Bernstein Shur Business and Commercial Litigation Newsletter #65
September 2016 | Issue 65
Our September recap highlights cases regarding the Wells Fargo phantom account scandal, an antitrust victory for American Express, and other news that will have an impact on business and litigation.
Wells Fargo is facing intense scrutiny and multiple lawsuits in the wake of its recent phantom account scandal.
Earlier this month, Wells Fargo agreed to pay federal regulators and the State of California a total of $190 million to resolve claims addressed to the opening of some 2 million customer accounts without permission. As early as 2011, the bank was aware that sales personnel were using inappropriate methods to meet sales quotas. Such activities included issuing credit cards to customers without their permission, creating unneeded accounts, and forging client approvals. In the wake of the scandal, a consumer class action has been commenced in the U.S. District Court for the District of Utah, accusing the bank of fraud, negligence, breach of privacy and other claims. Meanwhile, a shareholder class action has been commenced in the U.S. District Court for the Northern District of California based on allegations of securities fraud. Since the phantom account scandal was disclosed, Wells Fargo shares have fallen more than 10 percent, wiping out more than $25 billion in market capitalization.
The Second Circuit reversed a trial court judgment against American Express that held that the credit card issuer’s “anti-steering rules” for vendors violated federal antitrust laws.
In the underlying case, several retailers, including Target Corp., asserted that the terms of the credit card issuer’s merchant agreement unlawfully restrained competition because they prohibited steering customers to other credit cards with lower merchant fees. Although the trial court agreed with the plaintiffs, the Second Circuit vacated judgment in their favor, reasoning that anti-steering provisions benefited consumers because American Express’ higher fees allowed it to maintain customer satisfaction. On an annual basis, merchant fees paid in credit card transaction total more than $50 billion. MasterCard and Visa maintain about 1 billion credit cards accounts in the United States, followed by roughly 50 million credit cards accounts for American Express.
The California Supreme Court has agreed to review a controversial judgment requiring Yelp to remove a negative review from its website.
Yelp is an online business directory that allows users to submit and review ratings for businesses and service providers. In the underlying case, a lawyer sued a former client for posting negative reviews about her and her law firm on the website Yelp. The trial court not only granted a default judgment in favor of the plaintiff-attorney based on defamation, but also ordered Yelp to remove the negative reviews. Yelp appealed the judgment to California’s intermediate appellate court, which refused to vacate the judgment against it. The court also concluded that the federal Communications Decency Act did not protect Yelp from injunctive relief based on a judicial finding that the reviews were defamatory. The California Supreme Court has since agreed to review the decision in what is sure to be a closely watched appeal.
SolarCity, the solar energy company, is seeking sanctions against shareholders for filing what it said was a “factually baseless” securities fraud lawsuit.
In the suit, shareholders alleged that the company manipulated its financial statements to appear profitable by shifting overhead costs from sales (where they would be recognized immediately) to leases, where they were amortized over a twenty-year period. A federal judge for the U.S. District Court for the Northern District of California dismissed the plaintiffs’ claims. Even after several amendments to the plaintiffs’ complaint, the court determined that plaintiffs failed to plead enough facts to plausibly demonstrate a viable securities fraud claim. Earlier this month, SolarCity moved for sanctions under Rule 11 of the Federal Rules of Civil Procedure and the “fee-shifting” provisions of the Private Securities Litigation Reform Act of 1995, seeking over $663,000 in fees and costs it incurred in responding to the plaintiffs’ claims. SolarCity argued that the plaintiffs lacked any factual or evidentiary basis to allege that SolarCity employees were aware of any error in its accounting. A hearing on the motion for sanctions has been set for February 2, 2017, with the case otherwise pending on appeal before the Ninth Circuit Court of Appeals.