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January 2014 Archives

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

The purpose of allowing the people to petition their government for a redress of grievances is to ensure that those who have been wronged have the means to obtain compensation for the harm caused. Within this context, the debate over what constitutes "fair" compensation generally turns on two general considerations; namely, 1) whether the plaintiffs who seek a redress have legitimate claims and 2) if so, whether their accrued compensation is justified on the facts and circumstances of the case. Increasingly, the legislative and judicial systems have experienced burgeoning problems in dealing with the legitimacy of both factors.

To this end, Mark Behrens, Cary Silverman, and Christopher Appel of the legal firm Shook, Hardy, & Bacon L.L.P. have authored two important pieces. In terms of whether plaintiffs have legitimate claims, Behrens and Appel write in an op-ed for the National Law Journal that medical monitoring claims have increasingly been utilized by plaintiffs to try and obtain redress without the requisite injury-in-fact necessary to have standing. They laud courts that have attempted to restrict payments for injuries that may or may not occur, often at the expense of those truly harmed:

Suppose you have been exposed to a product that may increase your risk of a disease. You presently have no injury, but you are concerned that you could develop a disease in the future. Should the person who created the situation or made the product associated with the risk pay for you to obtain periodic medical testing?

Courts have come to different conclusions. Most courts over the past 20 years have said no to medical monitoring claims. Since 2000, these include the Supreme Courts of Alabama, Kentucky, Michigan, Mississippi, Nevada and Oregon. A few courts, however, recently have allowed medical monitoring claims in some situations, including the highest courts of Missouri in 2007, Massachusetts in 2009 and Maryland last year.

To the surprise of many in the plaintiffs' bar, a majority of New York's highest court recently joined the list of courts that have said no to medical monitoring for asymptomatic claimants. The New York Court of Appeals said that awarding medical monitoring to those individuals can threaten recoveries for the truly sick and lead to administrative nightmares and public policy judgments that are better left to the legislature.

The New York Court of Appeals reached the right conclusion. For over 200 years, one of the fundamental principles of tort law has been that a plaintiff cannot recover without proof of a physical injury. This bright-line rule may seem harsh in some cases, but it is the best filter courts have developed to prevent a flood of claims, provide faster access to courts for those with reliable and serious claims, and ensure that the sick will not have to compete with the nonsick for compensation.

As to the legitimacy of accrued compensation, Behrens, Silverman, and Appel write in the Wake Forest Law Review that courts are misrepresenting the ratio of actual or potential damage to punitive damages by including extra-compensatory damages that skew the ratio downwards, ostensibly making it seem valid:

Whether extracompensatory damages are considered in the ratio calculation has constitutional and practical significance. For example, if a jury awards a modest $50,000 in actual damages but $1 million in punitive damages, the resulting 20:1 ratio would far exceed the presumptive single-digit ratio limit expressed by the U.S. Supreme Court. But, if the court adds an additional $200,000 in attorney fees to the compensatory damages denominator, the double-digit ratio drops to 4:1 and is less constitutionally suspicious. Inclusion of prejudgment interest, which is set at statutory rates in some states that far exceed inflation, can have an even more significant effect on the constitutional calculus. For example, an Oklahoma appellate court upheld a $53.6 million punitive damage award where actual damages were $750,000; the award included $12.5 million in prejudgment interest to reach a 4:1 ratio. Without prejudgment interest, the 70:1 ratio between the punitive and actual harm damages should have led to a different result.

They theorize that the true ratios (minus the extra-compensatory damages) may be a presumptive violation of due process. If we accept these issues as inherently dangerous to the health of the judicial system, then there needs to be action taken in terms of mitigating the potential damage to defendants. If no action is taken, the chances of truly-deserving plaintiffs receiving compensation goes down and the administrative costs on the court and defendants go up. If defendants are then unable to cover the cost of legitimate claims, the result is no redress for the plaintiff and significant financial harm or bankruptcy for the defendant. It becomes self-evident, then, that if the scales of justice tip increasingly in favor of one party, both parties ultimately suffer.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

One frequently cited problem of 401(k) plans is that the volatility of the market puts workers at risk of losing their retirement savings at a moment's notice. In order to hedge against this problem, lawmakers tend to argue that safer alternatives, such as defined-benefit plans or 401(k) plans with limited exposure, should be the industry norm. In terms of both approaches, the argument is that the little to no market exposure will ensure worker returns upon retirement. An oft-overlooked consideration, however, is whether the extent of these returns is sufficient to ensure a stable retirement. Generally, safe investments mean lower yields, which in turn must outpace inflation to allow workers to reap even minimal rewards.

In order to offset this problem, another alternative is to utilize 401(k) plans that take on greater risk, but are able to hedge against this risk by diversifying portfolios to allow for investments with longer time-horizons to counter the effects of short-term volatility and provide returns much greater than the rate of inflation. Scott Higbee, a partner at the global private markets firm Partners Group, argues in today's Wall Street Journal for just such an approach:

Meanwhile, more than 50 million Americans rely on 401(k) plans for their retirement that typically are self-managed and restricted to a combination of traditional assets of stocks, bonds and cash. These defined-contribution plans generally don't provide investors with the opportunity to add a range of alternative assets to the mix. Given the current dismal yields on mainstream fixed-income securities, they should.

Some self-directed retirement savings vehicles such as IRAs allow investors typically with a net worth in excess of $2 million (excluding their primary residence) to invest in alternative assets such as private equity and real estate. But most 401(k) participants don't meet these thresholds and most plans are not designed with portability and liquidity in mind.

By opening up the alternative asset option for all investors, the government would allow 401(k) workers a better chance at securing a stable retirement, while minimizing the concomitant risk of such an approach. If this shift in policy were accompanied by a shift in the regulatory scheme to allow fund trustees a certain degree of immunity from alternative-asset related litigation, while preventing these trustees from aggregating risk in a small number of assets, the incentive to diversify into alternative-assets would certainly be extant. If this scheme proved successful, it could provide an impetus for the reconsideration of the defined-benefit system as well, which would save the government billions in public worker costs. Within the confines of a wise regulatory framework, this is an experiment that seems worth any potential costs.

Dodd-Frank's Central Risk-Takers
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During a conference hosted yesterday by two Dodd-Frank regulatory agencies, one of the panels focused on central counterparties (CCPs), the institutions that Dodd-Frank promises will help to avert the next financial crisis. But will they? The answer to that question remains very uncertain, and the panelists (all proponents of central clearing) highlighted some of the risks that we should be thinking about.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Broadly speaking, our justice system tends to utilize two main frameworks of punishment: Deterrence and Proportionality. While individual states make individual choices as to which framework best represents the wishes of their citizenry, extreme application of either of these two theories will ultimately serve to cast aspersions on the effectiveness of the other. Two recent cases demonstrate this concept in the context of extreme applications of deterrence.

Evan Bernick of the Heritage Foundation's The Foundry website has recently written about a case out of Alaska in which a man is being charged with the misdemeanor of illegally feeding moose that wandered onto his property. The penalty for the charge is up to $10,000 in fines and a year in jail. Based on the severity of the penalties, it seems reasonable to presume that they are so harsh because they are meant to make it so personally detrimental to feed animals who wander onto someone's property that people would refrain from ever engaging in such activity. Therefore, it seems fair to categorize the theory being utilized as extreme deterrence. From a normative standpoint, the idea of potentially incarcerating someone for a year because they feed animals that wander on their property seems to destroy any sense of proportionality in the law. While there is a place for deterrence as a preventative measure, the extreme application of it serves to render proportionality defunct, and therefore skews the underlying fairness aspect of our justice system.

As another example of this injustice, Brian Doherty of Reason.com's Hit and Run blog has written about how cops are conducting undercover sting operations to catch unlicensed rickshaw drivers who are conducting "illegal tours" in the city of Charleston, South Carolina. The penalty can be more than $1,000 for such an "egregious" act. Besides the potential entrapment issues, the crime of giving tours of the city without a license does not really seem to warrant such a high penalty. If we assume fairness is an important metric by which we judge justice, then this law seems fundamentally unjust. Once again, the deterrence aspect of the law is undercutting the proportional fairness of it.

In order to stem this sort of routine overreaction to seemingly minor infractions, states should strive to reassess the place of fairness in their justice systems.

Regulatory Budget Battles
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Yesterday's congressional spending deal did not contain all the money for which the Securities and Exchange Commission and Commodity Futures Trading Commission had asked. The SEC will get $29 million more than its fiscal 2013 level, and the CFTC will have approximately $10 million more to spend. Proponents of larger budgets for the financial regulators seem to see a directly proportional relationship between the amount of money each agency has at its disposal and the health of our capital markets. Based on the commissions' records, one wonders. The CFTC has employed much of its budget in recent years to remake the derivatives markets in a haphazard way that could impair their ability to serve the Main Street companies, farmers, and others that rely on them. The SEC has poured resources into writing (and defending against legal challenges) rules such as the proxy access rule, which would have paved the way for backroom deals with special constituencies at the expense of other shareholders, and the conflict minerals rule, which the SEC crafted to be even more onerous than the statute requires it to be. Both agencies already have large budgets that reflect the important roles they play in our capital markets, but congressional reluctance to send more money their way is not surprising given the way they might spend it.

In three coordinated settlements this week, JPMorgan paid approximately $2.5 billion mostly based on its failure to alert US authorities to the Madoff fraud. Employees of JPMorgan, which had banking and investing relationships with Madoff, had periodically questioned the legitimacy of his activities. In mid-2007, JPMorgan employees discussed rumors about Madoff, but, as one senior employee asked, could a firm regulated by the Securities and Exchange Commission and other securities regulators really be perpetrating a massive fraud? Over the next year, certain employees of JPMorgan continued puzzling over how Madoff was earning his returns. In October 2008, they formally notified British authorities about the bank's deepening concerns and its plans to reduce its Madoff exposures. This week's settlements fault JPMorgan for not simultaneously filing anti-money laundering reports in the United States. Settlement documents reveal that suspicions about Madoff also were not effectively communicated within JPMorgan to US operations that had significant exposure to Madoff.

Another case I'll be watching to see if the Supreme Court decides to take up: Limelight v. Akamai. As noted in The Federalist Society's blog, "Akamai charged Limelight with infringement of its patent on a method for delivering video content to consumers via the Internet." By a one-vote majority, an en banc panel of the Federal Circuit overturned lower court decisions that, under traditional patent principles, Limelight was not infringing on Akamai's business-methods patent by partially but not wholly replicating its competitor's process (Limelight's technology leaves some of the work up to the end-user). An array of businesses (Google, Cisco Systems, Oracle, Red Hat, etc.) and the Solicitor General have filed briefs asking the Court to take up the case (the SG's brief was filed at the Court's request -- and both that fact and the brief's recommendation augur well).

I tend to agree with the companies and the SG's office that the Court should hear this one -- and with the proposition articulated in the SG's brief that the Federal Circuit's broad interpretation of business-methods patent infringement could lead to "a significant expansion of the scope of inducement liability (and a corresponding increase in burdensome litigation)." That's a bad thing, and an increasing problem, as I explained earlier this year in Trial Lawyers, Inc.: Patent Trolls:

[P]atent trolling has emerged as a big and growing business line for what the Manhattan Institute has dubbed Trial Lawyers, Inc., the subset of the plaintiffs' bar that behaves like the biggest of big businesses (with the exception that instead of selling products to willing consumers, the lawyers extract monies from unwilling defendants through their unique access to the courts). . . . The number of patent lawsuits filed by PAEs grew from 466 in 2006 to 2,914 in 2012, an increase of 526 percent in just six years[]. In 2011, 2,150 companies were forced to mount 5,842 defenses against NPE-initiated patent lawsuits--up from only 1,401 defenses in 2005.

See also Gary Shapiro's op-ed on the case at the Washington Examiner.

Postscript: The Supreme Court on Friday granted cert on Limelight. We'll have more to say on the case as it comes before the Court on the merits.

As I discussed in yesterday's Washington Examiner, at tomorrow's conference, the Supreme Court will decide whether to grant certiorari on a pair of companion cases -- Sears v. Butler and Whirlpool v. Glazer, which Ted has previously discussed (here, here, and here).

Both cases involve 21 varieties of energy- and water-efficient "front-load" washing machines manufactured by Whirlpool.

In 2001, Whirlpool released the first of this diverse group of washers that reduced water and energy use by more than two-thirds (cutting $120 from the average family's annual water and power bills).

Whirlpool's washers have been ranked among the best in their class by Consumer Reports and helped the company win multiple "sustainable excellence" awards from the federal Environmental Protection Agency.

Class-action attorneys have pounced on the fact that a small percentage of these washers, like all washing machines, can (if improperly maintained) emit "musty odors" from leftover laundry residues.

Such odors may be marginally more likely in these newer machines than in traditional, less water- and energy-efficient washers.

A decade of call center data from Whirlpool and Sears place the percentage of consumers facing such odors at two to three percent, and a more recent February 2010 examination by the Consumers Union estimates the problem rate at less than one percent.

I agree with Ted and others (e.g., ATRA's Tiger Joyce, Tim Bishop & Joshua Yount, the bulk of the business community filing amicus briefs asking for cert) that these cases have broad-ranging potential implications and that the Supreme Court should take them up to clarify the reach of Wal-Mart v. Dukes and Comcast v. Behrend:

The Supreme Court has taken significant interest of late in limiting the use of class-action remedies. In its 2011 decision in Walmart v. Dukes (involving a gender discrimination claim) and last year's decision in Comcast v. Behrend (involving an antitrust claim), the court has emphasized that for a class of plaintiffs to be approved, the facts have to show a common and specific cause of harm that "predominates."

The washing machine cases certainly fail the Supreme Court's predominance test for class-action litigation.

Let's hope that the Supreme Court decides to step in yet again, because the legal theory underlying these cases is worse than musty -- it stinks.

Update: The Supreme Court neither granted nor denied the cert petitions here -- we'll watch for it at the next conference.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.