MDL-ing Transnational Litigation

What happens when the tax authority of the Kingdom of Denmark believes it was defrauded by more than 150 pension plans across the United States? A multidistrict litigation!

This post briefly summarizes an unusual litigation in the Southern District of New York captioned In re SKAT Tax Refund Scheme Litigation. The post begins with a brief summary of the procedural device known as multidistrict litigation (MDL), and it then turns the SKAT litigation and its recent developments.

MDL

In 1968, Congress adopted the Multidistrict Litigation Act to provide for the consolidation of civil actions pending in the federal courts. According to the statute:

When civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings. Such transfers shall be made by the judicial panel on multidistrict litigation authorized by this section upon its determination that transfers for such proceedings will be for the convenience of parties and witnesses and will promote the just and efficient conduct of such actions.

As the statute provides, a MDL is a coordinated proceeding for civil actions pending in different districts. Decisions to consolidate and assign cases are left to the Judicial Panel on Multidistrict Litigation, a group of seven federal judges hand-picked by the Chief Justice of the United States. The standard for consolidation is exceptionally low: one common question, plus the Panel’s belief that consolidation serves efficiency, convenience, and justice. When the Panel elects to consolidate cases, they select a district judge to handle the consolidated proceeding—and there are virtually no rules about who they can choose. MDL cases are consolidated for pretrial purposes only, though in practice almost all cases consolidated in a MDL are resolved in the MDL, either by settlement or on a dispositive motion.

MDL has become the dominant vehicle for resolving many large and high-profile controversies. This procedure has been used to consolidate hundreds of thousands of cases, including those addressing the BP oil spill, Johnson & Johnson baby powder, NFL concussions, opioids, and more. Importantly, though, while mass tort MDLs tend to get the headlines, the MDL procedure is not limited to mass torts. While products liability cases are the most common in MDLs, the procedure is also used in cases related to data privacy, antitrust, contracts, employment, intellectual property, securities, and more.

SKAT MDL

The Customs and Tax Administration of the Kingdom of Denmark (“SKAT”) is the agency responsible for the assessment and collection of Danish taxes. Under Danish law, Danish companies withhold a certain percentage of dividends distributed to shareholders as tax. However, if those withholdings are exempt from Danish taxation under a “double taxation” treaty, then the shareholders can apply to SKAT for a refund.

According to SKAT, a large number of U.S. pension funds applied for and received refunds of the dividend tax. However, SKAT alleges that the pension funds’ requests “were fraudulent because the [pension funds] did not own the shares that they claimed to own, they did not earn the dividends they claimed to have earned, and they were not entitled to the tax refunds they claimed.”

To remedy the alleged fraud, in 2018, SKAT filed more than 150 civil actions in federal courts across the United States. The Panel consolidated these cases in front of Judge Kaplan in the Southern District of New York, where several such cases had been filed and where some litigation had taken place. Shortly after the consolidation, the court denied a pre-consolidation motion to dismiss. Following another failed motion to dismiss, the court ordered the parties to complete fact and expert discovery by December 2021 and April 2022.

What happened next might strike some readers as odd. A common approach in a large MDL is to select a purportedly representative sample of cases for bellwether trials. Typically, bellwether trials give the parties information about how the other cases might come out, and presumably that information informs settlement negotiations. Here, Judge Kaplan worked with the parties to select bellwether cases for summary judgment. Seven cases were selected; defendants filed their motions for summary judgment; and the court issued a consolidated decision in late November 2023.

The details of the litigation and the defendants’ dozen primary arguments for summary judgment are not necessary for this audience. Two related arguments, though, are worth recounting in brief. Perhaps the most important argument offered by defendants was that these cases should be barred by the “revenue rule.” The revenue rule reflects the principle that “prohibits courts from hearing claims by foreign sovereigns that seek direct or indirect enforcement of their tax laws.” A suit by a foreign taxing authority, at first glance, looks like a prime candidate for the revenue rule. The district court held, however, that the revenue rule did not bar these cases. The court explained that SKAT was not seeking to enforce Danish tax law, but instead was seeking to remedy a fraud that just so happened to be related to tax. The court also rejected defendants’ back-up argument that the revenue rule barred these cases because their resolution would require the U.S. court to apply Danish tax law to assess the merits of the fraud claims. This argument failed both because an assessment of Danish tax law might not be necessary, and because the revenue rule does not bar a court from considering the effect of a foreign tax law.

A second and related argument sounded in collateral estoppel. SKAT filed similar suits in England, including some with overlapping defendants. The English trial judge applied that country’s version of the revenue rule to dismiss those cases. SKAT appealed some of those judgments, and the English Supreme Court ultimately held that the revenue rule did not apply. However, one of the parties to the English trial court judgment for which SKAT did not appeal was ED&F, also a party in the U.S. litigation. So, it seemed that ED&F had a binding English judgment saying that the revenue rule applied. The U.S. judge, though, declined to give that judgment collateral estoppel effect. The judge noted that the English version of the revenue rule may not be identical to the rule applicable in these cases, and given the procedural history of the related cases, collateral estoppel of the English trial court decision was not appropriate.

The judge went on to reject ten other arguments by the defendants, and thus denied the motions for summary judgment.

Conclusion

What is next for the SKAT litigation? Likely settlement, though trials are possible.

These cases are also noteworthy for two more procedural reasons. First, MDL has come to dominate the federal civil docket, and this case suggests that transnational litigation is not immune from MDL’s reach. Second, the procedure of using bellwether cases for summary judgment is far from common, but perhaps this MDL is a sign—a bellwether, if you will—that this practice may become more prominent in U.S. litigation, transnational or otherwise.