In Wal-Mart Stores Inc. v. Dukes,[1] the U.S. Supreme Court on June 20, 2011, decertified a class of approximately 1.5 million women, depriving the group of the chance to vindicate claims of systemic workplace discrimination.
In doing so, the Supreme Court revised the requirements for establishing commonality, reversed decades of unanimous circuit authority permitting certification pursuant to Federal Rule of Civil Procedure 23(b)(2) for employment discrimination cases seeking back pay, in addition to injunctive relief, and required that any Title VII class action provide the employer with the opportunity to raise individual defenses.[2] While at the time some believed that Dukes would totally preclude pursuit of employment discrimination class actions, the last decade has shown that Dukes was not a death knell for employment class actions, although some features of the ruling have impeded progress more than others, and it has driven up the expense of such litigation significantly.
Commonality
Regarding commonality under Rule 23(a), and related consideration of predominance under Rule 23(b)(3), courts have certified a variety of discrimination class claims, under both disparate impact and disparate treatment theory.
Policies incorporating discretionary decision-making may demonstrate commonalty in disparate impact cases.
The Dukes court reaffirmed its 1988 holding in Watson v. Fort Worth Bank & Trust[3] that a system of delegated discretion may give rise to liability under Title VII in appropriate cases.[4] In order for such claims to demonstrate commonality where discretion had been delegated to multiple decision makers, the court required demonstrating a common mode of exercising discretion and identifying a specific employment practice.[5]
In McReynolds v. Merrill Lynch Pierce Fenner & Smith Inc.,[6] the U.S. Court of Appeals for the Seventh Circuit in 2012 reversed a denial of class certification. As Judge Richard Posner explained for a unanimous panel, the existence of a companywide personnel policy distinguished the case from the delegation of discretion in Dukes, which failed to qualify as a discrete, company personnel policy.[7]
The Seventh Circuit found dispositive that the discretion permitted by the challenged policies was exercised “within a framework established by the company.”[8] The policies at issue in McReynolds — one that permitted brokers to form teams pursuant to criteria of their choice and another that permitted the allocation of departing brokers’ accounts pursuant to criteria of the remaining brokers’ choice — constituted discrete personnel policies that permitted those administering them broad discretion in how to implement them.[9]
The Seventh Circuit concluded that challenges to these policies presented questions about their adverse effect that could generate answers common to the class.[10]
Similarly, in Ellis v. Costco Wholesale Corp.,[11] the U.S. District Court for the Northern District of California in 2012 certified challenges to policies permitting discretion. Like McReynolds, the Ellis court found that exercising discretion pursuant to discrete company policies satisfied the commonality requirement of Rule 23.[12]
A constellation of policies formed the framework for discretion: a promotion-from-within preference, a practice against posting management job vacancies, and the absence of a formal application process for promotions to certain management positions.[13]
As the U.S. District Court for the Eastern District of New York explained in Calibuso v. Bank of America Corp. in 2012:
Dukes did not foreclose all class action claims where there is a level of discretion afforded to individual managers … here plaintiffs allege that the implementation of companywide procedures [including the compensation system] results in a disparate impact on women.[14]
Where decision makers exercise their discretion in an environment polluted by gender stereotypes, that only reinforces the conclusion that they exercised their discretion in a common manner.[15]
Disparate impact challenges to nondiscretionary policies continue to easily satisfy commonality.[16]
For example, courts have found commonality based on disparate impact challenges to “tap on the shoulder” employee promotion systems, as in the U.S. District Court for the Southern District of New York’s 2012 decision in Chen-Oster v. Goldman, Sachs & Co.[17] In other cases, policies in which pay increases are set as a percentage of existing salary can not only perpetuate but also increase disparities in pay.[18]
Recently, challenges to reliance on prior salary in setting starting pay have been a focus of successful class certification rulings.[19] Relocation requirements have similarly been found to raise common questions.[20]
And of course written exams or physical abilities tests used for hiring or promotion continue to present clear cases for certification, as in the U.S. District Court for the District of Connecticut’s 2011 decision in Easterling v. State of Connecticut Department of Correction.[21]
The existence of a single decision maker helps demonstrate commonality in both disparate impact and disparate treatment claims.
The Dukes court noted that one way plaintiffs can identify a common mode of exercising discretion is to show that the discretion was exercised through some common direction.[22] The court also provided the example of “the assertion of discriminatory bias on the part of the same supervisor” as a type of claim that is dependent upon a common contention capable of classwide resolution.[23]
Subsequent courts have found that where decisions are made by a single person or small group, a common mode of exercising discretion or operation of a general policy of discrimination are more readily apparent.
For example in Ellis, the court found that “[t]op management’s involvement in the promotion process [was] … consistent, and pervasive, classwide.”[24]
And in Scott v. Family Dollar Stores Inc., the U.S. Court of Appeals for the Fourth Circuit noted that “discretionary authority exercised by high-level corporate decision-makers, which is applicable to a broad segment of the corporation’s employees, is more likely to satisfy the commonality requirement.”[25]
Commonality for a disparate treatment claim may be proved through statistical and anecdotal evidence.
Although the Supreme Court has not explained precisely what constitutes “significant proof” of a general policy of discrimination,[26] sufficient to satisfy the commonality requirement for class certification under a disparate treatment theory, multiple courts have addressed this issue.
In Brown v. Nucor Corp.,[27] the Fourth Circuit in 2015 held that statistical and anecdotal evidence could provide the “glue” satisfying the commonality standard set by Dukes, and therefore could be sufficient to show a general policy of discrimination causing injury across the class. The Brown court noted that unlike a disparate impact claim, “a showing of disparate treatment does not require the identification of a specific employment policy responsible for the discrimination.”[28]
Thus, statistical and anecdotal evidence showing a pattern of discrimination “can alone support a disparate treatment claim, even where the pattern is the result of discretionary decision-making.”[29]
As the Supreme Court explained in International Brotherhood of Teamsters v. United States in 1977, a decision the Dukes court reaffirmed,[30] pattern or practice claims may establish liability upon showing that discrimination was the “regular rather than the unusual practice.”[31]
Statistically significant disparities between the observed and expected results in the challenged personnel practices are sufficient to establish liability, although individual accounts of discrimination bring “the cold numbers convincingly to life.”[32]
Statistical analyses must account for the decision maker to ensure that observed disparities are not the result of just a few bad apples.[33] And while an analysis at the decision maker level may be required for some claims, courts examining disaggregated results must consider the pattern of those results.[34]
A company’s response to disparities as a classwide issue demonstrates commonality.
In Ellis, the court found that the plaintiffs had provided sufficient proof of commonality in part by showing that the defendant regarded gender disparities as a companywide issue, and had taken steps to increase diversity within the company in response to those widespread disparities.[35]
Thus, when a company addresses a lack of diversity as a classwide problem, this itself demonstrates the existence of a common issue capable of classwide resolution.
Rule 23(b) Issues
The Walmart v. Dukes decision has proved a bigger obstacle to satisfying Rule 23(b). For all but the simplest cases, the ruling bars certification under Rule 23(b)(2) of claims to back pay.
Thus, most class certifications have proceeded either under Rule 23(b)(3), when common questions can be shown to predominate, or certification of issues common to the class under Rule 23(c)(4).[36]
With respect to predominance, courts have expressed relatively little concern about the formulation of damages in evaluating predominance,[37] but have exhibited somewhat greater concern over whether individual defenses will predominate.[38] The existence of some individual defenses does not necessarily defeat predominance.[39]
Moreover, some defenses that may be raised individually can be resolved with common evidence for everyone in the class as to whom the defense is raised.[40] If the liability finding or other classwide evidence can resolve whether a certain factor is a legitimate basis for a difference in pay or denial of promotion, then the availability of that factor as a defense to individual remedial claims may be addressed with evidence common to the class that satisfies the predominance standard.
For those courts that have been hesitant to certify the class claims in their entirety, they have with increasing frequency certified those issues that can be adjudicated with evidence common to the class pursuant to Rule 23(c)(4).
While the plaintiffs in the Dukes case sought certification of their claims under Rule 23(b)(2) and, as a backup, under Rule 23(b)(3), they never pursued, and the Supreme Court never addressed, certification of discrete issues under Rule 23(c)(4). Courts have considerable discretion to certify issues pursuant to Rule 23(c)(4) when doing so would materially advance the resolution of the action.[41]
And an earlier split in the circuits has largely been resolved in confirming that only those issues subject to Rule 23(c)(4) need satisfy the Rule 23(b)(3) predominance requirement, not the entirety of the case.[42] As a result, certification is often sought pursuant to Rule 23(b)(3) and Rule 23(c)(4) in the alternative.[43]
The Legacy of Walmart v. Dukes
While the Walmart v. Dukes decision did not bring an end to certification of employment discrimination claims, it raised the bar for certification, making certification more expensive and time-consuming to achieve.
Courts applying the Dukes decision have wrestled with the meaning of the new standards it announced, such as what qualifies as “significant proof” of a pattern of discrimination, the common mode of exercising discretion, and what was meant by “trial by formula” — which the Supreme Court clarified in Tyson Foods Inc. v. Bouaphakeo in 2016.[44]
Class certification was once addressed early in the litigation, but regrettably, the Dukes decision has typically delayed it to a much later stage, where it now resembles adjudication of the merits.
More discovery is needed before class certification can even be fairly presented to the court,
driving up the cost of class certification, which has made pursuit of those claims prohibitively expensive for some. Moreover, in what must be a development welcomed by employers, after the Dukes decision, class claims have typically been smaller in scope, as they seek to follow guidance by the court to focus their claims challenging discretionary decision-making on a single or small group of decision makers.
. . .
Joseph M. Sellers is a partner, and chair and founder of the civil rights and employment practice group, at Cohen Milstein Sellers & Toll PLLC. Christine E. Webber is a partner at the firm.
Disclosure: Sellers and Webber represented Dukes and the plaintiff class in Wal-Mart Stores v. Dukes, and Sellers argued the case before the Supreme Court.
. . .
Download a copy of the article.
By: Julie Goldsmith Reiser and Louise Renne
Companies across the United States should be closely following the California State Legislature hearings on the “Silenced No More Act,” which would prevent the use of nondisclosure agreements (NDAs) to silence employees from speaking up about all forms of discrimination and harassment.
The legislation was introduced in response to the stunning claims brought forward by former Pinterest employees alleging a pattern of racial and gender discrimination, harassment and retaliation. They courageously called attention to the hypocrisy of Pinterest’s aspirational comments on social issues even though the company had required them to sign NDAs.
As attorneys who work with shareholders to hold companies accountable for this misconduct, these allegations have deeply impacted our work. They formed the basis of an ongoing shareholder derivative lawsuit that a state pension fund we represent brought against Pinterest’s board of directors and top executives for participating in and otherwise protecting powerful executives who are alleged to have discriminated against Pinterest employees.
The Silenced No More Act would extend existing laws that limit the use of NDAs. Such laws are important because NDAs are intended to protect executives by keeping their harassment, discrimination and retaliation under wraps. That NDAs chill the voices of employees who have already been victimized makes them even more toxic. NDAs cause women to fear reprisal from the company, sometimes even incorporating financial penalty clauses, long after their individual claims have been resolved.
The Silenced No More Act should pass swiftly and be a model for other states, but this is what all companies throughout the country should be doing on their own, rather than waiting for legislation to drag an ethical NDA policy out of them.
Failure to recognize this necessity will lead to future corporate scandals as multiple accounts of the same type of misconduct in the workplace come to light. It will continue to uphold an unsustainable corporate system where executives in positions of power assume they will be protected no matter how unlawful their behavior toward others in the workplace.
We have seen from our investigations the compounding impacts of NDAs and how they allow problems to fester over years.
The two of us, working with others and on behalf of Alphabet shareholders, were part of the team that led a groundbreaking $310 million settlement with the tech company that led to historic diversity, equity and inclusion (DEI) reforms at the company. That settlement was the result of a shareholder derivative lawsuit where stockholders alleged that executives and board members violated their fiduciary duties by enabling a double standard that allowed executives to sexually harass and discriminate against women without consequence.
In that case, we believe Alphabet’s “culture of concealment” was driven in large part by the silencing effects of NDAs.
The duration of misconduct, enabled by NDAs, goes far beyond Alphabet and Pinterest. There is no shortage of #MeToo scandals at powerful companies, many with presences in California, that were exacerbated by muzzling NDAs. Weinstein Company, Wynn Resorts, NBC and 21st Century Fox are prominent examples of companies that first tried to keep allegations quiet through the use of NDAs and later faced a firestorm of allegations from former employees.
Fortunately, the landscape surrounding discrimination and harassment in the workplace is changing. Shareholders, workers, customers and other key business stakeholders are becoming more active in demanding that companies stop protecting harassers.
All of this should send a message to boards and C-suite executives that they must set the tone from the top and they are far better off being proactive than reactive. That means actively creating a company culture where DEI is a foundational component — not an afterthought. It also means intentionally prioritizing transparency and proactively doing away with policies that are antithetical to that goal, like NDAs that are intentionally designed to suppress the voices of employees.
The public and shareholders want to be associated with companies that do right by their employees. Business should recognize this change from a culture of compliance to one of equity and inclusion and embrace this new reality by stopping the practice of requiring complainants to enter into NDAs and fostering a culture of inclusion and accountability.
# # #
Julie Goldsmith Reiser is the co-chair of the Securities Litigation & Investor Protection group at national plaintiffs’ law firm Cohen Milstein Sellers & Toll.
Louise Renne is a founding partner of Renne Public Law Group and leads the firm’s public interest litigation.
The complete opinion piece can be viewed here.
Cohen Milstein’s Complex Tort Litigation practice group publishes the bi-weekly Complex Tort Eblast addressing a number of consumer safety and product liability issues.
Is Your Swimming Pool Safe: A Quick Checklist on Pool Safety Standards
As drowning remains the number one unintentional cause of death for children in the U.S. ages 1 to 4, and the second leading cause among children ages 5 to 14, it is important to make pool and water safety a top priority this summer.
May is National Water Safety Month and Cohen Milstein’s Complex Tort Litigation team has prepared a quick checklist on what to look for when evaluating the safety of public swimming pools:
- Are there adequate layers of security? According to major safety organizations, including the American Red Cross, the U.S. Consumer Product Safety Commission, and the American Academy of Pediatrics, public swimming pools should have adequate layers of protection. At a minimum, all swimming pools should have a child safety fence with self-locking doors and gates.
- Is the pool really closed? American National Standard for Public Swimming Pools (ANSPS) advocates that when a public pool is closed for use, a secondary lock system be put in place to prevent access.
- Are utility or service gates secure? The International Swimming Pool and Spa Code recommends that gates not intended for pedestrian use, such as utility or service gates, remain locked when not in use.
- What happens during bad weather? Centers for Disease Control and Prevention advocates that swimming pool activity should be prohibited during inclement weather.
- Are there safety devices? ANSPS requires that public pools always have safety hooks and flotation devices mounted in easy to see places and that are readily available for use and that all pools with a slope transition have safety line anchors and a safety line in place.
- Who can perform CPR? ANSPS requires that a CPR-certified individual be on premises whenever a public pool is in use.
Cohen Milstein’s Complex Tort Litigation practice litigates Unsafe & Defective Products, and Wrongful Death & Catastrophic Injury claims related to swimming pool safety. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us, or call us at 561.515.1400.
We co-counsel nationwide.
Securities fraud claims brought under Section 10(b) of the Exchange Act are subject to two separate timeliness provisions: a two-year statute of limitations and a five-year statute of repose. These two provisions begin running on different dates. For the two-year limitations period, the clock starts running when the plaintiff discovers the “facts constituting the violation.” The five-year repose period, on the other hand, begins from the defendant’s last culpable act, regardless of whether the plaintiff knows about it or not. By pairing a shorter statute of limitations with a longer statute of repose, the Supreme Court has explained, the two provisions work in tandem to give “leeway to a plaintiff who has not yet learned of a violation,” while protecting “the defendant from an interminable threat of liability.”
Earlier this year, two district court decisions in the Second Circuit— Abu Dhabi Investment Authority v. Mylan N.V. et al. and In re Teva Securities Litigation—illustrated the significant challenges that the statute of repose can present for plaintiffs alleging securities frauds that last longer than five years. Stemming from Mylan’s and Teva’s involvement in multiyear schemes to fix the prices of generic drugs, investors in the two cases alleged that the companies engaged in anticompetitive conduct to inflate the prices of their generic drugs and made a series of false and misleading statements over the course of more than five years as to the reasons underlying their purported business success. In each case, the defendants filed partial motions to dismiss, seeking dismissal of any claims to the extent they were based on allegedly false and misleading statements made more than five years before the complaints were filed.
Both courts granted the motions. Framing the relevant question to be what constitutes a “violation” under the Exchange Act, the two courts rejected the plaintiffs’ arguments that the repose period should be measured from the last misrepresentation or omission that the defendants made. Because a single misstatement can alone constitute a violation of the Exchange Act, the courts reasoned that the repose period runs from the date that each misstatement or omission was made. As a result, the courts dismissed claims based on misstatements or omissions made more than five years before the complaint was filed. The two decisions are the latest in a recent trend within the Second Circuit, with courts departing from some earlier decisions that had measured the repose period from the last misrepresentation. In so doing, these courts rejected that approach as tantamount to a “continuing violations” or “equitable tolling” theory, which the Supreme Court has repeatedly held to be inconsistent with statutes of repose.
Due to this trend in the case law, plaintiffs should be particularly mindful in cases involving longrunning frauds to file complaints as early as possible to avoid application of the statute of repose to bar parts of their claims, that is, to bar recovery on misrepresentations or omissions occurring early on in the fraud. In many cases, doing so will not be particularly difficult. After learning about a securities violation, plaintiffs have little reason to delay filing their complaint, whether it be in connection with a class action or an individual, direct action; after all, the sooner they can file their complaint, the sooner they can recover the money they lost as a result of the fraud. And while a fraud is necessarily secret at the beginning, it usually does not take longer than five years for the truth to come out. But that is not always the case.
So, what happens when a defendant successfully keeps a fraud under wraps for more than five years? Or, more egregiously, what happens when a defendant is continuing to deceive investors, even as the truth of a longrunning fraud is slowly leaking out? The decision in In re Teva Securities Litigation suggests one possible approach. In that case, class action plaintiffs argued at oral argument that while a single misrepresentation or omission can constitute a violation of subsection (b) of Rule 10b-5, the other two provisions of Rule 10b-5—subsections (a) and (c)— applied in that case. Commonly considered together as the “scheme liability” provisions, subsections (a) and (c) make it unlawful to “employ any device, scheme, or artifice to defraud” or to “engage in any act, practice, or course of business” to defraud investors. Plaintiffs argued that because those provisions make a scheme to defraud a violation of Rule 10b-5, the statute of repose for such fraudulent schemes should run from the end of the scheme, rather than each misstatement made in furtherance of the scheme. While the court ultimately held that the plaintiffs did not sufficiently allege scheme liability, the court indicated that if adequately alleged, scheme liability allegations could protect plaintiffs from statute of repose defenses. Such arguments are particularly promising in the wake of the Supreme Court’s decision in Lorenzo v. SEC, which indicated that scheme liability claims can potentially be based on misrepresentations or omissions, an approach which had been foreclosed by prior case law in many circuits, including the Second Circuit.
While further development of the law in this area is necessary, plaintiffs exploring this approach should take care to include allegations that sufficiently allege scheme liability in a manner that incorporates any misrepresentation allegations as part of the alleged scheme.
On February 8, less than three weeks after President Biden’s inauguration, the U.S. Department of Labor (DOL) withdrew its support for a lawsuit challenging the CalSavers Retirement Savings Program (CalSavers). “After the change in administration, the Acting Secretary of Labor has reconsidered the matter and hereby notifies the court that he no longer wishes to participate as amicus in this case and that he does not support either side,” the DOL said in its court filing. The DOL’s decision to end support is significant because it may potentially offer insight into how the Biden Administration will work with state-run automatic individual retirement accounts, known as auto-IRAs, which provide retirement savings programs to privates sector employees whose employers do not offer them.
As background, in 2011, the University of California, Berkeley’s Center for Labor Research and Education released a seminal study that found “middle class families in California are at significant risk of not having enough retirement income to meet even basic expenses, as nearly 50 percent of middle-income California workers will retire at or near poverty.” The study also said that Californians’ retirement security would worsen as future workers retire without employer-sponsored benefits. In 2012, California passed legislation to address this concern. Specifically, the legislature enacted the country’s first state-sponsored defined contribution program for private sector employees who do not have access to a retirement plan. The program is estimated to cover 7.5 million Californians. In 2018, CalSavers launched a pilot program; it will expand to all eligible employers by 2022.
In 2018, the Howard Jarvis Taxpayers Association (HJTA), a nonprofit lobbying and policy organization, filed a lawsuit seeking to block the CalSavers program. HJTA contended the federal Employment Retirement Income Security Act (ERISA) preempted the CalSavers program and no taxpayer money should be spent on the program. In March 2019, a federal district court dismissed the case, but allowed HJTA to amend its complaint. The court held that ERISA does not preempt the California statute establishing the CalSavers program because the key test for ERISA preemption is whether the CalSavers program “governs … a central matter of plan administration or interferes with nationally uniform plan administration.” The court concluded that because the CalSavers program neither “governs” nor “interferes with” any ERISA plan there is no “connection” between ERISA and CalSavers.
In March 2020, the same federal district court dismissed the lawsuit for a second time. In its second opinion, the court again confirmed that ERISA does not preempt the CalSavers program. The court said CalSavers does not create an “employee benefit plan” under ERISA because an “employer” does not establish or maintain the program. Specifically, the court said, “Actual employers have no discretion in the administration of CalSavers and do not make any promises to employees; employers simply remit payroll deducted payments to [CalSavers] and otherwise have no discretion regarding the funds.” In June 2020, HJTA appealed the decision to the United States Court of Appeals for the Ninth Circuit. That same month, the Trump Administration’s DOL filed an amicus brief supporting HJTA’s appeal. In its brief, the DOL argued that CalSavers “takes away the freedom of choice that lies at the core of ERISA by forcing employers either to establish their own ERISA plans or to maintain an equivalent plan under [CalSavers].” The brief further claimed that CalSavers is preempted by ERISA because it “disregards and runs afoul of ERISA’s statutory scheme by effectively requiring employers to maintain such plans …”
Although the Ninth Circuit Court of Appeals has yet to decide the case, the DOL’s decision to withdraw its amicus brief remains significant for a few reasons.
First, the withdrawal may indicate that, under President Biden, the DOL may be willing to return to an Obama-era interpretation of ERISA preemption that is less restrictive. Under Obama, the DOL in 2016 had issued a final rule that eliminated the federal barrier to states that seek to implement programs like CalSavers.
Second, the withdrawal may reflect Biden’s campaign promise to allow workers without a pension to have access to an automatic 401(k). That promise could be met by enabling state-run auto-IRA programs for private sector employees. To date, California, Illinois, and Oregon are running programs. Connecticut, Colorado, and Maryland will start programs this year. According to Georgetown University’s Retirement Initiative, another 20 states and cities have introduced legislation to create programs or establish a study group.
Finally, the withdrawal is consistent with President Biden’s nomination of Julie Su for Deputy Secretary of Labor. Currently, Ms. Su serves as secretary of California’s Labor and Workforce Development Agency, where she worked on the CalSavers program. During her recent U.S. Senate confirmation, Ms. Su said she would focus not only on protecting workers but on helping people with retirement security.
By David Maser
In March of 2020 the COVID-19 coronavirus was declared a pandemic, and two COVID-related securities class action lawsuits were quickly filed. The filing of these cases led to a heated debate of whether plaintiffs’ attorneys would leverage the effects of the pandemic to file an increased amount of securities class actions.
A year ago, in April 2020, Kent Schmidt, a California attorney who specializes in defending businesses in litigation, said a “tsunami” of class-action lawsuits in three areas—consumer, employment, and shareholder cases—was already sweeping ashore. “These early filings can be indicative of the liabilities that companies should take into consideration and inform their practices now to avoid getting hit with one of these costly lawsuits,” he told Newsweek. “I think we’re going to see these cases play out for years.”
Mr. Schmidt’s view was not unique. Many in the defense bar quickly assumed that there would be an increase in the filing of securities fraud class actions, along with insurance, consumer, and other types of cases.
Perhaps not surprisingly, most lawyers who represent plaintiffs in shareholder lawsuits had a different opinion of whether the pandemic would lead to a wave of frivolous securities filings. “Trying to take advantage of a worldwide tragic epidemic disaster? I just hope those suits aren’t brought,” Steven J. Toll, Cohen Milstein’s Managing Partner and the Co-Chair of its Securities Litigation & Investor Protection practice, said to Reuters in March 2020.
To this point, the plaintiffs’ bar appears to have done a better job of forecasting—at least with respect to shareholder lawsuits. As of March 2021, a total of 28 coronavirus outbreak-related securities class action lawsuits have been filed. While 28 securities lawsuits over 12 months is not a small number, it hardly constitutes a flood of litigation, given the 300 to 400 securities class action filed each year.
Cohen Milstein Partner Laura Posner was recently quoted by Law360 as saying that the huge numbers of COVID-19 filings predicted by the defense bar had “largely not come to fruition.” In fact, Ms. Posner told Law360, she expected to soon see a return to normal filing levels of lawsuits, even against the pharmaceutical industry, “given where the country is in drug development relating to COVID-19.”
“There may be a few more cases involving allegations that a company’s projections or revenue and income representations were false and misleading, but assuming that the economy picks up as expected and we begin to return to a more ‘normal’ lifestyle, I think those cases will grow even less common as well,” she said.
Mr. Toll said the “tsunami” never came to pass in part because the unpredictable nature of the pandemic made it hard for plaintiffs to meet the heightened pleading standards required for securities fraud lawsuits to succeed.
“It would have been extremely difficult to show a direct link of any subsequent stock price decline to an earlier fraudulent statement about the pandemic—in other words, to connect the dots to satisfy the element of loss causation,” he told the Shareholder Advocate.
“When the pandemic hit and started to change the nature of how society functioned, it really wasn’t known what the impact would be,” Mr. Toll said. “Thus, it would be very hard to allege a company had the requisite intent under the securities laws to commit fraud—that it was intentionally or recklessly misleading the investing public about the impact of the pandemic on its future earnings or profitability.”
Finally, Mr. Toll said, U.S. stock markets’ broad and sharp decline in early 2020 followed by an equally broad upswing helped keep the number of shareholder lawsuits in check. “When most or all stocks in a particular segment decline, it makes it almost impossible to claim an alleged fraud caused this loss when similar stocks all declined in the same manner,” he said. When stocks across the board rise, he added, it erases any shareholder losses.
Meanwhile, it is also true that litigation in general increased during the pandemic. Law360 reports that restaurants, bars and businesses filed more than 6,900 lawsuits related to the pandemic in 2020 with nearly 1,400 filed over insurance coverage alone and are making their way both state and federal courts. For the most part, these lawsuits reflect the enormous economic and physical damages wrought by the COVID-19 pandemic on individuals and businesses across the country, who have turned to the courts for help when other remedies fail them.
The Spring 2021 issue of the Shareholder Advocate includes:
- What the SPAC?! Blank-Check Explosion Draws New Regulatory Scrutiny – Richard E. Lorant
- Supreme Court Hears Oral Argument in Financial Crisis-Era Fraud Case
- Despite Warnings, Wave of Pandemic-Related Securities Suits Never Really Materialized – David M. Maser
- Recent Statute of Repose Rulings Highlight Obstacles, Potential Paths Forward – Carol V. Gilden and Jan E. Messerschmidt
- Fiduciary Focus: Biden’s DOL Drops Court Filing Against Calsavers – Jay Chaudhuri
Click here to download the Spring 2021 edition of the Shareholder Advocate (PDF).
By now even casual followers of financial news have heard of Special Purpose Acquisition Companies, or SPACs, blank-check companies that purportedly provide a smoother path for privately held companies to go public with less exposure to liability.
Initial public offerings of SPACs have exploded over the last several years, driven by market volatility, low interest rates, their own growing popularity, and the lucrative profits they can make for sponsors. But while the SPAC frenzy continues unabated, increased scrutiny from regulators may mean its days are numbered.
SPACs are shell companies that go public, usually priced at $10 a share, with the sole purpose of combining with an as-yet-undetermined private operating company within 18-24 months. Sometimes their barebones prospectuses specify a targeted industry or business, but that’s not required. If a deal materializes for the SPAC by the deadline, it merges with the private company to create a new publicly traded corporation in a business combination known as “de-SPACing.”
A total of 248 SPACs went public last year, accounting for 55% of U.S. IPOs and raising $83.34 billion—more capital than all previous SPACs combined, according to SPAC Analytics. And this year it took only three months to eclipse last year’s astounding total; as of this writing, 303 SPACs have raised nearly $98 billion this year, making up eight of ten U.S. IPOs and a staggering 70% of their proceeds.
SPACs have a mixed track record for investors. Those who buy in the original IPO get their money back with interest if there’s no merger or if they don’t approve of the acquisition. Still, they may end up receiving shares worth less than what they paid for their warrants. As for those who buy shares of the de-SPACed company on the secondary market, several studies show performance of de-SPACed companies lagged that of corporations that go through traditional IPOs.
In addition, some lawyers who advise on offerings say that SPACs actually may be a more expensive way to go public than traditional IPOs at the end of the day. Bloomberg columnist Matt Levine estimated they typically gobble up 25% of the money raised, “three or four times as much as you’d pay in an IPO, albeit better disguised.”
In contrast, SPACs all but guarantee big profits for sponsors—if they meet the de-SPAC deadline. In exchange for their expertise and a nominal investment, sponsors receive warrants worth 20% of the merged company, an outsized payoff that could tempt them to overpay for a target company, bring it public before it is ready, or ignore red flags.
Lured by the potential rewards, every financier, dealmaker, and industry expert seem to have sponsored a SPAC in the last couple of years. Lately they have been joined by celebrities like Fox Business commentator Larry Kudlow, former House Speaker Paul Ryan, musician Jay-Z, baseball great Alex Rodriguez, and basketball’s Shaquille O’Neal, whose venture was quickly dubbed the “Shaq SPAC.”
The misaligned incentives, celebrity sponsorship, and sheer number of SPACs have drawn the attention of the Securities and Exchange Commission, which is considering tighter regulations and increased disclosures regarding these blank-check IPOs.
On April 12, 2021, the SEC issued new guidance on the convertible warrants SPACs issue to their early investors, saying that some should be classified as liabilities for accounting purposes instead of equity instruments, as they currently are. The statement is the strongest in a series of what observers see as warnings to both SPAC issuers and target companies and may force some companies to restate their financial results, if the accounting change is deemed material.
The new guidance came just four days after John Coates, acting director of the SEC’s Division of Corporate Finance, issued a public statement saying the “unprecedented surge” in the popularity of SPACs was prompting “unprecedented scrutiny” and that it “may be time to revisit” the regulations governing them.
Mr. Coates cited a litany of troubling “concerns,” including “risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public.”
In particular, the statement took issue with claims that SPACs provide “less securities law liability exposure for targets and the public company itself” than traditional IPOs. Mr. Coates questioned the idea, for example, that business projections contained in disclosures filed with de-SPAC transactions are shielded from liability under the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.
Material misstatements made in the registration statements that must be filed with the SEC as part of the de-SPAC are subject to Section 11 of the Securities Act, he said; material misstatements in connection with proxy statements trigger liability under Section 14(a) of the Exchange Act. Both sections offer plaintiffs an easier path to establish liability than Section 10(b) of the Exchange Act.
“Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” Mr. Coates said. “Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.”
The public statement came two weeks after a March 25 Reuters report that the Commission had begun an inquiry into SPACs, sending letters to Wall Street banks “seeking information on how underwriters are managing the risks involved.” Though the letters asked for the information to be provided voluntarily, Reuters reported, they were sent by the SEC’s Enforcement Division.
Mr. Coates was the second SEC official to issue a public statement on SPACs. On March 31, Acting Chief Accountant Paul Munter encouraged private companies to “consider the risks, complexities, and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company.”
Mr. Munter’s statement flagged five areas of concern for target companies: the demands of going public on an accelerated timeline; their ability to comply with increased and heightened financial reporting requirements; the importance of maintaining internal control over financial reporting; the need for corporate board oversight, especially by the audit committee; and the shift to financial statements audited in accordance Public Company Accounting Oversight Board standards.
As SPACs have proliferated, so inevitably have shareholder lawsuits involving their offspring. Since 2019, 22 blank-check companies have been subject to securities class actions, according to the Stanford Law School Securities Class Action Clearinghouse.
These lawsuits, typically brought on behalf of investors who own shares in the merged company, asserting claims under the Exchange Act, focused on false statements after the merger, and the Securities Act, relating to the Registration Statement filed at the time of the merger. Few, if any, securities lawsuits are filed in connection with the original IPO, given the vague nature of most SPACs’ initial registration statements and investors’ ability to cash out.
A SPAC-related lawsuit filed April 2 against electric vehicle company Canoo, Inc. offers a cautionary tale of what can happen when a privately held company is not prepared to go public.
Canoo was formed in December 2020 through the merger of Hennessy Capital Acquisition Corp. and Canoo Holdings Ltd., a transaction that raised $600 in cash and valued the company at $2.5 billion. Electric vehicle and battery companies have been popular targets for blank-check companies over the last year, with at least 22 announcing deals to go public via SPACs, The Wall Street Journal reported. They have also drawn a number of securities lawsuits, whether or not they were formed via SPACs.
The August 18, 2020 news release announcing the planned merger said Canoo would rely on a “unique business model” based on three revenue streams: providing engineering services under contract to other vehicle makers; offering vehicles to consumers via a subscription service; and selling “last-mile” delivery vehicles to businesses.
The news release and accompanying presentation, which was filed with the SEC, said the consumer subscription service would be especially important, since it would be “more profitable and resilient” than selling new vehicles. In later public statements, the Canoo team continued to stress the three revenue streams. The company also touted a February 2020 agreement to provide contract engineering services to Hyundai Motor Group as an example of its experience and potential in that area.
But in its first post-merger earnings call on March 29, 2021, Canoo abruptly changed course, announcing the departure of its CFO, saying it would “deemphasize” the contract engineering services, and casting doubt on the future of the subscription service.
Adding to the confusion, the merged company’s CEO, who had co-founded and run Canoo as a privately held company, did not appear on the conference call, which was run by Executive Chairman Anthony Aquila, who had joined the company two months before the merger. As one analyst said, these were “significant surprises.” Soon after the call, The Verge reported the deal with Hyundai “appeared to be dead.”
Asked to explain the shift, Aquila pointed to the inexperience of the prior leadership team, which had been “a little more aggressive” and “presumptuous” than advisable in its public statements about business prospects and didn’t meet “our standard of representation to the public markets.”
“This comes back to having an experienced public company team,” Aquila said, referring to statements about potential engineering contracts with other manufacturers. “You’ve got to be careful of the statements you make.”
Well, yes. Canoo’s stock price fell 21% the next day.
With more than 400 SPACs on deadline to find targets, the pressure is only increasing on private companies to join the blank-check party—ready or not. Tighter regulations that gently let the air out of the SPAC bubble offer the best hope for a soft landing.
Swales v. KLLM Transport Services LLC has recently received considerable attention for directing district courts in the Fifth Circuit to abandon the two-step certification process for Fair Labor Standards Act collective actions that has been widely followed in every circuit for over two decades.
While the U.S. Court of Appeals for the Fifth Circuit adopted a one-step process in Swales, it did not alter the interpretation of the “similarly situated” certification standard required by Title 29 of the U.S. Code, Section 216(b), nor add other requirements to the standard. Moreover, courts outside the Fifth Circuit have not been adopting the Swales analysis, nor do they seem likely to do so.
Swales is unlikely to have far-reaching effects outside of the Fifth Circuit. The cases in other circuits that have addressed whether Swales impacts their use of the two-step approach have all decided that it does not.
For example, in February in McCoy v. Elkhart Products Corp., the U.S. District Court for the Western District of Arkansas rejected the defendant’s entreaty to follow Swales, stating: “The court will follow the historical, two-stage approach, which has proven to be an efficient means of resolution of this issue.”[1]
Similarly, in Piazza v. New Albertsons LP the U.S. District Court for the Northern District of Illinois in February declined to follow Swales where — unlike Swales — there was no threshold merits questions intertwined with the determination of whether the opt-in plaintiffs were similarly situated.[2]
In March, in Moreau v. Medicus HealthCare Solutions LLC, the U.S. District Court for the District of New Hampshire followed the two-step approach and rejected the defendant’s request to allow merits discovery before deciding the plaintiffs’ motion for conditional certification.[3]
In Wright v. Waste Pro USA Inc., the U.S. District Court for the Southern District of Florida in April refused to grant reconsideration of its prior conditional certification because of extensive support from the U.S. Court of Appeals for the Eleventh Circuit for the two-step process, and the rejection of Swales by all courts outside the Fifth Circuit.[4] The U.S. District Court for the Eastern District of Kentucky also declined in April to abandon the traditional two-step process in favor of Swales with its decision in Brewer v. Alliance Coal LLC.[5]
Parties should not expect Swales to broadly change the two-step process, which has been widely endorsed among the circuits[6] and implemented at the district court level.[7] However, FLSA plaintiffs should be vigilant in identifying and resisting attempts to apply Swales on the margins, a tactic to which some courts have been receptive.
For example, while in McColley v. Casey’s General Stores Inc. the U.S. District Court for the Northern District of Indiana explained in March that the “FLSA certification two-step remains the dance of this circuit” post-Swales, it questioned whether there should be more than a modest showing that plaintiffs are similarly situated at the conditional certification stage.[8]
Similarly, in Loomis v. Unum Group Corp., the U.S. District Court for the Eastern District of Tennessee in January relied on Swales to grant precertification discovery over the plaintiffs’ objection, but was careful to clarify that its method did “not undermine the two-step approach of FLSA cases in the Sixth Circuit.”[9] Even pre-Swales courts had discretion to permit precertification discovery, so this does not represent significant change.
Parties addressing Swales arguments outside the Fifth Circuit should be prepared to grapple with the timing issue, which was completely ignored by the Fifth Circuit in issuing Swales. In opt-in cases governed by Section 216(b), the statute of limitations continues to run for each potential plaintiff until they opt in to the litigation.
In Hoffmann-La Roche Inc. v. Sperling, the U.S. Supreme Court in 1989 identified the importance of timely notice as one reason the district court should be involved in the notice process.[10] One reason courts have widely adopted the two-step process is so that notice can be issued early in the litigation, before potential plaintiffs’ statute of limitations expires; proceeding with discovery prior to ruling on issuance of notice, as Swales advocates, would interfere with timely notice.[11]
When there are delays in issuing notice — which engaging in discovery before deciding on notice would certainly cause — then plaintiffs should seek tolling of the statute of limitations until the notice issue is resolved. Many courts have tolled the running of the statute of limitations in collective actions where there was delay in ruling on certification, including delay caused by discovery.[12]
One would expect to see plaintiffs in the Fifth Circuit, or in any other jurisdiction imposing discovery prior to ruling on certification, ask for tolling of the statute of limitations. Otherwise, defendants would be incentivized to drag their feet on discovery to run out the clock on claims.
Another point that courts confronting efforts to expand Swales should consider is one that Swales purports to answer: how best to ascertain “whether putative plaintiffs are similarly situated — not abstractly but actually.”[13] Until notice is issued, and opt-in forms received, any analysis of whether the group of plaintiffs seeking to proceed collectively are similarly situated is abstract and theoretical. Whether plaintiffs are similarly situated should be decided based on the specific individuals who opt in, not all those who theoretically might have been able to do so.
Cohen Milstein publishes on consumer safety and product liability issues.
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Building Safe Online Spaces
April is Sexual Assault Awareness Month and this year’s theme is “We Can Build Safe Online Spaces.” Never before has the need for safe online spaces for children and teens been so critical than this past year due to COVID-19. Children and teens are using the Internet every day for school, online games, video chat and more with greater frequency, making them potentially more vulnerable to online abuse and predatory behavior.
As sexual assault awareness advocates, Cohen Milstein believes that education is the most effective way to help prevent unthinkable tragedies from happening. We encourage you to share these tips from the National Sexual Violence Resources Center (NSVRC) to help keep kids safe online.
- Spend time online together to teach your kids appropriate online behavior.
- Keep the computer in a common area where you can watch and monitor its use, not in individual bedrooms.
- Monitor any time spent on smartphones or tablets.
- Bookmark kids’ favorite sites for easy access.
- Check your credit card and phone bills for unfamiliar account charges.
- Take your child seriously if he or she reports an uncomfortable online exchange.
- Contact local law enforcement if you hear of or see any offensive material that was directed at a child or if any predatory behavior towards a child takes place.
A victim in an abuse situation may not be able to directly communicate what is happening to them, especially a child. Here are some possible red flags that may indicate abuse:
- Yelling in the background of video or phone calls,
- Behavioral changes such as social withdrawal, difficulty concentrating, or loss of interest in usual activities,
- Unexplained absences, or
- Complaints about soreness, pain, or trouble sleeping.
Cohen Milstein’s Sexual Abuse, Sex Trafficking & Domestic Violence Litigation attorneys have recovered significant jury awards and confidential settlements on behalf of clients who are survivors of childhood and adult sexual abuse and assault. Our attorneys are nationally recognized as leaders in their areas of practice. If you’re interested in learning more about our Complex Tort Litigation practice or the Sexual Abuse, Sex Trafficking & Domestic Violence team, please email us, or call us at 561.515.1400.
We co-counsel nationwide.