Blawgletter®

The Relevance of Scienter to Securities Fraud Limitations Analysis -- Redux

Blawgletter wrote a couple of years ago that the tougher test for pleading securities fraud under the Private Securities Litigation Reform Act and Tellabs, Inc. v. Makor & Rights, Ltd., 551 U.S. 308 (2007), "would logically mean that the reasonable person wouldn't conclude he, she, or it had a claim until he-she-it learned facts suggesting a strong inference of fraud, right?  Which would have the effect of making a statute of limitations defense harder to prove and easier to whip, correct?"  The Relevance of Scienter to Securities Fraud Limitations Analysis, Jan. 9, 2009 (discussing Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342 (3d Cir. 2009)).

As we predicted, see Merck Lawyer Takes Nicks on Question of Timely Securities Complaint in Supreme Court, the Supreme Court in 2010 agreed with us in Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010).

Today, the Second Circuit chimed in.  It held that the district court erred in tossing a complaint on the ground that news stories put buyers of MBIA stock on "inquiry notice" of the bond insurer's possible fraud more than two years before plaintiffs sued.  Citing Merck, which post-dated the district court's dismissal order, the panel ruled that a securities fraud plaintiff doesn't "discover" that he-she-it has a claim for purposes of the two-year limitations statute until he-she-it "can adequately plead" scienter as well as the other elements of the claim.  City of Pontiac Gen'l Employees' Retirement Sys. v. MBIA, Inc., No. 09-4609-cv (2d CIr. Feb. 28, 2011).

The Second Circuit didn't mention Pharmacia (or Blawgletter).  Neither did it note the absurd delay in getting to the merits.  What we said about Merck goes double for MBIA:

What does an obvious bludgeoning in Supreme Court oral argument do to the value of a case like the one against Merck? 

If you said "increases it", you get a silver star. 

You'd receive a gold one if you added "but not that much". 

Why?  BECAUSE THE DISTRICT COURT STILL HASN'T RULED ON WHETHER THE CLASS ACTION COMPLAINT STATES A CLAIM -- MORE THAN SIX YEARS AFTER PLAINTIFFS BROUGHT THE CASE!!!

The district court in MBIA likewise has not yet ruled on a motion to dismiss -- and the Second Circuit didn't resolve the limitations issue or a statute of repose one.  In a case that started in 2005, the plaintiffs have taken barely a step forward. 

And to think that courts simply assume class actions involve no risk and put huge pressure on defendants to settle for outlandish sums.  Bah.

DeBeers Seems Likely to Keep Class Certification After En Banc Rehearing

In case you missed the en banc argument on Wednesday to the Third Circuit in Sullivan v. DB Investments Inc., No. 08-2784 (audio file here; post on panel decision here), Blawgletter offers our fragmentary notes below.

[By way of background, a panel of the Third Circuit ruled that, because some states don't allow indirect purchaser suits under their antitrust laws, the claims of the settlement class members didn't "predominate" within the meaning of Rule 23(b)(3).  The panel also concluded that certification for injunctive relief under Rule 23(b)(2) couldn't stand due to the fact that, in the opinion of two panel members, DeBeers no longer posed a big threat of anticompetitive conduct.  Sullivan v. DB Investments, Inc., No. 08-2784 (3d Cir. July 13, 2010).

Circuit Judge Rendell concurred in the outcome but not in the rationale.  She disagreed with the majority on the grounds that her colleagues paid inadequate heed of the court's decision in In re Warfarin Sodium Antitrust Litig., 391 F.3d 516 (3d Cir. 2004), and went too far in reaching issues that the district court, and not the court of appeals, should decide in the first instance.]

 We felt that Sam Issacharoff did a splendid job on behalf of the settlement class and performed better than the other three who argued against the certification order.  Issacharoff convinced us that Rule 23(b)(3) doesn't bar certification where some class members, perhaps many, have far weaker claims than other class members do.  We also came to the view that the court will likely uphold certification but remand the case for a closer look at the plan of allocation to assure fairness as between those with stronger claims and those with weaker claims.

Howard Bashman for Class Member Susan Quinn

Illinois Brick bars federal claims for indirect purchasers. Residents of states that bar indirect claims can't get recovery. Plaintiffs at first limited class to 31 for indirect consumer purchasers and 23 states for indirect reseller purchasers until the case settled. Plaintiffs now ask court to ignore Rules Enabling Act and Rule 23.  Court in Warfarin and Prudential said nothing that supports certification here.

Judge Scirica: what if all class members got 100 percent? Even indirect buyers have injury. Asking to vindicate Sullivan or something more like fairness of allocation.

Bashman: dilution cuts my client's recovery.

Scirica: so no problem if class members get 100 percent. Why not remand for reallocation? Rule 23 issue

Bashman: people who have no claims affect people who do.

Judge Rendell: where does it end? Would district court have to do conflicts analysis for each class member? Also limitations?

Bashman: can't escape that case presents whether state law allows claim.

Judge Fuentes: why not focus on misconduct of defendant? Amchem. Why get into vagaries of state law

Bashman: agree that but for Illinois Brick could settle. Common issues re "claims". Rule 23 itself speaks to claims, not questions.

Judge Fisher: DeBeers wants releases. States could pass repealers tomorrow. Why can't DeBeers get peace?

Bashman: Ohio supremes say no claim. Very clear.

Scirica: would judge also have to assure claim valid for purposes of joinder?

Bashman: Don't know.

Scirica: Reed Elsevier said don't need valid copyright claim to settle.

Bashman: That case involved a jurisdiction issue, not predominance.

Scirica: Matsushita says can settle claims.

Judge Ambro: Second Circuit case says can settle class claims even after court rejects on merits.  Why shouldn't we follow that case?

Bashman: different if don't have claims at all.Fuentes: nightmarish for district court to do what you say?

Bashman:  not nightmarish at all.  Plaintiffs originally limited to non-repealer states.

John Pence for David Murray

Second Circuit case on stock option and Verizon case allow cert if no valid claims because entire class lacks valid claims.  In re New Motor Vehicle involves weak claims, and allocation raises issue worthy of settlement. Court must reach merits on cert under Gersh.

Scirica: fairness analysis happens after certification.

Pence:  cert and fairness happen together.

Scirica:  not so.

Pence:  in this case, the court blended the analysis, brought in irrelevant question about enforceability of judgment.

Scirica: Gersh says district court needs to assess risks of litigation.

 Pence:  reply brief points out that judgment would last up to 20 years and has more value than money.

Robert Gaudet for members of consumer subclass

Gaudet:  Clear conflict of interest between class members.  Will make three points.

Should have considered chance for treble damages under Gersh.

Class members must have chance to object to fees and expenses applications. Filings happened after deadline for objections.

Third, consumer subclass reps shouldn't get $5,000 when average award to class members = $1.

Fuentes: did court address fairness?

Gaudet: no estimate of class damages that indirects suffered.

Scirica: proper for court to weigh lack of personal jurisdiction?

Gaudet: easy to establish personal jurisdiction over DeBeers. Need to fix class action system, which has become a joke even to Europeans.

Sam Issacharoff for class

Bashman argues that case divides Illinois Brick repealer states and non-repealer states. Case actually involves several class actions with variety of claims. Bashman's own client alleged unjust enrichment under non-repealer Texas law and now announces, for first time, that bought diamonds in New Mexico, a repealer state. The Lighter class action, one of seven, alleged DeBeers set up system to avoid liability in U.S. Alleged series of claims, including violation of Wilson Tariff Act. Have arguments on claims, however weak.

Judge Jordan: you lead with Lighter because Ohio law and other non-repelaer states so clearly don't allow indirect claims.

Issacharoff: Lighter came first. Null also there.

Jordan: clear Ohio bars indirects. Johnson.

Issacharoff: Johnson doesn't go that far. Seven complaints allege variety of claims.

Jordan: what if state Supreme Court barred all possible claims. Wouldn't certifying class that included claims under that state's laws violate predominance?

Issacharoff: yes, but only if court barred every conceivable claim as long as relates to price fixing. Not this case.

Jordan: Keyspan said can't get disgorgement.

Issacharoff: Lighter.

Jordan: passage of diamonds through NY gives right of action to Ohio?

Issacharoff: weak but there. Shady Grove.

Fuentes: if have only antitrust claims, would have problems?

Issacharoff: Illinois Brick states always in flux. Predominance issue would arise.

Fuentes: what should we focus on?

Issacharoff: whether as in Amchem have genuine controversy.

Jordan: question really relates to whether facts raise actual legal liability under relevant law.

Issacharoff: you keep pushing me back to hypo where some members have no claim. That is not this case. Lighter, Donnelly Act, false advertising, and various others. At least half dozen. What is the standard? "Valid claim" a new concept. Go back to Amchem. "Genuine controversy".

Ambro: Fifth Circuit said state law differences could swamp common issues.

Issacharoff: concerns manageability.

Rendell: answer surprised me. Couldn't DeBeers buy peace even if only claims involved non-repealer states? Illinois Brick a prudential decision. Settlement makes huge difference.

Issacharoff: agree.  Illinois Brick did indeed concern prudential concerns.

Jordan: you just retreated.  You said before that not having valid claim would defeat predominance.

Issacharoff: disagree with your view that state Supremes' ruling ends inquiry. You don't have a case that says you can't have claim for consumer fraud in a non-repealer state.

Jordan: Judge Chesler didn't certify federal claims.

Issacharoff: yes, he did. Lighter certified injunctive class, and pended on appeal.

Jordan: have to deal with actual cert.

Issacharoff: Chesler did certify more than you say.  He certified multiple cases involving multiple claims.

Rendell: Do you agree that Judge Chesler didn't do a predominance analysis?

Issacharoff: I don't.

Ambro: doesn't court have to look at differences in state law claims?

Issacharoff: Null and Lighter cases raised many claims. Can't be right that would have to look at every claim.  Would exhaust value of settlement to look at each claim.

Jordan: not so.  Johnson says no claims under Ohio law.

Issacharoff: we don't know if Johnson applies to anyone. Would have to inquire into facts for each class member.

Jordan: easy to figure out

Issacharoff: no, not easy. Conflicts analysis, for example, would become necessary.

Jordan: you still haven't answered me. If Ohioans don't have a claim, why do we have to do anything further?

Issacharoff: I concede your point but disagree with your assumptions. Would make settlement classes impossible. Go back to Prudential. Objections go to a different case from this one.

Bashman on Rebuttal

Bashman: Becker said have to do conflicts of law analysis. Amchem.

Ambro: how does case implicate Rules Enabling Act where defendant wants to settle lousy claim?

Bashman: because court approves class.

Scirica: shouldn't we focus on fairness to class members?

Bashman: Wachtel and Constar.

Jordan: respond to Issacharoff's point that claims uncertain.

Bashman: court didn't certify that class. Can't analyze on basis of possible changes in law.

Bashman: agree with Rendell's view that predominance analysis leaves a lot for us to desire.

The Coke Recipe, Trademark and Trade Secret Law, and The New York Times

Did you hear about the radio show that found the secret formula for Coca-Cola -- a decade or so ago in a story on the third page of an Atlanta newspaper?

Ira Glass, who narrates This American Life, told about the find in a February program. See (and hear!) Original Recipe.  The listener response crashed the show's server.

Yesterday, The New York Times picked up the thread.  Ran with it.  And perhaps tripped over it.

The cause of the possible stumble? Your normal everyday confusion about types of intellectual property.

The Times item said near the end that Coca-Cola doesn't "file trademark lawsuits against imitators because it would have to reveal the actual formula in court." But we know, don't we, that trade secret law, not the trademark kind, protects any rights Coke may enjoy in the True Way of making the Real Thing?

The law of trademarks applies to words, phrases, symbols, logos, and shapes -- not to mention (sometimes) colors, like the light blue of Equal packets, and sounds, such as the husky rumble of a Harley -- that somehow inform people what firm makes, or vouches for, products customers may want to buy. Trade secret law, by contrast, aims to stop misuse of confidential info that gives the owner a leg up over competitors.  The necessarily public nature of a trademark means that the trademark doesn't qualify for trade secret protection.

How could the "imitators" get in trademark or trade secret trouble for using the Atlanta Journal-Constitution's list of Coca-Cola components? They don't use Coke logos or claim that Coke makes or sponsors what they produce. They didn't get the list by theft. And so Blawgletter has a hard time seeing either a trademark infringement or a trade secret misappropriation.

But wait. Could the Paper of Record have meant that the imitators diluted Coca-Cola trademark rights by using ads that call their Brand X drinks a fair copy of the Coke recipe and therefore "tarnish" Coca-Cola trademarks?  That sounds more like it.  See "Blurring the Mark (Update)"

That leaves the question of why the maker of a Brand X rip-off could force Coke to disclose the current genuine formula.  We suppose if Coke sued Brand X for falsely claiming to use the current Real Thing recipe, Coke might have to show just what it contains. 

But even then disclosure seems unlikely.  A court might call on Coke to lay out with what Herculean Labors it Preserved Secrecy, but after that the court would require Brand X to show the basis for its claim.  Where you got the formula, for instance.  The bank vault that Coca-Cola keeps it in, you say?  Really?  Hmmm.

The small -- vanishingly tiny -- risk that Coca-Cola would have to reveal its true mix of ingredients seems more in line with another point of Original Recipe and the Times story:  the masterful job that Coca-Cola has done in parlaying the mystique of its secret formula into billions upon billions of dollars in sales.  Genius.

No Direct Appeal of Arbitration Award, Ninth Circuit Rules

Does the federal Arbitration Act allow you to appeal an arbitrator's award to a federal court of appeals, skipping the district court? What if the other side agreed to the direct appeal thing?

The Ninth Circuit held in Johnson v. Wells Fargo Mortgage, Inc., No. 09-15937 (9th Cir. Feb. 15, 2011), that the Act bars the shortcut.

Blawgletter marvels that the issue got so far. The parties' contract said they "shall participate in a binding arbitration with appeal rights." The "with appeal rights" bit caused the trouble. The district court thought it meant that the court must confirm the award no matter what and that the losing party must take any complaints to the Ninth Circuit. Huh?

How do you get all that from "with appeal rights"? Doesn't that just mean the loser has rights to "appeal" (to the district court, as the FAA allows) on a ground the FAA allows? Right?

Quote of the Day: Theodore Roosevelt

The training of a nation to fit itself successfully to fulfill the duties of self-government is a matter, not of a decade or two, but of generations.

Edmund Morris, Colonel Roosevelt 38 (2010) (quoting from a speech by the former President at Cairo University on March 9, 1910).

Blurring the Mark (Update)

A long, long time ago, in a Golden State far, far away, a denim genius built dungarees for working stiffs. We know him now as Levi Strauss. Or, more likely, as the namesake of modern day Levi's jeans.

But Blawgletter didn't know -- and perhaps you didn't either -- that a key feature of the Straussian allure goes by the name of "arcuate". That word describes the gold stitching on both back pockets of a pair of the genuine Levi's britches. See here:

 

The case pitted Levi's against another famous clothing outfit, Abercrombie & Fitch. The latter used pocket stitching that, some might say, recalls the Levi's arcuate. Judge for yourself:

 

 

The district court ruled that the A&F design didn't violate the federal anti-dilution statute, because, among other reasons, it didn't look "identical or nearly identical" to the Levi's mark. But the Ninth Circuit noted that Congress changed the federal dilution statute in 2006 because it didn't like judicial rulings that, you might say, diluted the anti-dilution protection. The identical or nearly identical test, the panel pointed out, hadn't survived passage of the Trademark Dilution Revision Act of 2006.  See 15 U.S.C. § 1125(c).  The new law in fact condemned not only "tarnishment" of a trademark but also "blurring" of it.  Because the district court used the old standard, the panel held, the judgment for A&F couldn't stand.  Levi Strauss & Co. v. Abercrombie & Fitch Trading Co., No. 09-16322 (9th Cir. Feb. 8, 2011).

Of course the great innovation of Mr. Strauss consisted not of gold stitching but of copper rivets to make pants pockets stronger.  But don't think I'm telling the cow how to eat the cabbage.

MDL Panel Boots Half of Transfer Requests

The U.S. Panel on Multidistrict Litigation has already finished its work from the January 21st session in New Orleans.

See the results:

Granting Transfer

S.D. Fla.

In re Enfamil LIPIL Mktg. & Sales Prac. Litig., MDL No. 2222 

N.D. Ga.

In re Camp Lejeune, North Carolina Water Contamination Litig., MDL No. 2218

N.D. Ill.

In re Discover Card Payment Protection Plan Mktg. & Sales Prac. Litig., MDL No. 2217

D. Mass.

In re Prudential Ins. Co. of Am. SGLI/VGLI Contract Litig., MDL No. 2208

S.D. Miss.

In re Regions Bank ATM Fee Notice Litig., MDL No. 2202

E.D.N.Y.

In re Gaceau VitaminWater Mktg. & Sales Prac. Litig. (No. II), MDL No. 2215

In re Am. Express Anti-Steering Rules Antitrust Litig. (No. II), MDL No. 2221

S.D.N.Y.

In re Commodity Exchange, Inc., Silver Futures & Options Trading Litig., MDL No. 2213

N. D. Ohio

In re Kaba Simplex Locks Mktg. & Sales Prac. Litig., No. 2220

Denying Transfer

In re Property Assessed Clean Energy (PACE) Programs Litig., MDL No. 2203

In re Schneider Nat'l Carriers, Inc., Wage & Hour Empl. Prac. Litig., MDL No. 2204

In re Webloyalty.com, Inc., Mktg. & Sales Prac. Litig (No. II), MDL No. 2206

In re Hungarian Holocaust Litig., MDL No. 2207

In re Equinox Fitness Wage & Hour Empl. Prac. Litig., MDL No. 2209

In re Abbott Labs., Inc., Similac Prod. Liab. Litig., MDL No. 2211

In re Student-Athlete Name & Likeness Litig., MDL No. 2212

In re Crystal Poole IRS Summons Litig., MDL No. 2216

In re Boehringer Ingelheim Pharm., Inc., Fair Labor Standards Act (FLSA) Litig., MDL No. 2219

Blawgletter wonders whether the fact that the Panel rejected motions to centralize cases in fully half of the MDL matters -- nine out of 18 -- made for quicker decisions.  We doubt it.  But we do think the denials fit with a trend we've spotted with this newish Panel.  

Panel members now seem more skeptical about the desirability in general of centralization.  Perhaps it reflects their collective concern that section 1407 transfers tend to favor certain kinds of outcomes or certain types of parties or lawyers.  As Chairman Heyburn noted in March 2010, the Panel has undertaken a study whether "centralization decisions may have the (unintended) tendency of benefitting certain groups of lawyers over others".  We'd guess that the Panel felt a need to test that hypothesis because, well, their honors already tended to believe it.

Or maybe parties and lawyers have just started filing weaker centralization motions.  

What do you think?

Giving Papers to Ecuadorian Court Expert Waived any Privilege, Third Circuit Holds

The strange case started almost two decades ago in New York.  On the motion of Texaco -- later Chevron -- it wound up in Lago Agrio, Ecuador. 

In it, a group of Ecuadorians claimed that Texaco/Chevron's oil and gas operations in their home land caused bad problems.  The court in Lago Agrio named an expert to help figure damages.  The expert, Richard Stalin Cabrera Vega, valued the harm at $27.3 billion.

Cabrera had received documents from the plaintiffs but not from Texaco/Chevron.  The latter deemed the idea of giving documents to the court's expert "absurd".  And, it alleged, a person on Cabrera's staff, Juan Cristobal Villao Yepez, at the same time worked for an environmental consulting firm in New Jersey.  And the firm was on the payroll of the plaintiffs.

Texaco/Chevron brought in New Jersey an action asking the court to order the New Jersey firm to turn over what it had given Cabrera as well as documents relating to Villao.  The district court complied.  It cited 28 U.S.C. § 1782(a), which permits orders compelling a person within the district to provide evidence "for use in a proceeding in a foreign or international tribunal" and the crime-fraud exception to the lawyer-client privilege and attorney work product doctrine.

The Third Circuit affirmed in part and sent the case back for more proceedings.  In re Application of Chevron Corp., No. 10-2815 (3d Cir. Feb. 3, 2011).  It rejected the plaintiffs' claim of privilege, holding that turning the documents over to the court expert Cabrera amounted to waiver.  The court also remanded so that the district court could look at the papers dealing with Villao.  The panel noted that the district court's in camera review of the documents might show that the plaintiffs' lawyers engaged in conduct that furthered a fraud on the Ecuadorian court.

The bit about the crime-fraud exception reminded Blawgletter that a finding of prima facie evidence to support the exception doesn't mean the court must order production of the documents.  The court still must weigh evidence that tends to negate the exception.  Prima facie doesn't get you there.  Post here.

Sucker Law Firm Loses Claim to Undo Wire Transfers

Have you gotten one of those emails that says a non-U.S. outfit has big money coming to it but somehow no one there knows any U.S. lawyers and that the sender wants you to help it get the big money?  Perhaps you could advance a small sum -- $10,000 perhaps -- to grease the skids?

How about one of those emails that promises an up-front retainer and lots of work to bill against it?

Or one that gives your firm the privilege of holding the new client's big money with no strings other than that you'll receive a fee of X percent for your fabulous help?

Believe it or not, some folks fall for that sort of thing.  And Blawgletter today feels a perverse joy in knowing that, per the Second Circuit, the law will not rescue them from their folly.

The case involved a firm that for some reason received and deposited into its account a check for $225,351, which the firm seemed to regard as partial payment of a debt to a "new client" of the firm.  Shockingly, before the check officially cleared, the new client asked for almost all of the funds.  The firm's bank reported the funds as "available".  And, per the new client's requests, the firm wired $182,780 and $27,895 to, er, South Korea and Canada.  

On the day of the second wire, the Federal Reserve Bank returned the check for $225,351, deeming it a fake.  The bank charged the firm for the total plus -- and we think this hurt the most -- a $10 fee for handling the return of the bad check.

The law firm sued the bank for breach of contract.  It alleged that the bank should not have called the proceeds of the fake check "available" before the check had in fact cleared.  But the district court granted summary judgment to the bank.  The Second Circuit affirmed, noting:

The obvious flaw with [the firm's] argument is that Citibank did not advise F&M that the funds were "available for withdrawal as of right."  Rather, CItibank advised only that the funds were "available," without representing that the Check had cleared or that the funds had been collected or that settlement had become final.  "Available" is different from "available as of right."

Fisher & Mandell LLP v. Citibank, N.A., No. 10-2155-cv, slip op. at 15 (2d Cir. Feb. 3, 2011).

Supreme Court Looks Doubtful on "Personal Privacy" of False Persons

In September of 2009, a court of appeals panel upheld the right of firms -- and of all other "persons" fictitious in law -- to block the feds' release of emails and other documents that the firms submitted to the feds but that might cast them in a bad light.  See "Do Fake Persons Hold Right to 'Personal Privacy'?"

On January 19 -- Blawgletter's birthday -- the parties argued the case to the Supreme Court.  The session didn't go well, as best we can tell, for those who would bar the government from handing over papers, under the Freedom of Information Act, that exposed (or hid) the True Views of the submitters.

The argument by and for the feds seemed weak.  So abstract!  So far from common sense!  And yet so right!

But the AT&T side made up for the government's failure to root its points in what ordinary people might see every day.  Justice Scalia brought out the defect, asking:  "Can you give me any examples in common usage where people would refer to the personal privacy of a -- of a corporation.  It's a very strange phrase to me."  Transcript at 25.  Chief Justice Roberts piled on:

I tried to sit down and come up with other examples where the adjective was very different from the root noun.  It turns out it is not hard at all.   You have craft and crafty.   Totally different.  Crafty doesn't have much to do with craft.   Squirrel, squirrely.  Right?  I mean, pastor -- you have a pastor and pastoral.  Same root, totally different.  So I don't understand -- I don't think there's much to the argument that because "person" means one thing, "personal" has to be the same relation.

Id. at 35.

What might we make of the pro-disclosure (and liberal) justices' apparent inability to link AT&T's secretiveness with citizens' every day experience of bad telephone service?  And what should we think of the conservative justices' contrastingly plain ability to dissect -- even to mock -- AT&T's (facially absurd) claim that artificial entities have some kind of right to "personal privacy"?

What do you think?