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/raid1/www/Hosts/bankrupt/CAR_Public/001003.MBX C L A S S A C T I O N R E P O R T E R Tuesday, October 3, 2000, Vol. 2, No. 192 Headlines AOL: 9th Cir Won't Revive Lawsuit Filed in CA over Charges and Privacy ARKANSAS: Teachers Testify in School Funding Lawsuit DELTA, COMAIR: Agree to Pay Comair Shareowners in KY, NY and OH Suits DELTA AIR: Defends Antitrust Lawsuits Filed in MI against Airlines DELTA AIR: Pilots File Oregon Suit for Retirement Benefits DELTA, ASA: Settle with ASA Shareowners in GA Suit; Complete Acquisition DONALDSON, LUFKIN: Weiss & Yourman Files Suit in NY over Stock Offer GUN MANUFACTURERS: Challenge of Congress Authority to Ban Dismissed IRIS CORKER: Alabama Supreme Ct OKs National Class of Skin Cap Buyers LUCENT TECHNOLOGIES: Milberg Weiss Appointed Lead Counsel in New Jersey MIAMI: Fails to Understand Seriousness of Its Misconduct, Says SEC MICROSOFT CORP: High Court Justice's Son is on Defense Team MOBILE HOME: Kentucky Court Rejects Lawsuit over Safety and Expense NORTHWEST AIRLINES: 1999 New Year Snowstorm Suit Gets Green Light NORTHWEST AIRLINES: Statement on Motions in 1999 Snowstorm Lawsuit RIDGEWOOD ENERGY; 18% of Settlement Fund for Attorneys Voided TOBACCO LITIGATION: Precedent-setting Smokers Case Opens in Norway WEST SUBURBAN: Cir Ct Sees No Precluion of Arbitration under TILA, EFTA WONDER BREAD: Judge Will Trim $121m Verdict in Discrimination Case WWII VICTIMS: Wartime Slaves Use U.S. Law to Sue Japanese * NJ Lawyer Presents Dichotomy Of Class Actions * Second Circuit Decisions May Increase Accountant/Auditor Liability ********* AOL: 9th Cir Won't Revive Lawsuit Filed in CA over Charges and Privacy ---------------------------------------------------------------------- The U.S. Supreme Court refused Monday to revive a lawsuit against America Online by subscribers who accused the Internet company of imposing unjust charges and failing to protect customer privacy. The court, without comment, turned down the subscribers' argument that AOL should be considered a ''common carrier'' that can be regulated by the Federal Communications Commission. Four AOL customers filed a class-action lawsuit in Los Angeles in March 1997 that said AOL set improper charges and failed to protect subscribers' privacy rights and copyrights in violation of the 1934 Communications Act. The FCC regulates ''common carriers'' under the communications law. But a federal judge dismissed the AOL subscribers' lawsuit, saying Internet companies are not common carriers and therefore are not covered by the law. The 9th U.S. Circuit Court of Appeals agreed. The FCC has repeatedly said Internet companies are not common carriers because they provide ''enhanced'' services rather than basic communication services, the appeals court said. Further, the appeals court said the 1996 Telecommunications Act specified that it was not designating interactive computer services as common carriers. In the appeal acted on Monday, the subscribers' lawyers said the FCC lacked authority to exempt Internet companies from regulation as common carriers. ''Only Congress may create such an exemption and ... it has not done so,'' the appeal said. (AP Worldstream, October 2, 2000) ARKANSAS: Teachers Testify in School Funding Lawsuit ---------------------------------------------------- Teachers from the school district that sued over how the state funds public schools testified last Thursday September 28 they are underpaid and don't have the physical plant needed to provide students a proper education. The Lake View School District is the lead plaintiff in a class action lawsuit alleging the state has failed to comply with a 1994 court order to eliminate unconstitutional disparities between wealthy and poor school districts. The case is before Pulaski County Chancellor Collins Kilgore. Among those taking the stand last Thursday September 28 was Lake View teacher Virgie Phillips, who has two master's degrees and earns $31,000 annually, despite 38 years at the school. She said she is the only science teacher and said the one room she is allotted does not have equipment for laboratory work. "We need to have the same things that the big schools have," Phillips said. Phillips said consolidating the district with nearby school districts like Elaine and Barton was not feasible because those districts have similar problems. She cited the region's slow economy and high rate of poverty. David Matthews, lawyer for the Bentonville and Rogers school districts, which intervened in the lawsuit, noted the Lake View district regularly has low test scores. Phillips said students who do go on to college don't often return to the farm. Phillips said her two sons have left; one is in medical school and the other has a doctorate in physics and works for NASA. Barton kindergarten teacher Barbara Davidson said she has taught 21 years and earns $33,000. She professed a love for the profession but said she encouraged her 11th-grade daughter to pick another career because of the pay. Fort Smith superintendent Benny Gooden told the court that his district faces problems similar to districts in east Arkansas. He said his elementary schools have a high proportion of students who come from poor families. He said the district also has about 2,000 students come from homes in which English is not the primary language. The educators testified on the first full day of the Lake View district's case against the state funding formula. (The Associated Press State & Local Wire, September 29, 2000) DELTA, COMAIR: Agree to Pay Comair Shareowners in KY, NY and OH Suits --------------------------------------------------------------------- In October and November 1999, shareowners of Comair Holdings filed several purported shareowner class action complaints in state courts in Kentucky, New York and Ohio against Comair Holdings, its board of directors and Delta. These lawsuits make allegations and seek remedies with respect to Delta's acquisition of Comair Holdings that are generally similar to the allegations made and the remedies sought with respect to Delta's acquisition of ASA Holdings in the ASA Holdings shareowner litigation discussed above. In November 1999, the parties to these lawsuits entered into a memorandum of understanding contemplating the settlement of this litigation. Pursuant to the memorandum of understanding, Delta and Comair Holdings amended their acquisition agreement to eliminate the termination fee payable to Delta by Comair Holdings if the acquisition agreement was terminated by Comair Holdings in favor of a superior proposal. The defendants also agreed to pay the fees and expenses of plaintiffs' counsel up to $675,000 and $75,000, respectively, subject to final court approval of the settlement. The parties have entered into a definitive settlement agreement, which the Circuit Court of Boone County, Kentucky approved on September 25, 2000. The time for appealing the Circuit Court's order has not yet expired. DELTA AIR: Defends Antitrust Lawsuits Filed in MI against Airlines ------------------------------------------------------------------ In June 1999, two purported class action antitrust lawsuits were filed in the United States District Court for the Eastern District of Michigan against Delta, US Airways, Inc., Northwest Airlines, Inc. and the Airlines Reporting Corporation, an airline-owned company that operates a centralized clearinghouse for travel agents to report and account for airline ticket sales. In the first case, the plaintiffs allege, among other things: (1) that the defendants and certain other airlines conspired with Delta in violation of Section 1 of the Sherman Act to restrain competition and assist Delta in fixing and maintaining anti-competitive prices for air passenger service to and from its Atlanta and Cincinnati hubs; and (2) that Delta violated Section 2 of the Sherman Act by exercising monopoly power to establish such prices in an anti-competitive or exclusionary manner. The complaint asserts that, for purposes of plaintiffs' damages claims, the purported plaintiff class consists of all persons who purchased a Delta full-fare ticket from June 11, 1995 to the present on routes (1) that start or end at Delta's hubs in Atlanta or Cincinnati; (2) on which Delta has over a 50% market share; (3) that are longer than 150 miles; and (4) that have total annual traffic of over 30,000 passengers. In the second case, the plaintiffs assert similar allegations and claims under Sections 1 and 2 of the Sherman Act with respect to US Airways' pricing practices at its Pittsburgh and Charlotte hubs ("US Airways Hubs"). The complaint asserts, among other things, that Delta, the other defendants and certain other airlines conspired with US Airways to restrain competition and assist US Airways in fixing and maintaining prices for air passenger service to and from the US Airways Hubs. In both cases, plaintiffs have requested a jury trial, and are seeking injunctive relief; costs and attorneys' fees; unspecified damages, to be trebled under the antitrust laws; and such further relief as the District Court deems appropriate. Delta believes that the claims asserted against it in these cases are without merit, and it intends to defend these lawsuits vigorously. DELTA AIR: Pilots File Oregon Suit for Retirement Benefits ---------------------------------------------------------- In March 2000, four retired Delta pilots filed a purported class action lawsuit against Delta and the Delta Pilots Retirement Plan (the "Retirement Plan") in the United States District Court for the District of Oregon. The plaintiffs, who are seeking unspecified damages, claim that the calculation of their retirement benefits violated the terms of the Retirement Plan and various Internal Revenue Code provisions. The plaintiffs seek to represent a class consisting of certain groups of retired and active Delta pilots. The District Court recently granted Delta's motion to transfer the case to the United States District Court for the Northern District of Georgia. Delta believes this lawsuit is without merit, and it intends to defend this matter vigorously. DELTA, ASA: Settle with ASA Shareowners in GA Suit; Complete Acquisition ------------------------------------------------------------------------ In February 1999, two shareowners of ASA Holdings filed a purported shareowner class action complaint in the Superior Court of Fulton County in the state of Georgia against ASA Holdings, its board of directors and Delta Air Lines Inc. The complaint seeks (1) to enjoin Delta's now completed acquisition of ASA Holdings or to rescind the acquisition; (2) unspecified compensatory and rescissory damages; and (3) costs and disbursements of the action. The complaint alleges, among other things: (1) that the board of directors of ASA Holdings breached its fiduciary duties by permitting ASA Holdings to enter into an acquisition agreement with Delta under which shareowners of ASA Holdings allegedly received an inadequate price; and (2) that Delta owed fiduciary duties to shareowners of ASA Holdings and breached those duties by entering into the acquisition agreement. In March 1999, the parties entered into a memorandum of understanding contemplating the settlement of this litigation. Pursuant to the memorandum of understanding, Delta and ASA Holdings amended their acquisition agreement to eliminate the termination fee payable to Delta by ASA Holdings if the acquisition agreement was terminated by ASA Holdings in favor of a superior proposal. The defendants also agreed to pay the fees and expenses of plaintiffs' counsel up to an aggregate amount of $400,000, subject to final court approval of the settlement. The parties have entered into a definitive settlement agreement, which is subject to the approval of the Superior Court of Fulton County. The Superior Court has scheduled a hearing to consider the settlement on October 20, 2000. DONALDSON, LUFKIN: Weiss & Yourman Files Suit in NY over Stock Offer -------------------------------------------------------------------- The law firm Weiss & Yourman announces that a class action lawsuit against Donaldson, Lufkin & Jenrette, Inc. (NYSE:DLJ), its directors and other parties was commenced in the United States District Court for the Southern District of New York, seeking an injunction and to recover damages on behalf of all purchasers/owners of the series of stock designated Donaldson, Lufkin & Jenrette, Inc.-DLJdirect Common Stock par value $.10 per share ("DLJdirect stock") (NYSE:DIR). In addition to seeking damages, the action seeks to enjoin a tender offer for the outstanding shares of DLJ common stock. The complaint alleges that the tender offer materials are false and misleading and that failure to make a similar offer for DLJdirect stock is unlawful and in violation of the representations made in the Prospectus for the initial public offering of DLJdirect stock in 1999. The tender offer is currently scheduled to close on October 5, 2000. Contact: Weiss & Yourman, New York Mark D. Smilow or Joseph H. Weiss 888/593-4771 212/682-3025 wynyc@aol.com GUN MANUFACTURERS: Challenge of Congress Authority to Ban Dismissed ------------------------------------------------------------------- Two gunmakers who challenged Congress' authority to ban the manufacture, sale and possession of semiautomatic assault weapons lost a Supreme Court appeal on Monday. The court, without comment, rejected an appeal that said Congress exceeded its power to regulate interstate commerce when it outlawed such weapons in 1994. The 1994 law, an amendment to the Gun Control Act of 1968, defines semiautomatic assault weapons to include a list of specified firearms and ''copies or duplicates of the firearms in any caliber.'' (AP Online, October 2, 2000) IRIS CORKER: Alabama Supreme Ct OKs National Class of Skin Cap Buyers --------------------------------------------------------------------- The Alabama Supreme Court has affirmed certification of a national class for purchasers of Skin Cap (Cheminova American Corp. v. Iris Corker, et al., Acuderm Inc. v. Iris Corker, et al., Nos. 1982176 and 1982177, Ala. Sup.). (Opinion in Section E. Document # 28-000803-105.) Iris Corker and others filed a state class action complaint against Cheminova American Corp., Acuderm Inc. and Nixon Drugs Inc. They allege injury from Skin Cap, an over-the-counter medication. While the product purportedly contained zinc pyrithione, the FDA discovered that it contained a potent corticosteroid and the product was recalled. Distributors Cheminova was the United States distributor of Skin Cap and Acuderm was a nonexclusive distributor that allegedly marketed the product for the treatment of psoriasis. Corker claimed that after she stopped using Skin Cap, her psoriasis worsened from rebound effect. Corker sought certification of a national class seeking compensation for fraud and suppression, breach of warranty, restitution and breach of contract. Following a certification hearing, the Alabama Circuit Court in Mobile County certified a national class for recovery of economic damages but denied certification of a class for fraud and suppression and personal injury. Rule 23 Met Reviewing the class requirements under Alabama Rules of Civil Procedure 23(a), the Alabama Supreme Court found the trial court did not abuse its discretion when it found the plaintiffs met the requirements for numerosity, typicality and adequacy of representation. The trial court also did not abuse its discretion in finding commonality, the high court said. It found no lack of privity between claimants who purchased the product directly from Acuderm. State law variations, the high court continued, "can be recognized and dealt with by the trial court, because the facts of the transactions are uniform and are not in dispute insofar as they related to privity. The questions of fact and law common to the class predominate over any questions affecting only individual members of the class." Other Arguments Fail The Supreme Court also ruled that the plaintiffs did not have to "prove" facts necessary to find liability at this stage of the litigation in order to satisfy Rule 23(a). The existence of Alabama's Deceptive Trade Practices Act, the high court said, does not preempt the class claims. That law, the court wrote, specifically allows consumers to sue under common law or the statutory law. (Mealey's Emerging Drugs & Devices, August 10, 2000) LUCENT TECHNOLOGIES: Milberg Weiss Appointed Lead Counsel in New Jersey ----------------------------------------------------------------------- After criticizing the lead plaintiff for not interviewing more firms, U.S. District Judge Alfred J. Lechner Jr. has appointed Milberg Weiss Bershad Hynes & Lerach as lead counsel in the securities fraud class action against Lucent Technologies Inc. The Employer-Teamsters Locals 175 & 505 S&P Pension Trust Fund originally wanted Milberg Weiss to represent the class, but the court only agreed with its choice after reviewing the submissions of three firms in a sealed-bid auction. In re Lucent Technologies Inc. Securities Litigation , No. 00-621, letter-opinion and order issued (D.N.J., Aug. 2, 2000). In addition to Milberg Weiss, the New York-based firms of Goodkind Labaton Rudiff & Sucharow and Lieff Cabraser Heimann & Bernstein submitted proposals for the appointment. In reviewing their bids, Judge Lechner relied on the ground rules established in his April 27 order, and did not look favorably on any deviation from his instructions. In making its ruling, the court cited the recent U.S. Court of Appeals for the Third Circuit decision, Gunter v. Ridgewood Energy Corp. No. 00-5053 (3d Cir., July 27, 2000), and its eight factors for evaluating an award of attorneys' fees. However, Judge Lechner said he could not determine the appropriateness of the fee at this stage of the litigation, and that Milberg Weiss' accepted bid is subject to adjustment so a full analysis under Gunter could be completed after the case has concluded. In calling for bids, the court said that the "percentage charged as compensation for fees and expenses should decline as the common fund increases, in order to avoid excessive compensation to counsel, while still providing motivation to class counsel." The Goodkind bid incorporated a "bell curve" with increased fees in the $25 million to $35 million range of recovery. Thereafter, the fee decreased until it reached the $200 million to $250 million recovery range, remaining constant until any recovery topped $1.5 billion. The original Lieff bid proposed that the firm would take a flat percentage at each stage of the litigation, except if the case settled for over $25 million after the motion to dismiss phase (in which case it would take more). In an amended bid, the firm proposed to reduce its percentage fees and expenses if the litigation were resolved prior to a motion to dismiss. The court noted this reduction remained constant whether the total class recovery is $500,000 or $100 million or more. In addition, the Lieff bid did not differentiate between the amounts the firm sought at the third stage (resolution from submission of motion for summary judgment) or fourth stage (resolution post-trial) of the litigation. According to Judge Lechner, "It appears this proposal may not provide sufficient incentive for the firm to push for a greater class recovery following the submission of a motion for summary judgment. This is potentially detrimental to the class." The amended Milberg Weiss bid structured its fee so that the "proposed fee percentage increases as the cases passes through various milestones events but, w ithin each milestone category the fee percentage declines as the recovery increases." Judge Lechner approved of this approach, stating, it "results in a potential for maximum recovery for both the class members, as well as counsel. Additionally, this format creates a disincentive for the lead counsel to 'sell out' the class because at no point should effort hypothetically outweigh potential recovery." Noting its selection of lead counsel was based on a variety of factors, the court commended Milberg Weiss for its evaluation of the case along with the "self-enforcing incentives" incorporated into the fee structure. Milberg Weiss was represented by David Bershad, Steven G. Shulman and Samuel H. Rudman of its New York office. (Securities Litigation & Regulation Reporter, August 30, 2000) MIAMI: Fails to Understand Seriousness of Its Misconduct, Says SEC ------------------------------------------------------------------ In administrative proceedings, the SEC says the city of Miami misunderstands the seriousness of the charges filed against it by "bragging that is merely charged with fraud." The SEC is alleging Miami officials misrepresented the city's cash flow crisis in three 1995 bond offerings so it could use the proceeds to solve its financial problems. In re Miami. (Securities Litigation & Regulation Reporter, August 30, 2000) MICROSOFT CORP: High Court Justice's Son is on Defense Team ----------------------------------------------------------- Byline: James V. Grimaldi , Washington Post Staff Writer To recuse or not to recuse. That was the question facing Chief Justice William H. Rehnquist. Here's the background. The chief justice's son, James C. Rehnquist of Boston's Goodwin, Procter & Hoar, is a partner on the legal team defending Microsoft Corp. in three Massachusetts class-action lawsuits that specifically cite U.S. v. Microsoft, the very case that appeared on the desk of papa Rehnquist. If U.S. District Judge Thomas Penfield Jackson's decision that Microsoft broke the law is upheld, then the three cases in a Boston courthouse will have a significantly greater chance of success. That's because under tenets of antitrust law, previous decisions in government antitrust cases can be used against the defendant by private parties without having to litigate the primary issues all over again. So the Supreme Court could directly affect those cases and hence affect the success of the legal work by the chief justice's son. Conflict of interest? Appearance of a conflict of interest? Depends on whom you ask. But in this case, apparently, only one opinion mattered: the chief justice's. In a written statement, Rehnquist said he should not disqualify himself. "The fact that our disposition of the pending Microsoft litigation could potentially affect Microsoft's exposure to antitrust liability in other litigation does not, to my mind, significantly distinguish the present situation from other cases that this Court decides," he wrote. The Supreme Court sent the matter back to a lower appeals court, meaning that the nation's highest court might not see the matter for at least a year. The ethics decision has stirred a debate among law professors, lawyers and observers in the historic Microsoft antitrust litigation. "I think he was wrong," said Stephen Gillers, a New York University law professor known as a bit of a hard-line ethicist. But Steven Lubet, a Northwestern University Law School ethics professor, disagrees. He and Gillers have exchanged lengthy e-mails over the issue. Robert Pugsley of Southwestern University School of Law, an ethics specialist who calls himself a moderate conservative, walked across the hall to Warren Grimes, a professor of antitrust law who leans liberal and has followed the Microsoft case closely. After a short discussion, they agreed. "I truthfully don't see how, on the facts of this case, that Justice Rehnquist's continuance on this case can't help but create an appearance of impropriety," Pugsley said. Grimes called it "troublesome." But Herb Hovenkamp, a University of Iowa law professor, sees nothing wrong with the chief's decision not to recuse himself. Rehnquist wrote that he had consulted his colleagues on the issue. And certainly they have thoughts. Since the U.S. Constitution does not have a celibacy requirement for the Supreme Court, many of the justices have spawned more lawyers. And at least two are married to lawyers. Justice Antonin Scalia has two sons who are attorneys. Eugene Scalia works for Gibson, Dunn & Crutcher, which closely follows guidelines prepared by the Supreme Court to avoid such potential family-related conflicts of interest, said Ted Olson, co-chairman of the firm's appellate practice. The rules go so far as to segregate the income from Supreme Court cases into a separate fund that does not go into Eugene's salary. Scalia's other son, John F. Scalia, who practices with the employment-law firm Curiale Dellaverson Hirschfeld Kelly & Kraemer in San Francisco, also abides by the guide. Other Supreme offspring who practice law: Justice John Paul Stevens's daughter, Susan S. Mullen, who works in Silicon Valley-based Cooley Godward's local office in Northern Virginia, and Columbia University law professor Jane C. Ginsburg, daughter of Justice Ruth Bader Ginsburg. But no one is suggesting, certainly, that Rehnquist go as far as Justice Tom C. Clark, who in June 1967 stepped down because his son, Ramsey Clark, was named attorney general of the United States. Justice Clark wanted to avoid the obvious conflict of interest. His departure made way for Thurgood Marshall's ascension to the high court. Still, Gillers suggests that at the very least Rehnquist should not have acted unilaterally and should have done what trial judges often do: Present the matter to the parties of the case and ask if they have any objections. Heavy Hitters for Microsoft Microsoft's legal team scored a big victory at the end of last month, convincing the Supreme Court that the antitrust appeal should go to the U.S. Court of Appeals for the D.C. Circuit. The star-studded team included Carter Phillips of Sidley & Austin, Rick Rule of Covington & Burling, and John Warden and Richard Urowsky of Sullivan & Cromwell. But the hard work--the draft arguments and winning briefs--was done by Rick Pepperman along with Steve Holley, two Sullivan & Cromwell lawyers who did yeoman's work at the trial. Consolidating Firestone-Ford Cases It was bound to happen. In fact, it is a wonder that Ford Motor Co. and Bridgestone/Firestone Inc. didn't do it sooner. In an attempt to cut losses in the growing number of lawsuits filed over the recall of 6.5 million tires, attorneys for the manufacturers want the cases consolidated into one courtroom in Chicago. Consolidation would make it easier for the two beleaguered companies to defend themselves against a flurry of lawsuits filed by people who want to recover the costs of replacing tires not covered by the recall, as well as some cases involving damage to property and personal injuries and deaths. The new Ford-Firestone strategy has exposed a rift among the trial lawyers who have filed the lawsuits against the companies. Some plaintiffs' attorneys worry about being cut out of the action if the judge who oversees the discovery process appoints a select number of lawyers to direct the activities. Plus, attorneys worry about delays for their clients. "They want to put us in limbo for a number of years," said Roger Braugh, a Corpus Christi, Tex., lawyer who filed the first class-action lawsuit against the companies. Other lawyers see a chance to step in and take charge--and the bulk of the attorneys' fees. Georgetown University professor Sherman Cohn said that the rift is common, but that it makes sense for one judge to decide complex issues about the manufacture of tires and the design of the Ford Explorer "in one place, at one time" as a way to conserve resources and avoid inconsistent rulings. A panel of federal judges will hear arguments on the matter later this month in Washington. (The Washington Post, October 2, 2000) MOBILE HOME: Kentucky Court Rejects Lawsuit over Safety and Expense ------------------------------------------------------------------- The Kentucky Court of Appeals last Friday September 29 rejected a lawsuit that made broad claims about the safety and expense of owning a trailer home. Stanley M. Chesley, a Cincinnati lawyer who specializes in big-ticket class-action lawsuits, attempted to bring the suit on behalf of what he said were the 126,000 Kentuckians who own mobile homes, which the industry likes to call manufactured housing. Chesley sued 41 manufacturers, alleging that mobile homes are more dangerous in fires and cost more to insure. Chesley said the manufacturers should have told buyers of the potential dangers and costs. The court, in a unanimous ruling from a three-judge panel, noted that none of the three plaintiffs actually named in the suit had suffered a fire at their mobile homes. The case had been dismissed in Pendleton County Circuit Court and the appeals panel upheld the dismissal. (The Associated Press State & Local Wire, September 29, 2000) NORTHWEST AIRLINES: 1999 New Year Snowstorm Suit Gets Green Light ----------------------------------------------------------------- A class-action suit against Northwest Airlines will move forward after a judge last Friday September 29 rejected the airline's bid to dismiss the case. Plaintiffs accuse Northwest of "willful misconduct" during a 1999 New Year's weekend snowstorm in Detroit. Nearly 8,000 Northwest passengers were stranded for up to 11 hours Jan. 3 on parked airplanes at Detroit Metropolitan Airport. Wayne County Circuit Court Judge Daphne Means Curtis rejected the airline's motions to throw out the case and said she will rule on remaining issues before a settlement conference scheduled for Oct. 11. Northwest said that the company is confident that the class-action suit does not meet the requirements of law. "Northwest believes that it took proper care and caution to maintain the safety of its passengers during especially difficult and extreme weather conditions during the New Year's weekend storm of 1999," it said. More than a dozen planes were left stranded on taxiways and tarmacs after nearly 2 feet of snow covered the ground. Wayne County plows were unable to clear the airfield. (Chicago Tribune, October 2, 2000) NORTHWEST AIRLINES: Statement on Motions in 1999 Snowstorm Lawsuit ------------------------------------------------------------------ Northwest Airlines (Nasdaq: NWAC) had made motions seeking to dismiss the class action lawsuit stemming from the 1999 snowstorm in Detroit, contending that the principal fact issues were undisputed. Wayne County Circuit Court Judge Daphne Means Curtis denied several parts of Northwest's motions while granting one request and taking another under advisement. Court observers understand that it is exceedingly difficult to win such motions at this stage of the case. It remains plaintiff's burden to prevail on such matters and Northwest remains confident that the claims made in the lawsuit will ultimately be found not to meet the requirements of law. Northwest believes that it took proper care and caution to maintain the safety of its passengers during especially difficult and extreme weather conditions during the New Year's weekend storm of 1999. Source: Northwest Airlines RIDGEWOOD ENERGY; 18% of Settlement Fund for Attorneys Voided ------------------------------------------------------------- Gunter V. Ridgewood Energy Corp., Third Circuit, No. 00-5053, July 27, 2000. By Becker, Chief Judge. Also on panel: Roth, C.J. and Rosenn, C.J. Appealed from the U.S. District Court for the District of New Jersey. Facts-on-Call Order Number 9165 In a complex class action that settled for $ 9.5 million, an award of attorneys' fees of 18 percent of the settlement fund when the attorneys had requested one-third of the settlement fund was an abuse of discretion. A group of individuals invested in a series of limited partnerships involving oil and gas interests formed and promoted by Ridgewood Energy Corporation, Robert E. Swanson, Gary L. Hall, and Hall-Houston Oil Company. Between 1986 and 1990, Ridgewood Energy, Swanson, Hall, and Hall-Houston fraudulently marketed and sold approximately $ 150 million worth of interests in the partnerships. In 1995, the investors brought a class action, alleging violations of RICO and the Securities Exchange Act. The complaint also asserted pendent state law claims for fraud and deceit, breach of fiduciary duty, and negligent misrepresentation. The investors sought damages and the imposition of a constructive trust. Discovery and pretrial motion practice took place during the next several years. The attorneys for the investors traveled across the country, performing many tasks related to the case. Much time was also spent litigating pretrial issues. The case was settled for $ 9.5 million. The attorneys for the investors applied for attorney's fees amounting to one-third of the settlement amount and approximately $ 300,000 in costs. In a "terse" opinion, the District Court approved the request for costs, but it set the attorney's fees at 18 percent of the settlement fund, or $ 1.71 million. The District Court explained its decision in a one-sentence statement: "The nature of this litigation, its resolution at this stage without the necessity of trial, the nature of the settlement, and its value, convince this court that it would place a reasonable burden on the class to award attorneys' fees of 18 percent of the Settlement Fund, or $ 1,700,000." The attorneys for the investors moved for reconsideration, contending that the 18 percent attorney's fee award represented a penalty for the attorneys because it entitled them to only 55 percent of their lodestar. In rejecting this argument and denying the motion, the District Court did not explain why it had refused to credit 2,500 hours of the approximately 8,500 hours that the attorneys had worked on the case, even though the attorneys had offered to provide documentation for their work. On appeal, the attorneys for the investors argued (1) that the District Court had failed to adequately explain its reasons for declining to grant their requested attorney's fee award and (2) that the District Court did not apply the relevant criteria for determining an attorney's fee award. The Third Circuit vacated the District Court's order and remanded. The Third Circuit found that the District Court's analysis constituted an abuse of discretion for two principal reasons. First, the District Court's statements that it had reviewed the record and applied the relevant case law were unsupported by careful analysis explicated in written opinions or rulings from the bench. Second, and more importantly, while the District Court referenced the fee-award factors in its opinions, the Third Circuit found that the District Court neither engaged those factors nor explained its reasoning. The Third Circuit concluded that "the District Court abused its discretion in this case by not exercising it, and when it did exercise it, by misapplying our jurisprudence." In vacating the order, the Third Circuit expressed no opinion as to how the award should ultimately be fixed. For appellants: G. Martin Meyers (Law Office of G. Martin Meyers, P.C.) and Joseph Sternberg (Goodkind, Labaton, Rudoff & Sucharow, LLP, New York). For appellees Ridgewood Energy Corp. and Robert E. Swanson: Douglas S. Eakeley (Lowenstein Sandler). For appellees Gary L. Hall and Hall-Houston Oil Co.: William T. Reilly (McCarter & English). (New Jersey Lawyer, September 11, 2000) TOBACCO LITIGATION: Precedent-setting Smokers Case Opens in Norway ------------------------------------------------------------------ Norway's first court case against the tobacco industry to claim compensation for a smoking-related illness opened on Monday. If 67-year-old smoker Robert Lund, who is terminally ill with cancer, wins his case against Norway's largest cigarette maker, hundreds of other suits were expected to follow. The case was the latest in a series of European court tests that followed recent decisions by U.S. courts to award compensation to ailing smokers and a 1998 agreement by U.S. cigarette makers to pay dlrs 240 billion over 25 years to American states for related health costs. Lund started smoking in 1954, when Norway still allowed tobacco advertising and public health warnings about the dangers of smoking were few. Norway did not require health warnings in tobacco products until 1975. In 1998, two years after he was diagnosed with lung cancer, Lund decided to sue Norway's largest tobacco concern Tiedemanns Tobakksfabrik AS, which controls about 80 percent of the local market. Lund, who still smokes about 30 home-rolled cigarettes a day, claims the company's tobacco products had damaged his health and it has an obligation to compensate him. Tiedemanns argues that it is not economically liable for health damage suffered by those who choose to smoke. Lund's attorney, Edmund Asboell, said his client hopes to live long enough to see the case through. ''The doctors have said his days are numbered, or as he, himself, asked me to say: He will die soon,'' Asboell said in his opening remarks before the district court in Orkanger, about 475 kilometers (300 miles) north of the capital, Oslo. The court is expected to take about 10 days to determine whether the tobacco company can be held accountable. If so, a separate court case would determine the amount of compensation. In June, a government commission said Norwegian law provides a good basis for smokers to claim compensation from the tobacco industry, especially if they started smoking before Norway banned tobacco advertising in 1975. The commission was set up by the government in 1998 to study the legal framework of such claims after seeing huge settlements in the United States. Its report predicted up to 2.3 billion kroner (dlrs 256 million) a year in compensation claims in the nation of 4.5 million people. About 32 percent of adults smoke daily. The tobacco industry has European countries and smokers have been testing cases against the tobacco industry. In September, Russia sued the U.S. tobacco industry for compensation for the health damage caused to its citizens by smoking. In December 1999, a French court held French cigarette maker Seita partially responsible for the death of a 49-year-old smoker from cancer. Other tobacco-related lawsuits are pending in the Netherlands, Spain and Poland. However, a class action by British smokers collapsed last year because lawyers saw little chance of winning. (AP Worldstream, October 2, 2000) WEST SUBURBAN: Cir Ct Sees No Precluion of Arbitration under TILA, EFTA ----------------------------------------------------------------------- 15-8-4833 Johnson v. West Suburban Bank, et al., Third Cir. (Becker, U.S.C.J.) (17 pp.) The court considers a question of first impression -- whether claims under the Truth in Lending Act and the Electronic Fund Transfer Act can be referred to arbitration, under an arbitration clause in the loan agreement, when a plaintiff seeks to bring a claim on behalf of multiple claimants. Plaintiff seeks to bring a class action against both the bank and the bank's agent for a loan transaction that plaintiff contends violated both the TILA and the EFTA. The District Court found that there was an inherent conflict between compelling arbitration and the TILA and the EFTA, and denied defendants' motion to compel arbitration. The circuit judges reverse, noting that, although there may be some tension between the purposes of the debtor - protection statutes and arbitration, they are not so persuaded that the two are so at odds as to preclude arbitration in this context. Because the judges can discern no congressional intent to preclude the enforcement of arbitration clauses in the texts of either the TILA or the EFTA, legislative history, or purpose, they hold that such clauses are effective even though they may render class actions to pursue statutory claims under the TILA or EFTA unavailable. (Filed Aug. 29, 2000.) The circuit panel concludes that the Foreign Trade Antitrust Improvements Act is inapplicable to this case and that the District Court erred in dismissing it. Further, it finds that the plaintiffs have offered sufficient evidence to demonstrate that the activities of the defendants/wholesale importers were intended to, and adversely did, impact on domestic commerce by engaging in a course of anti-competitive conduct to ensure that only they, the importers, could bring oriental rugs manufactured abroad into the United States for distribution. The court further holds that subject-matter jurisdiction exists under the Sherman Act, and that the plaintiffs have antitrust standing. (Filed Sept. 8, 2000.) (New Jersey Law Journal, September 25, 2000) WONDER BREAD: Judge Will Trim $121m Verdict in Discrimination Case ------------------------------------------------------------------ A San Francisco judge rejected defense arguments that jurors drinking alcohol had clouded minds during deliberations in a discrimination case against the baker of Wonder Bread and Twinkies. Superior Court Judge Stuart Pollak has refused to order a new trial but plans to reduce compensatory and punitive damages awarded to the 17 plaintiffs. Pollak last Friday September 29 said he would issue his ruling affecting the fates of the men who claimed they were denied promotions and pay raises and also suffered the indignities of racial slurs. "It seems quite clear that the jury heard evidence that there was a pervasive atmosphere and attitude running through this bakery that African-American employees were second-class citizens," Pollak said. "This policy was magnified in a whole variety of ways that I'm not going to elaborate on." Although Pollak agreed with the jury's findings in Carroll v. Interstate Brands Corp. 995728, regarding discrimination, he disagreed that it was so overwhelmingly oppressive. "The evidence of racial discrimination was pervasive. But it was not ubiquitous," the judge said. "It was not continuous...day to day." Pollak said he believes punitive damages are merited, but not in the amount the jury returned in its verdicts. "I'm not at all persuaded that anything like $121 millon is necessary to make the point that the jury was trying to make here," he said. Pollak also reduced each plaintiff's compensatory damages, which initially totalled $11 million, but were cut in half by the judge. He will now trim them more based on what he believes the evidence shows for each man in lost wages or emotional distress. The plaintiffs will then have to decide whether to accept the judge's reduction of their awards or go to trial again. Lead plaintiffs' attorney Angela Alioto said that if Pollak cuts the punitives to $60 million it'll "be like a gnat on the arm" of IBC, the nation's largest bakery. "This company has shown no remorse at all," Alioto said. "It has done nothing" to remedy the situation. IBC appellate attorney Paul Cane Jr. called the punitive award "freakish" and "bigger than anything by order of magnitude" ever recorded before in a published opinion. "When you have an award this aberrational, a new trial has to be granted," said the Paul, Hastings, Janofsky & Walker partner. Four jurors from the trial sat in the courtroom among the plaintiffs during the hearing. They frowned when the judge indicated he would cut the damage awards. Pollak also addressed Cane's claim of juror misconduct due to the drinking of alcohol during trial and deliberations by one or more jurors. He said the issue "has been blown way out of proportion," but did not deny that some jurors had imbibed a bit. The judge said he felt "entirely comfortable" with the conclusions he reached. "Drinking had absolutely no influence on the verdict in this case and this case should not be tried again," Pollak said. (Senior writer Dennis J. Opatrny's, (The Recorder, October 2, 2000) WWII VICTIMS: Wartime Slaves Use U.S. Law to Sue Japanese --------------------------------------------------------- Nearly a lifetime ago, during World War II, Japanese soldiers seized a strapping teenage peasant named Wang Songlin from a dirt path in his rural village in central China and shipped him off to work as a slave in coal mines owned by the Mitsubishi Company near Nagasaki in Japan. He was housed on the floor in a windowless warehouse and he still remembers the backbreaking work, the constant hunger and the vicious beatings meted out to those who complained. By the end of the war, the other 10 men taken from Mr. Wang's hometown had all died or gone out of their minds. Mr. Wang was forced to fish a friend's body out of a well after he committed suicide. Now, 55 years later, Mr. Wang -- partly deaf and missing teeth -- has joined thousands of other old Chinese men who served as forced laborers for Japanese companies in a landmark lawsuit filed this year in California asking them for an apology and compensation. "I am old and I may die soon," said Mr. Wang, angrily. "But I have asked my son and grandson to continue until this is resolved." The old men are hoping that the United States court system will provide the millions of Chinese enslaved by Japan with a sense of justice and international recognition that history, Asian politics and regional judicial systems have so far failed to provide. They are suing under a 1999 California law that allows victims who have been unable to pursue their claims elsewhere to file suit in California state courts against companies that may have benefited from slave labor years ago and now have subsidiaries in the United States. In addition to the Chinese men, slave laborers from the Philippines and Korea have also brought suit using the same California law. They are all hoping to repeat the success in other suits brought by Holocaust survivors against Swiss banks, German companies and other businesses across Europe, which have yielded $6.2 billion in recent settlements. While such lawsuits have generally not yielded large rewards to individuals, a small sum could still mean a lot to the Chinese retirees, they said. And their main goal is to force Japan to accept some guilt and responsibility for their wartime misdeeds -- burdens that German politicians have shouldered, but Japanese have generally avoided, they say. "Discovering that we could file the case in the U.S. was like finding a shortcut to justice," said Zhang Yibo, a retired professor at the Communist Party School of Shenyang, who organized the mostly illiterate former laborers. "We are taking advantage of the U.S. courts and also the chance to be heard in a third country." On May 19 this year, Yang Li, a Shenyang-born lawyer who now practices in New York, filed a class action suit on behalf of the men against the Mitsubishi and Mitsui Companies, which is being reviewed by the Federal District Court in San Francisco. In late August, a similar suit was filed in Los Angeles by Barry Fisher, a lawyer who has helped Gypsy survivors of the Holocaust gain millions of dollars in compensation. "If this route worked for the Jews, why not for the Chinese?" said Professor Zhang, clutching the carved wooden dragon at the top of his cane."People forget us, but we suffered as much as them." When the Japanese surrendered in 1945, an American ship took Mr. Wang back to China, where he and the estimated 50,000 Chinese forced laborers who toiled in Japan were mostly forgotten, their plight eclipsed by the Communist revolution of 1949 and the tumultuous years of early Chinese Communism. He settled here in Shenyang. In 1978, China and Japan signed a general friendship treaty, pushing them farther in the background. In the years since, many Chinese scholars and victims have remained deeply dismayed by what they consider Japan's unwillingness to accept moral or financial responsibility for its actions, including forcing women into military brothels and using Chinese as guinea pigs in medical experiments. As China has opened politically in the last two decades, they have found new opportunities to press their case and Chinese war victims have attempted to file 46 suits in Japanese courts -- all to no avail. A 1999 California law that allowed victims of forced labor during World War II to sue until 2010 provided a new tailor-made opportunity, at a time when Tokyo courts had started dismissing the Chinese claims. Yang Li, the New York lawyer, served as the bridge between the old, mostly illiterate men and the American legal system. The suit names two of the men as representatives -- one worked for Mitsubishi, the other for Mitsui. There are more than 8,000 other co-claimants, including Mr. Wang, who have also signed on, Professor Zhang said. There were an estimated 50,000 Chinese used as slaves in Japan and, in addition, 10 million or more who worked as forced laborers for Japanese companies in northwestern China, which was occupied by the Japanese for 14 years. Up to 10 percent of them died, experts say. Professor Zhang said that 35 companies used Chinese forced labor, and that suits against the other companies would soon follow. Shenyang has become a center of activism for those seeking compensation, in part because it was the first Chinese city occupied by the Japanese -- on Sept. 18, 1931, the start of a brutal 14-year occupation. Shenyang people say World War II started on that day. Every Sept. 18 at 10:20 p.m. -- the exact moment the Japanese marched into the city -- all bells and car horns here toll in unison. "All of Shenyang cries," Professor Zhang said. Indeed, here in northeastern China nearly everyone has a tale of horror. As a boy of 14, Professor Zhang watched Japanese soldiers bury his father alive, cementing the son's loyalty to the Communists, who fought savagely to oust the invaders. In addition to the forced laborers, a number of other Chinese are attempting to sue the Japanese for crimes during World War II, under various laws in the United States and Japan. The groups include women who were forced into army brothels and people who lived in villages sprayed with toxins like botulism and plague. But the forced laborers in many ways have a more straightforward case, experts say, because they are suing companies rather than a government. They were generally abducted late in the war to work in factories and mines, after Japan's own labor force had been decimated by its battles. Wen Jinhan, a hearty 75-year-old with a pompadour that makes him somewhat resemble Ronald Reagan, was 17 and working in his family's fields when he was arrested by armed Japanese in 1943 in central Hebei Province. The Japanese had already occupied that area for about five years, so it came as a shock when they started carting off locals. On the day he was seized, the Japanese rounded up about 200 young men from nearby villages, Mr. Wen recalled, taking them by truck and train to a processing center in the distant Chinese port of Tianjin. There, the sick -- even those who had scars -- were weeded out and killed, he said. The rest were issued uniforms and a blanket, and held under such tight security that they were even required to urinate in their rooms. They made the 12-day trip to Japan in the hold of a ship filled with coal. "Those who tried to escape were shot in front of their friends," he said. He and Mr. Wang ended up in the same Japanese mine, where beatings for disobedience were fierce and constant -- often because the young Chinese peasants did not understand the instructions. There were no plates or spoons, and the two daily meals each consisted of a bone and a ladle of burning hot soup placed directly into the laborers' mouths. "It was so hot the skin on your tongue often fell off, but you had to eat it otherwise it was taken away," Mr. Wen said. They were no baths, and the laborers were so hungry they ate rotten orange peels that had been discarded by the Japanese. Many fell ill, but they dared not miss shifts since those who did not work did not eat, Mr. Wang said. Mr. Wang said he eagerly signed on this summer when he read in a Shenyang newspaper that Professor Zhang was organizing men to sue in the United States. "I still have scars from that work," he said, rolling up his pants to show the remnants of a deep gash. Although the case is in its early stages, the two Japanese companies have tried -- so far unsuccessfully -- to have it dismissed. They claim that wartime claims are a matter of international politics, and that the compensation issue was settled in the San Francisco Treaty of 1951. Mr. Yang counters that China was not a party to that treaty, which he said covered only state-to-state reparations, not individual lawsuits. He added that no treaty can be used to pardon slavery, which violates many international treaties. Judge Vaughn Walker of the Federal District Court in San Francisco has recently given Mr. Yang and his team permission to begin depositions, even though he has not yet finally decided to certify the class-action suit. And here in Shenyang, the old men are ebullient that in three months it has gone this far. "These plaintiffs are old," Professor Zhang said. "More die each year. There's no time to wait." (The New York Times, October 2, 2000) * NJ Lawyer Presents Dichotomy Of Class Actions ----------------------------------------------- When it comes to class-action litigation, the consensus is you have to take the bad with the good. And there's lots that's bad about federal class-action damages suits: lawyers at times are quick to pounce on a perceived wrong, the class generally receives little compensation for slight damages, judges seldom if ever actually allow class members a significant voice, and then there's that pervasive criticism -- lawyers earn scads of money for doing relatively little work. The good, though, may outweigh that, according to lawyers and a recently published book on class-action suits: Such litigation gives the little guy and gal a voice against big players. And, said one New Jersey attorney, some corporations fearful of becoming defendants have changed their practices. "The principle benefit of class actions is the leveling of the playing field where individuals with somewhat small claims can be compensated for their losses," said Woodbridge attorney Christopher M. Placitella. For example, he represented a group of Jersey City children who had been playing on a ball field contaminated with chromium. The class wanted medical monitoring, which now is being provided by the University of Medicine and Dentistry of New Jersey. But for every good example, there's a bad one. A recent book published by the Rand Institute for Civil Justice is the latest indictment of class-action suits. And while Class Action Dilemmas: Pursuing Public Goals for Private Gain clearly spells out some of the abuses of class-action litigation, it stops short of providing meaningful solutions or answering the "great big question" it poses: Do class actions, on balance, serve the public well? Whether they do or not is left unanswered. But Rand does arrive at one conclusion: Judges hold the key to dismantling the belief that lawyers often profit unjustly from bringing class-action suits. "It is the outcome of one class action that determines whether another similar class action will be brought," the book states. "If judges approve settlements that are not in class members' interest and then reward class counsel for obtaining such settlements, they sow the seeds for frivolous litigation -- settlements that waste society's resources -- and ultimately disrespect for the legal system." Lawyers in New Jersey, too, say judges are the ultimate gatekeepers. And if Rand is correct in concluding that judges often fall short in dismissing frivolous class-action suits, it's no wonder there's a growing movement to curb such litigation. Corporate Legal Times recently reported the U.S. Chamber of Commerce has launched a three-year effort, dubbed the Litigation Fairness Campaign, to sharply reduce the number of class-action suits against American corporations. Part of the chamber's strategy includes fundamental changes that would lower plaintiffs attorneys' fees. Along with moving to make key legislative changes in Congress, the chamber has long-range plans to play a significant role in state elections of attorneys general and supreme court justices. And there is a move in Congress to federalize more and more class-action claims, especially securities litigation, lawyers said. So is class-action litigation worth the effort? "It is clear that the costs are high," said the Rand Institute. "But how one assesses the cost-benefit ratio of these class actions depends on how one assesses the merits of these actions, the value of the settlement to class members in the aggregate and individually, the deterrence value of the litigation, and the value to our democracy of providing access to the justice system for individuals with small, as well as large, grievances." But lawyers in New Jersey say class-action litigation has made life a bit safer. "I do see some positives from class actions," said John J. Degnan, president of the Chubb Corp. in Warren, who claims some companies, without having been sued, have been scared into manufacturing better and safer products. "In certain instances, they (class actions) have changed the behavior of corporate America." In New Jersey, the court manages certain mass tort class actions -- such as the lawsuits spawned by the gas pipeline explosion in Edison's Durham Woods apartment complex, certain tobacco litigation and the diet drug fen-phen, along with others -- in a mass-tort court located in Middlesex County. In all, mass tort filings in Middlesex account for more than one-quarter of the civil filings there. More often, said Placitella, the worthwhile class-action suits outnumber the worthless ones that give the process a black eye. "In every walk of life there are people in the extreme," he said. "But you have to look predominately at what's in the circle." Placitella is on the board of trustees of Trial Lawyers for Public Justice, a Washington, D.C., group that looks to remedy abuses in class-action settlements, especially if the settlement benefits lawyers rather than the class. The group has filed amicus briefs and intervened in a number of class-action cases nationwide, managing to scuttle or rework some settlements. Among the findings by the Rand study are: * Consumers don't get adequate reparations and companies pay too little in damages. * Compensation formulas to determine how much consumers should receive often bear little resemblance to reality. * Class-action litigation under Federal Rule of Civil Procedure 23 evolved as a necessity because of lax governmental regulation -- a laxity caused by over-worked government regulators and political influences on regulatory bodies. * Settlements rarely involve the voice of class members who often never meet the lawyers. In pointing to the Agent Orange class-action lawsuit in 1984, the Rand study said that while the judge conducted fairness hearings on the proposed settlement in five cities to make it easier for Vietnam veterans to get to the courthouse, the judge "viewed the role of the fairness hearing as catharsis -- an opportunity for individuals to have at least a vestige of their 'day in court' -- rather than a real opportunity to learn from class members what they wanted from the litigation." Redress With judges and government regulators dropping the ball, lawyers and consumer advocates believe consumers "ought to have a vehicle for obtaining compensation for losses that result from corporate wrongdoing, even when these losses are small," the book claims. That's the hook for Hackensack attorney Terry P. Bottinelli, who freely admits some lawsuits need to be filed to hold others accountable. He's filed suit in Bergen County against General Motors claiming the automaker misrepresented the size of the gas tank on the Chevrolet Yukon and Tahoe. While GM claims the vehicles have a 30-gallon tank, Bottinelli's suit says the tanks actually hold 25 gallons. So what's the big deal in a gas tank holding five gallons less than advertised? "When you have consumer laws, they should be enforced," he said. "Where do you draw the line and start condoning it?" And if he wins, New Jerseyans driving a Yukon or Tahoe probably will receive a rebate or a voucher toward the purchase of another GM vehicle. He expects damages would amount to about $ 1,000 per person. (New Jersey Lawyer, September 11, 2000) * Second Circuit Decisions May Increase Accountant/Auditor Liability -------------------------------------------------------------------- Byline: By John J. Rapisardi; John J. Rapisardi is a partner in the Business, Finance and Restructuring Department of Weil, Gotshal & Manges LLP and is an adjunct professor of law at Pace University School of Law. Troy Cady, an associate at the firm and Miranda Schiller, a partner at the firm, assisted in the preparation of this article. Over the last quarter of a century, accountants and auditors have increasingly been targeted in lawsuits brought by aggrieved third parties, such as creditors and shareholders, who seek recovery for alleged inaccuracy in financial statements. In 1993, the Big Six accounting firms (now the Big Five) expended approximately $ 1.1 billion in settling and defending lawsuits, representing roughly 11.9 percent of domestic accounting revenues. (See Dan Dalton et al., "The Big Chill," J. Acct., Nov. 1994, at 53; James Granelli, "Jumping Ship," L.A. Times, Oct. 22, 1995, at D1) Litigation costs for accountants continue to grow. Last year, for example, one major accounting firm alone paid well over $ 500 million to settle two lawsuits, brought by creditors and shareholders in the Cendant restructuring and the Merry Go Round bankruptcy case. (See Mitchell Pacelle & Elizabeth MacDonald, "Ernst & Young Settles One Suit in Cendant Scandal," The Wall Street Journal, Dec. 20, 1999, at B9; Elizabeth MacDonald, "Ernst & Young Will Pay $ 185 Million to Settle Claims of Merry-Go-Round," The Wall Street Journal, Apr. 27, 1999, at A2.) On the federal level, despite passage of the Public Securities Litigation Reform Act of 1995, enacted in part to effect a reduction of such litigation, neither the lawsuits brought against accountants and auditors, nor the expense associated with such litigation, appears to be declining. Such lawsuits seem inevitable particularly in restructuring and bankruptcy contexts, where accountants may be viewed as defendants with deep pockets. (Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of title 15 of the United States Code)) (See Elizabeth MacDonald, "More Accounting Firms Are Dumping Risky Clients," The Wall Street Journal, Apr. 25, 1997, at A2.) Against this backdrop, two recent decisions by the U.S. Court of Appeals for the Second Circuit add to the uncertainty confronting accountants faced with third-party lawsuits, and may increase their overall exposure to liability as well. Although New York has traditionally sought to limit accountant liability to a narrow class of plaintiffs, these decisions illustrate the current ambiguity surrounding judicial assessment of standards in suits brought by third parties. Two Decisions and Several Questions In Securities Investment Protection Corp. v. BDO Seidman, LLP, (2000 WL 713909 (2d Cir. June 5, 2000), the Second Circuit vacated a district court's order dismissing claims by a third party against an accounting firm for fraud and negligent misrepresentation and certified two questions to the New York Court of Appeals. The first question, relating to fraudulent misrepresentations, asks whether a non-client plaintiff may recover for fraudulent misrepresentations the accounting firm made to a third party, who was required to communicate negative information to the plaintiff, where the plaintiff relied to his detriment on the absence of such information. The second question concerns whether a plaintiff may recover against an accountant for negligent misrepresentation where the plaintiff had only minimal contact with the accountant, but the accountant's "end and aim" was to ensure that the plaintiff did not receive any negative information. In AUSA Life Insurance Co. v. Ernst & Young, (206 F.3d 202 (2d Cir. 2000), the Second Circuit vacated and remanded and reversed in part the district court's dismissal of federal securities law claims, common law fraud and negligent misrepresentation claims that were asserted by a non-client third party against Ernst & Young (E&Y). The Second Circuit concluded that the district court failed to make sufficient findings relevant to the forseeability aspects of loss causation for purposes of establishing federal securities claims, fraud and negligent misrepresentation claims; held that the scienter element for a section 10(b) action under the Securities Exchange Act of 1934 had been met; and reversed the district court's holding that for purposes of negligent misrepresentation no privity existed between E&Y and the plaintiff. This decision gave rise to three separate opinions dealing with the issue of causation of damages in the context of federal securities law violations. Interestingly, to permit the Court to issue a mandate, one judge "shifted [his] vote on the issue of loss causation - from affirmance to a vacatur with a remand for further findings." Id. at 225. In the Second Circuit and in other jurisdictions, accountants face considerable uncertainty on the question of their duty to third parties. In the midst of such haziness, one thing remains clear - whenever accounting irregularities are uncovered in the context of the audited client's business collapse, lawsuits by third parties against accountants and auditors will invariably result. The Causes of Action New York courts have traditionally recognized that only a party in privity with an accountant can recover damages for a claim against that accountant based on negligence. Therefore, where the plaintiff does not have a direct relationship of privity (i.e., a contractual client-auditor relationship) the plaintiff must establish some relationship with the accountant akin to privity. Accordingly, the New York Court of Appeals, in Ultramares Corp. v. Touche, (255 N.Y. 170, 174 N.E. 441 (1931), developed the "near-privity" standard to determine the scope of the duty owed to a non-client by an accountant for negligence claims. In that case, the court enunciated an exception to the strict rule of privity, whereby a non-client plaintiff must be an intended third-party beneficiary of the contract between the client and the accountant. See id. 180-85, 174 N.E. at 445-46. Although several states have adopted the rather strict near-privity test, other jurisdictions, whether under common law or by statute, follow less stringent standards for allowing third parties to bring claims against accountants. Under the Restatement approach, which follows Restatement (Second) Torts Section 552, an accountant who prepares financial statements or performs audits owes a duty to non-clients that the accountant intends such information to benefit. The accountant can be held liable for negligence for failure to exercise reasonable care in gathering or conveying such information if: (1) the non-clients justifiably rely on the information in a transaction (or substantially similar transaction) that either the accountant or client intends the information to influence, and (2) such reliance results in a pecuniary loss for the non-clients. See, e.g., Rusch Factors v. Levin, 284 F. Supp. 85 (D.R.I. 1968) (developing the Restatement standard) Under the reasonable foreseeability approach, an accountant has a duty to all person whom the accountant should reasonably foresee as receiving and relying on the accountant's financial statements. This standard limits an accountant's duty of care to non-clients whose decision is influenced by the information provided, and only those who obtain the information directly from the accountant. See, e.g., H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (1983) (enunciating the foreseeability approach). In 1985, the Court of Appeals refined the near-privity standard in the case of Credit Alliance Corp. v. Arthur Andersen & Co., (65 N.Y.2d 536, 483 N.E.2d 100, 493 N.Y.S.2d 435 (1985), holding that [before] accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes: (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance. Id. at 551, 483 N.E.2d at 118, 493 N.Y.S.2d at 443. In order to hold accountants liable in negligence to non-contractual parties who rely to their detriment on inaccurate financial reports, the three elements which must be met, while distinct, are interrelated. The Credit Alliance elements, therefore, collectively require the third party claiming harm to demonstrate a relationship with the accountants sufficiently approaching privity, based on some conduct on the part of the accountants. See Bankruptcy Services, Inc. v. Ernst & Young, LLP (In re CBI Holding Co., Inc.), 247 B.R. 341, 366 (Bankr. S.D.N.Y. 2000). The near-privity relationship turns on proof of a "direct relationship" with the accountant and the accountant's awareness of who besides its client would rely on its work and for what purpose. See Parrott v. Coopers & Lybrand, L.L.P., 263 A.D.2d 316, 321, 702 N.Y.S.2d 40, 44 (App. Div. 2000) (holding that the plaintiff failed to meet the near-privity requirement since "there is no indication that plaintiff met or even communicated with the accountants, or that the accountants were even aware... that the stock would be repurchased by the employer-client at a value fixed by the accountants"). Generally, multiple, direct contacts and substantive meetings or telephone conferences with accountants will be helpful in establishing the near-privity requirements. However, a plaintiff's reliance alone cannot impose an obligation on accountants where there was no near-privity relationship. See id. For example, in Security Pacific Business Credit, Inc. v. Peat Marwick Main & Co., the New York Court of Appeals held that a near-privity relationship did not exist between a lender and the corporation's accountant where the crux of the claim was based on an alleged conversation between the lender and the auditor. The Court explained that the audit "partner's responses to [lender] SPBC's inquiries in that single call placed after the fieldwork was completed were... 'limited to generalities that nothing untoward had been uncovered in the course of the audit and that an unqualified opinion would issue, certifying the tentative draft which plaintiff had received from [the corporation's] Top Brass itself.' " (79 N.Y.2d 695, 597 N.E.2d 1080, 586 N.Y.S.2d 87 (1992), (See id. at 700, 597 N.E.2d at 1083, 586 N.Y.S.2d at 89.) (Id. at 705, 597 N.E.2d at 1085, 586 N.Y.S.2d at 92.) New York Groundrules New York's policy underlying the near-privity requirement is to limit the potential exposure of accountants from "liability in an indeterminate amount for an indeterminate time to an indeterminate class." While the near-privity standard is a high one, it is not impossible to meet. In European American Bank & Trust Co. v. Strauhs & Kaye, the companion case to Credit Alliance, the Court of Appeals held that the plaintiff-lender adequately alleged "a direct nexus" between itself and the accountants. Specifically, the plaintiff alleged that (1) the accountants were aware of its lending relationship; (2) they were aware of plaintiff's reliance on their work; (3) the representatives of both sides were in direct communication throughout the lending relationship; and (4) these representatives met repeatedly to discuss the audits and plaintiff's reliance on them. (Ultramares, 255 N.Y. at 179, 174 N.E. at 449; 65 N.Y.2d 536, 483 N.E.2d 110, 493 N.Y.S.2d 435 (1985); Id. at 545, 483 N.E.2d at 114, 493 N.Y.S.2d at 439; See id. at 544, 483 N.E.2d at 113, 493 N.Y.S.2d at 438.) Unlike negligent misrepresentation in New York, fraud and fraudulent misrepresentation do not require a showing of privity. Instead, to assert a fraud claim against an accountant a plaintiff must prove "a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury." (Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421, 668 N.E.2d 1370, 1373, 646 N.Y.S.2d 76, 80 (1996).) The scienter element necessary to support such a fraud claim against accountants can be satisfied by a showing of either gross negligence or recklessness. As the New York Court of Appeals long ago explained: A refusal to see the obvious, a failure to investigate the doubtful, if sufficiently gross, may furnish evidence leading to an inference of fraud so as to impose liability for losses suffered by those who rely on the balance sheet. In other words, heedlessness and reckless disregard of consequence may take the place of deliberate intention. State St. Trust Co. v. Ernst, 278 N.Y. 104, 112, 15 N.E.2d 416, 419 (1938). Similarly, the Ultramares Court held that, at least in instances where "the negligence is gross," a party's "negligence or blindness, even when not equivalent to fraud, is nonetheless evidence to sustain an inference of fraud." 255 N.Y. at 190-91, 174 N.E. at 449. Thus, accountants are required under New York law to take positive steps to ensure the truthfulness of financial reports. For example, in Fidelity & Deposit Co. v. Arthur Andersen Co., the Court found that fraud claims, based on allegations that an accounting firm was reckless in failing to independently verify the corporation's financial statements, were sufficient to state a cause of action. (See 131 A.D.2d 308, 310, 515 N.Y.S.2d 791, 793 (App. Div. 1987).) Similarly, the Court in In re Livent, Inc. Securities Litigation commented that allegations of accountant awareness of management's ability to manipulate its own computer system, so that entries deleted from a ledger leave no trace, but where the accountant fails to take steps to insure that such manipulations are not taking place, could potentially satisfy the scienter requirement. (See 78 F. Supp. 2d 194, 218 (S.D.N.Y. 1999).) 'Seidman' Seidman involved claims of fraudulent and negligent misrepresentation, against the auditor of A.R. Baron & Co. (Baron), which were asserted by the Securities Investor Protection Corp. (SIPC), on behalf of itself and the customers of Baron. At issue was whether an accountant is liable to a non-client with whom the accountant has little or no direct contact, for failure to divulge negative information in financial reports. SIPC was created under the same regulatory scheme that requires brokerage firms to forward regular audit reports, which are prepared by an independent accountant, reflecting the firms' financial condition to the SEC. If those reports indicate that the brokerage firm is approaching financial difficulty, the SEC must inform SIPC, which is empowered to initiate liquidation proceedings. In Seidman, SIPC alleged that the accountant failed to report Baron's faltering financial condition, thereby permitting Baron's management to continue certain fraudulent and criminal conduct. SIPC argued that as a result of the accounting firm's silence, SIPC was unable to detect management's illegal activities and Baron's financial instability. In dismissing SIPC's claims, the district court found that SIPC lacked standing. Furthermore, the court found that SIPC could not state claims on behalf of the customers because the customers did not rely on Seidman's audit reports. On appeal, the Second Circuit affirmed the district court's dismissal of the customers' claims. SIPC could neither show that the customers relied on the audit reports, an element of the fraudulent misrepresentation claim, nor could it establish the requisite near-privity relationship between the customers and the accountants. The Second Circuit rejected the district court's determination as to the claims SIPC filed on behalf of itself, however. Although SIPC never received, read nor relied upon the actual audit reports, SIPC argued that it relied upon the absence of negative information about the financial condition of Baron. The Second Circuit observed that "[the] success or failure of the SIPC's fraud claim depends on the precise extent of New York's reliance requirement, specifically whether the SIPC can establish reliance on [the defendant accountant's] audit reports despite never having received or read those reports." (2000 WL 713909, 12.) According to the Second Circuit, this "no-news-is-good-news" theory of reliance finds support in New York cases where misrepresentations were communicated to the plaintiff through a third party. "Because we almost certainly would find reliance [where a defendant accounting firm's reports were repeated verbatim to SIPC], we similar might find reliance here, where the SEC and NASD effectively communicated through silence rather than affirmative transmittal of the information." (Id. at 13.) The Second Circuit's decision in Seidman does not expand New York law to include instances where the defendant accounting firm failed to convey information, rather than making a positive misrepresentation of information. Instead the court certified to the New York Court of Appeals the following question: May a plaintiff recover against an accountant for fraudulent misrepresentations made to a third party where the third party did not communicate those misrepresentations to the plaintiff, but where the defendant knew that the third party was required to communicate any negative information to the plaintiff and the plaintiff relied to his detriment on the absence of any such communication? Id. at 17. The Second Circuit also rejected the district court's ruling on SIPC's negligent misrepresentation claim. The court noted that "the SIPC's negligence claim turns on the stringency of the known party and linking conduct requirements under New York law" due to SIPC's lack of substantial and meaningful direct contact with Seidman. Id. at 12. In applying the second element in the Credit Alliance standard - that information was forwarded to a "known party" which was intended to "rely" on such information - the Second Circuit easily found that SIPC was a known party, but declined (as it had in the fraudulent misrepresentation context) to issue a ruling regarding whether SIPC could "rely" on the absence of negative communication, rather than base such reliance on the actual conveyance of misinformation. The third Credit Alliance element of "linking conduct" between the plaintiff and defendant also proved problematic for the Second Circuit, insofar as the accountant contacted SIPC directly only once a year. The Seidman court, however, pointed to a "second line of case law" holding that where a plaintiff's reliance is the "end and aim" of a defendant's conduct, direct contact is unnecessary to assert a claim for negligent misrepresentation. (Id. at 16.) Again deferring to the New York Court of Appeals as "the most appropriate forum to rule on this issue, particularly given the court's clearly expressed desire, as a matter of state policy, to limit accountant liability for negligence to a narrow class of plaintiffs," (Id. at 17.) the Second Circuit certified the following additional question to New York's highest court: May a plaintiff recover against an accountant for negligent misrepresentation where the plaintiff had only minimal direct contact with the accountant, but where the transmittal to the plaintiff of any negative information the accountant reported was the "end and aim" of the accountant's performance? Id. at 18. 'AUSA Life Ins. Co.' In AUSA, the Second Circuit reversed the district court's dismissal of negligent misrepresentation claims based on lack of privity and held that a near-privity relationship existed between E&Y, auditor for the liquidated debtor, JWP, Inc., and a group of JWP's noteholders. E&Y had provided "no-default" letters to JWP "for JWP to transmit to the noteholders... which stated that E&Y had audited JWP's financial statements and that JWP was in compliance with the financial covenants in the Note Agreements." (206 F.3d at 205.) In fact, " '[each] no-default certificate specifically recited the names of the [non-client] noteholders that were entitled to "use" and rely on [E&Y's] certification of JWP's debt compliance.' " Id. at 223 (citations omitted). E&Y, however, failed to disclose that E&Y was technically in default prior to JWP purchasing Businessland, an ill-fated acquisition that eventually led to a default on the notes and liquidation of JWP. The Second Circuit, applying the Credit Alliance standard, held that "[to] the extent that the 'no-default' letters were intended to serve the purpose of conveying to the investors that the notes which they held were not in default, E&Y knew what the letters were for and E&Y knew for whom the letters were intended, as the district court so found." Id. The near-privity requirement was satisfied because the E&Y's work product explicitly stated that the noteholders were entitled to rely upon their report. More interesting and confusing, the Second Circuit's decision resulted in three compelling and well-reasoned opinions that reached separate and distinct results regarding the element of causation under federal securities law as well as under New York law for both fraudulent and negligent misrepresentation claims. Only a special concurrence by Judge Dennis G. Jacobs, who shifted his vote, allowed the court to decide the appeal before it. Technically, the Second Circuit addressed causation in the context of alleged federal securities law violations. However, causation analysis is equally applicable to New York's common-law fraud and negligent misrepresentation claims. As recognized by the court in CBI Holding Co., "[the] element of causation is essential to liability in the context of [the plaintiff's] claims including malpractice, breach of contract, negligent misrepresentation and fraud." 247 B.R. at 362 (citing Charter Marine Transp. v. Mallory, Jones, Lynch & Assocs., Inc., 1990 WL 79863, at 2-3 (S.D.N.Y. June 7, 1990)). Judge Jacobs found that the district court had facts sufficient to reach a determination that the defendant's acts had not caused the plaintiffs' loss. Judge Ralph K. Winter, dissenting, reached the opposite conclusion and found that there were sufficient facts to show that, as a matter of law, the defendant's wrongdoing had caused the plaintiffs' loss. Judge James L. Oakes, writing for the court, held that the district court below had not provided sufficient facts to find for either position. All three opinions analyzed loss causation and foreseeability, associated elements that are required for a showing of fraudulent misrepresentation. Judge Oakes stated that loss causation " 'requires that the damage complained of be one of the foreseeable consequences of the misrepresentation.' " (206 F.3d at 212 (quoting Manufacturer's Hanover Trust Co. v. Drysdale Secs. Corp., 801 F.2d 13, 21 (2d Cir. 1986)).) However, Judge Oakes rejected the possibility that loss causation is a determination of whether the plaintiff would have conceivably still suffered a loss had the complained of act not occurred thus differentiating loss causation from transaction causation (but-for causation). Instead, Judge Oakes noted that a plaintiff has stated a viable cause of action for misrepresentation when the losses " 'are within the foreseeable risk of harm.' " Id. at 219 (citations omitted). Judge Winter, on the other hand, opined that the facts presented to the district court showed loss causation as a matter of law, and applied a concept of foreseeability in terms of a "zone of risk." See id. at 235. Foreseeability, according to Judge Winter, turns on the materiality of the misrepresented information. In essence, would a third-party investor consider the information significant, or would it affect the "total mix" of available information. See id. at 234. Therefore, if the misrepresentation causes an investor to apprehend a zone of risk, within which a loss is ultimately suffered, "then a misrepresentation from or omission as to that information may be deemed a foreseeable or proximate cause of the loss." Id. at 235. Ultimately, JWP collapsed following the acquisition of Businessland, an event that was encompassed within this zone of risk. E&Y had failed to disclose management's dishonesty and willingness to take risks, withholding such information from the investors through issuance of its no-default letters. JWP's default, according to Judge Winter, was therefore a foreseeable consequence of JWP's diminished aversion to risk, and well within the zone of risk. See id. at 238. Judge Jacobs, in his concurring opinion, would have affirmed the district court's decision. He disagreed with Judge Oakes that further fact finding was necessary, and believed that it was unforeseeable that E&Y's misstatements in the no-default letters would lead to the losses incurred by JWP. Judge Jacobs maintained that the foreseeability question was incorrectly set forth as "whether E&Y could have reasonably foreseen that their certification of false financial information could lead to the demise of JWP, by enabling JWP to make an acquisition that otherwise would have been subjected to higher scrutiny." Id. at 217, 226. According to Judge Jacobs, whether or not JWP's acquisition of Businessland was a foreseeable consequence of the misrepresentation is a misguided analysis, unless it can then be shown that the misrepresentation caused JWP's default. Instead, the correct inquiry is whether E&Y's misrepresentations could foreseeably lead to JWP's default as a result of the Businessland acquisition. Answering this question in the negative, Judge Jacobs stated that he would affirm the district court dismissal of the misrepresentation claims. Believing that the district court would, in the end, make further findings that would lead it to dismiss the plaintiffs' claims, Judge Jacobs shifted his vote to concur with Judge Oakes, and agreed to a vacatur and remand for the district court's determination on the issue of causation. See id. at 225. Conclusion The Seidman and AUSA decisions may ultimately make it easier for a plaintiff to survive an accountant's motion to dismiss. Accounting firms may, in fact, have increased exposure for liability to third parties depending how the New York Court of Appeals answers the questions certified by the Second Circuit in Seidman concerning privity. Moreover, the vastly different approaches adopted by each of the opining judges in AUSA concerning loss causation as an element of federal securities claims, fraud and negligent misrepresentation claims should be of concern to accounting firms. Until the issues raised in Seidman and AUSA concerning privity and loss causation, respectively, are resolved or further clarified there will remain uncertainty under New York law regarding an accounting firm's liability upon the business collapse of an audited client. In light of AUSA and Seidman, an accounting firm should review what steps should be taken to not only protect its independent status, but it should also actively question and investigate suspicious management practices. In that regard, accounting firms should also consider what steps can be taken to protect themselves from non-client third-party claims, such as obtaining releases from third parties before sharing information. To the extent possible, such practices may shield accounting firms from third-party liability "in an indeterminate amount for an indeterminate time to an indeterminate class." (New York Law Journal, September 21, 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. 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. 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