On November 21, 2013, in a terse, two-page summary order (here), the Second Circuit affirmed a district court ruling applying New York law and holding that a D&O insurance policy’s professional services exclusion precludes coverage for claims brought against  broker-dealer David Lerner Associates, based on the firm’s offering underwriter and financial products sales activities. The March 29, 2013 opinion of Eastern District of New York Judge Joseph F. Bianco, which the appellate court affirmed, can be found here.

 

Background

David Lerner Associates (DLA) is a broker-dealer that served as the underwriter and sole distributor for securities of the Apple Real Estate Investment Trust (REIT). In May 2011, the Financial Industry Regulatory Authority (FINRA) filed a disciplinary complaint against DLA (subsequently amended to include David Lerner individually). FINRA’s amended complaint alleged that DLA sold over $442 million of the REIT’s securities, allegedly by misrepresenting the value of the securities while failing to perform adequate due diligence.

 

In June 2011, investors who had purchased the Apple REIT securities filed three class actions against DLA, David Lerner and others, arising out the same circumstances as the FINRA action. The three class actions and a separate individual action were consolidated in the Eastern District of New York.

 

DLA submitted the FINRA action and the various private lawsuits to its D&O insurer, seeking coverage for its costs of defending the actions. The insurer denied coverage in reliance on the D&O policy’s professional services exclusion, which provides in pertinent part that

 

The Underwriter shall not be liable to may any payment for Loss in connection with any Claim made against the Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving the Insured’s performance of or failure to perform professional services for others

.

The policy does not define the term “professional services.”

 

DLA filed a lawsuit against its D&O insurer alleging breach of contract and seeking a declaratory judgment that the D&O insurer is obligated under its policy to indemnify and defend DLA in the regulatory action and private lawsuits. The D&O insurer filed a motion to dismiss DLA’s action.

 

The District Court’s March 29 Ruling

In his March 29, 2013 Memorandum and Order, Eastern District of New York Judge Joseph Bianco granted the D&O insurer’s motion to dismiss. 

 

Judge Bianco held that the insurer does not have a duty to indemnify or defend DLA in the underlying litigation “due to the unambiguous language of the professional services exclusion.” He said that the allegations in the underlying complaints alleging that DLA — while acting as the underwriter and sole distributor of the Apple REIT securities had failed to engage in due diligence —  “quintessentially and unambiguously fall within the common-sense understanding of the term ‘professional service.’”

 

Judge Bianco rejected DLA’s argument that because the term “professional services” was undefined in the policy, it was ambiguous and should be construed against the insurer. After reviewing New York case law, Judge Bianco said that

 

It is clear under New York law that the allegations in the underlying lawsuits against DLA – relating to its purported failure to, inter alia, conduct due diligence on the REITs in connection with providing investment advice to its customers in the sale of this financial product – constitute “professional services” under the common understanding of the term, and, thus, the exclusion from coverage under the policy unambiguously applies here.

 

Judge Bianco added that “to perform due diligence on REITs and market those securities, individuals are employed in an occupation, they rely on specialized knowledge or skill, and the skill is mental rather than physical. There is simply no question, based on the allegations in the underlying lawsuits, that the professional services exclusion applies.”

 

The Second Circuit’s November 21, 2013 Summary Order

On November 21, 2013, in a two-page summary order, a three judge panel of the Second Circuit affirmed Judge Bianco’s dismissal, quoting with approval from Judge Bianco’s opinion and stating that “the claims for which DLA seeks coverage fall within the professional services exclusion of the policy at issue.” 

 

The Second Circuit emphasized that under New York law insurance policy terms are to be “read in light of common sense speech and the reasonable expectations of a business person.” The appellate court also noted, as the district court had observed, that “the standard test for professional services is whether the employees acted with the special acumen and training of professionals when the engaged in the acts.”

 

Discussion

The determination of whether or not claims based on certain specified activities are precluded by a D&O insurance policy’s professional services exclusion is the other side of the coin from the determination of whether or not the claims constitute “professional services’ within the meaning of the coverage provisions of an Errors and Omissions (E&O) insurance policy.

 

Indeed, these judicial determinations that DLA’s underlying activities represent professional services do raise the question of why DLA submitted these claims to its D&O insurer, rather than to its E&O insurer. Neither the district court opinion nor the Second Circuit opinion refers to the possibility of coverage for these claims under a separate E&O policy.

 

There is always the possibility that DLA did not carry E&O insurance; however, give the size of its operations (the district court opinion notes that the firm has offices in two states and about 370 registered representatives), I find it unlikely that the firm did not have E&O insurance. My guess is that the firm also submitted these claims to its E&O insurer and that the E&O insurer also denied the claims, either because the offering underwriting activities that are the basis of the underlying claims fall outside the definition of “professional services” in the E&O policy or because the claims against DLA were not asserted by the customer for whom DLA performed the underwriting services (Apple REIT) but by third parties. I want to emphasize that I am speculating here, I have no way of knowing for sure why this insurance dispute arises under DLA’s D&O policy and there is no mention of DLA’s E&O policy.

 

It is not uncommon for coverage disputes to arise involving the professional services exclusion in a D&O insurance policy. A frequently recurring issue (that was not involved here) has to do with the use of the broad preamble language in the exclusion – that is, that the exclusion precludes coverage for claims “based upon, arising out of or in any way involving” the delivery of professional services. Insurers whose policies have this broad preamble will seek to apply the exclusion broadly, to sweep in a broad range of disputes involving the insured company’s operations. For that reason, it is preferable when the alternative wording is available to use the narrower “for” preamble, rather than the broader “based upon, arising out of” lead-in language. However, the narrower language often is not available.

 

It is interesting that one of the elements of the dispute in this case had to do with the fact that the D&O insurance policy precluded coverage for claims arising from the delivery of professional services but the policy does not define the term “professional services.” By contrast, in the typical E&O insurance policy, which designed to provide coverage for claims arising from the delivery of professional services, the term “professional services” is invariable a defined term, and typically is defined very narrowly. (For a recent discussion of the ways in which an E&O insurance policy’s definition of the term “professional services” can affect the availability of coverage under the policy, refer here.)

 

The difference in the ways that the two types of policies treat the term “professional services” raises the possibility that specific activities might constitute “professional services” for purposes of the D&O insurance policy’s exclusion, but might fall outside the definition of “professional services” for purposes of triggering coverage under the E&O insurance policy – which is one reason why it is preferable for financial services firms to have the D&O and E&O insurance provided by the same carrier.

 

As always when I stray into topics involving E&O insurance, I am interested in the thoughts and reactions of readers who work more frequently with those policy forms than I do. I encourage readers to add their comments to this post using the blog’s comment feature.

 

Shareholder claimants seeking to pursue a misrepresentation claim under the Ontario Securities Act must obtain leave of court to proceed based on a statutory requirement that the plaintiff must show a “reasonable possibility that the action will be resolved at trial in favor of the plaintiff.” Ontario’s courts agree that this requirement sets a “low bar,” but they have struggled to establish just how low this bar is.

 

In a November 5, 2013 decision in a securities suit against Kinross Gold Corporation and certain of its directors, Justice Paul Perell of the Ontario Superior Court of Justice examined the Act’s leave requirements and concluded that though the bar to obtain leave is low, the shareholder claimants had not met the statutory requirements and therefor leave to proceed was denied. A copy of the November 5 decision can be found here.

 

Though the decision will not end the debate about just how low the requirements are, the decision does show that even though the bar is low, the leave requirements do serve as a “genuine screening mechanism” and claimants may fail to meet the requirements.

 

Kinross is a Canadian international mining company. The plaintiffs are trustees of a Canadian pension fund who filed an action in the Ontario Court of Justice asserting a statutory claim for damages under the Ontario Securities Act and a claim for common law misrepresentation. The plaintiffs purported to represent a class of investors who purchased Kinross shares between May 3, 2011 and January 16, 2012.

 

The plaintiffs alleged that the defendants had made three misrepresentations. First, the plaintiffs alleged that Kinross ought to have written down goodwill associated with respect to two West African gold mines; Second, that Kinross had failed to disclose that drilling operations at one of the two West African mines had shown high concentrations of low grade ore; and third that Kinross had misrepresented that expansion efforts at one of the two West African mines remained on schedule.

 

Kinross was also targeted in a separate securities class action lawsuit that had been filed against the company and certain of its directors and officers in the Southern District of New York, under U.S. securities laws. The defendants had moved to dismiss the S.D.N.Y. action. The dismissal motion was granted in part, but it was denied with respect to the U.S. plaintiffs’ claim that the company had misrepresented that the accelerated schedule for developing one of the West African gold mines was achievable.  A copy of Southern District of New York Judge Paul Engelmayer’s March 22, 2013 order granting in part and denying in part the defendants’ motion to dismiss the U.S. action can be found here.

 

The plaintiffs in the Ontario case sought the court’s leave to proceed with their action and also sought to have the action certified as a class proceeding. The defendants opposed the request for leave and the request for class certification.

 

Part XXIII.I of the Ontario Securities Act provides a statutory cause of action for a company’s misrepresentations in its continuous disclosure documents. Section 138.8 (1) of the Act provides that the misrepresentation action may not proceed without leave of court to proceed, with leave to be granted only if “there is a reasonable possibility that the action will be resolved at trial in favor of the plaintiff.

 

Courts considering this leave requirement have reached what Justice Perell described as a “consensus” that the leave test imposes only a “low evidentiary threshold” (refer for example, here and here) – but Justice Perell added that “the test is nevertheless a genuine screening mechanism that requires the court to assess and weigh the evidence and to determine whether the plaintiff’s chance of success is a reasonable possibility.”

 

But while courts considering the question have agreed that the bar to meet the leave test is low, Justice Perell commented that “I do not think the debate about the measure of the height for the bar for the test for leave is over.” He described the debate about just how low the threshold is as a “limbo dance” as the courts have tried to resolve the questions of “how low is the low threshold and what must a plaintiff do to show that he or she has a reasonable possibility of success.”

 

For his part, Justice Perell determined that the leave test is a “genuine screening mechanism” that requires the court “to assess and weigh the evidence and that requires the court to determine wither the plaintiff’s chance of success is reasonable possibility.”

 

Applying these standards to the plaintiffs’ claims and assessing the allegations and the expert testimony on which the plaintiffs sought to rely, Justice Perell concluded that the plaintiffs failed the test for leave, and he denied class certification for both the statutory claims and the common law claim.

 

The plaintiffs are likely to appeal Justice Perell’s ruling, particularly the extent to which he assessed and evaluated the expert testimony on which the plaintiffs sought to rely in support of their allegations.

 

While this case may have much further to go yet, it does provide a useful reminder that though the bar for claimants to obtain leave to proceed is low, the grant of leave is not automatic. There are still minimum standards that must be met, and if the claimants do no meet these standards, leave to proceed will be denied.

 

It is interesting to note that the shareholder claimants were denied leave to proceed in the Ontario proceeding while the dismissal motion was denied in part in the S.D.N.Y. action. The difference in outcome is attributable to the fact that the U.S. claimants’ allegations differed slightly from those of the Ontario claimants. The Ontario plaintiffs sought to try to raise these same allegations in the Ontario proceeding and to rely on the dismissal motion ruling the S.D.N.Y. action, but Justice Perell rejected their efforts to rely on these allegations because they had not pleaded these allegations in their complaint. Justice Perell commented that “I do not see how the circumstances of a differently pleaded action in a different jurisdiction have any relevance to considering whether to grant leave in the case at bar.”

 

Special thanks to a loyal reader for supplying me with a copy of Justice Perell’s Reasons for Decision.

 

Coverage Under Canadian D&O Policy for Costs Incurred Defending Bankruptcy Claims Involving Bankrupt U.S. Subsidiary Not Precluded: In a February 25, 2013 decision (here), the Ontario Court of Appeal held that coverage was not precluded under the Canadian D&O policy for costs incurred in defending the claims of bankruptcy trustee against the directors and officers of a U.S. subsidiary of the Canadian policyholder.

 

As discussed in a November 14, 2013 memo from the McMillan law firm (here), the Court of Appeal rejected the insurer’s argument that coverage was precluded by the policy’s insured vs. insured exclusion and due to the failure of the policyholder to satisfy the policy’s notice requirements.

 

During the period 2010 to 2012, plaintiffs’ lawyers rushed to file a wave of securities suits against U.S.-listed Chinese companies. In general, the cases filed as part of this wave that have reached the settlement stage have settled for relatively modest amounts. However, at least one of these cases has now resulted in an absolutely eye-popping damages award.  

 

On November 14, 2013, Southern District of New York Judge Shira Scheindlin entered a default judgment order including a damages award of $882.3 million against Longtop Financial Technologies Ltd. and its former CEO, Wai Chau Lin. A copy of the order can be found here. However, as impressive as the size of this award is, the plaintiffs now have to try to enforce the judgment against the company and former CEO, both of whom are located in China and both of whom already proved elusive for purposes of service of process.

 

Unlike many of U.S.-listed Chinese companies, Longtop Financial did not obtain its U.S. listing through a reverse merger, but instead it became a public company through a conventional IPO in 2007. Its shares traded on the NYSE. At one point, its market capitalization exceeded $1 billion. Questions bgan to dog the company when Citron Research published an April 26, 2011 online report critical of the company. Among other things, the report questioned the company’s “unconventional staffing model,” alleged prior undisclosed “misdeeds” involving management, and referenced “non-transparent” stock transactions involving the company’s chairman, among other things. Other critical research coverage followed.

 

Longtop’s problems took another turn for the worse in May 2011 when, in advance of the high profile IPO of Chinese social networking company, Renren Network, Longtop’s CFO, who sat on Renren’s board as chair of the audit committee, resigned to prevent the questions at Longtop from affecting Renren’s IPO.

 

Then on May 23, 2011, in a filing with the SEC on Form 8-K, the company announced that both its CFO and its outside auditor, Deloitte Touche Tomatsu (DTT) had resigned. In its accompanying press release (here), the company said that DTT stated that it in its May 22, 2011 letter of resignation that it was resigning as a result of, among other things,

 

(1) the recently identified falsity of the Company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT’s audit process; and (3) the unlawful detention of DTT’s audit files.

 

DTT further stated that it was “no longer able to rely on management’s representation’s in relation to prior period financial reports, and that continued reliance should no longer be place on DTT’s audit reports on the previous financial statements.”

 

Securities class action lawsuits followed. The actions were consolidated before Judge Scheindlin in the Southern District of New York. The defendants in the lawsuits included the company, certain of its directors and officers (including the company’s former CFO, Derek Palaschuk) and Deloitte Touche Tohmatsu.

 

In her November 14 order, Judge Scheindlin reviewed the plaintiffs’ efforts to effect service of process on the company and on Wai Chau Lin, the company’s former CEO. In December 2011, the plaintiffs served the company with a copy of the complaint in English and simplified Chinese through its registered agent for service of process in the United States.

 

The plaintiffs first attempted to serve Lin with the summons and complaint pursuant to the Hague Convention on Service Abroad. However, this attempt proved unsuccessful as the service papers were returned in March 2013.after a Chinese government bureau reported that it had “failed to find the charge person and nobody came to the court to take documents.” Judge Scheindlin separately authorized the plaintiffs to serve Lin via email. The plaintiffs subsequently filed proof of service on Lin via email.

 

Both the company and Lin failed to appear or otherwise respond to the complaint. After the time to respond had elapsed, the clerk of court entered defaults against the company and the two defendants. The plaintiffs then moved for entry of default judgment, including in their motion an expert report on damages supporting a damages claim of $882.3 million. On November 14, 2013, Judge Scheindin entered a default judgment against the Company and Lin, in the form and amount the plaintiffs had requested.

 

The default judgment order finds the company and Lin jointly and severally liable for the damages amount of $882.3 million plus prejudgment interest of 9% from February 21, 2008 to the date of payment.

 

While the amount of the damages award is impressive, the question remains of how valuable the order will prove to be. The likelihood that a Chinese court would recognize and enforce the judgment, and that the plaintiffs could find assets of the company or Lin to satisfy the award, is remote.

 

The plaintiffs’ hopes that they might be able to extract some recovery from the Deloitte affiliate that acted as Longtop’s auditor were dashed in April 2013, when Judge Scheindlin dismissed the last of the remaining claims against the audit firm.

 

The one remaining defendant that plaintiffs have in their sights is the former CFO, Derek Palaschuk, whom the plaintiffs were able to serve in Canada in 2012 and who filed a motion to dismiss the plaintiffs’ claims against him. In a June 29, 2012 opinion (here), Judge Scheindlin, though acknowledging that the online research reports may well have been biased owing to the online analysts’ financial interests as short sellers of Longtop’s stock, nonetheless rejected Palaschuk’s motion. Among other things, she found that the plaintiffs had sufficiently alleged that in various company press release and financial filings, Palaschuk had made misleading statements about the company’s financial condition and the basis for its growth.

 

In her November 14 order, Judge Scheindlin retained jurisdiction over the action for purposes of the plaintiffs’ ongoing case against Palaschuk.

 

As impressive as the size of the damages award against the company and Lin may be, it also illustrates the problem that the plaintiffs in these cases face. The plaintiffs face enormous procedural challenges just trying to prosecute these actions in the ordinary course; routine procedures as basic as service of process may present insurmountable obstacles. The prospects for effecting a recovery may be remote.

 

Though a number of plaintiffs’ firms rushed to file the various cases against U.S.-listed Chinese companies between 2012 and 2012, many of these cases seem unlikely to moneymakers for the plaintiffs. Even large awards like the one Judge Scheindin entered here may prove to represent empty victories.

 

Whistleblower reports to the SEC continued to rise during the latest fiscal year, according to the agency’s annual Dodd-Frank Whistleblower Program report to Congress. According to the November 15, 2013 report, a copy of which can be found here, there were 3,238 whistleblower reports to the SEC during the 2013 fiscal year, brining the total number of whistleblower reports to the agency since the program’s August 2011 inception to 6,573.

 

The whistleblower program Dodd-Frank Act provides for the payment of a whistleblower bounty to individuals who voluntarily provide original information that leads a successful enforcement action resulting in monetary sanctions over $ 1 million. The eligible whistleblowers may receive a n award of ten to thirty percent of the amounts the agency collects. To ensure that bounty awards would not decrease the amount of recovery for the victims of securities law violations, Congress established a separate fund, called the Investor Protection Fund out of which the bounty payments are to be made.

 

In 2012, the first full fiscal year in which the program was in place, the agency received 3,001 whistleblower tips. The number of whistleblower reports increased in fiscal 2013 to 3,228, an increase of about 7.5%, bringing the total number of whistleblower reports since the program’s inception to 6,573.

 

The most common complaint categories reported by whistleblowers during the 2013 fiscal year were Corporate Disclosures and Financials (17.2%); Offering Fraud (17.1%) and Manipulation (16.2%). Other significant categories include insider trading (with 6% of tips during fiscal 2013)and FCPA violations (4.6%). The distribution of reports by complaint category during fiscal 2013 was roughly comparable to the distribution of whistleblower reports during the 2012 fiscal year.

 

During the 2013 fiscal year, the Commission received whistleblower submissions from individuals in all fifty states, as well as from the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. The states with the highest numbers of whistleblowers in fiscal 2013 were California (375 tips, or 11.6% of all tips during the fiscal year), New York (215), Florida (187) and Texas (135).

 

The SEC also received whistleblower reports from individuals in fifty-five countries during fiscal 2013, bringing the total number of countries from which the agency has received whistleblower reports since the program’s inception to sixty-eight. The countries with the highest numbers of whistleblower reports during fiscal 2013 were the United Kingdom (66), Canada (62) and China (52).

 

Though the agency has now received over 6,500 whistleblower reports, so far the agency has made only a total of six whistleblower bounty awards, including four during fiscal 2013. The 2013 awards included the largest award to date, an award of over $14 million at the very end of the 2013 fiscal year. The agency awarded a total amount of about $14.8 million during fiscal 2013. The balance remaining in the Investor Protection Fund (out of which the awards are made) was $439 million at the end of the fiscal year – so the SEC has plenty of funds out of which to make further awards.

 

Though the program has so far made only a few awards relative to the number of whistleblower reports, it seems likely that the number of awards will accelerate in the future. The very painstaking process the agency follow in making awards (described in the report to Congress) shows that the agency is being very careful and very deliberate in making awards. As the agency makes more awards, it seems likely that the program will attract more whistleblower reports, particularly to the extent that the agency makes more large awards (the recent $14 million award came only at the very end of the fiscal year and so had no impact in connection with the figures presented in the most recent report to Congress). The lengths to which the agency has gone to protect the anonymity of the whistleblower is also likely to encourage others to come forward.

 

The significant numbers of whistleblowers from outside the United States is very interesting. The agency reports that during fiscal 2013, the agency received 404 whistleblower reports from individuals located outside the United States, representing 11.77% of all whistleblower reports during the fiscal year. This is up slightly from the prior fiscal year, both in absolute numbers and in percentages; there were 324 whistleblower reports from outside the Unites States, representing 10.8% of all fiscal 2012 tips.

 

It will be interesting to see how these non-U.S. reports play out over time, and whether and to what extent the agency makes bounty awards to whistleblowers from outside the U.S. It will also be interesting to see if reports from outside the U.S. continue at the current levels in light of the fact that courts have held that the Dodd-Frank provisions protecting whistleblowers from retaliation do not apply outside the U.S. (about which refer here). Many prospective whistleblowers learning that they would not have the benefit of the anti-retaliation provisions might now be less willing to come forward. In the absence of these protections, the volume of whistleblower reports from outside the U.S. might well decline.

 

Another question that will be interesting to follow is whether or not there will be further follow -on civil lawsuits following in the wake of whistleblower reports (of the kind discussed here). My concern is that increased whistleblowing activity, encouraged by the availability of whistleblower bounties, could lead to an increase not only in SEC enforcement activity but also to an increase in follow-on civil litigation, including in particular securities class action litigation activity.

 

On November 19, 2013, Cornerstone Research, in conjunction with the Latham & Watkins law firm, released a report analyzing securities suit opt-out cases. The report, entitled “Opt-Out Cases in Securities Class Action Settlements,” and which can be found here, takes a comprehensive look at cases in which individual class members have opted out of the class action settlement and pursued a separate lawsuit. Cornerstone Research’s November 19, 2013 press release about the report can be found here.

 

The report’s analysis is interesting on its own, but it may take on a special significance in light of the fact that the Supreme Court’s reconsideration of the fraud on the market theory could lead to a securities litigation environment in which aggrieved investors may have to decide whether or not to pursue individual claims rather than class action claims. The analysis of the opt-out cases may help understand the circumstances in which investors might pursue their claims individually.

 

The report’s authors examined 1,272 securities class action lawsuit settlements between 1996 and 2011. The authors identified 38 cases, or about 3% of the total, in which at least one plaintiff opted out of the class action settlement and pursued a separate case against the defendants.

 

Unsurprisingly, the authors found that as the size of the class action settlement grew larger, “the propensity of plaintiffs to bring an opt-out case also increases.” The authors found that in ten percent of the cases involving class action settlements over $20 million and eight of 15 cases with settlements over $500 million had associated opt-out actions. However, only 0.9 percent of class action cases with settlements below $20 million had associated opt-out cases.

 

In 21 of the 38 class action settlements with associated opt-out cases, the authors were able to find publicly available information regarding settlements or judgments in the opt-out cases. The average total opt-out settlement amount was $85.4 million, or 12.5% of the average class action settlement for these cases. The averages are “skewed by the larger opt-out settlements,” as the median opt-out is only $3.9 million, or 3.9 percent of the related class action settlements.

 

The largest opt-out settlement was in the AOL Time Warner case, where the $764 million in opt-out settlements represented 30.6% of the class action settlement (refer here for background) . The largest opt-opt settlement as a percentage of the class settlement was the Qwest Communications case, where the $411 million opt-out settlement was 92.4 percent of the final, adjusted class action settlement (refer here for background).

 

In six of the cases involving opt-out settlements, the opt-out settlements exceeded 20 percent of the size of the class action settlement. However, all of the cases in which the opt-out settlement was greater than 5 percent of the class action settlement took place prior to 2007. The largest opt-out settlements took place between October 2004 and December 2007. The authors did not identify any opt-out settlements greater than $10 million from a class action settlement after 2007.

 

The most common plaintiffs in opt-out cases were pension funds, which were involved in 13 of the opt-out cases between 1996 and 2011.

 

While the report details a variety of impressive statistics detailing the opt-out plaintiffs’ recoveries, the report also shows that not all opt-outs succeed. The report describes a number of cases where the class action claims settled but in which the opt-out claimants’ separate cases were dismissed.

 

Discussion

The report’s analysis about the timing of the larger opt out cases is interesting. The reports findings suggest that opting out as a significant phenomenon in securities class action litigation was most prevalent  — and seemingly most productive for the opting-out party — during the era of corporate scandals, which resulted in some of the largest class action settlements ever.

 

It is worth noting that there are at least two significant opt-out actions that remain pending: the Countrywide securities lawsuit opt-out action (about which refer here) and the Pfizer securities lawsuit opt-out action (refer here). Both of these were filed more recently; their outcomes could eventually affect the analysis. But the existence of these cases does is not inconsistent with the general conclusion that the opt-out phenomenon is largely associated with the largest cases.

 

At first I was somewhat surprised the opt-out cases are associated with only 3 percent of securities class action settlements. However, this general observation may be a reflection of the number of smaller settlements. What is most interesting is that opt out cases were associated with ten percent of cases with class action settlements over $20 million.

 

These observations are interesting in and of themselves, but they are also interesting to think about in light of the fact that the U.S. Supreme Court will now be reconsidering the fraud on the market theory in the Halliburton case. The outcome of the Halliburton case is uncertain, but if the Supreme Court does set aside the fraud on the market theory, it will be more difficult for aggrieved investors to pursue securities suits as class actions. The investors will then have to consider whether or not they want to pursue a claim individually. While there are a host of factors that might affect this analysis, the authors’ report suggests that individual investors would be less likely to pursue individual claims in smaller cases, although likelier to proceed individually in larger cases.

 

The relatively short report contains a number of interesting observations and is worth reading at length and in full. The report includes a number of interesting observations about the motivations of opt-out plaintiffs and about the effect of the possibility of opt-outs on the class action settlement dynamic.

 

Third Quarter Securities Litigation Filing Trends: Readers interested in tracking securities class action filings trends will want to take a look at the November 2013 memo from Woodruff Sawyer reporting on filing trends through September 30, 2013. The report contains a number of interesting observations about securities class action filings. Among other things, the report notes that though there was an “upswing” in filings during the third quarter compared to the first two quarter of 2013, “we anticipate that total filings per year will be on par with 2012 at around 125 cases (127 cases were filed in 2012).” The full memo can be found here.

 

In a development that has the potential to change the way private securities suits in the United States are litigated, the U.S. Supreme Court has agreed to take up a case in which the petitioners seek to have the Court revisit the “fraud on the market” presumption. The presumption allows plaintiffs in securities suits under Section 10(b) to seek certification of a shareholder class without having to show that each one of the shareholders relied on the alleged misrepresentation. Without the benefit of the presumption, it would be much more difficult for Section 10(b) claimants to pursue their claims as a class action.

 

Because of the possibility that the Court could set aside the “fraud on the market” theory in the case, the long-running Halliburton securities suit could prove to be the most important securities case before the Court in a generation. 

 

However, as discussed below, though the Court’s willingness to take up the Halliburton case raises the possibility that the Court might set aside the “fraud on the market” presumption, a variety of other outcomes are possible. And even if the Court were to set aside the presumption entirely, private securities litigation would go on, even if in a distinctly different form.

 

Just the same, if the presumption is set aside, the D&O claims landscape as we have known it would be significantly changed, with very significant implications for the securities litigation bar and for the D&O insurance industry.

 

Background

Since the U.S. Supreme Court’s 1988 decision in Basic, Inc. v. Levinson, securities plaintiffs seeking class certification have been able to dispense with the need to show that each of the individual class members relied on the alleged misrepresentation, based on the presumption that in an efficient marketplace, a company’s share price reflects all publicly available information about a company, including the alleged misrepresentation, and that the plaintiff class members relied on the market price.

 

The “fraud on the market” presumption has many critics. And in connection with the U.S. Supreme Court’s 2013 decision in the Amgen case (about which refer here), at least four justices (Alito, Scalia, Thomas and Kennedy) appeared to question the continuing validity of the presumption. In his concurring opinion, Justice Alito asserted that the presumption “may rest on a faulty economic premise,” and specifically stated that “reconsideration” of the Basic presumption “may be appropriate.” In his dissenting opinion in the case (in which Justices Scalia and Kennedy joined), Justice Thomas noted that the “Basic” decision itself is "questionable.”

 

Recognizing the opportunity to have the Court reconsider the fraud on the market theory, the defendants in the long-running Halliburton securities class action litigation filed a petition for a writ of certiorari expressly seeking to have the Court consider whether the Court should “overturn or significantly modify” the Basic presumption of “class wide reliance derived from the fraud on the market theory.”

 

Halliburton filed its petition in connection with a securities class action lawsuit that has been pending against the company and certain of its directors and officers since 2002. In their complaint, the plaintiffs allege that the company and certain of its directors and offices understated the company’s exposure to asbestos liability and overestimated the benefits of the company’s merger with Dresser Industries. The plaintiffs also allege that the defendants overstated the company’s ability to realize the full revenue benefit of certain cost-plus contracts.

 

For several years now, the parties in the case have been engaged in full-scale combat on the issue of whether or not a class should be certified in the case. Indeed, the class certification issue in the case has already been before the U.S. Supreme Court; in 2011, the Court unanimously rejected the company’s argument (and the Fifth Circuit’s holding) that in order for a plaintiff to obtain class certification, the plaintiff must first establish loss causation. Following the Supreme Court’s ruling, the case was remanded back to the lower courts and in in June the Fifth Circuit certified a class in the case.

 

The Halliburton case is now back before the Court for a second time, for the Court to again review what issues may appropriately be considered at the class certification stage. In its petition, the company argued that the Basic presumption is based on outdated economic theory and that the special considerations given putative class plaintiffs in securities suits are out of keeping with the Court’s more recent class action case law, particularly the Wal-Mart case and the Comcast case. Among other things, the company argued that the stock market just isn’t as efficient as the Basic decision assumed. In opposing the petition, the plainitffs argued, among other things, that Congress has amended the securities laws numerous times since the Supreme Court decided the Basic case, but Congress did not set aside the “fraud on the market” presumption.

 

Discussion

The possibility that the Court could set aside the fraud on the market presumption means that the Halliburton case could be, in the words of leading securities plaintiffs’ attorney Max Berger of the Bernstein Litowitz firm (as quoted in Alison Frankel’s November 15, 2013 post on her On the Case blog) a “game changer.” As Jordan Eth and Mark R.S. Foster of the Morrison Foerster law firm noted in their November 15, 2013 memo about the Supreme Court’s cert grant in the case (here), Halliburton “has the potential to be the most significant securities case in a generation.” As Frankel noted in her blog post, without the benefit of the presumption of reliance at the class certification stage, “it is hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions.”

 

But while the Halliburton case has the potential the change the way private securities lawsuits are litigated in the United States, the outcome of the case is far from certain. There are a range of possible outcomes in the Supreme Court’s consideration of the case.

 

First, though it only requires four votes for the Court to take up a case, it takes five votes to determine the outcome of a case. The obvious candidate to supply the fifth vote in Halliburton is Chief Justice John Roberts, who generally votes with the four justices in the Court’s conservative wing who wanted the Court to reconsider Basic. However, in the Court’s recent Amgen decision, Roberts did not vote with the dissenting and concurring conservatives; instead, he joined Justice Ginsberg’s majority opinion, where she specifically noted that Congress had amended the securities laws in 1995 without altering the Basic presumption. In other words, just because the Court granted the cert petition, that doesn’t necessarily mean that the Basic presumption will be set aside.

 

Second, although the petitioners expressly sought to have the Court consider whether to “overturn or significantly modify” the Basic presumption, that was only one of two issues the petitioners sought to have the Court address. The petitioners also sought to have the Court consider (seemingly in the alternative to the possibilities presented by their first issue) “Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.”

 

In its order granting the cert petition, the Court did not restrict its consideration of the case to either of the two issues, which suggests that the Court will consider both issues. The existence of the second issue raises the possibility that, rather than setting aside a precedent of 25 years’ standing, the Court might instead explain the ways in which (and when) the Basic presumption may be rebutted, if at all, at the class certification stage. While this outcome would unquestionably be represent a significant securities litigation development, it would not be as revolutionary as would be the setting aside of the Basic presumption.

 

In his November 17, 2013 post on his D&O Discourse blog (here), Doug Greene of the Lane Powell law firm outlines a range of other additional ways the Supreme Court might rule short of simply throwing out the fraud on the market theory.

 

Even of the Supreme Court sets the fraud on the market presumption aside, private securities litigation will go on. As Doug Greene observes in his blog post, "the plaintiffs’ securities bar woudl adjust." 

 

Among other things, it is important to note that the Basic presumption applies to misrepresentation cases under Section 10(b) of the Exchange Act. As Stanford Law Professor Joseph Grundfest is quoted as saying is Alison Frankel’s blog post, even if the court eliminates the Basis presumption, “investors in some cases will still be able to bring class actions under Section 11 of the Securities Act of 1933,” which does not require a showing of reliance but holds defendants strictly liable for material misrepresentations

.

In addition, the requirement to show reliance arguably is limited to misrepresentation cases. As one commentator in Frankel’s blog post notes, there is precedent holding that in cases alleging omissions rather than misrepresentations, the shareholder claimants do not have to show that they relied on the omissions. In other words, even if the Court were to set aside the Basic presumption, the plaintiffs’ attorneys could try to work their way around the problem by recasting their alleging as omissions rather than as misrepresentations.

 

It is also worth noting that the way securities cases are being litigated was already changing in significant ways. Many of the securities suits filed in the wake of the financial crisis were filed as individual actions or group actions, not as class actions. And while that was due in part to the fact that many of the claimants in the credit crisis cases were able to plead massive individual damages, the fact is that the leading plaintiffs’ firms all already have extensive experience litigating securities cases on other than a class basis. In addition the plaintiffs’ firms have established significant client relationships with pension funds and other large institutional investors whose claims could be aggregated to present a collective action on behalf of a group of investors, even if those claimants might not be able to proceed as a class action.

 

As Doug Greene notes in his blog post, the non-cass securities lawsuits "would be no less expensive to defend than today’s class actions" — and could be even more expensive as they couldl require more complex case management. Greene also notes that experience with opt-out litigation shows that individual actions have tended to settle for a larger percentage of damages than today’s securities class actions. And even those cases that do settle won’t preclude additional suits by other investors, raising the possibility of opportunistic follow-on suits.

 

And even if the Court were to set aside the presumption, there is the question of what would happen next. Would the SEC be under pressure to bring more enforcement cases? Would Congress be under political pressure to provide an alternative means for aggrieved shareholders to obtain a recovery, particularly small investors who might be shut out of class action cases?

 

All of that said, there is no doubt that if the Basic presumption were set aside, it would change the way that securities lawsuits are litigated in this country. In Section 10(b) misrepresentation cases, it would become much more difficult for plaintiffs to obtain class certification. Without the benefit of being able to hold out the threat of ruinously large class-wide damages, plaintiffs’ lawyers would be less able to extract the kind of massive settlements that have become a feature of private securities litigation.

 

Without the possibility of being able to leverage outsized settlements, plaintiffs’ lawyers would likely file fewer cases. In insurance industry terms, the elimination of the fraud on the market presumption could mean material reduction in both claim frequency and severity.

 

It seems likely that among the many consequences that would result if the Basic presumption were set aside, the way many public companies purchase D&O insurance would also change. As Joe Monteleone noted on his D&O E&O Monitor blog (here), the end result could be that “there will be less of a need to buy large towers of D&O insurance, a likely reduction in rates and perhaps an overall shrinking of the D&O marketplace with fewer players and less revenue in both the insurer and brokerage communities.” Of course, if securities litigation were to mutate into something smaller but more complex, the impact on D&O purchasing patterns and rates could take a different turn.

 

In other words, though there are a lot of possible outcomes here, the Halliburton case has enormous potential significance for the D&O insurance industry – this one is likely to have an impact. 

 

For better or worse, we will not have to wait very long to see how all of this will play out. The Supreme Court has not yet set a briefing schedule for the case, but the case will likely be heard and decided before the end of the current term, in June 2014.

 

In a case that has important implications for the potential liabilities of individual directors and officers, on October 28, 2013 twelve former directors and officers of bankrupt Northstar Aerospace agreed to pay a total of $CAN 4.75 million to the Ontario environmental regulator for costs to remediate environmental contamination at the company’s manufacturing site. The case also raises important D&O liability insurance questions as well.

 

An October 28, 2013 new report describing the settlement can be found here. A November 12, 2013 memo from the McCarthy, Tetrault law firm about the case can be found here. A November 6, 2013 memo from the Faskin Martineau law firm can be found here. A November 1, 2013 memo from the Osler, Hoskin & Harcourt law firm can be found here.

 

 Background

Between 1981 and 2009, Northstar Aerospace (Canada) manufactured airplane parts at a plant in Cambridge, Ontario. In 2010, it was determined that chemicals the company had used in its manufacturing operations had migrated to nearby residential properties. Northstar had commenced remediation efforts prior to its 2012 bankruptcy. The proceeds realized from the bankruptcy sale of the company’s assets were not sufficient to fund further remediation efforts.

 

The Ontario Ministry of the Environment (MOE) took over the remediation efforts and filed a regulatory action against twelve former directors and officers of the company seeking to hold them responsible for remediation costs of approximately $CAN 15 million. In June 2013, the Environmental Review Tribunal entered an order holding the individuals personally responsible for the ongoing costs (about $CAN 1.4 million per year) while they pursued an appeal of the regulator’s action against them.

 

In their appeal, the individuals argued among other things that they had not been involved with the company at the time of the alleged contamination, and that in any event they had not been responsible for environmental issues at the company.

 

Undoubtedly because they were obliged to provide interim funding while they pursued their appeal, the individuals reached a settlement agreement with the MOE. According to news reports, the MOE said that the settlement represents “the first time that the Ministry has held corporate directors of a public company personally responsible for an environmental cleanup after a company has gone bankrupt.”

 

Francis Kean has additional interesting background regarding this case in an earlier  post on the Willis WIre blog, here.

 

Discussion

It is true that this case involves only the activities of a provincial regulator pursuing its mandate according to the particular requirements of the specific jurisdiction’s laws. I am not an environmental attorney and there may well be important differences between Ontario’s laws and those applicable in other jurisdictions that limit the significance of this case to the specific jurisdiction, circumstances and situation involved.

 

Nevertheless, the case presents yet another example where regulators have aggressively disregarded the corporate form in order to hold individual directors and officers responsible for corporate liabilities without regard to the individual’s personal culpability, a deeply troubling phenomenon on which I have frequently commented on this blog (most recently here). Because of regulators increasing willingness to try to impose direct personal liability on individual directors and officers for corporate violations – including for environmental violations – this case presents important implications for all individuals serving as directors and officers, not just those in Ontario.

 

At a minimum, this case has important implications for individuals serving companies whose operations potentially could produce environmental contamination. These individuals certainly will want to become informed about their company’s operations’ environmental impacts, as well as about their company’s environmental monitoring efforts.

 

Directors and officers concerned about their potential liabilities will also want know whether their directors’ and officers’ liability insurance will be available to protect them against their potential environmental remediation liabilities. (Because environment liability insurance is outside my area of expertise, I do not attempt to address here whether that type of insurance would provide protection. I certainly welcome comments from readers who have greater knowledge about the protection available from that type of insurance.)

 

The traditional D&O insurance policy typically includes an exclusion precluding coverage for all loss arising from pollution and environmental liabilities. These standard exclusions often include a coverage carve back for securities and shareholder claims, but a carve back of this type would be of little help for individual directors and officers’ remediation cost liabilities. The standard D&O pollution exclusion also sometimes will include a carve back preserving defense cost coverage protection for claims under the policy’s Insuring Agreement A (that is, when the company is insolvent or otherwise unable to indemnify them). While defense cost coverage could be very important, it provides no protection for remediation cost liabilities.

 

More recently some public company D&O insurers have eliminated the pollution exclusion from their base policy forms. However, carriers willing to remove the exclusion from the policy typically will require the policy’s definition of “loss” covered under the policy to specify that “loss” does not include environmental remediation costs. With remediation costs precluded from covered loss, even one of the new style policies that lack an actual pollution exclusion would not provide individual directors and officers remediation cost protection.

 

These days, many publicly traded companies also purchase Excess Side A/DIC insurance as part of their D&O insurance program. Many of these policies have no pollution exclusion, which raises the question whether one of these policies would “drop down” and provide insurance protection for insured directors and officers for the environmental remediation liabilities. Side A/DIC policies do not affirmatively grant coverage for these kinds of liability exposures, but then again the exposures are not excluded either, which suggests the possibility that the Side A/DIC policies could be called upon to provide protection for individuals’ environmental remediation liabilities.

 

In any event, these questions are likely to be raised with increasing frequency in the future. Though this case involved only a provincial environmental regulator in Canada, the issues involved are hardly unique to that jurisdiction. Give the increasing willingness of regulators everywhere to try to impose personal responsibility on individual directors and officers for corporate liabilities, these issues are likely to recur elsewhere.

 

It is a topic for another day, but I think we need to be seriously concerned about what regulators are trying to do to the corporate form. Modern economic activity requires the recognition of the corporation as a separate legal “person.” If this construct is undermined, many forms of economic activity could be imperiled. At the same time, our entire legal system is built around the principle that liability should not be imposed without culpability. Regulators’ willingness to impose liability on corporate officials for their company’s legal violations without regard to the individuals’ personal culpability also threatens to undermine the basic principles of liability.

 

Special thanks to a loyal Canadian reader for calling my attention to this case.

 

Corporate Officials Can Be Held Liable for Company’s Copyright Infringement: Speaking of the potential liabilities of individual directors and officers for their company’s legal violations, Northern District of Illinois Thomas Durkin held in an August 26, 2013 order (here) that under the facts presented, the two former corporate officials who ran their company as their “alter ego” could be held liable for their company’s alleged copyright infringement.

 

Asher Worldwide sells commercial kitchen equipment online. It has filed for copyright protection for the descriptions of the kitchen equipment that it uses on its website. In its complaint, Asher alleged that Housewaresonly.com had infringed on Asher’s copyright by using hundreds of Asher’s website’s kitchen equipment product descriptions for its own website.

 

Asher’s complaint also named as defendants Housewaresonly.com’s principals, Stuart and Marcia Rubin. After the lawsuit was filed, the Rubins allegedly shut down their website and allegedly depleted the company’s assets, according to Asher, to “avoid financial liability.”

 

The Rubins moved to dismiss Asher’s claims against them on the ground that Asher’s allegations were insufficient to hold them personally liable for their company’s alleged copyright infringement.

 

In his August 26 order, Judge Durkin, first noted Seventh Circuit standards specify that directors and officers typically cannot be held liable for their company’s copyright infringement absent a “special showing” that the individuals acted “willfully and knowingly” by “personally participating” in the infringement.

 

Judge Durkin noted that it was a “close question” whether Asher’s allegations were sufficient to impose liability on the Rubins personally given these standards. However, based on Asher’s allegations that the Rubins were the only two individuals associated with the company and therefore “comprised the entire work force” – which Judge Durkin found to lead to the “reasonable inference that they were personally involved in the corporate infringement” – the Rubins were “in fact ‘the corporation’” which they treated as their “alter ego.”

 

Judge Rubin concluded that Asher had alleged a sufficient level of personal participation to allow Asher’s copyright infringement claim against the Rubins to survive a motion to dismiss.

 

Housewaresonly.com was obviously a private company. Private company D&O insurance policies will typically include an entity- only intellectual property exclusion, meaning that the policy would not provide insurance coverage for the insured company’s copyright violations. The exclusion typically does not apply to individuals; however, because individual company officials can only be held liable for their company’s copyright violations for having acted “willfully” or “knowingly,” the imposition of liability on individuals would potentially trigger the policy’s conduct exclusion. The policy would, however, presumptively provide the individuals with defense cost protection, at least in the absence of a judicial determination that would trigger the conduct exclusion.

 

Given my comments above about regulators’ disregard of the corporate form, It is worth noting that the allegations in this copyright infringement case represent the kind of circumstances in which court historically have been willing to disregard the corporation’s separate legal existence. Judge Durkin also found that Asher had sufficiently alleged “personal participation” in the alleged infringing activity. My concerns about regulators and courts disregarding the corporate form do not involve the kind of circumstances involved in this case, in which the individuals allegedly were directly involved in the alleged wrongdoing.

 

A November 8, 2013 memo from the McDermott, Will & Emery law firm about the copyright case can be found here.

 

Earlier this year, when Chancellor Leo Strine issued an opinion in the Chevron case upholding the validity under Delaware law of a forum selection clause in the company’s corporate by-laws, a number of questions remained unanswered, including in particular what would happen if, notwithstanding the forum selection provision, a shareholder nevertheless filed an action in another jurisdiction.

 

In a November 5, 2013 proceeding, Vice Chancellor Laster considered these questions in a Delaware action filed by Edgen Group seeking to enjoin a merger objection lawsuit  filed in Louisiana, based on a forum selection clause in the company’s corporate charter. As reflected in a transcript of the proceeding (here), Vice Chancellor Laster declined to issue a temporary restraining order enjoining the Louisiana proceeding, in a ruling that addresses a number of interesting issues.

 

Background

Edgen went public on April 27, 2012. Its corporate charter contains a provision designating Delaware as the exclusive forum for breach of fiduciary duty claims against directors and claims relating to the internal affairs of the company.

 

On October 1, 2013, the company announced that its board had approved a merger with Sumitomo Corporation. On October 11, 2013, Jason Genoud, a Canadian shareholder of the company, filed an action in Louisiana (where Edgen has its corporate headquarters) alleging breach of fiduciary duty and seeking to enjoin the merger.

 

Edgen filed a motion to dismiss the Louisiana action based on the forum selection clause. Edgen also filed a separate action in Delaware against Genoud, seeking to have its forum selection clause validated and also seeking to have the Delaware court enforce the clause by enjoining Genoud’s Louisiana action. Because of an upcoming hearing in the Louisiana action, Edgen sought to have the Delaware court expedite its consideration of its request for a temporary restraining order. Because of the request for expedited consideration, Vice Chancellor Laster considered the motion on November 5, 2013, in a telephone proceeding.

 

At the time of the November 5 telephone hearing, Genoud had not yet been served with Edgen’s Delaware complaint. The November 5 proceeding opened with Edgen’s counsel’s description of their efforts to try to serve Genoud with the Delaware complaint. Though Genoud had not yet been served, the counsel that represents him in the Louisiana action participated in the November 5 telephone proceeding as a “friend of the court.” (Hereafter, I refer to Genoud’s counsel as plaintiff’s counsel). In the November 5 telephone proceeding, Edgen’s counsel advised the court that they (Edgen’s counsel) had asked plaintiff’s counsel to assist in helping to locate Genoud, but plaintiff’s counsel declined to do so.

 

In seeking to have the Delaware court enjoin the Louisiana proceeding, Edgen argued that if the Louisana court were to proceed and rule on Genoud’s request to enjoin the merger, the Louisiana court’s ruling could have res judicata effects that could irreparably harm Edgen’s interests. Plaintiff’s counsel, participating in the November 5th proceeding only as a friend of the court, argued that the Delaware action was at best premature, as the question of the enforceability of the forum selection clause was “teed up” and ready to be heard in the Louisiana action.

 

Vice Chancellor Laster’s Ruling

After having heard the parties’ arguments over the telephone, Vice Chancellor Laster proceeded to rule on Edgen’s request to have the Delaware court issue a temporary restraining order enjoining the Louisiana proceeding.

 

Vice Chancellor Laster opened by observing that the case “exemplifies the interforum dynamics that have allowed plaintiffs’ counsel to extract settlements in M&A litigation and that have generated truly absurdly high rates of litigation challenging transactions.” He also noted that plaintiffs’ counsel and the shareholders they “purport to represent” have the ability to sue in multiple forums, which “is a factor that imposes materially increased costs on deals and effectively disadvantages stockholders as a whole.”

 

Vice Chancellor Laster also observed that the case demonstrates why companies “have seen fit to respond” with the adoption of forum selection clauses “in an effort to reduce the ability of plaintiff’s counsel to extract rents from what is really a market externality.” The Vice Chancellor also emphasized that there is “no competition” between the Delaware courts and the courts of Louisiana or any other jurisdiction.

 

The Vice Chancellor then proceeded to review the details of the proposed merger and the basis on which the plaintiff sought to enjoin the deal. Laster said that in light of the particulars “under Delaware law, this is an exceedingly weak challenge to a deal” that would not likely survive a motion to dismiss.

 

Laster also noted that under the internal affairs doctrine, Genoud’s suit is governed by Delaware law and that the “logical and most efficient place” for the merger challenge to be heard is in Delaware.

 

Laster went on to say that the Louisiana action is “quite obviously violative” of the forum selection provision in Edgen’s charter, which Laster found to be “valid as a matter of Delaware corporate law.” He went on to say that the filing of the Louisiana action “facially breached the exclusive forum clause” because the claim asserted in the Louisiana action “falls squarely within the clause.” Laster also found that based on the pendency of the Louisiana action, Edgen had shown “irreparable harm sufficient to support the issuance of an injunction.”

 

However, despite the showing of “irreparable harm,” Vice Chancellor Laster declined to grant Edgen’s request for injunction relief, first because of remaining questions about the Delaware court’s exercise of personal jurisdiction over Genoud (he noted in that regard that the forum selection clause does not specify consent to personal jurisdiction).

 

The second reason Laster denied the request was out of concern for “interforum comity.” He said, in consideration of Chancellor Strine’s opinion in the Chevron case, that the question  of the enforceability of the enforceability of the forum selection clause should be made in the “non-contractually selected forum,” adding that “it is not clear to me that it is appropriate at this time to be making anti-suit injunctions the initial tool of judicial first resort.” Though the effect of his ruling was to allow the Louisiana proceeding to go forward, he did hold open the opportunity for the parties to return to his court “if there are concrete circumstances that would require me revisiting that issue.”

 

The Vice Chancellor did go out of his way to excoriate the plaintiff’s counsel for their actions (or lack thereof) with respect to Edgen’s efforts to effect service on Genoud. He said that plaintiff’s counsel – “a firm that I generally have respect for” – has “engaged in unsatisfying and, dare I say, pathetic representational contortions” in contending that they represent Genoud in the Louisiana action but not in the Delaware action. He added that “anyone remotely familiar” with this type of litigation understands that the plaintiff’s firm “is not taking its direction from a nominal client” but rather “is calling the shots itself.” Plaintiff’s counsel’s suggestion that they could not reach their client “is either, one, not credible” or “confirmatory that [the plaintiff’s firm] is not taking direction from its client about how to handle this litigation.”

 

Laster added that it is “quite disappointing behavior from a firm that otherwise has done a great deal to build up its reputational capital and credibility with the Delaware courts.”

 

Discussion

Although the adoption of a forum selection clause offers one way to try to eliminate the curse of multi-jurisdiction litigation, as this case shows, one of the shortcomings of the clauses is that they are not self-enforcing. Even with a forum selection clause, there is nothing to prevent a shareholder plaintiff, like the one involved here, from filing an action in another jurisdiction that the clause would require to be filed in Delaware. The company still has to face the action in the other jurisdiction and hope that the other jurisdiction’s court will respect the requirements of the forum selection clause.

 

Though Vice Chancellor Laster declined to grant the TRO, there are nevertheless a number of useful aspects to his ruling.

 

First, he ruled that a forum selection clause in a corporate charter is valid and enforceable. While this seems a logical extension of Chancellor Strine’s ruling in the Chevron case, Strine’s ruling had been with respect to a forum selection clause in a corporate by-law. Vice Chancellor Laster’s ruling confirms that forum selection clauses in corporate charters are equally enforceable.

 

Second, Laster made it clear that in his view, and under Delaware law, the filing of the Louisiana action violated the forum selection clause. Though he declined base on principles of comity to enjoin the Louisiana action, his discussion of these issues makes it clear what a forum selection clause permits and requires. His analysis of these issues should be instructive for a court in another jurisdiction considering whether or not to enforce a forum selection clause.

 

Third, although Laster was clearly concerned by plaintiff’s counsel’s actions with respect to service of process, he was also clearly concerned by personal jurisdiction questions. His observation that Edgen’s forum selection clause lacked any provision specifying shareholders’ consent to personal jurisdiction in Delaware does suggest that it would be advisable for companies adopting forum selection clauses to consider addressing the personal jurisdiction issue in the clause.

 

Laster did hold open the possibility that as forum selection clause issues evolve in Delaware, it could eventually become appropriate for Delaware court’s to provide injunctive relief enjoining proceedings in other jurisdictions.

 

There obviously are many issues yet to be worked out as companies seek to rely on forum selection clauses. The one thing that is clear is that the adoption of a forum selection clause alone will not be sufficient to eliminate the possibility that a company might still face shareholder litigation in other jurisdictions. Perhaps as time goes by a body of case law will develop in with other jurisdictions’ courts establishing their willingness to enforce these clauses and to defer to the selected forum, but until that time the possibility of multi-jurisdiction litigation will remain.

 

Special thanks to Bob Varian of the Orrick law form for sending me a copy of the transcript.

 

The D&O Diary is on assignment in Europe this week. In an abrupt and vivid scene change, I left the PLUS International Conference in Orlando last week and flew straight to Paris, to attend a conference of the International Association of Claims Professionals last Thursday and Friday.

 

My prior visits to Paris have all taken place in the warmer months; I was unsure what Paris might be like in November. Here’s what you need to know about Paris in November. Yes, it is late fall – temperatures are cooler, skies are greyer, evening gathers earlier, and it rains a bit. But it is still Paris.

 

Because we have visited the major monuments on prior visits to Paris, during this visit we focused on places and locations that while perhaps visited less frequently by tourists are nonetheless fully Parisian. Paris is a city of neighborhoods and the great thing about the Paris metro is that you can descend in one part of the city and emerge just moments later in a completely different neighborhood. One special area away from the busier environs of the Latin Quarter is the Rue Mouffetard. At the northern end of the street at the top of Mont Sainte-Geneviève is the Place de la Contrescarpe, a large quiet square ringed with cafes and brasseries that has something of a small village feel. The Rue Mouffetard itself – which is lined with small shops selling wine, cheese, tea, clothing and books – has rolled downhill toward the south since the Roman era. The area is also now laced with student bars, including one called (I am not making this up) “Student Bar.” 

 

Despite the cooler temperatures and occasional rain, the city retains its romantic atmosphere, even in November. Late one rainy evening while we sat at a sidewalk café in the Place de la Contrescarpe, a pair of dogs trotted past. The canine couple apparently decided that — despite the rainy conditions and cool temperatures, and the fact that an entire café full of people was watching them — the moment had arrived to try to make some puppies, right then and there. Même pour les chiens, Paris est une ville de l’amour.

 

We also visited another neighborhood away from the usual tourist itineraries. One of our law school classmates recently moved to Ménilmontant, a gentrifying area where clubs and restaurants sit next to falafel shops and halal butcheries. On our way out to the neighborhood on the metro, we paused along the way to have a look at the Bassin de la Villette (pictured left), on the Canal de L’Ourcq, a pleasant area far off the tourist grid that was an agreeable place to visit on a sunny afternoon. We then met our friend at the Restaurant Astier, a brilliantly updated realization of the traditional Parisian Bistro, on rue Jean-Pierre Timbaud. (Our friend, who has lived in Paris for many years, chose the restaurant with a great deal of care. It did not disappoint.) During dinner, we chided our friend for complaining about how young the habitués of the clubs on nearby rue Oberkampf seemed, but on the way home we saw for ourselves the crowds of adolescents spilling out of the bars and smoking on the sidewalks. Man, they looked young. (For those readers who have college age kids spending a semester in Paris and wondering what their kids up to, I can testify that they are hanging out on Rue Oberkampf.)

 

Though it is remarkably easy to move around Paris on the metro, it is even better to walk. Even in November, it is great just to walk around Paris. We started out Saturday morning in the Jardin des Plantes, where a few blooms remain despite the cooler temperatures, and then we made our way along the Quai Saint Bernard to the île St Louis. After lunch on the island, we crossed to the opposite bank and walked to the Bassin de l ‘Arsenal, where the Canal Saint-Martin connects to the Seine, adjacent to and just south of the Place de Bastille. In one of those happy coincidences that can make travel so rewarding, it turned out that there was an antique fair on the streets along the Bassin. Over 350 stalls lined the sidewalks, full of a fascinating array of art, furniture, jewelry, linens, and various other remnants of centuries of Parisian luxury living.

 

We had stumbled upon a real Parisian event, but we were not the only American tourists strolling through the stalls. We overheard one American couple trying to determine whether they could have the painting they wanted to buy shipped back to the U.S. Their question whether they could have the painting shipped via UPS or Fed Ex drew a blank look and an uncertain shrug from the proprietor, so in the time-honored tradition of Americans overseas, the American gentleman raised his voice and said with great care “WE (pause) WANT (pause) TO (pause) SHIP (pause) IT (pause) TO (pause) A-MER-I-CA.” It is well known that by shouting and speaking very slowly even a Frenchman can be made to understand plain English. (Actually, most everyone I ran across in Paris spoke perfectly serviceable English; even with my poorly remembered college French, I had few language issues.)

 

We made another interesting discovery in the streets just east of the antiques festival. Running along the Avenue Daumesnil to the east of the Opéra Bastille in the Faubourg Saint-Antoine is an abandoned railway overpass –now called the Viaduc des Arts — that has been converted into a colony for artisans and craftsman.  The structure’s brick archways been transformed into workshops and galleries where artisans make and display furniture, vases, plates, sculpture, ceramics, musical instruments, picture frames, toys, leather goods, clothing, shoes and a vast array of other goods.

 

As fascinating as it was to watch the artisans at work, we chanced upon yet another hidden Parisian treasure nearby that was an even better discovery. Along the top of the viaduct is the Promenade plantées, a pleasant green walkway that runs for over two miles at rooftop level above the hubbub of the street through the heart of the 12th arrondissement. The walkway is a verdant retreat from the busy city’s commotion. Despite a light rain, we walked the length of the promenade, feeling as if we had discovered a secret spot in the heart of Paris.

 

In addition to exploring new neighborhoods, we also had a chance to fulfill some long-unfulfilled tourist objectives. Anyone who has spent time in Paris has seen the advertisements announcing various artistic performances that adorn many walls and buildings, particularly on the Left Bank. I have long wanted to see what these shows were about. On Friday night, we attended a chamber music concert in the venerable Abbey of Saint-Germain-des-Prés, one of the city’s oldest religious sites and the burial site of many of the Merovingian kings. The beautiful music from the stringed instruments soared into the ancient structure’s vaulted ceilings. The historic setting and the beautiful music made a pretty amazing combination.

 

Not everything we did involved unfamiliar places and experiences. We chose some places to visit precisely because we had visited them before.

 

Several years ago, I took a public speaking course that included an extemporaneous speaking exercise in which the class participants were given five minutes to compose a speech on the topic “my favorite restaurant.” The others spoke about their preferred neighborhood establishment or the local place where they could take their children without strain or trauma. By contrast, when it was my turn to present, I described Restaurant Le Christine, a restaurant on rue Christine in Paris’s Sixth arrondissement, which we first visited on our honeymoon, in 1983. We visited the restaurant a second time when we visited Paris with our children in 2003. We returned to Le Christine again this past Saturday night, thirty years after our original visit.

 

The restaurant’s décor has been updated since our first visit; the interior is now lighter and more colorful, but the service and food remain memorable. Our three-hour meal — consisting of seven courses, each paired with its own delightful matching wine — was a truly remarkable culinary experience. After soup, foie gras, two fish courses, a rumpsteak entrée, a plate of cheeses and salad, a desert and coffee, we wandered very slowly but contentedly back to our hotel. Were I called upon again to deliver a speech about my favorite restaurant, I would still refer to Le Christine, which remains an important landmark on the map of my own personal Paris. 

 

The next morning, we walked to the Church of Saint-Sulpice, nearby our hotel. Though we had trouble following the French-language liturgy, the service was beautiful and the music was stirring. The 17th century church may not be as renowned as its slightly larger and more celebrated neighbor Notre Dame de Paris, but it has recently enjoyed a little of its own celebrity status as a result of its star appearance in the book and movie The DaVinci Code. In an earlier time, churchmen marked out on the church floor a longitudinal meridian between the church’s two transepts, as an astronomical tool to aid more accurate calculation of the correct date for Easter. Sunlight coming though small openings in the southern transept at noon on the equinoxes strikes various demarcated points along the meridian. The book erroneously identifies the line as the Paris meridian; numerous plot twists follow the suggestion that the line provides a signpost pointing the way to the hiding place of the Holy Grail. Following the church service, we were among the many tourists photographing the gnomon demarking the meridian line in the north transept.

 

After the church service, we rambled through the quiet Left Bank streets, eventually making our way to a brasserie near the Pantheon. Sitting in the early afternoon sun and huddled against the chilly breeze, we shared a plate of Normandy oysters along with a little white wine. After lunch, we strolled in the crisp November sunshine through the Jardin du Luxembourg (pictured below right), which is yet another important landmark on my personal map of Paris. The most essential Parisian spirits inhabit the gardens, where romantic couples slowly promenade and little children sailing their boats in the central fountain shout happily “Regardez, Maman! Regardez!”

 

In his memoir of his time in Paris, A Moveable Feast, Ernest Hemingway wrote “There is never any ending to Paris and the memory of each person who has lived it differs from that of any other.” Hemingway’s words confirm a view I have long held, which is that everyone who has visited the city believes, like me, that nestled within the city’s timeless monuments and beautiful streets is their own personal Paris. I sometime think that Paris is like an experienced courtesan who manages to convince her many lovers that each of them alone is the only one that has enjoyed her secret pleasures.

 

On Monday morning, I boarded the Eurostar at the Gare du Nord to make my way to London to attend the Advisen Euro D&O conference. As the train raced northward through the countryside, I couldn’t help looking back toward Paris wistfully. I hope I get a chance to return to Paris again before too long. But even though I know I can always go back, it is difficult to leave Paris behind..

 

Very special thanks to my good friend Helga Munger of Munich Re for inviting me to participate in the International Association of Claims Professionals event and giving me the chance to visit Paris again.

 

November in Paris

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is time to post another round of photos that readers have taken of their D&O Diary mugs I never cease to be amazed at the diversity of shots and the different photographic visions that readers’ pictures exhibit. .

 

Readers will recall that in a recent post, I offered to send out to anyone who requested one a D&O Diary coffee mug – for free – but only if the mug recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In previous posts (here, here, here, here, here, here, here, here and here), I published prior rounds of readers’ pictures. The pictures have continued to arrive and I have posted the latest round below.

 

The first shot in today’s round of pictures comes from Jillian Meyer of the Aon office in Chicago. Jillian took this picture while she was on vacation in Maryland. She reports that the picture “was taken looking southeast across the Severn River from the US Naval Academy (founded in 1845) in Annapolis Maryland, while the sailing team practices maneuvers in the background.’ I enjoyed seeing this picture because I did a lot of sailing on the Severn near the Naval Academy and on the adjacent Chesapeake Bay when I was a kid.

 

 

 

 

 

 

 

 

 

 

 

 

 

One of the striking things about many of the mug shots I have seen is the incredible diversity of ways that various readers devise to depict their mugs. Loyal reader Gene Comey of the Comey Rigby law firm in Washington envisioned a distinctly unique tableau for his mug shot; in the photo below, the mug is paired with an rather striking ensemble of figurines.

 

 

 

 

 

 

 

 

 

 

 

 

 

The next picture provides yet another demonstration of this blog’s international reach. This mug shot, depicting the Rotterdam “euromast” tower, as sent in my Bernard Vroom of Markel International Nederland.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loyal reader Kellly Reyher sent in this photo taken from his office window on the 21st floor of WTC 7 of the World Trade Center site in downtown Manhattan. A sobering sight and reminder of the tragic events of 9/11..  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The next photo represents something of an unusual twist on the mug shot theme. This picture came about as a result of my recent visit to Zurich (about which refer here). While I was there, I was fortunate to meet a number of industry colleagues for the first time, including Pawel Paluch of the Zurich Insurance Company office in Zurich. Pawel and I agreed that if I sent him a D&O Diary mug that he would send me a Zurich mug. I am happy to report that the mug Pawel sent me arrived safely. In the picture below, I am back home in Ohio enjoying some early November sunshine. Pawel reports that he is waiting for the sun to come back out in Zurich to take a picture of his D&O Diary mug.

 

 

 

 

 

 

 

 

 

 

 

 

It is so much fun to receive readers’ pictures and to see how (and where) they have decided to photograph their mugs. My thanks to everyone who has sent in a mug shot.

 

If there are still readers out there who would like to have a mug and have not yet ordered one, I still have a few mugs left. If you would like one, just drop me a note and I will be happy to send one along to you, as long as remaining supplies last. Just remember that if you order a mug, you have to send back a picture. Also, please be patient if you order a mug, it may be toward the end of the month before we can mail  out the next round of mugs.