December 6, 2016

Lit Alerts—December 2016 (First Edition)

A publication of the Litigation Practice Group


In This Issue:



Securities: Second Circuit Dismisses "Short Swing" Case Stemming From Facebook IPO

Section 16(b) of the Securities Exchange Act of 1934 generally requires company insiders to return profits made from the purchase and sale of company stock if both transactions occur within a six-month period (so-called "short-swing" profits). The Second Circuit this month affirmed a district court's dismissal of a § 16(b) case filed against underwriters and "certain pre-IPO shareholders" involved in the Facebook IPO. The plaintiffs had alleged that the lead underwriters of the offering and certain pre-IPO shareholders constituted a "group" under § 13(d), which, if proven, would then obligate the group members to disgorge any short-swing profits they had made trading Facebook stock under § 16(b).

The plaintiffs based their claim on the theory that the defendants constituted a group under § 13(d) because each defendant was subject to a "lock-up agreement" that prevented the party from selling its Facebook shares prior to various deadlines. They argued that the existence of common lock-up agreements permitted aggregating the shares held by the defendants, thereby obligating the defendants to disgorge any profits they made during the six-month period following their acquisition of Facebook stock under § 16(b).

However, the Second Circuit agreed with the district court's ruling that standard lock-up agreements are not sufficient by themselves to establish a "group" as defined by § 13(d). The Second Circuit did note that "coordination in acquiring, holding, or disposing of securities may demonstrate the existence of a group," but ruled that signing lock-up agreements that are standard practice in IPOs does not rise to the level required to establish a group.

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California Restrictive Covenants: Court of Appeal Affirms Permanent Injuction Against Franchisor's Illegal Non-Compete Clause and Award of Attorney's Fees to Dealer

A California court of appeal last month affirmed an award of attorney's fees under the state's Unfair Competition Law (UCL) and a permanent injunction against U-Haul Co. of California from enforcing an illegal non-compete covenant in its standard agreements with California U-Haul dealers.

The case, Robinson v. U-Haul Co., Case Nos. A141396, A145828, centered on a non-competition clause in U-Haul's dealer contracts that prohibited dealers from entering into business with any competitors until a year after U-Haul's Yellow Pages advertisements for that dealer were no longer in print. After one dealer terminated its contract and began renting trucks from a competitor, U-Haul sued for breach of the dealer contract. The dealer cross-complained for a declaration that the non-compete covenant was void and also filed a separate class action against U-Haul alleging malicious prosecution and violation of the UCL.

Despite U-Haul's insistence that the dealer's lawsuit was moot because it had, after the litigation progressed, voluntarily ceased enforcement of the non-compete covenant, the trial court held the non-competition clause was void and unenforceable as a matter of law and permanently enjoined U-Haul from further enforcement of the covenant. The jury also awarded damages on the dealer's malicious prosecution claim, and the trial court awarded the dealer more than US$800,000 in attorney's fees on the UCL claim. The court of appeal affirmed, holding that the trial court had not abused its discretion in issuing the permanent injunction and awarding the dealer attorney's fees.

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