In a recent published decision, the United States Court of Appeals for the Third Circuit clarified the standards that district courts must apply when certifying discrete issues–rather than an entire action–for classwide adjudication under Rule 23(c)(4).

What Is Rule 23(c)(4)?

Rule 23(c)(4) is an obscure part of federal class action practice. It states, simply, “When appropriate, an action may be brought or maintained as a class action with respect to particular issues.”

Because the rule (and its commentary) provide so little guidance, courts have had to fill the gap with criteria for issue certification. The Fifth Circuit, for example, has adopted a narrow holding that issue-class certification is appropriate only when a plaintiff shows that a court should certify an entire action as a class, reasoning that Rule 23(c)(4) “is a housekeeping rule that allows courts to sever the common issues for a class trial.”

But most circuits have rejected this approach and found that issue certification may be appropriate even if full Rule 23(b) certification is impossible. For example, the Sixth Circuit has said that issue-class certification is proper “where common questions predominate within certain issues and where class treatment of those issues is the superior method of resolution.”

The Third Circuit’s Latest Rule 23(c)(4) Decision

The recent case before the Third Circuit–Russell v. Educational Commission for Foreign Medical Graduates–involved a Pennsylvania nonprofit organization that certifies foreign medical school graduates for United States medical-residency programs. The organization certified a particular doctor despite having suspicions that he had misrepresented his identity on his applications. Law enforcement eventually arrested the doctor for possessing fraudulent or altered immigration documents, medical diplomas, medical transcripts, letters of recommendation, and birth certificates. He pleaded guilty to using a fraudulent Social Security number to obtain a medical license.

Following the doctor’s guilty plea, two former patients of the doctor sued the organization that signed off on his participation in a residency program, alleging negligent infliction of emotional distress. The plaintiffs brought their claims as a putative class action on behalf of all the doctor’s former patients.

Because there were clear individualized issues of injury, causation, and damages, the district court could not certify the class for full adjudication. But it did find that issues of duty and breach could be decided as to the entire class under Rule 23(c)(4), with injury, causation, and damages reserved for individual proceedings.

Addressing the issue-class certification in the case before it, the Third Circuit (in an opinion written by Judge Restrepo and joined by Judges Bibas and Porter) held that the district court abused its discretion when certifying the duty-and-breach issue class.

The Circuit held that a court resolving a motion to certify an issue class must make three determinations:

(1) Whether the proposed issue class satisfies Rule 23(a)’s numerosity, commonality, typicality, and adequacy requirements;

(2) Whether the proposed issue class “fit[s] within one of Rule 23(b)’s categories”; and

(3) Whether it is “appropriate” to certify these issues as a class.

Applying this standard, the Third Circuit reversed for two reasons. First, the Circuit found that the district court abused its discretion by failing to analyze whether the duty and breach elements satisfied Rule 23(b)(3). Second, the Circuit also held that the district court abused its discretion by certifying a class without considering all nine issue certification factors that the Court had earlier announced in Gates v. Rohm and Haas Co.

Although the Third Circuit vacated the district court’s class certification order, it explicitly declined to adopt the Fifth Circuit’s rule that issue classes are appropriate only when an entire case is suitable for class certification.

Practical Considerations for Rule 23(c)(4)

Rule 23(c)(4) has been on the books for more than 50 years, but only recently have plaintiffs’ attorneys started paying attention to it as an alternative to traditional class certification. As more circuits weigh in, it is likely to garner more attention and attract putative class actions that attorneys might not have considered traditionally strong candidates for classwide adjudication. In particular, claims that have clear individualized injury, causation, and damages questions might now find new life as issue-class cases.

Because the question has never been before the Supreme Court, each circuit’s law has different and important variations in how to analyze motions for issue-class certification. Companies and practitioners should be familiar with their home Circuit’s requirements when assessing a putative class action’s changes at certification.

In the wake of COVID-19, litigants have increasingly sought to excuse contractual performance by invoking force majeure clauses. In the early stages of the pandemic, there were few reported decisions on these matters, and the substance of these rulings echoed the principles that were applied in the pre-COVID era: force majeure clauses are strictly and narrowly construed. See, e.g., Lantino v. Clay LLC, 2020 WL 2239957, (S.D.N.Y. May 8, 2020) (rejecting a gym owner’s force majeure/impossibility argument that COVID-19 and the state’s shutdown order destroyed his business and ability to pay because the gym owner established financial difficulty but not a set of circumstances that made performance genuinely impossible).

Other recent opinions, however, have trended toward a more lenient standard. See, e.g., In re Hitz Restaurant Group, No. BR 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020) (excusing a restaurant owner and tenant’s performance under a lease due to force majeure where the owner argued that Illinois’ stay-at-home order precluded performance and the language in the lease’s force majeure clause that explicitly mentioned “laws and other government action”); Richards Clearview, LLC. v. Bed Bath & Beyond, Inc., 2020 WL 5229494 (E.D. La. September 2, 2020) (excusing a tenant’s failure to pay rent on force majeure grounds, even though the operative force majeure clause did not mention pandemics, COVID-19, or related government shutdowns).

Still, the varying authority on this topic has left litigants uncertain regarding whether they have a viable force majeure argument. But a recent opinion from the Eastern District of New York — Banco Santander (Brasil), S.A. v. American Airlines Inc., No. 20CV3098RPKRER, 2021 WL 4820646, at *3 (E.D.N.Y. October 15, 2021) — suggests that a related argument, “frustration of purpose,” may carry the day, even though it is based on the same facts and circumstances as an unsuccessful force majeure argument.

In Banco Santander, when the COVID-19 pandemic struck, American Airlines (“American”) suspended flights between Brazil and the United States. Prior to the pandemic, however, Banco Santander (“the Bank”) contracted with American to offer a credit card program, co-branded with American. Under the terms of the contract, cardholders would earn miles with their purchases, and the Bank would, in turn, pay American for those miles. But the Bank was required to purchase a minimum number of miles each year — regardless of how many miles cardholders would earn through their spending.

Because of the pandemic, the Bank sought to terminate the contract due to a force majeure event, and, in the alternative, the Bank argued that it should be excused from performance based on the common-law doctrine of frustration of purpose. The Court gave short shrift to the Bank’s force majeure argument. Particularly, it held that while the pandemic could, in theory, qualify as a force majeure event, the parties’ contract foreclosed the application of the doctrine to American because the force majeure provision applied only if American “delays performance or fails to perform due to a Force Majeure Event” for at least 90 days. However, the contract did not state that flying between Brazil and the United States was among the duties expressly assumed by American. Thus, the Bank’s force majeure argument was rejected.

Nonetheless, the Court refused to dismiss the Bank’s claim for frustration of purpose. The Court explained that under New York law, the frustration-of-purpose doctrine permits a party to stop performing under a contract when a “wholly unforeseeable event renders the contract valueless” to that party. Axginc Corp. v. Plaza Automall, Ltd., 759 F. App’x 26, 29 (2d Cir. 2018); cf. PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (N.Y. App. Div. 2011) (frustration of purpose applies when “a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract”). To that end, the Bank essentially realleged its force majeure argument — that the COVID-19 pandemic was an event unforeseen by the parties that both disrupted all air travel worldwide and led American to cease all air travel between the United States and Brazil. The Bank further claimed that the pandemic had a “fundamental” impact on the desirability of air travel between the United States and Brazil because it led to government travel restrictions, reductions in airline capacity, and a general reluctance to travel. Thus, the Bank concluded that the consequences of the unforeseeable global pandemic rendered the contract valueless to the Bank.

Notably, in refusing to dismiss the Bank’s claim, the Court explained that:

[F]airly read, the complaint argues that a confluence of factors stemming from the COVID-19 pandemic rendered the contract valueless — including not just the suspension of flights, Compl. ¶¶ 47-48, but also a broader decimation of air-travel demand, id. ¶ 49. Even if one link in the chain of events on which the bank relies was foreseen by the parties — the suspension of flights — it would be inappropriate to dismiss a frustration-of-purpose claim that also relies in substantial inm part on other, assertedly [sic] unprecedented events.

2021 WL 4820646, at *5. The Court then held that these are plausible factual issues that were not appropriate to resolve on a motion to dismiss.

There are several takeaways from this holding and the evolution of force majeure litigation in a post-pandemic era:

  • Careful attention should be paid to the evolving force majeure/COVID jurisprudence in the relevant jurisdiction.
  • Practitioners should be mindful of both (i) a contract’s force majeure language (namely, whether it identifies COVID-19, pandemics, or government shutdown orders as force majeure events) and (ii) the particular facts and circumstances that led to a client’s frustrated performance, with the understanding that some courts may require a thorough argument demonstrating that performance was not merely frustrated but impossible.
  • Despite the uncertainty of successful force majeure arguments, however, practitioners should consider arguing the common law doctrine of frustration of purpose as an alternative form of relief, as the same facts that constitute an unsuccessful force majeure argument may nonetheless state a viable frustration-of-purpose claim.

The common train of thought when litigating as an out-of-state defendant is that it is best to be venued in federal court so as to eliminate any advantage an in-state plaintiff might have with a local jury. Typically, foreign companies will seek to remove state court actions filed by local plaintiffs to federal court under 28 U.S.C. § 1332 on the basis that there is diversity of citizenship between the parties–i.e., the parties on opposite sides of the lawsuit are citizens of different states. But what happens when a local stakeholder sues a limited liability company (LLC) in which he or she has an interest that neither was formed nor operates in the forum?

While at first glance there would appear to be diversity of citizenship between the parties, the unique character of LLCs necessitates further analysis. Unlike corporations, which are considered citizens of the state where they are incorporated and the state where they maintain their principal place of business, LLCs, and other unincorporated entities, are considered citizens of every state where their members reside. Thus, when an LLC member names the company itself as one of several defendants in a lawsuit, there may not be grounds for removal because “diversity jurisdiction in a suit by or against [an unincorporated] entity depends on the citizenship of all the members.” Carden v. Arkoma Assocs., 494 U.S. 185, 195 (1990) (internal quotation mark omitted).  The plaintiff member’s residence would supply the state of citizenship for both him/herself and the company.

At present, the U.S. Supreme Court has not weighed in on the analysis to be applied when an LLC member and the company are on opposite sides of a lawsuit and diversity jurisdiction is challenged. District courts, however, have applied a “nominal defendant” test when evaluating whether complete diversity exists. That is, a court will decide whether the LLC’s presence impacts the jurisdictional analysis by examining whether the company is essential to the lawsuit. Under this test, the company’s citizenship will be evaluated if the plaintiff member has an independent cause of action against the company. If, on the other hand, the member is really asserting claims against the LLC’s other interest holders and the company was named in the lawsuit purely for the purpose of affecting any remedy granted to the plaintiff member, the company’s presence does not factor into the citizenship analysis. See, e.g., S. Lavon Evans, Jr. Drilling Venture, LLC v. Laredo Energy Holdings, LLC, No. 2:11-CV-12, 2011 WL 1104150 (S.D. Miss. Mar. 23, 2011); J2 Enterprises, LLC v. Fields, No. CIV-14-781, 2014 WL 4957300 (W.D. Okla. Oct. 3, 2014); Kroupa v. Garbus, 583 F. Supp. 2d 949 (N.D. Ill. 2008).

Rather than risk ending up locked in an unfavorable state court due to the absence of federal jurisdiction, LLCs can, to a certain degree, preempt the issue by including broad forum selection clauses in their operating agreements. Thus, by contract, an LLC can control where its members file lawsuits relating to company operations.  Li v. loanDepot.com, LLC, No. CV 2019-0026-JTL, 2019 WL 1792307 (Del. Ch. Apr. 24, 2019); KTV Media Int’l, Inc. v. Galaxy Grp., LA LLC, 812 F. Supp. 2d 377 (S.D.N.Y. 2011); Marth v. Innomark Commc’ns LLC, No. CV 16-8136, 2017 WL 3081684 (C.D. Cal. Apr. 19, 2017).  And even though the forum selection clause itself will not create diversity jurisdiction to provide an avenue into federal court (which depends on the citizenship of the company’s members), the company can use the clause to select a favorable or neutral state for resolving company disputes—for example, the state under whose laws the LLC was formed.

On Sept. 23, the Delaware Supreme Court endorsed a new universal three-part demand-futility test in United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al. (Zuckerberg).[1] This universal test combines the traditional demand-futility tests established in Aronson v. Lewis[2] and Rales v. Blasband.[3]

Background: the Zuckerberg case

The Zuckerberg case arose after the board of directors of Facebook Inc. voted in favor of a stock reclassification (reclassification) that would allow Facebook’s controller, chairman, and chief executive officer, Mark Zuckerberg, to sell most of his Facebook stock while maintaining voting control of the company. Facebook’s stockholders, with Zuckerberg casting the deciding votes, approved the reclassification. However, not long after, numerous stockholders filed lawsuits alleging that Facebook’s board of directors violated its fiduciary duties by approving a purportedly one-sided deal. The lawsuits were consolidated into a single class action. Facebook ultimately withdrew the reclassification and mooted the class action. In total, the company spent about $21.8 million defending the class action and $68.7 million in attorneys’ fees paid to plaintiffs’ counsel under the corporate benefit doctrine.

Another stockholder, the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund (Tri-State), filed a derivative complaint in the Court of Chancery seeking compensation for the money Facebook spent in connection with the class action. Tri-State did not make a demand under Court of Chancery Rule 23.1 and instead argued that demand would be futile.

The Aronson and Rales tests

Derivative suits seek to “deprive the board of control over a corporation’s litigation asset.”[4] “In order for a stockholder to divest the directors of their authority to control the litigation asset and bring a derivative action on behalf of the corporation, the stockholder must” either (1) make a demand on the board or (2) demonstrate that demand would be futile.[5] The Aronson and Rales tests were used by Delaware courts to determine whether demand was futile. The Aronson test applied where the complaint challenged a decision made by the same board considering a litigation demand.[6] Under the Aronson test, demand was excused as futile if the complaint alleged particularized facts that raised a reasonable doubt that “(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid business judgment.”[7]

The Rales test applies in all other situations.[8] Under the Rales test, demand was excused as futile if the complaint alleged particularized facts that created a “reasonable doubt that, as of the time the complaint is filed,” a majority of the board “could have properly exercised its independent and disinterested business judgment in responding to a demand.”[9] Ultimately, these tests address the same question, “‘whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand.”[10]

The Delaware Supreme Court’s reasoning in Zuckerberg and the new universal demand-futility test

On appeal to the Delaware Supreme Court, Tri-State argued that the Court of Chancery erred in holding that exculpated duty-of-care violations do not satisfy the second prong of Aronson.[11] At issue was that Facebook’s charter contained a Section 102(b)(7) (of the Delaware General Corporation Law) clause, thereby insulating its directors from duty-of-care claims such that they faced no risk of personal liability. The Delaware Supreme Court disagreed with Tri-State’s argument and affirmed the Court of Chancery’s decision. The Aronson case was decided before Section 102(b)(7) was adopted in 1995; thus, the court noted:

When Aronson was decided, raising a reasonable doubt that directors breached their duty of care exposed them to a substantial likelihood of liability and protracted litigation, raising doubt as to their ability to impartially consider demand. The ground has since shifted, and exculpated breach of care claims no longer pose a threat that neutralizes director discretion. These developments must be factored into demand-futility analysis, and Tri-State has failed to provide a reasoned explanation of why rebutting the business judgment rule should automatically render directors incapable of impartially considering a litigation demand given the current landscape.[12]

Further, the court rejected Tri-State’s argument that because the entire fairness standard or review applies ab initio to a conflicted-controller transaction (like the one at issue in Zuckerberg), demand is automatically excused under Aronson’s second prong.[13]

Most importantly, the Delaware Supreme Court adopted a three-part universal test, which blends elements of the Aronson and Rales tests. This test requires courts to assess the following on a director-by-director basis:

(i) Whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand

(ii) Whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand

(iii) Whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand[14]

Under this test, demand is excused as futile if the answer to any of the questions is “yes” for at least half of the members of the demand board.[15] As the court noted, “The purpose of the demand-futility analysis is to assess whether the board should be deprived of its decision-making authority because there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand.”[16] This universal test now “refocuses the inquiry on the decision regarding the litigation demand, rather than the decision being challenged.”[17]

The court stressed that Aronson, Rales, and their progeny remain good law because the new three-part test is consistent with and enhances these cases.[18]

Conclusion

Going forward, the new test will be applied, eliminating the need to determine whether the Aronson test or the Rales test governs a complaint’s demand-futility allegations. The court’s ruling in Zuckerberg affirms that “the demand requirement is not excused lightly because derivative litigation upsets the balance of power that the [Delaware General Corporation Law] establishes between a corporation’s directors and its stockholders.”[19]


[1] No. 404, 2020, 2021 WL 4344361 (Del. Sept. 23, 2021).

[2] 473 A.2d 805 (Del. 1984).

[3] 634 A.2d 927 (Del. 1993).

[4] Aronson, 473 A.2d at 811.

[5] Lenois v. Lawal, 2017 WL 5289611, at *9 (Del. Ch. Nov. 7, 2021).

[6] Zuckerberg, 2021 WL 4344361, at *7 (citing Rales, 634 A.2d at 933).

[7] Aronson, 473 A.2d at 814.

[8] Zuckerberg, 2021 WL 4344361, at *7.

[9] Rales, 634 A.2d at 934.

[10] Lenois, 2017 WL 5289611, at *9 (quoting Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988)).

[11] Zuckerberg, 2021 WL 4344361, at *8.

[12] Id. at *12.

[13] Id. at *13.

[14] Id. at *17 (internal citation omitted).

[15] Id.

[16]Zuckerberg, 2021 WL 4344361, at *16.

[17]Id. (internal citation omitted).

[18] Id. at *17.

[19] Id. at *7.

Today, the United States Supreme Court resolved a circuit split regarding what constitutes an “autodialer” under the Telephone Consumer Protection Act (TCPA). In a blow to the plaintiffs’ bar, the Supreme Court ruled in favor of defendant Facebook, establishing a narrower, nationwide standard for what type of dialing equipment constitutes an “autodialer.”

The TCPA prohibits auto-dialed calls and texts to cellphones without prior express consent. Statutory penalties under the TCPA are severe: $500 per call in violation of the statute, or $1,500 per call for willful violations. 47 U.S.C. § 227(b)(3). The key issue in the Facebook appeal was whether a computer that simply stores and then dials a list of numbers qualifies as an “autodialer,” or whether the “autodialer” must itself randomly generate the list of numbers to be called.

In Facebook, Inc. v. Duguid, et al., No. 19-511, a unanimous Court overturned a Ninth Circuit ruling that held that dialing equipment that dials numbers from a stored list (as opposed to a randomly generated list) can qualify as an autodialer under the TCPA. The high court held, instead, that “Congress’ definition of an autodialer requires that in all cases, whether storing or producing numbers to be called, the equipment in question must use a random or sequential number generator.” The Second, Sixth, and Ninth Circuits had previously held that equipment that merely dials numbers from a stored list can qualify as an autodialer under the TCPA.

The TCPA defines “automatic telephone dialing system” as “equipment which has the capacity to store or produce telephone numbers to be called, using a random or sequential number generator, and, to dial such numbers.” 47 U.S.C. § 227(a)(1). In the case below, Duguid filed a putative class action over text messages he received from Facebook in 2014, alleging that Facebook violated the TCPA by sending automated text messages to his cellphone using an autodialer. Facebook argued that the TCPA did not apply, saying the technology it used to send Duguid text messages was not an autodialer because it did not send him text messages using a “random or sequential number generator.” The district court agreed and the plaintiff appealed to the Ninth Circuit, which reversed.

Before the Supreme Court, Facebook argued that the phrase “using a random or sequential number generator” modified both “store” and “produce,” while the plaintiff urged that the phrase only modified “produce,” such that an autodialer would encompass any equipment that can simply store and dial numbers, such as your average smartphone. The Supreme Court held that Facebook’s reading provided the most natural construction and, further, that it more closely aligned with Congress’ intent in enacting the TCPA, which arose–in part–from concerns that autodialers could randomly dial emergency lines, creating a threat to public safety, or “tie up all the lines of any business with sequentially numbered phone lines.”

The Supreme Court also appeared to recognize the potentially crippling effect the plaintiff’s reading would have on businesses that use telemarketing, stating that “[e]xpanding the definition of an autodialer to encompass any equipment that merely stores and dials telephone numbers would take a chainsaw to these nuanced problems when Congress meant to use a scalpel.”

While today’s ruling is a significant victory for the TCPA defense bar, businesses should continue to ensure compliance with the TCPA’s other requirements and prohibitions, including those relating to prerecorded calls.

The U.S. Supreme Court will hear arguments on March 30, 2021, in a case that will help clarify when an intangible, nonmonetary injury is sufficiently “concrete and particularized” to give rise to Article III standing.1 The Supreme Court’s decision will likely provide guidance for class-action plaintiffs seeking to bring (and class-action defendants looking to defend against) claims for civil penalties in the wake of the Supreme Court’s 2016 decision in Spokeo, Inc. v. Robins.2 The case could have profound consequences for any company that is potentially subject to a claim for statutory civil penalties in a federal class action lawsuit.

The Ninth Circuit’s Decision in Ramirez v. TransUnion LLC

Sergio Ramirez tried to buy a car with his wife. The dealership obtained a credit report, which incorrectly identified Ramirez as appearing on a list of Specially Designated Nationals (“SDNs”)–that is, people prohibited from doing business in the United States for national security reasons. It is essentially a terrorist watch list.

Ramirez contacted the credit reporting agency, TransUnion, to fix the error. In response, he received two letters. The first letter contained his ordinary credit report with a summary-of-rights form and instructions on how to submit proposed corrections. The second letter (“SDN Letter”) disclosed that Ramirez’s name was a “potential match” for names on the Treasury Department’s SDN list, but it lacked a summary-of-rights form or instructions on corrections. As it turns out, TransUnion included SDN references in credit reports based on information supplied by a third-party vendor that used software dependent on comparing first and last names. The assessment thus did not consider addresses, Social Security numbers, or any other identifying information.

Ramirez sued, alleging that TransUnion violated the Fair Credit Reporting Act (“FCRA”) when it willfully failed to follow reasonable procedures to ensure accuracy of the alerts, willfully failed to disclose full credit reports by sending the SDN Letter separately from the balance of the credit report, and willfully failed to provide a summary of rights with the SDN Letter.

Ramirez’s suit was brought individually and also on behalf of all 8,185 individuals who received the SDN Letter in a seven-month period. The trial court certified that class, and the jury returned a verdict of $60 million in favor of the class, including $8 million in statutory civil penalties and $52 million in punitive damages. (The Ninth Circuit later reduced the punitive damages to $32 million.)

In a 2-1 decision, the Ninth Circuit affirmed class certification and the verdict.3 The majority opinion, written by Judge Murguia and joined by Judge Fletcher, applied a two-part test to determine “whether the violation of a statutory right constitutes a concrete injury.” The court first asked “whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights).” And then, if they were, “whether the specific procedural violations alleged actually harm, or present a material risk of harm to, such interests.”

The majority had little difficulty finding the answer to both questions to be yes, since the protective purposes of FCRA are clear, as is the risk of harm from a false accusation that a person is an SDN. In her dissent, Judge McKeown explained that the class consisted of anyone who received the SDN Letter rather than anyone who had the false SDN accusation distributed to third parties. There was therefore no guarantee that every class member even opened the mailing, let alone that the incorrect credit report confused, distressed, or otherwise affected the absent class members.

The Ramirez argument comes one month after a similar case in which the Eleventh Circuit held that data breach victims must show more than a heightened risk of future injury or costs incurred to mitigate potential harm in order to establish Article III standing.

The Upcoming Argument

The question before the Supreme Court is whether the absent class members in Ramirez sustained a concrete injury sustaining Article III standing.

TransUnion’s argument focuses on the record at trial, which definitively established only that a quarter of the absent class members had the incorrect information distributed to third parties. As a result, as much as three-quarters of the class never suffered any harm as a result of the incorrect information. TransUnion argues that the trial court therefore should have never certified the class because its membership (all persons who received the SDN Letter in a seven-month period) is untethered from the alleged harm–that is, dissemination of the false SDN identification.

Ramirez turns this on its head and points out that there is no dispute that a quarter of the class suffered a concrete injury through dissemination of the SDN Letters. As for the rest, Ramirez argues that TransUnion must have also disseminated the incorrect SDN allegation of the third-party vendor that printed the SDN Letters, which suffices for an FCRA violation. And in any event, under Spokeo, there need only be a “risk of real harm,” which Ramirez argues is present when TransUnion prepares an incorrect credit report that exists solely so that TransUnion can distribute it to its customers on demand.

The Supreme Court’s decision will likely turn on how speculative or inference-driven a predicate for Article III standing can be. The outcome will affect not only FCRA litigation but also virtually any claim in which a plaintiff sues only for civil penalties because of a statutory violation. Such claims are ubiquitous in consumer fraud statutes, such as the Fair and Accurate Credit Transactions Act, the Stored Communications Act, and the Telephone Consumer Protection Act.

 

1 TransUnion LLC v. Ramirez, No. 20-297.

2 578 U.S. 330.

3 Ramirez v. TransUnion LLC, 951 F.3d 1008 (9th Cir. 2020), reh’g denied (Apr. 8, 2020).

A White Collar Criminal Defense alert by Rachel Maimin, Kathleen McGee, and Carly Coleman discusses the $105 million settlement that New York State and New York City recently received from a hedge fund manager accused of evading tax liability.  This settlement results from a qui tam suit filed in 2018 under the New York False Claims Act, which permits a whistleblower to receive a significant portion of any recovery.  Read the alert here.

On February 16, Judge Furman of the Southern District of New York handed down a ruling in In re Citibank August 11, 2020 Wire Transfers concluding that Citibank could not recover $900 million inadvertently wired to lenders.

The entire 105-page decision[1] is a fascinating read, describing a near-perfect storm of convoluted financial arrangements, technological limitations, and all-too-understandable human error that culminated in the following screen shot from Citibank’s internal system:[2]

The premise was that the user needed to direct a principal payment to an internal Citibank account rather than out of the bank to the lenders, while allowing the payment of interest to leave the bank. To make this adjustment, the user clearly directs “PRINCIPAL” to an “Internal G[eneral] L[edger]” account, directing the system to “Overwrite [the] default settlement instruction.” In fact, to accomplish the intended redirection, the user also needed to select the “FRONT” and “FUND” lines. Without those cryptic additions, the full amount of all principal and interest, approximately $900 million, was inadvertently deposited in lender accounts.

The decision also offers an important and detailed discussion of New York’s discharge-for-value law. The court drew on the formulation from the leading Court of Appeals decision on the topic:

“When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.”[3]

The court, in deciding that the erroneously paid lenders were not, in fact, on notice that the payment was in error, specifically pointed to the Bloomberg Terminal chat functions, in which the hedge fund lenders ruthlessly skewered the Citibank employees … but only after Citibank asked that the funds be returned. The court reproduced some of the “quite colorful” comments, including:

“I feel really bad for the person that fat fingered a $900mm erroneous payment. Not a great career move” and “How was work today honey? It was ok, except I accidentally sent $900mm out to people who weren’t supposed to have it”[4]

Ultimately, however, one salient takeaway is inescapable: syndicated lending may, at times, look like investing in securities, but it is quite different.

Syndicated loans are not considered securities, and the loan is not based on a registration statement and prospectus but rather on a confidential information memorandum (CIM). Notably, statements in the CIM are not covered by state or federal securities laws.

Additionally, in the event a bond is to be retired early, the bondholder would expect to receive a notice that the bond is being called or, for bonds without call features, an offer to repurchase the bond at the prevailing market price (or perhaps at a premium). In the absence of these types of communications, the lender could arguably be considered to be put on notice that something was amiss should the entire outstanding principal and interest be returned prior to the bond’s maturity.

With a syndicated loan, there are generally no such formalities required. Consequently, in In re Citibank, there was no reason for lenders to imagine that they were receiving anything other than what they were due.

The case is In re Citibank August 11, 2020 Wire Transfers, No. 1:20-cv-06539-JFM (S.D.N.Y.). We expect to revisit this matter after an appeal.

[1] In re Citibank August 11, 2020 Wire Transfers, dkt. no. 243 (Feb. 16, 2021) (“In re Citibank”).

[2] Id. at 13.

[3] Banque Worms v. Bank Am. Int’l, 570 N.E.2d 189, 196 (1991).

[4] In re Citibank at 73.

Earlier this month, the Eleventh Circuit, in Tsao v. Captiva MVP Restaurant Partners, LLC, No. 18-14959, 2021 WL 381948 (11th Cir. Feb. 4, 2021), affirmed the dismissal of a class-action lawsuit brought on behalf of patrons of a restaurant chain, holding that data breach victims must show more than a heightened risk of future injury or costs incurred to mitigate potential harm in order to establish Article III standing.

The plaintiff in Tsao alleged that a data breach targeted at a restaurant chain’s point-of-sale system revealed class members’ credit and debit card information, exposing class members to identity theft and fraud.

Relying on the Supreme Court’s decision in Clapper v. Amnesty Int’l USA, 568 U.S. 398 (2013) and the Eleventh Circuit’s ruling in Muransky v. Godiva Chocolatier, Inc., 979 F.3d 917 (11th Cir. 2020), the court held that a plaintiff alleging a threat of future harm “does not have Article III standing unless the hypothetical harm alleged is either ‘certainly impending’ or there is a ‘substantial risk’ of such a harm.” Moreover, the court held, a plaintiff cannot “conjure standing” by inflicting harm on itself to mitigate the alleged risk, such as by spending time and resources canceling credit cards, resulting in temporary loss of use of the canceled cards and lost cash back or reward points. Applying this standard, the court found that plaintiff had failed to establish that the threat of future harm was “certainly impending” or that there was a “substantial risk” of such harm, and that he could not “manufacture standing” by incurring costs to mitigate a “non-imminent harm.”

In so holding, the Eleventh Circuit sided with the Second, Third, Fourth, and Eighth Circuits–all of which have declined to find standing based on an increased risk of identity theft and the cost of measures taken to protect against it. While the Tsao decision doesn’t resolve the circuit split, it provides additional protection to companies in the Eleventh Circuit that take steps to promptly alert their customers of data breaches. The Tsao decision is also likely to factor into the Equifax appeal, brought on behalf of a handful of objectors to the class settlement arising out of the 2017 data breach at Equifax–one of the largest ever, which is currently scheduled for oral argument before the Eleventh Circuit on April 20.

Last March, The New York Times reported that Senate Majority Leader Mitch McConnell had been “quietly making overtures” to older Republican-nominated judges to encourage them to retire so that then-President Trump could fill their vacancies before the end of his term. After the 2020 presidential election, the Los Angeles Times reported that, reciprocally, some federal judges had been deliberately delaying their retirements in the hope that a different president would be able to nominate their successors.

In the three weeks since President Biden’s inauguration, 28 federal judges have announced that they are retiring or transitioning to “senior status”–a form of semi-retirement available to more senior judges in which they can reduce their caseload or be more selective in the types of cases they accept, and that opens up their seat as vacant.

The recent retirement announcements include some jurists who are well known within the financial services industry:

  • Robert A. Katzmann has served on the Second Circuit since 1999 and was its Chief Judge from 2013 to 2020. The day after President Biden’s inauguration, NYU Law announced that Judge Katzmann was taking senior status and joining the NYU Law faculty. Among his many decisions in over two decades on the bench, Judge Katzmann wrote the seminal majority opinion in United States v. Martoma, which defined the personal benefit element of insider trading.
  • Denny Chin, who served as a district judge in the Southern District of New York from 1994 until 2010, when President Obama elevated him to the Second Circuit, will take senior status in June. Judge Chin is perhaps best known for presiding over the prosecution of Bernie Madoff, whom he sentenced to a prison term of 150 years. Judge Chin also granted summary judgment to dispose of a copyright class action that would have prevented Google from scanning tens of millions of books into a digital library.
  • Outside New York, Dan Aaron Polster, a federal district judge in Cleveland, has risen to national prominence as the judge presiding over the multidistrict litigation arising from opiate litigation in federal courts. He previously presided over a securities fraud action against Cliffs Natural Resources Inc., which resulted in an $84 million class settlement. Judge Polster took senior status on January 31.

In addition to those who have already announced their retirement, many judges with heavy footprints in capital markets litigation either are or will become eligible for retirement on pension or senior status within the next four years, should they so choose. These include, among many others, First Circuit Judge William J. Kayatta Jr.; Second Circuit Judges Jose A. Cabranes, Rosemary S. Pooler, and Susan L. Carney; Seventh Circuit Chief Judge Diane Wood and Judges Frank Easterbrook and David F. Hamilton; and Ninth Circuit Chief Judge Sidney Thomas.

These resignations are not likely to result in a sea change in the federal courts’ political composition. But the displacement of older voices with newer and often more ideological jurists may have a significant impact on capital markets litigation for decades to come.

President Biden has not yet announced any judicial nominations.

A complete list of retiring federal judges is available at the website of the Administrative Office of the U.S. Courts