Blawgletter®

The Value of Class Actions Just Fell. Again.

Another Term, another chance to gut class actions

If you've watched the Supreme Court over the last several years, you may have marveled at how earnestly some of the justices have worked to render Rule 23 a dead letter. Behold:

• You have to arbitrate class claims individually. AT&T Mobility, LLC v. Concepcion, 531 U.S. 321 (2011).

• You can't use statistical methods we don't find compelling to prove class claims. Dukes v. Wal-Mart Stores, Inc., 131 S. Ct. 2541 (2011).

• No, really, you have to arbitrate class claims individually, no matter what. American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

• Hey, didn't you hear what I said about not using statistical methods to prove class claims? Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).

The Court split 5-4 in all four cases, with the same five justices in the majority (Chief Justice Roberts and Justices Alito, Kennedy, Scalia, and Thomas) and the same four justices dissenting (Justices Breyer, Ginsburg, Kagan, and Sotomayor) every time.

We exaggerate only a little

In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the Court did uphold a crucial principle in securities fraud class actions -- that class plaintiffs may take advantage of a presumption that the securities buyers relied on the defendants' failure to disclose material information. And in Erica P. John Funds, Inc. v. Halliburton, 131 S. Ct. 2179 (2011), the Court did rule that class plaintiffs need not show "loss causation" in order to establish grounds for class certification of a securities fraud case.

But both rulings related to securities law violations, which hurt rich people more than poor ones, and in the 2014 decision the Court also ruled that defendants must have the chance to show at the class certification stage that the nondisclosure didn't inflate the price of the securities.

Other kinds of class cases

Class actions involving consumer fraud (Concepcion), antitrust law violations (Behrend and Italian Colors), and short-changing workers through discriminatory practices (Dukes) didn't fare nearly so well. In each case, the little person stood against the behemoth corporation -- and got a shellacking.

Last week, the Court took another class action case that aims to benefit the regular Joe and Josephine. In Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146 (U.S.), the Court will address -- big shout out to our friends at SCOTUSblog -- these questions:

(1) Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and (2) whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages.

The problem, as the petitioner Tyson Foods sees it, arises from the fact that class plaintiffs used averages to show how much time Tyson didn't pay, in the aggregate, for class members' donning and doffing gear they needed to wear to work at Tyson's pork processing plant in Storm City, Iowa. Using averages, Tyson insists, means that "hundreds" of the 3,344 class members did not suffer any compensable damages.

What will happen

Employment discrimination, consumer fraud, and antitrust claims almost always pit weak economic actors against far more powerful ones. Tyson Foods has the same David v. Goliath orientation. Blawgletter -- who will sign off with our last post on June 15 to begin The Contingency on June 16 -- expects that what happened to the plaintiffs in Concepcion, Dukes, Italian Colors, and Behrend will also occur to those in Tyson Foods.

Although the Court will not state the rule this way, the Court will come close to saying that class plaintiffs must present a near-perfect statistical model if they wish to use statistics to support a finding that questions common to class members predominate over individual ones. Justices Scalia and Thomas Some justices seem to think that forcing a defendant to pay an amount equal to the total harm it caused the class should never happen if any class member did not suffer recoverable damages.

Perfection becomes the enemy of the good, in their view. Or, more likely, the enemy of what they may see as a bad thing -- defendants having to pay for 100 percent of the harm they caused.

Get ready for The Contingency

My new law blog will go live on Tuesday, June 16, 2015. Please stand by for info on how to find The Contingency, how to subscribe, and other fun facts.

Price-Fixing Claims Parry Field Preemption in Supreme Court

Pre-emption? Ha!

A 7-2 split on the U.S. Supreme Court last week revived state-law antitrust claims against natural-gas pipelines. End-user (or retail) customers alleged that the pipelines conspired to rig index prices and thus inflate sales prices. The ruling gave narrow play to the pipelines' "field pre-emption" defense. The Court held that a federal agency's power under the Natural Gas Act to regulate any "practice" that affected wholesale prices to resellers did not pre-empt the claims. ONEOK, Inc. v. LearJet, Inc., No. 13-271 (U.S. Apr. 21, 2015).

The decision plainly will help plaintiffs who bring claims under state law to fend off federal pre-emption defenses. But it may also aid those who bring federal-law claims that defendants contend Congress tacitly pre-empted.

Gas, gas, gas

Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission (FERC) had and has the power to make rules and issue orders relating to some, but hardly all, aspects of the domestic gas industry. FERC's authority has notably included a role in regulating prices that interstate pipelines charge to utilities and other middlemen. But over the years FERC has done less and less of that.

In the 1970s, with prodding from Congress, FERC began to shed its function as the setter of prices that pipelines could pay and charge. Yet FERC remained a hovering presence in the gas industry, although now it mainly aimed to  assure that pipelines didn't garner too much power in individual gas markets.

A flood of sales to wholesale (reseller) and retail (end-user) purchasers ensued. The deluge in turn led to use of more or less local indices as pricing benchmarks. The index price in theory reflected actual, arm's-length transactions, and it often found its way into private contracts as a presumably objective proxy for the market price.

Rigging the market

But reality didn't match the theory or the presumption. People manipulated the indices. As the Court noted, "sometimes those who reported [pricing] information simply fabricated it". ONEOK, slip op. at 7. Other times, it pointed out, parties reported prices from "wash" trades, which had no substance. Id.

FERC had snapped to the manipulation by 2003 -- including as the result of the California electricity crisis of 2000-2001. By then, gas prices had more than tripled. Suspecting foul play, several groups of retail buyers sued, alleging a conspiracy to inflate gas prices through (among other means) rigging of price indices. They claimed violation of state antitrust laws only.

Dismissal and reversal

The defendants' having removed the cases to federal court, the district judge (in Nevada) who got all of them granted a motion to dismiss. He held that the NGA pre-empted the "field" and therefore barred antitrust claims that would have the (indirect) effect of regulating wholesale prices of natural gas. The fact that the plaintiffs limited their claims to retail prices, which FERC did not have jurisdiction to regulate, did not matter to the court. The practices in question affected prices at both levels, and the claims "aimed at" entities -- interstate pipelines -- over which FERC had regulatory jurisdiction and authority.

The Ninth Circuit reversed. The Supreme Court granted review. It affirmed the court of appeals decision.

Issues

The 7-2 majority, with Justice Breyer writing for it, leaned heavily on the fact that Congress left much of the natural-gas industry to state oversight, putting only the interstate transportation part under FERC's suzerainty. "Accordingly," Justice Breyer wrote, "where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents." ONEOK, slip op. at 10-11.

That "detailed examination" did not persuade the Court. "Antitrust laws", Justice Breyer noted, "are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace." Id. at 13. Under the Court's precedents, that meant the state-law claims could avoid pre-emption so long as they dealt with conduct that fell at least partly within state authority and did not "aim" to regulate the pipelines as pipelines. Because the retail buyers' lawsuits did not "seek to challenge the background marketplace conditions that affected both jurisdictional and nonjurisdictional rates", the NGA did not pre-empt them under a "field pre-emption" theory. Id. at 15.

Scalia dissent

Justice Antonin Scalia's dissent, which Chief Justice John Roberts joined, painted the pre-emption issue as a simple question of whether Congress gave FERC the sole power to regulate wholesale prices. "Because the Commission's exclusive authority extends to the conduct challenged here," he concluded, "state antitrust regulation of that conduct is preempted." Id. at 3 (Scalia, J., dissenting).

Upshot

ONEOK will have three main effects.

Most obviously, the pro-plaintiff outcome will help LearJet and the other end-users who brought or who will (by way of the class action mechanism) benefit from the litigation. Yet they have miles to go before they sleep. A "conflict pre-emption" attack awaits them upon their return to the district court.

Second, ONEOK will aid other plaintiffs who assert state-law antitrust and other claims that may impinge on the subject matter of federal regulation. Areas include these:

• telecommunications (some of which the Federal Communications Commission oversees),
• banking (the Federal Reserve);
• public trading of securities (the Securities and Exchange Commission);
• air transportation (Federal Aviation Administration);
• pharmaceuticals and medical devices (Food and Drug Administration);
• workplace safety (Occupational Safety and Health Administration); and
• healthcare (Department of Health and Human Services).

Whether ONEOK makes a difference in a particular context will depend partly on how much leeway Congress left states for regulation of the subject matter and -- assuming Congress left some room for state involvement -- partly on the result of the "detailed examination" of which Justice Breyer spoke.

Finally, the Court's 7-2 rejection of Justice Scalia's sweeping view of field pre-emption should imply a softening of the Court's "implied repeal" doctrine, which hypothesizes that a "plain repugnancy" between two federal statutes requires that one of the two give way. The Court in Credit Suisse, with Justice Breyer again the author, seemed too quick to find a conflict between securities and antitrust law.^** Justice Breyer's more modest approach in ONEOK may help confine Credit Suisse to its facts.

__________________

^* See Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007) (holding that SEC's authority to regulation initial public offerings of stock under federal securities law trumped claim under federal antitrust law that investment banks conspired to rig terms for providing IPO services). 

^** See Jesse W. Markham, Jr., The Supreme Court's New Implied Repeal Doctrine: Expanding Judicial Power to Rewrite Legislation Under the Ballooning Conception of "Plain Repugnancy", 45 Gonzaga L. Rev. 437 (2009/10).

 

Flimsy Opinions and Securities Fraud

False opinions

Giving a knowingly false opinion about a public company can expose the company and its insiders to liability for securities fraud under federal law.

But what about an opinion that they truly believe but for which they have a flimsy basis?

The Supreme Court held today that the lack of rigor may indeed support a claim under the Securities Act of 1933, 15 U.S.C. 77k(a), in spite of the opinion-giver's earnestness.

Omnicare's belief

The case arose from a public stock offering by Omnicare, Inc., a company that provided pharmacy services for people who reside in nursing homes. Omnicare said in the registration statement that it "believe[d]" it complied with relevant law. The belief proved untrue; Omnicare's rebates to pharmacies did violate federal law against paying kickbacks.

Pension funds that bought Omnicare stock in the initial public offering sued under section 11 of the Securities Act after lawsuits by the federal government undercut Omnicare's claim of legal compliance. The district court dismissed the case, but the Sixth Circuit reversed, holding "that a statement of opinion that is ultimately found incorrect -- even if believed at the time made -- may count as count as an 'untrue statement of material fact.'" Omnicare, Inc. v. Laborers Dist. Council Constr. Industry Pension Fund, No. 14-435, slip op. at 6 (U.S. Mar. 24, 2015) (quoting 15 U.S.C. 77k(a)).

Facts and opinions

The Court ruled 9-0 that the court of appeals erred in concluding that Omnicare had made an "untrue statement of material fact". While "a statement of fact ('the coffee is hot') expresses certainty about a thing," "a statement of opinion ('I think the coffee is hot') does not." Id. Because Ominicare said only that it "believe[d]" its rebates didn't violate anti-kickback law and the pension funds "do not contest that Omincare's opinion was honestly held", the statement -- of a false but sincere view -- did not run afoul of the Securities Act, all nine justices agreed. Id. at 9. "[A] sincere statement of pure opinion is not an 'untrue statement of material fact,' regardless whether an investor can ultimately prove the belief wrong." Id.

That left the question of whether the funds had alleged a viable claim that "Omnicare 'omitted to state facts necessary' to make its opinion on legal compliance 'not misleading.'" Id. at 10 (quoting 15 U.S.C. 77k(a)). Seven of the justices concluded that the funds deserved a chance to persuade the courts below that they had stated an adequate omission claim.

The majority pointed out that "a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view." Id. at 11. Justice Kagan explained:

Section 11’s omissions clause, as applied to statements of both opinion and fact, necessarily brings the reasonable person into the analysis, and asks what she would naturally understand a statement to convey beyond its literal meaning. And for expressions of opinion, that means considering the foundation she would expect an issuer to have before making the statement. 

Id. at 17. The Court sent the case back to the Sixth Circuit for analysis of whether the pension funds' complaint adequately stated an omissions claim.

Concurrences

Justices Antonin Scalia and Clarence Thomas concurred in separate opinions. Justice Scalia wrote that section 11 does not apply to omissions about the basis for opinions unless the opiner "intend[ed] to deceive" by failing to disclose the flimsiness of the basis. Id. at 6 (Scalia, J., concurring). Justice Thomas felt that the question of liability for an omission "is not properly before us" since the courts below had not passed on it. Id.  at 1 (Thomas, J., concurring).

Upshot

Omnicare offers more to plaintiffs than to defendants, for two main reasons. First, the mere fact that a public disclosure expresses or relates to an opinion will not preclude liability. Section 11 covers not only lying about an opinion -- saying you believe something when you don't -- but also falsely implying that an opinion rests on a reasonably rigorous basis -- suggesting that adequate expertise and a sufficient investigation support it.

Second, the Court's ruling saves Securities Act claims from the challenges of pleading a claim under the onerous standards of the Private Securities Litigation Reform Act of 1995. Justice Scalia would have imported scienter into the section 11 analysis despite its absence as an element under the Securities Act, but the majority rejected that approach. Id. at 15 n.11 (stating that "we think Justice Scalia's reliance on the common law’s requirement of an intent to deceive is inconsistent with §11’s standard of liability").

The Court's decision will give new life to securities cases that target false statements about legal and other opinions. Plaintiffs may want to rejoice.

In Blawgletter's opinion.

Note: Our series on the hottest oil and gas claims will resume tomorrow.

Why Comcast Corp. v. Behrend Went Off the Air

In Roach v. T.L. Cannon Corp., No. 13-3070-cv (2d Cir. Feb. 10, 2015), the Second Circuit gave a narrow reading of the Supreme Court's ruling on class certification in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).^*

The outcome does not surprise Blawgletter, who had the honor of arguing Comcast Corp. v. Behrend on behalf of class plaintiffs. In view of Comcast's provenance, it should not surprise anyone else either.

After losing in the courts below, Comcast sought review on the question of whether the Third Circuit and the district court erred by failing to grapple with the "merits", but the Court granted cert. on another issue, one that it had expressly reserved the year before (2011) in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) -- whether class plaintiffs must meet the Daubert test if they rely on expert proof to establish damages.

But the Court seems not to have realized that Comcast hadn't raised the Daubert issue in the district court or the court of appeals, that Comcast had as a result "forfeited" any objection to admissibility of our damages expert's opinions, and that the case therefore "would give lower courts scant guidance . . . in the great majority of cases" involving class certification. Respondents' Br. at 19.

The mismatch between the case that the Court thought it had and the one that it actually faced became more salient during oral argument. That apparently led to an impromptu post-argument meeting of the justices and a rewrite of the Question Presented; the revision in turn prompted a dual dissent, which Justices Ginsburg and Breyer delivered on the morning of the first arguments in the Obamacare cases.

At the Court, the history of the Comcast case had the effect of barring a reversal unless the Court could conclude that the class expert's testimony in no way tended to show damages, class-wide or otherwise. The majority did reach that conclusion, but it had to determine (in our view, contrary to the district court's findings and the evidence) that the damages expert tried to link damages to specific anti-competitive conduct but failed. (The liability expert did make the causal connection, but because of how the Court had re-framed the Question Presented, the briefing and argument did not explore the sufficiency of that important part of the record, which in any event did not support the Court's reading of the evidence.)

Almost all of the courts interpreting Comcast have correctly appreciated the narrowness of the Court's holding. While Blawgletter respectfully disagrees with the majority's conclusion that class plaintiffs did not present evidence linking anti-competitive conduct with class-wide damages, the case stands for that conclusion and nothing more.

We therefore think that the Second Circuit certainly reached the right conclusion yesterday when it held just that in Roach v. T.L. Cannon Corp.

_____________________

^{* For an overview of the Second Circuit case, which involved wage and hour claims by Applebee's employees, see Alison Frankel, The Supreme Court's class action underachiever", Feb. 11, 2015, Reuters.}

LIBOR Price-Fixing Claims Get Reprieve; Second Circuit Must Hear Appeal, Supreme Court Decides

Unanimous Court orders review of key district court ruling 

The Second Circuit made a mistake when it refused to hear an appeal, the Supreme Court held 9-0 today in Gelboim v. Bank of Am. Corp., No. 13-1174 (U.S. Jan. 21, 2015); see Supreme Court Takes LIBOR Case, Blawgletter®, July 1, 2014.

The Court's ruling will hasten -- by a year or more -- review of a key decision by the district court that has the job of handling price-fixing and other claims in the massive In re Libor-Based Financial Instruments Antitrust Litigation, No. 1:11-md-02262-NRB (S.D.N.Y.).

Gelboim also will likely affect how district judges and parties deal with discrete legal issues that could dispose of some but not all claims in complex, multi-district cases like Libor.

Gelboim and Libor

The underlying case -- in which Blawgletter's firm serves as co-lead counsel for a plaintiff class -- arose from efforts by banks during 2007-10 to suppress the London Inter-bank Offer Rate, or LIBOR. Because trillions of (nominal) dollars in loans, swaps, and other financial instruments use LIBOR as a benchmark (according to one source, "Libor underpins approximately $350 trillion in derivatives"), the banks' machinations caused them to appear more financially sound and thus enabled them to pay less in interest to commercial paper and other lenders, counterparties to interest-rate swaps, and others.

The plaintiffs in Gelboim alleged one claim -- that "a number of banks, acting in concert, had violated federal antitrust law" by fixing LIBOR, in violation of Sherman Act section 1. Gelboim, slip op. at 1. The Judicial Panel on Multidistrict Litigation assigned Gelboim and dozens of other cases from around the country to a single judge, in the Southern District of New York, "for pretrial proceedings" under 28 U.S.C. § 1407. Id.

Dismissal and appeal -- and dismissal of appeal

Acting on the banks' motions to dismiss, the district court threw out the antitrust claims of all Libor plaintiffs, including those in Gelboim. The court held that the plaintiffs could not prove "antitrust injury" from the banks' conspiracy to suppress LIBOR.

The Gelboim plaintiffs filed a notice of appeal in the Second Circuit, which oversees district courts in New York, Connecticut, and Vermont. That court dismissed the appeal on its own motion. It explained that the "orde[r] appealed from did not dispose of all claims in the consolidated action." Gelboim, slip op. at 6.

High Court review -- and reversal

The Gelboim plaintiffs filed a petition for review by the Supreme Court, which promptly granted it. The Court heard argument on December 9, 2014. Its unanimous ruling followed fewer than 60 days later.

The Court, per Justice Ginsburg, disposed of the issue before it in 10 pages. The putting of multi-district cases before one district judge for pretrial purposes does not, the Court ruled, effect a melding of them such that all dispositive orders must await a complete wrap-up of the MDL proceeding.

"Cases consolidated for MDL pretrial proceedings ordinarily retain their separate identities, so an order disposing of one of the discrete cases in its entirety should qualify under [28 U.S.C.] §1291 as an appealable final decision." Gelboim, slip op at 6-7.

Impact

The Court's ruling effectively permits all parties in Libor to obtain Second Circuit review of the district court's dismissal order. It also strengthens the hand of all Libor plaintiffs in any settlement talks with defendant banks, not least because the again-in-play antitrust claims allow joint and several liability regardless of contractual privity and permit recovery of treble damages and attorneys' fees. The state-law claims that remained after the dismissal of the price-fixing claims conferred neither advantage, the district court believed.

Gelboim may or may not speed up the handling of other MDL cases. MDL judges and parties now know that a dispositive ruling having "the hallmarks of a final decision" for even a single case among dozens, hundreds, or thousands can prompt appellate review as the other cases in the MDL lumber on.

Will that knowledge result in behavior that aims to postpone a "final decision" for strategic or tactical reasons? We will have to wait and see.

Illinois Brick Goes Global

Dear Blawgletterati:

A rebuke

Drop dead, the Seventh Circuit on November 26 told U.S. firms that want to collect treble damages under the Sherman Act for fixing prices on their foreign subs' purchases overseas.

Either have your subs buy the stuff in the U.S., the panel ruled, or purchase the goods for import into the U.S. yourself.

And quit your belly-achin', you could almost hear Circuit Judge (and antitrust maven) Richard Posner say.

Backdrop

The case that produced the Posner poke involved sales of liquid-crystal display panels by members of a price-fixing cartel. The price-fixers sold more than $5 billion worth of the panels to the Motorola phone-making enterprise, but only one percent of that amount went straight to the U.S. parent company; Motorola's non-U.S. subs bought the rest.

Motorola the parent joined with its overseas offspring in suing AU Optronics, Samsung, Sanyo, and other foreign members of the cartel. They noted, among other bits of proof, that a U.S. jury had already found AU Optronics guilty of fixing prices on LCD panels.

But, unlike the U.S. Department of Justice's Antitrust Division, Motorola and its subs had to prove not only that the bad conduct has a "direct, substantial, and reasonably foreseeable effect" on U.S. "trade or commerce", 15 U.S.C. 6a(1), but also that the "effect" on U.S. trade or commerce "gives rise to" the Sherman Act claim, id. 6a(2).These twin requirements of the Foreign Trade Antitrust Improvements Act (which Congress passed and President Ronald Reagan signed in 1982) doomed the claims by the non-U.S. Motorola entities to dismissal by the district court.

Affirmance

Without briefing or oral argument, the Seventh Circuit upheld the judgment. When Motorola protested, the same panel allowed both. But none of it mattered.

In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. Nov. 26, 2014), the court affirmed on the basis of the "gives rise to" prong of the FTAIA test. Judge Posner put a spotlight on the problem:

What trips up Motorola’s suit is the statutory requirement that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action. 15 U.S.C. § 6a(2). The conduct increased the cost to Motorola of the cellphones that it bought from its foreign subsidiaries, but the cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.

Motorola, slip op. at 6. The "price increase . . . occurred entirely in foreign commerce" because Motorola's foreign subs bought and took delivery of the LCD panels outside the U.S. That the cartel members knew the subs would send the panels to Motorola for resale in the U.S. might have met the "direct, substantial, and reasonably foreseeable effect" prong of the FTAIA, but it couldn't satisfy the one requiring the domestic effect to "give[] rise to" the antitrust claim, the panel held.

Forum Shopping and Illinois Brick

Judge Posner gave two main reasons for the ruling. He explained that Motorola chose to run its business overseas through non-U.S. subsidiaries and must therefore live with the consequences of that choice. "For example," he noted, "although for antitrust purposes Motorola contends that it and its subsidiaries are one . . . , for tax purposes its subsidiaries are distinct entities paying foreign rather than U.S. taxes." Motorola, slip op. at 7. "No doubt Motorola thinks U.S. antitrust remedies more fearsome than those available to its foreign subsidiaries under foreign laws", he added. "But that’s just to say that Motorola is asserting a right to forum shop." Id. at 8. 

Nor did Motorola's position square with a bedrock doctrine of U.S. antitrust law -- the "indirect purchaser" rule of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Illinois Brick "forbids a customer of the purchaser who paid a cartel price to sue the cartelist, even if his seller—the direct purchaser from the cartelist—passed on to him some or even all of the cartel’s elevated price." Motorola, slip op. at 9. The FTAIA's "gives rise to" requirement, Judge Posner urged, in effect enforces Illinois Brick's bar to damages suits by indirect purchasers. 

Bright-line rule?

Still, the Motorola opinion does leave a sliver of daylight for U.S. firms that buy components in foreign climes. The beam comes in the guise of the "pass-on defense" to Illinois Brick. As Judge Posner pointed out, the Court in Illinois Brick mentioned that a “situation in which market forces have been superseded and the pass‐on defense might be permitted is where the direct purchaser is owned or controlled by its customer.” Illinois Brick, 431 U.S. at 736 n.16. And a "customer" that "own[s] or control[s]" the "direct purchaser" sounds a lot like a parent company such as Motorola.

Judge Posner argued that the Illinois Brick exception may not matter, at least if you look at things from the subs' point of view:

Although Motorola, the “customer,” owns its foreign subsidiaries—the “direct purchasers” of the components—they are incorporated under and regulated by foreign law. What remedies they may have, if they overpay for inputs that they buy abroad, are determined not by U.S. anti‐trust law but by the law of the countries in which the subsidiaries are incorporated and are therefore citizens of, or the countries in which the price fixers they bought from operate, or the countries in which the purchases were made. And that is quite apart from Illinois Brick or other sources of U.S. anti‐trust law.

Motorola, slip op. at 12-13.

No cigar

But that rationale doesn't quite hold up. What if the relevant sale came not when the foreign subs bought the panels overseas but when Motorola purchased the phones that featured the panels in the U.S. from those subs? Wouldn't that avoid the moral peril of letting foreign firms reap the tax and other benefits of their non-U.S. status while also permitting them to morph into U.S. entities for purposes of suing under the Sherman Act?

Yes, it would. But Motorola had long before chosen not to base its claim in the passing-on theory. As Judge Posner put it:

In any event Motorola waived in the district court any argument that it could base damages on the effect of the cartel’s pricing of components on the cost to Motorola of cell-phones incorporating those components. It argued only that its foreign subsidiaries overpaid for the LCD panels. How the overcharge may have affected Motorola’s cellphone business because of the component price fixing was a path that Motorola stepped off of after the pleadings.

Motorola, slip op. at 13-14.

A U.S. enterprise whose non-U.S. subs buy goods overseas thus may have a claim despite the FTAIA, but the enterprise must base its damages model on the passing-on of price-fixing overcharges by the subs to the parent.

What to do?

If your company finds itself on the losing end of an international cartel, you should think about asking for a consultation with an antitrust expert. In many instances, the potential recovery would easily justify the expense of having the expert take a close look at the potential claim. 

Yours truly,
Blawgletter

Use of Phony Benchmark Rate Supports Bad Faith Claim, Second Circuit Holds

Good faith and fair dealing

New York law "implies" a duty in all contracts -- a duty to perform promises in good faith.^* 

Does that mean a party must adjust a contractual benchmark rate if it knows something has distorted the benchmark?

Yes, the Second Circuit held in Security Plans, Inc. v. CUNA Mut. Ins. Society, No. 13-384-cv (2d Cir. Oct. 17, 2014).

The ruling may prove important in pending cases that involve trillions of dollars in benchmark transactions.

Credit insurance

The case before the court arose from the sale of a credit insurance business. The asset purchase agreement required CUNA Mutual, the buyer, to pay an "earnout" that tracked future profits from the business.

The problem arose from the "loss ratio" that CUNA Mutual used to deduct "losses" from premium payments to compute the profits. As it realized before the earnout period ended, the loss ratio it applied to all its lines of business -- including the credit insurance segment -- overstated actual losses.

Lawsuit

The unduly high loss ratio produced a zero earnout. That upset the seller, Security Plans.

It sued, alleging, in relevant part, that CUNA Mutual breached the covenant of good faith and fair dealing -- both by setting the loss ratio too high and by failing to adjust it at the end of the earnout period.

The district court granted CUNA Mutual summary judgment in relevant part.^** Security Plans appealed.

Second Circuit ruling

The Second Circuit affirmed in part and reversed in part. It laid out the pertinent law as follows:

Under New York law, all contracts that confer discretion include an implied promise that neither party will "act arbitrarily or irrationally" in exercising that discretion.

*  *  *  *

The implied covenant [of good faith] does not "undermine a party's 'general right to act on its own interest in a way that may incidentally lessen'" the other party's expected benefit. . . . The covenant will be breached only in a narrow range of cases. A plaintiff must show substantially more than evidence that the defendant's actions were negligent or inept. . . . The plaintiff must instead demonstrate something more, such as that the defendant "act[ed] arbitrarily or irrationally in exercising [the] discretion" afforded to it under the contract.

Security Plans, slip op. at 3 & 24-25 (citations omitted).

CUNA Mutual's error in setting the loss ratio, the panel held, did not support a bad faith claim "inasmuch as the record contains nothing to suggest anything more than negligence" on its part. Id. at 26.

But CUNA Mutual's "refus[al] to provide a revised earnout calculation in light of an alleged system-wide error concerning claim reserves" presented a different matter, the court believed. Id. The panel said:

[T]he contract places on the defendant the responsibility for calculating the earnout, thereby conferring a limited discretion in selecting the values -- such as loss ratios and written premium -- that enter into the calculation in the first place. . . . This latter form of discretion is indeed the subject of plaintiff's claim in this case, and the plaintiff may therefore argue that the defendant acted arbitrarily or irrationally in handling the earnout calculation.

Id. at 26-27 (citations and footnote omitted). The panel concluded:

Making all inferences in the plaintiffʹs favor, a rational trier of fact could properly conclude that it was arbitrary for the defendant to refuse to revise the earnout calculation in order to correct for the suspect numbers. On this record, a trier of fact could, but would not necessarily be required to, conclude that: (i) the initial decision that set high claim reserves for the earnout period was made by mistake, and not as a result of actuarial judgment; (ii) this mistake caused Security Plansʹ performance data to be distorted in ways that negatively affected the earnout; (iii) this mistake30 was noticed in time to revise the earnout calculation accordingly, and such revision was possible; (iv) the mistake was acknowledged by all parties concerned; and (v) CUNA Mutual, for no valid business reason, decided not to adjust the earnout calculation. In making this second decision not to revise the calculation, CUNA Mutual was exercising its contractually conferred authority as the party charged with calculating the earnout, but a trier of fact could find it exercised this discretion arbitrarily.

Id. at 29-30.

Implications

The Southern District of New York has before it several cases that involve claims of deliberate manipulation involving benchmark rates. These include In re Foreign Exchange Benchmark Rates Antitrust Litigation, No. 13-07789 (S.D.N.Y.), In re North Sea Brent Crude Oil Futures Litigation, No. 13-md-02475 (S.D.N.Y.), and In re LIBOR-Based Financial Instruments Antitrust Litigation, No. 11-md-2262 (S.D.N.Y.).^***

The benchmarks at issue affect trillions of dollars in transactions.

In at least two of the three, the plaintiffs assert state law claims (as well as federal ones). The Second Circuit's ruling in Security Plans should give those claims a legal boost, pointing the way to showing conduct that violates the covenant of good faith and fair dealing in the setting or adjustment of the relevant benchmarks.

 _________________

^* Moran v. Erk, 901 N.E.2d 187, 190 (N.Y. 2008) (stating that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract").

** We've ignored other parts of the case to focus on the benchmark aspect.

^*** Blawgletter's firm serves as lead counsel for one of the plaintiff classes in the LIBOR litigation.

Loss Due to Lack of Loss Causation Wins Appeal; Error Caused Ruling, Fifth Circuit Says

Plaintiffs win a rare Fifth Circuit victory

If you represent a client who bought a stock that shed value more and more as bad news about the company trickled out, you can take courage from a rare pro-plaintiff decision by the Fifth Circuit. The court reversed the dismissal of a securities fraud class action on a tricky issue in such cases -- the element of "loss causation".

The appeals court panel held that a class of investors in Amedysis -- which "provides home health services to patients with chronic health problems" -- could take their securities fraud case beyond the motion to dismiss stage. Public Employees' Retirement Sys. of Mississippi v. Amedisys, Inc., No. 13-30580 (5th Cir. Oct. 2, 2014).

Loss causation -- huh?

The district court in Baton Rouge had thrown out the complaint on the ground that it failed to plead a plausible basis for the "loss causation" element of their claim.

Loss causation means, in essence, that false information about a company inflated the market price of a stock or other security and caused investors to overpay for the security. Proving it generally requires evidence showing that the post-purchase public airing of "corrective disclosures" about the company coincided with a drop in the market price of security.

Amedisys shareholders alleged that the company and company insiders hid the fact that it regularly engaged in fraudulently claiming reimbursement from Medicaid, grossly inflating its earnings beyond a sustainable amount. The district court thought that the public airing in dribs and drabs of the truth about Amedisys's crooked ways did not count as "corrective disclosure" of the true facts regarding those crooked ways.

Fifth Circuit decision

Citing the Supreme Court's ruling on loss causation in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the court of appeals held:

According to the Complaint, Defendants made materially false and misleading statements about their compliance to artificially inflate the price of Amedisys securities throughout the Class Period. Once Amedisys was placed under the spotlight of government scrutiny for Medicare fraud, its earnings dropped significantly because its employees could no longer continue exploiting Medicare reimbursements. After each negative partial disclosure, Defendants attempted to mitigate the impact of those disclosures by making contemporaneous misstatements to the market and prevented the full truth from being revealed at once. As a result, PERSM and the other Class members purchased Amedisys securities at artificially inflated prices and suffered economic loss when the artificial inflation dissipated and the price of these securities declined in response to the series of partial disclosures revealing the true nature of Amedisys’s business practices.

Taking the above facts as true, the 2008 Citron Report, the Swartz and Graham resignations, the 2010 WSJ Article and the above governmental investigations, coupled with Amedisys’s second quarter 2010 earnings report, collectively constitute and culminate in a corrective disclosure that adequately pleads loss causation for purposes of a Rule 12(b)(6) analysis. This holding can best be understood by simply observing that the whole is greater than the sum of its parts. The district court erred in imposing an overly rigid rule that government investigations can never constitute a corrective disclosure in the absence of a discovery of actual fraud.4 5 “To require, in all circumstances, a conclusive government finding of fraud merely to plead loss causation would effectively reward defendants who are able to successfully conceal their fraudulent activities by shielding them from civil suit.” In re Questcor Sec. Litig., No. SA CV 12-01623[,] 2013 WL 5486762[,] at *22 (C.D. Cal Oct. 1, 2013). Indeed, “there is no requirement that a corrective disclosure take a particular form or be of a particular quality . . . It is the exposure of the fraudulent representation that is the critical component of loss causation.” In re Bristol Meyers Squibb Co. Sec. Litig., 586 F. Supp. 2d 148, 165 (S.D.N.Y. 2008) (citations and internal quotation marks omitted). Accordingly, when this series of events is viewed together and within the context of Amedisys's poor second quarter 2010 earnings, it is plausible that the market, which was once unaware of Amedisys's alleged Medicare fraud, had become aware of the fraud and incorporated that information into the price of Amedisys's stock.

A motion to dismiss challenges the adequacy of the initial pleading. To plead loss causation in a private securities action, the complaint need only allege facts that support an inference that the Defendants’ misstatements and omissions concealed the circumstances that bear upon the loss suffered such that Plaintiffs would have been spared all or an ascertainable portion of that loss absent the fraud. Lentell, 396 F.3d at 175. Whether the connection between Amedisys’s misleading statements and the alleged corrective disclosures may ultimately be found too attenuated at a later stage in litigation is a highly fact intensive inquiry that need not be reached at this point. The Complaint consists of over 200 pages of allegations regarding, among other things, Defendants’ fraudulent Medicare billing practices. Where the Complaint sets forth specific allegations of a series of partial corrective disclosures, joined with the subsequent fall in Amedisys stock value, and in the absence of any other contravening negative event, the plaintiffs have complied with Dura’s analysis of loss causation.

Id. at 16-19.

Teaching

Amedisys teaches how to plead loss causation in cases where the truth comes out gradually and that plaintiffs should now despair a bit less about bringing securities fraud cases within the Louisiana-Mississippi-Texas area over which the Fifth Circuit presides.

Equal Pay Act Claim Requires Equal "Job Content", Second Circuit Holds

Equal pay for equal work

The Equal Pay Act of 1963, 29 U.S.C. 206(d), mandates equal pay for "equal work".

But what does "equal work" mean? A ruling by the Second Circuit focuses on the "content" of the "work" and rejects titles and labels as the basis for comparing male and female workers.

"Actual job content"

The court held in EEOC v. Port Authority of New York and New Jersey, No. 13-2705-cv (2d Cir. Sept. 29, 2014), that phrase requires a claimant to show that females did the same actual work as their male peers. As the panel noted:

[A] successful EPA claim depends on the comparison of actual job content; broad generalizations drawn from job titles, classifications, or divisions, and conclusory assertions of sex discrimination, cannot suffice. At the pleading stage, then, a plausible EPA claim must include "sufficient factual matter, accepted as true" to permit "the reasonable inference" that the relevant employees job content was "substantially equal."

Id. at 21-22 (quoting Ashcroft v. Iqbal, 556 U.S.. 662, 678 (2009)) (emphasis in original).

A case about lawyers

The lawsuit involved claims by the Equal Employment Opportunity Commission on behalf of female nonsupervisory attorneys" who worked in the Port Authority's law department. The EEOC alleged that "the Port Authority had violated the EPA by paying its female attorneys at a lesser rate than its male attorneys." Id. at 4.

The district court dismissed the case. The Second Circuit affirmed.

The panel rejected what it deemed the EEOC's theory -- that "an attorney is an attorney is an attorney". It noted:

[D]espite a three-year investigation conducted at the Port Authority's cooperation, the EEOC's complaint and incorporated interrogatory responses rely almost entirely on broad generalizations drawn from job titles and divisions, and supplemented only by the unsupported assertion that all Port Authority nonsupervisory attorneys had the same job, to support its "substantially equal" work claim. [T]he EEOC's complaint was rightly dismissed.

Id. at 22.

Lesson

The ruling points up a possibly common mistake in thinking about equal pay for equal work.

Under the Second Circuit's analysis, the EPA requires something like proof that a female worker had the same or similar skills, did the same or a similar job, and obtained the same or similar results as a male worker who got higher pay.

The fact that gender discrimination may have prevented or hindered the female worker from acquiring the same skills, doing the same work, and achieving the same results as her male peer may not matter under the EPA.

Apparently only Title VII -- and not the EPA -- deals with that aspect of gender injustice.

Dow Loses $1.2 Billion Price-Fixing Appeal; Large Victory for Class Actions

Big damages . . . and a big win for class actions

A Tenth Circuit panel of judges has upheld a $1.2 billion verdict and judgment against Dow Chemical for its role in a price-fixing conspiracy that involved urethane chemical products. Dow Chemical Co. v. Seegott Holdings, Inc., No. 13-3215 (10th Cir. Sept. 29, 2014) ( opinion here).

More than any other court of appeals decision in recent memory, the ruling should help blunt aggressive attacks on class actions in which the plaintiff class seeks an award of damages.

Class treatment prevails

The panel rejected Dow's four main arguments on appeal:

• that the district court shouldn't have certified the case as a class action,
• that statistical evidence of damages lacked a reliable basis,
• that plaintiffs failed to prove the price-fixing conspiracy succeeded, and
• that the damages award violated Dow's seventh amendment right to trial by jury.

The court distinguished Comcast Corp. v. Behrend, 133 S. Ct. 1346 (2013) and Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), holding that neither decision required the conclusion that individual issues predominated in the case against Dow Chemical and that the district court acted within its discretion in ruling otherwise.

The panel's treatment of the attacks on damages also stressed the broad discretion that district courts have in admitting expert testimony about statistics and other matters involving expert knowledge.

Kansas City trial

The jury trial took place before U.S. District Judge John Lungstrum in Kansas City, Kansas. It ended in early 2013. Blawgletter's friend and colleague Joe Goldberg served as lead trial counsel for the class.

Congratulations, Joe!