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/raid1/www/Hosts/bankrupt/CAR_Public/000201.MBX C L A S S A C T I O N R E P O R T E R Tuesday, February 1, 2000, Vol. 2, No. 22 Headlines CIRCUIT CITY: Arbitration Term Barring Employees’ Suit Is Unenforceable DOE RUN: Co-Defendant in MD Suit over Lead Paint in Housing HMO: UnitedHealthcare Sued for Removing Children's Hospital from List LSU: Ap Ct Says University’s Athletic Dept Knowingly Makes Gender Bias MOBIL OIL: AOPA Says Fuel Contamination Compensation Package Is Flawed MOBIL OIL: Aust Suit over Avgas by Aircraft Owners & Operators Begins NET GAMBLING: WI Fd Ct Dismisses RICO Suit over Losses thru Credit Card STATE BANK: Suit V Indian Bank over Payment of Bonds to Proceed in U.S. SYNTHETIC STUCCO: NC Homeowners May Net Millions from 5 Major Makers TIMBER COMPANIES: Sued in Florida over Migrant Farmworkers’ Wages TOBACCO LITIGATION: Erie County in NY Prepares to Securitize Settlement UNITED CONSUMER: Buying Club Not 'Enterprise' under Statute, IL Ct Says * Rethinking Clayton Act's Treble Damages Provision in Antitrust Cases ********* CIRCUIT CITY: Arbitration Term Barring Employees’ Suit Is Unenforceable ----------------------------------------------------------------------- Ramirez v. Circuit City Stores Inc., Supreme Court Case No. S085000 Case below: A085701; Cal.Ct.App., 1st Dist., Div. 1; 76 Cal.App.4th 1229, 90 Cal.Rptr.2d 916, 99 C.D.O.S. 9740 Petition filed: Jan. 11, 2000 Procedure: Petition for review after affirmance of judgment. Question presented: Was a non-negotiable arbitration agreement that, among other things, barred employees from bringing class actions against their employer unconscionable and therefore unenforceable? Facts: Robert Ramirez applied for work at the automotive department of a store run by Circuit City Stores Inc. As part of his job application, Ramirez was required to sign a "Circuit City Dispute Resolution Agreement." The agreement provided for mandatory and binding arbitration of any and all claims brought by Ramirez against Circuit City which might arise out of Ramirez's eventual employment with Circuit City. The agreement provided for arbitration of all employment-related claims, including claims arising from age discrimination, violation of civil rights or violation of the Fair Labor Standards Act. Ramirez was hired. He later filed a class action lawsuit against Circuit City, alleging multiple violations of the Lab. Code, the Cal. Code of Regulations, and the Bus. & Prof. Code. Specifically, Ramirez alleged that Circuit City failed to pay its employees at least twice the minimum wage despite requiring them to provide many of the tools used in the installation process, that Circuit City required its employees to work overtime but did not pay them overtime at the rate of one and one-half times the minimum wage, and that Circuit City was misreporting the statements of gross and net earnings of its employees. Ramirez brought the action on behalf of himself and all similarly situated Circuit City employees. He sought restitution, statutory damages, injunctive relief and attorneys fees. Circuit City moved to compel arbitration, citing the arbitration agreement executed by Ramirez. The trial court denied the motion, finding the lawsuit was brought as a class action and the arbitration agreement specifically excludes class actions from its mandatory arbitration provisions. The court found further that the agreement contravened California law to the extent that it limited the rights conferred on employees by the Lab. Code. Finally, the court found the agreement to be unconscionable. The court of appeal affirmed, holding that arbitration agreement was unenforceable as unconscionable. The court found the agreement to be both procedurally and substantively unconscionable. First, the contract was one of adhesion. Ramirez had no ability to negotiate the terms of the agreement and no meaningful choice other than to agree to the terms as stated, regardless of whether or not he even understood them, if he wanted to apply for work with Circuit City. The court rejected Circuit City's argument that Ramirez had the obvious choice simply not to apply for work with Circuit City. The court found Circuit City's contention ignored the realities of the marketplace. The court found persons such as Ramirez, applying for an entry level position, presumably need a job and lack much in the way of salable skills. Circuit City was in a position to provide the needed job. The court also found it unrealistic to suppose that persons such as Ramirez, seeking work and applying for positions not requiring specialized education, would have the background to understand the significance of rights they were relinquishing. In these circumstances, the agreement was procedurally unconscionable. Further, the substance of the agreement was unconscionable. The terms clearly favored Circuit City. Although employees were bound to arbitrate all claims against Circuit City, Circuit City was not so limited with regard to any claims it might have against an employee. The unilateral nature of the agreement rendered it unconscionable. The court found that the agreement also impermissibly limited the ability of an employee to obtain relief against Circuit City by participating in a class action. Further, the agreement subverted the purpose of punitive damage awards by limiting such awards to a maximum of $5000. Finally, the court found that the agreement tended to discourage the prosecution of employee claims that are encouraged by statute, by making discretionary awards of costs and attorneys fees that by statute are mandatory and by making a complaining employee potentially liable for Circuit City's costs and attorneys fees, a liability not authorized by statute. Counsel for petitioner Circuit City Stores Inc.: Rex Darrell Berry, Davis Grimm Payne Marra & Berry, 1111 Third Ave., Ste. 1865, Seattle, WA 98101, 206-447-0182 Counsel for respondent Robert Ramirez: Joseph A. Creitz, Van Bourg, Weinberg, Roger & Rosenfeld, 180 Grand Ave., Ste. 1400, Oakland, CA 94612 (California Supreme Court Service, January 21, 2000) DOE RUN: Co-Defendant in MD Suit over Lead Paint in Housing ----------------------------------------------------------- Doe Run Resources Corporation is one of several defendants in Cofield Et Al. V Lead Industries Association, Inc., Et Al. filed on September 21, 1999 in the Circuit Court for Baltimore City, Maryland. This is a class action seeking to certify as a class the owners of all housing in the State of Maryland built prior to 1978 that has lead paint on the premises. The complaint alleges that all defendants were members of Lead Industries Association (LIA), a trade association, who improperly promoted lead paint and seeks damages for paint removal for all such housing in the state of Maryland. This suit also seeks punitive damages. The Company, with several other defendants, was named in Smith Et Al. V. Lead Industries Association, Inc. Et Al., filed on September 21, 1999 in the Circuit Court for Baltimore City, Maryland. Defendants are the same defendants named in the COFIELD case except that this is a suit for personal injuries by children alleging lead poisoning from lead paint in the family residence. The suit requests damages, including punitive damages. HMO: UnitedHealthcare Sued for Removing Children's Hospital from List --------------------------------------------------------------------- Faced with the agonizing choice of either switching hospitals and pediatricians or suffering loss of insurance coverage, a group of UnitedHealthcare policyholders have banded together to challenge the managed care organization's decision to prohibit Children's Hospital here from participating in its healthcare provider network. Earlier this month, parents were notified that Children's Hopital was no longer an approved hospital in the UnitedHealthcare plan, forcing more than 20,000 insureds to seek treatment at Tulane Hospital or Ocshner Hospital's pediatric units. In a class action lawsuit filed January 31, parents claim UnitedHealthcare engaged in a "bait and switch" sales tactic by removing Children's Hospital, its pediatricians and sub-specialists from its provider network after most policies were purchased or renewed by year-end. Considering UnitedHealthcare exclusively sells group health insurance, and most of these group policies were purchased by parents and employers with the understanding that Children's Hospital, its pediatricians and sub-specialists would be available on the UnitedHealthcare plan, parents were shocked to learn United would not cover medical treatment at the only free-standing pediatric hospital in the state effective Jan. 1, 2000. Parents also claim the letters notifying them of the new policy were dated Dec. 13, 1999, yet did not arrive until mid-January 2000. According to court records UnitedHealthcare gave its assurance to policyholders that their pediatrician of record would not be affected by the change, since most doctors had privileges at "other UnitedHealthcare network facilities" in addition to Children's. Attorneys representing the class claim these letters blatantly misrepresented the fact since almost all doctors and medical staff associated with Children's do not have privileges at Tulane and Ocshner -- the only hospitals in the UnitedHealthcare network offering pediatric specialty resources. "Policyholders were told they could keep their pediatrician and only had to switch hospitals. That's simply not feasible when a doctor cannot and does not practice at any other pediatric hospital in the United network," explained Steven Lane of the Law Firm of Herman, Herman, Katz & Cotlar, representing the class plaintiffs. As doctors affiliated with Children's fielded calls from concerned parents, a second wave of letters arrived from United, this time requiring those pediatricians and pediatric specialists "to document admitting privileges at other network facilities" or be dropped from the provider network. In some cases, doctors were given only three days to do so, others received letters after the deadline had expired. While parents are reeling over how the state's largest healthcare provider could arbitrarily eliminate Children's Hospital, attorneys on their behalf are seeking injunctive relief in federal court from the ban. Class members claim United's decision will affect the quality of care their children will receive, arguing continuity of care is critical in the successful treatment of children. "When you're dealing with children who cannot express their needs, the benefit of a strong doctor/patient relationship exponentially increases. By forcing a parent to sever that relationship, you are putting a child at risk," explains Lane. "United made a tactical error -- they underestimated the passion and power of parents. Policyholders will not choose a pediatrician or hospital out of the Yellow Pages without a fight. It's going too far," contends co-counsel, Stephen Herman. Parents of children requiring specialized or long-term care are particularly concerned since generally a team of pediatric specialists develops an integrated treatment program for these children. "Many special-needs children have been cared for by the same team since birth. You're essentially asking their parents to start at square one," Lane said. Supporters of Children's Hospital worry the substantial loss of revenue from one of the largest provider networks in the state could place the community hospital at considerable risk as well. "It's a real concern, not just of the class members, but by locals who built and support this hospital," Lane said. "Since a large number of UnitedHealthcare members seek treatment at Children's, the loss of this group of patients has the potential to negatively affect all patients seeking care at the hospital," Herman warned. While it remains to be determined how far-reaching and detrimental the effects of the new policy will be on Children's Hospital, its staff members, local doctors, as well as tens of thousands of children and their parents, a judge will decide whether to temporarily halt the managed care organization's action until the case can be heard in court. Meanwhile, parents are urging United to respond to their concerns and reinstate the hospital "stat." Contact: Herman Herman Katz & Cotlar, New Orleans Steven Lane, 504/58 LSU: Ap Ct Says University’s Athletic Dept Knowingly Makes Gender Bias ---------------------------------------------------------------------- Louisiana State University's athletic department intentionally violated federal law requiring equal opportunities for male and female college athletes, a federal appeals court ruled. The decision released on January 27 by the panel of the 5th U.S. Circuit Court of Appeals means five women who filed a discrimination lawsuit can seek unlimited monetary damages from the university. The ruling reversed a 1996 finding by U.S. District Judge Rebecca Doherty. She found that the college's athletic department had ''archaic and antiquated'' views about female athletes but did not intend to violate Title IX, the federal law requiring equal athletic opportunities at schools accepting federal funding. The federal appeals panel also ordered Doherty to reconsider her decision denying the lawsuit class action status, meaning more female students could be added as plaintiffs. Testimony during the trial quoted LSU athletic director Joe Dean referring to plaintiff Lisa Ollar as a ''honey,'' ''sweetie'' and ''cutie.'' Dean also said the school's first women's softball team was disbanded because of the sexual preference of the players. And he told one plaintiff if he had to start one women's sport he'd prefer women's soccer because players ''look cute in their shorts.'' (AP Online, January 28, 2000) MOBIL OIL: AOPA Says Fuel Contamination Compensation Package Is Flawed ---------------------------------------------------------------------- Mobil's fuel contamination compensation packages came under renewed fire on January 31, being condemned as flawed. The Aircraft Owners and Pilots Association (AOPA) told a senate hearing in Sydney that there was not yet a way to quantify the financial burden of the avgas crisis which grounded 5,000 light aircraft. Mobil announced two packages - a $15 million hardship fund to help keep customers operating and another compensation package which has not been costed. But Mobil has said anyone who settled out of court must not take part in the two class actions or any other litigation against Mobil for compensation. AOPA President Bill Hamilton said there was no way the association would encourage its members to accept the packages. "The Mobil program at this point fails the most basic test of justice," Mr Hamilton told the hearing. He said the hardship funds were flawed, devised and run by the fuel giant. "Quite simply it is a Mobil program, with criteria established by Mobil and judged by Mobil." He said the level of detail being asked of those seeking compensation was similar to that needed on a tax audit. Many organisations were not willing to submit that degree of financial detail to another commercial company. The association said there was yet no way of determining the short or long term financial cost caused by the fuel disaster. "At this stage we have no idea even of the short term cost of getting the aviation fleet, some 5000 aircraft, back in the air.”"We're a long way from understanding whether there will be long term additional maintenance to keep those aircraft worthy.” "We haven't even begun to quantify the personal hardships, the problems suffered.” "The long term economic effects of this fuel disaster we haven't even begun to estimate it, let alone come up with any quantifiable figures." Mr Hamilton said in terms of losses the figures Mobil had presented were effectively meaningless. (AAP Newsfeed, January 31, 2000) MOBIL OIL: Aust Suit over Avgas by Aircraft Owners & Operators Begins --------------------------------------------------------------------- The first of two class actions brought by aircraft owners and operators against Mobil over contaminated avgas began in the Supreme Court in Melbourne on January 31. The action before Justice Hedigan involved an application by counsel for the Aircraft Owners and Pilots Association (AOPA) to expedite hearings. A decision on the applications was expected February 4. Slater & Gordon partner Peter Gordon, acting on behalf of AOPA, said the main aim was to get orders to have the trial heard as soon as possible. Mr Gordon said Mobil told the court they would deny any accusations they were negligent in distributing fuel which ended up forcing the grounding of about 5,000 small aircraft in the eastern states earlier this month. He also said Mobil told the court they may want to argue that the class action laws in the Victorian Supreme Court may be unconstitutional. The second class action, being brought by Maurice Blackburn Cashman on behalf of about 3,000 pilots and aviation firms, will also seek a speedy trial in light of the financial hardship faced by operators over the crisis. The case is due for a directions hearing in the Federal Court on March 1. (AAP Newsfeed, January 31, 2000) NET GAMBLING: WI Fd Ct Dismisses RICO Suit over Losses thru Credit Card ----------------------------------------------------------------------- A district court judge in Wisconsin has dismissed at the pleading stage a federal racketeering lawsuit against MasterCard International Inc. and MBNA American Bank, finding that the companies' involvement with on-line casinos does not constitute a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). Jubelirer et al. v. MasterCard International Inc. et al., No. 99-C-256-S (WD WI, Sept. 17, 1999). U.S. District Court Judge John C. Shabaz, of the Western District of Wisconsin, concluded that the plaintiff's third amended complaint failed to allege the existence of a RICO enterprise, or the conduct of such an enterprise, by the two defendants. According to the complaint, the plaintiff, Ari Jubelirer, activated a credit card account with Casino 21, an on-line gambling website. He used his MBNA MasterCard to place a deposit of $25 in order to receive 25 wagering chips. After losing $20, plus a $4.95 processing fee, Jubelirer filed a class action lawsuit against MasterCard and MBNA. Jubelirer alleged that MasterCard and MBNA committed RICO violations by charging, clearing, and paying credit card charges to illegal gambling operators. He further averred that the two defendants aided and abetted others in violating federal anti-gambling laws. Lastly, he sought to enjoin the collection of all debts for illegal gambling charged to MBNA credit cards, and (2) to have such activity declared unlawful. MasterCard and MBNA moved for dismissal, alleging the third amended complaint failed to state a claim under RICO, or for aiding and abetting a RICO violation. They also contended that declaratory relief was not available under the circumstances. Finally, they argued the action should be barred by the doctrine of in pari delicto, a doctrine by which the court usually denies relief when parties have made an illegal agreement and both are equally at fault. The court agreed with the defendants and dismissed the RICO and aiding and abetting claims with prejudice. According to Judge Shabaz, a RICO claimant under Sec. 1962(c) must allege four elements: (1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. He concluded Jubelirer insufficiently pleaded facts to support the existence of a RICO enterp rise or the conduct of such an enterprise by the defendants. Instead, he found MasterCard and MBNA merely collect debts incurred by its cardholders, regardless of the merchant involved. "Accepting plaintiff's allegations as sufficient to allege a RICO enterprise would lead to the absurd conclusion that each of the many million combinations of merchant, MasterCard, and lender is a RICO enterprise," Judge Shabaz wrote. "However broadly worded, the RICO statute is not to be applied to situations absurdly remote from the concerns of the statute's framers." The court concluded its analysis of the RICO claims by saying the defendants' involvement with online casinos is a routine contractual relationship that does n ot rise to the level of being an enterprise for RICO purposes. Turning to the separate aiding and abetting allegations, the court found the language of the RICO statute, requiring participation in the conduct of an enterprise, too narrow to permit liability for aiding and abetting. It observed that the language of Sec. 1962(c), which requires that a defendant "participate" "in the conduct of" an enterprise is narrower than liability for "aiding and abetting." "Implying a cause of action for aiding and abetting where the language is purposely drawn more narrowly would circumvent rather that further Congressional intent," Judge Shabaz said. The court also declined to grant Jubelirer declaratory relief, finding it lacked subject matter jurisdiction over the claim. Judge Shaba z said subject matter jurisdiction for declaratory actions generally exists only where the defendant could have brought a coercive action to enforce its rights in federal court against the plaintiff. Presently, however, the court determined that neither MasterCard nor MBNA could have sued Jubelirer in federal court to collect the $25 obligation he incurred in connection with Casino 21. The court found no federal question invo lved in a simple debt collection, and also concluded no diversity jurisdiction existed. Jubelirer and the proposed class are represented by Ronald S. Goldser and Keelyn M. Friesen with Zimmerman Reed in Minneapolis. MasterCard and MBNA are represented by Richard Norton Jr., Senior Vice President, Legal Depar tment, in Purchase, NY, and Stanley J. Adelman with Rudnick & Wolfe in Chicago. (Civil RICO Litigation Reporter, November 1999) STATE BANK: Suit V Indian Bank over Payment of Bonds to Proceed in U.S. ----------------------------------------------------------------------- Plaintiffs sought damages stemming from defendant foreign bank's alleged failure to deliver payment of the principal amount of certain bonds on the due date. The terms of the bonds stated "the Courts in India and the United States of America only shall have jurisdiction in respect of all matters of disputes about the [bonds]." Plaintiffs brought suit in the U.S. and defendant moved to dismiss for forum non conveniens, contending that India was the only convenient forum. The court found that the clause used the words "shall," and "only," thereby consenting to jurisdiction in those courts and making them the exclusive forums that may decide disputes. The court held that the combination of these words made the clause mandatory. Thus, plaintiffs chose a forum in compliance with defendant's contract. Defendant's motion was denied accordingly. Judge Cedarbaum PODDAR v. STATE BANK OF INDIA QDS:02762006 - Plaintiffs sue for breach of the terms of bonds purchased from defendant State Bank of India ("SBI"). SBI moves to dismiss the complaint on the ground of forum non conveniens. For the reasons that follow, the motion is denied. Background Plaintiffs Shrikumar Poddar, Mayurika Poddar, Vaishnava Center for Enlightenment, Inc. and India Foundation, Inc. seek damages for breach of contract and unjust enrichment stemming from SBI's alleged failure to deliver payment of the principal amount of certain bonds on the due date. The bonds at issue are Series II India Development Bonds ("IDBs"). SBI issued the IDBs in accordance with The Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991 (the "Act"). The Act was designed to attract foreign currency to the Indian economy. It encouraged investment in foreign exchange bonds by providing purchasers with certain tax benefits in India. Only individuals of Indian origin not residing in India and certain overseas corporations controlled by such persons could purchase IDBs. For purposes of the IDBs, persons of Indian origin were persons who at any time had held an Indian passport or who had a parent or grandparent who was at any time a citizen of India. Plaintiff Shrikumar Poddar purchased IDBs in the face amount of $ 100,000 in his individual capacity, $ 100,000 in his capacity as plan administrator of the ESS Employees Profit Sharing Trust, and $ 75,000 in his capacity as trustee of the Mayurika Poddar family trust. (Cmplt. P 23.) Plaintiff Mayurika Poddar purchased IDBs in the face amount of $ 100,000 in her individual capacity and $ 75,000 in her capacity as trustee of the Shrikumar Poddar Family Trust. (Cmplt. P 24.) Plaintiff Vaishnava Center for Enlightenment, Inc. purchased IDBs in the face amount of $ 100,000. (Cmplt. P 25.) Plaintiff India Foundation, Inc. purchased IDBs in the face amount of $ 100,000. (Cmplt. P 26.) Each of the named plaintiffs purchased the IDBs by submitting an application and remitting funds to the SBI branch in New York City. Plaintiffs have characterized this action as a class action on behalf of all bondholders similarly situated, but a class has not yet been certified. The IDBs matured on February 15, 1997. The Terms of Offer of the IDBs provided that "the principal amount of the IDBs and the interest earned thereon... are payable in US Dollars on expiry of five years from the date of allotment." To redeem the IDBs, holders were required to present the IDBs with "instructions regarding disposal of the proceeds to the Issuing Office, the State Bank of India, NRI Branch... Bombay." Plaintiffs allege that they complied with all of the redemption requirements but did not receive payment on February 15, 1997 as, they contend, the terms of the IDBs required. The complaint does not state when the named plaintiffs actually received payment, and the named plaintiffs do not specify their damages. SBI asserts that it mailed warrants to bondholders on February 15, 1997 and that mailing payment on that date fulfilled its obligations under the terms of the IDBs. The resolution of the underlying dispute will depend on how the redemption term of the IDBs is interpreted. The Terms of Offer of the IDBs state that "the Courts in India and the United States of America only shall have jurisdiction in respect of all matters of disputes about the IDBs." This same clause also appears on the face of the IDB certificates. The certificate explicitly incorporates the Terms of Offer as a part of the governing contract. For simplicity, this opinion only refers to the Terms of Offer. The Terms of Offer were not negotiated by plaintiffs. Plaintiffs accepted the Terms of Offer as presented by defendant by purchasing IDBs. Discussion Defendant must make the difficult showing that enforcement of the forum selection clause would be "unreasonable or unjust" or that the clause was the product of "fraud or overreaching" to avoid the enforcement of the forum selection clause. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S. Ct. 1907, 1916, 32 L. Ed. 2d 513, 523 (1972). The difficulty of making such a showing is particularly great in this case because the defendant drafted the language consenting to jurisdiction in the courts of the United States. Plaintiffs are contractually bound to bring any action relating to the IDBs in a United States or Indian court. Plaintiffs have complied with that obligation. Since SBI has a branch in New York, SBI drafted the clause at issue, and SBI solicited the purchase of IDBs in this country, enforcing the forum selection clause in this case is not so "unreasonable or unjust" as to justify setting it aside. Defendant argues that the forum selection clause is "permissive" rather than "mandatory" and that, therefore, the M/S Bremen standard does not apply. Blanco v. Banco Indus. de Venezuela, S.A., 997 F.2d 974, 979 (2d Cir. 1993). But an examination of Blanco shows that defendant's characterization of the forum selection clause in this case is erroneous. In Blanco, the forum selection clause stated that an action "may be brought" in one of four listed jurisdictions. The Court of Appeals read the word "may" as permissive language. Indeed, the Second Circuit emphasized that a forum selection clause identifying a number of permissible for a could be mandatory if the words used were words of command. Blanco, 997 F.2d at 979 ("We reach this conclusion solely because of the nonmandatory words the parties chose to express their agreement, and not... because the permissive clause contemplates more than one forum."). This forum selection clause, in contrast, limits available fora to courts in the United States and India only. This clause uses the word "shall," thereby consenting to jurisdiction in the courts of the United States and India, and uses the word "only," thereby making those courts the exclusive fora that may decide disputes arising from the IDBs. The combination of these words makes the clause mandatory. The plaintiffs have chosen a forum in compliance with a contractual obligation that the defendant drafted. The defendant will not now be heard to complain that the United States is an inconvenient forum. Even if normal forum non conveniens analysis applied in this case, defendant has not shown that the balance of both public and private interests weighs so strongly in its favor that plaintiffs' selection of a forum to which defendant has consented should be overturned. Conclusion Defendant drafted a mandatory forum selection clause consenting to be sued in the United States. It cannot now complain that India is the only convenient forum for this action. Moreover, defendant has not made the strong showing required to prevail on a motion to dismiss for forum non conveniens. Accordingly, defendant's motion is denied. (New York Law Journal, January 18, 2000) SYNTHETIC STUCCO: NC Homeowners May Net Millions from 5 Major Makers -------------------------------------------------------------------- North Carolina homeowners are expected to claim tens of millions of dollars in settlement money from the five major manufacturers of synthetic stucco. The Wilmington lawyers who brought the statewide class-action lawsuit say it's too soon to know how many homeowners will file claims or how expensive it will be for the manufacturers of the exterior siding. "We anticipate there will be thousands of claims," lawyer Trey Thurman said on January 28. "We're going to handle them and process the money as soon as possible." Average payments are expected to range from $ 15,000 to $ 18,000. The amount depends on how much of the house was damaged by the material, which is known as exterior insulation finish systems (EIFS). The material is believed to cause moisture to build up in walls and lead to rotting. The manufacturers deny their product is defective and blame builders and subcontractors for any damage. North Carolina homeowners will receive more per square foot than residents of other states under a national settlement reached with the Synergy Corp. in 1998. Except for claims involving the Sto Corp., homeowners in this state will receive $ 6 per exterior square foot that is proved to have been damaged. The Sto formula has not been determined. Thurman, from the law firm Shipman and Associates, said plaintiffs' attorneys are getting the word out to potential claimants through television advertisements and newspaper ads were soon to begin. As of January 27, more than 1,000 people had requested claim forms, which was in addition to the 1,300 people already in the firm's database, Thurman said. A Web site about the case, which has a claim form that can be downloaded, has attracted 1,400 hits, he said. Homeowners submitting claims for synthetic stucco made by Sto Corp. have until June 30. Claims to the other four companies can be made over the next three years. Sto only agreed to put $ 2.2 million into a court-controlled fund, which will be distributed on a square-footage rate determined by the number of claims submitted, minus attorneys' fees and court costs. Unlike Sto homes, claims submitted for the other companies will not have to wait until the filing period closes to pay. Thurman said payments should be made soon after the court approves each claim. Plaintiffs' attorneys could receive as much as $ 10 million in fees from the settlements. The settlements affect only EIFS used on one- or two-family houses and townhouses. Condominiums, apartments, hotels and other commercial buildings are not eligible. Anyone who as of Sept. 18, 1996, owned a home clad with synthetic stucco made by Parex Inc., Sto Corp., W.R. Bonsal Co., Continental Stucco Products Inc. or Dryvit Systems Inc. is covered by the settlements. Under some circumstances, homeowners who already have replaced EIFS and former homeowners may be entitled to some of the money. The class-action lawsuit was filed in 1996 in Superior Court in New Hanover County, where synthetic stucco first surfaced as a widespread problem. Subsequently, homeowners reported problems all over North Carolina and in many other states. In the Triangle, Cary has a concentration of problems connected to the material. The state Attorney General's Office called it perhaps the most serious consumer problem ever in this state. Superior Court Judge Ben F. Tenille, who handles complex business cases across the state, will review the settlements March 17 in Wilmington. Anyone who wants to file a claim can call (800) 378-4214, or write: EIFS Litigation, Class Counsel, PO Box 1567, Faribault, Minn. 55021-1567. The settlements are on the Web at http://www.ncstucco.com(The News and Observer (Raleigh, NC), January 31, 2000) TIMBER COMPANIES: Sued in Florida over Migrant Farmworkers’ Wages Three of the largest U.S. timber companies were accused in lawsuits filed January 27 of paying some 6,000 foreign workers in the United States less than the federal minimum wage and failing to pay overtime. The class-action lawsuits were filed in U.S. District Court in Tallahassee against International Paper Co., Georgia-Pacific Corp. and Champion International Corp. The lawsuits were filed on the migrants' behalf by the Florida Legal Services Migrant Farmworker Justice Project. The plaintiffs, from Mexico and Central America, were granted U.S. visas under an immigration law allowing them to work temporarily in jobs for which U.S. workers are in short supply, said James Knoepp, an attorney for them. They worked an average of four months each planting trees and thinning timber stands, mostly in the southeastern United States, Knoepp said. The lawsuits allege that the timber companies paid them less than the legal minimum wage, failed to pay them for all the hours they worked and failed to pay them overtime pay as required by law. The lawsuits also allege that the companies failed to reimburse workers for transportation costs and equipment purchases. The workers got $100 to $200 a week for 60 or 70 hours of work and had to use part of that for transportation, housing and work tools, the lawsuit alleged. ``You can't charge people for things that are for the benefit of the employee if those charges drop their wages below the minimum wage,'' Knoepp said. ``They didn't receive the minimum wage in the first place.'' A spokesman for Georgia Pacific, Ken Haldin, said the company would need to review the allegations but as a matter of policy did not comment on litigation. He added, however, that ``as a responsible company, we follow all applicable regulations and adhere to labor law.'' The lawsuits seek back wages for all foreign workers hired in the United States by the three companies from 1996 to the present, about 6,000 people. Most spoke little or no English and were unaware of their legal rights, Knoepp said. They were recruited in their home countries by labor contractors, who handled the actual hiring and distribution of wages. Still, the lawsuits said, the timber companies were aware of the abuses and ``turned a blind eye.'' International Paper is the largest pulp and paper company in the United States and the country's largest single private landowner. It owns and controls about 8.5 million acres of timber and other land. Georgia-Pacific and its affiliates, the nation's No. 2 pulp and paper company, own or control 4.8 million acres of timberland, while Champion owns or controls 5 million acres. (Reuters, January 27, 2000) TOBACCO LITIGATION: Erie County in NY Prepares to Securitize Settlement ----------------------------------------------------------------------- Caught between its location in a region badly in need of economic development, and a major source of revenue buffeted by constant controversy, Erie County, N.Y., is preparing to securitize its expected payments from the national tobacco settlements, according to county officials. Erie wants to hit the market "as soon as possible," said county Executive Joel A. Giambra. Giambra has yet to decide on how the proceeds will be used, but having begun an aggressive tax cut program intended to spur growth in the Buffalo region, some of the money could be used for economic development projects, he said. If Erie does bring a deal to market, it would be the fourth municipality in New York State, and possibly the fourth in the country, to securitize its expected tobacco settlement revenues. To date, New York City, Nassau County, and Westchester County have securitized at least some of the revenues they received from the tobacco settlement. One of the dynamics driving Erie into the market is the uncertain outlook for the tobacco industry, Giambra said. Shares of Philip Morris Cos., Loews Corp., and British American Tobacco hit 52-week lows as investors fled tobacco company stocks in the wake of a class-action suit by smokers seeking a share of payments from the national tobacco settlement. While investors in tobacco-backed securities have not been feeling the same jitters as tobacco company stockholders, secondary market trading in the securities has been light compared to some other large issues, investors said. Of the three deals in the market, only the bonds issued by TSASC Inc. -- the local development corporation created by New York City to issue its tobacco settlement debt -- appear daily on The Bond Market Association's Web site listing bonds traded four times or more in the same day. Underlying the light trading in tobacco settlement bonds has been retail investors' dominant presence in the municipal market, said Thomas C. Spalding, a portfolio manager with Nuveen Advisory Corp. "To the extent it's not really a retail item, which is where most of the demand has been over the last two to three months, I don't think there's a lot of liquidity," Spalding said. And the retail-led market is likely to hold sway for the near future, according to Spalding. "I sense it's going to last a while longer, at least until we stabilize and get through a Federal Reserve Board meeting or two," Spalding said. "I don't sense that we're going to be an institutionally driven market anytime in the first quarter, at least. Maybe in the second quarter we'll start to see some stabilization." Secondary trading may also be relatively light because of the arduous process fund companies undertook to qualify the unfamiliar credit for their portfolios, one market source said. After investing time and resources in the decision to buy tobacco bonds, a fund company might not want to quickly trade them, he said. While news surrounding the tobacco industry has alternated between bad and worse, investors in tobacco settlement bonds have not pushed the panic button. The prices reported to the Municipal Securities Rulemaking Board, and subsequently posted on TBMA's Web site, reflect yields both higher and lower than where the bonds debuted in November. Even when New York State implemented a 55-cent per pack increase on cigarette taxes in December, trading levels in the secondary market were unaffected, according to market participants. Erie County has sent out requests for proposals for a securitization and will begin to move forward once it has named a lead underwriter and a financial adviser, Giambra said. The county's securitization could produce approximately $245 million in proceeds, according to budget director Joseph Passafiume. The county expects to receive $580 million in settlement payments during the next 25 years. (The Bond Buyer, January 31, 2000) UNITED CONSUMER: Buying Club Not 'Enterprise' under Statute, IL Ct Says ----------------------------------------------------------------------- Plaintiffs Edward and Judy Stachon filed a timely amended class action complaint against United Consumer Club Inc. and its officers, franchisees, members, manufacturers, suppliers and wholesalers. They alleged violations of the civil provisions of RICO as well as the Illinois Consumer Fraud and Deceptive Trade Practices Act. Without reciting the facts of the case, the U.S. District Court for the Northern District of Illinois analyzed the RICO claim and dismissed it for failure to allege a proper RICO enterprise. (Stachon v. United Consumers Club Inc., No. 98 C 7020 (N.D. Ill. 10/21/99).) Under 1961(c) of the RICO statute, the plaintiff must show (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. The complaint alleged that the UCC and its members, franchisees, manufacturers, wholesalers and suppliers formed an association-in-fact, which is a kind of "enterprise" under RICO. The court first stated that UCC could not be a participant in the alleged enterprise because a firm and its employees or a parent and its subsidiaries are not an "enterprise" separate and distinct from the firm itself. Only individual defendants, and not UCC, are possible participants in the enterprise. The court then concluded that UCC franchisees could not be part of the RICO enterprise because franchisees are no different from employees when examining a RICO enterprise. The fact that a company chooses to operate through agents rather than employees does not make a difference in terms of preventing the type of abuse for which RICO was designed. The court next analyzed the remaining defendants: the manufacturers, suppliers and members of United Consumers Club. It said that an "enterprise" must have an ongoing structure of persons associated through time. The changing, unnamed manufacturers, suppliers and members did not function as a continuing unit or an ongoing structure. Plaintiffs offered nothing to show that the alleged "enterprise" was anything more than UCC simply contracting with members and suppliers. No case law supports the proposition that a purchasing club's ordinary business dealings with past and present manufacturers, suppliers or members constitute a structure. Moreover, the plaintiffs failed to show that the individual defendants were associated together for a common purpose of engaging in a course of conduct. Finally, the plaintiffs failed to show the enterprise was organized in a manner amenable to hierarchical or consensual decision-making. Plaintiffs did not demonstrate that the individual defendants ever made consensual decisions as a unit to promote the alleged common purpose or that members ever contacted or dealt directly with manufacturers or suppliers. The court ended by saying that a classic RICO association-in-fact is "a polite name for a criminal gang or ring." The plaintiffs had not proven the existence of such a criminal gang. Therefore, the RICO charges were dismissed. Opinion by: U.S. District Judge Norgle. (Civil RICO Report, December 23, 1999) * Rethinking Clayton Act's Treble Damages Provision in Antitrust Cases ---------------------------------------------------------------------- Kelly is managing partner of the Washington, D.C., office of Philadelphia's Morgan, Lewis & Bockius where his practice focuses on antitrust and trade regulation matters. He also represents clients before the U.S. Department of Justice's Antitrust Division and the Federal Trade Commission in criminal and civil matters. Sayyed is an associate at the firm. Treble damages can subvert the competitive process they are meant to protect, creating incentives for strategic use of antitrust laws to harass rivals or 'hold up' businesses. Corporations are acutely aware of the high price being paid by antitrust violators. In the last four years both Archer-Daniels-Midland and Hoffmann-La Roche pleaded guilty to price-fixing charges and paid hundreds of millions of dollars in fines. Top executives of Archer-Daniels-Midland also landed in jail In addition, violators can face more than staggering criminal fines and jail terms for employees; they also may be hit with follow-on litigation by states and private parties. The federal government's success in identifying and punishing companies engaged in cartel behavior is to be applauded. At the same time, this success underscores a crying need for reform. Enhanced criminal fines, particularly the twice-the-loss/twice-the-gain formulation enacted in 1987, may well deter some future violations, but they also threaten the very economic well-being of convicted corporations. The enormous penalties now being imposed by courts were never contemplated by Congress when it enacted the current enforcement scheme. The time has come therefore to reassess the antitrust damages package. The central question is whether mandatory treble damages in private antitrust actions are still appropriate. Section 4 of the Clayton Act states that "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor ... and shall recover threefold the damages by him sustained." This provision was intended both to compensate antitrust victims and to deter future misconduct. Antitrust violations are notoriously difficult and expensive to uncover and prove. By increasing the potential monetary award in excess of suffered harm, treble damages do create incentives for private parties to act as private attorneys general and pursue cases that are in the public interest. In essence, the possibility of treble damages alters the cost-benefit calculation of litigation. But treble damages also can subvert the competitive process they are meant to protect, creating incentives for strategic use of the antitrust laws to harass rivals or "hold up" businesses. This is not the first time that the question of treble damages reform has been raised. The Reagan administration tried and failed to pass reform legislation in the mid-1980s. The concern then was that private treble damages awards threatened companies with potentially uncapped liability. That problem has since been exacerbated by a new government aggressiveness in seeking high criminal fines. Making use of statutory and sentencing provisions not in place until a decade ago (and not used in any significant manner until the mid-1990s), the Justice Department's Antitrust Division has been able to significantly increase the potential costs to corporations and their officers of violating the antitrust laws. Fines of tens of millions of dollars are becoming commonplace; fines in the hundreds of millions of dollars no longer shock the antitrust defense bar. Last May, in the two main vitamin price-fixing cases United States v. F. Hoffmann-La Roche and United States v. BASF Aktiengesellschaft -- the Antitrust Division won awards of $500 million and $225 million, respectively. The previously shocking $100 million fine lowered on Archer-Daniels-Midland in 1996 pales in comparison. The hefty fines announced Sept. 9 of this year against three Japanese pharmaceutical companies -- $25 million, $40 million, and $72 million -- seem (almost) light. And individuals too can be liable for fines in the millions, as Dr. Kuno Sommer, a former executive at Hoffmann-La Roche, can testify. Fines of this magnitude are not made possible by anything in the Sherman Act, which limits fines to $10 million for a corporation and $350,000 for an individual. Instead, they are made possible by provisions of the Criminal Fine Improvements Act which allows for fines equal to twice the gain the company derived from the offense or twice the loss suffered by the victims -- or by the U.S. Sentencing Guidelines -- which sanction fines based on the volume of commerce affected. For antitrust cases, the guidelines decree a base fine, which can be adjusted upward or downward, of 20 percent of the volume of affected commerce. Fear of such fines is pushing antitrust conspirators to take advantage of the Antitrust Division's corporate leniency program at a record pace. In many cases, co-conspirators race each other to the Justice Department. Subtle adjustments to the scope of the leniency program are encouraging even more confessions, as parties attempt to limit, or even eliminate, their criminal liability. Corporations also recognize that there is an increasingly high degree of cooperation among antitrust enforcers globally. Both the European Commission's DG IV and the Canadian Competition Bureau are uncovering and prosecuting cartels and imposing fines at the same record pace as the Antitrust Division. Daunting as these criminal fines appear, they are only the beginning of what companies who have violated the antitrust laws face. Violators are soon the subject of numerous class actions and opt-out lawsuits, where the plaintiffs are seeking settlements of hundreds of millions, and even billions, of dollars. Even those parties who make use of the corporate leniency program to limit criminal fines are the subject of such suits. Rhone Poulenc SA, for example, which received leniency for helping the Antitrust Division crack the vitamins conspiracy and suffered no fines, is still a defendant in a series of private party actions, as is the Carbon Graphite Group, another recipient of Antitrust Division amnesty. In such situations, what worthwhile public policy goal is being achieved by the mandatory trebling of monetary damages? By simply participating in a follow-on suit, a private plaintiff is not truly serving as a "private attorney general." The enforcement agency charged with that responsibility has already acted. One could plausibly argue that follow-on suits border on overkill. Plaintiffs attorneys are just cashing in on the treble damages bonanza. Moreover, there is likely little marginal deterrent effect from additional penalties once a company has paid tens or hundreds of millions of dollars in criminal fines. Ultimately, the magnitude of treble damages can actually work to weaken or eliminate competition as companies cannot continue to operate in the face of such large losses. Consider the case of the SGL Carbon Corp., which filed for bankruptcy protection in Delaware last year in anticipation of the likely large settlement costs of private actions arising after its settlement with the Antitrust Division. While the division takes into consideration such a likelihood (since its mission is to protect competition, not maximize settlement amounts), private plaintiffs do not. At least on the margin, treble damages may also have the perverse effect of discouraging parties from making use of the corporate leniency program. Parties have to take into account that confessing to an undiscovered or limited violation of the antitrust laws will still make them subject to the likely follow-on private lawsuits. Concern about excessive or unnecessary recovery is not limited to criminal matters. It applies to the large number and variety of civil investigations undertaken by the antitrust agencies as well. It is true that because heavy criminal fines are not levied in civil cases, monetary damages awarded private plaintiffs may need to be higher to include some deterrent component. But this is offset somewhat by the increasing likelihood that the settlement of civil matters with the antitrust agencies or state attorneys general will include some monetary component. Moreover, any time that private parties bring a damage action after a government settlement, or the mere announcement of an agency action, they are initiating litigation from which some of the usual risk has been eliminated and in which there is a greater likelihood of recovery. Private parties in such follow-on cases do not need the extra motivation or compensation of treble damages. Duplicative Remedy? A striking recent development brings the continuing "need" for treble damages into further question. Last July, a U.S. district court held in Federal Trade Commission v. Mylan Laboratories Inc. that the FTC has the authority to seek consumer redress for antitrust violations through an order for disgorgement of profits, plus interest. William Baer, then director of the Bureau of Competition, advised that the FTC will seek restitution and disgorgement in two situations: (1) where the illegal activity is akin to a per se violation of the antitrust laws, i.e., price fixing, bid rigging, and certain group boycotts; and (2) where the illegal activity results in large monetary gains, but the likelihood of a successful private suit is low due to procedural hurdles. Such increased authority for the FTC would appear to decrease the rationale for both the deterrent and incentive effects of the treble damage provisions. The FTC's justification for use of this power -- that some individuals are hindered or prohibited from collection of antitrust damages -- may operate to frustrate the entire antitrust enforcement structure developed by Congress and interpreted by the courts. The agency's new-found authority creates a significant risk that courts will fashion duplicative or conflicting remedies -- something the Supreme Court warned against in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Use of this new authority would end-run the holding in Illinois Brick that only direct purchasers have standing to sue under the federal antitrust laws; the FTC has noted that it will seek monetary relief for indirect purchasers. In addition, Congress has explicitly and unequivocally granted power only to the Justice Department to seek monetary penalties for criminal behavior. Mylan illustrates another unfortunate feature of antitrust litigation: its incredible scale and scope. In the Mylan matter, there were approximately 20 private antitrust class actions and more than 30 attorneys general seeking monetary relief. Similarly, the private actions in the vitamins cases have grown to include more than 40 defendants, with more than 50 federal cases filed -- some of which can be attributed to forum shopping in search of a larger damages award with which to increase settlement pressure on other parties. The potential for duplicative recovery in such situations is great, even assuming that actual damages can be correctly measured. Trebling damages simply compounds any error. A fairly simple modification to the antitrust laws would address the dangers of overkill. Treble damages should be available only in actions where there is no ongoing antitrust agency investigation or where no settlement or guilty plea has been entered into with an antitrust agency. Single damages would remain available for any entity harmed by anti-competitive acts. Such a modification would respect the general intent of the Clayton Act's treble damages provision. It would not eliminate the incentive for private plaintiffs to bring an antitrust action where the agencies have not acted. It would not undercut the remedial, punitive, and public-good theories supporting treble damages. And it would be consistent with the practices of many other countries that already limit or proscribe private antitrust actions either entirely or once an official investigation has begun. What this modification would accomplish is the elimination of the piling on of subsequent lawsuits, which are destructive of economic wealth and corporate health. Private plaintiffs would still have the right to receive compensation to the extent of any harm suffered, plus attorney fees and costs. They would also continue to benefit from the antitrust agencies' success in winning criminal pleas and settlements, which would still be recognized as prima facie evidence of liability. (New Jersey Law Journal, January 17, 2000) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Romeo John D. Piansay, Jr., editor, Theresa Cheuk, Managing Editor. Copyright 1999. All rights reserved. ISSN 1525-2272. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The CAR subscription rate is $575 for six months delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are $25 each. 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