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July 2011 Archives

Kitec Systems has settled a class action accusing it of selling defective pipe. At first glance, the settlement seems almost reasonable: a $125 million settlement fund, with the attorneys asking for only a somewhat inflated $25 million. But, as in all too many class action settlements, the devil is in the details.

To make a claim and receive 50% reimbursement on repair costs, class members have to fill out and mail in a twelve-page form, and submit several required enclosures with the claims form, including a one-foot sample of defective pipe or fitting removed during the repair; at the end of the eight-year period, there's another distribution. Class counsel generously estimates that 30% of the 292,000-member class will make claims, despite these onerousness of the claims process, and the fact that there is next to no individualized notice. If I'm doing the math right, that's about $25-30 million over eight years for class members, another $60 million or so at the end of the eight-year period, while the attorneys get $25 million immediately. And, of course, there would be no repercussions to the class counsel if the claim rate turns out to be 3% instead of 30%, and 80+ million dollars is returned to the defendant.

Competing plaintiffs objected that even the $125M fund is too small, given the potential liability of other released defendants, and there was an interlocutory appeal pending in the Fifth Circuit from the judge's preliminary approval order enjoining pending litigation and arbitrations, but that appeal was voluntarily dismissed—despite the fact that Rule 23 prohibits objections from being dismissed without district court approval.

The case is In re Kitec Plumbing System Products, No. 09-md-2098 (N.D. Tex.) (MDL No. 2098) and No. 11-10537 (5th Cir.). (h/t A.S.)

Around the web, July 29

  • Coverage of the Rice Krispies objection from an interesting new original-reporting legal news website, Business Law Daily. [BLD]
  • I wasn't that impressed with the ABA Journal's "30 Lawyers, 30 Books" list. And it seemed that they only found room for one right-of-center lawyer, Professor Eugene Volokh. But I do wholeheartedly concur with Volokh's recommendation for Ward Farnsworth's The Legal Analyst, which is perhaps the most systematic guide to clear thinking this century.
  • Mississippi Supreme Court stays fishy $322M asbestos judgment. [LNL; earlier on POL]
  • Governor Jerry Brown, apparently nostalgic for Rose Bird, nominates Goodwin Liu to California Supreme Court; his confirmation will be a formality. This gives Asian-Americans four seats out of seven on the Court, with the only Latino on the Court retiring for the big bucks of mediation, so one would expect quota advocates—like Goodwin Liu—to call for affirmative action. [Whelan; Severino; LA Times]

  • Attorney-general cy pres slush fund in Arkansas. [Greenberg via Overlawyered; more on cy pres at POL]
  • What isn't being reported in that Justice at Stake poll on the Wisconsin Supreme Court. [Pero; earlier on POL]
  • Google lawyer says patents gumming up innovation. [Bloomberg]
  • Lawyers behaving badly: fight at the end of a deposition. One of these two lawyers is committing perjury, and if it can be proved which one, he should be disbarred. And somehow, it's hard to think that the aggressor was the one who had to miss the ex parte hearing because of a mandatory chemotherapy session with his oncologist. What does the court reporter say? [ATL]
  • McDonald's engages in defensive restauranting, adds apples to Happy Meals; 89% of parents prefer fries. Meanwhile, Campbell's discovers that people prefer salt in their soup. [Olson @NYDN; Chi. Tribune]

  • "Aussie Woman Seeks Workers Comp for Injury During Hotel Sex" [ABA J]
  • In an age of debt crisis, why aren't we auctioning unused broadband spectrum? [Brito @ Time]

Trying to reverse Skilling v. U.S.

We know overcriminalization and overaggressive DOJ prosecutions are a problem. So, of course, Congress is looking into making the "honest services" criminal statute vague and broad again post-Skilling. [BLT; House Judiciary; HR 2572]

(Update: good background post by Professor Bainbridge on Skilling, and see also Gryphon.)

I'll be on a variety of radio stations talking about overcriminalization today through Monday:

  • Thursday, July 28, WISN (Milwaukee) / WIBA (Madison), 4:06 PM Central
  • Friday, July 29, WHIS (West Virginia) / WTZE (Tazewell County, Virginia), 8:30 AM Eastern
  • Friday, July 29, WGN (Chicago), 10:05 AM Central
  • Sunday, July 31, WBAV (North Carolina), between 11 and noon
  • Monday, August 1, KMED (Oregon), 7:35 AM Pacific

More on Business Roundtable v. SEC

Despite the D.C. Circuit's devastating slapdown of Rule 14a-11, the SEC continues to refuse to consider the costs of its regulations. More: Ribstein; Bainbridge; Bainbridge roundup.

Meanwhile, the extensive new Dodd-Frank regulation of hedge funds that passed with the help of various Soros organizations is causing George Soros to go Galt with his own hedge fund rather than comply. As Ira Stoll points out, Soros had his problems with French regulators.

Does this regulation really help investors? A recent empirical study (via Bainbridge) casts doubt:

This study of initial public offerings (IPOs) carried out on the Berlin and London stock exchanges between 1900 and 1913 casts doubt on the received "law and finance" wisdom that legally mandated investor protection is pivotal to the development of capital markets. IPOs that resulted in official quotations on the London Stock Exchange performed as well as Berlin IPOs despite the Berlin market being more extensively regulated than the laissez faire London market. Moreover, the IPO failure rate on these two stock markets was lower than it was with better regulated US IPOs later in the 20th century.

We've already extensively covered why any reasonable appellate court is going to overturn the $500 million judgment against Teva and Baxter over a (now-criminally-charged) doctor's deliberate misuse of propofol. The Wall Street Journal reports that Jay Lefkowitz of Kirkland & Ellis, who successfully argued that federal law requires preemption of state failure-to-warn claims for generic drugs, given the lack of discretion that such generics have, in Pliva v. Mensing, now has another arrow in his quiver for overturning the earlier miscarriage of justice in Nevada. Alas, a lot of damage has already been done thanks to plaintiffs' lawyers putting profits ahead of people.

Updating my earlier post on the controversy over the damages cap in the Chatsworth train accident case, it's worth noting this letter from Antoine Frerot, the chairman and CEO of Veolia. I was apparently too generous to Andrew Cohen in assuming he was correct that it was indisputably engineer error that caused the accident: there was evidence that the signal the passenger train ran was green, rather than red—a possible consequence of Metrolink's failure to implement Positive Train Control safety technology. If so, this would have been the fault of the governmental Southern California Regional Rail Authority, which had induced Veolia to run Metrolink by promising to indemnify them for accidents—a contractual promise they ended up breaching.

Veolia's ban on cell-phone use by engineers exceeds federal safety regulations; the Federal Railroad Administration considered and rejected such a ban. (The engineer himself had been hired by Amtrak, not Veolia, who was required to retain Amtrak employees when assuming its share of Metrolink operations.)

Needless to say, all of this information further undermines Cohen's claims that the damage caps in the Amtrak Reform and Accountability Act that President Clinton signed in 1997 (much less tort reform) was bad public policy or an injustice. Even assuming that there would be a passenger railroad industry without the caps, in the absence of the caps, Veolia would have continued to contest liability, and would have refused to settle the case—and may well have won, leaving Chatsworth victims to collect even less money from the underinsured and underfunded SCRRA. (Indeed, per-passenger recovery in earlier Metrolink accidents was substantially lower.)

A Texas developer sued Carla Main and Encounter Books, an author and publisher respectively of a book criticizing the eminent domain practices he used—as well as Richard Epstein, who had the audacity to blurb the book. Fortunately, Texas law has procedural protections for victims of SLAPP suits, including interlocutory appeal when the trial court denies summary judgment, and an appellate court found there was no libel to be had. (This case was key in prompting Texas to pass anti-SLAPP legislation.) But there are dozens of other states where those who criticize the rich face tremendous risk of meritless libel suits to shut down their free speech rights, demonstrating the need for federal anti-SLAPP legislation. [Olson; Sullum @ Reason; IJ; Reporters' Committee; Dallas Observer; D Magazine; Main v. Royall (Tex. App. Jul. 25, 2011) (h/t W.C.)]

Federal criminal laws run amuck

The best mainstream media discussion of the problem of overcriminalization appeared in Saturday's Wall Street Journal, with example after example of innocents ensnared by ignorance of obscure federal regulations and laws. "Ignorance of the law is no defense" goes the cliche, but when the Department of Justice admits that there is no quantifiable number of the thousands of criminal statutes spread over 27,000 pages of the federal code, it's hard to see the fairness of some of these strict-liability crimes that don't require prosecutors to prove criminal intent. As Judge Posner wrote in his dissent in United States v. Wilson, "It is wrong to convict a person of a crime if he had no reason to believe that the act for which he was convicted was a crime, or even that it was wrongful." More: Blackman, Lynch; Overlawyered; Regulation.

Of course, states are not immune to the problem of overbroad criminal laws reaching out to solve rare problems. Sex offender registration laws, meant to protect children from pedophiles, are instead ruining the lives of children charged with minor crimes that have a sexual component: statutes intended to permit parents to track nearby rapists are being used to charge nonviolent teenagers engaging in consensual sex or 14-year-olds who rub their buttocks on a fellow teen's face as a prank. All in the name of Megan. [Detroit Free Press; Skenazy; WSJ Law Blog; earlier]

I'll be on KBAR-AM (Idaho) discussing the problems of overcriminalization today at 9:06 - 9:25 AM Mountain time. Yesterday's WPTF interview on Caylee's Law is online; I'm at the 33:00 mark.

Around the web, July 27

  • Tort reform working in Mississippi. [LNL; Behrens @ Obstetrics & Gynecology]
  • Three cheers for the intellectual honesty of Larry Tribe in the debt ceiling debate. [McConnell via Volokh]
  • Relatedly, I'd rather have Michael McConnell on the Supreme Court instead of blogging, but Michael McConnell blogging is still worthwhile.
  • "Obama Administration Creates New Debts to Pay Off Trial Lawyers Even as it Demands Increase in Debt Ceiling" [Bader]
  • FDA proposes regulation of distribution of health information on mobile devices. Meanwhile, House committee looks at the issue of the costs of FDA false negatives. [Reason; earlier on POL]
  • The legal cartel skimps on regulating its members, but they push very hard against unlicensed competition. [Fisher @ Forbes; Ribstein; see also Lanctot @ SSRN via Ribstein]
  • Skilling's legal team turns out another legal brief that devastates a bad Fifth Circuit opinion. [Kirkendall]
  • Jurisdiction-shopping shenanigans. [Beck]
  • Remembering Amchem—a decision that demonstrates that the Supreme Court's insistence on adhering to procedural protections in class actions can work in favor of plaintiffs, as well as defendants. [Trask]
  • The union guide to intimidation for dummies, exposed. [Wash Times]
  • DOJ malpractice in the Fast & Furious scandal. [Weekly Standard]

In the self-parody department, the New York Times headline is "Recession Study Finds Hispanics Hit the Hardest." But the data in the article shows that Asians and whites have suffered far greater declines in wealth than Hispanics on average and that the decline in wealth for Hispanics is much more attributable to the collapse of the housing bubble than the recession. Other than that, the headline is completely accurate.

I'm interviewed by Bob Dorigo Jones about why wacky warning labels are symptomatic of a larger problem; the video is supposed to air on local PBS stations.

I'd love to talk about class actions, the First Amendment implications of frivolous libel suits without anti-SLAPP protection, the myth of a pro-business Supreme Court, or even "Hot Coffee", but they just want to talk to me about Caylee's Law. Here's the Delaware version of the story, quoting me. And I'll be on News Radio 680 WPTF (North Carolina) at 10:06 AM to discuss the subject.

One-A-Day branded vitamins makes a gummy vitamin—but a serving size is two gummies. "Plaintiff Brad Howard sued Bayer and Bayer HealthCare LLC in November, saying the use of the One-A-Day brand constituted a violation of the Arkansas Deceptive Trade Practices Act and an express warranty." Howard complained that he thought he was buying a product where one gummy was one serving, notwithstanding the nutritional label to the contrary. Arkansas federal judge D. P. Marshall Jr. wasn't impressed and threw the case out: "No reasonable consumer... would be deceived." The case is Howard v. Bayer Corp., No. 4:10-cv-1662 (E.D. Ark.). [Law360 ($)]

One way class counsel can mute objections to excessive fee requests is by failing to disclose in the class notice that the attorneys will ask for more cash than the class will receive. The Center for Class Action Fairness LLC submits that this is illegal, and has objected on behalf of a class member in the Rice Krispies case we discussed earlier.

How do the attorneys get away with asking for $1.3M when the class is getting less than that? Well, defendant Kellogg will donate $2.5M of retail value in food products to charity. Several problems with that: (1) there is no reason for cy pres relief unless class members have failed to collect money due them; (2) this is a lawsuit about alleged fraud in nutritional claims, but nothing in the settlement prohibits Kellogg from donating junk food to the food banks; (3) if Kellogg donated $2.5M retail value food to charity, the IRS would not allow them to take a $2.5M deduction—so why does class counsel get to claim that this is worth $2.5M?

The settlement presents a variety of other cy pres problems, as well, and made it unreasonably and illegally burdensome to object.

Update: I will be on LaDona Live, KOGO 600 AM (San Diego), at 1:05 PM to talk about this case and other class actions.

The Center for Class Action Fairness LLC is not affiliated with the Manhattan Institute.

Rehearing sought in Mensing

Plaintiffs have filed a long-shot petition for rehearing in PLIVA v. Mensing. Beck explains why it's a dumb petition.

Warning: may be an ironic warning

I now have an entry for this year's Wacky Warning contest, though I have to think that this is marketing, rather than legal behind the text.

A Ginsburg/Sentelle/Brown court struck down Exchange Act Rule 14a-11, the rule requiring easier nomination of dissident directors. [Business Roundtable v. SEC via BLT]

Jackson on personal jurisdiction

In the wake of the wailing and moaning over AT&T Mobility v. Concepcion, I noted that the arbitration provision AT&T Mobility propounded was so consumer-friendly that consumers would invariably be individually better off arbitrating than as a class representative, much less as a class member. The lack of a class-action procedure would only adversely affect plaintiffs with meritless claims; those with meritorious common claims would find attorneys willing to bring en masse arbitrations.

As it turns out, the threshold of probability of success needed to profitably bring mass arbitration claims might be lower than even I imagined: entrepreneurial attorneys are recruiting AT&T Mobility customers to bring arbitration claims under the Clayton Act over the pending proposed merger with Sprint, using the arbitration provision's promise of a $10,000 bounty as enticement. (The attorneys are claiming a right to a 50% contingent fee plus expenses, so it's unclear how much of that will ever go to consumers.) Given that a Clayton Act plaintiff doesn't have to be an existing AT&T customer with an arbitration provision, it's clear that some plaintiffs' attorneys would prefer to arbitrate under AT&T Mobility's arbitration rules rather than litigate under the Federal Rules of Civil Procedure. But you won't hear Al Franken admit that. (h/t W.K.)

"The Senate's Lawsuit Factory"

Must-read piece by Kimberly Strassel (W$J; free Google News link) on how Senator Al Franken, the litigation lobby, and the media hammered the bogus Jamie Leigh Jones story into an unfair attack on arbitration and its defenders, though existing arbitration law did nothing to preclude Jones's day in court.

CSK Auto CEO Maynard Jenkins discovered accounting shenanigans after an internal audit he ordered. The SEC acknowledges that he was a victim of the fraud, but still wants Sarbanes-Oxley clawback of bonuses he received. Jenkins was forced to settle, but now that the SEC has rejected the settlement, the case is going to trial. [WLF; WaPo]

Lester Brickman podcast

Coverage of Sirius objection

There's nothing inherently wrong with a $4.4M settlement—except when the attorneys and class representatives are going to request $2.27M of it, about 52% of the total. The settlement also violates Rule 23 because it includes a secret side agreement not disclosed to the class.

The case is In re Mutual Funds Investment Litigation, Case No. 1:04-MD-15862-JFM (D. Md.); the objection deadline is October 1. One hopes a class member objects to this illegal settlement and unreasonable fee request. (h/t CCAF attorney Adam Schulman)

In 1997, Congress passed the Amtrak Reform and Accountability Act, which said, in part, "The aggregate allowable awards to all rail passengers, against all defendants, for all claims, including claims for punitive damages, arising from a single accident or incident, shall not exceed $200,000,000." The law had no provisions for inflation, and, in any event, a law like this is only meaningful if there is an occasion where someone's damages are limited. Sure enough, there was a 2008 rail accident in Chatsworth, California. A passenger train engineer missed a stop signal because he was texting someone; he paid the price with his own life when he collided with a freight train. The laws of physics being what they are, the passenger train took the brunt of the collision, killing 24 and injuring 100 according to Cohen (other reports have slightly different figures). A California judge recently held that total damages were $264 million, but that means that $64 million won't be paid.

The Atlantic's Andrew Cohen has a breathless and intellectually disingenuous piece claiming that this incident damns all tort reform. You'd think a fellow landsman named Cohen would be less careless throwing around analogies with Nazi Germany, but he uses the phrase "Sophie's Choice" three times to describe the horrible horrible situation where plaintiffs receive an average of $1.61M in compensation instead of $2.13M in compensation.

First, Cohen is using bad logic. If Grover Norquist were to point to a single dumb tax and say that this means no one should ever pass any tax ever, he would be rightly laughed at. So why does Cohen smear all tort reform with one 1997 law that has had consequences once?

Second, ARAA has very little to do with tort reform. No reformer I know proposes per-accident caps or economics damages caps. The policy debates today are not about per-accident caps or economics damages caps. So it's especially appalling to try to smear legitimate tort reforms that are good public policy with a per-accident cap law—the same dishonesty that the movie "Hot Coffee" engages in. Certainly legislators pass such laws from time to time, but they don't do so because of the tort reform movement; they're pure subsidies. The "per-accident" and "per-incident" language of ARAA is telling: it's meant to permit rail operators to have certainty about how much insurance they need to purchase and reduce their costs.

Third, if you're going to complain about a law that subsidizes the rail industry, you should look at the benefits in addition to the costs. You can't simultaneously complain that Congress passed a law that subsidizes the rail industry and complain that the US doesn't have the passenger rail system of Europe or Japan. Without the ability to control insurance costs, the passenger rail industry might not even exist. Now, perhaps the price of awarding rail victims in a single accident $1.61M on average instead of $2.13M once in fifteen years is too high a price to pay to have a passenger rail industry at all, but then make that argument rather than the argument that all tort reform is evil. Of course, passenger rail is considerably safer than many alternative means of transportation: the damages limitations of ARAA has probably saved dozens of lives and untold carbon emissions. That may or may not be worth a Chatsworth damages cap, but Cohen doesn't trust his readers to decide for themselves.

Fourth, Cohen misrepresents the facts of the case, falsely claiming that the engineer's employer was recklessly aware of the engineer's texting proclivities. His own link shows that this simply isn't so: the NTSB did not find Veolia had acted improperly, and the engineer was using a personal cell phone that employment laws would not permit Veolia to investigate, so Veolia did not know about the engineer's texting; union rules prohibited Veolia from disciplining the engineer for earlier infractions. Perhaps we could repeal those employment and labor laws imposing liability on employers for such investigations and discipline when public safety is involved? Ah, but that would be a tort reform, and we know from Cohen that all tort reforms are bad.

Fifth, what the heck? A $200 million cap would mean an average of over $4M for every fatality and over $1M for every injury, using Cohen's 24 dead and 100 injured figure (and remember, not all of the injuries are serious). Why on earth would that not be sufficient? How many people carry $4M life insurance in case they're killed by a judgment-proof mugger or drunk driver? Would it make that much difference if the figure was $5.3M and $1.3M? (Returning to the European passenger rail system, one notes that it has killed hundreds of people in accidents this century, and I assure you that those victims are not collecting millions in compensation.)

Sixth, Cohen leaves out the real reason $200 million is not enough—the trial-lawyer cartel is almost certainly charging the full 40% contingency fee in this case, even though the existence of the cap has permitted the rail operator to concede liability and walk away to let the parties fight over the $200 million pot. (Without the cap, the case would still be litigated, because trial lawyers wouldn't be satisfied with $264 million, and would have been seeking billions of dollars of unjustified punitive damages from the deep pocket, and none of the passengers would have been paid yet.) If the trial lawyers agreed to accept only a generous $42 million for their sure-thing litigation, then the passengers would be getting a full $158 million—or 60% of $264 million, the damages that Cohen thinks they deserve. And even then, both the lawyers and many passengers would be getting a windfall. It's trial lawyer greed more than anything else that is keeping Chatsworth victims from being fully compensated to the extent we think those victims are undercompensated. But we never hear that from Cohen.

(Can I propose Frank's Second Law? Never expect fruitful discussion from anyone who uses scare quotes for the words "tort reform.")

Update, July 27: I was too generous to Andrew Cohen.

The Center for Class Action Fairness LLC objected today to a valueless class action settlement: the objection, filed in the Southern District of New York on behalf of a class member, underscores that the proposed Sirius XM Radio settlement would provide valueless injunctive relief to the class but $13 million to class attorneys.

"Certainly, parties to a class action can agree to settle a case for $13 million," said Ted Frank, the lead attorney on the objection and the founder of CCAF. "But if they do, it is inherently unfair and unreasonable for the attorneys to extract 100% of the settlement benefit for themselves. Class actions should be prosecuted on behalf of the class members, not self-serving class counsel."

The settlement of the antitrust class action against Sirius XM requires only that the defendant agree to not raise prices for five months. But this is an entirely valueless promise, given that Sirius XM, facing admittedly heavy competition from Internet music services and MP3 players, has been lowering prices and engaging in deep discounting to keep customers. Yet class counsel (including the Milberg law firm) implausibly claims that the settlement is worth $180 million to the class.

The CCAF objection also targets Judge Harold Baer's class certification order. For several years, Judge Baer has controversially required class counsel to meet racial quotas as a condition of appointment. CCAF has requested that Judge Baer vacate that part of his class certification order as unconstitutional.

The case is Blessing v. Sirius XM Radio Inc., No. 09-cv-10035 (S.D.N.Y.).

The Center for Class Action Fairness, founded in 2009, is a not-for-profit program that provides pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients. It has won millions of dollars for class members over the last two years.

Aggregate litigation under the Fair Labor Standards Act, 29 U.S.C. § 216(b), requires an opt-in mechanism. Plaintiffs' lawyers would obviously prefer the Rule 23 opt-out mechanism to make the case larger. But in Butler v. American Cable and Telephone, No. 09-cv-5336 (N.D. Ill. Jul. 12, 2011), the district court said no dice.

It seems a couple of courts have improperly allowed FLSA settlements on an opt-out basis: See, e.g., Harden v. William Wrigley, Jr., Co., No. 07 C 5928 (N.D. Ill. Nov. 6, 2008); Frank v. Eastman Kodak Co., 228 F.R.D. 174 (W.D.N.Y. 2005) (no relation).

(Via CCAF attorney Adam Schulman.)


Today is 7-19. By a coincidence, as Professor Bainbridge points out, that is the record of the Ninth Circuit before the U.S. Supreme Court last term. We hear a lot of trumped-up complaining that the Supreme Court is biased towards business (though businesses only prevailed in half of the cases before the Court), but the Supreme Court is a reviewing court: when it reverses a lower court on a business-related case, it just shows that it is more pro-business than the lower court. How come no one is complaining about some of the lawless anti-business Ninth Circuit decisions that required Supreme Court reversal?

New York Caylee's Law?

Reuters reports; I'm quoted. (Link corrected.)

Mike Thompson represents California's 1st District in Congress. The District has a healthy concentration of vineyards, so it is not surprising that Thompson supports deregulation that would benefit wineries, including ending restrictions on direct interstate sales of wine. But one of those vineyards is a 20-acre affair owned by Thompson (which made him all of $18,000 last year), and the New York Times is shocked, shocked at the conflict of interest. But why stop there, Larry Ribstein asks: "Are there any lawyers in the House who write laws that benefit lawyers? Even if the House members aren't practicing law now, might they be interested in doing so in the future?" Surprisingly, this hasn't drawn as much attention from the Times.

Roundup, July 18

  • "Supreme Court Isn't Pro-Business, But Should Be" [Ponnuru]
  • Judge tosses major portion of Toyota shareholder suit under Morrison. [Law.com]
  • Qui tam action accuses retailers supplying government of violating Buy American Act. [AP]

  • Facebook accounts subject to secret search warrants. [Reuters]
  • "The University of California is cutting back on many things, but not useless diversity programs." [Mac Donald @ City Journal]
  • The truth about the auto bailouts. [Zywicki]
  • Arrest when parent protests unnecessary TSA groping of daughter. [Alkon]

"A man's nightmare made real"

The two-part LA Times story on the falsely accused Luis Gonzalez III is horrifying to read: his ex, trying to gain the upper hand in a child-custody dispute, falsely accused him of rape and kidnapping and torture, and he spent months in jail before he was cleared by alibi witnesses discovered by a private investigator. Gonzalez would faced five consecutive life sentences, but Ventura County prosecutors refuse to charge Tracy West with filing a false police report. Gonzalez won $55,000 in sanctions after winning a related civil proceeding where West sought a permanent restraining order, and settled a malicious prosecution suit. But if he hadn't bought a bagel for breakfast, he might still be in prison.

So suggests Brian Walsh about the Supreme Court's decision in Global-Tech v. SEB:

A recent decision of the Supreme Court of the United States in a patent lawsuit may, somewhat surprisingly, have a major and destructive impact on federal criminal law. In Global-Tech Appliances v. SEB, the high court held that the "willful blindness" doctrine, which relieves a plaintiff of proving that the defendant actually knew that its actions were infringing, applies to certain patent infringement claims. The Court also implied that the doctrine properly applies in federal criminal cases, which would undermine traditional criminal-intent, or mens rea, protections against unjust criminal punishment. The result may be that more innocent Americans will face criminal conviction.

See also Debevoise (PDF, page 11).

A paper by Bernard Sharfman:

Traditionally, the nomination of directors has been under the control of the board of directors and its nominating committee. However, Section 971 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 14(a) of the Securities Exchange Act of 1934 to permit the Securities and Exchange Commission (SEC) to adopt rules that will allow shareholders access to a public company's proxy solicitation materials for purposes of nominating their own directors. In response, the SEC promptly issued Rule 14a-11 which provides the current rules for giving certain shareholders proxy access.

A key aspect of the current proxy access rules is that they are, for all intents and purposes, mandatory. There is no opportunity to opt-in or at least opt-out. This one-size-fits-all approach to corporate governance is wealth reducing because it does not allow for private-ordering. In addition, federally mandated proxy access eliminates the benefits of our federalist system from this area of corporate governance.

But there is something even more fundamentally wrong with proxy access. That is, it is a very inefficient means to promote good corporate governance in a public company. As argued here, it is expected that proxy access will lead to increased error in the nomination of directors as decision-making is moved from the board of directors to shareholders who will make their nominations based on significantly less information and a shifting of the potential for certain opportunistic behavior, such as the extracting of private benefits from the corporation, from an independent board and nominating committee to certain shareholders who, unlike directors, are not subject to fiduciary duties. Moreover, even if proxy access can be argued to be good for corporate governance, Rule 14a-11 is not designed to be the optimal default rule.

Around the web, July 15

I'll be talking about Caylee's Law. One can listen live on-line.

My TruTV appearance yesterday on the same subject is now available as a podcast.

Wal-Mart v. Dukes not end of world

For all the hyperbole of how Wal-Mart v. Dukes closed the door of the courthouse to employment plaintiffs, it just ain't so: it only affected one implausible theory of disparate-impact liability and the tendency of some courts to certify classes even when doing so was wildly inappropriate. Thus, Reuters discovers that many employment class actions are proceeding apace after the Wal-Mart decision.

Paul Taylor in the Harvard Journal on Legislation:

Congress may consider an amendment to Title VI of the Civil Rights Act of 1964, which would permit private disparate impact discrimination lawsuits to be filed against entities receiving federal financial assistance. However, unlike Title VII of the same Act, Title VI does not contain a national security exception. This article addresses the potential impact of the proposed amendment on national security programs administered by federally subsidized entities. Particular emphasis is given to the airports, airlines, and private screening companies that administer the nation's post-9/11 security measures. Finally, the Article discusses how the disparate impact claims authorized by the amendment may frustrate legislatively enacted policies such as welfare reform and English language programs.

With a Republican House, one would suspect that the idea is at least temporarily dead. But of interest on pp. 105-06 (footnotes omitted), given yesterday's post:

One recent example of another side-effect of previous legal campaigns based on disparate impact claims is the current financial crisis. While there were many pressures on mortgage lenders to relax the standards under which loans were extended in the 1990's, one factor was the Clinton Administration Justice Department's aggressive pursuit of disparate impact claims. The Clinton Administration pursued those claims in the mortgage lending field as well, making allegations that lenders' facially neutral credit criteria had a disparate adverse impact on the availability of mortgages to certain covered groups, including those in low-income communities. The threat of such lawsuits pressured lenders to extend more mortgages to low-income communities so disparate impact lawsuits could be avoided. Economists have suggested that these relaxed lending standards were a prime cause of the current financial crisis because many loans were extended to people who could not reasonably be expected to be able to pay them back. As the Washington Post editorialized, "the problem with the U.S. economy . . . has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets. . . . [G]overnment helped make mortgages a purportedly sure thing in the first place."

Jury trials and the press, UK edition

"In 2002, the British government considered making it illegal for news organizations to offer tell-all financial deals to jurors in ongoing criminal trials--and to dangle a larger payment if the verdict were to be guilty." No such bill passed. [Holman Jenkins @ WSJ]

DOJ "witch hunt" against banks?

We earlier reported on the DOJ making work for its Civil Division with questionable disparate-impact lawsuits against banks over lending standards. Today's Investor's Business Daily (via Sailer) finds the problem even worse than that: as part of mau-mauing the banks into settlements so they don't face the bad publicity (and copycat litigation) from being called racist, the government insists on non-disclosure agreements so the banks can't publicly complain about the unreasonable tactics. Some of the settlements actually require banks to provide special rates for minorities:

In what could be a repeat of the easy-lending cycle that led to the housing crisis, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by IBD. ...

In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

Among other remedies: favorable interest rates and down-payment assistance for minority borrowers with weak credit. ...

[I]ndustry analysts fear Attorney General Eric Holder is rekindling an anti-bank witch hunt launched by Attorney General Janet Reno in the 1990s, when Holder served as her deputy.

Some blame that in part for the subprime boom, because banks were ordered to throw open their lending windows to credit-poor minorities. That crackdown spurred the American Bankers Association to distribute to its thousands of members "fair-lend ing tool kits" advising the adoption of more permissive underwriting criteria to help inoculate them from prosecution.

In the new prosecutions, Justice acknowledges in every case it did not prove charges of intentional discrimination, while banks have denied any wrongdoing. ...

As part of settlement deals, prosecutors have required banks to sign "nondisclosure agreements" barring them from talking about the methods used to allege discrimination. Bank lawyers contend the prosecutors are trying to hide the shaky legal grounds on which the cases are built. "It's horrible what they're doing at the civil rights division," said Reginald Brown, a partner at Wilmer Hale in Washington, who has represented banks in connection to recent race-bias investigations. "They don't have any proof, just theories."

He added, "They want you to sign something saying you agree, under the condition of any settlement with them, that you won't disclose what their theories were. That's because their theories are loopy and wouldn't stand the light of day."

One such theory -- "disparate impact" -- holds that merely a difference in loan application outcomes is enough to prove racial discrimination -- even if no intent exists on the part of loan officers to contrast based on the color of applicants, and even legitimate business factors -- such as credit scores and down payments -- help explain disparities in loan outcomes between white and black applicants.

Counterproductive CAFE regulations

Sam Kazman writes that fuel economy mandates make cars more dangerous. [Kazman @ WSJ; ungated version]

I might add that they make cars more expensive, encouraging consumers to drive older, lower-mileage, heavier-polluting vehicles, so they're counterproductive with their stated goal, too, while costing jobs to boot. Why not use price signals? A steadily increasing Pigouvian tax on gasoline would reduce carbon emissions naturally and create natural demand for high-mileage vehicles while preserving consumer choice. There would be the side benefits of reducing traffic (thus reducing the need for government expenditure on roads) and providing an additional revenue stream that would reduce the need for the government to tax (and thus deter) productive activity like investing or earning income. But that makes too much sense—or, rather, it would require politicians to directly charge voters for their expensive policy dreams, rather than hide the costs.

But also a Diet Coke. I'm inclined to cut her a break, since her anti-obesity program has largely been exhortatory rather than regulative, and no one can claim the First Lady isn't fit, so the occasional splurge isn't hurting her. Still, it's funny to note that Michelle Obama ordered a 1700-calorie meal at a popular chain burger restaurant (though no reporter has verified whether she cleaned her plate). [WaPo]

Around the web, July 12

  • I'm quoted. "Cobell Concludes with the Rich getting Richer." [Indian Country Today; earlier]
  • One problem with Cobell is the commonality of the sprawling Trust Administration class. Another D.D.C. court recently decertified a class because of similar commonality problems. [Trask; Lightfoot v. DC]
  • California court creates implied right of action to sue insurers. Insurance Journal
  • "A Supreme Court win for political speech." [Will @ WaPo]
  • Roger Parloff's Lago Agrio litigation financing story no longer behind paywall. [Fortune]
  • "Hypotheses are verified by testing, not by submitting them to lay juries for a vote." S.D. Fla. rejects junk-science lawsuit accusing Fixodent of causing myelopathy. [In re Denture Cream Prod. Liab. Lit. via Oliver]
  • CPSC overregulation of cribs costing tens of millions. [Olson; CFIF]
  • Another voice against TSA security theater, [Bloomberg]

I'll be on the program "In Session" to debate Caylee's Law with Rep. Jose Felix Diaz, who is behind the Florida version of Caylee's Law. Radley Balko systematically dismantles the law; Ilya Somin has good analysis; Time's Maia Szalavitz doesn't jump on the bandwagon.

(Note that the post originally indicated that the TV appearance is today. It's Wednesday.)

Tort reform advocates are often accused of being in the pocket of the insurance industry, but insurers are sometimes among the worst offenders in the civil justice system. Allstate is suing Toyota for $3 billion of subrogation claims relating to the bogus sudden acceleration theory, and has hired Cozen O'Connor to push for ludicrous venue rulings to forum-shop the case in Los Angeles County. [NLJ]

More thoughts on Caylee's Law

Some are suggesting that "Caylee's Law," which would make it a felony for a parent to fail to report a child missing or a child's death within a certain amount of time, should be federal; that's plainly unconstitutional. A million people have signed the petition, but it's hard to see what they hope to accomplish. Caylee Anthony herself lied to the police and faced first-degree murder charges; the law wouldn't have changed her behavior. Meanwhile, the vast majority of missing-person reports are erroneous or mistaken; blizzarding police with preemptive missing-persons report false-alarms by parents playing it safe to avoid felony criminal liability is going to make it harder for police to find the children who really are missing. And when do the 24 hours to report start running? When you send your teenager off to a weekend debate tournament or camping trip? The potential for abuse in child-custody cases is enormous also: spouses can harass each other while claiming they were only complying with Caylee's Law. So proponents are asking for a draconian law that is only going to snare the innocent, while the overcriminalization makes children worse off. [Alkon; Blackman; Salon; Stossel; Greenfield; earlier on POL]

Doesn't it say something about media views of the civil justice system that the dishonest "Hot Coffee" ended up on HBO, while the pro-reform expose "Injustice," by Brian Kelly, is on Reelz? If you don't get the cable channel, you can watch the trailer. The movie covers the Dickie Scruggs and Milberg Weiss scandals, among other things; interviews in the Chamber-funded movie include John Beisner, Lester Brickman, and Philip Howard. Kelly himself says he is a victim of lawsuit abuse, when it cost him $80,000 to win a lawsuit against a tenant he evicted. [ILR; BLT]

Wall Street Journal coverage; yesterday on Point of Law. Reading between the lines of plaintiffs' attorney Todd Kelly, Jones is likely to appeal the evidentiary rulings preventing her from alleging a variety of conspiracy theories that had no supporting evidence.

The question now becomes whether Al Franken will apologize to all the people he slimed over this case.

Jamie Leigh Jones was one of the stars of the litigation-lobby-sponsored "Hot Coffee" and a poster-child for the anti-arbitration movement—though her arbitration clause had nothing to do with the Department of Justice's decision not to criminally prosecute her rape allegations, and did not block her lawsuit against KBR or her alleged rapist.

This may not be a surprise to those who read my skeptical reporting (Dec. 2007 I, Dec. 2007 II, Dec. 2007 III, Feb. 2008 I, and Feb. 2008 II), but Mother Jones reporter Stephanie Mencimer (an inspiration for the "Hot Coffee" movie) is discovering that Halliburton's claims that Jones's allegations were false was not a smearing of an alleged rape victim, but have some merit.

The court has already thrown out Jones's most sensational allegations—gang rape and being "locked in a container" for reporting the rape—out of the case for lack of evidence. The medical evidence isn't very friendly to Jones, either. And her damages claims seem exaggerated: "At the same time Jones was telling therapists and psychiatrists that she was virtually disabled by post-traumatic stress disorder and could not work, leave the house, drive, or have meaningful relationships with men, she has completed three college degrees, including an MBA; gotten married; had two babies; worked as a teacher and now as a part-time college professor; testified repeatedly before Congress; gone on TV; appeared in a documentary; and started a foundation to support women working as contractors overseas. It's not the résumé of someone as paralyzed by trauma as Jones has claimed to various therapists and psychologists."

One thing Jones has working in her favor is that her story seems so incredible, her pursuit of justice so sincere, that it's almost unimaginable that she would make it up. After all, why would anyone put themselves through that kind of torture? But KBR and Boartz also have a ready answer to that question. It's The Jamie Leigh Story: How my Rape in Iraq and Cover-up Made Me a Crusader for Justice, the working title of her book.

For years, Jones has been in discussions with book agents, screenwriters, and production companies. In 2008, Paul Pompian, a film producer with dozens of docudrama credits to his name, bought the rights to her story. He says that his company is working on film version of Jones' story and that a book is also in the works. "Frankly, we're waiting for the outcome of the trial," he told me. "We're hoping for a verdict that will give us a third act. Hopefully it will be an outcome that's good for us and the movie and especially for Jamie Leigh." Both the screenwriter and Jones' coauthor were expected to be in Houston watching part of the trial, according to Pompian.

When KBR's lawyers first learned of the book deal, they went to court seeking access to the manuscript and other documents. Jones fought the disclosure, arguing that it would diminish the work's financial value. Jones' lawyers filed a motion with the court declaring that the manuscript was a work of fiction.

Update, July 12: I based my analysis of the trial on Mencimer's reporting, but Charles Boartz attorney Andrew McKinney writes us to say that I wasn't precisely accurate: "False imprisonment was booted, but the issue still went to the jury under the guise of fraud in the inducement. JLJ lost, but it was in the case. As for the gang rape allegation, it was simply abandoned for lack of evidence. She surely did make the allegations, which is why she lost, among other things."

Epstein on patent reform

Richard Epstein doesn't buy the argument that first-to-file rule is unconstitutional.

Caylee's Law?

Let's agree that the criminal jury verdict over the death of Caylee Anthony would be a poster-child demonstration of Dave Barry's joke that "the Sixth Amendment states that if you are accused of a crime, you have the right to a trial before a jury of people too stupid to get out of jury duty."

That doesn't excuse the proposed populist movement for Caylee's Law, a likely unconstitutional overfederalization of crime that as Josh Blackman points out would make it a felony (felony!) to wait 61 minutes to report a child's death or more than 24 hours to report a child missing (which would have precluded my weekend trips to debate tournaments). A press release from the petition organizers claims that legislators in three states have pledged to introduce a Caylee's Law bill, thus demonstrating Frank's Law that most legislation named after a child is likely to be poor public policy enacted by legislators who confuse voting against bad legislation with voting against the innocent person the bill is named after.

American lawsuits have wide-ranging discovery rules requiring the production of documents. These require attorneys to screen hundreds of thousands of documents for relevance. It's disadvantageous enough for a party to a lawsuit to have to disclose what it's required to disclose, but disclosing documents that a party is entitled to withhold (such as documents outside the scope of the discovery request or attorney-client privileged documents) could have severe consequences.

Now, there are a wide range of possible rules that could govern the inadvertent disclosure of privileged documents, but they generally fall into one of two categories. For example, the default rule could be a Golden Rule: if an attorney receives a privileged document mistakenly produced by the other party, they could be required to return it without being allowed to use it. The other alternative is a sort of strict liability: if the privileged document is produced, the other side "wins" and gets to keep and use the document; if one's really nasty about it, one could argue that the privilege is waived with respect to privileged documents that weren't produced.

The second rule obviously has dynamic consequences in how document production is done. If a law firm is not allowed to make mistakes in producing documents, it has to take much more care, and spend much more time and money and resources double-checking to ensure that no one has made a mistake in approving the production of privileged documents. This is pure wealth-destroying social cost to pay highly educated lawyers to do the economic equivalent of digging holes and filling them in again, but it's good for the lawyers. At the end of the day, not many more privileged documents are disclosed than under the alternative rule where inadvertently produced privileged documents are required to be returned, but a lot more money is spent by parties on the lawyers getting to that result.

Guess which default rule is generally adopted by the courts? You got it: the socially wasteful one that transfers wealth to attorneys. And a law firm that gets it wrong and accidentally produces thousands of privileged documents to the other side gets castigated for a "blunder" and exposed to potential malpractice liability, ensuring that it is forced to spend lots of money on overeducated hole-digging and filling-in-of-holes.

Related: Mark Herrmann (also at Above the Law) on "clawback" agreements.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.