August 2024 – Page 2 – Class Action Defense

August 5, 2024 by Class Action Defense

Illinois Corrects The BIPA’s “Cataclysmic, Jobs-Killing Damages” Regime In New Reform Legislation

By Gerald L. Maatman, Jr., Ryan T. Garippo, and George J. Schaller

Duane Morris Takeaways: On August 2, 2024, Illinois Governor J.B. Pritzker signed Senate Bill 2979, which amends the draconian penalties under Sections 15(b) and 15(d) of the Illinois Biometric Information Privacy Act (the “BIPA”). Senate Bill 2979 and its reformed language can be accessed here. For Companies caught in the BIPA’s crosshairs, this reform ushers in a welcome reprieve to the former statute’s harsh regime of penalties.

Background On The BIPA’s Former Construction

The BIPA statute codifies restrictions against companies that collect biometric information and identifiers. See 740 ILCS 14/1. The rationale for this legislation was that “[b]iometrics are unlike other unique identifiers that are used to access finances or other sensitive information” and as such, “[t]he full ramifications of biometric technology are not fully known.” Id. § 14/5(c)-(f). Consequently, the BIPA prohibited companies from “collect[ing], captur[ing], purchas[ing], receiv[ing]” or “disclos[ing], redisclos[ing], or otherwise disseminat[ing]” an individual’s biometric data. Id. § 14/15(b)-(d). The BIPA further imposed statutory damages in the amount of $1,000 for each negligent violation of the statute, and $5,000 for each intentional violation. Id. § 14/20.

As a result, what constituted a single “violation” of the BIPA had significant consequences for companies. If violations occurred on a “per person” basis, the highest amount of damages that a company could owe an individual was $1,000 or $5,000 respectively. However, if violations occurred on a “per scan” or “per incident” basis, companies would owe damages for each time that they collected or disseminated that data. Under the latter, companies could be required to sometimes pay “class-wide damages [that] . . . exceed $17 billion” dollars. Cothron v. White Castle System, Inc., 2023 IL 128004, ¶ 76 (Feb 17, 2023) (Overstreet, J., dissenting). Despite the legislature’s concerns with collecting biometric information, many companies argued that this outcome cannot be what the Illinois General Assembly intended.

Regardless, on February 17, 2023, the Illinois Supreme Court issued a landmark decision on this statutory question. The Supreme Court held that “the plain language of section 15(b) and 15(d) demonstrates that such violations occur with every scan or transmission.” Id. at ¶ 31. However, the opinion was not unanimous. Justice Overstreet objected to this interpretation of the statute and criticized the majority for adopting an interpretation that caused “Illinois businesses to be subject to cataclysmic, jobs-killing damages, potentially up to billions of dollars, for violations of the Act.” Id. at ¶ 73 (Overstreet, J., dissenting). But Justice Overstreets’ dissents were only dissents, and his interpretation of the law was not adopted.

Legislative Revisions To The BIPA Under SB 2979

On August 2, 2024, and over a year later, Governor Pritzker and the Illinois General Assembly vindicated Justice Overstreet’s dissents. They explained that “it does not withstand reason to believe the legislature intended this absurd result.” Id. SB 2979 makes two major corrections to the BIPA’s draconian reach. First, the reform removes “per scan” violations from the statute. Now, damages under Sections 15(b) and 15(d) of the BIPA accrue on a “per person” basis. Specifically, the statute now states:

(b) For purposes of subsection (b) of Section 15, a private entity that, in more than one instance, collects, captures, purchases, receives through trade, or otherwise obtains the same biometric identifier or biometric information from the same person using the same method of collection in violation of subsection (b) of Section 15 has committed a single violation of subsection (b) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section.

(c) For purposes of subsection (d) of Section 15, a private entity that, in more than one instance, discloses, rediscloses, or otherwise disseminates the same biometric identifier or biometric information from the same person to the same recipient using the same method of collection in violation of subsection (d) of Section 15 has committed a single violation of subsection (d) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section regardless of the number of times the private entity disclosed, redisclosed, or otherwise disseminated the same biometric identifier or biometric information of the same person to the same recipient.

740 ILCS 14/20 (b)-(c) (emphasis added).

Second, the statute now also allows for companies to obtain a “electronic signature” in order to secure a release from BIPA liability. 740 ILCS 14/10.

Impact Of SB 2979 On Class Action Litigation Under The BIPA

The importance of this reform cannot be understated. For example, before SB 2979, at a company like the one in Cothron, where each employee “scans his finger (or hand, face, retina, etc.) on a timeclock four times per day — once at the beginning and end of each day and again to clock in and clock out for one meal break — over the course of a year,” that company would have collected a single employee’s “biometric identifiers or information more than 1000 times.” Cothron, 2023 IL 128004, ¶ 78 (Overstreet, J., dissenting). Over the course of five years, that same employee may have scanned over 5,000 times. Tims v. Black Horse Carriers, Inc., 2023 IL 127801, ¶ 32 (Feb. 2, 2023) (holding 5-year statute of limitations applies for violations of the BIPA).

Under those circumstances, at a rate of $1,000 per violation, a company may owe $5,000,000 to that employee alone. And, at a rate of $5,000 per violation, a company may owe $25,000,000 to that employee. After SB 2979’s passing, this exact same company would only owe $1,000 or $5,000 to each employee respectively. A such, this reform ushers in a new era of damages limits surrounding BIPA litigation, and peace of mind to corporate counsel charged with defending their companies from such massive liability.

Implications for Employers

As to companies currently engaged in BIPA litigation, there is reason to believe that such legislation may not be viewed as retroactive. However, even if this legislation is not retroactive, damages under the BIPA are discretionary and are not required to be imposed. See, e.g., Rogers v. BNSF Railway Company, 680 F. Supp. 3d 1027, 1041-42 (N.D. Ill. 2023). Companies can expect the retroactive-effect of SB 2979, or lack thereof, to be the next battleground for BIPA litigation.

Consequently, SB 2979 now places companies in the best position possible to avoid “this job-destroying liability” until the remaining BIPA cases work themselves through the judicial system. Cothron, 2023 IL 128004, ¶ 86 (Overstreet, J., dissenting). As those cases progress, companies should revisit to ensure continued compliance with the BIPA and monitor SB 2979’s impact in on-going BIPA cases.

August 5, 2024August 5, 2024 by Class Action Defense

Eighth Circuit Overturns “Windfall” $78.75 Million Attorney Fee Award In T-Mobile Data Breach Class Action

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Emilee N. Crowther

Duane Morris Takeaways: In a data breach class action entitled In Re T-Mobile Customer Data Security Breach Litigation, Nos. 23-2944 & 23-2798, 2024 WL 3561874 (8th Cir. July 29, 2024), the U.S. Court of Appeals for the Eighth Circuit overturned a district court’s order granting $78.75 million in attorneys’ fees for class counsel as part of the underlying approval of the class action settlement. The Eighth Circuit held that the district court abused its discretion by awarding class counsel an unreasonable attorneys’ fee award, and improperly striking a class member objection to that award.

This decision serves as an important reminder that, in class actions, unnamed class members who cannot opt out of a class can object to and appeal a district court’s approval of a settlement — which can inure to the benefit of both the class and the defendant.

Case Background

At some point before August 16, 2021, a cybercriminal breached T-Mobile’s systems, capturing personally identifiable information for an estimated 76.6 million people. Id. Various plaintiffs filed suits nationwide, and in December 2021, the suits were combined into a multidistrict litigation proceeding in the U.S. District Court for the Western District of Missouri. Id.

In January 2022, the Court appointed twelve attorneys to represent the class in various roles (“class counsel”), who then filed a joint complaint, and entered settlement discussions with T-Mobile. Id. at 7. A month after class counsel filed the complaint, the parties agreed to a settlement where T-Mobile would, among other items, create a $350 million fund from which individual class members could recover up to $25,000 for out-of-pocket losses they could prove resulted from the data breach, and $25 (or $100 if a member of the California sub-class) for all other class members who did not submit proof of loss. Id.

After the class was notified of the settlement, class counsel moved for a fee award of 22.5% of the $350 million settlement fund, or a total award of $78.75 million. Id. at 8. Thirteen class members filed objections to the settlement. Two of the objecting class members, Cassie Hampe (“Hampe”) and Connie Pentz (“Pentz”), contended that the amount of attorneys’ fees sought was too high. Id. The district court struck Hampe’s objection under Rule 12(f), finding that Hampe and her law firm were serial objectors, and that her objection was vexatious, brought in bad faith, and brought for the sole purpose of extracting a fee from the settlement fund. Id. at 9. The district court also struck Pentz’s objection under Rule 12(f) because Pentz’ son had previously filed frivolous objections to class action settlements and Pentz herself would not attend a deposition. Id.

Hampe and Pentz appealed. They argued that the district court erred in relying on Rule 12(f) to strike their objections, and that the class counsel’s fee award was unreasonable. Id.

The Eighth Circuit’s Decision

The Eighth Circuit found that the district court abused its discretion in striking Hampe’s objections to class counsel’s attorney’s fees request, and also by awarding class counsel unreasonable attorneys’ fees. Id. at 19. The Eighth Circuit also held that the district court did not abuse its discretion by striking Pentz’ objections. Id.

First, the Eighth Circuit found that the district court abused its discretion by relying on Rule 12(f) to strike the objections of both Hampe and Pentz. Id. at 10. While Rule 12(f) permits courts to “strike from a pleading . . . any redundant, immaterial, impertinent, or scandalous matter,” the Eighth Circuit reasoned that it did not permit the district court to strike a class member’s objection to a settlement, since it is not a pleading under Rule 7(a). Id. at 9-10.

Second, the Eighth Circuit acknowledged that while the district court had inherent authority to strike objections as a sanction for misconduct, the alleged misconduct asserted here only supported the district court striking Pentz’ objection — not Hampe’s objection. Id. at 10. For Hampe, the Eighth Circuit found that the district court abused its discretion in striking her objection because there was no evidence that either Hampe or her attorneys were attempting to extort a payout, acted vexatiously, broke any rules, or acted unethically. Id. As for Pentz, however, the Eighth Circuit held that it could not fault the district court for striking her objection, since Pentz had been covertly working with an attorney (despite initially stating that she was acting pro se), evaded service of a subpoena compelling her to sit for a deposition, and generally refused to cooperate with the district court’s discovery orders. Id. at 11.

Finally, the Eighth Circuit analyzed Hampe’s objection that the fee award was unreasonable. Id. at 12-19. In class actions, courts use two methods to calculate attorneys’ fees, including: (i) the “lodestar” method (where the court multiplies the number of hours the attorneys worked by their hourly rates); or (2) the percentage method (where the court awards a percentage of the fund that the attorneys helped recover). Id. at 12. While district courts have discretion to choose which method should apply, the Eighth Circuit underscored that district courts should focus on whether or not the fee is reasonable under Rule 23(h), and consider “the time and labor required,” “the amount involved and the results obtained,” and “awards in similar cases.” Id. at 12.

The Eighth Circuit ultimately held that the district court’s attorneys’ fee award was unreasonable and constituted a “windfall” for class counsel. Id. at 16. The district court, in an attempt to demonstrate that the attorneys’ fee award was reasonable, conducted a lodestar crosscheck and found that the lodestar “multiplier” was 9.6, meaning that class counsel would get paid about 9.6 times their customary hourly rates. Id. While district court found this multiplier was reasonable, the Eighth Circuit did not, citing its previous holding in Rawa v. Monsanto Co., 934 F.3d 862, 870 (8th Cir. 2019) (holding that a 5.3 multiplier was too high and amounted to a windfall for class counsel). Id.

Implications For Class Action Defendants

The Eighth Circuit’s ruling in In Re T-Mobile Customer Data Security Breach Litigation serves as an important reminder that class members have power to object to attorney fee awards. While only awarding reasonable attorneys’ fees to class counsel certainly inures to the benefit of the class, it also benefits the defendants in claims-made data breach settlements. When calculating the total “payout” for a defendant in a claims-made data breach settlement, an attorneys’ fee award is a hard cost that drives up a defendant’s total likely payout. However, reducing the attorneys’ fee, it leaves more in the settlement fund for class members to claim. As stated in the 2024 Duane Morris Class Action Review, claim rates in data breach class actions are between 1% and 10%. Accordingly, by raising the amount left in the settlement fund for the class members to claim, the total payout for a defendant will likely substantially decrease.

August 2, 2024 by Class Action Defense

California Supreme Court Rules That Employers Facing Multiple Overlapping PAGA Lawsuits Can Settle With One PAGA Plaintiff Without Intervention By Another PAGA Plaintiff

By Eden E. Anderson, Gerald L. Maatman, Jr., and Shireen Wetmore

Duane Morris Takeaways: The California Supreme Court issued its opinion in Turrieta, et al. v. Lyft, Inc., Case No. S271721 on August 1, 2024. It held that, when an employer is facing multiple overlapping PAGA actions and settles one such action, the plaintiffs in the other PAGA actions are not permitted to intervene in the settled action, to require a trial court to receive and to consider their objections to the settlement, or to seek to vacate the ensuing judgment. The Turrieta decision has significant ramifications for employers facing a multiplicity of PAGA actions and ensures that an employer can settle one such action without substantial interference from other PAGA plaintiffs and their attorneys.

Case Background

In rapid succession between May to July 2018, three Lyft drivers, Olson, Seifu, and Turrieta, each filed separate PAGA actions alleging improper classification as independent contractors. In 2019, Turrieta reached a $15 million settlement with Lyft, which included a $5 million payment to her counsel. As part of the settlement, Turrieta amended her complaint to allege all PAGA claims that could have been brought against Lyft. She then filed a motion for court approval of the settlement.

The LWDA did not object to the settlement. However, when Olson and Seifu and their counsel got wind of the settlement, they moved to intervene and objected. The trial court denied the intervention requests, approved the settlement, and then denied motions by Olson and Seifu to vacate the judgment in the Turrieta PAGA action.

The Court of Appeal affirmed. It held that, as non-parties, Olson and Seifu lacked standing to move to vacate the judgment as only an “aggrieved party” can appeal from a judgment. On the intervention issue, the Court of Appeal explained that the real party in interest in a PAGA action is the State and thus neither Olson nor Seifu had a direct interest in the case.

The California Supreme Court then granted review to consider whether a PAGA plaintiff has the right to intervene, or object to, or move to vacate a judgment in a related PAGA action that purports to settle the claims that plaintiff has brought on behalf of the state.

The California Supreme Court’s Decision

The California Supreme Court agreed with the Court of Appeal and the trial court. Justice Jenkins authored the decision, with Chief Justices Guerrero and Justices Corrigan, Kruger, and Groban concurring.

The California Supreme Court first addressed whether a PAGA plaintiff can intervene in another PAGA action that settles. The Supreme Court noted there was nothing in the PAGA statute expressly permitting intervention, and that PAGA’s purpose — to penalize employers who violate California wage and hour laws and to deter such violations — was well served by the settling PAGA plaintiff. Thus, having other PAGA plaintiffs involved in a settled PAGA claim is not necessary to effectuate PAGA’s purpose. The Supreme Court also found significant the fact that the PAGA only requires that notice of settlement be provided to the LWDA and approved by the trial court, necessarily implying that other litigants need not be informed of the settlement or involved.

The Supreme Court also noted that permitting intervention would result in a PAGA claim involving multiple sets of lawyers all purporting to advocate for the same client and fighting over who could control the litigation and settlement process, and who could recover their attorneys’ fees. Not only does the PAGA not itself address such complexities, but also such a messy situation would thwart the pursuit of PAGA claims, contrary to the statute’s purpose.

The Supreme Court highlighted that PAGA plaintiffs nonetheless have a variety of options to pursue other than intervention. They remain free to seek consolidation or coordination of PAGA cases to facilitate resolution of the claims in a single proceeding. Or a PAGA plaintiff can offer arguments and evidence to a trial court assessing a PAGA settlement, or can raise his/her concerns with the LWDA so as to spur LWDA action.

The Supreme Court then held that the same reasoning for its conclusion against a right to intervention also meant that a PAGA plaintiff has no right to move to vacate the judgment obtained by another PAGA plaintiff in a separate PAGA action, or to require that any objections he/she files to another plaintiff’s settlement be ruled upon.

In a concurring opinion, Justice Kruger emphasized that there is nothing preventing a private plaintiff (rather than a PAGA plaintiff) from intervening to protect their own personal interests as an allegedly aggrieved employee, and she emphasized the trial court’s duty to carefully examine PAGA settlements.

Justice Liu penned a lengthy dissent. Seemingly mistrustful of trial courts’ ability to gauge the fairness of a PAGA settlement, Justice Liu expressed his view that the majority’s opinion creates a “substantial risk of auctioning settlement of PAGA claims to the lowest bidder and insulting those settlements from appellate review.” See Dissent at 2 Justice Liu encouraged the California Legislature to take action to amend the PAGA to expressly confer the rights the majority found lacking.

Implications For Employers

The Turrieta decision has significant ramifications for employers facing a multiplicity of PAGA actions.

By settling with one plaintiff who then amends the complaint to cover the claims at issue in the other PAGA actions, the employer can pull the rug out from underneath the other plaintiffs and their counsel. As we reported last month, recent amendments to the PAGA now require that a PAGA plaintiff have suffered the same alleged injury as the other allegedly aggrieved employees he or she is, as the State’s proxy, representing. That amendment diminishes the likelihood of employers continuing to face multiple overlapping PAGA claims. But, to the extent an employer is facing a multiplicity of overlapping PAGA actions, the Turrieta decision makes clear that settlement of one such action can be accomplished without substantial interference from other PAGA plaintiffs.

August 2, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 67: Key Developments In Securities Fraud Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Nelson Stewart with their discussion of significant developments in the securities fraud class action space, including analysis of two key rulings, class certification rates, and major settlements.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jerry Maatman: Thank you loyal blog readers for joining us for the next episode of our podcast series, the Class Action Weekly Wire. I’m Jerry Maatman, a partner in Duane Morris’ Chicago and New York offices, and joining me today is my colleague from our New York office, Nelson Stewart. Welcome.

Nelson Stewart: Thank you. Great to be here, Jerry.

Jerry: Today we wanted to discuss trends, issues, and important developments in the area of securities fraud class action litigation. Nelson, this is a big space, but could you give us, from your thought leadership perspective, some kind of summary of what you think are kind of key developments in this area?

Nelson: Sure, Jerry. Class action securities fraud claims typically involve an alleged public misrepresentation or omission made by the issuer of a security, a subsequent disclosure that reveals the statement or omission to be false, and a decrease in the value of the security resulting from the disclosure. Securities fraud claims readily lend themselves to class-wide treatment because the number of investors who may claim losses resulting from a misrepresentation is often considerable.

The principal federal statutes for securities fraud claims are the Securities Act of 1933 and the Securities Exchange Act of 1934. Both statutes were enacted for the purpose of regulating securities markets and providing increased disclosure and transparency for investors in the wake of the stock market crash in 1929.

The 1933 Act generally applies to misrepresentation made in connection with an initial offering of securities. The 1934 Act imposes liability for misrepresentations related to the purchase or sale of existing securities.

Jerry: Thanks, Nelson, for that framework. By my way of thinking, the absolute Holy Grail in class action litigation for the plaintiffs’ bar is class certification. They file the case, they certify it, and then they monetize it. How did plaintiffs fare over the last year in terms of certifying securities fraud class actions?

Nelson: In 2023, plaintiffs were incredibly successful in gaining class certification. The plaintiffs’ bar secured class certification at a rate of 97% – or put another way, 35 of 36 motions. Companies secured denials in 3% of the rulings, or just in one case.

Jerry: While we do a comparative study of securities fraud with respect to other areas of law, at least in 2023 securities fraud class certification rates were the highest. We recently did a mid-year report in 2024, and still very high, but down to about 67% – 10 out of 15 cases certified in the securities fraud area. In terms of the key guide posts on the playing field when it comes to securities fraud class action litigation, what are some of the key developments that corporate counsel should be aware of?

Nelson: One of the most notable decisions in 2023 was the U.S. Supreme Court’s ruling in Slack Technologies v. Pirani, et al. The Supreme Court addressed a split among the federal circuits created by the Ninth Circuit’s departure from a well-established interpretation of Section 11(a) of the 1933 Act. A plaintiff bringing a fraud claim under the 1933 Act must show that the purchase of shares at issue can be traced back to the false or misleading registration statement. The statute imposes strict liability and a lower standard of proof for a narrower class of securities than the 1934 Act, which applies to misrepresentations or omissions for any security, but carries a higher standard of that requires plaintiffs to show a scienter, reliance, and loss causation.

In Slack, plaintiffs had purchased shares through a direct listing that offered both registered and unregistered stock shares. The inability to trace unregistered shares to a registration statement would be fatal to plaintiffs’ claims under the 1933 Act. In denying defendant’s motion to dismiss the class action, the district court attempted to accommodate the traceability challenges of a direct listing through a broad reading of the “such security” phrase of Section 11(a). The district court held that the unregistered shares were “of the same nature” as shares subject to the registration statement and plaintiffs therefore had standing under Section 11(a) to bring the suit.

On appeal, the Ninth Circuit noted that the application of Section 11(a) to the direct listing was one of first impression and it affirmed the district court’s decision while rejecting its broader reading of Section 11(a). The Ninth Circuit expressed concern that the more restrictive reading of the statute advocated by Slack, and applied by other circuits, would limit an issuer’s liability for false or misleading statements through the use of a direct listing and thereby disincentivize the 1933 Act’s goal of transparency.

On further appeal, the Supreme Court vacated the Ninth Circuit’s decision and held that the language of the 1933 Act was intended to narrow its focus. Citing Sections 5, 6 and 11(e) as support for the conclusion that the term “such security” refers back to shares that are subject to the registration.

Slack confirms that the novelty of a specific type of offering, such as a direct listing, cannot excuse the well-settled requirements for claims brought under Section 11 of the 1933 Act. Unregistered shares from a direct listing or certain post-IPO offerings are subject to dismissal at the pleading stage for lack of standing under Section 11 if those shares cannot be traced back to the initial registration. Whether an issuer is required to register all shares for sale in a direct listing was not addressed in Slack because this question had not been raised in the prior proceedings.

Another key ruling came out of the Southern District of New York in a case titled Underwood, et al. v. Coinbase Global. There, plaintiffs brought claims under Sections 5 and 12(a) of the 1933 Act and Sections 5 and 29(a) of the 1934 Act. Plaintiffs alleged that Coinbase operated a securities exchange without registering with the SEC. Their amended complaint also alleged that the cryptocurrency tokens sold on the Coinbase platform were securities as defined under both statutes.

However, the issue of whether digital assets must be registered with the SEC was not determined because the court found the plaintiffs failed to state a claim under the 1933 Act and the 1934 Act. Section 5 of the 1933 Act prohibits any person from selling unregistered securities unless the securities are exempt from registration. Section 12(a) creates a private right of action for any buyer against the seller of an unregistered security. To meet the definition of a seller under Section 12(a), a seller must either pass title or other interest directly to the buyer, or the seller must solicit the purchase of a security for its own financial interest. The court granted Coinbase’s motion to dismiss the claims brought under 12(a) because the plaintiffs did not sufficiently plead either requirement.

The initial complaint had stated that there was no privity between a user of the Coinbase platform and Coinbase. The user agreement also expressly stated that Coinbase was simply an agent, and a user who purchased a token from through the online platform was not purchasing digital currency from Coinbase. Though the plaintiffs had attempted to avoid this issue by amending their complaint to state that privity only existed between the user and Coinbase, the court held that it would not allow an amended complaint to supersede the admissions in the plaintiffs’ earlier pleading, or the express language of the user agreement. These facts precluded an action against Coinbase under Section 12(a). The company did not meet the definition of a statutory seller as defined in Section 12(a) because it did not pass title directly to a buyer. The plaintiffs also failed to plead anything more than collateral participation in the purchase of the tokens. The court concluded that absent allegations that the plaintiffs purchased the tokens as a result of active solicitation by Coinbase, Section 12(a) was inapplicable.

The court further held that the plaintiffs’ claims under the 1934 Act also failed for lack of privity. Section 29(a) of the 1934 Act provides that every contract that violates any provision, rule, or regulation is void. The plaintiffs argued that the user agreement and the transactions were void because they involved contracts that were premised on an illegal purchase of an unregistered security on an unregistered exchange, which violated Section 5 of the 1934 Act. The amended complaint sought rescission of the transaction fees and the transactions. To allege a violation of Section 29(b), the plaintiff is required to show that: (i) the contract involved a prohibited transaction; (ii) the plaintiff is in contractual privity with the defendants; and (iii) the plaintiff is in a class that the 1934 Act intended to protect. The court again found that privity was not established under the user agreement. The initial complaint asserted that the plaintiffs contracted with users of the Coinbase platform, not Coinbase. Thus there was no contractual privity with Coinbase. The court also noted that the user agreement was not a contract that required the plaintiffs to do anything illegal. A party to the user agreement was free to use the platform to transact crypto currencies or not transact at all. The court concluded this was insufficient to render the sale of digital assets on the platform a prohibited transaction under Section 5 of the 1934 Act.

Recently, in April of 2024, the Second Circuit reversed the district court’s dismissal of alleged Securities Act violations, fin ding the district court improperly relied on the plaintiffs’ initial complaint and Coinbase’s user agreement, instead of looking solely to the allegations in the amended complaint. The Second Circuit noted that some versions of the user agreements in place when the transaction at issue occurred had conflicting language that could plausibly support the allegations that defendants had passed title to the plaintiffs under Section 12(a)(1) of the 1933 Act. The court upheld dismissal of certain claims brought under the Securities and Exchange Act of 1934, finding that the plaintiff’s conclusory out allegations provided insufficient detail to support a claim for rescission.

Jerry: Thanks for that analysis. Evident to see a lot of developments in this space over the past 12 months. In terms of that monetization of securities fraud class actions, how did the plaintiffs’ bar do on the settlement front?

Nelson: There were several settlements of over a billion dollars reached in securities fraud class actions last year, and the top 10 class action settlements in this space add up to $5.4 billion.

In SEC, et al. v. Stanford International Bank, the Court granted approval of a $1.2 billion settlement to resolve investors’ allegations that the banks aided Robert Allen Stanford’s $7 billion Ponzi scheme.

A $1 billion settlement was approved in In Re Dell Technologies Inc. Class V Stockholders Litigation, which was a class action brought by investors alleging Dell, its controlling investors, and its affiliates shortchanged shareholders by billions in a deal that converted Class V stock to common share.

And in In Re Wells Fargo & Co. Securities Litigation, another $1 billion settlement was approved in a class action brought by investors alleging that the company made misleading statements about its compliance with federal consent orders following the 2016 scandal involving the opening of unauthorized customer accounts.

Jerry: It seems like 2024 is equally upbeat for the plaintiffs’ bar. We’ve tracked through the first six months settlements totaling over $2 billion, with three individual settlements near the half-billion mark: $580 million, $490 million, and $434 million for securities fraud class action settlements, so a very robust area for the plaintiffs’ bar.

Well, thanks so much for your insights, Nelson. Very, very helpful in this space. And thank you to our loyal listeners for tuning in to this episode of the Class Action Weekly Wire.

Nelson: Thanks everyone.