WAMU PSLRA Class Action Defense Cases–South Ferry v. Killinger: Ninth Circuit Reverses District Court Order Denying Motion To Dismiss Securities Fraud Class Action Holding Core-Operations Inference Alone Does Not Satisfy PSLRA

“Core-Operations Inference” Insufficient Alone to Support PSLRA’s Heightened Pleading Requirements for Scienter in Securities Fraud Class Action Ninth Circuit Holds

Plaintiffs filed a putative class action against Washington Mutual and individual officer defendants alleging securities law violations; specifically, the class action complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. South Ferry LP, # 2 v. Killinger, 542 F.3d 776, 779 (9th Cir. 2008). The class action “relate[d] to several related aspects of WAMU’s mortgage lending business.” Id., at 780. The class action focused on two types of risks: the first involved the mortgage servicing rights (MSR) related risk that WAMU would lose revenue “due to the pre-payment of loans that it services”; the second involves a “pipeline risk” that WAMU will “commit to fund a loan at a certain interest rate only to see market interest rates change by the time the loan is finalized.” Id. According to the class action complaint, “the individual defendants made materially false or misleading statements concerning WAMU’s ability to manage MSR-related and pipeline risk during the class period.” Id. Defense attorneys moved to dismiss the class action for failure to meet the heightened pleading requirements under the Private Securities Litigation Reform Act (PSLRA). Id., at 779. The district court granted the motion as to certain defendants, but denied the motion as to others; it found plaintiff met the heightened pleading requirements of the PSLRA “by inferring that the remaining defendants had knowledge of WAMU’s difficulties with their information systems ‘because of the nature of the statements they [Defendants] were making and the nature of these specific alleged operational problems,’” id., at 781 (quoting In re Northpoint Communications Group, Inc. Securities Litig., 184 F.Supp.2d 991, 998 (N.D. Cal. 2001)). In short, the district court believed “that it may be inferred that facts critical to a business’s ‘core operations’ or important transactions are known to key company officers,” id. Defense attorneys filed an interlocutory appeal, and the Ninth Circuit reversed.

The issue on appeal was “whether a scienter theory that infers that facts critical to a business’s ‘core operations’ or an important transaction are known to a company’s key officers satisfies the PSLRA’s heightened pleading standard.” South Ferry, at 783. After reviewing its prior cases on the subject, see id., at 783-84, the Ninth Circuit explained at page 784 that plaintiffs argued that while not adequate in and of itself to satisfy the scienter requirement of the PSLRA, “the core-operations inference can be one relevant part of a complaint that raises a strong inference of scienter.” The Ninth Circuit concluded, “Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants’ actual exposure to information, it will usually fall short of the PSLRA standard.” Id., at 784. Moreover, “a general matter, ‘corporate management’s general awareness of the day-to-day workings of the company’s business does not establish scienter-at least absent some additional allegation of specific information conveyed to management and related to the fraud’ or other allegations supporting scienter.” Id., at 784-85 (citation omitted).

Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized

FLSA Class Action Defense Cases–Hoffman v. Construction Protective Services: Ninth Circuit Affirms Order Barring Plaintiffs From Introducing Evidence Of Damages At Trial Of Labor Law Class Action Due To Plaintiffs’ Failure To Disclose Damages

FLSA Class Action Plaintiffs Required to Disclose Evidence of Computation of Damages under Rule 26(a) and Failure to do so Justified District Court Order Granting Motion In Limine Barring such Damages Evidence at Trial as Sanction under Rule 37 Ninth Circuit Holds Plaintiffs filed a class action against Construction Protective Services alleging violations of the federal Fair Labor Standards Act (FLSA) and of the California Labor Code. Hoffman v. Construction Protective Services, Inc.

Class Action Court Decisions Employment Law Class Actions Uncategorized

UCL Class Action Defense Cases–Hoffman v. Citibank: Ninth Circuit Reverses District Court Order Dismissing Class Action And Compelling Arbitration And Remands For Reanalysis Of Whether Class Action Waiver In Arbitration Agreement Was Enforceable

District Court Order in Unfair Competition Law (UCL) Class Action Dismissing Class Action Complaint and Compelling Arbitration of Plaintiff’s Individual Claims Reversed and Remanded for Further Consideration because District Court’s Analysis of Whether South Dakota Law or California Law Applied was Flawed Ninth Circuit Holds

Plaintiff filed a class action against Citibank in California state court alleging violations of the state’s Unfair Competition Law (UCL); specifically, the class action “alleged that Citibank increased the class members’ interest rates retroactively, without advance notice, resulting in additional lump sum finance charges being improperly imposed.” Hoffman v. Citibank (South Dakota), N.A., 546 F.3d 1078 (9th Cir. 2008) [Slip Opn., at 14492]. Defense attorneys removed the class action to federal court, id. Defense attorneys then moved to dismiss the class action complaint and to compel arbitration of plaintiff’s individual claims. Id., at 14893. The district court concluded that the choice of law provision was enforceable, that South Dakota law governed the agreement, and that under South Dakota law “the class arbitration waiver was not unconscionable and was enforceable.” Id. Accordingly, the district court granted the defense motion, dismissed the class action, and ordered plaintiff to arbitrate her claims “on an individual, non-class basis.” Id. The district court certified its order for immediate appeal, and the Ninth Circuit reversed.

We do not here summarize the history of the plaintiff’s credit card account or the changes to the written credit card agreement, including the addition of a binding arbitration clause. See Hoffman, at 14489-90. We note only that the arbitration agreements including a class-action waiver provision. See id., at 14489-92. In analyzing the district court’s order, the Ninth Circuit noted that it reviews orders compelling arbitration de novo, and that “[a]n arbitration agreement governed by the Federal Arbitration Act is presumed to be valid and enforceable.” Id., at 14493 (citation omitted). It noted further the well-settled rule that “applicable state law controls whether an arbitration agreement is unconscionable and, therefore, unenforceable.” Id. The Ninth Circuit also noted that it “agree[d] with the district court’s conclusion that Citibank’s class arbitration waiver is not procedurally unconscionable under South Dakota law and therefore is enforceable if South Dakota law controls.” Id., at 14495 n.2. However, the Circuit Court held that the trial court erred in determining that South Dakota law applied, because “[f]ederal courts sitting in diversity look to the law of the forum state when making choice of law determinations,” id., at 14494, and the district court failed to examine under California law whether South Dakota or California law applied, id., at 14494-95. Accordingly, it remanded the action to the district court so that it could reexamine the issue. Id., at 14495.

Arbitration Class Action Court Decisions Uncategorized

Class Action Defense Cases—In re Countrywide Financial: Judicial Panel On Multidistrict Litigation (MDL) Grants Defense Motion To Centralize Class Action Litigation But Transfers Class Actions To Southern District of California

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Opposed by Some Class Action Plaintiffs and Two Attorneys General, but Transfers Actions to Southern District of California Seven class actions – three in the Central District of California, two in the Southern District of California, one in Illinois and one in Kentucky – were filed against Countrywide Financial Corp. and affiliated entities; the various class action complaints “aris[e] out of allegations that Countrywide engaged in predatory lending practices by (1) originating and/or servicing residential mortgages in an unlawful, unfair or deceptive fashion, (2) misrepresenting or concealing the terms, risk, or suitability of the loans; and/or (3) placing borrowers in loans that they could not afford.

Class Action Court Decisions Multidistrict Litigation RESPA/TILA Class Actions Uncategorized

Class Action Defense Cases–In re Lucent Death Benefits: Third Circuit Affirms Dismissal Of ERISA Class Action Agreeing That Pension Benefit Was Unvested And Terminable By Lucent

District Court Properly Dismissed ERISA Class Action because Employer’s Termination of Pensioner Death Benefits Underlying Class Action Claims were “an Unvested Welfare Benefit” and ERISA did not Prohibit Termination of the Benefit Third Circuit Holds Plaintiffs, former employees of AT&T and Lucent Technologies, filed a putative class action against various defendants alleging violations of the Employee Retirement Income Security Act (ERISA); specifically, the class action complaint alleged that defendants violated ERISA in terminating a pensioner death benefit.

Class Action Court Decisions Employment Law Class Actions Uncategorized

PSLRA Class Action Defense Cases–In re Ceridian: Eighth Circuit Affirms Dismissal Of Securities Fraud Class Action Holding Allegations Of Class Action Complaint Failed To Establish Scienter Required Under PSLRA

Securities Fraud Class Action Failed to Adequately Allege Scienter under Heightened Pleading Requirements of the Private Securities Litigation Reform Act (PSLRA) so District Court Properly Granted Defense Motion to Dismiss Class Action Complaint Eighth Circuit Holds

After Ceridian Corporation publicly disclosed accounting errors that “necessitated multiple amendments and restatements of its published financial statements,” the SEC opened an investigation into the company’s accounting practices and “numerous class action complaints were filed against Ceridian and three former corporate officers.” In re Ceridian Corp. Securities Litig., 542 F.3d 240, 243 (8th Cir. 2008). The class actions alleged securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Id. The class actions were consolidated, and defense attorneys moved to dismiss the consolidated class action complaint for failure to “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind,” as required by the Private Securities Litigation Reform Act (PSLRA). Id. The district court granted the motion and dismissed the class action. Relying on the Supreme Court’s opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), id., at 244, the Eighth Circuit affirmed.

The Eighth Circuit recited the well-settled heightened pleading requirement, including “the required state of mind,” established by the PSLRA. In re Ceridian, at 244. The Circuit Court noted that scienter may be established through “proof of severe recklessness, that is, ‘highly unreasonable omissions or misrepresentations that … present a danger of misleading buyers or sellers which is either known to the defendant, or is so obvious that the defendant must have been aware of it.’” Id. (citation omitted). The Eighth Circuit observed that under Tellabs, “Not only must a plaintiff state with particularity facts giving rise to an inference of scienter that is strong when viewed in isolation, the inference ‘must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.’” Id. (citation omitted).

Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized

Class Action Defense Cases–Gene & Gene v. BioPay: Fifth Circuit Reverses Class Action Certification Of TCPA Class Action Holding Plaintiff Failed To Establish Class-Wide Proof Existed As To Issue Of Consent To Receive Fax Advertisements

Class Action Alleging Violation of Telephone Consumer Protection Act (TCPA) Improperly Certified as Class Action because Issue of Consent to Receipt of Fax Advertisements not Susceptible to Class-Wide Proof Fifth Circuit Holds

Plaintiff filed a class action against BioPay alleging violations of the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227; The class action complaint alleged that BioPay, through a third-party contractor, sent more than 4000 fax advertisements over a four-year period to potential clients in Louisiana. Gene & Gene LLC v. BioPay LLC, 541 F.3d 318, 322 (5th Cir. 2008). The allegations underlying the class action were that the Bank decided to “implement[] a plan to consolidate the trust management activities of other banks it had acquired” and led class members to believe that “their assets were being managed on an individualized basis, when in fact the assets were being invested in shares of the Nations Funds mutual fund, managed by an investment company substantially owned by the Bank.” Id. The class action alleged further that “higher-yielding and better-managed mutual funds were available in the marketplace,” but the Bank directed customers to Nations Funds for the Bank’s economic benefit and that the Bank accomplished this by sending “misleading letters” to trustees and beneficiaries that, in part, threatened “adverse tax consequences” if they went elsewhere. Id. Defense attorneys moved to dismiss the federal claims on the merits, and moved to dismiss the state-law claims as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). Id. In part, the defense argued that the class action should be dismissed on the grounds of judge shopping because plaintiffs’ counsel “had already filed at least five class actions in various jurisdictions seeking redress for the same alleged injuries.” Id., at 1125. The district court granted the defense motion in its entirety, and denied plaintiffs’ request for leave to file an amended class action complaint. Id., at 1125. Defense attorneys filed an interlocutory appeal under Rule 23(f) arguing (1) the district court lacked subject matter jurisdiction over the class action, and (2) the district court erred in certifying the litigation as a class action. Id., at 321-22. The Fifth Circuit held that the district court had subject matter jurisdiction by virtue of the Class Action Fairness Act of 2005 (CAFA), but reversed the class action certification order.

By way of background, the TCPA prohibits sending “unsolicited advertisements” from one fax machines to another; a fax is deemed to be an “unsolicited advertisement” if it advertises “the commercial availability or quality of any property, goods, or services” and is sent without “prior express invitation or permission.” BioPay , at 322 (citation omitted). In this regard, Federal Communications Commission rules adopted to implement the TCPA provide that advertisements “from persons or entities who have an established business relationship with the recipient can be deemed to be invited or permitted by the recipient.” In re Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, 7 F.C.C.R. 8752, 8779 n.87 (1992). (The TCPA was amended by the Junk Fax Prevention Act of 2005, but this case involves acts that predate those amendments.) The TCPA authorizes private rights of action by recipients of unsolicited fax advertisements “to enjoin future violations of the TCPA and/or to recover the greater of his actual damages or $500 for each such violation,” and “[t]he monetary award may be trebled if the court finds that a violation was willful or knowing.” BioPay, at 322 (citation omitted).

Certification of Class Actions Class Action Court Decisions Uncategorized

PSLRA Home Depot Class Action Defense Cases–Mizzaro v. Home Depot:  Eleventh Circuit Affirms Dismissal Of Securities Fraud Class Action Holding Class Action Complaint Failed To Satisfy PSLRA’s Heightened Pleading Requirements

Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Allege Scienter under Heightened Pleadings Requirements of the PSLRA (Private Securities Litigation Reform Act of 1995) Eleventh Circuit Holds

In May 2006, plaintiff John Mizzaro filed a securities fraud class action against Home Depot and six of its officers and directors; the gravamen of the class action complaint was that “(1) Home Depot obtained excessive rebates from its vendors, and (2) violated the securities laws by not informing investors that the financial results it reported for fiscal years 2001-2004 were inflated by these excessive rebates.”  Mizzaro v. Home Depot, Inc., ___ F.3d ___ (11th Cir. October 8, 2008) [Slip Opn., at 5-6].  According to the class action, the failure to make this disclosure constituted a violation of § 10(b) of the Exchange Act of 1934 and Rule 10b-5. The class action complaint also sought to hold the individual defendants liable based on the allegation that they were “control persons” under § 20(a) of the Exchange Act.  _Id._, at 6.  Four identical class action lawsuits followed; the class actions were consolidated and plaintiff Bucks County Retirement Board was appointed lead plaintiff.  _Id._, at 5.  Defense attorneys moved to dismiss each of the class actions; in response, Bucks County filed a 150-page Amended Class Action Complaint, which became the operative class action complaint in all five cases.  _Id._  Defense attorneys again moved to dismiss the class action complaint arguing, in part, that the allegations “failed to create a ‘strong inference’ that [defendants] acted with the requisite scienter” under the Private Securities Litigation Reform Act of 1995 (PSLRA).  _Id._, at 6. The district court dismissed the class action and denied plaintiff’s motion for leave to further amend its class action complaint; the court held that the amended class action complaint “failed to adequately plead scienter, and that granting leave would be futile because the additional facts presented in the motion for leave would not change t hat result.”  _Id._, at 7.  In a 60-page opinion, the Eleventh Circuit affirmed.

The Circuit Court explained that “[t]o survive a motion to dismiss under the [PSLRA], the factual allegations contained in a private securities fraud class action complaint must raise a ‘strong inference,’ one that is ‘cogent and compelling,’ that the named defendants acted with the requisite scienter.”  Mizzaro, at 4.  This article assumes the reader is familiar with the PSLRA and with the U.S. Supreme Court opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007); the author’s summary of Tellabs may be found here

.  Central to the Eleventh Circuit’s analysis was its determination of an issue not addressed in Tellabs – viz., “how courts should go about evaluating allegations based on statements made by unidentified, confidential witnesses.”  Id., at 14.  As a matter of first impression, the Circuit Court held that a securities fraud complaint need not name a confidential source “so long as the complaint unambiguously provides in a cognizable and detailed way the basis of the whistleblower’s knowledge.”  Id., at 16.  However, in light of legitimate reasons to be “skeptical of confidential sources cited in securities fraud complaints,” id., the Eleventh Circuit held that “the weight to be afforded to allegations based on statements proffered by a confidential source depends on the particularity of the allegations made in each case, and confidentiality is one factor that courts may consider,” id., at 16-17.  The Court clarified its holding at page 17 as follows, “Confidentiality… should not eviscerate the weight given if the complaint otherwise fully describes the foundation or basis of the confidential witness’s knowledge, including the position(s) held, the proximity to the offending conduct, and the relevant time frame.”

Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized

Class Action Defense Cases–Rojas v. Brinderson:  California Federal Court Dismisses Labor Law Class Action For Failure To Allege Facts Necessary To Establish Class Action Claim

Class Action Claim on which Federal Court’s Original Jurisdiction was Based Dismissed for Failure to Plead Necessary Elements, and Supplemental Jurisdiction over Remaining Labor Law Class Action Claims will not be Exercised California Federal Court Holds

Plaintiffs-employees filed a labor law class action against Brinderson Constructors; the class action complaint contained five wage and hour claims, and a claim for alleged violation of California Labor Code section 2810.  Rojas v. Brinderson Constructors Inc., 567 F.Supp.2d 1205, 1207 (C.D. Cal. 2008).  With respect to the wage-and-hour claims, “[a] class action involving these very claims has been pending in California state court since 2004.”  Id.  Defense attorneys moved to dismiss the class action’s Labor Code section 2810 claim, which the district court had previously dismissed with leave to amend.  Id.  The district court granted the defense motion to dismiss the class action’s sixth cause of action, and then declined to exercise supplemental jurisdiction over the class action’s remaining state law claims and, accordingly, dismissed the class action complaint in its entirety.  Id.

Because the district court found Section 2810 to be unambiguous, the court found it unnecessary to consider the statute’s legislative history.  Rojas, at 1208.  The federal court explained at page 1208, “Under Section 2810(a), an entity is liable ‘where the entity knows or should know that the contract or agreement [it entered] does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws.’”  According to the statute, liability is predicated on an entity “entering into a contract with actual or constructive knowledge of the insufficiency of the funds,” thus requiring that the class action allege not only that Brinderson violated labor laws but that the Refinery Defendants “knew or should have known that their contracts with Brinderson did not include sufficient funds for Brinderson to comply with those laws.”  Id., at 1208-09.  The district court found that “Plaintiffs’ scattered allegations and incongruous arguments firmly ground this claim in conjecture.”  Id., at 1209.  Based on the court’s analysis, see id., at 1209-10, it held that “Plaintiffs may not proceed with this claim based on such vacuous allegations,” id., at 1210.

Class Action Court Decisions Employment Law Class Actions Uncategorized

iPhone Class Action Defense Cases–In re Apple & AT&TM: California Federal Court Denies Motions To Dismiss Antitrust Class Action And To Compel Individual Arbitration Of Class Action Claims

Class Action Complaint Adequately Alleged Antitrust and Consumer Protection Law Violations Arising out of Marketing and Sale of iPhones, and Class Action Waiver in AT&T Arbitration Agreement was Unconscionable thereby Requiring Denial of Motion to Dismiss Class Action Claims and Compel Arbitration of Individual Claims, California Federal Court Holds

Plaintiffs filed a class action against Apple and AT&T Mobility (ATTM) alleging violations of federal antitrust laws and other consumer protection statutes arising out of the sale of iPhones; the class action complaint alleged that “consumers were offered iPhones only if they signed a two-year service agreement with AT&T Mobility” and that “unknown to consumers, the companies had agreed to technologically restrict voice and data service in the aftermarket for continued voice and data services, i.e., after the initial two-year service period expired.” In re Apple & AT&TM Antitrust Litig., ___ F.R.D. ___ (N.D. Cal. October 1, 2008) [Slip Opn., at 1]. According to plaintiffs’ class action, ATTM entered into a written agreement with Apple to serve as the exclusive provider of wire and data services to iPhone customers for a period of five years, _i.e._, through 2012. _Id._, at 2. Under this agreement, until 2012 “iPhone purchasers who want voice and data services must sign a two-year service contract with ATTM.” _Id._ The Revised Amended Consolidated Class Action Complaint alleged _inter alia_ violations of Section 2 of the Sherman Antitrust Act and breach of warranty under the Magnuson-Moss Warranty Act, _id._; an itemized list of the 10 claims for relief may be found at page 5 of the opinion. ATTM’s defense attorneys filed a motion to dismiss the class action and compel arbitration pursuant to the Federal Arbitration Act (FAA), and Apple’s defense attorneys filed a motion to dismiss the class action complaint. _Id._, at 5-6. The district court denied the motions.

By way of background, the district court explained at page 1: “In the cellular telephone market, it has become a common practice for an equipment manufacturer and a voice and data supply company to join together to introduce a new cellular telephone to the market. Often, to obtain a particular model of telephone at a given price from a given manufacturer, purchasers must sign a contract with the joined service provider for voice and data services of a stated period of time. This case concerns such an arrangement between Apple, Inc. and AT&T Mobility upon the introduction to the market of the iPhone.” But according to the class action complaint, purchasers were not told that iPhone use would be restricted to the AT&T network even after the two-year service period expired. In re Apple, at 1. The class action further alleged (1) Apple and ATTM share revenue arising from iPhone use, (2) iPhone purchasers must use ATTM as their provider for 5 years “despite initially being required to agree to only a two-year contract,” (3) Apple agreed to enforce ATTM’s exclusivity agreement by “locking” iPhones, (4) Apple controlled all modifications to and software for iPhones, (5) ATTM charges an early termination fee even though it does not subsidize iPhone purchases, (6) Apple and ATTM agreed to take prevent people from unlocking iPhones, and (7) Apple agreed to delay developing a CDMA version of the iPhone. Id., at 3. Finally, the class action alleged that, after it was learned that people had successfully unlocked iPhones, Apple issued an “upgrade” of the iPhone’s operating software that was intended to disable iPhones that had been unlocked or on which users had downloaded software that had not been approved by Apple, and that Apple thereafter denied warranty claims on disabled or damaged iPhones on the ground that customers “had breached their warranty agreements by unlocking their phones or by downloading unapproved TPAs.” Id., at 4. The district court was presented with the question of whether these allegations sufficiently alleged claims for relief for violations of the Sherman Act and Magnuson-Moss Warranty Act. Id. The federal court held that class action allegations survived defendants’ motion to dismiss.

Arbitration Class Action Court Decisions Uncategorized