Does the doctrine of functus officio — "having performed his office" — allow an arbitrator to change his award?  Yes, the Second Circuit held today — if the parties agreed in advance to permit amendments.  T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., No. 08-08-3894-cv(L) (2d Cir. Jan. 14, 2010).

The panel also confirmed the court's "judicial gloss" on the old extra-statutory "manifest disregard of law" theory for attacking awards.  Id.. slip op. at 13.  (Old because Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008), deemed section 10 of the federal Arbitration Act the sole source of grounds for vacatur.)  The court uses MD as shorthand for the statutory grounds.

By the way, the First Circuit handled a functus officio point last January . . . and did pretty much the same thing.  Annals of Arbitration:  Kaput to Functus Officio?

Feed-icon-14x14 Our feed feels your pain.

The Second Circuit did a brave thing today.  It tossed dismissal of a price-fixing complaint that centered on "parallel" conduct — the very thing the Supremes disparaged as a basis for stating a section 1 Sherman Act claim in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).

The case involved allegations that major record label companies conspired to fix prices for tunes they sold over the Internet.  The court explained:

Applying the language and reasoning of Twombly to the facts of this case leads us to conclude respectfully that the district court erred in dismissing the complaint for failure to state a Section 1 claim. The present complaint succeeds where Twombly’s failed because the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants. As discussed above, the complaint contains the following non-conclusory factual allegations of parallel conduct. First, defendants agreed to launch MusicNet and pressplay, both of which charged unreasonably high prices and contained similar DRMs. Second, none of the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music. Third, when defendants began to sell Internet Music through entities they did not own or control, they maintained the same unreasonably high prices and DRMs as MusicNet itself. Fourth, defendants used MFNs in their licenses that had the effect of guaranteeing that the licensor who signed the MFN received terms no less favorable than terms offered to other licensors. For example, both EMI and UMG used MFN clauses in their licensing agreements with MusicNet. Fifth, defendants used the MFNs to enforce a wholesale price floor of about 70 cents per song. Sixth, all defendants refuse to do business with eMusic, the #2 Internet Music retailer. Seventh, in or about May 2005, all defendants raised wholesale prices from about $0.65 per song to $0.70 per song. This price increase was enforced by MFNs.

More importantly, the following allegations, taken together, place the parallel conduct “in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” Twombly, 550 U.S. at 557. First, defendants control over 80% of Digital Music sold to end purchasers in the United States. See 7 Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law (hereinafter “Areeda & Hovenkamp”) § 1431a (2d ed. 2003) (“[E]mpirical studies considering many industries have suggested that noncompetitive pricing [that may be the result of price coordination] is likely to appear when the four leading firms account for some 50 to 80 percent of the market.”). Second, one industry commentator noted that “nobody in their right mind” would want to use MusicNet or pressplay, suggesting that some form of agreement among defendants would have been needed to render the enterprises profitable. See id. § 1415b (“Some acts, or failures to act, cannot be profitably continued unless rivals behave in parallel.”); In re Flat Glass Antitrust Litig., 385 F.3d 350, 360-361 (3d Cir. 2004) (“Evidence that the defendant acted contrary to its interests means evidence of conduct that would be irrational assuming that the defendant operated in a competitive market. In a competitive industry, for example, a firm would cut its price with the hope of increasing its market share if its competitors were setting prices above marginal costs.”). Third, the quote from Edgar Bronfman, the current CEO of WMG, suggests that pressplay was formed expressly as an effort to stop the “continuing devaluation of music.”

Fourth, defendants attempted to hide their MFNs because they knew they would attract antitrust scrutiny. For example, EMI and MusicNet’s MFN, which assured that EMI’s core terms would be no less favorable than Bertelsmann’s or WMG’s, was contained in a secret side letter.  “EMI CEO Rob Glaser decided to put the MFN in a secret side letter because ‘there are legal/antitrust reasons why it would be bad idea to have MFN clauses in any, or certainly all, of these agreements.” SCAC ¶ 95. According to the executive director of the Digital Music Association, seller-side MFNs are “inherently price-increasing and anticompetitive.” SCAC ¶ 97.

Fifth, whereas eMusic charges $0.25 per song, defendants’ wholesale price is about $0.70 per song. See 7 Areeda & Hovenkamp § 1415b (“[O]ne cannot profitably increase its price above that charged by rivals unless they follow the price-raiser’s lead.”). Sixth, defendants’ price-fixing is the subject of a pending investigation by the New York State Attorney General and two separate investigations by the Department of Justice. Finally, defendants raised wholesale prices from about $0.65 per song to $0.70 per song in or about May 2005, even though earlier that year defendants’ costs of providing Internet Music had decreased substantially due to completion of the initial digital cataloging of all Internet Music and technological improvements that reduced the costs of digitizing new releases. See Richard A. Posner, Antitrust Law 88 (2d ed. 2001) (“Simultaneous price increases . . . unexplained by any increases in cost may therefore be good evidence of the initiation of a price-fixing scheme.”).

Starr v. Sony BMG Music Entertainment, No. 08-5637-cv, slip op. at 12-15 (2d Cir. Jan. 13, 2010) (footnote omitted).

In perhaps a Freudian slip, concurring Judge Newman wrote at length about the "perplexing" Twombly decision while spelling it Twombley.  Perplexing, indeed.

The law gives its strivers an odd sense of reality.  That goes double for those who work the courtroom.

You may put blood, sweat, and tears into a case for years, pressing to show and persuade the trier of fact that Thing A happened and that Fact A exists — and contrarily that Thing B didn't occur and that Fact B never lived.

But you don't KNOW.  And you won't KNOW until the fact-trier finds the facts.  Then you think, WOW, what a total vindication (or repudiation)!  My side's view of the cruel and random universe won (or lost) this time!  Woo-hoo!

The Ninth Circuit today — 28 months after the fact — pronounced that an order had died the day of its birth.  

The panel held that a preliminary injunction shuffled off the judicial coil when the district court entered final judgment on the same day.  That the trial judge failed to say what effect the final judgment had on the preliminary injunctioned mattered not.  By the nature of things — the panel said "ipso facto" — the final judgment dissolved the preliminary injunction, which exists solely to preserve the status quo until final judgment and therefore cannot ever survive the entry of one.  U.S. Philips Corp. v. KBC Bank N.V., No. 08-56296, slip op. at 930 (9th Cir. Jan. 12, 2010).

The court also concluded that an order purporting to modify the non-extant preliminary injunction had no more effect than the preliminary injunction had  post-final judgment existence.  "A district court cannot prospectively modify a preliminary injunction that is not in effect," the Ninth Circuit said.  Id. at 931.

The subprime residential mortgage business got much of its lending money from big banks.  Wall Street in turn acquired the cash by pooling thousands of subprime mortgages into securities and selling the paper to investors.  

In 2007, Lone Star bought $61 million of such securities from Barclays Bank and Barclays Capital.  The deal documents included a representation that none of the about 10,000 loans underlying the securities had gone delinquent.  But they also provided that, if any loan had gone bad, Barclays would replace or repurchase it, calling that remedy Lone Star's "sole" one.

Lone Star sued Barclays after learning that several hundred borrowers had defaulted on their mortgage payments at the time of the purchase from Barclays.  It alleged fraud.  The district court dismissed, citing the "substitute or repurchase" clause.  The Fifth Circuit affirmed, saying:

Barclays made no actionable misrepresentations.  Even though the mortgage pools contained delinquent mortgages, Appellants have not alleged that Barclays failed to substitute or repurchase the delinquent mortgages.  Appellants' efforts to focus on a single representation amid hundreds of pages of contractual documents are misplaced.  They are bound by the entirety of the contract.

Lone Star Fund V (US), LP v. Barclays Bank PLC, No. 08-11308, slip op. at 9 (5th Cir. Jan. 11, 2010) (applying Texas law).

Blawgletter can see how a "sole" remedy clause could negate reliance on a misrepresentation.  But the court goes on a different track, saying you have to read the whole agreement to understand whether a misrepresentation means what it says.  That sounds like a harder way to get to the result, and possibly a much more defendant-friendly way as well.

In February of last year, Blawgletter posted this item:

Got Champerty?

Often a yoke companion to maintenance, champerty means . . . what? 

Our law school Black's Law Dictionary (5th ed. 1979) defines the crime as:

A bargain by a stranger with a party to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if successful, a part of the proceeds or subject sought to be recovered. . . . "Maintenance" consists of maintaining, supporting, or promoting the litigation of another.

Perfectly clear, right?  Financing somebody else's lawsuit in return for a piece of the action.

But the Second Circuit last week said hold up, wait a minute.  A district court had declared the purchase of a claim champertous because the transaction had as its "primary purpose" the acquisition of "a lawsuit".  It relied on a New York statute that provided:

[N]o corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action of proceeding thereon.

New York Judiciary Law § 489(1).

Finding Empire State decisions on what counts as champerty unclear, the Second Circuit certified questions to the New York Court of Appeal:

1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law § 489(1), or must there be a finding of “sole” intent?

2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?

3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?

(b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor’s indemnification rights for reasonable costs and attorneys’ fees?

Trust for Certificate Holders of Merrill Lynch Investors Inc. Mortgage Pass-Through Certificates 1999-C-1 v. Love Funding Corp., No. 07-1050, slip op. at 26-27 (2d Cir. Feb. 13, 2009).

Blawgletter doesn't pretend to understand the nuances of New York's anti-champerty law, but we do note that the core purpose of deeming champertous conduct a crime lay (as the Second Circuit noted) in discouraging the purchase of claims for the purpose of ginning up fees and expenses and then recovering them. 

One may easily imagine a Dickensian lawyer who bought claims (cheap) for the sole purpose of (a) giving him something to do and (b) furnishing him a possible source of income.

We expect the Court of Appeal will recognize the permissibility of selling commercial claims in circumstances that don't suggest a lawsuit incubator and hatchery operation. 

The wheels of commerce cannot — must not — be stayed!

Today we got our answer.  Which we got exactly right.  Trust for Certificate Holders of Merrill Lynch Investors Inc. Mortgage Pass-Through Certificates 1999-C-1 v. Love Funding Corp., No. 07-1050-cv (2d Cir. Jan. 11, 2010) (holding that record failed as matter of law to show champerty).

Feed-icon-14x14 Our feed prefers not to brag.

The Class Action Fairness Act of 2005 put federal courts in charge of handling all but a small group of class cases with $5 million or more at issue. CAFA did so in part by growing the scope of "diversity of citizenship" jurisdiction — which applies when people on different sides hail from different states or, sometimes, from different countries.

Yesterday, in a small irony, the Fourth Circuit applied CAFA not to hold a class case in federal court but to send one that started in state court back there. 

The ruling turned on a CAFA part of the diversity jurisdiction statute, 28 U.S.C. 1332.  Subsection (d)(10), the court held, restricted the citizenship of limited liability companies to just one or two states — the one under whose laws someone organized the LLC in question and the one where it maintains its principal place of business.  The old rule (in most circuits) tagged LLCs with the citizenship of all its "members", which could number in the dozens and would therefore make "diversity" harder to achieve.

The irony resulted from the fact that the court would've kept the case in federal court if the pre-CAFA rule governed.  The defendant that removed the case from state court to federal qualified for citizenship in Kansas and Missouri under the old regime but Tennessee and South Carolina under the new one.  Because the plaintiffs all came from South Carolina, diversity jurisdiction — even the "minimal" kind CAFA allows — didn't exist.  Ferrell v. Express Check Advance of SC LLC, No. 09-240 (4th Cir. Jan. 8, 2010).

The Robinson-Patman Act came out of the Great Depression.  It aimed to stop big department stores from using their buying power to crush mom and pop stores with lower retail prices.  But its language applied broadly, barring any substantial discrimination in price.  

Courts have tried to manage the reach of RPA by expansively applying statutory defenses, creating new ones, imposing caveats, and even "elevat[ing] form over substance."  Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., 530 F.3d 204, 228 n.17 (3d Cir. 2008).  Carrying on the tradition, the Third Circuit yesterday again showed how little effect the RPA has.

The facts of the case at first look bad.  A food distributor, Feesers, had to pay a manufacturer, Michaels, almost 60 percent more for egg and tomato products than Michaels billed Sodexo, the biggest food services management company in the world, for the same stuff.

But Feesers and Sodexo didn't compete in the sense RPA demands.  While Feesers' customers would buy directly from it, Sodexo's made purchases from its distributors, not Sodexo.  And Sodexo didn't distribute anything; it just managed the food services shebang.

So in what way did Feesers and Sodexo compete?  By vying to persuade customers either to "self operate", in which case they'd buy from distributors like Feesers, or to let Sodexo manage their cafeterias, break rooms, and other food services facilities, in which case they'd purchase from Sodexo's distributors. 

That sort of competition, the Third Circuit held, doesn't put the plaintiff and defendant in a fight for the same purchases from the supplier.  By the time the purchases happen, Feesers or Sodexo has already won the business.  Feesers thus couldn't satisfy "the competing purchaser requirement" of the RPA.  Feesers, Inc. v. Michael Foods, Inc., No. 09-2548, slip op. at 23 (3d Cir. Jan. 7, 2010).

A California court of appeals today held that a city may hire private counsel to collect taxes on a contingent fee basis without violating state law. 

The case involved Anaheim's efforts to recoup tax payments from travel services, including Travelocity, Expedia, Priceline, and Orbitz.  The city alleged that the travel services short-paid its local transient occupancy tax.  Instead of basing their payments on the price they charged customers for a hotel stay, they used the wholesale price they paid the hotels for the room nights.

Anaheim retained three firms on a contingent fee basis.  Travelocity, et al., objected to the arrangement, arguing that it violated their right to "neutrality" from the government and denied it due process.

The trial court denied the request for a writ of mandate.  The Fourth Appellate District panel affirmed.  Priceline.com Inc. v. City of Anaheim, No. G041338 (Cal. App. Jan. 7, 2010).

Kimberley Kralowec at The UCL Practitioner has a good write up of the case and relates it to another one pending before the California Supreme Court.  See also this.

The Ninth Circuit affirmed summary judgment for Tyco Health Care Group on claims that it violated sections 1 and 2 of the Sherman Act via anticompetitive contracts and other bad acts in the market for pulse oximetry sensors and monitors.  Tyco tied discounts to buying items from it and came out with a new product on which it secured a patent.  Neither broke the law, the court held.   Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, No. 09-56314 (9th Cir. Jan. 6, 2010).

You've heard about drinking and driving.  A ruling today by the Eleventh Circuit involved drinking and diving. 

The court held that insurance may cover quadriplegia that resulted from a dive into the Atlantic off a platform in the Bahamas.  The diver, James Capone, seems to have trained for the head-first leap by imbibing fluids that induced in him a blood alcohol content north of .200.

Aetna argued that diving into the ocean can't count as an "accident" under the policy if the diver meant to dive.  The court said no to that.  Capone and others had already made dives before the one in which he struck his head on the bottom.  A rogue wave may well have suddenly shallowed the water, as Capone contended.  Capone v. Aetna Life Ins. Co., No. 09-10222 (11th Cir. Jan. 5, 2010) (applying Georgia law).

Nor did the alcohol exclusion necessarily apply.  The drinking may not have caused Capone to dive.  Perhaps he did it simply because his sober co-workers already had.

Feed-icon-14x14 Our feed seldom exceeds the legal limit of .08.