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A federal judge has given Well Fargo & Co. preliminary approval of its proposed $142 million class-action settlement to compensate millions of customers swept up in the fake account scandal that led to the ouster of CEO John Stumpf in October 2016. Current Wells Fargo Chief Executive Tim Sloan said in a statement that the proposed settlement represents "a major milestone in our efforts to make things right for our customers." The Wells Fargo Scandal The scandal broke in 2013 when it was revealed that thousands of Wells Fargo sales people were pressured to open new checking and savings accounts, credits cards, and lines of credit without customer approval in order to meet quotas. The bank subsequently terminated more than 5,000 employees who were allegedly involved in the improper account openings. In September 2016, the bank agreed to pay regulators $185 million over allegations that it created approximately 2.1 million unauthorized accounts without customer approval. The Class Action Settlement One of the factors involved in working out the proposed settlement was determining how many customers were actually affected. Originally, the bank agreed to pay $110 million based on the the 2.1 million accounts identified in the deal with banking regulators. After an internal investigation revealed that company executives first learned of the unauthorized accounts problem in 2002, Wells Fargo increased the fund to $142 million. Attorneys for the plaintiffs estimated the number of unauthorized accounts to be as high as 3.5 million. The proposed settlement will cover customers who had unauthorized accounts opened beginning May 1, 2002, and compensates customers for fees that were charged based on the number of unauthorized accounts. Moreover, the payout to customers whose credit was actually damaged by unauthorized credit card accounts is based on a formula that considers any loans they took out while their credit score was impaired. Determining the settlement to be preliminarily “fair, reasonable and adequate,” the court scheduled a hearing for January 4, 2018, to decide whether to grant final approval of the settlement. Wells Fargo said the proposed settlement will resolve substantially all claims in ten other pending class actions over the account scandal. While aggrieved customers will receive notices about the claims process in the next three months, payments will not be made until after final court approval.

The Consumer Financial Protection Bureau (CFPB) has released a highly anticipated rule that bars banks and credit card companies from using arbitration clauses to prevent customers from joining class action lawsuits. The rule was initially proposed by CFPB Director Richard Cordray last year and is slated to go into effect in eight months. Currently, mandatory arbitration clauses are used in an array of financial products and the rule applies to new agreements for credit cards, auto loans, payday loans and services that provide third-party billing. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” CFPB Director Richard Cordray said in a statement. The CFPB was authorized to review the effect of these clauses by the Dodd Frank Act. The bureau’s study indicated that hundreds of millions of contracts rely on arbitration clauses that have kept disputes out of court nearly two-thirds of the time, not only for class actions but individual actions against financial service providers as well. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,” said Cordray Although arbitration clauses are still permitted, the new rule requires companies to state that consumers cannot be stopped from joining class action cases. Instead, customers must be given the option of pursuing arbitration or joining a class action in the event of a dispute . Opposition to the New Rule Congress now has 60 legislative days to overturn the rule and GOP lawmakers may utilize the Congressional Review Act to challenge the regulation (as Republicans have done with a number of rules issued in the waning days of the Obama Administration). In addition, Keith Noreika, the acting Comptroller of Currency, previously sent a letter to Cordray raising concerns about the new rule and asked the CFPB to share data that was relied on to formulate the new rule; the agency did not provide the data. Noreika also noted that the Dodd-Frank Act authorizes the Financial Stability Oversight Council to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk. The Takeaway Although critics of the rule argue that class actions are costly, result in lower awards for consumers and ultimately benefit attorneys that bring these cases, proponents contend that consumers have a right to be heard in court and the class actions serve to correct bad corporate behavior. At this juncture, It remains to be seen whether GOP lawmakers will set aside the rule or whether lobbying groups such as the U.S. Chamber of Commerce will take legal action to block the rule.

On July 13, 2017, Charlotte-based LPL Financial, the largest retail investment advisory firm and independent broker-dealer in the United States, announced that it planned to provide its advisers with a new mutual fund platform early next year to improve the way its advisors offer mutual funds in brokerage accounts with participating fund companies, reduce fees for investors and standardize adviser compensation. “With this platform, LPL is striving to preserve choice for investors while managing the evolving regulatory environment,” said Rob Pettman, LPL executive vice president of product and platform management, in the firm’s press release. ( Here ). “We will be delivering a price-competitive solution with the benefit of free exchanges across participating fund companies to help our advisors differentiate their practices in the market and serve a broad range of investors.” The new platform, known as the Mutual Fund Only (“MFO”) platform, would standardize advisers’ upfront and trailing compensation for mutual fund sales, and slightly reduce the number of fund families available to clients. Under the MFO platform, advisers will receive a 3.5% one-time upfront commission for onboarding a client, who can then transfer funds in and out of 1,500 mutual funds across 20 asset management firms without incurring additional upfront sales charges. Advisers will receive a 0.25% annual trailing commission regardless of the subsequent fund selection. Clients who currently hold positions in the eligible mutual funds can avoid the onboarding commission if they transfer their positions to an MFO account. LPL’s decision to implement the MFO platform addresses one of the compliance requirements of the Fiduciary Rule ( i.e. , disclosure of compensation), which partially went into effect in June of this year. ( Here .) The Fiduciary Rule will become fully effective in January 2018, barring any congressional legislation to repeal the Rule, changes in the effective date, or amendments/modifications to the substance of the Rule. As this Blog previously noted, the DOL recently issued a request for comment on the Rule to guide any future changes. ( Here .) While the industry is adjusting to the requirements of the Fiduciary Rule, Congress is trying to legislate it out of existence. On the same day that LPL announced the implementation of its MFO platform, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing on the Fiduciary Rule, the purpose of which was “to gather evidence” about “the unintended consequences of the DOL fiduciary rule.…” Also on the agenda for the hearing was a discussion draft of a bill written by Rep. Ann Wagner, R-Mo. that would repeal the Fiduciary Rule and replace it with a best-interest standard for retail brokers providing retirement advice. Representative Wagner previously sought to stop the DOL from finalizing the Fiduciary Rule through the Retail Investor Protection Act ( H.R. 1090 ). Though passing the House, the legislation failed to advance in the Senate. Among other things, Representative Wagner’s new legislation: requires brokers to act in a customer’s best interest by providing recommendations that “reflect reasonable diligence,” and “reflect reasonable care, skill and prudence that a broker-dealer would exercise based on the customer’s investment profile”; requires brokers to “avoid, disclose or otherwise reasonably manage any material conflict of interest with a retail customer”; and imposes enhanced disclosure obligations on brokers, who would have to disclose at the point of sale, the compensation they receive, while providing the SEC with rulemaking authority “to promulgate the content of such disclosures.” Additionally, the draft measure allows brokers to charge commissions and take third-party payments, engage in principal transactions, sell proprietary products and offer a limited menu of products. It does not, however, require brokers to “recommend the least expensive security or investment strategy.” The bill would provide an exemption for the sale of annuities, as long as those sales are governed by an advice standard that is “substantially similar” to the one contained in the bill. The Financial Services Institute, which represents independent brokers and financial advisers, “fully supports this legislation,” said FSI spokesman Chris Paulitz. Others in the industry who oppose the Fiduciary Rule, because it is considered to be too complex and costly and will force brokers to abandon clients with modest retirement accounts, also support the draft bill. Opponents of the measure believe that it will do nothing to protect investors. “It’s an unnecessary, ill-conceived, poorly written bill that will weaken protections for retirement savers without doing anything to provide meaningful protections for non-retirement accounts,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in a letter to the committee. Democrats do not support the legislation, calling it a bill that “would be devastating to low-income, middle-income and senior citizens.” ( Here .) To date, Democrats have been united in their opposition to any attempts to repeal the DOL Fiduciary Rule. Though the industry has largely opposed the Fiduciary Rule, with the partial implementation of the Rule this past June, it has taken a pragmatic approach with regard to full compliance. Indeed, as Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, of the Consumer Federation of America noted, over the past year, “firms have announced implementation plans that show that the rule is reducing the cost of advice, improving the quality of investment products, and preserving access to advice through both fee and commission accounts for even the smallest account holders.” ( Here .) LPL Financial is the latest example of a firm adjusting to the changes required under the Rule. While the industry adapts, Congress continues to seek repeal of the Rule. The CHOICE Act 2.0 is a reminder of those efforts. ( Here .) This Blog will continue to follow the developments surrounding the industry’s adaptation to the Fiduciary Rule and Congress’s efforts to repeal it.

Under Section 10 of the Federal Arbitration Act (“FAA”), a party can vacate or modify an arbitral award under four narrow circumstances: “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption…; (3) where the arbitrators were guilty of misconduct … or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers ….” 9 U.S.C. §10(a).  These grounds are the exclusive ones for vacating an arbitration award under federal law. Hall Street Associates, LLC v. Mattel Inc. , 552 U.S. 576 (2008). Under FAA, the burden is on the parties seeking to modify or vacate an award to demonstrate that the relief sought is warranted. This burden, however, often proves too difficult to overcome. The reason is rooted in the deference accorded by the courts to arbitrators in the decisions they reach.  So long as the arbitrators act within the scope of their contractually delegated authority, their interpretation of the parties’ contract, including the law and facts related thereto, prevails even if the court has a better one. One of the more common bases for seeking vacatur of an arbitral award is that the arbitrators exceeded their authority. Essentially, the movant argues that the arbitrators abandoned their interpretative role. Under Section 10(a)(4) of the FAA (discussed below), courts will vacate an award only when the arbitrators stray from their task of interpreting a contract, not when they perform that task poorly. Section 10(a)(4): Arbitrator Exceeds Authority As noted, Section 10(a)(4) of the FAA permits a court to vacate an award “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Courts have “consistently accorded the narrowest of readings to this provision.” ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co. , 564 F.3d 81, 85 (2d Cir. 2009) (citation and internal quotation marks omitted). Consequently, the courts’ inquiry is focused on “whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue .” Jock v. Sterling Jewelers Inc. , 646 F.3d 113, 122 (2d Cir. 2011) (emphasis in original) (citation omitted). Moreover, a court “will uphold an award so long as the arbitrator ‘offers a barely colorable justification for the outcome reached.’” Jock , 646 F.3d at 122 (quoting ReliaStar , 564 F.3d at 86). The Supreme Court has made it clear that “ t is not enough . . . to show that the panel committed an error—or even a serious error.” Instead, vacatur is appropriate only “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.…” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. , 559 U.S. 662, 671 (2010) (internal citations and quotation marks omitted). Thus, “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, a court’s conviction that the arbitrator has committed serious error in resolving the disputed issue does not suffice to overturn his decision.” Jock , 646 F.3d at 122 (quoting ReliaStar , 564 F.3d at 86). Against this background, Larry Bogar (“Bogar”), a former registered representative at Ameriprise Financial Services, Inc. (“Ameriprise”), learned how difficult it is to vacate an award under Section 10(a)(4) of the FAA. Bogar v. Ameriprise Fin’l Servs., Inc. , No. 1:16-CV-7199-GHW (S.D.N.Y. May 4, 2017). Background Bogar worked as a registered representative at Ameriprise, a broker-dealer. In August 2013, Bogar signed a promissory note with Ameriprise in which Ameriprise agreed to loan $143,199 to Bogar in exchange for his agreement to repay the loan with interest at 1.47% per annum, in monthly installments for nine years (the “Promissory Note”). The Promissory Note had an acceleration clause that provided if Bogar’s employment with Ameriprise ended for any reason, the “unpaid principal balance of the principal sum, plus accrued interest, shall be due and payable as of the date of the termination.” On December 7, 2015. Bogar’s employment with Ameriprise ended making the outstanding balance ($107,819.56) due and owing under the Promissory Note. Thereafter, Ameriprise demanded payment of the outstanding balance on the loan. Bogar failed to repay the outstanding debt as demanded, and the matter proceeded to arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”). Ameriprise asserted four claims for relief in arbitration, all which sought recovery for Bogar’s failure to repay the amount due on the Promissory Note. Bogar failed to appear in the arbitration. On September 28, 2016, the arbitrator issued an award in favor of Ameriprise comprising $107,819.56 in compensatory damages, plus interest at the rate of 1.47% per annum from December 7, 2015 until the award is paid in full, and attorneys’ fees and costs of $2,429.83. Bogar moved to vacate the award under the FAA on the grounds that the arbitrator exceeded his powers. Ameriprise opposed the petition and moved to confirm the award. The Court denied the petition and confirmed the award. The Court’s Decision Bogar sought vacatur on two grounds. First, Bogar argued that the arbitrator exceeded his authority because he considered Ameriprise’s claims of unjust enrichment and conversion in addition to its direct claim for breach of contract in violation of FINRA Rule 13806. Second, Bogar argued that Ameriprise failed to submit proof of non-payment on the Promissory Note required to justify relief under New York law. As to the first grounds for vacatur, the Court found that the arbitrator did not violate the FINRA rule, which provides, in pertinent part, that “a claim may not include any additional allegations.” Rule 13806 applies to arbitrations involving a member’s claim that an associated person “failed to pay money owed on a promissory note.” The Court found “that is precisely the nature of the dispute on which the Award is based.” That Ameriprise pleaded “alternative nominal causes of action” did not, said the Court, “remove its claim for recovery of the debt from the scope of Rule 13806.” Indeed, found the Court, “the basis for Ameriprise’s claim was plainly ‘that an associated person failed to pay money owed on a promissory note.’” Moreover, said the Court, “even if the Arbitrator could not consider those additional counts, the breach of contract claim, uncontested by plaintiff, provides a sufficient basis for the Award.” Noting that an “arbitrator’s rationale for an award need not be explained,” and that the “award should be confirmed if a ground for the arbitrator’s decision can be inferred from the facts of the case” (citation omitted), the Court found that it could “easily infer that the Award was based on Ameriprise’s cause of action for breach of contract,” which Bogar did not claim was beyond “the arbitrator’s power to reach ….” As to the second grounds for vacatur, the Court rejected Bogar’s argument that the “Award must be vacated because Ameriprise did not submit to the Arbitrator any proof of Bogar’s failure to make payment on the note.” In doing so, the Court noted that “ n arbitrator’s factual findings are generally not open to judicial challenge” because “a court accepts the facts as the arbitrator finds them.” Because Bogar “made no concrete showing that the arbitrator lacked sufficient evidence to support a finding of non-payment,” despite having “the opportunity to appear at the arbitration hearing to contest the evidence presented to the arbitrator,” he could not “undermine the arbitrator’s conclusions … based on unsupported speculation.” The Court denied the petition to vacate “ ecause neither of Bogar’s asserted bases come close to clearing the “high hurdle” necessary to justify vacatur of the Award.” Takeaway The Supreme Court has long-held that the FAA “promotes a national policy favoring arbitration.” See , e.g. , Hall St. Assocs. , 552 U.S. at 583-84. Among the reasons why arbitration is favored for resolving disputes include its ability to respond to the parties’ intentions and contractual agreements, its ability to offer greater flexibly and speed than litigating in court, and its cost effectiveness. In order to promote the arbitral forum and its benefits, therefore, judicial review of an arbitration award is strictly limited. Indeed, the limitations on judicial review under the FAA are designed to preserve due process, without undermining the benefits of arbitration, by rendering it “merely a prelude to a more cumbersome and time-consuming judicial review process.” Hall St. Assocs. , 552 U.S. at 587 (quotation omitted). Given the foregoing benefits and policies, Bogar learned a hard and expensive lesson: the FAA not only establishes a “high hurdle” for vacatur, but that the hurdle it imposes is virtually impossible to overcome.

On June 26, 2017, the U.S. Supreme Court ruled, in a 5-4 decision, that the three-year statute of repose in Section 13 of the Securities Act of 1933 (the “Securities Act” or the “’33 Act”) is not subject to equitable tolling under American Pipe & Construction Co. v. Utah , 414 U.S. 538 (1974). California Public Employees’ Retirement Sys. v. ANZ Sec., Inc. , No. 16-373 (U.S.) ( here ). Background ANZ Securities arose from the demise of Lehman Brothers Holdings Inc. (“Lehman”) in September 2008, and its issuance of securities during the financial crisis. Around the time that Lehman filed for bankruptcy, investors filed class action complaints in the Southern District of New York against Lehman and its former officers and directors, among others, under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and against the underwriters of certain Lehman debt offerings in 2007 and 2008 under Section 11 of the Securities Act. The class action was consolidated with other securities actions against Lehman in a single multidistrict litigation in New York. On February 25, 2011, the California Public Employees’ Retirement System (“CalPERS”) filed an individual action in California federal court against Lehman’s former officers and directors and the underwriters of Lehman’s debt securities, alleging the same violations of law as in the class action. Notably, the action was filed more than three years after the debt offerings occurred. Soon thereafter, CalPERS’s case was transferred to and consolidated with the class case in New York. In late 2011, class counsel reached a settlement with Lehman’s former officers and directors, and the underwriters. CalPERS opted out of the class settlement in March 2012 in order to continue its individual action. Several of the underwriters (including ANZ Securities, Inc. (“ANZ”)) moved to dismiss CalPERS’s Section 11 claims as time-barred under Section 13 of the Securities Act, in particular under the three-year statute of repose. The district court dismissed the action, holding that the filing of the class action complaint in 2008 did not toll the repose period under Section 13 of the Securities Act. According to court, Section 13 is “absolute” and provides for no exception, including equitable tolling, for a plaintiff who opts out of a class action. The Second Circuit affirmed, holding that Section 13 is a statute of repose making equitable tolling under American Pipe inapplicable. In re Lehman Brothers Sec. and ERISA Litig. , 655 Fed. Appx. 13, 15 (2016). In so holding, the court followed its earlier decision in Police & Fire Retirement Sys. of Detroit v. IndyMac MBS, Inc. , in which it observed that tolling under American Pipe (which is grounded in a court’s equitable powers) is inconsistent with a statute of repose. See also Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson , 501 U.S. 350, 363 (1991) (“ he equitable tolling doctrine is fundamentally inconsistent with” the statute of repose governing claims under the Securities Act). Alternatively, the Second Circuit found that even if American Pipe tolling were appropriate under Rule 23 of the Federal Rules of Civil Procedure, using a procedural rule to toll a statute of repose would “necessarily enlarge or modify a substantive right and violate the Rules Enabling Act.” See IndyMac , 721 F.3d at 109; see also 28 U.S.C. § 2072(b) (The Federal Rules of Civil Procedure “shall not abridge, enlarge or modify any substantive right.”). Finally, the court rejected CalPERS’s argument that its individual claims were “essentially ‘filed’ in the putative class complaint,” so that the filing of the class action within three years made the individual claims timely. 655 Fed. Appx. at 15. CalPERS petitioned the Supreme Court for a writ of certiorari ( here ), highlighting the split between the Second, Sixth, and Eleventh Circuits – which held that American Pipe tolling did not apply to statutes of repose under the federal securities laws – and the Tenth Circuit, which held that American Pipe could be used to toll the statute of repose under Section 13 of the Securities Act. On January 13, 2017, the Supreme Court granted the petition. The Supreme Court Ruling: A Statute of Repose Cannot Be Tolled Under American Pipe In an opinion written by Justice Kennedy, the Court affirmed the Second Circuit’s ruling and found CalPERS’s opt-out action to be untimely. As an initial matter, the Court examined the purposes of statutes of limitations and statutes of repose, noting that although both mechanisms impose time limits on liability, they have very different purposes. According to the Court, statutes of limitations “encourage plaintiffs to pursue diligent prosecution of known claims,” whereas statutes of repose “give more explicit and certain protection to defendants” by providing a “complete defense to any suit” that is not filed within a “legislatively determined period of time” after the “last culpable act or omission of the defendant.” (Citations and internal quotation marks omitted.) With these purposes in mind, the Court turned to the Securities Act, and concluded that Section 13 of the ’33 Act is a “statute of repose”. In doing so, the Court reaffirmed its finding in Lampf that Section 13 “establish a period of repose, which impose an outside limit on temporal liability.” Lampf , 501 U. S. at 363 (internal quotation marks omitted). This finding, said Justice Kennedy, was supported by both the language and the structure of Section 13.  As to the former, the Court said: The statute provides in clear terms that “ n no event” shall an action be brought more than three years after the securities offering on which it is based. 15 U. S. C. §77m. This instruction admits of no exception and on its face creates a fixed bar against future liability. The statute,  furthermore, runs from the defendant’s last culpable act (the offering of the securities), not from the accrual of the claim (the plaintiff ’s discovery of the defect in the registration statement). Under CTS < corp. v. waldburger , 573 u. s. ___ (2014)> corp. v. waldburger, 573 u. s. ___ (2014)>, this point is close to a dispositive indication that the statute is one of repose . Citations omitted. As to the latter, the Court noted that: This view < i.e. , that section 13 is a statute of repose> i.e., that section 13 is a statute of repose> is confirmed by the two-sentence structure of §13. In addition to the 3-year time bar, §13 contains a 1-year statute of limitations. The limitations statute runs from the time when the plaintiff discovers (or should have discovered) the securities-law violation. The pairing of a shorter statute of limitations and a longer statute of repose is a common feature of statutory time limits …. The two periods work together: The discovery rule gives leeway to a plaintiff who has not yet learned of a violation, while the rule of repose protects the defendant from an interminable threat of liability. Citations omitted. Second, the Court addressed the issue of tolling, noting that tolling a repose period is appropriate only when provided by legislative enactment, such as where the statute itself contains an express exception. Equitable tolling, said the Court, is not such an example because it “derive from the traditional power of the courts to apply the principles . . . of equity jurisprudence.” (Citation and internal quotation marks omitted.)  Thus, “ he unqualified nature of determination supersedes the courts’ residual authority and forecloses the extension of the statutory period based on equitable principles.” Third, the Court resolved the question whether tolling under American Pipe is legal or equitable, holding that “the source of the tolling rule applied in American Pipe is the judicial power to promote equity, rather than to interpret and enforce statutory provisions.” Indeed, said Justice Kennedy, there is nothing in American Pipe to “suggest[] that the tolling rule … was mandated by the text of a statute or federal rule.” Because American Pipe was “based on traditional equitable powers, designed to modify a statutory time bar where its rigid application would create injustice,” and because statutes of repose “supersede[] the application of a tolling rule based in equity,” the three-year repose period in Section 13 could not be tolled. Finally, the Court addressed each of CalPERS’s counter arguments. First, the Court rejected CalPERS’s argument that its case was indistinguishable from American Pipe on the ground that the time bar at issue in American Pipe was a statute of limitations, not a statute of repose. Second, the Court disagreed with CalPERS’s argument that putting a defendant on “notice as to the content of the claims against it and the set of potential plaintiffs who might assert those claims” satisfied the purpose of a statute of repose. According to the Court, notice is relevant to a statute of limitations, it is not important to a statute of repose. If CalPERS were correct, then defendants may have to defend against multiple opt-out actions after the statute of repose has run, thereby increasing their “practical burdens” and financial liability. Such uncertainty, wrote Justice Kennedy, “can put defendants at added risk in conducting business going forward, causing destabilization in markets which react with sensitivity to these matters.” Third, the Court rejected CalPERS’s argument that “dismissal of its individual suit as untimely would eviscerate its ability to opt out,” holding that “any privilege to opt out” does not override the “mandatory time limits set by statute.” Finally, the Court found no merit in CalPERS’s claim that declining to apply American Pipe tolling will create inefficiencies because absent class members will inundate district courts with protective filings. The Court found that CalPERS’s claim was likely “overstated” because there has been no such influx of protective filings in the Second Circuit, where IndyMac has been in effect since 2013. The Court rejected CalPERS’s alternative argument that did not depend on tolling, namely that the filing of a timely class-action complaint “brought” an individual “action” for all putative class members within the three-year statute of repose. The Court construed the word “action” in Section 13 to refer to a judicial proceeding or lawsuit, not to the “general content of claims,” noting the “implausibility” of CalPERS’s alternative construction: This argument rests on the premise that an “action” is “brought” when substantive claims are presented to any court, rather than when a particular complaint is filed in a particular court. The term “action,” however, refers to a judicial “proceeding,” or perhaps to a “suit”—not to the general content of claims. Whether or not petitioner’s individual complaint alleged the same securities law violations as the class-action complaint, it defies ordinary understanding to suggest that its filing—in a separate forum, on a separate date, by a separate named party—was the same “action,” “proceeding,” or “suit.” The limitless nature of petitioner’s argument, furthermore, reveals its implausibility. It appears that, in petitioner’s view, the bringing of the class action would make any subsequent action raising the same claims timely. Taken to its logical limit, an individual action would be timely even if it were filed decades after the original securities offering—provided a class-action complaint had been filed at some point within the initial 3-year period. Congress would not have intended this result. Citations omitted. The Court further reasoned that CalPERS’s alternative argument was “inconsistent with the reasoning in American Pipe itself,” because that decision was based on promoting equity. In American Pipe , any individual filings post denial of class certification still had to be timely filed. “If the filing of a class action made all subsequent actions by putative class members timely,” as CalPERS argued, “there would be no need for tolling at all.” The Dissenting Opinion Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented from the Court’s opinion. Justice Ginsburg agreed with CalPERS that when the fund decided to opt out of the class action to pursue its claims individually, the underwriters were on notice of those claims since they were already alleged in the class complaint. (“Respondents … received what §13’s repose period was designed to afford them: notice of their potential liability within a fixed time window.”)  Thus, CalPERS “simply took control of the piece of the action that had always belonged to it.” Moreover, Justice Ginsburg agreed with CalPERS’s construction of the word “action” in Section 13, stating that under American Pipe the filing of the class action complaint “commence the action for all members of the class.” (Citation omitted.) Therefore, when CalPERS opted out of the class action, its “claim remained timely.” Further, Justice Ginsburg disagreed with the majority that the purpose of a statute of repose would be thwarted by allowing CalPERS’s action to go forward: CalPERS’ statement of the same allegations in an individual complaint could not disturb anyone’s repose, for respondents could hardly be at rest once notified of the potential claimants and the precise false or misleading statements alleged to infect the registration statements at issue. CalPERS’ decision to opt out did change two things: (1) CalPERS positioned itself to exercise its constitutional right to go it alone, cutting loose from a monetary settlement it deemed insufficient; and (2) respondents had to deal with CalPERS and its attorneys in addition to the named plaintiff and class counsel. Although those changes may affect how litigation subsequently plays out … they do not implicate the concerns that prompted §13’s repose period: The class complaint disclosed the same information respondents would have received had each class member instead filed an individual complaint on the day the class complaint was filed. Footnote omitted. Finally, Justice Ginsburg observed that the decision “disserves the investing public that § 11 was designed to protect,” who, unlike CalPERS, are often unsophisticated and do not have the wherewithal to file protective actions within the repose period. As such, “those members stand to forfeit their constitutionally shielded right to opt out of the class and thereby control the prosecution of their own claims for damages.” Justice Ginsburg also warned that the majority’s decision will incentivize defendants to “slow walk discovery and other precertification proceedings so the clock will run on potential opt outs.” Justice Ginsburg noted that such maneuvers would likely increase the costs of the litigation because every “class member with a material stake in a §11 case, including every fiduciary who must safeguard investor assets , will have strong cause to file a protective claim, in a separate complaint or in a motion to intervene, before the three-year period expires.” In closing, Justice Ginsburg cautioned that “ s the repose period nears expiration, it should be incumbent on class counsel, guided by district courts, to notify class members about the consequences of failing to file a timely protective claim.” “At minimum,” said Justice Ginsburg, “when notice goes out to a class beyond <§13’s limitations period> , a district court will need to assess whether the notice alert class members that opting out . . . would end chance for recovery.” (Citation omitted.) Takeaway The Court’s decision in ANZ Securities is likely to impact federal securities litigation in several ways. First, institutional investors will no longer be able to “wait and see” whether to opt out of Securities Act class actions – that is, wait to see if there is a settlement that adequately recompenses the fund and its beneficiaries. Under ANZ Securities , the decision will have to be made within the repose period, which often occurs before there is any discovery or settlement. Second, the majority’s reasoning should apply to the five-year statute of repose found in the Exchange Act. See Merck & Co., Inc. v. Reynolds , 559 U.S. 633, 650 (2010) (relied on by Justice Kennedy; the case analyzed the five-year statute of repose under the Exchange Act). Like the statutory structure of Section 13, the language and structure of the Exchange Act is similar. See 28 U.S.C. § 1658(b) (A private right of action alleging fraud under the Exchange Act “may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.”). Since IndyMac , the Second Circuit has extended its holding to claims under the Exchange Act. See , e.g. , SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos. L.L.C. , 829 F.3d 173, 177 (2d Cir 2016), cert . denied , No. 16-372 (U.S. June 27, 2017) (extending IndyMac ’s holding to Section 10(b) of the Exchange Act); DeKalb Cty. Pension Fund v.  Transocean Ltd. , 817 F.3d 393, 413-14 (2d Cir. 2016), cert . denied , No. 16-206 (U.S. June 27, 2017) (extending IndyMac ’s holding to Section 14(a) of the Exchange Act). Notably, the Court declined to consider the foregoing cases ( here and here ) on the same day it decided ANZ Securities . Third, the Court’s ruling makes it clear that the filing of a class action complaint does not commence an individual action for members of the class; that a plaintiff’s right to opt out does not supersede the time limitation in a statute of repose; and that a defendant’s statutory right to repose is absolute – that is, it is immune to equitable tolling. The Court’s decision in ANZ Securities is likely to impact other types of litigation as well. As noted, the Court not only concluded that repose periods cannot be equitably tolled, but it did so by providing a framework for the lower courts to evaluate whether a limitations provision is properly considered to be a statute of repose. This Blog will continue to follow lower court rulings applying ANZ Securities to see whether the courts outside the Second Circuit will apply the decision to Exchange Act cases and other non-securities actions and whether the concerns articulated by Justice Ginsberg come to fruition.

On June 27, 2017, the United States Supreme Court agreed to consider whether state courts retain concurrent jurisdiction over lawsuits brought under the Securities Act of 1933 (the “’33 Act” or the “Securities Act”), or whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) pre-empts them from considering such cases. ( Here .) Resolution of the issue will address a concern for issuers, underwriters and others involved in initial public offerings (“IPOs”) – i.e. , the use of state courts to avoid application of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In recent years, the number of ‘33 Act class action filings in state court, especially in California, has grown significantly. Though, many federal courts have found that SLUSA removed subject matter jurisdiction over ‘33 Act class actions from the states, others, most notably in the Ninth Circuit, have reached the opposite conclusion, finding concurrent federal and state jurisdiction over such actions. On June 27, 2017, the Supreme Court granted the petition for a writ of certiorari ( here ) in Cyan, Inc. v. Beaver County Employees Retirement Fund , 15-1439, to consider whether state courts lack subject matter jurisdiction over covered class actions under SLUSA that allege only Securities Act claims. Legal Issues In 1995, Congress passed the PSLRA to address perceived abuses in securities class action litigation. Among other things, the PSLRA imposed heightened pleading requirements on plaintiffs filing securities class action complaints in federal court, as well as an automatic stay of discovery during the pendency of a motion to dismiss those complaints. Thereafter, plaintiffs began bringing securities class actions in state court, rather than in federal court, seeking relief under state law rather than under federal law. Plaintiffs also bypassed federal court in favor of state court for class actions brought under the Securities Act class where state and federal courts have concurrent jurisdiction. This phenomenon lead to concerns by those involved in IPOs, as well as legal commentators, that plaintiffs were using state courts to circumvent the PSLRA. In 1998, Congress enacted SLUSA to address those concerns. Among other things, SLUSA eliminated concurrent state court jurisdiction over “covered class actions” (defined as “any damages action on behalf of more than 50 people”). Congress did so to ensure that, among other things, federal securities claims remained in federal court subject to the PSLRA’s heightened pleading requirements. Despite what seemed to be straightforward legislation, judicial interpretation of SLUSA proved to be less than uniform. Following enactment of SLUSA, the number of state court class action filings declined. In the cases that were filed in state court, defendants often removed them to federal court, where the issue was hotly litigated. In a few cases, however, the courts ( e.g. , mostly in the Ninth Circuit, and in particular in California) remanded the actions to the state courts, finding that SLUSA applied only to state securities law class actions. Notably, these courts found that concurrent jurisdiction found in the Securities Act survived SLUSA. Concerns about the issue increased exponentially after a California intermediate appellate court decided Luther v. Countrywide Financial Corp. , 195 Cal. App. 4th 789 (2011) (“Countrywide”). In Countrywide , the plaintiffs filed a state-court class action asserting ’33 Act claims against the issuers of mortgage-backed securities not traded on a national exchange. Reversing the lower court’s dismissal for lack of subject matter jurisdiction, the California Court of Appeal, Second Appellate District, held that state courts after SLUSA retain concurrent jurisdiction over class actions alleging only ’33 Act claims. Since Countrywide was decided, state-court filings alleging ’33 Act claims increased significantly. As noted by Cyan and one of the amici, California state-court filings rose by 1400 percent after Countrywide . In the 12 years between the enactment of SLUSA and the Countrywide decision, only six class actions alleging Securities Act claims were filed in California state courts – an average of one case every two years. In the five years after Countrywide , at least 38 class actions alleging ’33 Act claims were filed in California state courts – an average of more than seven cases every year. Fourteen were filed in 2015, and 10 were filed within the first five months of 2016. While many lower courts noted the split of authority on whether concurrent jurisdiction survived SLUSA, the issue has evaded review by the courts of appeals – procedurally, district court decisions involving motions to remand are not reviewable on appeal under 28 U.S.C. § 1447(d) (“An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise . . . .”), and decisions from lower courts are unlikely to be reviewed since they require discretionary approval, which is seldom granted. Cyan, Inc. v. Beaver County Employees Retirement Fund In May 2013, Cyan Inc. (“Cyan”) issued shares of stock pursuant to an initial public offering. Approximately one year later, following an announcement of weaker-than-expected results, shareholders sued the company in California superior court, seeking relief under the Securities Act. The plaintiffs did not allege any state-law claims. Cyan moved for judgment on the pleadings for lack of subject matter jurisdiction. The court denied the motion, explaining that because of Countrywide its “hands tied . . . .” The California Court of Appeal denied Cyan’s petition for a writ of mandate and/or prohibition or other relief. Thereafter, the California Supreme Court denied Cyan’s petition for review. In May 2016, Cyan petitioned the U.S. Supreme Court for a writ of certiorari. Cyan argued that review was appropriate despite the absence of conflicting appellate authority because of the “bitter[]” division among the lower courts about the question presented and because the issue often evades appellate review: Federal district courts in removal cases have divided bitterly over the question presented. Because of the procedural roadblocks to review of remand orders, federal appeals courts are unlikely to rule on, let alone resolve, the conflict. Absent this Court’s guidance, the district courts will remain in disarray with no end in sight. Beaver County Employees’ Retirement Fund opposed the petition ( here ), arguing that certiorari should be denied because of the absence of conflicting appellate authority and because the court below correctly determined that concurrent jurisdiction survived the enactment of SLUSA. Two amici briefs were filed in support of Cyan. The first brief ( here ), filed by the Securities Industry and Financial Markets, the U.S. Chamber of Commerce and the National Venture Capital Association, argued that the petition should be granted to undo “the shift in federal securities litigation from federal to state courts” and “because the decision below conflicts with SLUSA’s plain language and purpose.” The second brief ( here ), filed by a group of law professors, argued that the Court should grant the petition “to give guidance to district courts” about the interplay between the PSLRA and SLUSA, especially given the differences of opinion among the district courts over what Congress intended in passing SLUSA. Regardless of what one believes SLUSA’s jurisdictional amendments did, it is indisputable that Congress could not have intended the Securities Litigation Uniform Standards Act to result in this morass of inconsistent rulings across the country. Nor could Congress have intended that cases filed in California be litigated in state court, while substantively identical cases filed in New York are litigated in federal court. Only a decision by this Court can put an end to the inconsistencies in how district courts apply SLUSA. On October 3, 2016, after the parties and amici submitted their briefs, the Court invited the Solicitor General to express the government’s views on the issue. On May 23, 2017, the Solicitor General filed a brief ( here ), recommending that the Court grant certiorari based on “the frequency with which this issue arises, the ongoing confusion in the lower courts, and the obstacles to appellate resolution of the question presented.” As noted, on June 27, 2017, the last day of the Term, the Court granted Cyan’s petition. Takeaway Whether state courts retain jurisdiction for Securities Act lawsuits after SLUSA is an important question. As the law professors argued in their brief, there is a need for uniformity and consistency. For example, the heightened pleading requirements found in the PSLRA have no application in state court – “ any of the provisions apply only to actions brought ‘pursuant to the Federal Rules of Civil Procedure,’ i.e. , brought in federal court. 15 U.S.C. § 77z-1(a).” Also, the automatic stay of discovery under the PSLRA applies only in federal court – state courts “usually do not stay discovery.” “This is particularly important” because the costs of discovery can be high “and could cause defendants to settle” an action “rather than incur those costs.” Moreover, the risk of inconsistent judgments can be eliminated by a uniform rule. As the professors noted: “ iling in state court can also allow a plaintiff to avoid consolidation with federal actions asserting the same claims, leading to identical cases proceeding simultaneously in federal and state court.” Further, “state courts are not bound by federal court decisions,” except for those decided by the U.S. Supreme Court. Without a uniform rule, each state “will be a circuit unto itself, leading to a patchwork of legal standards for nationally traded securities.” Such a result would conflict with the “national interest in consistent enforcement of the federal securities laws.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit , 547 U.S. 71, 78 (2006) (“ he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated.”). The question of whether state courts retain jurisdiction over Securities Act claims after SLUSA has divided the courts and litigants for years. The Supreme Court now can answer this important question and provide the uniformity and consistency the courts and litigants desperately need. This Blog will continue to follow the case. Argument should be scheduled for the Court’s next term, which begins in October.

On Monday, June 26, 2017, the United States Supreme Court agreed to consider whether the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”) extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission (“SEC”) and, thereby, fall outside the Act’s definition of “whistleblower.” Digital Realty Trust v. Somers , 16-1276. In Digital Realty Trust v. Somers , the Ninth Circuit joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act of 2002 and other laws, rules, and regulations. (Discussed here .) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied the Act’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C. , 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2), which extends the anti-retaliation protections to those who make disclosures of suspected violations, whether the disclosures are ma de internally or to the SEC. Id . at 630. This split among the circuits provided support to Digital Realty to convince the Supreme Court to take its case. The Court’s June 26, 2017 order granting Digital Realty’s petition for a writ of certiorari can be found here . The Cert. Petition, the Opposition, and the Amici Briefs In seeking the Court’s review, Digital Realty highlighted the circuit split as the primary reason the why the Court should consider the case. Underscoring the importance of the split, the company opened its cert. petition ( here ) by stating “ his case presents a clear and intractable conflict on an important and recurring question of statutory interpretation,” and stated the following as the overarching reasons for granting petition: This case presents a straightforward conflict among the courts of appeals on an important and recurring question involving the interpretation of the Dodd-Frank Act. In the decision below, the Ninth Circuit expressly recognized that it was deepening an existing conflict on the question whether the anti-retaliation provision for “whistleblowers” extends to individuals who have not reported alleged misconduct to the SEC and thus fall outside the Act’s definition of a “whistleblower.” Three courts of appeals and at least two dozen district courts have weighed in on that issue. One court of appeals has held that the anti-retaliation provision reaches only individuals who qualify as “whistleblowers.” Two courts of appeals, including the court below, have held (over dissents) that the anti-retaliation provision applies to all individuals, regardless of whether they qualify as “whistleblowers” under the statutory definition. That conflict cries out for the Court’s review, and this case is an optimal vehicle in which to resolve it. The arguments on both sides of the conflict are well developed, having been aired in dozens of opinions. The question presented is one of substantial legal and practical importance, potentially affecting every publicly traded company. And this case presents the question squarely and cleanly. Because this case readily satisfies the criteria for the Court’s review, the petition for a writ of certiorari should be granted. The question for the Court, said the company, is whether the anti-retaliation provisions of the Act extend to individuals who have not reported alleged misconduct to the SEC and, thus, fall outside the statutory definition of “whistleblower.” In opposition to the petition ( here ), the respondent, Paul Somers, an executive fired by the San Francisco-based company after he complained internally about alleged misconduct by his supervisor but never reported the matter to SEC, argued that there was no meaningful circuit court split, stating that any split was based on one court ruling without the benefit of the SEC’s position, thereby rendering the split “shallow” and subject to resolution on its own: he circuit conflict is shallow and may ultimately resolve itself. The Fifth Circuit was not only the first circuit to resolve the issue, but the only circuit to do so without the benefit of the SEC’s direct participation. There is accordingly no split (2-0) in the courts of appeals where the panel had the benefit of hearing directly from the expert agency tasked with administering this particular statute. The Fifth Circuit’s reasoning has since been roundly criticized by a majority of lower courts, and the SEC has carefully articulated a host of reasons that the Fifth Circuit erred. Other circuits will soon have an opportunity to consider the issue; if they continue following the majority view, there is every reason to believe the Fifth Circuit will reconsider the question at the appropriate time. Somers also argued that the Ninth Circuit’s ruling did not need to be reviewed because it was correct; that is, the court had correctly interpreted and applied the applicable SEC regulatory provisions. And the SEC’s construction is not only reasonable but correct: petitioner’s view would render entirely insignificant a critical anti-retaliation safeguard, and do so in a way that would upset the proper operation of both Dodd-Frank and Sarbanes-Oxley. The SEC has carefully balanced the competing interests in this area, and resolved the question presented in a manner that is consistent with the statute and advances Congress’s intent. Its authoritative construction controls, and petitioner’s contrary position is mistaken. The petition should be denied. The case has attracted significant attention from the business community. Indeed, numerous third parties filed amici briefs with the Court, all in support of Digital Realty: 1. The U.S. Chamber of Commerce argued that the Ninth Circuit’s ruling “would greatly expand the number of employees authorized to pursue the enhanced remedies of the Act, and the period of time in which they may sue for alleged retaliation, without yielding the law enforcement benefits Congress intended when it enacted a ‘bounty’ and heightened protections for persons who complain to the Securities and Exchange Commission.” ( Here .) 2. The New England Legal Foundation and Associated Industries of Massachusetts argued that the Ninth Circuit impermissibly read into the Act language that was not used by Congress, thereby “extending Dodd-Frank’s whistleblower provision to employees who are not Dodd-Frank whistleblowers.” ( Here .) 3. Lime Energy, a provider of energy savings to utility clients, and a defendant in a wrongful termination action under the Act, argued that the circuit split necessitated action by the Court, and sided with the Fifth Circuit contending that the court’s analysis was the correct one: it “makes far more sense and is faithful to the statutory scheme, distinguishing between Dodd-Frank’s definition of a ‘whistleblower’ and the three categories of protected activity.” ( Here .) 4. DRI–The Voice of the Defense Bar, an international organization of attorneys who defend the interests of businesses and individuals in civil litigation, argued that the Ninth and Second Circuits’ “expansion of Dodd-Frank’s anti-retaliation provision moots the streamlined administrative dispute-resolution process for claims of retaliation for reporting suspected securities-law violations in the Sarbanes-Oxley Act, undercutting the efficiencies Congress intended. Takeaway In considering the case, the Court will have the opportunity to not only address the circuit split on the issue, but also the issue of the “Chevron deference” doctrine enunciated in the Court’s 1984 decision Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. Under this doctrine, courts defer to agency interpretations of statutory mandates unless the interpretations are unreasonable. With Justice Gorsuch now on the Court, it remains to be seen whether the doctrine will survive scrutiny. While sitting on the Tenth Circuit, then-Judge Gorsuch called the doctrine “a judge-made doctrine for the abdication of the judicial duty.” As noted in this Blog’s original post discussing the case ( here ), Chevron deference was a decisive factor in the Second Circuit’s ruling. The doctrine was also a factor in the Ninth Circuit’s opinion. If Justice Gorsuch’s view prevails, the Court’s analysis of the Act’s language and a decision on whether that language is as expansive as the Second and Ninth Circuits have held or as narrow as the Fifth Circuit has held, will have a profound impact on corporate whistleblowers. Indeed, if the Court sides with the Second and Ninth Circuits, the protections afforded under the Act will apply broadly and protect a wide number of individuals, regardless of whether they have reported alleged wrongdoing to the SEC. This result could mean an increase in the number of wrongful termination and/or retaliation lawsuits under the Act. However, if the Court sides with the Fifth Circuit’s narrower interpretation, the protections afforded under the Act will reach fewer persons and result in fewer filed actions. Such a result could court deter employees from reporting misconduct internally, which is the process advocated by the business community. This Blog will continue to follow the case. Argument should be scheduled for the Court’s next term, which begins in October.

As noted in a prior Blog post ( here ), the Labor Department's fiduciary rule, at least the first phase of the rule, has gone into effect, though its future remains uncertain. On June 9, 2017, two provisions of the rule, which requires financial advisers and other investment professionals to act in the best interest of their clients and to disclose any potential conflicts of interest when providing retirement advice, became effective. One expands the definition of who is a fiduciary, and the other establishes impartial conduct standards. While the future of the Rule is shrouded in uncertainty, state regulators are taking matters into their own hands. In Nevada, for example, under a law that takes effect on July 1, 2017, brokers, sales representatives, investment advisers or their representatives will be required to meet a fiduciary standard when providing investment advice. The existing fiduciary law only applies to financial planners; brokers, sales representatives, investment advisers or their representatives are excluded from that requirement. Prior to the new law, brokers operated under the suitability standards enforced by the Financial Industry Regulatory Authority Inc. ("FINRA"), which requires them to sell products that meet a client's risk tolerance, liquidity needs, and investment objectives. By contrast, investment advisors, are required to satisfy the requirements of the Investment Advisers Act of 1940, which provides that investment advisers must give advice that is in a client's best interests -- that is, meet a fiduciary standard.  Under Nevada's current fiduciary duty law, a financial planner must disclose any "profit or commission" they receive based on their guidance to clients and must make a "diligent inquiry" about a client's financial condition and goals. A financial planner is defined as “a person who for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.” The new law does not disturb the exclusions from the definition of financial planner for attorneys, CPAs, and insurance producers.   Under the new law, Nevada’s securities administrator is authorized to adopt regulations that define violations of the fiduciary duty and prescribe any “means reasonably designed to prevent” violations of acts defined as a violation of the duty.  Any rulemaking under this authority will apply only to brokers and their representatives, and investment advisers and their representatives.  It does not apply to any other financial planners.  Investors can sue financial planners for “the economic loss and all costs of litigation and attorney’s fees” that result from following a financial planner’s advice where the financial planner violated the fiduciary duty, was “grossly negligent” in offering the financial advice, or otherwise violated Nevada law in “recommending the investment or service.” One issue left unaddressed by the new law is whether brokers are subject to a continuing duty of care or whether their fiduciary duty is limited to the point of sale. Some observers believe the law could be challenged under federal preemption. If brokers are not required to register as fiduciaries at the federal level, Nevada may not have the authority to impose a fiduciary standard on them. Nonetheless, more states may be moving in the direction of a fiduciary standard. Other states, such as New York and California, are considering fiduciary statutes of their own. Additionally, courts in California, Missouri, South Carolina and South Dakota have recognized a fiduciary relationship between brokers and their clients, and a number of states impose standards that exceed FINRA rules. Takeaway The fate of the DOL's fiduciary rule looms large. If Congress legislates the Rule out of existence, or the DOL makes changes to, or delays implementation of, the remainder of the Rule, other states may follow Nevada’s lead. Given the uncertainty of the Rule's continued implementation, and questions about whether the Securities and Exchange Commission will step into the fray , it is more likely the states will fill the void.  From the investors' perspective, especially retirees, such action would be welcome.

Last year, this Blog wrote about a qui tam action that was dismissed by the Sixth Circuit because of the application of the public disclosure bar ( here ). In United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank , 816 F.3d 428 (6th Cir. 2016), the Sixth Circuit held that prior public disclosures are “substantially the same” for purposes of the public disclosure bar if they “encompass” the allegations in the subject qui tam action even though the prior disclosures do not reveal the specific fraud alleged. Following the dismissal, ABLE filed a petition for a writ of certiorari with the Supreme Court. In its petition, ABLE argued that Sixth Circuit’s definition of “substantially the same” differed materially from that of the Seventh and Ninth Circuits. In that regard, ABLE contended that the Seventh and Ninth Circuits had considered and rejected the Sixth Circuit’s “broad-brush approach,” holding that “a complaint that is similar only at a high level of generality” does not “trigger[] the public disclosure bar.” United States ex rel. Mateski v. Raytheon Co. , 816 F.3d 565, 575 (9th Cir. 2016); United States ex rel. Goldberg v. Rush Univ. Med. Ctr. , 680 F.3d 933, 936 (7th Cir. 2012). Instead, only disclosures alleging “that a particular had committed a particular fraud in a particular way” trigger the bar. Goldberg , 680 F.3d at 935. In its opposition, U.S. Bank argued that there was no substantive split because the courts applied the same legal standard: “The Sixth, Seventh, and Ninth Circuits all apply the same overarching rule: public disclosures bar a given complaint when they reveal allegations or transactions that are substantially the same as those presented in the complaint and so suffice to put the government on notice of its allegations.” Brief in Opposition at 24 & n.8 (noting that the First, D.C. and Tenth Circuits are each in accord). On October 3, 2016, the United States Supreme Court invited the U.S. Solicitor General to express the U.S. Government’s views on the issue. On April 14, 2017, the Solicitor General did so , arguing, in language substantively similar to the argument advanced by U.S. Bank, that “a writ of certiorari should be denied.” The approach is consistent with decisions from other courts of appeals. The different outcomes in those cases do not result from the application of competing legal standards, but simply reflect the fact that many applications of the public disclosure bar will depend upon a close examination of the relevant facts. The Solicitor General also argued that, from a practical perspective, there was nothing in the decisions at issue that interfered with the government’s authority to control the cases that get dismissed – a primary purpose of the public disclosure bar. A further, practical reason exists to decline review. The FCA empowers the United States either to dismiss or to prevent the dismissal of any complaint that is potentially subject to the public disclosure bar. Because the bar is designed to protect the government’s interest in preventing parasitic lawsuits, the government’s authority to control which cases are dismissed is generally sufficient to vindicate the primary purpose of the public disclosure bar. At the time of the post last October, this Blog believed, like ABLE, that there was a split among the circuits that required resolution by the Supreme Court. That belief was misplaced. On May 22, 2017, the Court denied ABLE’s petition.

On June 23, 2017, President Trump signed legislation that is intended to protect whistleblowers who report problems at the Department of Veterans Affairs ("VA"), and improve employee accountability for misbehavior and abusive conduct. In April of this year, the president signed an executive order that created the Office of Accountability and Whistleblower Protection ("OAWP") within the VA to investigate allegations of misconduct – including retaliation against whistleblowing employees who reported abuses — and identify systemic barriers that have prevented senior VA officials from addressing such problems, including with disciplinary action.  At the time of the executive order, VA Secretary David Shulkin told reporters that “ ccountability is an important issue to us at VA and something that we’re focusing on to make sure that we have employees who work and are committed to the mission of serving our veterans, and when we find employees that have deviated from these values, we want to make sure that we can move them outside of VA and not have them working at VA.” The bipartisan legislation, the VA Accountability and Whistleblower Protection Act of 2017, makes the OAWP permanent. The Act gives the VA Secretary more authority to fire misbehaving or underperforming employees, shorten the appeals process for that firing, prohibits employees from being paid while they pursue the appeals process, and revokes bonuses from underperforming staffers and, in certain cases, reduces the pensions of executive-level employees who are disciplined. It also includes new protections against retaliation for employees  who file complaints with the VA general counsel's office ( i.e. , whistleblow) and shortens the process of hiring new employees to fill a workforce shortage at the VA.    The Act marks the second time Congress has focused on changing the disciplinary process at the VA. In 2014, Congress tried to prevent senior executives from appealing disciplinary measures at the VA to the Merit Systems Protection Board in the Veterans Access, Choice and Accountability Act. However, the Court of Appeals for the Federal Circuit ruled that the act was unconstitutional because it violated the Constitution’s appointments clause. Some observers believe that the president is fulfilling a campaign promise to veterans. On the campaign trail, the president called the VA, the government’s second-largest department, the “most corrupt” and “most incompetently run agency in the United States.” At the signing ceremony for the new law, the president spoke about the VA wait time scandal in 2014 that saw veterans, who had been put on secret wait lists by some VA workers, die while waiting for appointments for medical exams. "What happened was a national disgrace, and yet some of the employees involved in these scandals remained on the payrolls," Trump said. "Today, we are finally changing those laws." Proponents of the measure believe the legislation will help to usher in a new era of accountability and integrity at the VA and place greater emphasis on patient outcomes. Although public employee unions opposed the measure, the law had overwhelming bipartisan support in Congress.   Since the 2014 scandal, the VA has been under a microscope from veterans organizations, Congress, and the public. This increased focus has revealed the existence of a significant number of misbehaving VA employees, as well as insufficient laws and policies in place to reprimand or remove them for violating ethical or legal standards. "There's nothing more demoralizing to our workforce and to our veterans than when the VA is forced to take employees back who have deviated from those values," Secretary Shulkin said. The new law follows a trend of whistleblower programs that have been implemented by the federal government to address fraud and other wrongdoing. In particular, the SEC, CFTC and the IRS all have whistleblower programs, and whistleblowers who report wrongdoing under the False Claims Act, are entitled to a percentage of any money recovered by the government (as are whistleblowers who report wrongdoing to the foregoing agencies). The question remains, however, whether whistleblowers under the new law will receive financial rewards for reporting wrongdoing at the VA.

Since the early 1900s, tortious interference with contractual relations has been a viable cause of action in New York. E.g. , S.C. Posner Co. v. Jackson , 223 N.Y. 325, 332 (1918); Lamb v. Cheney & Son , 227 N.Y. 418, 421 (1920).  It occurs when a business or individual who is not a party to a contract intentionally disrupts a business relationship formed by a contract. Lama Holding v. Smith Barney , 88 N.Y.2d 413, 424 (1996). Under New York law, an action for interference with a contractual relationship requires the existence of a valid, enforceable contract between the plaintiff and a third party, the defendant’s knowledge of that contract, the defendant’s intentional procurement of the third-party’s breach of the contract without justification, an actual breach of the contract, and damages resulting therefrom. NBT Bancorp v. Fleet/Norstar , 87 N.Y.2d 614, 621 (1996); RLR Realty Corp. v. Duane Reade Inc. , 145 A.D.3d 444, 445 (1st Dept. 2016). When the claim involves a corporate officer alleged to have personally interfered with a contract between the corporation and a third party, the plaintiff must satisfy a heightened pleading standard. Joan Hansen & Co. v. Everlast World’s Boxing Headquarters Corp. , 296 A.D.2d 103, 108-109 (1st Dept. 2002).  Thus, to plead liability for tortious interference with contract against a corporate officer, the complaint must allege that the officer’s acts were either outside the scope of his/her employment, or, if within the scope of employment, that the officer personally profited from the acts in contravention of the corporation’s interests. Id. ; Hoag v. Chancellor , 246 A.D.2d 224, 228 (1st Dept. 1998). Moreover, “ pleading must allege that the acts complained of, whether or not beyond the scope of the defendant’s corporate authority, were performed with malice and were calculated to impair the plaintiff’s business for the personal profit of the defendant.” Joan Hansen & Co. , 296 A.D.2d at 110 (internal citations omitted). TC Tradeco, LLC v. Karmaloop Europe, AG Dismissal for failure to satisfy the heightened pleading standard was at issue in TC Tradeco, LLC v. Karmaloop Europe, AG , 2017 NY Slip Op. 31217(U) , in which Justice Oing of the Supreme Court, New York County, Commercial Division dismissed a case based on, inter alia , a claim of tortious interference with contractual relations by a corporate insider. Background The case arose from a dispute relating to an Inventory Supply Agreement (“ISA”) between Karmaloop, Inc. and certain of its subsidiaries (“Karmaloop”) and the plaintiff TC Tradeco, LLC (“Tradeco”), as well as a dispute relating to a Payment Protection Agreement (“PPA”) between Karmaloop and Capstone Partners, LLC (“Capstone Partners”) and Greg Selkoe. The parties entered into the PPA to provide Tradeco with security after Karmaloop had defaulted on their payment obligations pursuant to the ISA. Defendant Brian Davies (“Davies”) signed the PPA on behalf of Capstone Partners. Defendant Selkoe signed a personal guarantee agreeing to be liable for any breach by Karmaloop of the PPA. The decision at issue involved a motion to serve a second amended complaint in which, among other claims, Tradeco sought damages against Davies for tortious interference with contract. The Court’s Ruling On the tortious interference with contract claim, the Court found that Tradeco failed to satisfy the heightened pleading standard required by the courts: Here, plaintiff has failed to plead sufficient facts to show that Davies acted for personal profit, independent of any benefit bestowed on CRS Capstone as a corporate entity. In its second proposed amended complaint, plaintiff merely alleges that both defendant Capstone Partners and/or Defendant CRS agreed in that it shall not pre-approve or authorize Karmaloop to make any payment to any person or entity if Karmaloop is not then current on any and all sums then owed. Such an allegation, standing alone, is insufficient to subject defendant Davies to a tortious interference claim. Plaintiff’s allegation that Davies personally profited from his procurement of the breach of the does not eliminate the above-noted pleading deficiency. Without more, the proposed pleading is palpably insufficient. Internal quotations and citations omitted. Takeaway As discussed, when seeking to hold corporate officials personally responsible for the company’s breach of contract under a theory of tortious interference with contractual relations, the plaintiff must satisfy “an enhanced pleading standard.” Joan Hansen , 296 A.D.2d at 109. This means that the plaintiff must come to court with facts, not conclusions. Tradeco failed to plead such facts ( i.e. , facts demonstrating that Davies acted for his personal profit, independent of any benefit bestowed on the company), and learned that its failure to plead the facts necessary to establish the elements of a wrongful and intentional interference with a contractual relationship sufficed to dismiss its claim. Id . at 110. TC Tradeco , therefore, stands as a reminder that “conclusory allegations — claims consisting of bare legal conclusions with no factual specificity — are insufficient to survive a motion to dismiss.” Godfrey v Spano , 13 N.Y.3d 358, 373 (2009).

Jimmy Smith is widely considered to have been one of the most influential and accomplished jazz musicians of his time, if not in jazz history. Smith, who died in 2005, revolutionized the use of the Hammond B3 organ in modern jazz, laying the groundwork for generations of jazz musicians to come. Estate of James Oscar Smith v. Cash Money Records, Inc. In 2013, rapper/singer/songwriter Drake released Pound Cake/Paris Morton Music 2 (“Pound Cake”) on his album, Nothing Was the Same . The track included a 35 second sample of the “Jimmy Smith Rap” (the “Rap” or “JSR”), a spoken word narrative that appeared on Smith’s 1982 album Off The Top .  Drake edited the excerpt of the Rap by moving and deleting words; however, he did not add any words to the sample. Approximately one week before Drake released Nothing Was the Same , a music publisher that represents songwriters in negotiating the licensing of copyrights reviewed an advance copy of the album’s credits. The publisher noticed that Drake had secured a license for the recording, but not the composition, of the Rap. Thereafter, the publisher informed Jimmy Smith’s estate (the “Estate”) that Drake was using a portion of the Rap in the Pound Cake track. Two months after Drake released Nothing Was the Same , the Estate sent a cease and desist letter to the defendants, informing them that it had a copyright interest in the Pound Cake track. After the Estate sued the defendants, both parties moved for summary judgment. On May 30, 2017, William H. Pauley III, United States District Court Judge for the Southern District of New York, ruled that, although the case was not ripe for summary judgment on the question of whether the defendants infringed upon the Smith copyright, it was ripe for summary judgment on the issue of fair use. The Court found that Drake’s 35 second use of the Rap was permissible under the fair use doctrine, even though Drake and his record label failed to obtain the publishing rights to the song. The Ruling Copyright Infringement As an initial matter, the Court addressed whether the defendants had infringed upon the Estate’s claimed copyright of the Rap. The Court concluded that neither party was entitled to summary judgment because genuine issues of material fact existed as to whether Smith was the author of the Rap and whether the sample used by Drake was entitled to copyright protection based on a subjective assessment of the similarity between Pound Cake and the Rap. Fair Use Having declined to grant summary judgment on the infringement claim, the Court turned to the defendants’ fair use affirmative defense. In doing so, the Court considered the four nonexclusive factors set forth in Section 107 of the Copyright Act of 1976: 1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. Purpose and Character of the Use Courts have referred to this factor as “ he heart of the fair use inquiry” because it focuses on the nature and purposes of the allegedly infringing use. Davis v. The Gap, Inc. , 246 F.3d 152, 174 (2d Cir. 2001). Central to the inquiry is “whether and to what extent the new work is ‘transformative.’” Campbell v. Acuff-Rose Music, Inc. , 510 U.S. 569, 579 (1994). The reason: “ he more the appropriator is using the copied material for new, transformative purposes, the more it serves copyright’s goal of enriching public knowledge and the less likely it is that the appropriation will serve as a substitute for the original or its plausible derivatives.” Authors Guild v. Google, Inc. , 804 F.3d 202, 214 (2d Cir. 2015). Accordingly, the relevant inquiry “is whether the new work merely supersedes the objects of the original creation, or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” Campbell , 510 U.S. at 579 (internal quotation drakesamplefairuse s omitted). Applying these principals, the Court found that Pound Cake fundamentally altered the message of the Rap.  By changing the words from “Jazz is the only real music that’s gonna last” to “Only real music is gonna last,” Drake had “transformed Jimmy Smith’s dismissive comment about non-jazz music into a statement on the relevance and staying power of ‘real music,’ regardless of genre.” Defendants’ use of JSR is transformative regardless of whether the average listener would identify the source of the sample and immediately comprehend Drake’s purposes. The critical question is “how the work in question appears to the reasonable observer,” not the quality or accessibility of the commentary. The average listener of Pound Cake would understand the sampled portions of JSR as a statement that, regardless of how a song was made or how one might classify it, “only real music is gonna last.” Because this purpose is “sharply different” from Jimmy Smith’s purpose in creating the original track, Defendants’ use is transformative and this factor weighs in favor of a finding of fair use. The Court rejected the plaintiffs’ argument that Drake’s use of the JSR could not be transformative because the copied portion was not readily identifiable and did not identify Smith. Noting that the plaintiffs were seeking to apply “the standard for fair use in parody to this non-parodic use,” the Court found that Drake had used the Rap in furtherance of a “distinct creative or communicative objective[ ]” and, therefore, his use “was a transformative one.” Citation and internal quotation marks omitted. Nature of the Copyrighted Work Noting that this factor is rarely determinative, the Court considered two factors: (1) whether the work is expressive or creative, such as a work of fiction, or more factual, with greater leeway being allowed to a claim of fair use where the work is factual or informational, and (2) whether the work is published or unpublished, with the scope for fair use involving unpublished works being considerably narrower. The Court found that because the JSR is a work of creative expression, “this factor weighs against a finding of fair use.” The Court noted, however, that “ his factor is of particularly limited usefulness in this case” because it had already determined that Drake used the Rap “for a transformative purpose.” Citations and internal quotation marks omitted. Amount and Substantiality of the Portion Used The test under this factor is “whether the quantity and value of the materials used[] are reasonable in relation to the purpose of the copying.” Blanch v. Koons , 467 F.3d 244, 257 (2d Cir. 2006). As the Court observed, “a finding of fair use is more likely when small amounts, or less important passages, are copied than when the copying is more extensive, or encompasses the most important parts of the original.” Authors Guild , 804 F.3d at 221. Applying the foregoing test, the Court held that the amount taken by the defendants was reasonable and in proportion to the needs of the intended transformative use. The Court found that the excerpt was not extraneous to Drake’s statement on the importance of “real” music, and that the use of the lines in the Rap drove the point home: “The full extent of the commentary is … that many musicians make records in similar ways …, but that only “real” music—regardless of creative process or genre—will stand the test of time.” The Court rejected the plaintiffs’ argument that the defendants “appropriated an unreasonable portion of JSR when they used thirty-five seconds of the one-minute track, and that any statement on the staying power of ‘real’ music would necessitate the use of only that single line.” Effect on the Market for the Copyrighted Work Under this factor, courts analyze “the effect of the use upon the potential market for or value of the copyrighted work,” 17 U.S.C. § 107(4), by considering “whether the copy brings to the marketplace a competing substitute for the original, or its derivative, so as to deprive the rights holder of significant revenues because of the likelihood that potential purchasers may opt to acquire the copy in preference to the original.” Authors Guild , 804 F.3d at 223. “The more transformative the secondary use, the less likelihood that the secondary use substitutes for the original.” Castle Rock Entm’t, Inc. v. Carol Pub. Grp., Inc. , 150 F.3d 132, 145 (2d Cir. 1998). The Court found that there was no evidence “to suggest that Pound Cake usurps any potential market for JSR or its derivatives” because Smith targeted a “sharply” different market than Drake: “JSR, a spoken-word criticism of non-jazz music at the end of an improvisational jazz album, targets a sharply different primary market than Pound Cake, a hip-hop track.” Moreover, the plaintiffs “never attempted to establish a market for licensed derivative uses of the JSR composition copyright until Defendants used the recording on the Album,” a fatal defect, observed the Court, that undermined the strength of the plaintiffs’ usurpation argument. A copy of Estate of James Oscar Smith v. Cash Money Records, Inc., et al., Case No. 14-cv-2703 (S.D.N.Y.) can be found here .