The Work

February 26, 2009 4:00 AM

The Am Law Litigation Daily: Feb. 26, 2009

Posted by David Bario

Corporate / Securities
Paul Weiss, Cravath, and Wachtell Win Key Delaware Ruling for Bank Directors in Subprime Case

Board directors at beleaguered financial institutions that gambled on subprime mortgages can breathe a little easier this week, thanks to a 58-page Delaware Chancery Court decision issued Tuesday. [Hat tip to the Delaware Corporate and Commercial Litigation Blog.]

In the first Delaware ruling to examine director and officer liability in a subprime-related case, Chancellor William Chandler III dismissed all but one of the claims in a derivative suit in which shareholders asserted that the officers and directors of Citigroup Inc. failed to "monitor and manage" the risks of the subprime lending market, and failed to disclose Citi's exposure to subprime debt. In addition to breach of fiduciary duty, the plaintiffs--represented by Daniel Krasner of Wolf Haldenstein Adler Freeman & Herz and Delaware's Chimicles & Tikellis--alleged "waste" on the directors' part for purchasing billions of dollars in subprime loans and approving a multimillion-dollar severance package for outgoing CEO Charles Prince in 2007.

Chandler threw out all the plaintiffs' substantive claims except the one regarding Prince's severance, writing that shareholders failed to show demand futility. And he didn't mince words in suggesting that plaintiffs in similar cases will face an uphill battle. "We must not let our desire to blame someone for our losses make us lose sight of the purpose of our law," Chandler wrote. "The discretion granted directors and managers allows them to maximize shareholder value in the long term by taking risks without the debilitating fear that they will be held personally liable if the company experiences losses."

The defendants had high-powered legal help. Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison took the lead for Citi officers. Robert Joffe of Cravath, Swaine & Moore represents the outside directors, and Lawrence Pedowitz of Wachtell, Lipton, Rosen & Katz represents Citigroup. Delaware counsel is Richards, Layton & Finger.

Karp told us that directors and their lawyers have been itching for the Delaware courts to address the issue of their potential liability for subprime-related losses. He called the decision a "very helpful one for directors"--an understatement, if you ask us.

Appellate / IP
Federal Circuit Hits Teva, Loeb & Loeb for Missed Discovery Deadline

A missed discovery deadline by Loeb & Loeb and its client Teva Pharmaceuticals will end any chance Teva had of going to market early with a generic version of Eli Lilly's blockbuster osteoporosis drug Evistra, according to a ruling Wednesday by the U.S. Court of Appeals for the Federal Circuit.

The case dates back to early 2006, when Teva sought Food and Drug Administration approval to manufacture a generic version of Evistra, which had nearly $1.1 billion in sales last year. Following standard procedure under the Hatch-Waxman Act, Teva asserted that Lilly's patents on the drug were invalid, and notified Lilly of its pitch. In response, Eli Lilly sued Teva for patent infringement. The FDA granted the statutory 30-month stay of the generic.

That stay would have expired four months before trial in the case, which is scheduled for next month. Unfortunately for Teva, it will now extend through the start of trial--because Teva and its counsel at Loeb & Loeb gave Lilly a reason to argue that the stay should be prolonged.

The blog Patent Baristas estimates that the extension of exclusivity is worth more than $41 million in sales for Lilly.

Here's what happened. In July 2008, Teva amended its FDA application to include a new ingredient. It informed Eli Lilly of the amendment two days later and provided samples on three different occasions. But two of those samples were turned over after an August 18 discovery deadline in the IP case. And lawyers at Loeb & Loeb, according to the Federal Circuit ruling, didn't turn over 27,000 pages of related documents until a few weeks later.

Lilly's lawyers at Finnegan, Henderson, Farabow, Garrett & Dunner filed a sealed motion seeking an extension on the stay, citing the "eleventh hour" change to the FDA application and Teva's "multiple delays in producing critical discovery," which they claimed had "adversely affected Lilly's infringement case and trial preparation." Federal district court judge Sarah Evans Barker of the Southern District of Indiana granted Lilly's motion in October and extended the stay until trial.

Loeb & Loeb filed an emergency appeal for Teva, arguing that Barker had abused her discretion. But the Federal Circuit ruled 2-to-1 to uphold Barker's ruling. Loeb & Loeb partner Jordan Sigale, who argued the appeal for Teva, declined to comment. Charles Lipsey at Finnegan argued the appeal for Eli Lilly.

--Nate Raymond

Law Firms
Layoff Report: Litigators Feel the Pinch, But Not as Severely as Their Corporate Colleagues

Last week the Litigation Daily wondered how the "Black Thursday" layoffs of Feb. 12 might have affected our readers, given litigation's reputation as a safe haven for law firms in troubled times. We heard from a few firms that litigators had been laid off, albeit not in the same numbers as their corporate brethren. But the news isn't all bad: Legal search consultant (and poker champion) Wendeen Eolis contacted us with the results of an informal survey suggesting, in Eolis's words, that there is "more activity in litigation departments than meets the eye." Thankfully, by "activity," Eolis means hiring, not layoffs.

In January, Eolis International Group surveyed 200 lawyers at 130 firms to find out what's happening in litigation departments around the country. Eolis told us that at least 50 of the firms she contacted were looking to hire partners and associates with experience in securities litigation. "It's not that litigation has suddenly ballooned," Eolis said. "But there has been an uptick that is far broader than what has generally been assumed and what's been reported on the blogs."

Eolis said her survey revealed that firms--particularly non-New York firms--are bulking up their regulatory capabilities, especially when it comes to securities. (A tribute, perhaps, to the prosecutorial experience of new SEC enforcement chief Robert Khuzami?) "All that gearing up for additional regulatory work is happening in litigation departments more than in stand-alone departments, interdisciplinary groups, or in corporate departments," Eolis told us.

Not surprisingly, Eolis's survey registered a move among firms to shift underworked litigators to bankruptcy and restructuring work. In general, she found that litigators have felt the economic pinch less acutely than corporate lawyers, confirming what we've been hearing as well.

But she said there is a caveat: Litigation partners without a book of business are being warned not to rely on their corporate counterparts to send work their way. "Even though corporate departments are much more pressured than litigation departments at the vast majority of firms," Eolis said, "the litigators are more pressured at the partner level if they don't have independent clients." In other words, time to polish up your rainmaking skills.

We're still interested in hearing what's happening at your firm. Contact us by confidential e-mail: [email protected].

Has the White-Collar Litigation Avalanche Begun?

When we heard about the FBI's arrest Wednesday of four investment fund chiefs on securities fraud charges, the Litigation Daily was all set to predict that the long-awaited onslaught of credit crunch-related prosecution had arrived. You've all heard the same thing: With trillions of dollars of market capital vanished, the public wants white-collar blood to run in the streets. You've also heard the explanations of why so few prosecutions have yet been launched.

But Wedneday's arrests of James Nicholson of Westgate Capital, Mark Bloom of the North Hills Fund, and Paul Greenwood and Stephen Walsh of WG Trading Investors don't mean the feds have broken through. These four are not accused of causing the financial meltdown, just of old-fashioned defrauding of investors, a la Bernie Madoff. (In fact, Madoff's lawyer, Ira Lee Sorkin of Dickstein Shapiro, is, according to the Securities and Exchange Commission, representing Nicholson in the related SEC civil case against Westgate.) We have yet to see the presumed creators of the financial bubble--the bankers, accountants, and perhaps lawyers who created and promoted all those toxic assets--hauled before the courts.

White-collar defense lawyers predict it could be a year or more before the true wave of meltdown-related prosecution arrives. "Given the complexity of the issues involved, we expect it will be a significant period of time before prosecutors complete their investigations and make charging decisions," said David Zornow of Skadden, Arps, Slate, Meagher & Flom.

Zornow told us that defending these cases, once they get rolling, is not going to be easy. The public mood is more likely to lead juries simply to nail Wall Street defendants than to learn to understand the complexities of, say, valuing collateralized debt obligations. "It will be very challenging for defense lawyers," Zornow said. But at least they'll have plenty to do. Added Zornow: "We are already incredibly busy, and it will only get busier."

Fish & Richardson Accused of 'Hot Potato' Gambit

In addition to being a kids' game, an 1980s game show, and a Puerto Rican fast-food chain, "hot potato" is a big ethical no-no for law firms (fourth item). And as our colleagues at The Recorder reported Wednesday, a San Francisco technology company has accused Fish & Richardson of playing the game by dropping it as a client just hours before suing it on behalf of a rival company.

Fish represents headphone maker Plantronics Inc. in a patent infringement challenge to Aliph Inc. over earbuds used in Aliph's Bluetooth devices. In a disqualification motion filed earlier this month, Aliph urged Tyler, Texas, federal district court judge Leonard Davis to bounce Fish from the case for dumping Aliph "like a hot potato" in order to represent Plantronics.

According to court documents, Aliph hired Fish & Richardson for FCC regulatory work in May 2008. Last December and again in early January, the firm asked Aliph for consent to represent an adverse party in litigation. Aliph refused. So on the evening of January 14, Fish's Terry Mahn informed Aliph that it could no longer represent the company unless Aliph agreed to waive the conflict. The next day, Fish filed the Plantronics infringement suit against Aliph.

The Recorder asked ethics lawyer Diane Karpman of Karpman & Associates to opine on Fish's actions in light of the "hot potato" doctrine barring firms from using conflicts as cover for dropping one client in favor of a more lucrative alternative. Karpman said Aliph's allegations were "breathtaking."

"[There] would seem to be a pretty valid argument that [Fish lawyers] were working on this beforehand," she said.

Aliph is represented by James Pooley of Morrison & Foerster and Eric Jacobs of Townsend and Townsend and Crew. The judge has yet to schedule a hearing on Aliph's disqualification motion.

Antitrust / Appellate
Supreme Court Says It's Okay to Squeeze

The big business news from the U.S. Supreme Court on Wednesday came in the antitrust arena, in a case called Pacific Bell Telephone Co. v. Linkline Communications. The court overturned a Ninth Circuit ruling, finding that small DSL providers could not proceed with a case that accused Pacific Bell of selling its DSL service to customers at a price that was too low for the independent companies to match. Chief Justice John Roberts, Jr., writing for the Court, said PacBell was not required to offer the independents wholesale prices under antitrust law.

Tony Mauro at Legal Times said the court's ruling solidified recent Supreme Court trends in antitrust law. Barry Pupkin, head of the antitrust practice at Squire, Sanders & Dempsey (and uninvolved in the PacBell case), told Mauro the ruling was "evolutionary law, not groundbreaking law," since the price-squeeze theory was already undercut by the Court’s 2004 Trinko decision.

PacBell was represented at the Supreme Court by Kellogg, Huber, Hansen, Todd, Evans & Figel of Washington, D.C. The independents had Los Angeles's Blecher & Collins.

--Alison Frankel

Edited by David Bario

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