August 2010: Trademark Trial Victory

Send to a friend

Quinn Emanuel won a complete trial victory for Caruso Affiliated and its principal, Rick J. Caruso. In 2008, Caruso opened a mixed retail and residential “lifestyle center” in Glendale, California named “The Americana at Brand.” Just months before The Americana at Brand opened, Fifth Avenue of Long Island Realty, the owner of the “Americana Manhasset” luxury shopping mall in Long Island, sued Caruso claiming that “The Americana at Brand” infringed on Fifth Avenue’s trademarks AMERICANA and AMERICANA MANHASSET. The stakes were high because a loss would have resulted in substantial costs to replace the brick and mortar name prominently displayed throughout the center and, more importantly, the loss of the goodwill associated with the name throughout the greater Los Angeles area. Quinn Emanuel, which had won $74 million for Caruso in a lawsuit against General Growth Properties in 2007, was retained to defend the good name of The Americana at Brand.

Quinn Emanuel tried the case in a six-day bench trial before Judge Leonard Wexler in the Eastern District of New York. On June 15, 2010, Judge Wexler issued his written opinion holding that The Americana at Brand name did not infringe any of Fifth Avenue’s trademarks. Judge Wexler also canceled Fifth Avenue’s AMERICANA trademark based on Caruso’s counterclaims that the name had been abandoned. The next time you are in Los Angeles, stop by The Americana at Brand for a little shopping, grab some dinner, or ride the old-fashioned trolley and be greeted by the bright lights of The Americana at Brand sign, evidence of another Quinn Emanuel victory.

August 2010: Class Certification Denial for Samsung

Send to a friend

The firm recently won major victories—denial of class certification and a voluntary dismissal—for its clients Samsung Electronics Co., Ltd., and Samsung Semiconductor, Inc., in two major antitrust class actions involving allegations of broad price-fixing in the market for flash memory. In re Flash Memory Antitrust Litigation, Case No. C 07-0086 (N.D. Cal. April 15, 2010). The cases, brought by putative classes of direct and indirect purchasers, involved high stakes, given that flash memory is found in numerous products ranging from computer drives to digital camera cards to iPods and given the plaintiffs’ pursuit of treble damages under the antitrust laws.

Adding to the challenges of these cases was the fact that, over the last few years, the plaintiffs’ counsel had filed several other actions alleging price-fixing by semiconductor manufacturers, and had enjoyed consistent success in having classes certified against other major defense firms. In particular, the plaintiffs’ counsel had recently obtained rulings from the Northern District of California certifying classes in cases concerning dynamic and static random access memory (known as DRAM and SRAM), products similar in some respects to flash memory.

Seeking to build on their DRAM and SRAM victories, the same plaintiffs’ counsel moved for class certification in the flash memory cases, but with markedly different results. Quinn Emanuel convinced the Court that plaintiffs had failed to produce any method that could show common impact from an alleged conspiracy to fix prices, even as to the direct purchasers. The Court found that the plaintiffs’ expert witness improperly relied on comparisons of average prices, which “does little more than show that the downward trend in prices is tied to technological advances, which is generally the case in the semiconductor industry.” In addition, the Court found that the plaintiffs’ purportedly class-wide method of determining impact on indirect purchasers actually amounted “to a retailer-by-retailer, manufacturer-by-manufacturer and product-by-product analysis of pass-through,” making the case inappropriate for class resolution. The Court also ruled that state laws allowing a presumption of class-wide impact did not apply because the defendants’ flash memory was built into other products before being purchased by the putative class members. Finally, the Court found that the plaintiffs had failed to define an ascertainable class because it would be difficult to establish whether a particular end-user product contained flash memory sold by a defendant as opposed to another manufacturer.

The result was a total victory denying certification of the indirect-purchaser claims. The court’s ruling accepted each of Quinn Emanuel’s arguments regarding why class certification should be denied. After the ruling, the sole direct purchaser class representative agreed to a voluntary dismissal with prejudice. It is not clear whether the remaining plaintiffs will appeal and risk an adverse ruling by the Ninth Circuit.

August 2010: Employment Trial Victory

Send to a friend

Quinn Emanuel recently won a trial victory in connection with its ongoing representation of Broadcom Founder Dr. Henry T. Nicholas. Dr. Nicholas has had an unbroken record of litigation success in matters in which Quinn Emanuel has represented him.

Quinn Emanuel’s most recent representation involved claims brought by a former Senior Executive Assistant who previously worked in Dr. Nicholas’s home office operation known as The Management Company (“TMC”). The plaintiff claimed that TMC had wrongfully terminated her and that she was owed significant overtime compensation. In pre-trial motion practice, Quinn Emanuel secured Dr. Nicholas’s dismissal on the grounds that he was not the plaintiff’s employer. The plaintiff, therefore, proceeded to trial against TMC only.

The court bifurcated the trial—trying the wrongful termination claim first and the overtime claim second. In the first phase, the jury rejected the plaintiff’s wrongful termination claim after Quinn Emanuel proved that the plaintiff had stopped showing up to work on a regular basis. The plaintiff then waived her right to a jury in the second phase and tried her overtime claim to the court. During the second phase, Quinn Emanuel established that the plaintiff was a manager within the Nicholas business organization and therefore was exempt from being paid overtime compensation. As a result, the court ruled in favor of TMC on that claim as well.

August 2010: IP Trial Victory

Send to a friend

The firm recently obtained a trial victory in a cybersquatting action for DIRECTV. The defendant, Jonathan Shiff, previously ran one of the largest and most successful independent DIRECTV retailers. He also happens to be a lawyer and an active member of the California bar. After his DIRECTV contract was terminated in 2007, Shiff started working as a partner/consultant for another independent DIRECTV retailer. While working with the new DIRECTV retailer, Shiff registered sixty-six domain names using “directv” followed by a city or state name. All of the domain names were registered without DIRECTV’s permission or knowledge and in violation of the DIRECTV retailer agreement, which forbids retailers from using DIRECTV trademarks in domain names.

After the new retailer was terminated for violations of DIRECTV policies unrelated to the domain names, Shiff used the domain names to redirect visitors to a website he created. This new venture claimed to offer products for the digital television conversion program of 2009, including products for customers of DIRECTV and its competitor Dish Network. Upon learning of Shiff’s registration and use of domain names incorporating the DIRECTV trademark, DIRECTV filed a complaint with the World Intellectual Property Organization (“WIPO”) to recover the domains. After being served with the complaint, Shiff informed DIRECTV that he was in bankruptcy and immediately agreed to turn over the offending domains.

DIRECTV filed a proof of claim in the bankruptcy action in the Southern District of California seeking damages for Shiff’s improper registration and use of its trademarks with the bad faith intent to profit. Shiff acknowledged that he used the DIRECTV marks but argued that he acted in good faith under the Anti-cybersquatting Protection Act’s (“ACPA”) safe harbor provision. His defense in the adversary proceeding was that he thought it was permissible to register the domain names when he was affiliated with a DIRECTV retailer and only intended to use the domain names to sell DIRECTV. As to his later use on the website, Shiff claimed he never made any sales, and turned over the domain names as soon as DIRECTV took issue with his registration and use of them. At trial, the Firm demonstrated that Shiff, changed his story repeatedly in each declaration he submitted, in his deposition, and finally in his trial testimony.

After closing arguments, the court took a 15-minute recess before coming back and reading the ruling on the record. The Court rejected each of Shiff’s arguments and returned a verdict in DIRECTV’s favor. The Court found not only that Shiff registered and used 66 domain names in bad faith for purposes of the ACPA, but also found the Firm had proved the higher standard of willfulness. According to the ruling, defendant “clearly used the mark in anticipation of personal profit and did so with the clear understanding that his use of the mark . . . was inconsistent with DIRECTV’s rights, desires, and contractual, oral, and written instructions.” Although DIRECTV did not offer any evidence of actual damages or Shiff’s profits, the Court awarded damages to DIRECTV of $7,000 per domain name for a total of $462,000.

July 2010: Victory in the United States Supreme Court

Send to a friend

On June 21, 2010, in Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., No. 08-1553, Quinn Emanuel won a victory in the U.S. Supreme Court for a Japanese ocean carrier (“K” Line) in a decision that will affect the transportation of trillions of dollars in goods annually in containerized cargo. The Supreme Court clarified the law applicable to shipments under “through” bills of lading providing for ocean transportation of containers that are then loaded onto trains or trucks for inland transportation to the final destination of the goods. The lower courts had been split over whether the inland leg of such transportation is governed by the Carriage of Goods at Sea Act, a relatively flexible statute that governs ocean transportation and allows parties to extend the Act’s terms to inland transportation under through bills of lading, or the Carmack Amendment, a relatively inflexible statute that governs domestic rail and motor carrier transportation. In the “K” Line decision, the Supreme Court held unanimously that ocean carriers do not qualify as rail carriers even when they subcontract for rail transportation and therefore are not governed by the Carmack Amendment, and held 6-3 that the Carmack Amendment does not apply to a rail carrier (co-petitioner Union Pacific) that provides inland transportation under through bills of lading for overseas transportation. The decision is important to the shipping industry because it allows ocean carriers to continue providing through transportation in an efficient manner without being subject to the extensive regulatory requirements governing rail carriers in addition to those governing ocean carriers. In this case, it meant that any suit had to be brought in Tokyo under a forum selection clause.

July 2010: Ninth Circuit Victory for Shell

Send to a friend

While the future of offshore drilling has become uncertain since the blowout of the BP Deepwater Horizon rig in the Gulf of Mexico, the Firm recently prevailed for Shell Offshore Inc. and Shell Gulf of Mexico Inc. in a decision that will allow offshore drilling to proceed in the Alaskan Arctic if the national drilling program resumes. The U.S. Court of Appeals for the Ninth Circuit, in an unanimous memorandum decision, rejected a challenge to approvals by the Minerals Management Service (“MMS”) of Shell’s 2010 exploration plan, which followed from MMS’s conclusion that the exploration plans would not have a significant impact on the environment. The challenges were brought by environmental non-governmental organizations (“NGOs”) that contended that the agency had not complied with the National Environmental Policy Act (“NEPA”) or the Outer Continental Shelf Lands Act (“OCSLA”). Shell successfully intervened in these proceedings in support of the MMS, filed a brief on the merits, and participated in oral argument alongside attorneys from the Department of Justice. Briefing was completed in late April—the same day as the BP spill in the Gulf of Mexico—and argument was held in early May, as the crisis in the Gulf was escalating and public opinion of offshore drilling, generally, and the MMS, in particular, were taking a serious hit.

Nonetheless, the Ninth Circuit panel decisively upheld Shell’s exploration plan only one week after argument. The Court held that “MMS has met its obligations under NEPA to take ‘a hard look at the consequences of its actions,’ to ‘base[] its decision on a consideration of the relevant factors,’ and to ‘provide[] a convincing statement of reasons to explain why a project’s impacts are insignificant.’” Employing a standard of deference to the agency, the court found that the petitioners had failed to prove that any of MMS’s conclusions was “‘so implausible that it could not be ascribed to a difference in view or product of agency expertise.’”

July 2010: Summary Judgment of Invalidity for Patents Asserted Against Bio-Rad

Send to a friend

On May 26, 2010, the District Court for the Central District of California provided a victory for the firm’s clients Bio-Rad Laboratories, Inc. and ARUP Laboratories, Inc., ordering summary judgment of invalidity of the claims of two patents owned by Billups-Rothenberg, Inc., a San Diego biotechnology company. Billups Rothenberg, Inc. v. Associated Regional and University Pathologists, Inc., No. 08-cv-01349. The two patents at issue concerned DNA-based genetic testing for mutations associated with hereditary hemochromatosis, an inherited disorder characterized by excessive iron stores. Hereditary hemochromatosis is one of the most common inherited disorders among people of Northern European descent.

The plaintiff, Billups-Rothenberg, Inc., alleged that our clients infringed the patents by offering genetic testing services for mutations in the hemochromatosis gene (HFE). Billups-Rothenberg asserted the alleged infringement was willful and sought enhanced damages and injunctive relief.

Following claim construction, having obtained key admissions from the inventors in deposition, Quinn Emanuel moved for summary judgment that both patents were invalid. As to the first patent, Quinn Emanuel contended that the patent failed to satisfy the written description and enablement requirements set forth in the Patent Act. The Federal Circuit had recently clarified its jurisprudence regarding these requirements in its en banc opinion, Ariad Pharms., Inc. v. Eli Lilly & Co., 598 F.3d 1336 (Fed. Cir. 2010). Quinn Emanuel argued that the first patent was invalid because, among other reasons, Billups-Rothenberg could not use the patent laws to “preempt the future” by claiming rights to DNA sequences for genetic mutations that were literally unknown at the time of the patent filing. With regard to the second patent, Quinn Emanuel successfully asserted that this later patent was invalid over prior art, which included an issued patent that disclosed the DNA sequence for the mutation that was to be detected by the claimed method.

Just weeks after the summary judgment hearing, the court granted Quinn Emanuel’s motion and invalidated the claims of both patents.

July 2010: Dismissal and Rule 11 Sanctions Against Eon-Net

Send to a friend

Quinn Emanuel recently won a complete victory for Flagstar Bank in a patent infringement case brought by Eon-Net, L.P. Eon-Net’s complaint alleged that Flagstar’s online banking system infringed its patents for an “information processing technology.” The firm’s initial investigation revealed that Eon-Net was in the habit of filing the identical infringement complaint against any company conducting business online. After filing each complaint, Eon-Net immediately negotiated a nuisance settlement, thus collecting small sums from each defendant while leaving Eon-Net’s theories of infringement and validity untested. Believing Eon-Net’s claims to be baseless, Flagstar chose to litigate those claims rather than to settle them for a small fraction of the expected litigation costs.

Once the decision to fight Eon-Net was made, Quinn Emanuel prevailed on every issue raised in district court. We transferred the action from New York to the Western District of Washington. We bifurcated discovery so that claim construction issues could be resolved before any discovery on Flagstar’s “e-commerce” business could be taken. And we won a decisive victory on claim construction, prompting Eon-Net to propose that a consent judgment of non-infringement be entered by the court.

After judgment was entered, the district court granted our motions for Rule 11 sanctions and for an award of attorneys’ fees and costs under the “exceptional case” statute. In granting those motions, the district court found that Eon-Net’s claim construction positions were baseless, that Eon-Net presented “multiple frivolous arguments to the Court,” that Eon-Net destroyed relevant evidence, and that Eon-Net brought its case for the improper purpose of collecting a nuisance settlement. Flagstar was awarded the full amount of the attorneys’ fees and costs that it incurred by litigating the case.

June 2010: Tyco Jury Trial Win

Send to a friend

The firm recently won a patent infringement jury trial for Tyco Healthcare Group LP against Applied Medical Resources Corp. in the Eastern District of Texas. In this case, Tyco accused a number of Applied’s surgical trocar products of infringement. Confronted with vigorous pre-trial efforts and advocacy, Applied modified the accused products and removed them from the market before the trial. Nonetheless, after a two-week trial, the jury found every accused product to infringe. The jury awarded Tyco $4,810,389 in damages, out of Applied’s total profit of $6,734,544 on the infringing sales. The Quinn Emanuel trial team was led by partners Peter Armenio and Faith Gay.

This trial was the latest chapter in an ongoing series of patent infringement litigation between Tyco and Applied in the surgical trocar area. Since Tyco turned to Peter Armenio for assistance, they are 4-0 against Applied. That record includes three defense wins for Tyco against Applied in the Eastern District of Texas, in addition to the plaintiff’s side win detailed here.

June 2010: Dismissal of Defamation Suit against Gartner, Inc.

Send to a friend

The firm recently won dismissal of all claims in ZL Technologies, Inc. v. Gartner, Inc., CV 09-023293 JF(PVT) (N.D. Cal. May 3, 2010), a defamation suit against our client Gartner, Inc., the industry-leading information technology research and advisory company. Among Gartner’s products is its signature “Magic Quadrant” report, in which it ranks leading vendors within a given market. The Magic Quadrant Reports place vendors within one of four quadrants: “leaders,” “challengers,” “visionaries,” and “niche players.” Plaintiff ZL Technologies, Inc. brought suit against Gartner, alleging that its rank as a “niche player” in the Magic Quadrant report for Email Active Archiving solutions constituted defamation, trade libel, and related torts. ZL sought $130 million in compensatory damages, $1.3 billion in punitive damages, as well as injunctive relief requiring Gartner to cease “disparaging” ZL and its products.

ZL’s basic contentions were that Gartner’s ranking lacked a factual basis and was influenced by Gartner’s alleged bias in favor of larger, more established companies. Quinn Emanuel moved for dismissal on the ground, among others, that the First Amendment protected Gartner’s Magic Quadrant reports as an expression of opinion and that ZL Technologies’ allegations were, on their face, not credible – even in the context of a motion to dismiss. The court agreed. Finding that Gartner “unambiguously presents the [Magic Quadrant] results as a reflection of its subjective ‘views’ or ‘opinions,”’ the court held Gartner’s reports to be protected speech under the First Amendment. In so holding, the court rejected ZL’s arguments that Gartner’s alleged use of a “rigorous mathematical model” to calculate the Magic Quadrant rankings transformed the Magic Quadrant reports from protected expressions of opinion to actionable statements of fact. The court also sided with Quinn Emanuel in holding that Gartner need not make a full disclosure of the factual basis for its opinion in order to come within the protection of the First Amendment, noting that “[i]f a defendant had to provide support for each fact forming the basis of its opinion in order to be entitled to First Amendment protection, an exhaustive and unreasonable inquiry into the materiality of facts disclosed or undisclosed necessarily would ensue in virtually all defamation and trade libel cases.” All claims were dismissed with prejudice.

June 2010: Complete Dismissal of Antitrust Claims against Honeywell

Send to a friend

The firm recently won dismissal, on behalf of client Honeywell International, Inc., of all claims filed by a disgruntled former distributor in Integrated Systems and Power, Inc. v. Honeywell International, Inc., 09 CV 5874 (RFP) (S.D.N.Y.). In 2009, Honeywell terminated the plaintiff as an authorized distributor of Honeywell’s fire safety systems for buildings. The plaintiff responded by filing antitrust claims in New York federal court, alleging that Honeywell had conspired with other distributors to foreclose competition from the plaintiff.

The Court’s decision is something of a primer on the circumstances when a distributor can invoke the antitrust laws against a manufacturer. The Court found, first, that the alleged conspiracy between Honeywell and its distributors could only be a vertical, rather than a horizontal, restraint of trade – meaning that the conduct could not constitute a per se violation of the antitrust laws and thus would need to be evaluated under the so-called “rule of reason.” In this regard, the Court provided a detailed analysis distinguishing this case from United States v. General Motors Corp., 384 U.S. 127 (1966), which had found a horizontal conspiracy where (i) GM’s dealers had themselves actively policed the conspiracy at issue (as opposed to here, where the only alleged action to enforce the conspiracy was Honeywell’s exercise of its contractual right to terminate the plaintiff as a distributor), and (ii) it was the agreement among the dealers to cease doing business with discounters that froze the discounters out of the market (unlike here, where the other Honeywell distributors were not alleged to have boycotted the plaintiff, and at most had complained to Honeywell about the plaintiff’s conduct). The Court also found that the complaint’s allegations were insufficient to suggest that the other Honeywell distributors had agreed with each other not to submit competitive bids.

As to a rule of reason analysis, the Court found insufficient the plaintiffs’ definition of a relevant market as “the sale, installation and servicing of NOTIFIER fire-detection and alarm system products.” The Court explained that “[c]ourts in this district have consistently held that [a] single brand name product cannot define a relevant market.” The Court noted as well that the plaintiff had failed to allege either a high market concentration for NOTIFIER products or the lack of substitute brands.

The Court then found that the plaintiff had failed adequately to allege an adverse effect on competition, as opposed to mere injury to the plaintiff itself. The Court observed that the complaint did not contain any allegations that a lack of competitive bidding for NOTIFIER service and maintenance contracts would have any effect on the overall market for fire-detection systems, or that, for example, only authorized NOTIFIER distributors could service NOTIFIER systems.

May 2010: Summary Judgment of Non-Infringement in Texas

Send to a friend

Quinn Emanuel won summary judgment of non-infringement for Google and AOL in Performance Pricing v. Google et al. in the Eastern District of Texas. In 2007, an Acacia plaintiff, represented by Dovel and Luner, filed suit against all major online search engines, including Google, AOL, Microsoft and Yahoo!, accusing their online advertising auction systems of infringing U.S. Patent No. 6,978,253. In particular, the plaintiff accused Google’s AdWords auction system, which is used by Google to sell advertising space on search results pages for Google.com and partner sites. AOL uses a white label version of Google Adwords, called AOL Search Marketplace.

The alleged innovation of the ‘253 patent is to offer buyers the opportunity to pay a lower price for a product based on the buyer’s performance in a collateral “price determining activity” or “PDA.” For example, a buyer might obtain a discount on the purchase of a Mark McGwire rookie card based on his level of success in a “PDA” such as a trivia quiz or game. All defendants other than Google and AOL settled before the claim construction hearing.

In September 2009, the court issued a claim construction order favorable to the defendants. Consistent with the defendants’ proposal, the court found that a PDA “is used to determine the price paid for the product or service and is not otherwise part of a sales transaction.” The defendants then moved for summary judgment of non-infringement because, among other grounds, there is no PDA in AdWords. Shortly thereafter, the case was transferred to Judge Randall R. Rader of the Federal Circuit sitting by designation in the Eastern District of Texas.

On March 18, 2010, Judge Rader issued an order granting summary judgment of non-infringement in favor of Google and AOL. He agreed that there is no PDA in AdWords. The plaintiff had argued that the advertiser’s creation and submission of ad text in AdWords is a PDA. However, the court found that the creation and submission of ad text is otherwise part of the AdWords sales transaction and, thus, cannot be a PDA under the court’s construction. The court explained that, in AdWords, the ad text defines the product itself. Additionally, the ad text may influence the selection process for the ad space awarded to the advertiser. The court further noted that the plaintiff’s arguments to try to “create an issue of fact” were “non-sequitors,” and concluded that “AdWords is not at all akin” to the patent. This marked the firm’s fifth win in the Eastern District of Texas this year.

May 2010: Complete Dismissal for AIG

Send to a friend

The firm recently won complete dismissal of claims against American International Group (“AIG”) and related defendants. The plaintiffs were current and former investors who purchased variable annuities through SunAmerica, an AIG subsidiary. Variable annuities combine elements of mutual funds and life insurance: investors purchase various funds, similar to mutual funds, which fluctuate according to the market value of their underlying investments. Variable annuities also include a death benefit, which adjusts according to the annuity agreement and the value of the underlying funds.

Following the market fluctuations of 2008, the plaintiffs sold most or all of the annuity funds they held through SunAmerica. They then sued AIG, dozens of its subsidiaries and affiliates, and many of their executives. The plaintiffs sought to proceed under California’s Unfair Competition Law (“UCL”), which allows for injunctive relief against defendants who commit illegal, unfair or deceptive business practices. The plaintiffs alleged that the AIG defendants had violated California’s UCL by committing various alleged wrongs (which they principally drew from allegations in unrelated litigation) and that the alleged wrongs had harmed them by decreasing both the value of their annuities and the likelihood that they would eventually receive their death benefits.

The plaintiffs filed two complaints, which were consolidated in the Los Angeles County Superior Court. The complaints sought sweepingly broad relief that would involve the court, and therefore the plaintiffs’ counsel, in wide-ranging oversight and regulation of AIG. The plaintiffs also moved for a preliminary injunction against the AIG defendants. Once again, the plaintiffs sought broad relief including, among many other things, the deposit of cash or cash equivalents sufficient to cover every deposit by every annuity holder in California.

Quinn Emanuel demurred to the complaints on two main grounds. First, the firm argued that plaintiffs had no standing to assert UCL claims, which can be filed only by plaintiffs who have suffered an actual injury such as a loss of money or property arising from the allegedly illegal, unfair or deceptive business practices. Because the plaintiffs had received every penny to which they were entitled under their annuity contracts, the firm argued that they had not alleged and could not prove any actual harm. The firm also argued that the plaintiffs’ claims regarding their death benefits were inherently speculative because no loss had so far occurred. There was therefore no actual injury. Finally, the firm argued that any injury the plaintiffs had suffered resulted only from their own actions.

Second, the firm argued that the court should decline to hear the case under the doctrine of UCL abstention, which allows a court to abstain from exercising its jurisdiction if adjudicating the case would involve the court in regulatory, legislative and political oversight.

The court agreed with Quinn Emanuel on both grounds, sustaining the demurrers without leave to amend. The court held that plaintiffs’ claims regarding their death benefits were “too speculative and conjectural to support a UCL claim,” and that their other claims alleged only damage that, to the extent it existed at all, was entirely self-inflicted and therefore could not be asserted against AIG. With respect to abstention, the court declared that even if the plaintiffs had shown standing, the court would abstain from hearing the case. Without an actionable complaint, the preliminary injunction was moot, and the case will be dismissed in full.

May 2010: Favorable Settlement with JPMorgan

Send to a friend

The firm recently negotiated a favorable settlement with JPMorgan on behalf of the Joint Provisional Liquidators of Parkcentral Global Hub Limited. The settlement came after Justice Lowe of the New York Supreme Court vacated an order of attachment that he had previously awarded to JPMorgan.

In the wake of the financial crisis in the fall of 2008, Parkcentral, a hedge fund affiliated with Ross Perot, had significant liquidity problems. One day before Parkcentral filed a petition for liquidation in Bermuda, JPMorgan brought suit against Parkcentral in New York state court and obtained an ex parte order of attachment of Parkcentral’s New York-based assets. Parkcentral had a custody account with JPMorgan’s London branch that held well over $200 million in cash and securities. Just days after obtaining the order of attachment, JPMorgan transferred the cash and securities from that London account to a New York account in JPMorgan’s name and turned the assets over to the New York Sheriff. The assets constituted almost the entire Parkcentral estate. Absent vacatur of the order of attachment, Parkcentral’s other creditors had little chance of making any kind of significant recovery in the liquidation proceeding.

Quinn Emanuel challenged the confirmation of the ex parte order of attachment on the grounds that the court lacked jurisdiction to attach the London-based cash and securities and JPMorgan had acted inequitably in transferring those assets to New York to subject them to attachment. The court refused to confirm the order of attachment; instead, it referred the matter to a Special Referee.

The firm then sought discovery from JPMorgan. By the time the parties were before the Special Referee, Quinn Emanuel had obtained documents and deposition testimony that established that JPMorgan had misled the court about its need for the order of attachment and the location of Parkcentral’s assets. Following briefing and argument, the Special Referee recommended that the order of attachment be vacated because (1) JPMorgan had “unclean hands” and was not entitled to equitable relief; and (2) there was no “continuing need” for the order of attachment because, in light of the liquidation proceeding, JPMorgan could easily enforce any award in its favor in Bermuda and did not need an attachment order to ensure that those assets would be available to satisfy a judgment.

Justice Lowe confirmed the Special Referee’s report and ordered that the attachment order be vacated and the cash and securities transferred to Parkcentral’s liquidators in Bermuda. He also ordered that JPMorgan pay Parkcentral’s costs and fees as well as statutory interest on the attached assets. Shortly after Justice Lowe’s ruling, JPMorgan initiated settlement negotiations and ultimately agreed to a settlement in the amount that it would have received had it taken its claim to the Bermuda liquidation proceeding. The remainder of the attached assets—totaling over $100 million—were transferred to Bermuda for distribution to Parkcentral’s creditors. The effect of Quinn Emanuel’s work was that the creditors received more than a 30 percent recovery on their claims, rather than almost nothing.

May 2010: Astonishing Confirmation of Chapter 11 Bankruptcy Plan Thwarted Despite Overwhelming Votes

Send to a friend

In a ruling issued April 1, 2010, the United States Bankruptcy Court for the District of Delaware sustained objections raised by the firm on behalf of an ad hoc committee of equity holders and denied confirmation of the chapter 11 plan proposed by Spansion, Inc. and certain of its affiliates. Specifically, the Bankruptcy Court agreed that the bankruptcy plan, which included a substantial equity incentive plan for the Debtors’ future senior management—without any distribution to subordinated creditors and existing shareholders—was not proposed in good faith. Despite the plan’s overwhelming acceptance by creditors, the Bankruptcy Court refused to confirm it.

The firm was retained in October 2009 by a group of investment funds holding subordinated debt and common stock of the Debtors. They believed that the Debtors were undervaluing the company, and sought assistance in challenging the valuation. After approving the disclosure statement for the Debtors’plan of reorganization, the Bankruptcy Court set a schedule for confirmation of the plan. Through a series of depositions and document productions, Quinn Emanuel concluded that the Debtors’senior management had been engaged in an effort to set the value of the reorganized company at a depressed level so that the new common stock distributed under the plan to senior management would be far more valuable. In addition, although it is commonplace for companies emerging from chapter 11 to have in place management incentives in the form of common stock and warrants, the Debtors’ plan was more generous than any other in recent history. 

At the hearing on confirmation, the Debtors touted the fact that every creditor class “in the money” had overwhelmingly accepted the plan. On cross examination, Quinn Emanuel obtained key admissions from the Debtors’ expert and other witnesses establishing that: (1) the Debtors’ lead financial advisor had instructed the Debtors to take a very aggressive position with respect to the equity incentive program; (2) the Debtors had convened a meeting of senior management and explained to them how a depressed value of the company upon emergence from bankruptcy would lead to greater financial rewards for senior management; and (3) senior management had handpicked the comparables to be used by their compensation "expert" in opining that the Debtors' equity plan was reasonable and within market parameters.

Nearly a month after the conclusion of the five-day confirmation hearing, the Bankruptcy Court issued its ruling denying confirmation of the Debtors' plan.  The Bankruptcy Court held that the Debtors had failed to demonstrate that the proposed equity incentive plan was "usual or reasonable for this market at this time."  Moreover, in espousing the legal standard in what appears to be a case of first impression, the Bankruptcy Court ruled that to confirm a chapter 11 plan with an equity incentive component for management, "the Debtor must devise an incentive scheme that garners universal support from its constituencies or is demonstrably reasonable and within the market," a standard the Debtors failed to satisfy.  The Bankruptcy Court also ruled that to compel releases by subordinated creditors and shareholders under a chapter 11 plan, there must be sufficient value given to the dissenting creditors in exchange for the releases.  As a result, Quinn Emanuel has staked out new grounds for opposing confirmation of plans tainted by management overreaching.

March 2010: Firm Obtains Preliminary Injunction Blocking $200 Million Loan Transfer by JPMorgan

Send to a friend

The firm recently secured a preliminary injunction preventing JPMorgan from transferring a $200 million, or 90%, interest in a loan JPMorgan had made to the firm’s client, Cablevisión. Cablevisión is the cable television affiliate of Mexico’s Grupo Televisa, the world’s largest Spanish-language media company. The intended recipient of the transfer was a bank controlled by Carlos Slim Helu (“Carlos Slim”)—listed by Forbes as the world’s wealthiest individual—and his family. The grant of the injunction was an important vindication of contractually bargained-for veto rights.

In December 2007, Cablevisión borrowed $225 million from JPMorgan pursuant to a Credit Agreement. While it was understood that JPMorgan would syndicate the loan, the Credit Agreement gave Cablevisión the express right to veto any loan “assignments”—defined as a transfer of the lender’s rights and obligations. The Credit Agreement distinguished loan “assignments” from loan “participations,” where an interest in the loan is sold without any transfer of lender rights or duties. Cablevisión’s contractual veto right was an important counterweight to JPMorgan’s power as lender to enforce, or grant waivers to, various covenants in the Credit Agreement restricting Cablevisión’s ability to expend capital or take on additional debt without the lender’s approval.

In 2009, JPMorgan asked for Cablevisión’s consent to assign 90% of the loan, or a $200 million interest, to Banco Inbursa, a Slim family-controlled bank in Mexico. Cablevisión declined to give that consent, noting that the Slim family also controlled land telephone and mobile phone companies, such as Telmex, that compete directly with Cablevisión and GrupoTelevisa in the emerging Mexican “triple play” market for combined packages of telephone, television and internet services. The assignment would have given Banco Inbursa, and thus the Slim family, access to Cablevisión’s most sensitive business information, and the critical power to grant or deny waivers to the Credit Agreement’s various restrictive covenants.

After failing to obtain Cablevisión’s consent, JPMorgan secretly entered an agreement with Banco Inbursa that was labeled as a “loan participation,” but included features that made the arrangement more like an assignment as defined in the Credit Agreement—including provisions giving Banco Inbursa the right to request and receive nearly unlimited information from Cablevisión and other provisions, not included in JPMorgan’s standard loan participation agreement, giving Inbursa the right to replace JPMorgan as lender in the event of a default by Cablevisión, as well as rights to share in fees JPMorgan earned as lender.

United States District Judge Rakoff of the Southern District of New York held that “[t]he facts presently before the Court make out a very strong showing that JPMorgan, after failing to obtain Cablevisión’s consent to an assignment of 90% of the loan to Inbursa, negotiated an agreement with Inbursa that, while it took the form of a participation, gave Inbursa much of the substance of the forbidden assignment and purposely undercut what JPMorgan knew the assignment veto was designed to prevent. Such an end-run, if not a downright sham, is not permissible if, as here, it does away with the ‘fruits’ of the contract.” The court agreed that “JPMorgan thereby violated, at a minimum, the covenant of good faith and fair dealing automatically implied by law in the Credit Agreement.” Invoking the Second Circuit’s 2003 ruling in Wisdom Import Sales Co. v. Labbatt Brewing Co., that violation of a contractually bargained-for veto right in and of itself can constitute irreparable harm justifying a preliminary injunction, Judge Rakoff concluded that JPMorgan’s transfer agreement “emasculate[d] Cablevisión’s right to veto assignments of the loan, and this sort of injury is irreparable as a matter of law.”

March 2010: Arbitration Victory for DIRECTV

Send to a friend

The firm recently won a complete victory for DIRECTV in an arbitration brought against former DIRECTV retailer NWS Corp. (“NWS”). NWS was engaged in a novel and complex fraudulent scheme to provide illegal programming to large commercial institutions, such as prisons, universities, hospitals and military bases. Most of the projects were under state and federal contracts, which were typically awarded to the lowest bidder who met the bid requirements. Pursuant to its contract with DIRECTV, NWS was required to charge those institutions based upon a national Rate Card set rate by DIRECTV for all programming reflecting the programming channels selected and the number of rooms to which the programming was delivered. NWS would receive a commission from DIRECTV for the programming and was also allowed to charge the institutions a reasonable fee for installing and servicing the equipment.

DIRECTV learned that NWS began winning a number of bids by submitting fraudulent programming contracts to DIRECTV. By using programming contracts intended for limited viewing environments and misrepresenting the nature and locations where this programming was being delivered, NWS was able to obtain the most expensive programming at a heavily discounted rate, which it then sold to the customer at a significant profit. For example, NWS would falsely represent to DIRECTV that programming it was ordering was going to a few private offices when, it was being distributed to thousands of dormitory rooms or prison cells, thus allowing NWS to underpay DIRECTV by hundreds of thousands of dollars each month in programming fees.

When DIRECTV discovered that NWS was engaged in this scheme at a single property, it terminated NWS and contacted the property owner to help it change to the proper account type. Through an intensive investigation, DIRECTV later learned that NWS was engaged in the same scheme at numerous properties across the country.

In February, 2009, Quinn Emanuel filed a demand for arbitration pursuant to the parties’ contract on behalf of DIRECTV for breach of contract, fraud, unfair business practices, violations of the Cable Communications Policy Act (47 USC §605(a)), unjust enrichment and conversion. NWS counterclaimed for breach of contract, unfair business practices, and tortious interference with contract. NWS argued that it was improperly terminated by DIRECTV and that the contracts did not forbid NWS’s behavior and that DIRECTV knew and approved of the manner in which it was using these contracts. It also argued that DIRECTV ultimately terminated NWS at the behest of one of NWS’s largest competitors as the result on corporate and political pressure. In late January, after a seven-day hearing, the Arbitrator found for DIRECTV on every affirmative claim and against NWS on all counterclaims. The arbitrator held that DIRECTV is entitled to millions of dollars in damages, attorneys’ fees and interest, the exact amount of which will be determined after the final hearing on these issues in May.

March 2010: Consumer Class Action Victory

Send to a friend

The Firm recently obtained a dismissal of a consumer class action brought against its client, a large food manufacturer. The plaintiff claimed that the use of High Fructose Corn Syrup (“HFCS”) violated California’s unfair competition statute and the Consumer Legal Remedies Act--even though the ingredient was disclosed on the product’s label--because the product was advertised as being “all natural.” In many circumstances the FDA regulates how such terms may be used. In this instance, the method of production used to produce the HFCS complied with the FDA’s guidance. Moreover, discovery showed that the plaintiff knew the product contained HFCS, and for many years had selected and consumed the product because she enjoyed it without suffering any health consequences whatsoever from it. Shortly after the plaintiff’s deposition, she allowed the lawsuit to be dismissed without further litigation.

February 2010: Defense Victory for Google in Its First Patent Trial – in Marshall, Texas No Less

Send to a friend

The firm won a complete defense victory for Google in the Eastern District of Texas, in Google’s first patent trial. The plaintiff, Function Media LLC, alleged that Google’s highly successful AdSense for Content and AdSense for Mobile online products infringed three patents involving a system and method for creating and publishing customized electronic advertisements. Function Media, represented by the law firm of Susman Godfrey L.L.P., is a husband and wife co-owner and co-inventor team living in East Texas; they sought over $600 million in reasonable royalty damages. After a one-week trial, the jury found that Google did not infringe any of the asserted patent claims and that each and every asserted claim is invalid in light of the prior art.

Quinn Emanuel took over the case from another firm only five months before trial, less than one month before the claim construction hearing, and long after most of the fact witnesses had been deposed. In the short time before the claim construction hearing, the firm narrowed the important claim construction issues and negotiated several stipulated constructions. After the hearing, the Court found that one of Function Media’s three asserted patents was indefinite and therefore invalid.

At trial, Quinn Emanuel argued that Google’s accused advertising systems did not infringe either of the remaining two asserted patents, and called several Google employees to testify about the inner workings of Google’s online advertising systems. Using demonstratives and documentation, Google’s witnesses explained to the jury how Google’s highly complex AdSense systems operate in a manner that is distinct from the manner claimed by the asserted patents. The jury rejected Function Media’s attempts to discredit Google’s witnesses by arguing that they were biased employees.

To support its argument that Function Media’s patents are invalid, Quinn Emanuel presented expert testimony and called various witnesses to testify about two key prior art advertising systems—AdForce and DoubleClick. The witnesses testified that these systems, which were publicly available before the critical date of Function Media’s patents, disclosed the same functionality claimed in the two asserted patents. To further support its argument, Google presented documentary evidence showing that these advertising systems practiced Function Media’s claims before the critical date. The jury rejected the testimony of Function Media’s expert, who opined that the asserted patents were novel.

Function Media attempted to support its demand for over $600 million in damages by presenting expert testimony that relied on the value of various agreements that Google had entered into. Quinn Emanuel attacked Function Media’s position by showing that the consideration Google received as part of those agreements was fundamentally different from and far exceeded the value of Function Media’s patents. During the cross-examination of the inventors of Function Media’s patents, Quinn Emanuel also showed that the inventors’ own advertising product was a failure in the marketplace. United States Magistrate Judge Charles Everingham presided over the trial in Marshall, Texas.

February 2010: Class Action Victory

Send to a friend

A recent order denying class certification dealt the final major blow to a class action filed against the firm’s client, Barnes & Noble Booksellers, Inc. Barnes & Noble was accused of various violations of the Labor Code, including failure to provide meal breaks and rest breaks and failure to pay overtime.

Plaintiffs claimed that Barnes & Noble had a widespread practice of doctoring employees’ time entries to make it appear as if a break was taken when it was not. Despite these allegations, Quinn Emanuel elicited damaging testimony from plaintiff’s proposed class representative, a former Barnes & Noble employee, that Barnes & Noble’s written meal break, rest break and overtime policies complied with California law, and that plaintiff himself had never worked off the clock. The firm marshaled dozens of declarations from proposed class members and their supervisors that destroyed plaintiff’s premise that Barnes & Noble systematically denied its employees meal breaks, rest breaks or overtime pay. Further, the firm demonstrated that plaintiff’s allegations of doctored time entries were demonstrably false given the constraints of Barnes & Noble’s timekeeping system.

Plaintiff’s desperation tactics did not end there. At the hearing on plaintiff’s motion, plaintiff unveiled a new class definition never briefed by the parties. Plaintiff also implored the Court to grant plaintiff leave to submit statistical evidence regarding its claims or, in the alternative, to stay the Court’s ruling pending the California Supreme Court’s decision in a related case. The Court rejected each of plaintiff’s offers. The Court denied certification in its entirety, ruling that plaintiff failed to satisfy his burden of demonstrating that common issues predominated over individual issues, and that a class action was a superior method of adjudicating plaintiff’s claims. The Court also denied plaintiff’s request to stay its ruling.

January 2010: Complete Dismissal of Patent Infringement Suit against Cisco

Send to a friend

On December 30, 2009, a District Court in the Eastern District of Texas provided a complete victory for the firm’s client Cisco Systems in ESN, LLC v. Cisco Systems, Inc., No. 5:08-cv-20, a closely watched case involving a patent on a switching technology related to Voice over Internet Protocol (“VoIP”) telephony issued to Gregory Girard. The plaintiff, ESN, a company formed by Mr. Girard, alleged that the patent was infringed by several of Cisco’s Integrated Services Routers and sought both an injunction and damages.

The hard-fought case was litigated in both the District Court and in the Patent Office through reexamination. In the Patent Office, Cisco obtained multiple rejections of the patent’s claims. Quinn Emanuel ultimately obtained victory before the District Court by establishing that ESN never owned the patent it asserted. Through diligent investigation and third-party discovery, Quinn Emanuel uncovered an employment agreement that Mr. Girard had drafted and entered into with a company he had previously founded, Iperia, Inc., to develop application servers for VoIP networks. That agreement automatically assigned to Iperia, among other things, all developments Mr. Girard conceived of during his employment that were related to Iperia’s business or used its proprietary information. Cisco then purchased from Iperia its ownership interest in the patent.

During Mr. Girard’s subsequent deposition, he conceded that he conceived of the invention during his employment with Iperia. Mr. Girard contended, however, that he had come to an agreement with Iperia’s former CEO that the employment agreement was inoperative, that the invention was not related to Iperia’s business, and that he could retain ownership of the invention. Numerous Iperia documents Cisco discovered, however, showed that the patent obtained by Girard, and asserted by ESN in the District Court, was related to Iperia’s business.

Quinn Emanuel moved to dismiss ESN’s complaint on the ground that the invention had been automatically assigned to Iperia and that, as a result, ESN never held title and lacked standing to sue. In its opposition, ESN argued that Mr. Girard had made the invention in his spare time and that it was unrelated to Iperia’s business or proprietary information. It filed declarations from Mr. Girard and Iperia’s former CEO stating that they had discussed the invention during Mr. Girard’s employment and come to the conclusion that Iperia did not own it.

After extensive briefing and oral argument, the District Court agreed with Cisco and Quinn Emanuel, held that ESN did not own the patent, and dismissed the case. The court found that the
overwhelming documentary evidence established that the patent was related to Iperia’s business, its products, and its intellectual property and that Mr. Girard had relied on Iperia’s proprietary information. The court reasoned that a finding that the patent was not related to Iperia’s business “would slice the scope of Iperia’s business too thin.” The court held that ESN’s declarations were entitled to “limited interpretive weight” and could “not override the weight of the evidence to the contrary.” Accordingly, the Court granted Cisco’s motion to dismiss, found that ESN lacked standing to assert its patent infringement claim, and entered judgment in Cisco’s favor.

The District Court’s ruling is a major victory for Cisco.

January 2010: Defense Victory for Ask.com in Delaware

Send to a friend

The firm recently obtained a favorable settlement on behalf of IAC Search & Media, Inc. (“IAC”) in a patent infringement suit in the U.S. District Court for the District of Delaware. The plaintiff’s patent covered systems and methods for presenting thumbnail images of web sites, and the plaintiff claimed that this patent was infringed by the “Binoculars” feature of IAC’s Ask.com search engine. The Binoculars feature allows an Ask.com user to call up preview images of the web pages that appear, along with hyperlinks, on an Ask.com search results screen.

During claim construction, Quinn Emanuel convinced the court that the central claims of the patent should be construed as requiring a thumbnail image of a different web page from the web page represented by a hyperlink in the search results screen. This favorable claim construction eliminated most of IAC’s potential exposure. Quinn Emanuel then moved for summary judgment against certain other claims of the patent on a divided infringement theory, since the accused Binoculars product required the participation of other parties to fully perform these claims. After initially rejecting the divided infringement defense, the court reversed itself two weeks later and granted summary judgment of non-infringement on these claims. With most of plaintiff’s requested damages barred by the claim construction ruling and most of its asserted claims barred by the divided infringement ruling, Quinn Emanuel was able to settle the case on very favorable terms.

January 2010: Dismissal of RICO Charges & Criminal Forfeiture Allegations: 59-Count Case

Send to a friend

The firm recently obtained a remarkable outcome for client George Torres in a serious federal criminal case. In 2007, Mr. Torres – the founder of a highly successful chain of supermarkets in Los Angeles – was charged in a 59-count RICO indictment with crimes ranging from political corruption to tax fraud to solicitation to murder. The charges carried a potential term of life imprisonment, and the indictment sought to forfeit $110 million in assets. Mr. Torres was placed in pretrial detention, where he remained until after trial.

Quinn Emanuel took over defense of Mr. Torres’ case in January 2009, just two months before his scheduled trial. The firm immediately began questioning whether the government was satisfying its constitutional obligations to provide exculpatory and impeachment evidence to the defense. Based on those questions, the firm brought a pre-trial motion to dismiss for government misconduct, which was denied. At the same time, Quinn Emanuel brought 20-plus motions in limine seeking to pare down the government’s bloated case, which alleged misconduct reaching back to the mid-1980s. Several of the motions were granted, resulting in the exclusion of many pieces of irrelevant evidence.

At trial Quinn Emanuel obtained acquittals from the judge (pre-jury deliberation) and the jury on multiple serious RICO charges. Unfortunately, the jury found Mr. Torres guilty of other serious RICO charges. Thereafter, Quinn Emanuel brought post-trial motions challenging the jury verdicts, including motions which again argued that the government had failed to honor its obligations to produce exculpatory and impeachment evidence. Based on the motions, the judge granted an evidentiary hearing. Immediately before the hearing, the government informed Quinn Emanuel and the Court that it was dismissing the RICO charges, with prejudice, based on evidence of government misconduct and the withholding of exculpatory and impeachment evidence. Mr. Torres was freed the same day, nearly two years after he had first been taken into custody.

Following the dismissal of the RICO case, Quinn Emanuel brought additional motions attacking the guilty verdicts on the remaining, non-RICO charges in the case (which alleged tax fraud, honest services fraud, and immigration violations). The government opposed the motions, but Quinn Emanuel prevailed, winning a motion for a new trial based on the argument that the inflammatory RICO evidence had caused prejudicial spillover on the remaining counts. Thereafter, Mr. Torres reached agreement with the government, and in mid-December 2009 pled guilty to a single charge of causing his company to fail to withhold $1,800 in payroll taxes. Under the terms of the agreement, Mr. Torres was sentenced to time served.

December 2009: QE Obtains Complete Dismissal of Patent Infringement Suit Against Cisco

Send to a friend

On December 30, 2009, a District Court in the Eastern District of Texas provided a complete victory for Quinn Emanuel’s client Cisco Systems in ESN, LLC v. Cisco Systems, Inc., No. 5:08-cv-20, a closely watched case involving a patent on a switching technology related to Voice over Internet Protocol (“VoIP”) telephony issued to Gregory Girard.  The plaintiff, ESN, a company formed by Mr. Girard, alleged that the patent was infringed by several of Cisco’s Integrated Services Routers and sought both an injunction and damages.

The hard-fought case was litigated in both the District Court and in the Patent Office through reexamination.  In the Patent Office, Cisco obtained multiple rejections of the patent’s claims.  Quinn Emanuel ultimately obtained victory before the District Court by establishing that ESN never owned the patent it asserted.  Through diligent investigation and third-party discovery, Quinn Emanuel uncovered an employment agreement that Mr. Girard had drafted and entered into with a company he had previously founded, Iperia, Inc., to develop application servers for VoIP networks.  That agreement automatically assigned to Iperia, among other things, all developments Mr. Girard conceived of during his employment that were related to Iperia’s business or used its proprietary information.  Cisco then purchased from Iperia its ownership interest in the patent.

During Mr. Girard’s subsequent deposition, he conceded that he conceived of the invention during his employment with Iperia.  Mr. Girard contended, however, that he had come to an agreement with Iperia’s former CEO that the employment agreement was inoperative, that the invention was not related to Iperia’s business, and that he could retain ownership of the invention.  Numerous Iperia documents Cisco discovered, however, showed that the patent obtained by Girard, and asserted by ESN in the District Court, was related to Iperia’s business.

Quinn Emanuel moved to dismiss ESN’s complaint on the ground that the invention had been automatically assigned to Iperia and that, as a result, ESN never held title and lacked standing to sue.  In its opposition, ESN argued that Mr. Girard had made the invention in his spare time and that it was unrelated to Iperia’s business or proprietary information.  It filed declarations from Mr. Girard and Iperia’s former CEO stating that they had discussed the invention during Mr. Girard’s employment and come to the conclusion that Iperia did not own it.  In addition, ESN cross-moved for sanctions, alleging that by purchasing Iperia’s interest in the patent, Cisco had somehow bribed third party-witnesses.  ESN also argued that Cisco had delayed supplementing its document production to include the employment agreement for a month.  ESN therefore sought to exclude the employment agreement from the case and to disqualify Quinn Emanuel from representing Cisco.

After extensive briefing and oral argument, the District Court agreed with Cisco and Quinn Emanuel, held that ESN did not own the patent, and dismissed the case.  The court found that the overwhelming documentary evidence established that the patent was related to Iperia’s business, its products, and its intellectual property and that Mr. Girard had relied on Iperia’s proprietary information.   The court reasoned that a finding that the patent was not related to Iperia’s business “would slice the scope of Iperia’s business too thin.”  The court held that ESN’s declarations were entitled to “limited interpretive weight” and could “not override the weight of the evidence to the contrary.”  Accordingly, the Court granted Cisco’s motion to dismiss, found that ESN lacked standing to assert its patent infringement claim, and entered judgment in Cisco’s favor.

The district court also denied the bulk of ESN’s cross-motion.  The court held that clear Federal Circuit authority established that Cisco’s purchase of Iperia’s interests in the patent was entirely proper, reasoning that “the ethical rules cited by Plaintiff are not directed to the present circumstances” and that “Plaintiff has not shown that the Patent Assignment Agreement is illegal, unethical, or otherwise forbidden.”  Accordingly, the court denied ESN’s request to disqualify Quinn Emanuel.  The court also rejected ESN’s argument that the employment agreement should be excluded from the case.  The court did, however, hold that the employment agreement should have been produced sooner, and ordered Cisco to pay a monetary sanction.  Cisco respectfully disagrees with the court’s ruling in this regard because it was undisputed that Mr. Girard had negotiated the agreement himself, he recalled its operative provisions from memory, and Cisco produced the agreement to ESN four weeks after Cisco obtained it.

The District Court’s ruling is a major victory for Cisco.

December 2009: Defense Victory in Derivative Lawsuit

Send to a friend

The firm recently obtained the complete dismissal of a shareholder lawsuit filed in California state court against its client, a Silicon Valley technology company that provides video-networking platforms. The shareholder plaintiff alleged in nine separate causes of action that the company’s current and former directors and officers made false and misleading statements about the company’s business, misled the investing public, failed to put in place adequate internal controls to prevent wrongdoing, and sold shares of company stock while it was trading at artificially inflated prices. The plaintiff asserted that the defendants engaged in this alleged conduct in advance of the Company’s initial public offering.

The complaint was styled as a “derivative” action and was based on the same conduct that was the subject of a federal securities class action lawsuit that settled for $11 million.

For a derivative suit to proceed, the plaintiff typically must establish “demand futility” with particularized allegations. That is, the plaintiff must show that serving a demand on the Board of Directors to take action and authorize a lawsuit would be a futile act. The plaintiff must establish that because of the potential liability that at least half of the board members face, they are disabled from adequately assessing a shareholder demand.

The court bifurcated the demurrer proceedings and ordered briefing on demand futility first. The individual defendants–current and former directors and officers of the Company – as well as the underwriter defendants deferred to the Company, and Quinn Emanuel as Company counsel, to file a demurrer to the complaint on demand futility grounds.

Quinn Emanuel’s demurrer argued that plaintiff failed to make a prior demand on the board of directors and that a demand would not have been futile. Among other things, Quinn Emanuel argued that the first amended complaint failed to address the change in board composition from the time the original complaint was filed and that the plaintiff failed to allege “demand futility" with respect to the correct board. Quinn Emanuel also argued that the plaintiff’s allegations were insufficient as a matter of law to establish that a majority of the board was incapable of exercising its independent business judgment to consider a demand.

The Court agreed, finding plaintiff’s demand futility allegations insufficient. It sustained the demurrer to every cause of action, but gave the plaintiff the opportunity to amend and try to cure the deficiencies in his pleading. Rather than amend his complaint and face another demurrer, however, the plaintiff agreed to voluntarily dismiss his claims with prejudice. Neither the individual nor underwriter defendants ever had to respond to plaintiff’s first amended complaint because of Quinn Emanuel’s success in securing dismissal of the case.

December 2009: Billboard Victory: QE Invalidates Controversial City Settlement Agreement

Send to a friend

Judge Terry Green of the Los Angeles Superior Court recently ordered the City of Los Angeles to set aside a highly controversial settlement agreement with two of the world’s largest advertising billboard companies, Clear Channel Outdoor, Inc. and CBS Outdoor Inc. The Settlement Agreement had allowed the two companies, without any public input or oversight, to erect over 100 digital billboards (resembling giant HD television screens) throughout Los Angeles, and to erect hundreds more later. No other advertising companies, were granted the right to put up the digital billboards.

The Agreement generated outrage in many Los Angeles neighborhoods when the billboards suddenly began springing up in 2007.

In 2007, Summit Media – a small, family-owned advertising company – retained Quinn Emanuel to set aside the Agreement as illegal and ultra vires. The legal argument was straightforward: California law prohibits government agencies from granting contractual exemptions from laws enacted for the public benefit. The Agreement, on its face, exempted Clear Channel Outdoor and CBS Outdoor from a host of zoning and building laws enacted for the public benefit. The difficult part was convincing a court to set aside an agreement that had been approved by the Los Angeles City Council, the Mayor, the incumbent City Attorney, and another highly respected judge of the very same court.

In addition, Clear Channel Outdoor and CBS Outdoor argued that the court had no jurisdiction to hear the case because Summit Media had not exhausted its administrative remedies. According to the companies, Summit was required to administratively appeal the issuance of one or more permits allowing digital billboards under the Settlement Agreement before it could ask the court for relief.

After 14 months, three hearings, four rounds of written submissions, and so many documents that they no longer fit in the judge’s chambers, the court granted Summit’s motion for judgment. The court found that the Agreement did, in fact, improperly exempt Clear Channel Outdoor and CBS Outdoor from City zoning regulations and was thus ultra vires. The court also held that Summit was not required to administratively appeal the issuance of a permit under the Agreement before filing suit because Summit was not challenging permits, but the Settlement Agreement. Moreover, the court agreed that any such appeal would have been futile because the Agreement obligated the City to issue the very permits that Summit purportedly should have administratively challenged. The court thus ordered the City to set aside the Agreement and to cease implementing it.

Within hours of the court’s decision, two Los Angeles City Council members presented a motion requiring Clear Channel Outdoor and CBS Outdoor to convert their digital billboards to static, wooden signs. The decision was praised by numerous homeowners associations and neighborhood groups. The City Council is now considering what further action to take as a result of the ruling.

Decemer 2009: Victory for G-I Holdings, Inc.

Send to a friend

Quinn Emanuel obtained a significant victory on behalf of G-I Holdings, Inc., when Chief United States District Judge Garrett E Brown. Jr. and Bankruptcy Judge Rosemary Gambardella, both of the District of New Jersey, confirmed the company’s plan of reorganization after nearly nine years in chapter 11. Quinn Emanuel served as special litigation counsel to the Debtor, or G-I. In late 2007, G-I (formerly GAF Corporation) reached a settlement with representatives for present and future asbestos claimants, its largest creditor constituency, to establish a $775 million asbestos trust. That settlement paved the way for a joint plan of reorganization, which was first filed in August 2008. The debtors were able to resolve almost all plan objections, except for that of the Internal Revenue Service, represented by the Department of Justice. The IRS and G-I have litigation pending in the District of New Jersey concerning certain IRS tax claims. The crux of the IRS’ objection to the plan related to the treatment of its tax claims under the plan, if it were ultimately determined that G-I or its affiliates have tax liability. The IRS’ objections were the subject of a contested confirmation hearing which the firm tried over the course of two weeks in late September and early October.

The IRS had three principal objections. First, it objected to the terms of the Plan, which provided that a six-year note from G-I would satisfy the tax liability, if any. Specifically, the IRS contended that the Plan violated the Bankruptcy Code in so far as it provided that (a) the note would pay an interest rate of LIBOR plus 1%, (b) the note would be payable with a single balloon payment six years after the final determination of the tax liability, and (c) the final determination of the tax liability would not occur until the entry of a final unappealable order. The court overruled the objections and found that the treatment of the IRS tax claim under the plan comported with applicable bankruptcy law.

Second, the IRS objected that the plan precluded it from assessing and collecting tax liability against G-I’s nondebtor affiliates. G-I is a holding company and its primary operating subsidiary, Building Materials Corporation of America (“BMCA”), the nation’s largest residential roofing manufacturer, was a nondebtor. The IRS contended that it had the right to make an immediate assessment against BMCA following a decision on the merits of its tax claim because BMCA was allegedly jointly and severally liable for the tax claims as a member of a consolidated tax group. Interpreting the terms of a tolling agreement, the court found that the IRS had agreed not to assess non-debtor affiliates for an amount greater or different than the assessment against G-I.

Third, the IRS contended that the plan violated the “absolute priority rule” because the plan’s sponsor, Samuel J. Heyman, who was the pre-petition equity holder, was not contributing sufficient “new value.” In support of their position, the IRS offered an expert witness who provided a valuation of the company and contended that the value of the equity was more than $1 billion greater than Mr. Heyman contributed. The court disagreed, finding that Mr. Heyman was providing sufficient new value in the form of a $220 million cash infusion plus more than $800 million in collateral to support a letter of credit for the asbestos trust. The court also concluded that the new value satisfied the requirement of Bank of Am. Nat. Trust & Sav. Ass’n v. 203 North LaSalle P’shp, 526 U.S. 434, 443 (1999), that the reasonableness of new value be market tested.

The court entered its order confirming the plan on November 12, 2009 and ordered that it become effective on November 16 at 5:00 p.m. The IRS’ motion for a stay pending appeal was denied.

The plan closed on November 17, 2009, finally allowing G-I to emerge from bankruptcy after nine years and operate its business, the nation’s largest residential roofing manufacturer, free and clear of future asbestos liability.

**We note with sadness, the passing of G-I’s Chairman, Samuel J. Heyman, shortly after the trial in which he testified and actively participated, and before the decision was rendered.

November 2009: Victory before the UK Supreme Court

Send to a friend

On October 29, 2009, Quinn Emanuel’s London office won a significant victory for a group of secured creditors in the United Kingdom’s new Supreme Court in the case of In re Sigma Finance Corporation (“Sigma”). Widely reported by the UK’s mainstream newspapers as well as in the legal press, Quinn Emanuel’s victory in the highest court in the land is an important decision for the construction of commercial contracts.

The case was one of the last appeals to be heard by the Judicial Committee of the House of Lords before being reconstituted as the new Supreme Court this October. The House of Lords—now the Supreme Court—only takes on about 70 cases a year. As a matter of English law, this court will only hear cases which it considers to be of general public importance.

Sigma was a Special Investment Vehicle (“SIV”). Its business consisted of investing in debt securities, derivatives and other financial instruments. Sigma issued medium term notes denominated in US dollars and in Euros in order to finance and refinance its activities, and it entered into interest rate and currency swaps and options in order to hedge its exposure to such risk. When the market collapsed, Sigma became insolvent with total liabilities in excess of US $9 billion. The case involved the administrative receivers of Sigma, who applied to the court for directions concerning the construction of a Security Trust Deed, and how Sigma’s proceeds should be paid to various categories of secured creditors.

The issue in the case concerned the payment of liabilities during a so called “Realisation Period” of 60 days. Specifically, if the administrative receivers were obliged to continue to pay the short term liabilities on a “pay-as-you go” basis during this period, the liabilities would have exhausted all of Sigma’s assets. The alternate construction of the Security Trust Deed obliged the administrative receivers to distribute all of Sigma’s assets pari passu between all of Sigma’s secured creditors, in respect of both short term and long term liabilities.

The secured creditors were grouped into 4 classes: Party A representing the creditors whose notes matured within the 60 day period and whose claim would have wiped out the remaining assets of Sigma under the “pay as you go” construction; Party B representing the creditors whose notes also matured within the 60 day period but who argued for the pari passu distribution of assets within the 60 day period; Party C representing the creditors whose notes matured after the 60 day period but within one year; and Party D representing the secured creditors holding notes maturing more than 365 days after the enforcement date. Parties C and D argued for the overall pari passu distribution of the assets both at first instance in the High Court, in the Court of Appeal and later in the House of Lords. Quinn Emanuel represented Party D.

Both the judge in the High Court, and the Court of Appeal (2 to 1) preferred the construction of Party A. In the Court of Appeal, Lord Neuberger (who has been recently appointed Master of the Rolls, i.e. the head of Civil Justice in England) dissented but on a variant construction which differed from the one advocated by Parties C and D. On appeal, the Supreme Court upheld the position of Parties D and C on their own construction of the Security Trust Deed, vindicating the positions advanced by Quinn Emanuel on behalf of its clients.

This case reinforces recent House of Lords decisions on the correct approach to the construction of a commercial contract, and it will be a frequently cited precedent. The decision could affect other disputes over failed concerns worth billions of dollars. As the Quinn Emanuel partner who argued the case, Sue Prevezer QC, noted, there are around 20 SIVs and other similar structures currently in existence. “If this ruling indicates the general approach to such vehicles,” Sue said, “then it will be significant.” Although the specific terms of the vehicles vary widely, virtually all SIVs feature waterfall clauses that are designed to specify the priority of creditors, despite the existence of debts maturing at different times. After this judgment, there will now be some guidance as to how the courts may rule when they are asked to interpret conflicting or ambiguous contractual provisions in often lengthy and complex Security Trust Deed documents. The majority of the Supreme Court was of the view that too much weight had been given by the lower courts to the so-called “natural meaning” of words used in the Security Trust Deed, and too little to the overall context in which such words were used. As Lord Collins put it, “detailed semantic analysis must give way to business common sense.”

November 2009: Victory for Roche in HIV Patent Action

Send to a friend

On September 30, 2009, the United States Court of Appeals issued a unanimous, precedential opinion providing complete victory for Quinn Emanuel’s client Roche Molecular Systems over Stanford University in a closely watched case involving intellectual property for HIV test kits.

In the late 1980s, at the height of the AIDS epidemic, Stanford and a biotech company later bought by Roche collaborated to develop test methods to monitor HIV levels in patients that were receiving experimental drugs. The parties entered a series of agreements to govern the intellectual property rights that might arise from the collaboration. As a result of this collaboration, Roche and Stanford scientists jointly developed a successful test protocol for measuring HIV and co-published a landmark paper describing it. Roche began selling an HIV test kit, which is now used around the world, saving countless lives.

Stanford, however, patented the inventions that resulted from the joint collaboration. After Roche had commenced selling its HIV test kits, the Stanford patents became public, and Stanford sought licensing royalties from Roche. In 2005, Stanford sued in federal court in San Francisco, seeking damages and an injunction to stop the sale of the HIV kits.

The lawsuit lasted more than four years and involved several phases. Stanford initially convinced the district court that statutes such as the Bayh-Dole Act, which governs the contractual relationship between the federal government and recipients of federal research grants, and the statute of limitations should excuse Stanford from meeting the obligations of its agreements. Having lost (for the moment) the defense of ownership and a license to the patents-in-suit, Roche was forced to defend itself against its own patents. Roche prevailed in that phase of the case, and the district court held that the patents-in-suit were invalid as obvious in light of the articles published from the collaboration. The court issued a final judgment in favor of Roche.

Stanford appealed the ruling of obviousness; Roche in turn cross appealed the district court’s denial of its ownership interest in the patents-in-suit. On September 30, 2009, the Federal Circuit, in a 26-page opinion, unanimously ruled that Stanford did not have standing to sue Roche because Roche owned portions of the patents-in-suit. The Federal Circuit upheld Roche’s affirmative defense of ownership and vindicated Quinn Emanuel’s initial arguments to the district court. In effect, Quinn Emanuel expanded Roche’s rights on appeal, protecting its long term investment in this important technology.

The case was fiercely litigated and resulted in four published opinions from the district court and two precedential opinions from the Federal Circuit: 237 F.R.D. 618 (N.D. Cal. 2006) (privilege waiver for submission of inventor declarations to patent office); 487 F.Supp.2d 1099 (N.D. Cal. 2007) (summary judgment to Stanford on ownership and licenses defenses); 528 F.Supp.2d 967 (N.D. Cal. 2007) (claim construction of HIV patents and discovery abuses); 563 F.Supp.2d 1016 (N.D. Cal. 2008) (Stanford’s patents are invalid as obvious); 516 F.3d 1003 (Fed. Cir. 2008) (denial of Roche’s writ of mandamus on ownership, with dissent from Judge Newman); and Federal Circuit Slip Op of Sept 30, 2009 (unanimous opinion that Roche owns share of patents).

November 2009: Victory in Criminal Case

Send to a friend

Quinn Emanuel secured a victory on behalf of a pro bono client in a federal narcotics case, when the judge sitting in the Southern District of New York granted Quinn Emanuel’s client a sentence of time served–a grand total of 2 days in jail. The client, who was charged with participating in a heroin importation conspiracy, faced a potential sentence of life in prison, and a mandatory minimum sentence of 10 years in prison, at the time Quinn Emanuel was appointed as her counsel. At sentencing, the team from Quinn Emanuel team successfully persuaded the judge that Quinn Emanuel’s client was the least culpable member of the conspiracy, that her own personal history did not suggest a proclivity to engage in criminal activity, and that her own family circumstances compelled a sentence of time served.

October 2009: Quinn Emanuel Scores Another ATS Victory for Coca-Cola

Send to a friend

Litigation against American corporations under the Alien Tort Statute for supposed violations of international law has increased dramatically in recent years despite the Supreme Court’s 2004 caution in Sosa v. Alvarez-Machain that such suits should be allowed only sparingly. ATS complaints can subject brand-name American companies that do business abroad to lengthy and burdensome litigation based on only the vaguest allegations of shadowy connections between those companies and foreign governments to whom international law generally applies.

In our August newsletter, we profiled a significant victory by The Coca-Cola Company in the Second Circuit, which affirmed the dismissal of an ATS complaint against Coca-Cola involving alleged human rights abuses in Turkey. On August 11, Coca-Cola and its Colombian bottlers won a second major appellate victory against similar allegations in a decision that will have broad value to other corporations sued under the ATS. In Sinaltrainal v. The Coca-Cola Company, the Eleventh Circuit upheld dismissal of an ATS complaint alleging that Coca-Cola had supposedly conspired with and aided and abetted paramilitaries who had committed violent acts against union officials, allegedly in order to deter unionization of the bottlers’ plants.

In a unanimous 34-page published decision, the Eleventh Circuit held that the alleged links between Coca-Cola, its bottlers, the paramilitaries, and the Colombian government were too general and vague to survive dismissal. The court reiterated that a link to state action is required under the ATS except in rare cases like war crimes and genocide, and held that the plaintiffs had failed to allege that the Colombian government knew of or directed the paramilitary forces’ specific acts. As to the one complaint involving a state actor (a policeman), the court held that the allegations that Coca-Cola or the bottlers had aided and abetted or conspired with the policeman were too vague, and that detention of the union official at the hands of the policeman did not qualify as a violation of the law of nations under the ATS. The Circuit also upheld dismissal of claims under the Torture Victims Protection Act.

The decision thus hands ATS defendants a powerful tool for use in future cases: to attack as deficient each link in the chain that supposedly connects the American company to the foreign government that is bound by international law.

Sinaltrainal was litigated both in the district court and the Eleventh Circuit by Quinn Emanuel partner Faith Gay, who adds this notable win for her long-time client Coca-Cola to her recent ATS victory for Coca-Cola in the Second Circuit in Turedi v. The Coca-Cola Company, the case that was profiled in our August newsletter. On both appeals, she was joined by Quinn Emanuel appellate lawyers Kathleen Sullivan and Sandy Weisburst. The Quinn Emanuel team recently filed a cert. petition for Pfizer in the U.S. Supreme Court seeking review of a Second Circuit decision reversing dismissal of an ATS complaint alleging that the company violated international law by conducting a clinical drug trial in Nigeria. The national Chamber of Commerce filed an amicus brief in support of the petition.

October 2009: QE Wins Summary Judgment in IBM Market Monopolization Case

Send to a friend

On September 30, Quinn Emanuel, along with co-counsel from Hogan & Harston, achieved a substantial victory for firm client, International Business Machines Corporation, in long-running litigation involving mainframe emulators when Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York granted summary judgment for IBM on all claims brought against IBM by T3 Technologies, Inc. in IBM v. Platform Solutions, Inc., et al., No. 06 Civ. 13565 (LAK) (S.D.N.Y. Sept. 30, 2009).

The case related to IBM’s System z mainframe technology and arose out of the activities of Platform Solutions, Inc. In the late 1990s, IBM spent billions of dollars developing its z/Architecture and its System z technology. IBM’s investment in the z/Architecture and System z produced a modern mainframe computing platform able to compete effectively in a server market in which alternative platforms had become increasingly dominant. With the backing of major supporters of these alternative platforms, PSI sought to develop software or firmware that would emulate IBM’s z/Architecture on Intel-based computers, and thereby allow Intel-based computers to act like IBM mainframes and to run System z operating systems and software that they otherwise were unable to run because of architectural incompatibility. PSI sought licenses from IBM for the IBM patents and trade secrets needed to develop and market its emulators, but IBM opted not to license its technology to PSI.

PSI moved forward with its emulator development program without licenses to IBM’s patents and other intellectual property, and launched its product in late 2006. IBM sued PSI for patent infringement and other violations in November 2006, and later added claims for trade secret misappropriation. PSI, in turn, filed antitrust counterclaims that accused IBM of being a monopolist in an alleged mainframe computer market and demanded that IBM be forced to license its patents and other mainframe technology so that PSI could use that technology to compete against IBM. PSI claimed that IBM had monopolized alleged markets for mainframe computers and mainframe operating systems by refusing to license its patents to PSI and tying licenses of IBM’s mainframe operating systems to the purchase of IBM mainframes.

T3, a reseller that had distribution agreements with PSI and another emulator supplier, intervened in the case, accusing IBM of excluding T3 from the market by refusing to license IBM’s technology to T3’s emulator suppliers. After IBM and PSI settled their claims in June 2008, T3 continued to pursue essentially the same antitrust claims that PSI had advanced.

On IBM’s motion for summary judgment, the Court held that T3 lacked antitrust standing because T3’s alleged injury flowed entirely from that of T3’s emulator suppliers. Under Second Circuit law, “one who complains of injury that is indirect or derived from injury sustained by another entity with which it has a business relationship has not alleged antitrust injury.” Slip op. at 11. The “critical components” of T3’s emulator products were the software and firmware of its emulator suppliers, which were “simply incorporated” into the products sold by T3, and it was that software and firmware that were “the alleged targets of IBM’s anticompetitive actions.” Id. at 12. T3’s alleged injuries, therefore, resulted from IBM’s “refusals to license” T3’s emulator suppliers and were “all derivative of those actions vis-à-vis” the suppliers, and T3 could not establish antitrust injury. Id. at 13.

The Court went on to hold that, even if T3 could establish antitrust standing, “its claims would fail because it cannot establish that IBM’s refusal to deal with [T3’s emulator suppliers] is actionable under the Sherman Act.” Id. at 19. T3 alleged that IBM had changed its prior practice of “freely licensing” its patents and operating systems to allow competitors to produce IBM-compatible mainframes, but the Court held that any resulting refusal to deal was nevertheless not actionable because “T3 has not demonstrated that IBM has foregone short term profits by refusing to license its patents ‘to achieve an anticompetitive end.’” Id. at 19-20. Rather, IBM had acted appropriately to protect its multi-billion dollar investment in System z. In achieving this result for IBM, Quinn Emanuel worked closely with Hogan & Hartson, implementing the "virtual law firm" model that has come to characterize many of the firm's cooperative efforts with co-counsel.

September 2009: Dismissal of $1 Billion Suit against AIG

Send to a friend

Quinn Emanuel won dismissal of a $1 billion fraud and RICO suit brought against its client AIG in the Northern District of Illinois. The plaintiff alleged that AIG had engaged in a decades-long scheme to defraud the other insurance-company members of a reinsurance pool. The factual allegations underlying the lawsuit first came to light in connection with the 2005 investigation of AIG conducted by then-New York Attorney General Eliot Spitzer and were derived from a memo written in 1992 by AIG’s former general counsel that alleged AIG had suppressed the amount of the workers’ compensation premium it had reported to the pool. According to the memo, AIG avoided hundreds of millions of dollars of payments into the pool, which in turn, increased the obligations of other insurance companies to make their own payments. In 2006, as part of a $1.6 billion settlement with the New York Attorney General, AIG agreed to pay more than $300 million into a settlement fund to redress the alleged underreporting.

The reinsurance pool did not believe that the settlement fund was sufficient and filed a $1 billion suit against AIG. The named plaintiff was the reinsurance pool’s administrative agent, which referred to itself as the pool’s “attorney-in-fact.” AIG moved to dismiss the complaint on the grounds that the “attorney-in-fact” lacked Article III standing to maintain the suit because it had not suffered any injury; rather, AIG argued, the members of the pool who had allegedly been harmed by AIG’s conduct were the only parties with standing. Addressing an issue of first impression in the Seventh Circuit, Quinn Emanuel argued that under U.S. Supreme Court and Second Circuit precedent, the Constitution did not provide standing to a representative acting as an “attorney-in-fact,” when that representative did not suffer the alleged injuries that are the subject of the lawsuit. Quinn Emanuel also argued that the pool, as an association of insurance companies, did not have associational standing to represent its members in their claims against AIG because there would be an improper conflict of interest if the association were allowed to sue one of its members. Judge Gettleman accepted Quinn’s arguments, holding that neither the “attorney-in-fact” nor the pool has standing to pursue claims against AIG.

September 2009: Film Finances Victory

Send to a friend

Quinn Emanuel obtained an arbitration award in favor of our client Film Finances, Inc. against Fortis Bank in a case involving Spike Lee’s latest film, Miracle at St. Anna. Fortis made a loan of $11 million to finance a portion of the production costs of the film. As part of the security for the loan, Film Finances issued a guaranty to Fortis that the film would be completed and delivered to the international distributor, TF1 International, according to certain criteria including a running time of less than 2 hours and a requirement that the film be based on an approved screenplay.

Spike Lee, however, initially made a 2 hour 40 minute film. When TF1 refused to pay its license fee because of the running time, Mr. Lee cut 40 minutes from the film. TF1 then refused to pay because the film purportedly was no longer based on the approved screenplay. Fortis demanded payment from Film Finances under the guaranty. Quinn Emanuel initiated an arbitration for declaratory relief to the effect that Film Finances satisfied its obligations under the guaranty and Fortis cross-claimed for the $11 million guaranty. Quinn Emanuel successfully proved that TF1 waived the running time requirement on the first version of the film and that the second version was based on the approved screenplay. The arbitrator awarded Film Finances the requested declaratory relief, dismissed the cross-claim and awarded Film Finances its attorney’s fees.

Diane Doolittle and Victoria Maroulis Recognized as Top Women Litigators in California

Send to a friend

The Daily Journal has recognized Quinn Emanuel partners Diane Doolittle and Victoria Maroulis as top women litigators in California. In Doolittle’s 20 years of practice, including five years as a prosecutor, she has tried more than 60 cases, ranging from intellectual property to white collar criminal defense to complex business disputes. This is the third time The Daily Journal has recognized Doolittle as a top litigator, this time highlighting her representations of billionaire Dr. Henry Nicholas III and The Scotts Miracle-Gro Company. She helped persuade federal prosecutors to dismiss charges against Nicolas, and also won a complete defense verdict from an Orange County jury in an employment case against him. Doolittle served as lead counsel for Scotts in multiple false advertising and trademark infringement lawsuits.

Maroulis is Co-Chair of the firm’s National Life Science Practice. Her work primarily focuses on intellectual property litigation, and she was recognized recently by Law360 as one of 10 “Rising IP Litigation Stars” nationwide. Maroulis was praised by The Daily Journal for her work last May representing Genentech in patent litigation related to a cancer treatment drug that established ground-breaking precedent regarding the law of venue in patent cases. She secured a writ of mandamus from the U.S. Court of Appeals for the Federal Circuit allowing the case to be transferred to the Northern District of California from the Eastern District of Texas.

Charles Verhoeven Named a Top Trial Lawyer by The National Law Journal

Send to a friend

Quinn Emanuel partner Charles Verhoeven was recently selected by The National Law Journal as a “Winning” trial attorney in its annual profile of top litigators in the United States each year. Nominated attorneys must have won at least one significant bench or jury trial verdict within the past 18 months and must have a record of success over many years. In choosing Verhoeven, The National Law Journal praised his recent high-profile victories for Google and Cisco. Verhoeven obtained a complete defense verdict for Google in a $600 million patent infringement suit brought by Function Media in the Eastern District of Texas, a hostile environment for any patent defendant. Verhoeven also obtained back-to-back summary judgment dismissals for Google in two other Eastern District of Texas patent cases, PA Advisors v. Google and Performance Pricing v. Google. Additionally, The National Law Journal cited Verhoeven’s achievement in obtaining a judgment of dismissal in a major patent case, ESN v. Cisco, involving voice-over-IP technology.

Quinn Emanuel Holds the First Intellectual Property (Mock) Jury Trial in Israel

Send to a friend

The legal system in Israel does not have any provision for jury trials. On May 24, 2010, however, more than 200 Israeli intellectual property lawyers, general practitioners, in-house counsel and executives gathered in Tel-Aviv to witness a jury trial in an IP-license dispute between a U.S. video game manufacturer and a British distributor of leisure products. Although a judge presided over the trial, and 12 local citizens sat as a jury, it was a mock trial put together and presented by Quinn Emanuel trial lawyers to teach Israeli lawyers about the U.S. jury system.

Quinn Emanuel founder John Quinn represented the plaintiff, an aggrieved distributor, and built his case around the theme of broken promises, while partner Claude Stern represented the defendant video game maker and stressed the strict interpretation of the distribution contract. Partner Victoria F. Maroulis moderated the mock trial and the post-trial discussion of the critical differences between the U.S. and Israeli legal systems. The audience members uniformly commented on how much they learned and how much U.S. litigation differs from that in other jurisdictions, and the event was covered by at least six prominent Israeli newspapers.

Alex Gerbi Joins Quinn Emanuel London

Send to a friend

Quinn Emanuel recently recruited highly rated commercial litigator Alex Gerbi to join the firm’s London office as a partner. Alex joins from Olswang where he was a partner in the firm’s litigation group. His arrival continues Quinn Emanuel’s strategy of building its UK litigation practice by recruiting rising star City litigators. Alex, who became a partner at Olswang just three years ago, is already recognized as a leading lawyer by Chambers; clients praised him as “extremely bright, sensible and practical.” He impressed Quinn Emanuel when acting opposite the firm in a major piece of insolvency litigation last year. Alex said, “after 10 great years at Olswang, I’m very excited to be joining Quinn Emanuel’s growing team in London. The Quinn Emanuel litigation model, coupled with the firm’s first rate lawyers and reputation, provides a unique and compelling platform from which to practice disputes work at the highest level in the London market.”

Quinn Emanuel’s Managing Partner, John Quinn, commented, “We have been very careful with our London expansion and Alex has the combination of legal talent, energy and ambition that we have been looking for to continue to grow our practice.” The hire marks a period of growth for Quinn Emanuel, which launched its first continental European office in Germany this year with the recruitment of a five-lawyer team from Allen & Overy. By offering only litigation and thus avoiding the conflicts that come with transactional practice, the firm occupies a unique position in each of the global legal centers. The London office has recently secured landmark victories in a host of major cases including Re Sigma Financial Corp, UBS AG and UBS Securities v HSH Nordbank as well as in a major dispute arising out of the sale of Skype to eBay.

Quinn Emanuel Expands Tokyo Office

Send to a friend

From its inception three years ago, Quinn Emanuel’s Tokyo Office has distinguished itself. Not only was it Quinn Emanuel’s first foreign office, but no other United States firm has opened a litigation-only practice anywhere in Asia.

The firm is proud to announce that Wayne Alexander and Marc Weinstein, formerly of Hogan Lovells’ Tokyo Office, have now joined the firm as Partner and Of Counsel, respectively.

Dividing his time between the United States and Japan, Wayne Alexander has over 25 years of experience in patent, trademark and copyright litigation, as well as extensive experience in licensing and enforcement. He has worked as in-house counsel for companies renowned for their intellectual property programs, including Sony Corporation, The Walt Disney Company and Thomson Licensing. His expertise covers a wide range of technologies including digital based electronics such as HDTV, LCD, LED, hard disc drives, semiconductors, video and still cameras, cellular telephones, and emerging technologies like carbon nanotubes. In addition to traditional litigation functions, Wayne counsels and represents clients in assessing the strength and value of patents, and developing patent licensing programs for revenue generation and market protection. Wayne is fluent in Japanese.

Marc Weinstein also has joined the firm as Of Counsel. Marc is a U.S. patent attorney with more than five years experience working in Japan. Marc has a degree in Electrical Engineering and has worked as a patent examiner at the USPTO. His practice has focused on representing and counseling clients for licensing and litigation matters in a variety of technologies.

The addition of Wayne and Marc to the Tokyo office reflects Quinn Emanuel’s commitment to expanding the firm’s presence and services in Japan.

“We have made great inroads in becoming the premier U.S. litigation firm in Tokyo. No other firm has U.S. trained litigators and trial lawyers that can strategize and work with the client in their native language like we do, or have our depth. Wayne and Marc distinguish us even further,” said Ryan Goldstein, who runs the Tokyo Office with Henry Koda.

David Bilsker Joins Quinn Emanuel

Send to a friend

David Bilsker, who has won some of the leading biotechnology trial victories in the U.S., has joined Quinn Emanuel as a partner in the San Francisco office after more than a decade as a partner at Howrey. Mr. Bilsker adds a significant West Coast presence to the firm’s growing Global Life Science practice. Early in his career, Mr. Bilsker worked on the University of California’s successful enforcement of its Human Growth Hormone patent, which resulted in a $200 million settlement after trial.  Since then, he has successfully tried cases involving HPV, the virus that causes cervical cancer, and cases covering medical devices and other recombinant drugs and biotechnology tools.  In two cases, he enforced patents on gene targeting growing out of discoveries that won the inventors the 2007 Nobel Prize in Medicine. Mr. Bilsker, who has undergraduate and graduate degrees in Chemical and Bio-Medical Engineering and who worked as an engineer designing pacemakers, also has successfully tried cases in the computer and semiconductor arts.  In one recent case involving the delivery of media content over the internet, he was able to defeat a plaintiff’s $1 billion claim by showing the patent had been fraudulently procured. In his free time, Mr. Bilsker mountain bikes, windsurfs, competes in triathlons and tries to keep up with his Rhodesian Ridgeback on long trail runs.

Quinn Emanuel Named to the “Appellate Hot List”

Send to a friend

The National Law Journal has named Quinn Emanuel to its “Appellate Hot List” for 2010, one of only 20 firms nationwide to earn this recognition. The Journal singled out for special notice the firm’s 8-1 win for Shell Oil Co. in the U.S. Supreme Court holding that companies shipping useful products may not be held liable for “arranging to dispose” of hazardous waste; the firm’s “stunning” victory before the New York Court of Appeals in upholding New York Governor David Paterson’s power to appoint Richard Ravitch lieutenant governor; and the firm’s success in the Eleventh Circuit in upholding dismissal of an Alien Tort Statute complaint concerning alleged activities by The Coca-Cola Company in Colombia.

The firm’s appellate practice is headed by Kathleen M. Sullivan, former Dean of Stanford Law School, who recently became a name partner in the firm. “We are honored to have been selected by the National Law Journal as one of the nation’s top appellate practices,” Sullivan said. “I am pleased the Journal recognized the broad scope of our appellate practice, as well as a number of talented appellate lawyers at the firm.”

In addition to Sullivan, the “Hot List” noted three of the firm’s other leading appellate lawyers: Susan Estrich in Los Angeles, Sanford Weisburst in New York, and Dan Bromberg in Silicon Valley. And acknowledging the integration of QE’s appellate practice with the firm’s trial expertise, the “Hot List” recognized three of the firm’s “trial stars” who contributed victories to the firm’s appellate scoreboard last year – Faith Gay (who won the Coca-Cola case), Robert Raskopf (who won a trademark case for the Washington Redskins), and Charles Verhoeven (whose recent victory in the Federal Circuit on behalf of Google raised his record in that court to 10-0).

Fred Bennett Honored as the Outstanding Arbitration Lawyer in U.S.

Send to a friend

Fred Bennett, head of the firm’s international and domestic arbitration practice, was recently awarded the International Law Office Client Choice Award as the outstanding U.S. arbitration lawyer for 2010. The ILO Client Choice Awards are presented annually to lawyers practicing in countries around the world, with one lawyer from each country being chosen for the arbitration category.  Nominations and selection are based exclusively on detailed input from in-house counsel. Fred was chosen as the recipient for the U.S. award from over 2000 nominees.  The ILO is the leading online resource for senior international corporate counsel at companies worldwide, and has for years been the official online media partner for the International Bar Association, the Association of Corporate Counsel, and the European Company Lawyers Association.

Quinn Emanuel Partner Victoria Maroulis Named One of Ten Intellectual Property Rising Stars

Send to a friend

In March 2010, Law360, the top daily newswire for business lawyers, selected ten national “Rising Stars”—outstanding attorneys under age 40—in select practices areas. Victoria (“Vicki”) Maroulis, 38, a partner in Quinn Emanuel’s Silicon Valley Office who specializes in litigating patent cases, was named one of the Intellectual Property Rising Stars.

Vicki started at Quinn as a first-year summer associate in 1993, when the firm had some 20 lawyers in its single Los Angeles office. In 1999, after a federal clerkship in the Southern District of New York and several years of practice, she joined Quinn Emanuel’s newly-established Northern California office, and has been instrumental in its growth. Vicki made an early choice to specialize in IP litigation after she settled in Silicon Valley. Since then, she has litigated patent cases in dozens of federal courts involving diverse technologies ranging from bicycle wheels to software texting to animal growth hormones. Today, herpractice focuses on high-stakes patent litigation for leading technology companies. Vicki has represented numerous Fortune 100 companies—including GE, Cisco, AOL, Genentech, Monsanto, and Oracle—in complex patent litigations throughout the country. She has also tried numerous patent and copyright cases to jury verdicts.

The Law360 article highlights some of Vicki’s major victories, including the seminal In re Genentech case. In that case, the Quinn Emanuel team obtained a writ of mandamus, transferring Genentech from the Eastern District of Texas to the Northern District of California. That decision has defined the law regarding venue in patent cases. Shortly afterwards, Vicki obtained a judgment of dismissal in another major patent case, ESN v. Cisco, related to voice-over-IP technology, again in the Eastern District of Texas. Vicki also helped obtain a multi-million dollar verdict and a finding of willful patent infringement for a subsidiary of AOL in Tegic v. Zi (N.D. Cal. 2002), in a case involving text-entry software.

Vicki came to the United States at 16 as a refugee from the Soviet Union. She graduated from Ohlone Community College, Stanford University, and Yale Law School. Vicki was elected a partner in the firm at 31, becoming one of the youngest partners in Quinn Emanuel’s history. Today, in addition to her active IP practice, she teaches trial advocacy in the Stanford Law School trial advocacy workshop and in the firm’s in-house trial training program, and she regularly judges local and regional mock trial and moot court competitions. Vicki also frequently lectures on IP issues both here and abroad; she recently conducted a workshop on U.S. Patent law for over 100 lawyers and business leaders in Israel, and will return to Israel in May for a mock trial with QE partners John Quinn and Claude Stern. When she isn’t working, Vicki spends her time with her husband, Jim Maroulis, a securities lawyer at Oracle, and their three kids, ages 5, 9 and 11.

What’s in a Name?

Send to a friend

On March 11, 2010, John Quinn announced that the firm he and Eric Emanuel founded 25 years ago would change its name to Quinn Emanuel Urquhart & Sullivan, LLP, adding the name of Kathleen M. Sullivan, a partner in the New York office and the head of the firm’s appellate practice. As John put it, “Kathleen Sullivan would be on anyone’s list of the top three or four advocates practicing today. Her inclusion in the firm’s name reflects the integration of our trial and appellate practices and our strengths as a national law firm with major presences in both the California and New York markets.”

Sullivan, a former Harvard Law School professor who served as Dean of Stanford Law School for five years, began practicing law in 1982 as an associate of Laurence H. Tribe and joined Quinn Emanuel in 2005. Since then, Sullivan has not only won key victories in appellate cases – including what the New York Times described as a “stunning” victory in the case upholding (by a 4-3 vote) New York Governor David Paterson’s appointment of Richard Ravitch as Lt. Governor – but has also represented a wide range of clients in motion practice in state and federal courts. Quinn Emanuel is the first and only AmLaw 100 firm with a woman as a name partner.

“I am thrilled to have been added to the name of this unique and magnificent law firm, “ Sullivan told reporters. “My colleagues at Quinn Emanuel combine legal brilliance, energy and creativity in a way that consistently produces rare and remarkable results for our clients. I am deeply committed to our firm’s litigation practice, and look forward to our continued growth.”

QE Partner Edith Ramirez to Serve as Commissioner of the Federal Trade Commission

Send to a friend

By a unanimous vote, the United States Senate on March 3, 2010, confirmed Edith Ramirez, a partner in the firm’s Los Angeles office, to assume the post vacated by former FTC Chairwoman Deborah Platt Majoras, whose term expired in September 2008. Ramirez, whose practice has encompassed both intellectual property and antitrust litigation, is a law school classmate of President Barack Obama and served with him on the Harvard Law Review. In her confirmation hearing before the Senate, Ramirez praised competition as a tool that “spurs economic innovation, lowers prices and brings greater and more informed choices to everyday Americans,” and stressed her vision of the FTC as the protector of the free market system. Senator Kay Bailey Hutchison, the ranking Republican on the Commerce Committee, praised Edith’s “extensive experience in complex business litigation. I appreciate her critical eye for mergers and business combinations which may potentially harm consumers.” Ramirez told the Committee: “The Commission’s duty to combat deceptive and unfair business practices and to foster competition has never been greater, particularly in the areas that have the greatest impact on the daily lives of Americans such as financial services, healthcare, energy, and technology.” Ramirez will be sworn into office in April by current FTC Chairman Jon Leibowitz.

Quinn Emanuel Opens First Office on European Continent

Send to a friend

Quinn Emanuel Opens First Office on European ContinentThe firm has opened an office in Mannheim, Germany, its first office in continental Europe. The office will focus on patent litigation and it will be led by Dr. Marcus Grosch, one of the leading patent litigators in Germany. Grosch joins Quinn Emanuel from Allen & Overy where he led that firm’s German patent litigation practice.

Opening the Mannheim office is a major step forward for the firm’s IP practice. Most major patent disputes involve parallel proceedings in multiple jurisdictions. Germany has become the epicenter for patent litigation in the EU and Mannheim is one of the two most important venues in Germany. The firm intends to develop the first integrated transatlantic patent litigation practice.

Grosch, who received his PhD in law summa cum laude from Mannheim University, also has an LLM from Yale University. He is an internationally recognized expert in patent litigation having been recognized by publications such as Chambers and Legal 500. The German legal publication JUVE has ranked him for years among the top German patent litigators and, in 2006, chose him as one of the top 40 German lawyers under age 40 (across all practice areas). Grosch has represented companies such as Assa Abloy, HID, Saint Gobain Isover, Crestron, Roche Diagnostics, Giesecke & Devrient, Freudenberg in both German and cross border litigation. Grosch teaches patent law at University of Freiburg.

The Mannheim office builds on the growing litigation practice in London, where dual qualified partner Marc Becker provides IP expertise on both U.S. and U.K. matters. Quinn Emanuel’s German office will have 6 lawyers and 12 employees overall. It will open its doors March 1, 2010.

Quinn Emanuel Expands Pharma, Biotech, and Medical Device Practices with Addition of Star Patent Litigator Peter Armenio

Send to a friend

Peter Armenio, one of the country’s most successful patent litigators who has won many major victories for his pharmaceutical industry clients, has joined Quinn Emanuel as a partner in the New York office. Peter joins the firm from Kirkland & Ellis where he was a leader in that firm’s IP practice. At Quinn Emanuel, he will Co-Chair the firm’s Global Life Sciences Practice as the firm continues to expand its patent litigation practice into the pharmaceutical, biotechnology, and medical device fields.

Peter has a long history as one of the top lawyers for companies involved in the highest stakes patent litigation, including numerous matters where the amount in controversy exceeded $1 billion. He has won major cases involving pharmaceuticals, biotechnology, and medical devices, including ANDA cases under the Hatch-Waxman Act.

Quinn Emanuel London Shortlisted for Legal Business Awards

Send to a friend

After only one year in operation, Quinn Emanuel London was nominated in two categories in this year’s Legal Business Awards, London’s equivalent of the American Lawyer awards (won by Quinn Emanuel this year as IP firm of the year).

The London team was nominated in the “Dispute Resolution Team of the Year” category, with the judges pointing out that the London team made headlines in 2009 in two major credit-crunch related disputes: Re Sigma and UBS v Nordbank. The judges recognized that Quinn Emanuel London has already built a reputation as a top firm for complex financial disputes.

QE London has also been shortlisted in the “US Law Firm of the Year” category. The judges cited the firm’s unique specialization in business litigation, noting that the firm has been able to fully exploit the counter-cyclical market conditions and has acted in some of the most significant disputes of the year.

Quinn Emanuel London partners Sue Prevezer QC, who sits as a deputy High Court judge, and Richard East were also recognized in the 2009 UK edition of Chambers and Partners.

New Case: TCW v. GUNDLACH

Send to a friend

Quinn Emanuel is representing Trust Company of the West (“TCW”) in highly publicized litigation against four former officers of TCW and their new company, DoubleLine Capital LP. The suit, pending in Los Angeles Superior Court, asserts claims for breach of fiduciary duty, unfair competition, misappropriation of trade secrets, intentional interference with contractual relations, among others.

The former officers are led by Jeffrey Gundlach, TCW’s former Chief Investment Officer and Group Managing Director, who managed or oversaw approximately $70 billion of TCW’s $110 billion in assets under management. Gundlach’s career at TCW made him widely recognized in the investment community and earned him Morningstar’s 2006 “Fixed-Income Manager of the Year” award.

The complaint alleges that as Gundlach became increasingly disgruntled at TCW, he developed a plan with his co-conspirators to steal TCW’s proprietary information and systems for use at the new company they formed while still employed by TCW. The complaint alleges that between September and December 2009, the co-conspirators downloaded TCW’s confidential and proprietary data to external hard drives on 37 separate days. This information included over 24,000 client contacts, over 150 TCW contracts with its clients, every holding of every TCW client in Gundlach’s group, and Excel spreadsheets with macros showing how TCW analyzes trade data. At the same time that the co-conspirators were downloading data, they were also acquiring office space for their new company, organizing the company in Delaware, and reserving the “DoubleLine” name.

Quinn Emanuel Named Top U.S. Litigation Firm

Send to a friend

Every two years the editors of The American Lawyer invite the top 200 law firms in the United States, the so-called AmLaw 200, to compete for top honors in litigation. In its January 2010 edition, Quinn Emanuel won the award for the top IP litigation firm in the U.S. It was also named one of the top six litigation firms in the U.S.

With respect to the IP award The American Lawyer said, “With a string of eye popping victories across a wide swath of subject matters from a bevy of partners, Quinn Emanuel put some distance between itself and the rest of the [IP] field.” The editors highlighted:

• the $100 million jury verdict and injunctions for Mattel against its archrival in the toy doll business, MGA;

• the victory for gaming machine maker Bally against IGT, which the editors called “the Microsoft of the gaming industry;”

• Nokia’s multinational (seven countries) patent licensing war with Qualcomm;

• the victory in the ITC for Seiko Epson against competing ink cartridge manufacturers;

• the victory for Roche Molecular Systems in a patent infringement suit brought by Stanford University; and

• a rare order from the Federal Circuit transferring a patent case from the plaintiff friendly Eastern District of Texas to a court in California 20 miles from its client’s headquarters.

Intellectual property litigation is the firm’s largest practice area. According to IP Law & Business, the firm has the third most active patent litigation practice in the US.

In connection with the general litigation award, the AmLaw editors emphasized the firm’s successes in the IP arena and its reputation for winning business cases at trial. The editors noted that “Quinn’s strong reputation helps drive settlements,” citing the following examples:

• the firm’s regulatory “coup of the year” convincing the SEC that Apple CEO, Steve Jobs, was unaware of the accounting significance of options back dating;

• $2 billion settlement for client Solutia when a bank syndicate backed out of a commitment to provide bankruptcy exit financing;

• $2.1 billion settlement for a number of hedge funds against Citibank; and

• representation of Dubai World in the multibillion dollar refinancing of the CityCenter in Las Vegas, the largest privately funded real estate development in  US history.

When asked why Dubai World hired the firm, general counsel George Dalton said: "They scare people."

The publication also focused on the firm's "aggressive plunge into financial litigation of all kinds, where its lack of a deal practice—and the conflict that would generate—gives them freedom to sue big banks."  It noted that Quinn Emanuel has filed lawsuits concerning structured finance products seeking over $50 billion in damages.  "Wall Street has reason to be scared."

Quinn Emanuel Elects Seven New Partners

Send to a friend

Seven associates and of counsel were elected to its partnership, effective January 1, 2010. The new partners are:

Adam Abensohn is in New York City. Adam’s practice focuses on white collar criminal defense and complex civil litigation. He served as an Assistant United States Attorney for the Eastern District of New York, where he was the lead prosecutor in numerous criminal trials and investigations. Adam also served as a law clerk to the Honorable Sonia Sotomayor, both on the United States District Court for the Southern District of New York (1996-1997) and on the United States Court of Appeals for the Second Circuit (1998-1999). He is a magna cum laude graduate of Georgetown Law School.

Anthony Alden is in Los Angeles. He does complex commercial and intellectual property litigation and arbitration, including patent infringement, contract, trade secret misappropriation, and class actions. Anthony received his Master of Laws from Columbia Law School, where he was a Harlan Fiske Stone Scholar.

Richard W. Erwine is in New York City. Richard’s practice focuses on intellectual property litigation with a particular emphasis on patent litigation. He has represented clients in matters involving computer hardware and software, electronics, and semiconductor devices. Richard received a Bachelor of Science degree in Electrical Engineering cum laude from the University of Michigan in 1990, and a Juris Doctor from the Ohio State University College of Law in 1995.

James Glass is in New York City. James specializes in intellectual property litigation, including patent and trade secret litigation. He has represented clients involved in a variety of complex technologies, including online advertising, video games, semiconductor fabrication and circuitry, LCD technology, networking technology, on-line trading systems, fiber optic gyroscope systems, noise filtering and adaptive comb filtering circuits used in video broadcasting, RAID technology, industrial automation process, thin film deposition techniques, and automated futures trading systems. He is admitted to practice before the U.S. Patent and Trademark Office. James received a Bachelor’s degree in Computer Engineering from Polytechnic University of New York and a Juris Doctor from Hofstra University School of Law.

Joseph Minias is in New York City. He has extensive experience in all aspects of restructuring matters, both in and out of court. He was recognized as one of the top “Outstanding Young Restructuring Lawyers of 2009” by Turnarounds and Workouts, a leading bankruptcy publication. He was one of twelve attorneys nationwide to be selected for this prestigious award, which honors the top bankruptcy and corporate restructuring attorneys under 40. Joseph received a Juris Doctor from Emory University School of Law. After law school, Joseph clerked for the Honorable Allan L. Gropper, Bankruptcy Judge for the Southern District of New York.

John Pierce is in Los Angeles. John is an experienced trial and appellate lawyer who represents companies and individuals in complex commercial litigation in state and federal courts throughout the country. He graduated from Harvard Law School in 2000, where he was an Editor of the Harvard Law Review.

Eric Wall is in San Francisco. He specializes in intellectual property litigation with an emphasis on patent litigation. Eric graduated from Harvard Law School where he was an Editor of the Journal on Legislation.

Quinn Emanuel Holds Patent Litigation Summit in Tel Aviv

Send to a friend

On November 12, 2009, the firm conducted a conference on U.S. patent litigation in Tel Aviv, Israel. The program, entitled “Litigating Patent Cases in the United Sates Successfully and Efficiently,” drew over 100 leading players in the Israeli intellectual property community, including top practitioners, academics, business executives, and leading entrepreneurs.

To say that Israel is a hotbed of innovation is an understatement. There are more Israeli companies listed on NASDAQ (most of them technology companies) than any other foreign country – in fact, there are more NASDAQ listed companies in Israel than there are on the entire European continent. In 2008, per capita venture capital investment in Israel was 2.5 times greater than in the U.S., more than 30 times greater than in Europe, 80 times greater than in China and 350 times greater than in India. Israel, with just 7.1 million people, attracted close to $2 billion in venture capital, as much as the 61 million living in the UK or the 145 million living in Germany and France combined.

Quinn Emanuel attorneys have been active in the Israeli legal community for years. The firm has close ties with leading Israeli companies and practitioners. This conference was the firm’s most in-depth presentation in Israel on U.S. IP litigation. John Quinn, the Founding and Managing Partner of the firm, spoke on the issue of controlling the costs of patent litigation. Claude Stern, Co-Chair of Quinn Emanuel’s National IP Litigation practice presented on winning strategies in patent and other IP litigation. Victoria Maroulis, a partner in the Silicon Valley office, examined several significant legal developments in patent law. Judging by the overwhelmingly positive reviews of the participants, the conference struck just the right balance between educating this sophisticated audience and providing practical litigation advice.

Quinn Emanuel Recognized Again as Top Plaintiffs’ Law Firm

Send to a friend

Most of Quinn Emanuel’s work is representing defendants. However, for the second year in a row, The National Law Journal has named Quinn Emanuel to its “Plaintiffs’ Hot List” honoring several firms that “did exemplary, cutting-edge work on the plaintiffs’ side” and that “demonstrated unusual flair and creativity” in achieving major victories on behalf of plaintiffs. This honor reflected The National Law Journal’s review of the firm’s work from the summer of 2008 to the summer of 2009. The firm’s lawyers regularly represent plaintiffs and have won well over $10 billion in judgments and settlements representing plaintiffs.

Among the firm’s representations recognized by The National Law Journal were a $100 million jury verdict on behalf of Mattel where MGA Entertainment, Inc. and its chief executive were found guilty of copyright-related violations and MGA was forced to turn over the billion-dollar Bratz doll franchise to Mattel, whose former employee had created the designs on Mattel’s dime; a victory for Micron Technology, Inc. against Rambus Inc. that could mean billions of dollars for the high-tech industry, where the court decided that 12 dynamic random access memory patents asserted against Micron were unenforceable due to Rambus’ bad-faith spoliation, a finding that led to a 39% drop in Rambus’ stock price; and a $30 million unanimous jury verdict for Mammoth Lakes Land Acquisition LLC against the town of Mammoth Lakes from a panel composed of Mammoth Lakes residents, the largest victory in the county’s history.

Fred Bennett Recognized as Leading Expert in Commercial Arbitration

Send to a friend

Fred Bennett, head of our arbitration practice, has been selected for inclusion in "The World's Leading Experts in Commercial Arbitration" for 2009, a publication by the Legal Medial Group. Selection is based on peer review conducted with leading practitioners in arbitration in over 60 countries. This is the second year that Mr. Bennett has been accorded this honor.

The Deal Identifies Susheel Kirpalani as Bankruptcy Star

Send to a friend

Quinn Emanuel partner Susheel Kirpalani was recently recognized by The Deal magazine as one of the world’s top young business bankruptcy lawyers. One of just eight lawyers from across all practice areas recognized by this leading business and finance publication, Kirpalani was lauded for his accomplishments since joining the firm just two years ago, including starting and growing the firm’s bankruptcy practice (which now includes 18 lawyers) and securing a number of high profile victories for firm clients. Earlier this year, the publication Bankruptcy 360, identified Quinn Emanuel as having the top creditors practice for bankruptcy cases having more than $100 million in assets.

Quinn Emanuel Nominated by Legal Business U.K. as the 2009 Most Enterprising Law Firm

Send to a friend

The London office of Quinn Emanuel has recently been nominated for a Legal Business Award, one of the most prestigious legal industry awards in the U.K. The firm was nominated for “Most Enterprising Law Firm of the Year” in recognition of the firms’ establishment of a unique “business litigation only” practice in London in 2008. Previous winners have included Linklaters, Lovells, Travers Smith and Mayer Brown.

Quinn Emanuel Bankruptcy Practice Ranked No. 1 for Creditors

Send to a friend

Law360, The Newswire for Business Lawyers, recently ranked Quinn Emanuel’s bankruptcy and restructuring practice number one among the leading creditors’ counsel in the United States based on the number of its creditor representations in major Chapter 11 cases.  Examining bankruptcy filings over a recent one-year period by companies with assets valued at more than $100 million, the 2009 Law 360 Litigation Almanac ranked Quinn Emanuel at the top of the list for firms representing creditors. 

In the past two years, the firm’s unique bankruptcy and restructuring practice has grown to 15 lawyers, focusing our efforts on litigation trusts, conflicts roles for referral firms, special counsel for debtors, and counsel to creditor and equity committees, primarily in liquidating cases or situations involving intercreditor disputes where litigation can drive recoveries. Recent representations include: the statutory creditors’ committees of Lehman Brothers, SemGroup, and Sentinel Management Group; the debtors in possession in Solutia Inc., Buffets Inc., and American Home Mortgage; ad hoc committees of creditors in Delphi Corp., ACA Capital, Summit Global Logistics, Norwood Promotional Products, and LeNature’s Inc.; and the Refco Litigation Trust. The firm is grateful to our friends in the bankruptcy and hedge fund communities for recognizing our capabilities and for helping us to offer services well-suited to our firm’s mission.

Increasing Government Scrutiny of Structured Finance Transactions

Send to a friend

Until recently, private litigants were in the vanguard in investigating and litigating wrongdoing arising from the credit crisis. Investors, insurers, and credit default swap counterparties brought both common law and federal securities claims based upon the defendants’ adverse selection of residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDO”), misleading marketing, improper payment demands, and inflated credit ratings. In response, the defendants routinely argued that the plaintiffs, as sophisticated investors, should be barred from asserting fraud claims because of (1) disclaimers in their marketing materials, (2) a purportedly heightened standard for pre-investment due diligence that amounts to fraud detection, and (3) the effect of the market downturn generally on structured products. The defendants have also argued that the rating agencies served as an independent check on their activity, and that so long as their products received the requisite ratings their actual credit quality was irrelevant.

Now, however, both federal and state government agencies have rejected these defenses and concluded that fraudulent conduct by arrangers, marketers, and managers of structured products played a significant role in the credit crisis. They also have rejected the argument that the rating agencies effectively immunized such conduct or could be relied on to prevent wrongdoing, both because of inadequacies in the rating agencies’ methodology and because of misconduct by investment banks in the rating process. These developments have been fueled by agency reviews of the defendants’ own files and documents.

SEC Settlement with Goldman Sachs
The SEC’s recent settlement with Goldman Sachs may prove to be a watershed. The SEC filed its complaint in April, alleging securities fraud for misrepresentations related to a synthetic CDO, ABACUS 2007-AC1, that Goldman structured and marketed. A synthetic CDO is a complex financial security used to speculate on or manage the risk that another’s obligation will not be paid. Synthetic CDOs like ABACUS—one in a series of transactions Goldman structured under that name—were purchased by sophisticated investors. The marketing materials contained extensive disclaimers; the CDO was exposed to the U.S. residential mortgage market, which has suffered enormous losses; and the rating agencies reviewed and rated the ABACUS securities.

Just as private litigants had done previously, the SEC concluded that none of these facts could excuse fraud. The ABACUS marketing materials represented that an independent collateral manager had selected the CDO’s RMBS collateral. According to the SEC, however, Paulson & Co.—a hedge fund client—played a significant role in the selection process unbeknownst to investors. Goldman and Paulson allegedly designed the CDO to fail for Paulson’s benefit, with Paulson helping Goldman and the collateral manager select a subprime RMBS portfolio that Paulson expected would experience losses. Paulson then entered into credit default swaps with Goldman to purchase protection on securities issued by the CDO, effectively shorting the RMBS portfolio. Goldman, meanwhile, misled the collateral manager into thinking that Paulson was investing in ABACUS’s equity and therefore that Paulson’s economic interests were aligned with those of the investors. Paulson paid Goldman $15 million to structure the CDO and assisted it in shorting the collateral. Less than a year after closing, 99% of the ABACUS portfolio had been downgraded, leading to a loss of over $1 billion to investors and approximately $1 billion in gains for Paulson. SEC v. Goldman Sachs & Co., No. 10-cv-3229, 2010 WL 1508202 (S.D.N.Y. Apr. 16, 2010).

In the days following the SEC filing, numerous private parties brought similar complaints against Goldman. Hubuschman v. Blankfein, No. 10-cv-3476, 2010 WL 1654116 (S.D.N.Y. Apr. 26, 2010) (shareholder derivative action) (lead-plaintiff motions pending); Sorkin v. Goldman Sachs Group, Inc., No. 10-cv-3493, 2010 WL 1689154 (S.D.N.Y. filed Apr. 26, 2010) (securities class action) (lead-plaintiff motion in progress); Richardson v. Blankfein, No. 10-cv-3505, 2010 WL 1689155 (S.D.N.Y. filed Apr. 26, 2010) (shareholder derivative action) (lead-plaintiff motion pending).
In July, Goldman agreed to settle the SEC action for $550 million and, without admitting or denying wrongdoing, acknowledged that, “the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information.” In announcing the settlement, Robert Khuzami, Director of the SEC’s Division of Enforcement, emphasized that relying on the sophistication of clients was no excuse for fraud. He said, “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.” Court approval of the settlement is currently pending. SEC Release 2010-123, “Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO,” sec.gov/news/press/2010/2010-123.htm.

SEC Complaint against ICP
The SEC’s suit against Goldman was followed two months later by a complaint against ICP Asset Management, an investment advisory firm that serves as a collateral manager for four CDOs. SEC v. ICP Asset Mgmt., LLC, No. 10-cv-4791 (S.D.N.Y. filed June 21, 2010). As with the SEC’s complaint against Goldman, the victims here are all presumably sophisticated financial entities, with the means to defend their own interests. Yet, the SEC nevertheless recognized that market integrity matters in every part of the financial sector, not just with small investors. According to the SEC, ICP violated its collateral management agreements by engaging in over a billion dollars in fraudulent transactions that favored ICP, its affiliates, and certain clients at the expense of the CDOs. ICP allegedly used the CDOs to buy and sell bonds for other clients in violation of its agreements, thus forcing the CDOs to absorb losses while ICP kept the profits for itself. The SEC alleges that ICP’s fraudulent trades cost the CDOs tens of millions of dollars.

Senate Reports on Investment Banks and Rating Agencies
The SEC is not alone in this new effort. The United States Senate recently issued highly critical reports on investment banks and the rating agencies. After more than a year of investigation into the investment banks’ role in the credit crisis, in April 2010 the United States Senate Permanent Subcommittee on Investigations (the “PSI”) released its report, using Goldman as a “case study”. The PSI found that Goldman helped lenders turn “high risk, poor quality loans” into highly rated securities and then exacerbated that risk by re-securitizing RMBS into CDOs. Although Goldman created such markets for its clients, Goldman profited substantially from the deterioration of RMBS via credit default swaps and other trading. As a result, Goldman was net short on the mortgage market throughout 2007. The PSI concluded that this created a conflict of interest between Goldman and its clients: “In 2007, Goldman Sachs went beyond its role as market maker for clients seeking to buy or sell mortgage related securities, traded billions of dollars in mortgage related assets for the benefit of the firm without disclosing its proprietary positions to clients, and instructed its sales force to sell mortgage–related assets, including high risk RMBS and CDO securities that Goldman Sachs wanted to get off its books, creating a conflict between the firm’s proprietary interests and the interests of its clients.” The PSI illustrated its finding with discussions of Goldman’s Hudson Mezzanine 2006-1, Anderson Mezzanine Funding 2007-1, and Timberwolf I CDOs. The PSI also released hundreds of internal Goldman emails supporting its findings. See http://hsgac.senate.gov/public/_files/Financial_Crisis/042710Exhibits.pdf.

The same month, the PSI released a new report on the rating agencies’ role in the structured-finance field, also accompanied by hundreds of internal agency e-mail messages. The PSI concluded that the rating agencies did not provide a significant check on the behavior of CDO and RMBS arrangers. Instead, it found that the agencies’ models were inadequate to predict how risky mortgages would perform and failed to account for increased credit risks from mortgage fraud, lax underwriting standards, and unsustainable housing price appreciation. It also found that the agencies failed to reevaluate securities after instituting more accurate models and failed to devote adequate resources to test their ratings. The PSI further found that competitive pressures affected the ratings; in particular, the agencies were pressured into providing AAA ratings to satisfy clients’ contractual obligations and ensure repeat business.  See hsgac.senate.gov/public/_files/Financial_Crisis/042310Exhibits.pdf.

New York AG Investigates Ratings Process
State governments also have turned a skeptical eye toward the relationship between the rating agencies and the banks that structured and marketed financial products. In May, New York Attorney General Andrew Cuomo initiated investigations of eight banks—Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole, and Merrill Lynch—to determine whether they misled the rating agencies into issuing inflated ratings. He noted the existence of a “revolving door” through which the banks lured rating analysts with huge pay raises (including Goldman’s hiring of a Fitch analyst who subsequently helped create the ABACUS CDO at issue in the SEC suit), and suggested that the ratings analysts may have helped the banks reverse-engineer their RMBS and CDOs, specifically to earn AAA ratings.

Case Law Confirms that Sophisticated Defendants Can Be Defrauded
In addition to the new agency focus, recent case law stemming from civil suits has further undermined defenses based upon the sophistication of plaintiffs in structured finance cases. In DDJ Management, LLC v. Rhone Group LLC, 2010 WL 2516811 (N.Y. June 24, 2010), the New York Court of Appeals reinstated fraud claims against a borrower that failed to repay loans provided by investment funds. The plaintiffs argued that the borrower provided misleading and inflated financial data to induce the loans. The defendants countered that the plaintiffs failed to investigate their statements and thus could not have reasonably relied on them. The court found that the plaintiff had taken reasonable steps to protect itself against deception and “should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” The court emphasized that the defendants’ written representations and warranties had assured the plaintiffs that the relevant financial figures were accurate. The case thus reinforces that due diligence does not require sophisticated plaintiffs to engage in forensic fraud detection.

Conclusion

Before the credit crisis, and for some time after it began, government entities stayed largely on the sidelines of the structured products space. Now, the game has changed. In using the traditional tools of government—subpoenas, hearings, reports, and enforcement actions—regulators and elected officials have validated an argument first advanced by private litigants: far from being a simple product of market forces, the credit crisis has its roots in fraud. In so doing, these governmental entities have fatally undermined the defenses those accused of misconduct have frequently employed in civil litigation involving structured products. The legal landscape for claims arising from them has changed radically, and, in the view of the government, the protection defendants had erected can no longer insulate them from liability.

The New Test for “Center of Main Interests”: New York Bankruptcy Court Grants Foreign Main Proceeding Recognition to BVI-Based Hedge Fund Liquidation Cases

Send to a friend

In 2005, Congress enacted chapter 15 of title 11 of the United States Code (the “Bankruptcy Code”), which makes relief available to administrators of non-U.S. insolvency proceedings following recognition by a U.S. Bankruptcy Court. Early decisions from the U.S. Bankruptcy Court for the Southern District of New York called into question whether chapter 15 relief was available to administrators of insolvent hedge funds chartered outside the United States where such funds had significant assets or investments in the U.S. See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 128 (Bankr. S.D.N.Y. 2007); In re Basis Yield Alpha Fund (Master), 381 B.R. 37, 46 (Bankr. S.D.N.Y. 2008). These opinions uniformly held that where a non-U.S. hedge fund’s primary assets were located in the U.S. and its management was located in the U.S., such fund’s “center of main interests” (“COMI”) was located in the United States and the fund could never be recognized as a “foreign main proceeding”. Indeed, the seminal Bear Stearns decision took this analysis one step further and implied that the only relief available to administrators of such non-U.S. hedge funds would be to commence a proceeding under chapter 11 of the Bankruptcy Code, which would greatly increase the administrative expense of these cross-border proceedings.

On July 22, 2010, the Bankruptcy Court for the Southern District of New York in In re Fairfield Sentry Ltd., No. 10-13164 (BRL) (Bankr. S.D.N.Y. July 22, 2010) [Docket No. 47] issued a ruling that carves back the apparently stringent boundaries established in Bear Stearns. In Fairfield, Judge Lifland determined that the proper time to determine the center of main interests of a non-U.S. hedge fund debtor is the time that the debtor files a chapter 15 petition. In Fairfield, Judge Lifland granted chapter 15 recognition as a “foreign main proceeding” to insolvency cases pending in the British Virgin Islands in respect of a group of insolvent hedge funds. Judge Lifland found that the debtors’ center of main interests at the time of the petition was the BVI because the ‘debtors’ activities were centralized in the BVI throughout the pending liquidation and the debtors’ assets consisted primarily of cash in a BVI bank account, notwithstanding the fact that while the funds were solvent, their assets and management were located in the United States.  The Fairfield opinion signals an interesting and important divergence from the previous law in the Southern District of New York. Now, administrators of insolvent non-U.S. hedge funds have a road map to recognition in the Southern District of New York.

Chapter 15 – A Brief Primer
Chapter 15 of the Bankruptcy Code governs “ancillary” insolvency proceedings, providing means by which a court-appointed representative in a non-US insolvency case can advance the interests of its estate and its creditors during the course of such proceeding. 11 U.S.C. § 1501(a)(3)-(5). Chapter 15 permits foreign debtors in non-U.S. insolvency proceedings to obtain ancillary protection through U.S. courts; it is the appropriate remedy for a foreign entity seeking the U.S. court’s assistance in a non-U.S. liquidation proceeding. See, e.g., United States v. Jones, 333 B.R. 637 (Bankr. E.D.N.Y. 2005) (denying receiver’s request to stay a U.S. lawsuit against a Canadian debtor and making clear that formal recognition under chapter 15 is required for assistance from US courts).

The first step to obtaining relief under chapter 15 is filing a petition for “recognition” of the foreign insolvency proceeding. The petition must include a certificate or other evidence affirming the existence of the foreign proceeding and the petitioner’s right to act as representative. 11 U.S.C. § 1515. The foreign proceeding may be recognized as either a “foreign main proceeding” or a “foreign nonmain proceeding.” Upon recognition of a foreign proceeding, certain relief may be automatically granted, depending on whether the case is recognized as a foreign main proceeding or a foreign nonmain proceeding. For example, where a foreign proceeding is recognized as a “foreign main proceeding,” meaning the non-US proceeding is pending in the country where the debtor has its COMI, see 11 U.S.C. § 1502(4), the automatic stay of section 326 of the United States Bankruptcy Code will apply, and all actions pending against the debtor, as well as all attempts to gain possession or control over the debtor’s property, will be stayed. See, e.g., 11 U.S.C. §§ 362(a), 1520(a).

In the case of a foreign nonmain proceeding, which is any non-US proceeding pending in the jurisdiction where the debtor has an “establishment” (defined as any place where the debtor conducts non-transitory economic activity), there is no automatic relief granted, although the court retains the ability to grant appropriate relief.

SDNY Generally Refuses to Recognize Hedge Fund Liquidations
The first reported decision from the Southern District of New York recognized the pending insolvency case of a Cayman Islands-based hedge fund as a foreign nonmain proceeding. See In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006). The SPhinX Funds were established as Cayman Islands entities. However, their business was managed and operated in New York. The SPhinX Funds in fact had no connection to the Cayman Islands, (i.e., it had no employees, offices, directors or assets in the Cayman Islands). Notwithstanding the apparent lack of connection to the Cayman Islands, the SPhinX court granted recognition as a foreign nonmain proceeding. The Court found that in the absence of any objection and where “pragmatic concerns” weigh in favor of recognition, the court will recognize the voluntary liquidation of a fund organized as a Cayman Islands Exempted Corporation. While the Court granted recognition to the SPhinX funds as a foreign nonmain proceeding, the Court did not grant any relief to the funds, which rendered recognition mostly meaningless.

Following SPhinX, a pair of decisions from the Bankruptcy Court for the Southern District of New York called into question whether an offshore fund organized as a Cayman Islands Exempted Corporation could ever qualify as a debtor in a Chapter 15 case. See In re Bear Stearns, 374 B.R. at 128; In re Basis Yield, 381 B.R. at 46. In Bear Stearns, Judge Lifland, one of the authors of Chapter 15, held that a Cayman Islands voluntary liquidation respecting a pair of related hedge funds was not entitled to recognition as either a foreign main or a foreign nonmain proceedings as defined by the Bankruptcy Code. The court took note of the fact that (i) the funds’ books and records were located in Delaware, (ii) the investment manager was a New York corporation (iii) the sole investor was located in the United Kingdom, (iv) there were no employees or managers in the Cayman Islands, although two managers were present, and (v) the majority of the funds’ assets were located in New York and found that, in light of these facts, the funds’ center of main interests was in New York. See Bear Stearns, 374 B.R. at 129-30. Additionally, the Court found that the Cayman Islands proceedings were not “foreign nonmain” proceedings because the debtors did not have an “establishment” in the Cayman Islands. The court held that it would be difficult for any Cayman Islands Exempted Corporation to demonstrate such an “establishment” “in view of the Cayman Islands’ statutory prohibition against ‘exempted companies’ engaging in business in the Cayman Islands except in furtherance of their business otherwise carried on outside of the Cayman Islands.”

Another recent opinion denied a motion for summary judgment requesting recognition of a Cayman Islands liquidation proceeding of an investment fund organized as a Cayman Islands Exempted Corporation notwithstanding the fact that no party objected to recognition. See In re Basis Yield, 381 B.R. at 46. The bankruptcy court in Basis Yield adopted the Bear Sterns court’s definition of center of main interests and found that the “conspicuous failure to try to establish, or even plead, facts supporting” the assertion that the debtor’s center of main interest was in the Cayman Islands prevented the court from granting summary judgment in favor of recognition. It is important to note that in Basis Yield, the court did not find that a voluntary liquidation in the Cayman Islands of a fund organized as a Cayman Islands exempted company could never be recognized as a foreign main proceeding, merely that there was not enough evidence to recognize this insolvency.

Fairfield Court Recognizes Proceeding as a Foreign Main
In Fairfield, Judge Lifland, the author of the Bear Stearns decision, was faced with a similar fact pattern to that presented in Bear Stearns. The Fairfield Funds (the “Funds”) were incorporated in the BVI. However, the Funds’ assets were located primarily in the United States and the Funds’ investment manager was based in New York. The Funds were Madoff “feeder funds”, meaning they primarily invested their assets with Bernard L. Madoff Investment Securities (“BLMIS”). In December 2008, BLMIS was placed into a SIPA proceeding upon discovery that the investment business was, in fact, the largest Ponzi scheme ever perpetrated. Following the commencement of BLMIS’s liquidation, the Funds ceased operations. From December 2008 through April 2009, a liquidation committee comprised of non-US based directors managed the Funds. In April 2009, certain of the Funds’ investors applied to the BVI court to commence liquidation proceedings. The BVI court granted the application and installed BVI-based joint liquidators (the “JLs”), who marshaled the Funds’ remaining cash into a BVI bank account and proceeded to wind down the Funds’ operations.

In June 2010, the JLs applied for foreign main recognition in the Southern District of New York. A pair of investors objected to the application. The central dispute in the case was the appropriate time frame for determining the location of the Funds’. The objectors argued that the Court should examine COMI as of the time when the Funds were operating companies (e.g., based on the period prior the commencement of the BVI liquidation). The objectors argued that during the period in which the Funds were operating entities, their assets and management were not located in the BVI, and instead were primarily located in the United States. The objectors further noted that the Funds’ investment manager was in the United States. As such, the objectors contended that under the Bear Stearns rationale, the Funds were not entitled to chapter 15 recognition. The JLs argued that the COMI determination should be made at the time of the filing of the petition. The JLs explained that when the petition was filed, the Funds’ only activities were those actions undertaken at the JLs’ direction in support of the liquidation. The JLs further noted that as of the filing of the petition, the Funds’ assets consisted of money in a BVI account and litigation claims in various jurisdictions.

Judge Lifland accepted the JLs’ arguments. The Court noted that upon discovery of BLMIS’ fraud, the Funds ceased operations and cancelled their contracts with their U.S.-based investment managers. Moreover, the Court found that given that the Funds’ U.S. assets consisted of investments with BLMIS, which were wiped out by the Madoff fraud, the Funds had no assets in the U.S. The Court then focused on the period after the Funds ceased operating. The Court held because the Funds’ operations were being managed from the BVI from December 2008 through the petition date (first through the liquidation committee and then through the JLs), the Funds’ “most feasible administrative ‘nerve center’ has existed for some time in the BVI.” The Court further recognized that “where, by necessity and in good faith, a foreign representative ‘relocates all of the primary business activities of the debtor to his location (or brings business to a halt), thereby causing other parties to look to the judicial manager as the location of [the] debtor’s business,’ the debtor’s COMI may ‘become lodged with the foreign representative.’” (citing In re British Am. Ins. Co. Ltd., 425 B.R. 884, 914 (Bankr. S.D. Fla. 2010)). The Court then found that there was no bad faith apparent in the JLs centralizing the Funds’ liquidation in the BVI. The Court found that in these circumstances, foreign main recognition was appropriate.

The Court further noted that even if the Funds’ insolvency case were to be recognized as a foreign nonmain proceeding, the Court would grant the JLs a broad injunction. The Court, however, did not set forth its reasoning for why foreign nonmain recognition would be appropriate.

Conclusion
Prior to the Fairfield opinion, foreign liquidators had been hesitant to attempt recognition of hedge fund cases in New York for fear of meeting the same judicial resistance seen in Bear Stearns and Basis Yield. The Fairfield decision, however, shifts the test for COMI from an examination of the debtor’s assets and operations as it was prior to its liquidation to an examination of the debtor’s assets and operations at the time its liquidators commence a chapter 15 petition. This shift in analysis opens the door for recognition as a foreign main proceeding where an administrator has been installed for sufficient time to centralize the assets and operations of the non-U.S. debtors. While the administrators in Bear Stearns and Basis Yield sought recognition shortly after their appointment, the JLs in Fairfield waited nearly a year after their appointment to seek recognition. During that year, the JLs made demonstrable progress in administering the estate and centralizing the debtors’ operations into the BVI – thereby establishing the Funds’ COMI in the BVI. The Fairfield ruling leaves unanswered questions regarding (i) the extent to which the administration and assets of a debtor must be centralized by an administrator before recognition is appropriate, and (ii) the length of time between appointment and a recognition hearing that is sufficient to support recognition. Regardless of the answers to these questions, Fairfield provides a framework for administrators of insolvent, off-shore hedge funds seeking recognition in the Southern District of New York.

The Supreme Court, OT 2009: The Business Cases

Send to a friend

The October Term 2009 in the Supreme Court was Justice Sonia Sotomayor’s first and Justice John Paul Stevens’s last. The Term’s most striking development was perhaps how Chief Justice John Roberts grasped the helm of the oft-divided Court. He voted in the majority 91% of the time overall and 83% in divided cases—the same percentage as Justice Anthony Kennedy, who is often seen as the “swing” vote on the Court. Because Chief Justice Roberts is a former big firm lawyer presumably sympathetic to the needs of the business community, this development bodes well for business interests. The Court decided an unusually large number of business cases—generally in favor of business interests.

Bilski v. Kappos, 130 S. Ct. 3218 (June 28, 2010), was the most anxiously awaited business decision of the Term. It was expected to decide whether business methods are patentable and to define what qualifies as a patentable “process” under Section 101 of the Patent Act. But the Court’s opinion decided little. A bare majority held that business methods may be patented, but held that the patent at issue, a method for hedging risk in the energy market, violated the principle that abstract ideas are unpatentable and suggested that other categories of business methods may also be found unpatentable. The Court also failed to define patentable “process,” rejecting the machine-or-transformation test adopted by the Federal Circuit as the exclusive standard, but noted that the test might still be useful in determining patentability in many cases. The Court declined to say whether software and other recently developed technologies are patentable. Thus, the Court left the specifics for the Federal Circuit to work out. Justice Stevens’s dissent, which argued that business methods categorically should not be patentable, was so long that many observers believed it might have begun as a majority opinion but suffered a defection in favor of the majority’s vaguer approach.

The Court was more decisive in the white collar arena. In Skilling v. United States, 130 S. Ct. 2896 (June 24, 2010), and its companion case, Black v. United States, 130 S. Ct. 2963 (June 24, 2010), the Court considered the scope of 18 U.S.C. § 1346, which extends the mail and wire fraud statutes to cover deprivation of “the intangible right of honest services.” That provision had been used to convict Jeffrey Skilling, the former president of Enron, and the media magnate Conrad Black, as well as a host of other prominent defendants. In Skilling, the Court considered whether the honest services provision was unconstitutionally vague. A majority of the Court chose not to strike down the provision but rather to interpret it narrowly to avoid vagueness, holding that deprivation of “honest services” must be limited to bribery and kickback schemes. As a consequence, the mail and wire fraud statutes may no longer be used to prosecute corporate (and public) officials for engaging in undisclosed self-dealing and other activities furthering their own financial interest to the detriment of shareholders or others that they are supposed to be serving.

In an important civil procedure development, the Court announced a bright line rule for a corporation’s “principal place of business” under the diversity jurisdiction statute. In Hertz Corp. v. Friend, 130 S. Ct. 1181 (Feb. 23, 2010), the Court adopted the “nerve center” test, under which a corporation’s principal place of business is held to be where a corporation’s officers direct, control and coordinate the activities of the corporation. Thus, a corporation’s headquarters will nearly always be its primary place of business, enabling corporations to remove to federal court many state court suits filed in California (or other states) where corporations do a disproportionate share of business and that might have been considered their “principal place of business” under now-discarded tests.

The Court adopted another bright-line rule in Stolt-Nielsen S.A. et al. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (Apr. 27, 2010). It held that a party may not be compelled under the Federal Arbitration Act to arbitrate a class action if the parties failed to reach an agreement to arbitrate class claims. But the decision did not determine whether arbitration agreements must expressly authorize class arbitration, leaving it unclear whether parties may implicitly agree to arbitrate class actions—for example, by adopting the American Arbitration Association rules, which include procedures for class arbitrations. Stolt-Nielsen also notably held that the arbitrators had exceeded their powers by ignoring the parties’ intent in finding class action claims arbitrable based on policy considerations. Traditionally, courts have been wary of analyzing the reasoning of arbitrators and have affirmed their rulings not withstanding manifest defects. Stolt-Nielsen’s unusual scrutiny of the arbitrators’ reasoning might now be cited to argue for more aggressive review of arbitration decisions.

In addition to reining in class action arbitrations, the Supreme Court restricted securities claims involving transactions on foreign exchanges. In Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (June 24, 2010), the Court held that Section 10(b) of the 1934 Act does not cover “foreign cubed” claims—that is, claims involving foreign investors, foreign issuers, and foreign exchanges. In Morrison, Australian investors claimed that an Australian bank had fraudulently over-stated the value of a subsidiary based in Florida. A majority of the Court held that Section 10(b) does not cover claims directed at foreign conduct. In so doing, the majority applied the presumption against the extraterritorial application of U.S. laws and rejected the “effects and conduct” test developed by Judge Henry Friendly more than 40 years ago. Dissenting, Justice Stevens accused the majority of “pay[ing] short shrift” to the “accumulated wisdom and experience of the lower courts.”

That wisdom and experience may prevail in the end. On July 21, 2010, President Obama signed into law financial reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010). An unheralded provision of the Act, Section 929P(b) seeks to restore the “effects and conduct” test by giving district courts jurisdiction over securities claims involving (a) conduct in the United States that “constitutes significant steps in furtherance” of a securities violation even if the transaction in question occurred abroad and involved only foreign investors and (b) conduct outside the United States that had “foreseeable substantial effects” in the United States. Congress made those revisions to the 1933 Act, the Investment Advisors Act, and the 1934 Act. Congress plainly intends that Section 929P(b) give those laws extraterritorial effect. That effort may nonetheless fail because in Morrison and several other cases this term, the Supreme Court held that extraterritoriality goes to the merits of the claim rather than to a court’s jurisdiction to hear it. Whether Congress succeeded in overruling Morrison may soon be for the Court to decide.

Securities plaintiffs had a clear victory this year in Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784 (Apr. 27, 2010), which invovled alleged misrepresentations concerning the arthritis drug Vioxx. In that case, the Supreme Court adopted an interpretation of the statute of limitations for securities fraud claims that favors plaintiffs. That statute of limitations requires securities claims to be brought within two years “after the discovery of the facts constituting the violation.” The Court held that this statute requires more than facts putting a would-be plaintiff on notice that he or she might have a claim. Instead, it requires that a plaintiff actually discover facts constituting the violation or that a reasonably diligent plaintiff would have discovered those facts, and such discovery must include facts showing both a materially false statement and scienter.

Finally, an antitrust plaintiff won a victory breaking a string of antitrust defense victories in the last few terms. In American Needle, Inc. v. National Football League, 130 S. Ct. 2201 (May 24, 2010), a sports apparel maker sued the league and its teams for entering into an exclusive agreement with Reebok to manufacture and sell trademarked hats and other headgear for NFL teams. The Seventh Circuit had held that the defendant teams, who had formed National Football League Properties to license their intellectual property, acted as a single entity and therefore were not capable of conspiring under Section 1 of the Sherman Act. The Supreme Court unanimously disagreed. In reasoning that applies to all joint ventures, the Court held that application of Section 1 turns upon substance rather than form and that, despite forming an entity to license their trademarks, the NFL teams should have been treated as independent entities because they are separate economic actors capable of pursuing separate economic interests. In so doing, the Court noted that the teams might have a justification for banding together to license their trademarks, but only if they could satisfy the “flexible Rule of Reason.” Although such a flexible, fact-specific analysis runs counter to the Roberts Court’s general affinity for bright-line rules, it is consistent with both the teachings of the Chicago School of Economics and the jurisprudence of Justice Stevens, who was an antitrust lawyer before joining the Court and the author of the American Needle opinion. Whether a majority of the Roberts Court continues to apply that approach to Section 1 claims after Justice Stevens’s retirement remains to be seen.

The Difference Between a Falsehood and a Lie: Recognizing, Preventing, and Confronting Perjury

Send to a friend

There is nothing so jarring to an attorney as when, during a deposition, the witness being deposed provides testimony the attorney believes to be untrue. False testimony, even if inadvertent, creates numerous difficulties for the attorney defending the deposition. Often the testimony will be inconsistent with other evidence of record, such as documentary evidence, and may create additional disputes that will need to be resolved by the trier of fact. Regardless of whether the false testimony is significant to the case, opposing counsel may use the false testimony to impeach the witness at trial, and the witness's testimony regarding more important matters may be disregarded by the jury. Finally, if a witness deliberately provides false testimony, the attorney may have an ethical obligation to take steps to remedy the witness's conduct. This article explores strategy for evaluating testimony to ascertain whether it is false, taking steps to ensure that a witness does not provide false testimony, and an attorney’s obligations if a witness intentionally gives false testimony.

Evaluating a Witness's Testimony
Before determining what action can be taken to prevent or remedy false testimony, an attorney must first ascertain whether testimony is false or not. Attorneys have a unique perspective on the events that are the subject of a civil litigation in that they are often privy to documentary evidence and testimony that their own clients may not even be permitted to review. Of course, the mere fact that information is set forth in documentary form does not make it accurate. A person may send an email that sets forth incorrect information. A contract may provide for certain obligations that go unperformed. Individuals negotiating an agreement may stretch the truth to enhance their bargaining positions. In short, the documentary evidence which attorneys often rely on should not be automatically accepted over the recollection of an individual who had first-hand involvement in the events that are the subject of the litigation.

Moreover, individuals perceive and interpret events differently, and it is the attorney’s role to advocate. his client’s version of events in the course of the representation. However, in the case of a corporate client, different employees may have differing recollections of past events, which does not necessarily mean that either is lying, particularly when the lawsuit concerns events that happened years before. A witness who intends to tell the truth may nevertheless provide false information.
There are, nonetheless, cases where a witness intentionally provides false information. The witness may be motivated by a desire to obtain a more favorable outcome of the litigation, especially if he has a vested interest in that outcome, or to prevent information that is unfavorable to the witness on a personal or professional level from coming to light. These are the cases that clearly pose the greatest challenge to the lawyer as advocate and as officer of the Court.

Avoiding False Testimony Through Deposition Preparation
Thorough preparation of a witness for deposition is the easiest and most effective way to ensure that a witness provides accurate and truthful testimony. For most witnesses, the prospect of testifying under oath encourages the witness to exercise care and accuracy when testifying. Deposition preparation provides the attorney defending the deposition an opportunity to investigate the witness's knowledge and serves to refresh the witness's recollection. By questioning the witness, the attorney has the opportunity to hear the witness recount his view of events. If the witness provides information that is inconsistent with other information of record, such as documentary evidence, the attorney can seek further clarification regarding the witness's recollection of events.

While deposition preparation plays a critical role in ensuring that a witness provides accurate testimony, the opposing party is entitled to at least some discovery of the information that the witness has reviewed. In California, for instance, opposing counsel is entitled to review all documents used to refresh a deponent’s memory with respect to any matter about which the deponent testifies. Cal. Evid. Code § 771 (a); see also International Ins. Co. v. Montrose Chemical Corp. of California, 231 Cal. App. 3d 1367, 1372 (Cal. App. 1991). The law in Illinois and New York is substantially similar. See Lebajo v. Dept. of Public Aid, 569 N.E.2d 70, 76 (Ill. App. 1990); E.R. Carpenter Co. v. ABC Carpet Co. Inc., 415 N.Y.S.2d 351, 353 (N.Y. City Civ. Ct. 1979). As a result, the act of refreshing a witness's questionable recollections with contradicting documentary evidence may itself lead opposing counsel right to the problem.

Potentially False Testimony at a Deposition
Even the most thoroughly prepared attorney, however, will not be able to anticipate every avenue of questioning at a deposition. The repercussions of providing a false answer in the deposition may be immediate: the opposing attorney may question the witness about the apparently false answer in the hopes of securing even more damaging testimony. Even if the opposing attorney does not attack the witness's answer, the defending attorney must decide whether to clarify the perceived false statement during redirect.

Redirect can be a very risky proposition. Courts in some states forbid an attorney defending a deposition to ask a witness about his answers off the record, except for the purpose of determining whether to assert a privilege. See Del. Super Ct. R.C.P. 30(D)(1); N.J. Ct. R. 4:14-3(f); S.C. R.C.P. 30(j)(5). And while in those states which permit such questions, the contents of such communications will generally fall within the ambit of the attorney-client and work-product privileges, Haskell Co. v. Georgia Pacific Corp., 684 So.2d 297, 298 (Fla. App. 1996), the mere fact that the witness discussed the subject of his testimony off-the-record with her attorney may still be used at trial to undermine the witness's credibility.

Redirect should therefore be employed only sparingly. It is best used in those instances in which the attorney is confident that there has been a factual misrepresentation, the witness could be made aware of that factual misrepresentation, and the witness is likely to correct that misrepresentation when confronted with it.

An Attorney’s Ethical Obligations Where a Client Has Willfully Made a False Representation
In certain circumstances, it may be apparent that the witness has willfully provided false testimony at a deposition. The most obvious example of such a situation is when the witness later admits to his attorney that he has provided false testimony in order to increase his chances of winning a case, eliminating any uncertainty as to falsity. See Nix v. Whiteside, 475 U.S. 157 (1986). In the context of assessing whether a defendant’s Sixth Amendment rights in a criminal trial have been violated where the attorney refuses to put a witness on the stand for fear of suborning perjury, courts have employed stringent standards in determining when an attorney may properly conclude that the witness will commit perjury. In Illinois, the attorney must have a “firm factual basis” for believing that the witness will commit perjury. People v. Calhoun, 815 N.E. 2d 492, 502-03 (Ill. App. Ct., 4th Dist. 2004). In California and New York, the standard is likely even higher, requiring that an attorney have “actual knowledge” that the statement was false. See New York State Bar Association Committee on Professional Ethics, Opinion 837 (2010) (“A lawyer’s reasonable belief that evidence is false does not preclude its presentation to the trier of fact.”); State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 1983-74. These authorities suggest that, in the context of civil litigation, the attorney must have a similarly high degree of confidence that the witness has committed perjury.

An attorney, whether in the criminal or civil context, has a duty of loyalty to his client and must zealously defend his client’s interests. See Cal. R. Prof’l Conduct, 3-100; Ill. Sup. Ct. R. Prof’l Conduct, R. 1.6(a); 22 NYCRR Part 1200, R. 1.6(a). At the same time, an attorney is an officer of the Court and may not mislead the Court by relying on information that he knows to be false. See Cal. R. Prof’l Conduct, 5-200; Ill. Sup. Ct. R. Prof’l Conduct, R. 3.3(a); 22 NYCRR Part 1200, R. 3.3(a). The obligations imposed upon attorneys to navigate between these conflicting interests differ from state to state.

No California court has addressed the issue with respect to perjured deposition testimony. Some guidance may be found, however, in the formal opinions of the State Bar and the Los Angeles County Bar Association. The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion 1983-74 suggests that if an attorney in a civil litigation is unable to convince his client to correct perjurious testimony, the attorney should seek to withdraw from the representation without disclosing the perjured testimony to the court. If the court does not permit the attorney to withdraw, the State Bar requires that the attorney continue his representation but forbids the attorney from thereafter relying upon or referring to any of the perjured testimony. Under no circumstances, however, is the attorney to disclose his client’s perjury to the court or opposing counsel. See Los Angeles County Bar Association Formal Opinion Numbers 305 & 386.

Attorneys practicing in New York, however, may be obligated to disclose perjurious testimony to the court. While no court in New York has squarely addressed the issue, the Minnesota Supreme Court’s decision in In re Disciplinary Action Against Mack is relevant, as it interprets the Model Rules of Professional Conduct, which New York has also adopted. 519 N.W.2d 900 (Minn. 1994). In that case, an attorney learned from his client that she had given materially false testimony in a deposition six months earlier. The attorney informed the client that she would have to correct her testimony if she testified at trial, but otherwise could continue the lawsuit and simply “rely on her right to remain silent.” Id. at 901. The attorney never advised his client to disclose her misrepresentation, and never disclosed the misrepresentation to the court himself. Id. at 901-902.

Appealing his suspension from the Minnesota State Bar, the attorney argued that his conduct was justified on the ground that the attorney-client privilege precluded the disclosure of the falsity of the client’s testimony. Id. at 902. The Minnesota Supreme Court rejected the attorney’s argument. The Court noted that the rules of professional conduct in Minnesota directly impose a duty to disclose or take remedial action when a client is known to have committed perjury, even if compliance requires disclosure of information that would otherwise be protected by the attorney-client privilege. Id.

Advisory opinions issued by the Professional Ethics Committees of both the New York State Bar Association and the New York County Lawyers’ Association are in accord with the Minnesota Supreme Court’s decision. Both opinions conclude that under the New York Professional Conduct Rules, an attorney has a duty to attempt to convince his client to correct false testimony. If the client refuses to correct her testimony, the lawyer is duty bound to disclose the perjury to the court or opposing counsel. New York State Bar Association Committee on Professional Ethics, Opinion 837; NYCLA Committee on Professional Ethics, Formal Opinion 741. Given that the professional conduct rules in Illinois are identical to those in Minnesota and New York, attorneys practicing in Illinois likely face similar ethical obligations.

Conclusion
Advocacy in civil litigation is based on an interpretation of the factual record. Depositions play an important role in elucidating that factual record and a witness should be prepared before a deposition to enable her to accurately provide her recollection of prior events. An attorney must be sensitive to the possibility that interpretations and recollections of the past will differ, and not come too quickly or easily to the conclusion that his client is lying. Only in those situations in which the attorney has a high degree of confidence that a witness has willfully given false testimony does an attorney have an obligation to take action to address the witness's actions.

The Economic Espionage Act: Protecting America’s Most Valued Assets

Send to a friend

The DOJ announced on April 26, 2010 that it was adding 35 new prosecutors and investigators as part of its increased effort to protect intellectual property. See http://www.justice.gov/opa/pr/2010/April/10dag-480.html. Acting Deputy Attorney General Grindler proclaimed that “intellectual property law enforcement is central to protecting our nation’s ability to remain at the forefront of technological advancement, business development and job creation.” Id. The Economic Espionage Act (“EEA”) of 1996 – the first federal law protecting intellectual property that has traditionally fallen outside of the protection of patent and copyright laws – is key to this effort. See H.R. Rep. 104-788, 1996 U.S.C.C.A.N. 4021, 4022-23. The EEA makes it a crime to wrongfully copy or otherwise control trade secrets, “if done with the intent to (1) benefit a foreign government, instrumentality, or agent, or (2) disadvantage the rightful owner of the trade secret and for the purpose of benefitting another person.” Id. at 4022. Prosecution under the EEA often runs parallel to a civil action, and the statute itself provides for some civil remedies. This article will provide a brief history of the EEA, and an explanation of the offenses that fall under it, defenses to prosecution and recent developments under the Act.

Purpose of the EEA
The EEA was passed to prevent injury to American businesses caused by corporate spying and theft of proprietary economic information by employees, competitors and foreign governments. Mark D. Seltzer & Angela A. Burns, Criminal Consequences of Trade Secret Misappropriation: Does the Economic Espionage Act Insulate Trade Secrets from Theft and Render Civil Remedies Obsolete, B. C. Intell. Prop. & Tech. F., May 25, 1999, at 5. At the time the EEA was passed, the American Society for Industrial Security estimated that American businesses were losing up to $63 billion a year as a result of trade secret theft. H.R. Rep. No. 104-788, 1996 U.S.C.C.A.N. 4021, 4024-25. “For many companies this information is the keystone of their economic competitiveness.” Id. at 4023. The passage of the EEA was necessary to “maintain our industrial and economic edge and thus safeguard our national security.” 142 Cong. Rec. H10,461 (1996).

Elements of the EEA
The EEA criminalizes two principal categories of corporate espionage: “economic espionage” pertaining to foreign governments, instrumentalities or agents as defined by 18 U.S.C. § 1831; and the “theft of trade secrets” by individuals and competitors as defined by 18 U.S.C. § 1832. Both provisions provide for prosecution of those who (1) steal, take, copy, upload, send or communicate a trade secret without authorization; (2) receive, buy or possess a trade secret knowing it to be stolen or taken without authorization; or (3) attempt or conspire to commit the aforementioned offenses. Sections 1831-1832.

Section 1831 focuses on those who act with the intent or knowledge that their offense will benefit a foreign government, instrumentality, or agent. This provision does not apply to theft by private corporations acting for their own benefit. It applies only when there is “evidence of foreign government sponsored or coordinated intelligence activity.” 142 Cong. Rep. S12,212 (daily ed. Oct 2, 1996) (Managers’ Statement for H.R. 3723). Section 1832, on the other hand, is a general criminal trade secrets provision, applying to anyone who knowingly engages in the theft of trade secrets, or an attempt or conspiracy to do so, “with intent to convert a trade secret . . . to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will injure any owner of that trade secret,” if the trade secret is related to or included in a product that is produced or placed in interstate or foreign commerce. 18 U.S.C. § 1832. This provision targets the more common theft of commercial trade secrets by business rivals and former employees.

Sections 1831 and 1832 differ with respect to the “intent” elements that must be proven for prosecution. A defendant charged under § 1832 must have an intent to convert a trade secret “to the economic benefit” of anyone other than the owner of the trade secret. Section 1831, however, requires that the offense merely benefit a foreign government, instrumentality or agent. The benefit under § 1831 may be interpreted broadly and includes a “reputational, strategic, or tactical benefit.” H.R. Rep. No. 104-788, at 11 (1996), reprinted in 1996 U.S.C.C.A.N. 4021, 4030. In addition, § 1832 requires proof that a defendant intended or knew that the misappropriation would injure the owner of the trade secret, while this requirement is absent in § 1831.

Trade Secrets
“Trade secrets” are defined in 18 U.S.C. § 1839 as encompassing “all forms and types of financial business, scientific, technical, economic, or engineering information.” This can include “patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.” 18 U.S.C. § 1839. To maintain its protected status, however, the owner of the alleged trade secret must “take reasonable measures to keep such information secret,” and the information must “derive some independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.” Id. This definition is based on the Uniform Trade Secrets Act (“UTSA”), the model statute for state civil actions for misappropriation of trade secrets, but goes further in including a wider array of intangible information than traditional state laws do. See United States v. Ho, 155 F.3d 189, 196 (3d Cir. 1998).

Under the EEA, a trade secret must not be known to, or be readily ascertainable by, the general public. The EEA widened the definition of trade secret under UTSA, which only mandates that a “trade secret” cannot generally be known to “other persons who can obtain economic value from its disclosure and use.” See David W. Quinto & Stuart H. Singer, Trade Secrets: Law and Practice 3 (Oxford University Press 2009). The EEA’s use of “public” suggests that items not known to a broader audience outside of “industry insiders” still qualify for trade secret protection. But see U.S. v. Lange, 312 F.3d 263, 267 (7th Cir. 2002) (reading “public” to refer to the “economically relevant public,” meaning “persons whose ignorance of the information is the source of its economic value”). Under either definition, however, nothing that is necessarily disclosed to the public can qualify for protection as a trade secret. See Hudson Hotels Corporation v. Choice Hotels Int’l, 995 F.2d 11, 1177 (2nd Cir. 1993).

Penalties Under the EEA
Individual violations of § 1831 are punishable by a prison sentence of up to fifteen years and/or a fine of up to $500,000, and organizations can be fined up to $10 million. Individual violations of § 1832 carry sentences of up to ten years imprisonment and individual fines of up to $250,000, with organizational fines of up to $5 million. Under both provisions, convictions require forfeiture of any property constituting, or derived from, the proceeds of an EEA crime, and, if the sentencing court so determines, any property used or intended to be used to commit an EEA violation. See 18 U.S.C. § 1834.

Defenses to the EEA
There are several defenses to prosecution under both provisions of the EEA. First, the owner of a trade secret does not have an “absolute monopoly on the information or data that comprises a trade secret.” 142 Cong. Rec. 27, 116 (1996). Independent development using unprotected information underlying a trade secret is a defense to theft of the secret. An individual or company may “reverse engineer” another’s trade secrets without misappropriating the secret. See ConFold Pac., Inc. v. Polaris Indus., 433 F.3d 952, 959 (7th Cir. 2006). The fact that a secret merely could be reverse engineered, however, is not a defense to the theft of the trade secret that is “not readily ascertainable.” Finally, a defendant’s good faith belief that he had a right to use the information, either because it was in the public domain or because the information belonged to him, may be a defense to prosecution. See 18 U.S.C. §§ 1831, 1832.

Recent Developments Under the EEA
In April 2010, the U.S. Attorney’s office for the Southern District of New York filed the second complaint this year against an individual for theft of trade secrets, in a case involving theft of computer codes for “high-speed trading systems.” Samarth Agrawal, a former trader at Societe Generale, allegedly printed and took hundreds of pages of proprietary computer codes for “high-speed trading” from his office on several occasions during the five months leading up to his resignation. Agrawal then allegedly deleted files on his personal drive containing the protected code on his last day in the office. Earlier this year, Sergey Aleynikov, a former employee at Goldman Sachs, was indicted for allegedly taking, on his last day of work, substantial portions of Goldman Sachs’ proprietary code for its automated “rapid-fire” stocks and commodities trading system. After transferring the code from his computer, Aleynikov allegedly deleted the files and programs from his computer in an attempt to erase evidence of the transfer. In press statements regarding the indictments, the U.S. Attorney stressed the corporate resources that went into developing the computer codes and the government’s commitment to prosecuting breaches of “economic security.” http://www.justice.gov/usao/nys/pressreleases/April10/agrawalsamartharrestpr.pdf; http://www.cybercrime.gov/aleynikovChar.pdf.

Prior efforts to prosecute conduct under the EEA have led to mixed results, however. In 2008, the U.S. Attorney’s Office for the Central District of California tried a case against a former Broadcom employee for taking, during the month prior to his resignation to commence work with a competitor, approximately 5,000 files and documents from Broadcom. U.S. v. Tien Shiah, No. CR06-92, slip op. (C.D. Cal. Feb. 19, 2008). The defendant claimed that the documents he took with him were part of his working “toolkit.” In a bench trial, the judge acquitted the defendant, finding the defendant lacked the requisite intent to convert Broadcom’s trade secrets, in part because the defendant did not distribute Broadcom’s trade secrets to his new employer and did not directly use any of the information taken from Broadcom at his new job. Id. at 44-45. And in November 2009, a jury in the Northern District of California was unable to reach a verdict on charges that two defendants conspired to steal computer chip design trade secrets from their employer, Netlogics Microsystems, as well as a Taiwan corporation where neither was employed. The indictment alleged that the individuals created their own company for the purpose of developing and marketing products related to the trade secrets, as part of a program created and operated by the People’s Republic of China.

Charges under § 1831 have only resulted in three convictions since the enactment of the law. In 2008, a Northern District of California judge handed down the first sentence for a violation of § 1831, in a case involving misappropriation of trade secrets for the benefit of the People’s Republic of China. See http://www.justice.gov/opa/pr/2008/June/08-nsd-545.html. The defendant pled guilty to misappropriating, on behalf of his new employer, trade secret source code products used for military purposes, including night vision and motion simulation. The defendant was also utilizing the trade secrets to assist two separate air forces in Southeast Asia. And last year, a judge in the Central District of California convicted a former Boeing employee of economic espionage for taking Boeing trade secrets relating to the Space Shuttle and the Delta IV rocket over the course of approximately twenty years, for the benefit of the People’s Republic of China.

Given the DOJ’s recent commitment of resources to protecting intellectual property interests, however, it seems likely that the EEA will play a greater role going forward.

Recent Decisions Reflect the Courts’ Increasing Scrutiny of Large Patent Damage Awards

Send to a friend

Recent Decisions Reflect the Courts’ Increasing Scrutiny of Large Patent Damage Awards

One of the most troubling patent issues facing in-house IP counsel is the increasing size of patent infringement damage awards. The perceived ease with which a patent jury will award seven-, eight- or even nine-figure awards creates perverse incentives in litigation, reducing the chances for early settlement. Patent holders with marginal patent claims, spurred by visions of windfall damages of hundreds of millions of dollars, irrationally reject reasonable settlement offers. And the specter of huge awards offers defendants the Hobson’s choice of either agreeing to the plaintiffs’ unreasonable settlement demands or expending millions of dollars while weathering years of patent litigation.

At the urging of a number of large corporations (who, not coincidentally, frequently find themselves in the crosshairs of patent holders), Congress is considering the first major reforms to U.S. patent law in 50 years. The proposed changes call for federal courts to play a much more active role in reviewing trial theories, evidence and jury instructions pertaining to damages in patent infringement suits. Advocates of reform argue the changes will increase consistency, uniformity and fairness in patent damages awards, thereby improving the chances for early resolution of patent disputes. But given the failure of similar reform efforts in the last three legislative sessions, there is little reason to believe that Congress will be any more successful this time.

Nevertheless, recent decisions addressing patent damage awards may give in-house counsel some reason for optimism. In advance of any legislative reform, both trial and appellate courts are already giving greater scrutiny to the theories and evidence supporting patent damages awards.

Current statutory framework for infringement damages
The Patent Act provides that a successful patent infringement plaintiff is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer[.]” 35 U.S.C § 284 (2006). Although the statute authorizes two types of compensation—lost profits or a reasonable royalty—most plaintiffs seek damages based on a reasonable royalty for reasons related to ease of proof.

A reasonable royalty calculation imagines the results of a hypothetical negotiation between the patentee and the infringer at the time the infringement begins. Integra Lifesciences I, Ltd. v. Merck KGaA, 331 F.3d 860, 869 (Fed. Cir. 2003). For purposes of the hypothetical negotiation, it is assumed that the patent-in-suit is valid and enforceable and both parties are willing to enter into a licensing agreement. To determine the relevant royalty rate, courts consider a number of factors, such as the royalty rates set in any comparable licensing agreements entered into by the patentee or the infringer. These factors are often referred to as the Georgia-Pacific factors, after Georgia-Pacific v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).

Plaintiffs who do not manufacture, sell or otherwise practice their patented inventions typically cannot obtain lost profits. Also, according to a recent study, because of the difficulty in proving lost profits, many plaintiffs who do practice their inventions still opt to seek only reasonable royalty damages, with nearly 60% of patent damages awards issued from 2002-2008 being based on a reasonable royalty analysis.

Even though these basic tenets of proof have not changed, recent decisions suggest that courts are scrutinizing these established damage principles more strictly than before, undercutting the popular perception that large patent damage awards are too easily obtained.

Cornell v. Hewlett Packard and the Entire Market Value Rule
In Cornell University v. Hewlett-Packard Co., 609 F. Supp. 2d 279 (N.D.N.Y. 2009), for example, Federal Circuit Judge Randall Rader, sitting by designation in the Northern District of New York, reduced the jury’s award of $184 million in infringement damages to $54 million, finding that Cornell’s damages expert incorrectly applied the “entire market value rule.” Because damages are intended to compensate the patentee for the use of the invention and not to punish the infringer, courts have required that evidence of damages be tied to the value of the invention. For example, following this general rule, the royalty base for a patent for an improved airplane seat—just one of many individual components that make up the final product—would be based on the sales price of the seat, not the sales price of the entire plane. If however, the plaintiff can prove that the patented feature creates customer demand for the entire product, the royalty base can be the price of the entire product. This exception to the general rule is called the “entire market value rule.”

Cornell’s patent was directed at technology enabling microprocessors to run faster by simultaneously executing multiple instructions. Hewlett-Packard (“HP”) purchased individual microprocessors from Intel and IBM, mounted several microprocessor units into components known as CPU bricks, and sold servers incorporating the CPU bricks. HP also sold a limited number of individual CPUs. After an eight day trial, the jury found that the microprocessors used in HP servers infringed Cornell’s patent. Relying on the entire market value rule, Cornell’s expert testified that the sales base should be calculated from the sales of HP’s completed server and workstation products, which was $23 billion. The jury ultimately awarded $184 million in damages by applying a 0.8% royalty rate to this $23 billion base figure.

Judge Rader, however, took issue with Cornell’s evidence and expert testimony regarding this royalty base. He noted that the patented invention affects only one of many components within the CPU, and that the CPUs are combined with many components to form CPU bricks, which are themselves but part of a server or workstation product. Finding no evidence that the patented invention drove demand for the entire server or workstation systems, he rejected Cornell’s attempt to apply the entire market value rule. He also noted that HP’s “hypothetical processor revenue calculation represents the only reliable evidence in this record of adequate compensation for infringement of the claimed invention.” As a result, the court granted HP’s motion for judgment as matter of law, reducing the jury’s damage award by more than 70 percent.

Lucent v. Gateway
In Lucent Technologies Inc. v. Gateway, Inc., et al., 580 F.3d 1301 (Fed. Cir. 2009), the Federal Circuit likewise rejected the application of the entire market value rule due to lack of evidence that the patented feature drove demand for the accused product. Lucent’s patent was directed at filling a data entry field with data selected by the user from an on-screen tool. Rejecting Microsoft’s validity challenge, the jury found that Microsoft products that feature a date selection pop-up tool, including Outlook, infringed the patent. Microsoft’s total sales of infringing software products were approximately $8 billion. At trial, Lucent asked the jury to apply an 8 percent royalty rate to this total sales amount, and to award $562 million in damages. The jury awarded a $358 million lump-sum royalty payment.

The Federal Circuit vacated the award and ordered a new trial on damages, finding that the jury’s lump-sumaward was not supported by substantial evidence. The court also held that to the extent the jury’s lump-sum award was based on an entire market value calculation, the award was both unsupported and against the clear weight of the evidence. The infringing “date picker” tool was “but a very small component” of a much larger software program with many important—and noninfringing—features. Noting the “unmistakable conclusion” that the patented invention was “not the reason consumers purchase Outlook,” the court held that it was an error to apply the entire market value rule.

The Federal Circuit also took issue with Lucent’s running royalty damages analysis because a lump-sum analysis was required to justify the jury’s lump-sum award. In a lump-sum licensing agreement, the patentee receives a substantial payment up-front, and the licensee enjoys the benefit of capping its liability and using the patented invention without any further expenditure. A lump-sum license does not usually require that the licensee report its actual use of the invention to the patentee. It therefore reduces the risk to the patentee that the licensee will engage in false reporting and underpay. In contrast, a running royalty requires the licensee to pay in proportion to its actual use of the invention, and the patentee assumes the risk that the invention may become less valuable or even commercially obsolete over time. Because Lucent’s damages expert relied on a running-royalty analysis to reach his conclusions, and Lucent presented “little factual testimony explaining how a license agreement structured as a running royalty agreement is probative of a lump-sum payment,” the court overturned the jury’s lump-sum award.

The court seemed particularly troubled by the evidence of purportedly “comparable” license agreements proffered to support an 8 percent royalty rate. Lucent introduced eight agreements, but only four were lump-sum agreements. The court found the 1993 Dell agreement with IBM, in which Dell paid $290 million in a lump sum to license IBM’s patent portfolio, “vastly different from any agreement Microsoft and Lucent would have struck for the [patent-in-suit] at the time of infringement,” noting that in 1993 Dell’s business was built around selling IBM clones (thus supporting a higher lump-sum payment to IBM). The court also dismissed as not comparable three lump-sum license agreements between Microsoft and HP ($80 million), Apple ($93 million) and Inprise ($100 million), noting that those were cross-license agreements for large patent portfolios, and not for a single patent. Finally, the court dismissed Lucent’s remaining agreements because they were structured around a running royalty, not a lump sum, again stressing that Lucent had failed to present the jury with evidence tying those agreements to a lump-sum award. The Federal Circuit ultimately vacated the $358 million award and remanded the case for a new trial on damages.

i4i v. Microsoft
Patent damages decisions have not all brought good news for defendants, however. The decision in i4i Ltd. Partnership v. Microsoft Corp., 589 F.3d 1246 (Fed. Cir. 2009), for example, provides a cautionary tale for patent defendants wishing to take advantage of the courts’ stricter scrutiny of damage awards. The jury awarded i4i $200 million in damages. Because Microsoft had failed to move for judgment as a matter of law (JMOL) prior to the verdict, the Federal Circuit held that it could not review the sufficiency of the evidence supporting the award.

The infringing feature was the XML editing functionality built into Microsoft Word. As a benchmark, the plaintiff’s expert relied on a product called XMetaL, which retailed for $499. The expert multiplied its price by Microsoft’s profit margin (76.6%) to determine a hypothetical profit for the invention. He then applied the 25-percent rule—which assumes that an infringer would be willing to part with 25 percent of the profits from infringing sales to use the invention—after testifying that the rule was well recognized and widely used in the field. His calculations yielded a royalty rate of $96 per unit, to which he added $2 per unit to account for additional Georgia-Pacific factors. By multiplying the $98 per unit royalty rate by the number of Word products used in an infringing manner (2.1 million), the expert arrived at a $200 million damages figure. The district court judge enhanced these damages by an additional $40 million based on the jury’s finding that Microsoft’s infringement was willful.

The Federal Circuit upheld the district court’s decision to admit i4i’s damages expert’s testimony. It explained that the weaknesses in the expert’s damage calculations identified by Microsoft were, “at their heart,” merely disagreements with the conclusions but not with the methodology.

Although facially a pro-patentee decision, the Federal Circuit demonstrated its intent to examine more vigorously damage awards. Unlike Lucent (in which the court could conduct a substantial review of the evidence), the Federal Circuit was “constrained to review the verdict under the much narrower standard applied to denials of new trial motions.” It stated that “the outcome might have been different” if it had been able to consider whether the award was “grossly excessive or monstrous” in light of the retail price of the infringing product and the fees Microsoft paid for comparable patent licenses. The court also suggested that, had its hands not been tied, it could have considered whether i4i’s damages expert gave the proper weight to certain Georgia-Pacific factors. Acknowledging that the $200 million jury award was “high,” the court concluded that the award “was supported by the evidence presented at trial, including the expert testimony—which the jury apparently credited.”

Conclusion
The stricter scrutiny of patent damages awards is already affecting pending patent litigation. In IP Innovation LLC, et al. v. Red Hat Inc., et al., No. 07-447 (E.D. Tex. Mar. 2, 2010), for example, Federal Circuit Judge Rader, again sitting by designation, excluded license agreements used by the plaintiff’s damages expert as not “comparable to the patents-in-suit.” Moreover, citing Lucent, he rejected the expert’s application of the entire-market-value rule. These decisions illustrate a trend toward courts adopting a “gate keeping role” as to patent damages, entirely consistent with, and in advance of, any benefit that may result from the Patent Reform Act.

Why Germany is Far and Away the Dominant Patent Litigation Forum in Europe

Send to a friend

Germany is by far the most attractive venue for patent proceedings in Europe. It attracts between 50% and 70% of all patent litigation activity there. This article summarizes some of the reasons for this phenomenon.

Germany has the largest economy in Europe. No big player can afford to ignore the German market. Thus, the possibility of blocking a competitor from serving the German market offers real leverage. This threat is created by the German patent law system, which allows injunctive relief as a matter of right. If a court determines that a defendant has infringed a patent, the plaintiff is automatically entitled to injunctive relief; there is no role for the court’s discretion. A first instance judgment is enforceable even pending an appeal, as long as the plaintiff posts a bond to cover the defendant’s possible damages if the decision is set aside on appeal.

This remedy is enhanced by the system of bifurcation. Germany separates infringement actions from validity proceedings. A defendant cannot ask the infringement court to dismiss the case on the grounds that the patent in suit is invalid. Rather, the defendant must file a separate nullity action in the German patent court in Munich or an opposition proceeding in the European Patent Office or the German Patent Office (depending on whether it is a European or a German patent). The effect of such filing on the infringement action is only indirect: the defendant can file a motion requesting that the infringement action be stayed during the nullity action. However, the threshold for a stay is high. The defendant must show a significant prospect of success in opposing the nullity action. Further, the defendant has to identify prior art that was not considered during prosecution and that comes closer to the patented subject matter than the prior art examined during prosecution. As a matter of practice, such a stay is rarely granted. The most important German courts that hear patent infringement cases (Düsseldorf and Mannheim) stay approximately 15 % of patent infringement actions. Because opposition proceedings and nullity actions typically take much longer than infringement actions (usually 2 years in the first instance), a plaintiff can obtain an enforceable injunction before the validity issue is decided. Getting such a positive first instance judgment, which can take as little as 8 to 10 months, is often enough to secure a favorable settlement. For a defendant, avoiding this predicament requires a carefully designed strategy that might, for example, involve pre-empting the filing of an infringement action by filing a nullity action to gain time. The closer the hearing in the nullity action, the more likely the court hearing the infringement case will be to issue a stay.

Patent infringement action are civil actions in the civil court. However, patent infringement actions are heard only by a few, highly specialized civil district courts. As a rule, each state only has one trial court with jurisdiction to hear patent infringement actions. Thus, for example, the district court in Mannheim is competent to hear patent infringement cases for the entire state of Baden-Württemberg. The Düsseldorf court has jurisdiction for the entire state of North Rhine-Westphalia. Because infringement typically occurs on a nation-wide scale, a plaintiff may pick a venue of its choice. Such forum shopping has resulted in two venues attracting the highest number of new patent cases: Düsseldorf and Mannheim account for roughly 90% of all German cases (600 new cases in Düsseldorf and 300 new cases in Mannheim each year). Each court can grant national relief.

At the trial court level, cases are heard by three-judge panels. The courts in Düsseldorf and Mannheim each have two panels that hear patent infringement actions. Typically, only one hearing takes place, usually toward the end of the proceedings. The written pleadings are more important than the hearing. During the hearing, the judges do not want counsel to repeat arguments made in the written submissions. Rather, they tend to pick certain issues and ask questions of both sides. The court may, at its discretion, call on independent experts, but rarely does so. Also, the parties are not expected to submit expert opinions. Thus, in contrast to the practice in the U.S. and U.K., infringement proceedings are not a battle of experts and experts cannot unduly lengthen the proceedings. However, in technically complex cases, a limited and focused expert opinion may be allowed to help.

There are no general pre-trial-discovery proceedings. If a plaintiff lacks sufficient evidence to prove infringement and there is no other way to get it, a plaintiff can request very limited discovery. Thus, patent infringement proceedings in Germany are streamlined and efficient, and therefore also cost-efficient.

European patents issued by the European Patent Office are dominant as a practical matter, but applicants can also seek German patents granted by the German Patent Office. For important patents, it is advisable to apply for both to increase the odds of getting at least one patent with a sufficiently broad scope. If the European Patent is ultimately broader in scope, the German patent cannot be enforced. Filing for a German utility model is possible based on either a European or a German patent application. A utility model is registered without examination and gives the owner the same entitlements to relief as a patent (including injunctive relief and full damages from the moment of registration). However, validity can be asserted as a defense in a utility model infringement action.

The European patent is a bundle of national patents so each of the national parts have to be enforced in the respective designated contracting states (e.g., Germany) as if it were a purely national patent. For the purposes of opposition proceedings, the European patent is treated as a uniform right. Thus a European patent can be revoked in its entirety (whereas a nullity action can lead only to the nullification of the patent rights in the particular country in which the proceeding is brought). An opposition can be filed within nine months upon grant of the European patent. This system has led to divergent and contradictory decisions of European courts regarding the same European patent. A Unified European Patent Court has been proposed to render a uniform infringement decision with respect to the entire coverage of a European Patent or for the entirety of the EU. However, it is still unclear whether such a system will ever be realized, although recently some political impetus has materialized in the form of a declaration of the EU Council.

The First Amendment Privilege: A Powerful Shield in Civil Discovery

Send to a friend

Recently, there has been a steady increase in attempts by litigants to seek discovery of lobbying and advocacy activities of companies and trade organizations. Several courts have now held that a party seeking discovery of such activities must satisfy a heightened relevance standard to avoid chilling the exercise of First Amendment rights.

The First Amendment privilege has recently been invoked in the “Prop 8” trial over the constitutionality of California’s ban on same-sex marriage. The privilege is not, however, limited to high-stakes constitutional litigation. Increasingly, it is being invoked in commercial litigation. For instance, plaintiffs in consumer class-action and antitrust cases have sought discovery of lobbying efforts by corporations and trade associations, that successfully invoked the First Amendment privilege to block discovery. Given the significant efforts of business groups to lobby the government, commercial litigators should be aware of the limits that the First Amendment privilege may place on discovery of such activities.

Genesis of the First Amendment Privilege: NAACP v. Alabama
The First Amendment privilege dates to the Supreme Court’s decision in NAACP v. Alabama, 357 U.S. 449 (1958). In the course of the lawsuit, Alabama sought discovery of the NAACP’s membership lists. The NAACP refused to produce the lists and was held in civil contempt. Id. at 453.

The Supreme Court vacated the contempt order, ruling that the state could not constitutionally compel production of the membership lists. The Court held that “the production order . . . must be regarded as entailing the likelihood of a substantial restraint upon the exercise by [the NAACP’s] members of their right to freedom of association,” noting that the NAACP “has made an uncontroverted showing that on past occasions revelation of the identity of its rank-and-file members has exposed these members to economic reprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility.” Id. at 462. Based on this record, the Court concluded that “compelled disclosure of petitioner’s Alabama membership is likely to affect adversely the ability of petitioner and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate, in that it may induce members to withdraw from the Association and dissuade others from joining it because of fear of exposure.” Id. at 463.

The Court observed that the membership lists had little relevance to the issues, and “whatever interest the State may have in obtaining names of ordinary members has not been shown to be sufficient to overcome petitioner’s constitutional objections to the production order.” Id. at 464.

Growth of the First Amendment Privilege:
Even among the lower courts, “the First Amendment privilege is rarely invoked.” Perry v. Schwarzenegger, 591 F.3d 1147, 1156 (9th Cir. 2010). Nonetheless, there is a small but important body of case law applying the First Amendment privilege to block discovery of a number of associational or petitioning activities.

Courts have, for example, applied the privilege to prevent or limit discovery of communications with government regulators, Aust./E. U.S.A. Shipping Conference v. United States, 537 F. Supp. 807 (D.D.C. 1982), membership in political discussion groups, Beinin v. Center for Study of Popular Culture, No. 06-2298, 2007 WL 1795963 (N.D. Cal. June 20, 2007), and lists of attendees at business association conventions, Grandbouche v. Clancy, 825 F.2d 1463 (10th Cir. 1987). The Prop 8 case, challenging the constitutionality of the California initiative that banned same-sex marriage, is the most recent, and most high profile, such decision. The plaintiffs seeking to overturn Prop 8 served discovery requests on the official “proponents” of Prop 8—a collection of individuals and political advocacy groups—seeking “production of Proponents’ internal campaign communications relating to campaign strategy and advertising.” Perry, 591 F.3d at 1152. The proponents resisted these discovery requests, claiming that their internal campaign documents were protected from disclosure under the First Amendment privilege.

The Ninth Circuit—hearing the dispute upon proponents’ petition for mandamus—set forth a two-part test for evaluating claims of First Amendment privilege. First, “[t]he party asserting the privilege must demonstrate . . . a prima facie showing of arguable first amendment infringement.” Id. at 1160. This requires a showing that enforcement of the discovery requests “will result in (1) harassment, membership withdrawal, or discouragement of new members, or (2) other consequences which objectively suggest an impact on, or ‘chilling’ of, the members’ associational rights.” Id. Second, once a prima facie showing has been made, the burden then shifts to the opposing party to “show that the information sought is highly relevant to the claims or defenses in the litigation—a more demanding standard of relevance than the ‘reasonably likely to lead to the discovery of admissible evidence’ standard under Federal Rule of Civil Procedure 26(b)(1). The request must also be carefully tailored to avoid unnecessary interference with protected activities, and the information must be otherwise unavailable.” Id. at 1161. Applying this two-part test, the Ninth Circuit found that these documents were privileged and not discoverable because compelled disclosure of internal campaign communications could chill the exercise of First Amendment rights, and the communications had only an “attenuated” relationship to whether Proposition 8 was motivated by unconstitutional anti-gay animus. See id. at 1165.

The First Amendment Privilege in Business Litigation
The logic of the Ninth Circuit opinion applies to discovery of communications by business organizations as well. Lobbying activities by businesses provide tempting discovery targets for parties suing those businesses. In re Motor Fuel Temp. Sales Prac. Litig., 258 F.R.D. 407 (D. Kan. 2009), was a consumer class action challenging the alleged failure of gasoline retailers to adjust their price per gallon to account for gasoline expansion and contraction at different temperatures. Plaintiffs served discovery requests on the individual retailers and their trade associations seeking “information related to the trade associations’ legislative affairs and lobbying efforts” that dealt with temperature adjustments in gasoline sales. Id. at 413. The retailers objected to the discovery requests on behalf of themselves and their trade organizations, arguing that this legislative and lobbying information was protected by the First Amendment privilege.

The district court agreed. Adopting a two-part test similar to the test adopted in the Prop 8 litigation, the district court first held that confidential lobbying documents were prima facie protected under the First Amendment. The court noted that “it is undisputed the trade associations—and defendants as members—are engaged in current congressional debates over temperature-adjusted retail sale of motor fuel. Disclosure of the associations’ evaluations of possible lobbying and legislative strategy certainly could be used by plaintiffs to gain an unfair advantage over defendants in the political arena.” Id. at 415. Accordingly, the court concluded that the “defendants have met their burden of showing . . . a chilling effect.” Id.

The court then analyzed whether the requested documents were sufficiently relevant to overcome the privilege. Like the Ninth Circuit, the Motor Fuel court held that “the relevancy standard for purposes of First Amendment analysis is more exacting than the general relevancy standard for discovery under Fed. R. Civ. P. 26(b)(1).” Id. The court found that the information did not meet the applicable relevancy standard of “‘certain relevance,’ which means that the information must go to the ‘heart of the matter.’” Id. Although the requested documents were likely the question whether defendants’ own lobbying efforts had made it impossible to use automatic temperature compensation (ATC) in gasoline sales, the court found that the plaintiffs could obtain sufficient information by examining the readily available public positions taken by the trade associations. Id. at 418. By contrast, “the nature of the information sought—showing the internal strategic processing done by associations as they prepare to advocate on behalf of their collective members—is highly privileged . . . Plaintiffs have not shown that they have a particular need in obtaining this information such that the First Amendment protection accorded it should be overborne.” Id. (emphasis added).

Heartland Surgical Specialty Hosp., LLC v. Midwest Div., Inc., No. 05-2164, 2007 WL 852521 (D. Kan. March 16, 2007), was an antitrust case brought against a consortium of hospitals and HMOs, alleging that they illegally conspired to drive a new hospital out of business. Plaintiff served a subpoena on a third-party trade association, the Kansas Hospital Association (KHA), seeking “documents related to KHA’s strategy of advocating for bills in the Kansas legislature that would have impacted specialty hospitals.” Id. at *5. KHA resisted the subpoena based on the First Amendment privilege. The court ruled that the First Amendment privilege did indeed shield the requested documents from discovery. The court found that the requested documents were prima facie protected under the First Amendment privilege because “KHA’s strategy of advocating for bills in the Kansas legislature . . . is precisely the type of internal associational activity and past political activity that the First Amendment is designed to protect.” Id. The court then ruled that the plaintiff had not made a sufficient showing of relevance to overcome the privilege, finding that KHA’s lobbying documents were only “minimally relevant” and “tangential” to the plaintiff’s claims. Id. at *6.

For businesses that are heavily involved in lobbying and petitioning the government, both individually and as members of trade associations, the First Amendment privilege can be a powerful shield against compelled discovery of such activities. Public advocacy and lobbying is the “primary purpose” of trade associations and chilling this activity through compelled disclosure might cause members to withdraw from such associations. See Motor Fuel, 258 F.R.D. at 414. Whether these associational concerns will have the same weight when asserted by individual companies is a question left open by the cases decided to date. While Motor Fuel talked about the unique “associational” concerns of trade associations, it also reasoned that compelling disclosure of internal lobbying strategy documents would allow plaintiffs to gain an unfair advantage in the political arena. See id. at 415. This concern would seem equally pressing in the context of an individual corporation’s lobbying activities—surely a corporation’s lobbying opponents could gain the same “unfair advantage” by viewing the corporation’s internal lobbying strategy documents. Similarly, Heartland applied the First Amendment privilege on the theory that KHA’s lobbying activities were “precisely the type of internal associational activity and past political activity that the First Amendment is designed to protect.” Heartland, 2007 WL 852521 at *5. While the “associational activity” prong of this theory might seem more suited to trade associations than individual corporations, the “political activity” prong is equally applicable to both, particularly in light of the Supreme Court’s recent ruling that corporations have a First Amendment right to lobby and engage in public advocacy. See Citizens United v. Fed. Elec. Comm’n, 130 S.Ct. 876, 913 (2010).

Conclusion
While the ultimate scope of the First Amendment privilege may still be unclear, the existence of the privilege is not. Business litigators should be mindful of this privilege as they propound or respond to discovery regarding lobbying activities or other activities protected by the First Amendment.

The Obama Administration’s Aggressive Push to Regulate Off-Label Drug Promotion

Send to a friend

Whatever the fate of health care legislation in Congress, the Obama Administration’s health care initiatives are alive and well down the street at the Department of Justice. The interagency Health Care Fraud Prevention and Enforcement Team (HEAT) has been actively filing charges since May 2009, and the first ever National Health Care Fraud Summit convened in Maryland last month. Delivering a welcome address to the packed hall of delegates, Attorney General Eric Holder described health care fraud as “one of our most urgent, destructive, and widespread national challenges.” Pharma Beware.

One major aspect of the government’s enhanced aggressiveness is a marked increase in enforcement activity relating to so-called off-label promotion. Off-label promotion refers to the marketing of a drug or medical device for a purpose other than the one reflected in the drug’s FDA-approved labeling. In the thirteen months since President Obama took the oath of office, the Department of Justice has secured guilty pleas to off-label charges from two of the world’s largest pharmaceutical corporations—Pfizer and Eli Lilly—as well as several smaller companies and individuals. The penalties paid in these cases can be staggering—in Pfizer’s case, $2.3 billion in penalties, disgorgement, and interest.

Widespread Off-Label Use
In the face of such massive settlements—and the attendant press coverage demonizing the companies involved—it is easy to forget that the use of off-label drugs is a widespread, well-accepted, and perfectly legal phenomenon. Recent studies estimate that more than 20% of all prescriptions are written for off-label uses, with much higher percentages in certain medical specialties. For example, several commonly prescribed treatments for bipolar disorder have been cleared by the FDA only as antidepressants, while certain antidepressants are commonly prescribed to treat pain. The vast majority of pediatric prescriptions are off-label, as are a large percentage of drugs prescribed to cancer patients and victims of HIV/AIDS.

Indeed, in the first month of the Obama Administration, the Food & Drug Administration issued a report that recognized that off-label drugs are a critical component of medical practice and “may even constitute a medically recognized standard of care.” FDA, Guidance for Industry: Good Reprint Practices for the Distribution of Medical Journal Articles and Medical or Scientific Reference Publications on Unapproved New Uses of Approved Drugs and Approved or Cleared Medical Devices, at 3 (Jan. 2009). Courts across the country have echoed that sentiment; according to one recent district court opinion, “‘unlabeled’ uses may be appropriate and rational in certain circumstances, and may, in fact, reflect approaches to drug therapy that have been extensively reported in medical literature.” United States ex rel. Polansky v. Pfizer, Inc., 2009 WL 1456582, at *6 (W.D.N.Y. May 22, 2009).

Given the critical role of off-label drugs in providing cutting-edge medical care, the government has an affirmative interest in encouraging the dissemination of information about beneficial off-label uses. Indeed, the FDA has acknowledged that “the public health may be advanced by healthcare professionals’ receipt of medical journal articles and medical or scientific reference publications on unapproved new uses of approved or cleared medical products that are truthful and not misleading.” Good Reprint Practices, supra at 3.

Off-Label Enforcement
Where the government purports to draw the line is at promotion by drug companies directed at off-label uses. However significant the benefits associated with an off-label use, and however great the interest in disseminating medical information about beneficial uses, the FDA insists that a drug not be promoted for that use unless and until the use is reflected in the drug’s approved labeling. Otherwise, they claim, drug companies would have no incentive to undertake the costly and time-consuming clinical trials necessary to secure FDA approval for new uses.

Off-label regulation is thus a very tricky piece of business; in the words of the Supreme Court, “the FDA is with the difficult task of regulating the marketing and distribution of medical devices without intruding upon decisions statutorily committed to the discretion of health care professionals.” Buckman Co. v. Plaintiff’s Legal Committee, 531 U.S. 341, 350 (2001). On the one hand, the government has an interest in fostering the spread of information about off-label usage; on the other, the government tightly circumscribes the role that drug companies can play in the educational process.

For example, if a company underwrites a promotional speech, the speaker must stay on-label—unless she is asked a question about an off-label use, in which case she is permitted to respond—and provide off-label information. Company sales representatives generally cannot discuss off-label uses, but the company’s scientific representatives are permitted to do so under certain circumstances, and their medical-affairs departments can send literature relating to off-label uses to physicians upon request. The reasoning behind the maze of regulations is clear enough, but the maze itself is notoriously difficult to navigate.

In the main, the government relies on two enforcement mechanisms to police off-label promotion: civil claims under the False Claims Act, and criminal charges for the sale of misbranded drugs. The False Claims Act (FCA) prohibits submitting or causing to be submitted a false claim to the government for payment. 31 U.S.C. § 3729(a)(1). Liability under the Act turns not on whether a claim is literally true or false, but on whether the claim seeks a payment to which the claimant is not entitled. Thus, a claim submitted to Medicare for reimbursement of an off-label use may accurately reflect the patient’s condition and the drugs administered to treat it, yet still give rise to False Claims Act liability if the claimant knows that the claim is ineligible for coverage. Accordingly, the government can pursue FCA actions against drug companies—or, frequently, intervene in FCA lawsuits filed by qui tam relators—on the theory that a company’s promotional activities caused health care providers to bill the government for uncovered off-label uses.

As courts have recognized, an essential predicate of this theory is that the off-label use is ineligible for reimbursement.  See, e.g., United States ex rel. Franklin v. Parke Davis, 2003 WL 22048255, at *2 (D. Mass. 2003) (noting that if a state exercised its discretion to cover off-label prescriptions, “then an off-label [] prescription would not be a false claim”). In fact, however, Medicare—like several other government-run health care programs—routinely reimburses many off-label treatments. Thus, liability under the FCA for off-label promotion may turn on a fact-intensive inquiry into the extent of coverage afforded to the off-label use. Further complicating matters, the national Medicare organization outsources most coverage determinations to regional Medicare contractors. Although each contractor applies the same standard to determine whether an off-label use is eligible for coverage, different contractors reach different results.

In the criminal context, prosecutions for off-label promotion are generally brought under 21 U.S.C. § 331. This statute prohibits the introduction into interstate commerce of any “misbranded” drug or device. A drug is misbranded if its label lacks “adequate directions for use,” meaning that the label does not reflect all of the drug’s “intended uses.” 21 U.S.C. §§ 352(f)(1); 21 C.F.R. § 201.5. In turn, the “intended uses” of a drug are determined by reference to “the objective intent of the persons legally responsible for the labeling of drugs.” 21 C.F.R. § 201.128. Under the terms of the regulation, there is virtually no limit on the considerations that may be relevant to the assessment of a company’s intent, including “labeling claims,” “advertising matter,” “oral or written statements,” and even knowledge on the company’s part that the drug is being used off-label. Id.

Violations of the misbranding statute can be either felonies or misdemeanors. 21 U.S.C. § 333. To prove the felony offense, the government must establish that the defendant had the specific intent to mislead or defraud. 21 U.S.C. § 333(a)(2); United States v. Mitcheltree, 940 F.2d 1329, 1349 (10th Cir. 1991). In practice, this requires a showing that the company knew that the drug was misbranded, i.e., that the label did not reflect all of the drug’s intended uses.

The consequences of a felony conviction are severe. In addition to massive financial penalties as high as twice the revenues generated by off-label sales—not to mention the inevitable public relations fallout—a felony triggers automatic exclusion from public health care programs. 18 U.S.C. § 3571(d); 42 U.S.C. § 1320a-7. Exclusion can be a virtual death sentence for a pharmaceutical company.

Legal Defenses to Off-Label Enforcement Actions
Of course, the primary defense to a charge of off-label promotion is that the drug was not promoted off-label. This could mean: either the allegedly off-label use was in fact on-label, or the concededly off-label use was not the result of promotion. In some cases, the scope of the label is sufficiently broad that uses flagged by the government as potentially off-label are, on closer inspection, within the boundaries of the labeled indication. But many cases do not fit into this pattern. Certain uses are, however common, unquestionably off-label. The issue then turns on the nebulous definition of “promotion”—the maze which this Administration seems to interpret to include a wide range of activities that might also be seen as informational. Serious First Amendment questions are triggered by government efforts to to regulate truthful speech about off-label uses.

In 1998, a federal district court in Washington, D.C. struck down as unconstitutional regulations purporting to prohibit the dissemination of scholarly materials containing truthful information about off-label uses. Washington Legal Foundation v. Friedman, 13 F. Supp. 2d 51 (D.D.C. 1998). In subsequent years, the government abided by the position it took on appeal in that case, viz., that the distribution of truthful materials about off-label uses could not, in and of itself, give rise to a prosecution for off-label promotion. This “safe harbor” for truthful scholarly reprints was affirmed once again in the FDA’s most recent guidance to industry in January 2009.

At the same time, however, the FDA persists in the view that even entirely lawful promotional activity can constitute evidence of intended off-label use. Paradoxically, then, the more a company takes advantage of safe harbors, the more it may seem to FDA that the company’s intended uses are off-label—and hence the more likely it may be that the government initiates enforcement action. In the Washington Legal Foundation litigation, while the government acknowledged that dissemination of truthful materials could not itself be grounds for prosecution, it left open the possibility of prosecution under an intended-use theory, whereby the distribution of truthful materials could be construed as evidence of an intended off-label use.

Conclusion
Pharmaceutical companies should continue to expect aggressive enforcement actions against off-label promotion in both the civil and criminal contexts. Quinn Emanuel is actively engaged in representing companies in this area, and we expect that more companies will face potential civil and criminal complaints arising out of prescription and use of approved drugs for off-label treatments. Great care must be practiced to avoid such actions, and to defeat them when they are brought.

Attorneys Fees Reform in English Litigation

Send to a friend

In January 2010, Lord Justice Jackson’s final report of his Review of Civil Litigation Costs in England and Wales was released. Although the report, and likely the majority of its recommendations, will become into law.

It is a feature of civil litigation in England that, as a general rule, the unsuccessful party is ordered to contribute to the legal costs incurred by the successful party—the ‘loser pays’ or adverse costs rule. As a practical matter the unsuccessful party is usually ordered to pay around 60-70% of the legal fees and other costs incurred by the successful party. Thus, a party’s decision whether to commence litigation must take into account this potential costs liability.

Lord Justice Jackson’s proposed reforms do not change this fundamental rule, but, they do include a wide-ranging series of changes to the way in which the regime is operated. Lord Justice Jackson acknowledges that litigating large commercial disputes in London is an expensive exercise, but that businesses are generally satisfied with the existing costs regime and are prepared to spend the substantial sums involved for the benefit of a high quality process. The majority of proposals in the report focus, therefore, on non-business litigation in areas such as personal injury, defamation, and housing disputes.

At present, contingency fee arrangements are not allowed in English proceedings. In 2000, a regime was introduced whereby ‘conditional fees’ were permitted. A conditional fee agreement, or CFA, involves a discount (sometimes 100%) on fees if the claim does not succeed, with a substantial uplift, or ‘success fee’ payable if the client wins—the success fee can be up to 100% of the undiscounted fees that would have been charged by the lawyer. The success fee is recoverable from the losing party under the loser pays rule, together with the rest of the claimant’s legal fees. The effect of this is that a defendant facing a claimant with a CFA faces a substantially higher costs liability than would be the case without a CFA. Importantly, the existing regime does not permit the success fee to be calculated as a proportion of the amount of the judgment won by the client.

Lord Justice Jackson’s proposal to reform this area is twofold. First, he proposes the introduction of contingency fees (with a requirement that an independent solicitor advise the client on the contingency fee agreement at the outset in order for it to be enforceable). Second, he proposes that the adverse costs rule be modified to protect defendants from the effects of CFA’s or contingency fees. For CFA’s, he proposes that the success fee payable by a successful client to their solicitor no longer be recoverable from the losing party. In cases where the successful party is paying a contingency fee,the losing party’s costs contribution will be calculated by reference to the hypothetical level of fees that would have been payable if the successful party had been paying on a traditional time/cost basis.

The most visible impact of these reforms is likely to be in the areas of personal injury and defamation, where claimant solicitors have achieved substantial profits through success fees paid by defendants (or defendants’ insurers), often at a level exceeding the actual damages paid in the case. Experience from the introduction of CFA’s suggests that the largest impact will be in straightforward low-value claims. In more complex, high value cases where there are a range of potential outcomes (and thus challenges in defining ‘success’) and where the sums claimed are substantially in excess of the level of legal costs, the impact is likely to be less.

Nonetheless, the ability to use contingent fee arrangements will make it possible to bring cases that would otherwise be uneconomic for clients. The proposed reform is also likely to increase the appetite of professional litigation funders to participate in high value litigation. For defendants, the proposed protection against liability for opponent’s success fees will be welcomed.

Lord Justice Jackson’s report also proposes a number of mostly minor changes to the conduct of litigation generally that are intended to decrease the total costs of civil proceedings. Two procedural changes of particular note for business litigants relate to document disclosure and the use of costs budgeting and estimates. Lord Justice Jackson concludes that the current ‘one size fits all’ approach to disclosure in business litigation is inefficient and that a ‘menu’ approach should be introduced, whereby the scope of parties’ disclosure obligations are defined by the nature of the case. Litigants can expect to see Judges taking a more active role in requiring and scrutinizing legal budgets for cases and subsequently monitoring compliance with those budgets—although judges in business cases will have discretion whether to use these tools, which are likely to be compulsory in non-business cases.

The Report is now being considered by the Ministry of Justice. The process of putting the recommendations into effect may not be straightforward, particularly because of the likely resistance from participants in the litigation process who have built their business models around the structure of the existing rules. However, the changes proposed for business litigation are likely to find the support of the business litigation community and it is hoped that they will come into force without undue delay.

New York’s Martin Act: A Unique Tool for Regulating the Securities Industry

Send to a friend

Before he was known for other things, Eliot Spitzer was the so-called “sheriff of Wall Street,” able to bring mammoth securities dealers to heel through the broad range of powers granted to him under New York’s Martin Act, N.Y. Gen. Bus. Law § 352 et seq. (McKinney 1996). The Martin Act not only allows the New York Attorney General to bring civil and criminal charges against persons who make false representations in connection with securities, but outlaws those practices without requiring proof of intentional conduct, or even proof that anyone was actually defrauded. The Martin Act grants the Attorney General a broad range of investigative options, both public and private, to pursue offenders. To be sure, one feature of the Martin Act favors defendants: its provision denying a right of action to private parties.

In these and other respects, the Martin Act implements a truly unique legislative scheme for regulating securities marketing. The blue sky laws of most states follow the Uniform Securities Act (which in turn follows the federal securities laws) in: (1) establishing state securities commissions, and empowering these commissions, rather than the state’s Attorney General, to regulate securities; (2) requiring scienter (i.e., intent to defraud) and reliance; and (3) providing a private right of action to defrauded investors. See, e.g., Uniform Securities Act § 501 (amended 2005); Section 17(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (2000); Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000).

This article discusses the key provisions of the Martin Act and some of the issues that have been raised in the practical administration of the statute.

The Martin Act’s Key Provisions
Section 352 of the Martin Act makes the following acts “fraudulent practices”: (1) Employing any “device, scheme, or artifice to defraud”; (2) Obtaining money or property “by means of any false pretense, representation, or promise”; (3) Making or attempting to make “fictitious or pretended purchases or sales of securities or commodities”; (4) Employing or seeking to employ “any deception, misrepresentation, concealment, suppression, fraud, false pretense, or false promise” for the purchase, exchange, investment advice, or sale of securities or commodities; (5) Engaging in any “practice or transaction or course of business relating to the purchase, exchange, investment advice, or sale of securities or commodities which is fraudulent or in violation of law” and which would operate “as a fraud on the purchaser”; (6) Selling or offering for sale or attempting to sell securities without registering as a broker, dealer, or salesman; or (7) Violating any other provision of the Martin Act. Martin Act § 352(1).

Section 352-c makes it criminal to use or employ any of the following acts and practices for purposes of inducing or promoting the “issuance, distribution, exchange, sale, negotiation, or purchase” of securities or commodities: (1) “Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale”; (2) “Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances”; (3) “Any representation or statement which is false, where the person making such representation or statement: (i) knew the truth; or (ii) with reasonable effort could have known the truth; or (iii) made no reasonable effort to ascertain the truth; or (iv) did not have knowledge concerning the representation or statement made”; (4) Engaging in “any artifice, agreement, device or scheme to obtain money, profit or property” by any aforementioned means; (5) For an entity engaged in the sale of securities or commodities, representing that it is an “exchange,” unless that entity is registered with the SEC or has been designated as a contract market by the Commodities Futures Trading Commission; or (6) Intentionally engaging in “any scheme constituting a systematic ongoing course of conduct with the intent to defraud ten or more persons or to obtain property from ten or more persons by false or fraudulent pretenses, representations or promises,” through securities dealing. Id. § 352-c.

Thus, the number of prohibited acts outlined by the Martin Act far exceeds the three fraudulent practices outlined in the Securities Act of 1933, which makes it unlawful: “(1) to employ any device, scheme, or artifice to defraud; (2) to obtain money or property by means of an untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” 15 U.S.C. § 77q(a) (2000). The rules under the Uniform Securities Act (followed by most states other than New York) and the Securities Exchange Act of 1934 are functionally identical. See Uniform Securities Act § 501 (amended 2005); 15 U.S.C. § 78j(b).

Private Actions and Preemption
Prior to 1987, New York state lower courts were divided as to whether the Martin Act impliedly conferred a private right of action upon investors. In CPC International Inc. v. McKesson Corp., 514 N.E.2d 116 (N.Y. 1987), the Court of Appeals resolved the conflict by holding that no private right of action existed. Since CPC International, several intermediate appellate state courts have extended the decision yet further, holding that the Martin Act not only does not confer a private right of action, but also preempts common-law claims (such as negligent misrepresentation) regarding conduct that is within the scope of the Martin Act. See, e.g., Horn v. 440 E. 57th Co., 547 N.Y.S.2d 1 (1st Dep’t 1989) (to sustain claims based on negligent representation and breach of fiduciary duty “would be, in effect, to recognize a private right of action under the Martin Act contrary to caselaw”). Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F. Supp. 2d 275, 291-92 (S.D.N.Y. 1998) (negligent misrepresentation).

The Fourth Department muddied the waters in 2001 with its decision in Scalp & Blade, Inc. v. Advest, Inc., 722 N.Y.S.2d 639 (4th Dep’t 2001), holding that “[n]othing in the Martin Act, or in the Court of Appeals cases construing it, precludes a plaintiff from maintaining common-law causes of action based on such facts as might give the Attorney-General a basis for proceeding civilly or criminally against a defendant under the Martin Act.” Id.

The Court of Appeals recently put an end to this line of contrary reasoning. The First Department, had concluded that the Martin Act “does not preclude a private party from prosecuting an otherwise valid common-law fraud claim in connection with the sale of securities whenever the alleged fraudulent conduct is such that the Attorney General would be authorized to bring an action against the defendant under the Martin Act.” Kramer v. W10Z/515 Real Estate L.P., 844 N.Y.S.2d 18, 19 (1st Dep’t 2007), rev’d sub nom. Kerusa Co. LLC v. W10Z/515 Real Estate L.P., 906 N.E2d 1049 (N.Y. 2009). In reversing this decision, the Court of Appeals expressly rejected this argument, discussing the earlier CPC International decision:

We concluded that CPC had sufficiently pleaded common-law fraud because, given its most favorable intendment, the complaint described a scheme to defraud CPC. Unlike this case, CPC Intl. did not turn on alleged non-disclosure of information required by the Attorney General’s Martin Act regulations. [. . .] In sum, Kerusa’s remaining cause of action for fraud relies entirely on alleged omissions from filings required by the Martin Act and the Attorney General’s implementing regulations. That Kerusa alleged the elements of common-law fraud does not transmute a prohibited private cause of action to enforce Martin Act disclosure requirements into an independent common-law tort.

Kerusa, 906 N.E.2d at 1055 (emphasis added).

After Kerusa, the Martin Act’s preemptive effect appears broader than ever. Whereas before, the Martin Act was held to preempt negligent misrepresentation and breach of fiduciary duty securities claims that did not rise to the level of actual fraud, the statute now blocks even fraud cases where the fraud claim is based solely on Martin Act disclosure requirements. Aggrieved securities purchasers in New York appear to be left with two choices: bring their complaint to the Attorney General, or seek redress in a different jurisdiction.

Investigatory Tools
Under section 352 of the Martin Act, New York’s Attorney General can require any person to file a written statement under oath as to the facts or circumstances concerning the subject matter the Attorney General is investigating and require that any data or information the Attorney General deems relevant be produced. The Attorney General is granted the power to subpoena witnesses, compel their attendance, and examine them under oath either at his office or before a magistrate, a court of record, or a judge or justice. If the person subpoenaed fails to appear without reasonable cause, or to be sworn, or to produce books and records when ordered to do so, he or she is guilty of a misdemeanor.

The Attorney General may conduct these proceedings in secret. Pursuant to section 352(5), it is a misdemeanor for anyone examined as a witness to disclose to any person other than the Attorney General any of the information discussed at the examination, including the names of any other witnesses examined or any other information thereby obtained. This rule is unlike a federal grand jury practice under Federal Rule of Criminal Procedure 6(e) or a formal order of investigation (such as the SEC’s investigation and subpoena mechanism). Additionally, some New York courts have held that such a witness does not have a right to counsel in a Martin Act investigation, see, e.g., H. Hentz & Co. v. Lefkowitz, 256 N.Y.S.2d 724 (N.Y. App. Div. 1965), aff’d, 208 N.E.2d 462 (N.Y. 1965), although the Attorney General as a matter of practice usually allows the witness to be accompanied by counsel.

Alternatively, the Attorney General may conduct a public investigation. Section 354 allows the Attorney General to do so simply by filing an application with a state trial court for an order directing persons to appear before a justice of the supreme court or referee to answer questions and to produce documents. The court has no discretion and must grant the application. The application need show only that on information and belief the testimony is material and necessary. To maintain the status quo while the investigation proceeds, the court can also grant a preliminary injunction or a temporary restraining order until the witness is examined or some other time. The Martin Act does not provide any method to challenge the facts and conclusion of a section 354 order. The injunction, if granted, stays in effect (absent a subsequent court order) when the Attorney General commences a Martin Act suit. See Attorney General of New York v. Katz, 434 N.E.2d 712, 713 (N.Y. 1982).

Civil Actions; No Scienter Or Reliance Requirement
Civil actions under the Martin Act do not require scienter or reliance. “Fraud” under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive the public, whether or not the product of scienter or intent to defraud.” State v. 7040 Colonial Road Associates. Co., 671 N.Y.S.2d 938, 941-42 (N.Y. Sup. Ct. 1998). Similarly, courts have held that “reliance need not be shown in order to obtain relief.” State v. Sonifer Realty Corp., 622 N.Y.S.2d 516, 367 (N.Y. App. Div. 1st Dep’t 1995).

Criminal Actions
In 1955, the New York Legislature made violating the Martin Act a misdemeanor, and in 1986, violations of the Act committed intentionally were deemed felonies. See Martin Act Practice Commentaries 13, 47. Under section 358, the Attorney General has power to prosecute criminal offenses for violations of the Martin Act; the Attorney General may alternatively transmit evidence of a violation to the district attorney of the county or counties in which the violation has occurred, who “shall forthwith” proceed to prosecute. Under section 359, the Attorney General may grant immunity to witnesses.

As noted, any violation of sections 352-c (1)-(4) is a misdemeanor, while violations of sections 352-c (5) and (6) are felonies. Notably, no intent to defraud is necessarily required for either a misdemeanor or a felony prosecution under the act. Both sections 352-c (5) and (6) require intent, but this requirement has been interpreted to require not fraudulent intent, but the intent to commit any of the actions statutorily defined as fraudulent by the Martin Act. See id. at § 352-c; People v. Sala, 695 N.Y.S.2d 169, 176 (N.Y. App. Div. 3rd Dep’t 1999). Furthermore, under section 352-d, any person who violates section 352-c can be separately prosecuted for acts constituting such felonies as conspiracy and petty larceny.

Conclusion
New York’s Martin Act adopts a broad civil and criminal enforcement model that empowers the Attorney General to enjoin and prosecute conduct that is deemed detrimental to the investing public, but denies private parties a similar right to recovery. The Act gives the Attorney General the power to conduct investigations in private or in public; to obtain a temporary injunction in order to prevent the continuation of prohibited conduct during such investigations; and, at the end of the investigation, to seek restitution of funds and institute criminal actions for the imposition of fines and penalties. The Act does not require a showing of scienter or reliance. These features make it a powerful tool for the government enforcer, and a reminder to sellers and marketers of securities that they must be ever cautious.

CA’s Anti-SLAPP Statute May Provide Quick Relief from Tortious Interference Claims

Send to a friend

Over the last quarter of a century, California courts have gradually expanded the scope of the various tort claims for interference with business relationships. The degree of a third party’s culpability—in terms of both intent and effect—required to impose liability for interference has decreased over time. Whenever a business dispute arises in which a third party is perceived to have played a part in disrupting the relationship at issue, a plaintiff can likely state a colorable claim for interference with contractual relations or prospective economic advantage.

Usually, there are few avenues to dispose of interference claims on a summary basis. However, defendants have increasingly sought refuge in “SLAPP” special motions to strike (in actuality, “anti-SLAPP” motions) filed under California Code of Civil Procedure section 425.16 (popularly called the “anti-SLAPP statute” because it targets “Strategic Lawuit against Public Participation”). A SLAPP motion seeks to strike causes of action arising from speech or petitioning activity protected by the First Amendment. Because interference claims often revolve around a third party’s communicative acts, defendants facing such claims should always consider employing the anti-SLAPP procedure. But, as examined below, attempts to quickly dispose of interference claims under the anti-SLAPP statute have met with mixed results in recent years.

The Broad Scope of Third Party Liability for Tortious Interference
A brief sampling of case law reveals the broad scope of exposure third parties face when a plaintiff looks for someone to blame for a business relationship that imploded, or even just sputtered. For example, a tort plaintiff need not plead that a third party caused an actual breach of an underlying contract. A party claiming intentional interference with contractual relations need not allege that interference has caused or will ultimately cause breach of contract; rather, the party may allege merely that the contract was disrupted, that is, performance was made more costly or more burdensome. Pacific Gas & Electric Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1129 (1990). This low pleading threshold makes it difficult for a defendant to defeat a claim on the pleadings. See Sebastian Intern., Inc. v. Russolillo, 162 F. Supp. 2d 1198, 1206 (C.D. Cal. 2001) (summary judgment for defendant precluded because “determination of whether performance of [plaintiff’s] contractual obligation is made more expensive or burdensome” is “an issue that should be determined by the ultimate trier of fact”). Similarly, courts have expanded the scope of acts that satisfy the “intentional act” element of the cause of action for interference with contractual relations. A third party’s motive for interfering with another’s contract is irrelevant; the defendant’s act need not be wrongful other than by interfering with the plaintiff’s contract. Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal. 4th 26, 55 (1998). A plaintiff claiming interference with prospective economic advantage need not allege that his business relationship with another would, in fact, have produced economic benefit; plaintiff must allege merely that it was “reasonably probable” that the relationship would have resulted in economic benefit. Youst v. Longo, 43 Cal. 3d 64, 71 (1987). Nor must a plaintiff claiming interference with prospective economic advantage allege that the third party’s conduct was wrongful because it violated some governmental law or regulation; even violation of a private trade association’s formal rules or regulations may suffice if they provide for enforcement and a remedy. See Stevenson Real Estate Servs., Inc. v. CB Richard Ellis Real Estate Servs., Inc., 138 Cal. App. 4th 1215, 1224 (2006).

The Framework for Analyzing and Resolving a SLAPP Motion
Resolution of a SLAPP special motion to strike involves a two-part inquiry. First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. Taus v. Loftus, 40 Cal. 4th 683, 712 (2007). If the court finds such a showing has been made, it then determines whether the plaintiff has demonstrated “a probability of prevailing on the claim.” City of Cotati v. Cashman, 29 Cal. 4th 69, 76 (2002). If the plaintiff fails to carry that burden, the cause of action is “subject to be stricken under the statute.” Navellier v. Sletten, 29 Cal. 4th 82, 89 (2002). Assuming a defendant can show that the challenged cause of action arises from protected activity, obtaining dismissal through a SLAPP motion will be much quicker and cost-efficient than obtaining dismissal on summary judgment or winning a judgment at trial.

Common Issues Arising in SLAPP Motion Litigation
A. Protected Speech
SLAPP motions can often be used to defeat interference claims premised on alleged wrongful conduct, where such conduct constitutes protected free speech. For example, in Colt v. Freedom Communications, Inc., 109 Cal. App. 4th 1551 (2003), the court affirmed the granting of a SLAPP motion to strike claims for interference with contractual relations and prospective economic advantage because defendant’s statements were published in its newspaper and affiliated website. The court found that such communicative acts constitute protected free speech. Courts, however, generally require that protected speech be made in a public forum rather than directly between individuals. In Adoption Network Law Center, Inc. v. Tayyanipour, 2007 WL 172365, *7 (Cal. App. 4 Dist. 2007), an adoption facilitator sued an adoptive parent for interference with prospective economic advantage. The adoptive parent made negative statements about the facilitator to the facilitator’s former employees and clients. The court reversed the trial court’s grant of a SLAPP motion striking the claim because the alleged interfering communications went “beyond the making of general postings on adoption Web sites” and “purported direct communication with prospective adoptive parents.” Finally, where plaintiff’s cause of action arises from both protected and unprotected speech, courts will grant a SLAPP motion only if the “thrust or gravamen” of the cause of action arises from defendant’s communicative acts. Fitzgibbons v. Integrated Healthcare Holdings, Inc., 2009 WL 3451745, *3-4 (Cal. App. 4 Dist. 2009).

B. “Concerning the Public Interest”
Activity “concerning the public interest” can also form the basis of a successful SLAPP motion. Courts have broadly interpreted this type of protected activity. In Tuchscher Development Enterprises, Inc. v. San Diego Unified Port Dist., 106 Cal. App. 4th 1219, 1227 (2006), plaintiff entered into a contract with a city to pursue negotiations regarding a real estate development in the city’s harbor. Subsequently, the commissioner of the harbor authority communicated with the city about a third party interested in participating in the development. Id. at 1227-1228. When the plaintiff sued the commissioner and port authority for interference with contract and prospective economic advantage, the appellate court held that the claims were subject to the anti-SLAPP law because they arose from the commissioner’s communications with the city and were protected under § 425.16(e)(4). “The prospect of commercial and residential development of a substantial parcel of bayfront property, with its potential environmental impacts, is plainly a matter of public interest.” Id. at 1234.

On the other hand, SLAPP motions are likely to be denied when the defendant cannot frame the issues in the context of the public interest, or when the public interest is tangential to the gravamen of the interference. In Mann v. Quality Old Time Service, Inc., 120 Cal. App. 4th 90, 110-11 (2004), the Court of Appeals affirmed the trial court’s denial of defendants’ SLAPP motion to strike interference claims because the claims arose from defendants’ communications with customers, not from separate statements made to governmental agencies. The court also rejected defendants’ contention that the communications related to issues of public interest. In doing so, the court reasoned that “[a]lthough pollution ... is a matter of general public interest, the focus of the anti-SLAPP statute must be on the specific nature of the speech rather than on generalities that might be abstracted from it.” Id. at 111. The court concluded that “[d]efendants’ alleged statements were not about pollution or potential public health and safety issues in general, but about [plaintiff’s] specific business practices.” Id. More recently, the court in Abolfathi v. Brent, 2009 WL 1163858, *2 (Cal. App. 4 Dist. 2009), held that a defendant’s statement, in an anonymous phone call to plaintiff’s employer, that plaintiff was a terrorist did not concern an issue of public interest. The court reasoned that plaintiff’s employer, Boeing, did not qualify as a government agency under the anti-SLAPP statute despite Boeing’s extensive relationship with the federal government.

Similarly, statements about the quality of a specific commercial product or about a particular business are not matters concerning a public issue or a matter of public interest within the meaning of the anti-SLAPP statute. See C.C.P. § 425.16(e)(3) & (e)(4); Commonwealth Energy Corp. v. Investor Data Exchange, Inc., 110 Cal. App. 4th 26, 34-35 (2003). Courts, therefore, generally deny SLAPP motions where the defendant cannot successfully portray the conduct as extending beyond commercial speech. In World Financial Group, Inc. v. HBW Ins. & Financial Services, Inc., 172 Cal. App. 4th 1561, 1569 (2009), defendant made negative statements about plaintiff’s competing business to plaintiff’s employees and customers. The court held that defendant’s speech, while tangentially related to employee mobility and competition in the abstract, did not concern an issue of public interest because its sole purpose was to promote defendant’s business as a superior employer and provider of products and services.

C. Petitions, Litigation Privilege and the Public Interest
The anti-SLAPP procedure can also be used outside the typical “free speech” context. For example, protected activity can include statements made by parents in a formal complaint to a school board and complaints to government agencies. It can also include various acts by attorneys, such as soliciting another attorney’s client, filing a notice of lis pendens, filing objections and requests for clarification in a bankruptcy proceeding, filing a lawsuit, submitting bills and lien claims for medical services in pending workers compensation cases, sending a “demand letter,” and sending notice of a security interest.

Courts have granted SLAPP motions to strike interference claims based on the right to petition. In Burk v. City of Arcadia, 2009 WL 33296, *6 (Cal. App. 2 Dist. 2009), the court found that defendant’s communication to plaintiff’s employer regarding plaintiff’s alleged criminal conduct was protected speech. The court reasoned that because plaintiff’s employer, a governmental entity, continuously evaluates and conducts reviews of its employees’ job performance, the matter concerned the public interest. Similarly, a defendant’s involvement in assisting others with filing reports with police and other governmental agencies has been deemed protected petitioning activity under the anti-SLAPP statute. In re Marriage of Haroonian and Harooni, 2009 WL 3235049, *7 (Cal. App. 2 Dist. 2009).

Although the anti-SLAPP statute appears to limit protection to statements made during or in connection with an “official proceeding,” courts have broadly interpreted the scope of such official proceedings. In Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192 (2006), the Supreme Court affirmed the grant of a SLAPP motion to strike a physician’s cause of action against his county hospital district for tortious interference with his right to practice medicine, holding that the hospital’s peer review qualified as an “official proceeding authorized by law” under the anti-SLAPP statute. Lower courts continue to follow Kibler today. See Small v. Schauermann, 2009 WL 2740510, *8 (Cal. App. 4 Dist. 2009); Arunasalam v. St. Mary Medical Center, 2009 WL 498700, *5 (Cal. App. 4 Dist. 2009).

The anti-SLAPP procedure is not always available, however, when the underlying facts involve attempts to obtain government permits. Specifically, when plaintiffs and defendants work together on a business project that involves obtaining a government permit, and the defendants engage in alleged improper conduct in the course of such predominately private business-oriented activity, the government permit is deemed to be only collateral to an official proceeding and the anti-SLAPP statute does not apply. See Film Permits Unlimited Inc. v. Film L.A., Inc., 2008 WL 62460, *4 (Cal. App. 2 Dist. 2008).

Courts have also granted SLAPP motions based on the litigation privilege. The anti-SLAPP statute generally protects statements made during a judicial proceeding or in connection with an issue under consideration or review by a judicial body. Courts, in this context, have interpreted anti-SLAPP protections broadly. For example, the following acts have been deemed protected conduct warranting the granting of a SLAPP motion based on the litigation privilege: (1) an email about a lawsuit containing text from a deposition, Victory Capital Holding Corp. v. Sharp, 2006 WL 1348723, *3 (Cal. App. 4 Dist. 2006); (2) acts taken in anticipation of litigation, Flores v. Emerich & Fike, 416 F. Supp. 2d 885, 905 (E.D. Cal. 2006); (3) actions or statements made when litigation is imminent, Weiss v. Speer, 2009 WL 1497507, *3 (Cal. App. 4 Dist. 2009); (4) post-judgment collection efforts, Mazzella v. Savitsky, 2008 WL 2690725, *4 (Cal. App. 4 Dist. 2008); and (5) communications made to an opposing party’s customers regarding claims or issues under review by a court, Raining Data Corp. v. Barrenechea, 175 Cal. App. 4th 1363, 1368 (2009).

The litigation privilege does not, however, provide an unbounded avenue for defeating an interference claim through use of a SLAPP motion. The court of appeal, in Haneline Pacific Properties, LLC v. May, 167 Cal. App. 4th 311, 319 (2008), rejected as unduly broad the suggestion that “nearly any attempt at negotiation is covered by the privilege, especially when attorneys are involved.” In Haneline, the appellate court reversed the trial court’s grant of a SLAPP motion because the justices remained “unpersuaded that the communications that form the gravamen of Haneline’s complaint fall within the ambit of the litigation privilege." Id. at 319.  The court held that the overall tone of the allegedly interfering communication was one of "persuasion and a desire to cooperate to achieve mutual goals."  Id.  While the defendants argued that "[t]he spectre of litigation 'loomed' over the entire course of the parties' communications," the court noted that "the same could be said of nearly any high-stakes negotiation." Id.

Conclusion
Defendants faced with tort interference claims should always consider whether the nature of the wrongful conduct alleged invites the use of a SLAPP motion to defeat the claim at the outset of the case.  If a cause of action is based upon activity protected by C.C.P. § 425.16,  a SLAPP motion to strike may allow the defending party to quickly dispose of the claim, avoiding the cost and burden of additional discovery and trial proceedings.

Statutory Rights to “Credit Bids” May Be Restricted by Governing Credit Documents

Send to a friend

In a recent decision, In re Electroglas, Inc., Case No. 09-12416 (PJW), the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) clarified the circumstances under which secured creditors may utilize secured indebtedness they hold to “credit bid” in an auction of a chapter 11 debtor’s assets. Specifically, the Bankruptcy Court held that the terms and conditions of the indenture (the “Indenture”) governing certain secured notes mandated rejection of two proposed credit bids submitted by noteholders, and directed the debtor to conduct a new auction. The Bankruptcy Court’s ruling emphasizes that although secured creditors may have a statutory right to credit bid, that statutory right may be limited by other factors, including intercreditor arrangements found in an indenture or credit agreement. Parties wishing to credit bid in a bankruptcy sale thus need a complete understanding of the terms of their credit documents before attempting to credit bid.

Background
The Debtors in Electroglas believed that the value of their bankruptcy estates would be maximized by a sale of their assets pursuant to section 363 of the Bankruptcy Code, which authorizes a debtor to sell its assets free and clear of any liens. In connection with such a sale, section 363(k) of the Bankruptcy Code generally allows a secured creditor to “credit bid” or offset an allowed secured claim against the purchase price of auctioned property.

After the Debtors commenced the chapter 11 cases, they filed a motion requesting approval of a proposed auction for a sale of substantially all of their assets to the bidder with the highest or otherwise best offer. The Debtors argued that the proposed sale of the assets was within the sound business judgment of the Debtors and should be approved because the prompt sale of the purchased assets pursuant to the proposed procedures and timelines presented the best opportunity to maximize the value for the estates. The Debtors received bids from two groups of noteholders, and each bid contained a “credit bid” component, whereby the noteholders sought to use their existing claims against the Debtors as currency in the auction. At the conclusion of the Bankruptcy Court hearing with respect to the Debtors’ motion to sell the assets, the Court requested that the parties submit further briefs as to whether and to what extent noteholders could credit bid.

Pursuant to the Court’s request, the purchaser of the Debtors’ assets, Formfactor, and a group of minority noteholders argued that the Indenture Trustee was the party that held the lien and acted as the collateral agent for the noteholders and thus, failure by the Indenture Trustee to tender a credit bid meant that there was not a credit bid for the Court to consider. The Indenture Trustee also submitted a brief and argued that the rights of the minority noteholders may be prejudiced if the majority noteholders authorized the Indenture Trustee to credit bid 100% of the outstanding principle of the notes. Moreover, the creation of a new corporate entity by the majority noteholders and the granting to the minority noteholders pro-rata ownership in the stock of the new entity did not insure that the rights of the minority noteholders would not be prejudiced and that they would have a viable economic interest in the acquired assets.

Advanced Inquiry Systems, Inc., the majority secured noteholder and DIP lender, filed a supplemental objection and argued that the Indenture did not permit the minority noteholders to separately credit bid. Further, Advanced Inquiry Systems, Inc. argued that the failure of the Indenture Trustee to act on instruction to credit bid on behalf of all noteholders entitled the majority noteholders to credit bid on behalf of all of the noteholders.

The Bankruptcy Court’s Decision
As an initial matter, the Bankruptcy Court found that it had jurisdiction to resolve the rights of the Indenture Trustee and noteholders under the Indenture as to credit bidding. Specifically, the Court found that consideration of the competing credit bids falls under the Court’s “core” jurisdiction because credit bidding (i) is a right specifically provided for by the Bankruptcy Code, (ii) only arises in the context of a bankruptcy proceeding, and (iii) will substantially affect the liquidation of assets of the estate. Although the proceeding involved the interpretation of documents executed by non-debtor parties, the Court stated that the interpretation involving credit bidding fundamentally impacts a bankruptcy proceeding. The Court also noted that the Indenture Trustee had submitted to the Court’s jurisdiction.

Second, the Court found that pursuant to the Indenture and related agreements, the noteholders were not given the right to credit bid directly either their portion of the notes or all of the notes. The Court cited various sections of the Indenture and found that these provisions made it impossible for noteholders to credit bid their portion of the notes because the Indenture did not allow noteholders to take an action that did not treat all noteholders equally and accrue to the common benefit of the noteholders. The Court then discussed the provisions in the Security Agreement and other agreements to support the overarching trend that “the Indenture and other agreements [were] set up for the benefit of noteholders as a whole.” In the Court’s review of documents, it could not find a provision that allowed the noteholders to act as a majority or minority with respect to credit bidding.

Third, the Court found that even a majority of noteholders were not permitted to require the Indenture Trustee to credit bid. Pursuant to section 7.7 of the Indenture, the Court found that a majority of noteholders may tell the Indenture Trustee what to do procedurally, but not substantively. Section 7.7 does not preclude noteholders from requesting that the Indenture Trustee take a specific substantive action, such as credit bidding. Nevertheless, it is within the Indenture Trustee’s discretion whether to take the substantive action in question. The failure of the Indenture Trustee to take a requested action may give the noteholders a cause of action against the Indenture Trustee, nevertheless, the Court found that the noteholders were not permitted to circumvent the Indenture Trustee and take an action that they thought appropriate.

The Court’s findings led the Court to hold that the two proposed bids in question were unacceptable because each included a credit bid component. The Court found that a majority of noteholders were not allowed to credit bid even if they had requested that the Indenture Trustee credit bid on their behalf and the Indenture Trustee denied the request. Since a majority of noteholders were not permitted to credit bid, the Court stated that consequently a minority of noteholders were not permitted to credit bid.

The Court discussed section 363(k) of the Bankruptcy Code, which the Court noted may allow noteholders to credit bid. Nevertheless, the Court ordered that noteholders were not permitted to credit bid pursuant to section 363(k) because to do so would create a confusion as to rights under the Indenture and accompanying agreements, given that the Court read the language in those agreements as not permitting credit bidding by the noteholders. The Court concluded that any credit bid needs to come from the Indenture Trustee.

Effect of the Decision
The Electroglas decision stands in contrast to the February 23, 2009 Delaware Bankruptcy Court decision in GWLS Holdings, which supported collective action by a majority of the first lien lenders, and authorized a credit bid in connection with a sale of substantially all the debtors’ assets. In GWLS Holdings, the Court found that the administrative agent for a group of first lien bank lenders had the authority to enter the credit bid in accordance with section 363(k) on behalf of all the first lien lenders as contemplated by the clear and unambiguous language of the collateral agreement. In GWLS Holdings, the Court looked to the plain meaning of the terms of the agreements executed in conjunction with the debt. The Court found that it was clear when interpreting both the credit agreement and the collateral agreement according to the plain meaning of their terms and giving force and effect to all provisions of each agreement, that the provision in the collateral agreement which allowed the first lien agent to enter into the proposed credit bid on behalf of the first lien lenders was not overridden by a section of the credit agreement. Since both the collateral agreement and the credit agreement were entered into contemporaneously, the credit agreement provision did not override the collateral agreement.

In Electroglas, Judge Walsh concluded that the documents governing the would-be bidders’ secured debt obligations (in particular, the relevant Indenture and accompanying agreements) did not allow the majority noteholders to credit bid. Rather, only the Indenture Trustee was permitted to credit bid on behalf of all of the noteholders. Even if the majority of the noteholders requested that the Indenture Trustee credit bid and the Indenture Trustee denied their request, the noteholders’ only remedy was to institute an action against the Indenture Trustee for acting improperly. The Electroglas decision thus makes clear that although Bankruptcy Code section 363(k) affords secured creditors a statutory right to credit bid, that statutory right may be restricted by the terms of the governing credit documents. Accordingly, Electroglas teaches that a secured creditor interested in submitting a credit bid in a bankruptcy auction must have a thorough understanding of the terms of the credit documents before attempting to bid.

Federal Circuit Panel Upholds Patentability of Medical Diagnostic Testing

Send to a friend

On September 16, 2009, a unanimous panel of the United States Court of Appeals for the Federal Circuit ruled that a medical process for calibrating drugs, in which a treatment drug is injected into a patient, and the patient’s subsequent metabolic response is measured, is patentable subject matter under 35 U.S.C. § 101. Prometheus Laboratories, Inc. v. Mayo Collaborative Services, No. 2008-1403 (Fed. Cir. Sept. 16, 2009). The decision has potentially significant implications for the patenting of medical diagnostic testing and raises the question of what natural phenomena can and should be the subject to the exclusive rights of the patent laws.

The district court found the medical patents to be invalid.
The patents at issue in Prometheus “claim methods that seek to optimize therapeutic efficacy while minimizing toxic side effects” of thiopurine, a drug used to treat autoimmune diseases. The patents’ methods contain three separate steps. First, the “administration” step in which a patient is injected with thiopurine. Second, the “determining” step in which a physician assesses the levels of the drug’s metabolites in the patient. (A metabolite is a by-product of a drug like thiopurine broken down in the body.) Third, the “warning” step in which the determined metabolite levels are compared to pre-determined metabolite toxicity levels, allowing a physician to adjust the drug’s dosage accordingly.

In 2004, Prometheus filed suit against Mayo Collaborative Services for infringement of these patents after Mayo announced that it planned to start using and selling its own test for measuring metabolites. The district court held on cross-motions for summary judgment that Mayo’s test literally infringed on the patents. Mayo then filed a motion for summary judgment of invalidity. The district court granted defendant’s motion for summary judgment finding that the patents impermissibly claim natural phenomena, meaning that the patents did not claim patentable subject matter under 35 U.S.C. § 101. The district court explained that the patents merely recited natural correlations between thiopurine drug metabolite levels and the effectiveness of the drug. The court concluded that the steps of gathering data from a patient and making a mental correlation did not result in a valid patent.

The scope of patentable subject matter is in dispute.
While it is well-established that patent protection does not extend to fundamental principles, such as laws of nature, natural phenomena, or abstract ideas, there has been dispute about the line between the principles themselves and their applications. Especially where process or method patents are concerned, distinguishing between patentable and unpatentable subject matter has been a difficult issue. Two cases —Laboratory Corp. of American Holdings v. Metabolite Laboratories, Inc. and In re Bilski—previously addressed this issue and provided the backdrop for the Prometheus decision.

The Supreme Court’s decision in LabCorp.
The district court in Prometheus relied heavily on Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 548 U.S. 124 (2006) (Breyer, J., dissenting). The patent at issue in LabCorp involved using any test to measure a body’s level of amino acid related to vitamin B, and then comparing that level to the “normal” level of the amino acid in the body. If the comparison showed an increased level of the amino acid, a doctor could conclude that the patient suffers from a deficiency in vitamins B12 and folic acid. The Supreme Court granted certiorari, but later dismissed the case after oral argument on the grounds that the petition had been improvidently granted. Justice Breyer, joined by Justices Stevens and Souter, dissented—he would have reached the merits of the case. In the dissenters’ view, the issue presented was an important and disputed issue in patent law: the correlation between two substances in the human body is a natural phenomena that should not be patented. Justice Breyer reasoned that any claim which “instructs the user to 1. obtain test results and 2. think about them” is not patentable subject matter under § 101. He wrote that the correlation between amino acid levels and vitamin deficiency fall in the realm of natural phenomenon. Thus, packaging the correlation into the form of a “process” for determining vitamin deficiency cannot, in his view, change it from an observation of natural principle into an application of that principle. Because of LabCorp’s posture, Justice Breyer’s opinion is not controlling law; however, it strongly influenced the district court’s decision, as noted in the Federal Circuit’s opinion.

The Federal Circuit and the Supreme Court opine on patentable subject matter in Bilski.
Rejecting the district court’s reliance on LabCorp, the Federal Circuit looked instead to its own recent In re Bilksi decision. F.3d 943 (Fed. Cir. 2008) (en banc), cert. granted, 556 U.S. 1 (June 1, 2009). In an attempt to set out clear criteria, Bilksi established the “machine-or-transformation test” for process patents. Under the test, a process is patentable under § 101 if (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Furthermore, to qualify as a process under the transformation prong, the transformation must be central to the purpose of the claimed process. It must not be solely “insignificant extra-solution activity” or merely a “data-gathering step.” In arriving at this “bright-line” test, the Federal Circuit relied heavily on several Supreme Court decisions, most notably Gottschalk v. Benson, 409 U.S. 63 (1972).

The Supreme Court granted certiorari to review Bilski, and heard oral arguments on November 9, 2009. The justices seemed likely to affirm the rejection of Bilksi’s patent application, which involved a process for hedging risk in commodities trading. In affirming, however, the Court may not necessarily wholly embrace the Federal Circuit’s “machine-or-transformation” test. The Court, the parties, and the sixty-eight amici briefs all recognized the potential sweeping impact that such a test could have on the scope patentable subject matter. Numerous amici and the U.S. Patent and Trade Office also argued that the test should not apply to software or to medical diagnostic testing.

The Federal Circuit finds the Prometheus patents are valid under Bilski.
The Federal Circuit relied upon Bilski’s “machine-or-transformation” test as its basis for overturning the district court holding. In doing so, the Court found a transformation in the first two steps of Prometheus’ patent. According to the Court, under the first, “administration,” step, that transformation occurs when the body metabolizes the administered drug. Under the second, “determination,” step, the transformation occurs when the bodily sample is manipulated to extract the metabolites and determine their concentration, using processes like high pressure liquid chromatography. In regards to the third, “mental” step, the Federal Circuit agreed with the district court that it was not patent-eligible. However, the Court made clear that the presence of a mental step does not negate an otherwise patentable process.

The two transformations, in the Court’s view, go beyond mere data gathering, and are central to the claim as required by Bilski. The Court characterized the claims as composing a “method of treatment,” whose intended purpose lay in treating the human body. Methods of treatment, concluded the Court, are always transformative when “a defined group of drugs is administered to the body to ameliorate the effects of an undesired condition.” Thus, the action of injecting the drug during the “administration” step is central to the ultimate purpose of having the body metabolize the drug. Similarly, the “determination” step’s manipulations are central to the treatment protocol. Because the Court considered Prometheus’ claims to be transformative, it held the district court’s characterization of the claims as mere correlations to be erroneous.

Mayo’s petition to the United States Supreme Court.
On October 28, 2009 Mayo filed a petition for certiorari in the United States Supreme Court, on the question of “[w]hether 35 U.S.C. § 101 is satisfied by a patent claim that covers observed correlations between patient test results and patient health, so that the claim effectively preempts all uses of these naturally occurring correlations.” The petition urges the Court to take the case because the Federal Circuit’s decision contravenes the reasoning of the three justices’ dissent in LabCorp. It further notes that the two amicus filings in LabCorp, in addition to the seven amicus filings in the Federal Circuit for Prometheus indicate that “the issue is one of exceptional public importance.”

With the Supreme Court’s potential reversal of Bilski, the outcome for Prometheus and diagnostic testing patents will be closely watched.

Quinn Emanuel Wins Stunning Reversal for New York Governor Paterson

Send to a friend

May a sitting governor appoint a lieutenant governor when there is a vacancy in that office? New York’s Governor David Paterson faced that question after he was elevated from lieutenant governor to governor upon Eliot Spitzer’s resignation. The vacancy remained for some time but the lack of a sitting lieutenant governor took on new urgency last summer, when partisan defections and redefections in the New York Senate left that chamber deadlocked at 31-31 and New York’s state government ground to a halt during the worst fiscal and budget crisis since the Great Depression. There was no one presiding over the Senate to break the tie, and worse still, each faction of senators claimed to a competing President of the Senate, so it was unclear who was in line to succeed the governor in case of emergency.

Governor Paterson’s solution was to appoint a lieutenant governor to fill the vacancy, and for the post he chose Richard Ravitch, a veteran fiscal problem solver who had twice helped save New York from earlier crises. The appointment was widely praised. But its constitutionality was widely challenged. How can the governor appoint his own successor? Mustn’t such an important statewide post be left to election? Why had no other New York governor appointed a lieutenant governor before? New York Attorney General Andrew Cuomo even posted a web page saying that he believed the appointment unconstitutional.

Without the Attorney General’s willingness to back his bold decision, Governor Paterson turned to Quinn Emanuel to defend the Ravitch appointment against anticipated challenge. The firm successfully did so in a nonstop ten-week litigation marathon that culminated in a historic 4-3 decision by the New York Court of Appeals, the state’s highest court, upholding the appointment in Skelos v. Paterson on September 22, 2009. The New York Law Journal, the New York Times and the American Lawyer all called the victory “stunning,” and the Times labeled it “a court victory few thought possible.”

And indeed, it was not easy getting there. The decision, which resolved a constitutional issue of first impression in New York, was written by Chief Judge Jonathan Lippman and joined by high court jurists appointed by Democratic and Republican governors alike. But until the Court of Appeals decision, not a single judge had endorsed the Governor’s position.

The Governor’s position was simple: A New York statute, Public Officers Law § 43, provides that, “[i]f a vacancy shall occur, otherwise than by expiration of term, with no provision of law for filling the same, if the office be elective, the governor shall appoint a person to execute the duties thereof until the vacancy shall be filled by an election.” POL 43 does not mention the lieutenant governor. But it does not exclude the lieutenant governor either, and its language is otherwise sweeping.

Two New York senators who had participated in the summer Senate “coup,” however, argued that the New York Constitution barred the use of POL 43 to appoint a lieutenant governor. They cited Article IV, § 6, which states that the “temporary president of the Senate shall perform all the duties of Lieutenant Governor during such vacancy,” and argued that this provision meant that such a vacancy could never be filled.

The Governor’s legal team responded that this provision merely created a harmonious three-step process: if there is a vacancy in the office of lieutenant governor, the temporary Senate president steps in as an immediate caretaker to perform the duties of the office until an appointment can be made, at which point the appointee fills the vacancy, and executes the duties of office, until the office is filled by election. The Court of Appeals agreed, upholding the appointment and overturning the decisions of two lower courts that had ruled in favor of the senators.

The underlying drama in the case was whether the senators even had standing to bring the suit in the first place. A 2001 Court of Appeals decision, Silver v. Pataki, 96 N.Y.2d 532 (2001), had limited legislator standing to cases where a senator’s vote had been nullified or his individual powers usurped. It held that the speaker of the Assembly could not challenge then-Governor Pataki’s line-item vetoes because any grievance about such vetoes was not a personal injury but rather was shared by the body as a whole.

The Court of Appeals could assume standing and rule on the merits for the Governor, holding the appointment constitutional. But it could not rule for the senators without deciding standing and dramatically expanding the power of legislators to take disagreements with sitting governors to court. That is because neither senator had had his vote nullified or his powers usurped by the appointment. They referred to Ravitch as “the interloper” and claimed they did not want to sit in the Senate under his gavel. But they could not show how that created any personal injury that distinguished them from any other senator, or from any citizen. The Court chose the former course, assuming standing but holding that the senators lost on the merits.

The Court of Appeals rejected the senators’ suggestion that the Governor’s appointment of a lieutenant governor could not be constitutional because no New York governor had made such an appointment before. The Governor’s legal team successfully argued that the mere fact that a constitutional power has not been exercised before does not prove it does not exist—and cited decisions in five other states from the 1890s to the 1990s in which governors had appointed lieutenant governors under statutory and constitutional provisions similar to New York’s.

The Court likewise rejected the senators’ argument that such an appointment is undemocratic and might allow “problematic individuals [to] be foisted upon the public, outside the remote contemplation of the voters.” The Governor’s team countered, and the Court agreed, that while elections are basic to our democracy, elections cannot be held every time there is a vacancy, and thus the “elective principle” cannot control when vacancies in public office must be filled in between elections. After all, the Governor’s team argued, democracy survives even though five unelected members serve today in the U.S. Senate solely by virtue of gubernatorial appointment. And there are political checks that ensure that a governor will not appoint Bernie Madoff to office, or, like the emperor Caligula, appoint his horse. Thus, the Court agreed, there is no reason in law or logic why the lieutenant governorship is the one office in the state from dogcatcher to Governor that could never be filled.

The decision has major significance for the State of New York, because it allows Governor Paterson and Lieutenant Governor Ravitch to roll up their sleeve and focus on solving the budget crisis. It also amounted to a master class in constitutional law. Showing a deep judicial modesty, the Court deferred to both its co-equal branches of government. It deferred to the legislative branch, holding that it had fulfilled its constitutional duty under New York Constitution Article XIII, § 3 to provide for the filling of all vacancies, including in the lieutenant governorship. And the Court deferred to a sitting Governor who had conscientiously sought to ensure that the executive branch had compatible and politically harmonious leadership—the vision that Republican Governor Thomas Dewey had invoked back in 1953 when he persuaded the people to amend the New York Constitution to provide that the Governor and lieutenant governor would run together on a single ballot.

Had the Court accepted the senators’ argument, by contrast, it would have disregarded the work of both other branches and done violence to the constitutional scheme. Under the senators’ view, the legislature could never pass any law for filling the lieutenant governorship. Under the Governor’s winning argument, the legislature can change the process if it wants to, requiring advice and consent of the Senate or a legislative resolution by both houses.

It was a thrill and an honor for the Quinn Emanuel team to work with Governor Paterson and his counsel in making not only law but history, especially in a come-from-behind victory that justified every long summer night of research into the deep recesses of New York’s constitutional scheme.

Suing the Ratings Agencies for Subprime Investment Losses: Recent Developments

Send to a friend

A new target in subprime litigation
The subprime crisis and subsequent market crash have given rise to substantial litigation by bilked investors, with over 500 related lawsuits filed to date. But one group of key players — the credit ratings agencies — although facing increased scrutiny from government regulators at both the federal and state level, has largely watched this private litigation unfold from the sidelines. Until now. While investors originally appeared content to target the mortgage originators and investment banks, they are now turning their sights on the ratings agencies and asserting claims ranging from fraud and negligent misrepresentation to breach of contract and Securities Act violations. And, while the ratings agencies have traditionally depended on the First Amendment to shield them from liability, recent court decisions suggest that this defense may not apply in the subprime securities context. The ramifications of these types of actions cannot be overstated. If investor suits against the ratings agencies are allowed to proceed, Moody’s, Standard & Poor’s (together with its parent, McGraw Hill) and Fitch could each potentially be liable to investors for hundreds of billions of dollars in losses stemming from failed subprime structured investments.

The crucial role of the ratings agencies in the subprime securitization industry
The ratings agencies have faced intense criticism for their role in the subprime securities industry. A recent SEC investigation concluded that “[t]he ratings agencies performance … raised questions about the accuracy of their credit ratings generally as well as the integrity of the ratings process as a whole.” Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies, United States Securities and Exchange Commission (July 2008) at 2. In particular, the investigation found numerous deficiencies in ratings agency practices, especially in relation to deviations from disclosed ratings methodologies and the management of conflicts of interest. According to one internal email, a ratings analyst expressed concern that the model being used did not capture “half” the deal’s risk, but noted that “it could be structured by cows and we would rate it.” Another internal email cautioned that the ratings agencies were creating “an even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

Moreover, the ratings agencies consistently received lucrative fees for their subprime securities ratings services. The compensation received by the ratings agencies for such transactions was at least double, and sometimes more than triple, those for corporate ratings, and a substantial portion of ratings agencies’ annual revenues came from their work on these structured finance deals. As recognized by the SEC investigation, the ratings agencies were thus subject to a significant conflict of interest because they were motivated to assign the highest possible ratings in order to increase revenue and attract future business. There is evidence that the ratings agencies failed to correct modeling errors, made frequent undisclosed “out of model” adjustments and regularly reduced loss expectation amounts, all of which resulted in higher ratings being assigned to subprime securities.

It is clear that the ratings assigned to subprime securities such as RMBS and CDO notes were crucial to their sale and marketing. The ratings agencies were often involved in advising underwriters how to specifically design the transactions’ capital structures to satisfy investors’ rating requirements. In this way, the investment banks used securitization to convert risky debt obligations — for instance the entitlement to residential mortgage repayments — into “packages” of securities which were in turn structured so that the bulk of the pieces of that package could be assigned a triple or double A rating. Ratings were thus the corner stone of securitization. Without the high investment grade rating the deals would not have closed, the investors would not have purchased the securities and the ratings agencies would not have been paid.

In sum, there is substantial evidence that the ratings agencies acted at least negligently, if not recklessly or fraudulently. As two commentators have observed: “These oligopolies [the ratings agencies], which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.” Op-Ed by Michael Lewis and David Einhorn, The End of the Financial World as We Know It, New York Times (Jan. 3, 2009).

Investors seek to hold ratings agencies liable for losses
In light of these criticisms, a handful of plaintiffs have recently sought to hold the ratings agencies liable for subprime investment losses. For instance, a series of class action suits were filed by two New Jersey union benefit funds in the summer of 2008 on behalf of investors in billions of dollars worth of mortgage backed securities issued by Royal Bank of Scotland Greenwich Capital. In addition to naming the issuers and underwriters as defendants, these complaints also alleged that the ratings agencies “failed to conduct due diligence and willingly assigned the highest ratings to such impaired instruments since they received substantial fees from the issuer” and “issued the ratings based on an outdated methodology designed in about 2002.” These complaints allege that the ratings agencies violated section 11 of the Securities Act 1933, which provides purchasers of securities with a private right of action in respect of misrepresentations in the registration statement. Here, two important issues of first impression will be whether the ratings agencies are “underwriters” within the meaning of section 11 of the Act and whether Rule 436(g)(1), which provides that the ratings assigned to securities shall not be considered part of the registration statement for the purpose of section 11, will preclude the union funds’ claims.

In another class action on behalf of investors in a multi-billion dollar structured finance vehicle, two institutional investors — Abu Dhabi Commercial Bank and Kinds County, Washington — also named the ratings agencies as defendants, but asserted claims for common law fraud, negligent misrepresentation and breach of contract. As discussed in more detail below, a recent decision of the Southern District of New York dismissed the negligent misrepresentation and breach of contract claims against the ratings agencies but allowed the fraud claims to proceed.

Finally, the California Public Employees’ Retirement System (CalPERS) recently filed suit against Moody’s, Standard & Poor’s and Fitch in California State Court, alleging that the ratings assigned to various structured investment vehicles in which CalPERS invested were “wildly inaccurate and unreasonably high” and caused CalPERS to suffer over $1 billion in losses. CalPERS relies on two causes of action: negligent misrepresentation and negligent interference with prospective economic advantage. Significantly, this suit appears to be the first complaint brought solely against the ratings agencies; neither the issuers nor underwriters were named in the action. The implications of these cases are of monumental significance and will no doubt be vigorously defended by the ratings agencies. However, as recent court decisions suggest, at least one of the key defenses traditionally asserted by the ratings agencies to avoid liability may not be available here.

Cracks in the ratings agencies’ defensive armor
Historically, ratings agencies have been effectively immune from suit because of the First Amendment defense. However, cracks have recently appeared in the ratings agencies’ defensive armor as the courts have rejected attempts by the agencies to assert the First Amendment defense in the structured products context. Traditionally, a ratings agency is considered a member of the financial press and its published ratings are protected by the First Amendment as a statement on a matter of public concern. This defense has been applied to tort claims, and, more controversially, to contract-based claims, and requires that a plaintiff demonstrate actual malice on the part of the ratings agency. In addition, if the rating is considered an opinion on a matter of public concern that is not “provably false,” the ratings agency will be completely shielded from any liability. As a result, “the courts have not held credit rating agencies accountable for alleged professional negligence or fraud and ... plaintiffs have not prevailed in litigation against them.” In re Enron Corp., Securities, Derivative & “ERISA” Litigation, 511 F.Supp.2d 742, 816 (S.D. Tex. 2005).

As the Courts have begun to recognize, however, there is a significant distinction between the traditional ratings agency function — the rating of public securities which are publicly disseminated and targeted to the investing public at large — and the rating assigned to structured financial products — which are assigned in return for a hefty fee and targeted only to a select class of private investors. While the First Amendment defense may reasonably apply in the first context, a series of recent decisions has paved the way for a significant exception where limited issue structured products are involved. Three recent cases, each concerning the rating of securitized debt structured in a manner almost identical to mortgage backed securities, rejected the ratings agencies’ attempts to rely on the First Amendment defense, accepting the plaintiffs’ argument that the defense should not apply because the ratings were not published to the investing public at large but were instead targeted to a select group of institutional investors with considerable resources. Equally significant was the fact that the ratings agencies were hired to rate the securities at issue and were paid a fee to do so. As one court explained: “[w]hile the Rating Agencies gave “opinions,” they did so as professionals being paid to provide their opinions to a client. If a journalist wrote an article for a newspaper about the bonds, the First Amendment would presumably apply. But if [the sponsor] hired that journalist to write a company report about the bonds, a different standard would apply.” Commercial Fin. Services, Inc. v. Arthur Andersen LLP, 94 P.3d 106, 110 (Okla. Civ. App. 2004).

The Second Circuit appears to agree with this analysis. In a 2003 decision, the court rejected Fitch’s attempt to avoid third party discovery on the basis of New York’s journalist privilege. In its decision, the court pointed to two key factors. First, it noted that Fitch reported only on specific transactions when hired to do so. Because “Fitch’s information-disseminating activity does not seem to be based on a judgment about newsworthiness, but rather on client needs. ... [T]his weighs against Fitch being able to assert the privilege.” In re Fitch, Inc., 330 F.3d 104, 111 (2d Cir. 2003). Second, the court pointed to the fact that Fitch takes an active role in structuring the transactions it analyzes, holding that this was inconsistent with the traditional journalistic role. This decision thus strongly supports the argument that there is a significant distinction between a ratings agency’s “traditional” function of rating public securities (which might permit First Amendment defenses) and its function in rating “privately” issued securitized assets (which should not).

Southern District of New York decision allows fraud claim to proceed
Relying on this line of cases, a recent landmark decision of the Southern District of New York rejected the ratings agencies’ motion to dismiss Abu Dhabi Commercial Bank’s and King County’s claims for common law fraud, holding that the First Amendment defense did not apply where “a rating agency has disseminated their ratings to a select group of investors rather than the public at large.” The court also rejected an argument that ratings constituted non-actionable opinions, finding that the plaintiffs had sufficiently pleaded that the ratings agencies “did not genuinely or reasonably believe that the ratings they assigned … were accurate and had a basis in fact.” This decision represents the first time a damages action against ratings agencies in relation to their rating of subprime securities has been allowed to proceed. Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., No. 08 Civ. 7508(SAS), at 9 (S.D.N.Y Sept. 2, 2009).

The opinion is particularly significant because Judge Scheindlin, in holding that the plaintiffs had sufficiently pleaded all the necessary elements of their fraud claim, relied on factors that will likely be present in many other cases against ratings agencies concerning investment losses stemming from structured financial products. First, the court pointed to the “conflicts of interest that arise when rating agencies rate entities in which they have a financial stake.” Here, the Court found that the “Rating Agencies had the motive and opportunity to communicate these allegedly false and misleading ratings to potential investors” because they knew that if they refused to assign the securities the high rating that the underwriter required, the underwriter “would have taken its business elsewhere.” The Court also noted that the compensation received by the ratings agencies in return for assigning the ratings was in excess of three times their normal fees and increased in tandem with the growth of the structured product at issue. Finally, the Court found it significant that the ratings agencies were paid only if they assigned the securities the desired ratings and only if the transaction ultimately closed with those ratings. These facts were thus sufficient to infer fraud on the part of the ratings agencies even under the heightened pleading standard applicable to fraud claims. Abu Dhabi Commercial Bank, No. 08 Civ. 7508(SAS), at 11-12.

Finally, the Court dismissed the plaintiffs’ negligent misrepresentation claim, finding this cause of action was preempted by the New York Martin Act, and dismissed the breach of contract claims, finding that the plaintiff investors were not third party beneficiaries of the services contract between the ratings agencies and the issuer or the underwriter.

Conclusion: the battle continues
In the wake of the Abu Dhabi case, it appears that the ratings agencies are now a legitimate target for investors seeking to recoup losses suffered by the collapse of structured financial products backed by subprime assets. But while this decision represents an important precedent, other courts and judges are yet to weigh in, and the battle between the ratings agencies and investors is likely just beginning.

Cases filed against the ratings agencies in relation to subprime structured financial products:
Abu Dhabi Commercial Bank v. Morgan Stanley & Co., No. 08 Civ. 7508(SAS) (S.D.N.Y Aug. 25, 2008); New Jersey Carpenters Vacation Fund v. HarborView Mortg. Loan Trust 2006-4, No. 08 Civ. 5093(HB) (S.D.N.Y. Jun. 3, 2008); New Jersey Carpenters Health Fund v. Home Equity Mortg. Trust, No. 08 Civ. 5653(DAB) (S.D.N.Y. removed on June 23, 2008); California Pub. Employees Retirement Sys. v. Moody’s Corp., No. CGC-09 490241, (Cal. Super. Ct. July 9, 2009); Connecticut v. McGraw Hill Co., Inc., No. 08 Civ. 1316(AWT) (D. Conn. Aug. 29, 2008).

Cases declining to apply First Amendment defense:
Abu Dhabi Commercial Bank v. Morgan Stanley & Co., No. 08 Civ. 7508(SAS) (S.D.N.Y. Sept. 2, 2009) (common law fraud in rating of notes in structured investment vehicle comprised of asset backed securities, RMBS and CDOs); In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig., 580 F.Supp.2d 630 (S.D. Ohio 2008) (negligent misrepresentation in ratings of notes secured over healthcare receivables); Commercial Fin. Services, Inc. v. Arthur Andersen LLP, 94 P.3d 106 (Okla. Civ. App. 2004) (auditor’s third party contribution claim against ratings agency for ratings of notes secured over pools of bad debt); In re Fitch, Inc., 330 F.3d 104 (2d Cir. 2003) (assertion of journalist’s privilege in response to discovery requests); LaSalle Nat. Bank v. Duff & Phelps Credit Rating Co., 951 F.Supp. 1071 (S.D.N.Y. 1996) (securities fraud and negligent misrepresentation in ratings of bonds secured by healthcare receivables); In re Taxable Mun. Bond Sec. Litig., Civ A. MDL No. 863, 1993 WL 591418 (E.D. La. Dec. 29, 1993 (third party contribution claims for securities fraud where ratings agencies hired to rate regular municipal bonds); Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 762 (1985) (credit report published to five subscribers and intended only for a “specific business audience”).

Cases applying First Amendment defense:
Compuware Corp. v. Moody’s Investors Services, Inc., 499 F.3d 520 (6th Cir. 2007) (defamation and breach of contract claim against ratings agency in respect of rating of company’s creditworthiness); Jefferson County School Dist. No. R-1 v. Moody’s Investor’s Services, Inc., 175 F.3d 848 (10th Cir. 1999) (intentional interference and injurious falsehood claims in respect of ratings of bonds issued by school district); In re Enron Corp. Securities, Derivative & “ERISA” Litigation, 511 F.Supp.2d 742 (S.D. Tex. 2005) (negligent misrepresentation claim in respect of rating of Enron securities); County of Orange v. McGraw Hill Companies, Inc., 245 B.R. 151 (C.D. Cal. 1999) (breach of contract claims against ratings agency in respect of rating of debt securities offered by municipal county).

Recent Trends in Securities Class Actions

Send to a friend

The upheaval in the world’s financial markets over the past two years has led to a surge in securities class action filings. In 2008, the number of filings reached levels not seen since 2002, and early indicators point to a similar result in 2009. The volatility in the markets, and the revelation of corrupt schemes by Madoff and others, has led to many new lawsuits.

Recently, several studies have been published describing the current trends in securities class action litigation. See Stephanie Plancich & Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2009 Mid-Year Update – Filings Remain High, Fueled by Credit Crisis and Ponzi Scheme Claims; Median Settlements Remain Under $10 Million, (NERA Economic Consulting, July 2009); Securities Class Action Filings – 2009 Mid-Year Assessment, (Cornerstone Research, 2009); John W. Molka III, Securities Litigation Drops in Q2 2009 – An Advisen Quarterly Report – Q2 2009 (Advisen, 2009). Each of these studies uses its own methodology, and consequently reports slightly different results. Nonetheless, the consensus is that there has been an increase in the number of securities class actions over the last two to three years, although the number of new filings declined in the second quarter of 2009. Initial reports from the third quarter, however, indicate that new filings are on the rise again. See Ross Todd, New Report Says Securities Filings Are Back Up, The American Lawyer (Aug. 4, 2009).

This article provides a survey of the recent trends in securities class actions, relying principally on data published by NERA Economic Consulting in its July 2009 report. We describe below new trends in the mix of securities filings, the type of allegations made, the defendants named, and the factors affecting likely recoveries.

Increase in the Number of Filings
The global credit crisis has resulted in a proliferation of securities class action filings over the past two years. Since early 2007, when the financial markets were first affected by the collapse of the subprime mortgage industry, the number of securities class action filings has risen, with more than 250 new cases filed during 2008. This trend appears to be continuing in 2009, with almost 130 filings during the first half of the year. Following a lull in the second quarter, there has been a resurgence of new filings in the third quarter of 2009. In addition to cases directly related to the credit crisis, there has also been an increase in the number of filings alleging the existence of Ponzi schemes, such as the one perpetrated by Bernard Madoff.

Since 2007, filings related to the credit crisis and to Ponzi schemes have increased as a percentage of all securities class action filings. Of the 194 securities class actions filed in 2007, 38 (20%) were cases related to the credit crisis. During 2008, there were 259 cases filed, of which 110 (42%) were related to the credit crisis, and 12 (5%) contained allegations of Ponzi schemes. During the first half of 2009, the number of filings reached 127, which included 54 (43%) credit crisis cases, and 27 (21%) Ponzi scheme cases.

Increase in Allegations Relating to the Credit Crisis and Ponzi Schemes
The frequency of certain types of allegations has changed as a result of the surge of credit crisis and Ponzi scheme cases. For example, breach of fiduciary duty and product defect allegations have both increased in number. Plaintiffs are increasingly alleging that investment agents breached their fiduciary duties by misleading their clients about the risks involved with certain securities. In addition, allegations that plaintiffs were sold defective financial products have increased.

Prior to 2007, the most common types of allegations made in securities class actions related to (1) accounting irregularities, (2) company-specific earnings guidance, and (3) insider trading. During the last two years, accounting and earnings-guidance allegations have remained high, but the number of cases alleging insider trading have diminished from 39% of the cases filed in 2007 to only 6% during the first half of 2009. The number of options-backdating cases has also declined significantly. Options-backdating cases constituted 20% of all securities class action filings in 2006, and new cases continued to be filed through 2008. As of June 30, however, no backdating cases had been filed in 2009.

Financial Sector Defendants
Not only has the credit crisis prompted a change in the types of allegations being made by securities class action plaintiffs, there has also been a shift in the relative occurrence of allegations against certain types of defendants. During the first half of 2009, 67% of the filings named at least one company in the financial sector as a defendant, representing an increase from the 2005 level of 25%. These numbers are similar to what was observed in 2008, when more than 50% of the cases filed named a financial company as a defendant. Not surprisingly, the increased prevalence of financial sector defendants is a direct result of the increase in cases related to the credit crisis. For example, cases relating to auction-rate securities were first filed in 2008, immediately after the market for these securities failed. The defendants in the first auction-rate cases were banks and broker-dealers who had been the market makers for these securities.

A sharper trend has been seen in connection with accounting firm defendants. In the first half of 2009, 17% of filings included at least one accounting firm as a defendant, an increase from 7% in 2007 and less than 6% in 2008. This trend has occurred notwithstanding the Supreme Court’s decision in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), which reaffirmed that the implied private right of action under § 10(b) of the Securities Exchange Act does not extend to aiders and abettors. The Court held that, even for secondary actors, liability under § 10(b) requires the plaintiff to prove all elements of the claim, including reliance upon a material misrepresentation or omission by the defendant.

Non-Financial Defendants
Plaintiffs in more recent auction-rate securities cases have targeted a different set of defendants that are not part of the financial sector. Instead of pursuing entities that sold the securities, recent cases have been filed against the companies and mutual funds that held portfolios of these securities. These companies are being sued by their own investors, who allege that they were misled about the companies’ exposure to the auction rate securities market. See, e.g., Tamar et al. v. Mind C.T.I., Ltd et al., Case No. 1:09-cv-07132 (S.D.N.Y. Aug. 13, 2009).

Foreign Defendants
Another recent trend is the increase in the percentage of cases filed against foreign defendants. During the first half of 2009, 15% of the filings named a foreign company as a primary defendant. This is the highest percentage of filings against foreign defendants since the passage of the Private Securities Litigation Reform Act (PSLRA) in 1995. To put this number in perspective, the percentage of foreign defendants in recently filed securities class actions is greater than the percentage of foreign corporations listed on securities exchanges in the United States.

Resolution of cases – Generally
Most credit crisis and Ponzi scheme cases are still in the early stages, and therefore few substantive legal trends have yet emerged. Among other important developments to observe will be the application in these cases of the Supreme Court’s recent guidance on the sufficiency of pleadings. Bell Atlantic, Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).

Between 2007 and mid-2009, a total of 202 credit crisis-related cases were filed. As of June 30, 2009, 16 (8%) had been dismissed and only 3 (1.5%) had settled. In other words, greater than 90% of all credit crisis-related cases were still pending. For this reason, the sample size of completed cases is too small to create an observable trend.

Resolution of cases – Pleading Requirements
Since the passage of the PSLRA in 1995, 44% of resolved cases were dismissed; the remaining 56% settled. During this period, only 22 cases have gone to trial. Of the cases that were filed between 2000 and 2006, over 84% have been resolved.

Defendants often invoke two Supreme Court decisions, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) and Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), to suggest that the bar has been raised for pleadings in securities class actions. Dura is cited for the proposition that plaintiffs in securities fraud cases must show “loss causation”– a causal link between the misconduct of the defendant and the loss suffered by the plaintiff. In Tellabs, the Court held that “an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs at 314. There is currently a split among the federal courts of appeal regarding the application of the Tellabs decision, with only some circuits interpreting the ruling as having increased the pleading requirements for plaintiffs.

Resolution of cases following Dura has shown a slight increase in the percentage of cases ending in dismissal compared with previous years. Whether this trend will continue in credit crisis and Ponzi scheme cases remains to be seen. Defendants in credit crisis cases will likely assert that loss causation could not be established, arguing that the volatility and general decline of the financial markets make it difficult to link the loss suffered by the plaintiff to specific conduct on the part of the defendant.

Resolution of cases – Settlement
The median settlement value for individual securities class action cases over the last ten years has been less than $10 million. During 2008 and the first half of 2009, the median value was $8 million. In contrast, the mean value has shown considerable variability over time, primarily owing to large settlements in cases like WorldCom and Enron, both of which settled for more than $1 billion. Cases such as these are outliers. On average, since January 2006, more than 50% of cases that have settled each year have been resolved for less than $10 million, and 70% to 75% have settled for less than $20 million.

Investor losses are the strongest determinant of settlement value. Investor losses can be estimated from publicly available information by comparing the return on a company’s stock to the return on the S&P 500 over the class period, and by using a model to estimate the number of affected shares of common stock. As investor losses increase, so does expected settlement value, although the relationship is non-linear.

Median investor losses for cases that have settled during the last five years were in the range of $300 to $400 million, with the exception of 2009, which saw a median investor loss of $289 million for cases that settled during the first half of this year. These values are for cases that were filed prior to the start of the credit crisis.

For cases filed in 2008 and 2009, the median investor loss is greater than $600 million. Further, when only those cases that are related to the credit crisis are considered, the median investor loss is even higher. The median investor loss for credit crisis cases filed in 2008 was $3.8 billion, and for cases filed in 2009 it was $835 million. These values are significantly higher than the median investor losses in cases unrelated to the credit crisis.

In addition to investor losses, there are several other factors that correlate with an increase in settlement value. For example, any admission of wrongdoing on the part of the defendants, perhaps in a proceeding before a government agency, will likely increase settlement value. Cases with professional firms as co-defendants tend to result in settlements of higher value than what would be expected based on the investor losses alone. The same is true for cases involving an institutional investor as a plaintiff, although this could be because institutional investors are attracted to inherently stronger cases. Finally, the wealthier the defendant, the higher the settlement value. This last factor is an important consideration in credit crisis cases. The credit crisis may have a negative impact on potential settlement values by exhausting the finances of the defendants in these actions. Therefore, even if the plaintiff achieves considerable leverage in settlement negotiations, the final payout may be diminished because of the circumstances that gave rise to the lawsuit in the first place.

Conclusion
Securities class action filings during the last two years have largely represented a response to the global credit crisis that resulted from the collapse of the subprime mortgage market. The vast majority of these cases are still pending and at early stages. For those cases that do survive dismissal, the settlement values may be enhanced by the tremendous losses that have been suffered by investors in the wake of the credit crisis. The final amount recovered in these cases, however, will depend to a large extent on the resources available to the defendants.

“Related to” Bankruptcy Jurisdiction in the Wake of the Financial Crisis

Send to a friend

As the financial crisis spurs new litigation, bankruptcy courts are faced with debtor estates of unprecedented size. The Lehman Brothers bankruptcy alone involves over $600 billion in debt, making it the largest bankruptcy ever, six times the size of WorldCom. As litigation related to the financial crisis continues to proliferate, many plaintiffs and defendants will be faced with the question of whether a litigation is “related to” a bankruptcy such that it can be consolidated with a bankruptcy proceeding. Thus, now more than ever, it is important to understand the different approaches among the circuit courts in interpreting the scope of jurisdiction over matters “related to” bankruptcy.

Federal Jurisdiction for “Related to” Bankruptcy Cases
Federal courts have exclusive subject matter jurisdiction over bankruptcy cases and non-exclusive jurisdiction over cases “related to” bankruptcy cases. 28 U.S.C. § 1334(b). If a case filed in state court is “related to” a case filed under Title 11 (the federal bankruptcy statute), defendants can remove the case to a federal district court, which will generally refer the case directly to the bankruptcy court in which the related bankruptcy case is proceeding.

Any Conceivable Effect on Bankruptcy.
Eight Circuit Courts (the First, Third, Fourth, Fifth, Eighth, Ninth, Tenth, and Eleventh) have adopted the definition of “related to” bankruptcy set forth in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984) – “whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” See In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir. 1991); In re A.H. Robins Co., 788 F.2d 994, 1002 n. 11 (4th Cir. 1986); In re Wood, 825 F.2d 90, 93 (5th Cir. 1987); In re Dogpatch, U.S.A., Inc., 810 F.2d 782, 786 (8th Cir. 1987); In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988); In re Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990); In re Lemco Gypsum, 910 F.2d 784, 788 (11th Cir. 1990).

In Pacor, the court ultimately concluded that the case at bar was not sufficiently “related to” the bankruptcy because the outcome would not bind the debtor. Pacor at 995. The court determined that although an action related to bankruptcy need not “be against the debtor or against the debtor’s property,” “[a]n action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate.” Id. at 994.

Although in In re Turner, 724 F.2d 338, 341 (2d Cir. 1983), the Second Circuit held that “related to” jurisdiction requires a “significant connection” between the proceeding and the bankruptcy, recent cases have made clear that there is no difference between this standard and the Pacor standard. In re Ames Dept. Stores Inc., 190 B.R. 157, 160 (S.D.N.Y. 1995). Thus, “related to” jurisdiction in the Second Circuit should be analyzed using the same standard applied in the other eight Circuits applying the Pacor test.

Other Tests.
The Seventh Circuit uses a more restrictive test to determine whether “related to” bankruptcy jurisdiction exists. In the Seventh Circuit, a matter is not related to bankruptcy “unless its resolution ‘affects the amount of property available for distribution or the allocation of property among creditors.’” Home Ins. Co. v. Cooper & Cooper Ltd., 889 F.2d 746, 749 (7th Cir. 1989) (quoting In re Xonics, Inc., 813 F.2d 127 (7th Cir. 1987)). This test aims to preserve state court jurisdiction over state court matters involving parties not related to the bankruptcy estate.

The Sixth Circuit’s standard, however, is arguably more inclusive than the Pacor test. The court in In re Salem Mortgage Co., 783 F.2d 626 (6th Cir. 1986) held that the bankruptcy court has jurisdiction over the claims against non-debtor co-defendants because the legislative history and the wording of § 1334(b) indicate that the intent was to give “district courts broad jurisdiction in bankruptcy cases.” Id. at 634.

Application to Recent Cases.
One recent case in the bankruptcy court for the District of Delaware may serve as an indicator of how bankruptcy courts will handle claims of “related to” bankruptcy jurisdiction in the wake of the financial crisis. The bankruptcy court found that a breach of contract case concerning mortgage securitizations was sufficiently “related to” bankruptcy. In re American Home Mortgage Holdings, Inc., v. Bank of America, 390 B.R. 120, 131-32 (D. Del. 2008). The debtor was not a party or third party beneficiary to the contracts disputed. Id. at 135. The court decided that the suit was nevertheless “related to” bankruptcy because the debtors’ liability under other contracts would be increased by virtue of claims Bank of America had filed against them relating to the litigation. Id. at 134. Though Bank of America requested that the bankruptcy court voluntarily abstain, which it is allowed to do under 28 U.S.C. §1334(c)(1), the court declined to do so.

Given the proliferation of cases resulting from the financial crisis, bankruptcy courts may start looking for ways to avoid jurisdiction of “related to” cases. One option courts may utilize to lessen their case load is abstention. Mandatory abstention applies under 28 U.S.C. §1334(c)(2) where: (1) a timely motion is made; (2) the claim or cause of action is based upon state law; (3) the claim or cause of action is related to a bankruptcy case, but did not arise in or under the bankruptcy statute; (4) the only basis for original jurisdiction in federal district court is the relation to a bankruptcy filing; and (5) the action has already commenced in state court. Most of the Circuit courts that have addressed the issue have held that mandatory abstention applies to a removal action. See, e.g., Mt. Mckinley Ins. Co. v. Corning Inc., 399 F.3d 436, 446-47 (2d Cir. 2005). The Ninth Circuit, on the other hand, has held that mandatory abstention does not apply in removal proceedings because there is no concurrent state action once the case has been removed. See In re Lazar, 237 F.3d 967, 981-82 (9th Cir. 2001).

The bankruptcy court may also remand cases “related to” bankruptcy under 28 U.S.C. § 1452(b) on any equitable ground. Permissive abstention is not proper where the outcome of a case may affect the entire bankruptcy estate. Allen v. J.K. Harris & Co., 331 B.R. 634, 645 (E.D. Pa. 2005). Other factors the court may consider in deciding whether to exercise permissive abstention include: (1) the extent to which state law issues predominate; (2) whether there are unsettled or difficult issues of applicable state law; (3) the presence of related proceedings in other non-bankruptcy courts; (4) the degree to which the proceeding is related to the main bankruptcy case; and (5) the likelihood of forum shopping. See id. at 645-648.

Conclusion.
The high profile bankruptcies of financial institutions during 2008 will likely lead to a flood of litigation that could be “related to” bankruptcy if the broadest applications are used. Should those defendants choose to try to remove those cases to federal court, the success will depend on construction of the "related to" jurisdiction.  For smaller cases, if "related to" jurisdiction is construed broadly, as it appears to be in the Sixth Circuit, only cases with extremely tenuous connections to the bankruptcy estate or entirely speculative claims will be remanded to state court.  Under a more restrictive application, like that employed in the Seventh Circuit, cases primarily implicating state law and only hypothetically affecting the bankruptcy estate will be candidates for remand or abstention.  Thus, attempting to consolidate a state action with a pending bankruptcy might be a powerful strategy for defendants to slow down litigation.  Then again, the already burdened bankruptcy courts may balk at the prospect of hearing every case related to any bankrupt company, and my choose to rely on their ability to abstain from such cases.

The Mighty Quinn - AmLaw Cover Story, June 2006

Send to a friend

Don’t dismiss Quinn Emanuel as some quirky West Coast litigation firm. Its lawyers have ambitions—big ones.

Susan Beck
The American Lawyer
June 1, 2006

There's nothing subtle about Quinn Emanuel Urquhart Oliver & Hedges. Visitors discover this when they're greeted by a sign-"Quinn Emanuel-Trial Lawyers"-in the lobby of the firm's main office in downtown Los Angeles. Its message: We are not your usual big-firm litigators who don't know their way around a courtroom. The firm's reception area also makes a statement: We're not stuffy. With its espresso coffee bar, a flat screen television tuned to a sports channel, and flashy tropical fish cruising in two oversize aquariums, a guest might think she stepped into a wealthy frat house rec room. On one March morning, most of the people milling about the area and slumped in chairs watching TV are dressed in jeans and T-shirts, including one silk-screened with Charles Manson's face. It's impossible to tell messengers from lawyers. The person wearing the Manson T-shirt is partner Patrick Shields, 31, a former Harvard Law Review editor. In warmer weather most folks opt for shorts and flip-flops.

Down the hall, the office of managing partner John Quinn is comfortably messy, crammed with family pictures and mementos. Quinn had expected to be in trial this day, but the case-a high-stakes patent dispute for Monsanto Company over a bovine growth hormone-settled at the last minute. Lean and wiry, the 54-year-old lawyer perches on the edge of his chair like a terrier pausing before a burst of activity. He gets right to the point: "We want to be the preeminent business litigation firm. We've been saying that for a long time before we could credibly make the claim. Now there's some credibility to the claim."

Quinn holds up a yellowed copy of a full-page ad the firm placed in The Wall Street Journal last September celebrating its victories. "Once in a lifetime results. Year after year," it proclaims. In smaller print, the firm boasts that it has won more nine-figure verdicts than any other law firm in America. A large ad in the Burbank airport similarly touts the firm's trial success with remarkable, if questionable, precision. "Justice may be blind, but she still sees it our way 92.3 percent of the time," it reads. Adds Quinn: "We try more business cases than any other firm in the country."

Close, but not quite. Jones Day, in fact, tries more business cases, according to our Litigation Department of the Year submissions. Still, Quinn Emanuel isn't far behind, which is pretty impressive given that Quinn Emanuel, with 244 lawyers, has a fraction of Jones Day's 1,000-plus litigators.

Without a doubt, Quinn Emanuel is one of the boldest firms among the ranks of The Am Law 200-and one of the most profitable. Average partner compensation in 2005 was $1.65 million, making it the most lucrative firm outside of New York. Fed a diet of contingency fee cases and regular hourly work, revenue jumped more than 20 percent for the third straight year, to $193.5 million. With four offices in California, it's mostly been known as a quirky West Coast litigation firm; but it's now taking on New York. The firm is attracting noticeable lateral partners there, such as Stephen Neuwirth from Boies, Schiller & Flexner, and Faith Gay and Robert Raskopf from White & Case, who all joined the Manhattan group this year. This summer it will move into a bigger New York office, with space for 100 lawyers.

Quinn Emanuel's model is at once simple and radical: all litigation all the time, with an emphasis on taking cases to trial. That means no corporate. No tax. No real estate. No structured finance. Even competitor Boies, Schiller has a corporate department to help feed the litigators. Can a big firm thrive with such a single-minded focus? So far, yes. The firm's clients include International Business Machines Corporation, Shell Oil Company, American International Group, Inc., Northrop Grumman Corporation, and General Motors Corporation. Its caseload ranges from high-stakes intellectual property disputes to major insurance and antitrust matters to a monster of a case brought in the wake of the collapse of the Italian dairy conglomerate Parmalat Finanziaria S.p.A.

"They are what they claim to be," says Donald Rosenberg, senior vice president and general counsel of IBM, which is the firm's biggest client. "They say they're trial lawyers, and they are. You can depend on the fact that these guys will have been in the courtroom multiple times." IBM has worked with Quinn Emanuel for ten years on cases ranging from employment to patent to product defect class actions, and it uses the firm as its main counsel in California.

Yet many still see the firm as a fringe player. A well-known litigator at a national firm said he'd never heard of Quinn Emanuel when he went up against it in 2004 in a case that is pending. When asked about Quinn Emanuel, a prominent partner at another litigation powerhouse joked, "Do they have to pass the bar there?"

Laugh all you want, but these guys are probably cold-calling your clients right now.

John Quinn vividly remembers his days as a struggling lawyer. In 1979, three years out of law school, he boldly set out to start his own practice in Los Angeles. He and a colleague worked from a small suite of offices in a generic office complex. Quinn had great credentials. He had been an editor of the Harvard Law Review and an associate at Cravath, Swaine & Moore before he decided to move to the West Coast. But he couldn't find enough work to keep busy. Before he knew it, he'd tumbled from the heights of the legal establishment to one of its cobwebbed corners. "I thought my career had taken a detour for the worse," he recalls. Admitting failure, he slunk back to a midsize firm, opening a one-room Los Angeles office for New York's Reboul, MacMurray, Hewitt, Maynard & Kristol.

But Quinn is a general, not a soldier. In 1986 he and three other lawyers-Eric Emanuel, David Quinto, and Phyllis Kupferstein-took another stab at starting a firm. "We were very naive," says Emanuel, 54. For one thing, the partners didn't withhold enough for their income taxes the first year, and Emanuel had to get a cash advance from his credit card to pay the government.

To drum up business, Quinn and his partners went door-to-door making cold calls to potential litigation clients. Give us a case, they said. We'll do it better than your current lawyers-and cheaper. Most companies rejected the entreaties. Still, Quinn and his partners brought in enough business-from clients like Mattel, Inc., and Lockheed Martin Corporation-to keep the new firm afloat. At that time the firm specialized in mundane employment matters, charging barely more than insurance defense rates.

But, from the start, Quinn set his sights higher, says Emanuel: "He once said to me-when we were in a building with a view of the dumpster-he said, 'I want to be the go-to firm when someone needs the best.' That was when we were nothing-when we were shabby-looking!"

Today Quinn Emanuel increasingly focuses on high-stakes cases, especially those heading to trial. (It still takes some lower- margin cases, often at a discount, to give young lawyers experience.) This April, San Francisco partner Charles Verhoeven won a defense verdict for RealNetworks, Inc., in a patent infringement case in Boston federal court against plaintiffs seeking more than $200 million. In the Monsanto bovine growth hormone case, which Quinn was preparing for trial, the University of California wanted $600 million from Monsanto and an injunction. Quinn was hired a year after the case was filed, replacing Howrey. In the end the university claimed victory. The settlement, negotiated by the company's in-house lawyers, requires Monsanto to pay $100 million, plus future royalties that could total another $100 million.

Another major matter, defending Micron Technology, Inc., in an antitrust suit by Rambus Inc., came into the office through a cold call. When a partner and an associate noticed that the company had been sued, they sent an e-mail to an in-house lawyer, suggesting they talk. A major client, The Academy of Motion Picture Arts and Sciences, hired Quinn after seeing him on the other side of a dispute-representing The Walt Disney Company in a fight over the Academy's use of Snow White in a bawdy sketch with actor Rob Lowe in 1989. Today, Quinn is the Academy's outside general counsel.

While the bulk of Quinn Emanuel's revenue comes from defense work-and half its caseload is intellectual property-it's the firm's plaintiffs verdicts that attract the most attention. Last year a team led by Los Angeles partners William Price and Christopher Tayback won a $128 million verdict in a patent case for Freedom Wireless Inc., which holds a patent on technology used to process prepaid cell phone calls. In 2003 Quinn and Price got a $290 million verdict in a suit brought by two German executives who claimed that Bertelsmann AG and its former CEO cheated them out of an equity stake in an AOL Europe joint venture. The parties settled for $192 million.

As it often does, Quinn Emanuel handled both of these cases for total or partial contingency fees. That's one of several things that distinguishes Quinn Emanuel from most firms on The Am Law 200. "We like having skin in the game," says Quinn. Risk clearly doesn't bother this man, who has run with the bulls in Pamplona and completed two Ironman triathlons. "John is the most competitive person I know," says partner Adrian Pruetz.

The firm's most successful contingency payoff was the Bertelsmann case. Quinn declined to reveal the firm's cut of the settlement, but the year it received that fee, 2004, was its most profitable to date. In the Freedom Wireless matter, Quinn Emanuel is working for a partial contingency fee. The firm, however, was disqualified in March from handling the appeal. In a complicated and unusual twist, another Quinn Emanuel client, Nextel Communications, Inc., intervened to object that the firm's position in the case was adverse to Nextel's business interests. Quinn says this should not jeopardize their fee: "We got the judgment, so I think we earned the fee." Larry Day, the president of Freedom Wireless, didn't want to comment on the fee. He is, however, still using the firm for a related patent case against other defendants, and he raves about the talent and dedication of the Quinn Emanuel team: "The job they did was superb," he says. "They were relentless."

Quinn and his partners insist that the benefits of a litigation-only firm are enormous. "It's the reason we're so successful," Quinn says. "Corporate lawyers don't really understand what litigators do. . . . If I had to explain to a corporate lawyer why contingency fee work makes sense, they wouldn't get it." The firm can sue major Wall Street institutions-the firm is seeking billions from Citigroup Inc. in the Parmalat matter-without freaking out the corporate department. "If we had corporate lawyers, they would shudder at this," he says.

Partner Pruetz, who joined the firm 12 years ago from Morrison & Foerster and sits on the contingency fee committee, explains the standards for taking cases that put the firm at risk: "We look at whether we think it's pretty much a slam dunk, not where [the success rate is] hovering around 50 percent. The potential damages must be very, very significant. We're speaking in the $100 million range."

That certainly describes the Parmalat case, at least as far as possible damages. In 2004 the Italian grocery giant was discovered to have falsified its financial statements, and it filed for bankruptcy with previously undisclosed losses totaling $14 billion. Quinn Emanuel was hired by Enrico Bondi, the "extraordinary commissioner" of Parmalat, who is the equivalent of a bankruptcy trustee, beating Boies, Schiller and Susman Godfrey for the assignment. To recover money for the estate, Quinn Emanuel has gone after Citigroup, auditor Grant Thornton LLP and its affiliates, and Bank of America Corporation, charging them with a range of claims, including federal and state RICO violations, for facilitating the fraud, and seeking more than $10 billion. The cases are in the early stages of discovery.

Parmalat has been a huge investment for Quinn Emanuel. Quinn is reluctant to discuss the fee arrangement, but confirms that it includes a contingency element. The firm has had to hire a small army of contract lawyers in the United States to help comb through millions of pages of documents. And not just any contract lawyers, but those who can read Italian, the language used in most of the documents. That, and other expenses incurred for the firm's rapid growth and its docket of other contingency cases, have eaten at the bottom line. From 2004 to 2005, Quinn Emanuel's overhead increased from $39 million to $71 million. As a result, even though the firm's revenue jumped 21 percent, average compensation to all partners slipped from $1.89 million to $1.65 million. Partner Richard Schirtzer, who oversees finances, says most of the expenses are "temporary investments" that will produce more revenue in 2006.

If the true test of a firm's strength is recruiting, then Quinn Emanuel is passing with flying colors. Go to the firm's splashy Web site and start clicking on the names of associates. Stanford Law School, Harvard, Stanford, Yale, Harvard, Chicago, Stanford, Columbia, Harvard, Yale. Law review editors. Federal clerks. These are associates you'd kill to have. Even students at Harvard must have at least an A-/B+ average to get hired. No exceptions. The buzz about Quinn Emanuel on campus is that it's the place to do litigation. Plus, it's totally cool.

Recruiting is overseen by partner A. William Urquhart, a tall bear of a man who exudes a relaxed goodwill. He and Quinn-who are good friends and define the heart, soul, and brains of the firm-might seem an odd couple. Quinn is a Morman from Bountiful, Utah, who was the seventh of eight children of a career Army officer. He buzzes with intensity even when relaxed. Urquhart comes from a middle-class home in Long Island, New York, the son of a midlevel insurance executive. He is so easygoing that it's hard to know whether to take him seriously. "Every minute, Bill is thinking, 'How can this be more fun?' " says Quinn, who met Urquhart when they were both associates at Cravath. He praises the people skills that have made Urquhart skilled at settlements: "He's so quick at sizing people up," says Quinn. In 2004 Urquhart got a $137 million settlement for client Superior National Insurance Group, Inc., in a case against Health Net, Inc., alleging fraud in the sale of several insurance companies.

On this day in March, Urquhart, 59, slumps in a comfy chair in his office, shoes off, full from a steak lunch, and weary from a trip to Anchorage for an insurance client. "[Quinn] and I are as different as night and day," says Urquhart, who joined the firm two years after it was formed. "John is about the bluntest person on the face of the earth." If Quinn is one of the bluntest, then Urquhart-who lacks any sharp edges-must be one of the least guarded. No topic seems off-limits. Discussing lateral hire Harold Barza, who joined the firm in 1999, he exclaims: "He's literally making ten times the amount of money he was making at Loeb & Loeb! Ten times!" Addressing how the firm knows that, as it proclaims, it's tried more cases than any other firm, Urquhart says gleefully, "In truth, we throw it out there, and we're not corrected."

Urquhart's amiability, however, masks a fiery drive. In high school he was the New York State champion for the mile, and he attended Fordham College on an athletic scholarship. Says Quinn: "If not for Bill, we would be a 20-lawyer firm."

Years ago, when the firm was obscure, Urquhart declared that Quinn Emanuel would target only top students from the best law schools. Some of his partners thought he was crazy. The firm couldn't even get good students at second-tier Los Angeles-area schools to interview. To get attractive recruits in the door, the firm let them split the summer, something that many top firms wouldn't allow. As a ploy for attention, Urquhart wore Hawaiian shirts, shorts, and sandals to on-campus interviews. "That was part of the schtick back then," he laughs, noting that he's now more apt to wear a sport shirt and jeans. Urquhart found that the more talented and accomplished students were often less concerned about the usual trappings of prestige. Today the firm gets attention in more conventional ways. This year it became the first firm outside New York to raise starting base salaries to $145,000. It's also had success attracting former federal prosecutors, with more than a dozen in its ranks.

Quinn Emanuel tries to give associates meaningful responsibility quickly. Partner Shon Morgan, 38, a former Harvard Law Review editor, recounts how he assumed a significant role for IBM as a junior associate. "Bill Urquhart said, 'I'm going to position you to be the go-to person,' " Morgan says. He and Urquhart shared responsibility on 24 days of depositions in a product defect case. Not long after, Morgan began taking lead duties on other IBM cases. Partner Michael Williams, 35, has tried 11 cases as lead attorney, including some important matters for The DIRECTV Group, Inc. He and name partner Dale Oliver, 58, won a ruling that defined how plaintiffs classes should be certified in arbitration in California, along the way getting an unfavorable ruling reversed by the U.S. Supreme Court. Williams and Morgan both made partner after four years. The firm's standard partnership track is six years, though there are exceptions at both ends.

As Quinn Emanuel grows-it now has 200 associates-it's become harder to find the smaller cases that the firm takes at reduced rates to give to young lawyers. Even a highly regarded young partner like Morgan hasn't taken a case to trial. "The trial issue [for associates] is one we're keenly aware of, and it's a problem," Quinn says. "We want to do the complex matters, but, by definition, the associates won't have much of a speaking role." Still, young lawyers at Quinn Emanuel seem to be getting more front-line experience than most of their friends at big firms. B. Dylan Proctor, a sixth-year associate, says he's argued roughly 15 motions in court and was the third chair at a two-month federal trial. Fourth-year associate Bethany Henderson reports that she's running a $50 million sexual harassment suit. "The client calls me two to three times a day," she notes.

To make sure more associates get courtroom experience, the firm has designated a lawyer to work full-time matching associates with cases likely to go to trial. Often they are assigned to those cases at no charge to the client. Others take on pro bono work outside the firm, such as handling Social Security hearings for individuals. To help them hone their skills, partner Emanuel focuses a large part of his time on associate development, and his office is on the same floor as the first-years.

Still, Quinn Emanuel isn't for everyone. Only half the associates who were with Quinn Emanuel in 2003 are still there, according to a comparison of the firm's rosters. Quinn says he didn't think that turnover had been this high. "Whatever the numbers are, I would be surprised if it's higher than average," he says. (It appears to be about average, according to figures from the National Association for Law Placement, which shows roughly 20 percent annual turnover at firms of this size.) And associates aren't the only ones leaving. In March partner Phyllis Kupferstein, one of the firm's original four lawyers, left to join McDermott, Will & Emery. She explains that a full-service firm is a better platform for her employment litigation and counseling practice.

The rigors expected of associates don't stop in the office. One firm tradition is the summer hike-or death march, depending on your point of view. Quinn has led bands of lawyers and summer associates on grueling treks through Olympic National Park in Washington State and up Half Dome in Yosemite National Park. On a trip to the Wind River Range in Wyoming, the troop finally reached a glacial lake at 9,000 feet after hiking ten miles. Quinn turned to a summer associate and told the fellow that he'd give him an offer if he'd swim across. Quinn was joking, but the young man wasn't. He stripped down and dived in. "I was worried," Quinn admits. The lake, no more than 300 feet wide, was icy cold. The student made it across safely and got the job. On the drive back from the trip, Quinn called one of his partners. "Is this guy any good?" he asked. "I just made him an offer."

The firm's offbeat culture can make it a fun place to work. But what do clients think about this freewheeling environment? Andreas von Blottnitz, one of the two plaintiffs in the Bertelsmann case, likes it. "They're a bunch of cool guys," he says. Although the litigation was "very tough and scary," he says, "in hindsight they made it a fun adventure." IBM's Rosenberg says the casual dress doesn't bother him (although he notes he's never seen anyone wearing cutoffs). He adds, however, that if he were bringing IBM's CEO to the office, "I would warn him in advance that this is not your typical button-down law firm."

The lack of formality extends to law firm management. Quinn Emanuel has no executive committee, no management committee, no recruiting committee, and no compensation committee. To decide partner compensation, John Quinn solicits input, and then circulates a memo with everyone's proposed pay. Any partner who has an issue can select three partners and argue his or her case to the trio. (Urquhart says this hardly ever happens.) The only committee is the contingency fee committee. "Law firms are often paralyzed by the decision-making process," says Urquhart. "We can make decisions like this," he says, snapping his fingers. Quinn labels most law firm management "bunk."

"There is zero bureaucracy at this firm," exclaims New York partner Michael Carlinsky, 41, who came from Orrick, Herrington & Sutcliffe in 2002. "Things get decided in a moment's notice." He was astounded how swiftly Quinn Emanuel reacted when it learned that Kenneth Chiate, a trial lawyer at Pillsbury Winthrop Shaw Pittman, was planning to start his own firm. Within 24 hours the firm had agreed to make him an offer. "I thought, 'This is great!' " Carlinsky recalls. "At my former firm, this person would have gone on a world tour, and there would have been issues and vetting."

Like many of his partners, Carlinsky insists that Quinn Emanuel is free of the usual law firm politics. "It will sound crazy, but we really don't track origination," he says, referring to the practice at many firms of rewarding partners on the basis of who brings in a client and who gets credit for the business that client generates. Battles over origination are often some of the fiercest in law firms. Quinn Emanuel partners who can try cases, but aren't business generators, are well rewarded. "Some of the most highly compensated partners at the firm have little or no business," notes Carlinsky.

The firm rarely uses headhunters to identify candidates. More often a partner simply picks up the phone to test the waters with someone. Claude Stern, who joined from Fenwick & West in 2003, was amazed that no one at Quinn Emanuel asked him about his book of business before hiring him. (Stern was, however, one of the better-known IP litigators in Silicon Valley.) After years at other firms, Stern has had to make adjustments. "I was in a client pitch with Bill Urquhart. I referred to a client as 'my client.' Afterward, Bill-who is the moral compass of the firm-said, 'We just don't do that. You have to lose that.' " Stern was also shocked that the partnership doesn't always accede to Quinn. Twice in recent years, he notes, partnership candidates backed by Quinn have failed to get enough votes.

Lateral partners now make up close to half of the partnership. Quinn says he's not worried about maintaining stability with so many newcomers. He's also not looking to combine with another firm. (The only time he considered it was when he talked to David Boies about uniting their firms about four years ago.) "I can't see us ever doing a merger," he says. "I think we have something that's really special. Why tamper with it?" He notes that the firm has also turned down opportunities to open offices in Washington, D.C., and Texas. "Every office you open is a chance for something to go wrong," he says. "It's like putting a witness on the stand."

The firm made an exception for New York, where it opened a three-lawyer office in 2001. The idea evolved after then-client Enron asked the firm to identify experienced New York trial lawyers for cases that might be filed there. "We could not come up with a list of ten," Urquhart recalls. The firm saw a huge untapped market. "We thought it would be like shooting fish in a barrel," Urquhart says. "And that's the way it's been."

Today the New York office has 54 lawyers. Quinn sees nothing but boundless success there. "It will be our largest office in three to five years," he predicts without hesitation. The New York office is headed by Peter Calamari, who ran his own litigation firm, Hertzog, Calamari & Gleason, which merged into Winston & Strawn. Carlinsky is one of its biggest business generators. He represents insurance giant American International Group, Inc., in a range of matters, including a dispute with former CEO Maurice Greenberg over the separation of Greenberg's business interests from the company. Neuwirth is planning to bring the sort of cases he did at Boies, Schiller: plaintiffs antitrust class actions that produced some windfalls for his old firm. It's not likely that the Manhattan office will be as free-spirited as the Los Angeles home base. They allow casual dress, but a Charles Manson shirt might raise eyebrows. "I think they go too far," remarks Carlinsky, about the L.A. attire.

The firm is also building an appellate practice, and made a splash when it hired former Stanford Law School dean and constitutional scholar Kathleen Sullivan as of counsel in 2004. "We've done better in a short amount of time than I could have imagined," she says. She's attracted several impressive hires, including former Jones Day partner Daniel Bromberg, and four associates who clerked for circuit court judges. She still teaches full-time at Stanford, which takes up more than half her work hours. Her foray into private practice hasn't been without bumps. Last year Sullivan failed the California bar, and this year the state supreme court denied her pro hac vice admission for an appeal of a $500 million judgment against client Genentech, Inc. The one case she's argued before the Supreme Court since she's been on board, Illinois Tool Works Inc. v. Independent Ink, Inc., which involved patent and antitrust issues, ended with an 8-to-0 defeat for client Independent Ink. But she notes that the firm got the case remanded on favorable grounds. Her current docket includes several U.S. Court of Appeals matters, but none for parties in a Supreme Court case.

As Quinn Emanuel grows in size and stature, the predictable questions arise. Can the firm maintain its offbeat culture? Can it minimize bureaucracy? Can it maintain stability as it hires more lateral partners? And, perhaps most importantly, will young lawyers still get meaningful trial experience?

In mid-April, Quinn addresses some of these questions while seated in a conference room in the firm's San Francisco office. In a week he'll be starting jury selection for a trial for client Occidental Petroleum Corporation in a dispute with Lloyd's of London over the destruction of gas pipelines in Columbia. Quinn doesn't see the need for any grand strategic overhaul as the firm expands. "I've never had any five-year plans or two-year plans," he says. "It will stop being fun if we stand still. The excitement and satisfaction is winning cases and working on more complex matters where more is at stake-keep raising the bar and see if we can keep clearing it."

To this day Quinn and most of his partners still cold-call for business. They scan new case filings for opportunities. Quinn attributes this to his "Depression-era mentality," stemming from his first failed effort to start a firm. "I was haunted by that experience," says Quinn. "[It] did stretch me to do some things I never would have done. I found things within myself. I found I could put myself at risk." He adds, "It's amazing how many people won't ask for work. I tell our associates, 'Learn to say the words-I would like some of your work.' "

"We jokingly say our goal is world domination," says Quinn. "But it's only half a joke." He continues, "O'Melveny is dead. Myers is dead. Latham is dead," he says, referring to the founders of those firms. "We're not going to wait 20, or 40, or 60 years to make our mark. We want to do it now."

And he wants to do it his way. Lots of Am Law 200 lawyers are hungry. Quinn just doesn't bother to hide it. "We're the undeserving, the unwashed, we're the parvenus," he says with a smile-and then mimics his critics: " 'Who do these guys think they are?' "

Who? Better. Faster. Tougher. Scarier. That's who. Game on.

August 2010

Send to a friend

Firm News:

Diane Doolittle and Victoria Maroulis Recognized as Top Women Litigators in California

Charles Verhoeven Named a Top Trial Lawyer by The National Law Journal

Quinn Emanuel Holds the First Intellectual Property (Mock) Jury Trial in Israel

Main Article:

Increasing Government Scrutiny of Structured Finance Transactions

Victories:

Trademark Trial Victory

Class Certification Denial for Samsung

Employment Trial Victory

IP Trial Victory

Noted with Interest:

The New Test for “Center of Main Interests”: New York Bankruptcy Court Grants Foreign Main Proceeding Recognition to BVI-Based Hedge Fund Liquidation Cases

The Supreme Court, OT 2009: The Business Cases

July 2010

Send to a friend

Firm News:

Alex Gerbi Joins Quinn Emanuel London

Quinn Emanuel Expands Tokyo Office

Main Article:

The Difference Between a Falsehood and a Lie: Recognizing, Preventing, and Confronting Perjury

Victories:

Victory in the United States Supreme Court

Ninth Circuit Victory for Shell

Summary Judgment of Invalidity for Patents Asserted Against Bio-Rad

Dismissal and Rule 11 Sanctions Against Eon-Net

Practice Area Updates:

IP Litigation Update

Japan Legal Update

Securities Litigation Update

June 2010

Send to a friend

Firm News:

David Bilsker Joins Quinn Emanuel

Quinn Emanuel Named to the “Appellate Hot List”

Fred Bennett Honored as the Outstanding Arbitration Lawyer in U.S.

Main Articles:

The Economic Espionage Act: Protecting America’s Most Valued Assets

Victories:

Tyco Jury Trial Win

Dismissal of Defamation Suit against Gartner, Inc.

Complete Dismissal of Antitrust Claims against Honeywell

Noted With Interest:

Securities Class Action Trends

Practice Area Updates:

London Litigation Update

Life Sciences Litigation Update

Trademark/Copyright Litigation Update

Bankruptcy Litigation Update

May 2010

Send to a friend

Firm News:

Quinn Emanuel Partner Victoria Maroulis Named One of Ten Intellectual Property Rising Stars

Main Articles:

Recent Decisions Reflect the Courts’ Increasing Scrutiny of Large Patent Damage Awards

Victories:

Summary Judgment of Non-Infringement in Texas

Complete Dismissal for AIG

Favorable Settlement with JPMorgan

Astonishing Confirmation of Chapter 11 Bankruptcy Plan Thwarted Despite Overwhelming Votes

Practice Area Notes:

Arbitration Update

Appellate Litigation Update

Class Action Litigation Update

White Collar Litigation Update

March 2010

Send to a friend

Firm News:

What’s in a Name?

QE Partner Edith Ramirez to Serve as Commissioner of the Federal Trade Commission

Main Articles:

Why Germany is Far and Away the Dominant Patent Litigation Forum in Europe

The First Amendment Privilege: A Powerful Shield in Civil Discovery

Victories:

Firm Obtains Preliminary Injunction Blocking $200 Million Loan Transfer by JPMorgan

Arbitration Victory for DIRECTV

Consumer Class Action Victory

Practice Area Notes:

Trial Practice Update

Structured Finance Litigation Update

Internet Litigation Update

February 2010

Send to a friend

Firm News:

Quinn Emanuel Opens First Office on European Continent

Quinn Emanuel Expands Pharma, Biotech, and Medical Device Practices with Addition of Star Patent Litigator Peter Armenio

Quinn Emanuel London Shortlisted for Legal Business Awards

New Case: TCW v. GUNDLACH

Main Articles:

The Obama Administration’s Aggressive Push to Regulate Off-Label Drug Promotion

Attorneys Fees Reform in English Litigation

Victories:

Defense Victory for Google in Its First Patent Trial – in Marshall, Texas No Less

Class Action Victory

Practice Area Notes:

Japan Legal Update

Patent Litigation Update

Securities Litigation Update

Entertainment Litigation Update

January 2010

Send to a friend

Firm News:

Quinn Emanuel Named Top U.S. Litigation Firm

Quinn Emanuel Elects Seven New Partners

Main Article:

New York’s Martin Act: A Unique Tool for Regulating the Securities Industry

Victories:

Complete Dismissal of Patent Infringement Suit against Cisco

Defense Victory for Ask.com in Delaware

Dismissal of RICO Charges and Criminal Forfeiture Allegations in 59-Count Criminal Case

Noted with Interest:

Ninth Circuit Adopts Liberal Approach to Enforcement of Forum-Selection Clauses

Florida Court of Appeal Holds Third-Party Investor Liable for Attorneys’ Fees

Busiest Patent Venues

London Digest: Winter 2010

Send to a friend

Main Articles:

Government Insolvency Reform

Rising from the Ashes: Pre-packs

Case Law Update: Exclusive Jurisdiction Clauses and Third Parties

Firm News:

Quinn Emanuel London Partners Recognized in Chambers & Partners UK

10 Years After Woolf: Lord Jackson Publishes Final Report on Litigation Costs

New Associate Joins Quinn Emanuel London

Victory:

Quinn Emanuel London Victory in the Supreme Court

December 2009

Send to a friend

Main Article:

California’s Anti-SLAPP Statute May Provide Quick Relief from Tortious Interference Claims

Victories:

Defense Victory in Derivative Lawsuit

Billboard Victory: Quinn Emanuel Invalidates Controversial City Settlement Agreement

Victory for G-I Holdings, Inc.

Noted with Interest:

Champerty Not a Defense Where Secondary Purchaser of Debt Has Pre-Existing Proprietray Rights

California Constitution Caps Punitive Damages at Amount of Compensatory Damages

Recent Developments in Obtaining U.S. Discovery under 28 U.S.C. § 1782 in Aid of Foreign Arbitrations

November 2009

Send to a friend

Main Articles:

Statutory Rights to “Credit Bids” May Be Restricted by Governing Credit Documents

Federal Circuit Panel Upholds Patentability of Medical Diagnostic Testing

Victories:

Victory before the UK Supreme Court

Victory for Roche in HIV Patent Action

Victory in Criminal Case

Noted with Interest:

Ninth Circuit Applies Insured Versus Insured Exclusion to Debtor in Possession

Patent Cases Involving Lost-Profits Contentions Versus Antitrust Counterclaims

District Court Orders Defendants to Use Plaintiffs’ Search Term List

October 2009

Send to a friend

Firm News:

Quinn Emanuel Recognized Again as Top Plaintiffs’ Law Firm

Main Articles:

Quinn Emanuel Wins Stunning Reversal for New York Governor Paterson

Suing the Ratings Agencies for Subprime Investment Losses: Recent Developments

Victories:

Quinn Emanuel Scores Another ATS Victory for Coca-Cola

Quinn Emanuel Wins Summary Judgment in IBM Market Monopolization Case

Noted with Interest:

New York Federal Court Rejects SEC Settlement with Bank of America

Connecticut Court Finds Probable Cause that UBS AG Defrauded CDO Investor

London Digest: Autumn 2009

Send to a friend

Main Article:

Corporate Restructuring and Junior Creditors: the IMO Carwash Case

Firm News:

Quinn Emanuel in the House of Lords

Quinn Emanuel London Welcomes Three New Associates

Victory:

Quinn Emanuel Wins for HSH Nordbank in the Court of Appeal in a Major Jurisdictional Dispute

September 2009

Send to a friend

Firm News:

Fred Bennett Recognized as Leading Expert in Commercial Arbitration

The Deal Identifies Susheel Kirpalani as Bankruptcy Star

Main Articles:

Recent Trends in Securities Class Actions

“Related to” Bankruptcy Jurisdiction in the Wake of the Financial Crisis

Victories:

Dismissal of $1 Billion Suit against AIG

Film Finances Victory

Noted with Interest:

Lack of Due Diligence Leads to Conviction in Foreign Bribery Conspiracy Trial

Presumption of Patent Validity

London Digest: Summer 2009

Send to a friend

Welcome to the inaugural copy of the Quinn Emanuel London Newsletter! This quarterly newsletter will highlight significant litigation developments in the London legal market and also hopefully will inform you of our future successes. As you are no doubt aware, we have been going for just over a year now in London. Our team has grown to nine lawyers and we have become involved in some of the most interesting and significant litigation which is currently ongoing in London. We are sure that this will continue and sincerely hope that you will all continue to consider us for matters which may arise in the future. In the meantime, we thank you for your support this past year and wish you all the best.

Main Articles:

Anglo Irish Bank v West LB: Pre-Action Disclosure in the Credit Crunch

Third Party Funding

Victory:

Quinn Emanuel’s London Office has Delivered a Win for Its Client in Litigation Arising out of the Sale of Skype to eBay.

Victory for Grupo Televisa on Eve of Trial in $225 Million Loan Dispute

Send to a friend

Charles Verhoeven Named Top U.S. Trial Lawyer

Send to a friend

Quinn Emanuel Obtains $61 Million Verdict for Dow Chemical

Send to a friend

Alex Gerbi Joins Quinn Emanuel

Send to a friend

David Bilsker Joins Quinn Emanuel

Send to a friend

Fred Bennett Honored as Outstanding Arbitration Lawyer in U.S.

Send to a friend

Quinn Emanuel Wins Dismissal of Antitrust Suit Against Honeywell

Send to a friend

Partners Diane Doolittle and Vicki Maroulis Named Top Women Litigators by The Daily Journal

Send to a friend

Upcoming New York Seminar Alert: Quinn Emanuel's Marcus Grosch presents \"Winning Strategies in German and European Patent Litigation\"

Send to a friend

Quinn Emanuel Selected to The National Law Journal's 2010 Appellate Hot List

Send to a friend

Upcoming Northern California Seminar Alert: Quinn Emanuel's Marcus Grosch presents \"Winning Strategies in German and European Patent Litigation\"

Send to a friend

Law360 Names Quinn Emanuel's Victoria Maroulis A \"Rising Star\"

Send to a friend

Quinn Emanuel Appellate Chair Kathleen Sullivan Made Name Partner

Send to a friend

Quinn Emanuel's Edith Ramirez Confirmed as FTC Commissioner

Send to a friend

Quinn Emanuel Opens First Office on European Continent in Mannheim, Germany

Send to a friend

Quinn Emanuel Wins Complete Defense Verdict for Google in Texas

Send to a friend

Charles Verhoeven Recognized as Litigator of the Week

Send to a friend

Quinn Win For Grupo Televisa's Cablevision in $200 Million Loan Dispute against JPMorgan

Send to a friend

Quinn Emanuel Named IP Litigation Department of the Year by The American Lawyer

Send to a friend

Quinn Emanuel Recognized as One of the Six “Top Business Litigation Firms” overall by The American Lawyer

Send to a friend

Focus Europe: The Credit Crunch After-Party

Send to a friend

All Criminal Charges Dropped in Broadcom Stock Options Backdating Cases

Send to a friend

Victory for Quinn Emanuel London in the United Kingdom Supreme Court

Send to a friend

Quinn Emanuel Invalidates Controversial City Settlement Agreement

Send to a friend

Quinn Emanuel Obtains Alien Tort Claims Statute Victory for Coca-Cola

Send to a friend

Susan Estrich Becomes Newest Partner

Send to a friend

The Deal Recognizes Susheel Kirpalani as Bankruptcy Star

Send to a friend

Quinn Emanuel Selected to The National Law Journal's Plaintiffs' Hot List for the 2nd Year in a Row

Send to a friend

Quinn Emanuel Wins \"Stunning Reversal\" for NY Governor Paterson

Send to a friend

Bill Price Named Top U.S. Trial Lawyer -- Again

Send to a friend

Quinn Emanuel -- America's Law Firm

Send to a friend

Christine Chung Joins Quinn Emanuel

Send to a friend

Eric Winston Joins Quinn Emanuel

Send to a friend

In Memoriam: George R. Hedges (1952 - 2009)

Send to a friend

News from London: Quinn Emanuel Hits the Square Mile

Send to a friend

Quinn Emanuel Wins Patent Trial for Micron

Send to a friend

A Case They Will be Studying for Years -- Quinn Emanuel Wins Big for Mattel

Send to a friend

IP Law & Business Reports: Quinn Emanuel One of the Top Law Firms Used by High-Tech Companies for IP Litigation

Send to a friend