There’s no shortage of interesting lawsuits out there. But which ones are going to have the biggest impact? To find out, we talked to litigators across a wide range of practice areas. They pointed us to the cases that they’ve been watching most closely.
It’s a diverse list. A hotel chain is trying to hold a leading private equity firm liable for its failed LBO. Women who used the NuvaRing contraceptive device have filed suit against its manufacturer. An American billionaire is seeking arbitration against the Hungarian government for a cancelled casino project. Two Silicon Valley giants are fighting over the patents for the Android smart phone. A group of banks have sued a insurer for spinning off its good assets into a separate company. And a challenge by 26 states to the new health care reform law seems to be heading to a showdown at the Supreme Court.
Keep an eye on these cases.
BANKRUPTCY: THE EXTENDED STAY LITIGATION TRUST V. THE BLACKSTONE GROUP L.P. ET AL.
A victory for Extended Stay–in one of the largest bankruptcies ever stemming from a failed leveraged buyout–could lead to greated risks for stakeholders in other privately held businesses should a company fail after an LBO.
For the Plaintiff: Baker & Hostetler
For the Defendant: Kirkland & Ellis; Simpson Thacher & Bartlett
When a privately held company changes hands in a leveraged buyout — and then goes bust — are its former stakeholders shielded from liability? Or can they face claims for fraud? That’s the issue in a dispute between the trustee of Extended Stay America, Inc., and The Blackstone Group L.P., the private equity firm, in federal bankruptcy court in Manhattan. The estate is seeking damages of $8.4 billion, ranking it as one of the largest claims ever filed over a failed LBO.
Lawyers watching the case say it’s emblematic of investor overconfidence and over-leveraging of real estate at the peak of the market, just before the financial crisis. Though fraudulent conveyance claims are common in LBO bankruptcy-related litigation, few reach the price tag on this one.
The suit, filed on June 15, stems from Blackstone’s 2007 sale of the hotel chain to real estate investment firm The Lightstone Group, LLC. Extended Stay’s trustee, Hobart Truesdell — of New York’s Walker, Truesdell, Roth & Associates — claims that the sale price, $8 billion, was artificially inflated by Blackstone, its lender Bank of America Corporation, and its financial adviser Citigroup Global Markets Inc.
Truesdell maintains that Blackstone, Bank of America, and Citigroup siphoned off approximately $2.1 billion from the LBO. At the same time, Truesdell alleges, the buyer Lightstone financed the deal almost entirely through loans, leaving the hotel group with $7.6 billion in debt.
Extended Stay filed for bankruptcy protection just over two years later. The estate claims it is owed $2.1 billion as well as treble punitive damages on a claim that the defendants maliciously breached their fiduciary duties.
Blackstone calls the suit an “opportunistic” claim. It blames the LBO’s failure on the 2008 recession and notes that the recession tipped every large hotel deal made in 2006 – 07 into either bankruptcy, foreclosure, or restructuring. Blackstone also claims that it can’t be found liable under the traditional “settlement payment” defense, which typically protects sellers from litigation over failed LBOs to preserve the orderly functioning of capital markets.
But a contrary decision this past April in a case involving a much smaller business — New Rochelle, New York – based restaurant Mac-Menamin’s Grill Ltd. — may throw a wrench in Blackstone’s argument. In that case, a bankruptcy judge in New York rejected the settlement payment defense because the restaurant was not a publicly held entity, and thus had no impact on any major capital market. Neither was Extended Stay at the time of its sale.
BofA, as Lightstone’s lender, faces its own risks. The Bankruptcy Code allows trustees to recover funds transferred in deals that involved fraud. Extended Stay is claiming that the loan obligation that Lightstone signed with Bank of America came about through fraud.
“It’s actually Bank of America who could actually be more exposed here,” says Kenneth Ziman, a corporate restructuring partner at Skadden, Arps, Slate, Meagher & Flom who is not involved in the case directly. “There’s a potential precedent there, with a lender being at greater risk like that.”
INTERNATIONAL ARBITRATION: VIGOTOP LIMITED V. THE REPUBLIC OF HUNGARY
A company formed by four investors, including American billionaire Ronald Lauder, has requested an arbitration against Hungary, claiming that the government broke a promise to let it build a megacasino outside Budapest.
For the Plaintiff: Volterra Fietta
For the Defendant: White & Case
Hungary’s decision to revoke approval for a planned casino outside Budapest is highlighting the government’s uneasy relationship with foreign investors.
The casino’s developers, via a company they formed in Cyprus called Vigotop Limited, filed an arbitration claim against Hungary in July before the International Centre for Settlement of Investment Disputes (ICSID). They maintain that the Hungarian government expropriated their investment in violation of a bilateral investment treaty between Cyprus and Hungary. Vigotop’s shareholders are Ronald Lauder, the billionaire son of the late cosmetics mogul Estée Lauder; Fred Langhammer, an executive at the Estée Lauder Corporation; Yoav Blum, a Hungarian businessman; and Itzhak Fisher, an executive at The Neilsen Company.
Back in 2007, when Vigotop first proposed a megacasino and luxury resort called the King’s City Project, government officials endorsed the idea, says Stephen Fietta, a solicitor with the London-based arbitration boutique of Volterra Fietta who is counsel to Vigotop. The government — then controlled by the Socialist Party — negotiated a deal with Blum, in which he received a plot of government-owned lakefront land in exchange for cash and other property he owned in Hungary, says Fietta. He adds that the government also formally designated the project a matter of high importance for the national economy and fast-tracked it for completion.
Why the sudden about-face? Fietta blames a change in political leadership. In 2010 the center-right FIDESZ party rode into office on a wave of Hungarian frustration over the European economic crisis.
A spokesperson for the Hungarian government declined to comment on the dispute. It is represented by White & Case, which also declined to comment.
But one local observer agrees that the change in government led to a change of heart. “The [FIDESZ­-led] government was quite skeptical of this project from the beginning,” says Péter Krekó, research director at Political Capital Policy Research & Consulting Institute in Budapest. Officials have cited environmental concerns, he says, and have accused the previous government of giving Vigotop a sweetheart deal.
Those allegations of misconduct, currently under investigation, may be politically motivated, Krekó says. “It is quite typical in Eastern Europe that when one government takes power, it wants to criminalize the previous one. It is part of the political game,” he says. The officials at the center of that investigation maintain their innocence.
Krekó adds that some of the criticism of the casino project from Hungary’s far right has featured “coded anti-Semitism.” Vigotop’s shareholders are all Jewish, says Fietta.
Before the 2010 election, The Economist accused FIDESZ of “stok[ing] discontent with privatization, foreign investors, and, to an extent, free-market capitalism in general,” after regional officials affiliated with FIDESZ terminated a contract with Suez Environnement, a French waterworks company, and blocked a bid by Apollo Tyres Limited, an Indian company, to build a plant in the country.
INTELLECTUAL PROPERTY: ORACLE AMERICA INC. V. GOOGLE INC.
This battle between two technolgy juggernauts over Java patents has the potential to disrupt a huge part of Google’s revenue stream: its Android mobile phone operating system.
For the Plaintiff: Morrison & Foerster; Boies Schiller & Flexner
For the Defendant: King & Spalding; Greenberg Traurig; Keker & Van Nest
As Google Inc. builds up market share for its Android smartphone operating system, the company’s rivals, armed with their own rich patent portfolios, are girding for battle. First, Apple Inc. filed suit against smartphone manufacturers that use Android — HTC Corporation and Motorola Inc. in 2010, and Samsung Electronics Co., Ltd., earlier this year. And in a suit pending in federal district court in San Francisco, Oracle American Inc. is now taking aim at Google itself.
In the complaint, filed in August 2010, Oracle claims that Android violates patents related to Oracle’s Java technology, which Oracle acquired in 2010 when it bought Sun Microsystems, Inc. The patents relate specifically to Oracle’s Java virtual machine, which formats mobile applications for use on various smartphones and tablets (Research In Motion Limited’s BlackBerry is a regular licensee, for example). Oracle claims that Android’s own virtual machine, Dalvik, violates its patents by taking programs meant to run exclusively on Java’s virtual machine and converting them to run on Dalvik, and thus, on Android devices. Its suit contains 168 claims related to seven patents.
Google moved to dismiss in October 2010, asserting that Dalvik didn’t use any of Oracle’s code. A month later, Google claimed that Oracle had doctored part of the code that it presented to the court to make it appear that Google had stolen the code. Google also moved to have Oracle’s patents declared invalid.
This summer, Google seemed to gain momentum. In June the Patent and Trademark Office agreed to reevaluate Oracle’s patents. At press time the office had eliminated 54 of the 89 claims pertaining to the first four patents; the remaining three patents were still being reviewed. In July, federal judge William Alsup threw out Oracle’s damages claims, ruling that it had overreached in its demand for $2.6 billion in lost revenues.
But there was a silver lining for Oracle: Alsup suggested that Google could be permanently enjoined from producing and running Android if Oracle can prove infringement. Oracle will also have a chance to recalculate its damages claim. In July it also won the right to depose Google cofounder and CEO Larry Page.
Trial is slated to begin on Halloween — and Google’s rivals will be following it closely. With IP litigation these days, “if you see somebody making a lot of money, you take them on,” says Michael Bettinger, an IP litigation partner in K&L Gates’s San Francisco office who is not involved in the suit. And Google’s Android makes a rich target, he adds. “I think Oracle saw the acquisition of the Java patents as an opportunity to get in on” the litigation.
RESTRUCTURING: ABN AMRO BANK NV ET AL. V. MBIA INC.
Bank policyholders of the monoline insurer MBIA are trying to get the insurer’s 2009 restructuring declared invalid — and get the billions they claim they are owed.
For the Plaintiffs: Kasowitz Benson Torres & Friedman
For the Defendant: Sullivan & Cromwell
After 2008′s global financial crisis, MBIA Inc. tried to cut its losses by dividing the company in two. Now 11 banks, which all hold MBIA mortgage-backed securities insurance policies, are suing the monoline insurer to undo the split. The suit is one of the biggest fraudulent conveyance claims stemming from the subprime meltdown, and could result in a rare reversal of a state court – approved restructuring. And the case is approaching trial.
The dispute goes back to the beginning of 2009, when MBIA had a troubled mortgage-backed securities insurance business and a financially healthy muni bond insurance unit. That February, MBIA decided to quarantine $5.4 billion in solvent assets into a subsidiary that would only pay out claims to the muni bond insurance policyholders, in a move to keep the riskier, structured finance products side from bringing down the whole company. The subsidiary, now known as National Public Finance Guarantee Corporation, was created in an out-of-court restructuring.
The 11 banks filed suit in New York state court in Manhattan in May 2009. The plaintiffs, mostly Wall Street banks that had purchased insurance policies on mortgage securities portfolios with the monoline insurer, claim that MBIA violated insurance laws by not consulting them about the restructuring, which unfairly left them holding the bag on subprime losses.
“MBIA had essentially shrunk the pool of payout-able funds to pay out to policyholders who had purchased insurance on mortgage-backed securities,” says Robert Hockett, a professor of financial and business law at Cornell Law School. “The banks were worried that the risk was increased that MBIA wouldn’t be able to pay out their claims should they arise.”
MBIA responded to the banks’ suit by filing a motion to dismiss, which the state court judge denied. MBIA appealed. In January 2011, New York’s state appellate court reversed. The court ruled that the banks were limited to challenging the restructuring via an Article 78 proceeding, a forum for contesting the activities of an administrative agency — in this case, the state insurance superintendent who approved the asset transfer. (Eric Dinallo was the superintendent at the time; he is now a partner at Debevoise & Plimpton.)
In late June, however, the state’s highest court reinstated the banks’ claims, concluding that state insurance law — and Dinallo’s approval of the deal — did not preempt policyholders from making the common law claims.
The court also gave the green light to a parallel Article 78 proceeding against Dinallo. In that case the bank policyholders allege that MBIA gave the state insurance department inaccurate data on its financial condition and exposure to losses. They also claim that Dinallo unlawfully approved a restructuring plan that favored one set of policyholders over another, which MBIA has denied. That case is scheduled to go to trial early next year.
A victory for the banks in either case could see MBIA’s reorganization invalidated; such an invalidation has little or no precedent. After a recombination, regulators might deem MBIA insolvent and seize the insurer, say lawyers watching the case.
Meanwhile, MBIA has launched a series of legal counterattacks against its policyholders, claiming the banks misrepresented the quality of toxic home loans, conning MBIA into guaranteeing the value of mortgage portfolios and securities they knew to be junk. MBIA has had some success, fending off motions to dismiss its fraud claims against Morgan Stanley and Bank of America Corporation’s Countrywide Financial Corporation. But in the massive thicket of related litigation, only one thing is certain: MBIA’s legal troubles won’t be over anytime soon.
HEALTH CARE LITIGATION: STATE OF FLORIDA ET AL. V. U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
A 26-state constitutional challenge to Obama’s health care law has created a circuit split, making it increasingly likely the Supreme Court wil have the ultimate say.
For the Plaintiffs: Attorneys general for the states; Baker & Hostetler (outside counsel for the states); Jones Day (outside counsel for National Federation of Independent Business)
For the Defendant: U.S. Department of Justice
Within hours after President Barack Obama signed the massive health care reform bill into law in 2010, opponents filed the first of seven federal suits to block the legislation’s provision that all citizens must purchase health insurance by 2014.
That so-called individual mandate is at the heart of the challenges to the Patient Protection and Affordable Care Act (also known as the ACA). Opponents argue that the mandate is invalid because it violates the commerce clause, a provision of the U.S. Constitution that gives Congress authority over interstate trade. While the Obama administration maintains that the law simply regulates the way people pay for health insurance in the interstate market and is well within congressional powers, challengers contend that the mandate exceeds the clause’s reach.
The ACA challenge most likely to reach the U.S. Supreme Court, according to several constitutional and health care lawyers and law professors, is a suit originally filed by Florida and later joined by 25 other states. This past January, federal district court judge Roger Vinson found that the individual mandate is unconstitutional under the commerce clause. Vinson, who sits in Pensacola, Florida, ruled that the entire ACA was invalid because the mandate couldn’t be severed from the act as a whole.
Vinson ruled that Congress is empowered to regulate the way people pay for health care, but determined that this authority may only be exercised at the time people seek medical care. Congress overreached, he wrote, in requiring the advance purchase of health insurance.
The U.S. Department of Justice appealed, arguing that the individual mandate is valid because the consumption of health care without insurance has adverse effects on interstate commerce. On August 12 the U.S. Court of Appeals for the Eleventh Circuit affirmed Judge Vinson’s ruling in part, finding the individual mandate provision unconstitutional. But it disagreed on the severability issue, and upheld the rest of the ACA.
The Eleventh Circuit is unlikely to have the last word on the reach of the commerce clause, however. Legal experts say the debate over the ACA is almost certain to reach the Supreme Court, both because of the constitutional issues raised by the law itself and because the federal courts are deeply split. Four of the seven challenges to the ACA had reached the appeals stage at press time. The Eleventh Circuit struck down part of the law; the Sixth Circuit upheld it; and the Third and Fourth Circuits both dismissed cases because the respective plaintiffs lacked standing to sue.
The ACA is fiercely opposed by many groups such as the National Federation of Independent Business, which joined the Florida suit as a plaintiff. Says Karen Harned, director of the small business legal center at the NFIB, “If Congress can require you to buy a product, what can Congress not do?”