Press Kit

Recent Advocacy in Support of Economic Freedom

▪ NELF Comments on Proposed Amendments to FASB Statements No. 5 and 141(R) August 8, 2008

Articles by and about NELF:

▪ 'Iannacchino': A Retreat on Chapter 93A?

      - Massachusetts Lawyers Weekly, October 6, 2008

▪ Nationwide Class Actions in Massachusetts Courts

        - Massachusetts Lawyers Weekly, August 11, 2008

▪ Rhode Island Rejects Expanded Products Liability

       - GC New England Magazine, Second Quarter 2008

▪ A New Door Has Been Opened

         - New England In-House, July 2008

▪ Courts Bound by Rule of Law, Not Societal Faults

        - The Boston Globe, Opposite Editorial, July 18, 2008

▪ SJC Refuses to Expand Piercing Corporate Veil Doctrine

       - New England In-House, May 2008

▪ Numerous Pending Cases Could Significantly Impact New England Companies

       - New England In-House, March 2008

▪ Ramifications of Bioterrorism-lab Ruling Could Extend 'Well Beyond' BU Project

       - Massachusetts Lawyers Weekly, February 4, 2008

▪ Requiem for the Employment-at-Will Doctrine?

       - New England In-House, January 2008

▪ Mixed-use Ruling Could Spawn More 40B Projects

       - Massachusetts Lawyers Weekly, December 3, 2007

▪ Bias Suit to Test Strength of Arbitration Clause

       - Massachusetts Lawyers Weekly, November 12, 2007

▪ Litigating in Delaware: When is it the right choice for New England companies?

        - New England In-House, November 2007

▪ Is the Supreme Court 'Biased' Toward Business?

       - New England In-House, September 2007

▪ Is Arbitration All That it's Cracked Up to Be?

        - New England In-House, July 2007

NELF White Papers:

The Power to Take: The Use of Eminent Domain in Massachusetts

Employment at Will and its Exceptions: A Troubled Doctrine in Need of Reform

           Employment at Will: Appendix A

           Employment at Will: Appendix B

Confidential Settlements

COMMENTS OF THE NEW ENGLAND LEGAL FOUNDATION

ON THE PROPOSED CHANGES TO FINANCIAL ACCOUNTING STANDARDS

FOR DISCLOSURE OF CERTAIN LOSS CONTINGENCIES

(The Proposed Amendments to FASB Statements No. 5 and 141(R)

INTRODUCTION

The New England Legal Foundation (“NELF”) submits the following comments on the June 5, 2008 Exposure Draft of a proposed Statement of Financial Accounting Standards entitled “Disclosure of Certain Loss Contingencies, an amendment of FASB Statements No. 5 and 141(R)” (“Proposed Statement”).  NELF is a nonprofit, public interest law firm, incorporated in Massachusetts in 1977 and headquartered in Boston.  NELF’s membership consists of corporations, law and accounting firms, individuals, and others who believe in NELF’s mission of promoting balanced economic growth in New England, protecting the free enterprise system, and defending economic rights.  NELF’s more than 130 members and supporters include a cross-section of large and small businesses and other organizations from all parts of New England and the United States.  Among its other activities NELF files amicus curiae briefs, publishes papers and articles, and convenes forums on legal issues of concern to New England businesses and property owners.

As is explained in greater detail below, NELF submits these comments because, in its view, the Proposed Statement would require businesses to make certain litigation-related disclosures that will alarm actual and potential investors and other users of financial statements without reasonable basis or legitimate purpose and will adversely affect the outcome of loss contingencies, to the detriment of all concerned.  The provisions of the Proposed Statement that would require disclosure of the likely outcome of lawsuits, estimated maximum litigation loss exposures, limiting terms of insurance and indemnity agreements, and certain remote contingencies should not be adopted.  They simply do not strike an appropriate balance between the need for disclosures regarding loss contingencies and the need to ensure that the reporting exercise does not itself cause financial loss.

I.   The Proposed Disclosures Would Have No Reasonable Basis or Legitimate Purpose.

Paragraph 7b of the Proposed Statement requires a reporting entity to disclose its “qualitative assessment of the most likely outcome of the contingency”—in other words, whether it is likely to win or lose a piece of litigation or a group of cases of the same type that are aggregated for reporting purposes.  Paragraph 7a of the Proposed Statement requires a defendant company, in the typical case where there is no specified ad damnum in a plaintiff’s complaint, to disclose the defendant’s “best estimate of the maximum exposure to loss” (or, as the Statement Summary phrases it, “the entity’s best estimate of the maximum possible exposure to loss”).  These proposed requirements assume, incorrectly, that the likely outcome of litigation is reasonably predictable and quantifiable.

Litigation is by definition unpredictable.  Many say that a party’s chances in any lawsuit, no matter what its attorneys think of the claims and defenses on the merits, are no better than 50/50, simply because there are always at least two sides.  Even highly experienced attorneys who specialize in litigation are frequently shocked by the results in cases.  Juries nullify the law, and judges get it wrong.  A great many legal questions have not been decided by appellate courts, and new facts can always come to light over the course of litigation that can dramatically alter the application of even established legal precedent.  Defendants cannot count on opponents being amenable to a reasonable settlement, and arbitration is not always the answer either.  In fact, many businesses complain that arbitral awards are typically unpredictable, “split-the-baby” compromises that bear no reasonable relationship to the value of either side’s case.

To expect litigants to provide reliable predictions of the outcome of this inherently unpredictable process is to ask the impossible and provide the users of financial statements with meaningless or even misleading information.  Given the general, “notice pleading” standard of most jurisdictions, it is also typically impossible to determine from the face of a complaint what relief the plaintiff truly seeks or expects.  There is often a very broad range of potential relief and tremendous uncertainty about how a court will approach valuation of the claims and/or the facts that might come to light that will increase or decrease claim value.  And the uncertainty is even greater in the case of a potential claim that has not yet been memorialized in any pleading.

Further, the maximum potential value of a claim will often be far greater than the plaintiff or its attorney has had any intention of seeking or hope of obtaining, and consequently the disclosure of the maximum potential value will unnecessarily raise concerns for those reading financial statements.  It is, for instance, typical for a simple commercial claim with a potential maximum value in the hundreds of thousands of dollars to be settled for $10,000 - $25,000, or even less.  Aggregating the estimated maximum values of such claims only aggregates unrealistically large numbers and misleads users of financial statements about the seriousness of loss contingencies.

Nor is there any purpose to disclosing the maximum potential amount of an unquantified claim.  The highest potential value that could possibly matter to the user of a financial statement is the highest judgment or settlement outlay that can reasonably be expected.

A specific example may be helpful.  Environmental statutes typically impose no-fault liability for environmental violations with enforcement alternatives ranging from informal administrative action (with no penalties), to formal administration action (with potential administrative penalties), to civil enforcement (with potential civil penalties), to criminal enforcement (with potential criminal fines and, for individuals associated with corporate defendants, even imprisonment).  There is typically little, if any, formal guidance distinguishing what should be redressed administratively from what should be prosecuted civilly or even criminally, with government personnel having tremendous discretion to choose among these enforcement options.  Moreover, civil and criminal penalties are often available “per violation,” with each day of violation of each subpart of regulations potentially counting as a separate violation.  Before the government initiates enforcement action, it is generally impossible for a company to know which enforcement option will be chosen.  And even when enforcement action is commenced, the government will not necessarily calculate the amount of administrative, civil, or criminal penalty sought or the number of violations to be counted (even from its perspective) for penalty purposes.

Thus, the Proposed Standard would have every entity that has learned of any alleged violation of any federal, state or local environmental regulations (which fill volumes), no matter how innocent or technical, disclose the possibility of criminal prosecution and imposition of the maximum potential fine for each day the alleged technical violation has continued (which could be years), even though the entity expects nothing more than a “slap on the wrist.”  Such a disclosure can only alarm without reasonable basis or legitimate purpose.

Companies have routinely indicated in their financial statements that they cannot estimate losses associated with complex claims and lawsuits because that is the reality.  There are simply far too many factual and legal variables in complex business litigation to allow for reliable prediction of the likely overall outcome, let alone the particular relief to be afforded and its monetary value.  The current disclosures declining to estimate losses are not evasive, but rather properly alert readers to the uncertain, unpredictable nature of these contingencies such that they can, if concerned, obtain additional information and form their own opinions about potential loss values.

II.          The Proposed Disclosures Would Adversely Affect Contingency Outcomes.

A.  Disclosure of Remote Loss Contingencies

It would be a logical contradiction to assert that reasonable people make important decisions based on avoiding risks that are not even “reasonably possible.”  Yet paragraph 6 of the Proposed Statement requires businesses to disclose such remote risks where the claims in question are expected to be resolved within a year and an adverse resolution “could have a severe impact on the entity’s financial position, cash flows, or results of operations.”  This appears to require disclosure of claims that have only a slight chance (or even an extremely slight chance) of resulting in any loss at all, even when they are not expected to have a severe impact on the reporting entity if a loss does result.  As long as there is any chance, however slim, of severe impact in the near term, disclosure is apparently required.

To require disclosure of such remote loss contingencies is to present them as information reasonably relied upon for decisionmaking, even though they are not, since otherwise there is no point to their disclosure.  Actual and potential investors, creditors, and others reviewing a reporting entity’s financial statement may therefore be misled into acting on risks that are not “reasonably possible,” to their own detriment and that of the reporting entity and all who have an interest in its financial viability.  The greater the amount of the possible exposure, the more likely investors and others will engage in this irrational, albeit understandable, behavior even in the case of a loss that has virtually no possibility of occurring.

Consider a lawsuit that seeks a preliminary injunction against certain key business operation(s) or product line(s).  Given the extraordinary nature of such pre-trial relief, and its fairly routine inclusion as a prayer for relief despite its general unavailability, the company may reasonably gauge the risk of loss as extremely remote, but the impact of such an injunction, were it to issue, might well be severe.  Disclosure of the loss contingency, even while describing it as remote, would give it credence it does not deserve and might therefore cause losses to the company that would not otherwise be experienced.

The unfairness and undesirability of this result are compounded to the extent a remote loss contingency derives from an unasserted claim.  While the Proposed Statement is unclear on this point, it arguably requires disclosure of even an unasserted claim that is not likely to be asserted and that would entail no more than a remote possibility of a loss if asserted, provided there could be a severe financial impact on the business in the near term were the claim in fact to be asserted and result in a loss.[1]  This treats the most remote of all possible loss contingencies—for example, an emotion-driven threat by a party not represented by counsel that does not even state a cognizable cause of action and should, if reason prevails, never result in an actual, let alone successful, claim—as information reasonably needed to guide the actions of others vis-à-vis the reporting company provided the potential claimant asserts an intention to seek relief that, if awarded, could have a severe impact on the company.  The company will not necessarily be saved from disclosure by the proposed provision limiting disclosure to “near term” loss contingencies, since arbitration or other expedited resolution of the dispute might be required or likely.  Nor, given the uncertainties of litigation and arbitration, could a company properly conclude that it would be impossible for such an unasserted, threatened claim to result in a loss. 

Even if the intention of the Proposed Statement is to require disclosure of remote loss contingencies associated with unasserted claims that could have severe financial impact in the near term only when those unasserted claims are probable of assertion (an intention that would need to be reflected far more clearly in the language of any final Statement), that more limited requirement would still necessitate disclosure of an outlandish, threatened claim just because there is reason to believe the party involved will carry through on its threat.  This gives unacceptable influence over the fate of reporting companies to desperate competitors, disgruntled employees, corporate gadflies, and others who are willing to pursue outrageous claims.

B.  Disclosure of Likely Litigation Outcomes and Estimated Maximum Values

The disclosures required by paragraphs 7a and b of the Proposed Statement regarding the “most likely outcome of the contingency,” the “significant assumptions made by the entity in estimating [the maximum loss exposure] and in assessing the most likely outcome,” and the contingency’s maximum possible value should not be adopted.  By their very nature, such disclosures would often affect adversely the outcome of the contingency. 

1.   Disclosure of Predictions as to Likely Litigation Outcomes

If a company concluded that, despite potential defenses, there was more than a 50% chance it would be found liable in a single lawsuit or class of similar claims, the Proposed Statement would require the company to make a statement against its own interests informing opponents that even the company does not expect its defenses to carry the day, and why.  Detailed work product of and privileged communications from defense counsel identifying and assessing potential legal and factual issues, protected at law from disclosure to opposing parties and their counsel, would now effectively be disclosed to the detriment of the defendant through the required recitation of the “significant assumptions” underlying the outcome prediction.  This would completely subvert the adversary system, whereby parties and their counsel bear the burden of proving a case, and would likely increase substantially the amounts that companies must pay to resolve claims outside of court.  Opposing counsel would likely find ways to ensure that judges become aware of these disclosures as well, potentially prejudicing judicial response to the defenses.

This required disclosure is inconsistent with and disrupts the privileged attorney-client relationship.  It is lawyers (both outside and in-house counsel) who evaluate and advise businesspeople regarding the likely outcome of litigation.  Neither attorneys’ advice, nor the bases for their opinions, can be discovered in litigation because it is well recognized in the law that privileged communications between counsel and client, like protected attorney work product, serve legitimate interests that are fundamental to our system of jurisprudence.  The Proposed Statement would effectively force disclosure of legal opinions and the bases for those opinions, chilling attorney-client communication and ultimately defeating the purpose of disclosure.  In effect, clients would be encouraged not to seek their attorneys’ honest opinions about their chances in litigation or any details regarding their attorneys’ evaluation of subsidiary legal and factual issues.  This could have serious negative consequences for decisionmaking in the litigation itself, and disclosures in financial statements would become uninformed, lay predictions by parties with a stake in the outcome and every incentive to adopt an unrealistically rosy outlook on their prospects.

It is no answer to this dilemma that in “rare” cases the Proposed Statement would exempt the contingency from this disclosure requirement.  It is the norm, not the exception, that a disclosure of this nature would be prejudicial.  Moreover, an entity relying on the exemption would still have to explain “the fact that, and the reason why, the information has not been disclosed.”  As soon as a company indicated that it was claiming the exemption with respect to the likely outcome of a claim or lawsuit, it would be presumed that, in the company’s assessment, the outcome will likely be adverse.

Assume for the moment that a company concludes it has valid defenses to a recent claim or lawsuit and intends to pursue those defenses vigorously to achieve a reasonable result, whether by settlement or full judicial process.  Company lawyers have advised business leaders that the odds of prevailing are roughly 40%.[2]  Disclosing in a financial statement that the claim(s) will likely be lost will give “aid and comfort to the enemy” that cannot necessarily be alleviated by aggregation.  There may be only one claim (or one claim of this type) against the company; or the issues (and, hence, the odds) may be the same with respect to the entire class of litigation to which a claim belongs (for example, in a product liability context because all the cases involve the same product with the same alleged defect and injury).

Under the Proposed Statement, the company in the above example must either disclose that it is likely to lose the case or group of cases or it must explain that it cannot reveal the likely outcome without prejudicing its interests.  Either way, it is clear that the company has assessed the odds of prevailing at less than 50%.  What began as lawyers’ best advice to company officials based on their then (likely incomplete) understanding of relevant facts and their preliminary identification and evaluation of legal issues has now become a self-fulfilling prophecy, increasing the company’s exposure.  The company has lost (at least for settlement purposes and perhaps for purposes of judicial process as well) the benefits of any advantageous future developments in the case because its opponents’ settlement expectations will have been raised (and judges’ perceptions of the case potentially indelibly affected) by the initial disclosure, whether explicit or implicit, of a likely adverse outcome.

In fact, as was previously noted, if this aspect of the Proposed Statement is adopted, at least some companies will likely stop seeking professional assessment of their litigation odds.  They will then have no proper basis on which to evaluate appropriate terms for settlement, making settlements far less likely.  The resulting increase in litigation costs and burdens (including the opportunity costs of resource diversion) for both parties and the judicial system could be staggering.  And, of course, compromise settlement payments would be replaced in many instances by higher judgments.  All of this harms the reporting business and its shareholders.

2.      Estimation of Maximum Possible Claim Values

Since most complaints do not specify the amount of damages or the value of other relief sought, paragraph 7a of the proposed Statement would place most defendants in the position of estimating their loss exposure.  Requiring a defendant company to disclose its “best estimate of the maximum exposure to loss” (or, as the Statement Summary phrases it, “the entity’s best estimate of the maximum possible exposure to loss”) would have defendants signaling to plaintiffs claim values that may be far higher than what the plaintiffs had envisioned and would again effectively reveal defense attorneys’ normally privileged work product whereby they evaluate and value claims.

The Proposed Statement indicates that the estimate of maximum claim value could be accompanied by a defendant’s “best estimate of the possible loss or range of loss if it believes that the . . . maximum exposure to loss is not representative of the entity’s actual exposure.”  It is unclear what is meant by either “possible loss” or “actual exposure,” and clearer terminology would need to be employed in any final version of this provision.  “Possible loss” and “actual exposure” both connote “maximum possible loss/exposure,” in which case this option in fact adds nothing.  Even assuming, however, that what is intended is to allow disclosure of the estimated range of possible loss where the maximum estimated exposure is greater than the likely or realistic estimated exposure, the required disclosure of the maximum estimated exposure still provides the plaintiffs with information that could impede efforts to settle the claim for a reasonable value and influence a court’s approach to claim valuation to the company’s detriment.

An example may again help illustrate the point.  Assume that an abutting property owner has sued a business for alleged contamination of its property, seeking unquantified recovery for clean-up costs, diminution in property value, enhanced damages, and attorneys’ fees.  Most businesses are unlikely to have other, simultaneous claims of this nature to combine with this claim for reporting purposes, and yet the Proposed Statement indicates that defendant companies must nonetheless disclose their estimated maximum exposure to loss.

This kind of case involves a myriad of factual and legal issues, resolution of which will dramatically affect the plaintiff’s likelihood of success and, if it succeeds, the value of its recovery.  The source of the contamination is typically in dispute and may not be the responsibility of the defendant company at all.  Discovery may reveal that the plaintiff was on notice of or even knew about the contamination for a long time and sat on its rights, such that recovery will be barred under applicable statutes of limitations, or there may be questions as to whether the plaintiff properly complied with statutory prerequisites to filing suit.  The plaintiff may have itself undertaken some activity on its property that has contributed to the contamination, caused contamination to migrate to its property, or aggravated the costs of remediation or the impact on the value of its property.  There may be unrelated, area-wide contamination that has commingled with the contamination in question and/or affected neighborhood property values to the point where the contamination at issue arguably has no additional impact.  The plaintiff may have performed an unnecessary, inefficient, or otherwise overly costly clean-up for which recovery (or full recovery) is unwarranted.  The nature and extent of the contamination may be such that expert appraisers will reach widely divergent opinions regarding the fact and/or the amount of any diminution in the property value.  It may be unclear what position, if any, government agencies with oversight authority will take with respect to the need for remediation or the proper remedial approach.  Moreover, the law of the jurisdiction may be unsettled as to the proper approach to valuation of these claims.  And there is tremendous uncertainty in the law generally regarding the calculation of punitive damages, with the consequence that a “run-away jury” may impose a punitive award that is grossly disproportionate to the amount of compensatory damages. 

Despite these many open questions, the Proposed Statement would require a defendant company and its counsel to predict, upon the filing of a general and uninformative complaint (or even before), and without the benefit of factual discovery or other legal proceedings clarifying the plaintiff’s expectations, the maximum amount to which the company may be exposed, which in this scenario could well be in the millions of dollars even without accounting for enhanced damages.  When further proceedings reveal that there are very strong defenses to plaintiff’s claims such that the likely recovery is minimal or nil, the defendant faces the virtually impossible task in subsequent settlement discussions of convincing the plaintiff to ignore the defendant’s own, original indication of the maximum value of the claim.  As a result the case will be far less likely to settle, to the disadvantage of both parties and the legal system.

C.  Disclosure of Limiting Terms in Insurance and Indemnity Agreements

Similar considerations argue against the Proposed Statement’s requirement in paragraph 7c that parties disclose detailed information about the terms of insurance and indemnity agreements.  Those disclosures are to include applicable “limitations . . . that could affect the amount of the recovery.” 

Insurance and indemnity agreements are themselves often the subject of litigation because their proper interpretation and application is debatable.  For instance, environmental insurance policies have been subject to litigation over what triggers coverage (i.e., is the “occurrence” that triggers coverage when the release of contamination first occurs, when it is discovered, or the entire time during which it is present in the environment), interpretation of the word “sudden” in provisions allowing coverage only for “sudden and accidental” pollutant releases, application of the “owned property” exclusion in the context of groundwater contamination, and the applicability of pollution exclusions to contamination that occurs as a result of another covered loss (e.g., fire or explosion).  These and many other coverage issues remain highly debatable in many jurisdictions, and disclosing potential limitations on recovery would reveal legal reasoning regarding potential coverage problems that could aid the insurer in subsequent negotiations or litigation.

Decades of litigation over insurance and indemnity agreements in the environmental and toxic tort contexts demonstrate that it is far from the “rare” case where the terms of these agreements are debatable in their application such that the disclosures required by the Proposed Statement would prejudice pursuit of the insurance coverage or indemnity.  Nor can aggregation necessarily alleviate the problem, since a single or limited number of insurers or indemnifying entities may be involved in all aggregated claims (e.g., a company’s general liability insurer).  Mandatory disclosure of potential limitations on recovery of insurance or indemnities is again simply too prejudicial to the reporting entity, and therefore ultimately harmful to investors.

CONCLUSION

For all of these reasons, the Board should not require businesses to predict the outcome of litigation against them, report remote contingencies, or disclose potential limitations in insurance and indemnity agreements.  There is simply no way to impose such obligations without prejudicing the outcome of the reported contingencies.  Similarly, any estimated claim value runs the risk of exceeding the value that a plaintiff and its attorney attach to a claim, with resulting prejudice to the reporting party.  Therefore, quantitative disclosures should be limited to actual claim amounts specified by claimants.

The purpose of reporting loss contingencies is, of course, to inform users of financial statements of “the likelihood, timing, and amount of future cash flows associated with loss contingencies . . .” to the extent reasonably predictable. Proposed Statement, par. 4.  The existing FAS5 Standard serves this purpose, while protecting the legitimate legal interests of reporting entities and thereby preserving shareholder value.  The purpose of financial reporting is most definitely not to affect in any way the outcome of loss contingencies, and yet the aspects of the Proposed Statement discussed herein would do just that, to the detriment of both reporting entities and the very people the Board seeks to protect.

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The following article, by NELF President Martin Newhouse, appeared in Massachusetts Lawyers Weekly on October 6, 2008:

'Iannacchino': A Retreat on Chapter 93A?

A recent decision by the Supreme Judicial Court brings up many questions about the SJC’s interpretation of the state’s consumer protection law.

The ruling in Iannacchino v. Ford Motor Co., 451 Mass. 623 (2008), raises yet again the specter of successful Chapter 93A claims that are not based on any actual injuries.

Two years ago, the SJC in Hershenow v. Enterprise Rent-A-Car Company of Boston, Inc., 445 Mass. 790 (2006), had seemingly ended the debate on this point when it held that consumers must allege and ultimately prove an actual injury to prevail under Chapter 93A.

As the court put it, even when conduct could be considered deceptive per se, a plaintiff “must demonstrate that [the] ... deception caused a loss” in order to recover under the statute (G.L.c. 93A, §9). Hershenow, at 798-99.

Massachusetts’ businesses welcomed Hershenow’s clarification of the injury requirement under Chapter 93A, since it removed potential exposure to individual lawsuits and class actions for money damages based on allegations of conduct (often innocent mistakes) that caused no harm to anyone.

As the New England Legal Foundation long had argued, this was consistent with the consumer protection statute itself, which expressly states that monetary damages are to be awarded for “actual damages” (or $25 when actual damages are less than that amount).

In upholding the actual-damage requirement, Hershenow restored the balance the Legislature had struck between the interests of consumers and businesses when it enacted Chapter 93A.

Unfortunately, the SJC’s decision in Iannacchino — while claiming consistency with Hershenow — raises many questions about its direction in the consumer protection area. Iannacchino may sow confusion where Hershenow had seemingly brought clarity.

Faulty door handles?

Iannacchino was a class action filed on behalf of all Massachusetts residents who owned certain Ford vehicles from model years 1997-2000. The plaintiffs alleged the outside door handles of their vehicles were defective because they did not comply with a specific federal safety standard.

In no case, however, had the outside door handles on any of the plaintiffs’ vehicles ever malfunctioned or caused personal injury, property damage or out-of-pocket loss through either repair or resale at a discounted value.

The trial court followed Hershenow and dismissed the Chapter 93A claim as “speculative and premature” because the complaint did not allege actual damage caused by the door handles.

While the SJC upheld the dismissal, it surprisingly said that, on the facts of the case, the lack of any actual injury arising from the allegedly defective door handles did not bar a claim under Chapter 93A.     

The court justified this seeming departure from the actual-injury standard, first, by declaring that Hershenow did not control because its facts were different. Hershenow involved a car rental transaction of limited duration, and the plaintiffs had sued after the transaction had been completed with no damage to them. In contrast, the court said the plaintiffs in Iannacchino still owned the allegedly defective motor vehicles.

Second, the SJC found Chapter 93A’s actual-loss requirement was satisfied in Iannacchino by determining, as a matter of law, that when a manufacturer of an inherently dangerous product is alleged to have knowingly failed to comply with a safety regulation, the consumers who purchased the product necessarily paid for something they did not receive, i.e., regulatory compliance.

This, the SJC found, is a compensable economic loss, measurable by the cost of bringing the vehicles into regulatory compliance, for which the consumers could sue under Chapter 93A.

Regulatory compliance 

That motor vehicles should be manufactured in compliance with all applicable federal safety standards is not debatable. However, whether a lawsuit under Chapter 93A is an appropriate way to deal with alleged noncompliance in this area is debatable.

The court’s reasoning was unaffected by the fact that, over the years, none of the door handles had ever malfunctioned. In fact, the court indicated it did not consider the absence of a “manifested defect” to bar recovery under the statute.

To be sure, the court sought to satisfy Hershenow’s actual-damage requirement by creating a new per se rule that economic damage occurs whenever a consumer purchases a vehicle that does not meet a safety requirement.

But the court adopted the rule a priori regardless of whether any individual consumer could prove he or she paid for a “safety regulation-compliant vehicle[],” as opposed to a vehicle that would in fact perform safely.

In addition, to the extent the new rule rewards plaintiffs for the risk of a possible future malfunction, it compensates potential loss as opposed to actual loss as required by Hershenow and Chapter 93A.  

Finally, the measure of economic loss adopted by the SJC — the cost of bringing the product into compliance — raises the issue of whether a damage award in such a case is even appropriate.

When no malfunction or personal injury has occurred, doesn’t it make sense to require that the vehicle be brought into compliance rather than to award damages, which might not be used by the plaintiffs to remedy the alleged defect?

The court’s seeming departure from a strict application of Hershenow, and its adoption of a per se injury rule, may lead to an undesirable result.

A bright side 

The SJC’s decision in Iannacchino has a bright side. The court adopted a new standard for Rule 12(b)(6) motions to dismiss, requiring plaintiffs to allege facts that plausibly suggest they are entitled to relief, as opposed to mere conclusory allegations.

Indeed, under this new standard, the court dismissed without prejudice the Chapter 93A claims on the basis that the plaintiffs had not adequately alleged that their vehicles failed to comply with an applicable safety regulation.

The court also declined, in the absence of any alleged personal injury or property damage, to adopt a rule that would hold a company liable under Chapter 93A for failing to meet its own internal “self-imposed standards that may in fact be aspirational goals conducive to the development and implementation of improved safety measures that exceed regulatory requirements.”

Despite these more positive aspects of the court’s decision, the issues discussed above are troubling and will undoubtedly have fallout as the SJC’s jurisprudence under Chapter 93A continues to develop.    

Martin J. Newhouse is president of the New England Legal Foundation. NELF filed an amicus curiae brief in Iannacchino v. Ford Motor Co. in support of the defendant.    

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The following article, by Jo Ann Kaplan, appeared in Massachusetts Lawyers Weekly on August 11, 2008:

Nationwide Class Actions in Massachusetts Courts

The jurisdiction of Massachusetts courts over nationwide class actions remains subject to challenge despite a recent decision of the Supreme Judicial Court addressing the issue.

The ruling, Moelis v. Berkshire Life Ins. Co., 451 Mass. 483 (2008), is a mixed bag for class-action defendants sued in Massachusetts courts.

On the one hand, the decision provides welcome confirmation that a plaintiff class containing nonresidents cannot be certified in a Massachusetts court unless a basis exists for the exercise of personal jurisdiction over every nonresident putative class member.

However, the court also concludes that Massachusetts courts can constitutionally exercise personal jurisdiction over nonresident plaintiff class members who have “minimum contacts” with the commonwealth even though state rules afford no opportunity for those putative class members to “opt out” of the action.

This latter conclusion appears to be inconsistent with governing Supreme Court precedent.

Debatable interpretation

The Berkshire Life case was an attempted nationwide consumer class action based on allegations that the insurer’s agents deceived purchasers of Berkshire policies. The SJC’s decision, authored by Justice Judith A. Cowin, upheld the trial court’s denial of certification for both nationwide and statewide classes.

The court based its decision with respect to the nationwide class on a debatable interpretation of the opinion of the U.S. Supreme Court in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), regarding constitutional limits on the exercise of jurisdiction over nonresident plaintiff class members.

The SJC interpreted the Shutts decision, as have some other courts, as permitting a non-opt-out jurisdiction like Massachusetts to certify a plaintiff class containing nonresidents provided the constitutional “minimum contacts” standard is satisfied.

On the facts presented, the court concluded that the nonresident Berkshire insureds did not have minimum contacts with Massachusetts and that a nationwide class therefore could not be certified. 

A plain reading of the Shutts decision, however, does not support the SJC’s conclusion in Berkshire Life that “minimum contacts” can substitute for an opt-out right.

In Shutts, the Supreme Court expressly rejected the petitioner’s suggestion that it apply to nonresident plaintiffs the “minimum contacts” standard for the exercise of jurisdiction over nonresident defendants. 472 U.S. at 807–08.

Having rejected the “petitioner’s premise” as “in error,” the court described the more “minimal procedural due process protection” prerequisite to “the exercise of jurisdiction over the claim of an absent class-action plaintiff” where that claim is for “money damages or similar relief at law.” Id. at 808–12.

In its critical ruling for current purposes, the court stated: “[W]e hold that due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” Id. at 812.

As has been recognized in subsequent Supreme Court cases, this ruling in Shutts appears absolute, requiring that any nonresident plaintiff, even one who has minimum contacts with the forum state, have a chance to opt out of the class. See Ortiz v. Fibreboard Corp., 527 U.S. 815, 848 (1999) (“[In Shutts] we said that ‘at a minimum ... an absent plaintiff [must] be provided with an opportunity to remove himself from the class.’”); Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367, 395 (1996) (Ginsburg, J., concurring in part and dissenting in part, joined by Justice Stevens and, in this respect, by Justice Souter) (“[The Shutts opinion] listed minimal procedural due process requirements a class action money judgment must meet if it is to bind absentees [including] ... a right to opt out ... .”); Ticor Title Ins. Co. v. Brown, 511 U.S. 117, 125 (1994) (O’Connor, J., dissenting from determination that certiorari was improvidently granted, joined by Chief Justice Rehnquist, who authored the Shutts decision, and Justice Kennedy) (“[W]e held in [Shutts] that there is a constitutional right [on the part of nonresident plaintiffs] to opt out of class actions brought in state court” for money judgments.). 

In Shutts, the Supreme Court rejected the suggestion that nonresident plaintiffs must take affirmative steps to “opt in” to a class, as opposed to being deemed to consent to class membership by failing to “opt out.” 472 U.S. at 812–13.

In doing so, the court revealed the theoretical underpinning for its rulings: “Any plaintiff may consent to jurisdiction. [citation omitted] The essential question, then, is how stringent the requirement for a showing of consent will be.” Id. at 812. See also Arthur R. Miller & David Crump, “Jurisdiction and Choice of Law in Multistate Class Actions after Phillips Petroleum Co. v. Shutts,” 96 Yale L.J. 1, 10 (1986) (noting the Shutts court’s “... reliance on consent as the basis of jurisdiction.”). 

The better reading of Shutts, then, appears to be that certification, in a state court action for money damages, of a plaintiff class that includes nonresidents is dependent on the nonresidents’ consent to the court’s determination of their claims, evidenced by notice of and failure to exercise a right to opt out of the class.

This interpretation treats unnamed plaintiff class members as less like defendants and more like named plaintiffs, who are subject to the court’s jurisdiction because they have affirmatively availed themselves of the tribunal for resolution of the dispute in question.

Under this interpretation of Shutts, the opt-out and related procedural protections required for nonresident plaintiffs are not, as the SJC describes them in Berkshire Life, “an alternative to the traditional minimum contacts test,” 451 Mass. at 487, but rather absolute prerequisites to a state court’s exercise of jurisdiction over nonresident plaintiffs in an action for money damages and, hence, to the court’s certification of a nationwide class.

It would not be accurate to view this interpretation of Shutts as inconsistent with the Supreme Court’s indication in that case that absent plaintiffs require less due process protection than absent defendants.

A nonresident plaintiff who has notice of, but fails to exercise, an opt-out right is bound by the forum’s judgments even in the absence of the minimum contacts that would be required to bind a nonresident defendant and, therefore, has less due process protection.

Nor does this reading of Shutts threaten the status of mandatory class actions limited to state residents. The Shutts opt-out requirement is restricted to nonresident plaintiffs, presumably because state courts have personal jurisdiction over residents based on their domicile within the forum state. See, e.g., G.L.c. 223A, §2.

Right to control litigation

The rationale for providing absent plaintiff class members with an absolute constitutional right to opt out of the class has been explained as a function of an individual’s right to control the litigation of his or her claim. See, e.g., Patricia Anne Solomon, “Are Mandatory Class Actions Unconstitutional?” 72 Notre Dame L. Rev. 1627, 1632 (1997).

As the Shutts opinion itself explains, a “chose in action is a constitutionally recognized property interest possessed by each of the plaintiffs,” and sometimes a nonresident plaintiff’s claim will be “sufficiently large or important that he wishes to litigate it on his own.” 472 U.S. at 807, 813.

The issue is not just of concern to nonresident plaintiffs, however. Defendants must be concerned that they will be bound by the judgment of a Massachusetts court in a nationwide class action while the nonresident putative class members over whom jurisdiction was improperly exercised remain free to bring additional actions against them in other jurisdictions.

For this reason, “the class-action defendant itself has a great interest in ensuring that the absent plaintiff’s claims are properly before the forum.” Id. at 809.

If, as the Berkshire Life decision indicates, Massachusetts courts can entertain nationwide class actions from which plaintiff class members cannot opt out, that enhances the state’s attractiveness as a forum for such actions.

Mandatory nationwide class actions for damages, not permitted under Federal Rule of Civil Procedure 23(c)(2)(B) or many state rules, have obvious advantages from the perspective of the plaintiffs’ bar.

Moreover, while certain class actions brought in state court are removable to federal court under the Class Action Fairness Act of 2005, Pub. L. No. 109-2, §2(a)(2), 119 Stat. 4 (2005), others will continue to be heard in state court. Thus, the import of Shutts for nationwide class actions in Massachusetts is of more than just theoretical concern.

In class actions before Massachusetts courts where “minimum contacts” may be found to exist between nonresident plaintiff class members and the commonwealth, defendants may wish to request that the SJC revisit the ability of Massachusetts courts to exercise jurisdiction over nonresident plaintiff class members.

Depending on the SJC’s response, defendants may choose to petition the Supreme Court for a writ of certiorari to clarify the meaning of the Shutts decision for non-opt-out jurisdictions. Because many jurisdictions have opt-out procedures, a Massachusetts case may be the best vehicle for final resolution of this important question.    

Jo Ann Shotwell Kaplan is general counsel of the New England Legal Foundation, which filed an amicus brief on behalf of itself and the Associated Industries of Massachusetts in support of the insurer in the Berkshire Life case.

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The following article, by Jo Ann Kaplan, appeared in GC New England Magazine in second quarter 2008:

Rhode Island Rejects Expanded Products Liability

New England businesses and their counsel can breathe a collective sigh of relief in the wake of the Rhode Island Supreme Court’s recent reversal of a jury verdict against lead pigment manufacturers in State of Rhode Island v. Lead Industries Ass’n, 2008 WL 2605396 (R.I. July 1, 2008).  The 2006 jury verdict was the first in the nation ever to hold lead pigment manufacturers liable on a public nuisance theory, and a decision upholding that verdict would have vastly expanded public nuisance doctrine, with far-reaching potential ramifications for all who make, market, or sell products.  In an admirable exercise of judicial restraint, Rhode Island’s high court soundly rejected the state Attorney General’s attempt to employ public nuisance doctrine to impose unforeseeable, no-fault liability on parties who lawfully manufactured and sold products many decades before those products allegedly caused harm while in the control of others.

Interior, lead-based house paint has not been manufactured in over 50 years.  When available, it was specified by many government agencies for use in public, residential buildings.  Nonetheless, in 1955, more than 20 years before the federal government banned consumer uses of lead paint, manufacturers acted voluntarily to eliminate the sale of lead-based paint for interior, residential application.

Intact, well-maintained lead paint is not a hazard, of course.  It is only when residential property owners fail to engage in normal maintenance or to repair deteriorating paint that children are potentially exposed to hazardous lead levels.  Like most states, Rhode Island has a comprehensive statutory scheme that requires landlords to engage in such maintenance and repair and imposes liability on them if they fail to do so.  And this program has reaped dramatic rewards.  As the former director of the Rhode Island Department of Health testified at trial, the resulting decline in childhood lead poisoning in the state is properly characterized as “a public health success story.”  Yet, prior to the Rhode Island Supreme Court’s decision on appeal, the trial judge was considering an abatement proposal from the Attorney General under which contractors would  enter homes throughout Rhode Island and remove or encapsulate intact lead paint.

Recognizing that an adverse decision in this appeal would provide welcome precedent for the plaintiffs’ bar and other state Attorneys General that might be followed by other courts and would not be limited to the lead paint context, the New England Legal Foundation (“NELF”) filed an amicus brief with the Rhode Island Supreme Court arguing against the requested expansion of public nuisance law.  NELF’s brief reviewed out-of-state decisions and academic commentary in an effort to demonstrate that a decision upholding the jury verdict would place the state far outside the mainstream.  The Court, which relied heavily on the authorities cited in NELF’s brief, embraced the point, concluding that “[t]he law of public nuisance never before has been applied to products, however harmful.”  NELF had further argued that there was simply no deterrent value to imposing retroactive, no-fault, unforeseeable liability and that doing so would discourage product development that is critical to a vibrant economy.

Decision Checks Public Nuisance Claims

The Court recognized that the Attorney General was attempting with its public nuisance claim to avoid the proof requirements of product liability law.  In fact, the AG sought to impose liability without proof of either negligence or intentional wrongdoing on the part of any defendant and without any evidence that a defendant ever sold lead pigment in Rhode Island or that its lead pigment was ever present in any Rhode Island residence.  The AG also sought to turn many alleged private nuisances (i.e., lead paint in multiple private residences) into a public nuisance based simply on aggregation.  And he wanted the Court to disregard the fact that it was the failure by property owners to maintain lead paint on building surfaces, and not the lawful sale of lead pigment, that had caused harm to Rhode Island children. 

Fortunately, reason prevailed.  The Court determined that, “however grave the problem of lead poisoning is in Rhode Island, public nuisance law simply does not provide a remedy for this harm. . . . [D]efendants were not in control of any lead pigment at the time the lead caused harm to children in Rhode Island, making defendants unable to abate the alleged nuisance, the standard remedy in a public nuisance action.  Furthermore, the General Assembly has recognized defendants’ lack of control and inability to abate the alleged nuisance because it has placed the burden on landlords and property owners to make their properties lead-safe.” 

The Rhode Island court has now joined the highest courts of Missouri and New Jersey and the Illinois Appellate Court in rejecting public nuisance liability for lead pigment manufacturers.  Comparable ongoing cases in Ohio and California remain of concern because, as the adage goes, hard cases can make bad law.  However, the high court of Rhode Island has helped point the way for these other courts.  Quoting U.S. Supreme Court Chief Justice Roberts, the Rhode Island justices remind us that “judges must be constantly aware that their role, while important, is limited.  They do not have a commission to solve society’s problems, as they see them, but simply to decide cases before them according to the rule of law.”  Noting that judge-made common law “serves the important social value of stability,” the justices further observe that common law “evolution takes place gradually and incrementally and usually in a direction that can be predicted.”

Applying these precepts of judicial restraint to the case before it, the Rhode Island Supreme Court declined to take the “enormous leap” urged by the Attorney General.  The Court acknowledged that for it effectively to create a new cause of action in order to redress the evil of lead poisoning in children “even if based on sound policy and the best of intentions, would be to substitute our will for that of a body democratically elected by the citizens of this state and to overplay our proper role in the theater of Rhode Island government.”  Amen.

Jo Ann Shotwell Kaplan is General Counsel of the New England Legal Foundation, a nonprofit foundation whose mission is to promote balanced economic growth in New England, protect the free enterprise system, and defend economic rights.  Among its other activities, NELF files amicus briefs in appellate litigation involving legal issues of concern to New England businesses and property owners.

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The following article, by Ben Robbins, appeared in New England In-House in July 2008:

A New Door Has Been Opened

Ruling suggests state law can control arbitral enforcement in federal court.

Businesses are frequently drawn to arbitration because it allows them to fashion their own private dispute resolution process.

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The following article, by NELF General Counsel Jo Ann Kaplan and NELF President Martin Newhouse, appeared in The Boston Globe on July 18, 2008:

Courts Bound by Rule of Law, Not Societal Faults

YOUR EDITORIAL "Lead paint: Blame game goes on" (Short Fuse, July 8), slamming the Rhode Island Supreme Court for its recent decision in lead paint litigation, could not have been further off the mark. Judges do not decide who should be "blamed" for societal problems, however grave. They are bound by the rule of law, and a decision by the court that would have pleased the Globe would have been at odds with the law of every jurisdiction in the United States and the English-speaking world.

The Rhode Island attorney general effectively sought judicial creation of a new cause of action - one that the state Legislature had declined to authorize - in order to impose liability without proof of wrongdoing or causation, or evidence that any defendant's product was even present in Rhode Island. In an 81-page decision, the court acknowledged both the serious problem of lead poisoning in children and the "public health success story" that the Legislature's chosen remedies have occasioned.

The court correctly declined to create retroactive, no-fault, unforeseeable liability for lawful sales of products many decades ago. Criticizing judges for properly performing their important, but limited, function leads to public misunderstanding of and disrespect for the judiciary.

JO ANN SHOTWELL KAPLAN
General counsel

MARTIN J. NEWHOUSE
President
New England Legal Foundation
Boston

The New England Legal Foundation filed a friend of the court brief in the Rhode Island lead paint case, challenging the attorney general's requested expansion of public nuisance law.

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The following article, by NELF President, Martin Newhouse, appeared in New England In-House in May 2008:

SJC Refuses to Expand Piercing Corporate Veil Doctrine

The Massachusetts Supreme Judicial Court recently declined an opportunity to expand the circumstances in which the corporate form may be disregarded.

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The following article, by Jo Ann Shotwell Kaplan, appeared in New England In-House in March 2008:

Numerous Pending Cases Could Significantly Impact New England Companies

A number of pending cases in New England and before the U.S. Supreme Court could potentially have a significant impact on businesses in our region.

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The following article, by Jo Ann Shotwell Kaplan, appeared in Massachusetts Lawyers Weekly on February 4, 2008:

Ramifications of Bioterrorism-lab Ruling Could Extend 'Well Beyond' BU Project

A Dec. 13 decision of the Supreme Judicial Court involving Boston University's proposed bioterrorism laboratory, Allen v. Boston Redevelopment Authority, 450 Mass. 242 (2007), implicitly decided two fundamental issues of first impression regarding the scope of the environmental impact review process under the Massachusetts Environmental Policy Act, G.L. c. 30, Sects. 61-62H.