As I noted in my recent analysis of the 2019 securities class action litigation filings, one of the significant factors driving the near-historical levels of securities suit filings during the year was the elevated levels of securities litigation against life sciences companies. A January 21, 2020 report from the Dechert law firm, entitled “Dechert Survey: Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies: 2019 Edition” (here), details the 2019 securities lawsuit filings against life sciences companies, and reports that once again life sciences companies were “popular targets” for securities litigation claims. According to the Dechert survey report, plaintiff shareholders filed a total of 97 securities class action lawsuits against life sciences companies. The 97 filings in 2019 represents a 12.8% increase over 2018, and a 148.7% increase from five years prior. Given the year-end 2019 total of 404 securities suit filings overall, the filings against life sciences companies represent about one out of every four securities suit filings during the year (24%). By contrast in 2018, life sciences securities suit filings represented about 21.3% of all securities suit filings. Slightly more life sciences lawsuits were filed in the second half of the year (51) than in the year’s first half (46). The report notes that a number of the life sciences lawsuits filed during 2019 involved non-U.S. companies. (Significantly, the report included within the life sciences filings the several lawsuits filed during the year against cannabis companies.) 22 lawsuits were filed against non-U.S. life sciences companies during 2019. The companies hit with these suits represented eight countries. Nine of these suits involved Canadian companies, and four are based in Ireland. 9.3% of the 2019 life sciences lawsuit filings were against cannabis companies, most of which are based in Canada. The survey reports authors noted several trends among the 2019 filings. First, with respect to the size of the life sciences companies sued during the year, the report notes the following. About 51% of the life sciences companies named as defendants has market capitalizations over $500 million. About 39% had market capitalizations over $1 billion. Of the suits against companies with market caps of $1 billion or greater, about half had market capitalizations of $5 billion or more (representing about one-fifth of all life sciences securities suit filings during the year). By the same token, 31 of the life sciences lawsuit filings were against companies with market capitalizations of under $250 million. The life sciences securities suits were concentrated in three federal judicial circuits: the Second Circuit; the Third Circuit; and the Ninth Circuit. During 2019, the largest number of life sciences lawsuits were filed in the Third Circuit, and the federal district with the greatest number of life sciences lawsuits was the District of Delaware (where many merger-related lawsuits are filed). Lawsuits filed in the District of Delaware accounted for about 29.9% of all life sciences securities suit filings in 2019. In a very interesting note, the authors report that approximately two-thirds of the 2019 life science securities suit filings were associated with just three law firms: RM Law; Ridgorsky & Long P.A. and Pomerantz LLC. The plaintiffs firm with the next most filings was The Rosen Law Firm. The increased involvement of the RM Law and Ridgorsky & Long law firms in life sciences litigation is attributable to the increase in merger litigation in Delaware, where those firms are particularly active. RM Law and Rigdorsky & Long together accounted for 26 complaints; the Pomerantz law firm accounted for 18 complaints; and The Rosen Law Firm accounted for 14 complaints. Of the 97 securities suits filed against life sciences companies, about 46.4 percent involved proposed misrepresentations in connection with mergers, sales, IPOs, or other offerings. The report does not separately break out what percent or number of cases were merger objection lawsuits, nor does it break down what percentage or number of cases were “traditional” or “core” lawsuits. By lumping the IPO-related lawsuits into the same category as the merger lawsuits, the report also does not break out the percentage or number of cases that were IPO-related. About 26.8% of the life sciences lawsuits related to underlying allegations of misconduct in the U.S. or abroad involving kickback schemes, anti-competitive conduct, tax issues, or inadequate internal controls in financial reporting. About 17.5% of life sciences cases related to concerns involving product safety or efficacy, including cases arising out of alleged failures to report or disclose negative side effects. About 15.5% of cases related to alleged misrepresentations involving regulatory hurdles, including FDA approvals. With respect to results for life sciences companies on motions to dismiss during the year, the report notes that the outcomes were mixed. There were 24 district court opinions that, according to the report, were favorable to the defendants, eight opinions in which the motion to dismiss was denied, and 14 opinions in which motions to dismiss were granted in part and denied in part. At the appellate level, four out of five opinions affirmed district court dismissals, but in the fifth case, the appellate court reversed a district court’s dismissal of a life sciences securities suit. In its overall analysis of the 2019 life sciences securities suit filings, the report notes that the numbers “illustrate that life sciences companies remain attractive targets for class action securities fraud claims” and suggest that “companies should continue to stay abreast of recent developments and implement best practices to reduce their risk of being sued.” The report includes a separate section of suggested risk management steps that companies can take to try to reduce their litigation risks. The report concludes by saying that “given the numbers from this and recent years’ filings, there is no indication that the filings of securities claims against life sciences companies is going to slow down any time soon.” A Closer Look at 2019 Securities Litigation against Life Sciences Companies published first on via Tumblr A Closer Look at 2019 Securities Litigation against Life Sciences Companies
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In the following guest post, Nessim Mezrahi, takes a look at event analysis, price impact, and damages in securities class action lawsuits. Mezrahi is cofounder and CEO of SAR, a securities class action data analytics and software company. A version of this article previously was published on Law 360. I would like to thank Nessim for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Nessim’s article. ****************** According to a recent article in the Harvard Law School Forum on Corporate Governance, the board of directors of a U.S. publicly traded corporation “has a fiduciary duty to promote the best interests of the corporation, and in fulfilling that duty, directors must exercise their business judgment in considering and reconciling the interests of various stake holders and their impact on the business of the corporation.”[1] Another says that this new era of corporate governance prompts “greater director engagement in risk oversight and monitoring activity, renewed emphasis on management-to-board reporting and increased director sensitivity to recognizing possible ‘red flags.‘”[2] Adverse events that have materialized during the preceding two years constitute possible red flags that may in fact trigger a securities class action that alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission Rule 10b-5 promulgated thereunder. In 2019, U.S. corporate exposure to securities class actions that allege violations of the federal securities laws under Section 10(b) and 20(a) of the Exchange Act amounted to $321.1 billion.[3] This aggregate exposure amount stems solely from alleged corrective disclosures that surpass thresholds of indirect price impact.[4] The predictability of what corporation will be the target of a securities class action is uncertain, but the range of potential exposure and severity is not. The U.S. federal court system has established and documented well-detailed instructions on how aggregate, or classwide, damages are determined. The U.S. Supreme Court has “repeatedly endorsed the use of class actions in adjudicating claims under the federal securities laws.”[5] As a result, boards of directors must rely on the professionals that represent and protect them to be well informed of the risk and exposure of a potential securities class action. Counsel has an elevated duty to recommend, draft and implement robust compliance directives that lay the foundations on how to hold C-suite executives accountable for the management of information that is disseminated to participants in the market, particularly after the Supreme Court ruling in Lorenzo v. SEC., “in which the Court held that those who disseminate false or misleading statements with the intent to defraud — even if they are not the ‘maker’ of the statement — can be found to have violated subsections (a) and © of Rule 10b-5.”[6][7] Directors have a fiduciary duty to ensure that the corporation is sufficiently covered and well prepared to manage the risk and related exposure borne from adverse events that a reasonably diligent plaintiff may utilize to substantiate an Exchange Act claim that alleges violations of Rule 10b-5.[8] Newly emphasized scrutiny of fiduciary duties by directors of publicly traded corporations gives rise for the need of a company-specific risk assessment of potential violations of the federal securities laws. This type of risk assessment is effectuated by identifying and quantifying exposure from high-risk adverse events that have materialized during the preceding two years. Adverse events that have materialized may be considered material enough, and potentially corrective, to trigger and substantiate a securities class action for alleged violations of the Exchange Act or Securities Act. Empirical analysis that applies the industry-accepted event study methodology is the most effective tool to identify a high-risk sample of adverse events and quantify the exposure that has dissipated from the company’s market capitalization during the preceding two years. Event studies are: regression models that are most often used in 10b-5 cases at the class certification stage for two distinct but closely related purposes: (i) testing whether the market in which the relevant security traded was efficient; and, (ii) testing whether an alleged affirmative misrepresentation or corrective disclosure affected the price of the relevant security.[9] At least three unique, yet related, conditions must be present to seed a high-risk adverse event that exposes directors and officers to risk of a securities class action for alleged violations of Rule 10b-5. First, the corporation must have issued a press release disseminating certain new and material information that the board of directors affirm is necessary for investors that buy and sell shares of common stock in the open market. Second, the corporation must have filed registration statements, periodic reports and other forms with the SEC to fulfill the duties of participating in the U.S. capital markets. Third, the corporation’s stock price must have exhibited verifiable evidence of indirect price impact — basically, the one-day residual return of stock price is statistically significant at the 95% confidence standard on the corresponding trading session. Case law establishes that “5% is the standard — though not exclusive — decision rule employed by courts in this context.”[10] The materialization of high-risk adverse events may not only prompt an event-driven securities class action but may also lead to a regulatory investigation by a government agency, as in the recent case of Under Armour Inc. in the U.S. District Court for the District of Maryland.[11][12] From a risk management perspective, identifying and cataloging high-risk adverse events for U.S.-listed corporations is a valuable empirical analysis that provides directors and officers their present-day risk and exposure to an event-driven securities class action. Every U.S.-listed corporation can have a record and catalog of the universe of high-risk adverse events. Directors and corporate stakeholders can rely on empirical evidence to more accurately assess securities class action risk and implement corporate governance systems that promote the best interests of the corporation.[13] This is similar to tracking a driver’s number of moving violations that have amassed over a period of time to assess the risk and determine the premium and deductible for securing sufficient automobile insurance. Cataloging high-risk adverse events that have materialized during the preceding two years also provides empirical evidence that counsel can rely on to evaluate the newness of alleged corrective disclosures claimed in an Exchange Act or Securities Act securities class action. This ongoing empirical exercise provides corporations a tactical defensive tool to effectively challenge and disqualify alleged corrective disclosures that plaintiffs’ counsel claim contains new potentially material information that allegedly rectifies a related materially misleading misrepresentation or omission. In re: Chicago Bridge & Iron Company NV Securities Litigation in the U.S. District Court for the Southern District of New York, defendants have introduced two new ways to rebut Basic Inc. v. Levinson’s presumption of reliance:
Results of the newness test can be instrumental to rebut the presumption of reliance and effectively negate any attribution of aggregate damages to the corresponding corrective disclosures that do not contain new information that has not already affected shareholders. Given this holding and at least one other subsequent district court proceeding, a “newness” analysis of the proffered corrective disclosure is required in this Circuit. … If a court finds that the alleged corrective disclosure is: (i) not new, (ii) not related to the subject or the misrepresentation, (iii) merely speculative or negative commentary, and if the misrepresentation did not cause a price increase when made, then the defendants will have “severed the link” between the misrepresentation and the stock price. In short, I conclude that a limited analysis of an alleged disclosure as to whether it is “corrective” is appropriate at this stage of the proceedings.[15] Aggregate damages in securities class actions can only be established if any of the alleged corrective disclosures disseminated to market participants contain new and corrective information that is related to a corresponding alleged material misrepresentation or omission. With respect to corrective disclosures, where the disclosure provided no new information or was otherwise not “corrective,” Defendants have successfully severed the link between the related misrepresentations without front-end impact and the stock price.[16] Today, the benefits of Halliburton Co. v. Erica P. John Fund Inc.’s, or Halliburton II’s, price impact defenses can be quantified. Data and analyses indicate that in 2019, 225 of 276 alleged corrective disclosures — adverse events that are claimed to be corrective disclosures in an Exchange Act claim for alleged violations of Rule 10b-5 — do not surpass thresholds of indirect price impact using the well-established 95% confidence standard.[17] There are two ways that a defendant can show lack of price impact. First, a defendant can provide direct “evidence of no ‘front-end’ price impact” — meaning that when an alleged misrepresentation was made, it “had no discernible impact on [the] stock price.” Second, a defendant can rebut the presumption with evidence of no back-end price impact — meaning that there was no decrease in price following a claimed corrective disclosure.[18] Data is available to effectively test the newness of alleged corrective disclosures that surpass established statistical thresholds of indirect price impact. If the information that comprises an alleged corrective disclosure has already been previously disclosed via a high- risk adverse event that affected participants in the market with evidence of indirect price impact, then any alleged attribution of potential aggregate damages to a new alleged corrective disclosure may be not warranted because its inclusion in a certified class is not justified according the newness test. Applying empirical evidence through the application of event study methodology provides data-driven analysis that directors and officers can rely on to effectively assess the risk and exposure of a potential securities class action. A company-specific catalog of high-risk adverse events provides robust evidence that can be used to evaluate whether alleged corrective disclosures are in fact disseminating new information that has not previously affected shareholders. Executives who are considering a position on the board of directors of a publicly traded company benefit from knowing whether the self-insured retention and insurance limits are sufficient to cover their potential liability based on the corporation’s embedded securities class action risk stemming from high-risk adverse events that have materialized during the preceding two years. Boards of directors deserve to know whether the corporation is sufficiently covered and equipped with a robust corporate governance risk management program to deter — and, if necessary, combat and defend — a securities class action. ______________________________ Nessim Mezrahi is co-founder and CEO of SAR LLC, a securities class action data analytics software company. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. _____________________________________ [1] “Some Thoughts for Boards of Directors in 2020,” Martin Lipton, Steven A. Rosenblum, Karessa L. Cain and Kathleen I. Tatum of Wachtell, Lipton Rosen & Katz, Dec. 10, 2019. https://ift.tt/2PBe9n0. [2] “Bernie Ebbers’ and Board Oversight of the Office of Legal Affairs,” Michael W. Peregrine of McDermott Will & Emery LLP. https://ift.tt/30a8edA. [3] “U.S. Corporate Exposure to Alleged Violations of the Securities Exchange Act Amounts to $50.9 billion in 4Q 2019 and $321.1 billion in 2019,” Jan. 10, 2020, SAR. https://ift.tt/30ZQ133. [4] Erica P. John Fund Inc. v. Halliburton Co. , 309 F.R.D. 251 (N.D. Tex. 2015). [5] Appaloosa Investment LP et al v. Chicago Bridge & Iron Company NV et al. See, Special Master Report and Recommendation Regarding Class Certification and Appointment of Class Representatives and Class Counsel, by Honorable Shira A. Scheindlin dated Oct. 16, 2019. [6] Lorenzo v. SEC , 139 S. Ct. 1094 (2019). [7] “Potential Rule 10b-5 Liability for Misleading Statements and Omissions,” Israel David, of Fried, Frank, Harris, Shriver and Jacobson LLP, Dec. 18, 2019. https://ift.tt/2Z5geMn. [8] “Second Circuit Clarifies Standard Regarding Knowledge Of Facts That Constitute A Securities Fraud Violation For Purposes Of Triggering The Two-Year Statute of Limitations For Rule 10b-5 Claims,” Corporate & Securities Law Blog, Sheppard Mullin. https://ift.tt/2TS5Ozi. [9] Appaloosa Investment LP et al v. Chicago Bridge & Iron Company NV et al. See, Special Master Report and Recommendation Regarding Class Certification and Appointment of Class Representatives and Class Counsel, by Honorable Shira A. Scheindlin dated Oct. 16, 2019. [10] Id. [11] “Under Armour Is Subject of Federal Accounting Probes,” Wall Street Journal, Nov. 4, 2019. https://www.wsj.com/articles/under-armour-is-subject-of-federal-accounting-probe-11572819835. Read more at: https://ift.tt/36lGKTN [12] In re: Under Armour Securities Litigation. [13] See, “Enterprise Risk Management — Applying Enterprise Risk Management to Environmental, Social and Governance Related Risks.” Committee of Sponsoring Organizations of the Treadway Commission (COSO) — COSO ERM Framework component on governance and culture and the five associated principles: (1) Exercises board risk oversight, (2) Establishes operating structures, (3) Defines desired culture, (4) Demonstrates commitment to core values, and (5) Attracts, develops and retains capable individual. https://ift.tt/2TRup7l. [14] Appaloosa Investment LP et al v. Chicago Bridge & Iron Company NV et al. See, Special Master Report and Recommendation Regarding Class Certification and Appointment of Class Representatives and Class Counsel, by Honorable Shira A. Scheindlin dated Oct. 16, 2019. [15] Ibid. [16] Ibid. [17] Ibid. [18] Ibid.
Assessing Securities Class Action Risk with Event Analysis published first on via Tumblr Assessing Securities Class Action Risk with Event Analysis NERA Economic Consulting: Federal Securities Suit Filings Remain at Recent Elevated Levels1/22/2020 Securities class action lawsuit filings remained at elevated levels in 2019, but the mix of cases changed during the year, according to the recently published annual report from NERA Economic Consulting. According to the report, which is entitled “Recent Trends in Securities Class Action Litigation: 2019 Full-Year Review,” there were relatively fewer merger objection lawsuits during the year, and relatively more standard securities suits. NERA’s January 21, 2020 press release about the report can be found here, and the report itself can be found here. My own analysis of the 2019 securities litigation can be found here. According to the report, there were 433 federal court securities class action lawsuits filed in 2019, the same number as NERA counted in 2018. For the last three years, the filing totals have been at their highest recorded levels (other than 2001, when the filing totals were inflated by a flood of over 300 IPO laddering cases). The number of federal court filings in 2018 and 2019 was nearly double the number of filings in 2014. (The NERA report discusses only federal court securities suit filings; the report does not include statistics about or discuss state court securities class action lawsuit filings). The report also notes that the rate of litigation (that is the number of lawsuits relative to the number of listed companies) has also significantly increased. According to the report, during the 20-year time span ending in 2019, the ratio of filings to companies listed has increased from 2.94% to 7.94%. The federal court securities suit filings are not even distributed throughout the country; rather, they are concentrated in certain courts. Between January 2017 and December 2019, 73% of all federal court securities lawsuits (including merger objection lawsuits) were filed in just three federal judicial circuits – the Second, Third, and Ninth. In 2019, the number of cases filed in the Second Circuit (108) was nearly double the number filed in the Ninth Circuit (56), which had the second most number of suits. Though the number of lawsuits filed each year in 2018 and 2019 was even, the mix of cases changed slightly. A greater percentage of the cases filed in 2017 and 2018 were merger objection cases, while the percentage of merger objection cases declined in 2019, and the percentage of all federal court securities lawsuit filings that were “traditional” or “core” cases increased by 7%. The report also notes that the number of federal court Section 11 lawsuit filings increased in 2019 by more than 80% to 42, from 23 in 2018. Since 2015, the industrial sector with the highest number of securities suit filings as been the health technology and services sector. This trend that continued in 2019, when this sector had 21% of all non-merger related cases. However, the percentage of cases in the sector has declined from a 2016 high of 34%. While in recent years a predominant number of securities class action lawsuit filings involved accounting issues, in 2019, a greater proportion of cases involved missed earnings guidance. More than 30% of the 2019 cases involved missed earnings guidance allegations, compared to an average of approximately 20% of cases in the prior four years. The report notes that while there were fewer cases in 2019 involving allegations relating to the #MeToo movement and relating to the opioid crisis, there were several filings during the year relating to cybersecurity allegations and also relating to cannabis. The report helpfully includes a detailed list of all opioid, #MeToo, cybersecurity and cannabis securities class action lawsuit filings during the period 2017 through 2019. The number of cases resolved in 2019 declined to 312, from the ten-year high of 340 cases resolved in 2018. Though the number of case resolutions declined, the number of resolutions remained the 2010-2016 annual average number of case resolutions of 215. Dismissals accounted for the highest number of case resolutions during 2019; during the year, more than two thirds of the cases that were resolved were resolved in favor of the defendants, with no payment to plaintiffs. The number of settlements declined below 100 for the first time since 2012. In the absence of any “outlier” large settlements during the year, the average settlement in 2019 declined to $31 million (excluding merger suits), compared to an inflation-adjusted average settlement in 2018 of $71 million (excluding merger suits). The 2018 average was substantially boosted by the massive Petrobras settlement. Excluding the Petrobras settlement, the 2018 average was $30 million. The median settlement, by contrast to the average settlement, increased in 2019, to $12.4 million (excluding merger cases), compared to an inflation-adjusted 2018 median of $11.5 million (excluding merger cases). There has been a general upward trend in the settlements every year since 2014. NERA Economic Consulting: Federal Securities Suit Filings Remain at Recent Elevated Levels published first on via Tumblr NERA Economic Consulting: Federal Securities Suit Filings Remain at Recent Elevated Levels As the various stories and revelations came to light during the peak of the #MeToo movement, there were also a number of D&O lawsuits filed against companies whose executives were the target of the stories. Among these lawsuits was the #MeToo-related securities class action lawsuit filed against CBS. On January 15, 2020, in a lengthy and detailed opinion, Southern District of New York Judge Valerie Caproni largely granted the defendants’ motion to dismiss the lawsuit, although the lawsuit did survive as to one set of allegations involved alleged statements by former CBS executive Leslie Moonves. The court’s ruling underscores the difficulty for plaintiffs in trying to translate sexual misconduct allegations into securities claims. Background As detailed in a prior post (here), on August 2018, Moonves was the subject of a lengthy article in The New Yorker magazine in which he was accused of sexual misconduct involving at least six women. The article contained the ironic note that in late 2017 after revelations of others’ misconduct Moonves had become a prominent voice in the #MeToo movement in Hollywood. On the first day that news of the forthcoming article began circulating, the company’s share price declined approximately 6%. The news was soon followed by the filing of a securities class action lawsuit. In their amended complaint (here), the plaintiffs raised a number of allegations. Among other things, the plaintiffs alleged that the defendants had on numerous occasions stated that the company maintained the highest standards for ethics and appropriate business actions, and that the company had a zero tolerance policy for sexual harassment, while in fact the company had a pervasive culture of sexual misconduct; that the company’s culture created an undisclosed risk that Moonves would have to leave the company; and that after the #MeToo story first began to emerge the defendants – and Moonves in particular—made a number of reassuring statements about the company and its practices, which the plaintiffs allege were misleading. The complaint further alleges that a number of CBS executives, including Moonves, sold millions of dollars’ worth of their personal holding in company stock in advance of the revelations about Moonves. The defendants filed motions to dismiss. The January 15, 2020 Opinion In a detailed 48-page opinion (here), Judge Caproni largely granted the defendants’ motions to dismiss, although she denied the motion with respect to statements Moonves made in an interview with Variety magazine in the early stages of the #MeToo story. With respect to the company’s various statements about its ethical codes and business practices, Judge Caproni held that the statements were far too “general and aspirational” to be actionable. The statements, Judge Caproni, were not made to reassure investors that no CBS executive would ever be the target of misconduct allegations, nor did the subsequent revelations suggest that the company had none of the stated aspirations. The statements were, in short, “mere puffery.” Judge Caproni also found that the complaint failed to establish that the statements were false and misleading. As for the plaintiffs’ allegations that the defendants had failed to disclose the risk that Moonves misconduct would lead to his termination, Judge Caproni found that the plaintiffs had failed to establish that Moonves’ departure was imminent until shortly before it actually happened. In any event, Judge Caproni said that the statements on which the plaintiffs sought to rely were not misleading, as they established only that Moonves was important to the company; the statements, she found, had nothing to do with Moonves’ alleged misconduct. Finally, with respect to the various allegedly reassuring the company allegedly made with respect to the various revelations concerning the #MeToo movement, Judge Caproni found that the plaintiff had failed to establish that the statements would be material to investors. However, Judge Caproni did find one statement that Moonves himself had made to Variety magazine to be false and misleading. Moonves had said that the #MeToo movement was a “watershed event,” adding that “It’s important that a company’s culture will not allow for this. And that’s the thing that is far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.” Judge Caproni found, taking the allegations in the light most favorable to the plaintiffs, that this statement was — “just barely” — false and misleading, as it implied that Moonves was just learning for the first time about this kinds of allegations when he was at the time actively seeking to conceal his own misconduct. The statement also falsely implied that he was not personally at risk himself. With respect to all of the alleged misstatements other than Moonves’ statements to Variety, Judge Caproni found that the plaintiffs had failed to sufficiently plead scienter. Judge Caproni found that all of the various insider trades on which the plaintiffs sought to rely had been made pursuant to pre-established Rule 10b5-1 trading plans that were put in motion before the allegations of sexual misconduct had arisen. Judge Caproni also found that the plaintiffs had failed to establish that any of the trades were suspicious. However, Judge Caproni did conclude that the plaintiffs’ amended complaint did sufficiently allege – again, “just barely” – that Moonves was “consciously reckless” when he made his statements to Variety. His statements disclaimed awareness of misconduct at a time when he was aware of his own precariousness and vulnerability. The plaintiffs’ allegations, Judge Caproni, were sufficient to establish that Moonves made the statements with awareness of their untruth or with reckless indifference to their truthfulness or falsity. Judge Caproni found that these statements were also sufficient to establish corporate scienter, as Moonves was speaking as the CEO of CBS at the time he made the statements. Finally, while openly questioning whether plaintiffs will ultimately be able to prove loss causation, Judge Caproni found that the plaintiffs’ loss causation allegations were sufficient as well, with respect to Moonves’ statements to Variety. Discussion While the plaintiffs’ amended did complaint did in one specific respect survive defendants’ dismissal motions, the outcome of the dismissal motions shows as a general matter how difficult it is for plaintiffs to try to transform allegations of sexual misconduct involving one corporate executive into a securities claim against the executive’s company or other company officials. To be sure, these kinds of allegations might serve as a basis of a mismanagement claim or a failure to supervise claim, but these plaintiffs chose to assert a securities claim, which as Judge Caproni’s ruling shows, can be a difficult task in this context. The fact that there was one category of allegations that did survive the dismissal motion, and that those allegations related to Moonves’ own statements is interesting. Clearly, Moonves would have been better off if he had said nothing at all or refused to give the interview. In effect, the allegations that survived the dismissal motion amount to the contention that Moonves was deceptively trying to cover-up his own culpability and misconduct. It is a cliché but it is also true that the cover-up often is the cause of problems. One aspect of this case that I found to be particularly interesting was Judge Caproni’s analysis with respect to scienter. Her conclusion that the plaintiffs could not rely on the defendants’ millions of dollars’ worth of insider trades to support allegations of scienter because the trades were made pursuant to pre-established trading plans is interesting and reinforces the value for executives of having these types of plans in place and of only trading pursuant to plans. Judge Caproni’s conclusion shows that these kinds of plans can in fact provide exactly the kind of protection that they are intended to provide. Though I do think that this case does show how difficult it is for plaintiffs to try to translate allegations of corporate executives’ sexual misconduct into securities claims, the fact is that a portion of the plaintiffs’ claims here did survive the defendants’ motions to dismiss, even if only “just barely.” The name of the game for plaintiffs in these kinds of cases is to get past the dismissal motion, even if just barely, which is what the plaintiffs managed to do here. How the case ultimately will play out remains to be seen, although general statistics and patterns suggest that the likeliest outcome will be a settlement of some kind. In any event, regardless of the ultimate outcome, the fact that the plaintiffs in this case were able to get past the dismissal, even if only with respect to one small part of their allegations, does show that it is possible for plaintiffs to survive the initial pleading hurdles in these kinds of cases, which could be relevant to other prospective claimants thinking of pursuing these kinds of claims. Special thanks to a loyal reader for providing me with a copy of Judge Caproni’s opinion. CBS #MeToo-Related Securities Suit Largely Dismisse, Though Some Allegations Survive published first on via Tumblr CBS #MeToo-Related Securities Suit Largely Dismisse, Though Some Allegations Survive As long time readers know, I have long been warning that climate change-related issues could have a significant impact on directors and officers liability exposures. In the following guest post, Francis Kean provides a summary outline of the specific litigation exposures that corporate directors and officers may face as a result of emerging climate change-related concerns. Francis is Executive Director FINEX Willis Towers Watson. Francis will be joining McGill and Partners in early spring 2020. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article. **************** Although no company has been found liable for the effects of climate change, the growing number of pending cases across the globe has had an impact on directors & officers (D&O) liability insurance policies. There are now over 1,300 climate change related cases being brought in 28 countries around the world with the U.S. alone accounting for over 1,000 of these. Just trying to keep abreast of the rapidly changing laws and regulations relating to climate change across the world represents a formidable challenge for managers of multi-national companies. Earlier this year, international law firm Herbert Smith Freehills (HSF) estimated there were more than 1,600 different laws and policies relating to climate change across 164 countries representing a 25-fold increase since 1997. To date no companies have been found liable for the effects of climate change let alone any directors and officers but this does not mean that the costs of defending these claims has not made an impact on directors & officers (D&O) liability insurance policies. How well adapted are these policies to this type of claim and what are the potential coverage pitfalls? Before attempting to answer that question, it’s worth reminding ourselves how directors can find themselves involved in these types of proceeding in the first place. Litigation threats against directors Among the litigation theories relevant to directors’ duties that are being tested in the courts are:
Under English law (which is similar in this respect to that of other developed economies) directors must exercise due skill, care and diligence in the performance of their roles and cannot delegate their overall supervisory function with respect to the company’s affairs. So how can directors keep track of the climate change risks run by their companies particularly where the risks may not always be obvious having regard to the company’s particular activities? (For example the Prudential Regulation Authority (PRA) has recently issued specific guidance on this issue to banks.) This is a rapidly developing area and there is evidence that litigation funders in Australia and elsewhere as well as the U.S. plaintiff’s bar are advancing increasingly inventive theories. Perhaps the most obvious vehicle for this type of litigation is the U.S. shareholder class action. And certainly this is among the models being deployed against one of the largest U.S. oil majors. Typically, these cases seek to allege that a company’s share price has suffered due to climate change during a time when engaged in misleading and deceptive conduct with respect to the true impact of such change. An alternative case theory that is often employed by plaintiff law firms — especially in the U.S. — is the derivative lawsuit. The broad principle which underlies this type of claim is that shareholders require a remedy in appropriate case to force a company to bring proceedings against delinquent directors who, by virtue of the control they exercise over the company’s management, could not otherwise be held to account. For this type of claim, shareholders do not need to identify a particular share price fall. A key distinguishing feature of these cases is that any damages ultimately payable are awarded to the company rather than to the shareholders bringing the claim, but this does not mean that they are necessarily less costly to defend. (See Von Colditz v. Woods et al) Protecting the company and reducing the liability threat It is perhaps no coincidence that in respect of perhaps the only other planet-sized threat affecting just about every company i.e. cyber risk, the starting point at board level is also typically a series of questions or a checklist from which more granular planning can occur. See for example the U.K. National Cyber Security Centre Board Toolkit. This is because the most solid plank of any defence to litigation alleging negligent failings at board level is the ability to demonstrate that the relevant risks were in fact duly understood and evaluated and that appropriate steps or measures were adopted. (Directors are not guarantors of good outcomes.) D&O liability insurance coverage challenges for climate change litigation So what are some of the potential coverage arguments which D&O insurers could arguably rely on to deny or restrict cover in the event that climate-related litigation is brought against directors?
Guest Post: Climate Change Litigation Threats to Directors and Officers published first on via Tumblr Guest Post: Climate Change Litigation Threats to Directors and Officers One of the hot topics for mainstream P&C insurers these days is dealing with “silent cyber” – that is, the coverage for cyber-related losses in traditional property and casualty insurance policies. There are a number of initiatives underway in the insurance underwriting community as insurers try to address silent cyber. However, as noted in an interesting January 14, 2020 memo from the Covington law firm entitled “The Noise About ‘Silent Cyber’ Insurance Coverage” (here), these initiatives have important implications for policyholders. Among other things, these initiatives potentially could result in a gap in policyholders’ coverage for cyber-related losses, as discussed below. Background The possibility that insurance coverage for cyber-related losses might be found in various insurance coverages in a policyholder’s insurance program is what many insurance industry commentators have called “silent cyber,” which is usually described in contrast to “affirmative cyber.” What is called “affirmative cyber” is the coverage available for cybersecurity-related incidents in purpose-built policies. “Silent cyber” is the possibility that insurance coverage for cyber-related losses may be found in other insurance policies, policies that the insurers would argue were not built with the possibility of coverage for cybersecurity related losses in mind. The traditional policies that potentially might wind up covering cyber-related losses do not necessarily grant affirmative coverage for cyber-related perils, but – at least historically – they do not expressly exclude cyber perils or cyber risks, either. The possibility that these kinds of policies might provide coverage for cyber-related losses has set off alarm bells among insurance underwriters. Insurers’ concerns in this regard are undoubtedly further stirred by several high-profile cases now pending (and discussed at length here) where policyholders are seeking to find coverage for cyber-related losses under GL and property insurance policies. As the Covington law firm’s memo notes, one particular area of concern is the possibility for property insurers of picking up losses associated with cyber-physical risks (say, for example, where property damage results from a data breach or other cyber incident). There have been a number of initiatives in London surrounding these concerns, from the UK financial regulator, on the one hand, and from the insurance markets themselves on the other hand. (The law firm memo helpfully links to many of the primary documents related to these initiative). Among other things, the London market (that is, the non-Lloyd’s) market has released certain proposed exclusions that underwriters can use to try to shield themselves from cyber-related losses. The Lloyd’s market has told its members that they must be clear on whether their products cover or exclude cyber-related losses. Insurers in other markets in Europe and in the United States are taking similar steps. The Law Firm Memo’s Recommendations In light of these marketplace initiatives and the possibility for changed terms or even the addition of exclusions, the law firm memo has a number of recommendations for policyholders. As a general matter, the memo proposes that policyholders “will need to deploy even greater vigilance and expertise at policy renewal time to ensure adequate protection from cyber-related risks.” Specifically, the memo recommends the following. First, the memo suggest that the holders of “property, general liability and marine insurance, among other traditional coverages, should carefully review their policies at renewal time, as they may reflect new terms purporting to redefine their coverage away from such risks.” An important corollary of this is the suggestion that, “to the extent practicable,” policyholders should “resist or limit the addition of new cyber exclusions in traditional property/casualty insurance policies.” Second, as insurers move to try to exclude cyber-related losses under these other traditional coverages, and in light of the common exclusions in cyber forms for risks such as physical injury or damage, policyholders should “carefully review and harmonize their lines of coverage at renewal,” to preclude insurers from introducing an exclusion in the traditional lines that is so broad that it “opens a new gap between traditional and cyber coverages.” Policyholders will also want to ensure that “they have not potentially lost a non-cyber aspect of their traditional coverage” if an exclusion is introduced. Third, and in the alternative, the memo suggests that policyholders consider new products “designed to fill cyber-related gaps’ (through “affirmative cover”). Examples include broader cyber insurance that expressly covers liability for physical bodily injury and property damage arising from cyber perils. Fourth, policyholders should keep in mind that insurance should only be a part of their organization’s risk management program. Companies should consider and deploy other available risk management mechanisms, such as vendor contracts or even the use of captives for other types of risk. The memo has further advice for policyholders that have experienced a cyber incident – that is, for policyholders to look across their entire insurance portfolio to identify all policies that might potentially provide coverage. Readers of this blog will be interested to note that among the specific types of policies that the authors suggest policyholder should consider are D&O, E&O, Crime, and K&R policies. The memo suggests further that policyholders should provide notice to all of these insurers and otherwise take steps to try to preserve potential coverage under those policies. One final note the memo’s authors make is the suggestion that in fighting for coverage under earlier issued policies, policyholders may be able to argue that the later addition of cyber exclusions or other restrictions to later-issued policies “is effective evidence that the prior policy at issue provided ‘silent cyber’ cover for the loss.” Discussion In my view, the authors’ suggestion that policyholders that have experienced a cyber incident provide notice to all potentially involved insurers is a sound recommendation, as policyholders should make every effort to try to preserve the possibility of coverage wherever it may be found. The authors’ mention of the policyholders’ D&O insurance policies is interesting to me. I am frequently asked by persons outside the D&O insurance about whether D&O insurers have been trying to add terms, conditions, or exclusions to try to restrict coverage available under the policy for cyber-related losses. So far, I am not aware of any comprehensive effort by any mainstream D&O insurer to try to preclude coverage under their policies for cyber losses, even though there have been a number of high-profile D&O claims arising out of cyber incidents. In my view, but for the fact that the cyber-related D&O claims involve cybersecurity concerns, they are otherwise plain vanilla D&O claims that by all rights ought to be covered under the D&O policy. However, given the insurance industry’s overall alarm about cyber losses and about “silent cyber,” it is important for policyholders and those that counsel them to be vigilant for insurer efforts to restrict coverage for D&O claims arising out of cyber-related incidents. Of all of the specific points in the authors’ memo, the one of greatest concern to me is their point about the possibility for a “gap” in coverage to emerge as traditional property and casualty insurers try to add restrictions or exclusions to eliminate the possibility for “silent cyber” coverage under their policies. The reason this is of concern to me is that, in our world of specialization, the insurance advisor that is counseling companies about their cyber insurance may be unaware of changes in their client’s traditional property or casualty insurance program. Given the possibility for what the authors called a “gap,” it will be important for everyone involved in assessing a company’s insurance for cyber risks to understand what limitations are being added elsewhere in a policyholder’s insurance program. Addressing “Silent Cyber” and the Risk of Coverage Gaps published first on via Tumblr Addressing “Silent Cyber” and the Risk of Coverage Gaps Plaintiffs seeking to pursue negligence claims for the disclosure of their personal information in a data breach often face hurdles in pleading a sufficient injury. The claimants’ failure to plead a sufficient injury frequently is the basis for dismissal. However, in a very interesting recent decision, the Georgia Supreme Court reversed the intermediate appellate court’s affirmance of the dismissal of the plaintiffs’ data breach claims, finding that the claimants had sufficient standing to assert their claims where they alleged that the disclosure of their personal information left them at an “imminent and substantial risk of identity theft.” As discussed below, the Court’s holding arguably makes data breach claims under Georgia law less susceptible to dismissal. However, as also discussed below, there are important limitations to the Court’s holding. The Georgia Supreme Court’s December 23, 2019 decision in Collins v. Athens Orthopedic Clinic, P.A. can be found here. Background In June 2016, a hacker stole personal identifiable information (including social security numbers, addresses, birth dates, and health insurance information) of at least 200,000 current and former patients of the Athens Orthopedic Clinic. The hacker demanded a ransom, but the clinic refused to pay. In the subsequent lawsuit, the plaintiffs alleged that the hacker offered some of the stolen data for sale on the “dark web” and that some of the information was made available on Pastebin, a data-storage web site. Three of the patients whose data was compromised initiated a class action for damages against the clinic, alleging negligence, breach of contract, and unjust enrichment. The plaintiffs alleged that their personal data had been “comprised and made available to others on the dark web” and that “criminals are now able to assume Class Members’ identities.” The named plaintiffs claimed they had spent time calling credit reporting agencies and placing fraud or credit alerts on their credit reports. At least one of the named plaintiffs claimed she had experienced fraudulent activity on her credit card shortly after the breach. The complaint alleges further that “even Class Members who have not yet experienced identity theft or are not yet aware of it nevertheless face the imminent and substantial risk of future injury.” The Clinic moved to dismiss the complaint, which the trial court granted. The plaintiffs appealed the dismissal to the intermediate appellate court. The Court of Appeals affirmed the trial court’s dismissal, concluding that “the fact of compromised data is not a compensable injury by itself in the absence of some loss or damage to the plaintiff’s legally protected interest as a result of the alleged breach of a legal duty,” and therefore the plaintiffs do not “allege a legally cognizable injury.” The plaintiff’s filed a writ of certiorari to the Georgia Supreme Court, which the Court granted. The December 23 Opinion In a December 23, 2019 opinion written by Justice Nels Peterson for a unanimous panel, the Georgia Supreme Court reversed the intermediate appellate court and remanded the case for further proceedings. In reversing, the Court noted first that the authorities on which the intermediate appellate court had relied in dismissing the plaintiffs’ complaint were all in procedural contexts other than a dismissal motion, as was the case here. The Court noted that on a motion to dismiss, the plaintiffs’ allegations must be taken as true (which is not the case in other procedural circumstances). Here, the Court noted, the plaintiffs had alleged that the “criminals are now able to assume their identities fraudulently and that the risk of such identify theft is ‘imminent and substantial.’” This, the Court said, “amounts to a factual allegations about the likelihood that any given class member will have her identify stole as a result of the data breach.” The Court also emphasized important factual differences between this case and the decision on which the intermediate appellate court relied; in the cases on which the Court of Appeals relied, there was no reason to believe that the data in question had fallen into criminal’s hands. Here, the Court said, “plaintiffs allege that their data was stolen by a criminal whose alleged purpose was to sell their data to other criminals.” The court noted other differences as well, including the fact that the plaintiffs here had alleged that the thief had actually offered some of the data for sale, and that “the class members now face ‘the imminent and substantial risk’ of identity theft given criminals’ ability to use the stole data to assume the class members’ identities.” The Court said that “assuming the truth of these allegations, as we must at this stage, we must presume that a criminal actor has maliciously accessed the plaintiffs’ data and has at least attempted to sell at least some of the data to other wrongdoers.” Thus, the Court said, “we are much further along in the chain of inferences that one must draw in order to conclude that the plaintiffs here likely will suffer identity theft.” There are important limitations in the Court’s opinion. The Court said that while showing injury in a case like this, where the data exposure occurs as a result of an act by a criminal motivated to sell the data to others, may be “easier,” that easier showing of injury “may well be offset by a more difficult showing of breach of duty.” The court expressly stated that it leave the discussion of legal duty “for another day.” The Court also noted in a footnote that “proving that plaintiffs injuries were proximately caused by the breach may also be more difficult.” In conclusion, the Court said with respect to these plaintiffs allegations that, construing them in the light most favorable to their case, “we cannot say that the plaintiffs will not be able to introduce sufficient evidence of injury within the framework of the claim.” The plaintiffs’ allegations of data theft by a criminal enabling criminals to assume their identities “raise more than a mere specter of harm.” These allegations the Court said “are sufficient to survive a motion to dismiss.” The Court’s conclusions in that regard do not depend on the allegations that the plaintiffs incurred costs mitigating the effect of the breach or that one of the named plaintiffs had allegedly experienced actual identity theft; “their allegation that the criminal theft of their personal data has left them at an imminent and substantial risk of identity theft is sufficient at this stage of the litigation.” Discussion Consumer plaintiffs asserting tort claims for the compromise of their personal information as a result of a data breach have struggled to allege an injury that courts have found sufficiently legally cognizable in order to state a claim for damages. As a result courts frequently dismiss these kinds of claims, as indeed the trial court did here. What makes this case interesting and potentially significant is that the Georgia Supreme Court said that it is sufficient in order to state a claim for the claimants to allege that the theft of their personal data left them at imminent and substantial risk of identity theft. In other words, the risk of future harm, if sufficiently imminent, is sufficient to state a claim. Indeed, the court went out of its way to emphasize that it was not basing its conclusion in that regard on the fact that one of the named plaintiffs apparently had suffered a form of identity theft (fraudulent credit card use). There are some specific aspect of this case that arguably could limit its application to other situations. Here, the plaintiffs not only alleged theft of their personal data, but alleged further that some of the class members’ data had already been offered for sale on the dark web. As the Court noted, these allegations put his case “much further along in the chain of inferences” necessary for the Court to conclude that there is sufficient risk of identity theft. These allegations “raise more than the mere specter of harm.” Not all prospective claimants seeking to assert negligence claims under Georgia law relating to data theft will be able to muster allegations sufficient to put themselves similarly further along the chain of inferences. As the Kilpatrick Townsend law firm noted in its January 13, 2020 memo about the Georgia Supreme Court’s decision (here), allegations of an imminent risk of identity theft many not be enough to establish injury “where less sensitive data is taken and where there is no allegations identifying who perpetrated the hack or what the hacker planned to do with the sensitive data.” There are also the other possible pleading challenges for prospective data breach claimants that the Court identified in its opinion. The Court clearly pointed the way for defendants to argue that data breach claimants have not sufficiently alleged a legal duty or a breach of that duty, and also to argue that the alleged harm was not proximately caused by the alleged breach. The Court’s opinion seems to be laying out these issues as the place where future battles may be — and likely will be – waged. All of that said, it should not be overlooked that the highest court of a state has said that a data breach claimant can state a claim for negligence without alleging actual injury by raising allegations sufficient to support a claim that the loss of data has left them at “imminent and substantial risk” of identity theft. This development could provide a substantial boost for data breach claimants seeking to assert claims for negligence under Georgia law. One final note. I think it is interesting that this sequence of events involved at the very beginning the hacker’s demand for a ransom, which the clinic refused to pay. Others can debate whether or not defiance of a ransom demand is or is not the right response. However, it does seem possible that many of the vulnerabilities the class members now face arguably could have been avoided if the clinic had not resisted the ransom demand. Which certainly begs the question about what the right response is to a hacker’s ransom demand. Call for More of Readers’ Top Travel Pics: I hope that everyone is aware that I have been publishing readers’ top 2019 travel pics. The pictures so far have been great. I have received some more readers’ pictures but not quite enough for an entire separate post. It would be great if a few more readers could send in their travel pictures, to help fill out another post! Send those pictures in! Georgia Supreme Court: Risk of Future Identity Theft Sufficient to Support Data Breach Negligence Claim published first on via Tumblr Georgia Supreme Court: Risk of Future Identity Theft Sufficient to Support Data Breach Negligence Claim Regular readers know that among the recurring themes on this site are concerns about problems with the application of notice rules to preclude insurance for claims that would otherwise be covered under the policy. These problems are, in my view, particularly abrupt where a claims is made during one policy period and the notice is provided during the policy period of a subsequent renewal policy issued by the same insurer. I have argued that continuity of coverage between the two policies and with the same insurer ought to be taken into consideration and that coverage should be denied only if the insurer can show that the late notice of claim during the renewal period prejudiced the insurer’s interests. In a recent appeal, the Ninth Circuit rejected this continuity of coverage argument. The appellate court’s opinion, though brief, raises a number of interesting points, as discussed below. The Ninth Circuit’s December 13, 2019 opinion in the case can be found here. A January 6, 2020 post on the Wiley Rein law firm’s Executive Summary Blog about the case can be found here. Background EurAuPair International Inc. is one of several federally authorized au pair programs. In November 2014, all 14 of the federally authorized au pair programs, including EurAuPair, were named as defendants in a lawsuit filed in the United States District Court for the District of Colorado (the “underlying lawsuit”). The complaint in the underlying lawsuit asserted a number of different claims against the defendants, including in particular a claim specifically against EurAuPair for alleged violation of the Sherman Anti-Trust Act. EurAuPair was served with the complaint in the underlying action in January 2015. According to the declaratory action complaint that EurAuPair subsequently filed against its D&O insurer, EurAuPair believed at the time it received service of the complaint that its defense expenses would be entirely within the applicable deductible. EurAuPair did not formally tender the claim to its D&O insurer until April 2016, after a motion to dismiss had been denied in the underlying lawsuit. EurAuPair had a non-profit D&O insurance policy in place during the time period October 1, 2014 through October 1, 2015. EurAuPair subsequently renewed its D&O insurance policy for the policy period October 1, 2015 through October 1, 2016. After EurAuPair formally tendered the claim to its D&O insurer, the D&O insurer denied coverage for the claim, based, among other reasons, on the grounds that EurAuPair’s provision of notice was untimely under the terms of the policy. EurAuPair filed a declaratory judgment action and action for bad faith against the insurer, in the Central District of California. The District Court granted the insurer’s motion to dismiss and EurAuPair appealed. The D&O insurer’s policy requires EurAuPair to report claims to the insurer “as soon as practicable but in no event later than thirty (30) days after the end of the Policy Period.” The December 13, 2019 Ninth Circuit Opinion In a December 13, 2019 three-judge panel per curiam opinion designated as Not for Publication, the Ninth Circuit affirmed the district court. On appeal, EuroAuPair had tried to argue that the notice-prejudice rule applied to its policy. However, the appellate court said that under California law the notice-prejudice rule does not apply to claims-made-and-reported policies. EuroAuPair’s policy, the appellate court said, is a claims-made-and reported policy, and therefore the insurer “need not demonstrate substantial prejudice to deny coverage.” EuroAuPair had also tried to argue on equitable grounds that its late provision of notice should not preclude coverage, owing to its renewal of the coverage with the same insurer. The appellate court rejected this argument, saying that “equitable relief is only justified under unique circumstances, such as when the insured did not have the opportunity to purchase extended reporting period and the insured reports the claim immediately upon learning it exists.” Here, the appellate court said, EurAuPair knew of the claim within the policy period and had thirty days after the policy period expired to report it “yet waited sixteen months to do so. Accordingly, the court said, equitable relief is not appropriate. Discussion This was always going to be a tough case for EurAuPair. The organization’s long delay in providing the insurer with formal notice was always going to be tough to explain. Late notice disputes are always going to be tough for policyholders that whose actions do not bespeak diligence. Beyond that, there is the added problem that the court here did not need to reach, that this might be one of those cases where the insurer actually might be able to show prejudice as a result of the late notice. The fact that the motion to dismiss in the underlying case had already been denied before EurAuPair finally provided notice to the insurer undoubtedly would have been relied on by the insurer to try to argue that the late provision of notice had prejudiced its interests. However, even if there are aspects of this situation that are not sympathetic to the policyholder, it still bothers me that the notice prejudice rule is not be available based on the categorical principle that it does not apply to claims made and reported policies. In my view, this elevates form over substance and it creates the possibility that a mere process error will result in a total forfeiture of coverage. As I have noted at length in prior posts, late notice happens — it happens for many reasons, it happens for no reason, simply because people are involved. In my view, late notice ought not eliminate coverage unless the policyholder’s late provision of notice prejudiced the insurer. If the law in certain jurisdictions prevents this, then the right solution is for the policy to address it. The inclusion of language along these lines would, in my view, correctly address this situation: If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the insurer can demonstrate that its interests were materially prejudiced by reason of such late notice. This provision represents an honest recognition that late notice happens. If the insurer is prejudiced as a result then the insurer can rely on the late notice as a defense to coverage. But otherwise – not. There is another thing about the sequence of events here that rubs me the wrong way. The insurer collected and will keep two consecutive premiums in order to provide this organization with insurance – indeed, or so EurAuPair argued in its declaratory judgment complaint, to provide insurance for the very type of claim that EurAuPair faced in the underlying lawsuit. This situation, which comes up all too frequently (in my view), has motivated me to argue in the past that “continuity of coverage” ought to be recognized as a remedy for the late provision of notice – not necessarily to excuse the late notice altogether, but at least to specify that the insurer that accepted consecutive premiums and received notice during a renewal policy period can only deny coverage based on late notice upon a showing that the late notice caused the insurer prejudice. While I believe this continuity of coverage argument has equitable merit, it has actually not fared that well in the courts recently. As I noted in a blog post last month (here), an Ohio appellate court, applying Ohio law, recently rejected this argument. Given the rejection by some courts of this argument, perhaps the answer is for the “continuity of coverage” issue to be addressed in the policy. As I noted in my recent blog post about the Ohio appellate decision, I have seen policies from other jurisdictions that have continuity of coverage provisions, along these lines: Notwithstanding the provisions of Section X, coverage is provided under this Policy for Claims that could have or should have been noticed under any policy of which this policy is a renewal or replacement or which it may succeed in time, provided that: (i) the Claim could have and should have been notified after the Pending and Prior Date set forth in the Policy Declarations; (ii) the Insurer has continued to be the insurer under such previous policy without interruption; and (iii) the coverage provided under this Section shall be in accordance with all the terms and conditions (including the limits of liability and deductible amounts) of the policy under which the Claim could have been notified. Any limit of liability available under this Section is part of, and not in addition to, the Limit of Liability set for in the Policy Declarations, and the payment by the Insurer of any such limit erodes the limit of liability erodes the Limit of Liability set forth in the Policy Declarations. I can imagine that there are insurer-side advocates that will contend that this type of provision unfairly exposes insurers to stale claims or encourage lack of diligence on the policyholder’s part. To address that concern, it would be appropriate for the section to provide further that the provisions do not apply if the insurer can show that it was prejudiced by the policyholder’s failure to provide notice of Claim. As I have also previously observed, this kind of provision will at least encourage a policyholder to renew with the same insurer. All of that said, I do think there is an important lesson to be drawn from this specific situation, beyond how the recurring late notice issues might be addressed. That is, that policyholders need to be diligent in protecting their own interests. A corollary is that policyholders should not talk themselves out of providing notice. At least according to EurAuPair’s declaratory judgment complaint, the reason it did not provide notice at the time it receives service of the underlying complaint is that it assumed that its defense expenses would be within the applicable deductible. This kind of analysis of the notice issue is always a bad idea; this reasoning should never be the basis for deciding not to provide notice. Unfortunately for EuroAuPair, this case provides a clear example of what can go wrong for any organization failing to provide notice on the assumption that the case with be resolved within the deductible. The problem is, as EuroAuPair found out, that you may not be able later to secure coverage if it turns out the case cannot be resolved within the deductible. Better – always better – to provide notice of claim at the earliest opportunity. Ninth Circuit Rejects Continuity of Coverage as Response to Late Notice of Claim published first on via Tumblr Ninth Circuit Rejects Continuity of Coverage as Response to Late Notice of Claim Employers need to update their new hire paperwork to include the recently revised Form W-4 for 2020. The new Form W-4 reflects the changes made to the tax code in the 2017 Tax Cuts and Jobs Act, which changed the standard deduction and created a new dependent credit. As a result of these and other changes, the prior version of the Form W-4 did not accurately estimate income tax withholding for certain individuals. The new version better estimates an individual’s income tax for purposes of withholdings. Gone is the concept of the employee stating a certain number of “allowances.” Instead, the employee is asked to disclose marital status and, if the employee has another job or working spouse, to use the IRS “estimator” to estimate an amount that the employer will use in calculating withholding. All new hires must complete this updated Form W-4 and existing employees must use the new form to change their withholding elections. Further, any employee who decides to change the amount withheld must use the new form. Importantly, employers cannot require current employees to complete a new Form W-4. However, employees are encouraged to do so as the old form may not accurately estimate their taxes. Not updating may result in the individual having a lower tax refund or even owing taxes when they submit their tax returns for 2020. IRS Applies Some WD-40 to its Form W-4 published first on via Tumblr IRS Applies Some WD-40 to its Form W-4 Securities class action litigation has been an important part of the corporate and securities litigation environment in the United States and Canada for many years. What has been interesting in more recent years has been the steady rise of collective investor actions outside North America. As these various claims have accumulated, a number of them have developed into significant settlements, as documented in a recent report. ISS Securities Class Action Services has published an interesting report entitled “The Top 25 Non-North American Settlements: Largest Securities-Related Settlements Outside of North America of All-Time” (here) detailing the largest collective investor action settlements in Europe, Australia, and Asia. The report notes at the outset that “despite the uncertainties in different jurisdictions that allow collective redress around the globe, foreign investors increasingly recognize the need to action and recover losses form securities fraud.” This trend, the report notes, was significantly advanced by the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which limited the extraterritorial reach of U.S. courts in securities lawsuits. This ruling effectively eliminated the U.S. courts as a forum for investors who purchased their securities outside the U.S. Investors increasingly have had to look to the courts of their home countries (or elsewhere) for redress. The report notes that ISS Securities Class Action Services has been tracking and ranking settlements, including settlements outside North America since 1998. The report presents a list of the 25 largest settlements outside of North American as ranked by U.S. dollar value. (All dollar figures reflected below indicate U.S. dollar values.) The largest settlement in the list is the massive $1.5 billion (€1.3 billion) in the Fortis case, a settlement that the report refers to by the name of the successor company, Ageas. This settlement, which, as detailed here, was entered in the court of Netherlands. It is, as the report notes, the “largest settlement of all time outside North America.” The second settlement on the list is the $1 billion settlement in the Royal Bank of Scotland case in the U.K., the details of which can be found here. While the largest settlements on the list involve proceedings in Netherlands and the U.K., the country with the most settlements on the list is Australia. Of the top 25 settlements on the list, 17 involved proceedings in Australia. The largest of Australian settlements is the 2012 settlement in the Centro Properties case, which settled for US$200 million. The 17 Australian settlements on the list together total US$1.5 billion. Five of the 17 Australian settlement on the list exceed US$100 million. Two countries that some readers may be surprised to find that have settlements on the Top 25 list are Japan and Israel. Japan is listed for the settlement in the Olympus case, which settled in 2015 for $92.4 million. The Olympus settlement is No. 12 on the Top 25 list. Israel is listed for the settlement in the Makhteshim Agan Industries Ltd. Case, which settled in 2011 for $44 million. The Makhteshim Agan settlement is No. 22 on the Top 25 list. The lowest value settlement to make the list is the 2016 settlement in the Billabong International Ltd. case in Australia. The Billagong case settled for US$34 million. Thus, while the largest settlements on the list are massive, and would rank among the largest settlements ever even compared to the largest settlements in the U.S., the size of the settlements further down the list diminishes to less stratospheric levels. For those who are accustomed to the dollar figures involved in U.S. securities class action lawsuit settlements, the figures on this list – other than the Fortis/Ageas and Royal Bank of Scotland cases and a few of the other largest settlements — may not seem noteworthy. The fact is that the values reflected on this list are extraordinary. There was a time not that long ago when any conversation about significant securities litigation was pretty much limited to a discussion of litigation in the U.S. Then for a time about ten to fifteen years ago, the conversation expanded to Canada and Australia. Now the conversation takes in many countries around the world, as collective investor actions have arisen in many countries – and not just the countries with settlements reflected on the Top 25 list, but a number of other countries as well. Just in 2019, collective investor actions were filed or announced in a wide number of different countries, including Denmark, South Africa, Brazil, Taiwan, Germany, and New Zealand. The report notes that in Europe in particular there has been significant recent investor collective redress activity. Among the multiple proposed claims launched in recent year against blue-chip companies are actions against such publicly traded companies as Volkswagen, Danske Bank, Daimler, and Steinhoff International. The report notes that while there is no way now to know whether the claimants will succeed in these cases, “these and other pending litigations will likely lead to significant recoveries for investors, and upon settlement, a prominent place with the ISS SCAS ‘Top 25.’” It is worth noting that of the 25 settlements on the list, only three have a settlement year before 2010. (The Unilever case in the Netherlands settled in 2007 for $406 million, good for third on the list; the Aristocrat Leisure case settled in Australia in 2008 for US$124 million, good for 7th on the list; and the Royal Dutch Shell case in the Netherland settled in 2009 for $389 million, good for 4th on the list). The remaining 22 settlements all took place in 2010 or later. In other words, the vast majority of the settlements on the Top 25 list took place in the last decade. The rise of the collective investor actions outside North America is a very recent phenomenon. But while the last decade was significant and eventful for the global rise of collective investor actions, the decade ahead is likely to be even more significant and eventful. One final note. Not all of the cases on the list represent actions by private investors. Ninth largest case on the list, the Tesco Compensation Scheme matter from the United Kingdom, resulting in a 2018 settlement of $106 million, relates to an action by the U.K. Financial Conduct Authority. The Top 25 Securities-Related Settlements Outside of North America published first on via Tumblr The Top 25 Securities-Related Settlements Outside of North America |
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