“The Kentucky Supreme Court ignored the Constitution by upholding a judgment over thirty times any potential harm.”
— John Masslon, WLF Senior Litigation Counsel
Click here for WLF’s brief.
WASHINGTON, DC— Washington Legal Foundation (WLF) today urged the U.S. Supreme Court to hear a case in which the Supreme Court of Kentucky affirmed a judgment that shocks the conscious. In an amicus brief, WLF argues that the Supreme Court’s review is necessary to clarify how lower courts must evaluate Excessive Fines Clause challenges to civil penalties and whether to adopt a 1:1 cap on the ratio of punitive damages to substantial compensatory damages in all cases.
The case arises from an action filed by contingency-fee counsel for the Commonwealth of Kentucky. Seeing dollar signs after the Department of Justice seized the defendants’ website and assets, Kentucky relied on a law passed during John Adams’s administration to recover compensatory damages more than ten times the $26 million that Kentuckians lost while interacting with the defendant. Eventually, the Kentucky Supreme Court affirmed an $870 million judgment—an amount over thirty times any possible harm.
In its brief supporting the defendants, WLF argues that Supreme Court review is needed to clarify how lower courts should evaluate Excessive Fines Clause challenges to civil penalties. The decision below deepens a split on whether a statutorily authorized penalty calculated using a mathematical formula can violate the Excessive Fines Clause. And the Kentucky Supreme Court’s decision failed to evaluate relevant factors when determining if the civil penalty was grossly disproportionate.
The post WLF Urges Supreme Court To Review Outsized Judgment Unmoored From Actual Harm appeared first on Washington Legal Foundation.
Court’s Vacatur of Navigable Waters Rule Introduces New Level of Gamesmanship into Administrative Law
By Jim Wedeking, counsel with Sidley Austin LLP in the firm’s Washington, DC office. Jim is also the WLF Legal Pulse‘s Featured Expert Contributor on Environmental Law and Policy.
In the last week of August, the U.S. District Court for the District of Arizona, in Pascua Yaqui Tribe v. U.S. Environmental Protection Agency, opted to shake things up a little bit. Instead of issuing a relatively routine order granting the federal government’s request to voluntarily remand the Navigable Waters Protection Rule (“NWPR”) for reconsideration, it decided to vacate the NWPR.
Vacating a rule is nothing new; however, vacating a rule on the merits before the parties finished summary judgment briefing, and leaving the country guessing as to whether or not the order has nationwide effect, is a bit unorthodox. The court will now consider whether to reinstate the 2015 Clean Water Rule—which has already been enjoined and remanded in 28 states. The decision raises serious issues, not just about the Clean Water Act, but about administrative law. Every time the Executive Branch changes parties, there is a procession of rulemaking reversals and challenges where agencies are forced to defend their predecessor administration’s rules. The Arizona court’s ruling has now introduced the potential for additional gamesmanship in legal proceedings that are already awkward and create regulatory uncertainty.
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Gregory A. Brower is Chief Global Compliance Officer for Wynn Resorts. He also serves on WLF Legal Policy Advisory Board and is the WLF Legal Pulse’s Featured Expert Contributor, White Collar Crime and Corporate Compliance.
As corporate environmental, social, and governance (“ESG”)-related obligations continue to expand under international law, U.S. federal law, and the laws of the various states, so too do the risks associated with such obligations for publicly traded companies across a broad range of industry sectors. Indeed, one sign of this growing set of risks was the SEC’s recent announcement of an ESG Task Force whose mission is to develop initiatives to proactively identify ESG-related misconduct among publicly traded companies. As the threat of ESG-related claims and enforcement actions continues to expand, companies need to be ready. Here are five things that companies can do now to mitigate the risks presented by this trend.
(1) Effectively communicate the company’s commitment to ESG. A company’s senior leadership team must very clearly communicate its ESG strategy. Companies should periodically report on their ESG impact in a way that is easy to understand, uses a standard ESG reporting framework, and includes a message from the CEO. With investors, regulators, and policymakers increasingly focused on companies’ ESG performance, transparent and useful ESG reporting can only serve to enhance a company’s credibility with each of these important constituencies.
(2) Clearly define the chief compliance officer’s role. As the focus on ESG increases, the attendant risks for any company become more significant. It therefore follows that the company’s CCO should play a central role in ensuring the company’s ESG compliance efforts. Whether it’s third-party due diligence or reviewing the accuracy of disclosures or investigating misconduct, ESG-related issues should be fully integrated into a company’s overall compliance program. As guardian of a company’s culture of compliance, and with the growing risk associated with ESG, it simply makes sense that the CCO be a partner in the overall ESG effort.
(3) Beware of enforcement and litigation risks. As noted above, the SEC clearly signaled its intention to significantly ramp up its focus on potential regulatory violations in the ESG space. So too has the plaintiffs’ bar turned its attention to ESG in three general areas—corporate operations, corporate governance, and corporate disclosures—and courts are increasingly allowing such claims. While ESG litigation has so far been mostly focused on climate change and environmental incidents, social issues are growing in prominence as potential targets for claims.
(4) Conduct risk assessments. While anticipating each and every contingency is impossible (see, e.g., COVID-19), it is possible for companies to anticipate and mitigate likely ESG risks. Indeed ESG risk analysis should be incorporated into a company’s overall enterprise risk management (“ERM”) efforts. A company should choose which risk assessment approach makes sense for its unique operational reality, but beyond identifying the right standards, the basic process should be familiar to companies from their experience with Sarbanes-Oxley or FCPA compliance.
(5) Engage with policymakers. Logical and consistent ESG standards and reporting requirements are obviously a matter of public policy, and companies should ensure that they have a seat at the table when such policies are being made. Earlier this year, the E.U. Parliament passed legislation which will allow for new regulations concerning ESG, and most observers agree that ESG policy will be a priority for the Biden Administration’s regulatory agenda. In addition, the U.S. House recently passed the ESG Disclosure Simplification Act, and several states have signaled their own interest in making ESG policy. In light of this clear interest by policy-makers, it will be important for companies and industries to get ahead of these efforts by engaging with legislators and regulators early in the law or rule making process so as to ensure that those making these decisions have the best information available about how such decisions will affect companies including their shareholders, employees, and other stakeholders.
It is now abundantly clear that ESG is a key business issue and mitigating the associated risks should be a priority for any publicly traded company. The myriad challenges presented by ESG issues are only going to grow in complexity in the months ahead. Increasingly, a company’s integrity will be evaluated and judged as much by its ESG strategy and performance as by other, more traditional measures. Companies are well-advised to embrace this new reality as ESG performance becomes ever more important to long-term growth and success.
The post Mitigating the Growing ESG Risk—A Corporate Compliance Officer’s Perspective appeared first on Washington Legal Foundation.
—John Masslon, WLF Senior Litigation Counsel
Click here for WLF’s brief.
WASHINGTON, DC—Washington Legal Foundation (WLF) today filed an amicus curiae brief urging the U.S. Supreme Court to hold that plaintiffs cannot assert disparate-impact claims under Section 504 of the Rehabilitation Act of 1973. Four courts of appeals have held that plaintiffs can pursue disparate-impact claims under Section 504. These decisions conflict with a well-reasoned Sixth Circuit opinion. WLF’s brief urges the Supreme Court to side with the Sixth Circuit and apply the Rehabilitation Act’s plain language.
The appeal arises from five AIDS patients’ lawsuit against CVS. The plaintiffs claim that CVS’s specialty-drug program has a disparate impact on those with AIDS. Under the Patient Protection and Affordable Care Act, participants in federally funded health-care plans can sue for disability discrimination. But rather than provide an independent remedy, the ACA merely incorporates Section 504’s remedy provision.
As WLF’s brief shows, the Supreme Court has held that the nondiscrimination statute with the most similar, but still broader, language does not authorize disparate-impact claims. Those statutes that allow disparate-impact claims use different language that indicates Congress’s intent to create a disparate-impact cause of action. And because the Constitution vests the power to make laws with Congress, the Court should not imply a cause of action that Congress declined to create.
WLF’s brief also explains the high costs of recognizing disparate-impact claims under Section 504. At least one court has held that businesses that received PPP loans can be sued under Section 504. If the Court allows disparate-impact claims, these businesses will face astronomical costs. Together with the Cato Institute, which joined the brief, WLF urges the Supreme Court to give Section 504 its plain-language meaning.
Celebrating its 44th year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.
The post WLF Urges Supreme Court To Apply Rehabilitation Act’s Plain Language appeared first on Washington Legal Foundation.
Stephen M. Bainbridge is William D Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law.
The SEC recently charged Matthew Panuwat—a former employee of Medivation Inc.—with insider trading after Medivation announced Pfizer Inc. would acquire Medivation (the complaint is here). If Panuwat had traded in Medivation stock, there would have been a strong case against him under the so-called classical (a.k.a. disclose or abstain) theory of insider trading. If Panuwat had traded in Pfizer stock, there would have a strong case against him under the so-called misappropriation theory of insider trading liability. But this is where the wrinkle comes in.
According to the SEC’s press release summarizing the charges:
Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the Aug. 22, 2016, announcement that Pfizer would acquire Medivation at a significant premium. . . . Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s stock price. . . . Following the announcement of Medivation’s acquisition, Incyte’s stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.
This is what insider trading experts call “shadow trading.” Those experts have speculated for some time as to whether shadow trading is illegal, but the Panuwat case is the first time the SEC has ever prosecuted such a case.
As a recent Day Pitney memo noted, some might question whether shadow trading ought to be illegal because Panuwat’s “trade had no impact on his employer, the acquiring company, or their stock price or investors.” Yet, while the facts of the case are somewhat unusual, the complaint arguably states a claim under the misappropriation theory. As Day Pitney explains:
The SEC’s complaint alleges several factors in support of a misappropriation theory of insider trading against Panuwat. These include that Medivation’s investment banker made a presentation (which Panuwat saw) that specifically discussed parallels with its close competitor, Incyte; Panuwat had signed a confidentiality agreement, which included the company’s insider trading policy, prohibiting him from using material nonpublic information to trade in securities of his employer ‘or the securities of another publicly traded company, including all … competitors of’ his employer; Panuwat was an experienced securities trader, and he bought the call options expecting that news of the transaction would not only boost his employer’s stock price but also boost its close competitor’s stock price (which indeed increased by approximately 8 percent after news of the acquisition became public).
The late Justice Ruth Bader Ginsburg explained the difference between the classical and misappropriation theories in U.S. v. O’ Hagan, 521 U.S. 623 (1997):
Under the ‘traditional’ or ‘classical theory’ of insider trading liability, § 10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. . . . The classical theory applies not only to officers, directors, and other permanent insiders of a corporation, but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation.
The ‘misappropriation theory’ holds that a person commits fraud ‘in connection with’ a securities transaction, and thereby violates § 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information.
The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider’s breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws trading on the basis of nonpublic information by a corporate ‘outsider’ in breach of a duty owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to ‘protec[t] the integrity of the securities markets against abuses by “outsiders” to a corporation who have access to confidential information that will affect the] corporation’s security price when revealed, but who owe no fiduciary or other duty to that corporation’s shareholders.’
Id. at 651-53 (citation omitted).
These theories were developed to replace an earlier theory—the so-called equal access test—that effectively premised liability on the mere possession of material nonpublic information. As I explained in Equal Access to Information: The Fraud at the Heart of Texas Gulf Sulphur, 71 SMU L. Rev. 643 (2018):
[In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969),] Judge Sterry R. Waterman’s majority opinion interpreted Securities Exchange Act § 10(b) and SEC Rule 10b-5 thereunder as mandating that:
[A]nyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.
Just over a decade later, however, in Chiarella v. United States, Justice Powell’s majority opinion expressly rejected that proposition, explaining that ‘a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.’
Why did the Supreme Court cut the heart out of TGS? Justice Powell’s main concern was the risk that broad application of the equal access test would criminalize legitimate trading activity. In doing so, however, Powell overlooked an even more fundamental problem; namely, Judge Waterman not only invented equal access out of whole cloth, but also compounded his fraud by outright misrepresentation of the few precedents he cited.
O’Hagan offers a classic example of how subsequent courts used the misappropriation theory to penalize some conduct that had been legalized by Chiarella. O’Hagan was a lawyer at Dorsey & Whitney, which was representing Grand Met in Grand Met’s effort to acquire Pillsbury. O’Hagan traded in Pillsbury stock and was criminally convicted of insider trading.
O’Hagan could not be held liable under the classical theory. He was not an insider of the company in whose stock he traded. He was not an agent or other fiduciary of the people with whom he traded. But Justice Ginsburg affirmed his conviction by validating the misappropriation theory.
Although the misappropriation theory has critics (myself included), it is now well-settled law. Accordingly, if Panuwat had traded in Pfizer stock, although the case would have been the reverse of O’Hagan (Panuwat worked for the target instead of the bidder), no one would have been particularly surprised by the SEC bringing the case.
The problem with the Panuwat case is the way it takes the chief flaw in the misappropriation theory to a new extreme. Securities Exchange Act of 1934 § 10(b) and Rule 10b-5 thereunder, on which the modern insider trading prohibition rests, imposes liability on fraud, manipulation, and other deceptive practices committed “in connection with the purchase or sale of any security.” In U.S. v. O’Hagan, 92 F.3d 612 (8th Cir.1996), rev’d, 521 U.S. 642 (1997), the Eighth Circuit held that because of the “in connection with” requirement Rule 10b–5 imposed liability only where there has been deception upon the purchaser or seller of securities, or upon some other person intimately linked with or affected by a securities transaction. Because the misappropriation theory involves no such deception, the court opined, but rather simply a breach of fiduciary duty owed to the source of the information, the theory could not stand. Absent such a limitation, the court explained, § 10(b) would be transformed “into an expansive ‘general fraud-on-the-source theory’ which seemingly would apply to an infinite number of trust relationships.”
In reversing, Justice Ginsburg essentially punted on this issue. Her opinion for the majority essentially ignored both the statutory text and the cogent interpretative arguments advanced by the Eighth Circuit. Justice Ginsburg’s failure to more carefully evaluate the meaning of the phrase “in connection with,” as used in § 10(b), has long been quite troubling. By virtue of the majority’s holding that deception on the source of the information satisfies the “in connection with” requirement, fraudulent conduct having only tenuous connections to a securities transaction is brought within Rule 10b–5’s scope. There has long been a risk that Rule 10b–5 will become a universal solvent, encompassing not only virtually the entire universe of securities fraud, but also much of state corporate law. The minimal contacts O’Hagan required between the fraudulent act and a securities transaction substantially exacerbated that risk. In addition, the uncertainty created as to Rule 10b–5’s parameters fairly raises vagueness and related due process issues, despite the majority’s rather glib dismissal of such concerns.
Extending the misappropriation theory to shadow trading severely exacerbates these problems. In particular, to claim that Panuwat’s deception of his employer was committed in connection with a securities transaction stretches that requirement to the breaking point. As noted, unlike the usual misappropriation case, Panuwat’s trade could not have negatively impacted Medivation, Pfizer, or even Incyte. Panuwat’s deception was complete before he used the information to trade. As the Fourth Circuit explained in a pre-O’Hagan decision:
In allowing the statute’s unitary requirement to be satisfied by any fiduciary breach (whether or not it entails deceit) that is followed by a securities transaction (whether or not the breach is of a duty owed to a purchaser or seller of securities, or to another market participant), the misappropriation theory transforms section 10(b) from a rule intended to govern and protect relations among market participants who are owed duties under the securities laws into a federal common law governing and protecting any and all trust relationships. If, as the Supreme Court has held, the fraud-on-the-market theory is insupportable because section 10(b) does not ensure equal information to all investors, . . . a fortiori such a general fraud-on-the-source theory in pursuit of the same parity of information cannot be defended.
U.S. v. Bryan, 58 F.3d 933, 950 (4th Cir. 1995), abrogated by U.S. v. O’Hagan, 521 U.S. 642 (1997).
As the Bryan court correctly recognized, the Supreme Court’s precedents—including O’Hagan—reflect a profound concern that an expansive prohibition of insider trading could easily interfere with the beneficial activities of market professionals whose efforts to find and act upon new information contribute substantially to the efficiency of the stock markets. As I recently observed in A Critique of the Insider Trading Prohibition Act of 2021, 2021 U. Ill. L. Rev. Online 231 (Aug. 8, 2021):
In Chiarella, Justice Powell noted that a broad insider trading prohibition might ban ‘a tender offeror’s purchases of target corporation stock before public announcement of the offer,’ a step Congress clearly had declined to take when it adopted the Williams Act to regulate tender offers. In the subsequent Dirks opinion, Justice Powell further explained that such a broad policy basis for regulating insider trading implied a ban that ‘could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.’
To be sure, Panuwat was not acting as a market analyst. It is also true that he had signed Medivation’s corporate insider-trading policy, which prohibited employees from using confidential information concerning Medivation to trade in “the securities of another publicly traded company.”
But did this information really concern Medivation? As a Bryan Cave memo notes, Panuwat “had been involved in discussions within the company and with its investment banking advisers about potential acquisitions of Medivation, a mid-cap oncology company, and had also discussed the market for acquisition of other mid-cap oncology companies by larger pharmaceutical companies. It alleges that he had focused on one particular peer company, Incyte.” Even if one assumes that Panuwat learned material nonpublic information about Incyte in those discussions, which seems implausible, that information had nothing to do with Medivation or an acquisition of Medivation. Instead, the only information Panuwat learned that concerned Medivation was that Pfizer was likely to buy Medivation. He then gambled that speculators would see Pfizer’s bid as signaling potential for other companies in the industry to be acquired. Saying that undisclosed use of such information touched and concerned Panuwat’s trades in Incyte stock seems like a considerable stretch.
To the extent the SEC’s case rests on Panuwat’s alleged violation of Medivation’s insider trading policy, Panuwat may also argue that that policy likely was intended to prevent Medivation employees from using inside information to trade in the stocks of related companies, such as major suppliers or customers. Medivation might well, for example, have wanted to prevent employees from shorting the stock of a supplier that Medivation was about to cease using. But the SEC’s broad theory of this case would suggest that it is now illegal to trade while in possession of any material nonpublic information a corporate employee learns on the job about any company, whether or not that other company is a party to a transaction with the employer. Shadow trading thus moves the SEC a long way in the direction of restoring the equal access to information theory the Supreme Court long ago rejected.
Several questions remain unanswered:
- Will Panuwat dare to fight the case? Courts have long imposed disgorgement of an inside trader’s profits (or loss avoided) as a penalty for illegal insider trading in SEC cases. In the Insider Trading Sanctions Act of 1984, Congress created a treble money civil fine that may be imposed in cases brought by the SEC. The fine is imposed over and above the disgorgement penalty. As a result, a convicted inside trader faces a potential civil penalty of four times the amount of his profit. The SEC can often induce defendants with plausible defenses to accept a settlement limited to disgorgement or perhaps disgorgement plus a single multiple of the trader’s profits. Risk-averse defendants will often take such a deal rather than risking the full potential penalty.
- Will courts allow the SEC to effectively resuscitate the equal access theory?
- If the SEC prevails, will employers clarify their insider trading policies to limit their application to trading in stocks of customers or suppliers (as well as those of the employer, of course)?
The post SEC Takes a Crack at Expanding Misappropriation Theory to “Shadow” Insider Trading appeared first on Washington Legal Foundation.
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Upcoming Briefing—Cases and Controversies: Expectations for the U.S. Supreme Court’s October Term 2021
- Gittings Photography
**Register below for live broadcast**
John P. Elwood, Partner, Arnold & Porter and Contributor, SCOTUSblog
Shay Dvoretzky, Partner, Skadden, Arps, Slate, Meagher & Flom LLP
Anastasia P. Boden, Senior Attorney, Pacific Legal Foundation and Co-host, Dissed Podcast
Our panel of appellate experts and SCOTUS big-thinkers will prepare you for the Court’s new term with snapshots of granted cases and pending petitions, as well as insights on how the glare of external attention has affected the Court’s inner workings.
Lawmakers’ Pressure on FDA Review of New Tobacco Products Blurs Line Between Oversight and Undue Influence
Ed. Note: This post originally appeared in WLF’s Forbes.com contributor page on August 30, 2021.
Food and Drug Administration (FDA) leadership and staff are accustomed to external criticism and pressure. After all, FDA-regulated products account for 20 cents of every dollar spent by American consumers, so criticism comes with the job. Over the past year, the volume of noise aimed at FDA over one particular duty—its review of applications for electronic nicotine delivery systems (ENDS) and other “deemed” new tobacco products—has been dialed to 11.
Pressure has come from a variety of voices and in different forms. Anti-tobacco activist groups, for example, have lobbied FDA to subject ENDS products to the new-drug approval process instead of the legislatively prescribed Premarket Tobacco Product Application (PMTA) process. FDA has thus far ignored that demand, as we discussed in our last Forbes.com commentary.
Members of Congress—several of whom co-sponsored the 2009 Tobacco Control Act—have stage-managed a pageant of outrage over ENDS that has featured committee hearings, press conferences, and information requests and letters to FDA. While those are common tools of legislative oversight, the Members’ ENDS pressure campaign may have stepped over the line between oversight and impermissible interference with agency adjudication.
Over the past year, the Office of Science in FDA’s Center for Tobacco Products (CTP) has been reviewing over 500 marketing applications for non-combustible tobacco products. Applicants have had to submit a considerable amount of information and undergo a multi-step process to prove that their product is “appropriate for the protection of public health.” Reviewers judge whether each product will increase the likelihood that current smokers will switch from combustible tobacco and decrease the likelihood that non-smokers will choose to use the ENDS product under review.
Lawmakers Get Pushy
On January 14, 2021, a group of Senators led by Majority Whip Durbin sent a pointed letter to FDA Commissioner Stephen Hahn. The Senators alleged that the agency’s slow-walk of the PMTA process contributed to underage use of e-cigarettes and urged FDA to focus intently on youth use when reviewing applications. In addition to these general complaints, the letter provided FDA with a very specific “non-exhaustive list of principles that should guide FDA’s review of PMTAs.” Each of those four principles are introduced by the phrase “FDA should not authorize a PMTA…” Each principle demanded blanket disqualification for products that had certain characteristics, such as “high” nicotine content. One principle admonished FDA to look beyond general public health and ensure that an ENDS product does not disproportionately harm “vulnerable populations.”1
A March 23 letter to Acting FDA Commissioner Woodcock headlined by Representatives Wasserman Schultz and DeGette took an equally aggressive approach, demanding several of the same categorical disqualifications as did Senator Durbin’s letter. The letter went one step further, however, specifically urging FDA to reject marketing for specific manufacturers’ products. During a June 23 House Oversight Subcommittee hearing at which Ms. Woodcock served as a witness, Rep. Wasserman Shultz (a non-committee member the subcommittee chairman invited to participate) pushed the Acting Commissioner to commit to using the PMTA process to reduce nicotine levels in ENDS and urged FDA to reject specific products.
In addition to Ms. Woodcock, Senator Durbin appeared as a witness at the House Oversight hearing. His prepared testimony repeated his January 14 letter’s harsh criticism of FDA on underage use. He went on to demand that FDA reject “any product with a history of increasing youth use,” and thundered, “It is time for FDA to be our partner in public health . . . and take these dangerous products off the market.”
And just to be sure that the Acting Commissioner didn’t forget what she said at the hearing, the subcommittee issued a press release not only quoting her statements, but also characterizing them in a way most favorable to the larger pressure campaign.
Finally, Senator Blumenthal chaired an August 3 Senate Commerce subcommittee hearing at which he singled out specific companies whose applications FDA should reject, and asked the witnesses to opine on how specific applications should fare.
Stepping Over the Line?
FDA and its leadership have properly refused to publicly engage with the Senators and Representatives who are lobbying them at hearings and in correspondence. To our knowledge, for instance, FDA has not responded to Senator Durbin’s January 14 letter. And Acting Commissioner Woodcock deftly deflected House Oversight subcommittee members’ numerous leading questions, refusing to comment on specific applicants.
But privately, it’s fair to wonder how the lawmakers’ pressure is not impacting the PMTA process. Line reviewers in the Office of Science have a great deal of discretion under the very broad public-health standard, and the constant accusations and demands by important Members of Congress could tip the balance against some approvals. And the Commissioner and other FDA leaders certainly are aware of who approves FDA’s budget and votes on agency nominations.
More than just offending general notions of good-government and illegitimately attempting to impose legislative standards on FDA that Congress hasn’t legislated, has the Members’ pressure campaign also crossed a legal line? Although the caselaw on legislators’ undue influence over agency decisions is sparse, a rejected PMTA applicant might have a colorable argument that political intrusion impacted FDA’s decision and thus violated the company’s procedural due-process rights.
Generally, courts have undertaken deeper scrutiny of Senators’ and Representatives’ influence over judicial or quasi-judicial agency outcomes than their pressure on rulemaking activity. For instance, in the seminal Pillsbury Co. v. FTC case, the Fifth Circuit found that members of a Senate subcommittee hearing had committed an “improper intrusion into the adjudicatory process of the Commission” when chastising the FTC Chairman and his staff about developments in a Clayton Act challenge pending before the FTC. The Senators argued that FTC should have applied a stricter per se standard to Pillsbury’s conduct in a preliminary order favorable to the company. In its final decision, the Commission applied the higher standard sought by the Senators and ruled against Pillsbury.
The Fifth Circuit reasoned:
To subject an administrator to a searching examination as to how and why he reached his decision in a case still pending before him, and to criticize him for reaching the wrong’ decision, as the Senate subcommittee did in this case, sacrifices the appearance of impartiality—the sine qua non of American judicial justice.
Pillsbury didn’t need to prove that the Senators actually influenced the outcome of the FTC adjudication. The court held that in the interests of Pillsbury’s due-process rights and the integrity of administrative adjudication, Pillsbury need only show the lawmakers’ actions cast doubt on agency’s impartiality. In post-Pillsbury cases where the plaintiff alleged undue influence of agency adjudication, courts have retained and applied that burden of proof.
FDA’s PMTA approval process is more adjudicative than it is rulemaking. The eventual outcome, a marketing or denial order, arises from a formal process based on a formal record, applying legal standards set in advance on a case-by-case basis. Thus, a plaintiff suing FDA would only need to show Members of Congress’s action cast doubt on the PMTA process’ impartiality.
The lawmakers’ pressure campaign on PMTA review featured multiple messages and messengers, as compared to the one Senate hearing in Pillsbury. And rather than Senators merely implying that FTC should have ruled differently in its Pillsbury case, Senators and Representatives over the past year have clearly demanded negative outcomes for specific PMTA applicants and dictated which factors should matter most during application reviews.
For many of the PMTA applicants, an FDA denial effectively puts them out of business. That reality certainly creates a strong incentive for legal challenges. How ironic if Members of Congress’s own words and deeds undo what they campaigned so aggressively for: FDA’s removal of ENDS products from the market.
Ed. Note: This is the first installment in a year-long series the WLF Legal Pulse is hosting of “frequently asked questions” on two California laws aimed at protecting the privacy of digital personal data. The author of the posts, David Zetoony of Greenberg Traurig LLP, authored a book on the laws for the American Bar Association from which this and future FAQs are excerpted. We thank the ABA for granting us permission to share them with our readers.
Data privacy has become one of the greatest areas of risk and concern for business. It is also quickly becoming a heavily regulated field with the adoption in Europe of the General Data Protection Regulation (GDPR) in 2016 and the adoption in California of the California Consumer Privacy Act (CCPA) in 2018 and the California Privacy Rights Act (CPRA) in 2020. Some states, such as Colorado and Virginia, have already followed California in enacting data privacy regulation; many others are considering it.
The American Bar Association (ABA) recently published a Desk Reference Companion to the CCPA and the CPRA, a book authored by David Zetoony the Co-Chair of the United States data privacy and security practice at Greenberg Traurig LLP. The book is designed to help in-house counsel understand the intricacies of California’s complex privacy regulations by providing answers to 516 of the most frequently asked questions from business. The following excerpt was reproduced with the permission of the ABA.1
Is the CCPA’s definition of personal information the same as the European GDPR’s definition of personal data?
The definition of “personal information” under the CCPA is not identical to the definition used within the European GDPR of “personal data,” although there are similarities. The following provides a side-by-side comparison of the two terms:
|“Personal information” means information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household. Personal information includes, but is not limited to, the following if it identifies, relates to, describes, is capable of being associated with, or could be reasonably linked, directly or indirectly, with a particular consumer or household . . .||“Personal data” means any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identify of that natural person.|
While it is difficult to identify data types that would fall under the CCPA’s definition of “personal information,” and would not fall under the GDPR’s definition of “personal data,” the reverse is not necessarily true. Put differently, it is possible for data to be considered “personal data” under the GDPR because it can theoretically be linked to an individual, and not be considered “personal information” under the CCPA because it cannot reasonably be linked to an individual. For example, while European regulators have suggested that data that is hashed would still fall within the definition of “personal data” because there remains a theoretical possibility that the data could be re-identified,4 a California court could determine that such information falls outside the scope of the CCPA as it cannot be “reasonably” linked to a consumer.
There are other differences between the definition of “personal information” under the CCPA, and “personal data” under the GDPR. The CCPA expressly excludes from its definition of personal information any “publicly available information” a term which is defined as referring to “information that is lawfully made available from federal, state, or local government records.”5 So, for example, under the CCPA the ownership of a residence (a matter of public record) might not be considered “personal information,” whereas such information would be considered “personal data” under the GDPR.
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This WLF Litigation Division feature highlights WLF court and agency filings, as well as decisions issued in response to WLF’s filings. In this edition, we list August 2021 filings and results.
Click on the PDF button above for the full report.
Pivotal Software, Inc. v. Superior Court of Cal.—WLF asks the Supreme Court to clarify that the PSLRA’s mandatory discovery stay applies equally in state and federal court.
California Trucking Association v. Bonta—WLF asks the Supreme Court to halt California’s attempt to regulate trucking nationwide.
In re Walmart, Inc.—WLF asks the Texas Supreme Court to grant mandamus relief by limiting the scope of discovery to the threshold question of foreseeability in a major premises-liability case.
Boley v. Universal Health Services—WLF urges the Third Circuit to vacate a class-certification order in an ERISA case due to lack of Article IIII standing.
Axon v. FTC—WLF asks the Supreme Court to clarify when (and where) regulated parties may challenge an agency’s structure.
U.S. ex rel Yarberry v. Supervalu—The Seventh Circuit aligns with its sister circuits in adopting the Supreme Court’s Safeco test for willfulness in False Claims Act actions.
Northern Plains Resource Council v. U.S. Army Corps of Engineers—The Ninth Circuit dismisses, as moot, an appeal from an overbroad order that blocked all new oil-and-gas pipeline projects, nationwide.
In re Packaged Tuna Antitrust Litigation—The Ninth Circuit votes to vacate, and rehear en banc, a panel’s decision decertifying a class-certification order in an important multi-district antitrust case.
In re FDA Amendments to “Intended Uses” Regulations—The FDA issues it final rule amending its medical-product “intended use” regulations, giving short shrift to manufacturers’ First Amendment rights.
Ed Note: Originally published by Forbes.com on WLF’s contributor page on August 24.
The Food and Drug Administration (FDA) is facing a court-ordered deadline of September 9 to act on 550 companies’ applications for marketing approval of electronic nicotine delivery systems (ENDS) and other “deemed” new tobacco products. FDA’s impending decisions arise from over three decades of legal, legislative, and regulatory battles and negotiations. Most of the participants in those battles—manufacturers, activists, elected officials, and health regulators—agreed that a ban on all nicotine-containing products would be a public-health disaster. Instead, they negotiated passage of the 2009 Tobacco Control Act (TCA), a law that vastly expands FDA’s authority over tobacco and sets out an approval pathway for non-combustible products that could reduce harms to consumers.
In the months before the approaching deadline, some activists who supported the TCA seem to be suffering from buyers’ remorse. Six prominent anti-tobacco organizations have urged FDA to abandon the Premarket Tobacco Product Application (PMTA) process and instead subject ENDS products to the drug-approval process.
FDA attempted to regulate tobacco as a medical product twice, once in 1996 and again in 2009, just after Congress passed the TCA. Federal courts intervened each time. The agency should reject the activists’ invitation to turn back the clock on tobacco regulation and continue reviewing ENDS applications in the scientific and apolitical manner Congress intended.
TCA Passage and the PMTA Process
Without the support of strident tobacco foes like Dr. David Kessler, Matthew Myers, and over 1,000 public-heath groups, the Tobacco Control Act would not have become law. In exchange for the law’s strict controls over tobacco manufacturing, sales, and marketing, organizations like the Myers-led Campaign for Tobacco-Free Kids accepted the legality of existing tobacco products and an approval pathway for new products..
In designing that approval pathway, FDA embraced its increased regulatory authority and set a rigorous standard that new product applicants must meet. The applicants must prove that their innovations are “appropriate for the protection of public health,” a standard that considers how the product will impact both current smokers and non-smokers. FDA is reviewing PMTA applications with the concept of harm reduction in mind. In announcing FDA’s comprehensive plan for tobacco regulation, FDA’s Commissioner and its Center for Tobacco Products director wrote, “the FDA is committed to striking an appropriate balance between protecting the public and fostering innovation in less harmful nicotine delivery.”
Activists Revert to Their Prohibitionist Ways
Rather than applaud the high standards for PMTA approval and FDA’s desire to improve public health through innovation, many of the same activists who sought the TCA’s passage now demand that FDA take a drastic detour. In an April 27, 2021 letter to acting FDA Commissioner Woodcock, six advocacy groups broadly declared: “If any e-cigarette, . . . can be shown to be effective for smoking or tobacco cessation, its manufacturer should submit evidence of this therapeutic benefit to CDER [FDA’s Center for Drug Evaluation and Research].”
The letter’s demand contravenes congressional intent and federal-court precedents. If Congress had meant for a nicotine-containing product whose delivery mechanism moves consumers away from smoking to be reviewed as a drug, why would lawmakers have bothered to legislate an entirely new review process? Section 387a(a) of the TCA explicitly states that “tobacco products . . . shall be regulated by the [FDA] under this subchapter and shall not be subject to the provisions of subchapter V.” Subchapter V of the Food, Drug & Cosmetic Act (FDCA, which the TCA amends) governs FDA’s regulatory authority over prescription drugs and devices.
Perhaps the anti-tobacco activists believed FDA would ignore this clear legislative statement in 2021 because FDA itself ignored the statement in 2009. That year, FDA categorized an e-cigarette as an unapproved drug-device product in an enforcement action. The manufacturer successfully sued to enjoin FDA’s regulation and in December 2010 a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit (featuring Judges Brett Kavanaugh and Merrick Garland) affirmed the injunction in Sottera, Inc. v. FDA.
The appeals court noted that Congress passed the Tobacco Control Act in part to fill the regulatory gap left by the U.S. Supreme Court’s FDA v. Brown & Williamson decision. In Brown & Williamson, the Supreme Court held that a 1996 FDA regulation defining tobacco products as drug-device combinations was inconsistent with the FDCA and thus invalid. The Sottera court reasoned that Congress’s passage of the TCA, as well as the law’s clear statement that the FDCA’s drug and device provisions do not apply, reflect Congress’s intent that FDA regulate tobacco only under the TCA.
The Sottera court also echoed the Brown & Williamson Court’s common-sense concerns about subjecting a tobacco product to the drug or device approval process. That process requires manufacturers to prove their products will be safe and effective for their intended uses. How can a tobacco-product maker establish their product as “effective,” let alone “safe,” given the products’ known risks? If a manufacturer cannot prove safety and efficacy, FDA must order the product removed from the market. That Catch-22 means that any ENDS product that effectively switches consumers from smoking to vaping must be banned. While that may well be the anti-tobacco activists’ intended outcome, prohibition is decidedly not what Congress intended with the TCA.
The activists’ April 21 letter accurately states that FDA can regulate a tobacco product as a drug if the manufacturer makes therapeutic claims about the product. The letter goes on to assert that certain ENDS manufacturers have emphasized e-cigarettes’ value as an alterative to smoking, and that such claims amount to therapeutic smoking-cessation claims. But PMTA applicants must explain their products’ potential as a switching mechanism to FDA so the agency can conduct health risk assessments. And the agency has dictated via rulemaking that “FDA does not consider claims suggesting that a tobacco product provides an alternative way of obtaining the effects of nicotine, or that a tobacco product will provide the same effects as another tobacco product . . . to bring a tobacco product within its drug and device authority.” Simply put, communications on a product’s switching virtues are not therapeutic claims.
Stay the Course
FDA thus far has shown no interest in the activists’ demand that it reinvent the PMTA process. The agency must know that the activists’ preferred path is not in the best interest of public health. The promise of harm reduction that ENDS products offer is real. Such products are far from risk-free, but as an August 19 American Journal of Public Health essay stated, “We believe the potential lifesaving benefits of e-cigarettes for adult smokers deserve attention equal to the risks.” Without alternatives to combustible tobacco, cigarette sales would likely rebound, an end result that even ENDS opponents can’t possibly prefer.
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—Cory Andrews, WLF General Counsel & Vice President of Litigation
Click HERE for WLF’s brief.
(Washington, DC)—Washington Legal Foundation (WLF) today asked the U.S. Supreme Court to vacate a decision of the Court of Appeal for the State of California, First Appellate District, in a securities class action with far-reaching implications. WLF’s amicus brief was prepared with the pro bono assistance of Lyle Roberts, George Anhang, and Stephen Janick of Shearman & Sterling LLP.
The Private Securities Litigation Reform Act of 1995 (PSLRA) stays discovery during the pendency of a motion to dismiss in “any private action” under the Securities Act of 1933. The discovery stay is a key component of Congress’s overall statutory scheme for private securities actions. Congress was concerned that plaintiffs bringing meritless securities suits were using abusive discovery as leverage to bolster their cases, avoid dismissal, and force settlements. Those policy concerns, and the accompanying mandatory discovery stay, apply equally no matter if a securities suit if filed in state or federal court.
The California court failed to apply the PSLRA’s mandatory discovery stay in this case. It held that the law’s discovery stay is procedural, not substantive, and so does not apply in state court. But as WLF explains it its amicus brief, the PSLRA’s plain language, overall statutory scheme, and animating public-policy concerns all confirm that the mandatory stay applies in all Securities Act cases, including those brought in state court. A contrary holding would permit plaintiffs to simply file parallel actions in state court to circumvent the discovery stay in federal court. As WLF shows, that is precisely what many plaintiffs’ counsel have been doing for years.
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Frank Cruz-Alvarez is a Partner with Shook, Hardy & Bacon L.L.P. in the firm’s Miami, FL office, and Britta Stamps Todd is an Associate in the firm’s Kansas City, Mo office. Mr. Cruz-Alvarez is the WLF Legal Pulse’s Featured Expert Contributor on Civil Justice/Class Actions.
What began as a patent litigation case spurred an antitrust case and ended with the Fourth Circuit’s latest reversal of class certification in In re Zetia (Ezetimibe) Antitrust Litigation. Luckily, no expertise in pharmaceutical patent litigation or antitrust law is required to break down the court’s clarification of Federal Rule of Civil Procedure 23’s numerosity requirement. In short, Merck developed a cholesterol-lowering drug that it patented and marketed under the name Zetia, with its patent giving Merck the exclusive right to develop the drug through April 2017. In 2006, another pharmaceutical company, Glenmark, sought FDA approval to market a generic version of Zetia on the basis that Merck’s patent was invalid. Merck promptly sued Glenmark for patent infringement, and the two companies eventually settled the case with an agreement that Glenmark could launch its generic version of the drug in December 2016. Alleging violations of federal antitrust law, the plaintiffs in the present case sued both Merck and Glenmark on behalf of a putative class that included drug wholesalers who purchased Zetia directly from Merck.
But the list of drug wholesalers who purchased Zetia directly from Merck and therefore comprised the putative class only includes thirty-five entities. Still, the three class representatives moved for class certification. Following the recommendation of a magistrate judge, the district court granted class certification under Rule 23(b)(3). As relevant to the numerosity requirement of Rule 23(a), the district court looked to the Third Circuit’s “non-exhaustive list” of factors, including “judicial economy, the claimants’ ability and motivation to litigate as joined plaintiffs, the financial resources of class members, [and] the geographic dispersion of class members.” In re Modafinil Antitrust Litig., 837 F.3d 238, 253 (3d Cir. 2016). Reasoning that multiple individual trials would be required unless the class was certified, the district court concluded that the numerosity requirement had been met, along with the other Rule 23(a) requirements, and certified the class.
Pointing to the low number of class members, all of which were sophisticated business entities, Merck and Glenmark appealed the certification decision to the Fourth Circuit. While no specific number of putative class members has been defined as a threshold for meeting Rule 23(a)’s numerosity requirement, courts have generally held that fewer than 20 putative class members is insufficient, but more than 40 members generally qualifies. The 35 putative class members in the present case fall squarely in the “gray area” between 20 and 40 members, requiring the district court to take into consideration the totality of the circumstances of the particular case to determine whether joinder of the putative class members is impracticable.
The district court’s rationale diverged from Rule 23’s actual language in its interpretation of the word “impracticable.” Adopting the magistrate judge’s reasoning, the district court concluded that judicial economy would be best served by class certification to avoid “multiple individual trials” involving “the same theories of liability and largely the same evidence.” The Fourth Circuit went so far as to agree that compared to joinder, “class certification will often be preferable from a judicial economy perspective.” But that does not equate to joinder being impracticable. Reminding district courts that Rule 23(a) is a “high standard,” the court reiterated that the balance of factors must make “joinder not only uneconomical but also economically impracticable.”
Again focusing on the economics of individual suits, the district court further found that class certification was warranted given “evidence from other cases regarding class members’ motivation to pursue claims on their own.” But the plaintiffs offered no evidence that it would be uneconomical for the smaller claimants to individually join a traditional suit. The Fourth Circuit clarified that whether some claimants may be economically unmotivated to pursue a claim via joinder is only one of many factors to be considered for numerosity. The focus must be on the impracticability of joinder, not the impracticability of individual suits. Because the district court concentrated its attention on the challenges of individual suits rather than the practicability of the 35 putative class members being joined in one traditional lawsuit, the Fourth Circuit reversed and remanded for the district court to decide the case with its fresh guidance in mind. The 35 putative class members may very well satisfy the numerosity requirement on remand, but the district court must consider the impracticability of joinder in its rationale for certification.
Writing separately in a concurring opinion, Judge Niemeyer offered additional practical measures of numerosity. He advised that a class with fewer than 30 members “should be exceptional.” Expanding on the “geographic dispersion” factor considered by some courts, he reasoned that if putative class members are “especially scattered” or “notably concentrated,” this factor should be afforded extra weight. And where putative class members may refrain from joining a traditional lawsuit out of fear of possible reprisals by the defendant, the individual class members’ motivation should be heavily considered. The concurrence also looked at the judicial economy factor from a granular perspective: courtroom space and correlated staffing concerns increase when 35 plaintiffs each have 2 or 3 attorneys in the courtroom to litigate a traditional lawsuit, compared to a few attorneys representing the entire class in a class action. Finally, Judge Niemeyer cautions against consideration of sunk costs of discovery that has already been completed—while future discovery may be considered as a factor, a class should not be certified simply because the putative class’s counsel has already conducted voluminous discovery.
While Merck and Glenmark also appealed other aspects of the class certification decision, the Fourth Circuit quickly rejected the remaining points of adequacy of class representatives and predominance. Although the Fourth Circuit only referenced antitrust standing in passing in its brief discussion of Rule 23(b)(3)’s predominance inquiry, antitrust standing can also bear on Rule 23(a)’s numerosity requirement. In addition to traditional Article III standing, private antitrust plaintiffs must establish antitrust standing as well. This creates an additional hurdle for class representatives trying to meet the magic number to achieve numerosity. In conjunction with the wave of cases in various federal circuits about class members’ standing, antitrust defendants should consider any possible challenges to a plaintiff’s antitrust standing to attack both numerosity and predominance in opposition to class certification.
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“Daubert motion” has become de rigeur slang among federal practitioners when referring to a motion to exclude an expert witness. Courts also frequently use that nomenclature, making statements such as “Now before the Court is a Daubert Motion filed by Defendants to strike or limit the purported expert testimony of Plaintiffs’ witnesses[.]” But these descriptions are inaccurate: Federal Rule of Evidence 702, not the Daubert holding, sets the admissibility standard. Many courts mistakenly take their guidance about the gatekeeping function from prior court rulings, rather than the rule. This preference has developed into a problem because, perhaps surprisingly, many district court and even some circuit court rulings describe the expert admissibility standard in ways that actually contradict Rule 702. References to “Daubert motions” reinforce courts’ misunderstanding by incorrectly signaling that caselaw, rather than the text of the rule, governs the assessment of opinion-testimony admissibility.
The Committee on Rules of Practice and Procedure unanimously voted on June 22, 2021 to publish for comment and potential enactment a proposed amendment to Rule 702 clarifying that courts must follow the text of the rule and disregard inconsistent caselaw statements. Analysis undertaken in the rulemaking process shows how courts often err by relying on prior decisions that fail to apply the gatekeeping approach that Rule 702 established. To overcome this ongoing problem, courts must recognize Rule 702’s authoritative status and internalize that fact. To keep attention focused on the applicable standard and avoid the distraction of outdated caselaw, litigants should describe challenges to the admissibility of opinion testimony as what they truly are: Rule 702 motions.
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Featured Expert Contributor: Mass Torts—Asbestos
Robert H. Wright is a Partner with Horvitz & Levy LLP in Los Angeles, CA.
Although courts across the country have issued conflicting opinions about the “bare metal” defense, the Iowa Court of Appeals has affirmed a judgment under a state statute that encompasses and extends that defense, and the Iowa Supreme Court has granted review to decide the issue.
Under the “bare metal” defense at common law, a product manufacturer is not liable for injuries caused by asbestos-containing products made by others. As my prior posts have noted (here and here), courts have split on application of that defense. The United States Supreme Court rejected the defense to products liability claims in maritime cases. Air & Liquid Systems v. DeVries, 139 S. Ct. 986, 991 (2019). But the highest courts in some states have embraced the defense. E.g., Coffman v. Armstrong Int’l, Inc., 615 S.W.3d 888, 890 (Tenn. 2021); O’Neil v. Crane Co., 266 P.3d 987, 991 (Cal. 2012); Simonetta v. Viad Corp., 197 P.3d 127, 132-33 (Wash. 2008). Most recently, the Tennessee Supreme Court concluded earlier this year that the manufacturers of equipment could not “be held liable for injuries resulting from products they did not make, distribute, or sell.” Coffman, 615 S.W.3d at 900.
In 2017, Iowa enacted the Asbestos and Silica Claims Priorities Act. See Iowa Code § 686B. That statute creates something akin to the bare metal defense, but applies it to all defendants, not just product manufacturers. Iowa Code § 686B.7(5) states that a “defendant in an asbestos action or silica action shall not be liable for exposures from a product or component part made or sold by a third party.”
In Beverage v. Alcoa, Inc., No. 19-1852, 2021 WL 1016602 (Iowa Ct. App. Mar. 17, 2021), the Court of Appeals applied the defense. Charles Beverage worked inside an aluminum plant where he was allegedly exposed to asbestos. After Charles’s death, his estate and children filed asbestos-related claims against both the owner of the plant and an installer of insulation The Court of Appeals held that the statute barred plaintiffs’ claims. Id. at *1.
The Beverage plaintiffs argued that the statute applied only to manufacturers. The Court of Appeals disagreed, noting that the statute, by its terms, applies to any “defendant.” Id. at *2. The Court of Appeals held that the term “defendant” should be given its common, ordinary meaning in the context of civil litigation and that all of the parties the plaintiffs had sued were defendants. Id. at *2-3.
The Beverage plaintiffs argued that, “while not directly stated in the statute,” its “meaning and purpose” were “quite clearly the establishment of the ‘bare metal defense.’ ” Id. at *3. The Court of Appeals concluded the statute was not so limited. It recognized that the immunity afforded by the statute “may overlap or even encompass the protections available under a ‘bare metal’ defense,” but nonetheless found no reason to conclude that the provision “was a mere codification of that defense.” Id. at *4. As the Court of Appeals stated, if “ ‘the legislature intended’ to merely codify a common-law ‘bare metal’ defense, the legislature ‘could easily have so stated.’ ” Id.
The Court of Appeals held that the “plain purpose” of the Iowa statute was “to narrow asbestos litigation by protecting defendants against liability for exposure to products that were ‘made or sold by a third party.’ ” Id. at *4. That effect “will naturally tend to refocus asbestos litigation on more culpable targets, such as asbestos manufacturers.” Id. The Court of Appeals stated there was “nothing absurd about this.” Id. The Iowa Supreme Court has granted review in the case and will have the final word.
The Iowa statute seems to be the first of its kind. Although the statute shares the same name and some of the same provisions as a model act by the American Legislative Exchange Council, the provision at issue does not appear in the model act. Moreover, my research did not disclose a similar provision in any other state statute.
The Iowa statute may not remain unique. The Georgia Legislature is considering a bill with similar language, which would provide that a “product liability defendant in an asbestos action shall not be liable for exposures from a product or component part made or sold by a third party.” 2021 Georgia House Bill No. 638, § 3. Now that the Court of Appeals has given effect to the Iowa statute, it could become a model for legislation in Georgia and beyond.
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Jurgita Ashley is a securities and corporate governance partner with Thompson Hine LLP, co-chair of the firm’s Public Companies group, and co-chair of the firm’s ESG Collaborative. David Wilson is an internal investigations, government enforcement, and securities and shareholder litigation partner with Thompson Hine LLP and partner in charge of the firm’s Washington, D.C. office.*
Calls for increased environmental, social and corporate governance (ESG) disclosures are growing exponentially. When providing them, companies should put in place systems to ensure that the disclosures are accurate and complete and implement litigation and enforcement safeguards.
Adding to demands from investors, employees and ESG rating organizations; legislative action in Europe and the United States; climate-based activity at state level; and the Biden administration’s focus on ESG issues is the U.S. Securities and Exchange Commission’s (SEC) new emphasis on climate and ESG disclosures. On March 4, 2021, the SEC announced the formation of a Climate and ESG Task Force in the Division of Enforcement. Soon thereafter, on March 15, 2021, the SEC announced a blueprint for reinvigorating climate and ESG-related disclosures in light of investor demand. Then SEC Chair Gary Gensler and other Commissioners released statements regarding ESG expertise on boards of directors and what form the climate and human capital disclosures may take in SEC filings. While the SEC has yet to initiate any definitive rule changes, proposed ESG rulemaking is currently on its agenda for October 2021, and its recent actions demonstrate a clear direction toward heightened sustainability reporting.
The SEC’s Climate and ESG Task Force is expected to initially focus on “identify[ing] any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules,” “analyz[ing] disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies,” and pursuing whistleblower tips on ESG-related issues. In addition, according to Law360, in July 2021, SEC Acting Director of Enforcement Melissa Hodgman noted that more ESG disclosure-related enforcement actions might be coming, potentially in cases “where there was a misstatement or something that wasn’t disclosed to investors that they needed to know to make [an] investment decision.”
Where disclosures are made in this burgeoning area as companies respond to the growing demands for ESG disclosures and navigate the challenges of what to disclose and how to disclose it, litigation is sure to follow. Litigation and regulatory activity related to ESG issues has already begun to take shape and is likely to evolve in the coming months and years. Potential areas for litigation include companies’ operations and governance arrangements, reporting, and officer and director claims for breach of fiduciary duties. Companies also have been subjected to “greenwashing” claims that dispute disclosures or claims that products or processes are environmentally friendly. Some recent lawsuits have challenged climate change disclosures and whether boards have adequately monitored their companies’ food safety practices, and others have alleged breaches by directors of their duty to ensure their companies’ commitments to diversity and anti-discrimination.
Particularly when including ESG disclosures in SEC filings, companies should recognize increased liability risks and ensure that the disclosures are accurate, appropriately cautioned, consistent with the company’s statements in sustainability reports and other forums, and carefully incorporated into the company’s disclosure controls and procedures. Some companies may see claims alleging that omitting certain ESG disclosures now rises to the level of a “material omission” or that general statements about ESG achievements include “material misstatements,” particularly during offerings or other transactional activities or when there are significant fluctuations in stock prices.
Now is the time to implement disclosure controls and prepare for what is on the horizon.
*The views expressed in this article are attributable to the authors and do not necessarily reflect the views of Thompson Hine LLP or its clients. This publication is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.