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A June 25th ruling by the Supreme Court cleared the way for workers to bring claims under the Employee Retirement Income Secuirity Act of 1974 against ERISA plan fiduciaries who imprudently allow or require the employees to invest in their employers' stock. But the window of liability for imprudent fiduciaries might not last very long — perhaps less than a quarterly reporting period.

Matching with stock

The decision came in the context of a public employer, First Third Bancorp, that — like many other public companies — matched its employees' voluntary contributions to their 401(k) plans but only with company stock in First Third's employee stock-ownership plan or ESOP.

Investing in company stock creates problems for the 401(k) plan beneficiaries when the company's stock becomes a bad investment. A drop in the stock's market price can badly deplete their nest eggs. But plan fiduciaries, who usually occupy high executive positions with the employer, have powerful incentives to keep the bad news from the shareholders, including the 401(k) plan participants.

Presuming prudence

A majority of federal courts compounded the difficulty by absolving plan fiduciaries of blame even though they knew the stock was in trouble yet continued to allow or require plan participants to own the stock. These courts did so by raising a "presumption of prudence". The presumption protected their decision to buy or hold overvalued company stock unless plan beneficiaries could "make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse." First Third Bancorp v. Dudenhoeffer, No. 12-751, slip op. at 1 (U.S. June 25, 2014).

Writing for a unanimous Court, Justice Stephen Breyer held that "no such presumption applies." Id. "ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general," he wrote, adding the obvious point that the fiduciaries "need not diversify" the assets in the ESOP itself. Id. at 1-2.

Plausible claim?

The balance of the opinion dealt with whether the plaintiffs had stated a plausible claim under Twombly and Iqbal.

The Court had doubts. It pointed to the fact that, as insiders who had access to non-public information about the First Third's true financial condition, the ERISA plan fiduciaries couldn't use their insider knowledge for the benefit of plan participants without risking violation of laws against insider-trading. The Court also noted that  taking steps to halt investment in the ESOP could do more harm to the participants than good by prompting a sell-off of the company's shares, causing the value of the ESOP holdings to plummet. Id. at 18-20.

The Court remanded the case to the Sixth Circuit to sort out whether, in light of the concerns about insider trading and more-harm-than-good, the complaint stated a plausible imprudent investment claim.

Meeting the test

Can the plaintiffs overcome those hurdles?

The answer may turn on whether the fiduciaries could as a practical matter change how the plan sponsor deals with matching contributions and any holding requirement without affecting the market price of the stock. Presumably that could happen, but the fiduciaries would have to take care that they meanwhile complied with all disclosure obligations under applicable securities laws. As companies must report at least quarterly on their financial condition, the period over which an imprudence claim could extend may necessarily last fewer than three months.

Vault SealVault just came out with its 2015 rankings of the Best Law Firms.

In the Litigation Boutiques category, Susman Godfrey L.L.P. won top honors. Vault's Overview notes:

Count Susman Godfrey . . . as one of the true boutiques. The litigation star maintains five offices — its Houston headquarters, a smaller Dallas branch, two offices on the west coast and a branch in New York — that house a total of 107 attorneys. Its small size notwithstanding, the firm handles truly megawatt cases. Its associates earn as much as (or often more than) their peers at much larger firms.

SG got 45.9 percent of votes nationwide; the first runner-up received 24.61.

The firm in fact has out-polled all other litigation boutiques in each of the four years that Vault has published results for Best Law Firms.

 

Shutterstock_151204913No more over-the-air TV on your laptop?

The Supreme Court today struck a mighty blow against Internet television.

Firms that beam television programs to Internet users for a fee now face staggering liability for copyright infringement.

The 6-3 Court held that Aereo infringed the copyrights of content owners by enabling subscribers to select the channels they want to watch via the Internet.

Blame-the-subscriber defense

Aereo argued that it didn't infringe because it didn't "perform" or "transmit" the content "publicly" within the meaning of the Copyright Act. It relied on the fact that each subscriber — and not Aereo — activates a unique antenna when she or he selects a show to watch and doesn't view the program in real time but instead sees a subscriber-specific copy of it after Aereo's servers record that copy for the subscriber. That the process takes seconds did not diminish the subscriber's control over the process, Aereo argued. It thus makes Aereo less like a cable company and more like an enterprising copy shop that generates business by giving library cards to college students so they can check out books and bring them back for cheap reproduction.

Aereo's position won the day in the Second Circuit but not in the Supreme Court. The subscriber's nominal control over the process of fetching, copying, and transmitting the program "means nothing to the subscriber", Justice Breyer wrote for the majority. Am. Broadcasting Cos., Inc. v. Aereo, Inc., No. 13-461, slip op. at 10 (U.S. June 25, 2014). "It means nothing to the broadcaster." Id. "We [therefore] do not see how this single difference, invisible to subscriber and broadcaster alike, could transform a system that is for all practical purposes a traditional cable system into 'a copy shop that provides its patrons with a library card.'" Id.

Winners and losers

The big TV networks and content owners got a large victory from the decision. Their win protects a key revenue stream from "retransmission" fees that they collect from cable and satellite companies. See NYT article here.

Aereo, on the other hand, may go the way of the pteradactyl.

Shutterstock_183259712In the last two weeks, the Supreme Court of Texas ruled as follows in the 11 cases it decided:

  • Threw out $46.5 million jury verdict for the owner of the Rivercenter Mall and the ground beneath the Marriott Riverwalk hotel in downtown San Antonio. The owner had sued its tenants for sending a letter that "blew up" a pending $166 million deal to sell the property. The Court held that, despite the "dramatic effect" of the letter on the deal, no evidence supported the jury's finding that the deal would have closed but-for the letter. HMC Hotel Properties II Ltd. P'ship v. Keystone-Texas Property Holding Corp., No. 12-0289 (Tex. June 13, 2014).
  • Held that the guarantor of a $696,000 note waived his statutory right to reduce the note amount by the $840,000 fair market value of the collateral securing the note at the time the lender foreclosed. The guaranty provided that the guarantor waived "any defense", which the Court construed to include the right of offset under section 51.003(b) of the Texas Property Code. Moayedi v. Interstate 35/Chisam Road, L.P., No. 12-0937 (Tex. June 13, 2014).
  • Ruled that cotton farmers had to arbitrate a dispute with a marketing pool. The Court severely limited the unconscionability defense, allowing a contract provision that entitled the pool but not the farmers to an award of attorneys' fees and ordering severance of an unenforceable waiver of the farmers' rights under the Texas Deceptive Trade Practices-Consumer Protection Act despite the pool's failure to request it in the trial court. Venture Cotton Coooperative v. Freeman, No. 13-0122 (Tex. June 13, 2014).
  • Overturned a jury finding that the majority shareholders of a Texas corporation oppressed the minority by thwarting their efforts to sell their shares. The Court held that the business judgment rule protected majority conduct that oppresses the minority. It also disallowed the trial court's order that the majority buy out the minority shareholders' stake and abolished any common-law claim for minority oppression in Texas. Ritchie v. Rupe, No. 11-0447 (Tex. June 20, 2014).
  • Tossed a jury verdict awarding a general contractor $5 million in damages for a subcontractor's egregiously faulty construction plans, ruling that the "economic loss" rule generally bars tort claims between participants in construction projects under Texas law. LAN/STV v. Martin K. Eby Construction Co., Inc., No. 11-0810 (Tex. June 20, 2014).
  • Vacated $26 million arbitration award in a dispute relating to the sale of insurance companies, concluding that the striking of an arbitrator for "partiality" violated the parties' arbitration agreement, which required only "knowledgeable" and "independent" arbitrators but not "impartial" ones. Americo Life, Inc. v. Myer, No. 12-0739 (Tex. June 20, 2014).
  • Rendered judgment for Schlumberger, whose guest on a fishing trip in the Gulf of Mexico drank himself to extreme drunkenness before driving home and hitting a couple riding a motorcycle and causing them to lose their legs, on the ground that Schlumberger's activity on navigable waters did not give rise to a claim under federal maritime law, which in contrast to Texas law would have recognized Schlumberger's liablity as a "host". Schlumberger Technology Corp. v. Arthey, 12-1013 (Tex. June 20, 2013).
  • Rendered judgment that the owner of Tract A could not recover damages from the lessee of minerals in Tract B for building a road between Tract A and Tract B, holding that a pooling order that covered parts of both Tract A and Tract B gave the lessee "implied" rights to use the surface of Tract A. Key Operating & Equip., Inc. v. Hegar, No. 13-0156 (Tex. June 20, 2014).
  • Reinstated a jury verdict in favor of Ford Motor Company. Ford claimed that the plaintiff and a juror in a personal injury case defrauded it into paying millions of dollars to settle the case by inducing the juror to send a note asking "what is the maximum amount that can be awarded" during deliberations. Ford Motor Co. v. Castillo, No. 13-0158 (Tex. June 20, 2014).
  • Rendered judgment against a victim of an assault at the Graham Central Station nightclub, ruling that no evidence supported the trial court's finding that Graham Central Station, Inc. owned and provided security for Graham Central Station. Graham Central Station, Inc. v. Pena, No. 13-0450 (Tex. June 20, 2014).
  • Held that a workers compensation provide had a right to receive a bigger share of the proceeds of workers' claims against third-parties. State Office of Risk Management v. Carty, No. 13-0639 (Tex. June 20, 2014).

Judge for yourself whether the decisions favored the strong or the weak.

Halliburton Bumper Sticker

Basic survives — barely

The Supreme Court held today that plaintiffs in securities fraud cases may continue to use a 26-year-old presumption that "the price of stock traded in an efficient market reflects all public, material information — including material misstatements." Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, slip op. at 1 (U.S. June 23, 2014) (declining to overrule Basic Inc. v. Levinson, 485 U.S. 224 (1988).

But the Court went on to hold that defendants may "rebut the presumption of reliance with evidence of a lack of price impact" in order to defeat class certification. Id. at 16.

Votes

Chief Justice Roberts authored the majority opinion, in which Justices Breyer, Ginsburg, Kagan, Kennedy, and Sotomayor joined.

Justice Ginsburg, in concurrence, noted that "[a]dvancing price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification" but "should impose no heavy toll on securities-fraud plaintiffs with tenable claims." Id. concurrence at 1. Justices Breyer and Sotomayor joined her opinion.

Justice Thomas, also concurring, explained why he would overrule Basic. Justices Alito and Scalia agreed with him.

Consequences

Contrary to Justice Ginsburg's optimistic view, the Court's allowance of attacks on the presumption of reliance at the class certification stage will vastly increase the expense of litigating certification issues. Event studies and other analyses by experts will result in expenditures of hundreds of thousands if not millions of dollars.

The number of law firms that can afford to prosecute securities class actions will continue to shrink.

Securities fraud will become less risky and more profitable.

Shutterstock_127074176Broad patents

You could get really rich if you had a patent on something like "a device that can make and receive wireless phone calls". That would cover every wireless phone, dumb and smart, that ever existed. It would include the satchel phone that Blawgletter's friend Darrell Gest carried around in his ratty pickup back in the 1980s. You could buy a Gulfstream for every day of the week with the royalties you would rake in.

That will never happen, of course. You aren't that lucky. Plus — for reasons the Supreme Court illuminated today — your patent would never survive a challenge to its validity.

Patentability

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work". Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

Financial intermediation

The case that the Court decided today involved a patent on using a neutral third party to control the completion of a financial exchange, such as the purchase of a stock. The neutrality of the "intermediator" lessens the risk that one of the parties would default on its obligation to pay for the stock or to deliver it.

The patent holder, Alice Corporation, accused CLS Bank of infringing a patent on reducing risk in financial exchanges by having a third-party serve as intermediator. The district court held the patent invalid for involving unpatentable subject matter — to wit, the abstract idea of financial intermediation. The Federal Circuit affirmed. So did the unanimous Supreme Court.

"Inventive concept" plus "transformation"

The problem consisted in the fact that humans realized about two minutes after they started trading with each other that financial intermediation cuts the risk of default. The wooly mammoth-swapping people's insight was an abstract idea. The fact that Alice's patent went on to say "use a computer to do the intermediation" didn't, in the Court's view, add an "'inventive concept' sufficient to 'transform' the claimed abstract idea into a patent-eligible application." Alice Corp. Pty. Ltd. v. CLS Bank Int'l, No. 13-298, slip op. at 7 (U.S. June 19, 2014) (quoting Mayo Collaborative Services v. Prometheus Labs., Inc., 132 S. Ct. 1289, 1294 (2012)). That doomed Alice's patent.

Vote count

Justice Thomas wrote the majority opinion. Chief Justice Roberts and Justices Scalia, Kennedy, Alito, and Kagan joined it.

The three concurring justices would have gone further. They (Justice Sotomayor, who wrote the concurrence, and Justices Breyer and Ginsburg) would have declared all "business method" patents in eligible for patenting.

Upshot

The ruling means that business method patents live to fight another day. But the fact that Alice's patent failed the test should give their owners pause.

The decision also continues the Court's effort to define patentable subject matter via the "inventive concept" plus "transformation" formula — as in the patent must reflect something "inventive" that somehow "transforms" the unpatentable subject matter into something other than a law of nature, natural phenomenon, or abstract idea. Which sounds to us a little abstract.

Shutterstock_122546788Apple settles

Apple has settled up to $841 million of antitrust claims by state attorneys-general and a nationwide class of consumers who bought e-books from Apple and its publisher co-conspirators.

The pact comes almost a year after U.S. District Judge Denise Cote in New York held Apple civilly liable for conspiracy to fix prices, a violation of section 1 of the Sherman Act. The United States brought the case, primarily for injunctive relief. Judge Cote entered a final judgment on September 5, 2013.

Before the trial, Apple had rejected a settlement offer by the Deparment of Justice before trial because, according to Apple's CEO Tim Cook, "we're not going to sign something that says we did something that we didn't do".

Amount unclear

We don't know how much Apple will pay. Its maximum exposure to the class and the states totaled $840,763,122, three times the plaintiffs' estimate of actual overcharges for e-books ($280,254,374 — a number that reflects a 17 percent inflation of e-book prices as a result of the conspiracy).

The Wall Street Journal weighs in

Should we feel sorry for Apple? The Wall Street Journal thinks so. It absolves Apple and the publishers for engaging in what criminal law would deem a felony. It points its finger of blame instead at the Department of Justice and Judge Cote.

What did they do, you ask? Instead of "letting the market decide whether the wholesale model [which Amazon preferred] or agency model [which the conspirators agreed to adopt] should prevail", Judge Cote "dictated the outcome by ruling against Apple."

Issing-may the oint-pay

But the "market" never had a chance to decide which model to use precisely because Apple and the publishers perverted the market through collusion.  They did so to drive up the prices they could charge. Worse, in the absence of the Apple-publisher cartel, the market plainly would have chosen the wholesale model that Amazon preferred. The squelching of competition by means of an illegal agreement — not the actions of the court or the DOJ — dictated the outcome.

Astonishingly, the WSJ purports to regard Apple and the publishers as innocent of wrongdoing. It asserts that Apple simply "offered e-book publishers the same [agency model] deal" and that they all coincidentally accepted the offer. But the evidence showed hard-core collusion — the kind involving secret CEO-only luncheons in private rooms of fancy restaurants and ensuing lock-step increases in prices — not indepedent action. As Judge Cote noted in her post-trial opinion on liability:

The question in this case has always been a narrow one: whether Apple participated in a price-fixing scheme in violation of this country's antitrust laws. Apple is liable here for facilitating and encouraging the Publisher Defendants' collective, illegal restraint of trade. Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.

United States v. Apple Inc., No. 12 Civ. 2826 (DLC), slip op. at 158 (S.D.N.Y. July 10, 2013).

Mumbo-jumbo

The WSJ's claim that Amazon's share of e-book sales "has soared" as a result of the DOJ's win is a combination of argle-bargle and mumbo-jumbo. The reasons that the paper cites for the supposed wind beneath Amazon's wings have nothing to do with breaking up the Apple-publisher cartel.

On the contrary. There is no discernible connection between the facts that Barnes & Noble "pulled back on its Nook", that "Sony and Samsung exited the e-reader market", and that Apple "seems focused elsewhere" and the breakup of the cartel. And Amazon's market share didn't "soar". It simply went back to where it was before the unlawful conspiracy. See id. at 14 ("Through 2009, Amazon dominated the e-book retail market, selling nearly 90% of all e-books.").

Prices should have risen

The WSJ ends by urging that antitrust enforcers should "stand aside and let the market determine winners and losers." That's all well and good, but if the WSJ is right that the DOJ has quashed competition, ebook prices would have soared in the last couple of years, right?

Just the opposite has happened As the leading authority on e-book prices said this on April 30, 2014:

In the nearly two years Digital Book World has been measuring the average price of a best-selling ebook, the tend has been unmistakable: down.

Best-selling ebooks cost more two years ago than they do now. Two years ago, many of the best-selling ebooks were agency priced, meaning that publishers determined the price of the books and the price was usually $10 and up.

Today, no publishers price their own books and retailers have generally lowered prices to compete with each other and sell more units.

Despite all that, L. Gordon Crovitz, who wrote the WSJ piece, preaches "humility" to Judge Cote and the DOJ. He might want to look in the mirror.

A challenge

The Second Circuit has Apple's appeal before it now. Argument will likely take place by year-end, and a decision will follow in due course.

In the meantime, Blawgletter issues this challenge to Mr. Crovitz: When the Second Circuit rules, we'll each write about it and explain how we either got it right or got it wrong.

Blawgletter can hardly wait.

Billions in bonds

Shutterstock_161391038You have a $2.5 billion judgment in a U.S. court against Argentina on bonds it defaulted on, but you have a problem. You can't find assets in the U.S. to satisfy the judgment. The pesky Argentines keep all of their seizable valuables overseas.

Can you get help from the U.S. court?

The U.S. Supreme Court today confirmed that principles of sovereign immunity do not prevent the court from giving you broad discovery about Argentina's assets in foreign lands.

No sovereign immunity from discovery

Argentina cited the penumbras and emanations of the Foreign Sovereign Immunities Act of 1976 as grounds for blocking the post-judgment discovery requests of NML, which owned Argentine bonds. It thus sought to prevent NML from getting documents and information out of the New York branches of two foreign banks. While acknowledging that the FSIA grants immunity to some assets of a foreign sovereign, the 7-1 Court gave the extra-textual arguments about immunity from discovery about assets the back of its judicial hand (unsurprisingly in view of the fact that Justice Antonin Scalia wrote the majority opinion).

The Court also dismissed Argentina's worries that the discovery would relate to assets that NML may ultimately prove unable to seize. The Court said:

[NML's subpoenas] ask for information about Argentina’s worldwide assets generally, so that NML can identify where Argentina may be holding property that is subject to execution. To be sure, that request is bound to turn up information about property that Argentina regards as immune. But NML may think the same property not immune. In which case, Argentina’s self-serving legal assertion will not automatically prevail; the District Court will have to settle the matter.

Republic of Argentina v. NML Capital, Ltd., No. 12-842, slip op. at 10 (U.S. June 16, 2014) (emphasis in original).

Minute Maid LabelIf you need to sue somebody for stealing your customers with false advertising, don't worry about a conflict between two federal statutes — the Food, Drug, and Cosmetic Act and the Lanham Act. No conflict exists, the Supreme Court held today.

To understand why, let us tell you . . .

. . . a story about juice

POM Wonderful likes to brag about how much liquid essence-of-pomegranate it squeezes into its curvy bottles.

But POM Wonderful gets plumb hissy when it thinks that another drink-maker has implied that its competing beverages contain lots of the tart nectar when in fact they have just a teeny dot of it.

That happened when Minute Maid (a part of Coca-Cola) started selling bottles of "Enhanced Juice" whose labels showed half a pomegranate, half an apple, three blueberries, three grapes, and a pair of raspberries. The words just below the fruit said "POMEGRANATE BLUEBERRY" and then, in smaller letters, "FLAVORED BLEND OF 5 JUICES".

The contents in fact consisted of 99.4 percent apple and grape juices, 0.3 percent pomegranate juice, 0.2 percent blueberry, and 0.1 percent raspberry.

Does "POMEGRANATE BLUEBERRY" tend to mislead?

POM Wonderful sued Minute Maid under the Lanham Act, which protects competitors from the effects of false and misleading advertising. POM Wonderful claimed that the Minute Maid label gave juice-buying customer the wrong idea that the bottle with "POMEGRANATE BLUEBERRY" on it contained mostly those kinds of juices rather than the squeezings from apples and grapes.

The district court and Ninth Circuit held that the FDCA precluded POM Wonderful's false-label claim under the Lanham Act. Because Congress gave the Food and Drug Administration the power to set standards for juice-labeling, the courts believed, the Lanham Act claim had to give way.

Sweet win

The Supreme Court, by an 8-0 vote, reversed. Justice Anthony Kennedy found no conflict between the FDA's authority to ban misleading labels and the right of competitors like POM Wonderful to sue for the harm arising from the consumer deception that resulted. On the contrary, "the FDCA and the Lanham Act complement each other in the federal regulation of misleading labels." POM Wonderful LLC v. Coca-Cola Co., No. 12-761, slip op. at 17 (U.S. June 12, 2014).

Observation

Although the Court did not write about other instances of federal "preclusion" — as in Credit Suisse Securities v. Billing, 551 U.S. 264 (2007) (holding that securities law precluded irreconcilable antitrust claim) – POM Wonderful suggests that preclusion doctrine will shrink. Co-existence, even in the face of conflict, will prevail. At least it should.

Shutterstock_134617934Limitations v.  Repose

The U.S. Supreme Court held today that Congress preempted "statutes of limitations" — but not "statutes of repose" – for toxic tort cases.

The Court explained that limitations periods require plaintiffs to bring claims promptly but that repose statutes aim to free defendants from worry. CTS Corp. v. Waldburger, No. 13-339 (U.S. June 9, 2014) (construing 42 U.S.C. § 9658).

Section 9658

Congress passed the preemption provision as part of the Comprehensive Environmental Response, Compensation, and Liability Act. The provision concerned "any action brought under State law for personal injury, or property damages, which are caused or contributed to by any exposure to any hazardous substance, or pollutant or contaminant, released into the environment from a facility". 42 U.S.C. § 9658. It preempted an action under state law "if the applicable limitations period for such action" called for a "commencement date" before the plaintiff knew or reasonably should have known that the toxic stuff caused or contributed to her personal injury or property damages. Id. (emphasis added). The later "federally required commencement date" in that event applied, lengthening the time for filing suit.

Writing for the 7-2 Court, Justice Anthony Kennedy conceded that courts, lawyers, dictionaries, and Congress haven't always made a sharp distinction between "limitations" and "repose". But he concluded that Congress's reference to "limitations period" in section 9658 meant the legislature didn't intend to preempt statutes of repose.

The Court accordingly affirmed dismissal of a toxic tort lawsuit claiming contamination that ended at least 24 years before the filing of the case. That the plaintiffs apparently did not know of the contamination until shortly before suing did not matter. The North Carolina 10-year statute of repose barred the claim, the Court ruled.

Implications

Federal laws that preempt state "limitations" periods will not, under the Court's ruling, save cases that run afoul of "repose" periods. Blawgletter does not know of any statutes, other than CERCLA, that contain a similar preemption provision. But the case could have a big effect on pollution cases, which often arise when an event occurring long after the contamination took place reveals the carcinogens and other nasty substances beneath the ground.