Something has gone amiss when Blawgletter feels brighter on a subject than the brainiacs who write lead editorials for The New York Times.  Today's exception, we think, proved the rule.

The way-smart NYT editors yesterday penned a top-of-the-left-hand-column-just-below-the-masthead item that looked at holes in the bank-unfriendly bills Congress now has before it.  They opined that the draft laws won't do enough to curb contracts that do things like "bet on the mortgage market, in which one side was destined to win and the other to lose, without 'investing' anything in the real economy.  The C.D.O. [collateralized debt obligation] did not hold actual mortgage-related bonds, but rather allowed the participants to stake a position on whether bonds owned by others would perform well, or tank."  

And they concluded:

That is not investing, it is gambling, and it is abusive.  It has no place in banks that can bring down the system if they fail.

Since when, we wonder, did buying stocks and bonds become anything other than "gambling".  And how do we tell what Wall Street bet amounts to gambling and what counts as investing?

Our view tends towards a rule that presumes an unlawful motive for any derivative buyer who doesn't own an genuine interest in an asset whose performance determines the value of the derivative.  A derivative buyer who wants to hedge against a default on a "reference security" — the 1,000 North Texas Tollway bonds she holds, say — would get a Fast Pass in court.  But non-NTT bondholders who bet against the Tollway bonds without owning any would have to show, by way of defense, that they had a Good Reason for throwing the dice on their bet that the NTT bonds will default or otherwise trigger a bad "credit event", which would force the derivative seller to pay the bettor her winnings.

A Good Reason might include the fact that the derivative-purchaser owns East Texas Tollway bonds, whose fate closely tracks that of the bonds of its Dallas-area cousin.  It wouldn't suffice, though, that the buyer simply wanted to make out like a bandit if, as he hoped, NTT bonds crashed and burned.

If all this sounds odd, welcome to the wacky world of derivatives.  

But let's not think, as the NYT editors seem to, that banning "abusive derivatives" and prohibiting "gaming contracts" means anything without a rule people (i.e., judges) can grasp.  A law that grants a defense to those who can show Good Reason for buying a derivative, despite lacking an interest in the "reference security" it derives from, would go a long way towards killing "abusive derivatives".  It would give content to a bar against "gaming contracts", on Wall Street if not in Las Vegas.

We end by nothing, as we have before, that derivatives blossomed as a result of a law Congress passed in 2000.  The very last section of the statute, which hamstrung federal regulation of derivatives, pre-empted state laws against "gaming".  Which tells you all you need to know about derivatives.

A lawyer who takes a case on a bet that she will win a judgment or settlement risks more than do colleagues who bet nothing on the outcome.  We call the latter hourly lawyers.  And, more than ever after today, we may deem the former gougers or worse.

For on yesterday the U.S. Supreme Court ruled, 5-4, that a trial judge errs when he awards class action lawyers a bump over their "lodestar" — hours x hourly rate — for simply doing a great job.  Perdue v. Kenny A., No. 08-970 (U.S. Apr. 21, 2010).

The judge in Perdue cut the class lawyers' lodestar by half for travel time and 15 percent for non-travel hours but then enhanced the much-lower lodestar by 75 percent.  The Eleventh Circuit affirmed the $10.5 million award, holding that its old decisions forced it to accept the bump.

The Perdue majority on the Supreme Court felt less restraint.  It held that, under the Court's own precedents, the district judge went so far out of line that he abused his discretion.

Blawgletter can't say whether we would've awarded a different fee.  But we can observe that the Court showed more than a little disdain for class action lawyers on the plaintiff side and that it removed any economic incentive for hourly lawyers to serve as class counsel in fee-shifting cases.

Justice Alito's opinion notes three situations that might justify a lodestar enhancement.  The first requires proof that the lodestar underpays "the rate that the attorney would receive in cases not governed by the federal fee-shifting statutes."  Id., slip op. at 10.  A lawyer who earns $X an hour in hourly cases may thus forget about winning more just because she achieves an extraordinary result.  The lodestar, the Court holds, means all; it needn't — mustn't — compensate for the risk of losing and, therefore, non-payment.

Second, an "extraordinary outlay of expenses" plus "exceptionally protracted" litigation may warrant an increase over lodestar.  Id. at 11.  But hourly lawyers seldom lay out any expenses, and the protraction of a case rewards rather than penalizes them.  And yet the Court limits any enhancement to "a standard rate of interest" on "the qualifying outlays of expenses."  Id.

The third factor — "exceptional delay in the payment of fees" — likewise ignores reality.  Id.  Every class action involves a big delay in compensation, while for the hourly lawyer a check usually arrives within 30-60 days.  Contrast that with the eight years the Perdue plaintiffs' lawyers have waited for their payment.

So why did the Court conflate an hourly lodestar with a class action lodestar?  We may surmise that most of the majority dislikes class actions — even ones that, like Perdue, aim to protect foster children from savage beatings.  But we suspect that at least one of Their Honors simply assumes that no sensible lawyer who must forego an hourly fee to represent a civil rights class would sign on for such a case.  Because in that instance none of the Court's enhancement factors makes sense.

No, we imagine, the majority believes that your normal every-day class action lawyer already inflates his or her hourly rate and thus builds into it a capacious profit margin.  Which may be true.  But that's not what the Court said.  It hung on a "don't bother" sign for many of the most capable lawyers in the country.  Which can only degrade the quality of class representation. 

The U.S. Supreme Court held today that "mistakes of law" by debt collectors don't count as "bona fide errors" under the Fair Debt Collection Practices Act. 

Justice Sotomayor wrote the Court's opinion; Justice Scalia concurred in part and in the judgment; and Justice Kennedy (with Justice Alito) filed a dissent.  Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA, No. 08-1200 (U.S. Apr. 21, 2010).

The case involved a claim that a law firm and one of its lawyers violated the FDCPA by telling a home mortgage debtor, Karen L. Jerman, that they would assume she owed the debt unless she disputed it in writing.  But the law doesn't allow debt collectors to require debtors to dispute the debt in writing or to assume the debtor owed the debt.  Ms. Jerman in fact had paid off the mortgage.  The Court deemed the law firm's and lawyers' mistake one of law and therefore not an unintentional bona fide error.

If you, like Blawgletter, wondered when U.S. antitrust watchdogs would announce new standards for judging whether M&A deals have hurt or would injure competition, wonder no more. 

On April 20, the Antitrust Division of the Department of Justice and the Federal Trade Commission put out for public comment a new set of "Horizontal Merger Guidelines".  The 2010 HMGs will replace those from 1992 and 1997.

To our eye, the changes look mainly to furnish more ways to weigh anticompetitive effects.  The FTC summarizes the edits thus:

  • The proposed Guidelines clarify that merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use a variety of tools to analyze the evidence to determine whether a merger may substantially lessen competition.
  • The proposed Guidelines introduce a new section on “Evidence of Adverse Competitive Effects.”  This section discusses several categories and sources of evidence that the agencies, in their experience, have found informative in predicting the likely competitive effects of mergers.
  • The proposed Guidelines explain that market definition is not an end itself or a necessary starting point of merger analysis, but instead a tool that is useful to the extent it illuminates the merger’s likely competitive effects.
  • The proposed Guidelines provide an updated explanation of the hypothetical monopolist test used to define relevant antitrust markets and how the agencies implement that test in practice.
  • The concentration levels that are likely to warrant either further scrutiny or challenge from the agencies are updated in the proposed Guidelines. 
  • The proposed Guidelines provide an expanded discussion of how the agencies evaluate unilateral competitive effects, including effects on innovation. 
  • The proposed Guidelines provide an updated section on coordinated effects.  They clarify that coordinated effects, like unilateral effects, include conduct not otherwise condemned by the antitrust laws.
  • The proposed Guidelines provide a simplified discussion of how the agencies evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power. 
  • The proposed Guidelines add new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.  

For information on how to submit comments, look here.

A Taiwanese company with headquarters in Taiwan sued Apple, Inc., in Arkansas federal court.  The claims related to digital music players and what the plaintiff deemed "abusive" litigation tactics by Apple in Taiwan and Germany.  The district court declined to moved the case to the Northern District of California.  The Eighth Circuit granted mandamus relief and ordered transfer.  In re Apple, Inc., No. 09-3689 (8th Cir. Apr. 19, 2010). 

John Kenneth Galbraith — the Harvard econ prof who sailed with the Kennedys, coined phrases (e.g., "conventional wisdom"), and adored big words — looked back at The Great Crash 1929 (1954) a quarter-century later and found much frenzy to marvel at and folly to lament.

One of his chapters he titled "In Goldman, Sachs We Trust".  In it, he looked at how a late-comer to the "investment trust" bubble, Goldman, Sachs and Company, sponsored "the most dramatic of all the investment company promotions" during the year of the crash.

Professor Galbraith ended the chapter with this Senate testimony:

Senator Couzons.  Did Goldman, Sachs organize the Goldman Sachs Trading Company?

Mr. Sachs.  Yes, sir.

Senator Couzons.  And it sold its stock to the public?

Mr. Sachs.  A portion of it.  The firm invested originally in 10 percent of the entire issue for the sum of $10,000,000.

Senator Couzons.  And the other 90 percent was sold to the public?

Mr. Sachs.  Yes, sir.

Senator Couzons.  At what price?

Mr. Sachs.  At 104.  That is the old stock . . . the stock was split two for one.

Senator Couzons.  And what is the price of the stock now?

Mr. Sachs.  Approximately 1¾.

The story that Professor Galbraith tells hinges in part on "worry that the country might be running out of common stocks."  Firms like GS solved the problem by setting up stock-speculating companies whose own shares allowed investors to "leverage" bets on the market, which seemed ever only to rise.

Something very like that happened in the middle of this decade.  And it goes a long way towards explaining why now the Securities and Exchange Commission has sued Goldman Sachs for civil fraud and, per The Wall Street Journal today, "is investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors."

Blawgletter's favorite Bloomberg columnist, Jonathan Weil, today takes keyboard in hand to tell us why the Securities and Exchange Commission just sued Goldman Sachs for civil fraud – "Goldman Serves One Master Better Than the Others".  He teases with this:

Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble — that it simply was serving clients’ needs — could come so unglued so quickly?

Mr. Weil ends thus:

Can’t wait to see how Goldman tries to talk its way out of this one.

SEC news release here.

Blawgletter likes Associate Justice David Souter.  Lots of people do.  Today he gave us further reason.  

He wrote for his former court of appeals:

 SOUTER, Associate Justice. Three principals organized the appellant, Take It Away, Inc., to act as a broker in a contemplated business of supplying dumpsters that do-it-yourselfers could rent from the appellee, The Home Depot, Inc., and like retailers. In a document called a “teaser,” mailed to a Home Depot official in 1997, Take It Away hopefully described itself as a “Nationwide Association” of waste haulers and others, with a “Retail Distribution Channel for renting Construction & Demolition Debris Removal Containers” (i.e., dumpsters), which was prepared to form “Strategic Partnerships” with building material supplies dealers like Home Depot. Take it Away would “provid[e] all the tools,” apparently dumpsters, “for [Home Depot] to capture [its] share of this immense untapped market,” presumably by renting the dumpsters to its customers. The statement described itself as confidential, and when the recipient at Home Depot agreed to have discussions he signed a “non-disclosure agreement” prepared by Take It Away, pledging that Home Depot would “utilize the Confidential Proprietary Information” to be disclosed “for the sole purpose of evaluating the business of [Take It Away] and [would] make no other use” of it without permission.

 

The information actually disclosed was a proposal that the association, Take It Away, would supply dumpsters (obtained, one supposes, from its associated trash haulers) that Home Depot would rent directly to its customers, pocketing ten percent of the charge and remitting the balance to Take It Away. Home Depot was not interested in becoming a dumpster lessor, and remained of that mind despite at least four more of Take It Away’s pitches to other company officers and employees over the next five years. Beginning in 2003, however, Home Depot signed agreements allowing four suppliers in the United States and Canada to use space in Home Depot stores to offer dumpster rentals directly as lessors to Home Depot customers.

 

Take It Away brought this suit in a Massachusetts state court. Count 1 accused Home Depot of violating the non-disclosure agreement; count 2 charged appropriation of trade secrets contrary to Massachusetts General Laws Chapter 93, § 42; count 3 alleged common law conversion of trade secrets; and count 4 claimed violation of Chapter 93A, § 11 of the Massachusetts statutes, forbidding unfair trade practices. Home Depot removed the case to federal court, where the district judge granted summary judgment to Home Depot on all counts. On appeal for de novo review, Klaucke v. Daly, 595 F.3d 20, 24 (1st Cir. 2010), we affirm.

 

The principal difficulty in this case is understanding what the confidentiality agreement was supposed to protect. “Confidential Proprietary Information” is undefined, and the district court not unnaturally took it at a fairly general level to cover “the concept of renting dumpsters from national home improvement retail centers.” At first, some of us also thought that was what the fight was about, but a careful rereading of Take It Away’s reply brief shows that its claim is a degree more particular, focused on brokerage. It says that its “dumpster-brokerage concept and business plan” were the intended subjects of protection; “the essence of its concept is national retail distribution dumpster brokerage” combined with a “separate business plan for putting its concept into practice” (emphasis in original). The stress in the reply brief is repeatedly on its “dumpster-brokerage concept” or “container-brokerage concept,” which is more specific than “rental of dumpsters.” 

 

The clarification at least saves Take It Away from the obvious response that all it disclosed was that Home Depot, like ever so many others, could rent out dumpsters. But even as clarified, the claim seems to boil down to this: the agreement was intended to protect a “brokerage” concept to the effect that Take It Away would deal with third parties to obtain dumpsters that Home Depot could rent to customers. The concept is not merely, “you can do it, too,” but no more than “you can do it, too, and we will broker your supplies.”

 

With the subject of the claimed protection so understood, we think the summary judgment order was correct on all counts. Although much of the briefing and argument addresses the potential breadth of “Confidential Proprietary Information” along with its relation to the notion of a trade secret and the criteria for concluding that information amounts to a trade secret, the anterior issue is whether the concept actually meant to be protected here can reasonably be seen as having enough value, beyond what was commonly known or obvious, to amount to consideration for Home Depot’s promise to limit its use of that concept as Take It Away subsequently disclosed it. The first reason for answering no is simply that before the Home Depot official signed the agreement he had already seen the teaser, which is fairly read as disclosing the concept of a network of businesses organized by Take It Away to supply dumpsters to be rented out by retail suppliers to their customers. That is, the teaser described an association in the role of a broker of rental goods. While the details of the business plan were not set out there, the basic business structure was apparent: Home Depot would “capture” the market, while Take It Away would work behind the scene of the retailer’s direct transaction with the customer. The concept was out in the open before Home Depot agreed to talk.

 

The detailed provisions of the business plan were not disclosed by the relatively short teaser statement, but this is irrelevant for two independent reasons. First, it does not appear that the plan adds anything to the concept that was not obvious from the concept as described by the teaser. And, second, Home Depot did not implement the details of Take It Away’s plan; its four contractors deal directly with the customers.

 

But even if the claimed secret had not already been revealed before the agreement was signed, one searches in vain for anything of value not readily imaginable that might be protected. It is undisputed that Home Depot rented tools and even trucks to its customers, that dumpsters were commonly rented out, and that retailers need manufacturers or suppliers. While it might have been information of some commercial (though not necessarily protectable) value that a previously unknown broker network was ready for business and could give Home Depot an immediate entree to the dumpster supply market, that could not have been protectable information here, if for no other reason than the undisputed fact that Take it Away’s “Nationwide Association” did not actually exist; the references to an association were expressions of hope, nothing more. In sum, it is hard to see what concept or plan Home Depot gained from the disclosure that it could not have thought up readily for itself if it had found any reason to expand its rental activity: a dumpster is a big tool for removing debris, and renting tools and establishing reliable supply networks are not the stuff of novel concepts. This is not to say, of course, that a proposal like Take It Away’s could not have led to lucrative business if accepted, but any such value would have come from efficient execution, not conceptual inventiveness, and disclosing the concept did not provide the value necessary for consideration supporting a contractual claim.

 

This view of the nature and worth of Take It Away’s disclosure answers its argument that “Confidential Proprietary Information” may be the subject of a confidentiality agreement covering more than trade secrets and may be protected by contract under Massachusetts law. We will assume this to be so, for it makes no difference. Whatever the state law of contract may protect, there must be a contract to protect it, and without valuable consideration on one side there is none.

 

As might be expected, the state doctrine of protectable trade secrets, the subject of counts 2 and 3, fails to improve Take It Away’s position. Under Massachusetts common law, a trade secret is “‘any formula, pattern, device or compilation of information . . . used in one’s business . . . which gives him an opportunity to obtain an advantage over competitors who do not know or use it,” J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc., 357 Mass. 728, 736, 260 N.E.2d 723, 729 (1970) (quoting Restatement of Torts § 757 cmt. b (1939)).

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While Take It Away brought claims under both Massachusetts common law and statutory law, it does not distinguish between them on appeal because it views them as “doctrinally equivalent.” This may well be true. See Incase Inc. v. Timex Corp., 488 F.3d 46, 52n.10 (1st Cir. 2007); Burten v. Milton Bradley Co., 763 F.2d 461,462 (1st Cir. 1985) (“Mass. Gen. Laws Ann. ch. 93, § 42 . . .essentially codifies the common law.”). Regardless, because Take It Away makes no argument that its statutory claim calls for a separate analysis, we analyze counts 2 and 3 together.

The definition is spacious to be sure, but a protectable secret must still be described aptly as a secret after considering six criteria, see Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840, 282 N.E.2d 921, 925 (1972), which are not much help to Take It Away.

 

The first and last criteria look to the extent that information was known outside Take It Away and the ease with which it could be acquired independently. As noted, the teaser revealed what a true teaser would have left for later, and for that matter anyone interested in domestic building construction could readily have thought of supplying dumpsters for rent by a lumber dealer; in fact, the idea struck one of Take It Away’s principals in a flash as he was driving by a Home Depot store. While it should not count against a small corporation that everyone working for it knows the supposed secret (under the second criterion), it does count against Take It Away (under the third) that the move it made to protect itself (getting a non-disclosure agreement) was outflanked by the teaser and was insisted upon in dealing with only one of at least seven Home Depot officers or employees to whom Take It Away revealed the concept. The others variously refused, declined, or were never asked to sign the non-disclosure form. See Healy, 357 Mass. at 738, 260 N.E.2d at 731 (he who wishes to preserve a trade secret “must exercise eternal vigilance”).

 

 The amount of effort and money devoted to developing the supposed secret (criterion five) does not enhance Take It Away’s case appreciably, for the 1700 hours of work claimed, and the thousands said to have been spent, include the extended and wholly unsuccessful marketing efforts. Finally, with respect to the fourth criterion (the value of the idea), while Take It Away’s expert envisioned millions in profits, nothing in his report suggests that a trade secret was the reason; he simply estimates the value of the business opportunity assuming vigorous marketing by Home Depot. Cf. Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011 n.15 (1984) (“[T]he value of a trade secret lies in the competitive advantage it gives its owner over competitors.”).

 

 It is not apparent that consideration of these six factors could support a conclusion of protectable trade secret. So summary judgment on counts 2 and 3 was proper. See Rodi v. S. New Eng. Sch. of Law, 532 F.3d 11, 15 (1st Cir. 2008) (explaining that summary judgment is appropriate if no reasonable jury could find for the non-movant, even on an issue that is “ordinarily a question of fact for the jury” under state law).

 

Take It Away’s final claim alleges violation of Massachusetts General Laws Chapter 93-A. As Take It Away succinctly put it in the reply brief, this claim “is premised on a number of unfair and deceptive acts . . . namely, Home Depot’s breach of the Agreement and misappropriation of trade secrets.” Absent an enforceable agreement and, specifically, a trade secret, count 4 fails as well.

 

Affirmed.

Take It Away, Inc. v. The Home Depot, Inc., No. 09-1336 (1st Cir. Apr. 15, 2010).

The Judicial Panel on Multidistrict Litigation decided to send the Toyota cases to Santa Ana, California.  It explained:

The oral arguments were quite helpful to the Panel and seemed to focus on several important issues.  Some attorneys questioned whether one judge or particular judge would have the necessary time and resources to handle such a complex, multi-faceted MDL.  Others argued that the individual personal injury cases might become sidetracked by larger, more complex class action economic loss cases.  These are absolutely legitimate concerns.  The Panel's decision addresses these concerns and expresses our confidence that the federal judiciary is well equipped to handle this litigation under Section 1407.

    Each of the actions currently before the Panel asserts economic damages on behalf of certain classes and/or individuals stemming from an alleged defect in certain Toyota vehicles that causes sudden, unintended acceleration.  The cases involve common questions of fact.  No doubt, centralization under Section 1407 will eliminate duplicative discovery; prevent inconsistent pretrial rulings, including with respect to class certification; and conserve the resources of the parties, their counsel, and the judiciary.  Consequently, centralization will create convenience for the parties and witnesses and will promote the more just and efficient conduct of this litigation.
 
    The Panel has given considerable thought to the suitability of centralizing the personal injury and wrongful death cases with the economic damage cases that are currently before the Panel.  Without prejudging the merits of any later-filed motion to vacate a conditional transfer order in this docket, and based upon the hearing record made, we are initially persuaded that the centralized proceedings should eventually include the related personal injury and wrongful death actions.  The liability discovery in all the cases will certainly overlap. By their very nature, the personal injury and wrongful death claims will require considerable individual discovery in addition[] to the common discovery in each case.  We are confident that the transferee judge can design the kind of distinct discovery tracks often employed to address these concerns.  In our experience, these are recurring issues that transferee judges regularly and successfully coordinate.
 
    The parties have suggested a number of very acceptable transferee districts and judges.  However, for the following reasons, we have settled upon the Central District of California as the most appropriate choice.  Toyota maintains its United States corporate headquarters within this district,and relevant documents and witnesses are likely located there.  Far more actions are pending there than in any other district.  Among the cases pending there are potential tag-along cases that assert personal injury or wrongful death claims.  After consulting with Chief Judge Audrey B. Collins, we have selected Judge James V. Selna as the transferee judge.  He is a well-regarded and skilled jurist.  Moreover, Judge Selna's 28 years of private law practice at the very highest levels and in some of the most complex cases leaves him well prepared for a case of this magnitude.
 
    Some counsel did express concern about the docket conditions in this district.  The ability and willingness of even the most experienced judges to devote the necessary time to a complex MDL is always a factor in our assignments.  In this particular instance, our consultations with Judge Selna and Chief Judge Collins convince us that Judge Selna is positioned to devote all the time necessary to manage and decide the important issues these cases raise.
Blawgletter notes that Judge Selna didn't have any of the Toyota cases before the Panel's order.  Two of his colleagues did.  The assignment of the cases to Judge Selna thus deviates from the normal rule that the first judge to get an MDL-worthy cases in the transferee district also handles the MDL.  The Panel doesn't note the deviation but does explain why it chose Judge Selna — his status as a "well-regarded and skilled jurist", his "28 years of private law practice at the very highest levels and in some of the most complex cases", and his resulting preparation "for a case of this magnitude."
 
BusinessWeek reports that Judge Selna has already set an initial conference for May 13 and named interim lead counsel for the plaintiffs.  The leads include our partner Marc Seltzer as well as Steve Berman and Elizabeth Cabraser.