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Business Law FLASHPOINTS April 2019

April 15, 2019Print This Post Print This Post

Joseph Kish, Segal McCambridge Singer & Mahoney, Ltd., Chicago
312-644-3538 | E-mail Joseph Kish

Lorenzo v. Securities and Exchange Commission

In Lorenzo v. Securities and Exchange Commission, No. 17-1077, 2019 WL 1369839 (Mar. 27, 2019), the Court considered whether a false statement by someone who does not retain the ultimate authority over that statement can be subject to liability under SEC Rule 10b-5 (17 C.F.R. §240.10b-5). Writing for a six-two majority, Justice Stephen Breyer held that the dissemination of false or misleading information with the intent to defraud falls within the broadly worded sections of Rules 10b-5(a) and 10b-5(c) even if the disseminator did not “make” the statements as defined under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 180 L.Ed.2d 166, 131 S.Ct. 2296 (2011).

Francis Lorenzo was the director of investment banking at Charles Vista, LLC. Lorenzo’s only investment banking client at the time was Waste2Energy, a company developing technology to convert waste to renewable energy. In a June 2009 public filing, Waste2Energy disclosed that they had total assets of about $14 million, $10 million of which was intellectual property. Lorenzo was skeptical of this valuation and later testified that he believed the intellectual property to be a “dead asset” because it did not work. 2019 WL 1369839 at *3. In fall 2009, Waste2Energy hired Lorenzo’s firm to sell investors $15 million worth of debentures. Soon after, Waste2Energy disclosed to Lorenzo that its intellectual property was worthless, and its total assets amounted to approximately $371,000. At the direction of his supervisor, Lorenzo sent an e-mail on October 14, 2009, to prospective investors stating that Waste2Energy had $10 million of “confirmed assets.” Id.

The SEC instituted proceedings against Lorenzo in 2013, later finding that he had violated SEC Rule 10b-5(b) of the Exchange Act and §17(a)(1) of the Securities Act of 1933, ch. 38, Title I, 48 Stat. 74. He was fined $15,000 and barred from working in the securities industry for life. Lorenzo then appealed to U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit held that Lorenzo could not be charged with “making” false statements under Rule 10b-5(b) considering Janus, supra. Under Janus, only the “maker” of a statement is liable. In this case, Lorenzo’s supervisor had supplied the contents of the e-mail, had asked Lorenzo to send the e-mail, and had approved the e-mail, making Lorenzo’s supervisor the “maker” of the false statements. Nevertheless, the court sustained the SEC’s finding under SEC Rules 10b-5(a) and 10b-5(c) because Lorenzo had knowingly disseminated false information to prospective investors.

The Supreme Court affirmed the D.C. Circuit. SEC Rule 10b-5 makes it unlawful

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact . . . , or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit . . . ,

in connection with the purchase or sale of any security. 17 C.F.R. §240.10b-5.

The Court held that one does not need to be the “maker” of a statement, akin to the analysis of Rule 10b-5(b) in Janus, to be held liable under subsections (a) and (c).

The Court first looked to the ordinary meaning of the subsections (a) and (c) and found that Lorenzo’s conduct was well within the prohibited conduct. By sending e-mails with information he knew to be untrue, he had “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within subsection (a). Similarly, under subsection (c), he had “engage[d] in a[n] act practice, or course of business” that “operate[d] . . . as a fraud or deceit.” 2019 WL 1369839 at *1. The Court indicated that (a) and (c) capture a wide range of conduct but that there was nothing borderline in this case. Lorenzo’s actions were plainly fraudulent. Finally, the Court stated that conduct under subsections (a), (b), and (c) was not meant to be mutually exclusive from each other and that different portions of securities laws prohibit some of the same activity.

Thus, Lorenzo could be held liable for violating Rule 10b-5 even though he could not be held liable for being the “maker” of a false statement under 10b-5(b).

Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC

The Court in Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC, ___ U.S. ___, ___ L.Ed.2d ___, 139 S.Ct. 881 (2019), considered whether registration of a copyright claim is complete when the copyright holder delivers the requisite application materials to the Copyright Office or when the Copyright Office registers the copyright. Writing for a unanimous Court, Justice Ruth Bader Ginsburg held that registration of a copyright claim is complete when the Copyright Office has processed the application and registered the copyright.

Fourth Estate is a news organization that produces online journalism. It licenses articles out to websites while still retaining the copyrights to those articles. Under this premise, Fourth Estate entered into an agreement with Wall-Street.com for several articles. Under this agreement, Wall-Street.com was required to remove all Fourth Estate content from its website if it canceled the agreement. Wall-Street.com eventually did cancel its account, but it continued to display content produced by Fourth Estate. Fourth Estate subsequently filed a lawsuit alleging copyright infringement, although Fourth Estate had only filed an application with the Copyright Office. The district court dismissed Fourth Estate’s lawsuit, finding that “registration” under the Copyright Act of 1976, Pub.L. No. 94-553, §101, 90 Stat. 2541, requires the Copyright Office to register the claim prior to a copyright owner having a valid claim. The Eleventh Circuit affirmed, and the Supreme Court granted certiorari to resolve a circuit split on what is sufficient “registration” for a claim under the Copyright Act.

The Court held that Fourth Estate’s application to register its copyrights was not complete under §411(a) of the Copyright Act because the Copyright Office had yet to register the claims. The Court analyzed the first two sentences of §411(a) and found that an application alone would render the second sentence superfluous. The Court noted that it was implausible that “registration” had different meaning in consecutive sentences and that the Court was cautious against such an interpretation. The Court also stated that interpreting complete registration as when the Copyright Office registers the copyright was consistent with §§408(f) and 410(a).

Thus, the Court affirmed the Eleventh Circuit and held that registration is complete only when the Copyright Office registers the copyright, not when application materials are submitted.

Rimini Street, Inc. v. Oracle USA, Inc.

In Rimini Street, Inc. v. Oracle USA, Inc., ___ U.S. ___, ___ L.Ed.2d ___, 139 S.Ct. 873 (2019), the Court considered whether the Copyright Act’s reference to “full costs” permits a court to award litigation expenses beyond the six categories of costs contemplated by Congress in the general costs statute, 28 U.S.C. §§1821, 1920. Writing for a unanimous court, Justice Brett Kavanaugh concluded that the term “full costs” means only costs specified in the statute. As a result, the case was reversed and remanded.

Oracle was a software company that also offered its customers maintenance service packages. Rimini Street was a third-party support service for Oracle’s software and was in lawful competition with Oracle’s direct maintenance service. However, in the course of providing software support, Oracle alleged that Rimini had copied Oracle’s software without licensing it. Oracle sued Rimini, asserting claims under the Copyright Act and various other federal and state laws. At trial, Oracle was awarded $50 million in damages plus attorneys’ fees and other costs, resulting in a total monetary judgment of $124.3 million. At issue in front of the Court was a $12.8 million judgment that the district court ordered to be paid to Oracle for litigation expenses, e-discovery, and jury consulting.

Rimini appealed the judgment to the Ninth Circuit, and the Ninth Circuit affirmed. The Ninth Circuit indicated that the term “full costs” did not confine the district court to the six categories identified in §§1821 and 1920.

The Supreme Court reversed. The Court held that “full costs” in §505 of the Copyright Act refer only to costs specified in §§1821 and 1920. These sections define what “costs” are, and absent an explicit statutory instruction otherwise, costs cannot be construed beyond the six categories listed. Because the Copyright Act did not explicitly authorize the award of litigation expenses beyond the six categories, the district court’s award of $12.8 million was improper. Finally, the Court found Oracle’s arguments regarding the word “full” modifying “costs” unpersuasive. The Court noted that “full” is an adjective and does not modify the meaning of the word “costs.”

Therefore, the Court concluded that the Copyright Act authorizes federal district courts to award costs specified in the general costs statute.

Alliance for Good Government v. Coalition for Better Government

The Fifth Circuit in Alliance for Good Government v. Coalition for Better Government, No. 18-30759, 2019 WL 1283987 (5th Cir. Mar. 21, 2019), considered whether the district court abused its discretion in awarding Alliance attorneys’ fees. Writing for the Fifth Circuit, Judge Patrick Higginbotham ruled that the district court had not abused its discretion in awarding attorneys’ fees but remanded the case so that attorneys’ fees could be awarded only for Lanham Act, ch. 540, 60 Stat. 427 (1946), claims.

Alliance and Coalition are both nonprofit organizations that endorse political candidates in Louisiana. Alliance began using a logo featuring a bird with outstretched wings in the 1960s, and Coalition began using a similar logo in the 1980s or 1990s. Coalition ceased using the logo for some time but began using it again in 2016. At that point, Alliance sued Coalition, claiming federal and state trademark infringement and unfair trade practices. Later, Alliance voluntarily dismissed its other claims, leaving only the Lanham Act claims. Alliance was granted summary judgment on the Lanham Act claims, but Coalition could continue to use its trade name. Alliance was also awarded over $68,000 in attorneys’ fees, which Coalition appealed to the Fifth Circuit.

Under the Lanham Act, attorneys’ fees are to be awarded to the prevailing party only for exceptional cases. The Fifth Circuit found that exceptional circumstances were met in this case (1) because of the strength of Alliance’s litigating position and (2) because Coalition litigated the case in an unreasonable manner. Since exceptional circumstances were present, an award of attorneys’ fees was appropriate.

Nevertheless, an appellate court is called on to determine all aspects of a district court’s fee determination for an abuse of discretion. When a party advances both Lanham Act and non-Lanham Act claims, a district court should endeavor to only award fees for successful Lanham Act claims. In this respect, Alliance did not prevail with respect to the trade name, and Alliance had previously dismissed other claims. While the court stated that an exact apportionment may be impossible, a district court is still called on to make some attempt at adjusting the fee award. The Fifth Circuit therefore remanded the case to the district court so that the attorneys’ fee award could be adjusted to account for claims in which Alliance did not prevail.

For more information about business law, see INTELLECTUAL PROPERTY LAW — 2017 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.


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