Opposition Brief — Jain v. J.P. Morgan Securities, Inc. (No. 08-838)

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OFFICE OF THE CLERK |

in The

Supreme Court of the Gnited States

NAVEEN JAIN and ANURADHA JAIN,

Petitioners,

Vv.

J.P. MORGAN SECURITIES INC.,

WILSON SONSINI GOODRICH & ROSaTI, P.C.

and PERKINS COIE, LLP,

Respondents.

¢

On Petition For A Writ Of Certiorari

To The Court Of Appeals

For The State Of Washington

S

RESPONDENT J.P. MORGAN SECURITIES INC.’S

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

¢

BINGHAM MCCUTCHEN, LLP

DaAvID M. BALABANIAN

Counsel of Record

JOHN D. PERNICK

ROBERT A. BRUNDAGE

NIMA E. SOHI

Three Embarcadero Center

San Francisco, CA 94111

(415) 393-2000

Counsel for Respondent J.P. Morgan Securities Inc.

a

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Under Section 16(b) of the Securities Exchange

Act of 1934, a corporate insider, who both purchases

and sells the corporation’s stock within a specified

period, must disgorge all profits from the transac-

tions. The statute is specifically intended to deprive

the insider of such profits.

The question presented is whether Section 16(b)

preempts the insider’s state-law indemnity claim to

regain the forfeited profits.

il

RULE 29.6 STATEMENT

Pursuant to Supreme Court Rule 29.6, J.P.

Morgan Securities Inc. states that it is a wholly-

owned subsidiary of JPMorgan Securities Holdings

LLC, which is a wholly-owned subsidiary of JPMor-

gan Chase & Co., a public company. No publicly held

company owns 10% or more of JPMorgan Chase’s

stock.

ill

TABLE OF CONTENTS

Page

PE) hog Bo By lk yy i

PRUE BO.G SEAR EMING csvcevncesscecsccvccscesesessoersouses li

OTHER PROVISIONS INVOLVED ....................... i

STATEMENT OF THE CASE..................cceseceeeceeees 1

I. THE UNDERLYING SECTION 16(b)

JUDGMENT AGAINST PETITIONERS;

FINDINGS OF UNDISPUTED FACT........ 2

Il. PETITIONERS’ INDEMNITY ACTION ..... 7

REASONS FOR DENYING THE PETITION ....... 9

I. ALL LOWER COURTS AGREE THAT

SECTION 16(b) PREEMPTS INDEMNITY

CLAIMS LIKE PETITIONERS .................. 9

Il. THE DECISION BELOW IS CORRECT

ON THE MERITS - PETITIONERS’

STATE LAW INDEMNITY CLAIMS ARE

DIRECTLY CONTRARY TO SECTION

16(b), AND ARE BARRED BY THE SU-

FRR CARMI IE oer sivenveccvinsexssrsenestncdesions 17

eae EIT paisa nk nolenapinsaeiiaiseadeenwiengisieuiineetasons 24

lv

TABLE OF AUTHORITIES

Page

CASES

All-Pure Chemical Co. v. White, 127 Wn.2d 1,

re a dosctipnsiisiviviyisensvedanenmanvaseses 14

Arden Way Associates v. Boesky, 664 F. Supp.

Ne I Me MN Poi sists Viciivsnnanswccsaskniuedevevesranesuesesets 14

Baker, Watts & Co. v. Miles & Stockbridge, 876

Me BE CREP, BO oor ceccevavsseascnense 12, 14, 20

Bershad v. McDonough, 428 F.2d 693 (7th Cir.

1970), cert. denied, 400 U.S. 992 (1971)................. 19

Blonder-Tongue Laboratories, Inc. v. University

of Illinois Foundation, 402 U.S. 313, 91

Sh. OE, RAG, Be he, Bek. Be TO CGE) occceccciccessecesesess 17

Bunker Ramo-Eltra Corp. v. Fairchild Indus.,

Inc., 639 F. Supp. 409 (D. Md. 1986).......... 11, 19, 21

Cambridge Fund, Inc. v. Abella, 501 F. Supp.

Re I i NE Nice cosiscsasin evidnivaceundidsekncovinwnecvencees 14

Deephaven Capital Mgmt., LLC v. Schnell, No.

06-844 (JRT/FLN), 2007 WL 101821 (D.

I I IED enced caveaksenvecavacuanesnercrniaonevs il, 22

Duncan v. Judge, 43 Wn.2d 836, 264 P.2d 865

III: cabcssis aloe cig bac da aiecaie pasa ecouae re oe neko osuubaiccanayekivs 17

Eichenholtz v. Brennan, 52 F.3d 478 (3d Cir.

ERROR SE POs teas Ten NUON eOm eI v tse gene eT aees 13, 20

First Golden Bancorporation v. Weiszmann,

942 F.2d 726 (10th Cir. 1991)........... 9, 10, 19, 22, 23

Vv

TABLE OF AUTHORITIES — Continued

Page

Foremost-McKesson, Inc. v. Provident Securities

Co., 423 U.S. 232, 96 S. Ct. 508, 46 L. Ed. 2d

Neen ccnacuisevecesesnvecccccsscens 22

Fromer v. Yogel, 50 F. Supp. 2d 227 (S.D.N.Y.

cin ecensdacnadcevtescessccescesccose 14, 21

Geier v. American Honda Motor Co., Inc., 529

U.S. 861, 120 S. Ct. 1913, 146 L. Ed. 2d 914

Neen weiwnvevenececesceccecoccoces 18

Gilbert H. Moen Co. v. Island Steel Erectors,

Inc., 128 Wn.2d 745, 912 P.2d 472 (1996) .............. 16

Globus v. Law Research Service, Inc., 418 F.2d

i inscararacecensecnscaccoveccecccsecceses 12

Greenwald v. American Medcare Corp., 666

Se I CORE P EN, ©. BOE ) <2... cceccccesscrescescoevcnses 14

Heizer Corp. v. Ross, 601 F.2d 330 (7th Cir.

EE LES Ee 13

Hines v. Davidowiiz, 312 U.S. 52, 61 S. Ct. 399,

es ascwrervavevscnsenccseestecssnces 18

In re Cendant Corp. Sec. Litig., 139 F. Supp. 2d

no veccessensccvonessuccereses 15,23

In re Sunrise Sec. Litig., 793 F. Supp. 1306

Teen cceiccnbdeicesdeovasons 15

In re U.S. Oil & Gas Litig., 967 F.2d 489 (11th

EE EA 13

Kern County Land Co. v. Occidental Petroleum

Corp., 411 U.S. 582, 93 S.Ct. 1736, 36

8) ee 22

vi

TABLE OF AUTHORITIES — Continued

Page

King v. Gibbs, 876 F.2d 1275 (7th Cir. 1989)....... 14, 20

Laventhol, Krekstein, Horwath & Horwath uv.

Horwitch, 637 F.2d 672 (9th Cir. 1980)............ 13, 20

Michigan v. Long, 463 U.S. 1032, 103 S. Ct.

By FF Bie GH MAE BAPE CRO) oo cncnscvenevsecsccncoressessee 24

Musick, Peeler & Garrett v. Employers Ins. of

Wausau, 508 U.S. 286, 113 S. Ct. 2085, 124

i, sca vevesecvenscesssesseevencerseeswers 21

Parklane Hosiery Co., Inc. v. Shore, 439 U.S.

322, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979)............ 16

Raychem Corp. v. Fed. Ins. Co., 853 F. Supp.

ee IID sca uadudssassoitissvevessencvovdverseseones 14

Reliance Elec. Co. v. Emerson Elec. Co., 404

U.S. 418, 92 S.Ct. 596, 30 L. Ed. 2d 575

AES SRS ee 9,11, 18, 19, 22

Riverhead Sav. Bank v. Nat'l Mortgage Equity

Corp., 893 F.2d 1109 (9th Cir. 1990)............0.0cccceees 20

Schaffer v. CC Investments, LDC, 286 F. Supp.

ee ee tts Be BOO) vecevcecovsnsexssvonscenss 10, 19, 21, 22

Stowell v. Ted S. Finkel Inv. Services, Inc., 641

I I, BOE) iscsi cdevensossscesbsnensensesoessossess 20

United Boatbuilders, Inc. v. Tempo Products

Co., 1 Wn. App. 177, 459 P.2d 958 (1969)............... 16

STATUTES

i ieinnesubundavénveneenstercesesetere passim

TABLE OF AUTHORITIES — Continued

Page

RULES

Supreme Court Rule 10(a)-(b)........... cece cece cee 10, 14

Supreme Court Rule 29.6........................cccesessecesseeesees il

CONSTITUTIONAL PROVISIONS

i PE I A is cninnnisedmeasesasldenevounutionens 1,18

1

OTHER PROVISIONS INVOLVED

In addition to Section 16(b) of the Securities

Exchange Act of 1934 (quoted at Petition 2-3), this

case involves Article VI, clause 2 of the United States

Constitution. It provides that federal law “shall be

the supreme Law of the Land; ... any Thing in the

Constitution or Laws of any State to the Contrary

notwithstanding.” U.S. Const. art. VI, cl. 2.

*

STATEMENT OF THE CASE

This is an indemnity action arising out of an

underlying federal-court judgment against Petition-

ers under Section 16(b) of the Securities Exchange

Act of 1934 (15 U.S.C. § 78p). Under Section 16(b), a

corporate insider who sells and purchases (or pur-

chases and sells) the company’s stock within a six-

month period must forfeit to the corporation all

profits from the purchase and sale. Such profits are

known as “short-swing” profits. Congress specifically

enacted this law to deprive insiders of all profit from

such transactions, as a blunt but effective method of

eliminating the incentive for transactions it deemed

especially susceptible to abuse. Pp. 9-11, 18-20 below.

As detailed below, the district court in the under-

lying case found that Petitioners had engaged in

purchases and sales within a six-month period. It

compelled Petitioners to disgorge their profits as

Section 16(b) required. Petitioners subsequently

brought the current indemnity action in Washington

2

state court, trying to force Respondents to reimburse

the profits that Petitioners had disgorged.

I. THE UNDERLYING SECTION 16(b) JUDG-

MENT AGAINST PETITIONERS; FIND-

INGS OF UNDISPUTED FACT.

Petitioners are Naveen Jain and his wife

Anuradha Jain. Mr. Jain was the founder, Chairman

of the Board of Directors, and CEO of a corporation

called InfoSpace. In 2001, an InfoSpace shareholder

brought a derivative action against Petitioners on

behalf of InfoSpace in the United States District

Court for the Western District of Washington. The

action sought to compel Petitioners to disgorge to

InfoSpace Petitioners’ profits on short-swing sales of

InfoSpace stock, under Section 16(b). No recovery was

sought under any other federal securities law.

The Section 16(b) Action against Petitioners

concerned two sets of transactions by which Petition-

ers acquired shares in InfoSpace from trusts that

Petitioners had established for tax purposes. See

Petition (“Pet.”) A-62-63. Contrary to the petition’s

representations, Petitioners were not innocent lambs

caught up in these transactions solely as a result of

others’ actions. These assertions were squarely raised

and resolved against Petitioners in the Section 16(b)

Action.

The first transaction occurred when InfoSpace

demanded that Mr. Jain “personally indemnify the

company” for certain claims by “placing one million

3

shares of his InfoSpace stock in escrow.” Pet. A-63.

Mr. Jain took one million InfoSpace shares from one

of the trusts, and placed them in escrow. Pet. A-63-64.

The district court found that this transaction was a

purchase under Section 16(b). Pet. A-78.

The petition for certiorari incorrectly represents

that “no such escrow was ever established” and

advises that it is a “verity” that Petitioners did not

know of the transactions that created it. Pet. 4, 6, 9,

16. The district court found precisely the opposite in

entering summary judgment against them in the

underlying 16(b) case. Pet. A-78-80.

Specifically, the court found that Mr. Jain himself

“executed an indemnification agreement to establish

the escrow fund.” Pet. A-78-79. The court found that

there was an “escrow agreement between Mr. Jain

and InfoSpace” that “reflects the encumbrance and

transfer of the personal property of one million

shares,” and it “is clear that the parties intended and

agreed to encumber the personal property and estab-

lish an escrow.” Pet. A-79-80. Besides personally

signing the escrow agreement, Mr. Jain also “person-

ally signed SEC filings representing that he had

placed shares into escrow.” Pet. A-55; accord Pet. A-

64, A-80. Mr. Jain even “requested that the Board

release the escrowed shares” once the one-year es-

crow period was over. Pet. A-64. Having personally

signed the escrow agreement, represented to the SEC

that the shares were escrowed, and later requested

release of the escrowed shares, Mr. Jain obviously knew

about the escrow. And the district court unequivocally

4

found that these acts “formed an escrow” under

Washington law. Pet. A-80.

The court’s findings also make clear that Mr. Jain

personally benefited by escrowing the trust’s shares

rather than his own. He “avoided pledging stock he

ulready owned, thereby gaining an opportunity to

trade a million shares that otherwise would have

been encumbered.” Pet. A-80. He also “incurred no

risk that the one million shares from the [trust]

would decrease in value, since he did not pay for the

shares... .” Pet. A-80.

Based on these facts, the district court found that

“Mr. Jain’s placement of [trust] shares into an escrow

account ... was voluntary ....” Pet. A-78. The district

court further found that this “transfer of stock from

the [trust] to an escrow account to satisfy a personal

obligation of Mr. Jain effected a change in beneficial

ownership” and that it “created the possibility of

speculative abuse.” Pet. A-71, A-77-78. Accordingly, it

found, “he [Mr. Jain] effected a purchase for purposes

of liability under Section 16(b).” Pet. A-80.

The other transactions at issue in the Section

16(b) Action concerned the transfer of shares from

trust accounts to Petitioners’ personal account follow-

ing an InfoSpace stock split (the “split-share transac-

tions”). Pet. A-64-66. As with the escrow transaction,

Petitioners’ representations that they were unaware

of the actions that created the split-share transac-

tions cannot be reconciled with the district court’s

findings against them in the underlying case. The

5

district court expressly found that Petitioners volun-

tarily participated in these transfers and that the

transfers would not have happened without Petition-

ers’ participation. Pet. A-76-77, A-80.

Specifically, Petitioners acquired the shares of

three trusts. As to two of these trusts, Petitioners

personally signed a letter of authorization “gift[ing]”

the trusts’ new shares to themselves personally. Pet.

A-65. Petitioners sent this letter to their personal

broker, Hambrecht & Quist (““H&Q”).' Pet. A-65. H&Q

accordingly deposited these shares into Petitioners’

‘personal accounts. Pet. A-65. The district court em-

phasized in awarding prejudgment interest that

“(tlhe Jains transferred shares to their personal

accounts by signing letters of authorization ... .” Pet.

A-55.

The district court also found that Petitioners

voluntarily participated in deposit of the third trust’s

new shares to their personal account. When Petition-

ers received this third trust’s new InfoSpace stock

certificates, Petitioners did not send the certificates

to Banc of America, where the ¢rust’s accounts were

held. Pet. A-65. Petitioners sent the certificates to

their personal broker at H&Q. Pet. A-65. H&Q conse-

quently deposited these shares in Petitioners’ per-

sonal account. Pet. A-65 (emphasis added).

' Hambrecht & Quist is predecessor in interest of Respon-

dent J.P. Morgan Securities Inc.

6

As with the escrow transaction, the district court

expressly found that the “Jain Defendants’ actions

were voluntary.” Pet. A-76. It further found that

Petitioners “caused deposits of trust stock into their

personal brokerage accounts by forwarding stock

certificates to their personal broker,” and they “signed

papers allowing transfer of funds from [certain

trusts].” Pet. A-76. Thus, Petitioners “participated in

the transfers and retained more than a degree of

control over the transactions. Without the participa-

tion of the Jains, the transfers would not have hap-

pened.” Pet. A-76-77.

Further, the court found, the transfers “created

the possibility of speculative abuse.” Pet. A-77. For

example, Petitioners could have sold the shares at a

high price, repurchased at a lower price, pocketed the

difference and returned the shares to the trusts. Pet.

A-77. Because Petitioners’ transfer of trust shares to

their personal accounts constituted a change in

beneficial ownership, was voluntary, and created the

possibility of speculative abuse, the court found they

were “purchases for purposes of Section 16(b) liabil-

ity.” Pet. A-78.

Completing the last link in the Section 16(b)

inquiry, the district court also found that Petitioners

sold InfoSpace shares within six months of these

transactions. Pet. A-51, A-6. Because Petitioners had

purchased and sold InfoSpace stock within six

months, they were required to disgorge their profits

under Section 16(b). The district court found that the

Petitioners’ profit was the difference between the

7

amount they paid for the shares ($0) and the amount

they realized in the sale, ever $200 million. Pet. A-51.

The district court accordingly entered judgment

against Petitioners and in favor of InfoSpace for just

over $200 million, the amount of the profit. Pet. A-58.

The court also awarded prejudgment interest, finding

that Petitioners had not established that they acted

in good faith in connection with the transactions. Pet.

A-55-56, A-59. Petitioners appealed. Pet. A-7. While

the case was on appeal, they settled and agreed to

pay InfoSpace $65 million for the Section 15(b) claim.

They subsequently dismissed their appeal. The

judgment is final and not subject to any further

review.

Il. PETITIONERS’ INDEMNITY ACTION.

Following entry of judgment against them in the

Section 16(b) Action, Petitioners filed this action in

Washington state court. Their current operative

complaint alleges claims against Respondents J.P.

Morgan Securities Inc., as successor in interest to

Hambrecht & Quist; Wilson Sonsini Goodrich &

Rosati (JP Morgan’s counsel); and Perkins Coie, LLP

(InfoSpace’s counsel). Petitioners’ complaint seeks to

recover the amounts that Petitioners paid to settle

the Section 16(b) Action, litigation costs such as

attorneys’ fees incurred in the Section 16(b) Action,

and supposed consequential damages from having to

pay those litigation costs. It does so on various tort

theories such as negligence, breach of fiduciary duty,

8

equitable apportionment, “recovery of non-settlement

damages,” and ejuitable indemnity.

After repeated amendments of Petitioners’ com-

plaint, the trial court dismissed the complaint against

each Respondent without leave to amend. Pet. A-21,

A-25, A-29.

The Washington Court of Appeals affirmed. In

accord with every reported case to address the issue,

it held that an insider compelled to forfeit profits

under Section 16(b) may not obtain indemnity. Such

indemnity, the court explained, would frustrate

federal law by restoring the profits Congress had

deliberately taken away. Pet. A-15. The court also

held that all of Petitioners’ claims against Respon-

dent JP Morgan are either indemnity or de facto

indemnity claims and are barred by the policy against

indemnity for Section 16(b) claims. Pet. A-15-16.

Last — and independent of preemption — the

Washington Court of Appeals held that because

Petitioners’ own conduct caused the transactions that

made them liable under Section 16(b), as a matter of

state law they cannot recover attorneys’ fees and

other litigation expenses from the 16(b) Action. Wash-

ington law does not allow a party whose “own conduct

caused it to be ‘exposed’ or ‘involved’ in litigation” to

recover indemnity for fees and costs from that litiga-

tion. Pet. A-17. This is called the ABC rule. Pet. A-16-

17. Quoting the district court’s findings of undisputed

fact set forth above, the Court of Appeals held that

“(tlhe Jains were not blameless in the transactions

9

giving rise to their liability.” Pet. A-17. Accordingly,

“[wle hold that the Jains’ own conduct caused them to

be involved in the litigation and, therefore, under the

ABC rule they may not recover fees or litigation

costs.” Pet. A-18.

The Washington Supreme Court denied Petition-

ers’ petition for discretionary review. Pet. A-2. Peti-

tioners then filed their petition for certiorari.

¢

REASONS FOR DENYING THE PETITION

I. ALL LOWER COURTS AGREE THAT

SECTION 16(b) PREEMPTS INDEMNITY

CLAIMS LIKE PETITIONERS’.

As this Court explained in Reliance Electric

Company v. Emerson Electric Company, 404 U.S. 418,

422, 92 S. Ct. 596, 30 L. Ed. 2d 575 (1972), Congress

enacted Section 16(b) “to curb the evils of insider

trading [by] ... taking the profits out of a class of

transactions in which the possibility of abuse was

believed to be intolerably great.” Thus, Congress

deliberately deprived short-swing traders of profits

under Section 16(b). Allowing them to obtain indem-

nity under state law would restore those profits to

them, frustrating Section 16(b)’s purpose.

Accordingly, the cnly two appellate decisions on

the issue -— the decision below and First Golden

Bancorporation v. Weiszmann, 942 F.2d 726, 729

(10th Cir. 1991) — both hold that Section 16(b) pre-

empts state-law indemnity claims to recover the

16

profits disgorged under Section 16(b). Petitioners

concede that “[t]he Tenth Circuit is the only Court of

Appeals that has addressed the indemnification issue

in the context of liability imposed by 16(b).” Pet. 24

(citing First Golden). That Tenth Circuit decision

unambiguously holds such claims preempted: “[Wle

hold that the public policy behind section 16(b) ren-

ders invalid any attempt by an insider to seek in-

demnification for his liability under section 16(b).”

First Golden, 942 F.2d at 729.

Decisions of federal district courts and state

lower courts — if relevant at all, see Supreme Court

Rule 10(a)-(b) — tell the same story. Every court that

has addressed the issue has held that state-law

indemnity claims, to recover the profits taken away

by Section 16(b), are preempted:

e “(TJhe Court is persuaded that allowing

indemnification for §16(b) violations

would frustrate the public policy behind

the statute because liable parties would

not have to return their short-swing

profits to the plaintiff issuer.” Schaffer v.

CC Investments, LDC, 286 F. Supp. 2d

279, 283 n.6 (S.D.N.Y. 2003).

e “{If] indemnification is found to be valid,

then the defendants would have been

able to waive, in effect, the requirement

of section 16(b).... This result would

frustrate the public policy behind the

prohibition of insider trading within the

six-month time period found in section

11

16(b).” Bunker Ramo-Eltra Corp. v. Fair-

child Indus., Inc., 639 F. Supp. 409, 419

(D. Md. 1986).

e “{Tjndemnity for section 16(b) violations

would undermine the deterrent purpose

of section 16(b) by allowing a wrongdoer

to recoup its disgorged profits.” Deephaven

Capital Mgmt., LLC v. Schneil, No. 06-844

(JRT/FLN), 2007 WL 101821, at *3 (D.

Minn. Jan. 8, 2007).*

Thus, there is nothing to review. All courts to

reach the issue agree that indemnity for Section 16(b)

liability would frustrate Congress’ purpose and is

preempted. The scarcity of cases addressing the issue

alsc confirms that it is not of widespread interest.

With no basis to review the issue actually raised

by this case, Petitioners try to manufacture a conflict

over whether indemnity is consistent with “federal

securities laws” generally when “the securities stat-

ute” is supposedly satisfied. Pet. i. That question is

not even raised by this case. Section 16(b), whose

specific objective is to deprive short-swing traders of

profits, see Reliance, 404 U.S. at 422, would by defini-

tion not be “satisfied” if those profits were restored.

But putting that aside, there is no conflict as to

whether federal securities laws preempt state-law

indemnity claims, even outside the Section 16(b)

* No state appellate court has addressed the issue, besides

the courts below.

12

setting. Not a single federal court of appeals or state

court of last resort, including those cited by Petition-

ers, has allowed a violator of any federal securities

law to pursue an indemnity claim. If anything, Peti-

tioners’ cases underscore the correctness of the deci-

sion below.

For example, Globus v. Law Research Service,

Inc., 418 F.2d 1276, 1288 (2d Cir. 1969), held that it

“would be against the public policy” of the Securities

Act of 1933 to allow indemnity. The court reasoned,

among other things, that civil liability under that Act

was designed to “deter negligence by providing a

penalty,” and that the “‘in terrorem effect’ of civil

liability ... might well be thwarted if underwriters

were free to pass their liability on ....” 418 F.2d at

1288. Thus, Globus arises under a different securities

law, and if on point at all, it agrees, not conflicts, with

the decision here. Petitioners vainly try to gin upa

conflict by pointing to Globus’s statement that it

considered only the facts before it, involving conduct

graver than ordinary negligence. Pet. 19. But stating

that the court is only considering the facts before it

does not remotely establish a contrary rule for differ-

ent facts not before the court. It certainly does not

create a conflict with other cases on those supposedly

different facts.

Petitioners’ other court of appeals cases similarly

agree with the result here. All of Petitioners’ court of

appeals cases addressing state-law indemnity claims

hold them preempted. See Baker, Watts & Co. v. Miles

& Stockbridge, 876 F.2d 1101, 1105 (4th Cir. 1989)

13

(holding that the federal policy against indemnifica-

tion for securities violations preempted state law

indemnity claim); Heizer Corp. v. Ross, 601 F.2d 330,

334 (7th Cir. 1979) (holding that indemnification is

preempted because it would “frustrate and defeat”

the policy of securities legislation); Laventhol, Krek-

stein, Horwath & Horwath v. Horwitch, 637 F.2d 672,

676 (9th Cir. 1980) (affirming dismissal of an indem-

nity claim because it would “undermine the statutory

purpose” of the securities laws); Eichenholtz v. Bren-

nan, 52 F.3d 478, 484 (8d Cir. 1995) (holding that

indemnification claims “run counter” to securities law

policies and are barred, even if party seeking indem-

nification was “merely negligent, played a ‘de mini-

mis’ role ... or was being held derivatively or

vicariously liable”).* Petitioners’ other two cases do

not even involve state-law claims for indemnity, and

they deny any right to indemnification under federal

law. In re U.S. Owl & Gas Litig., 967 F.2d 489, 495

* Petitioners note that Eichenholtz stated that one defen-

dant, First Jersey, would be able to recover from its agent,

Brennan, if First Jersey were held vicariously liable. 52 F.3d at

485 n.13; see Pet. 28-29. That has nothing to do with this case.

As Petitioners recognize, the district court there, as part of a

settlement, had barred claims only against settling defendants.

Pet. 27-28. Claims against Brennan were not barred “because

Brennan is a non-settling defendant.” 52 F.3d at 485 n.13

(emphasis added). Eichenholtz did not allow a party held

vicariously liable to obtain indemnity. To the contrary, it ex-

pressly held that state-law indemnity claims are preempted

even if the party seeking indemnity was “being held derivatively

or vicariously liable.” 52 F.3d at 484.

14

(llth Cir. 1992); King v. Gibbs, 876 F.2d 1275, 1276

(7th Cir. 1989). None of these cases allows a violator

of Section 16(b) or any other federal securities law to

obtain indemnity.”

Apparently recognizing that their asserted court

of appeals conflict is illusory, Petitioners cite district

court cases. An asserted conflict with district courts,

however, does not warrant this Court’s review. See

Supreme Court Rule 10(a)-(b). In any event, Petition-

ers’ district court cases are off point.’

* Baker, Watts, Heizer and Eichenholtz allow contribution

claims in some circumstances. Petitioners here cannot state a

contribution claim, as they acknowledge. Pet. 37. Contribution

lies only against joint tort-feasors. All-Pure Chemical Co. v.

White, 127 Wn.2d 1, 4, 896 P.2d 697 (1995) (Washington law

“provides for the right of contribution only among ‘two or more

persons who are jointly and severally liable’”) (quoting RCW

4.22.040(1)). Respondents cannot be joint tort-feasors because

Respondents, who did not purchase or sell InfoSpace stock, could

not have violated Section 16(b). Pet. 37.

* None of Petitioners’ district court cases presents a fact

situation similar to this case. Petitioners’ cases involved (1) a

plaintiff seeking indemnity who did not have a judgment

entered against it and thus would have an opportunity to prove

it was completely without fault, see Fromer v. Yogel, 50 F. Supp.

2d 227 (S.D.N.Y. 1999); Greenwald v. American Medcare Corp..,

666 F. Supp. 489 (S.D.N.Y. 1987); (2) indemnity voluntarily

agreed to, see Raychem Corp. v. Fed. Ins. Co., 853 F. Supp. 1170

(N.D. Cal. 1994) and Cambridge Fund, Inc. v. Abella, 501

F. Supp. 598 (S.D.N.Y. 1980) (consent order); (3) contribution-

type claims against a party who, unlike Respondents here,

allegedly violated the securities laws, see Arden Way Associates

v. Boesky, 664 F.Supp. 863 (S.D.N.Y. 1987); or (4) state-law

claims seeking more than plaintiffs’ settlement payments and

(Continued on following page)

15

Petitioners protest that the established no-

indemnity rule is unjust, and that they should not be

made to lose their profits under Section 16(b) solely

through the actions of others. See Pet. 15-17. They

are far off base, and this case would be a poor vehicle

to test any such contention. As detailed above, the

district court found that Petitioners personally exe-

cuted the agreement that created the escrow, person-

ally signed SEC filings stating that the shares had

been placed in escrow, personally signed letters

“sifting” trust shares to their personal accounts, and

personally sent trust share certificates to their per-

sonal broker. Pp. 2-6 above. That is how Petitioners

came to acquire the trusts’ shares, triggering Section

16(b). The district court found that all of these trans-

actions were voluntary, personally benefited Petition-

ers, and would not have happened without

Petitioners’ actions. It further found that Petitioners’

voluntary transactions created the very possibility for

speculative abuse that Section 16(b) was meant to

prevent. P. 6 above.

These findings of undisputed fact are fatal even

at the pleading stage, as the court below implicitly

recognized. It expressly relied on the district court’s

findings, holding that state law barred Petitioners’

claim for attorney fees and litigation costs because

“the Jains’ own actions caused them to run afoul of

litigation expenses. In re Cendant Corp. Sec. Litig., 139 F. Supp.

2d 585 (D.N.J. 2001); In re Sunrise Sec. Litig., 793 F. Supp. 1306

(E.D. Pa. 1992).

16

section 16(b).” Pet. A-17. Indeed, under Washington

law, Petitioners must demonstrate that they were

liable for the Section 16(b) claim before they can even

state an indemnity claim. See Gilbert H. Moen Co. v.

Island Steel Erectors, Inc., 128 Wn.2d 745, 763-64,

912 P.2d 472 (1996) (party seeking indemnity after

settlement must prove that it was liable for underly-

ing claim); United Boatbuilders, Inc. v. Tempo Prod-

ucts Co., 1 Wn. App. 177, 181, 459 P2d 958 (1969)

(same). They cite no authority suggesting they can

admit liability while denying the central findings that

establish that liability.° In addition, the district

court’s findings were necessary to both the liability

judgment and the decision to award prejudgment

interest as part of the judgment. Pet. A-55 (relying on

Petitioners’ voluntary participation in transactions to

impose prejudgment interest), A-76-81 (relying on

Petitioners’ voluntary participation and formation of

escrow account to find liability). Thus Petitioners are

collaterally estopped to deny them, as Respondents

JP Morgan and Wilson Sonsini emphasized in the

courts below. See Parklane Hosiery Co., Inc. v. Shore,

* Respondent Perkins Coie’s causation argument in connec-

tion with Petitioners’ malpractice claim applies equally to

Petitioners’ indemnity claims against JP Morgan. Petitioners

allege that JP Morgan’s purported wrongdoing was the cause of

the judgment against them in the Section 16(b) Action. However,

the Washington Superior Court found that the judgment against

Petitioners was in error and would have been reversed by the

Ninth Circuit. Therefore, the district court’s error and the Ninth

Circuit’s reversal break the chain of causation between JP

Morgan’s actions and Petitioners’ alleged damages.

17

439 U.S. 322, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979);

Blonder-Tongue Laboratories, Inc. v. University of

Illinois Foundation, 402 U.S. 313, 329, 91S. Ct. 1434,

28 L. Ed. 2d 788 (1971) (non-party to prior case may

assert collateral estoppel against party who lost: that

case); Duncan v. Judge, 43 Wn.2d 836, 843, 264 P.2d

865 (1953) (defendant found jointly responsible with

another defendant for accident could not seek indem-

nity from other defendant on the theory that the

other defendant was solely responsible).

In sum, this case does not warrant this Court’s

review. Only a handful of cases have addressed

whether a party forced to disgorge profits under

Section 16(b), like Petitioners, can maintain an

indemnity action to recover them. Every one holds

that they cannot. Petitioners cite no case from a state

court of last resort or federal court of appeals, under

any federal securities law, allowing a state-law in-

demnity claim on parallel facts. There is nothing to

review.

Il. THE DECISION BELOW IS CORRECT ON

THE MERITS - PETITIONERS’ STATE

LAW INDEMNITY CLAIMS ARE DI-

RECTLY CONTRARY TO SECTION 16(b),

AND ARE BARRED BY THE SUPREMACY

CLAUSE.

The decision below is also correct.

Article VI of the Constitution provides that

federal law “shall be the supreme Law of the Land;

18

. any Thing in the Constitution or Laws of any

State to the Contrary notwithstanding.” U.S. Const.

art. VI, cl. 2. Federal law preempts state law where,

inter alia, state law “stands as an obstacle to the

accomplishment and execution of the full purposes

and objectives of Congress” or is “contrary to” federal

law. Geier v. American Honda Motor Co., Inc., 529

U.S. 861, 873, 881-82, 120 S. Ct. 1913, 146 L. Ed. 2d

914 (2000) (quoting, in part, Hines v. Davidowitz, 312

U.S. 52, 67, 61S. Ct. 399, 85 L. Ed. 581 (1941)).

A state-law indemnity claim would stand as just

such an obstacle, indeed run directly contrary, to

Section 16(b). Congress’ intent in enacting Section

16(b) was to take the profits out of a class of transac-

tions in which it determined the possibility of abuse

of inside information was intolerably high. Reliance

Elec. Co., 404 U.S. at 422. To effectuate this purpose,

Congress created a hard and fast rule: All profits any

insider made as a result of any purchase and sale, or

sale and purchase, within a six-month period, must

be forfeited.

The objective standard of Section 16(b) im-

poses strict liability upon substantially all

transactions occurring within the statutory

time period, regardless of the intent of the

insider or the existence of actual speculation.

This approach maximized the ability of the

rule to eradicate speculative abuses by re-

ducing difficulties in proof. Such arbitrary

and sweeping coverage was deemed neces-

sary to insure the optimum prophylactic ef-

fect.

19

Reliance Elec. Co., 404 U.S. at 422 (quoting Bershad

v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970), cert.

denied, 400 U.S. 992 (1971)).

Allowing indemnity for Section 16(b) violations,

and thereby permitting insiders to keep the profits

from their short-swing sales, would defeat the pur-

pose of Section 16(b), presenting an obstacle to it.

That is why every court that has addressed the issue,

including the courts below, has denied indemnity

claims for Section 16(b) violations. See pp. 8-9 above.

Indeed, the Court of Appeals reviewed the case law on

Section 16(b) indemnity claims and found “[i]t is well

settled that an insider found to have violated section

16(b) may not seek indemnification for the ensuing

liability. This is to prevent an insider from effectively

waiving the requirement that short-swing profits be

returned, thus frustrating the policy behind section

16(b).” Pet. A-10 (citing First Golden Bancorporation,

942 F.2d at 728-29; Bunker Ramo-Eltra Corp., 639

F. Supp. at 418-19; Schaffer, 286 F. Supp. 2d at 283).

As noted above, Petitioners do not, and cannot,

cite a single case permitting indemnity for a Section

16(b) violation. Instead, they misleadingly argue that

their claims should have been upheld under a stan-

dard “allowing claims of indemnification by innocent,

or merely negligent, defendants accused of violating

the federal securities laws.” Pet. 19. But that pur-

ported standard does not exist. No appellate court

has allowed a defendant accused of violating the

securities laws to pursue an indemnity claim. In-

stead, the courts that have addressed the issue,

20

including those cited by Petitioners, generally hold

that indemnity is not available for any securities law

violations. See, e.g., Eichenholtz, 52 F.3d at 484 (“We

agree with those courts that have held that there is

no implied right to seek indemnification under the

federal securities laws.”); Baker, Watts, 876 F.2d at

1105 (“(A] right of action for indemnification would

frustrate the statute’s goal of encouraging diligence

and discouraging negligence in securities transac-

tions.”); King, 876 F.2d at 1282 n.10 (“It is difficult to

see how a right to indemnification for even innocent

persons would serve the deterrent function which

underlies the statute.”); Stowell v. Ted S. Finkel Inv.

Services, Inc., 641 F.2d 323, 325 (5th Cir. 1981) (“[Ijt

may be noted that indemnification tends to frustrate

the policy of securities legislation.”); Laventhol, 637

F.2d at 676 (“[T]he purpose of the Act is regulatory

rather than compensatory, and permitting indemnity

would undermine the statutory purpose of assuring

diligent performance of duty and deterring negli-

gence.”); Riverhead Sav. Bank v. Natl Mortgage

Equity Corp., 893 F.2d 1109, 1116 (9th Cir. 1990)

(“Indemnification is not available under federal

securities laws.”).

Even beyond the general unavailability of in-

demnity under federal securities laws, the policies

behind Section 16(b) make it particularly unsuitable

for indemnity claims. Even the Southern District of

New York, which Petitioners rely on to argue that

indemnity claims have been allowed in some securi-

ties fraud actions, see Pet. 19, n.2, has noted that

21

allowing a Section 16(b) violator to pursue an indem-

nity claim would be contrary to the policies behind

Section 16(b):

The Second Circuit has suggested that in-

demnity claims under the Act may proceed

where the wrong committed by those seeking

indemnity is no greater than ordinary negli-

gence. See Fromer v. Yogel, 50 F. Supp. 2d

227, 238 n.8 (S.D.N.Y. 1999). However, the

Second Circuit has not dealt directly with

indemnity claims by parties prosecuted un-

der § 16(b), and as this Court has acknow!]-

edged, several other Circuits suggest or hold

that indemnity is simply unavailable under

the federal securities laws. See id. at 238 n.8.

Moreover, the Court is persuaded that

allowing indemnification for § 16(b) vio-

lations would frustrate the public policy

behind the statute because liable par-

ties would not have to return their

short-swing profits to the plaintiff is-

suer. See Bunker Ramo-Eltra Corp. v. Fair-

child Industries, Inc., 639 F. Supp. 409, 418-

19 (D. Md. 1986) (finding that indemnifica-

tion clause in stock purchase agreement did

not indemnify defendants against § 16(b) ac-

tion).

Schaffer, 286 F.Supp. 2d at 283 n.6 (emphasis

added).

Petitioners’ other cases are off point. For exam-

ple, Musick, Peeler & Garrett v. Employers Insurance

of Wausau, 508 U.S. 286, 113 S.Ct. 2085, 124

22

L. Ed. 2d 194 (1993), allows a defendant in a securi-

ties fraud claim under Rule 10b-5 to bring a contribu-

tion claim under federal law. Petitioners admittedly

cannot state a contribution claim here, however. See

p. 14 n.4 above. Kern County Land Co. v. Occidental

Petroleum Corp., 411 U.S. 582, 93 S. Ct. 1736, 36

L. Ed. 2d 503 (. 973), and Foremost-McKesson, Inc. v.

Provident Securities Co., 423 U.S. 232, 96 S. Ct. 508,

46 L. Ed. 2d 464 (1976), did not authorize, or even

address, indemnity claims. They construed the scope

of liability under Section 16(b). But the scope of

Petitioners’ liability is not at issue. Petitioners’ liabil-

ity was conclusively established in the underlying

Section 16(b) Action; besides, Petitioners cannot state

an indemnity claim under Washington law unless

they admit Section 16(b) liability. P. 16 above.

Petitioners assert that their settlement with

InfcSpace fulfilled the purposes of Section 16(b)

because their profits (or at least a portion of them)

were returned to the issuer. But the effectiveness of

Section 16(b) depends on taking away profits from

insiders, not on where those forfeited funds go. See

Reliance Elec. Co., 404 U.S. at 422 (Congress enacted

Section 16(b) to take “profits out of a class of transac-

tions”); Deephaven Capital Mgmt., LLC, 2007 WL

101821, at *3 (andemnity claim would undermine

purpose of Section 16(b) “by allowing a wrongdoer to

recoup its disgorged profits”).

Schaffer, First Golden, Deephaven, and Bunker

Ramo-Eltra govern this case and the Court of Appeals’

23

Opinion is in accord with these decisions. Pet. A-10-

14.

The Court of Appeals was also correct in affirm-

ing the dismissal of all of Petitioners’ claims as “de

facto indemnity claims.” Pet. A-16. In First Golden,

the party seeking indemnity for a Section 16(b) claim

also brought other claims, including claims for

Section 10(b) liability, controlling person liability and

negligent misrepresentation. The First Golden court

held that the party could not avoid the bar against

indemnity claims by disguising its indemnity claim as

something else. “[Tlo the extent that the remaining

third-party claims were in reality just disguised

indemnity claims for a section 16(b) violation, it

would have been appropriate to dismiss them with

prejudice.” First Golden, 942 F.2d at 731. Similarly,

the court in In re Cendant Corp. Securities Litigation,

was quite clear about what should happen to state-

law claims that, like Petitioners’ claims here, seek to

recover damages related to securities liability: “[T]o

the extent claims are ‘integrally related’ with the

securities claims that were settled, they would be

held to be preempted by the federal securities laws.”

139 F. Supp. 2d at 596. Petitioners’ claims here,

whether entitled indemnity or something else, all

seek the same thing: Recovery of Petitioners’ settle-

ment payments and litigation expenses relating to

the Section 16(b) Action. Consequently, all of Peti-

tioners’ claims seek indemnity, are integrally related

with the Section 16(b) Action, and are barred.

24

Last, the Court of Appeals also held that Peti-

tioners cannot recover attorney fees and litigation

costs. Besides being correct under the federal law

already discussed, this ruling expressly rests on an

adequate and independent state-law ground. The

Court of Appeals held that Petitioners cannot meet

Washington law’s requirements for an indemnity

claim because their own actions caused the underly-

ing litigation. Pp. 8-9 above. This state-law holding is

not subject to review in this Court. See Michigan uv.

Long, 463 U.S. 1032, 1041, 103 S.Ct. 3469, 77

L. Ed. 2d 1201 (1983).

CONCLUSION

The issue presented by this case is whether

corporate insiders required to forfeit profits under

Section 16(b) can recover those profits through in-

demnity claims. The lower courts unanimously hold

they cannot. There is also no conflict on the broader

question Petitioners try to present, whether federal

securities laws generally preempt violators’ indem-

nity claims. The court of appeals and state court of

last resort decisions addressing such claims have

uniformly held them preempted. The decision below

25

is correct and agrees with established law. The peti-

tion should be denied.

Respectfully submitted,

BINGHAM MCCUTCHEN, LLP

DaviD M. BALABANIAN

Counsel of Record

JOHN D. PERNICK

ROBERT A. BRUNDAGE

NIMA E. SOHI

Three Embarcadero Center

San Francisco, CA 94111

(415) 393-2000