Chicago Business Litigation Lawyer Blog

Supreme Court To Address Standards For Class Certification in Securities Fraud Actions and Whether Plaintiffs Need to Prove “Fraud On The Market” Claim to Certify a Class-Action

October 1, 2012 | Peter S. Lubin and James V. DiTommaso

The Supreme Court in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds has recently agreed to decide on whether federal courts in certifying a securities class must decide in order to certify the class whether the fact of damages claims regarding a “fraud on the market” have merit or are true. Federal courts generally didn’t decide the merits of the case in class actions at the time of class certification. However, in the wake of the Supreme Court’s decision the Walmart class action corporate defendants and business interests have urged the Court to make Plaintiffs prove their case at the class certification stage.

An excellent article discussing the Supreme Court’s decision to hear Amgen and its ramifications can be reviewed by clicking here. The article explains the significance of the Supreme Court’s decision to hear the case as follows:

For over 20 years, the “fraud on the market” theory, which the Supreme Court endorsed in Basic Inc. v. Levinson, 485 U.S. 224 (1988), has been a key tool for plaintiffs in class action securities fraud litigation under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The theory posits that the price of a security trading in an efficient market reflects all publicly available information about that security. Based on that premise, the theory gives rise to a rebuttable presumption that investors rely on material misrepresentations reflected in market prices at the time they transact. Without this presumption, plaintiffs purporting to assert class action securities fraud claims would have difficulty showing reliance on a class-wide basis, and hence satisfying the typicality and predominance prerequisites to class certification under Fed. R. Civ. P. 23(a) and 23(b)(3). Decisions as to class certification strongly influence the balance of leverage as between plaintiffs and defendants in class actions generally. Thus, the showing plaintiffs must make in order to invoke the “fraud on the market” theory is a critical issue in securities litigation.

The impact of the Supreme Court’s decision in Amgen could go well beyond securities actions and make it more difficult to ever certify any type of class action.

IRS Awards Whistleblower a Record $104 Million

September 29, 2012 | Peter S. Lubin and James V. DiTommaso

It was announced on September 11, 2012 that the Internal Revenue Service awarded $104 million to whistleblower Bradley C. Birkenfeld for his role in providing information regarding an illegal offshore banking scheme by his employer, UBS. Not only is this the first major award by the IRS since its whistleblower program went into effect in 2006, it is believed to be the largest award given to an individual under any U.S. whistleblower program.

Birkenfeld learned in 2005 that UBS was providing illegal tax avoidance advice to its clients, and reported it to the bank’s compliance office. When UBS failed to alter its practices, in 2007 Birkenfeld informed U.S. authorities of the bank’s activities, which led to an enforcement action. In February 2009, UBS entered into an agreement with the government, pursuant to which it paid $780 million in fines and provided the names of more than 4,500 American clients who had participated in scheme. The government implemented a tax amnesty program that year, in which more than 14,000 Americans participated, leading to the recovery of more than $5 billion in unpaid taxes.

Prior to the adoption of the current whistleblower program, the IRS had discretion whether to pay an award to a whistleblower. IRS guidelines set awards at 1 percent, 10 percent, or 15 percent, and awards were not appealable. Under changes that were adopted in 2006, the IRS is required to pay whistleblowers 15 percent to 30 percent or recoveries which exceed $2 million. Moreover, whistleblowers now have the right to appeal an award to the Tax Court.

SEC’s First Whistleblower Award is for Maximum Amount

September 26, 2012 | Peter S. Lubin and James V. DiTommaso

The Securities and Exchange Commission announced its first award under the SEC’s Whistleblower Program on August 21, 2012. The whistleblower will receive nearly $50,000, which represents 30 percent of the amount collected thus far in an SEC enforcement action.

The SEC Whistleblower Program, which has been in effect for one year, has its roots in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and is designed to provide monetary incentives to individuals to report possible violations of the federal securities laws to the SEC.

In order to qualify for an award under the program, a person must:
• voluntarily provide “original information” about a possible violation; and
• the information must lead to a successful SEC action resulting in an order of monetary sanctions exceeding $1 million.

If these conditions are met, the Dodd-Frank Act authorizes the SEC to award individuals providing the information from 10 percent to 30 percent of any money collected in an enforcement proceeding. In the instant action, the SEC obtained an order of more than $1 million in sanctions, but has only collected $150,000 to date. If the SEC is successful in collecting more, the amount awarded to the whistleblower should be increased.

The identity of the whistleblower who received the award was not disclosed by the SEC. This is consistent with several provisions of the SEC program designed to protect individuals with pertinent information of potential securities violations. When an individual supplies information to the SEC, they can do so anonymously through an attorney. Even when information is not submitted anonymously, the SEC will endeavor to protect the identity of the whistleblower as much as possible. Moreover, provisions exist which provide redress to whistleblowers who are subjected to retaliation by an employer.

New Jersey Court Shoots Down Forum Selection Clause in UPS Franchise Case – The Business Store v. Mail Boxes Etc.

September 20, 2012 | Peter S. Lubin and James V. DiTommaso

In The Business Store v. Mail Boxes Etc., the District Court for the District of New Jersey considered the effect of a “forum selection clause” in a business dispute between companies from different states, finding that these clauses are not always enforceable.

In 2003, Plaintiff The Business Store, Inc., a New Jersey company, entered into a franchise agreement with Defendants Mail Boxes, Etc. (MBE) – a California company – and United Parcel Service (UPS), under which Plaintiff was to operate a UPS franchise in Spotswood, New Jersey. The parties entered into two additional agreements for new stores in 2007. Two years later, however, a disagreement arose over $80,000 in royalties that Defendants argued they were owed. When the parties could not reach an agreement, Defendants terminated the franchise agreements.

Plaintiff sued Defendants in New Jersey state court, alleging breach of the franchise agreements and an implied duty of good faith and fair dealing, as well as tortious interference with contract, fraud and violation of the New Jersey Franchise Practices Act (NJFPA). After Defendants removed the case to federal court – on diversity of citizenship grounds: the parties are from different states – they filed a motion to transfer the case to the federal district court in the Southern District of California. Defendants argued that the “forum selection clause” in each of the franchise agreements dictated that any disputes be litigated in California.

The court denied the motion to transfer, finding that each of the factors to be considered in reviewing a venue transfer request weighed in favor of New Jersey. 28 U.S.C. Section 1404(a) provides that “for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district . . . where it might have been brought.” The court noted that it considers “all relevant factors to determine whether on balance the litigation would more conveniently proceed and the interest of justice be better served by transfer to a different forum,” and that the burden is on the party requesting transfer to show that it is warranted.

The court began by finding that, because MBE’s principal place of business is in San Diego, the action would have been proper if originally brought in the Southern District of California. Nevertheless, the court noted that “[a] strong presumption of convenience exists in favor of a domestic plaintiff’s chosen forum.” Moreover, the fact that the dispute arose in New Jersey – where the contract was executed and performed – also weighed against transfer.

Illinois Court Limits Consumer Fraud Claims in Business Disputes – Classic Business Corporation v. Equilon Enterprises, LLC.

September 6, 2012 | Peter S. Lubin and James V. DiTommaso

In Classic Business Corporation v. Equilon Enterprises, LLC., the District Court for the Northern District of Illinois explains that while the state’s consumer fraud and deceptive business practice law is an important weapon in combating shady business operations, it is intended to protect private consumers rather than business entities.

Plaintiffs, gas station operators in the Chicagoland area, brought the action against Shell claiming that the company violated both its contracts with Plaintiffs and a duty of good faith by unilaterally changing its pricing methodology. Plaintiffs are considered “open dealers” because they own the real property on which their gas businesses are located rather than leasing it from Shell. Pursuant to a Retail Sales Agreement (“RSA”), Plaintiffs buy gas from Shell at the price in effect “at the time loading commences at the Plant for the place of delivery” and, in turn, are free to set the retail price at which they later sell the gas.

Plaintiffs claim that after agreeing to the RSA terms, Shell changed the way in which it sells gas – using wholesalers rather than selling directly to retailers – as well as its pricing method. As a result, according to Plaintiffs, Shell now sells the same gas to wholesalers and non-open dealers at a lower price than it sells to Plaintiffs and other open dealers in an attempt to drive them out of the business. In their complaint, Plaintiffs alleged the following counts: 1) federal price discrimination; 2) breach of contract and the Illinois Commercial Code based on the unilateral fuel price increase; 3) breach of contract for invoicing Plaintiffs for more fuel than was actually delivered; 4) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 et seq. (the “CFDBPA”); and 5) a claim for declaratory relief pursuant to the Illinois Declaratory Judgment Act.

The court granted Shell’s motion to dismiss the CFDBPA count (as well as the declaratory relief claim). In so doing, it noted that the proper test in reviewing a CFDBPA claim involving two businesses who are not consumers is “whether the alleged conduct involves trade practices addressed to the market generally or otherwise implicates consumer protection concerns.” In this case, the court found that Shell’s alleged practice of selling gas to the “relatively few” open dealers in the area at a higher rate than that charged to wholsesalers and other retailers “is not equivalent to a trade practice addressed to the market generally,” despite the fact that it may ultimately result in higher prices for Plaintiffs’ customers. Finally, the court quoted the Illinois Supreme Court’s decision in Avery v. State Farm in ruling that “[a] breach of contractual promise, without more, is not actionable under the [Illinois] Consumer Fraud Act.”

California Court Rejects “Harsh” Arbitration Clause in Car Fraud Case – Sanchez v. Valencia Holding Company, LLC.

August 23, 2012 | Peter S. Lubin and James V. DiTommaso

In Sanchez v. Valencia Holding Company, LLC., California’s Second District Court of Appeals explains that while a car buyer is generally bound by the terms of a sale contract, Golden State courts will not enforce terms that it deems unconscionable.

Gil Sanchez is the lead Plaintiff in a class action against Defendant car dealer Valencia Holding Company, LLC. He bought a pre-owned Mercedes-Benz from the dealer at a sales price of more than $53,000 and made a $15,000 down payment. Soon thereafter, Plaintiff allegedly experienced a wide range of problems with the vehicle, including engine failure. When the dealer allegedly was unable to repair the vehicle and indicated that the necessary repairs would not be covered under Plaintiff’s warranty, he filed the present action.

Plaintiff alleges that Defendant engaged in widespread fraud and unfair business practices in violation of California law by: (1) failing to separately itemize the amount of down payments that was to be deferred to a date after the execution of the parties’ Sale Contract; (2) failing to distinguish registration, transfer and titling fees from license fees; (3) charging buyers an “Optional DMV Electronic Filing Fee” without asking the buyer if he or she wanted to pay it; (4) charging new tire fees for used tires; and (5) telling Plaintiff to pay $3,700 to have the vehicle certified so he could qualify for a lower interest rate when that payment was actually for an optional extended warranty unrelated to the rate. In response, the dealer filed a motion to compel arbitration, asserting that the matter was subject to arbitration under the Sale Contract.

The trial court denied the motion to compel, ruling that a plaintiff suing under the state’s Consumers Legal Remedies Act has the right to maintain the suit as a class action, and therefore cannot be required to arbitrate his or her claims individually. On appeal, the Second District affirmed the lower court’s decision. However, the Court’s decision was based on the Sale Contract’s specific terms, rather than Plaintiff’s right to maintain a class action.

California law empowers a court to refuse to enforce any contractual provision that it deems both procedurally and substantively unconscionable. In this case, according to the Court, the Sale Contract’s arbitration provision “contains multiple invalid clauses, it is permeated by unconscionability and is unenforceable.” Specifically, the Court explained that “[t]he provision is unconscionable because it is adhesive and satisfies the elements of oppression and surprise; it is substantively unconscionable because it contains harsh terms that are one sided in favor of the car dealer to the detriment of the buyer.”

Illinois Court Explains Venue Transfer Rules in Business Litigation Case – Shakir Development & Construction, LLC v. Flaherty & Collins Construction, Inc.

August 9, 2012 | Peter S. Lubin and James V. DiTommaso

To transfer or not to transfer, that is often the question in inter-state business litigation where parties come from various states, often far from where the actual dispute takes place. In Shakir Development & Construction, LLC v. Flaherty & Collins Construction, Inc., the U.S. District Court for the Northern District of Illinois recently explained how a Court should decide on a request to transfer a case from one federal court to another.

Plaintiffs Shakir Development & Construction, LLC and a number of other entities as well as two individuals filed the action in Cook County Circuit Court against Defendants Flaherty & Collins Construction, Inc. and various related entities as well as two individuals, alleging fraud, breach of contract, tortuous interference with contract and unjust enrichment. According to the complaint, the parties entered into two contracts under which Defendants allegedly agreed to build and manage an apartment complex in Noblesville, Indiana. Plaintiffs allege that Defendants ultimately breached the contract, committing fraud in the course of so doing.

Defendants removed the case to the Northern District of Illinois on diversity grounds. Federal courts are empowered to hear cases in which none of the plaintiffs are from the same state as any of the defendants. In this case, the two individual defendants resided in Indiana and are Indiana citizens, while the entity defendants are Indiana corporations with their principal place of business in Indiana. The two individual plaintiffs resided in Illinois and are Illinois citizens; the entity plaintiffs are Indiana limited liability companies located in Indiana, but they are Illinois citizens for diversity purposes because their sole member is Sohail Shakir, one of the individual plaintiffs and an Illinois citizen.

Defendants then filed a motion requesting that the matter be transferred to the Southern District of Indiana, which includes Noblesville. 28 U.S.C. § 1404 allows a district court to transfer an action to another district court “for the convenience of parties and witnesses, in the interest of justice…” Citing its prior decision in Law Bulletin Publishing, Co. v. LRP Publications, Inc., the Court stated that it considers the following factors in evaluating convenience: 1) the plaintiff’s choice of forum; (2) the situs of the material events; (3) the relative ease of access to sources of proof; (4) the convenience of the witnesses; and (5) the convenience of the parties.

The Court granted Defendants’ transfer motion, finding that the factors “weigh heavily” in favor of transfer. Although Plaintiffs preferred to stay in Chicago, the Court noted that “choice of forum has only minimal value where none of the conduct occurred in the forum selected by the plaintiff.” Here, the alleged breach and fraud occurred in statements mailed from and made in meetings in Indiana. Similarly, the material events all occurred in Indiana and, as a result, the majority of witnesses – including Defendants’ employees along with subcontractors, architects and engineers – and parties were located in Indiana. Thus, the Court granted the motion to transfer.

California Court Limits Removal under Class Action Fairness Act – Westwood Apex v. Contreras

July 26, 2012 | Peter S. Lubin and James V. DiTommaso

“Location, location, location” isn’t just a mantra for real estate agents and house hunters. When it comes to litigation, venue is an important issue to consider for both plaintiffs and defendants alike. In Westwood Apex v. Contreras, the Court of Appeal for the Ninth Circuit explains an important federal law bearing on venue and, in particular, a class action defendant’s ability to change it.

Westwood Apex, a subsidiary of the for-profit higher-education institution Westwood College (Westwood) which operates campuses in 14 states including California, filed a breach of contract action against Jesus Contreras in state court, seeking to recover roughly $20,000 in unpaid student loan debt. In response, Contreras filed a class action counterclaim on behalf of all current and former Westwood students against the school as well as a number of affiliated entities alleging fraud as well as unfair and deceptive business practices in violation of various California consumer protection laws.

All of the counterclaim defendants except Westwood filed a notice of removal, transferring the action to a federal court, the District Court for the Central District of California. The Defendants asserted that removal was appropriate under a federal law called the Class Action Fairness Act (CAFA). The law grants federal courts jurisdiction over class action lawsuits where the amount in controversy exceeds $5 million and the opposing parties are minimally diverse (at least one plaintiff must live in a different state than one defendant).

After issuing an order to show cause as to why the case should not be removed, the District Court remanded the case back to the state court, ruling that CAFA does not permit a counterclaim defendant to remove an action to federal court. On appeal, the Ninth Circuit upheld this decision and the underlying reasoning.

Enacted in 2005, CAFA – codified at 28 U.S.C. § 1453 – was intended to fight perceived abuses (so-called “junk lawsuits”) in the class action litigation process. Although the statute allows “any defendant” to remove a qualifying class action, the Court held that it does not extend the removal power to counterclaim defendants. “[A] counterclaim defendant who is also a plaintiff to the original state action may not remove the case to federal court,” the Court ruled, citing the Supreme Court’s 1941 decision in Shamrock Oil & Gas Corporation v. Sheets as well as the Ninth Circuit’s more recent opinion in Progressive West v. Preciado (2007). As a result, the Court upheld the District Court’s ruling, leaving the action in state court.

Chicago Class Action Attorneys at DiTommaso Lubin Obtain Certification of a Class Action Against Abercrombie & Fitch For Refusing to Honor Promotional Cards Which Say on Their Face They Have No Expiration Date

July 25, 2012 | Peter S. Lubin and James V. DiTommaso

The law firm of DiTommaso Lubin on behalf of a class of Abercrombie & Fitch customers recently obtained certification of a class-action against Abercrombie regarding $25 promotional cards with no expiration date on the face of the cards. Abercrombie will not honor the cards any longer. Customers obtained the cards in a promotion which required a $100 purchase to receive the $25 cards. The cards came in a paper sleeve which stated a short use period of just a few months. However, the card itself stated that it had no expiration date.

The Federal District Court for the Northern District of Illinois certified a nationwide breach of contract class action based on the Class’s position that the card is a contract. It is the Class’s position that contractual term of no expiration date on the card itself trumps the sleeve either because the sleeve is mere advertising or because when two terms in a contract conflict the contract should be construed against the entity that drafted it — in this case Abercrombie & Fitch. The Court has not yet made a decision on the merits of the case. You can read the Court’s decision by clicking here. The 7th Circuit Federal Court of Appeals rejected Abercrombie’s request to hear an immediate appeal on the class-certification decision.

DiTommaso Lubin is also representing a consumer of Abercrombie’s sister company Hollister in an identical putative class action lawsuit involving the same promotion. The Court has not yet certified a class in that case.

If you are a member of the class alleged in Hollister case, you can contact DiTommaso Lubin for additional information about participating as a class representative.

Non-Competition Agreements — We represent employees and businesses in the Chicago Area Including in DuPage, Cook and Kane Counties in Non-Compete Agreement Lawsuits

July 24, 2012 | Peter S. Lubin and James V. DiTommaso