ATP Tour v. Deutscher Tennis Bund
On May 8 the Delaware Supreme Court upheld bylaws adopted by the professional tennis organization ATP Tour Inc. that require members to pay ATP’s legal bills if they sue the organization and lose. Experts say the ruling may thin the onslaught of strike suits against publicly traded companies filed in the wake of merger and acquisition announcements.
Proskauer Rose partners Bradley Ruskin, Charles Sims and Jennifer Scullion represented ATP, a Delaware corporation whose members are both players and tournament promoters, for both the underlying case and the Delaware appeal. Robert MacGill of Barnes & Thornburg represented the plaintiff, Deutscher Tennis Bund, the German Tennis Foundation, at trial and on the appeal.
The ruling stems from legal costs that ballooned during an unusual antitrust case over reorganization of its tournament calendar by ATP, which administers most of the major men’s professional tennis tournaments. In 2007 ATP placed tournaments into three tiers. The stated purpose was to win over fans by ensuring that the best players square off against each other more often. One long-running German tournament, the Hamburg Masters, was downgraded and moved to a less prominent post-Wimbledon date.
The German tennis group that promoted the Hamburg event brought suit in 2007 in U.S. district court in Wilmington. The federation argued that ATP’s conduct violated the Sherman Antitrust Act, and that board members breached their fiduciary duty. But jurors found in 2008 that ATP had not violated antitrust laws, while the other claims were dismissed during trial. The U.S. Court of Appeals for the Third Circuit affirmed ATP’s win.
Winning was costly, though. By late 2009, ATP’s legal bill was already up to $17.85 million. ATP demanded the federation cover the fees, pointing to fee-shifting provisions in its bylaws. DTB argued that the bylaws aren’t enforcable.
The dispute wound its way up to the Delaware Supreme Court. In its May 8 ruling siding with ATP, the court noted that “contracting “parties” can obligate the loser to pay the winner’s fees. Because corporate bylaws are “contracts among a corporation’ shareholders,” fee-shifting bylaws are permissible, the court concluded.
Corporate mergers are often challenged in court by shareholders. Fee-shifting bylaws would likely discourage shareholder litigation, because stockholders would face major liability if they lose. At press time the Delaware legislature was weighing a statutory amendment that would effectively overrule the decision and prohibit stock corporations from adopting fee-shifting bylaws.—Jan Wolfe
In re BofA AIG Disclosure Securities Litigation
In the annals of mortgage-backed securities litigation, the fight between Bank of America Corporation and American International Group Inc. alone could fill volumes. Now one small chapter, at least, appears to be at an end.
On May 19 the U.S. Court of Appeals for the Second Circuit ruled that Bank of America shareholders can’t pursue claims that the bank duped them about a massive impending lawsuit from AIG in 2011. It affirmed a ruling by U.S. District Judge John Koeltl in Manhattan, who sided with BofA and tossed the shareholders’ case last year. George Garvey of Munger Tolles & Olson argued the appeal for BofA; the bank was also represented by Munger’s Marc Dworksy and by Luke Connelly of Winston & Strawn. Hagens Berman Sobol Shapiro’s Jason Zweig argued the shareholders’ appeal.
AIG sued Bank of America in 2011, seeking as much as $10.5 billion from the bank in what was then the biggest mortgage-backed securities (MBS) suit brought by a single plaintiff. The insurance giant claimed that BofA and its Merrill Lynch and Countrywide Financial units fraudulently sold AIG about $28 billion in securities backed by shoddy loans. The case is pending in New York state court and in federal court in Los Angeles, where U.S. District Judge Mariana Pfaelzer is presiding over nationwide litigation related to Countrywide MBS. (Quinn Emanuel Urquhart & Sullivan represents AIG in that case.)
The initial filing of AIG’s suit helped spark a sell-off by BofA investors that sent the bank’s shares plummeting. The bank was soon fighting claims that it misled investors about the size and imminence of AIG’s case. In mid-2012 Koeltl appointed Hagens Berman lead counsel for a proposed class of investors who bought BofA shares between February and August 2011.
Koeltl ultimately rejected the shareholder claims in last November, finding that plaintiffs failed to show that BofA intended to deceive investors. The bank had disclosed in its February 2011 annual report that it was facing a smorgasbord of MBS-related litigation, Koeltl noted, and the most “compelling conclusion” is that the bank believed it had no duty to report the specifics of the looming lawsuit.
The Second Circuit panel affirmed Koeltl’s ruling, noting that even if, hypothetically, BofA had an obligation to disclose the potential AIG suit, the complaint “does not plausibly allege circumstantial evidence of conscious misbehavior.”—David Bario, with J.W.
U.S. v. Jiang
The U.S. Department of Justice suffered a mistrial on April 28 in one of its first criminal cases involving a Chinese company publicly listed in the United States via a so-called reverse merger.
A federal jury in Washington, D.C., said that it couldn’t reach a consensus on whether a former executive of China North East Petroleum Holdings, Chao Jiang, misappropriated funds and lied to U.S. regulators. Having already once before ordered the jurors to keep at it during their weeklong deliberations, U.S. District Judge Richard Leon declared a mistrial at the request of Jiang’s lawyers. Leon had acquitted Jiang on two of four counts of securities fraud earlier in the trial. Jiang was defended by Gibson, Dunn & Crutcher partners Michael Li-Ming Wong and Thad Davis.
Jiang served as vice president of corporate finance for CNEP between 2008 and 2011. In 2009 CNEP raised about $40 million by selling common stock to investors. In offering documents, CNEP said the proceedings would be used to build the company and buy back debt.
In a 2013 indictment, prosecutors alleged that CNEP improperly wired $965,000 of the stock offering proceeds to Jiang’s father and $300,000 to the wife of CNEP’s CEO, Wang Hongjun. According to the indictment, Jiang tried to cover up the misconduct in an interview with U.S. Securities and Exchange Commission investigators. Jiang initially faced four counts of securities fraud and two counts of false statements to the SEC. Wang, the former CEO, was named as a codefendant. The SEC also brought a related civil enforcement action against Jiang and Wang.
At trial the Gibson Dunn team sought to persuade jurors that Jiang never concealed the transfer to his father, asserting that it was simply part of a loan repayment.
The Justice Department has opted to retry the case. A retrial is set for Sept. 3. The related SEC civil action, which is being litigated in New York, was stayed pending the outcome of the trial.
The cases are particularly important to the DOJ and SEC. A few years ago, short-sellers began to clamor about rampant alleged fraud among Chinese companies that got themselves listed on U.S. stock exchanges through a backdoor method known as a reverse merger. The claims sparked regulatory scrutiny and a raft of class actions; this was the first criminal case to go to trial.—J.W.
Shell Oil Co. v. U.S.
In a come-from-behind win for Royal Dutch Shell plc and other oil giants, an appeals court ruled April 28 that the U.S. government must reimburse the companies for the cost of cleaning up a World War II-era toxic dump site in California. Damages could top $100 million.
Reversing a prior ruling, the U.S. Court of Appeals for the Federal Circuit concluded that the government needs to take responsibility for petroleum refinery waste that the oil companies dumped on 22 acres of land in Fullerton, Calif., in the 1940s. The Federal Circuit remanded the case to the trial judge, Thomas Wheeler of the U.S. Court of Federal Claims, to figure out exactly how much reimbursement the oil companies are entitled to for cleanup efforts they undertook in the 1990s.
The ruling is a win for a trio of companies—Shell, Atlantic Richfield Company (ARCO) and Chevron Corporation—which are represented by the appellate boutique Cooper & Kirk. Michael Kirk of Cooper & Kirk handled the Federal Circuit oral argument, squaring off against Stephen Tosini of the U.S. Department of Justice’s Civil Division.
Aviation gas (or “avgas”) was crucial to the U.S. war effort. In a series of agreements from 1942 and 1943, the government agreed to buy massive amounts of avgas from Shell, ARCO and oil companies now owned by Chevron. They dumped waste byproducts from their avgas production in Fullerton, on land now known as the McColl Superfund Site.
Cleaning up McColl became a priority in 1980 after the passage of the Superfund law, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In a lawsuit brought under CERCLA, California and the U.S. government won a ruling in 2002 that the oil companies are liable for almost $100 million in remediation costs.
The defendants brought a breach of contract suit in 2006, alleging that the government should indemnify them for the remediation costs. They pointed to a clause in the 1942 and 1943 agreements in which the government agreed to reimburse the oil companies for future “taxes, fees or charges” relating to avgas production levied by local, state or federal government agencies.
The case has taken years to wind its way through the courts, in large part because the Federal Circuit ruled in 2012 that the original judge, Loren Smith, should have recused himself entirely because his wife owned Chevron stock. Wheeler finally dismissed the case on summary judgment in January 2013, ruling that the “taxes, fees or charges” provision doesn’t put the government on the hook.
The Federal Circuit disagreed, concluding that the oil companies agreed to supply avgas in return for the government’s assumption of certain risks, including the environmental cleanup costs.
Kirk said in an interview that his clients are seeking upward of $100 million in the damages trial.—J.W.
In Re Pradaxa Products Liability Litigation
Boehringer Ingelheim GmbH announced on May 28 that it will pay $650 million to settle about 4,000 lawsuits over its drug Pradaxa, a blood thinner alleged to have caused bleed-out deaths among patients. The deal followed a hotly contested discovery process and arrives a few months before a bellwether trial was set to take place.
The tort claims were consolidated into a multidistrict litigation before U.S. District Judge David Herndon in East St. Louis, Ill. The first trial had been scheduled for September. Lawyers at Covington & Burling led by Paul Schmidt represented Boehringer, along with cocounsel Dan Ball at Bryan Cave and Eric Hudson at Butler, Snow, O’Mara, Stevens & Cannada. The plaintiffs steering committee in the MDL includes Seth Katz of Burg Simpson Eldredge Hersh & Jardine, Michael London of Douglas & London, Roger Denton of Schlichter, Bogard & Denton, Mikal Watts of Watts Guerra and Tor Hoerman of TorHoerman Law.
The head of Boehringer’s legal department, Andreas Neumann, criticized the American legal system in a press release explaining why the Germany drug company settled. “The U.S. litigation system is described by some as a business where lawyers run advertising campaigns to find clients,” Neumann said. “Furthermore we have to consider that juries composed of lay people have to decide about very difficult scientific matters.”
One thing that Neumann didn’t mention was Boehringer’s problems during discovery, which could have come back to haunt the drug company at trial. In December 2013 Herndon ruled that Boehringer’s efforts to hold on to documents relevant to the litigation were “grossly inadequate” and sanctioned the company almost $1 million. The judge said he might instruct jurors that they could infer that the missing evidence was harmful to Boehringer’s defense.
In a motion, still under seal, that was filed early this year, Boehringer’s lawyers at Covington & Burling sought a protective order prohibiting the plaintiffs lawyers from engaging in inappropriate behavior during depositions, such as accusing witnesses of lying or insulting them. While Herndon conceded that “animosity runs high” in the case, he concluded that “there is no evidence in the record that any witness had been intimidated or prejudiced in any way.”—J.W.
In re Neurontin Marketing, Sales Practices, and Products Liability Litigation
After a plea to the U.S. Supreme Court fell on deaf ears, Pfizer Inc. has agreed to pay $325 million to settle a long-running lawsuit accusing the company of marketing its epilepsy drug Neurontin for unapproved uses. Lawyers for a proposed class of health benefit providers who paid for Neurontin filed a motion on May 30 asking U.S. District Judge Patti Saris in Boston to approve the deal.
In 2004 Pfizer agreed to plead guilty to two felonies and to pay $430 million in penalties to settle charges brought by the U.S. Department of Justice that its Warner-Lambert unit marketed Neurontin for unapproved, off-label uses. A wave of private racketeering lawsuits followed, which were consolidated in multidistrict litigation in Boston federal court in 2005.
Judge Saris oversaw a five-week bellwether trial in 2010, and jurors ultimately awarded plaintiff Kaiser Foundation Health Plan Inc. $47 million in damages—subject to trebling under the Racketeer Influenced and Corrupt Organizations Act.
Last August, Pfizer’s lawyers at Quinn Emanuel Urquhart & Sullivan, led by Sheila Birnbaum, petitioned the Supreme Court to review the jury’s decision and decisions in related cases. The justices denied the petition late last year. (Birnbaum brought the case to Quinn Emanuel when she joined the firm from Skadden, Arps, Slate, Meagher & Flom last year.)
Thomas Greene of Greene LLP, one of the lawyers representing the plaintiffs, said he thinks that the deal marks one of the first times RICO claims related to off-label marketing have survived to yield a settlement.
Under the terms of the deal, plaintiffs counsel could ask for as much as one-third of the proceeds, or about $108 million. The plaintiffs steering committee also includes lawyers from Hagens Berman Sobol Shapiro and Lieff Cabraser Heimann & Bernstein, Barrett Law Office, the Law Offices of Daniel Becnel Jr. and Dugan & Browne.—Ross Todd