Opinion

Alison Frankel

What hope remains for consumers, employees after SCOTUS Amex ruling?

Alison Frankel
Jun 20, 2013 21:51 UTC

The U.S. Supreme Court’s ruling Thursday in American Express v. Italian Colors has narrowed to an irrelevant pinhole the so-called “effective vindication exception” to mandatory arbitration. Despite dicta in previous Supreme Court cases that suggested arbitration clauses are not enforceable when it is prohibitively expensive for claimants to enforce their rights through the arbitration process, the five justices in the Amex majority held that plaintiffs who sign arbitration agreements don’t have the right to pursue their claims on anything but an individual basis, even if the cost of that pursuit dwarfs their potential recovery.

The effective vindication exception “would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable,” Justice Antonin Scalia wrote for the majority. “But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” (As many early commentators have noted, Justice Elena Kagan wrote a memorable rejoinder for the three Amex dissenters: “Here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”)

The decision overturns a ruling by the 2nd Circuit Court of Appeals that permitted small businesses to proceed with an antitrust class action against Amex, despite arbitration agreements between the credit card company and the merchants suing over allegedly unfair fees. The majority’s reasoning will extend beyond arbitration over antitrust rights, however, and almost certainly beyond federal causes of action. There’s little doubt that one of the only other decisions to buck the Supreme Court’s 2011 pro-arbitration holding in AT&T Mobility v. Concepcion - a ruling last week by the Massachusetts Supreme Judicial Court, in a consumer case against Dell that raised similar issues of the affordability of pursuing individual claims through arbitration – will not survive Thursday’s Amex opinion. (Dell counsel John Shope of Foley Hoag told me that “it’s very clear” that under Amex, the Massachusetts ruling “is no longer good law, if it ever was.” The plaintiffs’ lawyer in the case,Edward Rapacki of Ellis & Rapacki, said his clients’ claims may yet survive under a slightly different theory.)

Between them, Concepcion and Amex leave consumers, employees and small businesses that are subject to class action waivers in mandatory arbitration provisions without hope of evading the waiver. If you can’t afford to arbitrate your claim individually, the Supreme Court majority seems to be saying, then don’t sign the contract requiring arbitration. The three liberal justices who dissented (Justice Sonia Sotomayor was recused) predicted that the consequence of the majority’s disregard for the effective vindication exception will be mandatory arbitration clauses in which companies “extract backdoor waivers of statutory rights, making arbitration unavailable or pointless.”

So what recourse do small businesses, consumers and employees have when they can’t litigate or arbitrate as a group? I asked that question Thursday to two lawyers on opposite sides of the mandatory arbitration debate and got two very different answers. Andrew Pincus of Mayer Brown, who won the Concepcion case for AT&T Mobility, and Paul Bland of Public Justice, the well-known public interest advocate for consumer rights, agreed that the Supreme Court has all but foreclosed courts from refusing to enforce class action waivers. But they disagreed on the implications.

Should defendants fear new SEC policy on admissions in settlements?

Alison Frankel
Jun 19, 2013 22:23 UTC

Mary Jo White proved herself to be quite a shrewd strategist on Tuesday, when she made a surprise announcement at The Wall Street Journal’s annual CFO Network Event. The chair of the Securities and Exchange Commission said that the agency would no longer maintain a blanket policy permitting defendants to settle SEC cases without admitting to wrongdoing. “We are going to in certain cases be seeking admissions going forward,” White said, according to my Reuters colleague Sarah Lynch. “Public accountability in particular kinds of cases can be quite important and if we don’t get (admissions), then we litigate them.” White said that in cases involving “widespread harm to investors,” “egregious intentional misconduct” or obstruction of the SEC’s investigation, the agency may insist that defendants accept liability as a condition of settlement.

In an internal email Monday to the staff of the Enforcement Division, co-directors Andrew Ceresney and George Canellos provided a bit more detail than White did in her public remarks. “While the no admit/deny language is a powerful tool, there may be situations where we determine that a different approach is appropriate,” Ceresney and Canellos said in the email, which was provided to me by an SEC representative. “In particular, there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution. We have been in discussions with Chair White and each of the other commissioners about the types of cases where requiring admissions could be in the public interest. These may include misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the commission’s investigative processes. In such cases, should we determine that admissions or other acknowledgement of misconduct are critical, we would require such admissions or acknowledgement, or, if the defendants refuse, litigate the case.”

That sounds like a major policy shift from an agency that has for decades permitted defendants to settle civil cases without admitting or denying the SEC’s allegations. Until last year, after all, even defendants who had already been convicted of financial crimes didn’t have to admit liability in settlements with the SEC. The neither-admit-nor-deny policy, as you know, has lately been criticized by a series of federal judges following the lead of U.S. Senior District Judge Jed Rakoff of Manhattan; and has been aggressively questioned by Senator Elizabeth Warren (D-Mass.). Given the public grumbling about the SEC’s perceived failure to obtain accountability from the financial institutions responsible for the economic crisis, it’s probably not an accident that White announced the agency’s new policy at an event well covered by reporters.

Supreme Court to resolve circuit split on timing of appeals

Alison Frankel
Jun 18, 2013 22:24 UTC

Once upon a time, ordinary lawyers appeared at the U.S. Supreme Court. If, by some chance, their client’s case defied long odds and made it onto the justices’ docket, lawyers who’d been on the litigation from its start would make a once-in-a-lifetime argument to the highest court in the land. Those days are mostly gone. As my brilliant Reuters colleague Joan Biskupic discussed Tuesday in a story about the competition to represent a pro se plaintiff whose petition for certiorari was granted last year, arguments at the Supreme Court have come to be the near-exclusive province of lawyers who specialize in this high-prestige, high-profile practice.

A case that the justices agreed Monday to hear in their upcoming term shows that the elite Supreme Court bar actually seems to be on the lookout for issues that will attract the justices’ attention even before cert petitions are filed. The case, Ray Haluch Gravel v. Central Pension Fund, raises the question of whether a federal district court’s ruling on the merits that leaves unresolved a request for contractual attorneys’ fees is a final decision – and thus appealable – or whether the decision is not appealable until the court has ruled on contractual attorneys’ fees. That’s a matter of consequence for parties deciding when to file their appeals, but certainly not a huge constitutional battle. Nor are the sums of money at issue – at most, about $350,000 in supposedly unpaid union contributions and attorneys’ fees – particularly notable, except for the Massachusetts landscaping company and union fund involved in the case. Both the landscaper and the union were represented in federal district court in Boston and at the 1st Circuit Court of Appeals by regional firms with fewer than 50 lawyers.

Yet both had top-notch Supreme Court counsel for their cert filings: Mayer Brown for Ray Haluch and the University of Pennsylvania Supreme Court Clinic for the union. Dan Himmelfarb of Mayer Brown and Stephanos Bibas of Penn declined to comment, but it’s a good bet that when the 1st Circuit issued its decision last September, noting a deep split in the federal circuits on whether contractual attorneys’ fees are collateral to the merits of a case, the Supreme Court bar suddenly became interested in an otherwise modest dispute between a small business and the union representing a few of its employees.

SCOTUS pay-for-delay ruling: New scrutiny for nonpharma patent deals?

Alison Frankel
Jun 17, 2013 21:08 UTC

In the U.S. Supreme Court’s ruling Monday on pay-for-delay settlements in the pharmaceutical industry – in which a brand-name drugmaker pays generic rivals to drop challenges to its patent, thus assuring its monopoly – five justices agreed with the Federal Trade Commission that the key question isn’t whether pay-for-delay deals exceed the scope of the brand-maker’s patent. Courts cannot simply rubber-stamp such settlements as presumptively legal, the majority said in FTC v. Actavis. But nor can they assume that pay-for-delay settlements are illegal by their very nature. Instead, according to the majority, trial courts must conduct a “rule of reason” analysis to determine whether reverse-payment settlements violate antitrust law.

Those inquiries, the majority concedes, are probably going to be “time consuming, complex and expensive” – a much less convenient alternative to the simple scope-of-the-patent test endorsed by the 11th Circuit Court of Appeals in the underlying case and by several other federal circuits in previous pay-for-delay suits by the FTC and private plaintiffs. But the scope-of-the-patent approach “throws the baby out with the bath water,” the majority said. A patent holder has monopoly rights only when its patent is valid, the very inquiry that is aborted through pay-for-delay settlements.

The justices concluded that trial judges need not conduct a full-blown inquiry into a patent’s validity to evaluate the anticompetitive impact of a pay-for-delay deal, but can consider (among other factors) the size of the reverse payment as a proxy for the patent’s weakness. “An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival,” the majority said, in an opinion written by Justice Stephen Breyer. “And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market – the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.”

SCOTUS in Myriad: Federal Circuit doesn’t know what’s patent-eligible

Alison Frankel
Jun 13, 2013 22:34 UTC

Justice Clarence Thomas of the U.S. Supreme Court doesn’t come out and say so in his straightforward, rhetoric-free, 19-page opinion for a unanimous court in Association for Molecular Pathology v. Myriad Genetics, but the takeaway from the ruling is not only that human genes are not patentable in and of themselves but that the Federal Circuit Court of Appeals isn’t very good at interpreting patent-eligibility under Section 101 of the Patent Act. As the Supreme Court decision notes, the Federal Circuit panel that ruled Myriad has the right to composition patents on genes associated with breast cancer disagreed on the rationale. One judge said that isolated genes are chemically distinct from the molecules found in nature. Another cited longstanding Patent and Trademark Office policy on gene patentability. The third disagreed with both explanations. So too did the entire Supreme Court, which said the dispositive question is whether the purported invention is created or found in nature. Genes are found in nature, the court said, and thus not patent-eligible.

Myriad’s share price actually bumped up after the court’s ruling because the justices also held that synthetic composite DNA is eligible for patenting, and that biotech companies may still seek patents on applications for human genes. In that regard, the Supreme Court decision is good news for both researchers, who argued that patents should not be used to restrict their use of identified genes, and the biotech industry, which quite understandably wants to profit from its investment in gene isolation.

But if you’re an IP lawyer trying to advise clients on the patent-eligibility of their research and development projects, the Myriad ruling is yet another exasperating sign that you can’t rely on the Federal Circuit to decide issues that are supposed to be at the heart of its mission. The United States has a centralized court for patent appeals because Congress wanted a single set of experienced judges to offer definitive interpretations of IP law, which often involves highly technical but economically critical decisions. As former Federal Circuit JudgeArthur Gajarsa, now senior counsel at Wilmer Cutler Pickering Hale and Dorr, said in a speech in March, the court’s statutory mandate is “to normalize patent law … by establishing rules which district courts can follow.”

Law profs, ex-SEC chair protest CommonWealth arbitration bylaw

Alison Frankel
Jun 12, 2013 20:27 UTC

Remember the fight over a mandatory shareholder arbitration bylaw adopted by the board of CommonWealth, an embattled $8 billion real estate investment trust? As I told you last month, when a couple of activist hedge funds sued in Maryland state court to invalidate the 2009 bylaw as part of their hostile takeover bid for the REIT, Baltimore Circuit Court Judge Audrey Carrionruled that CommonWealth’s mandatory shareholder arbitration clause is enforceable. The hedge funds, which had acquired their shares after the bylaw was enacted, subsequently dropped the suit and agreed to arbitrate their claims that CommonWealth’s board had breached its fiduciary duty. But in the meantime, shareholders whose ownership predated enactment of the mandatory arbitration bylaw picked up the fight to invalidate the provision.

On Monday, after Judge Carrion granted their emergency motion to stay arbitration, lawyers for the Central Laborers’ Pension Fund and two individual CommonWealth shareholders filed their opposition to CommonWealth’s motion to compel arbitration. The brief – submitted by Bernstein Litowitz Berger & Grossmann, Saxena White, Berger & Montague, and Tydings & Rosenberg - repeats many of the arguments shareholders made in their emergency stay papers, citing a 2011 San Francisco federal court decision inGalaviz v. Berg that denied Oracle’s motion to dismiss a shareholder derivative suit because the company’s forum selection bylaw was imposed without the consent of shareholders who purchased stock before its enactment. Even though two of the plaintiffs in the CommonWealth derivative suit purchased additional shares after the 2009 mandatory arbitration bylaw took effect, the brief said, the third plaintiff did not. And in any event, according to the brief, shareholders never received adequate notice of a bylaw that impermissibly extinguishes their property rights and violates federal securities laws.

Shareholders have amassed some impressive support for their argument that, as a matter of policy, CommonWealth’s mandatory arbitration bylaw must be ruled invalid. A group of 11 securities law professors, including Bernard Black of Northwestern, John Coates of Harvard and James Cox of Duke (the first three signatories), assert in a joint affidavit that mandatory arbitration of shareholder disputes would undermine U.S. capital markets. “Absent the transparency and visibility provided by legal proceedings in an open courtroom, and the possibility of a rebuke by a judge, fiduciaries would be much less deterred from violating their duties to shareholders,” the joint filing said. “Thus, it is critically important that public shareholders be permitted to vindicate their rights in court.” In particular, the law professors took issue with a provision in the CommonWealth bylaw that bars the award of fees to plaintiffs’ lawyers, even if they prevail in the arbitration. That clause, the professors said, makes it too expensive for shareholders to bring breach-of-duty claims, thus insulating the board from accountability.

MBIA loses $100 million case vs flamboyant distressed debt investor

Alison Frankel
Jun 11, 2013 22:38 UTC

Is there any private equity investor with a more flamboyant personal style than Lynn Tilton, CEO of the distressed debt private equity firm Patriarch Partners? Tilton is Yale- and Columbia-educated and Wall Street-trained, but here’s the first impression she made in a 2011 interview with New York magazine: “Tilton’s lipstick is frosty pink, her eyelashes are long and inky black, her hair is Barbie-doll blonde, with curls spilling over cleavage that is invariably visible, invariably tan, invariably accentuated by a diamond necklace, and invariably supported by a tight-fitting garment made by one of her favorite designers. Today she has chosen a Roberto Cavalli miniskirt accessorized with spike-heeled suede boots and a fur-trimmed cape.”

Not your typical vulture fund investor, though Tilton did say, “There’s never been a carcass I wouldn’t put on my back.” (Patriarch’s current portfolio of 39 companies includes the Rand McNally map business, several cosmetics companies and a bevy of industrial concerns.) Forbes investigated whether Tilton should be included on its billionaires’ list in 2011 and ended up deciding that she’s probably worth at least $830 million, although the magazine found her so confounding a character that it produced an indelible week-long series of articlesabout (among other things) Patriarch’s predilection for extremely complex transactions and Tilton’s brassy, sex-tinged antics.

You might not think that a woman like Lynn Tilton would play well before a judge like U.S. Senior District JudgeRobert Sweet, who was appointed to the bench in 1978 and turned 90 years old last October. But it would be a mistake to underestimate either of them. In a 155-page decision issued late Monday in the bond insurer MBIA’s $100 million breach-of-contract suit against Patriarch, Judge Sweet found Tilton to be “vigorous, authoritative, informed and almost entirely supported by documentary evidence,” with a “clear and unshaken” recollection of her interactions with MBIA. “She was an effective witness and in the main entirely credible,” Sweet wrote. The judge even cited, in a footnote, an ABC News feature that called Tilton a “stylish job saver.”

The Wall Street Journal wins a round against Sheldon Adelson

Alison Frankel
Jun 5, 2013 22:40 UTC

Sheldon Adelson, the billionaire atop the Las Vegas Sands casino empire, must surely hold the unofficial U.S. record for appearances as a libel and defamation plaintiff. I’ve written before about Adelson’s quick trigger for libel claims, but he outdid himself this February when he sued Kate O’Keefe, a reporter for The Wall Street Journal in Hong Kong, over a December 2012 piece in which she and a co-author referred to him as “a scrappy, foul-mouthed billionaire from working-class Dorchester, Mass.” Adelson took exception to being described as “foul-mouthed,” but his underlying objection may have been to the premise of the article, which drew a contrast between Adelson and the equally abrasive but more polished former Sands China CEO Steven Jacobs, with whom Adelson has been engaged in litigation over the company’s casino operations in Macau. The Journal reporter whom Adelson sued in Hong Kong had previously written stories about Jacobs’s claim – asserted in legal filings in his Nevada wrongful termination action against the Sands – that Adelson had condoned a “prostitution strategy” at the Macau casino. Adelson, who subsequently sued Jacobs for defamation in Miami-Dade Circuit Court, seems to have regarded The Wall Street Journal as a favored recipient of leaks from his archenemy Jacobs.

But the casino magnate cannot pierce New York’s shield law for journalists in order to confirm those suspicions, according to a ruling last Friday by New York State Supreme Court Justice Donna Mills. Mills sued Kate O’Keefe, a reporter for The Wall Street Journalgranted a motion by the Journal’s lawyers at Davis Wright Tremaine to quash a third-party subpoena and deposition demand by Adelson in the Florida defamation litigation against Jacobs, finding that Adelson didn’t satisfy any of the three prongs of the test for overcoming the qualified reporters’ privilege. And according to the judge, even if Adelson were able to show that emails and phone records documenting contacts between Jacobs and the Journal were highly material and critical to his Florida case – the first two prongs of the test – he wouldn’t be able to show that there’s no alternative source for the information, since Adelson can get the material from Jacobs himself.

Mills’s ruling is good news for reporters because it’s “a classic example of the proper application of the New York shield law,” said Wall Street Journal counsel Laura Handman of Davis Wright. But it’s not the end of the paper’s Adelson problems. As Davis Wright asserted in a reply brief filed on March 15 in the New York quash litigation, the mogul and his lawyers at Olasov + Hollander and Coffey Burlington seem to expect that information from the Journal will aid Las Vegas Sands in its defense against Jacobs’s wrongful termination case in Nevada. Discovery in that suit has been stayed for a resolution of jurisdictional issues. In the meantime, Davis Wright contends, Adelson is trying to use the Florida defamation action and his Hong Kong suit against Journal reporter O’Keefe to obtain discovery.

Accusations fly on Day 2 of hearing on BofA’s $8.5 bln put-back deal

Alison Frankel
Jun 5, 2013 00:17 UTC

The biggest news to come out of Tuesday’s ongoing hearing to evaluate Bank of America’s proposed $8.5 billion settlement with investors in 530 Countrywide mortgage-backed securities trusts is that the Office of the Comptroller of the Currency gave Bank of America clearance to put Countrywide into bankruptcy if Countrywide’s liabilities threatened BofA’s existence. Or at least that’s what Kathy Patrick of Gibbs & Bruns, who represents 22 institutional investors that negotiated the proposed deal with BofA and Countrywide MBS trustee Bank of New York Mellon, said her clients were told by BofA Chief Risk Officer Terry Laughlin in 2011 as they tried to come to terms on a settlement of investor claims that Countrywide breached representations and warranties about the underlying mortgage loans. To my knowledge, Patrick’s assertion – which was intended to support her argument that MBS investors risked getting much less than $8.5 billion for their put-back claims – is, if true, the first tangible indication that Bank of America ever did more than hypothesize bankruptcy for Countrywide.

Objectors to the proposed settlement, meanwhile, scored points with their argument that BNY Mellon had options aside from acquiescing to what AIG counsel Michael Rollin of Reilly Pozner called “a sweetheart deal for BofA.” Both Rollin and his partner Daniel Reilly, who occupied most of the three hours of opening arguments by objectors (including 22 AIG-related entities, several Federal Home Loan Banks, the investment manager Triaxx and a variety of pension funds and local banks), emphasized that after the Countrywide MBS trustee received a demand letter from Gibbs & Bruns on behalf of major institutional investors, the trustee could simply have begun requesting loan files from BofA as the servicer of Countrywide MBS trusts, evaluating those loan files for material breaches, and demanding that Bank of America repurchase defective loans.

Rollin played a deposition clip from a BofA servicing executive, who said it was the bank’s official policy to repurchase loans that breached representations and warranties. That statement alone, Rollin said, proved the fallacy of arguments that BNY Mellon and the Gibbs & Bruns investor group could not have pierced the corporate veil to tag Bank of America with successor liability for Countrywide’s breaches. The trustee could simply have asserted put-backs to BofA as the servicer, Rollin suggested, without ever getting into the quagmire of successor liability. After all, the Reilly Pozner lawyers argued, the $8.5 billion settlement amounts to the put-back of only 2.5 percent of the 1.6 million mortgages underlying 530 Countrywide MBS trusts covered by the deal. Had BNY Mellon taken the alternative route of demanding the put-back of defective loans, they said, the trustee could have forced BofA to buy back a higher percentage of loans.

It’s (finally) time for objectors to BofA’s MBS deal to make their case

Alison Frankel
Jun 4, 2013 13:15 UTC

To say that the hearing to evaluate Bank of America’s proposed $8.5 billion breach of contract settlement with investors in Countrywide mortgage-backed securities got off to a slow start would be something of an understatement. In a courtroom so crowded that New York State Supreme Court Justice Barbara Kapnick repeatedly admonished observers to clear a path to the door, the judge heard hours of pretrial motions, many on issues she regarded as already settled. In particular, objectors to the settlement – led by AIG, several Federal Home Loan Banks and other assorted pension and investment funds – told Kapnick that they should not be forced to proceed with opening statements until they’ve had a chance to take depositions based on privileged communications between Bank of New York Mellon, the Countrywide MBS trustee, and its lawyers at Mayer Brown. Kapnick ordered the documents produced late last month, and AIG counsel Daniel Reilly of Reilly Pozner said it wouldn’t be fair to begin a hearing to determine whether BNY Mellon made a reasonable decision to agree to the $8.5 billion settlement – which resolves potential claims by 530 trusts that Countrywide breached representations and warranties about underlying mortgage loans – until objectors have quizzed witnesses on the confidential material.

Kathy Patrick of Gibbs & Bruns, who represents BlackRock, Pimco, MetLife and other major institutional investors that negotiated the deal with BofA and BNY Mellon, said the objectors just wanted to delay Kapnick’s final reckoning of the settlement, which is being evaluated in a special proceeding under New York trust law. Reilly, who argued unsuccessfully last week for a stay of the case while the state appeals court considers whether it should be heard by a jury, insisted that he just wants the proceeding to be fair. Judge Kapnick, meanwhile, seemed preoccupied with getting the actual hearing under way. “I am trying to make this go ahead,” she told the objectors at one stage. “I am not going to reopen a point we spent an inordinate amount of time arguing about,” she said at another. “At some point, you have to get going with this.”

The delay issue came to a head in the afternoon session, when yet more motions to limit testimony and evidence had to be resolved. Reilly asked the judge to restrict Patrick from asserting that 93 percent of Countrywide MBS investors support the settlement when, in fact, the majority of certificate holders haven’t opined one way or the other. Patrick stood up and promised that she’d henceforth say that 93 percent do not object to the deal.

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