One of the more interesting developments in the securities litigation arena over the past several years has been the continuing influx of pandemic-related securities class action lawsuit filings. Here we are now approaching what will be the sixth year since the initial outbreak of COVID-19 in the U.S. and yet the pandemic-related suits are continuing to come in. In the latest example, last week a shareholder plaintiff filed a securities class action lawsuit against the toy company Hasbro, alleging that the company misled investors by claiming that the level of inventory it built up in response to pandemic lockdown-related consumer demand was appropriate, only to later announce it would have to incur substantial inventory reduction costs. A copy of the November 13, 2024, complaint against Hasbro can be found here.

Continue Reading Toy Company Hit with Pandemic-Related Securities Suit

This past week, The D&O Diary was on assignment in Chicago to attend the 2024 PLUS Conference. Hard to believe, but this year’s version was the 37th installment in the annual series. It was as well-attended and well-organized as always. The event was held at the Sheraton Grand Hotel Riverwalk, right on the Chicago River. Chicago is one of my favorite places to visit and it was great to be back again. It was also great to see so many old friends and to make some new friends as well, as reflected in the pictures below.

Continue Reading Chicago PLUS Conference 2024

It is now well-recognized, as Bloomberg columnist Matt Levine has famously said, that “Everything Everywhere is securities fraud.” Just the same, it does come as a surprise sometimes to see the things that make their way into securities class action lawsuit complaints. In the latest example of this phenomenon at work, a plaintiff shareholder has filed a securities class action lawsuit against the restaurant company Chipotle Mexican Grill, as a result of a social media campaign raising questions about the chain’s meal portions. To combat the social media chatter, the company concentrated on providing generous portions, which cut into the company’s margins – and drew a securities lawsuit. A copy of the November 11, 2024, complaint in the suit can be found here.

Continue Reading Social Media Squabble Over Restaurant Portions Begets Securities Suit

When it became public a few weeks ago that the SEC had disbanded its Climate and ESG Task Force, the SEC emphasized that it was not taking its eye off of ESG-related issues. In the latest example of the SEC’s continuing ESG-related monitoring, late last week the ESG announced that it had settled charges against investment adviser Invesco Advisers. The agency alleged that the company had made misleading statements about the percentage of company-wide assets under management that integrated ESG factors in investment decisions. In settling the charges, the company agreed to pay a $17.5 million civil penalty. The SEC’s November 8, 2024, press release about the charges and the settlement can be found here. The SEC’s November 8, 2024, cease-and-desist order in the matter can be found here.

Continue Reading SEC Charges Investment Adviser With ESG-Related Misleading Statements

Some of you may have heard: there was a Presidential election in the United States last Tuesday, as a result of which there will be a change in administration next January. This upcoming change almost certainly means a categorical shift in the regulatory environment in Washington, including in particular at the SEC. Many of the SEC’s regulatory initiatives under the Biden administration may be rolled back. In particular, the new administration likely will pull the plug on the SEC’s pending climate change disclosure guidelines. These likely developments at the federal level may mean that, as Cydney Posner noted in a November 7, 2024, post on the Cooley law firm’s PubCo blog (here), State level actions “may, in many ways, take on much larger significance.”

For that reason, it is worth taking a closer look at the ruling last week in the federal court lawsuit in which various business groups led by the U.S. Chamber of Commerce are challenging the California statutes requiring companies “doing business” in the state to make certain climate change-related disclosures. As discussed below, the Court has denied the plaintiffs’ pre-discovery motion for summary judgment on First Amendment grounds. The court’s interesting ruling may provide some indication of the future direction of the litigation, as well as on the likelihood that the California statutes will eventually compel companies to make the mandated disclosures. A copy of the Central District of California’s November 5, 2024, order can be found here.

Continue Reading What Now for Climate Change Disclosure Requirements?

Short sellers have a complicated relationship to securities class action litigation, as several prior posts on this site have noted (most recently here). Among the more unusual roles short sellers can play in a securities suit is to serve as lead plaintiff. One recent high-profile case where a short seller acted as lead plaintiff is the suit filed against Overstock, its founder and former CEO, Patrick Byrne, and other executives. The short seller alleged, with some plausibility, that Overstock and Byrne had attempted to mount a “short squeeze” targeted at the short sellers. The district court granted the defendants’ motion to dismiss, and in an interesting October 15, 2024, opinion, the Tenth Circuit affirmed the district court. The appellate court’s opinion has several interesting features, as discussed below.

Continue Reading Tenth Circuit Affirms Dismissal of Short Seller’s Securities Suit Against Overstock

In the wake of the SPAC frenzy, which peaked in 2021, investors have filed a significant number of SPAC-related lawsuits, including not only securities class action lawsuits, but also including Delaware direct action breach of fiduciary duty suits. The Delaware actions have so far in at least some cases proven to be successful. More recently, however, the Delaware courts have projected impatience and even fatigue with these kinds of suits, and in at least one recent case, granted the defendants’ motion to dismiss. However, in a more recent case, the Delaware Chancery Court, although noting that the plaintiff’s allegations are “not strong” and “close to the line between an adequate and an inadequate claim,” denied the defendants’ dismissal motion. There are several interesting features to court’s opinion, as discussed below. The Delaware Chancery Court’s October 18, 2024, opinion can be found here.

Continue Reading Del. Court Denies Dismissal Motion in SPAC-Related Action

A Dutch court has entered a significant ruling in one of the long-running efforts by Petrobras investors to recover damages following the company’s bribery scandal. The Petrobras U.S. securities class action lawsuit settled in 2018 for $3 billion. Investors who purchased their Petrobras shares outside the U.S. were not part of that settlement, and these investors have pursued claims elsewhere, including in the Netherlands, where an action filed by a Foundation acting on behalf of a group of investors is pending. In a ruling last week, the District Court of Rotterdam rejected the Foundation’s claims under Brazilian and Argentinian law. The Court also ruled on bondholders’ claims under Luxembourg and Dutch law, as discussed below. The court’s judgment is subject to appeal. Petrobras’s October 30, 2024, filing with the SEC on Form 6-K describing the court’s judgment can be found here.

Continue Reading Court Rules on Petrobras Investors’ Claims in Dutch Collective Action

Long-time readers know that the significant amount of SPAC activity in past years led to a surge in SPAC-related litigation. Some of this litigation has taken the form of traditional securities class action lawsuits. However, among the more noteworthy developments in the rise of SPAC-related litigation has been the emergence of a separate type of suit, the Delaware direct action breach of fiduciary class action lawsuit, sometimes referred to a MultiPlan claim in reference to the first suit of the type to be filed. As detailed below, these kinds of lawsuits have gone through a relatively swift evolution. Many of the these kinds of cases remain pending, have not yet reached the settlement stage. However, the GeneDX lawsuit, which is one of these kinds of cases, recently settled for $21 million, subject to court approval. There are a number of interesting aspects of this settlement, as discussed below. The parties settlement stipulation in the case can be found here.

Continue Reading Delaware SPAC-Related Direct Action Breach of Fiduciary Duty Suit Settles for $21 Million

Many private company D&O insurance policies have a so-called antitrust exclusions that precludes coverage for claims alleging violations of the antitrust laws. However, these exclusions are written broadly and often seek to preclude a wide range of kinds of claims, beyond just claims alleging violations of the antitrust laws. A recent case from the Eastern District of California provides an illustration of the antitrust exclusion’s coverage preclusive reach. The court, applying California law, held that the applicable policy’s antitrust exclusion barred coverage for the unjust enrichment claim and consumer protection law violation claim filed as part of a larger antitrust lawsuit. The court’s reasoning in concluding that the claims were precluded is interesting and provides some insight into the operation of the exclusion and its potential application to various kinds of claims.

The Court’s August 22, 2024, opinion in the case can be found here. The Wiley law firm’s October 14, 2024, post in its Executive Summary blog can be found here.

Background

Foster Poultry Farms is a chicken producer. It is one of several U.S. chicken producers named as defendants in the consolidated Broiler Chicken Antitrust Lawsuits. The plaintiffs in the antitrust lawsuit alleged four causes of action: violation of the Section 1 of the Sherman Act; violations of various state antitrust laws; violation of several state consumer protection and unfair competition laws; and unjust enrichment “by the receipt of unlawfully inflated prices and unlawful profits.”

At the relevant time, Foster maintained a program of D&O insurance consisting of a layer of primary insurance and a layer of excess follow form insurance. Foster submitted the complaints in the antitrust litigation to its insurers. Both the primary insurer and the excess insurer denied coverage for the claim im reliance on the antitrust exclusion. Foster and the primary insurer later worked out a compromise in which the primary insurer agreed to pay a percentage of Foster’s defense fees, up to an agreed-upon cap (the cap was less than the limits of liability of the primary policy).

The excess insurer filed an action seeking a judicial declaration that the antitrust exclusion precluded coverage for the entire antitrust litigation. In the coverage lawsuit, Foster did not dispute that the exclusion precluded coverage for the Sherman Act and state antitrust claims. Foster contended, however, that the antitrust exclusion did not apply to the separate causes of action in the underlying lawsuit for unjust enrichment and violations of the state consumer protection laws, and the separate allegations in the underlying lawsuit of fraud and false advertising. The parties filed cross-motions for summary judgment. The motions were ruled upon by Southern District of Texas Judge Lee Rosenthal, sitting by designation in the Eastern District of California.

Applicable Policy Language

The antitrust exclusion in the primary policy, to which the excess carrier followed form, excludes coverage for “any actual or alleged violation of any law, whether statutory, regulatory, or common law, respecting any of the following activities: antitrust, business competition, unfair trade practices or tortious interference in another’s business or contractual relationships.”

The Court’s Opinion

In an August 22, 2024, opinion, Judge Rosenthal, applying California law, held that the antitrust exclusion applied to preclude coverage for all of the claims in the underlying litigation, including the unjust enrichment claim and the state consumer protection law violations claim, as well as the allegations of fraud and false advertising.

Judge Rosenthal said that Foster’s arguments that the antitrust exclusion did not apply to the other claims “unpersuasive.” He said that the unjust enrichment claim is “derivative of, and entirely dependent upon, the antitrust claims and underlying price-fixing allegations,” noting that in support of the unjust enrichment claim the plaintiff had alleged that the defendants were “unjustly enriched by the receipt of unlawfully inflated prices and unlawful profits.” The allegations in the unjust enrichment claims, he said, “are identical to the allegations underlying the excluded antitrust causes of action.”

The state consumer protection law violation cause of action is, Judge Rosenthal said, “in this respect, no different from the unjust enrichment claims.” The allegations in the consumer protection claims “are the same as the allegations underlying the claims for violations of the Sherman Act and the state antitrust statutes.”

Judge Rosenthal also said that the same analysis applies to the separate allegations in the underlying litigation for fraud and false advertising. These claims are “exclusively allegations that the defendants omitted, concealed, and misrepresented material facts with the intent of hiding from the public their alleged conspiracy to fix the price of broiler chickens.”

Judge Rosenthal acknowledged that the antitrust exclusion “could have been drafted to apply more clearly to the unjust enrichment, consumer protection, and deceptive trade practices claims.” But he found no ambiguity that the antitrust exclusion applies to causes of action that “while not designated as ‘antitrust causes of action,’ are based entirely on allegations of anticompetitive conduct.” He added that this application of the exclusion was consistent with the principle of California law that “allegations in the complaint, not the labels given to the causes of action, determine the duty to defend.”

Discussion

Long-time readers know that in prior posts, I have sounded the alarm bell about the antitrust exclusion (as, for example, here). Antitrust exclusions are found in many, if not most, private company D&O insurance policies, as well as many kinds of professional liability insurance policies. But though these exclusions are referred to in shorthand terms as “antitrust exclusions,” they usually sweep much more broadly, encompassing a broad variety of other kinds of claims as well – as was the case with the exclusion in this policy, which not only precludes coverage for antitrust claims, but also for other kinds of claims, including “business competition, unfair trade practices or tortious interference with another’s business or contractual relationship.”

Many of these enumerated additional kinds of claims are not at all what most people think of when the hear the word “antitrust,” nor are they what most people would think of as being precluded from coverage by an exclusion denominated as an “antitrust exclusion.”

The court in this coverage lawsuit found that the antitrust exclusion swept broadly to preclude coverage not just for claims denominated as antitrust claims, but also to other kinds of claims, even though these other causes of action were not expressly to be found among the “other” claims specified in the antitrust exclusion. In essence, Judge Rosenthal said what matters with respect to the preclusive reach of the antitrust exclusion is not the labels causes of action are given, but rather the nature of the underlying allegations. Because all of the claims, including even the claims not denominated as antitrust claims, were based “entirely on allegations of anticompetitive conduct,” all of the claims, including the ones not expressly alleging violations of the antitrust laws, are precluded from coverage by the antitrust exclusion.

The fact that the antitrust exclusion was held here to preclude all of the causes of action, and not just the claims denominated as antitrust claims, shows how the antitrust exclusion can operate as a kind of stealth coverage bar. It is particularly noteworthy here that the exclusion was held to bar coverage even as to causes of action that, as denominated, were not among the exclusions list of “other” claims that for which the exclusion bars coverage.

The reach of the antitrust exclusion, and its potential applicability to many kinds of claims not denominated as antitrust claims, matters because many private company D&O insurance claims involve causes of action for deceptive or trade practices, of violations of state consumer or business protection laws. The antitrust exclusion can come into play in a wide variety of kinds of claims, much more frequently that is often understood.

As it has developed over the years, at least some carriers will remove the antitrust exclusion upon request. Other carriers will upon request modify the exclusion to narrow its scope, or at least provide antitrust coverage subject to a sublimit or coinsurance. It may be that in many insurance placement transactions, there is no alternative for a particular insurance buyer than to get insurance with a full antitrust exclusion. Many buyers will want to seek and prefer other alternatives.