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From the Pages of The Pomerantz Monitor: Further Evidence of Global Warming: Cracks in Canadian Class Action

As Adam Kurtz reports in the current issue of The Pomerantz Monitor, Canadian courts have recently become far more receptive to shareholder class actions. Now this trend is extending to Canadian antitrust actions. Two Canadian courts – an Ontario trial court and a British Columbia appellate court – recently certified class actions in cases alleging price fixing conspiracies, in violation of antitrust law (called competition law in Canada). Generally, in price fixing cases, the defendant manufacturers (i.e., competitors) are alleged to have agreed amongst themselves on price and/or supply of a product that results in a higher price than would have otherwise been paid in a competitive market. Prior to these two decisions, Canadian courts set a high bar for class certification and were very reluctant to certify class actions. Canadian courts required substantial expert evidence to prove that there was, in fact, a workable methodology to establish both loss and liability on a class-wide basis. Plaintiffs’ expert testimony was rigorously scrutinized and defendants’ expert opinion – that harm could not be shown on a class-wide basis – was commonly adopted. As a result, very few class actions were certified or even brought in Canada, especially compared to the U.S., where courts are known for certifying a wide variety of class actions. 

However, in September 2009, the Ontario Superior Court – in Irving Paper Limited v. Atofina Chemicals – granted certification of a class action alleging a pricing fixing conspiracy by producers of hydrogen peroxide. Although common in the U. S., this was one of the first times that a Canadian court had certified a class of direct and indirect purchasers in an alleged price-fixing conspiracy case. 

Shortly thereafter, in November 2009, the British Columbia Court of Appeal (“BCCA”) – in Pro-Sys Consultants Ltd. v. Infineon Technologies AG (“DRAM”) – overturned a lower court ruling and certified a class action alleging a pricing fixing conspiracy by manufacturers of computer chips, known as Dynamic Random Access Memory, that are in computers and other electronic devices. DRAM is significant because it is the first important appellate decision that deals with class action competition law. 

Together, DRAM and Irving Paper have – for now – lowered the bar for plaintiffs to establish loss and liability on a class-wide basis. In general, in DRAM, the BCCA held that “[t]he provisions of the CPA [Class Proceedings Act] should be considered generously in order to achieve its objectives: judicial economy …; access to justice …; and behavior modification ….” Toward this end, the BCCA further recognized that “[t]he certification hearing does not involve an assessment of the merits of the claim; rather it focuses on the form of the action in order to determine whether the action can appropriately go forward as a class proceeding.  * * * [I]n conformity with the liberal purpose approach to certification, the evidentiary burden in not an onerous one.”    

More specifically, in DRAM, the Court recognized that plaintiff, at this early stage of the litigation, “was required to show only a credible or plausible methodology” to establish loss and liability on a class-wide basis and not the higher standard that the existence of harm must, in fact, be determined. In Irving Paper, the trial court held that plaintiffs need only show that such a plausible methodology "may" exist: “Accordingly, where expert opinion evidence is adduced at the certification stage, … it should not be subjected to the exacting scrutiny required at trial.”   

From the Pages of The Pomerantz Monitor: Partner Stan Grossman Discusses "Secondary Actors" After Stoneridge

Within hours after the Supreme Court's decision in Stoneridge, news reports and law firm advisories were buzzing that the Court had sounded the death knell for "scheme liability" claims against "secondary actors" under the securities laws. In fact, though, and with apologies to Mark Twain, reports of the death of scheme liability have been greatly exaggerated.

Two important holdings in the case strengthen the position of investors.  First, the Court held that the law's prohibition of "deceptive conduct" was not limited to misstatements or omissions; all deceptive conduct is prohibited. The Supreme Court took the case to decide whether an injured investor may recover from a "party that neither makes a public misstatement nor violates a duty to disclose but does participate in a scheme to violate §10(b)." In holding that investors can recover in such cases, the Supreme Court delivered a win for investors.

Stoneridge: Where Did the Strict Constructionalists Go?

As our readers probably know, the Supreme Court recently decided the Stoneridge case.  Although the Court accepted the primary arguments we made on appeal (that the federal securities laws extend liability to secondary actors who commit primary violations and that conduct, as well as statements, can trigger liability) it determined that no such liability could be attached to the particular facts at issue.

The debate about exactly what the Court's decision means for the future is already hot.  Here is a recent post on the Harvard Law School Corporate Governance Blog, from J. Robert Brown, Jr., that provides an interesting take on the decision:

By now the holding in Stoneridge has become well known and widely discussed, including on my site, The Race to the Bottom.  The five justices concluded that Section 10(b) and Rule 10b-5 did not extend to vendors.  In reading the opinion, the analysis is reminiscent of Bush v. Gore, a decision that is better understood as a political rather than a legal statement.The majority was mostly influenced by its view of the appropriate method of enforcing the securities laws.  In the majority’s view, there is no real room for private enforcement, at least under Section 10(b) and Rule 10b-5.  Lacking the temerity (and the votes, no doubt) to eliminate the cause of action altogether, the Court simply announced that the guiding principle for interpreting the antifraud provisions would be no “expansion.”

As a practical matter, that means that common law principles will not control.  See Stoneridge, at 11 (“Section 10(b) does not incorporate common-law fraud into federal law.”).  Similarly, the intent of Congress doesn’t matter.  As Justice Scalia is often quick to point out, the best way to discern congressional intent is through textual analysis of the statute.  But other than quoting the statute at the beginning of the legal analysis, the Court engaged in no meaningful effort to make the opinion turn on the language of Section 10(b). 

Then what was the basis for the decision?  “Concerns with judicial creation of a private cause of action caution against its expansion.”  Note the passive nature of the sentence.  Who is concerned?  For purposes of statutory construction, the only one whose concern matters is Congress.  But in fact the authority cited by the majority for the proposition is an isolated sentence from Virginia Bancshares that makes the unremarkable point that “as a general matter” an action under the antifraud provision shouldn’t “grow beyond the scope congressionally intended”.  In other words, the Court cited no authority for the proposition and certainly didn’t demonstrate that the “concerns” emanated from Congress. 

This is because the “concerns” are those not of Congress but of the majority on the Supreme Court.  Legislation by the Court, in other words.  The Court’s legislative efforts to restrict private law suits will have consequences, most likely pushing enforcement away from the civil arena to the criminal authorities.  See Stoneridge, at 15 (”Secondary actors are subject to criminal penalties”.)  But that is a topic for another day. 

The Future of the "Group Pleading Doctrine"

Typically, plaintiffs at the pleading stage satisfy the Private Securities Litigation Reform Act’s requirement of “pleading with particularity” by invoking the so-called “group pleading doctrine.”  The doctrine allows plaintiffs to make allegations of misstatements and omissions in group-published documents, for instance, without having to marshal specific factual evidence as to a particular individual’s responsibility in connection with such misstatements and omissions.

It was the Ninth Circuit that originally developed the doctrine (in the late-1980s, prior to the enactment of the PSLRA) as an exception to the stricter pleading requirements in fraud suits as dictated by the Federal Rules of Civil Procedure.  Behind the doctrine is the well-founded supposition that officers and directors with day-to-day corporate responsibilities are generally aware of the goings on at their companies -- such that requiring a plaintiff to identify precisely who did and/or said what creates an unnecessarily high hurdle at the beginning stages of a securities lawsuit.

Despite the sound logic behind this doctrine, however, the Third Circuit in Winer Family Trust v. Queen -- decided at the end of September -- opined that the group pleading doctrine’s “presumption of particularity” is inconsistent with the PSLRA.

The Ninth Circuit has neglected specifically to revisit group pleading since passage of the PSLRA, and the Second Circuit has never defined its precise contours.  Perhaps the doctrine -- logical and important as it is -- will ultimately create a circuit split resolvable only by the Supreme Court.

Court Sides with Shareholders on Buyout Disclosure Issues

It appears that shareholders have found a friend in Vice Chancellor Leo Strine.

Strine recently issued back-to-back opinions that criticized two companies, Topps Co. and Lear Corp., for not disclosing enough information about deals in which the companies had agreed to be sold to private investors.

In the recent flurry of private buyout deals, many buyout firms are using enticing pay packages and other perks to entice management to agree to their offers. Shareholders have complained that these perks taint managements’ decision-making, getting them to agree to deals based on factors other than the best-available price.

Such was the case with the Lear and Topps deals. Apparently, the companies had failed to disclose certain incentives that management had received to agree to the deals. In the case of Lear Corp., which is being sought by Carl Icahn, the company had not disclosed enough about a proposed pension plan for the CEO that gave him an incentive to agree to the buyout that shareholders didn’t share. And in the Topps case, the company didn’t let shareholders know enough about a deal that its top management had cut with the acquiror that would let them keep their jobs. In both cases, the companies were ordered to give additional disclosures so that shareholders could make fully informed decisions.

The Delaware decisions, which are discussed at length in today’s Wall Street Journal, provide fuel for the growing shareholder activism in corporate deals, which we hope will gain even more momentum with time.

Appeals court invalidates hedge fund regulation

In a setback for the Securities and Exchange Commission, a U.S. appeals court threw out Friday an agency rule that had subjected the $1.1 trillion hedge fund industry to stricter regulation and random inspections.