Archives: Western District of North Carolina

Placeholder Class Cert Motions No Longer Needed

View David Wright's Complete Bio at robinsonbradshaw.comWe have commented before in this space about using offers of judgment to “pick off” the named plaintiff in a class action case, a tactic the Supreme Court addressed in Campbell-Ewald v. Gomez, 136 S. Ct. 663 (2016). There, the Supreme Court held that an unaccepted offer of judgment does not moot the case, at least where the defendant hasn’t actually deposited the money comprising the offer in an account payable to the plaintiff. The unsettled jurisprudence in this area has led to some strange procedural wrangling in the lower federal courts.

Judge Conrad dealt with one such maneuver – a so-called “placeholder motion for class certification” – in a recent decision. In RJR Chiropractic Center, Inc. v. BSN Medical, Inc., No. 3:16-cv-00842 (W.D.N.C. Oct. 11, 2017), the Court commented on plaintiffs’ filing of “vague placeholder motions to certify class simultaneously with their complaint,” in an effort to “beat defendants to the punch.” Id. at 4. The court took a dim view of this gambit, concluding that it was an “obsolete procedural tactic” in light of Campbell-Ewald Co.. Id. at 5. Because the complaint “faces no threat of becoming moot if [defendant unsuccessfully] attempts to pick-off [the plaintiff],” the Court was “left with a pending motion filled with vague allegations that is of no utility to either party.” Id. The placeholder motion, in the Court’s view, could not survive the “rigorous gambit of Rule 23,” “having been filed prior to any discovery” and containing no evidence supporting its contentions. Id. at 6.

Other permutations to Rule 68 lie in store, to be sure, but the “placeholder motion,” doesn’t seem to be in vogue any longer, at least in the Western District.

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Is an Institutional Investor Subject to the PSLRA’s “Professional Plaintiff” Bar?

View David Wright's Complete Bio at robinsonbradshaw.comThe Private Securities Litigation Reform Act (“PSLRA”) establishes special rules in securities class actions. One such rule, found in 15 U.S.C. Sect. 78u-4(a)(3)(B)(vi) and known as the “Five-in-Three Provision,” prevents a “person” from serving as a lead plaintiff in “more than 5 securities class actions” during any three-year period. Does that rule, though, apply to institutional investors? The plain words of the statute certainly suggest so—it is difficult to argue that an institutional investor is not a “person,” and had Congress wanted to exclude institutional investors from this prohibition, it could easily have done so. The Arkansas Teacher Retirement System, an active lead plaintiff, lost this issue in the Eastern District of Virginia last fall, when Judge Ellis found that the statutory language was clear. See Knurr v. Orbitral ATK, Inc., No. 1:16-cv-1031, 2016 WL 661157 (E.D. Va. Nov. 10, 2016) (noting that “it is doubtful that Congress would have hidden a major exemption in a single word,” echoing Justice Scalia’s phrase that “Congress . . . does not . . . hide elephants in mouseholes”).

But, as Judge Ellis also acknowledged, “one purpose of the [PSLRA] is to encourage institutional investors to serve as lead plaintiff.” And the House Conference Report pertaining to the PSLRA states that “institutional investors seeking to serve as lead plaintiff may need to exceed [the limit of lead plaintiffs] and do not represent the type of professional plaintiff this legislation seeks to restrict.” H.R. Conf. Rep. 104-369, at 35 (1995). So how to square this tension?

Recently, in Ollila v. Babcock & Wilcox Enterprises, Inc., No. 3:17-cv-109 (W.D.N.C. May 25, 2017), Judge Cogburn acknowledged these competing lines of authority but ultimately side-stepped the issue. Arkansas Teacher Retirement System, which had lost its argument to serve as lead plaintiff in Knurr, had better success with Judge Cogburn. Judge Cogburn found Knurr “persuasive,” but found “similarly persuasive” “the number of other district court cases that have held that institutional investors are not subject to the ‘five-in-three’ limitation.” Indeed, Judge Cogburn cited case law emphasizing that “the ‘majority’ view is that institutional investors are not subject to the professional plaintiff ‘three-in-five’ bar.”

Ultimately, Judge Cogburn took refuge in a section of the PSLRA that permits the court to override the “professional plaintiff limitation.” See 15 U.S.C. Sect. 78u-4(a)(3)(B)(vi). The putative financial losses of ATRS, which exceeded $5 million in the case, “dwarf[ed] those alleged by the competing institutional plaintiff,” leading the court to exercise its discretion to appoint ATRS as lead plaintiff even in the face of its activism in shareholder class actions across the country.

It remains to be seen whether the textual argument of Judge Ellis will ultimately hold sway in the Fourth Circuit.

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Securities Class Actions Continue To Rise

View Adam Doerr's Complete Bio at robinsonbradshaw.com Earlier this year, we reported that Multiple Studies Show Increase in Securities Class Actions. Cornerstone Research, one of the groups covered in our earlier report, recently issued its 2016 Midyear Assessment. This new analysis, which covers cases filed in January through June of this year, is consistent with several of the trends we reported previously, including the increasing number of securities class actions, the rise in the number of cases against smaller companies, and the increase in the number of Fourth Circuit cases.

Of particular interest is the significant increase in the number of merger & acquisition cases filed in federal courts. In the first half of 2016, there were 24 filings involving M&A transactions – a 167% increase from the second half of 2015. Given the size of this increase, it seems likely that this is related to significant changes in Delaware’s handling of merger objection litigation following the Trulia decision, and we will continue to monitor how this shift impacts merger litigation in federal courts in the Carolinas and the North Carolina Business Court.

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Multiple Studies Show Increase in Securities Class Actions

View Adam Doerr's Complete Bio at robinsonbradshaw.comRecent studies by PricewaterhouseCoopers, NERA Economic Consulting, Cornerstone, and Kevin LaCroix of D&O Diary have all found that federal securities class actions are on the rise. According to PwC, the data shows a trend towards more cases filed against smaller companies, especially for claims regarding accounting irregularities. Smaller companies also face a significant risk of claims regarding inadequate internal controls over financial reporting, likely due to their smaller size and more limited resources.

NERA found that standard federal securities class actions – complaints alleging violations of Rule 10b-5, Section 11, or Section 12 – increased for the third straight year. Both PwC and NERA determined that the number and proportion of federal cases challenging mergers and acquisitions also increased in 2015. It is unclear whether this is a result of Delaware’s increased scrutiny of merger litigation settlements, but we will monitor this trend, which also affects merger litigation in state courts, including the North Carolina Business Court.

Cornerstone analyzed the timing and progress of cases and found that the time to resolution appears to be increasing. Fewer cases were dismissed within the first year after they were filed, and the percentage of cases settled within three years also decreased. Despite this, only a small proportion of cases – just 26% — made it to a motion for class certification. The other 74% of cases were dismissed or resolved prior to class certification. When courts actually decided class certification motions, they granted them 75% of the time.

The studies were not consistent in identifying the number of cases filed in the Fourth Circuit, but all agreed that filings here are well behind those filed in the Second and Ninth Circuits, which saw more than 60% of securities class action filings. Although the Fourth Circuit did not see as much volume as these courts, one of the 10 largest settlements of 2015, a $146.3 million settlement of misrepresentation claims against an energy company, took place in the Western District of North Carolina.

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No Class Arbitration Where Arbitration Agreement is Silent on the Issue

View David Wright's Complete Bio at robinsonbradshaw.comIt is one thing for a federal trial court to decide, based on precedent and Rule 23, whether a class of individuals can be allowed – consistent with the principles of due process – to assert claims against a defendant.  But it is another – entirely – to contemplate an arbitrator making those decisions:  “class arbitration” can send chills down the spine of even the most seasoned defense lawyer. In NCR Corp. v. Jones, No. 3:15-cv-444 (Jan. 5, 2016), Judge Cogburn had to decide whether the parties’ arbitration agreement – which was silent on the subject – permitted class arbitration. (Unlike some cases, the parties in Jones agreed that the court – not the arbitrator – was empowered to make this decision).  Acknowledging that the “Fourth Circuit has not yet had an opportunity to address the precise issue of silence in an arbitration agreement as to class arbitration,” the Court noted that the circuits are “somewhat divided” on the subject. Analyzing the issue “under the principles of North Carolina contract law,” Judge Cogburn relied upon the “exclusive bilateral terms” of the arbitration agreement (i.e., the absence of a reference to arbitration with anyone other than the contracting parties) and the agreement’s reference to a single venue location. The court also weighed practical issues with class arbitration, including the fact that arbitrators may not be as knowledgeable as courts about key procedural issues like certification and the protection of absent parties. The court held that it “will not read the absence of a term regarding class arbitration to mean that the parties agreed to class arbitration.” It remains to be seen whether the employee – a declaratory defendant in the case – will take this first-impression issue to Richmond for ultimate decision.

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