PA Federal Business Decisions Volume 11, No. 3

Third Circuit Reviews Class Action Certification Process Where Representative Is Alleged To Inadequately Represent The Class

In Beck v. Maximus, Inc., 2006 U.S. App. LEXIS 19898 (3rd Cir. 2006) (Opinion by Scirica, Chief Judge), the plaintiff-appellant, Donna M. Beck, initiated a class action law suit when Maximus, Inc., improperly sent to her employer a form collection letter entitled “Employment Verification Request” in order to aid in the collection of overdue student loans. Beck did not have any student loans, but was confused with another Donna M. Beck living nearby who did. The two Donna M. Becks had been confused for each other several times in several settings.

Ms. Beck filed a complaint alleging violations of The Fair Debt Collection Practices Act, 15 U.S.C. ” 1692b, 1692c, 1692d, 1692e and 1692f. Among other things, the Act expressly prohibits “[a]ny debt collector communicating with any person other than the consumer” from “stat[ing] that such consumer owes any debt” and from “indicating that the debt collector is in the debt collection business or that the communication relates to the collection of a debt.” ‘ 1692b(5). The complaint alleged that the letter sent by Maximus was improper in that it disclosed the identity of Maximus as a debt collector and implied the existence of a debt.

This form letter was sent to Beck’s employer and to the employers of 775 other Pennsylvania individuals. Beck filed a motion for class certification. Maximus responded that it had a defense to Beck’s motion. First, Maximus stated that it was a bona fide error, as allowed in ‘ 1692k(c), that it sent Beck’s employer the form letter since Maximus really intended to send it to the employer of the other Donna M. Beck. Second, Maximus asserts that because this defense is unique to Beck, she is not an adequate representative of the class.

The District Court held that Beck’s claims were common to the class and approved class certification. Numerosity was also adequate in that 776 total claimants were represented. Finally, the District Court held that the class was adequately represented.

The Third Circuit granted an interlocutory appeal to review the “typicality” requirement of the underlying class certification. The court noted that unique defenses bear on both the typicality and adequacy of a class representative. The problem with unique defenses as to the class representative is that the class representative may dedicate time and effort to his/her defense at the expense of issues that are common and controlling for the class.

The appellate court stated that it had difficulty discerning the District Court’s reasoning for concluding that Beck was a typical and adequate class representative, noting that the District Court appeared to have adopted portions of both sides’ arguments in different parts of its opinion. At one point the District Court focused on whether the transmission of the letter to the employer violated the Act, while in another portion of the opinion the District Court noted that the content of the letter was determinative of the violation. The order certifying the class was vacated, and the case was remanded for further consideration based on the Third Circuit’s opinion.

Additionally, the Third Circuit was unable to determine from the District Court’s opinion whether the correct standard was applied in concluding that the unique defense Maximum had to Beck’s claims would render Beck atypical or inadequate. The correct standard, as announced by the court, is that “[a] proposed class representative is neither typical nor adequate if the representative is subject to a unique defense that is likely to become a major focus of the litigation.” Id. at *25.

–Contributed by Paul A. Custer, Esquire, Houston Harbaugh, Pittsburgh, PA

Subsequent improper sales of securities do not provide basis to rescind contract

In the late spring of 1996, Douglas Colkitt, M.D. (“Colkitt”) entered into an agreement with Berckeley Investment Group, Ltd. (“Berckeley”) under which Berckeley agreed to purchase 40 convertible debentures from Colkitt for $2,000,000. Berckeley Investment Group, Ltd. v. Douglas Colkitt, 2006 U.S. App. LEXIS 18584 (3d. Cir. July 25, 2006).

The debentures were convertible into shares of National Medical Financial Services Corporation (“NMFS”) under certain specified conditions. Colkitt was the Chairman of the Board and principal shareholder of NMFS. The debentures represented an unsecured loan for a one-year term, during which Colkitt was obligated to pay 6% interest to Berckeley. In lieu of receiving repayment in cash, Berckeley was entitled under the agreement to convert the debentures into shares of NMFS at a 17% discount. Under the terms of the agreement, all later sales of converted shares by Berckeley were required to comply with the Securities Act of 1933 (the “Securities Act”).

Pursuant to the terms of the agreement, Berckeley began making demands on Colkitt to convert the debentures into NMFS stock. On each occasion, Colkitt refused to comply with Berckeley’s demands to convert the debentures. After repeated requests, Colkitt eventually converted a portion of the debentures, however Colkitt refused to make the required quarterly interest payments or repay the balance due on the debentures at the end of the term.

On August 13, 1997, Berckeley filed suit in District Court alleging that Colkitt breached the agreement by failing to convert the debentures as requested. Following several procedural rulings, Colkitt filed a second amended counterclaim against Berckeley alleging violations of federal securities laws and the Pennsylvania Securities Act, common law fraud, and breach of contract. Following discovery, both parties filed cross-motions for summary judgment. On December 7, 1999, the district court granted Berckeley’s motion and denied Colkitt’s motion, with the understanding that several issues remained to be decided.

On appeal, Colkitt asserted that he should be entitled to rescind the agreement because it was made “in violation” of Section 10(b) of and Rule 10(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that “performance” of the contract violated Section 10(b), Rule 10(b)(5), and Section 5 of the Securities Act because Berckeley’s later sales of the converted shares would not be in compliance with securities laws.

In rejecting Colkitt’s argument, the Court held that because, at the time when the parties entered into it, the agreement could be performed without violating the provisions of the securities laws, Berckeley’s later sales could not serve as a basis to rescind the contract. The Court explained:

“[u]nlawful transactions made pursuant to lawful contracts” do not fall within the ambit ofSection 29(b). Thus, to the extent that a trier of fact determines that Berckeley’s downstream sales of unregistered NMFS shares violated Section 5, those sales are too attenuated to establish a claim under Section 29(b).

2006 U.S. App. LEXIS 18584 at *29 (citations omitted).

With respect to Colkitt’s claim for damages for Berckeley’s alleged violation of Section 10(b) and Rule 10(b)(5), the Court held that material issues of fact existed with respect to the intentions and actions of Berckeley under the agreement. Therefore, the Court affirmed the district court in part, reversed in part, and remanded the case to the district court for further proceedings.

–Contributed by Stephen S. Photopoulos, Esquire, Houston Harbaugh, Pittsburgh, PA

Eastern District Court Reviews Agent / Broker Status In Insurance Coverage Dispute Involving Philadelphia Flyers

In Comcast Spectacor, L.P. v. Chubb & Son, Inc., et al, 2006 U.S. Dist. LEXIS 55226 (E.D. Pa. 2006) (Opinion by Judge Dalzell), the issue to be resolved was whether the defendants, various insurance companies and their purported agents, agreed to provide coverage for certain performance bonuses for Philadelphia Flyers player Joni Pitkanen.

Comcast Spectacor, L.P. does business as the Philadelphia Flyers. The Flyers employed Pitkanen as a professional ice hockey player. Pitkanen’s salary was composed of a base salary of $592,500, and was eligible for six performance bonuses worth up to $2,600,000. Receipt of each bonus was dependant upon Pitkanen achieving certain individual awards or statistical plateaus. If Pitkanen achieved two or more of those bonus milestones, he would receive “the amount for each bonus earned plus the difference between the total amount earned and $2,600,000.” Id. at *6.

To account for the possibility of having to pay performance bonuses, the Flyers sometimes purchased insurance for certain players. In previous seasons, that coverage was placed through James McCarthy. Comcast alleges that McCarthy identified himself as an agent for the defendant insurance companies, and therefore was able to bind the insurance companies to the policies McCarthy allegedly represented to Comcast that it was getting. Comcast also alleges that through McCarthy it purchased coverage for payment of any bonus to be paid to Pitkanen, and that the insurers changed the wording of the policies, unbeknownst to Comcast, to say that coverage would only be provided if Pitkanen achieved at least two of the awards or statistical plateaus.

The court first discussed whether McCarthy and other named defendants were agents of the various defendant insurance companies. Because Comcast asserts the insurance companies were obligated to provide coverage for the performance bonuses through the direct acts of McCarthy and the other alleged agent-defendants, the first issue to resolve was the agency status of McCarthy and others. The court cited to the deposition testimony of Lewis Bostick, Vice-President of Risk Management at Comcast to dismiss Comcast’s assertions of agency. Specifically, Bostick was unable to recall any specific language from any conversations held with McCarthy, or the other alleged agents, wherein they specifically represented themselves as agents of the insurance companies. In addition to the deposition testimony, Comcast was unable to point to any written document that created agency status of McCarthy and the others. All of the defendants, including McCarthy, contended that McCarthy was an insurance broker, not an agent of the insurers. The court determined that without sufficient facts to rely upon in the record the claims against the insurance companies could not go to a jury and must be dismissed.

The court then analyzed the direct claims against McCarthy and the other alleged agent-defendants. First, the court dismissed Comcast’s breach of contract claims since there was no mention of the alleged agent-defendants in the insurance contracts which would give rise to any duty owed to Comcast. The court also dismissed claims for breach of oral contracts since the complaint alleged that McCarthy would “endeavor to obtain the requested coverage.” The court noted that to “endeavor” to obtain coverage cannot be construed as an agreement to obtain coverage. The court also dismissed the bad faith claims against the alleged agent-defendants since they were not insurers, and therefore could not act in bad faith toward Comcast.

The court did, however, deny McCarthy’s motion to dismiss the Intentional and/or Negligent Misrepresentation claims. McCarthy sought to have this count dismissed under the “gist of the action” doctrine, stating that all of Comcast’s claims arise out of and are essentially contract claims. The court held that since the allegations against McCarthy are not grounded in contractual duties, since he was not a party to the insurance contracts, the alleged fraud is not barred by the gist of the action doctrine, and therefore the claims are still active.

Finally, the court also dismissed Comcast’s counts for Rescission / Reformation against McCarthy and the others since the court found that McCarthy and the others are not parties to the contract.

–Contributed by Paul A. Custer, Esquire, Houston Harbaugh, Pittsburgh, PA

District Court Grants Summary Judgment in Favor of Plaintiff Where Ex-Hacker’s Investigative Efforts Reveal Illegal Distribution of Plaintiff’s “Lemony Snicket’s” Film

In Paramount Pictures Corp. v. Davis, 2006 U.S. Dist. LEXIS 50955 (E.D. Pa. 2006) (Opinion by O’Neill, J.), the Eastern District Court was asked to consider Plaintiff Paramount Picture Corporation’s (“Paramount”) injunction action concerning its rights in a movie known as “Lemony Snicket’s: A Series of Unfortunate Events.” Paramount had hired an internet detective agency, which used an individual who had admitted to “breaking into a small number of company’s [sic] computer systems twenty years” previously, to investigate possible infringement of its copyright in the film. Id. at *3-4. The movie was released in theaters on December 17, 2004. The internet investigator (“BayTSP”) located an “eDonkey” user offering for download 100% of a file “lemony snickets ‘jim carey’.mpg.” BayTSP downloaded segments of the digital file from the individual and identified the IP address as one assigned to Comcast. The lawsuit was filed against “John Doe,” because the infringer was unknown, but BayTSP was able to determine that the identified user was the first propagator, and Paramount confirmed that the file was the film. After undertaking the investigation, Comcast identified the defendant herein as the suspected infringer.

The court found by a preponderance of the evidence that Davis had a copy of the motion picture on his computer and that he had distributed the film via the eDonkey website. The court also found it “more likely than not” that Davis was the individual using his own computer and his own account to distribute the film. Therefore, the court determined that Paramount had proven by a preponderance of the evidence that Davis was the infringer of its copyright.

The court also found that:

Davis was the first propagator of the motion picture on the eDonkey network; (2) he placed the motion picture on the eDonkey network within a week of its theatrical release and months prior to its home theater release; (3) Paramount lost significant profits as a result; (4) Davis’ actions were willful; (5) Paramount incurs significant costs, approximately $40,000 per title, to locate and prosecute first propagators like Davis; and (6) this damage award is sufficiently high to deter other would be first propagators from infringing motion picture copyrights via online peer to peer networks.

Id. at *18. As such, the court further awarded $50,000.00 in statutory damages to Paramount, and also granted Paramount’s requested permanent injunction.

— Contributed by Shannon M. Clougherty, Esquire, Houston Harbaugh, Pittsburgh, PA

In Graham v. Haughey, et. al., 430 F. Supp.2d 458 (E.D. Pa. 2006) (Opinion by Bartle, J.), the United States District Court for the Eastern District of Pennsylvania considered cross motions for summary judgment on Plaintiff William A. Graham Company’s (“Graham”) copyright infringement and breach of contract actions against Defendants Thomas P. Haughey (“Haughey”) and USI Mid-Atlantic, Inc. (“USI”). For the reasons which follow, the court denied Plaintiff’s motion in total and granted Defendants’ motion in part.

Plaintiff Graham was an insurance brokerage firm, for whom Haughey worked as a broker between 1985 and 1991. While employed there, Haughey signed two Employment Agreements (the latter of which was the “1989 Agreement”). The 1989 Agreement contained restrictive covenants which prohibited Haughey from disclosing company information and retaining documents after termination. After his termination in 1991, Graham and Haughey entered into a consulting agreement (the “1991 Consulting Agreement”) in which Haughey agreed to continue to abide by the above covenants.

On February 21, 1995, Graham filed applications with the U.S. Copyright Office to register certain copyrights in what Graham had developed as a standard survey and analysis in procuring new insurance clients (the “Works”). On October 23, 2000, Graham filed supplementary applications for registration of the Works, in which Graham identified what it characterized as errors in the initial 1995 applications. The U.S. Copyright Office issued two supplementary certificates of registration for the Works, effective October 25, 2000.

When Haughey began working for Flanigan, O’Hara, Gentry & Associates, which was acquired by Defendant USI, he took copies of the Works with him, and USI incorporated language of the Works into USI’s client proposals. After Graham learned of the copying in November of 2004, it filed this lawsuit in February of 2005. The court determined that any language that was part of Graham’s proposals and distributed to clients prior to March 1, 1989 without notice of copyright was part of the public domain, and therefore, not subject to copyright protection. However, the court also found that there were genuine issues of material fact as to what material was published prior to March 1, 1989, and also that it was the jury’s duty to determine whether the Works are subject to copyright protection as derivative works and to compare them to Defendants’ proposals to determine unlawful appropriation. The court stated “[a]t this stage, plaintiff has merely established that the section in the Standard Proposal tilted ‘Coverage Specifications’ is sufficiently original to warrant copyright protection because it was independently created by Graham and contains the requisite minimal degree of creativity, and therefore denied Plaintiff’s motion for summary judgment. Id. at 473.

Finally, Defendants argued that they were entitled to summary judgment because they copied only a “de minimis” amount of language from the Works into the client proposals. The court stated “on the present record, the jury must compare defendants’ proposals to the Works and make a finding as to whether the copying was de minimis.” Id. The court further found that it was for the jury to determine whether the Works were derivative of the language Graham distributed to its clients prior to March 1, 1989. As such, the court denied Defendants’ motion for summary judgment in part on the following basis: “[a]ny material in the Works distributed by Graham prior to March 1, 1989 without notice of copyrights has entered the public domain, is not copyrightable, and cannot support an action for copyright infringement against defendants. Otherwise, genuine issues of material fact exist.” Id. Finally, the court granted Defendants’ motion for summary judgment on Plaintiff’s claim for statutory damages or attorney’s fees under the Copyright Act (and concluded that if Plaintiff were to include Haughey’s commissions in its calculation of actual damages and profits, it could only include those commissions received as a result of Haughey’s sale of proposals that a jury deemed to have infringed Plaintiff’s copyrights).

— Contributed by Shannon M. Clougherty, Esquire, Houston Harbaugh, Pittsburgh, PA

Third-Party Beneficiary Status Reviewed In Context Of Contractual Obligations Between Visa And Fifth Third Bank

In Pennsylvania State Employees Credit Union v. Fifth Third Bank, 2006 U.S. Dist. LEXIS 40066 (M.D. Pa. 2006) (Opinion by J. Caldwell), the Pennsylvania State Employees Credit Union (PSECU) sought damages represented by the costs of replacing Visa cards that had been “compromised” by a theft of bank-card numbers from computer files maintained by defendant, BJ’s Wholesale Club, Inc. PSECU also sued Fifth Third Bank, the bank that processes card transactions for BJ’s. Both were sued for breach of contract, negligence, equitable indemnification, and unjust enrichment, alleging that BJ’s improperly retained cardholder data in violation of Visa rules.

The issue for the court was whether Fifth Third and Visa had the intent or purpose to benefit PSECU when they entered into a member agreement. The member agreement required Fifth Third to ensure that BJ’s complied with Visa Operating Regulations, one of which prohibited retailers from retaining cardholder information.

The issue was resolved by way of summary judgment after discovery was completed. During discovery, a corporate representative of Visa was deposed. During his deposition, he testified that the core purpose of the Visa Operating Regulations was to, among other reasons, benefit “the Visa payment system, the members that participate in it and other stake holders such as cardholders, merchants, and others who may participate in the system as well.” Id. at *9. He also stated that “the purpose of the [Cardholder Information Security Program]… is to maximize the value to the Visa system as a whole… to protect a cardholder, the privacy of their information, to protect their confidence in using the Visa system, to protect issuers, to protect acquirers, to protect merchants….” Id. at *20 (Italics in original). Similar testimony was offered several times by the Visa representative throughout his deposition.

Relying on Section 302(1) of the Restatement (Second) of Contracts, the court noted that Fifth Third and Visa did not otherwise agree that PSECU would not be a third-party beneficiary of the member agreement between Fifth Third and Visa. Therefore, PSECU’s third-party beneficiary status would depend on whether “recognition of a right to performance” in PSECU “is appropriate to effectuate the intentions of” both Visa and Fifth Third in making the member agreement and whether “the circumstances indicate that” Visa intended to give PSECU “the benefit of the promised performance.” There must be evidence that Visa assumed a duty to PSECU. Id. at *26.

If Visa had no intent to benefit PSECU then PSECU is merely an incidental beneficiary and has no rights under the contract between Visa and Fifth Third. The court, reviewing the record before it, found that Visa did not intend for PSECU to be a third-party beneficiary of its agreement with Fifth Third. Rather, the member agreement was for the benefit of the Visa system as a whole, and not the individual participants in the system. The court relied heavily upon the testimony of the corporate representative of VISA in entering summary judgment in favor of Fifth Third and against PSECU.

–Contributed by Paul A. Custer, Esquire, Houston Harbaugh, Pittsburgh, PA

Motions to Dismiss Granted where District Court Found that Defendants’ Representations were Insufficient to Create “Reasonable Apprehension” of a Lawsuit

In Noble Fiber Technologies, LLC v. Argentum Medical, LLC, 2006 U.S. Dist. LEXIS 43357 (M.D. Pa. 2006) (Caputo, J.), Plaintiff Noble Fiber Technologies, LLC (“Noble”) filed a declaratory judgment action against Defendants, alleging that it was in apprehension of a patent infringement suit based on certain alleged representations made by Defendants and/or Defendants’ representatives. The patents at issue were “the ‘549 Patent,” “the ‘570 Patent,” and U.S. Patent Application “961.” Among the representations which the Court considered was an April 8, 2005 letter which Argentum Medical allegedly sent to Plaintiff, which stated in relevant part:

[Your] product or products appear to share many if not all of the features of the subject matter claimed in U.S. Patent No. 6,861,570. Accordingly, Argentum Medical invites you or your representative to contact the undersigned to explore possible licensing opportunities with regard to U.S. Patent No. 6,861,570 and related patents and patent applications.

Alternatively, Argentum Medical invites you to provide written comments on which features of the subject matter claimed in U.S. Patent No. 6,861,570 are not found in your product or products.

2006 U.S. Dist. LEXIS 43357, *4-5. The Middle District Court found that there was no explicit threat of suit, and also that Noble had not been placed in reasonable apprehension of a lawsuit. Specifically, the Court found the above letter was insufficient to create a reasonable apprehension of a lawsuit, stating that [“a] patentee’s statement that it intends to enforce its patent has been held not to create a reasonable apprehension of suit.” Id. at *12 (internal citations omitted). The Court also found that Defendants’ other alleged representations did not create an explicit threat of suit. Therefore, the Court dismissed Counts I through VI of Noble’s Amended Complaint for lack of jurisdiction under Rule 12(b)(1).

The Court also found that Plaintiff had failed to sufficiently the plead necessary element of bad faith, and therefore dismissed Plaintiff’s remaining claims for violations of the Lanham Act under Rule 12(b)(6).

— Contributed by Shannon M. Clougherty, Esquire, Houston Harbaugh, Pittsburgh, PA

Burden of Proof on Summary Judgment

In Pediatrix Screening, Inc. v. TeleChem International, Inc., 2006 U.S. Dist LEXIS 49894 (W.D. Pa. July 21, 2006), the District Court rejected a Special Master’s recommendation to deny the counter-claim defendant’s motion for summary judgment where the counter-claim plaintiff failed to present any evidence in opposition to the motion. The factual history of the dispute started in November 1999 when representatives of Pediatrix and TeleChem met at a professional conference and discussed the possibility of the companies collaborating to pursue federal research grants. The intent of the parties was to work together to develop a screening method using microarray technology to detect hearing loss in newborn infants. The parties subsequently entered into two contracts memorializing their agreement.

Within weeks of signing the second contract in April 2001, the parties’ collaborative efforts began to fall apart. The parties met and exchanged correspondence over the next several months in an attempt to resolve their differences, without success. On November 14, 2001, TeleChem advised Pediatrix that it considered Pediatrix to be in breach of the second contract and demanded specific performance or a return of consideration. Pediatrix responded by filing suit seeking declaratory judgment regarding the rights and obligations of the parties under the contracts.

TeleChem filed counterclaims asserting multiple contract-based claims, as well as misappropriation of its scientific and commercial trade secrets by Pediatrix. Following a prolonged and contentious discovery period, the parties filed cross-motions for partial summary judgment. The parties agreed to have the motions heard by a Special Master appointed for that purpose. On February 1, 2006, the Special Master filed his Report of Proposed Findings and Recommendations.

In his Report, the Special Master first considered Pediatrix’s motion for summary judgment on TeleChem’s trade secret counterclaims. In its motion for summary judgment, Pediatrix argued that TeleChem’s counterclaims should be dismissed because the scientific trade secrets alleged to have been misappropriated by Pediatrix were either not proper trade secrets, or were in the public domain. The Special Master rejected the arguments of Pediatrix on factual grounds and refused to dismiss TeleChem’s trade secret counterclaims. Pediatrix filed objections to the Special Master’s Report.

The Court reviewed the Report of the Special Master as required under Federal Rule of Civil Procedure 53(g). Pediatrix’s objections asserted that the Special Master had improperly shifted the burden on the counterclaims from TeleChem to Pediatrix. Pediatrix argued that although the Special Master acknowledged that TeleChem had failed to show that there were genuine issues of material fact, he improperly refused to grant summary judgment in Pediatrix’s favor. The Special Master based his recommendation in part on the fact that neither party had addressed the commercial trade secrets in their moving papers. The Special Master concluded that because Pediatrix had ignored the commercial trade secrets, “entry of summary judgment on TeleChem’s trade secret claim without even a challenge to these asserted trade secrets would be inappropriate.”

In reviewing the Special Master’s Report and Recommendation, the Court noted that once Pediatrix had moved for dismissal of “any and all claims” of trade secret misappropriation, TeleChem was obligated to show that each and every claim was a protectable trade secret. At summary judgment, the movant on trade secret claims satisfies its burden under Rule 56 by simply “pointing out” that there is no evidence to support one or more elements of the opposing party’s case. The movant is under no obligation to produce evidence itself, and the opposing party may not rest on its allegations to withstand summary judgment.

Because TeleChem failed to come forward with any evidence to support its claims regarding its commercial trade secrets, the Court held that the Special Master should have granted summary judgment in favor of Pediatrix on those claims. As a result, the Court sustained Pediatrix’s objections and granted summary judgment in favor of Pediatrix as to TeleChem’s commercial trade secrets.

–Contributed by Stephen S. Photopoulos, Esquire, Houston Harbaugh, Pittsburgh, PA

Court Approves Partial Class Action Settlement in Face of Non-Settling Defendant’s Objections

In re PNC Financial Services, Group, Inc., Securities Litigation involved a Consolidated and Amended Class Action Complaint seeking relief under the Federal Securities Laws “on behalf of all persons who purchased PNC common stock, call options on PNC stock, or sold put options on PNC stock, from July 19, 2001 through July 18, 2002 (‘the securities litigation’).” 2006 U.S. Dist. LEXIS 47618 at *5 (W.D. Pa. 2006). The Western District Court was asked to consider, and granted, a motion for final approval of partial settlement of class action and for attorneys’ fees and expenses in connection with this motion.

The Complaint alleged that Defendants removed “troubled and non-performing loans and investments” without disclosure to investors, banking regulators or the SEC in order to conceal losses and maintain PNC’s stock price. The Complaint further alleged that such removal was accomplished through the creation of an accounting structure for PNC to transfer these non-performing assets with the help of Ernst & Young, and AIG Financial Products Corporation. Id. at *6. The structure allowed PNC to transfer the non-performing assets to “special purpose entities” (“the SPE transaction”). On December 17, 2004, the putative class, the PNC Defendants and PNC’s insurance carrier proceeded to mediation, and entered into a Memorandum of Understanding wherein the PNC Defendants and AIG Financial Products agreed with the lead Plaintiffs to settle the claims that have been or could have been asserted in the securities litigation and which arose out of the allegations of the First Amended Complaint. Id. at *11. As part of this Agreement, PNC agreed to request its insurers to deposit the sum of $30 million for the benefit of the class and AIG Financial Products agreed to pay the sum of $4 million to the class. PNC and AIG Financial also agreed to provide to the lead Plaintiffs all of the documents which they had previously produced to the SEC and the U.S. Department of Justice in connection with the underlying litigation. As such, the parties to the Memorandum of Understanding executed a Settlement Agreement and then sought preliminary and final approval from the Western District Court.

The Court found that the proposed settlement enjoyed “an initial presumption of fairness.” Id. at *26. In reaching this conclusion, the Court applied what are known as the Girsh factors: (1) the complexity, expense and likely duration of litigation; (2) the reaction of the class to the proposed settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; and (9) the range of reasonableness of the settlement fund to the best possible recovery in light of all of the attendant risks of litigation.

In applying the foregoing factors, the Western District Court found that “the proposed settlement eliminates what would be complex, expensive and contentious litigation at multiple levels.” Id. at *29. The Court also considered that no class member had objected to the proposed settlement and, even though formal discovery had not begun, the Court found the lack of “formal discovery” did not stand as an impediment to the approval of the settlement. Id. at *32. In fact, the parties had not engaged in formal discovery due to a stay that had been imposed by the Private Securities Litigation Reform Act (the “PSLRA”). The Court also found that the settlement would provide the class with the immediate “tangible benefits of substantial settlement” and that there was a “cognizable risk in maintaining the action in accordance with the certification advanced for settlement purposes.” Id. at *37. Factor 7, the ability of the defendants to withstand a greater judgment, was found to weigh against settlement. However, the remaining factors weighed in favor of the settlement and the Court stated that “[a]ccordingly the proponents of the proposed partial settlement have carried their burden of demonstrating that it reflects a fair, reasonable and adequate resolution of the class claims being compromised.” Id. at *43.

However, Ernst & Young, the non-settling defendant, objected to the partial settlement. Specifically, Ernst & Young contended that the “proposed ‘bar orders’ contained in the partial settlement improperly exceed the scope of this court’s authority, are improperly unilateral and will extinguish E&Y’s right to bring a variety of independent, known claims (or to assert the same in defense) in other tribunals without adequate compensation.” Id. at *43. Further, Ernst & Young contended that it would be precluded from asserting legitimate contribution and other state law claims against PNC and other settling defendants in other actions, “such as those that could be asserted in actions brought by the “opt-out” class members or that E&Y might assert against AIG Financial Products in connection with PNC’s malpractice and misrepresentation claims pursuant to the MOU.” Id. at *44. Ernst & Young further contended that the proposed settlement failed to provide it with “adequate compensation . . . for the potential loss of its independent tort and contract claims against the released parties, and contribution claims against the non-party settling defendants,” and that the proposed plan of allocation was “unfair.” Id. at *45.

The settling Plaintiffs objected to Ernst & Young’s arguments, however, and further contended that Ernst & Young lacked standing to challenge the plan because “[Ernst & Young’s] rights [were] adequately protected by the settlement judgment reduction provision and the record contain[ed] more than sufficient information to demonstrate that the plan [was] fair and reasonable in any event.” Id. at *47. PNC joined in the foregoing argument of the Plaintiffs, and further argued for the approval of the partial settlement for other reasons, including that it released all of the contributing entities, PNC’s insurers, and various affiliates, employees, and others associated with the settling entities in exchange for the judgment reduction provision.

Although the Court found that Ernst & Young had standing to object to a partial settlement, the Court also found that Ernst & Young’s objections to the plan of allocation presented the type of challenge which a non-settling defendant lacked standing to pursue. As such, the Court found that Ernst & Young’s objections were unavailing and overruled them. The Court granted the lead Plaintiff’s motion for final approval of the partial class action settlement.

— Contributed by Shannon M. Clougherty, Esquire, Houston Harbaugh, Pittsburgh, PA

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