The Second Circuit today vacated a district court ruling that barred the victim of a contract breach from recovering profits it lost as as result of the other party’s violation of a long-term energy supply contract.  The court distinguished profit losses that count as "consequential" damages from those arising from the breaching party’s failure to pay money.  Although both types capture loss of profits, the latter "are the direct and probable consequence of the breach."  The difference matters because a less stringent standard of proof applies to general damages — the non-breaching party must prove only the "fact" of damage with certainty.  Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., Nos. 05-2985-cv & 05-5136-cv (2d Cir. May 22, 2007) (applying New York law) (available at www.ca2.uscourts.gov).

Barry Barnett

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The Sixth Circuit yesterday reversed an award of punitive damages despite a finding that a corporate defendant committed a tort maliciously.  The case involved violations of a non-compete agreement between Chicago Title and ex-employee James Magnuson.  After Magnuson moved to First American Title, 30 other Chicago Title employees and several customers switched to First American.  An Ohio jury awarded Chicago Title $10.8 million in actual and $32.4 million in punitive damages against First American for tortious interference with Magnuson’s non-compete.  The jury predicated the punitive award on a finding of "malice" by First American.  But the Sixth Circuit struck the punitive damages award as unconstitutional, holding that the finding of malice did not by itself justify punishment.  Chicago Title Ins. Corp. v. Magnuson, No. 05-4411 (6th Cir. May 21, 2007).

Barry Barnett

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Imagine that the U.S. government decides to invest $3 billion of taxpayer money in a Chinese private equity firm.

Now substitute "Chinese" for "U.S." (and vice versa), and you have today’s news story about the Republic of China’s purchase of a stake in private equity outfit Blackstone.

China of course remains Communist, and the U.S. persists in its capitalist thrust.  But any government’s investing in a "private" equity strikes a discordant note.  It makes "private" near-meaningless, if not deceptive.  Or does it?  Possibly it exposes a public-private connection that already exists.

Barry Barnett

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In the course of rejecting an antitrust complaint in Bell Atlantic Corp. v. Twombly, No. 05-1126 (U.S. May 21, 2007), the Supreme Court today repudiated the "no set of facts" formula of Conley v. Gibson, 355 U.S. 41, 47 (1957), for judging motions to dismiss for failure to state a claim under Rule 12(b)(6):

[A]fter puzzling the profession for 50 years, this famous observation has earned its retirement.  The phrase is best forgotten as an incomplete, negative gloss on an accepted pleading standard:  once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint. 

The Court held the complaint inadequate because it didn’t specify factual circumstances that made an antitrust conspiracy "plausible" rather than merely "conceivable".

Blawgletter suspects that the repudiation of Conley v. Gibson will exert more gravitational force than the conclusion that competitors’ parallel conduct, without more, doth not an unlawful agreement make.  Will Twombly open the way to searching review of pleadings on motions to dismiss?

We will refrain from predictions.  Conley lasted half a century.  Perhaps we’ll have another 50 years to sort out the implications of Twombly.

Barry Barnett

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The U.S. Supreme Court today upheld the district court’s dismissal of a complaint that alleged, under section 1 of the Sherman Act, "parallel conduct unfavorable to competition" but failed to provide "some factual context suggesting agreement, as distinct from identical, independent action."  Bell Atlantic Corp. v. Twombly, No. 05-1126 (U.S. May 21, 2007).

Barry Barnett

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Senator Arlen Spector (R-Pa.) guessed out loud today that U.S. Attorney General Alberto Gonzalez may resign his office before the Senate acts on a no-confidence resolution.  “I have a sense that before the vote is taken, that Attorney General Gonzales may step down.”

Blawgletter notes that no-confidence votes abound in parliamentary systems, such as the United Kingdom’s, but not on these shores.  Suffrage there determines whether the government stays or goes.  In this case, the no-confidence vote will have no official effect.  But, as Senator Spector suggested, it could have practical impact.

‘Tis a consummaton devoutly to be wished.

Barry Barnett

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Patent
New law would sap patent protection.

The Patent Reform Act of 2007 would do little reforming but much harm.  Specifically, it would:

  • Restrict where a patent holder may sue for infringement.
  • Limit damages to a fraction of a patent’s value to the infringer.
  • Cut damages for willful infringement.
  • Add protections for willful infringers.
  • Slow and fracture litigation by allowing interlocutory appeals from Markman (claim construction) rulings.
  • Increase bureaucratic control over patent validity issues.

These changes seem the more remarkable for their failure to address genuine concerns about the patent system, including:

  • Patentability of scientific principles.
  • Standards for issuing permanent injunctions.
  • Backlog and delays in considering patent applications.

The changes indeed appear to aim not at reforming patent law but at weakening it.  Even the U.S. Department of Commerce opposes key parts of the bill! 

And guess who joyously supports it — and may even have helped draft it?  Correct:  repeat infringers like Microsoft, Intel, Apple, Broadcom, Applied Materials, and Hewlett-Packard.

Oh.

Barry Barnett

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KKR, Blackstone, Cerberus, Texas Pacific, Sevin Rosen, Bain Capital, and Thomas H. Lee Partners belong to an elite group that raised $432 billion in commitments last year.  They draw on the commitments to make huge investments, especially — and most controversially — to take public companies private.

What drives the going-private trend in the U.S.?  The Wall Street Journal likes to blame regulation of American financial markets and often points its editorial finger at Sarbanes-Oxley, which tightened oversight of public companies in the wake of the Enron, WorldCom, and Tyco disasters.  Does the hypothesis hold up?

Blawgletter has our doubts, which stem in no small part from our perception that private equity firms bear little risk once they forge a deal.  The transactions often guarantee PEs an immediate return of their capital investment, leaving them nothing but upside once their pacts close.  Management also usually gets a lavish payday.  And let’s not even think about the accountants, lawyers, consultants, and advisors who reap tens of millions in fees.

Blawgletter holds nothing against folks for making a buck, even big bucks.  But we wonder where all the bucks come from.  The WSJ might say that liberation from the heavy hand of Sarbox releases enormous value.  Too bad, it might add, that public shareholders can’t drink from the money geyser that erupts once their companies go private.

Too bad, indeed.  A skeptic might wonder why so much of the lucre goes immediately into the pockets of executives.  Doesn’t that compromise their loyalty to existing owners?  And shouldn’t they insist that most of the benefits of going private inure to the public shareholders?  Or would that take too much of the fun out of it?

Barry Barnett

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Blawgletter got back this week from our first annual meeting as a member of the American Law Institute, in San Francisco.  One session in the four-day gathering focused on a second "discussion draft" of Principles of the Law of Aggregate Litigation.  And it fascinated Blawgletter.

The Principles project concerns not only class actions but also mass actions (lots of people asserting individual claims in one lawsuit or through one lawyer or firm) and even aggregate claims outside litigation.  The current draft reflects brilliant ideas for improving aggregate litigation, not least in its settlement.  One gets the impression that ALI aims to restore the fundamental sense of litigating and resolving similar claims together.

Blawgletter wishes the drafters Godspeed.

Barry Barnett

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The Federal Circuit held today that non-disclosure by drug distribution giant McKesson of relevant information during prosecution of a patent rendered the patent unenforceable.  The court therefore affirmed a judgment against McKesson after a four-day bench trial.  McKesson Information Solutions, Inc. v. Bridge Medical, Inc. , No. 06-1517 (Fed. Cir. May 18, 2007).

The patent had something to do with an information system that aims to make absolutely sure that the right patient gets the right medicine.  We think.

Barry Barnett

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