Federal courts are courts of limited jurisdiction; they cannot hear every case. A dispute must fall within the federal court’s specific “subject matter jurisdiction” in order for the federal court to hear and decide the dispute. One element of subject matter jurisdiction is Article III or constitutional standing. The Seventh Circuit recently rejected one argument as a “dubious strategy,” holding that state court defendants cannot remove a case to federal court and then move to dismiss for lack of standing under the Supreme Court’s decision in Spokeo, Inc. v. Robins.Read More
The United States Court of Appeals for Veterans Claims recently ruled that veterans seeking benefits from the Department of Veterans Affairs may pursue class actions. As one of the judges explained, “[t]his holding is a seismic shift in our precedent, departing from nearly 30 years of this Court’s case law.”Read More
The Ninth Circuit Court of Appeals recently clarified the parameters for using judicial notice and the incorporation by reference doctrine in the context of a motion to dismiss a complaint.Read More
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
Class actions suits enable individuals with relatively small claims to band together and force change where corporate wrongdoing is widespread. Here we present 5 examples of the power of class action lawsuits to make people’s lives better.Read More
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.
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.
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.
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!
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.