Opinion

Alison Frankel

N.Y. judge: Defendant can’t settle unless class can be certified

Alison Frankel
Jan 16, 2014 20:02 UTC

I’ve been writing a lot recently about the struggles of the 5th Circuit Court of Appeals to find consensus on the constitutionality of a settlement class that sweeps in uninjured claimants. Two different 5th Circuit panels have reached different conclusions on that issue in a pair of overlapping appeals in BP’s epic class action settlement of claims stemming from the 2010 Deepwater Horizon oil spill: Judge Edith Clement, in an opinion last October, said that trial judges may not approve certification of a class that includes members who lack constitutional standing; but last week, two judges on another 5th Circuit panel upheld certification of the BP class, with Judge Eugene Davis citing decisions by other federal circuits that acknowledged the reality of uninjured class members swept into global settlements. The 5th Circuit’s divide highlights the complexity of the underlying question, which is as important for defendants as it is for plaintiffs: Can a defendant buy global peace through a class action settlement when the class might not otherwise be certifiable?

A federal district judge in Manhattan who has been notably skeptical of class actions provided her answer to that question Wednesday: No. U.S. District Judge Katherine Forrest refused to approve a $1.7 million securities class action settlement between the audit firm Schwartz Levitsky Feldman and investors in China Automotive Systems, one of the many U.S.-listed Chinese companies accused of swindling investors through accounting fraud. Forrest had previously rejected a motion by class counsel at Pomerantz Grossman Hufford Dahlstrom & Gross to certify the investor class, finding both that the name plaintiffs weren’t typical investors because they bought and sold shares in the class period, and that shareholders hadn’t satisfied the Basic v. Levinson efficient-market test for classwide reliance. In Wednesday’s ruling, the judge said that shareholders hadn’t given her any reason to change her mind about class certification so her duty to absent investors with legitimate claims prevents her approval of the settlement.

“At no point during this litigation, including most significantly after the court’s ruling on class certification for litigation purposes, did plaintiffs sufficiently support predominance by showing that the question of reliance can be demonstrated on a representative (e.g. class) basis,” Forrest said. “If this court were to certify the proposed settlement class in light of the evidentiary findings it previously made and without anything more from plaintiffs, it would effectively allow plaintiffs who potentially did not rely on materials setting forth the alleged misstatements to collect from the settlement fund…. Doing so would prevent those plaintiffs with real claims from obtaining the maximum amount to which they may be entitled.”

Forrest’s reasoning seems on its face to be at odds with the 2nd Circuit Court of Appeals’ 2012 decision in In re American International Group Securities Litigation, but the judge insisted it’s not. In the AIG case, the appeals court ruled that when “intractable management problems” preclude certification of a securities fraud class for litigation purposes, the class can still be certified for settlement. “Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement,” the AIG opinion said.

Forrest, however, concluded that the 2nd Circuit’s intention in AIG was to ensure that trial-court judges “engage in a sufficiently thorough analysis of the various issues and interests in play in Rule 23 settlement class certifications -and that that be an analytically distinct inquiry from that involved in certification of a litigation class.” Forrest said that under AIG, the China Automotive plaintiffs were free to seek approval of a settlement class, despite her rejection of the litigation class, but that class counsel still had to solve the problems she’d previously identified. It would otherwise be inconsistent with Supreme Court precedent, she said, for her to approve the settlement.

Why does SCOTUS want SG view on Madoff trustee suits vs bank enablers?

Alison Frankel
Jan 15, 2014 22:26 UTC

Last Wednesday, JPMorgan Chase resolved civil and criminal allegations of enabling Bernard Madoff to swindle customers of his defunct broker by agreeing to pay $2.6 billion, including $543 million to Irving Picard of Baker & Hostetler as trustee for Madoff’s defrauded investors. Two days later, the U.S. Supreme Court gave Picard and his Baker & Hostetler team reason to hope that JPMorgan won’t be the last bank to cough up millions to Madoff customers: The court invited the U.S. solicitor general to submit a brief expressing the federal government’s position on Picard’s request that the Supreme Court review the 2nd Circuit Court of Appeals’ dismissal of Picard’s claims against the banks he has accused of enabling Madoff’s scheme.

Picard has to be encouraged by the justices’ request. Every certiorari petition faces long odds, and the Madoff trustee is asking the court to review an emphatic appellate decision on arcane issues that have arisen in only a handful of cases in the last 40 years. So any indication that the petition has piqued the justices’ interest is good news for the trustee and bad news for the banks that want the 2nd Circuit’s decision to stand as the last word on Picard’s claims.

Picard’s petition, moreover, doesn’t raise questions that would usually prompt the Supreme Court to ask for the SG’s views. Remember, Picard operates under the auspices of the Securities Investor Protection Corporation, a nonprofit that was established by Congress in the Securities Investor Protection Act but is not a federal agency. The trustee’s suits against Madoff’s bankers don’t implicate obvious federal government interests, as, for example, a case involving a foreign government would. Nor is this a circumstance in which the Supreme Court is weighing an issue that’s percolating in the lower courts and wants the SG’s view of whether a particular case presents a good vehicle to decide it. As I mentioned, the three questions presented in the trustee’s cert petition are obscure indeed: When the SIPC has advanced payments to defrauded investors, does it then have the right to pursue those investors’ claims against third parties under the theory of subrogation; does the SIPA give the trustee a right to sue third parties under state law for contributing to a brokerage’s wrongdoing; and does an SIPC trustee have standing to sue third parties on behalf of a brokerage’s customers through another mechanism, such as the federal bankruptcy code? (Believe it or not, I’ve attempted to strip those questions of legalese; that’s the best I could do.)

With 5th Circuit split on class constitutionality, what’s next for BP?

Alison Frankel
Jan 14, 2014 20:44 UTC

Considering that BP’s resolution of claims stemming from the Deepwater Horizon oil spill in 2010 is the biggest single-defendant private settlement in U.S. history, it’s only fitting that the case has generated a spectacular – and procedurally peculiar – appellate record on the constitutionality of class actions. As you’ve probably heard, on Friday a divided panel of the 5th Circuit Court of Appeals upheld certification of the settlement class, rejecting BP’s argument that class certification must be reversed if the class includes uninjured claimants. Friday’s majority opinion by Judge Eugene Davis directly contradicts a previous analysis of the constitutionality of the BP class by his 5th Circuit colleague Judge Edith Clement in a distinct but overlapping BP appeal decided in October. Since both 5th Circuit appellate rulings on the BP class included dissents, we now have opinions from five different 5th Circuit judges on whether a settlement that dishes out money to uninjured class members can survive constitutional scrutiny. For us class action geeks, these BP appeals are a fascinating debate with enormous consequences. For BP, the conflicting decisions present a multibillion-dollar strategic turning point.

The abbreviated appellate backstory dates back to December 2012, when U.S. District Judge Carl Barbier of New Orleans granted final approval to a class action settlement between BP and a steering committee of plaintiffs lawyers, negotiated over the course of more than a year. The settlement, which replaced a claims facility BP established right after the spill, was designed to compensate several different sorts of victims, from the shellfishing and tourism industries directly impacted by the spill to businesses whose losses were indirect fallout. As the settlement defined it, the class included everyone whose losses resulted from the Deepwater Horizon disaster.

BP supported class certification and approval of the settlement. But the company developed qualms after Judge Barbier approved policy decisions by claims administrator Patrick Juneau that, in the company’s view, enabled businesses unharmed by the oil spill to recover money from BP through creative accounting tactics. As business loss claims mushroomed, BP’s lawyers from Kirkland & Ellis (which had negotiated the settlement) and Gibson, Dunn & Crutcher (which came in for the company after the deal was approved) appealed Barbier’s order to the 5th Circuit. That appeal led to Judge Clement’s opinion last October. Despite arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to settlement terms that were open to the interpretation Barbier approved, Judges Clement and Leslie Southwick instructed Judge Barbier to reconsider his interpretation of deal terms. On her own, Clement went quite a bit further. If the BP settlement permitted claims by class members who had suffered no losses attributable to the oil spill, she said, then it was illegal. Uninjured plaintiffs don’t have standing under Article III of the Constitution, Clement wrote, and judges can’t create a cause of action that doesn’t otherwise exist – even if the defendant wants to buy global peace through a settlement.

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.

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.)

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