Tag: Litigation

And Here Come the Lawyers: Securities Fraud Suits Commence Private Litigation Phase of Danske Bank Scandal

More Allegations of Nordic Malfeasance Surface as Private Party Lawsuits Beset Danske Bank and SwedBank Gets Sucked into Unfolding Scandal

“Something was indeed rotten in the state of Denmark.” – Olav Haazen

In what is perhaps the least surprising development in the sprawling, continuously unfolding Danske Bank (“Danske”) money laundering scandal, investor groups have filed private securities fraud actions against the Denmark-based bank and its top executives: first in the United States District Court for the Southern District of New York then, most recently, in Copenhagen City Court in Denmark. These suits coincide with an announcement from the Securities and Exchange Commission (“SEC”) that it, too, was opening its own probe of potential securities and Anti-Money Laundering (“AML”) violations at Danske that could result in significant financial penalties on top of what could be the enormous private judgments. More significantly, the Danske shareholder suits and SEC investigation illustrate a second front of enormous exposure from a securities fraud standpoint for banks involved in their own money laundering scandals and a rock-solid guaranteed template for future investors similarly damaged by such scandals.

As we have blogged here, here and here, the Danske scandal – the largest alleged money laundering scandal in history – has yielded criminal and administrative investigations in Estonia, Denmark, France and the United Kingdom and by the United States Department of Justice. Those investigations have focused primarily on Danske’s compliance with applicable AML regulations, as well as the implementation and effectiveness of those regulations. The SEC and civil plaintiffs now have opened a new line of inquiry focusing less on the institutional and regulatory failures that yielded the scandal and responsibility for them and more on the damage those failures have caused Danske investors.

Meanwhile, banking stalwart Swedbank is reacting, with mixed success at best, to allegations that suspicious transactions involving billions of Euros passed from Danske’s Estonian branch through Swedbank’s own Baltic branches — allegations which have produced a controversial internal investigation report, a law enforcement raid, the loss of the bank’s CEO, and plunging stock value.

Background

The Danske story has been told many times. Between 2007 and 2016, at least 200 billion Euros were laundered through Danske’s Estonia branch primarily by actors connected to the former Soviet Union. During that time, numerous red flags allegedly were ignored by Danske operatives permitting countless suspicious transactions to flow through the bank unabated. Ultimately, a whistleblower alerted Danske management of his concerns over the suspicious transactions, prompting an internal investigation that ultimately revealed the massive scope of the money laundering operation.

The Securities Fraud Angle

While initial investigations have examined how a substantial European bank and the regulators responsible for overseeing it could miss or ignore thousands of suspicious transactions channeling hundreds of billions of illicitly-gained Euros to the West, the bank’s investors and the SEC are attempting to hold the bank accountable for misleading investors concerning what it knew of the Estonian money laundering and what it meant to the bank’s overall bottom line. When the results of the Danske internal investigation were announced in October 2018, revealing for the first time the full scope of the scandal, Danske’s share value cratered. Ultimately, Danske’s share price halved and investors in Denmark holding direct shares in the bank and foreign investors holding depositary shares lost almost $9 billion.

Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank, et al.

On January 9, 2019, the Plumbers & Steamfitters Local 773 Pension Fund filed a class action complaint (the “SDNY Action”) on its own behalf and on behalf of purchasers of Danske Bank American Depositary Receipts (“ADRs”) between January 9, 2014 and October 23, 2018. An ADR is a security that allows American investors to own and trade shares of a foreign company, created when a foreign company wants to list its shares on an American exchange. The company first sells its shares to a domestic branch of an American brokerage. Then those shares are deposited with a depositary bank, a United States bank with foreign operations that acts as a foreign custodian that, in turn, issues depositary shares to the purchasing broker. The depositary shares are then sold on an American exchange. Depositary shares are derivatives – they represent a security issued by the foreign company and their value derives from the share value of the foreign company. Thus if, for instance, the foreign company became embroiled in a money laundering scandal of unprecedented magnitude, and if that scandal had a deleterious effect on the company’s stock, it would create a coextensive loss in value to the ADR. As it happens, the American class of Danske investors who brought the SDNY Action have alleged this precise scenario.

The SDNY Action presents a standard Section 10(b) and Rule 10b-5 fraud claim (as well as a claim for control person liability under Section 20(a) of the 1934 Act) against Danske and its chief executives centered on the bank’s alleged knowledge of and failure to disclose the Estonian money laundering since 2014. According to the complaint, the deception took two forms.

First, in 2014, Danske executives became aware that billions of dollars in illegal transactions were flowing through the Estonian branch and generating significant profits for the branch and the bank generally. Yet, armed with the knowledge that its “outsized profits” were the result of illegal money laundering, Danske issued annual reports in 2014 to 2016 to its investors in which it “attributed the results to Danske Bank’s purported ongoing operation and strategic prowess, rather than to the money laundering that the whistleblower had already disclosed to Dansk Bank’s senior executives.” Danske’s concealment of the true basis for its financial performance permitted its shares to trade at artificially inflated prices. Share prices were further inflated when Danske, relying on its financial performance (driven by its processing of stolen Russian money) sought and obtained several corporate debt rating increases that facilitated its raising hundreds of millions of dollars by issuing and selling bonds in the European bond markets.

Second, in February 2017, rumors began to spread concerning Danske’s Estonian bank operations. Danske initially downplayed these rumors, releasing a statement that “[s]everal media today report on a case of possible international money laundering, and Danske Bank is mentioned as one of the banks that may have been used. For Danske Bank, the transactions involved are almost exclusively transactions carried out at out Estonian branch in the 2011-2014 period.”   The statement continued to tout the significant steps Danske had taken since 2014 to combat money laundering and the success of those efforts. Later, in September 2017, as reporting increased on Danske’s involvement in money laundering, it issued another release, stating that it had “expanded its ongoing investigation into the situation at its Estonian branch” and following “a root cause analysis concluding that several major deficiencies led to the branch not being sufficiently effective in preventing it from potentially being used for money laundering in the period from 2007 to 2015.”

From there the scandal broke in waves of investigations, fines, management departures, scaled-down and closing operations, and an ever-increasing total figure culminating in a Wall Street Journal report in October 2017 on Danske’s investigations pegging the total amount of illicit transactions at 200 billion Euros involving upwards of 15,000 non-resident customers.

According to the SDNY Action plaintiffs, between February 2018, “when Danske Bank ADRs traded at their Class Period high of $20.90 per share” and October 2018, when the magnitude of the scandal was revealed, “Danske Bank lost $11.40 per share in value, or 54%, erasing more than $2.793 billion in market value.” As luck would have it, the plaintiffs further note that “[a]s the U.S. SEC, DOJ and Treasury and Estonian Authorities continue to investigate, Danske Bank has built a reserve of $2.7 billion – equivalent to 85% of its 2017 net profit – to cover potential fines and reportedly continues to add to that reserve.”

The Danish Front

And Danske might be right to “continue to add to that reserve.” On March 14, 2019, a group of institutional investors filed a lawsuit against Danske in Copenhagen City Court on behalf of “[a]n international coalition of public pension funds, governmental entities, and asset managers” from Asia, Australia, Europe and North America (the “Copenhagen Action”). The Copenhagen Action was brought by the Delaware law firm Grant & Eisenhower and Florida securities fraud firm DRRT and was filed on behalf of all investors who purchased Danske securities since December 31, 2012.

Grant & Eisenhower explains in its press release, “[t]o date, more than 169 institutional investors, including many of the world’s largest pension funds, suffered substantial losses at the hands of Danske Bank unchecked laundering of funds passing through its branch in Estonia. The claimant group seeks $475 million USD in damages.” The Copenhagen Action follows the arc of the SDNY Action. As the lead attorney on the matter, Olav Haazan, describes: “Although the criminal laundering scheme flowed through the little Estonian branch, our lawsuit asserts that something was indeed rotten in the state of Denmark. . . . Danske Bank’s management engaged in a concerted cover-up of its enormous money laundering exposure, while continuing to paint a rosy picture to investors. For years, leadership made no disclosures about the problem and then misrepresented the extent of its participation in the scheme, while touting the bank’s anti-money laundering policies and procedures.”

Mr. Haazan has promised a second filing by June 1 by another group of aggrieved investors.

What – Me Worry?

Danske held its annual shareholders meeting over the course of five days after the Copenhagen suit was filed. Predictably, investors were displeased. Yet, Danske’s new Chairman, Karsten Dybvad struck a defiant tone in the face of potential civil exposure in the billions of dollars. Responding to the lawsuits, Dybvad told investors, “[i]t is our fundamental position that the bank has lived up to its information obligation. As such we don’t find any basis for lawsuits or for a settlement.” Nevertheless, according to Dybvad, “[t]he executive board has decided to waive the bonuses that could have been paid for 2018.”

Enter Swedbank

Howard Wilkinson, the Danske insider whose report launched a thousand investigations, testified that, while Danske’s role in facilitating money laundering was clear, where that money ultimately went is unknown. He went on to speculate that with the uncertainty surrounding any subsequent transactions from Danske involving laundered funds, Danske’s involvement is likely “the tip of the iceberg.” Recent events involving Swedbank have begun to take us further from the summit.

In late February, reports from Swedish broadcaster SVT revealed that between 2007 and 2015, suspicious transactions involving billions of Euros passed from Danske’s Estonian branch through Swedbank’s own Baltic branches. Swedbank’s shares fell nearly 20% on this news. Swedbank then hastily commissioned an internal investigation that yielded a widely lambasted and heavily redacted report from Forensic Risk Alliance concluding that an undisclosed number of suspicious Danske customers were also Swedbank customers and those customers moved some amount of money through Swedbank. From there, the Swedbank story has predictably exploded in size and scope.

First, on March 26, 2019, Swedish broadcaster SVT, which initially reported on the Swedbank scandal, reported that as much as 23 billion Euros in suspicious transactions flowed through the Swedbank Estonian operations. The following day, SVT reported that Swedbank was under investigation for withholding information from U.S. investigators about suspicious transaction and customers, including Paul Manafort and deposed Ukranian President Viktor Yanukovych. Later that day, Sweden’s Economic Crime Authority raided Swedbank’s headquarters related to an insider trading probe investigating whether the bank informed its largest shareholders of the February SVT report in advance.

Later still that day, news broke that Swedbank is under investigation by the New York Department of Financial Services for providing investors with misleading information concerning the money laundering scandal. Finally, March 27, 2019 was capped with an announcement that the Economic Crime Authority was also investigating whether Swedbank misled investors and the market through communications made in the months preceding the emergence of the scandal. The bank’s shares plunged an additional 12%.

Responding to the onslaught, Swedbank CEO Birgette Bonnensen – former head of Swedbank’s Baltic operations – issued a press release intended to reassure shaken investors. Noting that “[t]his has been a very tough day for Swedbank, our employees and our shareholders” Bonnensen stated that “Swedbank believes that it has been truthful and accurate in its communications,” adding “I will do everything in my power to handle the current situation.” Ms. Bonnensen was fired by the Swedbank board the following day.

Swedbank halted trading on the Stockholm exchange that day, but not before its shares fell another 7.8%, bringing its total decline since February to over 30% – wiping away approximately 7 billion Euro of its market value.

Adding to the intrigue swirling around the Swedbank story, a legal fight has broken out between Swedbank and Swedish prosecutors concerning the contents of a sealed envelope – a report prepared by Norwegian lawyer Erling Grimstad, who was commissioned by the bank to examine its activities after the scandal came to light in February. Swedbank contends the report is protected from disclosure by the attorney-client privilege and the bank will not waive the privilege until “all foreseeable consequences are known and assessed,” stating further “[i]t is incomprehensible that the prosecutor doesn’t respect the law and instead uses media to cast suspicion over the management of the bank by implying that the management is hampering the investigation.”

In just over a month, Swedbank went from Danske spectator to the subject of its own now 135 billion Euro Estonian money laundering scandal. More details will follow when the inevitable shareholder complaints are filed.

 

Copyright © by Ballard Spahr LLP.
This post was written by Terence M. Grugan of Ballard Spahr LLP.

Split Over Impact of Bristol-Myers Squibb on Class Actions Deepens

Bakov v. Consolidated World Travel, Inc. is the latest salvo in the conflict over whether the Supreme Court’s personal jurisdiction decision in Bristol-Myers Squibb applies in the class action context. As we have blogged in the past, Bristol-Myers concerned claims in California state court made by non-California residents, claims that were not sufficiently connected to California to qualify for specific personal jurisdiction on their own. The Court held that California state courts could not exercise specific jurisdiction over those claims even if they were packaged with claims by California residents in a mass tort action.

Bristol-Myers left two significant questions undecided: (1) whether the Fifth Amendment’s due process clause imposes the same jurisdictional limits on federal courts that the Fourteenth Amendment’s due process clause imposes on state courts; and (2) whether Bristol-Myers’ jurisdictional limit jurisdictional limit on state court mass actions also applies to federal court class actions.

Bakov is a Northern District of Illinois decision that answers yes to both of those questions. The plaintiffs in Bakovalleged that the defendant cruise line directed another company to place calls to the plaintiffs without their consent in violation of the Telephone Consumer Protection Act. They sought certification of a nationwide class action. The court certified a class of Illinois residents but refused to certify a nationwide class, holding that under Bristol-Myersthe court did not have specific jurisdiction over the claims of non-Illinois residents. Courts have reached sharply different conclusions as to whether the jurisdictional limit set forth in Bristol-Myers applies to class actions. Bakovjoins the minority in concluding it does.

Bakov v. Consolidated World Travel, Inc., No. 15 C 2980, 2019 WL 1294659 .

 Carlton Fields Jorden Burt, P.A.

This post was written by Nathaniel G. Foell and D. Matthew Allen of Carlton Fields Jorden Burt, P.A.

Read more Class Action analysis  on the litigation type of law page.

U.S. Supreme Court to Consider Whether Courts Must Defer to an Agency’s Interpretation of its Regulations – a Judicial Policy That Recently Resulted in Dismissal of Litigation Over ‘No Sugar Added’ Claims on 100% Juices

The U.S. Supreme Court heard arguments on March 27, 2019 about whether to overturn the principle of judicial review of federal agency actions that requires a federal court to yield to an agency’s interpretation of an ambiguous regulation that the agency has promulgated.  Under this policy, known as ‘Auer deference’ from the 1997 case Auer v. Robbins, a court must yield to an agency’s interpretation of its own unclear regulation unless the court finds that the interpretation is “plainly erroneous or inconsistent with the regulation.”

Auer deference was the basis for successful defendant motions to dismiss over the past year in a number of class actions concerning ‘No Sugar Added’ claims on 100% juices.  We reported, for example, on the U.S. District Court for the Central District of California granting a motion for summary judgment in favor of Odwalla, in Wilson v. Odwalla Inc. et al. (Case Number 2:17-cv-02763) based on the Food and Drug Administration’s (FDA) interpretation of paragraph (c)(2)(iv) of 21 CFR 101.60 (“Nutrient content claims for the calorie content of foods”) as permitting juice with no added sugar to be considered a substitute for juice with added sugar and similar sugar-sweetened beverages.

Based on the Justices’ comments in the recent hearing, it is not clear if Auerdeference will be intact at the end of June, by which time a ruling is expected.  Many food product labels could face renewed attacks under state consumer protection and false advertising laws if courts are no longer bound by FDA’s interpretation of ambiguous regulatory requirements, including the use of ‘no sugar added” under the regulation on nutrient content claims.

 

© 2019 Keller and Heckman LLP

U.S. Supreme Court to Decide If Immigration Law Preempts State Law Prosecution

Does the Immigration Reform and Control Act (IRCA) preempt states from using information in Form I-9 to prosecute a person under state law? The U.S. Supreme Court has agreed to review a case involving prosecution for identity theft under Kansas law based on information in the Form I-9 Employment Eligibility Verification. Kansas v. Garcia (No. 17-834).

Background

Ramiro Garcia, Donaldo Morales, and Guadalupe Ochoa-Lara did not have social security cards. They were all convicted of identity theft in Kansas for using other people’s social security numbers to gain employment in various restaurants. In September 2017, the Kansas Supreme Court reversed those convictions on the grounds that the state was prohibited from using information found on the defendants’ I-9 forms to prove its case because such prosecution was preempted by the IRCA. State v. Garcia, 401 P.3d 588 (Kan. 2017).

Questions Presented

The State of Kansas petitioned the U.S. Supreme Court for review and, on March 18, 2019, the Court agreed to review the case. The Court will decide the following:

  • Whether IRCA expressly preempts the states from using any information entered on or appended to a federal Form I-9, including common information such as name, date of birth, and social security number, in a prosecution of any person (citizen or alien) when that same, commonly used information also appears in non-IRCA documents, such as state tax forms, leases, and credit applications; and
  • Whether IRCA impliedly preempts Kansas’ prosecution of the defendants.

Kansas Supreme Court Opinion

IRCA expressly limits the use of information on or attached to I-9 forms. The Kansas Supreme Court held that the state may not use such information even if the information could be found elsewhere. In this case, the defendants’ “fake” social security numbers also had been entered on their tax withholding forms. The Kansas Supreme Court’s opinion would prevent all prosecutions by states based on false employment verification data supplied to employers on I-9 forms. Indeed, the broad effect of this was pointed out by Kansas Supreme Court Justice Daniel Biles in his dissent. Justice Biles noted that the decision would “wipe numerous criminal laws off the books” and that Congress “did not intend to immunize [defendants] from traditional state prosecutions for identity theft” by enacting IRCA.

The State of Kansas echoed the argument that the Kansas Supreme Court’s opinion would prohibit the use of all sorts of identifying data in state criminal prosecutions that happened to also be found on I-9 forms.

***

Oral arguments in Kansas v. Garcia will take place during the U.S. Supreme Court’s term starting in October 2019.

Jackson Lewis P.C. © 2019

Getting Political: Florida Gubernatorial Candidate Democrat Jeff Greene Personally Hit with TCPA Class Action

As I have written numerous times, where the TCPA intersects politics things can get spicy.

Imagine it–using a draconian statute to assault your political rivals and bludgeon old foes with ligation designed to extract millions of dollars from their pocket based upon campaign phone calls.

Suing political candidates under the TCPA has become a bit of a ritual in America over the last few years. Obama faced a TCPA suit. As did Trump. More recently Beto O’Rourke faced such a suit. As did an organization supporting the Kavanugh confirmation.  Heck, even the Human Society’s text campaign supporting California’s Prop 12 was *ahem* neutered by a TCPA class action.

In furtherance of that great tradition,  a Florida resident named Lynda Maceda filed suit yesterday against bested Florida gubernatorial candidate Jeff Greene. According to his wiki page Jeff is a successful business guy and real estate investment type. According to Ms. Maceda’s Complaint, however, he’s a robocaller that sent the following message without consent:

“Hi, this is Democrat Jeff Greene running for governor. I’ll stand up to Donald Trump and for Florida’s families. Joseph, if you want world-class schools, commonsense gun reform and to protect women’s choice, please vote for me with your absentee ballot! Can we count on your support?”

The Complaint alleges that thousands of similar complaints were sent all of them without express consent. Ms. Maceda hopes to represent a failsafe clas of all individuals that received the texts without express consent. If these allegations are proven Ms. Maceda hopes to hold Mr. Greene accountable for “amounts [] greater than $15,000,000.” Gees.

Notably, Mr. Greene is sued personally for these violations–usually these TCPA claims are asserted against a candidate’s campaign rather than against the candidate individually.

The Complaint can be found here: Class Action Complaint against Florida Democratic Gubernatorial Candidate Jeff Greene

 

© Copyright 2019 Squire Patton Boggs (US) LLP
This post was written by Eric J. Troutman of Squire Patton Boggs (US) LLP.
Read more Litigation news on the National Law Review’s Litigation Type of Law page.

Sex and the (Nursing) Facility

Intervening When Nursing Home Residents with Dementia Engage in Sexual Activity

If Carrie Bradshaw finds herself in a nursing home one day, what obligations will the nursing home have to oversee her sex life? The federal court of appeals in Chicago addressed that question recently, holding that skilled nursing facilities have an obligation to intervene when residents with dementia or Alzheimer’s disease engage in sexual activity.

In Neighbors Rehabilitation Center, LLC v. United States Department of Health and Human Services, three residents who suffered from dementia and/or Alzheimer’s disease engaged in what the facility viewed as consensual sexual activities. One 80-year-old resident suffered from dementia but functioned at a relatively high level. His care plan required staff to assess whether his behavior endangered other residents and to intervene as necessary. Another 65-year-old male resident with Alzheimer’s and dementia had significant cognitive impairments and had exhibited socially inappropriate behaviors, including asking staff to perform sex acts and inappropriately touching staff. The third resident, a 77-year-old female who suffered from Alzheimer’s, had low cognitive functioning and severe hearing impairment.

At various times, the nursing facility staff found two of these residents engaged in sexual activities but failed to intervene because staff viewed the acts as consensual. A survey by the Illinois Department of Public Health, acting for itself and for the Centers for Medicare & Medicaid Services (CMS), cited the nursing facility with an immediate jeopardy violation for failing to adequately supervise the residents and a level J violation of the federal nursing home standards. The surveyors alleged that the nursing facility allowed residents to have consensual sexual interactions and that supervisors told staff they should not intervene or report sexual interactions unless a participant showed outward signs of non-consent.

The nursing facility argued that even residents with cognitive impairments have the right to engage in consensual intimate relationships and that staff monitored the relationships in question as necessary.
The CMS administrative law judge upheld the survey findings after a hearing. In response, the CMS Appeals Board and the nursing facility appealed those decisions to the federal court.

The federal appeals court began its analysis by noting that the facility did not dispute that the sexual interactions had occurred. Rather, the facility only disputed whether its handling of the interactions was inadequate or hazardous under the applicable regulations.

The facility alleged that it had sufficiently monitored the residents’ interactions in a way that properly balanced the residents’ need for privacy against their right to safety and that the staff knew to look for signs that any interaction was not consensual. The court noted, however, that when nursing home residents have cognitive or physical impairments, a facility must ensure that such intimate relationships are, in fact, consensual and that the nursing facility had failed to exercise that level of care.

The court also noted that the facility records showed no evidence that it had undertaken any investigation into whether the interactions at issue were consensual or whether the residents had the capacity to consent.

The federal appeals court, therefore, upheld the finding by the CMS Appeals Board.  Because the facility failed to 1) talk to the residents about their feelings regarding these relationships, 2) document the residents’ capacity for consent and 3) obtain medical assessments of how the residents’ cognitive deficits affected their capacity to consent, the level J violation and the immediate jeopardy findings were correct.

Skilled nursing homes often have to balance residents’ right to privacy against their ability to consent to sexual activity. As with many other concerns faced by nursing facilities, the failure to document residents’ capacity to consent, consult with residents’ physicians and discuss the issue with the residents themselves is a recipe for disaster.

Carrie’s sex life will continue to be overanalyzed, even in her old age.

© 2019 Much Shelist, P.C.
This post was written by Robert K. Neiman of Much Shelist, P.C.

Using Prior FCC Rulings and Focusing on Human Intervention, Court Finds Texting Platform Is Not An ATDS

In today’s world of ever-conflicting TCPA rulings, it is important to remember that, where courts are asked to determine the TCPA’s ATDS definition, their inquiry will revolve around the question of whether that definition includes only devices that actually generate random or sequential numbers or also devices with a broader range of functionalities.  However, it is also important to remember that, when courts are trying to determine whether a calling/text messaging system meets the ATDS definition, focusing on the level of human intervention used in making a call or sending a text message is a separate decisive inquiry that also must be made.

As we’ve previously mentioned, this latter inquiry is important in all types of TCPA cases, but recently the issue has been given special attention in cases regarding text messages and text messaging platforms.  Indeed, this happened again yesterday when the court in Duran v. La Boom Disco determined a nightclub’s use of text messaging did not violate the TCPA because of the level of human involvement exhibited by the nightclub in operating the software and scheduling the sending of messages.

Background

In Duran v. La Boom Disco, the United States District Court for the Eastern District of New York was tasked with analyzing the ExpressText and EZ Texting platforms, which are text messaging software platforms offered to businesses and franchises, whereby the business can write, program, and schedule text messages to be sent to a curated list of consumer mobile phone numbers.

At first glance, the facts in Duran appear to signal a slam dunk case for the plaintiff.  The defendant nightclub had used the ExpressText and EZ Texting platforms to send marketing text messages to the plaintiff after he replied to a call-to-action advertisement by texting the keyword “TROPICAL” to obtain free admission to the nightclub for a Saturday night event.  Importantly, though, after the plaintiff texted this keyword, he never received a second text messaging asking whether he consented to receive recurring automated text messages (commonly referred to as a “double opt-in” message).  He did, however, receive approximately 100 text messages advertising other events at the nightclub and encouraging him to buy tickets, which ultimately led him to bring a TCPA action against the club.

Accordingly, the initial issue that the Duran court was tasked with deciding was whether the defendant nightclub had texted the plaintiff without his prior express written consent.  The court quickly dispensed with it, determining that the nightclub had not properly obtained written consent from the plaintiff, as it had failed to use a double opt-in process to ensure the plaintiff explicitly agreed to receive recurring automated marketing text message and could not otherwise prove that the plaintiff explicitly consented to receiving recurring messages or a marketing nature (which, under the TCPA, the nightclub had the burden to prove).

At this stage, then, things were looking bad for the nightclub.  However, this was not the end of the court’s analysis, as the nightclub could only be liable for sending these non-consented-to messages if they had been sent using an ATDS.  Thus, the court turned to its second – and much more important – line of inquiry: whether the ExpressText and EZ Texting software, as used by the nightclub to text the plaintiff, qualified as an ATDS.

Defining the ATDS Term in the Aftermath of ACA International

In order to determine whether the ExpressText and EZ Texting platforms met the TCPA’s ATDS definition, the court performed an analysis that has become all too common since the FCC’s 2015 Declaratory Order was struck down in ACA International: determining what the appropriate definition of ATDS actually is.  With respect to this issue, the litigants took the same positions that we typically see advanced.  The plaintiff argued that the ExpressText and EZ Texting platforms were the equivalent of “predictive dialers” that could “dial numbers from a stored list,” which were included within the TCPA’s ATDS definition.  The Nightclub countered that predictive dialers and devices that dialed from a database fell outside of the ATDS definition, meaning the nightclub’s use of the ExpressText and EZ Texting platforms should not result in TCPA liability.

The court began the inquiry with what is now the all-too-familiar analysis of the extent to which the D.C. Circuit’s opinion in ACA International invalidated the FCC’s prior 2003 and 2008 predictive dialer rulings.  After examining the opinion, the court found that those prior rulings still remained intact because “the logic behind invalidating the 2015 Order does not apply to the prior FCC orders.”  The court then concluded that, because the 2003 and 2008 ATDS rulings remained valid, it could use the FCC’s 2003 and 2008 orders to define the ATDS term, and that, based on these rulings, the TCPA also prohibited defendants from sending automated text messages using predictive dialers and/or any dialing system that “dial numbers from a stored list.”

However, the fact that the ExpressText and EZ Texting platforms dialed numbers from a stored list did not end the inquiry since, under the 2003 and 2008 orders, “equipment can only meet the definition of an autodialer if it pulls from a list of numbers, [and] also has the capacity to dial those numbers without human intervention.”  And it was here where the plaintiff’s case fell apart, for while the ExpressText and EX Texting platforms dialed from stored lists and saved databases, these platforms could not dial the stored numbers without a human’s assistance.  As the court explained:

When the FCC expanded the definition of an autodialer to include predictive dialers, the FCC emphasized that ‘[t]he principal feature of predictive dialing software is a timing function.’  Thus, the human-intervention test turns not on whether the user must send each individual message, but rather on whether the user (not the software) determines the time at which the numbers are dialed….  There is no dispute that for the [ExpressText and EZ Texting] programs to function, ‘a human agent must determine the time to send the message, the content of the messages, and upload the numbers to be texted into the system.’

…

In sum, because a user determines the time at which the ExpressText and EZ Texting programs send messages to recipients, they operate with too much human involvement to meet the definition of an autodialer.

Human Intervention Saves the Day (Again)

In Duran, the district court made multiple findings that would ordinarily signal doom for a defendant: it broadly defined the ATDS term to include predictive dialers and devices that dialed numbers from a stored list/database and it found the nightclub’s text messages to have been sent without appropriately obtaining the plaintiff’s express written consent.  However, despite these holdings, the nightclub was still able to come out victorious because of the district court’s inquiry into the human intervention issue and because the ExpressText and EZ Texting platforms the nightclub used required just enough human involvement to move the systems into a zone of protection.  In many ways, this holding – and the analysis employed – is unique; however, with respect to the focus on the human intervention requirement, the district court’s decision can be seen as another step down a path that has been favorable to web-based text messaging platforms.

Indeed, over the course of the last two years, several courts have made it a point to note that the human intervention analysis is a separate, but equally important, determination that the court must analyze before concluding that a device is or is not an ATDS.  With respect to the text-messaging line of cases, this has especially been the case, with numerous courts noting that, no matter whether the ATDS definition is or is not limited to devices that randomly or sequentially generate numbers, the numbers must also be dialed without human intervention.  What is interesting, though, is that the courts that have interpreted this line of cases have focused on different actions as being the key source of human intervention.

As we already discussed, the court in Duran noted that the key inflection point for determining whether human intervention exists is based off of the timing of the message and whether a human or the device itself gets to determine when the text message is sent out.  And in Jenkins v. mGage, LLC, the District Court for the Northern District of Georgia reached a similar conclusion, finding that the defendant’s use of a text messaging platform involved enough human intervention to bring the device outside of the ATDS definition because “direct human intervention [was] required to send each text message immediately or to select the time and date when, in the future, the text message will be sent.”  The District Court for the Middle District of Florida also employed this line of thinking in Gaza v. Auto Glass America, LLC, awarding summary judgment to the defendant because the text messaging system the company employed could not send messages randomly, but rather required a human agent to input the numbers to be contacted and designate the time at which the messages were to be sent.

In the case of Ramos v. Hopele of Fort Lauderdale, however, the District Court for the Southern District of Florida found a separate human action to be critical, focusing instead on the fact that “the program can only be used to send messages to specific identified numbers that have been inputted into the system by the customer.”  And another court in the Northern District of Illinois echoed this finding in Blow v. Bijora, Inc., determining that, because “every single phone number entered into the [text] messaging system was keyed via human involvement … [and because] the user must manually draft the message that the platform will sent” the text messaging platform did not meet the TCPA’s ATDS requirements.

Indeed, with the entire industry still awaiting a new ATDS definition from the FCC, there is still much confusion as to how the ATDS term will be interpreted and applied to both users of calling platforms and users of texting platforms.  Fortunately, though, there appears to be a trend developing for text message platforms, with multiple courts finding that human intervention is a crucial issue that can protect companies from TCPA liability.  Granted, these courts have not yet been able to agree on what human action actually removes the platform from the ATDS definition, and, as we’ve noted previously, even if human intervention remains the guiding standard, determining precisely what qualifies as sufficient intervention and when in the process of transmitting a message the relevant intervention must occur remains much more an art than a science.  However, the cases mentioned above are still useful in pointing marketers everywhere in the right direction and present guidelines for ensuring they send text messages in compliance with the TCPA.

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
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In re Celexa and Lexapro – The First Circuit Weighs in on China Agritech and American Pipe Tolling

The Supreme Court meant what it said in China Agritech, Inc. v. Resh – that is the primary lesson from the First Circuit’s January 30th decision in In re Celexa and Lexapro Marketing and Sales Practices Litigation.  As my partner, Don Frederico, explained in a blog post last year, the Supreme Court observed in China Agritech that its prior ruling in American Pipe & Constr. Co. v. Utah “tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails.”  China Agritech went on to hold that “American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.”  The First Circuit, in In re Celexa and Lexapro, rejected a plaintiff’s attempt to read China Agritech narrowly.

In re Celexa and Lexapro involved consolidated prescription drug marketing cases.  Plaintiffs asserted RICO and state-law claims, alleging that defendants fraudulently promoted antidepressant drugs for uses the FDA had not approved – referred to as “off-label” uses.  The same defendants had previously been named in a qui tam action that was unsealed in February 2009.  One of the plaintiffs, Painters, and Allied Trades District Council 82 Health Care Fund (“Painters”), sought certification of two classes of third party-payors that had paid for or reimbursed off-label prescriptions of Celexa or Lexapro. The district court denied class certification.

On appeal, the First Circuit – while brushing aside the district court’s concerns about individual issues of causation and injury – nevertheless affirmed the denial of class certification.  Judge Kayatta, writing for a unanimous panel, concluded that Painters had put forward evidence that could establish causation and injury on a class-wide basis.  He went on, however, to find that the class action was time-barred.

The Court first found that Painters’ individual claims were timely.  The Court concluded that the four-year statute of limitations was subject to the discovery rule and held that, as a matter of law, the limitations period began running in March 2009 after the qui tam action was unsealed.  Painters’ claim was timely because the running of the limitations period was stayed for eight months by a prior class action (the “N.M. UFCW case”).  Because Painters was a putative class member of that prior class action, American Pipe tolling applied to its claim during the pendency of the N.M. UFCW case.

Even though Painters’ own claim was timely, the Court nevertheless held that Painters’ class action was not.  As Judge Kayatta wrote,

China Agritech clarified that [American Pipe] tolling has limits: While a putative class member may join an existing suit or file an individual action upon denial of class certification, a putative class member may not commence a class action anew beyond the time allowed by the untolled statute of limitations.

The Court refused to limit China Agritech to situations in which class certification was denied in the earlier-filed class action.  Painters had argued that, unlike China Agritech, there was no substantive ruling on class certification in the N.M. UFCW case that had preceded Painters’ own action.  The First Circuit, however, held that the decision in China Agritech stood for the broad proposition that the “tolling effect of a motion to certify a class applies only to individual claims, no matter how the motion is ultimately resolved.  To hold otherwise would be to allow a chain of withdrawn class-action suits to extend the limitations period forever.”  The Court, therefore, affirmed the denial of class certification.

After In re Celexa and Lexapro, there is no doubt that China Agritech is no paper tiger in the First Circuit.  The rule is clear:  a class action does not toll the statute of limitations for subsequent class actions.

 

©2019 Pierce Atwood LLP.
This post was written by Joshua D. Dunlap of Pierce Atwood LLP.
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Trouble In Paradise: Florida Court Rules That Selling Bitcoin Is Money Transmission

The growing popularity of virtual currency over the last several years has raised a host of legislative and regulatory issues. A key question is whether and how a state’s money transmitter law applies to activities involving virtual currency. Many states have answered this – albeit in a non-uniform way – through legislation or regulation, including regulatory guidance documents. For instance, Georgia and Wyoming have amended their money transmitter statutes to include or exclude virtual currencies explicitly. In other states, such as Texas and Tennessee, the state’s primary financial regulator has issued formal guidance. In New York, the Department of Financial Services issued an entirely separate regulation for virtual currencies. Still, in others, neither the legislature nor the relevant regulator has provided any insight into how the state’s money transmitter law may apply.

In most states, the judicial branch has not yet weighed in on the question. But Florida is an exception. On January 30, 2019, in State v. Espinoza, Florida’s Third District Court of Appeal interpreted the state’s money transmission law broadly and held that selling bitcoin directly to another person is covered under the law. [1] The decision will have broad implications for the virtual currency industry in Florida.

BACKGROUND: MIAMI BEACH POLICE DEPARTMENT AND MICHELL ESPINOZA

In December 2013, the Miami Beach Police Department (“MBPD”) perused an Internet website that provided a directory of buyers and sellers of bitcoin. In an undercover capacity, an MBPD agent contacted one of the users, Michell Espinoza. Shortly thereafter, the agent arranged to meet and purchase bitcoin from Espinoza in exchange for cash. The MBPD agent who purchased the bitcoin implied that he would use the bitcoin to fund illicit activities. One month later, the MBPD made a second purchase from Espinoza, telling him that the bitcoin would be used to purchase stolen credit card numbers. After a third and fourth transaction, the MBPD arrested Espinoza. The State of Florida charged him with two counts of money laundering and one count of engaging in the business of a money transmitter without a license. Espinoza moved to dismiss the charges, arguing, among other things, that Florida’s money transmitter law does not apply to bitcoin. The trial court agreed and dismissed all counts against Espinoza.

THE THIRD DISTRICT COURT’S OPINION: SELLING BITCOIN CONSTITUTES MONEY TRANSMISSION

Florida appealed, and the appellate court reversed the trial court’s ruling. The court started its analysis noting that the state’s money transmitter law requires anyone engaging in a “money services business” to be licensed. [2] A “money services business” is defined as “any person . . . who acts as a payment instrument seller, . . . or money transmitter.” [3] The court held that bitcoin is regulated by Florida’s money transmitter law, and, as a result, Espinoza was both “acting as a payment instrument seller” and “engaging in the business of a money transmitter.”

Under the Florida statute, a “payment instrument seller” is an entity that sells a “payment instrument.” [4] The phrase “payment instrument” is defined to include a variety of instruments, including “payment of money, or monetary value whether or not negotiable.” [5] The phrase “monetary value,” in turn, is defined as “a medium of exchange, whether or not redeemable in currency.” [6] The court interpreted these definitions – which it described as “plain and unambiguous” – to conclude bitcoin falls under the definition of “payment instrument.” To reach that conclusion, it reasoned that bitcoin, which is redeemable for currency, is a medium of exchange, which falls under the definition of “monetary value.” Therefore, it falls under the definition of “payment instrument.” [7] To purportedly bolster its point, the court noted that several businesses in the Miami area accepted bitcoin as a form of payment. It also pointed to a final order from the Florida Office of Financial Regulation (“OFR”) in which OFR granted Coinbase a money transmitter license. The court noted that Coinbase provides a service “where a Coinbase user sends fiat currency to another Coinbase user to buy bitcoins.” “Like the Coinbase user,” the court reasoned, the MBPD detective “paid cash to Espinoza to buy bitcoins.”

The court also concluded Espinoza was acting as a money transmitter. Under the Florida statute, a money transmitter is an entity that “receives currency, monetary value, or payment instruments for the purpose of transmitting the same by any means….” [8] Espinoza argued he fell outside this definition because he did not receive payment for the bitcoin for the purpose of transmitting the same to a third party. The court disagreed. It held that the law does not require the presence of a third party because the definition of money transmitter does not mention a third party, either expressly or implicitly. [9] It also disagreed with the trial court and Espinoza’s “bilateral limitation,” which would require Espinoza to have both received and transmitted the same form of currency, monetary value, or payment instrument. According to the court, Espinoza fell within the ambit of the law because he received fiat for the purpose of transmitting bitcoin. It explained that the phrase “the same” in the definition of “money transmission” modifies the list of payment methods, and the use of “or” in that list of payment methods – “currency, monetary value, or payment instrument” – means that “any of the three qualifies interchangeably on either side of the transaction.”

As additional support for its position, the court distinguished a final order entered into by OFR: In re Petition for Declaratory Statement Moon, Inc. According to the court’s description, Moon sought to establish a bitcoin kiosk program under which a Moon customer would pay fiat to a licensed money services business in exchange for a PIN, and the customer would then enter the PIN into a Moon kiosk, which would initiate a transfer of bitcoins to the user from a Moon bitcoin address. Once the PIN was redeemed, the licensed entity would pay Moon. OFR determined Moon did not a license. The court distinguished the Moon order because “Moon merely facilitated the transfer of bitcoins through the use of a licensed money services business,” whereas “[h]ere, no licensed money services business was utilized in the exchange of U.S. dollars for bitcoins that occurred between Espinoza and” the MBPD agent.

COUNTERPOINTS TO THE COURT’S OPINION

Several state legislatures or regulators have amended or interpreted their money transmitter laws to apply to virtual currency, but those actions do not take the form of a judicial opinion. Here, the Third District Court provided its specific reasoning for reaching its conclusions. It remains to be seen whether Espinoza will seek review from the Florida Supreme Court, but there are at least a few points in the court’s opinion that warrant further review and analysis.

First, Espinoza did not receive money for the purpose of transmitting it. He received it in exchange for selling bitcoin; he received it for the purpose of possessing it. The court rejected Espinoza’s attempt to impose a third-party requirement, but the most natural reading of the phrase “transmitting” would require Espinoza to send onward whatever value he received. Merriam-Webster defines “transmit” as “to send or convey from one person or place to another.” By using the words “receive” and “transmit,” the Florida law focuses on the act of sending money to another person and excludes the act of selling money or monetary value. If simply selling property were sufficient to trigger the money transmitter law, the statute would likely sweep far more broadly than intended. Here, Espinoza was acting as a merchant selling goods. This would not constitute money transmission under any reasonable reading of the law. Indeed, some states (and FinCEN) have recognized that a party selling its own inventory of virtual currency in a two-party transaction is not a money transmitter.

Second, the court’s conclusion is further undercut by considering the Moon proceeding the court discusses. The opinion notes “the PIN provided by the licensed money services business to Moon’s customers provided a mechanism by which the exchange of U.S. dollars for bitcoins could be identifiable.” The PIN could arguably be classified as a payment instrument because it is an “other instrument” or “monetary value.” If transmission to a third party is not required, as the court holds, then Moon should have needed a license when it received the PIN and then transmitted bitcoins back to the user that was redeeming the PIN. But that wasn’t the conclusion OFR reached.

Third, the court’s interpretation of how OFR would treat Espinoza’s actions is questionable. In 2014, OFR issued a consumer alert stating that “[v]irtual currency and the organizations using them are not regulated by the OFR.” [10] In addition, in January 2018, OFR released another consumer alert regarding cryptocurrency, stating that “[cryptocurrencies] are subject to little or no regulation,” which further indicates OFR does not interpret the money transmission law to cover cryptocurrencies. [11] The court does not acknowledge these statements. Although the court focuses on an OFR order regarding Coinbase, that order granted Coinbase a license and listed a variety of activities in which Coinbase was engaged or planned to engage. The order does not specify what specific activity was licensable, but it is likely that a license was granted because of the receipt and transmission of fiat currency.

CONCLUSION

If Espinoza appeals, the case could go to the Florida Supreme Court, where the virtual currency industry will receive a more definitive answer. In the meantime, virtual currency businesses should be aware that the Florida Attorney General’s Office interprets the state’s money transmitter act to regulate bilateral sales of virtual currency for fiat currency and is willing to prosecute at least certain cases of unauthorized sales. As of now, Florida’s Third District Court agrees. How the Espinoza case concludes and whether and how the Florida legislature responds will be important to the virtual currency industry.

NOTES

[1] — So. 3d –, 2019 WL 361893 (Fla. 3d DCA 2019).

[2] FLA. STAT. § 560.125.

[3] Id. § 560.103(22).

[4] Id. § 560.103(30).

[5] Id. § 560.103(29) (emphasis added).

[6] Id. § 560.103(21).

[7] The court principally discusses whether bitcoin falls under Florida’s money transmitter law. In a few instances, it also references “virtual currency” generally, but it is not clear how broadly it was intending to apply its holding.

[8] Id. § 560.103(23).

[9] As a counterpoint, the court noted that the Financial Crime Enforcement Network’s (“FinCEN”) definition of money transmitter explicitly includes a third party requirement because it defines a money transmitter as someone that accepts value from one person and transmits value to “another location or person by any means….” 31 C.F.R. § 1010.100(ff)(5)(i)(A).

[10] Consumer Alert: Update on Virtual Currency, Office of Financial Regulation, Sept. 17, 2014.

[11] Consumer Alert: Cryptocurrency, Office of Financial Regulation, Jan. 17, 2018.

 

Copyright 2019 K&L Gates

Supreme Court Update: SCOTUS Grants CERT on Issue of Punitive Damages for Unseaworthiness and Denies CERT on Maritime Contract Test

Last month, the US Supreme Court decided to take up whether punitive damages are recoverable in general maritime law claims for unseaworthiness when it granted certiorari in Batterton v. Dutra Group, 880 F.3d 1089 (9th Cir. 2018), writ granted Docket No. 18-266 (Dec. 7, 2018). As we reported in June 2018, Batterton brings the issue into focus for the high court because it is directly at odds with a 2014 US Fifth Circuit decision that held that punitive damages are nonpecuniary and therefore not recoverable in unseaworthiness actions. McBride v. Estis Wells Serv., 768 F.3d 382 (5th Cir. 2014).

The US Ninth Circuit in Batterton relied on a prior decision from that circuit, Evich v. Morris, 819 F.2d 256 (9th Cir. 1987), which held that punitive damages are available for general maritime law claims of unseaworthiness if certain conditions are present (i.e., when the conduct constitutes reckless or callous disregard for the rights of others, gross negligence, actual malice, or criminal indifference). The Ninth Circuit also relied on the broad principle announced in Atlantic Sounding v. Townsend, 557 US 404 (2009), that punitive damages have been available under the general maritime law and should, therefore, be available in unseaworthiness actions even though that case concerned the refusal of an employer to pay maintenance and cure benefits to a seaman.

The Fifth Circuit in McBride, however, relied on an earlier Supreme Court decision in answering the same question. In Miles v. Apex Marine Corp., 498 US 119 (1990), the Supreme Court held that a seaman’s damages are limited to pecuniary loss. The Fifth Circuit determined that punitive damages are nonpecuniary, and therefore are not recoverable for an unseaworthiness claim.

The Supreme Court will take up the question in due course, and we will continue to provide updates on this case, as punitive damages can impact the value of a case and present insurance coverage issues.

Separately, the Supreme Court denied cert in December 2018 from In re Crescent Energy Servs., L.L.C., 896 F.3d 350 (5th Cir. 2018), writ denied Docket No. 18-436 (Dec. 10, 2018), the first Fifth Circuit case that applied the new test for determining whether a contract in the oil and gas context is maritime since the en banc court changed the test in In re Larry Doiron Inc., 879 F.3d 568 (5th Cir. 2018). We summarized that line of cases in our August 2018 newsletter. The test under Doiron is two-pronged:

  1. Is the contract to provide services to facilitate the drilling or production of oil and gas on navigable waters?
  2. If the answer to the above question is “yes,” does the contract provide for, or do the parties expect, a vessel to play a substantial role in the completion of the contract? If so, then the contract is maritime in nature.

In In re Crescent Energy Servs., L.L.C., the issue presented on appeal was whether a contract to provide services to oil wells located on fixed platforms in navigable waters within a state is a “maritime” contract when a vessel plays a substantial role in the performance of the contract. The Fifth Circuit applied the Doiron test and answered in the affirmative, finding that the contract was indeed maritime. The Supreme Court denied cert, and the new test for a maritime contract in the oil and gas context adopted by Doiron continues to apply. Whether a contract is maritime in nature plays a role in the enforceability of indemnity obligations among the parties because indemnity provisions are generally enforceable under maritime law, but are often prohibited under oilfield anti-indemnity acts in Texas and Louisiana. If a contract is nonmaritime, then state law applies, which can bar enforcement of the indemnity provisions in the contract.

 

© 2019 Jones Walker LLP
This post was written by Jeanne Amy of Jones Walker LLP.
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