Emerging Markets Law

Showing 8 posts in Litigation.

Taylor English Victory in Litigation Against IRS

My tax partner, Julian Fortuna, assisted in obtaining a great result for our client, Linchpins of Liberty, Inc., in its suit against the IRS.

Our client, Linchpins of Liberty, is a non-profit organization that, along with roughly 37 other clients, applied for non-profit status under IRC Sections 501(c)(3) or 501(c)(4). Because of their names, the IRS failed to properly process these organizations’ applications for non-profit status as part of a program that tried to frustrate or delay non-profit status for conservative or anti-administration organizations. Linchpins of Liberty, along with many other organizations, sued the IRS on constitutional grounds, claiming that they were being denied constitutional rights because of their political beliefs.

After the fact of the IRS’ program of delay and non-response came to light, the IRS claims to have halted the program and resumed the proper processing of applications for non-profit status. At the trial court level, the IRS had succeeded in dismissing certain of Linchpins of Liberty’s constitutional claims as moot on the grounds that the IRS was no longer engaged in its intentional policy of delay and non-response.

In an opinion released last week the D.C. Circuit Court of Appeals reversed the trial court’s ruling, holding that the IRS had not carried its “heavy burden” to prove that the constitutional claims were moot. The opinion of the D.C. Circuit took the IRS to task for its argument:

“The IRS offers a rather puzzling explanation for why the continued failure to afford proper processing to at least some of the victim applicants should not prevent a finding of cessation. That explanation is that the organizations whose applications were still pending “were involved in ‘litigation’ with the Justice Department . . . .” Id. at 27. . . It is not at all clear why the IRS proposes that not ceasing becomes cessation if the victim of the conduct is litigating against it. The IRS position is reminiscent of Catch-22 from the novel of the same name. Under that “catch,” World War II airmen were not required to fly if they were mentally ill. However, anyone who applied to stop flying was evidencing rationality and therefore was not mentally ill. See Joseph Heller, Catch-22 (1971). “You are entitled to an exemption from flying,” the government said, “but you can’t get it as long as you are asking for it.””

Julian Fortuna was co-counsel for these clients, along with the American Center for Law and Justice, and participated in oral argument in the case.

Cyber Hygiene Habits: Have a Plan For Your Employees

For 2015, we are addressing data security and privacy by discussion of topics relating to information security and hygiene. Parts one and two covered knowledge of what laws cover your business and of what data you have in your networks. This installment covers the human side of data handling: which employees have access to your data, and why.

Continue reading Cyber Hygiene Habits: Have a Plan For Your Employees ›

3d Circuit Wyndham Decision Will Be Counterproductive

The 3d Circuit Court of Appeals in Federal Trade Commission v. Wyndham Worldwide Corporation, in a decision filed August 24, 2015, ruled that the Federal Trade Commission (the "FTC") by virtue of Section 5 of the FTC Act, has jurisdiction over the data security practices of corporations that collect and use the personal data of their cases.

Consumer advocates have celebrated the case as a win for consumers. I fear it will have the opposite effect.

Continue reading 3d Circuit Wyndham Decision Will Be Counterproductive ›

FTC Settles Crowdfunding Fraud Case

Posted In Crowdfunding, Government, Litigation, Securities

The FTC announced last week its first settlement in a crowdfunding fraud case.

The FTC had accused Erik Chevalier of defrauding consumers in a Kickstarter crowdfunding campaign in which he sought to raise funds for a board game to be called “The Doom that Came to Atlantic City.”

Chevalier and his company, The Forking Path, launched their campaign for “The Doom That Came to Atlantic City” on Kickstarter in May 2012.  The game was based on a board that looked a lot like Monopoly, and required players to play the roles of villains in a post-apocalyptic version of Atlantic City.

Continue reading FTC Settles Crowdfunding Fraud Case ›

California Hospital Wins $500 million Data Privacy Case

Posted In Litigation, Privacy

A hospital in California that was victimized in a computer hack prevailed in a lawsuit brought as a class action by affected former patients whose personal information was breached in the hack prevailed on appeal.

At issue was a California statute protecting personal health information.  The plaintiffs in the case had personal data (including name, billing information, social security number and contact details) breached, but the breach did not include any medical information.  The California court of appeals rejected the plaintiffs case under the statute because the plaintiffs had not proved that any substantive medical information was actually released.

Supreme Court Makes it Easier for Corporations to Defeat Securities Class Actions

Posted In Litigation, Securities

In its decision in Halliburton v. Erica P. John Fund the Supreme court made it easier for corporations to avoid the expense of litigating certain types of class actions brought by unhappy investors.

As I wrote in Out of Balance, one of the key drivers in litigation is the cost of litigation itself.  Litigation is expensive and the U.S. is one of the few industrialized countries where each party bears its own attorneys' fees, even if it prevails in the case.  As a result, a corporate defendant will almost always have to pay its own attorneys' fees, even if the case against is eventually determined to have no merit.

This phenomenon often drives corporate defendants to settle meritless cases.

In the securities litigation arena, because of a case called Basic v. Levinson, potential classes of plaintiffs are able to sue publicly-traded corporations in which the plaintiffs are stockholders based upon a "fraud upon the market" theory.  That legal tactic allows the plaintiffs' lawyers to organize and initiate a class action against a corporation that has suffered a significant decline in stock price without having to prove that any of the potential class members actually relied upon an alleged falsehood or misleading statement made by the defendant corporation.

Defending against a class action lawsuit is difficult and expensive.  Once the lawyers initiating the suit achieve "class certification" the case moves into the discovery stage in which the plaintiffs' lawyers are able to require the defendant corporation to disclose tons of documents and submit to having their officers and directors deposed and so on.  Until now, plaintiffs' lawyers in such cases were not required to show that any of their individual stockholder clients actually relied on the alleged falsehood or misleading statement until after the class certification stage.  Likewise, corporate defendants were not allowed to rebut the presumption that their alleged misstatements were "material" to the price of their stock.

In its ruling in Halliburton this month, the Supreme Court held that corporate defendants could prove - prior to class certification - that any alleged misstatement that might have occurred would not have been "material" and would therefore not have had an effect on the price of the corporation's stock.  Proving that point would allow the trial court to dismiss the case at an early stage, before the expensive and distracting discovery phase would have begun.

While the Halliburton ruling still allows aggrieved investors to sue, it raises the bar for plaintiffs and will likely result in fewer early settlements (and therefore fewer lawsuits overall).

SEC Brings First-Ever Whistle-Blower Retaliation Case

The SEC announced recently a settlement in its first-ever whistle-blower retaliation case.

Retaliation against a whistle-blower is prohibited under various legal theories, including the Sarbanes-Oxley Act and the Dodd-Frank Act each of which contain express prohibitions against whistle-blower retaliation.

The SEC had accused Paradigm Capital Management Inc. and its ownership of punishing a trader for blowing the whistle on allegedly improper transactions.  The SEC alleged that Paradigm punished the trader by demoting him after it learned he was the source of leaks to the SEC about the improper transactions.

According to the SEC, Paradigm agreed to pay about $2.2 million in sanctions to settle the charges without admitting or denying wrongdoing.

The strengthening of whistle-blower protections gives the SEC and other regulators extraordinary powers to sanction firms that might appear to retaliate against employees who cooperate with regulators.  First who are aware of allegations against them are well-advised to act cautiously when dealing with employees in such circumstances.

Judge Sanctions Porn Troll

Posted In Industry, Litigation

In a victory for corporate defendants that often face baseless suits intended to extort a quick settlement, a judge this week imposed sanctions on so-called "porn troll" Prenda.

Prenda had filed multiple suits against Comcast, AT&T and other internet service providers, claiming copyright infringement arising from the downloading of copywritten pornographic materials.  The defendants claimed that the claims were baseless and that Prenda had brought the claims in hopes of extorting a quick settlement from corporations looking to avoid an association with pornography.

U.S. District Judge Patrick Murphy did not mince words:

“These men have shown a relentless willingness to lie to the court on paper and in person, despite being on notice that they were facing sanctions in this court, being sanctioned by other courts and being referred to state and federal bars, the United States Attorney in at least two districts, one state attorney general and the Internal Revenue Service.”

Judge Murphy ordered Prenda to pay more than $260,000 in attorneys' fees and litigation costs to the defendants.  Earlier this year a federal judge in California also ordered Prenda to pay defendants' attorneys' fees based on similar reasoning.

Because of the high cost of defending litigation, plaintiffs willing to aggressively plead cases can often extort settlements from defendants who are willing to settle at a price they think will be less than their cost of litigation.  I covered this phenomenon and described the high economic costs resulting from the practice in my 2005 book, Out of Balance.


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