March 3, 2009
We issued a Client Alert on February 19, 2009 on the Tenth Circuit opinion setting forth a robust analysis of the loss causation burden under the federal securities laws. In that opinion, the Tenth Circuit affirmed the grant of summary judgment against the plaintiff class on the basis of the loss causation decision of the United States Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) and the plaintiffs’ failure to meet the expert testimony requirements set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). This Update addresses the Tenth Circuit’s affirmance of the award to the defendants of $611,964.20 following their summary judgment victory.
This companion case also arose out of the collapse in share value and subsequent bankruptcy of Williams Communications Group ("WCG"), a telecommunications company. WCG had been formed earlier by The Williams Companies ("Williams"), a natural gas and pipeline company headquartered in Tulsa, Oklahoma. WCG was able to use decommissioned Williams pipelines and rights of way to construct a nationwide fiber-optic network, and Williams effected a tax free distribution of the bulk of its WCG shares to Williams shareholders in April 2001. WCG ceased being a subsidiary of Williams and thereafter functioned as a separate company with its own board of directors.
The period after April 2001 was a difficult period for WCG and the telecommunications industry. The market as a whole suffered in the wake of the September 11 terrorist attacks and the Enron bankruptcy. The telecommunications industry suffered industry-wide price declines, the stock price of WCG suffered declines that paralleled the declines of other telecommunications companies, and WCG ultimately filed for bankruptcy protection on April 22, 2002.
The first of several securities lawsuits were filed on January 29, 2002, the same day that Williams announced that it was delaying reporting its fourth quarter and 2001 year-end financial statements while it reevaluated the status of contingent liabilities it had with respect to its former subsidiary WCG. After WCG filed for bankruptcy, WCG was dropped as a defendant, and the plaintiffs chose to pursue claims against Williams, the outside auditors, and several former officers and directors of WCG. Motions to dismiss were denied by the district judge originally handling the case, Gibson Dunn was then brought in to represent Williams and its former CEO, and the parties engaged in many months of intensive discovery and motion practice. In April 2006, the defendants moved for summary judgment and to exclude expert testimony proffered by plaintiffs, oral argument was heard over two days on October 31 and November 1, 2006, and summary judgment and exclusion orders were issued by the district court on July 2007. Plaintiffs appealed the judgments in favor of Williams and the WCG individual defendants. That judgment was affirmed by the Tenth Circuit last month.
After their summary judgment victory, the defendants moved for costs pursuant to Fed. R. Civ. P. 54(d)(1) and 28 U.S.C. § 1920. Following several hearings before the clerk, the magistrate judge, and the district court, the district court reviewed and largely approved the report of the magistrate judge and entered a twenty-two page order awarding costs of $168,490.95 in favor of Williams and its former CEO, $222,753.78 in favor of the eight individual WCG defendants, and $220, 719.47 in favor of the outside auditors. Plaintiffs appealed.
Costs May Be Awarded If They Were Reasonably Necessary For Use in the Case, Even if Ultimately Not Used by The District Court in Its Summary Judgment Ruling
Plaintiffs asserted that the Defendants did not meet their burden of demonstrating that certain deposition costs were "necessarily obtained for use in the case" because the district court did not actually use all of the depositions in deciding summary judgment. The Tenth Circuit rejected what it called Plaintiffs’ "exceedingly narrow view of the deposition expenses authorized" under 28 U.S.C. § 1920 (Slip Op. at 9), holding that the challenged costs need only have been "reasonably necessary for use in" the case at the time the expenses were incurred. The Tenth Circuit affirmed the award of costs of seventy-four depositions based upon the district court’s familiarity with the nature and course of the litigation: "Considering that the parties presented a combined total of sixty-nine fact witnesses, the district court’s conclusion hardly seems suspect." Slip Op. at 11. The court similarly rejected challenges to the award of copy costs, and specially held that a "prevailing party need not ‘justify each copy’ it makes", citing Case v. Unified Sch. Dist. No. 233, 157 F.3d 1243, 1259 (10th Cir. 1998). Slip. Op. at 10.
The District Court Was Not Required to Reduce the Award Because Some of the Costs Also Related to the Settled Action.
Early in the case, the district court bifurcated the litigation into two subclass of plaintiffs and ordered coordinated discovery. One of the subclasses settled its case, and in the appeal of the costs award in the WCG Subclass litigation, the plaintiffs argued that many of the costs were equally attributable to the settled subclass action and that the district court abused its discretion in taxing them for the full amount of the costs. The Tenth Circuit held that the district court did not abuse its discretion in determining that because of factual overlaps between the two matters, the Defendants would have incurred the challenged costs even in the absence of the settled action.
The Size of the Award Was Proper in Light of the "Cold, Hard Facts" and Plaintiffs’ Litigation Choices.
Plaintiffs, represented by the Milberg, Susman Godfrey, and the now-closed Yorman Alexander & Parekh firm, argued at both the district court and before the Tenth Circuit that the award of over $610,000 "is the largest award in the history of American jurisprudence, even in cases involving multiple defendants."
The Tenth Circuit acknowledged that the costs awarded were "undoubtedly higher than the norm," but the size was not particularly surprising "given the massiveness and complexity of the litigation at issue" and the fact that the Plaintiffs sought almost $3 billion in damages. Slip Op. at 12. "Defendants’ costs were, quite plainly, driven upward by the cold, hard facts of this case," and in particular, "Plaintiffs’ litigation choices; including the number of defendants, the high amount of damages sought, the broad allegations asserted, the complexity of the claims at issue, and Plaintiffs’ aggressive course of discovery …" Slip. Op. at 13. No abuse of discretion was found in awarding over $610,000 in costs: "In this case, the stakes were indisputably high, and ‘it was incumbent on [De]fendants to fully prepare their case on the merits.’" Id., citing Callicrate v. Farmland Indus. Inc., 139 F. 3d 1336, 1341 (10th Cir. 1998).
Implications of Cost Award Affirmance
The federal securities laws do not permit an award of fees to the prevailing party, and it continues to be the rule that ordinarily each side is to bear its, his or her own fees and costs. Plainly an award of $610,000 in costs to the prevailing defendants represents only a fraction of what it cost each of them to defend the case, and does not take into account the extreme diversion of management time in responding to a massive securities lawsuit.
But the Federal Rules of Civil Procedure do provide a mechanism for recovering some of those costs. This decision also serves as a reminder to be mindful of the costs of the choices made in litigation. There is a cost in deposing dozens of people and demanding the production of millions of documents. The amount of the cost inflicted on defendants may later be sought (at least partially, pursuant to the strict statutory cost rules) if your side happens to end up on the losing side.
Gibson Dunn represented The Williams Companies before the district court and on appeal. Ted Boutrous argued on behalf of Williams and its former CEO before the Tenth Circuit on the appeal of the summary judgment and Daubert rulings; the Tenth Circuit elected to decide the cost award case without oral argument. Tim Roake of the Palo Alto office and Ethan Dettmer of the San Francisco office were on the briefs before the Tenth Circuit, along with the Tulsa firm of Hall, Estill, Hardwick, Gable, Golden & Nelson, and were assisted by Danielle Kitson and Marisa Hudson-Arney of Gibson Dunn’s Denver office. A large team from the Gibson Dunn offices in Palo Alto, San Francisco, Orange County, Los Angeles, Denver and Dallas represented Williams and its CEO at the district court level, including Messrs. Roake and Dettmer, Wayne Smith, Meryl Young, Joe Busch, and Jeff Reeves. The eight individual WCG officer and director defendants were represented by the Tulsa office of the Oklahoma firm of Crowe & Dunlevy. The outside auditors were represented by the New York and San Francisco offices of Latham & Watkins and the Oklahoma City firm of Ryan, Whaley & Coldiron.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Timothy Roake (650-849-5382, [email protected]) in the Palo Alto office, Wayne Smith (949-451-4108, [email protected]) or Meryl Young (949-451-4229, [email protected]) in the Orange County office, Ethan Dettmer (415-393-8292, [email protected]) in the San Francisco office, or any of the following:
Securities Litigation Group:
Wayne W. Smith (949-451-4108, [email protected]) in Orange County
Meryl Young (949451-4229 [email protected]) in Orange County
Jonathan C. Dickey (212-351-2399, [email protected]) in New York
Robert F. Serio (212-351-3917, [email protected]) in New York
Timothy Roake (650-849-5382, [email protected]) in Palo Alto
Appellate and Constitutional Law Practice Group:
Theodore B. Olson (202-955-8500, [email protected]) in Washington, D.C.
Theodore J. Boutrous, Jr. (213-229-7000, [email protected]) in Los Angeles
Daniel M. Kolkey (415-393-8200, [email protected]) in San Francisco
Thomas G. Hungar (202-955-8558, [email protected]) in Washington, D.C.
Miguel A. Estrada (202-955-8500, [email protected]) in Washington, D.C.
Julian W. Poon (213-229-7758, [email protected]) in Los Angeles
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