As product liability lawyers, we know that one of the goals of every product company should be the safety of its users. Many companies take significant measures to ensure they follow this objective in terms of product design, manufacturing, and notification compliance. Occasionally a company may fall short of design standards and safety measures and/or fails to make it right.

Peloton saw significant growth and success during the COVID-19 pandemic. New work and lifestyle demands have necessitated the adoption of different methods of exercise and stress relief, including the creation of in-home gyms outfitted with Peloton bikes and treadmills. Unfortunately for Peloton, they have also realized that a rise in popularity and product demand can lead to a rise in consumer safety concerns. Since October 2020, Peloton has faced three Consumer Product Safety Commission (CPSC) product recalls for three separate products based on three different types of product liability claims.

As the below three recalls show, Peloton has scored a product liability trifecta.

Manufacturing Defect

In Florida, under strict liability, a product is “unreasonably dangerous because of a manufacturing defect if it is different from its intended design and fails to perform as safely as the intended design would have performed.”1 It appears Peloton’s manufacturing is missing the mark.

In October 2020, the CPSC issued a recall on the PR70P Clip-In Pedals fitted on Peloton bikes (sold between July 2013 and May 2016).2 The CPSC received more than 120 consumer reports of pedal breakages, including 16 reports of leg injuries. Five of those injuries required medical care, such as stitches to the lower leg.

This recall was for approximately 27,000 bikes (54,000 pedals). According to Healthline and Reddit, the complaints go back five months to early 2020, when users describe that the pedal “snapped clean off from the arm while I was standing up riding.” The same user posted a photo, demonstrating that the break occurred where the pedal spindle joins the crankset.

Originally published by Taxpayers Against Fraud on September 30, 2021.

If you are an avid movie watcher – as many of us have become over the last two years – it may seem like whistleblowers are very common.  After all, they are heroes of popular films such as The Insider, Erin Brockovich, The Informant, and many others. While they are a popular and constant presence in the media, whistleblowers are not so common in real life.

In the most recent fiscal year, there were only 672 False Claims Act lawsuits filed by whistleblowers (also known as “qui tam” actions”).  In a country with over 255 million adults, this means only 1 qui tam lawsuit is filed for every 380,000 adults.  This low number is nowhere near what the movies may lead one to believe.

Let’s put that number – 672 – in context.  On one hand, fewer people were injured in lightning strikes last year than became FCA whistleblowers.   On the other hand, there were more skunk attacks than whistleblower lawsuits filed.  Nearly twice as many people are drafted by a major league baseball each year than become whistleblowers.  And more than four times as many people were accepted to Harvard as filed a whistleblower lawsuit, although not for lack of trying.

Here’s one more: Guess how many people last year voted for Kanye West for President of the United States.  If you guessed 67,906, you are correct.  More than 100 times more people voted for Kanye than filed False Claims Act cases.

Although whistleblowers are rare, they make an impact. This is not an opinion. As we have documented throughout the last 30 days, fraud whistleblowing works, and it remains the most effective tool in preventing fraud on the government.

Tomorrow we start a new federal fiscal year knowing the amount and potential for fraud in the country is not media hype or a film creation. So we close out our month of Fraud by the Numbers with one simple question. Do we have too many whistleblowers or not nearly enough?

On September 23, 2021, the Delaware Supreme Court issued a decision in United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Mark Zuckerberg, et al. and Facebook, Inc., C.A. No. 2018-0671-JTL, which set forth a “new” demand futility test designed to supplant the use of the Court’s prior Aronson and Rales tests. Demand futility is a key hurdle in most shareholder derivative cases to establish that the plaintiff has standing to pursue the lawsuit. Failure to establish demand futility results in an early dismissal of the case. The Facebook test, as it will be known, cleans up some confusion about how Aronson and Rales are applied, while ensuring that outcomes will stay consistent with what would have occurred under the prior tests.

The Facebook decision sustained a Court of Chancery ruling, which found that plaintiffs failed to plead demand futility in a case arising from the expenditure of litigation expenses and payment of fees when Facebook abandoned plans to reclassify stock. In the Court of Chancery, Vice Chancellor Laster described the Aronson and Rales demand futility tests and how their interpretation had evolved over time. (Del. Ch. Oct. 26, 2020). Vice Chancellor Laster concluded that the two tests no longer had separate utility in light of subsequent court interpretations and the enactment of a statute by the Delaware legislature designed to protect directors from liability for breaching their duty of care. Instead, his decision boiled them down to a single three-prong test. He explained:

Fundamentally, Aronson and Rales both address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf in considering demand. For this reason, the Court of Chancery has recognized that the broader reasoning of Rales encompasses Aronson, and therefore the Aronson test is best understood as a special application of the Rales test. (Citations and quotation marks omitted.)

The Delaware Supreme Court affirmed this approach, and explained from a practical perspective what a plaintiff must establish to show that making a demand would be futile as to a majority of the board. The “new” demand futility test is a three-pronged approach that asks:

  1. whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
  2. whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
  3. whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

“If the answer to any of the[se] questions is ‘yes’ for at least half of the members of the demand board, then demand is excused as futile.”

Notably, while the Delaware Supreme Court described this as a new test, it went out of its way to assuage practitioners that this was not a substantive change, explaining that both demand futility tests “‘address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand’; and the refined test does not change the result of demand-futility analysis.” Later in its decision, the Supreme Court reiterated that Aronson, Rales, and their progeny remain good law.

As a practical matter, we expect that Delaware corporations will latch onto some language in the opinion that reminds plaintiffs that pleading demand futility is no easy task, particularly in light of Section 102(b)(7), which exculpates directors for breaches of duty of care, and cannot be used as a path to expose directors to a substantial likelihood of liability or as a basis for finding demand futility.

Yet, despite likely efforts to make this decision seem like a sea change for stockholders, demand futility may still be established based on particularized pleading of non-exculpated breaches of fiduciary duties. Therefore, we do not see the Facebook decision as a significant change to current pleading practices. Plaintiffs have been cognizant of this heightened burden and plead their claims accordingly. Courts, too, understand that whether to apply Aronson or Rales “does not matter” because “under either approach, demand is excused if Plaintiffs’ particularized allegations create a reasonable doubt as to whether a majority of the board of directors faces a substantial likelihood of personal liability for breaching the duty of loyalty.”. Rosenbloom v. Pyott, 765 F.3d 1137, 1150 (9th Cir. 2014).

For example, Cohen Milstein represented stockholders who were able to establish demand futility in the Wynn Resorts litigation and similarly argued that the particular test applied does not matter. That litigation involved allegations that the company’s former CEO and Chairman, Steve Wynn (“Wynn”), had terrorized, sexually harassed, and sexually abused dozens of employees on company property. The incumbent board of directors were made aware of serious allegations against him, yet failed to stop his misconduct or protect company employees. Even more seriously, the directors were personally obligated to report instances of unsuitability to gaming regulators, yet they failed to act which jeopardized existing licenses and future business opportunities. Instead, the directors allowed Wynn to remain at the helm of his namesake company where he continued sexually harassing employees. In Wynn Resorts, the court concluded that plaintiffs had adequately pled demand futility because the “Board had actual knowledge of serious allegations that Steve Wynn was violating the law” and “faces a substantial likelihood of liability for its knowing and conscious inaction.” (Thomas P. DiNapoli. v. Stephen A. Wynn, et al., Case No. A-18-770013-B, (Eighth Jud. Dist. Crt., Clark Cnty., Nev.) Order Denying Defendants’ Motion to Dismiss/Granting Lead Plaintiffs’ Motion to Strike, Sept. 6, 2018).

In this case, the well-known proverb “the more things change, the more they stay the same” seems particularly apt. The two demand futility tests already had culminated in a reasonably consistent application of demand futility. The Delaware Supreme Court is now blessing what already had come to be.

There’s growing recognition of the need to increase gender diversity in corporate America, but progress has been frustratingly slow, says Laura Posner, partner with Cohen Milstein. But, she adds, an unlikely group of players—institutional investors—is finally having some success in forcing corporations to change.

Women, and Black and Latina women in particular, remain hugely underrepresented on U.S. corporate boards. As of 2020, just 20.9% of Fortune 500 board seats were held by White women and 5.7% were held by Black and Latina women. In 2021, S&P 500 companies tripled the share of new directors who are Black and more than doubled the percentage who are Latino. Still, nearly 80% are White, and about 70% are men.

Studies repeatedly show that increasing board diversity is not only the right thing to do for an organization’s culture, but that it leads to better business outcomes, smarter decision-making, and powers innovation, among other benefits. Companies with a market capitalization of more than $10 billion and with women on their boards outperform comparable businesses with all-male boards by 26% worldwide over a period of six years.

Companies with gender-diverse boards have fewer instances of problematic business practices, such as fraud, corruption, bribery, and shareholder battles, and are associated with more transparent disclosure of stock price information and fewer financial reporting mistakes.

There is growing recognition of the need to increase gender diversity in corporate America, but progress has been frustratingly slow. An unlikely group of players, however, are finally having some success in forcing corporations to change—institutional investors.

Changing the Board Game

In September 2018, California Gov. Gavin Newsom (D) signed a bill mandating that corporations with their “principal executive office” in the state with six or more directors have at least three female directors. In the two years since, there was an increase of 66.5% of board seats held by women. At least 11 other states have enacted or are considering board diversity legislation.

In December 2020, Nasdaq proposed a “comply or explain” rule that the SEC approved in August 2021 (over the objection of the Republican-appointed commissioners) that will result in most companies listed on its exchange to have at least one female director and one director who self-identifies as being part of an underrepresented minority group. The rule also requires companies listed on the Nasdaq to disclose uniform diversity information about their boards of directors.

What is, perhaps, less well known are the efforts institutional investors have taken to force companies to diversify their boards. According to TIAA President and CEO Thasunda Brown Duckett, Nuveen, TIAA’s asset manager, encouraged about 325 of the 450 companies in the U.S. that did not have a single woman on their board to add a female director.

State Street announced earlier this year that it will now vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards; and in 2022, it will vote against them if they do not have at least one director from an underrepresented community.

BlackRock expects to see at least two women as directors on every board. To the extent that it believes a company has not adequately accounted for diversity in its board composition within a reasonable time frame, it may vote against the nominating or governance committee for an apparent lack of commitment to board effectiveness.

Similarly, Goldman Sachs will no longer take a company public without two diverse board members, one of whom must be a woman, and JPMorgan Chase will generally vote against the chair of the nominating committee when the issuer does not disclose the gender or racial and ethnic composition of the board.

The New York City Employees’ Retirement System will generally vote against members of a nominating or governance committee if the board lacks meaningful gender, racial, and ethnic diversity, including, but not limited to, any board on which more than 80% of directors are the same gender. Institutional investors have also increased their focus on diversity data, with ISS, Glass Lewis, Calvert, SSGA, and others pressing for greater DEI-focused disclosure, and demands that the SEC issue regulations mandating unform DEI disclosures.

The Role of Institutional Investors

Institutional investors also have been forcing board change on a case-by-case basis through shareholder derivative litigation alleging toxic workplace cultures due to discrimination, retaliation, and gender and racial bias. Through litigation and ultimately settlement, these companies have been forced to not only completely revamp their DEI initiatives and discrimination, harassment and retaliation policies, procedures and oversight functions, but also to change the composition of their boards.

For example, in the Wynn Resorts derivative action—litigation led by the New York State Common Retirement Fund and the New York City Employees Retirement System—Wynn Resorts agreed to split the CEO and chair position, make a stated commitment to 50% board diversity, and to use a Rooney Rule to require interviews of diverse candidates. (The Rooney Rule is an NFL policy that requires any team with a head coaching vacancy to interview at least one diverse candidate.)

In the wake of shareholder actions led by the state of Oregon arising out of allegations of sexual misconduct at L Brands Inc., the newly spun-off Victoria’s Secret board is now composed of nearly all-women directors (six out of seven directors) and half of the Bath & Body Works Inc. independent directors (the new name of L Brands) are women.

Efforts to diversify boards are long overdue, but the gains we are finally starting to see—however slow—are bound to have a positive impact on company culture and performance across the country. That listing exchanges and institutional investors have become engaged players in the push for such governance reforms is a promising sign of what is to come. Over time, it is likely that these entities will require even higher levels of diversity, bringing more perspectives to boardrooms and greater value to shareholders.

Read Board Diversity Is Critical to Protect Shareholders, Bottom Line

Cohen Milstein’s Complex Tort Litigation group publishes the bi-weekly Complex Tort Eblast addressing a number of consumer safety and product liability issues.

As the summer wanes and parents begin sending their children back to school, Cohen Milstein has compiled a few health and safety tips to help keep children safe this school year. Although the dangers posed by the Covid-19 pandemic have understandably been of utmost concern, it is important to remain mindful of other everyday dangers children may encounter this school year. It is our hope that the following tips will help parents and kids take on this new school year with greater safety and confidence.

  • Transportation Safety
    • Walkers: Be sure children follow safe walking procedures such as walking on sidewalks, looking both ways before crossing intersections, and avoiding distractions like phones or games while walking.
    • Bikers: Make sure children ride on the correct side of the road (in the same direction as traffic), come to a complete stop at intersections before crossing, and wear bright clothing. Have children wear properly fitted helmets that have not been subjected to an accident or hard fall. Helmets are designed to take one good hit and any helmet that has already taken such a hit needs to be replaced.
    • Bus Riders: Go over the rules when riding on a bus, teach children the proper way to enter a bus and to cross in front of a bus to enter and exit– in clear view of the driver. Instruct children to wear seatbelts on the bus when available.
    • Drop-off / Pick-up: Make sure children are alert and aware of where they are being picked up and dropped off and by whom. Consider agreeing on a family password and advising your children never to leave school with anyone who does not know that password.
    • Teen Drivers: Car crashes are the #1 cause of death for teens. Parents should actively practice safe driving with their teens. Phones down while driving! Research the availability of apps to prevent texting while driving that may be available for your teen’s phone or through your mobile provider.
  • Backpack Safety
    • Don’t Oversize: Provide your child with a properly fitted backpack that is no larger than your child’s back. Measurement guides are available online.
    • Don’t Overload: Heavy backpacks are bad for children’s’ bodies. The general rule is a backpack should be 5%-10% of the child’s body weight. Avoid rolling backpacks because they are heavier and are usually not permitted to be rolled on school grounds.

Ergonomic Styles: Make sure kids wear their back packs with both straps tightened correctly so weight is supported by the whole back. Consider a model with a chest strap that will help secure the pack in its proper place and distribute its weight while reducing

  • the stress placed on your child’s shoulders, neck, and back.
  • Playground & Sports Safety
    • Some bumps and bruises are normal with outdoor play and sports, but head injuries should never be ignored. Make sure children know to report injuries, especially head injuries, which may lead to concussions.
    • Teach your child to voice their health concerns to the responsible adult, whether it be heat related, bully related, injury related, or safety related.
    • Send your child to school with an insulated thermos full of water so they can rehydrate throughout the day, particularly after engaging in outside activities.

Below are helpful weblinks on child safety during the school year:

Cohen Milstein’s Complex Tort Litigation attorneys litigate Unsafe & Defective Products, Wrongful Death & Catastrophic Injury, Environmental Toxic Torts, Sexual Abuse. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us or call us at 877.515.7955.

We co-counsel nationwide.

Released on July 26, 2021, Federal Deception Law, Chapter 9, “The Federal False Claims Act and Other Whistleblower Laws,” National Consumer Law Center Digital Library, was updated by Cohen Milstein’s Gary L. Azorsky and Jeanne A. Markey, Co-Chairs of Cohen Milstein’s Whistleblower / False Claims Act practice, with the assistance of Raymond M. Sarola, Of Counsel. The updated chapter addresses federal and state False Claims Act whistleblower protections, as well as whistleblower protections under the SEC, CFTC, IRS and DOT programs, the rights of relators under the FCA, FCA litigation procedure, mandatory arbitration requirements, remedies, and exemplar cases by industry.

9.1.1 Introduction

The federal False Claims Act (FCA) imposes liability on entities and individuals that make false or fraudulent claims to the government for payment for services and products, or that improperly avoid an obligation to repay overpayments to the government. Although FCA cases have traditionally been used to file claims against government defense and health care contractors and suppliers, they arise as well in other areas—such as insurance, housing, government entitlement programs, government loan programs, and environmental and labor laws—that offer potential use by consumer lawyers.

Unlike almost all other fraud statutes or common law causes of action, the FCA, with its unique qui tam provisions, allows private individuals to file and prosecute a lawsuit in the name of the United States. Because FCA cases are brought on behalf of the government, the individual whistleblower plaintiff—or “relator”—need not suffer any personal harm to bring the action. By authorizing suits in these situations, the FCA offers a tremendous opportunity for individuals and organizations to remedy and prevent fraud and other marketplace conduct that harms the government.

The FCA empowers individuals and organizations with knowledge of fraud against the government to file lawsuits to recover damages and penalties for the government. Its express intent is to encourage qui tam suits by giving consumers the tools and incentive to represent the government in actions against those that falsely bill the government for services or goods.

As powerful a tool as the FCA is, the inexperienced practitioner should also recognize its challenges. The Supreme Court has noted that “[t]he False Claims Act’s qui tam provisions present many interpretative challenges,” such that it may not always be possible, even for the Supreme Court itself, “to make them operate together smoothly like a fine tuned machine.”

The outline for Chapter 9 The Federal False Claims Act And Other Whistleblower Laws follows:

9.1 Background

9.2 The Rights of Relators and the Government Under the False Claims Act

9.3 Elements of an FCA Case

9.4 The False Claims Act’s Litigation Procedures

9.5 The False Claims Act Claims on Behalf of the Government Should Not Be Subject to Arbitration Requirements

9.6 Remedies

9.7 Financial Incentives Available to the Relator

9.8 Examples of False Claims Act Cases

9.9 The False Claims Act’s Whistleblower Protection

9.10 State False Claims Acts

9.11 Other Statutes That Give Rewards to Whistleblowers

9.12 The False Claims Act Checklist

The complete treatise, Federal Deception Law, can be accessed here via NCLC’s Digital Library.

About the Authors

Gary L. Azorsky, contributing author, is Co-Chair of Cohen Milstein’s Whistleblower/False Claim Act practice, has recovered nearly $2.5 billion in defrauded funds for federal and state governments, including a $784.6 million settlement in USA, ex re. Kieff v. Wyeth (D. Mass.), the seventh-largest FCA recovery on record and the second-largest recovery in history involving a single class of drugs. Mr. Azorsky has also provided expert FCA guidance in congressional hearings and at the state level and has testified in federal and state courts as an expert witness concerning the False Claims Act.

Jeanne A. Markey, contributing author, is Co-Chair of Cohen Milstein’s Whistleblower/False Claim Act practice, is recognized among the Lawdragon “500 Leading Plaintiff Financial Lawyers” in the United States. Ms. Markey has successfully represented whistleblowers in federal and state cases across the country in some of the highest-profile qui tam litigation in the healthcare, defense, and financial services industries, including USA, ex re. Kieff v. Wyeth (D. Mass.), which resulted in a $784.6 million settlement, the seventh-largest FCA recovery on record and the second-largest recovery in history involving a single class of drugs.

Other Contributors

Raymond M. Sarola is Of Counsel Cohen Milstein’s Whistleblower/False Claims Act and the Ethics and Fiduciary Counseling practice groups. Mr. Sarola represents whistleblowers in qui tam cases brought under the federal and state False Claims Act statutes in industries that conduct business with the government, including health care, defense, and financial services.  As a member of the firm’s Ethics and Fiduciary Counseling practice, Mr. Sarola calls on his experience as a trustee on the New York City pension fund boards in counseling public pension funds fiduciary issues.

The law should be modified to require that it be public whether a 10b5-1 plan exists and include the date it was entered into; all 10b5-1 plans be approved by a company’s compensation committee; and most critically, the owner of the plan must be blind to the dates and/or strike prices for purchases and sales set forth in their plan, so that they are not incentivized to improperly keep material news from investors.

By now, the story is familiar: A company announces either good or bad news and its stock price goes up or down, only for investors to later learn that around the same time, corporate insiders sold millions of dollars of their company stock holdings, often for the first time in years. It happened at Eastman Kodak, Moderna Therapeutics, and, more recently, at government contractor Emergent BioSolutions, whose share price fell over 50% from February 2021 to April 2021, coinciding with its announcement of negative financial results and COVID-19 vaccine production problems. Just before that period of bad news, for the first time in over four years, its CEO Robert G. Kramer sold a substantial amount of his company stock for proceeds of over $10 million.

These transactions have something in common besides their fortuitous timing: They were all the result of an SEC rule that was meant to prevent insider trading on the basis of material nonpublic information. The SEC rule, formally known as 10b5-1, covers what are known as “trading plans,” and requires that executives pre-arrange for specific amounts of stock to be sold at specific times according to pre-established criteria. Notably, the rule does not require disclosure of the substance of the plans to investors, and executives can cancel the plans at any time and enter into as many plans as they want.

The theory was that if these plans are adopted when insiders are not in possession of material nonpublic information, they would prevent illegal insider trading. To encourage their use, the Rule provides those who adopt a 10b5-1 plan a “safe harbor” that serves as an affirmative defense to claims of insider selling.

Over the past year, such plans have garnered mounting scrutiny from federal regulators, including SEC Chairman Gensler, and lawmakers. Several recent peer-reviewed studies and hearings in Congress have demonstrated that rather than prevent insider trading, executives use these plans to obtain financial windfalls—the exact opposite of the Rule’s purported intent. The focus thus far has been on whether these plans are being used to promote (not prevent) insider trading on material nonpublic information by encouraging executives to sell before bad news is disclosed, and whether the plans ought to continue to operate as get out of jail free cards when they mask such improper insider selling.

But there is another serious risk that has not garnered enough attention: the risk that 10b5-1 plans create an incentive for company insiders to continue to hide bad news from investors and prop up stock prices by making false and misleading positive statements in advance of planned trades. In addition to corporate insiders’ decisions to sell, there should be heightened scrutiny of corporate insiders’ decisions to speak to investors around the time of planned sales. After all, an executive who knows that they have pre-planned trades on the horizon, or trades that their plan will execute at a certain price, may have an improper motive to reap as much money as possible by keeping the company’s stock price as high as possible.

One way in which investors demonstrate motive in securities fraud cases is by alleging that executives made unusual or suspicious trades based on factors such as their profits, timing, and percentage of holdings sold. But despite the fact that 10b5-1 plans were created as an affirmative defense against allegations of insider trading, courts in these separate securities fraud cases have also routinely allowed company insiders to rely on their 10b5-1 plans to defeat an inference of a motive. As long as an insider has a 10b5-1 plan adopted before the start of a fraudulent scheme, courts almost always find that stock trades pursuant to the plan weigh against an inference that defendants knowingly or recklessly misled investors based on a motivation to inflate the stock price to maximize profits.

Potential changes are on the horizon. The flood of recent massive insider sales has prompted the SEC to call for restrictions on trading plans—for instance, a cooling-off period between when the plan is adopted and when trades can begin—as proposed recently by SEC Chairman Gensler. The House of Representatives also recently passed a bill directing the SEC to carry out a study of potential amendments to Rule 10b5-1, including requiring issuers to adopt a window during which insiders are allowed to trade.

While these proposed changes are a step in the right direction, they fall short of fixing the problems inherent in the 10b5-1 safe harbor. To protect investors, ensure that these plans are not being manipulated for the benefit of insiders, and garner the protection of the safe harbor in litigation, the law should be modified to require that it be public whether a 10b5-1 plan exists and include the date it was entered into; all 10b5-1 plans be approved by a company’s compensation committee; and most critically, the owner of the plan must be blind to the dates and/or strike prices for purchases and sales set forth in their plan, so that they are not incentivized to improperly keep material news from investors.

The Rule’s safe harbor must also be modified to make clear that it is applicable only to claims of insider selling, and does not automatically negate well-pled allegations of motive in securities fraud actions. Although not a panacea, such changes would go a long way to ensuring that 10b5-1 plans are not used by executives to financially benefit themselves at the expense of investors or to hide material information from the market.

#     #     #

Laura Posner is a partner at Cohen Milstein and a member of the firm’s securities litigation & investor protection and ethics & fiduciary counseling practice groups. She was previously the top securities regulator in New Jersey. Megan Kinsella Kistler, associate at the firm and member of the firm’s securities litigation & investor protection practice, represents institutional and individual shareholders in derivative lawsuits and securities class actions. She is a former federal prosecutor. 

For most, summer is synonymous with having fun in the sun. But sometimes products designed to help keep you safe in the sun or better enjoy the summer may actually be dangerous. We all know sunscreen can help reduce the risk of skin cancer, but a recent U.S. Food & Drug Administration (FDA) recall suggests some sunscreens may increase the risk of cancer. Information about that recall and other recent summer product recalls are discussed below.

Johnson & Johnson Sunscreen Recall
On July 14, 2021, the FDA announced that Johnson & Johnson voluntarily recalled specific Neutrogena and Aveeno aerosol sunscreen products due to the presence of Benzene, a known carcinogen. The aerosol sunscreen products being recalled are:

  • NEUTROGENA® Beach Defense® aerosol sunscreen,
  • NEUTROGENA® Cool Dry Sport aerosol sunscreen,
  • NEUTROGENA® Invisible Daily™ defense aerosol sunscreen,
  • NEUTROGENA® Ultra Sheer® aerosol sunscreen, and
  • AVEENO® Protect + Refresh aerosol sunscreen.

According to the FDA announcement, Johnson & Johnson advises that consumers should stop using these specific products and appropriately discard them.

Umbrosa Pool and Patio Umbrellas Recalled Due to Injury Hazard
On May 27, 2021, the United States Consumer Product Safety Commission (CPSC) announced that Umbrosa has recalled umbrellas equipped with the Umbrosa Evolution Arm/Holder due to an injury hazard from the umbrella arm breaking at the elbow while in use. According to the CPSC announcement, consumers should immediately stop using the recalled umbrellas and contact Umbrosa to receive a free replacement arm/holder. Umbrosa is contacting all known purchasers directly.

Pool Heaters Recalled by Pentair Water Pool and Spa Due to Fire Hazard
On April 18, 2021, the CPSC announced a recall of StaRite and Mastertemp pool heaters due to a fire hazard. According to the CPSC announcement, consumers should stop using the heater immediately if they have one of the specific models cited in the recall. Owners can contact Pentair Water Pool and Spa for a free repair.

Cohen Milstein closely monitors product recalls across industry:
Launched in July 2019, Cohen Milstein’s U.S. Product Recall News Blog tracks product recalls across industry, including consumer products; motor vehicle, tire, and roadway safety products; food, drugs, cosmetics, and medicines; as well as chemicals and environmental products. We monitor the following regulatory agencies and product recall websites:

When safety issues regarding a product are brought to the CPSC, NHTSA or the FDA, these agencies will evaluate and track the issues and will determine whether or not a specific product is not fit or safe for public use. Depending on the product and scope of the problem, either a voluntary recall may be issued by the offending company or a mandatory recall will be issued by the governing agency. The agencies will also work with the offending company on the most appropriate mitigation strategies, including corrective actions.

Cohen Milstein’s Complex Tort Litigation attorneys litigate Unsafe & Defective Products, Wrongful Death & Catastrophic Injury, Environmental Toxic Torts and other matters related to dangerous products, recovering hundreds-of-millions of dollars for consumers who have been harmed by such defective or dangerous products. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us or call us at 877.515.7955.

We co-counsel nationwide.

By Michelle C. Yau, Mary J. Bortscheller, and Julie S. Selesnick

The January 2020 edition of the Shareholder Advocate discussed important fiduciary liability concerns related to the actuarial equivalence requirements of ERISA. This article revisits the subject and provides an overview of court rulings that occurred in the past 18 months.

Actuarial Equivalence Explained

Actuarial equivalence is a computation that means that, all else being equal, all optional forms of benefits offered by a pension plan have the same economic value as each other. Practically speaking, two forms of pension benefits are actuarially equivalent if the present value of all the monthly payments that are likely to be paid to a retiree are equal in value; this calculation is done using two primary actuarial assumptions: an interest rate and a mortality table. The interest rate discounts the value of future payments, while the mortality table provides the anticipated length of time the future payments will be made based on the life expectancy of a person at a given age.

Significantly, ERISA requires the value of all optional forms to be actuarially equivalent to the value of a single life annuity beginning at normal retirement age.1 And whether a plan violates ERISA’s actuarial equivalence rules turn1 Those provisions include ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), ERISA § 203(a), 29 U.S.C. § 1053(a), ERISA § 205(a) & (d) (1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B) and § 206(a)(3), 29 U.S.C. § 1056(a)(3).s on whether the actuarial assumptions used to calculate all optional forms of benefits are reasonable. On the question of whether a pension plan’s actuarial assumptions are reasonable, courts have considered whether those assumptions have been updated to reflect current trends in mortality and interest rates.

ERISA Litigation Alleging Non-Actuarially Equivalent Benefits

To date, eleven (11) class action lawsuits have been filed asserting ERISA violations for the failure to pay actuarially equivalent pension benefits. To date, all lawsuits in this area have involved corporate pension plans. The vast majority survived motions to dismiss in jurisdictions around the country, including: Torres v. American Airlines, Inc. (N.D. Tex.); Smith v. U.S. Bancorp (D. Minn.); Cruz v. Raytheon Company (D. Mass.); Belknap v. Partners Healthcare System, Inc. (D. Mass.); Duffy v. Anheuser Bush (E.D. Mo.); Berube v. Rockwell Automation, Inc. (E.D. Wis.); Herndon v. Huntington Ingalls Industries, Inc., et al. (E.D. Va.); Masten v. Met Life (S.D.N.Y) and Scott v. AT&T Inc. (N.D. Cal).

Only two courts have granted motions to dismiss: DuBuske v. PepsiCo, Inc. (S.D.N.Y.) and Brown v. UPS (N.D. Ga.). But both dismissals were based upon procedural rather than substantive issues and in the PepsiCo case, the plaintiffs were given leave to replead.

Torres v. American Airlines and the Smith v. U.S. Bancorp were the first two cases where class certification was contested. In both, the proposed classes were not certified. In U.S. Bancorp, shortly thereafter, the parties announced they had reached an undisclosed settlement in principle.

The first major settlement for the failure to pay actuarially equivalent benefits came in February 2021, in Cruz v. Raytheon Company. In this case, the plaintiffs challenged Raytheon’s use of 1971 mortality tables to calculate JSAs. Raytheon has agreed to pay $59.2 million to more than 10,000 participants and beneficiaries. The settlement followed the district court’s denial of the motion to dismiss.

Recommendations

Because continued litigation in this area is likely, ERISA pension plan trustees should review their plan documents and work with their actuary to consider whether the actuarial assumptions used by the plan are reasonable. It is important to document all steps a plan takes to evaluate the reasonableness of the plan’s actuarial assumptions in the event that litigation ever ensues.

As you consider these issues, Cohen Milstein’s ERISA/employee benefits group is available to assist with a review of the actuarial assumptions in your retirement plan(s).

1 Those provisions include ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), ERISA § 203(a), 29 U.S.C. § 1053(a), ERISA § 205(a) & (d) (1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B) and § 206(a)(3), 29 U.S.C. § 1056(a)(3).

By Michael B. Eisenkraft

A recent ruling by the Second Circuit Court of Appeals in Set Capital LLC v. Credit Suisse Group AG, 996 F.3d 64, 77–78 (2d Cir. 2021) revived claims that financial giant Credit Suisse Group AG (“Credit Suisse”) had manipulated the market for a popular security that, oddly enough, allowed investors to bet against an index reflecting expectations of upcoming stock market volatility. Significantly for investors, the April 2021 decision created positive jurisprudence for investors seeking to bring so-called “scheme liability” claims under Sections 10b-5(a) and (c) of the Securities Exchange Act of 1934 (“Exchange Act”), an area where case law has been sparse. Cohen Milstein Sellers & Toll PLLC serves as co-lead counsel for the putative class in this case and briefed and argued the case before the Second Circuit.

A Product Whose Popularity Created Problems

Credit Suisse issued and sold a very popular Exchange Traded Note (“ETN”) formally named the VelocityShares Daily Inverse VIX Short-Term ETN, but more commonly known by the nickname XIV. XIV was a volatility-linked financial product associated with the VIX Index, sometimes referred to as Wall Street’s “fear index” or “fear gauge.” The value of XIV is derived from the inverse value of the daily returns of the S&P 500 VIX Short-Term Futures Index (“VIX Futures Index”), which tracks a portfolio of first- and second month VIX futures contracts. Generally speaking, when the relevant VIX futures contracts underlying the VIX Futures Index decrease in value by 1%, the XIV notes increase in value by 1%, and vice versa. So, when VIX goes one way, XIV goes the other—hence its clever nickname, VIX spelled backwards. To remove some of this volatility risk from its books, Credit Suisse decided to hedge the risk. And the more XIV Credit Suisse issued, the more it needed to hedge. One way to hedge the risk was to buy the underlying VIX futures contracts. The problem for Credit Suisse was XIV’s popularity. XIV became a huge product, which correspondingly increased Credit Suisse’s need to hedge. The danger was that one of the main ways to hedge that risk, purchasing VIX Futures, could drive up the value of the VIX Futures indexes if done in high enough volume, thus further driving down the value of XIV and creating a vicious cycle.

According to the complaint investors filed in this matter, that is exactly what happened, in dramatic fashion. On June 30, 2017, Credit Suisse offered an additional 5,000,000 XIV notes to investors. On January 29, 2018, Credit Suisse offered an additional 16,275,000 notes on top of the 10,793,880 XIV notes already outstanding. This dramatically increased Credit Suisse’s need to hedge. On February 5, 2018, XIV prices dropped due to an increase in volatility—a drop that accelerated due to a massive purchase of VIX futures. In a single day, the price of XIV crashed by 96%. Credit Suisse then declared an Acceleration Event that effectively delisted the security. The Complaint alleged that Credit Suisse knew, based on prior events and other data, that its massive sales of XIV would create a correspondingly massive need to hedge that, in a time of volatility, would force buying of large amounts of VIX futures that, in turn, would drive down the price of XIV even further. To quote Adam Levine, who pithily described the allegations in his Bloomberg column: “1. [Credit Suisse] sold notes that would go down when VIX futures went up. 2. Then [Credit Suisse] bought a ton of VIX futures, pushing their prices up. 3. Investors in the notes lost everything. 4. [Credit Suisse] made a bunch of money.”1 In the Offering Documents for these XIV notes, while Credit Suisse acknowledged that its hedging activity “could affect” the value of VIX Futures index, it also stated that it “had no reason to believe” that any impact would be “material.”

Investors filed suit, alleging violations of Rules 10b-5(b) of the Exchange Act of 1934 for false and misleading statements made by Credit Suisse, Section 11 of the Securities Act of 1933 for false and misleading statements in the prospectus, and 10b-5(a) and (c) of the Exchange Act for the entire manipulative scheme. The District Court dismissed the claims in their entirety, but the Second Circuit, in an opinion issued April 27, 2021, largely reversed the District Court, allowing most of the claims to move past the motion to dismiss. See Set Cap., at 68–69 (2d Cir. 2021).

The most important part of this opinion, from the perspective of an investor, is likely its ruling on the 10b-5(a) and (c) or “scheme liability claims.” 10b-5(a) and (c) claims are broader than 10b-5(b) claims in that they do not require misrepresentations or omissions. Despite being broader than 10b-5(b) claims, they are brought far less frequently, resulting in sparse case law regarding scheme liability claims. The key quotation from Set Capital is the following holding:

Credit Suisse argues that the complaint fails to allege any “artificial” impact on the price of XIV Notes because its hedging trades were “done openly” for the legitimate purpose of “manag[ing] risk,” not deceiving investors. To be sure, it is generally true that short selling or other hedging activity is not, by itself, manipulative—even when it occurs in high volumes and even when it impacts the market price for a security. But here, the complaint alleges more than routine hedging activity: It alleges that Credit Suisse flooded the market with millions of additional XIV Notes for the very purpose of enhancing the impact of its hedging trades and collapsing the market for the notes. In this context, it is no defense that Credit Suisse’s transactions were visible to the market and reflected otherwise legal activity. Open-market transactions that are not inherently manipulative may constitute manipulative activity when accompanied by manipulative intent. In some cases, as here, “scienter is the only factor that distinguishes legitimate trading from improper manipulation.” To the extent Credit Suisse claims it hedged for a legitimate purpose, its position contradicts the complaint. As we discuss in detail below,

Set Capital specifically alleges that Credit Suisse executed its hedging trades on February 5 for a manipulative purpose—to trigger a liquidity squeeze that would destroy the value of XIV Notes. Set Cap. at 77–78 (internal citations omitted).

This is important for three reasons. It re-affirmed the flexibility and adaptiveness of 10b-5(a) and (c) to cope with novel schemes, it illustrated that scheme liability can protect investors in non-traditional investments, and it expanded the concept of open market fraud to the Second Circuit.

Recently, in Lorenzo v. SEC, 587 U.S. ___ (2019), the Supreme Court also made clear that the scheme liability provisions “capture a wide range of conduct[,]” id. at 6; “even a bit participant in the securities market may be liable under [Rule] 10b-5 so long as all the requirements for primary liability . . . are met[,]” id. at 12 (internal quotation marks and citations omitted); and in drafting and passing the federal securities laws, “Congress intended to root out all manner of fraud in the securities industry[,]” id. at 13. In Set Capital, Credit Suisse was alleged to have executed a novel scheme that harmed investors because of the relationship between two securities—XIV and VIX futures— both of which were recent creations. Set Capital, one of the first circuit decisions to address scheme liability post-Lorenzo, reaffirms that securities fraud, no matter how novel, still falls under the remit of 10b-5.

In their papers, Credit Suisse also argued that XIV was an extraordinarily risky product designed for professional traders and that investors essentially assumed the risk that the product would fail abruptly and they would lose their entire investment. In reviving investors claims, the Second Circuit in Set Capital reaffirmed the principal that securities fraud is unacceptable and actionable for any securities— no matter how esoteric or risky.

Finally, in Set Capital the Second Circuit adopted the concept of open-market fraud. Whether or not otherwise legal conduct can constitute manipulation if the intent is to manipulate is a question that is currently actively being debated amongst the Courts. See, e.g., Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation by Gina Gail S. Fletcher Duke Law Journal. (noting divergence of views in the Courts on this issue). Set Capital moves the Second Circuit into line with the D.C. Circuit and out of sync with the Third Circuit. See, e.g, Koch v. S.E.C., 793 F.3d 147, 153–54 (D.C. Cir. 2015), cert. denied, 577 U.S. 1235, 136 S.Ct. 1492, 194 L.Ed.2d 586 (2016) (holding that a “burst of trading” on the open market, combined with manipulative intent, was enough to violate the Exchange Act); GFL Advantage Fund, Ltd., 272 F.3d at 205 (explaining that market manipulation depends on the activity rather than the intent). Given the circuit split, there is a chance that this will be an issue eventually settled by the Supreme Court.

For all these reasons, Set Capital is both an important decision and a positive step for investors.

1 https://www.bloomberg.com/opinion/articles/2021-05-04/under-armour-earni…