Blawgletter could hardly contain our enthusiasm when we heard about the nomination of Michael Mukasey to replace Alberto Gonzales as U.S. Attorney General.  We said Call Us Crazy, but We Like Mukasey.  We updated our feelings a couple of times but not since the second day of Mr. Mukasey’s testimony to a Senate committee.  That day, unlike the first, didn’t go so well for lovers of constitutional democracy and its many blessings.

Now we hear that Mr. Mukasey’s nomination hinges on his simultaneous revulsion to, but uncertainty about the lawfulness of, "waterboarding".  He and supporters say he can’t answer the legality question — whether waterboarding = torture — until he knows all the details, which he can’t get for security reasons until he becomes AG.  Plus he shouldn’t prejudge the issue anyway.  Too unseemly.

Mr. Mukasey’s dilemma reminds us of Lord Acton‘s observation on the effects of power.  Except in this case the dictum applies to someone on the cusp of it and madly anxious to grasp it but dependent on others to entrust it to him.  Talk about unseemly.

Barry Barnett

Our feed wishes all a happy Friday.

The Federal Circuit today affirmed a district court’s refusal to award attorneys’ fees in a patent case.  The plaintiff, Digeo, bought a patent on an "as is" basis at a bankruptcy sale and sued the defendant, Audible, for infringement.  Audible discovered a fatal defect in title to the patent — someone had forged one of the signatures on the patent application. 

The forgery related to "Oliver Chang", whom the application falsely represented as the executor of the estate of a dead co-inventor, "Edward Chang".  Audible showed that Oliver Chang didn’t sign the application and that Edward Chang hadn’t died yet.  Digeo sought a voluntary dismissal, which the district court granted.  But the court declined Audible’s request for an award of attorneys’ fees under 35 U.S.C. 285, finding the case not sufficiently "exceptional" under the statute.

The Federal Circuit agreed.  It pointed out that Audible bore the burden of showing exceptionality but had fallen short because it failed to prove that Digeo, when it filed suit, realized that somebody had forged Oliver Chang’s signature or that Edward Chang still lived.  The court accordingly affirmed.  Digeo, Inc. v. Audible, Inc., No. 07-1133 (Fed. Cir. Nov. 1, 2007).

Barry Barnett

Had enough Halloween candy?  Feast on our feed.

After years of litigation and arbitration, a federal judge considers whether to confirm an award that resulted from the arbitration.  He orders a hearing but doesn’t say he’ll take up the motion to confirm.  But at the hearing he grants a motion by the lawyer for the party opposing confirmation to withdraw (due to a conflict of interest).  The Article III appointee then proceeds with the merits of the confirmation motion.  He rejects a continuance request (to secure new counsel) and refuses to consider an opposition (that old counsel filed before withdrawing).  Finding the motion to confirm without opposition, His Honor confirms the award.  The losing party appeals.

Does this sort of stuff still happen?  Yes, Blawgletter fears, it does indeed.  The Fourth Circuit fortunately corrected the miscarriage, holding that the proceedings denied the appellant’s "due process right to meet and oppose the claims" and "otherwise [to] participate in the resolution of the merits of this case."  RZS Holdings AVV v. PDVSA Petroleo S.A., No. 06-1680 (4th Cir. Nov. 1, 2007).

Wow?  Yikes!

Barry Barnett

Our feed welcomes you to November.

10.       A big solo case looks big

At least $10 million in hard damages

9.         A little case may count as a big case if it involves conduct that affects a lot of people

Competitors and business customers:  Monopolization, price-fixing, territory or customer allocation, limit of supply, boycott, tying products

Buyers, sellers, and owners of securities:  Securities fraud, officer and director breach of fiduciary duty, minority oppression

Consumers:  Deceptive trade practices, fair credit reporting,

Current and ex-employees:  Overtime, pension, and health benefits

8.         Any client may bring you the big case

Businesses, including (especially) ones in bankruptcy

Local governments

Employees of large companies

Trade groups, business associations, and employee organizations

7.         You can improve your chances of getting the big case by watching legal developments

Legal publications

            Law360, American Lawyer

National press

            — The Wall Street Journal

            — Bloomberg and Reuters

Firm newsletters and websites

Blawgs

            — Blawgletter.com

Relationships

6.         Act promptly

Limitations may be running

Avoid overanalysis paralysis

Most cases organize fast

Having relationships expedites the process

5.         Identify a handful of lawyers, not law firms

Law firms don’t try cases, lawyers do

4.         Consider the lawyers’ available resources and track record

Expertise

Ability to fund litigation expenses

Ability to project lawyers where necessary

Local and national reputation

3.         Make contact with at least two but get confidentiality from all

Competition works

Make contact personally

Working relationships matter

Confidentiality agreement protects the client and you

2.         Negotiate and sign a fee agreement

ABA rules require (a) proportionate division or joint responsibility for representation, (b) client approval in writing, and (c) reasonableness.  Mod. R. Prof. Cond. 1.5(e).

Agreement should define relationships (e.g., lead counsel, responsibility for costs, decision-making process)

1.         Don’t be shy!

Nobody resents getting your first call

If you don’t ask, you won’t get

Barry Barnett

Happy Halloween!

Blawgletter reported yesterday about the Supreme Court’s accepting review of the $2.5 billion punitive damages award in Exxon Shipping Co. v. Baker, No. 07-219.  Order List at 2.  We guessed that the Court may use the case to open up a new line of battle in the war against punitive damages.  We feel a little better today.

Why?  Because the Court’s order limits the grant to three issues under "maritime law" — whether it allows punitive damages for (in effect) corporate gross negligence, whether the Clean Water Act’s specification of penalties precludes a punitive award under it, and whether the award falls within the limits it permits.  The Court denied review of a due process question.  We suspect it would have gone otherwise had Justice Alito not recused himself.

Shew!  We worried that the Court might start requiring each punitive damages case to negotiate yet another, one through which only flagrantly necessary yet tiny awards might pass.  Not yet.

The prospect — likelihood — that the Court will axe another jury verdict (after the Ninth Circuit slashed it in half already) still troubles us.  But at least it isn’t worse.  Yet.

Barry Barnett

He who fights and runs away lives to fight another day.

These obviously insane people trade commodities.

A very nice ABA person asked Blawgletter to write an item for the Preview of United States Supreme Court Cases. She specified a case — did she call it glamorous? — involving a private cause of action under the Commodities Exchange Act.  How could we resist?  Writing and pork bellies. Woo-hoo! So wrote we did. And today’s oral argument in Klein & Co. Futures v. Board of Trade of the City of New York, No. 06-1265, appears here and our Preview opus below.

COMMODITIES TRADING

May a Futures Commission Merchant Sue a Board of Trade for Failure to Keep a Commodities Exchange Honest?

by Barry Barnett
Barry Barnett grew up in Nacogdoches, Texas; graduated from Yale and Harvard; and practices business trial law at Susman Godfrey L.L.P. in Dallas, Texas. His writing projects include a law blog, Blawgletter, and a newsletter, award-winning Barnnett’s Notes on Commercial Litigation. You can reach him at bbarnett@susmangodfrey.com or 214-754-1903.

In this case the Court is being asked to decide to either broaden or restrict the class of persons who may sue commodity boards of trade under the Commodity Exchange Act. If the class is broadened, not only people who bought or sold commodity contracts could recover losses but also those who process such trades under the arrangements peculiar to commodity exchanges.

Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, et al. Docket No. 06-1265

Argument Date: October 29, 2007

From: The Second Circuit

The Commodity Exchange Act provides an express private right of action to recover actual losses to a person who “engaged in any transaction” that was on or “subject to the rules of” a commodity board of trade if the board, in bad faith, engaged in illegal conduct that caused the person to suffer the actual losses. 7 U.S.C. § 25(b)(1).

ISSUE

Did the court of appeals in this case err in concluding that futures commission merchants lack statutory standing to invoke the right of action contained in 7 U.S.C. § 25(b)(1)?

FACTS

Norman Eisler used Klein & Co. Futures, Inc., a futures commission merchant (FCM), to buy futures contracts, in a Pacific Stock Exchange Technology Index (P-Tech), for his firm, First West Trading, Inc. First West purchased the contracts “on margin” – with a loan from Klein & Co. At the same time, Eisler exploited his positions as chairman of the New York Futures Exchange and as a member of the P-Tech Futures and Options Settlement Committee to manipulate the end-of-day value (or “settlement price”) of all P-Tech futures and options contracts. He did this to hide big losses on the First West positions during 1999 and 2000.

Or so Klein & Co. alleged after Eisler’s scheme collapsed, killing the firm.

The derailment went like this: In May 2000, people started complaining about settlement prices for P-Tech contracts. The gripes led to Eisler’s ouster from the NYFE and the P-Tech committee and a fresh look at the values of P-Tech contracts. Recomputation produced – surprise! – far lower assessments and a $4.5 million deficit in First West’s trading account at Klein & Co. A now-frantic Klein & Co. called on First West for more collateral, but First West of course defaulted – and took Klein & Co. down with it.

But why did First West’s demise likewise kill Klein & Co.? The answer may hold the key to the Supreme Court’s decision in this case.

Let us start our journey by defining some terms. You already know about commodities – just about anything that the imagination of mankind can conceive of standardizing, packaging, and trading in. Stuff like pork bellies, barrels of sweet crude oil, and (yes) even futures and options contracts. A futures contract obligates the buyer to purchase or sell the relevant commodity on a date certain – the “strike date.” An options contract, on the other hand, entitles the buyer to do the same thing but doesn’t require him to do so.

Commerce in options and futures amounts to risky-but-legal gambling. The buyer of a contract – for, say, 100 pounds of choice white grease – bets that the market grease price will go up between the purchase date and the strike date. If the price of grease does rise, he pockets the difference between what he agreed to pay on the strike date and the market price at which he may now sell the oleaginous substance. Vice versa if the price tumbles.

Eisler and First West gambled on the value of P-Tech futures and options, but they lost. And their crapshoot brought down Klein & Co. because the resulting charge pushed its net capital below the minimum necessary for it to maintain trading privileges with the New York Clearing Corporation (NYCC) and the New York Mercantile Exchange (NYMEX). Suspensions by NYCC and NYMEX put the nails in Klein & Co.’s coffin. Klein & Co. sued the Board of Trade of the City of New York (NYBOT), NYCC, Eisler, and others under sections 25(a) and (b) of the Commodity Exchange Act (CEA), 7 U.S.C. § 25. After dismissing Klein & Co.’s CEA claims, the district court declined to exercise supplemental jurisdiction over state law claims and tossed them without prejudice. Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, 2005 WL 427713 (S.D.N.Y. Feb. 18, 2005).

The Second Circuit affirmed. Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, 464 F.3d 255 (2d Cir. 2006). The two-judge panel – a third judge recused himself – first concluded that Klein & Co. lacked standing to sue under the CEA. The court opined that all four subdivisions in section 25(b) “limit claims to those of a plaintiff who actually traded in the commodities market” and therefore do not cover non-traders. Id. at 260. Because Klein & Co. acted solely as an FCM of the NYCC, it did not “actually trade” in the P-Tech contracts and thus could not bring a claim under the CEA. The court also upheld the district court’s discretionary dismissal of Klein & Co.’s state law claims in light of the absence of federal question jurisdiction. The Supreme Court granted Klein & Co.’s petition for a writ of certiorari and granted leave for the Solicitor General to participate. The United States and the Futures Industry Association, Inc., have both filed amicus briefs in support of the Klein & Co. position.

CASE ANALYSIS

At first glance, Klein & Co. Futures, Inc. v. Board of Trade presents a straight question of statutory construction. Section 25(b) of the CEA provides:

§ 25. Private rights of action

(b) Liabilities of organizations and individuals; bad faith requirement; exclusive remedy

(1)(A) A contract market or clearing organization of a contract market that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by section 7a(8) and section 7a(9) of this title,

(B) a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission, or

(C) any contract market, clearing organization of a contract market, or licensed board of trade that in enforcing any such bylaw, rule, regulation, or resolution violates this chapter or any Commission rule, regulation, or order,

shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such contract market or licensed board of trade to the extent of such person’s actual losses that resulted from such transaction and were caused by such failure to enforce or enforcement of such bylaws, rules, regulations, or resolutions.

Section 25(b)(4) adds a bad faith element. 7 U.S.C. § 25(b)(4) (requiring that defendant “acted in bad faith in failing to take action or in taking such action as was taken.”).

The statutory question resolves into what phrase “a person who engaged in any transaction” means. Klein & Co. takes it to signify “an indispensable party to” a commodities transaction in the sense either of the actual trader or of a “clearing member” (like Klein & Co.) who processes the trade. Brief of Petitioner at 8. The petitioner emphasizes that commodity exchange rules make it far more than a mere participant in trades. The rules also mandate “that any contract made on the exchange ‘shall be made on behalf of a clearing member,’ such as petitioner, ‘who shall be the buyer or seller of said contract on the terms set forth therein’ and that the clearing member shall assume as its own the futures contracts on the exchange.” Id. (quoting New York Futures Exchange Rule 306(i)(2)) (emphasis added). The Solicitor General makes much the same point. Brief of the United States as Amicus Curiae Supporting Petitioner at 20-24.

The respondents see things quite differently. They urge that the plain language of section 25(b)(1) – plus several other factors – limits the class of people with standing to actual traders on a commodity market. They portray Klein & Co. and amici as arguing that “any transaction” in section 25(b)(1) covers “any activity governed in any way by the rules of a contract market.” Brief of Respondents at 21. They then cite three statutory snippets that, they contend, use the term “transaction” to refer only to something that traders do.

SIGNIFICANCE

The outcome of the case will, in the narrow sense, either broaden or restrict the class of persons who may sue under the CEA. If the class is broadened, not only people who bought or sold commodity contracts could recover losses but also those who process the trades under the arrangements peculiar to commodity exchanges. The latter of course include clearing member FCMs such as Klein & Co. A broadening of potential liability through a reversal in Klein & Co. seems modest. How often, really, will a clearing member choose to sue a commodity exchange, on whose goodwill its business depends? Plus the requirement of proving bad faith looks tough. The case of Klein & Co. thus appears to be an outlier.

Let us note here that Klein & Co. doesn’t involve a circuit split. It doesn’t embody a fact pattern that one expects to see on a reality television show. So why did the Court reach out for it?

The true significance of Klein & Co. may consist in its pairing this Term with Stoneridge Inv., LLC v. Scientific-Atlanta, Inc., 06-43 – probably the most important securities case before the Court so far this decade. Stoneridge offers the justices a chance to limit liability under federal securities law to companies and individuals who actually make misrepresentations on which investors rely in buying securities. Allowing clearing members to sue quasi-regulators under the CEA for what amounts to bad faith failure to prevent commodities fraud might seem like an elegant way to contrast the two statutory schemes. We shall see.

ATTORNEYS FOR THE PARTIES

For Klein & Co. Futures, Inc. (Drew S. Days III (202) 887-1500)

For Board of Trade of the City of New York, et al. (Andrew J. Pincus (202) 263-3220)

AMICUS BRIEFS

In Support of Klein & Co. Futures Inc. Futures Industry Association, Inc. (Christopher Landau (202) 879-5000) United States (Paul Clement (202)-514-2217)

Barry Barnett

Our feed likes commodities because they attract price fixers.

The Supreme Court announced today, per The Washington Post, that it will consider Exxon’s fight against the biggest punitive damages award in history.  An Anchorage jury ordered the world’s biggest oil company to pay $5 billion in 1994 for letting an alcoholic who’d relapsed into dipsomania captain an enormous oil tanker, the Exxon Valdez.  Exxon’s entrustment of the vessel to Captain Joseph Hazelwood resulted in its 1989 grounding and rupture and catastrophic pollution of the coastline. 

The Ninth Circuit cut the award to $2.5 billion, but did that satisfy Exxon?  Nosir.

The Exxon Valdez after running aground on Bligh Reef.

Blawgletter read an op-ed thingy about the case last week in the WSJ.  From that item, one infers that the high court wants to fashion yet another way to stop punitive damages awards — by ruling that the malfeasor didn’t get enough notice that mere malfeasance could subject it to punitive damages.  Existing legal rules, Exxon argues, required it to "direct" or "countenance" the wrongful act before a jury could even think of awarding punies.

We note that reaching out for the Exxon Valdez case continues a pro-business trend by the Court.  It also suggests distrust, or worse, of juries.  What better case to signal to Americans that verdicts don’t count for much, that plaintiffs can win over and over only to see an appellate court take it all away more than a decade later?

Barry Barnett

Our feed seeks the high ground.

Remember the telephone game?  Your kindergarten teacher sat the girls and the boys around in a circle.  She cupped her hand and quietly said a message into the first one’s ear.  She told everyone to whisper the same words to the next person, making sure not to let anyone overhear.

What started as "a robin sings" turns into "a bird sings" and then "a bird chirps", "a brad hurts", "spad mertz" and "glad works".  We all laughed when teacher compared the input with the output.

Blawgletter marvels that people (who also went to kindergarten and played the telephone game) still accept third, fourth, and fifth hand information as useful, much less accurate.  Removing the bother of a warrant allows otherwise mature people to maintain the illusion that invading citizens’ privacy actually helps.  Well, it doesn’t help.  It hurts.

Barry Barnett

Our feed unaccountably likes an octopus’s garden in the rain.