I have frequently written and spoken about the many nuances of advancing a product liability claim, as well as a variety of strategic tactics to employ in order to advance a mature case theory. As a 15-year veteran product defect attorney, these are naturally the topics that appeal to me. However, as a young attorney, or an attorney generally unfamiliar with the intricacies of product liability, discussing these topics is akin to coaching someone to land a plane without ever discussing how to take off in the first place. And as the downtime of the pandemic has granted me the capacity to renew my love of learning about astrophysics, I have come to accept that somewhere in the dimensional multiverse is a version of me who is also new to the field of complex torts and product defects, and he or she needs to have resources containing the fundamentals as well. This article is written for him or her.
What Is Product Liability?
Product liability, in the context of this publication, is a claim rooted in the defectiveness surrounding the design, manufacture, and/or warning of a product that has caused a tortious harm to an individual.
A design defect means that the actual intended iteration of the product is such that its foreseeable use is dangerous to the user and/or public at large. Examples would include Takata airbags or asbestos-lined construction materials, which are (arguably) defective from inception. Florida continues to recognize the “consumer expectations” test as well as the risk/utility test in defining a design defect. Aubin v. Union Carbide Corp., 177 So. 3d 489 (Fla. 2015). “A product is unreasonably dangerous because of its design if [the product fails to perform as safely as an ordinary consumer would expect when used as intended or when used in a manner reasonably foreseeable by the manufacturer] [and] [or] [the risk of danger in the design outweighs the benefits].” Fla. Std. Jury Instr. (Civil) 403.7b.
A manufacturing defect is where an otherwise (presumably) safe product is made unsafe due to errors during the actual manufacturing/construction of the product. An example of this would include the recent recall for specific batches of Similac baby formulas that were found to have harmful contaminants introduced during the manufacturing stage.
A warning defect is where the nonobvious dangers of a product are not adequately conveyed to the user and/or public at large. Examples of this include warnings about pharmaceutical drug contraindications or about the dangers of using an infant car seat as a sleeping device outside of a vehicle.
Read the complete “Back to Basics: A Product Liability Primer” article in the September/October 2022 issue of the Florida Justice Association Journal.
Securities Litigation 101
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Securities fraud costs investors billions of dollars a year and shareholder lawsuits are the best available tool to recover fraud-related losses. The top 100 securities class action settlements alone have returned more than $68.6 billion to defrauded investors since 2001; approximately $10 billion in settlement proceeds awaited distribution as of September 30, 2022, according to ISS Securities Class Action Services.
Potential securities litigation claims are considered assets of the trust fund, giving trustees and staff a fiduciary duty to manage them effectively. For that reason, many pension funds have established portfolio monitoring programs to calculate their losses when new shareholder lawsuits are filed and keep track of settlements in which they are entitled to share. This article reviews the elements of a successful monitoring program.
Adopting and Maintaining a Securities Litigation Policy
A successful monitoring program begins with a comprehensive and up-to-date securities litigation policy. The Board should approve a policy that reflects its thinking about the factors that could tip the balance between remaining an “absent” class member, which is suitable for most shareholder lawsuits, or actively pursuing litigation as a lead or individual plaintiff. Spending time in this area bears dividends because a well-considered policy makes sure that staff will only spend their time on cases that the policy defines as worth the effort.
Tracking Settled Cases
For securities acquired in the United States, trustees should at least take steps to ensure their fund’s custodial bank is filing all class-action settlement claims to which the fund is entitled. Because U.S. class actions function on an “opt in” basis, settlement claims administrators will attempt to contact all class members via their custodian once a settlement receives final approval. At that time, any fund owed a recovery can decide whether to collect its share, opt out of the class to pursue individual litigation, or object to the settlement.
Monitoring New Cases
When a securities class action is filed in U.S. federal court, impacted shareholders have 60 days to ask the judge to appoint them lead plaintiff. For that reason, trustees arguably have a fiduciary duty to monitor newly filed lawsuits to decide if active involvement can boost a fund’s recovery or is otherwise beneficial to fund members. Since custodian banks only concern themselves with settlement claims, investors often select law firms or other third-party providers to track all new cases, calculate a fund’s initial losses, and evaluate the merits of active involvement (something discussed in greater detail below).
A securities litigation policy should list factors the fund wants evaluators to consider before recommending it consider pursuing active litigation. Policies sometimes include a minimum dollar loss threshold to trigger a full case evaluation. They may specify other factors to weigh: the strength of the legal claims at issue; the probability of a meaningful financial recovery; the opportunity for corporate governance improvements; the amount of staff time necessary to oversee counsel; and the egregiousness of the fraud, for example.
Non-U.S. Litigation
Since many non-U.S. cases are litigated in “opt out” jurisdictions, where a fund must register earlier to collect in an eventual settlement and where a “loser pays” regime may expose plaintiffs to financial risk, policies may establish different criteria for U.S. and non-U.S. litigation.
The National Association of Public Pension Attorneys and other organizations have model policies to use as templates.
Selecting Monitoring Firms
If the policy calls for retaining monitoring law firms, staff should manage the process. The quality, selectivity, and number of law firms selected —together with the policy guidelines—will affect the number of cases flagged for consideration. Some funds issue open or targeted RFPs to select firms; others invite a group of reputable firms to submit proposals and select some to make “final” presentations to the board. While there is no magic number of monitoring firms to select, using more than one firm is a best practice; doing so offers checks and balances at no extra cost (since law firms do not charge a fee for monitoring), ensures a single firm won’t be excluded from considering a case due to conflicts of interest, and allows for a mix of law firms with different approaches, strengths, and experiences. You’ll want to consider reducing the number of monitoring firms if your staff feels overwhelmed by too many recommendations.
With a properly designed program, staff involvement will be limited largely to reviewing periodic reports from monitoring law firms and, on occasion, screening case recommendations. Monitoring firms should identify all new cases that impact the fund; investigate and evaluate their merits; properly assess initial losses and complications in collecting damages; and recommend the best course of legal action, focusing on the fund’s policy goals. Most newly filed U.S. securities class actions will not require action before the settlement stage.
Pursuing an Active Role in Litigation
There are cases, however, where a fund may want to become a lead plaintiff. Doing so may boost its recovery and will ensure proper management of a case in which it has a significant financial interest. Typically, the lead plaintiff signs off on major strategic decisions, reviews important filings, and is involved in any settlement discussions. It may be able to pursue corporate governance remedies. It selects lead counsel, negotiates attorneys’ fees, and oversees class counsel. Some lead plaintiffs choose to do more. While there are no out-of-pocket costs—lead counsel reimburses the costs of travel and other expenses—the lead plaintiff should expect to dedicate some hours of staff time to the litigation. If the case is successful, lead counsel may petition the court to authorize compensating staff for time spent carrying out lead plaintiff duties.
Conclusion
Putting a portfolio monitoring program in place to account for securities litigation assets is a best fiduciary practice and enacting a securities litigation policy is the best way to provide a fund with clear, consistent guidelines about protecting its interests in shareholder lawsuits. Just as an investment policy is regularly reviewed to ensure consistency with the fund’s evolving circumstances, a securities litigation policy should be regularly reviewed to ensure it accurately reflects the fund’s evolving attitude toward involvement in securities litigation.
It seems as though Environmental, Social and Governance investing is on the forefront of everyone’s mind these days. News stories on the topic abound, with politicians of every stripe propounding their positions. A recent opinion piece in one national newspaper pronounced that trustees who engaged in Environmental, Social and Governance investing were clearly violating their fiduciary duty, while an op-ed in a competing news outlet claimed that those who ignored Environmental, Social and Governance investing were most certainly in violation of their fiduciary duty. What is a prudent fiduciary supposed to do in these polarized times?
Language Matters—Define the Terms
Critical to the analysis of fiduciary duty and Environmental, Social and Governance investing is an understanding of exactly what Environmental, Social and Governance investing actually means. One of the greatest difficulties in this area is a lack of clarity over Environmental, Social and Governance investing terminology, as Environmental, Social and Governance investing is not clearly defined and can mean different things to different investors. As set forth by State Street Global Advisors, different Environmental, Social and Governance investing strategies include: “exclusionary screening” (excluding certain companies, sectors or countries from the universe of possible investments); “positive screening” (affirmatively tilting the portfolio toward certain companies based on Environmental, Social and Governance investing metrics—note that the appropriateness of the metrics themselves has been hotly debated); “impact investing” (targeting a measurable positive social or governance impact, usually project specific); “active ownership” (engaging with companies on a variety of issues to initiate changes in company policies, practices and behaviors), and “ESG integration” (consideration of factors in order to achieve higher returns and/or mitigate risk). As these strategies differ widely, analyzing the application of fiduciary duty in each of these strategies may likewise be different.
Back to Basics
The fundamental starting point for any prudent pension system fiduciary facing a difficult situation is to return to the fundamental elements that underlie fiduciary duty. Fiduciary duties have been called “the highest known to the law.” Key to beginning an analysis is the exclusive benefit rule, which provides that investments shall be for the exclusive benefit of the participants and beneficiaries of the system and therefore fiduciaries must act solely in the interests of the members and beneficiaries of the system. This common law rule is codified in the enabling legislation that governs most public pension plans. Moreover, the Internal Revenue Code (“IRC”) provides that no part of the corpus or income of the pension trust may be used for or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries. This is critically important since public pension plans must remain “qualified plans” in order to entitle their members and beneficiaries to tax exemptions.
Closely related to the exclusive benefit rule and central to every statement of fiduciary duty is the fiduciary duty of loyalty, which provides that trustees must act solely in the interest of members and beneficiaries without regard to the interest of any other person. The trustee owes a duty to the beneficiary to administer the trust solely in the interest of the beneficiary and may not be guided by the interests of any other parties or person. The duty of loyalty is strictly construed in law and the U.S. Supreme Court has stated that the duty to trust beneficiaries must overcome any loyalty to the interests of the party that appointed the trustee. This is sometimes called the “one hat rule,” requiring that while trustees may also have a “day job”—as an elected official, an employee of an employer who pays into the system, or an officer of a union whose members belong to the system, for example—when making decisions as a trustee of the retirement system they may only wear their fiduciary trustee “hat.” This means that trustees of public retirement systems are not fiduciaries for appointing authorities, employers who pay into the systems, employees, unions, constituents, taxpayers, the public—or anyone other than the members and beneficiaries.
One Size Does Not Fit All—And May Not Fit Forever
Public pension plans come in a variety of sizes and shapes and each plan is different. Funding levels, for example, may vary dramatically, as may pension obligations. When setting the strategic asset allocation for the pension plan, which is often referred to as one of the most important functions of a trustee, trustees consider the plan’s funding levels and pension obligations and the plan’s risk tolerance and diversification of the investment portfolio. When making investment decisions, the fiduciary duties of prudence and care require consideration of the prevailing circumstances—meaning that investment action that is prudent for one investor may not be prudent for another.
Moreover, since fiduciaries must consider the prevailing circumstances, what is prudent at one time may not be prudent at a later time. This means that fiduciary duty is dynamic—i.e., while the fundamental fiduciary duties are based on legal principles that do not change, the application of those principles cannot be static, since fiduciaries must take into consideration current circumstances.
Conclusion
Applying this analysis, we see that not every type of Environmental, Social and Governance investing may be appropriate in every case. Prudent fiduciaries must keep the interest of the plan participants and beneficiaries paramount, and may not permit the use of the corpus or income of the pension trust in violation of the exclusive benefit rule, thereby risking disqualification under the IRC. They may not sacrifice investment returns and take on additional risk to promote interests unrelated to the portfolio’s objectives.
But prudent fiduciaries cannot ignore Environmental, Social and Governance investing factors that influence the performance of investments and are material to long-term returns and levels of risk. It cannot be impermissible for trustees to consider the state of the world in applying fundamental fiduciary principles to fulfill their obligations to members and beneficiaries, since they are seeking to preserve the assets for future generations of members and beneficiaries. Indeed, that is what trustees do when exercising their fiduciary responsibilities: they gather facts about prevailing circumstances and potential investment vehicles to make well informed decisions. Decisions made in 2022 are not the same as those that might have been made in 1972. The world has changed, and circumstances are different. Factors affecting the long-term considerations that public pension trustees must weigh are different. If responsible, informed decision making were static, there would be little need for trustees or the rules guiding their decision making. Fiduciaries must gather facts, analyze and assess those facts, and make decisions based on all relevant facts. It is impossible to invest prudently, loyally, and carefully without considering the impact of factors—including environmental, social, governance, cultural, economic, and political factors—that influence the performance of investments and are material to long-term risk and return. It’s a classic approach that has served pension funds and their beneficiaries well for a very long time—and should serve them for a very long time to come.
The Fall 2022 issue of the Shareholder Advocate includes:
- Holding Auditors Accountable for Complicity in Corporate Fraud – Laura Posner
- Third Circuit Rejects Bid to Overturn Class Certification in EQT Litigation – Benjamin Jackson
- Tenth Circuit Revives Investors’ Fraud Suit Against Pluralsight – Carol Gilden
- Securities Litigation 101: Portfolio Monitoring Best Practices – Christopher Lometti and Richard Lorant
- Fiduciary Focus: Between a Rock and a Hard Place: Fiduciary Duty and Investment Concerns – Suzanne Dugan
Click here to download the Fall 2022 edition of the Shareholder Advocate (PDF).
Cohen Milstein and its co-counsel recently scored an important victory in the Third U.S. Circuit Court of Appeals, which refused to allow Defendants to appeal the District Court’s class certification decision in In re EQT Corp. Securities Litigation, a federal securities class action relating to the 2017 merger of major natural gas producers EQT Corporation and Rice Energy. In re EQT is a prime example of how federal securities defendants nowadays nearly always file a Rule 23(f) petition following a decision to certify a class, no matter how long the odds of securing a reversal.
EQT is a major producer of natural gas that drills wells through hydraulic fracturing, or “fracking.” In November 2017, EQT acquired rival gas producer Rice Energy for $6.7 billion. EQT’s senior executives told investors at the time that the merger would create synergies worth between $2.5 billion and $7.5 billion by combining the two companies’ supposedly contiguous drilling acreage, which would allow for longer and more efficient lateral wells, and by enabling EQT to capitalize on best practices and new technologies developed by Rice Energy. Plaintiffs in In re EQT allege that these representations were false and misleading because, among other things, the claimed synergies were based on assumptions Defendants knew or recklessly disregarded were invalid, and because EQT did not in fact intend to adopt Rice Energy’s best practices or technology following the merger. After the acquisition, EQT concealed skyrocketing costs and serious problems drilling long lateral wells, instead telling shareholders it was “ahead of schedule for achieving our capital synergies.” The truth was ultimately revealed through EQT’s financial disclosures and a series of presentations the former Rice Energy executive team made during a proxy contest for control of the company.
On August 11, 2022, the U.S. District Court for the Western District of Pennsylvania issued a thorough 51-page opinion that granted Plaintiffs’ motion for class certification. Defendants then filed a motion for leave to appeal the District Court’s decision to certify the class to the Third Circuit pursuant to Federal Rule of Civil Procedure 23(f).
Defendants raised three principal arguments to support their petition. First, they argued the District Court’s ruling conflicted with the Supreme Court’s decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021), even though the District Court directly quoted and correctly applied the standard endorsed by that decision. Second, Defendants argued that the District Court had ignored “qualitative” evidence of the lack of price impact in the form of analyst reports, even though the District Court assessed the qualitative evidence of the “economic materiality” of the corrective disclosures at issue. Third, Defendants argued that Plaintiffs’ out-of-pocket damages model is not susceptible of common proof on a classwide basis and violated the requirements of Comcast Corp. v. Behrend, 569 U.S. 27 (2013)— ignoring that Comcast is generally inapplicable in securities litigation, that the out-of-pocket damages model is the accepted standard approach in securities class actions, and that the District Court thoroughly analyzed Plaintiffs’ model and found it to be applicable class-wide.
On September 23, 2022, just nine days after the parties’ briefing on the petition was complete, a Third Circuit panel consisting of Judges McKee, Shwartz, and Bibas denied Defendants’ petition for leave to appeal. The Third Circuit gave no quarter to Defendants’ arguments, dispatching with their petition in a terse, three-sentence order.
In re EQT exemplifies the current trend of defendants filing Rule 23(f) petitions following class certifications as a matter of course. Hopefully, more plaintiff victories like the one in In re EQT will give defendants pause and deter them from filing meritless petitions and imposing unwarranted costs on federal securities plaintiffs.
In a significant holding for plaintiffs arguing scienter in shareholder lawsuits, the Tenth U.S. Circuit Court of Appeals said a lower court had erred when it found that Pluralsight, Inc. Defendants’ use of a predetermined trading plan automatically removed their motive to manipulate the company’s stock price. In its August 23, 2022 opinion reversing the District Court’s dismissal of the shareholder lawsuit1 , the Tenth Circuit held, among other things, that the existence of a 10b5-1 trading plan does “not per se rebut an inference of scienter where … a defendant was allegedly motivated to misrepresent or withhold material information to affect a stock price.”
Pluralsight is a startup software company that offers a cloud-based technology skills platform and sells subscriptions to its products and services. At the start of the class period in January 2019, the complaint alleged that Defendants misrepresented the size of the company’s salesforce—the primary driver of Pluralsight’s quarter-over-quarter billings growth, which was the key business metric by which Pluralsight attracted investors. In addition, the complaint alleged that the company and its CEO and CFO knew that Pluralsight misrepresented the size of the salesforce and intentionally withheld this pertinent information from investors. The Lead Plaintiffs appealed to the Tenth Circuit after the U.S. District Court for the District of Utah dismissed the amended complaint on August 2, 2021.
The Tenth Circuit reversed the dismissal in part, holding that the two Lead Plaintiffs—the Indiana Public Retirement System and the Public School Teachers’ Pension and Retirement Fund of Chicago—had plausibly alleged that Defendants made a false and misleading statement at the start of the class period. At that time, Pluralsight CFO James Budge had stated that the company had “about 250” quota-bearing sales representatives; however, it was later revealed that Pluralsight actually only had only “about 200” quota-bearing sales representatives at the time. The Tenth Circuit stated that this “strongly suggests Pluralsight could not have had ‘about 250′ quota-bearing sales representatives on January 16, 2019” and found that the information was “objectively verifiable.” The misstatement marked the beginning of the class period and was a key misrepresentation, the falsity of which was revealed in the third quarter of 2019, when the Company reported a dramatically decreased billings rate of growth, shocking analysts and investors alike. The stock price dropped nearly 40 percent.
In ruling for Lead Plaintiffs on the scienter element of a 10b-5 securities fraud claim, the Tenth Circuit found that Lead Plaintiffs had pled a compelling inference that Defendants knew overstating Pluralsight’s number of quotabearing sales representatives was likely to mislead investors. The Tenth Circuit performed a holistic review in reaching this conclusion, looking to multiple allegations. To begin with, the panel cited Defendants’ statements to analysts and investors on July 31, 2019 and in January 2020, which supported the inference that the CFO knew of the capacity gap but failed to admit it. The appellate court’s finding was bolstered by the fact that the CFO had repeatedly emphasized to analysts and investors that Pluralsight carefully monitored the data surrounding Pluralsight’s billing growth and that the size of the sales force was at the core of Defendants business model.
Moreover, the Tenth Circuit held that the CEO’s and CFO’s suspicious trading within the Class Period, both inside and outside of their 10b-5-1 trading plans, supported scienter. Importantly, the Tenth Circuit agreed with Lead Plaintiffs’ argument, supported by an Amici Curiae brief by former SEC Commissioners Robert J. Jackson and Luis A. Aguilar, former SEC Chief Accountant Lynn Turner and Columbia Law Professor Joshua Mitts, along with other prominent academics, that the “text and history of Rule 10b5-1 shows that such plans can be manipulated easily for personal financial gain and thus cannot rebut the inference that personal financial gain was a motive for Defendants’ material misrepresentations.” The Court noted that these plans do not prevent officers from “making false statements to artificially inflate the stock price to trigger those automatic trades—and that is what plaintiffs allege occurred here.” The Court then found that Lead Plaintiffs’ allegations raised a strong inference of scienter because the CEO and CFO allegedly profited from their stock sales, sold a significant portion of their holdings, and the volumes of sales were higher than outside the class period.
The Tenth Circuit also revived Plaintiffs’ claims under Section 20A of the Exchange Act, which provides a private right of action to contemporaneous purchasers against corporate insiders who purchase or sell a security while in possession of material inside information.
This case is an important holding for investors. It demonstrates that affirmatively misrepresenting facts or data that a company and it officers continuously report on and that form a “key metric” in attracting investor interest, presents a danger of misleading investors and will support a finding of scienter. Significantly, the Tenth Circuit’s holding also shows that 10b5-1 trading plans are not an automatic shield to fraud claims, or a “get out of jail free card.” Courts recognize that, regardless of when the plan is created, Defendants with a 10b5-1 plan could be motivated to make material misrepresentations affecting the stock price to their benefit before a scheduled sale or to trigger a sale at a particular price.
1. Indiana Public Retirement System, et. al. v. Pluralsight, Inc., 45 F.4th 1236 (10th Cir. 2022).
Ernst & Young’s move to split up its auditing and consulting businesses will help the firm more easily avoid conflicts of interests—and the inevitable problems they lead to—says Cohen Milstein Sellers & Toll’s Laura H. Posner.
Earlier this month, Ernst & Young LLP announced an industry-first split of their auditing and consulting functions, dubbed “Project Everest,” a radical move that could completely transform the business model for accounting firms. The split still needs final approval from EY Partners, with a vote slated for later this year.
The announcement has ignited a fiery debate from the global accounting and business community, with many praising EY for its bold, first-mover split and the potential windfall for EY’s advisory businesses. Others speculate that Everest may be too ambitious a climb and harm EY’s brand.
If it becomes official, the division will separate EY’s accountants who audit companies such as Amazon.com Inc., Salesforce.com Inc., Alphabet, Inc. and more, from its faster-rising—and typically more profitable—consulting business. The company’s split would also mark the biggest shake-up in the sector since the 2002 collapse of Arthur Andersen, the auditor that was mired in the Enron scandal and whose downfall reduced the Big Five to the Big Four.
The Big Four accounting firms—EY, Deloitte LLP, KPMG LLP, and PricewaterhouseCoopers LLC—have been under regulatory scrutiny for years over concerns that their advisory services undermine their ability to conduct independent reviews. As reported in the Wall Street Journal in March, the SEC sent letters to them and other accounting firms in late 2021 seeking information about its audit clients and auditor practices. UK auditing and accounting regulator, the Financial Reporting Council, went a step further and asked the Big Four in 2020 to separate auditing as a standalone business in Britain by June 2024.
While details are still being hammered out, accounting insiders speculate that the move to separate the two operations will, in effect, stop newer EY recruits from pursuing cross-practice advancement of audit, tax, and advisory work as their more experienced colleagues have.
Nevertheless, from an investor protection perspective, the move should be a big win. Over the years, serious conflicts of interests have arisen due to accounting firms conducting both audit and consulting work for the same or related companies. Such conflicts frequently lead to corporate misstatements, breaches of fiduciary duties, and in some cases, fraud—which inevitably erodes investor confidence and results in securities class actions and regulatory actions.
By splitting the two businesses, these conflicts of interest, and the inevitable problems they lead to, could more easily be avoided. For example, EY recently agreed to pay the SEC $10 million for their work with Sealed Air—a packaging company known for its brands, Cryovac food packaging, and bubble wrap cushioning packaging—related to charges of auditor independence misconduct perpetrated by several partners to secure Sealed Air as a client.
This past April, in the UK, EY was hit with a $2.5 billion suit for its auditor negligence in NMC Health, which filed for bankruptcy in 2020 after billions of dollars of undisclosed debt was unearthed.
All eyes are watching. As if sending a warning shot across EY’s bow, the SEC’s acting chief accountant, Paul Munter, issued a statement in August reminding accounting firms that “it is paramount that the accounting firm fully understands its responsibility for maintaining auditor independence and it discloses such requirements to the non-accounting firm investors involved” while exploring audit firm restructurings and other complex transactions.
Although EY’s proposal will continue to spark heated debates across the industry, the move will most likely limit conflicts of interest and better protect investors moving forward, meaning EY could avoid some costly securities litigation and SEC regulatory actions in the future as well.
EY’s first-mover split is bold. Hopefully, Deloitte, KPMG, and PwC will take note as they consider the future of splitting up their own consulting and auditing arms and keeping the interests and protection of their auditing clients’ investors top of mind.
Author Information
Laura H. Posner is a partner in Cohen Milstein Sellers & Toll PLLC’s securities litigation and investor protection practice, as well as its ethics and fiduciary counseling practice. Prior to joining the firm in 2017, she was the bureau chief for the New Jersey Bureau of Securities.
Read the article on Bloomberg Tax. (Subscription required.)
Amy Miller authored the “Second Circuit” chapter for the American Bar Association’s 2022 Survey of Federal Class Action Law: United States Supreme Court and Circuit-by-Circuit Analysis. The book, produced by the ABA Litigation Section’s Class Actions and Derivative Suits Committee and edited by Elizabeth J Cabraser and Fabrice N Vincent, provides up-to-date analysis of class action law in each federal circuit.
The 2022 Survey of Federal Class Action Law: A U.S. Supreme Court and Circuit-by-Circuit Analysis is a valuable tool for both in-house and outside counsel who confront the prospect of litigating class actions in federal circuits with which they may have little or no experience and must make informed recommendations on removal. Succinct summaries are prepared by litigators from each of the respective circuits and address changes in rules and statutes as well as significant case law.
The federal False Claims Act and similar state anti-fraud statutes authorize private citizens to redress government fraud by filing a legal action on behalf of the United States, as well as for certain states, to recover for the government the funds that wrongdoers unlawfully obtained, along with substantial penalties. These lawsuits are referred to as qui tam actions, and the private citizens, known as whistleblowers, who successfully prosecute these suits may receive a portion of the recovery. Because the United States and individual states are the real parties in interest to qui tam actions, they have the right to take over, or intervene in, the whistleblower’s action. For a variety of reasons, however, the federal and state governments often opt not to take over qui tam cases even though the whistleblowers’ allegations are meritorious.
When the government declines to intervene in a filed False Claims Act lawsuit, the whistleblower can still pursue the action on the government’s behalf. Numerous whistleblowers who have continued pursuing their False Claim Act cases following a government declination have gone on to successfully recover substantial sums for the government and taxpayers. According to data published by the U.S. Department of Justice, between 2010 and 2021, whistleblowers secured more than $3 billion in judgments and settlements for the government in cases in which the government declined to intervene.
Whistleblowers’ perseverance and success in securing significant recoveries for the government in declined False Claims Act cases continues in 2022. On July 20th, whistleblower Michael Bawduniak announced that pharmaceutical company Biogen agreed to pay $900 million to resolve his qui tam action alleging that Biogen provided kickbacks to induce physicians to prescribe its drugs to Medicare and Medicaid patients. Mr. Bawduniak pursued his case even though the United States and several states declined to intervene. And on August 3rd, a jury sided with whistleblower Ronald Streck and entered a $61 million verdict against Eli Lilly after determining that the drug company deliberately reported false pricing to state Medicaid programs in order to lower rebates that it owed to the states. If upheld, the verdict will be trebled under the False Claims Act. Here again, Mr. Streck pursued his qui tam action and prevailed despite the United States’ and several states’ decisions not to intervene.
For many qui tam cases, a decision by the government not to intervene does not mean that the whistleblower’s allegations lack merit and should not be pursued. Whistleblowers’ continued litigation of meritorious cases after a government declination brings accountability to corporations that defraud the government while returning large sums to our nation’s treasury and deterring future fraud.
Boeing will revise bylaws that a Seventh Circuit panel said improperly barred federal derivative claims, ending a dispute with shareholders over alleged proxy misstatements regarding its 737 Max jet that spawned suits in both Illinois federal court and the Delaware Court of Chancery.
If the settlement deal disclosed Wednesday is approved in both Delaware and Illinois, Boeing’s executive and board director insurance will pay the company $6.25 million. Attorneys for Seafarers Pension Plan, which sued on the company’s behalf, will seek up to $4.25 million of that settlement fund in fees and expenses, according to the preliminary approval motion.
Full court approval will also require Boeing’s board of directors to amend its forum-selection bylaw to allow exclusively federal derivative claims from stockholders in either the District of Delaware or the District of Virginia. Boeing announced in May it was moving its headquarters from Chicago to Arlington, Virginia.
That part of the deal is important, the plan said, because it will do away with the company’s current bylaw, which had only allowed such suits in the Delaware Chancery court. That “prevented the federal derivative claims at issue in this case, or any other exclusively federal derivative claim, from being brought,” according to the filing.
. . .
Seafarers is represented in both suits by Cohen Milstein Sellers & Toll PLLC, with Offit Kurman PA serving as local counsel in Delaware.