Opec
OPEC spans the globe.

With the market price of West Texas Intermediate crude oil hovering just above $125 a barrel and regular gasoline prices spiking above $4.00 a gallon, your ordinary American citizen wants to know who to blame.  Count Blawgletter as one of them.

We can speculate about causes.  Does the lack of new refineries in the U.S. explain the price inflation?  If so, can’t we blame environmental extremism (and federal law) for making the cost of anti-pollution measures prohibitively expensive?  Nah.  According to the Energy Information Administration, which uses government data, domestic refineries ran at 83.2 to 88.9 percent between October 2007 and March 2008.

What about Big Oil?  In the fourth quarter of 2007 and the first three months of 2008, Exxon Mobil alone raked in net income of $22.6 billion.  Do you think it earned all that strictly through hard work and clever management?  Probably not all.  Suspect no. 1.

Restrictions on drilling offshore and in places like the Arctic National Wildlife Refuge in Alaska may also have contributed to an imbalance between supply and demand.  Skeptics point out that the fat profits of oil companies give them plenty of resources to explore for new reserves.  Not to mention government subsidies.  Plus the fact that ANWR would supply U.S. needs for less than 2.25 years under the best of circumstances.  And yet that sounds like more than a drop in the barrel to us.  Suspect no. 2.

What have we missed?  Oh, yes.  OPEC.  The Organization of Petroleum Exporting Countries, which consists of 12 sovereign nations, including Hugo Chavez’s Venezuela and Ayatollah Khameini’s Iran.

Congress hasn’t forgotten about the most famous price-fixing, quota-setting, and consumer-gouging cartel on Earth.  Earlier this month, the House of Representatives passed a bill, by a veto-proof margin (again), that would call OPEC to account for its antitrusty ways.

H.R. 6074 would amend section 1 of the Sherman Act so that it explicitly applies to restraints of trade in petroleum, natural gas, and other petroleum products.  It would condemn price and supply manipulation and the like by "any foreign state, or any instrumentality or agent of any foreign state," when it acts "collectively or in combination with any other foreign state, any instrumentality or agent of any other foreign state, or any other person, whether by cartel or any other association or form of cooperation or joint action".  The bill also would bar an "act of state doctrine" defense as well as one asserting foreign sovereign immunity.  And it authorizes the Attorney General of the U.S. to bring an action under the new provisions and requires a task force to study stuff like price-gouging and other bad conduct in the energy industry.

H.R. 6074 does not address possibly the most important issue — the political question doctrine.  As the Fifth Circuit reminded us on May 28, in a case involving death and injury to contract employees in Iraq, that doctrine prohibits judicial action that second-guesses the conduct of the political branches — the executive and Congress.  Lane v. Halliburton, No. 06-28074 (5th Cir. May 28, 2008) (reversing dismissal of tort claims and remanding cases for further development of record).  We expect that any action under the NOPEC statute would likely implicate all manner of policies — including the invasion and administration of Iraq, the President’s recent request that Saudi Arabia increase production, and the State Department’s stances towards OPEC and its individual members.

Which signifies to us that NOPEC will go nowhere even if it does pass the Senate and gets past a veto.  It apparently doesn’t allow private litigants to sue OPEC; only the Attorney General has such authority.  And even if the new President in January 2009 instructs the new Attorney General to sue under NOPEC, the political question doctrine may doom any challenge to violations that happened previous administrations.  And probably post-swearing in ones too.  What court can sort all that junk out?

Political theater.  Don’t you just love it?

Feedicon Actually, our feed doesn’t like it that much.

Thom Weidlich at Bloomberg reports that "[a]t least 24 proposed class actions have been filed since mid-March against brokerages over claims investors were told the [auction rate] securities were almost as liquid as cash."  The cases stem from the collapse of auctions that supplied liquidity for ARSs in February.  Investors could no longer sell the ARSs and so couldn’t get their money out.

Mr. Weidlich explains that the class actions face two serious obstacles.  The first concerns the merits.  Many ARSs paid interest at rates a tad higher than other "liquid" alternatives, such as a money market account.  But the failure of the auctions sent them into default, which in turn triggered a contractual obligation by the issuers to pay a higher rate.  An investor earning interest at the default rate may run into trouble showing that she would’ve gotten a better return on her money but-for her inability to get at the cash she invested in an ARS.

This damages problem likely doesn’t apply to people who bought auction rate preferred securities, which don’t reset to a higher return after default.  But the difference between the dividends on the ARPSs and earnings on alternative investments may not amount to much.

The second roadblock relates to the requirements for treating claims on an aggregate basis in a class action.  A court generally won’t handle a case for damages on a class basis unless the lawyers can show, on a class-wide basis, that all class members suffered harm.  Note the "class-wide basis" thing.  If the nature of the class claims requires each class member to prove the fact of injury individually, class certification becomes an iffy proposition.

How does one establish class-wide harm?  In price-fixing cases, plaintiffs typically do it by showing that the price fixers elevated the price by a minimum percentage — 10 percent, say.  Some class members may have overpaid more than the 10 percent, but everybody overpaid by at least one-tenth.

Securities cases do much the same thing.  Experts opine that the fraud inflated the market price of the relevant stock or bond by at least such and such percentage at the time of purchase; damages represent the difference between the purchase price and the "true" value of the security.

But the collapse of auctions for ARSs didn’t affect their underlying value.  The issuer’s ability to pay didn’t change as a result of the withdrawal of liquidity from the auction market.  So how can the investors demonstrate losses?

They conceivably could cite the difference between the buying price and the lower prices on secondary markets.  But where will they get that information for each ARS?  Unlike stocks and bonds, ARSs don’t trade publicly and so purchase and sale prices don’t show up in the business section of newspapers.

Conceivably an expert will find a way to calculate the minimum value of the liquidity feature of ARSs.  Blawgletter shares Bloomberg’s skepticism about whether such an opinion will survive defendants’ savage attacks on it, but we will wait and see.

That leaves damages resulting from an investor’s inability to access his funds to use for a specific purpose.  He can’t make his payroll, for instance.  Or he has to break a contract to buy a company, a piece of land, or other investment.  But such losses of profits don’t happen to everyone in a class and would require proof unique to each claimant.  And brokerages that sold ARSs to such people have in some cases loaned them funds to mitigate their harm.  Those sorts of individual circumstances often mean no class action.

ARS investors still may pursue individual claims.  The best candidates are those who couldn’t get their money out in time to close a pending acquisition and lost a tidy sum as a result.

Feedicon14x14 There will be blood.

Bribery
Bribery doesn’t necessarily add up to securities fraud.

What happens to a company that pays $420,000 in unlawful consulting fees to a state senator whose legislative committees oversees the company’s activities?  Good government?

What about when the truth outs?  Can you say plunge in price per share?

A 42-month series of $10,000 payments to a Tennessee lawmaker lay at the heart of a putative class action against a healthcare company for securities fraud.  The complaint alleged that the bribery resulted in scandal, which produced regulatory action, which gave Wall Street heartburn, which generated a big drop in the market value of United American Healthcare’s stock. Zaluski v. United American Healthcare Corp., No. 07-1298 (6th Cir. May 27, 2008).

The concatenation of events gives a clue as to why the district court dismissed and the Sixth Circuit affirmed:  bribery generally doesn’t violate section 10(b) of the Securities Exchange Act.  And, because it doesn’t, you wouldn’t expect a public company to make representations about whether or not greasing the palm of an overseeing solon has gone on.

The Sixth Circuit did a nice job of dissecting the complaint.  Reminding Blawgletter of a grand old common law case — in which one of the 19th-century English judges pronounced a statement "a mere puff" — the court deemed a happy assurance (that the state counted the company among "viable" managed care organizations) to constitute "immaterial puffery".

But the guts of the decision emphasized the indirectness of the connection between paying bribes and a plummeting share price.  The jump off a cliff doesn’t kill you, the court reasoned; the sudden stop at the bottom does.  Quod erat demonstrandum.

Feedicon Q.E.D.

Why do people kill themselves?  Does self-destruction ever make sense?  And who can say what caused a specific person — Lance Dowell, say — to hang himself after hospital doctors negligently failed to urge him to stay for psychological treatment?

If you think a jury ought to hear all the evidence and render a verdict about responsibility for Mr. Dowell’s irrational choice, you would have excellent company.

Article I, section 15 of the Texas Constitution provides that "[t]he right of trial by jury shall remain inviolate" and that "[t]he Legislature shall pass such laws as may be needed to regulate the same, and to maintain its purity and efficiency."  The United States Constitution similarly requires that, "[i]n 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."

But a majority of the Texas Supreme Court begs to differ with you.  Last Friday, five of the Justices ruled, in Providence Health Care Center v. Dowell, No. 05-0386 (Tex. May 23, 2008), that the jury never should have found a causal connection between the doctors’ negligence and Mr. Dowell’s suicide.

Never mind that the trial judge considered the evidence sufficient to go to the jury.  Or that the court of appeals, in a 2-1 decision, agreed.

Or that Mr. Dowell’s parents showed that the hospital’s negligent failure to diagnose his condition and advise hospitalization led to his hanging.  As the dissent noted:

The Dowells presented evidence that a reasonable person similarly situated would have consented to hospitalization.  The evidence presented indicated that suicidal patients generally consent to hospitalization when it is properly advised.  All three of the Dowells’ experts testified that, in their experience, all or nearly all of their patients agree to hospitalization when the consequences of not doing so are explained.  In sum, the Dowells presented evidence that a reasonable person in Lance’s position would have agreed to hospitalization, and there is no legal support for requiring more.

A court cannot follow the constitutional command to treat the right to trial by jury as "inviolate" and to "maintain its purity" by reweighing the evidence and holding that the jurors got it wrong.  Inviolate means inviolate.  Pure means pure.

Blawgletter fears that this court, in its enthusiasm to overturn jury verdicts it disagrees with, cultivates the view that Texas juries render only advisory opinions about the facts.  And that the court will undo findings that 12 citizens have deliberately made whenever five or more officeholders conclude that they would have found the facts differently if they had they sat in the jury box.

Nor can we fathom the court’s seeming disrespect for litigants.  It waited a full three years (from May 17, 2005) before acting on the hospital’s petition for review.  It did not hear oral argument.

We would humbly remind Their Honors, on this Memorial Day weekend, of the words of Abraham Lincoln:

It is rather for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom — and that government of the people, by the people, for the people, shall not perish from the earth.

Feedicon Turning and turning in the widening gyre.

Lincoln
Abraham Lincoln liked jury trials just fine.

Last February, Blawgletter reported a steep decline in Texas state court jury trials in civil cases.  In 1996, district court juries rendered 2,971 verdicts but only 1,428 during 2006 — a drop of 52 percent.  District judges also directed verdicts 253 times in 1996 but 473 times in 2006 — an increase of 87 percent.

We wondered whether the trend continued into 2007.  Today we disclose the results.

According to The Texas Office of Court Administration, juries decided 1,643 district court cases in 2007, and district judges directed verdicts in 384.  The performance improved the decline in jury verdicts to less than 45 percent from 1996 and the jump in directed verdicts to below 52 percent.

Will the trends towards more jury trials and fewer directed verdicts continue in 2008?  The statistics through April 2008 give good news and bad.  The 459 jury verdicts in the first four months translate into 1,377 for the full year — raising the drop-off from 1996 to 53.6 percent — but the directed verdicts so far (103) equal 309 for all of 2008 — a rise of only 22 percent versus 1996.

Note that a fall-off in caseloads cannot account for the trend.  In 1996, pending district court cases (including criminal matters) totaled a bit more than 700,000.  By 2006, the number had grown to more than 900,000 and in 2007 to about 950,000.  We should have more jury trials now rather than fewer.

The overall results suggest that trial by jury in civil cases remains under pressure if not in danger of extinction.

Section 12 of the Texas Constitution provides that "[t]he right of trial by jury shall remain inviolate.  The Legislature shall pass such laws as may be needed to regulate the same, and to maintain its purity and efficiency." 

What happened?

Feedicon Can you say standard of review?

Celltower
Golden Bridge’s new argument (about validity of a wireless technology patent) has fallen down.  My fair lady.

Can you raise on appeal an argument you didn’t make in the trial court?  Usually not.  Golden Bridge Technology, Inc. v. Nokia, Inc., No. 07-1215 (Fed. Cir. May 21, 2008).

What if you have shiny new appellate counsel?  Counsel who thought up a bodacious new point that the old lawyers somehow missed?  Does that matter?

No.  It.  Does.  Not.

Blawgletter realizes that the losing party in its bitterness may feel a strong tug towards firing the old legal team and bringing in the pros from Dover.  We don’t blame them.  But, as the Golden Bridge case illustrates, switching counsel on appeal will seldom change the outcome.  Indeed, if the new lawyer cites her predecessor’s mistake as the principal reason for reversal, she may (rightly) feel like a genius.  But no court will rescue the client on that ground.  And, unlike the old lawyer, the new counsel won’t even get Their Honors’ sympathy.

So we think clients, in general, ought to put aside their disappointment, unpoint the Finger of Blame, and go upstairs with the counsel who brung ’em.

Feedicon Period.

Blawgletter hears and reads a lot about meritless lawsuits.  We wonder what the speakers and writers mean by that. 

Meritless, to us, implies something close to frivolous.  And frivolous treads on ground parlously close to, if not over the line of, sanctionable.

But let’s not go there today.  Let’s stick with meritless.

The word can’t signify only that the lawsuit-bringer loses.  Tons of stuff can bring defeat:  Lack of jurisdiction, suing too late, suing too early, sanctions for discovery abuse, failure to meet deadlines, estoppel, issue and claim preclusion, volenti non fit injuria, running out of money for fees and expenses, and a thousand other shocks that claims are heir to.

Nor does meritless imply a trouncing on the merits.  We have gobs of procedural hurdles that aim to balance our desire to correct wrongdoing against the risk of collateral consequences.  Fraud pleadings thus must allege deceit with particularity; after Twombly‘s horror of discovery, averments must (sometimes) meet a (vague) plausibility test; and certain types of claims have to satisfy a clear and convincing standard of proof.

So what does meritless mean?  Probably just this:  that the lawsuit, or its handling, failed any of the multivarious challenges that our system puts in its way.

Yesterday reminded us of how seldom a jury, instead of a judge, passes judgment on whether the lawsuit has merit.  The 13 federal courts of appeals published, by our count, eight opinions in regular civil cases.  One reversed denial of a motion to vacate a default judgment; another overturned a refusal to allow intervention; three upheld summary judgments; one affirmed a dismissal for failure to state a claim; and one okayed a judgment on the pleadings.

What happened in the eighth case?  It went to trial.  A jury rendered a verdict.  The district court entered judgment on it.  But then the court of appeals reversed and remanded for entry of judgment contrary to the verdict.

We guess that one was meritless, too.

Feedicon14x14 But how can we really know?  For now we see through a glass, darkly.

Babysteps
Will the ALI opt for baby steps on new aggregate settlement principles?

Remember that 1L who talked in class all the time?  The one whose hand shot up even if the prof hadn’t asked a question?  The gunner who made you wish Socrates kept his method to himself?

Every law school section had an individual like that.  If you ever wondered where they all went, speculate no more.  They joined the American Law Institute.  And they have gathered at The Mayflower — the sometime home-away-from-home of a Blawgletter law classmate, Eliot Spitzer, and until Wednesday the temporary headquarters of law geekdom.

(Note the they.)

The session yesterday devoted several hours to chapters 1 and 3 in Principles of the Law of Aggregate Litigation, Tentative Draft No. 1 (Apr. 7, 2008).   Members aimed comments, criticisms, and a few barbs at the Reporter and Associate Reporters, who handled them in good cheer.  The discussion produced several revisions and clarifications.  It also resulted — with a big exception — in consensus approval of both chapters.

The sections dealing with aggregate settlements — 3.17, 3.18, and 3.19 — failed to gain general acceptance.  At the suggestion of ALI’s Director, Lance Liebman, they didn’t go up for a vote.  The reporters will instead revisit the provisions and present them again at the next annual meeting in 2009.

Sections 3.17-3.19 would make a major change to what people call the "aggregate settlement rule".  The ASR in general invalidates an agreement by multiple clients to abide by a majority vote on accepting an aggregate settlement.  Section 3.17(b)-(d) would reverse the ASR, allowing enforcement of such agreements if the joint clients knowingly consent, in writing, to an approval mechanism by a "substantial majority" of the clients.

The consensus broke down over concern that the new rule would cede undue authority to mass tort lawyers.  Some commenters suggested support for the rule in the context of business litigants but worried that many personal injury claimants lack enough information and sophistication to give effective consent at the time of hiring counsel.  A third group supported the rule as an improvement over the ASR, which now impels plaintiffs’ lawyers to abandon representation of clients who refuse to take their share of an aggregate settlement (think fen-phen and Vioxx as examples).

We can’t predict how the reporters will navigate the fault lines within the ALI, but two options look possible if not likely:  First, they will build even more client protections into Sections 3.17-3.19 and, second, they will scale back their ambitions — for now — and deal only with classes of clients that satisfy a test for sophistication. 

The latter strikes us as a prudent incremental step towards a better regime for handling settlements in aggregate litigation.  If experience proves it good, the ALI and courts may extend it to other situations.

Feedicon14x14 Our feed likes baby steps.

Blawgletter wrote this comment to the American Law Institute last week:

Congratulations on your excellent progress towards making Principles of the Law of Aggregate Litigation a reality.  I appreciate and commend your dedication to such a challenging project.

So I ask your indulgence for my suggestion of what I see as an improvement to a draft that I otherwise embrace.  My suggestion relates to section 3.17, which as you know prescribes the "circumstances required for aggregate settlements to be binding".  Subsection (a) says that lawyers may settle non-class claims "on an aggregate basis provided that each claimant gives informed consent, in writing."  So far so good, I think. 

But the accompanying Comment should, and yet does not, address the situation — familiar to me — in which clients agree in advance to (a) pay a specific contingent fee and (b) split any aggregate recovery according to a mechanical formula. 

Section 3.17 contemplates an entirely different set of circumstances — where the prospect of an aggregate settlement gives the plaintiffs’ lawyers a powerful incentive to accept the settlement regardless of its impact on individual clients and the value of their unique claims. 

The section makes me think of fen-phen, breast implants, Vioxx, and other mass action cases involving personal injury.  In those cases, clients generally lack sophistication and have claims that may vary widely in value.  Plus they engage counsel without reference to clients that the lawyer already represents and those the lawyer may agree to represent in the future. 

Commercial litigants, by contrast, can assess the value of their claims relative to others’ at the outset and intelligently agree to split any proceeds of a lawsuit according to a formula.  In a price-fixing case, for example, clients enter into an agreement that sets each client’s share of any recovery in terms of a percentage.  The agreement may, and probably should, specify a voting mechanism for deciding whether or not to accept an aggregate settlement.  The only question at that point concerns the adequacy of the total settlement — not how the clients will divide the proceeds. 

Forcing commercial clients onto the Procrusetean bed of section 3.17 would not further the ALI’s aim of protecting clients from their lawyers’ indifference to individual circumstances once defendants offer enough aggregate money to buy the lawyers off.  Clients should have the option of entering into an effective agreement (usually pre-litigation) for a formulaic division of aggregate proceeds, if any.  That will facilitate their retention of counsel. 

I therefore suggest adding to the Comment the following language: 

For purposes of this section, clients may give "informed consent, in writing" to a methodology for dividing the benefits of any aggregate settlement when they hire counsel.  This section therefore does not prevent clients from agreeing, at the time of retaining counsel, to divide any aggregate recovery on the basis of a formula, such as a percentage for each client.

Feedicon The ALI annual meeting starts today.