Bernstein Shur Business and Commercial Litigation Newsletter #40

May 2014 | Issue 40

 By Paul McDonald and Dan Murphy

We are pleased to present the 40th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we discuss fee shifting provisions in corporate bylaws, the settlement of high stakes smartphone patent litigation between Apple and Google, and SEC enforcement of broker practices. We hope you enjoy the newsletter.

In the News:

Delaware High Court upholds “loser pays” provision in corporate bylaws. In ATP Tour, Inc. v. Deutscher Tennis Bund, et al., No. 534, 2013, the Delaware Supreme Court ruled that a corporate bylaw provision that shifted attorneys’ fees and costs to the losing party in intra-corporate litigation was valid and enforceable. Noting that corporate bylaws  constitute a contractual agreement  among a corporation’s shareholders, the Court held that bylaw provisions  addressed to fee-shifting may be enforced under  Delaware law. The bylaw provision at issue had been adopted by a private company, ATP Tours Inc., which oversees men’s professional tennis tournaments. However, the ruling is significant because it potentially opens the door for public companies to adopt similar provisions in the hope of deterring stockholder lawsuits. Plaintiffs’ lawyers have already mobilized to recommend legislative amendments to Delaware’s Corporation Code that would bar such fee shifting bylaws.  

Access the Court’s opinion here.

Second Circuit Court of Appeals reverses judgment entered in favor of the SEC against a broker charged with abusive market timing practices. In the case SEC v. O’Meally, Francis O’Meally, a broker-dealer at Prudential Securities, Inc., was alleged to have employed improper market trading practices in violation of the trading policies of his employer. The practice of market timing entails numerous short-term trades aimed at profiting from temporary differences in the market prices of securities. Although market timing itself is not illegal, securities trading  carried out in a fraudulent or deceptive manner can result in liability under securities laws. At the trial level, a jury rendered verdict in favor of the SEC on its claims based on Sections 17(a)(2) and a(3) of the Securities Act of 1933, which required only a finding of negligence, but rejected all claims based on intentional conduct. On appeal, the Second Circuit vacated the judgment against the broker, stating that no reasonable juror could have found that the conduct by the broker was negligent based on the record developed by the SEC at trial.  In particular, the Second Circuit noted that the SEC’s trial strategy focused entirely on proving intentional conduct, while the defendant provided uncontroverted testimony that his market timing practices were reasonable, customary, and approved by his employer and supervisors. Holding that the SEC failed to meet its evidentiary burden, the Court stated that the “SEC ultimately succumbs to its strategic choice at trial to pursue a theory of scienter or nothing.”

Read more about the case here and access the Court’s opinion here. 

Apple and Google call a truce in smartphone patent litigation. Apple and Google agreed this month to drop all pending patent infringement lawsuits between them. Google inherited the litigation, which involved approximately twenty suits pending in the US and Germany, when it acquired Motorola in 2012. Motorola had sued Apple, which counterclaimed against Motorola, for claims arising out of the use of Google’s Android mobile operating system in smartphones. Notwithstanding this settlement, Apple continues its patent litigation battle with Samsung concerning Samsung’s use of the Android system, which Apple contends infringes on patents cornering Apple’s iOS mobile operating system.

Click here for a link to the story.

The U.S. Commodity Futures Trading Commission makes its first whistleblower award under authority of the Dodd-Frank Act. Under the Act, a whistleblower’s bounty is available to any individual who voluntarily provides original information that leads to a successful enforcement action where the award or penalty exceeds $1 million. The payment available to a successful whistleblower ranges from 10 to 30 percent of the money received by the government. Although most details regarding the CFTC’s first award under the Act were kept confidential, the agency disclosed that the whistleblower’s bounty totaled $240,000 and was addressed to violations of the Commodity Exchange Act.  

Read more about this development here.