Opposition Brief — Hall v. Coram Healthcare Corp.

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No. 98-1490

OFFICE Of

IN THE cae

Supreme Court of the United States

OCTOBER TERM, 1998

WILLIAM J. HALL, BARBARA LISSER,

on behalf of themselves and all others similarly situated,

Petitioners,

ae

CoRAM HEALTHCARE CORPORATION,

JAMES M. SWEENY, PATRICK FORTUNE, and SAM LENO,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

MICHAEL P. KENNY

Counsel of Record

TERESA T. BONDER

RuTH L. GREENBERG

ALSTON & Brrp LLP

One Atlantic Center

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

(404) 881-7000

Counsel for Respondents

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

Whether the Eleventh Circuit Court of Appeals cor-

rectly held that the merger clause contained in

the Stipulation of Settlement precludes Petitioners as

a matter of law from asserting the claims in their

Complaint.

Whether the terms of the Stipulation of Settlement

expressly prohibit the relief sought by Petitioners.

Whether Petitioners’ claims are barred by the pre-

clusive effects of a prior final judgment, which af-

firmed and incorporated the terms of the Stipulation

of Settlement, in a related class action and of a final

decision on the merits that denied Petitioners’ at-

tempt to modify the Stipulation of Settlement based

on the same factual allegations as set forth in the

Complaint in this case.

Whether Petitioners have failed to state a claim for

securities fraud because they have not alleged justifi-

able reliance on any misrepresentations made to them

by Respondents.

Whether Petitioners lack standing to state a claim for

securities fraud because they are not purchasers or

sellers of securities.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED o....0........ccccccccsessseecececeeeeesee i

TABLE OF AUTHORITIES .......222o....eee.cessesecesteeeeees iv

STATEMENT OF THE CASE ow... oeececececcecseeecsenede 1

REASONS FOR DENYING THE WRIT .....0......... 8

A. Because No Split In The Circuits Exists, The

Court Has No Grounds On Which To Base A

Grant Of The Petition For Writ Of Certiorari.... 8

B. The Eleventh Circuit’s Decision In This Case Is

Consistent With Recent Law In Other Circuits

And Supreme Court Precedent ...0..000000.. 0... 11

C. Petitioners’ Reasoning Is Inconsistent With The

Policy And Practices Of Allowing Parties To

Settle Federal Securities Claims .......................... 14

NPR eM CD NE Sin i hh dalle dash eines sichd bic ivaiédnciibsalnsse 16

{iii)

iv

TABLE OF AUTHORITIES

CASES Page

Basic Inc. v. Levinson, 485 U.S. 224 (1988).............. 4,11

Blue Cross & Blue Shield of Ala. v. Sanders, 138

FBG 1487. (Lith Cir. 19GB) icc cccenibeisccscscccceecctscsnde 7

Coker v. Trans World Airlines, Inc., 165 F.3d 579

CER SRE. BBD) seicciteintinssthiliebtniils dehbitdeccsicotouseLedteoudalas 7

Cotton v Hinton, 559 F.2d 1326 (5th Cir. 1977)...... 15

Federal Deposit Ins. Corp. v. Verex Assurance,

Inc., 3 F.8d 391 (11th Cir. 1998) ......................... 7

Freytag v. Commissioner of Internal Rev., 501 U.S.

et) 5 Bee Riaaieteieh air agin eat 7

Hall v. Coram Healthcare, Inc., 157 F.3d 1286

C236 Cle, ROD hicceniscch sd etdinindl died aides: 6

Harsco Corp. v. Segui, 91 F.8d 387 (2d Cir.

ROD mc ciccascccecninccoccsteetibeemtnbibicsdeséadiech abiieauiamabah, dalled 12

Hubbard v. United States, 514 U.S. 695 (1995)...... 11

Locafrance U.S. Corp. v. Intermodal Sys. Leasing,

Ine.; 666 F.20 1118 (20 Cir. 19077) ..........522...2.2. 13, 14

Matsushita Elec. Indus Co. Ltd. v. Epstein, 516

oR Me Be RISHERAT Rd Se REND is rete tenets el 11, 14, 15

Meason v. Gilbert, 226 S.E.2d 49 (Ga. 1976) .......... 5

Norwest Bank of North Dakota, N.A. v. Doth, 159

AP Bi - ee ie; eR oN ee 7

Nottingham Partners v. Trans-Lux Corp., 925 F.2d

Oe eee CE Bee ost bi eee 14

Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337

COE SR ROE piictisntrecinalstucrsescebeabdelicauseckckece etna 13, 14

Rogen v. Ilikon, 361 F.2d 260 (1st Cir. 1966) .......... 8, 9, 10

Shearson/American Express, Inc. v. McMahon, 482

ek RG RF fg Fee ent aeeslen se oa co vee COE 14

Thomas R.W. v. Massachusetts Dept. of Educ., 130

iP Ripe! oe Me: , 5 RONG DoMc dle oe remuc omen 7

Wald v. Wolfson (In re U.S. Oil and Gas Litig.),

967 F.2d 1887 (lith Cir. 1992) ............................ 15

STATUTES

RO BEALE FELTED wiscsiencibiadcsiiesnndislbbicedintacanl ett taboad passim

BO Us.Us § TOCEBD nnn sncesivesens sailisscisipaceneslbeiaascuisiiaoniiies 3

en Ne eh EER ERIE tN TE

Vv

TABLE OF AUTHORITIES—Continued

Page

RD Ue @ FUME URD Nice ended ee passim

Be Ane sdbe ORO ee passim

RULE

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In THE

Supreme Court of the United States

OCTOBER TERM, 1998

No. 98-1490

WILLIAM J. HALL, BARBARA LISSER,

on behalf of themselves and all others similarly situated,

e Petitioners,

CORAM HEALTHCARE CORPORATION,

JAMES M. SWEENY, PATRICK FORTUNE, and SAM LENO,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

STATEMENT OF THE CASE

This case has a long history. Petitioners’ claims in the

District Court purportedly relate to an earlier federal

securities class action that, after Protracted negotiations,

resulted in a comprehensive settlement. The earlier litiga-

tion involved consolidated nationwide class actions that

had been filed in 1992 and 1993 against T? Medical,

Inc. (“T?”) and certain members of its senior manage-

ment alleging violations of the federal securities laws. In

re T* Medical, Inc. Shareholder Litigation, Master File

No. 1:94-CV-744-RLV, United States District Court for

the Northern District Court of Georgia.

2

After extensive negotiations, Petitioners entered into a

Stipulation of Settlement (the “Settlement”) dated Janu-

ary 27, 1995, with Coram Healthcare Corporation

(“Coram”), T*’s successor corporation.’ [R. 2-8, Ex. A.]

Petitioners voluntarily agreed to release “all claims, . . .

known or unknown, suspected or unsuspected, . . . whether

or not concealed or hidden of every nature and descrip-

tion whatsoever,” that were asserted or could have been

asserted as of the effective date of the Settlement. [R. 2-8,

Ex. A, 4 1.17.] Petitioners also expressly agreed that the

Settlement could not be modified as a result of alleged

newly discovered facts, events, or legal issues, and that

“no representations, warranties or inducements have been

made” concerning the Settlement, other than those con-

tained in the stipulation (the “merger clause”). [R. 2-8,

Ex. A, € 10.7.]

In exchange for these releases and agreements, Coram

paid the Petitioners $25 million in cash and issued to Peti-

tioners 2,520,000 warrants convertible into Coram un-

restricted stock. [R. 2-8, Ex. A, 994 2.1(a), 2.3.] Over

the next several months and after protracted negotiations,

the parties ultimately agreed to key terms related to the

warrants, including a formula by which the exercise price

of the warrants would be set.* The District Court then

approved the settlement terms in an Order of the Court,

which was signed on May 19, 1995. [R. 2-8, Ex. D.]

That judgment became final pursuant to its own terms

on June 19, 1995.

1 Petitioners inaccurately suggest in their Petition that Coram

is “a stranger to the prior litigation.” [Pet. for Writ of Cert. at

12.] In fact, Petitioners, through their knowledgeable and expe-

rienced counsel, painstakingly negotiated and ultimately entered

into the Settlement with Coram, T2’s successor corporation, specifi-

cally bargaining for Coram stock.

2 The exercise price was calculated at $22.125. (Warrant Agree-

ment, 2.01 [R. 2-8, Ex. B.]})

eee IEE ern tere ree

3

On November 21, 1995, Petitioners filed a Complaint

against Coram and certain of its officers and directors,

the Respondents herein, alleging violations of Sections

10(b) and 20(a) of the Securities Exchange Act, 15

U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R.

§ 240.10b-5, promulgated thereunder, as well as certain

state law violations. [R. 1-1.] Petitioners alleged in their

Complaint that “Coram common stock and, in turn, the

Warrants were artificially inflated at the time plaintiffs

agreed to settle the earlier litigation and at the time the

settlement was submitted to the Court for approval.” [R.

1-1, ¢ 3 (emphasis added).] Petitioners alleged that the

Respondents issued false and misleading statements “from

at least November 1994” and “for several fiscal quarters

preceding the final determination of the exercise price of the

warrants.” [R. 1.1, 44 32, 97.] According to Petitioners,

the alleged fraudulent conduct artificially inflated the value

of Coram stock and the warrants that they had obtained

pursuant to the Settlement. Petitioners did not allege

direct reliance on any fraudulent statements made during

settlement negotiations or elsewhere, but rather that they

“rel{ied] upon the integrity of the market” in agreeing to

accept warrants. [R. 1-1, @ 122.]

In their Petition, Petitioners mischaracterize the allega-

tions contained in the Complaint, which was dismissed

pursuant to Fed. R. Civ. P. 12(b)(6). In direct conflict

with the Complaint’s allegations, Petitioners now assert,

without citation to the Complaint, that, “[i]t was during

the Formula Period, the period between the effective date

of the settlement and the June exercise pricing of the war-

rants, that the fraud occurred.” [Pet. for Writ of Cert.

at 2-3.] Petitioners cannot revise by argument years later

their Complaint’s allegations that the alleged fraud oc-

_ curred “{djuring the pendency of the settlement of the

Earlier Class Action,” in an attempt to avoid the effect of

RE rT

4

the Settlement’s merger clause. [R. 1-1, 4 63.] Given the

procedural posture of this case, the allegations in the Com-

plaint control.*

As reflected in the Complaint, Petitioners did not at-

tempt to rescind the Settlement. Instead, they affirmed

the Settlement agreement, kept the $25 million in cash

that Coram had paid, and sued for the alleged loss in

value of the warrants.

Respondents moved to dismiss Petitioners’ Complaint for

failure to state a claim pursuant to Fed. R. Civ. P. 12(b)

(6). The grounds for Respondents’ motion included the

following: (1) Petitioners’ claims are barred by specific

terms of the Settlement, including the release and waiver

provisions and the merger clause; (2) Petitioners cannot

adequately plead the essential element of reliance under

the fraud-on-the-market theory; (3) Petitioners’ claims are

barred by the doctrines of res judicata and collateral

estoppel; (4) Petitioners have no standing to assert claims

under Section 10(b) of the Securities Exchange Act of

1934, because they are not purchasers of securities, and

(5) Petitioners have not suffered any cognizable damages,

because they still hold the warrants.* [R. 2-8.] Signifi-

cantly, Petitioners did not raise before the District Court

the issue that they now contend is the controlling ques-

3 Even under their newly articulated contention that the alleged

fraud occurred after the Settlement was finalized, Petitioners’ Sec-

tion 10(b) claim is still without merit. In Basie Inc. v. Levinson,

485 U.S. 224, 108 S.Ct. 978 (1988), this Court noted that in

order to state a claim under the federal securities laws, a plaintiff

must have relied on a misrepresentation of fact. If Petitioners had

already signed the Settlement at issue before the alleged fraud

occurred, then, as a matter of law, they cannot establish the essen-

tial reliance element of their claim.

#Thus, even if the Court were to grant certiorari and reverse

the lower courts’ decisions, this case would nonetheless likely be

dismissed on remand.

$

tion: the effect of Section 29(a) of the Securities Ex-

change Act of 1934 on the Settlement’s release and merger

provisions.

On February 12, 1997, the District Court granted Re-

spondents’ motion to dismiss the Complaint, finding that

Petitioners’ action was barred by the merger clause con-

tained in the Settlement. [Pet. for Writ of Cert., App. B.]

The merger clause provides:

[The] Side Letter Agreement, Stipulation and the

Exhibits attached hereto constitute the entire agree-

ment among the parties hereto and no representa-

tions, warranties or inducements have been made

to any party concerning the Stipulation, the Exhibits

or the Side Letter Agreement other than the repre-

sentations, warranties and covenants contained and

memorialized in such documents.

[R. 2-8, Ex. A, 4 9.7.] In holding that Petitioners were

barred from prosecuting the suit, the District Court rea-

soned as follows:

If a contract contains a merger or ‘entire agreement’

clause and the injured party seeks damages on the

contract rather than rescission, then the clause will

prevent recovery by estopping the claimant from as-

serting reliance on any misrepresentations (or omis-

sions) allegedly made outside of the four corners of

the contract.

{Pet. for Writ of Cert., App. B at 21a (citations omitted)

(emphasis added).]

Petitioners filed their appeal in the Eleventh Circuit on

March 13, 1997. [R. 3-25.] In their opening appellate

brief, Petitioners again failed to argue the question they

now present to this Court: whether Section 29(a)

prevents enforcement of the Settlement’s merger clause.

Instead, Petitioners relied heavily on Meason v. Gilbert,

236 Ga. 862, 226 S.E.2d 49 (Ga. 1976), a Supreme

6

Court of Georgia case in which the plaintiff was permitted

to rescind a contract and sue for fraud, despite the con-

tract’s merger clause.

On October 15, 1998, the Eleventh Circuit affirmed the

District Court’s dismissal of Petitioners’ Complaint. In

so affirming, the Court of Apeals recognized that, unlike

Petitioners, the plaintiff in Meason sought to rescind the

contract at issue. The court wrote:

Here, the settlement agreement contained a merger

clause specifically stating that the settlement and the

attached exhibits constituted the entire agreement,

and that no representations, warranties, or induce-

ments were made to any party other than what was

contained in the documents. The appellants did not

attempt to rescind the settlement, but elected to sue

for damages on the contract, rather than in tort.

The merger clause governs, and the district court

correctly found that the complaint failed to state a

claim.

Hall v. Coram Healthcare Corp., 157 F.3d 1286, 1290

(11th Cir. 1998).

Petitioners then filed their Petition for ‘Vrit of Certiorari

on March 16, 1999, essentially asking this Court to review

a statutory provision that the District Court did not have

the opportunity to examine and to address a line of rea-

soning that has been waived. Thus, if certiorari were

granted, this Court would be the inaugural court to decide

the issue now raised by Petitioners.

For these reasons, Respondents submit that Petition-

ers are disingenuously characterizing the question pre-

sented in their Petition as whether the Eleventh Circuit

violated the express language of Section 29(a) in uphold-

ing the Settlement. Petitioners further misleadingly assert

that the Eleventh Circuit “rejected the application of Sec-

tion 29(a).” [Pet. for Writ of Cert. at 13.] In fact,

r

7

Petitioners chose not to assert their Section 29(a) argu-

ment either in the District Court or in their opening brief

to the Court of Appeals.

Because Petitioners did not present their argument

based on Section 29(a) to the District Court for review,

the issue was not preserved for appeal and has been

waived. See Freytag v. Commissioner, 501 U.S. 868, 894-

95, 111 S. Ct. 2631, 2647 (1991) (“The very word ‘re-

view’ presupposes that a litigant’s arguments have been

raised and considered in the tribunal of first instance.

To abandon that principle is to encourage the practice

of ‘sandbagging’ . . . .”) (Scalia, J. concurring in part

and concurring in the judgment). See also Blue Cross &

Blue Shield v. Sanders, 138 F.3d 1347, 1357 (11th Cir.

1998) (finding that argument that had not been raised at

district court level was waived); Federal Deposit Ins.

Corp. v. Verex Assurance, Inc., 3 F.3d 391, 395 (11th

Cir. 1993).

In fact, Petitioners did not argue that Section 29(a)

operates to shield them from the Settlement’s merger

clause until their reply brief to the Eleventh Circuit.>

Because they did not raise the argument in their opening

brief, the argument was waived for purposes of review. See

Coker v. Trans World Airlines, Inc., 165 F.3d 579, 585

(7th Cir. 1999), Norwest Bank, N.A. v. Doth, 159 F.3d

328, 334 (8th Cir. 1998) (stating that issues first raised in

reply briefs ordinarily will not be considered); Thomas

R.W. v. Massachusetts Dept. of Educ., 130 F.3d 477, 480

(1st Cir. 1997) (“[B]ecause an appellee is entitled to rely

on the content of appellant’s brief for the scope of the

issues appealed, an[{] appellant generally may not pre-

5 In their initial brief to the Eleventh Circuit, Petitioners referred

to Section 29(a) only once, in a “see also” cite in a footnote, but, as

in the District Court, Petitioners did not suggest that this provision

should serve as a basis for invalidating the Settlement’s merger

clause.

8

serve a claim merely by referring to it in a reply brief or at

oral argument.”) (citation and internal quotation marks

omitted).

Neither the District Court nor the Eleventh Circuit was

given the opportunity to address Section 29(a) in the

context of this case. Rather, the issue presented to both

courts was the enforceability of a carefully crafted settle-

ment agreement negotiated by parties having equal bar-

gaining power. Accordingly, Petitioners have waived their

Section 29(a) argument.

REASONS FOR DENYING THE WRIT

Petitioners contend that certiorari should be granted

pursuant to Supreme Court Rule 10, because the Eleventh

Circuit’s opinion in this case and the First Circuit’s opin-

ion in Rogen v. Ilikon, 361 F.2d 260 (1st Cir. 1966),

create a split within the circuit courts regarding the appli-

cability of Section 29(a) of the Securities Exchange Act

of 1934 to agreements settling federal securities claims.

{Pet. for Writ of Cert. at ii.] This contention is incorrect,

because the Eleventh Circuit’s opinion involves questions

that are factually and legally distinct from those at issue

in Rogen. Accordingly, because the two cases do not

conflict, there is no controversy between or among the

circuit courts that demands Supreme Court intervention

pursuant to Rule 10. Indeed, recent decisions demon-

strate that courts are generally in agreeemnt, among them-

selves and with Supreme Court precedent, regarding the

effect to give a merger clause and similar settlement pro-

visions in subsequent litigation.

A. Because No Split In The Circuits Exists, The Court

Has No Grounds On Which To Base A Grant Of The

Petition For Writ Of Certiorari

The Eleventh Circuit’s decision, upholding a negotiated

settlement agreement that disposes of federal securities

9

claims and that precludes Petitioners from Overriding the

contract's express language, does not conflict with the

First Circuit’s opinion in Rogen v. Ilikon. The very fact

that the Rogen case is 33 years old makes dubious any

argument that there is some “split of authority” on an

important issue that has been percolating through the

lower courts in recent years, resulting in contradictory

decisions, and requiring resolution by this Court. Further-

more, Rogen is both legally and factually distinguishable.

Specifically, the First Circuit in Rogen did not hold that

enforcing a federal securities settlement agreement on be-

half of a competently represented nationwide class violates

Section 29(a), as Petitioners contend the Eleventh Cir-

cuit should have held in this case. The Rogen decision is,

therefore, not in direct conflict with the Eleventh Circuit’s

decision.

The issue decided by the First Circuit was entirely dif-

ferent from that decided by the Eleventh Circuit. The

First Circuit held that a genuine issue of material fact

existed as to whether the plaintiff would have found cer-

tain omitted facts material and whether the plaintiff relied

on the alleged non-disclosures to his detriment. Rogen,

361 F.2d at 26-67. In contrast, the Eleventh Circuit ruled

that Petitioners could not avoid the terms of a compre-

hensive settlement, which resulted from painstaking nego-

tiations designed to terminate the ongoing, protracted

litigation once and for all.

Indeed, the First Circuit only mentions Section 29(a)

in a passing “comment.” See id at 268. In that comment,

the court dismissively states that the non-reliance pro-

vision of the contract did not alter its analysis that, con-

sidering the evidence in the light most favorable to the

plaintiff, a trier of fact could find in his favor. Id. at 268.

In its remarks regarding the non-reliance provision of the

contract, the court acknowledged that it was “not- aware

10

of other judicial treatment of such a provision.” Id.

Given that the case was decided more than 30 years ago,

this admission is not surprising. In sum, the First Circuit

did not base its holding on an analysis of Section 29(a),

and it never addressed whether a merger clause in a settle-

ment agreement that resolves class-wide claims is enforce-

able where the class members never attempted to rescind

the contract.

In addition, Rogen involved facts significantly different

from those here. First, in Rogen, there was no merger

clause in the relevant agreement. The District Court

and Eleventh Circuit, in contrast, premised their deci-

sions on the Settlement’s merger clause. Rogen is ac-

cordingly not an appropriate counterpart to this case.

Second, unlike Petitioners, the plaintiff in Rogen did seek

rescission of the relevant contract. See Rogen, 361 F.2d

at 265. Indeed, the compelling facts in Rogen show that

the defendants had put the plaintiff in an impossible posi-

tion by rejecting the plaintiff's request for recission and

simultaneously arguing that he was bound by the contract’s

terms. Jd. at 268. Conversely, Petitioners never sought

to rescind the Settlement and tender back the $25 million

that they received. Petitioners, therefore, voluntarily

elected their remedy to affirm and to sue under the Settle-

ment contract.

Furthermore, the Rogen court noted that the plaintiff

did not appear to be a sophisticated seller or “experienced

business man,” but instead seemed “exceedingly gullible”

or “overtrusting” and, viewing the evidence most favorably

to the plaintiff, might have been “negligent—perhaps

grossly so.” Rogen, 361 F.2d at 267 (citations and in-

ternal quotation marks omitted). In this case, Petitioners

were represented in the settlement negotiations by more

than 60 law firms experienced in federal securities class

action litigation.

P «al

TT

11

Finally, the plaintiff in Rogen alleged that he relied

on the defendants’ representations and omissions made

during the negotiation of the contract. Conversely, the rep-

resentatives of the nationwide class, represented by numer-

ous law firms, were not unsophisticated or overly trusting

in the least and have never alleged that the negotiations

were in any way tainted by fraud. To the contrary, un-

like in Rogen, the settlement agreement at issue here is the

product of extensive discovery and protracted bargaining

among equals.* For these numerous reasons, the Eleventh

Circuit’s decision in no way conflicts with the First Cir-

cuit’s 1966 opinion in Rogen.

The issues presented here are neither controversial nor

have they figured prominently in recent jurisprudential

discourse. Indeed, this case does not satisfy the Court’s

“high degree of selectivity” standard,” because no conflict

between or among the circuits exists. For these reasons,

Respondents respectfully request that the Court deny Peti-

tioners’ Petition for Writ of Certiorari.

B. The Eleventh Circuit’s Decision In This Case Is Con-

sistent With Recent Law In Other Circuits And Su-

preme Court Precedent

The Eleventh Circuit’s holding neither conflicts with

more recent cases examining comparable issues nor con-

flicts with any prior Supreme Court decision. In fact, the

Eleventh Circuit obtained substantial guidance from the

6 Rather than impugn the integrity of the settlement process,

Petitioners attempt to prove the essential reliance element in their

Section 10(b) claim through the fraud-on-the-market theory. But,

where one relies on something other than the integrity of the

market to purchase stock, such as in direct transactions with the

seller, the fraud-on-the-market theory does not apply. Basie Inc.,

485 U.S. at 244.

7 Hubbard v. United States, 514 U.S. 695, 720, 115 S. Ct. 1754,

+767 (1995) (Rehnquist, C.J., dissenting).

12

Court’s recent decision in Matsushita Elec. Indus. Co.,

Ltd. v. Epstein, 516 U.S. 367, 116 S. Ct. 873 (1996).

In addition, recent case law shows general circuit har-

mony with regard to the effect that a merger clause, such

as the one relevant here, has on subsequent litigation

brought by a sophisticated and ably represented party

that voluntarily waived its rights to sue and voluntarily

disavowed reliance on anything not contained within the

relevant written agreement.

For example, the Eleventh Circuit decision is consistent

with the Second Circuit decision in Harsco Corp. v. Segui,

91 F.3d 337 (2d Cir. 1996), where the court dismissed

securities fraud claims brought in connection with a stock

purchase agreement that contained a merger clause. The

Second Circuit rejected the argument that the merger

clause constituted an impermissible waiver of securities

fraud claims in violation of Section 29(a) and affirmed

the dismissal of the plaintiff's claims for failure to plead

justifiable reliance. The court held that, although the con-

tract provisions “weaken” the purchaser’s ability to re-

cover under Rule 10b-5, “such a ‘weakening’ does not

constitute a forbidden waiver of compliance [with the

securities laws.]” Harsco, 91 F.3d at 343.

In reaching its decision, the court noted that there was

no “disparity in bargaining power” between the parties,

and that the purchaser had taken precautions to determine

independently the value of the stock it was purchasing.

Id. at 344. The Second Circuit also noted that the parties

had negotiated to include certain representations in the

agreement, any of which, if fraudulent, could provide the

basis for a securities fraud action. “Thus, it is not fair

to characterize [the ‘no representations’ clause and the

merger clause] as having prevented [the purchaser] from

protecting its substantive rights. [The purchaser] rigor-

ously defined those rights in {the agreement.]” Jd.

i a ae arcs

i3

Similarly, in Petro-Ventures, Inc. v. Takessian, 967 F.2d

1337 (9th Cir. 1992), the Ninth Circuit upheld the

merger clause contained in a settlement agreement pur-

suant to which the plaintiffs had obtained a cash payment

and the transfer of certain securities. Jd. at 1338. The

court dismissed the plaintiff's subsequent securities fraud

claim based on the comprehensive release entered into as

part of the settlement. Jd. at 1339. On appeal, the plain-

tiff argued that enforcing the release as to the federal

securities claim would violate Section 29(a). The Ninth

Circuit held that the release could be enforced to bar the

securities claim and explained, “[{w]hen, as here, a release

is signed in a commercial context by parties in a roughly

equivalent bargaining position and with ready access to

counsel, the general rule is that if ‘the language of the

release is clear, . . . the intent of the parties is indicated

by the language employed’.” Jd. at 1342 (quoting Loca-

france U.S. Corp. v. Intermodal Sys. Leasing, Inc., 558

F.2d 1113, 1115 (2d Cir. 1977) (upholding release in

a settlement agreement arising out of a lawsuit where

violations of federal securities laws were alleged, on the

grounds that the parties had equal bargaining positions as

well as access to counsel)) (internal quotation marks

omitted ).

Significantly, in Takessian, the Ninth Circuit also held

that, because of the “adversarial setting that is character-

istic of litigation,” the typical disparity of bargaining

power and access to information did not exist. Takessian,

967 F.2d at 1341. The court concluded that “allowing

the assertion of a federal securities claim in the face of

such a complete settlement agreement would discourage

settlement negotiations in all litigation in which a federal

securities claim may eventually be discovered.” Id. at

1339 (citation omitted).

Here, the Eleventh Circuit’s decision is entirely con-

sistent with the decisions of the Second and Ninth Circuits

oe

14

and does not conflict with any other circuit court holding.

Accordingly, the Petition in this case does not present

a conflict or any other rationale justifying certiorari.

C. Petitioners’ Reasoning Is Inconsistent With The Policy

And Practice Of Allowing Parties To Settle Federal

Securities Claims

Petitioners argue that Rogen stands for the proposition

that settlement provisions purporting to give liability

waivers and other assurances to negotiating parties violate

Section 29(a). The logic of this argument suggests that

Section 29(a) effectively prevents parties from achieving

finality in settlements of federal securities claims, where a

release of securities law claims is a necessary part of their

agreement. The logic of Petitioners’ argument is not sup-

ported by case law, which shows that settlements and

releases of federal securities claims are commonplace and

enforceable without regard to Section 29(a). See, e.g.,

Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29,

33 (1st Cir. 1991); Petro-Ventures, Inc., 967 F.2d at

1342; Locafrance, 558 F.2d at 1115.

Indeed, this Court’s decision in Matsushita Elec. Indus.

Co. Ltd. v. Epstein, 516 U.S. 367, 375, 116 S. Ct. 873,

878 (1996), recognizes that, for settlement purposes, a

federal securities claim is fundamentally like any other.®

8In a related vein, this Court’s opinion in Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332 (1987),

also demonstrates that federal securities claims are not unique. In

McMahon, the Court rejected the argument, similar to the argu-

ment advanced by Petitioners, that Section 29(a) prevented the

enforcement of a predispute arbitration agreement. McMahon.

482 U.S. at 228. In reaching its decision, the Court reasoned that

because Section 27 of the Exchange Act did not “impose any duty

with which persons trading in securities must ‘comply,’” Section

29(a) did not prevent the jurisdictional waiver in the arbitration

agreement. Jd. Given the Court’s holding, Petitioners’ citation to

McMahon is misleading. [See Pet. for Writ of Cert.at 6.] Although

15

In giving effect to the entry of a comprehensive class ac-

tion settlement in a related state court litigation, this

Court held that the respondents, who were members of

the state court class action, were barred from prosecuting

their federal securities claims. Matsushita Elec. Indus.

Co., 516 U.S. at 385-86. Thus, as a practical matter,

the respondents were deemed to have released their fed-

eral securities claims through settlement.

This result is not surprising because, on the whole,

“[p]Jublic policy strongly favors the pretrial settlement of

Class action lawsuits.” Wald v. Wolfson (In. re U.S. Oil &

Gas Litig.), 967 F.2d 489, 493 (11th Cir. 1992) (citing

Cotton v.-Hinton, 559 F.2d 1326, 1331 (5th Cir. 1977)).

Settlements of complex class action cases are favored, not

only because they help conserve judicial resources, but

they also allow parties to “establish[] a general peace.” See

Takessian, 967 F.2d at 1342 (citation omitted). In this

case, Respond ts bargained for finality. For this “peace,”

they agreed to pay Petitioners a handsome sum, and Peti-

tioners voluntarily accepted the bargain, knowing its terms.

Petitioners have presented the Court with no grounds

for granting their Petition, but instead they ask the Court

to review a settled issue and render a decision that under-

mines sound public policy. Specifically, if Petitioners are

able to override the explicit terms for which they bargained,

incentives to end disputes through settlement will weaken.

Under the precedent that Petitioners request, every com-

prehensive settlement agreement intended to resolve litiga-

tion fully and finally would be vulnerable to attack when

one party determines, after the fact, that certain terms

are no longer to its liking. Accordingly, the current state

of the law should be preserved. As the Eleventh Circuit

cited favorably, McMahon rejects, rather than supports, Petitioners’

Section 29(a) argument.

has explained: “Defendants buy little peace through set-

tlement unless they are assured that they will be protected”

against future liability. In re U.S. Oil & Gas Litig., 967

F.2d at 493-94.

CONCLUSION

Wherefore, for all the foregoing reasons, Respondents

pray that this Court deny this Petition for Writ of Certi-

orari, because there is no split of authority between or

among the circuits on the issue of Section 29(a)’s effect

on settlements of federal securities claims or on the issue

addressed by the Eleventh Circuit Court of Appeals below.

Respectfully submitted,

MICHAEL P. KENNY

Counsel of Record

TERESA T. BONDER

RUTH L. GREENBERG

ALSTON & Birp LLP

One Atlantic Center

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

(404) 881-7000

Counsel for Respondents

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