Blawgletter®

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).

 

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.

Supreme Court Takes LIBOR Case

Get ready for the Supreme Court to resolve a question that has divided courts of appeals for years:

Whether and in what circumstances is the dismissal of an action that has been consolidated with other suits immediately appealable?

If that doesn't sound sexy enough for you, consider that the issue arises in massive litigation over manipulation of LIBOR -- the London Inter-bank Offer Rate, a key interest rate benchmark for lenders and borrowers worldwide. In one of the cases that constitute In re LIBOR-Based Financial Instruments Antitrust Litigation, No. 1:11-md-02262-NRB (S.D.N.Y.), the plaintiffs alleged only a federal antirust claim, and as a result of the district court's dismissal of all antitrust claims the case effectively ended for those plaintiffs. Must they nonetheless wait until everyone else finishes with their surviving claims before these antitrust-only plaintiffs can prosecute an appeal?

Alison Frankel of Reuters offers a splendid exposition of the background, the stakes, and the potential impact of the Court's granting of review. Frankel's piece highlights the effect of review on Blawgletter's clients in the case -- and quotes us to boot:

[I]t’s certainly good news for Libor claimants that the U.S. Supreme Court granted a petition for certiorari by bond investors whose case [District Judge] Buchwald dismissed in its entirety when she bounced the Libor antitrust claims. “We are both optimistic and pleased,” said Barry Barnett of Susman Godfrey, who represents a class of investors in over-the-counter securities in the Libor litigation and filed an amicus brief urging the justices to grant the bond investors’ appeal. The cert grant, Barnett said, means that as the Libor class moves ahead with discovery on the claims that have survived Buchwald’s dismissal rulings, they have some hope that the federal antitrust claims will be revived.

The Court will likely hear oral argument in the appeal later this year.

Third Circuit Judicial Conference to Explore Current Issues in MDL Cases and Class Actions

Hershey hosts.

If you find yourself this in the neighborhood of Hershey, Pennsylvania -- the Sweetest Place on Earth -- you may want to see if you can sneak into a two-hour discussion of "Current Issues in Multidistrict Litigation and Class Actions". The event kicks off the first full day of the Third Circuit Judicial Conference's 71st yearly meeting. It starts at 9:00 a.m. in the Hershey Lodge.

You actually have to register for the Conference. Nor does Blawgletter recommend crashing an event that is full of people who routinely send people to federal prison.

Impact of Hydrogen Peroxide, Wal-Mart, Comcast, and other developments in class actions.

But you couldn't keep me away, as I will appear as a speaker on a panel that will feature Senior Circuit Anthony J. Scirica as moderator.

You will recall that Judge Scirica wrote a blockbuster 2008 opinion, one that loosed a tide of challenges to class certification motions. The court's ruling in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3d Cir. 2008), set the stage for a case that I had the privilege to argue to the U.S. Supreme Court, Comcast Corp. v.  Behrend, 133 S. Ct. 1426 (2013).

Panelist members.

My fellow speakers will be John Beisner of Skadden Arps, Professor Stephen Burbank of the Penn law school, Elizabeth Cabraser of Lieff Cabraser, and Robert Heim of Dechert -- a very distinguished group.

You may expect a lively airing of views but no fist fights.

You can't have everything.

BP Loses Bid to Add Causation Test to Blowout Settlement

Oops.

A panel of the Fifth Circuit held by a 2-1 vote that British Petroleum must pay some business loss claims even if the claimants cannot prove that the blowout at the Deepwater Horizon rig in 2010 actually caused the loss.

The majority ruled that the energy giant agreed to pay claims for losses that in fact occurred during the claim period but may not have resulted from the blowout and its oily aftermath. In re Deepwater Horizon, No. 13-30315 (5th Cir. Mar. 3, 2014).

Court Can't Order Foreign Workers to Come to U.S. to Testify, Seventh Circuit Rules

A panel of the Seventh Circuit split 2-1 on whether to halt a district judge's order that called for a big drug-maker in Germany to ship a baker's dozen of its workers to New York for depositions. In re Petition of Boehringer Ingelheim Pharmaceuticals, Inc., No. 13-3898 (7th Cir. Jan. 24, 2014). The court opted to rescind the come-to-New-York order but upheld, for now at least, other sanctions against Boehringer.

Judge Posner explains the panel's thinking on the Main Issue:

The  problem  is  the  form  the  sanction  ordered by  the  judge  took—ordering  Boehringer  to  be  the  court’s  agent  in  violating  federal  legal  limitations  on  compelled  discovery  in  foreign  countries,  merely  so  that  depositions  could  be  shifted  [from Europe] to  a  place  inconvenient  for  the  [German] witnesses  who  are  to  be  deposed.  They  are  to  be  punished  for  the  sins  of  their employer.  And  they  are  not  even  corporate  bigwigs,  who  might  feel  humiliated  by  a  travel  order;  so  far  as  appears,  they  are  merely  research  scientists.  They  are  not  responsible  for  Boehringer’s  contumacy,  yet  they  are  the  targets  of  the  sanction.

Id. at 4-5.

The dissent, by Judge Hamilton, opposed relief by the "extraordinary" writ of mandamus instead of through the normal course, which involves defying an order and then pressing an appeal after the district court holds you in contempt. His Honor deemed Boehringer a wuss:

The extraordinary thing in this case is that the petitioners themselves recognize these alternatives, but they just seem too weak-kneed to use them. They explain in note 6 of their petition that they do not want to refuse to comply with the order because they respect the court and because they do not want “to further jeopardize their interactions with the [district] court by willfully disregarding its order.” 

We should not enable this approach to litigation. With all due respect, this is a major league discovery dispute in high-stakes international litigation. Refusing to comply with a discovery order you believe is unlawful is the respectful course and the orderly procedure. E.g., Allendale Mut. Ins. Co. v. Bull Data Systems, Inc., 32 F.3d 1175, 1179 (7th Cir. 1994) (dismissing appeal of discovery order where party failed to take that step). Refusal is a serious step that makes a party think hard about how important the issue is and how confident it is in its position. See, e.g., Ott v. City of Milwaukee, 682 F.3d 552, 555 (7th Cir. 2012) (“The adversely affected party is expected to put its money where its mouth is, so to speak, before an appeal will be heard.”); Reise[ v. Board of Regents], 957 F.2d [293,] 295–96[ (7th Cir. 1992)]. 

Judges understand that the option of refusal and contempt is available for a party that is truly serious about wanting prompt appellate review of a discovery order. Taking this option does not indicate the kind of lack of respect that these defendants had been showing prior to the second sanctions order. The petition should be rejected on procedural grounds alone. We need not and should not enable the use of mandamus as an alternative, thereby inviting far too many interlocutory appellate reviews of discovery orders.

Id. at 9. Judge Hamilton also believed the district court acted within its power to impose sanctions for Boehringer's abuse of its discovery duties:

There is no reason for this court to have qualms about whether the defendants can or will order their employees to comply with the district court’s sanctions order. Courts routinely issue orders to corporate parties that require them to order their employees to do things they might prefer not to do, such as appear for a deposition, answer interrogatories, or search for documents for discovery. Nor is there anything unusual about having these defendants order an employee to travel across an international border, whether for meetings or for depositions. These defendants are part of a global pharmaceutical enterprise. Their employees travel across international borders all the time.

Id. at 12.

For another mandamus fight over making people travel, see "Court Hearing Tax Case Went Too Far by Telling Feds to Send Someone with Power to Settle, Ninth Circuit Rules".

Libel Suit Over Blog Post Belongs in California, Fifth Circuit Rules

Roger Chadderdon's firm, Cataphora, won a breach-of-contract case against a bunch of lawyers who had hired the firm to provide "litigation support".

The lawyers served on the Plaintiffs' Steering Committee in a massive case that the Judicial Panel on Multi-district Litigation sited in New Orleans. See In re Chinese-Manufactured Drywall Products Liabiity Litig., No. MDL-2047 (E.D. La.).

They defended themselves on the ground, likely among others, that Cataphora "had surreptitiously included [in its contract with them] a provision calling for the company to receive a 'success fee.'" Herman v. Cataphora, Inc., No. 12-30966, slip op. at 2 5th Cir. Sept. 17, 2013).

Let us pause now to think about what a success fee means in the context of litigation support as well as how one might insert a success fee clause into a contract surreptitiously with a bunch of lawyers.

Ha!

Chadderdon chose to Gloat about the win, which Cataphora obtained from a jury in the Northern District of California. But Chadderdon did so in a talk with Above the Law's Christopher Danzig (now an ATL ex-pat). And, in the course of the Gloating, Chadderdon used words like "hypocrites", "screwed", and "kicked their ass".

The bragging prompted two of the lawyers to Sue for libel. They did so in the Pelican State. Chadderdon and Cataphora moved to dismiss for want of personal jurisdiction. And they won.

The Fifth Circuit upheld the order. The panel ruled that the lawyers hadn't met the "focal point" test of Calder v. Jones, 465 U.S. 783 (1984), largely because the bad-mouthing (if any) took place in the Golden State, not the Pelican one.

The court none the less vacated the district court's order. Go west, the panel instructed, because sending the case there would serve the interest of justice under 28 U.S.C. 1406(a), partly because a transfer could avoid statute of limitations concerns. Herman, slip op. at 9.

D.C. Circuit Derails Fuel Surcharge Class

Oops.

The D.C. Circuit today vacated class certification in an antitrust case on behalf of firms that paid fuel surcharges on top of basic charges to freight railroads. In re Rail Freight Fuel Surcharge Antitrust Litig., No. 12-7085 (D.C. Cir. Aug. 9, 2013). The court cited what it called the "propensity toward false positives" of the class's damages model. The panel also relied on Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), which likewise rejected an antitrust damages model.

Direct buyers of rail freight services may now wish to look at pursuing individual claims. Or they can wait to see what happens on remand. But for now the statute of limitations clock may have started ticking again.

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D.C. Circuit Voids Class in Freight Rail Antitrust Case