Opinion

Alison Frankel

New class action: Real victims of Samsung infringement are consumers

Alison Frankel
Feb 10, 2014 19:55 UTC

Once again, we are reminded that defendants underestimate the creativity of the class action bar at their own peril.

Last week, the firms Reese Richman and Halunen & Associates filed quite an interesting class action complaint in federal court in San Francisco. The case asserts that Samsung’s infringement of various Apple patents in its mobile devices – as established in a jury trial in federal court and in a proceeding at the U.S. International Trade Commission – has injured unwitting Samsung mobile device buyers who believed they were purchasing non-infringing products. According to the complaint, the resale market for Samsung devices has been hard-hit by infringement findings against the company; the suit claims that Samsung owners are actually in danger of violating the Tariff Act of 1930 if they attempt to resell infringing tablets and smartphones.

As you may recall, Samsung is on the hook to Apple for more than $900 million in damages after a partial damages retrial in November of its first round of patent infringement claims against Samsung in San Francisco federal court. The purported nationwide consumer class action actually claims far more than that on behalf of Samsung device purchasers. Under one of the suit’s causes of action, the class wants Samsung to repay the entire cost of the infringing mobile devices to the consumers who bought them – or at least the lost value consumers have realized as a result of Samsung’s infringement. Under another theory, class members assert that Samsung must disgorge to them all of its profits from selling infringing devices. That’s a lot of money: According to Apple, Samsung took in $3.5 billion in revenue from the sale of almost 11 million infringing devices.

So what are these theories that give rise to such outsize potential liability? The complaint claims breach of warranty on behalf of Samsung purchasers nationwide, citing state consumer warranty laws. It also claims violations of New York and New Jersey deceptive trade practices laws on behalf of the nationwide class. The New York law, according to the complaint, provides for at least $50 in statutory damages to every purchaser of an infringing device (or, if Apple’s sales tally is correct, $550 million). The New Jersey law allows consumers to seek damages based on arguments that they wouldn’t have bought the devices at all if they’d known of Samsung’s infringement. But that’s not all: The suit also alleges unjust enrichment under California, New York and New Jersey statutes, demanding restitution of the full purchase price of the infringing products. (In addition, the complaint alleges California unfair trade practices laws on behalf of a California-only class.)

Mayer Brown‘s Class Defense Blog, where I first heard about the Samsung consumer suit, points out some of the potential obstacles for consumers claiming damages from the purchase of infringing products, some specific to smart device cases (Did consumers really know or care about infringement claims when they bought tablets and smartphones?) and some the usual class action defenses, such as whether injury and damages can be shown on a nationwide class basis. Mayer Brown’s Archis Parasharami says in the blog post that he’s skeptical judges will buy the theory that infringement harms consumers, but if they do, you can expect a proliferation of such claims. “It is easy to see why plaintiffs’ lawyers might find these kinds of cases attractive,” he wrote. “If the result of a battle between competitors is that a product has been determined to be infringing by a court or agency, that may substantially reduce the work a plaintiffs’ lawyer needs to do to pursue the case. And that lawyer will likely argue that key aspects of liability have already been established before the class action even gets started.”

Big guns roll out to defend securities class actions as SCOTUS amici

Alison Frankel
Feb 6, 2014 19:40 UTC

Conventional wisdom has it that the future of most securities fraud class actions will come down to U.S. Supreme Court Chief Justice John Roberts (and possibly Justice Samuel Alito, who, as a judge on the 3rd Circuit Court of Appeals, wrote quite interesting decisions about fraud-on-the-market reliance). Last term, in dissents in Amgen v. Connecticut Retirement Plans, Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy made clear their skepticism about the court’s 1988 precedent in Basic v. Levinson, the case that made securities fraud class actions possible via its holding that shareholders may be presumed to have relied on corporate misstatements about a stock that trades in an efficient market. Based on the Amgen majority opinion, Justices Ruth Bader Ginsburg, Stephen Breyer, Elena Kagan and Sonia Sotomayor seem disinclined to overturn Basic when the court once again takes up the issue of classwide shareholder reliance on March 5 in Halliburton v. Erica P. John Fund.

Presumably with Chief Justice Roberts in mind, the Erica P. John Fund and its lawyers at Boies, Schiller & Flexner made deference to Supreme Court precedent a major theme of the merits brief they filed last week. As I told you, Boies Schiller cast Basic as a decision rooted in the 80-year-old history of this country’s securities laws, entwined with government regulation of the securities markets and implicitly endorsed by Congress, which has had multiple opportunities over the last 25 years to roll back the presumption of reliance and has repeatedly declined to do so.

As of late Wednesday, it’s not only Boies Schiller saying so to the Supreme Court. Erica P. John – and, by extension, the securities class action industry – has received powerful support in amicus briefs from (among many others) the Justice Department; two former chairmen of the Securities and Exchange Commission (one Republican, one Democrat); 11 current and former members of Congress; and scholars of the doctrine of stare decisis, whose filing was authored by Harvard Law professor Charles Fried – the onetime U.S. solicitor general who wrote the Justice Department brief supporting investors in the original Basic case at the Supreme Court.

Will old M&A class settlements tank private equity collusion case?

Alison Frankel
Jan 29, 2014 20:08 UTC

In his latest update on class actions filed in the wake of deal announcements, Dealbook’s Deal Professor Steven Davidoff (whose day job is teaching law at Ohio State) found that in 2013, shareholder suits followed almost all – 97.5 percent – deals of more $100 million. That’s not quite as inevitable as night following day but it’s getting there, especially when you consider that the rate of post-M&A class action filings is up from 91.7 percent in 2012 and 39.3 percent in 2005. Companies grumble all the time that these suits are nothing more than a “deal tax,” a sort of legal extortion racket by plaintiffs lawyers whose true motive is not enhancing shareholder value but skimming millions in fees for holding up transactions with silly claims.

Regardless of the merits of that argument, I’m sure that when shareholders in seven companies acquired by private equity funds in the early 2000s settled M&A class actions, they never imagined that those settlements could come back and complicate a completely different case. Nor could the settling defendants have imagined that their deal-tax settlements could very well shield them from facing an antitrust collusion class action and its attendant treble damages.

That would be the unintended consequence of M&A shareholder settlements if U.S. District Judge William Young of Boston agrees with Bain Capital, Blackstone, KKR, Goldman Sachs and two other private equity firms that former shareholders in eight companies that changed hands in leveraged buyout deals cannot be certified as a class because of broad releases by shareholders in seven of the deals. In their recently filed brief opposing class certification, the private equity defendants assert that the previous judge in the case, now retired Edward Harrigan, already ruled that shareholders who sold stock in the various deals cannot introduce evidence from those transactions against defendants they released from liability in M&A settlements. As a result of that ruling, the private equity funds argue, the plaintiffs’ evidence of the funds’ alleged overarching collusion to suppress prices is a patchwork, with different plaintiffs permitted to make claims against different defendants in different deals, all depending on which plaintiff released which defendants in which LBO.

How Facebook IPO class action lawyers changed judge’s mind

Alison Frankel
Dec 20, 2013 20:37 UTC

The first paragraph of Facebook’s motion to dismiss a securities class action that raised allegations about disclosures in its initial public offering was a no-brainer. Last February, U.S. District Judge Robert Sweet of Manhattan tossed four shareholder derivative suits based on the same underlying facts, concluding in a voluminous opinion that Facebook had “repeatedly made express and extensive warnings” about potential weaknesses in its revenue model as users shifted from desktop computers to mobile devices. So in May, when Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss the parallel securities class action, which is also before Judge Sweet, they quoted the judge’s own words right back to him, not just in the first paragraph but seven more times in the dismissal brief.

To no avail, as it happened.

Sweet ruled earlier this week that Facebook IPO investors may proceed with their class action, holding that their consolidated complaint made out a sufficient case that the company failed to disclose material information about the impact of mobile usage on Facebook revenues and that the company materially misrepresented its knowledge of that impact. The judge noted twice – once in a footnote and once deep in the ruling in his discussion of materiality – that his new decision might seem to be at odds with his dismissal of the derivative suits. But after a long quote from the previous ruling that included his prior words about Facebook’s “express and extensive warnings,” Sweet called the language “dicta (that) does not change the analysis here.”

So how does a judge move from his finding that a company has told investors all they need to know in advance of its IPO to a holding that (based on untested shareholder allegations, to be sure) those same disclosures and representations are materially deficient? Sweet gave two explanations: The derivative claims were based on an alleged breach of duty, which has a higher evidentiary standard, and class counsel from Bernstein Litowitz Berger & Grossmann and Labaton Sucharow managed to tweak shareholders’ allegations to distinguish their arguments from those in the derivative suit.

How to define a market rate for fees in class action megacases

Alison Frankel
Aug 15, 2013 19:50 UTC

In a notable 2001 opinion called In the Matter of Synthroid Marketing Litigation, Judge Frank Easterbrook of the 7th Circuit Court of Appeals set out guidelines for trial judges awarding fees to plaintiffs lawyers in class action megacases, defined as those in which the class recovery exceeds $75 million. Easterbrook said there should be no automatic cap on fees, even in these very big cases. Instead, he pointed to the 7th Circuit’s oft-stated preference for fee awards that reflect both the risk borne by class counsel and “the normal rate of compensation in the market at the time.” The 7th Circuit has made it clear that the best way to assure a market rate is for class action lawyers and their clients to reach a fee agreement before the litigation begins, but the 2001 Synthroid opinion didn’t specify exactly how trial judges should approximate an arm’s-length negotiation if there’s no preset deal on fees. In a 2003 follow-up opinion, Easterbrook and his fellow panel members actually set class counsel fees themselves, finding that “a decent estimate of the fee that would have been established in ex ante arms’-length negotiations” was a sliding percentage of recovery that declined as the size of the settlement increased.

Objectors to a flat 27.5 percent fee award of $55 million to Robbins Geller Rudman & Dowd in a $200 million securities class action settlement with Motorola were counting on Judge Easterbrook’s two Synthroid opinions when they asked him and two other 7th Circuit judges to cut Robbins Geller’s fees. That proved a vain hope. In a seven-page opinion Wednesday, Easterbrook and his colleagues upheld U.S. District Judge Amy St. Eve‘s approval of the firm’s $55 million award, despite finding 27.5 percent in fees to be “exceptionally high” in a megacase and expressing concern about the flat percentage structure of the award.

The panel, which also included Judges Ilana Rovner and David Hamilton, said it was assuaged that none of the institutional investors in the class, which hold, in combination, more than 70 percent of the claims in the settlement fund, objected to Robbins Geller’s fees. They’re sophisticated litigants with a fiduciary duty to preserve class assets, the appeals court said. So even though the fee award was “at the outer limit of reasonableness,” it was within St. Eve’s discretion to award it. That finding seemed to me to be in keeping with the 7th Circuit’s customer-oriented preference for class action clients to determine the market rate for their lawyers’ fees, just like clients in other kinds of cases.

The next great benchmark manipulation case?

Alison Frankel
Jul 16, 2013 19:27 UTC

Last spring, when U.S. District Judge Naomi Reice Buchwald of Manhattan decimated the consolidated private litigation over banks’ manipulation of the London Interbank Offered Rate, the only claims that remained upright in the rubble of her ruling were those brought under the Commodity Exchange Act, which makes tampering with the price of exchange-traded commodities or futures illegal. Buchwald’s opinion cited a plethora of Manhattan federal court decisions that permitted victims of futures price manipulation to move forward with their suits, including three consolidated class actions involving rigged prices for oil futures. I suspect we’re going to be hearing a lot more about those cases over the next several months. Even as the class action bar tries to persuade the 2nd Circuit Court of Appeals to reinstate the Libor antitrust claims that Buchwald dismissed, plaintiffs lawyers are gearing up for the next big litigation: claims that BP, Royal Dutch Shell, Statoil and other unidentified conspirators violated commodity and antitrust laws by reporting false prices for North Sea Brent crude oil to the price-setting agency Platts.

Lowey Dannenberg Cohen & Hart filed the first class action, in federal court in Manhattan, on May 22, just days after investigators from the European Commission raided oil company offices in a probe of alleged collusion to distort prices for crude oil and biofuels during the half-hour window in which Platts sets prices. Five more class actions have since hit the docket in Manhattan and one in federal court in Louisiana, all naming BP, Statoil and Shell as defendants. (EC investigators also collected information from Platts, a division of McGraw Hill, but it has not been targeted in the private suits.) Last Thursday, Lowey Dannenberg petitioned the Judicial Panel on Multidistrict Litigation to consolidate the cases before U.S. District Judge Andrew Carter, who’s been assigned to oversee all of the New York filings.

The complaints are light on specific details of the alleged collusion, but with Britain’s Serious Fraud Office and the U.S. Federal Trade Commission reportedly investigating crude oil price-setting along with the European Commission, class action lawyers should eventually be able to piggyback on regulatory findings. Plaintiffs lawyers seem to have filed now because they’re worried about the statute of limitations for claims of alleged price-fixing that go back to 2002. Several of the complaints, in fact, assert that the statute should be tolled because the defendants conspired to cover up their conspiracy.

Retired NFL stars reject settlement of their own licensing class action

Alison Frankel
Mar 25, 2013 20:28 UTC

In 2009, six retired pro football stars filed a class action against the National Football League in federal court in Minneapolis, claiming that the NFL misappropriated their names and images without their consent. The class action, led by (among others) former Houston Oiler Hall of Famer Elvin Bethea and former Los Angeles Ram All Pro and television star Fred Dryer, asserted that the NFL didn’t compensate its retired players when it used clips from old games to promote the league. In September 2011, the Dryer case was consolidated with two other similar class actions. Three firms, Zimmerman Reed, Hausfeld and Bob Stein, were named interim lead counsel.

Last week the NFL and the class filed a $50 million settlement with U.S. Senior District Judge Paul Magnuson. Two days later, Dryer, Bethea and the other four retired players who filed the original suit – and who are still the first six name plaintiffs in the case - objected to the settlement, arguing that it delivers no cash directly to class members and, as such, should be treated with the judicial skepticism that has lately greeted settlements involving no money for class members and millions for their lawyers. That argument may be familiar, but the circumstances of this objection are anything but. How often do you see six original name plaintiffs repudiate the settlement of their case? Aside from the widespread retailer discontent with the recent Visa and MasterCard interchange fee settlement, I can’t think of an example. Nor can I remember a case in which plaintiffs’ lawyers fought so nastily over settlement terms that the court had to appoint a lawyer outside of the lead counsel triumvirate to negotiate on behalf of the class. What a mess for Judge Magnuson to clean up.

Court-ordered settlement talks began before U.S. Magistrate Arthur Boylan last summer, after the class filed an amended complaint (adding more retired players as plaintiffs) and discovery got under way. But it turns out that a deep schism had developed between some of the players and their counsel Michael Hausfeld. (Hausfeld was actually the second lawyer for Dryer, Bethea and their fellow original name plaintiffs, who began the case with counsel from Charles Zimmerman of Zimmerman Reed.) Last November, former journeyman quarterback Dan Pastorini filed a notice in the Minnesota class action, informing the court that he had sued Hausfeld and his eponymous firm for malpractice in state court in Harris County, Texas. Pastorini said that he and many of Hausfeld’s other clients “do not support the present actions of defendants to attempt to settle their own class action case in a way that lines the pockets of defendants with legal fees, creates nonsensical entities orchestrated by defendants to obtain still more additional side benefits to them, but does nothing to effectively further the interest of plaintiff and the class members that he represents.”

Downside of business development: accusations of facilitating cartel

Alison Frankel
Mar 22, 2013 19:57 UTC

Alan Kaplinsky of Ballard Spahr had a good thing going at the turn of the century. Along with a couple of partners at the firm now known as Wilmer Cutler Pickering HaleandDorr, Kaplinsky was the leading lawyer for credit card issuers considering the addition of mandatory arbitration clauses to their agreements with cardholders. Between 1999 and 2003, Kaplinsky and three Wilmer partners, Ronald GreeneChristopher Lipsett and Eric Mogilnicki, led a series of meetings with in-house lawyers for the credit card companies, virtually all of which subsequently hired Wilmer or Ballard Spahr to help them implement new cardholder agreements that mandated arbitration and foreclosed class actions.

Good business strategy or antitrust facilitation? Those long-ago meetings led by Wilmer and Ballard Spahr are now at the heart of cardholders’ claims of an illegal antitrust cartel among the credit card companies in a case that’s headed for a ruling by U.S. District Judge William Pauley of Manhattan. The long-running class action seeks an injunction forcing credit card issuers to remove mandatory arbitration clauses from cardholder agreements. Several companies have already settled, but American Express, Citigroup and Discover went to trial in January. This week, cardholders represented by Berger & Montague and Scott + Scott filed a post-trial finding of facts that portrays Ballard Spahr and Wilmer as advisors to credit card conspirators dedicated to depriving consumers of their class action rights. “The business interests of the issuing banks and their outside counsel, Lipsett, Mogilnicki and Kaplinsky, dovetailed comfortably,” the cardholder brief said. “The issuing banks desired to insulate themselves from potential class action liability, relying on (arbitration) clauses, and these outside counsel were engaged in the business of drafting (such) clauses for consumer credit businesses.”

“Wilmer and Ballard Spahr were clearly involved,” said lead class counsel Merrill Davidoff of Berger & Montague. “They were outside counsel to virtually all of the participants.”

2nd Circuit squelches Title VII exception to mandatory arbitration

Alison Frankel
Mar 21, 2013 21:03 UTC

The 2nd Circuit Court of Appeals has been known on occasion to buck the judicial trend of deference to arbitration and champion plaintiffs’ rights to class action litigation. But not if the only justification for classwide litigation is a phantom statutory right. In a notably short and emphatic decision issued Thursday in a closely watched sex discrimination case against Goldman Sachs, a three-judge appellate panel reversed a lower-court ruling that former Goldman managing director Lisa Parisi may pursue a class action despite the mandatory arbitration clause in her employment contract. The appeals court agreed with just about every argument by Goldman’s lawyers at Sullivan & Cromwell, ruling that the bank’s arbitration clause does not preclude Parisi’s statutory rights under Title VII of the Civil Rights Act because she has no private cause of action to claim that her employer engaged in a pattern or practice of discrimination.

A contrary ruling by the 2nd Circuit would have punched a huge hole in employment agreements mandating individual arbitration. Instead, the appeals court acknowledged that employers can curtail class actions against them, even when they’re accused of violating employees’ civil rights.

The 2nd Circuit panel (Judges Barrington ParkerReena Raggi and Gerard Lynch) said that U.S. Magistrate Judge James Francis and U.S. District Judge Leonard Sand erred when they found that Parisi could not vindicate her Title VII rights without classwide litigation. Parisi’s trial lawyers at Outten & Golden had persuaded the lower courts that she could only prove Goldman’s supposed pattern or practice of discrimination – and thus assure her statutory civil rights – through a class action, because her employment agreement prohibited classwide arbitration. But the 2nd Circuit sided with Goldman. As an initial matter, the opinion said, the Civil Rights Act of 1991 contains specific language endorsing arbitration as a vehicle for resolving discrimination claims, and courts have “consistently found” that civil rights claims can be subject to arbitration. Moreover, the court said, the pattern-or-practice method of proof is intended to enable the government to enforce Title VII on behalf of employees, not to give private plaintiffs a freestanding cause of action. And since Parisi has no statutory right to pursue a pattern-or-practice class action, the 2nd Circuit held, she cannot rely on that right to invalidate the mandatory arbitration clause in her employment contract.

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