Say you bought a share of Enron stock before it belly-flopped into chapter 11. You paid too much for it, right? $90 or so. And when the belly-flopping took place, the market price for your share in the Greatest Company Ever fell to, oh, about $1. You lost around $89 bucks, right?

Maybe. In your basic federal securities fraud case, the measure of damages takes "the fair value of what [you] would have received had there been no fraudulent conduct" — the $90 — and subtracts "the fair value of all that [you in fact] received" — which may or may not equal the $1. Affiliated Ute Citizens v. United States, 406 U.S. 128, 155 (1972). See? If the Enron share had a value of more than $1 when you bought it, your loss doesn't equal the difference between the $90 you paid and the $1 market price after the stock tanked.

Timing matters. So the Second Circuit's ruling teaches us this week in Acticon AG v. China North East Petroleum Holdings Ltd., No. 11-4544-cv (2d Cir. Aug. 1, 2012). The district court in Manhattan had kicked the case, on a motion to dismiss. China North, et al., had convinced Her Honor that a rise in the price of China North's stock after the (alleged) fraud came to light negated any loss to the plaintiffs, who claimed they overpaid for their shares.

The Affiliated Ute test for measuring loss, the Second Circuit held, doesn't take account of a post-purchase recovery in the stock's market price. It subtracts from the price you paid the True Value of the security at that moment. 

[Nor, the panel ruled, did a damages cap that Congress created in 1995 preclude a finding that the plaintiffs suffered real loss. But let's keep this simple, shall we?]

The court erred because it seems to have inferred that if the plaintiffs could have sold their shares at a break-even price (or even at a profit-making price) after the fraud outed, the defendants shouldn't have to pay damages for the fraud. Things worked out for the plaintiffs, right?

No, not really, the Second Circuit instructed. The suckers still paid an above-value price when they should have paid less (and maybe a great deal less). They suffered harm as soon as they overpaid, in that nanosecond when the trade cleared. Later events shouldn't affect the recovery. And at least in the Second Circuit after yesterday they won't (except a little because of the damages cap thing).

Scene:   Snappy dozes at her laptop. Across the table, Bitey sips from a LavAzza cup. Slurps, really. Yet it doesn't wake Snappy. So Bitey clears his throat. Snappy straightens. She yawns.

Snappy:    Curse you. Can't you see. Can't you see my slumber. Your crudeness has chased it. Caught it. Made it depart. Dang. And why has my screen gone blank?

Bitey:    Um.

Snappy:    Speak up.

Bitey:    Someone back in the States, I can't say who, may perhaps have possibly cut off your access to the firm's webernet.

Snappy:    And why might someone have done that?

Bitey:    My mind, although often a blank, this time tells me it Must Mean we have suffered a Breach of Security.

Snappy:    You grow less tedious. Tell me more.

Bitey:    Well, if you MUST know. The Home Office just broadcast a warning about a Now Former Employee. The NFE took some stuff off our Extremely Secure computer network system and used it to induce a customer to switch to the NFE's new outfit.

Snappy:    Do you mind if I do some knee bends while you go on about this?

Bitey:    Of course not. So. We seem to have sued the NFE for doing bad.

Snappy:    Bully for us.

Bitey:    Except.

Snappy:    Don't try my patience, Bitester. I have the power to exclude you from, among other places, the Uffizi.

Bitey:    Say no more. We did the suing in federal court. Under the Computer Fraud and Abuse Act, 18 U.S.C. 1030.

Snappy:    And? Reflect that you may never see the Doni Tondo again.

Bitey:    We lost. Not on the merits. But because the CFAA doesn't cover things like theft by people who work for you.

Snappy:    Explain. Because I feel pretty sure the Seventh Circuit said just the opposite in Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006).

Bitey:    Well. The whole dispute seems to turn on what "so" means.

Snappy:    So?

Bitey:    Right. The statute gives you the right to sue for damages if someone does hurtful stuff with a computer "without authorization". And it defines "exceeds authorized access" as "to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter."

Snappy:    Do go on in that charming ditzy way you have.

Bitey:    It all boils down to what "not entitled so to obtain or alter" means.

Snappy:    True that.

Bitey:    Really it comes to what "so" signifies.

Snappy:    Now you have riveted me.

Bitey:    The Fourth Circuit held that "so" doesn't mean anything, really. WEC Carolina Energy Solutions, LLC v. Miller, No. 11-1201 (4th Cir. July 26, 2012).

Snappy:    So our NFE could steal our stuff under CFAA so long as he or she had authorization to go into our computer system in the first place?

Bitey:    Yes.

Snappy:    That rots. Although I must say that our friends in Congress should have said that they wanted to bar your run of the mill trade secret theft more clearly if indeed they desired that.

Bitey:    May I buy you an espresso, Snappy?

Snappy:    How about some grappa. I could use some grappa just now.

Winstar_Communications_logo.png

 

Did high-flyer Winstar co-opt its auditing firm? 

Defendants facing securities fraud claims have won more than their share of cases in the last half a decade or so. Decisions by the U.S. Supreme Court have helped.

In 2011, for instance, the Court ruled that you must have "ultimate authority" to make a false statement before a lie exposes you to liability under federal securities law.  Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (post). Few auditors, if any, will have such authority, other than with respect to their own (one-page) audit opinions.

The Court in Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (post), held that aiding and abetting securities fraud doesn't run afoul of the Securities Exchange Act of 1934, at least in private litigation. That eliminates most claims against auditing firms.

And in Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007) (post), the Court set a tough test for judging whether a complaint alleges facts that raise a "strong inference" of the scienter element — whether the pleading as a whole gives "cogent" reasons for believing that the defendants meant to practice a fraud. The standard defeats a great many securities fraud cases, including those against auditors.

The plaintiffs' bar recognizes that courts tend to view fraud claims against auditors with a skeptical eye. Such claims rarely survive the long gauntlet they must run — from Twombly motions to dismiss, Dukes attacks on class certification, Daubert challenges to experts, and Celotex motions for summary judgment — even if claims do survive against the securities issuer itself or its insiders.

But one squeezed by last week. In Gould v. BIM Intermobiliare SGR, No. 10-4028-cv(L) (2d Cir. July 19, 2012), the court reversed summary judgment for an auditing and accounting firm, Grant Thornton, which issued a clean audit opinion for the (fraudulent) 1999 financial statements of broadband services provider Winstar Communications. Winstar filed for bankruptcy protection about a year after it published its 1999 financials, which inflated its revenues by more than $100 million. The panel reversed the district court's ruling, which held that the plaintiffs had failed to present evidence that raised an inference of scienter. The panel said:

Some evidence supports the Plaintiffs' contention that GT consciously ignored Winstar's fraud when it approved Winstar's recognition of revenue for the suspicious 1999 transactions. This evidence goes beyond a mere failure to uncover the accounting fraud and, in general, relates to (1) Winstar's recognition of revenue for the sale of equipment or services without sufficient indicia of delivery, (2) its reconition of all revenue associated with the incomplete sale of telecommunications systems, and (3) its recognition of revenue for sales of IRUs [indefeasible rights of use], equipment, and services to financially unstable companies to whom Winstar paid back large sums under separate contractual obligations.

Id. at 20.

 

Does a woman's belly show at eight months of pregnancy enough to make a potential employer's question of "[h]ow much longer do you have" questionable?

You have to ask?

How do you feel about the follow-up question: do you have any other children?

She did. And she didn't get the job.

Oddly, the case turned on the question of whether the firm that chose not to hire Ann Gove waived a great argument — that the federal Arbitration Act favors construing unclear arbitration clauses in favor of arbitration. By a two to one vote, the First Circuit held that, because of the waiver, Maine law, which construes unclear contracts against the author, trumped any federal policy favoring arbitration. Gove v. Career Systems Development Corp., No. 11-2468 (1st Cir. July 18, 2012).

Let Blawgletter repeat: because of the waiver.

The dissenting judge cited a case in which the court enforced the rule that favors arbitration. And yet in the case he cited, Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006), the court refused to compel arbitration.

He could have a point. Maybe not.

K-Dur
K-Dur treats low potassium. We think.

Since 2003, the Federal Trade Commission has fought a losing battle to halt bargains in which a brand-name drug-maker pays a generic competitor to put off entering the market. Pacts like that, the agency urged, result in "reverse payments", which compensate a patent infringer not to do stuff that might infringe the patent. Such arrangements violate antitrust law, it argued.

But, after a strong start in the D.C. and Sixth Circuits, the FTC lost three in a row when the Eleventh, Second, and Federal Circuits (post) Begged to Differ with their fellows in Our Nation's Capital and in Cincinnati.

Today evened the score. The Third Circuit ruled that the Sherman Act will bar reverse-payment deals under a "quick look" review unless the reverse payor shows "that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit." In re K-Dur Antitrust Litig., No. 10-2077, slip op. at 33 (3d Cir. July 16, 2012).

The outcome handed a big win to the FTC's chairman, Jon Leibowitz, who had put much energy and prestige into the fight. His office released a statement in which he said:

The Third Circuit Court of Appeals seems to have gotten it just right: These sweetheart deals are presumptively anticompetitive. As our Bureau of Economics has estimated, they cost American consumers $3.5 billion a year in higher health care costs. Restricting these arrangements, as many in Congress have proposed, would reduce federal government debt by $5 billion over 10 years, according the Congressional Budget Office. It's time for the pharmaceutical companies to return to the side of consumers.

Blawgletter agrees with the FTC (and the D.C., Sixth, and Third Circuits) that courts shouldn't give a free antitrust pass to reverse-payment deals. The test by the Eleventh, Second, and Federal Circuits okayed such pacts so long as the patent-holder paid the generic competitor not to do things that might infringe the patent (assuming it didn't fall to an invalidity, unenforceability, or some other defense). As the Third Circuit noted, "the scope of the patent test does not subject reverse payment agreements to any antitrust scrutiny." Id. at 26.

 

In "I Am Furious (Yellow)", Bart Simpson creates "Angry Dad", a cartoon about the rages into which Bart's dad Homer often flies.  Bart puts the series online, and it becomes "the single most popular non-pornographic website of all time". Almost eight million viewers watched the episode when it aired in 2002.

Perturbation over the use of online tools to swipe copies of a German porno movie, "Der Gute Onkel", prompted a lawyer in Denton, Texas, to sue 180 or so "John Does" in Dallas. The northern Texas lawyer moved, on behalf of his Teutonic client, for an order that would have let him skip the step of talking with the John Does about a plan for dealing with pre-trial "discovery" — requests for documents and other info — before serving formal requests, including document subpoenas to third-parties.

The district judge wrote about what happened next:

To summarize the staggering chutzpah involved in this case: [The lawyer] asked the Court to authorize sending subpoenas to the [Internet service providers] ISPs [because they could identify the porn-swipers]. The Court said "not yet." [The lawyer] sent the subpoenas anyway. The Court appointed the Ad Litems to argue whether [the lawyer] could send the subpoenas. [The lawyer] argued that the Court should allow him to — even though he had already done so — and eventually dismissed the case ostensibly because the Court was taking too long to make a decision. All the while, [the lawyer] was receiving identifying information and communicating with some Does, likely about settlement. The Court rarely has encountered a more textbook example of conduct deserving of sanctions.

On July 12, the Fifth Circuit ruled on the lawyer's appeal from the district court's order awarding $10,000+ in sanctions against him for serving the subpoenas and for thus trying to shame the Does into paying money in order to avoid exposure as viewers of online porn. The panel held that the lawyer had waived all of the points he made on appeal because he failed to make them in the district court. But it added:

[The lawyer] committed those violations as an attempt to repeat his strategy of suing anonymous internet users for allegedly downloading pornography illegally, using the powers of the court to find their identity, then shaming or intimidating them into settling for thousands of dollars — a tactic that he has employed all across the state and that has been replicated by others across the country.

Mick Haig Productions E.K. v. Does 1-670, No. 11-10977, slip op. 6 (5th Cir. July 12, 2012) (footnote omited).

Is the liberal love affair with Anthony Kennedy — which should have ended five years ago with his preposterously patronizing opinion in Gonzales v. Carhart upholding the federal Partial-Birth Abortion Ban Act of 2003 and suggesting that women are incapable of acting in their own best interests — finally over?

Linda Greenhouse, "The Mystery of John Roberts", The New York Times, July 11, 2012.

A great many of your bigger companies require new hires to sign contracts that convey to the employers any "Intellectual Property" that the workers "make or conceive" during the term of employment. Courts treat such assignments as valid in spite of the at-will nature of the relationship.

But what happens if a worker conceives an invention before starting the new job and inking the contract but doesn't make it until later? Does the invention belong to her or to the employer?

The Federal Circuit ruled in Preston v. Marathon Oil Co., No. 11-1013 (Fed. Cir. July 10, 2012), that the company wins in that situation. It concluded that Yale Preston lost his ownership of a patentable invention, which improved the flow of methane gas from wells that tapped wet coal seam beds, when he executed "the April Employee Agreement". In paragraph 1(b) of that writing, Preston "hereby assign[ed] to MARATHON all Intellectual Property" that he "made or conceived . . . during the term of employment with MARATHON which (1) relate to the present or reasonably anticipated business of the MARATHON GROUP, or (2) were made or created with the use of Confidential Information or any equipment, supplies, or facilities of the MARATHON GROUP."

Even if Preston had "conceived" the invention before he began work for Marathon, the court noted, he had not "made" it (or, as the patent jocks say, "reduced it to practice") until after he joined the Marathon team. Id. at 17. That made all the difference:

The plain language of [the contract] indicates that any "invention" that is "made or conceived" by an employee while employed at Marathon constitutes "Intellectual Property" and is therefore automatically is [sic] assigned to Marathon under Paragraph 3. (emphasis added). Thus, if Preston's invention was not both made and conceived prior to his employment, it constitutes "Intellectual Property" under Paragraph 1 of the April Employeet Agreement.

Id. (emphasis in original).

But Preston still might have an out, the panel said. In the contract, he had listed "CH4 Resonating Manifold" as one of his "unpatented inventions", which Marathon agreed "are NOT Intellectual Property and are NOT the property of MARATHON hereunder."

That didn't work either. The district court found, after a bench trial, that "Preston 'had little more than a vague idea [of the invention] before his employment with Marathon began". Id. That, the court held, did not count as "conception" of the invention because "an invention necessarily requires at least some definite understanding of what was invented." Id. at 20.

So there you have it. Before you sign that innocent-looking, standard-form, two-page employment agreement, think about whether you do have an "unpatented invention" rattling around in your brain, make sure you list it, and take steps to get it to the point at which it satisfies the Federal Circuit's test for conception of an "invention" — "at least some definite understanding" of what you invented.

 

Does the taxing power of Congress extend federal authority beyond the reach of the commerce clause — does it let Congress do more than it could under its power to regulate commerce? Or does it just provide a way to enforce proper exercises of the commerce power (or some other source of federal power)?

A 5-4 majority of the U.S. Supreme Court ruled last week:

The Affordable Care Act's requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.

Nat'l Federation of Independent Business v. Sebelius, No. 11-393, slip op. at 44 (U.S. June 29, 2012).

The four dissenters on the tax point wrote:

The provision challenged under the Constitution is either a penalty or else a tax. . . . But we know of no case, and the Government cites none, in which the imposition was, for constitutional purposes, both. The two are mutually exclusive.

Id. at 18.

Whether you call the enforcement mechanism for the individual mandate a tax and only a tax or you instead deem it both a penalty and a tax says a lot about whether you agree with the majority or the dissent.

Some ridicule the majority's view — and particularly the Chief Justice's, because he alone accepted the government's "tax power" argument while rejecting the "commerce power" one — by coining words like "penaltax" and "taxalty".

Blawgletter respectfully suggests that they not do that, at least if they want to draw a clear distinction between the pro-mandate bunch and themselves. Because those terms make a muddle of the ruling, for just about everyone except pedants, who almost by definition irritate the rest of us.

One of the presidential candidates seems to have reached the same conclusion, after a slow start.

On this Fourth of July, let us think of our patriot farmers. Also our domestic glass-blowers, soap-makers, even people who produce feed for our critters. For all use potash — "mineral and chemical salts that are rich in potassium". And all of them fell victim to a 600 percent price increase that resulted from a nefarious plot between 2003 and 2008 by the — yes — (mainly Canadian and Russian) Potash Cartel.

But, you ask — can a foreign price-fixing plot by non-U.S. firms violate the Sherman Act? And if it can when does it?

The en banc Seventh Circuit last week upheld a class action complaint against the biggest potash providers on the planet. (They had 71 percent of the world-wide market in 2008.) The full court ruled 8-0 (with three judges taking no part) that the pleading met the test Congress had set for antitrust claims that involve commerce with other nations when it passed the Foreign Trade Antitrust Improvements Act of 1982, 15 U.S.C. § 6a. Minn-Chem, Inc. v. Agrium, Inc., No. 10-1712 (7th Cir. June 27, 2012).

The en banc-worthy part of the case related to a pretty dull issue (but an important one, dangit!) – whether "the FTAIA relates to the merits of a claim, rather than the subject-matter jurisdiction of the court". (Heavy sigh.) The Seventh Circuit held, en banc, almost a decade ago that the statute deprives courts of jurisdiction. See United Phosphorus v. Angus Chemical, 322 F.3d 942, 952 (7th Cir. 2003). This time, the court went the other way, citing newer decisions by the Supreme Court, including Morrison v. Nat'l Australia Bank Ltd., 130 S. Ct. 2869 (2010), in which the Court threw out a securities case on the merits (too Australian-y) instead of for jurisdictional reasons. Hard to disagree with that.

The rest of the opinion dealt with the strange way Congress went about writing the FTAIA. In a nutshell, the statute sets up a tough test for antitrust cases in the U.S. if they involve stuff that happened outside the U.S. — such as price-fixing that caused firms in, say, France, Vanuatu, or Paraguay to pay a supra-competitive price for goods or services. But the tough test doesn't apply (as the "chapeau" in the statute makes, uh, clear) if the bad conduct involves "import trade or import commerce". 15 U.S.C. § 6a.

Which makes sense. Because when Americans overpay for stuff, including stuff we import, that hurts us.

But what about cartel conduct that doesn't in a "direct" way cause the sending into the U.S. of stuff that has a supra-competitive price tag? Such as conspiracy-aiding acts by a "unified marketing and sales agent" for cartel members but only in countries other than the U.S. Minn-Chem, slip op. at 20.

The issue turns on what "direct", in the FTAIA phrase "direct, substantial, and reasonably foreseeable effect", means. Does it require, as the defendants urged, an "immediate" link between the bad conduct and the harm to buyers in the U.S.? Or does it just import that old tort notion of "proximate cause", as the U.S. Department of Justice believes? The latter. Id. at 22-25.