A crucial part of a patent case involves the Markman hearing. There, the district judge listens to and sees evidence, PowerPoints, blow-ups, claim charts, and arguments that each side puts forward in hopes that Her Honor will choose their version of what the words of the patent claims mean.

You might wonder why they put so much effort into defining terms and phrases — or construing them, in Markman lingo — but you'll get over that if you take time to read the actual language of a patent.

Dense, turgid, looping, vague, arcane, and — with shocking frequency — brimming with typos and syntactical and punctuation errors.

After all that work and bother, the trial court judge issues a Markman order. This piece of prose becomes the Rosetta Stone for the case. "Means for rotating grooved metal object into solid material" becomes "screwdriver". That can save the finder of fact a lot of mental effort.

So you'd expect that the appeals court would see that the district judge likely had a better chance to get the Markman rulings right. He saw the Keynote presentation as the lawyers walked him through it. He handled the exemplar devices. He may even have talked with his own technical expert. How can an appeals court hope to do better than he?

The Federal Circuit chose not to defer to district judges on their Markman rulings in 1998. See Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448 (Fed. Cir. 1998) (en banc). Last week, the full court stuck by that choice. By a 6-4 vote — two of the 12 circuit judges recused themselves – the court ruled that "the principles of stare decisis" persuaded them to "confirm the Cybor standard of de novo review of claim construction, whereby the scope of the patent grant is reviewed as a matter of law." Lighting Ballast Control, LLC v. Philips Electronics N. Am. Corp., No 12-1014, slip op. at 7 (Fed. Cir. Feb. 21, 2014) (en banc).

The lack of deference to Markman orders helps explain why in 2013 the Federal Circuit reversed district court judgments 19 percent of the time vs. 11.3 percent by all other courts of appeals in "private civil" cases — a whopping 41 percent higher rate of reversal.

Blawgletter expects that the Supreme Court will take up the issue soon, maybe next Term. It should.

Bonus:    Gold Hat, in The Treasure of the Sierra Madre (1948), said "I don't have to show you any stinkin' bades."

Allen StanfordMany lower courts have given the Securities Litigation Uniform Standards Act of 1998 a wide preemptive scope. In those courts, a black-hole-like SLUSA devours all cases that come within a light year of its omnivorous gullet. If a lawsuit said pretty much anything about buying or selling an interest in a company — BAM! Into the back hole it went.

All that changed today. The U.S. Supreme Court held that a "covered security" means one that trades on a public market — your NYSEs and your Nasdaqs, to name the two biggest ones. Because SLUSA applies only to "covered" securities, a complaint that alleges fraud in a purely private purchase or sale of a stock, bond, note, or other security falls beyond the reach SLUSA's inhalations. Chadbourne & Parke v. Troice, No. 12-79 (U.S. Feb. 26, 2014).

The Court thus agreed with an unusually cautious Fifth Circuit that a class of people who bought certificates of deposit from the bank that Texan Allen Stanford set up in Antigua could bring state-law claims against Stanford and his helpers. SLUSA did not preempt such claims, the panel held in reversing dismissal of cases that originated in federal court and order remand of cases that began in state court.

Justice Breyer wrote for the 7-2 Court. Chief Justice Roberts and Justices Scalia, Thomas, Ginsburg, Sotomayor, and Kagan joined in the opinion. Justice Kennedy dissented, as did Justice Alito, who signed onto the Kennedy dissent.

What does the decision portend, if anything, for the blockbuster case that the Court may use to weaken or even sweep away the "fraud-on-the-market" theory in securities class actions? The Court will hear that appeal, in Halliburton Co. v. Erica P. John Fund, No. 13-317 (U.S.), on March 5, 2014. The case presents two questions:

1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.

2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

The fact that the plaintiffs in Chadbourne & Parke live to fight another day provides a Ray of Hope for their brethren and sisteren in the Halliburton case.

But what about the Kennedy dissent? He says that federal law alone should apply to just about any securities transaction and that the availability of state-law claims somehow weakens federal-law protections of investors. Having more grounds for relief is bad for investors, according to the dissent.

Does that imply a hostility to expansive private remedies for securities investors? Justice Kennedy (and Justice Scalia) sat on the Court that handed down Basic, Inc. v. Levinson but did not participate in the decision. During the argument in the Amgen case from last Term, Justice Kennedy said "24 years of economic scholarship — I think that's how long it's been since Basic was decided — has shown that the — the efficient market theory is — is really — really an overgeneralization. It could be much more subtle than that". Which suggests skepticism.

What do you think?

The U.S. Supreme Court today held that state and federal courts sitting in State A lack the power to compel someone who resides outside of State A to answer a lawsuit in State A unless the out-of-stater did something that caused harm in State A. Hurting a person who lives in State A won't do it. You pretty much have to injure the person in State A.

In Walden v. Fiore, No. 12-574 (U.S. Feb. 25, 2014), a 9-0 Court reversed a ruling that allowed plaintiffs who lived in California and Nevada to hale a Georgia policeman into a Las Vegas federal court for seizing money from them in Atlanta on suspicion that the cash came from a drug deal. Per Justice Thomas, the Court said:

The proper focus of the "minimum contacts" inquiry in intentional-tort cases is"‘the relationship among the defendant, the forum, and the litigation.’" Calder[ v. Jones], 465 U. S.[ 783,] 788[ (1984)]. And it is the defendant, not the plaintiff or third parties, who must create contacts with the forum State. In this case, the application of those principles is clear: Petitioner’s relevant conduct occurred entirely in Georgia, and the mere fact that his conduct affected plaintiffs with connections to the forum State does not suffice to authorize jurisdiction. We therefore reverse the judgment of the Court of Appeals.

Id. at 13-14.

The ruling follows one from last month on whether a court has "general jurisdiction" over an out-of-state entity. See Putting on a New Shoe: Supreme Court Cobbles Strict Test for Jurisdiction over Tort Cases.

When the Naismith Memorial Basketball Hall of Fame inducted long-time Chicago Bulls shooting guard Michael Jordan in 2009, Jewel Food Stores gave an assist by agreeing to sell (in its 175 Windy City-area grocery stores) a special Sports Illustrated issue that honored Jordan and his awesome career. SI in return provided Jewel a free throw – a full-page ad on the inside back-cover of the issue for free.

But no one had asked for Jordan's okay. Nor did he like the ad. No.

Blawgletter knows that because His Airness called a foul. He sued Jewel* under the federal Lanham Act, which deals mainly with trademarks, and under Illinois law. His theory of offense?  That Jewel used the ad to link him to Jewel's trademarks in the "Jewel-Osco" logo and its "Good things are just around the corner" slogan.

The district court ruled the case out of bounds, holding that Jewel's conduct amounted to non-commercial speech and that Jewel's right to free speech under the first amendment therefore entitled Jewel to sweep Jordan off the court.

Reversing, a panel of the Seventh Circuit held that Jordan could take another shot. Their Honors observed that, "[e]ven if Jewel's ad qualifies as noncommercial speech, it's far from clear that Jordan's trademark and right-of-publicity claims fail without further ado." Jordan v. Jewel Food Stores, Inc., No. 12-1992, slip op. at 9 (7th Cir. Feb. 19, 2014). But, the court noted, Jewel plainly couldn't win the contest on free-speech grounds if the ad fell outside of the noncommercial speech bucket. It then blocked the district court's noncommercial-speech classification:

In short, the ad’s commercial nature is readily apparent. It may be generic and implicit, but it is nonetheless clear. The ad is a form of image advertising aimed at promoting goodwill for the Jewel-Osco brand by exploiting public affection for Jordan at an auspicious moment in his career.

Id. at 19. The panel thus rebounded the case to the district court "to address whether the Lanham Act claim warrants a trial and if not, whether the district court should retain or relinquish supplemental jurisdiction over the state-law claims." Id. at 25.

Bonus:    In a footnote, Judge Diane S. Sykes noted that many people deem Jordan "the greatest basketball player of all time" but that some "suggest[] that the 'best ever' title should go to Kareem Abdul-Jabbar based on lifetime statistics." Id.  at 3 n.1. She added that "[t]he Milwaukee judges on this panel would not dissent from that." Id.

Judge Sykes served on the Wisconsin Supreme Court before moving to the Seventh Circuit and grew up in Brew City. A second panel member, Judge Rudolph T. Randa, sits in Milwaukee.

The last of the three, Judge Joel Martin Flaum, lives in Chicago. He seems not to have minded the double-team by his colleagues.

_________________________

* Jordan seems not to have gone after SI, but he did sue another grocery-store chain for doing pretty much the same thing that Jewel did.

You know already that lawyers should assume that any memos and emails they send clients will show up on the front page of The Wall Street Journal or The New York Times. You may not know that the same goes for purely oral advice. A recent ruling by the Third Circuit shows why.

The case involved an Attorney whose Client asked Attorney for help in connection with Client's effort, as President of Corporation, to get a loan from a Bank in the U.K. for a Corporation customer. As the panel noted:

In April 2008, Client approached Attorney to discuss issues he was having with the [loan-seeking] project. Client explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process.

In re Grand Jury Subpoena, No. 13-1237, slip op. 4 (3d Cir. Feb. 12, 2014). What did the lawyer do? This:

Attorney did some preliminary research, found the [Foreign Corrupt Practices Act], and asked Client whether the Bank was a government entity and whether Banker was a government official. Although Attorney could not ascertain given his limited research whether the planned action was legal or illegal, he advised Client not to make the payment.

Id. at 4-5. What did Client do? His company "made payments totaling more than $3.5 million to Banker's sister." Id. at 4.

Not to the Banker. To his sister.

A grand jury looking into possible violations of the FCPA by Client subpoenaed the Attorney. Corporation and Client objected, citing attorney-client privilege (and, later, attorney work-product).

The district court received ex parte evidence from the Department of Justice and questioned Attorney in camera. The court then held that the "crime-fraud" exception to privilege applied to Attorney's advice to Client. Corporation and Client appealed.

The Third Circuit affirmed the ruling. The panel held:

  • Privilege protects a lawyer's advice to a client unless "'the party seeking to overcome the privilege . . . make[s] a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.'" Id. at 8 (quoting In re Grand Jury, 705 F.3d 133, 151 (3d Cir. 2012)).
  • A district court may order an in camera review of lawyer-client communications – including oral ones – upon "a 'showing of a factual basis adequate to suport a good faith belief by a reasonable person that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.'" Id. at 12.
  • The court may exclude the holder of the privilege from the in camera review and may refuse to provide the holder a transcript of what the lawyer said during the review if doing so will protect the secrecy of grand jury proceedings. Id. at 15.
  • The crime-fraud exception defeats a claim of privilege if the court finds a "reasonable basis to suspect" that the client used the lawyer's advice to further crime or fraud. Id. at 15-16.
  • The record supported the district court's finding of a reasonable basis to suspect in that it suggested Client sought Attorney's advice after deciding to bribe Banker and then used the advice to come up with "the idea of routing the payment through Banker's sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation." Id. at 20.
  • The crime-fraud exception applies just as much to the lawyer work product doctrine as it does to the lawyer-client privilege. Id. at 21-22.

The good news? A finding that the crime-fraud exception applies doesn't indicate that the lawyer did anything wrong. It just means that the client sought and used the lawyer's advice to help the client commit a crime or fraud.

But it does mean you'll have a non-client — and likely an adverse party — looking over what you wrote or said in what you thought was private.

So remember: Assume that anything you write or say will end up on the front page of a newspaper. You'll probably give better advice if you do. As Attorney apparently did in this case.

MusiclandAlfred S. Teo, Sr., hid the fact that he owned a lot of stock in Musicland. He did so in reports he filed with the Securities and Exchange Commission. He also bought 45,000 shares of Musicland stock on the basis of a Musicland insider's tip that Best Buy wanted to make a best buy of Musicland.

Teo admitted all of that in a civil action by the SEC. Little wonder that a New Jersey jury found that he violated the Securities Exchange Act of 1934 and ordered him to disgorge $17 million of the $21 million profit that he made upon selling Musicland shares to Best Buy.

The main issue on appeal dealt with whether Teo's luck in holding a lot of Musicland shares at just the moment when Best Buy came calling cut the causal link between his Bad Deeds and his Huge Profits. The Third Circuit held that the SEC did enough to connect Teo's violations to his profits. Securities and Exchange Comm'n v. Teo, No. 12-1168 (3d Cir. Feb. 10, 2014).

Yes, the panel ruled by a 2-1 vote, Teo did get lucky, but that fact didn't preclude disgorgement of almost all of Teo's $21 million gain upon selling his Musicland shares to Best Buy. The SEC had to show only "but-for" causation, the panel pointed out, and once that happened Teo had the burden of proving how much of the $21 million rightly belonged to him. Because Teo didn't do enough to establish by how much his Good Fortune should reduce the amount of his Huge Profits, the panel concluded that the district court had rightly adjudged Teo liable for the $17 million.

Judge Jordan dissented. He wrote that Teo carried his burden by pointing to his Good Fortune.

Bonus:    Teo argued that the district court erred by letting the SEC tell the jury about what he said when pleading guilty to a criminal charge of insider trading. The panel noted that Teo's counsel hadn't objected to admission of the fact of his guilty plea into evidence. It also gave the back of its hand to Teo's complaint about the timing of the SEC's use of the things he confessed to in pleading guilty:

The Appellants complain, among other things, that the SEC’s use of the allocution at the end of its cross examination was particularly prejudicial because it was more likely to make an impression on the jury. However, so long as the evidence raised in the cross-examination was admitted and used for a permissible purpose, counsel is free to organize its examination of the witness in any manner it sees fit.

Id. at 11 n.7.

 

Crying BunnyYou know that Jeffrey Abraham convinced the Second Circuit last month to revive an insider trading case against Xcelera big wigs. But did you know the case has Greater Import than Blawgletter told you about?

It does. As Jeff tells us:

The more important parts of the holding, in my opinion, are that in a claim like this, consistent with Affiliated Ute,* the plaintiff does not have to prove reliance and that scienter is adequately alleged based upon possession of insider information and then trading on same.

Jeff has in mind this passage from the Second Circuit's Xcelera opinion:

To establish an insider trading claim, it is not necessary to show that corporate insiders used the nonpublic information; it is sufficient to prove that they traded their corporation’s securities "while knowingly in possession of the material nonpublic information." . . . Additionally, the Supreme Court has "dispensed with a requirement of positive proof of reliance, where a duty to disclose material information had been breached, concluding that the necessary nexus between the plaintiffs’ injury and the defendant’s wrongful conduct had been established."

Xcelera, slip op. at 8 (citations omitted).

Jeff also points to a second case — this one in Delaware – where his client earned a big win in December 2013. In Silverberg v. Gold, No. 7646-VCP (Del. Ch. Dec. 2013), the court upheld a derivative complaint against insiders of Dendreon Corporation for selling big chunks of their Dendreon holdings just before bad news came out about Dendreon's only product, Provenge. The fate of such a case often hinges on whether the complaint alleges facts that allow a court to infer that the insiders sold their shares with an intent to exploit the inside info. The Silverberg pleading cleared the hurdle because: 

Defendants’ large-scale disposal of stock immediately following the FDA’s approval of Provenge is accompanied by alleged facts supporting a reasonable inference that Defendants knew when they sold that, at a minimum, there was a significant risk of the physician community being reluctant to prescribe Provenge because of the cost and reimbursement concerns associated with it, and that Defendants did not disclose that information to the public. For purposes of a motion to dismiss, therefore, Plaintiff’s allegations are sufficient to support a reasonable inference that Defendants, including Bayh and Watson, intentionally exploited their informational advantage.

Silverberg, slip op. at 36.

What does it all mean? Mainly that clearing the reliance and scienter hurdles in insider trading cases looks easier than many insiders may have assumed.

That may help explain the Securities and Exchange Commission's recent string of wins in such cases — including today's verdict against Mathew Martoma, the ex-trader at the SAC hedge fund.

 It also means that Jeff has a thriving docket. Go Jeff.

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In Affiliated Ute Citizens v. United States, 406 U.S. 128 , 153-54 (1972), the Court held that a failure to disclose key facts about a stock can allow a court to presume that the buyer of the stock believed the facts didn't exist — the buyer presumptively relied on the failure to disclose.

Poker GameSay you own shares of stock in Podunk Corp. Perhaps you won them in a poker game. You can't sell them on a stock exchange; no one has done what federal securities law requires in order to "register" the stock.

You know almost nothing about what Podunk has done in the last five years. You think it has something to do with energy, but you don't get income statements or balance sheets from the people who run the thing. But for some reason those guys offer to buy your shares for $15 a pop. They of course know all about Podunk's finances, but they tell you bupkes. Take the deal or leave it, they say.

You take it.

A couple years later, you find out that Podunk had hit it big in the Bakken shale play! Your shares really had a value of $1,500 each!! Boy do you feel stupid!!!

But do you have a federal securities law claim for insider trading?

Yes, the Second Circuit affirmed in Steginsky v. Xcelera Inc., No. 13-1327-cv (2d Cir. Jan. 27, 2014). As the panel noted:

[T]he duty of corporate insiders to abstain from trading or to disclose material inside information applies to unregistered securities. Section 10(b) explicitly applies to “any security registered on a national securities exchange or any security not so registered.” 15 U.S.C. § 78j(b) (emphasis added). We have explicitly stated that “closed corporations that purchase their own stock have a special obligation to disclose to sellers all material information.” Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001).

Id., slip op. 9.

The holding came as a bit of a surprise to Blawgletter. We knew that claims under sections 11 and 12 of the Securities Act of 1933 give a civil remedy for hanky-panky that results in a purchase or sale of securities but only ones that trade publicly. An insider trading claim, on the other hand, falls under the Securities Exchange Act of 1934, and while that Act applies most often to big-time securities that have a public market, it also reaches no-name stocks like Podunk. Now it makes total sense!

Kudos by the way to the lawyer who won in the Second Circuit — the one and only Jeffrey S. Abraham. Way to go, Jeff!