On June 18, 2012, in an opinion written by Justice Samuel Alito for a 5-4 majority, the U.S. Supreme Court held that pharmaceutical sales representatives are not entitled to overtime pay. The question before the Court was whether or not the sales reps were employed “in the capacity as outside salesmen” and therefore within an exemption in the Fair Labor Standards Act (FLSA)  from the overtime pay requirements. Because wage and hour disputes are a growing area of employment related litigation, the Court’s opinion is potentially significant. It also has a number of other interesting features, as discussed below.  

 

The Court’s opinion in Christopher v. SmithKline Beecham can be found here.

 

The plaintiffs are two pharmaceutical sales representatives who were employed by  the defendant pharmaceutical company (which does business as GlaxoSmithKline) for about four years. During that time they worked about 50 to 70 hours a week. About 40 hours were devoted to field work, visiting doctors, with the rest of the time spent on office work (email, etc.). The purpose of their office visits was, as the Court put it, “obtain a nonbinding commitment from the physician to prescribe [defendant’s] drugs.” The plaintiffs “were well compensated for their efforts,” earning over $70,000 annually, in base and incentive compensation. They were not paid overtime when they worked more than 40 hours per week.

 

The plaintiffs filed an action in federal court alleging that their employer violated the FLSA by failing to pay overtime. The company argued that because the plaintiffs were employed “in the capacity of outside salesmen” they were exempt from the FLSA’s overtime requirements. The district court entered summary judgment in the company’s favor. The plaintiffs them filed a motion with the court to alter or amend its motion, arguing that the district court failed to give appropriate deference to a Department of Labor interpretation of the FLSA regulation, which the plaintiffs contended supported their overtime claim. The district court rejected this argument and denied the motion.

 

The Ninth Circuit affirmed the lower court, agreeing that the Department of Labor’s interpretation was not entitled to controlling deference. The Ninth Circuit’s opinion conflicted with opinion out of the Second Circuit, and the Supreme Court granted a writ of certiorari to resolve the circuit split.

 

In both the Second and Ninth Circuit, the Department of Labor had submitted amicus briefs arguing that pharmaceutical sales representatives were not exempt from the FLSA overtime requirements. The DOL took the same position before the U.S. Supreme Court, although its reasoning changed on the point of what kind of activity makes something a “sale.”

 

 In taking up this case, one of the issues the Supreme Court had to decide is whether the agency’s interpretation was entitled to “controlling deference.” The Supreme Court held that the agency’s interpretation was not entitled to controlling deference, in part because the position the agency took in the appellate courts diverged from decades of the agency’s prior position on the question of whether or not pharmaceutical sales representatives were exempt from the overtime requirements. The Court went on to state that it found the DOL’s interpretation “quite unpersuasive” and that it conflicted with relevant language in the FLSA itself.

 

Having concluded that it would not give the agency’s interpretation controlling deference, the Court turned to the FLSA for its own interpretation. Based on its review, the majority concluded that the “most reasonable interpretation” is that the plaintiff’s qualify as outside salesmen within the meaning of the statute and are therefore exempt from the FLSA’s overtime requirement.

 

Justice Breyer, joined by Justices Ginsberg, Sotomayor and Kagan, dissented. He agreed with the majority that the DOL’s interpretation was not entitled to controlling deference. However, he contended that the pharmaceutical sales representatives were not exempt salesmen, because, as he put it ”unless we give the words of the statute and regulations some special meaning,” the sales representatives duty is not to make a sale, but at most to “convince a doctor to prescribe a drug for a particular kind of patient.” A sale, if it takes place at all, takes place at the pharmacy, or perhaps when the pharmacy purchases the drugs from distributors. Because there was no “sale” the representatives are not salesmen, and they are not exempt from the FLSA overtime requirements.

 

Discussion

For several years, wage and hour suits have been one of the fastest growing areas of employment-related claims. Among reasons for the growth in the number of these claims are the efforts of the employment law plaintiffs’ bar to try to extend the laws’ reach to higher paid positions, as this case appears to be an example.

 

At one level, this rruling in this case relates only to pharmaceutical sales representatives, or pharmaceutical detailers as they are sometimes called. That is no small thing,even if it is just limited to them. According to the opinion, there are over 90,000 pharma sales reps in the US. Not only that, but in January, Novartis agreed to pay $90 million to settle the class action overtime pay claims of its sales reps (refer here).

 

Indirectly the case may have a broader impact, particularly in the part of the majority opinion in which the court explores the reasons for the FLSA’s overtime exemption for outside salespersons. The court emphasis on the fact that exempt employees usually earn salaries well above minimum wage and are involved in the kind of work that is difficult to standardize and therefore hard to spread to other workers, among other things, could be highly relevant in the event of overtime claims by other types of sales and marketing personnel.

 

By the same token, the Court’s refusal to give the DOL controlling deference could make it harder for regulatory agencies to change their regulatory interpretations without given affected industries a chance to be heard, or merely because there has been a change in administrations. There would certainly seem to be less interest among regulatory agencies to try to regulate by way of amicus briefs.

 

The Court’s emphasis on the exemption’s application to higher compensated workers is particularly interesting. Indeed, after reiterating that the two plaintiffs make over $70,000 a year, Justice Alito states that the plaintiffs are “hardly the kind of employees that the FLSA was intended to protect.” The phrase sounds like a warning against efforts to try to extend the FLSA to more highly compensated workers and may therefore prove highly relevant given recent wage and hour claims trends. 

 

The Court also emphasized that it had been the DOL’s consistent position for decades that pharmaceutical detailers were exempt from the FLSA’s overtime requirement. According to Justice Alito, the first time the agency took the position that the detailers were not exempt was in an amicus brief the agency filed with the Second Circuit in 2009. It seems to me that Justice Alito’s emphasis of the date was deliberate. 2009 was of course the year when the current administration came into office — the date suggests that the new administration threw out years of consistent practice in the area, on which the pharmaceutical companies had come to rely.

 

The inferential association of the agency’s position with the current administration might be interpreted as the explanation of the way the Court split on this issue, with the Justices appointed by Republican Presidents on one side, and the Justices appointed by Democratic Presidents on the other. There’s only one problem with that theory. Justice Breyer’s dissent actually agrees with the majority opinion that the agency’s interpretation is not entitled to controlling deference. That is, his opinion is not simply agreeing with the current administration’s position. Rather, in his view the work of the pharmaceutical detailers was not really the work of outside salesman, and so therefore they are not exempt and are entitled to overtime pay. Basically, the way it works out is that the conservative judges favor a narrower scope for the overtime pay requirement, and the liberal justices favor a broader applicability of the overtime pay requirement.

 

It is pretty clear that one mistake the DOL made was in trying to change its explanation for its position on the application of overtime pay requirements to pharmaceutical detailers. Both the majority and the dissent cited that as among the reasons not to give the agency’s interpretation controlling deference. In retrospect, the agency’s decision to try to change its explanation looks like a poor tactical judgment. Even if they decided the prior explanation was less persuasive, the agency would have been better off sticking with the original explanation.

 

In a June 18, 2012 memo about the decision (here), the Mayer Brown law firm noted that the conclusion of both the majority and the dissent that the agency was not entitled to controlling deference “could have broader significance for other regulated industries” because it “could limit the ability of agencies to adopt regulatory interpretations that impose unexpected liability on regulated entities.”

 

From the perspective of the insurance marketplace, a narrower application of the overtime pay requirement would be more desirable. Of course, the carriers are not responsible for the payment of unpaid wages in overtime pay cases. But many employment practices liability policies are written with sub-limited coverage (usually in the range of $100,000 to $250,000) for wage and hour claim defense costs. Wage and hour claims involving more highly compensated employees are more expensive to defend, because there is more at stake and are therefore harder to resolve. To the extent this decision discourages efforts to expand overtime pay requirements to higher compensated employees, it could reduce the carriers’ wage and hour expense burden.

 

Opinion Day at the Supreme Court: Maybe the specter of something like the following is the reason why the Court won’t allow cameras in the Court:

 

Chief Justice Roberts: Thank you, Samuel, for that great performance on behalf of the Stalwart Republican Quintet. I for one certainly enjoyed that rousing rendition of “Don’t Cry for me Detailers, You Make a Bundle Anyway.” And now with a dissenting opinion, it’s that veteran performer, Southpaw Steve, accompanied by the Liberal Lady Justices Trio. Take it away, Steve.

 

Justice Breyer: Thank you, thank you very much. As I always say, a Supreme Court audience is the greatest audience in the world. You know, I just flew in from the Court’s left wing, and boy, are my arms tired. Ha Ha! Um, is this thing on? (Tap, tap). OK, well, this morning we are going to perform the classic tune “All We Are Saying Is Give Detailers OT.” Ready, ladies? Uh-one and-a two, and here we go…

 

I Don’t Speak the Language, But I Think He is Trying to Tell Us That Portugal Scored: I want to share a great link with you, but first, here’s a question. What do Greece, Spain, Portugal and Italy have in common? If you said, they are all at the heart of the Eurozone crisis, you have not been monitoring current events closely enough. The correct answer is that those four countries’ national teams have qualified for the quarterfinals of the Euro 2102 soccer championship. Another quarterfinal qualifier is Germany. Which raises the possibility that the countries have the opportunity to solve the whole Eurocrisis on the playing field. Of course, the Czech Republic, France and England – the other three quarterfinal qualifiers — might also have something to say, at least about the tournament. The quarterfinal schedule can be found here.

 

Speaking of Portugal, if you have not yet heard it, you should drop everything you are doing right now – RIGHT NOW, I MEAN IT — and listen to this Portuguese announcer’s call of Christiano Ronaldo’s second goal in Portugal’s 2-1win Sunday over The Netherlands. The goal not only guaranteed Portugal’s qualification for the quarterfinals, but it also ensured that The Netherlands, which played in the World Cup finals just two years ago and in Euro 2012 fielded a lineup that looked like an all-star team, would be going home without winning or drawing a game in the group stages.

 

And by the way, in case you missed the article in yesterday’s WSJ, it turns out that not only is Ronaldo among the best players in the world but he is also the hardest working man in sport, anywhere, period. He logged more playing time on the field in the past year than any other non-goalie athlete. He also appears to be one of the most durable. And he is one of the key reasons that Portugal is still around and will be taken very seriously in the next round.

 

Besides the Dutch, another team that is probably surprised to find itself going home is Russia. They were clearly playing for a draw Saturday night against Greece, which would have been sufficient for Russia to move on to the next round. But Greece snuck a quick goal at the very last tick of the clock in the first half when Russia’s guard was down, and Russia could not recover. Russia probably still can’t believe the whole thing. They are going home, yet the Czech Republic, whom Russia demolished by the score of 4-1 on June 8th, is advancing to the next round. (As Arsene Wenger, the coach for Arsenal in the English Premier league, and who is French, might say with a Gallic shrug: “Zat ees football.”)

 

Spain, the defending Euro and World Cup Champions, clearly remain the favorite to win. (Indeed, some have argued that Spain’s current squad is the greatest team ever, in any sport.) But I have to say, not one but two players were offside for Spain’s lone goal Monday night in the final group stage game against Croatia. I make no predictions, but, you know, Germany played their group stage games damn well.  

 

In its final group stage game on Tuesday, England was also the beneficiary of an incredible blown call. In the second half of their game against Ukraine, England player John Terry’s clearance kick was clearly too late, the Ukraine shot clearly having gone over the goal line. But the referee’s assistant, who was after all right there, said it was not a goal. England of course will point out that Ukraine was offside on the play, so there shouldn’t have been a goal anyway  (actually, in England they would say that Ukraine were offside but that particular usage has always sounded stilted to me).

 

The team that has the most to answer for is France. Sure, France qualified for the quarterfinals. But in their last game of the group stages against a Sweden side that had already been eliminated, France played poorly. The French team did not actually go on strike, the way they literally did at the World Cup in 2010, but they might as well have, losing to a spirited Sweden side, 0-2. For their efforts, or lack thereof, France draws Spain as their opponent in the next round. They play on Saturday, in Donetsk.

 

I Would Have Thought it Was Sufficient To Argue for a Change That Buckeye Fans Are Insufferable: I am not making this up. According to a report on Deadspin, an Ohio man wants to have the Buckeye removed as Ohio’s State Tree because it is bisexual, having both male and female reproductive organs. Having such a tree as the state tree is, according to the man’s letter to the Findlay (Ohio) Courier, “flaunting the Holy Bible.” The Deadspin article notes that this would be pitch perfect satire — if it were in fact satire. If is not satire, well, it is just depressing.

 

My friend and former law partner Chuck Hadden would want me to point out that the Ohio man should have said “flouting the Holy Bible” not “flaunting the Holy Bible.”

 

Things That Were in my Childhood Home That Are Not in my Current Home:

 

Whole milk

A popcorn popper

Waxed paper and Freezer Paper

Wooden tennis rackets

A Sears catalog

Pipe cleaners

Typewriter ribbon

A skate key

A coffee percolator

Green Stamps

Calamine lotion

Evening newspapers

A slide rule

Encyclopedia Britannica

Margarine

Camera film – and  Film Cameras

Ashtrays

Parakeets

Tang

Plastic  record adpaters (so that 45 RPM records can play on a 33 RPM turntable spindle)

Hot water bottles

Airplane glue 

 

 

 

 

  

Things That Are in my Current Home That Were Not in my Childhood Home:

 

Bagels

A Rabbit corkscrew

Butter

SPF 45 sunscreen

Chopsticks

Cilantro

Recycle bins

Lacrosse sticks

Quinoa

Zip-lock bags

Bicycle helmets

Anti-bacterial soap

Suitcases with wheels

A golf club with a club head as big as a toaster

Color comics in the weekday newspaper

Velcro

Soy milk

Open-on-the-bottom condiment containers

Pesto

Blue corn tortilla chips

Erythromycin

 

Readers are cordially invited to suggest their own items for these lists, using the blog’s comment feature.  

Our legal system is one of our society’s crowning achievements. But for all of its grandeur, our legal system is not without its flaws. Among other things, our system encourages litigiousness that all too often involves frivolous suits and lawyers’-fee driven litigation, including the recent phenomenon of multi-jurisdiction derivative litigation driven by plaintiffs’ lawyers competing to get control of the dispute in order to try to capture the fee.

 

Two separate opinions this past week – one out of the Seventh Circuit and one from the Delaware Court of Chancery – harshly criticized these kinds of practices. Both of the opinions were entered in shareholders’ derivative lawsuits, too. Though both of the cases are sharply critical of fee-driven plaintiffs’ lawyers’ practices, only one of the cases resulted in the dismissal of the suit. Interestingly, in the Delaware case, owing to the Court’s disdain for the practices of “fast-filing” plaintiffs’ firms in parallel California proceedings, the Delaware case will be going forward.

 

The Allergan Case in Delaware

In September 2010, Allergan pled guilty to a criminal misdemeanor for misbranding its Botox product and paid a total of $600 million in civil and criminal fines. Various plaintiffs’ firms filed multiple derivative suits both in federal court in California and in Delaware. The California cases went forward more quickly, while in Delaware, at least one of the plaintiffs sought to pursue a books and records action against the company, in order to obtain further information pertinent to the company’s board. The Delaware plaintiff used the information and documentation to amend its complaint. The California plaintiffs ultimately also obtained the same information and documentation and supplemented their complaint as well.

 

The defendants moved to dismiss the California action on the ground that the plaintiffs had not made a demand on the Allergan board to pursue the claims, nor had they established demand futility. The California court granted the defendants’ motion to dismiss. The defendants then sought to have the Delaware action dismissed, arguing that the collateral estoppel effect of the California dismissal was preclusive of the demand futility issue.

 

In a massive and muscular June 11, 2012 opinion (here), Delaware Chancery Court Vice Chancellor Travis Laster firmly rejected the suggestion that the California court’s prior ruling compelled him to dismiss the Delaware action. He relied on two grounds in rejecting the argument that the California judgment is preclusive; first, he found that the California judgment was preclusive only as to the individual California shareholder plaintiffs, and second, he found that the California plaintiff did not adequately represent Allergan.

 

Both of these lines of analysis are interesting and so I discuss both below, but it is the inadequate representation issue that is the main interest to this blog post.

 

Vice Chancellor Laster first held that question of whether or not pre-suit demand is futile is controlled by the internal affairs doctrine and therefore governed by the law of the state of incorporation – in this case, Delaware. It should not, he said, be governed by potentially different rules across “twelve different circuits, fifty states and the District of Columbia, Puerto Rico and the other territories.”

 

He held further that under Delaware law a shareholder seeking to pursue a derivative claim on behalf of a corporation represents only his own individual interest until it is established that he has the right to pursue the claim. Because the California plaintiff was found not to have the right to pursue the claim, the California court’s judgment is preclusive only the California plaintiff alone, not on all other shareholders or the corporation (that is, the California plaintiff is not in “privity” with the other shareholders).

 

As an independent basis for rejecting the preclusive effect of the California judgment, Laster held that the California plaintiffs did not adequately represent Allergan. In concluding that the California plaintiff had not provided adequate representation, Laster launched a lengthy disquisition of the motivations and actions of the specialized plaintiffs’ shareholder bar and the specific actions taken on this case.

 

These specialized firms face a competitive environment where they often can only control the case and capture the fee if they are the first-to-file. The first-filed rule “incentivizes the plaintiffs’ lawyers to file as fast as possible in an effort to gain control of the litigation.” These firms, facing first-to-file pressure “rationally eschew conducting investigations and making books and records demands, fearing that any delay would enable to gain control of the litigation.” As he put it, “No role, no result, no fee.”

 

For the “fast-filing lawyers” their lawsuit “has the dynamic of a lottery ticket,” since in most cases their hastily prepared complaint will risk dismissal. However “in the rare case, fate may bless the fast-filer with something implicating the board,” which will make the case likelier to survive the motion to dismiss and improve the settlement value of the case exponentially.

 

 “A fast-filer” can “readily build a portfolio of cases in the hope that one will hit.” Filing a derivative claim “is relatively cheap” and search costs are minimal. Indeed, derivative plaintiffs “often piggyback on the efforts of other specialized plaintiffs’ firms.” The lawyer’s “most difficult task will be finding a suitable plaintiff.’

 

The “first-to-file” regime “disserves stockholder interests across multiple dimensions.” It prevents plaintiffs’ lawyers from “acting optimally” and “forces defendants to respond to multiple complaints in multiple jurisdictions” but at the same time gives defendants litigation advantages, because the hastily filed complaints are more likely to be dismissed. Noting Delaware’s courts’ resistance to the first-to-file regime, Laster commented that “a state that ritualistically favored defendants might embrace such a regime, but Delaware has a long history of striving to balance the interests of stockholders and managers to craft an efficient corporation.”

 

Laster found that the California proceedings demonstrate all of the shortcomings with the race-to the courthouse phenomenon:

 

By leaping to litigate without first conducting a meaningful investigation, the California plaintiffs’ firms failed to fulfill the fiduciary duties they voluntarily assumed as derivative action plaintiffs. Rather than seeking to benefit Allergan, they sought to benefit themselves by rushing to gain control of a case that could be harvested for legal fees. In doing so, the fast-filing plaintiffs failed to provide adequate representation.

 

Moreover, the California plaintiff’s shortcomings were not later redeemed when the California plaintiff belatedly asked for and received the fruits of the Delaware plaintiff’s books and records action. Laster concluded that “rather than representing the best interests of the corporation, the California plaintiffs sought to maximize the potential returns of the specialized law firms who filed the suit on their behalf.”

 

Having rejected the defendants’ suggestion that the California court’s determination was preclusive on the issue of demand futility, Laster then went on and rejected the basis on which the California court had determined that demand was futile. He said that he found the California court’s analysis “unpersuasive.” He concluded that the Delaware plaintiffs, pleading with the benefit of the results of their books and records action, had established that demand was excused as futile. 

 

The Seventh Circuit’s Decision in the Sears Case

Following the 2005 merger of Kmart and Sears, the merged company board included two individual directors who also served on the boards of other companies that competed with Sears. Two Sears shareholders filed a derivative lawsuit alleging that the two directors’ interlocking directorships violated the Clayton Act. Sears moved to dismiss the suit on the grounds that the plaintiffs had not made a pre-suit litigation demand on the Sears board. Northern District of Illinois Judge Ronald Guzman denied the motion to dismiss. Faced with the prospect for further litigation, Sears agreed to a settlement of the case that consisted of agreements for one of the two directors to step down and for the defendants not to object to the plaintiffs’ attorneys’ fee request of $925,000.

 

Sears shareholder Theodore Frank moved to intervene in the case in order to object to the settlement. Judge Guzman denied Frank’s request to intervene. Frank appealed the denial of his request to intervene. In a June 13, 2012 opinion written by Chief Judge Frank Easterbrook for a three-judge panel of the Seventh Circuit (here), the appellate court ruled that Frank’s motion to intervene had been improperly denied. That determination would seem to represent all that the appellate court was called upon to do. But the Court did not stop there; it went on to add a few choice words about the case (and perhaps about the District Court as well).

 

The district court’s reason for denying Frank’s motion to intervene, the Seventh Circuit said, is “unsound.” The district court denied the motion because the existing plaintiffs adequately represented Frank’s interests. But as the Seventh Circuit said, “that the plaintiffs say they have the other investors’ interests at hear does not make it so.” The Seventh Circuit emphasized that its case decisions encourage liberal allowance of intervention.

 

“We could,” the Court said, “stop at this point and leave the parties to slug it out In the district court.” But, “this litigation is so feeble that it is best to end it immediately.” The only goal of this suit “appears to be fees for the plaintiffs’ lawyers.” It is “impossible to see how the investors could gain from it – and therefore impossible to see how Sears’ directors could be said to violate their fiduciary duty by declining to pursue it.” The court went on to note how unlikely it is that a consumer or regulator would pursue any claim based on the interlocking directorates.

 

It is “an abuse of the legal system to cram unnecessary litigation down the throats of firms whose directors serve on multiple boards, and then use the high costs of antitrust suits to extort settlements (including undeserved attorneys’ fees) from the targets.”

 

In short, the Court said, “the suit serves no goal other than to move money from the corporate treasury to the attorney’s coffers, while depriving Sears of directors whom its investors have freely elected.”

 

Discussion

In both of these two decisions, the courts criticized derivative actions motivated by plaintiffs’ attorneys’ desire to collect a legal fee but otherwise to the detriment of the company involved. To the extent the views expressed in these opinions represent an evolving judicial view of how some plaintiffs’ firms are conducting business, they could represent a troubling threat to the business model of at least certain parts of the plaintiffs’ bar

 

But though there are similarities of perception and expression between these two cases, there are some very important differences between the two cases as well.  For example, as a result of the Seventh Circuit’s opinion, the Sears case, which was to have continued to go forward in the district court (owing to the fact that the proposed settlement had for unrelated reasons come apart), will now not be going forward. By contrast, owing to Vice Chancellor Laster’s opinion, the Allergan case, which seemed like it was over as a result of the California court’s opinion, will now be going forward in Delaware.

 

The Seventh Circuit was concerned that the district court had allowed a fee-driven frivolous suit to go forward (and it certainly does seem as if its opinion in the Sears case is a very carefully aimed slap at the district court); Vice Chancellor Laster seems concerned that as a result of inadequate actions of fee-driven plaintiffs’ lawyers proceeding in another jurisdiction, a potentially meritorious case was being threatened with being shut down.

 

The key may be Laster’s insight that the hastily prepared “first to file” complaints actually benefit the defendants, as the cobbled together complaints are easier to get dismissed – which is what happened in California. Laster also seemed troubled that the Delaware plaintiffs, who were in his court and who had proceeded deliberately, could have deprived of the benefit of their labors owing to the hasty actions of the inadequately prepared California plaintiff.

 

An important context for Vice Chancellor Laster’s opinion is the ongoing problem of multi-jurisdiction litigation and the jurisdictional competition that has ensued. Laster seems to have just about had it with courts in other jurisdictions presuming to interpret and apply Delaware corporate law and making a mess of it. You can imaging him shaking his head in disgust as he notes, first, the plaintiffs’ lawyers rushing to file actions in other jurisdiction’s court and making a hash of it, and then the courts in those other jurisdictions making a further mess of the situation.

 

It will not be lost on any plaintiffs’ lawyers in the room that the outcome of Laster’s opinion is that a case that appeared dead will now be going forward. It is as if to say to the plaintiffs’ bar, go ahead, rush off to those other courts and file your actions if you want, maybe the lottery ticket will produce a winner. But take your time and prepare appropriately, and file your suit in Delaware, and you will receive a full and fair hearing. Laster expressly contrasts Delaware with a (supposedly hypothetical) state “that ritualistically favored defendants.” Delaware, he said, “has a long history of striving to balance the interests of stockholders and managers to craft an efficient corporation law.” The message to the plaintiffs ‘ bar seems to be that Delaware’s courts are open for business – and its courts are not going to be put off by competing litigants pushing ahead on other courts.

 

Maybe I am reading too much into Judge Laster’s opinion. But it sure seems like there are some things for defendants to worry about here. Not just the fact that the case is going forward after being dismissed in California. It is this case, taken in combination with other developments – such as the massive plaintiffs’ award in the Southern Peru case—that seemingly would give corporate defendants cause for concern. The question for defendants is what to make of these developments and what they might mean as Delaware tries to protect its turf in the jurisdictional competition.

 

There is still the problem of the lack of recognition given to the California court’s ruling on the demand futility issue. As Alison Frankel said in her June 12, 2002 article in her On The Case blog (here) discussing Laster’s ruling, Laster’s collateral estoppel analysis could prove to be “very controversial.” The principles of judicial efficiency militate very heavily in favor of a presumption that issues are decided only once. Anything that seemingly gives litigants a second bite at the apple flies in the face of these principles.

 

The prospects of multiple, competing demand futility determinations is potentially troubling. Multi-jurisdiction litigation may be the result of the actions of a competitive, fee driven plaintiffs’ bar, but it is not going to go away any time soon. It is already a serious problem. But if courts stop giving effect to determinations made in other courts, the problems of multi-jurisdiction litigation could get a whole lot worse.

 

All of that said, it is very encouraging to see courts actively worrying about problems caused by frivolous and fee-driven litigation. If these opinions do represent an evolving judicial perception about the motivations driving certain kinds and categories of litigation, the environment for that type of litigation has become decidedly more hostile. And as Justice Laster’s opinion shows, eliminating the abuses would be a good thing not just for defendants, but also for plaintiffs that proceed responsibly.

 

In the latest of what is now a lengthening line of cases, on June 12, 2012, the New York Supreme Court, Appellate Division, First Department, applying Illinois law, ruled in a coverage case brought by JPMorgan Chase that owing to settlements by underlying carriers in a professional liability insurance program, excess insurers in the program have no payment obligation because conditions precedent to coverage under the excess carriers’ policies had not been met. As discussed below, this case presents an interesting twist on the usual set of circumstances involved in these kinds of coverage disputes. A copy of the June 12 opinion can be found here.

 

Background

Though this coverage action was initiated by JP Morgan, the insurance coverage at issue was procured by Bank One, which later merged into JP Morgan. For the policy period October 1, 2002 through October 1, 2003, Bank One had procured a total of $175 million of bankers’ professional liability insurance and securities action claim coverage. The insurance was structured in a program of eight layers, consisting of a primary layer and seven excess layers.

 

In November 2002, actions were brought against Bank One and certain of its affiliates in connection with their roles as indenture trustees of certain notes issued by various NPF entities. After it acquired Bank One, JP Morgan settled the NPF actions for a total of $718 million and sought coverage under the Bank One insurance program for a portion of the settlement amount.

 

Prior to initiating the coverage suit against the carriers in the Bank One insurance program, JP Morgan settled with the sixth level excess carrier for $17 million. The sixth level excess carrier’s policy provided excess insurance coverage of $15 million in excess of $140 million. However, the $17 million insurance settlement with this sixth level excess carrier covered both the carrier’s liability under the Bank One program and claims under a separate policy the same carrier’s affiliate company issued under a different insurance program. There was no allocation of the $17 million insurance settlement among the carrier’s various policies

 

After initiating the coverage lawsuit, JP Morgan entered a separate $17 million settlement with the third level excess carrier. This separate insurance settlement covered both the third level excess carrier’s liability under the Bank One program as well as a separate claim under a separate insurance policy the carrier had issued.

 

Following these developments, the excess carriers in the fourth, fifth, and seventh excess insurance layers moved for summary judgment in the coverage action, arguing that as a result of the settlement with the third level excess carrier (and in the case of the seventh level excess carrier, the settlement with the sixth level excess carrier), conditions precedent to coverage under their respective policies had not been fulfilled, particularly with respect to their policies’ requirement that the underlying layers should be exhausted by payment of loss.

 

In a May 31, 2011 opinion, the New York (New York County) Supreme Court granted the excess carriers’ motions for summary judgment. JP Morgan appealed.

 

The June 12 Opinion

A June 12, 2012 opinion written by Judge Leland DeGrasse for a five-judge panel off the New York Supreme Court, Appellate Division, First Department and applying Illinois law,  affirmed the lower Court’s summary judgment rulings.

 

Focusing first on the fourth level excess carrier’s position, the appellate court noted that the carrier’s excess policy provide that “liability for any Loss shall attach to [the carrier] only after the Primary and Underling Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability.” The court noted that the “plain language of this attachment provision” requires both the underlying insurers’ admission of liability and the payment of the full amount of their limits, as “conditions precedent” to the carrier’s liability.

 

The appellate court agreed with the fourth level excess carrier that neither of conditions precedent had been met. The first condition was not met because the third level excess carrier’s settlement agreement with JP Morgan specifically provided that the agreement “shall not constitute, or be construed as, an admission of liability.” Moreover, the court noted, there is “no way to determine that [the third level excess carrier] paid the full amount” under its excess policy in the Bank One tower, because the settlement agreement “provided for no allocation” of the $17 million insurance settlement payment between the two policies that the carrier had issued and that were part of the insurance settlement.

 

For similar reasons, the court further concluded that conditions precedent in the fifth and seventh level carriers’ policies had not been met either. Relying on the Northern District of Illinois’s 2010 opinion in the Bally Total Fitness Holding Corp. case (about which refer here) and the Fifth Circuit’s 2011 opinion in Citigroup case (about which refer here), the court concluded that the lower court had “properly granted summary judgment” because JP Morgan’s settlements with the third and sixth level excess carriers “preclude any determination” whether the settling excess insurers’ policy limits were exhausted as required by the excess policies of the carriers that had moved for summary judgment, “because there was there was no allocation of settlement between the two underlying carriers.”

 

The appellate court also rejected JP Morgan’s efforts to rely on the venerable second circuit opinion in Zeig v. Massachusetts Bonding & Ins. Co. The appellate court here said that the Second Circuit’s unwillingness in Zeig to allow the excess carrier to evade payment when an underlying carrier had settled for less than full policy limits had been dependent on a finding of an ambiguity in the excess policy at issue in that case. The appellate court found no ambiguity in the excess policies of the carriers that had moved for summary judgment here, making the present case distinguishable from Zeig. The appellate court also questioned, in reliance on the Bally Total Fitness case, whether Zeig was contrary to applicable Illinois precedent.

 

Discussion

As I noted at the outset, this decision joins a growing list of cases that have found Zeig to be inapplicable and that have required as a trigger of coverage for excess insurance coverage that the limit of liability of the underlying insurance be exhausted by payment of loss. (A full list of the growing line of cases can be found in the Discussion section of my post pertaining to the Fifth Circuit’s opinion in the Citigroup case, refer here.)

 

An interesting complication in this case was the fact that the two excess carriers that had reached settlements with JP Morgan had in each case settled the insurance dispute with JP Morgan for payment of amounts that were actually greater than the amount of their respective excess layers in the Bank One insurance program. In each of the two settlements, the involved carrier’s respective layers in the Bank One program were $15 million, and the amount of each insurance settlement was $17 million.

 

The complicating factor was that in each of these two settlements, the settlements had also involved the settlement of coverage under a second insurance policy, other than the carrier’s policy in the Bank One program. Because of the involvement of these separate policies and because of the absence of any allocation between the policies in the respective insurance settlements, there was no way (the appellate court found) to determine whether or not the insurance settlements had exhausted the applicable excess policies in the Bank One program.

 

Although it may be twenty-twenty hind sight, you can certainly see in retrospect how these insurance settlements could have been structured to avert the outcome here. Just to put this into perspective, the policy limits of the excess carriers who prevailed on summary judgment in the lower court and on appeal totaled $95 million.

 

It is probably worth adding that there is nothing that says that even if the excess carriers had not prevailed on this specific issue that there would have been coverage available under their respective excess policies. Indeed, it appears that, even though the various carriers on the third level through seventh level excess layers are now out of the case (either through settlement or through summary judgment), the carriers on the primary and first two excess layer levels all apparently remain in this case and all apparently are continuing to contest coverage.

 

While this list of case authority on the excess trigger issue is growing longer, it is important to keep in mind that the outcome of each of these cases was a direct reflection of the specific language of the excess policies at issue. These cases underscore the critical importance of the language describing the payment trigger in the excess policy. In recent years, and in large part as a reaction to these cases, excess carriers increasingly have been willing to provide language that allows the excess carriers’ payment obligations to be triggered regardless whether the underlying amounts were paid by the underlying insurer or by the insured. This language was not generally available in 2002 when Bank One purchased the insurance that was at issue here.

 

Increasingly larger settlement amounts and increasingly higher defense expenses are increasingly driving claims losses into the excess layers, and as a result these issues pertaining to the excess policies’ coverage triggers are also increasingly important. These cases underscore the critical importance of the specific wording used in the excess policies, which in turn highlights the need to have an experienced, knowledgeable insurance professional involved in the insurance placement process.

 

In a recent post on this blog (here), I commented on a May 29, 2012 Dealbook blog post entitled “Why S.E.C. Settlements Should Hold Senior Executives Liable” (here), which had been written by two University of Minnesota law professors, Claire Hill and Richard Painter. After my post appeared, I contacted Professors Hill and Painter to let them know about my post and to invite them to respond to my post if they would like. Professors Hill and Painter (who are pictured to the left) did, in fact, have some comments in response to my post, and I am pleased to be able to publish their comments below as a guest post.

 

I am very grateful to Professors Hill and Painter for their willingness to provide a detailed response to my post and for their willingness to allow me to publish their comments here. The Professors comments follow.

 

Senior executives in investment banks and other financial services firms make a lot of money a lot of the time.   Jamie Dimon, the CEO of JP Morgan, for example will receive total compensation of $23 million this year, even though JP Morgan has suffered a $2 billion (or more) loss incurred by an improvident and unsupervised trader known as the “London Whale.” MF Global’s board had approved an $8 million pay package for CEO Jon Corzine the year before MF Global collapsed, it having “lost” $1.6 billion in customer funds that were apparently comingled with its own. Senior executives at Bear Stearns, Lehman Brothers and Merrill Lynch “earned” similarly large pay packages in the years before those firms collapsed.

 

In a law review article, two op-eds in the New York Times dealbook section, here and here, and in a forthcoming book on the ethics of investment bankers, we express our concern that for too many senior executives in financial services, their work has become a game of “heads I win, tails you lose” played with investors and creditors, and, when there is a government bailout, with taxpayers. This we think is wrong – and it is not the way the banking game was always played.

 

We are not ivory tower academics who don’t like bankers (many of our friends and family members are bankers or have been bankers). We just think that bankers should play the game with some more of their own money. We also think that, if they did, they might play the game differently.

 

In the 1970s the largest investment banks – Morgan Stanley, Lehman Brothers, Salomon Brothers, Goldman Sachs and others — were general partnerships.   A firm’s capital belonged to the partners, so when they made an investment, or authorized a trader to take a position, they were investing their own money.  If the firm was socked with an SEC fine or civil judgment for violating the securities laws, the fine came out of the firm’s assets, which meant it came out of the partners’ pockets.   If the firm went bankrupt, the partners not only lost the investment they had in the firm, but they were personally liable for debts that the firm could not pay.

 

Investment banks took big risks in those days – but nowhere near the magnitude or risks that in 2008 caused three of the five largest investment banks in the United States – Bear Stearns, Merrill Lynch, and Lehman Brothers – to fail.

 

The fact that these banks, as most all others these days, were operated not as partnerships but as corporations, with limited personal liability for their executives, has, we think, something to do with what happened.   Banking for them is a game of “heads I win, tails you lose.” 

 

To fix this we have proposed that the most senior bankers (those making more than $3 million) be asked in return to make a substantial portion of their personal assets (all except perhaps a few million dollars) available to pay the debts of the firm if it fails, and/or have a portion of their compensation be assessable stock that would be subject to a capital call if the firm becomes insolvent. More recently, we suggested (and one of us suggested two weeks ago in Congressional testimony) that senior executives of a financial institution be asked to pay, perhaps out of the bonus pool, a significant portion of any fine that the SEC or other regulator levies against the bank for illegal conduct.  This, we think, is fairer than imposing the entire cost of the fine on the bank’s shareholders, who had no role in the illegal conduct or responsibility for supervising the individuals who engaged in it.

 

None of what we propose has anything to do with collective guilt or finding of fault without due process, as has been implied in a well-written post by the host of this site. What we propose has to do with collective responsibility for the consequences – both good and bad – of corporate conduct in the financial services industry.   Financial services firms devote a very substantial portion of their revenues to salaries and bonuses (more than many other industries), something we do not in principle object to. We only suggest that when firms break the law, or lose so much money that they become insolvent, the persons responsible for managing those firms should bear a portion of the cost. Banks, shareholders and creditors, and society as a whole, would be better off if bankers went back to playing an honest game of “heads I win, tails I lose.”’ 

 

Why should bankers be treated differently than executives of other firms? Why shouldn’t they get the limited liability that executives at other incorporated firms have?  Financial services firms are different from other businesses in several respects including the fact that leverage ratios are high, financial assets such as derivative products are extremely hard to value, it is difficult for shareholders, creditors and regulators to assess risks that managers are taking, and senior managers are paid extremely well when their bets pay off.   Also, for creditors, other financial services firms and the economy as a whole, the repercussions from risks that bankers take can be enormous. The impact of financial managers’ risk taking turns on, among other things, the types of activities they and their firms engage in, their firms’ size, and the extent to which the firms are interconnected with one another and with other entities. High risk-taking may lead to a firm’s failure, but the firm has a good chance of being bailed out given its size and interconnectedness. The moral hazard – e.g. incentive for managers to take enormous risks – is very strong.

 

Although limited liability has advantages for raising capital and attracting talented employees, it sometimes has downsides. Bankers know this, and before they extend credit to riskier incorporated enterprises they often insist on personal guarantees from the principals. Bankers know that corporate borrowers whose managers have guaranteed corporate indebtedness will be managed more conservatively than corporate borrowers whose managers have not made personal guarantees.   Indeed, up until the 1980s, almost all of the largest investment banks operated as partnerships, with partners personally liable for firm debts.  Now, after 2008, we know that the greatest risk exposure that financial institutions face comes from imprudent decisions by persons in the executive suite who have every incentive to maximize short term profits and bonuses, but not enough incentive to avoid excessive legal and financial risk. 

 

Limited liability for officers of businesses is generally acceptable, but there are exceptions. Investment banks and most other financial services firms should be an exception. Solvency guarantees and partial payment of fines for illegal firm conduct by the most highly paid financial services executives are a reasonable quid pro quo for the enormous pay packages that they receive. 

 

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Worth Reading: Here at The D&O Diary, we never rest from our task of making sure our readers are fulliy informed, and in is in that spirit that we pass along the following links for all of our readers.

 

First, in a excellent June 12, 2012 article on her On The Case blog (here)., Alison Frankel takes a detailed look at Delaware Vice Chancellor Travis Laster’s June 11, 2012 opinion in the Allergan derivative litigation, in which the Vice Chancellor, as Frankel puts it, "blasts first-to-file firms" in shareholder derivative and M&A litigation. It is a long-ish article but very much worth reading in full.

 

Second, Victor Li’s June 12, 2012 article on Am Law Litigation Daily (here) takes a look at the ruling entered Monday in the Western Distrcit of Pennyslvannia in the long-running RICO action brought in that court against Alcoa and others by Bahrain Aluminum BSC (Alba), in which Alba accuses the defendants of bribing Alba officials and other senior Bahrain government officials. As Li explains, Monday’s decision rejected the defendants’ attempt made in reliance on the U.S. Supreme Court’s decision in Morrison v. National Australia Bank to have the case dismissed.

 

Third, a June 11, 2012 Reuters article entitled "SEC Probes Hit a Wall in Uncooperative China" (here) takes a look at the problems that the SEC is having trying to investigate fraud allegations involving Chinese companies. According to the article, the SEC is finding that "cooperative cross-border investigations are completely foreign to China." 

 

On Monday, June 11, 2012, the United States Supreme Court granted the petition of Amgen for a writ of certiorari in a securities lawsuit pending against the company. As a result, next term the Court will be addressing the question of whether securities plaintiffs must establish in their class certification petition that the alleged misrepresentation on which they rely was material. The Court’s June 11 order can be found here.

 

As discussed at greater length here, the plaintiff first sued Amgen and certain of its directors and officers in the Central District of California in April 2007. The plaintiff alleged that Amgen made misrepresentations about the safety of two of its products. The plaintiff also alleged that the company made misrepresentations about a May 2004 FDA advisory meeting; about clinical trials involving one of the products; about the safety of on-label uses of the two drugs and about the marketing of the drugs.

 

The plaintiff moved to certify a class of Amgen shareholders. The defendants opposed the motion, arguing that the plaintiff was not entitled to a class-wide presumption of reliance based on the fraud-on-the-market theory, because the plaintiff could not show that the alleged misrepresentations were material. To the contrary, the defendants argued that as a result of analyst reports and public documents, the market was aware of the information that the plaintiff alleged had been concealed.

 

In an August 12, 2009 Minute Order (here), Central District of California Judge Phillip Gutierrez granted the plaintiff’s class certification motion, rejecting the defendants’ argument that the plaintiffs’ had to establish the materiality of the alleged misrepresentation to trigger the presumption.

 

The Ninth Circuit granted the defendants leave to appeal the class certification ruling. In a November 8, 2011 decision written by Judge Barry Silverman for a three-judge panel of the Court, the Ninth Circuit affirmed the class certification.

 

The Ninth Circuit rejected the defendants’ contention that the plaintiff must provide proof of materiality at the class certification stage. The Ninth Circuit said that, as a predicate to class certification, a plaintiff need only show that the market for a company’s shares is efficient and that the supposed misstatements were public. The Ninth Circuit reasoned that because materiality is “an element of the merits” of a securities class action, it need only be addressed at the trial stage or in a summary judgment motion. The Ninth Circuit also approved the district court’s refusal to consider the company’s rebuttal evidence on the issue of materiality.

 

Amgen then filed a petition to the United States Supreme Court for a writ of certiorari. In its petition, a copy of which can be found here, Amgen argued that there is an “irreconcilable conflict” in the federal judicial circuits on the question of whether or not a plaintiff must establish materiality at the class certification stage. According to the cert petition, the Second and Fifth Circuits have held that a plaintiff must prove materiality for class certification and that defendants may present evidence to rebut the applicability of the fraud-on-the-market theory at the class certification.

 

The Third Circuit, according to the petition, has adopted an “intermediate approach” which holds that a plaintiff does not need to demonstrate materiality as part of an initial showing before class certification, but that defendants may rebut the applicability of the fraud-on-the market theory by disproving the materiality of the alleged misrepresentation.

 

The Seventh and Ninth Circuits, by contrast, hold that district courts are barred from considering materiality at the class certification stage.

 

Amgen argues in its petition that

 

The issue at the heart of the circuit split here is whether the defendants should be forced to defend securities fraud litigation against a class of plaintiffs, based on a rebuttable presumption, in instances where the named plaintiff has yet to prove all the predicates of the very theory that allows for class certification in the first place, and where the defendant is given no opportunity for rebuttal prior to certification.

 

Amgen stressed not only the logic concerns, but fairness concerns as well,l because of the “in terrorem power of certification” in the securities litigation context, which often compels defendants to enter into  massive settlements. The presence or absence of this kind of pressure will, Amgen argued, depend on the circuit in which the case was filed. In the Seventh and Ninth Circuits, the company argued, defendants “will frequently be forced by practical realities, to settle cases for enormous sums regardless of whether they have a meritorious materiality defense,” while in the Second and Fifth Circuits, the plaintiffs would have to establish materiality as a precondition to class certification, and in the Third Circuit, the defendants would have the opportunity to rebut any materiality showing.

 

In opposing the cert petition, the plaintiffs first argued that there is in fact no circuit split, but rather, the Ninth Circuit opinion stood alone as the first decision to consider the materiality arguments in light of the U.S. Supreme Court’s recent decisions in Erica P. John Fund v. Halliburton and in WalMart v. Dukes. The plaintiff also argued that the supposed circuit split on which Amgen relies is merely the product of a “strained” reading of the various courts’ opinions. The plaintiff also opposed the petition on procedural grounds, among other things.

 

There were also several amicus briefs filed in connection with Amgen’s cert petition, including one filed by several former SEC commissioners and certain law and finance professors, which was filed in support of Amgen’s petition. In their amicus filing, the commissioners and professors argued that the U.S. Supreme Court’s seminal decision in Basic v. Levinson (which recognized the fraud-on-the-market presumption)

 

recognized that any showing that severs the link between an alleged misrepresentation and the market price of a security – including a showing that a misrepresentation was immaterial – rebuts the presumption of reliance and makes class certification improper.

 

The commissioners and professors also argued that what they described as a “three-way circuit split” has produced a “deep and persistent conflict” that “invites forum shopping.”

 

Amgen was also supported in its petition in amicus briefs filed by the U.S. Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America.

 

Discussion

In granting Amgen’s petition, the Roberts court once again demonstrates its willingness to take up securities cases. Over the past several terms the Court has taken up numerous securities cases that have individually and collectively had a significant impact on securities litigation. In that sense, the plaintiff definitely has a point about the fact that the lower courts are trying to work through all of the issues and implications of the recent raft of securities law and class action procedure questions coming out of the Supreme Court.

 

Though the Supreme Court is still generally weighted toward a more conservative predisposition, and though the Court’s decisions in recent years have included a number of defendant-friendly securities law decisions (for example, the Tellabs and the Morrison decisions), the Court’s decisions have not been uniformly defendant- friendly. For example, the Court’s 2011 decision in the Matrixx Initiatives case rejected the defense argument that in order to establish materiality, a plaintiff had to show that the allegedly omitted information was “statistically significant.”

 

Another element that adds to the unpredictability is the possibility that the Court will go off in an unexpected direction, as it did in the Morrison decision. In Morrison, Justice Scalia’s majority opinion set aside decades of lower court case law on the “cause and effects” test to establish the extraterritorial effect of the securities laws, and promulgated a new “transaction” based test in its stead. There is always the possibility here that the Supreme Court –rather than narrowly interpreting the existing standard under Basic v. Levinson for the applicability of the fraud-on-the-market presumption — does something more radical instead,  like entirely redefining whether, when and how the fraud-on-the market presumption might apply. Indeed, this case presents the Court with its first clear chance to revisit the doctrine since it was first arrticulated in the Basic case nearly a quarter of a century ago.

 

One final factor that could affect the outcome is the possibility that Justice Breyer may not participate in the consideration of the Amgen case. In its June 11 order granting the cert petition, the Court noted that Breyer “took no part in the consideration or decision of this petition.” If he were to similarly remove himself from the Court’s consideration of the merits of the case, there would be at least the numerical possibility for a dreaded 4-4 split among the justices.

 

This will in any event be an interesting case to watch. Issues relating to class certification potentially have a very significant impact on the seriousness of the case. To the extent Amgen prevails on the merits and establishes that plaintiffs must show materiality at the class certification stage, the defendants will have one more tool in the toolkit to undermine the plaintiff’s case and to try to reduce the threat that the case represents to the defendants.

 

As the Morrison & Foerster firm said in its June 11, 2012 memorandum about the Supreme Court’s cert grant in the Amgen case,

 

A clear answer from teh Supreme Court to these questoins coud have a significant impact on securities litigation. A decision that endorses the Ninth Cirtcuit’s approach could made securities litigation more costly for defendants, particularly in circuits where plaintiffs are presently required to prove materiality at class certification. Conversely, a decision rejecting the Ninth Circuit’s approach could provide defendants an early opportunity to challenge the viability of class action claims.

 

David Bario’s June 11, 2012 Am Law Litigation Daily about the grant of the Amgen cert petition can be found here.

 

The plaintiffs’ complaint cited twenty-three confidential witnesses and relied on statements the appellate court itself described as “extravagant,” but the First Circuit nevertheless affirmed the lower court’s dismissal of the credit crisis-related securities class action lawsuit investors filed against Textron and certain of its directors and officers. A copy of the First Circuit’s June 7, 2012 opinion can be found here.

 

The plaintiffs’ complaint relates to events at Textron just before and at the beginning of the financial crisis. During 2007 and 2008, Textron made reassuring statements about the strength and depth of order backlog at its Cessna Aircraft subsidiary, which backlog Textron represented would help carry it through the difficult economic times. In early 2009, after several reassuring statements in 2008 about the strength of the backlog, Textron reported substantial cuts to Cessna’s production levels in the fourth quarter of 2008, citing few orders, as well numerous cancellations and delivery deferrals. The company’s share price slumped and securities class action lawsuits ensued.

 

As detailed here, the plaintiffs alleged that the Cessna airplane order backlog was artificially inflated. The plaintiff relied on 23 confidential witnesses in support of its allegations of known weak nesses in the backlog, in part by showing weaknesses in the underwriting for aviation financing offered in support of the airplane purchases. The defendants moved to dismiss.

 

In an August 24, 2011 order (here), District of Rhode Island Judge Paul Barbadoro found that the plaintiffs’ allegations were insufficient to show that material information was omitted. Judge Barbadoro found that the plaintiffs’ allegations of relaxed financing underwriting standards were too vague and failed to show that the alleged misrepresentations about the order backlog were false when made.

 

In its June 7, 2012 opinion written by Judge Michael Boudin for a three-judge panel that included retired Supreme Court Justice David Souter sitting by designation, the First Circuit affirmed the lower court’s dismissal of the case, saying that “we conclude that the complaint was deficient but regard the materiality issue as a close call and rest instead on the failure of the complaint to plead facts justifying a reasonable inference of scienter.” 

 

In addressing the question of materiality, the court did note that the confidential witnesses do “provide at least some indication that underwriting standards were loosened,” while at the same time “Textron comforted investors with assurances of its ‘traditional strong conservative underwriting process.’” After noting that discovery might “have clarified issues” in this regard, the Court observed that “we need not decide the materiality issue because the complaint fails adequately to allege scienter.”  

 

With respect to scienter, the Court said:

 

Nothing in the complaint suggests that any of the named officers believed, or was recklessly unaware, that the backlog’s significance had been undermined by weakened underwriting standards, sales to intermediaries, or any of the other flaws on which the plaintiffs rely…. Textron’s top managers may have been negligent if they were not aware; surely French [Textron’s CFO] was extravagant in saying of the backlog that Textron had “torn it apart.” But negligence or puffing are not enough for scienter…

 

The Court added that “while the relatively detailed factual proffers in the complaint go some distance toward making a case for materiality, they are considerably weaker in offering any direct evidence of guilty knowledge or fraudulent intent.” On the “crucial question” of when the airplane order cancellations began piling up, the various reassuring statements during 2008 and the confidential witnesses description of cancellations increasing “suddenly in ‘late summer 2008’” are, the Court said, “not in conflict.”

 

The Court concluded with the acknowledgement that the PSLRA’s heighted pleading requirements leave “a plaintiff’s counsel with a greater than usual burden of investigation before filings a securities fraud complaint.” District courts can, the Court said, refuse to dismiss cases that “fall into an intermediate gray area,” but “this complaint’s scienter allegations were weaker than its materiality allegations and did not even arguably fall into a gray area encouraging further proceedings.”

 

Discussion

The underlying facts in this case clearly reflect the impact of the global financial crisis as it unfolded in the third and fourth quarters of 2008. The First Circuit does not expressly say it, but its analysis seems to reflect an awareness of how suddenly and dramatically things unraveled during that period. The Court’s analysis does seem to imply that merely because later circumstances turned out significantly different than anticipated, that alone does not mean that earlier statements were untrue or misleading when first made.

 

Nevertheless, the case does demonstrate, as the Court itself acknowledges, how difficult it is for plaintiffs to overcome the PSLRA’s heightened pleading standards. It is difficult to show materiality, and even if a plaintiff can establish materiality, the plaintiff must still establish scienter, and it is hard to establish scienter as well. The sheer difficulty of the task is highlighted by the fact that these hurdles cannot be overcome even with the benefit of the testimony of 23 confidential witnesses and even reliance on statements that the court itself described as “extravagant.”

 

In the end, however, and even though the subsequent events turned out differently than expected, the plaintiff’s case will not be going forward because the plaintiff wA unable to show that the statements were known to be untrue when made. Indeed, given how rapidly the crisis unfolded in late 2008, it seems at least equally plausible that the company truly believed that airplane order backlog would carry it through, and that the company, like so many others, was caught short by the extent of the drop off that followed the dramatic events in September 2008.

 

I have in any event added the First Circuit’s affirmance of the lower court’s dismissal to my running tally of the subprime and credit crisis-related lawsuit case resolutions. The tally can be accessed here.

 

Claire Zillman’s June 8, 2012 Am Law Litigation Daily article about the First Circuit’s opinion and entitled “23 Confidential Witnesses Still Can’t Save Textron Shareholder Suit” (here).

 

And Speaking of the Financial Crisis: With the passage of time, it is easy to forget just how crazy things were in late 2008. (If things continue as they are going in Europe now, we may get to re-experience many of the same emotions and sensations later this summer.) One of the many dramatic events during that period was the collapse of Washington Mutual, which failed on September 25, 2008. As I noted at that time (here), there were so many extraordinary things going on then that even the largest bank failure in U.S. history quickly faded from the front pages.

 

On June 8, 2012, the Wall Street Journal, in an article entitled “A Bank on the Run: How WaMu’s Demise Hit Home” (here) published an excerpt from a new book by Kirsten Grind entitled The Lost Bank, about the collapse of Washington Mutual. The excerpt recounts how the “seeds” of WaMu’s demise “were sown” in a “headlong push into subprime lending that sprouted with the 2004 purchase of Long Beach Mortgage, which was among the most aggressive sellers of home loans to people with sketchy credit histories.”

 

The bank’s subprime mortgage operations quickly produced problems, and the Long Beach Mortgage operations were the subject of critical internal audit reports, which cited the operations “unsafe” lending practices. American International Group, the company insuring WaMu’s mortgages, based on its own sampling of the mortgages, found evidence of mortgage fraud, but WaMu ignored the insurer’s warnings.

 

The excerpt also recounts how WaMu’s own marketing department, attempting to devise ways to make subprime mortgages more attractive to borrowers, compiled video footage of existing borrowers that gave “a sneak peak of the mortgage bust.” Rather than providing support for the attractiveness of the mortgages, the video footage unintentionally constituted a “raw and merciless documentary on high-risk lending.” When shown the footage, the “startled” head of WaMu’s Home Loans Group ordered the marketing team to begin working on “a friendlier approach.”

 

In the end the bank’s collapse has left a legacy of problems for homeowners, for investors and even for J.P. Morgan, which bought WaMu’s assets and which continues to increase its reserves because of deterioration in the WaMu mortgage portfolio.

 

WaMu’s collapse may have taken place nearly four years ago, but the events surrounding its collapse continue to reverberate. Just this past Friday night, the FDIC closed four more banks, after closing only two during the entire month of May. The four latest closures bring the 2012 YTD total number of failed banks to 28. The financial crisis may have peaked a while ago, but the consequences are still continuing to unfold.

 

Man in the Middle: It is never a good sign when  a U.S. Supreme Court justice appears on the cover of Time Magazine. It usually signifies that the Court is at the center of an important controversy, which certainly is the case these days. The justicve on the week’s cover is Justice Anthony Kennedy, who could well cast the deciding vote on several key cases either now before the Court or likely soon to be before the Court.

 

The article, entitled "What Will Justice Kennedy Do?" (here) takes a detailed look at Kennedy’s backgrodund, his judicial track record, and on his pragmatic, non-ideological approach to the cases before the Court. The article tries to tie his approach to Kennedy’s upbringing and professinal career in Sacramento.

 

The article rocounts how Kennedy has in recent years often served as the deciding vote in 5-4 decisions. The article asks rhetorically whether "sonething is wrong with democracy when one person holds so much sway over so many?" and the points out the "Kennedy is not the only person responsible for this state of affairs," adding:

 

He would not havd his majority-making power if his eight colleagues were not so rigid in their views. And the eight woudl not be so adamant if the political parties had not decided over the past generation that only carefully groomed, philosophically pure ideologues should be placed on the high court. Like the rest of the government, the Supreme Court has become polarized, increasingly unable to rise to the American tradition of splitting the difference, finding a compromise, muddling through.

 

Kennedy, the article says,  has "wrestled openly with the complications and nuances of a tough call."

 

The question is whether or not it is a good thing that Justice Kennedy may well prove to be the deciding vote on several of the ksy cases yet to be decided this term and to be decided next term.

 

The March 2008 collapse of Bear Stearns was, in the words of Southern District of New York Judge Robert Sweet, “an early and major event in the turmoil that has affected the financial markets and the national and world economies.” The securities class action litigation that followed the company’s collapse was among the highest profile of the cases that arose in the wake of the subprime meltdown and credit crisis.

 

The parties to the Bear Stearns securities litigation have now agreed to settle the case for $275 million, subject to court approval. The parties’ June 6, 2012 settlement stipulation, attached to the affidavit of plaintiffs’ counsel, can be found here. The parties’ motion for preliminary approval of the settlement can be found here.

 

As detailed here, the plaintiffs first sued Bear Stearns and certain of its directors and officers shortly after its March 2008 collapse and the company’s eleventh hour acquisition  by J.P. Morgan Chase.

 

In their massive consolidated amended complaint (here) , the securities class action plaintiffs allege that in a series of statements during the class period, the defendants made material misrepresentations or omissions with regard to the company’s exposure to subprime mortgages; with respect to the performance of and valuations in connection with one of its hedge funds; with respect to the company’s liquidity; with respect to the company’s risk management and valuation practices. The company is alleged to have inflated its reported financial results and financial condition, among other things due to use of inappropriate models to value the company’s subprime-mortgage related assets. Deloitte & Touche, LLP, the company’s outside auditor, is alleged to have knowingly and recklessly offered materially misleading opinions about the company’s accuracy.

 

As detailed in greater length here, on January 19, 2011, in a gigantic 398-page opinion, Judge Sweet denied the defendants’ motion to dismiss the securities class action lawsuit. He did however grant defendants’ motions to dismiss the related shareholders’ derivative lawsuit and ERISA class action lawsuits.

 

On June 6, 2012, the parties to the Bear Stearns securities litigation filed their settlement papers with the court, in which they advised the court that they had agreed to settle the case for $275 million, following mediation. The parties to the settlement include Bear Stearns and seven former Bear Stearns directors and officers (including the former Bear Stearns CEO, Jimmy Cayne). However, the list of defendants to be released by the settlement does not include Deloitte & Touche LLP.

 

The Settlement Stipulation provides that Bear Stearns “shall pay, or cause to be paid” the $275 million settlement amount into escrow within a specified time of preliminary settlement approval. The settlement papers do not disclose whether any portion of the settlement amount is to be paid by insurance. However, the released parties include, among others, the defendants’ “insurers.”

 

There may well have been an insurance component of or contribution to this settlement, but unlike the $90 million settlement of the Lehman Brothers D&O lawsuit (about which refer here), the settlement was not dependent exclusively on dwindling D&O insurance proceeds. Bear Stearns may have collapsed, but it was acquired by J.P. Morgan Chase, so there was a solvent entity to contribute to the settlement. It is entirely possible that JP Morgan anticipated the possibility of this development at the time it acquired Bear Stearns; according to press reports at the time, in connection with the acquisition, JP Morgan set aside $6 billion to cover anticipated litigation costs (among other things). 

 

There is nothing in the settlement papers to suggest that any of the individual defendants is being called upon to contribute in any way toward the settlement. The settlement stipulation provides only that the $275 million settlement proceeds will be paid by or on behalf of Bear Stearns.

 

The Bear Stearns settlement is one of the largest securities lawsuit settlements as part of the subprime and credit crisis-related litigation wave. It is by far the largest of the settlements so far in 2012, and overall, is exceeded only by the Wachovia Preferred Securities Settlement ($627 million, about which refer here); the Countrywide Settlement ($624 million, refer here); the Lehman Brothers Offering Underwriters’ settlement ($417 million, refer here); the Merrill Lynch Securities Settlement ($425 million, refer here); and the Merrill Lynch Mortgage Backed Securities Settlement ($315 million, refer here).

 

In any event, I have added the Bear Stearns settlement to my list of subprime and credit crisis-related case lawsuit resolutions, which can be accessed here.

 

SEC Awash in Whistleblower Reports: Since the enactment of the Dodd-Frank Act, which provided for rich whistleblower bounties under certain circumstances, there has been a great deal of anticipation that the provisions would lead to a flood of whistleblower reports. Indeed, the SEC’s early reports were that there had been a significant influx of whistleblower reports.

 

According to recent reports, the SEC is now awash in whistleblower reports. According to a June 5, 2012 Law 360 article entitled “SEC Enforcement Division Buries in Whistleblower Tips” (here, subscription required), the SEC is receiving an average of seven reports per day and the agency is “struggling to keep up.”

 

Even though only “two to three tips submitted per day are worth investigating,” according to an SEC source quoted in the article, the SEC may not have sufficient staff to investigate all of the reports. According to the article, “the SEC is trying to triage the tips it gets as best it can, making sure the best leads get sent to the enforcement division for investigation.”

 

Ironically, this surge of reports has developed even though the SEC is yet to make its first award under the Dodd-Frank whistleblower bounty provisions. According to one commentator quoted in the article, “This is going to explode once the first award comes down. The program is only going to get bigger and bigger.”

 

The criminal trial in which Jerry Sandusky, the former defensive coordinator of Penn State’s football team, stands accused of sexually abusing at least 10 boys over a 15-year period began Tuesday, June 4, 2012, in Bellefonte, Pa. Sandusky has been charged with forty criminal counts. Sandusky has also separately named as a defendant in a civil action in which one of the alleged victims seeks damages.

 

Sandusky, who denies the allegations in both the criminal and civil actions, has sought coverage for the claims against him under the management liability insurance policy issued to a non-profit group, The Second Mile, of which Sandusky had been an officer. Second Mile’s insurer filed an action in the Middle District of Pennsylvania seeking a judicial declaration that it is not obligated to provide Sandusky with coverage under its policy, which incorporated both D&O and EPL coverage. The insurer contends that Sandusky was not acting in an insured capacity when he committed the alleged wrongful acts. The insurer contends that certain policy exclusions preclude coverage under the Policy for the claims against Sandusky.

 

The insurer moved for judgment on the pleadings in the coverage action, arguing that even if the policy were interpreted to cover the losses stemming from the allegations against Sandusky, the policy would be void as against Pennsylvania public policy. The insurer argued that it should not be required to defend or indemnify against the damages arising out of the claims.

 

In an opinion issued June 4, 2012, the same day that Sandusky’s criminal trial began, Middle District of Pennsylvania Chief Judge Yvette Kane held that while Pennsylvania’s public policy would not permit enforcement of the Second Mile policy to the extent that it provides for indemnification to Sandusky for civil liability for damages arising from sexual molestation, in the absence of any findings or factual record, the Court must defer the question whether any obligation the insurer owes to Sandusky to provide a legal defense to the civil claims or criminal prosecution are void as against Pennsylvania public policy. A copy of Judge Kane’s June 4 opinion can be found here.

 

Judge Kane began her analysis with a confirmation that Pennsylvania public policy “prohibits the reimbursement of Sandusky for any damage award that he may ultimately be found to owe arising from the allegations that he molested and sexually abused children.” What is not clear, however, and “must not be prejudged” is whether the same public policy bars coverage for The Second Mile or any other principal of that organization.

 

Judge Kane also found that Pennsylvania has not “squarely addressed the remaining and most pressing issue before the Court; whether in light of the strong public policy against allowing a perpetrator to insure against the consequences of his own intention wrongdoing, “the insurer’s duty to provide Sandusky a defense to the civil and criminal proceedings “is likewise unenforceable as against public policy because of the nature of the conduct alleged.” On this issue, the Court ‘writes on a blank slate.”

 

After reviewing relevant case law and public policy considerations, Judge Kane concluded that “without the benefit of a factual record, it is not entirely clear that Pennsylvania’s public policy would prohibit enforcement of the insurance policy to the extent that it provides Sandusky with defense costs.” Accordingly, Judge Kane concluded that she must “defer issuance of a ruling on the public policy question as it relates to [the insurer’s] obligation to provide for Sandusky’s legal costs to defend the civil action and criminal prosecution.”

 

Discussion

The alleged wrongful acts of which Sandusky is accused are highly repugnant. At first  I didn’t even want to write about Judge Kane’s opinion in the insurance coverage action. However as offensive and shocking as the allegations against Sandusky are, they remain at this point only that – allegations.

 

It is very frequently the case that individuals insured under management liability policies are accused of misconduct that is exceptional or extraordinary. But until the allegations are established, they remain only unproven charges. If mere allegations alone were sufficient to vitiate defense cost protection, the accused individuals would regularly find themselves compelled to defend themselves without the benefit of insurance to fund their defense.

 

At least in recent times, management liability insurance is typically  structured to provide that conduct exclusions do not apply unless the underlying allegations have been proven. It seems to me that this operation of the insurance policy should not change merely because the basis on which the insurer seeks to disclaim coverage is public policy rather than an express policy exclusion.

 

It comes as no surprise that Pennsylvania’s public policy would prohibit insurance for damages caused by the type of egregious and reprehensible conduct of which Sandusky is accused. However, in the absence of any factual determination or record, it would not be appropriate for the public policy principles to prohibit him from obtaining insurance protection for his defense. Insured persons accused of wrongdoing and who maintain their innocence rightfully ought to be able to look to applicable insurance coverage to provide their defense. These principles should apply regardless of how repugnant the misconduct of which the insured is accused.

 

In a ruling that has gained a great deal of attention and scrutiny, Southern District of New York Judge Jed Rakoff rejected the “neither admit nor deny” settlement in the SEC’s enforcement action against Citigroup, a ruling that is now on appeal in the Second Circuit (about which refer here). Among other things, Judge Rakoff’s ruling raises the question of whether or not settlements of SEC enforcement actions should be permitted without some type of admission of guilt or wrongdoing.

 

In a May 29, 2012 Dealbook blog post entitled “Why S.E.C. Settlements Should Hold Senior Executives Liable” (here), two University of Minnesota law professors, Claire Hill and Richard Painter, suggest that in order to increase the effectiveness of SEC enforcement actions, rather than requiring an admission of guilt, “a more effective approach would be to make senior, highly compensated officers of the bank pay some portion of the fine.”

 

The authors suggest that officers making more than $1 million a year “should be personally and collectively liable for paying a significant portion (perhaps 50 percent) of S.E.C. fines levied against the bank.” The authors add that independent directors should supervise negotiations with the S.E.C., and if the case is litigated rather than settled, the officers should be personally responsible for a portion of the bank’s legal fees. Banks should be prohibited from reimbursing the officers for the amounts the officers pay. The authors propose that the officers should be personally liable for fines whether or not the bank admits to liability.

 

In support of this proposal, the professors point out that under current practice, fines effectively are paid by shareholders, who “neither caused the behavior that led to the fine nor were they responsible for preventing it.” The authors also point out that many of the investment banks formerly did business in partnership form, which ensured that when there was a loss, the most highly paid partners suffered the most.

 

I have a number of concerns about the authors’ proposal. In commenting on their proposal, I do not in any way mean to minimize their observation about how the costs settlements are now imposed on shareholders. I agree that there are very serious questions that need to be addressed. However, I disagree that forcing corporate officers to bear personal liability for corporate fines is an appropriate solution. I want to stress at the outset that in offering my views here, I mean no disrespect to the Professors or their article. I mean only to present a contrasting point of view.

 

First, it appears that, though not expressly stated in their article, the authors proposal is directed specifically and exclusively toward companies in the financial sector. Indeed, it appears that in proposing their solution the authors were thinking only about investment banks, perhaps because they made their proposal in the context of the Citigroup settlement controversy. However, the authors do not provide any principle whereby their proposed solution would (or could) be limited just to the investment banking sector. If this proposal is fair for officers of investment banks, then it ought to be fair if applied to any publicly traded company. And if it would not be fair for other companies, it would not be fair for investment banks – it not enough simply to say it is fair because investment bankers make a lot of money.

 

Second, it is also not expressly stated in their article, but it appears to me that the authors intended that the officers should be held personally liable for corporate fines regardless of whether the officers had any involvement in or even awareness of the alleged wrongdoing – and indeed whether or not the bank itself has admitted to any wrongdoing.   In other words, the authors seem to be suggesting that the officers should have to pay a portion of the fines not because of any actual or even alleged culpability, but simply as a matter of their status. Indeed, the officers have to be prepared to pay out of their own pockets if they want to fight the charges even if they themselves are not charged with any wrongdoing.

 

As I have stated before on this blog (most recently here), I think there is an increasing and unfortunate tendency to try to impose personal liability in corporate officers without regard to culpability. Among other things, an increasing and indiscriminate use of the “responsible corporate officer” doctrine has been used to impose personal liability on corporate officers for fines involving healthcare and environmental violations. Statutory provisions such as the Sarbanes Oxley compensation clawback provisions similarly have been used to impose liability on corporate officials whose companies restate prior financials, regardless of whether the officers themselves had any actual or even alleged involvement in the circumstances that required the restatement. 

 

I am concerned that a generalized presumption that corporate executives as a group or class are somehow blameworthy and deserving of liability is behind this trend toward imposing liability on corporate executives without actual culpability. There is an unfortunate trend in our society to assume that when something has gone wrong that somebody has to be punished. This general proclivity to look for someone to blame is exacerbated by a general willingness to demonize corporate “fat cats,” which in turn leads some to conclude that corporate executives deserve liability because of their position, without regard of whether they actually did anything culpable.

 

The authors’ proposal to impose personal liability on investment bankers simply because of their pay grade embodies all of these concerns. It overlooks any notion that liability in our legal system ought to be premised on culpability. Moreover, there seems to be a suggestion that because investment bankers are highly compensated, liability can fairly be imposed on them even if it might not be fairly imposed on comparable officials at other types of firms or under other similar circumstances.  

 

It is not an answer or justification for this approach that investment banks formerly did business as partnerships, in which partners bore losses personally. These firms long ago stopped doing business in that form, and chose to do business as corporations precisely because there are advantages to doing business in corporate form. There is absolutely no reason why investment banks doing business in corporate form are any less entitled to the protection of the corporate form than any other type of business doing business as a corporation. There is no reason to overlook the corporate form and impose corporate liability on individual officers simply because officers at the investment bank are highly compensated.

 

Let me come at this from a completely different direction. Many recent law school grads and many commentators have noted that recent law school graduates have had trouble getting legal employment. There are many causes to this problem. One might suggest that the law schools would be quicker to find solutions to this problem if law professors had to give back a portion of their compensation paid to them during the period when the unemployed law students were enrolled at the school. I suspect that law professors would see many problems to this kind of “solution” – it isn’t their fault that the students can’t get employment; their compensation has no relation to the students’ employability; they themselves never promised that the students would get employment, and so on.

 

Many of the same obvious objections to the modest solution about law professor compensation clawbacks are equally applicable to the authors’ proposal about the investment bankers’ personal liability for corporate activity. The point is that the imposition of penalties without culpability is fundamentally unfair, and this fairness is not eliminated simply because the persons on whom the fines would be imposed are highly compensated. When investment bankers are viewed as mere abstractions, as corporate fat cats lighting cigars with hundred dollar bills, it is easy to propose penalties and impositions on them that would not be considered fair in any other context. It is easy to ignore basic constraints such as the notion in our society that there should be no liability without culpability, or that corporations are legally separate from the persons who run them.

 

If there are problems with the way investment bankers are compensated, well, fine, let’s discuss that issue. But even if investment bankers’ compensation needs to be addressed, that is no reason to deprive them of the same protections of fair play that to which everyone else is entitled.

 

I appreciate that many believe corporate executives need to be held more accountable. Nevertheless, I am concerned that as a result of the increased tendency to try to impose liability on corporate executives without culpability, there is a contrary danger that corporate executives could be held liable too frequently, or at least in instances when they have done nothing themselves to deserve it. Scapegoating any individual – even a highly paid investment banker – for circumstances in which they were not involved and of which they were not even aware is inconsistent with some of the most basic assumptions of a well-ordered society governed by law.

 

Lady Justice carries a sword. But she also carries scales that are evenly balanced. And she is blindfolded. It should not matter who stands before the law. .

 

Tiananmen Square Remembered: Yesterday, June 4, 2012 was the 23rd anniversary of the date in 1989 when the Chinese authorities violently cleared Tiananmen Square after six weeks of protests and demonstrations there. In recognition of the anniversary, the Atlantic Magazine online published a gallery of photos from Tiananmen Square, then and now. The pictures, which are fascinating and moving, can be found here. 

 

Given the violence of the suppression, it is hardly surprising that no one in China wants to talk about those events now. But it is remarkable observing in the photos how many people were involved in the demonstrations. A lot of the people who (understandably) won’t talk about it now were marching in the streets then.

 

I know from my April visit to Beijing that the Square itself is now full of tourists and aspiring capitalists trying to sell genuine Rolex watches to foreigners, and that the street between the Square and the Forbidden City is now full of tour busses, SUVs, and taxi cabs. And also government officials speeding past in Audi A6s with tinted windows.

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About the Title of This Post: The title of this post is a reference to a line from Voltaire’s Candide. At that time, England had notoriously executed Admiral John Byng for “failing to do his utmost” during England’s naval defeat at the Battle of Minorca, at the outset of the Seven Year’s War. In Voltaire’s book, the main character, Candide, witnesses the execution in Plymouth, and is told that "in this country, it is good to kill an admiral from time to time, in order to encourage the others." (Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres).