Editor

Byeongsook Seo

Snell & Wilmer L.L.P., 1200 17th Street, Suite 1900, Denver, CO 80202, 303.635.2085, [email protected]

Byeongsook Seo is a member of the Snell & Wilmer L.L.P.’s commercial litigation practice.  He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors.  Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation.  His honors include Colorado Super Lawyers and The Best Lawyers in America.  Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.

Contributors

Melissa Donimirski

Heyman Enerio Gattuso & Hirzel LLP, 300 Delaware Avenue, Suite 200, Wilmington, DE 19801, 302.472.7314, [email protected]

Melissa N. Donimirski is an attorney with Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware.  She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court.  Melissa is Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee.  She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University.  Melissa has also co-edited and co-authored a treatise on business divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Anthony Ostlund Baer & Louwagie P.A., 90 South 7th Street, 3600 Wells Fargo Center, Minneapolis, MN 55402, 612.492.8245, [email protected]

Janel Dressen is a lawyer and shareholder with the litigation boutique firm Anthony Ostlund Baer & Louwagie P.A., located in Minneapolis, Minnesota.  Janel has 19 years of experience as a trial lawyer and problem solver.  She assists her clients to avoid and prepare for business and employment-related disputes in and outside of the courtroom.  Janel spends a significant amount of her time resolving family-owned and privately held business disputes for owners that are in need of a business divorce.  In 2019, Janel was selected by her peers to the Top 50 Women Minnesota Super Lawyers list by Super Lawyers.  In 2017, Janel was honored as one of Minnesota’s Attorneys of the Year.

Thomas Kanyock

Schwartz & Kanyock, LLC, 33 North Dearborn Street, Ste. 2330, Chicago, IL 60602, 312.441.1040, [email protected]

Thomas Kanyock is a principal with Schwartz & Kanyock, LLC, in Chicago, where he regularly litigates and resolves commercial disputes involving injunctions, trials and appeals in state and federal courts.  Tom concentrates in representing oppressed equity interest holders frozen into and out of closely held business entities.

John Levitske

Ankura, One North Wacker Dr., Suite 1950, Chicago, IL 60606, 312.252.9533, [email protected]

John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA, JD, is a Senior Managing Director in the disputes and economics practice of Ankura, a global business advisory and expert services firm.  He serves as a business valuation, forensic accounting and damages expert witness, arbitrator, and advisor.  John is frequently consulted regarding business disputes, shareholder disputes and post-acquisition transaction disputes.  In addition, he is the current Chair of the Dispute Resolution Committee of the Business Law Section and a Member at Large of the Standing Committee on Audit of the American Bar Association.

John C. Sciaccotta

Aronberg Goldgehn, 330 N. Wabash Ave., Suite 1700, Chicago, IL 60611, 312.755.3180, [email protected]

John C. Sciaccotta is a Member at Aronberg Goldgehn.  He focuses his practice on litigation, arbitration and business counseling matters with a special emphasis on complex civil trial and appellate cases brought in federal and state courts throughout the United States.  John has also been appointed by the American Arbitration Association as an Arbitrator and Lawyer Neutral to adjudicate various claims and disputes in arbitration.  For many years he has advised public and privately held businesses, lenders, employers and individuals in business transactions and disputes.  He is experienced in dealing with numerous industries and business activities and has a specialty focus on representing entities in business divorce and complex ownership dispute resolution.  John is highly active in professional associations and within his community.  Among his activities, he is Co-Founder and current Chair of the Chicago Bar Association’s Business Divorce and Complex Ownership Disputes Committee.  He served on the CBA’s Board of Managers from 2017 to 2019.

Ben T. Welch

Snell & Wilmer L.L.P., 15 West South Temple, Suite 1200, Salt Lake City, UT 84101, 801.257.1814, [email protected]

Ben T. Welch is a commercial litigator and trial attorney at Snell & Wilmer LLP. Ben litigates all types of complex business disputes, including shareholder disputes, contract disputes, and disputes regarding corporate dissolution, non-compete agreements, and trade secrets.

§ 1.1 Introduction

This chapter provides summaries of developments related to business divorce matters that arose from October 1, 2019 to September 30, 2020 from mostly eight states.  Each contributor used his or her best judgment in selecting cases to summarize.  We then organized the summaries, first, by subject matter, then, by jurisdiction.  This chapter, however, is not meant to be comprehensive.  The reader should be mindful of how any case in this chapter is cited.  Some jurisdictions have rules that prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published.  To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure relevant and permissible precedent is found for any particular matter.  We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 1.2 Access to Books and Records

§ 1.2.1 Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  Plaintiff held dual status as a corporation’s chief technology officer and 30% shareholder.  Plaintiff left the company and his position as CTO, while maintaining his 30% shareholder status.  More than a year later, plaintiff used his knowledge of the company’s computer systems to gain control of its website and to cut off the CEO’s email access for several days.  Plaintiff filed suit claiming statutory rights, per G.L.C. 156D, §16.02, to inspect books and records.  The trial court dismissed the claim.  However, the issue arose again in the defendant company’s counterclaim brought under three federal statutes, each of which provide protections against unauthorized impairments or invasions of computer systems.  The company obtained a preliminary injunction requiring plaintiff to return systems controls.  However, despite the preliminary injunction, plaintiff downloaded and kept select company records and communications.  Plaintiff claimed that his continuing status as a 30% shareholder authorized him to access records and communications.  The trial court entered judgment for counterclaimant and plaintiff appealed.

Plaintiff argued on appeal that he was authorized to take the actions at issue, acting in good faith out of a desire to help the corporation.  Plaintiff asserted his 30%ownership of the close corporation, citing Donahue v. Rodd Electrotype Co., 367 Mass. 578 (1975), claiming a right to participate in management.  As such, reasoned plaintiff, he had an unfettered right to access the computer system to force the controlling member to negotiate.

The Appellate Court, in an unpublished order, rejected plaintiff’s core argument for three main reasons, including:

[T]he trial judge made several factual findings that establish that Bernstein was not “authorized” to take the actions at issue.  The judge found that Bernstein left the company’s employ in September of 2011, that the company termed that a “resignation,” and that Bernstein did not contest that designation at that time.  Thereafter Bernstein may have been involved in some oversight functions, but he was no longer “at the company.”  Bernstein’s successor as CTO changed the company passwords, and did not share them with Bernstein.  The judge found that “within a few months of leaving, [Bernstein] was no longer allowed access to company emails.”  To the extent Bernstein contests these findings, they are not clearly erroneous.  Accordingly, even if we were to accept Bernstein’s contention that his employment with MyJoVE continued past September 30, 2011, the judge was still more than justified in concluding that when Bernstein accessed the company’s computer system over one year later, he knew he was not employed by MyJoVE, and knew he did not have the requisite authorization.

§ 1.2.2 New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.3 Business Judgment Rule

§ 1.3.1 California

Coley v. Eskaton, 51 Cal.App.5th 943 (2020).  In an action involving homeowner claims against directors of an HOA, the court addressed whether the business judgment rule was properly ignored to impose liability against the board members for breach of fiduciary duty among other claims for relief.  In doing so, the court analyzed both statutory and common law versions of the business judgment rule.

California recognizes two types of business judgment rules: one based on statute and another on the common law.  Corporations Code section 7231 supplies the relevant statutory rule for nonprofit mutual benefit corporations like the Association.  Under that statute, a director is not liable for “failure to discharge the person’s obligations as a director” if the director acted “in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”  The common law business judgment rule is similar but broader in scope.  It is similar in that it immunizes directors for their corporate decisions that are made in good faith to further the purposes of the corporation, are consistent with the corporation’s governing documents, and comply with public policy.  And it is broader in that it also insulates from court intervention those management decisions that meet the rule’s requirements.  A director, however, cannot obtain the benefit of the business judgment rule when acting under a material conflict of interest.

Corporations Code section 7233 provides, among other things, that an interested director who casts a deciding vote on a transaction must show the “transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.”  Section 7233, however, only applies to transactions “between a corporation and one or more of its directors, or between a corporation and any domestic or foreign corporation, firm or association in which one or more of its directors has a material financial interest.”  The common law rule, as before, is similar but broader in scope.  It is similar in that it requires interested directors to prove that the arrangement was fair and reasonable—a rigorous standard that requires them not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.  And it is broader in that it is not concerned only with transactions between a corporation and either its directors or a business in which its directors have a material financial interest.  Courts have found directors must also satisfy the common law requirements when they approve other transactions in which they have a material financial interest distinct from the corporation’s own interest.

Here the directors were employees of the development company that developed the residential community.  The directors were compensated in a way that encouraged them to pass assessments that benefit the development company and not the owners.  Plaintiff initiated the action in his individual capacity and derivatively on behalf of the HOA.  During litigation, the defendant directors participated in privileged communications between the HOA and its counsel, then shared privileged information with their employer, who was also a defendant in the action.  Given these facts, the court determined the directors had a material conflict of interest, which precluded the application of the business judgment rule.

§ 1.3.2 Massachusetts

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *12-13 (Mass. Super. 2020).  In a case mixing Massachusetts and Delaware oppression issues, plaintiff brought a claim against the company’s controlling shareholder for failure to issue distributions.  Plaintiff alleged that defendant siphoned assets by, among other things, overcompensating himself and family members, thus leaving no funds available for distribution.  Defendant moved to dismiss asserting that the company charter granted him “sole discretion” whether to pay dividends.  The Court denied the motion reasoning that defendant may have frustrated plaintiff’s reasonable expectations:

A minority owner of a closely-held corporation may sue under a freeze-out theory by alleging that a corporate fiduciary kept corporate benefits for themself while denying them to the minority plaintiff.  See Clemmer v. Cullinane, 62 Mass. App. Ct. 904, 905-06 (2004) (rescript) (applying Delaware law).  “Freeze-outs can occur … ‘[w]hen the reasonable expectations of a [minority] shareholder are frustrated.’”  Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 536 (2014).

Where those in control of a closely-held corporation with lots of free cash do not pay any dividends, but use other mechanisms to pay or distribute substantial sums to themselves, they may be liable to the minority shareholders for engaging in shareholder oppression; this is “a classic squeeze out situation.”  Litle, 1992 WL 25758, at *8; accord Crowley v. Communications for Hosp., Inc., 30 Mass. App. Ct. 751, 762-63 (1991) (majority froze out minority stockholder by, among other things, paying themselves excessive compensation while refusing to declare dividends).

§ 1.3.3 New York

Beckerman v. Lattingtown Harbor Property Owners Association, Inc., 183 A.D.3d 821, 124 N.Y.S.3d 651 (N.Y. App. Div. 2020).  A homeowner brought an action against the homeowners’association seeking to annul a license agreement between the board and another member of the association regarding use of the community dock.  In reviewing the action under the business judgment rule, which inquired whether the action was taken in good faith and in furtherance of the legitimate interest of the association, the Court concluded that it should defer to the homeowners’association as long as the board “acts for the purposes of the [homeowners’ association], within the scope of its authority and in good faith.”  Id. at 654.  Here, however, the trial court found that the homeowners’association was acting outside its authority and therefore annulled the license.  The appellate court affirmed.

Witty v. Wallace, 176 A.D.3d 906, 107 N.Y.S.3d 871 (N.Y. App. Div. 2019).  This case involved a dispute between 50% co-owners of a limited liability company that owns a commercial building that leases to a bank under a triple-net lease.  When the lease was renewed in 2010, the tenant was granted a rent reduction, whereupon one of the co-owners brought an action for corporate waste.  In reviewing the application, the Court concluded that pursuant to the business judgment rule, absent evidence of bad faith, fraud, self-dealing, or other misconduct, courts would respect business judgments.  Here, the evidence for overcoming the business judgment rule was not present; rather, the evidence suggested that the lease extension was made in good faith and in furtherance of the corporation’s legitimate business interest.  Thus the trial court’s decision to dismiss the plaintiff’s complaint was proper.

§ 1.4 Dissolution

§ 1.4.1 Delaware

SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, 2020 WL 1291638 (Del. Ch. Mar. 18, 2020).  The Court held that equitable dissolution was not available where the petitioning party failed to demonstrate that the Court should “invoke equitable principles to override the plain language” of the Delaware LLC Act and the relevant LLC agreement.  Originally, plaintiff SolarReserve held a direct ownership interest in the subject company, Tonopah Solar Energy, LLC, which would have permitted plaintiff to seek judicial dissolution of that entity.  However, that interest was reduced to an “indirect equity interest” through several intermediary entities, which the Court held were “calculated choices to reshape Tonopah’s complicated ownership structure in order to secure additional funding.”  Because the intended relationship of plaintiff to the subject Company was intended to be remote, the Court held that plaintiff did not meet the standard set forth in In re Carlisle Etcetera LLC, 114 A.3d 592 (Del. Ch. 2015) to warrant finding that plaintiff had equitable standing to seek dissolution.

§ 1.4.2 New York

PFT Technology, LLC, v. Wieser, 181 A.D.3d 836, 122 N.Y.S.3d 313 (N.Y. App. Div. 2020).  A limited liability company and its majority members filed suit against a minority member seeking to dissolve the company and reconstitute without the minority member.  The minority member, in turn, counterclaimed for breach of the operating agreement.  The minority member eventually agreed that the majority could buy out his membership interest, and the court held a valuation proceeding in which the minority member’s interest was valued at $1.250M.  The minority member was also awarded attorney fees and prejudgment interest but not any damages based on his counterclaim.  Both sides appealed.

On appeal the appellate court noted that although limited liability law did not expressly authorize a buyout in a dissolution proceeding, that remedy was appropriate as an equitable remedy.  The appellate court found that the trial court’s decision to allow the buyout was a “provident” exercise of its discretion.  However, the trial court erred in applying certain adjustments to the company’s value, which should have been $1.489M.  The trial court also erred in the amount of attorney fees it awarded.  The trial court did not err in deciding not to award damages on the counterclaim or in the amount of prejudgment interest.

§ 1.4.3 Utah

HITORG, LLC v. TC Veterinary Serv. Inc., 2020 UT App 123, 472 P.3d 1177.  A veterinarian brought suit against other veterinarians for breach of contract, breach of good faith and fair dealing, and dissolution of a limited liability company based on her expulsion.  The other veterinarians moved to compel arbitration pursuant to the operating agreement.  The plaintiff-veterinarian opposed the motion and filed a motion to stay arbitration claiming that she sought dissolution and other causes of action arising from duties and obligations outside the operating agreement (such as statutory dissolution on the basis of oppressive conduct or fraud).  The trial court granted the motion to compel and denied the motion to stay, concluding that the operating agreement contained a provision for judicial dissolution and therefore the issue of dissolution was within the power of the arbitrator to decide along with other claims.  The court of appeals affirmed.

§ 1.5 Jurisdiction, Venue, and Standing

§ 1.5.1 California

Clark v. S&J Advertising, Inc., 611 B.R. 669 (E.D. Cal. 2019).  This case involves the interplay between a bankruptcy court’s jurisdiction and California’s involuntary dissolution/valuation/share buyback statute (Cal. Corp. § 2000) and related proceedings.  A married couple filed a Chapter 13 bankruptcy petition.  The wife later filed a certificate of election to wind up and dissolve a company with the California Secretary of State pursuant to Cal. Corp. Code § 1900.  She owned 50% interest in the company.  The company filed a petition to stay dissolution proceedings and ascertain value of the wife’s shares under § 2000 in state court.  The state court stayed dissolution until appraisers could arrive at a fair valuation.  The bankruptcy court granted the company relief from stay so the valuation could proceed in state court.  The court approved the § 2000 valuation and the transfer of the wife’s shares to the corporation for the valuation price.

The couple appealed the bankruptcy court’s decision to adopt the § 2000 valuation under the Rooker-Feldman doctrine, which precludes a federal court from overturning a state court’s judgment.  Since the bankruptcy court did not overturn the state court’s decision, but effectively affirmed the state court’s decision to proceed with § 2000 proceedings, Rooker-Feldman did not apply.

The couple also argued that the bankruptcy court could not exercise subject matter jurisdiction over the § 2000 proceeding absent removal from state court pursuant to 28 U.S.C. § 1452(a), which sets forth a formal removal process that was not followed in this case.  But the bankruptcy court had not exercised jurisdiction over the § 2000 state proceedings.  It just adopted and applied the § 2000 valuation to the bankruptcy proceedings, so removal was neither necessary nor relevant to the bankruptcy court’s jurisdiction analysis.  The bankruptcy court had proper jurisdiction over the couple and the wife’s shares in the company.

§ 1.5.2 Illinois

Tabirta v. Cummings, 2020 IL 124798.  The Illinois Supreme Court held that an employee’s home office within a county did not qualify as an office of the employer for the purposes of venue.  The court found that there was no evidence that the employer hired the employee because of the location of his residence and home office or that his employment would be affected if he moved to another county and therefore the employer did not purposely select a fixed location as necessary to avail itself to venue in that county.

§ 1.5.3 Massachusetts

In re Bos. Grand Prix, LLC, 2020 WL 6140391, at *16 (Bankr. D. Mass. 2020).  The Court rejected a Chapter 7 trustee’s argument that he had standing to ask the Court to hold an LLC member personally liable for all debtor LLC’s debts as the LLC’s alter ego.  The trustee brought a series of fiduciary breach claims against the sole member, manager, and operating officer of an insolvent LLC purporting to promote auto races in Boston.  The Court had little difficulty entering judgment against the LLC member based on an apparently indefensible series of egregious self-dealings acting as a fraud on creditors, resulting in the Court awarding significant damages and unwinding fraudulent transfers.  However, the Court held that the trustee went too far asking to hold the LLC member personally liable for all LLC debts as its alter ego.  The Court held that, under the Bankruptcy Code, only actual creditors, and not the trustee, have standing to pierce the debtor’s veil.

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *12-13 (Mass. Super. 2020).  In a case mixing Massachusetts and Delaware oppression issues, plaintiff brought direct and derivative claims against the company’s controlling shareholder for failure to issue distributions.  Plaintiff alleged that defendant siphoned assets by, among other things, overcompensating himself and family members, thus leaving no funds available for distribution.  The company had layers of subsidiaries.  The company was a Delaware corporation, but one of its subsidiaries was a Massachusetts corporation.  Plaintiff sued derivatively on behalf of the Massachusetts entity.

Defendant moved to dismiss arguing that plaintiff lacked standing because he never made a pre-suit derivative demand.  Delaware and Massachusetts statutory law differ in that Delaware law still applies the futility exception, while Massachusetts changed its BCA, G.LC. 156D, § 7.42, to always require a prerequisite derivative demand on behalf of a corporation.  The Court denied the motion, noting that plaintiff brought a pass-through “double-derivative” claim and therefore was suing primarily in the interests of the Delaware corporation, thus applying Delaware’s futility exception.

JT IP Holding, LLC v. Florence, 2020 WL 5217118, at *3–4 (D. Mass. 2020).  Unlike corporations, Massachusetts’s LLC Act has no universal pre-suit derivative demand requirement.  Defendant moved to dismiss a derivative claim for failure to make a pre-suit demand, regardless of futility, per § 156 C, § 56, arguing that the LLC operating agreement did not authorize suit without a demand.  The Court denied the motion, holding that a provision in the operating agreement prohibiting action on behalf of the entity without approval of all members was too generic, without more specific language, to require a pre-suit derivative demand.

§ 1.6 Claims and Issues in Business Divorce Cases

§ 1.6.1 Accounting

§ 1.6.1.1 New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.6.2 Alternative Entities

§ 1.6.2.1 Delaware

Franco v. Avalon Freight Services, LLC, 2020 WL 7230804 (Del. Ch. Dec. 8, 2020).  Where an LLC Agreement provides that the co-equal members must agree on the identity of a tie-breaking director, but is silent on the topic of how to remove a director, removal is governed by the Delaware LLC Act.  Such provision does not mean that, if one faction becomes dissatisfied with the service of the tie-breaking director, such director must be removed.  Avalon Freight Services, LLC, is a co-equally owned LLC, owned between two members.  The Company is governed by a board of directors, on which sits the two members, two additional directors, one appointed by each member, plus a tie-breaking director, whose appointment must be agreed upon by the two members.  When one member became dissatisfied with the tie-breaking director, that member brought this action seeking a declaration that his dissatisfaction with the tie-breaking director means that “position must be vacated and [the members] must mutually agree on a new person to fill the position.”  The Court held that the provision in question related only to the appointment of the tie-breaking director, and not to such director’s removal.  Because the LLC Agreement did not specify how to remove a director, the terms of the Delaware LLC Act were considered incorporated to fill the gap.

§ 1.6.3 Breach of Fiduciary Duty

§ 1.6.3.1 Delaware

Wright v. Phillips, 2020 WL 2770617 (Del. Ch. May 28, 2020).  In a business divorce between co-equal owners who were formerly husband and wife, the Court found that Phillips failed to demonstrate that Wright’s actions rose to the level of a breach of her duty of care or loyalty.  Phillips claimed that Wright breached her fiduciary duties by (1) using company funds to pay personal credit card bills; (2) “raiding” the offices to take files and equipment; (3) engaging in accounting practices that caused cash crunches; (4) failing to follow the Receiver’s instructions; and (5) removing money to bank accounts that she independently controlled.  The Court held that Wright credibly explained why personal credit card charges appeared on the company accounts and found that there was insufficient evidence to find that this activity was wrongful or that it breached Wright’s fiduciary duties.  The Court additionally held that the allegations of “raiding” the company offices to take files and equipment were without scienter, and were actually “careless actions … directed at the disintegrated personal relationship between the parties.”  With respect to the “cash crunches,” the Court found that both parties were equally at fault in this regard, and, again, that Wright’s actions lacked scienter.  With respect to failing to follow the Receiver’s instructions, which included designating office hours for Wright, the Court held that “a failure to obey guidelines set by a Receiver is not a per se violation of fiduciary duties.”  The Court additionally credited Wright’s trial testimony that she had logical reasons for her choices regarding work hours and location that included her safety and her long history of working from home.  Finally, the Court held that Wright’s actions in removing company money to her personal bank accounts were not actionable because she had “cognizable reasons to move the funds,” and because the Receiver’s instruction to transfer them back was contingent on Phillips reinstating her salary, which he did not do.

§ 1.6.3.2 Illinois

Flynn v. Maschmeyer, 2020 IL App (1st) 190784.  The appellate court held that a member of an Illinois limited liability company who was held to have breached his fiduciary duties to his co-members and the LLC was nonetheless entitled to a judgment on his counterclaim for the fair value of his interest in the LLC.  The court held that the member did not forfeit his right to recover his interest in the LLC by failing to respond to a purported capital call that was sent only to him to recover the amount of funds he had misappropriated from the LLC.

§ 1.6.3.3 Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  (See description in § 7.1).  The Court rejected plaintiff/counter-defendant’s argument that, after he resigned his position as Chief Technology Officer, he remained a 30% shareholder entitled to access records and communications because defendant/counter-plaintiff breached fiduciary obligations owed to him:

Bernstein did not at any time have an unfettered right to participate in management, and he surely did not once he resigned as CTO.  More importantly, Bernstein’s status as a shareholder of a close corporation did not give him a right to engage in unauthorized acts.  “Allowing a party who has [allegedly] suffered harm within a close corporation to seek retribution by disregarding its own duties has no basis in our laws and would undermine fundamental and long-standing fiduciary principles that are essential to corporate governance ….  ‘Rather, if unable to resolve matters amicably, aggrieved parties should take their claims to court and seek judicial resolution.’”  Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 552-553 (2014), quoting Rexford Rand Corp. v. Ancel, 58 F.3d 1215, 1221 (7th Cir. 1995).  See Donahue, 367 Mass. at 593 n.17 (recognizing that, “[i]n the close corporation, the minority may do equal damage through unscrupulous and improper ‘sharp dealings’”).  To the extent Bernstein felt aggrieved by any mistreatment he may have received by MyJoVE or Pritsker (including Pritsker’s refusal to meet with him), his recourse was not through unauthorized access to the company’s computer system.

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *13 (Mass. Super. 2020).  Plaintiff shareholder brought, among other things, aiding and abetting breach of fiduciary duty claims against the company’s lawyer for failure to inform plaintiff that the company’s controlling shareholder improperly siphoned assets by overcompensating family members, thus leaving no funds available for distribution.  The Court dismissed the claim, holding that allegations that the lawyer had familiarity with the company’s financial condition did not rise to the level of actual knowledge of wrongdoing.

Mahoney v. Bernat, 2019 WL 6497601, at *3 (Mass. Super. 2019).  Plaintiff minority shareholder, Mahoney, brought an aiding and abetting claim against the company’s lawyers, the Sabella Defendants, alleging that they breached a duty owed to him by assisting with preparing a buy-out of another shareholder that plaintiff claimed harmed him.  The Court granted the lawyers’ motion to dismiss:

Massachusetts law imposes a fiduciary obligation on corporate counsel to protect the interests of individual members or shareholders only in rare circumstances.  See Baker v. Wilmer Cutler Pickering Hale & Dorr, LLP, 91 Mass. App. Ct. 835, 837 (2017) (recognizing fiduciary duty on part of corporate counsel to individual members of limited liability company where the LLC was “governed by an operating agreement providing significant minority protections,” and it was alleged that counsel “secretly worked to eliminate those protections …”).  Those rare circumstances are not present here.  The Shareholders’ Agreement does not afford Mr. Mahoney “significant minority protections,” and there is no allegation that the Sabella Defendants engaged in any clandestine effort to undermine Mr. Mahoney’s position vis-a-vis the Company.

§ 1.6.3.4 Minnesota

Blum v. Thompson, No. A19-0938, 2020 WL 1983218 (Minn. Ct. App. Apr. 27, 2020), review denied (July 23, 2020).  Richard Ward and Rosemary Ward raised seven children.  Three of their children, Kathryn, Charles and Thomas (plaintiffs), sued three of their siblings and their father relating to the operations of their family-owned business, Ward Family, Inc. (“WFI”).  The dispute involved a long-term lease that WFI executed that gave one of the defendants’ corporation, El Rancho Manana, Inc., greater authority over a large plot of land known by the parties as “the Ranch.”  Following a jury trial on plaintiffs’ common-law breach-of-fiduciary duty claim against defendants and a court trial on plaintiffs’ statutory shareholder-oppression claim, both the jury and district court found in favor of defendants.  The Minnesota Court of Appeals affirmed, reasoning that the shareholders knew about the plan to formalize the lease arrangement, and that WFI allowed shareholders to propose terms of the lease.  The Court of Appeals, like the district court, rejected a claim that consensus was needed among the shareholders as to the terms of the lease.  While the parties had reached a consensus on some issues in the past, “it was not reasonable for [plaintiffs] to expect that WFI would be governed in a manner inconsistent with its bylaws.”  WFI’s bylaws stated that actions were approved by simple majority. “It is not clear error to conclude that it is unreasonable for minority shareholders to expect that they have veto power over an action permitted by the company’s bylaws just because the majority shareholders had tried to achieve consensus with them in previous disputes.”

40 Ventures LLC v. Minnesquam, L.L.C., No. A19-2082, 2020 WL 5507887 (Minn. Ct. App. Sept. 14, 2020).  Members of Aspire Beverage Company LLC (“Aspire”) entered into a Membership Control Agreement (MCA) that established a six-person board of governors for Aspire.  Plaintiff, a member of Aspire, alleged breach of contract, breach of fiduciary duty, and tortious interference with contract, and sought an order compelling Aspire to disclose company records.  When the Aspire board voted to dissolve Aspire, plaintiff alleged that the board did not have the authority to do so (breaching supermajority requirements set forth in the MCA).  The district court dismissed all of the claims on a Rule 12 motion for failure to state a claim.  The Court of Appeals affirmed, reasoning that the MCA supermajority requirements in the MCA provision applied to the board, not the members.  The Court held that plaintiff could sustain a breach-of-fiduciary-duties claim against the members just because the members appointed governors to the board.  The plaintiff alleged that its allegations in the Complaint related to “actions taken by the members, not the governors, in violation of the member-control agreement”; the only alleged violations of the member-control agreement are the alleged violations of the supermajority requirements in section 3.3 of the member-control agreement, which is an alleged violation by the Aspire board, not by the members themselves.

§ 1.6.3.5 New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.6.4 Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing

§ 1.6.4.1 Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  The Appellate Court rejected plaintiff/counter-defendant’s argument that, after he resigned his position as CTO, he remained a 30% shareholder and therefore entitled to access records and communications because defendant/counter-plaintiff breached the obligation to treat him fairly and in good faith:

[W]e are aware of no authority that would allow Bernstein, as a minority shareholder of a close corporation, to surreptitiously access the company’s computers in retaliation for the alleged breach of such a duty.  Put differently, whether Bernstein was treated with the “utmost good faith and loyalty,” in connection with his resignation or termination in 2011 is simply not before us.  Rather, the issue before us is whether Bernstein was authorized, in November of 2012, to access MyJoVE’s computer system and to interfere with the company’s operations.

Crashfund, LLC v. FaZe Clan, Inc., 2020 WL 4347254 (Mass. Super. 2020).  Plaintiffs invested in Wanderset LLC, which then merged into defendant Wanderset, Inc.  In exchange for plaintiffs’ cash investments, Wanderset granted plaintiffs the conditional right to obtain specified shares of capital stock if Wanderset changed ownership.  Plaintiffs contended that occurred when Wanderset functionally, but not formally, merged Wanderset into FaZe Clan, Inc. Plaintiffs sued both Wanderset and FaZe, asserting two alternative breach of contract theories, tortious interference, and unjust enrichment.

The Court granted defendant FaZe’s motion to dismiss the first alternative breach of contract claim seeking shares of its stock.  Plaintiff’s express contractual right to convert stock was limited to legal mergers, did not extend to de facto successor liability, and thus plaintiff had no right to stock of the succeeding entity.  However, the Court denied the motion as to plaintiff’s second alternative contract claim alleging successor liability for consequential damages equal to the value of the stock if plaintiffs had been permitted to participate if defendants had acted in good faith.  The Court held that plaintiffs may be entitled to recover against all defendants for breach of contract, at least insofar as plaintiff seeks consequential damages, unjust enrichment, and tortious interference.

Ramey v. Beta Bionics, Inc., 2020 WL 4931636, at *5–6 (Mass. Super. 2020).  Plaintiff alleged that a defendant promoter orally promised him a salary and 5% equity stake in a new company to be established developing medical devices.  Plaintiff began working for nothing, and then for his salary, as the defendant established the company.  However, defendant then refused to assign plaintiff his 5% equity, instead engaging in a series of negotiations trying to convince plaintiff to accept a fraction of that stake.  The Court rejected defendant’s argument that the alleged agreement’s terms were too vague to enforce:

While “[i]t is not required that all terms of the agreement be precisely specified, and the presence of undefined or unspecified terms will not necessarily preclude” a contract’s formation, “[t]he parties must, however, have progressed beyond the stage of ‘imperfect negotiation.’”  Id., (citations omitted).…  It may be that, after discovery, Ramey will not be able to prove that his negotiations with Damiano in 2013 progressed beyond the stage of “imperfect negotiations” to an oral agreement on material terms that is sufficiently definite to be enforceable .…  However, given the specificity of Ramey’s allegations that in the fall of 2014, Damiano offered, and he accepted, a 5% interest in the corporation to be formed in exchange for his continued work on the Project, I cannot conclude at this stage that Count I fails to state any claim for breach of contract.

§ 1.6.5 Fraud

§ 1.6.5.1 Massachusetts

In re Blast Fitness Grp., LLC, at *9 (Bk. D. Mass. 2020).  Creditors alleged that a general partner fraudulently induced them to participate in a real estate transaction.  The Bankruptcy Court noted extensive allegations of aiding and abetting the fraud on the part of other entities.  However, the Court stopped short of allowing an aiding and abetting claim against the partnership itself, noting that the complaint contained no such allegations against the partnership – thus drawing a distinction between a general partner acting on behalf of the partnership, which the Court allowed, and whether the partnership itself aided and abetted the fraud, which the Court disallowed.

Sapir v. Dispatch Techs., Inc., 2019 WL 7707794, at *3 (Mass. Super. 2019).  Plaintiff alleged that two director shareholders fraudulently induced him to sell his shares in a closely held corporation by withholding information about the status of software development and fundraising efforts.  Plaintiff also claimed negligent misrepresentation and breach of fiduciary duty.  Defendants moved to dismiss proffering the sale agreement containing the usual integration and waiver clauses.

The Court denied the motion as to the fraudulent inducement claim, holding that, generally, Massachusetts law recognizes that neither integration clauses nor releases bar fraudulent inducement claims, citing Shawmut-Canton, LLC v. Great Spring Waters of America, Inc., 62 Mass. App. 330, 335 (2004).  An exception exists where the alleged inducement contradicts clear statements in the writing – a situation not usually present unless the waiver contains contextual references.

The Court granted the motion as to the negligent misrepresentation claim.  Unlike a claim for fraudulent inducement, a claim for negligent misrepresentation ordinarily can be released or waived; thus, the seller release barred plaintiff’s claim for simple negligence.

The Court also granted the motion as to the fiduciary breach claim.  The Court held that, as a Delaware corporation, Delaware law controlled that issue and that, unlike other jurisdictions, Delaware does not impose a heightened duty of good faith and loyalty on shareholders or directors in a close corporation and does not impose a fiduciary duty on the part of a close corporation for the benefit of individual shareholders.

§ 1.6.6 Interference

§ 1.6.6.1 California

Siry Investment, L.P. v. Farkhondehpour, 45 Cal.App.5th 1098 (2020).  Penal Code section 496 is entitled “Receiving or concealing stolen property.”  Subdivision (a) makes it a crime to (1) “buy[ ] or receive[ ] any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained,” or (2) “conceal[ ], sell[ ], [or] withhold[ ] any property from the owner, knowing the property to be so stolen or obtained.”  Subdivision (c) empowers “[a]ny person who has been injured by a violation of subdivision (a)” to “bring an action for three times the amount of actual damages [he has] … sustain[ed]” as well as for “costs of suit[ ] and reasonable attorney’s fees.”  This case presents the question: Does Penal Code section 496, subdivision (c) authorize treble damages and attorney fees where the underlying criminal conduct did not involve trafficking in stolen property, but rather the improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation, and breach of fiduciary duty?  The court ruled that treble damages and attorney fees are not available under Penal Code section 496, subdivision (c) in cases where the plaintiff merely alleges and proves conduct involving fraud, misrepresentation, conversion, or some other type of theft that does not involve “stolen” property for two reasons.  First, treble damages under Penal Code section 496, if held applicable to torts of fraud, misrepresentation, conversion or breach of fiduciary duty, would all but eclipse traditional tort damages remedies.  Second, reading Penal Code section 496 to apply in theft-related tort cases would effectively repeal the punitive damages statutes.  The legislature never declared that it wanted to effect significant changes to tort remedies but only wanted to “dry up the market for stolen goods.”

§ 1.6.6.2 Massachusetts

Viken Detection Corp. v. Videray Techs. Inc., 2020 WL 68244, at *6–7 (D. Mass. 2020).  Defendant allegedly stole confidential information and trade secrets and formed a new entity.  Plaintiff’s claims included one against defendant’s new entity for tortious interference with plaintiff’s customer relationships.  The individual and entity defendants moved to dismiss contending that plaintiff failed to state a claim because the individual defendant, as owner and principal of the entity, was synonymous with his company.  In other words, the individual was so “closely identified” with the entity that he should not be considered a third party for purposes of a claim of tortious contractual interference.  The Court denied the motion, at least at the pleading stage, holding that whether an individual is synonymous with a corporation of which he is owner and principal is a fact-intensive question “ill-suited” for resolution at the motion-to-dismiss stage.

§ 1.6.7 Equitable/Statutory Relief

§ 1.6.7.1 Massachusetts

Automile Holdings, LLC v. McGovern, 483 Mass. 797, 813–14, 136 N.E.3d 1207, 1221–22 (2020).  Defendant was a minority equity owner and executive of plaintiff but left to work for a competitor.  He violated a restrictive covenant in his repurchase agreement by poaching three employees.  Among other claims, plaintiff sued the individual’s new employer for tortious interference and sought a preliminary injunction barring defendant from employing the former officer.

Defendants argued that absent “more expansive interests,” Wells v. Wells, 9 Mass. App. Ct. 321, 326, 400 N.E.2d 1317, 1321 (1980), no legitimate interest exists in stifling competition.  The Court, however, found that more expansive interests indeed existed.  The Court noted the individual’s status as both an owner and officer of plaintiff, reasoning that the contract was more akin to a business interest than an employment restriction.

The Court emphasized that the individual sold his minority interest at a premium because he agreed to the restrictive covenant.  His repurchase agreement, aimed at shoring up the protections in the original operating agreement, thus served plaintiff’s legitimate business interest in ensuring that defendant did not “derogate from the value of the business interest he sold to the other owners” when he left, quoting Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 639, 815 N.E.2d 572 (2004), and Alexander & Alexander, Inc., 21 Mass. App. Ct. at 496, 488 N.E.2d 22 (“Where the sale of the business includes good will, as this sale did, a broad noncompetition agreement may be necessary to assure that the buyer receives that which he purchased”).

§ 1.6.8 Privilege

§ 1.6.8.1 Delaware

Pearl City Elevator, Inc. v. Gieseke, 2020 WL 5640268, at *1 (Del. Ch. Sept. 21, 2020).  The Court ordered the production of documents withheld as privileged on behalf of the subject company regarding matters as to which the subject company and the plaintiff were not adverse.  Plaintiff, Pearl City Elevator, Inc., sought a declaration under 6 Del. C. § 18-110 that it may appoint a seventh and controlling member to the board of directors of nominal defendant, Adkins Energy, LLC.  The Board currently consists of six directors, three designated by Pearl City, as an Adkins member, and three designated by Adkins’ General Members (the “General Directors”).  After plaintiff’s dispute with the General Members emerged, counsel to Adkins Energy began to give legal advice to the General Members and General Directors, to the exclusion of Pearl City and its directors on the question of whether Pearl City’s unit acquisitions were bona fide, and whether Pearl City’s effort to place a seventh member on the Board were effective.  Citing Moore Business Forms, Inc. v. Cordant Holdings Corp., 1996 WL 307444, at *1 (Del. Ch. June 4, 1996), the Court held that Pearl City was just as much the “client” of counsel to Adkins as the General Directors were, and accordingly counsel to Adkins was required to produce to plaintiff privileged documents respecting its analysis of the bona fides of Pearl City’s unit acquisitions and, relatedly, the effectiveness of Pearl City’s effort to place a seventh member on the Board.

§ 1.6.9 Trade Secret

§ 1.6.9.1 Delaware

iBio, Inc. v. Fraunhofer USA, Inc., 2020 WL 5745541, at *14 (Del. Ch. Sept. 25, 2020).  The Court held that the Delaware Uniform Trade Secrets Act (“DUTSA”) preempts common law claims based upon alleged misappropriation of confidential information that does not otherwise qualify as a trade secret under the statute.  iBio, Inc. and Fraunhofer USA, Inc., enjoyed a commercial relationship for several years pursuant to which Fraunhofer developed plant-based biopharmaceutical technology for iBio.  iBio later discovered that Fraunhofer had entered into an agreement to perform the same services for an iBio competitor.  iBio brought suit alleging that, among other things, Fraunhofer misappropriated iBio’s technology in the performance of its duties for the competitor.  iBio brought claims under both DUTSA, as well as for conversion and misappropriation of confidential information that does not qualify as a trade secret under DUTSA.  The Court held that DUTSA preempted the common law claims for conversion and misappropriation, even though the confidential information alleged to have been converted did not qualify as a trade secret under DUTSA.

§ 1.7 Valuation and Damages

§ 1.7.1 Alabama

Porter v. Williamson, 2020 Ala. Lexis 98; 2020 WL 3478540 (Ala. Supr. Ct., Jun. 26, 2020).  In this appeal regarding an action for specific performance of a shareholders agreement, the Court addressed the valuation of the interests in five companies owned by a pair of brothers.  Ultimately, the Court determined that the valuation process at trial was error because it was inconsistent with the evaluation process set forth in the shareholders agreement and beyond the action in the claim and remanded the case to the trial court.

The two brothers owned interests in four corporations and one limited liability company.  The Court stated that the claim before the trial court was only for specific performance of part of the agreement and an injunction, and that the shareholders agreement provided a clear, specific, two-step process to determine values including the parties’ expression that the companies’ accountant would provide the evaluation methods.

Regarding the claim presented, the Court noted that the defendants “argue only that the trial court awarded relief beyond the scope of a request for specific performance of the agreement.”  In addition, the Court stated regarding its review of a trial court’s decision, “The trial court’s findings of fact, insofar as they are based on evidence presented during the hearing, are presumed correct and will not be overturned unless they are shown to be plainly or palpably wrong … However, a presumption of correctness does not attach to the trial court’s legal conclusions, which are reviewed de novo.”  In addition, “Regardless of whether [the] paragraph … of the agreement may allow for legal and equitable remedies beyond specific performance of the agreement and an injunction, [plaintiff] is bound by the claims he actually brought against the … defendants.”

Regarding the process in the agreement, the Court stated, “We cannot agree that the method of determining share value in the agreement was so unclear or indefinite that it could not be specifically enforced … there is no indication that any of the parties believed that the part of the agreement requiring an evaluator to be selected by [the companies’ accountant] … that was acceptable to the shareholders was indefinite or otherwise unenforceable.  Yet, the trial court ignored that clear and specific part of the agreement when it accepted the valuation provided by an evaluator independently selected by [one employee-owner].  As to the second step, we must conclude, as a matter of law, that the agreement clearly expressed the parties’ agreement that [the companies’ accountant] … would provide the evaluation methods that would be used by the independent evaluator acceptable to the shareholders to determine share value… given his knowledge and familiarity with the … companies, we see no reason why the parties could not have agreed to allow [the companies’ accountant] to provide the evaluation methods to be used by an independent evaluator for purposes of determining share value.”

Considering the terms of the agreement in combination with the nature of the claim, the Court concluded that the trial court was not at liberty to depart from and ignore the process in the agreement nor to provide relief in “any other legal or equitable remedy” under the agreement.  Therefore, the Court determined it was an error for the trial court to ignore a clear and specific part of the agreement when it accepted the valuation provided by an evaluator selected by the plaintiff.

§ 1.7.2 Connecticut

R.D. Clark & Sons, Inc. v. Clark, 222 A. 3d 515, 194 Conn. App. 690 (Dec. 10, 2019).  In a buyout dispute involving the value of the departing shareholder’s interest in a family business organized as an “S” Corporation, the Appeals Court considered the trial court’s decision to not tax affect the company’s earnings in determining value even though both sides’ experts had applied tax affects.  The Court affirmed the trial court’s decision to not tax affect.

On appeal, the company asserted that not tax affecting “artificially inflated” the value.  The Court reviewed relevant court decisions in various jurisdictions.  The Court noted that some courts “have chosen to reject an S corporation cash flows based on taxes” such as the US Tax Court in Gross v. Comm’r v. IRS, 272 F.3d 333, 335 (6th Cir. 2001) and called it “the only reported decision on tax affecting by a United States Court of Appeals.”  It also noted that some cases such as one Delaware and one Massachusetts state trial court cases had approved tax affecting.  Furthermore, the Court stated that “the issue of tax affecting continues to be an open debate among experts in the field.”

The Court found it important and influential in this case that before it was a “fair value” proceeding rather than a “fair market value” proceeding.  In this current context of fair value, the Court considered the fact of the company’s policy of covering the shareholders’ tax liabilities.  Ultimately, the Court found that considering that policy, “The present case seems particularly ill-suited to tax affecting earnings … based on the facts of this case … and …  We discern no bright line rule in this area.”

§ 1.7.3 Delaware

Kruse v. Synapse Wireless, Inc., 2020 Del. Ch. Lexis 238 (July 14, 2020).  In a statutory appraisal fair value buyout action, the Court addressed issues of whether there was meaningful market-based evidence of fair value in prior purchases of the company’s stock, and whether there were flaws in the experts’ comparable transactions and discounted cash flow valuation analyses.  Based upon the evidence, the Court found that there was no “wholly reliable indicator of value” in the case and decided to adopt the discounted cash flow valuation analysis by the company’s expert but adjust it.

The Court noted that both experts used the same three valuation methods and “the experts reached monumentally different valuations.”  In its analysis of the evidence regarding prior purchases of the company’s stock, the Court found that the two prior transactions did not take place in a competitive market, and that the earlier of the two transactions was “stale” and at a time when the company faced different prospects.  Regarding the experts’ comparable transactions analyses, the Court found that approach “a dicey valuation method in the best of circumstances,” one in which both experts made “well-considered, convincing objections to the other side’s model,” and, therefore, not reliable in this case.

Regarding the experts’ discounted cash flow analyses, the Court noted that the discounted cash flow method of valuation is “widely considered the best tool for valuing companies when there is no credible market information and no market check.”  Furthermore, the Court considered that both experts looked largely to the company’s management projections for the forecast for the first five years, but the experts differed widely regarding the forecast for years six through ten, long-term growth rate and weighted-average cost of capital discount rate.

The Court determined that none of the valuations by the experts was “wholly reliable,” and that a fact-finder might find that neither party has met their burden of proof, but that the Court “in the unique world of statutory appraisal litigation” was forced to make a fair value decision.  In this regard, the Court viewed the forecasts, long-term growth rate and discount rate used by the company’s expert as more reliable, and the figure for debt of the company as of the transaction date used by the plaintiff’s expert as more reliable.  The Court commented that the company’s expert “credibly made the best of less than perfect data to reach a proportionately reliable conclusion.”  As a result, the Court adopted the company’s expert’s discounted cash analysis but adjusted it by adopting the figure for debt of the company as of the transaction date used by the plaintiff’s expert.

Riker v. Teucrium Trading, LLC, 2020 Del. Ch. Lexis 178; 2020 WL 2393340 (C.A. No. 2019-0314-AGB, May 12, 2020).  In this Demand action to inspect books and records of a limited liability company (“LLC”) for appraisal purposes, the Court concluded that some books and records sought were not necessary, while it deemed others, such as plans and projections, important to valuation.  In its analysis, the Court considered the purpose for seeking the specific books and records, whether the requested information was necessary and essential to valuation, whether the request was reasonably targeted, and whether there was wrongdoing in errors in filed documents.  Consequently, the Court granted in part and denied in part the member’s demand for books and records under the Delaware LLC Act, Section 18-305.

Regarding document requests, the Court considered that “the company [had] produced some documents to [plaintiff] … within weeks of receiving his inspection demand, produced a substantial number of additional documents to him after engaging in a mediation, and produced certain other documents after trial.”  As a result, six document requests from the Demand were still in dispute.

The Court stated that, under the Delaware LLC Act, valuing one’s own interest is a proper purpose to seek books and records.  Furthermore, the Court considered that plaintiff “testified credibly that he was looking to value his interest … to determine whether to sell or hold his shares in light of the Company’s ‘deteriorating financial performance’ and what he perceives to be ‘erratic decision-making at the Company’”; and plaintiff “more specifically identified at trial … types of information … he needs to prepare a DCF analysis.”

In its review of the scope of the requests in dispute, the Court deemed the request for: (1) the Excel workbook detailing the company’s expense allocation model not necessary for the plaintiff’s stated purpose, far exceeds the types of information in the Demand, and that necessary expense information could be found in the company’s audited financial statements which were produced or in the process of being produced; (2) memoranda regarding contingent assets and liabilities not necessary, because they are not significant and information is in the financial statements produced; and (3) documents to investigate potential mismanagement, appointment or removal of officers, not necessary, because no credible evidence of wrongdoing was presented and the errors in the document filings were honest mistakes and corrected.  Nevertheless, the Court deemed the request for cash projections, including the full current year’s budget and business plan, not just portions, important to valuation under the facts in this case and granted this request, because “an investor cannot hope to do is [to] replicate management’s inside view of the company’s prospects.”  In this regard, the Court directed that “to the extent that other parts of the Company’s 2020 budget address expanding the outstanding shares of the Funds, increasing the Company’s assets under management, or restoring the Company to profitability, the Company must produce those parts of the 2020 budget.”

Consequently, the Court concluded that the plaintiff “has failed to establish an entitlement to receive any further documents in response to his broadly worded demand except for a few specific items enumerated herein relevant to valuing his interest in [the company]….”

Zachman v. Real Time Cloud Servs., LLC, 2020 Del. Ch. Lexis 115 (C.A. No. 9729-VCG, Mar. 31, 2020).  At trial regarding a valuation dispute involving a member’s interest in an LLC related to an alleged breach of fiduciary duty, each side offered a valuation expert to opine on the fair value of plaintiff’s fifty-percent economic interest in the company.  In its determination, the Court selected the most representative analysis and then made what it deemed appropriate adjustments to arrive at a valuation.

In evaluating the two sides’ valuation reports, the Court deemed the expert’s report more reliable, which valued the plaintiff’s interest at the date of the subject merger transaction and relied upon financial information from the company’s accounting system, in comparison to the other report which valued the interest as of five months preceding the transaction with financial information from an accounting firm engaged to re-create the company’s financial statements based upon source documents provided by plaintiff.

According to the Court, the plaintiff “had no credible basis for the financial figures supplied to” his valuation expert, “simply guessed” at some of the expenses, and “inflated [the company’s]… income figures.”  Instead, the Court used the figures in the defendants’ expert report as the basis for determining the value of plaintiff’s interest at the time of the merger.

Nevertheless, the Court made adjustments because it found that the defendant’s expert report valuation was based on unduly conservative future growth estimates for the business.  Consequently, the court adjusted the growth estimates upwards “to account for the Company’s early-years hyper-growth” in determining the value of plaintiff’s interest.

§ 1.7.4 Kentucky

§ 1.7.4.1 Henley Mining v. Parton, U.S. Dist. Ct., ED Ky., S. Div., No. 6:17-cv-00092-GFVT-HAI (Aug. 3, 2020)

In a dissenting shareholder action, both sides offered expert testimony and their estimates of fair value varied widely.  The Court found that summary judgment was not the appropriate means to resolve the valuation dispute; because both sides presented thorough expert valuations, the Court’s role is not simply to pick one valuation over the other, and that the Court “may combine or choose among [estimates] as it believes appropriate given the evidence” and “make whatever use of the experts’ appraisals it deems reasonable.”  Consequently, the Court concluded that the fair value standard does not automatically preclude all use of a net asset approach to meet the legal definition of fair value “of the company as a whole and as a going concern.”

The Court noted established precedent that the “value of dissenting shareholders is to be calculated ‘In accord with generally accepted valuation concepts and techniques and without shareholder level discounts for lack of control or lack of marketability.’”  Furthermore, the Court deemed that “one such valuation concept is the net asset value …. [in which] ‘one of the things the appraiser seeks to do is to establish the market value, as opposed to the book value of the company’s assets.’”  It also noted precedent that “the company’s going concern value … is almost certain to be, estimated by reference to market values of one sort or another” but “what is being sought is the company’s going concern value, not the mere liquidation value of its tangible assets,” (p. 5) therefore, “to the extent that the asset approach cannot yield a going concern value … it should be given no weight.”

After reviewing the experts’ reports, the Court determined that the challenged expert valuation is not “inherently, legally flawed because [it] … appraised [the company’s]… equipment as he would equipment for sale.”  Furthermore, the Court considered that the expert “conducted additional analysis” which “also considered the health of the economy, the … industry and a financial analysis of [the company].”  In this context, the Court noted that “business appraisal, of course, is ‘as much an art as it is a science,’” and “should the Court later reject [the challenged] valuation, the Court is not then bound to accept Plaintiff’s valuation whole-cloth.”  Therefore, the Court rejected the motion of summary judgment.

§ 1.7.5 Missouri

Robinson v. Langenbach, 599 S.W.3d 167; 2020 Mo. Lexis 192; 2020 WL 2392488 (Supr. Ct. Mo., No. SC97940, May 12, 2020).  This family business valuation dispute regarding a determination of fair value arises from claims of breach of fiduciary duty and shareholder oppression.  On appeal, the Court evaluated whether the trial court’s use of a valuation which applied discounts for lack of marketability and lack of control was appropriate.  The Court considered the context and particular facts, determined that a separate prior trial on the breach of fiduciary claim had already awarded damages to plaintiff for the increase in the company’s value before plaintiff’s removal, that in this case the shareholder oppression claim does overlap and that the trial court had determined that valuation discounts are needed to avoid double recovery.  As a result, the Court concluded that the trial court’s decision was within the trial court’s broad equitable discretion, and, therefore, upheld the trial court’s decision.

In its analysis, the Court noted that the “parties here agree that fair value is a broader, equitable concept” than fair market value, and that both sides’ experts relied on valuation treatises which indicated that “there is no hard and fast rule regarding the use of discounts to determine fair value… the case law is literally all over the place.”  Although the Court agreed that “the rationale for applying a minority and marketability discount usually would have limited application in the case of a court-ordered sale to a majority stockholder,” it stated that there is “no fixed set of factors a court must review to determine ‘fair value,’” “context is crucial in a ‘fair value’ analysis,” and a trial court has broad discretion “to shape and fashion relief to fit the particular facts and circumstances and equities of the case before it.”  Therefore, considering the particular facts, the Court determined it was not an error for the trial court to agree with the defendant’s expert that a discount was proper in this one case and noted that the trial court “did not purport to determine any broad principle of law as to application of these discounts.”

§ 1.7.6 Nebraska

Anderson v. A&R Spraying & Trucking, Inc., 306 Neb. 484; 946 N.W. 2d 435, 2020 Neb. Lexis 116 (Supr. Ct. Neb., July 17, 2020).  On appeal, in a shareholder buyout dispute regarding fair value, the Court upheld the trial court’s valuation of the shares in which it adjusted the earnings-based valuations of both parties’ experts and averaged the results.  The Court deemed that trial court’s approach not to be an error, because it was reasonable and had an acceptable basis in fact and principle for use of the experts’ income approach valuation analyses but adjusts for inconsistencies.

The Court noted that neither party asserted on appeal that the trial court used an incorrect valuation method, and instead, “the sole issue presented is whether the… court’s valuation ‘is unreasonably high,’ considering expert’s reports and supporting testimony regarding the income approach.”  In addition, the Court commented that “the determination of the weight that should be given expert testimony is uniquely the province of the fact finder.  The trial court is not required to accept any one method of stock valuation as more accurate than another accounting procedure.  A trial court’s valuation of a closely held corporation is reasonable if it has an acceptable basis in fact and principle.”

On appeal, in a shareholder buyout dispute regarding fair value, the Court upheld the trial court’s valuation of the shares in which it adjusted the earnings-based valuations of both parties’ experts and averaged the results.  The Court deemed that trial court’s approach not to be an error, because it was reasonable and had an acceptable basis in fact and principle for use of the experts’ income approach valuation analyses but adjusts for inconsistencies.

In its analysis, the Court found that the trial court carefully reviewed the expert opinions, identified certain variables that were inconsistent with the income approach, adjusted each opinion accordingly, and used the resulting average of the two adjusted valuation conclusions.  Furthermore, a fair value determination assumes that the business is valued as a going concern, which can be achieved through an income approach.  Therefore, it found that the trial court was not speculative when it made an adjustment because it viewed one expert’s “subtracting 100% of the debt from the valuation estimate of the business [because it] does not comport with the overall theory of the Income Approach because a business, as a going concern, is not required to pay back all of its debt on a lump sum basis.”  In this regard, the Court also considered that the business continued to operate, “there have been no effort to liquidate,” both experts agreed that the company generated significant cash flows, and its banker testified that the company paid its loans on time.

§ 1.7.7 New York

Magarik v. Kraus USA, Inc., No. 606128-15, Nassau County, Supreme Court of New York (April 10, 2020).  In a claim alleging shareholder oppression and a petition for judicial dissolution, the Court considered each of the parties’ experts’ valuations, which came to conclusions that “were vastly disparate from each other.”  The Court selected the valuation which item deemed to “reflect a more accurate value,” and rejected the valuation by plaintiff’s expert that it deemed was “based on income projections that were unrealistic and optimistic and not based on comparable businesses.”

In this case, the company prepared projections for purposes of applying for a bank loan, but not in the ordinary course of running the business.  The plaintiff’s expert relied on those projections.  But, based upon the facts in this case, the Court deemed those projections to be “ambitious and, in fact, overstated.”

In evaluating the projections, although the Court noted the early rapid sales growth of the company, it viewed that “not as great as petitioner contended (especially considering … negative cash flow) nor was it accurately predictive of future success.”  Rather, it deemed the projections used “did not sufficiently account for the competitive nature of the … business … lack of cash flow,” and lack of ownership of the brand name.  Furthermore, regarding the statements and forecasts that the company’s owners made to the bank in obtaining the loan, the Court noted “the representations were not accurate.”  Consequently, according to the Court, the plaintiff’s expert’s income approach “was based on unrealistic projections, proven to be unrealized and wrong.”

In addition, the Court considered that both parties’ experts also applied a market valuation approach.  It deemed that the market approach used by the plaintiff’s expert to be “based on incorrect comparables … public companies, not reasonably related to [the subject company] in terms of size, ownership or marketability.”  Nevertheless, the Court viewed the market approach using the “merged and acquired company method” when weighted with the income approach to be “sound” in this case.

In this situation, the plaintiff owned 24 percent of the company’s shares, the other two owners held 25 percent and 51 percent, respectively.  Finally, the Court also accepted “application of a discount for lack of marketability [of 5 percent], recognizing that the shares of [the subject company] cannot be readily sold on a public market.”

PFT Technology, LLC, v. Wieser, 181 A.D.3d 836, 122 N.Y.S.3d 313 (N.Y. App. Div. 2020).  A limited liability company and its majority members filed suit against a minority member seeking to dissolve the company and reconstitute without the minority member.  The minority member, in turn, counterclaimed for breach of the operating agreement.  The minority member eventually agreed that the majority could buy out his membership interest, and the court held a valuation proceeding in which the minority member’s interest was valued at $1.250M.  The minority member was also awarded attorney fees and prejudgment interest but not any damages based on his counterclaim.  Both sides appealed.

On appeal, the appellate court noted that although limited liability law did not expressly authorize a buyout in a dissolution proceeding, that remedy was appropriate as an equitable remedy.  The appellate court found that the trial court’s decision to allow the buyout was a “provident” exercise of its discretion.  However, the trial court erred in applying certain adjustments to the company’s value, which should have been $1.489M.  The trial court also erred in the amount of attorney fees it awarded.  The trial court did not err in deciding not to award damages on the counterclaim or in the amount of prejudgment interest.

§ 1.7.8 Tennessee

Boesch v. Holeman, 2020 Tenn. App. Lexis 410; 2020 U.S.P.Q.2D (BNA) 11062; 2020 WL 5537005 (Ct. App. Tenn., Knox., No. E2019-02288-COA-R3-CV, Sep. 14, 2020).  This case concerns valuation of a disassociated partner’s interest in a business, and the issue of whether a discount should have been applied to the value of the disassociated partner’s one-third minority interest.  On appeal, the Court determined that a discount for lack of marketability as to the entire partnership business and not as to the minority partnership interest may be appropriate, but a discount for lack of control by the minority partnership interest is inappropriate because [Tennessee Code Annotated, Section 61-1-701 (b)] calls for determining value based on the sale of the entire partnership as a going concern.  Consequently, the Court deemed the trial court’s application of a minority discount improper and remanded the case back to the trial court.

In this situation, the plaintiff is one of three partners.  The Court considered that the expert’s report, which the trial court accepted, applied both a discount for lack of control (aka discount for minority position) and a discount for lack of control.  The Court referenced the Uniform Law comment to Tennessee Code Annotated, which states, “The notion of a minority discount in determining the buyout price is negated by valuing the business as a going concern.  Other discounts, such as for a lack of marketability or the loss of a key partner, may be appropriate, however.”  Furthermore, the Court stated that “the statute calls for determining value based on a sale of the entire partnership business as a going concern.”  As a result, the Court concluded that since that expert’s report did not comply with the Tennessee Code, remand to the trial court was necessary.

Raley v. Brinkman, et al., 2020 Tenn. App. Lexis 342 (M2018-02022-COA-R3-CV, Jul. 30, 2020).  In a buyout dispute involving one of the two 50% owners of a limited liability company (“LLC”) organized as an “S” corporation for income tax purposes, the issue on appeal was whether tax affecting is “relevant” to the determination of fair value buyout.  The trial court declined to tax affect.  On appeal, the Court determined that tax affecting assisted “in determining the going concern value of the S corporation to the shareholder or member.”

The Court noted that the defendant’s expert explained “in considerable detail” why tax affecting and applying an income tax rate “was entirely appropriate and comports with generally accepted valuation standards and methods.”  The expert’s rationale included that “all of the components of the Capitalization Rate are based on after-tax values or after-tax income data, the income stream to which the Capitalization Rate is applied in the Income Approach must also be an after-tax amount in order to be comparing apples to apples.”

The Court considered that its role on appeal is not to determine value but only to determine “whether tax-affecting constitutes relevant evidence of fair value.”  Furthermore, the Court stated that relevant evidence under Tennessee law includes “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.”

The Court stated that the trial court erred in rejecting tax affecting because the trial court incorrectly “applied the fair market value standard, as the Gross court[1] [in a tax case, not a buyout case] did” and incorrectly relied on an Internal Revenue Service (“IRS”) job aid.[2]  The Court noted that although there is no Tennessee case law on the precise issue of how to define fair value under the LLC Act, there is a Tennessee decision, Athlon Sports, under the dissenter’s rights statute that is instructive.  In Athlon, the Tennessee Supreme Court said that fair value is the required standard, fair value is not fair market value, and that the selling fair value owner is “not in the same position as a willing seller on the open market – he is an unwilling seller with little or no bargaining power.”

Instead of Gross and the IRS job aid which the trial court referenced, the Court deemed that the better guidance was Delaware Open MRI,[3] in which the Delaware Court of Chancery determined the going concern fair value of interests in an S corporation and deemed tax affecting relevant to determine “what the investor ultimately can keep in his pocket.”  Therefore, the Court concluded that tax affecting is relevant evidence.

§ 1.7.9 Virginia

Biton v. Kreinis and New Tomorrow, Inc., 2020 Va. Cir. Lexis 94 (Cir. Ct. Norf. Va., No. CL19-7991, Jul. 10, 2020).  In this buyout litigation dispute, the fair value of the departing owner’s shares in a corporation was at issue.  Both parties’ experts used an income approach-capitalization of earnings valuation method, but they reached very different conclusions.  Based upon the evidence, the Court resolved disputed issues regarding valuation date and key valuation inputs of: estimating representative annual revenue to calculate annual cash flow to use in the income approach to value, whether a revenue discount is appropriate due to the implied loss of the sales expertise of the departing owner, estimating representative net income margin percentage to calculate annual cash flow, and estimating capitalization rate.

Regarding valuation date, the Court determined that since this is an action for dissolution of corporate stock in lieu of dissolution, “The statutory valuation date is the day before the date on which the dissolution petition was filed unless the court deems another valuation date appropriate under the circumstances. [Plaintiff] … filed her dissolution action on August 2, 2019, so the presumptive valuation date is August 1, 2019.”

In estimating representative annual revenue to calculate annual cash flow to use in the income approach to value, the Court addressed the lack of projections, little revenue history, and problems with the quality of some historical financial information.  In this regard, the Court commented that “although using the twelve months of revenue immediately prior to the valuation date arguably would have yielded a more accurate representative annual revenue for valuation purposes, that would have required using the monthly [internal accounting] figures, which … are not reliable,” and noted several problems, including “the [internal accounting] data are suspect, as evidenced by the fact that the 2018 revenue is more than twelve percent higher than the 2018 tax-reported revenue, a fact that neither expert could explain.  Further, … two [internal accounting] profit-and-loss statements produced in discovery … for the same time period … are markedly different.”

In addition, the Court rejected the defendant’s expert’s use of full calendar year 2019 internal accounting information, because it includes five months of information subsequent to the valuation date of August 1, 2019.  The Court stated, “Using data after the valuation date is discouraged by the Statement on Standards for Valuation Services,[4] which states that ‘[g]enerally, the valuation analyst should consider only circumstances existing at the valuation date and events occurring up to the valuation date,’ and [defendant’s] expert acknowledged as much in his expert report, and he admitted during his testimony that using post-valuation date revenue was highly irregular.”

Based upon the evidence, “For valuation purposes, the Court finds it appropriate to use the 2018 revenue as calculated by [the plaintiff’s] expert … as … representative annual revenue, … subject to discounting to account for [plaintiff’s] unique contributions.”  The Court considered that “[plaintiff’s]… expert chose to use the 2018 tax reported annual revenue because it was the last available year an accountant had filed a corporate tax return, the last full year before the valuation date, and the last year before the events that led to [plaintiff] filing for dissolution.  He also claimed that there was no reason to believe … operations would not continue as in 2018.  He filled in the missing months of … [the additional location’s] operations revenue — January through April 2018 — by calculating an average 2018 monthly income per location and applying a seasonal adjustment.”  The Court also noted that “the … 2018 revenue information that [plaintiff’s] expert used, on the other hand, appears reliable.  The 2018 corporate tax return is available.”

Regarding whether the revenue discount is appropriate, “The Court finds, based on evidence presented at trial, that [plaintiff’s] sales expertise is not easily replaceable and that the corporate revenue for purposes of valuation therefore should be discounted based on her loss,” and “finds it appropriate to discount the representative annual revenue by ten percent to represent [the company’s] future cash flows without the benefit of [plaintiff’s] sales expertise.”

In estimating the representative net income margin percentage to calculate annual cash flow, the Court made adjustments for non-recurring items such as one-time store opening expenses, discretionary charitable contributions, and manager and officer salary costs.

In analyzing the capitalization rate, the Court considered the totality of the evidence and the company’s current circumstances.  According to the court, “The experts agree to a large extent on the discount rate to be used to calculate the capitalization rate applicable to the ongoing cash flows … [however] the experts disagree regarding … longterm sustainable growth rate.”  Regarding growth rate, the Court considered testimony regarding historical and forecast increases in economic gross domestic product, projected inflation rates, and inflation and future prospects for retail sales.

§ 1.7.10 Washington

McClelland v. Patton, 2019 Wash. App. Lexis 2960, 11 Wn. App. 2d 181 (No. 35401-6-III, Nov. 21, 2019).  In this dissolution case regarding interests in a professional limited liability company (PLLC), the Appellate Court addressed a dispute over whether a PLLC can have entity goodwill value separate from the goodwill of the professionals.  The Court considered the evidence, reviewed goodwill principles, and affirmed the trial court’s finding of entity goodwill.

As a basic premise, the Court noted that “goodwill blossoms from a business’ brand name, trade name, customer relationships, locations, memes, logos, patents, and proprietary technology.”  In addition, it noted that previously regarding goodwill, the Washington Court of Appeals said that goodwill is the “expectation of continued public patronage,” and that helpful insight from the Texas Court of Appeals said, “Goodwill is generally understood to mean the advantages that accrue to a business on account of its name, location, reputation, and success.”

The Court considered the proffered testimony by both parties’ valuation experts on the issue, and that the courts in numerous states recognize that a professional business may possess goodwill separate from that of the individual practitioners, but a few states recognize that professional goodwill attaches to the individual professional rather than the entity.  Among various facts, the Court considered that at the time of trial, referrals were still occurring to the PLLC, not to the professionals, professionals continued to practice at all three of the offices, patients received a bill from the PLLC, not the individual professional, and that when the plaintiff bought into the practice several years earlier, he paid a specified amount then for goodwill value.

The Court rejected the assertion by defendant’s expert as a “false alternative” that either the individual practitioner or the entity but not both could have goodwill.  Rather, the Court concluded that “no reason exists to preclude the practitioner and the entity that employs the practitioner from both enjoying goodwill,” and it adopts “the rule that a professional business entity may enjoy goodwill as the rule that best follows the phenomenon that some customers or clients chose to conduct business with the professional organization not only because of the individual skill of one professional inside the entity.”  Furthermore, the Court concluded that dissolution of the PLLC does not mean it is a going concern, and based upon the fact, the value of the entity as a going concern was preserved.  Finally, the Court listed the five goodwill valuation methods, which the Washington Supreme Court has recognized, and stated that the trial court “could have accepted [plaintiff’s expert’s] valuation of goodwill based on a market value on a going concern basis.”

[1] Gross v. Comm’r v. IRS, 272 F.3d 333, 335 (6th Cir. 2001).

[2] “Valuation of Non-Controlling Interests in Business Entities Electing to be Treated as S Corporations for Federal Tax Purposes,” prepared by representatives of the Large Business and International Division NRC Industry, Engineering Program and the Small Business/Self-Employed Division Estate and Gift Tax Program, dated October 29, 2014.

[3] Delaware Open MRI Radiology Associates, P.A. v. Kessler, 898 A.2d 290 (Del. Ch. 2006).

[4] “Statement on Standards for Valuation Services,” American Institute of Certified Public Accountants.

The following article is an excerpt from 200 Years of American Financial Panics: Crashes, Recessions, Depressions And The Technology That Will Change It All. 

Artificial intelligence has allowed us to enter the age of Big Data, where extremely large collections of digitized data can be analyzed computationally through the application of complex algorithms to reveal patterns, trends, and associations relating to human behavior and interactions. If you believe that history merely repeats itself, Big Data can be enormously profitable to the extent that it allows users to better predict economic outcomes.

The gap in this seamless evolution of technology is the government. If banks are now technology companies, the government should regulate them as such. That means that government regulators must also understand and use technology. But federal and state banking agencies still ground many decisions on the results of manually collected historical data and physical on-site examinations. There is still an important role for an examiner’s ability to look into the eyes of bank executives and discuss and debate the operations and safety and soundness of a bank during an on-site examination. It is also a critical way to identify and evaluate potential fraud and other misdeeds. But it can no longer be the main tool in a real-time environment.

The Panic of 2008 has pointed regulators in the direction of evaluating future risks. For example, regulators now oversee the creation of elaborate bank resolution plans called living wills, sophisticated capital, and stress testing under alternative financial scenarios as a part of its Comprehensive Capital Analysis and Review (CCAR), and measurements of liquidity and risk management plans under similar duress. But the supervisory function should move to the next level and become fully focused on the comprehensive, real-time collection of data that can be analyzed by artificial intelligence algorithms to assess present and predict future economic and financial behavior.

Predicting the next financial crisis is comparable to forecasting the next hurricane. There are endless human, operational, and financial variables that may impact the outcome and timing. Artificial intelligence can be the bridge between the historically based microeconomic analysis that financial regulation supervisors focus on, and predictive macroprudential regulation that can use Big Data to build a safer and sounder financial services network. The risks embedded in the financial statements of a bank are only a part of the challenge that it must confront. The risks inherent in the overall economy and financial networks will often have as much if not more of an impact on the quality of the credit that it has extended and its performance than its own financial predicament.

Our current system of financial regulation is not only seriously challenged when it comes to averting or mitigating financial crises, it can often exacerbate them. Technology provides a solution because the supervision of financial institutions relies on “the evaluation of a vast quantity of objective and factual data against an equally vast body of well-defined rules with explicit objectives.”

Consider how artificial intelligence and Big Data could have impacted the Panic of 2008. Assume that a huge amount of macroeconomic and financial industry data going back to 1965 had been compiled and was being analyzed by sophisticated computer algorithms beginning in 2000. That data input would have covered the inception of interest and usury rate controls, the most volatile interest rate environment the country had ever experienced, the failure of a massive number of S&Ls and banks, the collapse of oil prices, risky lending in Latin America, several real estate development recessions, the junk bond boom and bust, the stock market collapse of 1987, dramatic changes in demography, the rise of mutual and money market funds, the emergence of asset management businesses, and the internet and social media explosion.

An integrated approach to the evaluation of financial data could also have included information related to the financial incentives and behavior, rational and irrational, that were built into the system. Socialized risk and short-term compensation incentives could have been factored into the mix, perhaps leading to a quicker grasp of how, for example, the securitization of assets ranging from home mortgages to credit cards had skewed the risk/reward formula. With better data sets and analysis, the government and industry executives would have had more reliable indications of developing crises years before they arrived.

What would have occurred if years before the Panic of 2008, regulators and executives accessed these new databases and ran simulations that began to show red flags emerging? They would have seen, as early as 2000, disturbing data about the impact of increases in the amounts of outstanding credit, leverage, second and third mortgages, default rates, and the potential impact of several generations of variable-rate mortgages in rising rate and decreasing home value scenarios. Intelligent machines could have analyzed data that the government had in ways that it was not capable of doing. Red flags would have been seen earlier and more clearly about the interrelated impact of reductions in credit quality, increases in credit availability and the proliferation and interaction of shiny new financial products such as MBS, collateralized debt obligations, and credit default swaps. The creation of excessive risk created by parties with no skin in the game and few downside concerns would have been noticed and hopefully financial incentives could have been adjusted. Intelligent computers would have produced alternative economic scenarios that regulators could have evaluated. If regulators could have spent less time micro-supervising less important matters, they would have had the time to war game how these events might have intersected and made appropriate course corrections.

Congress, bank and investment banking executives, the SEC, and the Federal Reserve might have had the chance to realize that under the developing circumstances, the capitalization and leverage ratios of firms like Bear Sterns and Lehman Brothers were dangerously low and were creating a massive systemic threat. Similarly, regulators and executives might have seen much earlier that AIG could not have sustained a credit default swaps exposure that was effectively insuring all of Wall Street. Better data and predictive analysis could have led to more fulsome public securities disclosures by Bear Sterns, Lehman Brothers, AIG, and Merrill Lynch about possible risk factors that the companies were facing. That would have given shareholders the opportunity to speak through their platforms and, perhaps, alter the course of future events.

Technology, and particularly artificial intelligence, bring with it significant challenges. Artificial intelligence is a tool that relies on the integrity of the program, the programmer, and the data being used. It can be wrong, biased, corrupted, hijacked, stale, or simply based on bad data. Trusting artificial intelligence is an exercise in caution and discretion. Whether factual or not, the parable about the US Navy’s testing of artificial intelligence is instructive. As it goes, when the navy’s artificial intelligence applications sensed that a simulated convoy was moving too slowly, it simply sank the slowest two ships in its convoy to speed up the convoy’s overall progress. That is hardly a solution that would work in the field of financial regulation.

The issues of “explainability” and “accountability” are extraordinarily important in the financial world. How does a financial institution explain why the predictive conclusions of a machine were followed or rejected, particularly after the outcome goes wrong? How can a decision made by an intelligent machine be challenged? How is the use of artificial intelligence impacted by privacy laws and the ability or inability to identify an accountable party? Can machines explain what their algorithms did or how they did it to satisfy the kinds of legal obligations that are imposed by the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act, and the European General Data Protection Regulation to provide the borrower or customer with an explanation about why credit was denied?  

Big Data, superintelligent and quantum computers, the cloud, complex algorithms, and artificial intelligence will increasingly provide governments with tools that will dramatically increase their ability to predict and avert future economic disasters. While those systems will never be foolproof, they will increase the opportunity for the government and businesses to make course corrections based on a wider and clearer field of vision. They will potentially give regulators better intelligence and more time to improve and adapt financial regulation, monetary and interest rate controls, and economic responses to impending downturns. Imagine being able to avoid the next financial crisis or, more realistically, lessening its impact because of the decisions made based on information produced by algorithms feverishly analyzing sets of Big Data years before. The advantages of having substantially more data that can be analyzed quickly by intelligent machines can alter the course of financial history and create a smarter and more effective system of financial supervision. Every day that passes without this technological tool in the government’s pocket is another day the economy potentially creeps closer to the next financial Armageddon without any clear warning.

200 Years of American Financial Panics:  Crashes, Recessions, Depressions And The Technology That Will Change It All is available from Prometheus Books and all online book outlets. Learn more about the author.

Although the use of ‘blank check’ vehicles dates back to the 1980s, there has been a proliferation of Special Purpose Acquisition Companies (SPACs) as a means of raising capital over the last 18-24 months (mid-2019 to present). The rise of SPACs has – despite a recent slowdown – been unprecedented, both in terms of the number of new SPAC listings taking place and the amount of capital raised.

Of the 248 SPACs which listed in the US in 2020,[1] 94 were incorporated in either the British Virgin Islands (BVI)[2] or, predominantly, the Cayman Islands.[3] This highlights the significance of these international finance centers to the re-emergence of SPACs as a dominant force in the US capital markets.

By June 2021, the number of new SPAC IPOs had begun to fall away from its peak in Q1 2021: whereas the first three months of 2021 saw more capital raised by SPACs than in the whole of 2020,[4] the number of new SPAC listings fell sharply from April 2021.[5] 

This drop-off has been attributed to a combination of possible factors.  The Securities and Exchange Commission’s statement in April 2021 (the SEC’s Statement)[6] concerning the treatment of warrants in a typical SPAC structure as liabilities on a SPAC’s balance sheet rather than as equity undoubtedly led to a pause amongst SPAC sponsors and service providers while the ramifications of the SEC’s Statement were digested and some financials had to be restated.  Further, large numbers of investment opportunities caused institutional investors who typically participate in the Private Investment in Public Equity (PIPE) financing element of SPAC transactions to become more discerning, and merger valuations were impacted by significant competition amongst large numbers of SPACs simultaneously hunting for a target.

As the SPAC IPO market begins to cool slightly in the US, the attention of many M&A practitioners is turning to the substantial levels of capital sitting within SPACs seeking a merger target – recently estimated by Goldman Sachs to be around $129 billion.[7]  Given that SPACs are required to spend money within a certain period or return it to shareholders via redemptions, this seems certain to have a meaningful impact on the domestic and cross-border M&A markets at least through the first half of 2023 as these vehicles begin to effect ‘de-SPAC’, or business combination, transactions.

Since a substantial proportion of SPACs’ dry powder is contained within Cayman Islands or BVI incorporated entities,[8] it is pertinent to analyse the range of options available pursuant to the laws of those jurisdictions to effect a de-SPAC transaction once the SPAC’s management team has identified a merger target.

Initial choice of Cayman Islands or BVI as jurisdiction for SPAC incorporation  

The selection of a jurisdiction for the incorporation of a SPAC (i.e., whether it should be formed in the US or offshore) is typically driven in large part by complex US tax considerations which are both beyond the scope of this article and outside the scope of offshore counsel’s involvement in the structuring process. 

However, generally speaking, where the SPAC’s management team has ascertained that it is more likely than not that the acquisition of a non-US based company – rather than a domestic US company – will be targeted by the SPAC, a non-US jurisdiction is often selected as the jurisdiction of incorporation of the SPAC.

The Cayman Islands or the BVI are commonly selected as the jurisdiction of a non-US SPAC’s incorporation for a number of reasons:

• the entity may be a ‘foreign private issuer’ from an SEC perspective if correctly structured;[9]
• both the Cayman Islands and the BVI are tax neutral, with no withholding taxes, capital gains or stamp duty levied;[10]
• the company law frameworks in each jurisdiction are flexible but sophisticated, with a simple solvency test for distributions, no corporate benefit requirements, and bespoke governance requirements capable of being included in tailored constitutional documents; and
• there is considerable market familiarity (amongst sponsors, institutional investors, bankers and US counsel) with the use of vehicles incorporated in these jurisdictions.    

Just as the corporate flexibility of Cayman Islands and BVI vehicles is attractive at the IPO stage of the SPAC lifecycle, the range of options provided by Cayman Islands and BVI company laws to achieve a desirable structuring outcome in the de-SPAC transaction is notable. 

Availability of de-SPAC structuring alternatives under Cayman Islands and BVI company law

At the business combination stage of the SPAC lifecycle, it is not always the case that a target company which is taken public by an offshore-incorporated SPAC (Offshore SPAC) will continue to be structured as a Cayman Islands or BVI-incorporated holding company after the reverse merger is effected. 

If the Offshore SPAC acquires a non-US target company (Foreign Target), the post-merger listed entity is often incorporated in the same jurisdiction as the Foreign Target, with the transaction commonly accomplished by way of a cross-border merger.  A possible series of transactions in this scenario (assuming that the Offshore SPAC is incorporated in the Cayman Islands) would be:

• Foreign Target forms a wholly-owned Cayman Islands subsidiary (Merger Sub);
• Merger Sub merges with and into the Offshore SPAC with the Offshore SPAC continuing as the surviving company after the merger; and
• the Offshore SPAC becomes a direct, wholly-owned subsidiary of Foreign Target.

This form of transaction structure was used, for example, in the acquisition of Taboola, the Israeli targeted marketing platform, by ION Acquisition Corp. 1 Ltd., a Cayman Islands-incorporated SPAC[11] at an implied valuation of $2.6 billion, per SEC filings in connection with the transaction.[12]     

The statutory merger provisions in Cayman Islands company law allow this form of transaction to be accomplished with ease: typically, a special resolution of the shareholders of the Cayman entity is required to approve the merger, which is generally capable of being passed by 2/3 of voting shareholders at a duly convened and quorate shareholder meeting, along with such other authorization, if any, as may be set out in the Cayman entity’s constitutional documents.  The law also requires the consent of certain security interest holders, although it is rare for a SPAC to have granted security over its assets.[13]

If the Offshore SPAC acquires a domestic US target company, it may be the case that the Offshore SPAC will effect a domestication to a US jurisdiction such as Delaware as part of the business combination transaction, with a domestic US entity as the resulting public company.  For example, per SEC filings,[14] this deal structure was employed in the acquisition of San Francisco-headquartered property technology company Opendoor by the Cayman Islands-incorporated SPAC Social Capital Hedosophia Holdings Corp. II, in a transaction which valued Opendoor at an enterprise value of $4.8 billion.[15]          

As with the Cayman Islands statutory merger provisions, the procedure for effecting a re-domiciliation out of the Cayman Islands (known as a ‘de-registration’) is straightforward.  A number of procedural steps need to be taken in the Cayman Islands, including the filing of a declaration by a director of the Cayman Islands entity confirming that, amongst other things:

• it is solvent and able to pay its debts as they fall due;
• the application for de-registration is not intended to defraud its creditors;
• any contractual consent to the transfer has been obtained, waived or released;
• the transfer is permitted by and has been approved in accordance with the company’s constitutional documents; and
• the laws of the jurisdiction where the Cayman Islands entity is transferring have been or will be complied with.[16]

Alternatively, where the parties to the merger can receive their consideration in the form of shares in another entity formed for that purpose, that entity will then list with both the SPAC and the original target vehicle sitting beneath it.

The corporate flexibility and political stability afforded by both the Cayman Islands and the BVI has ensured that both jurisdictions have been vital in the structuring of cross-border mergers, acquisitions, IPOs and investment fund formations for decades.  Even if the SPAC IPO boom witnessed throughout 2020 and Q1 2021 continues to taper off somewhat, the Cayman Islands and the BVI will continue to remain absolutely central to the domestic and global M&A markets as the billions of dollars of undeployed capital sitting within SPACs incorporated in these jurisdictions continues to seek out suitable merger targets.

[1] https://spacinsider.com/stats/.

[2] Per an analysis of the SEC Form S-1s filed by SPAC issuers in 2020, which disclose the SPAC’s jurisdiction of incorporation.

[3] Ibid.

[4] https://spacinsider.com/stats/.

[5] SPAC Research, reported in CNBC article ‘SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest’, Yun Li, 21 April 2021.

[6] SEC Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), 12 April 2021.

[7] Goldman Sachs analyst note (led by David Kostin) dated 21 April 2021, reported by businessinsider.com, ‘SPACs could drive $900 billion of dealmaking over the next 2 years despite the boom slowing, Goldman says’, Harry Robertson, 22 April 2021.

[8] See supra note 2.

[9] SEC Division of Corporation Finance, ‘Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers’ (Part II: Foreign Private Issuer Status).

[10] See, for example, section 242 of the BVI Business Companies Act 2004 (as amended).

[11] https://www.sec.gov/Archives/edgar/data/1821018/000121390021003870/ea133754-8k_ionacquis1.htm.

[12] Reuters.com, ‘Taboola to go public through $2.6 billion blank-check deal’, 25 January 2021.

[13] Part XVI, Cayman Islands Companies Act.

[14] https://www.sec.gov/Archives/edgar/data/1801169/000110465920112009/tm2030455-1_s41.htm.

[15] Techcrunch.com, ‘Opendoor to go public by way of Chamath Palihapitiya SPAC’, Alex Wilhelm, Natasha Mascarenhas, 15 September 2020.

[16] S. 206 Cayman Islands Companies Act.

Two recent reports suggest that a federal crackdown on cryptocurrency tax avoidance in the United States is in process. In March 2021, Damon Rowe, Director of the IRS Office of Fraud Enforcement, and Carolyn Schenck, National Fraud Counsel & Assistant Division Counsel (International) in the IRS Office of Chief Counsel, announced a partnership between the IRS’s civil office of fraud enforcement and criminal investigation unit targeting cryptocurrency tax evasion.[1] Dubbed “Operation Hidden Treasure,” the effort is “all about finding, tracing, and attributing crypto to U.S. Taxpayers.”[2] Reports indicate that IRS employees are working with European law enforcement agencies as a part of the effort.[3]

Likewise, at an April 13, 2021, hearing of the Senate Finance Committee, Sen. Rob Portman (R-OH) and IRS Commissioner Charles Rettig discussed issues relating to the reporting of cryptocurrency transactions. Commissioner Rettig specifically highlighted new cryptocurrency disclosure obligations on the Form 1040 tax return. Sen. Portman announced a forthcoming bipartisan bill specifically aimed at tax reporting of cryptocurrency-related transactions.[4]

The increased targeting of cryptocurrency transactions means users of cryptocurrency—and their counsel—should be aware of possible tax reporting and fraud issues.

Cryptocurrency Regulatory Confusion

One of the major problems with cryptocurrency regulation in the United States is an inconsistent regulatory conceptualization. Federal banking regulators disagree as to whether cryptocurrency firms are engaged in the business of banking. According to the Securities and Exchange Commission, some, but not all, cryptocurrencies are securities. The Federal Elections Commission considers cryptocurrency as currency, yet cryptocurrency campaign contributions are considered “in-kind” contributions.[5]

The IRS position is also inconsistent, recognizing cryptocurrency as a medium of exchange but refusing to treat it as currency. Instead, the IRS treats of cryptocurrency as a capital asset.[6] Essentially, when a person acquires a cryptocurrency, the cost associated with its acquisition is the asset’s basis. For an owner who holds the cryptocurrency for appreciation in value (as one might with publicly traded securities), the sale or disposition of the cryptocurrency results in either a gain or loss, with appropriate tax treatment.

But cryptocurrency is not acquired just for capital appreciation; it is used as a medium of exchange in ordinary commercial transactions. When normal currency is used in a commercial transaction, typically only the vendor must recognize taxable income. But because the IRS treats cryptocurrency as property with basis, when it is used for the purchase goods or services, the purchaser also must recognize taxable gain or loss on the disposition of the asset.[7]

It is unclear whether cryptocurrency users are aware of these tax consequences. One source estimates that 18 to 21 million taxpayers will need to consider cryptocurrency transactions for 2021 income.[8] And in reporting income, taxpayers need to be careful to properly track the basis of the cryptocurrency to correctly calculate taxable gain or loss.[9]

Form 1040 Disclosures

The 2020 Form 1040 tax return requires taxpayers—as the very first question on the return—to answer, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”[10] According to the Form 1040 Instructions, virtual currency includes digital currency or cryptocurrency, and virtual currency transactions include, but are not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
• An exchange of virtual currency for goods or services;
• A sale of virtual currency;
• An exchange of virtual currency for other property, including for another virtual currency; and
• A disposition of a financial interest in virtual currency.[11]

Taxpayers seeking to avoid IRS attention to their cryptocurrency transactions may be tempted to answer “no” to the question, hoping that the supposed anonymity offered by cryptocurrency will protect them. This is the specific type of activity that the IRS seeks to target with Operation Hidden Treasure:

The IRS, through its trained agents working together with specialist vendors, is “analyzing blockchain and de-anonymizing [crypto] transactions” to be “able to track, find, and work to seize crypto in “both a civil and a criminal setting.”

Schenck had a message for crypto traders who are would-be tax evaders: “We see you.”[12]

Civil and Criminal Tax Fraud

Failing to properly disclose cryptocurrency transactions can trigger both civil and criminal tax fraud. If—or perhaps when—the IRS eventually traces cryptocurrency transactions back to the taxpayer, the Internal Revenue Code allows a 75% civil penalty for any underpayment of taxes attributable to fraud.[13] While the IRS bears the burden of proving by clear and convincing evidence that the underpayment is due to fraud, the burden is met by showing that an underpayment of tax exists, and that the taxpayer intended to evade taxes known to be owed intentionally concealing, misleading, or otherwise preventing the collection of taxes.[14]

Criminal tax fraud is also a possibility if the taxpayer fails to truthfully answer the cryptocurrency question on the tax return.[15] However, the federal criminal tax fraud statutes include the heightened mens rea element of willfulness, which is not found in the civil tax fraud statutes. Courts have construed “willfulness” in the context of tax fraud to require the government to show that the law imposed a duty on the taxpayer, that the taxpayer knew of the duty, and that the taxpayer voluntarily and intentionally violated the duty.[16] Given the incongruence between the common use of cryptocurrency in transactions and the tax treatment thereof by the IRS, many taxpayers may be saved by the willfulness element.

Tax Amnesty

Some observers have noted the similarities in the IRS’s early approach to foreign account disclosures and the tactics currently employed with regard to cryptocurrency.[17] Under the Offshore Voluntary Disclosure Program (“OVDP”), first instituted in 2009, taxpayers with undisclosed foreign financial accounts could avoid criminal prosecution and heightened civil penalties by fully disclosing accounts and paying a lesser amount.[18] This “carrot”—contrasted with the “stick” of criminal prosecutions—netted the IRS $11.1 billion of voluntary payments.[19]

Some have called for an IRS voluntary disclosure and amnesty program for cryptocurrency users, similar to the OVDP. At least one observer has described the IRS’s game plan thusly: use Joe Doe summonses directed to cryptocurrency exchanges to obtain user information, push Congress to pass legislation addressing third-party reporting of cryptocurrency transactions, and then offer amnesty for violators that voluntarily disclose.[20] Thus far, the IRS has rebuffed calls for cryptocurrency tax amnesty,[21] but Sen. Portman’s proposed legislation may be a vehicle to advance the outlined strategy.

Foreign Cryptocurrency Accounts

Subsequent to the initial OVDP amnesty, Congress passed the Foreign Account Tax Compliance Act (“FATCA”) in 2010.[22] Like OVDP, FATCA is tool to reduce tax avoidance via foreign financial accounts. Under the statute, foreign financial institutions are obligated to identify and report information about U.S. account holders to the IRS. Institutions that fail to comply with the requirements face a 30% withholding tax on certain types of U.S.-sourced income.[23]

At least one observer has called on regulators to include cryptocurrency within the FATCA regime, noting the similarity between cryptocurrency virtual wallets and financial accounts.[24] Indeed, regulators announced in 2020 that the current foreign reporting regulations would be updated to address cryptocurrency.[25]

But FATCA relies on cooperation between the IRS, foreign governments, and foreign financial institutions in order to complete reporting of foreign accounts. It is unclear whether a FATCA-style reporting system is workable with cryptocurrency—virtual wallet providers beyond the scope of the IRS’s jurisdiction may not voluntarily report their users’ activity, especially when supposed anonymity is one of the selling points of cryptocurrency usage.

Tax Whistleblower Statute

Cryptocurrency users should also be aware of the federal tax whistleblower statute. In a commercial transaction, the vendor and buyer necessarily have identifying information about the other, so that the vendor can ensure that payment is received, and the buyer can ensure that goods or services are delivered according to the contractual specifications. This is true even in commercial transactions with cryptocurrency serving as the medium of exchange—the vendor must be able to match the cryptocurrency to the transaction as a bookkeeping function.

Thus, if a vendor accepting cryptocurrency learns that the buyer is using cryptocurrency to avoid taxes, the vendor may be able to take advantage of the whistleblower program. Under the statute, a whistleblower is eligible to receive up to 30% of the proceeds collected by the IRS in an enforcement action, with lesser amounts available depending on the extent of the whistleblower’s assistance.[26]

The tax whistleblower statute is in contrast with the federal False Claims Act, which permits qui tam actions by individuals to encourage whistleblowing.[27] In a qui tam action, a private person may file a suit under seal on behalf of the government against the defrauding party. The government may take over the case, in which case the relator is entitled to 15% to 25% of the amount recovered; alternatively, the government may decline the case, in which case the relator may continue the action and receive 25% to 30% of the recovery. A successful relator is also entitled to recover attorney fees and other expenses.

Because commercial counterparties will have greater access to information about cryptocurrency usage than the IRS., the qui tam scheme may be especially helpful in eliminating tax fraud. However, the federal False Claims Act specifically excludes tax cases,[28] so qui tam actions are not available to private persons who may know of a tax avoidance scheme. Some have argued for an expansion of the False Claims Act to include federal tax fraud, in an effort to encourage private participation in eliminating tax fraud.[29]

Speculating on Forthcoming Cryptocurrency Taxation and Regulation 

Thus far, Sen. Portman has been coy about the specifics of his forthcoming bill. His comments raise two general areas of concern: defining cryptocurrency for tax purposes, and improving information reporting.[30] With regard to the first concern, a more consistent overall federal regulatory approach treating cryptocurrency as a true medium of exchange would be welcome for commercial parties.

With regard to the second, foreign cryptocurrency account reporting certainly seems to be on the regulatory radar, as discussed above. Vendors accepting cryptocurrency as payment may also see additional information reporting requirements—such as Form 1099s specifically for cryptocurrency transactions. This could potentially open the door for private enforcement mechanisms such as qui tam actions, but there is no indication that policymakers are considering that tactic.

Portman’s comments also specifically highlighted a $1 Trillion “tax gap” between amounts owed by taxpayers and collected by the IRS, with taxes owed on cryptocurrency transactions constituting part of that gap. Treasury Secretary Janet Yellen has also criticized the use of cryptocurrencies in certain commercial transactions as “extremely inefficient.”[31]

One may speculate as to whether enhanced information reporting requirements will be sufficient to close the gap, or whether stronger disincentives towards cryptocurrency use may be on the regulatory horizon. Users of cryptocurrency should consider what a cryptocurrency-specific taxation scheme could look like. A financial transfer tax, such as the “Tobin tax”[32] or “Section 31 Fees”[33] could serve as a model for a federal excise tax on cryptocurrency transactions.

[1] Guinevere Moore, Operation Hidden Treasure Is Here. If You Have Unreported Crypto, Get Legal Advice, Forbes (Mar. 6, 2021), https://www.forbes.com/sites/irswatch/2021/03/06/operation-hidden-treasure-is-here-if-you-have-unreported-crypto-its-time-to-get-legal-advice/?sh=3dcaff4439c9.

[2] Id.

[3] Daniel Kuhn, IRS Initiates ‘Operation Hidden Treasure’ to Root Out Unreported Crypto Income, Coindesk (Mar. 7, 2021) https://www.coindesk.com/irs-operation-hidden-treasure-unreported-crypto.

[4] Press Release, At Senate Finance Hearing, Portman Discusses Concerns Regarding IRS’ Processing Backlog of Tax Filings, Modernization (Apr. 13, 2021), https://www.portman.senate.gov/newsroom/press-releases/senate-finance-hearing-portman-discusses-concerns-regarding-irs-processing.

[5] See, Ralph E. McKinney Jr., Casey W. Baker, Lawrence P. Shao & Jeff Y. L. Forrest, Cryptocurrency: Utility Determines Conceptual Classification Despite Regulatory Uncertainty, 25 Int. Prop. & Tech. L.J. 1, 3-4 (2021).

[6] IRS Notice 2014-21, 2014-1 C.B. 938; 2014-16 I.R.B. 938.

[7] McKinney, et al., supra note 5, at 12-13.

[8] Roger Russell, IRS Sharpens Focus on Crypto Transactions, Accounting Today (Apr. 13, 2021), https://www.accountingtoday.com/news/irs-sharpens-focus-on-crypto-transactions.

[9] Shehan Chandrasekera, What Crypto Taxpayers Need To Know About FIFO, LIFO, HIFO & Specific ID (Sept. 17, 2020), https://www.forbes.com/sites/shehanchandrasekera/2020/09/17/what-crypto-taxpayers-need-to-know-about-fifo-lifo-hifo-specific-id/?sh=b85b47336aa3.

[10] IRS Form 1040 (2020), U.S. Individual Income Tax Return, https://www.irs.gov/pub/irs-pdf/f1040.pdf.

[11] IRS Form 1040 (2020), Instructions, https://www.irs.gov/instructions/i1040gi#idm140260168286256.

[12] Moore, supra note 1.

[13] 26 U.S.C. § 6663.

[14] Parks v. Commissioner, 94 T.C. 654, 660-61 (1990).

[15] See, e.g., 26 U.S.C. §§ 7201 (tax evasion), 7207 (fraudulent return).

[16] Cheek v. United States, 498 U.S. 192, 201; 111 S. Ct. 604, 610 (1990).

[17] See, Caroline T. Parnass, Pay Toll with Coins: Looking Back on FBAR Penalties and Prosecutions to Inform the Future of Cryptocurrency Taxation, 55 Ga. L. Rev. 359 (2020); Nathan J. Hochman, Policing the Wild West of Cryptocurrency: Part Two: The Ability of Federal and State Regulators to Work Together Will Determine Whether the Wild West of Cryptocurrency Enforcement Will Be Won, 41 Los Angeles Lawyer 14 (2018); Arvind Sabu, Reframing Bitcoin and Tax Compliance, 64 St. Louis L.J. 181 (2020).

[18] Jay R. Nanavati & Justin A. Thornton, DOJ and IRS Use “Carrot ‘N Stick” to Enforce Global Tax Laws, 29 Crim. Just. 4 (2014).

[19] IRS, News Release, Offshore Voluntary Compliance Program to End Sept. 28 (Sept. 4, 2018), https://www.irs.gov/newsroom/irs-offshore-voluntary-compliance-program-to-end-sept-28.

[20] Hochman, supra note 17, at 18.

[21] Moore, supra note 1.

[22] Pub. L. No. 111-147, §§ 501, et seq.; 124 Stat. 71, 97-117 (2010).

[23] 26 U.S.C. § 1471.

[24] Elizabeth M. Valeriane, IRS, Will You Spare Some Change?: Defining Virtual Currency for the FATCA, 50 Val. U.L. Rev. 863 (2016).

[25] Financial Crimes Enforcement Network, Notice 2020-2, Report of Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual Currency (Dec. 30, 2020), https://www.fincen.gov/sites/default/files/shared/ Notice-Virtual%20Currency%20Reporting%20on%20the%20FBAR%20123020.pdf.

[26] 26 U.S.C. § 7623.

[27] 31 U.S.C. §§ 3729-3733; see, U.S. Dep’t. of Justice, The False Claims Act: A Primer (2011), https://www.justice.gov/sites/default/files/ civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf

[28] 31 U.S.C. § 3729(d).

[29] Franziska Hertel, Qui Tam For Tax?: Lessons From The States, 113 Colum. L. Rev. Sidebar 1897 (2013). But see, Sung Woo “Matt” Hu, Fine-Tuning the Tax Whistleblower Statute: Why Qui-tam is not a Solution, 99 Minn. L. Rev. 783 (2014).

[30] See, Press Release, supra note 4.

[31] Jeff Cox, Yellen Sounds Warning About ‘Extremely Inefficient’ Bitcoin, CNBC.com (Feb. 23, 2021), https://www.cnbc.com/2021/02/22/yellen-sounds-warning-about-extremely-inefficient-bitcoin.html.

[32] James Tobin, A Proposal for International Monetary Reform, 4 E. Econ. J. 153 (1978).

[33] Sec. and Exch. Comm’n, Office of Investor Education and Advocacy, Section 31 Transaction Fees (Sept. 25, 2013), https://www.sec.gov/fast-answers/answerssec31htm.html.

When a company files Chapter 7 bankruptcy, the U.S. Bankruptcy Code provides for the appointment of a trustee that, essentially, displaces the company’s existing management.  The Bankruptcy Code tasks the trustee with administering the company’s assets and making distributions to creditors.  This process often includes reviewing transactions that occurred prior to the filing of the bankruptcy petition and determining whether causes of action may exist against third parties, including the company’s former officers and directors. 

When former directors and officers become the target of a trustee investigation and subsequent litigation, one of the first items that both the bankruptcy trustee and the former directors and officers will address is whether the company purchased an executive risk insurance policy (a “D&O Policy”) prior to the bankruptcy filing.  D&O Policies frequently play outsized roles in determining the course and outcome of trustee investigations and litigation against former directors and officers because trustees view these policies as easily accessible sources of recovery for creditors.  At the same time, former directors and officers typically rely on D&O Policies as the source of payment of defense costs—most notably attorney’s fees—in defending against trustee litigation since the Chapter 7 debtor is no longer permitted to indemnify the former directors and officers for their defense costs. 

Bankruptcy courts often must resolve the competing interests in the D&O Policies.  One common dispute involves the interplay between the automatic stay and the beneficiaries’ desire to access the D&O Policy proceeds to pay the defense costs.  Trustees may seek to block the former directors and officers from accessing policy proceeds to pay defense costs to preserve the policy proceeds for the trustee’s potential claims.  It is important for attorneys retained to handle such disputes to make the right arguments in support of accessing D&O Policy proceeds, and those arguments require counsel to understand the various coverages under a D&O Policy and who has the right to benefit from those coverages.

Side A Coverage

Most D&O Policies provide coverage for losses incurred directly by directors and officers for their alleged wrongful acts to the extent those losses are not reimbursed by the company.  This coverage is known as “Side A” coverage.  Defense costs incurred by directors and officers to defend against a lawsuit filed by a bankruptcy trustee alleging breaches of fiduciary duties is a common example of a loss covered by Side A.  In a Chapter 7 bankruptcy, even if the debtor had the resources, the trustee would not agree to, nor the would the bankruptcy court permit, reimbursement of the directors’ and officers’ defense costs out of bankruptcy estate assets for defending litigation brought by the trustee.  Thus, Side A coverage benefits the directors and officers exclusively, and the bankruptcy trustee, standing in the shoes of the company, should not have any claim to D&O Policy proceeds under the Side A coverage.

Side B Coverage

Another type of coverage commonly found in D&O Policies, “Side B” coverage, is for losses incurred by the company in indemnifying directors and officers for losses the executives incurred for their wrongful acts in accordance with the company’s governance provisions.  The company, and thus the bankruptcy trustee, may benefit from policy proceeds of this coverage to reimburse the company for its indemnification obligations.  An example of a claim for such coverage in the bankruptcy context would be the efforts of a bankruptcy trustee to recover monies for which the debtor reimbursed its former directors and officers in defending claims against them, such as shareholder litigation, and for which the insurer had not paid the company under the policy at the time of its Chapter 7 bankruptcy filing.  In this instance, the trustee may seek to preserve policy proceeds on account of the company’s claim against the insurer under the D&O Policy’s Side B coverage rather than agreeing to allow the Side A beneficiaries to drain the policy proceeds in which Side B claims may share.  It would be much more difficult for the trustee to argue that policy proceeds should be preserved for Side B coverage claims if the company had not incurred any eligible losses as of the bankruptcy petition date.  This is because there are few, if any, circumstances in which a Chapter 7 trustee would reimburse the debtor company’s former directors and officers out of estate assets for losses related to their pre-petition wrongful acts.

Side C Coverage    

A third type of coverage that D&O Policies may contain, known as “Side C” coverage, is “entity coverage” for situations in which a corporation is sued along with its directors and officers.  Insurers typically offer this type of coverage to public corporations to cover claims of securities laws violations, while broader coverage may be available for private companies.  Bankruptcy trustees may cite existing or potential claims covered by Side C as reasons to preserve policy proceeds and limit directors and officers from accessing coverage to pay defense costs.  However, many D&O Policies subordinate Side C coverage to other D&O policy coverages, such as Side A.  Directors and officers, and their counsel, should review the D&O Policy’s payment priority provisions carefully to understand how these provisions may affect access to policy proceeds if the company files bankruptcy.

A Recent Bankruptcy Court Decision Addressing These Issues

In In re National Fish & Seafood, Inc., No. 19-11824, 2021 WL 771652 (Bankr. D. Mass. Feb. 26, 2021), the U.S. Bankruptcy Court for the District of Massachusetts recently issued an opinion addressing a bankruptcy trustee’s challenge to attempts by directors and officers to access D&O Policy proceeds.

In May 2019, National Fish and Seafood, Inc. (the “Debtor”) filed for Chapter 7 bankruptcy and a trustee (the “Trustee”) was appointed to administer the Debtor’s estate.  In April 2020, the Trustee filed a complaint against three of the Debtor’s former directors and officers (collectively, the “D&Os”), alleging that the D&Os breached their fiduciary duties by authorizing a series of transactions that removed $31 million in assets from the Debtor (the “D&O Litigation”).  In early-2021, the D&Os filed a motion seeking relief from the automatic stay imposed by Section 362 of Title 11 of the U.S. Code (the “Bankruptcy Code”), to allow the D&Os to receive payment and/or the advancement of defense costs from the Debtor’s D&O Policy, which was purchased prior to the bankruptcy filing, for fees and expenses incurred in connection with defending the D&O Litigation.  The Trustee opposed the D&Os’ request to access the D&O Policy proceeds. 

The D&O Policy provided for up to $3 million of primary insurance coverage, along with an additional $500,000 in executive coverage applicable to the D&Os.  The D&O Policy further provided for the advancement of defense costs incurred in connection with a covered claim.  The D&O Policy included all three types of coverages discussed above: Side A, Side B, and Side C.

Additionally, the D&O Policy provided that any loss covered by the Side A coverage would be paid first, the Side B coverage would be paid second, and the Side C coverage would be paid last.  The D&Os and the Trustee agreed that the claims asserted in the D&O Litigation constituted Side A covered claims, and that no Side B or Side C claims either had been or were expected to be asserted under the D&O Policy (although the D&Os may ultimately have a Side B indemnification claim against the Debtor, but such claim would be unlikely based on the direct Side A coverage). 

The D&Os demanded payment of their defense costs in the D&O Litigation as covered Side A claims.  The insurer agreed to cover defense costs upon entry of an order authorizing such advances and a finding that making the advances was not a violation of the automatic stay.  First, the Court addressed whether the proceeds of the D&O Policy constituted property of the Debtor’s estate.  While the D&Os and the Trustee agreed that the D&O Policy itself was property of the estate pursuant to Section 541 of the Bankruptcy Code, the parties disagreed with respect to the proceeds of the policy.  The Trustee argued that the policy proceeds were property of the estate, and therefore any distribution of such proceeds would violate Section 362(a)(3) of the Bankruptcy Code, which prohibits acts to obtain possession of and exercise control over property of the estate.

While courts universally hold that pre-petition insurance policies issued to the debtor are property of the estate, they are divided concerning whether the proceeds of such policies also constitute estate property.  Such determination commonly depends on the language of the insurance policy, as well as the other specific facts and circumstances of the case and the jurisdiction.  “Where the policy covers claims against the directors and officers (Side A Coverage) as well as claims against the corporation (Side B or Side C Coverage), courts have almost uniformly found the proceeds to be assets of the estate. . . . These cases focus on the proposition that the bankruptcy estate is worth more with the D&O policy that includes entity coverage than without it.”  In re Nat’l Fish & Seafood, Inc., 2021 WL 771652, at *3.

While the Court in National Fish agreed that the proceeds of the D&O Policy constituted estate property subject to the automatic stay, “cause” existed for relief from the automatic stay pursuant to Section 362(d)(1) of the Bankruptcy Code.  The D&Os cited a number of facts supporting cause for relief from stay, including:

• the D&O Policy provides for payment of defense costs;
• the D&Os relied on that coverage in serving as directors and officers;
• the D&Os had a real need for the coverage and would be unable to retain counsel to defend themselves in D&O Litigation if they were denied access to the policy proceeds;
• the Side B and Side C coverage that the Trustee sought to protect was, at best, highly speculative and remote; and
• the Trustee’s real concern was to preserve Side A coverage to fund the Trustee’s anticipated judgment in the D&O Litigation, which is not an appropriate basis for opposition because the Side A coverage belongs entirely to the D&Os and is not subject to any right of control by the Debtor (or the Trustee standing in the place of the Debtor).

Ultimately, the Court agreed with the D&Os, finding that the Trustee’s request to continue the automatic stay to determine whether any Side B or Side C claims might arise was not supported by the terms of the D&O Policy.  “The property of the estate that requires protection here is limited to the Debtor’s rights under the policy, such as they are.  In the policy, they coexist with and are limited by the right of officers and directors to A-side coverage.”  Id. at *4.  Additionally, the priority of payments provision in the D&O Policy clearly stated that Side A claims are to be paid in full first, and therefore always take priority over any Side B or Side C coverage rights the Trustee may someday accrue (if ever).  Thus, continuation of the stay would not protect the estate and only delay the inevitable distribution to Side A covered claims.  Finally, the Trustee’s “real reason for his opposition” – preserving the amount of Side A coverage to pay any judgment in the D&O Litigation – was not a valid basis to deny relief from the automatic stay.  Thus, the Court permitted the insurer to distribute funds to the D&Os for attorney’s fees.[1]

Takeaways

When a company files Chapter 7 bankruptcy, the appointed bankruptcy trustee has a duty to investigate potential causes of action, including against the company’s directors and officers.  While it is imperative that directors and officers ensure that adequate insurance coverage is in place, Chapter 7 trustees may target the D&O Policy as a potential source of recovery for creditors.  This creates a potential conflict between the directors and officers who are insureds under the D&O Policy and the trustee who steps into the shoes of the corporation as the owner of the policy. 

Notwithstanding the ruling in National Fish, and the fact that the matter was contested, the first step for any directors and officers facing this situation is to attempt to negotiate an agreed order with the Chapter 7 trustee (or other estate representative) and the insurer to allow access to the D&O Policy proceeds.  A Chapter 7 trustee may request a cap on payments to the directors and officers for defense costs.  Frequently, the parties agree to a soft cap, which allows the executives to seek additional payments if the cap is reached and circumstances justify further payments.  To assist the parties in ascertaining whether to seek further relief from the court, an agreed order may include a reporting provision that requires the insurer to periodically report any amounts it pays under the D&O Policy.

[1] The insurer already had advanced $100,000 in defense costs to the D&Os before the Court rendered its opinion.  The Court, however, refused to make its ruling retroactive to encompass such payments, finding that the D&Os had not offered a compelling reason to justify retroactivity.If the parties are unable to reach agreement on an order permitting access to D&O Policy proceeds, directors and officers may have no choice but to file a contested motion to access the policy to pay defense costs.  In that situation, National Fish and other cases in which courts address this issue provide a good road map for the arguments to make.  More specifically, counsel should carefully review the D&O Policy to understand what coverages it contains and how they relate to each other, particularly with respect to any priorities of payment provisions that may favor the directors and officers.

Lawyers and legal professionals are intimately familiar with the importance of institutions. Law itself is an institution, one that can be used for good or ill. Law and other legal institutions have justified great harms but can also be the venue for transformative change. The difference between the two comes down not only to individual commitment to principles but also the institutional milieu and the cultural norms people surround themselves with. To shift those norms, and to allow the law to more equitably serve all people by confronting racial inequities, we must change our institutions.

Luckily, each of us has the power to create change in the institutions we belong to. Indeed, doing this work is crucial to creating an anti-racist and just society. Toni Morrison says that the “function of freedom is to free someone else.” In other words, there is a duty to promote the agency of those who lack it, a duty to empower those who are marginalized. In the context of racial equity, that means those of us with relative safety and the ability to speak out and create change must do so. As advocates, lawyers and legal professionals have a special responsibility because they are in fact well placed to make a difference.

Organizing for change within institutions is no easy task because their very function is to maintain continuity over time. They are designed to resist change and possess an intrinsic immune system that fights transformation, regardless of whether the shift imagined is good or bad. Overcoming that resistance is easiest when institutional leadership supports the change and is prepared to commit to concrete modifications to better embody inclusive values. However, even those without formal authority can participate in efforts to change the organization for the better. To aid in those efforts, With a Lever is a DIY guide that identifies six steps on the path toward creating institutional change for racial equity.

Step One: Evaluate Starting Conditions

Changing an institution, shifting it on racial equity, requires understanding the institution: its pressure points, its values, how people have tried to change it in the past. Anyone who belongs to an institution already has the primary tool needed to understand all this: connection to other people within it. Institutional knowledge resides within the individuals who make up an institution, and understanding its past and missteps is an important part of preparing to shift it toward greater equity and inclusion.

Step Two: Set Expectations

Pushing for institutional change can be exhausting. It is key to be prepared to face resistance from the institution, and to expect both tedium and conflict. Even when the leaders of an institution are eager to embrace change and understand the value of promoting racial equity, the structures and cultural norms that reinforce existing inequalities are not easy to address.

Step Three: Build a Coalition and Get Buy-in on Goals

Institutions are made up of people and so a diverse team is necessary to make collective action and inclusive decision-making possible. Gather a coalition of people interested in creating change by starting discussions with as many people as possible about how the institution can improve racial equity issues. These discussions are not easy, and are sometimes uncomfortable, but that is a sign that they are necessary.

Step Four: Make a Plan and Stay Organized

Once a coalition comes together, it should agree on a plan and establish basic logistics. This means having a rough timeline for action, setting up structure, and running effective meetings. These are all important for accountability and for focusing energy on concrete actions to address inequities.

Step Five: Avoid Common Pitfalls

Understanding why efforts to change institutions and improve representation as well as inclusiveness stalled in the past is important because it can help the coalition to avoid the same mistakes. With a Lever offers some common challenges to watch out for.

Step Six: Maintain Momentum

The last step is simply to keep spirits up by acknowledging the need to settle in for the long haul while also celebrating small victories. This is true precisely because promoting institutional change is not easy.

The DIY guide, available both as a PDF and as a series of articles, delves into each of these steps and expands upon them with concrete tips for doing the critical work of transforming our institutions to entrench and normalize racial equity. Of course, each institution is different and so its path toward racial equity must be individually tailored but the information contained within the DIY guide is meant to provide practical advice. With a Lever aims to guide anyone who wishes to engage with equity and inclusion work at their institutions because transformative societal change is only possible when all of us work together.

In recent years, the United States Supreme Court has twice addressed the meaning of the five-year statute of limitations for government enforcement actions for civil penalties.*  On both occasions, in 2013 and 2017, the Court unanimously ruled against the government’s interpretations of 28 U.S.C. Section 2462 and its efforts to stretch or avoid the five-year rule.  Section 2462 provides as follows:

Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued, if within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.

In 2013, the Supreme Court ruled in Gabelli that for all enforcement actions, including fraud, the statute begins to run when the claim or fraud “first accrued” and not when the fraud was discovered by the government.[1]  Four and a half years later, in 2017, the Supreme Court ruled in Kokesh that the government’s pursuit of a “disgorgement” claim was a “penalty” action under Section 2462 and the government was required to bring the disgorgement claim within five years.[2] 

While Gabelli and Kokesh resolved two issues, other issues under Section 2462 have not yet been ruled upon by the Supreme Court and remain unsettled.  These unsettled issues include important questions concerning the proper interpretation of the statute:

(1) Whether government actions for obey-the-law injunctions are actions covered by the penalty language of Section 2462. One Federal District Court held on December 13, 2017 that the “obey-the-law” injunction sought by the SEC was punitive and penal in nature and covered by the five year rule of Section 2462.[3]  On appeal, the Third Circuit ruled that the SEC injunction statute does not permit the issuance of punitive injunctions and therefore “punitive’ or “penalty” injunctions are not covered by Section 2462 because they cannot be brought at any time–even within five years.[4]

(2) Whether the five-year clock is tolled until the defendant is present in the United States. One Federal District Court has ruled, at the government’s urging, that the five-year clock does not begin to run until the defendant is present in the United States.[5] 

In Gabelli and Kokesh, the Supreme Court set out basic and long-standing principles it has applied to statute of limitations issues since 1805.  These principles include the importance of the certainty created by a fixed time frame to bring an action, the undesirability of allowing cases to be brought at any distant time, the need to avoid stale claims, lost evidence, or faded memories, and the importance to the welfare of society by promoting timely justice and stability in human affairs.

In 1805, the Supreme Court addressed whether an action for debt to recover a penalty is covered by a two-year statute of limitations in Adams v. Woods.[6]  Chief Justice Marshall provided the following insight in ruling for the defendant:

In expounding this law, it deserves some consideration, that if it does not limit actions of debt for penalties, those actions might, in many cases, be brought at any distance of time.  This would be utterly repugnant to the genius of our laws.  In a country where not even treason can be prosecuted after a lapse of three years, it could scarcely be supposed that an individual would remain forever liable to a pecuniary forfeiture.[7]

This has been an important principle for most Congressional lawmaking on statutes of limitations, as well as precedent for the Supreme Court rulings in Gabelli and Kokesh.

I. Background of 28 U.S.C. Section 2464.

The general five-year statute of limitations in the U.S. Code for government enforcement actions for civil penalties is set forth in 28 U.S.C. Section 2462.  Essentially the same statute was first enacted by Congress in 1839 as part of “[a]n act in amendment of the acts respecting the Judicial Systems of the United States.”[8]  The 1839 Act itself was focused in part on defendants receiving service of process before a lawsuit could go forward against the defendant and be adjudicated.  Although there is no legislative history on the statute of limitations provision in the 1839 Act, it was adopted against the backdrop of Chief Justice Marshall’s opinion in Adams v. Woods.

II. Gabelli—Whether the statute of limitations clock starts ticking when the claim first accrued or when discovered by the government

In Gabelli v. SEC, Chief Justice Roberts wrote the unanimous opinion of the Court.  The question presented was as follows:

The Investment Advisers Act makes it illegal for investment advisers to defraud their clients, and authorizes the Securities and Exchange Commission to seek civil penalties from advisers who do so.  Under the general statute of limitations for civil penalty actions, the SEC has five years to seek such penalties.  The question is whether the five year clock begins to tick when the fraud is complete or when the fraud is discovered.[9]

The SEC brought its enforcement action for civil penalties more than 5 ½ years after the alleged fraud had occurred.  The defendants in the District Court action invoked the five-year statute of limitations of Section 2462.  The District Court ruled that it applied and dismissed the SEC’s civil penalty claim as barred by Section 2462.

The SEC appealed to the U.S. Court of Appeals for the Second Circuit on the grounds that they had brought the civil penalty action within five years of discovering the fraud and that the “discovery rule” should be applied to Section 2462.  The Second Circuit agreed with the SEC.  It grafted onto Section 2462’s language of “five years from the date when the claim first accrued” the “discovery rule” for fraud matters – that the fraud claim accrues when it is discovered or could have been discovered with due diligence.[10]  In sum, the Second Circuit concluded that “for claims that sound in fraud a discovery rule is read into the relevant statutes of limitations.”[11]

The Supreme Court reversed the Second Circuit’s ruling.  The Court unanimously concluded that “[g]iven the lack of textual, historical, or equitable reasons to graft a discovery rule onto the statute of limitations of §2462, we decline to do so.”[12] 

The Court recognized that the “discovery rule” for fraud claims was designed to protect victims of fraud who did not learn that they had been defrauded for some time.  It distinguished fraud victims for whom the discovery rule was created from government enforcement agencies whose responsibility it was to investigate fraud.

Chief Justice Roberts emphasized that in 1805 “Chief Justice Marshall used particularly forceful language in emphasizing the importance of time limits on penalty actions, stating that it ‘would be utterly repugnant to the genius of our laws’ if actions for penalties could ‘be brought at any distance of time.’ Adams v. Woods, 2 Cranch 336, 342, 2 L.Ed. 297 (1805).”[13] Chief Justice Roberts recognized that adopting the discovery rule for Section 2462 would leave defendants exposed for not only the five years but for an additional uncertain period, concluding that “[r]epose would hinge on speculation about what the Government knew, when it knew it, and when it should have known it.”[14]  

Chief Justice Roberts made abundantly clear that the catchall statute of limitations, 28 U.S.C. Section 2462, serves an important purpose: a party should not be able to hold a threat of litigation over another party indefinitely.  This fear seems particularly potent when the party threatening litigation is the United States government. 

III. Kokesh—Whether a claim for disgorgement is a penalty claim under Section 2462

In Kokesh v. SEC, the issue presented under Section 2462 was whether claims for disgorgement as a sanction for federal securities law violations were subject to its five-year limitations period.[15]  Rejecting the Government’s contention that Section 2462 did not apply to claims for disgorgement, the Court echoed the language from Gabelli that “[s]tatutes of limitations ‘se[t] a fixed date when exposure to the specified Government enforcement efforts en[d].’ . . . Such limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”[16] 

Justice Sotomayor, writing for a unanimous court, set out the allegations against Kokesh:

Charles Kokesh owned two investment-adviser firms that provided investment advice to business-development companies.  In late 2009, the Commission commenced an enforcement action in Federal District Court alleging that between 1995 and 2009, Kokesh, through his firms, misappropriated $34.9 million from four of those development companies.  The Commission further alleged that, in order to conceal the misappropriation, Kokesh caused the filing of false and misleading SEC reports and proxy statements.  The Commission sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from violating securities laws in the future.[17]

The issues surrounding sanctions had arisen after the case went to trial and a jury found that Kokesh had violated a number of securities laws.  The SEC sought both monetary penalties and disgorgement monies as a result of the jury’s findings.  The District Court considered both sanctions in the light of the Section 2462 statute of limitations.

First, the District Court found that Section 2462’s five-year limitations period prevented the award of penalties for conduct more than five years before the SEC’s complaint was filed.  Therefore, the District Court ordered a civil penalty of $2,354,593, the amount Kokesh received during the five-year period.

Second, the District Court considered whether Section 2462’s five-year limitations period applied to disgorgement claims.  The SEC sought $34.9 million for disgorgement, of which $29.9 million would relate to conduct more than five years prior to the complaint.  The SEC argued that disgorgement was not a “penalty” under Section 2462.  The District Court agreed and awarded a disgorgement amount of $34.9 million plus $18.1 million in prejudgment interest.

Kokesh appealed and the Tenth Circuit affirmed, ruling that Section 2462 does not apply to SEC disgorgement claims.  The Supreme Court agreed to hear the case to resolve the disagreement among the Circuits.[18] 

The Supreme Court held that “[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462.  Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”[19] 

The Kokesh Court looked at a ‘penalty’ as a “punishment, whether corporal or pecuniary, imposed and enforced by the state, for a crime or offen[s]e against laws.’  Huntington v. Attrill, 146 U.S. 657, 667 (1892).”[20]  The Court then gave three reasons why disgorgement in an SEC enforcement context is a penalty.  First, disgorgement is imposed for violating public laws.  Second, disgorgement is imposed for punitive purposes.  Third, disgorgement is not compensatory and frequently the funds go to the United States Treasury as a deterrent.

The Supreme Court made it clear in a footnote that “nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC disgorgement proceedings or on whether courts have properly applied disgorgement principles in this context.”[21]  Three years later, in June 2020, the Court in Liu v. SEC answered these question in an 8-1 decision, holding that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under” securities laws.[22]  The Court also found that lower courts had gone beyond equitable principles in awarding disgorgement by: (1) “ordering the proceeds of fraud to be deposited in Treasury funds instead of distributing them to victims;” (2) “imposing joint-and-several disgorgement liability;” and (3) “declining to deduct even legitimate expenses from the receipts of fraud.”[23]

IV. Gentile—Whether obey-the-law injunctions fall within Section 2462

The SEC frequently brings an action for an obey-the-law injunction alongside its enforcement action for civil penalties and disgorgement.  If the SEC establishes that a defendant has violated the securities laws, they have routinely asked courts to impose an obey-the-law injunction, which enjoins the defendant from violating the securities laws in the future.  Since everyone is required to obey the law in the first place, the question arises whether the purpose of these type of injunctions are to penalize and stigmatize the defendant.  This issue has arisen in the context of Section 2462 and whether the claim for an obey-the-law injunction is really another type of penalty under Section 2462, which would require the claim for injunction to be brought within five years.

Six months after the Supreme Court decision in Kokesh on June 5, 2017, one district court addressed the issue of whether an obey-the-law injunction is a penalty and must be sought within five years under Section 2462.[24]  There, the SEC had filed suit against defendant Gentile in March 2016 for securities violations relating to two schemes manipulating penny stocks that allegedly occurred some eight to nine years earlier, between April 2007 and June 2008.  The SEC sought two remedies: an obey-the-law injunction and a bar to engaging in any penny stock offerings in the future—arguing that these remedies were ‘equitable’ and therefore outside the scope of legal remedies specified in Section 2462. 

Chief Judge Linares of the District Court of New Jersey determined that the issue of whether the claims for relief were time-barred under the five-year statute of limitations in Section 2462 turned on whether the relief sought was a “penalty . . . pecuniary or otherwise” within the meaning of Section 2462.  He concluded that the injunctions sought were “punitive in nature” and a penalty under Section 2462:

The Court disagrees with [Plaintiff SEC’s] arguments.  First, and most importantly, both injunctions sought by Plaintiff are punitive in nature.  Indeed, the “obey-the-law” injunction would simply require Defendant to obey the already established federal laws and regulations relating to securities.  Should the Court enter such an order, Defendant would not be required to do anything more than obey the law; a basic understanding of all citizens and those involved with securities.  However, such an order would also stigmatize Defendant in the eyes of the public.[25]

It is instructive to compare Chief Judge Linares’ post-Kokesh views on whether obey-the-law injunctions are penalties under Section 2462 with the pre-Kokesh views of the U.S. Court of Appeals for the Eleventh Circuit in SEC v. Graham.[26]

The Eleventh Circuit reviewed the District Court decision of Judge James Lawrence King who had ruled that Section 2462 barred the untimely relief sought by the SEC for disgorgement and an obey-the-law injunction.[27]  As to disgorgement, the District Court held that disgorgement was essentially an action for ‘forfeiture’ under Section 2462 and therefore barred by the five-year rule.  As to the obey-the-law injunction, the District Court rejected the SEC’s argument that no statute of limitations applies to injunctions since the word ‘injunction’ is not found in Section 2462.  Instead, the District Court looked to Gabelli and the concern expressed by the Supreme Court for “leav[ing] defendants exposed to government enforcement action not only for five years after their misdeeds, but for an additional uncertain period in the future.  [Gabelli] at 1223.”[28] The District Court concluded that “the injunctive relief sought by the SEC in this case forever barring defendants from future violations of federal securities laws can be regarded as nothing short of a penalty ‘intended to punish.’”[29] 

The Eleventh Circuit agreed with the District Court that disgorgement was a ‘forfeiture’ subject to Section 2462.  Kokesh later held that ‘disgorgement’ was a ‘penalty’ under Section 2462 rather than a “forfeiture, but still subject to Section 2462.”

However, as to obey-the-law injunctions, the Eleventh Circuit reversed the District Court’s ruling and stated that “[b]ecause injunctions are equitable, forward-looking remedies and not penalties within the meaning of §2462, we conclude that the five year statute of limitations is inapplicable to injunctions such as the one the SEC sought in this case.²”[30]  Footnote 2 in the Graham case condemned obey-the-law injunctions as follows:

We note that the injunction the SEC requested in the operative complaint sought to prevent the defendants from violating federal securities laws, otherwise known as an “obey-the-law” injunction.  Repeatedly we have said that, in the context of SEC enforcement actions and otherwise, “obey-the-law” injunctions are unenforceable.  See SEC v. Smyth, 420 F.3d 1225, 1233 n. 14 (11^th Cir. 2005); Fla. Ass’n of Rehab Facilities v. Fla. Dep’t of Health & Rehab, Servs., 225 F.3d 1208, 1222-23 (11^th Cir. 2000) (citing cases holding that obey-the-law injunctions are unenforceable).  In particular, “an injunction which merely tracks the language of the securities statutes and regulations,” as the injunction in this case presently is described, “will not clearly and specifically describe permissible and impermissible conduct” as required by Federal Rule of Civil Procedure 65(d). SEC v. Goble, 682 F.3d 934 952 (11^th Cir. 2012).  We “condemn these injunctions because they lack specificity and deprive defendants of the procedural protections that would ordinarily accompany a future charge of a violation of the securities laws.”  Id. at 949. . . .[31]

In reaching its conclusion that obey-the-law injunctions are not penalties under Section 2462, the Eleventh Circuit did not have the benefit of the Supreme Court’s discussion of what the word ‘penalty’ means under Section 2462 in its 2017 opinion in Kokesh.  The Eleventh Circuit also relied on its own precedent that Section 2462 only applied to claims for legal relief and not equitable remedies.  To support this, it cited to cases involving ongoing violations like discharging materials into wetlands in violation of law.  These cases are distinguishable since the government must be able to enjoin and stop ongoing violations, and statutes of limitations seem irrelevant to ongoing violations.

The SEC filed a notice of appeal in the Gentile case on February 7, 2018 in the U.S. Court of Appeals for the Third Circuit.  The appeal was argued on November 6, 2018 and decided on September 26, 2019.  The Third Circuit framed the issue and its holding as follows:

At issue in this appeal are two different remedies sought by the SEC: an injunction against further violations of certain securities laws and an injunction barring participation in the penny stock industry. The District Court held that those remedies—like the disgorgement remedy at issue in Kokesh—were penalties. We see these questions of first impression differently and hold that because 15 U.S.C. § 78u(d) does not permit the issuance of punitive injunctions, the injunctions at issue do not fall within the reach of § 2462.[32]

In other words, obey-the-law injunctions are not permitted at all if they are ‘punitive’ or a ‘penalty;’ and therefore, any statute of limitations is irrelevant.  Section 78u(d)(1) states:

Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter, [or] the rules or regulations thereunder . . . it may in its discretion bring an action in [district court] to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond.[33]

The Third Circuit concluded that under this provision “injunctions may properly issue only to prevent harm” when “there is a reasonable likelihood of future violations,” but “not to punish the defendant.”[34]

The Court remanded the case to the District Court to determine whether the obey-the-law injunction sought against Gentile was ‘preventive’ or ‘punitive.’  In so doing, it provided the District Court with the following guidance:

We stress that the District Court, on remand, should not rubber-stamp the Commission’s request for an obey-the-law injunction simply because it has been historically permitted to do so by various courts. . . If the District Court, after weighing the facts and circumstances of this case as alleged or otherwise, concludes that the obey-the-law injunction sought here serves no preventive purpose, or is not carefully tailored to enjoin only that conduct necessary to prevent a future harm, then it should, and must, reject the Commission’s request. We note that the District Court has already addressed some of the relevant concerns involved in its opinion. We are also troubled by the fact that the Commission appears to seek two injunctions that attempt to achieve the same result.[35]

Of course, Chief Judge Linares already found that the obey-the-law injunction sought by the government against Gentile was “punitive in nature.”  How all this plays out going forward in other future cases remains to be seen. If Gentile remains good law, it does not seem likely that the government will be able to obtain obey-the-law injunctions as a matter of course going forward, especially in cases where the wrongful conduct occurred and concluded years earlier.

Chief Judge Linares retired from the bench several months before the Third Circuit’s ruling and opinion in Gentile.  On remand, the case was reassigned to District Judge Brian R. Martinotti who was then called upon to consider Gentile’s motion to dismiss.  On September 29, 2020, Judge Martinotti issued a 31-page opinion granting the motion to dismiss on the ground that “the allegations of the Amended Complaint are insufficient to state a plausible claim for [injunctive] relief.”[36]  The court then added that it would, “however, []permit the SEC one final opportunity to amend their complaint.”[37] The SEC declined to do so and the case was closed. 

V. Straub—Whether a defendant’s presence in the United States is required for Section 2462 to start to run

Notwithstanding that Section 2462 does not provide for tolling when the defendant is outside the United States, one district court judge, at the government’s urging, ruled that Section 2462 does not take effect unless the defendant is present in the United States.[38]

On December 29, 2011, the SEC filed an enforcement action in federal district court in the Southern District of New York against defendants Elek Straub, Andras Balogh and Tomas Morvai, three former senior executives of the Hungarian telephone company Magyar Telekom, Plc. (“Magyar”).  All three defendants were Hungarian citizens who worked and resided in Hungary.  The complaint alleged that more than five years earlier, in 2005 and 2006, the defendants engaged in a scheme to bribe Macedonian government officials in order to receive favorable treatment for Magyar’s Macedonian cellphone subsidiary, which was jointly owned by Magyar and the Macedonian government.  The action was brought under the civil anti-bribery and accurate books and records provisions of the Foreign Corrupt Practices Act, 15 U.S.C. Sections 78dd-1, et seq.  The suit sought civil penalties, disgorgement and an obey-the-law injunction.  The action was filed more than five years after the claims first accrued.

The defendants moved to dismiss the SEC’s claims on the grounds that they were time barred under Section 2462.  On February 8, 2013, the District Court issued an opinion in which it adopted the government’s position that the claims were not time barred.

It is undisputed that more than five years have elapsed since the SEC’s claims first accrued.  (See Opp’n 23-24; Reply 10.)  The parties nevertheless disagree as to the plain meaning of §2462 and, given that Defendants were not physically located within the United States during the limitations period, whether the statute limitations has run on the SEC’s claims.  The SEC argues that the statute of limitations has not run because the statute applies only “’if, within the same period, the offender . . . is found within the United States.’”  (Opp’n 23-224 (quoting 28 U.S.C. §2462).)  Thus, according to the SEC, because the Defendants were not “found” in this country at any point during the limitations period in question, the Court’s inquiry should end.  (Id. at 24.)  The Court agrees.

*          *          *

Here, the operative language in Section 2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run.[39]

A close reading of Section 2462 shows that the District Court got it backwards.  Instead of concluding that because the defendants could not be found in the United States for service of process within the five year limitations period, the case could not be brought, the Court ruled just the opposite – that the case could be brought at any time in the future after the five year period had elapsed.  This leaves open the possibility that the SEC can bring suit 20 years, 30 years, or even more after the claim first accrued.

The language of Section 2462 is drafted in a way that makes reasonably clear that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise, shall not be entertained unless” certain things occur.  The two things that must occur to allow the lawsuit to be entertained are (1) the suit must be “commenced within five years from the date when the claim first accrued” and (2) “if within the same [five-year] period, the offender or the property is found within the United States in order that proper service may be made thereon.”  Unless these two things take place, the statute dictates that the lawsuit “shall not be entertained.” Yet the District Court neither acknowledged nor applied this clear structure.

The Court also disregarded the fact that under the Hague Convention the SEC could have served the defendants anytime it wanted within the five-year limitations period.  In fact, it was under the Hague Convention that the SEC made its service some six plus years after the claim ‘first accrued.’

On February 27, 2013, approximately three weeks after the District Court issued its opinion on Section 2462 in the Straub case, the Supreme Court issued its opinion in Gabelli.  Of particular relevance to the Straub issue was the statement in the opinion by Chief Justice Roberts that the ‘discovery rule’ “would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future.”[40] 

In light of Gabelli, the Straub defendants requested the District Court to certify an interlocutory appeal under 28 U.S.C. Section 1292(b) to the Second Circuit regarding the statute of limitations ruling.  The District Court did not disagree that the legal issue in dispute was “a controlling question of law as to which there is substantial ground for difference of opinion” under Section 1292(b).[41]  However, the Court denied the Straub defendants’ motion to certify an interlocutory appeal because an immediate appeal would not “materially advance the ultimate termination of the litigation” under Section 1292(b).[42]  The Court stated that “even if reversal would eliminate the SEC’s claim for civil penalties, the claims for disgorgement and injunctive relief would still survive . . . Further, in seeking these equitable remedies, the SEC will still need to establish Defendants’ liability.”[43] 

Of course, had this litigation and request for interlocutory appeal occurred in 2018 or 2019, the Kokesh decision on disgorgement, the Gentile case, and the discussions in the Graham decisions on obey-the-law injunctions may have gotten the issue to the Second Circuit and possibly the Supreme Court.  The Straub case went forward with several years of discovery and then motions for summary judgment.  A critical issue in the motions for summary judgment was the five-year statute of limitations of Section 2462 and whether the District Court erred when it ruled that “the operative language in §2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run.”[44]

The issue for the District Court became much more complicated because discovery had shown that two of the three defendants had been in the U.S. for a short period of time during the five-year period, as the Court acknowledged:

Discovery has since revealed, however, that, despite the SEC’s allegations at the pleading stage, two of the defendants – Straub and Morvai – were physically present in the United States in 2005.  Specifically, Straub traveled to New York and Boston during the week of September 6, 2005 (Def. 56.1 ¶ 1), and Morvai traveled to San Francisco on June 23, 2005 and, on a separate trip, to New York on October 21, 2005 on his way to Connecticut (id. ¶ 2).  These undisputed facts require the Court to now consider what effect, if any, these visits have on the running of Section 2462’s statute of limitations.[45]

In deciding how Section 2462 should be applied in these circumstances, the District Court wrote a complicated ten-page analysis.  It was a far cry from the straightforward and “set[ting] a fixed date” opinion of Chief Justice Roberts in Gabelli.  The District Court began its analysis by concluding “that Section 2462 does not apply to the SEC’s claims to the extent those claims seek injunctive relief or disgorgement − it applies only to the SEC’s claim for penalties.”[46]  As we now know from Kokesh, the District Court in the Straub case got disgorgement wrong, and as the Third Circuit ruled in Gentile, obey-the-law injunctions sought by the SEC that are ‘punitive’ and a ‘penalty’ are not permitted to be issued by federal courts at any time.

The District Court then addressed the fact that two of the defendants (Straub and Morvai) were in the United States for a few days each during the five-year period while one of the defendants (Balogh) was not. The Court found that:

actions covered by Section 2462 are subject to a five year statute of limitations that applies if the defendant is present in the United States at any time during that five year period, which begins to run on the date the subject claim accrues and does not toll while the defendant is absent from the United States.  The Court also finds that the limitations period does not apply at all if the defendant is not present in the United States at any point during the five year period. . .[47]

This rather bizarre result − that a foreign defendant who is in the U.S. for a few days or a “fleeting” moment gets the benefit of Section 2462 while a foreign defendant who is not in the U.S. at all does not get its benefit − cannot be justified by the language Congress enacted.

The District Court erred when it “ruled that ‘found in the United States’ means ‘physically present’ within the United States.”[48]  The phrase in Section 2462 that states “if within the same period, the offender or the property is found within the United States in order that proper service may be made thereon” means something quite different than ‘physically present.’  It means the government must ‘find’ the defendant in order to serve him, and the defendant likewise must be ‘found’ by the government in the United States in order to be served.  Merely being ‘physically present’ in the U.S. does not mean the government has ‘found’ the defendant to effect service; and absent finding the defendant and properly serving him, the enforcement action cannot truly commence. 

As discussed earlier, Section 2462 does not allow an enforcement action to be entertained unless it is commenced in five years and if – within the same period – the government can find the defendant to effect proper service.  In the 1839 statute, Congress gave the government five years to find the offender in the United States in order to make proper personal service on him.  Congress did not provide the government with a limitless time frame. 

The SEC argued that Section 2462 means that the statute of limitations “tolls whenever the defendant is absent from the United States.”[49]  The District Court rejected this argument because

the statute contains none of the language typically associated with tolling provisions, such as references to a period being “tolled,” “suspended,” “excluded,” “extended,” or “enlarged.” (See Def. Mem. at 21-23 (collecting tolling provisions from Defendants’ impressive survey of 135 federal statutes of limitations)).

*          *          *

Moreover, the Court’s own research has revealed virtually no cases even suggesting, much less holding, that Section 2462’s limitations period tolls while a defendant is absent from the United States. . .[50]

Yet the District Court ruled that the five-year period of Section 2462 did not run while one defendant was outside the United States.  This generates the confusion of there being no apparent difference between ‘being tolled’ and ‘not starting to run.’  The District Court then held that even though two of the defendants were in the U.S. during the five-year period, albeit briefly, Section 2462 only applied to claims that first accrued in the five-year period before defendants’ presence in the United States.  For those claims that accrued after the defendants’ presence in the U.S., the five-year limitations period of Section 2462 did not apply.

Three summary points about all these contortions: First, several years earlier, a unanimous Supreme Court in Gabelli espoused a simple and straightforward approach to analyzing Section 2462 and being able to “set[ ] a fixed date when exposure to the specified government enforcement efforts ends” and thereby avoid leaving the government’s options open “for an additional uncertain period into the future.”[51]

Second, the District Court in Straub appears not to have considered Section 2462 in the context of the 1839 Act.  Section 1 of the 1839 Act provided jurisdiction for the courts to proceed to decide lawsuits even if all parties had not been properly served, so long as the court proceeded only with respect to “the parties who may be properly before it” and did not issue any judgment that would  “prejudice other parties” not before the court—such as those who were “not regularly served with process” because they were “not inhabitants of nor found within the district.”[52]  Congress was focused on not having cases proceed and adjudicated against defendants unless they had been found and properly served.

Third, as set forth earlier, Chief Justice Roberts and a unanimous Supreme Court stressed the importance of Chief Justice Marshall’s views on this issue:

Chief Justice Marshall used particularly forceful language in emphasizing the importance of time limits on penalty actions, stating that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time.”  Adams v. Woods, 2 Cranch 336, 342, 2 L.Ed. 297 (1805).[53]

The District Court in Straub, however, found defendants’ reliance on this language to be ‘absurd’ since Congress had enacted indefinite tolling provisions in other and more recent specific statutes dealing with Customs and IRS violations.[54]  The Straub Court’s point actually proves just the opposite.  If Section 2462 did not run while defendants were out of the country, there would be no reason for Congress to have provided for specific Customs and IRS claims a tolling provision for persons outside the United States.  The fact that Congress enacted tolling provisions in a few specific instances where defendants are out of the country does not impact on the importance of the general rule in Section 2462 of having a fixed period of time, without the possibility of bringing the action at any indefinite period of time in the future. 

Ultimately, Straub was settled before trial and therefore the District Court’s decision was not appealed. Thus, the issue of tolling the limitations period when defendants are not in the United States remains unsettled.

VI. Conclusions

We are now 180 years after the predecessor statute to Section 2462 was first enacted by Congress. The Supreme Court has addressed the meaning of the statute twice in recent years.  District Courts and Circuit Courts are still addressing the open issues as to its meaning and scope.  Issues remain unsettled and the Supreme Court may well have to step in again to provide clarity.  Hopefully, the five-year rule will remain intact as originally intended.  As the Supreme Court has opined regarding statutes of limitations: “They provide ‘security and stability to human affairs.’ . . . We have deemed them ‘vital to the welfare of society,’ . . . and concluded that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”[55] 

On January 1, 2021, the 1,480 page, $740 billion National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) became law after the House (on December 28, 2020) and Senate (on January 1, 2021) overwhelmingly voted to override President Trump’s veto of the law.  Section 6501 of the NDAA, which was buried deep in a miscellaneous part of the bill dealing with other matters, contained amendments to the Securities Exchange Act of 1934 sought by the SEC to attempt to modify and alter rulings by the Supreme Court and other federal courts in cases like Kokesh, Liu and Gentile. These amendments, essentially hidden in a defense bill in the middle of a pandemic, raise questions about respect for the rulings of the federal courts and Supreme Court.

Of particular note for this article, none of the amendments made to the law by the NDAA changed the text of 28 U.S.C. Section 2462.  What the amendments did, among other things, was to create special statute of limitations rules for SEC disgorgement and equitable relief actions, including a 10-year statute of limitations for the SEC to bring scienter-based disgorgement claims and equitable relief claims, and added a provision that tolls the statute of limitations for disgorgement and equitable claims while the alleged wrongdoer is outside the United States (“shall not count towards the accrual of that period”).

This means the SEC has made the statute of limitations for disgorgement and equitable claims a separate rule outside of Section 2462 and covered by its clause “except as otherwise provided by Act of Congress.”  Of course, we are left wondering why the SEC – and the few in Congress willing to do its bidding – paid so little attention to the wisdom of Chief Justices Marshall and Roberts, some 200 years apart, as to the vital role that statutes of limitations play in our laws and history.

* Mr. Rauh is a former U.S. Attorney for the District of Columbia, a former senior partner at Skadden Arps, and presently the principal in the Rauh Law Offices.  Mr. Rauh was counsel to Elek Straub in one of the cases discussed in this article.  Ms. Rauh is an associate at the Buckley, LLP law firm.

[1] Gabelli v. SEC, 133 S.Ct. 1216 (2013). 

[2] Kokesh v. SEC, 137 S.Ct. 1635 (2017).

[3] SEC v. Gentile, Civ. Action No. 2:16-cv-01619-JLL-JAD, 2017 WL 6371301 (D.N.J. 2017) (Jose L. Linares, C.J.).

[4] SEC v. Gentile, 939 F.3d 549 (3rd. Cir. 2019).

[5] SEC v. Straub, et al., No. 11-cv-09645-RJS, 2016 WL 5793398 (S.D.N.Y. 2016) (Richard J. Sullivan, J.).

[6] 2 Cranch 336, 342, 2 L.Ed. 297 (1805). 

[7] Id.

[8] Law of Feb. 28, 1839, Sess. III, Ch. 36, 5 stat. 322 (1839) (the “1839 Act”). 

[9] Gabelli v. SEC, 133 S.Ct. at 1218-1219 (2013).

[10] SEC v. Gabelli, 653 F.3d 49, 59 (2011). 

[11] Gabelli v. SEC, 133 S.Ct. at 1220.

[12] Id. at 1224.

[13] Id. at 1223.

[14] Id. at 1223.

[15] 137 S.Ct. 1635 (2017).

[16] Id. at 1641 quoting Gabelli v. SEC, 133 S.Ct. 1216, 1221 (2013).

[17] Id. at 1641.

[18] Compare SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016) (Section 2462 applies to disgorgement) with Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010) (Section 2462 does not apply to disgorgement).

[19] Kokesh v. SEC, 137 S.Ct. at 1645.

[20] Id. at 1642. 

[21] Id. at 1642, fn.3. 

[22] Liu v. SEC, 140 S. Ct. 1936, 1937 (2020).

[23] Id. at 1946.

[24] SEC v. Gentile, Civ. Action No. 2:16-cv-01619-JLL-JAD, 2017 WL 6371301 (D.N.J. Dec. 13, 2017).

[25] Id. at *4.

[26] SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016).

[27] SEC v. Graham, 21 F. Supp. 3d 1300 (S.D.Fla. 2014).

[28] Id. at 1309.

[29] Id. at 1310.

[30] SEC v. Graham, 823 F.3d at 1362. 

[31] Id. at 1364, fn 2.

[32] SEC v. Gentile, 939 F.3d 549, 552 (3rd. Cir. 2019).

[33] Id. at 554 (quoting 15 U.S.C. § 78u(d)(1)) (emphasis added).

[34] Id. at 556.

[35] Id. at 565.

[36] SEC v. Gentile, No. 2:16-cv-1619 (BRM) (JAD) at 31 (D.N.J. Sep. 29, 2020). 

[37]  Id.

[38] SEC v. Elek Straub, Andras Balogh, and Tomas Morvai, No. 1:11-cv-09645 (S.D.N.Y.) (Richard J. Sullivan, J.). 

[39] SEC v. Straub, 921 F.Supp. 2d 244, 259, 260 (2013).

[40] SEC v. Gabelli, 133 S.Ct. at 1223 (emphasis added).

[41] SEC v. Straub, 2013 WL 4399042, at *5 (S.D.N.Y. Aug. 5, 2013).  

[42] Id.

[43] Id. (emphasis added).

[44] SEC v. Straub, 221 F. Supp. 2d at 260.

[45] SEC v. Straub, 2016 WL 5793398, at *13 (S.D.N.Y. Sep. 30, 2016).

[46] Id. at *15. 

[47] Id. at *19.

[48] Id. at *15. 

[49] Id. at *16. 

[50] Id. at *16, *17.

[51] Gabelli v. SEC, 133 S.Ct. at 1221, 1223.

[52] 1839 Act, § 1. 

[53] Gabelli v. SEC, 133 S.Ct. at 1223.

[54] SEC v. Straub, 2016 WL 5793398 at *18.

[55] Gabelli v. SEC, 133 S.Ct. at 1221 (citations omitted).

Barbara Sicalides
Megan Morley

Troutman Pepper Hamilton Sanders LLP
3000 Two Logan Square
Philadelphia, PA 19103-2799
215.981.4783
[email protected]

§ 1.1 Introduction

Antitrust litigation in 2020 included a number of cases addressing the National Collegiate Athletic Association’s amateurism rules, the analysis that should apply to trade restraints imposed by large or arguably dominant companies and some of the more esoteric antitrust subjects, including the filed rate doctrine, the Foreign Antitrust Trade, merger analysis and application of antitrust to digital platforms. Each of these and other significant antitrust decisions is discussed in this Chapter.[1]

§ 1.2 The Sherman Act Developments, Section 1

Overview

The Sherman Act, under Section 1, prohibits “every contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.”[2] The main purpose of the section is to prevent conduct that unreasonably restrains competition.[3] Accordingly, the principal issues often are whether an agreement exists or has been pled adequately, whether a restraint should be examined under the rule of reason or the per se rule, and, if subject to the rule of reason, whether the restraints there are reasonable.

§ 1.2.1 Standing – Sonterra Capital Master Fund Ltd. v. UBS AG, 954 F.3d 529 (2d Cir. 2020)

In Sonterra Capital Master Fund Ltd. v. UBS AG,[4] the Second Circuit examined whether a group of investment funds had standing to bring Section 1 claims based on defendants’ alleged manipulation of the benchmark interest rates used to price financial derivatives in the Yen currency market. There, the court concluded that the plaintiffs had antitrust standing and reversed the district court’s dismissal in favor of the defendants.[5]

The plaintiffs in Sonterra Capital traded in three different types of Yen-based financial derivatives that were priced based on the Yen LIBOR and Euroyen LIBOR interest rates (“LIBOR rates”). These LIBOR rates are daily rates intended to reflect the interest rates at which banks offer to lend unsecured funds in the denomination of Japanese Yen. Plaintiffs alleged that defendant banks rigged the LIBOR rates in favor of their derivatives trading positions, which, in turn, negatively impacted plaintiffs. The complaint listed specific transactions where plaintiffs traded derivatives at unfavorable rates on dates when defendants purportedly manipulated LIBOR rates.[6]

The three types of Yen-based derivatives at issues were Yen FX forwards, interest rate swaps, and interest rate swaptions. According to the complaint, the LIBOR rates affect the value of the Yen FX forwards because it is used to take the cost of Yen for immediate delivery, and adjust it to account for the amount of interest paid or received on Yen deposits over the duration of the agreement. Interest rate swaps allow a party to exchange a fixed stream of interest rate payments for one based on a floating reference rate, such as the LIBOR rates. A Swaption gives the buyer the right to enter into an interest rate swap in the future. Plaintiffs allege that the LIBOR rates affect the value of a swaption because it determines the value of the interest rate swap underlying that swaption.[7]

The only issue on appeal was whether the plaintiffs sufficiently pled that they suffered harm as a result of defendants’ alleged manipulation of LIBOR rates, satisfying the injury in fact requirement of Article III standing.

To satisfy Article III standing, a plaintiff “must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016). … To plead injury, in fact, a plaintiff must allege ‘that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical.’ … ‘Any monetary loss suffered by the plaintiff satisfies’ this requirement.”[8]

To maintain a federal antitrust claim, the plaintiffs must have suffered antitrust injury. Antitrust injury is an “injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendant’s acts unlawful.”[9] The second aspect of antitrust injury – plaintiffs’ injury must have been proximately caused by the defendants’ antitrust violation overlaps with Article III constitutional standing.

The Second Circuit pointed to the numerous instances whether the plaintiffs entered into derivatives transactions at prices that they alleged were artificial because of defendants’ alleged price fixing. The court found the allegations related to the Yen FX forwards, where plaintiffs alleged specific trades in which they had to pay higher prices because of defendants’ market manipulation. Although the court appeared more skeptical of the swap and swaption allegations because they were not as direct, the court determined that, at the motion to dismiss stage, they were adequate.[10]

The Second Circuit held that plaintiffs plausibly pled that they suffered monetary loss from the Yen FX forwards, swap and swaption transactions as a result of defendants’ alleged manipulation of LIBOR rates and that this was sufficient to plead standing under Article III.[11]

§ 1.2.2 Agreement – Freedom Watch, Inc. v. Google, Inc., 816 Fed. Appx. 497 (D.C. Cir. 2020)

Although the D.C. Circuit declined to publish its opinion in Freedom Watch, Inc. v. Google, Inc.,[12] given the more recent spate of antitrust cases against U.S. technology companies and asserting untraditional forms of harm it is included here.

Plaintiffs are known as a conservative public interest group and congressional candidate. Plaintiffs filed a putative class action lawsuit in the U.S. District Court of the District of Columbia in 2019. The complaint named Google, Facebook, Twitter, and Apple as defendants and alleged that the platforms conspired to suppress conservative political opinions in violation of the First Amendment, the Sherman Act, and the District of Columbia Human Rights Act.[13]  The district court dismissed the complaint as failing to state colorable legal claims.

The D.C. Circuit first addressed Freedom Watch’s standing to bring the instant case and held that it had standing based on its allegation that the platforms conspired to suppress its audience and revenues. Next, the court affirmed dismissal of Freedom Watch’s First Amendment claim because the platforms were not the “government” or otherwise a state actor.[14]

Although a less than conventional antitrust claim, the D.C. Circuit addressed an issue frequently at the core of Section 1 motions to dismiss—whether plaintiffs alleged a plausible agreement or conspiracy among the defendants. Plaintiffs argued that the court should infer an agreement principally from the platforms’ parallel behavior. Specifically, plaintiffs asserted that each of the defendants refused to provide certain services. Citing to Bell Atlantic Corp. v. Twombly, the D.C. Circuit noted that, without more, parallel conduct is not a sufficient basis to allege an agreement. The Supreme Court addressed pleading standards in antitrust cases in Twombly.[15] The Court held that stating an antitrust claim required a complaint with “enough factual matter” to demonstrate “plausible grounds to infer an agreement” was reached. The Court further held that “parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality.”[16]

Freedom Watch contended that it alleged more than parallel conduct. Specifically, plaintiffs argued that the platforms are motivated by political objectives and that they are pursuing a “revenue-losing strategy.”[17] The D.C. Circuit, however, found that those alleged facts alone did not make it more likely that the platforms’ actions were the result of an agreement among them than merely the independent conduct of each of the platforms.[18]

Next, the court addressed plaintiffs’ Section 2 monopolization claim. The court noted that a required element of a monopolization claim is that the defendant acquired or sought to maintain their monopoly power through anticompetitive conduct. The D.C. Circuit, however, found that the only anticompetitive conduct alleged by plaintiffs was that the platforms conspired to suppress conservative content, but nowhere alleged that they conspired to achieve or maintain a collective monopoly or explained how the purported agreement to suppress conservative content enhanced their market power.[19]

§ 1.2.3 Class Certification Predominance Element – In re: Lamictal Direct Purchaser Antitrust Litigation, 957 F.3d 184 (3d Cir. 2020).

In In re: Lamictal Direct Purchaser Antitrust Litigation,[20] the Third Circuit examined the district court’s analysis of the putative class’s poof of antitrust injury and determined that it had impermissibly relied on average prices to demonstrate the common proof of antitrust injury necessary for satisfying the predominance requirement of class certification. The Third Circuit also puts lower courts to task—a rigorous assessment of the facts and data must be undertaken when the use of averages are in dispute.

A putative class of direct purchasers of an anti-epilepsy drug sued GlaxoSmithKline (“GSK”) and Teva Pharmaceuticals (“Teva”), alleging that the pharmaceutical manufacturers entered an impermissible reverse-payment settlement in violation of antitrust law. According to the plaintiffs, this agreement delayed the launch of multiple generic versions of the drug and resulted in purchasers paying more for the drug than they would have absent the GSK-Teva arrangement.[21] Plaintiffs moved to certify a class of direct purchasers of the branded and generic version of the drug, and the district court granted the motion. The defendants appealed the inclusion of the generic purchasers in the class, and the Third Circuit vacated the class certification decision and remanded the case back to the lower court. The appellate court concluded that the district court had not performed the rigorous analysis required in assessing whether issues common to the putative class predominate over individualized ones.[22]

GSK is the patent holder for Lamictal, an anti-epilepsy drug, and it has been selling the drug since 1984. GSK’s Lamictal patent was set to expire in 2009. In April 2002, Teva filed for authorization with the FDA to begin selling a generic version of Lamictal, called Iamotrigine. In response, GSK sued Teva for patent infringement. After Teva won a bench trial for one of the claims in 2005, the pharmaceutical companies settled. Under the settlement, Teva would begin selling Iamotrigine in mid-2008, which was six months prior to when Teva could sell the generic had GSK won the infringement suit. GSK, in exchange, agreed not to sell an authorized generic version (“AG”) of Lamictal.[23] Plaintiffs alleged that, without the agreement, Teva would have launched Iamotrigine and GSK would have responded by selling an AG. With two generics in the market, the price would have decreased. Thus, plaintiffs contended that they were harmed by paying more for the generic Iamotrigine than they otherwise would have absent the settlement.[24]

To counter this theory, defendants argued that GSK competed with Teva on price despite not launching an AG. Because doctors appeared reluctant to switch their patients’ epilepsy drugs, GSK had long been worried that selling an AG would be ineffective since doctors would not move patients from Lamictal to the lower-priced generic. Moreover, to take advantage of this particularity of the anti-epilepsy drug market, GSK developed a strategy to compete aggressively with Teva on price by offering significant discounts and rebates to targeted pharmacies if the pharmacies sold Lamictal instead of Iamotrigine (the “Contracting Strategy”). According to defendants, Teva found out about GSK’s Contracting Strategy, and in response, lowered its prices on Iamotrigine. Direct purchasers thus did not pay more for Iamotrigine than they would have without the settlement.[25]

Under Federal Rule of Civil Procedure 23(b), common questions of law or fact of class members must predominate over ones affecting individual members.[26] For this predominance requirement to be met, courts must perform a “rigorous analysis” of the evidence and arguments proffered to determine whether the plaintiffs’ claims are capable of common proof at trial by a preponderance of the evidence.[27] In opposing class certification, defendants argued that plaintiffs could not show that injury to the proposed class of generic purchasers is capable of common proof at trial because plaintiffs’ evidence impermissibly relied on averages. These averages were inappropriate because up to one-third of the proposed class members likely paid no more, or even less, than they would have absent the settlement as a result of the discounting strategies employed by defendants. On appeal, defendants contended that the district court erred by accepting these averages without performing a rigorous analysis of the parties’ competing expert reports and resolving factual disputes on which the expert testimony was predicated.[28]

The Third Circuit agreed, vacating class certification and remanding the case. First, the Third Circuit explained that the lower court failed to perform the requisite “rigorous analysis” and resolve factual disputes that underlie the competing expert reports. The determination of whether the use of average prices was acceptable depended on several disputed facts, including “1) whether the market is characterized by individual negotiations; 2) whether Teva preemptively lowered its pricing in response to the Contracting Strategy; and 3) whether and to what extent GSK, absent the settlement agreement, would or could have pursued both the Contracting Strategy and an AG.”[29] Moreover, the district court failed to evaluate the sources of the competing experts’ pricing and discount data to decide what evidence was credible and could be used to support the expert reports. Assessing this “micro-level analysis” was required to decide whether plaintiffs could establish that common issues predominate by a preponderance of the evidence at trial, despite competing evidence and expert testimony.[30] While the Third Circuit acknowledged that the use of averages may be acceptable when they do not hide individualized injury, that determination could not be made here given the lack of rigorous analysis.[31]

Second, the Third Circuit further explained that the lower court confused the dispute regarding the use of averages as one involving damages, not injury.[32] However, the Third Circuit distinguishes between the questions of whether an injury actually occurred and what the value of damages for that injury should be, and it applies a more permissive predominance standard in class certification for damages than for injury. “While every plaintiff must be able to show antitrust injury through evidence that is common to the class, damages need not be susceptible of measurement across the entire class for purposes of Rule 23(b)(3).”[33] Because the district court applied the more lenient damages standard, remand was appropriate.[34]

Although the Third Circuit acknowledged that injury may be shown using averages, the opinion questions whether averages are appropriate to show common issues predominate.

§ 1.2.4 Class Certification Predominance Element – In re Suboxone (Buprenorphine Hydrochlorine & Naloxone) Antitrust Litigation, 967 F.3d 264 (3d Cir. 2020)

The Third Circuit again addressed class certification in another pharmaceutical case In re Suboxone (Buprenorphine Hydrochlorine & Naloxone) Antitrust Litigation.[35] Here, the Third Circuit focused its analysis on the totality of the conduct, as opposed to “considering each aspect” in isolation. The decision could make it more challenging for defendants to prevail and encourages plaintiffs to make as many allegations as they can substantiate to paint the full picture of the alleged misconduct.[36] Similarly, the ability to delay the eventual need for individualized damages past the class certification phase reduces plaintiff barriers to successfully certifying a class action.

Direct purchasers of Suboxone (“Purchasers”) sued Indivior, formerly Reckitt Benckiser Pharmaceutical, Inc. (“Reckitt”), for allegedly engaging in anticompetitive conduct that impeded the entry of generic versions of Suboxone into the market,[37] violating Section 2 of the Sherman Act.[38] The district court granted class certification for the plaintiffs, holding that common evidence of injury and damages demonstrated that 1) “[p]urchasers paid more for brand . . . name than they would have for generic tablets due to Reckitt’s actions to . . . suppress market entry” and 2) “[i]ssues regarding allocation of individual damages [were] insufficient to defeat class certification.”[39] On appeal, the Third Circuit affirmed the decision.[40]

The FDA granted Reckitt a seven-year exclusivity period for the drug Suboxone, which treats opioid addiction.[41] At the end of that period, Reckitt developed an under-the-tongue film version of the drug that also would have its own exclusivity period. Additionally, unlike the anticipated generic Suboxone tablets, the film version would not be AB-rated—meaning, pharmacists would not have to substitute a generic if a patient were prescribed Suboxone film under state substitution laws.[42] This transition to Suboxone film was allegedly coupled with efforts to eliminate demand for tablets, coercing providers to prescribe Suboxone film over the tablet form.[43] These actions resulted in the Purchasers bringing a class action against Reckitt for anticompetitive practices, “alleging that its efforts to suppress generic competition amounted to unlawful maintenance of monopoly power.”[44]

The Third Circuit agreed with the district court on class certification, holding that class members satisfied both the predominance and adequacy requirements.[45]

Regarding the question of predominance, Reckitt made two arguments. First, it contended that Purchasers had not provided common evidence of injury or damages as required by Comcast Corp. v. Behrend,[46] because Reckitt could “lawfully raise the prices on Suboxone tablets and change its rebate program.”[47] However, the Third Circuit wrote that the plaintiffs’ case was not just about the pricing of the brand tablets, but rather the totality of Reckitt’s actions, which also included “withdrawing tablets from the market, providing rebates only for film, disparaging the safety of tablets, and delaying the generics’ entry by filing a citizen petition and not cooperating in the REMS process.”[48] The court concluded that common evidence would be used to prove that these actions together suppressed competition, examining the evidence in its totality.[49] Second, Reckitt argued that since the plaintiff’s damages model only calculates aggregate damages, predominance was not satisfied.[50] But the court also rejected this argument, noting that prior Third Circuit cases allow for models that estimate “the damages attributable to the antitrust injury, even if more individualized determinations are needed later.”[51] Therefore, the court rejected both arguments, finding that the plaintiffs satisfied predominance under Rule 23(b).

Finally, Reckitt also challenged the adequacy of the class representative, arguing that the class representative has a risk of conflict with class counsel and lacks control over the litigation to class counsel.[52] The Third Circuit wrote that the risk of conflict was “hypothetical” which “cannot defeat adequacy.”[53] In addition, the Third Circuit rejected the argument that class certification should be denied because of the class representative’s lack of control. The court said that Reckitt cited no Third Circuit precedent that requires the class representative to control the litigation and reiterated that any suggestion that class counsel does not direct and manage class actions is “sheer sophistry.”[54]

§ 1.2.5 Collaborations – In re National Collegiate Athletic Association Athletic Grant-In-Aid Cap Antitrust Litigation (9th Cir. 2020)

Over 35 years ago, the Supreme Court, in NCAA v. Board of Regents of the University of Oklahoma,[55] suggested that rules regarding eligibility standards for college athletes would be subject to a different, less stringent standard than most trade restraints. But in May 2020, the Court of Appeals for the Ninth Circuit ruled, in a case brought by Division 1 football and basketball players, that the National Collegiate Athletic Association’s (NCAA) limits on (1)cash education related benefits below $5600 in academic or graduation awards and incentives and (2) non-cash education related benefits—such as computers, science equipment, post-graduate scholarships and internships—violated federal antitrust laws. In December, the Supreme Court granted certiorari and agreed to review that decision in National Collegiate Athletic Association v. Alston[56] and American Athletic Conference v. Alston.[57]

The Sherman Act prohibits agreements in restraint of interstate trade or commerce. The Ninth Circuit explained that, when examining agreements among entities involved in league sports, such as here, the court must determine whether the restriction is unreasonable under the rule of reason. The appellate court further explained the rule of reason’s “three-step framework:”

(1) Student-Athletes “bear[ ] the initial burden of showing that the restraint produces significant anticompetitive effects within a relevant market”; (2) if they carry that burden, the NCAA “must come forward with evidence of the restraint’s procompetitive effects”; and (3) Student-Athletes “must then show that any legitimate objectives can be achieved in a substantially less restrictive manner.” Throughout this analysis, we remain mindful that, although “the NCAA is not above the antitrust laws,” courts are not “free to micromanage organizational rules or to strike down largely beneficial market restraints,” Accordingly, a court must invalidate a restraint and replace it with an LRA only if the restraint is “patently and inexplicably stricter than is necessary to accomplish all of its procompetitive objectives.”[58]

Founded in 1905, the NCAA establishes rules governing college athletics. Its mission statement is to “maintain intercollegiate athletics as an integral part of the educational program and the athlete as an integral part of the student body and, by so doing, retain a clear line of demarcation between intercollegiate athletics and professional sports.” For many years, among other things, NCAA rules have provided that student athletes may not be paid to play. Specifically, at issue in the instant case was the NCAA regulations that govern the payments student-athletes may receive in exchange for and incidental to their athletic participation as well as in connection with their academic pursuits.

The NCAA categorizes its member schools into three competitive divisions: Division 1 schools—350 of the NCAA’s approximately 1,100 member schools—sponsor the largest athletic programs and offer the most financial aid. Division 1 football has two subdivisions, one of which is the Football Bowl Subdivision (FBS).  In 2014, the NCAA amended its Division 1 bylaws (the “Bylaws”) to provide the “Power Five” conferences autonomy to adopt collectively legislation in certain areas, including limits on athletic scholarships known as “grants-in-aid.” In early 2015, the Power Five increased the grant-in-aid limit to the cost of attendance (“COA”), and, since August 2015, the Bylaws have provided that a “full grant-in-aid” encompasses “tuition and fees, room and board, books and other expenses related to attendance at the institution up to the [COA],” as calculated by each institution’s financial aid office under federal law. The Bylaws also contain an “Amateurism Rule,” which strips student-athletes of eligibility for intercollegiate competition if they “[u]se[ ] [their] athletics skill (directly or indirectly) for pay in any form in [their] sport.”  “[P]ay” is defined as the “receipt of funds, awards or benefits not permitted by governing legislation.”[59]

In O’Bannon v. NCAA,[60] a class of student athletes challenged the NCAA’s rules that prohibited payment for use of their names, images and likenesses. There, the court deemed several of the NCAA’s rules unlawful under the rule of reason’s balancing test, finding that less restrictive alternatives to the challenged rules existed. Specifically, the court found that the NCAA’s rule that capped athletic scholarships at tuition and fees and meant student-athletes were not being compensated for the full COA violated the Sherman Act and required the NCAA to allow colleges to pay athletes $5,000 above the COA and unrelated to any educational expenses.[61]

On appeal, the Ninth Circuit held that the “rule of reason” analytical framework applies to all the NCAA rules and rejected the NCAA’s arguments that the Supreme Court’s Board of Regents decision perpetually shielded from antitrust claims the NCAA’s amateurism rules, including those barring athlete compensation. The Ninth Circuit affirmed the district court’s ruling in O’Bannon, except for the $5,000 payments, which the court said would “vitiate” athletes’ amateur status. The Ninth Circuit acknowledged the existence of “a concrete procompetitive effect in the NCAA’s commitment to amateurism: Namely the amateur nature of collegiate sports increases their appeal to consumers.”[62]

Another set of student athletes brought a new proposed class action against the NCAA challenging its amateurism rules and seeking to bar altogether the NCAA’s prohibition of unlimited cash payments to athletes. In 2017, the NCAA entered into a $208.7 million settlement covering part of the suit and resulting in payments to approximately 40,000 football and basketball players. The litigation, however, continued over possible injunctive relief.

The district court accepted plaintiffs’ theory narrowing the relevant market to one where students sell their “labor in the form of athletic services” to schools in exchange for athletic scholarships and other payments permitted by the NCAA. The court also found significant anticompetitive effects in the relevant market. Although the NCAA granted the Power Five autonomy to establish new forms of compensation and to expand previously available compensation and benefits, the district court observed that these conferences remain constrained by “overarching NCAA limits” that cap compensation at an artificially low level.

Although the district court accepted the NCAA’s “amateurism” justification, which drives consumer interest in college sports because consumers value amateurism with respect to the NCAA’s limits on cash compensation untethered to education, it did not accept it as to the limits on non-cash education-related benefits. In fact, the court found no proof that the rules directly foster consumer demand and observed that the NCAA’s proffered connection between amateurism and its pay-for-play prohibition is riddled with exceptions. The court then reached two conclusions: (i) the challenged rules do not follow any “coherent definition” of “amateurism” or “pay” and (ii) payments (many of which post-dated O’Bannon) have not reduced the demand for college sports.

Next, the district court examined three potential alternatives to the challenged restraints and whether they were less restrictive but virtually as effective in preventing “demand-reducing unlimited compensation indistinguishable from that observed in professional sports.” The district court rejected two proposed LRAs, both of which would have permitted individual conferences to limit above-COA compensation, but would have otherwise invalidated either (i) all NCAA compensation limits or (ii) NCAA limits on education-related compensation and existing caps on benefits incidental to athletics participation, such as healthcare, pre-season expenses, and athletic participation awards. The district court rejected these alternatives on the basis that they could result in professional-style cash payments and undermine the distinction between amateur and professional sports.

The district court then identified a viable LRA:

(1) allow the NCAA to continue to limit grants-in-aid at not less than the [COA]; (2) allow the [NCAA] to continue to limit compensation and benefits unrelated to education; (3) enjoin NCAA limits on most compensation and benefits that are related to education, but allow it to limit education-related academic or graduation awards and incentives, as long as the limits are not lower than its limits on athletic performance awards now or in the future.[63]

The court also identified a number of specific education-related benefits that, if the above, LRA applied, could not be barred by the NCAA: computers, science equipment, musical instruments and other items not currently included in the [COA] but nonetheless related to the pursuit of various academic studies; post-eligibility scholarships for undergraduate, graduate, and vocational programs at any school; tutoring; study-abroad expenses; and paid post-eligibility internships.

On appeal to the Ninth Circuit, the NCAA challenged the district court’s analysis at the rule of reason’s second step, where the NCAA bears a “heavy burden” to “competitively justify” its restraints. The NCAA advances a single procompetitive justification: The challenged rules preserve “amateurism,” which, in turn, “widen[s] consumer choice” by maintaining a distinction between college and professional sports.

The Ninth Circuit affirmed the district court’s finding that only some of the challenged NCAA rules serve that procompetitive purpose: limits on above-COA payments unrelated to education, the COA cap on athletic scholarships, and certain restrictions on cash academic or graduation awards and incentives. The Ninth Circuit also concluded that the record supported the district court’s finding that the remaining rules—those restricting “non-cash education-related benefits”—do not foster or preserve demand because the value of such benefits, like a scholarship for post-eligibility graduate school tuition, is inherently limited to its actual value, and could not be confused with a professional athlete’s salary.

The Ninth Circuit rejected the notion that prior precedent immortalized the definition of “amateurism” as excluding payment for athletic performance. The NCAA proffered a survey of 1,100 college sports fans, reflecting that 31.7 percent watch college sports because, among other things, they “like the fact that college players are amateurs and/or are not paid.” But, reliance on the survey disregards the district court’s finding that the survey results do not capture the effects, if any, that the tested compensation scenarios would have on consumer behavior.  The NCAA’s continued reliance on the survey further ignores the district court’s finding that its use of the phrase “amateurs and/or not paid” made its responses unreliably ambiguous: respondents who selected “amateurs and/or not paid” may have very well equated amateurism with student status, irrespective of whether those students receive compensation for athletics.

The Ninth Circuit found reasonable the district court’s conclusion that consumer demand for college athletics is not necessarily dependent upon the NCAA’s capped education-related benefits because such benefits are easily distinguishable from professional salaries; “their value is inherently limited to their actual costs”; and “they can be provided in kind, not in cash.”[64]  The appellate court also found record support for the district court’s less restrictive alternative provision of education-related benefits. The NCAA failed to explain why the cumulative evidence, which included demand analyses regarding the growth of NCAA revenue while payments to athletes were simultaneously expanding in the form of the NCAA’s Student Assistance Fund and Academic Enhancement Fund for a variety of purposes, such as academic achievement or graduation awards, school supplies, tutoring, study-abroad expenses, post-eligibility financial aid, health and safety expenses, clothing, travel, “personal or family expenses,” loss-of-value insurance policies, car repair, personal legal services, parking tickets, and magazine subscriptions. The district court also reasonably concluded that permitting student-athletes to receive up to $5,600 in aggregate athletic participation awards amount in academic or graduation awards and incentives will not erode consumer demand.

The Supreme Court granted certiorari to determine whether the Ninth Circuit erroneously held that the NCAA’s eligibility rules regarding student-athlete compensation violate federal antitrust law. The context of the case, however, increased focus on large buyers of labor and concerns that they have historically been permitted to inhibit increased compensation through unnecessary restraints.

§ 1.3 The Sherman Act Developments, Section 2

Overview

The statutory language of Section 2 makes unlawful “monopolization,” “attempts to monopolize,” or “conspiracies to monopolize.” The statute itself, however, does not define any of these offenses or explain the importance of key issues such as “relevant market,” “market power,” or “anticompetitive conduct.” Consequently, Section 2 has in recent years been the subject of a number of high-profile antitrust cases.

Even though the Supreme Court moved the line of scrimmage for Section 2 claims, particularly in the area of certain unilateral pricing conduct, fertile ground remains for Section 2 litigation. While Congress and various state legislatures are exploring reducing the standard for proof of harm from a single firm’s conduct, the courts continue to search for the right balance.

§ 1.3.1 Multi-Sided Platforms — Federal Trade Commission v. Surescripts, LLC, 424 F. Supp.3d 92 (D.D.C. 2020)

In 2018, the United States Supreme Court ruled that American Express’s contractual “anti-steering provisions” did not violate Section 1 of the Sherman Act’s prohibition on agreements that unreasonably restrain trade.[65] Both consumers and merchants depend on credit card networks to intermediate between them for transactions to work—they extend the cardholder credit to make a purchase and they provide merchants quick, guaranteed payment. As such, the credit card market is considered a “two-sided platform.”[66] Moreover, the Supreme Court characterized this particular structure as a “transaction platform,” because a sale to one side of the platform can only occur with a simultaneous sale to the other side.

In a five-to-four decision split along ideological lines, the conservative justices in the majority determined that plaintiffs did not carry their burden of showing that American Express’s anti-steering provisions result in anticompetitive effects in a properly defined product market.[67] In so doing, the Supreme Court announced that a multi-sided market cannot appropriately be analyzed without considering the effects of the restraint on both or all sides of a platform where transactions take place simultaneously.

As part of the enforcement agencies’ continuing efforts to reign in purportedly harmful restrictions in technology and healthcare markets, in 2019 the Federal Trade Commission (FTC) filed a complaint alleging that Surescripts, LLC (“Surescripts”) used anticompetitive vertical and horizontal contract restraints to monopolize two important e-prescribing markets.[68] The FTC claims that Surescripts used loyalty pricing, exclusivity, non-competition commitments, and threats in order to block its competitors from sufficient volume to achieve the critical mass necessary to be a viable competitor in the electronic prescription routing and eligibility markets in violation of Section 2 of the Sherman Act and Section 5 of the FTC Act.[69] In so doing, Surescripts prevented any meaningful competitors from entering either market, which caused higher prices, reduced innovation, and lowered output.[70]

The FTC’s challenge to Surescripts’ strategies will require the federal court to apply the antitrust laws to two-sided high tech, data driven markets where network effects are prevalent. The FTC’s complaint is the latest in a series of challenges to predominantly vertical contract provisions.[71]

Routing is the electronic transmission of prescription information from a healthcare provider to a pharmacy through a provider’s electronic health record (EHR) system. Providing routing requires building a two-sided network (or platform) linking EHRs to pharmacies.[72] Eligibility is the electronic transmission of a patient’s formulary and insurance coverage information from a payer (typically a patient’s pharmacy benefit manager (PBM)) to the prescribing provider’s EHR. Providing eligibility requires building a two-sided network (or platform) linking EHRs to PBMs.[73] Surescripts provides connections between EHRs and pharmacies for routing transactions and between EHRs and PBMs for eligibility transactions, both the routing and eligibility markets are considered “two-sided.”[74]

As two-sided platforms, the value to participants on one side of the platform increases when there are more participants on the other side. Therefore, neither side will join the platform unless they believe the other side will also join—what the FTC describes as the “chicken-and-egg-problem.”[75] In other words, for example, EHRs would be unlikely to join a routing network unless those EHRs believe a large number of pharmacies use the network, and pharmacies will only join the network if they believe they have access to a substantial number of EHRs.[76] This chicken-and-egg-problem increases the barriers for any new entrant.[77]

The FTC alleged that, in reaction to the threat of new competition, Surescripts maintained its near monopoly of the routing and eligibility markets by imposing anticompetitive contract provisions and threats.[78]

First, Surescripts imposed exclusivity in its pharmacy and PBM contracts through loyalty discounts. Those pharmacies that used Surescripts for all or nearly all routing transactions received a loyalty discount. Surescripts used the same tactics in the PBM eligibility contracts.[79] In addition, Surescripts enacted clawback obligations, which required a pharmacy or a PBM that switched from exclusive to non-exclusive to pay back the loyalty discount for past transaction volume over the term of the contract.[80] Under Surescripts’ EHR loyalty program, if an EHR agrees to be exclusive only in routing, Surescripts pays the EHR an incentive fee equal to a portion of each routing transaction or, if an EHR agrees to be exclusive only in eligibility, for a portion of each eligibility transaction. If the EHR agrees to be exclusive in both routing and eligibility, Surescripts pays the EHR a higher incentive fee on both transactions, leading nearly all EHRs participating in the loyalty program to agree to exclusivity for both transactions.[81]

Second, Surescripts included exclusivity and non-compete requirements with one of its largest customers and a potential rival, a health information technology company that resells Surescript’s routing transaction services to pharmacies. Surescript’s agreement with this customer provided for a discount if its customer exclusively used the Surescript network and a non-competition requirement.[82]

Third, Surescripts used contract provisions and threats to secure a large EHR customer. To ensure that its competitor did not gain a foothold in the market through this large EHR customer, Surescripts used its purportedly “must-have” EHR platform to require the customer to end its routing connection to the competitor’s network. Surescripts also threatened to cut the customer off from important information, such as a pharmacy directory and medication history, unless it agreed to exclusivity.[83]

According to the FTC, through these contractual provisions and a series of threats Surescripts was able to maintain at least a 95 percent share in each of the relevant e-prescribing markets.[84] Surescripts loyalty programs covered 79 percent of pharmacy routing transaction volume and at least 78 percent of PBM eligibility transaction volume, making it substantially more expensive for any firms that wanted to make use of a platform in addition to the Surescripts platforms.[85] By controlling, directly or indirectly, such a large portion of the transaction volume a challenger could not overcome the chicken-and-egg-problem.[86] It would not be able to convince one side of its platform that there are a substantial number of participants on the other side as too many participants were exclusive to Surescripts. With this monopoly power, Surescripts has imposed high prices and stalled innovation, and there were no procompetitive justifications for Surescripts’s conduct that outweighed these competitive harms.[87]

Surescripts moved to dismiss the complaint, arguing that the case was both procedurally and substantively defective. First, Surescripts argued that the court lacks subject matter jurisdiction over the FTC’s request for a permanent injunction under Section 13(b) of the FTC Act.[88] Second, Surescripts argued that the Section 2 monopolization claim fails because the FTC does not allege that the prices offered by Surescripts were predatory or that Surescripts’s market practices violated the rule of reason.[89]

With respect to Section 13(b), Surescripts argued the court lacks subject matter jurisdiction because is not a “proper case” under the statute to adjudicate the FTC’s request for permanent injunctive relief. Specifically, Surescripts contended that only straight forward, routine cases are proper candidates for relief under Section 13(b). This case, however, according to Surescripts, does not qualify as routine or straightforward because it involves complex and novel issues of antitrust law, such as how to understand the two-sided e-prescription markets of routing and eligibility in light of the Supreme Court’s recent decision in Ohio v. American Express Co. The FTC argued in response that the language of Section 13(b) does not clearly speak to courts’ power to adjudicate such claims. In addition, the FTC contended that this case is “proper” because that term just means any case in which a permanent injunction would be “appropriate.” The FTC posits that any case where a law enforced by the FTC has been violated and equitable remedies are needed to make harmed consumers whole is an appropriate case.[90] The district court found the FTC’s position more persuasive, denying Surescripts’s motion to dismiss on the basis that the court lacked subject matter jurisdiction under Section 13(b).

The court noted that the relevant provision provides that “in proper cases the [FTC] may seek, and after proper proof, the court may issue, a permanent injunction.”[91] The court found important that neither this specific provision nor Section 13(b)’s broader framework regarding equitable relief even include the word “jurisdiction,” let alone a clear statement that any of the statutory requirements are jurisdictional.[92] Surescripts’s argument that “proper cases” is a jurisdictional requirement relied, in part, on the label of Section 13(a)—“Power of Commission; jurisdiction of courts” and that Section 13(a) is “identical” to Section 13(b) in structure. The court, however, relied on the Supreme Court’s decision in Arbaugh v. Y&H Corp.,[93] defining the proper inquiry as whether Congress “clearly states that a threshold limitation on a statute’s scope” is jurisdictional, and Surescripts’s structural argument from Section 13(a)’s label falls short of this high bar.[94] Moreover, the court examined the title of Section 13(b) itself and its separate and distinct label (“Temporary restraining orders; preliminary injunctions”) that does not include any reference to jurisdiction.

Although the court agreed with Surescripts that “proper cases” is not synonymous with “all cases,” it noted that its task was not to define the term “proper cases” for all scenarios, but to determine whether the instant case is proper for a permanent injunction, if won by the FTC. The court took comfort in the FTC’s assurance that the primary authority governing the case was the D.C. Circuit’s precedent, United States v. Microsoft Corp.,[95] and that the court would not need to “go much beyond Microsoft.” Based on those assurances, the court concluded that the complaint adequately alleges a “proper case” under Section 13(b).[96]

Surescripts next argued that the FTC’s monopolization claim should be dismissed for two primary reasons. Specifically, Surescripts claimed that because its loyalty program was “optional,” it could not serve as the basis for a monopolization claim unless the prices under the loyalty program were “predatory” but the FTC did not plead the necessary elements for a predatory pricing claim. Additionally, Surescripts argued that the complaint should be dismissed even if, as the FTC claimed, its loyalty programs were analyzed as exclusive dealing arrangements because the FTC did not adequately allege that Surescripts’s loyalty programs created any anticompetitive effects. Specifically, Surescripts suggests that, because the FTC concedes that both routing and eligibility are two-sided markets, “the FTC must plausibly plead foreclosure of a substantial share of each of those markets as a whole.”

The court found that Surescripts’s loyalty programs or alleged practice of charging loyal pharmacies and PBMs less, and paying loyal EHRs greater incentives, do not need to constitute predatory pricing for Surescripts’s exclusionary practice to constitute illegal maintenance of a monopoly under Section 2.[97] The court pointed out that exclusivity provisions covering approximately 40–50 percent of the relevant market have been found to foreclose competition illegally, while Surescripts’s loyalty program allegedly locks 70–80 percent of the routing and the eligibility markets into effectively exclusive contracts. Thus, Surescripts’s criticism that the FTC failed to allege sufficient anticompetitive effects or foreclosure in each of the two-sided markets was incorrect. The court further determined that, Amex did not change the central question—whether the FTC alleged that Surescripts engaged in exclusionary conduct that “harmed competition, not just a competitor,” by blocking entrants into the market.[98]

The FTC’s monopolization case continues, despite Surescripts’s arguments that its optional loyalty programs would have to meet quite specific and rigorous standards for pleading, including predatory pricing and anticompetitive effects in each platform. Instead, the court focused on the broader concern of foreclosure in each market and its effect on the ability of firms to enter the market.

§ 1.3.2 Exclusivity and Refusal to Deal — Federal Trade Commission v. Qualcomm, Inc., 969 F.3d 974, rehearing en banc denied, (9^th Oct. 28, 2020)

The Ninth Circuit Court of Appeals reversed a high profile decision which found that Qualcomm’s patent licensing practice violated Section One and Section Two of the Sherman Act.  The court aptly described the case as drawing “the line between anticompetitive behavior, which is illegal under federal antitrust law, and hypercompetitive behavior, which is not.”[99]  This distinction between aggressive competition and unlawful competition is often the subject of monopolization.

Qualcomm’s practices have been the subject of much antitrust scrutiny. In 2017, on the heels of investigations by government agencies in Japan, Korea, Taiwan, China, and the European Union, the FTC sued Qualcomm for its alleged use of anticompetitive tactics to maintain its monopoly power in the wireless cellphone chip market.[100] Much of the FTC’s complaint centered on Qualcomm’s ownership of certain standard essential patents (SEPs), including some related to code division multiple access (CDMA) and premium long-term evolution (LTE) cellular modem chips and that are key to the development and production of compatible devices able to communicate with each other.[101] Because an SEP is critical to other industry participants, SEP holders must commit to licensing their SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms.[102] The FTC claimed that Qualcomm’s refusal to license its SEPs to other chip suppliers violated its FRAND commitment and the antitrust laws, that Qualcomm instead used its monopoly over chip supply and threats to withhold supply to coerce device manufacturers into unfair license arrangements, and that Qualcomm tied up such a large portion of the available business through exclusive dealing arrangements that its rival chip suppliers were unable to enter or thrive in the market.

After a ten-day bench trial, the U.S. Federal Trade Commission (FTC) convinced a California federal district court that Qualcomm’s longstanding intellectual property licensing practices and volume-based discounts violated the antitrust laws. As an initial matter, the court determined that Qualcomm had market power in two relevant global product markets—CDMA modem chips and premium LTE modem chips—based primarily on ordinary course documents reflecting high market shares and higher royalty rates.[103] Further, the court held that the FTC need not prove that the alleged anticompetitive acts caused harm to competition. Instead, the district court stated that in a government agency’s case for injunctive relief, the court need only infer causation where a defendant has market power and the defendant’s conduct “reasonably appears capable” of maintaining that power.[104]

The trial court also granted the FTC’s far-reaching requested injunctive relief—including the renegotiation of existing patent licenses and a seven-year compliance monitoring period. In fashioning its remedy, the court was not deterred by Qualcomm’s non-dominant position in the nascent 5G chip market or the Department of Justice, Antitrust Division’s last-minute attempt to intervene in the remedies phase.[105]

Before an examination of each of Qualcomm’s allegedly anticompetitive practices, the Ninth Circuit reset the analytical framework. The Ninth Circuit affirmed that the relevant product markets were the market for CDMA modem chips and the market for premium LTE modem chips,[106] but criticized the district court’s focus on the impact of Qualcomm’s conduct on the much broader market of cellular services generally. Accordingly, the Ninth Circuit reframed the issues to focus on the impact of Qualcomm’s practices in only the area of effective competition—the markets for CDMA and premium LTE modem chips.[107]

Refusal to Deal with Rivals. In advance of the trial, the district court granted the FTC’s partial summary judgment motion, holding that Qualcomm’s commitments to two standard setting organizations (SSO) required it to license its SEPs to other chip suppliers on FRAND terms and leaving the court to determine only whether Qualcomm’s failure to do so gave rise to antitrust liability. Qualcomm would only enter into licensing agreements with rivals if they agreed to sell only to cellphone manufacturers who also had separate licensing deals with Qualcomm, and to disclose customer names and sales volumes to Qualcomm. Based on the evidence at trial, the district court concluded that Qualcomm’s licensing practice constituted a refusal to license fairly and directly to its rival chip makers, and, accordingly was anticompetitive conduct without any procompetitive justification.

Additionally, the district court controversially held that Qualcomm has an antitrust duty to deal with its rivals, relying on the Supreme Court’s decision in Aspen Skiing Co. v. Aspen Highland Skiing Corp.[108] and the Ninth Circuit’s decision in Metro-Net Services Corp. v. Qwest Corp.[109] Specifically, the court concluded that such a duty exists when three conditions are met: (1) the defendant unilaterally terminated a voluntary and profitable course of dealing; (2) the defendant refused to deal even if compensated at market rates, which the court interpreted as proof of “anticompetitive malice”; and (3) the withheld product was already sold to other customers. Accordingly, the court found Qualcomm’s previous voluntary and profitable licensing deals with competitors particularly problematic and concluded that Qualcomm’s real justification for not licensing rivals was to prevent them from effectively competing. Finally, although Qualcomm complained that it would be difficult to engage in the multi-level licensing scheme the FTC posited, such arrangements were routine in the industry before Qualcomm began licensing only to cellphone manufacturers, and a market for chip-based licenses (as opposed to device-based licenses) undoubtedly existed.

The Ninth Circuit began its analysis of this issue by emphasizing the fundamental principle that a firm does not have a duty to deal with its competitors.[110] Next, the Ninth Circuit rejected application of the Aspen Skiing exception to this principle. Specifically, the court found that the district court’s reliance on Aspen Skiing to impose a duty on Qualcomm to grant exhaustive SEP licenses to its rival chip suppliers was misplaced because it ignored “critical differences between Qualcomm’s business practices and the conduct at issue in Aspen Skiing.[111] First, the Ninth Circuit determined that Qualcomm had not terminated a voluntary and profitable course of dealing in connection with licensing at the chip-manufacturer level because Qualcomm never granted exhaustive licenses to rival chip makers. Although Qualcomm previously entered into non-exhaustive, royalty agreements with chipmakers that explicitly did not grant rights to the chip supplier’s customers, it ceased this practice in response to developments in patent law’s exhaustion doctrine.[112] Second, Qualcomm’s reason for switching to OEM-level licenses was not to sacrifice short-term benefits in order to obtain higher profits in the long run by exclusion of competition but instead was to address patent exhaustion issues and maximize its profits in the short and the long term.[113] Third, there was no evidence that Qualcomm targeted any single chip maker for anticompetitive treatment in connection with its SEP licensing, while in Aspen Skiing the defendant sold the same lift tickets to any willing buyer with the exception of the plaintiff for the purpose of driving the plaintiff out of business.[114]

The Ninth Circuit also rejected the FTC’s proposed alternative basis for imposition of a duty to deal with its competitors on Qualcomm. Specifically, the FTC claimed that Qualcomm’s alleged breach of its contractual commitment to deal with its rivals as part of the SSO process constituted prohibited anticompetitive conduct in violation of section 2. The FTC was required to prove harm to competition, not merely Qualcomm’s competitors, but the Ninth Circuit found that the FTC failed to identify the requisite harm. Accordingly, the FTC failed to demonstrate that Qualcomm had a duty to deal with its chip-maker rivals or that the Ninth Circuit should apply the Aspen Skiing exception or recognize a new exception based on any SEP contractual obligations.  

“Taxing” Competitors’ Sales Through a “No License-No Chips” Policy. The district court held that Qualcomm engaged in anticompetitive behavior by refusing to sell chips to cellphone manufacturers who would not sign a separate license agreement that covered not only the patents in Qualcomm chips, but also Qualcomm’s SEPs in other manufacturers’ chips. Because of its strong position in the chip market, Qualcomm increased its licensing leverage by threatening to withhold (or actually withholding) chips that cellphone manufacturers needed.

The district court concluded that, through this coercive tactic, Qualcomm was able to charge royalties that exceeded the value of its IP in several ways, including by allowing it to charge a royalty on the price of the entire device, no matter the incremental value the chip added to the device, and by permitting Qualcomm to maintain a 5 percent royalty despite the fact that its role in standard setting declined over time. This no license-no chips policy gave Qualcomm an edge over competitors on whose chips Qualcomm was collecting an identical royalty, harmed consumers by driving up the price of competing chips, and, with further threats to cut off chip supply, prevented litigation that would have tested the royalty rates—all of which perpetuated Qualcomm’s chip monopoly and allowed its anticompetitive licensing techniques to continue.

The Ninth Circuit, however, rejected the district court’s anticompetitive surcharge as failing to present a cogent theory of anticompetitive harm and found that it was based on a misunderstanding of the law related to calculation of patent damages.[115] First, the Ninth Circuit determined that the district court erroneously labeled Qualcomm’s royalty rate as unreasonable solely because the rate was based on the handset price instead of the chip price.[116] The Ninth Circuit also rejected the district court’s conclusion that any royalty rate exceeding patent law were automatically anticompetitive. Regardless of the extent or nature of the effect of any excess royalty rate, the Ninth Circuit noted that any putative harms would have been to the OEMs, and, therefore, outside the areas of effective competition—the CDMA and premium LTE modem chips markets. Similarly, the alleged negative effects of the “no license, no chip” policy effect were not in the areas of effective competition.[117]

De Facto Exclusive Dealing Arrangements. The district court began its analysis of Qualcomm’s agreements with Apple by defining de facto exclusivity to include the offering of contractual incentives and penalties that, in effect, coerce purchasers into buying a substantial portion of their needs from the supplier. The court then found that incentives Qualcomm provided to cellphone manufacturers amounted to this de facto exclusive dealing. Because of Apple’s substantial purchase volume and significance in the industry, the court focused on Qualcomm’s agreements with Apple. The court found that Apple received hundreds of millions in rebates if it purchased exclusively from Qualcomm—rebates that Qualcomm could clawback if Apple purchased any chips from a Qualcomm rival during the deal periods.

The court’s analysis of Apple-Qualcomm agreements concentrated on Apple’s stature and sales volume, the duration of the deal, and the presence of additional competition reducing or enhancing provisions. For example, the court noted that Qualcomm’s agreement with Apple blocked Qualcomm rivals from field testing and engineering collaboration opportunities with Apple and from the reputational boost that flows from an Apple partnership. In addition, the court took issue with the five-year duration of the rebate agreements, which, when paired with the rebate clawback provision, in effect, blocked Qualcomm’s rivals from supplying chips to Apple for the full five-year terms of the agreements.

The court also found that several Qualcomm near-exclusive deals with other cellphone manufacturers allowed Qualcomm to coerce cellphone manufacturers into favorable licensing deals by threatening to withhold the chips on which its near-exclusive dealing partners depended.

The Ninth Circuit examined the same Qualcomm agreements with Apple and the context surrounding those agreements and reversed the district court’s related rulings.[118] On appeal, Qualcomm argued, as it had below, that its agreements with Apple were volume discount contracts, not exclusive dealing contracts. The FTC urged the Ninth Circuit that the “practical effect” of Qualcomm’s agreements was to impose exclusive dealing on Apple, making the arrangements de facto exclusive.[119]

Despite recognizing that there is “some merit in the district court’s conclusion that the Apple agreements were structured more like exclusive dealing contracts than volume discount contracts,” the Ninth Circuit determined that those agreements did not substantially foreclose competition in the CDMA modem chip market. The basis of the Ninth Circuit decision was twofold: (1) within one year of entering into a new supply agreement with Qualcomm, Apple switch suppliers and entered into an agreement with Intel and (2) there was no evidence in the record to support Intel as a viable competitor until 2014, the same year that Apple switched from Qualcomm to Intel.[120]

The Ninth Circuit reversed the district court’s judgment on the FTC’s exclusive dealing claims as well as all the FTC’s challenges to Qualcomm’s other practices.

§ 1.4 Robinson-Patman Act Developments

Overview

The Robinson-Patman Act was enacted in 1936 to address the perceived inadequacies of the Clayton Act, the first federal price discrimination statute. Congress’s goal in creating the statute was to ensure that equivalent businesses stood on equal competitive ground.[121] In essence, the Robinson-Patman Act was designed to protect small, independent retailers and their independent suppliers from unfair competition from vertically integrated, multi-location chain stores.[122]

The Robinson-Patman Act established several key provisions. Section 2(a) of the Act requires sellers to sell to everyone at the same price.[123] Under Section 2(b), inter alia, an affirmative defense is allowed if the discrimination arises from “meeting competition.”[124] Section 2(c) prohibits parties from granting or receiving certain commissions or brokerage fees except for services rendered.[125] Sections 2(d) and 2(e) prohibit sellers from providing or paying for promotion or advertising in connection with a product’s resale, unless equivalent benefits are offered to all competing buyers.[126] Section 2(f) prohibits buyers from knowingly inducing or receiving a discriminatory price.[127] For liability to exist under the Robinson-Patman Act, plaintiffs must demonstrate several things:

1. Two or more consummated sales by the same seller;
2. Reasonably close in point of time;
3. Of commodities of like grade and quality;
4. With a difference in price;
5. To two or more different purchasers;
6. For consumption, or resale within the United States or any territory thereof; and
7. By persons engaged “in commerce” requirement.[128]

There are two types of possible injury, primary line and secondary line. Primary line injury is actual injury to competition between the seller granting the discriminatory pricing and other sellers. Secondary line injury is actual or threatened injury to competition between the favored customer of the seller and the seller’s disfavored customers.

Despite the continual narrowing of the Robinson-Patman Act, some plaintiffs still try to pursue price discrimination claims. Below is a discussion of the most interesting such case decided in 2020.

§ 1.4.1 H&C Animal Health, LLC v. Ceva Animal Health, LLC, ___ F.Supp.3d ___, 2020 WL 6384303 (D. Kan. Oct. 30, 2020)

The plaintiff, H & C Animal Health, LLC, is a distributor of pet products to brick-and-mortar stores and through the Internet. The defendant Ceva Animal Health, LLC. (Ceva) develops and manufactures animal pharmaceuticals and provides related services and equipment. The plaintiff distributes defendant’s products, and according to the complaint, comprise 75 to 90 percent of the domestic market for pheromone-based pet-behavior products. The complaint identifies several different lines of products that have been developed by defendant for dogs and cats. Many of these products have been patented by defendant. The defendant’s products are sold to consumers through several channels, including brick-and-mortar stores, online platforms, and veterinarians.[129]

The parties had entered into a distribution and supply agreement under which the plaintiff held exclusive distribution rights for pet stores and their online platforms, which is referred to as the “Pet Specialty Channel” and “Independent Retail Channel.” The complaint refers to these channels as the “Pet Store Channel.” The plaintiff’s territory under the agreement specifically excluded sales through veterinarians or veterinary distributors. With respect to online platforms, which the complaint refers to as the “Ecommerce Channel,” the agreement granted the plaintiff non-exclusive authority to sell and advertise there.[130]

The plaintiff claimed that Ceva violated the Robinson-Patman Act by engaging in two different types of discriminatory pricing. First, Ceva allegedly engaged in price discrimination by offering rebates tor products sold through the Pet Store Channel that were not available for products sold through the Ecommerce Channel. Second, the plaintiff alleged that Ceva engaged in price discrimination by selling its products directly or indirectly to its own Ecommerce Channel customers for a lower price than it charged the plaintiff for distribution to the plaintiff’s Ecommerce Channel customers.[131]

Ceva argued that the price difference for products sold to the plaintiff for resale through the two different channels could not state a claim under the Robinson-Patman Act because the plaintiff did not allege that there were two purchasers. Instead, the allegations involved only a single purchaser—the plaintiff. The plaintiff argued, in response, that it stated an indirect price discrimination claim. The court explained that to state an indirect price discrimination claim, the seller must “`control the terms upon which a buyer once removed may purchase the seller’s product from the seller’s immediate buyer.’”[132] Under the indirect purchaser theory, a plaintiff which purchased through a middleman is considered to be a purchaser for Robinson–Patman purposes if the supplier sets or controls the resale prices paid by the plaintiff. The court rejected plaintiff’s claim of price discrimination based on two different prices from the rebates in the Pet Store Channel because there are not two different purchasers.

Next, the court examined the plaintiff’s claim that Ceva violated the Robinson-Patman Act by charging a different price to its own customers in the Ecommerce Channel than it charged to the plaintiff. Ceva argued that this second theory failed because the Robinson-Patman Act requires that discriminatory pricing be charged to buyers in the same market and there is not an injury to competition if the purchasers are not at the same functional level. The plaintiff responded that its Ecommerce Channel customers compete on the same level as Amazon.com, Ceva’s Ecommerce Channel customer, and that the price discrimination harms competition between its customers and Amazon.com.

The court sought existing case law that addressed the same facts, but apparently was unable to locate precedent addressing the current realities of the online marketplace or the treatment of direct sales by suppliers to Amazon.com. The court analogized the facts presented to when a manufacturer sells to both a distributor and a retailer.[133] The type of injury alleged here and addressed by the Robinson-Patman Act is often referred to as “secondary line injury,” because the actual or threatened injury is to competition between the favored customer of the seller and the seller’s disfavored customers. Although actual injury to competition must be established in order to establish primary line liability under Section 2(a) of the Robinson-Patman Act, the third clause of Section 2(a) expressly prohibits price discrimination where “the effect of the discrimination may be substantially” to “injure, destroy, or prevent competition with any person who grants or knowingly receives the benefit of the discrimination, or with the customers of either of them. . . .”

Therefore, the court concluded that “a price discriminator cannot ‘avoid the sanctions of the Act by the simple expedient of adding an additional link to the distribution chain.’”[134] In the instant case, the plaintiff alleged that Ceva sold its product to its Ecommerce Channel customers for less than it sold the same product to the plaintiff and that there was an injury to competition because it harms the plaintiff’s customers which compete with Ceva’s customers. Based on the alleged injury to competition, the court determined that these allegations were sufficient to plausibly state a claim under the Robinson-Patman Act.

§ 1.5 Miscellaneous

§ 1.5.1 Filed-Rate Doctrine – PNE Energy Supply LLC v. Eversource Energy (1st Cir. 2020)

One of the narrow exceptions to antitrust liability is the filed-rate doctrine. The filed-rate doctrine provides that there can be no antitrust damages action for rate levels that were set with the consent of a federal or state regulatory agency.[135] Although the Supreme Court has expressed the view that the reasoning behind the creation of the filed-rate doctrine is suspect, the Court has declined to overrule it because Congress has taken no action in over sixty years to eliminate the doctrine: “If there is to be an overruling of the [filed-rate doctrine], it must come from Congress, rather than from this Court.”[136] In 2020, the First Circuit again examined the filed-rate doctrine and when it might bar an antitrust claim.

PNE Energy Supply LLC v. Eversource Energy[137] was filed on the heels of the publication of a 2017 report examining “vertical market power” in the natural gas and electricity business. Plaintiff, a wholesale energy purchaser, was prompted to file the instant case shortly after the defendants challenged an earlier suit, triggered by the same 2017 report, on the basis that electricity consumers did not have standing to sue under the antitrust laws for manipulation in gas transmission markets.[138] The electricity consumer case was Breiding, v. Eversource Energy.[139]  The District of Massachusetts dismissed Breiding, holding that the filed-rate doctrine barred the retail consumers’ claims, and in the alternative, that plaintiffs failed to plead antitrust injury or a plausible claim of monopolization.[140] On appeal, the First Circuit affirmed that dismissal, concluding that the filed-rate doctrine precluded plaintiffs’ Sherman Act and related state claims.[141]

Here, the wholesale electricity purchaser plaintiffs, thinking that they were better positioned to assert standing, also claimed that the defendants, by restricting the available natural gas capacity, increased electricity prices by approximately 20 percent on average and totaling billions of dollars in overcharges.[142] The court explained the regulatory background of natural gas transmission and sales. The Federal Energy Regulatory Commission (FERC) is the agency tasked with regulating natural gas sales and transmission.[143] This regulatory authority includes determining just and reasonable rates for the transportation of natural gas for resale, requiring no-notice contracts between pipelines and gas distribution companies for the purchase of gas capacity, and delegating the management of auctions for wholesale electricity to non-profit organizations that ensure just and reasonable rates.[144]

The First Circuit then outlined the filed-rate doctrine, explaining that it could be “understood as a form of deference and preemption which precludes interference with the rate setting authority of an administrative authority, like FERC.”[145] “`The filed-rate doctrine is “a set of rules that . . . revolve[s] around the notion that . . . utility filings with the regulatory agency prevail over . . . other claims seeking different rates or terms than those reflected in the filings with the agency.”’”[146] The court noted that upstream anticompetitive conduct that indirectly affects a downstream FERC-approved tariff is not always protected under the filed-rate doctrine, which applies to the downstream activity.[147] According to the court, FERC had exclusive authority to regulate natural gas transmission and required that companies file rate schedules for the transportation of natural gas and that pipelines offer no-notice contracts to energy distribution companies to ensure that unexpected demand is met.[148] Pursuant to these requirements, the FERC-approved Algonquin Pipeline tariff includes a statement of rates and addresses no-notice contracts. It also allows energy distribution companies to resell excess pipeline capacity, but it does not require that these companies do so.[149]

Although, in Breiding, the First Circuit concluded that the defendants had not engaged in any conduct other than that allowed by Algonquin’s detailed and reasonably comprehensive FERC-approved tariff, that FERC declined to require that energy companies sell their excess capacity, and that Congress granted FERC the ability to police anticompetitive conduct in the gas transmission industry, PNE Energy Supply persisted in its appeal. Specifically, PNE Energy Supply argued that the court should not be focused on the defendants’ use of no-notice contracts, but instead should focus on the fact that defendants not only failed to release excess transport capacity to the primary capacity market, but also refused to sell their extra capacity in the short-term secondary capacity market.[150]

The First Circuit determined that PNE Energy Supply’s characterization of the defendants’ conduct as “refusing to sell” was of no moment. The court noted that the “pivotal challenged conduct” in both Breiding and here was the alleged “over-reserving of and then failure to release gas transportation rights exercised under the defendants’ contracts with the Algonquin pipeline.”[151] The court examined the scope of FERC’s involvement in the secondary market on which PNE Energy Supply focused and found that the release of capacity into the secondary market is expressly regulated by FERC. Although a FERC order left to the market the determination of rates for short-term capacity releases, the court rejected PNE Energy Supply’s argument that this order is proof that how and under what terms a shipper should release any capacity falls outside FERC’s purview.[152] Instead, the court pointed to FERC statements that it has continued oversight of capacity releases and that it will entertain complaints and respond to specific allegations of market power. The First Circuit determined that defendants’ challenged activities related to reselling capacity on the pipeline and refusal or failure to sell stored natural gas and that these activities are within FERC’s scope of authority.

Accordingly, the filed-rate doctrine barred PNE Energy Supply’s claims.[153]

§ 1.5.2 Acquisitions — Federal Trade Commission v. Thomas Jefferson University, CV 20-01113, 2020 WL 7227250 (E.D. Pa. Dec. 8, 2020)

Although the U.S. antitrust enforcement agencies have an extraordinary record of success in litigation, in 2020, two district courts in the Third Circuit rejected a federal antitrust agency’s challenge to two different acquisitions between private parties.

The FTC and the Pennsylvania Attorney General sought to enjoin a merger between Thomas Jefferson University (Jefferson) and the Albert Einstein Healthcare Network (Einstein) until there was an administrative determination on whether the merger would violate Section 7 of the Clayton Act.[154] The Eastern District of Pennsylvania rejected this motion because the government failed to properly identify the geographic market at risk of anticompetitive effects should the merger proceed.[155]

Jefferson and Einstein are two of 13 provider systems providing general acute care (GAC) services that operate in southeastern Pennsylvania.[156] “GAC services include a broad cluster of medical, surgical, and diagnostic services that require an overnight hospital stay.”[157] According to economic analyses, healthcare providers face two stages of competition: (1) selection as an in-network provider by an insurer; and (2) selection by the members of an insurer’s plan for care.[158] The health insurance market in this region is “far more consolidated” with only four major health insurance companies, and thus, insurers have stronger bargaining power.[159] According to testimony, the largest of the four insurance companies in the region, Independence Blue Cross (IBC), has such a strong position that neither company can afford being out of IBC’s network.[160]

As the court explained, to succeed on an injunction, the government must show that a “substantial lessening of competition’ is ‘sufficiently probable and imminent.”[161] The government does not have to show that the proposed merger would violate Section 7, but rather that the proposed merger is likely to violate Section 7.[162] To make a prima facie case of a Section 7 violation, the government must propose the proper relevant market and show the anticompetitive effect from the proposed acquisition.[163] Defendants have the opportunity to rebut and then, if successfully rebutted, the burden of proof returns to the government.[164]

While the parties agreed that GAC services were a relevant product market, the court rejected the government’s identification of various geographic regions.[165] Properly selected markets must “correspond to the commercial realities of the industry” and must use the most relevant buyers to identify the parameters of that industry.[166] In this case, the court explained, the insurers, not the hospital patients, are the most relevant buyers, given that patients themselves are not the direct purchasers of healthcare.[167] In selecting this geographic area, the government must be able to show that the area is where an insurer “may rationally look for goods or services [it] seeks,” and then the government must show that a hypothetical monopolist in that area could impose a “small but significant non-transitory increase in price (SSNIP).”[168]

The government focused on patients instead of insurers to define the geographic market, relying predominantly on diversion ratios.[169] Although the government contended that the commercial realities and insurer’s involvement was “baked into the diversion numbers,” the court noted that diversion ratios “only capture insurer preferences . . . where . . . insurer decisions about which hospitals to include in their networks are aligned with patient decisions about where to seek care.”[170] Additionally, the court was unable to find a correlation between patient and insurer behavior to justify using diversion ratios because the insurers’ testimony on the potential correlation was not unanimous or unequivocal and was undercut by other evidence.[171]

In evaluating the testimony regarding whether there could be a post-transaction price increase on insurers, the court compared the evidence in this case to the evidence in Federal Trade Commission v. Penn State Hershey Medical Center (Penn State Hershey).[172] In Penn State Hershey, the Third Circuit reversed the district court’s denial of a preliminary injunction, even though the government had mainly presented statistical evidence based on patient behavior, because the government also had presented “extensive evidence showing that the insurers would have no choice but to accept a price increase.”[173] The extensive evidence included: (1) credible testimony from insurers that post-merger they could not market to employers without the merged hospital system; (2) evidence showing that at least one insurer was no longer viable when it excluded both of the merging hospitals; (3) testimony supporting the proposed geographic market area as distinct; and (4) testimony that other hospitals in the area were not suitable alternatives.[174]

However, here, the government’s evidence failed to reach the high bar set out in Penn State Hershey. First, there are more hospitals in a far smaller radius in Philadelphia when compared to the area in question and number of hospitals in Penn State Hershey.[175] Second, two of the four insurers failed to testify that the absence of both Jefferson and Einstein in their network pools would result in a price increase.[176] Third, the largest insurer for the area was not credible because its witness was motivated, not by antitrust concerns, but by concerns that the merger would make the joined hospital groups a “competitive threat in the insurance market.”[177] Fourth, while one of the insurance company witnesses indicated that they would pay higher rates, the court discounted his testimony because the record had already established that the company does not rely currently on these hospitals.[178]

Finally, the court also rejected an additional product market proposed by the FTC—inpatient acute rehabilitation services. However, because these services play only a “minor role in health systems’ operations and contracts,” the court rejected the FTC’s argument that an insurer could not offer a marketable health plan without Jefferson or Einstein.[179]

This case gives more insight into developing a prima facie case under Section 7 of the Clayton Act, with a focus on how to identify a relevant market. For healthcare-related mergers, it highlights the importance of selecting the correct relevant buyer (insurers not patients) in statistical analysis. But it also provides insights into how the proper market could still be identified through testimonial and other evidence, by comparing the record of Penn State Hershey with the record in this current case. Notably, the court, in viewing the record, considered the credibility of various third-party insurer witnesses, given the possibility of other motives underlying their testimony.[180]

§ 1.5.3 Acquisitions — United States v. Sabre Corp., 452 F. Supp. 3d 97 (D. Del.), vacated on mootness grounds, No. 20-1767, 2020 WL 4915824 (3d Cir. July 20, 2020)

The United States Department of Justice (DOJ) filed an expedited antitrust action against Sabre Corporation and Sabre GLBL (collectively, Sabre) and related defendants to enjoin their acquisition of Farelogix, Inc. (Fairlogix),[181] alleging that the transaction would violate Section 7 of the Clayton Act.[182] According to the DOJ, the acquisition would harm competition because Farelogix is an “innovative disruptor in the market for booking services,” which historically had been dominated by three players (including Sabre) that had tried to “stifle innovation.”[183] After an eight-day bench trial, the District Court of Delaware rejected the government’s arguments and refused to enjoin Sabre from acquiring Farelogix.[184]

Sabre is a large player in the airline travel industry boasting the largest U.S. global distribution system (GDS).[185] The GDS accounts for most of Sabre’s revenue through airline customer booking fees.[186] Additionally, Sabre offers information technology products for airlines including a passenger service system.[187] Farelogix, on the other hand, is a smaller company that offers information technology to airlines and other products relating to “distributing and merchandising airline content.”[188]

The district court concluded that the DOJ failed to establish a prima facie case under Section 7 of the Clayton Act and did not prove a reasonable probability of anticompetitive harm.[189] The court explained that the DOJ failed to establish a prima facie case because (1) Farelogix and Sabre did not compete as only Sabre was a two-sided platform and (2) the DOJ did not properly define relevant product or geographic markets. Moreover, it also failed to show a reasonable probability that the transaction would lessen competition.[190]

To establish a prima facie case, the government must define a relevant product and geographic market and demonstrate that the effects of the merger are likely to lessen competition.[191] Relying on a recent Second Circuit interpretation of the Supreme Court’s decision in Ohio v. American Express Co. (Amex), the District Court of Delaware determined that Sabre is not a competitor of Farelogix because Sabre is a two-sided platform that facilitates transactions between airlines and travel agencies whereas Farelogix only interacts with airlines and therefore is one-sided.[192] The district court rejected the DOJ’s attempts to distinguish Amex by suggesting that the Supreme Court precedent only applied to the credit card industry.[193] Similarly, the court was unpersuaded by the DOJ’s argument that limiting potential Section 7 violations to when two-sided companies acquire two-sided companies would give two-sided companies “carte blanche to buy any one-sided company.”[194]  Rather, the court explained that the Amex rule would allow challenges to acquisition of one-sided companies, so long as the government could show that the transaction will harm competition “on both sides of the two-sided market.”[195] Here, however, the DOJ expert only looked at one side of the Sabre GDS, and the DOJ failed to produce evidence that any anticompetitive impact of the merger on the airline side of the Sabre platform would be so significant as to result in the two-sided platform becoming less competitive overall.[196]

In addition, the DOJ also failed to identify proper relevant product and geographic markets. The DOJ argued that “booking services” was the proper product market.[197] The court rejected this definition, opining that the DOJ improperly excluded other services that Sabre provided through its GDS. The government did not show that “booking services” generated separate demand from Sabre’s other services such that they to be their own relevant product market.[198] The court similarly did not accept the DOJ’s proposed geographic area of “U.S. point of sale.”[199] It explained that the relevant geographic area must be “where customers look to buy a seller’s products or services.” Farelogix’s customers are airlines located outside the United States, and it competes with foreign competitors to win bids. Sabre markets a direct connect product to airlines outside of the United States. The proposed geographic market, thus, was “at odds with commercial realities.”[200] By not defining proper geographic and product markets, DOJ failed to establish a prima facie case.[201]

Even if the government had properly defined markets, it failed to present evidence of a reasonable probability of anticompetitive harm.[202] The Third Circuit has previously held that a high market concentration can establish a prima facie case or a presumption of anticompetitive harm.[203] As such, the DOJ used the Herfindahl-Hirschman Index (HHI) market concentration measurements to support its theory of harm.[204] However, the DOJ expert’s calculations were flawed because he excluded airline.com, despite its competitive pressure on Sabre, and he misattributed sales by Sabre to Farelogix.[205] Once these errors were corrected, the numbers did not show a high post-acquisition market concentration, and so, the DOJ was not entitled to a presumption of anticompetitive harm.[206]

Without that presumption, the DOJ failed to prove that anticompetitive harm was likely. The DOJ also argued that there were barriers to entry that prevent adequate competition to Sabre post-acquisition and that the acquisition will harm competition or innovation.[207] The barriers to entry argument was quickly dismissed by the court, which pointed to “Farelogix’s vigorous competition with rival[s].”[208] Additionally, the court found that the merger was not designed to eliminate Farelogix and its platforms from the market or to stifle innovation, but rather to “integrate” Farelogix’s capabilities into Sabre’s own platform and that there was enough competition still to constrain Sabre’s ability to raise prices.[209] Therefore, the acquisition was not likely to harm competition or innovation.

Despite this win at the district court, Sabre and Farelogix ended up abandoning their deal after the U.K.’s Competition and Markets Authority challenged the acquisition.

In its decision, the district court carefully analyzed what constitutes a prima facie case under Section 7 of the Clayton Act. The case was particularly notable because the court found Sabre’s story—that Sabre did not view the new distribution capability (a capacity that Farelogix pioneered) as a threat, even when used for bypassing their global distribution system—as not credible.[210] Nevertheless, the court held that the DOJ was unable to meet their burden of proof to make a prima facie case because they failed to show competition between two “two-sided” platforms, they did not properly define the relevant markets, and they presented flawed market concentration calculations.[211]

§ 1.5.4 The Foreign Antitrust Trade Improvements Act

The Foreign Trade Antitrust Improvements Act (FTAIA),[212] enacted to provide greater clarity on the extraterritorial reach of the Sherman Act, instead continues to generate confusion. In 2004, antitrust practitioners looked to the Supreme Court’s decision in F. Hoffman—LaRoche Ltd. v. Empagran, S.A. (Empagran I) to address the complex and confusing statutory language of the FTAIA.[213] In pertinent part, the FTAIA provides:

[The Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless:

(1) such conduct has a direct, substantial, and reasonably foreseeable effect;

(A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or

(B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and

(2) such effect gives rise to a claim under the provisions of [the Sherman Act] …

The FTAIA establishes a general rule placing all (non-import) activity involving foreign commerce outside the Sherman Act’s reach. It then brings such conduct back within the Sherman Act’s reach provided that the conduct (1) sufficiently affects U.S. commerce (known as the “direct effect test”) and (2) gives rise to plaintiffs’ antitrust claim.

• Jurisdictional or Substantive Element?

Until recently, the FTAIA was treated as a jurisdictional statute, which needs to be satisfied for an antitrust claim to be actionable under U.S. law. This was important because it allowed litigants the opportunity to challenge plaintiffs’ ability to satisfy the FTAIA standards earlier in a case than if the FTAIA requirements were deemed an element of the substantive antitrust claim.

After the Supreme Court decision in Arbaugh v. Y&H Corp., however, the trend has shifted. The question presented in Arbaugh was whether Title VII’s definition of employer to include only those having firms with fifteen or more employees was a requirement for the exercise of subject matter jurisdiction or was simply an element of plaintiff’s case.[214] The Court noted that courts had been imprecise in their use of the term jurisdiction and have been using it to describe a variety of doctrines that operate to bar a plaintiff’s suit.[215] The Court further explained that “[s]ubject matter jurisdiction in federal-question cases is sometimes erroneously conflated with a plaintiff’s need and ability to prove defendant bound by the federal law asserted as the predicate for relief—a merits-related determination.”[216] The Court held that the number of employees was not a jurisdictional requirement for a Title VII claim and expressed its desire to avoid “drive-by jurisdictional rulings” that have “no precedential effect” on the jurisdictional question.[217]

The Court established a test for deciding whether something is jurisdictional: “If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”[218] Following Arbaugh, a number of courts, including the Second, Third, Seventh, and Ninth Circuits, have considered the question of whether the FTAIA is a substantive element of a Sherman Act claim or jurisdictional and each has determined that it is substantive.[219]

• Extraterritorial Reach

With respect to the extraterritorial reach of the Sherman Act, in Empagran I, the Supreme Court determined that the “domestic injury exception” of the FTAIA did not provide a right to sue under the Sherman Act, to foreign plaintiffs in circumstances where the anticompetitive conduct “significantly and adversely affects both customers outside the United States and customers within the United States, but the adverse foreign effect is independent of any adverse domestic effect.”[220] Following that decision, the D.C. Circuit’s Empagran v. F. Hoffman-LaRoche Ltd. (Empagran II)[221] clarified that the domestic injury exception to the FTAIA requires is not triggered by “but for” causation. Rather, in order to sue under the domestic injury exception, the foreign plaintiff must prove that it is the domestic effects of a defendant’s anticompetitive conduct rather than the anticompetitive conduct itself, which gives rise to the plaintiff’s foreign injuries.

Since the Supreme Court’s ruling and the subsequent clarification by the D.C. Circuit, there have been a number of cases dealing with the FTAIA and its “domestic injury exception.” There was a string of cases that followed the Empagran II direct cause requirement and, thereby significantly restricted the ability of a foreign plaintiff to seek redress in the United States for anticompetitive conduct where the impact is felt only abroad.

Although 2020 was a relatively quiet year with respect to the FTAIA, below is a discussion of a case that tackled the question of whether U.S. courts have jurisdiction over antitrust claims based on a global patent licensing program under the FTAIA.

• Continental Automotive Systems, Inc. v. Avanci, LLC, — F.Supp.3d —-2020 WL 5627224 (N.D. Tex. Sept. 10, 2020)

The U.S. District Court of the Northern District of Texas considered its jurisdiction over certain antitrust claims under the Foreign Trade Antitrust Improvement Act (the FTAIA). Plaintiff Continental Automotive Systems, Inc., manufactures telematics control units (TCUs) for motor vehicles. The motor vehicle manufacturers use the TCUs, including a baseboard processor in a network access device to provide their cars various functionalities, including cellular connectivity. To connect to cellular networks, the TCUs. To access second generation (2G), third generation (3G), and fourth generation (4G) cellular networks, the baseboard processors, network access devices, and TCUs must comply with standards set by standard setting organizations (SSOs). Plaintiff also alleged that Defendants Nokia Corporation, Nokia of America Corporation, Nokia Solutions and Networks US LLC, Nokia Solutions and Networks Oy, Nokia Technologies Oy (collectively, Nokia Defendants), Conversant Wireless Licensing SARL (Conversant), Optis UP Holdings, LLC, Optis Cellular Technology, LLC, Optis Wireless Technology, LLC (collectively, Optis Defendants), and Sharp Corporation (Sharp) (collectively, the Licensor Defendants) all own Standard Essential Patents (SEPs) for 2G, 3G, and 4G connectivity required in order to comply with SSOs’ established standards, and that as a result, the Licensor Defendants were obligated to license the relevant SEPs to the plaintiff on fair reasonable and non-discriminatory (FRAND) terms and conditions. Plaintiff further asserted that these FRAND terms should reflect the ex-ante value of the SEP, excluding its value obtained solely from its inclusion in the standard.[222]

The Licensor Defendants also pooled their SEPs and used the same licensing agent, offering their patents in a pooled arrangement. Through this pooling arrangement, the plaintiff alleged, the Licensor Defendants implemented an unlawful agreement to grant OEMs license to the SEPs only on non-FRAND terms. The OEMs, in turn, could or would seek indemnification from the plaintiff.[223] In addition to alleged harm suffered as a result of such indemnification, the plaintiff claimed that it was injured by its inability to obtain the SEP licenses needed for its TCUs from the Licensor Defendants on FRAND terms.[224]

The court held that the FTAIA limits subject matter jurisdiction over antitrust claims involving trade or commerce with foreign nations, unless it pertains to imports or the conduct has a direct, substantial, and reasonably foreseeable effect on U.S. domestic, import, or export trade or commerce, where that effect gives rise to the antitrust claims. Because the plaintiff used the SEPs to manufacture its TCUs in the United States, the court concluded that plaintiff’s allegations related to the import of SEP licenses for foreign patents, and the FTAIA’s limitations on subject matter jurisdiction would not bar Plaintiff’s claims.[225]

Separately, the court looked more broadly at the defendants’ SEP licensing program and found that even if it did not involve import trade, it would still satisfy the FTAIA’s jurisdictional requirements. The plaintiff alleged that the defendants had obligations to US SSOs and owed FRAND obligations to US entities seeking to license SEPs. Because these obligations are related to global licensing and product markets, which necessarily included US markets, the plaintiff alleges direct, substantial, and reasonably foreseeable effects in the U.S. that gave rise to the plaintiff’s antitrust claims. Therefore, the court denied the defendants’ motion to dismiss plaintiff’s claims on the basis of lack of subject matter jurisdiction.[226]

§ 1.5.5 Remedies – Federal Trade Commission v. AbbVie Inc., 976 F.3d 327 (3d Cir. 2020)

The Supreme Court granted certiorari on July 9, 2020, to decide the most significant challenge to the FTC’s authority in decades.[227] The Supreme Court must decide whether to affirm or reverse AMG Capital Management, LLC, et al. v. Federal Trade Commission,[228] where the Ninth Circuit held that that the FTC has the authority to seek restitution under Section 13(b) of the Federal Trade Commission Act (“FTC Act”). ^[229] 

The AMG Capital Management case involved a series of companies controlled by Scott Tucker that offered high-interest, short term loans. In 2012, the FTC filed suit against Tucker alleging that he violated Section 5 of the FTC Act’s prohibition against “unfair or deceptive acts or practices” because his loan notes did not disclose the terms that Tucker actually enforced. The FTC asked the court to “permanently enjoin Tucker from engaging in consumer lending and to order him to disgorge ill-gotten-monies.” The district court ultimately determined that Tucker was required to pay $1.27 billion. Tucker appealed to the Ninth Circuit and argued that the district court “did not have the power to order equitable monetary relief under §13(b).” The Ninth Circuit acknowledged that “Tucker’s argument has some force,” but found that prior precedent supported the FTC’s position.

Although most circuits that have examined the issue, including the Ninth Circuit, held that the FTC has the authority to seek monetary relief under Section 13(b), in 2019 the Third and Seventh Circuits ruled against the FTC, creating a split among the circuits. The circuit decisions Federal Trade Commission v. Shire Viropharma, Inc.[230] and Federal Trade Commission v. Credit Bureau Center, LLC[231] specifically limited the FTC’s enforcement toolkit, leading the trend toward narrowing the implied statutory remedies available to federal agencies. Although the FTC may pursue administrative remedies that have traditionally required expending more resources and yielded smaller rewards, its preferred enforcement route—via FTC Act section 13(b)—allows the agency to bypass the administrative process. If the FTC believes anyone is violating, or is about to violate an FTC-enforced law, the FTC may immediately seek a temporary restraining order or temporary or permanent injunction in the courts.[232] A temporary restraining order or injunction will dissolve if the FTC does not file an administrative complaint within 20 days. However, “in proper cases[,] the [FTC] may seek, and . . . the court may issue, a permanent injunction.”[233]

Section 13(b) has been a significant tool and a mainstay of the FTC’s consumer protection program. However, until the 1980s, it was only used to bolster administrative proceedings. Since, however, the FTC has argued, and circuit courts have agreed, that by invoking the district court’s equitable jurisdiction under section 13(b), the district court has access to, and may use, a full suite of equitable remedies, including restitution. An implied restitution remedy allowed the FTC to collect over $17.5 billion through section 13(b) proceedings from 2016, 2017, and 2018 alone—far outpacing the funds obtained through administrative civil penalties.

In Shire Viropharma, issued in early 2019, the Third Circuit concluded that section 13(b) only permits the FTC to halt ongoing or imminent harms, and does not allow the FTC to sue for past conduct, even if it believes that conduct has “a reasonable likelihood” of recurring. The Third Circuit side-stepped the remedies question tackled by the Seventh Circuit in Credit Bureau Center, but its decision strongly suggested that section 13(b) permits the FTC to obtain only injunctive relief (and nothing more) to address ongoing or imminent conduct.

The Seventh Circuit’s decision in Credit Bureau Center more clearly undermines the FTC’s section 13(b) authority. In 2017, the FTC brought a suit against Credit Bureau Center and its sole operator and owner, for duping customers who believed they were receiving “free” credit-related information into subscribing to a $29.94 monthly membership. Defendants also enlisted the help of an agent who funneled unwitting consumers to defendants’ website by advertising fake rental properties and directing applicants to obtain a “free” credit report from defendants. The district court entered a permanent injunction and ordered defendants to pay more than $5 million in restitution.

On appeal, defendants conceded liability but argued section 13(b)’s reference to preliminary and permanent injunctions—and no other remedy—meant the FTC was prohibited from seeking any more relief than the statute explicitly authorized. In other words, because section 13(b) does not say a district court can require restitution, the FTC cannot seek it under section 13(b). The Seventh Circuit agreed, reversing decades of precedent and creating tension with eight sister circuits, most of whom had tacitly agreed that the FTC’s section 13(b) remedies include restitution. The Seventh Circuit explained that restitution is an inherently retrospective remedy because it orders the return of unlawful, past gains. Injunctions, on the other hand, halt ongoing or prevent imminent harms. The appellate court reasoned that if section 13(b), which only provides for injunctive relief, could be used to recoup restitution for past harms, then restitution would be conditioned on proof of ongoing or imminent conduct. According to the Seventh Circuit, such a reading was illogical.

Moreover, the court continued, Congress provided the FTC with avenues to seek equitable and civil penalties in actions pursuant to section 5 of the FTC Act. Both backward-looking enforcement provisions in section 5 explicitly authorize “the refund of money,” and when a person violates a final order, a district court can “grant mandatory injunctions and such other and further equitable relief as they deem appropriate.” If the FTC could use section 13(b) to obtain restitution without navigating section 5’s administrative process, then, the Seventh Circuit reasoned, it would have been unnecessary for Congress to enact section 5. By reading section 13(b) prospectively, the court afforded independent significance to each of the FTC’s enforcement tools.[234]

In 2020, the Third Circuit directly addressed whether the FTC had a right to seek disgorgement under section 13(b) in Federal Trade Commission v. AbbVie Inc.[235] The case began in 2014 when the FTC sued AbbVie Inc. and other pharmaceutical manufacturers, alleging that the patent owners[236] for the testosterone replacement therapy AndroGel impermissibly maintained their AndroGel monopoly using sham litigations and anticompetitive reverse-payment agreements. Specifically, the FTC contended that AbbVie and Besins brought sham patent infringement lawsuits against competitors Teva Pharmaceuticals USA, Inc. (Teva) and Perrigo Company (Perrigo) that had filed FDA applications for generic testosterone gels. AbbVie settled the litigations by agreeing to license a generic version of AndroGel to Teva and Perrigo in three years (which was still six years prior to the expiration of the patent). In addition, with the Teva settlement, AbbVie also agreed to grant Teva a license to the generic version of cholesterol drug TriCor.[237]

Pursuant to section 13(b), the FTC asked the district court to enjoin defendants from engaging in such conduct in the future and requested other equitable relief, including restitution and disgorgement.[238] Through numerous rulings and a bench trial, the district court dismissed the FTC’s reverse-payment claim, but it ruled in favor of the FTC on the sham litigation theory. Although the district court denied the request for an injunction, it awarded the FTC $484 million in disgorgement of ill-gotten gains. Both the FTC and defendants appealed.[239] The Third Circuit affirmed in part and reversed in part. It determined that that the district court erred in dismissing the reverse-payment theory and in concluding the litigation against Teva was a sham. It also erred in awarding disgorgement. However, the Third Circuit affirmed the conclusion that the Perrigo litigation was a sham, that defendants had monopoly power, and that injunctive relief should be denied.[240]

Reverse-payment settlements, also known as “pay-for-delay” agreements, occur when a patent holder sues an alleged infringer and then pays the alleged infringer to end the litigation. These settlement agreements can be anticompetitive if they permit a brand name pharmaceutical company to split monopoly profits with a generic drug supplier in exchange for the generic delaying market entry.[241] On this issue, the Third Circuit overruled the district court’s dismissal of the pay-for-delay theory and concluded that the FTC plausibly alleged an anticompetitive reverse-payment agreement.[242]

First, the FTC plausibly alleged that AbbVie and Besins brought sham patent litigations against Perrigo and Teva, which triggered a 30-month stay to the FDA’s approval process for the generic versions of AndroGel. The FTC then alleged that both AbbVie and Teva believed that Teva would win the lawsuit, so AbbVie approached Teva to enter a settlement. Teva agreed not to sell a generic AndroGel for three years in exchange for AbbVie authorizing Teva to sell a generic version of TriCor for four years with AbbVie supplying this drug to Teva at a percentage above production cost and a royalty.[243]

Second, the FTC alleged that the payment was “plausibly large.” Teva was struggling to get FDA approval for its generic version of TriCor, so with the authorization for and supply of the product from AbbVie, Teva could capitalize on the exclusivity window given to the first generic in the market. Teva estimated its net sales for TriCor would be $175 million over the four year window. TriCor’s estimated net sales far exceeded likely litigation costs for the patent infringement suit and the money Teva would have made marketing AndroGel.[244] Third, the FTC plausibly alleged that the payment was “unjustified” because the TriCor deal cannot be explained as an independent business arrangement from AbbVie’s perspective. Indeed, the deal increased competition for TriCor, and the royalty terms for TriCor in the Teva deal were worse for AbbVie than royalties received through other supply agreements. According to the FTC, AbbVie expected to lose $100 million in TriCor revenue, and this loss would not be offset by the royalties from Teva.[245] Finally, the FTC plausibly alleged that anticompetitive effects would outweigh any procompetitive results of the TriCor deal because the $100 million AbbVie would lose in TriCor sales was a small fraction of the billions of dollars in AndroGel revenues AbbVie protected by delaying generic competition for the drug for three years.[246]

As to the sham litigation claims, the Third Circuit upheld the district court’s ruling that the Perrigo litigation was a sham, but the appellate court reversed the lower court’s decision that the Teva lawsuit was so. Pursuant to the Noerr-Pennington doctrine, “those who petition the government for redress are generally immune from antitrust liability,” including those that bring federal lawsuits.[247] However, the immunity is not absolute, and those that bring sham lawsuits to interfere with the business relationships of competitors are not protected. For this sham exception to apply, the lawsuit first must be objectively baseless, meaning no reasonable litigant could expect success on the merits. If objectively baseless, then a court examines the litigant’s subjective motivation to determine whether the lawsuit conceals an attempt by the litigant to use the government process to interfere with a competitor.[248]

With respect to the Teva litigation, the Third Circuit determined that the infringement suit was not objectiveless baseless as prosecution history estoppel did not apply.[249] The defendants were not estopped from bringing the patent prosecution claim because, although the defendants’ October 2001 amendment to the AndroGel patent did not include the penetration agent in Teva’s generic formulation, the defendants drafted the amendment in response to a different penetration agent and would not have been expected to draft an amendment encompassing the agent used by Teva.[250]

Conversely, the Third Circuit concluded that the district did not err in ruling that the Perrigo lawsuit was a sham. First, the litigation was objectively baseless because the patent’s prosecution history estopped the defendants from claiming infringement. A December 2001 amendment to the patent narrowed the list of penetration agents, removing the agent used by Perrigo. Second, the subjective motivation prong also was met. The defendants had experienced patent counsel that knew the patent litigation would not succeed, while they also knew that they would benefit financially if Perrigo’s generic application was delayed. Therefore, the district court’s conclusion that defendants’ motivation was to delay generic entry, as opposed to asserting a patent in good faith, was not in error.[251]

The Third Circuit also concluded that the district court did not err in ruling that defendants had monopoly power for transdermal testosterone replacement therapies (“TTRT”). For the FTC to succeed on its monopolization claim, it had to show that defendants had monopoly power in a relevant market. “Monopoly power is the ability to control prices and exclude competition in a given market.”[252] The appellate tribunal first concluded that the lower court did not err in excluding injectable therapies from the relevant product market definition because evidence showed that AndroGel was priced much higher than injectables, that defendants did not price AndroGel against injectables, and that defendants did not consider injectable products to compete with AndorGel. The district court also did not err in finding that AndroGel had a dominant share of TTRT and that there were significant barriers to entry to this market because it considered market share data, the durability of AndroGel’s share, consumer demand, the size and strength of AndroGel’s competitors, and AndroGel’s pricing trends and practices. The evidence of monopoly power included AndroGel being the most widely prescribed TTRT, AndroGel’s share being above 60 percent prior to Perrigo’s generic entering the market, AndroGel’s profit margin being 65 percent, AndroGel’s prices increasing from 2011-2014, and the three brand-name TTRT products that entered the market from 2011-2014 having a very low share.[253]

As to remedies, the Third Circuit upheld the lower court’s ruling denying an injunction. To obtain an injunction, the FTC needed to show “a cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive.”[254] The district court did not abuse its discretion in determining that defendants reengaging in sham litigation was only a mere possibility. The FTC did not establish that defendants had a pattern or practice of filing sham litigations and did not present any evidence that any other patent infringement litigations as to the AndroGel patent since 2011were shams. In addition, generics had been on the market for three years. Finally, with the proposed injunction, the FTC sought to limit defendants’ ability to file infringement suits with respect to any patent, and the lower court concluded this was too broad.[255]

Notably, the Third Circuit reversed the district court’s $448 million disgorgement award, concluding that court’s lack the power to order disgorgement for claims brought under Section 13(b) of the FTC Act.[256] First, the text of section 13(b) authorizes courts to enjoin violators, but it is silent on disgorgement, which is a form of restitution not injunctive relief. Second, the statute’s language states that to bring a suit the FTC must believe that an entity or individual is “violating, or is about to violate,” an antitrust law. Given this language, the Third Circuit reasoned that providing for injunctive relief made sense, given that injunctions restrict future action. On the other hand, disgorgement dispossesses a violator of past gains—not for profits from ongoing or impending conduct. Third, other sections of the FTC Act specifically list out the forms of relief that can be granted; other forms of equitable remedies are not assumed to be a part of injunctive relief.

[1]        The chapter was prepared with the invaluable and excellent assistance of Megan Morley, Associate at Troutman Pepper Hamilton Sanders LLP.

[2]        15 U.S.C. § 1 (2004).

[3]        Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988).

[4]        954 F.3d 529 (2d Cir. 2020).

[5]        954 F.3d 529, 531-32.

[6]        Id. at 532.

[7]        Id. at 532-533.

[8]        Sonterra Capital, 954 F.3d at 534.

[9]        Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977).

[10]       Id.

[11]       Id. at 535.

[12]       Freedom Watch, Inc. v. Google, Inc., 816 F.3d 619 (D.C. Cir. 2019).

[13]       Id. at 499.

[14]       Id.

[15]       Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007).

[16]       Id. at 1966.

[17]       Freedom Watch, 816 Fed. Appx. at 498.

[18]       Id.

[19]       Id.

[20]       957 F.3d 184 (2020).

[21]       Id. at 189.

[22]       Id. at 187-88.

[23]       Id. at 188-89.

[24]       Id. at 189.

[25]       Id.

[26]       Id. at 190. Other requirements of class certification under Federal Rule of Civil Procedure 23(a) and (b) include: “(1) the class must be so numerous that joinder of all members is impracticable (numerosity); (2) there must be questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties must be typical of the claims or defenses of the class (typicality); [] (4) the named plaintiffs must fairly and adequately protect the interests of the class (adequacy of representation, or simply adequacy)…and (ii) the class action is the superior method for adjudication (superiority).”  Id.

[27]       Id. at 190-91 (citing In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 309 (3d Cir. 2009)).

[28]       Id. at 192-93.

[29]       Id. at 194.

[30]       Id.

[31]       Id. (citing Gates v. Rohm & Haas Co., 655 F.3d 255, 266 (3d Cir. 2011)).

[32]       Id. at 194.

[33]       Id. at 194-95.

[34]       Id. at 195.

[35]       967 F.3d 264 (3d Cir. 2020).

[36]       Id. at 270.

[37]       Id. at 267.

[38]       15 U.S.C. § 2.

[39]       Suboxone, 967 F.3d at 269.

[40]       Id. at 273.

[41]       Id. at 267-68.

[42]       Id. at 268.

[43]       Id. (According to the plaintiffs, Reckitt allegedly: “(1) engaged in a widespread campaign falsely disparaging Suboxone tablets as more dangerous to children and more prone to abuse; (2) publicly announced that it would withdraw Suboxone tablets from the market due to these safety concerns; (3) ended its Suboxone tablet rebate contracts with managed care organizations in favor of Suboxone film rebate contracts; (4) increased tablet prices above film prices; (5) withdrew brand Suboxone tablets from the market; and (6) impeded and delayed the market entry of generic Suboxone tablets by manipulating the FDA’s Risk Evaluation and Mitigation Strategy (“REMS”) process and filing a baseless citizen petition.”).

[44]       Id.

[45]       Id. at 269.

[46]       569 U.S. 27, 37-38 (2013).

[47]       Suboxone, 967 F.3d at 270.

[48]       Id.

[49]       Id. at 270-71.

[50]       Id. at 271.

[51]       Id. at 271-72 (citing In re Modafinil Antitrust Litig., 837 F.3d 238, 262 (3d Cir. 2016), as amended (Sept. 29, 2016).

[52]       Id. at 273.

[53]       Id. (citing Dewey v. Volkswagen Aktiengesellschaft, 681 F.3d 170, 183-84 (3d Cir. 2012)).

[54]       Id. (citing In re Cmty. Bank of N. Va., 622 F.3d 275, 292 (3d Cir. 2010) (quoting Greenfield v. Villager Indus., Inc., 483 F.2d 824, 832 n.9 (3d Cir. 1973))).

[55]       468 U.S. 85 (1984).

[56]       958 F.3d 1239 (9^th Cir. 2020).

[57]       Id.

[58]       Id. at 1256 (citations omitted).

[59]       Id. at 1243.

[60]       7 F. Supp.3d 955, aff’d in part, rev’d in part, 802 F.3d 1049 (9^th Cir. 2015).

[61]       Id. at 1004-08.

[62]       802 F.3d 1049, 1073.

[63]       Id. at 1087.

[64]       958 F.3d 1239, 1261 (quoting Alston, 375 F. Supp. 3d at 1102).

[65]       Ohio v. American Express Co.,585 U.S. _____, 138 S. Ct. 2274 (2018).

[66]       Id. at 2280.

[67]       Id. at 2284-85.

[68]       Complaint at 1, Federal Trade Commission v. Surescripts, LLC, No. 1:19-cv-01080 (D.D.C. Apr. 1, 2019) (hereinafter “Complaint”).

[69]       Id. at 2-3.

[70]       Id. at 3.

[71]       See.e.g., Fed. Trade Comm’n v. Qualcomm Inc., No. 17-CV-00220, 2019 U.S. Dist. LEXIS 86219 (May 21, 2019); McWane, Inc. v. Federal Trade Commission, 783 F.3d 814 (11th Cir. 2015).

[72]       Complaint at 6.

[73]       Id. at 3.

[74]       Id. at 5-6.

[75]       Id. at 6-7.

[76]       Id.

[77]       Id. at 8.

[78]       Id. at 13-14.

[79]       Id. at 14-15.

[80]       Id. at 15.

[81]       Id. at 16-17.

[82]       Id. at 19-21, 32-37.

[83]       Id. at 22-27.

[84]       Id. at 39.

[85]       Id. at 40.

[86]       Id. at 43.

[87]       Id. at 44-48, 51-52.

[88]       See 15 U.S.C. § 53(b).

[89]       424 F.Supp.3d 92, 96.

[90]       Id. at 97.

[91]       Id. (quoting 15 U.S.C. § 53(b)).

[92]       Id.

[93]       Arbaugh v. Y&H Corp., 546 U.S. 500, 515 (2006).

[94]       424 F.Supp.3d at 97 (quoting Arbaugh, 546 U.S. at 515).

[95]       253 F.3d 34 (D.C. Cir. 2001) (en banc) (per curiam).

[96]       Surescripts, 424 F.Supp.3d at 99-100.

[97]       Id. at 102.

[98]       Id. at 103.

[99]       969 F.3d 974, 982 (9^th Cir.), reh’g en banc denied, ____ F.3d ___ (9^th Cir. Oct. 28, 2020).

[100]     Federal Trade Commission v. Qualcomm, Inc., 411 F.Supp.3d 658, 675-66 (N.D. Ca.  2019).

[101]     Id. at 671-673.

[102]     Id. at 671-72.

[103]     Id. at 685-695.

[104]     Id. at 697.

[105]     Id. at 820-23.

[106]     969 F3d 974, 992.

[107]     Id. at 993.

[108]     472 U.S. 585 (1985).

[109]     383 F.3d 1124 (9th Cir. 2004).

[110]     969 F.3d at 993.

[111]     Id.at 994.

[112]     Id.

[113]     Id.

[114]     Id. at 994-95.

[115]     969 F.3d at 998.

[116]     Id. at 998-99.

[117]     Id. at 1001-02.

[118]     969 F.3d at 1004.

[119]     Id.

[120]     Id.

[121]     Antitrust Law Developments Volume 1 at 483 (Jonathan M. Jacobson ed., 6th ed.).

[122]     (Donald S. Clark Secretary FTC) Boise Cascade Corp., 107 F.T.C. 76, 210 (1986) (citing General Motors Corp., 103 F.T.C. 641, 693-96 (1984)).

[123]     Antitrust Law Developments Volume 1 at 483 (Jonathan M. Jacobson ed., 6th ed.).

[124]     Id.

[125]     Id.

[126]     Id.

[127]     Id.

[128]     International Tel. & Tel. Corp., 104 F.T.C. at 417 (quoting E. Kitner, A Robinson-Patman Primer 35 (2d ed. 1979)); accord. L. Sullivan, Handbook of the Law of Antitrust 679-90 (1977).

[129]     2020 WL 6384303, at  *1 (D. Kan Oct. 30, 2020).

[130]     Id.

[131]     Id. at *7.

[132]     Id. at *8 (quoting Purolator Prods., Inc. v. Fed. Trade Comm’n, 352 F.2d 874, 883 (7th Cir. 1965)).

[133]     Id.at *9.

[134]     Id. (quoting Texaco, Inc. v. Hasbrouck, 496 U.S. 543, 567 n.26 (1990)).

[135]     Square D Co. v. Niagara Frontier Tariff Bureau, 476 U.S. 409, 415-17 (1986).

[136]     Id. at 424.

[137]     974 F.3d 77 (1^st Cir. 2020).

[138]     Id. at 78-79.

[139]     939 F.3d 47, 51 (1st Cir. 2019).

[140]     Id. at 51-52.

[141]     Id. at 55-57.

[142]     PNE Energy Supply, 974 F.3d at 78.

[143]     Id. at 79.

[144]     Id.

[145]     Id. at 81.

[146]     Id. (quoting Breiding, 939 F.3d at 52).

[147]     Id. (quoting Breiding, 939 F.3d at 53).

[148]     Id. at 80. 

[149]     Id. at 82.

[150]     Id. at 82-83.

[151]     Id. at 83.

[152]     Id.

[153]     Id. at 87.

[154]     Id. at *1.

[155]     Id. at *28.

[156]     Id. at *2.

[157]     Id. at *7.

[158]     Id. at *12.

[159]     Id. at *5 (According to a witness, insurance providers “especially the big ones, United, Aetna, IBC, of course, and Cigna, they could just say fine, we won’t [keep a provider in-network]’ and not suffer negative repercussions.”)

[160]     Id. at *6.

[161]     Id. at *10 (citing United States v. Marine Bancorporation, Inc., 418 U.S. 602, 622, 623 n.22 (1974)).

[162]     Id.

[163]     Id.

[164]     Id. at *11.

[165]     Id. at *7.

[166]     Id. at *11. (citing Brown Shoe Co. v. United States, 370 U.S. 294, 336 (1962)).

[167]     Id. at *12 (citing Fed. Trade Comm’n v. Advocate Health Care Network, 841 F.3d 460, 475 (7th Cir. 2016)).

[168]     Id. (citing Fed. Trade Comm’n v. Penn State Hershey Med. Ctr., 838 F.3d 327, 338 (3d Cir. 2016)).

[169]     Id. at *13 (“[D]iversion ratios . . .  are “a measure of patient substitution patterns” to define the relevant geographic markets for GAC…”).

[170]     Id.

[171]     Id. at *14-15. (comparing this situation to Fed. Trade Comm’n v. Advocate Health Care, No. 15-11473, 2017 WL 1022015, at *4 (N.D. Ill. Mar. 16, 2017), where the Northern Illinois District Court similarly rejected the notion that the patients (instead of the insurers) were the most relevant buyers; nevertheless the court ultimately found a prima facie case because of unequivocal testimony from insurance executives that they “had to include at least one of the merging hospitals to offer a product marketable to employers”).

[172]     838 F.3d 327 (3d Cir. 2016).

[173]     2020 WL 7227250 at *16.

[174]     Id. at *16.

[175]     Id.

[176]     One of the four insurers even testified that they had “no concerns” about the merger. Id. at *17.

[177]     Id. at *21-22.

[178]     Id. at *22-23.

[179]     Id. at *25-27.

[180]     Id. at *19-22.

[181]     Id. at 103.

[182]     15 U.S.C. § 18.

[183]     Sabre, 452 F. Supp. 3d at 103.

[184]     Id.

[185]     Id. at 105.

[186]     Id.

[187]     Id.

[188]     Id.

[189]     Id. at 148-49.

[190]     Id. at 136.

[191]     Id. at 135-36, 138.

[192]     Id. at 135-37 (citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2287 (2018)) (discussing In US Airways v. Sabre Holdings Corp., 938 F.3d 43, 48-49 (2d Cir. 2019)).

[193]     Id. at 137.

[194]     Id. at 138.

[195]     Id.

[196]     Id. (citing Am. Express Co., 138 S. Ct. at 2287 (2018)).

[197]     Id. at 139.

[198]     Id. at 140.

[199]     Id. at 142.

[200]     Id. at 143.

[201]     Id.

[202]     Id. at 143-44.

[203]     Id. at 144.

[204]     “The HHI is calculated by summing the squares of the individual firms’ market shares. In determining whether the HHI demonstrates a high market concentration, we consider both the post-merger HHI number and the increase in the HHI resulting from the merger. A post-merger market with a HHI above 2,500 is classified as “highly concentrated,” and a merger that increases the HHI by more than 200 points is presumed to be likely to enhance market power.”  Id. (quoting FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 346-47 (3d Cir. 2016).

[205]     Id. at 144.

[206]     Id.

[207]     Id. at 145.

[208]     Id.

[209]     Id. at 146-47.

[210]     Id. at 112, 129.

[211]     Id. at 149.

[212]     15 U.S.C. § 6a (1982).

[213]     F. Hoffman—LaRoche Ltd. v. Empagran, S.A., 542 U.S. 155, 164 (2004).

[214]     Id. at 503.

[215]     Id. at 510 (“This Court, no less than other courts, has sometimes been profligate in its use of the term.”).

[216]     Id. at 511 (quoting 2 J. Moore et al., Moore’s Federal Practice § 12.30[1], p. 12-36.1 (3d ed. 2005)).

[217]     Id. at 511.

[218]     Arbaugh, 546 U.S. at 515-16. The Supreme Court also applied the clear statement rule and determined that statutory requirements were substantive instead of jurisdictional. Morrison v. Nat’l Austl. Bank, Ltd., 561 U.S. 247, 254 (2010) (extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934); Reed Elsevier, Inc. v. Muchnick, 599 U.S. 154, 160-66 (2010) (requirement under Copyright Act).

[219]     U.S. v. Hsiung, 758 F.3d 10,74 (9th Cir. 2014) (substantive); Lotes Co. v. Hon Hai Precision Industry Co., 753 F.3d 395 (2nd Cir. 2014) (substantive); Animal Sci. Prods., Inc. v. China Minmetals (3d Cir. 2011) (substantive); Minn-Chem v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012) (en banc) (substantive).

[220]     Id. at 164.

[221]     417 F.3d 1267, 1271 (D.C. Cir. 2005) (“Empagran II”).

[222]     2020 WL 5627224, at *722.

[223]     Id. at *726.

[224]     Although the court held that the alleged harm flowing from the indemnification was too speculative to serve as a basis for the plaintiff’s antitrust claim, it concluded that the harm from the alleged refusal by four of the five defendants to license SEPs on FRAND terms was sufficiently direct harm to satisfy standing requirements. Id. at *726-27.

[225]     Id. at 727-28.

[226]     Id.

[227]     AMG Capital Management, LLC, et al. v. Federal Trade Commission, No. 19-508, Petition for Writ of Certiorari filed by AMG Capital Management, LLC; Black Creek Capital Corporation; Broadmoor Capital Partners, LLC; Level 5 Motorsports, LLC; Scott A. Tucker, Park 269 LLC; and Kim C. Tucker (Oct. 18, 2019), available at https://www.supremecourt.gov/DocketPDF/19/19‑508/119538/20191018161100345_Tucker%20Cert%20Petition%20PDFA.pdf.

[228]     910 F.3d 417, 421 (9th Cir. 2018), cert. granted, 141 S.Ct. 194 (July 09, 2020).

[229]     15 U.S.C. § 53(b).

[230]     917 F.3d 147 (3d Cir. 2019).

[231]     937 F.3d 764 (7th Cir. 2019).

[232]     15 U.S.C. § 53(b).

[233]     Id.

[234]     The Seventh Circuit’s logic was not limited to FTC-specific principles. It also relied on the Supreme Court’s refusal to find implied statutory remedies where Congress did not provide them. In Meghrig v. KFC Western, Inc., the Supreme Court held that an environmental statute in which Congress permitted private plaintiffs to obtain injunctions against toxic-waste handlers did not provide an implied restitution remedy. Similarly, the Seventh Circuit reasoned that because Congress did not list restitution among the section 13(b) remedies, the FTC was foreclosed from seeking it.

[235]     976 F.3d 327 (2020).

[236]     Defendants AbbVie Inc. (“AbbVie”) and Besins Healthcare, Inc. (“Besins”) own the patent relating to AndroGel.  Initially, defendant Unimed Pharmaceuticals LLC (“Unimed”) and Besins jointly filed for the AndroGel patent. In 1999, Solvay acquired Unimed, and then defendant Abbot Laboratories (“Abbott”) purchased Solvay in 2010. In 2013, Abbott split into Abbott and AbbVie, with AbbVie taking the pharmaceutical business (including AndroGel). For ease of discussion, Unimed, Abbott, and AbbVie are referred to as “AbbVie.”  Id. at 341.

[237]     Id. at 342-45.

[238]     AbbVie, 976 F.3d at 345-46.

[239]     Id.

[240]     Id. at 338.

[241]     FTC v. Actavis, Inc., 570 U.S. 136, 153-58 (2013).

[242]     AbbVie, 976 F.3d at 356.

[243]     Id. at 356-57.

[244]     Id. at 357.

[245]     Id.

[246]     Id.

[247]     Id. at 359-60 (citing Prof’l Real Estate Invs., Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 56 (1993)).

[248]     Id. at 360.

[249]     Id. at 364-66.  “[P]rosecution history estoppel…applies when the patentee originally claimed the subject matter alleged to infringe but then narrowed the claim in response to a rejection…The patentee may not argue that the surrendered territory comprised unforeseen subject matter that should be deemed equivalent to the literal claims of the issued patent.” Id. at 362 (citing Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 733-34 (2002)).

[250]     Id. at 364-66.

[251]     Id. at 366-71.

[252]     Id. at 371 (citing Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 306-07 (3d Cir. 2007)).

[253]     Id.at 371-74.

[254]     Id. at 379 (citing United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953)).

[255]     Id. at 379-81.

[256]     Id. at 374-379.

Most limited liability company operating agreements contain provisions that address transfers of interests by the LLC members.[1]  In the absence of specific provisions in an operating agreement, statutory defaults will apply.  In privately held companies, transfers are often severely restricted by governing law, and sometimes prohibited altogether.  LLC statutes commonly permit transfers of economic interests (i.e., the right to receive allocations and distributions), but not governance rights (e.g., voting, access to information).  The bifurcation of LLC interests between economic rights and governance rights can, over time, tend to concentrate management authority in the person(s) who still possess governance rights, even though the person(s) represent only a minority of the economic interests in the LLC at present.

To address this tension, operating agreements often contain so-called “buy-sell” provisions to facilitate orderly transfers of economic interests and ensure a reasonable level of congruity between ownership of economic interests in the LLC and its governance.  Sometimes these provisions are designed to mimic an unrestricted market dynamic in which capital can be efficiently deployed and property rights easily alienated.  More often than not, however, the provisions contain cumbersome processes and ambiguous legal terms which are far removed from the goal of facilitating transfers at a price “a willing buyer would pay a willing seller.”

There are five key topics that counsel should consider when drafting buy-sell provisions:

• the events which trigger buy-sell rights (including deadlock),
• valuation of the interest,
• the form of transaction and payment terms,
• the means for resolving disputes regarding value, process, or both, and
• tax consequences.

Triggering Events.  Triggering events vary greatly based upon the nature of the LLC’s business. For example, service partnerships in which all members agree to devote substantially all of their time and attention typically list buy-sell triggers that include death, disability, resignation, and retirement.  On the other hand, an LLC organized solely as a passive real estate holding company under third party management is likely to have a very limited set of triggering events.  Where management authority is divided (either generally or with respect to approval of material transactions) in a manner that could result in deadlock, the parties may choose to include buy-sell provisions as a method for breaking (or superseding) the deadlock.

Valuation of LLC Interests.  The basis for valuing LLC interests generally falls into the following three categories: the Market-Based approach, the Income-Based approach, and the Asset-Based approach.  Some agreements reference a (seemingly) objective standard such as “fair value,” “fair market value,” or “book value;” and some go the extra step of describing the person responsible for making the determination (e.g., the company’s accountant, a panel of appraisers, or a third-party independent valuation firm).  Other agreements use a detailed formulaic approach based on some multiple of revenues, earnings, or both.  Finally, some simply reference the value as determined by an outside expert.  Among the issues often neglected in a buy-sell agreement are the impact of changed market conditions and company circumstances, extraordinary events (especially those that result in anomalous operating results), the applicability of valuation discounts (whether at the enterprise or equity owner level), or the relationship of the valuation to the amount of available insurance. For example, in today’s context, market conditions, company circumstances and extraordinary events arising from the COVID-19 pandemic and its aftermath may be relevant valuation factors.  The parties also should consider the impact of value determinations made in the context of a buy-sell transaction on subsequent equity-based transactions, such as the grant of profits interest or options.

Transaction Structure and Terms.  Buy-sell transactions can be structured as cross-purchase transactions between or among equity owners, entity purchase transactions, or a combination of the two.  The structure of the transaction not only has important tax implications, but it can also significantly impact ownership ratios and the resulting governance of the LLC.  In certain circumstances, transactions can be funded with insurance.  In others, a long-term payout may be required to ensure the soundness of the entity.  The agreement must consider release from debt obligations and other liabilities (especially those taken into account in the valuation of the enterprise); and any cash waterfalls or profits interests (with corresponding value hurdles).  Finally, the parties may want to address the possibility of a clawback in favor of the selling equity holder in the context of a future sale or other change in control transaction consummated within a defined window following the buy-sell transaction.

Dispute Resolution.  Buy-sell transactions often generate disagreement – on value, on terms, on structure, and any other issue that parties can contest.  This is particularly true when the transaction has been precipitated by alleged oppressive or other improper conduct.  The success of a buy-sell agreement is highly dependent on the parties’ (mutual) perception of fairness and willingness to share information which may be perceived to be relevant to value.  To that end, engagement of a competent neutral under well-defined conditions can help ensure a speedy end to potentially intractable disputes – especially if the agreement specifies the requisite background and qualifications of the neutral.  If parties agree to a good process up front, they can eliminate (or at least minimize) months- or years-long battles over selection of mediators, arbitrators, appraisers and other experts, access to information, and the allocation of costs of the process itself.[2]

During the COVID-19 pandemic, courts and counsel have increasingly relied on mediation in civil cases. In fact, a new ABA study comments that for civil cases many “judges, plaintiff attorneys and defense attorneys agree that mediation is the fairest way to resolve cases.”[3]  In the context of business valuation disputes, mediation presents an opportunity to implement an innovative (and cost-effective) approach in which an independent valuation expert is jointly retained by the disputing parties to serve as a neutral expert advisor to the mediator.

Tax Implications.  A buy-sell transaction is in essence a mini-acquisition, and like any other acquisition, the structure of the transaction will dictate its tax consequences for both the buyer and seller (e.g., whether the buy-out will be funded with pre-tax or post-tax dollars, whether the buyer will get a basis step-up in the entity assets or just its interest the acquired equity, etc.).  Tax consequences depend on both the structure of the transaction and the tax classification of the entity itself.  It is possible for the parties to agree up front to standard deal terms – or at least on a process to deviate from those terms so long as the after-tax position of the parties is largely preserved.  For entities taxed as partnerships, the agreement must also consider so-called “hot assets”, the impact of release from debt, the availability of Section 754 elections, and the taxation of periodic payments (especially those that are based on the future performance of the company, tied to subsequent employment or service obligations, or are open-ended in amount).  Lastly, the “new” partnership audit rules in effect for 2018 and subsequent years must be considered, as standard release language in buy-sell agreements may operate to shift pre-closing tax risks of the seller to the buyer.

Buy-sell agreements are a challenge – especially for clients who resist the reality that nothing ever stays the same.  For the alert practitioner, they also present an opportunity to deliver real value, even if its impact may not be realized until well into the future.

[1] Daniel J. Sheridan, Esq., Partner, Potomac Law Group, PLLC; Elizabeth Fialkowski Stieff, Esq., Associate, Venable LLP; Mario A. Richards, Esq., Associate, Latham & Watkins, LLP; and John Levitske, Senior Managing Director, Disputes & Economics – Valuation & Accounting, Ankura Consulting Group, LLC. Ankura is not a law firm and cannot provide legal advice. This topic addressed in this article was the subject of a presentation by the authors at the 2020 LLC Institute sponsored by the ABA Business Law Section Committee on LLCs, Partnerships and Unincorporated Entities.

[2] See Who Decides Disputed Valuation Under LLC Agreement’s Buy-Out Provision: Arbitrator or Appraiser? in New York Business Divorce (Blog Post, February 15, 2021)

[3] New ABA Study Explains Why Civil and Criminal Jury Trials are Disappearing, Jan. 11, 2021: https://www.americanbar.org/news/abanews/publications/youraba/2021/0111/disappearing-juries