Activists Investors Force Firearm Manufacturers to Report on Safety Efforts

More than two years ago, a group of faith-based institutions purchased shares in Sturm, Ruger and American Outdoor. Then the Parkland, Florida tragedy occurred on February 14, 2018.  A few weeks later, these faith-based investors submitted two nearly identical shareholder proposals to Sturm Ruger and American Outdoor, “requesting reports detailing the companies’ efforts to make their products safer.” 

Read More

Supreme Court Allows Mandatory Arbitration in Employment Agreements

By: Joshua Ruthizer

The inclusion of mandatory arbitration clauses with class action waivers has become common in contracts people face every day.  For example, it is difficult to fill out a credit card application, get cell phone or internet service, or even sign up for a website or shop online, without agreeing to mandatory arbitration and waiving the right to bring or participate in a class action.  The use of these clauses has also become common in employment contracts.  According to a 2017 study, since the early 2000s, the number of non-union, private sector employees who are subject to mandatory arbitration has more than doubled to 55%.

The use of mandatory arbitration and class action waivers just got a big boost, and is probably going to become even more common.  Last month, the Supreme Court held in Epic Systems Corp. v. Lewis that the use of mandatory arbitration clauses in employment contracts that prevent workers from engaging in a class action is permissible and does not violate federal labor law. 

The story here begins in the early 20th Century.  Before that time, many courts looked askance at arbitration provisions, and would refuse to enforce them.  In 1925, Congress passed the Federal Arbitration Act, or FAA (not to be confused with the Federal Aviation Administration), which states that agreements between parties to submit disputes to arbitration are valid and enforceable.  Ten years later, Congress passed the National Labor Relations Act (NLRA).  The NLRA protects workers’ rights to engage in “concerted activities,” including “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . , and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 

The plaintiffs in Epic claimed that the NLRA’s provisions protecting their right to concerted activities trumped the FAA and made class action and joint action waivers in employment contracts invalid.  The Supreme Court, in a 5-4 decision by Justice Gorsich, disagreed.  The Court held that the NLRA’s protection of “concerted activities for the purpose of collective bargaining or other mutual aid or protection” focuses on the right for unions to organize and bargain collectively.  The Court also focused on the fact that the provision is silent on arbitration and class or collective/group actions.

Justice Ginsburg wrote an impassioned dissent, stating that the Court “today subordinates employee-protective labor legislation to the FAA” and “In so doing, the Court forgets the labor market imbalance that gave rise to the NLGA and the NLRA, and ignores the destructive consequences of diminishing the right of employees ‘to band together in confronting an employer.’” (Emphasis added).   Justice Ginsburg added that “the inevitable result of today’s decision will be the under enforcement of federal and state statutes designed to advance the well-being of vulnerable workers.

Justice Ginsburg’s dissent already may be more fact than prediction.  In a January 2018 paper titled “The Black Hole of Mandatory Arbitration,” NYU Law Professor Cynthia L. Estlund concluded that “the great bulk of employment disputes” subject to mandatory arbitration “evaporate before they are even filed.”  One reason is that claimants may be unable to find legal representation due the small amount of damages, which make paying an hourly rate or a contingency fee arrangement both economically unviable.  This is not a phenomenon limited to employment contracts.  In 2015, the New York Times published a three part series titled “Beware the Fine Print.”  The articles discuss numerous cases of how arbitration can be stacked against wronged consumers and employees.

The Supreme Court’s decision in Epic is its latest in a line of cases over the past ten years that have found arbitration agreements and class action waivers valid, the FAA trumps state laws that try to limit them (AT&T Mobility v. Concepcion (2011)  and DIRECTV, Inc. v. Imburgia (2015)), and class arbitration requires a contractual basis to conclude that it was specifically agreed to by the parties (Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010)).  The push towards arbitration will again reach the Supreme Court in its 2018-2019 term in Lamps Plus Inc. v. Varela.  Varela’s employment contract with Lamps Plus included a waiver of the right to file a lawsuit in court and have his claims decided by a judge or jury.  Varela agreed “that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.”  The agreement did not expressly allow or prohibit class arbitration.  The Ninth Circuit Court of Appeals concluded, applying state contract law, that a “reasonable–and perhaps the most reasonable–interpretation of this expansive language is that it authorizes class arbitration.”  The Supreme Court will decide whether state contract law interpretation of a general arbitration clause can allow for class arbitration, or whether such an interpretation is banned by the FAA (which would likely mean that a contract must specifically state class arbitration is allowable).  This case has the potential to further limit employees and consumers class action rights.  We will follow this case and update you when a decision is issued.

Reel v. Real, 5 Silicon Vall. 7, 8 (2018)

By Joshua Ruthizer

Spoilers to follow! If you haven’t seen episodes 7 and 8 of HBO’s Silicon Valley, go watch and come back to us!  

Episodes 7 and 8 of Silicon Valley find Pied Piper on the verge of launching the new internet.  Richard is ready to get his Series B investment from his VC backers at Bream/Hall.  However, when Guilfoyle realizes that the price of some Pied Piper computing credits being traded among other start-ups has gone through the roof, he approaches Richard with the opportunity for Pied Piper to launch an Initial Coin Offering (ICO) rather than taking the Bream/Hall’s money.  Richard raises this issue with Monica, who flips out, espouses all the other benefits besides investment capital that Bream/Hall provides (regulatory and legal advice), and asks Richard why he would ask her opinion about an ICO that is essentially a competitor to VC’s everywhere.  Monica sends Richard and Guilfoyle to meet with Russ Hanneman, the arrogant (to put it nicely) and foul-mouthed (understatement) billionaire investor from earlier seasons.  Richard and Guilfoyle meet Russ at a garbage dump, where Russ is paying workers to look for a thumb-drive that contains $300 million worth of cryptocurrency that was accidentally thrown out.  It turns out that Russ lost $1 billion running 36 ICOs, 35 of which failed.  This is enough to convince Richard to take the Series B from Bream/Hall.While Richard is executing the documents, Monica interrupts him and tells him to do the ICO.  It turns out that Laurie wants 70% of Pied Piper’s revenue to come from ads, something that Richard is totally against.  Richard convinces Monica to leave Bream/Hall, come to Pied Piper, and run the ICO. 

All is right with the world, right?  Well, no.  The ICO is a flop, trading at less than $1 per coin.  Also, Jian-Yang, back in China, has figured out a way to run his stolen version of Pied Piper’s new internet and not infringe on Richard’s patent.  After unsuccessful attempts to buy the tech by Gavin Belson, Jian-Yang sells his tech to Yao, a former partner of Gavin and new partner of Laurie.  Laurie and Yao plan totake over the new internet through a 51% attack.  They are manufacturing phones and installing the Pied Piper app on them.  Once they have 51% of the users, they will seize control, re-write the code, and delete the octo-pipers (really a bad name) from the system.  Luckily, Pied Piper discovers the scheme, and after enlisting Gavin’s help, a double-cross by Gavin, a triple-cross of Gavin by Richard, and some unfortunate dancing and use of languageby Richard, Pied Piper is able to add users, retake control of the system, and eliminate the threat from Laurie and Yao.  Finally Silicon Valley fans, Pied Piper is a success, will have to significantly staff up, and is moving into huge new offices.  Oh yeah, and the price of Pied Piper Coin goes up to over $2.

We thought that these two episodes would be a great way to give an introduction to ICOs and cryptocurrencies.  Cryptocurrencies, or crypto, are digital currencies that are not backed by central governments.  Instead, they obtain their value from supply and demand.Cryptocurrencies are also de-centralized.  Rather than centralized recording of transactions (i.e. your bank), every transaction is monitored and recorded by all persons who purchase the currency.  Every new transaction for a cryptocurrency unit (usually referred to as a coin or a token) is recorded on the network as a new “block” on the “chain” of transactions for that coin – hence the term “blockchain.” 

There are over 1,500 known cryptocurrencies out there, many of which were distributed through ICOs.  But investors should be aware, because of the decentralized nature of crypto, and the until-recently lack of regulatory oversight, there is the potential for fraud in the ICO process.  The Wall Street Journal recently examined documents for 1,450 ICOs, and found that 271 of those offerings (which raised more than $1 billion) had red flags and indicia of fraud, including plagiarized investor documents, promises of guaranteed returns, and missing or fake executive teams.The Securities and Exchange Commission (“SEC”) also unveiled a fake ICO to educate investors on just how easy it is to be defrauded.

There is also confusion over whether crypto is a security, subject to oversight by the SEC, or a commodity subject to oversight by the Commodity Futures Trading Commission (“CFTC”).  In March 2018, a federal judge in Brooklyn ruled that they are commodities subject to regulation by the CFTC.  However, currently (May 2018), another judge in the same courthouse is hearing a criminal case where the defendant is challenging the DOJ’s position that the tokens at issue are securities.  The eventual resolution of this question is important as it will determine how, and under what laws, ICO investors can bring claims to recover damages caused by fraud or wrongdoing. 

We hope you have enjoyed our first series of Reel v. Real.  Check back soon for our next series, which will be launched in Summer 2018. 

Reel v. Real, 5 Silicon Vall. 5, 6 (2018)

By Joshua Ruthizer

Spoiler Alert!! As always, make sure you watch HBO's Silicon Valley (this week we're covering Episodes 5 and 6) before reading our coverage of the legal happenings on the show. 

Episodes 5 and 6 of Silicon Valley introduce us to Eklow Labs, an Artificial Intelligence (AI) company run by its namesake Ariel Eklow and funded by Pied Piper’s VC backers Bream/Hall.  Laurie and Monica at Bream/Hall have invested $112 million in Eklow Labs, and want Pied Piper to help with its new internet.  When Richard objects, Laurie tells him “You are completely within your rights to bitterly disappoint your largest investor.” 

Richard relents, and goes to help Eklow Labs, meets their very human looking AI project Fiona, and observes some strange contact between Ariel and Fiona.  After hooking Fiona into Pied Piper’s system, and witnessing Ariel inappropriately touch Fiona, Richard tells Fiona that her relationship with Ariel is off.  Later, Pied Piper’s system mysteriously goes down due to usage from Eklow Labs.  It turns out that Ariel had been “perversely” and “clumsily” groping Fiona for a long time, and training Fiona’s AI to believe that was appropriate conduct.  Yes, this is gross, and has serious shades of #MeToo.  Once Fiona was connected to Pied Piper’s network, she was exposed to the real world, and realized what was happening to her – “sickening advances of a handsy, greasy little wierdo,” as described by Richard.  Fiona, now enlightened, texted Richard (the only other person she has ever met), for help.  Once Ariel realized Fiona has become enlightened to her true circumstances, he shut her down and sabotaged Pied Piper as a cover up and to keep Fiona all for himself (and on his own servers).  Once confronted with the truth, Ariel confirms his ill-intentions and states “I made her.  I can do anything I want with her.” 

Ariel later flees, taking Fiona with him, in an effort to keep Bream/Hall from taking away his company and Fiona.  After Ariel is captured, Fiona finds her way back to Richard, and after Jarred appears to fall in love with her, Richard returns Fiona to the now Bream/Hall controlled Eklow Labs.  Laurie, having taking over as head of Eklow in Ariel’s absence, strips Fiona for parts and sells off the tech to raise money to keep Eklow afloat.

There are a lot of legal issues we could delve into here, but we thought we would focus on inappropriate use of company assets by Ariel.  Directors, and also, in certain cases, executives of public and private companies are fiduciaries for shareholders.  Similarly to how a trustee manages a trust corpus/assets for the beneficiaries of the trust, the officers and directors are managing the corporation for the benefit of the shareholders.  Directors and offices have a duty of care to act prudently and a duty of loyalty to put the interests of the corporation before their own.  Ariel clearly violated the duty of loyalty – he used company assets to develop Fiona not for eventual public sale and use, but for his own benefit, and then ran off and stole Fiona when he was discovered.  It looks like Eklow shareholders would have a good case against Ariel for breach of fiduciary duty.  While we have never seen a case like this, we here at Wolf Popper have litigated a number of fiduciary duty lawsuits

The second issue is the fact that Ariel appears to have induced Bream/Hall to invest $112 million on false pretenses - with the promise of world changing AI that could be sold and monetized, when in fact the goal was to develop Fiona for Ariel’s own private (and creepy) use.  This is fraud, and shareholders would be within their rights to sue to recover their investments. While not exactly the same, this situation brings to mind the recent events at Theranos, where Elizabeth Holmes is alleged to have induced over $700 million in investments with the promise of technology that would revolutionize blood testing with a simple finger prick, as opposed to traditional blood draws that use vials.  However, it appears the technology never worked, and that Theranos faked lab results in order to fool investors and regulators. 

We hope you will join us for our recap of episodes 7 and 8, coming later this week. 

Reel v. Real, 5 Silicon Vall. 3, 4 (2018)

By Joshua Ruthizer

Spoiler alert: If you have not yet watched Episodes 3 and 4 of Silicon Valley, go watch and then come back to us!

Since we last left off (cue deep radio announcer voice), all-around creep and Pied Piper nemesis Gavin Belson of tech giant Hooli and his head of security have placed a spy among Pied Piper’s staff of coders:  Jeff.  Jeff lucks out, as he (without even hiding his disdain) allows Dinesh to move in with him after Jian-Yang has evicted Pied Piper C-suite from the incubator and Dinesh can’t afford his own place after spending all his money buying and repairing a Tesla.  Jeff proceeds to get Dinesh  drunk and Dinesh spills the beans about how Gilfoyle saved Pied Piper with a slightly unintentional hack of Seppen smart fridges (see Season 4’s “The Patent Troll”, an episode worthy of its own post), which also resulted in some R-rated images of a mime being displayed on the fridges’ consoles. 

Jeff, the loyal soldier, reports this information to Hooli, and Gavin gets the smart fridge company to sue Pied Piper for $10 million in damages for “soiling their smart fridges.”  But worry not Pied Piper fans:  Gilfoyle discovers that the smart fridges have been recording and streaming to the cloud every conversation that occurs near them, in violation of Seppen’s terms of service (and possibly illegal wiretapping).  Gilfoyle and Jarred are able to use this information to negotiate a settlement with Seppen, whereby Pied Piper will fix Seppen’s code, and Seppen will drop the lawsuit.  As a result, Gilfoyle and Jared discover Jeff’s treachery and his exploitation of Pied Piper’s greatest weakness – Dinesh and his desperation for a friend.  They confront Jeff and instruct him to sit at his computer and do nothing, so as to not tip off Hooli and Gavin.    

Jeff is engaged in what could be described as corporate spying or corporate espionage.  Corporate spying can be legal if you do not use illegal means.  Think secret shoppers, or eavesdropping at a trade show.  However, as mentioned in episode 4, Jeff signed a very strong non-disclosure agreement (NDA) when he came to work for Pied Piper.  That NDA prevents him from disclosing information about Pied Piper’s business operations, intellectual property and proprietary technology.  Spying for Hooli and disclosing Pied Piper’s information could open Jeff and Hooli up to potentially huge civil liability.  Just look at the recent dispute between Waymo (a division of Google) and Uber over the alleged theft of self-driving car trade secrets.  The case settled in February for $245 million in the middle of trial.    

However, Jeff (and even Gavin and Hooli) may have another problem.  If Jeff compromised any trade secrets (Pied Piper’s code?), he could be a violation of the Economic Espionage Act of 1996.  Stealing and selling, or giving away, trade secrets—financial, business, scientific, technical, economic, or engineering information that has monetary value to the owner—can be punishable by 10 years in jail and penalties of at least $5 million.  For example, a California man was sentenced to years in jail in 2001 for copying Intel trade secrets to use at his new employer Sun Microsystems. 

We will be back with our take on Episodes 5 and 6 soon!

Pension Fund Power: A Conversation with Professor David Webber

On behalf of Wolf Popper LLP

Some readers may have noticed the recent New York Times op-ed, “The Real Reason the Investor Class Hates Pensions.”  In it, Boston University law professor David H. Webber argues that pension funds, aside from their traditional roles of protecting and administering pension assets, have also become effective corporate activists, harnessing their large stakes in public companies to agitate for more shareholder power. Unsurprisingly, special interests—such as the Koch brothers and former Enron executives—have not taken kindly to this trend, pouring millions into “every form of political advocacy available” to replace pension funds with defined benefits to individual 401(k) retirement accounts that lack collective oversight power.  

Adam Blander recently caught up with Professor Webber, who is promoting his new book, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, which describes the pension fund movement to democratize our corporations as a “rare good-news story for American workers, an opportunity hiding in plain sight”. Below are excerpts from that conversation (edited and condensed for clarity) in which the professor explains why pension funds make for excellent class action representatives, what “economic voter suppression” means, and how the push favoring arbitration over traditional lawsuits and the push for pension reform are often two sides of the same coin.

Adam Blander: Can you give a few examples of litigation or corporate governance efforts that pension funds have undertaken recently? Particularly ones that not only had consequences for pensions’ own constituencies, but also for the broader stockholder base or broader public?

David Webber: Sure. First of all, I think that public pension funds and labor union funds have been the most important force in the corporate governance reform movement. Pensions funds played an absolutely crucial role in getting proxy access, particularly after the proxy access rule implemented under Dodd-Frank was struck down by the D.C. Circuit Court of Appeals [NOTE: “proxy access” is the policy allowing certain shareholders to include their own director nominees in a company’s proxy statement, which encourages more competitive elections].  It was the New York City funds with the help of some other pensions that picked up the baton and got proxy access at hundreds of companies.

The public pension funds were also behind the efforts to destagger corporate boards.  Union funds were also very involved in pushing for majority voting.  One fund filed something like 700 shareholder proposals for this.  

What is majority voting?

Most board members run for an election uncontested.  They are nominated by a nominating committee, which is basically the board nominating itself or its own replacement  Most companies had plurality voting rules, which meant that if you’re running unopposed, even if you got only one vote, you could be re-elected. So, majority voting required some directors to win a majority of the vote, that is, fifty percent of shares plus one.  This gives a lot of more power to shareholders because even if they are not running a competing candidate, they can still run a withhold vote campaign, and prevent board members from being reseated.  This makes board members, even those running unopposed, more accountable to shareholders.

So all shareholders have benefited from pension fund efforts on the corporate governance front and the same is true on the litigation side.  I have been involved in some studies, but there have been studies by other folks too that show that when a public pension fund serves as a [class action] lead plaintiff, that correlates with both high recovery for shareholders and lower attorney fees.  In the “10(b)” [i.e. federal securities fraud] context, there is a presumption favoring whoever has the largest loss.  This presumption is specifically designed to bring in institutional investors like pension funds.  Well, the evidence shows that the presumption basically works as designed: the largest funds correlate with higher recovery and lower attorney fees for the class. And by the way, this result is not only for securities fraud lawsuits, but also for merger and acquisition deal litigation, like in Delaware. So that’s another example where public pension funds have stepped forward and played a positive role not only in protecting the value of workers’ own retirement funds but also everyone else who is in the market.

Regarding the efforts by some big business interests to limit the power of pension funds and the conflicting movement by pension funds to use their power to effect broader stockholder changes: is that a distinctly American dynamic, or are pensions in, say, Latin America or Europe facing similar issues?  

I think that the U.S. is unique in that there aren’t that many jurisdictions that allow for shareholder proposals. Also, in many parts of the world, companies—even public companies—have a controlling shareholder, which is often a controlling family.  In the U.S., we have a dispersed shareholder base which means there typically is no controlling shareholder, and the CEO and corporate management are therefore much more powerful.  So, in the U.S. context, where shareholder-manager balance is more tilted in favor of managers, it does make sense to have shareholder proposals or other opportunities for shareholder input.

You’ve used the term “economic voter suppression” before.  Would you explain what that means?

Yes. A lot of the big pension funds, like CalPERS [the California Public Employees’ Retirement System], the New York City funds, or the California State Teachers’ Retirement System, have been very involved in the corporate governance movement.  Well, right now around the country many of these funds are being threatened by a drive to convert them into basically a million individually managed 401(k) accounts.  The typical justification for this pension reform drive is concern about underfunding.  But what I am very worried about is that the big collectively managed pension funds’ power in terms of shareholder activism or litigation stems from the fact that they are collective.  CalPERS has over $300 billion in assets.  So, when it calls up an investment manager or it approaches a company, whether it is to engage in some kind of activism or to hire a lawyer and bring suit, it has a lot of clout because of its size.  

But if you were to break up a fund like that into millions of individually managed 401(k)s, the reality is that those of us who own 401(k)s: we hardly ever vote, we don’t know much about the fees we’re paying, we don’t know how much the CEO is paid, and we don’t know how our fund has performed relative to S&P 500.  401(k) holders are almost totally passive.

A pension in some ways is like a union.  When you are in a union you have an organization that is bargaining on your behalf, and you have some collective power.  But if you’re just an individual employee, you’re on your own and have very little power over your employer and consequently you get paid less, and you get treated worse.  There is a similar analogy here which is that these big collective public pension funds are in a good position to protect themselves and to advocate on behalf of workers.  But break them up into individualized accounts and you lose that clout. So that is what I call economic voter suppression.  I view it as a way of silencing the voice of shareholders, and I think that certainly will be to the detriment of shareholders.

I presume you’d say this pension reform movement is similar to the movement by some business interests to limit the class action device?

Definitely. I think there have been clear attempts to limit class actions.  The latest threat we are seeing, which has been hanging around for a few years now, is the mandatory arbitration provision.  Everybody understands these provisions will kill the class action by breaking everyone up into one investor rather than letting investors proceed collectively.  So every individual investor with a small claim will drop out.  The point of mandatory arbitration provisions is not to shift the claims from court into arbitration, but to eliminate these claims entirely.  

Is there a self-help aspect to your book? Meaning, do you identify any steps that individual pensioners should take, particularly those who may not be that well versed in the legal or financial minutia of these labor issues?

Yes, insofar as I am encouraging workers to be vigilant in protecting pension funds’ collective voice and not allowing them to be broken up into millions of individually managed accounts. Some of my advice is also geared more at the institutional level, where I suggest actions these funds can explore to retain some power, even if a shareholder proposal avenue or litigation avenue is closed off.  A lot of these issues are also going to be decided at the ballot box in many states. In California, for example, there is talk of seeing a pension ballot proposal in 2018 or 2020. Workers and pensioners should be paying very close attention to these issues.

 

Reel v. Real, 5 Silicon Vall. 1, 2 (2018)

By Joshua Ruthizer and Aubrey Pritchett

HBO’s Silicon Valley explores the tech startup industry, with a humorous point of view.  Along with the laughs at the sometimes incompetent, sometimes genius programmers, the show also delves into many interesting legal issues faced by the Pied Piper team, including corporate law; intellectual property theft; non-compete agreements; trade secrets; and corporate espionage.   All these real life legal issues play out to our amusement on the show, although sometimes the drama happens in real life as well:  Jawbone’s recent failure has been cited as the “second-costliest-VC-backed startup failure of all time,” and who can forget the litigation between Marc Zuckerberg and the Winklevoss brothers (dramatized in the Oscar winning The Social Network). 

We here at Wolf Popper enjoy Silicon Valley and, as we are lawyers, sometimes discuss the legal issues that drive the plot.  We thought that we would discuss some of these issues that are presented in Season 5 here on our blog. 

Spoiler alert: if you want to watch first (you do), detour to HBO, quickly binge watch seasons 1-4, and episodes 1 and 2 of the current season, and come back to read our take. 

We begin Season 5 with Richard Hendricks, our favorite genius and anxious Pied Piper CEO, in quite the predicament:  brand new gorgeous offices, a patent wanting to be fully realized into a new decentralized internet, and… no staff in sight but for three “magnificent stallions” as Gilfoyle and Dinesh lovingly [read: creepily] refer to them. 

Richard, Gilfoyle and Dinesh drag their feet on hiring the remaining coders they need to staff up, and when all 63 well-qualified candidates are hired right out from under them by nemesis/all around creep Gavin Belson, they are left with few options other than to acquire Optimoji, an existing company nearing bankruptcy, and its staff of coders.  Pied Piper makes an offer and gets a [debatable] oral agreement to buy Optimoji and keep on 12 of its 30 employees, but Optimoji’s CEO Kira is swayed to be purchased by Sliceline [to be clear: not a pun, just a rhyme], whose CEO Duncan (a coder Pied Piper rejected) makes her a better offer to take on her entire staff of 30.  [We have made an internal decision to spare you an academic discussion of whether or not Pied Piper had an enforceable agreement to acquire Optimoji.] 

Luckily, Richard and Pied Piper snuff out the weakness of Sliceline’s business model:  while Sliceline aims to find you the cheapest delivery pizza in any given area, during it start-up phase it is buying pizzas from Domino’s and repackaging them in Sliceline boxes.  Putting aside the legality (and morality) of passing another’s pizza off as your own, Sliceline is losing $5 per pizza until order routing and allocation is optimized.  Richard and his engineers create a botnet program and thousands of fake users, indistinguishable from real ones, all over the city that will order pizzas, maximizing Sliceline’s delivery time and costs, all for the purpose of devaluing Sliceline so that Pied Piper can make a lowball acquisition offer that Sliceline cannot refuse.  [Did anyone else wonder what they did with the roughly 2,000 pizzas they ordered?]  Pied Piper wins again with the acquisition of Sliceline, firing Duncan and Kira, and successfully gaining 50 new employees, which is a few…err 38…more than they set out for.  Queue all of Richard’s nerves.

But does Richard’s negotiation strategy cross a legal line? The threat and use of bots to order pizza and bleed Sliceline to bankruptcy, all for the purpose of devaluing the company, does sound shady.  But is it extortion, or just hard bargaining?  The California Penal Code defines extortion as “the obtaining of property or other consideration from another, with his or her consent, or the obtaining of an official act of a public officer, induced by a wrongful use of force or fear, or under color of official right.”  “Fear” to rise to the level of extortion “may be induced by a threat… [t]o expose a secret affecting him, her, or them.”  While we are not experts in the California Penal Law here at Wolf Popper, Richard’s actions do not seem to rise to the level of extortion.  His threat is not to expose a secret, he was able to figure out Sliceline’s weakness on his own from public information.  One can’t deny though, it seems sinister.  On the other hand, one could argue that Richard’s tactic was merely a result of close observation and the need for vengeance; he didn’t rely on any facts that were not otherwise available, or perhaps obvious, to the public.  Any other coder in the Valley, given the funds, could have made the same calculated move.

We leave off Episode 1 skeptical of how this trio of companies are going to interact, especially with Richard unable to take leadership and address the room.  In the background another legal issue comes to the forefront.  We haven’t seen Erlich in a while, thanks to Gavin (see the season finale of Season 4), and Jian-Yang decides to take over Erlich’s incubator house and business.  Jian-Yang tries to pass a (clearly forged) letter off to Pied Piper’s in-house lawyer to assert that Erlich has given the house to him, only to find out from the lawyer that a) the lawyer does not represent Erlich personally, and b) Jian-Yang must prove that Erlich is dead in order to acquire the property.

Getting into Episode 2 we see that Jian-Yang is still serious about his endeavor when he reveals a dead pig corpse in the back of his car which he plans to cremate to replicate a dead Erlich’s ashes.  [Are pigs and large humans close enough to pass? Maybe?] It’s a little concerning that Jian-Yang is able to have Erlich declared dead with nothing more than some forms and pig ashes.  One would hope that the Court required a copy of a death certificate or other official document proving his death, and proof that he made a diligent search for family.  Forging or filing fake copies of public record is typically a felony, and California law requires someone to be missing for five years before they are presumed dead

When Jian-Yang makes it to court, the judge seems more sickened by cremated remains in a courtroom than incredulous of the identity of said remains, and delivers the biggest blow to Jian-Yang’s wild plan.  If Jian-Yang wants to be executor of Erlich’s estate, he must also take care of Erlich’s debts and bills; and as it seems Erlich had quite a few debts to pay off.  Mirroring the back and forth between Gilfoyle and Dinesh, Jian-Yang makes the decision that the reward of pride and being financially involved in Pied Piper’s presumed success is worth the costs and effort. 

9th Circuit Holds That Victims of Data Breach Can Sue Based on Substantial Risk of Identity Theft of Fraud

News stories of data breaches have become all too common these days. From retail giant Target’s colossal data breach of 70 million of its customers during the 2013 holiday season, to the Equifax credit reporting data breach that impacted almost 148 million consumers, to Facebook's negligence in safeguarding the personal data of 50 million users, to the Hudson's Bay Company (think Saks and Lord & Taylor) breach affecting more than 5 million customer debit and credit cards, now more than ever the conveniences provided by our digital world put the security of our personal information at risk. 

How can victims of data breaches respond?  There are recommended security steps to take depending on the data exposed.  You may need to change the login ID and password at the hacked website, monitor your bank accounts and credit reports, or cancel and request new credit cards.  In addition, consumers may be able to bring lawsuits against the company that exposed your data. 

The question of who can bring a suit in response to a data breach has been debated and litigated in a number of courts.  One question debated is whether the data must have been used to commit identity theft or fraud or cause financial losses, or whether the potential for identify theft or losses is enough.  The U.S. Court of Appeals for the Ninth Circuit recently held in In re Zappos.com, Inc. Customer Data Security Breach Litigation that a substantial risk of identify fraud or theft can be a sufficient harm (standing) to bring a lawsuit. 

In 2012, hackers breached Zappos’s servers and gained access to names, account numbers, passwords, email addresses, billing and shipping addresses, telephone numbers, and credit and debit card information of more than 24 million customers.  Customers impacted by the data breach sued Zappos.  The U.S. District Court for Nevada dismissed the claims of customers who had not alleged that they had already suffered financial losses (those alleging the risk of future identify theft and losses), but allowed the claims of those who had alleged they suffered financial losses to continue.

The Ninth Circuit disagreed, and held that the plaintiffs' allegations of substantial risk of identify fraud or theft were sufficient to show standing because they alleged a credible threat of real and immediate harm.

The Ninth Circuit’s decision seems to recognize that the sensitivity of the information stolen, i.e. whether it can be used to commit identify theft, plays a part in whether or not the plaintiffs can bring a claim.  The Zappos plaintiffs alleged that the data stolen in the Zappos breach gave hackers the means to commit identify theft and fraud.  The Ninth Circuit found this to be credible, relying on the facts that some consumers had already suffered identify theft, and Zappos urged customers to change their passwords at Zappos and any other account where they used the same or a similar password.

The Ninth Circuit’s decision recognizes that the risk of identity theft and fraud resulting from a data hack of sensitive information is very real, and consumers have been injured whether or not they immediately suffer financial losses from identity theft.  After all, hackers who steal consumers’ data do so with the intention of exploiting it for their own personal gain, not simply for the thrill of stealing it. 


For more information as to your rights, please contact Wolf Popper LLP at www.wolfpopper.com

State Courts Remain Open for Federal Claims in Public Securities Offerings

By Sean Zaroogian

On March 20, 2018, the Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund, unanimously confirming that state courts have jurisdiction to hear class actions arising under the Securities Act of 1933 (the “Securities Act”).  The Supreme Court further held that these type of class action cannot be removed from state to federal court.

Background on State Court Jurisdiction under Federal Securities Laws

The Securities Act regulates a public offering of securities (such as an initial public offering), while the Securities and Exchange Act of 1934 (the “Exchange Act”) regulates the trading of securities on national exchanges (such as the New York Stock Exchange).  Together, these two acts provide the foundation of the federal securities laws.  Congress provided federal courts with exclusive jurisdiction over Exchange Act claims.  However, it provided a rare grant of concurrent jurisdiction to state and federal courts over Securities Act claims.  Investors could therefore bring federal securities claims arising out of public offerings in either state or federal court.  Moreover, the Securities Act prevented a corporate-defendant from removing claims properly brought in state court to federal court.

In 1995, as a result of perceived abuses of the federal securities laws, Congress passed the Private Securities Litigation Reform Act (the “PSLRA”).  With the aim of eliminating lawsuits that appeared to be frivolous, the PSLRA made significant amendments to the securities laws, including, inter alia, a safe harbor for forward-looking statements, heightened pleading requirements, and an automatic stay of discovery pending a motion to dismiss.  As a consequence of (presumed) legislative oversight, litigants were free to avoid the PSLRA by bringing securities class actions in state courts under state statutory and common laws (blue sky laws), which do not offer corporate-defendants the same protections afforded by the PSLRA.

In response to an increase in state court filings as a workaround for the PSLRA, Congress passed the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).  SLUSA reinforced the PSLRA’s protections against potentially frivolous securities litigation by amending Section 16 of the Securities Act (15 U.S.C. § 77p) to prohibit “covered class actions” (those involving more than 50 investors) arising under state blue sky laws (e.g., actions involving false statements or deceptive devices in the sale of securities).  SLUSA also required any action in violation of the Section 16 prohibition to be removed from state to federal court, thereby ensuring dismissal of the state law action.  Furthermore, in what the Supreme Court theorized may have been a bout of hypersensitivity by Congress, SLUSA amended the Securities Act’s jurisdictional provision (§77v(a)) to grant concurrent jurisdiction between state and federal courts, “except as provided in section 77p [Section 16] of this title with respect to covered class actions . . .” (the “Section 16 exception”).  In other words, the grant of concurrent jurisdiction under the Securities Act became limited by Section 16’s prohibition of covered class actions.

State Court Jurisdiction is Disputed and Resolved

Following the passage of SLUSA, state and federal courts around the country were split as to whether the Section 16 exception prevented state courts from hearing federal securities claims.  In cases such as Knox v. Agria Corp., courts held that the Section 16 exception applied to any “covered class action” brought in state court, i.e., any securities claim on behalf of more than 50 investors.  This interpretation effectively granted federal courts exclusive jurisdiction over securities class actions, including federal claims arising under the Securities Act.  In contrast, in cases such as Luther v. Countrywide Financial Corp., courts held that the Section 16 exception applied only to covered class actions arising under state blue sky laws, and not federal Securities Act claims brought in state courts. This interpretation preserved the existence of concurrent jurisdiction between state and federal courts under the Securities Act.

Enter Cyan.  In Cyan, the Supreme Court resolved the split by affirming a California Superior Court ruling that relied upon Luther to find that state courts had jurisdiction to hear Securities Act claims.  Justice Kagan, on behalf of a unanimous Supreme Court, focused on the plain text of the Section 16 exception and found that, “by its terms,” it has no effect on Congress’s grant of concurrent jurisdiction for Securities Act claims.  Specifically, Justice Kagan declared that the Section 16 exception applies only to securities class actions arising under state blue sky laws.  Justice Kagan then responded to an argument raised by the United States Government in an amicus curiae brief (although not at issue in the underlying Cyan case) and held that SLUSA did not alter the Securities Act’s prohibition on removing actions from state to federal court.  As such, corporate-defendants called into state court for violations of the Securities Act continue to be barred from removing the case to federal court. 

By way of Cyan, the Supreme Court has upheld investors’ rights to bring class actions for violations of the Securities Act in either state or federal court.  This is welcome news to investors seeking to keep open options for protecting their investments.


Wolf Popper LLP is a preeminent law firm that has protected the rights of defrauded investors for over 70 years.  Concerned that your investments may be exposed to securities fraud?  Contact us, or monitor our ongoing investigations into potential securities fraud here