On May 8, U.S. District Judge John Feikens, presiding in the Procter & Gamble v. Bankers Trust litigation, issued an order and opinion dismissing 12 bases for recovery asserted by P&G. (For P&G, these dismissed counts proved to be nonessential.)
The dismissed causes of action were based on federal securities laws, Ohio securities laws, federal commodity laws, the Ohio Deceptive Trade Practices Act, breach of fiduciary duty, negligent misrepresentation, and professional negligence.
Importantly, however, the court left intact the essential core of P&G's case - its common-law fraud count. In fact, Judge Feikens considerably enhanced the strength of P&G's case by finding that a legal requirement existed that Bankers Trust disclose material information even if there were no fiduciary duty.
Two of my colleagues have recently provided in this space their differing views as to what this judge held - Daniel P. Cunningham of Cravath, Swaine & Moore on June 20 and Warren Davis of Sutherland, Asbill & Brennan on May 21.
This article, in turn, will concentrate on the potential future effect of this decision.
The order is helpful in that it is the first written holding by a judge in the United States to address the broad range of legal issues challenging the enforceability of swap and swap-related transactions. However, as a guidepost to the future, the order has several significant limitations, particularly as to the counts dismissed.
Not binding. The order was not an action with far-reaching authority and effect, such as a decision by the U.S. Supreme Court or legislation enacted by Congress and becoming "the law of the land." In fact, this order and opinion by a single U.S. district judge is legally binding in one and only one case - and that case has now been settled and dismissed. Future courts will be free to accept or reject Judge Feikens' reasoning.
Moreover, if the order is not officially published, it will be entitled to even less weight.
Not tested. Another court, in deciding whether to adopt Judge Feikens' analysis, will undoubtedly note that these legal conclusions were not tested on appeal. That future court may also note that in the one instance in this case where a decision by the present court was appealed (prior restraint on publication by Business Week of sealed documents), the federal Sixth Circuit Court of Appeals not only reversed but sharply criticized the legal findings.
Rejection of expert regulator analysis. Another court might view the Securities and Exchange Commission as well positioned to determine whether a particular structure is an option on a security or group or index of securities and thus a "security" - and then defer to (rather than, as here, disagree with) the SEC's conclusions in that regard.
Limited scope. Judge Feikens himself stressed that his decision, particularly with respect to the federal securities counts, was limited to the facts of this case, and that some swaps "because of their structure, may be securities." However, his reasoning of "no security" would seem to apply to all but the most exotic trades.
P&G unique. The findings regarding fiduciary duty, commodity trading adviser, and other issues were made against P&G. But P&G is one of America's corporate giants; relatively few end users have annual revenue in excess of $30 billion or the accompanying level of sophistication. Another court with another end-user counterparty might reach other conclusions on these issues.
Questionable choice of substantive law. This court's rejections of the claims based on breach of fiduciary duty, negligent misrepresentation, professional negligence, violation of Ohio securities laws, and the Ohio Deceptive Trade Practices Act rest on a vulnerable premise.
Early in his analysis, Judge Feikens reached a fork in the road - what substantive law to apply to determine the validity of these claims?
It is generally held that a federal court in a diversity action is bound by the choice of law rules in the forum state - here Ohio. But, over P&G's objection, Judge Feikens based his decision on New York law. Another court (in Ohio, Illinois, or elsewhere), applying its own state conflicts principles, could well reach different ultimate results.
Other state securities laws. Judge Feikens determined that the two disputed swaps were not a "security" as defined by Ohio law and, additionally, that the contractual choice of New York law precluded recovery under Ohio's securities laws. As I have suggested, another court could well disregard the notion that the contractual choice of law clause displaces the protection of its own state securities laws. Risk under state securities laws should not be entirely disregarded, particularly as to more exotic trades.
But the duty to disclose has a more solid basis. Again, this is a decision by a single U.S. district judge in which the issues immediately became moot and not appealed. But here, unlike with many of the dismissed claims, the application of New York law seems entirely correct, in light of the choice of New York law contractual provision. This holding does, however, raise numerous unanswered questions.
In short, Judge Feikens' order provides interesting and detailed analysis in a number of areas. But this judge was not able to - and did not - single-handedly resolve the host of legal issues inherent in these derivative products.
Mr. Foster, a New York lawyer, advised Procter & Gamble and its trial counsel in P&G's suit against Bankers Trust. He regularly represents end- users of derivatives.