As I have previously noted on this blog, one recurring source of securities class action litigation exposure for publicly traded companies is the companies’ underlying environmental liabilities. In the latest example of this type of litigation, a plaintiff shareholder has now filed a securities suit against The Chemours Company, a chemical company that spun out of E.I. du Pont de Nemours and Company (“DuPont”) in July 2015. One of the extraordinary things about the new securities suit is that it draws heavily on allegations Chemours itself raised in a 2019 Delaware Chancery Court lawsuit it filed against DuPont, in which, among other things, Chemours alleges that when DuPont spun out the company, its environmental liabilities reserves were “spectacularly” inadequate. A copy of the on October 8, 2019 securities class action complaint filed in the District of Delaware against Chemours, its CEO, and its CFO can be found here. Background Prior to its July 2015 spin out, Chemours had been the Specialty Chemicals division at DuPont. Prior to the spin-off, DuPont had had a series of environmental challenges arising from the manufacture in its Specialty Division of various chemicals, including in particular its manufacture of perfluoroalkyl and polyfluoroalkyl substances (“PFAS”), toxic chemicals that according to the subsequent securities complaint “have become the basis for environmental regulatory actions, governmental prosecutions, personal injury lawsuits, and extensive remediation and other clean-up efforts.” The securities complaint alleges that DuPont had long known about the extent of its environmental liabilities. The complaint alleges that instead of “actually addressing” these liabilities, DuPont developed a plan to “unload the vast majority of its environmental liabilities onto Chemours.” In the Delaware Chancery Court lawsuit that Chemours filed against DuPont in May 2019, Chemours alleged that DuPont set about to “shift as much liability onto Chemours as possible – and at the same time to extract for DuPont a multi-billion dollar dividend payment from the new company.” The securities complaint alleges that in connection with the spin-off, Chemours concealed these facts, instead marketing the spin-off by saying that its environmental liabilities were “well understood [and] well-managed” and that the possibility of incurring environmental liabilities greater than its accruals was “remote.” The complaint further alleges that throughout the Class Period, Chemours had reassured investors that any potential environmental liability exposures exceeding the accrual amounts would not be material to the company’s financial position. The securities complaint alleges that “in reality, the Company’s accruals were woefully insufficient and Chemours knowingly and systematically understated its known environmental liabilities exposure.” In making these allegations, the securities complaint quotes extensively from the complaint that the company filed against DuPont in May 2019, and that the Chancery Court unsealed on June 28, 2019. In the Delaware lawsuit, Chemours claims that DuPont misled the company and its executives about the amount of liabilities the spinoff would be taking on and that Chemours was forced to accept responsibility for what could total billions of dollars. Among other things, the Delaware lawsuit alleges that while Chemours inherited only 19% of DuPont’s business lines, it was spun off with two-thirds of DuPont’s environmental liabilities and 90% of DuPont’s pending litigation by case volumeIn the Delaware lawsuit, Chemours seeks a declaratory judgment that it is not obligated to indemnify DuPont for the full cost of environmental liabilities, as would otherwise be required under the separation agreement that supported the spin-off, or alternatively that DuPont should return the $3.91 billion dividend Chemours paid DuPont at the time of the spinoff. The subsequent securities lawsuit complaint, drawing on the allegations in Delaware lawsuit, alleges that contrary to what Chemours said in its SEC filings that the chances of its environmental liabilities exceeding its $500 million accruals as being “remote,” the company in fact, as it stated in its Delaware complaint, faced environmental liabilities of over $2.5 billion – an amount that does not even take into account the company’s PFAS litigation exposure. The securities complaint, relying on the allegations in the Chancery Court complaint alleges that throughout the class period, Chemours made “misrepresentations to investors” and that it “concealed the true extent of the massive environmental liabilities the Company incurred from decades of producing and releasing a variety of chemicals that have been linked to cancer and other serious health consequences.” The complaint alleges that in the company’s August 1, 2019 press release and its August 2, 2019 SEC filing on Form 10-Q, the company disclosed significant increases in the Company’s estimated liabilities, including with respect to numerous new legal and regulatory actions related to PFAS. The complaint alleges that on these disclosures, the company’s share price declined 19% (after having already declined 10% following the unsealing of the Delaware Chancery Court complaint). The securities lawsuit complaint purports to be filed on behalf of a class of Chemours investors who purchased the company’s securities between February 16, 2017 and August 1, 2019. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks to recover damages on behalf of the plaintiff class. Discussion As I noted at the outset, this lawsuit is only the latest example of a securities class action lawsuit arising out of underlying environmental liability exposures. The most recent prior example is the lawsuit filed in August 2019 against 3M, which I discussed in a prior post (here). The interesting thing about these two lawsuits is not only that the both arise from underlying environmental liabilities but that both of the securities suits refer to the defendant companies’ expanding liability exposures relating to PFAS litigation – a significant point that may be of interest to D&O underwriters attempting to develop underwriting criteria relating to applicant companies’ environmental liability exposures. It is interesting to note that while the complaint refers extensively to statements made at the time of the July 2015 spinoff, the beginning date of the purported class period is not the date of the spinoff, but rather is February 16, 2017, the date of the company’s year-end 2016 earnings call, in which the company’s CEO made numerous statements relating to the recent settlement of an Ohio MDL action and in which the CEO make statements about the settlement’s impact on the company’s environmental liabilities exposure. The securities complaint alleges that these various statements were false and misleading. Whether or to what extent these February 2017 statements may support the plaintiff’s liability claims remains to be seen, but the fact is that the earlier statements made in connection with the July 2015 spinoff and cited extensively in the complaint cannot be the basis for liability claims on behalf of an investor class who did not purchase the company shares until on or after February 16, 2019. The most distinctive feature of the new complaint is the extent to which the plaintiff is able to rely on the company’s own allegations in the separate Delaware Chancery Court action. The company’s Delaware complaint is written in particularly vivid language, on which the plaintiff in the securities suit heavily relies. However, most of the allegations in the Delaware complaint relate to disclosures and valuations made in connection with the spin-off — that is, made well before the start of the class period stated in the securities complaint. It remains to be seen how the company might respond to allegations based on the company’s own statements in the Delaware lawsuit, but one probable response is that the company’s own allegations in the Delaware complaint are irrelevant to the securities suit, with its later class period. In any event, as this lawsuit and the prior lawsuit against 3M show, companies’ environmental disclosures clearly will face increased scrutiny. This latest complaint underscores a point that I have made in prior posts, which is that companies’ environmental liabilities and disclosures can be the source of significant management liability litigation exposure, including securities class action litigation exposure. As numerous examples show, the management liability litigation exposures can be serious. D&O insurance underwriters considering companies whose operations may present environmental concerns will want to review the environmental disclosures in the companies’ periodic reports in order to assess the extent to which the disclosures provide a specific and detailed picture of the company’s environmental compliance circumstances. As noted above, exposures to PFAS related regulatory action and litigation may be of particular concern. As for companies that have environmental liability and regulatory exposures, it clearly is going to be important for them to ensure that their D&O policy contains no pollution exclusion (as is the case in many current D&O insurance policies, which, rather than including a pollution exclusion simply carve out environmental remediation costs from the definition of covered loss), or, if they have a pollution exclusion, that the exclusion contains a provision carving back coverage for derivative claims and securities suits. The post Environmental Liability-Related Securities Suit Filed against DuPont Spin-off Chemours appeared first on The D&O Diary. Environmental Liability-Related Securities Suit Filed against DuPont Spin-off Chemours syndicated from https://888migrationservicesau.wordpress.com via Tumblr Environmental Liability-Related Securities Suit Filed against DuPont Spin-off Chemours
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That’s a good thing if you like what the EPA is doing, not so much if you are its sworn enemy. In Center for Biological Diversity v. US EPA the plaintiff did not have standing so sue the EPA over the granting of a water discharge permit. The court dismissed the suit and would not resolve the substantive issues. The basis of the suit The Clean Water Act prohibits discharge of pollutants from any point source without a permit from the EPA. The EPA issued a general permit for various oil and gas operations in the central and western portions of the Gulf of Mexico. The CBD and other organizations petitioned the Fifth Circuit to review the grant of the permit, alleging that it violated the National Environmental Policy Act and the Clean Water Act in several ways. Standing, the right to sue Standing for an organization to sue is determined by the “associational standing doctrine”: In a three-part test,
The question Could an individual member of CBD show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent? Here, they could not. An injury to the environment is insufficient to establish injury. Sometimes the member’s aesthetic, recreational and scientific interests provide that link. The injuries asserted by the petitioners in this case depend on four conditions:
Was there a geographic nexus? An interest in an area roughly in the vicinity of a project site is not sufficient. The petitioner’s members must plan to make use of specific sites where environmental effects would allegedly be felt. While one member claimed to plan to visit specific locations, the permit authorizes discharges in a very generalized area. The members’ affidavits did not provide nearly enough information to infer with any degree of certainty that any discharges would geographically overlap with their interests. Was there a temporal nexus? An affiant stated that he intended to take boat trips to platforms operating under the permit. But there was no evidence that his boat trips would coincide with timing of discharges. You can’t commit harikari and then sue the sword maker Critical to an aesthetic injury is whether an experience was actually offensive to the plaintiff. One affiant said he intended to go looking for oil spills. That doesn’t count. Standing cannot be conferred by a self-inflicted injury. Is the injury traceable? The EPA prepared an allegedly inadequate Environmental Impact Statement. The CBD did show that if the EPA had properly prepared and considered an EIS before implementing its plans it might have not issued the permit. But that showing alone was not sufficient. The plaintiff must show that the injury is fairly traceable to the challenged action of the government and not the result of independent action of third parties not before the court. The affidavits supporting the claim had conclusory assertions, which are not evidence. Musical interludes A Cajun fiddler for a Louisiana case: D’Jalma Garnier, brother of Bob Dylan’s bassist, grandson of the leader of N. O.’s Camelia Brass Band, born in … Minnesota? And RIP Ginger Baker. Not Everybody Can Sue the EPA syndicated from https://888migrationservicesau.wordpress.com via Tumblr Not Everybody Can Sue the EPA Guest Post: India: The Consumer Protection Act 2019 Exposures & Liability Insurance Protection10/9/2019 In the following guest post, Umesh Pratapa takes a look at the new Indian Consumer Protection Act, 2019. As Umesh discusses below, the Act not only has important implications for the rights of consumers, but it also has important liability insurance, product liability insurance, and professional liability insurance implications in Indian as well. Umesh’s article was originally published in BimaQuest September 2019 issue. Reproduced with kind permission of the Publisher, National Insurance Academy, Pune, India. I would like to thank Umesh for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Umesh’s article. ____________________________ “The penal law of ancient communities is not the law of crimes, it is the law of wrongs the person injured proceeds against the wrong doer by an ordinary civil action and recovers compensation in the shape of money damaged if he succeeds.” – Sir Henry Maine The long awaited, much debated and well reformed consumer protection legislation is finally in place – The Consumer Protection Act 2019. It attempts to widen the ambit of the legislation and simplify the processes towards achieving the avowed objective of consumer protection. It is heartening to see the law makers discussing the nuances of various provisions of the bill. Some extracts from the Lok Sabha debate are given below. “Now to end, I would like to put forward a true example where a woman tried to sue a butter company that had printed the word ‘LITE’ on its product’s packaging. She claimed to have gained so much weight from eating that butter, even though it was labelled as being ‘LITE’. In the court, the lawyer representing the butter company simply held up the container of butter and said to the judge, “My client did not lie. The container is indeed light in weight”. The woman lost the case. From this, it is evident that consumer protection is a crucial and sensitive matter which is to be dealt with proper caution. I hope this Bill will make concerned changes to make itself more promising” – Shrimati Pratima Mondal (Jaynagar) “I can give you a good example about it. One day, a man came to me. He told me that his dhoti is torned due to a nail fitted in railway seat. I asked him to file a complaint against railways. He filed a complaint. The litigation took a long time but at last the court ordered railways to pay the expenses of fares for trips to Mumbai and also to gift of 2 dhotis to the complainant. This is a classic example of alertness and awareness. Government cannot intervene in everything and everywhere. Citizens should be cautious about their consumer rights and also to fight against injustice. You have given the much needed protection to them through this bill. But, I think awareness is the key to all the problems. We should focus more and more on awareness. We should come out with more ‘Jago Grahak Jago like Campaigns’. Lastly, I would like to reiterate that more funds should be allocated for courts. We cannot discuss all the issue of the bill due to paucity of time. But, I think commitment and willingness of the Government is more important.” – Shri Girish Bhalchandra Bapat (Pune) (Source: Loksabha Debates – Tuesday, July 30, 2019/ Shravana 8, 1941 (Saka)) One of the major advantages this Act has bestowed upon the consumer is that the aggrieved party can now file the complaint even from where he/she resides unlike earlier where it had to be filed in the jurisdiction where the seller or service provider is located. The earlier provision had significant cost and time implications for the complainant. The latest provision is more beneficial to the consumer because e-commerce and e-transactions are on the rise and the service providers/ sellers may have their registered offices anywhere in the world. Let us now look at some of the salient features of the Consumer Protection Act (CPA), 2019: Consumer: “Who is a consumer” is defined under Sec. 2 (7) of the Act. A consumer is defined as a person who buys any good or avails a service for a consideration. It does not include a person who obtains a good for resale or a good or service for commercial purpose. It covers transactions through all modes including offline and online through electronic means, teleshopping, multi-level marketing or direct selling. It does not include anyone obtaining goods or availing services without consideration. Rights of consumers: The rights which are listed under Sec. 2 (9) include:
Central Consumer Protection Authority: The Act provides for the establishment of an executive agency known as the Central Consumer Protection Authority (CCPA) to promote, protect and enforce the rights of consumers; make interventions when necessary to prevent harm to consumer arising from unfair trade practices and to initiate class action including enforcing recall, refund and return of products, etc. This fills an institutional gap in the regulatory regime. Penalties for Misleading Advertisement: Provision is made for imposing penalties on a manufacturer or service provider who causes a false or misleading advertisement to be made which is prejudicial to the interest of consumers. An endorser of misleading advertisement also can be punished. Consumer Disputes Redressal Commission: The Act provides for several provisions to simplify the consumer dispute adjudication process. The pecuniary jurisdiction for such redressal commissions have been enhanced in comparison with the 1986 Act. The Act provides for establishment of consumer mediation cell as an Alternate Dispute Resolution Mechanism. Consumer Mediation Cell will be attached to the Redressal Commission at the District, State and at the National level. Product Liability: This is a major and significant inclusion in the Act. It codifies the principle of product liability with respect to sale or supply of defective products or delivery of defective services to consumers. It specifies liability of product manufacturer, liability of product service provider, liability of product sellers, exceptions to product liability action. The chapter, dealing with product liability, shall apply to every claim for compensation under a product liability action by a complainant for any harm caused by a defective product manufactured by a product manufacturer or serviced by a product service provider or sold by a product seller. This also specifies the situations in which exceptions to product liability action apply. Definitions of Product liability and Product liability action are given below: Sec. 2 (34): “product liability” means the responsibility of a product manufacturer or product seller, of any product or service, to compensate for any harm caused to a consumer by such defective product manufactured or sold or by deficiency in services relating thereto; Sec 2 (35) “product liability action” means a complaint filed by a person before a District Commission or State Commission or National Commission, as the case may be, for claiming compensation for the harm caused to him. What do all these mean and hold for liability insurance in India? It is important to note that for the first time a complete chapter is dedicated to product liability in the Act. “Who and when is responsible” is specified with timelines for various actions. Authority also has been given to grant punitive damages if the circumstances dictate. It may be noted that a product manufacturer shall be liable in a product liability action even if he proves that he was not negligent or fraudulent in making the express warranty of a product. The Act provides for both civil and criminal penalties including specifying the amounts. So, all entities in the product supply chain are expected to be proactive and vigilant and put in place best practices in every sphere – be it design, production, labeling, marketing or distribution. Should something go wrong in spite of all the care, caution and best practices, the port of call should be insurance cover. The following covers are considered relevant in this context while a few other covers also may become necessary depending upon circumstances. Product Liability Insurance Policy: Anyone who makes products available to the public runs the risk of being held responsible for the injuries those products cause. Claims may result from a defect in the product, a deficiency in the packaging, inadequate or wrong labelling on any information relating to the product. Governments all over the world are enacting legislations in this sphere and taking steps for vigorous enforcement of the same. Defects in the product may be due to
The purpose of the product liability Insurance is to indemnify the manufacturer, distributor, wholesaler, and retailer against claims of any third-party bodily injury/ property damage resulting from the use or consumption of product manufactured, sold, distributed or handled. In India there is no specific legislation that provides the complete legal framework for product liability claims. There are laws like The Sale of Goods Act 1930 and The Indian Contract Act 1872 besides The Consumer Protection Act 2019 that are relevant for product liability action. The discussion in this article is primarily focused on exposures from The Consumer Protection Act 2019. Product liability insurance offers indemnity in respect of claims from third parties arising out of defects resulting in:
(Relating to the caselaw in this area, of immediate recall value is the judgement of The Delhi High Court on 30 May 2019 directing Johnson and Johnson to pay Rs.25 lakh each to 67 patients in hip implant cases. Earlier, India’s drug regulatory authority had asked J&J to pay Rs.65 lakh and Rs.74 lakh as compensation to two unidentified patients in Maharashtra)
Product liability insurance policy provides indemnity to the insured in respect of:
Product Recall Expenses: It is possible to cover product recall expenses under product liability policy as an extension or as a separate policy. This covers expenses associated with recalling a product from the market. A product recall is a request to return to the maker, a product or a batch of products usually over safety concerns or design defects or labelling errors that are likely to cause personal injury or property damage to a third party or damage reputation to the manufacturer. Some of the Recalls in India in recent past are:
Product recall expenses mean the reasonable and necessary costs associated with recalling a product. Indicative list of expenses is given below:
As regards Recall of products, Consumer Protection Act 2019 Section 20 states as under: “Where the Central Authority is satisfied on the basis of investigation that there is sufficient evidence to show violation of consumer rights or unfair trade practice by a person, it may pass such order as may be necessary, including--
Provided that the Central Authority shall give the person an opportunity of being heard before passing an order under this section.” Similarly, BIS Act 2016, Drugs and Cosmetics act 1940 read with Medical Devices rules 2017 and Food Safety and Standards Act 2006 also provide for recall of goods. Government mandated recalls are generally excluded under the policy. Even in situations where some coverage is available, it is a qualified and conditional cover. Product liability policy can be also taken as a part of CGL (Commercial General Liability) which includes product liability, premises liability, operations liability and completed operations liability. International Risk Management Institute (IRMI) describes CGL as under: “A standard insurance policy issued to business organizations to protect them against liability claims for bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations; and advertising and personal injury (PI) liability” The policy provides indemnity to the insured in respect of:
Professional Indemnity Insurance: Professionals have a duty to offer reasonable skill and care, as part of the service they provide. If they fail to exercise this duty and are subsequently proven to be negligent and if any loss is caused, they may be liable for the losses incurred by their customers or other third party. No matter how good professionals are at their jobs or how good their attention is to detail, there is always the possibility for small mistakes to be made. Proving innocence may cost and it pays to be protected. Professional indemnity (PI) insurance offers indemnification to professionals who provide advice or services to their customers against legal liabilities arising from acts, omissions or breaches in the course of discharge of their professional duties. In simple terms, this means that if a professional does something or omits to do something in the course of his/her work, and the principal suffers injury or financial loss as a result, professional indemnity insurance responds. This policy is also known as Errors& Omissions (E&O) Liability insurance policy. The policy provides indemnity to the insured in respect of:
Sections under CPA 2019, and Possible Insurance Cover Major exposures emanating from the provisions of the Act and possible insurance covers are mapped here. Product liability is relevant for tangible products and professional indemnity cover is for services.
Insurance Cover: Product liability/ Professional Indemnity ________________________________________________________________________
Insurance Cover: Product liability / Product Guarantee ________________________________________________________________________
Insurance Cover: Product Liability ________________________________________________________________________
Insurance Cover: Professional Indemnity ________________________________________________________________________
Insurance Cover: Product liability insurance with appropriate cover widening endorsements like Vendors liability clause, Technical Collaboration inclusion clause, Mixing and Blending clause etc. ________________________________________________________________________
Insurance Cover: CGL/ Combination of covers ______________________________________________________________________________ It is not that the product seller or product manufacturer is liable in all circumstances. The Act does list exceptions to product liability action under Section 87 providing the primary defence to them. Insurance is not a remedy or solution for all exposures. Insurance is meant for unintentional errors and not for intentional, deliberate and dishonest acts. Insurance is for those aspects of negligence which creep in despite all the care and caution. Further, it must be noted that all insurance policies have exclusions which need to be reviewed carefully before purchasing any policy. ______________________________________________________________________________ P. Umesh Consultant – Liability Insurance www.liabilityinsurancepractice.com Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues. The post Guest Post: India: The Consumer Protection Act, 2019 – Exposures & Liability Insurance Protection appeared first on The D&O Diary. Guest Post: India: The Consumer Protection Act, 2019 – Exposures & Liability Insurance Protection syndicated from https://888migrationservicesau.wordpress.com via Tumblr Guest Post: India: The Consumer Protection Act, 2019 – Exposures & Liability Insurance Protection News Flash: Insurer That Paid Full Policy Limits Did not Breach the Policy or Act in Bad Faith10/8/2019 D&O insurance policyholders sometimes bridle when the insurers take steps to try to rein in burgeoning defense expense. In that situation, the D&O insurers will often try to remind the policyholder that because defense expense erodes the limit of liability, it is in everyone’s interest for defense expense to be monitored closely. An unusual coverage action in the Western District of New York reversed the usual concerns about insurer defense cost control. The policyholder sued its D&O insurer for breach of contract, bad faith, and intentional infliction of emotional distress not for failing to pay defense costs or full defense costs, but rather for allowing the policyholder’s defense expenses incurred in an underlying criminal action to exhaust the applicable limit of liability. While it is hardly a surprise that a court concluded that an insurer that paid out its full limits cannot be held liable for breach of contract – much less bad faith or infliction of emotional distress –there are still a number of interesting aspects to this dispute and to the court’s ruling. The court’s September 10, 2019 opinion can be found here. An October 4, 2019 post on the Wiley Rein law firm’s Executive Summary Blog can be found here. Background Marc Irwin Korn is the sole owner of Senior Associates LLC and a number of other businesses operating nursing homes in and around Buffalo, New York. In December 2011, Korn was indicted on several criminal charges, including wire fraud and making a false statement. Korn submitted the criminal matter to the D&O insurer of Senior Associates. The insurer accepted the defense subject to a reservation of its rights under the policy. At that time and in several subsequent communications, the insurer reminded Korn that defense expense erodes the limit of liability. After the prosecutors filed a superseding indictment against Korn adding several additional criminal charges, the insurer affirmed that it would continue to provide Korn with a defense. However because it was determined that the insurer’s regular panel counsel could not handle the criminal matter, the insurer agreed that a non-panel attorney would be retained to provide the defense. Korn requested the insurer’s assistance in obtaining criminal representation and recommended several criminal defense lawyers, noting again that defense costs would erode the limits of liability. Korn selected one of the law firm’s the insurer recommended. The insurer made periodic payments to the defense counsel Korn selected. The insurer contended in the subsequent insurance coverage action that at the time of each payment, the insurer advised Korn of the amount remaining of the limits of liability available. An April 2015 defense expense payment exhausted the remaining limit of liability. In December 2016, Korn filed an action against the insurer alleging breach of fiduciary duty, breach of contract, bad faith, and intentional infliction of emotional distress. The insurer filed a motion for summary judgment. In November 2018, Korn ultimately resolved the criminal matter by pleading guilty to two criminal misdemeanors. The September 10, 2019 Opinion In a September 10, 2019 Opinion, Judge Christina Reiss, applying New York law, granted the insurer’s motion for summary judgment. Korn’s had first claimed that the insurer had breached its fiduciary duty by its failure to monitor his criminal defense attorneys and failing to keep track of the legal fees. Judge Reiss rejected this claim, holding that New York does not recognize a fiduciary duty or vicarious liability based on the acts or omissions of outside counsel retained by an insurance company for its insured’s defense. While there are rare exceptions when a special relationship between the parties may give rise to a fiduciary duty, the court found that the circumstances justifying the exception were not present here, even if, as Korn alleged, the insurer had “brokered” the attorney client relationship. Korn also alleged that the insurer had breached in the insurance contract by failing to insure that his defense in the underlying criminal action progressed at the proper rate. He also alleged that the insurer breach the insurance contract by failing to follow its own defense counsel guidelines. Finally, he alleged that the insurer breached the contract by adding attorneys and law firms to the defense without his approval. Judge Reiss granted the insurer’s motion for summary judgment on all three of these issues, holding first that the plaintiff had failed to establish a contractual obligation under the policy to ensure a “reasonable rate of progression’ so as to avoid exhaustion of the policy limit. Similarly, Judge Reiss said that the plaintiff had identified no obligation in the policy requiring the insurer to follow its own guidelines for Korn’s benefit. Moreover, Judge Reiss added, even if Korn could establish such an obligation, he had failed to proffer any evidence that it had been breached. Judge Reiss also granted the insurer’s motion for summary judgment on the breach of contract allegation relating to the staffing of the defense. Plaintiff had argued that the insurer had breached the contract by allowing three firms to bill time on the defense – although he did also admit that he did request that additional legal personnel outside of the selected law firm be added to his legal team. Judge Reiss noted that the policy gave the insurer the “sole right and duty to select counsel for the defense, and so it is “immaterial” whether the insurer or Korn or both participated in the staffing of Korn’s criminal defense. Finally, Judge Reiss rejected Korn’s bad faith and emotional distress claims. Judge Reiss said that the plaintiff had failed to establish any legal duty separate from the insurer’s duties under the contract, adding that in any event Korn had failed to proffer any evidence that the insurer had failed to act in good faith. In rejecting the emotional distress claim, Judge Reiss noted that under New York law, emotion distress generally is not compensable in a breach of contract, and that no legal duty independent of the contract had been established. Discussion As someone who spends far too much of my time wrestling with insurers trying to get them to step up and pay their policyholders’ defense expense, it is somewhat startling to see a policyholder claiming that an insurer breached its policy and acted in bad faith by paying its full out its policy limit in defense. And not just in defense, but in defense of a criminal matter. The underlying facts certainly do underscore the fact that because the payment of defense expense erodes the limit of liability that it is in both the policyholder’s interest and the insurer’s interest for defense expense to be controlled However, the issue of defense cost control usually comes up in a far different context, usually where the policyholder (or the policyholder’s counsel) argues that the insurer’s efforts to control defense expense are undermining the defense of the claim or represents bad faith. So it is quite ironic that in this case that policyholder alleged that the insurer’s failure to control defense expenses breached the contract – indeed, not only breached the contract but constituted bad faith and inflicted emotional distress on the policyholder. Usually it is the other way around, the policyholder is alleging that it is the attempt to control defense costs or to make defense counsel adhere to counsel guidelines that is a breach of the contract or represents bad faith. While one important underlying message of this case is the mutual interest of the policyholder and the insurer in managing defense, there is another important lesson — which is that the enormous expense that the defense of a serious claim can entail is an important consideration to be taken into account when the time comes for the policyholder to decide how much insurance they want to buy. For anyone who has never been involved in a serious D&O claim, it can be hard to imagine how fast defense expenses can mount. All too often, D&O insurance buyers decide to buy the minimum amount of insurance; as this case shows, minimal amounts of insurance may be insufficient to protect a policyholder in the event of a serious claim (in this case, the policy’s limit of liability was $ 1million). Many insurance buyers do not want to hear that if they want to be fully protected against a serious claim, they need to buy additional limits of liability; a frequent perception is that an insurance advisor’s plea that the policyholder consider buying additional limits is nothing more than an incentivized actor’s bid to try and sell more insurance. As this case demonstrates, additional limits of liability could prove indispensable in the event of a serious claim. The post News Flash: Insurer That Paid Full Policy Limits Did not Breach the Policy or Act in Bad Faith appeared first on The D&O Diary. News Flash: Insurer That Paid Full Policy Limits Did not Breach the Policy or Act in Bad Faith syndicated from https://888migrationservicesau.wordpress.com via Tumblr News Flash: Insurer That Paid Full Policy Limits Did not Breach the Policy or Act in Bad Faith The Federal Trade Commission held a workshop yesterday in Washington, D.C., to discuss possible updates to the COPPA Rule, which implements the Children’s Online Privacy Protection Act (“COPPA”). COPPA was originally enacted in 1998 and regulates the way entities collect data and personal information online from children under the age of 13. The Rule hasn’t been updated since 2013, and the intervening years have produced seismic technological advances and changes in business practices, including changes to platforms and apps hosting third-party content and marketing targeting kids, the growth of smart technology and the “Internet of Things,” educational technology, and more. For the most part, FTC staff moderators didn’t tip their hand as to what we can expect to see in a proposed Rule revision. (One staff member was the exception, whose rapid-fire questions offered numerous counterpoints to industry positions, so much so that the audience would be forgiven for thinking they were momentarily watching oral argument at the Supreme Court.) Brief remarks from Commissioners Wilson and Phillips staked out their positions more clearly, but their individual views were so different that they too offered little assistance in predicting what a revised Rule may look like. Commissioner Wilson opened the workshop by sharing her own experience as a parent trying to navigate and supervise the games, apps and toys played by her children, and emphasized the need for regulation to keep up with the pace of technology to continue protecting children online. Commissioner Phillips also referred to his children at one point, but his remarks warned against regulation for regulation’s sake, flagged the chilling effect on content creation and diversity when businesses are saddled with greater compliance costs, and advocated a risk-based approach. The divergent views of the Commissioners were echoed throughout the workshop’s many panels, which comprised members of industry, consumer advocacy groups and academia. A majority of the participants agreed that the COPPA Rule should be updated and enforcement stepped up, but agreement largely ended there. Industry clamored for clarity in the COPPA Rule, particularly in terms of the multifactor test for determining that a service is child-directed. Industry representatives also sought consistency across legal regimes, noting that COPPA, the European Union General Data Protection Regulation, the California Consumer Privacy Act, and various similar laws around the world set different age limits and impose differing legal obligations. Some in industry also feared regulations that would require them to collect more personal information than they currently do, and argued that doing so undermines the principle of data minimization. As would be expected in any discussion about regulation, industry also argued against any Rule changes that increase the cost of doing business. Finally, many of the industry representatives expressed a strong desire to continue limiting the COPPA Rule to one addressing the collection of children’s data, and to confine the rulemaking proceeding accordingly. They opposed turning COPPA Rule reform into a referendum on children’s content standards. By contrast, consumer and child privacy advocates argued against weakening existing protections and repeatedly pressed the Commission to invoke its 6(b) authority to gather more information from industry. They argued that children’s privacy cannot be protected without understanding current industry practices on child data collection, use and disclosure, as well as the relative value of various advertising types and algorithms that utilize varying degrees of personal information for targeting and personalization. Advocates also pushed to expand the list of factors for child-directed services to include operators’ representations about their audiences. They argued that if an operator tells app stores, investors, advertisers, ad networks and others that their service is a good way to reach children, it constitutes constructive knowledge at the very least. Finally, advocates argued that teens have been largely ignored and should be offered some level of protection through regulation. All in all, the workshop made for a lively day of discussion on what, if anything, should be done to update the COPPA Rule, with FTC staff listening intently to the discussions. If you’re interested in this topic and missed the workshop, it is not too late for your voice to be heard. The public comment period is open until October 23 and comments can be submitted here. This rulemaking is critically important to multiple industries and is of particular relevance to online video/streaming platforms, esports/gaming companies, and app developers, among others. If you would like to discuss the COPPA Rule or possible updates, or would like assistance submitting a comment, please feel free to contact Katie, Chris, or Melissa.
via Tumblr FTC’s COPPA Rule Workshop: A Summary of Priorities from Advocates and Industry, and the FTC’s Poker Face It depends on which “debate” you’re talking about. What if there were an honest debate about all aspects of climate change? It wouldn’t be a faux debate about whether the world will end before the next Mardi Gras or during Lent, … or before the next most-important election in history! The discussion could include the causes, the extent, the effects, and the solutions. We could have a panel! The participants would be people who actually know something about the science and the economics (Some do say the world’s standard of living counts. Perhaps the average UN bureaucrat’s can take a hit but there are others who aren’t so fortunate.) These people are out I would exclude those who are “all-in”, others who are irrational, and especially those who are both. Thus, the following:
These people are in I would include
Why should we even bother? Because, for example:
Is the Climate Change Debate Over? syndicated from https://888migrationservicesau.wordpress.com via Tumblr Is the Climate Change Debate Over? Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them10/7/2019 Earlier this year, in Marchand v. Barnhill, the Delaware Supreme Court underscored that boards that fail to establish oversight procedures for their company’s mission critical functions can be held liable for breach of their Caremark duties. In an October 1, 2019 decision in the Clovis Oncology Derivative Litigation, the Delaware Chancery Court provided further perspective on directors’ potential liability for breaches of the duty of oversight. The Chancery court held, citing Marchand, that boards not only must be able to show that they have made good faith efforts to implement an oversight system, but that also that they monitor the system – particularly when a company operates in a highly regulated industry. The Chancery Court’s October 1, 2019 decision in the Clovis Oncology Derivative Litigation can be found here. Background Clovis is a developmental stage biotechnology company. During the relevant period, the company’s fortunes largely rested on Roci, a developmental drug intended to treat a type of lung cancer. In order to test Roci, the company established a clinical trial procedure using widely recognized and rigorous testing and reporting protocols. Under these protocols, the success of the trial, the likelihood of FDA approval, and the possibility of later physician update would depend on confirmed clinical responses, as unconfirmed clinical responses were viewed as less reliable. In the subsequent shareholder derivative complaint, the plaintiffs alleged that the company misrepresented to investors and others the level of confirmed responses in the Roci clinical trial process. When the FDA later declined to approve the drug and when the actual confirmed response rate became public, the company’s share price declined precipitously. The plaintiff shareholders filed a derivative lawsuit against the individuals on the company’s board of directors. The plaintiffs alleged that the board had breached its fiduciary duties under Caremark by failing to fulfill their duties to oversee the Roci clinical trials. The defendants moved to dismiss asserting that the plaintiffs had failed to make the requisite demand on the board of directors and also asserting that the plaintiffs had failed to plead a claim on which relief could be granted. Although not directly relevant to the derivative lawsuit, it is interesting to note that these circumstances involved in derivative suit were also the subject of securities class action litigation. The securities suit ultimately settled for $25 million in cash and $117 million in Clovis stock. The SEC also pursued an enforcement action against three Clovis officials, which led to a consent decree requiring the three defendants to pay $20 million, $250,000 and $100,000 in civil penalties. The October 1, 2019 Opinion In an October 1, 2019 opinion, Vice Chancellor Joseph R. Slights III denied the defendants’ motion to dismiss with respect to the duty of oversight claim. In ruling on the motion to dismiss, Vice Chancellor Slights noted the Delaware Supreme Court’s decision in Marchand v. Barnhill, which, he said, “underscores the importance of the board’s oversight function when the company is operating in the midst of a ‘mission critical’ regulatory compliance program.” He also noted that Marchand “makes clear” that where a company operates in a “mission critical” regulatory environment, “the board’s oversight function must be more rigorously exercised.” In order to show fulfillment of this oversight function, the board must show “a good faith effort to implement and oversight system and then to monitor it.” Vice Chancellor Slights did find that the plaintiffs’ could not establish a breach of the first prong of the oversight duty, as the board did have oversight and reporting systems in place for the clinical trials. However, he did find that the plaintiffs’ allegations were sufficient to state a claim with regard to the second prong – that is, the duty to monitor the oversight systems. In reaching this conclusion, Vice Chancellor Slights found that the plaintiffs had alleged that “the Board consciously ignored red flags that revealed a mission critical failure to comply” with the rigorous clinical trial protocols and associated FDA regulations, and that “this failure of oversight caused monetary and reputational harm to the Company.” The Vice Chancellor specifically found that the plaintiffs had alleged that the “Board ignored multiple warning signs that management was inaccurately reporting” the cancer drug’s efficacy. Discussion Vice Chancellor’s reliance upon and citation to the Delaware Supreme Court’s Marchand v. Barnhill decision underscores the importance of that decision and its significance for directors’ potential liability for breach of fiduciary duty claims based on alleged breaches of the duty of oversight. However, in Marchand, the Court was focused primarily on the alleged failure of the board in that case to have made a good faith effort to establish appropriate oversight systems in connection with a mission critical regulatory compliance issue. By contrast, in the Clovis Oncology case, the focus was not on the failure to have an oversight system, but the alleged failure to monitor the oversight system. As noted in an October 5, 2019 post by attorneys from the Wachtell, Lipton on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), the Clovis Oncology decision represents a ruling “further extending the practical reach of the Caremark doctrine.” Having a compliance program alone is not enough; directors must have procedures in place to “ensure that the board itself monitors ‘mission critical’ corporate risks.” While the Marchand and Clovis Oncology decision unquestionably have important implications for directors’ potential liabilities for alleged breaches of their duty of oversight, there are several important considerations to keep in mind. First, in both Marchand and Clovis Oncology, the courts took great pains to underscore the fact that Caremark breach of the duty of oversight cases face a “high bar” and noting that Delaware’s courts have said, and repeated, that a Caremark claim “is among the hardest to plead and prove.” Nothing about the courts’ decision in these cases eliminated the “onerous” burden for plaintiffs to establish a Caremark claim. Second, both Marchand and Clovis Oncology involved egregious circumstances that arguably colored the courts’ perceptions of the subsequent derivative lawsuits. In Marchand, the background included the deaths of customers that had consumed the defendant company’s product. In Clovis Oncology, the derivative claim related to circumstances that had already been the subject of a massive securities class action lawsuit settlement and also the subject of a settled SEC enforcement action. Clearly, neither of these cases represent routine or run of the mill circumstances. Third, both Marchand and Clovis Oncology emphasized that the board’s oversight responsibilities were particularly important with respect to “mission critical” regulatory requirements. That is, the claims arose out of circumstances that involved compliance requirements that the board had to be watching, given the importance of the requirements to the company’s operations and business success. In other words, these recent cases do not imply some massive expansion of boards’ oversight duties. They are not likely to result in some huge influx of duty of oversight claims. Nevertheless, these cases do have important implications. Among other things, the courts’ decisions in these cases, which both involved denials of motions to dismiss, establish that while the burden for plaintiffs to establish a claim for breach of the duty of oversight is “onerous,” the standards are not insurmountable, and that allegations can be presented that meet these pleading requirements. The decisions also establish that boards’ responsibilities do include both the establishment of and the monitoring of processes to oversee their companies’ “mission critical” regulatory compliance requirements. Further, the decisions establish that boards that do not fulfill these oversight requirements can be held liable for breaches of their fiduciary duties. As I noted in a recent post with respect to boards’ oversight duties, these lessons are relevant with respect to any number of challenges that companies might face, but they arguably could have significant implication with respect to two areas that are the subject of particular regulatory focus at the moment, cybersecurity and privacy. The post Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them appeared first on The D&O Diary. Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them syndicated from https://888migrationservicesau.wordpress.com via Tumblr Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them Lettuce Turnip the Beet: When puns are “functional”In LTTB LLC v. Redbubble, Inc., plaintiff LTTB, an online apparel company, contended its success was “largely due to public fascination with its Lettuce Turnip the Beet trademark,” and alleged that defendant Redbubble’s sale of products featuring the phrase “Lettuce Turnip the Beet” infringed its mark, 18-cv-00509-RS. Redbubble, an online marketplace selling products made by independent artists, argued that LTTB was not entitled to preclude others from using the “Lettuce Turnip the Beet” pun absent any evidence of source confusion. On July 12, 2019, the Northern District of California issued its decision granting summary judgment in favor of defendant Redbubble, finding that LTTB did not have an exclusive right to sell products displaying the pun “Lettuce Turnip the Beet,” and that LTTB therefore did not have a viable trademark infringement claim. The court’s decision turned on its application of the “aesthetic functionality doctrine,” a controversial trademark law principle unevenly applied by federal courts. See McCarthy on Trademarks and Unfair Competition § 7:80 (5th ed.). Under the aesthetic functionality doctrine, when goods are bought largely for their aesthetic value, their features may be functional – if a feature is an important ingredient in the commercial success of the product, the interest in free competition permits its imitation in the absence of a patent or copyright. See Pagliero v. Wallace China Co., 198 F.2d 339 (9th Cir. 1952). The issue in LTTB was whether LTTB had a viable infringement claim where the alleged infringing products merely displayed the pun “Lettuce Turnip the Beet” and did not otherwise include any indication that they were produced by LTTB. In other words, was the pun “Lettuce Turnip the Beet” a functional feature permitting imitation? The LTTB court explained that while the Ninth Circuit’s modern application of the “aesthetic functionality” doctrine has been more limited, the circumstances of the LTTB case “undeniably” called for the application of the aesthetic functionality doctrine. The court in LTTB concluded that no reasonable trier of fact could find that consumers sought to purchase products based on LTTB’s reputation, rather than mere interest in the pun “Lettuce Turnip the Beet.” The court found that LTTB’s products were simply the vehicle for distributing the claimed “trademark” on the pun “Lettuce Turnip the Beet” rather than the other way around, where a trademark is used to identify the source of the goods. The court also clarified, however, that nothing in its ruling precluded LTTB from enforcing its rights against a party that markets a product misleadingly suggesting LTTB as the product’s source. Feyonce v. Beyoncé: When puns dispel potential confusion between trademarksIn another noteworthy case involving the ability to enforce trademark rights as to a pun or play on words, Beyoncé Knowles-Carter and BGK Trademark Holdings, LLC dismissed their trademark infringement action in the Southern District of New York against defendant Feyonce, Inc., an apparel company marketing its FEYONCE-branded merchandise toward the engaged-to-be-married. Knowles-Carter v. Feyonce, Inc., 16-CV-2532 (AJN). Knowles-Carter and BGK had alleged that defendant’s Feyonce-branded merchandise infringed the famous BEYONCE trademarks; Feyonce, Inc. disputed the infringement allegation and argued that FEYONCE was not confusingly similar to the BEYONCE marks. Whereas the LTTB decision turned on whether the plaintiff had an exclusive right to use a pun in its product names, the Feyonce court discussed whether the defendants’ use of a pun was sufficient to dispel confusion with plaintiff’s nearly identical mark. Before ultimately voluntarily dismissing their claims, plaintiffs Knowles-Carter and BGK Trademark Holdings moved for partial summary judgment as to their trademark infringement claims, which was denied. The court explained that the “critical question” was “whether a rational consumer would mistakenly believe FEYONCE products are sponsored by or affiliated with BEYONCE products.” In other words, was the pun was sufficient to dispel a likelihood of confusion among the consuming public? The court found that the answer could be yes. While the court could not conclude that FEYONCE rose to the level of a parody of BEYONCE, it explained that “even a pun on an existing mark that does not contain an expressive message may avoid infringing if it is adequately distinguishable from the existing mark by virtue of pun.” Id. citing Tommy Hilfiger Licensing, Inc. v. Nature Labs, LLC, 221 F. Supp. 2d 410, 417 (2002). In denying Beyoncé’s motion for summary judgment as to the trademark infringement claim, the court reasoned that “even though the marks were “certainly extremely similar in text, font, and pronunciation,” “because of the additional connotation of ‘fiancé,’ a reasonable jury could conclude that consumers looking for BEYONCE products were “unlikely to select a FEYONCE product inadvertently.” By choosing a mark that sounds identical to the word “fiancé,” Defendants could be said to have “purposefully differentiated their products by eliciting a mental association with a word that has a dictionary definition unrelated to Beyoncé.” Defendants’ mark could be considered a pun because it was clearly a reference to Beyoncé but was “just as clearly a signifier of a specific relationship status.” FEYONCE’s play on words could dispel consumer confusion that might otherwise arise because of its facial similarity to the BEYONCE mark. The court emphasized that there is no likelihood of confusion “if the similarity [between the marks] merely results in an association between the products in a consumer’s mind, as opposed to confusion regarding the source, sponsorship, or affiliation of the products.”
via Tumblr We Got The Beet: Trademark Claims and Puns In a prior post, I noted recent academic research detailing the rise of mootness fee dismissals in federal court merger objection litigation. In these merger-related lawsuits, the plaintiffs agree to dismiss their suit based on the defendants’ agreement to make changes to the merger documents – thus, making the merger suit moot – and to pay the plaintiffs’ attorneys a mootness fee. An October 4, 2019 Law 360 article entitled “Plaintiffs Firms Follow Easy Merger Money to Federal Court” (here, subscription required) takes a look at the small group of plaintiffs’ law firms that the most active in filings these kinds of cases and obtaining mootness fees, in a process that at least one federal district judge has characterized as no better than a “racket.” Background The current merger objection lawsuit practice in which plaintiffs’ voluntarily dismiss their suit based on defendants’ changes to the deal-related proxy statement and the payment of a mootness fee has its roots in the Delaware Chancery Court’s January 2016 decision in the Trulia case in which the Court rejected a disclosure only settlement of a merger objection suit. That Chancery court ruling has led the plaintiffs’ lawyers to shift their merger suit filings from state court to federal court. Before Trulia, 97% of the merger objection lawsuits were filed in state court (during the period 2009 to 2015). However, in 2018, only 34% of mergers that resulted in merger litigation faces state court suits, while 91% were challenged in federal court . (Some mergers were challenged in both state and federal court.) The Trulia decision is also arguably the source of the current mootness fee phenomenon. In his Trulia opinion, one of Vice Chancellor Bouchard’s concerns about the disclosure only settlements in merger objection suits is that the defendants extracted as part of the settlement a total release of all claims, even those that had not been asserted. Bouchard suggested voluntary dismissals with the payment of a mootness fee; this approach would not involve the problems he perceived with respect to comprehensive claims releases, and he assumed the defendants’ incentives would motivate them to police the amount of the fees paid to the plaintiffs’ attorneys. In practice, the defendants are not policing the mootness fees because it is easier and less bother just to pay the plaintiffs lawyers to go away. As the Law 360 article notes these dismissals and fee payments face “little scrutiny from judges” as a result of which the practice surrounding these mootness fee cases “amounts to a shakedown with little benefit beyond lining attorneys’ pockets.” It is a practice that, as one of the authors of the academic paper cited below notes, amounts to “blackmail,” noting that the defendant companies are paying the fees “just to make these cases go away.” The Plaintiffs’ Firms The interesting thing about the Law 360 article is that it details which plaintiffs’ firms are the ones whose pockets are being lined. There are, in fact, only a very small number of plaintiffs’ firms that are responsible for the vast majority of merger objection lawsuit filings in recent years and also in collecting mootness fees. The law firm information in the article comes from the May 29, 2019 paper entitled “Mootness Fees” (here), Matthew Cain and Steven Davidoff Solomon of UC Berkley Law School, Jill Fisch of Penn Law School, and Randall Thomas of Vanderbilt Law School, about which I previously reported in the blog post to which I linked at the top of this post. The academic paper’s authors note that mootness fees generated more than $23 million in mootness fee payments for plaintiffs’ law firms in 2017. The amount of fees in any given case in the past has ranged between $50,000 and $300,000, but more recently the range has narrowed to between $50,000 and $150,000. According to the information in the Law 360 article, three law firms – Monteverde, Ridgorsky & Long, and RM Law – are “driving the shift” of merger objection cases from state court to federal court. Ridgorsky & Long has filed 163 federal district courts YTD in 2019, all but one involving mergers and other transactions. RM law has served as co-counsel to Ridgorsky & Long in 106 of the complaints. The Monteverde law firm has filed 76 federal district court complaints so far this year, all but five involving a corporate transaction. For these firms and others active in this space, the majority of the cases they file are voluntarily dismissed with the payment of mootness fees. For the Monteverde law firm, a whopping 80% of merger objection suits the firm filed between 2017 and January 2019 were voluntarily dismissed with the payment of a mootness fee. For the Ridgorsky & Long firm, 68% of the merger objection suits it filed were dismissed with the payment of a mootness fee. For the RM Law firm, the figure is 65%. This practice has become pervasive among the small number of plaintiffs’ firms active in this space. According to the academics’ research, none of the six plaintiffs firms most active in this area reached court-approved settlements in more than 4% of these cases. Instead, the plaintiffs’ firms are avoiding judicial scrutiny through the voluntary dismissal and mootness fee approach. Each of the six most active firms dismissed their lawsuits and negotiated mootness fees at least 65% of the time. Discussion Earlier this year, when Northern District of Illinois Judge Thomas Durkin ordered the plaintiffs’ attorneys in the Akorn merger objection lawsuit to return the $322,000 mootness fee they had negotiated in exchange for what Judge Durkin characterized as “worthless” additional disclosures, I was hopeful that the ruling might represent “the beginning of the end” of the merger objection lawsuit mootness fee racket. And indeed other courts have rejected merger objection plaintiffs’ mootness fee requests. However, by and large, the mootness fee racket continues unabated. Plaintiffs’ lawyers are simply avoiding the jurisdictions where the process might face questions. As one commentator quoted in the Law 360 article notes, “plaintiffs’ lawyers [are] going throughout this country picking jurisdictions or picking courts that they believe they’ll get a higher fee.” The fact that this practice is permitted to continue or even to exist is an embarrassment to our entire legal system. The plaintiffs’ lawyers have found a way to set themselves up as toll takers, where they extract a payment from merger parties for doing nothing except filing a complaint. When commentators in other legal systems talk about abuses in the U.S. system of litigation, they are talking about practices like this mootness fee racket. Worse still, if these practices are, as one academic notes in the Law 360 notes, “blackmail,” it is blackmail achieved by use of the courts. It may be that over time enough judges will find their way to the same conclusions about these kinds of cases as Judge Durkin did in the Akorn lawsuit. Even if that ever happens, it will likely take a considerable amount of time. It may be that legislative measures are required. As I have noted in several prior posts, there are efforts afoot to initiate another round of securities class action litigation reform. The efforts include, for example, suggestions to try to address the unfortunate side effects resulting from the U.S. Supreme Court’s March 2019 decision in Cyan. Many of the proposed reforms have significant merit, and should be pursued. As these initiatives progress, I hope the litigation reform dialog also includes a discussion of ways to squash the merger objection litigation racket. The federal courts in this country should not be the instrument for the extraction of blackmail payment. Litigation that has absolutely no socially redeeming value and does nothing except enrich a very small number of plaintiffs’ lawyers must be eliminated. The post Plaintiffs’ Lawyers, Merger Objection Litigation, and Mootness Fees appeared first on The D&O Diary. Plaintiffs’ Lawyers, Merger Objection Litigation, and Mootness Fees syndicated from https://888migrationservicesau.wordpress.com via Tumblr Plaintiffs’ Lawyers, Merger Objection Litigation, and Mootness Fees In the latest securities class action lawsuit to be filed against a company that has experienced a data breach or other cybersecurity incident, a plaintiff shareholder has filed a securities suit against Capital One in connection with the company’s recent massive data breach. While there have been a number of data breach-related securities suits before, there are some unique features of the Capital One situation that make it distinctive and interesting, as discussed below. The plaintiff shareholder’s October 2, 2019 complaint can be found here. The Capital One Data Breach In a July 29, 2019 press release, Capital One announced that on July 19 the company had determined that there had been unauthorized access to its systems by an individual who had obtained personal information of the bank’s credit card applicants and customers. The company said that the breach involved the personal information of over 100 million customers in the U.S. and another 6 million in Canada. The company’s press release announced that the company had notified the FBI of the breach and that the person responsible for the data breach had been arrested and was in custody. On the news of the breach, the company’s share price dropped approximately 6%. In the days following the news of the breach, news reports identified the hacker responsible for the data breach as Paige Adele Thompson, a former employee of Amazon’s cloud computing division that according to the reports was responsible for running much of Capital One’s information technology infrastructure. On July 29, 2019, the U.S. Department of Justice filed a criminal complaint against Thompson that provides many of the details surrounding Thompson’s hack of the Capital One data. Subsequent filings in the criminal proceeding on behalf of the government alleged that Thompson had in fact targeted a number of companies and other organizations. One of the features of the hack that immediately attracted attention was the fact that Thompson accessed the Capital One customer data by hacking improperly secured Amazon cloud accounts, as discussed in greater detail in a guest post on this blog (here). The Securities Class Action Lawsuit On October 2, 2019, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Capital One, its CEO, Richard Fairbank, and its CFO, R. Scott Blackley. The complaint purports to be filed on behalf of a class of persons who purchased Capital One securities between February 2, 2018 and June 29, 2019. [Note: the complaint identifies the class end date as June 29, 2019, but that is almost certainly a typographical error, as the date on which Capital One released the news of the data breach was July 29, 2019, not June 29, 2019, and the complaint refers extensively to the company’s July 29 press release.] The plantiff’s brief complaint consists of a series of block quotations from various Capital One SEC filings in which the company made a number of statements about its privacy security, as well as the data security of third-party service providers. The complaint also verbatim quotes the July 29 press release and includes quotations from the criminal complaint against Thompson. The complaint alleges that the company’s share price dropped 5.9% on the news of the breach. The complaint alleges that these various statements were materially false and misleading because the mispresented or failed to disclose that: “(1) the Company did not maintain robust information security protections, and its protection did not shield personal information against security breaches; (2) such deficiencies heighted the Company’s exposure to a cyber-attack; and (3) as a result, Capital One’s public statements were materially false and misleading at all relevant times.” The complaint seeks to recover damages on behalf of the class based on allegations that the defendants’ alleged misrepresentations or omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Discussion In the wake of the news of the Capital One cybersecurity breach, a number of different people expressed surprise to me that there was not, at least not right away, a data breach-related D&O lawsuit filed against the company or its senior management. The incident was after all very high profile. In the immediate aftermath of the news of the data breach, there were in fact a number of plaintiffs’ law firm “trolling” press releases through which the plaintiffs’ lawyers sought to find a plaintiff shareholder on whose behalf they might sue the company. In the end, the complaint that was eventually filed was filed by one of the so-called “emerging law firms” that have been responsible for so much of the elevated levels of securities class action lawsuit filing activity in recent years. In that regard, it is worth noting that in addition to being a data breach-related securities lawsuit, this lawsuit is also an example of event-driven securities litigation – that is, where the securities suit is not based on traditional allegations of accounting misrepresentations or financial fraud, but rather based on a negative development in the company’s business operations the risk of which the investors supposedly were not adequately warned. The plaintiffs’ law firm that filed this suit is one of the very small number of “emerging law firms” that have been actively filing these kinds of event-based securities suits. As is the case with so many event-driven securities suits, the scienter allegations in this complaint are notably scarce – as in, the court is going to have a really hard time finding anything in this complaint that remotely resembles an allegation of scienter. This lawsuit is the latest in a series of suits filed in recent months against companies that have experienced cybersecurity incidents. Recent high profile examples of these kinds of lawsuits include the suit filed in June 2019 against FedEx (about which refer here) and the securities lawsuit filed last year against Marriott related to a data breach that occurred at the company’s recently acquired Starwood division. In many instances, data breach-related D&O lawsuits have not fared particularly well. For example, late last year the court granted the defendants’ motion to dismiss in the data breach-related securities suit that had been filed against PayPal. (The district court in that case recently granted the defendants’ renewed motion to dismiss – with prejudice, this time – the plaintiffs’ second amended complaint.) To be sure, there have been instances where plaintiffs have been more successful in data breach-related D&O lawsuits. For example, the data breach-related securities class action lawsuit filed against Yahoo ultimately settled for $80 million. A related shareholder derivative suit was later settled for $29 million. However, the Capital One lawsuit arguably lacks many of the important features of the Yahoo lawsuits – unlike the Yahoo lawsuit, this case does not involve long delays in communicating the news of the data breach, and also does not involve the kind of direct and demonstrable financial losses that were part of the Yahoo lawsuits. Whether or not the new lawsuit ultimately is successful, there are a number of circumstances surrounding the Capital One data breach that are relevant for corporate boards. Among the most important is that the data breach involved data storage and networking arrangements with a third-party vendor, in this case Amazon’s cloud services. As discussed in John Reed Stark’s thoughtful guest post on this site (here), the third-party vendor aspect of the Capital One data breach has important implications for corporate boards’ cybersecurity oversight responsibilities. The significance of these oversight responsibilities appears even greater in light of the Delaware Chancery Court’s recent decision in Marchand v. Barnhill; as discussed here, the Marchand decision has important implications for corporate boards’ liability exposures arising out of their cybersecurity and privacy oversight responsibilities. On a slightly different note, John Reed Stark also published a separate guest post on this site (here) discussing the intriguing question of whether Amazon itself has any liability for the Capital One hack. Indeed, as Stark notes in his guest post, at least one consumer privacy lawsuit filed in the wake of the Capital One data breach names Amazon as one of the defendants. The post Data Breach-Related Securities Suit Filed Against Capital One appeared first on The D&O Diary. Data Breach-Related Securities Suit Filed Against Capital One syndicated from https://888migrationservicesau.wordpress.com via Tumblr Data Breach-Related Securities Suit Filed Against Capital One |
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