Welcome to Shearman & Sterling LLP’s Need-To-Know Litigation Weekly, which analyzes notable U.S. decisions, orders and developments each week in areas of Securities Litigation, M&A Litigation, Government/Regulatory Enforcement, Antitrust Litigation and IP Litigation. This weekly newsletter is intended to supplement our various publications and thought leadership concerning these important substantive areas.
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Central District Of California Sustains Putative Class Action Against Canadian Silver Company And Its Auditor For Failing To Disclose Major Potential Tax Liability In Its Public Financial Statements
On March 25, 2019, Judge Christina A. Snyder of the United States District Court for the Central District of California denied a motion to dismiss a class action filed against a Canadian silver company (the “Company”), current and former executives of the Company, and its auditor and tax consultant (the “Auditor”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In Re Silver Wheaton Corp. Secs. Lit., No. 2:15-cv-05146; 2:15-cv-5173 (C.D. Cal. Mar. 25, 2019). Plaintiffs allege defendants failed to disclose USD$207 million in Canadian tax liabilities and that the Auditor wrongfully issued clean audit opinions. The Court held that plaintiffs sufficiently pleaded claims against all defendants. Of particular note, while the Court acknowledged several hurdles that generally result in the dismissal of claims against auditors, it held that those hurdles had been surmounted by plaintiffs given the unique circumstances of the case.
SEC Awards Total Of $50 Million To Two Whistleblowers In A Single Action, While Denying Five Other Claimants
On March 26, 2019, the SEC announced two multi-million dollar awards to whistleblowers who made reports of misconduct that led to a successful enforcement action after denying claims of five other whistleblowers in the same case (only two appealed the preliminary determination denying their application). SEC Press Release, SEC Awards $50 Million to Two Whistleblowers, No. 2019-42 (Mar. 26, 2019). One whistleblower received $37 million, which represents the third-largest SEC whistleblower award in history, while the other whistleblower received a $13 million award, a difference apparently based on the speed with which each reported the misconduct to the SEC and the relative value of their information. These significant awards continue a trend of rising awards by the SEC, and the number of whistleblowers in the action highlights the degree to which the SEC has successfully incentivized whistleblowers. Since 2012, the SEC has now awarded approximately $376 million to 61 whistleblowers, with an average award of over $6 million.
DOJ And SEC Announce Resolution Of FCPA Investigation That Spanned Over Fifteen Countries With NPA, Monitor, And Over $231 Million In Disgorgement And Fines
On March 29, 2019, the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC”) announced that they had reached resolution with a German-based major worldwide provider of medical equipment and services (the “Company”), in connection with alleged bribery payments and books and records violations in more than fifteen different countries. See In the Matter of Fresenius Medical Care AG & Co. KGaA, Admin. Proc. No. 3-19126 (Mar. 29, 2019); Press Release, SEC Charges Medical Device Company with FCPA Violations, No. 2019-48 (Mar. 29, 2019). In aggregate, the Company agreed to pay in excess of $231 million in disgorgement and penalties, and also agreed to the imposition of a compliance monitor for two years. And as part of a non-prosecution agreement with the DOJ, the Company admitted responsibility for willfully violating the Foreign Corrupt Practices Act (“FCPA”) and agreed that the facts described by the DOJ were true and accurate. See Non-Prosecution Agreement, Fresenius Medical Care AG & Co. KGaA (Feb. 25, 2019); Press Release, Fresenius Medical Care Agrees to Pay $231 Million in Criminal Penalties and Disgorgement to Resolve Foreign Corrupt Practices Act Charges (Mar. 29, 2019).
Delaware Supreme Court Revives Stockholder Claims, Finding MFW Protections Were Not In Place Prior To Economic Negotiations
On April 5, 2019, the Delaware Supreme Court reversed in part and affirmed in part a decision of the Delaware Court of Chancery that had dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”). Olenik v. Lodzinski et al., No. 392, 2018 (Del. April 5, 2019). Plaintiffs claimed that Earthstone’s directors, officers, and Earthstone’s alleged controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders. As discussed in our prior post on the case, the Court of Chancery dismissed the case after concluding that the transaction was properly structured under Kahn v. M&F Worldwide, 88 A.2d 635 (Del. 2014) (“MFW”), and the business judgment rule applied. On appeal, the Delaware Supreme Court reversed, finding that Earthstone initiated economic negotiations before the requisite MFW protections were put in place. Accordingly, the Court reinstated the breach of fiduciary claim as to the terms of the transaction; the Court sustained dismissal of the disclosure-based claim.
District Of New Jersey Denies Building Materials Manufacturer’s Motion For Summary Judgment In Alleged Price Discrimination Lawsuit
On April 1, 2019, Judge William J. Martini of the United States District Court for the District of New Jersey denied Firestone Building Products Company LLC’s motion for summary judgment on price discrimination claims brought by a building materials distributor. Marjam Supply Co. v. Firestone Bldg. Prod. Co., LLC, No. 2:11-cv-7119, 2019 WL 1451105 (D.N.J. Apr. 2, 2019). Plaintiff alleged that defendant, a manufacturer of building materials, offered its roofing products to several of plaintiff’s competitors (“Favored Distributors”) at terms more favorable than those offered to plaintiff through a variety of non-uniform rebate, discount and financing programs in violation of Sections 2(a) and 2(d) of the Robinson-Patman Act. Plaintiff claimed that due to the disparate terms offered by the manufacturer, Favored Distributors were able to offer the manufacturer’s products to plaintiff’s major customers at lower prices than plaintiff and that it lost significant business as a result.
PTAB Goes “Deeper,” Offering Further Guidance On Its Post-SAS Practice
On April 5, 2019, the Patent Trial and Appeal Board (“PTAB”) at the United States Patent and Trademark Office designated as “Informative” two prior decisions relating to the PTAB’s discretion about whether to institute inter partes review (“IPR”) proceedings for trial. In each, the PTAB exercised its discretion to deny institution of an IPR proceeding, even though the Petitioner demonstrated a reasonable likelihood of prevailing on some claims.