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LAW.COM: ‘Shell Model’ Opens Door to European Class Actions

Amsterdam could become the class action capital of Europe — if the U.S. declines the honor

Michael Goldhaber
The American Lawyer
January 7, 2008

Walter van de Vijver, then the head of oil and gas exploration at Royal Dutch/Shell Group, committed one of the great e-mail gaffes of all time when he wrote to the company chairman in November 2003, “I am becoming sick and tired about lying about the extent of our reserves issues.”

Shell would later slash its reserves estimate by some 4 billion barrels, with the largest reduction occurring in Nigeria. Shell’s restatements, followed by the revelation of this and other embarrassing e-mails in an internal investigation, touched off a predictable round of securities fraud suits in the U.S. courts — and a less predictable chain of events in Europe.

When Shell’s European shareholders joined a U.S. class action filed in January 2006, the odds were stacked against them. Foreign shareholders suing a foreign corporation whose stock they bought on a foreign exchange are known as foreign-foreign-foreign, or “F-cubed,” plaintiffs. To proceed in a U.S. court, F-cubed plaintiffs must show a connection between the alleged fraud and the defendant’s U.S. conduct. It’s hard to see how that test is satisfied by Shell’s Dutch and English executives exaggerating the company’s oil reserves in places like Nigeria.

At the same time, Shell had resolved to make peace with its European investors. As luck would have it, Shell and its biggest investors are based in the one European jurisdiction with the rudiments of a broad class action system: the Netherlands. Under legislation that went into effect in July 2005, the Netherlands now allows a U.S.–style settlement to bind all members of a class who do not “opt out” of it. But the solution was not so simple as Shell plaintiffs filing a Dutch suit, because the 2005 law, the Dutch Act on Collective Settlement of Mass Damages, has one huge flaw: It provides only for damages settlements, not damages actions. Plaintiffs may ask a Dutch court for various types of relief under the act, but not damages. To put it mildly, this limits the plaintiffs’ negotiating leverage.

The lawyers’ innovative solution was to use the Dutch Act on Collective Settlement to settle a U.S. civil suit. The beauty of the Shell model for European plaintiffs is that it allows them to settle litigation on their home turf while enjoying all the advantages of U.S. actions at the front end of the litigation. Thus an action without a future plus a settlement without a past came together to create a complete legal reality — and a precedent with serious potential.

Global class actions are the topic du jour. Conferences on the subject were held this past autumn at both Columbia Law School and Oxford University. A new chair of Comparative Mass Litigation has been created this term at Tilburg University in the Netherlands, and an international Class Actions Law Journal will be launched next year by a professor at the Victorian Law Reform Commission in Australia. Whether European class actions will translate from the conference circuit to the courtroom is another matter.

The widespread replication of the Shell model depends on two things: the willingness of Dutch courts to open their gates to foreign plaintiffs, and the proclivity of U.S. courts to close their gates. Few doubt that class action plaintiffs — whether in securities law or other fields — will prefer U.S. litigation unless they are barred at the courthouse door. Some see in recent U.S. developments a drift in that direction. For those European plaintiffs who find their way blocked in the United States, and for defendants who seek to appease their European shareholders, Shell may show the way forward.

The company now known as Royal Dutch Shell plc struck a deal on April 11 with its non–U.S. investors for $352 million. Beyond that amount, the deal calls for the Securities and Exchange Commission to distribute $96 million of Shell’s $120 million fine to the non–U.S. investors (corresponding to their share of the investor base). Attorney fees bring the deal’s total value to about half a billion dollars. This money will benefit more than 90 foreign institutional investors and countless individual shareholders in the Netherlands. The agreement is contingent on the U.S. district court in New Jersey declining foreign jurisdiction, which it did on Nov. 13 — and on the Amsterdam Court of Appeals approving the deal. The Dutch ruling should issue in late 2008. Although predictions are perilous, it is not expected to stand in the way of the settlement.

And once the deal is approved by a Dutch court, it is highly likely to be enforceable throughout Europe through the European Commission regulation on jurisdiction and recognition of judgments. Observers will closely watch the Amsterdam Court of Appeals for its views on standing. If the Dutch courts broadly welcome non-Dutch parties (and not just Dutch defendants like Shell), then this procedure, despite its hybrid origins, may sire a new line of cases.

Perhaps predictably, the Dutch lawyers on both sides of the deal can foresee the Netherlands becoming a mecca for European class action settlements, in the way that Delaware has become a destination for bankruptcy law. But they are joined in this view by many independent European lawyers and academics.

“If successful, we think this is a new model for universal class action settlements,” says Jurjen Lemstra of Pels Rijcken & Droogleever Fortuijn in The Hague, who represented the Dutch Investors’ Association in the deal. “It could definitely be a model for the future,” agrees Marnix Leijten of De Brauw Blackstone Westbroek in The Hague, which served as Shell’s counsel alongside the firm now known as Dewey & LeBoeuf. “Grievances of European investors with regard to European companies will be resolved more often in European courts.”

Paul Lomas, the head of commercial disputes at Freshfields Bruckhaus Deringer in London, says that Dutch institutions, European plaintiffs and European defendants are all conspiring to bring about such a development, because there is a need for it. “Shell has made people think quite creatively about crashing through a settlement when it is economically rational for all parties, where otherwise the numbers and diversity of interests would make it too difficult,” says Lomas. Freshfields itself is defending a mass claim in another jurisdiction (Lomas won’t disclose more details) in which the lawyers are examining the possibility of a Shell-style settlement. “Quite a lot of lawyers hope they have the next test case,” he says. And when the next case comes, he suspects the Dutch courts will be waiting with open arms: “My personal guess is, if they’ve had a successful result with Shell, the Dutch public authorities would want to push the scope of that and create a center for these sorts of things.”

European academics also see Shell’s potential — and approve. “I think the Shell case will set a standard in Europe,” adds Maarten Kroeze of Erasmus University in Rotterdam. “It’s appropriate if European courts solve European problems.” Marco Ventoruzzo of Bocconi University in Milan concurs. “European class actions in U.S. courts might be a nice source of business for American law firms,” Ventoruzzo says, “but there is something ugly about judicial imperialism.”

Surprisingly, the Dutch Act on Collective Settlement was created at the initiative of corporate lobbyists. Pharmaceutical manufacturers asked the legislature to pass the law in 2005 to avoid a continuing flood of individual suits by families that suffered injuries related to the synthetic hormone DES. The act paved the way for a €38 million ($56 million) DES settlement, approved in June 2006. A second case, arising out of the sale of retail securities by Dexia Bank, saw a €400 million ($589 million) settlement approved in January 2007. The third case is Shell.

“I don’t think the legislature grasped the law’s practical value for national securities legislation, let alone international securities legislation, but lawyers saw its value immediately,” says Kroeze. “The act has been tremendously successful,” adds Daan Lunsingh Scheurleer of NautaDutilh in Amsterdam, who acted for the defendant in Dexia and plaintiffs in Shell and heads the firm’s class action team. “It has already been used successfully in the diverse areas of product liability, consumer finance and securities. There is now the possibility for companies to buy peace for a certain amount of money.”

“European plaintiffs are excited about settling litigation in Europe [where they know and trust the legal institutions] for psychological reasons,” says American plaintiffs attorney Richard Schiffrin of Schiffrin, Barroway, Topaz & Kessler in Philadelphia, who represented some of the European funds in the Shell case.

But while Europeans may prefer to settle in Europe, they’ll probably prefer to file suit in the United States so long as they can, for reasons both pragmatic and psychological. The practical advantages of the U.S. court system for class action plaintiffs are well-known. The United States is unique for its jury system, the availability of punitive and treble damages, the cultural embrace of jackpot verdicts, the acceptance by both business and law firms of litigation as a profit center, the existence of universal class action procedures and the absence of a “loser pays” rule in the award of legal fees. In securities law in particular, plaintiffs in U.S. courts are blessed with two doctrines that are rare overseas. Derivative suits allow shareholders to sue in the corporation’s name, and the fraud-on-the-market theory presumes that injured shareholders relied on corporate misrepresentations.

A less obvious advantage is that Old World parties can find themselves emboldened by the Wild West atmosphere of U.S. litigation. “I’ve seen clients be aggressive in the U.S. who would never dream of being aggressive in Europe,” says Jay Eisenhofer of Grant & Eisenhofer in Wilmington, Del., who was the lead American plaintiffs lawyer in the Shell deal and regularly represents ABP, a Dutch pension fund that manages more assets than the California Public Employees’ Retirement System.

The three U.S. plaintiffs firms in the Shell settlement — Grant & Eisenhofer; Shiffrin, Barroway; and Spector, Roseman & Kodroff — are at the forefront of a well-entrenched movement to recruit European clients to join U.S. court actions. According to PricewaterhouseCoopers, 9 percent of securities class actions filed in the U.S. courts over the past decade were filed by foreign plaintiffs. Despite representing European funds in the Shell deal, Robert Roseman of Spector Roseman in Philadelphia thinks Shell may be a sideshow. “The future of European class action litigation,” he declares, “is definitely in U.S. courts.”

But not if U.S. courts close their entry gates. There is so much U.S. case law that it’s hard to tell which way the gates are moving — but there are signs that they might be starting to shut.

For U.S. plaintiffs lawyers, the year’s most ominous doctrinal development transpired in the Vivendi S.A. securities litigation in the Southern District of New York. In certifying the class, federal district court Judge Richard Holwell refused to include any plaintiffs from Germany or Austria, on the reasoning that the courts of Germany and Austria were hostile to opt-out procedures and therefore unlikely to give a U.S. class action judgment or settlement binding effect. Judge Holwell thus interpreted the requirements of class certification effectively to create a new gatekeeper doctrine. Trial lawyers are nervously watching to see whether the Vivendi approach is followed by other courts with respect to German and Austrian plaintiffs and whether plaintiffs from other countries deemed hostile to opt-out procedures, including Italy and Spain, will be categorically excluded from U.S. class actions.

The Vivendi twist on class certification is only one of many U.S. gatekeeper doctrines, among them subject matter jurisdiction and forum non conveniens. These doctrines are so complicated, and so contradictory, that judges may in practice have the freedom to raise or lower the gate as they see fit.

Arguably, the most consequential development for U.S. judicial imperialism was political rather than doctrinal. At the end of 2006 a spate of blue-ribbon panels — headlined by Treasury secretary Henry Paulson Jr. and New York Mayor Michael Bloomberg — concluded that the U.S. capital markets were losing their competitive edge, in part because U.S. litigation terrifies foreign companies. To the extent that judges simply follow their gut, many are likely to be influenced by the fear of U.S. financial decline, especially in New York, which is anxious to keep its status as the world’s financial capital.

In antitrust class actions, the bad news on international access to the courts came three years ago, in the U.S. Supreme Court case of F. Hoffman–La Roche, Ltd. v. Empagran S.A. But while the Supreme Court interpreted the antitrust statute to exclude foreign plaintiffs whose purchases fell entirely outside of U.S. commerce, it left uncertain the status of foreign plaintiffs in borderline cases, where the domestic effects of the defendant’s conduct helped to bring about the foreign injury. The plaintiffs firm of Cohen, Milstein, Hausfeld & Toll, which pressed for broad foreign jurisdiction in Empagran, is now testing the edges of the doctrine in the lower courts. Its new cases include the “Air Passenger” antitrust litigation, which targets British Airways and Virgin Airlines for fixing prices on the New York-London route, and the “Air Cargo” litigation, which targets the major airlines of Western Europe, among others, for colluding on fuel surcharges. A further narrowing of foreign antitrust jurisdiction might be in the offing, barring more foreign plaintiffs from U.S. courts.

Perhaps not coincidentally, Cohen Milstein has hedged its bets by becoming Europe’s first and only U.S. plaintiffs firm. It hung out a shingle in London last spring, and the new five-solicitor office is laying the groundwork for European versions of the firm’s airline antitrust suits while awaiting a ruling in federal district court in New York on foreign jurisdiction in the Air Cargo case, expected early next year. Still, Cohen Milstein insists that Europe will not always be the backup plan. “We don’t view Europe as a stepsister,” says Brian Ratner of the Washington, D.C., office. “We view it as an enormous opportunity.” As regulators in Brussels and London levy ever-heftier fines, they create lucrative follow-on opportunities for trial lawyers. Under a U.K. law that took effect in 2003, consumer groups may file suit based on competition law findings by the Office of Fair Trading in London or the European Commission in Brussels. And the E.C. last year tripled its maximum fines in cartel cases. In antitrust, private attorneys general are gearing up, and they need not use the class action form to succeed.

When it comes to European class actions, hype can run ahead of reality. The British legal press mistakenly reported this spring that Andrew Sandler of Skadden, Arps, Slate, Meager & Flom in Washington, D.C., was moving to London to form a class action defense group for Skadden.

Sandler learned about it in the shower, when his wife asked him, “Honey, is there something you need to tell me?” Then he started getting calls from London estate agents. No calls came from the class action bar in Europe, for no such thing exists. The poster child for European class actions five years ago, Stephen Alexander of Class Law, has shuttered his firm for lack of business. Like most defense firms, Skadden is in wait-and-see mode.

What observers see in Europe is a vast pool of potential plaintiffs who are no longer willing to leave money on the table. The question is where their future lies: in the courts of Europe, or America? The Shell settlement suggests that the answer may be a little bit of both — including an odd hybrid of the two.

http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1199700328427

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