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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New Jersey District Court Dismisses Putative Securities Fraud Class Action For Failure To Plead Scienter
On January 31, 2019, Judge Madeline Cox Arleo of the United States District Court for the District of New Jersey granted with leave to amend defendants’ motion to dismiss a putative securities fraud class action against a digital printing company (the “Company”) and two of its officers. In Re: Electronics For Imaging, Inc. Securities Litigation, No. 17-5592 (D. N.J. Jan. 31, 2019). Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by intentionally misrepresenting the adequacy of the Company’s internal controls. The Court disagreed, finding that because the complaint did not allege facts sufficient to show that the deficiencies were “‘so obvious’ that defendants must have known about them . . . , or allegations that defendants ignored ‘red flags,’” it failed to plead scienter.
Tenth Circuit Holds That Dodd-Frank Act Granted SEC Extraterritorial Authority
On January 24, 2019, the United States Court of Appeals for the Tenth Circuit affirmed a decision by the United States District Court for the District of Utah holding that the Dodd-Frank Act of 2010 grants the Securities and Exchange Commission (“SEC”) authority to enforce extraterritorially the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934. SEC v. Scoville, No. 17-CV-4059 (10th Cir. 2019). Months before the Dodd-Frank Act was passed, the Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247, 265 (2010), held that, given the general presumption against extraterritorial application of U.S. laws and the lack of clear indicia of congressional intent to the contrary, the federal securities laws did not apply extraterritorially. But the Tenth Circuit concluded in Scoville that the Dodd-Frank Act “affirmatively and unmistakably” evidenced Congress’s intent to allow the SEC and the U.S. to enforce the federal securities laws whenever the “conducts-and-effects” test is met, effectively rendering Morrison inapplicable to SEC and other government enforcement actions while not disturbing its impact on private securities actions.
Delaware Supreme Court Affirms Dismissal Of Misappropriation Claims Against Private Equity Investor That Invested In A Competitor
On February 7, 2019, the Delaware Supreme Court issued an order affirming the dismissal of misappropriation claims by Alarm.com Holdings, Inc. against ABS Capital Partners Inc. (and its affiliates), a private equity firm that had a controlling interest in plaintiff and whose partners served on plaintiff’s board, with one as chairman. Alarm.com Holdings, Inc. v. ABS Capital Partners Inc., No. 360, 2018 (Del. Feb. 7, 2019). After its subsequent initial public offering, plaintiff alleged that defendant misappropriated its confidential information by investing in a competitor and asserted claims for violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) and common law misappropriation. The Delaware Court of Chancery found that multiple agreements between defendant and plaintiff made it clear that defendant could invest in competitors and this fact was also evident in plaintiff’s charter of corporation, which included a provision under Delaware General Corporation Law (“DGCL”) Section 122(17) to exempt stockholders and certain directors from any duty not to pursue corporate opportunities that otherwise might arguably belong to plaintiff. In addition, in the complaint, plaintiff “relies only on [defendant’s] investment in [a competitor],” which was made approximately a year after defendant’s representative left the board, and does not allege specific facts demonstrating the misuse of plaintiff’s confidential information. Therefore, the Court of Chancery held that the facts “do not support a reasonably conceivable inference of misappropriation.” In a summary order, the Delaware Supreme Court affirmed on the same basis.
The Eastern District Of Michigan Holds That An Arbitration Clause Does Not Apply To Direct Purchasers In A Private Suit Alleging Price-Fixing
On January 29, 2019, the Honorable Judge Marianne O. Battani of the United States District Court for the Eastern District of Michigan denied without a hearing Defendant KYB Corporation’s and KYB America’s (collectively, the “Company”) motion to dismiss all federal antitrust claims because those claims were subject to an arbitration clause. In re Shock Absorbers, Master File No. 12-md-02311 (E.D. Mich. Jan. 29, 2019). In so finding, the Court denied the Company’s 30(b)(1) motion and concluded that the Court had subject matter jurisdiction.
United States District Court For The Eastern District Of New York Finds Patent Defendant Estopped From Asserting Invalidity Grounds That Defendant Did Not Include In Its Petition For Inter Partes Review
On Wednesday, January 30, 2019, Judge Kiyo A. Matsumoto of the United States District Court for the Eastern District of New York denied the request of defendant Presidio Components, Inc., (the “Company”) to supplement its invalidity contentions. American Technical Ceramics Corp. et al. v. Presidio Components, Inc., Case No. 14-cv-6544 (E.D.N.Y. Jan. 30, 2019). Judge Matsumoto determined that the Company was statutorily estopped from raising invalidity grounds that it did not include in its petition for inter partes review (“IPR”) to the U.S. Patent and Trademark Office (“USPTO”), and, thus barred the Company from supplementing its invalidity contentions in the subsequent district court proceeding.