Author: Dave Hoffman

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Guidant/JJ Litigation

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Counsel, start your time-clocks.

As has been well-reported, Guidant has sued Johnson & Johnson for specific performance of J&J’s $25.4 billion acquisition. J&J will almost certainly assert that its obligation is void under the merger agreement’s “material adverse effect” clause, and, specifically, will argue that the clause has been triggered by Guidant’s messy encounters with state and federal regulators over its heart stents.

Bill Sjostrom at the Business Law Prof Blog has been all over this looming fight.

Back in September, he started questioning the deal’s continued viability. In October, he put up a great post on the MAE at issue in the (then) potential litigation. He argued that NY AG Spitzer’s lawsuit against Guidant may strengthen JJ’s claim here. Finally, he broke news of the suit here.

Obviously, I do not know how this will turn out. But doesn’t it seem that J&J could have protected itself against this type of risk with more precision? Isn’t regulatory action the number two legal problem medical device makers potentially face, after patent claims?

For more information, Pharmablog talks about the underside of drug testing here. Finally, the Stent Blog (!) is a must-read resource if you care about the statistical likelihood of stent failure.

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Welcome Business Week Readers

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This week’s Business Week Online contains a reference to this blog’s postings on Judge Alito’s securities jurisprudence. For your reference, we’ve written about Judge Alito several times.

1. Solove on Alito and privacy law.

2. Hoffman on the power of Congress to subpoena Alito’s former law clerks.

3. Solove on the utility of mining Alito’s record.

4. Hoffman on Alito and securities law (Part I).

5. Hoffman on Alito and securities law (Part II).

6. While you are here, you may also be interested in posts that don’t appear on our main page, including Oman on the bankruptcy of France and the philosophical significance of the repo man, and Wenger on liability for blogging. Plus, you really ought to read our registration statement.

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“Potentially Safer” Cigarettes

images.jpeg This article from the Times (UK) is interesting. Apparently, BAT is planning to introduce a cigarette that, through various filtering technologies, may cut the risk of cancer and other smoking related diseases up to 90%

There are many problems with producing, marketing and buying “safer” cigarettes. Some were explored in one of my favorite books about American business, Barbarians at the Gate. As the article points out, the BAT folks are nervous. Although “privately” they refer to the cigarette as “risk free” or “low-risk cigarettes”, they are going to be sold as merely “potentially safer”.

But here is the kicker. BAT executives understand they can’t say, out loud, that consumers using their product as it was intended to be used will not get sick. Even safe cigarettes are bad for you, even if somewhat less so than competitive brands. But the “safe” inference is the inference that BAT really would like consumers to make. Without the inference, why would smokers buy a cigarette that likely will be more expensive, or have a harder “draw,” or might even taste terribly. So, BAT is “likely to focus its advertising on the new technology,” and hope that consumers will reach the appropriate conclusion themselves.

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Why Congress Shouldn’t Subpoena Judge Alito’s Clerks.

This morning, I read this Sunstein-influenced NYT article which reads the tea-leaves of Judge Alito’s dissents to better predict his future rulings. The guessing game is pretty risky for many political players. Both sides of the aisle face retribution from their bases if Judge Alito deviates from (their respective views of) his predicted path. Senate Republicans have more at stake: if Judge Alito does not vote to overturn Roe, which seems at least possible given the malleability of Casey, the base would be irritated beyond all measure.

If Senators want more information about a nominee than that found in his or her public record (including financial record!), they’ve a few places to go: (1) the administration (through private and public channels); (2) the Judge (through written and oral Q&A); (3) the Judge’s friends, family and colleagues, and (4) the Judge’s former law clerks.

UTR has already gotten us going on this last track, summarizing the reactions from a few of Judge Alito’s former clerks. But, obviously, these reactions are highly self-selective. Let’s assume that the Senate really wanted to know more from the clerks about Judge Alito’s privately expressed (but legal) views about abortion, gay marriage, the death penalty, securities law, executive detention, etc. Could the Senate subpoena the law clerks and force them to talk?

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Jury Finds for Merck: Will its Critics Notice?

The NJ jury hearing the latest Vioxx case found Merck & Co. not liable for the death of Frederick “Mike” Humeston after seven and a half hours of deliberation. The ruling contrasted with an earlier Texas jury’s determination that Merck was liable for the death of Robert Ernst.

Following the Ernst verdict, a hue and cry arose against the jury system, with some claiming, for instance, that “this incident . . . raises serious questions as to the competence of lay jurors to resolve technical issues.” Now that we’ve another anecdote in hand, is it possible that these earlier critics owe the American jury system an apology?

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Becker and Posner Mull Price Gouging

Over at the Becker-Posner Blog, the resident luminaries have gotten around to discussing the problem of whether and when to punish “price gouging” after natural disasters. Judge Posner makes the expected moves (“sheer ignorance of basic economics”; “[t]he only beneficiaries will be people with low costs of time and nonurgent demand”; “higher prices for gasoline are a source of substantial external benefits”.) However, he does concede that price gouging regulations might be appropriate under two types of circumstances.

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Leiter, Caron and Hodnicki and a Typology of Successful Academics

It has been well-reported that Brian Leiter, Paul Caron and Joe Hodnicki have teamed up to produce the latest non-USNews law school ranking data. One part of their project measures faculty quality using the proxy of the citations of the more productive members of each faculty. The list is here.

I know our legal readers are way (way) beyond rankings, so they might not actually visit the site. That would be a shame, because the trio wrote a fascinating introductory section discussing six ways in which citation studies may be distorted. The basic theme seems to be that although we would normally assume that work that is cited more often is “better” than work that isn’t, some folks’ work will get cited more often than quality alone would dictate. Those distorted writers are (to paraphrase):

1. Drudges.

2. Treatise writers.

3. Flash-in-the pans faddists.

4. The very wrong.

5. “[O]nce-productive dinosaurs.”

6. Public law scholars, constitutionalists and crits.

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Horwitz on Sensitive Corporate Judges

Over at Prawfs, Paul Horwitz has been trying to get some precision on what it would mean for a judge to be “sensitive” to business interests.

Here is a taste:

If I were writing opinions in these [employment discrimination cases] that were “sensitive” to business, I would fully acknowledge that employees may use Title VII to try to turn garden-variety dismissals, demotions, etc. into discrimination cases, in the hope that the corporate defendant will settle after protracted litigation, and that this may ultimately drive down the incentive to hire; that class actions similarly attempt to induce settlement and may discourage innovation; and that consumer arbitration clauses are one way to efficiently channel disputes without the significant burden of litigation. But I might also “sensitively” acknowledge that proferring legitimate nondiscriminatory reasons is hardly the same thing as proving a dismissal was not, in fact, motivated by discrimination; that courts may be so tough on Title VII cases in part because they are caseload-driven; that businesses do in fact sometimes commit mass torts, and may even (at least until recently) collude in settlements that primarily serve the interests of the corporate defendant and plaintiffs’ counsel; that businesses may prefer arbitration because they think it ups their chances of success, particularly before repeat-player arbitrators, and deters consumers from pursuing their claims; and that there may be something qualitatively different between a commercial business contract and a boilerplate arbitration clause in a consumer or employment agreement. In short, I don’t know at first blush whether the corporate interest would win or lose; but I would be “sensitive” about the issues faced by business. So it doesn’t seem to me that a pro-business record of judicial rulings really tells us anything about whether that judge is sensitive to business interests. He may simply be insensitively supportive of them.

Go ahead and read the whole thing.

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Alito and Securities Law: Part II

As Prof. Ribstein notes, there has been a significant amount of interest, both on the internet and offline, in Judge Alito’s record as a “business friendly” jurist. The emerging consensus is (for marketeers) bullish. Forbes quotes Ted Frank as saying “All and all, business wins,” and then (rather wistfully) the magazine continues that the “stock market may have signaled its agreement on Monday; the Dow Jones Industrial Average had risen 49 points at midday.”

In any event, I’ve done a bit more research into Judge Alito’s record as a judge in securities cases, and I think defense attorneys may not want to uncork the champagne just yet.

As I noted when discussing the Burlington Coat factory case, the Judge does not appear hostile (as some do) to securities claims as a general matter. Rather, he appears to want to force plaintiffs to plead scienter with particularity, and to measure materiality by its market impact. In this post, I’ll continue my analysis of two additional Alito securities decisions that Prof. Ribstein didn’t focus on.

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Alito: The Business Friendly Justice?

Larry Ribstein has a great new post up on the jurisprudence of Third Circuit Judge Samuel Alito, a potential SCOTUS nominee. He sums up:

In short, Alito has displayed a marked tendency to enforce contracts as written, specifically including choice of law/forum and arbitration provisions that are intended to mitigate litigation costs. He’s also obviously aware of the problems that can be caused by lax proof standards and open-ended liability.

On the list that Prof. Ribstein has created, I was particularly interested in In re Burlington Coat Factories Sec. Lit. Prof. Ribstein says that decision involves a “deni[al] securities claims for failure to adequately allege scienter and materiality, and for lack of a duty to update.” My reading of the decision produced a somewhat more complicated picture, which may give some insights into Alito’s opinions about securities complaints.

First, unlike the district judge whose opinion the Third Circuit was passing on, Alito’s opinion is significantly more respectful of the pleading standard, reversing (in effect) a dismissal on materiality grounds. This decision – if representative of Alito’s larger jurisprudence – suggests that he is not particularly hostile to securities plaintiffs. In the end, the opinion does dismiss claims on 9(B) grounds, but with leave to re-plead.

Most significantly, the Judge appears to buy into the efficient capital markets hypothesis without hesitation, dismissing one claim which failed to result in a market reaction with the following reasoning.

In the context of an “efficient” market, the concept of materiality translates into information that alters the price of the firm’s stock. . . . This is so because efficient markets are those in which information important to reasonable investors (in effect, the market) … is immediately incorporated into stock prices. … Therefore, to the extent that information is not important to reasonable

investors, it follows that its release will have a negligible

effect on the stock price.

There are two basic problems with the idea that non-price-movement should mean immateriality as a matter of law. First, there will be times when market-wide distortions will dampen reaction to disclosures — which is why we require litigants to conduct expensive loss causation analyses which correct for the effect of the market-basket. Second, the behavioral finance literature, summarized by Ribstein (in a great paper) here, should give pause to judges, plaintiffs and others who seek to rely heavily on the ideal of a perfectly well-functioning market. To be fair, we can’t blame Judge Alito for not being aware of this literature back in 1997, but it would be interesting to know what he thinks today.

Needless to say, if I were on the judiciary committee, we’d have fewer questions on intellectually moribund subjects like con law, and many more of the following type(s): “How should judges go about evaluating the question of whether the stock market is fully efficient? Can securities class actions survive evidence of irrational decisionmaking?”

[UPDATE: I've investigated Judge Alito's securities decisions further here.]