Donaldson was too tough on Wall Street, so he got the ax.  Then you had Christopher Cox, because he wasn't going to do his job.  That's why he got the job.

The five commissioners of the S.E.C. are securities lawyers.  Securities lawyers never understand finance.  They don't have the math background.  If you can't do math and if you can't take apart the investment products of the 21st cntury backward and forward and put them together in your sleep, you'll never find the frauds on Wall Street.

Harry Markopolos in Deborah Solomon, "Math Is Hard", The New York Times Magazine, Feb. 28, 2010.

Now we know.  

The Ninth Circuit held today that domain names ending with .com or .net dwell at 487 East Middlefield Road, Mountain View, CA.

The case involved efforts to collect a judgment against a man, John Zuccarini, who owned some .com or .net domain names.  The "situs" of the names mattered for constitutional and state law reasons.

Noting that the case involved a question of type two quasi in rem jurisdiction, the court located the situs as the headquarters of the "registry", VeriSign.  Which made the Northern District of California's appointment of a receiver to grab the domain names just fine.  Office Depot Inc. v. Zuccarini, No. 07-16788 (9th Cir. Feb. 26, 2010).

Registrars register domain names for registrants on registries.  

Sally sells sea shells by the sea shore.

U.S. District Judge Ron Clark today used his seat on a Federal Circuit panel as soapbox for speaking out against de novo review of Markman rulings.

In Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996), the Court snatched from juries the task of deciding what operative words in a patent mean.  The Court held that judges, not jurors, must do the "claim construction" job. 

The Federal Circuit affirmed today that it reviews the district courts' Markman work "without the slightest iota of deference."  Trading Technologies Int'l, Inc. v. eSpeed, Inc., No. 08-1392, slip op. at 13 (Fed. Cir. Feb. 25, 2010).

Judge Clark, who sits in the Eastern District of Texas, concurred with the panel's affirmance.  But he added: 

I write separately to respectfully suggest that the current de novo standard of review for claim construction may result in the unintended consequences of discouraging settlement, encouraging appeals, and, in some cases, multiplying the proceedings.

Determination of the meaning that would have been attributed to a claim term by one of ordinary skill in a sophisticated field of art on the date of filing often requires examination of extrinsic evidence—a determination of crucial facts underlying the dispute, as outlined by Judge Rader in the majority opinion. On some occasions, a determination will be made based, in part, on the weight to be given to conflicting extrinsic evidence or even to an evaluation of an expert’s credibility.

The standard of review that will be applied by a higher court sets one of the important benchmarks against which competent counsel evaluates decisions regarding settlement and appeal. The importance is highlighted by the fact that every brief must state the standard of review. See Fed. R. App. P. 28(a)(9)(B), (b)(5); Fed. Cir. R. 28(a)(10),(b).

The de novo review standard has at least two practical results, neither of which furthers the goal of the "just, speedy, and inexpensive determination of every action and proceeding." Fed. R. Civ. P. 1. First, rejection of settlement is encouraged, and a decision to appeal is almost compelled, where counsel believes the client’s position is valid, even if debatable, depending on the view taken of extrinsic evidence. It is a natural reaction upon receiving an unfavorable claim construction from a trial court to conclude that one’s own view of complicated facts will be better understood by the judges of the Federal Circuit, who generally have more experience with patent cases, and who, by their own authoritative rule, review the claim construction without regard to any determination the lower court has made.

A patentee has the opportunity to write clearly enough so that the meaning of the claims can be determined from the specification. What public policy is advanced by a rule requiring the determination of underlying facts by more than one court, especially when the likely result is that another group of citizens will be required to "volunteer" for lengthy jury duty on remand?

A second, although less common, consequence of the de novo review standard is the opportunity it offers to the party that presents a case with an eye toward appeal rather than the verdict. Skilled counsel who believes a client may not be well received by a jury is tempted to build error into the record by asking for construction of additional terms, and/or presenting only a skeleton argument at the claim construction stage.

This is risky, but it would be unusual for this Court to consider a point waived if a particular claim construction had been requested of the trial court and some argument made, but the clearest explanation was presented on appeal. An appellate court normally does not consider an unpreserved point of error, but a more sharply focused argument regarding points presented on appeal, from among those that are technically preserved, is actually the goal of the appellate specialist. This tactic would be less inviting if claim construction was officially accorded some measure of deference, even if it was applied only in those cases in which resort to extrinsic evidence was necessary.

The Sixth Circuit today booted a case because it couldn't tell if it belonged in federal court or not.

The lawsuit pitted a Keystone State corporation (with a Pennsylvania principal place of business, which as Blawgletter knows from yesterday coincides with the firm's "nerve center") against a limited partnership.  The complaint alleged diversity of citizenship as the basis for jurisdiction (under 28 U.S.C. 1332).  It also averred that the limited partnership belonged to two limited liability companies and an "S.A.R.L." from France.

As the Sixth Circuit pointed out, the citizenship of LLCs depends on the citizenship of their "members" (owners).  Plus, if an LLC member itself takes the LLC form, its citizenship likewise equals the citizenship of its members.  And so on and so on (and scoobie doobie doobie) until the end.

Kind of like those Russian nesting dolls.

The court couldn't figure out if diversity existed because the record didn't show the insides of all the LLC nesting dolls.  The French S.A.R.L. also vexed the panel, as no one seemed to know whether it counted as a corporation or a non-corporation and thus whether the nesting doll thing applied to it as well.

"As it stands," the court said, "the current jurisdictional allegations are fatally incomplete, leaving us uncertain that diversity jurisdiction exists."  V&M Star, LP v. Centimark Corp., No. 09-3249, slip op. at (6th Cir. Feb. 24, 2010).

The U.S. Supreme Court today resolved a debate over where a "corporation" has its "principal place of business".  The ruling will add certainty to whether federal courts have jurisdiction over many cases invoking "diversity of citizenship". 

The relevant statute, 28 U.S.C. 1332, empowers federal courts to decide cases that pit citizens of different states against each other.  Section 1332(c)(1) provides that "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business."

The Court held that principal place of business "refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities.  Lower federal courts have often metaphorically called that place the corporation's 'nerve center.'"  Hertz Corp. v. Friend, No. 08-1107, slip op. at 1 (U.S. Feb. 23, 2010).

Plaintiffs who sue under section 1 of the Sherman Act must allege a contract, combination, or conspiracy that restrains competition.  Some kinds of conspiracies so patently harm competition that courts presume injury and call them "per se" violations.  Agreements between competitors to fix prices, not to compete for specific customers or in particular areas, and to boycott a competitor come to mind.

But other, less obviously pernicious kinds of conduct fall under the "rule of reason".  Section 1 then requires the plaintiffs to allege and prove actual damage to competition.  And a basic building block of the requirement involves defining the "relevant market" — both in terms of product and geography.

[Note, though, that, as the Federal Trade Commission reminded us today in an amicus brief, some "inherently suspect" kinds of practices may shortcut the analysis of power in a relevant market.]

Today, the Fifth Circuit skipped the difference between per se and rule of reason cases under section 1.  The plaintiffs alleged that AT&T and owners of multiple dwelling units conspired to shut out competition for MDU dwellers' purchases of cable, Internet, and telephone services.  The panel said:

In order to demonstrate a violation of § 1, Appellants must allege that (1) AT&T and the Manor owners engaged in a conspiracy, (2) the conspiracy had the effect of restraining trade, and (3) trade was restrained in the relevant market.  The first step in this analysis is determining the relevant market, which itself is a function of the relevant product market and the relevant geographic market.

Wampler v. Southwestern Bell Telephone Co., No. 09-50208, slip op. at 3 (5th Cir. Feb. 22, 2010) (footnotes omitted).  The claim failed, the court held, because an MDU doesn't represent a relevant geographic market (too little) as a matter of law.  But the opinion says naught about the fact that the plaintiffs alleged a rule of reason claim, not a per se one.

Tsk, tsk.

Lawyers may share fees with other lawyers.  But may an attorney take part of a fee just for referring a case?

No, the Second Circuit confirmed in Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., No. 08-4966-cv (2d Cir. Feb. 18, 2010).  

The panel cited New York Disciplinary Rule 2-107(A)(ii), which (like similar rules in other states) bars fee-sharing between lawyers unless "[t]he division is in proportion to the services performed by the lawyer, or, by a writing given the client, each lawyer assumes joint responsibility for the representation".  Id., slip op. at 13-14.  

The referring lawyer, Daniel J. Baurkot, performed no services (other than sending the case to Wagner & Wagner, which in turn hired Atkinson, Haskins, et al.) and never assumed joint responsibility for the representation in a "writing given the client" (or indeed until after the case settled for almost $1 million), the court concluded.  

Nor could the lawyers cure the defect after the fact:  Baurkot simply hadn't done valuable work for plaintiff, and "the undertaking of joint responsibility is difficult (to say the least) to accomplish, other than as a charade, after a settlement with the defendant has been reached."  Id. at 15.

[Contrast that with a 2009 New York Court of Appeal case in which the referring lawyer did assume joint responsibility — and got his fee — despite ethical objections by the referee lawyer.]

The court noted two other requirements of the disciplinary rule.  The client must "consent[] to employment of the other lawyer after a full disclosure that a division of fees will be made", and "[t]he total fee of the lawyers [must] not exceed reasonable compensation for all legal services they rendered to the client."  Id. at 13-14 (quoting N.Y. Disciplinary R. 2-107(A)(i) & (iii)).  

The one-third contingent fee satisfied the "reasonable compensation" prong, but the client didn't receive "a full disclosure that a division of fees will be made" until very late.  That, too, ran afoul of Rule 2-107(A).

The court affirmed the district court's remedy for the ethical violation — forfeiture of the fee that Wagner & Wagner agreed to pay Baurkot.  Those funds went to the plaintiff, an infant.

The court expressed its concern that the lawyers seemed insufficiently conscious of their duties to the plaintiff. Baurkot and Wagner & Wagner took the appeal without plaintiff's consent in writing and still hadn't acquired the annuity that the settlement terms called for plaintiff to receive.  The court appointed pro bono counsel to represent plaintiff.  It also remanded the case to the district court to assure that plaintiff does obtain the annuity and for the court to "take any appropriate remedial and disciplinary actions."  Id. at 18.

Holders of convertible notes claimed, through their trustee, that the acquisition of the note-issuing company triggered their right, under the trust indenture, to receive cash or stock if and when a "Public Acquirer Change of Control" took place.  "Public Acquirer", according to the indenture, meant a person that "has a class of common stock traded on a United States national securities exchange".  Did the purchase of the note issuer by a Luxembourg firm that listed only its American Depository Shares on a U.S. national securities exchange (the NYSE) count as a Public Acquirer Change of Control?

The Second Circuit today said no.  ADSs represented a claim on the buyer's common stock.  But they differed from common stock.  The indenture defined "Capital Stock" as including ADSs but nowhere equated "common stock" with ADSs, the court noted.  It explained:

The parties could easily have included in the Indenture a definition of common stock in general with a parenthetical phrase expressly including ADSs, such as the parenthetical in the definition of "Capital Stock"; or they could have included such a parenthetical after "common stock" in the "a class of common stock traded on a United States national securities exchange" clause of the Public Acquirer definition.  They did neither.

Law Debenture Trust Co. of New York v. Maverick Tube Corp., No. 08-5668-cv, slip op. at 19 (2d Cir. Feb. 19, 2010).

The Supreme Court of Texas voted 5-3 today to decertify a class action.  The class representative, a company that audits telephone bills and seeks refunds for customers, alleged on behalf of a Texas class that Southwestern Bell overcharged by collecting municipal fees it did not have to pay.  The majority held that the assignee couldn't adequately represent the interests of the class.  Southwestern Bell Telephone Co. v. Marketing on Hold, Inc., No. 05-4078 (Tex. Feb. 19, 2010).

The dissent said the record disclosed no actual conflict between the assignee and other class members, only hypothetical ones.  The opinion also noted an upside:  "In my view, STA's unique expertise gives it an ability superior to that of any other class member to pursue this litigation as class representative and supervise the activities of class counsel, as the trial court found."  Id. at 2 (O'Neill, J., dissenting).

The Court held the class certification order otherwise proper.

Blawgletter cannot recall any class action that the Court has allowed to proceed in the last decade.  In November 2007, we counted 14 (out of 15) cases that went the other way.

Blawgletter thinks we don't go over the line when we say the Fifth Circuit deserves its rep as the court of appeals least likely to abide a class action.

Fresh proof came last week.  The court upheld the denial of class treatment in a securities fraud case against Halliburton.  It said, in a footnote:

Plaintiff contends that our precedent, specifically the requirement of Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007), that class plaintiffs prove loss causation at the class certification stage, is contrary to Supreme Court and sister circuit precedent.  Plaintiff may not assail Oscar as wrongly decided, as we are bound by the panel decision.

Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., No. 08-11195, slip op. at 2 n.2 (5th Cir. Feb. 12, 2010).

We can posit few burdens tougher to carry in a securities fraud case than the one for loss causation. Indeed, the Fifth Circuit's take on loss causation strikes us as the hardest of all.  In its view, plaintiffs must show not only that exposure of an untruth coincided with a drop in the stock's price but also that nothing else could explain the fall:

Causation therefore requires the Plaintiff to demonstrate the joinder between an earlier false or deceptive statement, for which the defendant was responsible, and a subsequent corrective disclosure that reveals the truth of the matter, and that the subsequent loss could not otherwise be explained by some additional factors revealed then to the market.  This requirement that the corrective disclosure reveal something about the deceptive nature of the original false statement is consistent with liability in a securities fraud action, where it is those who affirmatively misrepresent a material fact affecting the stock price that are held responsible for losses.

Id., slip op. at 6-7.

Proving a negative?  Good luck.

Why, you ask, does the court insist that plaintiffs prove loss causation at the class certification stage? The panel said that the Archdiocese "may not assail" the 2007 case in which the court (per the panel) mandated evidence that proved loss causation.  That makes sense to the extent it says one panel may not overrule another one.  

But one may hope that the full court (or perhaps the Supreme Court), some day, will see that class certification calls for proof not that plaintiffs will win at trial but that the proof they expect to offer could establish the elements of their claim — including loss causation — on a class-wide basis.  Their Honors will then overrule Oscar as an unwise effort to fuse class certification with the merits.

Some day.