One year has passed since JDS Uniphase defeated shareholders in a rare class-action securities lawsuit that went to trial. Defense lawyers involved in the case, however, say companies faced with similar lawsuits are still learning valuable lessons from the Uniphase dispute.
A maker of telecommunications equipment, JDS Uniphase had been a star of the dot-com era until the industry collapsed in 2001. Its stock price plummeted from $125 in 2000 to a measly $3 by 2002, and unhappy shareholders filed suit with the usual complaints about management making false and misleading statements. The plaintiffs sought $18 billion in damages.
Then things got strange: Rather than settle, the case actually went to trial—almost unheard of in class-action securities lawsuits. In November 2007, a federal jury in Oakland, Calif., found in favor of Uniphase. And in March 2008, the court entered a no-appeal judgment.
Eth
In a Webcast by Cornerstone Research last month on the first anniversary of the Uniphase victory, the company’s chief defense counsel Jordan Eth highlighted several key takeaways of the case. By following that advice, he said, the chance of losing a jury verdict in a securities lawsuit could be significantly reduced.
Believe in the unbelievable. Eth noted several myths that companies should discard when forging ahead with a securities class-action lawsuit. These typically include beliefs such as:
Securities cases always settle;
A judge won’t allow a “long and boring” case to go to trial;
An expert’s “junk science” is not going to hold water on the stand; and
Wealthy defendants never win.
Get these thoughts out of your head now, said Eth, a partner at the law firm Morrison & Foerster. “The so-called ‘impossible’ can happen.”
Think about the class-action trial in stages. Eth recommended considering class-wide issues first, and issues tied to specific individuals later. From there, you can assess how to structure each stage of the trial, he said.
“Very often, confidential witnesses don’t really say what complaints say they say.”
— Jordan Eth,
Partner,
Morrison & Foerster
“Making sure what it was we were going to focus on and how we were going to do it” was critical, said Allan Kleidon, a testifying expert who helped Uniphase with damages and causation issues.
For example, the right to call specific witnesses “certainly will affect how you present the information,” Eth said. In the Uniphase trial, plaintiffs couldn’t call the individual defendants, who also were defense witnesses, because the defendants otherwise could have wound up having to testify twice, he said.
Factor witnesses into the equation. Lawyers handling class-action lawsuits often tend to work from a checklist, such as whether a restatement is involved, what the stock sales are, who the defendants are, Eth said. That overlooks an important detail for jurors. “I think the key thing that’s missing from this is … what actual people really care about: Did these individuals commit fraud? Are these individuals liars and thieves, or not?”
Likewise, Eth advised, don’t get caught up on confidential witnesses who don’t end up testifying, as was the case in the Uniphase trial. “Very often, confidential witnesses don’t really say what complaints say they say.”
Have an affirmative story. A typical defense lawyer in a securities litigation trial often doesn’t tell stories that resonate with a jury, Eth said; the lawyer says something like “the plaintiffs haven’t pleaded with particularity the exact amount of the overstatement of the revenue.” In other cases, Eth said, defendants may argue, “‘Well, maybe we lied, but that’s not why you lost money.’”
NO APPEAL
What follows is the “Stipulation and Order as to Corrected Form of Judgment” for in Re JDS Uniphase Corporation Securities Litigation.
The parties, through counsel, hereby stipulate to the entry of a corrected form of
judgment. The form of judgment entered by the Court on March 21, 2008, does not identify members of the class, as required by Federal Rule of Civil Procedure 23(c)(3). Correction of the judgment is proper so that the judgment accurately reflects the Court’s intent. Fed. R. Civ. P. 60(a); Vaughn v. Eastern Airlines, Inc., 817 F.2d 685, 689 (11th Cir. 1987). This correction does not alter the substantive rights of any party or class member, as the Court already has certified the class referred to in the corrected judgment, and notice of the action also has been provided to the class. Accordingly, the parties request that the Court enter the [Proposed] Corrected Final Judgment, attached as Exhibit 1.
After the Court entered judgment on March 21, 2008, the parties agreed that no party shall appeal the judgment (or any other issue in this action) and that Defendants will waive their costs of suit recoverable in this action. Under the circumstances of this case, no further notice to the class need now be given. See, e.g., Rosengarten v. Buckley, 613 F. Supp. 1493, 1501 (D. Md. 1985) (“The case law does not require shareholder notice or court approval prior to post-judgment settlement of a class action.”)
Source
No Appeal Judgment in JDS Uniphase Case (March 28, 2008).
Neither example is “a particularly moving story,” Eth said. Instead, the defense should focus on two simple questions: What happened? Why did the stock go down?
During the Uniphase trial, the plaintiff lawyers failed to connect the outcome (a lousy stock price) with the actions taken by Uniphase executives. Specifically, Kleidon said, the plaintiffs’ experts waded through various announcements and take price changes that occurred on those days, measuring the increase in price. The problem: There was no framework to show that the alleged misstatements directly affected stock prices, he said.
At issue was $40 billion that Uniphase eventually wrote down in goodwill—the largest such write-off in U.S. history. Kleidon and other defense experts contended that the prior decline in Uniphase’s stock price had nothing to do with the write-down, because the market was already aware of the company’s declining stock price. “That was old information,” he said.
Weaknesses in the plaintiffs’ argument in the Uniphase case highlight that plaintiffs must do more than show insiders’ sale of stock and a later market decline to win their cases. That’s good news for many companies involved in such suits, which often fear that juries will simply look at top executives reaping stock profits while the little investor suffers, and hold the company liable.
Despite the victory, however, Eth stressed that settling a class-action suit still beats going to trial “There are very few defendants who want their day in court,” he said. “One thing that we easily forget is the toll that any case takes on an individual—the amount of time, worry, money, physical energy—that’s spent on this type of case.”
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