Alison Frankel

Justice Department sides with Madoff’s banks on SCOTUS review

Alison Frankel
May 27, 2014 20:02 UTC

Not every shred of hope is lost for Bernard Madoff trustee Irving Picard in his quest to recover billions from the international banks he has accused of abetting Madoff’s fraud. But it’s looking bleak for the Madoff trustee after the Justice Department filed a brief Friday at the U.S. Supreme Court. In response to the court’s request for the government’s view of Picard’s petition for a writ of certiorari, Solicitor General Donald Verrilli advised the justices to reject Picard’s appeal.

The dismissal in 2013 of Picard’s fraud suits by the 2nd U.S. Circuit Court of Appeals “does not conflict with any decision of (the Supreme Court) or of another court of appeals,” the SG’s brief said. “The decision below also does not preclude customers from pursuing their own actions against (the banks) based on the same alleged conduct that forms the basis of (Picard’s) claims. Further review is not warranted.”

The brief is an arduous trudge through the deep weeds of the law on federal pre-emption of state contribution claims; subrogation rights of the Securities Investor Protection Corporation; and the Bankruptcy Code standing of securities trustees to bring common-law claims on behalf of brokerage customers. If you are in the extremely small group of people for whom these are consequential questions, perhaps you’ll find illumination in the SG’s discussion of the intersection of Picard’s claims with such precedent as Caplin v. Marine Midland and Redington v. Touche Ross. For the rest of us, the brief is notable for the many different ways in which the Justice Department and its co-signer, the Securities and Exchange Commission, undercut Picard’s arguments for Supreme Court review.

According to the filing, the issues are obscure, the 2nd Circuit decision was well-founded and Picard’s appeal suffers from procedural defects because he didn’t even raise at the 2nd Circuit some of the arguments he’s asserting in his cert petition. In short, the Justice Department and the SEC said, there’s no justification for the Supreme Court to revive Picard’s suits claiming that JPMorgan Chase, UBS, HSBC and Unicredit made possible Madoff’s infamous Ponzi scheme.

It’s still possible that four justices will vote to take the case when it comes up for conference next term. A fascinating empirical study of cert grants and SG briefs, published in the George Mason Law Review in 2009, concluded that the Supreme Court followed the Justice Department’s recommendation in about 80 percent of the cases in which it invited briefing by the SG between 1998 and 2004. But in 18 percent of the cases in which the SG recommended against review, the justices nonetheless granted cert. Those aren’t great numbers for Picard, but his chances of a hearing at the Supreme Court are still better, according to the 2009 study, than they’d have been if the justices had not asked for the Solicitor General’s brief. A spokeswoman for Picard and his BakerHostetler team said in an emailed statement that the trustee and his lawyers “respectfully disagree” with the government’s brief and are still hoping that the Supreme Court grants cert and resolves the important issues the case presents.

In Chevron case, Ecuador says new tests prove long-standing pollution

Alison Frankel
May 22, 2014 21:22 UTC

The biggest frustration for Ecuador’s ambassador to the United States, Nathalie Cely Suárez, in her country’s seemingly endless dispute with Chevron over the cleanup of old drilling sites in the Amazon rainforest, is how effectively the oil company has created doubts about the contamination. “Of course contamination existed, and still exists today,” Cely said in an interview Wednesday. “People tend to forget that the most important thing in this case is people’s lives.”

This week, for the first time, the Ecuadorean government disclosed the results of water and soil testing conducted in 2013 by its experts — the U.S. environmental, engineering and infrastructure consultant Louis Berger Group — at five sites once operated by Chevron predecessor Texaco. Cely told me that she hopes the government’s disclosure, which comes in documents from its ongoing bilateral investment treaty arbitration with Chevron, will shift attention back to the plight of the Ecuadoreans who live in the drilling region and away from the conduct of the lawyers who represented the villagers. “Finally, we have our own proof,” she said. It’s one thing for Chevron to discredit testing by experts working for plaintiffs’ lawyers deemed by a federal judge in the United States to have engaged in fraud. But Cely said, “It’s another story when you have your own report, your own findings.”

Nothing in the Chevron case is simple and straightforward, so, of course, Chevron has its own interpretation of the Ecuadorean government’s test results. The oil company contends that the samples are evidence only of the harm inflicted on the region by the government’s own state-sponsored drilling and its failure to live up to remediation promises. “Rather than take responsibility for their activities,” a Chevron spokesman said in an emailed statement, ” President Correa and his subordinates continue to lay blame elsewhere. The only entities responsible for current environmental and social conditions in the Oriente are the Republic of Ecuador and Petroecuador.”

Allergan investors (other than Ackman!) sue for say in takeover fight

Alison Frankel
May 21, 2014 21:56 UTC

Valeant Pharmaceutical’s soon-to-be sweetened $47 billion bid for Allergan has been called “a weird textbook for the Future of Mergers & Acquisitions”: It’s the first deal in which an activist hedge fund investor, William Ackman of Pershing Square Capital, has teamed up with an operating company on a bid; and the first in which hostile bidders have convened an unofficial shareholder meeting and proxy vote to scare their target into negotiations. Ackman and Valeant are adding new steps to the old M&A dance — and shareholder class action lawyers are trying to figure out how to keep up with their moves.

On Tuesday, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer filed their second declaratory judgment complaint against the Allergan board in Delaware Chancery Court. Two weeks after suing directors for supposedly promulgating a misinterpretation of a proposed bylaw amendment that would serve to entrench the board, the shareholder firms are back with a new theory and a new client. This time around, the lead plaintiff is the Police Retirement System of St. Louis and the allegation is that the Allergan board intends to rely on a “constituency” clause in its certificate of incorporation to rebuff a takeover offer that benefits shareholders. (Hat tip to the great Chancery Court newsletter, Chancery Daily.)

Allergan’s constituency provision, according to the complaint, permits the board to consider the interests of groups other than shareholders — such as customers and employees — in evaluating a takeover offer. The suit claims that the provision is contrary to Delaware’s doctrine, which holds that the board’s primary obligation is to maximize shareholder value. The plaintiffs’ firms, including Robbins Arroyo, are asking Delaware Chancellor Andre Bouchard to declare that Allergan’s constituency provision is void and to enjoin the board from relying on it.

5th Circuit’s last word to BP leaves constitutional question-mark

Alison Frankel
May 20, 2014 22:28 UTC

The 5th U.S. Circuit Court of Appeals has had it with BP and its attempts to evade the consequences of the deal it struck to end litigation over the 2010 Deepwater Horizon oil spill.

On Monday, eight 5th Circuit judges refused to review the decision of a divided three-judge panel, which held in March that the class action settlement’s payout process complies with the U.S. Constitution. That’s the last word from this court, which has now heard BP’s protestations about the settlement in four different rounds of briefing before two different three-judge panels. But it may not be the last word in the dispute. A dissent by three 5th Circuit judges practically implores the U.S. Supreme Court to take the case and resolve tricky constitutional questions about standing in class action settlements.

Judge Leslie Southwick wrote an opinion explaining the 5th Circuit’s decision not to rehear BP’s appeal en banc. His explanation is heavy on specifics about whether a particular exhibit in the settlement agreement conflicts with a policy statement subsequently issued by the claims administrator and ratified by the judge overseeing the class action, U.S. District Judge Carl Barbier of New Orleans. But Southwick’s opinion boils down to a simple idea: BP made compromises when it bought global peace via a gigantic class action settlement, and now it’s stuck with the repercussions.

Lesson from the smartphone wars: Litigation is not a business plan

Alison Frankel
May 19, 2014 19:55 UTC

After almost five years of suing each other in courts in the United States and Europe over patents on mobile devices, Apple and Google abruptly announced Friday night that they’ve called a ceasefire: They’re dropping all of the litigation. They’re not even making a deal to cross-license one another’s IP, just declaring a truce and walking away.

Apple has not yet settled with Samsung, the device manufacturer that most successfully employs Google’s Android operating system, so the two companies haven’t entirely resolved their dispute; evidence from the recently concluded patent infringement trial between Apple and Samsung in San Jose, Calif., revealed that Google is paying at least part of Samsung’s defense costs. (The Korea Times reported Monday that Apple and Samsung are in global settlement talks.) Until there’s a Samsung deal, two law professors, Brian Love of Santa Clara University and Michael Risch of Villanova told Bloomberg, the Google settlement is more important as a symbol than for any actual impact.

What is increasingly obvious is that the same can be said for the entire panoply of smart device patent cases. Apple and Samsung have now been through two long and expensive patent infringement trials before U.S. District Judge Lucy Koh in San Jose. Apple has won both, but the jury in the trial that concluded earlier this month awarded the company only $119.6 million in damages, less than a day’s sales for Samsung. Most importantly, Apple failed to win an injunction in the federal-court litigation. Samsung also tried and failed, in its case at the U.S. International Trade Commission, to win any prohibition on the importation of Apple products. Microsoft, meanwhile, established in separate litigation against Google that individual patents in high-tech devices are worth a pittance.

California finds ‘right to privacy’ for anonymous online commenters

Alison Frankel
May 16, 2014 21:29 UTC

The big headlines this week on privacy and the Internet were about a ruling from the European Union’s highest court, which, as you know, held that Internet search companies must respect a “right to be forgotten.” The EU decision is a money pit for Google and its ilk, which now have to figure out how to respond to people’s requests that search engines disable links to purportedly irrelevant information about them, even if the information is otherwise accurate and publicly accessible. First Amendment advocates in the United States lamented the EU’s decision as an incursion on the public’s access to perfectly legitimate information. I’m with them on that.

In California, by contrast, an intermediate appeals court has just found that privacy and free speech on the Internet actually operate in tandem, not in tension. And while the EU decision involved the privacy rights of those who are the subject of free speech, the California case flipped the inquiry to consider the rights of the speaker. On Wednesday, the Court of Appeal for the Second Appellate District, in Los Angeles, ruled that anonymous online comments are protected by the California state constitution’s right to privacy. The decision reversed a trial court order that the online news site Digital Music News must turn over computer records to the parent company of the digital music sharing site Grooveshark to enable Grooveshark to identify an anonymous commenter who claimed to be an employee.

The anonymous poster, wrote Judge Victoria Chaney for a panel that also included Judges Frances Rothschild and Jeffrey Johnson, “has done nothing more than provide commentary about an ongoing public dispute in a forum that could hardly be more obscure — the busy online comments section of a digital trade newspaper,” Chaney wrote. “Such commentary has become ubiquitous on the Internet and is widely perceived to carry no indicium of reliability and little weight. We will not lightly lend the subpoena power of the courts to prove, in essence, that Someone Is Wrong On The Internet.”

The downside of Ackman’s call for Allergan “meeting”? There is none!

Alison Frankel
May 14, 2014 20:45 UTC

Valeant Pharmaceuticals and its hostile takeover partner William Ackman of Pershing Square Capital have a phalanx of lawyers working on their $47 billion bid for Allergan – Kirkland & Ellis for Ackman; Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom for Valeant- so I don’t know who deserves credit for the tactic they announced yesterday. But whoever came up with the idea of holding an unofficial meeting and proxy vote to give Allergan shareholders an opportunity to urge the board to enter discussions with Valeant is quite a strategist. The Ackman/Valeant proxy is apparently the first time a hostile bidder has called for a non-binding straw poll of shareholders but I bet it won’t be the last. This is a win-win proposition for Ackman and Valeant, and here’s why.

To start, the unofficial meeting and proxy vote permit Allergan’s bidders to avoid two different sorts of obstacles: the company’s board-friendly corporate framework and its recently-adopted poison pill. Matt Levine at Bloomberg View did a great job Tuesday of explaining why Ackman — who holds about 9.7 percent of Allergan’s stock through Pershing — can’t talk directly to other shareholders for fear of crossing the 10 percent “beneficial ownership” threshold and triggering the poison pill. But the pill, Levine explained, has an exception for proxy solicitations like the one Ackman just launched. So the unofficial proxy vote permits Ackman and Valeant to show Allergan what major investors think without actually talking to shareholders.

Plus, Ackman and Valeant don’t have to worry about satisfying requirements in Allergan’s corporate charter and bylaws for shareholder meetings. To convene a special meeting of shareholders – which they would have to do, since Allergan’s regular annual meeting took place on May 6 – they’d have to obtain written consent from 25 percent of the shareholders. (Ronald Barusch of The Wall Street Journal’s Dealpolitik detailed the special meeting process last week, after Valeant mentioned that it might go that route in a conference call with analysts.) Shareholders can bind the corporation through votes at special meetings, though there’s a chance Allergan would claim that a newly-adopted bylaw amendment bars shareholders from replacing directors through a meeting convened by written consent. (It’s complicated, but one pension fund shareholder explained why in a complaint filed last week against Allergan’s board in Delaware Chancery Court.)

The misguided attack on incentive awards in class actions

Alison Frankel
May 13, 2014 20:28 UTC

U.S. District Judge Colleen McMahon of Manhattan included a highly unusual warning in her recent opinion approving the $15 million settlement of a securities class action against the clothing retailer Aeropostale: She’s no longer following the standard operating procedure of awarding extra fees to plaintiffs who lead class actions. “This opinion should serve notice that this court, at least, will not routinely decide to ‘tip’ lead plaintiffs simply because their names appear in the caption,” she wrote, “and will view with some skepticism conclusory arguments that they actually made a meaningful substantive contribution to the lawsuit.”

The award of incentive fees is apparently something of a bugaboo for McMahon, who said she has “always been troubled by the practice,” though she’s previously approved the payments. Unprompted by Aeropostale or objectors to the settlement, the judge raised doubts at a hearing last week about a request by the City of Providence for $11,000 in reimbursement for the 150 hours its legal department expended on the case. McMahon reluctantly approved the request, but only “after much soul searching” and assurances from class counsel at Labaton Sucharow that it received legitimate help from the city’s legal staff. Going forward, McMahon said, she’s not going to be so amenable. Lead plaintiffs, she said, ought to know what is expected of them in class action litigation and shouldn’t sign up for the job if they expect to be paid for it.

“For the most part, I fail to see why a party who chooses to bring a lawsuit should be compensated for time expended in appearing at a deposition taken in order to insure that he is actually capable of fulfilling his statutory obligations, or responding to document requests, or performing what are essentially duplicative reviews of pleadings and motions that his lawyers are perfectly capable of reviewing for him,” McMahon wrote.

College application process violates antitrust law: new suit

Alison Frankel
May 12, 2014 21:19 UTC

Revenue at the Common Application is practically infinitesimal by the standards of big business: $13 million in 2011, the last year for which its tax returns are public. But if you’re the parent of a kid who has applied or will be applying to college, you know Common App’s importance bears little relationship to its revenue. The non-profit completely dominates the college application process. More than 550 institutions in the United States are members of Common App, whose online application services permit students to prepare a single application that can be distributed to multiple schools, along with transcripts and teacher recommendations that are also uploaded to Common App’s site. These days, just about every kid applying to a selective college — one that judges applicants on more than just grades and test scores — is doing it through Common App.

Is that a violation of the Sherman Act?

One of Common App’s for-profit competitors claims it is. In a new antitrust complaint, filed Thursday in federal court in Portland, Oregon, CollegeNET alleges that over the last 10 years, Common App has stealthily changed its agreements with member colleges to impede competition from other application processing companies. Selective colleges, according to the suit, are all desperate to increase the number of applicants for admission, not just for the application fee revenue they receive but more importantly, to boost their selectivity, a key metric in rankings by U.S. News & World Report. By pioneering online applications more than 15 years ago, Common App positioned itself to bestow colleges with hordes of applicants they need in order to slash admission rates. Since then, CollegeNET claims, Common App has used its leverage to impose ever-expanding rules to punish members for using other services.

Common App’s fee structure, for instance, gives members a discount if they agree to use only its services, according to the suit. The non-profit also supposedly requires members to use official Common App forms for teacher evaluations and transcripts, extra submissions from art students, early decision agreements and even processing of application fees. According to CollegeNet, the non-profit “aggressively enforces its policies to ensure compliance and, not coincidentally, exclude competitors.” The complaint offers one concrete example of such supposed ruthlessness: After Tulane tried to stanch a drop in applications after Hurricane Katrina by waiving application fees and allowing fast-track admission, Common App expelled Tulane from membership. When Tulane tried to re-join, Common App allegedly demanded that it sign a multi-year agreement to use the service exclusively.

A smoking gun in debate over consumer class actions?

Alison Frankel
May 9, 2014 22:12 UTC

The biggest obstacle in evaluating class actions involving inexpensive consumer products is the frustrating lack of empirical data. Sure, we can compile statistics on case filings, dismissals, settlements and attorneys’ fees, but publicly available evidence about whether these cases actually benefit the people who bought the supposedly flawed products is scant indeed.

You may remember the tit-for-tat “studies” on consumer class action outcomes issued last December by Mayer Brown (at the behest of the U.S. Chamber of Commerce) and the Consumer Financial Protection Bureau. Not surprisingly, given that Mayer Brown undertook its research to counter, pre-emptively, the CFPB’s preliminary report on mandatory arbitration clauses, the two studies reached opposite conclusions about whether class actions deliver real value to class members.

Both analyses, however, had to extrapolate aggressively to reach their predictable outcomes. There have been thousands of consumer class action settlements, but Mayer Brown based its conclusions about class members’ claim rates on data from a whopping six cases. The CFPB looked at eight. I’m not blaming either of them. They looked hard for data, but it’s just not available in public records.