Why wasn’t Epic v. Apple a jury trial like Epic v. Google?

Epic’s antitrust cases against each of Apple and Google resulted in arguably inconsistent outcomes.  In both, Epic challenged app-store commission fees and in-app payment requirements as anticompetitive.  After a bench trial in Epic v. Apple, the district court largely ruled against Epic on its core antitrust claims, finding that, even if Apple’s practices were anticompetitive, Epic had not successfully demonstrated a viable, less restrictive alternative to achieve the pro-competitive justifications for Apple’s practices (e.g., security justifications).  The Ninth Circuit affirmed.  But in Epic v. Google, a jury found Google’s similar restrictions to violate the antitrust laws.

It’s notable that only the Apple case was tried to a jury: Both of Epic’s cases against Apple and Google started as a preliminary injunction complaint for purely equitable relief (so no jury trial right attached).  Both Apple and Google responded by filing contract-based counterclaims for damages and requesting a jury trial on those.  But in the Apple case, Apple subsequently withdrew that jury trial request with Epic’s consent.  See Dkt. 105 (Case No. 4:20-cv-05640) (“Epic and Apple have met and conferred, and the parties agree that Epic’s claims and Apple’s counterclaims should be tried by the Court, and not by a jury.”).  Epic’s Google case, however, was initially set to be tried concurrently with Match Group’s similar case against Google that included a request for damages.  The damages request entitled Match to a jury, but Match settled its case with Google shortly before trial.  Google never withdrew its contract-based counterclaims or its request for a jury trial.  Nonetheless, in a statement to the court on the eve of jury selection, Google requested that its contract-based claims be tried to a jury first, followed by a bench trial on the antitrust claims.  See Dkt. 499 (Case No. 3:20-cv-05671). The court denied that request, leaving Epic able to successfully present its antitrust case to the jury largely due to happenstance.

The right to tell a tale

In today’s world of intricate, jargon-heavy litigation, it’s refreshing to come across a circuit court opinion sustaining the importance of storytelling at trial. In In re Diet Drugs Prods Liability Litigation, 369 F.3d 293 (3d Cir. 2004), the Third Circuit nicely summed up why a trial must be more than the rote presentation of evidence:

A trial is more than a matter of presenting a series of individual fact questions in arid fashion to a jury.  The jury properly weighs fact questions in the context of a coherent picture of the way the world works.  A verdict is not merely the sum of individual findings, but the assembly of those findings into that picture of the truth.  As the Supreme Court instructed in Old Chief v. United States, evidence “has force beyond any linear scheme of reasoning, and as its pieces come together a narrative gains momentum, with power not only to support conclusions but to sustain the willingness of jurors to draw the inferences, whatever they may be, necessary to reach an honest verdict.” 519 U.S. 172, (1997).  Unduly sterilizing a party’s trial presentation can unfairly hamper her ability to shape a compelling and coherent exposition of the facts.

Id. at 314.

Litigation funding documents are non-discoverable work-product

J. Bibas of the Third Circuit, sitting by designation in the District of Delaware, recently denied a motion to compel litigation funding documents, concisely summarizing the relevant scope of the work-product doctrine:

[W]hatever work product’s precise scope, it includes [litigation funding documents].  They are confidential documents created by lawyers to evaluate the strengths, weaknesses, and strategy of an impending lawsuit. While those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover. That is legal analysis done for a legal purpose.

See Design with Friends, Inc. v. Target Corp., No. 1:21-cv-01376-SB, 2024 WL 4333114 (D. Del. Sept. 27, 2024).

The court held that the the litigation funder—both before and after diligencing the matter—was the plaintiff’s representative for work-product purposes, and further underscored the flexibility of the work-product doctrine:

The final question is whether Validity created these documents as Design’s repre- sentative. The records cover two periods: before and after Validity agreed to fund the suit. In both periods, this element is met. . . . Work-product doctrine is “intensely practical ..., grounded in the realities of litigation in our adversary system.” Nobles, 422 U.S. at 238. In litigation finance, one of those realities is that financiers need to evaluate the strength of a case before agreeing to fund it.

Id.

CA Supreme Court removes prejudice requirement for waiving arbitration rights

If a complaint is filed in court for a claim covered by an arbitration agreement, the defendant can move to compel arbitration.  If the defendant chooses to litigate in court, he may forfeit the right to arbitration through waiver.  The California Supreme Court previously required showing prejudice to establish waiver.  But in Morgan v. Sundance, Inc. (2022), the U.S. Supreme Court held that federal law treats arbitration agreements equally with other contracts (it doesn’t favor them). Therefore, courts must apply the same waiver principles to arbitration agreements as to other contracts. In light of this ruling, in Quach v. Cal. Commerce Club, Inc., No. S275121 (Cal. July 25, 2024), the California Supreme Court overruled its prior precedent requiring a showing of prejudice.  So, going forward, California no longer requires showing prejudice to establish waiver in arbitration cases, aligning state law with federal law.

Live Nation doesn’t like its venue

The DOJ and various state AGs filed their antitrust case against Live Nation in SDNY, seeking to unwind  its merger with Ticketmaster.  Today, Live Nation moved to transfer the case to D.C., arguing that the initial merger of Live Nation and Ticketmaster is subject to a 2020 consent decree that “includes a mandatory forum selection clause designating the D.C. Court as the forum for legal actions.”  Additionally, it argues that the suit will generally be more conveniently litigated there.  But the consent decree doesn’t suggest venue is exclusively proper in DC (see Section XIV.), and it’s unclear if the current suit is a dispute over the application of the decree.  Plus, Live Nation and Ticketmaster are both headquartered in California (where most relevant witnesses and documents presumably are), so it’s tough to see why DC makes any more sense than NY (where the defendants have offices), and why Live Nation overlooks CA as a more convenient venue.

So why seek to transfer at all?  The judge overseeing the Live Nation case is Judge Arun Subramanian, a former plaintiff-side antitrust litigator coming from a law firm that has a history of bringing (and winning) major antitrust suits.  So it’s not a stretch to assume that Live Nation isn't anticipating a favorable reception from the young J. Subramanian as the case unfolds, and DC was where it has the best chance of getting a more sympathetic judge who oversaw the finalization of the consent decree. 

Moelis stirs Delaware

On February 23, 2024, Vice Chancellor Laster issued a decision finding parts of an agreement between Moelis & Co. facially invalid. See West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 22, 2024).  

The stockholders had challenged the agreement between the investment bank and Ken Moelis, the bank’s founder.  Stockholders argued that certain provisions of the agreement were invalid under DGCL § 141 because the provisions granted Moelis extensive control over the company's governance (unbeknownst to most stockholder).  The control included certain pre-approval provisions giving Moelis the authority to limit the board's size, the designees on the board and its committees, and various other provisions to maintain his influence over the board.  Moelis & Co. argued that the stockholder agreement was based on market practice and otherwise valid.  VC Laster disagreed, concluding that “When market practice meets a statute, the statute prevails.”  The following week after the Moelis decision, Chancellor McCormick cited Moelis and similarly found invalid the Activision board’s approval of the Microsoft deal because its merger approval process violated both DGCL §§ 141 and 251.  See Sjunde AP-Fondemn v. Activision Blizzard, Inc., et al., C.A. No. 2022-1001-KSJM (Del. Ch. February 29, 2024).  

Reaction to these decisions was swift, with many commentators wondering whether previously executed agreements consistent with market practice were now subject to challenge.  In April, Delaware’s bar association sent over draft legislation to the General Assembly, which was overwhelmingly approved, and recently signed by the Governor.  

Why the swift (hasty) reactino?  One answer is that the decision undermined the primary value of Delaware as a corporate jurisdiction: certainty.  That is, the decision undermined the validity of an unknown number of agreements that entrenched founder authority over the board.  Another answer is that too intense of a spotlight was being shined on Delaware recently, with Musk looking to incorporate his companies in Texas, TripAdvisor looking to incorporate in Nevada, and general competition from other jurisdictions looking to topple Delaware’s dominance in the corporate formation market.  On the latter point, Texas even recently rolled out its own business court to incentivize the filing of more complex commercial litigation in its jurisdiction.  It’s probably a combination of these things, but it’s hard to imagine why any alleged harms caused by the Moelis and Activision decisions had to be addressed so quickly, before any appeals were even exhausted.  

Chancellor McCormick sent a letter to the executive committee of the Delaware State Bar Association that both defended the Moelis and Activison decisions and basically asked: Why the rush?  The answer, to my mind, is plain old political pressure. 

Art. III and class representatives under Rule 23

The Fifth Circuit had a nice summary of the current circuit-split over whether class representatives have constitutional standing to litigate harms of class members that the representative didn’t suffer herself.  In Chavez v. Plan Benefit Services, 22-50368 (5th Cir. July 15, 2024), the Court summarizes the two primary approaches to analyzing the standing of class representatives to maintain a class action for harms not exactly like those of the representative: One approach is the “class certification approach,” while the other is “the standing approach.”  Under the former approach, if a class member has standing, that’s enough for Art. III purposes, and the court moves on to address issues re the dissimilarity in injuries suffered under other Rule 23 prerequisites.  But under the later approach, the class representative may be found to lack standing to pursue the class members’ claims if those injuries are not like the class representative’s injuries.  The First, Third, Sixth, and Ninth Circuit follow the class certification approach, while the Second and Eleventh Circuit take the standing approach.  The Fifth Circuit concludes that the plaintiff in Chavez has standing under both approaches. 

How “freely assignable” are antitrust claims?

Can federal antitrust claims be assigned? Yes.  See John Wiley & Sons, Inc. v. DRK Photo, 882 F.3d 394 (2d Cir. 2018).  Can the assignee of the claim substitute in for the assignor? Also yes.  See Cordes & Co. Fin. Servs., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91 (2d Cir.2007).  Will the assignee have standing to litigate?  That’s usually a yes too. See Silvers v. Sony Pictures Entertainment, Inc., 402 F.3d 881, 903 (9th Cir. 2005). 

But what if a litigation funder controls the assignee entity?  Seems that’s a no-go (or at least it’s not an abuse of discretion to deny the substitution request):

The Magistrate Judge exercised his discretion to deny the motions. He did not invalidate Sysco’s assignment of its claims to Carina, but denied the motions for substitution after reasoning that substitution would be contrary to the Federal Rules and public policy. (Magistrate Judge’s Order at 3, 14–15.) The Magistrate Judge was particularly concerned with the possibility that on the facts of this case, substitution would allow a litigation financer “with no interest in the litigation beyond maximizing profit on its investment to override decisions made by the party that actually brought suit.” (Id. at 3.) The Magistrate Judge concluded that Sysco and Burford’s assignment agreement and substitution request would allow Carina to stymie settlements for Burford’s gain, contravening public policy favoring party control over litigation and settlements. (Id. at 18–21.) Specifically, he wrote that “[t]he largest harm that condoning Burford’s efforts to maximize its return on investment would cause is the harm of forcing litigation to continue that should have settled.” (Id. at 17.)

See In re Pork Antitrust Litig., No. 18-cv-1776 (D. Minn. June 3, 2024).

It’s unclear why Sysco, as the assignor, still has standing to litigate a claim that it assigned away to Carina. 

Jarkesy 7th Amendment decision changes nothing for non-governmental civil disputes

The Supreme Court’s Jarkesy decision held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.  This was a based on a straight-forward application of Granfinanciera, S. A. v. Nordberg, 492 U.S. 33 (1989) and Tull v. United States, 481 U.S. 412 (1987).  Though civil litigants will likely cite the case for the Chief Justice’s eloquence in summarizing the history and importance of the Seventh Amendment right to a jury trial, the Court said nothing of what its decision means for civil cases not brought by the Government.  The decision will undoubtedly be a sea change for Government attorneys enforcing civil penalty schemes against regulated parties (think FTC, CFTF, FDA, etc.).  But for the rest of us the decision gives lower courts no more or less room to deprive litigants of their jury trial rights (or overturn the jury’s decision if a court disagrees with it). 

Negotiating fee agreements

Negotiating fee agreements with outside counsel is a crucial responsibility for in-house counsel, requiring a balance between cost-effectiveness and securing high-quality legal representation appropriate for addressing the business risk. The evolution of non-hourly fee arrangements like contingent, flat fees, and hybrid models with success incentives, has broadened the options available to in-house counsel. Understanding the practical implications of these risk-sharing pricing models is essential to successfully manage any litigation. 

Contingent fee agreements generally don’t require the client to pay an hourly fee (but often do require the client to pay other litigation costs).  These agreements are structured to require the payment of percentage of litigation proceeds (or a percentage of saved expenses on the defense side), thereby aligning the interests of the client and counsel towards achieving a favorable outcome. Contingent fee arrangements necessitate a detailed understanding of the case's merits, potential recoveries, and associated risks.   

Flat fees offer predictability in billing but, like hourly fees, do not depend on the litigation outcome, promoting efficiency in counsel's work.  But these arrangements require careful risk evaluation by the counsel, as a case with misjudged or uncertain resource requirements may lead outside counsel to under-work the case relative to the client’s expectation. Thus, the flat fee option works best if the client and outside counsel understand and agree on business risk and required legal work to manage it.  

Hybrid models combine elements of these arrangements to balance incentives, risks, and rewards for both parties.  They generally involve a full or partial hourly component coupled with a “success fee” that’s defined by contract.  The hourly fee allows the client to not pay for more legal work than they receive, provide compensation for outside counsel’s time, and also align incentives to ensure that litigation tasks are identified and further executed in manner that maximizes their impact.  

Lastly, particularly when the needs of a litigation are uncertain, a pure hourly fee arrangement may work best.  This is because hourly fee arrangements do not necessitate an upfront evaluation of the case by counsel but they may require more active management of the case by in-house counsel, particularly earlier on in the litigation.  

Ultimately, the choice of arrangement should be guided by a thorough understanding of the case specifics, client goals, and financial considerations. Moreover, the agreement should address the scope of representation, potential for conflict, and arrangements for covering litigation expenses.  In-house counsel must navigate these considerations carefully, ensuring the chosen fee arrangement aligns with the client's interests, legal objectives, and budgetary constraints, promoting a beneficial relationship with outside counsel that contributes to successfully resolving the case. 

Antitrust class action statistics

Some interesting stats buried in a law and economics article on a normative critique of private antitrust class actions: 

• The overwhelming bulk of federal antitrust suits (92%) are brought by private parties. 

• Only 9% of private antirust suits are follow-on cases to government enforcement actions, i.e., the overwhelming majority of private antitrust action are for harms that the government mostly isn’t* addressing. 
  Average attorney contingency fee percentage is 25% (compared to the typical contingent fee percentage of 33% to 40% in individual litigation). 

• Fees were about 38% for recoveries below $1.1 million and 12% of recoveries over $175 million.

Choi, Albert H. and Sprier, Kathryn E., "Class Actions and Private Antitrust Litigation" (2020). Law & Economics Working Papers. 180. https://repository.law.umich.edu/law_econ_current/180

The effect of motions practice on settlement

Motions practice in business litigation can be expensive, with the key question often being “is it worth it?”  A recent study based on a sample of 585 federal district court cases provide some worthwhile findings on the interplay between filing non-discovery motions and the timing of settlement:

• The likelihood of settlement increases by 375% after a substantive motion is filed;

• A granted motion increases settlement speed by 270%;

• If the plaintiff’s motion is granted there will be a stronger effect on settlement timing (an increase of 450%) than a motion from the defendant;

• There is no statistically significant difference in settlement timing based on the type of substantive motion filed;

• Motions that apply law to fact or are pleading-based show no statistically significant impact on settlement timing in the initial month after denial but both motion types exhibit a positive (though not statistically significant) effect on settlement timing after the first month.

In short, the study finds that that the initiation, content, and outcome of motions, as well as whether the plaintiff or defendant filed the motion, can significantly influence the timing of settlements.   See Boyd, Christina L. Boyd, Christina L. and Hoffman, David A., "Litigating Toward Settlement" (2013), https://scholarship.law.upenn.edu/faculty_scholarship/2551/

A FRAND Encumbrance May Not Necessarily Dampen Damages Under 35 U.S.C. § 284

Patentees (and litigation funders) sometimes worry that a FRAND encumbered patent will necessarily command a lower damages figure under 35 U.S.C. § 284 than a non FRAND-encumbered patent.  Not so, for a few reasons:

1. A FRAND rate arguably only applies to a license (ex post release of future liability) not damages (remedy for ex ante infringement). For example, FRAND provisions say things like “[patentee must] grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.” So suing to recover a reasonable royalty doesn’t necessarily violate a FRAND commitment.  See Atlas Global v. TP Link, 2:21-cv-00430-JRG-RSP (ED Tex. July 28, 2023) (“The [IEEE] Letter of Assurance does not require a license or specific terms be offered before filing suit . . . [it] requires a commitment to grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.”); see also Ericsson Inc. v. D-Link Sys., Inc., No. 6:10-CV-473, 2013 WL 4046225, at *25 (E.D. Tex. Aug. 6, 2013) (“A patent holder does not violate its RAND obligations by seeking a royalty greater than its potential licensee believes is reasonable … Instead, both sides’ initial offers should be viewed as the starting point in negotiations.”).  

2. Entitlement to FRAND is an affirmative defense that may be waived if not pled. See Wi-Lan Inc. v. HTC Corp., No. 2:11-CV-68-JRG, 2013 WL 8811318, at *4 (E.D. Tex. Oct. 11, 2013) (holding that FRAND is an affirmative defense for which “Defendants have the affirmative burden of proof”); see also 3G Licensing, S.A., Koninklijke KPN N.V., Orange, S.A., v. HTC Corporation, No. 1:17-cv-00082-LPS (D. Del., Oct. 2, 2020). 

3. Entitlement to a FRAND rate may require the potential licensee to concede essentiality. See HTC Corp. v. Telefonaktiebolaget LM Ericsson, 12 F.4th 476, 481 (5th Cir. 2021) (“Companies seeking to license under these terms become third-party beneficiaries of the contract between the standard-essential patent holder and the standard setting organization. They are thus enabled to enforce the terms of that contract”); see also 3G Licensing, S.A., Koninklijke KPN N.V., Orange, S.A., v. HTC Corporation, No. 1:17-cv-00082-LPS (Delaware, Oct 2, 2020) (finding that alleged infringed failed to analyze infringement of the standard or essentiality, which is a necessary precondition to entitlement to a FRAND rate). 

4. Entitlement to a FRAND rate arguably requires the licensee to be “willing.” Particularly when there is a strong willfulness case, there is a decent argument that a licensee can’t claim entitlement to a FRAND rate as a nominal third-party beneficiary of a contract that it is arguably repudiating.  See In re Qualcomm Litig., 2019 WL 7834768, at *7 (S.D. Cal. Mar. 20, 2019) (finding unwilling licensee not entitled to a FRAND rate). 

The Basic Interplay Between SEPs and FRAND

Standard Essential Patent (“SEP”) and Fair, Reasonable, and Non-Discriminatory (“FRAND”) are key concepts in the context of standardization and technology development. SEPs are patents essential for implementing an industry or technology standards established by standard-setting organizations (“SSO”). SEPs ensure interoperability and compatibility among various technologies.

FRAND, by contrast, is a set of licensing terms to which SEP holders generally commit when licensing their patents (and often in exchange for the SSO including their patent as part of the standard). Failing to comply with a FRAND obligation may lead to the the SSO to remove the technology from the standard. Courts employ various approaches, including competition law/dominance and contract approaches, to assess whether a SEP holders' licensing practices are FRAND-compliant. The cases addressing FRAND have generally adjudicated negotiation rules and the availability of injunctions against unwilling licensees.

In short, SEPs and FRAND licensing form the foundation of standardization. As the legal landscape continues to evolve, parties must navigate the complexities of licensing processes, consider leveraging patent pools, and engage in good-faith negotiations to balance compensation for the value-add of a SEP to and promoting incentives to innovate and rely on the standard.

The DOJ’s Merger Guidelines

Here is each guideline from the DOJ’s recently finalized (and highly anticipated) Final 2023 Merger Guidelines: 

• Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.

• Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.

• Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination.

• Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market.

• Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete.

• Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position.

• Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly.

• Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.

• Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform.

• Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers.

• Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition.

Opening statement frameworks for patent cases

Patent infringement trials are perceived by many to be dry and technical.  Yet, many attorneys manage to move the jury with a compelling story that results in a significant damages award. Reading their opening statements, it’s clear that their structure falls within one of three categories:

The first category is the “inventory story.” This approach structures the opening statement around the story of the inventor and the “aha moment” preceding it.  The structure is compelling because it’s in consonance with how ordinary people perceive how inventions come about.  The approach was masterfully utilized in Voxer v. Meta (Case No. 1:20-cv-00655, WDTX), wherein the plaintiff’s attorney told a compelling story of a Yale-educated inventor who, while working as an special forces communications sergeant, came up with a patented invention concerning “live messaging” technology “on the battlefield of Afghanistan following 9/11.”  The plaintiff allege that Meta’s video streaming offerings infringed these patents.  After 2.5 hours of deliberation, the jury awarded $174.5 million in running royalties.

The second category is the “technology story.”  These opening statements tell a story about the societal value of the patented technology.  This approach is most often utilized by non-practicing entity (NPE) plaintiffs hoping to move the jury to conclude that the just result is requiring the defendant to pay their fair share for using the NPE’s ground-breaking technology.  The approach is also consistent with the public’s perception that a patent is only granted  for highly valuable inventions deserving of the property right. This approach was used in PanOptis  v. Apple (Case No. 2:19-cv-00066, EDTX) with a story about the value of LTE technology generally, and the value of plaintiff’s patents to the LTE standards specifically.  The opening statement told the story of how every company but Apple acknowledged the value of PanOptis’s patents, so it’s only right for Apple to have to pay too.  The trial resulted in a verdict of $506 million (and then retried the following year, resulting in $300 million verdict).

The third category is the “good guy vs. bad guy” story.  This approach works best when the defendant has not only refused to license a patent but has acted in bad faith during the parties’ dealings, allowing the plaintiff to present a story that highlights evidence that the defendant learned of the value of plaintiff’s intellectual property but never had a genuine intention of paying for it.  This was the case in Viasat v. Space Systems (Case No. 3:12-cv-00260, SD Cal.), where Viasat accused Space Systems of feigning interest in a partnership only to relay the information learned about Viasat’s technology to Viasat’s competitor (who later developed an infringing technology for Space Systems).  The opening statement hammered home the idea that the jury has the power to right the wrong inflicted on Viasat, resulting in a $284 million verdict ($181 million for patent infringement and $102 million for breach of contract).  See Edmond Cahn, 1949, The Sense of Injustice (“the most powerful call is not to do right, but to undo wrong.”).

These approaches highlight the importance of creating a compelling story around any patent infringement trial (and why there is no need for a patent infringement trial to be a dull affair). 

Implied contractual covenants should be stated explicitly

Certain contractual principles are considered “implied,” so-called because one need not state them explicitly to trigger their application.  These include the duty of good faith, the duty of fair dealing, and (in some contexts) the duty to make and maintain agreements and settle disputes.  Given their existence of by implication, many lawyers think that explicitly referring to them in a contract may be redundant.  But in FMLS Holding Co. v. Integris BioServices, LLC, the Delaware Chancery court’s analysis of a breach of contract claim suggests that an expressly stated obligation to not act in bad faith may provide more protection than relying on the background duty to act in good faith alone.  There, the purchase agreement required the acquirer to use“commercially reasonable efforts” to achieve an earnout and to not take any actions in “bad faith” that would undermine achieving the earnest. 

Reading the case, it’s notable how heavily the court relies on the the parties’ explicit “promises” via the good faith provision to work to achieve the earnout, particularly given how dismissive some courts are of breach of contract cases premised on the breach of the implied good faith covenant, often suggesting some unspecific degree of egregiousness is necessary for a plaintiff to avail itself of the covenant. But FMLS suggests that it may be worth making implied covenants more explicit, particularly if the implied covenant is key to receiving an ancillary post-closing payment. 

Full case here: https://courts.delaware.gov/Opinions/Download.aspx?id=355240

Defeating Mandatory Arbitration

Commercial agreements often include an arbitration clause as an alternative to public litigation.  The allure of arbitration lies in its perceived speed, cost-effectiveness, and confidentiality. But a party experiencing contracting-remorse has a series of arguments available to it to try and avoid arbitration, most of which are below:

There is no valid and enforceable contract between the parties.  See ISC Holding AG v. Nobel Biocare Investments N.V., 351 F. App'x 480, 480 (2d Cir. 2009) ("Without a meeting of the minds such that an enforceable agreement to arbitrate was formed, we will not compel arbitration.”).  Importantly, though parties can agree to have an arbitrator decide whether a specific dispute is subject to arbitration, the question of contract formation is a non-delegable issue for a court to decide.  See Eiess v. USAA Fed. Sav. Bank, 404 F. Supp. 3d 1240, 1248 (N.D. Cal. 2019) (“The issue of contract formation, however, is not a delegable gateway issue. ”).

The arbitration clause isn’t applicable to the parties’ dispute.   See International Brotherhood of Electrical Workers v. GKN Aerospace North America, Inc., 431 F.3d 624, 629 (8th Cir. 2005) ("Determining whether the arbitration clause applies to a particular dispute thus requires a determination of whether the grievance at issue arises under the agreement.”).

The arbitration clause is void. See Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 921 (9th Cir. 2013) ("Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability.”).

The counter party waived its right to compel arbitrate.  See Khan v. Parsons Glob. Servs., Ltd., 521 F.3d 421, 425 (D.C. Cir. 2008) ("However, consistent  with arbitration's contractual basis, a party may waive its right to arbitration by acting inconsistently with the arbitration right.”).

Opting Out of Class Actions to Maximize Recovery

Legal claims are valuable assets.  But businesses often either fail to pursue a recovery strategy at all or employ a strategy that falls short of maximizing the asset’s value.  In the context of large securities class actions in particular, this can a very costly mistake. An article by Prof. John Coffee had some eye-popping data on just how costly the mistake can be.  Here are three examples:

• WorldCom lItigation—Class settlement of $6.2 billion, but three California pension funds opted out and settled their opt-out claims for $257.4 million.  Five New York City pension funds also opted out and settled their $130 million in claims for $78.9 million.  Their counsel announced that this settlement amounted to "three times more than they would have recovered if they had joined the class.”  

• AOL Time Warner litigation—Class settlement of $2.4 billion, but opt out did much better: “the University of California settling for $246 million, the Ohio State Pension Funds for $144 million, CalPERS for $117.7 million, and CalSTRS for $105 million.”  And “the State of Alaska settled its $60 million claim for $50 million and said that it had done 50 times what we would have recovered from the class.” 

• Qwest litigation—Class settlement of $400 million, but this was the first class settlement “in which the total payments to opt outs actually exceeded those to the class,” totaling $411 million.  

These datapoints buttress a simple proposition: For class members with large standalone claims, it may pay more to opt out.   The full article discussing these and other datapoints can be found here.  It’s worth a read, particularly if you or a loved one think you may have a large securities fraud claim. 

See John Coffee, Accountability and Competition in Securities Class Actions: Why "Exit" Works Better than "Voice", 30 Cardozo L. Rev. 407 (2008).