“A Tough Knot to Crack” (photo by Jay Fanelli)
Updated post (December 18, 2017): We knew that the case discussed below, St. Jude v. Muddy Waters, would be a hard-fought lawsuit given the personalities of the litigants and their lawyers. We have not covered the lawsuit’s first year because, really, it’s just getting started. The lawsuit is brought by a medical device maker against a “short-seller,” that is, an investor who makes money by predicting company failures (or, at least, a company’s drop in share value). In sum, short-sellers make money by “betting against” particular companies.
Sometimes, short-sellers are accused of fraud and market manipulation. They are accused of disseminating false and harmful information about a company, causing the stock price to fall, and taking advantage of the stock-drop.
Roughly, this is the claim against Muddy Waters.
In recent months, the parties have been negotiating settlement and, in that context, St. Jude Medical disclosed information in settlement “subject to Rule 408” about which Muddy Water’s founder, Carson Block, tweeted.
All experienced U.S. litigators know that “Rule 408” refers to a rule of evidence that provides that “settlement communications” may be excluded from evidence under certain circumstances. In our experience, courts often read this exclusion from evidence quite broadly; that is, they are quite reluctant to let a counter-party introduce another party’s settlement communication into evidence. But Rule 408 has nothing to do with whether a communication must be kept confidential and non-public.
Or does it?
In our experience, settlement communications are very often designated “Confidential and Subject to Rule 408.” That keeps the communication confidential, right?
Unfortunately (maybe obviously?), putting aside strong professional and social norms (which, however, should not be underappreciated or ignored), simply calling something “confidential” provides no legitimate expectation of confidentiality.
One does not have a legal obligation to keep information confidential simply because the counter-party stamps it “confidential.”
Now the SJM/Abbott/Muddy Waters parties are fighting about whether there needs to be an “attorneys’ eyes only” confidentiality provision in the lawsuit. Should Abbott (the company that bought St. Jude Medical in the time this lawsuit has been pending, which is now an additional plaintiff) have to share private, proprietary, business-sensitive information with its adversary, Muddy Waters, which promotes itself as: “Doing the Work Wall Street Won’t…Muddy Waters peels back the layers, often built up by seemingly respected but sycophantic law firms, auditors, and venal managements”?
In our view, Muddy Waters and, its founder, Carson Block, have the edge on this fight. We have recently argued (unsuccessfully, however) that the “attorneys’ eyes only” designation, while appropriate in narrow circumstances, sharply increases the expense of litigation, seriously compromises a litigant’s ability to communicate with its lawyer, and, often (and, it seems in the Muddy Waters case), would seriously undermine the lawyers’ efficacy. Although judges and lawyers often wish to sideline litigants in litigation, reserving the work for “the professionals,” our justice system works best with actively engaged and informed litigants.
Original post (October 26, 2016) (under the headline, “St. Jude v. Muddy Waters: The Fight is On. Shields Up, Photons Loaded.): As we said last month, St. Jude Medical has brought a complaint against short-seller Muddy Waters Consulting and others for false advertising, conspiracy and the resultant manipulation of the public markets. Essentially, St. Jude’s 33-page lawsuit alleges that Muddy Waters’ business model is to malign companies, like St. Jude Medical, with false or misleading public criticism of their business practices or products, so that Muddy Waters, which has “shorted” stock in the target company (see below), can make money.
The basic idea of shorting or short-selling is that an investor sells stock he does not actually own on Date 1, with a promise to the buyer that he will deliver the stock on later Date 2. If the share price drops between Date 1 and Date 2, the short-seller makes money because buyer, who is correspondingly going “longer” on the stock, is bound by the Date 1 sale price. If the share price goes up between Date 1 and Date 2, the short seller takes a loss. The details of short-selling are, of course, more complicated.
At issue in St. Jude v. Muddy Waters, are statements by Muddy Waters people questioning the safety of St. Jude implantable cardiac rhythm management (“CRM”) devices, colloquially known as pacemakers. Was this merely a ploy to drive St. Jude’s price down? Muddy Waters has now filed its answer.
The immense challenge for businesses like St. Jude is to prove that the short-sellers’ public criticism is truly false and misleading, rather than reasonable criticism. This task is particularly difficult because, in areas of ambiguity or uncertainty, the first amendment of the U.S. Constitution weighs heavily in favor of public speech rights. Predictably, Muddy Waters answered St. Jude’s Complaint this week, wrapped up tightly in the American flag.
Where will this end? When will this end?
Given the amount of money at stake and my sense of the war chests involved, I speculate that this case is going to be a hard-fought and protracted siege.
Given the allegations and defenses, I predict that this case is going to have an enormous “e-discovery” component; that is, both sides should prepare themselves (and have been preparing themselves for months now, I expect) for deep dives into their “ESI,” or electronically stored information.
St. Jude will be dredging Muddy Waters for evidence and admissions that Muddy Waters is and was solely concerned about making money and uninterested either in patient safety or in the accuracy of publicly available information.
Muddy Waters, on the other hand, will be cutting into the digital guts of St. Jude to buttress their claims of a genuine concealed threat to public safety allegedly posed by St. Jude’s CRM devices.
[editor’s note: A Minnesota Litigator reader directs us to “Profitsoverpatients.com“, a Muddy Waters production. The perfect theme song for this bloodletting in the making is linked here.]