Appellate Law & Practice

CA1: who determines whether a termination is for cause (and defamation)

Noonan v. Staples, Inc., No. 07-2159 (8/21/08) affirms a grant of summary judgment to Staples.  Noonan was fired.  Staples says he was fired “for cause” and therefore it doesn’t have to treat him like a man: he can’t exercise his stock options, and he doesn’t get severance benefits.  It also told 1,500 via email people that he was fired for padding his expense reports.  It normally didn’t humiliate people like this.  Strangely, the amount he “stole” was only about $1,500, which is less than most firms spend on a summer associate outing.  So, I don’t see what Staples is so upset about.

On the stock option agreement breach issue, the First sides with Staples.  This is particularly disgusting. The First say that the question of “cause” is for Staples alone to determine, and that courts must determine whether such a determination was “ arbitrary, capricious, or made in bad faith.”  The First doesn’t really go into why a Massachusetts court would rule this way but seems to just count noses of other jurisdictions. 

On the libel claim, Staples claims that its email was true. Noonan says it isn’t really true, but he admits that he disregarded the letter, not the spirit, of the policy.  The First rejects Noonan’s argument that the whole email painted a very nasty portrait of him, as arrogantly disregarding Staples policy based on a whim.  You have to be an equity partner to do that.  But, for this reason it also rejects the breach of the severance agreement claims: because he didn’t comply with the letter of the contract, Staples gets to not honor its part.

The actual malice theory fails as well.  But, you get a good discussion of the law of libel in Massachusetts, so, if this floats your boat, you can read it.

More on scienter

Kevin LaCroix has an interesting (albeit late) account of New Jersey Carpenters Pension & Annuity Fund v. Biogen Idec which we covered here. 

CA1: what is enough of a risk under the PSLRA to show scienter

New Jersey Carpenter v. Biogen Idec Inc., No. 07-2626 affirms the dismissal of a Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 case.  The underlying issue involves a drug company with a drug that did some bad things, and when voluntarily withdrawn the price of the stock went down.  The plaintiffs allege that the various insiders traded stock based on their knowledge of the drug and made false statements about the drug and the company.  So, the question comes down to one of whether the plaintiffs were plea scienter with enough particularity. 

The first says that knowledge of five adverse events doesn’t create the kind of knowledge necessary to know the drug is bad.  Essentially, the plaintiffs didn’t claim that the defendants knew enough of a significant risk.  The Court also dismisses a similar theory regarding a different period of time that insiders knew about these problems.

CA1: forfeiture in employee stock plan okay

Weems v. Citigroup. No. 06-2565 (7/24/08).  This is a pretty large MDL case, in which the plaintiffs claim that it is wrong for their employer to give them the option of receiving part of their salary as stock (at a discount rate), but requiring them to forfeit said stock if they “voluntarily” leave the company before they “vest” (usually after two or three years). 

Despite the fact that most of the people involved in litigating this issue probably tell everyone they meet that they work in “securities” this comes down to a fairly straight-forward contract claim.  Not really that glamorous.  The First says that there was no breach of a contract. 

Someone found a memo which says that the purpose of this thing is to punish people that go work for competitors, and therefore it is an unlawful restrictive covenant.  (There are far, far, worse things companies do to their employees.)  But the First says this is fine, because forfeiture occurs whether or not they work for a competitor.  This doesn't really ring true, and it seems they are not taking this part of the argument too seriously.

Similarly, the First treats the rest of the common-law contract claims (under Florida law) with almost no degree of seriousness. 

CA1: PSLRA dismissal reversed

Mississippi Public Employees' Retirement System v. Boston Scientific  Corp. et al., 07-1794 reverses the dismissal of a Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 case.  If you practice securities law you should know about this case by now, because your clients expect you to.  If practice securities law and you have not read this case, you are not detail-oriented, and are malpracticing.  That said, I will briefly touch on the issues for those of you that don’t care about your clients but falsely claim to know something about “Securities.” 

Sorry, where was I?  Oh yeah... This case includes both regular FRCP pleading-with-particularity issues as well as PSLRA pleading-with-particularity issues.  The plaintiffs claimed that the executives were not up front about Boston Scientific’s ongoing litigation and problems with some of its medical equipment.  The theory the plaintiffs assert is thus:

Plaintiff's theory is that the investing world was aware of reports of patient death and injury involving TAXUS. However, defendants said that the problems with the TAXUS stents were caused by doctor unfamiliarity with the new product. It was natural for investors to conclude the problems would disappear over time as doctors became more familiar with the product, and there would be no recalls. Having given that explanation, the defendants, plaintiff argues, were required to disclose as soon as they could the connection between the patient problems, the manufacturing defect, and the manufacturing change remedying this problem.

The First concludes that there was enough in the complaint to show that the managers knew what they knew at a certain time, and acted with scienter.

The defendants had argued that the plaintiffs were really seeking liability under a “fraud by hindsight” theory, but the First says that this Circuit caselaw forecloses it, and besides this isn’t a case where “...plaintiff alleges that the fact that something turned out badly must mean defendant knew earlier that it would turn out badly.”

As well, the insider trading dismissals are also reversed.

The D&O Diary Comments here.

CA1: stock option period strictly enforced

Mariasch v. Gillette Company, 07-1549.  An employee got some stock options from his employer.  He says he gets to exercise them late.  There is a choice of law issue, but the First says that this is really a matter of internal corporate governance, and therefore the state of incorporation of the corporation (Delaware) provides the rule of decision.  Applying First Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006) (our coverage here), the First says that the option exercise period must be strictly enforced.  An equitable estoppel argument fails, because at a deposition he said some things that foreclosed it.

CA1: PSLRA case goes to defendant (as does denial of motion to amend), but not all news is good for defendants

ACA Financial v. Advest , 07-1367.  The First proudly announces that this its first post-Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) PSLRA case.  PSLRA, in case you are a moron, stands for Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.  And, of course, it affirms the dismissal of the claims of bond-holders that were defaulted on by Bradford College (the bonds were issued by the Massachusetts Industrial Finance Agency ("MIFA")).   

The First acknowledges that its prior PSLRA precedent was, in part overruleed (as to determining the sufficiency of pleadings of scienter in securities fraud cases under FRCP 12(b)(6)).  So In re Credit Suisse First Boston Corp., 431 F.3d 36 (1st Cir. 2005) (our coverage here) ("Scienter allegations do not pass the 'strong inference' test when, viewed in light of the complaint as a whole, there are legitimate explanations for the behavior that are equally convincing.") is now bad law, and “In other words, where there are equally strong inferences for and against scienter, Tellabs now awards the draw to the plaintiff.” 

And you are never going back to your old bankrupt school... so read on.

CA1: punitive damages and defamatory U-5s

Galarneau v. Merrill Lynch, No. 06-2410.  The plaintiff was fairly sophisticated stock broker at Merrill that handled accounts of the moderately wealthy, and developed somewhat (though not extremely) sophisticated tax strategies for them.  They vetted the strategies with Merrill’s in-house counsel who seemed to approve.  Her strategies were initially successful, but a client complained and sued and settled.  Merrill thought she was “churning,” (see, lawyers are not the only ones that do it) Merrill fired her and told the NASD that she had engaged in “inappropriate bond trading.”

There were a number of communications between counsel for the plaintiff and defendant that were excluded under FRE 403, but the First basically says that this wasn’t an abuse of discretion.

Merrill had conducted an internal and external investigation.  It also notified the Maine Securities division and NASD via a form U-5.

The First notes that under Maine law, a statement in a U-5 is conditionally privileged under Maine law, and “While a conditional (or qualified) privilege does not change the actionable quality of words published, it rebuts the inference of malice that is imputed in the absence of the privilege...[and] A conditional privilege may be abused if the defamatory statement is made with reckless disregard as to its falsity. 

Buy low, sell high and keep reading.

CA1: claim preclusion in derivative actions

In Re: Sonus Networks, Inc, No. 06-1937.  This is a really big piece of derivative litigation.  The plaintiff’s claims were dismissed when the district court held that their claims were precluded by an earlier state-court lawsuit, in which the plaintiffs did not plead that they demanded that the company sue its employees (or allege futility under the law of the state of incorporation).  The state court had held that futility wasn’t apparent from the face of the complaint, which named several officers, because it wasn’t really alleging wrongdoing by them, but rather a failure of supervision and there wasn’t enough particularity to show that the other directors were so disinterested that they couldn’t consider the demand.   

CA1: not enough to allege scienter for purposes of the PSLRA

Rodriguez-Ortiz v. Margo Caribe, Inc., No. 06-1765 (6/19/07). This case deals with the ever-present question of “how much particularity is enough” to meet the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b). The underlying claim involves an alleged failure of a former employer to allow a former employee to exercise his stock options after failed negotiations with an executive as to the terms of his resignation (which the company called a dismissal.) The First looks at the complaint and determines that for the securities claims, there just isn’t any specifics regarding the defendant’s scienter or an “intent to deceive” when the underlying contract was signed.

Apparently the other claims (i.e. contract) were not dismissed.