Blawgletter®

Bad News for Auditors from Third Circuit

May auditors who help a company's officers disguise their cooking of its books avoid liability to the company (now insolvent) by imputing the officers' knowledge of the fraud to the company?

By saying the officers' fraud conferred at least a "peppercorn" of benefit to the company?

The Third Circuit this week held that its previous yes responses must give way to a new decision by the Supreme Court of Pennsylvania -- a decision that the federal court requested by certifying questions.  Keystone State law, the Court concluded, bars imputation and the in pari delicto (equally at fault) defense if the auditors failed to act materially in good faith towards the company.  Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers LLP, 989 A.2d 313 (Pa. 2010).   

Accepting the Court's answers, the Third Circuit reversed summary judgment in favor of the auditing firm.  Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers, LLP, No. 07-1397 (3d Cir. May 28, 2010) (overruling Lafferty Official Committee of Unsecured Creditors v. R. F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) (applying Pennsylvania law)).

Blawgletter wonders if Allegheny will breathe new life into the "deepening insolvency" theory of liability, which theory posits that prolonging the life of a firm wastes what little assets it has available to pay its obligations and therefore increases the losses of creditors.

Pop Goes the Needle

The U.S. Supreme Court held yesterday that the National Football League may not escape antitrust scrutiny by claiming it functions as a "single entity".  Am. Needle Inc. v. Nat'l Football League  No. 08-861 (U.S. May 24, 2010).

The NFL theorized that the ban under section 1 of the Sherman Act on contracts, combinations, and conspiracies to restrain trade didn't apply to it because the league's members always (or almost always) acted in concert.

Blawgletter hasn't studied the opinion, which retiring Justice John Paul Stevens wrote, but it looks like a whopping loss for those who hoped to make section 1 a dead letter.

Seventh Circuit Affirms Consumer Fraud Class

Today the Seventh Circuit rapped the idea that consumer fraud cases never qualify for class treatment. 

The panel affirmed certification of two classes of people who bought defective windows, which let water seep in and somehow promoted wood rot.  That decision of the class issues won't resolve all issues didn't bar certification, the court held.  "While consumer fraud class actions present challenges that a district court must carefully consider," the panel said, "there are circumstances where certification is appropriate.  We conclude that this case is one of those circumstances."  Pella Corp. v. Saltzman, No. 09-8025, slip op. at 11 (7th Cir. May 20, 2010) (per curiam).

Blawgletter notes that Judge Richard Posner chaired the panel and, in light of the brief but elegant writing, opines that he likely penned the anonymous opinion.

Blawgletter in Trial

Blawgletter starts a jury trial on Monday, May 17.

Expect spotty posting for awhile.

Judges Must Rule on Class Waivers, En Banc Third Circuit Holds

The Third Circuit held today, 6-4, that courts must decide whether to enforce a class ban in arbitration clauses.  Courts may not defer the question to arbitrators because, the majority ruled, the unconscionability or not of a contractual bar to class treatment raises an issue of "arbitrability", which the federal Arbitration Act leaves to judges.  Puleo v. Chase Bank USA, N.A., No. 08-3837 (3d Cir. May 10, 2010).

Blawgletter wonders what impact the decision might have -- in light of the fact that the Supreme Court just concluded that the Arbitration Act prohibits class arbitration unless the clause by its terms permits it.  We suppose that, theoretically, a class arbitration ban could violate state unconscionability principles, but then what?  If the clause, after striking the ban, says nothing about class treatment, you can't get it anyway.

But perhaps we've missed something.  Although we doubt it.

Golden State Supremes Hear Contingent Fee Case

Does a contingent fee give lawyers too much control over public nuisance cases? 

Or can public entities control the lawyers enough to prevent abuse of the governmental power they wield?

The Supreme Court of California heard argument on those questions this week (finally).  Kimberley Kralowec at The UCL Practitioner gives us a blow-by-blow.

The Rhode Island Supreme Court held two years ago that public entities may, indeed, retain private lawyers on a contingent fee basis so long as the entities supervise them and hold a veto on strategic and tactical decisions.

A court in the Province of New Brunswick ruled the same way last year.

Blawgletter pondered the questions At Some Length in January 2008. 

We come out the same way today -- as, apparently, the Golden State Supreme Court will.

Lawyering in the Cloud

Tech firms like Cisco, EMC, Hewlett-Packard, and IBM urge us to compute in the cloud.

What cloud, you say?  The Internet, Blawgletter replies.

You can store vast amounts of information in the Internet cloud -- millions of pages of your clients' documents, for instance.  The info resides, electronically, on a physical server somewhere.  You don't care where, because you can access it from anywhere, as long as you can connect to the Internet.

We worry some about storing confidential client info in the cloud, our work product especially.  While the cloud sounds unthreatening and safe, we wonder how well it protects against prying eyes.

Lawyers rightly expect that colleagues -- including those who oppose our clients in lawsuits -- would not stoop to hacking into our pieces of the cloud.  That would break rules of ethics.  

But why would others refrain?  The risk of discovery and criminal charges doesn't seem enough.  And who can say for sure that ethical bars will subdue the urge of even our fellow lawyers from using technology to probe our deepest thoughts about our cases?

We'd like to see lawyer-specific standards for security of the items we entrust to the cloud.  The notion of password protection doesn't seem to us quite enough.  We should understand what stands in the way of a stranger getting into our databases.  

A stitch in time saves nine.

Fee Simple

The New York Times published a fascinating article yesterday about fees in mega-bankruptcies -- your Lehman Bros., your Washington Mutuals, and your General Motors, to name a few.  

Compare Nelson D. Schwartz and Julie Creswell, "Who Knew Bankruptcy Paid So Well?" with "How Susman Godfrey Handles Cases".

Gin a Body Enjoin a Body

Holden Caulfield misheard a word in the song "Comin Through the Rye" -- "catch" a body instead of "meet" a body -- and so wanted to stand between a cliff and children heading towards it, unawares, through a field of rye and catch them before they could tumble off and down.   See Catcher in the Rye (1951).

Caulfield's creator, J.D. Salinger, who died this year, didn't like a fake "sequel" to Catcher and sued under federal copyright law to stop its sale.  The district court obliged by granting a preliminary injunction.

The Second Circuit yesterday reversed.  It held that the district court erred by not using all four prongs of the Supreme Court's test for injunctive relief in eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).  Salinger v. Colting, No. 09-2878-cv (2d Cir. Apr. 30, 2010).  That standard calls for proof that the injunction-seeker will likely win on the merits, that he will suffer "irreparable" harm unless the court issues an injunction, that the "balance of hardships" favors him, and that an injunction won't disserve the "public interest".  The district court looked only at the first prong -- likelihood of success -- and concluded that the Second Circuit's pre-eBay precedent allowed the court to presume irreparable harm resulting from infringement of copyright.

The panel ruled that eBay bars such a presumption and remanded the case for the district court to consider whether the evidence shows probable irreparable injury, balance of hardships, and public interest.  The court upheld the findings under the first prong and rejected the idea that 60 Years Later:  Coming Through the Rye didn't infringe Salinger's copyright.