INSIDE THIS ISSUE

•  Upcoming Supreme Court Ruling Could Undermine Consumers’ Right To Join Class Actions

•  Panel Proposes New Federal Rule On Preservation And Spoliation Of E-Discovery

•  Scott+Scott LLP Files Case On Behalf Of Beneficiaries Of Fallen U.S. Service Members

•  Jury’s Verdict Holds Defendants Accountable In Rare Securities Class Action Trial

•  Conferences And Events...

(Flashlit version)

Upcoming Supreme Court Ruling Could Undermine Consumers’ Right To Join Class Actions

On November 9, 2010, the U.S. Supreme Court heard competing arguments in AT&T Mobility LLC v. Vincent Concepcion et ux., No. 09-893, on whether it should uphold a California district court decision to strike a class action waiver in AT&T Mobility LLC's consumer arbitration agreement.

Class-action waivers are often found in standard form contracts and purport to bar consumers from pursuing class-wide proceedings in any forum. In circumstances where a class action waiver functions to release a party from liability, such waivers have been held unenforceable under the generally applicable contract law of twenty states—without regard to whether they are found in arbitration agreements.

The Federal Arbitration Act provides that arbitration agreements are enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract.” The question of whether the Federal Arbitration Act preempts contract law when a class-action waiver that otherwise would be unenforceable under generally applicable contract law is embedded in an arbitration agreement, has been a frequent point of contention in U.S. consumer cases. A 2005 California Supreme Court decision has been used by many courts to answer this question in the negative.

In June 2005, the California Supreme Court issued the consumer-friendly decision in Discover Bank v. Superior Court (Boehr), in which the court held that class action waivers in consumer contracts of adhesion are unconscionable and unenforceable under certain circumstances and that Federal Arbitration Act does not preempt a state’s prohibition of such waivers.

Under the “Discover Bank Rule,” as later discussed in a Ninth Circuit opinion in Shroyer v. New Cingular Wireless Services Inc., a class waiver is unconscionable if (a) it is a contract of adhesion (a contract so imbalanced in favor of one party over the other that there is a strong implication it was not freely bargained); (b) the potential disputes are predictably ones involving small sums of money; and (c) the party with superior bargaining power was alleged to have “deliberately cheat[ed] large numbers of consumers out of individually small sums of money.” According to Discover Bank, a contract with a class waiver is procedurally and substantively unconscionable because the court determined it is an adhesive contract that insulates a defendant from liability—a “'get out of jail free card' while compromising important consumer rights.”

The High Court’s decision in AT&T will squarely address the Discover Bank Rule and, as such, could have far-reaching effects for the resolution of consumer litigation.

Vincent and Liza Concepcion sued AT&T for deceptive practices because it advertised discounted cellular phones while charging sales tax on the full retail price. In light of the small amount of money at stake per phone – around $30, it made no sense for the Concepcions to sue alone; thus, they sued on behalf of a class of other purchasers. The service agreement the Concepcions signed with AT&T, however, required any claim to be resolved through arbitration and contained a class action waiver, exempting AT&T from class action proceedings. The district court found the class action waiver was unenforceable, finding that, under California law, the contract was too one-sided, or unconscionable.

AT&T, on appeal from the federal court decision, contends that the Federal Arbitration Act preempts state contract law and makes class-action exemptions enforceable when they are combined with arbitration.

During oral argument, the Court seemed wary of striking California’s unconscionability doctrine but at the same time appeared concerned that a ruling for the Concepcions would allow courts to chip away at arbitration so that it mirrored litigation. “Are we going to sit in judgment?” Justice Antonin Scalia asked counsel for AT&T, during his opening argument. “If a state wants to apply a lesser standard of unconscionability, can we strike that down?”

Some justices questioned how far states should be allowed to go in imposing rules that have the effect of inhibiting arbitration and questioned if a rule requiring class adjudication should be allowed if other types of rules imposing court-like procedures in arbitration would not be. “What is the difference ... between a rule that says you must follow the rules of evidence in every adjudication and a rule that says class adjudication must always be available,” Justice Samuel Alito asked counsel for respondents.

Consumer advocates are wary that the Supreme Court will vote against consumers. Lower courts have consistently backed state laws protecting consumer-class actions, and, arguably, if the Supreme Court agreed, they would have never accepted AT&T's appeal.

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Panel Proposes New Federal Rule On Preservation And Spoliation Of E-Discovery

The E-Discovery Panel at the 2010 Conference on Civil Litigation reached a rare consensus on a proposal outlining critical elements of a new federal rule of civil procedure governing the preservation and spoliation of e-discovery. According to Panel member, U.S. District Judge Shira A. Scheindlin of the Southern District of New York, “the consensus of the panel members [and lawyers working with institutional clients of all sizes] was that there is an acute need for increased certainty and predictability in connection with the accrual, scope, and enforcement of preservation duties.”

Judge Scheindlin’s presence on the Panel was fitting given the fact that she authored a series of ground-breaking opinions addressing e-discovery issues beginning in 2003 in Zubulake v. UBS Warburg LLC. Judge Scheindlin’s opinions addressed novel e-discovery issues such as: (i) the scope of the duty to preserve electronic data during litigation; (ii) cost-shifting for the recovery of inaccessible data; (iii) an attorney’s duty to monitor their clients’ compliance with preservation and production of electronic evidence; and (iv) sanctions for spoliation, i.e. the negligent and intentional destruction of electronic evidence in pending or foreseeable litigation.

Since Judge Scheindlin issues her opinions on these and other e-discovery issues, federal courts continue to tangle with complex preservation and spoliation issues on a regular basis. Conflicting opinions have unfortunately created much uncertainty for attorneys and their clients concerning their duties to preserve and potential sanctions. The E-Discovery Panel’s proposed elements for a new federal rule aim to eliminate this uncertainty and provide uniformity throughout the country’s federal courts. To that end, the Panel has identified at least 10 critical elements for the proposed new federal rule on e-discovery preservation and spoliation, including:

+ A general trigger (i.e. pending litigation or a reasonably foreseeable possibility of litigation) of the duty to preserve electronic information

+ A specific trigger (i.e. actual notice, written request to preserve, or statutory preservation requirements) of the duty to preserve electronic information

+ The scope of preservation, including time frame, data sources and the types of covered data

+ The preservation standards for non-parties to the litigation

+ The format in which electronic data subject to the preservation duty should be maintained

+ The limitations and guidance for determining the individuals and custodians for whom data must be preserved

+ The duration of preservation duties

+ A safe harbor for companies that use formal litigation hold procedures

+ The scope of discovery protection for internal efforts to ensure compliance with preservation duties

+ The specific sanction for spoliation or breaches of the duty to preserve

The Panel hopes that these elements not only increase uniformity but also serve as a guide for attorneys and institutional clients facing complex e-discovery requests. Without appropriate guidelines, attorneys and their clients are devoting unnecessary resources to preserve a wide range of electronic data to make sure they avoid sanctions from the Court. A new federal rule addressing the duty to preserve should help litigants reduce cost and simplify the discovery process.

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Scott+Scott LLP Files Case On Behalf Of Beneficiaries Of Fallen U.S. Service Members

Scott+Scott LLP has brought a lawsuit against Prudential Insurance Company of America and Prudential Financial Inc. (“Prudential”) in the United States District Court for the District of New Jersey on behalf of beneficiaries of Service-members Group Life Insurance, Veterans Group Life Insurance, Family Service-member Group Life Insurance and Traumatic Injury Protection Insurance. An individual beneficiary and a non-governmental 501(c)(4) not-for-profit organization, Veterans and Military Families for Progress, serve as named plaintiffs in this action alleging that Prudential mishandled and misappropriated life insurance proceeds for fallen military service-members and veterans. The beneficiaries’ complaint alleges eight distinct claims against Prudential, including breach of fiduciary duty, breach of contract, fraud, unjust enrichment and violation of the New Jersey Consumer Fraud Act.

Since 1965, the Federal Government has entrusted Prudential with the administration of life insurance for service-members; including active duty service-members of the Army, Navy, Marine Corps and Air Force, ready reservists and members of the National Guard. Plaintiffs allege that Prudential has breached this trust through “predatory and unconscionable insurance practices” by which Prudential has misappropriated “hundreds of millions of dollars worth of life insurance proceeds that are properly due to the beneficiaries of fallen military service members and veterans.”

Under its contract with the Federal Government, and by statutory mandate, Prudential has a duty to pay out life insurance proceeds as elected by the service-member who purchases the insurance. For service-members who elect to have death benefits paid to beneficiaries as a lump sum, the proceeds of their life insurance are due to beneficiaries immediately following the death of the service-members. Despite this obligation, since 1999 Prudential has not paid out the monies to beneficiaries as directed, and instead informs beneficiaries that their insurance proceeds have been placed in an “interest bearing account” called an “Alliance Account.” Prudential provides beneficiaries with a “check book” with which beneficiaries are told they may withdraw money.

In fact, the “Alliance Account” is a legal fiction because no separate bank account is created in the name of beneficiaries. Instead, insurance proceeds are retained by Prudential in their general corporate account, earning as much as 4-5% interest on the funds, while paying beneficiaries as low as 0.5% interest. Moreover the “check book” is not a check book. It is actually a book of “IOU” notes. Thus, the complaint alleges that Prudential actively misleads the beneficiaries and, in breach of its fiduciary obligations, advises the beneficiaries to leave their funds with Prudential without disclosing that Prudential retains the lions’ share of the interest.

Prudential defends its scheme as standard industry practice. As the complaint states, in reality “Prudential’s profiteering machine takes advantage of service-members’ families in their most vulnerable time.” Indeed, in their state of bereavement, beneficiaries do not suspect fraud or have any reason to question Prudential’s practices.

Scott+Scott is proud to represent beneficiaries who have lost loved ones in active service to their country. Scott+Scott is committed to not only seeing proceeds of the insurance benefits rightfully restored to past beneficiaries, but also pursuing fundamental changes in military life insurance practices to ensure that future beneficiaries and service-members are given their rightful benefits and the necessary information to make financial decisions during such a difficult time.

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Jury’s Verdict Holds Defendants Accountable In Rare Securities Class Action Trial

On November 18, 2010, a jury returned a verdict in favor of investors in a securities class action filed against Bank Atlantic Bancorp in a Miami, Florida federal court. This jury verdict represent only the tenth securities class action lawsuit verdict since the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). With the latest verdict in the case against BankAtlantic, juries have found for plaintiffs in six of the ten securities class action trials.

Indeed, according to the Claims Compensation Bureau, since PSLRA was passed in 1995, there had been only nine securities class action lawsuits that have been tried and reached a jury verdict. Seven post-PSLRA securities fraud cases went to trial but never reached a jury verdict. Eleven other securities class actions have gone to trial after 1995 but involved pre-PSLRA conduct.

The extremely low number of jury verdicts is remarkable given that there have been well over 3,000 securities class actions filed since 1995. Studies have shown that approximately half of all securities class actions end before the discovery process begins and before an amended complaint is filed. In fact, according to the PLUS Foundation, approximately two-thirds of securities class actions settle and the remaining third are dismissed. The PLUS Foundation’s research shows that many cases actually settle early with 19% settling before a court rules on the first motion to dismiss. These cases typically involve a parallel Securities and Exchange action or investigation or a restatement of financial filings.

In virtually all cases where the defendant’s motion to dismiss is denied, the case is settled rather than tried. Of these settlements, roughly half are settled during the discovery phase of the lawsuit. Some settlements are made after lengthy discovery. In some securities class actions, a settlement is reached after over five years of discovery.

The verdict in the securities class action against BankAtlantic is estimated to translate to total damages of as much as $42 million for investors. The verdict, however, will most certainly be appealed. Regardless, the verdict serves as a reminder to investors and defendant companies that not all securities class actions are settled and that some do actually get tried before a jury of their peers.

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Conferences and Events

Super Bowl of Indexing

December 5- 8, 2010

Arizona Biltmore

Resort & Spa

Phoenix, AZ

IMN presents its 15th Annual Conference for the indexing industry. This invitation only event is attended by fund managers, public and private plan sponsors, financial advisors and index providers. This year’s meeting promises an agenda including timely topics, knowledgeable speakers and the opportunity to discuss current issues.

Public Funds Board Forum and Guns & Hoses

December 11- 14, 2010

Grand Hyatt San Francisco

San Francisco, CA

IIR’s 19th Annual Conference will include both pension fund events this year. Some new topics to be discussed this year will cover fiduciary compliance, portfolio balancing and manager selection.

Government Finance Officers Association Conferences

Wisconsin GFOA

December 2-3, 2010

Manitowoc, WI

Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.

Scott+Scott’s PT+SM System is the firm’s proprietary investment portfolio tracking service. Carefully combining the firm’s proprietary computer-based portfolio monitoring software with Scott+Scott’s hands-on approach to client  relations is a proven method for institutional investors and their trustees to successfully

* Monitor their investment portfolios  

* Identify losses arising from corporate fraud    

* Consider what level of participation any given situation requires   

* Recover funds obtained on their behalf through investor litigation action   

To obtain more information about Scott+Scott’s PT+SM services or to schedule a presentation to fund trustees, fund advisors or asset managers, please contact:    

David R. Scott + Toll Free: 800.404.7770     email: drscott@scott-scott.com + UK Tel: 0808.234.1396