"Skadden's 2012 Insights, January 2012: Global Litigation"

U.S. Supreme Court Cases to Watch

In the current term, the Supreme Court has once again agreed to decide cases of significant interest to the business community. Media coverage has justifiably concentrated on the potential implications of the challenges to President Obama’s health care reform, but other cases also are likely to have important impacts on the business world.

• The Supreme Court will consider the constitutionality of President Obama’s Affordable Care Act in three consolidated cases, National Federation of Independent Business v. Sebelius, No. 11-393, Florida v. Department of Health & Human Services, No. 11-400, and Department of Health & Human Services v. Florida, No. 11-398. The Court ordinarily limits oral argument in cases to a total of one hour, but it has agreed to hear five and a half hours of argument about the Affordable Care Act. The issues that the Court will consider include whether the Commerce Clause permits Congress to require individuals to purchase health insurance (the so-called individual mandate), whether the individual mandate, if deemed unconstitutional, can be severed from the rest of the act, whether the incentives given to states to expand Medicaid are unconstitutionally coercive under the Spending Clause, and whether the challenges to the law are prohibited at this time by the Anti-Injunction Act. The Court’s interpretation of the limits of Congress’ power under the Commerce and Spending Clauses is likely to have ramifications far beyond the health care industry.


• In Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, and Mohamad v. Palestinian Authority, No. 11-88, the Supreme Court will consider whether the Alien Tort Statute and the Torture Victim Protection Act of 1991 permit actions against corporations or other organizations of individuals. If the Court permits suits against such defendants, some corporations with significant assets in the United States that do business elsewhere in the world likely will face additional claims in U.S. courts arising from their business outside the United States. Given the limitations on U.S. courts’ authority to compel witnesses and documents located abroad to appear before them, corporate defendants in these suits could face many practical problems in preparing their defenses. (See “International Litigation and Arbitration: Upcoming Supreme Court Cases and Arbitration Claims Against Sovereigns.”)


• In Magner v. Gallagher, No. 10-1032, the Court will consider whether disparate impact claims are cognizable under the Fair Housing Act. The Obama administration has brought new FHA actions under a disparate impact theory, and private plaintiffs have brought actions premised on similar theories of liability under fair lending laws. The Court’s decision in this case is likely to affect disparate impact suits under the Fair Housing Act and other statutory provisions as well.


• The Supreme Court has agreed to hear two notable tax cases. In United States v. Home Concrete & Supply, LLC, No. 11-139, the Supreme Court will consider whether to defer to a retroactive regulation that was issued during pending litigation in an effort to determine the outcome of the litigation. In Armour v. Indianapolis, No. 11-161, the Court will consider whether the Equal Protection Clause permits a local tax authority to refuse to refund payments made by those who have paid their assessments in full, while forgiving the obligations of identically situated taxpayers who chose to pay over a multiyear installment plan.


• In FCC v. Fox Television Stations, Inc., No. 10-1293 131 S. Ct. 3065 (2011)(mem.), the Supreme Court has agreed to hear a First Amendment challenge to the Federal Communications Commission’s indecency regime. One argument the broadcasters in the case make is that the reduced First Amendment scrutiny the Supreme Court has applied to restrictions on broadcast media is inappropriate and should be abandoned. In addition to the obvious effects the case will have on broadcast media, it will be important to see if the Court continues its recent trend of affording broad First Amendment protection to corporations, such as in Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010) (striking down limitations on political speech based on the speaker’s corporate identity), and Brown v. Entertainment Merchants Association, 131 S. Ct. 2729 (2011) (striking down restrictions on violent video games). The Supreme Court also may clarify the level of specificity required of a regulation, at least where the regulation affects fundamental rights.

Securities Litigation: Recent Supreme Court Decisions and Future Trends

Recent and Upcoming Supreme Court Decisions

In 2011, the Supreme Court decided three significant securities cases: Matrixx Initiatives, Inc. v. Siracusano 131 S. Ct. 1309 (2011), regarding statistical significance in the context of securities fraud; Erica P. John Fund, Inc. v. Halliburton Co. 131 S. Ct. 2179 (2011), addressing the relationship between loss causation and class certification; and Janus Capital Group, Inc. v. First Derivative Traders 131 S. Ct. 2296, 2305 (2011), construing the phrase “to make” under the SEC’s Rule 10b-5. Coming up in the term that began in October 2011, the Court will decide Credit Suisse Securities v. Simmonds, to clarify the two-year statute of limitations under Section 16(b) of the Securities Exchange Act.

• In Matrixx, a unanimous Supreme Court rejected statistical significance as a bright-line test for materiality and scienter under Section 10(b) of the Securities Exchange Act. The Court held that shareholders can state a claim based on a company’s failure to disclose adverse events associated with the company’s product, even if the complaint does not allege that the company knew of a statistically significant number of such adverse events. The Court reasoned that if regulators and consumers rely upon information that fails to attain statistical significance, it follows that investors could as well.


• In Halliburton, the Court resolved a split between the Fifth and Seventh Circuits regarding whether plaintiffs must prove loss causation at the class certification stage. The justices unanimously sided with the Seventh Circuit, ruling that plaintiffs need not prove loss causation to certify a class. The Court noted that the merits of loss causation — unlike, for example, the reliance element of fraud — bear no logical connection to whether individual or common issues will predominate for a proposed class action.


• The Janus opinion clarified what it means to “make” a false statement under Section 10(b)’s anti-fraud provision. The majority held that the maker of an allegedly false statement is “the person or entity with ultimate authority over the statement.” Under that ruling, one who merely publishes a statement on another’s behalf is not the statement’s maker and cannot be liable for the alleged fraud. Lower courts continue to explore how the Janus holding applies to corporate officers when an allegedly false statement is attributed to the officer, but the company holds the ultimate authority over the statement.


• On the horizon for 2012 is Simmonds, which will review the Ninth Circuit’s long-standing accrual rule for insider trading claims under Section 16(b). The Ninth Circuit recently reaffirmed its rule that the two-year limitations period to recover short-swing profits from corporate insiders under Section 16(b) is tolled until the insider reports the offending trades to the SEC under Section 16(a) — regardless of the plaintiff’s actual knowledge of his or her claim and failure to sue in spite of that knowledge. Notably, the Ninth Circuit opinion’s author also wrote separately that the Ninth Circuit rule ignores the statutory text and congressional intent, and the Supreme Court granted certiorari.

Filings Trends Continued to Evolve in 2011

The number of securities class actions decreased slightly in 2011 as compared to 2010; however, considering the recent decline in the number of public companies, an argument can be made that the number of filings (as a percentage of public companies) is on the rise.

Among other trends, while credit crisis-related litigation continued in 2011, it has extended beyond the securities class action realm, as evidenced by a recent surge in mortgage-backed securities (MBS) actions, including “put-back” suits involving contractual breaches of representations and warranties. Litigation activity in this area also is being driven by more than just the “traditional plaintiff,” with monoline insurers, financial firms and other industry participants bringing credit crisis-related claims of their own. Additionally, government agencies, such as the Federal Housing Finance Agency and the FDIC are becoming active litigants. For example, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, recently filed suits against financial institutions alleging securities law and state law violations stemming from MBS issuances; and the FDIC has initiated more than a dozen “failed bank” lawsuits against former officers and directors, alleging negligence and related theories.

One trend we...