of the burden of the expenses since the trial outcome gave the mutual fund leverage in its separate negotiations with Dell.) But according to Vice-Chancellor Laster, working up an appraisal case is an expensive proposition.

As Laster pointed out, Chancery Court judges in the five appraisal cases immediately preceding his Dell opinion all concluded that the deal price is the most reliable indicator of a company’s fair value. To prove otherwise in the Dell case, Vice-Chancellor Laster wrote, Grant & Eisenhofer “had to conduct discovery into the sale process and develop well-supported arguments as to why the process fell short for purposes of price discovery.”

The plain truth, the vice-chancellor wrote, is that appraisal actions have “become more complex” in the past few years. Defendants have been able to persuade Delaware judges that when the sale process is robust and transparent, the price is most likely fair. To counter that defense, shareholders have to bring in experts and conduct discovery to expose flaws in the sale process. Investors can’t just hire a valuation expert and expect to win.

And the vice-chancellor didn’t even delve into this summer’s change in Delaware’s law on appraisal actions, which allows appraisal defendants to avoid accruing interest charges at a high statutory rate. (That change didn’t apply in the Dell case.) The high interest rate had spurred the business of “appraisal arbitrage,” in which hedge funds bought shares of just-acquired companies in order to bring appraisal suits, betting that the statutory interest rate would make the investment profitable even if courts found the market price to be fair value.

But it seems to me that the hidden-in-plain-sight message Vice-Chancellor Laster means to send shareholders in the Grant & Eisenhofer opinion is that they should think hard about the costs and benefits of appraisal litigation. According to the judge, it took $4 million just in expenses to win the Dell case – and that, he suggests, is what it’s going to take future appraisal plaintiffs to win these increasingly complex cases. Add in a few million bucks for legal fees, since, as I mentioned above, appraisal plaintiffs usually pay their lawyers on an hourly basis. Subtract the safety net of high statutory interest rates. And suddenly, appraisal arbitrage isn’t nearly as attractive a business model as it used to be.

I ran my theory past Samuel Hirzel of Proctor Heyman Enerio, who represents Global, one of the funds that challenged Grant & Eisenhofer’s fee and expense request. (He is also Delaware counsel to Magnetar but was not speaking on behalf of that client.) Hirzel said that appraisal actions can be tried much less expensively than the Dell case – and that if T. Rowe Price hadn’t been in this case through trial, Dell investors would not have spent as much money as Grant & Eisenhofer laid out. “Four million dollars only made sense when T. Rowe was in the case,” he said.

Hirzel declined to say whether Global planned to appeal the fee ruling when Vice-Chancellor Laster enters final judgment in the case.

Stuart Grant of G&E didn’t respond to my email.

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2nd Circuit disqualifies BakerHostetler from forfeiture case in rare mandamus grant http://blogs.reuters.com/alison-frankel/2016/10/18/2nd-circuit-disqualifies-bakerhostetler-from-forfeiture-case-in-rare-mandamus-grant/ http://blogs.reuters.com/alison-frankel/2016/10/18/2nd-circuit-disqualifies-bakerhostetler-from-forfeiture-case-in-rare-mandamus-grant/#comments Tue, 18 Oct 2016 18:23:31 +0000 http://blogs.reuters.com/alison-frankel/?p=7419 (Reuters) – For nine months spanning 2008 and 2009, John Moscow of BakerHostetler represented the U.S. hedge fund Hermitage Capital in the investigation of an epic, $230 million tax fraud in Russia. The alleged scheme is incredibly complicated, but for this story, all you need to know is that the U.S. Justice Department believes fraudsters in Russia co-opted Hermitage portfolio companies to effectuate their tax scam. In 2013, at Hermitage’s urging, the U.S. government brought a forfeiture action against the Cyprus-based company Prevezon, which the Justice Department accused of buying New York real estate to launder some of the proceeds of the Russian tax fraud.

Hermitage is not a party to the forfeiture action, but it lies at the center of the Justice Department’s allegations against Prevezon. The U.S. government regards Hermitage as a victim of the Russian tax fraud. Prevezon does not. In fact, Prevezon’s lawyers said in their brief opposing Justice’s motion for summary judgment that the company intends to defend itself in the forfeiture case by claiming that Hermitage’s founder, William Browder, cooked up the tale of the Russian tax scheme and promoted the story to the Justice Department in an attempt to thwart his own arrest on tax charges in Russia.

Who are the Prevezon lawyers making these claims about Hermitage?

None other than Hermitage’s own former counsel from BakerHostetler.

Actually, as of Monday, it is more appropriate to use the past tense to describe BakerHostetler’s client relationship with Prevezon. In a rare grant of a petition for a writ of mandamus, the 2nd U.S. Circuit Court of Appeals overturned decisions by U.S. District Judge Thomas Griesa of Manhattan that had allowed BakerHostetler and Baker partner John Moscow to defend Prevezon in the forfeiture case, despite protests from Hermitage. The 2nd Circuit panel – Judges Rosemary Pooler, Raymond Lohier and Susan Carney – remanded the forfeiture case with instructions to disqualify BakerHostetler. (While the appeal was underway, the case was transferred from Judge Griesa to U.S. District Judge William Pauley.)

The appeal presented a novel question for the 2nd Circuit: Can a law firm be disqualified for a potential conflict of interest involving a former client that is neither a party nor a witness in the case at issue? The appeals court concluded that even though BakerHostetler stopped representing Hermitage in 2009, its ongoing duty to its former client precludes it from representing Prevezon in the forfeiture. Lawyers “must preserve a client’s confidences even after the attorneyclient relationship ends,” the panel said. “A client cannot fully and candidly discuss its situation with counsel if the client must worry that such confidences could be used to implicate him in the very crimes for which he hired that attorney to defend him, significantly undermining the lawyerclient relationship.”

The panel also said that allowing BakerHostetler to defend Prevezon by leveling accusations at its former client would undermine the government’s ability to persuade crime victims to talk. “If crime victims fear that the attorneys they hire may turn against them, they may be less likely to assist government in its investigations,” the opinion said.

Judge Griesa changed his mind twice about BakerHostetler’s disqualification before the 2nd Circuit took up the appeal. Hermitage’s first attempt to block its former lawyers from representing Prevezon was in a complaint to the grievance committee of the Manhattan federal court. The committee declined to take action. Hermitage’s current lawyers at Susman Godfrey then moved in 2014 for BakerHostetler’s disqualification. The law firm said at the time that there was no conflict between Hermitage and Prevezon because both were innocent. Judge Griesa agreed, finding in 2014 that Hermitage’s conflict concerns were mere speculation.

After Prevezon’s response to the government’s summary judgment motion last December, Griesa agreed to bounce BakerHostetler, but then rescinded his own order the following month, concluding that the Russian tax fraud was “merely background information” in the Prevezon forfeiture case. Hermitage, he said, was “a mere spectator” whose interests were not directly at stake.

The 2nd Circuit found Judge Griesa had committed clear error. “Absent disqualification, there is a real risk of Hermitage’s confidences being misused,” the judges found.

Prevezon was represented at the 2nd Circuit by Michael Mukasey of Debevoise & Plimpton, who said in an email statement that the panel did not view the underlying facts the same way that Judge Griesa did – and the trial judge was much more familiar with those facts. He also said the panel decision is inconsistent with 2nd Circuit precedent and that Prevezon is considering its options.

(This post has been corrected. An earlier version incorrectly reported that Michael Mukasey represents BakerHostetler.)

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Gun companies get to keep their secrets in Sandy Hook plaintiffs’ defeat http://blogs.reuters.com/alison-frankel/2016/10/17/gun-companies-get-to-keep-their-secrets-in-sandy-hook-plaintiffs-defeat/ http://blogs.reuters.com/alison-frankel/2016/10/17/gun-companies-get-to-keep-their-secrets-in-sandy-hook-plaintiffs-defeat/#comments Mon, 17 Oct 2016 20:48:25 +0000 http://blogs.reuters.com/alison-frankel/?p=7415 In the American justice system, plaintiffs’ lawyers are bounty hunters on the prowl for misbehaving corporations. Now we can argue forever about whether it’s good or bad to have private lawyers acting as for-profit regulators. The business lobby has been complaining for decades that unfounded lawsuits stifle innovation, drive legitimate companies into bankruptcy and benefit no one except for plaintiffs’ lawyers. Personally, I’m more inclined to side with the plaintiffs’ bar, which contends that liability litigation has made the country safer by proving the danger of products like asbestos, cigarettes and lead paint and holding accountable the companies that make and sell those products.

I picked those three examples on purpose. Plaintiffs’ lawyers fought losing battles against asbestos, tobacco and lead paint defendants for years. They ended up, of course, making vast amounts of money in the asbestos and tobacco litigation, though not from lead paint suits. But in all three examples, litigation exposed both the public health threat posed by the products and the industry’s attempts to hide the dangers. Public education is the often-overlooked benefit of contingency fee litigation. Lawsuits force businesses to reveal their secrets.

That’s one of the reasons why I’m so disappointed in Friday’s dismissal of a suit against the gun makers and sellers that supplied the weaponry Adam Lanza used to murder 26 children and educators at Sandy Hook Elementary School in 2012. Because Connecticut Superior Court Judge Barbara Bellis dismissed the suit before the Sandy Hook plaintiffs – most of them parents of first-graders killed in the massacre – had a chance to reveal what they learned in discovery, the public record on gun makers’ trade practices remains a blank. Only the gun industry gets to keep all of its secrets.

Congress – and not Judge Bellis – is entirely responsible for immunizing the gun business. The Sandy Hook plaintiffs asserted cutting-edge theories against the defendants, Remington Arms, the firearms distributor Camfour and the gun shop that sold a Bushmaster semi-automatic rifle to Lanza’s mother. The federal law shielding gun defendants, the Protection of Lawful Commerce in Arms Act of 2005, bars suits by victims of gun violence except in a couple of situations: when plaintiffs can show a defendant negligently entrusted a weapon to the shooter; or when plaintiffs can show a defendant broke federal or state law in marketing the weapon and that the violation directly led to the shooting.

Lawyers for the Sandy Hook families argued that Remington and the other defendants were negligent in entrusting to civilians a weapon best suited for military and law enforcement personnel because the defendants knew or should have known the product would be misused. The plaintiffs also claimed Remington and the other defendants violated Connecticut’s trade practices law in marketing the Bushmaster semi-automatic, so they are liable under the “predicate exception” to the federal gun shield law.

Judge Bellis carefully considered both arguments. She concluded the negligence theory failed under both Connecticut common law and under the federal shield law. Common law requires foreknowledge to establish negligence, she said, and it’s too far a stretch to find that the defendants should have known civilians would have misused the weapon. “To extend the theory of negligent entrustment to the class of nonmilitary, nonpolice civilians – the general public – would imply that the general public lacks the ordinary prudence necessary to handle an object that Congress regards as appropriate for sale to the general public,” she wrote. “This the court is unwilling to do.”

The federal law’s definition of negligent entrustment is narrower than the common law’s, according to Judge Bellis, who delved into PLCAA’s legislative history. Congress meant to restrict potential liability to defendants that put weapons directly in the hands of shooters who shouldn’t have had them, she said. “Plaintiffs have not alleged that any of the defendants’ entrustees ‘used’ the firearm within the confines of PLCAA’s definition of the term,” she said. “To the contrary, the plaintiffs have alleged facts that place them directly in the category of victims to which Congress knowingly denied relief.”

The judge agreed with the Sandy Hook victims that Connecticut’s unfair trade practices law can serve as a predicate exception to the federal gun shield law, but ultimately crushed that theory of liability as well. State case law, she said, requires some sort of business relationship between trade practices plaintiffs and defendants. The Sandy Hook shooting victims, she said, cannot slip through PLCAA’s exception for gun sellers that violate marketing laws because they don’t have standing for claims under Connecticut’s unfair trade statute.

Lead counsel for the plaintiffs, Josh Koskoff of Koskoff Koskoff & Bieder, said in a statement that the shooting victims’ families will appeal. It seems to me, however, that their problem lies not with Judge Bellis’ interpretation of the law but with the law itself – in particular, PLCAA.

As Judge Bellis said, the Sandy Hook victims’ families are precisely the category of plaintiffs Congress had in mind when it enacted immunity for gun makers and sellers. Nice work, Congress.

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6th Circuit denies en banc on data breach standing issue. Prelude to SCOTUS? http://blogs.reuters.com/alison-frankel/2016/10/14/6th-circuit-denies-en-banc-on-data-breach-standing-issue-prelude-to-scotus/ http://blogs.reuters.com/alison-frankel/2016/10/14/6th-circuit-denies-en-banc-on-data-breach-standing-issue-prelude-to-scotus/#comments Fri, 14 Oct 2016 21:06:13 +0000 http://blogs.reuters.com/alison-frankel/?p=7407 (Reuters) – Someday, this endless presidential campaign will be over, a new president will take office and the Senate will confirm a ninth justice for the U.S. Supreme Court. (One hopes.) We obviously have no idea if that future justice will have the same appetite for class action issues as the late Justice Antonin Scalia. But eventually, the Supreme Court will probably have to resolve a circuit split on data breach class actions that was cemented this week by the 6th U.S. Circuit Court of Appeals.

The 6th Circuit denied a petition by Nationwide Insurance to rehear a three-judge panel’s Sept. 2016 decision to allow a negligence class action stemming from a 2012 data breach to proceed. Nationwide’s lawyers at Morgan Lewis & Bockius argued in the en banc petition (as the insurer argued in federal district court in Columbus, Ohio, and before the three-judge panel) that Nationwide customers whose data was stolen do not have constitutional standing to sue because they have not actually been harmed.

Like just about every data breach class action defendant in the past few years, Nationwide relied heavily on the U.S. Supreme Court’s 2013 analysis in Clapper v. Amnesty International of what sort of injury gives rise to constitutional standing. The injurer contended that in the four years since hackers gained access to customers’ personal information, those customers have experienced no harm – “no out-of-pocket expenses, no fraudulent charges, no identity theft,” Nationwide said in the en banc petition. Under Clapper, the petition said, the possibility that the information may be misused in the future does not establish standing. (For what it’s worth, the Nationwide class wants to file an amended complaint alleging that one plaintiff’s data has already been misused by the hackers.)

In rejecting the petition for rehearing, the 6th Circuit panel – Judges Helene White and Alice Batchelder, as well as U.S. District Judge Sheryl Lipman of Memphis, sitting by designation – said it had already considered those arguments before it issued its decision in September.

In that ruling, the 6th Circuit sided with the 7th Circuit in holding that data breach victims don’t have to wait until their identity has been stolen to sue. “A substantial risk of harm, coupled with reasonably incurred mitigation costs, are sufficient to establish a cognizable Article III injury at the pleading stage of the litigation,” Judge White wrote for the 6th Circuit panel. “There is no need for speculation where plaintiffs allege that their data has already been stolen and is now in the hands of ill-intentioned criminals.”

The 3rd Circuit has interpreted constitutional requirements for data breach suits differently than the 6th and 7th Circuits, albeit before the Supreme Court’s Clapper decision. In 2011’s Reilly v. Ceridian, the 3rd Circuit refused to allow customers of the payroll processing company to move ahead with a data breach class action, holding that their “allegations of ‘possible future injury’ are not sufficient to satisfy Article III.”

So the 6th Circuit’s ruling in the Nationwide case seems to presage a showdown at the Supreme Court over just what data breach plaintiffs must show in order to establish standing. Neiman Marcus, which was on the losing end of the 2015 7th Circuit decision that initially created the split, apparently considered filing a petition for Supreme Court review; its lawyers at Sidley Austin sought and received two extensions on the deadline for a certiorari filing. Ultimately, Neiman Marcus did not go to the justices.

I called Nationwide counsel Allyson Ho of Morgan Lewis to ask if the insurer planned to go where Neiman Marcus did not. I didn’t hear back from her.

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