March 29, 2024

Appeals Court Rejects S.E.C. Rule on Access to Proxy Materials

The ruling, by the United States Court of Appeals for the District of Columbia Circuit, is at least the third time in six years that the court has thrown out a new S.E.C. rule because the agency failed to adequately assess its economic effects.

The S.E.C. approved the regulation, which has long been sought by unions, pension funds and other institutional investor groups and fiercely opposed by business lobbyists, by a 3-2 vote last year. The rule would have required companies to include in their proxy materials information about shareholder-nominated candidates for election to a corporate board of directors.

Past efforts by the S.E.C. to guarantee shareholders access to company proxy statements have been challenged over whether the agency had the authority or whether it was primarily a matter of state law. But the Dodd-Frank Act, the regulatory overhaul signed into law last July, gave the S.E.C. explicit authority to write new proxy access rules.

The new regulation was scheduled to become effective in November, but the agency stayed that pending the outcome of a court challenge filed by the U.S. Chamber of Commerce and the Business Roundtable, a trade group for corporate executives. The case, No. 10-1305, was argued before the appeals court in April.

Under the rule, groups that owned at least 3 percent of the voting power of a company’s stock for at least three years could nominate candidates for a corporate board and have them included in the company’s proxy materials, mailed to shareholders at the company’s expense.

Currently, outside groups mounting a proxy contest to elect board candidates must pay for their distribution of materials.

The three-judge appeals court panel rebuked the S.E.C. for its failure to satisfy the provisions of the Administrative Procedure Act, which requires cost-benefit studies to justify a new government regulation, in its adoption of the proposal.

The court ruled that the S.E.C. “acted arbitrarily and capriciously” in failing to adequately consider the rule’s effect on “efficiency, competition and capital formation.”

“Here the commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” the court said, in a unanimous decision written by Judge Douglas H. Ginsburg.

Kevin J. Callahan, an S.E.C. spokesman, said the agency was “reviewing the decision and considering our options.”

The S.E.C. could seek a rehearing before the panel or the entire appeals court or could appeal the case directly to the Supreme Court. It also could abandon the initiative or restart the rulemaking process with a new proposal, including additional economic analyses and comments from the public.

A second S.E.C. regulation, which allows shareholders to submit proposals for proxy access at their companies, adopted at the same time, is unaffected by the court’s decision.

A Chamber of Commerce official called the ruling “a big win for America’s job creators and investors.”

“We applaud the court’s decision to prevent special-interest politics from being injected into the boardroom,” Thomas J. Donohue, president and chief executive of the chamber, said in a statement. “Companies and directors need to continue to focus on the important work of creating jobs and reviving our economy.  Today’s decision also sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs.”

The panel said the commission had not sufficiently supported its conclusion that increasing the potential for shareholder-nominated directors would improve performance and shareholder value.

Roger J. Dennis, dean of the law school at Drexel University in Philadelphia, said the D.C. Circuit has been particularly tough on the S.E.C.’s rulemaking in recent years.

“Cost-benefit analysis is not a science,” he said. Requiring the commission to have “excruciating detail” on the costs and benefits of a proposal “is a stealth way of telling them that they don’t have the right to regulate it.”

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Court Rules Against S.E.C. on Proxy Materials

WASHINGTON — A federal appeals court on Friday delivered a sharp rebuke to the Securities and Exchange Commission by throwing out a recently approved regulation that would have required companies to include in their proxy materials information about shareholder-nominated candidates for election as directors.

The ruling, by the United States Court of Appeals for the District of Columbia Circuit, is the third time in six years that the court has thrown out a new S.E.C. rule because the agency failed to adequately assess its economic effects.

The S.E.C. approved the regulation, which has long been sought by pension funds and other institutional investor groups and fiercely opposed by business lobbyists, by a 3-2 vote last year. The rule was scheduled to become effective in November, but the agency stayed that pending the outcome of the court challenge.

That challenge, filed by the Chamber of Commerce and the Business Roundtable, was argued before the appeals court in April.

The rule would have allowed groups that owned at least 3 percent of the voting power of a company’s stock to nominate board candidates and have them included in the company’s proxy materials, which are mailed to shareholders at the company’s expense.

Currently, outside groups that are mounting a proxy contest to elect candidates to a board must pay for their own distribution of materials.

A three-judge panel rebuked the S.E.C. for its failure to satisfy the provisions of the Administrative Procedure Act, which requires cost-benefit studies to justify a new government regulation.

The court ruled that the S.E.C. “acted arbitrarily and capriciously” in failing to adequately consider the rule’s effect on “efficiency, competition and capital formation.”

“Here the commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” the court said, in a unanimous decision written by Judge Douglas H. Ginsburg.

Kevin J. Callahan, an S.E.C. spokesman, said the agency was “reviewing the decision and considering our options.”

The S.E.C. could seek a rehearing before the panel or the entire appeals court or could appeal the case, No. 10-1305, directly to the Supreme Court. It also could simply abandon the initiative or restart the rulemaking process with a new proposal, including an economic analysis and comments from the public.

A Chamber of Commerce official called the ruling “a big win for America’s job creators and investors.”

“We applaud the court’s decision to prevent special-interest politics from being injected into the boardroom,” Tom Donohue, president and chief executive of the United States Chamber of Commerce, said in a statement. “Companies and directors need to continue to focus on the important work of creating jobs and reviving our economy.  Today’s decision also sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs.”

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N.F.L. in Limbo as Owners Try to Preserve Lockout

If the stay is not granted by Nelson or the United States Court of Appeals for the Eighth Circuit, the N.F.L. will have to put rules in place that would allow players to return to work and free agency to open within days.

If a stay is granted, the N.F.L. will remain dormant while owners appeal Nelson’s decision. That would probably keep the league shut down until at least mid-June and perhaps into early July, about a month before teams usually open training camps.

A final decision on the stay is likely to take no more than several days.

Late Monday night, e-mails were circulating among players  encouraging them to report to team facilities on Tuesday and informing them that if there is no stay, it would be a violation of Nelson’s ruling for them to be turned way.

It was unclear how many players would show up at team facilities. Ryan Clark, the player representative for the Pittsburgh Steelers, said in a text message Monday night that he was advising his teammates to report for work at the Steelers’ facilities Tuesday.

But team officials will probably be unable to have contact with players if they do show up.

Jim Quinn, who argued the players’ case before Nelson, said Monday night that teams were theoretically allowed to sign free agents now, but that players had to give the N.F.L. time to let the dust settle. If it takes too long to begin signing players without a stay in place, owners could be subject to collusion charges, he said.

One agent, Brad Blank, said Monday night that he had contacted several of his clients and told them that they should contact their player representatives and be prepared to report to their teams’ off-season training programs.

One legal analyst, Gabe Feldman of Tulane Law School, who has done work for NFL Network, said the league had to be given time to reopen business, adding that if players show up, they could be told that while they are no longer being locked out, owners need more time to get up and running.

In a telephone interview, Quinn said: “It’s one more loss in a long line of losses in court for them. From the players’ perspective, it wasn’t at all unexpected. It was a very well-reasoned decision. Therefore, we think it is upheld on appeal.”

In its filing to seek a stay, the N.F.L. said it could be subjected to further antitrust charges by players and it would be impossible to “unscramble the eggs” if business were to reopen, only to have the appeals court reinstate the lockout. It also said that by enjoining the lockout, the district court created new law on three issues that the Court of Appeals will review. 

“We believe that federal law bars injunctions in labor disputes,” the league said in a statement. “We are confident that the Eighth Circuit will agree.”

That premise, contained in the Norris-LaGuardia Act, was rejected by Nelson in her 89-page decision, in which she wrote that she did not believe the act applied to the N.F.L.’s dispute with players because the union has disbanded. She accepted that the union’s decertification, which the league contended was merely a negotiating ploy, was valid. She wrote that she had discretion to decide whether to cede jurisdiction to the National Labor Relations Board. The league filed a charge with the N.L.R.B. in February that the union had not negotiated in good faith and that its decertification was a sham, intended only as a bargaining tactic.

Nelson also wrote that players were already suffering the threat of irreparable harm from the lockout even though no games have been missed. She pointed especially to free agents like Peyton Manning and Logan Mankins, making the case that they are suffering because a lockout prevents them from negotiating with teams. Finally, Nelson said that the public interest, fans, does not favor a lockout.

“The public ramifications of this dispute exceed the abstract principles of the antitrust laws, ranging from broadcast revenues down to concession sales,” Nelson wrote. “And of course the public interest represented by the fans of professional football — who have a strong investment in the 2011 season — is an intangible interest that weighs against the lockout. In short, this particular employment dispute is far from a purely private argument over compensation.”

Nelson’s decision did not come as a surprise to either the players or the league after she made several comments from the bench during a hearing earlier this month that indicated some of her opinions. Now the N.F.L. will cast its lot with the Court of Appeals.

The N.F.L. has long thought it has a better chance for success at the appeals court level than at the district court. But legal experts are divided.

William Gould, a former chairman of the N.L.R.B., said in a telephone interview Monday night that the Eighth Circuit was the league’s best chance because he regards it as a very conservative court that is particularly management-friendly.

“They couldn’t have a better court in the country, the owners,” Gould said. “Even when I was chairman of the N.L.R.B., this was one of the most unreceptive courts for any order aimed at an employer.”

If the appeals court upholds the injunction, the league will be forced to open its doors for the first time since the lockout began March 12. That would give players considerable leverage over owners in negotiations to settle the antitrust litigation in which the sides have been engaged since talks broke off and the players union decertified.

But if the appeals court overturns Nelson’s decision, the lockout will be back in place, and players will lose much of their leverage. With players facing the prospect of missing paychecks when the season starts — most players are not losing money yet — the lawyers for the players would be under pressure to reach a settlement that would let the players return to work and the season to begin.

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Court Upholds Facebook Settlement With Twins

SAN FRANCISCO — Tyler and Cameron Winklevoss, the Olympic rowers and identical twins who claimed that they, not Mark Zuckerberg, had the original idea for Facebook, have lost the latest chapter in their six-year legal feud. But it’s a loss that comes with a pretty nice consolation prize. And it may not be the end of the case.

A three-judge panel of a federal appeals court here ruled Monday that the brothers, whose fight over Facebook’s origins was the narrative arc of the Hollywood hit The Social Network, cannot back out of a settlement they signed with the company in 2008. That settlement is now worth approximately $200 million, according to estimates by experts.

The twins had asked the court to undo the settlement so they could pursue their original case against Mr. Zuckerberg and Facebook, and presumably, win a richer payday.

They had argued that Facebook had deceived them about the original value of the settlement, and the court roundly rejected their claims. Yet the sharply worded decision, written by Alex Kozinski, the chief judge of the United States Court of Appeals for the Ninth Circuit, apparently, has not persuaded the twins to give up. They said through their lawyers that they plan to ask that their case be heard by the entire appeals court.

Judge Kozinski wrote: “The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity.”

Judge Kozinski added: “For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.”

The settlement, which included $20 million in cash and more than 1.2 million Facebook shares, was initially valued at $65 million. But shortly after signing it, the Winklevosses, and their partner, Divya Narendra, argued that Facebook had deceived them about the value of the shares, leaving them with much less than they had agreed. While they believed the shares to be worth $35.90 each, Facebook had conducted an internal valuation that priced the shares at $8.88, they claimed.

Whatever their value at the time, the shares have recently traded as high as $150, after adjusting for splits. That values the stock portion of the settlement at more than $180 million.

“The appeals court kept the Winklevosses from potentially throwing away many tens of millions of dollars each,” said Eric Goldman, a professor at Santa Clara University Law School and the director of its High-Tech Law Institute. “It’s hard to complain too much about a loss like that.”

But the twins are not giving up.

“In my judgment, the opinion raises extremely significant questions of federal law that merit review by the entire Ninth Circuit Court of Appeals,” Jerome B. Falk Jr., the lead appellate lawyer for the Winklevosses, said in a statement.

In a statement, Colin Stretch, Facebook’s deputy general counsel, said, “We appreciate the Ninth Circuit’s careful consideration of this case and are pleased the court has ruled in Facebook’s favor.”

The dispute dates back to 2003, when Mr. Zuckerberg, then a Harvard sophomore, agreed to help the Winklevosses and Mr. Narendra program a social Web site called Harvard Connection, and later renamed ConnectU.

But instead of following through on the verbal agreement, Mr. Zuckerberg delayed work on Harvard Connection and instead worked on his own project. When pressed for answers, he stalled, according to the Winklevosses. In February 2004, Mr. Zuckerberg released TheFacebook, which eventually became Facebook.

Later that year, the ConnectU founders sued him and Facebook. Facebook countersued a year later. The 2008 settlement was meant to resolve all the claims.

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House Votes Against ‘Net Neutrality’

WASHINGTON — The House of Representatives approved a measure on Friday that would prohibit the Federal Communications Commission from regulating how Internet service providers manage their broadband networks, potentially overturning a central initiative of the F.C.C. chairman, Julius Genachowski.

The action, which is less likely to pass the Senate and which President Obama has threatened to veto, is nevertheless significant because it puts half of the legislative branch on the same side of the debate as the United States Court of Appeals for the District of Columbia in restricting the F.C.C.’s authority over Internet service.

House Joint Resolution 37, which was approved by a vote of 240 to 179, was spurred by the F.C.C.’s approval in December of an order titled “Preserving the Open Internet.” The order forbids the companies that provide the pipeline through which consumers gain access to the Internet from blocking a user’s ability to reach legal Internet sites or to use legal applications.

But Republicans in the House maintained that the order exceeded the F.C.C.’s authority and put the government in the position of overseeing what content a consumer could see and which companies would benefit from Internet access.

“Congress has not authorized the Federal Communications Commission to regulate the Internet,” said Representative Greg P. Walden, an Oregon Republican who sponsored the resolution.

The F.C.C. order “could open the Internet to regulation from all 50 states,” Mr. Walden said, and was little more than the Obama administration’s attempt to use the regulatory process “to make an end run around” the Court of Appeals ruling.

Representative Henry A. Waxman, a California Democrat, warned of dire consequences should the resolution be approved. “This is a bill that will end the Internet as we know it and threaten the jobs, investment and prosperity that the Internet has brought to America,” Mr. Waxman said.

It is likely that Democrats in the Senate can defeat the measure, but by no means is that certain. The joint resolution was initiated under the Congressional Review Act, meaning that it cannot be filibustered and requires the support of only 30 senators to bring it to the floor.

President Obama courted Silicon Valley supporters during his campaign by promising to enact a “net neutrality” provision, as the F.C.C.’s Open Internet order is known. Advisers to the president have said that he will veto the resolution; it would then take a vote by two-thirds of each house of Congress to override the veto.

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Court Rejects Suit on Network Neutrality Rules

WASHINGTON — A federal appeals court on Monday rejected as “premature” a lawsuit by Verizon and MetroPCS challenging the Federal Communications Commission’s pending rules aimed at keeping Internet service providers from blocking access to certain Web sites or applications.

While the decision, by the United States Court of Appeals for the District of Columbia circuit, is a first-round victory for the F.C.C. and its chairman, Julius Genachowski, the real battle over the agency’s attempt to regulate broadband providers has barely begun.

Several broadband companies, and some consumer advocacy and public interest groups, are likely to return to court this year to challenge aspects of the rules. Edward S. McFadden, a Verizon spokesman, said Monday that the company intended to refile its lawsuit this year.

The House will take up a joint resolution condemning the new Internet access rules this week. Though the House is likely to pass the resolution prohibiting the F.C.C. from putting the new rules into effect, it is doubtful that the resolution will go much further because many Senate Democrats and the Obama administration support the rules.

The Verizon lawsuit was dismissed as premature, the court said, because federal regulations dictate that a challenge to new F.C.C. rules must come within 10 days after a new rule is published in the Federal Register.

That publication has not taken place, although the F.C.C. approved its rules in December, because the regulations must be reviewed for compliance with the Paperwork Reduction Act. That F.C.C. review, which includes a 60-day public comment period, will be completed this month. Then, the Office of Management and Budget will conduct a review, with a 30-day comment period, before the rules are published.

A commission spokesman, Robert Kenny, said the agency was pleased by the court’s decision and believed its policy “preserves Internet freedom and openness and strikes the right balance for consumers and businesses across America.”

The new regulations, which the commission calls its Open Internet Order, are commonly known as net neutrality rules. They prohibit companies providing broadband Internet service to consumers from discriminating in granting access by customers to content providers.

Once the regulations are published in the Federal Register, any legal challenge filed in 10 days is entered in a lottery to determine the legal venue.

Verizon and MetroPCS tried to sidestep that provision by contending that the rules modified their licenses to operate wireless broadband networks. So, they said, the dispute was a licensing issue, not an appeal of a new rule, a position the court rejected.

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