Recently, in Lawrence E. Jaffe Pension Plan v. Household International, Inc., the United States District Court for the Northern District of Illinois granted the defendants’ Rule 39 motion for appellate costs and ordered the plaintiffs to pay a total of $13,281,282. Judge Alonso's decision is noteworthy for institutional investors and their attorneys. Despite the Court's view of the potential for shifting risk of costs to the class, imposing such a costly burden on representative plaintiffs may chill future securities litigation. In this case, the plaintiffs now have to pay over $13 million in costs simply because they were successful at trial in obtaining a multi-billion dollar judgment.
In October of 2013, the jury ruled in favor of plaintiff class members and judgment entered for approximately $2.4 billion. In May of 2015, the Seventh Circuit reversed the judgment, with costs, and remanded the case. The Seventh Circuit ordered a new trial on the limited issues of (a) proof of the amount of loss caused by the misstatements that the jury found actionable and (b) which individual defendant was liable for making the misstatements that the jury found actionable. In brief, the Seventh Circuit upheld the ruling that Household was liable for its officers' misstatements, but ruled the trial court needed to retry issues concerning the plaintiffs' expert's damages model and the allocation of liability between the defendants. Thus, the defendants liability will not be an issue on remand.
Upon remand, over which Judge Alonso presided, the defendants moved under Rule 39 of the Federal Rules of Appellate Procedure for the plaintiffs to pay the appeal filing fee ($455) and the supersedeas bond premiums ($13,280,827). The plaintiffs contended that such a cost award “would chill future securities litigation and inequitably burden lead plaintiffs.” Judge Alonso rejected the argument, reasoning that class-action representative plaintiffs can shift the risk of loss to the lawyers, who can in turn “spread that risk across many cases and thus furnish a form of insurance.”
The Court also rejected the plaintiffs' contentions that the costs were unreasonable. Rule 39 stipulates that “if a judgment is reversed, costs are taxed against the appellee” and such costs include “premiums paid for a supersedeas bond," so long as the costs are reasonable. In arguing that the costs were unreasonable, the plaintiffs pointed to the fact that a less-costly alternative was available to the defendants—an escrow account with a guaranty. However, the plaintiffs had previously rejected the escrow option because of concerns over its viability were Household to file for bankruptcy. This led the Court to reject the plaintiffs' arguments because the Court failed to find “any case stating that an appellant must forego recovery bond costs if it could have obtained a less expensive form of security.” Thus, the Court ultimately held that, “[h]aving opted for a bond, with full awareness of the potential consequences, plaintiffs must now live with that decision.”
The plaintiffs further asserted that, regardless of its determination as to reasonableness, the Court should exercise its discretion to deny the defendants' recovery. In employing this discretion, Judge Alonso was guided by Rule 39’s “implicit presumption” in favor of awarding costs and other objective factors such as the resources of the parties and outcome of the underlying suit.
While the plaintiffs did not claim a lack of resources, they argued that awarding of costs was inappropriate because the defendants “did not achieve total victory on appeal.” Indeed, the Seventh Circuit affirmed that Household was liable for 17 misstatements. But in ordering the plaintiffs to pay the full costs of the supersedeas bond, the Court held that reversal was a victory regardless of the Seventh Circuit’s failure to completely adopt the defendants' reasoning and refused to consider the complexity of the underlying issues or the plaintiffs’ good faith.