Opinion

Alison Frankel

Has Supreme Court lost its zeal to curb consumer class actions?

Alison Frankel
Mar 11, 2014 19:35 UTC

On Monday, the U.S. Supreme Court declined to grant review to two small Nebraska banks facing class action allegations that they failed to post stickers on ATM machines to alert users about add-on fees. That might not seem like a surprise, except that the certiorari petition by the banks’ counsel at Mayer Brown raised a question that the Supreme Court has previously struggled with: whether class action plaintiffs asserting federal laws that provide statutory damages have constitutional standing to sue even if they haven’t suffered any actual injury. The justices heard a different case posing the exact same question in 2011 in First American Financial v. Edwards, but didn’t resolve the issue because they dismissed the appeal on the last day of the term in June 2012. Class action opponents like the U.S. Chamber of Commerce, the Washington Legal Foundation and the Association of Credit and Collection Professionals were hoping that the Nebraska banks’ case was a new chance to end litigation by uninjured plaintiffs whose small, individual statutory damages claims turn into a big nuisance when they’re accumulated in class actions.

Monday’s cert denial is the second time in two weeks that the justices have decided to sidestep thorny consumer class action issues. On Feb. 24, as you probably know, the court refused to grant certiorari to Sears and Whirlpool, which had argued that the 6th and 7th Circuit Courts of Appeal erroneously certified classes of washing machine owners whose appliances have an alleged tendency to develop a moldy smell. The moldy washer cert petitions were the subject of a vigorous public relations campaign by business groups that contended the vast classes, consisting mostly of owners whose machines never developed a moldy smell, perfectly exemplified the perniciousness of class actions. The justices were clearly interested in the cases, since they discussed the Sears and Whirlpool appeals at least three conferences. But even though the 6th and 7th Circuit certifications came on remand from the Supreme Court, the justices ultimately decided not to accept the invitation from Sears, Whirlpool and their influential amici to remake the rules of consumer class actions.

So: two big opportunities to curb classwide consumer cases and two big punts by a Supreme Court that has in recent years shown no hesitation to limit the litigation rights of ordinary people. (A few prime examples from a long list: American Express v. Italian Colors, AT&T Mobility v. Concepcion, Wal-Mart v. Dukes.) Are we witnessing the dawn of a new era at the Supreme Court?

I posed that question to Deepak Gupta of Gupta Beck, who wrote the brief in opposition to the Nebraska banks’ cert petition, in the case the justices declined to review on Monday. “Not so fast,” Gupta told me. “I’d say to class action lawyers, ‘Don’t think you’re out of the woods yet.’”

Last term, Gupta said, the court granted cert in some class action cases that turned out to be awkward vehicles for the issues it wanted to consider. According to Gupta, Genesis Healthcare v. Symczyk, which presented the question of whether defendants can moot class actions by settling with name plaintiffs, and Comcast v. Behrend, which asked whether class action plaintiffs must present a classwide theory of damages to win certification, were factually messy cases that prompted angry dissents about the court’s departures from its own procedures. The recent cert denials, Gupta said, may indicate that the justices have resolved to pick their battles more carefully.

Delaware ‘abetting’ ruling v. RBC should scare M&A advisors

Alison Frankel
Mar 10, 2014 21:19 UTC

If there were any remaining shreds of doubt that Delaware Chancery Court has come to regard financial advisors in M&A deals with considerable mistrust, they ought to be erased by Vice-Chancellor Travis Laster‘s 92-page decision Friday in a shareholder class action stemming from Warburg Pincus’s $17.25-per-share acquisition of the ambulance company Rural/Metro.

Rural/Metro’s directors settled the case last year for $6.5 million, which meant that when shareholder lawyers from Robbins Geller Rudman & Dowd and Bouchard, Margules & Friedlander went to trial against Royal Bank of Canada for aiding and abetting the board’s breach of duty, they had to show that RBC induced directors to make unreasonable decisions about selling the company. That made the case tougher for shareholders, but they nevertheless convinced Laster that RBC was conflicted by its hope of earning big financing fees from Warburg in this deal and from other banks in a related transaction. The judge concluded that RBC is indeed liable for aiding and abetting the board’s breach – a precedent-setting opinion that means the litigation risk to financial advisors in M&A deals just got very real.

Laster’s RBC decision is the logical extension of a couple of recent Chancery Court rulings involving conflicted financial advisors. In 2011, Laster enjoined the acquisition of Del Monte by a private equity consortium, finding that Del Monte’s advisor, Barclays, was secretly receiving financing fees from the consortium. Barclays later settled with Del Monte shareholders for $90 million. A year after the Del Monte ruling, Chancellor Leo Strine (now Delaware’s chief justice) issued a scathing opinion describing Goldman Sachs’s “furtive” and “troubling” decision to advise El Paso Corporation in its sale to Kinder Morgan, even though Goldman held a big equity stake in Kinder. Goldman eventually agreed to waive more than $20 million in fees and legal costs as part of Kinder Morgan’s $110 million settlement.

How Texas oil company won $319 million ‘common law’ partnership verdict

Alison Frankel
Mar 7, 2014 22:42 UTC

The oil and gas industry was stunned this week a $319 million verdict for Energy Transfer Partners, courtesy of a state court jury in Dallas, Texas. Jurors agreed with ETP’s lawyers at Lynn Tillotson Pinker & Cox that ETP and Enterprise Products had a binding agreement to develop a pipeline to carry crude oil from Oklahoma to refineries on the Gulf of Mexico, and that Enterprise breached the agreement when it decided instead to hook up with a Canadian pipeline company called Enbridge.

That might seem like a straightforward determination – except that the letter of intent between ETP and Enterprise included language that specifically said their deal wasn’t binding unless there was a formal term sheet and their respective boards approved the agreement. Neither of those things happened.

So how did Enterprise and its lawyers at Beck Redden and Sayles Werbner wind up on the wrong side of a $319 million verdict? Because the judge in the case, Emily Tobolowsky, rejected their summary judgment argument that as a matter of Texas contract law, preconditions must be satisfied to create binding partnership obligations. Judge Tobolowsky’s denial of Enterprise’s summary judgment motion, which was not accompanied by an opinion, meant that ETP and lead trial counsel Michael Lynn could ask jurors to judge the relationship between ETP and Enterprise just as they’d judge a common law marriage. ETP told jurors that it didn’t matter what the formal paperwork said if Enterprise acted as though it were partnered with ETP. To emphasize his client’s “if it walks like a duck” theme, Lynn even showed the jury a poster of a duck holding a sign that said, “I am not a partner.”

Unprecedented Dewey charges put law firms on notice

Alison Frankel
Mar 6, 2014 23:50 UTC

Steven Davis, the onetime LeBoeuf Lamb chairman who engineered his firm’s 2007 merger with Dewey Ballantine, then presided over the titanic collapse of Dewey & LeBoeuf in 2012, is now an accused felon, along with Davis’s longtime deputy, Stephen DiCarmine, and Dewey’s former CFO Joel Sanders. The three criminal defendants and two other former Dewey financial professionals have also been named in an enforcement action by the Securities and Exchange Commission.

The New York state court indictment and the SEC complaint outline roughly the same allegations: When Dewey’s revenue came up short in 2008, the firm embarked on a disastrous course of accounting fraud that continued through its $150 million private placement in 2010 and, ultimately, its demise in 2012.

These are truly ruinous allegations. According to the New York District Attorney’s office and the SEC, Davis, DiCarmine and Dewey’s non-lawyer finance employees defrauded their bank lenders and the insurance companies that invested in the law firm’s private placement by various stratagems to “cook the books,” as CFO Sanders described Dewey’s accounting in an email to the COO in December 2008.

At Halliburton argument, justices show little appetite for killing Basic

Alison Frankel
Mar 5, 2014 20:25 UTC

After oral arguments Wednesday morning at the U.S. Supreme Court in Halliburton v. Erica P. John Fund, I ran into a few securities class action plaintiffs lawyers in the court’s lobby, at the statue of Chief Justice John Marshall. They were looking jaunty indeed. The consensus in their little group was that the justices showed little inclination to toss out the 1988 precedent that has been the foundation of the megabillion-dollar securities class action industry. They regarded Wednesday’s argument as a hopeful portent that classwide securities fraud litigation is likely to survive the Supreme Court’s re-examination of Basic v. Levinson.

I have to agree. From the questions posed to Halliburton counsel Aaron Streett of Baker Botts and EPJ Fund lawyer David Boies of Boies, Schiller & Flexner, the Supreme Court seems to be searching for a way to require investors to demonstrate the price impact of alleged corporate misrepresentations in order to win class certification. That would be a new and different burden for the securities class action bar, which, under Basic’s fraud-on-the-market theory, simply had to show that shares traded in an efficient market in order to invoke the presumption that investors relied on corporate misstatements. To establish price impact, plaintiffs would have to hire experts to conduct event studies analyzing the market effect of particular misrepresentations. But such event studies are already common in securities class action litigation, as both sides acknowledged to the justices. So a new price impact requirement would leave the securities class action industry more or less intact. “We can live with that,” one plaintiffs lawyer told me.

If oral argument is a reliable predictor of the Supreme Court’s ultimate direction – a dicey proposition, of course – all of the lawyers and economic experts who worried they’d be scrabbling for work if the court overruled Basic can relax a bit. In fact, if the justices figure out some way to make price impact part of the class certification process, economics consultants could actually emerge from the Supreme Court’s scrutiny of Basic with more securities fraud business than ever.

As Basic hangs in the balance, next SCOTUS securities case looms

Alison Frankel
Mar 4, 2014 19:28 UTC

On Wednesday, the U.S. Supreme Court will hear oral arguments in Halliburton v. Erica P. John Fund, the most momentous securities case of the last quarter century. When this term ends in June, we’ll know whether the fraud-on-the-market theory that the Supreme Court codified in the 1988 case Basic v. Levinson will remain intact as the foundation of the securities class action industry or whether shareholders will lose the leverage of classwide damages claims for supposed fraud under the Exchange Act of 1934. I’ve been saying it for months: Untold billions of dollars hang on the justices’ determination in the Halliburton case.

The stakes are admittedly not quite as high in Omnicare v. Laborers District Council Construction Industry Pension, which the justices have just agreed to hear next term. Omnicare presents the question of whether plaintiffs asserting claims under Section 11 of the Securities Act of 1933 must only show that defendants made objectively false statements in offering documents – as the 6th Circuit Court of Appeals held in the Omnicare case – or must also show that defendants didn’t believe the supposedly false statements at the time they were made, as at least two other federal circuits have concluded. Section 11 class actions, as you know, aren’t historically as prevalent as Exchange Act fraud class actions. But if the Supreme Court overturns Basic v. Levinson, Securities Act claims will be one of the few remaining avenues for shareholders who want to sue through class actions. The justices’ reasoning on the standard of proof will go a long way toward determining how big a threat these cases present to issuers – and to their underwriters, auditors and lawyers.

To set that standard, the Supreme Court will have to resolve apparent tension between two of its own precedents. In the court’s 1991 ruling in Virginia Bancshares v. Sandberg, the majority considered “the actionability per se of statements of reasons, opinions or belief” under Section 14 of the Exchange Act. Because that sort of statement “purports to express what is consciously on the speaker’s mind,” the Supreme Court said, it made sense to limit any discussion of liability to misstatements that did not reflect the speakers’ true beliefs and opinions. According to Omnicare’s petition for certiorari, the 2nd, 3rd and 9th Circuits have all relied on that holding in Virginia Bancshares to conclude that even under Section 11 of the Securities Act – which calls for a more expansive view of liability than the Exchange Act provision at issue in the Virginia Bancshares case – defendants can only be sued for statements that depart from their actual opinions.

Brutal accusations fly in fight to lead juicy M&A derivative case

Alison Frankel
Feb 28, 2014 23:05 UTC

By Alison Frankel

Feb 28 (Reuters) – If the allegations of the minority shareholders of a small Ohio property insurer called National Interstate are true, the conduct of National Interstate’s majority owner, Great American Insurance, is egregious enough to make even Charles Ergen blush. A subsidiary of the insurance megalith American Financial, Great American proposed in early February a surprise $28-per-share tender offer to acquire the 48 percent stake in National Interstate that it doesn’t already own. Even its own financial advisor, Duff & Phelps, considered that price inadequate, as did the four independent board members of National Interstate, who urged Great American to establish a special committee to negotiate a fair price. That suggestion went nowhere, but earlier this month Great American and American Financial boosted the bid to $30 – so long as the independent directors agreed to support the sweetened offer. They protested to no avail: Six National Interstate directors in the sway of Great American and American Financial voted to announce a neutral position on the tender offer, according to an account of the dispute by The Wall Street Journal’s Liz Hoffman, and the bid went public.

In the tumultuous week that followed the tender offer’s announcement, Duff & Phelps resigned as Great American’s financial advisor and one of the independent directors, National Interstate founder Alan Spachman, filed an extremely rare denunciation of the bid with the Securities and Exchange Commission. Spachman, who owns about 9 percent of National Interstate’s shares, called Great American’s tender offer a “brazen attempt by a majority shareholder to force minority shareholders of the company to sell their shares at a price that is unfairly low, pursuant to a flawed process orchestrated by the majority shareholder, on terms which are designed to be extremely coercive and with inadequate disclosure to the public holders of shares.”

I am sure that when the time comes, Great American, American Financial and their lawyers – at Keating Muething & Klekamp; Calfee, Halter & Griswold and Day Ketterer – will explain why the tender offer is perfectly fair and the process that produced it is beyond reproach, but it’s not entirely clear where they will ultimately have the opportunity to do so. Will it be in Cincinnati’s Hamilton County, where the plaintiffs firm Wolf Popper filed a shareholder derivative class action on Feb. 11, before National Interstate’s board even took a vote on the offer? Or will it be in Summit County Court in Akron, Ohio, where National Interstate is based and where Labaton Sucharow and Friedman Oster filed their shareholder complaint on Feb. 18?

In new amicus brief, SEC wants to protect whistleblowers – and itself

Alison Frankel
Feb 21, 2014 19:30 UTC

In 2012 and 2013, when the 5th Circuit Court of Appeals was considering the question of whether Dodd-Frank’s anti-retaliation provisions protect whistleblowers who report their concerns internally, rather than to the Securities and Exchange Commission, the SEC stayed out of the fray. The case, Khaled Asadi v. G.E. Energy, centered on the tension between two sections of Dodd-Frank, one of which seemed to define whistleblowers only as those who tip the SEC about potential misconduct by their employers. In its Dodd-Frank implementation process, the SEC attempted to resolve the tension, issuing rules to clarify that whistleblowers are protected from retaliation regardless of whether they report concerns to the agency or up the chain of command through internal compliance programs, as the older Sarbanes-Oxley Act had encouraged. The SEC’s rules have convinced most of the federal trial judges who have considered the scope of Dodd-Frank whistleblower protections; courts have typically cited the deference due to the agency’s interpretation of a law it is responsible for enforcing.

Not the 5th Circuit, however. Last July, the appeals court dismissed Asadi’s retaliation suit against G.E., holding that he is not a Dodd-Frank whistleblower because he first informed his boss, and not the SEC, about possible Foreign Corrupt Practices Act violations in G.E. Energy’s dealings with Iraqi officials. The 5th Circuit said it didn’t need to reach the SEC’s interpretation because the statutory language of Dodd-Frank is unambiguous: Whistleblowers are defined as those who report suspicions to the SEC.

The same issue of the scope of protection for whistleblowers who have reported internally is now before the 2nd Circuit, in a Dodd-Frank retaliation case brought by Meng-Lin Liu, a former Taiwanese compliance officer for a Chinese subsidiary of Siemens. And this time, the SEC isn’t taking any chances that the appeals court will ignore the agency’s prerogatives. On Thursday, the SEC filed an amicus brief explaining its position – and explaining why the courts owe deference to the agency’s statutory interpretation.

Aereo’s future rests on Copyright Act’s definition of ‘public’

Alison Frankel
Feb 20, 2014 23:38 UTC

A ruling Wednesday by a federal judge in Salt Lake City, prohibiting the television streaming service Aereo from transmitting intercepted broadcasts from its antennas in Utah to subscribers’ Internet devices, lays out precisely the question that the U.S. Supreme Court will confront in April in a separate challenge to Aereo’s business model. Are Aereo and similar services content hijackers taking advantage of the hard work of those who produce and transmit television shows? Or are they mere facilitators, providing the technical means for individual viewers to watch private transmissions of TV shows? The answer to that question will lie in how the Supreme Court interprets a single clause of the Copyright Act, in a case that will test Congress’s ability to write laws that anticipate technological change.

In 1976, when lawmakers updated the Copyright Act of 1909, they closed a loophole that had opened with the advent of cable television. In a couple of rulings preceding the amendment, the Supreme Court found that community television antenna systems, as cable networks were then known, did not infringe broadcasters’ copyrights when they set up antennas to intercept transmissions of television shows and then relayed broadcasters’ shows to paying customers. The 1976 version of the Copyright Act made that practice illegal through a provision known as the Transmit Clause, which said that it’s a breach of copyright “to transmit or otherwise communicate a performance or display of the work…to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”

When the law was passed, Congress obviously had no idea what the television industry would look like 40 years later, since the Internet in 1976 was just a rudimentary network of mainframe computers. But the Transmit Clause seemed to foresee changes in technology with the phrase “by means of any device or process.” In 1976, those devices were antennas erected by cable networks, which realized after the new law was enacted that they had no choice but to agree to license TV content from copyright owners. Now it’s possible, of course, to stream shows almost instantaneously through teensy antennas to Internet devices, but according to broadcasters and copyright holders, the technological advances of the last 40 years haven’t undercut the power of the Transmit Clause. They argue that Congress specifically left room in the provision to expand copyright protection to cover infringing transmissions via devices and processes unknown at the time.

In new SCOTUS bid, Argentina hedges bet on sovereign immunity

Alison Frankel
Feb 19, 2014 21:34 UTC

On Tuesday, the Republic of Argentina asked the justices of the U.S. Supreme Court to grant review of a pair of rulings by the 2nd Circuit Court of Appeals that, according to Argentina’s brief, have put millions of Argentineans on the brink of economic catastrophe. The 2nd Circuit decisions, as you may recall, held that under the pari passu, or equal footing, clauses of defaulted Argentine bonds, Argentina may not make payments to bondholders who participated in two rounds of restructuring before it pays more than $1 billion to holdout distressed debt investors that refused to exchange their defaulted bonds. In the cert petition, Argentina’s new Supreme Court counsel, Paul Clement of Bancroft, reprises arguments that failed to sway U.S. District Judge Thomas Griesa and the 2nd Circuit when Cleary Gottlieb Steen & Hamilton previously asserted them. But Argentina is counting on the Supreme Court’s proven interest in the boundaries of sovereign immunity, and, if that doesn’t do the trick, in the court’s federalism concerns.

In fact, the cert petition presents federalism as the first issue for the justices, asserting an extremely unusual request for the U.S. Supreme Court to refer a question to a state high court. The 2nd Circuit, you’ll recall, agreed to block Argentina’s payments to exchange bondholders based on the appellate court’s interpretation of the pari passu provisions in the country’s sovereign debt offerings. Argentina contends not only that the federal appeals court reached the wrong conclusions, but that it exceeded its authority when it did. The interpretation of the pari passu provision is of surpassing interest to New York because it will impact the state’s status as a financial center, the brief said. And no New York state court has issued a decision on the meaning of an equal footing clause in a sovereign debt contract.

So according to Argentina, the justices should certify to the New York Court of Appeals the question of whether a foreign sovereign breaches pari passu provisions when it pays interest to holders of performing debt before paying holders of defaulted bonds. As precedent for this unusual maneuver, the brief cites the justices’ 2013 referral in the abortion pill case Cline v. Oklahoma Coalition for Reproductive Justice, but in that case, the U.S. court was asking Oklahoma justices to clarify a recently passed state law, not to interpret a contract provision.

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