Litigation and Trial - Max Kennerly : Philadelphia Trial Lawyer Max Kennerly : Business and Commercial Litigation : Civil Attorney : The Beasley Firm : Philadelphia Pennsylvania

[Update: I somehow missed Ron Coleman's earlier take on the article, but it's required reading if you're interested in the subject. Coleman and Walter Olson both seem on board with, as Olson words it, "steering rights owners into agency complaints or arbitration as an alternative, or at least precondition, to court action."] 

Via Kevin Drum, Wired's Threat Level has a profile of Steve Gibson, CEO of Righthaven, a company which has applied the much maligned — but often quite lucrative — "patent troll" model to copyright litigation on behalf of publishers:

Borrowing a page from patent trolls, the CEO of fledgling Las Vegas-based Righthaven has begun buying out the copyrights to newspaper content for the sole purpose of suing blogs and websites that re-post those articles without permission. And he says he’s making money. ...

Gibson’s vision is to monetize news content on the backend, by scouring the internet for infringing copies of his client’s articles, then suing and relying on the harsh penalties in the Copyright Act — up to $150,000 for a single infringement — to compel quick settlements. Since Righthaven’s formation in March, the company has filed at least 80 federal lawsuits against website operators and individual bloggers who’ve re-posted articles from the Las Vegas Review-Journal, his first client. ...

Gibson says he’s just getting started. Righthaven has other media clients that he won’t name until the lawsuits start rolling out, he says.

“Frankly, I think we’re having tremendous success at a number of levels,” Gibson says. “We file new complaints every day.”

They sure do; a search on Justia Dockets for "Righthaven" shows a handful of new suits every week, including a recent suit against those scourges of American society, the American Society of Safety Engineers. Here's the complaint, in which Righthaven requests the Court, e.g.,

3. Direct Network Solutions and any successor domain name registrar for the Domain to lock the Domain and transfer control of the Domain to Righthaven;

4. Award Righthaven statutory damages for the willful infringement of the Work, pursuant to 17 U.S.C. § 504(c);

5. Award Righthaven costs, disbursements, and attorneys’ fees incurred by Righthaven in bringing this action, pursuant to 17 U.S.C. § 505;

Apparently either the ASSE or one of its chapters (the complaint references the Central Florida Chapter of the ASSE) cut and pasted into their newsfeed a copy of an article from the Las Vegas Review-Journal titled, “Bill would help regulators better enforce safety rules."

Cutting-and-pasting someone else's article isn't kosher, but look at the harsh relief claimed by Righthaven.

I'm doubtful of the demand in #3 that Righthaven be given control of asse.org, considering that they raise solely a copyright claim, not a cyber-squatting claim, and "Copyright law does not protect domain names." I suppose the Court has the power to enjoin defendants from further infringing activity, but that's a far cry from locking someone's entire website and transferring it simply because there was, at some point, an infringing work on it.

#4 and #5 are standard in copyright litigation: the plaintiff can elect "statutory damages" of up to a whopping $150,000 per incident, just shy of three times the median annual household income, plus the costs (including attorneys' fees) of suit.

Putting aside those substantial damagins, just hiring an attorney to defend the case will cost a couple thousand dollars, even if they are on a flat fee with someone who specializes in copyright defense.

As Kevin Drum and Wired both note, the notion of litigation "trolling" — whether on behalf of patents or copyright — is not without its critics. That said, as well-intentioned as the ASSE may have been, truth is, it wasn't their content, and they shouldn't have posted it. So long as the claims are meritorious, the settlement demands are not extortionate, and the practice of trolling is limited to companies, rather than individuals — the primary target of the RIAA's hopelessly failed litigation campaign — then I'm not that worried about due process or "SLAPP" concerns.

But two aspects of the practice as applied to publishing copyrights bother me.

First, there is no doubt that copyright law and copyright norms affect culture. Consider this fascinating article at Ars Technica about how comedy routines changed dramatically once it became taboo to steal other comedian's jokes. When it comes to copyright trolls, I worry that legitimate fair use of portions of articles will be chilled by litigation concerns, as is already the case in the world of film.

Second, if we assume — as I do — that the bulk of these cases involve minor infractions that can and should be settled for less than $10,000, that raises a basic question of fairness. One of the least-discussed aspects of the civil justice system is how we have completely different systems for the most common types of claims, i.e. employment discrimination claims and minor injuries.

In many states, including Pennsylvania, if you want to sue an employer for employment discrimination, you can't. Instead, you need to file an agency complaint — which you must do within 180 days, much sooner than you must file any other type of lawsuit — and then you must work your way through the agency process before you can even begin your lawsuit in court.

Similarly, as the Court of Common Pleas of Allegheny County here in Pennsylvania pioneered, a number of jurisdictions enforce compulsory arbitration for claims of low value. If you have one of those low-value claims, the full powers of the civil justice system aren't available to you, at least not initially.You need to go through the compulsory arbitration system first, thereby delaying your relief and making it harder for you to prosecute it.

Are agency investigations and compulsory arbitration bad ideas? Not necessarily. Both of them do, in fact, save defendants a tremendous amount of time and money, and sometimes they facilitate a resolution of the case in a much cheaper and more expedient manner than the full-fledged trial courts.

But if our purpose in setting up those parallel legal systems is to lessen the burden on the defendant for comparatively small claims, why not set up as a similar system for comparatively small copyright infringement claims like those brought by Righthaven? Is there some reason that a claim arising from a single copying of a single newspaper article should be entitled to start immediately in the federal district courts while a claim arising from the wrongful termination of an employee for discriminatory reasons should have to go through a year or more of agency investigation?

It would seem to me that the terminated employee — who may have wrongfully suffered a grievous economic injury — should have a stronger entitlement to immediate relief than a well-funded company that exists solely to carry out litigation. 

[As I commented at Overlawyered following Walter's link here] I think these types of copyright claims are more appropriate for agency investigation or arbitration than employment discrimination or personal injury suits. The latter two are typically dependent upon oral testimony (and thus the credibility of the witnesses, which needs to be assessed through live testimony), while the former could reasonably be evaluated solely on the documents.

Just taking that ASSE case as an example, all the agency would really need, other than the complaint filed, is an answer from the defendant admitting or denying the material facts about the extent and nature of republication.

And that would be it; the investigator or arbitrator could then look at those documents, the core of which would be fewer than 20 pages, and start discussing with the parties a reasonable settlement. That would obviate the need to bring on attorneys for hundreds of dollars an hour, and would keep these small potatoes matters from clogging our federal courts.

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Kenneth Feinberg, whose pro bono publico work in the 9/11 Compensation Fund was widely lauded, is back again administering the $20 billion BP Compensation Fund and is in the middle of a publicity tour on the Gulf of Mexico. C-SPAN just posted a video of him discussing the Fund and his work on it this morning.

Unlike with the 9/11 Fund, though, this time Feinberg is getting paid, and that raises a few questions.

Nobody questions Feinberg's integrity, but the whole point of having a nation of law, not men, is to make everyone accountable to that law, and Professor Byron Stier at the Mass Tort Litigation Blog raises the right issues:

The issue of Feinberg's compensation is interesting. Feinberg worked pro bono on the 9/11 victim compensation fund -- a remarkable and laudable commitment given the substantial time involved. I'm not suggesting that Feinberg should go on doing such monumental administrative tasks pro bono -- but is it appropriate for him to keep his compensation from BP confidential?

As with the 9/11 fund, Feinberg will likely have tremendous discretion in fashioning the administrative claim mechanism for the BP compensation fund. His exercise of discretion could possibly result in BP saving substantial funds, especially if any remainder of the $20 billion fund is to be returned to BP. Accordingly, a fair process at a minimum requires that both the amount of his compensation, and the method of compensation be disclosed publicly. If BP has the ability to review and cut his billable hours or his billable-hour rate, for example, Feinberg might have a conflict of interest that could lead him unconsciously to favor BP in structuring the administrative fund or making awards.

Andrew Perlman at Legal Ethics Forum follows up:

I haven't followed the details of the BP fund, but if there is little or no chance that there will be money in the fund after the awards are made (a seemingly plausible assumption), I'm not sure I see how Mr. Feinberg's behavior could be impacted (consciously or unconsciously) by his compensation.  BP is out the $20 billion regardless of how the proceeds are distributed.  Are there other ways in which Mr. Feinberg's conduct might be affected by how his compensation is structured?

I'm not Feinberg's accountant, but from the little bit I know about his practice — like his role in resolving the multibillion-dollar antitrust suit by AmEx against MBNA — I'm confident that Feinberg is doing quite well financially, and isn't planning on making this Fund into his own retirement. Similarly, in light of his unpaid commitment to the 9/11 Fund, I imagine he values his reputation, not to mention his dignity and integrity, over any quibbling over billable hours that he might get from BP.

On paper, there's no obvious reason for concern. But Roger Ebert's rules for critics comes to mind:

No commercial endorsements. This used to be a given in journalism ethics. A critic must be especially vigilant. If you express approval of a product, you must sincerely believe what you are saying. How will we know you're sincere? Because you have (1) accepted no money, (2) or donated the money to a charity, and (3) have not accepted a free example of the product, except in such cases as foodstuffs, where the difficulties are apparent. You gotta eat 'em to review 'em. The Sun-Times has a policy: All Christmas gifts must be returned, except for perishables like papayas, etc. Candy is not a perishable. Neither, to the incredulity of many reporters, is liquor. Back to endorsements. Were I to recommend, say, a rice cooker, that must not imply I obtained it for free, or that 100 lb. sacks of rice were being dropped at my door. I mention this because I may be compelled to recommend a rice cooker in the very near future, in defense of my Who's Who entry, which claims I can cook almost anything in a rice cooker.
...

No advertisements. Gene Siskel, who I frequently quote as a fierce paragon of high standards, used to quote what someone, maybe it was David Mamet, told him: "As a critic, everything you say depends on your credibility. When you sell that, somebody else owns it." Gene and I (regretfully) turned down offers in the extremely low seven figures  from a fast food chain and an airline. "After we retire, then it would be okay," we speculated. Even then, maybe not. Look at Fred Astaire. How many people thought they were paying him for their dance lessons? They look at "Swing Time" on TCM, and say, "There's that bastard who overcharged me for the mambo."

The emphasis of Mamet's quote is mine. Fact is, Feinberg is being paid by BP to run the Fund, and being paid by BP to promote the Fund. That's enough to create the appearance of impropriety.

Among judges, it is unnecessary to demonstrate the reality of impartiality; the paramount concern is the appearance of impropriety:

The goal of section 455(a) is to avoid even the appearance of partiality. If it would appear to a reasonable person that a judge has knowledge of facts that would give him an interest in the litigation then an appearance of partiality is created even though no actual partiality exists because the judge does not recall the facts, because the judge actually has no interest in the case or because the judge is pure in heart and incorruptible. The judge's forgetfulness, however, is not the sort of objectively ascertainable fact that can avoid the appearance of partiality. Hall v. Small Business Administration, 695 F. 2d 175, 179 (5th Cir. 1983). Under section 455(a), therefore, recusal is required even when a judge lacks actual knowledge of the facts indicating his interest or bias in the case if a reasonable person, knowing all the circumstances, would expect that the judge would have actual knowledge." 796 F. 2d, at 802.

Liljeberg v. Health Services Acquisition Corp., 486 US 847, 860-862 (1988)(quoting the Second Circuit).

So it goes with Ken Feinberg.

What will it take to fix that? Personally, I don't think we need to know every detail, but we do need to know more.

I don't need to know exactly how much he is being paid, but I do want to know if it is (a) hourly or fixed and (b) if it is significantly above or below his normal rate. Those two elements could, potentially, create an incentive either to draw out the work or to hurry through the claims to get back to his more profitable work.

Do I think he will do that? No, but that's not the issue: the issue is if it appears that his judgment could be affected by his compensation, and I think it's fair to say such an appearance exists. The victims of the spill — the ones who are being asked to trust his judgment — deserve to know a little more before they sign on.  

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Via Howard Bashman, whose client won, comes the Third Circuit's Sullivan et al. v. De Beers et al. ruling reversing the District of New Jersey's approval of a massive, nationwide settlement of antitrust claims brought by diamond purchasers against the De Beers cartel. As The Legal Intelligencer put it:

In its 75-page opinion in Sullivan v. DB Investments Inc., the 3rd U.S. Circuit Court of Appeals ruled that the settlement must be vacated because the lower court had improperly certified a nationwide class of indirect purchasers despite recognizing that some of those plaintiffs would be barred from pursuing such indirect claims under the laws of their own states.

As a result, the 3rd Circuit found that a single objector from Texas had identified a fatal flaw in the lower court's class certification analysis by showing that the common issues did not "predominate."

"The objection regarding the lack of predominance of class issues in this case raises an insurmountable hurdle to certification of the indirect purchaser class," U.S. Circuit Judge Kent A. Jordan wrote.

"Two plaintiffs cannot be joined in a single class to adjudicate the same set of facts when those facts give only one of them a legally cognizable claim," Jordan wrote in an opinion joined by visiting U.S. District Judge Donetta Ambrose of the Western District of Pennsylvania.

U.S. Circuit Judge Marjorie O. Rendell concurred in the judgment, but wrote a separate opinion that said she disagreed with Jordan's decision to undertake his own analyses of predominance and the plaintiffs' entitlement to injunctive relief, rather than allowing the lower court on remand to evaluate these issues in the first instance.

Frankly, I'm surprised by the ruling, but it takes some background to explain why.

As described by the Court:

The plaintiffs in the seven cases can be divided into two categories, based on the claims that they assert. The first category consists of direct purchasers that acquired rough gem diamonds directly from De Beers or one of its competitors. The direct purchasers advanced claims of price-fixing and monopolization, citing §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2, for which they sought damages and injunctive relief under §§ 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26.

The second category of plaintiffs consists of indirect purchasers, which are entities or individuals that acquired either rough or cut-and-polished gem diamonds but did not do so directly from De Beers or its competitors. Consumers and jewelry retailers fall into this category, as do middlemen who acquired diamonds from sightholders or from another indirect purchaser. The indirect purchasers sought recovery for the same
antitrust injury as did the direct purchasers but brought their claims under state antitrust, consumer protection, and unjust enrichment law. These plaintiffs could only rely on state law as a route to monetary relief because they lack standing to bring a federal antitrust claim for damages under § 4 of the Clayton Act. Illinois Brick Co. v. Illinois, 431 U.S. 720, 735-36 (1977). They did, however, seek injunctive relief for those antitrust violations under § 16 of the Clayton Act. See Mid-W. Paper Prods. Co. v. Cont’l Group, 596 F.2d 573, 594 (3d Cir. 1979) (“Illinois Brick does not preclude indirect purchasers from suing for injunctive relief[,] and ... they have standing to sue under § 16 ... .”).

That is to say, direct purchasers can all claim together under the same federal antitrust law, but, since federal antitrust law doesn't permit indirect purchasers to claim, each of those indirect purchasers has to rely on the law of their own states to obtain relief. Those states, however, vary widely in their treatment of indirect purchaser claims: some states reject them (like federal law does), some states expressly permit them, and some states permit them, but with limitations.

The District Court simply lumped all of those indirect purchasers together, hence the reversal. Their claims don't share enough "commonality."

One possible solution to the problem would have been to set up subclasses for each of the fifty states, but that's not what happened here, apparently because De Beers wanted the class action settlement to resolve all possible claims in all 50 states. (I suppose we'll have to put aside, for the moment, why De Beers felt it necessary to resolve indirect purchaser claims in the states which don't recognize indirect purchaser claims.)

It would not have surprised me if, in the first instance, the Third Circuit had ruled that a national class action can't be certified — not even for settlement purposes, where the defendants essentially concede a class would be appropriate — if some of the subclasses rely on varied state laws. As noted above, it's possible to cure that defect, albeit difficult and time-consuming: set up subclasses for indirect purchasers in each state, and compensate them based on the strength of their state's laws.

But as the majority opinion admitted, the Third Circuit already ruled that it was okay to cobble together disparate state law claims for purposes of a nationwide class action settlement:

We have recognized that “there may be situations where variations in state laws are
so significant so as to defeat commonality and predominance even in a settlement class certification.” In re Warfarin Sodium Antitrust Litig. (Warfarin Sodium II), 391 F.3d 516, 524, 529-30 (3d Cir. 2004) (certifying a class of consumer deception claims under the law of all fifty states while recognizing that the entire class also shared a single, common deception claim under the law of Delaware, where the allegedly deceptive communications had originated). However, neither we nor our sister courts of appeals have considered whether variations among state antitrust statutes are so far-reaching that those differences overshadow commonalities when a class of indirect purchasers seeks certification on a nationwide basis. We must therefore consider for the first time whether a national class of indirect purchaser claimants under state law is “sufficiently cohesive to warrant adjudication by representation.” Amchem, 521 U.S. at 623.

You can read the In re Warfarin opinion here. The most pertinent part was:

[S]everal Appellants argue that the District Court erred when it certified a single nationwide class of plaintiffs because variations in and inconsistencies between the state consumer fraud and antitrust laws of the fifty states defeat the commonality and predominance requirements of Rule 23. Appellants rely principally on the Seventh Circuit's decision in In re Bridgestone/Firestone Inc., 288 F.3d 1012 (7th Cir.2002) ("Bridgestone"), a case involving the certification of a nationwide class alleging tort claims arising under the laws of all fifty states. However, Bridgestone is distinguishable from the instant matter because that case concerned certification of a class for purposes of litigation, not a class solely for purposes of settlement, which is at issue in this case. 288 F.3d at 1018.

The difference is key. In certification of litigation classes for claims arising under the laws of the fifty states, we have previously noted that the district court must determine whether variations in state laws present the types of insuperable obstacles which render class action litigation unmanageable. See Prudential, 148 F.3d at 315; see also In re Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir.1986). Thus, for instance, we have stated that a district court should examine whether varying state laws can be grouped by shared elements and applied as a unit in such a way that the litigation class is manageable. Prudential, 148 F.3d at 315; In re Sch. Asbestos Litig., 789 F.2d at 1010. However, when dealing with variations in state laws, the same concerns with regards to case manageability that arise with litigation classes are not present with settlement classes, and thus those variations are irrelevant to certification of a settlement class. See Amchem, 521 U.S. at 620, 117 S.Ct. 2231 (in a settlement-only class certification, "a district court need not inquire whether the case, if tried, would present intractable management problems ... for the proposal is that there be no trial").

Nonetheless, we recognize that problems beyond those of just manageability may exist when a district court is asked to certify a single nationwide class action suit, even for settlement purposes, when claims arise under the substantive laws of the fifty states. Although there may be situations where variations in state laws are so significant so as to defeat commonality and predominance even in a settlement class 530*530 certification, this is not such a case.

Was the In re Warfarin situation really so different from De Beers just because there was that single Delaware claim? The Third Circuit back then didn't think so; instead, it found it "key" that the certification was solely for settlement purposes.

As I described above, De Beers demanded these non-existent state law indirect purchaser claims be released. Whatever the Third Circuit thinks of the merits of that, De Beers sure thought the indirect purchasers in all fifty states had something, and so sought to release those claims. In the absence of some clear, verifiable prejudice to other members of indirect purchaser classes, I just don't see the need to unwind the settlement, much less do so in a manner that ties the District Court's hands.

And that's the key difference between the majority and Judge Rendell's opinion. Judge Rendell would have vacated the settlement with instructions to the District Court to better develop its reasoning, which would then have had its reasoning reviewed under an "abuse of discretion" standard. The majority, however, has all but precluded the District Court from doing anything but adopting the majority's analysis of the various state laws, and then going about the laborious — and unwanted by anyone but a single objector — process of determining the availability of relief under each state's laws.

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Judicial supremacy made an unexpected comeback this week with Martin Feldman of the Eastern District of Louisiana, a "fair" and "terrifying" judge (who, for what it's worth, dismissed one of my cases a few months ago — no hard feelings), granting an injunction against the Secretary of the Interior from enforcing the Obama administration's moratorium on deepwater oil drilling because the moratorium was "arbitrary and capricious:"

After reviewing the Secretary’s Report, the Moratorium Memorandum, and the Notice to Lessees, the Court is unable to divine or fathom a relationship between the findings and the immense scope of the moratorium. The Report, invoked by the Secretary, describes the offshore oil industry in the Gulf and offers many compelling recommendations to improve safety. But it offers no time line for implementation, though many of the proposed changes are represented to be implemented immediately. The Report patently lacks any analysis of the asserted fear of threat of irreparable injury or safety hazards posed by the thirty-three permitted rigs also reached by the moratorium. It is incident specific and driven: Deepwater Horizon and BP only. None others. While the Report notes the increase in deepwater drilling over the past ten years and the increased safety risk associated with deepwater drilling, the parameters of “deepwater” remain confused. And drilling elsewhere simply seems driven by political or social agendas on all sides. The Report seems to define “deepwater” as drilling beyond a depth of 1000 feet by referencing the increased difficulty of drilling beyond this depth; similarly, the shallowest depth referenced in the maps and facts included in the Report is “less than 1000 feet.” But while there is no mention of the 500 feet depth anywhere in the Report itself, the Notice to Lessees suddenly defines “deepwater” as more than 500 feet.

... The Shallow Water Energy Security Coalition Presentation attempts at some clarification of the decision to define “deepwater” as depths greater than 500 feet. It is undisputed that at depths of over 500 feet, floating rigs must be used, and the Executive Summary to the Report refers to a moratorium on drilling using “floating rigs.” Other documents submitted summarize some of the tests and studies performed. For example, one study showed that at 3000psi, the shear rams on three of the six tested rigs failed to shear their samples; in the follow up study, various ram models were tested on 214 pipe samples and 7.5% were unsuccessful at shearing the pipe below 3000psi. How these studies support a finding that shear equipment does not work consistently at 500 feet is incomprehensible. If some drilling equipment parts are flawed, is it rational to say all are? Are all airplanes a danger because one was? All oil tankers like Exxon Valdez? All trains? All mines? That sort of thinking seems heavyhanded, and rather overbearing.

... While the implementation of regulations and a new culture of safety are supportable by the Report and the documents presented, the blanket moratorium, with no parameters, seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger.

On the record now before the Court, the defendants have failed to cogently reflect the decision to issue a blanket, generic, indeed punitive, moratorium with the facts developed during the thirty-day review. The plaintiffs have established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously in issuing the moratorium.

Ashby Jones at the WSJ Law Blog has been all over the story, with lots of followup links and questions about Judge Feldman's oil industry investments.

I don't agree with the ruling; the government's assumption, as worded by Judge Feldman, "that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger" is sound. We still don't know why the "failsafe" measures on the Deepwater Horizon failed to be safe. Although the government's conclusions included a number of inconsistencies, it's hard to argue that the government's chosen remedy — the moratorium — was not rationally related to the compelling national interest of limiting the amount of oil in the Gulf of Mexico to the millions of gallons already there.

But let me play devil's advocate for a moment. From a purely legal standpoint, the order isn't extraordinary. Although the writ of habeas corpus is rightly called "the Great Writ" by virtue of its ability to force the federal and the states' governments alike to release an individual from confinement, the Great Writ's less heralded cousin civil context is the Administrative Procedures Act, which is almost constitutional in its breadth and power:

 To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall—

 

(1) compel agency action unlawfully withheld or unreasonably delayed; and

(2) hold unlawful and set aside agency action, findings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(B) contrary to constitutional right, power, privilege, or immunity;

(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;

(D) without observance of procedure required by law;

(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or

(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court. 

5 U.S.C. § 706.

There it is, plain as day, a statute enacted by the Congress the President empowering (commanding, some might say) federal judges to set aside any decision by any federal agency — the means by which the President and his Cabinet effectuate their policies — if they find that agency action to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."

That's why the exercise of this power is not, by itself, noteworthy: it's exactly how our government's checks and balances are supposed to function. As another check on the system, despite some suggestions otherwise, federal appellate courts (like the Fifth Circuit) can and do engage in a searching analysis of injunctions. See Karaha Bodas v. Perusahaan Pertambangan Minyak, 335 F. 3d 357, 363-364 (5th Cir. 2003)(Reversing injunction, noting "Even though the ultimate decision whether to grant or deny a preliminary injunction is reviewed only for abuse of discretion, a decision grounded in erroneous legal principles is reviewed de novo. ... We have cautioned [that] a preliminary injunction is an extraordinary remedy which should only be granted if the party seeking the injunction has clearly carried the burden of persuasion on all four requirements. As a result, the decision to grant a preliminary injunction is to be treated as the exception rather than the rule.")

As favorable as the Fifth Circuit sometimes is to oil interests, there's good odds they would likely have reversed this injunction and sent it back for the District Court to craft a more limited remedy that preserved the moratorium against any oil platforms that were comparable to, or had comparable risks of, the Deepwater Horizon.

But the main point here is what happened as a result of the order: the Secretary of the Interior announced he would issue a new, more detailed, possibly more narrowly-crafted moratorium. And that's just what the APA was designed to do: to limit the ability of the federal government's agencies to impose their will on people, to force them to "refine" their actions when necessary. Moreover, at the moment, no additional damage is being done to the Gulf, and Judge Feldman has scheduled a conference call this morning to consider staying his injunction while the Department of the Interior appeals his ruling and issues a new moratorium.

Thus, as critical as I might be of the reasoning of the order, the fact of the order is something to herald: for once, your government is functioning the way it is supposed to.

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Some background: the Oil Pollution Act establishes strict liability for anyone who spills oil, but limits that liability in the case of offshore rigs to $75 million per spill, plus removal costs. Congress has contemplated removing those caps for the BP spill and all future spills.

Over at the National Law Journal, David Ingram reports that BP, in addition to spilling oil and other substances all over the Gulf of Mexico, is now blowing smoke in the Washington, DC vicinity:

A private consultant for energy companies told Congress on Tuesday that any effort to rewrite oil spill liability laws retroactively would likely face a legal challenge based on breach-of-contract claims.

W. Jackson Coleman, managing partner of EnergyNorthAmerica, said that if successful, those breach-of-contract claims could cost the federal government billions of dollars in payments to the oil and gas industry.

Coleman testified at a hearing of the Senate Judiciary Committee, which is considering legislation to lift limits on damage awards. A former lawyer for the Interior Department and for Republicans on the House Committee on Natural Resources, Coleman said the drilling leases purchased by oil and gas companies are contracts with the federal government, and that the contracts were signed with certain expectations about liability.

He said there is ample precedent for companies to sue when the federal government changes the terms of those leases.

In 2000, for example, the U.S. Supreme Court ruled that the federal government had to return $158 million to Mobil Oil Exploration & Producing Southeast Inc. and Marathon Oil Co. after Congress passed a law limiting drilling off the Outer Banks of North Carolina. Justice Stephen Breyer wrote for an 8-1 majority in the case, Mobil Oil Exploration v. United States. Coleman worked on the case when it was before the U.S. Court of Federal Claims and he was at the Interior Department.

"Certain expectations about liability?"

Since when could you sue the United States government for monetary damages over your "expectations" about its laws?

The Mobil Oil Exploration case was an entirely different situation. There, the government sold a bunch of leases and then passed laws that precluded them from complying with certain terms of the leases. Such is, undoubtedly, a breach of contract: the government did not do what it contracted to do.

In the Gulf of Mexico, BP bought leases from the United States government to conduct offshore drilling. The government complied with every last word of those lease contracts. All on its own, BP screwed up and initiated the revenge of the dinosaurs.

The fact that BP bought the leases with the "expectation" that they would be subject only to the liability caps in the Oil Pollution Act is irrelevant. The government changes its laws all the time, including those relating to liability. In MGM v. Grokster, for example, the Supreme Court invented a wholly-new cause of action for "contributory" copyright infringement, putting Grokster out of business.

In one sense, though, these arguments over the Oil Pollution Act may be a tempest in a teapot, or I suppose a drop in the bucket.

First, the Oil Pollution Act's caps don't apply if the spill was caused by "gross negligence or willful misconduct" or "the violation of an applicable Federal safety, construction, or operating regulation." From the little bit we know about Transocean using seawater instead of mud or cement, and about the impotence of the "failsafe" blowout preventer, at least one of those is going to be met, possibly all of them.

Second, there are a lot of ways to sue BP; the common law of Texas, Louisiana, Mississippi, Alabama, and Florida all allow full recovery under negligence and trespass claims when a person is damaged by someone else's irresponsible conduct.

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The Wall Street Journal (and their Law Blog) had an amusing piece recently about the jockeying underway for the position of lead counsel in the Toyota Motor Corporation Unintended Acceleration Marketing, Sales Practices, and Products Liability Multidistrict Litigation, which has been consolidated in the Central District of California:

Lawyer Daniel Becnel Jr. of Reserve, La., donated a kidney to his sick brother. Alexandria, La., attorney Richard Arsenault organized a symposium featuring a lawyer played by John Travolta in the movie "A Civil Action." New York lawyer Anita Jaskot's father is a doctor. She is also single and speaks Polish.

These are among the many personal morsels lawyers hope will help them win a lead spot in the litigation against Toyota Motor Corp., which has been consolidated in a Santa Ana, Calif., courtroom. ...

For the Japanese auto maker, which declined to comment for this story, billions of dollars in legal liability could be at stake as it fights suits tied to its recalls of vehicles because of sudden-acceleration issues. The lawyers' quest is a pot of as much as $500 million in fees. Only a few will share it.

For reference, here's David Becnel's, Richard Arsenault's, and Anita Jaskot's applications.

You can't blame them for pulling out all the stops. Judge James V. Selna specifically ordered:

[T]he Court presently intends to appoint plaintiffs’ lead counsel and liaison counsel. Applications for these positions must be filed with the clerk’s office on or before April 30, 2010. The Court will only consider attorneys who have filed an action in this litigation. The main criteria for these appointments are (1) knowledge and experience in prosecuting complex litigation, including class actions; (2) willingness and ability to commit to a time-consuming process; (3) ability to work cooperatively with others; and (4) access to sufficient resources to prosecute the litigation in a timely manner. Where appropriate, applications should also set forth attorney fee proposals, rates, and percentages that applicants expect to seek if the litigation succeeds in creating a common fund.

How intense and expensive can these cases get? 

Consider the class action filed back in 1996 on behalf of 300,000 Native Americans alleging the U.S. Department of the Interior mismanaged trust accounts and land under the Dawes Act of 1887. The suit tentatively settled for $3.4 billion a few months ago, but approval is being held up by the political process.

The case was driven by a team at Kilpatrick Stockton, which sunk more than $22 million in legal fees and expenses into the suit, through fourteen years of litigation, seven trials (totaling almost 28 weeks in trial), and 10 rounds of appeals against the most well-funded defendant in the world: the United States government.

But they weren't lead counsel.

That honor went to Dennis Gingold, a solo practitioner who used to represent big banks.

It wasn't easy:

Mr. GINGOLD: We gave [Blackfeet tribe leader and lead plaintiff Elouise Cobell] a commitment that no matter what it took, we would do what needs to be done to resolve this for the individual Indians, because it's the dark side of American history and we as lawyers have an obligation to correct it if we can.

SHAPIRO: How much of your time has this case taken up as a percentage of your total practice in the last 14 years?

Mr. GINGOLD: A hundred percent.

SHAPIRO: Really, this has been your sole case for the last 14 years?

Mr. GINGOLD: I haven't had a vacation since December of 1998. I've generally worked seven days a week on this case.

Twenty years ago Gingold organized the takeover of Baltimore Bancorp. That massive, hostile deal was like a vacation compared to the Indian Land Trust case, which swallowed up his whole professional and personal life for more than a dozen years.

But he did it, and did it well. You can't say he did the whole case by himself — Kilpatrick's $22 million contribution was essential — but you can say he managed the litigation by himself.

So what does it take to be lead counsel on a multidistrict class action? They need access to money, sure, but that can be effectively guaranteed by appointing multiple plaintiff's firms to the case.

What it really takes is dedication. As much as I'd like to see the Court adopt Philip Thomas' suggestion that the lawyers compete on an obstacle course — a process that would probably yield similar or better results to relying on the whimsical applications — my hope is that the most dedicated lawyer is chosen.

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Did Halliburton improperly cement the drill hole at Deepwater Horizon? Did Transocean fail to activate the blowout preventer — or were the shear rams too weak to crimp pipes designed for deepwater drilling? Why didn't BP have any contingency planning in place for a spill of this magnitude?

Whatever the cause, my hometown of Ocean Springs, Mississippi, already smells like crude oil, and the oil itself is on the way.

That wasn't supposed to happen, not in a supposedly high-tech, sophisticated, safety-conscious industry with redundant environmental protections in place.

So what next?

If you've been affected, you don't need a lawyer to pursue some of your claims. As the White House Blog posted yesterday:

BP is now accepting claims for the Gulf Coast oil spill. Please call BP’s helpline at 1-800-440-0858. A BP fact sheet with additional information is available here. For those who have already pursued the BP claims process and are not satisfied with BP’s resolution, can call the Coast Guard at 1-800-280-7118. More information about what types of damages are eligible for compensation under the Oil Pollution Act as well as guidance on procedures to seek that compensation can be found here. 

The Coast Guard website has a little bit more detail about the types of compensation available here. If you're on the Gulf Coast, you should start keeping a journal of any expenses / damages you have due to the oil spill that fit those criteria.

You don't need a lawyer, but you should have one, in my opinion. The Oil Pollution Act doesn't cover personal injury or non-economic damages. Moreover, BP has every incentive to low-ball their estimates of the claims. BP already has been running around trying to trick people — including people volunteering to help the cleanup effort — into signing away their rights for less than $5,000.

Though you can call the Coast Guard if you don't like BP's estimate, and though the Coast Guard wants to be fair to you, truth is, it's not their job to advocate for you.

That would be your lawyer's job. Your lawyer will raise questions like: how can BP claim they will fairly value your claim when most of the damage has yet to be done?

Which brings us to the lawsuits. Dozens of putative class actions have already been filed. Let's take a look at the claims being advanced.

Gulf Shores West Beach Investments et al. v. BP, Transocean, Halliburton, and Cameron International, in the Southern District of Alabama, alleges negligence, "wantonness," nuisance, and strict liability.

Carrone and Landry v. BP et al., in the Eastern District of Louisiana, alleges negligence and violation of the Oil Pollution Act. 

Parker et al. v. Transocean et al., in the Southern District of Mississippi, alleges "negligence, gross negligence, willfully, wanton and careless disregard for the plaintiffs" (as a single claim) and strict liability.

You might be wondering: why are all the claims different? Don't the lawyers know what they're doing?

In short: the lawyers don't care if they get the claims right at this point. They want to be appointed the lawyers for the whole class of plaintiffs, and to try to get that they're in the oft-derided "race to the courthouse." 

Alabama, Louisiana and Mississippi are all in the Fifth Circuit, where, as a general matter:

The first-to-file rule is based on "principles of comity and sound judicial administration." Save Power Ltd. v. Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997). It "requires federal district courts — courts of coordinate jurisdiction and equal rank — to exercise care to avoid interference with each other's affairs." West Gulf Maritime Ass'n v. ILA Deep Sea Local 24, 751 F.2d 721, 728 (5th Cir. 1985).

"Under the first-to-file rule, when related cases are pending before two federal courts, the court in which the case was last filed may refuse to hear it if the issues raised by the cases substantially overlap." Cadle Co. v. Whataburger of Alice, Inc., 174 F.3d 599, 603 (5th Cir. 1999) (citing Save Power, 121 F.3d at 950; West Gulf Maritime, 751 F.2d at 728). The rule vests in the court in which the first of the two related actions was filed the responsibility of "determin[ing] whether subsequently filed cases involving substantially similar issues should proceed." Sutter Corp. v. P & P Indus., Inc., 125 F.3d 914, 920 (5th Cir. 1997). Therefore, the second-filed court should usually stay, dismiss, or transfer the action over which it is presiding in deference to the first-filed court. See West Gulf Maritime, 751 F.2d at 729 & n.1, 730. This enables the court in which the first related action was filed to "decide whether the second suit filed must be dismissed, stayed or transferred and consolidated." Sutter Corp., 125 F.3d at 920.

Twin City Insurance Company v. Key Energy Services, C.A. H-09-0352 (United States District Court, S.D. Texas, Houston Division)(2009).

Some lawyers read language like the above and, as a matter of habit, throw together a slapdash complaint the moment they see bad news in the papers.

This strategy used to work, and there are indeed old cases in which the class counsel was chosen almost entirely on the basis of the first-to-file.

But those days are behind us, and the first-to-file rule has little influence in the selection of class counsel these days. As the Third Circuit's Task Force Report on the Selection of Class Counsel quoted from a Delaware securities fraud case,

Although it might be thought, based on myths, fables, or mere urban legends, that the first to file a lawsuit in this Court wins some advantage in the race to represent the shareholder class, that assumption, in my opinion, has neither empirical nor logical support.

Too often judges of this Court face complaints filed hastily, minutes or hours after a transaction is announced, based on snippets from the print or electronic media. Such pleadings are remarkable, but only because of the speed with which they are filed in reaction to an announced transaction. It is not the race to the courthouse door, however, that impresses the members of this Court when it comes to deciding who should control and coordinate litigation on behalf of the shareholder class.

Indeed, with the Class Action Fairness Act — which puts class actions worth more than $5 million (with a few additional requirements) in federal court — the governing rule for most major class actions these days is Federal Rule of Civil Procedure 23(g), which says:

(g) Class Counsel.

(1) Appointing Class Counsel.

Unless a statute provides otherwise, a court that certifies a class must appoint class counsel. In appointing class counsel, the court:

(A) must consider:

(i) the work counsel has done in identifying or investigating potential claims in the action;

(ii) counsel's experience in handling class actions, other complex litigation, and the types of claims asserted in the action;

(iii) counsel's knowledge of the applicable law; and

(iv) the resources that counsel will commit to representing the class;

(B) may consider any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class;

Nothing about first-to-file.

Considering that the courts are supposed to evaluate "counsel's knowledge of the applicable law," I have to wonder how lawyers think the courts in these oil pollution cases will react when they see lawyers file slapdash complaints that, like two examples of the above, don't even cite the Oil Pollution Act? (Mistakes abound on that Act, too, like among the lawyers quoted this Business Week article, who ignored the limitations of the Oil Pollution Act, such as the absence of personal injury damages and the caps on damages unless the plaintiffs prove misconduct.)

* * *

One of the best parts of being a plaintiff's lawyer is that you get to be selective with your cases. You can take cases that inspire you. We've been in touch with environmental lawyers down on the Gulf Coast about the prosecution of these cases — it takes a lot cooperation, resources and determination to take on companies with combined annual revenues around a quarter-trillion dollars — and are setting up triage for cases here.

If you're looking for a couple quick bucks out of BP, call 1-800-440-0858.

If you're looking to fight for full, adequate and just compensation, drop me a line.

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Marcia Lowry and Ira Lustbader are extraordinary lawyers. They are the public interest lawyers at Children's Rights who, with the assistance of Don Keenan (remember him?) and attorneys at Bondurant, Mixson & Elmore, sued the State of Georgia:

In June 2002, Children’s Rights filed a class action against state and county officials responsible for the foster care system in metropolitan Atlanta, on behalf of the approximately 3,000 children in foster care in Atlanta. The federal complaint cites numerous systemic problems with dangerous consequences for children, among them:

• Children languish for months in dangerous emergency shelters without necessary treatment and services, exposed to violence, sexual assault, and other illegal activity;
• Children in foster care experience high levels of abuse and neglect;
• Children are routinely shuffled from foster home to foster home, spending many years in state custody; and
• Children in foster care receive inadequate health care and educational services.
• Children in foster care are denied adequate legal representation in the Juvenile Courts due to high caseloads of attorneys assigned to represent children.

Case overview here. Complaint here.

Together, the attorneys and their staff put over 30,000 hours into the case, including reviewing a half-million documents and conducting 60 depositions. In addition to the time spent on the case, they incurred $1.65 million in out-of-pocket costs.

With that devotion and investment, they achieved an extraordinary result:

A settlement agreement was reached with Georgia officials in July 2005, requiring infrastructure changes, service guarantees, and improved oversight over child safety; and requiring the state to meet 31 specific benchmarks in reforming the child welfare system. The federal court approved the settlement in October 2005 and appointed two independent monitors to report on the state’s performance in implementing the required reforms.

Two additional settlements were subsequently reached with Fulton and DeKalb counties (metro Atlanta) which guarantee every child the right to effective legal representation throughout their involvement with the child welfare system. In May 2006, the federal court approved the right-to-counsel settlements and appointed two separate, independent monitors for Fulton and DeKalb counties, respectively. The reports issued by those independent monitors reflect how legal representation for children has improved as a result of the right-to-counsel settlements. In Fulton County, caseloads have been reduced and an independent Child Advocate Attorney’s Office has been created, but the County still has far to go to implement the required reforms. However, the legal representation of foster children in DeKalb County has improved so dramatically that in October 2008, the federal judge ended court oversight of the County’s compliance, following the monitor’s finding that DeKalb was meeting or exceeding all of the requirements of the settlement.

It's no stretch to say those lawyers single-handedly reformed the foster care system in metropolitan Atlanta.

And they did that by spending their own money and putting in their own time, with no guarantee they would recoup any of their out-of-pocket costs, much less get paid a fee for their services. Had they been paid by the hour as they went along, their services would have been worth more than $7 million.

But they weren't paid by the hour to pursue the case. They were paid nothing at all; instead, they paid money — $1.65 million — for the privilege of cleaning up abuse and neglect in the foster care system.

As Blawgletter explains, there's a big difference between getting paid to defend a case and paying to pursue one. The former is safe and simple and can be done in perpetuity. The latter is risky and complicated and can only be done for as long as funds are available. 

Class actions are, by their nature, extraordinary. Few firms pursue them; they're too expensive, too time-consuming, and too risky. Just ask Jan Schlichtmann. We do them and, like most plaintiffs' firms, are very selective about which ones we take.

The District Court that oversaw the litigation against the State of Georgia recognized that risk, recognized the protracted and contentious nature of the litigation, and recognized that the plaintiffs' attorneys had displayed "a higher degree of skill, commitment, dedication, and professionalism . . . than the Court has seen displayed by the attorneys in any other case during its 27 years on the bench." The District Court also recognized that, "[a]fter 58 years as a practicing attorney and federal judge, the Court is unaware of any other case in which a plaintiff class has achieved such a favorable result on such a comprehensive scale.”

Accordingly, the District Court, pursuant to 42 U.S.C. § 1988, awarded the plaintiffs' attorneys their costs, their $7 million or so in hourly fees, and then gave them an "enhancement" of $4.5 million.

Not so fast, the Supreme Court said yesterday in Perdue v. Kenny A.

Despite the risk and expense, the Court said, the plaintiffs' attorneys should only receive a fee "that roughly approximates the fee that the prevailing attorney would have received if he or she had been representing a paying client who was billed by the hour in a comparable case." Slip op., 7.

Such is commonly known as the "lodestar" analysis. The "lodestar" analysis instructs District Courts to ignore the fiscal reality of contingent fee litigation — like, as here, civil rights class actions — and pretend, after the fact, that the plaintiffs' lawyers had been paid the whole time, just like the defense lawyers, and that the plaintiffs' lawyers didn't advance a dime on the case.

It's a legal fiction, of course, adopted for a specific purpose: to penalize lawyers who pursue class action cases, despite Congress' laws and the discretion District Courts are afforded in determining fee awards.

Sure, the Supreme Court made a few remarks about how departures from the "lodestar" could be allowed in "extraordinary" situations, and it allowed the plaintiffs' lawyers to take another shot at "enhancement,"  but it also didn't provide much explanation for what would make a particular case "extraordinary," other than to say that it's "rare."

Which begs the question: if these lawyers aren't extraordinary, then who is?

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The newspapers Friday were filled with disturbing revelations:

The Lower Merion School District today acknowledged that investigators reviewing its controversial laptop tracking program have recovered "a substantial number of webcam photos" and that they expect to soon start notifying parents whose children were photographed.

Responding to a motion filed Thursday as part of a lawsuit brought by the family of a Harriton High School sophomore, School Board President David Ebby said the district's lawyers have proposed enlisting Chief U.S. Magistrate Judge Thomas Rueter to supervise a system by which parents are to be notified and allowed to view the photos.

"We hope to start that process shortly," Ebby said in a statement addressed to parents and guardians and posted on the district's website. "During that process the privacy of all students will be strongly protected."

(See the longer Inquirer story here.)

It's a cold comfort to hear that the institution which systematically took surreptitious pictures of children in their home will "strongly protect" the children's privacy the second time around. 

So where's this case going? As the Plaintiffs' motion for sanctions against Carol Cafiero, the technology coordinator at Lower Merion, pointed out, Cafiero asserted her Fifth Amendment right against self-incrimination in response to every single question asked at her April 9, 2010 deposition.

Smart move in the big picture, since she's also being investigated criminally. Criminal defendants do themselves no favors by doing all the talking upfront; best to wait to see what the prosecutors uncover before you start talking, if you talk at all.

For the civil suit, it's a disaster. She can't claim she was only doing her job in good faith when she's not claiming anything at all.

But there's a bigger problem lurking in the plaintiff's motion:

For instance, in one email, when one IT person commented οn how the νiewing of the webcam pictures and screen shots from a student's computer was like "a little LMSD soap opera", Cafiero responded "Ι know, Ι love it!"

Back when the lawsuit was first filed, some argued:

If Harriton High School actually gave its students laptop computers with webcams for the surreptitious purpose of spying on them, maybe they should be monetarily punished. If it was simply the action of an overzealous administrator of the program, then appropriate disciplinary action should be taken and procedures put in place to ensure it never happens again - and maybe leave it at that.

With the last revelation, we know it wasn't just "an overzealous administrator" — at the very least, the IT personnel, too, knew about and enabled the secret "soap opera" Cafiero was watching for her own amusement. I doubt that IT person was alone in knowing of the program. Cafiero certainly wasn't alone in watching the "soap opera;" the whole scheme was inadvertently brought down by an Assistant Principal.

Indeed, the most perplexing part of this story is how it came to light. As the complaint alleges, the school district unabashedly "informed minor Plaintiff that the School District was of the belief that minor Plaintiff was engaged in improper behavior in his home, and cited as evidence a photograph from the webcam embedded in minor Plaintiffs personal laptop issued by the School District."

They didn't even consider that, just maybe, the parents wouldn't be grateful to learn a school administrator was peeping on their child.

That's a problem for the school district. They didn't have an employee go rogue; they had multiple employees intentionally establish a hopelessly illegal policy of spying upon children — including taking photographs and monitoring communications — in their own homes.

The plaintiffs raised seven claims in their Complaint, seeking class action status:

1. Interception of electronic communications in violation of the Electronic Communications Privacy Act;
2. Theft of intellectual property in violation of the Computer Fraud and Abuse Act;
3. Unauthorized access of an electronic communications service in violation of the Stored Communications Act;
4. Deprivation of constitutional rights to privacy (under 42 U.S.C. 1983);
5. Invasion of privacy in violation of the Fourth Amendment;
6. Communication interception in violation of Pennsylvania's Wiretapping and Electronic Surveillance Act;
7. Invasion of Privacy (under the Pennsylvania common law).

I harbor doubts about the second, third and fourth claims (the fifth raises vicarious liability issues too complicated to go into here), but they've got winners in at least the first, sixth and seventh claims. If the Plaintiffs want to fight this case through litigation and trial up to a jury verdict, they've probably got the law and the facts to do it.

The latest Order of the Court, entered April 14 by agreement, indefinitely extends the time in which the Defendants have to answer the Complaint, based in part upon a prediction that the School District's investigation will be concluded by May 4, 2010. A week thereafter, the original Plaintiffs will have to respond to the motions other parents filed to intervene in the case. (That's not really a fight over which parents and children have viable claims or if one of their claims is worse than another's; it's a fight over whose lawyers will control the litigation.)

Based on that Order, I don't understand how the School District came up with this press release:

On April 14, 2010 -- two days ago -- the Court issued an Order mapping out the events that we hope will lead to a resolution of the litigation. All parties agreed to the framework set forth in the Court's Order. Indeed, a meeting among the Robbins' counsel, the proposed interveners' counsel and our counsel is scheduled for this afternoon.

The Court issued nothing of the sort; it issued an Order ensuring the photographs were kept as private as they can be at this point, and granting everyone a little bit more time before they have to start filing briefs against one another. There's nothing at all about "a resolution of the litigation."

Similarly:

We do not feel it is appropriate for anyone other than the investigators to dictate the timing of the investigation and the release of complete findings. As we have made clear since day one, we are committed to providing all of the facts -- good and bad -- at the conclusion of the investigation.

The School District gave up the right to complain about premature forensic examinations when it spied on the students in the first place. The parents and children understandably need to know if they, too, were involved, and understandably don't trust the School District to investigate the matter itself. Correspondingly, the Court already allowed the Plaintiffs' discovery to begin, hence the Cafiero deposition, three other depositions, and "tens of thousands of pages of documents and e-mails."

So what's next? It depends on the investigation. If the School District comes clean, then a permanent order can be entered against them prohibiting them from using the software, and the students actually spied upon — hopefully not many — can press forward on their claims for compensation, if they want. Some probably won't; litigation takes a toll on everyone, particularly people trying to move on with their lives, like teenagers going off to college.

The signs aren't looking good at this point, though. As the press release continues:

[T]he plaintiffs' Motion suggests that the LANrev tracking feature may have been used for the purposes of "spying" on students. While we deeply regret the mistakes and misguided actions that have led us to this situation, at this late stage of the investigation we are not aware of any evidence that District employees used any LANrev webcam photographs or screenshots for such inappropriate purposes.

They just don't get it. Watching someone at home, without their knowledge, for your private "soap opera" is the essence of "spying." Hearing that the spying was "loved" by the technology coordinator, enabled by another IT staff member, and revealed by (and thus known about) by an administrator implies that many more knew about and condoned the spying. Trouble loves company.

Until the School District accepts and confronts that, a "resolution of the litigation" will be out of sight for years to come as the Plaintiffs and other parents conduct their own investigations through the civil justice system.

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The New Colossus:

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
"Keep, ancient lands, your storied pomp!" cries she
With silent lips. "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!"

But what of the tired and poor of our own shores?

WASHINGTON — With a client list that reads like a roster of Fortune 500 firms, a little-known company with an odd name, the Talx Corporation, has come to dominate a thriving industry: helping employers process — and fight — unemployment claims.

Talx, which emerged from obscurity over the last eight years, says it handles more than 30 percent of the nation’s requests for jobless benefits. Pledging to save employers money in part by contesting claims, Talx helps them decide which applications to resist and how to mount effective appeals.

The work has made Talx a boom business in a bust economy, but critics say the company has undermined a crucial safety net. Officials in a number of states have called Talx a chronic source of error and delay. Advocates for the unemployed say the company seeks to keep jobless workers from collecting benefits.

“Talx often files appeals regardless of merits,” said Jonathan P. Baird, a lawyer at New Hampshire Legal Assistance. “It’s sort of a war of attrition. If you appeal a certain percentage of cases, there are going to be those workers who give up.”

Like Gerald Grenier:

Advocates for the unemployed cite cases like that of Gerald Grenier, 47, who spent four years as a night janitor at a New Hampshire Wal-Mart and was fired for pocketing several dollars in coins from a vending machine. Mr. Grenier, who is mentally disabled, told Wal-Mart he forgot to turn in the change. Talx, representing Wal-Mart, accused him of misconduct and fought his unemployment claim.

After Mr. Grenier waited three months for a hearing, Wal-Mart did not appear. A Talx agent joined by phone, then seemingly hung up as Mr. Grenier testified. The hearing officer redialed and left an unanswered message on the agent’s voice mail. The officer called Mr. Grenier “completely credible” and granted him benefits.

Talx appealed, claiming that the officer had denied the agent’s request to let Wal-Mart testify by phone. (A recording of the hearing contains no such request.) Mr. Grenier won the appeal, but by then he had lost his apartment and moved in with his sister.

Mentally-disabled, but still working the night shift to pay his way, just so some morally-disabled companies can fire him and deny him his due.

I can't take these cases. No private lawyer can. The potential client has no way to even pay the costs, much less an attorney's fee.

In a perfect world, the government would intervene to stop major corporations from trampling on the rights of the powerless. 

Sometimes they do, but it depends on the people who represent the government:

[Ohio Attorney General Richard] Cordray is instead focused on using his authority to protect consumers from predatory lending and fraud. He has organized numerous legal challenges of banks and lenders, recently held a summit dedicated to combating consumer fraud that included 300 Ohio consumer advocates, and has been working with other state AGs and the Obama administration to "report trends in fraud and illegal conduct to Treasury to help develop a coordinated and effective national response" and argue in favor of effective financial reform.

A dozen other state AGs are too busy filing lawsuits against health care reform — suits that virtually no one believes will succeed — to care about a couple hundred thousand unemployed citizens being held down in poverty by a former employer too cheap to pay its dues and a frivolous-objection-filing machine.

Even AGs who do care don't have the resources to prosecute every company that systematically cheats its employees, former employees, and consumers. There's simply too much cheating out there.

Same goes for public interest / legal aid firms. They do great work, but even the ones in major cities labor under "shoestring budgets" and the beneficence of big firms with whom they partner, big firms which represent those same companies. 

Who, then, could take up the banner?

Not law school clinics, not anymore:

ANNAPOLIS, Md. — Law school students nationwide are facing growing attacks in the courts and legislatures as legal clinics at the schools increasingly take on powerful interests that few other nonprofit groups have the resources to challenge.

[...]

Law clinics at other universities — from New Jersey to Michigan to Louisiana — are facing similar challenges. And legal experts say the attacks jeopardize the work of the clinics, which not only train students with hands-on courtroom experience at more than 200 law schools but also have taken on more cases against companies and government agencies in recent years.

“We’re seeing a very strong pushback from deep-pocket interests, and that pushback is creating a chilling effect on many clinics,” said Robert R. Kuehn, a law professor at Washington University in St. Louis, citing a recent survey he conducted that found that more than a third of faculty members at legal clinics expressed fears about university or state reaction to their casework and that a sixth said they had turned down unpopular clients because of these concerns.

A bill is pending in Louisiana that would "forbid law students at clinics that receive any public money from suing government agencies, companies or individuals for damages unless exempted by the Legislature." The bill is "a response to a suit brought by the Tulane Law School clinic on behalf of an environmental group against federal and state environmental regulators, seeking greater enforcement of air quality standards in the Baton Rouge area."

That's right: we passed these laws, but we don't want anyone out there actually enforcing them.

Just like the unemployment compensation: it's on the books, but heaven forbid you get any of it.

The government can fix these problems in a blink. Leave the clinics alone. Provide more funding to public interest law firms. Make unemployment compensation objections subject to qui tam laws with treble damages for violations, a per-violation fine, and an award of attorney's fees.

If we're not going to have enough attorneys general to enforce the laws on the books, then we need to make a market for private ones.

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Yesterday, the Supreme Court released its opinion in Shady Grove v. Allstate.

On the whole, the issue was quite simple:

New York law prohibits class actions in suits seeking penalties or statutory minimum damages. We consider whether this precludes a federal district court sitting in diversity from entertaining a class action under Federal Rule of Civil Procedure 23.

The answer was no: 

The question in dispute is whether Shady Grove’s suit may proceed as a class action. Rule 23 provides an answer. It states that “[a] class action may be maintained” if two conditions are met: The suit must satisfy the criteria set forth in subdivision (a) (i.e., numerosity, commonality, typicality, and adequacy of representation), and it alsomust fit into one of the three categories described in subdivision (b). Fed. Rule Civ. Proc. 23(b). By its terms this creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action. (The Federal Rules regularly use “may” to confer categorical permission, see, e.g., Fed. Rules Civ. Proc. 8(d)(2)–(3), 14(a)(1), 18(a)–(b), 20(a)(1)–(2), 27(a)(1),30(a)(1), as do federal statutes that establish procedural entitlements, see, e.g., 29 U. S. C. §626(c)(1); 42 U. S. C. §2000e–5(f)(1).) Thus, Rule 23 provides a one-size-fits-all formula for deciding the class-action question. Because §901(b) attempts to answer the same question—i.e., it states that Shady Grove’s suit “may not be maintained as a class action” (emphasis added) because of the relief it seeks—it cannot apply in diversity suits [...] .

In short, States cannot preclude state-law class actions from being filed in federal court because the federal rules specifically permit class actions.

The way in which the Supreme Court got there, however, was anything but simple:

SCALIA, J., announced the judgment of the Court and delivered the opinion of the Court with respect to Parts I and II–A, in which ROBERTS, C. J., and STEVENS, THOMAS, and SOTOMAYOR, JJ., joined, an opinion with respect to Parts II–B and II–D, in which ROBERTS, C. J., and THOMAS, and SOTOMAYOR, JJ., joined, and an opinion with respect to Part II–C, in which ROBERTS, C. J., and, THOMAS, J., joined. STEVENS, J., filed an opinion concurring in part and concurring in the judgment. GINSBURG, J., filed a dissenting opinion, in which KENNEDY, BREYER, and ALITO, JJ., joined.

Yikes.

Let's break that down.

Scalia wrote an opinion that was broken up into Parts I, II-A, II-B, II-C, and II-D.

Five justices agreed with Parts I and II-A: Scalia, Roberts, Stevens, Thomas and Sotomayor. Those two parts are thus the law of the land.

Four justices agreed with Parts II-B and II-D: Scalia, Roberts, Thomas and Sotomayor.

Three justices agreed with Part II-C: Scalia, Roberts and Thomas.

Stevens, in addition to joining Parts I and II-A, wrote a separate concurrence.

Ginsburg disagreed with all of it, so wrote a dissent, with which Kennedy, Breyer and Alito agreed.

Here's the interesting part. Stevens agreed with the result and with Parts I and II-A of Scalia's opinion, but didn't agree with the rest, so he wrote a concurrence explaining why he didn't also join Parts II-B, II-C, and II-D.

Sotomayor, in contrast, agreed with Parts I, II-A, II-B, and II-D, but not with II-C. Let's take a look at the beginning of Part II-C to figure out why not:

A few words in response to the concurrence. We understand it to accept the framework we apply—which requires first, determining whether the federal and state rules can be reconciled (because they answer different questions), and second, if they cannot, determining whether the Federal Rule runs afoul of §2072(b). Post, at 5–7 (STEVENS, J., concurring in part and concurring in judgment). The concurrence agrees with us that Rule 23and §901(b) conflict, post, at 15–16, and departs from usonly with respect to the second part of the test, i.e., whether application of the Federal Rule violates §2072(b), post, at 7–13. Like us, it answers no, but for a reason different from ours. Post, at 17–22.

The concurrence would decide this case on the basis, not that Rule 23 is procedural, but that the state law it displaces is procedural, in the sense that it does not “function as a part of the State’s definition of substantive rights and remedies.” Post, at 1. A state procedural rule is not preempted, according to the concurrence, so long as it is “so bound up with,” or “sufficiently intertwined with,” a substantive state-law right or remedy “that it defines the scope of that substantive right or remedy,” post, at 4, 13.

This analysis squarely conflicts with Sibbach, which established the rule we apply. [...]

Presumably, since Sotomayor did not join Part II-C, she disagreed with its criticisms of Stevens' concurrence.

Yet, she also didn't join Stevens' concurrence. She didn't give any indication as to what she thought about the debate between Part II-C (i.e., Scalia, Roberts and Thomas) and Stevens' concurrence.

Why not? We may never know.

You, however, are reading a blog, so let's speculate.

As I wrote before about Sotomayor's first opinion, in Mohawk Industries v. Carpenter, "As hoped, Justice Sotomayor has brought her trial experience to bear, and has contributed a practical understanding of how the law works at the trial level previously unseen in Supreme Court opinions."

My speculation is: Sotomayor understood that the debate between Scalia, Roberts, Thomas and Stevens was irrelevant to deciding the case at hand. The debate was, in legal terms, little more than dictum proprium that would serve only to confuse lower courts.

Every time a Supreme Court nomination comes up, politicians throw around the terms "judicial temperament" and "judicial restraint."

If you want to know what these terms mean, look no further than Justice Sotomayor.

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Kevin LaCroix at The D&O Diary reports,

On March 24, 2010, Cornerstone Research released its annual study of securities class action lawsuit settlements. The most recent study, which is entitled "Securities Class Action Settlements: 2009 Review and Analysis" and is written by Ellen M. Ryan and Laura E. Simmons, can be found here. Cornerstone’s March 24, 2010 press release concerning the study can be found here.

The study reflects a number of interesting observations about median and average securities class action lawsuit settlements that were approved during 2009. The study also includes a useful analysis of the factors that affect settlement size, and concludes with some commentary about likely future settlement trends.

The WSJ Law Blog has more links here.

Though the overall settlement numbers get the headlines — Bloomberg titles their report, "Securities Class-Action Settlements Rose 39% to $3.8 Billion" — those numbers are always skewed by the two or three biggest cases of the year, which generally comprise one-third to one-half of the total, and so don't tell us much about the industry as a whole.

More interesting to me are the factors correlated with a successful settlement, including:

Institutional Investors Plaintiffs: Cases involving institutional investors as lead plaintiffs are associated with significantly higher settlements. The higher settlements are associated with cases involving public pension plans as lead plaintiffs as opposed to union funds or other institutional investors. These larger settlements may be due to the fact that the sophisticated investors get involved in the stronger cases and the larger cases. However, even when controlling for case size and other factors the presence of a public pension plan as lead plaintiff is still associated with a statistically significant increase in settlement size.

That's important, given the never-ending chorus complaining that "pay-for-play" drives public pension plan securities fraud class actions. The Cornerstone Research study confirms that public pension plans don't file frivolous lawsuits because some trial lawyer contributed to a politician's campaign; the public pension plans file and join the strongest cases. 

Coincidentally, a recent analysis of public pension plans' securities litigation from 2003 through 2006 — when most of the suits settled in 2009 were originally filed — concluded:

“[P]ay-to-play” is, at most, a marginal factor in the funds’ participation in securities class actions.

[...]

(1) politicians and political control of pension fund boards negatively correlate with lead plaintiff appointments;

(2) beneficiary board members—and outright beneficiary control of the board—positively correlate with such appointments; and

(3) the degree of a pension fund’s underfunding positively correlates with lead plaintiff appointments, particularly when the fund is controlled by beneficiaries.

This evidence suggests that beneficiary board members, not politicians, drive these cases for reasons having to do with the financial soundness of the fund.

Fact is, it doesn't matter how much "pay-for-play" is going on among the public pension plans: to get a securities fraud settlement out of a major corporation, you still need a viable lawsuit. No amount of campaign contributions or fancy dinners can buy a trial lawyer that.

The Cornerstone Research study confirms, once again, that the primary drivers of securities fraud class actions are the merits of the cases, which is why SEC Enforcement — as good a proxy as any for the merit of the case — was also positively correlated with higher settlements.

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Last week, Prof. Edward A. Hartnett (of Seton Hall University School of Law) posted Responding to Twombly and Iqbal: Where Do We Go from Here?

Hartnett's idea was eminently reasonable:

I also offer my own proposal, which focuses on the core issue at stake in debates about Twombly and Iqbal: should a plaintiff be able to obtain discovery in an effort to uncover evidence without which he or she cannot prevail?

Hartnett proposes amending Rule 12 of the Federal Rules of Civil Procedure to include:

Rule 12(j): Allegations Likely To Have Evidentiary Support After a Reasonable Opportunity for Discovery

If, on a motion under Rule 12(b)(6) or 12(c) that has not been deferred until trial, the claim sought to be dismissed includes an allegation specifically identified as provided in Rule 11(b)(3) as likely to have evidentiary support after a reasonable opportunity for discovery, the court must either (1) assume the truth of the allegation, or (2) decide whether the allegation is likely to have evidentiary support after a reasonable opportunity for discovery. In deciding whether an allegation is likely to have evidentiary support after a reasonable opportunity for discovery, the court must consider the parties‘ access to evidence in the absence of discovery and state on the record the reason for its decision.

If the court decides that the allegation is likely to have evidentiary support after a reasonable opportunity for discovery, it must allow for that discovery, under the standards of Rule 26, and deny the motion to dismiss. If the court decides that the allegation is not likely to have evidentiary support after a reasonable opportunity for discovery, the court must treat the motion as one for summary judgment under Rule 56, and provide all parties a reasonable opportunity to present all the material that is pertinent to the motion.

Again, eminently reasonable. Such an addition would immediately focus litigation on the real issues, thereby (1) enabling plaintiffs to conduct discovery into the most important areas while also (2) empowering defendants to have cases dismissed—prior to full discovery—if the plaintiff won't be able to prove an essential element of their case.

How could anyone think that was unfair?

The defense bar champions at Drug and Device Law tried to manufacturer an objection, but the argument degenerated into blather and insults. They barely even mention the details of Hartnett's proposal. Instead, they summarily dismissed him with:

Most of these proposals (except Professor Burbank's) actually go far beyond Twombly/Iqbal and would overrule all or most of the prior precedent we cited above. That strikes us as facially overkill and indicative of unexpressed (and in some cases, ulterior) motives at work.

...

We understand that a lot of academics feel that they have to help their students get jobs, or else eventually they won’t have jobs either.  Thus, they tend to support anything and everything that results in more, rather than less, litigation.

Oh, snap.

Then again, an accusation of "ulterior motives" probably would have meant more if it didn't come from someone paid by the hour to ensure corporations pay as little as possible to the people and families they hurt.

Frankly, reading through the post, I can't help but wonder if Beck et al. indeed have some "ulterior motive" in misrepresenting how defense lawyers use Ashcroft v. Iqbal in their practice:

So when we get a complaint, we look to see whether, there’s at least one actual fact pleaded that supports each essential element of a cause of action.  A plaintiff can plead more if s/he so pleases, but there has to be at least one – otherwise we’ll probably file a Twombly/Iqbal motion.

The implied concession there—that they won't file a motion to dismiss if "there's at least one actual fact pleaded that supports each essential element of a cause of action"—is rubbish. They don't run a charity over there at Dechert: if you file a case against one of their clients, they will come up with any argument they can to get it dismissed.

And that's where the problem with Twombly / Iqbal—really, just Iqbal—comes in. Every time a case is filed today, the defendant inevitably files a motion to dismiss claiming that the "actual facts" plead aren't "facts" at all, they're "conclusions," and so are not, under Iqbal, entitled to an assumption of truth.

What's the difference between a "fact" and a "conclusion?" Merriam-Webster says:

fact: an actual occurrence

conclusion: a reasoned judgment

Let me ask you, Dear Reader: who really won more votes in Florida in 2000, Bush or Gore?

Is your answer a "fact" or a "conclusion?" Do you know it as an actual occurrence, or did you make a reasoned judgment?

The problem with Iqbal is that it instructs courts—at the very beginning of the lawsuit, when they have nothing in front of them but a "short and plain" complaint—to perform a wildly subjective analysis about which allegations are merely "conclusions" and which of the non-conclusory allegations are "plausible." 

There's nothing new about that problem. It's the same problem that prompted Rule 8—the Rule supposedly interpreted by Iqbal—to be enacted in the first place:

You used to have the requirement that a complaint must allege the “facts” constituting the “cause of action.” I can show you thousands of cases that have gone wrong on dialectical, psychological, and technical argument as to whether a pleading contained a “cause of action”; and of whether certain allegations were allegations of “fact” or were “conclusions of law” or were merely “evidentiary” as distinguished from “ultimate” facts. In these rules there is no requirement that the pleader must plead a technically perfect “cause of action” or that he must allege “facts” or “ultimate facts.”

Rules of Civil Procedure for the District Courts of the United States: Hearings Before the H. Comm. on the Judiciary, 75th Cong. 94 (1938) (statement of Edgar B. Tolman, Secretary of the Advisory Committee on Rules for Civil Procedure Appointed by the Supreme Court); quoted by p.4 of Professor Stephen Burbank's testimony before the Senate.

The whole point of Rule 8 was to ensure that the right to civil justice didn't turn on metaphysical word games.

And yet we're supposed to come full circle because, as Beck et al. continue,

Twombly/Iqbal are about reining in the cost of litigation; we might feel differently about Professor Hartnett's proposal if it required payment of all a defendant’s costs of “appropriate” (the Article's term) discovery – should designated allegations nonetheless turn out to be unfounded.  But under the proposal as offered, there’s no penalty for over-designation.  If it’s one thing that the fifty-year life span of Conley established, it’s that unrestrained pleading imposes huge discovery costs on defendants.  Even Professor Burbank (who really tried hard) was reduced to relying upon a single study of tiny cases in which even then 25% of the parties believed the process was too expensive.  The excessive cost of modern discovery is simply not a issue capable of dispute any longer.

At least Burbank actually cited something. Defense lawyers think they're entitled to assert the cost of discovery—a cost due primarily to their own practice of relentlessly frustrating discovery at every turn—is "excessive" through sheer ipse dixit.

Sounds like a "conclusion" to me, not an "actual fact."

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As always when a major corporation is caught killing, maiming or poisoning innocent people, the apologists have come out in full force in defense of Toyota. This time, they're blaming senior citizens.

You see, old people become confused. They don't realize when they're accelerating and when they're braking. At least that's what I've been told by the usual suspects.

Don't buy it:

In the 50-second tape, crash victim Chris Lastrella begins by telling the dispatcher: “We're in a Lexus ... we're going north (state Route) 125 and our accelerator is stuck.”

The dispatcher asks where they are passing, and Lastrella is heard asking someone in the car where they are. He exclaims: “We're going 120 (mph)! Mission Gorge! We're in trouble – we can't – there's no brakes, Mission Gorge ... end freeway half mile.”

The dispatcher asks if they can turn the car off.

Lastrella doesn't answer and says repeatedly: “We are now approaching the intersection, we're approaching the intersection, we're approaching the intersection.”

The last sounds heard on the tape are someone saying “hold on” and “pray.” Lastrella says: “Oh shoot ... oh ... oh” Then a woman screams.

Killed in the crash were CHP officer Mark Saylor and his wife Cleofe who were both 45, their 13-year-old daughter Mahala, and Lastrella, 38, who was Cleofe Saylor's brother. All four lived in Chula Vista.

So much for blaming the victims for being too old to understand how to drive a car. A California Highway Patrol officer in his prime couldn't stop one of those death traps, so he, his wife, his daughter, and his brother-in-law paid with their lives because, at Toyota, Safety Is Job #2.

That case conveniently didn't make it into any of the articles blaming elderly drivers for the crashes.

Here's something else the corporate apologists won't tell you: lawsuits are the primary reason that cars are safer today than they were in the past.

In the 1970s and '80s, litigation was watched keenly by manufacturers and regulators as a kind of early warning system on safety defects, said Kelley, now semi-retired and consulting on auto product hazards from his home in Pebble Beach, Calif.

Steered by lawsuits and safety standards set by the National Highway Traffic Safety Administration after its creation in the late 1960s, automakers corrected design defects that had exposed drivers to impalement on gearshifts and lacerations from shattered auto glass.

Also in the 1960s, seat belts became widely adopted by automakers and crash tests were refined into a serious science.

The 1970s provided automakers with a wake-up call in the Grimshaw vs. Ford Motor Co. case, in which a California appeals court ordered the carmaker to pay $125 million in punitive damages to the victims of one of the Ford Pinto's fiery explosions. The huge punitive damages award followed evidence showing that Ford knew of the defect but failed to recall the vehicles for what was estimated to be an $11 repair. The award was reduced to $3.5 million in a post-verdict negotiation but nevertheless was one that signaled to the auto industry that it would be harshly sanctioned for ignoring known defects.

Improved seat belts and seat backs emerged in the 1980s, spurred by lawsuits brought on behalf of accident victims. Before three-point restraints were made mandatory a decade ago, back-seat occupants were prone to paralyzing injury when frontal crashes caused their upper bodies to fly toward the impact, smashing into seats, doors or other passengers.

Fact is: money talks. If it costs Toyota less to shuttle a few families to an untimely demise than to fix the problem, Toyota won't do it. 

Every time a car company today evaluates the safety of the car's gas tank and fuel system, an engineer, manager or lawyer at the company inevitably says,

Remember the Ford Pinto cases.

Then they check the gas tank and fuel system again. And again.

Next time a car company investigates reports of sudden acceleration, which would you prefer that engineer, manager or lawyer says,

Remember the Toyota cases.

or

Is it really worth issuing a recall?

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Last week, the Supreme Court agreed to hear Bruesewitz v. Wyeth. The case will decide:

Whether Section 22(b)(1) of the National Childhood Vaccine Injury Act of 1986 — which expressly preempts certain design defect claims against vaccine manufacturers “if the injury or death resulted from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper directions and warning” — preempts all vaccine design defect claims, regardless whether the vaccine’s side effects were unavoidable.

The relevant briefs and opinions are available at SCOTUSBlog.

There's an old saying that lawyers and judges bat around, "reasonable minds can disagree." (Of course, few people really believe that, but we all say we do.)

On the above question — in essence, whether Congress intended to wash away (i.e., "preempt") whole swaths of state-law product liability claims against vaccine manufacturers or if Congress merely intended to set up streamlined compensation for a certain class of rare but unavoidable vaccine-related injuries — the Georgia Supreme Court and the United States Court of Appeals for the Third Circuit reached expressly opposite answers less than one year apart from one another. The Georgia Supreme Court answered "no," while the Third Circuit answered "yes." 

The Supreme Court will tell us which Court was right.

I'll leave the merits of the arguments to others. Obviously, if a state Supreme Court and a federal Court of Appeals reached opposite conclusions, then "reasonable minds can disagree." The Third Circuit's opinion is here. The Georgia Supreme Court's opinion is here. Judge for yourself.

What caught my eye was this portion of Wyeth's brief to the Supreme Court, part of their argument for why the Supreme Court should hear the case:

Today, a new litigation threat to the nation’s vaccine supply exists. Approximately 5,000 petitions are currently pending in the "Omnibus Autism Proceeding" in Vaccine Court. HRSA, National Vaccine Injury Compensation Program Statistics Report (Sep. 14, 2009, http://www.hrsa.gov/vaccinecompensation/statistics_report.htm. While the omnibus proceeding will decide for all of the pending cases whether there is a causal link between childhood vaccines and autism, that ruling will have no preclusive effect outside of Vaccine Court. 42 U.S.C. § 300aa-23(e). Each claimant may elect to file a civil action after proceeding through Vaccine Court. Over 350 civil actions have been filed against vaccine manufacturers in various courts with allegations that childhood vaccines caused the recipient to develop autism.

The potential deluge of post-Vaccine Court litigation could lead to the same dangerous situation that existed in the mid-1980s. The number of childhood vaccine manufacturers has not increased since the enactment of the Vaccine Act. In the United States market today, as in 1986, there is still just one manufacturer for the polio vaccine, one for MMR, and two for the DTP vaccine. Compare 1986 U.S.C.C.A.N. at 6348, with FDA/CBER, Thimerosal in Vaccines, http://www.fda.gov/CBER/vaccine/thimerosal.htm (last updated Aug. 31, 2009). Thus, what Congress said in 1986 is true today: "The loss of any of the existing manufacturers of childhood vaccines at this time could create a genuine public health hazard." 1986 U.S.C.C.A.N. at 6348.

Wyeth Brief, pp. 17-18.

At first blush, Wyeth's reasoning seems sound. The question presented by Bruesewitz v. Wyeth could determine the fate of more than 5,000 pending cases. That makes Bruesewitz v. Wyeth worthy of attention.

But that doesn't make the case necessarily worthy of the Supreme Court's attention. Outside of constitutional rulings, the Supreme Court's primary job is to interpret the laws passed by Congress, not to enact new laws or to fret over the consequences of old laws. To the extent upcoming autism litigation is a problem, that's an issue for Congress — not the Court — to address.

If, indeed, "the loss of any of the existing manufacturers of childhood vaccines at this time could create a genuine public health hazard," then Congress could step in and immediately terminate all of the pending cases by amending the National Childhood Vaccine Injury Act of 1986. Congress could, for example, amend to law to clearly preempt all civil suits brought for injuries arising from polio, MMR, or DTP vaccines. 

Moreover, though 5,000 cases sure sounds like a lot, it's not really that much in the big picture. The Vioxx settlement involves ten times that many. And do you know how many cases it really turned into?

One.

Thanks to the Judicial Panel on Multidistrict Litigation, once litigation over a particular issue becomes too big, it can be consolidated into a single proceeding before a single judge. That's what happened to Vioxx, it's what's happening to Toyota, and it's what will happen to the Autism/Vaccine litigation. At this very moment, approximately 92,000 separate lawsuits arising from a wide variety of situations (ranging from asbestos poisoning to securities fraud) have been consolidated into a mere 310 MDL actions.

A "deluge" of one, I suppose.

And what will likely happen in that single case?

Probably the same thing that happened before the Special Masters and before the Court of Federal Claims: the plaintiffs will lose. Odds are good that the plaintiffs won't even get to a jury; all it takes is for the MDL court to find that plaintiffs' experts' theories do not satisfy Daubert and — poof — the cases are all over before a single witness testifies.

Consider this passage from the Cedillo opinion:

[...] Petitioners’ sequence of cause and effect depends upon a presence of persistent measles virus infection in Michelle’s body. However, the Special Master concluded that “the petitioners offered virtually no evidence concerning this necessary element in their proposed chain of proof– i.e., their claim that the measles virus, which they claim to persist in [autistic] children, is vaccine-strain measles virus.” Id. at *52. The Special Master also saw no logical sequence of cause and effect between the MMR vaccine and Michelle’s development of inflammatory bowel disease. Specifically, the Special Master found Dr. Krigsman’s theory that Michelle suffered from an MMR-induced inflammatory bowel disease to be factually incorrect because Michelle did not suffer from gastrointestinal inflammation, and Dr. Krigsman “gravely misunderstood the temporal history of Michelle’s gastrointestinal problems.” Id. at *114-15. The Special Master’s conclusion that Petitioners failed to demonstrate any relationship between the MMR vaccine and Michelle’s autism is eminently reasonable. He determined that they offered “virtually no evidence” to support their claim. See id. at *52.

That's a big problem. Given the amount of effort put into the case, it's hard to see the plaintiffs curing this problem down the road. Similarly, the primary study demonstrating a connection between the MMR vaccine and autism was officially retracted last month.

But we're getting ahead of ourselves with these details. The point is: if the Supreme Court agrees with the Georgia Supreme Court and finds that only claims arising from unavoidable vaccine injuries are preempted, the sky will not fall. Not even if the autism litigation goes forward.

Most likely, the sky won't even move at all.

And if it moves too much, then Congress can put it back, just like they did in 1986.

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One of the true gems of the Internet is TED (Technology, Entertainment, Design), a nonprofit that invites luminaries from a wide variety of fields to give brief presentations about their signature ideas. A quick googling of "Best TED Talks" is well worth the hours of education and inspiration that will ensue.

I was thus disappointed to see that TED invited Philip K. Howard to talk about "Four ways to fix a broken legal system."

I have debunked Mr. Howard's work before (see my thoughts on his "Life Without Lawyers," his "health courts," and his claims about public support for tort reform). The bulk of his talk presents more of the same argument-by-anecdotes and generalized assertions that don't withstand a moment's scrutiny. Despite his claim around the 14:00 mark, I can safely assure my readers that we, as a society, do in fact still have seesaws, swingsets, and jungle gyms. Moreover, his overall argument that these problems are so insidious that you don't even notice them is, to me, unpersuasive.

About halfway through, Mr. Howard moves onto his four propositions, which are:

1. Judge law mainly by its effect on society, not individual situations
2. Trust in law is an essential condition of freedom. Distrust skews behavior towards failure
3. Law must set boundaries protecting an open field of freedom, not intercede in all disputes
4. To rebuild boundaries of freedom, two changes are essential: simplify the law and restore authority to judges and officials to apply law.

To call these propositions "vague" is an understatement.

That said, I generally agree with the first three. Indeed, it seems the irony of Mr. Howard's first proposition was lost on him; although his talk only mentions the former, for each funny story of a fishing lure with a warning label, there's a car manufacturer that bragged about avoiding a recall and ended up needlessly and carelessly endangering millions of people.

The fourth proposition, however, is where Mr. Howard and I diverge. It's not that I believe the law shouldn't be simple or that judges shouldn't apply the law; of course I do. I just don't believe it how he means it, which is to deny individuals the right to a jury trial.

But there's a bigger problem with his talk: the "authority to judges and officials to apply law" he claims should be "restored" never existed, and for good reason.

As part of his simplification argument, Mr. Howard gives, as an example, the United States Constitution. It's "only 16 pages" yet "worked well for over 200 years." Let's take a look at the Seventh Amendment thereto:

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

(See the link for primary sources on the Amendment.)

I don't know what Mr. Howard thinks the words "common law" and "rules of the common law" mean there, but to the Framers of the Constitution, "common law" referred to hundreds of years of confusing — and sometimes contradictory — English court opinions.

So much for simplification.

But simplification isn't really what Mr. Howard wants; he wants to get rid of "the right of trial by jury."

That's not "rebuilding" freedom, nor is it "restoring" the way the Founders intended the civil justice system to work. It is a rescission of the freedoms guaranteed by the Seventh Amendment, which expressly preserved the same right to jury trial that was embodied in the Magna Carta and was recognized long before.

Indeed, the English "common law" of which the Framers were so enamored did not give judges any "authority" to usurp the fact-finding role of the jury. Mr. Howard claims that he wants to give judges the power "to apply law," but they have always had that power -- what Mr. Howard really wants is to give judges the power to determine facts, a power that the Framers of the Constitution expressly denied them.

Mr. Howard doesn't want to fix the legal system, he wants to break it.

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It's no secret: plaintiffs like state court and defendants like federal court.

The reasons include: 

• federal juries, by virtue of their larger geographic range, include fewer urban jurors and more rural jurors, and thus (according to lawyers' lore) will award lower verdicts;
• the Federal Rules of Civil Procedure place express limits on the amount of discovery available;
• federal courts are (and were even before Ashcroft v. Iqbal) more prone to grant motions to dismiss (and motions for summary judgment) than state courts.

Even if a plaintiff files their lawsuit in state court, the defendant can "remove" the case to federal court if the case could have been filed in federal court.

There are two ways a case 'could have been filed in federal court': first, if the claim arises under federal law; second, if all plaintiffs and all defendants are citizens of different states. The latter is called "diversity" jurisdiction, and it has a long history of being "disfavored" by federal courts. As I wrote before, in discussing one of the games defendants play to remove cases, "much like how we prefer federal courts preside over cases bringing federal claims, we prefer state courts preside over cases bringing state claims."

So how do we determine of which States a corporation is a "citizen?" 28 U.S.C. § 1332(c)(1) says, "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business."

Incorporation is simple enough; all corporations are incorporated in one, and only one, state, most commonly Delaware.

But where is the corporation's "principle place of business?"

The Supreme Court's answered that question yesterday in Hertz Co. v. Friend et al. Here's the facts from the opinion, with substantial edits for clarity by yours truly:

In September 2007, Melinda Friend and John Nhieu, two California citizens, sued the Hertz Corporation in California state court for violations of California’s wage and hour laws as part of a potential class action on behalf of other California citizens similarly-situated to them.

Hertz removed the case to federal court claiming that the plaintiffs and the defendant were citizens of different States, and thus the federal court had diversity jurisdiction over the claims. Friend and Nhieu, however, claimed that the Hertz Corporation was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking.

To support its position, Hertz submitted a declaration by an employee relations manager that claimed Hertz’s “principal place of business” was in New Jersey, not in California, because — though its California operations accounted for 273 of Hertz’s 1,606 car rental locations, about 2,300 of its 11,230 full-time employees, about $811 million of its $4.371 billion in annual revenue and about 3.8 million of its approximately 21 million rentals — the leadership of Hertz and its domestic subsidiaries is located at Hertz’s corporate headquarters in Park Ridge, New Jersey, where its core executive and administrative functions are carried out, except for some lesser, but still substantial, administrative operations in Oklahoma City, Oklahoma.

Let's start with the big picture: this case has no business being in federal court. It's a class action brought solely by California residents alleging solely California-law claims against a company that has more business in California than anywhere else. None of the concerns underlying federal jurisdiction are present. There is no reason to believe that Hertz would be prejudiced by having the case heard by a California state court, and there are no federal issues in the case.

As the Supreme Court noted yesterday, two-hundred-and-one years ago, the Supreme Court, in a unanimous opinion by Chief Justice Marshall, scoffed at the very notion that a corporation was a "citizen" entitled to diversity jurisdiction: “the term citizen ought to be understood as it is used in the constitution, and as it is used in other laws. That is, to describe the real persons who come into court, in this case, under their corporate name.” Bank of United States v. Deveaux, 5 Cranch 91–92 (1809); see Slip op., p.5. If that was the law today, Hertz would not be entitled to remove any state-law case from any state court, since it would be a "citizen" everywhere.

But that was then, this is now. The statute we have today says Hertz is a citizen "of any State by which it has been incorporated and of the State where it has its principal place of business." If Hertz is sued anywhere else, it can remove the case to federal court. So where is its "principle place of business?"

Prior to the Hertz opinion yesterday, the answer depended upon the Circuit in which the case was brought. Friend's case was brought in the Ninth Circuit,

which instructs courts to identify a corporation’s “principal place of business” by first determining the amount of a corporation’s business activity State by State. If the amount of activity is “significantly larger” or “substantially predominates” in one State, then that State is the corporation’s “principal place of business.” If there is no such State, then the “principal place of business” is the corporation’s “‘nerve center,’” i.e., the place where “‘the majority of its executive and administrative functions are performed.’”

Slip op., p. 3. Other courts, like those in the Seventh Circuit, jumped straight to the "nerve center" approach.

Yesterday, the Supreme Court held that the "nerve center" test is the only test, that "the phrase 'principal place of business' refers to the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities." Slip op., p. 1.

The opinion is a classic example of Justice Breyer's methodology; long on "administrative simplicity" (p. 13), short on the plain meaning rule. I will leave, as an exercise for the reader, the question of whether the Court's unanimous opinion is consistent with the originalism and formalism pressed by four, sometimes five, members of the Court.

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Warren Buffet often gets credit for coining the phrase "skin in the game" — even though it's not his — and his definition is, shall we say, on the money. "Skin in the game" makes a difference:

Mutual funds whose directors have "skin in the game" significantly outperform their competitors, according to a study by Syracuse University Prof. David Weinbaum. His results confirm the commonly held belief that directors who are invested in the funds that they oversee act as better stewards than directors who don't have any money on the line.

It's not the first time Prof. Weinbaum has shown that.

I'm a big believer of "skin in the game" — virtually all of my clients are on a contingent fee — and have written before about how contingency fees reduce frivolous litigation and how third-party investment in lawsuits can level the playing field against well-funded defendants.

So I was happy to read Why Investment Bankers Should Have (Some) Personal Liability at The Harvard Law School Forum on Corporate Governance and Financial Regulation:

We have written a short paper for a symposium on the work of Adolf Berle in which we advocate reintroducing some measure of personal liability for bankers, as was the case in Berle’s day, and indeed up through the 1980’s. We describe in our paper the broad outlines of a proposal to impose some measure of personal liability for a bank’s debts on the most highly paid bankers. The proposal would revive two mechanisms that imposed personal liability in an earlier era: general partnership, which was common for investment banks prior to the 1980s, and assessable stock, which was relatively common in corporations including some commercial banks through the 1930s.

It is difficult to imagine the investment banking business returning to the partnerships of old. General partnership – with the illiquidity and liability it imposes on general partners and the constraints it imposes on a bank’s ability to raise capital – probably will not be considered a viable option. It is also difficult to imagine corporations in the financial services industry issuing assessable stock to all of their shareholders or regulators seeking to require them to do so.

Our objective is to design another way to impose some of the risks of unlimited liability on the most highly compensated managers and other decision makers at investment banks and other financial services and trading firms. We seek to do so without requiring the firm itself to switch to general partnership form or to make any other change in its organizational or capital structure. We discuss below two alternatives, each one based on historical precedent.

We could argue all day about whether the theoretical incentives investment bankers have are good enough to keep them from crashing the whole financial system — a whole cottage industry has developed in the pages of the Wall Street Journal, Forbes and Business Week to do just that. But the facts are undeniable: our banking industry is broken, dangerously so.

I don't see how we can fix that without giving the bankers some "skin in the game."

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Before Ashcroft v. Iqbal improperly re-wrote the Federal Rules of Civil Procedure, Bell Atlantic Corp. v. Twombly foolishly imposed a new hurdle for plaintiffs who brought antitrust claims. Specifically, in Twombly the Supreme Court held,

In applying these general standards to a §1 claim [e.g., a price-fixing claim], we hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement. ...[A]n allegation of parallel conduct and a bare assertion of conspiracy will not suffice. Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality. Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.

... A statement of parallel conduct, even conduct consciously undertaken, needs some setting suggesting the agreement necessary to make out a §1 claim; without that further circumstance pointing toward a meeting of the minds, an account of a defendant’s commercial efforts stays in neutral territory. An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a §1 complaint: it gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of “entitle[ment] to relief.”

A number of defense lawyers — and, unfortunately, courts — have interpreted the above language to mean that an antitrust plaintiff can only "raise[ ] a suggestion of a preceding agreement" by proving, at the beginning of the lawsuit, that the defendants secretly agreed to raise prices together.

But how do you prove a secret agreement before you can use court processes to conduct an investigation?

Normally, you can't.

Catch-22.

Thankfully, the Second Circuit has just corrected those errors in reversing dismissal of a price-fixing case against several digital music companies. As the opinion (PDF) holds:

Defendants’ arguments that plaintiffs have failed to state a claim are without merit. Defendants first argue that a plaintiff seeking damages under Section 1 of the Sherman act must allege facts that “tend[] to exclude independent self-interested conduct as an explanation for defendants’ parallel behavior.” Appellee’s Br. 15-17. This is incorrect. Although the Twombly court acknowledged that for purposes of summary judgment a plaintiff must present evidence that tends to exclude the possibility of independent action, 550 U.S. at 554, and that the district court below had held that plaintiffs must allege additional facts that tended to exclude independent self-interested conduct, id. at 552, it specifically held that, to survive a motion to dismiss, plaintiffs need only “enough factual matter (taken as true) to suggest that an agreement was made,” id. at 556; see also 2 Areeda & Hovenkamp § 307d1 (3d ed. 2007) (“[T]he Supreme Court did not hold that the same standard applies to a complaint and a discovery record . . . . The ‘plausibly suggesting’ threshold for a conspiracy complaint remains considerably less than the ‘tends to rule out the possibility’ standard for summary judgment.”).

Defendants next argue that Twombly requires that a plaintiff identify the specific time, place, or person related to each conspiracy allegation. This is also incorrect. The Twombly court noted, in dicta, that had the claim of agreement in that case not rested on the parallel conduct described in the complaint, “we doubt that the . . . references to an agreement among the [Baby Bells] would have given the notice required by Rule 8 . . [because] the pleadings mentioned no specific time, place, or person involved in the alleged conspiracies.” 550 at 565 n.10. In this case, as in Twombly, the claim of agreement rests on the parallel conduct described in the complaint. Therefore, plaintiffs were not required to mention a specific time, place or person involved in each conspiracy allegation.

Starr et al v. Sony BMG et al., slip op., 08-5637 (2d Cir., January 13, 2010), pp. 15-16.

It's hard to call the opinion a "win" for antitrust plaintiffs — Twombly should have been better decided — but it definitely leaves antitrust plaintiffs better off than they were before.

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Oh, Ashcroft v. Iqbal, will we ever stop blogging about you?

The newest online debate pits the class action defense lawyers at Drug & Device Law against University of Pennsylvania Law School Professor Stephen Burbank at PENNumbra, the online supplement to UPenn's Law Review.

Beck and Herrmann open with a defense of Iqbal on several grounds, including:

[C]ourts have no legitimate basis for favoring plaintiffs when interpreting pleading standards. A just system does not pick sides in advance, but instead establishes neutral rules. We reject the normative view that it is somehow “better” to let unmeritorious cases proceed than to risk that meritorious cases will be dismissed. Either way represents error, and neither error is inherently better than the other. Indeed, given the enormous transaction costs that litigation entails, Type II errors (false negatives) are probably preferable to Type I errors (false positives) from a purely economic perspective.

From a "purely economic perspective" it is better if corporations stop wrongfully causing damage in the first place, which they will only do if they have an economic incentive like the threat of legal liability.

But there's a bigger problem with Beck and Herrmann's argument.

It is an "error" when a court dismisses a meritorious case. It is a particularly unjust, unfair, and avoidable "error" when a court dismisses a meritorious case prior to any discovery.

It is not, however, an "error" for a court to refuse to dismiss a case that may be unmeritorious.

Why not? Because the case may be meritorious and, if it is not, the defendant has four more opportunities to resolve the case favorably by testing the merits of plaintiff's claim: judgment on the pleadings, summary judgment, trial, and post-trial relief. That is to say, even after the motion to dismiss, Plaintiff's claims will be assessed, re-assessed, re-re-assessed, then re-re-re-assessed. Then there's an appeal to re-re-re-re-assess each and every element of plaintiff's claims and each and every element of plaintiff's damages.

When a court declines to dismiss an unmeritorious case, there is ample room for error-correction down the road to ensure plaintiff's claims have merit. It's why we have a civil justice system: to provide a thorough airing and evaluation of disputes.

When a court dismisses a meritorious case, however, the only error-correction is a single appeal that will be evaluated under the same unfair anti-plaintiff standard established by Iqbal.

Beck and Herrmann have it exactly backwards: there is "no legitimate basis" for not favoring plaintiffs when interpreting pleading standards. Their "neutral" interpretation of pleading rules is not "neutral" at all, but rather a "normative view" that plaintiffs are not entitled to the same error-correcting procedures to which defendants are entitled.

A "just system" wouldn't pick defendant's side in advance.

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"Removal" is the process by which a defendant in a state court case "removes" the case to federal court. 28 U.S.C. § 1441(b) makes it sound so simple:

Any civil action of which the district courts have original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States shall be removable without regard to the citizenship or residence of the parties. Any other such action shall be removable only if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.

There are two ideas behind removal, each expressed in their own sentence above. (If you're in the mood for some light reading of 18th century constitutional debates, here's primary source material on federal court jurisdiction.)

The first idea (in the first sentence) is that defendants have the right to have claims made against them under federal law heard by a federal court. For example, if plaintiff brings a claim under the RICO Act, a claim for violation of federal constitutional rights, or a claim under the Lanham Act, then the defendant has the right to remove the case to federal court so that a federal court will preside over the federal claims.

The second idea (in the second sentence) dates to the beginning of our Republic: federal courts, where the judges were appointed by the President and confirmed by the Senate, were (and still are) perceived as being less likely to be biased in favor of local litigants than state courts, where the judges were either elected by the public or appointed by state officials. The "other such actions" described by 28 U.S.C. § 1441(b) refer to cases brought under "diversity" jurisdiction, which allows plaintiffs in one state to sue defendants in another state in federal court, regardless of the claims brought. Thus, out-of-state defendants concerned about bias in a plaintiff's home state can remove cases if the case could have been filed in federal court in the first place under "diversity" jurisdiction.

Diversity jurisdiction, however, is disfavored by the federal courts. Personally, I think the most simple reason for the federal courts' dislike for diversity jurisdiction is because, much like how we prefer federal courts preside over cases bringing federal claims (as reflected by the first part of 28 U.S.C. § 1441(b)), we prefer state courts preside over cases bringing state claims. Much like how a defendant has an interest in having federal law claims against them heard in federal court, a plaintiff has an interest in having their state law claims heard in state court.

The United States Constitution provides for a limited federal government, including a limited federal judiciary. Thus, the requirements for removal have been strictly construed, since loosely construing them would violate basic principles of federalism:

Because lack of jurisdiction would make any decree in the case void and the continuation of the litigation in federal court futile, the removal statute should be strictly construed and all doubts resolved in favor of remand." Abels v. State Farm Fire & Cas. Co., 770 F.2d 26, 29 (3d Cir. 1985) (citations omitted). If there is any doubt as to the propriety of removal, that case should not be removed to federal court. See Boyer v. Snap-On Tools Corp., 913 F.2d 108, 111 (3d Cir. 1990), cert. denied, 498 U.S. 1085, 111 S. Ct. 959, 112 L. Ed. 2d 1046 (1991).

Brown v. Francis, 75 F.3d 860, 864–865 (3d Cir. 1996). 

The latest "fad" among defense lawyers — more on the source of the word "fad" in a moment — is to hire companies to monitor state court dockets for suits against big corporations, particularly class actions alleging product liability. The moment a plaintiff files a lawsuit that includes any out-of-state defendants, the big corporations collude to have the out-of-state defendant file for removal, on the grounds that the in-state defendants haven't been "properly joined and served" yet.

It doesn't matter if the case involves 99 in-state defendants and 1 out-of-state defendant. It doesn't matter, if, quite obviously, the case could not have been filed in the first instance as a diversity case, since it involves in-state defendants, too. The big corporations found themselves a dubious loophole and decided to run with it.

And run with it they have: the defense gurus at Drug & Device Law have tallied a few dozen of these cases across the country. The defense argument is always the same: under the "plain meaning" of the statute, we can remove any case we want if the in-state defendants haven't been served yet.

It's a silly argument: the plain meaning rule does not permit a court to find a "plain" meaning “demonstrably at odds with the intentions of the drafters.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989). There is, of course, no indication that Congress intended to let defendants avoid the strict, centuries-old federal policies against diversity jurisdiction and against removal by setting up a computer program that downloads the state court dockets every 10 minutes.

The more compelling "plain meaning" of 28 U.S.C. § 1441(b) is that Congress wanted to ensure the in-state defendants were "proper" defendants, and thus prevent plaintiffs from adding bogus in-state defendants to a lawsuit.

The defendants' game worked for a while, but the tide is turning.

Via Gregory P. Joseph's Complex Litigation Blog, we see the Northern District of Ohio rejecting the "properly joined and served" silliness:

Comerica's interpretation of §1441(b) suggests that the language "properly joined and served" creates an exception to the forum defendant rule. This argument is not novel; in fact, it has been the topic of much jurisprudential debate with varying success across the country. I, however, have no need to survey such case law because the Northern District of Ohio recently rejected Comerica's argument in a case of first impression. In Ethington v. Gen. Elec. Co., 575 F. Supp. 2d 855, 861 (N.D. Ohio), my colleague, District Judge Dan Aaron Polster, engaged in a thorough review of available case law.

And what does Ethington say?

The Court further notes that the growing trend among district courts wrestling with this latest litigation fad is to grant a timely motion to remand. While a review of the Frick, Thomson, and Ripley cases indeed shows that the judges in those cases abided by the plain meaning interpretation of the forum defendant rule, the GE Defendants' assertion that the New Jersey federal district courts 'ha[ve] rejected Plaintiffs' argument' is disingenuous at best; it fails to acknowledge that Frick (issued February 23, 2006), Thomson (May 22, 2007), and Ripley (Aug. 16, 2007) were each issued well in advance of the more recent case law from the District of New Jersey -- starting with Judge Chesler's opinion in DeAngelo-Shuayto -- that in fact rejected the approach taken in those three earlier cases. See, e.g., DeAngelo-Shuayto, 2007 U.S. Dist. LEXIS 92557, at 5, 2007 WL 4365311, at *3 (finding that '§ 1441(b) must bar removal by a forum defendant, whether it has been served or not'); Fields, 2007 U.S. Dist. LEXIS 92555, at *12-13, 2007 WL 4365312, at *5 (rejecting the plain language approach because it would create an 'untenable result' that would 'eviscerate the purpose of the forum defendant rule,' and holding that 'the 'properly joined and served' language of § 1441(b) does not encompass the situation in which the removing party is a forum defendant, and that in such situations removal to federal court is improper.'). See also, Brown, 2008 U.S. Dist. LEXIS 55490, at *8, 2008 WL 2833294, at *5 (adopting magistrate judge's report and recommendation with additional analysis, explicitly embracing the reasoning provided in the R&R, DeAngelo-Shuayto, and Fields, and stating 'this Court agrees with [the conclusion] that § 1441(b) must be read to preclude removal by an in-state defendant whether it has been served or not.'); Brown v. Organon USA Inc. (hereafter 'Brown R&R'), 2008 U.S. Dist. LEXIS 50179, at *24-25, 2008 WL 2625355, at *8 (D.N.J. June 27, 2008) (M.J. Salas) (magistrate judge's R&R concluding that '[t]he Court agrees with DeAngelo-Shuayto' and finding 'that § 1441(b) bars a forum defendant from removing to federal court even if they have not been 'properly joined and served.''); Optec Displays, Inc. v. Am. Maint., Inc., 2008 U.S. Dist. LEXIS 47562, at *3, 2008 WL 2510633, at *2 (D.N.J. June 16, 2008) (J. Debevoise) (remanding removed case with forum defendant, and explaining that 'even if [defendant] was not properly joined and served, it is still precluded, as a forum defendant, from removing the action to federal court.') (citing DeAngelo-Shuayto, 2007 U.S. Dist. LEXIS 92557, at *15, 2007 WL 4365311, at *3)).).

Notably, these more recent New Jersey federal district court cases are not alone in adopting Judge Chesler's reasoning and analysis on the proper way to interpret § 1441(b). Other federal district courts as of late have likewise followed the reasoning articulated in DeAngelo-Shuayto. See, e.g., Allen, 2008 U.S. Dist. LEXIS 42491, at *13-15, 17-18, 2008 WL 2247067, at *4-6; Vivas v. Boeing Co., 486 F. Supp. 2d 726 (N.D.Ill. 2007) (J. Lefkow). (See also, ECF No. 30-2, Pls.' Rep. Mem., Ex. A to Aff. Dec. of Mitchell M. Breit, 1-6 (remand order in Evans v. GlaxoSmithKline PLC, Civ. A. No. 07-5046 (Jan. 10, 2008) (J. Brody); remand order in Hance v. GlaxoSmithKline PLC, Civ. A. No. 07-5047 (Jan. 10, 2008) (J. Brody); remand order in Malone v. GlaxoSmithKline PLC, Civ. A. No. 07-5048, 2007 U.S. Dist. LEXIS 97461 (Dec. 4, 2007) (J. Savage) (citing Oxendine v. Merck & Co., Inc., 236 F. Supp. 2d 517, 524-25 (D. Md. 2002)); remand order in Scott v. GlaxoSmithKline PLC, No. 07-CV-5049, Order of March 11, 2008, 2008 U.S. Dist. LEXIS 84490, n.1 (E.D. Pa. Mar. 11, 2008) (J. Joyner)).) But see Flores v. Merck & Co. (In re Fosamax Prods. Liab. Litig.), 2008 U.S. Dist. LEXIS 57473, at *37-38, 2008 WL 2940560, at *2 (S.D.N.Y. July 28, 2008) (a recent federal district court opinion invoking the plain language of § 1441(b) with little analysis to deny plaintiff's motion to remand).

After considering Sixth Circuit precedent on statutory interpretation and carefully reviewing case law on both sides of a federal district court split, the Court finds that applying the plain language of § 1441(b) would produce a result demonstrably at odds with Congressional intent underpinning the forum defendant rule, and specifically with the 'properly joined and served' language. Accordingly, the Court hereby joins the DeAngelo-Shuayto line of cases, and in so doing, the Court incorporates and adopts the well-reasoned, thorough analysis and holdings of Judge Chesler in DeAngelo-Shuayto as the basis for the instant ruling.

Ethington v. GE, 575 F. Supp. 2d 855, 864 (N.D. Ohio 2008). A "fad" that is "demonstrably at odds with Congressional intent." 

Told you so.

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[Updated to clarify a distinction between securities suits and investment company act suits.]

This week, the Supreme Court heard arguments in Jones v. Harris. Briefly, the Oakmark complex of mutual funds "hired" Harris Associates as investment advisers, paying Harris 1% (per year) of the first $2 billion of the fund’s assets, 0.9% of the next $1 billion, 0.8% of the next $2 billion, and 0.75% of anything over $5 billion. I write "hired" because the situation is murky: Harris is directly affiliated with Oakmark. Importantly, the fee charged by Harris to Oakmark is more than double the fee it charges unaffiliated mutual funds.

Plaintiffs are investors in Oakmark funds who sued Harris under a variety of claims, including a claim that Harris's fees were "excessive," in violation of Section 36(b) of the Investment Company Act.

Section 36(b), which was added in 1970, is almost poetic in its ambiguity:

For the purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser . . . . With respect to any such action the following provisions shall apply:

(1) It shall not be necessary to allege or prove that any defendant engaged in personal misconduct, and the plaintiff shall have the burden of proving a breach of fiduciary duty.

(2) In any such action approval by the board of directors of such investment company of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, and ratification or approval of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, by the shareholders of such investment company, shall be given such consideration by the court as is deemed appropriate under all the circumstances. . . .

In essence, the statute says only that the plaintiff can recover against the investment adviser by "proving a breach of fiduciary duty." Subsections (1) and (2) fill in a little detail — i.e., the investor need not prove "personal misconduct" and the court shall "consider" board of directors and/or shareholder ratification — but that's it.

Congress might as well have written, "investors can sue if investment advisers do something bad, but 'bad' doesn't necessarily mean really bad."

Twenty-seven years ago, faced with the same opaque language, the Second Circuit Court of Appeals came up with its own standard for "excessive fee" claims:

[T]he test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in the light of all of the surrounding circumstances.

[and]

[t]o be guilty of a violation of §36(b) . . . the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.

Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923, 928 (2d Cir. 1982).

Last year, the Seventh Circuit Court of Appeals came up with a different standard for "excessive fee" claims:

Having had another chance to study this question, we now disapprove the Gartenberg approach. A fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth. ...

Federal securities laws, of which the Investment Company Act is one component, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. Plaintiffs do not contend that Harris Associates pulled the wool over the eyes of the disinterested trustees or otherwise hindered their ability to negotiate a favorable price for advisory services. The fees are not hidden from investors—and the Oakmark funds’ net return has attracted new investment rather than driving investors away.

In short, the Seventh Circuit held that, regardless of what the Investment Company Act says, investment advisers don't have a fiduciary duty to investment companies; instead, they're held to the same fraud and misrepresentation standards as total strangers.

The Seventh Circuit opinion was remarkable not only because it eviscerated the Investment Company Act — which clearly does not require personal misconduct like "pulling the wool over [investors'] eyes" — but also because it produced a sharp disagreement on the underlying economics between Judges Easterbrook and Posner, two of the most notable adherents to the conservative "law and economics" doctrine.

It goes almost without saying that there are reasonable arguments in favor of both the investors and the investment advisers. The statute is ambiguous; there's no clear answer for what the standard "should" be in these cases, but there's also little doubt that something has gone awry with investment adviser fees in the context of affiliated mutual funds.

I write "almost," however, because Professor John Coates of Harvard Law School wants nothing to do with reasonable arguments:

How can such cases make it to the highest court in the land? Plaintiffs’ lawyers are able to file these cases because of three features of the US legal system. First, investors are dispersed, and cannot easily work together to protect their own interests. Collective action costs are often identified as a reason that investors cannot protect themselves from predatory institutions – and sometimes that is true. But those same costs also make it impossible for investors to control the lawyers who nominally represent them. Investors cannot stop lawyers from using weak or even frivolous claims to extract rich legal fees. Nor need lawyers even listen to investors with the most at stake in a case. Unlike the advisers, the lawyers are not required to negotiate with independent trustees, or to submit their lawsuit for approval to the investors. Once lawyers have appointed themselves as investor guardians, they face little competition – again, unlike the advisers, who compete with other advisers to attract new investments.

In Professor Coates' world, a lawyer can, on her own, file a "weak or even frivolous" case and "extract rich legal fees" without any involvement of the actual investors.

What a great racket! Lawyers must be filing these cases all the time and collecting big fat checks for nothing.

Or maybe fewer than 200 securities class actions are filed every year, and maybe only half of them settle for any amount, with the other half of investors and their lawyers recovering nothing for their losses.

Since Coates has never represented any investors in a lawsuit, much less represented a class of investors on a contingent fee, I suppose he needs a few reminders on how the process works.

"Jones" in Jones v. Harris is an investor, not a lawyer. Only investors can bring lawsuits and they can only win if they prove every element of their case. Like I wrote above, most of these cases are sent to the rubbish heap without any payment.

If the investors are in the lucky half that survive years of litigating over dismissal (for reference, Jones v. Harris was filed five years ago and is still at the dismissal stage), the court will carefully analyze which investor should represent the class as the lead plaintiff, giving preference to the investors with the "most at stake in a case." Nonetheless, every investor with a stake in the case, even if not the lead plaintiff, can participate in, and object to any part of, the process, including any settlement and any award of attorneys' fees.

Unsurprisingly, three-quarters of successful investor lawsuits are lead by large institutional investors (p. 27) such as public and union pensions, the ones with "the most at stake in the case."

Coates thus has it backwards: it's not "impossible for investors to control the lawyers who nominally represent them," it's impossible for lawyers to bring and win a lawsuit without the participation and support of the investors, particularly the ones with "the most at stake."

Indeed, in most potential investor class action cases, it's impossible for the lawyers to collect any fee at all: you never know when a court will read an act that says "it shall not be necessary to allege or prove that any defendant engaged in personal misconduct" and nonetheless require the investor prove personal misconduct. Based on this week's oral argument, it looks like the Supreme Court will do just that, leaving the investors and their lawyers with nothing after five years of litigation.

So much for a "rich legal fee." And that's the greatest irony: in the nearly forty years since Section 36(b) was passed, not one single court (see pp. 3–4) has ever held an investment adviser's fee was "excessive."

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Business Week points us to the major cases.

As Litigation & Trial is a legal, rather than a business, blog, I'm going to take their list of cases but replace their description of each with the actual legal issue at stake, along with links to SCOTUSWiki, which hosts all of the relevant briefs for your reading pleasure:

Bilski v. Kappos: Whether a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (”machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101 and whether the “machine-or-transformation” test for patent eligibility, contradicts Congressional intent that patents protect “method[s] of doing business” in 35 U.S.C. § 273.

Free Enterprise Fund v. Public Company Accounting Oversight Board, et al.: Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.

Black et al. v. United States: Whether the “honest services” clause of 18 U.S.C. § 1346 applies in cases where the jury did not find - nor did the district court instruct them that they had to find - that the defendants “reasonably contemplated identifiable economic harm,” and if the defendants’ reversal claim is preserved for review after they objected to the government’s request for a special verdict.

American Needle Inc. v. NFL, et al.: Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities.”

United Student Aid Funds, Inc. v. Espinosa: Where a debtor declares to discharge a student loan debt in his Chapter 13 bankruptcy plan, has the debtor satisfied the due process requirements of Mullane v. Cent. Hanover Bank & Trust Co, and does the fact that the debtor failed to initiate an adversary proceeding render the enforceability of the discharge order under 11 U.S.C. 1327(a)inapplicable?

Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company: Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?

Hemi Group, LLC, et al v. City of New York: Whether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its “business or property” by alleging non commercial injury resulting from non payment of taxes by non litigant third parties.

Graham County Soil and Water Conservation Dist v. ex rel. Wilson: Whether federal courts have jurisdiction over False Claims Act suits based on revelations in administrative reports or audits issued by state or local governments, as opposed to the federal government.

Stay tuned for more discussion of each in upcoming posts.

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As Ashby Jones at the WSJ Law Blog notes:

For all those who’ve made lists of cases to watch heading into the fall, may we kindly suggest adding the Google Books case, if you haven’t already.

The backstory: Manhattan judge Denny Chin is currently sitting on a settlement reached last year between the search engine giant and publishers that would allow Google to sell digital books online. (A hearing on the case is scheduled for Oct. 7.)

Since the settlement was announced, a chorus of objectors has emerged, many of whom have howled that, were the deal allowed to go forward, Google would be allowed a near-monopoly on the publication of out-of-print books and other titles.

You can read the Google Books Settlement press release and proposed settlement here, where I casually described it as "good news for everyone," largely on the assumption that the Author's Guild had reached a settlement that would both make orphan works more accessible and provide compensation for such use. Such was how the settlement was described.

But the settlement is much bigger than that. Walter Olson at Overlawyered rounds up some criticism:

One blogger turns thumbs down on Google Books settlement [Patrick at Popehat] “Laundering orphan works legislation through a class action lawsuit”? [James Grimmelmann, ACS Blog via Mass Tort Lit] Much more: Lynn Chu/Writer’s Reps (who, I should note, has represented my literary interests on matters unrelated to this); WSJ Law Blog; Pasquale/ConcurOp.

The objections are worth considering. Principally, the objection is, as Chu writes,

The Google Book Settlement far exceeds any mere litigation settlement. Settlement is about damages for specific, past harms. This, by contrast, is a business proposal. The plaintiffs' claim was about the harm from Google’s book copying before January 5, 2009. After four years of self-serving business planning, what the parties now place before the court is no “settlement” of this claim at all, but a 335 page publishing and union contract—a proposal for a business venture they wish to present to the class.

Google, although generally a good corporate citizen, has often been cavalier about the rights and interests of individuals, particularly with regard to privacy and copyright, which, like the book settlement, affect the ability of individuals to control the content they produce. As such, there is reason to be suspicious.

One issue, however, seems to be missing from the debate so far: a general principle of governance is that, in the absence of regulation, social policy issues will be determined by litigation.

It is the second half of 2009.  He have affordable technology to unlock much of the collective wisdom of humanity and make it immediately accessible anywhere in the world. Indeed, we even have a well-regarded company ready and willing to do it for free.

That is not a mere business proposal. That is a social policy issue of considerable importance, one will may affect us for generations to come, particularly if, as academics have warned, the inaccurate metadata used by Google Books represents a "train wreck" for scholars. It should be the subject of legislative and executive attention; that is why we have representative government in the first place, to assess and to act upon (or intelligently decide not to act upon) social policy issues.

But it is not the subject of much legislative or executive attention, likely because our intellectual property regime is captive to a handful of corporations that believe they can and should control the bulk of culture forever. They like how things are going for them. They're not going to rock the boat over mere books; indeed, they probably like seeing Google centralize control over publishing the way the RIAA and MPAA have centralized control over music and film.

One consequence of this laissez-faire approach by the government is, as we see in the Google Books settlement, creation of "policy" by the judicial branch by way of litigation. Litigation, however, is particularly ill-suited to solve these problems, for the very reasons mentioned by the objectors, such as the lack of notice to, and participation by, millions of interested parties, including parties which will become interested in the future.

As such, we're stuck. An internationally-and-instantly-accessible, free-of-charge Library of Alexandria is, in theory, a wonderful idea. But so is reasonable protection for the rights of authors (and so is the assurance that appropriate metadata has been captured). And who will decide the wisdom of the new Library of Alexandria?

Judge Denny Chin. I have nothing against Judge Chin -- he may issue a ruling far superior to that which could have been produced by any Congressional subcommittee -- but I can assure you that the Framers of the Constitution had no intention of leaving such matters to him alone.

[UPDATE: Ask, and ye shall receive. The House of Representatives' Committee on the Judiciary is holding a hearing entitled, "Competition and Commerce in Digital Books." Hopefully, prepared remarks will be available on the site soon.]

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Hizook.com, "the robotics news portal," relates an unfortunate incident:

Hizook.com has received an amazing flurry of activity in the last 10 days.  We made it to the front page of Slashdot (twice!),  Reddit (twice!), Engadget, Makezine, Hacker News (etc, etc) -- amassing well over 100,000 pageviews!  During the height of the activity, we received an email indicating that Hizook's Google Adsense account was being disabled.  There was no further explanation, no warning, no attempt made to resolve the situation -- in fact, our only recourse was to fill out a web form and hope for a prompt response.  Apparently that is indicative of Google's customer service.  The remainder of our account is chronicled below.  But, as extremely loyal Google users (Search, Gmail, Google Voice, Google Calendar, formerly Adsense, someday Adwords) and Google share holders, we are simply... aghast.

Here is the entirety of the explanation provided by Google, at 11pm on Sunday night, when they unilaterally disabled the account:

Hello,

While going through our records recently, we found that your AdSense
account has posed a significant risk to our AdWords advertisers. Since
keeping your account in our publisher network may financially damage our
advertisers in the future, we've decided to disable your account.

Please understand that we consider this a necessary step to protect the
interests of both our advertisers and our other AdSense publishers. We
realize the inconvenience this may cause you, and we thank you in advance
for your understanding and cooperation.

If you have any questions about your account or the actions we've taken,
please do not reply to this email. You can find more information by
visiting
https://www.google.com/adsense/support/bin/answer.py?answer=57153.

Sincerely,

The Google AdSense Team

I've made the front page of Hacker News twice -- it is indeed quite a traffic spike, and, if I advertised, I would be very upset if my advertiser torpedoed me without notice at the height of the traffic.

So, can they sue?

Let's look at the Google Adsense Terms and Conditions:

9.      No Warranty. GOOGLE MAKES NO WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WITH RESPECT TO ADVERTISING, LINKS, SEARCH, REFERRALS, AND OTHER SERVICES, AND EXPRESSLY DISCLAIMS THE WARRANTIES OR CONDITIONS OF NONINFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR ANY PARTICULAR PURPOSE. TO THE EXTENT ADS, LINKS, AND SEARCH RESULTS ARE BASED ON OR DISPLAYED IN CONNECTION WITH NON-GOOGLE CONTENT, GOOGLE SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE DISPLAY OF SUCH ADS, LINKS, AND SEARCH RESULTS.

10. Limitations of Liability; Force Majeure. EXCEPT FOR ANY INDEMNIFICATION AND CONFIDENTIALITY OBLIGATIONS HEREUNDER OR YOUR BREACH OF ANY INTELLECTUAL PROPERTY RIGHTS AND/OR PROPRIETARY INTERESTS RELATING TO THE PROGRAM, (i) IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT FOR ANY CONSEQUENTIAL, SPECIAL, INDIRECT, EXEMPLARY, OR PUNITIVE DAMAGES WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY AND (ii) GOOGLE'S AGGREGATE LIABILITY TO PUBLISHER UNDER THIS AGREEMENT FOR ANY CLAIM IS LIMITED TO THE NET AMOUNT PAID BY GOOGLE TO PUBLISHER DURING THE THREE MONTH PERIOD IMMEDIATELY PRECEDING THE DATE OF THE CLAIM. Each party acknowledges that the other party has entered into this Agreement relying on the limitations of liability stated herein and that those limitations are an essential basis of the bargain between the parties. Without limiting the foregoing and except for payment obligations, neither party shall have any liability for any failure or delay resulting from any condition beyond the reasonable control of such party, including but not limited to governmental action or acts of terrorism, earthquake or other acts of God, labor conditions, and power failures.

Google obviously believes the answer is "no," and wrote their contract to prohibit any suits at all.

Yet, like with most tech companies, Google's terms of service provide "This Agreement shall be governed by the laws of California." California is among the most consumer-friendly states in the nation.

So the question isn't so simple:

Under UCC § 2-719(1)(b), '[r]esort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.' However, '[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this code.' UCC § 2-719(2). ... See id.; RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 547 (1985) ('Under the Code, a plaintiff may pursue all of the remedies available for breach of contract if its exclusive or limited remedy fails of its essential purpose.').

'A limited remedy fails of its essential purpose when the circumstances existing at the time of the agreement have changed so that enforcement of the limited remedy would essentially leave plaintiff with no remedy at all.' Computerized Radiological Servs., Inc. v. Syntex Corp., 595 F. Supp. 1495, 1510 (E.D.N.Y. 1984), aff'd in part and rev'd in part, 786 F.2d 72 (2d Cir. 1986) (emphasis added). This theory often is raised where a buyer seeks a refund or rescission of the original agreement, but the seller insists that repair is the only available remedy. See, e.g., Gavaldon v. DaimlerChrysler Corp., 32 Cal. 4th 1246, 1259-65, 13 Cal. Rptr. 3d 793, 90 P.3d 752 (2004)."

Stearns v. Select Comfort Retail Corp., 2009 U.S. Dist. LEXIS 48367, at *16–17 (N.D. Cal. Jun. 5, 2009).

Sure seems like Hizook is left with "no remedy at all" under the contract. It thus seems they could indeed sue for direct and consequential damages, including the lost ad revenue.

The above analysis applies to goods, rather than services, but two points weigh in Hizook's favor: first, the original RRX Indus., Inc. opinion itself found a software system to be a "good," and, second, a number of courts recognize the same analysis for service contracts, too.

Unfortunately, it's probably not worth Hizook's time or energy to sue over it -- which is why some creative Silicon Valley lawyers should be thinking about initiating a class action. Google's search engine shows 16,500 hits for "While going through our records recently, we found that your AdSense account has posed a significant risk to our AdWords advertisers."

As Bruce Schneier has written in the context of security software, liability changes everything. If AdSense users want Google to shape up, it seems they need to sue their way into it.

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AmLawDaily catches Merck passing the reins from Cravath, Swaine & Moore to Williams & Connolly for its petition to the Supreme Court regarding the consolidated Vioxx securities litigation. In a moment, we'll look at Merck's (likely very, very expensive) brief, and marvel at the Catch-22 it proposes.

But first, some background, courtesy of the Third Circuit's opinion:

Appellants, purchasers of Merck & Co., Inc. stock, filed the first of several class action securities fraud complaints on November 6, 2003, alleging that the company and certain of its officers and directors (collectively, “Merck”) misrepresented the safety profile and commercial viability of Vioxx, a pain reliever that was withdrawn from the market in September 2004 due to safety concerns. The District Court granted Merck’s motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, holding that Appellants were put on inquiry notice of the alleged fraud more than two years before they filed suit, and thus their claims were barred by the statute of limitations. Appellants argue that the District Court erred in finding as a matter of law that there was sufficient public information prior to November 6, 2001 to trigger Appellants’ duty to investigate the alleged fraud.

The Third Circuit agreed with Appellants and reversed the dismissal. That's what Merck has appealed to the Supreme Court.

Although Merck had internal doubts over Vioxx's safety long before it was even approved by the FDA, it never made those doubts public (they were only discovered through litigation). After the "VIGOR" study released in 2000 suggested Vioxx had an increased risk of cardiovascular incidents over another pain reliever, naproxen, Merck argued the difference was due to a protective effect of naproxen, rather than any danger due to Vioxx. In September 2001, the FDA sent Merck a warning letter, which noted:

Although the exact reason for the increased rate of [myocardial infarctions] observed in the Vioxx treatment group is unknown, your promotional campaign selectively presents the following hypothetical explanation for the observed increase in MIs. You assert that Vioxx does not increase the risk of MIs and that the VIGOR finding is consistent with naproxen’s ability to block platelet aggregation like aspirin. That is a possible explanation, but you fail to disclose that your explanation is hypothetical, has not been demonstrated by substantial evidence, and that there is another reasonable explanation, that Vioxx may have pro-thrombotic properties.

The issue remained controversial and disputed until October 2003, when a "study by the Harvard-affiliated Brigham and Women’s Hospital in Boston that found an increased risk of heart attack in patients taking Vioxx compared with patients taking Celebrex and placebo." A week after that study was made public, the investors sued Merck.

Merck's argument is that the FDA warning letter alone -- which it vigorously disputed in public, while concealing its own internal doubts -- was evidence enough that they committed securities fraud, thereby putting investors on "inquiry notice" and beginning the statute of limitations.

Thanks to the Private Securities Litigation Reform Act of 1995, and the Supreme Court's 2007 decision in Tellabs Inc. v. Makor Issues & Rights, Ltd., investors alleging fraud need to show facts, in their initial complaint, which create an "inference of scienter" (i.e., the defendant’s intention “to deceive, manipulate, or defraud) that is

more than merely “reasonable” or “permissible”—it must be cogent and compelling, thus strong in light of other explanations. A complaint will survive, we hold, only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.

It's a high bar to meet, a "heightened pleading requirement" to be sure. In essence, investors filing a shareholder fraud suit have to prove, when they file suit, that they'll likely win.

Keep that in mind while reading Merck's brief to the Supreme Court:

With regard to those elements that are required for a violation of Section 10(b), moreover, it is not necessary that the plaintiff possess sufficient information to satisfy any heightened pleading requirements applicable to those elements before the limitations period begins running. In the Private Securities Litigation Reform Act of 1995 (PSLRA)—enacted after this Court first set out the limitations period for Section 10(b) actions in Lampf—Congress adopted heightened pleading requirements for private securities-fraud actions, including the requirement that the complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 1934 Act § 21D(b)(2), 15 U.S.C. 78u-4(b)(2).

In Rotella, this Court considered and rejected the argument that the existence of heightened pleading requirements should drive application of the discovery
rule. Specifically, the Court rejected the plaintiff’s contention that it should adopt a broader version of the discovery rule for civil RICO claims on the ground that, in
many cases, those claims were subject to the heightened pleading requirement for fraud claims in Federal Rule of Civil Procedure 9(b). 528 U.S. at 560-561. While acknowledging the plaintiff’s concern that a narrower rule could “allow[] blameless ignorance to defeat a claim,” the Court concluded that “we simply do not think such a concern should control the decision about the basic limitations rule.” Id. at 560 (internal quotation marks and citation omitted). Although the PSLRA operates differently in some respects from Rule 9(b), the basic point remains the same: under the discovery rule, the limitations period may be triggered even when a plaintiff will not possess sufficient information to satisfy any applicable heightened pleading requirements.

It is therefore true, at least as a theoretical matter, that, under Section 1658(b), a plaintiff may not be in a position to file a securities-fraud complaint that would survive a motion to dismiss before the limitations period runs. Even when the discovery rule is applicable, however, the purpose of the limitations period itself is to give the plaintiff a specified period of time in which to “prepare a case against [the] perpetrators”—not to sit on his complaint once it is ready. Lampf, 501 U.S. at 378 (Kennedy, J., dissenting); see, e.g., Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1334 (7th Cir. 1997). As the government has previously explained in another case involving the discovery rule, “statutes of limitations are designed to induce prospective plaintiffs to investigate and act; they are not designed to offer a period of leisure between the completion of an investigation and the filing of suit.” U.S. Br. at 13, Kubrick, supra (No. 78-1014). The possibility that a heightened pleading requirement “will exact some cost,” insofar as some plaintiffs may be unable to prepare valid complaints within the limitations period, is thus an insufficient basis for adopting a broader interpretation of the discovery rule. Rotella, 528 U.S. at 560.

Like I said: Catch-22. According to Merck, you can't sue until you have enough evidence to show a "strong inference" of scienter, but you have to sue within two years of the first sign -- determined in hindsight -- of when you should have been "induce[d] ... to investigate and act," even if there was no evidence of scienter.

It's odd that Cravath and Williams & Connolly didn't put more effort into this argument. Rotella reached its conclusion by analogizing the racketeering claims at issue there -- brought by a psychiatric patient eleven years after discharge against a facility which, he alleged, fraudulently kept him there to boost profits -- to medical malpractice, where the patient is typically put on "notice" of their claims at the time of their injury.

Such bears little resemblance to the Merck case, in which the investors were arguably vaguely "injured" by the 2001 FDA letter regarding Merck's marketing, but had nothing even suggesting deliberate concealment of Vioxx's risks until 2003.

Moving on to the next two paragraphs in Merck's brief: 

Significantly, in extending the limitations period for Section 10(b) claims from one year to two years in the Sarbanes-Oxley Act, Congress acted out of concern that the preexisting one-year period would foreclose plaintiffs who were unable to prepare complaints sufficient to satisfy the PSLRA’s heightened pleading requirements in time. In its report, the Senate Judiciary Committee observed that “[t]he one year statute of limitations from the date the fraud is discovered is * * * particularly harsh on innocent defrauded investors,” because “the complexities of how the fraud was executed often take well over a year to unravel, even after the fraud is discovered.” S. Rep. No. 146, supra, at 9. Specifically, the committee noted that, “[w]ith the higher pleading standards that * * * govern securities fraud victims, it is unfair to expect victims to be able to negotiate such obstacles in the span of 12 months.” Ibid. That concern would have been wholly misplaced if the one-year period did not begin to run until the plaintiff possessed enough information to satisfy the PSLRA’s heightened pleading requirements in the first place.

Conversely, if the limitations period were triggered only once a plaintiff was able to bring suit, the practical effect of Congress’s adoption of heightened pleading requirements in the PSLRA would have been to postpone the start of the limitations period, sometimes significantly, in many cases. Given that the PSLRA’s primary purpose was to “check * * * abusive litigation by private parties,” Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007), it is implausible that, in enacting the PSLRA, Congress would have wanted effectively to extend the time for filing private securities fraud actions—and thus to enable more plaintiffs to use securities-fraud actions as a hedge against downside risk. See pp. 48-49, infra. In sum, the limitations period in Section 1658(b) is triggered by something short of the ability to file a viable complaint, and there is therefore no valid statutory basis for the court of appeals’ rule that a plaintiff must possess information specifically relating to scienter in order to be on inquiry notice.

That misses the point entirely. If Congress wanted to "check abusive litigation," then it is similarly "implausible" that Congress wants to force investors to file suit before they "possess sufficient information to satisfy any heightened pleading requirements."

Which is what Merck suggests.

The investors' brief is due in October. The Supreme Court has not yet scheduled oral argument.

But it will raise an interesting question: should investors be required to sue companies at the first hint of trouble, or can they wait until they have facts suggesting wrongdoing? Do we really want to encourage suits which even the plaintiffs don't know are meritorious?

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In today's Wall Street Journal:

Good news: The Pennsylvania Supreme Court has agreed to hear an unusual but important legal challenge in a case involving Governor Ed Rendell’s hiring of a contingency fee law firm to sue a drug manufacturer on behalf of the state.

The lawsuit—which we first wrote about in April—concerns Bailey Perrin & Bailey, a Houston law firm tapped by the Rendell administration to prosecute Janssen Phamaceuticals over the marketing of its antipsychotic drug Risperdal. When states lack the resources or expertise to bring certain suits, it’s not uncommon for them to seek help from private lawyers. ...

In agreeing to hear the challenge, the state Supreme Court said it will consider, among other things, “whether Bailey Perrin Bailey, LLP, should be disqualified because the due process guarantees of the United States and Pennsylvania Constitutions prohibit the Commonwealth from delegating the exercise of its sovereign powers to private counsel with a direct contingent financial interest in the outcome of the litigation.”

The WSJ makes a big deal out of donations the firm made to Governor Rendell's campaign while negotiating the contract. If there's an issue there, this appeal won't address it.

Drug & Device Law has a copy of the petition for review, which bizarrely claimed companies accused of ripping off taxpayers have a due process right to force the government to hire only lawyers who are "impartial."

Of course, everyone wants government officials to be "impartial." But once those impartial officials have made the decision to sue, common sense dictates they hire lawyers who will "act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf," as required by the Pennsylvania Rules of Professional Conduct.

The real issue is whether the Commonwealth may hire lawyers on the same terms as businesses and individuals do every day or if the Commonwealth is forced to use a particularly wasteful system invented by corporate lawyers that came to prominence in the 1970s (and is being rejected today) as a means of extracting greater profits from business clients by creating unnecessary work for recent law graduates.

You can guess what I think: the appeal is a blatant attempt to make litigation more expensive for the government, thereby making it harder for the government to sue companies when they cheat or injure taxpayers.

If there was pay-for-play, that's obviously illegal and unethical, but contingent fee litigation itself is a win-win for taxpayers, as it protects the public coffers (no fee if they lose), preserves state cash for other use (no billables to pay at the end of each month), and ensures the matter will be prosecuted in a prompt and efficient manner, rather than through the relentless fee churning that characterizes complex litigation billed by the hour.

Examples of waste by the hour aren't hard to find: the litigation (excluding trial) of a few trust documents at Princeton was reached $40 million for each side. The white collar criminal defense of an executive for accounting fraud was a "feeding frenzy" of $12 million. Compare that to the $0.00 that Pennsylvania taxpayers have paid so far for the prosecution of Commonwealth of Pennsylvania v. Janssen Pharmaceutica, Inc.

It should be noted that the "among other things" to be considered by the Pennsylvania Supreme Court are:

A. Whether 71 P.S. § 732-103 dictates that Petitioner lacks standing to
seek disqualification of Bailey Perrin Bailey, LLP on the basis of alleged
violations of constitutional law.

B. Whether the Attorneys Act, 71 P.S. § 732-101 et seq., authorizes the Office
of General Counsel’s contingent fee arrangement with Bailey Perrin Bailey, LLP.

C. Whether Bailey Perrin Bailey, LLP, should be disqualified because the
General Assembly did not authorize the contingent fee arrangement between
the Office of General Counsel and the law firm, such that the agreement
violates Article III, § 24 and the separation of powers mandate of the
Pennsylvania Constitution.

The first question is a substantial one. 71 P.S. § 732-103 reads in full:

No party to an action, other than a Commonwealth agency including the Departments of Auditor General and State Treasury and the Public Utility Commission, shall have standing to question the authority of the legal representation of the agency.

Such would appear to be a clear indication by the General Assembly that choice of counsel is a political question.

Nonetheless, an interesting and important case to watch. Will Pennsylvania taxpayers be required to open their wallets again?

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Judge Timothy J. Savage of the United States District Court for the Eastern District of Pennsylvania had a straightforward job.

All he had to do was:

• survey the laws of all fifty states with regard to unjust enrichment and breach of the implied warranty of merchantability,
  • Huber v. Taylor, 469 F.3d 67, 82-83 (3d. Cir. 2006) (consideration of the requirements for certification must be conducted in light of the correct jurisdiction's law); see also In re Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir. 1986).;
• determine whether there were actual or real conflicts between those laws,
  • Hammersmith v. TIG Ins. Co., 480 F.3d 220, 230-31 (3d Cir. 2007)
• where there was such a conflict, assess which state has the greater interest in the application of its law to determining the liability for defective aircraft crankshafts that were allegedly more vulnerable to stresses in their ordinary and foreseeable use,
  • Cipolla v. Shaposka, 439 Pa. 563, 267 A.2d 854, 856 (Pa. 1970); Melville v. Am. Home Assurance Co., 584 F.2d 1306, 1311 (3d Cir. 1978)
• and consider whether applying that law to all plaintiffs and class members violates the Due Process and Full Faith and Credit Clauses through individualized scrutiny of the claims asserted by each member of the plaintiff class.
  • Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13, 101 S. Ct. 633, 66 L. Ed. 2d 521 (1981) (plurality opinion); see generally, 1 Joseph M. McLaughlin, McLaughlin on Class Actions: Law and Practice § 5:46 (4th ed. 2007).

Simple, right? Apparently not:

Our review of the record persuades us that the choice-of-law examination here had its shortcomings. As one instance, the District Court observed in its unjust enrichment analysis that a true conflict existed between the relevant states' laws because Pennsylvania and some others preclude recovery if the parties had an express contract.  Believing unjust enrichment to be a hybrid of contract and tort law, the Court purportedly weighed the factors from sections 188 (concerning contracts) and 148 (relating to torts involving fraud and misrepresentation) of the Restatement (Second) Conflict of Laws and concluded that Pennsylvania 'has the most significant relationship to the transaction and the parties.' Defendants were sued in Pennsylvania, manufactured the crankshafts there, 'issued service bulletins and instructions . . . about the crankshafts . . . in Pennsylvania, and plan[] to replace [them] [t]here.'"

Powers v. Lycoming Engines, No. 07-4710, 2009 U.S. App. LEXIS 6785, at *10–12 (3d Cir. Mar. 31, 2009).

Unfortunately, the above was in error because:

Pennsylvania, however, does not consider unjust enrichment to be either an action in tort or contract. Unjust enrichment, rather, an equitable remedy and synonym for quantum meruit, is 'a form of restitution.' Mitchell v. Moore, 1999 PA Super 77, 729 A.2d 1200, 1202 n.2 (Pa. Super. Ct. 1999); see also Ne. Fence & Iron Works, Inc. v. Murphy Quigley Co., 2007 PA Super 287, 933 A.2d 664, 667 (Pa. Super. Ct. 2007); Sack v. Feinman, 495 Pa. 100, 432 A.2d 971, 974 (Pa. 1981) (citing Restatement of Restitution § 1 (1937) as a source for the elements of an unjust enrichment claim); Meehan v. Cheltenham Twp., 410 Pa. 446, 189 A.2d 593, 595 (Pa. 1963) (same). The Restatement views restitution as an area of the law 'which is neither contract nor tort.' Restatement (Second) of Conflict of Laws § 221 introductory note (1971)."

If there is a claim under Pennsylvania law that falls within the scope of restitution under the Restatement (Second) Conflict of Laws, [Fn 3] the following factors should have been addressed in the choice-of-law examination: (1) the place where the parties' relationship was centered; (2) the state where defendants received the alleged benefit or enrichment; (3) the location where the act bestowing the enrichment or benefit was done; (4) the parties' domicile, residence, place of business, and place of incorporation; and (5) the jurisdiction "where a physical thing . . . , which was substantially related to the enrichment, was situated at the time of the enrichment." Id. § 221(2) (1971).

Id. Footnote 3 notes:

Although we have found no instance in which Pennsylvania has adopted section 221, our case law, in explaining the state's choice-of-law approach, directs courts to "use the Second Restatement of Conflict of laws as a starting point." Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 463 (3d Cir. 2006). "[T]o properly apply the Second Restatement and remain true to the spirit of Pennsylvania's 'flexible approach,' [courts] must . . . characterize the particular issue . . . in order to settle on a given section of the Restatement for guidance." Id. Because Pennsylvania considers unjust enrichment to be a form of restitution, we believe applying section 221 would be proper.

In other words, Judge Savage, having no Pennsylvania precedent at all to rely on, incorrectly predicted which way Pennsylvania would go in making the archaic distinction between claims in law and claims in equity in the choice of law context. The Third Circuit predicted that, if Pennsylvania courts had to decide if unjust enrichment was a tort or contract claim, the Pennsylvania courts would say, "neither, it's a claim in equity," and so should be evaluated under different standards in determining which state's laws should be evaluated for potential application in a class action filed in Pennsylvania.

Oh.

Nonetheless, in light of Judge Savage's lengthy opinion analyzing most of the relevant issues under the similar, but erroneous, standard he used, it's hard to see how the outcome will change by this ruling.

A model of efficiency, class actions are not.

I don't have an easy answer for how class actions should be prosecuted and evaluated. Judge Savage and the Appellate Judges (Ambro, Weis and Van Antwerpen) clearly did the best they could; fact is, class actions are complicated, time-consuming, expensive and just plain hard to litigate and to decide. It's not uncommon to bounce back and forth between the trial court and the appellate court several times prior to even beginning discovery, much less trial. Then comes the "real" post-trial appeal from a final order.

Plaintiff's complaint was filed July 10, 2006, more than two-and-a-half years ago. Plaintiff and his lawyers have gone essentially nowhere since then, and still have years of litigation ahead, all at substantial time and expense to the plaintiff's counsel, who likely represents plaintiff on a contingent fee, a fee that will depend not only on winning, but on the judge's own evaluation of whether the claimed fee is fair and reasonable. All years down the road.

Something to keep in mind when you hear about all these "unfair" counsel fees in class actions.

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 You may have seen this article in The American Lawyer:

Simpson Thacher & Bartlett partner Barry Ostrager isn't exactly mincing words in his assessment of the counsel that guided Chubb Insurance to the U.S. Supreme Court, where on Monday it will square off against Ostrager's insurance company client, Travelers Indemnity. "Whoever has been advising Chubb," he told the Litigation Daily on Friday, on a train en route to Washington, "gave them the worst advice any lawyer ever gave a client." ...

Way back in 1986, Manhattan federal bankruptcy court judge Burton Lifland confirmed the Chapter 11 reorganization plan of the granddaddy of all asbestos companies, Johns-Manville Corp. The plan was groundbreaking. It created a trust, to be funded by Johns-Manville and its insurers, through which all asbestos claims against the company would be processed. ...

Fast-forward to 2001, when asbestos plaintiffs lawyers began testing new theories of liability against insurance companies. They filed tortious interference suits -- which have become known as "direct action" claims -- asserting that insurers had an independent duty to warn potential victims of the dangers of asbestos. In 2002, Travelers asked Judge Lifland -- the Manville bankruptcy judge -- to enjoin the "direct action" cases. ...

At this point, Chubb became involved. Chubb hadn't been part of the Manville deal but it was worried that if Judge Lifland approved the Travelers settlement, it would be precluded from suing Travelers in cases in which they shared liability. Chubb aligned with the asbestos plaintiffs lawyers to challenge the bankruptcy court's power to enjoin suits against parties other than the debtor. (That's the decision that Ostrager has scorned.)

That bothered Stephen Cozen enough that he wrote a letter to The American Lawyer, deriding Ostranger as a "noncredible source ... launching ad hominem attacks."

The irresistible part is that this feud involves none other than the In re Johns Manville Corp. constellation of cases, including 06-2320 (2nd Cir., Jan. 17, 2007), in which Mr. Ostrager's cross-appeal was rejected because:

Travelers had 14 days to file its notice of cross-appeal. However, the firm calculated the 14 days from the date it received the notice, not from the date the notice was actually filed. The district court denied Traveler’s motion to extend the deadline by one day, explaining that this was a case of “garden variety attorney inattention” and not excusable neglect. The Second Circuit affirms.

Doh! But let's focus on the supposed worst advice ever.

The Travelers / Simpson argument is that Chubb / Cozen should have kept their mouths shut and not attempted to intervene, because the arguments they made (or the precedent created) in support of intervention could be used by plaintiffs attempting to sue Chubb in a later "direct action" case involving an asbestos trust.

There is something to be said for not putting forth your best argument in a particular case as part of a broader strategy involving other cases. That something is: you should not sandbag your own arguments in one case unless there is clear and convincing evidence that it will help you in other cases.

The law of unintended consequences applies to the practice of law just as it applies to everything else. What, exactly, did Travelers / Simpson believe would happen in the absence of the Chubb / Cozen intervention? That the billion-dollar asbestos plaintiffs lawyers industry would not realize a bankruptcy court's injunction protecting a non-debtor raised serious statutory and constitutional concerns?

We already know exactly the opposite is true, and that the asbestos plaintiffs lawyers were already challenging the power of the court to enjoin the "direct action" cases against insurance companies. These issues were already destined for the Circuit Courts and the Supreme Court. The difference was the names on the briefs.

Where then would that have left Chubb if Cozen had told them to sit on their rights and not intervene? Had the Supreme Court denied certiorari for the appeal, or if the Supreme Court agrees with the Second Circuit in prohibiting the bankruptcy court from enjoining these suits, then Chubb would have been left out in the cold, potentially precluded from raising issues relating to hundreds of millions of dollars in insurance coverage and tort liability.

Could that be in the running for the worst advice a lawyer ever gave a client?

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Kevin LaCroix at The D&O Diary delivers news that surprises no one, a securities class action based upon Bank of America's untimely disclosure of Merrill Lynch's catastrophic losses:

As has been well-publicized, within a matter of weeks of closing its acquisition of Merrill Lynch, Bank of America announced previously undisclosed 4Q08 operating losses at Merrill of $21.5 billion that required BofA to obtain an emergency $20 billion cash injection from the U.S. Treasury, as well as an additional $118 billion asset backstop. BofA’s stock market valuation has dropped more $100 billion since the day before the merger was announced through the company’s January 16 earnings release.

As the Wall Street Journal reported (here), questions immediately arose following BofA’s announcement of the Merrill losses, such as why BofA’s CEO Kenneth Lewis "didn’t discover the problems prior to the Sept. 15 deal announcement" and "why he didn’t disclose the losses prior to the vote on the Merrill deal on Dec. 5 or before closing the deal on Jan. 1."

With these kinds of questions circulating, it comes as no surprise that plaintiffs’ attorneys have initiated litigation. There were actually two different lawsuits announced on January 21, 2009 relating to these circumstances. Both of the lawsuits purport to be filed on behalf of persons who held BofA securities on October 10, 2008, the record date for the December 5, 2009 special meeting of shareholders to approve the merger.

LaCroix, no stranger to director and officer liability, has a thorough take on it, and Ideoblog raises the possibility of a "national interest" exception to securities disclosure laws due to the circumstances: on December 17, Lewis had become so concerned that he went to DC to meet with Bernanke and Paulson for guidance, both of whom, Lewis said, "[were] firmly of the view that terminating or delaying the closing...could result in serious systemic harm."

The Fed denied they requested Lewis to keep quiet. Either way, Lewis obviously knew of the trouble by the December 17 meeting with the Fed, but didn't report the losses publicly until Bank of America's next earnings statement on January 16. That's problematic.

The WSJ Law Blog also flags another action, this one brought by Susman Godfrey, alleging the same, with a particular paragraph of interest in their complaint:

As reported in The Wall Street Journal, just three days after shareholders voted to approve the merger, on December 8, 2008, Merrill’s CEO John Thain addressed a meeting of Merrill’s Board of Directors. Thain reported that Merrill suffered significant losses in November, which Thain described as one of the worse months in Wall Street history. Despite the size of these losses, Thain told Merrill’s board the losses were in line with BOA’s estimates. Neither BOA nor Merrill, nor any of the Individual Defendants, ever disclosed any such estimates . . . to their shareholders in the Proxy Statement. Likewise, no loss estimates were disclosed in any subsequent filings.

Ruh-roh!

• September 15 -- Deal is reached. BoA and ML get to work on details.
• October 31 -- Proxy statement issued to shareholders (you can find it here) in conjunction with the special meeting.
• December 5 -- Special meeting of shareholders, who vote to approve the deal.
• December 8 -- Thain tells ML board of significant losses in November, losses "in line with BOA's estimates."
• "Mid December" -- Lewis learns of ML's losses.
• December 17 -- Lewis meets with Bernanke and Paulson
• January 16 --  BoA discloses losses to shareholders.

Lewis & Thain's stories are not consistent. Either:

1. BoA didn't provide ML estimates like Thain suggested;
2. Lewis didn't know about BoA's own estimates, even though Thain did; or,
3. Lewis knew sbout ML's losses sometime significantly before December 8.

The plaintiffs are betting on #3, though they could make hay out of #2. It's hard to see how anyone could sue for #1 -- the BoA deal was the best thing that could have happened to ML, without which ML probably would have collapsed.

Of course, there's another issue here: both Bank of America and Merrill Lynch were effectively insolvent throughout the plaintiffs' class period. Both are completely dependent upon emergency government policies to stay operating, and the government has already stepped in to convert the messy merger into a complicated loan and guarantee program.

That is to say, anyone who bought shares of Bank of America in this time frame knew they were buying an effectively insolvent company, and the damages of the Merrill transaction may be, at most, to rearrange the form of Bank of America's insolvency -- possibly to its advantage.

(If you're not familiar with Section 14(a) shareholder class actions, there's a little background below the fold.)

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Overlawyered leads us to this line from a Posner opinion in Mirafasihi v. Fleet Mortgage Co., decided December 30, 2008:

It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest ...

The case alleged numerous violations of state (every state) consumer protection statutes and the federal Fair Credit Reporting Act. Specifically, Fleet Mortgage Corporation wrongfully used private financial and personal information it had on home mortgages to solicit (with deceptive practices, no less) 1.6 million of its homeowners with offers for financial services. 190,000 of them took the bait and purchased some of these services.

Suit was filed with two proposed classes, one for the 15% who were financial victims and one for the 85% who were 'merely' privacy victims. A settlement was eventually negotiated and approved simultaneously with class certification.

It was an awesome deal: the 1.4 million who merely had their privacy illegally violated so that a national bank could attempt to swindle them received nothing. Nothing despite state statutes imposing an average penalty-per-violation of over $1,000.

Wait, that's not fair, they did get something: they were to be precluded from ever filing suit individually.

Judge Posner was right: the situation presented a huge conflict of interest. Fleet almost certainly exploited the fact that the same lawyers represented both classes, and so likely deliberately negotiated with the intent to split the 190,000 financial victims from the 1.4 million privacy victims. The quote referenced above comes from this passage in Posner’s opinion:

We are disheartened that the litigation by the information-sharing class has been allowed to drag on for eight years, when it had no merit—and that as a matter of law, without need to take evidence. It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest, as we discussed recently in Thorogood v. Sears, Roebuck & Co., supra, 547 F.3d at 744–46. The lawyers for the class could not concede the utter worthlessness of their claim because they wanted an award of attorneys’ fees. The lawyers for Fleet were reluctant to argue the utter worthlessness of the claim because they were able to negotiate a settlement that cost their client virtually nothing—provided they did not take such a strong stand that it jeopardized the class lawyers’ shot at a generous award of attorneys’ fees, and hence the settlement.

That’s all well and good, and it is exactly why we permit members of a proposed class action settlement to file objections to the proposed settlement.

And that is what happened here: some of the 1.4 million homeowners whose privacy was intentionally violated as part of a fraud objected to the settlement on the grounds that they would receive nothing and no steps were going to be taken to ensure that neither Fleet nor anyone else would do this again.

The district court denied the first objection and approved the settlement, so the objectors appealed and won. The district court then approved a newly negotiated settlement with the privacy victims getting nothing, but with a quarter million going to consumer law public interest attorneys.

The objectors appealed again and won again.

The district court then went back, looked at the value of their claims, and concluded it was right the first two times. It also awarded, for the twice-successful appeals, $18,750 to the objectors' attorneys.

For reference, an appeal in a basic slip-and-fall case will cost at least $15,000 in hourly fees. Most humdrum state tort appeals cost between $20,000 and $50,000.

So what did Posner do on the third appeal? Blamed the objectors and their lawyers, forced them to be part of a settlement that extinguishes their claims for nothing, and affirmed the paltry attorneys' fee award for two prior successful appeals to the exact same court for which Posner was writing, the Seventh Circuit Court of Appeals. Then he accused the objectors' attorneys of "chutzpah" for daring to request fees on par with the original attorneys, the one's Posner accused of representing clients amid a conflict of interest.

Posner continued by blaming the district court for insufficiently analyzing the merits of plaintiff’s claims, apparently missing the irony of his own court waiting for the third appeal to point out that plaintiffs’ federal claims were "waived" before the first appeal and that the objectors' state claims had been “worthless” on their face the whole time.

And so the “typical pathology of class action litigation, which is riven with conflicts of interest” continued unabated, with the objectors and their attorneys penalized with foreclosed claims and massive losses in fees for only winning two out of three appeals, on grounds that evaded everyone for years except Posner.

Chutzpah, indeed.

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