KT Class Action Blog

Archive for February 2018

Posted on Thursday, February 22 2018 at 2:23 pm by -

New York Trial Court Does Its Best To Shore Up Standard for Approving Disclosure-Only Class Action Settlements

by Annica Bianco

Takeaway: Strike suits against corporate mergers are often resolved in worthless “disclosure-only” settlements. Derided as a “peppercorn and a fee,” a disclosure-only settlement provides no monetary relief to the stockholders. Instead, it results in the payment of a significant fee to the plaintiff’s attorney, coupled with “supplemental disclosures” about the transaction to address alleged deficiencies in the proxy. The new disclosures – touted in the settlement as beneficial to shareholders – are typically worthless. Led by the Delaware Court of Chancery, most notably in In re Trulia, Inc. Stockholder Lit., 129 A.3d 884 (Del. Ch. 2016) (Bouchard, C.) (“Trulia”), a number of courts have heightened the showing required for approval of such settlements, resulting in a decline in meritless merger litigation. However, New York’s First Department has not followed suit, endorsing in a recent decision (Gordon) a more lenient settlement approval standard, a decision criticized by a leading commentator (John C. Coffee, Jr.) as constituting a “legal rubber stamp.” See Gordon v. Verizon Commc’ns, Inc., 148 A.D.3d 146, 46 N.Y.S.3d 557 (1st Dept. 2017). But a recent New York trial court decision, City Trading, shows that even in jurisdictions such as New York that have not expressly adopted Delaware’s Trulia standard, trial judges are still on the lookout and will not approve disclosure-only settlements perceived as worthless to the shareholders of a corporation. City Trading Fund v. Nye, No. 651668/2014, 2018 WL 792283 (N.Y. Sup. Ct. Feb. 8, 2018).

In City Trading, the trial judge (Judge Shirley Werner Kornreich of the New York County Supreme Court) evaluated a proposed disclosure-only settlement arising out of a stockholder suit that sought to enjoin a merger on the basis of inadequate disclosures. The trial court was required to apply New York’s governing Gordon standard. Her opinion strongly suggests, however, that she did so under protest.

The Gordon decision, which was issued after Trulia and acknowledged the “increasingly negative view” of disclosure-only settlements, declined to follow Trulia’s lead. Gordon, 148 A.D.3d at 154-155. To the contrary, the Gordon court observed that it was premature to conclude that Trulia and like decisions signaled the extinction of disclosure-only settlements. Id.

The Gordon court went on to review the then-current New York standard for approving non-monetary settlements, adding two additional factors to address “the need to curtail excesses” in M&A litigation. Id. at 158. These two additional factors required that a settlement be in “the best interests of all of the members of the putative class” and also “in the best interest of the corporation.” Id. The Gordon court concluded that, as supplemented, the New York standard was “comparable” to Trulia and “assure[d] an appropriately balanced standard of review.” Id. at 162. But there was quick disagreement with the Gordon court’s conclusion that the two standards were comparable. Gordon was widely viewed as a more lenient standard and a meaningful departure from Trulia. See City Trading, 2018 WL 792283, at *1 n.4 (discussing John Coffee’s article criticizing Gordon, entitled, The Race to the Bottom: Is the Last Stop New York?).

In City Trading, the trial court in which Gordon originated, albeit before a different judge, and which initially denied approval of Gordon’s disclosure-only settlement before being reversed by the First Department in Gordon, had a chance to respond. And respond it did.

City Trading discusses the Trulia and Gordon standards at length. The decision regales the former as “a thorough and compelling decision” that “eloquently explained” the dynamic of so-called strike suits. Id. at *5, n.8. In contrast, the court dedicates a nearly page-long footnote to criticism of Gordon. Id. at *1, n.4. And although the court issued its decision under the cloak of Gordon, it employed language plucked directly from Trulia to do so. The court summarized Trulia’s “plainly material” standard as requiring that the value of the proposed disclosures “should not be a close call.” Id. at *5. It then used this same language to characterize the case before it: “This case is not a close call.” Id. at *10. The court distinguished City Trading from two post-Gordon decisions in which New York courts granted final approval of disclosure-only settlements, noting that neither of those “was a strike suit seeking the extraction of a merger tax.” Id. at *14. It went on to dismiss the supplemental disclosures proposed in that case as “utterly worthless” before dutifully, if briefly, applying the facts to the Gordon factors. Id. at *17. With no room left for suspense, the court rejected the proposed disclosure-only settlement. Id.

In addition to its thorough and approving summary of Trulia, City Trading is also noteworthy because the court effectively shored up the New York standard, a task it was uniquely situated to undertake, given the case’s procedural history. Id. at *2. The parties in City Trading had already appeared once before the appellate court following the trial court’s denial of preliminary approval of a disclosure-only settlement. Id. In that first appeal, which preceded Gordon, the appellate court reversed the trial court’s denial as premature on a motion for preliminary approval (the “Preliminary Decision”). Id. It found that the proposed disclosures were “arguably beneficial” and directed the trial court to hold a fairness hearing to determine whether final approval of the settlement should be granted. Id.

The City Trading court spent several pages assessing the intended meaning of the Gordon standard, which requires that proposed disclosures provide “some benefit to the shareholders.” Id. at *7-8. It specifically considered and rejected the conclusion that Gordon only required that proposed disclosures be “arguably beneficial,” language the appellate court had used in its Preliminary Decision in City Trading. Id. A finding that proposed disclosures were only “arguably beneficial” would not pass muster under Gordon. Id. Instead, the City Trading court concluded that a showing of “some benefit” required that “the court must be able to plausibly conclude that the supplemental disclosures would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger.” Id.

Through its analysis, City Trading arguably elevated the standard set out in Gordon. Moving forward, New York courts will have to contend with the distinction between disclosures that are “arguably beneficial,” which would fail the Gordon test under City Trading’s analysis, and those which would plausibly in fact provide information that assists a stockholder in assessing and approving a merger. The court’s tough analysis also reveals the limits of Gordon’s plaintiff-friendly leniency. The decision serves as a reminder to prospective litigants that despite disparate standards for approving disclosure-only settlements, those standards are subject to an inherently flexible materiality analysis that will likely be made against the backdrop of Trulia. And, parties should no longer presume that they will be able to settle such claims for a “peppercorn and a fee.” Id. at *1 (quoting Solomon v. Path Commc’ns Corp., 1995 WL 250374, at *4 (Del. Ch. 1995)).

Posted on Tuesday, February 20 2018 at 9:32 am by -

Five Years After Justice Alito’s Oxford Health Concurrence, Have The Second Circuit and Southern District of New York Signaled The End of Opt-Out Class Arbitrations?

by Michael J. Breslin

In 2013, Justice Alito’s concurrence in Oxford Health raised serious questions whether absent class members could be bound by an arbitrator’s incorrect determination that an arbitration agreement authorized class arbitration. Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 573 (2013) (Alito, J., concurring). Even if the parties to the arbitration would be bound by the arbitrator’s ruling (because they voluntarily had submitted the issue to the arbitrator), “absent class members of the plaintiff class never conceded that the contract authorizes the arbitrator to decide whether to conduct class arbitration. It doesn’t.” Id. at 574. Because the arbitration agreement did not authorize class arbitration explicitly (as required under Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662, 685 (2010)), “it is far from clear that [absent class members] will be bound by the arbitrator’s ultimate resolution of this dispute.” Id. And because every arbitration agreement requires consent of the parties, “at least where absent class members have not been required to opt in, it is difficult to see how an arbitrator’s decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide on a classwide basis which arbitration procedures are to be used.” Id. at 574-75 (emphasis in original).

Last month, Judge Rakoff of the Southern District of New York held, consistent with Justice Alito’s concurrence, that an arbitrator lacks the authority to certify an “opt-out” class where the arbitration agreements did not explicitly authorize class arbitration. Jock v. Sterling Jewelers Inc., 08 Civ. 2875, 2018 WL 418571 (S.D.N.Y. Jan. 15, 2018), appeal filed, No. 18-153 (2d Cir. Jan. 18, 2018). This potentially watershed ruling issued after the Second Circuit’s reversal last year of the district court’s 2015 ruling confirming in part the arbitrator’s class certification award. See Jock v. Sterling Jewelers, Inc., 703 Fed. Appx. 15 (2d Cir. 2017). Together, these decisions may signal the end of “opt out” class arbitrations where the underlying arbitration agreements do not include an explicit authorization for class arbitration (as required under Stolt-Neilsen).

The saga of Jock v. Sterling Jewelers began in 2008, when the plaintiffs (current and former female employees of Sterling) filed a class arbitration alleging that Sterling discriminated against them in pay and promotion. In 2009, the arbitrator ruled that the claimants’ arbitration agreements authorized class arbitration, and Sterling moved to vacate that ruling. During the appeal of the district court’s denial of the motion to vacate, the Supreme Court decided Stolt-Nielsen, which requires an explicit contractual basis for class arbitration. This prompted the district court to request a remand of the pending appeal, so that it could reconsider its prior denial of the motion to vacate. Jock v. Sterling Jewelers Inc., 725 F. Supp. 2d 444, 449 (S.D.N.Y. 2010). The Second Circuit remanded, and the district court vacated the arbitrator’s ruling.

In the ensuing appeal, the Second Circuit reversed, holding the parties voluntarily had submitted to the arbitrator the question of whether their agreement authorized class proceedings. Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011). Even if the arbitrator wrongly had determined that the arbitration agreement authorized class arbitration, that incorrect ruling did not authorize vacatur, which could only be sustained on the ground that the arbitrator had exceeded her authority (and not merely because the award was legally incorrect). Id. at 115.

In 2015, the arbitrator certified a class of approximately 70,000 people. Sterling again moved to vacate, arguing the arbitrator exceeded her authority by purporting to bind absent class members (i.e., class members other than the plaintiffs and those who had affirmatively opted into the arbitration proceeding). The district court denied Sterling’s motion, concluding that the “law of the case” effect of the Second Circuit’s 2011 ruling foreclosed the argument that the arbitrator had exceeded her power by certifying the class. Jock v. Sterling Jewelers Inc., 143 F. Supp. 3d 127 (S.D.N.Y. 2015).

The Second Circuit reversed and explained the limitations of its prior 2011 decision. In the earlier appeal, the Court of Appeals had held only that the parties to the arbitration had agreed the arbitrator could determine the availability of class arbitration. 703 Fed. Appx. at 17. This ruling did not determine the “pertinent” question of “whether an arbitrator, who may decide the question whether an arbitration agreement provides for class procedures because the parties ‘squarely presented’ it for decision, may thereafter purport to bind non-parties to class procedures on this basis.” Id. at 28 (emphasis in original).

On remand, the district court held the arbitrator could not bind absent class members to class procedures under an arbitration agreement that did not explicitly authorize class arbitration, even if the named parties had submitted the class issue to the arbitrator. 2018 WL 418571, at *3. The district court explained that a contrary ruling “would open the door to collateral lawsuits by absent class members.” Id. “That is because, given that the Arbitrator was wrong as a matter of law about whether the [arbitration] agreement permits opt-out classes, it is hard to see how courts could bind individuals who did not opt out, but who have not otherwise opted in, to her decisions.” Id. Thus, the district court concluded “that the Arbitrator here had no authority to decide whether the [arbitration] agreement permitted class action procedures for anyone other than the named parties who chose to present her with that question and those other individuals who chose to opt in to the proceedings before her.” Id. at *4.

Three days after the district court’s ruling (and despite the clear signals in the Second Circuit’s 2017 decision), the class claimants again appealed. See No. 18-153 (2d Cir. Jan. 18, 2018). Assuming the Court of Appeals does not have a dramatic change of heart, the Jock decisions could mark the end of “opt-out” class arbitrations in any cases where the arbitration agreement does not include an explicit agreement to class arbitration (again, as required under Stolt-Neilsen).

Consistent with the teachings of the Oxford Health majority, any defendant presented with a class arbitration demand should insist upon a judicial determination of the class arbitration question at the outset, before the arbitrator has addressed the issue. See 569 U.S. at 569 n.2 (explaining availability of class arbitration constitutes a “question of arbitrability” presumptively for the court, rather than the arbitrator, to decide). But even where a defendant must proceed under an incorrect class arbitration ruling, the Jock rulings authorize a challenge to the authority of the arbitrator over absent class members who have not agreed to the arbitrator’s determination of the class arbitration issue. Ultimately, these decisions could signal the end of “opt-out” class arbitrations in all but the most unusual of cases (i.e., where the arbitration agreement explicitly authorizes class arbitration in accordance with Stolt-Neilsen).

Posted on Thursday, February 8 2018 at 4:09 pm by -

Fourth Circuit Reaffirms Pre-Dart Cherokee Ruling that Counter-Defendant Cannot Remove Class Action Counterclaims Under CAFA

By Joe Reynolds

In Jackson v. Home Depot U.S.A., Inc., 880 F.3d 165 (4th Cir. Jan. 22, 2018), the Fourth Circuit held a counter-defendant cannot invoke federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”). The Court reasoned that both CAFA and the general removal statute, 28 U.S.C. § 1441 expressly provide for removal by a “defendant”—not a counter-defendant. The Seventh and Ninth Circuit have reached the same result, Westwood Apex v. Contreras, 644 F.3d 799 (9th Cir. 2011), and Tri-State Water Treatment, Inc. v. Bauer, 845 F.3d 350 (7th Cir. 2017). But the Fourth Circuit’s careful attention to the procedural posture of the case suggests a different timeline might have produced a different result.

In Jackson, Citibank filed a debt collection action against George Jackson in North Carolina state court, based on Jackson’s failure to pay for a water treatment system purchased using a Citibank-issued credit card. 880 F.3d at 167. Jackson responded by filing a counterclaim against Citibank and third-party class action claims against Home Depot and Carolina Water Systems (“CWS”), claiming the latter two entities misled customers about their water treatment systems. Following Citibank’s voluntary dismissal of its original claims against Jackson, Home Depot removed the action to federal court, invoking federal jurisdiction under CAFA. And after removal, Home Depot moved to realign the parties such that Jackson would be the plaintiff and Home Depot, CWS, and Citibank would be the defendants. Jackson moved to remand and then amended his third-party complaint to remove any reference to Citibank. Id.

The general removal statute contemplates that “the defendant” or “the defendants” may remove a case to federal court, providing in pertinent part: “[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.” 28 U.S.C. § 1441 (emphasis added). CAFA incorporates this statute, providing that a class action filed in state court may be removed “in accordance with section 1446 [the procedure for removal of civil actions under § 1441]… without regard to whether any defendant is a citizen of the State in which the action is brought, except that such action may be removed by any defendant without the consent of all defendants.” 28 U.S.C. § 1453(b) (emphasis added).

Apart from this statutory language, the Supreme Court held long ago that a plaintiff cannot remove a counterclaim brought against it. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941). In doing so, the Supreme Court held that the predecessor to the current removal statue, which used similar language, should be strictly construed. Id. at 108. Congress enacted CAFA, on the other hand, “to facilitate adjudication of certain class actions in federal court.” Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547, 554 (2014). As such, “CAFA’s provisions should be read broadly, with a strong preference that interstate class actions should be heard in a federal court if properly removed by any defendant.” Id. (quoting S.Rep. No. 109–14, p. 43 (2005)).

In advocating for the application of CAFA, Home Depot first argued the phrase “any defendant” in CAFA should be read to include a counter-defendant, especially in light of the Supreme Court’s recent decision in Dart Cherokee that “no antiremoval presumption attends cases invoking CAFA.” Jackson, 880 F.3d at 170 (quoting Dart Cherokee, 135 S. Ct. at 554). The Fourth Circuit rejected this argument, holding that Congress chose to use the term “defendant,” and absent evidence otherwise, the Court would presume that Congress intended to adopt its well-established meaning. The Court of Appeals also refused to “upend so settled a definition as ‘defendant’ without clear direction from the Supreme Court,” leaving it to the highest court to rule “directly” CAFA effectuated such an expansion. Id. at 171.

Home Depot next argued that it actually constituted the true “defendant” as to the only live action remaining in the case (Jackson’s third-party class action claims against Home Depot and CWS). 880 F.3d at 171. The Fourth Circuit rejected this argument as well, paying “particular attention to the complex timeline of events in this case.” Id. Specifically, the Court of Appeals placed great emphasis on the fact that, at the time Home Depot removed, Citibank remained a counterclaim-defendant, even if Jackson thereafter dropped his claims against Citibank. Id.

Finally, Home Depot challenged the district court’s denial of its motion to re-align the parties. 880 F.3d at 172. The Fourth Circuit likewise gave short shrift to this argument, on the grounds that the purpose of realignment is to prevent “the creation of sham diversity jurisdiction.” Id. According to the Court of Appeals, “[b]ecause no party contends that this case involves an attempt to fraudulently manufacture jurisdiction, we need not delve too deeply into the issue of realignment.” id. at 172-73.

Takeaway: The Jackson decision rejected the argument that Dart Cherokee warranted a change to the existing law holding that an existing counterclaim-defendant could not remove. But the decision’s careful attention to the timeline of the case may leave open a procedural path for removal by a similarly-situated counterclaim-defendant in the future. If, for example, an additional counterclaim-defendant facing class claims can persuade a state court to re-align the parties with the original defendant as plaintiff (which could only happen if, as with Citibank in Jackson, the original plaintiff dismissed its claims against the original defendant), would the state court order granting realignment constitute an “order or other paper” rendering the case removable under 28 U.S.C. § 1446(b)(3)? For that matter, could Home Depot “re-remove” the case if it persuaded the North Carolina state court to re-align the parties following the remand of Jackson? Until these remaining procedural questions have been answered, the final fate of the current rule barring additional counterclaim-defendants from removing remains unresolved.

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