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,” which may or may not also be the title of an Agatha Christie mystery. 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: (1) there was publicly available information with early signs that the subprime lending market was going to blow up; and (2) 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 either 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 Circuit found the allegations to be sufficient to state a claim.

It turns out that everyone was wrong about everything. Dear Prudence.

With one fell swoop, the Court obliterated the “presumption of prudence,” finding 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 Respondents and a huge loss for the ESOP fiduciaries. But—and to quote Pee Wee Herman, “everyone I know has a big ‘but’—let’s talk about [the Supreme Court’s] big ‘but’”: while both the district court and the Circuit were wrong about the presumption of prudence, the Circuit, according to the Supreme Court, was probably also wrong 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 evi¬dence 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

Defeating the “Fail Safe” Class Definition

Some class action plaintiff lawyers facing individualized liability issues will try to obtain class certification by defining the proposed class in a way that assumes liability.  It’s somewhat akin to the baseball player who runs outside the baseline to avoid a waiting tag.  But just as the umpire will call the wayward baserunner out anyway, a court can strike the plaintiff’s class allegations if they propose a “fail safe” class definition—such that the class cannot be defined until the case is resolved on its merits.

A recent federal case in Ohio reviewed the “fail safe” issue in the context of the Telephone Consumer Protection Act, which prohibits the use of unconsented calls to cellular telephones using an automatic dialing system or an artificial or prerecorded voice.  In Sauter v. CVS Pharmacy, Inc., the plaintiff sought to represent a nationwide class of persons who received such calls from CVS “and who did not provide prior express consent for such calls.”  After analyzing several “fail safe” cases within the Sixth Circuit and in the TCPA context, the court found that the plaintiff had alleged a “fail safe” class definition and struck the complaint’s class allegations.

The problem?  The limitation to class members “who did not provide prior express consent” for the calls.  The court found that the proposed class consisted solely of persons who could establish that the defendant violated the TCPA.  If the plaintiff could demonstrate that the calls were made to the class members’ cell phones without their prior express consent, than the class would win; if not, then the class would not exist—and therefore would not be bound by the judgment in CVS’ favor.

The court granted the plaintiff leave to amend his complaint.  How can he solve the problem?  He could follow the lead of the plaintiff in Olney v. Job.com, Inc., a California federal case from last year, who attempted to bring similar TCPA claims on behalf of call recipients who “had not previously consented to receiving such calls” during the class period.  The court there rejected the class definition as fail-safe and granted leave to amend.  The amended complaint removed the consent element, broading the definition to include all persons in the United States who received cellular calls from the defendant through the use of an automatic dialing machine.  The court found that this definition was sufficient to avoid a “fail safe” problem.  The plaintiff in Sauter could similarly amend.

But under such an amended definition, the plaintiff’s counsel will face a different problem at class certification:  predominance.  By broadening the class to include every person who received an automated call from the defendant, the plaintiff’s amended class definition would raise individualized questions of whether each class member consented to the calls.  And this is likely to be the primary, if not the only, factual issue in dispute.  Will the plaintiff be able to establish that common questions predominate over individual questions?

Some lawsuits, even though the individual claims may be small, depend so heavily on individualized determinations of fact that they are simply not appropriate for class treatment.  Sauter may prove to be one of them.  In such cases, the defendant is not necessarily required to wait until the class certification stage to make this argument.

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Posted in Class Certification, Class Definition

Dispatches from the E-Book Wars

Apple’s e-book fortunes in the Southern District of New York darkened and then brightened this past week as Judge Denise Cote denied Apple’s request to stay its upcoming damages trial and plaintiffs’ class notification. Later in the week, however, the Second Circuit issued a temporary administrative stay and referred the full motion to a three judge panel.

On April 23, 2014, Judge Cote held enough already, i.e., the damages trial, which had originally been set for May and is now scheduled for July, had been delayed long enough. Apple was seeking to stay the trial pending its appeal of Judge Cote’s July 2013 finding (in a separate US Department of Justice Action) that Apple had violated the antitrust laws by conspiring with a group of major publishers by entering into “agency” pricing arrangements.

After Judge Cote certified a nationwide class of plaintiffs on March 28, Apple also sought to stay the required class notification. But the class plaintiffs objected, arguing that any delay of class notification would inevitably push the July 14, 2014 trial back even further. Texas Assistant Attorney General Eric Lipman also weighed in, opposing the stay.
Judge Cote sided with the plaintiffs (as she has a time or two in this matter).

As with other prior rulings in this case, Apple sought immediate appellate relief, filing a motion to stay with the Second Circuit the same day as Judge Cote’s April 23 ruling (Apple had, perhaps, prepared these papers in advance). Apple argued that it is likely to succeed on appeal, and allowing the class notice and trial to proceed now would cause irreparable harm to Apple’s reputation.

On April 25th, the Second Circuit granted a temporary administrative stay and referred the matter to a three judge panel to consider the full stay request.

We will continue to keep an eye out for any new developments in this case.

Posted in Antitrust, Class Certification, Uncategorized

Tech Titans Settle Wage Antitrust Case

As often happens in the vicinity of courthouse steps, the high-profile Silicon Valley hiring antitrust class-action lawsuit has settled, pending court approval. In re: High-Tech Employee Antitrust Litigation originally pitted five software engineers as representatives of a broad putative class of high-tech workers against the titans of the high-tech world (including Apple, Google, Intel, Adobe Systems, Inuit, Lucasfilm, and Pixar) over collusive anti-poaching agreements and policies.

Three of the original defendants, Lucasfilm, Pixar and Intuit, settled for a total of $20 million last year, before a class was certified. Now, after certification, the remaining defendants, Apple, Google, Intel and Adobe, have agreed to settle for north of $300 million.

That’s a big difference. And, while it may be tempting to say that the remaining defendants should have settled earlier (as some have suggested), we doubt that it is that simple. Plaintiffs, besotted by the evidence against the bigger players, certainly may have made pre-certification settlement much more expensive and difficult for those big players than they did for the earlier-settling defendants. The remaining defendants are certainly extremely sophisticated and are represented by able counsel capable of reading the writing on the wall.

It is true, for instance, that the evidence in the case (much of which was uncovered by the Justice Department in its investigation) has long placed Apple and Google at the center of the storm—including emails that must have had the plaintiffs’ lawyers salivating. In one string of emails, Eric Schmidt, Google’s chairman, assured Apple’s Steve Jobs that a Google recruiter who had dared to contact an Apple employee would be terminated “within the hour.” Jobs responded with this:   :-)

Meanwhile, the defendants focused on what appeared to be significant damages and procedural problems for the plaintiffs. They argued throughout 2013 that, despite the rather unsavory emails and the existence of anti-poaching agreements, there was no antitrust injury—that is, there was no evidence that the plaintiffs were actually paid any less or were given any less favorable terms because of those agreements. The defendants also maintained that individual issues predominated over common issues, precluding certification.

And things were looking up for the tech giants – for a while. In April 2013, Judge Lucy Koh of the Northern District of California refused to certify the plaintiffs’ class.

Judge Koh, however, left the door ajar for the plaintiffs to renew their motion to certify a narrower class. And she nailed a roadmap to the door. Following that roadmap, in May 2013, the plaintiffs filed a motion to certify the narrower class (more than 60,000 individuals who worked for the defendants in technical, creative, or research and development capacities between 2005 and 2009). That’s when LucasFilm, Pixar and Intuit settled. Apple, Google, Adobe and Intel stayed the course.

But on October 24, 2013, three days after the court held a hearing on preliminary approval of the LucasFilm/Pixar/Intuit settlement, the court certified the plaintiffs’ amended class. Then the Ninth Circuit refused to review class certification on an interlocutory basis. That’s not a great place to be.

So, facing a certified class and no immediate way to de-certify it, the remaining defendants tried a summary judgment motion. They also moved to exclude the plaintiffs’ economist’s expert report. Less than a month ago, the court denied both motions.

Within three weeks, the terms of the settlement had been hammered out.

We’ll never know what settlement discussions occurred before the court certified the narrower class. That’s the way these things go. But we feel fairly confident that the plaintiffs were not making settlement easy or cheap for the remaining defendants during that time. And, with that, we’re hesitant to conclude that the lesson here is simply that the remaining defendants should have settled earlier. It probably wasn’t nearly that easy.

We will update you as the proposed settlement moves toward approval.

Posted in Antitrust, Settlement, Uncategorized

Fear and Trebling: E-Book Class Action Takes a(nother) Bite out of Apple

The legal drama continues for Apple, Inc., as the tech giant recently suffered another in a string of significant legal setbacks in the e-book antitrust saga in the Southern District of New York.  Last month, Judge Denise Cote granted the plaintiffs’ motion for class certification, allowing e-book consumers to proceed as a national class against Apple for the same conduct that Judge Cote has already ruled violated the antitrust laws in a separate case brought by the Justice Department. 

(By way of full disclosure,  in case anyone is watching, this blog post was written, in part, on Michael de Leeuw’s MacBook Pro.  His family, collectively, has an iMac, two MacBooks, three iPads, four iPhones, and a drawer full of old iPods; his first Apple product was Apple II Plus.)

As you may recall, back in July, Apple was found after trial to have violated section 1 of the Sherman Act by conspiring with five major publishing houses (Hachette, HarperCollins, Simon & Schuster, Penguin and Macmillan ) to fix e-book prices through an “agency” model for e-book pricing.  While the class action is a separate case, the plaintiffs have moved for summary judgment on liability based on the collateral estoppel effect from the DOJ case.  If  Judge Cote grants that motion, all that would be left for the plaintiffs would be to prove damages, which could be extensive.

Judge Cote rejected each of Apple’s arguments for why the case was inappropriate for  class action treatment:

(i) each  plaintiffs’ claim in the current case was different because each transaction was unique;

(ii) Apple should, in any event, be entitled to offsets because of the overall benefits conferred by Apple’s entry into the e-book market; and

 (iii) plaintiffs’ experts’ model was unreliable for determining damages.  Based on these arguments, Apple argued that the putative class could not meet the commonality and predominance requirements for class certification.

In rejecting these arguments and stubbing out Apple’s Daubert challenge, Judge Cote extensively analyzed the damage model created by plaintiffs’ expert, Dr. Roger Noll.  In yet another ominous sign for Apple, Judge Cote wrote that “this Court has conducted a ‘rigorous analysis’ of Noll’s model and finds it capable of reliably estimating class members’ damages.”

So to recap, (i) there is a liability opinion waiting in the wings, (ii)  Judge Cote believes the  plaintiffs’ expert’s model is reliable for estimating members’ damages, (iii) that model says that those damages are $280 million, and (iv) there is that whole trebling thing to consider.

Apple is in the process of appealing Judge Cote’s various decisions, including the main July 2013 liability decision in the DOJ case and Judge Cote’s controversial ruling appointing Michael Bromwich as an external monitor to oversee the company’s antitrust compliance.  Apple has asked Judge Cote for a stay of all proceedings until the appeals have been decided by the Second Circuit.  Unfortunately for Apple, she has denied previous requests for a stay in these cases.

We will continue to follow these fascinating cases until we get to the core.

Posted in Antitrust, Class Certification, Consumer Class Actions, Uncategorized

New Jersey District Court Cleans Up Complaint in Washing Machine Class Action Litigation

Washing machine class actions have been so active recently that some firms may be scrambling to form their own appliance-law practice groups.  And who knows?  That might not be a bad idea.  Some of our greatest legal minds, like Judge Posner, have been weighing in on this litigation.  In two of his opinions, the Seventh Circuit certified a washing-machine purchaser class (see our comments on that decision here) and later reinstated it after the Supreme Court vacated and remanded the certification decision for reconsideration consistent with its decision in Comcast v. Behrend.

We’re not sure what all the excitement is about.  Washing machines seem fine to us.  Great, really.  You put the clothes in, turn it on, and they come out clean.  You move the clothes to the dryer, turn it on, and they come out dry and clean.  No washboard, no scrubbing, no clothes line.  That’s tremendous.  Where’s the problem?

Well, the class action complaints say the problem is mold.  And, admittedly, that doesn’t sound good.  But does it sound like a class action?  Judge Posner thought so.  And the Supreme Court (recently) decided not to disturb his decision.

So, regardless of whether we believe that these cases are properly treated as class actions, it is clear that opposing class certification has gotten harder.  Fortunately for defendants, much can happen to plaintiffs’ claims before the class certification stage.  In particular, a Rule 12(b)(6) challenge to the legal viability of the claims can weaken the entire case.  That’s what Samsung America tried, to great success, in Spera v. Samsung Electronics America, another washing-machine class action.  It involved New Jersey, Missouri and Colorado plaintiffs asserting warranty claims, unjust enrichment claims, and claims under the consumer fraud/protection statutes of New Jersey, Missouri and Colorado.

Some of the claims against Samsung America simply weren’t viable.  The implied warranty of merchantability claim never stood a chance.  The user manual disclaims – in all capital letters – “any implied warranties of merchantability”:

EXCEPT AS SET FORTH HEREIN, THERE ARE NO WARRANTIES ON THIS PRODUCT EITHER EXPRESS OR IMPLIED, AND SAMSUNG DISCLAIMS ALL WARRANTIES INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, INFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE.

That reads like a winner.  And, as the court recognized, New Jersey law honors such clear and conspicuous disclaimers.  The claim was dismissed.

The Missouri and Colorado plaintiffs’ claims under the New Jersey Consumer Fraud Act (“NJ CFA”) weren’t viable either.  While these out-of-state plaintiffs no doubt found the availability of treble damages under the NJ CFA to be attractive, the court followed a long line of Third Circuit case law “holding that a consumer’s home state law should apply to transactions that bear no relationship to New Jersey other than the location of the defendant’s headquarters.”  So, as much as these particular plaintiffs may have wanted to sue under the NJ CFA, they couldn’t.

Another claim – the unjust enrichment claim – just couldn’t work.  The plaintiffs didn’t purchase directly from Samsung America.  The court noted:  “Under New Jersey law, an indirect purchaser cannot succeed on a claim for unjust enrichment.  When an individual purchases a consumer product from a third-party store and not the manufacturer, the purchaser has not conferred a benefit directly to the manufacturer such that the manufacturer could be found to have been unjustly enriched.”

Other claims went away because of pleading deficiencies that may present lasting difficulties for plaintiffs.  For their express warranty claims, the plaintiffs didn’t allege that they gave Samsung America the required notice during the warranty period.  While the plaintiffs may turn around and simply insert such notice allegations in their amended pleadings, it may not be so simple.  The notice requirement would add complexity and individuality to the plaintiffs’ claims, which is never good for plaintiffs in class actions.  It will also reduce the number of potential class members, which is never good for plaintiffs’ attorneys in class actions.

The plaintiffs also failed to plead facts to suggest an ascertainable loss under what remained of their New Jersey, Missouri and Colorado consumer fraud claims.  They alleged only that the washing machines cost money to repair and were worth less than what plaintiffs paid for them.  Under TwIqbal (that’s Twombly and Iqbal for the uninitiated), however, plaintiffs must plead facts that make their claims plausible.  Conclusory allegations about repairs and the product being worth less than its price tag aren’t enough:

Here Plaintiffs have not alleged how much they paid to purchase, repair or replace their washers.  Instead, Plaintiffs claim broadly that they “have suffered an ascertainable loss in the form of…monies spent to repair and replace the Washing Machines and diminution in value of the Washing Machines.”  For Plaintiffs to adequately plead ascertainable loss, they must set forth more specific facts as to their out-of-pocket loss and/or the alleged diminution in value of the Washing Machines they purchased.  Ultimately, Plaintiffs must make a more detailed attempt to quantify the difference in value between the promised product and the actual product received.

In fact, since each of these consumer fraud act claims are based in fraud, the plaintiffs’ allegations must satisfy the heightened pleading requirement for fraud under Rule 9(b).  Plaintiffs’ allegations that Samsung America knew of the alleged defect in the washing machines didn’t meet this standard either:

The Complaints do not pinpoint a specific time at which Samsung allegedly became aware of the purported defect.  Plaintiffs’ Complaints allege that Samsung received an “avalanche of consumer complaints.”  However, Plaintiffs fail to identify a particular complaint, who it was made by, who it was received by, or when it would have put Samsung on notice of the alleged defect.  Overall, the Complaints do not provide sufficient factual allegations to establish that Samsung knew of the alleged defects prior to the sale at issue in this litigation.

Now, it is true that the plaintiffs will have an opportunity to amend their complaint.  And they may or may not fix some of these problems.  But they’ve been hobbled a bit.  The purchasers outside of New Jersey will not have treble damages available to them.  Those who failed to give notice to Samsung America during the warranty period cannot be members of the potential class or may become members of a much smaller class, all of which may tempt the plaintiffs to drop that claim altogether.  And stating a proper complaint, particularly as to the consumer fraud act claim elements, has now become more costly and difficult for the plaintiffs to accomplish.

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Posted in Articles, Consumer Class Actions

No Silver Lining for Plaintiffs as J.P. Morgan Defeats Silver Market Manipulation Suit

History has shown that large class action cases often follow government investigations the way that the lamb followed Mary to school that day.  Sometimes, however, those investigations die and Mary gets lost and brings her little lamb to the slaughterhouse. 

The Second Circuit recently affirmed the dismissal of a class action in which investors claimed that J.P. Morgan manipulated the price of silver in violation of the Commodity Exchange Act (“CEA”) and the Sherman Antitrust Act.  In In re Commodity Exchange, Inc. Silver Futures & Options Trading Litigation, the putative class of investors in COMEX silver futures and options contracts had alleged that  J.P. Morgan artificially deflated silver prices in order to profit from the massive short position it held in the market.  The plaintiffs also accused JP Morgan of improper “late day trading.”

More than a year ago, on March 15, 2013, the district court dismissed the suit because the plaintiffs didn’t support their claims with sufficient factual allegations.  The district court also denied the plaintiffs’ request to file an amended complaint.  So the plaintiffs were off to the Second Circuit! 

But the Second Circuit summarily affirmed.  The plaintiffs had simply failed to plead the facts needed to state a CEA market manipulation claim:  1) the defendant had the ability to influence prices; 2) the defendant had the intent to do so; 3) the manipulation resulted in an artificial price; and 4) the defendant, in fact, caused the artificial price.  The Second Circuit also affirmed the district court’s denial of the plaintiffs’ request to file an amended complaint.

The court rejected the plaintiffs’ argument that an intent to defraud could be inferred simply from J.P. Morgan’s market power, noting that “this ‘incentive’ could be imputed to any company with a large market presence in any commodity market.”  We agree.  Such reasoning would, in essence, eliminate this pleading requirement and allow a plaintiff to satisfy it by simply suing companies with a large presence in a market.   

The court also nixed the plaintiffs’ “vague allegations” of “uneconomic conduct, ” finding that the plaintiffs offered no specific factual allegations to support their argument that J.P. Morgan’s trading behavior was “inconsistent with trying to obtain the best sales price execution, but consistent with trying to move prices down by aggressively selling in a compressed period to receive less on the sales transactions.”  Once again, the court refused to infer intent from the, shall we say, less-than-compelling supporting allegations.

Finally, the Second Circuit scrapped the plaintiffs’ Sherman Act conspiracy claims, noting that “Plaintiffs failed to plausibly allege even a tacit agreement to manipulate prices,” offering only conclusory allegations of the type that Twombly and Iqbal have (supposedly) eradiated. 

In a wonderful  coincidence (if you happen to be J.P. Morgan), the day that Sullivan & Cromwell (Daryl Libow and Amanda Davidoff) filed its responsive brief in the Second Circuit on behalf of J.P. Morgan, the Commodity Futures Trading Commission announced that it was closing its five-year investigation into the alleged improper manipulation of the silver market.  This allowed J.P. Morgan to end the first paragraph of its preliminary statement with this nugget: “Indeed, the CFTC today closed the investigation that prompted this lawsuit, determining that there was “not a viable basis” to support any claims of manipulation.”  That’s a litigator’s dream.  Though, to be fair, it’s a nightmare if you happen to be on the other side.

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Posted in Securities Class Actions
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