Business Litigation Alert

Business Litigation Alert

Practical Perspectives on Litigation Developments & Trends

Wrap Up of United States Supreme Court’s 2013-2014 Term

Posted in General Litigation

With the close of the United States Supreme Court’s 2013-14 term, we offer this wrap-up of the Court’s term, focusing on the Court’s most important business and commercial cases (excluding intellectual property opinions):

Halliburton Co. v. Erica P. John Fund: The Court upheld the fraud-on-the-market theory first set forth in Basic Inc. v. Levinson, which allows investors to satisfy the reliance element of a section 10b-5 securities fraud claim by invoking a presumption that the price at which stock is purchased in an efficient market reflects all public, material information — including material misstatements. Basic’s presumption of reliance facilitates the certification of class actions by absolving investors of establishing individual reliance on alleged misstatements. In Halliburton, however, the Court threw defendants a bone in holding that the presumption can be rebutted at the class-certification stage by direct evidence that the alleged misrepresentation did not in fact affect the stock price. While such evidence has always been admissible during the merits stage to rebut the Basic presumption, the Court’s decision to allow it at the threshold class-certification stage is notable. The decision is not the game-changer it would have been had Basic been overturned, but it does give defendants another potential “out” — and will almost certainly drive up the cost of litigating securities class actions by virtue of the additional price impact work that economic consultants will be retained to furnish prior to class certification.

Fifth Third Bancorp v. Dudenhoeffer: The Court unanimously threw out the defense-friendly presumption of prudence that ERISA fiduciaries of employee stock ownership plans, or ESOPs, have used to avoid liability when the price of company stock in which they are invested drops. In finding that ESOP fiduciaries owe no lesser duty of prudence than any other ERISA fiduciary (except that they need not diversify the fund’s assets), the Court rolled back almost twenty years of precedents from the circuit courts, the bulk of which, beginning with the Third Circuit’s 1995 decision in Moench v. Robertson, conferred on ESOP fiduciaries a presumption that they acted consistently with ERISA by investing fund assets in employer stock. The practical impact of the opinion is likely to be far less radical, however, as the Court went on to observe that a fiduciary’s reliance on publicly available stock-price information is not typically imprudent. Nor is the allegation that an ESOP fiduciary failed to act on non-public information likely to survive a motion to dismiss since the duty of prudence neither requires a fiduciary to violate insider trading laws nor to sabotage the value of the stock it already holds by disclosing negative information that isn’t mandated by the securities laws. Fifth Third Bancorp’s bark, in other words, may well prove worse than its bite.

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Halliburton Gives Defense Bar New Tool to Defeat Class Certification

Posted in Class Action Defense

The Supreme Court has raised the class certification stakes yet again, holding in Halliburton v. Erica P. John Fund that defendants in securities class actions may rebut the fraud-on-the-market presumption of reliance at the class certification stage. Over the objections of Justices Thomas, Scalia, and Alito, the Court declined to toss out the presumption altogether.

The fraud-on-the-market presumption of reliance, first recognized in Basic v. Levinson, permits a plaintiff to show indirectly that the defendant’s misrepresentation impacted the price of its stock. In Halliburton, the Court observed that price impact is “an essential precondition” for a securities class action because if the presumption does not apply, each individual plaintiff must prove its own reliance, causing individual issues to predominate over common issues. Therefore, the Halliburton Court reasoned that it would be illogical to permit indirect proof of price impact through the fraud-on-the-market presumption at the class certification stage — as a plaintiff may do to prove market efficiency — yet not permit direct evidence of no price impact, i.e., “showing that the alleged misrepresentation did not actually affect the stock’s market price and, consequently, that the Basic presumption does not apply.”

The Supreme Court found this dichotomy particular troubling because defendants may already introduce evidence of a lack of price impact at either the merits stage or to show at the class certification stage that the market is not efficient. Likewise, the Court observed that plaintiffs can introduce price impact evidence to show that the defendant’s stock price generally responds to publicly reported events. Accordingly, said the Court, the defendants’ evidence may show that the market is efficient, but the alleged misrepresentation had no price impact. In this situation, if the defendant is not permitted to rebut the presumption at the class certification stage, the action will proceed as a class action despite the fact that the fraud-on-the-market theory cannot possibly apply and common reliance cannot be presumed.
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Recent D.N.J. Opinion Offers Roadmap to Practitioners Defending Antitrust Claims

Posted in Antitrust

A recent opinion from the District of New Jersey illustrates the breadth of defenses available to an entity accused of violating the antitrust laws. World Phone Internet Services, Pvt. Ltd., a provider of VoIP services in India, and its majority shareholder, TI Investment Services, LLC, sued Microsoft (owner of Skype), alleging that Microsoft’s intentional failure to abide by the requirements of India’s licensing regime for VoIP service providers allowed it to undercut World Phone’s pricing, which advantage Microsoft supposedly used to quash its competitors. In granting Microsoft’s motion to dismiss the complaint in TI Investment Services, LLC v. Microsoft Corp., the Court relied on four independent grounds to decide that plaintiffs’ claims of monopolization and collusion did not pass muster under the Sherman Act.

First, the Court held that World Phone did not adequately allege antitrust injury and thus lacked standing to pursue the matter. The anticompetitive conduct boiled down to a claim for predatory pricing. But the Complaint did not plausibly allege that Microsoft’s pricing was below its costs. And neither did the Court find a dangerous probability that Microsoft could recoup its losses from the predatory pricing by raising rates; even if Microsoft succeeded in driving World Phone out of the market, it would still have to compete with its other “non-compliant” peers in the market, making a rate hike unlikely.

Second, the Foreign Trade Antitrust Improvements Act (“FTAIA”) removes from the reach of the Sherman Act conduct that injures a foreign competitor in a foreign market. Microsoft’s sale of VoIP services to customers in India, which purportedly injured World Phone in India, thus was foreclosed by the FTAIA.
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New Jersey Court Reaffirms Privilege Over Employee’s Personal Legal Communications Through Employer’s E-mail in Absence of Unambiguous Communications Policy

Posted in General Litigation

In an era when electronic communications are rapidly replacing most forms of correspondence, the Superior Court, Law Division, Bergen County, in Ferrer v. Stahlwerk Annahutte Max Aicher Gmbh & Co., recently reiterated that absent a clear electronic communications policy, employees have an expectation of privacy in the electronic communications they send from the workplace, including those from work accounts.

During the course of litigation between a former employee and his former employer and co-workers, the former employer and co-workers challenged the former employee’s claims of privilege over three e-mails located on employer’s servers. The e-mails were sent using company e-mail addresses to counsel for the purpose of seeking personal legal advice.

Because the employer did not have a policy prohibiting the personal use of its workplace e-mail system or advising its employees that their use of the e-mail system would be monitored, the Court found that the employee had no expectation that his electronic communications would be monitored by the employer and, therefore, that the employee had a reasonable expectation of privacy that such communications would remain private. The Court thus upheld the employee’s claims of privilege.
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Juridical Link Doctrine Does Not Relax Article III Standing Requirements in Class Actions

Posted in Class Action Defense

In 6803 Boulevard East, LLC v. DIRECTV, LLC, the District of New Jersey rejected the notion that “the juridical link doctrine” provided a limited exception to Article III standing requirements in a class action against several related defendants and granted DirecTech’s motion for summary judgment because the named plaintiffs were not injured by DirecTech’s actions.

The juridical link doctrine, as articulated by the Ninth Circuit’s 1973 decision in La Mar v. H & B Novelty & Loan Co., provides that the typicality and adequacy-of-representation prongs of Rule 23(a) governing class certification may still be satisfied when the representative plaintiff has not been harmed by a particular defendant if “all defendants are juridically related in a manner that suggests a single resolution of the dispute would be expeditious.” In an opinion authored by Senior Judge William H. Walls, the New Jersey district court refused to extend the juridical link doctrine to issues of Article III standing.

In 6803 Boulevard East, the putative class action complaint alleged that each of the defendants installed satellite equipment on the plaintiffs’ property without their consent. But one of the defendants, DirecTech, never installed any satellite dishes on the plaintiffs’ properties. When DirecTech challenged the plaintiffs’ standing to sue based on the absence of harm caused by DirecTech, the plaintiffs argued that they could rely on the juridical link doctrine to establish standing, because all defendants are juridically related such that a single resolution would be expeditious.
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Third Circuit Finds Proposed Dual Service as Class Counsel and Class Representative Does Not Preclude CAFA Removal

Posted in Class Action Defense

The Third Circuit recently considered whether the District Court properly denied a motion for remand brought by a pro se plaintiff, an attorney also seeking to serve as class counsel, who argued that since his “dual service” precluded class certification in federal court, the defendant could not aggregate the proposed class’s claims to satisfy the $5 million amount in controversy under the Class Action Fairness Act (“CAFA”). In affirming the denial of the plaintiff’s remand motion, the Third Circuit built upon recent Supreme Court precedent confirming that a plaintiff cannot stipulate to less than $5 million in damages to avoid the federal court’s subject matter jurisdiction under CAFA. You can read about that decision, Standard Fire v. Knowles, here.

In Nutraceutical Corp., plaintiff Harold Hoffman, Esq., “an attorney who has made a habit of filing class actions in which he serves as both the sole class representative and sole class counsel,” challenged removal of the action to the District of New Jersey. Mr. Hoffman argued that CAFA jurisdiction was not satisfied to a “legal certainty” because Third Circuit law does not permit class certification if the proposed class representative is also proposed class counsel, therefore, without any class claims to aggregate, the amount in controversy is only the value of his individual claim, or about $200. The District Court concluded that the plaintiff had “failed to show that the class was not certifiable and that the class claims could not be aggregated,” explaining that class certification was “indeed possible,” as demonstrated by Mr. Hoffman’s very decision to pursue the matter as a class action.
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Supreme Court to Address Evidentiary Requirements for Determining Removal Jurisdiction in Class Actions

Posted in Class Action Defense

The Supreme Court of the United States granted certiorari in Dart Cherokee Basin Operating Company, LLC v. Owens, to resolve a circuit split over the evidentiary standard for determining removal jurisdiction pursuant to the Class Action Fairness Act (“CAFA”). Specifically, the Court will consider “[w]hether a defendant seeking removal to federal court is required to include evidence supporting federal jurisdiction in the notice of removal, or is alleging the required ‘short and plain statement of the grounds for removal’ enough?”

In Dart Cherokee, the district court concluded that the defendant failed to satisfy its burden of establishing removal jurisdiction under CAFA because, although the Notice of Removal alleged that CAFA’s $5 million jurisdictional threshold was satisfied, the defendant did not submit any attendant evidence in its Notice of Removal. Rather, the defendant only provided the evidence in opposition to the plaintiff’s motion for remand, which the court concluded could not be properly considered. The Tenth Circuit refused to hear the appeal and, in an opinion dissenting from the Circuit Court’s refusal to hold a rehearing en banc, three Circuit Judges concluded the district court’s decision to remand the case was “contrary to fundamental principles regarding the purpose and function of pleadings in federal court,” and that the burden imposed as a result of the decision was “excessive and unprecedented.”

Currently, the Circuit Courts of Appeal apply varying standards in deciding whether a defendant has sufficiently pled the required amount in controversy in a CAFA removal case. Those standards range from the more easily satisfied “reasonable probability,” “preponderance of the evidence,” and “legal impossibility” tests to the more stringent “legal certainty” standard. Courts disagree on what evidence may be considered in reaching a decision that the amount in controversy under CAFA has been satisfied and, moreover, some Circuits have yet to even reach a decision as to the standard a court must apply to find the amount in controversy has been sufficiently pled.

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Hobbs Act Remains a Formidable Obstacle in Challenging FCC Regulations Under the TCPA

Posted in Class Action Defense

In Nack v. Walburg, the plaintiff consented to receive a fax advertisement from the defendant. But, because the fax lacked an “opt-out” notice arguably required by regulations promulgated under the Telephone Consumer Protection Act (“TCPA”), plaintiff filed a class action complaint, seeking millions of dollars in class-wide statutory damages under the TCPA. The district court granted summary judgment in favor of the defendant, holding that the pertinent regulation should be narrowly interpreted to require opt-out notices only for unsolicited faxes, not invited faxes. The Eighth Circuit, however, relying on an amicus brief from the FCC, disagreed and reversed, holding that the Hobbs Act prevented judicial review of administrative regulations, except on appeal from a prior agency review. The court expressed skepticism as to “whether the regulation (thus interpreted) properly could have been promulgated under the statutory section” at issue but suggested that defendant seek a stay of the civil proceedings while it pursued administrative remedies.

Defendant petitioned for a writ of certiorari to the Supreme Court, arguing that the Eighth Circuit (and Seventh Circuit) conflicted with a Sixth Circuit decision that held that courts have authority to review the plaintiff’s arguments that an FCC rule exempting certain broadcaster prerecorded calls to consumers as regulated “advertisements” under the TCPA was unlawful. An amicus petition also raised due process concerns and argued that the ruling permits administrative agencies to insulate themselves from judicial review while denying those harmed by their regulations the right to defend themselves. Two other petitions were also filed; one underscored the “crippling” practical effect of the Eighth Circuit’s ruling on business, and the other argued that the Eighth Circuit misconstrued the Hobbs Act. Despite the circuit split and constitutional arguments, on March 24, 2014, the Supreme Court denied certiorari.

In light of the Court’s decision not to consider the issue, the Hobbs Act remains a daunting hurdle for defendants to challenge the TCPA. Now, a business facing massive liability in a TCPA class action in the Seventh or Eighth Circuits cannot challenge the statutory basis of the administrative rule in court, even if the rule blatantly exceeds the agency’s statutory authority, and even if the rule is unconstitutional. Instead, a defendant may only challenge an FCC rule by petitioning the agency itself, but the agency has thus far declined to take final action in response to any such petitions and has even taken the position that it has no duty at all to resolve such petitions. Furthermore, this decision opens the door for a fresh round of TCPA class actions based on the opt-out provision for a new group of professional plaintiffs who actively solicit and consent to receiving fax advertisements with the hopes of receiving treble damages.
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California District Court Denies Class Certification in Consolidated Gmail Litigation for Lack of Rule 23(b)(3) Predominance

Posted in Class Action Defense

In In re: Google Inc. Gmail Litigation, a consolidated multi-district litigation, a California federal court denied the plaintiffs’ motion to certify classes and subclasses because each class failed to satisfy Rule 23(b)(3)’s predominance requirement. The plaintiffs alleged that Google violated anti-wiretapping laws by intercepting messages through its email service, Gmail. The plaintiffs sought to certify four classes and three subclasses of different categories of Gmail users. Here, one of the central questions bearing on liability was whether the plaintiffs and class members consented to the alleged interceptions.

The district court found that the predominance requirement could not be met because the “evidence suggests that consent must be litigated on an individual, rather than class-wide basis.” For example, with respect to the proposed class for education accounts, the court determined that “the diversity of disclosures made by educational institutions, ranging from specific disclosures about the method and reasons for interceptions to the incorporation of vague disclosures, may well lead a fact-finder to conclude that end users at some universities consented, while end users at other universities did not” and that therefore “there are substantial individualized inquiries on the issue of express consent.” Next, regarding implied consent through various disclosures for all remaining proposed classes, the court reasoned that a fact-finder “would have to evaluate to which of the various sources each individual user had been exposed” and whether each user consented to the interception of email as a result of the exposure.

In short, the district court denied class certification because the “factual inquiry is an intensely individualized one” in which questions regarding consent “are likely to overwhelm any common issues” during litigation. Importantly, the decision highlights the need for defendants challenging class certification pursuant to Rule 23(b)(3) to consider carefully whether the class members present any individualized issues, such as user consent, that are likely to predominate over common questions.

Timothy J. Petty is an Associate in the Gibbons Business & Commercial Litigation Department.

Eleventh Circuit Holds That Complaint for Declaratory Relief is “Up to the Task” of Satisfying the $5 Million Jurisdictional Amount for CAFA Removal

Posted in Class Action Defense

Recently, in South Florida Wellness, Inc. v. Allstate Insurance Co., the Court of Appeals for the Eleventh Circuit held that a class action complaint seeking only declaratory relief may be removed to federal court under the Class Action Fairness Act (“CAFA”), because the class members would be eligible to recover more than $5 million — the “amount in controversy” threshold for federal jurisdiction under CAFA — if such relief were granted. Central to the court’s holding was that the “amount in controversy” is an estimate of the value of what is at stake in the litigation, and not a precise measurement of plaintiffs’ likely recovery. In affirming the removal of a complaint seeking only declaratory relief under CAFA, the Eleventh Circuit offered useful insight on the burden of proof for “amount in controversy” purposes.

In South Florida Wellness, the plaintiff, South Florida Wellness (“SFW”) filed a putative class action on behalf of itself and other health care providers and insureds in Florida state court, seeking a declaration that the language in Allstate’s insurance policies limiting PIP coverage to the statutory fee schedule was ambiguous and unclear. Allstate removed the matter to federal court, with an affidavit detailing the number of potential plaintiffs and the amount of each claim. Allstate contended that, although SFW only sought declaratory relief, a judgment in SFW’s favor would entitle class members to recover approximately $70 million. SFW moved to remand, arguing that even though a declaration in its favor would entitle class members to seek payments from Allstate, the financial effect of such a judgment should not be considered because it was too speculative and required additional steps for class members to recover. The District Court held that declaratory relief was insufficient to meet the monetary threshold and remanded the matter to state court.

The Eleventh Circuit reversed, holding that even though the complaint sought only declaratory relief, the actual amount in controversy was about $70 million. The Court explained that at the jurisdictional stage the relevant inquiry is not how much the plaintiffs are ultimately likely to recover but the “value of the object of the litigation measured from the plaintiff’s perspective.” The Court found that it contradicted common sense and human nature to assume that class members would not seek monetary recovery if a declaratory judgment were entered. The Court of Appeals reasoned that potential developments, such as the possibility that the class would not be certified or that class members would opt out or be deterred by the additional steps, were irrelevant to the jurisdictional analysis. The Court of Appeals also pointed out that while Allstate had the burden of proving that the amount in controversy exceeded the jurisdictional threshold, SFW offered no proofs rebutting Allstate’s estimations and calculations.
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