Alison Frankel

Credit card antitrust judge: Client marketing is ‘professional peril’

Alison Frankel
Apr 10, 2014 21:24 UTC

In 1999, a couple of partners at the firm now known as Wilmer Cutler Pickering Hale and Dorr had a fabulous idea. Businesses were just beginning to recognize the potential advantages of imposing mandatory arbitration provisions and class action waivers on their customers. In early 1998, First USA was the first credit card bank issuer to adopt a mandatory arbitration clause, followed by American Express at the end of the year. Wilmer, which had a roster of credit card clients, came up with a marketing strategy to position itself as an expert on the clauses. In May 1999, Wilmer lawyers invited big credit card issuers to attend a conference on arbitration provisions at its Washington offices “to show these folks that this was something on which we were at the leading edge,” one of the partners later testified.

Wilmer was absolutely right about the marketing potential of mandatory arbitration. After that initial meeting at the firm’s offices on May 25, 1999, Wilmer teamed up with another firm, Ballard Spahr, and several in-house credit card lawyers. They dubbed themselves the “Arbitration Coalition” and invited lawyers from other outside firms and from companies in other industries to join the group. The coalition met throughout 1999 and 2000, as credit card issuers rushed to adopt class action waivers and arbitration clauses. Spin-off groups — including a very short-lived cluster called the Class Action Working Group and a loose band of lawyers for credit card issuers, known as the In-house Working Group — also held sessions in 2000 and 2001.

In all, including that initial session Wilmer convened in 1999, members of the credit card industry met 28 times over the course of four years to discuss how to impose and implement mandatory arbitration clauses. By the end of 2001, when Citi adopted the provisions in its agreements with cardholders, mandatory arbitration clauses had become the industry standard.

That mass conversion to mandatory arbitration was not a coincidence — but nor was it a violation of antitrust law, according to a 92-page opinion issued Thursday by U.S. District Judge William Pauley of Manhattan. After 10 years of litigation, culminating with a five-week bench trial last spring, Pauley held that Discover, Citigroup and American Express did not engage in an antitrust conspiracy when they and other credit card issuers adopted antitrust clauses between 1999 and 2001.(Four other issuers previously settled out of the two parallel, injunction-only class actions before Judge Pauley and agreed to remove mandatory arbitration clauses from cardholder agreements.)

Pauley considered the allegations by class counsel at Berger & Montague and Scott + Scott credible enough that he denied the credit card defendants’ summary judgment motions and permitted the two cardholder class actions to proceed to last year’s bench trial. But when he weighed the evidence from the trial, he said in Thursday’s opinion, he concluded that credit card holders hadn’t shown an anticompetitive agreement among the banks to implement arbitration across the industry. “While the extensive record of inter-firm communications among competitors would give any court pause,” he wrote, “this court cannot infer an illegal agreement based on the evidence marshaled at trial.”

5th Amendment trumps 1st in prosecution involving unnamed commenters

Alison Frankel
Apr 9, 2014 21:09 UTC

When an anonymous speaker’s First Amendment rights conflict with a criminal defendant’s right to due process under the Fifth Amendment, which constitutional protection prevails?

There’s actually not a lot of precedent on how to balance those competing constitutional protections, according to a ruling Tuesday by the 5th U.S. Circuit Court of Appeals. The U.S. Supreme Court has gone out of its way to protect unnamed speakers, hearkening back — most recently in its 1995 ruling in McIntyre v. Ohio Elections Commission — to this country’s long tradition of anonymous political speech. On the other hand, the trial judge in the case before the 5th Circuit believed there was a reasonable possibility that the unmasking of two pseudonymous commenters to an online news article would reveal misconduct by federal prosecutors. Tuesday’s opinion left the 5th Circuit with a chance to change its position some day, but for now, the court said, it’s sticking with the trial judge: The Fifth Amendment trumps the First when anonymous online comments are possible evidence of due process violations.

The circumstances of the case that prompted the 5th Circuit’s holding were, to quote the opinion, “extraordinary.” Last June, after a years-long investigation, the former director of the non-profit New Orleans Affordable Homeownership was indicted by a federal grand jury for allegedly accepting kickbacks from contractors her group employed to repair houses damaged by Hurricane Katrina. Two months after the director, Stacey Jackson, was charged, U.S. District Judge Kurt Engelhardt of New Orleans issued a stunning opinion in a different Katrina corruption case against several former New Orleans police officials. Engelhardt vacated their convictions, finding rampant misconduct by a former first assistant and senior litigation counsel in the New Orleans U.S. Attorney’s office. Among their misdeeds: anonymous online comments and blog posts about ongoing investigations, prosecutions and even trials. To call the posts intemperate would be to understate drastically their offensiveness.

Can SAC insider trading target Elan force hedge fund to pay legal fees?

Alison Frankel
Apr 8, 2014 20:57 UTC

Elan Pharmaceuticals believes it was victimized twice over by SAC Capital, the notorious hedge fund now called Point72. The first time was when SAC obtained insider information about unsuccessful trials of the Alzheimer’s drug bapineuzumab and dumped $700 million in shares of the Irish drug company and its drug development partner Wyeth. But to add insult to that injury, Elan had to spend a small fortune, about $1.6 million, in legal fees and costs stemming from the government’s investigation of SAC’s insider trading. That is money SAC should have to pay, according to Elan. With the hedge fund due to be sentenced Thursday by U.S. District Judge Laura Taylor Swain of Manhattan, the pharma company’s lawyers at Reed Smith have submitted a letter asking Swain to recognize Elan as a victim of SAC’s crimes and order the hedge fund to pay it $1.6 million in restitution.

It’s a fascinating request. You probably recall that in a couple of high-profile cases in the recent spate of insider-trading prosecutions, Morgan Stanley and Goldman Sachs won rulings that former employees (in a broad sense of that word) were on the hook for legal fees the banks incurred as a result of the employees’ crimes. In February 2013, U.S. District Judge Jed Rakoff held that under the federal victims’ restitution law, former Goldman director Rajat Gupta owes the bank $6.2 million — the money Goldman laid out to Sullivan & Cromwell to investigate Gupta’s conduct internally and to cooperate with government investigators. Last July, the 2nd U.S. Circuit Court of Appeals affirmed a similar ruling by U.S. District Judge Denise Cote. She had concluded in 2012 that Morgan Stanley was the victim of insider trading by FrontPoint hedge fund manager Chip Skowron, so Skowron was responsible not just for repaying the bank the cost of his own defense but also for restitution of the legal fees Morgan Stanley advanced to other FrontPoint employees.

The 2nd Circuit’s ruling in the Skowron case didn’t leave much doubt that employers can receive restitution as victims for the money they spend to cooperate with government investigations of employees who go on to plead guilty or be convicted. Elan, however, didn’t employ SAC or Mathew Martoma, the former SAC trader who was convicted of trading on inside information about the company. On Monday, in a response to Elan’s letter requesting restitution, SAC’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison said Elan’s theory of restitution is “without precedent.”

Mud-flavored yogurt? Chobani founder, ex-wife wage ugly ownership war

Alison Frankel
Apr 7, 2014 21:16 UTC

For a scant two years, from 1997 to 1999, Hamdi Ulukaya, then a young Turkish immigrant with dreams of a business in Turkish-inspired dairy products, and Ayse Giray, a physician in New York with Turkish roots, were married. Giray believed in and supported Ulukaya’s vision, so much so that even after they were divorced, her family loaned him almost $200,000 in 2002 to keep his inchoate cheese-making business afloat. Ulukaya soon thereafter expanded from feta cheese into Greek yogurt, establishing a company called Chobani with a factory in upstate New York. Last month, Reuters revealed that Chobani is in negotiations to sell a minority stake for $2.5 billion. But Giray and Ulukaya are not jointly celebrating the company’s runaway success. Quite the contrary.

In filings last week in Manhattan state court, these once-friendly exes (or, more accurately their lawyers) exchanged allegations as vicious as those you’d see in the most bitter of custody disputes. Of course, in a way that’s what their litigation is: Giray is suing because she claims Chobani is at least partly her baby.

And she seems perfectly willing to undermine the company to prove it. I can’t imagine that it’s to Giray’s benefit to damage Chobani’s value if, as she claims, she owns a big percentage of the yogurt maker. Nevertheless, she’s claiming not only that Ulukaya deceived two different banks and the U.S. Department of Agriculture in order to obtain his start-up loans, but also that he paid a former employee of rival Greek yogurt maker Fage 30,000 Euros to obtain the recipe Chobani now uses.

Kosher hot dog case presents a real constitutional pickle

Alison Frankel
Apr 4, 2014 22:32 UTC

Who would have guessed that a consumer class action accusing ConAgra of deceiving consumers in the labeling of its Hebrew National hot dogs and salami would implicate two meaty constitutional issues? (Sorry, couldn’t resist.)

As the 8th U.S. Circuit Court of Appeals explained in an opinion Friday, the class action, which contends that ConAgra falsely labels Hebrew National products as 100 percent kosher, presents a question that the 8th Circuit has never before answered: whether the Establishment Clause of the First Amendment precludes federal courts from hearing claims against a secular company just because its labels invoke religious rules. That’s a toughie, according to the 8th Circuit panel — Chief Judge William Riley and Judges Roger Wollman and James Loken, who clearly had no appetite to bite off more than they could chew. (Yes, that was intentional. Sorry again.) The judges opened their discussion of the case by quoting from a 1905 case, Burton v. United States, in which the U.S. Supreme Court said, “It is not the habit of the court to decide questions of a constitutional nature unless absolutely necessary.”

That cardinal rule from 1905 has a corollary, though, according to the 8th Circuit: “If a case may be resolved on easy and settled constitutional grounds, the court should do so instead of deciding the case on difficult and novel constitutional grounds.” In the Hebrew National case, the 8th Circuit hit upon what it considered to be a relatively easy constitutional question, at least compared to the First Amendment issue. The panel found that the consumers suing Hebrew National didn’t have standing in federal court under Article III of the U.S. Constitution because they could not show they’d actually been injured.

Can banks force clients to litigate, not arbitrate?

Alison Frankel
Apr 3, 2014 20:38 UTC

If you are a customer of a big bank — let’s say a merchant unhappy about the fees you’re being charged to process credit card transactions — good luck trying to bring claims in federal court when you’re subject to an arbitration provision. As you probably recall, in last term’s opinion in American Express v. Italian Colors, the U.S. Supreme Court continued its genuflection at the altar of the Federal Arbitration Act, holding definitively that if you’ve signed an agreement requiring you to arbitrate your claims, you’re stuck with it even if you can’t afford to vindicate your statutory rights via individual arbitration.

But what if you’re a bank customer who wants to go to arbitration — and, in a weird role-reversal, the bank is insisting that you must instead bring a federal district court suit? Will courts show the same deference to arbitration when a plaintiff, rather than a defendant, is invoking the right to arbitrate and not litigate?

On Friday, the 2nd Circuit Court of Appeals will hear a rare tandem argument in two cases that present the question of whether bank clients have the right to arbitrate their claims even though they’ve signed contracts with forum selection clauses directing disputes to federal court. Believe it or not, the 2nd Circuit will be the third federal appellate court to answer this question, which has divided its predecessors. In January 2013, the 4th Circuit ruled that a UBS client may proceed to arbitration, but on Friday, the 9th Circuit held that a Goldman Sachs customer who agreed to a nearly identical forum selection clause must sue in federal court. To add to the confusion, the 9th Circuit panel was split, which led the majority to call the case “a close question.”

Sotheby’s shareholders defend activist investors in suit vs board

Alison Frankel
Apr 2, 2014 20:13 UTC

The heat surrounding so-called activist investors — hedge funds that buy up big chunks of a company’s stock, then leverage their position to mount proxy campaigns or otherwise force boards to change the way the company is managed — could hardly be more intense than it is now. Well, okay, maybe there would be even more controversy if Michael Lewis wrote a book about a genius upstart who defied accepted deal conventions and revolutionized corporate takeover battles. But putting aside the Wall Street tizzy inspired by this week’s publication of Lewis’s new book about high-frequency trading, the deal world’s favorite topic remains activist investors like Carl Icahn, Paul Singer, William Ackman and Dan Loeb.

Just in the last two weeks, Chief Justice Leo Strine of the Delaware Supreme Court published his extraordinary essay on shareholder activism at the Columbia Law Review, the Wall Street Journal did a fabulous story on hedge funds tipping each other off about their targets, and Martin Lipton of Wachtell, Lipton, Rosen & Katz — whose avowed disdain for short-term investors has recently manifested in litigation with Icahn — revealed at the Tulane M&A fest that there are actually a couple of activist funds he respects. (He said he wouldn’t go so far as to say he “likes” them, though.)

A new shareholder derivative complaint against the board of the auction house Sotheby’s is the latest contribution to the furor over activist investors. Two of the most successful shareholder firms in the game, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer, filed the class action Tuesday night in Delaware Chancery Court on behalf of St. Louis’s employee pension fund. The suit squarely aligns shareholders with activist investor Loeb and his Third Point hedge fund, which owns nearly 10 percent of Sotheby’s stock and has launched a proxy contest for three board seats at the auction house.

D.C. judge wants DOJ to justify ‘gag orders’ on Twitter, Yahoo

Alison Frankel
Apr 1, 2014 20:58 UTC

For the last two weeks, U.S. Magistrate Judge John Facciola of Washington, D.C., has been on a one-man campaign to hold the government accountable for secret subpoenas to Internet companies.

On March 24, Facciola issued unusual orders in two cases, one involving Twitter and the other Yahoo. The Justice Department had applied for court orders under the Electronic Communication Privacy Act to bar Twitter and Yahoo from disclosing that they had received grand jury subpoenas for customer information. Those non-disclosure applications are routine, but Facciola decided he wasn’t going to grant the government’s requests unless Twitter and Yahoo had an opportunity to be heard. He ordered the government to file a redacted version of its applications on the public docket and asked Twitter and Yahoo to inform him whether they intended to file briefs in response.

The government immediately went over Facciola’s head, appealing his orders to Chief Judge Richard Roberts of Washington federal district court. Facciola’s response? He refused to grant a Justice Department non-disclosure application in a third case, also involving a grand jury subpoena for Twitter records. And this time, the magistrate wrote a detailed, citation-filled opinion explaining why he believes Twitter has a constitutional right under the First and Fifth Amendments to be heard before he can issue what he called a “gag order.” Facciola once again instructed the Justice Department to file a public version of its non-disclosure application and invited Twitter to brief him on its view of its free speech rights.

New yen Libor ruling is bad omen for rate-rigging antitrust claims

Alison Frankel
Mar 31, 2014 21:12 UTC

One of the most controversial and consequential antitrust rulings of the last few years came last March, when U.S. District Judge Naomi Reice Buchwald of Manhattan tossed class action claims under the Sherman Act against the banks on the London Interbank Offered Rate panel. Buchwald acknowledged that her holding was “incongruous,” considering that some of the bank defendants had already admitted to colluding to manipulate the benchmark Libor rate, which was used to set interest rates for trillions of dollars of securities. But the judge was convinced the class couldn’t show any antitrust injury. The Libor rate-setting process (in which individual banks report the interest rates they’re being charged to borrow, which are then averaged and reported daily) was cooperative, not competitive, she said. So even if the banks conspired to rig Libor, Buchwald held, any harm they caused was not from reduced competition — and since federal and state antitrust laws are intended to target conduct that impedes competition, they don’t apply to Libor manipulation.

The ruling shocked antitrust plaintiffs firms, which had sunk enormous expense into expert analysis of the alleged Libor conspiracy. They asked Buchwald for leave to file an interlocutory appeal of her ruling to the 2nd Circuit Court of Appeals. She refused (and pretty angrily, to boot), which means that it will probably be years before the 2nd Circuit gets to consider the question of whether collusive rate-rigging is anti-competitive. After Buchwald’s ruling, some Libor claimants, including the Federal Deposit Insurance Corporation in its recent suit against Libor panel banks, made the decision to assert breach-of-contract claims as their main cause of action. But that’s only possible when plaintiffs engaged in Libor-pegged transactions directly with the banks. Other Libor plaintiffs, like the National Credit Union Administration, are counting on the 2nd Circuit to overturn Buchwald’s interpretation of antitrust injury.

That hope looks a bit more remote after a ruling Friday by a Buchwald colleague, U.S. District Judge George Daniels, who is overseeing a class action alleging manipulation of two other benchmark interest rates, the Euroyen Tokyo Interbank Offered Rate (or Tibor) and the yen Libor. Daniels agreed completely with Buchwald’s analysis of antitrust injury, endorsing her controversial holding that collusive rate manipulation doesn’t amount to a horizontal antitrust conspiracy. That’s bad enough for plaintiffs who are hoping to revive Libor antitrust claims (which, of course, carry treble damages). But Daniels also rested his antitrust holding in part on the very 2nd Circuit case plaintiffs are relying upon to refute Buchwald. When a judge turns your own citation against you, that’s got to be discouraging. (I should note that Daniels kept alive class claims based on the Commodity Exchange Act, as did Buchwald in the U.S. dollar Libor litigation.)

First Amendment protects Internet search results: N.Y. judge

Alison Frankel
Mar 28, 2014 17:34 UTC

U.S. District Judge Jesse Furman of Manhattan grabbed the chance Thursday to set precedent on a question that has received surprisingly little attention in the courts: Does the First Amendment’s protection of free speech extend to the results of Internet searches? Furman was clearly captivated by the issue as an intellectual challenge, delving into the vigorous academic discussion of the First Amendment and Internet search even deeper than the two sides in the case, the Chinese search engine Baidu and the activists who sued the site for supposedly violating their civil rights by blocking their pro-democracy works from appearing in search results. In a supersmart opinion that Furman seems to have written to be widely read, the judge concluded that when search engines exercise editorial judgment – even if that judgment is just algorithms that determine how results will be listed – they are entitled to free speech protection.

That protection, he said, is quite broad in scope. “There is a strong argument to be made that the First Amendment fully immunizes search-engine results from most, if not all, kinds of civil liability and government regulation,” Furman wrote. “The central purpose of a search engine is to retrieve relevant information from the vast universe of data on the Internet and to organize it in a way that would be most helpful to the searcher. In doing so, search engines inevitably make editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information (for example, on the first page of the search results or later).”

The judge said U.S. Supreme Court precedent on the First Amendment “all but compels” his conclusion. The plaintiffs in the Baidu case are New York residents accusing the search engine of suppressing their political speech at the behest of the Chinese government. Those allegations, Furman wrote, necessarily imply that Baidu is exercising editorial judgment. So the search engine, he said, is no different from a newspaper editor deciding what stories to run, a guidebook writer picking which events to highlight or Matt Drudge making judgments “about which stories to link and how prominently to feature them.” And though it might seem counterintuitive that the right of free speech would protect editorial judgments to squelch free speech, Furman said that’s the point of the First Amendment.