Litigation in the USA: an Introduction

Litigation trends and developments in 2022 have reflected major initiatives of the Biden administration and federal agencies. In addition, widely disparate issues – including creative restructurings of mass tort liability, employee bargaining strength amidst a tight labour market, and repercussions from highly politicised Supreme Court decisions – will ensure busy litigation dockets for years to come. This article highlights a number of those trends, including:

• Department of Justice (DOJ) enforcement priorities;
• environmental, social and governance (ESG) litigation risks for public companies;
• bankruptcy litigation: make-whole claims and non-consensual third-party releases;
• pay transparency; and
• employment policies regarding abortion rights.

DOJ Reinforces Commitment to Biden Civil and Criminal Enforcement Priorities

DOJ continues to bulk up its resources for 2023 to investigate and prosecute cases reflecting the administration’s priorities, including pandemic-related fraud and government contracting fraud, anti-competitive practices, and white-collar and corporate crime. It has been extensively recruiting attorneys, has established the Office of Environmental Justice, and is seeking a historic budget increase for antitrust enforcement. As the Attorney General stated, "enforcement activity will only accelerate as we come out of the pandemic".

DOJ ramps up False Claims Act (FCA) investigations and recoveries

Liability under the FCA will continue to pose an increasing risk in 2023 for companies engaged in business with federal agencies or receiving federal funds, as DOJ commits additional resources to its FCA civil enforcement efforts. DOJ recovered USD5.6 billion in FCA settlements and judgments in 2021, and enforcement activity during the first six months of 2022 outpaced the same period in 2021.

Cases have been filed in venues across the United States, and the expanded use of data analytics to develop investigative leads without whistle-blowers may lead to additional cases in the years ahead. Companies involved in the healthcare and life sciences industries continue to represent an outsized share of FCA recoveries, followed by other industries involved in government contracting and procurement.

In 2022, DOJ also announced the first settlements under the FCA related to DOJ’s newly established "Cyber Fraud Initiative", which focuses on threats to the security of sensitive information and critical systems, including misrepresentations of compliance with contractual cybersecurity requirements.

Companies may also face increased risk from whistle-blowers or other private citizens who file so-called qui tam claims on behalf of the government under the FCA. The United States Supreme Court has agreed to consider a petition seeking to limit DOJ’s ability to dismiss such cases in United States ex rel. Polansky v Executive Health Resources Inc., with a decision expected by mid-2023. DOJ, for its part, has been declining cases more promptly, thereby deferring to qui tam claimants, and, in a shift from the prior administration, is rarely exercising its authority to dismiss whistle-blower complaints.

DOJ redoubles aggressive antitrust enforcement efforts

Consistent with President Biden’s 2021 executive order on competition, DOJ remains committed to aggressive antitrust enforcement. The Antitrust Division requested a budget increase of almost USD17 million for 2022 and a historic budget increase of USD88 million for 2023, including plans to hire more than 100 new attorneys and support staff. In 2022, the Division revised its leniency programme to encourage prompt reporting of violations on discovery of wrongdoing, announced that it will bring criminal monopolisation cases for the first time in nearly 50 years, and doggedly pursued novel legal theories at trial. The Division has also promised enhanced scrutiny of mergers, and stated a preference for active litigation over consent decrees.

However, DOJ’s intensified antitrust scrutiny has had mixed results. In October, the Division successfully blocked publisher Penguin Random House’s planned USD2.2 billion purchase of competitor Simon & Schuster. However, in April, trials in two separate criminal antitrust matters relating to the labour markets led to acquittals. Likewise, in a criminal price-fixing case relating to the broiler chicken industry, juries were unable to reach a verdict in two consecutive trials against a number of individual defendants, and a third jury rendered a verdict of acquittal in July.

Despite setbacks, all signs indicate that the Division remains steadfast in its commitment to aggressive antitrust enforcement in all industries, and particularly in the labour markets. The Division’s current docket of active litigation is its largest in history, and its persistence in the face of defeats demonstrates its dedication to administration priorities.

Additional resources likewise signal that these efforts will ramp up in 2023. Companies would be well advised to keep their antitrust compliance and training programmes current, particularly in less traditional antitrust areas such as labour and employment.

DOJ takes aim at individual wrongdoers in revised corporate criminal enforcement policies

In 2022, DOJ announced further revisions to its corporate criminal enforcement policies, which were first enhanced in October 2021. The new policies aim to expedite indictments against individual defendants by offering leniency to companies in exchange for prompt and sweeping disclosures of potential misconduct. Specifically, by conditioning corporate co-operation credit on companies’ timely turning over of all relevant, non-privileged information about all individual wrongdoers, the revised policies underscore DOJ’s stated "first priority" to hold the individuals who commit and profit from corporate crime accountable, regardless of their position or seniority. Companies are also encouraged to claw back compensation from executives and other employees responsible for wrongdoing.

The revised policies raise the stakes for both companies and their employees in deciding whether to self-disclose. The revised policies also provide guidance for evaluating prior corporate misconduct, prior co-operation and corporate compliance programmes, and guidance for when and how prosecutors should seek independent monitors.

Companies Face Increasing ESG Litigation Risks

Corporations are increasingly focusing on their impact on ESG issues, including climate change, ethical supply chains, board diversity and workplace harassment, posing increasing litigation risk for companies and their directors. In recent years, lawsuits based upon ESG representations and performance have been brought by a range of stakeholders, including consumers, investors, regulators and advocacy or activist groups. In addition, newly proposed securities regulations mandating certain ESG disclosures may, if adopted, further increase the risk of litigation.

Plaintiffs challenging ESG-related deficiencies and misrepresentations have asserted claims under common law fraud, breach of warranty, and state consumer protection and unfair competition laws, as well as under federal securities laws and common law fiduciary duty theories, against companies as well as corporate officers and directors. The governing standard is often whether the claims are adequately pled under the reasonable consumer or reasonable investor test.

While generic or aspirational corporate statements are not generally actionable, lower courts have in some instances upheld claims relating to such statements, as ESG is increasingly understood as being material to consumers and investors. Moreover, many companies appealing to public sentiment and other pressures are making more specific, actionable representations. Shareholder plaintiffs are increasingly relying on books and records demands to seek information that may bolster their claims.

In addition, the US Securities and Exchange Commission (SEC) has proposed a number of regulations prescribing certain mandatory ESG disclosures, regardless of materiality. If passed, these rule proposals would require public companies to make certain climate-related disclosures and also impose new record-keeping requirements. However, a recent decision from the Supreme Court ruling that agencies need clear congressional permission to create regulations with major economic or political effects, coupled with calls to challenge the proposals, has cast doubt over the viability of the proposed rules. Nevertheless, the SEC and its newly formed Climate and ESG Task Force remain focused on ESG and have already successfully pursued enforcement actions under its existing authority.

Bankruptcy Litigation: Make-Whole Claims and Non-Consensual Third-Party Releases

Chapter 11 debtors have become increasingly aggressive in testing the outer limits of the Bankruptcy Code. Of particular interest for creditors is the evolving landscape around make-whole interest claims and non-consensual third-party releases and injunctions.

Make-whole Claims

Debt facility agreements generally provide that a debtor’s payment of a loan prior to maturity is an event of default that accelerates the loan and triggers the payment of default interest and a penalty intended to compensate lenders for the lost value of future interest income. Debtors have often sought to pay creditors an amount other than default interest and treat creditors as "unimpaired" under a plan.

A creditor is unimpaired where its "legal, equitable and contractual rights" are left unaltered, pursuant to Section 1124(1) of the Bankruptcy Code; in such circumstances, the creditor is "conclusively presumed" to have accepted the plan pursuant to Section 1126(f) of the Bankruptcy Code and cannot vote against confirmation.

Debtors have argued that such creditors are unimpaired because make-whole provisions violate Section 502(b) of the Bankruptcy Code, which disallows claims for unmatured interest, and that a lesser rate such as the federal judgment rate should apply. Creditors have responded by arguing that a make-whole payment is not unmatured interest but something else (such as liquidated damages), or by arguing in favour of the continued applicability of the "solvent debtor" exception, a long-recognised but non-codified equitable doctrine predating the Bankruptcy Code that requires solvent debtors to make creditors whole before distributing surplus value to equity holders.

In August 2022, in the first Circuit-level decision to address this issue, the Ninth Circuit in In re PG&E Corp. held that the "solvent debtor" exception applies, notwithstanding Section 502(b). Shortly thereafter, in October 2022, the Fifth Circuit in In re Ultra Petroleum Corp. reached the same conclusion regarding the solvent debtor exception. In doing so, however, the court also expressly rejected the creditors’ argument that make-whole interest was not unmatured interest but instead an enforceable liquidated damages provision, holding that it was in fact both.

These decisions, as well as recent conflicting decisions by prominent bankruptcy courts, suggest that the issue may end up before the Supreme Court and should be monitored closely. For examples, see In re Hertz Corp. (Bankr. D. Del. 2021) (rejecting solvent debtor exception as improper use of "equitable principles to modify express language of" Section 502(b)) and In re Latam Airlines Grp. (S.D.N.Y. Aug. 31, 2022) (holding solving debtor exception applies, but through Section 1127(a)(7) of the Bankruptcy Code, not 1124(1), and finding that the federal judgment rate would apply).

Non-consensual third-party releases

Although Section 1141(d) of the Bankruptcy Code generally allows the pre-petition liabilities of a reorganised, non-liquidating Chapter 11 debtor to be discharged, there is no analogous provision in the Bankruptcy Code expressly extending non-consensual releases to third parties. Nonetheless, non-consensual third-party releases and related injunctions are recognised in a majority of Circuits and frequently approved, so long as certain requirements are met, including the opportunity for creditors to opt-out, a finding that the party receiving the release made a substantial contribution in exchange for the release, and the channelling of claims to a settlement fund rather than extinguishment of the claims (see In re Metromedia Fiber Network, Inc. (2d Cir. 2005)).

Although the permissibility of releases and injunctions are fact dependent and highly litigated, nothing in the Bankruptcy Code expressly prohibits them, and courts have relied upon various provisions in the Bankruptcy Code to authorise them; for example, see 11 U.S.C. §§ 105(a) (authorising bankruptcy court to issue "any order, process or judgment that is necessary or appropriate" to carry out the provisions of the Bankruptcy Code), 1123(a)(5) (requiring a plan to provide adequate means for implementation), and (b)(6) (allowing Chapter 11 plans to include "any other appropriate provision not inconsistent with the applicable provisions of this title").

However, the permissibility writ large of third-party releases, with certain exceptions, has recently come under more intense scrutiny, beginning with the Bankruptcy Court’s decision confirming the Purdue Pharma Chapter 11 cases. There, Judge Robert Drain of the Bankruptcy Court for the Southern District of New York, who retired this year, issued a decision extending non-consensual third-party releases and injunctions to the Sackler family, owners of Purdue Pharma, and related individuals and entities pursuant to a plan confirmed in September 2021. In particular, he found that the Sackler family had agreed to pay USD4.325 billion over nine years, agreed to certain restrictions on naming rights, and agreed to refrain from engaging in business with the reorganised debtors, exit foreign companies within a prescribed time, release a public document depository for the benefit of the public, and abide by certain "snap back" protections to enhance collectability upon a default in settlement payments.

After the plan was confirmed, eight objecting states and the US Trustee, who had objected to confirmation, among others, appealed to the Southern District of New York. Judge McMahon ultimately reversed the Bankruptcy Court’s decision. In her analysis, Judge McMahon found that nothing in the Bankruptcy Code authorises non-consensual third-party releases for non-derivative claims (that is, claims for which an individual is liable by virtue of the debtor, as opposed to derivative liability, for which a creditor may be liable independently of the debtor), and non-asbestos claims (which Section 524(g) of the Bankruptcy Code expressly allows).

Judge McMahon expressly rejected the argument that any "equitable authority" or "residual" authority in other provisions of the Bankruptcy Code permits third-party releases, while acknowledging the well-developed body of case law across the Circuits, including the Second Circuit, that has permitted such releases, observing that although "[o]ne would think that this had been settled long ago ... [i]t has not been."

Employment Litigation

Pay transparency laws

A growing number of jurisdictions have enacted laws to bridge pay gaps between similarly situated employees by making it easier to identify potential pay discrimination among employees not of the same sex, race or ethnicity. California, for example, which already required certain employers to report pay data broken down by employees’ sex, race and ethnicity, recently enacted new legislation requiring many employers to include pay scales in job postings.

Similarly, in June 2022, the New York State Legislature passed Senate Bill 5598-D, which mandates position-based record-keeping of salary information and requires certain job postings to include a salary or salary range and a description of other forms of compensation to be offered, such as fringe benefits. The New York State bill would require employers to maintain records, such as the history of salary ranges for each job, promotion or transfer opportunities and job descriptions for each position. At the time of writing, the New York State bill is awaiting the signature of the governor.

The Effect of the Supreme Court’s Overturn of Roe v Wade on Employers

In June 2022, in Dobbs v Jackson Women’s Health Organization, the Supreme Court held that there is no constitutional right to abortion, overturning its long-standing precedent established in Roe v Wade. Since then, several states – including certain high job growth states – have restricted a woman’s right to an abortion. In response, some large employers such as Amazon, Bank of America, Disney, Netflix and Proctor & Gamble have announced polices to cover the cost of out-of-state travel for employees in restrictive states seeking abortions.

The legal landscape for such employers is complicated by laws in certain states (eg, Texas and Oklahoma) that not only prohibit abortions in-state, but potentially proscribe the aiding and abetting of individuals in pursuit of abortions out-of-state. With more states contemplating the enactment of similar laws, constitutional challenges are expected to follow.

Among other issues, courts will be asked to determine whether the Texas and Oklahoma laws infringe the sovereignty of other states, unlawfully restrict the right to travel, violate the full faith and credit clause, and/or create an undue burden on interstate commerce. Courts will also be asked to adjudicate whether such laws violate federal statutes, including the Employee Retirement Income Security Act, which pre-empts state regulation of certain group health plans, and the Pregnancy Discrimination Act of 1978, which prohibits discrimination on the basis of an abortion. Employers wishing to maintain or introduce policies covering such out-of-state travel will need to closely monitor legal developments in this area.