Category: Litigation

Priceline Does Not Owe You Anything, Including Protecting You From Your Willingness To Spend More Than A Seller Will Accept.

Plaintiffs sue Priceline over “Name Your Own Price” and because Priceline didn’t protect them from poor bidding practices and the knowledge that Priceline needs to make a profit to stay in business.

Johnson v. Priceline.com, Inc. – US Court of Appeals, 2nd Circuit

Lo and behold, advertising where the former Star Trek star pretends to negotiate discounted hotel rates for Priceline customers does not create a fiduciary duty and corresponding duty to disclose a profit motive for a business.

Priceline’s Name Your Own Price (“NYOP”) is designed to not accept a bid unless it can get a hotel room meeting a customer’s specifications at a rate lower than the bid amount, with Priceline keeping the spread.  In other words, it is not a nonprofit, either by design or circumstance.

Priceline did not explicitly say it was making money from customers using NYOP, but it didn’t hide it either.

Two plaintiffs got the hotels they were looking for at prices they were willing to pay, but they claimed they were harmed because Priceline didn’t tell them it was paying the hotels less than the NYOP bid amount.  The plaintiffs looked to the William Shatner commercials to contend that Priceline owed a fiduciary duty to the plaintiffs to tell them that the cost of providing the service was less than the price the customers paid.

The court looked for a fiduciary duty.  The plaintiffs said that because an agency relationship exists between Priceline and its customers with respect to NYOP, “fiduciary duties automatically apply by operation of law.”  The court said that the plaintiffs failed to demonstrate that Priceline was a travel agent, with the corresponding duties.

Looking to agency principles, the court stated that once Priceline accepts a customer’s bid, it is contractually obligated to provide the desired accommodations at the stated sum. After submitting the bid, however, the customer retains no authority over the manner in—or price for—which the reservation will be procured.

The court continued by stating that Priceline’s actions are akin to those of an intermediary or middleman rifling through its inventory of discounted hotel rooms until it locates an item for which the customer has stated a willingness to pay a specified price. The fact that only Priceline has access to both its algorithm and its particular inventory of discounted hotel rooms does not create a fiduciary relationship with a customer where none otherwise exists.

Since there was no agency relationship, there was no fiduciary duty to breach.

William Shatner looking out for your best interests.


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Technical stuff.  Points for staying awake.
The three elements necessary to an agency relationship are:

 

  • a manifestation by the principal that the agent will act for him;
  • acceptance by the agent of the undertaking; and
  • an understanding between the parties that the principal will be in control of the undertaking.
An agent owes a duty of disclosure, specifically, a “duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and [that] the principal would desire to have.” Second, an agent owes a duty to account for all profits arising out of the agent’s employment that do not form part of his agreed-upon compensation.

A Couple of New Securities Litigation Cases from the Supreme Court

The Supreme Court issued a couple of securities litigation opinions today.  A snapshot:

Amgen Inc. v. Connecticut Retirement Plans and Trust Funds

Held:  Proof of materiality is not a prerequisite to certification of a securities-fraud class action seeking money damages for alleged violations of Securities Exchange Act of 1934 Section 10(b) and Rule 10b–5.

A quick reminder:  Elements of an implied Section 10(b) cause of action for securities fraud are:

  • a material misrepresentation or omission by the defendant;
  • scienter;
  • a connection between the misrepresentation or omission and the purchase or sale of a security;
  • reliance upon the misrepresentation or omission;
  • economic loss; and
  • loss causation.

Basic v. Levinson, an important case in the securities law area, provided, among other things, that fraud-on-the-market can establish the reliance element.

In addition, to certify a class, a plaintiff must also establish that the questions of law or fact common to class members predominate over any questions affecting only individual members.  They are fighting for the group, so to speak.

Considering whether to certify a class in a securities fraud case, the court looked at whether proof of materiality is needed to ensure that the common questions of law or fact predominate over individual questions as the litigation progresses.  The court said ‘no’ because:

  1. materiality is judged according to an objective standard, it can be proved through evidence common to the class; and
  2. a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a securities-fraud claim.

The second point was a focus of the dissenting justices, which said that the failure to establish materiality retrospectively confirms that:

  • fraud on the market was never established;
  • questions regarding the element of reliance were not common; and
  •  therefore, certification was never proper.

Therefore, the dissent said that the plaintiffs should not be excused at certification that questions of reliance are common merely because they might lose later on the merits element of materiality.  Because a securities-fraud plaintiff invoking fraud-on-the-market to satisfy the certification rules should be required to prove each element of the theory at certification in order to demonstrate that questions of reliance are common to the class.  However, they lost.

Gabelli v. Securities and Exchange Commission

The Investment Advisers Act makes it illegal for investment advisers to defraud their clients and authorizes the SEC to bring enforcement actions against fraudsters.  To do this, the SEC must file suit “within five years from the date when the claim first accrued.”

So, what does that time limit mean?

In this case, the SEC sought civil penalties in 2008 for fraud allegedly committed from 1999 until 2002.  The SEC argued that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud.

Held:  The five-year clock in begins to tick when the fraud occurs, not when it is discovered.

The SEC argued that because of the fraud aspect, a plaintiff may not know it has been injured so the statute of limitations should begin at discovery.

The court said that it has never applied the discovery rule where the plaintiff is not a defrauded victim seeking compensation, but is instead the government bringing an enforcement action for civil penalties.  The government is a different kind of plaintiff whose purpose, in the case of the SEC, is to root out fraud.  The discovery rule helps to ensure that the injured get compensation, but civil penalties go beyond compensation, are intended to punish and label defendants wrongdoers.

In addition, deciding when the government knew or reasonably should have known of a fraud would also present particular challenges for the courts, such as determining who the relevant actor is in assessing government knowledge, whether and how to consider agency priorities and resource constraints in deciding when the government reasonably should have known of a fraud, and so on.