Maximizing this = commercial bliss.

Companies that find themselves members of a class action often want to stay there.  In commercial cases, they generally prefer the relative anonymity because, if they filed their own lawsuit, they would have to sue a supplier — usually one whose goods or services their business depends on.  Unhappy relations with a key vendor can really hurt.

So why would a company choose to pursue a claim outside of a class action? Many do.  Why do they risk upsetting an important supplier in hopes of getting a few more bucks?

Let Blawgletter suggest an answer, which builds on several realities.

• An ongoing business relationship gives large purchasers more bargaining leverage with suppliers than they have as class members.  It may also provide the basis for a friendly negotiation, which may enhance the relationship.
• Existing customers can get a dollar of benefit from in-kind benefits (such as future discounts) that cost suppliers less than a dollar.  That can maximize the value of a settlement to the buyer, who must otherwise depend on the class action to recover harder-to-afford (and therefore harder-to-get) cash.
• Trying to hide in a class doesn’t work all that well.  The vendor knows about you already.  He may in fact approach you to ask that you not participate in the class.
• Choosing not to opt out of a class cedes substantial control of your claim, often to lawyers you don’t know.
• Class actions usually recover direct overcharges only and don’t recoup other kinds of losses, including a hit to your profits.

These realities will seldom justify initially taking an aggressive posture with suppliers.  But they do support having a backup plan.

Law firms that specialize in representing potential opt-out plaintiffs can help you realize maximum benefit on your claim without harming your vital relationships with vendors.  Their expertise in the governing law, familiarity with the morass of class litigation procedures, thorough investigation of your claims, and close monitoring of class proceedings can significantly strengthen your position and give you a readily available alternative to class membership.

Your agreement with such counsel — whether on an hourly or contingent fee basis –should state that you alone will decide whether and when to opt out of the class case.  That will preserve your flexibility by saving you from having to commit to opt out too early. It will also free you to make your own best deal with the supplier.

If you choose the contingent route, the agreement should also specify the percentages for recoveries at different stages.  The rates should start relatively low for settlements you reach before the filing of an individual lawsuit and ramp up only after you actually do file.

This strategy allows you to choose the alternative that best serves the overall interests of your company. And that can’t hurt.

Barry Barnett

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When 2 + 2 = 5.

The Second Circuit today held an auditor potentially liable for federal securities fraud if it doesn’t correct a false or misleading report on its audit.  The court said:

The precise issue on appeal is whether an auditor may incur primary liability under § 10(b) and Rule 10b-5 when the auditor provides a certified opinion that is false or misleading when issued, subsequently learns or was reckless in not learning that the earlier statement was false or misleading, knows or should know that potential investors are relying on the opinion, yet fails to take reasonable steps to correct or withdraw its opinion and/or the underlying financial statements.  We hold that under such circumstances, an auditor becomes primarily liable for securities fraud, assuming all the other elements of a securities fraud claim are present. Since the complaint pleads precisely this theory of liability, we vacate the District Court’s dismissal and remand for further proceedings consistent with this opinion.

Overton v. Todman & Co., CPAs, P.C.., No. 06-2496-cv (2d Cir. Feb. 26, 2007).

Barry Barnett

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Charles Caleb Colton (1780-1832), reverend and aphorist, wrote that "[i]mitation is the sincerest of flattery."  How true.

A February 24 commentary in The Wall Street Journal, by Robert E. Litan, says that "it is the innovators who matter most."  Also true.  But Mr. Litan goes on to prescribe an interesting couple of ways to encourage development of new goods and services:  by curbing "frivolous" litigation through adoption of "the ‘English rule’ — loser pays — on attorneys’ fees for litigation with commercial parties on both sides" and by "limiting the award of punitive damages where defendants have complied with prevailing regulatory standards."

At first blush, Blawgletter perceives imitation more than innovation in Mr. Litan’s litigation proscriptions.  The sensation persists on second blush.  For the English rule already prevails in most lawsuits "with commercial parties on both sides" — such as disputes about which business breached a contract — and judges and juries routinely take compliance with regulations into account when deciding whether (and how much) to punish reprehensible conduct.

Perhaps Blawgletter has misunderestimated Mr. Litan.  But if he means that "loser pays" should apply as a matter of course to securities, antitrust, patent, copyright, and other "commercial" spats, he has even less of a claim to innovation.  Enemies of change have long advocated penalizing those who use litigation to alter the status quo but who, for technical reasons, fall short of the goal.  America departed from the English rule for the same reason we rebelled from English imperialism — and for the same reason innovators do a world of good:  the status quo (and its imitation) hinders realization of human potential.

Much the same goes for Mr. Litan’s proposal to limit punitive damages (in a way he doesn’t describe) if a product satisfies "prevailing regulatory standards."  Why would we give a safe harbor to a product because a government bureaucracy doesn’t realize (or ignores) its dangers?

Blawgletter’s heart swells with pride in American innovators and innovation.  And we totally agree with Mr. Litan’s thesis that entrepreneurship drives progress.  Too bad, then, that he adopts the arguments of the powerful in hopes of protecting the weak.

Barry Barnett

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What, you may ask, do the Academy Awards have to do with business trial law?  Only this:  Blawgletter kicked behind by getting five out of six predictions right:

• Best Director — Martin Scorcese (The Departed).
• Best Film — The Departed.
• Best Actor — Forest Whitaker (The Last King of Scotland).
• Best Actress — Helen Mirren (The Queen).
• Best Supporting Actor — Alan Arkin (Little Miss Sunshine).

Our only miss concerned Best Supporting Actress.  We still think that Rinko Kikuchi (Babel) should have won but congratulate Jennifer Hudson (Dreamgirls) on her Oscar.

Barry Barnett

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Will NEC’s high-tech desktop
doodad help revolutionize
e-discovery?

Gerry Kenney, the amiable General Counsel of NEC Corporation of America, recently clued Blawgletter into an ingenious way to manage e-discovery — before it starts.  Even in advance of somebody filing a lawsuit.

The remedy doesn’t take e-discovery as its primary concern — or even, as far as Blawgletter can tell, a quaternary one.  It aims instead to reduce the overall cost of information technology.  It does the job by relocating software and data storage to servers and replacing personal computers with thinner, less expensive, and easier-to-maintain terminals.  See an overview of "thin computing" here.

The thin client approach to enterprise computing should eliminate many of the nooks and crannies that electronic documents make their way into nowadays.  It thus ought to:

• Simplify carrying out "litigation holds" on e-document destruction, reducing the risk of e-spoliation and sanctions.
• Allow faster searching for and retrieval of relevant e-documents.
• Permit more efficient copying and production of relevant e-documents.
• Eliminate the need (or temptation) to convert e-documents from native format to a format that lacks (or alters) important metadata, which tells the history of each e-document.

These advantages fit nicely with the new federal rules on e-discovery and The Sedona Guidelines:  Best Practice Guidelines & Commentary for Managing Information & Records in the Electronic Age (Sedona download requires registration).

Mr. Kenney holds more than an academic interest in thin client technology.  NEC hopes to sell lots of its Virtual PC Centers.  (A January 30 WSJ article projected that thin client purchases will more than double by 2010 from current levels.) We wish them the best.

Blawgletter doesn’t pretend that thin client will bring us to e-discovery nirvana.  Only a hair or two closer.

Barry Barnett

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Ellen Degeneres, who’ll host
this year’s Awards.

The Academy Awards furnish guerdon to films, actors, directors, and others — possibly including best boys, grips, and best boy grips.  Here, now, Blawgletter predicts the results of the impending Oscars.  We focus on the five Best Picture nominees.

Babel gets nods for Best Supporting Actress (Rinko Kikuchi) and Best Director (Alejandro Gonzalez Inarritu).  Blawgletter doesn’t understand the movie’s story line but wonders why the Academy dissed Brad Pitt, who gets much play in the trailer.  Go Rinko!

The Departed leaves the gate with nominations for Best Supporting Actor (Mark Wahlberg) and Best Director (Martin Scorsese).  Blawgletter foresees Departed leaving with Best Picture and Best Director.

Letters from Iwo Jima, counterpart of Flags of Our Fathers, writes of senseless slaughter and horrific loss.  Sound familiar?  But don’t expect it, or gentlemanly director Clint Eastwood, to win this year.

Little Miss Sunshine earns nominations for Best Supporting Actor (Alan Arkin) and Actress (Abigail Breslin). Blawgletter loves Arkin. He’ll win.

Finally, The Queen produces Academy proposals for Best Actress (Helen Mirren) and Best Director (Stephen Frears).  Mirren in a runaway.

Who’ll win Best Actor?  Blawgletter crosses fingers for Forest Whitaker, lead in The Last King of Scotland.

Barry Barnett

In the Top 10 on Justia.  Free to smart people like you.

Blawgletter noted on Tuesday that the U.S. Supreme Court ruled for defendants in two significant business cases.  But now we wonder about one of the two defense victories — the one about punitive damages, Philip Morris USA v. Williams, No. 05-1256 (U.S. Feb. 20, 2007).

Readers will recall that the Court threw out a $79 million punitive damages award in a case involving actual damages (to a cigarette smoker) less than $1 million.  The more than 80-to-1 ratio between the punies and actuals struck many as high and fired hopes among the chamber of commerce set that the Court would adopt a bright line limit on such ratios.  A clear standard would assure proportionality between real harm and punishment and promote economic efficiency (at the expense, some would say, of a just result).

The Court’s decision dashed those expectations.  The 5-4 decision turned not on proportionality but on the wording of jury instructions.  (See ABA Journal article here.)  The trial court in Williams erred, the majority held, in allowing jurors to consider harm to non-parties in setting the amount of punitive damages.  The opinion thus affirmed the jury’s primacy in determining appropriate punishment.

So the case may signal a healthy reluctance on the Court to undo the work of juries.  Blawgletter hopes so.

Barry Barnett

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Microsoft faces a bodacious patent
award.

The inventive genius of America never ceases to amaze Blawgletter.  Nor does inventors’ audacity in pursuing patents.

Just today, the Federal Circuit dealt with patents on what Blawgletter imagines consist of sippy cups — the kind that rug rats drop or throw as often as they drink from them.  The court upheld a judgment of non-infringement on one patent and invalidity on a second.  Hakim v. Cannon Avent Group, PLC, No. 05-1398 (Fed. Cir. Feb. 23, 2007).

Please don’t mistake Blawgletter’s tone as suggesting that the inventor in this case didn’t deserve his patents.  Far from it.  But the sippy cup patents do make a nice contrast with Alcatel-Lucent’s MP3 technology patent that just won a $1.52 billion verdict against Microsoft.

Barry Barnett

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