Opinion

Alison Frankel

First Amendment protects Internet search results: N.Y. judge

Alison Frankel
Mar 28, 2014 17:34 UTC

U.S. District Judge Jesse Furman of Manhattan grabbed the chance Thursday to set precedent on a question that has received surprisingly little attention in the courts: Does the First Amendment’s protection of free speech extend to the results of Internet searches? Furman was clearly captivated by the issue as an intellectual challenge, delving into the vigorous academic discussion of the First Amendment and Internet search even deeper than the two sides in the case, the Chinese search engine Baidu and the activists who sued the site for supposedly violating their civil rights by blocking their pro-democracy works from appearing in search results. In a supersmart opinion that Furman seems to have written to be widely read, the judge concluded that when search engines exercise editorial judgment – even if that judgment is just algorithms that determine how results will be listed – they are entitled to free speech protection.

That protection, he said, is quite broad in scope. “There is a strong argument to be made that the First Amendment fully immunizes search-engine results from most, if not all, kinds of civil liability and government regulation,” Furman wrote. “The central purpose of a search engine is to retrieve relevant information from the vast universe of data on the Internet and to organize it in a way that would be most helpful to the searcher. In doing so, search engines inevitably make editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information (for example, on the first page of the search results or later).”

The judge said U.S. Supreme Court precedent on the First Amendment “all but compels” his conclusion. The plaintiffs in the Baidu case are New York residents accusing the search engine of suppressing their political speech at the behest of the Chinese government. Those allegations, Furman wrote, necessarily imply that Baidu is exercising editorial judgment. So the search engine, he said, is no different from a newspaper editor deciding what stories to run, a guidebook writer picking which events to highlight or Matt Drudge making judgments “about which stories to link and how prominently to feature them.” And though it might seem counterintuitive that the right of free speech would protect editorial judgments to squelch free speech, Furman said that’s the point of the First Amendment.

“The First Amendment protects Baidu’s right to advocate for systems of government other than democracy (in China or elsewhere) just as surely as it protects Plaintiffs’ rights to advocate for democracy,” he wrote.

Two other federal judges have previously held that the First Amendment applies to Internet search results, according to Furman: a 2007 ruling, Langdon v. Google, from U.S. District Judge Joseph Farnan of Delaware, and a 2003 case, Search King v. Google, from U.S. District Judge Vicki Miles-LaGrange of Oklahoma. Neither gave the issue the thorough analysis Furman devoted to it. Of his own accord, the judge dived into the academic debate on free speech, government regulation and Internet research (which, he noted, plaintiffs’ lawyer Stephan Preziosi of The Law Offices of Stephen N. Preziosi hadn’t cited). In particular, Furman seems to have been guided by a 2012 piece by Eugene Volokh and Donald Falk, “Google First Amendment Protection for Search Engine Results,” which, among many other points, notes that search engine algorithms “inherently incorporate the search engine engineers’ judgments about what material users are most likely to find responsive.”

Shareholders beware: Federal judge OKs corporate arbitration clause

Alison Frankel
Mar 27, 2014 21:10 UTC

Complaining about mandatory arbitration clauses in consumer and employment contracts is like whining about the weather: an exercise in futility. Whatever slim hope remained for opponents of mandatory arbitration after the U.S. Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion was extinguished last year in the court’s decision in American Express v. Italian Colors, which said that arbitration clauses are valid even if they effectively preclude people from enforcing their statutory rights. After the Italian Colors ruling came down, I speculated that corporations would next take advantage of the Supreme Court’s enthusiasm for arbitration by enacting provisions to require shareholders to arbitrate their claims against the company or its directors.

Law professors James Cox of Duke and John Coates of Harvard told me that some intrepid business was bound to attempt to impose arbitration on its shareholders, either in the charter of a company first offering shares to the public or in a bylaw amendment for an already public company. The profs said that the Securities and Exchange Commission, which has historically opposed mandatory shareholder arbitration, might not be able to stop a corporation that chose to fight all the way to the Supreme Court. The biggest obstacle to requiring shareholders to give up the right to sue in court, Coates told me, would probably be the issue of providing adequate notice. Would courts agree that shareholders had consented not to sue simply by purchasing the stock of a corporation with a mandatory arbitration provision?

We now have an answer to that question from a federal judge in Boston – and it’s one that should embolden corporations considering shareholder arbitration clauses. On Thursday, U.S. District Judge Denise Casper refused to invalidate a mandatory shareholder arbitration clause in the bylaws of the notorious Commonwealth real estate investment trust. Casper said that under the principle of res judicata, she was bound by two previous opinions from a Maryland state court judge who found that the Commonwealth arbitration clause was valid. But even if she were ruling on the merits of the provision, Casper said, she would find that shareholders hadn’t shown mandatory arbitration to be unenforceable.

U.S. stays out of Argentina pari passu case at SCOTUS – for now

Alison Frankel
Mar 26, 2014 19:18 UTC

France, Brazil and Mexico told the U.S. Supreme Court this week that the 2nd Circuit Court of Appeals has endangered sovereign debt markets with its ruling last year against the Republic of Argentina. In amicus briefs supporting Argentina’s petition for Supreme Court review, the foreign sovereigns argue that the 2nd Circuit gravely misinterpreted the so-called “pari passu” (or equal footing) clause of Argentina’s sovereign debt contracts. By ruling that Argentina may not pay bondholders who exchanged defaulted bonds for restructured debt before it pays hedge fund creditors that refused to exchange their defaulted bonds, the amicus briefs argue, the 2nd Circuit has undermined international debt restructurings, permitting vulture investors to hold entire foreign economies hostage.

The United States made quite similar arguments, as you may recall, when Argentina’s pari passu case was before the 2nd Circuit. But there’s no filing from the Justice Department among the 10 new amicus briefs urging the Supreme Court to take Argentina’s appeal. Does that mean Argentina has lost its most influential friend in the U.S. court system?

It does not, but it does mean that the administration is waiting for an invitation from the Supreme Court justices before it takes a position in the Argentina pari passu case. And there’s at least some chance the invitation will never come.

Strine: Stop shareholder activism from hurting American investors

Alison Frankel
Mar 25, 2014 19:32 UTC

This country’s most important arbiter of corporate law – Chief Justice Leo Strine of the Delaware Supreme Court – believes that shareholder democracy has run amok. In a startling new essay for the Columbia Law Review, “Can We Do Better by Ordinary Investors?” Strine outlines the deleterious long-term effects of subjecting corporate decision-makers to shareholder votes dominated by short-term investors. These ill consequences range, according to Strine, from the outright dollars corporations must spend to educate shareholders about everything they’re entitled to vote on all the way to excessive risk-taking and regulatory corner-cutting by executives and directors worried about delivering quick returns lest they be ousted by shareholders. Strine is deeply worried about a divergence of interests between money managers, who wield the power of shareholder votes, and ordinary investors in their funds, who are typically saving for retirement or their kids’ education. He’s convinced that the entire American economy will suffer unless short-term investors are reined in.

Strine’s diagnosis is interesting enough, though he’s previously written about what he considers to be the cancer of short-term investing. In the new essay, though, he also suggests a cure: eight actual suggestions to restore power to corporate boards and long-term investors (plus a pie-in-the-sky fantasy about changing the U.S. tax code to encourage shareholders to take a long view of their investments). Strine, who calls himself “someone who embraces the incrementalist, pragmatic, liberal tradition of addressing the world as it actually is,” argues that his proposals do not roll back shareholders’ hard-won rights to a voice in corporate affairs. Instead, he says, he’s “trying to create a system for use of those rights that is more beneficial to the creation of durable wealth for them and for society as a whole.”

The proposals make Strine’s paper indispensable reading if you run a corporation or advise corporate decision-makers. Even if you’re put off by his somewhat tedious rhetorical device of styling the essay as a response to Harvard Law professor Lucien Bebchuk – who advocates relentlessly for expanding shareholders’ franchise and apparently plays Dungeons & Dragons – or by the 154 dense footnotes in Strine’s 54-page article, you should take a look at his suggestions, which begin on page 29. Strine has done more thinking, reading and writing about the real-world consequences of shareholder power than anyone I can think of. He spent 16 years, after all, as a judge in Delaware Chancery Court, three of them as chancellor, before ascending to the Supreme Court this year. And based on those 154 footnotes, Strine seems to have devoted most of his time off of the bench to reading academic papers on corporate governance and shareholder rights. (Or, at least, whatever he could spare from keeping abreast of pop culture.)

Fannie, Freddie investors: Treasury plotted to nationalize shares

Alison Frankel
Mar 24, 2014 20:32 UTC

Some very sophisticated hedge funds are claiming to be victims of a secret Treasury Department scheme to nationalize the government-sponsored mortgage entities Fannie Mae and Freddie Mac. In a summary judgment brief filed Friday in federal court in Washington, D.C., Fairholme Funds and Perry Capital (along with other Fannie and Freddie preferred shareholders) said they’ve obtained a Treasury memo from December 2010 that proves the government intended to wipe out the value of their shares without telling them.

“The meaning of the Treasury memorandum is crystal clear: The government of the United States established a policy to destroy private shareholder value,” the brief said.

Fannie and Freddie shareholders, as you may recall, are suing the government in both U.S. district court and the Court of Federal Claims over an August 2012 amendment to the terms of Treasury’s agreement to invest taxpayer money in Fannie and Freddie. They contend that up until the amendment, preferred shareholders believed that if Fannie and Freddie returned to profitability under the conservatorship of the Federal Housing Finance Agency, private investors would share the spoils. The 2012 amendment, they assert, illegally cut off their interests by requiring Fannie and Freddie to pay Treasury a quarterly dividend that essentially delivers all of the housing entities’ net worth to the government.

Can federal judges base rulings on their own investigations?

Alison Frankel
Mar 21, 2014 21:19 UTC

Last year, when U.S. District Judge Sterling Johnson of Brooklyn was skeptical about the impact of a suit accusing a Subway restaurant of failing to provide access to customers in wheelchairs, he took a field trip. According to an opinion he wrote in March 2013, Johnson checked eight establishments that had been targeted in Americans with Disabilities Act suits by the same team of plaintiffs lawyers. The cases had all been resolved through settlements or default judgments, but Johnson was shocked to discover that the defendants hadn’t bothered to fix handicapped access problems. The judge’s fact-finding mission confirmed his worst suspicions that the lawyers who brought the cases were more concerned about ginning up fees for themselves than about the civil rights of the disabled.

Judge Johnson’s opinion denying any fees to lawyers he described as “parasites” was based on many considerations aside from his field trip to the targeted restaurants. But when the 2nd Circuit Court of Appeals reviewed his opinion, Johnson’s judicial expedition was all that mattered. In a much-discussed summary order on March 11, Chief Judge Robert Katzmann, Judge Robert Sack and U.S. District Judge Jed Rakoff (sitting by designation) held that Johnson erred when he drew conclusions from his own investigation. The 2nd Circuit said that according to the rules of evidence in federal court, judges are permitted only to consider indisputable facts from unquestionable sources. Judge Johnson hadn’t permitted the restaurants he visited nor the plaintiffs’ lawyers in the case to contest or explain what the judge witnessed. The appeals court judges said that under those circumstances, they couldn’t be sure that the restaurants’ conditions were beyond dispute.

The clear message from the 2nd Circuit was that Judge Johnson should not have permitted his own investigation to affect his decision. That certainly seems like a reasonable conclusion. In our adversary system, judges are supposed to preside over investigation by opposing parties, not to conduct their own independent fact-finding outside of the courtroom. But in a decision this week, Judge Richard Posner of the 7th Circuit Court of Appeals has done exactly what the 2nd Circuit seems to have frowned upon in its ruling on Judge Johnson’s restaurant visits.

Wachtell plays shareholder savior in weird National Interstate case

Alison Frankel
Mar 17, 2014 20:36 UTC

There is probably no law firm more closely associated with corporate charter and bylaw provisions requiring shareholders to litigate their claims in Delaware Chancery Court than Wachtell, Lipton, Rosen & Katz. Wachtell didn’t defend the Chevron and FedEx cases that led then Chancellor Leo Strine to uphold the validity of forum selection clauses, but Wachtell partners Theodore Mirvis and William Savitt (among others) have been ardent boosters of the tactic as a means of curbing the expensive and duplicative shareholder suits that almost inevitably now follow deal announcements.

That’s what makes Wachtell’s role in the litigation over American Financial’s tender offer for the 48 percent stake in National Interstate that it doesn’t already own so notable. In representing a shareholder seeking to squelch the deal – National Interstate founder Alan Spachman, who owns more than 9 percent of the outstanding shares – Wachtell engaged in the sort of forum selection gamesmanship we usually see from shareholder class action firms, leading to accusations of forum shopping that Wachtell is more accustomed to tossing than receiving. After two different state court judges in Ohio refused to enjoin American Financial’s $30 per share tender offer to National Interstate’s minority shareholders, despite widespread criticism of the sale process, Wachtell and Baker & Hostetler sued on Spachman’s behalf in federal court in Akron, adding federal securities claims to the breach of duty assertions in the two previous cases.

The third time turned out to be the charm for National Interstate’s minority shareholders. Despite American Financial’s arguments that Spachman and his lawyers were blatantly shopping for a friendly judge and that a single shareholder should not be permitted to block a $300 million deal, U.S. District Judge James Gwin was willing to grant what his state-court cohorts were not. At the end of a long hearing Friday, Gwin said he would enjoin the tender offer from closing Monday. On Sunday, American Financial announced that it was dropping the offer and returning shares already tendered.

Google to 9th Circuit: Undo unworkable ‘Innocence’ copyright ruling

Alison Frankel
Mar 14, 2014 21:47 UTC

Does Chief Justice Alex Kozinski of the 9th Circuit Court of Appeals know more about the Copyright Act than the U.S. Copyright Office?

Not according to Google. In a new brief to the 9th Circuit, Google has asked the entire court to review a controversial Feb. 26 opinion in which Kozinski and Judge Ronald Gould concluded that Google and YouTube must take down video from the explosive film “Innocence of Muslims” because the movie likely infringes the right of an actress, Cindy Lee Garcia, to control her own five-second performance in the film. Google’s new brief argues that Kozinski and Gould misinterpreted the Copyright Act when they found, in an issue of first impression, that Garcia likely has an independent interest in her performance. And the company’s lawyers at Hogan Lovells gave the 9th Circuit a good reason why all of the judges on the court should reconsider Kozinski’s take on Garcia’s rights: A week after his opinion came out, the U.S. Copyright Office rejected Garcia’s application to register a copyright on her performance in “Innocence of Muslims.” In a March 6 letter to Garcia’s lawyer, Cris Armenta of The Armenta Law Firm, the Copyright Office said that its “longstanding practices” do not allow actors to copyright individual performances within a movie.

Google is not alone in hoping that the 9th Circuit will reconsider the Kozinski opinion. As the brief points out, the possibility that actors with bit parts may have a right to control the distribution of entire movies has struck fear in film producers and documentarians. Meanwhile, a group of news organizations, including The New York Times and the Los Angeles Times, has filed an amicus brief arguing that the 9th Circuit’s takedown order contradicts important First Amendment principles and ought to be reconsidered. (Technically, the publishers’ brief addressed en banc review of the 9th Circuit’s decision not to stay the takedown order while Google pursues appeals, but the same arguments also apply more broadly.)

Cranky Posner opinion mocks brief, suggests sending lawyer to jail

Alison Frankel
Mar 13, 2014 19:13 UTC

In an interview last November with The Daily Beast, Judge Richard Posner of the 7th Circuit Court of Appeals explained why he wouldn’t want to sit on the U.S. Supreme Court. “I don’t think it’s a real court,” Posner said. “It’s a quasi-political party. President, House of Representatives, Supreme Court. It’s very political. And they decide which cases to hear, which doesn’t strike me as something judges should do. You should take what comes.”

That idea – that judges should not shape the law by cherry-picking cases but by deciding the cases that come their way – stuck with me. Posner’s not completely ingenuous, because, as he goes on to say in the interview, he does pick which opinions he wants to write and assigns out the rest. Nevertheless, it says something profound about American justice that Posner applies his incisive intellect to a semi-random gamut of cases, matters large and small, legally interesting and run-of-the-mill.

The acerbic judge was at his worst – or best, depending on your perspective – in an opinion Wednesday that’s already become an instant classic. Posner mocked the brief filed by a car crash victim and her lawyer, who were found in civil contempt for failing to deposit $180,000 in a trust account while they fight over the money with a union healthcare fund, as “a gaunt, pathetic document” with a grand total of 118 words of argument (including citations). He said the conduct of the crash victim and her lawyer was “egregious” and “outrageous,” and directed the trial judge presiding over their dispute with the union fund to consider throwing them in jail for contempt until they’ve come up with the $180,000. Posner suggested that the Justice Department might also be interested in the case, and then, to boot, scolded the trial judge, U.S. District Judge Joan Lefkow of Chicago, for permitting the case to drag on as “the stench rose.” Would Posner get to write such a masterpiece if he were on the Supreme Court? I think not.

Scant attorney-client protection for GM

Alison Frankel
Mar 12, 2014 20:00 UTC

On Tuesday, Reuters found out that General Motors is facing a criminal investigation by federal prosecutors in Manhattan into allegations that the auto company failed to alert consumers and regulators about long-running ignition-switch problems. Word of a possible criminal case followed GM’s revelation Monday that it has hired Jenner & Block and King & Spalding to assist its general counsel in an internal investigation of the company’s response to the ignition defect, which has been blamed for 13 deaths. The confluence of the two investigations raises an intriguing question: How much will GM’s own lawyers have to tell the Justice Department about their findings?

The answer: a lot. GM lawyers will almost certainly have to inform the government of all the facts they uncover, despite Justice Department guidelines that prohibit prosecutors from conditioning leniency for corporate defendants on their waiver of attorney-client privilege. Prosecutors are not supposed to ask corporations outright to surrender the traditional protections shielding legal advice, attorney work product and communications between clients and their counsel. But the Justice Department guidelines allow government lawyers to demand an account of the facts corporate investigators have obtained. If a corporation wants to receive credit for cooperating with the government, the guidelines state, then it “must disclose the relevant facts of which it has knowledge,” including facts uncovered through an internal investigation.

That policy, which the Justice Department promulgated in August 2008, came in response to widespread criticism of the government’s previous requirement that corporations waive their attorney-client privileges in order to receive a deferred prosecution or non-prosecution deal. Theoretically, the revised guidelines permit cooperating corporate defendants to assert attorney-client privilege over materials such as the notes their law firm investigators make during interviews of corporate witnesses, so long as inside investigators are careful to disclose all relevant facts to prosecutors. “Lawyers have to conduct internal investigations in a way that the facts can be gathered and then communicated to the government while still preserving the privilege,” said former Justice Department prosecutor Nathaniel Edmonds, now at Paul Hastings.

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