Navigating today’s complex risk environment can be a monumental task. Steve Shappell, Alliant Claims & Legal, spearheads Executive Liability Insights, a monthly review of news, legal developments and information on executive liability, cyber risk, employment practices liability, class action trends and more.
Table of Contents
GENERALITY MATTERS IN CLASS CERTIFICATION, SCOTUS SAYS
Goldman Sachs Grp., Inc. v. Arkansas Teacher Ret. Sys., 54 U.S. __ (2021)
The U.S. Supreme Court recently sent a securities fraud class action case back to the lower court, finding that when certifying the class, the lower court should have considered whether a company’s alleged generic misstatements could have affected its stock price.
Read More >>
BREACH OF CONTRACT EXCLUSION IN PRIVATE EQUITY LIABILITY POLICY PRECLUDES COVERAGE FOR SUIT ALLEGING FRAUDULENT REPRESENTATION AND CONCEALMENT
AKN Holdings, LLC v. Great Am. E&S Ins. Co., 2021 WL 2325647 (C.D. Cal. May 14, 2021)
A private equity firm was sued in connection with the sale and lease of a manufacturing facility once used as refuge for a drug cartel. The buyer alleged the firm fraudulently represented that it would make rental payments and fraudulently concealed its pending litigation against the prior owner of the facility and the presence of the cartel.
Read More >>
'FUNDAMENTALLY IDENTICAL' OPT-OUT CASE RELATED TO ORIGINAL SECURITIES CLASS ACTION UNDER D&O POLICY
First Solar Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh PA, et al., C.A. No. N20C-10-156 MMJ CCLD (Del. Super. Ct. June 23, 2021)
Shareholders of a solar panel company filed a securities class action alleging, among other things, that the company misrepresented the reduction of its manufacturing costs. The company’s directors and officers liability (“D&O”) insurer provided coverage for the suit and the policy limits were ultimately exhausted.
Read More >>
SHAREHOLDER OF CALIFORNIA PUBLICLY TRADED COMPANY HAS STANDING TO CHALLENGE CALIFORNIA BOARD DIVERSITY LAW
Meland v. Weber, Case No. 20-15762 (9th Cir. Jun. 1, 2021)
In 2018, the California legislature passed a law requiring all public companies headquartered in the state to have at least one female board member, with the quota increasing depending on the size of the board. The rationale behind the law was a finding that, without proactive measures, it would take decades “to achieve gender parity among directors” in the state. Penalties for violations of this new law can be as much as $300,000.
Read More >>
D&O POLICY’S EXCLUSION FOR INVASION OF PRIVACY APPLIES TO CLAIMS BROUGHT UNDER TCPA
Horn v. Liberty Ins. Underwriters, Inc., 2021 U.S. App. LEXIS 16279 (11th Cir. Jun. 1, 2021)
A federal court recently held that, under Florida law, a policy exclusion barring coverage for claims alleging invasion of privacy extended to claims brought under the Telephone Consumer Protection Act (“TCPA”) that also referenced invasion of privacy.
Read More >>
SCOTUS NARROWS SCOPE OF COMPUTER FRAUD AND ABUSE ACT
Van Buren v. U.S., No. 19-783, 539 U.S. ___ (2021)
In this highly anticipated opinion, the U.S. Supreme Court narrowed the scope of the Computer Fraud and Abuse Act (“CFAA”). In a decision with wide impact for tech companies and employers everywhere, the Court held a person exceeds their authorized access in violation of CFAA only when they alter or obtain “information located in particular areas of the computer—such as files, folders, or databases—that are off limits to [them].” The Court rejected the government’s broad interpretation of the prohibition, declining to extend CFAA’s reach to people with computer access who merely breach circumstance-specific limits (such as a restriction against accessing business files for personal use).
Read More >>
TALES FROM THE CRYPTO CURRENCY SECTOR
Crypto Assets Fund LLC, et al. v. Block.One, et al., 1:20-cv-03829 (2nd Cir. June 11, 2021)
The lead plaintiff in a putative class action case recently agreed to a settlement stemming from the failure of a cryptocurrency company to register the sale of its tokens through an initial coin offering with the Securities and Exchange Commission (“SEC”).
Read More >>
DERIVATIVE EXCEPTION TO INSURED VERSUS INSURED EXCLUSION IN D&O POLICY ONLY APPLIES TO SUITS BY NON-INSUREDS
T.D. Williamson, Inc. v. Federal Ins. Co., 2021 WL 2117054 (N.D. Okla. May 25, 2021)
A director of a pipeline services company filed a direct claim against other directors of the company for breach of fiduciary duty and, in the alternative, brought a derivative claim. The company sought coverage under its directors and officers liability (“D&O”) policy, but the insurer denied coverage, citing subsection (c) of the policy’s insured versus insured (“IvI”) exclusion, which precluded coverage for any claim “brought by an Insured Person in any capacity against an Insured.”
Read More >>
8TH CIRCUIT STRIKES CLASS ACTION ALLEGATIONS, UPHOLDS ARBITRATION CLAUSE IN PUTATIVE SECURITIES FRAUD CLASS ACTION
Donelson v. Ameriprise Fin. Serv., Inc., No. 19-3691 (8th Cir. 2021)
This matter arose after a customer of an investment advisory firm met with his investment advisor and signed an account application, which included an acknowledgement that he received, read, and consented to an arbitration clause to resolve all controversies except for a putative or certified class action. Subsequently, the customer filed a putative securities fraud class action against his investment advisor, the advisor’s firm, and the individual officers of the firm. The defendants attempted to strike the class action allegations and compel arbitration, but the district court denied.
Read More >>
SINGLE LAWSUIT CONTAINS MULTIPLE ‘CLAIMS’ UNDER D&O POLICY
Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 1736823 (N.D. Cal. May 3, 2021)
An insured technology company sough coverage under its directors and officers liability ("D&O") policy for a shareholder lawsuit for allegations associated with a 2013 stock financing round and a 2017 loan to the company by a member of the board of directors.
Read More >>
STATEMENTS CONTAINING MATERIAL OMISSIONS AND INTENTIONAL MISREPRESENTATIONS ARE ACTIONABLE CLAIMS
State of Rhode Island v. Alphabet Inc. et al, No. 20-15638 (9th Cir. 2021)
A claim against a major technology giant and its holding company alleged fraud in their failure to disclose security problems with the company’s social network in its quarterly reports after having discovered a glitch that left private data users exposed for three years. The court initially dismissed the action on the grounds the plaintiff failed to adequately allege a material misleading misrepresentation or that there was an intentional or reckless failure to disclose known security violations.
Read More >>
GENERALITY MATTERS IN CLASS CERTIFICATION, SCOTUS SAYS
Goldman Sachs Grp., Inc. v. Arkansas Teacher Ret. Sys., 54 U.S. __ (2021)
The U.S. Supreme Court recently sent a securities fraud class action case back to the lower court, finding that when certifying the class, the lower court should have considered whether a company’s alleged generic misstatements could have affected its stock price.
This case arose when shareholders of an investment banking company filed a putative securities class action in federal court alleging the company and several of its executives made “generic” statements about the company’s ability to manage conflicts. The shareholders maintained those allegedly false and misleading statements led to an artificially inflated stock price, and when the truth eventually surfaced, the stock price dropped and shareholders suffered damages. In an attempt to certify a class, the shareholders relied on a theory espoused in Basic v. Levinson, which states that investors rely on the market price of a company’s stock, and an efficient market incorporates all of the company’s representations. In response, the defendants argued their alleged misrepresentations had no effect its stock price.
In an opinion written by Justice Barrett, the Court held that the when considering class certification, a court “should take into account all record evidence relevant to price impact, regardless of whether that evidence overlaps with materiality or any other merits issue.” Furthermore, the Court noted the generic nature of a misrepresentation in connection with the sale of securities often is important evidence of price impact that courts should consider at class certification. Moreover, defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence at class certification. While the Court noted the lower court correctly placed the burden of proving price impact on the defendants, it was not clear whether the lower court properly considered the “generic nature” of the alleged misrepresentations.
BREACH OF CONTRACT EXCLUSION IN PRIVATE EQUITY LIABILITY POLICY PRECLUDES COVERAGE FOR SUIT ALLEGING FRAUDULENT REPRESENTATION AND CONCEALMENT
AKN Holdings, LLC v. Great Am. E&S Ins. Co., 2021 WL 2325647 (C.D. Cal. May 14, 2021)
A private equity firm was sued in connection with the sale and lease of a manufacturing facility once used as refuge for a drug cartel.
The buyer alleged the firm fraudulently represented that it would make rental payments and fraudulently concealed its pending litigation against the prior owner of the facility and the presence of the cartel. The firm tendered the suit under its private equity liability insurance policy, but the insurer denied coverage, citing the policy’s breach of contract exclusion, which barred coverage for claims “based upon, arising from, or in any way related to any actual or alleged breach of contract or agreement; provided; however, this exclusion shall not apply to liability for Loss which would have attached even in the absence of such contract or agreement.”
Finding the contract exclusion at issue was extraordinarily broad, the U.S. District Court for the Central District of California sided with the insurer, holding it had no duty to defend the private equity firm because the claims arose from an alleged breach of contract and would not exist absent the sale and lease agreements. The firm argued the contract exclusion did not apply because the lawsuit alleged misrepresentations that predated the agreements, but the court disagreed, noting the claim need only be “related to any actual or alleged breach of contract or agreement” to fall within the scope of the exclusion. Since the purpose of the alleged misrepresentations was to induce the buyer into entering the agreements, the court determined the alleged misrepresentations were related to an alleged breach of agreement. The court further rejected the firm’s argument that the exclusion should not apply because the firm itself was not a party to the disputed agreements, noting the exclusion barred coverage for “any actual or alleged breach of contract or agreement,” not just those to which the policyholder is a formal party.
The Takeaway
The “arising out of” language in a contract exclusion can be interpreted broadly by courts. This wording should be narrowed at all costs to avoid inadvertently creating a gap in coverage.
‘FUNDAMENTALLY IDENTICAL’ OPT-OUT CASE RELATED TO ORIGINAL SECURITIES CLASS ACTION UNDER D&O POLICY
First Solar Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh PA, et al., C.A. No. N20C-10-156 MMJ CCLD (Del. Super. Ct. June 23, 2021)
Shareholders of a solar panel company filed a securities class action alleging, among other things, that the company misrepresented the reduction of its manufacturing costs. The company’s directors and officers liability (“D&O”) insurer provided coverage for the suit and the policy limits were ultimately exhausted.
Over a year after the securities class action was filed, a number of shareholders opted out of that litigation and filed a second suit alleging various defects and concealments by the company. The opt-out suit was tendered under the D&O policy in place at the time it was filed, but the insurer denied coverage on the grounds the opt-out suit was essentially identical to the initial suit. The company disagreed, arguing the opt-out case did not relate back to the securities class action because the two cases were not “fundamentally identical,” and coverage litigation ensued.
The Delaware Superior Court found in favor of the insurer, noting the two cases “involve[d] the same fraudulent scheme” regarding the company’s alleged misrepresentations. The court concluded the opt-out suit and the securities class action had “substantial similarities,” including some of the same plaintiffs, the same defendants, overlapping class periods, overlapping allegations regarding securities violations, and overlapping disclosures. While the most conspicuous difference between the underlying cases was the type of damages sought by the plaintiffs in the opt-out suit, the court determined that difference was not enough to separate the two cases. “The unambiguous terms” of the policy “preclude coverage for claims that predate the inception of the polic[y],” the court noted, finding the opt-out case and the securities class action were “fundamentally identical,” and the opt-out case was a claim first made at the time of the securities class action, prior to the inception of the policy under which it was noticed.
SHAREHOLDER OF CALIFORNIA PUBLICLY TRADED COMPANY HAS STANDING TO CHALLENGE CALIFORNIA BOARD DIVERSITY LAW
Meland v. Weber, Case No. 20-15762 (9th Cir. Jun. 1, 2021)
In 2018, the California legislature passed a law requiring all public companies headquartered in the state to have at least one female board member, with the quota increasing depending on the size of the board. The rationale behind the law was a finding that, without proactive measures, it would take decades “to achieve gender parity among directors” in the state. Penalties for violations of this new law can be as much as $300,000.
In the case at hand, a shareholder of a California publicly traded company filed a lawsuit against California’s Secretary of State, alleging the diversity law discriminates on the basis of sex in violation of the Equal Protection Clause of the 14th Amendment. The complaint asserted the company’s shareholders were now “forced” to add three female board members, and as a result, must discriminate against prospective male board members whom they may have been inclined to support.
The lower court dismissed the complaint, in large part because there was no direct harm or individualized injury to the complaining shareholder. The shareholder himself was not discriminated against and, absent such direct injury, had no standing to bring a court challenge.
On appeal, the Ninth Circuit disagreed, finding “a person required by the government to discriminate by ethnicity or sex against others” can challenge the validity of the requirement even though the government does not directly discriminate against that individual. More specifically, the Ninth Circuit held that if the subject law “requires or encourages” a shareholder to discriminate on the basis of sex, then that shareholder has suffered a sufficient concrete and individualized injury to bring suit.
The Takeaway
As this current dispute heads back to district court, at least twelve other states are in the process of establishing similar board diversity requirements. Moreover, in California, a second law passed in late 2020 now requires California companies to have at least one board member from an underrepresented group or community, in addition to the requirement regarding female board membership.
If challenges to board diversity requirements are unsuccessful, non-compliance by corporations will lead to fairly robust fines and penalties. Typically, directors and officers liability (“D&O”) insurers seek to exclude fines and penalties coverage by way of a carve-out to the definition of “Loss” or through specific exclusions. Given the link between board diversity shareholder voting and potential resulting fines and penalties, brokers may want to push for narrow carve-back coverage for any loss resulting from shareholder action (or inaction) with respect to board diversity regulations.
D&O POLICY’S EXCLUSION FOR INVASION OF PRIVACY APPLIES TO CLAIMS BROUGHT UNDER TCPA
Horn v. Liberty Ins. Underwriters, Inc., 2021 U.S. App. LEXIS 16279 (11th Cir. Jun. 1, 2021)
A federal court recently held that, under Florida law, a policy exclusion barring coverage for claims alleging invasion of privacy extended to claims brought under the Telephone Consumer Protection Act (“TCPA”) that also referenced invasion of privacy.
The underlying claim was a consumer class action alleging a health insurance brokerage sent unsolicited text messages in violation of TCPA. The brokerage’s directors and officers liability (“D&O”) insurer denied the claim, citing an exclusion that barred claims “based upon, arising out of, or attributable to any actual or alleged … invasion of privacy.” The brokerage ultimately settled the case, and as part of that settlement assigned all its rights against its insurer to the plaintiffs. When the insurer refused to pay damages, the plaintiffs sought to enforce the judgment against the insurer, arguing: (1) the lawsuit alleged other forms of harm; (2) TCPA claims do not hinge upon proving an invasion of privacy; and (3) the insurer’s wording was vague and the dispute should resolve against it.
In finding for the insurer, the Eleventh Circuit reasoned the exclusion of any allegation in the complaint from coverage would render the entire claim excluded. The court further held that Florida law’s expansive reading of the phrase “arising out of” meant that simply “a connection with” an invasion of privacy would subject the lawsuit to the exclusion. Lastly, the court concluded the policy wording was unambiguous, and thus barred coverage for the class action.
SCOTUS NARROWS SCOPE OF COMPUTER FRAUD AND ABUSE ACT
Van Buren v. U.S., No. 19-783, 539 U.S. ___ (2021)
In this highly anticipated opinion, the U.S. Supreme Court narrowed the scope of the Computer Fraud and Abuse Act (“CFAA”). In a decision with wide impact for tech companies and employers everywhere, the Court held a person exceeds their authorized access in violation of CFAA only when they alter or obtain “information located in particular areas of the computer—such as files, folders, or databases—that are off limits to [them].” The Court rejected the government’s broad interpretation of the prohibition, declining to extend CFAA’s reach to people with computer access who merely breach circumstance-specific limits (such as a restriction against accessing business files for personal use).
Van Buren involved a police officer who had work access to a law enforcement license plate database. The officer allegedly accepted a bribe to use his access to obtain information about a particular license plate, in violation of his department’s policy against database use for non-law enforcement purposes. The officer was indicted under CFAA and charged with exceeding authorized access, which under 18 U.S.C. § 1030(e)(6) means “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accessor is not entitled so to obtain or alter.”
In a 6-3 opinion written by Justice Barrett, the Court held the “exceeds authorized access” prohibition applies only when a person obtains “information from particular areas in the computer—such as files, folders, or databases—to which their computer access does not extend.” In explaining its rejection of the government’s circumstance-based authorization test, the Court referenced the example of websites that “authorize a user’s access only upon his agreement to follow specified terms of service.” According to the Court, “if the ‘exceeds authorized access’ clause encompasses violations of circumstance-based access restrictions on employers’ computers, it is difficult to see why [the clause] would not also encompass violation of [terms of service] restrictions on website providers’ computers … [thus] criminali[zing] everything from embellishing an online-dating profile to using a pseudonym on Facebook.”
The Court left two critical issues on the table. First, while the Court made clear that exceeding authorized access means a computer user obtained information from particular areas to which their access did not extend, it did not address what type of limits would define the denial of access—if technological or “code-based” limits would be necessary, or if contractual and policy limits would suffice. Second, while the Court briefly addressed the meaning of the prohibition against accessing a computer “without authorization,” it did not construe that provision.
The Takeaway
All computer users—okay, pretty much everyone—must pay careful attention to how CFAA is being applied to new factual scenarios. Companies, in particular, will need to evaluate existing information security policies and potentially modify their networks to ensure sensitive information is not accessible by those without authorization. This promises to be a dynamic area of the law with more developments to come.
TALES FROM THE CRYPTO CURRENCY SECTOR
Crypto Assets Fund LLC, et al. v. Block.One, et al., 1:20-cv-03829 (2nd Cir. June 11, 2021)
The lead plaintiff in a putative class action case recently agreed to a settlement stemming from the failure of a cryptocurrency company to register the sale of its tokens through an initial coin offering with the Securities and Exchange Commission (“SEC”).
The complaint alleged the failure of the company to register the securities and conduct a sale pursuant to a registration statement violated Sections 5, 12(a)(1) and 12(a)(2) of the Securities Act of 1933, as well as Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934. According to the complaint, the company used false and misleading statements throughout the sale, then, rather than using the proceeds from the sale to develop its blockchain technology, allegedly diverted the proceeds to another one of its trading arms, which used the funds for bitcoin as well as other more traditional investments. The profits of those investments were realized by the company’s executives and owners, rather than by investors, the complaint alleged.
Once the company’s misrepresentations were revealed, the SEC issued a cease and desist order and levied a significant fine. Although the lead plaintiff alleged to have suffered significant losses resulting from the alleged misrepresentations, when weighing the risks of litigation (including the likelihood of surviving a motion to dismiss and objections to class certification), the parties ultimately agreed to a settlement of the matter.
The Takeaway
As cryptocurrency continues to become accessible to more investors, litigation surrounding cryptocurrency companies will likely see a corresponding rise in frequency.
DERIVATIVE EXCEPTION TO INSURED VERSUS INSURED EXCLUSION IN D&O POLICY ONLY APPLIES TO SUITS BY NON-INSUREDS
T.D. Williamson, Inc. v. Federal Ins. Co., 2021 WL 2117054 (N.D. Okla. May 25, 2021)
A director of a pipeline services company filed a direct claim against other directors of the company for breach of fiduciary duty and, in the alternative, brought a derivative claim. The company sought coverage under its directors and officers liability (“D&O”) policy, but the insurer denied coverage, citing subsection (c) of the policy’s insured versus insured (“IvI”) exclusion, which precluded coverage for any claim “brought by an Insured Person in any capacity against an Insured.”
In the ensuing coverage litigation, the company argued that, because the director pled his claim alternatively as a derivative claim, his claim was brought by an “Organization,” not an “Insured Person,” and subsection (c) of the IvI exclusion did not apply. Instead, the company argued subsection (b) of the exclusion applied, which precluded coverage for any claim “brought by an Organization against an Insured Person of such Organization” but included an exception for “a securityholder derivative action.” The company argued the derivative exception applied to the lawsuit, and to hold otherwise would render the derivative exception superfluous because “the only way for the … carve-out to have any meaning is to recognize that a ‘securityholder derivative action’ is ‘brought-by’ the corporation.” In response, the insurer argued applying subsection (c) to bar coverage would not render the derivative exception superfluous because the exception could still apply to derivative suits brought by non-insured persons.
The court agreed with the insurer, finding subsection (c) of the IvI exclusion operated independently of subsection (b), and unambiguously precluded coverage for derivative lawsuits brought by insured persons. The court thus held subsection (c) precluded coverage for the lawsuit because it was brought by an “Insured Person” (the director plaintiff) in any capacity against “Insureds” (the director defendants), and therefore the insurer did not have a duty to defend nor indemnify the claim.
8th CIRCUIT STRIKES CLASS ACTION ALLEGATIONS, UPHOLDS ARBITRATION CLAUSE IN PUTATIVE SECURITIES FRAUD CLASS ACTION
Donelson v. Ameriprise Fin. Serv., Inc., No. 19-3691 (8th Cir. 2021)
This matter arose after a customer of an investment advisory firm met with his investment advisor and signed an account application, which included an acknowledgement that he received, read, and consented to an arbitration clause to resolve all controversies except for a putative or certified class action.
Subsequently, the customer filed a putative securities fraud class action against his investment advisor, the advisor’s firm, and the individual officers of the firm. The defendants attempted to strike the class action allegations and compel arbitration, but the district court denied.
On appeal, the Eighth Circuit reversed the district court’s decision, finding the arbitration clause was valid and enforceable, even if the client never saw the provision or signed the agreement. According to the court, it was sufficient for the client to sign a separate agreement—the account application—that expressly incorporated the arbitration clause by reference.
The Eighth Circuit also determined the district court abused its discretion by declining to strike the class action allegations. The court held that if it is “apparent from the pleadings that the class cannot be certified” because “unsupportable class allegations bring ‘impertinent’ material into the pleading” and “permitting such allegations to remain would prejudice the defendant by requiring the mounting of a defense against claims that ultimately cannot be sustained,” then it would be appropriate to strike said class allegations pursuant to Federal Rule 12(f). After effectively disposing of the class action aspect of the case, the Eighth Circuit held the arbitration clause, which exempted putative or certified class actions, applied and ordered the matter to arbitration.
The Takeaway
Despite the fact that district courts have varied opinions as to the applicability of Rule 12(f), the Eighth Circuit’s decision endorses the striking of securities class action allegations on the pleadings prior to class discovery and a motion for class certification. The court’s holding could significantly change the landscape for settlement negotiations in securities cases where the class action allegations lack merit and are primarily asserted to exert pressure on defendants to settle.
SINGLE LAWSUIT CONTAINS MULTIPLE ‘CLAIMS’ UNDER D&O POLICY
Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 1736823 (N.D. Cal. May 3, 2021)
An insured technology company sought coverage under its directors and officers liability (“D&O”) policy for a shareholder lawsuit for allegations associated with a 2013 stock financing round and a 2017 loan to the company by a member of the board of directors.
The suit also asserted allegations related to a 2010 employment dispute in which the company’s co-founder was terminated. The insurer denied coverage, citing multiple policy exclusions, and asserted the suit was a claim made prior to the policy’s inception as it related back to the 2010 employment dispute. Coverage litigation ensued.
The U.S. District Court for the Northern District of California determined the shareholder lawsuit consisted of two separate claims: a claim associated with the 2013 stock financing round and a claim associated with the 2017 loan from the member of the board of directors. Under the policy, “Claim” was defined as “a written demand against any Insured for monetary damages or non-monetary or injunctive relief” and “a civil proceeding against any Insured seeking monetary damages or non-monetary or injunctive relief, commenced by the service of a complaint or similar pleading.” According to the court, the shareholder suit asserted a cause of action “for breach of fiduciary duty, conspiracy, and unjust enrichment based on allegations that the underlying defendants schemed to dilute the underlying plaintiffs’ shares through the 2013 Stock Financing.” The suit also asserted a cause of action “for breach of fiduciary duty based on allegations that the 2017 Loan constituted impermissible self-dealing.” Accordingly, the court concluded “the causes of action relating to the [2013 stock financing] and the [2017 loan] were separate ‘demand[s] … for monetary damages,’ and thus separate Claims,” despite the fact that the policy also defined “Claim” as a “civil proceeding.”
Next, the court found the policy’s interrelated wrongful act exclusion barred coverage for the 2013 stock financing “Claim” because it was interrelated to the 2010 employment dispute, which was a “Claim” made prior to the policy period. The court further found the prior and pending litigation, breach of application, and insured versus insured exclusions all barred coverage for the 2013 stock financing “Claim.” Nevertheless, the court determined coverage was available for the 2017 loan “Claim” because it did not relate back to the 2010 employment dispute and no other exclusion applied.
STATEMENTS CONTAINING MATERIAL OMISSIONS AND INTENTIONAL MISREPRESENTATIONS ARE ACTIONABLE CLAIMS
State of Rhode Island v. Alphabet Inc. et al., No. 20-15638 (9th Cir. 2021)
A claim against a major technology giant and its holding company alleged fraud in their failure to disclose security problems with the company’s social network in its quarterly reports after having discovered a glitch that left private data users exposed for three years. The court initially dismissed the action on the grounds the plaintiff failed to adequately allege a material misleading misrepresentation or that there was an intentional or reckless failure to disclose known security violations.
On appeal, the Ninth Circuit recently reversed in part the decision to dismiss investors' securities fraud action, finding at least two of the statements made by the tech giant in filings with the U.S. Securities and Exchange Commission were materially misleading and omitted facts. In determining whether a statement is misleading, the court made a distinction between statements that are “corporate puffery” and “vague statements of optimism,” versus a concrete description misleading the state of affairs in a material way from the one that actually existed. Under the circumstances, the tech giant’s statement that there had been no material changes to its risk factors, when in fact a known software glitch existed for a three-year period–exposing private information of hundreds of thousands of users–indicated there were significant problems with security controls. Additionally, the report discussed the potential harm public knowledge of the glitch might cause the company, which further bolstered the court’s determination regarding the materiality of the misleading omission.
Article 1
Article 2
E-COMMERCE COMPANY COULD FACE STEEP FINES UNDER GDPR FOR PRIVACY PRACTICES
Luxembourg’s National Data Protection Commission (Commission Nationale pour la Protection des Données) recently circulated a draft decision proposing a fine of over $425 million for an American multinational e-commerce company. The proposed fine stems from the company’s collection and use of individuals’ personal data and alleged violations of the General Data Protection Regulation (“GDPR”), the European Union’s landmark data privacy rules. GDPR requires companies to seek people’s consent before using their personal data or risk facing steep fines.
The court must approve the settlement, which is set for a ruling later this year. While not deciding on the merits of the case, the court previously ruled the plaintiffs had standing to bring suit against the park operator, reasoning that alleged violations of the notice and consent requirements of BIPA were enough to render plaintiffs “aggrieved,” apart from any separate showing of harm. The case, which reached the state’s highest court, spurred a slew of privacy litigation under the same statute.
The Takeaway
Data protection is a fluid process and companies should have practices in place that are flexible and reflective of the ever-changing privacy landscape. Additionally, cyber policies should address not just local laws, but also look internationally to GDPR.
SEC Corner
SEC HIGHLIGHTS ESG DISCLOSURES IN 2021 REGULATORY PRIORITIES
The U.S. Securities and Exchange Commission (“SEC”) Office of Information and Regulatory Affairs recently identified its short- and long-term regulatory priorities in the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which highlighted the following areas of focus:
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environmental, social, and governance ("ESG") related disclosures, including those concerning climate risk, workforce and corporate board diversity, and cybersecurity risk;
- the market structure of equity, treasury, and other fixed-income markets;
- the transparency of stock buybacks, short-sale disclosure, ownership of securities-based swaps, and the stock loan market;
- investment fund rules, including those concerning money market, private and ESG funds;
- affirmative defense provisions under Rule 10b5-1 ("Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases");
- pending action directed by Dodd-Frank, including SBS-related rules, compensation arrangements based on incentive, and conflicts of interest in securitizations;
- the improvement of shareholder democracy;
- special-purpose acquisition companies ("SPACs"); and
- required electronic filings and transfer agents.
One of the areas the SEC plans to focus on in 2021 is ESG related disclosures, including those concerning climate risk. The U.S. House of Representatives narrowly approved a bill backing the SEC’s efforts to craft new rules requiring comprehensive ESG disclosures. Under this new bill, which now faces an uphill battle in the Senate, the SEC would issue rules within two years requiring every public company to disclose climate-specific metrics in financial statements. These rules would require metrics tied to greenhouse gas emissions, fossil-fuel related assets, and other risks posed by the changing climate and would pertain specifically to the finance, transportation, electric power, mining, and non-renewable energy sectors. President Biden recently issued a statement in support of the bill, saying the measures will promote “greater equity, transparency and enhanced investor protections.”
Noteworthy Enforcement Actions, Settlements, and Judgements
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Shareholder Corner
JUNE 2021 SECURITIES CLASS ACTION FILINGS*
^denotes SPAC-related
*Source: Stanford Law School Securities Class Action Clearinghouse
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