Opinion analysis: Divided court holds firm on deadlines for investors opting out of securities class actions

Opinion analysis: Divided court holds firm on deadlines for investors opting out of securities class actionsInvolving as it does a relatively technical question about class action procedures, California Public Employees’ Retirement System v. ANZ Securities did not look like a probable candidate for the final day of the term. But it was not until the last Monday in June that we finally received a 5-4 decision, with Justice Anthony Kennedy […]

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Opinion analysis: Divided court holds firm on deadlines for investors opting out of securities class actions

Involving as it does a relatively technical question about class action procedures, California Public Employees’ Retirement System v. ANZ Securities did not look like a probable candidate for the final day of the term. But it was not until the last Monday in June that we finally received a 5-4 decision, with Justice Anthony Kennedy writing for the narrow majority.

The issue in the case involves the right to opt out of a class action: When representatives file a class-action proceeding, any of the members of the class are entitled to “opt out” and represent themselves. The question in this case is how statutes of limitations work in that situation. Does the filing of the main class action count as the filing for the individual that opts out or does the party that wants to opt out have to file its own complaint before the deadline? The Supreme Court has addressed a similar question before, in its 1974 decision in American Pipe & Construction v. Utah. The court held in that case that the class complaint did count as the claim of the individual claimants for purposes of statutes of limitation; specifically, it held that the class complaint “tolled,” or suspended, the statute of limitations so that the individual’s later complaint was timely.

The securities laws include two different kinds of filing deadlines. Specifically, for claims about misrepresentations in connection with the issuance of securities (under Section 11 of the Securities Act), Section 13 establishes two distinct deadlines: a one-year deadline running from the “discovery of the untrue statement” and an outside three-year deadline running from the date on which the statement was made. The U.S. Court of Appeals for the 2nd Circuit consistently has held that tolling under American Pipe applies only to the one-year deadline, not the three-year deadline. Applying that rule, it barred the action brought in this case by CalPERS – which opted out of a large class action brought against Lehman Brothers. The original action was brought in a timely manner, but CalPERS did not opt out of that action until more than three years after the challenged statements.

Kennedy’s opinion for the court affirms the 2nd Circuit’s decision, treating the case as directly governed by Kennedy’s 2014 opinion for the court in CTS Corp. v. Waldburger, which outlined a firmly bounded framework for analyzing statutes of limitation and statutes of repose. Repeatedly quoting from Waldburger, Kennedy explains:

Statutes of limitation are designed to encourage plaintiffs “to pursue diligent prosecution of known claims.” … In contrast, statutes of repose are enacted to give more explicit and certain protection to defendants. … For this reason, statutes of repose begin to run on “the date of the last culpable act or omission of the defendant.”

In this case, the opinion explains, the statute “in clear terms” bars any action more than three years after the offering, “admits of no exception[,] and on its face creates a fixed bar against future liability.” For the majority, then, the statute’s tie to “the defendant’s last culpable act [rather than] the accrual of the claim … is close to a dispositive indication that the statute is one of repose.”

Once the opinion has adopted the Waldburger framework and concluded that the three-year deadline is a statute of repose, the idea that tolling should extend the deadline has little chance of success. As Kennedy sees it, equitable tolling of a statute of repose is almost nonsensical: “In light of the purpose of a statute of repose, the provision is in general not subject to tolling,” especially “customary tolling rules arising from the equitable powers of courts. … The unqualified nature of [a statute of repose] supersedes the court’s residual authority and forecloses the extension of the statutory period based on equitable principles.” Turning to the specific tolling rule before the court, Kennedy notes that because the “tolling rule applied in American Pipe … was grounded in the traditional equitable powers of the judiciary,” it “does not apply to the 3-year bar mandated in § 13.” “[T]he object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity.”

The opinion acknowledges the practical concerns that CalPERS emphasized in its briefing – that a rule that bars tolling will force sophisticated litigants to file large numbers of separate protective complaints even before they decide to opt out – but takes the position that those concerns “likely are overstated,” pointing to the absence of “any recent influx of protective filings in the Second Circuit, where the rule affirmed here has been the law since 2013.”

The opinion closes with a coda offering a page of classic Kennedy prose, noting the strong interests on both sides of the case:

Tolling may be of great value to allow injured persons to recover for injuries that, through no fault of their own, they did not discover because the injury or the perpetrator was not evident until the limitations period otherwise would have expired. This is of obvious utility in the securities market, where complex transactions and events can be obscure and difficult for a market participant to analyze or apprehend. …

The purpose of a statute of repose, on the other hand, is to allow more certainty and reliability. These ends, too, are a necessity in a marketplace where stability and reliance are essential components of valuation and expectation for financial actors.

Having made it clear to the reader that the court has taken note of those interests, the opinion closes by distancing itself from any obligation to resolve the tension between them. Thus, reiterating what the early pages had made clear, the majority describes the appropriate analysis as a “straightforward” application of a statute that “displaces the traditional power of courts to modify statutory time limits in the name of equity.” If anybody is going to take action to lessen the practical obstacles of class actions, it will have to be Congress.

The most obvious take on CalPERS is to file it as another in the continuing line of cases reflecting a general skepticism about the social value of large-scale class-action litigation. In case of doubt, the “tie” in those cases seems always to go to the class-action defendants. There surely is a bit of truth in that view, but on a broader jurisprudential front I would add just a note about the parallelism between the decision here and the recent decisions in Petrella v. Metro-Goldwyn-Mayer and SCA Hygiene Products v. First Quality Baby Products. The two earlier cases involved the statutes of limitations in intellectual property cases – Petrella under the Copyright Act and SCA Hygiene under the Patent Act. In both cases, the court rejected the use of laches to bar cases filed before the expiration of a statute of limitations in a federal statute. Although the earlier cases gave plaintiffs longer to sue (ensuring that they got the entire statutory limit) and this one makes it harder to sue (firmly holding plaintiffs to the statutory limit), all three of the cases show a court receding from the business of case-by-case equitable decisions about the timeliness of litigation. I will not be at all surprised to see more of these kinds of cases rising to the top of the court’s docket in the next few years.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioner in this case. The author of this post, however, is not affiliated with the firm.]

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Opinion analysis: Justices reject California courts’ jurisdiction over claims by out-of-state litigants against out-of-state defendants

Opinion analysis: Justices reject California courts’ jurisdiction over claims by out-of-state litigants against out-of-state defendantsThe court’s decision this morning in Bristol-Myers Squibb v. Superior Court of California could hardly surprise anybody who noticed the court’s near-unanimous ruling last month in BNSF Railway Co. v. Tyrrell, which reaffirmed the justices’ commitment to the limitations on state-court jurisdiction announced a few years ago in Daimler AG v. Bauman. The issues in […]

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Opinion analysis: Justices reject California courts’ jurisdiction over claims by out-of-state litigants against out-of-state defendants

The court’s decision this morning in Bristol-Myers Squibb v. Superior Court of California could hardly surprise anybody who noticed the court’s near-unanimous ruling last month in BNSF Railway Co. v. Tyrrell, which reaffirmed the justices’ commitment to the limitations on state-court jurisdiction announced a few years ago in Daimler AG v. Bauman. The issues in these cases are so closely related that it would have been remarkable if the court had not reversed the decision of the California Supreme Court.

Today’s decision involves litigation by several hundred individuals from 33 states (along with 86 California residents) seeking compensation for injuries associated with the Bristol-Myers drug Plavix. Although Bristol-Myers has extensive contacts with California, little about the claims of these particular plaintiffs involves California: Bristol-Myers did not develop or manufacture the drug in California and there is no reason to think that marketing, promotion or distribution in California was involved in the injuries of the out-of-state plaintiffs. The only way in which the nonresidents’ claims relate to California is that the marketing and promotion of the pharmaceutical was conducted on a nationwide basis: The same advertising and distribution arrangements that reached the out-of-state plaintiffs also reached the in-state plaintiffs (who plainly can sue in California courts).

Traditionally, the court has considered cases of this type under a two-part framework. Under the first part of the framework, the court has permitted state courts to assert “general” jurisdiction over all claims against companies that are so pervasively active in a particular state as to make it seem reasonable to hold them accountable in that state for all of their behavior, wherever it occurs. Under the second part of the framework, the court has permitted state courts to assert “specific” jurisdiction over defendants only if the claims are related to the defendants’ contacts with the particular state. The 2014 decision in Daimler AG was important because it held that general jurisdiction for the most part is limited to a corporation’s home state. All agree that California cannot assert general jurisdiction over Bristol-Myers under Daimler AG.

In this case, the California Supreme Court held that because Bristol-Myers has such substantial contacts with California, it was appropriate for the California courts to exercise specific jurisdiction over the nonresidents’ claims against Bristol-Myers even though the relation between the claims of the nonresidents and the activities of Bristol-Myers in California was elusive. The briefing and argument suggested that several of the justices regarded this as an effort to circumvent the limits Daimler AG imposed on state-court jurisdiction. The opinion of Justice Samuel Alito for eight of the nine justices (all but Justice Sonia Sotomayor) suggests that this concern dominated the court’s resolution of the matter.

Justice Alito’s opinion explains that the approach of the California court “is difficult to square with our precedents,” in large part because it “resembles a loose and spurious form of general jurisdiction.” To the Supreme Court, a simple recitation of the salient facts demonstrates the failure of the California court to “identif[y] any adequate link between the State and the nonresidents’ claims”:

[T]he nonresidents were not prescribed Plavix in California, did not purchase Plavix in California, did not ingest Plavix in California, and were not injured by Plavix in California. The mere fact that other plaintiffs were prescribed, obtained, and ingested Plavix in California—and allegedly sustained the same injuries as did the non-residents—does not allow the State to assert specific jurisdiction over the nonresidents’ claims.

The opinion does not ignore the practical consequences of the limitation on state-court jurisdiction, but the justices seem persuaded that their rejection of the California courts’ authority “will not result in the parade of horribles that [the nonresident plaintiffs] conjure up.” To illustrate the point, the opinion closes by offering three specific ways in which the litigation could proceed notwithstanding this decision:

Our decision does not prevent the California and other out-of-state plaintiffs from joining together in a consolidated action in the States that have general jurisdiction over BMS. …. Alternatively, the plaintiffs who are residents of a particular State—for example, the 92 plaintiffs from Texas and the 71 from Ohio—could probably sue together in their home States. In addition, since our decision concerns the due process limits on the exercise of specific jurisdiction by a State, we leave open the question whether the Fifth Amendment imposes the same restrictions on the exercise of personal jurisdiction by a federal court.

There is every reason to think that the events of this term reflect a consolidation of perspective. Justice Sonia Sotomayor was the lone dissenter in this case and in Tyrrell. Also, because this case was argued in April after the confirmation of Justice Neil Gorsuch, we can see from his joinder here that he will not be leading a charge to reshape this area of the law. In sum, plaintiffs’ attorneys seeking a forum for mass actions probably need to accept the reality that the defendant’s home jurisdiction often will be the only state-court forum for a consolidated nationwide suit.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. The author of this post, however, is not affiliated with the firm.]

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Opinion analysis: Justices reject lax rule permitting free review of decisions denying class certification

Opinion analysis: Justices reject lax rule permitting free review of decisions denying class certificationWhen you see headlines announcing a major Supreme Court decision in a case called Microsoft v. Baker, you might expect another foray into the law of patents. This one, though, involves class actions, and the court’s decision reflected a unanimous vote (sans Justice Neil Gorsuch, who joined the bench after the oral argument) rejecting the […]

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Opinion analysis: Justices reject lax rule permitting free review of decisions denying class certification

When you see headlines announcing a major Supreme Court decision in a case called Microsoft v. Baker, you might expect another foray into the law of patents. This one, though, involves class actions, and the court’s decision reflected a unanimous vote (sans Justice Neil Gorsuch, who joined the bench after the oral argument) rejecting the U.S. Court of Appeals for the 9th Circuit’s tolerance of a litigation tactic involving procedures for class certification.

Traditionally, federal courts of appeal cannot review anything a district court does until it issues a final decision. When plaintiffs try to bring a class action, litigating as a group, the claims of individual plaintiffs survive even when a district court refuses to certify a case for adjudication as a class. Thus, a district court 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 class relief.

For many years, the lower federal courts tolerated those appeals, reasoning that the certification decision was the “death knell” of the litigation, and concluding with an air of pragmatism that a death-knell order was close enough to a final order to justify an immediate appeal. The Supreme Court, though, in a landmark 1978 decision (Coopers & Lybrand v Livesay), rejected that doctrine, holding that because a district court’s denial of class certification is not final, plaintiffs cannot appeal from such a ruling. To complete the context for the present dispute, the Supreme Court in 1998 approved a revision of the federal rules of civil procedure (Rule 23(f)), which mitigated Coopers & Lybrand slightly, giving plaintiffs a narrow route for appeal of those orders, limited to cases in which the court of appeals consents.

During the 20 years since the adoption of Rule 23(f), plaintiffs have developed a new strategy for appealing denials of class certification even without the consent of the court of appeals. Under that strategy, the plaintiffs respond to a denial of class certification with a voluntary agreement to dismiss their claims. With that dismissal in hand, they claim they have a final order that they can appeal to the court of appeals, planning to revive their claims if the court of appeals reverses the district court and holds that class-based adjudication is proper. Although several of the courts of appeals have rejected that tactic, it has been successful in the 9th Circuit.

Microsoft v. Baker brought that arrangement before the court, and not one of the eight participating justices approved it. Microsoft’s strategy was to emphasize the inconsistency of characterizing the district court’s decision as final while retaining the right to pursue the individual claims after an appeal. Microsoft argued that if the district court’s decision did in fact finally dismiss the claims of the plaintiffs, then the litigation had to end because the plaintiffs no longer had any live claim that would present a case suitable for adjudication by a federal court. On the other hand, if the plaintiffs’ claims were still live, then the district court’s decision wasn’t really final, so the plaintiffs should not be allowed to pursue an appeal. The questioning of the justices at the argument was so unremittingly hostile to the position of the plaintiffs that the only question seemed to be which of the two routes the justices would take to rejecting the decision of the 9th Circuit. Yesterday’s opinions answer that question: A bare majority of five hold that the district court’s decision was not final (with Justice Ruth Bader Ginsburg writing for the majority); the other three justices (Justice Clarence Thomas, joined by Chief Justice John Roberts and Justice Samuel Alito) hold that the dismissal deprived the plaintiffs of any interest in further adjudication.

Ginsburg’s opinion rests the court’s decision on a structural argument, that the voluntary-dismissal strategy was an impermissible effort to avoid the framework established by Coopers & Lybrand and Rule 23(f) allowing plaintiffs to appeal a denial of class certification if, but only if, the court of appeals permits an appeal. Because the 9th Circuit in this case refused to permit the appeal under Rule 23(f), the plaintiffs’ later efforts to gain appellate review should have been unavailing. Thus, in the view of the court, the plaintiffs’ “dismissal device subverts the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed.”

The opinion emphasizes that the most important consideration – “‘[o]f prime significance to the jurisdictional issue before us’” – is the likelihood that the “tactic [will] undercu[t] Rule 23(f)’s discretionary regime.” Embracing the rulemaking process that it supervises, the court explains that any further “changes” to the procedures for appeals in this area “are to come from rulemaking, however, not judicial decisions in particular controversies or inventive litigation ploys. In this case, the rulemaking process has dealt with the matter, yielding a ‘measured, practical solutio[n]’ to the questions whether and when adverse certification orders may be immediately appealed.”

Summarizing its conclusion in categorical terms that contemplate no further strategic circumvention, the opinion concludes that “[p]laintiffs in putative class actions cannot transform a tentative interlocutory order … into a final judgment … simply by dismissing their claims with prejudice – subject, no less, to the right to ‘revive’ those claims if the denial of class certification is reversed on appeal.”

Although the opinion certainly provides the last (even “final”) word in rejecting the strategy that it addresses, it underscores a closely related problem that has been festering in the court’s decisions for the last several years: the ability of defendants to engineer the resolution of a class action by settling the claims of the named plaintiffs. The three concurring justices here held that a class action cannot survive a settlement of the individual claims of the named plaintiffs, while the majority did not address that question. Last year’s decision in Campbell-Ewald v. Gomez held that a settlement offer does not moot the claims if the plaintiff does not accept it, at least if it is not sufficiently robust and unqualified to remove any controversy with the plaintiffs. It is fair to say that the effect of individual settlements on the continued litigation of a class action is one that the court will face again soon.

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Opinion analysis: Gorsuch’s first opinion confirms exemption of debt buyers from Fair Debt Collection Practices Act

Opinion analysis: Gorsuch’s first opinion confirms exemption of debt buyers from Fair Debt Collection Practices ActThis morning brought the first opinion from Justice Neil Gorsuch, explaining the decision of a unanimous court in Henson v. Santander Consumer USA that the Fair Debt Collection Practices Act does not apply to debt buyers – entities that buy and collect defaulted consumer debt. Perhaps this was not Gorsuch’s favorite case of the April […]

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Opinion analysis: Gorsuch’s first opinion confirms exemption of debt buyers from Fair Debt Collection Practices Act

This morning brought the first opinion from Justice Neil Gorsuch, explaining the decision of a unanimous court in Henson v. Santander Consumer USA that the Fair Debt Collection Practices Act does not apply to debt buyers – entities that buy and collect defaulted consumer debt. Perhaps this was not Gorsuch’s favorite case of the April argument calendar; it was the first argument in which he did not ask a question. But it does present the customary criteria for a first opinion: a unanimous decision in a case lacking great controversy. What makes the opinion more important than the decision it reflects is its first glimpse of Gorsuch’s style: Does it tell us anything useful about the approach he will take to drafting his opinions? Obviously one unanimous majority opinion in a straightforward statutory case is a small and unrepresentative sample, but at the risk of over-reading today’s offering, I would suggest that the two most salient features of this particular opinion are an effort to craft memorable prose – some may regard it as purple – and a commitment to taking seriously all of the arguments of the losing party.

As suggested above, the case presents a basic question under the Fair Debt Collection Practices Act: whether the statute applies to the recently emerging industry of “debt buyers,” large entities that purchase the debts they collect instead of limiting themselves to providing collection services to the lenders that originated the defaulted obligations. The dispute turns on the oddity that the statute regulates debt collection, but only by debt collectors, not the originators of the debt. Sensibly or not, Congress decided that federal supervision was appropriate not for original lenders, but only for third-party collectors arguably less likely to have an ongoing relationship with the debtor. This case involves neither of those groups, but rather an entity that (at least for the customers involved here) buys debts previously originated by others and then collects them on its own behalf.

We are alerted to our author’s self-conscious styling by the opinion’s alliterative opening reference to the “[d]isruptive dinnertime calls [and] downright deceit [that] drew Congress’s eye to the debt collection industry,” resulting in a statute that authorizes “weighty fines … to deter wayward collection practices.” Literary devices aside, the opinion’s treatment of the statutory question is direct and comprehensive. Noting that the statute limits its coverage to those that collect debts “owed … another,” the opinion all but resolves the controversy in a single paragraph, explaining that

by its plain terms this language seems to focus our attention on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself. Neither does this language appear to suggest that we should care how a debt owner came to be a debt owner — whether the owner originated the debt or came by it only through a later purchase.

Having offered an affirmative reading of the statute, the opinion turns to the core textual argument of the borrowers, who “observe that the word ‘owed’ is the past participle of the verb ‘to owe.’ And this, they suggest, means the statute’s definition of debt collector captures anyone who regularly seeks to collect debts previously ‘owed … another.’” As the opinion explains, the central submission of the borrowers is that Congress “would have used the present participle ‘owing’” if Congress had intended that “you must collect debts currently ‘owing … another’ before implicating the Act.” Having generously offered nearly half a page of text setting out the borrower’s argument, Gorsuch proceeds to dismiss it out of hand as inconsistent with the “ordinary meaning” of our common speech. As he sees it, “[p]ast participles like ‘owed’ are routinely used as adjectives to describe the present state of a thing—so, for example, burnt toast is inedible, a fallen branch blocks the path, and (equally) a debt owed to a current owner may be collected by him or her.” Perhaps offering a lifeline to readers who might find the discussion of “tenses” and “participles” a bit elevated, he underscores the point with a folksy (though perhaps not precisely on-point) example: “Just imagine if you told a friend that you were trying to ‘collect a debt owed to Steve.’ Doesn’t it seem likely our friend would understand you as speaking about a debt currently owed to Steve, not a debt Steve used to own and that’s now actually yours.” Although the tone makes the anecdote disarming, it might match the interpretive question more closely if the author had you ask how surprised your friend would be to learn that you had chosen those words (“owed to Steve”) to describe a debt previously but no longer owned by Steve.

At that point, many (if not most) of the present justices might feel that enough had been said to justify the court’s understanding of the statutory language. Gorsuch’s opinion, though, continues for an additional four pages addressing with care several additional minor points adduced by the borrowers to support their position. Because it would surprise no reader of the opinion (or of this entry) to learn that none of those points undermined the author’s confidence in the first-stated understanding of the statute, I think I can safely spare the reader any further discussion of them.

After disposing of the statutory points, the opinion turns pointedly to what it treats as completely separate questions of “policy,” noting that “from the beginning that is the field on which th[e borrowers] seem most eager to pitch battle.” As the opinion explains, the borrowers argue that Congress in the original statute

excluded loan originators from the Act’s demands because it thought they already face sufficient economic and legal incentives to good behavior. But … Congress never had the chance to consider what should be done about those in the business of purchasing defaulted debt. … Had Congress known this new industry would blossom, th[e borrowers] say, it surely would have judged defaulted debt purchasers more like … independent debt collectors.

Just as it does in its treatment of the borrowers’ statutory contention, the opinion follows the lengthy summary of the borrowers’ argument with an abrupt rejection. The opinion explains that “[a]ll of this seems to us quite a lot of speculation. And while it is of course our job to apply faithfully the law Congress has written, it is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced.” Working its way up to a charged conclusion, the opinion acknowledges that “reasonable people can disagree with how Congress balanced the various social costs and benefits in this area,” and also admits the possibility of “reasonable disagreements on whether Congress should reenter the field and alter the judgments it made in the past,” given the frequency with which “new business models … emerge in response to regulation,” and with which “regulation in turn … address[es] new business models.” With that backdrop set, the opinion closes with what surely is intended to be a memorable rhetorical flourish: “Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People’s representatives.”

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, was among the counsel to the petitioner in this case. The author of this post, however, is not affiliated with the firm.]

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Opinion analysis: Justices unanimously uphold ERISA exemption for church-affiliated pension plans

Opinion analysis: Justices unanimously uphold ERISA exemption for church-affiliated pension plansThe justices’ decision today in Advocate Health Care Network v. Stapleton resolves a question of considerable significance for the world of pension plans: whether the church-affiliated hospitals that play such a major role in our health-care system must comply with the Employee Retirement Income Security Act, which includes an array of rules designed to ensure […]

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Opinion analysis: Justices unanimously uphold ERISA exemption for church-affiliated pension plans

The justices’ decision today in Advocate Health Care Network v. Stapleton resolves a question of considerable significance for the world of pension plans: whether the church-affiliated hospitals that play such a major role in our health-care system must comply with the Employee Retirement Income Security Act, which includes an array of rules designed to ensure the solvency of pension plans and otherwise protect the plans’ beneficiaries. On the one hand, exempting those plans from ERISA exposes the hospitals’ employees to the catastrophe of making career-long contributions to a pension plan that is insolvent by the time they retire – a catastrophe from which ERISA has protected almost all of us for nearly half a century. On the other hand, because compliance is expensive, extending those rules to church-affiliated hospitals would raise the costs of health care at a time when the need for cost containment in the health-care industry could hardly be more pressing. Justice Elena Kagan’s opinion for a unanimous court of eight justices (the case having been argued before Justice Neil Gorsuch joined the court) sidesteps those issues entirely, resting directly on the language of ERISA.

Justice Kagan with opinion in Advocate Health Care Network (Art Lien)

The case turns on a provision of ERISA that always has exempted any plan “established and maintained for its employees by a church.” Shortly after the adoption of ERISA, the IRS held that the exemption did not reach hospitals established by an order of Catholic nuns, reasoning that the hospitals did not involve “religious functions.” Congress responded with a 1980 amendment to ERISA that broadened the church-plan exemption, stating 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.”

Even the casual reader will observe two features of that language: The statute exempts a plan maintained by a church only if the church established it; and the statute as revised exempts a plan established by a church and maintained by an affiliated organization. The question, though, is whether the exemption reaches a plan that the affiliated organization maintains even if that plan was not established by a church. That is not merely a detail; the plans so common in the health-care industry commonly were established by the affiliated organizations rather than the churches themselves.

Although it seems odd to think that an exemption with churches at the core should exempt church-maintained plans only if they are established by churches but exempt affiliate-maintained plans without regard to their provenance, the court plainly decided to take Congress at its word. With a presentation you would expect to have seen on a PowerPoint slide in one of Kagan’s class sessions from her days as a law professor, the opinion portrays the question of statutory reading as “a simple logic problem”:

Premise 1: A plan established and maintained by a church is an exempt church plan.

Premise 2: A plan established and maintained by a church includes a plan maintained by [an affiliated] organization.

Deduction: A plan maintained by [an affiliated] organization is an exempt church plan.

In sum, “[b]ecause Congress deemed the category of plans ‘established and maintained by a church’ to ‘include’ plans ‘maintained by’ [affiliates], those plans – … all those plans – are exempt from ERISA’s requirements.”

Surely the biggest hurdle that the employees faced was the apparent oddity of the language Congress adopted to extend the church-plan exemption. If the employees were correct – that Congress intended to burden affiliate-maintained plans with the same establishment requirement as church-maintained plans – you would expect Congress to have said that for purposes of the church exemption the reference to “a plan maintained by a church includes a plan established and maintained by [an affiliate].” But Congress’ statement that “a plan established and maintained by a church includes a plan maintained by [an affiliate]” is so odd that it is difficult to credit the idea that its failure to “adopt that ready alternative” was simply a mistake. Exaggerating somewhat, Kagan quips that “the employees ask us to treat those words as stray marks on a page – notations that Congress regrettably made but did not really intend. Our practice, however, is to give effect, if possible, to every clause and word of a statute.”

At bottom, the employees needed to persuade the justices that waiving the establishment requirement for affiliate-maintained plans was not simply odd (as I characterized it above), but so bizarre that the justices should walk away from a straightforward reading of the language. The opinion explains, though, that the briefing and argument did not convince the court that reading the statute literally had “the contextual implausibility – the ‘Congress could not have meant that’ quality” – necessary to dislodge the justices from the path of least resistance.

It shows how far the court has moved in the still-nascent post-Scalia epoch that an opinion can justify its sense of what Congress could and could not have meant by reference to legislative history, without a single word of objection or qualification. In a passage that would have been remarkable in a unanimous opinion a few short years ago, Kagan reports that “everything we can tell from extra-statutory sources about Congress’s purpose … supports our reading of its text.” To be sure, the opinion’s tack is to suggest that the legislative history is unhelpful rather than to say that the legislative history is affirmatively persuasive:

We say ‘everything we can tell’ because in fact we cannot tell all that much. The legislative materials in these cases consist almost entirely of excerpts from committee hearings and scattered floor statements by individual lawmakers – the sort of stuff we have called ‘among the least illuminating forms of legislative history.’ And even these lowly sources speak at best indirectly to the precise question here.

I suspect, though, that Kagan’s willingness to include a two-page interlude analyzing the vagaries of those materials would have prompted a curt rejoinder from Justice Antonin Scalia characterizing the exercise as a waste of time. The opinion does have a bright side for Scalia fans — the fifth citation already this term for the treatise on “Reading Law” that Scalia wrote with Bryan Garner (up from two citations during Scalia’s last term on the bench).

I should close by mentioning that this ruling extends Lisa Blatt’s unparalleled won-lost record before the justices to a glittering 33-2. It may not, though, bring a conclusive end to the efforts of employees to bring these hospitals within ERISA. Although Justice Sonia Sotomayor joined Kagan’s opinion and commented that she “agree[s] … that the statutory text compels today’s result,” she wrote separately to emphasize the debatable-at-best policy implications of the decision. Among other things, she pointedly notes that “organizations such as petitioners operate for-profit subsidiaries, employ thousands of employees, earn billions of dollars in revenue, and compete in the secular market with companies that must bear the cost of complying with ERISA. … This current reality might prompt Congress to take a different path.” On that point, of course, only time will tell.

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Opinion analysis: Federal Circuit loses again, as justices categorically reject enforcement of post-sale patent restrictions

Looking for a landmark ruling on patent exhaustion, the patent community got just that in the Supreme Court’s decision this morning in Impression Products, Inc. v Lexmark International, Inc. The court has been deciding a steady diet of patent cases for much of the last decade and has been rejecting the U.S. Court of Appeals […]

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Looking for a landmark ruling on patent exhaustion, the patent community got just that in the Supreme Court’s decision this morning in Impression Products, Inc. v Lexmark International, Inc. The court has been deciding a steady diet of patent cases for much of the last decade and has been rejecting the U.S. Court of Appeals for the Federal Circuit’s rulings in those cases almost routinely; the Federal Circuit is now 0 for 5 in the current term, by far the worst record of any of the federal courts of appeals. Most of those decisions reflect a cautious reluctance on the part of the court to say more than is necessary to decide the case before it, founded on an evident reluctance to wreak far-reaching and destabilizing consequences on the innovative markets for which patent doctrine is so important. In this case, by contrast, the opinion of Chief Justice John Roberts displays a confident and assertive verve, full of quotable maxims certain to populate the U.S. Reports for decades to come. More surprisingly, the opinion attracted the votes of all the eight active justices except for Justice Ruth Bader Ginsburg (who dissented only from the court’s resolution of the cross-border question discussed at the end of the post).

The Supreme Court bench, with Justice Breyer absent, as opinions are announced in four cases (Art Lien)

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, supported by a quarter-century of Federal Circuit precedent, 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 court could hardly have been more unequivocal in its broad embrace of a mandatory doctrine of exhaustion. For the court, the doctrine seemed to devolve ineluctably from the first principles of the law of patents:

When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership. A patentee is free to set the price and negotiate contracts with purchasers, but may not, by virtue of his patent, control the use or disposition of the product after ownership passes to the purchaser. The sale terminates all patent rights to that item.

The court praised the “impeccable historic pedigree” of the exhaustion doctrine, tracing its lineage back to the common law’s refusal to permit restraints on the alienation of chattels.” With a flourish of rhetorical excess, the court suggested that post-sale conditions on alienation “have been hateful to the law from Lord Coke’s day to ours and are obnoxious to the public interest. The inconvenience and annoyance to the public that an opposite conclusion would occasion are too obvious to require illustration.”

Dialing down the tone a bit, the court went on to add wryly that “an illustration never hurts,” following up with a folksy anecdote about “a shop that restores and sells used cars.” For the justices, that “business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles.” Uninfluenced by the claims in the briefing that more reticulated contracting structures are integral to modern technology industries, the court concluded that “extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain.” The court pointedly noted that “increasingly complex supply chains [well might] magnify the problem,” offering a citation to an amicus brief suggesting that a “generic smartphone … could practice an estimated 250,000 patents.”

The court underscored its uncompromising vision of exhaustion in a section of the opinion explaining that the Federal Circuit “got off on the wrong foot” when it characterized exhaustion as “a default rule” that “presumptively grants authority to use [an item] and resell it.” For the court, any suggestion of a “presumptive” aspect of exhaustion is far too tentative:

The misstep in this logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on the scope of the patentee’s rights. The right to use, sell or import an item exists independently of the Patent Act. What a patent adds … is a limited right to prevent others from engaging in those practices. Exhaustion extinguishes that exclusionary power.

The opinion also dismissed the idea (prominent in Federal Circuit jurisprudence) that “it would make little sense to prevent patentees from [imposing post-sale restrictions] when they sell directly to consumers” if they easily can use a license to accomplish the same thing. The court agreed that restrictions a patentholder imposes in a license are enforceable under patent law, but it explained that this is true only “because a license does not implicate the same concerns about restraints on alienation as a sale.” Returning again to its focus on the objects that embody the patented invention, the court explained:

Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly. … Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.

But enforcing licensing restrictions, the court cautioned, could not be permitted to interfere with the free flow of commerce. Any sale of goods permitted by a license must be treated “for purposes of patent exhaustion, as if the patentee made the sale itself. The result: The sale exhausts the patentee’s rights in that item.”

As it happens, the case involved cartridges sold by Lexmark both in the United States and overseas. The overseas transactions present a harder problem because of the court’s recent efforts to limit the extraterritorial effect of United States statutes. Viewed through the lens of that effort, there is something incongruous about holding that a foreign sale exhausts the rights of a patentholder to enforce its patent with regard to activity in the United States. As you might expect from the tone of the passages summarized above, that problem did not long detain the court, which unambiguously held that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”

Sidestepping the general question of extraterritorial interpretation, the court instead pointed to its 2013 decision in Kirtsaeng v. John Wiley & Sons holding that the exhaustion doctrine of copyright law (the “first sale” doctrine) “applies to copies of a copyright work lawfully made and sold abroad.” In a passage that surely will grate on the sensibilities of the intellectual-property scholars who spend so much time writing and teaching about the foundational distinctions between copyright and patent protections, the court concluded that “differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense,” because the two “share a strong similarity and identity of purpose,” and “many every day products … are subject to both patent and copyright protections.” Resuming the high-flown tone of the early parts of the opinion, the court rested its decision on “a historic kinship between patent law and copyright law,” a “bond [that] leaves no room for a rift on the question of international exhaustion.”

Finally, with considerable repetition of its earlier discussion, the court emphasized the apparently self-evident fairness of a rule of international exhaustion that leaves complete control in the hands of the purchaser:

A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate for the article and the invention which it embodies. … [T]he right to exclude just ensures that the patentee receives one reward – of whatever amount the patentee deems to be satisfactory compensation – for every item that passes outside the scope of the patent monopoly.

It is hard for anybody to claim surprise when the Supreme Court rests an all-but-unanimous reversal of the Federal Circuit on the failure of that court to bring patent law into conformity with broad and general jurisprudential norms. Nor is it a surprise that the court rebuffed yet another of Lexmark’s efforts to limit the aftermarket for its print cartridges; the last time Lexmark was before the court it lost 9-0 on a Lanham Act issue arising out of the same cartridge program. Still, as with so many areas of the Federal Circuit’s jurisprudence, the Supreme Court has stayed its hand from considering this problem for a generation, leaving the high-tech community to develop increasingly intricate patterns of contracting, all premised on the enforceability of regimes of post-sale patent enforcement. The 16 amicus briefs filed in support of Lexmark document the far-ranging reliance on those devices.

In the end, though, the opinion shows a Supreme Court persuaded that the Federal Circuit did not merely err in some detail or nuance, but was as fundamentally misguided as it was when it came up with the venue rules discarded just last week in TC Heartland LLC v. Kraft Foods Group Brands, LLC. At bottom, when the court is minded to destroy the status quo, it knows how to do it, and this opinion provides a textbook exemplar. It will take years before we can observe the transactional structures that will emerge to protect the interests that have relied on the Federal Circuit’s lax rules about patent exhaustion. About the only thing we can say about them is that it will be harder, much harder, to implement them than it was before this sure-to-be-landmark decision.

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Opinion analysis: Justices rein in Federal Circuit’s lax rules on patent venue

Opinion analysis: Justices rein in Federal Circuit’s lax rules on patent venueWhere have I read this before: U.S. Court of Appeals for the Federal Circuit – patent-holding plaintiffs win; Supreme Court – corporate defendants win. The Supreme Court struck yet another blow against the expertise of the Federal Circuit, the specialized appellate court for patent cases, with Monday morning’s opinion in TC Heartland LLC v. Kraft […]

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Opinion analysis: Justices rein in Federal Circuit’s lax rules on patent venue

Where have I read this before: U.S. Court of Appeals for the Federal Circuit – patent-holding plaintiffs win; Supreme Court – corporate defendants win. The Supreme Court struck yet another blow against the expertise of the Federal Circuit, the specialized appellate court for patent cases, with Monday morning’s opinion in TC Heartland LLC v. Kraft Foods Group Brands, rejecting the rules on patent venue that the Federal Circuit has been administering for more than 25 years. The odd part of it is that this time it was the Federal Circuit saying that patent litigation should look more like conventional litigation and the Supreme Court saying that patent litigation needs to have special rules different from the rules of ordinary civil cases. The Federal Circuit can’t win even when it decides that patent litigation should follow the well-developed rules of mainstream civil procedure!

To understand the issue dividing the Federal Circuit from the Supreme Court, a little background about federal civil procedure is useful. Generally speaking, modern venue statutes treat corporations as present in any state in which they conduct a substantial amount of business. Because venue rules generally permit a plaintiff to sue a defendant in any state in which it is present, that means that in general civil litigation, a plaintiff suing a large company that does business nationwide usually can pick just about any state that seems to provide a forum favorable to the plaintiff. That practice replaced an earlier 19th-century regime, in which corporations were treated as residing in (or “inhabiting”) only the single state in which they were incorporated.

For most of the 20th century, litigation involving patents proceeded on a different track, retaining the old limited-venue rule that permitted suits against corporate defendants only in the jurisdiction in which they were incorporated. The Supreme Court confirmed that regime in its 1957 decision in Fourco Glass v Transmirra Products. In that case, the Supreme Court held that the rules for corporate “residence” in a separate statute for patent venue (Section 1400(b)) should continue to apply narrowly notwithstanding Congress’ adoption of a broad conception of corporate venue in the general venue statute (Section 1391). In 1990, however, the Federal Circuit held that venue in patent cases should follow general venue rules, reasoning that congressional amendments to the general venue statute had superseded Fourco.

That all might sound overly technical, but it had a very tangible result: Since 1990 patent litigation under the Federal Circuit doctrine has become centralized in a single federal court in the Piney Woods in East Texas – where, the conventional wisdom has it, juries are likely to be favorable to patent-holders. Indeed, we know from the briefs that one-quarter of all patent cases nationwide in the last three years have been assigned to a single federal judge in that court sitting in the bustling community of Marshall, Texas. Plaintiffs have flocked to that forum and defendants have objected to the travesty of a procedural system under which “all roads lead to Marshall.”

As you would expect from an opinion authored by Justice Clarence Thomas, there is not even an allusion to the concerns that made this such a high-profile issue at the Federal Circuit. Instead, what we get is an opinion that is brief even by Thomas’ standards – not even ten pages. The opinion, joined by all of the justices except for Justice Neil Gorsuch (who joined the court shortly after the argument), turns on a single interpretive move, the adoption of a clear statement rule that calls for a “relatively clear indication … in the text” before the Supreme Court will read a statute as rejecting one of the court’s earlier statutory interpretation decisions. Thomas backed up his “relatively clear indication” standard with a lengthy quote from a treatise on “Reading Law,” co-written by Thomas’ late colleague Antonin Scalia, which explains that a “clear, authoritative judicial holding on the meaning of a particular provision should not be cast in doubt” simply because Congress has adopted some “related though not utterly inconsistent provision.”

Because the opinion already has explained in its summary of the facts that Fourco “definitively and unambiguously held that” the reference to a “reside[nce]” in Section 1400(b) “refers only to the State of incorporation,” the clear-statement rule is all that is required to resolve the case. Having recited that rule, the court needs only to note that Congress has never amended Section 1400(b) since the decision in Fourco and that “[t]he current version of § 1391 does not contain any indication that Congress intended to alter the meaning of § 1400(b) as interpreted in Fourco.” At that point, the outcome is clear.

Recognizing that the summary above is entirely pedestrian, I should adhere to standards of craft by mentioning at least one item of more particular interest from the opinion. For that purpose, I point the reader to footnote 2. Perhaps it says more about my day job teaching courses in commercial law than it does about the justices, but to me that footnote shows a court straining to decide a question that is not before it. As decided, the case involves the indisputably weighty question of where a corporation resides for venue purposes in patent cases. But the justices have decided that question in a case that clearly does not involve a corporate defendant. The defendant is “TC Heartland LLC.” As any second-year law student can tell you, a name that ends in “LLC” cannot be the name of a corporation but must instead be the name of a limited liability company, a wholly distinct type of business enterprise. Thomas notes in footnote 2 that the parties “suggest that petitioner is, in fact, an unincorporated entity.” We can only assume that this bland statement reflects an intentional effort at the ambiguity necessary to permit the court to reach the corporate question presented as opposed to a fundamental failure to understand the identity of the parties in this case. In any event, the footnote certainly will pave the way for further litigation about the venue status of the many non-corporate businesses involved in patent litigation, for whom a single-jurisdiction venue rule would be even more remarkable than it is for corporations.

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Opinion analysis: Justices approve filing stale claims in consumer bankruptcies

Opinion analysis: Justices approve filing stale claims in consumer bankruptciesA sharply divided Supreme Court yesterday held that debt collectors do not violate the Fair Debt Collection Practices Act when they file in a bankruptcy proceeding a claim for a debt that has become uncollectible because the statute of limitations has expired. Writing for a 5-3 majority (the case was argued before Justice Neil Gorsuch […]

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Opinion analysis: Justices approve filing stale claims in consumer bankruptcies

A sharply divided Supreme Court yesterday held that debt collectors do not violate the Fair Debt Collection Practices Act when they file in a bankruptcy proceeding a claim for a debt that has become uncollectible because the statute of limitations has expired. Writing for a 5-3 majority (the case was argued before Justice Neil Gorsuch arrived), Justice Stephen Breyer disposed of Midland Funding, LLC, v. Johnson in a short and antiseptic opinion. Explaining that the statute punishes conduct by debt collectors that is “false,” “deceptive,” “misleading,” “unconscionable” or “unfair,” the court’s opinion first explained why filing stale claims is not false, deceptive or misleading, and then why it is not unconscionable or unfair.

On the first point, the court essentially concluded that it is not misleading to file a time-barred claim in a bankruptcy proceeding because that obligation remains a “claim” for purposes of bankruptcy law. The opinion noted the court’s repeated statements that “Congress intended [when it adopted the Bankruptcy Code] to adopt the broadest available definition of ‘claim.’” It also emphasized that the statutory text directly recognizes the possibility that an obligation would be a “claim” even if it were unenforceable; specifically, the statute “says that, if a ‘claim’ is ‘unenforceable,’ it will be disallowed. It does not say that an ‘unenforceable’ claim is not a ‘claim.’”

The court went on to explain that “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense.” Against that historic practice, “we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.” Adding one last point, the court emphasized that “determin[ing] whether a statement is misleading normally requires consideration of the legal sophistication of its audience” and that the “audience in [consumer] bankruptcy cases includes a trustee … likely to understand [the importance of objecting to an untimely claim].”

The court acknowledged that it is “a closer question” whether filing a stale claim is unfair or unconscionable, but had no trouble disposing of that issue as well. The opinion noted that several lower courts have found it improper to enforce stale claims directly (by filing suit on them), largely based on the view that “a consumer might unwittingly repay a time-barred debt.” But for Breyer, those considerations should “have significantly diminished force in the context of a Chapter 13 bankruptcy.” The opinion made two main points. First, Breyer suggested that because the “consumer initiates [the bankruptcy] proceeding, … the consumer is not likely to pay a stale claim just to avoid going to court.” Second, the opinion pointed again to the “knowledgeable trustee” as a likely source of objections protecting the consumer.

Breyer closed with a structural point, describing the Bankruptcy Code as embodying a “delicate balance of a debtor’s protections and obligations” that would be “upset” by application of the FDCPA to create such a “new significant bankruptcy-related remedy” without any “language in the Code providing for it.” By “requir[ing] creditors … to investigate the merits of an affirmative defense (typically the debtor’s job to assert and prove),” the “upshot could well be added complexity, changes in settlement incentives, and a shift from the debtor to the creditor [of] the obligation to investigate the staleness of a claim.”

The opinion prompted a scorching dissent from Justice Sonia Sotomayor, joined by Justices Ruth Bader Ginsburg and Elena Kagan. Longer than the majority’s opinion, Sotomayor’s dissent summarized the immense market for consumer debt (“trillions of dollars”), and the recent rise of large-scale debt buyers who buy long-stale “debts for pennies on the dollar.” Noting that the Federal Trade Commission and the Consumer Financial Protection Bureau have pursued debt buyers (including the buyer involved in this case) with claims that their litigation of stale claims is “unfair” under the FTCPA, Sotomayor concluded that the [d]ebt collectors’ efforts to entrap consumers … have no place in honest business practice.” She ridiculed the court’s claim that routine trustee objections to these claims can be expected to limit their value, pointing out that the claims have monetary value only because of the possibility the trustee will forget to object to them. She closed with a rhetorical flourish: “It takes only the common sense to conclude that one should not be able to profit from the inadvertent inattention of others. It is said that the law should not be a trap for the unwary. Today’s decision sets just such a trap.”

The court’s high praise of the bankruptcy trustees is notable, though arguably a bit unrealistic. As Sotomayor noted in her dissent, the trustees’ trade association filed an amicus brief in support of the debtor, explaining the impractical burden of interposing objections to the flood of stale claims appearing in consumer bankruptcies in recent years. I have the strong sense that trustees as a group would have been happier with a little less laudatory description and a little more appreciation of the constrained resource setting in which they operate. As Justice Sotomayor noted, they’ll have to hope now for relief from Congress because they won’t be getting it from the courts.

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Opinion analysis: Justices rebuff Kentucky rule invalidating arbitration agreements signed under power of attorney

Opinion analysis: Justices rebuff Kentucky rule invalidating arbitration agreements signed under power of attorneyFor anybody who thought that the Supreme Court’s protective attitude toward arbitration agreements would differ in the absence of the late Justice Antonin Scalia, the decision this morning in Kindred Nursing Centers Limited Partnership v. Clark will come as a surprise. By a 7-1 margin, the court firmly rejected a Kentucky decision that adopted a […]

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Opinion analysis: Justices rebuff Kentucky rule invalidating arbitration agreements signed under power of attorney

For anybody who thought that the Supreme Court’s protective attitude toward arbitration agreements would differ in the absence of the late Justice Antonin Scalia, the decision this morning in Kindred Nursing Centers Limited Partnership v. Clark will come as a surprise. By a 7-1 margin, the court firmly rejected a Kentucky decision that adopted a clear-statement rule under which a general power of attorney, valid to authorize the execution of contracts generally, would not validly authorize execution of an arbitration agreement unless the power of attorney explicitly addressed that topic.

Resembling more than anything last term’s decision in DIRECTV, Inc. v. Imburgia, the opinion shows a Supreme Court bristling at the lack of candor shown by state courts that disagree with its favorable treatment of pre-dispute arbitration agreements. Doctrinally, the case is written as a routine application of the court’s existing rules holding that the Federal Arbitration Act obligates state courts to put arbitration agreements on an “equal footing” with other contracts and invalidates defenses that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

To the extent there is any new law in this case, it comes in the opinion’s explanation of the last point in the previous paragraph. As demonstrated in today’s decision, the court is now forbidding not only a law “prohibiting outright the arbitration of a particular type of claim,” but also “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” In this case, the Kentucky Supreme Court adopted a rule for all contracts that waive the “divine God-given right” to a jury trial, requiring “an explicit statement before an attorney-in-fact … could relinquish that right on another’s behalf.” Applying the rule summarized above, the Supreme Court held that the Kentucky decision must fall because the state court “adopt[ed] a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.” As the opinion puts it, “[s]uch a rule is too tailor-made to arbitration agreements—subjecting them, by virtue of their defining trait, to uncommon barriers.”

The Supreme Court’s emphatic quotation of the Kentucky court’s description of the religious underpinnings of the jury-trial right is just one indication that the justices are skeptical about the state court’s sincerity. For example, the opinion quotes the suggestion of the Kentucky court that the rule applied here “could also apply when an agent endeavored to waive other ‘fundamental constitutional rights’ held by a principal.” Writing for the majority, Justice Elena Kagan responds sarcastically: “But what other rights, really? No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.” Kagan also points out that “[n]othing in the decision below (or elsewhere in Kentucky law) suggests that explicit authorization is needed” for other agreements “relinquishing the right to go to court,” such as “a settlement agreement or consent to a bench trial.” The opinion takes that as “yet another indication that the [Kentucky] court’s demand for specificity in powers of attorney arises from the suspect status of arbitration rather than the sacred status of jury trials.” In summary, the opinion concludes, the Kentucky court’s unpersuasive protestations that its rule was neutral toward arbitration “only makes clear the arbitration-specific character of the rule, much as if it were made applicable to arbitration agreements and black swans.”

For me, the 7-1 vote was the most salient thing about this decision. All of the participating justices agreed except for Justice Clarence Thomas, who could not endorse the outcome based on his longstanding view that the FAA does not apply in state courts. By contrast, the vote last year in the quite similar case of Imburgia was 6-3. Perhaps the justices were motivated here less by their views about the FAA than by their views about the proper response to insincere state supreme courts.

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Argument analysis: Justices cautious about validating California court’s jurisdiction over claims by out-of-state litigants against out-of-state defendants

Tuesday morning’s argument in Bristol-Myers Squibb v. Superior Court of California brought the justices a case at the intersection of class actions and personal jurisdiction. The case involves litigation by several hundred individuals from 33 states (many, but not all of them, from California) for injuries associated with the Bristol-Myers drug Plavix. The question for […]

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Tuesday morning’s argument in Bristol-Myers Squibb v. Superior Court of California brought the justices a case at the intersection of class actions and personal jurisdiction. The case involves litigation by several hundred individuals from 33 states (many, but not all of them, from California) for injuries associated with the Bristol-Myers drug Plavix.

The question for the justices is whether California courts have the authority to adjudicate the claims brought against Bristol-Myers by individuals from other states. Although Bristol-Myers has extensive contacts with California, nothing about the claims of these particular plaintiffs involves California: Bristol-Myers did not develop or manufacture the drug in California and there is no reason to think that marketing, promotion or distribution in California was involved in the injuries of the out-of-state plaintiffs. The only way in which their claims relate to California is that the marketing and promotion of the pharmaceutical was conducted on a nationwide basis: The same advertising and distribution arrangements that reached the out-of-state plaintiffs were the ones that reached the in-state plaintiffs (who plainly can sue in California courts).

The justices were fully engaged, with pointed questions for advocates on both sides. The biggest problem for the defendant Bristol-Myers (represented by Neal Katyal) was the prospect of “piecemeal litigation,” a theme Justice Sonia Sotomayor reiterated throughout the argument. Her concern was that a constitutional rule preventing one forum from adjudicating all the claims against a single defendant would cast a shadow over commonplace procedural devices such as the class action and multidistrict litigation.

Neal K. Katyal for petitioner (Art Lien)

Katyal’s answer was that the rules for due process in federal courts and state court are quite different, emphasizing that federal courts, founded on national sovereignty, have an easy justification for nationwide service of process and the like, while state courts, founded on the limited territorial sovereignty of any particular state, have a much less easy time justifying the exercise of jurisdiction for nonlocal claims involving nonresidents. Justice Anthony Kennedy plainly agreed with that point, commenting that “there’s a different set of criteria [that] you apply” when assessing due process concerns at the two levels; “[t]he States are limited in their [ability to exercise] jurisdiction … nationwide, the Federal government isn’t.”

But Sotomayor was far from satisfied. As she stated, “I have no idea how you draw that [state-federal] line.” Sotomayor’s questioning was particularly pointed during the presentation of Rachel Kovner, an assistant to the U.S. solicitor general who argued in support of Bristol-Myers. For example, positing a hypothetical about a foreign defendant, Sotomayor pointed out that “[u]nder your theory, [a] foreign corporation might be sued in the particular State in which an injury occurred. But since it has no home State in the United States, that means that in that situation, there’s no place for plaintiffs to come together and sue that person, correct?” Similarly, returning to her concern about the need for efficient nationwide litigation, she asked Kovner: “If due process says that you can’t hale someone into a court with which they’ve had no contacts, how do you justify the many criminal statutes we have – RICO, CERCLA, there’s a whole bunch of them – that permit the joinder of all of these defendants in one indictment?”

Parallel to that problem was a “so what’s the big deal” theme, put most clearly by Justice Elena Kagan. All agree that Bristol-Myers is subject to suit in California at the behest of the hundreds of California residents who used Plavix, and all agree that Bristol-Myers can hardly be surprised at the location of that litigation given its marketing and distribution in the state. Given those points, Kagan asked, “why is it unfair to glom on Texas claims and New York claims to the California claims, once we already have a mass action which will have multiple jury trials? … [Y]ou already know because this is … nationwide marketing … that you’re subject to jurisdiction in any of the 50 States.”

That’s not to say that it was smooth sailing for Thomas Goldstein (appearing on behalf of the non-resident plaintiffs, trying to preserve the California forum). Several of the justices seemed firmly set against his argument that Bristol-Myers’ contacts with California residents should have any weight in assessing its vulnerability to a California suit brought by nonresidents.

Thomas C. Goldstein for respondents (Art Lien)

So, for example, one group of justices thought his argument failed to give due weight to the states outside California. In Justice Anthony Kennedy’s view, Goldstein was offering “a very patronizing view of federalism. California will tell Ohio ‘Oh, don’t worry, Ohio. We’ll take care of you.’ That’s … not the idea of the Federal system. The Federal system says that States are limited.” In the same vein, Kagan asked what Goldstein had to say “about the interest of the State the Bristol-Myers resides in? In other words, they might have an interest in not having their citizens haled into court against their will in another part of the country.”

More generally, Kagan seemed to find Goldstein’s proposed due process framework inconsistent with her understanding of the cases. She likened his argument to a Rube Goldberg arrangement in which “the claim relates to another claim that relates to contacts with the forum.” In her view, by contrast, the law requires a direct relationship between the plaintiff and the defendant’s contacts with the forum:

I’m missing what the relationship is between an Ohio plaintiff’s claim and the defendant’s contacts with the forum that doesn’t go through another claim…. But I guess what I’ve always thought that our personal jurisdiction cases require is … something like … [t]he plaintiff’s claim relates to or arises out of the defendant’s contacts with the forum State. … And I just want you to tell me how an Ohio plaintiff’s claim arises out of or relates to the defendant’s contacts with California.

Following up on that point with similar skepticism, Justice Stephen Breyer at one point asked “what is it I say in a single sentence that … make[s] it clear to that defendant why he is here?”

In response, Goldstein pointed to the role of McKesson – the California-based distributor through which Bristol-Myers distributed much (though not all) of its Plavix sales. McKesson’s role as a distributor leaves it a defendant alongside Bristol-Myers with respect to many of the out-of-California plaintiffs. Because McKesson is based in California, California plainly has the authority to adjudicate all of the claims of nonresidents against McKesson. Picking up on an earlier interchange between Justice Ruth Bader Ginsburg and Kovner, in which Kovner had acknowledged that under Bristol-Myers’ theory, there might be no other “place where these plaintiffs could sue McKesson as well as Bristol-Myers,” Goldstein suggested that the role of McKesson provided yet another reason why this particular case could be adjudicated in California. That prompted a curt rejoinder from Justice Neil Gorsuch, who found it “a very fact-specific argument.” Gorsuch went on to add that “we took this, I thought, to decide whether we … permit this sliding scale business that California engages in, as a legal matter.” When Goldstein responded that McKesson’s role was integral to the lower court’s analysis and that it would be “very confusing to the lower courts to simply cast it aside,” Gorsuch retorted: “What’s confusing, though, about simply saying ‘here’s the correct test, reverse, remand, go apply the correct test’?”

The most difficult portion of Goldstein’s presentation came when he suggested (echoing Kagan’s point from earlier in the morning) that California jurisdiction is made more palatable by the presence of several hundred indisputably local claims involving local residents. The implicit suggestion of a balancing test involving the number of local residents struck a raw nerve with Chief Justice John Roberts, who interjected that “we’re dealing with a jurisdictional rule, and when we do that, we want the rules to be as simple as possible. … [Y]ou’re articulating a rule that [governs] businesses trying to figure out where to do business and plaintiffs where to sue and courts whether it’s [permissible]. Your rule depends upon some line between [a] handful and … hundreds.”

Then, when Goldstein tried to defend that line, Kagan brusquely cut him off, arguing that Goldstein’s comments to Roberts contradicted his earlier discussion with her:

It seems to me, on your theory, it could be zero California plaintiffs, because here’s what you told me. You told me that the reason that … an Ohio citizen’s claim arises out of the contacts in California is because the contacts in California are really nationwide contacts. And if that’s so, it’s met regardless of whether there are any California plaintiffs or not.

Somewhat surprisingly, it was only near the end of the argument that the discussion turned to the problem of specific and general jurisdiction that occupied so much of the briefing. Responding to the interchange with Roberts and Kagan by acknowledging some tension between his position and some of the court’s recent cases, Goldstein suggested that it would make sense for the court to adjust the details of its rules for specific jurisdiction (a state’s power to hear a case based on its connection to that particular dispute, the power at issue here) to accommodate its marked narrowing in Daimler AG v. Bauman of rules for general jurisdiction (a state’s power to hear a case based on its connection to the defendant). Raising that topic got the attention of Justice Ruth Bader Ginsburg (the author of the Daimler opinion), who pointedly remarked that “[w]hat you’re suggesting is that the Court was wrong in … Daimler” and added that this case could be viewed as “an attempt to reintroduce general jurisdiction, which was lost in Daimler, by the back door.” As noted here, the discussion of Daimler continued during the next hour’s argument in BNSF Railway Co. v. Tyrrell, in which several justices seemed set on reaffirming or extending Daimler. To the extent that same intuition carries over to this case, it poses a challenging hurdle for the plaintiffs.

At the end of the day, the argument makes it clear that the justices will tread cautiously here, recognizing the broad systemic implications of pronouncements about the constitutional limits on judicial authority. The combination of caution with the intricate framework of the relevant cases suggests that we will be waiting several weeks for a resolution in this one.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. The author of this post, however, is not affiliated with the firm.]

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