Opinion analysis: Justices approve broad damage recovery for patent-infringing exports

Opinion analysis: Justices approve broad damage recovery for patent-infringing exportsThis morning’s opinion in WesternGeco v. Ion Geophysical Corp., holding that the Patent Act authorizes a damage award for patent-infringing exports, is far from what you would have expected from the argument. In April when the justices heard from counsel for the parties, the bench engaged in a heated and far-ranging debate that touched on […]

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Opinion analysis: Justices approve broad damage recovery for patent-infringing exports

This morning’s opinion in WesternGeco v. Ion Geophysical Corp., holding that the Patent Act authorizes a damage award for patent-infringing exports, is far from what you would have expected from the argument. In April when the justices heard from counsel for the parties, the bench engaged in a heated and far-ranging debate that touched on extraterritorial application of the Patent Act as well as basic tort-theory concepts of proximate cause in the like. This morning, though, the justices disposed of the matter with a short and highly formalistic opinion from Justice Clarence Thomas, which barely alludes to those topics. With seven votes for Thomas’ opinion, the concerns of the oral argument and the briefing were relegated almost entirely to a dissent from Justice Neil Gorsuch, joined only by Justice Stephen Breyer.

The case involves Section 271 of the Patent Act, which defines the types of conduct that amount to infringement of a patent. In general, the section applies only to conduct that occurs in the United States. There is an exception, though, in Section 271(f), a provision adopted in response to (and overruling) a notorious Supreme Court case that exonerated a defendant who had manufactured the components of an invention in the United States but had shipped them abroad for assembly into an infringing device. Specifically, Section 271(f) includes within its definition of “infringement” the act of supplying the components of a patented device from the United States. In this case, for example, ION Geophysical manufactured in the United States components that it shipped to companies abroad; when assembled by ION’s customers, those components produced a system for surveying the seafloor that duplicated patented technology held by WesternGeco (perhaps better known by its earlier name Western Geophysical).

The question is what the proper remedy should be for ION’s infringement. The basic premise of the Patent Act (reflected in Section 284) is that the patent-holder should receive full compensation for infringement. Because WesternGeco as a matter of policy did not license its technology, it would have signed service agreements with the parties who bought the components from ION. The lower courts concluded that WesternGeco’s profit from those contracts would have been about $90 million, but they declined to award that amount as damages, reasoning that WesternGeco could not obtain damages for use of the patented device overseas.

Thomas sees it quite differently. He starts by reciting the well-known presumption that federal statutes “apply only within the territorial jurisdiction of the United States,” ornamenting it with his citation of a “medieval maxim” that is new to me: “Statua suo clauduntur territorio, nec ultra territorium disponunt.” (Loosely translated, that means something like “A statute is bound by its own territory and has not effect beyond that domain.”) The parties briefed and debated the question whether that presumption should “apply to statutes, such as § 284, that merely provide a general damages remedy for conduct that Congress has declared unlawful.” Thomas, however, declines to address that question, noting that it “could implicate many other statutes besides the Patent Act.”

Rather, he explains, application of the presumption of extraterritoriality depends on the statute’s “focus,” which he describes as “the object of its solicitude, … the conduct it seeks to regulate, as well as the parties and interests it seeks to protect or vindicate” (quotation cleaned up considerably). Here, Thomas explains, because Section 284 provides “damages adequate to compensate for the infringement,” the focus of this statute is “the infringement.” Because the act that constituted infringement under the relevant portion of Section 271 was the act of supplying components from the United States, Thomas reasons that the “focus” is a wholly domestic act. Thus, he concludes abruptly, “[t]he conduct in this case that is relevant to that focus clearly occurred in the United States,” as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Because Thomas sees the case as “a domestic application of Section 284,” the presumption against extraterritoriality is irrelevant.

Gorsuch’s dissent emphasizes that in every practical way the court’s opinion has validated an award of damages that compensates the patentholder for extraterritorial conduct and notes the disruption that could occur if foreign countries applied a rule of similar breadth to activity within our borders. Thomas dismisses those concerns out of hand, repeating his point that the focus of the statute is infringement and his view that the “infringement” was the act of supply, not the overseas use, and criticizing Gorsuch for “wrongly conflat[ing] legal injury with the damages arising from that injury.”

The only suggestion of a narrowing possibility in the opinion is a brief footnote at the end suggesting that the court “do[es] not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases,” a topic that Justice Elena Kagan discussed at oral argument. In context, though, that does not seem likely to provide much of a limiting effect, given the likelihood that the U.S. Court of Appeals for the Federal Circuit already recognizes proximate cause in its framework for the assessment of damages. What we have, then, is a rare reversal of the Federal Circuit for being unduly niggardly in its assessment of the rights of patentholders.

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Opinion analysis: Justices invalidate civil-service appointments of administrative law judges

Opinion analysis: Justices invalidate civil-service appointments of administrative law judgesIt may be years before the implications of the Supreme Court’s opinion this morning in Lucia v. Securities and Exchange Commission are clear, but at first glance the opinion strikes a major blow at one of the centerpieces of the administrative state – the tradition of civil-service appointments of independent administrative law judges. Specifically, the […]

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Opinion analysis: Justices invalidate civil-service appointments of administrative law judges

It may be years before the implications of the Supreme Court’s opinion this morning in Lucia v. Securities and Exchange Commission are clear, but at first glance the opinion strikes a major blow at one of the centerpieces of the administrative state – the tradition of civil-service appointments of independent administrative law judges. Specifically, the court holds that the appointments of the administrative judges of the Securities and Exchange Commission violate the Constitution’s appointments clause because they were appointed by commission staff rather than the commission itself. Because the opinion contains no obvious narrowing limitations, it is entirely possible that it will extend to invalidate all existing appointments of ALJs.

Justice Kagan with opinion in Lucia v. SEC (Art Lien)

The clause in question (Article 2, Section 2, Clause 2 of the Constitution) requires that all “officers” of the United States be appointed by the president, by the “courts of law,” or by the “heads of departments.” Because these ALJs (like the ALJs in most executive departments) were appointed by civil-service procedures, it is plain that their appointments are invalid if they are “officers” of the United States. The biggest problem for the defenders of those positions is the 1991 decision in Freytag v. Commissioner, in which the Supreme Court held that “special trial judges” of the tax court were officers for purposes of the appointments clause. It seemed clear at the argument that the justices faced three options: Follow Freytag and invalidate the appointments; read Freytag with narrow disingenuity and preserve the appointments; or reject the Freytag decision as out of touch with modern administrative realities.

Justice Elena Kagan’s succinct opinion for a six-member majority takes the first of those approaches. Reasoning that the judges held to be officers in Freytag “are near-carbon copies of the Commission’s ALJs,” she finds that “Freytag says everything necessary to decide this case.” The first part of Freytag’s two-part test is whether the judges “hold a continuing office established by law,” a point that all parties concede given the career full-time appointments that the ALJs hold. Thus, the only question subject to debate is whether the commission’s ALJs have sufficient discretion over sufficiently important functions to warrant the same treatment as the Freytag judges. And Kagan does not think that is a hard question, because “[b]oth sets of officials have all the authority needed to ensure fair and orderly adversarial hearings—including nearly all the tools of federal trial judges.” Summarizing the ability of the judges to take testimony, conduct trials and enforce compliance with discovery orders, she concludes that “point for point – straight from Freytag – the Commission’s ALJs have equivalent duties and powers as [the Freytag judges] in conducting adversarial inquiries.” Indeed, the most important distinction that Kagan sees between the Freytag judges and the SEC’s ALJs gives the SEC officers even more authority than the Freytag judges had; the tax court was obligated to review all opinions issued by the Freytag judges, while opinions of SEC ALJs automatically become final if the SEC decides not to review them.

After disposing of the merits so easily, the only remaining question is the proper remedy. That question is complicated by the decision of the SEC, after the Supreme Court decided to review Lucia, to ratify the appointments of the judges, so that the judge who heard Lucia’s case now holds an appointment from the commission itself. The court does not address the validity of those post-hoc appointments, but does go out of its way to hold that Raymond Lucia is entitled to another hearing before a new judge; Kagan explains that a second hearing before the same judge would not provide an appropriate remedy for the constitutional violation because that judge “cannot be expected to consider the matter as though he had not adjudicated it before.”

Kagan’s opinion garners the votes of six of the nine justices. On one side, Justices Clarence Thomas and Neil Gorsuch join her opinion, but argue that in future cases the Supreme Court should apply an historical standard that would treat as officers “all federal civil officials that perform an ongoing, statutory duty—no matter how important or significant the duty.” On the other side, Justice Stephen Breyer agrees that the appointments are invalid, although he relies on a narrow argument under the Administrative Procedure Act rather than the constitutional argument. He dissents from Kagan’s remedy, though, arguing that a second hearing before a now-duly-appointed judge should be enough for Lucia. The only dissent on the merits comes from Justice Sonia Sotomayor, joined by Justice Ruth Bader Ginsburg; emphasizing the importance of independent ALJs, she argues that Freytag should be narrowed to exclude the SEC ALJs from officer status.

Kagan’s opinion offers not a word to assess or mitigate the consequences of the Supreme Court’s holding for ALJs elsewhere in the executive branch. It is plain from the briefing that the great majority of those judges are in the Social Security Administration, though a substantial number of ALJs are scattered throughout other departments. Given the relatively fact-specific nature of the assessment in Kagan’s opinion, it is entirely possible that the authority granted to some of those judges could be distinguished from the authority granted to the ALJs of the SEC. Having said that, the briefing does not suggest that there is anything particularly unusual about the role that ALJs play in the SEC. Thus, although it is fair to expect future litigation on the point, it would not be at all surprising if Lucia ended up invalidating all of the existing systems for appointments of ALJs.

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Opinion analysis: Justices limit tolling of statutes of limitations that permits “stacked” class actions

Opinion analysis: Justices limit tolling of statutes of limitations that permits “stacked” class actionsLet’s try a free-association game about recent topics in Supreme Court civil procedure cases. If the first topic is “equitable tolling of statutes of limitation,” your answer should be something like “don’t bet on it.” If the second topic is “class actions,” your answer should be something like “good luck with that.” So if I […]

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Opinion analysis: Justices limit tolling of statutes of limitations that permits “stacked” class actions

Let’s try a free-association game about recent topics in Supreme Court civil procedure cases. If the first topic is “equitable tolling of statutes of limitation,” your answer should be something like “don’t bet on it.” If the second topic is “class actions,” your answer should be something like “good luck with that.” So if I tell you that the question in China Agritech Inc. v. Resh is whether equitable tolling should extend the statutory deadline for filing a class action, you wouldn’t be surprised to hear that Justice Ruth Bader Ginsburg’s opinion for a unanimous bench this morning holds that equitable tolling — a judge-made doctrine that extends the deadlines that otherwise would bar an action as untimely — is not available to validate the putative class action filed in China Agritech.

This particular case involves a tolling doctrine established in 1974 in American Pipe and Construction Co. v. Utah. That case (and the 1983 decision in Crown Cork & Seal Company Inc. v Parker) considered the effect of a failed class action on later filings by the individuals who would have been members of a class if the class action had succeeded. Together, those cases concluded that these individuals should be able to bring their own actions after the class action fails, even if the statute of limitations has expired in the meantime. The question in this case is whether that rule extends to permit not only later individual actions but also later class actions. Despite a reasonably sympathetic reception to the plaintiffs’ position during the oral argument, we now learn that the correct answer is a resounding “no.”

Ginsburg presents the question solely as one of relative judicial efficiency. Application of American Pipe to permit tolling of individual claims, she explains, makes sense “because economy of litigation favors delaying those claims until after a class-certification denial. If certification is granted, the claims will proceed as a class and there would be no need for the assertion of any claim individually.” That rationale does not apply to later class filings, she reasons, because there is an affirmative value in having all the class filings as soon as possible. Where early filing of the individual claims would simply clog dockets to no purpose in the event the court certifies a class, “early assertion of competing class representative claims” is beneficial because it allows “the district court [to] select the best plaintiff with knowledge of the full array of potential class representatives and class counsel.”

She points out that this is particularly true in actions (like this one) brought under the Private Securities Litigation Reform Act, which requires the early class filer to send notice of commencement of the class action to all potential plaintiffs. “With notice and the opportunity to participate in the first … round of class litigation, there is little reason to allow plaintiffs who passed up those opportunities to enter the fray several years after class proceedings first commenced.”

Citing an opinion written by then-Judge Samuel Alito, Ginsburg also makes a point that Chief Justice John Roberts and Justice Neil Gorsuch emphasized at the argument – that application of American Pipe has the potential to extend the statute of limitations repeatedly. “The time to file individual actions [under American Pipe] once a class action ends is finite, extended only by the time the class suit was pending; the time for filing successive class suits, if tolling were allowed, could be limitless.” The action in China Agritech, for example, is the third putative class action filed arising out of the same fact pattern. This “further distinction between the individual-claim tolling established by American Pipe and tolling for successive class actions” cuts strongly against extending American Pipe because “[e]ndless tolling of a statute of limitations is not a result envisioned by American Pipe.”

Finally, Ginsburg is unpersuaded that “declining to toll the limitation period for successive class suits will lead to a ‘needless multiplicity’ of protective class-action filings.” For one thing, the U.S. Courts of Appeals for the 2nd and 5th Circuits (which include New York and Texas) “declined to entertain out-of-time class actions in the 1980s” but seem not to “have experienced a disproportionate number of duplicative, protective class-action filings.” Empirical evidence aside, though, Ginsburg’s central response to that possibility is to repeat her earlier point, that “a multiplicity of class-action filings is not necessarily ‘needless,’” because they “may aid a district court in determining, early on, whether class treatment is warranted, and if so, which of the contenders would be the best representative.”

Perhaps the most interesting thing about the opinion is the unremittingly functional nature of the justifications that Ginsburg offers to support the result. As I mentioned in my argument preview, the justices over the last several years have been cutting back on the role of judicially crafted exceptions to statutory limitations periods, voicing the sentiment that federal courts intrude on the legislative power when they permit (or bar) actions based on equitable adjustments to a deadline set by Congress. The last decision in that line of cases came last year in CalPERS v. ANZ Securities, which held that American Pipe tolling applies only to statutes of limitations, not statutes of repose. One likely explanation for the absence of any such reasoning from this opinion is that Ginsburg dissented from the 5-4 decision in CalPERS. Perhaps if this case had been argued earlier in the term we would have seen a concurrence emphasizing the broader criticisms of equitable tolling made by the majority in CalPERS. But as it is, the only concurrence in China Agritech comes from Justice Sonia Sotomayor (who joined Ginsburg’s dissent in CalPERS), and she writes not to offer broader reasons for rejecting tolling but rather to suggest a narrowing justification for the decision – which she would limit to PSLRA cases in which potential class representatives receive notice of the initial class filing.

[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 respondents in this case. The author of this post is not affiliated with the firm.]

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Opinion analysis: Justices reject state-court justification for limiting tribal immunity from state-court actions to adjudicate title to land

Opinion analysis: Justices reject state-court justification for limiting tribal immunity from state-court actions to adjudicate title to landRarely have I read a set of opinions that so closely tracked the discussion at oral argument as the opinions this morning in Upper Skagit Indian Tribe v Lundgren. The case involves a narrow and technical question of sovereign immunity: whether the immunity of a federally recognized Indian tribe protects it from a suit in […]

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Opinion analysis: Justices reject state-court justification for limiting tribal immunity from state-court actions to adjudicate title to land

Rarely have I read a set of opinions that so closely tracked the discussion at oral argument as the opinions this morning in Upper Skagit Indian Tribe v Lundgren. The case involves a narrow and technical question of sovereign immunity: whether the immunity of a federally recognized Indian tribe protects it from a suit in state court to adjudicate the tribe’s claim to land located outside the tribe’s reservation. The Washington Supreme Court rejected the tribe’s plea of immunity, reasoning that tribal immunity never applies to suits that are brought “in rem” (against the land), as opposed to “in personam” (against the tribe itself). The Supreme Court’s decision this morning rejected the state court’s analysis for the time being, though the various opinions leave little reason to think that the tribe ultimately will prevail.

To give a little context, the case involves a 40-acre piece of land adjacent to the reservation of the Upper Skagit tribe in northwestern Washington, which the tribe purchased in 2013. When it undertook to survey the land, the tribe discovered a barbed-wire fence running for about 1,300 feet a few feet inside the boundary of the parcel. About one acre of the parcel was on the far side of the fence, adjacent to land owned by the respondent Lundgrens. When the tribe threatened to tear down the fence and build a fence on the parcel’s boundary, the Lundgrens claimed that they  own the land outside the fence under rules for “adverse possession,” because they have continuously exercised control over the land for more than half a century, with the acquiescence of the parcel’s prior owner.

The problem the Lundgrens faced in the Supreme Court is that there is almost no support for the distinction between “in rem” and “in personam” actions that the Washington Supreme Court offered to allow the Lundgrens’ suit to proceed. By the time of the oral argument, even the Lundgrens admitted that the only basis for that distinction was the Supreme Court’s 1992 decision in County of Yakima v Confederated Tribes and Bands of Yakima Nation, and the justices who discussed the question at the argument seemed to think Yakima could not support such a broad intrusion on sovereign immunity. Justice Neil Gorsuch’s brief opinion for the court bluntly dismissed the state court’s reliance on Yakima as “error,” explaining that “Yakima did not address the scope of tribal sovereign immunity.” Rather, he explained, “it involved only a much more prosaic question of statutory interpretation concerning the Indian General Allotment Act of 1887.” Thus, Yakima “resolved nothing about the law of sovereign immunity,” as the Lundgrens “[c]ommendably … acknowledged … at oral argument.”

If this were the only thing going on in the opinions, the tribe would win the case easily. The problem for the tribe, though, is that the reason the Lundgrens abandoned Yakima as a justification for the decision below is that they found a much stronger basis for rejecting the tribe’s sovereign immunity: the idea that a sovereign has no immunity for actions involving “immovable property” located in the territory of another sovereign.  As Gorsuch acknowledged, that doctrine has been recognized by the Supreme Court for more than 200 years. If the doctrine were adopted as an attribute of tribal sovereign immunity, the tribe would have no immunity from the Lundgrens’ action, because the Lundgren parcel is outside the Upper Skagit reservation. The majority of the justices, though, declined to resolve that question, “leav[ing] it to the Washington Supreme Court to address these arguments in the first instance.” The court noted that “[d]etermining the limits on the sovereign immunity held by Indian tribes is a grave question; … and the alternative argument for affirmance did not emerge until late in this case, … only when the United States filed an amicus brief.” Closing his opinion, Gorsuch suggested that “[t]he source of confusion in the lower courts that led to our review was the one about Yakima … , and we have dispelled it.  That is work enough for the day.”

To make matters worse for the tribe, the two separate opinions that accompanied Gorsuch’s opinion for the majority underscored that the justices are unlikely to welcome a decision by the Washington Supreme Court granting the tribe immunity on remand.  First, Chief Justice John Roberts (joined by Justice Anthony Kennedy) wrote briefly to suggest that it would be “intolerable” if a grant of immunity left the Lundgrens without any legal remedy to protect the land they have occupied since World War II. As his comments at the argument suggested, Roberts was particularly incensed by the suggestion of the solicitor general that the Lundgrens were free to “[g]o onto the disputed property and chop down some trees … or otherwise attempt” to force the tribe to come into court against them. Roberts found himself “skeptical that the law requires private individuals – who had no prior dealings with the Tribe – to pick a fight in order to vindicate their interests.”

Even more pointedly, Justice Clarence Thomas (joined by Justice Samuel Alito) filed a sharp dissent, almost twice as long as Gorsuch’s opinion for the majority, arguing that the “immovable property” exception to sovereign immunity is so well settled that the justices should have reached out to decide the question in this case rather than leaving it for the Washington Supreme Court. Thomas offered a tour de force of historical arguments, citing among other things four treatises that predated adoption of the Constitution, numerous decisions of the Supreme Court addressing the problem in the context of foreign sovereigns, and even longstanding guidance from the State Department on the question. For Thomas, the idea that a sovereign would be immune from litigation over land it held in the territory of another sovereign is so ridiculous that it was absurd for the court to leave the question unresolved. As Thomas put it, it is “difficult to justify” subjecting the Lundgrens to yet another round of litigation over the tribe’s claim of “a sweeping and absolute immunity that no other sovereign has ever enjoyed—not a State, not a foreign nation, and not even the United States.”

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Opinion analysis: Justices reject Patent and Trademark Office’s rules for partial consideration of petitions for inter partes review

Opinion analysis: Justices reject Patent and Trademark Office’s rules for partial consideration of petitions for inter partes reviewThe second of yesterday’s two patent decisions was SAS Institute v. Iancu. As I explained in my post about Oil States Energy Services v. Greene’s Energy Group, both cases involve the process for “inter partes review” that Congress added to the Patent Act in 2012, a process under which a competitor (or, for that matter, […]

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Opinion analysis: Justices reject Patent and Trademark Office’s rules for partial consideration of petitions for inter partes review

The second of yesterday’s two patent decisions was SAS Institute v. Iancu. As I explained in my post about Oil States Energy Services v. Greene’s Energy Group, both cases involve the process for “inter partes review” that Congress added to the Patent Act in 2012, a process under which a competitor (or, for that matter, anyone at all) can ask the director of the Patent and Trademark Office to reconsider a previously issued patent. If the director agrees to reconsider the patent, the Patent Trial and Appeal Board then conducts a trial-like proceeding adjudicating the validity of the patent. The Supreme Court held yesterday in Oil States that Article III permits Congress to allocate that responsibility to an executive agency rather than an Article III court. This decision, though, invalidates a major part of the administrative rules under which the board has been conducting those reviews.

The specific topic before the court in SAS is the board’s practice of instituting a “partial” inter partes review, agreeing to review some but not all of the challenged claims of a patent. Commonly (as in this case), challengers file petitions that allege defects with all or substantially all of the claims in an issued patent. Seeking to allocate its adjudicative resources more efficiently, the board routinely agrees only to review the claims it finds substantial. At about the same time as it rejected constitutional challenges to the entire process, the U.S. Court of Appeals for the Federal Circuit approved the process for “partial” inter partes review. The justices, though, reject that process as wholly inconsistent with the statutory design. Notably, Justice Neil Gorsuch (who dissented sternly in Oil States) writes for a narrow 5-4 majority, over dissenting votes by Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan (all of whom joined the majority in Oil States).

Gorsuch’s majority opinion does two things. The first is the less interesting – a workmanlike explanation of the reasons that persuade the majority that the partial-review process is not consistent with the best reading of the statute. To that end, Gorsuch starts by emphasizing the statute’s command that the board “shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner.” Liberally sprinkling citations that I can omit here, he explains: “This directive is both mandatory and comprehensive. The word ‘shall’ generally imposes a nondiscretionary duty. And the word ‘any’ naturally carries ‘an expansive meaning.’ … So when [the statute] says the Board’s written decision ‘shall’ resolve the patentability of ‘any patent claim challenged by the petitioner,’ it means the Board must address every claim the petitioner has challenged.”

Gorsuch buttresses that reading of the provision with a discussion of the statute’s structure, which contemplates a proceeding guided by the petitioner rather than the director:

This language doesn’t authorize the Director to start proceedings on his own initiative. … Instead, the statute envisions that a petitioner will seek an inter partes review … guided by a petitioner describing “each claim challenged.” … From the outset, we see that Congress chose to structure a process in which it’s the petitioner, not the Director, who gets to define the contours of the proceeding.

Similarly, the statute only authorizes the director to decide “whether to institute … review … pursuant to a petition.” For Gorsuch, the “language indicates a binary choice – either institute review or don’t. And by using the term ‘pursuant to,’ Congress told the Director what he must say yes or not to: an inter partes review that proceeds “'[i]n accordance with’ or ‘in conformance to’ the petition” (quoting definitions of “pursuant to” from the Oxford English Dictionary). Again, Gorsuch suggests that it would make no sense for the statute to require the patentholder to respond “to the petition” filed by the challenger if Congress expected the director to decide the scope of the proceeding; the statute would call for a response to the director’s institution notice.

Gorsuch is similarly unpersuaded by the director’s “attempts [at] a policy argument … that partial institution is efficient because it permits the Board to focus on the most promising challenges and avoid spending time and resources on others.” Gorsuch notes the competing arguments about institutional design from the challenger and briskly washes his hands of the matter: “Each side offers plausible reasons why its approach might make for the more efficient policy. But who should win that debate isn’t our call to make. Policy arguments are properly addressed to Congress, not this Court.”

The second thing the opinion does is far more interesting: It explains why the statute is not sufficiently ambiguous to warrant deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., which requires courts to defer to reasonable agency interpretations of ambiguous statutes. Remarkably, Gorsuch starts by noting SAS Institute’s bold suggestion that the Supreme Court abandon Chevron entirely. What Gorsuch does not do is dismiss the suggestion out of hand; indeed, he goes so far as to offer a citation to a well-regarded pre-Chevron opinion of Judge Henry Friendly explaining that “the meaning of a statutory term” is more suited for “judicial [rather than] administrative judgment.” Gorsuch then suggests that “whether Chevron should remain is a question we may leave for another day.” Falling back on the statutory analysis summarized above, Gorsuch can close by asserting that “[t]he statutory provisions before us deliver unmistakable commands,” leaving “no room in this scheme for a wholly unmentioned ‘partial institution’ power that lets the Director select only some challenged claims for decision.”

On the credibility of that discussion, suffice it to say that Breyer’s dissent (joined by Ginsburg, Sotomayor and Kagan) reads the ambiguity question quite differently. For the dissenters, the majority amends the statute to require adjudication of “‘any patent claim challenged by the petitioner’ in the petitioner’s original petition,” when the agency reasonably read the statute to require adjudication of “‘any patent claim challenged by the petitioner’ … ‘in the inter partes review proceeding.’”

If Sessions v. Dimaya, decided last week, and Oil States had not persuaded us, Gorsuch’s opinion here stakes out his position as the court’s leading skeptic of the administrative state. As I suggested in my post on Oil States yesterday, we can expect more on that front during the remaining weeks of the term.

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Opinion analysis: Justices rebuff constitutional attack on administrative re-examination of patents

Opinion analysis: Justices rebuff constitutional attack on administrative re-examination of patentsThis morning brought decisions in both of the patent cases argued in November, with the government prevailing on the constitutional question raised in Oil States Energy Services v. Greene’s Energy Group, but losing on the statutory question presented in SAS Institute v. Iancu. Both cases involve the process of inter partes review added to the […]

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Opinion analysis: Justices rebuff constitutional attack on administrative re-examination of patents

This morning brought decisions in both of the patent cases argued in November, with the government prevailing on the constitutional question raised in Oil States Energy Services v. Greene’s Energy Group, but losing on the statutory question presented in SAS Institute v. Iancu. Both cases involve the process of inter partes review added to the Patent Act in 2012 as part of the Leahy-Smith America Invents Act. That process authorizes a petition for inter partes review by any competitor that believes that the Patent and Trademark Office erred in issuing a patent on an invention that already existed in prior art. If the PTO determines (in its sole discretion) that the petition has merit, it institutes a trial-like review process that can result, if successful, in amendment or invalidation of the patent, subject to review in the U. S. Court of Appeals for the Federal Circuit.

The question before the justices is whether the adjudication of those petitions by an administrative body (the Patent Trial and Appeal Board) is an exercise of the “judicial power” that under Article III of the Constitution can be exercised only by the federal courts. If it seems fanciful to suppose at this late date that the Constitution could invalidate such a seemingly innocuous administrative process, consider the example of the Bankruptcy Code, provisions of which have been invalidated for intrusions on Article III twice since its initial adoption in 1978.

As it happens, though, inter partes review found a more sympathetic audience than some of Congress’ earlier innovations. Writing for seven of the justices (all but Chief Justice John Roberts and Justice Neil Gorsuch), Justice Clarence Thomas took a straight and simple route to upholding the statute. Sidestepping the longstanding dissatisfaction with the court’s distinction between “public rights” and “private rights,” Thomas set the dispute directly within that framework, which gives Congress “significant latitude to assign adjudication of public rights to entities other than Article III courts.” Quoting the two cases that invalidated provisions of the Bankruptcy Code, Thomas acknowledged that the “Court has not ‘definitively explained’ the distinction between public and private rights,” and that “its precedents applying the public-rights doctrine have ‘not been entirely consistent.’” Still, he says, the framework is adequate for this case because it so clearly involves a public right – “reconsideration of the Government’s decision to grant a public franchise.”

Thomas divides the problem into two steps, first explaining why “the decision to grant a patent is matter involving public rights.” Once he establishes that point, he can argue that, because “[i]nter partes review is simply a reconsideration of that grant, … Congress has permissibly reserved the PTO’s authority to conduct that reconsideration.”

Two key points support the view that patents are matters of purely “public right.” The first is the notion, illustrated by quotations from earlier cases, that the patent is a “creature of statute law” that “take[s] from the public rights of immense value, and bestow[s] them upon the patentee.” The second is that the Constitution explicitly allocates to Congress the power to “promote the Progress of Science and useful Arts” by granting patents; Congress’ decision to authorize the executive branch to grant patents is thus a constitutionally sanctioned delineation of “the executive power,” something which “need not be adjudicated in an Article III court.”

The bigger hurdle is the second step, explaining why the trial-like process in which one competitor persuades the PTO to invalidate a patent is similarly “executive.” On that point, Thomas explains that because its purpose is to ensure that “patent monopolies are kept within their legitimate scope, … inter partes review involves the same interests as the determination to grant a patent in the first instance.” Thomas analogizes the patent to a franchise “to erect a toll bridge” or “to build railroads or telegraph lines,” as to which it has long been held that Congress can “qualify the grant by reserving its authority to revoke or amend the franchise … through legislation or an administrative proceeding.”

Thomas acknowledges a set of 19th-century cases in which the Supreme Court explained not only that “[t]he only authority competent to set a patent aside, or to annul it … is vested in the courts of the United States, and not in the department which issued the patent,” but also that administrative invalidation would “deprive the applicant of his property without due process of law, and would be in fact an invasion of the judicial branch.” Although those quotations might sound pretty persuasive at first reading, Thomas dismisses them as irrelevant in the modern context, “best read as a description of the statutory scheme that existed at that time” and shedding no light on “Congress’ authority under the Constitution to establish a different scheme.”

Given his interest in historical arguments, it will surprise nobody that Thomas gives extended attention to the argument that adjudication of the validity of an issued patent is “judicial” because those disputes ordinarily were resolved by a suit at common law in the English courts of the 18th century. Acknowledging the routine nature of judicial attention to patent litigation, though, “does not establish that patent validity is a matter that, from its nature, must be decided by a court.” The key point for Thomas is that “there was another means of canceling a patent in 18th-century England, which more closely resembles inter partes review: a petition to the Privy Council to vacate a patent.” English patents were subject at the time of the framing to validation by the Privy Council – admittedly a branch of the executive. Thomas therefore argues that “it was well understood at the founding that a patent system could include a practice of granting patents subject to potential cancellation in the executive proceedings of the Privy Council.” Because “nothing in the text or history of the Patent Clause or Article III … suggest[s] that the Framers were not aware of this common practice,” Thomas concludes that the Privy Council practice is enough to validate inter partes review.

It is remarkable that Thomas managed to secure seven votes for his entire opinion. Sharp divisions marked previous cases in the area, several of which were decided without any single majority opinion. The strong majority here could go a long way to establishing the public-right/private-right distinction – however incoherent it seems to the outsider – as a firm boundary delineating areas plainly within congressional control.

Having said that, the opinions as a whole do display a considerable divergence of viewpoint among the justices. First, three of the justices (Justice Stephen Breyer, joined by Justices Ruth Bader Ginsburg and Sonia Sotomayor) suggest that they would go much further in tolerating administrative innovation, emphasizing that the Supreme Court’s opinion says nothing about procedures in which “private rights” are “adjudicated [outside] Article III courts … by agencies.” For that group, sympathetic to the efficiencies of the administrative state, the distinction between public rights and private rights is not a useful way to identify limits on congressional power, though they are happy to use it as a way to define plainly permissible processes.

The most notable writing, though, is on the other side of the matter — a powerful dissent from Gorsuch, joined by Roberts. For Gorsuch, the “efficient scheme” that Congress has designed, however “well intended,” is an unacceptable “retreat from the promise of judicial independence.” Although the opening paragraphs of his opinion mention in passing some of the administrative abuses that have plagued inter partes review (such as the decision by the director to “pack” panels with favorable judges), he rests the weight of his analysis on his reading of the English history.

For Gorsuch, the point of Privy Council review is that executive review was fading away by the time of the Constitution’s framing, with the last actual invalidation occurring in 1746. Gorsuch portrays a progression from the early understanding of patents as “feudal favors” involving “the exclusive right to do very ordinary things, like operate a toll bridge or run a tavern” to a modern understanding of “invention patents … as a procompetitive means to secure to individuals the fruits of their labors and ingenuity.” Offering a remarkable paean to the value of strong protections of intellectual property, Gorsuch argues that the shift toward patents as the earned fruit of “a contract between the crown and the patentee” brought with it a shift toward purely judicial adjudication, coinciding with the “dying gasp” of the Privy Council’s authority in this area.

Having drawn such a firm distinction between “invention patents” and the patronage-like grants of franchises, Gorsuch is particularly critical of the majority’s reliance on cases sanctioning administrative limitations on franchises. For him the better analogy is the land patent – creating a right in real estate that could not exist without the grant from the sovereign. As he points out, courts always have held that the invalidation of interests in land, even when granted by the sovereign, necessarily involves an exercise of the judicial power. He sees no reason to treat invention patents any differently, and thus would reject the scheme for inter partes review as an intolerable incursion on the judicial power. He closes with a characteristically rhetorical flair, ornamented by a quote from the Federalist Papers: “[T]he loss of the right to an independent judge is never a small thing. It’s for that reason Hamilton warned the judiciary to take ‘all possible care … to defend itself against’ intrusions by the other branches.”

Paired with his concurrence last week in Sessions v. Dimaya (to say nothing of his majority opinion in SAS also issued yesterday), Gorsuch’s dissent begins to reveal his deep-seated skepticism about the propriety and utility of the administrative state. Coming hard on the heels of Monday’s argument in Lucia v. Securities and Exchange Commission, these opinions suggest that Gorsuch will not be eager to uphold the appointment practices challenged there.

[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 worry about politicizing administrative law judges

Argument analysis: Justices worry about politicizing administrative law judgesWhen the justices started their last week of arguments this morning with Lucia v. Securities and Exchange Commission, they were well aware of the implications the decision holds for the administrative state. Because the case presents a constitutional challenge to the method by which civil-service administrative law judges are appointed, it raises the possibility that […]

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Argument analysis: Justices worry about politicizing administrative law judges

When the justices started their last week of arguments this morning with Lucia v. Securities and Exchange Commission, they were well aware of the implications the decision holds for the administrative state. Because the case presents a constitutional challenge to the method by which civil-service administrative law judges are appointed, it raises the possibility that the justices might (in the words of Justice Stephen Breyer) “driv[e] wedges of dependence into what was to be since Chester Alan Arthur a merit-based civil service.”

The problem comes from the Constitution’s appointments clause, which requires that all “officers” of the United States be appointed by the president, by the “courts of law,” or by the “heads of departments.” As Chief Justice John Roberts emphasized repeatedly during the argument, the clause reflects the concern of the Constitution’s drafters with “accountability” – the idea that some readily identifiable official could be held accountable for the selection of any “officer” of the United States. There is considerable tension between that principle, which necessarily ties all who qualify as constitutional “officers” to political appointees, and the principles that undergird the Administrative Procedure Act’s conception of administrative law judges, who are established by design as a base of activity independent from political influence.

Mark Perry for petitioners (Art Lien)

To give some context, the case before the court involves the administrative law judges of the Securities and Exchange Commission, traditionally selected as civil-service employees rather than as appointees of the SEC itself, much less the president. As relevant here, the main activity of those ALJs is to adjudicate enforcement proceedings that the commission brings against private individuals such as petitioner Raymond Lucia – found by one of the ALJs to have violated a variety of antifraud provisions of the securities laws.

Although the argument ranged broadly, four distinct threads provide a good overview. The first is sympathy for the development of an independent and merit-based civil-service system. Breyer, for example, plainly approached the case from the premise that the Constitution could accommodate that system. Thus, in conversation with Deputy Solicitor General Jeffrey Wall (arguing for the government that existing appointments are unconstitutional), Breyer commented: “One thing I’m certain of, or fairly certain, or moderately certain, [is] that the Constitution does not inhibit the creation of a merit-based civil service and an adjudicatorily merit-based system of hearing examiners, ALJs.”

Justice Breyer questions Deputy Solicitor General Jeffrey B. Wall (Art Lien)

More expansively, Justice Elena Kagan seemed viscerally sensitive to the importance of maintaining the independence of adjudicators from political influence. Thus, challenging Wall’s view that the appointments are unconstitutional because of their independence from the commission, Kagan explained:

There are different ways to interfere with decisional independence. One is by docking somebody’s pay. One is by having a removal power that you hang over your head. And another is by being the person who gets to decide who gets the job or not.

And so all of these things in some manner tie the adjudicator more closely to the political system. And the APA came up with this foundational compromise which had as a very significant part of it that the hearing examiners, the adjudicators, would have some detachment, would have some insulation from the political system. Not the way an Article III judge does, but still something.

And you want to ratchet that down.

A second thread, almost diametrically opposed to the first, is evident in the emphatic view of Roberts that the APA’s effort to “insulat[e]” judges from the elected executive derogates directly from the Constitution’s requirement of accountability. Thus, in a dialogue with Anton Metlitsky (appearing in support of the existing appointments), Roberts commented:

One of the principles that caused the drafters to give the authority to appoint officers to the President was the important one of accountability. … But in this case, you don’t have that accountability. The Commission can say: Don’t blame us. We didn’t do it. The President can say: Don’t blame me.  I didn’t appoint them. And, instead, it’s something in the administrative bureaucracy which operates as insulation from the political accountability that the drafters of the Constitution intended.

A third thread noted the odd circumstances of the challenge to this particular group of appointments, which argues that the existing judges were unduly biased despite the civil-service methodology of their appointment. It seemed troublesome both to Kagan and to Justice Anthony Kennedy that a shift to appointment by the commission itself would, if anything, produce judges who were even less independent than the judges that Lucia challenges. As Kagan put it, “where we have adjudications … we typically think we want the decisionmaker to be insulated from political pressures. So wouldn’t putting these decisionmakers even closer to the political body only exacerbate the problem that you’re complaining of?” As much as anybody, Kagan shared Breyer’s embrace of the process-based values behind the shift away from patronage-based hiring at the end of the 19th century.

If that summary captured the entire argument, I might have expected a strong majority to rule in favor of the existing appointments, perhaps with a dissent from Roberts and Justices Clarence Thomas and Neil Gorsuch. But to complete the picture I have to mention a fourth and final thread: the strong sense that the court’s prior decisions all but compel a ruling invalidating the challenged appointments. The basic point is that the activities of the officers here are similar to the activities considered by the Supreme Court in its 1991 decision in Freytag v. Commissioner, which held that “special tax judges” of the Tax Court qualified as officers for purposes of the appointments clause. The activities of ALJs are quite similar to the activities of the Freytag judges, who also supervised trial-like proceedings, formed an evidentiary record and reached preliminary decisions in the matters before them.

Anton Metlitsky, for amicus curiae in support of judgement below (Art Lien)

Thus, Roberts brusquely cut off Metlitsky’s effort to begin his argument with a recitation of the standard under which he recommends validation of the existing appointments:

If I were trying to figure out who an officer is, I think I might have started with Freytag. And your test that you just proposed doesn’t seem similar to what Freytag talked about which was a laundry list – not that long perhaps – of particular authorities. And I don’t see, other than the contempt power, I suppose, what’s different here than in Freytag.

Even Kagan, who plainly shared Metlitsky’s concerns about fostering an independent civil service, found it hard to swallow Metlitsky’s attempt to distinguish Freytag:

I guess what strikes me, Mr. Metlitsky, is that if you had a list and you said top 10 attributes of the judges that were involved in Freytag and the judges that are involved here, you’d pretty much say that nine of them are the same and maybe one is different… [I]t’s just so hard to get around … the commonalities of these judges and the judges in Freytag.

Indeed, as Metlitsky’s argument wound down, Kagan suggested to him that however much she liked his proposal as a matter of institutional design, she found it quite difficult to reconcile with the Constitution as it previously has been understood:

As I listen to you, and especially as I compare your test to some of the others on offer, you know, there seems to be a good deal to be said for yours, except I don’t know where it’s coming from, honestly.

So you spent a lot of time in your brief talking like this is a historical test, this is a traditional test… And I guess it seems to me like the test actually, it’s sort of the opposite, the test you would make up if you were doing everything on a blank slate. But I don’t really see what the source of this test is.

I suggested in my preview that Kagan’s views might be central to discerning the side to which the court might tip. A comment like that last one certainly makes it hazardous to say much about her likely disposition. I would, though, add two closing observations. First, the justices seem to view this as a case likely to have broad implications. Mark Perry (appearing on behalf of Lucia to challenge the appointments) tried repeatedly to limit the breadth of his argument to a small group of only 150 administrative law judges scattered around the federal government, suggesting that the court’s decision would apply only to cases of wholly adversarial adjudication – a group from which he pointedly tried to exclude Social Security adjudications. That approach seemed to accomplish little, as several justices (with Justice Sonia Sotomayor probably the most vehement) rejected Perry’s efforts to limit the breadth of a potential decision. Second, if any of my readers are thinking that the “originalist” camp is likely to accept these appointments, I would mention that the only comment of the often-voluble Gorsuch during the oral argument was a question about what the appropriate remedy would be if the existing appointments are held unconstitutional.

In sum, the defenders of the administrative state are not entirely out of the woods. Although some of the justices are sympathetic to the goals that motivate independent appointments, it is not at all clear that five of them will agree that those goals pass muster under the constitutional framework the court’s decisions establish.

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Argument analysis: Breyer and Kagan seek middle ground on damages for patent infringing exports

Argument analysis: Breyer and Kagan seek middle ground on damages for patent infringing exportsThe justices’ second argument this morning was WesternGeco v Ion Geophysical Corp., a case that requires the justices yet again to consider  Section 271 of the Patent Act. Although the Patent Act generally does not apply to conduct outside the nation’s borders, that section imposes a narrow (and controversial) exception that permits a suit for […]

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Argument analysis: Breyer and Kagan seek middle ground on damages for patent infringing exports

The justices’ second argument this morning was WesternGeco v Ion Geophysical Corp., a case that requires the justices yet again to consider  Section 271 of the Patent Act. Although the Patent Act generally does not apply to conduct outside the nation’s borders, that section imposes a narrow (and controversial) exception that permits a suit for infringement of a domestic patent when components are made in the United States and shipped abroad for assembly into the patented device.

The particular question here involves the damages available to the patentholder. Ordinarily, in a purely domestic patent case, the patentholder would be entitled to both a reasonable royalty (what the infringer would have paid if it had licensed the technology from the patentholder) and lost profits (opportunities lost because of the infringement). Here, for example, the infringer (the respondent ION) was ordered to pay a royalty of about $12 million for manufacturing and shipping components that, when assembled, would infringe patents of petitioner WesternGeco. Separately, the lower court ordered ION to pay damages of about $90 million that WesternGeco would have earned if it had been able to sell service contracts to the overseas purchasers of the assembled devices. Although at first glance the two parts of the award seem to overlap, all agree that the damage award would be proper if all of the activity occurred domestically. The narrow question for the justices is whether WesternGeco can get both the royalties and the lost profits damages.

As a group, the justices seemed far from settled on a resolution. About the only thing that seemed clear from the argument was that few if any of the justices are ready to accept WesternGeco’s argument that it is more or less automatically entitled to the damages – that the enactment of Section 271 (labeling ION’s conduct infringement) is enough to justify the full range of conventional patent remedies without regard to the location of the conduct. Justice Neil Gorsuch, for example, commented to Paul Clement (representing the patentholder) that “you don’t have a … lawful monopoly to use this technology abroad. That doesn’t belong to you. …. And so why would you get lost profits … because of a third party’s use entirely abroad? …. Your patent doesn’t run to the high seas, and so your uses aren’t protected there.”

In a similar vein, Justice Stephen Breyer was pervasively worried about the “comity” implications of the dispute – the concerns other countries might have with an American rule imposing large damages for commercial activity outside the borders of the United States and wholly lawful in the country where it occurs. So, for example, at one point he asked Zachary Tripp (appearing for the government in support of the patentholder) to consider what might happen if:

France ha[d] this law that you want here, right? Joe Smith goes to France one day and he makes a tiny particle, which it turns out violates somebody else’s French patent. He ships it back to the United States, where it forms a small part of a very large and valuable gizmo. And all of a sudden, we discover that he’s paying the entire profits of the entire gizmo industry to some French company that had a small patent on a small part. Now all I have to do is generalize from that and I think, my God, we have a lot of problems here.

For Breyer, the entanglement with foreign commerce was troubling: “I can see how that would, in fact, upset foreign countries a lot, because, after all, it wasn’t even a violation of any foreign patent law.” Returning to that theme repeatedly, Breyer emphasized his concern about the potential backlash from a decision in favor of the patentholder. “I mean, if we can have a law like this, so can every other country. … I mean, suppose 10 countries do this.  I try to think about that and I see chaos or confusion. And that point, I think part of comity is, what happens if everybody does it?”

At the same time, several justices were reluctant to protect the infringer entirely under a so-called presumption against extraterritorial reading of statutes – a presumption that the Patent Act should not be read to apply overseas without Congress’ explicit approval.  Justice Samuel Alito, for example, thought such a ruling could not be reconciled with the text of the statute:

If you have a liability provision that says there is liability for acts that are committed abroad, what sense does it make to say, well, although Congress thinks there should be liability for these acts committed abroad, we have to analyze the remedial provisions separately to see whether they wanted any remedy for these acts that are committed abroad?

Alito’s resistance to the infringer’s argument is particularly disheartening for the infringer, because Alito wrote the court’s last major decision on the presumption against extraterritoriality.

Similarly, Justice Anthony Kennedy repeatedly pressed Kannon Shanmugam (who defended the lower court ruling protecting the infringer) to admit that he was seeking to protect his client from the consequences of its infringing behavior: “[Y]our position is that the petitioner is not entitled to full compensation for its injury? That’s your position?”

Justice Ruth Bader Ginsburg seemed to reach a similar position from a different baseline, suggesting that copyright law would contemplate fully compensatory damages in a case like this one: “Isn’t that exactly how the copyright law is applied under the so-called predicate act doctrine? The copyright owner can get damages flowing from the exploitation abroad of domestic acts of infringement. Isn’t this an application to the patent field of the same doctrine?”

You might think that a stark division would flow from the tension between the comments of Ginsburg and Kennedy (concerned about departing from the routine norm of full compensation) with the comments of Gorsuch and Breyer (concerned about the broad reach of American law necessary to provide full compensation). But Breyer and Justice Elena Kagan seemed to be pushing for a middle ground, in which courts would use tort-law concepts of “proximate cause” to limit free awards of damages for conduct only tenuously related to the domestic activity of the infringer. Kagan, for example, suggested to Shanmugam that his parade of horribles was nothing more than a “classic law school proximate-cause hypo. I mean, that’s what that hypo is. And it suggests that if there’s a problem here, it’s a problem about where you draw the causal line. It’s not a problem about some categorical extraterritoriality rule.” Welcoming Kagan’s suggestion, Breyer explained near the end of the argument that a proximate-cause limitation on the ready availability of lost profits in cases like this one would resolve his concerns about comity:  “If you have a tough proximate-cause law, … you will stop people from being fully compensated, but the reason you do it is because you’re afraid with 92 district courts and juries and so forth, it’ll get out of control and be a kind of major problem with other countries.”

In the end, then, I expect a fair amount of back and forth among the justices before they come to rest on this one. I wouldn’t expect the kinds of virulent dissents that we see so commonly in late-June decisions, but I do think it will take quite a while for the justices to settle on positions from such disparate starting points.

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Argument preview: Justices turn to constitutional limits on appointment of administrative law judges

Argument preview: Justices turn to constitutional limits on appointment of administrative law judgesThe justices face a lot of high-stakes cases the last week of the term – with Abbott v. Perez on Tuesday and Trump v. Hawaii on Wednesday – but Monday’s argument in Lucia v. Securities and Exchange Commission may be as important a decision for the administrative state as any case the justices have heard […]

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Argument preview: Justices turn to constitutional limits on appointment of administrative law judges

The justices face a lot of high-stakes cases the last week of the term – with Abbott v. Perez on Tuesday and Trump v. Hawaii on Wednesday – but Monday’s argument in Lucia v. Securities and Exchange Commission may be as important a decision for the administrative state as any case the justices have heard all year. The case involves the Constitution’s appointments clause, which requires that all “officers” of the United States be appointed by the president, by the “courts of law,” or by the “heads of departments.” This case involves the administrative law judges (commonly known as ALJs) of the Securities and Exchange Commission, who traditionally have not been appointed by the SEC, much less the president or the judicial branch. If those ALJs are officers, then their appointments have been unconstitutional.

The particular challenger here is one Raymond Lucia, an investment adviser found by an SEC ALJ to have violated a variety of antifraud provisions of the securities laws. But he is joined by the solicitor general appearing on behalf of the executive branch to argue that the Constitution requires treatment of ALJs as officers subject to the appointments clause. Only at first glance would it seem strange that the government is supporting the challenger: A broad reading of the appointments clause brings direct control of a larger share of the federal bureaucracy within the hands of the president and his political appointees and makes it harder for Congress to shelter government operations from political influence. Thus, when the justices turn to this case, they will find no brief at all from the SEC; the brief in support of the existing system comes from Anton Metlitsky at O’Melveny & Myers, appointed by the justices to argue as an amicus curiae in support of the judgment below that the existing appointments accord with the Constitution.

On the merits, the argument that the appointments are invalid is a powerful one, largely because the activities of ALJs are so similar to the activities considered by the Supreme Court in its 1991 decision in Freytag v. Commissioner, which held that “special tax judges” of the Tax Court qualified as officers for purposes of the appointments clause.  Like the ALJs involved here, those officers supervised trial-like proceedings, formed an evidentiary record and reached preliminary decisions in the matters before them. If the justices decide to take seriously the opinion and analysis in Freytag, then the challenge here will have a great deal of credibility.

The strongest argument in support of the existing arrangement is that the judges here are not officers because nothing that they do is actually effective as a decision of the SEC until the SEC approves it – the ALJ decisions are only tentative and have no effect until the SEC acts.  Similarly, the ALJs cannot themselves sanction parties for contempt or issue subpoenas compelling parties to appear or produce information; all such actions must come from the commissioners themselves. Metlitsky argues for a bright-line rule that a federal employee is not an officer subject to the appointments clause unless Congress delegates to that officer the authority to bind the government or agency. Because they lack that authority, the ALJs at issue here should not, Metlitsky argues, be regarded as officers. As for Freytag, Metlitsky can only urge that the analysis in that opinion could be regarded as nonbinding dictum because the tax judges in fact did have the authority to issue binding decisions in some cases (though not in the case before the Supreme Court). More generally, amici supporting the status quo argue with considerable force that a ruling broadly applying the appointments clause hamstrings the modern administrative state by forcing Congress to broaden the range of political (patronage) hiring as opposed to civil-service (merits-based) hiring.

I would not paint the scenario accurately if I did not mention the back story against which this particular case arises – the swirling controversy about the SEC’s burgeoning use of its in-house tribunal for enforcement proceedings. Since the 2010 adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has markedly ramped up the use of that in-house tribunal for enforcement proceedings that in previous decades would have been conducted in a federal district court. It is surely unfortunate for defenders of the status quo that the particular process before the Supreme Court has been the subject of increasingly vehement attacks alleging bias over the last several years. The judge in this particular case, for example, did not rule against the SEC a single time in his first 50 cases and adopted a bright-line rule of issuing lifetime bans on employment in the investment industry against any defendants who had the nerve to contest the proceedings against them.

Several effective amicus briefs add considerable nuance to that narrative. On the one hand, an amicus brief from professors Urska Velikonja and Joseph Grundfest presents the results of Velikonja’s empirical analysis of the SEC enforcement proceedings, which indicate that the SEC is no more likely to prevail when it uses its in-house tribunal than it is when it proceeds in federal court. In a brief supporting the petitioners, the New Civil Liberties Alliance offers a detailed (and sobering) argument that the SEC’s process for picking ALJs leads systematically to the selection of individuals with no experience or expertise in securities law, the exact opposite of the meritocratic “civil service” model that is the central justification for the modern administrative state. It is ironic that the permissibility of a process that insulates ALJs from political appointment should come before the justices in a context in which the outcomes seem to be so far from independent, but that is the case the justices have before them.

The oral argument may be crucial here. Several of the justices have stated in previous cases that they regard ALJs generally as officers subject to the appointments clause (Justice Anthony Kennedy, by his joinder in the Freytag opinion, and Justices Stephen Breyer, Ruth Bader Ginsburg and Sonia Sotomayor in more recent decisions). If those four maintain that view, it will be difficult for Metlitsky to find five votes to uphold the status quo. I would watch particularly for the reaction of Justice Elena Kagan, whose scholarly background is likely to give her a strong reaction to the competing interests. In the end, though, the ramifications of the decision for the administrative state are so stark that the justices surely will take some time to consider this case closely, even in a month when they’ll face racial gerrymandering (in Abbott) and the president’s travel ban (in Trump). I would put this one down for the last half of June.

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Argument preview: Justices to grapple again with patent infringement overseas

Argument preview: Justices to grapple again with patent infringement overseasOn the first morning of the Supreme Court’s April session next week, the justices will return to problems of extraterritorial patent infringement, hearing argument in WesternGeco v Ion Geophysical Corp. For the third time in recent years, the court will consider Section 271 of the Patent Act. The statute was adopted in response to the […]

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Argument preview: Justices to grapple again with patent infringement overseas

On the first morning of the Supreme Court’s April session next week, the justices will return to problems of extraterritorial patent infringement, hearing argument in WesternGeco v Ion Geophysical Corp. For the third time in recent years, the court will consider Section 271 of the Patent Act. The statute was adopted in response to the court’s 1972 holding in Deepsouth Packing v Laitram Corp. that the Patent Act does not provide a remedy for overseas patent infringement. Deepsouth was an early example of a presumption against extraterritoriality, which has come to loom quite large in the Supreme Court’s recent jurisprudence. Traditionally, under that canon of construction, a statute applies only to conduct within the United States unless Congress explicitly indicates a contrary intent.

In the particular case of Deepsouth, though, Congress moved quickly to reject a categorical protection for overseas infringement. Specifically,  Section 271 provides a narrow exception that permits a suit for infringement of a domestic patent when components are made in the United States and shipped abroad for assembly into the patented device. In Microsoft v AT&T, in 2007, the justices clarified how the statute applies when software is transmitted from the United States but copied overseas. Last term, in Life Technologies v Promega, the justices considered how many components have to be shipped overseas for the statute to apply. The issue here is whether the damages for a violation of Section 271 can include not only royalties on the infringing assemblies, but also lost profits for overseas contracts the patentholder would have obtained if the infringement had not occurred.

WesternGeco (formerly Western Geophysical) owns several patents that are used to search for oil beneath the ocean floor. Ion manufactured and shipped abroad components that, when assembled, infringed the WesternGeco patents. Accordingly, Ion was held liable under Section 271 and obligated to pay WesternGeco a reasonable royalty for the assemblies that it had exported (about $12 million). WesternGeco also showed that it would have earned $90 million in profits from contracts that it would have made with Ion’s customers had Ion not sold them the assemblies. Because patentholders ordinarily are entitled under Section 284 of the Patent Act to recover lost profits in addition to royalties, the district court awarded the lost profits. On appeal, however, the U. S. Court of Appeals for the Federal Circuit vacated the lost-profits award, reasoning that WesternGeco would have performed the lost contracts overseas, and that awarding damages for the loss of those contracts was an impermissibly extraterritorial application of the patent law.

WesternGeco, the patentholder, argues that the presumption against extraterritoriality should have little or no role here, because Section 271 was enacted as an exception to that presumption. From that perspective, a court that finds infringement that falls within the exception carved out by Section 271 should award traditional patent damages as a remedy for that conduct. Any other result, WesternGeco contends, would leave the patent holder undercompensated for indisputably sanctionable infringement.

For its part, the infringer, Ion, maintains that the presumption against extraterritoriality must be applied separately to each statutory provision. Because nothing in Section 284 suggests an intention to sanction extraterritorial conduct, the presumption against extraterritoriality should make courts cautious to award damages for hypothetical contracts that would have been performed wholly outside the boundaries of the United States. In an effort to rebut WesternGeco’s argument that denial of lost profits leaves a patentholder undercompensated, Ion emphasizes that WesternGeco already has received a reasonable royalty for the infringing assemblies. Awarding lost profits that are several multiples of a reasonable royalty, Ion suggests, cannot be justified without some reference in Section 284 justifying extraterritorial application.

Because the presumption against extraterritorial application is an entirely judicial gloss, it is not easy to predict how the justices will react to these arguments. My guess is it would be most useful to watch for the views of Justice Samuel Alito (who authored an opinion broadly applying the presumption against extraterritoriality in 2016, in RJR Nabisco v. The European Community) and Justice Sonia Sotomayor (who wrote last term’s opinion in Life Technologies narrowly interpreting Section 271). I would expect those justices to be as skeptical of the patentholder’s arguments as anybody.  Without their support, Ion will have a tough time eking out an affirmance of the Federal Circuit.

 

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