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April 24, 2018 |
Supreme Court Clarifies That Inter Partes Review Must Decide All Challenged Claims

SAS Institute, Inc. v. Iancu, No. 16-969 Decided April 24, 2018 Today, the Supreme Court held 5-4 that if the Patent Trial and Appeal Board (PTAB) exercises its discretion to institute inter partes review, it must issue an opinion on all challenged claims. Background: Inter partes review is an administrative process in which the PTAB revisits the patentability of claims in existing patents. The PTAB may institute that review if the petitioner shows a “reasonable likelihood” of success on at least one claim. 35 U.S.C. § 314(a). If the PTAB institutes inter partes review, it “shall issue” a written decision as to the patentability of “any patent claim challenged by the petitioner.” 35 U.S.C. § 318(a). In this case, SAS Institute petitioned the PTAB for inter partes review of a certain patent. The PTAB reviewed only some of the claims, as U.S. Patent and Trademark Office (PTO) regulations permit. SAS Institute argues that the PTAB was required to issue a final decision on all of the claims. Issue: Whether the PTAB must issue a final written decision as to every claim challenged by the petitioner when it institutes an inter partes review. Court’s Holding: Yes, if the PTAB institutes inter partes review, it must rule on all challenged claims. “Even under Chevron, we owe an agency’s interpretation of the law no deference unless, after ‘employing traditional tools of statutory construction,’ we find ourselves unable to discern Congress’s. meaning.” Justice Gorsuch, writing for the majority What It Means: The Court determined that the statute’s plain text does not permit the PTAB to decide which claims to review when it grants inter partes review. Instead, if the PTAB decides that the petitioner is reasonably likely to succeed on at least one claim, the statute requires the PTAB to review all of the claims in the petition. The Court rejected SAS Institute’s invitation to overrule Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), under which courts defer to reasonable agency interpretations of an ambiguous statute. Here, the Court held that the PTO is not entitled to deference because the statute is not ambiguous. The majority left open the possibility that the PTAB could deny a petition while noting that one or more claims merit reexamination and permitting the petitioners to file a new petition limited to those claims. The America Invents Act’s estoppel provisions prevent a petitioner from arguing that a claim is invalid, in a district court or before the International Trade Commission, on any ground raised or that reasonably could have been raised on inter partes review if the PTAB issues a final written decision on the claim. As a result of today’s decision, if the PTAB institutes review, every claim raised must be addressed—and so likely will trigger the estoppel provisions. The Supreme Court’s ruling may lead the PTAB to grant fewer petitions—meaning more patent litigation in the district courts. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Intellectual Property Wayne Barsky +1 310.552.8500 wbarsky@gibsondunn.com Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com Mark Reiter +1 214.698.3100 mreiter@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2018 |
Supreme Court Upholds PTO Inter Partes Review of Patent Validity

Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 Decided April 24, 2018 The Supreme Court held 7-2 that the U.S. Patent and Trademark Office’s inter partes review process does not violate the Constitution. Background: In 2011, Congress passed the America Invents Act, which created a new adversarial process within the U.S. Patent and Trademark Office (PTO), known as inter partes review. This process allows anyone to challenge the validity of an existing patent on the grounds that the patent was anticipated by is or obvious in light of the prior art. Under that process, the Patent Trial and Appeal Board (PTAB) – rather than a federal court – decides whether to cancel or confirm a challenged patent, subject to deferential review by the Federal Circuit. Issue: Whether inter partes review violates Article III’s grant of judicial power to the federal courts and the Seventh Amendment’s right to a jury trial. Court’s Holding: No, patents are public rights, and not purely private rights, so Congress may allow non-Article III tribunals (like the PTAB) to adjudicate those rights. “[T]he decision to grant a patent is a matter involving public rights—specifically, the grant of a public franchise. Inter partes review is simply a reconsideration of that grant, and Congress has permissibly reserved the PTO’s authority to conduct that reconsideration.” Justice Thomas, writing for the majority Gibson Dunn filed an amicus brief defending inter partes review for Dell, Facebook, Hewlett Packard, Twitter and others. What It Means: The Court held that patents are public rights that may be granted, abridged, or withdrawn without adjudication by an Article III court or factfinding by a jury. The Court explained that a patent owner’s property rights in an issued patent are subject to PTO’s authority to reexamine or cancel the patent. Although inter partes review resembles adversarial litigation, it determines a party’s patent right against the government – not liability between private parties. The Court rejected the argument that, historically, the validity of a patent could only be challenged in court. Instead, drawing on the argument that Gibson Dunn made in its amicus brief, the Court concluded that inter partes review is consistent with historical practice under the English patent system. The Court emphasized that its holding is narrow and that it did not decide whether infringement actions or other patent matters could be heard outside of an Article III court or whether the retroactive application of inter partes review is constitutional. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Intellectual Property Wayne Barsky +1 310.552.8500 wbarsky@gibsondunn.com Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com Mark Reiter +1 214.698.3100 mreiter@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2018 |
Supreme Court Holds That Foreign Corporations Cannot Be Sued Under The Alien Tort Statute

Jesner v. Arab Bank, PLC, No. 16-499 Decided April 24, 2018 Today, the Supreme Court held 5-4 that a foreign corporation may not be sued under the Alien Tort Statute. Background: The Alien Tort Statute of 1789 (ATS) provides that foreign nationals may sue in federal court “for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. In recent years, plaintiffs increasingly have relied on the ATS to sue multinational corporations and banks in federal courts for alleged terrorist activities and human rights violations abroad. In this case, the plaintiffs sued Arab Bank, PLC—a Jordanian financial institution with a branch in New York—alleging that the bank helped finance terrorist attacks in the Middle East. Issue: Whether foreign corporations can be sued in federal court in the United States under the ATS. Court’s Holding: No. Neither the language of the ATS nor the Court’s precedents interpreting it supports extending the statute to reach suits against foreign corporations. The political branches, rather than the courts, are responsible for weighing foreign-policy concerns and deciding whether foreign corporations should face liability for acts like those at issue in this case. The Judiciary is “not well suited to make the required policy judgments that are implicated by corporate liability in cases like this one.” “[A]bsent further action from Congress it would be inappropriate for courts to extend ATS liability to foreign corporations.” Justice Kennedy, writing for the majority What It Means: Although the decision does not resolve whether plaintiffs may sue U.S. corporations under the ATS, it does stop the recent trend of plaintiffs using the ATS to sue foreign corporations and foreign financial institutions in the United States. Jesner joins a line of recent precedents refusing to create new private rights of action and reiterating that the decision to attach liability to certain conduct is best left to Congress. By clearly prohibiting ATS liability against foreign corporations, the decision may strengthen the arguments of U.S. corporations seeking to dismiss an ATS suit when the underlying claim is based on the conduct of a foreign affiliate. The decision may place greater pressure on Congress to legislate in this area. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Transnational Litigation William E. Thomson +1 213.229.7891 wthomson@gibsondunn.com Andrea E. Neuman +1 212.351.3883 aneuman@gibsondunn.com Perlette Michèle Jura +1 213.229.7121 pjura@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 17, 2018 |
Supreme Court Holds That Recent Legislation Moots Dispute Over Emails Stored Overseas

Click for PDF United States v. Microsoft Corp., No. 17-2 Decided April 17, 2018 Today, the Supreme Court held that Microsoft’s dispute with the federal government over the government’s attempts to access email stored oversees is moot. Background: The Stored Communications Act, 18 U.S.C. § 2701 et seq., authorizes the government to require an email provider to disclose the contents of emails (and certain other electronic data) within its control if the government obtains a warrant based on probable cause. In this case, the federal government obtained a warrant to obtain emails from an email account used in drug trafficking. The drug trafficking allegedly occurred in the United States, but the emails were stored on a data server in Ireland. Microsoft refused to provide the emails on the ground that the Stored Communications Act does not apply to emails stored overseas. Issue: Whether the Stored Communications Act requires an email provider to disclose to the government emails stored abroad. Court’s Holding: The case is moot. On March 23, 2018, the President signed the Clarifying Lawful Overseas Use of Data Act (CLOUD Act), which amended the Stored Communications Act so that it now applies to emails stored abroad. The parties’ dispute under the old version of the law therefore was moot. “No live dispute remains between the parties over the issue with respect to which certiorari was granted.” Per Curiam What It Means: Given passage of the CLOUD Act, there was no longer any need for the Supreme Court to interpret the prior version of the Stored Communications Act. The CLOUD Act requires an email provider to disclose emails, so long as the statute’s procedures have been followed, regardless of whether those emails are “located within or outside of the United States.” CLOUD Act § 103(a)(1) (to be codified at 18 U.S.C. § 2713). But the CLOUD Act permits courts to exempt providers from disclosing emails of customers who are not U.S. Citizens or residents, if disclosure would risk violating the laws of certain foreign governments. CLOUD Act § 103(b) (to be codified at 18 U.S.C. § 2703(h)).   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: White Collar Defense and Investigations Joel M. Cohen +1 212.351.2664 jcohen@gibsondunn.com Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com Related Practice: Privacy, Cybersecurity and Consumer Protection Alexander H. Southwell +1 212.351.3981 asouthwell@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 5, 2018 |
M&A Report – AOL and Aruba Networks Continue Trend of Delaware Courts Deferring to Deal Price in Appraisal Actions

Click for PDF Two recent decisions confirm that, in the wake of the Delaware Supreme Court’s landmark decisions in Dell and DFC, Delaware courts are taking an increasingly skeptical view of claims in appraisal actions that the “fair value” of a company’s shares exceeds the deal price.[1] However, as demonstrated by each of these recent Delaware Court of Chancery decisions—In re Appraisal of AOL Inc. and Verition Partners Master Fund Limited v. Aruba Networks, Inc.—several key issues are continuing to evolve in the Delaware courts.[2] In particular, Delaware courts are refining the criteria in appraisal actions for determining whether a transaction was “Dell-compliant.” If so, then the court will likely look to market-based indicators of fair value, though which such indicator (unaffected share price or deal price) is the best evidence of fair value remains unresolved. If not, the court will likely conduct a valuation based on discounted cash flow (DCF) analysis or an alternative method to determine fair value. The development of these issues will help determine whether M&A appraisal litigation will continue to decline in frequency and will be critical for deal practitioners.[3] DFC and “Dell-Compliant” Transactions In DFC, the Delaware Supreme Court endorsed deal price as the “best evidence of fair value” in an arm’s-length merger resulting from a robust sale process. The Court held that, in determining fair value in such transactions, the lower court must “explain” any departure from deal price based on “economic facts,” and must justify its selection of alternative valuation methodologies and its weighting of those methodologies, setting forth whether such methodologies are grounded in market-based indicators (such as unaffected share price or deal price) or in other forms of analysis (such as DCF, comparable companies analysis or comparable transactions analysis). In Dell, the Court again focused on the factual contexts in which market-based indicators of fair value should be accorded greater weight. In particular, the Court found that if the target has certain attributes—for example, “many stockholders; no controlling stockholder; highly active trading; and if information is widely available and easily disseminated to the market”—and if the target was sold in an arm’s-length transaction, then the “deal price has heavy, if not overriding, probative value.” Aruba Networks and AOL: Marking the Boundaries for “Dell-Compliant” Transactions In Aruba Networks, the Delaware Court of Chancery concluded that an efficient market existed for the target’s stock, in light of the presence of a large number of stockholders, the absence of a controlling stockholder, the deep trading volume for the target’s stock and the broad dissemination of information about the target to the market. In addition, the court found that the target’s sale process had been robust, noting that the transaction was an arm’s-length merger that did not involve a controller squeeze-out or management buyout, the target’s board was disinterested and independent, and the deal protection provisions in the merger agreement were not impermissibly restrictive. On this basis, the Court determined that the transaction was “Dell-compliant” and, as a result, market-based indicators would provide the best evidence of fair value. The Court found that both the deal price and the unaffected stock price provided probative evidence of fair value, but in light of the significant quantum of synergies that the parties expected the transaction to generate, the Court elected to rely upon the unaffected stock price, which reflected “the collective judgment of the many based on all the publicly available information . . . and the value of its shares.” The Court observed that using the deal price and subtracting synergies, which may not be counted towards fair value under the appraisal statute,[4] would necessarily involve judgment and introduce a likelihood of error in the Court’s computation. By contrast, AOL involved facts much closer to falling under the rubric of a “Dell-compliant” transaction, but the Court nonetheless determined that the transaction was not “Dell-compliant.” At the time of the transaction, the target was well-known to be “likely in play” and had communicated with many potential bidders, no major conflicts of interest were present and the merger agreement did not include a prohibitively large breakup fee. Nonetheless, the Court focused on several facts that pointed to structural defects in the sale process, including that the merger agreement contained a no-shop period with unlimited three-day matching rights for the buyer and that the target failed to conduct a robust auction once the winning bidder emerged. In addition, and importantly, the Court took issue with certain public comments of the target’s chief executive officer indicating a high degree of commitment to the deal after it had been announced, which the Court took to signal “to potential market participants that the deal was done, and that they need not bother making an offer.” On this basis, the Court declined to ascribe any weight to the deal price and instead conducted a DCF analysis, from which it arrived at a fair value below the deal price. It attributed this gap to the inclusion of synergies in the deal price that are properly excluded from fair value. Parenthetically, the Court did take note of the fact that its computation of fair value was close to the deal price, which offered a “check on fair value analysis,” even if it did not factor into the Court’s computation. Key Takeaways Aruba Networks and AOL provide useful guidelines to M&A practitioners seeking to manage appraisal risk, while also leaving several open questions with which the Delaware courts will continue to grapple: Whether market-based indicators of fair value will receive deference from the Delaware courts (and, correspondingly, diminish the incentives for would-be appraisal arbitrageurs) depends upon whether the sale process could be considered “Dell-compliant.” This includes an assessment of both the robustness of the sale process, on which M&A practitioners seeking to manage appraisal risk would be well-advised to focus early, and the efficiency of the trading market for the target’s stock, to which litigators in appraisal actions should pay close attention. For those transactions found to be “Dell-compliant,” the best evidence of fair value will be a market-based indicator of the target’s stock. Whether such evidence will be the deal price, the unaffected stock price or a different measure remains an open question dependent upon the facts of the particular case. However, for those transactions in which synergies are anticipated by the parties to be a material driver of value, Aruba Networks suggests that the unaffected share price may be viewed as a measure of fair value that is less susceptible to errors or biases in judgment. For those transactions found not to be “Dell-compliant,” DCF analyses or other similar calculated valuation methodologies are more likely to be employed by courts to determine fair value. As AOL and other recent opinions indicate, however, there is no guarantee for stockholders that the result will yield a fair value in excess of the deal price—particularly given the statutory mandate to exclude expected synergies from the computation. [1] Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017); DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017). See our earlier discussion of Dell and DFC here. [2] In re Appraisal of AOL Inc., C.A. No. 11204-VCG, 2018 WL 1037450 (Del. Ch. Feb. 23, 2018); Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL, 2018 WL 922139 (Del. Ch. Feb. 15, 2018). [3] It is worth noting that, after DFC and Dell, the Delaware Supreme Court summarily affirmed the decision of the Court of Chancery in Merlin Partners, LP v. SWS Grp., Inc., No. 295, 2017, 2018 WL 1037477 (Table) (Del. Feb. 23, 2018), aff’g, In re Appraisal of SWS Grp., Inc., C.A. No. 10554-VCG, 2017 WL 2334852 (Del. Ch. May 30, 2017). The Court of Chancery decided SWS Group prior to the Delaware Supreme Court’s decisions in DFC and Dell. Nonetheless, it is clear that the court would have found the transaction at issue in SWS Group not to be “Dell-compliant,” as the transaction involved the sale of the target to a buyer that was also a lender to the target and so could exercise veto rights over any transaction. Indeed, no party to the SWS Group litigation argued that the deal price provided probative evidence of fair value. See our earlier discussion of the SWS Group decision by the Delaware Court of Chancery here. [4] See 8 Del. C. § 262(h) (“[T]he Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation . . . .”); see also Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch.) (“The entity must be valued as a going concern based on its business plan at the time of the merger, and any synergies or other value expected from the merger giving rise to the appraisal proceeding itself must be disregarded.” (internal citations omitted)), aff’d, 11 A.3d 214 (Del. 2010). The following Gibson Dunn lawyers assisted in preparing this client update:  Barbara Becker, Jeffrey Chapman, Stephen Glover, Eduardo Gallardo, Jonathan Layne, Joshua Lipshutz, Brian Lutz, Adam Offenhartz, Aric Wu, Meryl Young, Daniel Alterbaum, Colin Davis, and Mark Mixon. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group: Mergers and Acquisitions Group / Corporate Transactions: Barbara L. Becker – Co-Chair, New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Co-Chair, Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Co-Chair, Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Dennis J. Friedman – New York (+1 212-351-3900, dfriedman@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310-552-8641, jlayne@gibsondunn.com) Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) Jonathan Corsico – Washington, D.C. (+1 202-887-3652), jcorsico@gibsondunn.com Mergers and Acquisitions Group / Litigation: Meryl L. Young – Orange County (+1 949-451-4229, myoung@gibsondunn.com) Brian M. Lutz – San Francisco (+1 415-393-8379, blutz@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) Paul J. Collins – Palo Alto (+1 650-849-5309, pcollins@gibsondunn.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com) Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Adam H. Offenhartz – New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 4, 2018 |
Supreme Court Round-Up: A Summary of the Court’s Opinions, Cases to Be Argued Next Term, and Other Developments (April 4, 2018)

As the Supreme Court continues its 2017 Term, Gibson Dunn’s Supreme Court Round-Up is summarizing the issues presented in the cases on the Court’s docket and the opinions in the cases the Court has already decided. The Court has accepted 64 cases for argument this Term, and has heard arguments in 51 cases.  Gibson Dunn has presented one oral argument this Term and has two arguments this month, in addition to being involved in ten cases as counsel for amici curiae.  In addition, the Court has granted certiorari in eight cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in one of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 19 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields. Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. *   *   *  * Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Rajiv Mohan (+1 202.955.8507, rmohan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 22, 2018 |
Delaware Supreme Court Holds That Forum Non Conveniens Dismissals Do Not Require An Alternative Available Forum

Click for PDF On March 22, 2018, in a 4-1 opinion, the Delaware Supreme Court held that where defendants have demonstrated that litigating in Delaware would result in an overwhelming hardship to defendants, Delaware courts may dismiss suits under the doctrine of forum non conveniens even if no alternative forum is available.[1]  Given the significant number of multinational corporations subject to suit in Delaware, and the challenges those defendants face presenting a meaningful defense where the key documents, witnesses and evidence reside overseas, this ruling will go a significant way toward enabling defendants to better protect their rights to a full and fair trial. The underlying litigation was filed in Delaware state court by Argentine citizens alleging exposure to pesticides used on Argentine tobacco farms and seeking compensatory and punitive damages against several defendants, including Monsanto Company, Philip Morris Global Brands, Inc., and Philip Morris USA Inc. (“Philip Morris USA”). Rejecting the rules governing forum non conveniens in federal court, and adopting reasoning consistent with the forum non conveniens approach in New York’s courts, the Delaware Supreme Court held that the existence of an alternative forum is not a pre-requisite to dismissal, but rather only one of many factors to be considered in making the determination whether “‘litigating in Delaware would result in an overwhelming hardship to [the defendant].’”[2] The Delaware Supreme Court explained that the doctrine of forum non conveniens has changed dramatically since it was first recognized by the U.S. Supreme Court in 1947.  Citing one study showing that federal courts granted “roughly half of motions to dismiss for forum non conveniens,” the Court wrote that “state courts now shoulder more of the transnational litigation.”[3]   But these “cases are complex and strain judicial resources,” as demonstrated by the present litigation, in which all conduct occurred in Argentina, all documents and witnesses would be located in Argentina, and the Delaware courts would need to apply Argentine law to a dispute that “has no real connection [to Delaware].”[4] International comity also informed the Court’s decision not to require an alternative forum prior to dismissal.  The Court recognized that “some countries have erected barriers preventing plaintiffs from pursuing litigation in their home country once a case has been filed in the United States” and that “plaintiffs can take steps to render the foreign jurisdiction unavailable.”[5]  The Court reasoned that rejecting the available-forum requirement “might encourage foreign jurisdictions to rethink laws and rules shifting to the U.S. courts disputes that are more closely connected to their own countries and citizens.”[6] In announcing the rule, the Delaware Supreme Court did not totally foreclose foreign plaintiffs from bringing suit against Delaware companies in Delaware courts because “[t]he degree of the Delaware corporate defendant’s connection to the alleged wrong will still be considered” in the forum non conveniens analysis.[7]  But the Court emphasized that “trial court[s] will … have the discretion to dismiss a transnational dispute when the defendant has demonstrated overwhelming hardship if the case is litigated in the Delaware courts, even if an alternative forum is not available.”[8] The Delaware Supreme Court’s decision is a significant development in transnational case law.  Given the sheer number of businesses incorporated in Delaware, Delaware state court is an obvious target for foreign plaintiffs seeking to avail themselves of American courts, which are widely viewed as plaintiff-friendly.  But this decision gives U.S. businesses sued in connection with foreign conduct another arrow in their quivers as they defend against costly transnational litigation. Gibson Dunn represented Philip Morris USA in the Delaware litigation.  Patrick Dennis, Miguel Estrada, Perlette Jura, and Amir Tayrani led the Gibson Dunn team.    [1]   Aranda v. Philip Morris USA, Inc., No. 525, 2016 (Del. Mar. 22, 2018).    [2]   Id. at 13-14 (quoting Mar–Land Indus. Contractors, Inc. v. Caribbean Petroleum Refining, L.P., 777 A.2d 774, 779 (Del. 2001)).    [3]   Id. at 14-15 (citing Maggie Gardner, Retiring Forum Non Conveniens, 92 N.Y.U. L. Rev. 390, 396 (2017)).    [4]   Id. at 15-16.    [5]   Id. at 16.    [6]   Id. at 17-18.    [7]   Id. at 18.    [8]   Id. The following Gibson Dunn lawyers assisted in the preparation of this client update: Patrick Dennis, Perlette Jura, Amir Tayrani, Chris Leach, and Miguel Loza Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s Transnational Litigation Group: Randy M. Mastro – New York (+1 212-351-3825, rmastro@gibsondunn.com) Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Scott A. Edelman – Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com) Andrea E. Neuman – New York (+1 212-351-3883, aneuman@gibsondunn.com) William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com) Perlette Michèle Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com) Please also feel free to contact the following  members of the Environmental Litigation and Mass Tort practice group: Washington, D.C. Stacie B. Fletcher (+1 202-887-3627, sfletcher@gibsondunn.com) Avi S. Garbow – Co-Chair (+1 202-955-8558, agarbow@gibsondunn.com) Raymond B. Ludwiszewski (+1 202-955-8665, rludwiszewski@gibsondunn.com) Michael K. Murphy (+1 202-955-8238, mmurphy@gibsondunn.com) Daniel W. Nelson – Co-Chair (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley – Co-Chair (+1 202-887-3689, pseley@gibsondunn.com) Los Angeles Patrick W. Dennis (+1 213-229-7568, pdennis@gibsondunn.com) Matthew Hoffman (+1 213-229-7584, mhoffman@gibsondunn.com) Thomas Manakides (+1 949-451-4060, tmanakides@gibsondunn.com) New York Anne M. Champion (+1 212-351-5361, achampion@gibsondunn.com) Andrea E. Neuman (+1 212-351-3883, aneuman@gibsondunn.com) San Francisco Peter S. Modlin (+1 415-393-8392, pmodlin@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 20, 2018 |
Supreme Court Holds States May Hear Securities Fraud Class Actions Under The 1933 Act

Click for PDF Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439 Decided March 20, 2018 Today, the Supreme Court held 9-0 that class actions alleging only federal claims under the Securities Act of 1933 may be heard in state court and, if brought in state court, cannot be removed to federal court. Background: Federal and state courts have traditionally shared jurisdiction over claims under the Securities Act of 1933. After the Private Securities Litigation Reform Act of 1995 (PSLRA) tightened standards for pleading and proving federal securities fraud class actions, plaintiffs began filing those claims in state court. In response, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which requires certain “covered class actions” alleging state law securities claims to be heard and dismissed in federal court. 15 U.S.C. § 77p(c). But courts were split over whether covered class actions filed in state court that allege only claims under the 1933 Act also must be heard in federal court. In this case, investors in Cyan, Inc. filed a class action in California state court alleging only claims under the 1933 Act. The California courts refused to dismiss the case for lack of subject-matter jurisdiction. Issues: (1) Whether state courts lack subject-matter jurisdiction over class actions that allege only Securities Act of 1933 claims, and (2) Whether defendants in class actions filed in state court that allege only 1933 Act claims may remove the cases to federal court. “[W]e will not revise [Congress’s] legislative choice, by reading a conforming amendment and a definition in a most improbable way, in an effort to make the world of securities litigation more consistent or pure.” Justice Kagan,writing for the Court Court’s Holding: SLUSA does not deprive state courts of subject-matter jurisdiction over class actions raising only claims under the 1933 Act and does not authorize defendants to remove such actions to federal court. What It Means: SLUSA has often been the subject of statutory-interpretation disputes. But here, the unanimous Court held that SLUSA’s “clear statutory language” does not preclude state courts from adjudicating class actions involving 1933 Act claims. SLUSA’s class-action bar and federal-court-channeling provision apply only to state law claims. Under SLUSA, covered securities class actions based on the 1934 Act must proceed in federal court. 15 U.S.C. § 78aa. But as a result of the Court’s decision today, covered class actions based only on the 1933 Act may proceed in state court. Either way, the Court emphasized, the substantive protections of the PSLRA (such as the safe harbor for forward-looking statements) apply to all claims under both the 1933 and 1934 Acts. The United States argued that SLUSA permits defendants in class actions filed in state court that raise 1933 Act claims to remove those actions to federal court. The Court disagreed. In the wake of this ruling, businesses should expect to see more securities class actions alleging violations of the 1933 Act in state court, because plaintiffs will seek to take advantage of state courts that are perceived to be friendlier to their interests. This significant loophole may prompt Congress to enact new legislation, similar to SLUSA, to ensure that plaintiffs are required to bring securities class actions in federal court. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Securities Litigation Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com Robert F. Serio +1 212.351.3917 rserio@gibsondunn.com Meryl L. Young +1 949.451.4229 myoung@gibsondunn.com Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 19, 2018 |
FERC Takes Aim at Income Tax Over Recovery in Pipelines’ Regulated Rates

Click for PDF Last week, on March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a number of orders aimed at addressing potential over-recovery of income tax in pipelines’ regulated rates.  First, in the wake of a loss in the D.C. Circuit, FERC reversed course on its long-standing policy of allowing master limited partnerships (MLPs) to include an income-tax allowance in their cost-of-service rates.  Second, FERC announced various initiatives to address potential over-recovery of taxes through cost-of-service rates that may result from the reduction in the corporate tax rate from 35% to 21%.  Although the markets initially reacted quite negatively, the actual impact will not be immediate and will vary considerably from company to company. Indeed, many companies have already announced that the FERC orders will not have a material impact on their revenue. Reversal of Income Tax Policy for MLPs[1] In the wake of the unfavorable United Airlines v. FERC[2] decision, the FERC reversed its long-standing policy of allowing MLPs to include an income-tax allowance in their cost-of-service rates.  FERC issued a policy statement that found such an allowance results in an impermissible double-recovery of costs in combination with the discounted cash flow (DCF) methodology for calculating return on equity.  FERC concluded that because the DCF methodology used to calculate the return necessary to attract capital is done on a pre-tax basis, investors’ tax liability is already reflected in calculated return on equity.  Thus, FERC concluded that any allowance for income tax with respect to an MLP would result in double-recovery of those costs. A few important points to keep in mind regarding the impact of this policy change: This only impacts FERC cost-of-service rates: Oil Pipelines: For oil pipelines, market-based rates and settlement rates will be unaffected.  With respect to indexed rates, there is no automatic immediate impact.  FERC will, however, address this issue in the next reassessment of the index in 2020. Gas Pipelines:  For interstate gas pipelines negotiated rates, market-based rates, and settlement rates are not affected.  Discount rates could be impacted, but only to the extent recourse rates are reduced below the discount-rate level as a result of the implementation of this policy. The policy statement does not actually change any pipeline’s rates. Oil Pipelines:  For oil pipelines, it announces a new policy that the pipelines may no longer include an income tax allowance in their cost of service on the annual Form 6 reporting.  Once this cost-of-service data is made publically available, it certainly could lead to FERC or shippers filing a complaint pursuant to Section 13(1) of the Interstate Commerce Act to reduce rates.  In addition, FERC intends to address the impact of the tax reduction in the five year review of the oil pipeline index in 2020.  Thus, in theory, FERC could require a reduction in rates for any pipelines whose rates are set at the ceiling by setting a negative index at that time. Gas Pipelines:  For gas pipelines, FERC is proposing a one-time reporting requirement to obtain data about the impact of this policy and the reduction in the corporate tax rate on each pipeline’s cost of service as discussed in more detail below.  Again, once this cost-of-service data is made public, FERC or shippers could initiate a proceeding to reduce rates pursuant to Section 5 of the Natural Gas Act.  This result is not automatic, however. The policy statement did not decide whether other non-pass through entities (e.g., limited partnerships, LLCs, etc.) would also no longer be permitted to recover a tax allowance in their rates.  Instead, FERC deferred those issues to consideration in future rate proceedings, but made clear that the issue of double-recovery would need to be addressed in those instances.  FERC’s Order on Remand in the United Airlines case[3] seems to leave little room for FERC to reach a contrary finding or other pass-through entities, as FERC reasoned that “MLPs and similar pass-through entities do not incur income tax at the entity level” and therefore the ROE offered under the DCF methodology must be sufficient to cover the investor’s tax liability. Notice of Proposed Rulemaking on Federal Income Tax Rate Reductions for Gas Pipelines[4] FERC issued a notice of proposed rulemaking that seeks require natural gas pipelines to do a one-time informational filing of an “abbreviated cost and revenue study” to provide information to allow FERC to determine whether gas pipelines are over-recovering for taxes in light of the reduction in the corporate tax rate.  FERC proposed to use the same form that FERC has attached to its orders initiating Section 5 rate investigations in recent years for this informational filing.  FERC then proposes several options to address over-recoveries, including some intended to encourage pipelines to voluntarily reduce rates: Limited Section 4 Filings:  Although FERC typically does not allow pipelines to file a limited rate case to adjust individual components of rates, FERC proposed to allow pipelines to file a limited Section 4 rate case to reduce their rates by the percentage reduction in the cost of service from the decrease in the federal corporate income tax rate and the elimination of the income tax allowance for MLPs. File a Statement Explaining Why an Adjustment is Not Necessary:  If a pipeline’s reduction in cost of service from the tax cuts and elimination of income tax allowance are offset by increases in costs elsewhere or if the pipeline is overall not recovering its cost of service despite the tax decease, a pipeline can file a statement explaining why no decrease in rates is appropriate despite the income tax reduction. Commit to File a General Section 4 Rate Case (or an Uncontested Settlement):  In lieu of a limited Section 4 rate case, pipelines can commit to file a general Section 4 rate case and indicate an approximate time-frame for making such a filing.  FERC proposes that if a pipeline commits to make such a filing by December 31, 2018, FERC will not initiate a Section 5 investigation of the pipeline’s rates prior to that time. File the Information Required and Do Nothing Else:  FERC, in a somewhat disingenuous acknowledgement that it cannot legally force pipelines to file a Section 4 rate case, notes that a pipeline may simply file the required information with FERC, take no further action, and wait to see if FERC initiates a Section 5 investigation.  FERC proposes, however, to open a rate proceeding docket for each filing and issue a public notice inviting interventions and protests on the filing.  FERC will then decide whether to initiate a Section 5 proceeding based on the public comments and protests.  In sum, these procedures are strikingly similar to requiring a Section 4 rate filing. With respect to intrastate Hinshaw and Section 311 pipelines, FERC found that its existing policies are generally sufficient to address potential over-recovery resulting from the Tax Cuts and Jobs Act.  However, FERC does propose to require that if a pipeline adjusts its state-jurisdictional rates as a result of the Act, then the pipeline must file a new rate election within 30 days after the reduced intrastate rate becomes effective. Notice of Inquiry Regarding the Effect of Tax Cuts and Jobs Act[5] Finally, FERC opened an inquiry to solicit comments on the impacts of other aspects of tax reform on jurisdictional rates, such as the treatment of accumulated deferred income taxes and the new 100% bonus depreciation regime which applies to oil pipelines.  In this regard, FERC is particularly interested how to treat accumulated deferred income tax going forward in light of the reduction in future tax liability.  FERC is soliciting comments on various topics related to ADIT, including: How to ensure rate base continues to be treated in a manner similar to that prior to the Tax Cuts and Jobs Act until excess and deficient ADIT is fully settled. Whether and how adjustments should be made so that rate base may be appropriately adjusted by excess and deficient ADIT. How tax allowance or expense in cost of service will be implemented to reflect the amortization of excess and deficient plant-based ADIT. FERC is also soliciting comments on the effect of the bonus depreciation change under the Tax Cuts and Jobs Act, which increases the bonus depreciation allowance from 50% to 100% for qualified property placed into service after September 1, 2017 and before January 1, 2023. Comments are due 60 days after publication of the notice in Federal Register.    [1]   Revised Policy Statement on Treatment of Income Taxes, 162 FERC ¶ 61,227 (2018).    [2]   827 F.3d 122 (D.C. Cir. 2016).    [3]   SFPP, L.P., 162 FERC ¶ 61,228 at P 22 (2018).    [4]   Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, 162 FERC ¶ 61,226 (2018).    [5]   Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission Jurisdictional Rates, 162 FERC ¶ 61,223 (2018). Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following: William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com) Ruth M. Porter – Washington, D.C. (+1 202-887-3666, rporter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 12, 2018 |
Brexit – converting the political deal into a legal deal and the end state

Click for PDF In our client alert of 8 December 2017 we summarised the political deal relating to the terms of withdrawal of the UK from the EU with a two year transition.  It is important to remember that this “Phase 1” deal only relates to the separation terms and not to the future relationship between the UK and the EU post Brexit. In her Mansion House speech on 2 March 2018 UK Prime Minister Theresa May set out Britain’s vision for a future relationship.  The full text of her speech can be found here.  It continues to make it clear that the UK will remain outside the Single Market and Customs Union. On the critical issue of the Irish border, the UK Government’s position remains that a technological solution is available to ensure that there is neither a hard border within Ireland nor a border in the Irish Sea which would divide the UK.  Neither the EU nor Ireland itself accept that a technological solution is workable, and there remain doubts whether such a solution is possible if the UK is outside the EU Customs Union (or something equivalent to a customs union).  The terms of the political deal in December make it clear that, in the absence of an agreed solution on this issue, the UK will maintain full alignment with the rules of the Single Market and Customs Union. The UK’s main opposition party, The Labour Party, has now shifted its position to support the UK remaining in a customs union. The Government is proposing a “customs partnership” which would mirror the EU’s requirements for imports and rules of origin. Theresa May has acknowledged both that access to the markets of the UK and EU will be less than it is today and that the decisions of the CJEU will continue to affect the UK after Brexit. On a future trade agreement, the UK’s position is that it will not accept the rights of Canada and the obligations of Norway and that a “bespoke model” is not the only solution. There is, however, an acknowledgement that, if the UK wants access to the EU’s market, it will need to commit to some areas of regulation such as state aid and anti-trust. Prime Minister May has confirmed that the UK will not engage in a “race to the bottom” in its standards in areas such as worker’s rights and environmental protections, and that there should be a comprehensive system of mutual recognition of regulatory standards. She has also said that there will need to be an independent arbitration mechanism to deal with any disagreements in relation to any future trade agreement. Theresa May has also said that financial services should be part of a deep and comprehensive partnership. The UK will also pay to remain in the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency but will not remain part of the EU’s Digital Single Market. Donald Tusk, the European Council President, has rejected much of the substance of the UK’s position, stating that the only possible arrangement is a free trade agreement excluding the mutual recognition model at the heart of the UK’s proposals.  Crucially, however, he has said that there would be more room for negotiation should the UK’s red lines on the Customs Union and Single Market “evolve”. It is clear that this is an opening position for the two sides in the negotiations and that there is a long history of EU negotiations being settled at the very last minute.  The current timetable envisages clarity on the final terms of the transition and the “end state” by the European Council meeting on 18/19 October 2018. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 7, 2018 |
Intra-EU Investment Treaties: Is It Time to Restructure Your Investment?

Click for PDF Yesterday, the Court of Justice of the European Union (CJEU) issued its much awaited ruling on the compatibility of intra-EU bilateral investment treaties (BITs) with EU law, in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia.[1] The CJEU determined that arbitration provisions found in BITs concluded between EU Member States are incompatible with EU law.  Adopting the policy views expressed by the European Commission in recent years, the CJEU’s decision goes against the Advisory Opinion of the Attorney General Wathelet issued in September 2017[2], who had advised that there is no incompatibility with EU law.  The decision also goes against a long line of decisions from international arbitration tribunals rejecting the suggestion that EU law precludes the jurisdiction of such arbitral tribunals. The decision itself is surprisingly light in terms of its reasoning and leaves many questions unanswered.  For example, it is not clear how the CJEU ruling will impact pending disputes against EU Member States under intra-EU BITs.  It also appears to suggest that arbitration under the Energy Charter Treaty may be unaffected. However, the ruling no doubt will have consequences for the protection of foreign investments within the EU going forward.  Investors will not be able to commence arbitration proceedings under BITs between EU Member States.  Thus, in order to maximize protection from potential adverse government actions, investors from EU Member States with investments in other EU Member States should seriously consider restructuring their investments in order to ensure that they can take advantage of investment treaty protections. Background to the Dispute The question of compatibility of intra-EU BITs with EU law was brought before the CJEU following a request for preliminary ruling by the German Federal Court of Justice (Bundesgerichtshof) (BGH) in 2016.[3]  The BGH referred the issue to the CJEU in the context of a challenge to an arbitral award rendered under the Netherlands and Slovakia BIT of 1991 in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia in December 2012.  The Slovak Republic was seeking to set aside the UNCITRAL award before the Frankfurt courts (Frankfurt was the seat of arbitration).  The arbitral tribunal had awarded the claimant, Achmea, EUR 22.1 million plus interest and costs. The Slovakia argued inter alia that the BIT was incompatible with EU law based on certain provisions of the Treaty of the Functioning of the European Union (TFEU) and that the EU courts had exclusive jurisdiction over Achmea’s claims.  The first instance court in Frankfurt initially dismissed Slovakia’s application to have the award set aside.  Slovakia subsequently appealed to the BGH, following which BGH referred the questions on incompatibility to the CJEU, while enunciating its view that the BIT was in fact compatible with EU law. Although not binding on the CJEU, the EU Advocate General (AG) also weighed in the discussion with an Advisory Opinion in September 2017 in which he opined that intra-EU BITs are indeed compatible with EU law.  The AG expressly disagreed with the European Commission’s position (which had intervened and filed written submissions in a number of intra-EU BIT arbitrations[4]) that intra-EU BITs are incompatible with EU law.[5] CJEU’s Decision The BGH’s opinion and the AG’s Advisory Opinion, however, did not sway the CJEU.  In fact, the CJEU ruled that the arbitration clause featured in the Netherlands and Slovakia BIT of 1991 has an adverse effect on the autonomy of EU law and was therefore incompatible.  The Court opined that the BIT established a mechanism for settling disputes between an investor and a Member State by an arbitral tribunal which falls outside the judicial system of the EU and thus did not ensure the full effectiveness of EU law should the dispute in question require the interpretation or application of EU law. Implications of the CJEU Decision Currently, there are more than 190 BITs between EU Member States still in force and the CJEU’s ruling today will therefore have ramifications for the future of investment protection within the EU.  Although it remains to be seen how future investment treaty tribunals will interpret the CJEU’s ruling, they may consider that they lack jurisdiction when asked to hear disputes brought by European investors against EU Member States under intra-EU BITs in light of this ruling.  At the very least, any EU national court that is asked to assist in arbitration proceedings seated in EU Member States or hear recognition/enforcement applications for investment treaty awards under intra-EU BITs would need to consider the CJEU’s ruling.  What this decision means for arbitrations taking place outside the EU or under the self-contained regime of the ICSID Convention rules, however, is unclear. From the face of the decision, it appears that the CJEU left open the question as to whether its findings would apply to the provisions of multilateral treaties, such as the Energy Charter Treaty (ECT), to which the EU itself is a Party.   In particular, the CJEU appeared to distinguish between agreements only signed between two EU Member States and those signed by the EU itself (such as the ECT).  To date, all ECT tribunals that have considered jurisdictional objections based on EU law have rejected such arguments.[6] What Should Investors Consider Doing in Light of the Decision? In light of today’s ruling, it would be wise for EU based investors with investments in other EU Member States to consider restructuring their investments to ensure that their corporate structure includes at least one entity outside the EU in a country that has a BIT with the relevant EU Member State.  As has been consistently confirmed by investment treaty tribunals, re-structuring of investments before a dispute arises with a view to maximizing investment treaty protections is a legitimate business goal.  By undertaking such a restructuring, investors will ensure that they have additional remedies should they face adverse government actions against their investments.    [1]   The ruling can be accessed at curia.europa.eu.    [2]   Opinion of Advocate General Wathelet, Case C-284/16, Slowakische Republik v Achmea BV, 19 September 2017, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62016CC0284&from=EN>.    [3]   See the press release No. 81/2016 dated 10 May 2016, in which the BGH announced that it requested a preliminary ruling from the CJEU, available at <http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=pm&Datum=2016&Sort=3&nr=74606&pos=2&anz=83>.    [4]   For example, in Eastern Sugar v. Czech Republic, SCC Case No. 088/2004; AES v. Hungary, ICSID Case No. ARB/07/22; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; Charanne v. Spain, SCC Case No. V062/2012; Isolux v. Spain, SCC Case V2013/153; Blusun v. Italy, ICSID Case No. ARB/14/3; Novenergia v Spain, SCC Case No. 2015/063; in enforcement proceedings in Micula v Romania No. 15-3109-cv (2d Cir.).    [5]   In the recent years, the Commission has been increasing pressure on arbitral tribunals hearing disputes under intra-EU BITs to decline jurisdiction and also on EU Member States.  In 2015, for example, it initiated infringement proceedings against five EU Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) and requested them to terminate their intra-EU BITs, see press release dated 18 June 2015 available at: <http://europa.eu/rapid/press-release_IP-15-5198_en.htm>.  In late November 2017, the European Commission’s Competition Office has indicated that any compensation to be paid by EU Member States to foreign investors following successful investment treaty claims would constitute state aid requiring approval from the Commission: see report dated 10 November 2017 available at: <http://ec.europa.eu/competition/state_aid/cases/258770/258770_1945237_333_2.pdf>.    [6]   See for example Charanne B.V. and Construction Investments S.A.R.L. v. Spain, SCC No. 062/2012; RREEF v. Spain, ICSID Case No. ARB/13/30; Eiser Infrastructure v. Spain, ICSID Case No. ARB/13/36; Blusun v. Italy, ICSID Case No. ARB/14/3; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration practice group, or the following: Cyrus Benson – London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com) Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com) Jeffrey Sullivan – London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com) Rahim Moloo – New York (+1 212-351-2413, rmoloo@gibsondunn.com) Ceyda Knoebel – London (+44 (0)20 7071 4243, cknoebel@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 2, 2018 |
ALJs Check Their Own Work, With Unsurprising Results

San Francisco partner Marc Fagel is the author of “ALJs Check Their Own Work, With Unsurprising Results,” [PDF] published by Law360 on March 2, 2018.

February 21, 2018 |
Two Gibson Dunn Cases Named Top Verdicts of the Year

The Daily Journal recognized two Gibson Dunn cases in its annual feature on the top verdicts in California for 2017: Bastidas v. Good Samaritan Hospital LP [PDF], where the Gibson Dunn team won a unanimous verdict in a civil rights case with important implications for the ability of medical staffs to properly censor doctors, was recognized as one of the 20 cases in the Top Defense Verdicts list U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. [PDF], in which Gibson Dunn defended Gardens Regional Hospital and Medical Center Inc. from a False Claims Act lawsuit, was also recognized as a Top Defense Verdict. The feature was published in the February 21, 2018 issue.

February 15, 2018 |
Michele Maryott and Theane Evangelis Named Litigators of the Week

The Am Law Litigation Daily named partners Michele Maryott and Theane Evangelis as its Litigators of the Week [PDF] for their trial victory on behalf of Grubhub “in a bellwether case that could have a lasting impact on how gig-economy workers are classified.”  The profile was published on February 15, 2018.  

February 8, 2018 |
Law360 Names Gibson Dunn Among its Securities 2017 Practice Groups of the Year

Law360 named Gibson Dunn one of its seven Securities Practice Groups of the Year [PDF] for 2017. The firm’s profile was published on February 8, 2018.

February 6, 2018 |
Webcast: Shareholder Litigation Developments and Trends

Shareholder lawsuits are not only complicated to litigate, but due to the high financial stakes, these actions can be among the most threatening to a company and its directors and officers. It has been over twenty years since Congress enacted the Private Securities Litigation Reform Act of 1995, and since that time, private actions under the federal securities laws have continued to be filed at a steady pace. In addition, shareholders have aggressively pursued state-law claims to contest mergers or to assert claims purportedly on behalf of companies. Over the last decade, the U.S. Supreme Court and the Delaware Supreme Court have issued multiple decisions impacting the way shareholder actions are litigated and decided. This One-Hour Briefing will highlight recent developments and trends in this constantly evolving and complex area of the law. View Slides Expert faculty discuss: Shareholders actions filing and settlement trends. Developments in appraisal litigation, in which shareholders whose shares will be cashed out in a merger or consolidation seek judicial appraisal of the value of their shares. Developments concerning loss causation in Section 10(b) cases precipitated by short sellers PANELISTS: Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher. She is co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. Ms. Conn has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, accounting malpractice, antitrust, contracts, insurance and information technology. She is also a member of Gibson Dunn’s General Commercial Litigation, Securities Litigation, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Gabrielle Levin is a partner in the New York office of Gibson, Dunn & Crutcher. She is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. Her practice focuses on representing corporate clients in securities, employment, and general litigation matters. She has extensive experience in securities class actions, shareholder derivative litigation, SOX and Dodd-Frank whistleblower litigation, and employment litigation. Ms. Levin is a member of Gibson Dunn’s Securities Litigation Practice, Labor and Employment Practice, and Media, Entertainment and Technology Practice Group, as well as the Firm’s Diversity Committee. Alexander K. Mircheff is a partner in the Los Angeles office Gibson, Dunn & Crutcher. He is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. His practice emphasizes securities and appellate litigation, and he has substantial experience representing issuers, officers, directors, and underwriters in class action and shareholder derivative matters. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.00 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

February 2, 2018 |
Law360 Names Gibson Dunn Among its Transportation 2017 practice Groups of the Year

Law360 named Gibson Dunn one of its five Transportation Practice Groups of the Year [PDF] for 2017. The firm’s profile was published on February 2, 2018.

February 2, 2018 |
Exmark v. Briggs: Role of Claim Language in Damages Apportionment

New York partner Paul Torchia is the author of “Exmark v. Briggs: Role of Claim Language in Damages Apportionment” published by Bloomberg BNA’s Patent, Trademark & Copyright Journal on February 2, 2018.

February 1, 2018 |
2017 Year-End Securities Litigation Update

Click for PDF 2017 brought a furious and nearly unprecedented rate of new filings, as well as several important developments in securities law.  This year-end update highlights what you most need to know in securities litigation developments and trends for the latter half of 2017: The Supreme Court heard oral argument in Cyan, which should resolve whether state courts have subject matter jurisdiction over class actions brought under the Securities Act of 1933.  Although there is evidence that the pace of filings of state securities lawsuits has slowed somewhat, defendants in pending state court cases have generally been unsuccessful in using Cyan to procure a stay or remove such cases to federal court. The Supreme Court also granted certiorari in China Agritech to address whether the filing of a class action tolls the statute of limitations for absent class members who bring subsequent class actions. A settlement by the parties in Leidos means the Supreme Court will not yet resolve the split between the Second and Ninth Circuits over whether omission of a disclosure required by Item 303 of the SEC’s Regulation S-K is actionable under Section 10(b) and Rule 10b–5 of the federal securities laws, leaving uncertainty as to the scope of companies’ disclosure obligations under Item 303. We explain important developments in Delaware courts, including the Court of Chancery’s application of Corwin, as well as the Delaware Supreme Court’s treatment of (1) deal price in appraisal litigation, (2) Caremark claims, (3) shareholder ratification of director self-compensation decisions, and (4) collateral estoppel in the context of prior determinations of demand futility. Finally, we highlight significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II. I.     Filing and Settlement Trends The number of new securities class actions filed in federal court in 2017 significantly exceeded filings in previous years.  According to a newly-released NERA Economic Consulting study (“NERA”), 432 cases were filed in 2017, compared to 300 in 2016 and an average of 235 cases filed annually over the last five years.  The only year in the past two decades that remotely compares is 2001, but that year included a significant number of so-called “IPO laddering” cases.  Although there is not a similar singular explanation for the marked increase in filings in 2017, so-called “merger objection” cases appear to be one driving force.  According to NERA, nearly 200 merger objection cases were filed in federal court in 2017, more than double the number filed in 2017 (90), and quadruple the number filed in 2015 (46). The other big takeaway from the data may be more welcome news:  while the number of filings is up, both average and median settlement amounts were down in 2017.  More than 60% of settlements in 2017 were under $10 million, while only 8% were more than $100 million and none exceeded $500 million.  Most significantly, median settlement amounts as a percentage of investor losses continue to reflect a pattern that has persisted for decades.  In the last fifteen years, median settlement amounts have never exceeded 3% of total alleged investor losses.  In 2017, that percentage was 2.6%. The industry sectors most frequently sued in 2017 continue to be healthcare (26% of all cases filed), tech (14%), and finance (14%).  2017 also continued the upward trend in the percentage of cases filed against consumer products companies, which accounted for 10% of cases in 2017. A.     Filing Trends Figure 1 below reflects filing rates for 2017 (all charts courtesy of NERA).  Four hundred and thirty-two cases were filed this year.  This figure does not include the many class suits filed in state courts or the increasing number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery.  Those state court cases represent a “force multiplier” of sorts in the dynamics of securities litigation today.  Figure 1: B.     Mix of Cases Filed in 2017 1.     Filings By Industry Sector Following a significant bump in the percentage of cases filed against healthcare companies last year, new 2017 filings show a relative decline in this sector.  Health technology and services still accounts for more than 1 out of every four 4 cases, however.  The percentage of new cases involving consumer products continues a three-year trend upward, now comprising 10% of all filings in 2017.  The proportion of cases in the electronics, finance, and energy sectors remained roughly consistent as compared to 2016.  See Figure 2 below. Figure 2:   2.     Merger Cases As shown in Figure 3 below, almost 200 “merger objection” cases were filed in 2017.  This is more than double the number of such cases filed in 2016, and more than quadruple the number filed in 2014 and 2015.  Note that this statistic only tracks cases filed in federal courts.  Most M&A litigation occurs in state court, particularly the Delaware Court of Chancery.  But as we have discussed in our prior updates, the Delaware Court of Chancery announced in early 2016 in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016) that the much-abused practice of filing an M&A case followed shortly by an agreement on “disclosure only” settlement is just about at an end.  This is likely driving an increasing number of cases to federal court. Figure 3:   C.     Settlement Trends As Figure 4 shows, median settlements were $6 million in 2017, lower than the median amounts in any of the last dozen years.  In any given year, of course, the statistics can mask a number of important factors that contribute to any particular settlement value, such as (i) the amount of D&O insurance; (ii) the presence of parallel proceedings, including government investigations and enforcement actions; (iii) the nature of the events that triggered the suit, such as the announcement of a major restatement; (iv) the range of provable damages in the case; and (v) whether the suit is brought under Section 10(b) of the Exchange Act or Section 11 of the Securities Act.  Median settlement statistics also can be influenced by the timing of large settlements, any one of which can skew the numbers, but those big settlements were markedly absent this year. In 2017, the percentage of settlements above $100 million decreased sharply from 15% to 8% of all settlements, and there were no settlements over $500 million for the first time in the last decade. At the same time, the percentage of settlements below $10 million increased from 51% to 61%. Figure 4:   D.     Emerging Areas:  Data Breaches and Cryptocurrencies One much-publicized source of securities litigation in 2017 was corporate data breaches.  Although previous breach-related derivative suits have been largely unsuccessful, many believe that a significant increase in the number of securities fraud cases targeting companies’ disclosures related to major data breaches is likely.  In the second half of 2017 shareholders launched class actions against, among others, Equifax and PayPal that are currently pending.  The results of these cases could affect the number and scope of similar securities cases we see in 2018 and beyond. Another area to watch closely in the coming year is crytpocurrencies.  The dramatic rise in value of Bitcoin and series of initial coin offerings in 2017 have been met with increased attention not only from the media but also the SEC and securities litigation plaintiffs’ attorneys.  Indeed, the end of 2017 saw securities class actions filed against multiple cryptocurrency-related entities including Tezos, Centra Tech, Monkey Capital, ATBCOIN, and The Crypto Company. We will monitor these and other similar cases in 2018. II.     What to Watch for in the Supreme Court A.     Leidos Removed from Oral Argument Calendar after Parties Reach Settlement In our 2017 Mid-Year Securities Litigation Update, we highlighted Leidos v. Indiana Public Retirement System, No. 16-581, in which the Supreme Court was scheduled to hear oral argument on November 6, 2017.  As readers will recall, Leidos concerned a circuit split on whether a private class action under Section 10(b) and Rule 10b-5 could be premised on alleged omissions from disclosures required by Item 303 of the SEC’s Regulation S-K, 17 C.F.R. § 229.3030.  However, the Court has removed the case from its oral argument calendar after the parties informed the Court that they had agreed to settle the litigation.  The case is now being held in abeyance pending the district court’s approval of the parties’ settlement agreement.  See Stipulation of Settlement (Dkt. 179), In re SAIC, Inc. Secs. Litig., No. 1:12-cv-01353-DAB (S.D.N.Y. Dec. 13, 2017). We analyze the implications of the Leidos settlement, including the continuing unresolved split between, on one hand, the Second Circuit and, on the other hand, the Third and Ninth Circuits, in Section V below. Gibson Dunn represents petitioner in this case. B.     Making Sense of “Gibberish” – Cyan and the Securities Litigation Uniform Standards Act As readers will recall, the Supreme Court granted the petition for a writ of certiorari in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, on June 27, 2017.  The fundamental issue in Cyan is whether Congress intended to preclude state-court jurisdiction over “covered class actions” under the Securities Act of 1933 when it enacted the Securities Litigation Uniform Standards Act (“SLUSA”) in 1998.  As amended by SLUSA, the Securities Act provides for concurrent jurisdiction “except as provided in section 77p of this title with respect to covered class actions.”  15 U.S.C. § 77v(a). Federal courts have been sharply divided over this issue in recent years.  Of note, courts in the Second Circuit have favored exclusive federal jurisdiction while courts in the Ninth Circuit have permitted state courts to exercise concurrent jurisdiction.  This divergence is significant because the Second and Ninth Circuits handle more federal securities litigation than the other circuits combined.  California state courts have been particularly active in this area since 2011, when the California Court of Appeal held that states have concurrent jurisdiction.  See Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789 (2011).  Indeed, Cyan originated in California state court, where the lower court denied the petitioners’ motion for a judgment on the pleadings for lack of subject matter jurisdiction. In their merits brief, petitioners (defendants below) argue that while state courts generally have concurrent jurisdiction to decide claims under the Securities Act, SLUSA constricted state courts’ jurisdiction to cases “except as provided in section 16 with respect to covered class actions [i.e., those involving fifty or more people].”  Brief for Petitioners at 10 (quoting 15 U.S.C. § 77v(a)).  In other words, petitioners contend that by referencing covered class actions within an “except” clause, Congress intended to define the “covered” Securities Act claims that could no longer be adjudicated by state courts. In their responsive brief on the merits, respondents (plaintiffs below) argue that Congress did not intend to alter the longstanding concurrent jurisdiction of state courts to hear claims under the Securities Act when it enacted SLUSA.  Brief for Respondents at 6.  Rather, respondents maintain that SLUSA only stripped state courts of jurisdiction to hear so-called “mixed claims,” or those covered class actions raising both state-law and federal Securities Act claims.  Id. at 13–14. The United States, appearing as amicus curiae, argues that SLUSA does not preclude state-court jurisdiction over Securities Act claims, but that it did permit removal of Securities Act suits “like this one”:  “class actions that assert claims only under the [Securities] Act.”  Brief for the United States as Amicus Curiae at 7. On November 28, 2017, the Supreme Court heard oral argument.  Several Justices, seemingly frustrated by the statute’s confusing language, characterized SLUSA’s jurisdictional limitation as “obtuse” at best and “gibberish” at worst.  See Transcript of Oral Argument at 11, 47.  Justice Alito in particular found the statute so poorly drafted that he asked the government’s lawyer whether there is “a certain point at which we say this means nothing, we can’t figure out what it means, and, therefore, it has no effect, it means nothing?”  Id. at 41.  On the other hand, Justice Gorsuch noted that that it was the Supreme Court’s “job to try and give effect whenever possible to Congress’s language.”  Id. at 47. We expect a decision in Cyan by the end of the 2017 Supreme Court Term in June 2018.  We will continue to monitor developments in this area and report on any updates in our 2018 Mid-Year Securities Litigation Update. C.     China Agritech and the Limits of American Pipe Tolling On December 8, 2017, the Supreme Court granted certiorari in China Agritech, Inc. v. Resh, No. 17-432, to consider whether a statute of limitations is tolled for absent class members who bring subsequent class actions outside the applicable limitations period.  While China Agritech does not directly affect substantive securities laws, the holding will likely be of great significance to securities litigators who routinely encounter class actions. China Agritech is set to address the familiar class action tolling rules announced by the Supreme Court in American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983).  In American Pipe, the Supreme Court held that “the commencement of the original class suit tolls the running of the statute for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status.”  414 U.S. at 553.  In Crown, the Supreme Court extended the American Pipe rule to “class members . . . choos[ing] to file their own suits.”  462 U.S. at 354.  Accordingly, “[o]nce the statute of limitations has been tolled, it remains tolled for all members of the putative class until class certification is denied.”  Id. at 354.  If class certification is denied, the Court explained that “class members may [then] choose to file their own suits or to intervene as plaintiffs in the pending action.”  Id. The procedural history of China Agritech highlights the need for further development of American Pipe and Crown.  On June 30, 2014, Michael Resh, an individual stockholder, filed a putative class action against China Agritech and several individual defendants, alleging that they violated federal securities laws by making material misstatements in the company’s SEC filings in 2008 and 2009.  The complaint was based on the same facts and circumstances, and on behalf of the same would-be class, as two previously filed class actions that had been dismissed several months before.  Of note, Resh filed the suit seventeen months after the relevant two-year statute of limitations would have expired absent tolling.  The district court granted the defendants’ motion to dismiss on December 1, 2014, concluding that the rules in American Pipe and Crown would only toll the statute of limitations for Resh’s individual claims, and not for a subsequent class action.  Resh v. China Agritech, 2014 WL 12599849, at *5 (C.D. Cal. Dec. 1, 2014).  To hold otherwise, the district court opined, “would allow tolling to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class certification on the basis of different expert testimony and/or other evidence.”  Id. On May 24, 2017, the Ninth Circuit reversed.  Resh v. China Agritech, Inc., 857 F.3d 994 (9th Cir. 2017).  The court held that American Pipe tolls the limitations period for otherwise untimely class actions and that a plaintiff who seeks to bring a new class action raising the same issues is barred only by “the criteria of Rule 23” and “comity [and] preclusion principles.”  Resh, 857 F.3d at 1005. China Agritech filed a petition for a writ of certiorari to the Supreme Court on September 21, 2017.  It contended that the Ninth Circuit’s holding “cannot be reconciled with the principles animating American Pipe tolling and would lead to significant adverse policy consequences,” primarily that “the tolling period ends only when previously absent plaintiffs stop trying to certify new class actions.”  Petition for Writ of Certiorari at 22.  Such a rule, petitioner argued, would make it difficult to settle disputes in a timely manner, among other practical problems.  See id. at 26.  Petitioner also identified a three-way circuit split on the issue.  It posited that the First, Second, Fifth, and Eleventh Circuits reject American Pipe tolling for subsequent class actions, while the Sixth, Seventh, and Ninth Circuits take the opposite position and extend American Pipe tolling to the limitations period for otherwise untimely class actions.  Petitioner further noted that the Third and Eighth Circuits split the difference by allowing tolling for successive class actions in some circumstances but not when class certification was previously considered and denied.  See id. at 11–18.  The Resh plaintiffs filed their opposition brief on October 23, 2017, disputing the existence of a circuit split regarding American Pipe‘s application to subsequent class actions as well as petitioners’ contention that the Ninth Circuit’s opinion permits endless re-litigation of class certification determinations.  See id. at 15–21. As noted above, the Supreme Court granted certiorari in December 2017.  We expect that the parties will submit their briefing to the Supreme Court in the Spring of 2018, with oral argument to follow in the coming months.  We will continue to monitor this appeal and provide an update in our 2018 Mid-Year Securities Litigation Update. Gibson Dunn represents the Chamber of Commerce and Retail Litigation Center as amici curiae supporting petitioner in this case. D.     Recent Developments in SEC Enforcement Litigation – Lucia and Digital Realty The Supreme Court has also been active in cases relevant to both SEC enforcement and civil securities litigation. On July 21, 2017, Raymond Lucia and Raymond Lucia Companies, Inc., filed a petition for a writ of certiorari to review the D.C. Circuit’s opinion that SEC administrative law judges (“ALJs”) are not officers of the United States within the meaning of the Appointments Clause and, therefore, do not need to be nominated by the President and confirmed by the Senate.  Lucia v. SEC, No. 17-130.  Notably, the Tenth Circuit recently held the contrary in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), which called into question the validity of many ALJs’ prior rulings.  Moreover, while the SEC took the position in the courts of appeals that its ALJs were mere “employees,” the Solicitor General now takes the position in the Supreme Court that ALJs are “Officers.”  The Supreme Court granted review on January 12, 2018, and will hear oral arguments in April.  Gibson Dunn represents petitioners in this case. Separately, on November 28, 2017, the Supreme Court heard oral argument in Digital Realty Trust, Inc. v. Somers, No. 16-1276.  Digital Realty concerns whether the anti-retaliation provision for “whistle-blowers” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported a violation of the securities laws to the SEC and thus fall outside the Act’s literal definition of a “whistle-blower.”  We expect a decision by June 2018. For further analysis of Lucia and Digital Realty, please see our 2017 Year-End Securities Enforcement Update. III.     Delaware Developments A.     Corwin Doctrine In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court held that the business judgment standard of review should be applied to transactions approved (and thereby ratified or “cleansed”) by a non-coerced, fully informed stockholder vote in the absence of a controlling stockholder.  125 A.3d 304 (Del. 2015).  As discussed in our 2017 Mid-Year Update, the Court of Chancery declined to extend the Corwin doctrine under the circumstances in In re Massey Energy, Co. Derivative & Class Action Litigation, where plaintiffs filed Caremark claims to hold defendant directors personally liable for their roles in deliberately flouting mining safety laws and permitting a massive explosion that claimed the lives of twenty-nine miners.  160 A.3d 484, 507 (Del. Ch. 2017) (reasoning that Corwin was not meant to “exonerate[e] corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained”).  In the second half of 2017, the Court of Chancery continued to apply the Corwin doctrine where fully informed, uncoerced stockholders approved an underlying transaction.  E.g., van der Fluit v. Yates, 2017 WL 5953514, at *7–8 (Del. Ch. Nov. 30, 2017) (finding stockholders were not fully informed, and thus Corwin was not satisfied, where the company failed to disclose which of its representatives were involved at key stages of negotiations); Morrison v. Berry, 2017 WL 4317252, at *1 (Del. Ch. Sept. 28, 2017) (applying Corwin in “an exemplary case of the utility of the ratification doctrine”). In one exceptional case, however, the Court of Chancery declined to extend the Corwin doctrine to books-and-records-requests under Section 220 of the Delaware General Corporation Law.  Lavin v. West Corp., 2017 WL 6728702 (Del. Ch. Dec. 29, 2017).  There, the plaintiff’s stated purpose for inspecting the company’s books and records was to “determine whether wrongdoing and mismanagement had taken place” in connection with the underlying merger, and “to investigate the independence and disinterestedness” of the selling company’s board.  Id. at *1.  The defendant company moved to dismiss the plaintiff’s complaint, arguing that the plaintiff failed to state a credible basis of wrongdoing against the company’s board because the company’s disinterested stockholders’ voluntary, fully informed vote “cleansed” any purported breaches of fiduciary duty by satisfying the Corwin doctrine.  Id.  But the Court of Chancery rejected this argument.  Instead, the court held that “Corwin does not fit within the limited scope and purpose of a books and records action in this court,” and explained that “Delaware courts generally do not evaluate the viability of the demand based on the likelihood that the stockholder will succeed in a plenary action.”  Id. at *9. B.     The Delaware Supreme Court Reaffirmed The Role Of Deal Price In Appraisal Litigation—But Stopped Short Of Establishing A Bright-Line Presumption In our 2017 Mid-Year Update, we reported on a clear trend in Delaware appraisal litigation in which courts increasingly defer to deal prices following a robust sale process.  Recently, the Delaware Supreme Court affirmed this trend in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 2017 WL 6375829, at *1–2 (Del. Dec. 14, 2017).  There, the Supreme Court reversed the Court of Chancery’s decision to accord the negotiated deal price no weight, concluding that, “[t]aken as a whole, the market-based indicators of value—both Dell’s stock price and deal price—have substantial probative value.”  Id. at *25.  In particular, the Supreme Court noted, “when the evidence of market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of [management’s] own votes is so compelling, then failure to give the resulting price heavy weight because the trial judge believes there was mispricing missed by all the [company] stockholders, analysts, and potential buyers abuses even the wide discretion afforded the Court of Chancery in these difficult cases.”  Id. at *26. Nonetheless, the Supreme Court also declined to adopt “a presumption that the deal price reflects fair value if certain preconditions are met, such as when the merger is the product of arm’s-length negotiation and a robust, non-conflicted market check, and where bidders had full information and few, if any, barriers to bid for the deal,” because the appraisal statute “require[s] that the Court of Chancery consider ‘all relevant factors'” in its analysis.  Id. at *14 (quoting 8 Del. C. § 262(h)). 1.     The Court of Chancery accorded deal price no weight The Court of Chancery relied on three central premises in concluding deal price was “not the best evidence of [Dell’s] fair value” and assigning it no weight.  Id. at *10.  First, the court hypothesized that the bidding over Dell was anchored at an artificially low price due to a “valuation gap” between the company’s stock price and its intrinsic value resulting from “investor myopia” and fatigue from a recent company transformation.  Id. at *16.  Second, the court suggested that the deal price was below fair value because of the absence of pre-signing competition from a strategic buyer in the sale process.  Id. at *16; see also In re Appraisal of Dell Inc., 2016 WL 3186538, at *28, *36 (Del. Ch. May 31, 2016).  In particular, the court found that “[t]he factual record in this case demonstrates that the price negotiations during the pre-signing phase were driven by the financial sponsors’ willingness to pay based on their LBO pricing models, rather than the fair value of [Dell].”  Id. at *30.  Third, the court concluded that factors endemic to MBOs further eroded the deal price’s credibility.  Dell, 2017 WL 6375829, at *16.  In particular, the Court of Chancery identified structural issues that the Court found inhibited the effectiveness of the go-shop, including the size and complexity of Dell and that bidders considering a proposed MBO “rarely submit topping bids because they have no realistic pathway to success.”  Id. at *23. 2.     The Delaware Supreme Court held that deal price deserved heavy weight under the circumstances On appeal, the Delaware Supreme Court held that “[t]here is no requirement that a company prove that the sale process is the most reliable evidence of its going concern value in order for the resulting deal price to be granted any weight,” id. at *25, and reversed the Court of Chancery “because the reasoning behind the trial court’s decision to give no weight to any market-based measure of fair value runs counter to its own factual findings.”  Id. at *12. In particular, the Supreme Court found that “[t]he three central premises that the Court of Chancery relied upon to assign no weight to the deal price were flawed.”  Id. at *16.  First, the Supreme Court found that the record “provides no rational, factual basis for … a ‘valuation gap.'”  Id. at *17.  According to the Supreme Court, “the record shows that Dell had a deep public float, was covered by over thirty equity analysts in 2012, boasted 145 market makers, was actively traded with over 5% of shares changing hands each week, and lacked a controlling stockholder.”  Id. at *17 (internal citations omitted). Second, the Supreme Court reaffirmed its prior holding that a buyer’s status as a financial sponsor is not rationally related to whether the deal price is fair (a “private equity carve out”) and rejected the lack of strategic bidders as a credible basis for disregarding deal price.  Id. at *20.  “Here,” the Supreme Court explained, “it is clear that Dell’s sale process bore many of the same objective indicia of reliability that we [previously] found persuasive enough to diminish the resonance of any private equity carve out or similar such theory….”  Id. (citing DFC Global Corp. v. Muirfield Value Partners, 172 A.3d 346, —, 2017 WL 3261190, at *22–23 (Del. Aug. 1, 2017)).  Other facts contradicting the trial court’s conclusion include that an independent committee armed with the power to say “no” persuaded the buyer to raise its bid six times, investment bankers canvassed 67 potential buyers—20 of which were strategic acquirers, and that “the go-shop’s overall design rais[ed] fewer structural barriers than the norm.”  Id. at *20–21. Third, the Supreme Court found that the case presented none of the three features “endemic to MBOs” that theoretically could have undermined the reliability of the deal price.  Id. at *22.  For example, the Supreme Court found that the structure of the go-shop provided rival financial bidders “a realistic pathway to succeeding if they desired,” and even the petitioner’s expert characterized the go-shop as “rais[ing] fewer structural barriers than the norm.”  Id. at *23.  As for the potential for a “winner’s curse,” competing bidders were permitted “to undertake extensive due diligence, diminishing the information asymmetry that might otherwise facilitate a winner’s curse,” and “[t]he trial court even concluded that the [c]ommittee appears to have addressed the problem of information asymmetry and the risk of the winner’s curse as best they could.”  Id. C.     Caremark Claims Generally, a Caremark claim seeks to hold directors personally accountable for damages to the company arising from a failure to properly monitor or oversee employee misconduct or violations of law.  The Delaware Supreme Court recently affirmed dismissal of a complaint for failure to adequately plead a Caremark claim in City of Birmingham Retirement & Relief System v. Good, 2017 WL 6397490 (Del. Dec. 15, 2017) (“Duke Energy“). The Duke Energy plaintiffs asserted that they were not required to make a demand on Duke Energy’s board prior to instituting litigation because the board’s management of the company’s environmental policies amounted to a Caremark violation when a ruptured storm pipe caused twenty-seven million gallons of coal ash slurry and wastewater to spill into the Dan River—ultimately leading the company to plead guilty to nine misdemeanor violations of the Federal Clean Water Act and pay a $102 million fine.  The Court of Chancery, however, dismissed the plaintiffs’ derivative complaint, holding that “to hold directors personally liable for a Caremark violation, the plaintiffs must allege that the directors intentionally disregarded their oversight responsibilities such that their dereliction of fiduciary duty rose to the level of bad faith,” and “reports from management relied on by the board to address coal ash storage problems negated any reasonable pleading-stage inference of bad faith conduct by the board.”  Id. at *1. The Delaware Supreme Court agreed, emphasizing that “plaintiff[s] must allege with particularity that the directors acted with scienter, meaning ‘they had actual or constructive knowledge that their conduct was legally improper,'” and that “[i]nferences that are not objectively reasonable cannot be drawn in the plaintiff[s’] favor.”  Id. at *5 (internal citations and quotations omitted).  The Court rejected plaintiffs’ description of the information presented to the Board as unfair, concluding that a fair characterization of management’s board presentations “do[es] not lead to the inference that the board consciously disregarded its oversight responsibility by ignoring environmental concerns.” Id. at *8.  The Court also rejected as inadequate plaintiffs’ allegations that Duke Energy illegally colluded with a corrupt regulator, noting that “general allegations regarding a regulator’s business-friendly policies are insufficient to lead to an inference that the board knew Duke Energy was colluding with a corrupt regulator.”  Id. at *11. D.     Ratification Defense Limited In Executive Compensation Context Considering stockholder ratification of director self-compensation decisions for the first time in more than fifty years, in In re Investors Bancorp, Inc. Stockholder Litigation, the Delaware Supreme Court limited the ratification defense when directors make equity awards to themselves under the general parameters of an equity incentive plan.  2017 WL 6374741, at *1 (Del. Dec. 13, 2017).  Absent stockholder approval, directors must prove that, when challenged by stockholders, equity incentive awards they grant to themselves are entirely fair to the company.  Similar to the Corwin doctrine, when a majority of fully informed, uncoerced, and disinterested stockholders approve a challenged equity incentive award that directors granted to themselves, the ordinary entire fairness standard of review shifts to business judgment review.  Before Investors Bancorp, this was generally true with respect to equity incentive plans with fixed terms and discretionary terms, like those at issue in Investors Bancorp, id. at *11, so long as discretionary terms have “meaningful limits” on the awards directors can make to themselves. In Investors Bancorp, however, the Supreme Court extended Sample v. Morgan, 914 A.2d 647 (Del. Ch. 2007), which “underline[d] the need for continued equitable review of self-interested discretionary director self-compensation decisions,” Investors Bancorp, 2017 WL 6374741, at *11.  In this case, the plaintiffs alleged stockholders were told initially that the plan would reward future performance, but that the board instead granted themselves awards to reward past efforts.  Id. at *12.  Additionally, the rewards were purportedly unusually higher than peer companies’.  Id.  The Supreme Court found that “[t]he plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties,” and “[b]ecause the stockholders did not ratify the specific awards the directors made under the [plan], the directors [were required to] demonstrate the fairness of the awards to the [c]ompany.”  Id. at *13. E.     Delaware Supreme Court Rules On The Application Of Collateral Estoppel To Prior Judgments Of Demand Futility On January 25, 2018, the Delaware Supreme Court in California State Teachers Retirement System v. Alvarez unanimously affirmed a previous Court of Chancery decision by Chancellor Andre Bouchard that stockholders who were pursuing derivative claims were collaterally estopped from continuing because, in a parallel case, a federal court in Arkansas had held that demand was not futile.  As discussed in our 2016 Year-End Securities Litigation Update, the Delaware Court of Chancery had then recently been exploring the contours of the application of collateral estoppel to prior judgments of demand futility.  Among these decisions was the decision by Chancellor Bouchard, granting the Defendants’ Motion to Dismiss in this case, that applied the Delaware Supreme Court’s decision in Pyott v. Lampers, 74 A.3d 612, 618 (Del. 2013), to hold that a federal stockholder derivative plaintiff’s election not to use books and records procedures under Section 220 of Delaware’s General Corporation Law did not bar the application of preclusion doctrines in subsequent stockholder derivative suits. After initial briefing and a hearing on appeal, the Delaware Supreme Court remanded to the Court of Chancery for the limited purpose of further discussing potential Due Process issues raised by the dismissal on the grounds of collateral estoppel.  Reconsidering his prior ruling, Chancellor Bouchard’s supplemental opinion recommended that the Delaware Supreme Court adopt a rule proposed, in dictum, in In re EZCORP, Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934, 948 (Del. Ch. 2016).  Under the EZCORP rule, a judgment could not bind “the corporation or other stockholders in a derivative action until the action has survived a Rule 23.1 motion to dismiss, or the board of directors has given the plaintiff authority to proceed by declining to oppose the suit.”  Id. On return from remand, the Delaware Supreme Court declined to adopt the EZCORP rule, aligning instead with federal courts that “each arrived at the same conclusion: the Due Process rights of subsequent derivative plaintiffs are protected, and dismissal based on issue preclusion is appropriate, when their interests were aligned with and were adequately represented by the prior plaintiffs.”  California State Teachers Retirement System v. Alvarez, No. 295, 2016, 2018 WL 547768 at *11 (Del. Jan. 25, 2018).  Further, “the ‘dual’ nature of a derivative action does not transform a stockholder’s standing to sue on behalf of the corporation into an individual claim belonging to the stockholder,” because “[t]he named plaintiff, at this stage, only has standing to seek to bring an action by and in the right of the corporation and never has an individual cause of action.”  Id. at *16.  This “highlights a fundamental distinction from class actions, where the named plaintiff initially asserts an individual claim and only acts in a representative capacity after the court certifies that the requirements for class certification are met.”  Id. The Delaware Supreme Court also found—applying Arkansas law and noting that federal decisions on privity in derivative actions come to the same conclusion—that privity applies between different groups of stockholder derivative plaintiffs.  Id. at *15-18.  Thus “the evaluation of the adequacy of the prior representation becomes the primary protection for the Due Process rights of subsequent derivative plaintiffs.”  Id. at *19. The court went on to find that the Arkansas Plaintiffs’ representation was adequate because (1) the interests of the plaintiffs were aligned, (2) both groups of plaintiffs recognized that a judgment in their case could impact the other stockholders and thus the derivative plaintiffs understood they were acting in a representative capacity, and (3) it was undisputed that Delaware Plaintiffs had notice of the Arkansas action (although the court noted it did not need to resolve whether such notice was required).  Id. at *19-20.  The court also reasoned that representation was adequate under the framework of the Restatement, because the Arkansas Plaintiffs were not grossly deficient in their representation and their economic interests were not antagonistic to other stockholders.  Id. at *20-21.  The Delaware Supreme Court agreed with the previous decision of the Court of Chancery that the Arkansas Plaintiffs’ failure to seek books and records did not make them grossly deficient.  Id. at *21. The court emphasized that “our state’s interest in governing the internal affairs of Delaware corporations must yield to the ‘stronger national interests that all state and federal courts have in respecting each other’s judgments'”—and concluded that adopting the EZCORP rule would impair this “delicate balance.”  Id. at *23. IV.     State Securities Suits and the PSLRA – Status of State Securities Act Class Action Filings in Light of Cyan As reported above, the United States Supreme Court’s decision in Cyan may have a transformational impact on Securities Act class actions filed in state courts.  Unsurprisingly, this pending sea change has brought uncertainty to the bar and courts.  But anecdotal evidence suggests that the status quo has remained in place pending the Court’s decision.  Plaintiffs have continued to file securities class actions in state courts that are historically hospitable to such suits—though there is evidence the pace has slowed.  Defendants, in light of Cyan, seem more eager to try their luck at removal, even when such efforts have been historically unsuccessful.  And, consistent with prior rulings on this jurisdictional issue, federal courts—especially those in California—have generally found in favor of state court jurisdiction and refused to stay cases pending the decision in Cyan. Though full-year 2017 data has not yet been compiled, it appears that, at least in California, the pace of Securities Act class actions filed in state court has slowed somewhat.  As we reported in the Mid-Year Update, since 2011, Securities Act Section 11 filings skyrocketed in California after a California Court of Appeal held that states have concurrent jurisdiction over Securities Act class actions.  See Luther v. Countrywide Fin. Corp., 195 Cal.App.4th 789 (2011).  As the Cyan petitioners noted, between 1998 and 2011, only six class actions alleging violations of Section 11 were filed in California state court.  See Petitioners’ Br. at 8 n. 6.  By contrast, 14 were filed in 2015 alone.  Id.  And in 2016, 18 were filed.  However, “[i]n the first half of 2017, there were four [such] cases brought in California state courts, distinctly fewer than observed in either the first or second halves of 2016.”  See Cornerstone Research, Securities Class Actions Filings – 2017 Midyear Assessment at 4 (2017).  The Cyan respondents argue that this is a return to the norm after the 2016 aberration.  See Resp. Supp. Br. at 1. Defendants in these suits in California have attempted to use the pending Cyan decision as an opportunity to again try their luck at removal—without much success.  In multiple California cases, defendants sought to remove state-filed securities class actions to federal court, where they then sought an order of a stay pending the Cyan decision.  See, e.g., Guo v. ZTO Express (Cayman) Inc., Case No. 17-cv-05357-JST, Dkt. No. 41 (N.D. Cal. Dec. 22, 2017); Seafarers Officers & Empls. Pension Plan v. Apigee Corp., Case No. 17-cv-04106-JD, Dkt. No. 16 (N.D. Cal. Sep. 1, 2017); Bucks Cty. Empls. Ret. Fund v. NantHealth, Inc., No. 2:17-cv-03964-SVW-SS, 2017 WL 3579889, at *2 (C.D. Cal. Aug. 18, 2017); Olberding v. Avinger, Inc., No. 17-CV-03398-CW, 2017 WL 3141889, at *3 (N.D. Cal. July 21, 2017); Book v. ProNAi Therapeutics, Inc., No. 5:16-CV-07408-EJD, 2017 WL 2533664, at *1 (N.D. Cal. June 12, 2017).  In each case, the district court denied defendants’ request.  These courts cited the unanimity in the Ninth Circuit that such cases should be remanded and found that there was no basis for a stay pending the decision in Cyan.  See, e.g., Seafarers Officers, Case No. 17-cv-04106-JD, Dkt. No. 16. Though California has dominated the scene when it comes to these filings, federal courts in other states confronting this issue in 2017 have generally come to the same conclusion.  See e.g., Christians v. KemPharm, Inc., 265 F. Supp. 3d 971, 984 (S.D. Iowa 2017).  However, one court did break from the majority and granted a stay pending the outcome in Cyan.  See City of Birmingham Ret. & Relief Sys. v. ZTO Express (Cayman), Inc., No. 2:17-CV-1091-RDP, 2017 WL 3750660 (N.D. Ala. Aug. 29, 2017).  Though that court acknowledged that “most of the district courts in the First, Seventh, Ninth, and Eleventh circuits have remanded [similar] cases back to state court,” it nonetheless denied the motion to remand without prejudice and granted a stay.  Id. at *1.  Notably, the City of Birmingham court did not expound on its reasoning, other than to say that “it is prudent to await the Supreme Court’s guidance” in Cyan. A decision in Cyan is expected in June 2018.  We will report back on the impact of this decision in our 2018 Mid-Year or Year-End Securities Litigation Update. V.     Leidos. Scope of Item 303 Liability Remains Uncertain After Settlement Forestalls Supreme Court’s Consideration of Issue As noted in Section II(A) above, in light of a settlement reached between the parties in the closely watched Leidos case, the Supreme Court announced in October that it would not address an important question of federal securities law:  whether omitting information required to be disclosed under Item 303 of SEC Regulation S-K, which governs the contents of the Management’s Discussion & Analysis section of a company’s quarterly and annual reports, gives rise to a private claim for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Supreme Court’s anticipated visitation of this question was significant, as it would have resolved a circuit split over the extent of a company’s Section 10(b) liability premised on violations of Item 303.  The Supreme Court has long held that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5.”  Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (internal quotation marks omitted).  Indeed, the Supreme Court has held that a duty to disclose under Section 10(b) and Rule 10b–5 arises only when an omission would render an affirmative statement misleading or would violate a special duty founded in a relationship of trust and confidence; thus, companies can “control what they have to disclose . . . by controlling what they say to the market.” Against this backdrop, the Second Circuit nevertheless held in Indiana Public Retirement System v. SAIC, Inc. (“SAIC“) that an omission under Item 303 can give rise to Section 10(b) and Rule 10b–5 liability.  818 F.3d 85, 94–95 (2d Cir. 2016).  The plaintiffs in SAIC had brought claims in the Southern District of New York under various securities laws, including Section 10(b), alleging that Leidos’s predecessor, SAIC, Inc., made material omissions by failing to disclose federal and state investigations into the company’s unlawful overbilling practices in connection with a government contract with the City of New York.  Id. at 88.  Plaintiffs charged that SAIC should have disclosed this allegedly known and potentially significant exposure in its March 2011 Form 10-K because Item 303 requires that such disclosures “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations,” 17 C.F.R. § 229.303(a)(3)(ii).  Id. The district court dismissed this claim for failure to plead facts establishing that “management (1) had knowledge that the company could be implicated in the . . . fraud or (2) could have predicted a material impact on the company.”  In re SAIC, Inc. Securities Litigation, 2014 WL 407050, at *4 (S.D.N.Y. Jan. 30, 2014).  Thus, while not disagreeing with the proposition that an Item 303 omission could be actionable under Section 10(b) and Rule 10b–5, the district court found insufficient allegations that SAIC had a disclosure obligation under Item 303 with the facts as pled. On appeal, the Second Circuit vacated the portion of the district court’s ruling related to Item 303 and remanded it for further proceedings.  SAIC, 818 F.3d at 88.  The Second Circuit agreed that Item 303 requires the registrant to disclose only those trends, events, or uncertainties that it “actually knows of”—as opposed to those that it “should have known”—when it files with the SEC, but it concluded that SAIC was allegedly “aware of the fraud” at the time of the report.  Id. at 94. The Second Circuit’s decision in SAIC on the Item 303 issue placed it in conflict with earlier-issued decisions by the Ninth and Third Circuits, which held that violations of Item 303 are not actionable under Section 10(b) and Rule 10b–5.  In 2014, the Ninth Circuit in In re NVIDIA Corp. Sec. Litig. held that “Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b–5.”  768 F.3d 1056 (9th Cir. 2014).  In so holding, the Ninth Circuit relied on a Third Circuit decision authored in 2000 by then-Circuit Judge Samuel Alito, Oran v. Stafford, where the Third Circuit declared that “a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b–5,” and, accordingly, “that a violation of SK-303’s reporting requirements does not automatically give rise to a material omission under Rule 10b-5.”  226 F.3d 275, 287–88 (3d Cir. 2000). This circuit split between the Second Circuit on the one hand, and the Ninth and Third Circuits on the other, teed up the issue for resolution by the Supreme Court, which granted certiorari in Leidos on March 27, 2017, and had set oral argument for November 6, 2017.  But exactly one month prior to the scheduled arguments, on October 6, 2017, the parties filed a joint motion advising the Court that they had “reached an agreement in principle to settle” the dispute.  On October 17, 2017, the Supreme Court granted the parties’ motion, and ordered that same day that the case be removed from the November 6, 2017 argument calendar. With Leidos no longer before the Supreme Court, the Second-Ninth Circuit split over the scope of Item 303 liability remains.  As things currently stand, Leidos continues to control in the Second Circuit, while In re NVIDIA Corp. Sec. Litig. still controls in the Ninth Circuit.  This lingering divide, according to some legal commentary, will have important implications for litigants, for the courts themselves, and for companies seeking to avoid Item 303 liability going forward. For one, in light of the Leidos decision, which effectively endorsed a private right of action under Section 10(b) for violations of Item 303, plaintiffs will likely continue to flock to the Second Circuit to litigate securities fraud claims premised on Item 303 deficiencies.  Conversely, the Ninth Circuit, which has shown itself to be far less amenable to such claims, will likely see far fewer shareholders bring their claims in that court. Furthermore, because the Second and Ninth Circuits together handle more federal securities cases than the rest of the circuits combined, the existing circuit split may well create a deepening fissure among those two circuits.  And other courts that have yet to take up the issue will likely follow either one of the Second or Ninth Circuits’ approaches, leading to a further divergent development of caselaw.  In addition to looking to Second and Ninth Circuit authority, these as-yet-decided courts may also choose to take note of the amicus brief filed by the SEC in Leidos, which was consistent with the Second Circuit’s ultimate holding in that case.  Specifically, the Commission asserted in its brief, “[a] reasonable investor, reading an MD&A in the applicable legal context, understands it to contain all the information required by Item 303.  An MD&A that discloses only some of the information Item 303 requires therefore is misleading.” The Leidos settlement, and the circuit split that remains in its wake, may also have important implications for companies trying to ascertain the scope of their disclosure obligations under Item 303.  Until the Supreme Court weighs in on this issue, uncertainty is likely to abound for companies over, what, exactly, are considered to be “known trends and uncertainties,” among other relevant issues.  Accordingly, in an effort to stave off legal challenges further down the road, companies susceptible to jurisdiction in the Second Circuit may choose to over-disclose. Despite the present uncertainty, the Supreme Court will certainly be petitioned again upon the next circuit court decision on the matter.  (Indeed, regardless of whether the next decision is plaintiff- or defendant-friendly, the issue will be ripe for appeal given the existing circuit split.)  One candidate to reignite a Supreme Court resolution is Plumbers and Steamfitters Local 137 Pension Fund v. Am. Express Co., 2017 WL 4403314 (S.D.N.Y. Sept. 30, 2017).  In Plumbers, a group of purchasers of American Express’s common stock brought a putative class action against American Express, asserting claims under Section 10(b) and Rule 10b-5 in connection with American Express’s non-renewal of its co-brand agreement with Costco (an agreement under which the two companies had partnered to offer co-branded cards for consumers and small businesses).  Plaintiffs alleged, in relevant part, that American Express violated its duty to quantify and disclose “the expected impact of known trends and uncertainties in Amex’s business,” in violation of Item 303.  Plumbers, WL 4403314, at *17.  Specifically, plaintiffs argued that American Express failed to disclose 1) the expected impact that increased competition with respect to obtaining co-branded agreements would have on American Express’s business, and 2) its uncertainty regarding renewal of its agreement with Costco, as well as the impact of nonrenewal of the agreement—omissions that, plaintiffs asserted, gave rise to Section 10(b) liability.  Id.  The district court disagreed.  In dismissing plaintiffs’ complaint, it noted that American Express had complied with Item 303 by sufficiently disclosing the trend at issue (“[w]e also face substantial and increasingly intense competition for partner relationships”), and how that negative trend could affect its business (“we could lose partner relationships”).  Id. at *19.  Accordingly, the court concluded, American Express had met its disclosure obligations and did not omit required quantitative information under Item 303, thus precluding Section 10(b) liability on that basis.  Id.  Plaintiffs subsequently appealed the decision to the Second Circuit. If the Second Circuit reverses the district court’s finding that American Express met its Item 303 disclosure obligations, the matter could again be teed up for resolution by the Supreme Court.  Gibson Dunn will continue to monitor for developments in connection with this topic. VI.     Falsity of Opinions – Omnicare Update Federal courts continue to put flesh onto the bones of the Supreme Court’s 2015 decision in Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015).  That decision addressed the scope of liability for false opinion statements under Section 11 of the Securities Act.  The Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless of whether an investor can ultimately prove the belief wrong.”  135 S. Ct. at 1327.  An opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue.  Id. at 1326–27.  In addition, the Court held that an omission gives rise to liability when the omitted facts “conflict with what a reasonable investor would take from the statement itself.”  Id. at 1329.  Put differently, an opinion statement becomes misleading “if the real facts are otherwise, but not provided.”  Id. at 1328. In the second half of 2017, two courts issued notable opinions regarding the threshold question of what constitutes a statement of opinion under Omnicare.  First, the Ninth Circuit held that the statement “FDA clearance risk has been achieved” – made on behalf of drug company Atossa Genetics regarding certain drug tests – is a statement of opinion.  See In re Atossa Genetics Inc. Sec. Litig., 868 F.3d 784, 801 (9th Cir. 2017).  The court reasoned that whether FDA clearance risk has been “achieved” is not definite enough to be a statement of fact, as this could mean that FDA clearance risk is completely eliminated or just that an acceptable level of risk has been eliminated; “[i]ndeed, it is the speaker’s personal definition of ‘achieved’ that here produces the opinion.”  See id. In what is sure to be a controversial decision, the court in Bielousov v. GoPro Inc., No. 16-cv-06654-CW, 2017 WL 3168522, at *4–5 (N.D. Cal. July 26, 2017), decided that a statement that seemingly met the requirements of the PSLRA’s safe harbor for forward-looking statements was nonetheless an actionable statement of opinion.  One of the statements challenged by plaintiff was the CFO’s statement that “we believe” that GoPro was “on track” to meet its previously-issued revenue guidance.  See id. at *4.  Although defendants argued this was a forward-looking statement protected by the safe harbor, the court held that by including the phrase “we believe” the CFO “was representing his and GoPro’s existing state of mind” which is “a statement of present opinion . . . not covered by the PSLRA safe harbor provision.”  See id. at *5.  Taken to its logical conclusion, the GoPro court’s reasoning would turn most statements previously considered forward-looking in nature into actionable statements of opinion.  While this appears to be an outlier opinion, we will monitor further developments in this area of securities law. Numerous recent opinions showcase the difficulty of pleading the falsity of opinion statements after Omnicare.  In Markette v. XOMA Corp., No. 15-CV-03425-HSG, 2017 WL 4310759, at *5 (N.D. Cal. Sept. 28, 2017), the court held that conclusory allegations that defendants did not believe in their opinion statements are insufficient to plead falsity.  While the court did not analyze this issue in depth, the court implicitly reasoned that a plaintiff must allege specific facts showing that a defendant did not believe in his stated opinion in order for plaintiff’s claim to survive a motion to dismiss.  In Wilbush v. Ambac Fin. Grp., Inc., the court reaffirmed the principle that plaintiffs cannot state a claim by pleading “fraud by hindsight” – that is, a plaintiff cannot show that an opinion was false when made solely by pointing to subsequent developments that are inconsistent with that opinion.  See No. 16 Civ. 5076-RMB, 2017 WL 4125364, at *10 (S.D.N.Y. Sept. 5, 2017) (opinion about adequacy of loss reserves for investments not false solely because company ultimately suffered losses on investments).  Finally, the court in Jaroslawicz v. M&T Bank Corp., No. 15-897-RGA, 2017 WL 4856864 (D. Del. Oct. 27, 2017), highlighted what plaintiffs need to allege to plead an actionable omission of “material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion.”  See Omnicare, 135 S. Ct. at 1329.  In this Section 14(a) case, the court rejected as insufficient “hypotheticals” about what defendants could have done to make an inquiry before rendering an opinion about the company’s compliance with banking laws, holding that plaintiffs needed to instead plead “particular facts about what Defendants did or did not do in forming the compliance opinion” at issue.  See 2017 WL 4856864 at *6 (dismissing allegations that opinion about legal compliance would have been shown to be false if defendants performed “adequate due diligence” or hired a “trained, independent consultant”). Of course, if plaintiffs can plead specific facts as to the falsity of an opinion statement, courts are willing to allow plaintiffs’ cases to proceed.  In the Atossa Genetics case, for example, the Ninth Circuit held that plaintiffs sufficiently pleaded the opinion that “FDA clearance risk has been achieved” was misleading by omission because they alleged (i) only part of the multi-part drug test at issue had been approved by the FDA, and (ii) the FDA had expressed concerns to Atossa about this lack of complete clearance.  See 868 F.3d at 802.  These facts, the court held, “relate directly to the basis for” the opinion statement, and “conflict with what a reasonable investor would take away from the statement.”  Id.  And in Perez v. Higher One Holdings, Inc., No. 3:14-cv-755-AWT, 2017 WL 4246775, at *6 (D. Conn. Sept. 25, 2017), the court – after dismissing plaintiffs’ previous complaint with leave to amend – denied a motion to dismiss the amended complaint as to an opinion that Higher One Holdings does “not expect any further losses as a result of” an FDIC investigation that led to a consent order in 2012.  Because the amended complaint alleged specific facts showing that defendants were violating the 2012 consent order and were specifically warned “about their ongoing violative conduct,” the court held that plaintiffs sufficiently pleaded falsity because “defendants could not have reasonably believed their own statements of corporate optimism.”  See id. As reported in previous updates, we continue to see courts applying Omnicare outside of the Section 11 context.  Most of the foregoing decisions arose out of complaints alleging violations of Section 10(b) of the Exchange Act, which continues a trend we highlighted in previous updates.  Additionally, courts are applying Omnicare in actions asserting claims under a variety of other securities laws.  See Jaroslawicz v. M&T Bank Corp., 2017 WL 4856864 (Section 14(a) of the Exchange Act); Knurr v. Orbital ARK, Inc., No. 1:16-cv-1031, 2017 WL 4286273 (E.D. Va. Sept. 26, 2017) (Section 14(a) of the Exchange Act); Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d 85 (2d Cir. 2017) (Section 12(a) of the Securities Act).  And, in a natural extension of Omnicare, given its roots in disclosure-based law, the court in Hutton v. McDaniel, 264 F. Supp. 3d 996, 1021 (D. Ariz. 2017), applied Omnicare to a state law breach of fiduciary duty claim arising out of directors’ alleged failure to disclose information to shareholders. VII.     Halliburton II Market Efficiency and Price Impact Cases As discussed in our 2017 Mid-Year Update, courts across the country continue to grapple with implementing the Supreme Court’s landmark ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II), and several recent decisions are beginning to shape the post-Halliburton II landscape.  In Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption—a presumption enabling plaintiffs to maintain the common proof of reliance that is essential to class certification in a Rule 10b-5 case—but made room for defendants to rebut that presumption at the class certification stage with evidence that the alleged misrepresentation had no impact on the price of the issuer’s stock.  Two key questions continue to recur:  first, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 123 S. Ct. at 2417, with its previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage, see Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I“); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184 (2013).  And second, what standard of proof must defendants meet to rebut the Basic presumption with evidence of no price impact? As discussed in our January 18, 2018 Client Alert, the Second Circuit recently addressed both of these issues in two substantive opinions: Waggoner v. Barclays, 875 F.3d 79 (2d Cir. 2017) and Ark. Teachers Ret. Sys. v. Goldman Sachs, — F.3d –, Case No. 16-250, 2018 WL 385215 (S.D.N.Y. Jan. 12, 2018).  In so doing, the Second Circuit joined the Eighth Circuit as the only federal circuit courts of appeals to interpret Halliburton II since it was issued.  In Goldman Sachs, the Second Circuit directed that price impact evidence must be analyzed prior to certifying a class, even though “price impact touches on materiality,” which is to be reserved for trial.  Goldman Sachs, 2018 WL 385215, at *7-8.  However, the Barclays and Goldman Sachs decisions leave the Second Circuit at odds with the Eighth Circuit’s 2016 decision in IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775 (8th Cir. 2016) on the standard of proof defendants must meet to rebut the Basic presumption. A.     Evidence Properly Considered at the Class Certification Stage In Goldman Sachs the Second Circuit vacated the district court’s order certifying a class, and remanded for further proceedings to determine whether the defendants had presented sufficient evidence to demonstrate that the alleged misstatements did not impact Goldman Sachs’ stock price.  The Second Circuit encouraged the district court to hold any evidentiary hearing or oral argument it finds appropriate to address the issue on remand. In the district court, defendants attempted to rebut the presumption of reliance by presenting evidence that the statements at issue had no impact on Goldman Sachs’ stock price.  They offered evidence that (1) the stock price did not increase on the days when the alleged misstatements were made and (2) the stock price did not decrease when those statements were “corrected” by news that was publicly revealed on thirty-four separate occasions before the alleged corrective disclosure dates.  Goldman Sachs, 2018 WL 385215 at *7.  If the prior disclosures “correcting” the alleged misstatements did not negatively impact the company’s stock price, defendants reasoned, then the alleged misstatements themselves “did not affect the price of Goldman stock and plaintiffs could not have relied on them in choosing to buy shares at that price.”  Id. at *4.  The district court rejected defendants’ evidence regarding the lack of price impact based on these earlier “corrective” press reports, labeling the argument a premature “materiality” argument. The Second Circuit acknowledged that price impact “touches on materiality,” but nonetheless instructed the trial court, on remand, to consider defendants’ price impact evidence.  Goldman Sachs, 2018 WL 385215 at *8.  The court explained that price impact and materiality are distinct, and that price impact “refers to the effect of a misrepresentation on a stock price.”  Id. (quoting Halliburton I, 563 U.S. at 814).  “Whether a misrepresentation was reflected in the market price at the time of the transaction—whether it had price impact—” the court explained, “‘is Basic‘s fundamental premise.'”  Id.  (quoting Halliburton II, 134 S. Ct. at 2416).  Therefore, a defendant’s evidence of a lack of price impact must be fully considered at the class certification stage.  Id. B.     Standard of Proof to Rebut the Presumption In Barclays, the Second Circuit’s only substantive Halliburton II discussion addressed the standard of proof required to rebut the presumption of reliance.  There, the court upheld the district court’s certification of a class, holding that once a plaintiff establishes that the presumption applies, the defendant bears the burden of persuasion to rebut it.  This standard, reaffirmed in Goldman Sachs, puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence (“Rule 301”) when reversing that trial court’s certification order.  Best Buy, 818 F.3d at 782.  Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.”  By its own terms, Rule 301 applies in all civil cases “unless a federal statute or these rules provide otherwise.”  In both Barclays and Goldman Sachs, the Second Circuit panels reasoned that “the Basic presumption is a substantive doctrine of federal law that derives from the securities fraud statutes” in departing from the standard burden-shifting paradigm of Rule 301.  Goldman Sachs, 2018 WL 385215, at *6-7 (citing Barclays, 875 F.3d at 102–03). We will continue to monitor the Goldman Sachs remand and cases in all courts throughout the year. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Monica Loseman, Matt Kahn, Brian Lutz, Laura O’Boyle, Mark Perry, Lissa Percopo, Travis Andrews, Jefferson Bell, Scott Campbell, Vivek Gopalan, Michael Kahn, Kim Kirschenbaum, Mark Mixon, Emily Riff, Samantha Weiss, Christopher White and Zachary Wood. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee: Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2018 |
Fourth Quarter 2017 Update on Class Actions

Click for PDF This update provides an overview and summary of key class action developments during the fourth quarter of 2017 (October through December), and a brief look ahead to some of the key class action issues anticipated in 2018. Part I addresses class action developments at the United States Supreme Court, including the December grant of certiorari in an important case regarding the tolling effect of putative class actions under the American Pipe rule, and a pending certiorari petition that could provide clarification of the propriety of cy pres awards in class action settlements. Part II covers rulings from the Third and Ninth Circuits that explore the limits that Article III standing imposes on consumer protection suits in the absence of a clear injury to the plaintiff, and the circuit split that now exists on this issue. Part III describes several rulings from the federal appellate courts on the issue of removal under the Class Action Fairness Act (“CAFA”). Part IV discusses noteworthy rulings from the California Court of Appeal that reaffirm the differences in class certification standards between California and federal courts, including California’s emphasis on the ascertainability of a proposed class. In 2017, our first quarter update covered notable decisions by the federal courts of appeals interpreting the Supreme Court’s rulings in Spokeo, Inc. v. Robins (standing to sue for statutory violations) and Campbell-Ewald Co. v. Gomez (whether an unaccepted offer of judgment may moot a class action), and other key decisions in the areas of class certification and class settlement.  Our second quarter update addressed the Supreme Court’s opinion in Microsoft v. Baker (rejecting plaintiffs’ attempts to manufacture appellate jurisdiction by a “voluntary dismissal” following orders denying class certification), and several other topics of interest to class action litigators, including CAFA issues.  And our third quarter update focused on arbitration-related developments, interlocutory appeals under Rule 23(f), and other noteworthy appellate rulings issued during that quarter. We will continue to issue quarterly updates on developments in the law of class actions throughout 2018. I.     Supreme Court Agrees to Decide Tolling Effect of Putative Class Actions and Weighs Certiorari on Cy Pres Relief As our second quarter 2017 update explained, the Ninth Circuit in Resh v. China Agritech, Inc., 857 F.3d 994 (9th Cir. 2017), in conflict with several other circuits, held that the tolling of a statute of limitations under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974)—which held that the timely filing of a putative class action tolls the limitations period as to the individual claims of the putative class members—applies not only to the filing of subsequent individual lawsuits but also to subsequent class action lawsuits.  On December 8, 2017, the Supreme Court granted China Agritech’s cert petition (No. 17-432) to decide whether the American Pipe rule permits a previously absent putative class member to bring a subsequent class action outside the applicable limitations period.  Whether the American Pipe rule extends to successive (or “stacked”) class actions—and thus whether the rule can be used to revive the claims of absent persons who did not themselves sue after class certification was denied in an earlier case—is of considerable practical importance to class action defendants, who face the prospect of a series of duplicative putative class actions over a potentially lengthy period of time.  The Court has set the case for oral argument on March 26, 2018.  (At the petition stage, Gibson Dunn represented the Chamber of Commerce of the United States of America and the Retail Litigation Center as amici supporting petitioner China Agritech.  At the merits stage, Gibson Dunn represented those organizations, and the American Tort Reform Association, in an amicus brief supporting the petitioner.) Additionally, the Supreme Court is also expected to decide by June 2018 whether the National Labor Relations Act precludes enforcement of class action waivers in mandatory employment arbitration agreements, which is the question presented in Epic Systems Corp. v. Lewis (No. 16-285), National Labor Relations Board v. Murphy Oil USA, Inc. (No. 16-307), and Ernst & Young LLP v. Morris (No. 16-300).  We discussed the underlying circuit split in our third quarter 2016 update, and described the October 2, 2017 oral argument in our third quarter 2017 update. In 2018, the Court could also address a significant class action question raised by the certiorari petition in Frank v. Gaos (No. 17-961) (pet. for cert., filed Jan. 3, 2018).  Specifically, the petition in Frank gives the Court the opportunity to address some of the “fundamental concerns” Chief Justice Roberts previously identified “surrounding the use of” cy pres remedies—under which courts redirect unclaimed funds to their next best use, often benefitting persons who are not identical to the aggrieved class of plaintiffs—which are “a growing feature of class action settlements.”  Marek v. Lane, 134 S. Ct. 8, 9 (2013) (Roberts, C.J., respecting denial of certiorari).  The petitioners in Frank objected to the fairness of the “cy pres-only,” no-money-for-the-class settlement approved by a divided vote in In re Google Referrer Header Privacy Litig., 869 F.3d 737 (9th Cir. 2017).  We described the Ninth Circuit’s decision sustaining that settlement in our third quarter 2017 update. Petitioners challenge the allowance of purely cy pres settlements, in which money flows to non-parties (typically, charitable institutions selected by class counsel and the defendants), whenever direct monetary payments to class members is deemed “infeasible” (in that the monetary amount would be small when divided among class members).  They contend the Ninth Circuit’s forgiving standard for such settlements conflicts with the more stringent standards of the Third, Fifth, Seventh, and Eighth Circuits disfavoring purely cy pres relief, inviting class action plaintiffs’ counsel to favor the Ninth Circuit.  Petitioners urge the Court to reject the Ninth Circuit’s approach as “a serious abuse of the class action mechanism that puts the interests of those it is intended to protect, class members, dead last.”  Respondents’ brief in opposition is currently due on March 9, 2018. II.     The Courts of Appeals Issue Significant Rulings on Article III Standing In two notable decisions this quarter, the Third and Ninth Circuits issued rulings making it more difficult for defendants to obtain the dismissal of class complaints on Article III standing grounds. Cottrell v. Alcon Labs., 874 F.3d 154 (3d Cir. 2017) In Cottrell, a split panel reversed a district court’s dismissal of a putative consumer class action lawsuit on standing grounds.  The plaintiffs were consumers of prescription eye medication who alleged that manufacturers and distributors of the medication packaged it with a dispenser that discharged the medicine in doses that were too large, forcing consumers to waste it, and thereby violating the consumer protection statutes of their home states.  Id. at 159.  The district court granted the defendants’ motion to dismiss on the grounds that the named plaintiffs lacked Article III standing, finding that the plaintiffs had not pleaded an injury in fact.  Id. at 161. Breaking with a decision of the Seventh Circuit, the Third Circuit held that, under Spokeo, Inc. v. Robbins, 136 S. Ct. 1540 (2016), the plaintiffs had sufficiently alleged an injury to confer standing to sue for unfair trade practices based on their theory that a manufacturer is obliged to optimize the number of eye drop doses in a container of fixed volume, even if there was no misrepresentation as to the number of doses in the product.  Id. at 163-65.  The court acknowledged that the Seventh Circuit had recently reached the opposite conclusion when faced with similar allegations in Eike v. Allergan, Inc., 850 F.3d 315 (7th Cir. 2017), but concluded that the Seventh Circuit improperly “blended standing and merits together in a manner that the Supreme Court has exhaustively cautioned courts against,” and in so doing, the Seventh Circuit’s analysis “flips the standing inquiry inside out, morphing it into a test of the legal validity of the plaintiffs’ claims of unlawful conduct.”  Id. at 165-66. In a strongly-worded dissent, Judge Jane R. Roth cautioned that the Third Circuit’s opinion “erodes [constitutional] strictures by allowing the plaintiffs here to manufacture a purely speculative injury in order to invoke our jurisdiction.”  Id. at 171.  Judge Roth further warned that “the Majority … invites judges—rather than industry experts, market forces, or agency heads—to second-guess the efficacy of product design even in the most opaque of industries.”  Id. at 175-76. The Third Circuit’s decision also appears to be in tension with the Ninth Circuit’s decision in Ebner v. Fresh, Inc., 838 F.3d 958 (9th Cir. 2016), which concluded that a plaintiff could not state a valid claim for false advertising based on the quantity of lip balm in a dispenser tube, some of which may not be reasonably accessible once the consumer reaches the bottom of the tube using a screw mechanism.  The Ninth Circuit concluded that the product’s label accurately stated the amount of lip balm in the tube, and was “not false and deceptive merely because the remaining product quantity may be ‘unreasonably misunderstood by an insignificant and unrepresentative segment of the class of persons’ that may purchase the product.”  Id. at 996. Davidson v. Kimberly-Clark Corp., 873 F.3d 1103 (9th Cir. 2017) In Davidson, the Ninth Circuit revived a putative class action filed by a consumer who alleged that Kimberly-Clark’s flushable wipes are not actually flushable.  The plaintiff in Davidson asserted claims under California’s Consumers Legal Remedies Act, Unfair Competition Law, and False Advertising Law, and sought damages and injunctive relief, among other remedies.  The district court found that the plaintiff lacked standing to seek injunctive relief because she was unlikely to purchase Kimberly-Clark’s flushable wipes in the future.  Id. at 1108-09.  On the merits, the district court concluded that the plaintiff had failed to adequately allege why the representation “flushable” was false, and dismissed the complaint.  Id. at 1109.  Finally, the district court found that the plaintiff failed to allege any harm due to her use of the product.  Id. The Ninth Circuit reversed, holding that the complaint adequately alleged that the term “flushable” deviated from the dictionary definition of the term.  Id. at 1110-11.  The court further held that the plaintiff sufficiently alleged harm because she claimed she was exposed to false information about the product purchased, which caused the product to be sold at a higher price.  Id. at 1112. In reaching its decision, the Ninth Circuit noted that several district courts had reasoned that plaintiffs who are already aware of the deceptive nature of an advertisement are not likely to be misled into buying the relevant product in the future and, therefore, are not capable of being harmed again in the same way.  Id. at 1113-14.  The Ninth Circuit, however, rejected that reasoning, and instead held that “a previously deceived consumer may have standing to seek an injunction against false advertising or labeling, even though the consumer now knows or suspects that the advertising was false at the time of the original purchase, because the consumer may suffer an ‘actual and imminent, not conjectural or hypothetical’ threat of future harm.”  Id. at 1115. III.    Disputes Regarding the Removal of Class Actions Under CAFA Continue to Be Resolved y the Courts of Appeals The federal courts of appeals continue to grapple with the terms of the CAFA statute and its application to various factual scenarios, and this quarter they issued an unusually high number of decisions on these issues. Corporate Citizenship.  In Roberts v. Mars Petcare US, Inc., 874 F.3d 953 (6th Cir. 2017), the Sixth Circuit reversed the district court’s denial of a motion to remand to Tennessee state court a lawsuit by a putative class of Tennessee citizens against a Delaware corporation headquartered in Tennessee.  The court held that the phrase “a citizen of a State different from any defendant” in CAFA, 28 U.S.C. § 1332(d)(2)(A), refers to “all of a defendant’s citizenships, not the alternative that suits it.”  Roberts, 874 F.3d at 955.  The court reasoned that CAFA did not alter the general rule under the diversity jurisdiction statute that a corporation is considered a citizen of both its state of incorporation and the state of its principal place of business for diversity purposes, and that Mars Petcare was therefore not diverse from the members of the putative class.  Id. at 955-56. Discretionary Exception.  In Speed v. JMA Energy Co., 872 F.3d 1122 (10th Cir. 2017), the district court remanded a lawsuit filed by a putative class of oil well owners to Oklahoma state court.  Although the class met the elements for removal under CAFA, the district court concluded that the factors in the discretionary exception to CAFA, 28 U.S.C. § 1332(d)(3), weighed in favor of remand, because the plaintiff had sued an Oklahoma energy company under an Oklahoma statute, and more class members were from Oklahoma (48%) than from any other state.  The Tenth Circuit affirmed, rejecting the defendant’s argument that a factor in the discretionary exception analysis found to be “neutral” should count against remand.  Speed, 872 F.3d at 1128-29. “Home State” Exception.  In Brinkley v. Monterey Financial Services, Inc., 873 F.3d 1118 (9th Cir. 2017), the plaintiff filed a lawsuit in California state court alleging violations of California and Washington laws that prohibit recording of telephone conversations without notice, on behalf of a putative class of individuals who had made or received a recorded phone call with the defendant “while physically located or residing in California and Washington.”  The defendant removed, and during jurisdictional discovery produced a list of more than 152,000 persons whose calls had been recorded and who had a California or Washington address, and the plaintiff filed an expert report analyzing a random sample of the list.  Id. at 1120.  The district court granted the plaintiff’s motion to remand under the “home state” exception to CAFA, 28 U.S.C. § 1332(d)(4)(B), finding that at least two-thirds of the members of the putative class were California citizens based on the expert’s statistical evidence.  Id.  The plaintiff, however, had produced evidence only regarding individuals “residing in” California, and had failed to present evidence regarding either the size of the entire class or the composition of the “located in” California subgroup of the class.  Id. at 1122.  The Ninth Circuit therefore vacated the district court’s decision, holding that the plaintiff’s attempt to remand the case “based on evidence of only some class members’ citizenship” was improper.  Id. CAFA and Mass Actions.  In Liberty Mutual Fire Insurance Co. v. EZ-FLO International, Inc., 877 F.3d 1081 (9th Cir. 2017), the Ninth Circuit affirmed remand of lawsuit that the defendant had removed as a “mass action” under 28 U.S.C. § 1332(d)(11)(B)(i).  The case was brought by 26 insurance companies in their capacity as subrogees of 145 insured homeowners with leaking pipes.  Id.  at 1083.  The court applied the Supreme Court’s holding in Mississippi ex rel. Hood v. AU Optronics Corp., 134 S. Ct. 736 (2014), that the “persons” in the phrase “100 or more persons” in the CAFA definition of “mass action” refers to named plaintiffs, and therefore concluded that the 145 insureds, although real parties in interest in the case, did not count toward the CAFA numerosity requirement because they were not the parties who had actually brought the lawsuit, filed or served papers, or had any right to control the lawsuit, and thus could not be counted as “plaintiffs.”  EZ-FLO, 877 F.3d at 1084-85. Notice of Class Settlements to State Officials.  In In re Flonase Antitrust Litigation, 879 F.3d 61 (3d Cir. 2017), the Third Circuit affirmed the district court’s denial of a motion by GlaxoSmithKline to enforce a class settlement against the State of Louisiana through an injunction to prevent the state from pursuing its claims against the manufacturer in a separate lawsuit.  Louisiana, an indirect purchaser of Flonase and a potential member of the class, had not received class notice, but had received notice of the litigation pursuant to the CAFA provision that requires the complaint be sent to each state in which a class member resides, 28 U.S.C. § 1715(b).  Id. at 63-64.  The court held that the class settlement could not be enforced against Louisiana through an injunction because the state had not waived its sovereign immunity and its receipt of the statutory notice under CAFA did not constitute a clear declaration of its consent to be sued.  Id. at 68-69. As these cases indicate, parties removing cases under CAFA should pay close attention to the text of the statute when determining whether the removal requirements apply, and should stay advised of the latest developments in the courts of appeals as they continue to interpret various provisions of the statute. IV.    Notable California Appellate Decisions on Class Certification Standards The California Court of Appeal issued two notable class actions decisions last quarter that reaffirmed the differences between California and federal class certification standards, and emphasized the state’s heightened rule for establishing ascertainability. Hefczyc v. Rady Children’s Hospital-San Diego, 17 Cal. App. 5th 518 (2017) (pet. for review filed Dec. 27, 2017) In Hefczyc, the plaintiff filed a putative class action against a hospital seeking only declaratory relief regarding certain contractual terms between a class of the hospital’s patients (or their guarantors) and the hospital.  Id. at 522.  The plaintiff moved for class certification under California Code of Civil Procedure section 382 and asserted that this provision of law was the state law equivalent of Federal Rule of Civil Procedure 23(b)(1) and (b)(2), the elements of which are less onerous for declaratory or injunctive relief actions than for damages actions.  Id. at 525-26.  The trial court rejected the plaintiff’s argument and denied class certification, finding that the plaintiff’s motion was insufficient because he failed to establish ascertainability, predominance, and superiority as required by section 382.  Id. at 526. The California Court of Appeal affirmed, holding that section 382 does not have an equivalent to Federal Rule of Civil Procedure 23(b)(1) or (b)(2), and as a result, California’s procedural requirements apply to declaratory relief, injunctive relief, and damages actions alike.  The court explained: [T]here is no gap in California precedent to be filled by reference to Federal Rules of Civil Procedure, rule 23(b)(1)(A) or (b)(2) (28 U.S.C.) on the issue of what class certification standards must be met when a plaintiff seeks only declaratory or injunctive relief on behalf of a class.  Even when the plaintiff seeks solely declaratory or injunctive relief, California case law follows the well-established requirements that our Supreme Court has consistently stated, namely, (as relevant here) that the plaintiff must establish that (1) the class is ascertainable; (2) common questions predominate; and (3) a class action would provide substantial benefits, making it superior to other procedures for resolving the controversy. Id. at 535-36. Noel v. Thrifty Payless, Inc., 17 Cal. App. 5th 1315 (2017) (pet. for review filed Jan. 24, 2018) In Noel, the plaintiff filed suit under the California Consumers Legal Remedies Act, Unfair Competition Law, and False Advertising Law after purchasing an inflatable swimming pool that was smaller than it appeared in a photo on the box.  Id. at 1320-21.  The trial court denied the plaintiff’s motion to certify a proposed class of more than 20,000 customers, concluding that the proposed class was not ascertainable, and further found that the plaintiff had not presented any evidence to establish a method for identifying class members, including what records were available or what those records would show.  Id. at 1323. The Court of Appeal affirmed the denial of class certification, criticizing “class counsel’s premature filing of the motion without first conducting sufficient discovery to meet its burden of demonstrating there are means of identifying members of the putative class so that they might be notified of the pendency of the litigation.”  Id. at 1321.  Doing so, the court reasoned, “jeopardizes the due process rights of absent class members.”  Id. The court also concluded that the trial court did not abuse its discretion by denying the plaintiff a continuance to conduct additional discovery, noting that “no one forced [plaintiff’s counsel] to file a premature class certification motion.”  Id. at 1337.  Although the plaintiff had obtained new counsel between the filing of the motion and the hearing, the court noted that new counsel could have withdrawn the motion and conducted additional discovery or requested a continuance if he had concluded the motion was premature.  Id. at 1338. The Noel decision’s strict enforcement of California Code of Civil Procedure section 382’s ascertainability requirement is a positive development for defendants in class action suits, but conflicts with another California Court of Appeal decision, Aguirre v. Amscan Holdings, Inc., 234 Cal. App. 4th 1290 (2015), which held that a plaintiff could wait until the remedial stage to offer a member identification plan. The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley J. Hamburger, Indraneel Sur, Jennafer M. Tryck, Samuel D. Eisenberg and Laura A. Sucheski. Gibson Dunn are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (213-229-7726, tevangelis@gibsondunn.com) Kahn A. Scolnick – Los Angeles (213-229-7656, kscolnick@gibsondunn.com) Bradley J. Hamburger – Los Angeles (213-229-7658, bhamburger@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.