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Annals of Arbitration: Cutting Class

The Fifth Circuit seldom affirms class certification orders. Can it stand class actions?

The court's ruling last week in Reed v. Florida Metro. Univ., No. 11-50509 (5th Cir. May 18, 2012), suggests not. The case dealt with the near-worthless degrees that Everest College sold -- awarded -- online and from store-front "campuses", where (per Everest's introductory video) aspiring students meet first with a "Director of First Impressions".

Jeffrey H. Reed, a Texan, spent $51,000 for an online bachelor's degree in "paralegal studies" only to find that law schools and the local police deemed the Everest degree no degree. Mr. Reed sued under the Texas Education Code, which sets basic rules for degree-awarding outfits, on behalf of himself and a class of the other Everest victims -- graduates -- who lived in the Lone Star state.

The district court enforced an arbitration clause in Mr. Reed's Enrollment Agreement with Everest. The court left to the arbitrator whether to handle the arbitration on a class basis.

The arbitrator ruled that, because the arbitration clause gave him the power to award any "remedy", it therefore authorized him to certify an arbitration class. The district court confirmed what Blawgletter will call the certification award, which seems not to have dealt at all with the merits.

The Fifth Circuit reversed. The panel held that the arbitrator "exceeded his powers when he concluded that the parties' agreement permitted class arbitration." Id. at 12. The court leaned mainly on Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which we thought when it came out meant "that arbitrators will have no choice but to deny almost all class certification requests." Although the panel said "the agreement to submit to class arbitration may be implicit", it added that such an agreement "should not be lightly inferred." Id. at 16 (footnote omitted). It went on to say that the arbitrator inferred way too much from his express power under the parties' contract to award "[a]ny remedy available from a court under the law". "[A] class action cannot properly be considered a 'remedy' under state or federal law", the panel averred. Id. at 21 (emphasis added).

The Second and Third Circuits do not agree with that outcome, as the panel noted. Id. at 22 & n.13 (rejecting Sutter v. Oxford Health Plans LLC, 675 F.3d 215 (3d Cir. 2012) (post here), and Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011), cert. denied, 132 S. Ct. 1742 (2012)). The panel pointed to "the Supreme Court's lengthy discussion of the significant disadvantages of class arbitration". Id. at 25 (citing Stolt-Nielsen, 130 S. Ct. at 1776) (emphasis added).

We wish to highlight Judge Dennis's concurring opinion, at least the part where he says "in different kinds of future cases" -- ones that involve such small stakes that "bilateral arbitration would . . . offer claimants . . . no practicable or realistic remedy" -- "an arbitrator can properly find an implicit agreement to class arbitration procedures". Id. at 33 (citing In re Am. Express Merchants' Litig., 667 F.3d 204, 214) (2d Cir. 2012)).

We wish also to aim a pinky at the panel's spin on the phrase "any remedy available from a court under the law". The court seems to have added "substantive" before "remedy" and "law". But why? The Securities Litigation Uniform Standards Act, for instance, describes "Class action limitations" as "Limitations on remedies". 15 U.S.C. 78bb(f)(1) (emphasis added). And courts often refer to class treatment as a "remedy" instead of merely a "procedure". E.g., Quilloin v. Tenet HealthSystem Philadelphia, Inc., 673 F.3d 221, 233 (3d Cir. 2012) (quoting Thibodeau v. Comcast Corp., 912 A.2d 874, 884 (Pa. Super. 2006)); In re Am. Express Merchants' Litig., 634 F.3d 187, 196 (2d Cir. 2011), on rehearing, 667 F.3d 204 (2d Cir. 2012).

So why didn't the arbitrator have the power to construe "remedy" in the sense of a "procedural remedy"? Don't arbitrators have broad authority? The Second and Third Circuits based their holdings on that precept. Why not the Fifth Circuit?

10-K OK in SEC Case for Backdate of Stock Options, per Ninth Circuit

We can all agree that granting people stock options that can't lose -- as Apple and lots of other (often high-tech) outfits did Not Long Ago -- at least feels wrong. But who knew that accounting for them in the wrong way could expose you to a suit by the Securities and Exchange Commission?

Blawgletter surely did not know. As far as you know. But surely the chief financial officer of a public company should have known that, right?

Likely.

Yet we want to tell you about something else. We desire to let you know that an Annual Report on Form 10-K, the Ninth Circuit held today, can come into evidence under the business records exception to the hearsay rule to help persuade a jury that, yes, you (as CFO) messed up in how you accounted for those stock options that your firm back-dated. Even though the 10-K came out long after you left. And in spite of the fact that the parts the SEC used against you dealt with the results of a series of judgments about pretty complex stuff (like generally-accepted accounting principles). Securities and Exchange Comm'n v. Jasper, No. 10-17064, slip op. 5159-64 (9th Cir. May 15, 2012).

Quote of the Day: Boyce F. Martin, Jr.

Note the dripping red wax on the seal.

All bourbon is whiskey, but not all whiskey is bourbon.

Maker's Mark Distillery, Inc. v. Diageo N. Am., Inc., No. 10-5508, slip op. 4 (6th Cir. May 9, 2012) (affirming verdict and judgment that dripping-wax red seal on tequila bottles infringed trademark for same on bottles of bourbon) (per Boyce F. Martin, Jr., J.).

Eleventh Circuit Goes En Banc on Pack of Hedge Funds

May a pack of hedge funds gang up on a borrower to stop pack members from cutting deals with the borrower to lighten its debt burden?

Of course they can (and would), you say. But would they thus run afoul of the Sherman Act? Did you think of that? Heard of section 1? Which bars contracts, combinations, and conspiracies to restrain trade? Huh?

If that notion failed to flit across the great swirling maelstrom of your ever-churning mind, don't feel lonesome. The Eleventh Circuit ruled that section 1 Did Not Apply to a boycott by a group of hedge funds, which owned debt of subprime lender CompuCredit. At least the panel felt that way last November.

But now the Whole Court will give it further thought. The order sets a briefing schedule and oral argument some time in the week of October 15, 2012.

Please do not confuse this CompuCredit case with this one in the U.S. Supreme Court from January 2012 or this other one in the Eleventh Circuit from April 2012.

False Claims Act Claim Against Harvard Gets New Chance

The First Circuit sits in Boston. Which when Blawgletter went to law school called itself "The Hub". As in "Hub of the Universe". Which we found charming. Also troubling.

True, though? Kinda.

Today the court that sits in the Hub held that a qui tam -- False Claims Act -- claim about Harvard Medical School and others should have gotten beyond a summary judgment motion. The panel said:

The dispute at the heart of this case is not about resolving which scientific protocol produces results that fall within an acceptable range of "accuracy." Nor is it about whether Killiany's re-measurements, the basis for the preliminary scientific conclusions reported in the Application, are "accurate" insofar as they fall within a range of results accepted by qualified experts. Rather, the essential dispute is about whether Killiany falsified scientific data by intentionally exaggerating the re-measurements of the EC to cause proof of a particular scientific hypothesis to emerge from the data, and whether statements made in the Application about having used blinded, reliable methods to produce those results were true. If the jury should find that statements in the Application are false, they must also determine whether those statements were material and whether the Defendants acted knowingly in violating the FCA.

Because we conclude that genuine issues of material fact remain on these central issues, we vacate the district court's order and remand for further proceedings consistent with this opinion. Costs are awarded to the appellant.

So ordered.

United States ex rel. Jones v. Brigham & Women's Hospital, No. 10-2301, slip op. 50-51 (1st Cir. May 7, 2012).

 

 

Federal Circuit Nips Multi-Party Patent Cases

The Federal Circuit today ruled that the Eastern District of Texas has the wrong idea about whether Rule 20(a) lets plaintiffs sue a bunch of defendants in one patent infringement case simply because they all infringed the same patents.

You have to show something more, it held -- such as that the defendants somehow acted in concert to infringe the same patent, made the same infringing product, or used the same infringing method to make their own infringing products. In re EMC Corp., Misc. No. 100 (Fed. Cir. May 4, 2012) (granting mandamus and ordering district court on remand to use different legal test in ruling on motions to sever and transfer).

Blawgletter notes that the ruling applies to mandamus petitions that pre-date the Leahy-Smith America Invents Act, which in 2011 changed the joinder rules in patent cases.

Annals of Oil and Gas: Posner on Leases

Do you think of Chicago as an oil and gas town? Dallas, yes; Houston, for sure; New Orleans, uh-huh; maybe Bismarck, North Dakota (for the shale gas); and perhaps even New York (because of trading oil futures on the NYMEX).

Chicago? Meh.

But wait up. Today Judge Richard Posner wrote about oil and gas leases. Forget that the leases covered acreage in Texas. And never mind that he mainly lays out some basics on "lessor", "lessee", "primary term", "secondary term", and "operator". Judge Posner represents Chicago the way J. R. Ewing does Dallas. And the fact that a Chicagoan wrote about oil and gas sort of tickled Blawgletter.

The case involved a not-so-mundane fight over contempt of an Indiana district court's order. The edict in question called on SonCo Holdings to pay a $250,000 bond to the Texas Railroad Commission, which deals with oil and gas matters in the Lone Star State, and to replace ALCO Oil & Gas as the leases' "operator", which handles drilling wells and so forth. Except the order didn't say the part about getting a new operator in So Many Words. Yet the judge held SonCo in "contempt" for not doing what the order required and as a "sanction" forced SonCo to sign the leases over to ALCO. SonCo appealed.

Judge Posner didn't buy SonCo's point that it didn't violate the order because the order didn't say in So Many Words "get a new operator to replace ALCO". "We said the order was poorly drafted, and meant it wasn't clear." Securities and Exchange Comm'n v. First Choice Mgmt. Svcs., Inc., No. 11-1702, slip op. 10 (7th Cir. May 1, 2012). That differs from calling the order "ambiguous". He noted that "context . . . can disambiguate . . . [and] does so in this case." Id.

The panel vacated the sanction, though, finding that the district court didn't explain how forcing SonCo to give the leases over to ALCO counted as compensation rather than punishment and therefore made the order one for civil contempt rather than the criminal kind.

Settlement Privilege? Ha!

In the last 30 days, two U.S. courts of appeals have held (sort of) that no "settlement privilege" -- a right to deny others access to the terms of your settlements with third-parties -- exists.

In the first case, the Federal Circuit ruled, "in light of reason and experience, . . . that settlement negotiations related to reasonable royalties and damages calculations [in patent infringement cases] are not protected by a settlement negotiation privilege." In re MSTG, Inc., Misc. No. 996, slip op. 19 (Fed. Cir. Apr. 9, 2012) (denying mandamus petition seeking to halt order that required claimant to turn over documents showing settlement negotiations with infringement defendants).

The other case dealt with a barge that the Government of Ghana hired Balkan to render able to produce 150 megawatts of electricity. Balkan settled a case in Missouri federal court against its subcontractor, ProEnergy. Ghana wanted to know on what terms -- not least because Balkan had accused ProEnergy in the Show Me state case of messing up the barge at the same time it said, in its dispute with Ghana, that everything on the barge worked just fine. The Eighth Circuit said "[w]e have no reason to assume that the district court intended to acknowledge a novel claim to privilege." Government of Ghana v. ProEnergy Services, LLC, No. 11-2714, slip op. 6 n.3 (8th Cir. May 1, 2012). But it (a) went on to hold that the district court acted within its discretion when it refused to order ProEnergy to turn over its settlement agreement with Balkan but (b) seemed pretty clear it thought the settlement privilege idea a dim one.

Blawgletter notes that the later case didn't cite the one from three weeks earlier. Clerks, wake up!

"No-Action" Clause Barred Suit by Holders of Notes, Eleventh Circuit Holds

When a firm borrows money by selling an issue of bonds or notes to the public, it does so under an "indenture" that sets out the loan terms and creates a trust in favor of the buyers. The indenture also names a trustee to run the trust for the benefit of people who acquire the bonds or notes, and it lists the trustee's rights and duties.

Many such indentures include a "no-action clause", which aims to bar most lawsuits by holders of the debt, leaving the right to sue to protect their interests largely in the hands of the trustee.

The Eleventh Circuit this week ruled on the effect of one such provision. The panel held that the clause required the district court to dismiss a complaint in which holders of a majority (by face amount) of the notes alleged claims under the Georgia Fraudulent Transfer Act against CompuCredit (a sub-prime lender) and its officers and directors.

The court thus rejected the holders' arguments (1) that only CompuCredit (and not the officers and directors) could enforce the no-action clause, (2) that the clause didn't apply because they almost complied with an exception that in some instances allowed holders of a majority of the notes to sue (having failed to follow the literal terms of the exception), and (3) an extra-contractual exception for when a trustee has a conflict of interest in doing its duty did not apply either. Akanthos Capital Mgmt., LLC v. CompuCredit Holdings Corp., No. 11-13227 (11th Cir. Apr. 27, 2012) (applying New York law).

Blawgletter suspects that the holders' status as hedge funds didn't help their cause.

We also note that the hedge funds didn't even try to show that the trustee had a conflict of interest. Because most trustees -- banks, by and large -- do often have a great many interests, at least some of which may conflict with the interests of debt owners.

AMI in JOA Ended in 1974, Fifth Circuit Rules

If you've tried an oil and gas case, you've likely seen a form contract that the American Association of Professional Landmen wrote to "help landmen effectively do their jobs." And if your case dealt with a falling out over efforts to explore for, find, and produce oil and gas, the AAPL form you saw more often than not will have laid out the terms in one of the AAPL's Model Form Operating Agreements.

But a form can do only so much. Many times you'll see big parts of an MFOA with slashes across them, meaning those sections don't apply, or smaller changes by way of write-ins or type-ins. And, at the end, you'll probably find a section that says "OTHER CONDITIONS, IF ANY, ARE:" with either a blank space or the parties' other terms.

A case the Fifth Circuit decided this week concerned that last part of a joint operating agreement, this one on the AAPL's first model form for JOAs -- the 1956 version.

The JOA in question involved the pooling in 1971 of oil and gas leases that covered lands within 10 townships in Montana. The two parties to the JOA -- predecessors in interest to A. L. Ballard and Devon Energy Production Company -- agreed to work together under the JOA towards finding oil and gas within the 10 townships (almost 250,000 acres), which they deemed their "Area of Mutual Interest" in subparagraph F of paragraph 31, the "OTHER CONDITIONS" part of the JOA.

Ballard claimed that Devon breached the JOA by not giving him the chance to buy into leases that Devon acquired within the AMI decades after the predecessors of Ballard and Devon had entered into the JOA. His lawsuit turned on whether parts of the AMI provision in paragraph 31 lasted for only three years or whether they instead endured until the End of Time.

Can you see where this will come out?

The pieces that Ballard relied on in subparagraph 31F did oblige Devon to share any leases it got within the AMI. Another sentence, later in the subparagraph, dealt with losing rights to share if, for example, a party failed to maintain a lease. And just below that sentence, which the court called "a 'surrender' provision", appeared this:

The above subparagraph of 31F shall be effective from the date of the Farmout Agreement to which this Operating Agreement is attached and shall terminate and be of no further force and effect after three years from the date of this operating agreement.

Did the three-year term apply to all the parts of 31F or just the "surrender" sentence?

The Fifth Circuit panel held Ballard's view, while "plausible", would produce the "absurd" result that the AMI would bind the parties until Kingdom Come. And it therefore upheld summary judgment in favor of Devon. Ballard v. Devon Energy Production Co., L.P., No. 10-20497 (5th Cir. Apr. 19, 2012) (applying Montana law).