The Work

October 2, 2008 9:30 AM

The Am Law Litigation Daily: October 2, 2008

Posted by Joe Phalon

Edited by Andrew Longstreth

Is Credit Default Swap Litigation the Next Big Thing?

It seems that hardly a day goes by anymore without someone predicting with utmost confidence that boom times for litigators are just over the horizon. Today's prognostication, courtesy of a media lunch hosted yesterday by Paul, Hastings, Janofsky & Walker: It's going to be all about the credit swaps. Robert Claassen, chair of the firm's derivatives group, and Keith Miller, chair of the credit crisis group, told reporters that the banking industry's implosion means that banks with a piece of the $43 trillion market in these unregulated instruments are likely to sue to recoup their losses. And who are they going to sue? Other banks.

A credit default swap, for those of you who aren't versed in the obscurities of sophisticated financial instruments--a group that until yesterday included us--is a credit derivative contract in which the buyer makes regular payments to the seller in exchange for the right to a payoff if there is a default or "credit event." Basically, these are insurance contracts, which were widely sold as a hedge against declines in the markets for complex securities.

But if credit swap default litigation takes off, big Wall Street firms could end up on the outside looking in. The problem is conflicts. As we've written before, banks don't generally like to sue other banks, and they particularly don't like the law firms that get in the middle of such disputes. Miller of Paul Hastings speculates that firms outside of New York that don't ordinarily represent the big banks will have real entrée here, just as they have in signing up the hedge fund clients that are already active plaintiffs against banks.

*Correction: Due to an editing error, the final paragraph in an earlier version of this story inaccurately described the outcome of a credit default swap case involving Quinn Emanuel Urquhart Oliver & Hedges. We regret the error.

--Reported by Robin Sparkman

Jones Day Wins Dismissal of Derivative Action Against Macy's Directors and Officers
Back in the real world, where straightforward derivative shareholder actions are still a lot more common than credit swap default suits, New York federal district court judge Richard Howell has dismissed a case filed against directors and officers of Macy's. The plaintiffs alleged that the Macy's defendants breached their fiduciary duty when they made rosy forecasts following the company's merger with May Department Stores. The statements, plaintiffs claimed, artificially inflated Macy's stock price.

Jones Day partner Geoffrey Ritts, who represented the defendants, told us that the plaintiffs did not satisfy a key requirement of derivative suits, in which plaintiffs, before filing a claim, must demand that the board take legal action on behalf of the company; or else show that making such a demand would be futile because of the board's lack of independence. In this case, Ritts told us, Judge Howell determined that the plaintiffs had failed to show that a majority of the board either lacked independence or had a financial interest in the matters in which they would be held personally liable. Assisting Ritts on the case were Jones Day partner John Newman and associates Michael Platt and Arthur Margulies.

Jeffrey Fink of Robbins Umeda & Fink, who represented the plaintiffs, did not immediately return our call.

Supreme Court Agrees to Hear Superfund Case
It took only four months for Gregory Garre, the U.S. Solicitor General since June, to run smack into the rock-solid expertise of a pair of Supreme Court pros: Latham & Watkins's Maureen Mahoney and Quinn Emanuel's Kathleen Sullivan. Yesterday, the Supreme Court granted cert in a environmental cleanup case against the government.The petitioners were Shell Oil, represented by Sullivan; and, in a related case, Burlington Northern Santa Fe and Union Pacific, represented by Mahoney. Garre had urged the court not to take the case after the Ninth Circuit ruled in the government's favor.

At issue is the scope of the Comprehensive Environmental Response, Compensation, and Liability Act. The Ninth Circuit ruled that under CERCLA, Shell had to help pay for the cleanup of a site where chemicals seeped into the ground and threatened water supplies. In Shell's petition for certiorari, Sullivan argued that Shell merely sold the chemicals used at the site and had nothing to do with their sloppy handling.

The Ninth Circuit also put the railway companies on the hook for cleanup because they owned part of the land where the chemicals leaked. Mahoney argued in the railroad companies' cert petition that the Ninth Circuit's assessment of their liability was unreasonable, considering that they were absentee landlords of a small part of the CERLA site.

McDermott Will Hit With Big 'Abuse of Advocacy' Sanction; Wilson Sonsini Gets Wrist-Slap for Forum Shopping
McDermott, Will & Emery had good reason to think that Colorado federal district court judge Richard Matsch was not going to be gentle in deciding how big a sanction to levy against the firm and its client Medtronic Inc. When Matsch ruled last February that Medtronic and McDermott had misled jurors in a patent infringement case against BrainLAB, he had pretty harsh words for McDermott partners Vera Elson and Terrence McMahon. "The [McDermott] lawyers artfully avoided the limitations of the patent claims and created an illusion of infringement," Matsch wrote. "They did so with full awareness that their case was without merit."

On Tuesday, the Recorder reports, Matsch put a dollar figure on McDermott and Medtronic's misdeeds: $4.3 million, which the two must pay BrainLAB's lawyers for their three years of work on the case. The Recorder notes that McDermott must be particularly galled to have to pay the fees of Orrick, Herrington & Sutcliffe, which BrainLAB hired to provide a second opinion on the case. (BrainLAB's lead counsel was Renner, Otto, Boisselle & Sklar.)

McDermott had argued that Match should have stopped any conduct that he believed was improper, and that he should have granted BrainLAB's motion to dismiss if he believed Medtronic's case was too weak to go to the jury. Both the firm and Medtronic said they would appeal the ruling, but two legal ethics experts told the Recorder to expect Medtronic to sue its onetime law firm if the sanction is upheld. "I'm going to go out on a limb, and I will predict such litigation," one of them told the newspaper.

Wilson Sonsini Goodrich & Rosati, meanwhile, discovered the cost of forum shopping: not a whole lot. In an order this week, San Francisco federal district court magistrate judge Maria-Elena James awarded Foley & Lardner's client Abbyy Software a relatively paltry $11,375 after it complained that Nuance Communications and its lawyers at Wilson Sonsini had engaged in forum shopping. Foley was asking for $27,000.

Nuance's patent infringement case against Abbyy has bounced around from the Western District of Wisconsin to the Central District of California to its current home in San Francisco. According to Magistrate James, those first two stops were an obvious attempt at forum shopping. "By it own words, Nuance's choice of Wisconsin and the Central District had little, if anything to do with the merits of the case," she wrote.

But Magistrate James also found that Abbyy's lawyers at Foley & Lardner overreached in their damages request. She ruled, for example, that Nuance should not have to pay for the preparation of Abbyy's motion to dismiss. She also found that while the hourly billing rates that Foley partners Naikang Tsao ($550) and Ronald Wawrzyn ($620) charged were not unreasonable, Foley could just as well have had less-expensive lawyers handle Abbyy's procedural motions.

Howard Rice Wins Same-Sex Child Custody Case
When it comes to supporting gay rights in the courtroom, few firms can match the accomplishments of San Francisco's Howard Rice Nemerovsky Canady Falk & Rabkin. For the last few years, it has been representing the City of San Francisco in same-sex marriage litigation, which ultimately resulted in the landmark California Supreme Court ruling that struck down the state's ban on same-sex marriage. And now the firm has won another important victory for the cause of gay and lesbian rights, this time in the area of child custody.

On Tuesday, in a case of first impression, a Missoula, Montana state court judge granted Michelle Klustad joint custody rights to two children she adopted with her former partner, Barbara Maniaci. When the two were a couple, they adopted Liam (now 8) and Nani (now 4). Because Montana law does not allow two parents in a same-sex relationship to adopt a child, Maniaci officially adopted both children, but Klustad shared parental duties.

After the couple split up in 2007, Maniaci married a man and sought to exclude Klustad from seeing the children. Eventually, the ACLU became involved on Klustad's behalf, and brought in Howard Rice partner Kevin Lewis, who tried the case over two days in May with Missoula attorney Susan Ridgeway.

In ruling for Klustad, Judge Ed McLean employed stinging language. "To discriminate further against Ms. Klustad because of her sexual preference in this day and age," he wrote, "is no different than telling a person to go to the back of the bus because of her skin color."

Lewis told us that this case, which he anticipates will be appealed to the Montana Supreme Court, is one of several across the country in which expert witnesses have claimed that research shows gay couples are unfit to be parents. "This court rejected that theory," said Lewis.

We called the Alliance Defense Fund, a conservative Christian nonprofit organization that funded Maniaci's case, but we didn't hear back.

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