Elsevier involved a class action copyright case.  A class of freelance journalists was certified by the district court (SDNY) to finalize a settlement agreement involving class copyright claims against online publishers and electronic databases.  The class included both journalists who had registered their work with the US Copyright Office under 17 USC 411(a), and journalists who had not registered their work.

On appeal, the Second Circuit Court of Appeals raised a subject matter jurisdictional challenge to composition of the class, sua sponte, refusing to recognize class certification.  The US Supreme Court reversed, affirming the class certification.

17 USC 411(a) provides, inter alia and with certain exceptions, that “no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.”  

The Court explained this precondition is part of the Copyright Act’s remedial scheme. “It establishes a condition—copyright registration—that plaintiffs ordinarily must satisfy before filing an infringement claim and invoking the Act’s remedial provisions.”

On the other hand, the term “jurisdiction” refers to a court’s adjudicatory authority. “Accordingly, the term ‘jurisdictional’ properly applies only to ‘prescriptions delineating the classes of cases (subject matter jurisdiction) and the persons (personal jurisdiction)’ implicating that authority.’”

While perhaps clear in theory, the distinction between jurisdictional conditions and claim-processing rules can be confusing in practice. Courts—including this Court—have sometimes mischaracterized claim-processing rules or elements of a cause of action as jurisdictional limitations, particularly when that characterization was not central to the case, and thus did not require close analysis.

In Arbaugh v. Y & H Corp., the US Supreme Court described the general approach to distinguish “jurisdictional conditions” from “claim-processing requirements” of a claim:

If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as non-jurisdictional in character.

The Court then considered whether §411(a) “clearly states” that its registration requirement is “jurisdictional;”  and ruled that it does not.

First, and most significantly, §411(a) expressly allows courts to adjudicate infringement claims involving unregistered works in three circumstances: where the work is not a U. S. work, where the infringement claim concerns rights of attribution and integrity under §106A, or where the holder attempted to register the work and registration was refused.

Separately, §411(c) permits courts to adjudicate infringement actions over certain kinds of unregistered works where the author “declare[s] an intention to secure copyright in the work” and “makes registration for the work, if required by subsection (a), within three months after [the work’s] first transmission.” 17 U. S. C. §§411(c)(1)–(2).

It would be at least unusual to ascribe jurisdictional significance to a condition subject to these sorts of exceptions.

In concluding that the District Court had jurisdiction to approve the settlement, the Supreme Court “expressed no opinion” on the settlement’s merits.  The Court also declined to address whether §411(a)’s registration requirement is a “mandatory precondition to suit.”

The Court’s opinion was delivered by Mr. Justice Clarence Thomas.  The Court’s other conservative members joined the opinion: Justice Roberts, Justice Scallia, and Justice Alito.  Justice Kennedy also joined the majority opinion.   Justice Ginsberg filed a concurring opinion that was joined by Justice Breyer and Justice Stevens.  Justice Sotomayor did not participate.

A shareholder class action lawsuit alleged a related proxy statement did not adequately disclose the backdated options.  The class action case sought (a) rescission of management’s vote for the backdated options and (b) compensatory damages to shareholders for the resulting 20% share dilution.

The Ninth Circuit Court of Appeals allowed direct class claims against Steve Jobs (and others) holding: ”Where a shareholder has been denied one of the most critical rights he or she possesses—the right to a fully informed vote—the harm suffered is almost always an individual, not corporate, harm.”

But the Ninth Circuit Court rejected any remedy for rescission of the vote or for compensatory damages for the 20% share dilution under the Private Securities Litigation Reform Act (PSLRA).

Shareholders argued for rescission of the backdated options in an effort to plead around the narrow economic loss rule of the PSLRA.

The Ninth Circuit Court rejected this distinction, holding: “the PSLRA does not differentiate between plaintiffs seeking legal and equitable remedies, and thus, without an allegation of economic loss, no remedy, equitable or otherwise, is available.”

It is becoming vanishingly difficult to plead ANY claim under the PSLRA.

Direct Claims Allowed

In the option backdating scheme, Steve Jobs allegedly acquired 630,000 extra shares, valued at over $50 million.  Other managers and employees also received backdated options.  The scheme allegedly caused 20% dilution in Apple stock not approved by shareholder vote.

The district court characterized the shareholder claims as derivative of the rights of the corporation, and dismissed the shareholders’ direct claims.

The Ninth Circuit Court reversed, ruling that a claim under Securities Exchange Act § 14(a) may be brought either as a direct or a derivative claim.

Whether a claim is direct or derivative is governed by the law of the state of incorporation, and “must be based solely on the following questions: Who suffered the alleged harm—the corporation or the suing stockholder individually —and who would receive the benefit of the recovery or other remedy?”

”Where a shareholder has been denied one of the most critical rights he or she possesses—the right to a fully informed vote—the harm suffered is almost always individual, not corporate, harm.”

But Remedies Rejected

Treating the claim as a direct claim under SEA §14(a) shareholders needed to allege loss causation.  Loss causation under the PSLRA requires a showing that the defendant “caused the loss for which the plaintiff seeks to recover damages.” 15 U.S.C. § 78u-4(b)(4).

The Supreme Court ruled in Dura Pharmceuticals that the loss causation rule of the PSLRA requires a plaintiff to prove both economic loss and proximate causation.  In well-pleaded § 14(a) claims, loss causation connects the proxy misstatements with an actual economic harm.

 In Dura Pharmaceuticals, the Supreme Court ruled under the PSLRA, an “artificially inflated purchase price is not itself a relevant economic loss.”

In the instant case, shareholders argued their economic loss was a diluted stock price that could be remedied by recission of management’s vote for the backdated options.  Therefore, shareholders argued, their claims should not be controlled by the Dura Pharmaceuticals ruling that rejected claims based on an inflated stock price. 

The Ninth Circuit Court rejected this distinction, holding: “the PSLRA does not differentiate between plaintiffs seeking legal and equitable remedies, and thus, without an allegation of economic loss, no remedy, equitable or otherwise, is available.”

While the Ninth Circuit Court gave plaintiff leave to allege claims under SEA §10(b) it is difficult to see how economic loss can be pled under SEA §10(b) that would show proper loss causation under the PSLRA, where loss causation could not be pled under SEA §14(a).

The net effect: a wrong without a remedy.

See a related discussion of Hemi Group, LLC v. City of New York regarding RICO damages causation.

Prevailing counsel was George Riley.

The Ninth Circuit panel included: Judge David R. Thompson, Judge Sidney R. Thomas and Judge Ann Aldrich, District Court Judge, District of Ohio.

In August 2007, Oakley announced the proposed sale of its company. The pension plan shareholder thereafter filed a lawsuit to enjoin the acquisition, but dropped the case when Oakley made some changes to its final proxy statement. The shareholder then asked for attorneys fees, claiming it was the “catalyst” that caused changes to the proxy statement, to the “substantial benefit” of the other shareholders.

Because there was no settlement or court judgment, the shareholder’s fee claim arose under a “catalyst theory,” which allows for attorney fees, even when litigation does not result in a judicial resolution, if the defendant changes its behavior substantially because of, and in the manner sought by, the litigation. See, Trope v. Katz ; Code Civ. Proc., § 1021.

The trial court denied the shareholder’s claim for an award attorney fees, and the California Court of Appeals, Fourth District, affirmed, explaining:

[A] shareholder cannot claim unjust enrichment on a catalyst theory where it failed to provide pre-suit notification to the company. In suing first and asking for changes later, the shareholder failed to comply with an elemental equitable precept: that one who seeks equity must do equity.

Awarding attorney fees for litigation when those rights could have been vindicated by reasonable efforts short of litigation does not advance that objective and encourages lawsuits that are more opportunistic than authentically for the public good. Lengthy pre-litigation negotiations are not required, nor is it necessary that the settlement demand be made by counsel, but a plaintiff must at least notify the defendant of its grievances and proposed remedies and give the defendant the opportunity to meet its demands within a reasonable time.

Here, plaintiff waited until nearly four weeks after filing its amended complaint to send a letter to Oakley’s board regarding its concerns. The Court of Appeals therefore rejected plaintiff’s claim that the Oakley shareholders were unjustly enriched by the “benefits” they supposedly received from plaintiff’s lawsuit because plaintiff never made any effort to forward its suggested revisions to management before filing its complaint.

It is, however, important to note that the California Supreme Court, in Vasquez v. State of California , declined to adopt a categorical pre-suit notification requirement to attorney fee claims arising in non-catalyst cases which resulted in a judgment or settlement. But even for non-catalyst cases, Vasquez noted that a court, in considering whether to exercise its equitable powers to award still properly takes into consideration whether the party seeking fees attempted to resolve the matter without litigation.

In the high-stakes game of class action litigation, the lesson here is to be reasonable in trying to settle a case before litigation.

Prevailing counsel in the case were Eric S. Waxman and Peter B. Morrison.

The California Court of Appeals, Fourth District, panel included: Justice Richard M. Aronson, Justice William W. Bedsworth and Justice Raymond J. Ikola.

The Orange County Superior Court judge in the case below was Judge Gail Andrea Andler, Dept. CX102.