The D.C. Circuit today upheld the Federal Communications Commission's authority to discipline a telephone service provider for wooing customers who decided to switch to a rival.  Verizon received customer change requests from alternative service providers (i.e., cable companies) and used the knowledge of impending customer losses to sweet talk the customers into staying.  The FCC concluded that Verizon's conduct violated 47 U.S.C. 222(b), which prohibits a telecommunications carrier "that receives or obtains proprietary information from another carrier" from using the info "for its own marketing efforts."  The D.C. Circuit sustained the FCC's order and denied Verizon's petition for review.  Verizon California, Inc. v. Federal Comm. Comm'n, No. 08-1234 (Feb. 10, 2009).

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The telephone company tells you it will give you low, low rates on your calls.  It even says you'll get the cheapest charges of all.

The nice salesperson has no clue how your rate plan stacks up against other customers' plans.  In fact, per the tariff it filed with the agency that regulates it, you will pay much more than the guy told you.  Sucker!

Blawgletter just insulted you because a nifty kink in the law — the filed rate doctrine — guarantees you can't get relief.  That doctrine, as the Eighth Circuit noted today, "prohibits a regulated entity from charging any rate other than that filed with the relevant regulatory authority . . . ."   Firstcom, Inc. v. Qwest Corp., No. 07-3548, slip op. at 16 (8th Cir. Feb. 9, 2009).

In Firstcom, the court affirmed dismissal of claims by a competitive local exchange carrier against Qwest.  The CLEC, Firstcom, bought access to Qwest's network under an "interconnection agreement".  It alleged that Qwest gave other CLECs better and cheaper access.  Qwest lodged a copy of the Firstcom interconnection agreement with the Minnesota Public Utilities Commission, which approved the agreement.  The filing, the court held, triggered the FRD, precluding Firstcom's overcharge claims.

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Blawgletter's unscientific survey of practicing lawyers confirms two things you would've expected — that mergers and acquisitions, real estate transactions, and other deals have fallen off the table while bankruptcy work has picked up.

But even in the bankruptcy up-tick lies a negative subtrend:  Our friends see more chapter 7 liquidations and fewer chapter 11 reorganizations.

The reorg cases last longer (hence more work) and aim to rehabilitate the business (ergo more professional satisfaction).  The 7s, on the other hand, go swiftly into carving up the businesses' still-warm corpses.

Yet that ill wind may blow more jobs towards another slice of the profession — the commercial litigation and trial types.

A decision by the Sixth Circuit today offers a glimpse into why.  It has to do with "derivative standing" of creditors.

The case concerned a debtor that owed around $18 million to Hyundai, a semi-truck trailer manufacturer.  Hyundai threw the debtor, Trailor Source, into an involuntary liquidation proceeding.  The bankruptcy court appointed a trustee.  Hyundai asked him to file an action to undo transfers that Trailer Source and an affiliate, Southern Trailer, made to another affiliate.  The trustee demurred, pleading poverty. 

Hyundai countered by filing a motion for permission to pursue the claims derivatively (on behalf of the bankruptcy estate of Trailer Source).  The trustee replied the same day by moving for approval of a settlement that traded a release claims to recover $20 million worth of allegedly fraudulent transfers for a cash payment of $50,000.  The bankruptcy court denied Hyundai's motion and granted the trustee's.

The district court reversed, and the Sixth Circuit agreed.  The bankruptcy court didn't make adequate findings to support approval of the $50,000 settlement, the both courts held.  Nor did it have grounds for denying Hyundai's application to proceed derivatively on the fraudulent transfer claims.  On the latter point, the court said:

[I]n 11 U.S.C. § 503(b)(3)(B) Congress has expressly provided that creditors may be compensated on a priority basis for their efforts in recovering property for the benefit of the estate. Specifically, § 503(b)(3)(B) provides for the priority payment of the expenses of “a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor.” 11 U.S.C. § 503(b)(3)(B).  An avoidance action pursuant to § 544(b)—as Hyundai proposes here—falls within the scope of § 503(b)(3)(B) as an action to recover “property transferred . . . by the debtor.”  Based upon the text and statutory history of § 503(b)(3)(B), we believe that the only explanation for this provision is that it approves the practice of permitting creditors, with court authorization, to pursue claims on behalf of bankrupt debtors.

In re Trailer Source, Inc. (Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc.), No. 07-5584, slip op. at 14 (6th Cir. Feb. 6, 2009).

The recognition of derivative standing in chapter 7 cases gives creditors the option of pursuing commercial claims when the trustee declines to do so.  Trustees do that from time to time because estates in liquidation often lack resources or the trustees don't want to work on a contingent fee basis.

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MoneyBundles 
Sharing risk produces this stuff.

An article in the NYT today leads with this:

Lawyers are having trouble defending the most basic yardstick of the legal business — the billable hour.

Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.

Oddly, to Blawgletter's way of thinking, the item says nothing about an obvious alternative — the contingent fee.

Let's see.  Unlike the hourly fee — which must die — a contingent fee arrangement:

  • aligns the interests of client and lawyer — in maximizing and expediting recovery,
  • encourages efficiency — in hours and expenses, and
  • minimizes the client's cash outlays — making more money available to fund profit-seeking business operations.

The NYT piece does hint at why so few firms offer the contingent fee option:

[T]he biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.

Ouch.

We would add that firms lacking experience with contingent fee work seldom do it well.  Reasons include:

  • Habits that formed in an hourly regime tend to carry over to a one-off contingent fee case.  That generates overinvestment (too many useless memos, unnecessary motions, and marginally helpful discovery), tension with the client (once the firm realizes its mistake and pulls back from working the case), and subpar economic outcomes for firm and client.
  • The crucial skill of evaluating a case results from years of learning what works and what doesn't, not sudden elightenment.

  • Taking on the peril of losing a case and shouldering the uncertainty of cash flow clash with firms' risk-averse cultures.

The director of litigation at a large oil and gas company told Blawgletter recently that his experiments with contingent fee arrangements had largely produced unsatisfactory results.  His take on why?  The firms "didn't know what they were getting into."

Just so.

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HVSubmarineCable 
An undersea high-voltage cable.  Note the coral.

Reuters quotes a statement from the U.S. Department of Justice that the Antitrust Division has started taking a look at "the possibility of anti-competitive practices in the submarine and underground cable industry."

On Monday, the Competition Bureau of the European Commission said in a press release:

The European Commission can confirm that on 28-30 January 2009 Commission officials carried out unannounced inspections at the premises of companies involved in the manufacture of high voltage undersea cables. The Commission has reason to believe that the companies may have violated EC Treaty rules on restrictive business practices (Article 81), which prohibit practices such as price fixing.

The Reuters item notes that an Italian company, Prysmian, and the largest cable-maker, Nexans, confirmed involvement in the investigation.  A Prysmian press release says:

Prysmian informs that antitrust authorities of certain countries commenced investigations aimed at assessing commercial practices in the submarine or underground high voltage cable market.

Prysmian is cooperating with the representatives of the competent authorities for the purpose of enabling the completion of the above mentioned investigations.

A "communique" from Nexans, a French outfit, says:

An investigation of Nexans, along with other international cable manufacturers, has been undertaken by competition authorities in Spain, Japan, South Korea, and the United States, as well as by the European Commission concerning in particular high voltage activities of the Group.

From time to time, investigations such as this one are carried out by competition authorities. Nexans is cooperating in providing requested documents.

At this stage, Nexans has no other comments to make.

Blawgletter expects to see a lot more announcements like this.  The tone of antitrust enforcement in the U.S. has shifted with the advent of a new administration and a new Attorney General — not to mention the nomination of a new enforcement chief, Christine Varney, at the Antitrust Division.

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MonkeyAndCat 
The Monkey and the Cat tells about a clever monkey that got a cat to burn its paw fetching chestnuts from a fire.

The Third Circuit today upheld a bankruptcy court's judgment ordering Lucent Technologies to return $188.2 million to Winstar Communications, which filed for bankruptcy protection on April 18, 2001.

The decision pivoted on whether Lucent counted as an "insider" of Winstar at the time it received the money less than a year before the bankruptcy filing.  If Lucent did move from mere creditor to insider, 11 U.S.C. 547(b) allowed Winstar's trustee to recover the $188.2 million remittance.

The Third Circuit affirmed the lower court's classification of Lucent as a Winstar insider.  Winstar's dependence on Lucent, as creditor and supplier, had so progressed by the time of the payment that Winstar had ceased to deal with its master at arm's length.  That Lucent had manipulated its dealings with Winstar — including forcing Winstar to buy Lucent equipment it didn't need — didn't help.  Nor did Lucent's purpose:  inflating its earnings.  In re Winstar Communications, Inc. (Schubert v. Lucent Technologies, Inc.), No. 07-2569 (3d Cir. Feb. 3, 2009).

Lucent also lost its appeal from a $62 million breach of contract award and beat an equitable subordination claim only to the extent the Third Circuit ordered the bankruptcy court not to subordinate Lucent's claims against Winstar below the claims of equity holders.

Feed-icon-14x14 Cat's paw fever!

Listen up, all you dieters out there.  Losing weight always, always, always means burning more calories than go down your alimentary canal.  One jumbo doughnut costs 633 of the buggers.  A person who weighs 150 pounds would have to run at five miles per hour for more than an hour just to get back to even!

Exercise alone, my friends, will not get you where you want to arrive.

Neither, apparently, will contradicting your in-court position to Judge A when Judge B wears the robe. 

The Ninth Circuit taught that lesson today to a "Hollywood" diet peddler, Spectrum, whose packaging — its "trade dress" — prompted another, Sunset, to sue for infringement.  Sunset alleged before Judge A that Spectrum's refusal, despite demands, to change its infringing 1998 trade dress until 2001 showed intransigence and warranted a preliminary injunction.  Spectrum answered that it began using a new trade dress similar to the 2001 version in 1999 and that Sunset acted inequitably in delaying three years to seek an injunction.  Judge A bought the argument and denied injunctive relief. 

The case later settled for $3,220,000.  One of Spectrum's insurers, United, contributed $340,000 to the pot.

United sued to recover its money.  It pointed out that its policy, which issued in 2001, didn't cover claims for "publication" of infringing matter before the date of issuance.  Spectrum answered by asserting — surprise! — that its 1999 trade dress didn't count as the first publication.  Judge B concluded that Spectrum couldn't disown its position before Judge A, and the Ninth Circuit agreed:

If we now allow Spectrum to argue that the claim did not arise until 2001, Spectrum's "gaming" of the courts will allow it the possibility of prevailing on the very position it successfully discredited while attempting to avoid [a] preliminary injunction.  The result would be unfair to Sunset, whose alleged harms increased as a result of Spectrum's 1999 arguments.  The result would also be unfair to United, whose indemnification obligations increased as Sunset's damages widened after Spectrum successfully avoided an injunction, then later settled.

United Nat'l Ins. Co. v. Spectrum Worldwide, Inc., No. 07-55833, slip op. at 1169-70 (9th Cir. Feb. 2, 2009).

Groundhog 
Happy Woodchuck (a/k/a Groundhog) Day!

You don't often see defendants wanting to talk about "wealth" in a jury trial.  But, in a patent infringement case that the Federal Circuit decided today, the defendants did just that.  Kinetic Concepts, Inc. v. Blue Sky Medical Group, Inc., No. 07-1430 (Fed. Cir. Feb. 2, 2009).

The lawsuit concerned patents that "relate to treating difficult-to-heal wounds by applying suction".  After a six-week trial in San Antonio, Texas, the jury returned a verdict that rejected the defendants' obviousness and unenforceability defenses but also declined to find infringement.  The district court (per Hon. W. Royal Furgeson, Jr.) entered judgment on the verdict and denied a welter of post-trial motions, including plaintiffs' motion for new trial on the ground that the defendants improperly appealed to jurors' disdain for rich people trying to get richer at the courthouse.  Defense counsel said the plaintiffs' owner wanted to "make a lot of money" off the patents. 

The Federal Circuit affirmed:

KCI alleges that Defendants’ . . . "blatant class-warfare arguments," including references to KCI’s wealth and the need for an inexpensive alternative to the VAC, prejudiced the jury and resulted in an incorrect verdict.

Blue Sky . . . argues that its references to KCI’s wealth were relevant to prove the bias of KCI’s witnesses and respond to KCI’s arguments that Blue Sky was more interested in profits than patients.

We agree with Defendants and the district court that the arguments to which KCI objects had proper uses or were made in response to issues raised by KCI. The district court expressly found that Defendants’ arguments did not amount to class warfare. Additionally, the jury was specifically instructed that it should not treat anyone unfairly based on wealth. Accordingly, we find no abuse of discretion in the court’s denial of KCI’s motion for a new trial.

Kinetic Concepts, slip op. at 23-24.

Feed-icon-14x14 Our groundhog saw its shadow today.

As all the world knows, the Private Securities Litigation Reform Act — which President Bill Clinton vetoed but which Congress passed anyway — toughened the pleading requirements for securities fraud claims.

The Supreme Court, in Tellabs, Inc. v. Makor & Rights, Ltd., 127 S. Ct. 2499 (2007), recognized the enhancement of difficulty by holding that the PSLRA allows a complaint to survive a motion to dismiss "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."  Tellabs, 127 S. Ct. at 2511.

The hardening of the scienter-pleading test would logically mean that the reasonable person wouldn't conclude he, she, or it had a claim until he-she-it learned facts suggesting a strong inference of fraud, right?  Which would have the effect of making a statute of limitations defense harder to prove and easier to whip, correct?

You are so smart.  The Third Circuit held on Friday that "inquiry notice, in securities fraud suits, requires storm warnings indicating that defendants acted with scienter."  Alaska Electrical Pension Fnd v. Pharmacia Corp., Nos. 07-4500 & 07-4564, slip op. at 11 (3d Cir. Jan. 30, 2009).  False statements, standing alone, don't tell an investor he-she-it has a claim.  The investor must also have information that makes the inference of fraudulent intent "cogent and at least as compelling as any opposing inference one could draw" from the information. 

 

Blawgletter has noted the proliferation of efforts to ban arbitration of similar claims on a class basis.  Under the guise of choosing an arbitral forum over a judicial one to settle disputes, more and more contracts embed within the arbitration clause a prohibition on class treatment.

We know that arbitration aims to speed and streamline dispute resolution, but what purpose does barring class arbitration serve? 

The U.S. Chamber of Commerce argues that "class arbitration removes the principal benefits of individual arbitration, yet multiplies the risks exponentially.  For this reason, few businesses would — or could — willingly consent to class-wide arbitration."

That sounds plausible.  What does the other side say?

Two main lines of attack have emerged — that banning class arbitration (1) frustrates enforcement of statutory rights and (2) runs afoul of state law unconscionability principles.  Both approaches urge that claimants cannot obtain effective relief unless they can aggregate their claims with those of others and thus make the proceeding economically viable.

Recent decisions include these:

  • Frustration.  Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007) (Cable Act); Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006) (antitrust); Booker v. Robert Half Int'l, Inc., 413 F.3d 77 (D.C. Cir. 2005) (civil right statute); Hadnot v. Bay, Ltd., 344 F3d 474 (5th Cir. 2003) (Title VII claim); Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en banc) (Title VII).
  • Unconscionability.  Skirchak v. Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007) (applying Massachusetts law); Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) (California law); Tillman v. Commercial Credit Loans, Inc., 665 S.E.2d 362 (N.C. 2008); Simpson v. MSA of Myrtle Beach, Inc., 644 S.E.2d 663 (S.C. 2007); Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en banc); Kinkel v. Cingular Wireless LLC, 223 Ill.2d 1 (Ill. 2006).

Yesterday, the Second Circuit came down on the side of courts that see more mischief in prohibiting class arbitration than in allowing it, at least in cases where enforcement of a class ban would immunize the defendant from liability for its misdeeds.  In In re American Express Merchants' Litig. (Italian Colors Restaurant v. American Express Travel Related Services Co., No. 06-1871-cv (2d Cir. Jan. 30, 2009), the court reversed the district court's refusal to strike a clause that required merchants to arbitrate claims against American Express on an individual basis.  The plaintiffs alleged that American Express violated section 1 of the Sherman Act by tying the merchants' ability to sell to premium "charge card" customers to an obligation to honor all American Express cards.  The tying arrangement, the complaint asserted, forced merchants to pay American Express excessive fees.

The Card Acceptance Agreement between merchants and American Express provided:

There shall be no right or authority for any Claims to be arbitrated on a class action basis or any basis involving Claims brought in a purported representative capacity on behalf of the general public, other establishments which accept the Card (Service Establishments), or other persons similarly situated.  Furthermore, Claims brought by or against a Service Establishment may not be joined or consolidated in the arbitration with Claims brought by or against any other Service Establishment(s), unless otherwise agreed to in writing by all parties.

In re American Express, slip op. at 11.

The court reviewed Supreme Court and other decisions that suggested or recognized "frustration of statutory rights" as a viable basis for invalidating a class arbitration ban.  It distilled from the cases the principle that a ban fails if the evidence demonstrates that enforcing it would grant "de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."  Id., slip op. at 33.

Note the court's emphasis that "the record abundantly supports the plaintiffs' argument that they would incur prohibitive costs if compelled to arbitration under the class action waiver."  Id., slip op. at 26.  The evidence include an expert's affidavit that detailed the high costs of litigating a tying claim and the infeasibility of prosecuting such a claim on an individual basis.  Indeed, as the court noted, "Amex has brought no serious challenge to the plaintiffs' demonstration that their claims cannot reasonably be pursued as individual actions".  Id., slip op. at 31.