by Lyle Roberts, Cooley LLP
*Editor’s note: We are cross-posting this commentary from Mr. Roberts’s blog, The 10b-5 Daily, where it originally appeared. Mr. Roberts authored Washington Legal Foundation’s amicus brief in Halliburton.
The U.S. Supreme Court has issued a decision in the Halliburton v. Erica P. John Fund case holding that defendants can rebut the fraud-on-the-market presumption of reliance at the class certification stage with evidence of a lack of stock price impact. It is a 9-0 decision authored by Chief Justice Roberts, although Justice Thomas (joined by Justices Alito and Scalia) concurred only in the judgment. As discussed in a February 2010 post on this blog, Halliburton has a long history that now includes two Supreme Court decisions on class certification issues. A summary of the earlier Supreme Court decision can be found here.
Under the fraud-on-the-market presumption, reliance by investors on a misrepresentation is presumed if the misrepresentation is material and the company’s shares were traded on an efficient market that would have incorporated the information into the stock price. The fraud-on-the-market presumption is crucial to pursuing a securities fraud case as a class action—without it, the proposed class of investors would have to provide actual proof of its common reliance on the alleged misrepresentation, a daunting task for classes that can include thousands of investors.
The fraud-on-the-market presumption, however, is not part of the federal securities laws. It was judicially created by the Supreme Court in a 1988 decision (Basic v. Levinson). In Halliburton, the Court agreed to revisit that decision, but ultimately decided that there was an insufficient “special justification” for overturning its own precedent. Continue reading
The U.S. Court of Appeals for the Fourth Circuit issued a decision on April 16 in a case called Company Doe v. Public Citizen that signals hope for asbestos defendants who are seeking to combat fraudulent claims in North Carolina. Those claims were brought in connection with a bankruptcy proceeding styled as In re: Garlock Sealing Technologies, LLC et al. (“Garlock”). How could an anonymous CPSC case from Maryland affect a gasket company’s asbestos bankruptcy from North Carolina? In a word: transparency. Both cases involve the ability of third parties to gain access to documents enmeshed in public litigation.
In issuing its ruling in Company Doe, the Fourth Circuit surely had no inkling that its words might cheer long-suffering asbestos defendants. However, that court’s insistence on transparency and public access to the judicial process bodes well for an asbestos case in which similar issues have been percolating. When the district court (and perhaps eventually the Fourth Circuit) hears motions from asbestos defendants and others about divulging sealed documents from the Garlock asbestos bankruptcy docket, the recent decision in Company Doe will surely loom large. There is no guaranty as to where the Fourth Circuit ultimately will come down on the sealing issues in Garlock. But it does appear that a new day is dawning, and—if the Court of Appeals acts consistently with its stated policy favoring public access in Company Doe—it just might prove to be the Day of Reckoning for fraudulent asbestos plaintiffs and their trial lawyer accomplices.
Company Doe Takes Two Steps Forward in District Court
Company Doe v. Public Citizen, No. 12-2209 (“Company Doe”), started when the U.S. Consumer Product Safety Commission received a “report of harm” and sought to post it on its new government-run product safety database website. [Full disclosure: I worked as legal counsel to CPSC Commissioner Anne Northup from 2009 through 2010, but left before this report of harm was received.] The report alleged that a company’s product was related to the death of an infant, but the company strongly objected that the report of harm was not accurate. When the company could not obtain satisfaction through direct negotiations with the Commission, it was forced to file suit against the CPSC in federal district court in Maryland (where the CPSC is located) to enjoin the Commission from posting the erroneous report of harm. Continue reading
by John E. Villafranco, Michael C. Lynch, and Paul R. Garcia, Kelley Drye & Warren LLP*
(Ed. Note: Villafranco and Lynch authored an October 2013 WLF Legal Opinion Letter previewing the Lexmark case which can be accessed here)
On March 25, 2014, a unanimous Supreme Court in Lexmark Int’l, Inc. v. Static Control Components, Inc. ruled that a manufacturer of components for use in refurbished toner cartridges has standing under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), to sue the maker of printers in which the cartridges could be used for false advertising. Static Control Components, Inc., the component manufacturer, alleged that Lexmark International, Inc., the printer company, falsely told consumers that they could not lawfully purchase replacement cartridges made by anyone other than Lexmark, and falsely told companies in the toner cartridge remanufacturing business that it was illegal to use Static Control’s components.
The question before the Court was not whether Static Controls has constitutional standing under Article III, but whether it has so-called “prudential standing.” The Court initially noted that “prudential standing” is a misnomer, and that the real question “is whether Static Control falls within the class of plaintiffs whom Congress authorized to sue under § 1125(a).” Slip Op. 8-9. If it does, a court “cannot limit a cause of action that Congress has created because ‘prudence’ dictates.” Slip Op. 9. Rejecting the various approaches of the lower courts—from the competitor-only test, to antitrust standing, to the reasonable interest inquiry—the Supreme Court instead adopted a two-party inquiry.
Washington Legal Foundation filed an amicus brief supporting the petitioner in Halliburton v. Erica P. John Fund, on which we were represented by Lyle Roberts on a pro bono basis. The brief is available here.
If you would like a copy of Mr. Robert’s comments, click here.
Cross-posted by Forbes.com at WLF’s contributor site
A little over a decade ago, federal regulators and state attorneys general initiated a litigation campaign to alter how government health care programs reimbursed doctors for prescription drugs. Like most “regulation by litigation” efforts, this campaign seized upon laws of broad application such as the False Claims Act (FCA) and encouraged private lawsuits of questionable merit. Government enforcers have long since moved on to other crusades, but as a federal court decision last month reflects, some private suits still drag on, burdening American businesses with needless legal expenses.
AWP. In the early 2000s, the federal government reimbursed health care providers based in part on a drug’s average wholesale price, or “AWP.” Some likened AWP to the sticker price, or MSRP, of a new car: an inflated number which almost no one actually paid. Everyone involved in health care was aware of the illusory nature of AWP, and federal and state regulators urged legislative change, but Congress resisted reform. So unelected officials and their brethren in the plaintiffs’ bar sought to impose change. As this 2002 WLF Working Paper explains, they devised legal theories which branded AWP as an overcharging scheme, and accused drug makers, price publishers, and other entities such as pharmacy benefit managers (PBMs) of perpetrating a fraud. State attorneys general filed billion-dollar fraud actions and plaintiffs’ lawyers teamed up with “whistleblowers” to file qui tam suits under the FCA.
The ensuing litigation crusade provided moderate returns at best to the plaintiffs’ lawyers and state AGs who jumped on board. For instance, in 2009, the Alabama Supreme Court dashed the state’s (and its contingent-fee lawyers’) dreams of a huge payday, dismissing two AWP cases, finding no fraud existed. Continue reading
by Kirsten V. Mayer and Douglas Hallward-Driemeier, Ropes & Gray LLP
Last month, the U.S. Court of Appeals for the Fourth Circuit reaffirmed that False Claims Act relators must plead presentment of a false claim with particularity. The decision in United States ex rel. Nathan v. Takeda Pharmaceuticals N.A. Inc. requires that relators proceeding under Section 3729(a)(1)(A) of the False Claims Act offer concrete details that plausibly allege—not just speculate—that actual presentment of a false claim occurred. By requiring that relators plead false claims with particularity, the Fourth Circuit strikes a blow against relators who would prefer simply to allege a fraudulent scheme and proceed directly to costly discovery. The holding should be particularly useful to defendants in “off-label” promotion cases, where relators often only speculate that ineligible claims were submitted for reimbursement to government-funded programs.
In Nathan, a Takeda sales manager alleged that Takeda’s Kapidex marketing caused false claims to be presented to the government in two main ways: (1) Takeda allegedly promoted Kapidex to rheumatologists, who do not typically treat patients with conditions that can be treated by Kapidex on-label; and (2) Takeda allegedly promoted Kapidex use at higher doses than FDA had approved.
Liability under Section 3729(a)(1)(A) requires that a defendant actually presented false claims to the government for payment. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 789 (4th Cir. 1999). Nonetheless, the Nathan relator urged the Fourth Circuit to adopt a relaxed application of Rule 9(b) that would rely on inferring from an alleged “fraudulent scheme” that false claims essentially must have been presented to the government. In support, the relator pointed to a Fifth Circuit decision, United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009). In Grubbs, the relator had alleged with detail that doctors fraudulently recorded medical services that were never performed, and the Fifth Circuit held that this satisfied Rule 9(b), even though the complaint did not provide specific allegations that those records caused the hospital’s billing system to present fraudulent clams to the government. Id. at 192. Continue reading
Before fully moving forward into 2013, The Legal Pulse offers five late December developments our readers may have missed during the holiday season:
1. Administration’s Regulatory Plan Released. The federal government waited until late December to release its Spring 2012 Unified Agenda of Regulatory and Deregulatory Actions. This is the list of regulatory plans that the Office of Information and Regulatory Affairs at the Office of Management and Budget requires all federal agencies to submit to it by April of each year. As noted by the House Oversight Committee, the Unified Agenda has traditionally been issued between April and July. We’re in the process of reviewing it, but one item from the EPA’s priorities list jumped off the screen: “Expanding the Conversation on Environmentalism and Working for Environmental Justice.” We’ve consistently raised red flags about environmental justice here at The Legal Pulse, and will keep an even closer eye on that going forward.
2. FTC Issues Report on “Child-Directed” Food Advertising. What a difference a year makes. At the end of 2011, we were still talking about the threat posed to free speech and freedom of choice by the Interagency Working Group’s (IWG) Nutrition Principles to Guide Industry Self-Regulatory Efforts. As that Legal Pulse post explained, Congress all-but terminated that effort by requiring a cost-benefit analysis. Last March, FTC Chairman Leibowitz told a congressional panel that it was “time to move on” from the IWG “self-regulatory” effort.On December 21, the Commission released what it termed a “follow-up” study on food ads directed at children. FTC’s study credited the food industry for expanding its self-regulatory efforts, but remained critical of the amount of money devoted to advertising foods the FTC deemed less-than-nutritious. The study has one major flaw: it is based on data that is three years old. It’s fair to say that a significant amount of improvement in the nutritional value of foods has occurred in those three years. Continue reading
Two recent federal appellate court opinions have expanded the availability of qui tam suits under the False Claims Act (FCA), and created new incentives for abuse. Briefly, the FCA’s qui tam provisions incentivize private parties, called relators, to bring litigation on behalf of the government by providing a relator with a share of the recovery. Like private attorney general suits, this mechanism has been criticized for its abuse by politically unaccountable individuals seeking personal gain–monetary, political, or otherwise–and the Act’s vast expansion beyond its original Civil War era purpose.
In United States ex rel. Little v. Shell Exploration & Production Co., the Fifth Circuit, addressing “who may sue,” determined that government employees–even those whose job is to investigate fraud for the government–can bring a private qui tam suit under the FCA. The court dismissed the obvious conflict of interest problems as “extraneous” to the legal interpretation of the FCA, and found no textual basis for excluding government employees from the scope of “person[s]” eligible to bring a qui tam suits.
The court noted that in cases where allegations are first publicly disclosed by another party, government officials cannot bring suit because of the FCA’s “original source” rule. Such sources must voluntarily disclose allegations to the government. Government officials, of course, cannot be said to voluntarily disclose allegations to the government because, well, that’s their job. Continue reading
Cross-posted by Forbes.com at WLF contributor site
Two weeks ago in Friedman v. Sebelius, a divided U.S. Court of Appeals for the District of Columbia Circuit largely upheld what amounts to the lifetime exclusion of three senior pharmaceutical executives from any further involvement in the industry. Their offense: pleding guilty to misdemeanor charges that they were executives of Purdue Frederick Co., at a time when (unbeknownst to them) some company employees engaged in the improper promotion of Purdue Frederick drugs.
Criminal prosecution of corporate executives not shown to have a guilty state of mind (or even to have acted negligently) has long been controversial. Such prosecutions—under what is known as the “Responsible Corporate Officer” (RCO) doctrine—have twice survived constitutional challenges in the Supreme Court by razor-thin 5-4 margins in 1943 and 1975. The Supreme Court reasoned that the RCO doctrine allows society to make a strong statement regarding its disapproval of corporate misbehavior without unduly punishing largely blameless senior executives, because penalties in RCO cases “commonly are relatively small, and conviction does no grave danger to the person’s reputation.” Morisette v. United States. There is serious reason to question whether the lifetime exclusion largely upheld by the D.C. Circuit fits the Supreme Court’s definition of a “relatively small” penalty. In light of federal officials’ determination to bring more such prosecutions, the Supreme Court ought to revisit the RCO doctrine and decide whether it is being applied in a manner that comports with due process of law. Continue reading
By Amanda McKinzie, a 2012 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.
Forcing defendants to settle securities fraud class actions regardless of the claims’ merits will likely be the consequence of the U.S. Court of Appeals for the Ninth Circuit’s decision in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds. Not only did the decision lower the standard for invoking the fraud-on-the-market presumption, but it also barred defendants during the certification phase from providing evidence negating materiality to rebut the presumption. Two other circuits, the Third and Seventh, have rendered similar opinions, whereas decisions from the First, Second, and Fifth Circuits were contrarily decided. The Supreme Court has been asked to grant review in this case to resolve this circuit split. The Court is expected to announce its decision on Amgen’s request on Monday, June 11. Continue reading