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No one likes to read fine print or lengthy agreements. Anyone buying insurance, for example, knows this to be so. In fact, a 2016 car insurance TV commercial by Liberty Mutual highlights this point. In the ad, the actress talks about an insurance policy that is over 20 pages long that no one reads, except for lawyers. The question becomes, then, does a failure to read an insurance policy bar a claim against an insurance company or broker for failing to obtain insurance believed to be in the policy? Justice Knipel of the Kings County, Commercial Division, found that it does not. In 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp. , 2017 NY Slip Op. 31484(U) , the Court held that an insured’s failure to read an insurance policy was an insufficient basis to dismiss the insured’s claim against a broker for failure to obtain adequate insurance. The Applicable Law An insurance agent has a duty to provide requested coverage within a reasonable time or advise of its inability to do so, and may be held liable for negligence when a client establishes that a specific request was made for coverage that was not provided in the policy. See , e.g. , Murphy v. Kuhn , 90 N.Y.2d 266, 270 (1997); Am. Bldg. Supply Corp. v. Petrocelli Group, Inc. , 19 N.Y.3d 730, 735 (2012). Background of the Action Overview The action arose from flood damage to the plaintiffs’ three Brooklyn, New York properties (the “Brooklyn Properties”) caused by Super Storm Sandy in October 2012 (the “Loss”).  Following the Loss, the plaintiffs (a group of associated partnerships, corporations, limited liability companies, and one individual), submitted insurance claims to their property carrier, Travelers Excess and Surplus Lines Company (“Travelers”). Travelers denied coverage for the Loss on the grounds that the properties were located in National Flood Insurance Program-designated flood zones excluded by the policy. The plaintiffs alleged that their insurance broker, defendant Alliance Brokerage Corp. (“Alliance”), negligently failed to obtain flood coverage for the properties despite a specific request to do so prior to the Loss. Relevant Facts Since 2002, the plaintiffs procured various lines of property and business insurance coverage for the Brooklyn Properties through Alliance. These policies included commercial general liability, property coverage, loss of rental income, boiler and machinery coverage, and excess umbrella coverage. Prior to 2011, the plaintiffs instructed Alliance to obtain quotes regarding flood coverage. After reviewing the quotes, the plaintiffs instructed Alliance to obtain flood coverage for, inter alia , the Brooklyn Properties. The additional insurance coverage for risk of flood damage to, inter alia , the Brooklyn Properties was added to the Travelers policy. Pursuant to its express terms, however, the Travelers policy insured the plaintiffs for flood damage only with respect to the properties that were not located within one or more of the specified flood zones (the zone-based exclusion). Because each of the Brooklyn Properties was located within one or more of the specified flood zones, the Travelers policy did not insure any of those properties for flood damage. Thereafter, the plaintiffs annually renewed the Travelers policy without changing their flood coverage for the Brooklyn Properties. Following Hurricane Irene in August 2011, the plaintiffs requested that Alliance advise them in writing “if any of the Brooklyn commercial properties have the flood coverage.” Alliance responded, in relevant part, that “ ll of the commercial properties have . . . a $1 million limit for flood.…” In making the request, the plaintiffs did not read the policy. The following year, the plaintiffs again renewed the Travelers policy without changing their flood coverage for the Brooklyn Properties. When the flood from Hurricane Sandy damaged each of those properties, Travelers denied the plaintiffs flood coverage, citing the zone-based exclusion in its policy. In January 2014, the plaintiffs filed suit against Alliance. Their complaint asserted tort claims sounding in negligence, breach of fiduciary duty, and misrepresentation. After discovery was completed and a note of issue was filed, the parties filed motions for summary judgment. The Court’s Decision The Court denied the motions. In doing so, the Court found that there were issues of fact requiring the following determinations: (1) whether plaintiffs requested from defendant specific coverage for flood damage to their commercial properties, including the subject properties, and whether defendant failed to obtain an insurance policy as requested; (2) whether an alternative flood insurance policy for the subject properties was available from the FEMA; and (3) whether plaintiffs’ reliance on defendant’s unqualified representation in its Oct. 2011 email that all of their Brooklyn commercial properties had flood coverage was justified. As to the third issue, the Court held that the plaintiffs’ admitted failure to read the “Travelers policy not a superseding cause precluding defendant’s liability as a matter of law.” The Court noted that under New York law, “‘ n the absence of any showing that an insured is aware of the discrepancy between the coverage it claims to have requested and that actually obtained by the insurance , an insured has a right to rely upon the presumed obedience to his or her instructions.’” ( Quoting Mets Donuts, Inc. v. Dairyland Ins. Co. , 166 A.D.2d 508, 509 (2d Dept. 1990). Takeaway As noted in the introduction to this post, the average person does not read fine print or lengthy agreements, including insurance policies. If a person has a coverage question, it is more likely than not s/he would contact his/her insurance company or broker to confirm the scope of the coverage and/or request that coverage be made. 386 3rd Ave. Partners teaches that insurance companies and/or insurance brokers cannot escape liability as a matter of law by pointing to a densely worded, multi-page insurance policy that does not expressly state if the insured is covered. This is especially so when the insured makes a specific request for coverage and receives a response from his/her carrier. As Alliance learned, an insured has the right to reasonably rely on “the expertise of its broker with respect to insurance matters.” Am. Bldg. Supply Corp. , 19 N.Y.3d at 736.

Earlier this month, Judge Richard J. Sullivan of the Southern District of New York dismissed a federal claim at the plaintiffs’ request, despite the defendants’ argument that the plaintiffs were “clearly and intentionally attempting to engage in forum manipulation.” In Nix v. Office of The Commissioner of Baseball, D/B/A Major League Baseball , Judge Sullivan found that while the plaintiffs’ “manifest purpose” was “to defeat federal jurisdiction” it was not the only factor to consider in determining whether to permit withdrawal of the federal claim and remand the remaining claims to state court. Instead, there are many factors to consider – namely, judicial economy, convenience, fairness, and comity. Background The Long and Winding Road Between State Court and Federal Court The case involved allegations that former major league baseball player Neiman Nix (“Nix”) ran a fake player development academy and later a sports science testing facility through which he and the other plaintiff, DNA Lab, sold performance-enhancing drugs to players that had been banned by the MLB. In February 2014, the plaintiffs filed a claim in Florida state court seeking relief against the defendants. However, the plaintiffs missed several initial case management conferences and failed to perfect service of their amended complaint, resulting in the dismissal of the action for failure to prosecute. Although the plaintiffs appealed that decision, they voluntarily withdrew the appeal on April 24, 2015. On July 14, 2016, Nix and DNA Lab filed a diversity jurisdiction action in the Southern District of New York, alleging tortious interference with prospective economic advantage and defamation against the same defendants. See Nix v. Office of the Comm’r of Baseball , No. l 6-cv-5604 (ALC) (S.D.N.Y. July 14, 2016). On October 19, 2016, the defendants filed a pre-motion letter regarding their contemplated motions for dismissal pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and sanctions under Rule 11 of the Federal Rules of Civil Procedure. After the court held a pre-motion conference on October 27, 2016, the plaintiffs filed a motion for voluntary dismissal without prejudice pursuant to Rule 4l(a)(l)(A)(i) of the Federal Rules of Civil Procedure on November 3, 2016. On November 9, 2016, the plaintiffs took their case against the defendants to state court again, this time in New York State Supreme Court, alleging tortious interference with business relations, defamation, and violations of the Computer Fraud and Abuse Act (“CFAA”). On February 17, 2017, the defendants removed the case to federal court pursuant to 28 U.S.C. § 1441(a), asserting that the Court had: (1) original jurisdiction pursuant to the 28 U.S.C. § 1331 over the plaintiffs’ CFAA claim, and (2) supplemental jurisdiction over the Plaintiffs’ state law tort claims pursuant to 28 U.S.C. § 1367. On February 27, 2017, Judge Sullivan issued an order directing the plaintiffs to file either: (1) a motion to remand, pursuant to 28 U.S.C. § 1447(c), or (2) an amended complaint conforming to the pleading standards under Rule 8 of the Federal Rules of Civil Procedure. On March 29, 2017, the plaintiffs moved to voluntarily dismiss their CFAA claim and remand the case to New York State Supreme Court pursuant to 28 U.S.C. § 1447. The defendants opposed the motion, arguing that the plaintiffs were engaging in prohibited forum manipulation. The Court’s Decision Judge Sullivan found that since the plaintiffs were “willing to dismiss their CFAA claim with prejudice,” there was no reason under Rule 41(a)(2) not to grant the plaintiffs’ motion, especially since “the defendants not even attempt[] to articulate any they suffer as a result of such a dismissal.…” In fact, said the Court, despite the forum shopping ( i.e. , the attempt to defeat federal jurisdiction through voluntary dismissal), “ ourts have uniformly held that defendants are not prejudiced under Rule 41(a)(2) by having to face trial in state court.” Having granted the motion to voluntarily dismiss the CFAA claim with prejudice, the Court turned its attention to the issue of remand. On this issue, Judge Sullivan found that the balance of factors to be considered by the Court – “judicial economy, convenience, fairness, and comity” – “point toward declining to exercise jurisdiction over the remaining state-law claims.” (Citations and internal quotation marks omitted.) Judicial Economy The Court noted that it had not expended any time and resources to the matter: “the Court has dismissed Plaintiffs’ only federal claim with prejudice long before ‘the investment of significant judicial resources’ – that is, long before any conferences before this Court, motion practice under Rule 12, or discovery. Thus, there ‘no indication that ... judicial economy ... would be advanced by the Court’s exercise of supplemental jurisdiction.’” (Citations omitted.) Convenience, Fairness and Comity The Court said that it could “discern no extraordinary inconvenience or inequity occasioned by permitting Plaintiffs to bring their claims across the street in the New York State Supreme Court, where they will be afforded a surer-footed reading of applicable law.” (Citations and internal quotation marks omitted.) This was so, said Judge Sullivan, because the state law claims involved were “not complex or unsettled,” as the defendants contended. (Citations and internal quotation marks omitted.) The Court rejected the defendants’ argument that the Court should retain jurisdiction because the plaintiffs were “clearly and intentionally attempting to engage in forum manipulation,” to avoid “the adjudication of their claims and avoid an unfavorable decision in this Court.” (Internal quotation marks omitted.)  In doing so, the Court noted that although forum manipulation is a factor to consider “in determining whether the balance of factors” support remand, it is not dispositive. Thus, “where, as here, a plaintiff has voluntarily dismissed his federal claims prior to the start of discovery, even when his ‘manifest purpose’ in doing so ‘is to defeat federal jurisdiction,” a court should decline to exercise supplemental jurisdiction. (Citations omitted.) Finally, the Court concluded that “while Plaintiffs’ failure to prosecute and their general inattentiveness to jurisdictional issues in other cases very troubling,” remand was nevertheless appropriate because “all federal claims have been dismissed before the Court has overseen any discovery or resolved any substantive motions.” Accordingly, the case was remanded to the New York State Supreme Court. Takeaway While forum manipulation is frowned upon, Nix teaches that is not the dispositive consideration in determining whether to permit withdrawal of a federal claim and exercise supplemental jurisdiction. Instead, it is one of many factors ( e.g. , “judicial economy, convenience, fairness, and comity”) to be considered by the courts.

Although courts will pierce the corporate veil “to prevent fraud or achieve equity,” Morris v. N.Y. State Department of Taxation & Finance , 82 N.Y.2d 135, 140 (1993) (quoting Int’l Aircraft Trading Co. v. Mfrs. Trust Co. , 297 N.Y. 285, 292 (1948)), they are, nevertheless, reluctant to disregard the corporate form. TNS Holdings Inc. v. MKI Sec. Corp. , 92 N.Y.2d 335, 339 (1998). After all, the purpose of incorporating is to allow individuals to avoid personal liability. See Gartner v. Snyder , 607 F.2d 582, 586 (2d Cir. 1979) (citing Bartle v. Home Owners Cooperative , 309 N.Y. 103 (1955)). Thus, New York courts will pierce the corporate veil and hold shareholders/owners liable for the corporation’s debts only when “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” Morris , 82 N.Y.2d at 141. (This Blog previously addressed veil piercing here and, more recently, here .) The determination whether to pierce the corporate veil is a fact-intensive one. And, because it is fact-intensive, the courts have held that it is not appropriate to make the determination “on a pre-answer, pre-discovery motion to dismiss.”  BT Ams. Inc. v. ProntoCom Mktg. Inc. , 859 N.Y.S.2d 893 (Sup. Ct. N.Y. County 2008) (holding that veil piercing “is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss”). Significantly, because the analysis is so fact dependent, it “eschews mechanical interpretation.” LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017) (quoting Morris , 82 N.Y.2d at 141). Accordingly, the courts consider the totality of the facts and evidence, as well as the public policy of “protect those who deal with the corporation.” Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc. , 933 F.2d 131, 139 (2d Cir. 1991). Exercise of Control The first inquiry – whether the alleged alter-ego “exercised complete domination” – is case-specific and must be considered in view of “the totality of the facts.” United States v. Funds Held in the Name or for the Benefit of Wetterer , 210 F.3d 96, 106 (2d Cir. 2000). New York courts consider a number of factors in aid of this determination. These factors include: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own. Wm. Passalacqua , 933 F.2d at 139; Shisgal v. Brown , 21 A.D.3d 845, 848-49 (1st Dep’t 2005). Because the decision whether to pierce the corporate veil depends “on the attendant facts and equities,” Morris , 82 N.Y.2d at 141, and said facts can apply to an “infinite variety of situations,” William Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir.1989), no one factor controls the consideration. Thus, for example, in applying the factors, “courts recognize that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting Wrigley , 890 F.2d at 601); see also Capricorn Investors III, L.P. v. Coolbrands Int’l, Inc. , 897 N.Y.S.2d 668, 24 Misc. 3d 1224(A), at *5 (Sup. Ct. N.Y. Co. 2009) (“LLCs generally have operating agreements, which may include meeting requirements, or other such formalities. Plaintiff’s assertion that the LLCs have no officers or directors, and did not hold board or executive committee meetings are not persuasive veil piercing factors for an LLC, where plaintiff does not argue that management was required to be centralized in a board.”). In applying these and other factors, the cases “reveal[] common characteristics” that necessitated piercing the corporate veil. Wrigley , 890 F.2d at 601. “In each case, the evidence demonstrated an abuse of that form either through on-going fraudulent activities of a principal, or a pronounced and intimate commingling of identities of the corporation and its principal or principals, which prompted the reviewing courts, driven by equity, to disregard the corporate form.” Id. The Use of The Corporate Form to Commit a Fraud or Wrong The second factor allows courts to pierce the corporate veil where the shareholder/owner uses the corporation “to commit fraud , or violate other legal duty, or has been used to do an act tainted by dishonesty or unjust conduct violating plaintiff’s rights or … where such fraud or wrong results in unjust loss and injury to plaintiff ….” Lowendahl v. Baltimore & Ohio R.R. Co. , 247 A.D. 144, 157 (1st Dep’t 1936), aff’d , 272 N.Y. 360 (1936); Morris , 82 N.Y.2d at 141. It is not necessary, however, for there to be an alleged fraud. Gorrill v. Icelandair/Flugleidir , 761 F.2d 847, 853 (2d Cir. 1985). Rather, it is sufficient that the alter ego “through their domination of the corporation, ‘abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against such that a court in equity will intervene.’” JSC Foreign Econ. Assoc. Technostroyexport v. Int’l Dev. And Trade Servs., Inc. , 386 F. Supp. 2d 461, 465 (S.D.N.Y. 2005) (quoting Morris , 81 N.Y.2d at 142). In fact, in Wm. Passalacqua , the court held that it would be error to instruct a jury “that plaintiffs were required to prove fraud” to pierce the corporate veil, stressing that the “critical question is whether the corporation is ‘shell’ being used by the to advance their own purely personal rather than corporate ends.” 933 F.2d at 138. Piercing the Veil Between Corporations The alter ego doctrine has also been applied to pierce the veil between corporations when affiliate or subsidiary corporations are used by a dominating parent corporation to engage in fraudulent or wrongful conduct. Under New York law, a corporation is considered to be a “mere alter ego when it ‘has been so dominated by . . . another corporation . . . and its separate identity so disregarded, that it primarily transacted the dominator’s business rather than its own.’” Trabucco v. Intesa Sanpaolo, S.p.A , 695 F. Supp. 2d 98, 107 (S.D.N.Y. 2010). When that occurs, “the dominating corporation will be held liable for the actions of its subsidiary . . ..” Id . As with veil piercing, control is an important factor. The factors considered for veil piercing are also used to determine alter ego liability.  Trabucco , 695 F. Supp. 2d at 107. Again, no one factor is dispositive and “all need not be present to support a finding of alter ego status.” N.Y. Dist. Council of Carpenters Pension Fund v. Perimeter Interiors, Inc. , 657 F. Supp. 2d 410, 421 (S.D.N.Y. 2009). LiquidX v. Brooklawn Capital, LLC Recently, Judge William H. Pauley, III of the Sothern District of New York had the opportunity to consider these principles in LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017). Background The Receivables Exchange and the Final Funding Round The dispute arose out of the demise of The Receivables Exchange (“TRE”), a financial technology company that operated an online exchange for accounts receivable – i.e. , debts held on a company’s books, such as scheduled payments for goods shipped on credit. The platform allowed companies to access short-term liquidity by selling these accounts at a discount to buyers on the exchange, who would then become the creditors on these accounts and would profit if and when the debtor paid the account in full. By the fall of 2013, though raising nearly $60 million from a variety of venture capital entities over five rounds of funding, TRE found itself in dire financial straits. To staunch the bleeding, TRE’s board implemented a number of measures to slow the company’s “burn rate”, and secured a $3.25 million loan from Comerica Bank while it sought additional funding. In the summer of 2015, after the TRE board failed to secure a sixth round of funding, Gary Mueller (“Mueller”), an investor and entrepreneur, who was a business acquaintance of John Connolly (“Connolly”), a managing director of TRE, agreed to invest money into TRE and lead a renewed financing campaign. Mueller began his diligence in earnest and set a closing date of September 28, 2015. In late September, Solaia Capital, an aggrieved customer of TRE, won an arbitration against TRE in which the arbitrator awarded Solaia $186,000 in damages. Although the award was relatively small, the Solaia arbitration involved claims substantially similar to those asserted by Brooklawn Capital Fund LLC, and Brooklawn Capital Fund II, LP (collectively, “Brooklawn”) in a separate arbitration against TRE. Brooklawn was seeking more than $8 million in its arbitration. Mueller reviewed the award and, after discussing it with TRE’s management, understood that TRE was exposed to greater liability, and canceled the funding round on the very day it was set to close. The “NewCo” Plan By October 1, two days after he canceled the funding round, Mueller began working with James Toffey (Toffey”), president and CEO of TRE, on an alternative plan – Mueller would form a “NewCo” to purchase TRE’s loan from Comerica and foreclose on TRE’s assets as the first-priority secured creditor. Comerica, aware of the failed funding round, sent a letter on October 15 outlining several different options for TRE to avoid default, including a “going-concern” sale or an outright sale of TRE’s assets. Toffey declined to consider those alternatives and instead pursued Mueller’s proposal. Three TRE insiders – Toffey, Connolly, and finance chief James Kovacs (“Kovacs”) – planned to invest in “NewCo” and join Mueller in running “NewCo” after the foreclosure. An integral part of the plan was keeping it from the other members of TRE’s board, whom Connolly and Mueller did not intend to include in “NewCo.” Starting in October 2015, the three TRE insiders stopped using their TRE email accounts to communicate with Mueller and switched to their personal Gmail accounts. On October 15, 2015, Comerica consented to the Mueller/Toffey plan, but only if the sale was to a “disinterested buyer” who would offer the loan’s entire principal and interest. Because TRE was not yet in default, Comerica would only agree to a sale at par – i.e. , at a price that “pays the bank back in full.” On November 6, 2015, “NewCo” came into being as LiquidX, Inc., with Mueller as president and Kovacs as Treasurer. Toffey, Connolly, Kovacs, and Mueller capitalized the new company with $1,000, receiving approximately 80% of the shares at incorporation. By the end of November, the four investors had purchased additional LiquidX stock and loaned the company $4.05 million. LiquidX was ready to purchase the Comerica loan. The Loan Purchase and Foreclosure On November 20, 2015, Mueller sent a term sheet to the TRE board outlining his plan to purchase the loan and effect a strict partial foreclosure on TRE’s assets. Those assets, which Mueller believed were worth “$2 to $3 million,” would constitute partial satisfaction of the $3.25 million loan – thus, LiquidX would remain TRE’s senior secured creditor. In effect, TRE would cease to be an existing company and LiquidX would acquire its remaining cash and assets, including the exchange platform. In order to implement the foreclosure, TRE needed to obtain an independent appraisal of its assets. Mueller needed the valuation to be low – i.e. , below the $3.25 million loan amount – for the transaction to work. If TRE’s assets were appraised above $3.25 million, TRE’s junior creditors (like Brooklawn) would still have claims on those assets after LiquidX foreclosed. Therefore, Mueller needed a valuation between $2 and $3 million in order to “leave unsecured creditors behind.” On December 4, 2015, Toffey learned that the appraisal expert had valued TRE at $2.05 million With the appraisal in place, LiquidX could acquire TRE for $4.05 million (the cost of the loan plus interest), notwithstanding the fact that Mueller had valued TRE’s assets at $18.2 million, with considerable upside potential. TRE becomes LiquidX Over the following two months, TRE’s management worked on the “rebranding” into LiquidX. Toffey and other executives moved vendor contracts, bank accounts, and customer agreements to LiquidX. Although TRE had informed its vendors and customers of the “rebranding,” TRE’s common stockholders and contingent creditors (including Brooklawn) were left in the dark. LiquidX commenced operations on January 1, 2016, using, inter alia , the same offices, employees, vendors, and finance department that had served TRE the day before. The Lawsuit and Decision As noted, Brooklawn brought an arbitration proceeding against TRE. After the foregoing events occurred, Brooklawn sought to join LiquidX in that proceeding. When Brooklawn did so, LiquidX filed the action seeking a declaration that joinder would be improper on the grounds that it is not TRE’s alter ego. Following a four-day bench trial, the Court found that LiquidX “is the alter ego of TRE.” On the issue of control, Judge Pauley found that TRE and LiquidX “are virtually indistinguishable” and that “LiquidX is a new company in name only.” Beginning on January 1, 2016, LiquidX continued to operate TRE’s business in a seamless transition. TRE’s offices and employees became LiquidX’s offices and employees, the exchange was simply rebranded, and LiquidX took over responsibility for financing and defending TRE’s outstanding legal disputes (including the Brooklawn arbitration.) …. Citation omitted. In concluding that there is “no meaningful distinction between the company that TRE was and the company that LiquidX is today,” the Court rejected LiquidX’s argument that there is no “overlap in ownership because Toffey, Connolly, Kovacs, and Mueller never owned shares of both TRE and LiquidX.” Judge Pauley found that the argument was not compelling, “as it rests on an overly formalistic conception of ‘domination and control.’” Ownership, in the corporate context, is a proxy for control. It is certainly possible, however, to exercise control over corporate functions without owning the corporation itself …. The Court found Mueller, Toffey, Connolly, and Kovacs did, in fact, control LiquidX. In this regard, the Court found that The TRE insiders ensured that Mueller’s transaction would be successful by declining to consider other options after the funding round fell apart. Connolly and Toffey, both former TRE board members, became directors of LiquidX on the company’s first day in business. Kovacs worked for both companies simultaneously in November 2015 as he endeavored to ensure a smooth transition after the foreclosure. Mueller was never a part of TRE but nonetheless exercised considerable influence on the board, as he was the only viable source of funding at the end of 2015. Taken together, these facts reveal a substantial overlap in directors, officers, and control between TRE and LiquidX. “The most significant factor” said the Court, is the fact “that the corporations did not deal with one another ‘at arm’s length.’” The substantial involvement of TRE’s management team, and Toffey in particular, in engineering the foreclosure from both sides suggests that this was anything but a disinterested negotiation between sophisticated parties. Toffey’s influence over the independent appraisal is particularly glaring.… Indeed, there would be no reason for Toffey to push for a low valuation if he were a disinterested TRE executive. On the issue of using control of TRE to commit a wrong, the Court found that there was “ample evidence … that LiquidX, through the actions of TRE’s management, structured and executed this transaction to perpetrate a wrong—namely, a foreclosure that would allow LiquidX to acquire TRE’s business free and clear of its creditors, leaving Brooklawn with nothing but a shell company to litigate against.” According to Judge Pauley, “ he sequence of events leading to the foreclosure renders this conclusion inescapable.” TRE’s final funding round cratered immediately upon Mueller learning of the Solaia arbitration award—not because the award was large, but because it amplified the litigation risk of Brooklawn’s more substantial claim. Instead of walking away from the transaction, Mueller and Connolly came up with an approach that would allow them to acquire TRE’s functioning platform while ‘leav unsecured creditors behind.’ Brooklawn would find itself arbitrating against a ‘ShellCo,” and LiquidX, with TRE’s contingent creditors safely in the rearview mirror, would be a functioning business worthy of a multi-million dollar investment in a matter of months. To achieve this outcome Mueller relied on insiders like Toffey to stack the deck in LiquidX’s favor—for example, by agreeing on behalf of TRE (without disclosing his interest in LiquidX to the board) to amend the loan agreement and allow LiquidX to conduct a private foreclosure. Ultimately, the foreclosure turned Brooklawn’s otherwise-viable arbitration into an exercise in futility. This result would not have been possible without the high degree of control that Mueller, Toffey, Connolly, and Kovacs exercised over TRE’s operations. Citations omitted. Takeaway Although courts are reluctant to impose alter ego liability or pierce the corporate veil, they will do so when the facts and circumstances indicate that the corporate form was used to commit a fraud or other wrong. LiquidX illustrates the type of circumstances in which the factors considered by the courts support the imposition of liability on the corporate owners or affiliates.

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.