Corporate America is cheering a recent victory by JDS Uniphase over aggrieved shareholders in a rare class-action securities lawsuit that actually went to trial—an outcome that may embolden other companies to fight class-action lawsuits as well.
The verdict was handed down Nov. 27 by a jury in federal district court in Oakland, Calif. Shareholders had been seeking $18 billion in damages from the company and four former executives. A maker of telecommunications equipment, JDS Uniphase had been one of the stars of the dot-com era, until the industry collapsed in 2001 and the stock cratered.
Class-action securities lawsuits hardly ever go to trial; according to NERA Economic Consulting, nearly 40 percent of all class-action suits filed from 2001 to 2006 were dismissed, and almost all the others were settled. Any case that does reach a judge and jury, therefore, is closely watched.
Eth
“There are plenty of people who said these lawsuits in general can’t be tried,” says Jordan Eth, a lawyer with the law firm Morrison & Foerster and Uniphase’s chief defense counsel. “This is a really great example that this is not true.”
Even attorneys for the plaintiffs admitted that Uniphase played its cards skillfully. “The defendants took a calculated risk that was very intelligent for them in hindsight,” says Barbara Hart, with the law firm Labaton Sucharow and lead counsel for the plaintiffs. Connecticut Retirement Plans and Trust Fund, known as an aggressive protector of its investment interests, was lead plaintiff.
The complaint itself was nothing unusual as class-action securities go. The plaintiffs accused four former executives—Kevin Kalkhoven and Jozef Straus, both CEOs; Anthony Muller, a CFO; and Charles Abbe, a chief operating officer—of making false and misleading statements to investors and selling their shares for hundreds of millions in profit, knowing the stock would soon falter. After peaking at $125 in August 2000, JDS Uniphase’s stock plunged to a mere $3 two years later. Uniphase also eventually wrote down $40 billion in goodwill, the largest such write-off in U.S. history.
Eth and other defense lawyers, however, contended that it was impossible for Uniphase and its executives to known in advance what the company’s customers would do. Moreover, the executives sold a larger percentage of their shares before August 2000 and still held on to a large majority of their stock holdings.
Eth points to the jury’s speedy decision (it rendered a verdict after only two days of deliberations) as evidence that plaintiffs must do more than show insiders’ sale of stock and a later market decline to win their cases. That is often a fear of companies involved in such suits: that juries will simply look at top executives reaping stock profits while the little investor suffers, and hold the company liable.
“Here was a stock with a tremendous market price loss, the largest ever goodwill write-down, hundreds of millions of dollars of stock sales, and it [the trial] wasn’t even in a red state,” Eth says. “The verdict couldn’t be more resounding.”
Lefler
“In this case, it is clear that the jury separated the issue that the executives made a lot of money from the issues of the case,” adds Daniel Lefler, partner at the law firm Irell & Manella. “This decision will embolden the defense bar a little and tells plaintiffs that juries will listen.”
Consequences Unclear
Still, other legal experts stress that for most companies, settling a class-action lawsuit will remain their first and best choice. Lewis Murphy of the law firm Squire, Sanders & Dempsey, believes actual trials will continue to be rare sights. “Most litigants will act like rational people and avoid all-or-nothing gains,” he says.
That being said, Murphy also believes the Uniphase verdict will give companies more confidence to stand their ground during negotiations with plaintiffs. “Certainly, the result of the case would encourage the defense to be tougher,” he says.
Lefler agrees: “In weaker plaintiff cases where in the past they were inclined to push for more money, the defense will say, ‘We’ll try the case.’”
Hart
Hart, however, says the Uniphase case had several unusual circumstances that make its ramifications harder to predict. The facts of the case were complex, she contends, and Uniphase had no government probes against it; plaintiffs often use such probes to glean details of corporate information during the discovery phase of a case.
Uniphase is also based in Canada, adding an extra logistical hurdle to pretrial activity and deposition of Canadian witnesses. For example, one Canadian witness initially refused to testify, forcing Hart to wrangle with U.S. and Canadian courts for more than a year before the individual finally did sit down for a deposition. “To get a foreign witness is a much more difficult road,” she says.
Another class-action trial is underway now in Arizona, against the scandal-plagued Apollo Group. But both Hart and Eth stress that they don’t believe the Uniphase verdict will lead to a surge in class-action trials. Rather, they say, Uniphase went to trial because of its unique complexity and fact pattern. Says Hart: “I don’t expect this to have any impact on any longer trend.”
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