Wednesday, March 31, 2021

ICC Compendium of Antitrust Damages Actions

 

Launch of the ICC Compendium of Antitrust Damages Actions

31.03.2021

Republication

 

Free publication of the ICC Compendium of Antitrust Damages Actions which addresses the evolution of private competition law enforcement over recent years, and how the proliferation of legal practices across the globe, following in part the adoption of the EU Damages Directive in 2014 and its transposition by the EU Members States into national laws, has engendered concerns within the business community and beyond.  

 

The ICC antitrust Compendium is the fourth publication of the Competition Commission and was produced by its Task Force on Antitrust Damages Actions comprised of over 80 antitrust and litigation experts from 21 jurisdictions.  

 

Designed to be a reference for business, ranging from multinational companies to SMEs, private practitioners, judges, and economists, the Compendium is a unique collection of court proceedings and decisions from landmark cases related to damages actions from a variety of key jurisdictions.  Opening with a chapter on the European Damages Directive, the Compendium includes 21 chapters, organized around nine key topics, and counts a total of 275 decisions.











Monday, March 29, 2021

U.S. Court of Appeals for the Ninth Circuit, Pacific Gulf Shipping Co. v. Vigorous Shipping & Trading S.A., Docket No. 20-35159, for Publication

 

Admiralty

 

Maritime Law

 

Successor-Liability

Corporate Successorship

 

Alter-Ego Liability

To Pierce the Corporate Veil

 

 

The panel unanimously concludes that this case is suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2).

 

The panel affirmed the district court’s partial dismissal and partial summary judgment in favor of the defendants in an admiralty action alleging successor and alter-ego liability.

 

Pacific Gulf Shipping Co., in possession of an arbitral award against Adamastos Shipping, sought to collect from Vigorous Shipping & Trading S.A. and Blue Wall Shipping Ltd. on the grounds that they were either successors or alter-egos of Adamastos. The district court dismissed the successor-liability claim and granted summary judgment to Vigorous and Blue Wall on the alter-ego claim.

 

The panel held that Pacific Gulf had Article III standing because, even if Adamastos ultimately owed Pacific Gulf no damages, Pacific Gulf at least suffered a concrete, particularized injury in arbitration costs.

 

The panel affirmed the district court’s dismissal for failure to state a claim of Pacific Gulf’s claim based on successor liability. Applying federal common law, and joining other circuits, the panel held that maritime law requires a transfer of all or substantially all of the predecessor’s assets to the alleged successor before successor liability will be imposed on that alleged successor.

 

Affirming the district court’s summary judgment in favor of the defendants on the alter-ego claim, the panel held that to pierce the corporate veil, a party must show that (1) the controlling corporate entity exercises total dominion of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own; (2) injustice will result from recognizing the subservient entity as a separate entity; and (3) the controlling entity had a fraudulent intent or an intent to circumvent statutory or contractual obligations. Indicia used to determine whether to pierce the corporate veil include (1) disregarding corporate formalities such as, for example, in issuing stock, electing directors, or keeping corporate records; (2) capitalization that is inadequate to ensure that the business can meet its obligations; (3) putting funds into or taking them out of the corporation for personal, not corporate, purposes; (4) overlap in ownership, directors, officers, and personnel; (5) shared office space, address, or contact information; (6) lack of discretion by the allegedly subservient entity; (7) dealings not at arms-length between the related entities; (8) the holding out by one entity that it is responsible for the debts of another entity; and (9) the use of one entity’s property by another entity as its own.

(…) This list is, of course, nonexhaustive.

 

But the mere presence of some of these indicia is not dispositive, nor is it necessarily enough to survive summary judgment. For example, we held in Chan that, without more, a single person’s common ownership of three corporations was insufficient to prove at trial that the corporations were alter-egos. 123 F.3d at 1294. The Fifth Circuit has held that indirect ownership of all of a corporation’s stock, a “number of common officers and directors,” and “substantial control” over an alleged subservient corporation’s “general policy decisions” were insufficient to “establish a prima facie showing of alter ego” because the entities also observed corporate formalities and there was “no more control than appropriate for a wholly-owned subsidiary.” Adm’rs of Tulane Educ. Fund v. Ipsen, S.A., 450 F. App’x 326, 330–31 (5th Cir. 2011). Courts have also found that “superficial indicia of interrelatedness” such as shared office space and phone numbers are “not dispositive of the alter-ego question,” instead looking to a corporation’s “practical operation” as “more instructive.” E.g., Coastal States Trading, Inc. v. Zenith Navigation, S.A., 446 F. Supp. 330, 334 (S.D.N.Y. 1977).

 

(…) As we stated in American Queen, the Ninth Circuit has a conjunctive test: there must be domination and control and injustice from not piercing the veil and some form of ill intent. 708 F.2d at 1489–90; see also Seymour, 605 F.2d at 1109–13 (first articulating the three requirements to pierce the corporate veil in the context of a labor dispute and applying them conjunctively).

 

Viewing the record as a whole, the panel agreed with the district court that there was insufficient evidence to support a finding that either Blue Wall or Vigorous was operated as an alter-ego of Adamastos.

 

(…) Sitting in admiralty, we apply the federal common law in examining corporate identity. Chan v. Soc’y Expeditions, Inc., 123 F.3d 1287, 1294 (9th Cir. 1997).

 

Secondary Sources: David H. Barber, Piercing the Corporate Veil, 17 Willamette L. Rev. 371, 372–75 (1981).

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, March 29, 2021, Pacific Gulf Shipping Co. v. Vigorous Shipping & Trading S.A., Docket No. 20-35159, for Publication)

 

 

Wednesday, March 24, 2021

Responsibility of the Swiss Manufacturer? - Specific Personal Jurisdiction - U.S. Court of Appeals for the Sixth Circuit, LYNGAAS v. CURADEN AG

 

Responsibility of the Swiss Manufacturer?

Specific Personal Jurisdiction

Alter-Ego Theory

 

Undercapitalization

To Pierce the Corporate Veil

Distribution Agreement

Michigan Law

 

Class Action

Consumer Law

Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227

Unsolicited Advertisement

 

 

Appeal from the United States District Court for the Eastern District of Michigan at Detroit.

 

This case involves two unsolicited fax advertisements received by Brian Lyngaas, D.D.S., in March 2016. Lyngaas asserts, on behalf of himself and all similarly situated class members, that Curaden AG and its U.S. subsidiary, Curaden USA, violated the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, by sending the advertisements.

 

At the summary-judgment stage of the case, the district court ruled that Lyngaas could not pierce the corporate veil to hold Curaden AG liable for Curaden USA’s action, that faxes received by a computer over a telephone line (in addition to faxes received by traditional fax machine) violated the TCPA, and that it had personal jurisdiction over both defendants. Following a bench trial, the district court held that Curaden USA violated the TCPA by sending the two unsolicited fax advertisements to Lyngaas, but that Curaden AG was not liable as a “sender” under the TCPA. The court further held that Lyngaas’s evidence and expert-witness testimony as to the total number of faxes successfully sent by Curaden USA were inadmissible due to unauthenticated fax records. It therefore established a claims-administration process for class members to verify their receipt of Curaden USA’s unsolicited fax advertisements.

 

Both Lyngaas and Curaden USA appeal the judgment of the district court, and both Lyngaas and Curaden AG cross-appeal. For the reasons set forth below, we affirm the judgment of the district court.

 

Lyngaas is a dentist who practices in Livonia, Michigan. On March 8 and again on March 28, 2016, Lyngaas received on his workplace fax machine unsolicited faxes advertising the Curaprox Ultra Soft CS 5460 toothbrush. The toothbrush in question is manufactured by Curaden AG, a privately owned Swiss entity. Curaden USA, an Ohio corporation headquartered in Arizona, is a subsidiary of Curaden AG that promotes Curaden AG products, including the Curaprox Ultra Soft CS 5460 toothbrush, throughout the United States.

 

Although a standard written distribution agreement typically governs the practices of Curaden AG’s subsidiary distributors, Curaden AG and Curaden USA operated instead under an oral agreement. This is because the written distribution agreement was exchanged but never formally executed. But since “everybody had assumed it had been signed,” according to the managing director of Curaden AG, many of the tenets of the standard written distribution agreement have been observed in practice by both entities. For example, Curaden USA was the exclusive distributor of Curaden AG products within the United States, consistent with § 2.1 of the distribution agreement, and Curaden USA “used its best endeavours to promote the sale of the Curaden AG products throughout the Territory,” consistent with § 5.1.

 

Some of the terms of the standard distribution agreement, however, were not observed by Curaden USA. As relevant to this case, Curaden USA never presented its advertising materials to Curaden AG for review or approval, even though § 5.7 and § 5.8 of the distribution agreement gave Curaden AG the right to approve all marketing materials developed by its distributors.

 

Curaden USA planned a fax campaign as part of its marketing efforts. It purchased a target list of thousands of dental professionals’ fax numbers, and Curaden USA employee Diane Hammond created the two fax advertisements at issue in this case. Both advertisements promoted the Curaprox Ultra Soft CS5460 toothbrush and were directed to “dental professionals.” Displayed on the advertisements was Curaden USA’s contact information, including a fax number, phone number, email address, website, and social media accounts, all of which were connected to and exclusively maintained by Curaden USA. The advertisements made no mention of Curaden AG, instead referring all communications to Curaden USA.

 

Curaden USA did not provide the advertisements for review to either Curaden AG or to Richard Thomas, the managing director of Curaden UK and an advisor to all Curaden AG subsidiaries. Rather, on February 23, 2016, Curaden USA’s vice president and managing director Dale Johnson approved the advertisement and directed Hammond to broadcast the faxes. Hammond in turn instructed Curaden USA employee Magen James to send the advertisement to the purchased target list of over 46,000 fax numbers. Curaden USA hired AdMax Marketing, a fax broadcasting company, to send the faxes. AdMax then hired another company, WestFax, to complete the job.

 

(…) After the faxes were transmitted, AdMax invoiced Curaden USA, and Curaden USA paid the invoices.

 

B. Personal jurisdiction over Curaden AG

 

In resolving Curaden AG’s motions to dismiss and for summary judgment, the district court found that it had specific personal jurisdiction over Curaden AG based on Curaden AG’s contacts with the state of Michigan and that, in the alternative, jurisdiction was proper under Rule 4(k)(2) of the Federal Rules of Civil Procedure based on Curaden AG’s contacts with the United States as a whole. But the court then granted summary judgment in favor of Curaden AG on the question of whether Curaden USA served as an “alter ego” of Curaden AG, holding that the court should not pierce the corporate veil to exercise personal jurisdiction over Curaden AG on the basis of Curaden USA’s actions. Lyngaas renews his “alter ego” theory on appeal, whereas Curaden AG again argues that the district court lacked personal jurisdiction over it on any basis.

 

1.   Curaden USA as an alter ego of Curaden AG

 

We agree with the district court’s conclusion that Curaden USA is not Curaden AG’s alter ego. The alter-ego theory can subject a parent company to personal jurisdiction where “the parent company exerts so much control over the subsidiary that the two do not exist as separate entities but are one and the same for purposes of jurisdiction.” Indah v. S.E.C., 661 F.3d 914, 921 (6th Cir. 2011). In the present case, both parties correctly rely on Michigan law in determining whether alter-ego liability applies. See Bd. of Trustees, Sheet Metal Workers’ Nat’l Pension Fund v. Courtad, Inc., No. 12-2738, 2014 WL 3613383, at *3–4 (N.D. Ohio July 18, 2014) (“Outside of labor law or ERISA claims, courts tend not to supplant state corporate liability doctrine with federal common law.”).

 

To pierce the corporate veil under Michigan law, “first, the corporate entity must be a mere instrumentality of another; second, the corporate entity must be used to commit a fraud or wrong; and third, there must have been an unjust loss or injury to the plaintiff.” In re RCS Eng’rd Prods. Co., Inc., 102 F.3d 223, 226 (6th Cir. 1996) (citing Nogueroas v. Maisel & Assocs. of Mich., 369 N.W.2d 492, 498 (Mich. 1985)). Lyngaas argues that the district court erred, first, by not taking Curaden USA’s undercapitalization into full account in the “mere instrumentality” analysis and, second, by using the incorrect standard in requiring Lyngaas to show that Curaden AG “engaged in deliberate wrongful conduct that was either designed to or actually did produce injury.”

 

Regarding undercapitalization, that factor indeed provides at least prima facie weight in favor of finding that Curaden USA was a “mere instrumentality” of Curaden AG because Curaden USA was not profitable, and the evidence is unclear as to what extent Curaden USA paid Curaden AG for the products it purchased. But undercapitalization is just one factor in the analysis. Whether the corporate entity is a “mere instrumentality of another” is determined by analyzing

(1) whether the corporation is undercapitalized, (2) whether separate books are kept, (3) whether there are separate finances for the corporation, (4) whether the corporation is used for fraud or illegality, (5) whether corporate formalities have been followed, and (6) whether the corporation is a sham.

Lim v. Miller Parking Co., 560 B.R. 688, 706 (E.D. Mich. 2016) (quoting Glenn v. TPI Petrol., Inc., 854 N.W.2d 509, 520 (Mich. 2014)).

Lyngaas does not dispute the district court’s findings that “the two companies keep separate books . . . and follow corporate formalities,” nor that “Curaden USA has its own employees and its own offices.” Because the evidence further shows that the plan was for Curaden USA, launched in 2014, to be profitable within eight years, the district court did not err in finding that Curaden USA’s “undercapitalization” was outweighed by the other five factors, none of which supported the finding of an alter-ego relationship. See Needa Parts Mfg., Inc. v. PSNet, Inc., 635 F. Supp. 2d 642, 647 (E.D. Mich. 2009) (“While it may be true that PSNet was an undercapitalized start-up company, it does not follow that the court must rule as a matter of law that PSNet is a mere alter ego of PSNet Communications.”).

 

Lyngaas also fails to point to any other telling signs of undercapitalization, such as leaving creditors unpaid or using Curaden USA as the parent company’s bank account. Cf. Laborers’ Pension Trust Fund v. Sidney Weinberger Homes, Inc., 872 F.2d 702, 705 (6th Cir. 1988) (piercing the corporate veil where the individual defendant paid corporate expenses out of his own pocket, the corporation paid the individual’s personal expenses, the individual withdrew money from the corporation and left creditors unpaid, and the financial records were inadequate); Grass Lake All Seasons Resort v. United States, 2005 WL 2095890, at *13 (E.D. Mich. Aug. 29, 2005) (piercing the corporate veil where the individual defendant looted the corporation for personal use, did not have his own bank account or property in his own name, and used the company to avoid paying taxes for over ten years).

 

As to whether “the manner of use effected a fraud or wrong on the complainant . . . , it is not necessary to prove that the owner caused the entity to directly harm the complainant; it is sufficient that the owner exercised his or her control over the entity in such a manner as to wrong the complainant.” Green v. Ziegelman, 873 N.W.2d 794, 807 (Mich. Ct. App. 2015). Lyngaas states the correct standard, but points to no evidence showing how Curaden AG exercised its control over Curaden USA in such a manner as to wrong him or to pursue some unlawful end. See Seasword v. Hilti, Inc., 537 N.W.2d 221, 224 (Mich. 1995) (holding that the corporate veil “may be pierced only where an otherwise separate corporate existence has been used to subvert justice or cause a result that is contrary to some other clearly overriding public policy”)

 

2.   Personal jurisdiction over Curaden AG due to its contacts with the United States

 

This leads us to the question of whether there is some other basis for personal jurisdiction over Curaden AG. The district court held that, pursuant to Rule 4(k)(2) of the Federal Rules of Civil Procedure, it had personal jurisdiction over Curaden AG due to Curaden AG’s contacts with the United States as a whole. Notably, Curaden AG does not offer any argument to the contrary. Rule 4(k)(2) “acts as a sort of federal long-arm statute,” Sunshine Distrib., Inc. v. Sports Auth. Mich., Inc., 157 F. Supp. 2d 779, 788 (E.D. Mich. 2001).

 

To establish that jurisdiction is proper under Rule 4(k)(2), “(1) the cause of action must arise under federal law; (2) the defendant must not be subject to the personal jurisdiction of any state court of general jurisdiction; and (3) the federal court’s exercise of personal jurisdiction must comport with due process.” Plixer Int’l, Inc. v. Scrutinizer GmbH, 905 F.3d 1, 6 (1st Cir. 2018); see also Cent. States, Se. & Sw. Areas Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 940 (7th Cir. 2000) (similar). There is no dispute that the first two requirements are met here: this is a federal-question case and Curaden AG has pointed to no state where it could properly be sued. See Adams v. Unione Mediterranea Di Sicurta, 364 F.3d 646, 651 (5th Cir. 2004) (“So long as a defendant does not concede to jurisdiction in another state, a court may use 4(k)(2) to confer jurisdiction.” (citing ISI Int’l, Inc. v. Borden Ladner Gervais LLP, 256 F.3d 548, 552 (7th Cir. 2001))). The remaining question is whether personal jurisdiction comports with due process.

 

Because this is a federal-question case in federal court, the due process requirements emanate from the Fifth rather than the Fourteenth Amendment. Sunshine Distrib., 157 F. Supp. 2d at 788. But they “are the same as with any other personal jurisdiction inquiry, i.e. relatedness, purposeful availment, and reasonableness, only in reference to the United States as a whole, rather than a particular state.” Id. (citing Cent. States, 230 F.3d at 941–42).

 

Curaden AG purposefully availed itself of the American market by launching Curaden USA here. And it mandated that Curaden USA “use its best endeavours to promote the sale of the Products throughout the United States.” Finally, although it did not exercise its right of prior approval over Curaden USA’s marketing materials in this case, Curaden AG nevertheless retains such a right. Curaden AG, in short, made a deliberate decision to target and exploit American markets, thus showing purposeful availment. See Sunshine Distrib., 157 F. Supp. 2d at 789 (holding that the defendant purposefully availed itself of the American market where it “not only sought out and negotiated a licensing agreement with Razor U.S.A. to distribute its products throughout North America, including the United States,” but also “essentially created Razor U.S.A. for this sole purpose”); see also J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873, 885 (2011) (noting that J. McIntyre directed marketing and sales efforts at the United States when it contracted with a U.S. distributor to sell its machines in the country).

 

The next consideration is whether Lyngaas’s TCPA claims arise out of—or relate to— Curaden AG’s contacts with the United States. This court’s standard for meeting that requirement is “lenient.” See Bird v. Parsons, 289 F.3d 865, 875 (6th Cir. 2002). “If a defendant’s contacts with the forum state are related to the operative facts of the controversy, then an action will be deemed to have arisen from those contacts.” CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1267 (6th Cir. 1996).

 

Lyngaas’s alleged injuries caused by the fax advertisements “relate to” Curaden AG’s creation of its U.S. subsidiary and its direction for the subsidiary to promote Curaden AG’s products throughout the United States. Curaden AG is correct, as we discuss later, that it was not the “sender” of the faxes for purposes of TCPA liability. But the standard here is not so stringent, and it is met when “the operative facts are at least marginally related to the alleged contacts” between the defendant and the forum. Bird, 289 F.3d at 875. That standard is clearly met here.

 

The final consideration is whether the exercise of jurisdiction over Curaden AG would be reasonable, such that it would “comport with traditional notions of fair play and substantial justice.” CompuServe, 89 F.3d at 1268. An inference arises that the third factor is satisfied if, as here, the first two factors are met. Id. But where the case involves a “non-resident alien defendant,” the court must give “special weight to the ‘unique burdens placed upon one who must defend oneself in a foreign legal system.’” Theunissen v. Matthews, 935 F.2d 1454, 1460 (6th Cir. 1991) (emphasis in original) (quoting Asahi Metal Indus. Co. v. Superior Court of Cal., 480 U.S. 102, 114 (1987)).

 

We recognize that the burden on Curaden AG is high because it had no prior contact with the U.S. federal-court system. But that burden is nonetheless outweighed by other factors. First, the United States has an interest in enforcing federal laws. Second, Lyngaas’s interest in obtaining relief is particularly high given that Curaden USA is not profitable and is unlikely to be profitable in the immediate future. Cf. City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 666 (6th Cir. 2005) (finding the interests of the United States and class plaintiffs to be “relatively light” where the court’s jurisdiction over the key defendants was already conceded and “the marginal addition of one of the defendants would add little or nothing to the potential recovery should the plaintiffs ultimately prevail on the merits and be awarded damages”). We therefore conclude that the district court’s exercise of personal jurisdiction over Curaden AG is reasonable, and that it comports with due process. And because the district court properly exercised personal jurisdiction over Curaden AG due to Curaden AG’s contacts with the United States as a whole, we need not reach the question of whether the court has personal jurisdiction over Curaden AG due to the latter’s contacts with Michigan alone.

 

C. Curaden AG’s liability under the TCPA

 

Having decided that personal jurisdiction over Curaden AG exists, we will now examine whether the district court erred in concluding that Curaden AG was not a “sender” for purposes of TCPA liability. The TCPA makes it “unlawful for any person within the United States . . . to use any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement.” 47 U.S.C. § 227(b)(1)(C). In 2006, the Federal Communications Commission (“FCC”) promulgated regulations that defined the “sender” of a fax as “the person or entity on whose behalf a facsimile unsolicited advertisement is sent or whose goods or services are advertised or promoted in the unsolicited advertisement.” 47 C.F.R. § 64.1200(f)(10).

 

(…) In sum, the TCPA does not impose strict liability on a manufacturer simply because its products wind up on the face of an unsolicited fax advertisement; the manufacturer must independently fit the role of a “sender.”

 

(…) But the present case differs slightly from Health One because, although Curaden AG did not hire a fax broadcaster to advertise its products, it did enter into a distribution agreement with Curaden USA to “use its best endeavours to promote the sale of the Products throughout the Territory.” The determinative question, therefore, is whether entering into such a distribution agreement “caused” the sending of the fax advertisements.

 

(…) The distribution agreement in this case mirrors the agreement in Garner Properties. Further, the undisputed evidence shows that Curaden AG did not even know that Curaden USA planned to use faxes as a method of advertisement, much less that Curaden USA had hired a fax broadcaster or created the fax advertisements at issue. Curaden USA, not Curaden AG, paid AdMax’s invoices and communicated with AdMax. Cf. Garner Properties, 2018 WL 6788013, at *3 (“Marblecast did not discuss the Fax with anyone at American Woodmark before it was sent . . . . American Woodmark had no independent knowledge that Marblecast was sending the Fax.”). Indeed, all of the contact and social media information listed on the faxes directed consumers to Curaden USA and not to Curaden AG.

 

(…) Because Curaden AG clearly lacked knowledge of and involvement in the fax advertisements, we agree with the district court’s conclusion that Curaden AG was not a “sender” and thus not liable under the TCPA.

 

(…) But, the FCC stated, the statute’s prohibition “does not extend to facsimile messages sent as email over the Internet.”

 

(…) The Bureau also clarified its earlier email caveat: “By contrast, a fax sent as an email over the Internet—e.g., a fax attached to an email message or a fax whose content has been pasted into an email message—is not subject to the TCPA.” 30 F.C.C. Rcd. 8623–24 ¶ 10 (emphasis in original). In other words, with an efax “there is an end-to-end communication that starts when the faxed document is sent over a telephone line and ends when the converted document is received on a computer,” whereas emails originate not as a fax over a telephone line, but “over the Internet.” Id.

 

 

Secondary sources: William B. Rubenstein, Newberg on Class Actions § 12:15 (5th ed. 2017)

 

 

(U.S. Court of Appeals for the Sixth Circuit, March 24, 2021, LYNGAAS v. CURADEN AG, Docket Nos. 20-1199/1200/1243, recommended for publication)

 

 

Hearsay - Data Automatically Generated by a Computer

 

Hearsay

Data Compilations Automatically Generated by a Computer

Federal Procedure

 

(…) Regarding the summary-report logs, we agree with the district court’s conclusion that the logs at issue do not constitute hearsay. The hearsay rule applies only to out-of-court statements, Fed. R. Evid. 801(c)(1), and the rule defines a “statement” as “a person’s oral assertion, written assertion, or nonverbal conduct, if the person intended it as an assertion,” Fed. R. Evid. 801(a). The “written assertion” here was not made by a “person”; the court instead found, and the defendants do not contest, that the logs were data compilations automatically generated by a computer. This means that the logs are not hearsay. See Patterson v. City of Akron, 619 F. App’x 462, 479–80 (6th Cir. 2015) (holding that a Taser Report was “merely a report of raw data produced by a machine” and thus did not constitute hearsay) (collecting similar cases); United States v. Lamons, 532 F.3d 1251, 1263–64 (11th Cir. 2008) (concluding that a computer-generated spreadsheet of telephone billing data was not hearsay).

 

(U.S. Court of Appeals for the Sixth Circuit, March 24, 2021, LYNGAAS v. CURADEN AG, Docket Nos. 20-1199/1200/1243, p. 22, recommended for publication)

Friday, March 19, 2021

Court of Chancery of the State of Delaware, Tetragon Financial Group Limited v. Ripple Labs Inc., Docket C.A. No. 2021-0007-MTZ

 

 

Blockchain Company

 

Cryptocurrency

-       Officially Determined to Constitute a Security?

-       In the Affirmative: Redemption Right is Triggered in Favor of Series C Preferred Stock’s Holder, According to Stockholders’ Agreement

 

Wells Notice and the SEC’s Filing of an Enforcement Action

 

Contract Drafting

 

Meaning of the Term “Determination

 

Delaware Law

 

 

 

In this expedited contractual dispute, defendant Ripple Labs, Inc. (“Ripple”) has moved for summary judgment (the “Motion”). Granted.

 

Ripple is an enterprise blockchain company. It uses a cryptocurrency called XRP in its payment network, and hosts a platform, RippleNet, to  facilitate transactions. Plaintiff Tetragon Financial Group Limited is an   investment company. Plaintiff, through its affiliates (collectively,  “Tetragon”), holds a majority of Ripple’s Series C preferred stock. Ripple  and Tetragon executed a stockholders’ agreement dated December 20, 2019 (the “Stockholders’ Agreement”) memorializing Tetragon’s investment and status as « Lead Purchaser. » Pursuant to that agreement, Tetragon has a redemption right that is triggered upon a “Securities Default” as defined in Section 5.4: A “Securities Default” means if XRP is determined on an official basis (including without limitation by settlement) by the U.S. Securities and Exchange Commission (or (1) another governmental authority or (2) a governmental  agency  of  similar  stature  and  standing)  to  constitute a security  on  a  current  and  going  forward  basis  (and  not,  for  the avoidance  of  doubt,  a  determination  that  XRP  was  a  security  in  the past). If a Securities Default occurs, Tetragon may demand redemption of its shares via a « Redemption Request. » Following receipt of a valid Redemption Request, the Stockholders’ Agreement requires Ripple to redeem Tetragon’s shares within sixty days and apply all of its legally available cash and other assets to the redemption. At issue in this case is whether certain actions by the Securities and Exchange Commission (the “SEC” or the “Commission”)—in particular, a “Wells Notice” and the filing of an enforcement action—constitute a “Securities Default” under Section 5.4.  Some brief background on these processes provides helpful context.

 

Wells Notices And Enforcement Actions Generally

SEC investigations are usually initiated when a potential violation of securities law is identified. If the matter escalates, the SEC will issue a Formal Order of Investigation, which identifies the nature of the investigation, grants power to the SEC’s staff (the “Staff”) to investigate, and allows the SEC and its officers to issue subpoenas and compel sworn witness testimony. If the Staff finds that further action is warranted, the Staff may recommend that the SEC file an enforcement action or institute other enforcement proceedings.

 

Prior to doing so, the Staff may send potential defendants a Wells Notice, which allows potential defendants the chance “to provide a written submission” in defense of their actions. At this stage, the Staff must obtain an Associate or Regional Director’s approval. Once a potential defendant submits a written response to a Wells Notice, that submission must be sent to the Commission with a staff memorandum.

 

Based on the Action Memorandum and the potential defendant’s written submissions, the Commission votes to approve or reject the recommendation.

 

An enforcement action begins when the SEC files suit in federal court. After the Commissioners vote to bring an enforcement action, they are minimally involved in the litigation. Once the SEC decides to file in federal court, the SEC’s role pivots to that of advocate for its position; barring settlement, the Court—not the Commission—decides whether the instrument in question is ultimately a security.

 

(…) In line with “Delaware’s well-understood principles of contract interpretation,” I find that the Stockholders’ Agreement’s plain language is susceptible to only one meaning: a determination “on an official basis” that XRP “constitutes a security on a current and going forward basis” answers the question of whether XRP is a security in the affirmative and with finality. Applying that meaning to the undisputed facts, I conclude that a Securities Default has not occurred.

 

(…) Neither party here meaningfully contends that the definition of Securities Default is ambiguous, so I do not reach the parties’ arguments about their negotiation history or other extrinsic evidence of their intent.

 

Instead, I turn directly to the language in question, and apply it to the Wells Notice and the SEC’s filing of the Enforcement Action.

 

“Under well-settled case law, Delaware courts look to dictionaries for assistance in determining the plain meaning of terms which are not defined in a contract,” as “dictionaries are the customary reference source that a reasonable person in the position of a party to a contract would use to ascertain the ordinary meaning of words not defined in the contract.” And so, I look to contemporary dictionaries to help understand Section 5.4’s undefined terms.

 

By its plain meaning, a “determination” has finality. According to Merriam- Webster’s Dictionary, to “determine” something means “to fix conclusively or authoritatively,” as in to “determine national policy,” or “to settle or decide by choice of alternatives or possibilities,” as in to “determine the best time to go.” The Oxford Learner’s Dictionary similarly states that a “determination” is “the process of deciding something officially.” The “official” nature of a determination is echoed in definitions in the legal arena. In those definitions, a determination comes from an authoritative source, such as a court. Black’s Law Dictionary tells us that a “determination” is “the act of deciding something officially; especially, a final decision by a court or administrative agency.” Merriam-Webster’s definition suggests that a legal determination has finality, « a judicial decision settling and ending a controversy ».

 

(…) Applying this plain meaning to the SEC’s decision to file the Enforcement Action and issue a Wells Notice, it is clear that neither constitutes a Securities Default.

 

(…) Tetragon’s arguments regarding the Wells Notice present an even weaker case for a Securities Default. A Wells Notice precedes an enforcement action, giving potential defendants notice of the SEC investigation and providing them the opportunity to explain to the SEC why an enforcement action is unnecessary. As the parties’ experts explained, a Wells Notice indicates that the Staff might recommend an enforcement action to the SEC Commissioners, but the Commission itself is free to reject this recommendation. SEC Commissioners, who lead the SEC, are simply not involved in the Wells process. Further, a Wells Notice invites the potential defendant to convince the Staff that such a recommendation would be improper. Wells Notice from Staff is a far cry from the type of official, final decision contemplated by Section 5.4.

 

My conclusion that the SEC actions at issue fall short of “determinations” does not gut Section 5.4 of its meaning. It is undisputed that the SEC can make “determinations on an official basis” in three other ways: (1) an administrative proceeding, (2) a report pursuant to the Securities Exchange Act of 1934 (the “’34 Act”), and (3) rulemaking.

 

 

(Court of Chancery of the State of Delaware, March 19, 2021, Tetragon Financial Group Limited v. Ripple Labs Inc., Docket C.A. No. 2021-0007-MTZ)