In This Issue

New laws, old remedies.

Did You Know?

You've no doubt noticed the flurry of acts that have lately passed through Congress and gained the presidential okay.  But did you know that pieces of the new legislation have created or expanded rights that people may enforce in court?

Consider these:

• The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 amended the Truth in Lending Act, which allows recovery of actual and statutory damages.
• Section 1553(c)(3) of the American Recovery and Reinvestment Act of 2009  entitles non-federal whistleblowers who suffer "reprisal" for reporting misuse of government funds to sue for damages and other relief.
• Under the Fraud Enforcement and Recovery Act of 2009 , deceptive conduct involving commodities,  TARP funds, and mortgage lending will become criminal (and likely subject to civil RICO remedies); FERA also broadens the reach of the False Claims Act , which allows citizens to sue on behalf of the government.

Fast as . . .

Arbitration Gets Another Supreme Court Boost

At least three courts of appeals have held that a non-contracting party who loses a motion to compel arbitration under the doctrine of "equitable estoppel" has to wait until the end of a court case to appeal.  See "Antitrust Class Beats Arbitration-by-Estoppel".  The Second Circuit parted company with its sister courts (the Sixth, Tenth, and D.C. Circuits).  See "Supremes to Settle Arbitration Appeal Split".

On May 4, the U.S. Supreme Court took the minority view also.  In Arthur Andersen LLP v. Carlisle , No. 08-146 (U.S. May 4, 2009), six of the nine justices agreed that section 16(a)(1)(A) of the federal Arbitration Act controls.  That section provides a right to a midstream appeal from "an order . . . refusing a stay of any action under section 3."  It thus allows anyone who loses a motion to stay a lawsuit pending arbitration to appeal right away:

By that provision's clear and unambiguous terms, any litigant who asks for a stay under section 3 is entitled to an immediate appeal from denial of that motion -- regardless of whether the litigant is in fact eligible for a stay.  Because each petitioner in this case explicitly asked for a stay pursuant to section 3, App. 52, 54, 63, 65, the Sixth Circuit had jurisdiction to review the District Court's denial.

Id., slip op. at 3.

But what of section 3 itself, which limits stayable actions to ones "referable to arbitration under an agreement in writing"?  The majority of the courts of appeals read section 3 to bar relief if the losing party didn't bind itself to "an agreement in writing" and instead argued that equitable estoppel allowed it to enforce the clause against one who did so bind himself.  Justice Scalia, writing for the Court, would have none of it:

Respondents argue that, as a matter of federal law, claims to arbitration by nonparties are not "referable to arbitration under an agreement in writing . . . because they seek to bind a signatory to an arbitral obligation beyond that signatory's strictly contractual obligation to arbitrate," Brief for  Respondents 26.  Perhaps that would be true if section 3 mandated stays only for disputes between parties to a written arbitration agreement. But that is not what the statute says. It says that stays are required if the claims are "referable to arbitration under an agreement in writing." If a written arbitration provision is made enforceable against (or for the benefit of) a third party under state contract law, the statute's terms are fulfilled.

Id. at 7 (emphasis in original).

Justice Souter wrote a dissent, in which Chief Justice Roberts and Justice Stevens joined.

Hot Lunch

Party A works for an investment bank that underwrites bonds.  He learns that his bank plans to expand a customer's upcoming bond sale.  Party A passes the inside information to a client, Party B. 

Party B, a hedge fund adviser, uses the tip to buy an insurance contract.  Party B knows that the value of the contract will rise when the bank goes public with the bond redo.  Party B later sells the contract for a $1.2 million profit.

Insider trading?  The Securities and Exchange Commission thinks so.

The SEC recently announced that it filed insider-trading charges against Party A and Party B.  The complaint alleges that, in 2006, Jon-Paul Rorech, a salesman at Deutsche Bank Securities, tipped off Renato Negrin, who worked at Millennium Partners.  Negrin bought insurance that protected against a default on the bonds.  The insurance -- credit default swaps (CDSs) -- rose in value because the growth in the size of the bond issue increased the dollars at risk.

Your Editor has guessed that the big surge in the CDS industry over the last several years vastly enhanced the temptation to rig the market.  I went so far as to ask whether fraud inhered in the huge, opaque, and unregulated CDS business.  This case illustrates the incentive that CDSs give to people willing to cut corners.  See "The Cramer Solution to Market Crisis:  Hoosegow for Miscreants".

Expect to see more of these kinds of cases.

But note how hard a time we'll have in uncovering the bad acts.  The SEC managed to get tapes of calls between Rorech and Negrin.  Just imagine the difficulty a private investor who suspected fraud would face in getting at the truth.  He'd have to know lots of details even to get past a motion to dismiss under the Private Securities Litigation Reform Act of 1995.  Unlike the SEC, which can issue subpoenas without filing a case, the private investor couldn't take discovery until after he beats a motion to dismiss.

On the bright side, at least the SEC's complaint confirms that the anti-fraud pieces of federal securities laws do apply to "security-based swap agreements."  But, unless the SEC becomes very active in ferreting out fraudulent uses of CDS contracts, that small victory will give private investors small comfort.

Antitrust Resurgent:  What to Expect

Teddy Roosevelt's Department of Justice sued to bust up Standard Oil .

The signs of a tougher approach to bigness and badness have grown like . . . Google.

On May 18, 2008, presidential candidate Barack Obama said:

I will assure that we will have an antitrust division that is serious about pursuing cases.

There are going to be areas, in the media for example where we're seeing more and more consolidation, that I think [it] is legitimate to ask . . . is the consumer being served?

We're going to have an antitrust division in the Justice Department that actually believes in antitrust law. We haven't had that for the last seven, eight years.

Some of the consolidations that have been taking place, I think, may be anti-competitive.

Flash forward to April 20, 2009, when the U.S. Senate confirmed President Obama's nominee, Christine Varney, to head the Antitrust Division in the Department of Justice.

Two days later, Ms. Varney named  her top aides, all of them sporting pro-antitrust credentials.

But the coup de grace came on May 11, 2009.  On that day, Ms. Varney withdrew an antitrust-lite report that her agency had issued only eight months earlier, "Competition and Monopoly:  Single-Firm Conduct Under Section 2 of the Sherman Act ". 

The New York Times had called the report "a new set of guidelines that narrow the interpretation of abuse that would justify government intervention against monopolies.  It is a deregulatory gift aimed at getting pesky antitrust enforcers off of the back of big business."  The Federal Trade Commission had refused to sign it, deeming it "a blueprint for radically weakened enforcement of section 2 of the Sherman Act."

Plainly the mood has changed.  What can we expect from Ms. Varney's resurgent Antitrust Division?

1.  Merger challenges.  The previous administration did not contest any corporate mergers.  In her Senate hearing, by contrast, Ms. Varney wondered why the government gave a pass to mergers between XM and Sirius and Maytag and Whirlpool.  Last year, she also deemed an abortive Google-Yahoo deal on search ads "fundamentally anticompetitive. 

2.  Monopoly cases.   In dropping the Section 2 report, Ms. Varney said that "the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers."  The "Don't Be Evil " guys, among others, likely got the message.

3.  ARRA fraud cases.  The American Recovery and Reinvestment Act of 2009 set aside $500 or so billion to revive the economy.  The Antitrust Division has created its own Recovery Initiative to help prevent "third-party fraud, waste, and abuse relating to the securing and use of ARRA funds."  We can also expect prosecutions.  We'll have to see whether the anti-fraud work carries over to other stimulus projects, such as the Troubled Asset Relief Program and the impending Public-Private Investment Program .

4.  Cartel litigation.  While praising the Division's recent record of fighting criminal cartel activity, Ms. Varney warned that, "[w]ith the higher levels of concentration and economic instability, markets are increasingly vulnerable to collusion and other fraudulent activity."

5.  Focus on technology.  Ms. Varney headed her firm's Internet practice group.  She said she wants to look at "other new areas of civil enforcement, such as those arising in high-tech and Internet-based markets."  She also  opined last year that "Google has acquired a monopoly in Internet online activity".

6.  Scrutiny of industries in distress.  The top economist in the Antitrust Division, Carl Shapiro, said on May 13, 2009, that "tough economic times . . . are exactly the times when suppliers may be most likely to seek some relaxation of the antitrust laws and most tempted to collude."

7.  More doubts at federal agencies on industry structure and pro-competitive arguments.  Ms. Varney rejected the Section 2 report in part because it "sound[ed] a call of great skepticism regarding the ability of antitrust enforcers -- as well as antitrust courts -- to distinguish between anticompetitive acts and lawful conduct, and raises the related concern that the failure to make proper distinctions may lead to 'over-deterrence' with regard to potentially procompetitive conduct."  We can expect that her aversion to the skepticism will carry over to other agencies.  The acting Chairman of the Federal Communications Commission, Michael Copps, spoke recently about "[t]wo decades of mindless deregulation" and "a veritable tsunami of consolidation across not just communications, but most business sectors . . . ."  And the new FTC Chairman, Jonathan Leibowitz, decried the Section 2 report as "chiefly concerned with firms that enjoy monopoly or near-monopoly power".

8.  An up-tick in follow-on civil cases.  Antitrust actions by government agencies tend to produce private civil actions also.  Expect to see more of both.

One thing Your Editor would like to see but probably won't:  More attention in judicial nominations to views on competition law.  Although comments in the business press about Supreme Court nominee, Second Circuit Judge Sonia Sotomayor , do imply at least some interest in that area.

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Laying Blame

Cicero (David Bamber) had some anger issues.

Your Editor doesn't know much about rhetoric -- although I've tried to learn.

I've read Jay Heinrich's funny Thank You for Arguing (2007), parts of the ponderous Classical Rhetoric for the Modern Student (4th ed. 1999), and even book one from Cicero's On the Orator  (55 B.C.).

But not much has stuck.  So many rules!  Syllogism:  major premise + minor premise = conclusion.  Tons of terms!  Chiasmus?  Metonomy?  Onomotopoeia?  Ugh.

One rule did stick, though:  past tense implies blame.

See how you react to these statements, both about a new book :

• Richard Posner blames capitalism.
• Richard Posner blamed capitalism.

Perhaps you feel a bit more critical about the second sentence, the one where Judge Posner did something in the past?  (Another rule:  present tense reflects values, which we tend to feel more tolerant about.)

The urge to find culpability fills the air these days.

An article in The New Yorker highlights the indignation we feel.  "Was it Wall Street in general -- or even its clients, and the debt-hungry masses -- that behaved abominably, or just a scattering of scoundrels?", asks Nick Paumgarten in "Annals of Finance:  The Death of Kings".  We want "expiation", he says.  Someone must pay. 

Oliver Wendell Homes, Jr., traced tort liability to "the passion of revenge" against the person or thing that caused harm.  Just so.

But, by itself, perturbation at what happened to us -- a wrong someone did to us -- offers an insufficient reason for striking back.  The pre-eminent device for looking back in anger, the lawsuit, an institution that lives and breathes in the past tense, may often run on the passion of revenge; but let us recall that many snares and traps lie on the path to verdict and judgment.  And that sort of expiation costs money, not to mention psychic resources.

No, let's calmly evaluate grievances.  Let's identify the costs and benefits and weigh them.  As Abraham Lincoln said:

Discourage litigation.  Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser - in fees, expenses, and waste of time.  As a peacemaker the lawyer has a superior opportunity of being a good man.  There will still be business enough.

Twombly Applies in All Civil Cases 

Retiring Associate Justice David Souter wrote Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).

A 5-4 majority of the U.S. Supreme Court held this month that high federal officials need not answer civil claims over post-9/11 detention policies.  The Court ordered dismissal of a complaint by Javaid Iqbal against former Attorney General John Ashcroft and ex-FBI Director Robert Mueller.  Ashcroft v. Iqbal, No. 07-1015 (U.S. May 18, 2009).

Mr. Iqbal framed his lawsuit, under Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388 (1971), as a constitutional tort case to remedy a policy of bias against Arab Muslims and non-U.S. citizens.  He asserted that Messrs. Ashcroft and Mueller okayed the policy "solely on account of religion, race, and/or national origin and for no legitimate penological interest." Id., slip op. at 4-5.

The Court made two key rulings:

1. It rejected "supervisory liability" under Bivens.  "Absent vicarious liability, each Government official, his or her title notwithstanding, is only liable for his or her own misconduct."  Id., slip op. at 13.
   

2. It held the complaint too vague to make out a "plausible" Bivens claim against Messrs. Ashcroft and Mueller under Bell Atl. Co. v. Twombly, 550 U.S. 544 (2007).  The Court rejected Mr. Iqbal's allegations that the two men knew of and condoned a policy of abusing detainees as "conclusory and not entitled to be assumed true."  Id. at 17.  It also deemed the charge of knowing discrimination implausible.  "On the facts respondent alleges the arrests Mueller oversaw were likely lawful and justified by his nondiscriminatory intent to detain aliens who were illegally present in the United States and who had potential connections to those who committed terrorist acts."  Id. at 18.

Justice Kennedy wrote the majority opinion, in which Chief Justice Roberts and Justices Alito, Scalia, and Thomas joined.  Justices Souter and Breyer dissented; all the dissenting justices joined the Souter opinion.

Lest you have any doubt about how far the "plausibility standard" of Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), will reach, witness what the majority said on that score in Ashcroft v. Iqbal:

Respondent . . . says that our decision in Twombly should be limited to pleadings made in the context of an antitrust dispute. . . . This argument is not supported by Twombly and is incompatible with the Federal Rules of Civil Procedure.  Though Twombly determined the sufficiency of a complaint sounding in antitrust, the decision was based on our interpretation and application of Rule 8.  550 U.S. at 554.  That Rule in turn governs the pleading standard "in all civil actions and proceedings in the United States district courts."  Fed. Rule Civ. Proc. 1.  Our decision in Twombly expounded the pleading standard for "all civil actions," ibid., and it applies to antitrust and discrimination suits alike.  See 550 U.S. at 555- 556 and n. 6.

Your Editor notes that the author of Twombly, the retiring Justice David Souter, wrote the main dissent in Ashcroft v. Iqbal, observing that the "majority . . . misapplies the pleading standard under" Twombly by "looking at the relevant assertions in isolation" and by treating non-conclusory allegations as conclusory.  Ashcroft v. Iqbal, slip op. at 12 & 13 (Souter, J., dissenting).

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