Alison Frankel

SCOTUS’s next big privacy issue: Can police seize smartphones?

Alison Frankel
Sep 4, 2013 21:20 UTC

David Riley was already in deep trouble when the San Diego Police Department got hold of his Samsung smartphone in August 2009. Riley had been driving around the neighborhood in a Lexus with expired tags, and when he was pulled over police discovered that his license had been suspended. They searched his car and found guns hidden under the hood. Riley was arrested for carrying concealed and loaded weapons.

But it was the smartphone that sank him. At the arrest site, police scrolled through Riley’s text messages and contacts, finding what they considered to be indications that Riley was a member of the Bloods gang. Hours later, when he was under interrogation at the police station, a gang expert conducted a second search of Riley’s phone. He found photos and videos that, according to police, tied Riley to a gang-related drive-by shooting. Despite defense arguments that the smartphone seizure violated Fourth Amendment strictures on warrantless searches, prosecutors later used a photo and videos taken from Riley’s phone at his trial, which ended with his conviction for shooting at an occupied vehicle and two other charges. And because the smartphone supposedly linked Riley to gang activity, he was subject to an enhanced sentence. Instead of a maximum of seven years, he was sentenced to a prison term of 15 years to life.

The California Supreme Court declined to hear Riley’s Fourth Amendment appeal earlier this year, presumably because the state high court had already determined, in a 2011 case called Diaz v. California, that police may conduct warrantless searches of cellphones when the phones are seized from a person under arrest. On July 30, Riley’s lawyers at Stanford’s Supreme Court Litigation Clinic and Goldstein & Russell petitioned the U.S. Supreme Court to take his case. “This is the leading privacy issue, the next big technology and Fourth Amendment issue everyone is watching,” said Riley’s lead appellate counsel, Jeffrey Fisher of Stanford. “Now it has come to a crescendo.”

The question of whether police can search cellphones they seize during arrests is, in fact, so hot that Riley’s certiorari petition isn’t the only one raising the issue at the Supreme Court. Two weeks after Riley’s filing, the Justice Department asked the high court to review Wurie v. U.S., a 2013 decision by the 1st Circuit Court of Appeals that squarely conflicts not only with the 2011 California Supreme Court decision that doomed Riley but also with rulings by two other state Supreme Courts and three federal circuit courts. Both the Justice Department and Riley petitions argue that the high court must step in to reconcile contrary rulings that have left police departments and prosecutors without clear guidance on defendants’ Fourth Amendment rights to shield their phones from warrantless searches. It seems inevitable that the Supreme Court will eventually have to decide the question, but first the justices will have to figure out whether Riley’s case or the Justice Department’s (or both) is the best vehicle to clarify the law.

The defendant in the Justice Department case, Brima Wurie, was arrested back in 2007, before smartphones became commonplace. Police seized Wurie’s more basic flip-style cellphone after arresting him for selling two bags of crack cocaine. From a limited search of the phone, the government was able to figure out Wurie’s home address (he had given them a false address) and to obtain a warrant to search the house. That search turned up the drug stash at the heart of Wurie’s conviction in federal court in Boston.

BP plays Twister in latest Deepwater Horizon appellate brief

Alison Frankel
Sep 3, 2013 20:20 UTC

Last year, when BP agreed to a historic multibillion-dollar class action settlement with people and businesses harmed by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the company pledged to defend the deal against objections and appeals. As is customary, lawyers for the claimants actually filed the motion to certify the settlement class, but BP told the court it fully supported the settlement agreement. The company and class counsel submitted joint expert declarations attesting to the fairness of the proposed deal, including a jointly filed report by Columbia Law School professor John Coffee, who said that although he’s skeptical of broad mass tort class actions, the agreement in this case did such a good job of defining class membership that the settlement class should be certified. When U.S. District Judge Carl Barbier of New Orleans certified the settlement class in December 2012, the case seemed to be on a typical track for a mass tort, with both sides benefiting from use of the class action vehicle. Defendants settle these cases because they want the certainty that comes from a classwide release of claims. They can’t get classwide releases without class certification.

But on Friday, BP swerved drastically off-course, filing a startling brief at the 5th Circuit Court of Appeals in a case first brought by objectors to the class action settlement. Unless the 5th Circuit undoes the trial court’s interpretation of settlement terms, BP now argues, class certification cannot stand. The oil company contends that the class is fatally flawed under both the rules for federal class actions and the U.S. Supreme Court’s 2013 holding in Comcast v. Behrend because the claims administrator’s supposedly erroneous reading of deal terms has permitted improper claims by uninjured businesses alongside legitimate claims by injured class members. “Federal class action rules,” the company said in an email statement, “do not permit class action settlements where such conflicts exist.”

BP, in other words, is doing something apparently unprecedented in class action history: siding with objectors in an attempt to scotch its own deal. That’s a contorted position, one that New York University law professor Samuel Issacharoff – who, admittedly, represents class counsel in a BP appeal at the 5th Circuit – said BP may not even have the right to assert because the company didn’t object to class certification at the trial court level and didn’t appeal Judge Barbier’s class certification ruling. BP’s brief is all the more head-scratching because, according to class counsel, even if BP and the objectors succeed in overturning class certification, the settlement agreement requires the oil company to still pay claims already in the pipeline.

U.S. criminal laws don’t apply to conduct abroad: 2nd Circuit

Alison Frankel
Aug 30, 2013 19:11 UTC

Attention, American fraudsters! If you restrict your criminal activities to conduct outside of the United States, you’re safe from prosecution under U.S. laws.

That’s not exactly how a three-judge panel of the 2nd Circuit Court of Appeals worded its decision Friday in U.S. v. Alberto Vilar and Gary Tanaka, but it’s the effective result of the appellate court’s finding that criminal statutes – in particular, criminal securities fraud laws – don’t extend overseas. The opinion noted that the 2nd Circuit has long recognized a presumption against the extraterritorial application of U.S. criminal laws. But make no mistake, the Vilar ruling is a major interpretation of what the court acknowledged to be an open question after the U.S. Supreme Court’s 2010 admonition against overextending the scope of U.S. laws in Morrison v. National Australia Bank. Namely, does Morrison apply to criminal as well as civil laws? The 2nd Circuit panel – Judges Jon Newman, Jose Cabranes and Chester Straub – could not have answered the question more decisively. “The general rule,” wrote Cabranes, “is that the presumption against extraterritoriality applies to criminal statutes.”

That reasoning could result in the dismissal of some counts of the government’s indictment of onetime SAC Capital trader Mathew Martoma, whose lawyers at Goodwin Procter argued in a brief filed in June that Morrison precludes charges based on trading in the American Depository Receipts of Elan, a company whose stock trades on Irish and British exchanges. The intersection of Morrison and fraud prosecution is also at issue in a 2nd Circuit appeal by former Sky Capital executives Ross Mandell and Andrew Harrington, who were convicted of defrauding mostly British investors in London-traded securities.

No circuit split on charity-only settlements: Facebook, Public Citizen

Alison Frankel
Aug 29, 2013 21:10 UTC

In 2011, after U.S. District Judge Richard Seeborg approved the $9.5 million settlement of a class action accusing Facebook of violating its users’ privacy through a since-dismantled program that disclosed their online purchases to their friends, the public interest group Public Citizen appealed Seeborg’s ruling to the 9th Circuit Court of Appeals. On behalf of an objecting class member, Public Citizen told the 9th Circuit that Facebook users were not slated to receive a penny in exchange for releasing claims that Facebook’s Beacon program violated their privacy rights. Instead, all of the money in the settlement that didn’t go to class counsel’s legal fees and expenses was to be directed to a new charity, the Digital Trust Foundation, with a two-person advisory board consisting of a Facebook representative and a plaintiffs lawyer from the case. Public Citizen took the position that charity-only payouts, otherwise known as cy pres settlements, are sometimes appropriate, but not when the lucky recipient of class members’ money doesn’t have the same interests as the class.

Public Citizen lost the appeal in September 2012. So you might think the public interest group would hop aboard a petition for Supreme Court review of the 9th Circuit ruling by class action watchdog Ted Frank of the Center for Class Action Fairness, who represents another objector. If so, you’d be wrong.

In a brief filed Thursday with the Supreme Court, Public Citizen said it was taking no position on whether the court should grant cert, though it said it agreed with the Center for Class Action Fairness that the Facebook Beacon settlement is fatally flawed. But the brief also undermined CCAF’s argument that there’s a split among the federal circuit on the standard for cy pres settlements. Public Citizen actually agreed with its former opponent Facebook, which filed its brief opposing cert on Tuesday: There is no meaningful difference, they both said, amongst the federal appeals courts that have issued recent rulings establishing standards for cy pres awards. So there is no reason for the Supreme Court to take up the issue.

How a contrarian appellate judge helped brokers in Merrill race case

Alison Frankel
Aug 28, 2013 21:05 UTC

In a historic decision in June 2011, the U.S. Supreme Court ruled that female employees of Wal-Mart could not sue the company for gender discrimination as a nationwide class. The court said in Wal-Mart v. Dukes that the women could not attribute any discrimination they’d supposedly suffered to corporate policies because those policies were implemented by local managers. I’m ignoring the subtleties of a long and complex decision, but, in essence, the Supreme Court concluded that Wal-Mart’s nationwide policies weren’t strong enough glue to bind together women with individual employment histories. A sweeping class action, the court said in a decision written by Justice Antonin Scalia, could not provide “a common answer to the crucial discrimination question.”

Dukes was widely viewed as a death knell for nationwide employment discrimination class actions (not to mention other broadly formulated class actions). So how is it that two years after the Supreme Court’s ruling, 700 African-American brokers who claim to have suffered race discrimination at Merrill Lynch have obtained a $160 million class action settlement from Bank of America, Merrill’s successor?

The answer lies in a bold reading of Dukes by the brokers’ lawyers at Stowell & Friedman – and a surprising endorsement of that interpretation by the 7th Circuit Court of Appeals, in an opinion written by a free-thinking judge who has shown no hesitation to tangle with Dukes author Scalia. Had it not been for Judge Richard Posner and his colleagues on the 7th Circuit panel that heard the Merrill brokers’ appeal, this case would not have resulted in what The New York Times reported to be the biggest-ever race discrimination payout by a U.S. employer. But don’t get too excited: According to the lawyer who won the Dukes case at the Supreme Court, Posner’s ruling in the Merrill class action isn’t going to help other employees who want to band together to bring discrimination claims.

Judge in Facebook class action: no fees for lawyers for non-cash relief

Alison Frankel
Aug 27, 2013 19:27 UTC

It’s a self-evident truth that if contingency fee lawyers don’t see value in a case, they won’t bring it. With that in mind, I’ve often wondered whether class action defendants should be more vociferous about big fee requests by class counsel. I know what you’re thinking: Plaintiffs lawyers won’t agree to settle unless defense counsel pledge not to oppose their fee request. And realistically, defendants’ main concern is making a case go away as cheaply as possible. How settlement money is divided between class members and their lawyers is, for defendants, a secondary issue, at best. If objecting to class counsel’s fee request will prevent a deal from going through, most defendants won’t object.

That’s short-term thinking, though. Contingency fee lawyers are perhaps the most rational economic actors in the legal business. The best way to curtail nuisance litigation is to make it economically unattractive. And one way to do that – even in cases in which the size of the class and the potential of statutory damages makes settlement unavoidable – is for defendants to argue for minimal class counsel fees.

That’s what Facebook and its lawyers at Cooley did in the Sponsored Stories class action that was approved Monday by U.S. District Judge Richard Seeborg of San Francisco. As you probably recall, this case, which involves Facebook’s supposed misappropriation of users’ names and profile photos in sponsored advertising, has something of a tortured history. Faced with the potential of $750 per class member in statutory damages to a class numbering as many as 100 million Facebook users, the company agreed to a $20 million cy pres settlement in 2012, of which $10 million was to go to class counsel from The Arns Law Firm and Jonathan Jaffe Law. Judge Seeborg rejected the deal, questioning why plaintiffs’ lawyers were slated to recover so much when class members were to receive no individual compensation.

WildTangent to SCOTUS: End the patent eligibility madness!

Alison Frankel
Aug 26, 2013 19:45 UTC

On Friday, the online game company WildTangent filed a petition asking the U.S. Supreme Court to decide, once and for all, whether computer-implemented abstract ideas are eligible for patents. According to the company’s lawyers at Latham & Watkins, a three-judge panel of the Federal Circuit Court of Appeals ran amok in June when it held that patent eligibility extends to the concept of permitting online access to copyrighted material in exchange for viewing an advertisement. Instead of seriously considering the Supreme Court’s previous admonition about patent eligibility in Mayo v. Prometheus Laboratories, the WildTangent brief said, the Federal Circuit opinion, written by Chief Judge Randall Rader, sets up an eligibility test so easy that just about every computer-implemented abstract idea can pass. WildTangent contends that the Federal Circuit has contradicted itself, defied the Supreme Court and rewritten the Patent Act to promulgate its own expansive doctrine of patent eligibility.

Considering that the Supreme Court has already signaled its concern with the patent eligibility of computer-implemented ideas – after its Mayo v. Prometheus ruling in 2012, it sent the WildTangent case back to the Federal Circuit for reconsideration – it’s a good bet that the justices will take up the issue. It’s become almost an annual rite, after all, for the Supreme Court to school the Federal Circuit on some aspect of patent eligibility: business method patents in Bilski v. Kappos in 2010, patents based on laws of nature in Mayo in 2012, and gene patents Association for Molecular Pathology v. Myriad last spring. But will the court grant certiorari to WildTangent or will it decide to review CLS Bank v. Alice Corporation, the Federal Circuit’s spectacular en banc failure to agree on when computer-implemented abstractions are eligible for patent protection? You remember the now-infamous May 2013 ruling in CLS: The appeals court spewed 135 pages of concurrences and dissents but set precedent only in one paragraph finding Alice’s computer-assisted escrow process to be ineligible for a patent.

The splintered CLS decision, which comes in for quite a bit of disdain in WildTangent’s cert petition, was issued about a month before the three-judge panel came down with a decision in the WildTangent case, so you might expect Alice Corp to have struck first with a request for Supreme Court review. According to WildTangent’s petition, Alice told the justices in July that it intends to seek certiorari but requested and was granted an extension until Sept. 6 to file its petition. (I called and emailed Alice’s lead Federal Circuit lawyer, Adam Perlman of Williams & Connolly, but didn’t hear back.)

Did banks jump too soon in opposing eminent domain mortgage seizures?

Alison Frankel
Aug 23, 2013 21:12 UTC

The first rule of litigation in federal court is that you can’t bring a suit unless it’s based on an actual controversy. U.S. courts do not issue advisory opinions. Federal judges only have jurisdiction to oversee disputes that present an issue ripe for decision. And according to a new brief by the city of Richmond, California, its plan to use eminent domain to take over mortgages from mortgage-backed securities trusts is not ripe under Article III of the U.S. Constitution and should not be tested in the suits that MBS trustees filed earlier this month in federal court in San Francisco. Counsel for the city and Mortgage Resolution Partners (the private company supplying the capital for Richmond’s contemplated mortgage takeover plan) contend that Wells Fargo and Deutsche Bank acted precipitately when they moved for a preliminary injunction to block the city from proceeding with eminent domain takeovers.

According to Richmond’s lawyers at Altshuler Berzon, the eminent domain plan is still a hypothetical, not a reality, because the city council hasn’t yet voted on a resolution specifically approving the takeover of any loan, and it may reject such a resolution if one is proposed (despite a unanimous vote in April to launch the mortgage seizure program). Even if the council does vote to snatch some or all of the 624 mortgages that Richmond has offered to buy from MBS trusts (and that MBS trusts have refused to sell), the brief said that the proper time and place for the MBS trustees to raise their objections to the plan’s constitutionality is in an eminent domain proceeding in California state court, not a preliminary injunction case in federal court.

I predicted when the banks filed their suits that ripeness was going to be the threshold question in the battle over eminent domain mortgage seizures. The city’s brief shows how much Richmond and MRP would like to erase the trustees’ federal-court challenge without even litigating the merits of arguments that the plan, which the trustees claim will benefit MRP and selected homeowners at the expense of MBS investors and the broader housing market, violates the Takings, Commerce and Contracts clauses. Richmond’s new brief does address those arguments, asserting that a program intended to benefit strapped homeowners and ward of foreclosure blight easily satisfies the “public use” requirement of a government taking; that the plan doesn’t violate the Commerce Clause because it does not discriminate against investors outside of California; and that the Supreme Court held in the 1984 decision Hawaii Housing Authority v. Midkiff that the Contracts Clause doesn’t apply to eminent domain seizures. Richmond and MRP also make some constitutional arguments of their own, asserting that the city council has a First Amendment right to establish a record on the use of eminent domain to take over securitized mortgages. But the bulk of the new brief is dedicated to showing U.S. District Court Charles Breyer – who is overseeing the Wells Fargo and Deutsche Bank case – that he doesn’t have jurisdiction.

How SCOTUS’s Amex ruling may help businesses evade class actions

Alison Frankel
Aug 22, 2013 22:21 UTC

Now that the U.S. Supreme Court has pretty much knocked down all barriers to contracts prohibiting classwide arbitration, via 2011′s AT&T Mobility v. Concepcion and last term’s American Express v. Italian Colors, have businesses actually rushed to add mandatory individual arbitration clauses to their contracts? A new study of agreements between franchisors and franchisees finds that they have not, and theorizes that the side effects of arbitration, including the limited right to appeal, may deter some businesses from adopting mandatory arbitration clauses. What’s more, the study’s authors – two law professors with long expertise in arbitration – hypothesize that the Supreme Court’s Amex ruling may permit businesses to prohibit class litigation without the collateral consequences of arbitration agreements.

In “Sticky’ Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex,” Peter Rutledge of the University of Georgia and Christopher Drahozal of the University of Kansas look specifically at contracts in the franchise industry, which they say were predicted to be revamped after the court’s Concepcion ruling to include mandatory arbitration clauses. (Rutledge and Drahozal have previously studied mandatory arbitration clauses in credit card agreements, but Drahozal told me that his work as a special advisor to the Consumer Financial Protection Bureau precludes him from publishing on issues before the CFPB.) The empirical data they collected (from 68 franchisors listed as the top franchising opportunities in Entrepreneur Magazine and from a random sample of 239 franchise agreements filed with the Minnesota Department of Commerce) indicates that Concepcion did not actually have much of an impact on franchise contracts. The percentage of franchisors using arbitration clauses increased from 39.7 percent before the ruling to 44.1 percent in 2013, or 49.4 percent of franchises in 2011 to 50.6 percent in 2013. Not all of those clauses, moreover, include class arbitration waivers. In 2011, 77.8 percent of franchisors with arbitration clauses prohibited classwide actions; by 2013, after Concepcion, the percentage was up to 86.7 percent. Those numbers, write Rutledge and Drahozal, show “at most a slight shift to arbitration following Concepcion, and certainly not the ‘tsunami’ predicted by some commentators.” (Hat tip to Andrew Trask of McGuireWoods, author of the Class Action Countermeasures blog.)

The professors include the caveat that their data is only on franchise contracts, and they note that other businesses – particularly online consumer giants such as Sony, Netflix, eBay and Instagram – have inserted post-Concepcion mandatory arbitration clauses in their contracts. (Sony and Netflix switched over to arbitration after defending big data breach class actions, they point out.) The two years since Concepcion may also not have been enough time for a robust assessment of the ruling’s impact, Rutledge and Drahozal wrote. And in a phone interview, Drahozal emphasized that this study didn’t directly measure whether Concepcion has led to a decline in class action litigation.

Diamond, shareholders reach unusual deal: class to receive stock

Alison Frankel
Aug 21, 2013 22:20 UTC

On Wednesday, lawyers representing a certified class of shareholders who claim Diamond Foods deceived them about its payments to walnut growers in 2010 and 2011, notified U.S. District Judge William Alsup of San Francisco that they’ve reached a proposed settlement with the company. According to the memo in support of the deal, class counsel at Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein were confident that they’d be able to prove at least $270 million and as much as $430 million in damages against the company. Instead, they’re settling for about $107 million, $11 million in cash and the remaining $96 million in Diamond common shares. Yes, that’s right. The supposedly defrauded and disillusioned shareholders in the Diamond class action are being compensated with more stock in the offending company. It’s like that old joke: First prize is a week in Philadelphia; second prize is TWO weeks there.

Class counsel explain in their memo why they had little choice but to agree to the unusual structure of this proposed settlement, which must still be approved by Alsup. Diamond is on the brink of insolvency, with $579 million in debt and just $7.2 million in cash, according to its latest balance sheet. Its primary asset is goodwill and its core walnut business is in decline. Because of the overhang of the shareholder class action, the memo said, the company can’t attract new capital and may even run into problems refinancing its existing loans. There’s some insurance money, the memo said, but the cost of continuing to litigate the case is consuming those funds.

So, according to class counsel, shareholders’ only real shot at recovery was to agree to accept more Diamond equity, and sooner rather later. Otherwise, the class risks driving Diamond into bankruptcy. That would certainly be the outcome, the brief said, if the lead plaintiff, the Mississippi Public Employees’ Retirement System, insisted on trying the case and obtaining a judgment against Diamond. It’s in the best interests of class members, the brief said, not to bankrupt the company and become judgment debtors but to accept $11 million in cash (all that remains of Diamond’s insurance proceeds) and 4.45 million shares of Diamond common stock, the maximum the company can issue without triggering a shareholder vote.