You are a United States company but a global citizen. Your shares are traded on U.S. exchanges. You have sales forces in Europe, manufacturing in Asia, and your eyes on the Middle East. It used to be that only the largest companies had a broad international reach. Now, it seems corporations of all sizes, in order to be competitive, must carefully consider overseas operations. While technology has made transition into the new global economy easier, it also creates special risks.

Imagine the following: You wake up one morning to a flurry of activity in France, where regulators have raided your main sales office seeking documents and information regarding alleged kickbacks to a key customer. You are asked to turn over hard drives, backup tapes and access to your servers. A reporter from Le Monde picks up the story, and by the time the U.S. opens for business there is a story on WSJ.com. Your stock price falls throughout the day; by the end of the week a leading class action law firm has announced the filing of a securities fraud case. The Securities and Exchange Commission (SEC) asks for information about your global sales practices and accounting policies.

Suddenly, you are faced with a swirl of information demands and document preservation obligations. French regulators want to cart your computers away-but the SEC wants the information they contain. American plaintiffs' lawyers will want it as well, and there's no telling whether additional regulators or litigants will become involved.

In today's business, all information is electronic. Paper may have been heavy, hard to store, and time-consuming to review-but it was a tangible thing, easy to inventory, and it tended to be limited in volume, even in the largest cases. More importantly, identifying relevant documents for preservation or production was relatively easy: Either a document was in your possession or custody, or it wasn't, and if it wasn't, either you controlled the people who had it, or you didn't. Electronic communication has led to exponential increases in the amount of data that companies store, and the locations where the information is stored: desktops, laptops, servers, PDAs, BlackBerries™, smart phones, optical drives, thumb drives, iPods™ and more.

Unless you spend a great deal of time talking shop with your IT managers, you probably don't know how many e-mail or file servers your company uses. You probably don't know exactly where your electronic documents are stored, what happens to your e-mails after you delete them, or how frequently your company's servers are backed up to tape. Are you prepared for information discovery across borders? Do you understand how to preserve, collect and analyze data in a way that will meet the requirements of foreign as well as U.S. courts and regulatory bodies? Are you sure?

If you operate internationally, you must be cognizant not only of a patchwork of laws and regulations-many of which could conflict-but also of cultural differences that affect your response to requests for electronic information.

The initial stage in any litigation or regulatory effort is to ensure preservation of relevant materials. But an international scope makes this far more complicated than just issuing a directive to employees to stop deleting e-mails or drafted documents. You need to know where information is located, how it is stored, when it is backed up, and whether backups are rotated or destroyed. Automatic deletion or rotation policies mean that if you do nothing, you may lose files that are subject to a regulatory or litigation request.

Data collection also is far more complicated in an international context than in a purely domestic one. Local laws may prohibit an employer from searching employee e-mail files. As a cultural matter, most Americans are accustomed to the idea that an employee's computer and e-mail account belong to the employer. Outside of the U.S., the cultural understanding is frequently just the opposite: An employee's computer and e-mail account are considered private, and it may be a criminal offense to invade that privacy. Collection of data outside the U.S. may be seen as coercion by an employer, and it may lead to labor union grievances or complaints.

Once the information is collected, getting it reviewed and produced to a U.S. regulator or litigant is also no simple matter. Data privacy and blocking statutes in Europe, Asia and South America may forbid the transfer of personal data outside of their borders to an "unprotected" jurisdiction like the United States-and personal data include names, e-mail addresses and office phone numbers. Indeed, special procedures may be required before individuals outside a company-including the company's outside counsel-may review the data. And local laws may dictate that only data specifically responsive to a request may be exported, requiring counsel to review materials locally rather than shipping them to the U.S. to one centralized location, as is normally done in U.S. litigation

Do not expect, however, any sympathy from U.S. regulators or plaintiffs' lawyers. U.S. regulators are skeptical of data protection laws and may take the view that international companies hide behind them to avoid cooperating with the regulators' investigations. U.S. courts may not be more understanding. The Supreme Court has held that U.S. discovery rules presumptively apply in civil litigation involving an international company, even if producing data in response to a discovery request would be unlawful in the international company's host jurisdiction.

Last week, the U.S. Court of Appeals for the Second Circuit issued its opinion in McLaughlin v. American Tobacco Co. The decision constituted a major win for Big Tobacco - and a major loss for the plaintiffs.

The theory behind the case - which was a class action -- was simple. The plaintiff class was composed of persons (and the estates of persons) who had smoked lights cigarettes and allegedly suffered harm. The plaintiff class alleged that the tobacco industry has known for years that "light" cigarettes are not safer than regular cigarettes. Therefore, the class argued, the advertisement campaigns for light cigarettes constituted a form of consumer fraud, in which the seller promised one thing (a safer cigarette) and intentionally delivered something else (a cigarette that was not, in fact, safer).

Given this compelling, simple theory, why did the plaintiffs suffer a major loss? In this column, I'll explain the reasons. I'll also consider what that loss might mean for the future of consumer class actions in the Second Circuit.

A Prediction Made by Many Observers, Based on the Oral Argument, Is Now Fulfilled

Last July I wrote a column suggesting that Michael Hausfeld, one of America's greatest plaintiffs' lawyers, had made a crucial error in an oral argument in this case - an error that, I contended, ensured that the Second Circuit would hand him a defeat. In fact, my prediction was confirmed--Hausfeld lost 3-0 before the Second Circuit. Importantly, however, I was far from

the only person who predicted that Hausfeld would lose. To the contrary, it was the conventional wisdom among lawyers observing the case that the Second Circuit would reverse the lower court's decision. After all, the district judge was Jack Weinstein, and his decision was a true Weinstein special--brilliant, iconoclastic, and somewhat inconsistent with precedent.

Hausfeld's major error, as I explained in my prior column, occurred when he told the panel that there was nothing out of the ordinary with Judge Weinstein's decision, and that they would be breaking with twenty years of precedent if they did not affirm the lower court. That statement was, on its face, ridiculous, and it left the two moderates on the panel - Judges Walker and Pooler - nowhere to turn if they were inclined to help the plaintiffs in the case. (The last member of the panel, Judge Winter, was a lost cause from the start.)

Before the argument, it had seemed plausible that the McLaughlin class action might appeal to the sympathies of the two moderates.

Other lawyers have brought lights cases around the country with mixed success. Moreover, since lights cases are fraud cases involving money damages, not personal injury, they should, in theory, have been easier to certify as class actions, since class actions in tobacco have proven impossible to certify when they involved highly individualized questions regarding cancer and other ailments. But this case proved somewhat different.

Overextending the Reach of the "Fraud on the Market" Theory

Hausfeld hit upon the idea of bringing a nationwide class action based on a federal racketeering statute, the Rackeetering-Influenced Corrupt Organizations ("RICO") law. This strategy had the advantage of permitting Hausfeld to consolidate the millions of small-value individual claims into a single, huge, $800 million class action ($2.4 billion, if treble damages were awarded, as RICO allows).

Racketeering law is still the law of fraud, however, and fraud class actions have their own problems. The single most important problem is that fraud typically requires proof of reliance -- that is, proof that it was the defendant's intentional misrepresentation that caused the victim of the scheme to part with his or her money.

Judge Weinstein held that because the advertisement campaigns for light cigarettes were directed towards the public as a whole, the question of class-wide reliance could be solved by simply borrowing the concept of "fraud on the market" from securities fraud. This theory holds that generalized, class-wide reliance can be shown - and individualized reliance need not be shown - if the defendant engaged in "uniform misrepresentations" to which the entire market for a particular product (such as a stock) was exposed.

Hausfeld suggested at last year's oral argument that the Second Circuit had already held in previous cases such as Moore v. PaineWebber, Inc. that generalized proof of reliance could be adopted by the courts where the defendant engaged in "uniform misrepresentations," and that Weinstein had merely applied Moore to the lights case. In my view, this was Hausfeld's biggest error: to claim

that the facts in the "lights" cases were just like the facts in financial fraud cases like Moore. As the Second Circuit noted in its rejection of Hausfeld's argument, it had stated in Moore that generalized proof of reliance would only be appropriate in the absence of "material variation in the kinds or degrees of reliance by the persons to whom" the misrepresentations were addressed.

At oral argument, the panel in the "lights" case was very concerned that the record suggested that smokers had a variety of reasons for buying "lights" cigarettes -- even though the advertising by the tobacco industry had affected the choices of almost all purchasers. The problem was that no one knew how much that advertising mattered to the smokers' overall decision of which cigarettes to buy, and whether to buy cigarettes at all. People may have bought "lights" for non-health-related reasons.

In sum, by saying to the Second Circuit that its previous rulings obliged it to treat a consumer product like cigarettes just like a financial product or a security, Hausfeld may have caused the panel to rule exactly the opposite way from the way he had sought. In the decision last week, the court seemed to suggest that, notwithstanding Moore, plaintiffs would be hard-pressed to be able to come up with cases where circumstantial evidence would be sufficient to permit a presumption of reliance.

As I said earlier, the decertification of the lights class action was not, in itself, a great surprise. The case was always a bit of a gamble. (In fact, the Supreme Court has just granted review in a federal preemption case that might eliminate "lights" litigation entirely.) But did the Second Circuit go further than just decertifying this particular action, to foreshadow doom for similar consumer actions in the future?

Did the Second Circuit Shut the Door on Future, Similar Consumer Class Actions?

Put another way, by overreaching, did Hausfeld provoke the Second Circuit into overreacting, thus producing a decision that shuts the door for future consumer class actions?

I don't think so. It is important to note that the Second Circuit went out of its way to distance itself from the Fifth Circuit's 1996 decision in Castano v. Am. Tobacco Co,. which the Second Circuit described as imposing a "blanket rule" against class certification whenever issues of individual reliance exist.

Furthermore, the phrase "material variation," which the court used to map out the boundary between acceptable and unacceptable class-wide treatment, is not meaningless --- although Hausfeld, in oral argument, seemed to suggest it was.

Rather, "material variation" clearly contemplates that will be some individual differences between the reasons for reliance among the members of a class. Thus, it does not require, for certification, a presumption that all members of the class have identical reasons for acting (as is the case in fraud-on-the-market in the securities context, where investors are presumed to all know about and act on public information).

Consider, for example, a hypothetical consumer fraud claim based on the purchase of word-processing software that fails to work with a certain type of computer, despite contrary representations by the manufacturer on the box. It may be the case that some of the class of consumers who purchased the software did not, in fact, rely on that representation. For example, some of these purchasers might not have owned a computer incompatible with the software until after they bought the software, so the misrepresentation may have been irrelevant to them at the point of purchase.

However, one might assume that, at the point of purchase, all of the purchasers would have placed a value on the full functionality of the software, even if their decision to buy was not motivated by a desire to exploit that functionality. Let's assume - quite realistically, I think -- that functionality with a typical range of computers is part of the core set of elements that consumers expect in a commercial software program. If so, then the fact that some did not actually subjectively respond to the misrepresentation about functionality should not be, even after last week's Second Circuit decision, a bar to class certification. That is because the differences in various class members' reasons for purchasing the software do not vary in any "material" sense, and thus, the hypothetical class proposed by this example should not fail the Second Circuit's "material variation" test.

Sirote & Permutt PC recently expanded its mortgage banking litigation practice to assist financial services and mortgage banking companies with legal challenges surrounding the subprime mortgage banking crisis.

The Birmingham-based firm repositioned 16 lawyers into the team with industry-focused knowledge. The team will be led by Sirote Shareholder C. Lee Reeves, according to the press release.

"Because of the challenging environment that exists today and because of our heavy involvement in mortgage banking generally, we have prioritized the importance of our mortgage banking litigation group to best take care of the needs of our clients."

Sirote & Permutt PC operates offices in Birmingham, Huntsville and Mobile.

Birmingham Business Journal - by Crystal Jarvis Staff

A textile company that closed after a train wreck and toxic chemical spill in 2005 settled a lawsuit with a railroad company, ending a trial that began a month ago, an attorney for the firm said Monday.

Avondale Mills, Norfolk Southern railroad and the mill's insurance company reached a deal over the weekend, said attorney Terry Richardson. He said the agreement did not allow him to release the details of the settlement.

Avondale Mills sued Norfolk Southern for $420 million in damages, claiming equipment at the firm's Graniteville facilities was covered with corrosive chemicals and it would have cost more than the business was worth to clean the buildings and replace the machinery.

On Jan. 6, 2005, a Norfolk Southern train veered off the main track onto a spur, rear-ending a parked train whose crew had failed to switch the tracks back to the main rail. The wreck ruptured a car carrying chlorine and released a poisonous cloud over the mill town of Graniteville. Nine people died and 250 were injured. Some 5,400 people were evacuated.

Richardson said Norfolk Southern should be held accountable because the railroad knew members of the crew operating the Graniteville tracks the night before the crash had been working long hours in violation of company rules.

A federal appeals court on Wednesday appeared unwilling to end a pair of lawsuits that claim the Bush administration engaged in widespread illegal surveillance of Americans.

The 9th U.S. Circuit Court of Appeals repeatedly pressed Gregory Garre, the Bush administration's deputy solicitor general, to justify his requests to toss out the suits on grounds they could endanger national security by possibly revealing "state secrets."
Judge Harry Pregerson wondered: "We just have to take the word of members of the executive branch that it's a state secret. That's what you're saying, isn't it?"
A moment later Judge Michael Hawkins suggested that granting the request could mean "abdication" of our duties.

At the heart of both cases is the U.S. Justice Department's argument that any lawsuit claiming illegal activity on behalf of AT&T and the National Security Agency--even if the eavesdropping is known to have taken place--cannot proceed because it could let enemies and terrorists know how the government's surveillance apparatus works.
It "could compromise the sources, methods and operational details of our intelligence gathering capabilities," Solicitor General Garre said.

In the first case, called Hepting v. AT&T, the Electronic Frontier Foundation and other attorneys had filed a class action lawsuit against AT&T saying it unlawfully opened its networks to the NSA. Last summer, U.S. District Judge Vaughn Walker in San Francisco ruled that it could proceed.

The second case, Al-Haramain Islamic Foundation v. President Bush, is unique: it involves a classified document that the U.S. Treasury Department accidentally turned over to an attorney for the foundation. The top-secret document showed, according to the group, "Al-Haramain and its attorneys had been subjected to warrantless surveillance in violation of (federal law)." They responded by filing another lawsuit in February 2006 alleging violations of the Foreign Intelligence Surveillance Act.
The Justice Department says the Al-Haramain case must be thrown out because it, too, could endanger state secrets. The foundation's attorneys must not even be allowed to refer to it, government attorney Thomas Bondy said Wednesday, because their "mental recollections of the documents are also out of the case."

"I'm feeling like Alice in Wonderland," replied Judge M. Margaret McKeown.
While no decision was announced Wednesday, and a final ruling might not be reached for months, a three-judge panel of the 9th Circuit pressed prosecutors to justify asking that the case be dismissed based on declarations submitted by senior Bush administration officials. (All three judges are Democratic appointees.)

"The bottom line here is that once the executive declares that certain activity is a state secret, that's the end of it?" Pregerson asked. "No cases, no litigation, absolute immunity? The king can do no wrong?"

The conversation occasionally took bizarre turns, such as when the attorneys and the judges knew the contents of confidential documents they had all reviewed--but could not discuss those contents in a courtroom with reporters and the public in the audience.
Another odd twist was the repeated reference to the Bush administration's public claim that there is no widespread surveillance of Americans--meaning a kind of suspected electronic dragnet that would permit the NSA to sift through a large chunk of Internet communications. Last April, retired AT&T employee-turned-whistleblower Mark Klein described just that kind of arrangement at an AT&T switching facility in downtown San Francisco on Folsom Street.

But administration officials have never been willing to deny a dragnet program in a signed affidavit made under penalty of perjury. That might derail the lawsuit against AT&T for now, but on the other hand, it could carry threat of criminal prosecution if the affidavit turned out to be a lie.

"What would be wrong with a simple affidavit denying that the government has intercepted the telephone conversations of American citizens without a warrant," Hawkins asked.

In December 2005, after The New York Times reported the existence of the NSA eavesdropping program, the president replied by saying: "I authorized the National Security Agency to intercept the international communications of people with known links to al Qaeda and related terrorist organizations."

McKeown suggested this wording for an affidavit: "Without admitting or denying that the government has a relationship with AT&T, I, Mr. or Mrs. So-and-So from the executive branch under oath, essentially affirm what President Bush said." The judge also said that because the government denies the dragnet program "and says they do not do any such surveillance without a warrant and there is no such program," the affidavit should be no problem.

Garre replied that such an affidavit is unnecessary because the president has already made a public statement.