Opinion analysis: Court uses cheerleader uniform case to validate broad copyright in industrial designs

Opinion analysis: Court uses cheerleader uniform case to validate broad copyright in industrial designsIt’s the kind of case my colleagues who teach copyright law might spend an entire class session analyzing, pondering the pros and cons of copyright protection for industrial designs. In a rare moment for the Roberts Court, the opinion in Star Athletica v Varsity Brands addressed that question broadly and categorically, passing up every opportunity […]

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Opinion analysis: Court uses cheerleader uniform case to validate broad copyright in industrial designs

It’s the kind of case my colleagues who teach copyright law might spend an entire class session analyzing, pondering the pros and cons of copyright protection for industrial designs. In a rare moment for the Roberts Court, the opinion in Star Athletica v Varsity Brands addressed that question broadly and categorically, passing up every opportunity to narrow or confine its ruling.

The case involves cheerleader uniforms designed by Varsity Brands, the market leader, and copied by Star Athletica. The legal problem is whether copyright protection, which extends naturally not only to works of music and literature, but also to “pictorial, graphic, or sculptural” works, protects the particular combination of chevrons, zigzags and stripes that characterizes Varsity’s uniforms. Star Athletica argues, with considerable support from lower courts and commentators, that this kind of “industrial” design, largely influenced by utilitarian considerations, does not warrant copyright protection, which is best reserved for wholly aesthetic creations. The majority opinion of Justice Clarence Thomas, though, has nothing to say about concerns of competition policy. Rather, as you might expect from a Thomas opinion, the text addresses the topic wholly as a matter of statutory interpretation. Working in that vein, it reads the statute as giving remarkably broad protection to industrial designs.

The key language of the statute emphasizes that it does not protect useful articles as such. Instead, it protects only “the design of a useful article,” and it protects that only if the “design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” The key doctrinal question, then is the question of “separability,” or when the expressive aspects of the design are sufficiently “separable” from the utilitarian design.

Quoting the Oxford English Dictionary’s definition of “capable,” the court’s opinion states that for copyright protection to reach the design, “[t]he decisionmaker must determine that the separately identified feature has the capacity to exist apart from the utilitarian aspects of the article,” explaining that “[i]f the feature is not capable of existing as a pictorial, graphic, or sculptural work once separated from the useful article, then it was not a pictorial, graphic, or sculptural feature of that article, but rather one of its utilitarian aspects.”

Pointing to the explicit protection for copyrighted works applied to useful objects, the court explains that the Copyright Act as a whole “makes clear that copyright protection extends to pictorial, graphic, and sculptural works regardless of whether they were created as free-standing art or as features of useful articles.” Thus, the court concludes, the ultimate question is whether a particular design “would have been eligible for copyright protection … had it originally been fixed in some tangible medium other than a useful article before being applied to a useful article.”

What the court does not state expressly in that part of its opinion is that the standard for determining whether a graphic work (for example) is copyrightable is minimal. Unlike patents, which require a notable step of inventiveness, the level of expressive spark necessary for copyright protection is quite low. So once the court has said that any design can gain copyright protection if it would be protectable if placed first on a piece of paper, it really has ensured that all but the subtlest graphic designs will be able to gain copyright protection.

The proof of the breadth of the court’s analysis comes a few pages later, when the court applies its test to the facts at hand to find that the designs were protectable. The sum of the court’s analysis is as follows:

Applying this test to the surface decorations on the cheerleading uniforms is straightforward. First, one can identify the decorations as features having pictorial, graphic, or sculptural qualities. Second, if the arrangement of colors, stripes, and chevrons … were separated from the uniform and applied in another medium – for example, on a painter’s canvas—they would qualify as “two-dimensional … works of … art.” And imaginatively removing the surface decorations from the uniform and applying them in another medium would not replicate the uniform itself.

To put it more bluntly, once we determine that the designs “hav[e] … graphic … qualities … [and could be] applied … on a painter’s canvas,” the test for copyrightability is met.

The remainder of the court’s opinion consists of a half-hearted dismissal of a variety of Star Athletica’s contrary arguments. At bottom, Star Athletica’s central contention is that copyright protection requires that the useful article “would remain equally useful” without the design features in question. Here, for example, the cheerleader’s uniform would be considerably less useful as a cheerleader’s uniform without the chevrons, stripes, and zigzags; what team dresses its cheerleaders in plain white tunics? That contention is fundamentally misguided, the court explains, because it rests on the assumption that copyright protection is limited to features that are “solely artistic.” Rather, the court explains, “[t]he focus of the separability inquiry is on the extracted features and not on any aspects of the useful article that remain after the imaginary extraction.” In the court’s view, the explicit extension of copyright protection to “applied art” necessarily contemplates copyright protection for expression that is at least in part utilitarian.

I am sure that my colleagues who study intellectual property will write at length for years to come about the doctrinal nuances of the court’s discussion of the separability requirement, which seems to me a marked shift from most of the prior treatments. What is most interesting on the face of the opinion, though, is the marked lack of concern for the problem Justice Sonia Sotomayor noted at the argument –  allowing copyright law to decimate the “knockoff” industry. The bulk of the briefing in and attention to this case emphasized the industrial policy questions affected by applying copyright law to industrial designs. For the justices, though, those concerns surface only in the dissenting opinion of Justice Stephen Breyer (joined by Justice Anthony Kennedy).

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Argument analysis: Justices skeptical of categorical “exhaustion” of patent rights

Argument analysis: Justices skeptical of categorical “exhaustion” of patent rightsFor a court that has heard so many crucial intellectual property cases over the last several years, October Term 2016 is remarkable in that it was not until this morning that the court heard an intellectual property case that has the potential to be a “major” decision. But they faced a case of potentially momentous […]

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Argument analysis: Justices skeptical of categorical “exhaustion” of patent rights

For a court that has heard so many crucial intellectual property cases over the last several years, October Term 2016 is remarkable in that it was not until this morning that the court heard an intellectual property case that has the potential to be a “major” decision. But they faced a case of potentially momentous importance for modern commerce when they heard argument in Impression Products, Inc. v Lexmark Int’l, Inc.  Unfortunately, I don’t think many people left the courtroom knowing much more about the case than they did when they entered. Perhaps the justices wore themselves out with so much incisive questioning in the morning’s first argument (Microsoft v. Baker), but this argument was much more like the Monday argument in Howell v. Howell on which Amy Howe reported here: a cold bench largely leaving the advocates to their own devices.

The case involves the doctrine of “exhaustion,” under which a patentholder’s rights to enforce its patent ordinarily are “exhausted” with regard to any particular object at the moment the patentholder sells the object. As applied to this case, for example, Lexmark’s rights to control the use of its patented refillable print cartridges would be “exhausted” when it sells those cartridges to retail buyers, even if Lexmark conditions the sale on the promise that the buyer will not refill the cartridge. That, at any rate, is the argument of Impression Products, which makes a business out of refilling Lexmark cartridges in violation of those agreements. Lexmark’s argument, by contrast, is that modern commerce requires that innovators have the flexibility to devise contracting structures that segment the market into separate sectors, each of which gets a different price commensurate with the uses to which products will be put in that sector.

The terrain of the case is complex. There is a recent case (Kirtsaeng v John Wiley & Sons, Inc.,) in which the justices adopted a broad rule of exhaustion under copyright law, but that case affords little guidance because the Copyright Act, unlike the Patent Act, codifies the exhaustion doctrine. Justice Anthony Kennedy seized on that distinction early, asking Andrew Pincus, counsel for the defendant Impression Products, “[w]hy hasn’t this been codified? …. Too busy or what? …. Did the failure to codify mean we should be somewhat cautious in extending … or in interpreting [it]?”

It says something about the ill-defined nature of the problems before the court that the parties can’t even agree on the basis for the exhaustion doctrine. For his part, Pincus argued that the exhaustion doctrine rests on common-law rules that are hostile to restraints on alienation. Conversely, Malcolm Stewart, appearing on behalf of the U.S. solicitor general in support of Impression Products, argued that the doctrine was an interpretation of the exclusive rights granted to inventors by the Patent Act, a view shared by Constantine Trela, who argued on behalf of the patentholder, Lexmark.

Although counsel spent a great deal of the argument in largely uninterrupted presentations about the best way to read a large group of old cases examining contractual restraints in the patent area – no surprise that both sides believe the cases support them – most of the justices’ relatively sparse interjections involved more practical problems. Justice Sonia Sotomayor, for example, seemed impressed by what Pincus had to say about the cases, but moments before the end of his argument, stopped him to comment that “there are serious issues about this rule and its consequences,” and to ask him “[h]ow do you address all the negative consequences that your rule appears to be creating?” In the same vein, Justice Samuel Alito commented to Pincus: “The Federal Circuit’s rule on this is 25 years old. Has it caused a lot of problems?”

Chief Justice John Roberts and Justice Stephen Breyer also probed repeatedly as to why the patentholders like Lexmark cannot rely solely on contract law, but instead need patent law to enforce these restrictions. Roberts, for example, asked “Why is normal contract law and normal State law inadequate, for your purposes?” After listening to a few minutes of Trela’s response , Breyer asked “[w]hy can’t you enforce the contract downstream?” And when Trela explained that Lexmark (and other licensors) would lack privity with downstream purchasers, Breyer pressed yet again: “Then why don’t you require the person who sells it to just resell it with the requirement that they promise [to comply].”

In my judgment, the argument had only three significant revealing moments. In one of them, Breyer displayed an apparently visceral perspective that the kinds of provisions that Lexmark wants to impose should be routinely condemnable:

[A]ny monopolist, including a patent monopolist, would love to be able to go to each buyer separately and extract from each buyer and user the maximum amount he would pay for that particular item. …. But by and large, that’s forbidden under many laws, even though it does mean slightly restricted output, and it also means a lower profit for the monopolist.

That is not the comment of somebody predisposed to accept the idea that the realities of 21st-century commerce require updating of traditional restrictions on commercial contracting.

The other two moments involved the international aspect of the case: whether an overseas sale exhausts rights under the United States patent. On that topic, Alito and Breyer were deeply skeptical of Pincus’ argument. Alito was the more forceful:

[I]t’s somewhat surprising to me that none of the briefs in this case talk about our cases regarding extraterritoriality. In recent years, we’ve … said … that a statute does not apply outside the United States unless it says that it applies outside the United States. I don’t see why that shouldn’t be the same for a common-law rule like the rule here. And if what’s involved here is the application of U.S. patent law abroad, where is the clear statement that the exhaustion rule applies outside of the borders of the United States? I … don’t see where that can be found.

Alito hardly does the briefs justice; amicus briefs for IBM and Qualcomm, for example, included extended sections emphasizing the court’s precedents counseling against extraterritorial application of domestic statutes.

Breyer took a different tack, but reached a similar point, as he discussed the consequences of a hypothetical sale in Germany by an American holder of multiple patents on a single invention:

[T]hey have received money for that first sale under, let’s say, a German patent, and they have not received any money on this American patent. So they say, well, how could you be subjecting us to a rule that that first sale exhausted our right to money under the American patent when we never received any money under the American patent?”

My take on this is that the justices are well aware of the major implications here and don’t see any obvious way to avoid doing something that will have real economic consequences. None of the parties suggested any obvious narrowing strategy that would allow the justices to limit their decision. Rather, it seems, they are going to have to decide if these kinds of restrictions will, or will not, remain a product of 21st-century innovation policy. About the most to be gleaned from the argument is that Impression Products might have a harder time on the international point than it will on the domestic one. I would not count on hearing anything more about this case until June.

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Argument analysis: Justices dubious about free review of decisions denying class certification

Argument analysis: Justices dubious about free review of decisions denying class certificationThis morning’s long-delayed oral argument in Microsoft v. Baker finally gave Microsoft its “day in court,” more than two years after the U.S. Court of Appeals for the 9th Circuit decision under review, and almost four-and-a-half years after the district court decision. Although it is a big patent day at the Supreme Court – with […]

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Argument analysis: Justices dubious about free review of decisions denying class certification

This morning’s long-delayed oral argument in Microsoft v. Baker finally gave Microsoft its “day in court,” more than two years after the U.S. Court of Appeals for the 9th Circuit decision under review, and almost four-and-a-half years after the district court decision. Although it is a big patent day at the Supreme Court – with the decision in SCA Hygiene and the argument in Impression Products v. Lexmark – the Microsoft matter is a civil procedure case, examining the options available for plaintiffs when a district court determines that a case is not suited for adjudication as a class action.

Traditionally, the authority of the federal courts of appeal is limited to reviewing “final” decisions of a district court. Because the claims of individual plaintiffs survive even when a district court refuses to certify a case for adjudication as a class, the decision denying certification ordinarily does not produce a final order suitable for immediate review on appeal. The problem that plaintiffs face, though, is that adjudication of the individual claims often makes no sense without class relief; the costs and fees associated with a trial typically dwarf the possible recovery from any particular individual’s claim. Accordingly, plaintiffs often want to appeal immediately when a district court rejects the availability of class relief.

A common strategy in recent years for plaintiffs facing that problem has been for the named plaintiffs to voluntarily dismiss their individual claims. Although the dismissal is only conditional (the plaintiffs expect to press those claims again if they can persuade the court of appeals that class-based relief is appropriate), the 9th Circuit has concluded that the tactic produces the final decision that plaintiffs need in order to obtain immediate appellate review. This case puts that strategy squarely before the court and the justices seemed deeply skeptical.

You knew things were going well for Microsoft when the justices gave Jeff Fisher, representing the company, free rein to lay out his rejection of the plaintiffs’ position with a simple “damned if they do, damned if they don’t” argument. If the decision is final, then the plaintiffs have no remaining claims and thus there is no Article III “case” for further adjudication. Conversely, if the courts take seriously the idea that the plaintiffs can revive a claim that they have voluntarily dismissed, then the decision is not really final, and so it does not yet qualify for appellate review.

To the extent they addressed it, most of the justices seemed to take the first approach. The general sentiment was that the 9th Circuit made a serious misstep when it adopted the underlying doctrine, as the justices could not see any reason why a plaintiff should be able to appeal a district court judgment that he or she asked the district court to enter. Early on, for example, Justice Sonia Sotomayor, remembering her days on the district court bench, commented that “I haven’t been able to imagine a situation in which a case is dismissed with prejudice, but where there may be some issues that should survive.”

The questioning grew particularly heated when Peter Stris, arguing for the plaintiffs, came to the podium in defense of the tactic. Justice Elena Kagan, for example, asked with incredulity whether “this [is] a procedure that’s used in the Ninth Circuit? … Why did people think that this was the governing law?” Similarly, Chief Justice John Roberts exclaimed: “It’s one thing … if you’ve got a judgment against you and you have arguments why it shouldn’t have been. But you told the district court to enter a judgment against you, so you can’t argue that it shouldn’t have done that.”

Another major problem Stris faced is the history leading up to Federal Rule of Civil Procedure 23(f). In the 1960’s a practice had developed under which plaintiffs had a relatively free hand to appeal decisions denying class certification, on the theory that though not technically final, those decisions were effectively the “death knell” of the class litigation. The Supreme Court’s 1978 decision in Coopers & Lybrand v. Livesay rejected that idea, ushering in an era when plaintiffs had no avenue for immediate appeal of an adverse certification decision.

After deliberation, though, the rules committee amended rule 23, adding a new paragraph 23(f), which permits those appeals, but only with the permission of the court of appeals. (The plaintiffs tried that process in this case, but the court of appeals refused to grant permission.) Justice Ruth Bader Ginsburg seemed particularly dubious about the tension between the plaintiffs’ strategy and rule 23(f): “The rule makers went through a lot of work to figure out what to do with an interlocutory ruling on class action status.  And it came up with 23(f). And this device seems to be just a way to get around 23(f).” As she commented at one point, under the plaintiff’s strategy “23(f) is out the window.”

The low point of the argument for Stris came when Justice Stephen Breyer repeated the bifurcated syllogism from Fisher’s argument in its entirety: “So you’re in a dilemma.  If you say I condition my dismissal upon my later appealing, you run into our case … which says then the judgment isn’t final. But if you don’t reserve something, you’re in the box you’re in right now and the case is over.” For him, as for Ginsburg, the “conditional voluntary dismissal” strategy seemed at best a feeble effort to avoid the obvious import of rule 23(f).

This is one of those arguments in which the justices leave little doubt about the ultimate outcome. Even in the absence of Justice Antonin Scalia, this is a bench with several jurists deeply worried about the excesses of class-action litigation. And on that bench it is fair to say that Breyer, Ginsburg, Kagan and Sotomayor are the least hostile to class actions. It is hard to imagine, after hearing such harsh criticism of the plaintiffs’ position from those four justices, that the class action plaintiffs have any realistic hope of prevailing. In the end, then, a prompt and all-but-unanimous reversal of the 9th Circuit is the likely outcome here.

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Opinion analysis: Justices reject application of laches in patent cases

Opinion analysis: Justices reject application of laches in patent casesThe refrain is in some ways familiar. The Federal Circuit early on adopts a patent-specific rule grounded in the particularities of patent procedure and practice. Decades pass, in which the rule is applied without serious challenge to dozens (hundreds?) of cases. When the issue finally reaches the Supreme Court, the justices reject the Federal Circuit’s […]

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Opinion analysis: Justices reject application of laches in patent cases

The refrain is in some ways familiar. The Federal Circuit early on adopts a patent-specific rule grounded in the particularities of patent procedure and practice. Decades pass, in which the rule is applied without serious challenge to dozens (hundreds?) of cases. When the issue finally reaches the Supreme Court, the justices reject the Federal Circuit’s decision out of hand, typically paying little or no attention to the patent-specific factors that seemed so important to the Federal Circuit.

This week’s chapter in that story is SCA Hygiene Products v. First Quality Baby Products.  The specific question is whether the equitable doctrine of “laches” permits a court to reject a suit to enforce a patent based on the plaintiff’s unreasonable and prejudicial delay in bringing suit, even if the suit is brought within the Patent Act’s statute of limitations. At the Federal Circuit, the primary consideration was (to steal a well-turned phrase from Justice Stephen Breyer) a “century and a half of history” of routine lower-court application of laches in patent cases. At the Supreme Court level, however, the most obvious authority is the court’s decision three terms ago in Petrella v. Metro-Goldwyn-Mayer, which considered a nearly identical question under the Copyright Act. In Petrella, Justice Ruth Bader Ginsburg wrote for a majority of the court, holding that because Congress adopted a specific statute of limitations for copyright cases, courts should not use vague equitable doctrines like laches to bar suits as untimely when they are brought before the deadline set in the statute. With five members of the Petrella majority still on the bench (all but the late Justice Antonin Scalia), the oral argument suggested that the weight of that precedent would be dispositive.

Against that backdrop, not a word of the opinion of Justice Samuel Alito surprises. He lays out the issue in the case as “the application of the defense [of laches] to a claim for damages,” remarking that “[w]e discussed this subject at length in Petrella.” He then proceeds to summarize Petrella in broad and unqualified terms. First, as to its general principle, he explains: “When Congress enacts a statute of limitations, it speaks directly to the issue of timeliness and provides a rule for determining whether a claim is timely enough to permit relief. … Therefore applying laches within a limitations period specified by Congress would give judges a ‘legislation-overriding’ role that is beyond the Judiciary’s power” (quoting Petrella).  Summarizing, he concludes even more firmly: “Laches is a gap-filling doctrine, and where there is a statute of limitations, there is no gap to fill.”

After such a categorical summary, it is no surprise when the opinion begins its analysis of the issue at hand with the statement that “Petrella’s reasoning easily fits the provision at issue here.” The court notes a Patent Act provision (Section 286) that bars relief “for any infringement committed more than six years prior to the filing of the complaint.” Because that provision bars suits more than six years after the fact, it is all that the justices need to resolve the dispute: “By the logic of Petrella, we infer that this provision represents a judgment by Congress that a patentee may recover damages for any infringement committed within six years of the filing of the claim.”

All that is left is for the court to address the long line of lower-court cases that motivated the Federal Circuit to adhere to a contrary rule. The court’s basic answer is that it is unimpressed by the long line of lower-court patent cases on which the Federal Circuit relied. For the justices at the Supreme Court, what is important is the long line of their own cases on which they based Petrella – none of them involving patents – holding that laches generally should not apply when Congress has adopted a statute of limitations. Having generously described the court’s own cases, Alito easily dismisses the authorities on which the court of appeals relied: “In light of the general rule regarding the relationship between laches and statutes of limitations [in our cases], nothing less than a broad and unambiguous consensus of lower court decisions could support the inference that [the Patent Act] codified a very different patent-law-specific rule. No such consensus is to be found.”

Few will find this decision remarkable. It would have been surprising for the justices who joined in Petrella to resolve the case differently. But this case is a little different from most of the cases in which the court has rejected the Federal Circuit’s patent-specific proclivities. As a rule, most of those Federal Circuit decisions broadened the rights of patentholders in one way or another, by expanding the remedies available to them or adopting a more capacious understanding of patentability. Here is a case, though, in which the Federal Circuit toed a strong historical line to rein in litigation conduct by patentholders that is aggressive at best. And the Supreme Court steps in, dismissing that history as irrelevant and brushing aside the specific risks of abuse in patent litigation (chronicled in Justice Breyer’s dissent), all in the service of the extension to patent law of a rule that was in truth not all that clear until the decision in Petrella just three years ago. It goes without saying that the vigor of the decision sends a message to the Federal Circuit about how it should balance history against general interpretive doctrines, but it also has some more immediate relevance. Specifically, my main thought when I reread this opinion is what I would be saying if I were one of the advocates trying to frame the “special rule for patent venue” question the justices will hear next week in TC Heartland v. Kraft Foods Group Brands.

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Argument preview: Justices to consider venue for patent litigation

Have you ever been to Marshall, Texas? Assuming that most of my readers did not, as I did, grow up in East Texas, it is a safe bet that few of you have visited that relaxed municipality at the intersection of I-20 (the interstate highway running from Dallas to Atlanta) and Texas Highway 59 (a […]

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Have you ever been to Marshall, Texas? Assuming that most of my readers did not, as I did, grow up in East Texas, it is a safe bet that few of you have visited that relaxed municipality at the intersection of I-20 (the interstate highway running from Dallas to Atlanta) and Texas Highway 59 (a local highway that runs from Houston northeast to Texarkana). It might help you locate it if I told you it is about 60 miles east of Tyler, the home of football icon Earl Campbell. Of one thing, though, I can be certain: The readers of this entry who engage in patent litigation will be familiar with Marshall. More than 40 percent of the nation’s patent cases are filed there; indeed, over the last three years, about one-quarter of all patent cases nationwide have been assigned to one particular judge in the federal court there (Judge Rodney Gilstrap). In a nutshell, the question in TC Heartland v. Kraft Foods is whether the justices should do something about that. Should they step in to reverse the remarkable concentration of patent litigation in that one court?

Kraft’s “MiO” liquid water enhancer, the subject of the patent infringement suit in this case.

In a system that allows plaintiffs to select the courts in which they file lawsuits, there must be something about the forum in the Eastern District of Texas attractive to patentholders suing for alleged patent infringement, because it is just about impossible to imagine a venue system that would force patentholders to pick a court so remote from the centers of innovation and finance that might seem like more logical fora. So it should come as no surprise that a lot of money is at stake here – evidenced by the 30-odd amicus briefs filed on one side or the other of the matter.

Despite the voluminous briefing, the case in fact is relatively straightforward if you think of it as proceeding at two levels. The first level is an uncomplicated question of statutory interpretation involving two frequently amended and interlocking statutory texts that govern venue in patent cases, Sections 1391 and 1400 of the federal judicial code (Title 28 of the United States Code). Section 1400 states that a “civil action for patent infringement may be brought in the judicial district where the defendant resides”; the last time the Supreme Court examined the statute (its 1957 decision in Fourco Glass v Transmirra Products), it concluded that this meant “the state of incorporation only.” Thus, under Section 1400 as read in Fourco, patent suits against a corporation would have to be brought in the state in which the defendant is incorporated (usually, at least for large businesses, Delaware).

The general venue statute, Section 1391, by contrast, states: “For all venue purposes … [a corporation] shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” Because large businesses are likely to have sufficiently pervasive business activities to be subject to personal jurisdiction throughout the nation, that section makes venue generally appropriate in most districts. More or less ignoring the Supreme Court’s decision in Fourco, the U.S. Court of Appeals for the Federal Circuit has read Section 1391 to broaden Section 1400, producing the bizarre results summarized above.

This case stems from a lawsuit in which Kraft Foods alleged that TC Heartland had infringed Kraft’s patent for a liquid water enhancer. Kraft sued in Delaware, but Heartland sought to transfer the case to Indiana, its place of incorporation, arguing that Section 1400 does not authorize venue in Delaware. As a matter of statutory language, Heartland argues that the patent statute reflects the specialized realities of patent litigation. Because the Supreme Court already has interpreted the language, and because the relevant language of Section 1400 has not changed since the court interpreted it in 1957, Heartland urges that it makes no sense to treat trivial alterations in Section 1391 as upending the sensible result the court reached in 1957. Heartland also reads Section 1391 as supporting its argument that patent venue is only proper in a defendant’s place of incorporation. That section begins with the qualification that it “shall govern the venue of all civil actions” only “[e]xcept as otherwise provided by law”; Heartland reasons that the special patent rule in Section 1400 does exactly that – “otherwise provid[ing]” for patent cases.

At bottom, though, the buzz about this case is not about the statutory language. The case is significant because it throws a spotlight on the bizarre and accelerating concentration of patent litigation in the Piney Woods of East Texas. That is the main focus of the amicus briefs, which battle over every empirical detail that is available to shed light on the quality of the work done on the patent docket of the Eastern District of Texas: whether it rules for defendants more often than other courts, whether it dismisses complaints less often than other courts, whether the Federal Circuit upholds its decisions as often as it does those of other courts. In the end, though, my sense is that most of the data is relatively ambiguous. About the only thing that seems to come through clearly is that the Texas court moves cases along swiftly, something the justices may not find troubling.

If we put the atmospherics of the prior Supreme Court decision to the side, Kraft has a strong statutory argument. Section 1400’s reference to the district “where the defendant resides” seems to tie naturally into the determination in Section 1391 of where corporations reside “for all venue purposes.” Kraft also argues that the provision of Section 1391 treating corporations as ubiquitously resident reflects a major effort, led by the American Law Institute, to recast the venue rules. The enactment of that project by Congress may be enough to persuade the justices to set aside the court’s early reading of Section 1400 in Fourco. They also surely will be aware that Congress has considered many times stepping in to solve this particular venue problem but has never taken action despite adopting the most important revisions to the Patent Act of my lifetime just a few years ago.

In the end, I think the key question is whether long-simmering complaints about the concentration of patent venue in Texas will be enough to motivate the justices to intervene. The statutory language and their prior interpretation of it is are malleable enough to support a rejection of the status quo. Still, their level of outrage may have to be pretty high to persuade them to step in where Congress has declined to tread.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel on an amicus brief by Ericsson Inc., Allergan, Inc., and Traxxas L.P. in support of the respondent in this case. The author of this post, however, is not affiliated with the firm.]

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Argument preview: Justices to consider application of ERISA to church-affiliated pension plans

Compared to the other previews I’ve written for the March argument session, Advocate Health Care Network v. Stapleton is a breath of fresh air. The cases I previewed for the first week (Impression Products v. Lexmark and Microsoft v. Baker) presented open-ended problems lacking any textual grounding in statute or rule to guide or constrain […]

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Compared to the other previews I’ve written for the March argument session, Advocate Health Care Network v. Stapleton is a breath of fresh air. The cases I previewed for the first week (Impression Products v. Lexmark and Microsoft v. Baker) presented open-ended problems lacking any textual grounding in statute or rule to guide or constrain the analysis of the justices. Advocate Health Care Network, by contrast, brings the justices as straightforward and direct a question of textual explication as they’re likely to face this term.

The case involves the application of ERISA to church-affiliated pension plans. ERISA, as most who will have read this far already know, is the Employee Retirement Income Security Act of 1974. Responding to the rampant self-dealing and mismanagement of employee pension plans that was endemic in the 1960s, the statute imposes a variety of regulatory rules on the plans to which it applies and also subjects those that manage them to a federal standard of fiduciary duty. Compliance with those rules, of course, is neither costless nor convenient. It should be no surprise, then, that churches seeking to avoid that regulatory burden were able to obtain an exemption from ERISA for their pension plans.

This case is about the breadth of that exemption. Specifically, the question is whether the exemption applies not only to plans that churches operate for the benefit of their own employees, but also to plans operated by organizations that are affiliated with churches although not themselves churches. If that sounds obscure, think hospitals: Organizations affiliated with churches operate a large share of the hospitals in this country. For example, Advocate Health Care Network (the defendant in the lead case) is a ministry of the Lutheran and Church of Christ denominations that operates 12 hospitals in Illinois. Saint Peter’s Healthcare System (the defendant in the second of the three cases before the court) is a Catholic ministry that operates a hospital in New Jersey. The third defendant, Dignity Health, operates several hospitals that Catholic nuns sponsor in California. For more than 30 years, the three federal agencies that administer ERISA (the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation) have treated the pension plans of those hospitals as exempt from ERISA. The question before the justices is whether the text of ERISA will bear that reading. In each of the three cases, employees of the health-care providers filed suit alleging that the pension plans provided by their employers do not qualify for the exemption.

The exemption from ERISA depends on a definition of “church plan” originally set out in ERISA as exempting any plan “established and maintained for its employees by a church.” The exemption was broadened by the 1980 amendments to ERISA at issue in this case, which state that a “plan established and maintained for its employees … by a church … includes a plan maintained by an organization … controlled by or associated with a church.” Because the revision quotes the exemption directly (“established and maintained … by a church”), and provides that the exemption includes “a plan maintained by an organization [affiliated] with a church,” it seems to say that affiliate plans are exempted without regard to their establishment. That, in a nutshell, is the argument of the health-care providers, supported by the U.S. solicitor general.

The obvious problem with that argument is the odd line it draws between plans that are exempt and those that are not exempt. If we assume that plans for the employees of the churches themselves are at the core of the exemption, why would Congress insist that pure-church plans be both established and maintained by religious organizations while church-affiliated plans need only be maintained by religious organizations? That is the central point of the employees, who suggest that the 1980 amendments should be viewed as limited to relaxing the requirement that they address by providing that church-affiliated plans, like church plans, must be “established” by the “church” itself, but that they will retain their exempt status whether they are “maintained” by the church itself or by the affiliate.

To my mind, the policy arguments are largely a wash. On the one hand, because ERISA is expensive, applying it to hospitals will raise the costs of health care, and who could suppose Congress is in favor of increasing the costs of health care? On the other hand, if we accept that ERISA is on balance a good thing for employee-retirement policy (and it’s hardly appropriate to read ERISA on the assumption that it is a bad thing), then we should doubt Congress’ intent to leave such a large sector of the economy unprotected.

At the end of the day, I think the justices are likely to find their answers almost entirely in the text of ERISA Congress has provided, leaving it to Congress to redraw any lines that seem misplaced. That inquiry into the meaning of the statute, I expect, will dominate next week’s argument.

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Argument preview: Justices finally to hear long-granted case on appellate review of decisions denying class certification

If I told you that the first Tuesday of the March argument session featured the biggest patent case of the term, you probably would not be surprised if you already knew that was the day of the Microsoft argument. As it happens, though, Microsoft v. Baker is not the big patent case; that one is […]

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If I told you that the first Tuesday of the March argument session featured the biggest patent case of the term, you probably would not be surprised if you already knew that was the day of the Microsoft argument. As it happens, though, Microsoft v. Baker is not the big patent case; that one is Impression Products v. Lexmark, which I’ve previewed here. Microsoft v. Baker does not have anything to do with patents or intellectual property at all; it is, rather, a civil procedure case. That is not to say it will be a dull one. Indeed, there is every reason to think the justices will be fully focused when they come to that argument, because more than 14 months will have elapsed since the court agreed to hear the case. Yes, this is one of the cases granted while Justice Antonin Scalia was still on the court, for which the justices seem to have deferred argument in an effort to avoid adjudicating the case with an eight-member bench. We now know, of course, that despite the delay only eight justices will be on the bench next week to hear the argument.

Those eight justices will consider the options available for plaintiffs when a district court determines that a case is not suited for adjudication as a class action. Traditionally, the federal courts of appeal can hear appeals only from “final” decisions of a district court. Because the claims of individual plaintiffs survive even when a district court refuses to certify a case for adjudication as a class, the decision denying certification ordinarily does not produce a final order suitable for immediate review on appeal. The problem that plaintiffs face, though, is that adjudication of the individual claims often makes no sense without class relief because the costs and fees associated with a trial would dwarf the possible recovery from any particular individual’s claim. Accordingly, the denial of class certification is as a practical matter the end of most cases filed as class actions.

Responding to that practicality, lower courts developed a practice in the 1960s and 1970s of permitting plaintiffs to appeal immediately upon the denial of class certification, reasoning that even if it was not technically final the certification order was the “death knell” of the litigation. In 1978, though, the Supreme Court’s decision in Coopers & Lybrand v. Livesay rejected the death-knell doctrine, holding definitively that a denial of class certification does not create a final order eligible for immediate appellate review.

Responding to the rise of class actions, and the high stakes that certification decisions present, the Advisory Committee in 1998 amended Federal Rule of Civil Procedure 23 (which governs class actions) to permit immediate appeals of certification decisions, but only if the court of appeals agrees that it is appropriate for the appeal to proceed; it is common ground that Rule 23(f) grants the courts of appeals “unfettered discretion” to determine whether to permit such an appeal.

Against that background, the question in this case is whether the rule leaves any options for the plaintiffs when the district court denies certification and the court of appeals declines to permit an appeal under Rule 23(f). The most common tactic that plaintiffs have adopted is a sort of quasi-dismissal. Specifically, when the court of appeals declines to permit Rule 23(f) interlocutory review of a denial of class certification, the named plaintiffs voluntarily “dismiss” their individual claims; I use “scare quotes” because the dismissal is only conditional, hinging on the expectation that the claims of the named plaintiffs will revive if the court of appeals approves certification. The idea is that the dismissal of the individual claims produces a final judgment suitable for immediate appeal. That strategy has been controversial, and the Supreme Court has not previously considered it. This case presents the strategy directly: The district court rejected the claims for class-based relief in a case stemming from an alleged defect in Microsoft’s Xbox 360 home video game console; the named plaintiffs voluntarily dismissed their complaint; the court of appeals accepted the plaintiffs’ appeal and reversed the district court’s decision rejecting class-based adjudication.

Although the procedural maneuvering summarized above may seem intricate, the arguments produced to attack and defend it are fairly direct and easy to follow. For its part, Microsoft, the class-action defendant, contends that the strategy is a thinly veiled end-run around the policy choice made in Rule 23(f), which loosens the Livesay holding to permit interlocutory appeals of class-certification decisions, but only at the discretion of the court of appeals.

Perhaps the most telling criticism of the voluntary-dismissal strategy (emphasized most sharply in a “friend of the court” brief from a group of civil-procedure scholars) is the effect that strategy has on delaying the ultimate disposition of the proceeding. The compromise reflected in Rule 23(f) permits interlocutory review of the certification decision but does not stay the district court proceedings; in that domain, then, the proceedings on the merits move forward in the trial court while the court of appeals considers the certification decision. If the court of appeals eventually overturns the certification decision, the district court proceedings continue, simply amplified in their effect because they could benefit a class in addition to the named plaintiffs. The voluntary-dismissal strategy, by contrast, stops the district court proceedings in their tracks pending appellate resolution of the certification decision. Thus, the strategy often leads to lengthy delays in the adjudication of the merits; courts traditionally oppose piecemeal interlocutory appeals primarily to avoid just such delays. On that point, it is greatly to Microsoft’s advantage that this case arose in one of the slowest courts of appeals. The record here shows that the trial court proceedings already have been in abeyance for more than four years, since October 2012, when the district court originally dismissed the individual claims. If the voluntary-dismissal strategy works, the case would resume in the district court this fall after a hiatus of almost five years.

Arguing in favor of the voluntary-dismissal strategy, Seth Baker, one of the named plaintiffs in the putative class action, contends that the strategy provides exactly what Livesay demands: a final order of dismissal. The district-court proceedings ended with a dismissal of the complaint with prejudice, the paradigmatic final order suitable for appellate review. Baker maintains that the dismissal is real in the only way that matters: An affirmance by the court of appeals of the denial of certification would conclusively end the litigation without any opportunity for further proceedings in the district court. Baker aptly characterizes much of Microsoft’s argument as mere policy concerns that are irrelevant given the actual finality of the order challenged on appeal.

Microsoft’s rebuttal emphasizes the conditional nature of the dismissal. Microsoft insists that no view of the conditional dismissal can leave the case in a posture that would support appellate review. On the one hand, if the court treats the plaintiffs’ claims as subsisting – still in existence – then there is not yet a final order that would satisfy Livesay. On the other hand, if the court takes the plaintiffs at their word as having dismissed their claims, then the case must be moot. We know from the court’s 2013 decision in Genesis Healthcare v. Symczyk that a class action becomes moot if the claims of the named plaintiff are moot; if this dismissal is a real one, disposing of the individual interests of the named plaintiffs, then, Microsoft argues, Genesis compels the conclusion that the named plaintiffs no longer retain a justiciable interest that would support continuing appellate review.

Reasonable minds certainly can differ about the power of Microsoft’s dichotomous analysis of the plaintiffs’ dismissal. On the one hand, although the case differs a bit from Genesis, it is reasonably likely that all five of the justices in the majority in Genesis would find Microsoft’s argument compelling. The problem Microsoft faces, though, is that only four of the five justices from the majority in Genesis remain on the bench. Scalia’s absence leaves a bench composed of four justices from the Genesis majority, balanced by all four of the Genesis dissenters. If we want to look for a reason that the justices thought argument in this case would benefit from a ninth vote, that seems like the best place to look. And that tells me that what we should be watching most closely in the argument is the justices’ attention to the question whether this conditional dismissal that the plaintiffs have accepted leaves them an interest sufficient to support a justiciable controversy.

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Argument preview: Justices to consider limits on “exhaustion” of patent rights

The March argument session brings the most important patent cases of this term. In the October (Samsung Electronics Co. v. Apple) and December (Life Technologies Corp. v Promega Corp.) sessions, the justices heard cases that involved rules for multi-component products. The March session features two cases of much more central importance to the patent process. […]

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The March argument session brings the most important patent cases of this term. In the October (Samsung Electronics Co. v. Apple) and December (Life Technologies Corp. v Promega Corp.) sessions, the justices heard cases that involved rules for multi-component products. The March session features two cases of much more central importance to the patent process. The second week of the session, in TC Heartland v Kraft Foods Group Brands, the justices finally will consider a crucial procedural problem, the rules for patent venue that have been so controversial for the last decade. The first week, they will review Impression Products, Inc. v Lexmark Int’l, Inc., which also presents a momentous transactional question: When a firm holding a patent sells a product to which the patent applies, does the sale necessarily “exhaust” its rights to enforce the patent as to that product? The 34 “friend of the court” briefs filed in the case should give you a sense of the far-reaching ramifications the case might have for innovation policy.

Practical intuition suggests that the sale of the patent product obviously must exhaust the rights of the patentholder: Why would I buy a patented medical tool if I weren’t getting the right to use it? If that intuition has any force, it would bode well for Impression Products, the alleged infringer. And if you’re a regular reader of this blog, your recollection of the court’s firm application of the exhaustion doctrine to protect overseas buyers of copyrighted books in 2013, in Kirtsaeng v. John Wiley & Sons, Inc., might suggest that the present group of justices has a strong inclination to protect purchasers; any such inclination would provide further support for the alleged infringer. Then again, the court’s other 2013 decision on exhaustion – the plant-patent ruling in Bowman v. Monsanto Co. – came down firmly in favor of the patentholder, so perhaps you shouldn’t read all that much into Kirtsaeng.

It is fortunate that the case before the justices involves Lexmark, because Lexmark’s pricing strategy is so simple and well-known that it is easy to understand. Lexmark is one of the leading manufacturers of printers suitable for personal use. It sells its printers at a relatively low price, but charges a relatively high price for the ink cartridges necessary for the printers to operate. Both the printers and the cartridges include technology protected by an assortment of patents; it is accordingly plain that it would violate the Patent Act for competitors to make or sell cartridges without authorization from Lexmark.

This case arises from one of Lexmark’s two pricing schemes for cartridges. The baseline (full-price) scheme sells unlimited-use commercial-grade cartridges; the second scheme (Lexmark’s “Return Program”) sells cartridges at a discount of about 20%. A microchip in those cartridges disables them after their first use; purchasers agree when they buy the cartridges that they will not reuse them or refill them except by returning them to Lexmark. Impression Products operates a business that recycles used Lexmark cartridges in violation of those restrictions. The question before the court is whether Lexmark’s patents follow the cartridges through their sale, use and resale into the hands of Impression Products. All sides agree that the patent law includes some doctrine of exhaustion; the Supreme Court’s earliest cases applying the doctrine predate the Civil War. The court’s old cases, though, do not squarely resolve the two issues presented here: the extent to which a seller can limit exhaustion by conditions in its contract of sale, and the extent to which the doctrine applies to sales of patent-protected merchandise outside the United States.

The case draws its potential importance from two overlapping features of the controversy. First, unlike the Copyright Act at issue in Kirtsaeng, the Patent Act does not include an express provision addressing the extent of exhaustion. This means that the justices are working an area of largely common-law adjudication. Indeed, although most would agree that the exhaustion doctrine should be regarded as an explication of the Patent Act rather than wholly untethered federal common law, the statute itself offers little or nothing to guide (or constrain) the justices in defining the bounds of patent exhaustion. Second, the case comes to the court against the backdrop of more than a decade of Supreme Court decisions developing the idea that the U.S. Court of Appeals for the Federal Circuit (the specialized lower court that hears patent-related appeals) systematically has overprotected patentholders. Justices who view this case through that lens may have little sympathy for the patentholder.

To the extent it turns on any specific authority, the first question in the case – the ability of Lexmark to restrict the use of its patented cartridges after it has sold them – turns on how the court wishes to read its earliest descriptions of the exhaustion doctrine, which generally suggest that a patentholder loses its rights whenever it sells an object “without any conditions” and that a user infringes a patent whenever it acts without the patentholder’s “authority.” The Federal Circuit has taken the view for many years that sale limitations like those that Lexmark imposes should be enforceable because they are the kinds of “conditions” that vitiate any grant of “authority” under those cases. Competitors (like Impression Products in this case) argue that the court was talking about a “conditional sale,” an arcane type of financing transaction, not even enforceable under modern commercial law, in which a seller purports to retain “title” until the buyer finishes paying for its purchase. For that side of the case, then, any sale of the patent-protected product under the authority of the patentholder is an “absolute” sale, without “conditions.” Nobody seriously doubts that Lexmark authorized a sale of the cartridges; for Impression Products, that should be the end of the matter.

To my mind, the justices easily could adopt either reading of the loose language from the old cases. The truth, as the justices certainly will know, is that none of those cases confronted the highly-structured licensing and contracting arrangements that characterize modern commerce. So I’d be surprised if the justices approach this case as an exercise in identifying the best reading of their 19th-century patent jurisprudence. Rather, I expect, they’ll be worrying about the consequences of their decision for innovation policy.

As you would expect, many trees have fallen to produce the voluminous briefing addressing the policy implications of the problem, which is of course a challenging problem of industrial economics. Impression Products, and its many amici, including the solicitor general, emphasize the importance of competitive resale and used-goods markets; allowing a patentholder to limit resale of used products leaves those markets largely at the mercy of the manufacturer. There also is a strong argument that I would characterize (perhaps inaptly) as “intuitive,” suggesting that a patentholder has received its due reward when it has extracted the price that it can get for selling its invention; efforts to reach beyond that sale to constrain post-sale behavior have an unsavory aroma of overreaching.

For its part, Lexmark confines itself almost entirely to a careful and detailed reconstruction of the court’s precedents. The policy reasons why the justices should want to validate Lexmark’s business strategy come from the host of amici that file on its behalf. To distill a great deal of fervid discourse into a few brief sentences, those filings emphasize the complexity of the modern contracting markets that have grown up in the years since the Federal Circuit held these kinds of restrictions enforceable. A particularly compelling brief from Qualcomm makes two key points that play directly to the insecurities that have dominated the court’s analysis in so many of the major patent cases of the Roberts court. First, the brief urges that a sudden shift in the enforceability of these kinds of contracts could destabilize important supply chains that have developed without incident under the existing Federal Circuit rule; that argument should speak loudly to those justices who have been concerned about making a misstep in patent law that would disrupt innovation, and who have been responsible for the court’s frustratingly Delphic pronouncements in cases like Bilski v. Kappos and Alice Corp. Pty. Ltd. v. CLS Bank Int’l.

A second point is that the existing rule, although it might not facilitate competition among resellers, does facilitate competition among business models: Lexmark sells low-cost printers with expensive cartridges (a “razor-blade” model); Epson, by contrast, sells relatively expensive printers with easily refillable ink tanks. The Lexmark model – with its low up-front costs – might be ideal for customers who print relatively little, the Epson model superior for those who print a great deal. How can the justices be sure that the patent law should require patentholders to follow the Epson model? Again, justices self-aware of their lack of comparative expertise in industrial economics may worry about a decision that privileges one arrangement over the other.

I recognize that the extended discussion above includes not a word about the second question before the court – the extent to which overseas sales exhaust domestic patent rights. That is not because I think the question unimportant. Indeed, it well might be even more important than the first question. It reflects, rather, my sense that the Federal Circuit’s analysis of the second question is much harder to unseat. For one thing, if we accept the idea that patent rights are a creature of the Patent Act, then it is hard to see how a sale overseas exhausts rights under the Patent Act. Because each nation has its own patent laws, a United States patent imposes no constraints at all on activities wholly outside the United States. (Hence last month’s decision in Life Technologies Corp. v Promega Corp., discussed here, considering when a manufacturer has purchased enough components from the United States to make its overseas assembly an infringement of the United States patent laws.) If that is so, it is not immediately obvious how an overseas sale could have anything at all to do with rights under the Patent Act, much less compel their exhaustion.

Impression Products is well aware of that problem, which it solves by characterizing exhaustion as a wholly common-law development founded on the common law’s abhorrence of restraints on alienation. The argument is a strong one, and given the vagueness of the court’s prior explanations of the source of the exhaustion doctrine, it could get some traction with some of the justices. My hunch, though, is that the justices will be reluctant to take that route. For one thing, I expect that several of them will have a visceral distaste for describing this long-standing doctrine as a matter of purely judicial artifice, wholly untethered in any statutory scheme. Given the opportunity to anchor the doctrine in the Patent Act, presumably most of them will prefer to do so.

A second problem is that the justices have a brief on this point from the solicitor general, who advises the court that the United States has entered into at least two free-trade agreements (with Australia and Morocco) that contemplate overseas sales that would not exhaust domestic patent rights; it would take something pretty compelling to convince the justices to adopt a rule of federal common law inconsistent with existing treaty obligations.

A final point stems from the apparent practical difficulties of adopting an exhaustion regime for overseas sales. If the Qualcomm brief does a good job of portraying disruption in domestic markets from a mandatory exhaustion regime, the amicus brief that IBM files (limited to the cross-border question) provides a devastating discussion of the disruption that would flow from a rule of mandatory (or even presumptive) exhaustion from overseas sales. Among other things, it points out the relatively feeble patent regimes under which many overseas sales occur; a rule that allowed goods sold in weak-patent regimes to be transported and resold in strong-patent regimes (like the United States) would effectively import the weak-patent regime into United States markets. Moreover, as IBM explains, even the presumptive rule that the solicitor general favors – a presumption that foreign sales exhaust patent rights unless exhaustion is disclaimed in the sales contract – would disrupt existing supply chains because it would protect domestic patentholders only if they could force foreign contract partners to renegotiate their existing contracts to prevent exhaustion. Any justices worried about trying to fix something that isn’t broken will, I think, be most reluctant to overturn the settled transactional framework on that point.

Although this is probably the longest post I have ever written, I have only scratched the surface of the issues that the justices will confront when they take up this case next week. We should learn a lot about their inclinations from the argument.

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Argument analysis: Justices dubious about Missouri’s right to expand insurance benefits for federal employees

Sparks were not flying yesterday in the argument in Coventry Health Care v. Nevils. This is a case in which the justices seem to have come to the bench strongly predisposed to reverse the Missouri Supreme Court; nothing in the argument jumps out as having shifted that inclination. The case involves medical benefits for federal […]

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Sparks were not flying yesterday in the argument in Coventry Health Care v. Nevils. This is a case in which the justices seem to have come to the bench strongly predisposed to reverse the Missouri Supreme Court; nothing in the argument jumps out as having shifted that inclination.

Miguel A. Estrada for petitioner (Art Lien)

The case involves medical benefits for federal employees, paid under an insurance policy provided pursuant to the Federal Employees Health Benefits Act. Under that statute, the federal Office of Personnel Management sets the terms of the policies. Among other things, those policies include so-called “subrogation” clauses, which authorize the insurers to recover funds their insureds obtain from third parties, usually through successful tort litigation. The basic premise of those clauses is that if the insurance company already has paid for the employee’s losses, the insurance company should have the benefit of the tort recoveries.

It happens that Missouri, like many other states, has a consumer-protection statute that invalidates subrogation clauses in insurance contracts. The question in this case is whether that state statute can apply to invalidate the terms of the OPM-specified insurance policies issued to federal employees. It is no surprise that this kind of conflict would arise; the federal statute directly addresses the possibility of such a conflict, stating that the “terms of any [such policy] which relate to the nature, provision, or extent of coverage of benefits (including payments with respect to benefits) shall supersede and preempt any State or local law.” Notwithstanding that broad language (and an OPM regulation interpreting it to pre-empt the state law), the Missouri Supreme Court held that the subrogation clauses are ineffective as to federal employees in Missouri.

The argument suggested a broad and abiding skepticism about the employee’s argument. For one thing, several of the justices thought the language of the statute so clearly applied to this dispute that they could hardly understand the contrary argument pressed by Matthew Wessler, representing the employee, Jodie Nevils. For example, Justice Samuel Alito asked with apparent incredulity whether Wessler would defend the view that the Missouri statute “doesn’t affect the benefits that the participant receives.” Alito asked, “If … there’s no subrogation claim, the [participant] receives a certain amount. If there is a … requirement of subrogation, the participant receives that amount minus X?” When Wessler tried to say that the subrogated funds were not insurance benefits because they came from tort litigation, Justice Elena Kagan cut him off to insist that “money is money, and … one dollar is as good as the next. … I’ll just say it my way… [S]ay you’re in a car accident. One way you get all the hospital and medical costs that you incur, and the other way you get those costs minus any recovery in a tort suit.” It would extend this post to no purpose to quote similar comments by Justices Stephen Breyer and Sonia Sotomayor.

The only flash of excitement came when Wessler’s repeated efforts to turn to Congress’ intentions in adopting the statute struck a nerve with Alito. So, after Wessler commented that “we know that [Congress’] goal was not to create an expansive form of preemption,” Alito asked, “How do we know that?” When Wessler referred to the legislative history, Alito provoked laughter by interjecting, “You know, our colleague Justice Scalia is not here any longer, but he would be having a fit at this point.”

For another thing, little in the argument suggested any interest on the part of the justices in accepting Wessler’s argument that the statute was unconstitutional because it allowed a private contract (rather than a federal statute) to pre-empt state law. Alito in particular seemed to think that Wessler was making a big deal out of some innocuous aspects of the statutory language. At one point, Alito asked, “[W]ould you make the same argument if it said this statute hereby supersedes and preempts any State or local law that conflicts with the terms of the contract?” When Wessler stated that he’d have no problem with a statute in that form, Alito seemed to think that Wessler had given the point away entirely: “Well, boy, if you’re willing to concede that, I don’t see what there is to your argument because that’s, in essence, what this [statute] is … saying.” Alito, at least, seemed to have no appetite for drawing a line between statutes that make the contract pre-empt conflicting state law and statutes that pre-empt state law that conflicts with the contract. As he put it, “If you say the contract preempts anything that conflicts with State law, that’s … a problem. But if [the] statute … preempts anything that conflicts with the contract, that’s … not a problem?”

To be sure, at one point Chief Justice John Roberts did suggest that “sometimes semantics matter” and that “[i]f you wanted to take care of that problem, you just have to pass a law saying that the … State laws are preempted.” He seemed, though, more to be musing about the triviality of the problem than to be mounting a serious attack on the statute.

Perhaps the most telling feature of the argument was the lack of pointed questioning during Miguel Estrada’s argument on behalf of the insurer, Coventry Health Care. The bulk of Estrada’s argument was consumed by comments exploring the boundaries of a potential ruling in his favor. For example, Justice Anthony Kennedy, after commenting that “you have an express-preemption provision [and] a Federal entity that makes the contract[, which] may be all you need … in order to prevail,” asked if “some limiting principles … should just be in the back of our mind when we think about preemption.” And again, after suggesting apologetically that “it’s not really your obligation to … address a parade of horribles that isn’t in this case,” Kennedy asked if Estrada could offer any “general limiting principles [for] determining whether or not preemption … is permitted.”

Similarly, Roberts seemed interested in exploring the possible limits of a rule permitting contracts to pre-empt state law, as he raised far-ranging hypotheticals about statutes that held state law pre-empted either by American Bar Association rules of professional responsibility or by private shipping contracts.

Given the delicacy of pre-emption doctrine in general, I would not expect this to be one of the first cases to come down from the February calendar. But I would be surprised if the justices fail to coalesce with near unanimity around some straightforward basis for reversing the Missouri court’s judgment.

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Argument analysis: Justices dubious of state-court decision limiting pre-dispute arbitration contracts

Argument analysis: Justices dubious of state-court decision limiting pre-dispute arbitration contractsYesterday’s argument in Kindred Nursing Centers Limited Partnership v. Clark had the justices retracing some pretty familiar terrain, as they considered whether the Federal Arbitration Act pre-empts a decision of a state supreme court holding an arbitration agreement unenforceable based on the lower court’s thinly disguised hostility to pre-dispute arbitration agreements. This particular contract called […]

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Argument analysis: Justices dubious of state-court decision limiting pre-dispute arbitration contracts

Yesterday’s argument in Kindred Nursing Centers Limited Partnership v. Clark had the justices retracing some pretty familiar terrain, as they considered whether the Federal Arbitration Act pre-empts a decision of a state supreme court holding an arbitration agreement unenforceable based on the lower court’s thinly disguised hostility to pre-dispute arbitration agreements. This particular contract called for arbitration of disputes between Kentucky nursing homes and their residents. Representatives of the residents routinely signed those contracts, relying on broadly written general powers of attorney granted by the residents. The Kentucky court held that the powers of attorney were not broad enough to authorize execution of arbitration agreements, explaining that powers of attorney would need to mention arbitration contracts specifically because arbitration contracts involve a waiver of fundamental constitutional rights (like the right to a jury trial).

The bench approached the argument largely from the perspective offered by Andrew Pincus, representing the nursing homes, who argued that the decision of the Kentucky Supreme Court must be reversed if it failed to put arbitration contracts on an “equal footing” with contracts in general. Two distinct threads of discussion dominated the argument. First, several of the justices besieged Robert Salyer, arguing on behalf of Janis Clark and Beverly Wellner, the residents, with questions reflecting a widely shared skepticism that the Kentucky opinion could be read as an evenhanded treatment of arbitration.

By far the most acerbic was Justice Stephen Breyer. He pressed two of his typically extended hypotheticals. The first one asked whether a contract that granted an attorney the right to litigate a dispute would include the right to seek a bench trial or mediation, both of which would involve a waiver of the right to a jury trial. When Salyer answered that the attorney’s authorization would include a right to make those strategic decisions, Breyer responded pointedly: “I will tell you in my opinion right now you have discriminated against arbitration.” Salyer attempted to backtrack, but Breyer cut him off caustically:

I’m testing out whether it’s really true [that you’re not discriminating against arbitration]. Of course I’m highly suspicious as you can tell from my tone of voice. What I really think has happened is that Kentucky just doesn’t like the Federal law. That’s what I suspect. So they’re not going to follow it. Now, … you’re going to say no, they would never do that. … [But i]t seems to me that arbitration as a means of settlement of a … dispute, mediation as a means of settling a dispute, a judge as a means of settling a dispute, are equally and no different in the respect that none of those three involves a trial by jury.

A few minutes later, Breyer returned with a hypothetical about patent litigation, perhaps thinking of the opinion in Life Technologies Corporation v. Promega Corporation announced minutes before the argument. This time, he posited a contract authorizing an attorney to manage a patent, which resulted in litigation that terminated in a settlement containing a confidentiality agreement limiting the client’s rights to cast aspersions on a competitor’s patent. Breyer suggested that perhaps under Kentucky law the power of attorney would not authorize the settlement because the settlement waived rights of free speech. This time, Salyer quickly agreed. But that did not pacify Breyer any more than Salyer’s previous responses. Still unsatisfied, Breyer retorted: “Every time I think of examples that would be very weird, … you say, oh, well, yeah, that’s right. You can’t do that anymore in Kentucky. And every time you say that, the law of Kentucky in terms of … powers of attorney is getting more and more peculiar. That’s why I suspect something is going [on] there.”

A second theme in the argument, which occupied much of the time Pincus spent at the podium, was an apparent effort to explore and define boundaries to a decision reversing the Kentucky court. The problem troubling the justices was that it is difficult to distinguish between an opinion discriminating against arbitration and an opinion announcing a broad and non-discriminatory rule calling for a narrow reading of powers of attorney. Summarizing the situation, Justice Anthony Kennedy put the problem this way: “In other words, for a number of years Kentucky allowed powers of attorney and the first time that one was called into question under this theory was with reference to arbitration.”

Viewed that way, as Chief Justice John Roberts explained, the Kentucky court’s opinion “doesn’t single out arbitration. That happens to be the issue before it. It seems to me what it’s coming down to is you just don’t believe the Kentucky Supreme Court when it says this is the general principle. And you’re saying, well, I really think you’re hostile to arbitration because I haven’t heard that principle before.” Similarly, Justice Elena Kagan noted that “[u]sually we don’t presume that State courts are acting in ways that are not in accordance with law. Actually, we usually give them the benefit of a kind of good faith presumption.”

If any single statement epitomized the argument, it was a question Breyer posed to Pincus near the end of his rebuttal argument: “Now, sometimes courts don’t write enough in the opinion for us to make the decision as to whether or not it is being discriminated against, in which case we send it back and ask them to write more. So is that what we should do?” That certainly leaves open the possibility that a desire to give state courts the benefit of the doubt will lead a majority of the justices to take the Kentucky court more or less at its word. But I for one would be surprised to see that result later this spring. The long string of summary reversals and evasive state-court opinions in the area suggests that most of the justices would feel duped if they let this case pass without reversal.

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