This week, a divided Ninth Circuit panel addressed when a plaintiff’s reliance on an omission may be presumed in a securities-fraud case, and another panel considered when an arbitration award must be set aside due to an arbitrator’s failure to disclose a relationship with one of the parties (while also unanimously calling for en banc review of the decision that governed much of that inquiry).
PUERTO RICO GOVERNMENT EMPLOYEES & JUDICIARY RETIREMENT SYSTEMS ADMINISTRATION v. VOLKSWAGEN*
The Court holds that in securities-fraud cases in which the plaintiffs allege both omissions and affirmative misrepresentations, the Affiliated Ute presumption of reliance does not apply unless the plaintiffs allege primarily omissions claims.
Panel: Judges Wallace, M. Smith, and Restani (Intl. Trade), with Judge M. Smith writing the opinion and Judge Wallace dissenting.
Key highlight: “[W]hile fraud necessarily involves concealing the truth, we cannot allow such concealment to transform affirmative misstatements into implied omissions. To do so would stray from Affiliated Ute’s purpose of excusing the difficult or impossible evidentiary burden of proving a speculative possibility in an area where motivations are complex and difficult to determine.” (Internal quotation marks omitted.)
Background: Plaintiff Puerto Rico Government Employees & Judiciary Retirement Systems Administration is a public pension fund. From May 2014 to May 2015, the fund purchased bonds issued by Volkswagen. Subsequently, the public learned that Volkswagen was secretly installing defeat devices in its diesel vehicles to hide unlawfully high emissions. As a result of this revelation, Volkswagen bonds temporarily dropped below par value.
The fund filed a putative class action against Volkswagen to recover its losses, alleging violations of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The fund claimed that Volkswagen made numerous misleading statements in its offering memoranda, including that Volkswagen is focused on “the reduction of fuel consumption and emissions of the fleet” and that Volkswagen coordinates its planning “to avoid breaches of emission limits[.]” And it claimed that Volkswagen’s nondisclosure of its defeat devices artificially inflated the value of its debt securities. Volkswagen moved for summary judgment on the issue of reliance, arguing that the fund had no evidence that it relied on Volkswagen’s offering memoranda when purchasing bonds.
The district court denied Volkswagen’s motion for summary judgment. In Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), the Supreme Court held that courts may presume reliance in cases “involving primarily a failure to disclose,” rather than material misrepresentations. The district court concluded that this presumption was applicable here, reasoning that the driving force behind the fund’s claims was Volkswagen’s failure to disclose the defeat device issue. But recognizing that there was “substantial ground for disagreement” over the scope of Affiliated Ute, the district court certified its decision for interlocutory appeal. The Ninth Circuit agreed to hear the appeal.
Result: The Ninth Circuit reversed. The majority concluded that the Affiliated Ute presumption applies only when “the case can be characterized as one that primarily alleges omissions.” As the Court explained, that follows from the reasoning underlying Affiliated Ute—that “reliance is impossible or impractical to prove when no positive statements were made.” Accordingly, the Court held, “the Affiliated Ute presumption should be limited to situations in which a plaintiff would be forced to prove a speculative negative.”
Applying that standard, the majority held that the fund’s claims did not primarily allege omissions. The Court acknowledged that “Plaintiff alleges an omission” —namely, Volkswagen’s failure to disclose its use of defeat devices—“and that omission looms large over Plaintiff’s claims.” But, the Court continued, the fund also alleged over nine pages of Volkswagen’s supposed affirmative misrepresentations. These alleged misrepresentations, the majority concluded, “push this case outside Affiliated Ute’s narrow presumption.” As the Court explained, the “omission regarding Volkswagen’s use of defeat devices” was “simply the inverse of the affirmative misrepresentations” alleged. The dissent’s contrary conclusion, the majority reasoned, “‘would swallow the reliance requirement almost completely’ because affirmative misrepresentations are almost always rendered misleading by an omission.”
In dissent, Judge Wallace contended that Affiliated Ute’s presumption of reliance should be available whenever the defendant has a duty to disclose withheld information and that information is material, including in “mixed” cases that also involve affirmative misrepresentations. Judge Wallace viewed that rule to be required by Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975). There, Judge Wallace explained, the plaintiffs alleged both omissions and misrepresentations, and Ninth Circuit nevertheless held that the presumption of reliance applied.
Judge Wallace further disagreed with the panel’s determination that the fund did not allege primarily an omissions case. He reasoned that while Plaintiffs also allege affirmative misrepresentations, their principal theory is that Volkswagen’s “omission rendered those affirmative misstatements misleading.” On that basis, he would have affirmed.
EMH PRODUCTIONS, INC. v. STARLINE TOURS OF HOLLYWOOD, INC.
The Court affirms an order confirming an arbitration award in large part, but remands for further proceedings regarding the relationship between the prevailing party, the arbitrator, and JAMS.
The panel: Judges Gould, Lee, and VanDyke, with Judge VanDyke both writing for the panel and issuing a concurring opinion.
Key highlight: “[S]aying you have nothing further to disclose is markedly different than simply refusing to provide any further disclosures based on the shifty reasoning that the Arbitrators no longer have jurisdiction over the case, which is deliberately evasive on the key question of whether they have something to disclose or not. As such, it was clearly erroneous for the district court to (mis)construe JAMS’s response to the request for Monster Energy disclosures as indicating that the Arbitrators had nothing further to disclose, and the district court thus abused its discretion in denying the Rule 59(e) motion on that basis.”
Background: Starline and TMZ had a joint venture operating a celebrity tour bus. After TMZ terminated the agreement, the parties proceeded to arbitration before a JAMS arbitrator concerning both TMZ’s termination and its subsequent launch of a competing venture. During that arbitration, after the law firm representing TMZ merged with a larger firm, JAMS responded to a request for a conflicts check by saying the arbitrator had “nothing further to disclose.”
The arbitrator issued a final award in favor of TMZ, concluding that it had properly terminated the joint venture and striking Starline’s counterclaims under California’s anti-SLAPP statute. A JAMS appeal panel affirmed, determining that while the anti-SLAPP procedure was not available in the arbitration, the counterclaims would have failed in any event.
Starline then moved to vacate the award in federal district court. The district court denied the motion and granted judgment to TMZ.
Subsequently, invoking the Ninth Circuit’s recent decision in Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019)—which held that vacatur of an arbitration award was required where the arbitrator did not disclose its ownership interest in JAMS and JAMS’ substantial business relationship with one of the parties—Starline wrote to JAMS, asking it disclose whether the arbitrator that decided its case had an ownership interest in JAMS and how often JAMS had been engaged by TMZ. JAMS refused to provide any further disclosures, stating that the decision was final and that it “ha[d] no further jurisdiction.” The district court then denied Starline’s Rule 59(e) motion to set aside the judgment, which was premised both on JAMS’ refusal to provide the requested disclosure and on evidence that TMZ and its counsel had participated in a number of JAMS arbitrations and mediations.
Result: The Ninth Circuit reversed in part. First, the Court rejected Starline’s argument that its evidence regarding JAMS, TMZ, and TMZ’s counsel warranted relief. As the Court explained, “Monster Energy only requires disclosure when an arbitrator holds an ownership interest in JAMS and JAMS engages in nontrivial business dealings with a party to the arbitration.” Thus, without evidence that any of the arbitrators involved in the case had some sort of ownership interest in JAMS, there was no basis to conclude that any arbitrator evinced “evident partiality.” Moreover, even if one of the arbitrators had such an interest, Starline’s evidence was still insufficient, as it focused largely on TMZ’s attorney, and the “Monster Energy court was . . . concerned with the potential bias created by repeat payors in the arbitral forum, as opposed to merely repeat players.”
Second, the Court rejected Starline’s argument that the award should be set aside because the arbitrator had failed to provide any supplemental disclosure after TMZ’s counsel merged with another firm. Starline, the Court emphasized, did not contend that the arbitrator actually had anything to disclose; rather, its complaint was that the arbitrator had failed to use a particular disclosure form stating that it had nothing to disclose. The Court concluded it would be “nonsensical” to read the relevant disclosure rules “as requiring the Arbitrator to affirmatively disclose that she has nothing to disclose.”
Third, the Court concluded that the abitrator’s use of the anti-SLAPP procedures did not warrant vacatur of the award. As the Court explained, the parties had intended for the arbitrator to address these claims, which the arbitrator could have instead dismissed under a different procedural mechanism, like a demurrer. Thus, the Court held, “[t]he Arbitrator did not demonstrate evident partiality or exceed her powers by addressing Starline’s counterclaims,” and the arbitration appeal panel likewise acted properly in affirming any error as harmless.
Fourth, the Court rejected Starline’s contention that the arbitrator had manifestly disregarded California partnership law in concluding that TMZ properly launched a competing celebrity bus tour shortly after dissolving its joint venture with Starline. As the Court explained, the joint venture agreement specifically contemplated such competition after termination, and Starline “failed to point to any caselaw indicating that a party could breach its fiduciary duty when exercising a right granted under the joint venture agreement.”
Finally, the Court concluded that the district court abused its discretion in interpreting JAMS’s post-judgment response to Starline’s request for further disclosure “as an indication that JAMS and the Arbitrators had nothing to disclose.” The panel agreed with Starline that Monster Energy applied to arbitration awards confirmed before the Ninth Circuit issued that decision. And, the Court continued, JAMS had clearly stated “that the Arbitrators were not required to provide the information set out in Monster Energy because they no longer had jurisdiction of the matter,” not that those arbitrators had nothing further to disclose. In a footnote, the Court noted that because of this error, the district court had not addressed whether JAMS’ refusal to disclose “establishes evident partiality, warranting vacatur of the arbitration award,” but that “[p]resumably this issue will be mooted on remand once JAMS makes the disclosures required by Monster Energy.”
In a concurrence joined by all members of the panel, Judge VanDyke highlighted Judge Friedland’s dissent in Monster Energy, which predicted “‘endless litigation over arbitrations that were intended to finally resolve disputes outside the court system.’” Observing that “[t]his case is certainly some evidence that her warning was warranted,” the concurrence encouraged the Ninth Circuit “to reconsider Monster Energy en banc.”
* Note: Morrison & Foerster filed an amicus brief supporting Volkswagen on behalf of the Chamber of Commerce of the United States, the Securities Industry and Financial Markets Association, and the Alliance for Automotive Innovation.