ScotussealThe U.S Supreme Court did not issue its long-awaited decision in the Halliburton case yesterday and so it looks as if we will have to wait a little while longer to find out whether or not the Court will throw out the fraud on the market theory. The Court will for sure release its opinion some time during June, before the end of its current term at the end of the month. But we don’t have to just sit around drumming our fingers impatiently in the meantime. There are some interesting related issues we can contemplate while we wait.

 

1. What will happen if instead of either tossing the fraud on the market theory or keeping it unchanged, the U.S. Supreme Court takes a middle course and requires securities plaintiffs seeking to take advantage of a presumption of reliance in class actions to establish that the alleged misrepresentation had a price impact? As discussed here, in the March 5, 2014 oral argument in the case, Justice Kennedy, seeking to find “midpoint” between the two extreme outcomes, invoked a proposal from the amicus brief of two law professors (Adam Pritchard of Michigan Law School and Todd Henderson of U. Chicago) that in order for there to be a presumption of reliance at the class certification stage there should be an event study to establish that the allegedly misleading statement distorted the company’s share price,.

 

Obviously, there is no way to know for sure how this case will turn out or whether the Court’s decision will incorporate some form of the price impact proposal. But as discussed in a May 30, 2014 Law 360 article entitled “Halliburton’s Middle Ground Still Promises Sweeping Change” (here, subscription required), even the “middle course” that the two law professors’ suggested “presents unknowns that could tie up the court with knotty new questions or expose new classes of defendants to litigation.” As one commentator asked in considering what a price impact requirement might mean. “Do you have to disaggregate the amount of information that came out at one time? Do you need expert testimony saying this failure to take an impairment caused this price to move?” It will, as another commentator noted, “be important to see what preconditions [the Court] sets on when to use an event study and what other tools could be used to determine price impact.”

 

The net result, the article note, could be “longer, more expensive processes.” And the cases that survive the gauntlet “probably will demand a much higher price to settle than they would have before,” according to another attorney quoted in the article.

 

In addition, allowing price impact evidence in order to be able to evoke the presumption of reliance could allow plaintiffs to go after other kinds of defendants. The article quotes Professor Pritchard as saying that the price impact approach could “help plaintiffs go after issuers of less-liquid securities, such as over-the-counter securities or municipal bonds, where it cannot be presumed an efficient market exists.”

 

2. If the U.S. Supreme Court goes ahead and tosses the fraud on the market theory altogether, could it mean an influx of securities litigation in Canada? A May 28, 2014 Financial Post article entitled “If U.S. Retreats on Securities Class Actions, Canada Stands Ready to Fill the Gaps” (here) raises the question whetehr an adverse ruling for plaintiffs in Halliburton could divert prospective securities claimants to Canada. As one commentator quoted in the article notes, “it does make you wonder whether that will have an impact on the number of securities class actions in Canada at large and in Ontario specifically.”

 

Another commentator quoted in the article notes that in recent years as the U.S. Supreme Court has made it more difficult for U.S. plaintiffs counsel to mount U.S. securities class actions, “Canadian courts have been welcoming,” adding that “Canada may become the overflow jurisdiction for some of these cases that aren’t finding a home in the U.S. as a result of some of these changes.” Among other things, Canadian courts have certified global classes in securities suits under Canadian law, and Canadian courts have declined to follow the U.S. Supreme Court ‘s Morrison holding, and have certified shareholder classes that include investors who purchased their shares outside of Canada.

 

There are of course a number of hurdles that would complicate things for prospective litigants considering the possibility of filing claims in, say, Ontario. Plaintiffs must first seek and obtain the court’s permission before pleading the statutory action under Ontario law, and the Ontario law places a cap on damages. In addition, the jurisdictional test requires a “real and substantial “connection to Canada in order for the Canadian court to have jurisdiction, which could restrict the occasions on which foreign claimants might be able to proceed in a Canadian court.

 

3. There are yet other Supreme Court cases to think about while we are awaiting the U.S. Supreme Court’s decision in Halliburton. As Alison Frankel noted in a May 28, 2014 post on her On the Case blog entitled “After Halliburton, SCOTUS has Another Securities Litigation Puzzler” (here), “Halliburton has cast such an enormous shadow that the court’s next big securities case hasn’t gotten much attention.”

 

As I discussed in an earlier post (here), in March 2014, the U.S. Supreme Court granted cert in the IndyMac MBS case to determine whether or not the filing of a class action lawsuit tolls the running of the three-year statute of repose under the Securities Act of 1933. The Second Circuit ruled in the case that the three-year statute of repose provide defendants with a “substantive right’ to be free of exposure to Securities Act litigation, and therefore that the filings of a securities class action lawsuit does not toll the statute of repose.

 

As Frankel discusses in her article, the claimants in the IndyMac case have now filed their merits briefs, in which they argue that the Second Circuit’s ruling in the case unsettled long-standing practices with regard to the principles of tolling and that the appellate court’s ruling that the filing of a class action suit is inconsistent with the idea of class action litigation in which the class representative acts on behalf of class of absent class members. A separate amicus brief filed on behalf of over 40 pension funds raised the practical argument that if the statute of repose cannot be tolled the funds will have to monitor and analyze a large number of pre-certification securities suits to ensure that the limitations period does not run. Federal dockets could be swamped with individual investors worried about protecting potential Securities Act claims even if they are already members of the class asserting the same causes of action.

 

And as if that were not enough, there will be yet another securities case before the Supreme Court during its next term. As discussed here, in March 2014, the U.S. Supreme Court agreed to take up the Omnicare case, to determine whether or not to survive a dismissal motion it is sufficient for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made. As noted here, the Court extended the time within which the petitioners must file their merits brief, but they will be filing their briefs later this week. In other words, as hard as it is to look beyond Halliburton, even after the Court has finally ruled on that case, there will be lots of action yet to come in securities case at the Supreme Court.

 

So there is much to think about while we await the outcome of the Halliburton case and much to look forward to in the months that will follow the Court’s decision. That should help fill the time in the interim.  

 

earthIn a series of letters sent to individual board members of various major energy companies and to a number of participants in the directors and officers liability insurance industry, three environmental groups contend that climate change denial by energy industry representatives presents a risk of personal liability to the individual energy company board members. The letters also contend that “the threat of future civil or criminal litigation could have major implications for D&O liability insurance coverage.” The letters, which demand that the recipients respond to a list of specified question, clearly seek to make the global climate change debate personal and to take the fight to the D&O insurance industry.

 

The letters were sent in late May by three environmental organizations – Greenpeace International, the World Wildlife Fund International and the Center for International Environmental Law – to board members at 32 energy companies and to 44 participants in the D&O insurance industry. The list of energy companies whose board members received the letters include petroleum giants such as ExxonMobil, Chevron, and ConocoPhillips, as well as many of the world’s largest coal companies, including Peabody Energy, Murray Energy and Arch Coal. Insurers receiving the letter included American International Group, Berkshire Hathaway, and Zurich Insurance Group.

 

A complete list of the companies and insurers that were sent the letters can be found here. An example of the letter sent to the board members of the companies can be found here. An example of the letter sent to the D&O insurance industry participants can be found here.

 

Each of the letters asserts that the environmental groups sent the letters to companies that “rank among the largest historic contributors to industrial greenhouse gas emissions.” The letters also assert that the companies “share the majority of the responsibility for the estimated global industrial emissions of CO2.” The letters further assert that these companies “may have been or may be working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information on climate risks” despite “increased awareness of the threats associated with climate change” among shareholders and insurers and despite “the overwhelming body of climate science on impacts, adaptation and vulnerability.”

 

The letters go on to assert that these actions “aiming to obstruct action on climate change, coupled with the development, sponsorship or dissemination of false, misleading or intentionally incomplete information” about climate change risks “could pose a risk to directors and officers personally.” The threat of future civil or criminal litigation “could have major implications for D&O liability insurance coverage.”

 

Each letter requests that the individual board member respond within four weeks to a list of questions presented in an annex to the letter. Similarly, the letters to the D&O insurance industry participants requests that the insurers respond to questions. The letters state that responses will be posted on the website for Greenpeace.

 

An Annex to the letters (refer here) details what the environmental groups characterize as the “potential implications of climate-related litigation on D&O liability policies.” Among other things, the Annex asserts that “fossil fuel companies and utilities have been and will continue to be the target of climate-related lawsuits.”  The Annex goes on to assert that “some insurance industry experts believe that the fiduciary duties of directors and officers are evolving in the context of climate change and that this will have a major effect on D&O coverage.”

 

The Annex asserts that claims against directors and officers for “concealment, misrepresentation and mismanagement of climate change-related risk may look for reimbursement of defense costs and indemnification” from their D&O insurers; however, there is a risk that the policies might not provide coverage “creating a personal risk for directors and officers.”

 

In a May 28, 2014 press release (here), a representative for the Center for International Environmental Law is quoted as saying that the letter campaign is intended to elicit information and to “start a conversation about climate inside the companies, and with the public and investors.” A representative for Greenpeace is quoted as saying that because the cost of climate change is personal “the responsibility – not just the devastating effects – should be personal.” A representative of the World Wildlife Fund is quoted as saying that “Sooner or later those who hide the facts and oppose policies to fight climate change will be held to account by the courts.”

 

Discussion 

I mean no disrespect to the three environmental groups and I do not mean to seem as if I am belittling the seriousness of their message.  But just the same, whatever the environmental groups’ motivations were in sending these letters, when you look at what they actually did, their efforts can only be described as scattershot. The list of “insurers” to whom the letters were sent is, well, just plain odd.

 

Though the list includes some of the major global D&O insurers, other important insurers are simply missing. Other companies on the list are not insurers at all, but are insurance  brokers – and not even the largest brokers, but a seemingly random selection of smaller brokers. The list also includes reinsurers. In some cases the letter apparently was sent to the reinsurance division of a major insurance holding company but not to the direct insurance division that actually provides D&O insurance. The list also includes reinsurance intermediaries – why? And finally the list includes several companies that I literally have never even heard of. So, for starters, I think the environmental group can fairly be faulted for failing to do their homework.

 

The energy companies to whose board members the environmental groups contacted all seem to be significant petroleum or coal companies, so the energy company list in that respect makes more sense than the insurance company list. But the environmental groups really don’t explain why those particular companies are receiving letters. Though the letters assert generally that the companies involved “may have been or may be working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information,” none of the letters identify any specific ways any particular company engaged in these alleged activities.

 

The Annex to the letter that purportedly identifies the false and misleading information the energy industry has been putting out is full of bizarre typographical errors. (I suspect the version that is posted on the Internet has some weird technological bug.)  But with respect to the list of publications and resources to which the Annex intended to refer, the Annex itself says, “We are not providing evidence of specific company involvement in these activities, or suggesting that specific companies were or are currently involved.” Instead, what the Annex refers to are climate change denial statements by “trade associations, public relations firms or other third party intermediaries.”

 

 

In other words, the environmental groups apparently are not alleging that the specific companies to whom the letters were sent are involved in efforts to undermine action on climate change. Rather, the groups seem to be suggesting that energy companies generally are guilty by way of their very industry involvement in efforts by third-party groups to try to counter the environmental groups’ advocacy on climate change.

 

I will leave it to others to comment on the environmental groups’ premise that the board members of various individual energy companies should be held personally liable for statements by unidentified third party groups that have had the temerity to express views different than those of the environmental groups on issues of public importance. I will say that other than rhetorical flourish, the environmental groups provide little support for their contention that the statements by those thrid-party groups translates to personal liability for the individual board members.

 

I also think the letters reflect a peculiar idea of how liability insurance works or might work if the kinds of claims the environmental groups describe were actually filed. The letters’ references to D&O insurance and their questions about the availability of coverage suggest that the environmental groups regard the insurance coverage as “always on,” like a TV remote control, and all somebody needs to do is push a button and the coverage, which always running in the background, is triggered. However, insurance doesn’t work like that. Insurance is a matter of contract. The insurance policy runs for specified time periods, insures certain parties, and includes certain terms and conditions.

 

Availability of coverage for any particular claim depends on when the lawsuit is filed, who is named as a defendant and what specific theories are alleged. The coverage also depends on the specific wordings of each separate policy as the D&O insurance policies are each separately negotiated and each involves its own particular wording. In addition, whether coverage is available in any particular situation may depend on post-claim events, such as the provision of notice and cooperation with the insurer.

 

Some of the carriers on the list of letter recipients only participate in the D&O insurance marketplace as D&O insurers in an excess capacity. Their coverage will not be triggered unless the underlying insurance is exhausted. Other carriers on the list only participate in the D&O insurance marketplace as Excess Side A insurers. Coverage under their policies would only be triggered if the claim filed is nonindemnifiable, whether due to insolvency or legal prohibition. Some of the carriers on the list are not active players in the energy industry, and they likely do not insure any of the energy companies on the list.

 

I suspect that the environmental groups that sent these letters would be very impatient with my objections. Throughout the letters, the groups’ real message seems to be that climate change is a catastrophically serious threat and something needs to be done right away. In their view, the critical importance of the message far outweighs any trivial flaws that might be involved in the communication of the message. The groups seem to think that invoking the threat of personal liability will motivate corporate board members to look into whether their company is supporting the climate change deniers. The groups also seem to think that they can goad the D&O insurance industry to put pressure on companies to avoid actions that could create liability for the insured directors and officers. These are not meant to be subtle messages and so from their perspective a blunderbuss approach works just fine.

 

In certain respects at least, I have to say the environmental groups’ efforts were successful. The letter-writing campaign obviously was a publicity stunt. The stunt did succeed in garnering publicity. Stories about the groups’ letters appeared in such diverse publications as Bloomberg (here), Insurance News (here), and The Nation (here). The environmental groups want to try to undercut support for the climate change deniers, and so the publicity is important to their efforts to try to put pressure on the individual board members and the D&O insurers to question the energy companies about their support for these groups.

 

There is another respect in which the environmental groups’ efforts may have had an impact. That is, even though the groups’ efforts to communicate with the D&O insurance industry were clumsy, the groups’ letters and publicity campaign do raise questions about the costs associated with climate change and about who is going to pay those costs. The question of who bears the costs of climate change is going to become increasingly important. (I will stipulate that there are those who believe that climate change is a hoax or a political issue; I am not taking sides on this debate, I am merely saying these questions are going to be asked).

 

Just last week, according to an article on Law 360 (here, subscription required), Illinois Farmers Insurance Co. launched nine proposed class actions arguing that hundreds of Illinois municipalities were to blame for storm losses because they were ill-prepared for climate change.

 

Because the costs claimed to be associated with climate change could be enormous, there are going to be more lawsuits like that of Illinois Farmers as those affected try to sort out who should bear those costs. And just as there have long been efforts to try to impose the costs of more traditional environmental incidents to the boards of the companies that allegedly caused the incident (refer for example here), we can all be sure that there will be efforts to try to impose the costs of climate change on the boards of the companies that supposedly caused the climate change-related loss.

 

So even though I find fault with the way the environmental groups delivered the message, I think there could well be some truth to the idea that there will be efforts to hold corporate board members personally liable for the costs associated with climate change. For that matter, it may even be these same environmental groups that bring these claims. Other claims could come from shareholders, regulators, property owners, municipalities and, yes, even insurers. I am not saying that I think these claims would be meritorious. And of course any claim of this type would face significant causation issues among many other hurdles. I am just saying that there may be some truth to the environmental groups’ suggestion that climate change-related claims against corporate boards could be coming.

 

While one might question the environmental groups’ tactics and methods, it probably is in fact a worthwhile exercise for the D&O industry to think about whether or not climate change related claims might be coming and to think about how the industry should be preparing to respond. The list of items to be considered includes questions about how these possibilities should affect pricing, underwriting and risk selection. The issues also should include terms and conditions – such as, for example, whether the provisions of the typical pollution and environmental liability exclusion found in many policies needs to be revised.

 

In the interests of full disclosure, I should acknowledge that I first made a prediction about the possibility of these kinds of D&O claims quite a while ago (refer here). These claims have not yet materialized. I think that in part that might be because the global financial crisis intervened and these issues were put on the back burner. These issues could well stay on a low boil for some time to come. However, there are groups like those involved here that want to make these issues a higher priority. And if there are more events like Superstorm Sandy, these issues could quickly move up the agenda. That is all the more reason for the D&O insurance industry to consider these issues now, rather than at a time when developments could overwhelm the dialogue.

nystate3A New York appellate court, applying New York law, has rejected a D&O insurer’s argument based on alleged late notice of claim that it had no coverage obligations for amounts Sirius XM Radio  had incurred in underlying litigation, holding that the insurer’s policy was ambiguous on the timeliness requirements for notice of interrelated claims. A copy of the New York Supreme Court, Appellate Division’s May 29, 2014 opinion can be found here.

 

According to a summary of the insurance dispute on Law 360 (here, subscription required), the underlying lawsuits related to the merger of Sirius Satellite Radio and XM Satellite radio. A total of five lawsuits ultimately were filed, alleging, among other things, that the two companies had conspired to create a monopoly by combining in order to increase prices, in violation of the state consumer protection laws and federal antitrust statues.

 

The five cases ultimately were resolved. Sirius XM sought to be reimbursed for amounts incurred in the litigation from the D&O carrier whose policy was in force from August 2008 through August 2008 through August 2009, the period during which the first of the lawsuits was filed. XM also sought reimbursement for these amounts from the D&O insurer whose policy was in force at the time of the subsequent lawsuits were filed. The D&O insurer whose policy was in force in 2008-09 denied coverage for these amounts, as did the subsequent D&O insurer.

 

XM initiated a coverage lawsuit in New York Count (New York) Supreme Court against both of the D&O insurers. The D&O insurer whose policy was in force during 2008-09 moved to dismiss, arguing among other things that XM had not provided timely notice of claim with regard to three of the lawsuits. The D&O insurer contended that XM knew about the three actions in March, April and May of 2011, but did not provide notice to the D&O insurer until sending a January 2012 email.

 

In a November 8, 2013 ruling, Supreme Court Judge Peter Sherwood denied the D&O insurer’s motion to dismiss, and the D&O insurer appealed.

 

In a unanimous May 29, 2014 opinion, a panel of the New York Supreme Court, Appellate Division, First Department affirmed the trial court’s ruling, holding that the D&O insurer’s policy’s notice requirements are “ambiguous” on the question “whether its requirement of notice with respect to ‘any’ claim pertains to claims that are related under the provisions for ‘interrelated wrongful acts.’”

 

The appellate court said that “even assuming that plaintiff did have to notify [the D&O insurer] of every interrelated claim as soon as practicable, the documentary evidence fails to resolve all factual issues as a matter of law.” The appellate court said that, among other things, triable issues exist “as to the relatedness of the timely claim and three disputed claims.”

 

Discussion         

It is hard to discern everything that is going on here from the appellate court’s terse opinion, particularly given the opinion’s use of run-on sentences that telescope seemingly unrelated topics. The one thing is clear is that the D&O insurer was not able to get out of the case based on a late notice defense.

 

It was my observation back when I made my living as an attorney representing D&O carriers in coverage litigation that courts generally do not like notice defenses. I think many judges have an unconscious bias against allowing insurers out of coverage based on merely procedural grounds, particularly where the insurer can demonstrate no prejudice. In this case, the carrier was not only trying to raise one of those disfavored notice defenses, but it was trying to raise the argument in the context of an interrelated claim issue. As I have noted at length elsewhere, courts find interrelatedness issues vexing and court decisions on interrelatedness issues are all over the map.

 

My point here is that even if I can’t discern from the appellate court’s brief three-page opinion everything that was going on in this case, the one thing I do know is it was always going to be tough for a carrier to prevail on a disfavored notice defense particularly given the interrelated claim context.

 

I will say that the case does raise an interesting issue. If there are multiple interrelated claims and if notice for the first of the claims was timely, must notice of all subsequent interrelated claims also be timely? On the one hand, I can see the policyholder’s argument against imposing a continuing notice requirement as it could operate as a trapdoor to snatch coverage away. On the other hand, I can see the carrier’s argument that it must be provided with timely information about subsequent claims so that the insurer can take appropriate steps to protect the policyholder’s and the carrier’s mutual interests.

 

In the end the court decided that the clause was ambiguous and that questions of fact remained, so its opinion does not substantially answer the question of whether or not the notice of all subsequent interrelated claims must comply with the policy timeliness of notice requirements if the provision of notice of the initial claim complied with the notice timeliness requirements. It is interesting question that undoubtedly will come up again in the future.

dukeenergyDuke Energy, the largest provider of electricity in the United States, faces a number of challenges as it struggles to deal with the consequences of the February 2, 2014 coal ash spill at its Dan River Steam Station in Eden, North Carolina. In addition to the environmental remediation issues facing the company, two of its shareholders have now filed a derivative lawsuit against the company, as nominal defendant, as well as against 14 of its officers and directors, seeking damages, corporate governance changes, and injunctive relief. The shareholder lawsuit highlights how environmental issues can lead to potential D&O liability exposures and D&O insurance coverage concerns as well.

 

The shareholder lawsuit follows in the wake of a February 2, 2014 incident in which a broken storm water pipe beneath a coal ash pond at the company’s Dan River Steam Station allowed 39,000 tons of coal ash and twenty-seven million gallons of contaminated water to spill into the Dan River. The incident triggered a series of governmental investigations. According to news reports, the federal authorities have launched a criminal probe of the circumstances surrounding the spill. On May 22, 2014, the company announced that it had reached an agreement with the EPA regarding cleanup of the coal ash spill.

 

On May 21, 2014, two shareholders filed a derivative lawsuit against in Delaware Chancery Court against Lynn Good, the company’s CEO, B. Keith Trent, the company’s COO, and fourteen of the company’s current directors. The complaint (which can be found here) asserts claims against the individual defendants for breach of fiduciary duty, waste of corporate assets and unjust enrichment.  The complaint alleges that the defendants’ alleged misconduct has “exposed the company to billions of dollars of potential liability.”

 

The complaint alleges that the defendants “have known for years that the Duke Energy’s coal ash ponds were seeping toxic chemicals into the soil and rivers, yet took no action to remedy the problems.” The complaint also alleges that the individual defendants “also knew since at least 2010 that the Company was illegally operating without proper permits in several Duke Energy facilities.” The complaint alleges that “the board was well aware of the company’s longstanding violations, yet failed to take ay meaningful action to prevent further harm.” Instead, the complaint alleges, “the board caused or allowed Duke Energy to operate without proper permits, continuously pollute the environment, and fai to properly inspect the company’s coal ash ponds.”

 

The lawsuit seeks to recover the amount of damages that the individuals’ allegedly caused the company; to compel the company to comply with a March 6, 2014 state court order directing the company to eliminate contamination sources at its North Carolina coal plants; to abate existing and refrain from future environmental violations; to require the company to strengthen internal controls and adopt corporate governance reforms; and to compel the defendants to restore to the company compensation and other benefits they received.

 

It remains to be seen whether or not the plaintiffs will achieve their objectives with this lawsuit. But the because of the seriousness of the underlying incident, the company and the individual defendants will take this lawsuit very seriously as well.

 

As I have noted in prior posts (refer for example here), and as this lawsuit illustrates, corporate environmental liabilities can lead to director and officer liability exposures. The typical D&O liability insurance policy will contain an exclusion for loss arising from claims for pollution and environmental liabilities. However, many of these exclusions also contain a provision carving back coverage for shareholder claims. This case shows the importance of this kind of coverage carve back. The carve back ensures that directors and officers hit with this kind of shareholder suit filed in wake of an environmental incident are able to rely on their  D&O insurance to defend themselves against the shareholder suit.

 

In recent years, a number of D&O insurance carriers have introduced policy forms that eliminate the pollution exclusion altogether but that also incorporate into the policy’s definition of “Loss” a provision stating that Loss will not included environmental remediation or cleanup costs.

 

One area where questions can arise is when (as for example is the case here) a claimant seeks to recover as damages in a shareholder lawsuit the environmental remediation costs the company incurred. The insurer may take the position that the policy was not intended to provide insurance for environmental clean up costs, whether imposed directly in an environmental liability action or indirectly in a shareholder suit. Because these kinds of shareholder lawsuits typically settle, these insurance coverage issues have to be sorted out in the course of settlement negotiations. Because the shareholder claimants are seeking to recover a variety of alleged damages beyond just the cleanup costs, the individual defendants will contend that the insurance should be available to settle these claims.

 

In any event, this shareholder suit is yet another example of a recent phenomenon I have noted frequently on this blog (refer for example here), which is the incidence of shareholder litigation following in the wake of a regulatory or enforcement action. Regulatory and enforcement actions continue are an increasingly significant source of these kinds of follow-on claims. As this case demonstrates, among the enforcement arenas where these kinds of claims can arise is environmental regulation.

 

 

delaware2In a May 28, 2014 opinion (here), the Delaware Supreme Court held that an action by the bankrupt Washington Mutual bank holding company’s liquidating trust seeking a judicial declaration of coverage under the bank’s D&O insurance program for claims asserted by the trust against the failed bank’s directors and officers must be dismissed on ripeness grounds. The Court determined that the parties’ dispute “has not yet assumed a concrete or final form” and therefore that “any judicial determination at this stage would necessarily amount to an impermissible advisory opinion.”

 

Background 

In the days just before WaMu’s collapse in September 2008, the bank holding company made a $500 million “downstream” capital contribution in what proved to be a futile attempt to alleviate the bank’s liquidity crisis. The FDIC took control of the bank on September 28, 2008 and the bank holding company filed for bankruptcy. Following the bankruptcy filing, the committee of unsecured creditors sent the holding company’s former directors and officers a demand letter, asserting that the downstream capital contribution was wrongful and had been made in breach of their fiduciary duties and seeking damages.

 

For the policy period May 1, 2007 to May 1, 2008, WaMu’s bank holding company (hereafter, WaMu) had a $250 million D&O insurance program arranged in twelve layers. For the following period, May 1, 2008 to May 1, 2009, WaMu had a separate $250 million D&O insurance tower also consisting of twelve layers.

 

The former directors and officers to whom the creditors committee had sent the demand letter submitted it to the D&O insurers. The primary insurer denied coverage for the creditors’ committees claims under its 2008-09 policy; however, the insurer indicated that the claims would be covered under the 2007-08 program. The directors and officers have incurred defense fees in connection with the creditors committees’ claims which have been paid under the 2007-08 program. However, due to the numerous claims arising out of WaMu’s collapse, the 2007-08 program has been significantly depleted.

 

To date, the trust has not initiated any formal legal action against the former directors and officers to enforce the claims arising from the downstream capital contribution.

 

In October 2012, the liquidating trust, as successor to the creditors’ committee’s claims, filed an action in Delaware Superior Court disputing the insurers’ denial of coverage under the 2008-09 policies. The trust asserted three claims: one alleging breach of contract and another alleging breach of the implied duties of good faith and fair dealing for the denial of coverage under the 2008-09 policies, and a third claim seeking a judicial declaration that coverage under the 2008-09 policies is available for the claims concerning the downstream capital contribution and that the $50 million retention on the primary policy does not apply.

 

The insurers moved to dismiss the trust’s lawsuit arguing that the trust lacks standing to assert the first two claims and that the trust’s declaratory judgment claim does not allege an “actual controversy” that is ripe for adjudication. The trial court denied the insurers’ motion to dismiss, based on its determination that the trust has standing and that the declaratory judgment action presents a claim that is ripe for adjudication. The insurers sought leave to pursue an interlocutory appeal, which the trial court granted. The Delaware Supreme Court accepted the interlocutory appeal.

 

The May 28 Opinion 

In a May 28, 2014 opinion by Justice Jack B. Jacobs, the Delaware Supreme Court reversed the ruling of the court below and remanded the case to the trial court to be dismissed without prejudice. The Supreme Court found that the dispute was not yet ripe for resolution because it has “not yet reached a concrete or final form” and therefore “any judicial resolution at this stage would necessarily be based on speculation and hypothetical facts, and ultimately could prove unnecessary.” Because the Court resolved the appeal on the basis of the ripeness issue, the Court did not address the question of whether or not the trust had standing to assert the claims.

 

The ripeness doctrine under which the Supreme Court dismissed the case is sometimes expressed in the adage that the courts “do not render advisory or hypothetical opinions.” The purpose of the principle is to “conserve limited judicial resources” and to “avoid rendering a legally binding decision that could result in premature and possibly unsound lawmaking.”

 

To illustrate the point that “any judicial determination at this stage would necessarily amount to an impermissible advisory opinion,” the Court reviewed a series of hypotheticals. It could turn out, for example, that the trust might decide not to initiate a legal action against the directors and officers. Or, if the trust files a lawsuit, the directors and officers might prevail. Even if the trust were to file a lawsuit and ultimately obtain a settlement or judgment, determination in the case could affect the availability of coverage and could even affect the applicability of the retention.

 

Because the court determined that the parties’ dispute is not yet ripe for resolution, the court determined that the trust’s claims for breach of contract and breach of the implied duties of good faith and fair dealing are also not yet ripe. As the court noted, it would be “logically inconsistent for this Court to rule that a dispute is not sufficiently ripe to warrant entertaining a declaratory judgment claim, yet is sufficiently ripe to warrant entertaining and deciding claims for contractual breach.”

 

Discussion

WaMu’s collapse was the largest bank failure in U.S. history and its demise led to a flood of litigation. (To see my views about the bank failure at the time it occurred, refer here.) Among other things, the collapse has led to extensive coverage litigation. As discussed here, one of the recurring insurance coverage disputes is whether or not the various lawsuit are all interrelated and therefore trigger only the single tower of D&O insurance that was in force at the time the first claim was made or whether the second tower of insurance was also triggered. The question of whether or not the second tower has been triggered is significant because defense costs and settlement amounts have largely exhausted the first tower.

 

The coverage lawsuit the liquidating trust filed is another effort to try to get at the second tower of insurance. The creditors’ committee’s and the liquidation trust’s claims against the former WaMu directors and officers over the downstream capital contribution come down to a bid to try to nab some of the insurance money in the second insurance tower. Since the 2007-08 tower of insurance is substantially depleted, the liquidating trust’s claims against the former directors and officers only have value if the liquidating trust can hope to recover against the 2008-09 insurance program. The liquidating trust filed this coverage  lawsuit because if it can’t get at the second tower of insurance, its claims aren’t worth bringing.

 

The Supreme Court recognized that what the trust was really trying to do with its coverage action was to try to find out if it would be worth filing a lawsuit against the individual directors and officers. The Supreme Court observed that “the Trust’s only interest in having its dispute litigated now is apparently to receive judicial guidance about how much coverage would be available to the Ds&Os if the Trust were to initiate litigation against them.”

 

However, the Court said, while the trust was seeking guidance, it was doing so “not as a contractual counterparty seeking to vindicate the D&Os’ contractual rights, but rather as a potential claimant against the Ds&Os.” The trust’s desire to “receive advice” is “not a cognizable interest that will justify a Delaware court exercising its jurisdiction to decide this dispute.”

 

The Supreme Court remanded the case to the lower court to have it dismissed — but dismissed without prejudice. In other words, if the liquidating trust manages to get a settlement from or judgment against the former WaMu directors and officers on its claims, the trust would then be free to reinstitute its coverage action. It will only be at that point that the trust will find out whether or not it can get at the second tower. The trust will have to figure out if the costs and effort required to get to that point are worth the effort, especially allowing for the possibility that the trust could go through all of the intervening steps and then find out in the end that there wasn’t any coverage under the second tower any way.

 

Special thanks to a loyal reader for providing me with a copy of the Delaware Supreme Court’s opinion.

federal depositOverall, the banking industry continued to improve in the first quarter of 2014, although banks did see their noninterest income decline due to reduced mortgage activity and a drop in trading revenue, according to the FDIC’s Quarterly Banking Profile for 1Q14. The latest Quarterly Banking Profile can be found here and the FDIC’s May 28, 2014 press release about the report can be found here.

 

As the banking industry overall continues to improve, the number of “problem institutions” continues to decline as well. (A “problem institution” is a bank that the FDIC ranks as a 4 or a 5 on its scale of financial stability. The agency does not release the names of the banks its regards as problem institutions.) In the first quarter of 2014, the number of problem institutions declined for the twelfth straight quarter, from 467 at the end of the fourth quarter 2013, to 411 at the end of the first quarter (representing a decline of 12%).  The number of “problem” banks now is less than half the post-crisis high of 888 at the end of the first quarter of 2011.

 

Though the number of problem institutions continues to decline, the problem institutions still represent about 6.1% of all reporting institutions. Moreover, as positive as the decline in the number of problem banks may be, by and large the problem banks are not improving themselves out of the “problem” status – the likelier explanation for the declining number of problem institutions is that they are simply being absorbed by other more stable banks, or that they are simply failing. Along those lines, the FDIC reports that mergers absorbed 74 banks during the first quarter.

 

In addition, even though we are now well over five years peak of the credit crisis, banks are continuing to fail. According to the report, five banks failed during the first quarter of 2014, compared to four bank failures during the first quarter of 2013. Three more have failed so far during the year’s second quarter, bringing the total for the year to date to eight, compared to 24 for the full year of 2013.

 

In addition to releasing the latest Quarterly Banking Profile, the FDIC also recently updated the information on its website regarding its failed bank litigation activity. The latest update, as of May 23, 2014, shows that the FDIC has now filed 96 lawsuits against the former directors and officers of 95 failed banks. The agency has already filed twelve lawsuits during 2014, but only three since mid-March. Interestingly, the FDIC’s website also states that of the 96 lawsuit that it has filed, 24 have settled. The number of settlements seems to have accelerated recently.

 

The likelihood is that the agency will continue to file additional lawsuits in the months ahead. The website discloses that it has authorized lawsuits connection with 138 failed institutions against 1,115 individuals for D&O liability. These figures are inclusive of the 96 D&O lawsuits the agency has filed naming 742 former directors and officers.

 

delaware2As discussed in a recent post (here), in a May 8, 2014 decision the Delaware Supreme Court upheld the facially validity of a nonstock corporation’s bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. Because the court’s holding seemed to be equally applicable to stock corporations as well as to nonstock corporations, the decision appeared to open the way for all Delaware corporations to adopt fee-shifting bylaws. The possibility that companies might be able to shift litigation costs to unsuccessful shareholder claimants potentially could have transformed shareholder litigation.

 

However, as discussed in a May 23, 2014 post on Francis Pileggi’s Delaware Corporate and Commercial Litigation Blog (here), a legal committee in Delaware has now proposed a change to the Delaware General Corporation Law that would limit the impact of the Delaware Supreme Court’s opinion to nonstock corporations and specifically limit stock corporations’ ability to use fee-shifting bylaws.

 

On May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”

 

As reflected in a May 22, 2014 Law 360 article entitled “Del. Attys Push to Shield Stock Cos. From Fee-Shifting Ruling” (here), there was a great deal of concern in the wake of the Delaware Supreme Cour decision about the possibility that stock corporations might adopt fee-shifting bylaws. The Law 360 article quotes the head of the Corporation Law Section of the Delaware Bar as saying that the adoption of fee-shifting bylaw provisions “could drastically reduce the ability of stockholders to bring even meritorious claims,” adding that “while many believe there is more shareholder litigation than is desirable or constructive, a measure that potentially eliminates all such litigation could create serious concerns for the stockholders of Delaware corporations.” 

 

As Pileggi noted in his recent blog post, the widespread adoption of fee-shifting bylaws “would discourage inappropriately the function of meritorious stockholder suits as the only means to hold fiduciaries accountable for fulfilling their fiduciary duties.”

 

According to Pileggi, the proposed legislative revision is expected to be presented to the Delaware General Assembly for passage prior to the end of the current legislative session on June 30, 2014, with a proposed effective date of August 1, 2014.

 

In a May 23, 2014 New York Times  article (here), Ohio State Law Professor Steven Davidoff noted the “hysteria” that had followed in wake of the Delaware Supreme Court’s ruling. He also noted that some prominent attorneys were already publicly advocating that Delaware corporations adopt a fee-shifting bylaw. However, while there may have been a sense that companies might rush to adopt the kinds of bylaw provisions, Davidoff expressed his view that this was “highly unlikely to be the case.”

 

Davidoff suggested that “most companies” would hesitate to adopt these kinds of provisions “because of the questionable legality of such a provisions and the threat of shareholder opposition.”  Davidoff noted that the Delaware Supreme Court’s decision did not state that it was applicable to stock corporations, but it did state that whether or not a fee-shifting by law is enforceable “depends on the manner in which it was adopted and the circumstances in which it was invoked.” He added that “whether the Delaware courts would enforce a bylaw that could effectively end most shareholder litigation at public companies is questionable. Such a decision would not only put many of its lawyers out of jobs but impair Delaware’s ability to rule on cases.”

 

Davidoff also noted that for companies that might try to adopt these provisions, the market reaction would “likely be furious.” He speculated that institutional investors and proxy advisory firms would lkely try to push out directors who voted to adopt a fee-shifting bylaw. Davidoff also noted that the provisions would not in any event have been applicable to federal securities litigation, given the views of the courts and of the SEC that restricting a person’s right to sue for securities fraud is illegal.

 

In the end, as Davidoff notes, the “life of the fee-shifting bylaw may be quite short.” I suspect that the speed with which the proposed legislative revision has been put forward has a lot to do with the point Davidoff makes that the widespread adoption of fee-shifting bylaws would put many of Delaware’s lawyers out of jobs.

 

The Two Professors Behind the Supreme Court’s Reconsideration of Fraud on the Market: At some point in the next few weeks, the Supreme Court will release its long-awaited decision in the Halliburton case, in which the Court is reconsidering the Fraud on the Market theory. Readers who like me are awaiting the Court’s decision with interest will want to read a very interesting May 23, 2014 Reuters article entitled “Behind Major U.S. Case Against Shareholder Suits, A Tale of Two Professors” (here). In the article, Frankel tells the story of how the initiative and intellectual work of two law school professors – Stanford Law Professor Joseph Grundfest and Michigan Law Professor Adam Pritchard – fueled the effort to have the Court reconsider the Fraud on the Market theory. Ultimately the two professors’ work led them to propose different analyses  that were presented to the Court in two different amicus briefs.

 

At least based on the record at oral argument, Pritchard’s “price impact” approach seems to have garnered the most attention from the Court. But as discussed in Frankel’s article, it remains to be seen which of the various theories proposed will prevail. Indeed, as the article notes, another group of two dozen law professors  filed an amicus brief urging the Court to uphold the Fraud on the Market theory. At some point in the next few weeks, we will find out which view has carried the day

dojCybersecurity has been a hot button issue for quite a while, but the U.S. Department of Justice ratcheted things up last week when it announced the indictment of five Chinese military officers for hacking into U.S. companies’ computers to steal trade secrets and other sensitive business information. U.S. prosecutors clearly believe the intrusions were serious enough to warrant an action that risked causing diplomatic tensions with China. However, as serious as these state-sponsored cyber incidents are alleged to be, the three public companies involved had not previously disclosed the breaches. These circumstances raise interesting questions about the current state of cyber security disclosure practices.

 

First, the background. On Monday May 19, 2014, the Department of Justice announced the indictment of five officers of Unit 61398 of the Chinese People’s Liberation Army in Shanghai. The five defendants are alleged to have hacked into six American entities to steal trade secrets that would be useful to Chinese companies. The six entities include five U.S. companies and a labor union.

 

In the 45-page indictment (which was filed in the Western District of Pennsylvania and which can be found here), the defendants are variously charged with thirty-one criminal counts, including conspiring to commit computer fraud; accessing a protected computer without authorization; transmitting a program, information code or command with intent to cause damage to a protected computer; aggravated identity theft; economic espionage; and trade secret theft.

 

In a May 19, 2014 statement released when the indictment was announced, Attorney General Eric Holder said that “the range of trade secrets and other sensitive business information stolen in this case is significant and demands an aggressive response.” He also said that the Administration “will not tolerate actions by any nation that seeks to illegally sabotage American companies and undermine the integrity of fair competition in the operation of free markets.” This case, Holder said, “should serve as a wake-up call to the seriousness of the ongoing cyberthreat.”

 

In other words, this is very serious stuff. Serious enough, in fact, that the Administration was willing to risk damaging diplomatic relations with China by filing the indictment. And it is clear that China is not happy at all about the indictment. A Wall Street Journal May 20, 2014 article about the indictment quotes a spokesperson from the Chinese Foreign Ministry as saying that the indictment “grossly violates the basic norms governing international relations and jeopardizes China-U.S. cooperation and mutual trust.”

 

So here’s the situation – the U.S. government thinks the cyber attacks were serious enough to risk making an international incident out of it. But as serious as these breaches clearly were, the publicly traded companies involved chose not to disclose the incidents to their investors.

 

As discussed in a May 21, 2014 Bloomberg article entitled “U.S. Companies Hacked by Chinese DIdn’t Tell Investors” (here), the breaches that Attorney General described as “significant” and as “undermining the integrity of fair competition” and serious enough to imperil international relations nonetheless apparently were not sufficiently “material “ for the companies involved to disclose the incidents to their shareholders. The article quotes a representative of Alcoa as saying “to our knowledge, no material information was compromised during this incident which occurred several years ago.”

 

As the Bloomberg article notes, there are no explicit instructions from the SEC on how cyber breaches must be disclosed. The SEC has issued cyber security disclosure guidelines, but these guidelines allow companies a great deal of judgment on what must be disclosed. As I discussed in an earlier blog post (here), since the guidelines have been in place, very few companies (less than 1% of the Fortune 1000) have disclosed that they had in fact been the subject of an actual cyber event.

 

As the Bloomberg article puts it, companies generally have been “slow to inform the public about cyber-attacks and the loss of customer data.” But as one commentator quoted in the article says, “the question is would an investor have cared if Chinese hackers broke into a company and were messing around the place?”

 

Public companies clearly are reluctant to disclose cyber security breaches and other issues. For now, there seems to be little incentive for companies to be more forthcoming.  Current practices seem unlikely to change unless the SEC takes greater initiative. The Bloomberg article quotes a former SEC official as saying “What it would take is an enforcement action against someone prominent. Until then you are going to continue to see the same approach taken by companies.”

 

I have no way of knowing for sure what the SEC will do, but I suspect that sooner or later we will see an SEC enforcement action on cyber security disclosure issues. And whether or not the SEC takes the enforcement initiative, we are certainly going to hear more about data breach disclosure issues in the form of shareholder lawsuits.  It is worth noting in that regard that both of the two recent shareholder suits involving high profile cyber breaches – including the one filed in January 2014 against Target and its executives and the one filed earlier this year against Wyndham executives —  contained allegations in which the shareholder plaintiffs  asserted among other things that the company’s disclosures about their respective breach incidents had been inadequate.

 

In addition to shareholder derivative litigation, we may also see securities class action litigation against reporting companies over alleged misrepresentations and omissions about data breaches, as Doug Greene predicts in an interesting May 20, 2014 post on his D&O Discourse blog (here). Among other things, Greene says that the “advent of securities class actions following cybersecurity breaches” is “inevitable.”

 

Time will tell whether or not cyber-related securities class action lawsuits become a significant phenomenon. One reason that we may not see a significant number of cyber breach-related securities suits is that in general the securities markets have not proven to be particularly sensitive to a company’s disclosure that it has been hit with a data breach. A May 23, 2014 Bloomberg article entitled “Investors Couldn’t Care Less About Data Breaches” (here), discussing a recent data breach at Ebay states that the trend among companies that have suffered cyber attacks is that “the stock market practically ignores them.” (Which I suppose arguably supports the conclusion of the companies that were the victims of the Chinese military hacks that the incidents were not “material”).

 

It may be, as Greene suggests in his blog post, that stock price drops following the disclosure of a data breach are “inevitable.” However, in the absence of a significant stock price drop to point to, plaintiffs will have little incentive to file securities class action lawsuits. Unless and until a company’s announcement of a data breach causes the company’s share price to drop significantly, it seems likelier that the shareholder claimants will pursue derivative lawsuits, of the kind filed against Target and Wyndham.

 

In the meantime, there may be more to come from U.S. prosecutors on the topic of state-sponsored hacking. According to the Journal article about the Chinese military officers’ indictment, “other cases relating to China are being prepared,” and in addition “alleged hackers in Russia are likely to be targeted soon.” In other words, the U.S. government is preparing to ratchet things up even further.  

 

secAs part of the SEC’s efforts under chairman Mary Jo While to refocus the agency’s efforts to detect and pursue accounting fraud, the agency has undertaken a number of initiatives, including the formation of a Financial Reporting and Audit Task and the creation of the Center for Risk and Quantitative Analytics. As part of these efforts, the SEC has stated that it intends to employ “data analytics” to detect indicia of accounting fraud, through the implantation of what the agency calls the “Accounting Quality Model” (AQM) and what the media have dubbed “Robocop.”

 

As discussed at length in a prior post, the agency’s planned implementation of the AQM means that reporting companies could face more frequent inquiries from the SEC on substantive items in their financial reports. In a May 19, 2014 article entitled “Automated Detection in SEC Enforcement: Anticipating and Adapting to Emerging Accounting Fraud Enforcement Strategies” (here), NERA Economic Consulting takes a look at the SEC’s anticipated quantitative approach and suggests strategies for companies to adopt in anticipation of the agency’s forthcoming analytic scrutiny.

 

In its study, NERA states that the SEC’s use of analytic tools to identify reporting anomalies “alters the landscape on a fundamental level.” NERA suggests that reporting companies “would be well advised to anticipate SEC questions and identify anomalies in their financial reporting.”  The report defines “anomalies” as “unusual changes in financial accounting data and/or accounting treatments.” The report also notes that “developing an understanding of the theoretical economic impact of any potential reporting anomalies will also be important.”

 

The presence of a statistical anomaly in a company’s financial statements – “whether or not it represents a reporting error” — may “trigger scrutiny by regulatory authorities prior to more overt and clear evidence of a problem.” According to NERA, the SEC is “actively developing the capabilities to cast a wider net,” as a result of which it is “important for companies to assess and anticipate what the SEC will consider to be red flags potentially warranting further investigation.”

 

In discussing how companies should anticipate the SEC’s heightened scrutiny, the report notes that the agency’s automated detection means that “any statistical anomaly (regardless of whether it is a misrepresentation) might be identified and ‘red-flagged’ by the SEC.” Accordingly it is important for companies to evaluate whether their current-period financial data are “out of line compared to industry peers”; deviate from their own historical patterns; or are “internally inconsistent” (such that, for example, their balance sheet, income statement and cash flow statement do not fully reconcile with one another).

 

In addition, various key financial ratios are “likely to matter both in their absolute levels and based on how they have changed over time.” The report suggests that the SEC will not simply look at individual accounting measures in isolation but would develop a model in which weights are assigned to anomalous measures across different accounting data, to arrive at a summary indicator of potential accounting issues.

 

The report suggests that companies can attempt to preempt SEC scrutiny by address apparent accounting anomalies through adequate pubic disclosures. Similarly, companies that are flagged by the SEC may be able to explain in public filings any accounting anomaly to the extent it is due to a company-specific factor. This kind of information might be disclosed either in an anticipatory public disclosure or in response to SEC inquiries.

 

In summary, the report suggests, the anticipated analytic scrutiny has important implications for all public companies. Companies need to be aware of “what may trigger scrutiny in order to anticipate it and to be prepared to explain legitimate financial reporting anomalies that may appear suspicious.”  

 

ausIn an interesting and provocative article, an Australian attorney has sounded the alarm on escalating securities class action litigation in his country. The May 2014 article, written by John Emmerig of the Jones Day la firm’s Sydney office, is entitled “Securities Class Actions Escalate in Australia” (here). The article suggests that in light of recent litigation activity Australia may now be as litigious as the United States, a development that is all the more surprising given the differences in class action litigation between the two countries.

 

The author opens his article by asserting that in the last seven months there has been “yet another increase in the level of securities class actions in Australia.” According to the author, during the last seven months “there have been 12 new class actions threatened or filed” involving companies listed on the ASX. Of these, nine have been alleged to have violated their continuous disclosure obligations or engaged in misleading or deceptive conduct.

 

Referencing the relative population size of Australia and of the United States, the author notes that the 12 securities class actions is roughly as proportionate to Australia’s population of 24 million as the 166 securities class action lawsuits filed in the U.S. in 2013 are to the population of 315 million in the United States.  Given the recent increasing levels of securities class action litigation activity in the country, Australia “looks very likely to be outstripping that ratio in the short term.”

 

The author comments that the idea that the litigation rate in Australia would exceed that of the United States is “sobering” and he asks rhetorically “is it really suggested that corporate governance standards and legal compliance suddenly deteriorated to warrant this position?”

 

The level of litigation activity in Australia is “all the more remarkable” given the litigation-friendly features of the American legal system that are not present in Australia. For example, the U.S. has the so-called American rule pursuant to which each party to a lawsuit bears its own legal costs. Australia, by contrast, has a “loser pays” model, in which the unsuccessful litigant must pay the other party’s legal costs. In addition, the U.S., unlike Australia, allows contingency fees, and the U.S., again unlike Australia, allows jury trials.

 

On the other hand, as the author acknowledges, Australia does have a well-developed litigation financing industry, “which is much more active in class actions here than in the U.S.” In addition, under the Australian securities laws, a securities claimant does not have to plead or prove “fault or state of mind,” unlike in the U.S. where, at least in securities lawsuits under Section 10 of the ’34 Act, plaintiffs must plead and prove scienter.

 

The author notes that as if prospective litigants did not have enough to encourage them to pursue litigation, the Australian Productivity Commission in  its recently issued Access to Justice Arrangements,  recommended the introduction of contingency fees while making no distinction between class actions and other forms of litigation. The author contends that “allowing contingency fees would be like throwing fuel on a fire as Australia moved closer to the American model of litigation.” The introduction of contingency fees would make class action litigation, which allows claims to be aggregated, “even more attractive as lawyers are able to take a cut from each claim.”

 

The author concludes by noting that the commonplace assumptions that Australia does not have a litigious culture “may now need to be re-evaluated” given that “perhaps Americans are about to lose their mantle as the ‘most litigious people in the world.’”

 

The author’s observations and commentary are interesting. it is certainly worth asking whether recent litigation trends may mean. I do think it is important to note, however, that the alarm that the author is trying to sound is based only on litigation developments over the last seven months. I know that even in the horribly litigious country in which I live, litigation levels ebb and flow, and even though everybody tries to make generalizations about short term litigation patterns, litigation trends in the United States can only be understood meaningfully over long periods of time.

 

The author is correct that there are features in the U.S. legal system that contribute to our litigiousness. However, the litigation funding industry is better established and more significant in Australia, and as I have noted in prior posts, is a significant factor in the growth of class action litigation in that country. Indeed, even though Australia has a “loser pays” model, the presence of litigation funding helps reduce this factor’s deterrent effect. I suspect the author is correct when he argues that the introduction of contingency fees could fuel increased litigation activity.

 

I will say that I find it amusing how horrified the rest of the world is with the litigation system in the United States. As I have traveled around the world in recent years, I have heard these same tones of revulsion about American litigiousness numerous times. It is true that in the U.S. all too often disputes that could be resolved by other means wind up in court, and I recognize that there unquestionably are cases that are filed that should not be filed and outcomes that are excessive, unreasonable and unfair. All of that said, however, courts in the United States are highly respected here. In our country, everyone knows that they have rights and that if they are aggrieved they can go to court and their rights will be enforced and protected. So, while I understand that our system of litigation appalls the rest of the world, as I travel around the world and hear the disparaging comments, I do not apologize to anyone for it.

 

In fact, though I hear the steady criticism of the U.S. legal system, what I see is a slow but steady convergence, where over time many attributes of the U.S. legal system are gradually being adopted in a large number of countries. These trends accelerate whenever aggrieved parties believe existing mechanisms are insufficient for them to obtain redress. That is, in fact, what seems to be happening in Australia, Or to put it another way, the increase in litigation in Australia may be less of a reflection of some kind of cultural deterioration, and more of a factor of an increase in the number of persons who believe they have harmed and who feel they are entitled to redress.   

 

Professional Liability Underwriting Society to Host Regional Symposium in Hong Kong on May 27, 2014:  On May 27, 2014, the Professional Liability Underwriting Society (PLUS) will host its 2014 Professional Liability Regional Symposium in Hong Kong. This half-day program will focus on regulatory and corporate fraud issues facing the Asian marketplace. PLUS’s presentation of this event marks the third year that PLUS has hosted a regional educational and networking event in Hong Kong.

 

The event will be held from 2:00 pm to 6:00 pm on Tuesday May 27, 2014 at the Hong Kong Football Club. The event will be followed by a networking reception. The event program includes several distinguished speakers and panelists. The keynote speakers include Mark Robert Steward, who is a member of Hong Kong’s Securities and Futures Commission and Executive Director with responsibility for the Enforcement Division. The keynote speakers will also include Kenneth Morrison of Mazars CPA Limited and Richard Hancock of NYA International Limited. A full listing of the event speakers and panelists can be found here.

 

This annual event has attracted insurance industry professionals, attorneys and many others in the past and the event promises to be well-attended again this year. Industry professionals in Hong Kong and elsewhere throughout the region will not want to miss this important educational and networking event. I strongly urge everyone to join their industry colleagues and to help support PLUS’s efforts to help develop the professional liability community in Hong Kong. Space is limited so registration now is well-advised. To register or for further information, please refer here.