No Harm, No Foul in Apple E-Book Notice Screw Up

In mid-September, class notices went out in the ongoing Apple E-books class action lawsuit that might have momentarily had Apple’s attorneys a little concerned. Over three million potential members of the class received information detailing the next phase in the litigation–the trial to determine the extent of damages against Apple. The problem, of course, is that the damages trial was canceled a few months ago.
In this latest (and least substantive) chapter of the ongoing e-book antitrust saga, Plaintiffs’ counsel were forced to explain to the Court that they had for “currently unknown reasons” accidentally sent out notices informing class members about the canceled upcoming damages trial. Plaintiffs thereafter sent a letter to U.S. District Judge Denise L. Cote, clarifying that the class notice had erroneously been sent.
Prior to being rendered unnecessary by the settlement, the second phase of the trial was set to fix Apple’s liability arising from its e-book antitrust violations. After some initial skepticism, Judge Cote approved the settlement in August, eliminating the need for any further litigation on Apple’s damages.
The settlement finally put to rest claims that Apple’s 2010 distribution deal with the top five publishers in the market illegally raised the prices of e-books. The five publishers settled with the government, but Apple took the case to trial, and In July 2013, Judge Cote ruled that the company had orchestrated the scheme in violation of the Sherman Act, which prohibits anti-trust violations. Of course, any damages for antitrust violations could have been trebled, leaving Apple on the hook for potentially hundreds of millions of dollars.
Apple’s schadenfreude in class counsel’s notice error was short lived as Judge Cote quickly allowed the Plaintiffs’ attorneys to correct their error.

Posted in Uncategorized

Cozen’s Tom Wilkinson Comments on Seventh Circuit Opinion Rejecting Class Action Settlement

Cozen O’Connor member Tom Wilkinson is quoted extensively in this article from the ABA’s Litigation News regarding a recent Seventh Circuit opinion rejecting a class action settlement as “scandalous.” The opinion was highly critical of class counsel.

Posted in Uncategorized

Fourth Circuit: Rule 23(f) Review Does Not Apply to Decertification Denials

Rule 23(f) provides for discretionary interlocutory review of an order “granting or denying class-action certification” if a party files a petition for permission to appeal within 14 days after the order is entered.  Last month, the Fourth Circuit rejected an attempt to extend that deadline to appeals from the denials of decertification motions.

In Nucor Corp. v. Brown, the district court originally certified two classes.  Over the next two years, the defendants filed a series of four decertification motions, finding partial success on the second motion, which decertified one of the two classes; the first, third, and fourth motions were denied.  After the denial of their fourth decertification motion, the defendants sought interlocutory review of the denial under Rule 23(f).

The Fourth Circuit, persuaded by the prior like decisions of the Third, Fifth, Seventh, Tenth, Eleventh and D.C. circuits, held that the denial of the decertification motion was not appealable under Rule 23(f).  The order did not grant or deny class-action certification;  it merely refused to disturb the two-year-old original order granting class certification.  In fairly strong words, the court remarked:  “We will not render the Rule 23(f) deadline ‘toothless’ by permitting Nucor to ‘easily circumvent Rule 23(f)’s deadline by filing a motion to amend or decertify the class at any time after the district court’s original order’ . . . .”

The takeaway:  in the Fourth Circuit (and probably every other circuit), the 14-day period runs from the original certification order.  A subsequent order on class certification will be appealable only if it alters the class action status in some way (thus, the plaintiff presumably could have appealed the court’s partial grant of the defendants’ second decertification motion within 14 days).  Mere denial of a motion to reconsider the original ruling, or otherwise decertify the class, is not appealable under Rule 23(f).

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Posted in Class Certification

Third Circuit: Courts, Not Arbitrators, Decide Whether to Require Classwide Arbitration

Recent Supreme Court precedent has clearly reinforced the validity of contractual class action/arbitration waivers.  In AT&T Mobility v. Concepcion, the Court made clear that class action waivers are enforceable, even if state common law would hold them unconscionable.   In American Express Co. v. Italian Colors, the Court extended the same enforceability to class arbitration waivers, even where they effectively eliminate a plaintiff’s ability to vindicate a federal statutory right.

But what if an arbitration provision is silent about the availability of a classwide proceeding?  Can a defendant be required to submit to classwide arbitration?  And is that a decision for the court or for the arbitrator?

According to a Third Circuit opinion issued last week, whether an arbitration provision can be construed to permit classwide arbitration is a question for the court.  In Opalinski v. Robert Half International, the issue was whether this question is a “question of arbitrability.”  The Supreme Court has held that questions of arbitrability—a narrow range of “gateway” issues that go to whether a case is to be arbitrated at all—are presumptively for courts to decide.  Typical questions of arbitrabiltiy include whether the parties are bound by a particular arbitration provision, or whether the provision applies to a certain type of controversy.  Other questions are deemed “procedural” questions that are for the arbitrator to decide.

The Supreme Court has not decided which category characterizes the availability of class arbitration.  A plurality opinion in 2003 concluded that the question was not one of arbitrability, but more recent opinions have emphasized that the issue remains unresolved by the Court.

In holding that the availability of classwide arbitration is a question of arbitrability, the Third Circuit followed the lead of the Sixth Circuit—the only other circuit thus far to squarely weigh in on the issue.  The Third Circuit reasoned that the availability of class arbitration implicates whose claims the arbitrator may resolve, since the procedure would empower the arbitrator to resolve claims of individuals who are not parties to the litigation.  The panel also concluded that allowing class arbitration implicates the type of controversy submitted to arbitration because, as the Supreme Court has recognized in the past, class arbitration changes the nature of the arbitration to such a degree that parties should not be presumed to have consented to it merely because they agreed to the arbitration provision.

Thus, in the Third Circuit, courts will presume that the availability of classwide arbitration is an issue for the court.  What can overcome the presumption?  Nothing short of “express contractual language unambiguously delegating the question of arbitrability to the arbitrator. . . . Silence or ambiguous contractual language is insufficient to rebut the presumption.”

It remains to be seen whether other circuits will follow suit, or whether this question will ultimately work its way up to the Supreme Court.  In the meantime, would-be class action defendants who wish to avoid being forced into class arbitration by an arbitrator can protect themselves by ensuring that their contracts expressly (i) prohibit class arbitration and (ii) provide that all questions of arbitrability are to be decided by a court of competent jurisdiction.

Posted in Uncategorized

Caveat Empty Box

In a strong defense victory from earlier this year, the U.S. District Court for the Eastern District of California denied a proposed class of laptop purchasers the opportunity to proceed against Toshiba as a class, instead forcing individuals with complaints to engage in arbitration with the manufacturer.  In the decision, Herron v Best Buy Stores LP, Senior Judge Garland Burrell upheld the enforceability of an arbitration provision contained within the box packaging for Toshiba laptops–and only brought to the court’s attention two years after the case was initiated. 

The case, originally filed in state court on behalf of a proposed class of consumers who purchased Toshiba laptops at Best Buy, alleged violations of California’s Consumer Legal Remedies Act and California’s Unfair Competition Law.  The plaintiff claimed that the defendants misrepresented the lifespan of Toshiba laptop batteries, and as a result of these misrepresentations, the plaintiff (and his proposed class) were induced to purchase the laptops for a higher fee.  Importantly, a Limited Warranty was found in the box for each laptop and contained a capitalized and bold-faced arbitration provision.  The provision stated that any disputes between the customer and Toshiba “arising from or relating to” the Limited Warranty or use of the laptop would be resolved “exclusively and finally by binding arbitration.”  The provision continued:  “Customer understands that, in the absence of this provision, customer would have had a right to litigate disputes through a court in front of a judge or jury, including the right to litigation claims on a class-wide or class action basis, and that customer has expressly and knowingly waived those rights and agreed to resolve any disputes through binding arbitration … .”  Moreover, the laptop itself was sealed in a plastic bag, affixed to which was a sticker repeating the arbitration provision language.

The motion to compel arbitration arrived at a unique procedural posture.  The parties initially engaged in motion practice on the merits, which resulted in the filing of three amended complaints following partial grants of motions to dismiss.  Only upon the filing of the Third Amended Complaint – nearly two years after the case was originally filed – did Toshiba file a motion to compel arbitration.  In its motion, Toshiba argued that the plaintiff unequivocally agreed to submit his claims to arbitration, and that any delay in compelling such arbitration was not prejudicial to plaintiff and should therefore not preclude arbitration.  The plaintiff attacked Toshiba’s motion as “forum shopping,” pointing out that the case had been litigated on the merits for two years and that only upon losing on the merits did Toshiba attempt to move the case before an arbitration panel.  The plaintiff argued that the right to arbitrate had been waived and further argued that the arbitration clause in the packaging was provided only after the laptop was purchased; as such, arbitration was not agreed to and was rather only a “proposal for additional terms,” which the plaintiff had not accepted.  Finally, the plaintiff argued that the arbitration clause itself was unconscionable – procedurally, because it was a “form contract” that provided plaintiff only with a “take it or leave it” option, and substantively, because the arbitration clause was unclear as to the range of disputes over which it would govern.

In a concise, strongly-worded opinion, Judge Burrell gave little credence to the plaintiff’s concerns and forced the matter into arbitration.  The court first held that the placement of the arbitration provision in the laptop box – to be found only after its purchase – did not undermine the provision’s enforceability.  The court relied on existing case law that “contracts contained in boxes are no less enforceable than any other type of contract.”  The court also declined to find the arbitration provision unconscionable.  Rather than determining the issue of unconscionability, the court noted that the arbitration provision contained a delegation clause vesting the arbitration panel with the exclusive power to hear challenges to the validity of the agreement – including claims of unconscionability.  Finally, the court refused to find that Toshiba had waived its right to arbitrate the dispute.  Citing the “strong federal policy favoring enforcement of arbitration agreements,” the court dismissed the plaintiff’s concerns that he had already expended considerable resources and time litigating the case in court and his argument that Toshiba was merely seeking “a second bite at the apple” in an alternate forum.  The court summarily called these concerns “conclusory” and noted simply that the plaintiff had not met his high burden to demonstrate prejudice from the delay.  Notably, the court did not specifically address the lapse in time or the motion practice that had been initiated prior to the filing of the motion to compel.

Defendants should take comfort in the Herron ruling.  If there were ever circumstances that would defeat a strongly-worded arbitration provision, the two-year delay and extensive motion practice in this case would surely qualify.  And yet, the court gave these concerns the back of the hand, demonstrating that federal courts still really, really (really) want to find ways for cases to go to arbitration.  The case is continuing against Best Buy.

Posted in Arbitration Issues

Third Circuit Ascertainability Rulings Continue to Imperil Low-End Consumer Class Actions

It’s a pattern repeated in millions of households every day:  you go to the grocery or the drug store, buy the items you need, and don’t bother to keep the receipt.  You may throw the receipt away immediately, you may throw it away after you get home, or you may not even take it from the cashier in the first place.  But if you bought a low-end, everyday consumer item more than a week or two ago, chances are that you no longer have the receipt.

So if the product you purchased ultimately becomes the subject of a class action lawsuit, how are you going to prove your claim?  Typically, purchasers of such small-dollar items are permitted to recover their portion of an award or settlement through an affidavit of purchase, often with a higher recovery to those few class members who can actually provide proof of purchase.

A recent series of opinions from the Third Circuit, however, appears to have put an end to the “affidavit of purchase” method, on grounds that such affidavits are an insufficiently reliable way of ascertaining who is in the class.  Because ascertainability is a threshold issue for class certification, consumer class actions based on typically undocumentable purchases are becoming problematic in the Third Circuit—and may do so elsewhere, if the court’s reasoning persuades other circuits.

Last month, a federal court in New Jersey denied class certification in Stewart v. Beam Global Spirits & Wine, Inc., a case alleging that the producers and sellers of “Skinnygirl Margarita” made false claims about the product.  The court held that the membership of the class of Skinnygirl Margarita purchasers could not be reliably ascertained, as the defendants had no sales records that would identify the retail purchasers of the product and few class members were likely to have retained their receipts.  The problem was exacerbated by the fact that the defendants themselves were not retailers, and thus did not sell directly to the class members.

The named plaintiffs in Stewart proposed that putative class members submit affidavits regarding their class membership.  The court rejected this idea, finding it “unlikely that putative class members will accurately remember every Skinnygirl Margarita purchase they made during the class period, let alone where these purchases were made and the prices they paid each time.”

The court relied on three Third Circuit decisions in 2012 and 2013 (Hayes v. Wal-Mart Stores, Inc.; Marcus v. BMW of North America, LLC; and Carrera v. Bayer Corp.), in which “the Circuit clearly cautioned district courts against approving the use of affidavits to ascertain members of the class.”  The plaintiffs attempted to limit the scope of those cases to situations in which the number of allegedly defective or deceptive products sold could not be verified—unlike Skinnygirl Margaritas, where the volume of sales could be determined from retailer records.  The court rejected this narrow reading of the Third Circuit’s precedent.

The plaintiffs also argued that the Third Circuit had not completely ruled out the use of affidavits as a principal means to identify class members, but had left the door open for affidavits if the plaintiffs proposed a sufficiently reliable process whereby a qualified claims administrator would screen the affidavits for “further indicia of reliability.”  The plaintiffs in Stewart proposed that a claims administrator could screen the Skinnygirl Margarita affidavits by cross-referencing them with currently available records of consumers (including emails sent by consumers to the defendants), social media “likes,” and comments about Skinnygirl Margarita on the defendants’ websites.  As to those affidavits that could not be cross-checked, the plaintiffs proposed using “proven algorithms” to identify fraudulent claims based on data and behavioral patterns tailored to the case; cross-checking prices paid and geographic retail locations against the defendants’ retailer records; and requiring affiants to provide specific information regarding packaging and method of purchase to detect fraud or inaccuracy.

The court was not satisfied, noting the absence of any evidence regarding the percentage of Skinnygirl Margarita purchasers who were likely to either email the defendants or “like” the product on Facebook.  The court reiterated that the Third Circuit cases “make clear that relying on affidavits of putative class members as the primary method of ascertaining the members of the class is not a prudent course of action for a district court and is generally insufficient to meet the requirements of Rule 23.”  The court added that affidavits “amount to nothing more than reliance on the subjective ‘say so’” of the putative class members, leaving defendants “without a suitable and fair method for challenging these individuals’ purported membership in the class. . . .”

Was the Stewart court overly rigid in its interpretation of the Third Circuit’s position on affidavits?  Apparently not.  In dissenting from the Third Circuit’s denial in May of a petition for rehearing en banc in Carrera, Judge Thomas L. Ambro expressed concern that Carrera “gives the impression to many that we now carry [the ascertainability] requirement too far.”  Judge Ambro noted that one California federal court had opined that Carrera “eviscerates low purchase price consumer class actions in the Third Circuit.”

If putative class counsel held out any hope for the continued viability of affidavits to ascertain class membership in the Third Circuit, Stewart appears to have slammed the door shut.  It remains to be seen whether the Third Circuit’s approach gains traction in other circuits, or whether an apparent circuit split eventually works its way to the Supreme Court.

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Posted in Class Certification, Consumer Class Actions, Rule 23 Compliance Issues, Uncategorized

ESOPs’ Fables: On Winning Wars but Losing Battles

As the end of the Supreme Court term approached, decisions came down fast and furious. Last week’s big decisions, at least around our nerdish water cooler, were Halliburton and Fifth Third Bancorp v. Dudenhoeffer. (Yes, we know that there were major rulings on Obamacare, public unions, buffer zones, digital copyright, recess appointments and the groundbreaking cell phone warrant case that my twelve-year old daughter tried to cite until I either astounded or bored her with an explanation of state action and, just in case, issued a warrant for my wife to review the poor girl’s Pinterest account).

Fifth Third is one of those decisions that starts off really poorly (or really well, depending on which side of the “v” you happen to be on), gets worse (or better) for a while, and then suddenly turns about to be pretty good (or pretty bad). That’s probably about the way that James Madison felt when reading Marbury v. Madison.

Fifth Third involves ESOPs (Employee Stock Ownership Plans), creatures of ERISA. ESOPs are tax-deferred retirement plans that are managed by fiduciaries who have all of the same duties as ERISA fiduciaries, save one: they do not have the duty to diversify their portfolios. And that makes sense because the whole purpose of an ESOP is to invest primarily in the company’s own stock.

Of course, bad things happen occasionally, stock prices fall, and employees who were heavily invested in their companies’ ESOPs lose a lot of money. Class actions follow, typically alleging that the plan fiduciaries breached their duties of prudence by not selling the company stock, continuing to buy the company stock, or not disclosing material non-public information to “correct” the company’s stock price. Over the years, in many of the circuits, a presumption arose that ESOP fiduciaries’ decisions to buy or hold company stock were prudent. This presumption became known as the “presumption of prudence.”  The presumption, in most of the circuits, could be rebutted only by a showing that the fiduciary acted while the company was in dire financial condition, bordering on collapse.

Without getting too deeply into the weeds, as a result of the subprime mortgage meltdown, many Fifth Third employees who had invested in the company’s ESOP lost a significant amount of their retirement income when the price of Fifth Third shares declined precipitously. In the complaint, some of those employees on behalf of a purported class alleged that by July 2007, the fiduciaries “knew or should have known that Fifth Third’s stock was overvalued” for two reasons: (i) there was publicly available information with early signs that the subprime lending market was going to blow up and (ii) the fiduciaries had access to nonpublic information (given that they were insiders) indicating that Fifth Third had deceived the market through misrepresentations about the company’s financial prospects. They alleged that a prudent fiduciary would have sold the company stock; stopped buying more; cancelled the ESOP altogether; or disclosed the material nonpublic information that would correct the market.

The district court dismissed the claim, citing the presumption of prudence, but the Sixth Circuit reversed, holding that, while the presumption exists, it is an evidentiary presumption that cannot be relied upon at the pleading stage. The panel found the allegations to be sufficient to state a claim.

It turns out that everyone was wrong about everything.

With one fell swoop, the Supreme Court obliterated the “presumption of prudence,” holding that “the law does not create a special presumption favoring ESOP fiduciaries.” (We note that a similar sentence could have also have been drafted in the Halliburton decision—the last time we checked we did not see a “presumption or reliance” anywhere in the ’34 Act.) The result in Fifth Third must have been fairly surprising to the litigants since, prior to oral argument, the case was really about how and when the presumption should be applied—not whether it existed at all.

The result is a big win for the plaintiffs and a huge loss for the ESOP fiduciaries. But while both the district court and the Circuit were wrong about the presumption of prudence, the Sixth Circuit, according to the Supreme Court, was probably also wrong in holding that the allegations in the complaint were sufficient to withstand a motion to dismiss.

The Court noted that there are other protections for ESOP fiduciaries, namely the new rigors of federal pleading. The Court held that a plaintiff’s allegation that a plan fiduciary should have known that a company’s stock was overvalued because of publicly available information (absent some “special circumstances” not alleged in Fifth Third) fails as a matter of law under TwIqbal. Second, the Court made clear that a plan fiduciary is under no obligation to break the insider trading laws and act based on material nonpublic information—though the Court left open whether a fiduciary could refrain from purchasing additional company stock consistent with the securities laws. Lastly, the Court noted that courts must consider, under TwIqbal, whether allegations that a fiduciary should have acted or refrained from acting in a particular way are actually plausible. A plaintiff must plausibly allege that there was a more prudent course of action that did not involve running afoul of the securities laws and did do more harm than good.

Perhaps the only scenario that would give rise to such “plausible” pleadings is the scenario where a company is on the brink of financial collapse. In other words, it’s possible that not much has actually changed, except that the battle will assuredly be fought at the pleading stage. We will certainly watch and see as “special circumstances” and the tension between the securities laws and an ESOP’s fiduciary duty of prudence get fleshed out over the years.

Posted in Securities Class Actions, Uncategorized

Halliburton Decided! World Does Not End

This morning the Supreme Court released its highly-anticipated decision in Hallburton Co. v. Erica P. John Fund, Inc.  As we (and, to be fair, others) predicted after the oral argument, the Court did not have the appetite to overturn Basic Inc. v. Levinson (though Justices Thomas, Scalia and Alito were apparently a bit hungrier and explained in a concurring opinion that they would have totally overturned Basic).  The Court, as predicted, found a middle ground.

For the uninitiated, Basic’s fraud-on-the-market doctrine has been a critical aspect of securities class actions for the past 25 years.  It acts as a substitute for the reliance element of a securities fraud claim and allows plaintiffs to get past the critical class certification stage without showing that any member of the class actually relied on any allegedly false statements.  The fraud-on-the-market doctrine was considered an adequate proxy for reliance, in large part, because of the “efficient market hypothesis,” an economic doctrine that was in vogue way back when Basic was decided in 1988—like synth-pop music and Michael Dukakis.  The efficient market hypothesis posits that financial markets rapidly take all publicly available information into account, and the price of a security, therefore, has all material information baked into it.  So, according to the fraud-on-the-market doctrine, the buyer of a security is presumed to have relied on a particular public misrepresentation because the import of that misrepresentation was already reflected in the stock price at the time of the purchase.

In today’s opinion, written by the Chief Justice, the Court found that there was no “special justification” for overturning Basic. The Court also passed on requiring plaintiffs to demonstrate “price impact” at the class certification stage, i.e., place the burden on the plaintiffs to show that the alleged misrepresentation actually affected the stock price.  Instead, the Court chose what was behind curtain number three, allowing defendants to put forth evidence at the class certification stage to rebut the presumption of reliance.  This certainly makes sense.  As the Court put it:

Suppose a defendant at the certification stage submits an event study looking at the impact on the price of its stock from six discrete events, in an effort to refute the plaintiffs’ claim of general market efficiency.  All agree the defendant may do this.  Suppose one of the six events is the specific misrepresentation asserted by the plaintiffs.  All agree that this too is perfectly acceptable.  Now suppose the district court determines that, despite the defendant’s study, the plaintiff has carried its burden to prove market efficiency, but that the evidence shows no price impact with respect to the specific misrepresentation challenged in the suit.  The evidence at the certification stage thus shows an efficient market, on which the alleged misrepresentation had no price impact.  And yet under EPJ Fund’s view, the plaintiffs’ action should be certified and proceed as a class action (with all that entails), even though the fraud-on-the-market theory does not apply and common reliance thus cannot be presumed.

Such a result is inconsistent with Basic’s own logic.  Under Basic’s fraud-on-the-market theory, market efficiency and the other prerequisites for invoking the presumption constitute an indirect way of showing price impact. . . . But an indirect proxy should not preclude direct evidence when such evidence is available.  As we explained in Basic, “[a]ny showing that severs the link between the alleged misrepresentation and . . . the price received (or paid) by the plaintiff . . . will be sufficient to rebut the presumption of reliance” because “the basis for finding that the fraud had been transmitted through market price would be gone.”

Make no mistake about it, Halliburton will have an impact on securities class actions and will certainly create more action at the class certification stage.  But the case is in no way a death knell to securities class actions.  Both plaintiffs and defendants in these cases are used to getting event studies done at early stages of a case, and they will now need to prepare their experts to do battle on price impact at class certification.  Presumably some attacks on price impact will be successful, leading to fewer class actions being certified, and then a raft of appeals on nuances of rebuttable presumptions.

We certainly cannot wait, and we thought it was going to be a dull summer!

Posted in Class Certification, Securities Class Actions, Uncategorized

An Investor Class Scrambles to Save Its Event Study (and its Claims)

At some point in a securities fraud case, the plaintiffs are going to have to prove “loss causation” – proof that the alleged misrepresentation caused the drop in the price of the relevant security.  They often do this through an expert’s “event study.”  (And after the Supreme Court issues its decision in Halliburton v. Erica P. John Fund, Inc., it’s entirely possible that investors will also have to rely on event studies to show reliance on a class-wide basis to obtain class-certification.  See our earlier discussion of the Halliburton oral argument here).

But event studies can be tricky business.  After an expert has submitted an event study that links market disclosures to drops in pricing and damages, the judge as “gatekeeper” determines whether the methodology employed by the expert is reliable under Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).  (For example, last month in Bricklayers and Trowel Trades Int’l Pension Fund, et al. v. Credit Suisse Securities (USA) LLC, et al., Case No. 12-1750, the First Circuit affirmed a district court’s decision to preclude an event study in a securities class-action against Credit Suisse and, in turn, grant summary judgment dismissing the class-action, because the event study was unreliable under Daubert.)

Even after a report survives Daubert review, the judge can make a determination that certain of the market disclosures contained in the subject event study cannot be properly considered in determining causation and damages as a matter of law.  That would be a problem for plaintiffs.  And that’s what eventually happened in In re Pfizer Inc. Securities Litigation, Case No. 04-CV-09866 (LTS) (HBP).

At first, the Pfizer plaintiffs managed this tricky business quite well.  They sued Pfizer in 2004 based on alleged misrepresentations related to the drugs Celebrex and Bextra, and the plaintiffs survived multiple motions to dismiss and multiple days of Daubert hearings scrutinizing their expert and their event study.

But then it all changed.  In a May 21 ruling, Judge Swain (Southern District of New York) granted Pfizer’s motion in limine precluding the testimony and event study of Plaintiffs’ loss causation expert, University of Chicago Law School Professor Daniel R. Fischel.  In other words, plaintiffs lost their ability to show damages.  So what happened?

After Fischel had already submitted his event study, Judge Swain granted partial summary judgment for Pfizer, holding that Pfizer could not be held responsible for certain representations, including statements by Pharmacia (the former owner of Celebrex and Bextra), corrective disclosures contained in a Canadian news story that was later debunked, and a news report on Pfizer’s quarterly earnings that merely reflected prior corrective disclosures.  This was a problem for plaintiffs whose expert had already included all of these statements in his causation analysis.

Professor Fischel tried to fix the problem, but in doing so made some significant errors.  He submitted a supplemental expert report in which he claimed to have removed losses attributable to these now excluded representations.  But, critically, without explanation he did not adjust the estimate for the excluded Pharmacia statements.  He also added what he called a “parallel adjustment” by which he was able to ignore, without explanation, price increases in Pfizer’s stock that occurred as the result of false information.  This “parallel adjustment” mitigated the reduction in plaintiffs’ losses that would have otherwise resulted from Judge Swain’s summary judgment decision.  It also did not help that Fischel had previously testified that, if certain corrective disclosures were deemed irrelevant, he would simply reduce the amount of the estimated losses attributable to those disclosures, an admission Pfizer was happy to emphasize.

Fischel’s admission, his failure to follow it when he wrote his supplemental report, and his inability to explain what the “parallel adjustment” was all about, doomed the event study.  Judge Swain concluded that his report and testimony would no longer be helpful to the jury—a virtual death knell for plaintiffs.

But plaintiffs may still save themselves.  At a follow up conference, Judge Swain gave plaintiffs another chance, granting the parties until this past Friday to file motions regarding proposed expert reports.  Plaintiffs filed a motion seeking leave to file an amended supplemental expert report from Professor Fischel that attempts to explain the “parallel adjustment” and why the Pharmacia statements did not impact the analysis of loss causation.  Interestingly, Professor Fischel included in the amended supplemental study an alternative analysis in which the “parallel adjustment” is jettisoned completely—a contingency plan if the court is unconvinced by Professor Fischel’s explanation.  Pfizer, for its part, submitted a motion to end the case on account of there being no evidence of loss causation and no good reason to allow plaintiffs to amend their event study.  We will see what the court decides and update you.

Judge Swain also noted at the May 23 conference that Halliburton may present additional problems for the plaintiffs.  As we discussed recently here, in Halliburton, the Supreme Court will soon decide a rare frontal assault on one of its prior decisions, Basic v. Levinson, which ensconced the efficient market theory in our securities fraud jurisprudence.  Judge Swain is right: if Basic is overturned completely, the Pfizer plaintiffs (indeed, all investors) will likely have to show individualized reliance on particular misrepresentations by each investor, since they would no longer be able to rely on the presumption created by the efficient market theory that underlies most event studies and, indeed, securities fraud class-actions.  Not only would such a ruling create an incredibly difficult obstacle to continuing the Pfizer suit, it would likely spell the end to 10b-5 class-actions.

On the other hand, as we explained earlier, it’s very possible that there is a majority of the Court in favor of a “third-way,” requiring class-action plaintiffs to produce at the class-certification stage an event study similar to what is normally produced before summary judgment motions.  If the court adopts this third-way, then we will continue to see event studies and the type of jockeying we are seeing in Pfizer, but much earlier in the proceeding – not 10 years after the case was filed.

Posted in Uncategorized

GR8 News for Mobile Carriers: District Court Lets Them Off the Hook In Text Messaging Case

FWIW, AT&T, Sprint, T-Mobile, Verizon Wireless, and CITA—a wireless trade association—can def breathe a sigh of relief. On May 19, 2014, a federal judge from the Northern District of Illinois granted summary judgment in favor of the defendants, finding that plaintiffs had failed to put forth credible direct or circumstantial evidence of collusive action to increase prices on individual text messages. (BTW, if any of you are still paying text-by-text, I’ve got a great bridge you can buy).

This case, as you may recall, has been going on for, like, ever.  It has weathered two motions to dismiss and two trips up to the Seventh Circuit. Back in 2008, after some typically-probing Congressional hearings into text message pricing, plaintiffs brought suit, alleging that the defendants had entered into and implemented a continuing plot to fix, raise, maintain, and stabilize prices for text messaging service sold in the United States. OMG!

After the extensive Rule 12 (b)(6) practice and some apparently entertaining discovery, the carriers moved for summary judgment. The plaintiffs countered with a motion for an adverse inference and a spoliation motion. The plaintiffs had what they considered a “smoking gun,” an email from a T-Mobile employee “admitting” that the price increases were “collusive.” Ouch! But, as we all know, there are SMOKING GUNS and then there are, well, smoking guns, and this was, uh, the latter. The court determined that the person who wrote the e-missive was (no offense, if you’re reading this) too junior and removed from the guts of the alleged conspiracy to have any direct knowledge of the alleged collusive behavior. And the plaintiffs had utterly failed to tie the author to the alleged conspiracy. The court also found that the plaintiffs’ complaints about spoliation (thank you spell-check) were insufficient under Seventh Circuit law.

The court concluded that although plaintiffs had presented evidence indicating that executives from each company had met and conferred in meetings, there was simply no direct or circumstantial evidence that anything other than parallel action occurred. And, although each carrier increased its rates from (two to ten cents) up to exactly twenty cents during the same three year period, these carriers did not do so as part a coordinated, “lockstep” operation.

BRB? It remains to be seen whether the plaintiffs will get any traction this time from the Seventh Circuit, but we will certainly be watching.

Posted in Antitrust, Uncategorized
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