Move by Biotech Company Tees Up Court Consideration of Attorneys’-Fee Clause in Corporate Bylaws

DelawareThe Wall Street Journal Law Blog reported today that Philadelphia-based (but Delaware-incorporated) biotechnology company Hemispherx BioPharm Inc. has injected itself into the middle of a growing dispute over attorneys’ fees in shareholder class action lawsuits. (A hat-tip to the Institute for Legal Reform, whose must-read daily email referenced the WSJ Law Blog piece) Prompted by a May 14 Delaware Supreme Court decision, ATP Tour, Inc. v. Deutscher Tennis Bund, et al., Hemispherx earlier this month adopted a provision in its corporate bylaws that shareholder plaintiffs must pay the company’s legal fees if Hemispherx prevails in a shareholder-initiated lawsuit. The provision applies retroactively to pending suits, and lawyers for shareholders in a class action against Hemispherx have asked the Delaware Chancery Court to invalidate the bylaws.

A July 11 Washington Legal Foundation Legal Backgrounder, Is Delaware High Court Ruling an Ace for Merging Companies Served with Shareholder Suits?, discussed the ATP Tour decision and assessed how it could be applied to deter frivolous shareholder class actions. Authored by Snell & Wilmer LLP attorneys Greg Brower and Casey Perkins, the paper explains that ATP Tour involved not a public company, but a private membership corporation which included in its bylaws a fee-shifting provision. The Delaware Supreme Court, answering a question certified to it by the U.S. Court of Appeals for the Third Circuit, held that the fee-shifting provision was a matter of private contract, and nothing in the state’s corporate law prohibited its inclusion in ATP’s bylaws.

The authors went on to examine whether Delaware statutory or common law would permit public companies to include such a fee-shifting mechanism in their bylaws. They found that a recent Delaware Chancery Court case, Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation, et al., strongly supported the legality of fee-shifting through bylaws.  Brower and Perkins concluded:

Chevron and ATP Tour together make it clear that Delaware law is intended to give broad leeway to corporations, private and public, to adopt bylaws not otherwise prohibited by law, and that duly adopted bylaws are presumed to be part of the contract between the company and the member or shareholder. This means that publicly-traded companies and their shareholders ought to be able to freely contract for the details of their relationship, including details such as where disputes between them will be litigated, and whether the losing party in such litigation should have to pay the legal fees of the prevailing party. Such contracts are part of the fundamental structure of the corporate law of Delaware—or, it seems, of any other state for that matter.

Given the financial implications for the securities fraud class action bar and the promise such provisions hold for public companies, the Hemispherx case is likely just the first skirmish in what will be a drawn-out, intense battle over fee-shifting through corporate bylaws.

Class Actions Alleging Injuries from Data Breaches Continue to Wither in Face of Standing Challenges

securityGuest Commentary

by Jennifer Wissinger, a 2014 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

Data-breach cases were supposed to be a new, lucrative litigation frontier for plaintiffs’ attorneys. Some experts speculated a wave of class-action suits would emerge against companies victimized by unauthorized access of customer data. Media reports of lawsuits filed in the immediate aftermath of high-profile data breaches, like the one that befell Target last December, have created the impression that these cases are proliferating rapidly. Reality belies such perceptions of success, however. Trial courts in fact have routinely dismissed data-breach lawsuits because plaintiffs cannot answer the American legal system’s most fundamental threshold question: have you actually been harmed? As a series of U.S. Supreme Court cases construing the constitutional standing-to-sue requirement dictate, mere fear of possible future harm does not suffice. In many data-breach cases, fear of future harm is the most plaintiffs can prove.

As The Legal Pulse has discussed, the Supreme Court most recently addressed standing two years ago in Clapper v. Amnesty International. Since 2012, federal and state trial courts have consistently applied Clapper’s reasoning to dismiss data-breach cases for lack of standing. In the last two months, three more courts have thrown out data-breach cases because the plaintiffs failed to show that the expected injury was at least “certainly impending.”

Galaria v. Nationwide Mutual Insurance Co. After Nationwide’s computer systems were hacked, the company notified its customers and advised them to safeguard their personally identifiable information (PII). Even though Nationwide offered its customers free credit monitoring for a year, the plaintiff in Galaria sued alleging violations of the federal Fair Credit Reporting Act (FCRA) and unlawful invasion of privacy under Ohio common law. Continue reading

Pennsylvania High Court Joins Judicial Stampede That’s Trampling State Attorneys-General/Plaintiffs’ Bar Alliances

PA scotusOn June 16, the Pennsylvania Supreme Court rejected the Commonwealth’s arguments that Bristol Myers Squibb (BMS) was liable for fraudulently overcharging state health agencies. The state had sued BMS and 13 other pharmaceutical companies and won a $27 million damage award. In the unanimous ruling, the Court dropped a noteworthy footnote in which it questioned Pennsylvania’s reliance on private contingent-fee lawyers to prosecute the case. The decision is just the latest in a string of costly failures by deputized plaintiffs’ lawyers in state actions against drug companies.

The Court’s unanimous Commonwealth v. TAP Pharmaceutical Products decision turned on whether the Pennsylvania agencies suffered any financial loss when taking into account the value of rebates that BMS provided the state for drug purchases. The state claimed that BMS took advantage of the complex “average wholesale price” (AWP) formula to artificially increase its profits from sales to health agencies. BMS denied those charges, and argued that even if the agencies were overcharged, the rebates offset the alleged financial harm. Despite testimony from state officials that they did take rebates into consideration when assessing drug payments, Pennsylvania excluded rebates when formulating its damages claim. The trial court bought the state’s justification for this contradictory stance, as did the Commonwealth Court on appeal.

The justices seemed shocked by the lower courts’ unquestioned acceptance of Pennsylvania’s stance on rebates. Justice Saylor wrote, “[T]his Court is not in need of a body of evidence to apprehend that a rebate operates to reduce the net price of a commodity.” The Supreme Court found it “astonishing” that the Commonwealth Court would allow the state to collect “a billion dollars in rebates relative to social welfare reimbursements while giving no credit to the payers.” Continue reading

Five Ways to Undo your Own Class-Action Settlement

zero dollars“This settlement is so unfair, it cannot be fixed.”

That statement marked the beginning of the end of a federal district court judge’s opinion, as well as the class-action settlement to which the opinion referred. U.S. District Court for the Northern District of California Judge William Alsup’s May 29 opinion in Daniels v. Aéropostale West, Inc. provides a tutorial on how not to win judicial approval of a class-action settlement.

Ms. Daniels alleged that she and other employees of the trendy apparel retailer Aéropostale were denied non-discretionary bonus pay (i.e., overtime) in violation of the federal Fair Labor Standards Act (FLSA). Judge Alsup conditionally certified the class in April 2013. Daniels provided notice to all employees in the class, and 594 opted into the suit. The parties filed a motion on April 24, 2014 seeking preliminary approval of a proposed settlement.

For reasons we will elaborate, Judge Alsup refused to grant approval. On June 12, the court entered an order decertifying Daniels, dismissing the claims, and extending the statute of limitations for 30 days so dismissed plaintiffs could pursue individual suits if they wish. The order noted that the parties agreed to the decertification, and that Aéropostale would make payment to any class member “who did not receive full payment for the overtime adjustment on any non-discretionary bonus earned during the collective action period.” The plaintiff’s lawyers agreed to provide notice of the action’s decertification at their own expense.

Lessons. In just 12 pages, Daniels offers litigants and their lawyers at least five lessons on how to undo your own class-action settlement.

Lesson #1: Be unresponsive to the court’s requests

In just the second paragraph of the opinion, Judge Alsup took the unusual step of noting the name and affiliation of all counsel of record in the case. This was not done to recognize their brilliant advocacy. As the rest of the opinion reveals, the lawyers, among other things, failed to provide the court with expert damage reports as required by federal procedural rules. After the parties filed their proposed settlement, the court had to ask twice for more information or corrections to the document. When pressed by Judge Alsup, Daniels’s lawyer could not state how much the plaintiff would ask the jury to reward. In addition, “Plaintiff’s counsel also failed to provide any specific information about overtime hours worked and non-discretionary bonuses paid.” Continue reading

New Hampshire Union Leader Publishes WLF Op-Ed on State’s MTBE Lawsuit

scalesNew Hampshire likes to be first. It boasts America’s first modern state-run lottery, the first ski school, and even the world’s first paintball game.  And Dixville Notch, NH residents enter the first votes in each presidential election.

Thanks to a recent $236 million verdict in a state-sponsored lawsuit, New Hampshire may be gunning for first in the hearts and minds of America’s plaintiffs’ bar too—a distinction, Washington Legal Foundation’s General Counsel Mark Chenoweth argues in a June 11 New Hampshire Union Leader op-ed, that the state should not proudly embrace.

New Hampshire hired private, contingent-fee attorneys to sue oil companies for groundwater contamination. As Mark explains:

They alleged that leaking underground storage tanks contaminated local groundwater with the chemical MTBE. But rather than sue gas stations that owned the leaking tanks (and violated EPA rules), the state’s hired guns went after deep-pocketed oil companies (that were following EPA rules). The lawyers calculated that they could win a large payday, regardless of those companies’ actual responsibility, by putting deep pockets and pollution claims in front of a jury.

In compliance with a statutory mandate, EPA allowed the addition of MTBE to gasoline to improve air quality. Congress anticipated that leaks might occur, so it created a fund states could tap for clean-up. New Hampshire did not seek money from the fund, perhaps, the Union Leader op-ed notes, because the state would have to use those funds for groundwater clean-up. Not wanting to be limited, the state filed suit instead, even though it could not show physical harm to any person or destruction of any property.

New Hampshire now could have a $236 million slush fund courtesy of a jackpot justice verdict, and as Mark writes, “Attorney General Joseph Foster has staunchly opposed placing the money in a state-managed trust devoted to testing and clean-up.”

New Hampshire’s “success” has inspired neighboring Vermont to jump on the MTBE lawsuit bandwagon. Dallas law firm Baron & Budd and New York firm Weitz & Luxenberg will be joining up with New Hampshire’s local counsel, the Pawa Law Group, to represent Vermont and its litigious attorney-general, William Sorrell.

Fifth Circuit Puts an End to Texas Pharma Plaintiff’s California Dreamin’

laskerGuest Commentary

By Eric G. Lasker, Hollingsworth LLP (Mr. Lasker argued McKay on behalf of Novartis Pharmaceuticals Corporation in the Fifth Circuit)

Debates over whether—and in which circumstances—Food and Drug Administration (FDA) approval of prescription drugs and medical devices should preempt State law have been in the forefront of Supreme Court jurisprudence and Congressional action for over a decade. However, when a State itself concludes that FDA approval is the correct standard for state law liability, one would think that would end the debate, right? Well, yes, but not without a few tantrums along the way.

Texas’s FDA Defense. In 2003, Texas enacted a tort reform statute which protects pharmaceutical products manufacturers (subject to specifically defined exceptions) from liability based upon a warning or other information that was approved by the FDA. Tex. Civ. Prac. & Rem. Code § 82.007(a). Texas took this step based upon the Legislature’s informed view that the State was facing an environment of excessive litigation that had caused a crisis in access to healthcare. Of course, the plaintiffs’ bar argued strenuously to the contrary. Many of their brethren appeared in hearings before the Texas Legislature; they accused the Legislature of caving to “Big Pharma” and argued that the FDA couldn’t be trusted to review drug safety. But the Legislature disagreed, and FDA-approval was adopted as the presumptive standard of care in pharmaceutical products liability cases in Texas.

Plaintiffs’ Bar’s Efforts to Judicially Nullify § 82.007(a). What was the response? Predictable. The plaintiffs’ bar turned to the courts to undo what the Legislature had done. They argued that § 82.007(a) should be read narrowly to apply only to expressly-labeled “failure to warn” claims, ignoring the fact that in pharmaceutical litigation, the adequacy of warnings is key regardless of the legal theory of liability. They argued that a jury should decide whether § 82.007(a) even applied, seeking a threshold whereby the jury could decide that the manufacturer secured regulatory approval through fraud on the FDA—despite clear U.S. Supreme Court authority that such a state law jury inquiry was preempted by federal law. They argued that the entire statute should be stricken if their interpretation of the fraud-on-the-FDA exception to § 82.007(a) was not accepted.

Thus far, each of these arguments has been rejected. As a result, one Texas plaintiff recently took a step that many Texans would consider a sacrilege: he asked the court to treat him as a Californian instead! The case is McKay v. Novartis Pharmaceuticals Corp., and on May 27, 2014, the United States Court of Appeals for the Fifth Circuit rejected this desperate gambit as well. McKay v. Novartis Pharm. Corp., __ F.3d __, No. 13-50404, 2014 WL 2198544 (5th Cir. May 27, 2014). Continue reading

Ninth Circuit “Unfriends” Privacy Class Action Despite Finding Statutory Standing

likefacebookLawsuits alleging harm from either a business’s failure to protect personal information from a data breach or from its allegedly unauthorized sharing of data with third parties were supposed to be the “next big thing” for the Litigation Industry. But, as we’ve noted on previously (here and here, for instance), few of these suits have made it past the motion-to-dismiss stage. Plaintiffs consistently fail to demonstrate that they suffered an injury-in-fact, which is a constitutional prerequisite known as “standing.”

Lawyers who work in the Litigation Industry are nothing if not persistent, as former Washington Attorney General Rob McKenna and his Orrick, Herrington & Sutcliffe LLP colleague Scott Laidlaw explained in a February WLF Legal Backgrounder, “Targeting Harm From A Breach: Plaintiffs’ Lawyers Get Creative In Data Privacy Suits.” For example, some class action attorneys sue under federal statutes, such as the Wiretap Act and the Stored Communications Act. Those laws purport to provide “statutory standing” to private individuals and thus relieve them of the need to establish constitutional standing.

But as the U.S. Court of Appeals for the Ninth Circuit reminded a class of plaintiffs last week, litigants with standing to sue still must  prove they have a claim. On May 9, the Ninth Circuit affirmed a district court’s dismissal of two separate class actions filed under the Wiretap and Stored Communications Acts against Facebook and Zynga Game Network.

In re: Zynga Privacy Litigation involved claims that Facebook and Zynga unlawfully disclosed the information contained in “referer headers” to third parties such as advertisers. Referer headers, the court explained, display “the user’s Facebook ID and the address of the Facebook webpage the user was viewing.”

The Ninth Circuit had to determine whether the record information contained in the referer header constituted the “contents” of a communication under the two federal laws. The court examined the plain language and design of the statutes and concluded that “the term ‘contents’ refers to the intended message conveyed by the communication, and does not include record information regarding the characteristics of the message that is generated.” That conclusion is consistent with the reasoning in similar cases from the First and Third Circuits. The plaintiffs argued that third parties could utilize information from a referer header and determine a person’s specific identity and access his or her Facebook content. The court responded that neither the Wiretap Act nor the Stored Communications Act “preclude[s] the disclosure of personally identifiable information; indeed they expressly allow it.” Continue reading

Update: Two Food Labeling Suits Settle after Judge Certified Narrowed Classes

kellogg'sLast November, while assessing several losses by plaintiffs in “all natural” food labeling class actions, we discussed two opinions issued by the same Southern District of California judge (Marilyn Huff) on the same day (July 30, 2013). Both opinions certified far narrower classes of plaintiffs than the lawyers in each case sought.

The defendants in these cases—Bear Naked and Kashi (both owned by Kellogg’s)—unsuccessfully sought the U.S. Court of Appeals for the Ninth Circuit’s permission to immediately appeal Judge Huff’s certification orders. With Kellogg’s facing trial in both cases, albeit against smaller classes of plaintiffs, it entered into negotiations which resulted in proposed settlements to be presented to Judge Huff in consecutive hearings on May 27. We describe the proposed settlements below and offer some thoughts on them.

Astiana v. Kashi Company. Frequent plaintiff Skye Astiana, who complained in a suit against Ben & Jerry’s that the company’s alleged mislabeling of its ice cream “disrupted my vibe,” will be $4,000 richer thanks to the proposed settlement’s “incentive award” for the named plaintiffs. The company is creating a settlement fund of $5 million, out of which the incentive awards will be paid, as will the $1,250,000 in attorneys’ fees and costs. What will the “absent” class members recover? That depends on the proof they offer. Those with proof of purchase can recover $.50 for each item, with no limit on the total amount of recovery as long as receipts are presented. Those with no proof of purchase can file claims for $.50 per item with a maximum recovery of $25. In addition, Kashi will remove from certain products’ labels and advertisements the terms “All Natural” and “Nothing Artificial.”

Thurston v. Bear Naked. The proposed settlement terms in Thurston largely mirror those in Astiana. The named plaintiffs are to receive $2,000 incentive awards. The settlement fund is $325,000. Absent class members with receipts can receive $.50 for each product with no maximum recovery limit. Those who can’t prove they purchased the supposedly offending Bear Naked products can claim $.50 for each item with a $10 maximum. Bear Naked agrees to remove “100% Natural” and “100% Pure and Natural” from its labels and ads. And the attorneys’ fees? The Class Counsel will only be seeking “an award of reasonable, actual out-of-pocket expenses.” Why so modest? Many of the same law firms which sued Bear Naked were also counsel to the Astiana class. Because Thurston and Astiana involved nearly identical issues, it’s doubtful that Judge Huff would award substantial fees for the law firms’ work in Thurston. Continue reading

Third Circuit’s Denial of Rehearing in Class Action Strengthens “Ascertainability” Criterion

Third Circuit_LS_option1_1In a February 21, 2014 post we discussed a U.S. Court of Appeals for the Third Circuit decision, Carrera v. Bayer Corp. The court denied certification to a class of multivitamin purchasers because the plaintiffs offered no reliable and administratively feasible way to prove they had purchased the targeted product (and were thus members of the class). 

On May 2, the Third Circuit denied rehearing en banc in Carrera. The written opinions accompanying the court’s denial of rehearing reflect the rancor this issue can inspire among federal judges.

Denial of Rehearing Opinion. Nine judges voted to deny rehearing. Judges Smith, Chargares, and Scirica, all of whom sat on the panel that decided Carrera last August, signed an “Opinion Sur Denial of Panel Rehearing.” The opinion reiterated that Carrera failed to meet his ascertainability burden. The judges also noted that the panel remanded the case to the district court where Carrera would have an opportunity to “submit a screening model specific to this case that can reliably distinguish between accurate affidavits and fraudulent or inaccurate ones.”

Dissent from Denial of Rehearing. Judges Ambro, Rendell, Fuentes, and Chief Judge McKee voted to rehear Carrera. Judge Ambro penned an “Opinion Dissenting Sur Denial.” Judge Ambro was the author of a 2012 opinion, Marcus v. BMW of NA, on which Carerra relied. In his dissent from rehearing denial, Judge Ambro stated that “Carerra goes too far” in applying the principles laid out in Marcus. He contrasted the “prolix” parameters of the Marcus class with the “simple” class definition in Carerra, implying that simplicity eases the ascertainability burden.

Judge Ambro was also troubled that because Bayer did not sell its multivitamins directly to consumers (which he termed “a fortuity”), it would not have sales records. He explained that in situations where “the defendant’s actions—a defendant’s lack of records and business practices,” as the judge put it—”cause the difficulty, we should be flexible with our application” of ascertainability requirements. This is quite at odds with the Third Circuit’s rationale in another August 2013 class-action decision, Hayes v. Wal-Mart. Judges Ambro, Fuentes, and Scirica presided over that appeal. In remanding the case back to the district court to determine ascertainability, Judge Scirica wrote, “the nature or thoroughness of a defendant’s recordkeeping does not alter the plaintiff’s burden to fulfill Rule 23’s requirements.” Judge Ambro did not dissent in Hayes.

Call for Judicial Conference Review. In addition to calling for rehearing en banc in Carrera, Judge Ambro urged the Judicial Conference’s Committee on Rules of Practice and Procedure to “look into . . . how easy (or hard) must this identification [i.e. if class members can be reasonably ascertained] be?” Continue reading

Will Fourth Circuit Decision to Unseal a CPSC Case Be a Boon to Asbestos Defendants?

4th CircuitThe 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