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When forum selection bylaws first became a thing, the response from the plaintiffs’ bar was a bit muted.  This is because at least some plaintiffs’ firms viewed forum selection bylaws as beneficial, in that they had the potential to cut down on competition among plaintiffs’ firms for control over a given case.  No longer would a firm filing a case in Delaware have to fear that a competing firm, filing a case in another jurisdiction, would settle on sweetheart terms – or worse, end up getting dismissed, with collateral estoppel effects – before the Delaware firm had a chance litigate. 

 Which brings us to the Walmart litigation and a dispute between two plaintiffs’ firms.

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When I write a law review article, I usually include in the author’s footnote a brief note of thanks to the student research assistants who helped me on that article. When I write a book, I thank my research assistants in the preface.

My research assistant also helps me from time to time with research related to this blog. (Yes, I actually research some of the things I write on this blog. Hard to believe, isn’t it?) Blogs don’t have prefaces or author’s footnotes, so there’s no convenient way to acknowledge his help. I decided to give him his own blog post.

My thanks to Stephen Knudsen, University of Nebraska College of Law Class of 2015, for the assistance his has given me over the past year on this blog. (He is, of course, totally responsible for anything I wrote that you found objectionable or wrong.) The two or three people who read what I write here are now aware of his contribution and he can provide the link to his parents, almost doubling my usual readership.

I saw this in Utah over spring break and I just had to share it with our readers: the Supreme Court building made out of Legos.

Supreme Court Lego Edited

This was part of an extensive Lego exhibit that also included the White House, the Capitol, and the Washington Monument, among other familiar D.C. monuments. If you have a child that likes Legos, a lot of time, and a lot of money for the Legos, feel free to try this at home. What better way for a lawyer or law student to teach a child about the Supreme Court?

The darling model next to the building is my five-year-old granddaughter Payton, something of a Lego expert herself. Thanks to Sandy Placzek for the photography. (Grandpa has too much fun playing with the grandchildren to spend time taking pictures.)

On Tuesday, the Supreme Court finally issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (.pdf), concerning the definition of “opinion falsity” in the context of a lawsuit under Section 11 of the Securities Act.

Joan described the case in more detail here, but the basic issue was, what does it mean for a statement of opinion to be false?  Or, to ground it more in the facts of Omnicare, if the company files a registration statement – as Omnicare did – that claims that the company “believes” its contracts are in compliance with the law, is that statement false when the DoJ sues for Medicaid fraud?

The defendants argued that opinion statements – such as a “belief” in legal compliance – can only be false if they falsely represent the speaker’s belief, i.e., if the speaker did not really believe that Omnicare was in compliance.  If the speaker did believe in such compliance, then even if that belief was unfounded or turned out to be false, the statement itself would be literally true.  

The plaintiffs agreed that statements of opinion may be false if the speaker misrepresents his or her own opinion, but also argued that opinions may be false for other reasons.  For example, according to the plaintiffs, an opinion statement is false if the statement has no reasonable basis, regardless of the subjective beliefs of the speaker.  So in Omnicare’s case, its statement about legal compliance would be false if it did not bother to investigate whether its contracts were in compliance with the law, or if it ignored information that suggested the contracts were not in compliance.

In general, the case was pitched as a dispute about the continuing viability of Section 11 as a strict liability statute.  Section 11, 15 U.S.C. §77k, provides that issuers are strictly liable for false statements in registration statements, and signatories of the registration statement are liable unless they demonstrate that they conducted a reasonable investigation of those statements.  So, if Omnicare prevailed in its argument that belief statements are only false if the speaker misstates his own belief, it would, as a practical matter, require the plaintiffs to demonstrate that the speaker intentionally misled investors, thus importing a scienter requirement into Section 11.  The effect would be particularly pronounced because there is a great deal of slipperiness regarding what counts as an opinion statement in the first place.

Ultimately, the Supreme Court adopted a standard that fit within the framework advocated by the plaintiffs, although the Court used a narrower formulation.  The Court agreed with the defendants that statements of opinion can only be false if disbelieved by the speaker – if the speaker misstates his or her own belief – but then went on to hold that such statements may be misleading if they omit material information.  Such as, if they omit the fact that the speaker had no basis for the belief he or she purported to hold and failed to conduct any investigation into the matter.  It depends on context and delicate inferences yadda yadda yadda, but a registration statement is a formal document and investors are likely to assume that statements of belief contained therein are the product of a reasonable investigation, etc.

But none of this is what the case was really about.

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The UAW Retiree Medical Benefits Trust recently won a battle with Gilead and Vertex to have those companies include on their proxy statements proposals to require them to explain to shareholders the risks of their drug pricing decisions.

Basically, both Gilead and Vertex have come under fire recently for charging extremely high prices for new drugs.  There’s an argument, of course, that this is simply a bad business decision – if your customers can’t afford your drugs, they won’t buy them.  And that’s the official basis for the Trust’s proposal.  The Trust describes, for example, how Sanofi was once forced to dramatically cut drug prices because the initial prices were set unrealistically high.

But I find it very hard to believe that the UAW Retiree Medical Benefits Trust is genuinely concerned about drug pricing in its capacity as a shareholder seeking maximum returns.  Instead, it seems far more likely that the Trust’s concern is, you know, drug prices.  That it has to pay.  For its beneficiaries.  And it’s using its status as shareholder of several pharmaceutical companies to try to influence policy in that regard.  The fact that the SEC is allowing the proposal to be included on the…

So, I repeatedly threatened that I’d eventually post a summary of my paper on arbitration clauses in corporate governance documents – and well, now you’re all finally being subjected to it.

This post was originally published at CLS Blue Sky blog, but I’ve made some minor edits and added a new introduction.

For many years, commenters have argued that at least some shareholder disputes can and should be arbitrated, rather than litigated, and that this could be accomplished by amending the corporate “contract” – namely, its charter and/or its bylaws – to require arbitration.  The possibility was raised in articles by John Coffee and Richard Shell in the late 1980s,[1] and the idea has resurfaced many times since then, including this year by Adam Pritchard.[2]  For almost as long as the idea has been kicked around, there have been warnings that if arbitration clauses are “contractually” binding by virtue of their presence in corporate governance documents, then they may be subject to the Federal Arbitration Act (FAA), which would preempt state attempts to regulate/oversee their use.  Coffee discussed that possibility in his 1988 piece on the subject[3]; more recently, Barbara Black[4] and Brian Fitzpatrick[5] have sounded further alarms.

For foes of shareholder litigation, this is a feature, not a bug; though they rarely say so explicitly, whenever anyone relies upon FAA cases to justify the insertion of arbitration clauses in corporate charters and bylaws, they are implicitly advocating the idea that not only are charters and bylaws “contracts” for FAA purposes, but that federal law requires their enforcement, regardless of the preferences of the chartering state.  After the Supreme Court decided AT&T Mobility LLC v. Concepcion,[6] the notion was particularly powerful, because it meant that corporations would be free to use arbitration clauses to require that shareholder claims be brought on an individual, rather than class, basis.  Given the economics of shareholder litigation, this would almost certainly mean the death of most shareholder lawsuits.

And that’s where my paper comes in.   

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