Alison Frankel

In a post earlier this week, I wrote about whistleblower lawyers’ concerns that unsuspecting tipsters will be misled into signing up with one of the many non-lawyer groups advertising on the Internet for Dodd-Frank whistleblowers. Unlike lawyers’ websites, ads by non-lawyers aren’t subject to state bar regulations. Nor are fee agreements between whistleblowers and non-lawyer agents. Lawyers who regularly represent tipsters told me that a proliferation of supposedly deceptive ads after the Securities and Exchange Commission implemented its whistleblower bounty program is one of the biggest problems in their business.

Repeat False Claims Act plaintiff Joseph Piacentile’s group, Whistleblowers Against Fraud, long predates the SEC program and is certainly not deceptive in representing its legal expertise online. WAF’s website says very clearly that the organization is composed not of lawyers but of former whistleblowers who want to “partner with our clients to develop the strongest case possible, recommend the right attorney for their case, and guide them through each phase of their case.” (As for fees, WAF says it takes a percentage of the whistleblower’s recovery but makes individual arrangements with each client.) Instead of legal advice, WAF sells its “experience and relationships,” which it says “are invaluable in developing large, successful whistleblower actions.” Government lawyers, the website says, have come to know and trust the (unidentified) principals of WAF, who have assisted the federal government and state authorities in recovering billions of dollars.

But relations between Piacentile and at least some of those government lawyers are decidedly frayed. On Sept. 30, U.S. District Judge Sterling Johnson of Brooklyn dismissed a False Claims Act case that Piacentile and a former Amgen sales representative brought against the pharma company, granting a motion by the U.S. Attorney’s office that claimed the whistleblowers’ information added little or nothing to the government’s $780 million settlement in 2011 of civil and criminal allegations against Amgen. Johnson’s opinion picked up the skeptical undertones of the government’s motion to dismiss. Like government lawyers in the U.S. Attorney’s dismissal brief, the judge cited Piacentile’s 1991 conviction for income tax evasion and conspiracy to make false Medicare claims, and said that after his conviction the former physician “gained notoriety as a repeat whistleblower.” Johnson’s dismissal of the suit effectively shuts Piacentile and his fellow Amgen whistleblower, Kevin Kilcoyne, out of any recovery because they previously rejected the government’s offer of a $1.8 million bounty from its 2011 settlement with Amgen.

Piacentile’s lawyers at Berger & Montague and Kilcoyne’s at Stone & Magnanini decried what they called the government’s unwarranted hostility toward Piacentile, who, according to a 2010 American Lawyer profile that dubbed him “The Professional,” has received at least $17 million in FCA bounties from his many forays into whistleblowing. Their response to prosecutors’ motion to dismiss Piacentile’s case complained of “unseemly ad hominem attacks,” “a personal animus” and “unfair and arbitrary treatment.” None of that makes sense, they argued, because Piacentile has helped the government considerably. According to the brief, his own qui tam actions have resulted in more than $1.4 billion in recoveries for the United States.

In the Amgen matter, they said, Piacentile was the second whistleblower to file an FCA suit, way back in 2004, and his initial complaint raised allegations of kickbacks and inflated Medicare pricing that no other Amgen tipsters previously asserted. Yet instead of appropriately rewarding Piacentile and Kilcoyne (who joined the complaint in 2007), the whistleblower lawyers said, the government insulted them by offering a mere $1.8 million bounty. When Piacentile and Kilcoyne refused to accept, according to their brief, they were cut out of the $780 million Amgen deal – “arbitrarily and unfairly excluded from any relator share arising out of the agreement,” in the words of their lawyers.

Can a defendant buy global peace in sprawling litigation through a class action settlement that benefits people who haven’t suffered any harm? Should courts permit class settlements that might sweep in uninjured claimants? And if not, what obligation do judges have to assure that settlements compensate only class members who meet the constitutional threshold to assert a claim?

In a remarkable dialogue in Wednesday’s ruling by the 5th Circuit Court of Appeals in BP’s challenge to the interpretation of some terms in its multibillion-dollar class action settlement with victims of the 2010 Deepwater Horizon oil spill, Judges Edith Clement and James Dennis expressed quite different answers to these questions. And though their discussion did not directly impact the majority holding that U.S. District Judge Carl Barbier must reconsider his interpretation of the settlement agreement’s definition of accounting terms for businesses that operate on a cash basis, the back-and-forth between Clement and Dennis raises important questions about the class action vehicle. We don’t often see appellate courts delve deeply into class action settlements (except those involving payments to charities in lieu of class members) because such agreements are rarely challenged. So the 5th Circuit’s clash of views on class membership and constitutional standing is noteworthy, especially in the context of the intensifying nationwide judicial reconsideration of class actions.

First, the 5th Circuit’s holding: Two members of the appellate panel, Judge Clement and Judge Leslie Southwick, agreed with BP and its lawyers at Gibson, Dunn & Crutcher that the settlement agreement cannot be interpreted to define monthly revenue as cash received and variable expenses as cash paid out. The majority ordered Judge Barbier to reconsider his approval of those definitions for business and economic loss claims by businesses purporting to have been affected by the Deepwater Horizon spill. Judges Clement and Southwick rejected arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to terms that were open to the interpretation Judge Barbier gave them, so the company must be bound by the deal it signed. BP, as you probably recall, had run an intense public relations campaign claiming that it was being robbed of billions of dollar by uninjured claimants taking advantage of Barbier’s misinterpretation. I’m sure the majority holding will assuage concerns that BP’s experience will dissuade future mass tort defendants from agreeing to class action settlements. (I didn’t buy those concerns, but greater minds – including some terrific mass tort defense lawyers – were convinced.)

At around the time on Tuesday that the Securities Exchange Commission announced its latest award to a whistleblower – at $14 million, it’s by far the largest of the handful of tipster payments the SEC has made since implementing its Dodd-Frank whistleblower program in 2011 – Andrew Calamari of the SEC’s New York regional office was fielding questions about the program from Susan Brune of Brune & Richard. Brune, who was moderating a panel at the Practising Law Institute’s White Collar Crime conference, asked Calamari whether the commission has any policy on fee agreements between whistleblowers and the lawyers who represent them. Calamari, who had previously said that the tipsters his office sees are typically accompanied by lawyers who’ve whipped up nifty presentations on their clients’ allegations, said the SEC “hasn’t publicly announced a position.”

Brune pointed out that an entire industry seems to have sprung up in the last couple of years to attract SEC whistleblower clients (who can obtain bounties of 10 percent to 30 percent of the sanctions obtained by the SEC in enforcement actions with resolutions of more than $1 million). If whistleblower lawyers can collect big contingency fees simply for working up a presentation and then turning matters over to SEC enforcement, that’s a great business model. “Seems like there’s huge economic potential,” Brune said.

She’s right, but the SEC has no intention of overseeing the burgeoning business of representing Dodd-Frank whistleblowers. It turns out that the commission has already considered implementation of a rule to restrict fees for whistleblower lawyers and has made a policy decision not to impose restrictions. Nor does the agency have authority to solve what two whistleblower lawyers told me Wednesday is actually the biggest concern in their business: non-lawyers misrepresenting themselves in advertising to attract whistleblower clients. Right now, the prevailing rule in the rough-and-tumble market for SEC whistleblower advice seems to be caveat emptor, or buyer beware.

Wachtell, Lipton, Rosen & Katz put out a plaintive client alert last week, responding to SEC Chair Mary Jo White‘s speech to the Council of Institutional Investors. White, who is, as you know, a former U.S. Attorney, emphasized the agency’s enforcement power and obligations. “The more successful we are at being – and being perceived as – the tough cop that everyone rightfully expects, the more confidence in the markets investors will have, the more level the playing field and the more wrongdoing that will be deterred,” she said in her speech on Sept. 26. Wachtell’s response questioned whether the SEC ought to be playing cops.

“As a regulator, the SEC’s only enforcement function is remedial – to shine a light on and improve business conduct, protect investors and markets, and deter future misconduct,” Wachtell’s memo said. “Historically, the SEC has been most effective when it has kept its focus on performing that regulatory function.” The agency already has a “robust and aggressive” enforcement program, argued Wachtell partners Theodore Levine, John Savarese, Wayne Carlin and David Anders (acknowledging that their view is not shared by the “many commentators and observers” who believe SEC enforcement is “anemic and faltering”). “It is our hope,” the memo said, “that the SEC will keep its eye on its regulatory role in charting the future course of its enforcement program.”

But based on a talk Tuesday at the Practising Law Institute by SEC co-director of enforcement Andrew Ceresney, the SEC has no intention of unflexing its muscles. In fact, Ceresney explicitly took issue with “those who believe the commission has become overly aggressive,” insisting to the contrary that there’s still plenty of “room for bolder action” by SEC enforcers. “My goal was to help bring the SEC’s swagger back,” Ceresney said. “I think we’re doing that.”

There’s an ideological battle under way in the federal courts of America that will determine the future viability of class actions.

The conservative wing of the U.S. Supreme Court is leading a camp that believes the rules governing class actions establish high barriers for class certification, even if those obstacles are sometimes so high that legitimate claims can’t be asserted. (The exception to this general rule is securities class actions, which the justices have so far treated with relative gentleness.)Opposing the Supreme Court are a few federal circuits – most notably, the 7th Circuit Court of Appeals, in opinions by the wise and contrarian Judge Richard Posner – that continue to believe class actions are an efficient vehicle to determine whether defendants are responsible for wronging large groups of people, no matter how small their individual damages might be. You can bet that cert petitions in October by Sears and Whirlpool in the infamous moldy washer class action litigation are going to be a flashpoint in this debate, focusing on whether alleged victims with disparate damages claims can litigate as a class. But in the meantime, a three-judge panel of the 3rd Circuit Court of Appeals has provoked a new controversy with a holding in August that classes may not be certified unless individual class members can be ascertained. According to a motion for reconsideration filed Friday, the 3rd Circuit’s “unprecedented” theory has the potential to eliminate corporate accountability to private consumers who buy their products.

The new motion asks the 3rd Circuit for en banc reconsideration of an Aug. 21 opinion in Carrera v. Bayer by Judges Anthony Scirica, Brooks Smith and Michael Chagares, who decertified a class of Florida purchasers of Bayer’s One-A-Day WeightSmart diet supplement. The consumers claimed they were deceived by Bayer’s representation that green tea extract in the supplement would boost their metabolism. U.S. District Judge Jose Linares of Newark, New Jersey, refused to approve a nationwide class asserting claims under New Jersey consumer laws, but granted the name plaintiff’s subsequent motion for certification of a class of Florida purchasers under that state’s consumer-friendly trade practices statute.

U.S. District Judge William Alsup of San Francisco has the instincts of a really great reporter. He is a skeptic who pushes for answers, even if that means hauling the CEOs of Google and Oracle into settlement talks or demanding that state pension funds disclose their lead counsel selection process. So when shareholders proposed an unusual settlement of their securities class action against Diamond Foods, in which nearly 90 percent of the class recovery would come in the form of new stock in the company, I was really curious to see what Alsup would make of the deal. If the judge thought class members were being rooked in this peculiarly structured settlement, he’d say so.

He doesn’t think that. On Thursday, Alsup granted preliminary approval of the settlement, in which class members will receive $11 million in cash – according to the brief in support of the deal, that’s pretty much everything left of the company’s D&O insurance coverage – and 4.45 million shares of newly-issued Diamond common stock, worth $85 million as of the date plaintiffs moved for approval of the settlement. Alsup said an all-cash deal would have been preferable, but that he’s convinced Diamond’s perilous finances preclude it. (For good measure, he refused to permit shareholders to file their expert witness report on Diamond’s balance sheet under seal, so you can see for yourself how very little cash the debt-laden company has.) “Given Diamond’s strained financial state and the uncertainty (over) lead plaintiff’s ability to collect on any judgment,” the judge wrote, the class’s decision to settle for a mostly stock deal is justified.

The judge did insist that Diamond and the Mississippi public pension fund leading the shareholders’ case narrow the scope of the release of class claims, which originally exceeded the class certification ruling. He also called for changes in the notice to class members. But as you can see from the supplemental brief on the amended deal filed by class counsel from Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein, these are minor tweaks. On the big question of whether it’s OK to compensate allegedly deceived shareholders with more stock in the company that supposedly lied to them, Alsup answered with a reluctant yes.

In a board meeting on July 21, the satellite television company Dish Network disbanded a two-member independent committee that had been established in May to vet Dish’s $2.2 billion bid for the spectrum licenses of the bankrupt company LightSquared. A few days later, one of the directors on the committee, Gary Howard, resigned from the board in what The Wall Street Journal has reported to be a protest over the abrupt end of the special committee, whose members expected to have an ongoing role in the bidding process for LightSquared’s licenses. Dish’s directors – including majority shareholder Charles Ergen – have said that the independent committee’s work ended when the company finalized its stalking-horse offer in LightSquared’s Chapter 11. But shareholders in a derivative suit in state court in Las Vegas say that’s not why Ergen and his allies on Dish’s board ditched the independent committee. They claim that Ergen was looking out for his own conflicting interest as the holder of $1 billion in LightSquared debt. According to the shareholders, Dish’s “fundamental corporate governance breakdown” has endangered the company’s bid for LightSquared’s licenses and exposed Dish to liability for interfering with LightSquared bankruptcy.

At a hearing last Thursday on shareholders’ motion for a preliminary injunction barring Ergen from participating in the LightSquared bidding process, lawyers for the company told Clark County District Court Judge Elizabeth Gonzalez that Ergen and the board have the exact same interests as outside shareholders. They also said, however, that Dish has formed another independent committee, this one to weigh the outside shareholders’ allegations. Meanwhile, at least three other shareholders filed their own derivative suits last week, one also in state court in Nevada, where Dish is incorporated, and two in federal district court in Colorado, where the company is headquartered. At the very least, Dish’s impetuous disbanding of the original independent committee is going to cost the company a fortune in director time and legal fees (in addition to Las Vegas firms, the company and board are represented by Sullivan & Cromwell and Ergen by Willkie Farr & Gallagher). And if shareholders’ direst predictions come true, Ergen’s supposedly untoward influence on the company could cost Dish the LightSquared spectrum licenses it so badly wants.

Ergen began acquiring LightSquared debt after the wireless networking company, which is backed by Philip Falcone and his Harbinger Capital hedge fund, entered Chapter 11 in May 2012. The Dish chairman is now LightSquared’s biggest creditor, holding more than $1 billion in secured debt. He’s also involved in bitter litigation with Harbinger, which sued Dish and Ergen in August, claiming manipulation of the bankruptcy process. Harbinger wants to hold onto LightSquared’s valuable licenses in the company’s reorganization, so it is trying to block Ergen and Dish from acquiring them. LightSquared, moreover, wants to disallow Ergen’s debt, claiming he acquired it improperly.

The 21st Amendment of the U.S. Constitution, which repealed Prohibition but also gave states the right to enact laws regulating the import and distribution of liquor within their borders, was ratified in December 1933. Within three years, the U.S. Supreme Court was confronted for the first time with a constitutional dilemma that courts are still trying to resolve a full 80 years after the amendment took effect: Since the Commerce Clause prohibits discrimination against out-of-state businesses, how can the 21st Amendment permit states to treat in-state liquor companies differently from those outside of their borders? On Wednesday, the 8th Circuit Court of Appeals issued the latest installment in this long-running saga, upholding the constitutionality of Missouri’s requirement that officers and directors of licensed liquor wholesalers reside in Missouri.

That’s the second big federal circuit win for state liquor regulators since the Supreme Court last considered the intersection of the Commerce Clause and the 21st Amendment, in the 2005 case of Granholm v. Heald. Ironically, the high court’s Granholm opinion held that New York and Michigan restrictions on sales by out-of-state wineries violate the Commerce Clause because they distinguish between in-state and out-of-state alcohol producers. But the court also said in dicta that the states’ tiered systems of regulation, which separately address alcohol producers, importers and wholesalers, are not unconstitutional. The court drew a distinction between state laws involving alcohol production and those involving alcohol distribution, concluding that problems arise when state policies enacted under the 21st Amendment interfere with out-of-state alcohol producers protected by the Commerce Clause. “State policies are protected under the 21st Amendment when they treat liquor produced out of state the same as its domestic equivalent,” the Supreme Court said. “In contrast, the instant cases involve straightforward attempts to discriminate in favor of local producers.”

In 2009, the 2nd Circuit Court of Appeals underlined Granholm’s language on states’ rights to regulate alcohol distribution when it ruled in Arnold’s Wine v. Boyle that New York may bar out-of-state wine distributors from selling directly to New York residents. The appeals court said that New York’s system includes no favoritism for alcohol produced in New York over alcohol produced in other states – all liquor can be distributed only by licensed sellers – so it complies with the Supreme Court ruling. “Granholm validates evenhanded state policies regulating the importation and distribution of alcoholic beverages under the 21st Amendment,” the appeals court said. “It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause.”

On Monday, the National Credit Union Administration filed the latest blockbuster complaint based on banks’ manipulation of the benchmark London Interbank Offered Rate. On behalf of five failed corporate credit unions that held tens of billions of dollars of financial instruments with Libor-pegged interest rates, the federal agency – like so many duped investors before it – claims that Libor panel banks conspired to suppress their reported borrowing costs to the British Bankers’ Association, which supervised the benchmark average of reported rates. NCUA contends that because traders at Libor banks schemed to depress rate reports, the credit unions received less interest income than they were entitled to. The agency also raises the familiar accusation that as a result of artificial Libor suppression, the panel banks appeared healthier than they really were. NCUA asserts the same cause of action for this alleged (and in some cases admitted) misbehavior that we’ve seen in the big over-the-counter investors’ Libor class action and a host of suits by cities and counties that claim to be victims of Libor rate-rigging: antitrust violations under the Sherman Act and related state laws.

That’s quite an interesting calculation by NCUA and its lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Korein Tillery; and Stueve Siegel Hanson. As you surely recall, the judge overseeing the consolidated Libor multidistrict litigation, U.S. District Judge Naomi Reice Buchwald of Manhattan, does not believe that the alleged conspiracy to suppress Libor constitutes an antitrust violation. In a shocker of a ruling last March, Buchwald dismissed class action antitrust claims, finding that investors couldn’t show any antitrust injury from Libor manipulation because the supposed rate-rigging was not designed to impede competition amongst the banks. After Buchwald’s ruling, some alleged Libor victims, particularly those represented by Quinn Emanuel Urquhart & Sullivan, opted to emphasize securities claims over antitrust violations. Others, most notably the municipalities represented by Cotchett, Pitrie & McCarthy, are still pushing antitrust as their first cause of action. NCUA and its lawyers have had a lot of success in pioneering mortgage-backed securities litigation, so it’s notable that the agency has chosen the latter route. (I should note that NCUA filed its complaint in federal court in Kansas, but the suit is almost certain to consolidated in the Libor MDL and transferred to Buchwald for pre-trial rulings.)

Clearly, the agency is hoping that Judge Buchwald will change her mind about Libor antitrust claims – a dim prospect, as I’ll explain – or that the 2nd Circuit Court of Appeals has a different view of antitrust injury than she does. Either way, NCUA is apparently so confident that antitrust will be restored as a cause of action for Libor rate-rigging that it is only asserting antitrust claims, eschewing alternative fraud or securities causes of action.

Off the top of your head, do you know whether the Jim Croce hit “Bad, Bad Leroy Brown” was recorded before February 15, 1972? How about Don McLean’s “American Pie”? Thankfully, most of us don’t need to clog our brains with the knowledge that Croce’s song was third on Billboard’s year-end chart in 1973 and McLean’s, recorded in late 1971, was third on the 1972 chart. But then, most of us aren’t Internet service providers that rely upon the safe harbor protections of the Digital Millennium Copyright Act of 1998. For Internet sites engaged in any kind of file-sharing, there’s now a deep gulch of potential liability dividing songs that came out before and after February 1972, when Congress passed the Copyright Act. And unless Congress acts to fill in the gap, video-sharing sites have to be very concerned about permitting users to upload files containing any old songs at all, for fear that they predate the Copyright Act.

That’s the consequence of a summary judgment ruling last week by U.S. District Judge Ronnie Abrams of Manhattan, in a case brought by recording companies against the video-sharing site Vimeo. Abrams ruled that although Vimeo is broadly entitled to DMCA safe harbor protection, the music companies may proceed with claims based on 55 potentially infringing videos either uploaded or otherwise publicly acknowledged by Vimeo staffers. The recording companies didn’t alert Vimeo that any of the videos breached copyrights, but the judge said that Vimeo staff may have known the IP was infringed or else disregarded red-flag warnings about misuse of copyrighted material. Judge Abrams also said that regardless of Vimeo’s anti-infringement policies and actions, there simply is no safe harbor under the DMCA when it comes to common-law copyright misappropriation claims based on songs that predate the federal Copyright Act. In combination, Abrams’ findings mean that Internet sites have no easy escape from litigation over files containing old songs, even when copyright owners don’t provide notice of infringement. If the ruling holds up, it would make more sense for sites simply to ban potentially actionable files rather than try to figure out whether songs in user-uploaded files were recorded before or after February 1972.

As Abrams explained in her decision, she is not the first court to consider the DMCA’s safe harbor protection for pre-1972 songs. In October 2011, her Manhattan federal court colleague William Pauley reached a different conclusion from Abrams in Capitol Records v. MP3tunes. The recording companies in the MP3 case, like those in the Vimeo case, argued that the DMCA can only protect defendants from federal copyright claims, not state or common-law claims, because the Copyright Act specified that it does not annul or limit IP rights that existed before its passage in 1972. Judge Pauley found that to be too cramped a reading of the Copyright Act. In context, he said, it’s clear that the Copyright Act wasn’t intended to prohibit all regulation of pre-1972 recordings; the law’s language on “infringement of copyrights” is meant to encompass violations of both federal and state protections, Pauley wrote. So the DMCA’s safe harbor, according to Pauley, similarly extends to alleged state and federal violations.