Federal income tax cuts expire at the end of this year.  Or should we say that taxes rise on New Year's Day?  Or that tax rates revive when that ball in Times Square reaches its nadir?

No matter what you call what will happen a few months hence tax-wise, Blawgletter cannot, for the life of us, figure out One Simple Thing.

We've heard and read lots about keeping current tax rates in place for poor people and the middle class.  We've also witnessed Much Discussion, tax-wise, about "the wealthiest Americans" (NYTimes) or "high-income earners" (WSJ).  But What Does It Mean to distinguish between wealthy/high-income people, on the one hand, and everybody else, on the other?

As best we can tell, the rule we learned in law school Taxation will keep applying:  Your federal income tax rate starts small at the low-end and rises as your income grows. 

In 2009, for instance, you paid 10 percent on every taxable dollar you earned up to $16,700; 15 percent for taxable dollars between $16,700 and $67,900; 25 percent between $67,900 and $137,050; 28 percent between $137,050 and $208,850; 33 percent from $208,0850 through $372,950; and 35 percent for everything above $372,950.

All of which means, we think, that the Debate over expiring tax cuts, raising taxes, and reviving old rates at the end of this year boils down to a Debate over the ascending rates that'll apply to income above $250,000.

Why, we wonder, does the Debate relate to "the wealthiest Americans" and "high-income earners" instead of "earnings in excess of $250,000"?

We can see why politicos would want to personalize the discussion.  We guess they picture electoral gold.  But would it kill journalistas to make clear that people who make $250,001 won't suddenly see their IRS bill jump from an average of less than 25 percent to more than 33 percent?

Too hard to explain?  How about:  Big earners would pay at higher rate only to extent they reap over $250,000.  Or:  Obama would preserve tax rates for incomes up to a quarter-million dollars, raise rates for excess amounts.

The Second Circuit last week prescribed death for a class action alleging that Eli Lilly and Company fooled doctors into treating patients with Lily's anti-schizophrenia drug Zyprexa.

The plaintiffs — unions and others that pay all or part of patients' pharmaceutical bills — alleged that Lilly violated the Racketeer-Influenced and Corrupt Organizations Act by hiding and misrepresenting Zyprexa's side effects, which included greater risk of hyperglycemia and even diabetes.  The district court certified a nation-wide class of third-party payors (TPPs).  Lilly got permission to appeal under Rule 23(f).

The Second Circuit panel held that the TPPs couldn't show that Lilly caused damage to all or almost all class members.  Their Honors noted that, since Bridge v. Phoenix Bond & Indem. Co., 128 S. Ct. 2131 (2008) (post here), RICO plaintiffs needn't show that they relied on a fraudulent statement or omission but most often did need to prove that somebody relied on it.  The TPPs' theory failed the test for class treatment, the panel ruled, because they couldn't use class-wide evidence to establish that the prescribing doctors and other intermediaries (including the TPPs themselves) relied on Lilly's misleading marketing of Zyprexa.  Their reasons may vary, the court reasoned.  UFCS Local 1776 v. Eli Lilly and Co., No. 09-0222-cv (2d Cir. Sept. 10, 2010).

Fresh from firing its CEO Mark Hurd, Hewlett-Packard has now sued him for going to work for Oracle. 

So reports The Bottom Line blog.  The post includes a link to the Civil Complaint for Breach of Contract and Threatened Misappropriation of Trade Secrets.

Something about inevitable disclosure of trade secrets.  Paragraph 46 of the Civil Complaint says:

Hurd will be violating his legal obligations to HP and his trade protection agreements by working as Oracle's President and as a member of the Board of Directors.  He cannot perform his job at Oracle without disclosing or utilizing HP's trade secrets and confidential information. 

Good luck with that, HP, in the Superior Court of Silicon Valley (actually Santa Clara County, but it comes to the same thing).

(Hat tip to Mark Hilliard.)

The Seventh Circuit struck a blow last month for certifying securities fraud cases as class actions — and against the Fifth Circuit's attempt, the panel believed, "to 'tighten the requirements' for class certification" in such cases.

The court held the district court did right by rejecting the defendants' "arguments that if accepted would end the use of class actions in securities cases."  Schleicher v. Wendt, No. 09-2154, slip op. at 4 (7th Cir. Aug. 20, 2010) (per Easterbrook, C.J.).  The arguments?  That "before a class can be certified plaintiffs must prove everything (except falsity) required to win on the merits" and that even then "individual damages questions still predominate and prevent class certification."  Id. at 5.

The panel explained why the fraud-on-the-market doctrine applied to the case under Basic, Inc. v. Levinson, 485 U.S. 224 (1988), in spite of the fact that the price of Conseco stock fell throughout the class period because "fraud could have affected the speed of the fall."  Id. at 8.

Then came the ugly part: 

We could stop here, but for Oscar Private Equity[ Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007)].  The fifth circuit earlier held that, when truthful and false statements are made simultaneously, plaintiffs must establish how much of the price movement can be attributed to the false statements.  See Greenberg v. Crossroads Systems, Inc., 364 F.3d 657, 666-67 (5th Cir. 2004).  Otherwise they can't establish loss causation, which Dura Pharmaceuticals[, Inc. v. Broudo, 544 U.S. 336 (2005)] holds is one element of a securities-fraud claim.  In Oscar Private Equity the fifth circuit held that proof of loss causation is essential not only to success on the merits but also to class certification.  The majority in Oscar Private Equity stated that Basic entitles each circuit to "tighten the requirements" for class certification (487 F.3d at 265) and that the fifth circuit would use this authority to curtail the ability of plaintiffs to put pressure on defendants to settle.  Id. at 266-70.  The right way to show loss causation, the fifth circuit held, is to establish that when the issuer announces the truth "the market reacted to the corrective disclosure."  Id. at 262.

Unlike the fifth circuit, we do not understand Basic to license each court of appeals to set up its own criteria for certification of securities class actions or to "tighten" Rule 23's requirements.  Rule 23 allows certification of classes that are fated to lose as well as classes that are sure to win.  To the extent it holds that class certification is proper only after the representative plaintiffs establish by a preponderance of the evidence everything necessary to prevail, Oscar Private Equity contradicts the decision, made in 1966, to separate class certification from the decision on the merits.  See Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974).

Id. at 11-12.  The court added:

Oscar Private Equity represents a go-it-alone strategy by the fifth circuit.  It is not compatible with this circuit's decisional law (Asher, Eckstein, Flamm, and others), and we disapprove its holding.  It has not been adopted by any other circuit, and it has been rejected implicitly by some.  See, e.g., In re Salomon Analyst Metromedia Litigation, 544 F.3d 474, 479, 483 (2d Cir. 2008).

Id. at 14-15.

Will Schleicher arrest the trend towards making plaintiffs prove their case before allowing class certification?  Not in what the panel deemed the "fifth circuit", of course.  But elsewhere?

The court's logic seems sound to Blawgletter.  Weakness on the merits ought not bar class treatment.  And we don't buy the argument — now ubiquitous in the land — that certifying a class dooms defendants to pay Too Much Money to Settle.  Why would they?  Do judges really think defendants lack the wits to value a case correctly, certification or no?

We've written before about our view on the notion of "hydraulic pressure" to settle.  We deem it mythical.  But so long as federal judges beguile themselves with the fictional phenomenon, we fear that Schleicher will prove the exception to the rule.

Blawgletter recalls early on hearing about "the bow tie rule".  People who wear bow ties, the rule supposes, want to stand out.  They regard themselves as unique.  They desire others to see visible proof of their disdain for norms, wardrobe-wise and otherwise.  And you don't want them on your jury.  They'll tend to disagree with other jurors for the same reason they wear bow ties.  You'd rather not risk the bow tie guy hanging your jury.

The Federal Circuit dealt with bow ties yesterday for a different reason.  Raymond E. Stauffer sued Brooks Brothers for selling him bow ties whose BB tags showed the seven-digit numbers of patents that had expired in the 1950s.  He based his claim on a qui tam statute, 35 U.S.C. 292, which allows "any person" to recover up to $500 "for every" instance of falsely marking an item with a dead, invalid, or otherwise unenforceable patent number.  The district court ruled that Mr. Stauffer lacked standing because he didn't suffer any injury as a result of the false-marking.  The court also denied the U.S. government's motion to intervene.

The Federal Circuit panel reversed on both grounds.  Mr. Stauffer could sue, the court held, because the federal government had by statute assigned its right to police false-marking to the public at large, a group that included the patent attorney.  It also concluded that the government had a right to intervene due to the fact that "the government would not be able to recover a fine from Brooks Brothers if Stauffer loses, as res judicata would attach to claims against Brooks Brothers for the particular markings at issue."  Stauffer v. Brooks Bros., Inc., No. 09-1428, slip op. at 15 (Fed. Cir. Aug. 31, 2010).

The same court late last year loosened the strictures on penalties for false-marking in The Forest Group, Inc. v. Bon Ton Tool Co., 590 F.3d 1295 (Fed. Cir. 2009), requiring district courts to impose the statutory fine of up to $500 per article instead of for a course of conduct (e.g., falsely marking a bunch of bow ties with the same patent number).  See False Patent Marking Gets Fine "Per Article", Federal Circuit Rules.

For WSJ's take on Stauffer, see here.

The Third Circuit has ordered rehearing by the full court in a sprawling antitrust case against price-fixer and market-allocator DeBeers. 

The order vacated a panel decision that mainly upheld denial of class certification.  Blawgletter did a short review of the decision in Third Circuit Cuts Global Diamond Class.  There we said:

DeBeers, the diamond behemoth, limited supply of and fixed prices on sparklies for years and years and in all 50 states plus the District of Columbia.  But it sold to only a small group of outfits, none of which dared sue the font of their mercantile wealth.

That didn't stop indirect purchasers from bringing cases against DeBeers.  And, after almost a decade of wrangling, DeBeers declared a truce with them.  It also agreed to fund a $295 million settlement.

The hard-working district court okayed the pact and certified two classes, one under Rule 23(b)(2) — for injunctive relief – and the other under Rule 23(b)(3) — for damages.  Yesterday, the Third Circuit set the orders aside.

The problem?  In two words, Illinois Brick.  That old U.S. Supreme Court case held that people who don't buy straight from a price-fixer cannot recover damages under the Sherman Act.  Illinois Brick meant that the indirect purchasers who went after DeBeers for damages had to do so under state law.

A panel of the Third Circuit ruled that, because some states don't allow indirect purchaser suits under their antitrust laws, the claims of the settlement class members didn't "predominate" within the meaning of Rule 23(b)(3).  The panel also concluded that certification for injunctive relief under Rule 23(b)(2) couldn't stand due to the fact that, in the opinion of two panel members, DeBeers no longer posed a big threat of anticompetitive conduct.  Sullivan v. DB Investments, Inc., No. 08-2784 (3d Cir. July 13, 2010).

Circuit Judge Rendell concurred in the outcome but not in the rationale.  She disagreed with the majority on the grounds that her colleagues paid inadequate heed of the court's decision in In re Warfarin Sodium Antitrust Litig., 391 F.3d 516 (3d Cir. 2004), and went too far in reaching issues that the district court, and not the court of appeals, should decide in the first instance.

Blawgletter notes that neither of the opinions cites the American Law Institute's new Principles of the Law of Aggregate Litigation, section 3.06(b) of which states that, before approving a class settlement, "[t]he court need not conclude that common issues predominate over individual issues."

Both the author of the majority opinion, Circuit Judge Jordan, and the concurrer, Circuit Judge Rendell, belong to ALI.

You sell your company, including its "good will", to a competitor.  Your buyer promises in the Purchase Agreement to hire you in a "generally comparable" position and to make you "eligible for participation in the Incentive Cash Bonus Plan".  But the contract puts the "amount of the bonus . . . at the discretion of the Salary Committee" and specifies "a range of 0% to 250% of base pay."

After the sale, something makes you mad — likely including the measly bonuses you've gotten – and you quit to join another competitor.  You don't tell your clients or customers that you've left.  But they find out and start calling you.  Some of them switch to your new firm, whose efforts to woo them you aid.

Have you done anything wrong?

Can you sue the buyer for giving you tiny (in your view) bonuses?

The Second Circuit said this week that, first, it depends, and, second, no.

The it depends answer resulted in part from the court's doubts about the scope of New York's "Mohawk doctrine", which takes its name from the rulings in Von Bremen v. MacMonnies, 200 N.Y. 41 (1910), and Mohawk Maint. Co. v. Kessler, 52 N.Y.2d 276 (1981).  The New York Court of Appeals in those cases held that the seller of a business and its good will owes a never-ending duty to the buyer not to "solicit" clients or customers improperly.  Defining what kind of conduct amounts to "improper solicitation" so vexed the Second Circuit panel that Their Honors asked the Court of Appeals in Albany to lend a hand.

The court thus certified the question of "[w]hat degree of participation in a new employer's solicitation of a former employer's client by a voluntary seller of that client's good will constitutes improper solicitation."  Bessemer Trust Co., N.A. v. Branin, No. 08-2462-cv(L), slip op. at 35 (2d Cir. Aug. 24, 2010).  The panel added:

We are particularly interested in how the following two sets of circumstances influence this analysis:  (1) the active development and participation by the sller, in response to inquiries from a former client whose good will the seller has voluntarily sold to a third party, in a plan whereby others at the sller's new company solicit the client, and (2) participation by the seller in solicitation meetings where the seller's role is largely passive.

Id. at 35-36.

The no answer about the bonuses turned on the fact that the Purchase Agreement gave the buyer "discretion" in choosing the amount of any bonus — or, indeed, to award any bonus at all.  Id. at 32.

The court reserved judgment on whether the district court erred when it concluded that Francis S. Branin, Jr., violated the Mohawk doctrine by responding to, but not initiating, inquiries from clients whose investments he managed at Bessemer Trust after moving to Stein Roe.  But the court affirmed the district court's judgment against Branin on his counterclaim for bigger bonuses.

Seldom does Blawgletter get the pleasure of reading an Intriguing and Forceful Analysis of a recent and important court of appeals decision.  Our dear friend Sam Simon blessed us with his views about In re Ins. Brokerage Antitrust Litig., No. 07-4046 (3d Cir. Aug. 16, 2010) (post here), today.  And, with his kind permission, we pass his thoughts on to you:

The court of appeals' recent decision in In re Insurance Brokerage Antitrust Litigation, No. 07-4046 (3d Cir. Aug. 16, 2010), presents a situations that is worth a further look. 

The unusual antitrust case is an appeal of consolidated private civil actions based on an enforcement effort by the New York State Attorney General's office that the Multidistrict Panel consolidated before District Judge Garrett Brown in the District of New Jersey.  The court of appeals' opinion weighs in at 200 pages, so you are strongly advised to have a bottle of Excedrin or Advil and a tall glass of water next to you as you peruse it.

The court's decision is unusual in many respects. In fact, it is so unusual that it may not serve as precedent for much of anything beyond its peculiar facts. 

The first item that immediately strikes the reader's attention is that plaintiffs declined to make this a rule of reason case. Hoping to simplify the litigation, plaintiffs insisted on treating the convoluted legal theories and the complex factual scenario in this "hub and spoke" case — actually, two complaints, each as long as the court of appeals' opinion — as either a per se or a quick look case. Though the court of appeals declined further to break down "quick look" into either "to condemn" or "to exonerate," defendants were able to use jiu-jitsu and effectively turn plaintiffs' attempt to simplify the litigation to defendants' own advantage. This is lawyering of the highest quality.

One of the factors that makes the decision unusual, and perhaps sui generis, is that the district court permitted plaintiffs to take years of discovery, enabling them to draw upon documents and depositions in the successive drafts of their complaint even as the court confronted (and granted) repeated dismissal motions. Slip Op. at 23. The fact that both the district court and the court of appeals addressed defendants' facial challenges to the complaint under Rule 12(b)(6) and Twombly/Iqbal, as opposed to converting the motion into one for summary judgment, would seem inconsisent with the substantial amount of detailed evidentiary matter set forth in the complaint, some of which the court of appeals quoted at length.

Under these circumstances, it might be suggested that the court of appeals confused and conflated Rule 12(b)(6) and Rule 56 standards, thus rendering the opinion all but useless as a guide for evaluating other antitrust complaints under either standard.  On the one hand, much admissible evidence, as gathered during the discovery process, was considered in deciding the dismissal motions, thus removing the motion from one that examined only the facial sufficiency of the Complaint.  But on the other hand, there was no contention that plaintiffs had completed discovery, thus arguably making the filing of a Rule 56 motion premature.

The decision itself seems chronically confused on whether it comprises a facial examination of a repeatedly amended complaint or a summary judgment evaluation. Compare Slip Op. at 25 (a complaint must plead evidence), 51 (plaintiff must plead "evidentiary facts" at a time when discovery has not yet begun), 24 and 57 ("a single 'method of proof' at the pleading stage"), 76 n.30 ("When we search for additional information") and 104 (use of detailed evidence to evaluate complaint, e.g., "the complaint contains enough well-pled factual matter") with the many references throughout the opinion (e.g., Id. at 144) that the decision is only "based on the face of the complaint," and on nothing else. 

The court of appeals wanted to have its cake and eat it too. The result of this chronic confusion is likely to strike an objective reader as 200 pages of gibberish or, as one eminent practitioner I know has stated, "the ravings of the law clerks."  Such an opinion would have given someone like Justice Holmes a heart attack. Its War and Peace-like length bespeaks a fundamental incomprehesion of the issues involved, as well as the role of an appellate court.  The decision, with its staggering length and its attempt to traverse much of antitrust, insurance-antitrust, and RICO jurisprudence in a tour d'horizon of limitless dicta, sometimes on topics of no possible relevance to the decision (e.g, tying arrangements, see Slip Op. at 37 n.19), is a locus classicus of the frequently repeated observation that "appellate courts" may be properly defined as the law clerks and their word processors.)

The unfortunate thing is that no one is supposed to care about a complaint and an answer, which only frame the case and set out discovery perimeters, and are (or should be) quickly forgotten. Modern federal practice ("modern means" since 1938, the same year Mr. Tompkins walked along a railroad track in Hughestown, Pa., near Pittston and Forty Fort) is supposed to be about a search for the truth, i.e., Just the Facts. This is why Rule 15(a) permits untrammeled leave to amend a complaint, including even during the trial itself. Confronted with such embarassments as this uncouth appellate opinion, it does not take a perfervid imagination to visualize the ghosts of David Dudley Field and code pleading arising, like ghouls, from the grave. 

The court of appeals affirmed the district court's dismissal of the principal antitrust allegations on the ipse dixit that, no matter how explicitly they may have been pleaded, "they do not give rise to a plausible reference of horizontal conspiracy" — "plausible," that is, under the court's "understanding" of Twombly. But Twombly's reference to "plausible" can mean anything at all because plausibility, like beauty, is in the eye of the beholder. The court also makes the fundamental error of considering plaintiff's conspiracy allegations singly and wiping the slate clean after each, as opposed to considering them holistically, as it was required to do under Poller v. CBS (1962). 

Several additional points. The opinion (Id. at 114) cites the court of appeals' previous decision in Lum for the proposition that Rule 9(b) may have a place in anaylzing an antitrust complaint. In 1995, Congress resolved the historic tension between Rule 9(b) and Rule 8(a) in favor of demanding microscopic particularity in pleadin in securities cases sounding in fraud.  This antitrust decision another step in particularizing antitrust complaints, and thus in eviscerating another area of private enforcement of fundamental federal policy. (At one point there was a bill in Congress to reverse Twombly and restor Conley v. Gibson, but I don't know what happened to it or, if if ever becomes law, the Supreme Court will strike it down on separation of powers grounds.) 

The opinion (Id. at 167) cites Dura and the "in terrorem" effect of defendants of certain types of litigation — here, a civil RICO suit, which the judiciary has long disfavored. But civil RICO is no more terroristic than Section 4 of the Clayton Act, i.e., treble damages + a reasonable statutory attorney's fee. The next, logical step will, of course, be to call Section 4 itself an "in terrorem" statute, which will lead to its repeal or modification. (This may not be altogether a bad thing because it has long been the excuse that foreign antitrust authorities employ not to assist our own private enforcement efforts, e.g., In re Uranium Cartel Antitrust; moreover, the statutory imposition of treble damages + attorney's fees conduces many a district judge to look with jaundiced eye on private antitrust enforcement.) Futhermore, citing a Seventh Circuit decision in Limestone the opinion assumes that treble damages are punitive (Id. at 167). Not mentioned is Justice Marshall's decision in Hawaii v. Standard Oil (1972), in which the Court stated that treble damages are not punitive but compensatory.

For its more learned moments the opinion relies on treatises by Herbert Hovenkamp, among the most partisan and ideological of scholars, to the exclusion of many other scholars whose views of the antitrust laws are different and, in many cases, irreconcilable.

At one point (Slip Op. at 86), the opinion actually rules in plaintiffs' favor by concluding that "bid-rigging behavior does plausibly suggest concerted action by [defendants]." But instead of extrapolating from this conclusion that the other alleged conduct is also sufficiently suseptible of a "concerted action" inference to permit full-bore discovery, the court holds exactly the contrary, to wit, that it does not. This suggests that, though the opinion was unanimous, there was actually an irreconcialible split among its members as to the correct result, so that the decision became a classic split decision, with something for everyone. Nonetheless, even the areas in which the district court's analysis was found deficient did not, for the most part, produce a clear win for plaintiffs; rather, those particular portions of the decision below were largely vacated and remanded for yet further study and analysis in the district court. 

The decision has a near-endless discussion of McCarran-Ferguson, one of the few statutes to be named after an airport.  See Slip Op. at 122-45.  It should be of interest to all of us who litigate in the antitrust-insurance field. 

Finally, and captiously, the decision is not free of grammatical and syntactical errors. Examples include (a) the phrase "plaintiffs' allege that. . ." (Slip Op. at 76), with its misplaced apostrophe, (b) an inability to distingush whether the phrase "none" ["none" ="no one"], when used as the subject of a sentence, takes a plural or a singluar predicate (compare Slip Op. at 79 ("none. . .give reason" and 101 ("none have merit") vs. Slip Op. at 126 ("none. . .is") and 1988 ("none was addressed"), thus betraying multiple authorship, and (c) the use of a word (instantiations", Slip Op. at 80) that does not appear in a standard dictionary.  These, to be sure, are scarcely the decision's primary flaws.

Plaintiffs should nonetheless have reason to be pleased. They have settled with Marsh & McLennan defendants during the course of the appeal.  (Slip Op. at 24 n.4).  This development would hopefully mean that Marsh has agreed to a cooperation clause. Because Marsh is "the dominant force" and "did the enforcing" of the alleged conspiracy (Slip Op. at 103, see also Id. at 106), the Marsh defendants' hoped-for cooperation with plaintiffs could force the remaining defendants to the settlement table. Given the unremitting hostility plaintiffs encountered in the district court and the prolix, turgid, and largely negative decision their efforts have generated in the court of appeals, this is their moment to resolve the case.

Samuel R. Simon
Bala Cynwyd, PA

By the way, you can reach Sam at samuel.simon@srsimon.com.  Sam practices antitrust and securities law and has been an adjunct professor at Rugers Law School since 2004.  He has also testified before Congress on antitrust issues on behalf of the American Antitrust Institute.

The Third Circuit came out last week with a 200-page rumination on the post-Twombly plausibility of conspiracies under section 1 of the Sherman Act (and the Racketeer-Influenced and Corrupt Organizations Act).  In re Ins. Brokerage Antitrust Litig., No. 07-4046 (3d Cir. Aug. 16, 2010).

The court upheld dismissal of hub-and-spoke conspiracy claims that accused big insurance brokers (the hubs of different wheels) of conspiring with insurers (the spokes on each wheel) to limit competition for coverage-buyers' business.  The decision turned on the panel's view that no plausible rim connected the spokes.  A rimless wheel, the court noted, may make out a vertical conspiracy (between a broker-hub and the insurer-spokes) but not a horizontal one.  Because a vertical agreement doesn't get per se illegal treatment (see here) and because the plaintiffs disclaimed a rule of reason claim (check here), the court concluded that Twombly mandated crushing the claims.

But the panel vacated rejection of a less ambitious theory — one that put a single broker, Marsh, at the hub of an at least tacit agreement (between Marsh and insurers and among the insurers) to let Marsh steer customers to incumbent insurers, killing competition between upstarts and incumbent on incumbement business.  The court found plausible the idea that the incumbents would serve self-interest by agreeing to help Marsh maintain the status quo by submitting fake bids for non-incumbent business.

That Marsh more or less admitted the conspiracy may have helped.

For a Brilliant Analysis of In re Ins. Brokerage, please see Guest Post:  Sam Simon.

[Warning:  Blawgletter's firm represented a group of defendants-appellees in the case.]