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The Second Circuit just split from the Ninth in Stratte-Mcclure v. Stanley, 2015 U.S. App. LEXIS 428 (2d Cir. N.Y. Jan. 12, 2015) regarding whether a company violates Section 10(b) – and is subject to private lawsuits – for failure to disclose required information.  The holding would be well-positioned for a Supreme Court grant except that it was not outcome determinative, functionally insulating the decision from Supreme Court review.  But this is definitely a split to watch in the future.

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In their new article, Litigation Discovery and Corporate Governance: The Missing Story About the ‘Genius of American Corporate Law,’ Érica Gorga and Michael Halberstam argue that the U.S.’s unique, liberal discovery standards in private civil litigation have had an important role in shaping the content of corporate law.

They make a number of interesting claims in the paper, including that civil discovery provides detailed data for courts and regulators to use when creating legal standards, and that the omnipresent threat of civil discovery forces corporate managers to run their companies with more care: they must engage in extensive internal monitoring and recordkeeping in order to protect themselves should a dispute arise.  Additionally, the internal process of having attorneys and other experts review documents in anticipation of litigation – even if the documents are never turned over to the plaintiffs – generates information that assists managers, in their monitoring roles, and assists gatekeepers – attorneys, experts, etc – in understanding both the specific firm targeted and the industry in general.  Gorga and Halberstam also argue that the standards for adequacy of corporate internal investigations – which themselves play a growing role in corporate governance – are informed by the standards set…

Financial reforms/un-reforms depending upon your view are unsurprisingly set to be front and center in some upcoming debates.  Here are two interesting articles on the upcoming fight on financial measures taked onto must-pass bills like the budget, the exposure game and the likely resulting pressure.  Either way, financial regulation is keyed to be a big news cycle item in the upcoming political season.

These two articles just state the stance of the Obama Administration– please leave a note in the comments if you have any sources stating the opposition view.  Would love to present a balanced view of this, and am asking for the reader’s help to do so on this time-crunched Wednesday.

Anne Tucker

It’s nice to know that at a time when law firms are feeling financially squeezed, and hiring has been greatly reduced, one firm still seems to be able to write its own ticket.  That firm would be Wachtell Lipton, whose M&A billing practices were exposed in a lawsuit by Carl Icahn alleging that Wachtell committed malpractice in the course of its representation of a target company that – unsuccessfully – sought to fend off Icahn’s takeover bid.

As the American Lawyer reports, Wachtell does not charge hourly rates to its M&A clients, nor does it provide a breakdown of “services or details as to particular lawyers and hours.”  Instead – according to its fee agreement – it apparently selects a fee based on its own internal calculations of the value of what it has accomplished, taking into account “the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved.”  Though it claims not to base fees on deal size, it informs clients that fees tend to be approximately 1% or more of deal size for matters under $250 million, and 0.1% or less on matters over $25 billion.

The interesting thing about…

Okay, fine, that’s not what the Second Circuit formally held, but to be honest, I can’t read this decision any other way.

I’ve blogged about this issue before here, here, and here.  Basically, the situation is this:  In the class action context, there is frequently an issue as to whether the named plaintiff’s own individual claims against the defendant are sufficiently similar to the claims of the rest of the class so as to allow the named plaintiff to sue in a representative capacity.  Historically, these issues have been resolved via Rule 23 of the Federal Rules of Civil Procedure, which, among other things, requires a court to decide whether there is “commonality” among the class members, whether the common issues predominate over the individual ones, whether the named plaintiffs’ claims are typical of those of absent class members, and whether the named plaintiff will serve as an adequate representative for the absent class members.  Rule 23, of course, is only invoked after there has been substantial discovery, and certification determinations under Rule 23 frequently include expert analysis.

In the wake of the mortgage crisis, more and more courts began making these determinations on the pleadings, framing the question not in terms of class certification, but in terms of whether the named plaintiff has “standing” to bring claims on behalf of absent parties, as I discussed in more detail here.  The issue has basically been that if an investment bank underwrites multiple RMBS offerings, and I buy an RMBS issued by a particular trust backed by a particular pool of mortgages, how can a court be certain that my claims are similar enough to purchasers of different RMBS issued by a different trust, backed by different mortgages, such that I should be permitted to represent those purchasers in a securities class action against the underwriter? 

Courts have been unwilling to go the traditional route and wait until a class certification hearing to make this decision; instead, they have been seeking to limit a named plaintiff’s ability to represent absent RMBS purchasers.  They have been fundamentally troubled by the idea that a purchaser of one RMBS could represent all purchasers not only of that RMBS, but of multiple other RMBS, with face values totaling in the billions of dollars.  Courts have come up with a variety of bright-line rules limiting how the class can be defined, at the pleading stage – for example, some courts have held that plaintiffs may only represent purchasers of RMBS from the same trust; others have held that plaintiffs may only represent purchasers of RMBS from the same tranche within a trust.

That orientation has spread to other kinds of claims – similar disputes have arisen in the context of false advertising, for example, where a single misrepresentation is alleged to have been plastered across multiple similar products.  (Say, a false representation that ice cream flavors are “natural,” appearing on chocolate, vanilla, and strawberry – is it necessary that the plaintiff have purchased neapolitan in order to represent absent purchasers of all three flavors?).

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