Argument analysis: Justices frustrated by “gibberish” in statutes limiting state-court adjudication of securities class actions

Argument analysis: Justices frustrated by “gibberish” in statutes limiting state-court adjudication of securities class actionsThe key word in today’s argument in Cyan, Inc. v. Beaver County Employees Retirement Fund was “gibberish” – the characterization by several of the justices of the text Congress provided in the Securities Litigation Uniform Standards Act of 1998. The argument revealed the justices’ frustration at the statute’s sloppy craftsmanship. The case involves the interplay […]

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Argument analysis: Justices frustrated by “gibberish” in statutes limiting state-court adjudication of securities class actions

The key word in today’s argument in Cyan, Inc. v. Beaver County Employees Retirement Fund was “gibberish” – the characterization by several of the justices of the text Congress provided in the Securities Litigation Uniform Standards Act of 1998. The argument revealed the justices’ frustration at the statute’s sloppy craftsmanship.

The case involves the interplay between two sections of the federal securities laws. 15 U.S.C. § 77v states that the “district courts … shall have jurisdiction … , concurrent with State … courts, except as provided in section 77p of this title with respect to covered class actions, of … actions … to enforce any liability … created by [the Securities Act of 1933].” However, as I explained in more detail in my preview, nothing in Section 77p restricts the jurisdiction of state courts over actions to enforce the Securities Act of 1933. The petitioner, Cyan (the defendant in the class action), argues that the provision bars concurrent jurisdiction over all “covered class actions,” whether based on state law or federal law, pointing to a definition of covered class actions in Section 77p. The class-action plaintiffs, Beaver County Employees Retirement Fund and others, argue that the provision bars jurisdiction over “mixed” state- and federal-law actions, pointing to a provision in Section 77p that bars securities class actions that rely on state (as opposed to federal) law. The government, offering yet another reading, agrees with the plaintiffs that the statute bars only the actions that rely on state law, but argues that defendants can remove all actions (based on state or federal law) from state court to federal court.

All the participating justices resisted the idea that any of those three readings flows readily from the actual language of Section 77v quoted above. So, for example, when Neal Katyal, representing Cyan, summarized his position that the statute broadly bars all state-court securities class actions – whether based on federal law or state law – Justice Ruth Bader Ginsburg responded that “Congress chose a rather obtuse way of saying that federal courts shall have exclusive jurisdiction. I could have simply said, in covered class actions related to claims under the ’33 Act, federal courts shall have exclusive jurisdiction, period, and that would be clear and everybody would understand and you would prevail. But the Congress certainly took a[n] odd route to getting there.” After suggesting that “this body could have written a much better statute than our friends across the street,” Katyal contended that “the anomaly on the other side is far worse.”

When Katyal tried to discuss the purpose of the statute as opposed to the text, Justice Elena Kagan resisted: “Could we … just talk about the text before we speak about the purpose?” Kagan then focused directly on what she saw as the central weakness of Katyal’s reading:

[T]he natural way to read that is we look at 77p, the whole thing, and we see what’s the “except” that’s provided [there]. We don’t look to an ancillary definitional provision that all it does is define a term. We look for a rule that might be in conflict, that could be taken to be in conflict, with the jurisdictional provision. … So, … it just seems as though your interpretation does a very odd thing textually when you read “except as provided” in Section 77p to say let’s look to a definition in that section.

Katyal tried repeatedly to justify his reading, but Kagan closed the discussion by commenting: “[I]f your reading were right, Mr. Katyal, it would be written something like: ‘Except with respect to [covered] class actions as defined in’ – not ‘as provided by’ – ‘as defined in 77p(f)(2)’ – not just ‘77p.’”

Justice Sonia Sotomayor shared Kagan’s doubts about Katyal’s reading. For her, the point of departure was “the presumption, and one that exists when there’s an ambiguity, that says we presume in favor of concurrent jurisdiction.” Given the apparent ambiguity of the statute, she contended that Katyal was calling for “a fairly extreme result … taking a very strong presumption, turning it on its head, and saying we’re ousting state courts o[f] jurisdiction o[ver] securities actions that have nothing to do with federal law.”

Sotomayor appeared particularly exercised by the application of Katyal’s reading to bar state-law actions even if they weren’t pre-empted by the Securities Act, asking:

In what other situation where we do not have a federal law that preempts a state law, have we ever permitted the federal government to tell the states that they can’t adjudicate a case under their own law?

You can pass a federal law that says this federal law precludes these actions. But if you don’t have one that says that, … how can you order the state court not to adjudicate a claim that is not precluded, … that is expressly not [pre]cluded?

Things didn’t go much more smoothly for Allon Kedem, arguing on behalf of the government for the view that Congress intended to permit removal of all actions to federal court. Justice Samuel Alito for one found that reading untenable:

Do you really think that whoever wrote this removal provision thought about all this stuff that you’re telling us now? … If they set out to do what you say this does, and they decided this is the way we’re going to do it, I think it’s so far from reality that it really strains credulity.

Kedem did, however, have the distinction of receiving a sympathetic comment. Justice Stephen Breyer posited a drafter “given a task … to do two things … to … get rid of these state actions [and] to remove the federal act cases into federal court.” For him, “this is the language that does it.” But Breyer immediately qualified his comment by suggesting that the removal result for which Kedem argued was so eccentric that “I would expect there would be a report and in this report there would be an explanation such as you gave me of the [text]. And my guess is there is no such report.” Kedem had to concede, as Alito suggested, that there is nothing in the legislative record to suggest that Congress had intended the removal reading that the government posited. Moreover, because the case in fact was not removed from state court, several justices (most notably Ginsburg and Justice Anthony Kennedy) seemed to think that the court could not properly consider Kedem’s reading in this case even if the justices did find it plausible.

The forceful questioning continued when Thomas Goldstein appeared on behalf of the plaintiffs, arguing that the statute should be read to match the jurisdictional provisions in section 77v to the preclusion provisions in section 77p, a position that would permit purely federal actions (like this one) to proceed in the state courts. Justice Neil Gorsuch commented that Goldstein’s reading left the statute so “superfluous” that it was “stating the blindingly obvious, … closing a door twice.”

Alito also criticized Goldstein’s reading: “What sense does that … make? The … state courts have concurrent jurisdiction over ’33 Act claims, except if a lawyer is foolish enough to include in the state court complaint the state claims that fall within the … prohibition? What sense does that make?”

Goldstein countered that Section 77v is “not intended to do very much. It’s a conforming amendment. We don’t think that the statute … is intended to accomplish very much.” But Ginsburg characterized Goldstein’s reading as a “road to nowhere” for the provision.

A comment of Alito near the beginning of Katyal’s presentation captured the justices’ frustration with the statutory language:

Our late colleague [Antonin Scalia] wrote a book called Reading Law, which provides guidance about how you read statutes. And I looked through that to see what we are supposed to do when Congress writes gibberish. And that’s what we have here. You said it’s obtuse. That’s flattering. And we have very smart lawyers here who have come up with creative interpretations, but this is gibberish. It’s … just gibberish.

Sharing Alito’s perspective, Gorsuch later asked Goldstein whether “[s]peaking of gibberish, aren’t we stuck with gibberish your way too? I mean, it seems like gibberish all the way down here.”

For Alito, the drafting went far beyond the normal range of ambiguity or lack of clarity. Indeed, he suggested at one point that the statute in this case was so poorly crafted as to make the judicial task impossible: “I mean, all the readings that everybody has given to all of these provisions are a stretch. I’m serious. Is there a certain point at which we say this means nothing, we can’t figure out what it means, and, therefore, it has no effect, it means nothing?” Presumably the justices won’t issue an opinion concluding that the statute means nothing. But the tenor of the argument suggests that they may have a hard time finding a reading to which all of them can subscribe.

[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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Argument analysis: Justices debate Patent and Trademark Office’s rules limiting scope of inter-partes review

Argument analysis:  Justices debate Patent and Trademark Office’s rules limiting scope of inter-partes reviewThe second case of yesterday’s Supreme Court patent day was SAS Institute v. Matal. I would not have been surprised if this little statutory case had been a letdown after the constitutional concerns with which the justices began their morning in Oil States Energy Services v. Greene’s Energy Group. But the justices seemed just as […]

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Argument analysis:  Justices debate Patent and Trademark Office’s rules limiting scope of inter-partes review

The second case of yesterday’s Supreme Court patent day was SAS Institute v. Matal. I would not have been surprised if this little statutory case had been a letdown after the constitutional concerns with which the justices began their morning in Oil States Energy Services v. Greene’s Energy Group. But the justices seemed just as engaged in this one as they were in Oil States and, if anything, even less settled on how to move forward. Indeed, it is not much of an exaggeration to suggest that there were as many views on SAS Institute as there were talkative justices.

As I explained in the preview, this case involves the practice of the Patent Trial and Appeal Board’s instituting a “partial” inter-partes review, agreeing to review some but not all of the challenged claims of a patent. As the justices reaffirmed last year in Cuozzo Speed Technologies, LLC v. Lee, the statute gives the board unreviewable discretion over the decision whether to institute review; it only bars the board from initiating a proceeding unless it determines that “there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.”

Justice Sonia Sotomayor dominated the early minutes of the argument, which began with Gregory Castanias arguing on behalf of the challenger, SAS Institute, against partial decisions by the board. Castanias emphasized the language of Section 318 of the Patent Act, which obligates the board to “issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner.” In his view, the board’s practice of partial institution violates the statute because it leads to a final decision that addresses only those claims as to which the board has instituted review.

Sotomayor, though, suggested that Castanias’ argument was disingenuous: “I’m not at all clear what it is you’re challenging here. Are you challenging the Board’s right to initiate partial adjudications or are you challenging the fact that they are not addressing all of the claims in their final decision? What is it that you’re actually asking us to review?”

When Castanias responded that the board should issue a decision with regard to the unreviewed claims, she pounced: “Ahh, you want to get around Cuozzo.” After Castanias resisted, maintaining that he was asking only that the board comply with Section 318, Sotomayor interjected:

[T]hat’s exactly what you want to do. … Well, I don’t see what else you’re trying to do, because what will you do? You will come up on appeal and say the Board was wrong in not instituting review of those other claims? That’s what Cuozzo was about, us saying you can’t do that. …

Because there is absolutely no way that that’s anything other than that. …. [I]f you’re not challenging their decision not to institute review, why would that make any difference?

Sotomayor also emphasized the incongruity of forcing appellate review of the unreviewed claims, suggesting that the approach Castanias advocates would be wholly impractical: “If the Board didn’t institute review of those claims, there would be an incomplete record with respect to those other claims.” Castanias argued that the record was adequate, pointing out that under the board’s rules his client’s petition for review included an expert declaration. Sotomayor remained unconvinced: “But if the Board didn’t institute review of those other claims, the other side has not had an opportunity to present its evidence in contravention of your expert. You’re asking the appellate court to decide patentability on the basis of an incomplete, undeveloped record.”

Justice Elena Kagan also challenged Castanias, but her concerns related to the language of Section 318. Castanias agreed with Kagan that the board had no obligation to address patent claims that were cancelled before the conclusion of the proceeding, explaining that as a practical matter those claims were “no longer in dispute.” But for Kagan, that concession made it difficult to credit Castanias’ view that the statute obligates the board to issue a decision on unreviewed claims.  As she put it, the statute makes no distinction between cancelled and noncancelled claims: “This one also is no longer in dispute. … And I think what the Board would say is that the same thing is true here, there’s nothing to adjudicate because they have said that it doesn’t pass the threshold, so they’re not in the business of adjudicating it.”

The broad statutory grant of discretion seemed to have persuaded Kagan, like Sotomayor, to tolerate the board’s practice.  In the end, Kagan concluded:

[O]ne of the stories that the statute as written seems to tell is of great discretion to the Board with respect to the institution decision. … It says you never have to institute; it’s your choice whether to institute; you can’t get review of the institution decision, which is our Cuozzo case; you get to write your own rules about the institution decision … . So it’s a little bit odd to say, well, here’s one thing you don’t have discretion over when it comes to institution: you can’t say these claims but not those claims. … In a context in which Congress said the institution decision is really for the Board, it’s a discretionary decision that lies in its bailiwick, why should we carve out that one thing?

Justice Stephen Breyer seemed to agree that the board’s approach, which allows it to focus its resources on the challenges that seem to it most substantial, makes sense as a practical matter. The language of the statute left enough “opening and ambiguity” to permit Breyer to accept Castanias’ reading of the text. He was reluctant to do so, he explained, because he “was having trouble … trying to imagine what the purpose would be of writing a statute the way you want, though I find it very practical to think of the statute as your opponents want it.”

Justice Anthony Kennedy offered yet another approach, proposing a Solomonic solution to Castanias: “Could the Board contact the parties and say, we will not grant review as to all of the challenges claimed, but if you reduce it to just claims 3 and 4, we will hear it? Could the Board do that?” Castanias happily embraced that solution, explaining that his client well might prefer to abandon the board’s process and proceed directly to litigation if it understood up front that the process would produce only a limited assessment of its claims. Kennedy offered the same suggestion to Jonathan Bond, who appeared on behalf of the government in defense of the board’s practice. As Kennedy put it, “why couldn’t the Board just say we decline to grant it unless you … eliminate this claim.” Kennedy seemed taken with this idea, pointing out that “then we can rule against you, and there’s no real problem, …  because the challengers might say … in that event, we’ll just go to the district court. We don’t want [a partial review].”

On the other side of the matter, Justice Samuel Alito and Chief Justice John Roberts repeatedly challenged Bond, arguing that the board’s practice cannot be reconciled with the clear command of Section 318. Alito derided Bond when Bond argued, as he had in his brief, that the reference to a claim “challenged by the petitioner” is ambiguous: “[Y]ou think that is a serious interpretation of this challenge — they challenged it in a discussion in their office. They challenged it in a discussion in a bar. It means challenged it in this proceeding. What else could it mean?”

Sotomayor intervened in Bond’s support, commenting that “there is one very telling sign that the ‘any patent claim challenged by the Petitioner’ has a different meaning, and that’s in 314 [the section that grants the Board discretion over instituting review], which says ‘claims challenged in the petition.’ If Congress intended claims challenged in the petition to be a part of 318, it could have used exactly the same words.” But Roberts seemed no more persuaded than Alito, commenting to Bond that his reading of the statute seemed “a fairly complicated and refined stretch of any claim challenged by the Petitioner.”

Justice Neil Gorsuch took yet another tack, suggesting that the statutory framework gives the board’s director a narrower authority than some of his colleagues had discerned: “I’d agree with you that you’[r]e given great disc[ret]ion on the standards for showing sufficient grounds to institute a review. I’m not sure, I guess you can help me on how that also includes the authority whether to grant review of this or that claim, the weeding out process.” As Gorsuch read the statute, “it might affect the reasonable likelihood inquiry and how the director is going to go about doing that, but … I guess it’s a little less clear to me how it also grants him authority or her authority to decide which claims to proceed with.”

Apparently wedded to the premise that the statute accords the director little or no discretion on the point at issue here, Gorsuch repeatedly offered the idea that Section 314 “cut[s] against the government … by suggesting that all the PTO needs to do is decide whether there is one claim that isn’t frivolous … that’s the sum total of its job under the plain terms. … [A]nd beyond that, it need not go further.” As he put it, “in 314 … all the PTO has to do is decide whether there is one non-frivolous claim. It’s a thumbs-up or a thumbs-down decision … that’s anticipated there, … not a claim-by-claim examination.”

The wide variety of views makes it foolhardy to suggest how the case will come out. The most I can say is that it seems most unlikely that the justices will find a consensus that can bridge the disparity between the apparently settled views of justices as much at odds as Sotomayor and Gorsuch seemed at the argument. I would expect a wait of several months followed by a divided decision. Ironically, this relatively slight question of statutory interpretation might end up being more contentious than the weightier constitutional issues considered earlier in the day in Oil States.

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Argument analysis: Justices hesitant to invalidate congressional scheme for re-examination of patents by Patent and Trademark Office

Argument analysis: Justices hesitant to invalidate congressional scheme for re-examination of patents by Patent and Trademark OfficeThe justices opened their December argument sitting with a pair of patent cases, both raising questions about the inter partes review process that Congress adopted in 2011 as part of the Leahy-Smith America Invents Act. First up was Oil States Energy Services v. Greene’s Energy Group, a high-stakes dispute that directly challenges Congress’ constitutional authority. […]

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Argument analysis: Justices hesitant to invalidate congressional scheme for re-examination of patents by Patent and Trademark Office

The justices opened their December argument sitting with a pair of patent cases, both raising questions about the inter partes review process that Congress adopted in 2011 as part of the Leahy-Smith America Invents Act. First up was Oil States Energy Services v. Greene’s Energy Group, a high-stakes dispute that directly challenges Congress’ constitutional authority. As I explained in more detail in my preview, petitioner Oil States contends that Congress violated Article III of the Constitution and the Seventh Amendment when it authorized the Patent and Trademark Office, acting at the behest of respondent Greene’s Energy, to invalidate an Oil States patent without affording Oil States an opportunity for a jury trial supervised by a federal judge.

Allyson N. Ho at lectern for petitioner (Art Lien)

As you would expect for a case raising constitutional questions that go directly to the institutional role of the judiciary, the justices came to the bench in a voluble mood. A spirited and wide-ranging argument suggested a considerable variety of perspectives, though in the end none of the justices seemed to have a strong interest in invalidating the new process.

One tack was to press the practical idea that (as Justice Ruth Bader Ginsburg put it) “there must be some means by which the Patent Office can correct the errors that it’s made, like missing prior art that would be preclusive.” When Allyson Ho (arguing on behalf of Oil States) agreed that the PTO can correct errors, Ginsburg and Justice Elena Kagan pressed her hard on why this particular error-correction mechanism is unconstitutional. Conceding that several earlier processes for error correction had been constitutional, Ho contended that inter partes re-examination is different because it effectively pits the patentholder against the alleged infringer rather than the government. Kagan in particular challenged Ho to define a clear line that would justify invalidation of this procedure but not the various error-correction mechanisms that preceded it:

Can I take you back to this question of where you would draw the line … between [the older procedures] and this? Because, as I understand what you would permit, those proceedings too can be initiated by a third party … [and] in those proceedings too, the third party can participate … can make known its views. So what’s the line? … [W]hat are the procedures that are here that you think make this essentially adjudicatory that are not in those other proceedings[?]

Ho suggested that the problem with the new procedure is that it is “trial-like,” but Kagan plainly found that inadequate: “And so what is [the defect]? Is it discovery? Is it … participation in the hearing? I just want to ground this in something.”

Justice Sonia Sotomayor joined in the discussion. Responding to Ho’s suggestion that participation by the third party is the central flaw of the new procedure, Sotomayor pointed out that under the pre-existing procedures:

You can’t write the PTO and say: I think this patent’s invalid, period. You have to supply them with a reason for doing what they’re doing. So why is that reason any different than actively participating and pointing the PTO in the right direction? What is so fundamentally Article III that changes this process into an Article III violation?

Sotomayor went on to offer another reason why she doubts the characterization of the new procedure as essentially a dispute between the third party and the patent holder: “[I]f the third party settles with the patent owner, the PTO can still continue the action, can still decide the question, can still participate on appeal. So it is a public issue that is being litigated or discussed or adjudicated, so isn’t that quite different than a normal adjudication?” Ginsburg seemed particularly taken with that point, more or less forcing Ho to acknowledge that it was “an error” for her to have said in her brief that “the PTO can’t go on … if the parties settle.”

Justice Anthony Kennedy had a somewhat different take on the problem, emphasizing the oddity of a constitutional rule that would limit Congress’ authority to specify the procedures for evaluating an asset that exists only by Congressional authority: He started by asking whether “Congress [could] say that we are reducing the life of all patents by 10 years?” When Ho didn’t dispute the point, he retorted: “[D]oesn’t that show that the patent owner has limited expectations as to the scope and the validity of the property right that he holds?”

Not surprisingly, Justice Stephen Breyer saw the case through a broader perspective on the administrative state:

I thought it’s the most common thing in the world that agencies decide all kinds of matters through adjudicatory-type procedures often involving private parties. So what’s special about this one, or do you want to say it isn’t special and all the agency proceedings are unlawful? Because a lot of them would fit the definition, I think, that you propose.

Ho tried to take the former approach, suggesting that it is rare to have administrative adjudications in which the government is not acting “as the enforcer,” but Breyer responded with examples of disputes among airlines, trucking companies and utilities, as well as between management and employees, all situations in which administrative law “judges” resolve disputes among private parties through trial-like proceedings.

A protracted historical discussion exemplified the depth of engagement. All agree that the constitutional boundaries of Congress’ authority depend on historical practice at the time of the framing. Ho pointed to a tradition of common-law adjudication of cases involving patent infringement, but Sotomayor took issue with her historical argument, citing a long-enduring practice of executive retraction of patents:

[I]s your position that somehow at the founding in 1789, given the replete English history of the crown and the Privy Council … sidestepping any judicial adjudication of validity, that in 1789 the founders intended to change that system as radically as to say, no, we’re not going to permit … the legislature to change the terms of a patent grant?

Apparently referring to an amicus brief filed by Alliacense Limited in support of Oil States, Sotomayor commented that even “[y]our strongest amici says that it had waned over time … But the fact that it waned didn’t mean it was eliminated, and it didn’t mean that the Privy Council or the crown thought that it no longer had those rights.”

Christopher M. Kise for respondent (Art Lien)

That is not to say that the argument went all that smoothly for Christopher Kise (arguing on behalf of the respondent, Greene’s Energy). His assertion that Congress had almost plenary authority to define the boundaries of patent grants struck a nerve with Chief Justice John Roberts, who responded:

[Y]our position, it strikes me, is simply that you’ve got to take the bitter with the sweet. If you want the sweet of having a patent, you’ve got to take the bitter that the government might reevaluate it at some subsequent point. … [H]aven’t our cases rejected that … proposition? We’ve said you … cannot put someone in that position. You cannot say, if you take public employment, we can terminate you in a way that’s inconsistent with due process.

The justices were particularly concerned about incidents in which the PTO director admittedly “stacked” the panels of particular cases in an effort to control the outcome of those cases – Roberts and Justice Neil Gorsuch both criticized that practice.

Gorsuch was by far the most critical of the inter partes review process, suggesting a view almost precisely the opposite of Breyer’s – that the Constitution might prohibit administrative adjudication altogether in any case in which the decisionmaker is not “adjunct” to an Article III court. Absent some arrangement “like a magistrate judge or a bankruptcy judge,” Gorsuch found it unsettling that there could be “a self-executing judgment issued by the director that, [even] if not appealed, has all the force of law of an Article III court.” As Gorsuch pointed out, the system doesn’t work that way “with respect to magistrate judges or anything like that. …[T]he district judge has to put its imprimatur on it before it has [full force and effect.]” To me, though, the critical comments sounded more like an effort to coalesce upon an explanation for exactly why the court should uphold the inter partes review procedure than an explanation of why it should invalidate the procedure.

Given the Supreme Court’s track record of sharply divided decisions in cases that explore the minimum requirements of Article III adjudication, it would be astonishing if the justices found a ready consensus here. My sense, though, is that there will be a strong majority to uphold the statute. The justices well might write with caution – and they might spend several months doing it – but I think it most unlikely that this case will lead the court to take as bold a step as invalidating a major congressional initiative like the inter partes review process.

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

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Argument preview: Justices to consider limits on securities class actions in state courts

Argument preview: Justices to consider limits on securities class actions in state courtsSecurities litigators have spent the last two decades working out the implications of two statutes Congress passed in the closing years of the last century, both designed to limit securities class actions. The first was the Private Securities Litigation Reform Act of 1995, known as the PSLRA. When that statute produced more of a flight […]

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Argument preview: Justices to consider limits on securities class actions in state courts

Securities litigators have spent the last two decades working out the implications of two statutes Congress passed in the closing years of the last century, both designed to limit securities class actions. The first was the Private Securities Litigation Reform Act of 1995, known as the PSLRA. When that statute produced more of a flight to state courts than it did a decline in class actions, Congress responded with the Securities Litigation Uniform Standards Act of 1998, known as SLUSA. It is a testament both to the high stakes involved in securities litigation and to the sloppy drafting of both the PLSRA and SLUSA that the Supreme Court has faced numerous questions of interpretation under those statutes. Indeed, to the outsider the most remarkable thing about the argument next week in Cyan, Inc. v. Beaver County Employees Retirement Fund may be how many basic questions about the two statutes remain unsettled.

Because Cyan does not involve any regulations, the Supreme Court confronts a pure question of statutory interpretation. And because the relevant statutes are so intricate, some considerable discussion of the contested provisions is necessary to elucidate the problem at hand. The first point to understand is the tradition of concurrent jurisdiction over securities claims. From the enactment of the Securities Act of 1933 during the Great Depression, Congress traditionally expected (and explicitly provided in the statute) that securities litigation would proceed in both state and federal courts. Thus, the statute always has stated (in 15 USC § 77v) that the “district courts shall have jurisdiction, concurrent with State courts, of actions to enforce any liability created by [the Securities Act of 1933].” Responding to the PSLRA-driven flight of securities class actions from federal court to state court, SLUSA added a major qualification to Section 77v, which now provides that the state courts exercise concurrent jurisdiction “except as provided in section 77p … with respect to covered class actions.”

The question in this case is whether that proviso bars from state court both mixed class actions (those that present claims under both federal and state law) and pure federal class actions (those that assert claims only under the Securities Act), or only mixed class actions. That question, not surprisingly, depends on exactly what Congress “provided in section 77p … with respect to covered class actions.” It turns out that Section 77p does several things of arguable relevance. One is that Subsection 77p(b) completely bars any state-court class action raising claims under state law (which would include a mixed class action), so long as the action is a “covered class action” and involves a “covered security.” Section 77p also defines those terms, providing that a securities class action is “covered” if it involves 50 plaintiffs and that a security is “covered” if it is traded on a national exchange.

The most that the Supreme Court can do then (because it doesn’t sit to write report cards assessing the quality of Congress’ literary craft) is decide whether it makes more sense to read the proviso as barring all covered actions or instead as barring only mixed class actions. On the one hand, the employees argue that interpreting the proviso as barring all covered actions confers a lot of important substantive content on a phrase that reads as if it is only cross-referencing substantive action that Congress took elsewhere. On the other hand, in Cyan’s view, reading the proviso as barring concurrent jurisdiction only over mixed actions doesn’t accomplish very much when Section 77p(b) already has barred them categorically.

Much of the briefing, especially by the amici, raises policy questions about the merits of state court versus federal court resolution of securities class actions. Cyan’s amici inveigh against the danger of permitting the wild and ungovernable state courts to torment our nation’s large businesses, and the employees stress the longstanding routine of trusting state courts to play the major role in adjudicating commercial litigation in our federal system. In the past, the Supreme Court has shown a willingness to read SLUSA as a compromise statute designed to eradicate some, but clearly not all, state securities litigation. Oral argument should provide an indication of whether the parties’ and amici’s policy arguments will influence the justices’ resolution of the statutory interpretation questions in this case.

[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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Argument preview: Justices to consider propriety of the Patent and Trademark Office’s rules limiting scope of inter partes review

The second case of the Supreme Court’s patent day next Monday is SAS Institute v. Matal. That case should be a relief; after considering the weighty constitutional concerns summarized in my preview in Oil States Energy Services v. Greene’s Energy Group, the justices will turn to a straightforward question of statutory interpretation. The statutory provision […]

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The second case of the Supreme Court’s patent day next Monday is SAS Institute v. Matal. That case should be a relief; after considering the weighty constitutional concerns summarized in my preview in Oil States Energy Services v. Greene’s Energy Group, the justices will turn to a straightforward question of statutory interpretation. The statutory provision at issue, like the constitutional problems the justices will confront in Oil States, involves the “inter partes review” process that Congress added to the patent law in 2011 as part of the Leahy-Smith America Invents Act.

As I explain in the Oil States preview, inter partes review provides a streamlined two-step administrative adjudication of the validity of recently issued patents. At the first step, the Patent Trial and Appeal Board reviews a petition challenging the patent and decides whether a full-blown review of the patent is appropriate. The statute says little about how the board should decide when a review proceeding is justified; the sole constraint bars the board from initiating a proceeding unless it determines that “there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.” At the second stage, if it decides to institute a review proceeding, the board adjudicates the validity of the challenged patent, subject to review on appeal by the U.S. Court of Appeals for the Federal Circuit.

This case involves the board’s practice of limiting the scope of the review proceedings to the most serious allegations of error. Responding to the reality that patents often have numerous claims (the patent at issue in this case has 16), the board has developed a practice of instituting proceedings limited to the claims as to which it regards the challenges as substantial. In this case, for example, the petitioner, SAS Institute, challenged all 16 claims of the patent issued to respondent, a company named ComplementSoft; the board instituted proceedings limited to claims 1 and 3-10, declining to review ComplementSoft’s challenges to claims 2 and 11-16.

The problem with that partial institution of review arises at the end of the proceeding, when the statute obligates the board to “issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner.” The board’s routine practice is to limit its final decision to the claims it actually has adjudicated (claims 1 and 3-10 in this case).

If upheld on appeal, the board’s final decision provides the last word on the validity of the claims that it addresses; the statute bars future challenges to those claims by the party that instituted the proceeding. The omission of the unadjudicated claims from that decision leaves those claims (claims 2 and 11-16) somewhat in limbo: The board has expressed the tentative view that the challenges to those claims are insubstantial, but without a final decision, SAS Institute cannot challenge the board’s decision on appeal. For its part, the Federal Circuit (the only court in which parties can challenge board decisions) has validated the current process. This case brings the scrutiny of the Supreme Court to bear on that problem.

As patent cases go, this one is about as straightforward as they come. It is a far cry from the murky and imprecise questions the court confronts when it considers issues of patentability (cases like Alice Corporation Pty. Ltd. v. CLS Bank International), the mind-numbingly intricate puzzles presented by specialized pharmaceutical regimes (cases like Sandoz v. Amgen), or the serious constitutional concerns the justices will have considered earlier Monday morning in Oil States. Rather, the case turns almost entirely on the statement in 35 U.S.C. § 318(a) that the board “shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner.”

SAS’ case pretty much stands or falls on its contention that Section 318(a) “means what it says,” and that when the statute refers to any patent claim “challenged by the petitioner” it refers to the initial petition seeking inter partes review. SAS argues that the board’s practice of limiting its decision to the claims as to which it instituted review – a subset of all the claims challenged by petitioner – directly contradicts the unambiguous language of the statute. More generally, SAS criticizes the balkanization of adjudication that the PTO’s partial-institution rule generates. Because the PTO’s rule leaves the unadjudicated claims entirely outside the inter-partes-review process, those claims necessarily will be left for a separate track of litigation in the federal courts. To SAS, that result markedly undercuts the benefits of inter partes review.

For its part, the government vigorously defends the board’s practice. Four points are central. First, it is a great waste of resources for the PTO to adjudicate all of the claims presented in a petition for inter partes review. Congress gave the PTO broad and unreviewable authority to decide whether to hold those proceedings. The only guidance Congress gave the PTO was that it should only hold proceedings for cases that present substantial claims. Who can criticize a procedure that carves off the apparently insubstantial claims, preserving the agency’s resources for the adjudication of substantial claims? As an amicus (the Houston IP Law Association) emphasizes, a rule requiring the agency to hold proceedings for all claims whenever a single claim is substantial is necessarily a rule that limits the number of patents the agency can consider.

Second, it makes no sense as a matter of process for the agency to write an opinion rejecting a claim that it has not adjudicated; if the claim has not been adjudicated, it is much more sensible to leave the parties where they lie, with the preclusive effect of the inter partes proceeding limited to the claims that the agency actually adjudicates.

Third, SAS’ criticism of the balkanization that flows from the PTO’s partial-institution regime ignores the structure of the inter-partes-review process. As the government’s brief pointedly notes, the inter-partes-review statute is limited to certain specific kinds of claims (generally claims of novelty and obviousness). That limitation necessarily leaves judicial adjudication as the sole forum for all other claims (including, among other things, claims about patentability). Whatever the court does here, the process will remain to some degree balkanized.

Finally, and perhaps most importantly, the U.S. solicitor general argues that the statute is not nearly so clear as SAS suggests. In a provision addressing the conclusion of a review proceeding, it is surely sensible for the agency to read a reference to claims “challenged by the petitioner” to mean claims challenged by the petitioner in that proceeding.

The justices typically are quite active in patent cases. It also bears noting that the justices have shown a great willingness in the past to reject the judgments of the Federal Circuit and the PTO. Key to the argument, I expect, will be what the justices think about the PTO’s stated desire to allocate its limited resources to the most substantial patent challenges. If the justices credit that intent, it seems most unlikely that they will read the statute to prevent its implementation.

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Argument preview: Justices to consider constitutional limits on adjudicatory authority of Patent and Trademark Office

Argument preview: Justices to consider constitutional limits on adjudicatory authority of Patent and Trademark OfficeIt will be patent day at the Supreme Court when the justices return to the bench next Monday for their December sitting. The morning brings a pair of cases considering the “inter partes review” process that Congress added to the patent law in 2011 as part of the Leahy-Smith America Invents Act. The adoption of […]

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Argument preview: Justices to consider constitutional limits on adjudicatory authority of Patent and Trademark Office

It will be patent day at the Supreme Court when the justices return to the bench next Monday for their December sitting. The morning brings a pair of cases considering the “inter partes review” process that Congress added to the patent law in 2011 as part of the Leahy-Smith America Invents Act. The adoption of inter partes review implements Congress’ desire to shift a share of patent litigation away from the judicial process – criticized as slow and expensive – toward an administrative process that Congress (with considerable naiveté) expected would be swift, inexpensive and uncontroversial.

In general, inter partes review proceeds in two stages. First, competitors unhappy about the issuance of a patent file a petition asking the director of the Patent and Trademark Office to institute a review proceeding. After giving the patent holder an opportunity to respond to the petition, the PTO must decide within three months whether to institute a review proceeding; within the PTO, the decision is made by the Patent Trial and Appeal Board. If a competitor convinces the Patent Trial and Appeal Board that the PTO erred in issuing the patent, the board has the authority to invalidate the patent, subject to review by the United States Court of Appeals for the Federal Circuit.

The first case of the day will be Oil States Energy Services v. Greene’s Energy Group, a high-stakes dispute that directly challenges Congress’ constitutional authority to enact the administrative process of inter partes review. The dispute that presents those questions is remarkably pedestrian. Petitioner Oil States sued respondent Greene’s Energy, contending that Greene’s Energy was infringing a patent that Oil States holds on technology useful for preserving wellhead equipment in the oil and gas industry. Predictably, Greene’s responded by seeking inter partes review, hoping that the PTO would invalidate the Oil States patent. When the PTO concluded that the patent in fact was invalid, Oil States raised the stakes, arguing that Congress violated Article III and the Seventh Amendment when it authorized an administrative agency to invalidate the patent without affording Oil States an opportunity for a jury trial.

The Supreme Court’s consideration of Oil States is a major event because of the intertwined issues of commercial and constitutional consequence. For businesses interested in the patent process, the possibility that the court would eradicate the inter partes review process is momentous; the process has provided significant relief to the operating companies that are so frequently defendants in patent litigation and at the same time has markedly undercut the leverage that patentholders have to enforce rights under their patents.  Even putting collective filings of trade associations to the side, more than 100 companies joined in amicus filings. At the same time, because the case directly challenges the statute as an intolerable congressional intrusion on authority that the Constitution allocates to the judicial branch, it raises questions that go directly to one of the most challenging problems of constitutional adjudication. More than 100 academics joined in briefs offering their advice to the justices on those questions. All told, the 57 amicus briefs are the most in any case the justices have heard this term; to put that number in perspective, it’s been more than a year since the justices faced that many amicus filings in a single case. Admittedly, those filings pale before the 90-odd filings they have for Masterpiece Cakeshop the following week, but it is a remarkable level of attention for what is at bottom a commercial dispute between competing businesses.

On the merits, the argument challenging the statute is easy to summarize. At bottom, the idea is that Congress should not be able to remove litigation from federal courts just because it doesn’t like the answers courts give when they decide cases.  All agree that the leading motivation for the development of inter partes review was a broadly held perspective that the adjudicative process for patent litigation was working so poorly that it had become a drag on innovation. On the merits of the constitutional argument, all agree that the Supreme Court has used a historical test to assess the boundaries of the judicial power. However ludicrous it might sound as a matter of institutional design, it is only a slight exaggeration to say that the boundaries of Congress’ ability to design an effective patent regime will turn largely on the details of practice in the English courts of the mid-18th century. Thus, the briefs of the parties and their amici are redolent with the details of British proceedings going back to the Glorious Revolution in 1688. For its part, the patentholder, Oil States, underscores a longstanding British tradition of judicial adjudication of disputes about the validity and infringement of patents. Oil States views an abrupt departure from that tradition as an unacceptable intrusion on the Constitution’s regime of juries sitting in federal courts.

On the other side of the matter, the allegation that the statute is unconstitutional brings the government into the case as a party. The argument in support of the statute has several distinct strands. For one thing, patents exist wholly as a matter of administrative action. They are, and always have been, the product of an executive grant; the scope and significance of patent rights have never been a matter of common-law accretion. Thus, the allocation of decision-making authority to the executive branch does not raise the same questions as statutes that limit adjudication of common-law causes of action.

For another thing, there has been a long tradition of administrative procedures that reassess the decision to issue a patent. Where Oil States portrays the adoption of inter partes review as an avulsive shift diverting an unbroken course of adjudicative process into the administrative realm, the government portrays it as the most recent configuration of a long and varied series of processes that Congress has prescribed to permit the agency to correct its own mistakes without recourse to adversary litigation. As it happens, that tradition dates at least to the 17th century – when the Privy Council of England exercised the authority to revoke a defective patent in response to a complaint from competitors. Indeed, the historical evidence of common-law adjudication is considerably less plain than the briefs of Oil States and its amici suggest. Among other things, so far as I can tell the courts at law in the late 18th century routinely considered allegations of infringement, but it is much less clear (as an amicus brief from the Internet Association emphasizes) that those courts could entertain claims of invalidity. It is at least arguable that courts of the time considered claims of invalidity as a defense and did not themselves have the power to invalidate patents more broadly.

It would be understandable for a casual observer to think this is an obvious winner for the government: Who could take seriously the idea that the Supreme Court would announce that the Constitution does not give Congress the authority to do something so obviously practical as update the administrative process for patent review? Ordinarily, we would expect that Congress would have all but unreviewable discretion over those kinds of determinations. The lesson of the Supreme Court’s cases in this area, though, suggests that considerable caution is appropriate. The drafters of the Bankruptcy Code of 1978 were just as sincere as the drafters of this statute in their view that concerns of procedural efficacy justified replacing a badly broken judicial process with a more administrative process. Yet the Supreme Court had no hesitancy in invalidating the framework as an impermissible derogation from the judicial power – despite the Constitution’s explicit grant to Congress of authority to manage the bankruptcy process (parallel to the clause giving Congress authority over the patent system).

I think it is safe to say that the justices will come to the Oil States argument keenly interested in exploring the validity of Congress’ handiwork.

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

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Argument analysis: Justices struggle to find the “beef” in challenge to congressional authority to resolve pending litigation

Argument analysis: Justices struggle to find the “beef” in challenge to congressional authority to resolve pending litigationReaders worrying that Justice Neil Gorsuch is hogging time at oral argument may find more cause for concern when I lead with his “where’s the beef” quip from today’s argument in Patchak v. Zinke. But a post about a separation-of-powers case doesn’t offer enough choices for a good lede that I can ignore his efforts. […]

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Argument analysis: Justices struggle to find the “beef” in challenge to congressional authority to resolve pending litigation

Readers worrying that Justice Neil Gorsuch is hogging time at oral argument may find more cause for concern when I lead with his “where’s the beef” quip from today’s argument in Patchak v. Zinke. But a post about a separation-of-powers case doesn’t offer enough choices for a good lede that I can ignore his efforts. Pleasantries aside, though, the end point of a relaxed and thoughtful discussion this morning bodes ill for David Patchak’s effort to persuade the justices to invalidate a federal statute ratifying the decision of the Secretary of the Interior designating as Indian land a tract near Patchak’s home.

That’s not to say Patchak’s litigation efforts have not been impressive. His suit challenging the secretary’s decision has already been up to the Supreme Court once – leading to a remarkable 2012 ruling in Salazar v. Patchak that the Administrative Procedure Act waived the sovereign immunity of the secretary and that Patchak had standing to challenge the secretary’s action. Unfortunately for Patchak, the secretary (presumably tiring of the litigation) obtained a federal statute that explicitly ratified the secretary’s decision and purported to end the litigation, stating among other things that “an action … relating to the land [in question] shall not be filed or maintained in a Federal court and shall be promptly dismissed.”

Patchak’s challenge to the statute culminated in this morning’s argument, in which his counsel Scott Gant maintained that the statute crosses constitutional limits on congressional authority over the judiciary by declaring the result in specific litigation.  If winning a case on that basis is like driving a camel through the eye of a needle, this particular needle will probably remain intact. Despite a bench flush with distinct theories about the general problem, none of the justices seemed to show the least interest in striking down this particular statute.

Scott E. Gant for the petitioner

Gant began his argument by focusing on the closing words of the statute, which state – in language that seems to be directing a result in a specific case – that any pending actions “shall be promptly dismissed.” The problem with that argument, though, is that it runs head-on into the Supreme Court’s long-standing rule (based on the 1869 decision in Ex parte McCardle) that Congress has power to “strip” the federal courts of jurisdiction. Channeling her days as a law professor, Justice Elena Kagan explained, “We know that Congress can alter the jurisdiction of the federal courts. And we know that Congress can alter that jurisdiction and apply it to pending cases. We’ve said that over and over again. So what … would make this unconstitutional if we assumed that this is a jurisdiction-stripping statute?”

Relying on last year’s decision in Bank Markazi v Peterson, Gant argued that what Congress had done was improper because it “dictated the outcome of the case without changing the law.” But Kagan had no patience for that contention:

[T]he law is the jurisdictional law. That’s what Congress is changing. Congress is changing jurisdiction. In so doing, Congress is changing the law. We haven’t said Congress has to change … substantive law. Here Congress is changing jurisdictional law. It’s saying … yesterday you had jurisdiction over a certain category of cases. Today you don’t. Now, why is that unconstitutional?

Gant answered that the earlier part of the statute (stating that the action “shall not be filed or maintained”) is jurisdictional (and thus within Congress’ authority), but that Congress overstepped its authority when it explicitly directed dismissal of the action. At that point, Justice Neil Gorsuch interjected that Patchak can’t have a sensible complaint limited to Congress’ “directing the dismissal. [I]f that’s the only beef we have, is that really a beef at all because that’s a natural consequence of a jurisdiction-stripping statute as [in] McCardle itself, … so there’s nothing left. I think it’s almost a virtual quote from McCardle, right, there’s nothing left to be done but dismiss.  So where is the real beef here?”

Justices Ruth Bader Ginsburg and Samuel Alito seemed to take the same view, reading the statute as a straightforward example of conventionally permissible jurisdiction-stripping; both repeatedly pressed Gant to offer some explanation for a decision that would justify invalidating this statute without abandoning the century-long doctrine granting Congress authority in that area. As Kagan put it, “Why aren’t you saying that every time we said that, we were wrong; that any time Congress changes the jurisdiction of the federal court and then applies [it] to pending cases, that that’s a separation-of-powers issue?”

Justice Sonia Sotomayor went even farther. The parties and the justices for the most part took as common ground a discussion from Bank Markazi, suggesting (in Kagan’s rephrasing) that “if you had a piece of legislation that said in Jones v. Smith, Smith loses, that that would be unconstitutional.” Sotomayor, though, seemed to doubt that rule should apply at all in cases (like this one) to which the government is a party. Starting from the longstanding tradition that the sovereign has plenary control over its immunity from suit, she offered that as a basis for disposing of this particular case without addressing the jurisdiction-stripping implications of the specific language at issue:

I do think there’s a difference between the Congress coming in between two private parties and directing a result in favor of one private party. I think that’s a quintessential separation of powers question and a very, very serious one. But I think there is something fundamentally different about suits involving the government because … any suit against the government is a matter only of largesse and the government’s voluntary choice. We have repeatedly through the centuries said the government can at any moment take away its [abrogation of] sovereign immunity. …. So I see … less of a problem with separation of powers if … the government has withdrawn [its abrogation of] sovereign immunity than [in its] directing the outcome between private parties.

Ann O’Connell, assistant to the solicitor general

Several of the other justices, though, seemed much less comfortable with the sovereign-immunity point. At one point, for example, Chief Justice John Roberts commented to Ann O’Connell, who appeared on behalf of the government to defend the statute, that “on the sovereign immunity question, … that is the federal government sort of going nuclear. You know, … I’m like the king; you can’t sue me because I can do no wrong. And it seems to me there’s a real political accountability problem there because this statute doesn’t say anything about sovereign immunity.” Alito had a similar take on that point, doubting that the statute was specific enough to be read as reinstating the secretary’s sovereign immunity.

The most promising questions for Patchak came from Roberts, who seemed more concerned than any of the other justices about preserving the judiciary’s institutional integrity against potential congressional overreaching. So, for example, in an extended interchange with O’Connell, Roberts asked pointedly: “Does the government recognize any limit on Congress’s power to decide the result in a pending case?” When O’Connell offered the “Smith wins” hypothetical from Bank Markazi, he asked why that rule didn’t apply here. And when she argued that Congress had acted here by withdrawing jurisdiction rather than adopting a rule of decision, he retorted: “So Congress has plenary authority to insulate itself from separation of powers arguments? A statute that says in any case in which a statute is alleged to violate the separation of powers, federal courts have no jurisdiction. You think that’s okay?”

Pratik A. Shah for Pottawatomi Indians respondent

For Roberts, the case raised a more fundamental question, familiar to any reader who has taken a law-school course in federal courts, described by Roberts as “a famous dialogue between Professors Wechsler and Hart about whether Congress can achieve unconstitutional objectives by preventing federal courts from adjudicating claims that those provisions are unconstitutional.” As he pointed out, “during the civil rights era, there were a lot of proposals in Congress that said the federal courts have no jurisdiction over any case in which busing is sought as a remedy. And those types of proposals are consistently submitted whenever Congress attempts to achieve an unconstitutional result by depriving the federal courts of jurisdiction.” Returning to that point repeatedly, he seemed most reluctant to let the case rest solely on the jurisdiction-stripping point, remarking late in the argument that he finds Congress’ authority in that area “a real difficult question.”

As I suggested at the outset of this post, today’s argument revealed no serious indication that any of the justices wants to invalidate the particular statute about which Patchak complains. But because these cases tread so close to the court’s own institutional role, the justices take very seriously the problem of trying to describe exactly what types of congressional activity they will tolerate. I think all of the justices would regard this case as pretty close to the boundary of congressional authority, so the likelihood that they will coalesce on any broad statement validating the statute is slim. It is safe to expect an outcome typical of the Roberts court: either a brief, narrow and uninformative opinion joined by all or almost all of the justices, or a series of separate opinions airing the various justifications for tolerating what Congress has done.

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Argument analysis: Justices dubious about limiting bankruptcy court’s right to recover fraudulently transferred assets

Argument analysis: Justices dubious about limiting bankruptcy court’s right to recover fraudulently transferred assetsPerhaps a week with only two cases on the argument calendar gave the justices more time to prepare than normal. They certainly seemed to come to the argument in Merit Management Group v FTI Consulting with a strong predisposition about how to decide the case. As I explained in more detail in my preview, the […]

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Argument analysis: Justices dubious about limiting bankruptcy court’s right to recover fraudulently transferred assets

Perhaps a week with only two cases on the argument calendar gave the justices more time to prepare than normal. They certainly seemed to come to the argument in Merit Management Group v FTI Consulting with a strong predisposition about how to decide the case.

As I explained in more detail in my preview, the case involves the “avoidance” powers of the bankruptcy court, which generally permit the court to recover (“avoid”) dubious payments that bankrupts make before their bankruptcy filings. The provisions are intricately drafted, with numerous detailed exceptions – excellent terrain for law-school exam questions! This case involves a “safe harbor” exception that protects transactions in the securities industry; that provision bars recovery of any “settlement payment” made under a “securities contract” if the payment is made “by or to” a financial institution. The transaction here involved a transfer of assets between parties that were not themselves financial institutions; to make the transfer, the assets had to pass through a financial institution. The U.S. Court of Appeals for the 2nd Circuit has held for many years that those “conduit” payments are protected from avoidance; the U.S. Court of Appeals for the 7th Circuit in this case disagreed.

From the earliest moments of the argument, it seemed clear that the justices were skeptical of the 2nd Circuit’s position. Brian Walsh rose first, arguing that the securities exception protected Merit Management, the recipient of the payment. But before Walsh could get to his third sentence, Justice Anthony Kennedy interrupted to ask why an exemption protecting a settlement payment should be relevant if “that’s not the transfer … that the trustee seeks to avoid.” When Walsh explained his view that the exception protects securities-related payments whenever they happen to be made through a financial intermediary, Justice Ruth Bader Ginsburg cut him off sharply to ask, “why should it matter whether the transmission was through the banks rather than handed over [directly]?”

Walsh insisted that the provisions were designed to protect the securities industry, but an incredulous Justice Sonia Sotomayor quickly broke in to comment:

I understood that the safe harbor was not intended to protect people involved in financial transactions. … If Congress wanted to do that, why bother even creating the fraudulent transfer provisions? Just say any contract that any of these people sign in any of these fields is exempt.

Moments later, Justice Samuel Alito took the discussion back again to the same simple question from which Kennedy had started: “So why shouldn’t the … exemption be applied to the transfer that the trustee is seeking to avoid, as opposed to intermediate transfers that … are not constructively fraudulent?”

Justice Stephen Breyer weighed in a few moments later, trying out a hypothetical that he regarded as “the paradigm case of a fraudulent conveyance,” in which “knowing I’m about to go bankrupt, I take my share [in a company], and I tell them go transfer it to my wife.” When Walsh confirmed that his reading of the statute would exempt that transaction, Breyer commented ominously: “So this … is going to cover all kinds of things.”

I could go on, but suffice it to say that by the time Walsh sat down, each of the justices other than the characteristically taciturn Justice Clarence Thomas had taken a turn challenging Walsh’s position. It is common, of course, after the justices have dealt harshly with the first attorney to appear before them, for them to turn about and question counsel on the opposing side just as aggressively.  But not this time, as the justices showed no interest in challenging Paul Clement, who argued on behalf of the creditors seeking to recover the payment.

Rather, the justices spent most of Clement’s time debating exactly what an opinion in his favor should say. Kennedy, for example, worried about the proper bounds of such a ruling: “Well, if we’re writing the opinion to accept your proposition, how do we qualify it?” Similarly, the justices wondered whether there is any substantial difference between Clement’s position and the position presented in an amicus brief by a group of law professors (probably not).

The most interesting interchange came close to the end of the argument, when Justice Elena Kagan, a former solicitor general, asked Clement, also a former solicitor general, if he had any idea why the government did not participate in the case: “I’ve never seen a bankruptcy case, maybe ever, but certainly a bankruptcy case like this one, in which we do not have a Solicitor General brief.” Clement was understandably unable to shed light on the government’s decision not to file, though he did comment that “if what we were urging on you was really a catastrophe for the markets or something else, boy, I sure think the SG would be here … waving at least a yellow flag.”

My preview suggested that the justices would view this as a straightforward textual case, and the argument suggests that they’ve coalesced around a decision affirming the decision of the 7th Circuit. Considering the court’s light argument calendar this fall, we can expect an opinion in this one long before spring.

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Argument analysis: Justices unsure whether to resolve case about standard of review for findings of insider status

Argument analysis: Justices unsure whether to resolve case about standard of review for findings of insider statusThe argument yesterday morning in U.S. Bank National Association v. The Village at Lakeridge displayed a bench not at all certain the case is worth deciding. The basic problem is that the justices agreed to consider the standard of review for a judge’s determination that a particular individual is – or is not – an […]

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Argument analysis: Justices unsure whether to resolve case about standard of review for findings of insider status

The argument yesterday morning in U.S. Bank National Association v. The Village at Lakeridge displayed a bench not at all certain the case is worth deciding. The basic problem is that the justices agreed to consider the standard of review for a judge’s determination that a particular individual is – or is not – an “insider” for purposes of a bankruptcy proceeding, but now that they’ve reviewed the briefs they’re not at all sure what the legal standard is for deciding if somebody is an insider. Because they explicitly declined to grant review as to the legal standard, they don’t have briefs on that question, so they are reluctant to resolve it. And without knowing exactly what the standard is, they find themselves unable to decide if it looks more like a factual question or a legal question.

Some background information about the Bankruptcy Code is needed to understand the quandary the justices face. The Bankruptcy Code includes a definition of “insider,” designed to identify a group that the bankruptcy court should view with suspicion; the general idea is that the insolvent bankrupt might engage in transactions that favor insiders and thus disadvantage other less-favored creditors. The statute enumerates a lengthy list of obvious insiders (partners, officers, directors, parents, spouses and the like), but all agree that the statutory definition reaches relations that do not fall within the enumerated categories if the facts of a particular case justify treating them as insiders.

This case, for example, involves a purchase of a claim against the debtor by one Robert Rabkin. At the time of the transaction, Rabkin was involved in a romantic relationship with the principal individual representative of the bankrupt, Kathleen Bartlett. Bartlett’s role with the debtor made her an enumerated insider; the bankruptcy court concluded that Rabkin’s romantic relationship with her was not enough to make him an unenumerated insider, largely because of the level of negotiating in which he engaged before making the purchase. Rabkin’s status was important because the bankruptcy court could not have confirmed the plan of reorganization that the debtor proposed if Rabkin had been an insider. The U.S. Court of Appeals for the 9th Circuit affirmed the bankruptcy court’s ruling.

The simplest way to think of the case – pressed on the justices by Daniel Geyser on behalf of the debtor, the Village at Lakeridge, and Morgan Goodspeed on behalf of the U.S. solicitor general – is that insider status depends entirely on whether the transaction proceeded at “arm’s length.” And if that is the test, then it would make sense to treat the application of that test to any particular situation as a question of fact, which appellate courts review only for clear error – in contrast to questions of law, which are generally reviewed de novo, or without deference to the lower court’s decision. Early in the argument, several of the justices seemed to see the case in just that way. Chief Justice John Roberts, for example, suggested that “arm’s length was not invented by the Court here. Arm’s length is a legal concept that goes back beyond Blackstone. It’s a familiar legal test for lawyers.” Similarly, in a colloquy with Gregory Cross (representing U.S. Bank, the creditor challenging the plan), Justice Ruth Bader Ginsburg asked if there was anything more to the standard than whether “they deal with each other as if they were strangers? Isn’t that the definition?” Jumping in to the discussion at that point, Justice Samuel Alito, noting that Ginsburg’s definition “comes right out of Black’s Law Dictionary,” seemed certain that it was a question of fact: “Isn’t that very close to a question of pure fact?”

Cross faced a tricky problem in his argument, though, because he thinks the legal standard is more complicated: In his view, the proper standard turns not only on the arms’-length features of the transaction but also on whether the “closeness” of the parties is similar to the “closeness” of enumerated insiders. So when Cross suggested that the standard was more complex than Ginsburg had described, Alito cut him off, interjecting: “I think you’re talking about two separate questions. And it’s not your fault that the two are hard to separate because we took one question and we didn’t take the other. But the issue here is what is the standard of appellate review with respect to the standard that was applied by the Ninth Circuit. I take it that is the question.”

Gregory A. Cross for petitioners (Art Lien)

By the time Geyser appeared, presenting argument on behalf Lakeridge, several of the justices had homed in on that problem. When Geyser tried to press the easy propriety of clear-error review for determinations of arm’s-length status, Justice Elena Kagan interrupted him to point out that “it’s not really the legal test according to the Ninth Circuit, right, because the Ninth Circuit has the arm’s-length component of its legal test, but it also has this question whether the closeness of the relationship with the debtor is comparable to that of the enumerated insider classifications in the statute. And how any particular set of facts does or does not meet that prong of the test does not seem much of a factual question.”

Elaborating on that point, Kagan seemed convinced that under the two-part standard (closeness plus arm’s-length) clear-error review made little sense: “One way of thinking of this is that once you have the facts and the facts are uncontested and you’re trying to figure out whether those facts satisfy a given legal standard, here whether they’re comparably close to the statutory insiders, … what the Court is then doing is trying to figure out how important each fact is, given the legal test. And that sounds like a legal inquiry to me.”

Faced with colleagues on one side suggesting that arm’s-length status is a “quintessential” fact question and Kagan on the other side suggesting that the actual 9th Circuit standard can’t be treated as a fact question, Justice Neil Gorsuch pressed the view that the court simply can’t decide the standard of review without first deciding what the legal rule is: “[H]ere we’re being asked to decide what the right standard of review is. Can we do that with any degree of assurance when we don’t know what the right legal test is? And don’t we run the risk, perhaps, of sending the wrong signal to lower courts that we’re … endorsing the Ninth Circuit’s formulation of what the test is?” Closing with a quip, he suggested the problem posed “a high degree of difficulty, … like one of those high dives, you know it’s a 10 out of 10 difficulty.”

Geyser’s response was to stand by his view that the legal test is the single question of whether a transaction is conducted at arm’s length, but Gorsuch would not accept that position, reporting that he “had a law clerk survey that for me and I’ve looked at it and I’m not sure I entirely agree.”  Joined by Justice Sonia Sotomayor, Gorsuch pressed Geyser hard to admit that the lower-court cases consider both “closeness” and “arm’s length.” Ultimately, though, Gorsuch returned to the idea that perhaps “we [should] wait to see what the courts of appeals sort out on all this before we decide what the standard of review is?” I should point out that it is easy for Gorsuch to complain that the justices decided to review the wrong question – the court granted review in this case a week before he was confirmed.

Aside from the serious questions about whether the justices have a case in front of them apt for resolution, the most interesting strain of the argument was the protracted debate about whether the issues in the case are better suited for resolution at the bankruptcy-court level or the appellate level.

Recognizing the strong element of finance, several of the justices seemed to find the whole area one best committed to the bankruptcy courts. Sotomayor, for example commented that “I think it’s better left in the hands of the bankruptcy judge who deals with financial transactions all the time.” In the same vein, Alito asked pointedly, “Which entity is better positioned based on role and experience to determine whether a particular transaction is the kind of transaction in which strangers would engage, the bankruptcy judge or a panel of the court of appeals[?]” Continuing in that vein, Roberts commented:

I think it’s pertinent whether they’re more difficult for the district judge or more difficult for the court of appeals. And it seems to me that a lot of the issues we’re talking about here are the sort of things that district court judges, bankruptcy court judges, look at all the time. But to get the intense factual record on a subsidiary issue and ask the court of appeals to look at it after the district court has already done it … I’m not quite sure that’s desirable.

Justice Stephen Breyer piled on, preoccupied with the importance of oral testimony to the bankruptcy court’s deliberations (“He heard them. He saw them.”) and the relative incapacity of an appellate court left only with “a cold record.”

Taking the opposite tack, Justice Anthony Kennedy seemed to wax poetic over the important role that appellate courts can play in developing law over the long run. Responding to Geyser’s suggestion that it is wasteful for multiple levels of appellate panels to review bankruptcy-court factual findings, Justice Kennedy retorted:

[Y]ou’re assuming that it’s not cost-effective for courts over a period of time to elaborate certain standards for the guidance of district courts … That’s not the way the system works. … [A]n appellate opinion after it makes a resolution explains neutral standards that are principles that are applicable to other cases. That’s the whole function of the judicial process. …. You say “Oh, that’s inefficient.” We might as well just let everybody do everything they want every time.

Trying to make sense of the argument as a whole, it is hard to see an obvious path to a decision. It seems quite likely that most of the justices would find treatment as a factual question appropriate if the legal standard were the unitary arm’s-length test pressed by the debtor and the solicitor general. It is almost as likely that most of the justices would find the closeness-to-an-enumerated-category test a legal question. If those alignments hold, though, the dispute turns on the correct definition of the legal standard. Nothing in the argument suggested any appetite for reaching out to articulate the legal standard directly. Of course, the justices could ask for briefs on that question and perhaps set the case for reargument, but presumably the eight of them who were on the bench in March already have decided that the question is not ripe or suitable for plenary consideration. The justices might be reluctant to drop another case from a calendar already truncated by the departure of the Trump travel- ban cases and the dismissal of the PEM matter in August. But in truth this case seems a likely candidate for dismissal.

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Argument preview: Indian case turns justices’ scrutiny to Congress’ power to use statutes to circumvent pending litigation

Argument preview: Indian case turns justices’ scrutiny to Congress’ power to use statutes to circumvent pending litigationDavid Patchak probably never thought his complaint about the decision of the secretary of the Department of the Interior to take a tract of land near his home into trust for the benefit of a Michigan group known as the Gun Lake Tribe of Indians would net him two Supreme Court cases and a federal […]

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Argument preview: Indian case turns justices’ scrutiny to Congress’ power to use statutes to circumvent pending litigation

David Patchak probably never thought his complaint about the decision of the secretary of the Department of the Interior to take a tract of land near his home into trust for the benefit of a Michigan group known as the Gun Lake Tribe of Indians would net him two Supreme Court cases and a federal statute. Little did he know.

Responding to the tribe’s desire to build a casino, the secretary took the land into trust for the tribe in 2005. Patchak filed suit in 2008 claiming that the action was illegal, and has been in litigation with the secretary for most of the intervening decade, during which time the tribe has opened a profitable casino. The dispute seemed to turn on whether the tribe’s status under federal law had attained a required level of formality by 1934. The first time around, the trial court dismissed Patchak’s suit, reasoning that the casino’s effects on his property were not enough to give him standing and that in any event the United States had not waived its sovereign immunity for such a suit. Eventually, the Supreme Court decided to review the case; it decided in 2012 (Salazar v. Patchak) that Patchak did have standing and that the Administrative Procedure Act waived the secretary’s sovereign immunity.

Having lost in the courts, the tribe (and the secretary) turned to Congress, which obligingly adopted a brief statute called the Gun Lake Trust Land Reaffirmation Act. The statute does two things. First, it states that the land in dispute is “reaffirmed as trust land,” and that the “actions of the Secretary … in taking that land into trust are ratified and confirmed.” Second, the statute states that “an action … relating to the land [in question] shall not be filed or maintained in a Federal court and shall be promptly dismissed.” Responding to the statute, the district court promptly dismissed Patchak’s action and the court of appeals affirmed.

If this seems vaguely unfair to you, you have a future as a federal-courts scholar. It turns out that there is an ancient rule, dating to an 1872 case called United States v. Klein, in which the Supreme Court invalidated a federal statute because it improperly “prescribe[d] [a] rule[] of decision” for a pending case. As it happens, Klein is topical these days for a separate reason – it is one of the few occasions on which the Supreme Court has said anything about the pardon power.

Getting back on message: The decisions since Klein have been extraordinarily vague. All agree that Klein is still valid and thus that Congress cannot prescribe a rule of decision for a specific case. Having said that, it is also clear that the justices have given Congress tremendous leeway to come quite close to that result. Most obviously, Congress has considerable though probably not unlimited power to alter jurisdictional rules and have them apply to pending cases. So, for example, just two terms ago in Bank Markazi v Peterson, the Supreme Court upheld a statute that specified that a particular pool of assets – held since the Iranian Revolution – should be available to satisfy claims of victims of Iran-sponsored terrorist acts. The Supreme Court (over a biting dissent by the unlikely pair of Chief Justice John Roberts and Justice Sonia Sotomayor) held that the statute was constitutional because it changed the applicable law, rather than deciding the particular case.

The government argues that the Gun Lake statute should be upheld as a straightforward jurisdictional statute, valid under Congress’ acknowledged authority to define and alter the jurisdiction of the federal courts. Patchak points out, though, that the statute says nothing about “jurisdiction” or even “sovereign immunity”; it simply says that Patchak’s action “shall be promptly dismissed.”

Again, the government argues that the statute is just like the one upheld in Bank Markazi in that it changes the relevant law by declaring the land in dispute suitable for trust status. It should not matter that the change in the rules applies only to this case; that was true in Bank Markazi as well. For his part, Patchak points out that the statute does not in fact say anything about changing rules of law – it doesn’t, for example, waive the requirement that the Gun Lake Tribe satisfy the 1934 deadline. It simply “reaffirm[s]” that the land is “trust land,” “ratif[ying]” and “confirm[ing]” the secretary’s actions without ever declaring that they were proper in the first instance.

The most telling argument for the government is the recitation (in an amicus brief filed by a group of law professors) of the dozens of statutes Congress has adopted through the centuries resolving Indian land disputes and dealing high-handedly with Indian lands. It is notable that Bank Markazi emphasized Congress’ supreme authority over foreign affairs in its rejection of the Klein claim in that case. Congress’ plenary authority to regulate and protect Indian tribes leaves room for a similar resolution of this case without explicitly rejecting the Klein rule. Bank Markazi of course said nothing about Congress’s power over Indian affairs, so that result wouldn’t really follow from Bank Markazi. It would, though, afford the justices a way to decide the case narrowly, which seems to have been their goal in these cases.  The key thing to watch for in the argument will be any sense that any of the members of the Bank Markazi majority show a willingness to treat this case differently than they did that one.

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