Alison Frankel

Why (most) consumer data breach class actions vs Target are doomed

Alison Frankel
Jan 13, 2014 20:38 UTC

Who doesn’t empathize with the 70 million Target customers whose private information was supposedly hacked? No one likes to worry about identity theft and impaired credit ratings, the odds of which, according to Reuters, drastically increase for data breach victims. But that doesn’t mean Target customers have a cause of action in federal court. I don’t see how the vast majority of hacked Target shoppers can get past the threshold constitutional requirement that they show an actual injury, at least under the U.S. Supreme Court’s 2013 definition of injury in Clapper v. Amnesty International.

I’m not saying Target faces no litigation exposure for the data breach. Some of the new cases against the company are class actions by financial institutions that had to bear the cost of notifying customers about compromised debit cards, closing customer accounts and reissuing new cards. Those cases involve real-money claims that will be tough for the company to fend off with threshold defenses. So too will be suits by state attorneys general making claims in state court under state consumer protection laws (assuming, of course, that the Supreme Court does not hold that state AG suits have to be litigated in federal court in this term’s Mississippi v. AU Optronics case). And depending on the facts that emerge about Target’s disclosure decisions, Target shareholders may have viable class action claims that the company engaged in misrepresentation-by-omission.

Customers, however, are a different story, thanks to what I predict will be a fatal intersection between the 2013 Clapper decision and the Class Action Fairness Act.

CAFA, as the class action law is known, requires that class actions involving more than 100 people and claims of more than $5 million be litigated in federal court, even if they assert only state laws. Target will almost certainly be able to remove all of the consumer class actions stemming from the data breach to federal court. It’s also a near certainty that the suits will be consolidated into a multidistrict litigation, in which a single federal judge will decide pretrial motions. Target’s first substantive motion in the consolidated litigation, you can be sure, will be an argument that the privacy breach cases must be dismissed because consumers do not have standing, under Article III of the U.S. Constitution, to sue in federal court because they can’t show they’ve been injured.

That’s where the Clapper decision comes in. As I’ve explained in previous blog posts, the Clapper case involved allegations by human rights groups and public interest lawyers claiming that the National Security Agency’s warrantless wiretapping program violated their First and Fourth Amendment rights. The Supreme Court held that the human rights advocates did not have standing because they couldn’t show their communications with terrorism suspects were actually intercepted, only that they might have been. (That finding came before Edward Snowden’s revelations about the extent of NSA wiretapping.) The majority opinion in Clapper, written by Justice Samuel Alito, said that standing requirements can be met only by showing actual harm or “certainly impending” injury. Alito also said that plaintiffs can’t establish standing by spending money to ward off a feared injury. “If the law were otherwise, an enterprising plaintiff would be able to secure a lower standard for Article III standing simply by making an expenditure based on a non-paranoid fear,” he wrote. “(Plaintiffs) cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending.”

Dow Jones chooses weak weapon in suit vs news aggregator Ransquawk

Alison Frankel
Jan 10, 2014 22:41 UTC

Like most creators of news content – those of us who used to be known as “reporters” – I worry a lot about the value of information. Unless information consumers – those of you who used to be called “readers” – won’t pay for the content we provide, news organizations can’t make enough money to keep our owners happy. The journalism business is now in the slow and painful process of figuring out how to convince readers that news is worth paying for.

Our foes, of course, are businesses that undermine the value of content by free-riding on the hard work of journalists. You know what I’m talking about: data scrapers and aggregators that gobble up and regurgitate news stories produced by reporters employed elsewhere. These free-riders can charge less for content than journalism outfits because aggregators don’t have to bother with the expense of actually finding things out or crafting and editing stories. As the Associated Press wrote last year in a summary judgment brief in its copyright and misappropriation case against the news aggregator Meltwater, content piracy has sent the news industry into “a period of crisis, with numerous news publications folding or struggling with significantly reduced staffs.”

So you’d think it would be in the best interests of a news organization to throw everything it’s got at a data scraper it believes to be profiting from the hijacking of its work, right? That’s why I can’t figure out why Dow Jones, publisher of The Wall Street Journal, is only asserting “hot news” misappropriation and tortious interference – and not also copyright infringement – in its newly filed complaint against the financial news aggregator Real Time Analysis & News, better known as Ransquawk.

Too late for MBS investors to sue in N.Y. state? Try federal court!

Alison Frankel
Jan 9, 2014 20:55 UTC

We are just beginning to witness the impact of the ruling last month by the New York State Appellate Division, First Department, that the six-year statute of limitations for breach-of-contract claims based on mortgage-backed securities begins to run on the securities’ closing date. As you surely recall, a unanimous state appeals court flatly rejected contrary reasoning by State Supreme Court Justice Shirley Kornreich, who had ruled that the breach in MBS contracts occurs not at the moment the deal closes but when the issuer refuses an MBS trustee’s demand for the repurchase of underlying mortgages that don’t live up to the issuer’s representations and warranties. Kornreich’s interpretation would have permitted MBS mortgage repurchase, or put-back, claims to be filed throughout the life of the securities. Instead, the appeals court essentially capped put-back exposure for MBS issuers. It’s only been a couple of weeks since the appellate ruling, but as the New York Commercial Litigation Insider reported Wednesday, state-court judges have already begun tossing mortgage repurchase cases filed more than six years after the MBS closing date.

That’s why a one-paragraph, handwritten order Tuesday by U.S. District Judge Alvin Hellerstein of Manhattan raises such intriguing possibilities.

Judge Hellerstein is presiding over a breach-of-contract suit by MBS trustee Deutsche Bank against MBS issuer WMC Mortgage, a now-defunct General Electric mortgage originator. On Dec. 17 – two days before the New York state appellate ruling on the statute of limitations – Hellerstein denied a motion by WMC’s lawyers at Jenner & Block to dismiss the case on timeliness grounds. The federal judge agreed with his state-court colleague Kornreich that the breach of an MBS contract occurs when the issuer refuses to cure false representations and warranties by repurchasing deficient underlying mortgages. After the state court held otherwise on Dec. 19, the trustee’s counsel, Ropes & Gray, sent Hellerstein a letter asserting that he need not reconsider his Dec. 17 finding because he’s not bound by the decision of an intermediate state appeals court.

FDA punts again on GMO labeling, in boon to class action plaintiffs

Alison Frankel
Jan 8, 2014 23:04 UTC

A couple months back, I told you that labeling of food containing genetically modified ingredients could be one of the rare issues in which private litigation has more impact than federal regulation on industry practices. That prospect has become more likely than ever, thanks to a letter that the Food and Drug Administration sent Monday to three federal judges overseeing consumer class action claims involving food with bio-engineered ingredients.

Consumers have filed more than 60 class actions across the country in which they claim to have been deceived by labels that described food containing genetically modified ingredients as “natural” or “all natural.” In at least three of those cases, as I discussed in a post last October, federal judges denied defense motions under the primary jurisdiction doctrine to stay the class actions until the Food and Drug Administration issues binding policy on the labeling of genetically modified ingredients. Those judges all said there was no point in holding up the class actions in the hope that the FDA would suddenly come up with a hard-and-fast answer to a question it’s actually been dodging since 1992.

Three other judges, however, did halt class actions in order to ask the FDA for guidance. They got it on Monday: The agency wrote to judges overseeing cases against Campbell Soup, General Mills and Gruma Corp (a maker of corn tortillas) to inform them that it would not be issuing an administrative decision on the labeling of bio-engineered foods in response to the judges’ requests. If the agency were to somehow amend its existing policy – which does not formally define the term “natural” but prohibits such labeling for food containing an unexpected artificial or synthetic ingredient – “we would likely embark on a public process, such as issuing a regulation or formal guidance, in order to determine whether to make such a change; we would not do so in the context of litigation between private parties.”

New Delaware Supreme Court nominee Strine speaks! (Well, sort of)

Alison Frankel
Jan 8, 2014 21:03 UTC

On Wednesday, Delaware Governor Jack Markell nominated Chancellor Leo Strine of Chancery Court to become chief justice of the state’s Supreme Court. Assuming Strine’s nomination is approved, Chancery Court is going to be a much less colorful place. Strine is a legal mastermind – with an unpredictable and outspoken judicial demeanor. Occasionally, his off-tangent courtroom riffs have landed him in trouble. In 2012, for instance, Strine said he regretted comments he made during a hearing involving fashion entrepreneur Tory Burch in which he asked her attorney if Burch is Jewish and compared her dispute with her former husband to a “drunken WASP-fest.” Strine was also gently chided last year by his future colleagues on the Delaware Supreme Court for using judicial opinions to express his “world views.”

My Reuters colleague Tom Hals has been covering Strine in court for years. Unfortunately, the chancellor has repeatedly declined to sit down for a formal interview with Reuters. So to celebrate his nomination, we’ve constructed an imaginary Q&A. Well, partly imaginary. We’ve made up the questions, but all of Strine’s “answers” are verbatim quotes – albeit out of context – from his courtroom comments or opinions.

Reuters: You’re well known for your work as a judge. But tell us a bit about you as a person.

Halliburton alert! New briefs argue Congress never endorsed Basic

Alison Frankel
Jan 7, 2014 20:47 UTC

Last February, when Chief Justice John Roberts and Justice Samuel Alito of the U.S. Supreme Court sided with the court’s liberal wing in Amgen v. Connecticut Retirement Plans, they joined an opinion that left intact the standard for certification of a class of securities fraud plaintiffs. Amgen, as you probably recall, had asked the court to impose a requirement that shareholders prove the materiality of supposed corporate misrepresentations in order to win class certification. The majority refused, in a decision written by Justice Ruth Ginsburg. Among other things, Justice Ginsburg said that if Congress had wanted to tinker with the Supreme Court’s 1988 precedent on securities class certification, Basic v. Levinson, it could have done so in 1995, when lawmakers passed the Private Securities Litigation Reform Act, or again in 1998, when the Securities Litigation Uniform Standards Act became law. Instead, Justice Ginsburg wrote in Amgen, “Congress rejected calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic.”

But is that really what Congress did in 1995? The answer to that question could have a big impact on the future of securities class actions.

The Amgen case, as you know, led directly to this term’s securities blockbuster: Halliburton v. Erica P. John Fund, which puts Basic’s presumption of shareholder reliance on supposed corporate misstatements – and thus the foundation of most securities fraud class actions – directly before the justices. Halliburton’s lawyers at Baker Botts filed their merits brief last week, urging the court to undo Basic as bad law based on misguided economic theory. On Monday, Halliburton’s amici joined in. They’re mostly the usual suspects: the U.S. Chamber of Commerce and other pro-business organizations; the Securities Industry and Financial Markets Association; the American Institute of Certified Public Accountants; the Washington Legal Foundation; and DRI – The Voice of the Defense Bar. Two different groups of law professors filed briefs, one a technical argument about the efficient-market theory underlying Basic and the other a scholarly condemnation of securities class action litigation.

Now that pot’s legal, what happens to employees who use?

Alison Frankel
Jan 6, 2014 23:40 UTC

I don’t want to harsh the mellow of all you Coloradoans enjoying your newly instituted right to use marijuana for recreational purposes, but if you smoke dope on your time off and later test positive in a workplace drug test, your employer can fire you, according to partners at five major employment law firms. The same is true in all but a handful of other states that have legalized pot for medical purposes. Unless you work in Arizona, Delaware, Maine, Rhode Island, Illinois or Connecticut, you aren’t protected for the authorized use of marijuana (and your protection even in some of those states isn’t a sure thing). As long as federal law treats pot as an illegal drug, employers have strong arguments to counter state laws permitting its use.

State supreme courts in California, Oregon, Washington and Montana, as well as federal appellate courts in the 6th and 9th Circuits, have explicitly sided with employers that fired employees using marijuana for authorized medical purposes, according to Nancy Delogu of Littler Mendelson. “Federal law pre-empts state law when they’re in direct conflict,” Delogu said. So, even though many states, including Colorado, have statutes precluding employers from acting against employees who take part in legal activities outside of the workplace – like smoking a cigarette on your break, taking a drink on a Saturday night or attending a political rally after hours – that protection doesn’t extend to using marijuana when state law bumps into the federal ban on pot.

A Colorado intermediate appeals court reached just that conclusion last April in a case involving a Dish Network employee named Brandon Coats, a quadriplegic who was authorized to use the drug medicinally before Colorado passed its broad pot legalization law. Even though Coats claimed he only used marijuana lawfully, on his own time and in compliance with Colorado’s restrictions on medicinal use, a divided appeals court held that medical marijuana usage is not a protected “lawful activity” because pot is federally prohibited. (Coats’ counsel from The Evans Firm told the Denver Post that he is appealing the ruling to the Colorado Supreme Court.)

For law firms, 2014 will be year of extreme change – and challenge

Alison Frankel
Dec 26, 2013 20:08 UTC

Just before Christmas, a partner at one of the most perennially profitable law firms in the land told me a funny story about a former colleague’s explanation for jettisoning his career at the firm and entering academia. The Big Law refugee told his partners that being elected to their ranks was like winning a pie-eating contest, only to discover that the prize is more pie. It wasn’t worth it to put in years of crushing work to become a partner, he said, when partnership’s only reward (aside from heaps of money) is the right to continue to work yourself into numbness.

I laughed at the story, mostly at the vision of expensively suited law firm partners with their faces planted in coconut cream pies, but the context was serious. We were talking about the decline in law school applications. My Big Law companion – whose own children have avoided legal careers – said kids are smart to opt against a future in which the only certainty is law school debt. Too gloomy an outlook, especially from a partner at the pinnacle of the profession? He’s still working as hard as ever, after all. After we plowed through the Christmas party crowds at the restaurant bar and said our goodbyes, he headed back to his office to log a few more hours.

I think my Big Law friend is dead-on – and not just about the prospects for young lawyers. I suspect that 2014 is going to be a pivotal year for big-case litigators, a moment when the normal cycles of litigation combine with changes wrought by the U.S. Supreme Court to undermine the foundation of their practice. If firms fail to anticipate and adapt to looming declines in the cases they’re built to handle, new law school graduates won’t be the only lawyers looking for work.

Paulson bets (for now) on JPMorgan in $2.7 bln FDIC fight

Alison Frankel
Dec 23, 2013 20:03 UTC

The relatively new industry of litigation funding, in which an investor otherwise uninvolved in a dispute agrees to front the money for one side or the other (almost always the plaintiffs) to litigate the case, has occasioned much soul searching about who has the right to bring a claim and control its prosecution. But there’s really nothing new about investors betting on litigation, albeit by acquiring a direct interest in a case. I’m speaking, of course, about hedge funds engaged in litigation arbitrage, in which they purchase a security in the hope that successful litigation will drive up its value. The phenomenon is best known in the distressed debt arena, where hedge funds have made heaps of money by buying up notes of bankrupt or near-bankrupt companies and then clawing for creditors’ rights by any means necessary. You also see trading in claims against receiverships, as in the brisk secondary market for claims belonging to Bernard Madoff’s investors, as well as trading in stock whose value is particularly driven by litigation developments, as, for instance, MBIA’s used to be. More recently, we’ve seen investors buying mortgage-backed notes with the intention of acquiring a big enough stake to force the MBS trustee to pursue repurchase claims. (Although, as I told you last week, that’s become a very low-odds bet, thanks to the New York state appellate court’s new ruling on the statute of limitations for put-back suits.)

The hedge funds that succeed in this game are, by definition, smarter than other investors about how litigation will impact the value of the securities they acquire. In that sense, Paulson & Co’s reported sale last week of its stake in Washington Mutual senior secured notes is a sign that JPMorgan is winning its years-long fight with the Federal Deposit Insurance Corporation over indemnification for WaMu MBS liability. As The Wall Street Journal reported Sunday, the hedge fund ditched its position in WaMu debt days after JPMorgan’s lawyers at Sullivan & Cromwell filed a complaint in federal court in Washington, demanding first dibs on the FDIC’s $2.7 billion WaMu receivership funds.

JPMorgan’s new suit repeats its long-running argument that when it took Washington Mutual off the FDIC’s hands in 2008, the acquisition contract required JPMorgan to assume only certain WaMu liabilities – and that liability based on deficient WaMu MBS remained with FDIC. The bank’s latest complaint does not assert a claim, at least for now, against the FDIC as a corporate entity, but demands more than $1 billion from the FDIC’s WaMu receivership fund, which contains about $2.75 billion (roughly $1.9 billion from JPMorgan purchase of WaMu plus another $800 million that the fund recovered through the Chapter 11 bankruptcy of WaMu’s holding company). JPMorgan’s complaint identifies 13 settled WaMu MBS investor cases and five that have yet to wrap up, and claims that the FDIC receivership is responsible for covering those deals, among other costs.

How Facebook IPO class action lawyers changed judge’s mind

Alison Frankel
Dec 20, 2013 20:37 UTC

The first paragraph of Facebook’s motion to dismiss a securities class action that raised allegations about disclosures in its initial public offering was a no-brainer. Last February, U.S. District Judge Robert Sweet of Manhattan tossed four shareholder derivative suits based on the same underlying facts, concluding in a voluminous opinion that Facebook had “repeatedly made express and extensive warnings” about potential weaknesses in its revenue model as users shifted from desktop computers to mobile devices. So in May, when Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss the parallel securities class action, which is also before Judge Sweet, they quoted the judge’s own words right back to him, not just in the first paragraph but seven more times in the dismissal brief.

To no avail, as it happened.

Sweet ruled earlier this week that Facebook IPO investors may proceed with their class action, holding that their consolidated complaint made out a sufficient case that the company failed to disclose material information about the impact of mobile usage on Facebook revenues and that the company materially misrepresented its knowledge of that impact. The judge noted twice – once in a footnote and once deep in the ruling in his discussion of materiality – that his new decision might seem to be at odds with his dismissal of the derivative suits. But after a long quote from the previous ruling that included his prior words about Facebook’s “express and extensive warnings,” Sweet called the language “dicta (that) does not change the analysis here.”

So how does a judge move from his finding that a company has told investors all they need to know in advance of its IPO to a holding that (based on untested shareholder allegations, to be sure) those same disclosures and representations are materially deficient? Sweet gave two explanations: The derivative claims were based on an alleged breach of duty, which has a higher evidentiary standard, and class counsel from Bernstein Litowitz Berger & Grossmann and Labaton Sucharow managed to tweak shareholders’ allegations to distinguish their arguments from those in the derivative suit.