Opinion analysis: States can’t keep money they collect pursuant to subsequently overturned convictions

Opinion analysis: States can’t keep money they collect pursuant to subsequently overturned convictionsSometimes, it’s hard to tell what a Supreme Court decision is about, or what the court has held, until well into the majority opinion. And then there are examples like Justice Ruth Bader Ginsburg’s opinion for the Court in Nelson v. Colorado, which opened with the following concise paragraph: When a criminal conviction is invalidated […]

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Opinion analysis: States can’t keep money they collect pursuant to subsequently overturned convictions

Sometimes, it’s hard to tell what a Supreme Court decision is about, or what the court has held, until well into the majority opinion. And then there are examples like Justice Ruth Bader Ginsburg’s opinion for the Court in Nelson v. Colorado, which opened with the following concise paragraph:

When a criminal conviction is invalidated by a reviewing court and no retrial will occur, is the State obliged to refund fees, court costs, and restitution exacted from the defendant upon, and as a consequence of, the conviction? Our answer is yes. Absent conviction of a crime, one is presumed innocent. Under the Colorado law before us in these cases, however, the State retains conviction-related assessments unless and until the prevailing defendant institutes a discrete civil proceeding and proves her innocence by clear and convincing evidence. This scheme, we hold, offends the Fourteenth Amendment’s guarantee of due process.

Given that Colorado’s scheme appears to be unique, and that the Colorado legislature has already passed legislation that goes into effect in September and provides for automatic reimbursement of “amounts paid following a vacated conviction,” the actual impact of the court’s decision in Nelson will surely be modest. Instead, its more interesting implications may stem from the debate between the majority and Justice Clarence Thomas, who, alone in dissent, did not think it nearly as obvious that “defendants whose convictions have been reversed have a substantive right to any money exacted on the basis of those convictions.”

As we noted in our argument preview, Nelson arose from the Colorado Supreme Court’s interpretation of the state’s Exoneration Act — a statute passed to provide monetary compensation to individuals who had been wrongly convicted — as also encompassing situations such as those presented in Nelson, when a defendant pays money to the states in conjunction with a conviction, only to have that conviction vitiated on direct appeal or through a collateral post-conviction proceeding. Although Colorado’s practice before the Exoneration Act had been, like every other jurisdiction, to automatically return that money once it becomes clear that the prior conviction will not be restored, the Colorado Supreme Court held that the Exoneration Act displaced that rule — even though it requires defendants to initiate a separate civil proceeding, in which they have to prove their innocence by clear and convincing evidence, before thay can collect the deposited funds.

Writing for a 6-1 majority (Justice Samuel Alito concurred in the judgment, but would have reached the same result by applying the more restrictive approach to due process in criminal cases articulated in Medina v. California.), Ginsburg opened by explaining why the traditional Mathews v. Eldridge due process balancing test, rather than Medina, applies. Because “[t]hese cases … concern the continuing deprivation of property after a conviction has been reversed or vacated, with no prospect of reprosecution,  … [and] no further criminal process is implicated, Mathews ‘provides the relevant inquiry.’”

Turning to Mathews’ familiar factors, the court made quick work of explaining how “[a]ll three considerations weigh decisively against Colorado’s scheme.” First, the petitioners clearly have a significant interest “in regaining the money they paid to Colorado,” because “Colorado may not presume a person, adjudged guilty of no crime, nonetheless guilty enough for monetary exactions.”

Second, the court held, there is a clear risk of erroneous deprivation of the petitioners’ money, because the Exoneration Act puts the burden on them to prove their innocence by clear and convincing evidence, even though their convictions have been wiped off the books. If that weren’t problematic enough, Ginsburg continued, the Exoneration Act “provides no remedy at all for any assessments tied to invalid misdemeanor convictions,” and “when amounts a defendant seeks to recoup are not large [as in the petitioners’ cases], the cost of mounting a claim under the Exoneration Act and retaining a lawyer to pursue it would be prohibitive.”

Indeed, the court explained, the fundamental error in Colorado’s position was in conflating compensation with reimbursement: “Just as the restoration of liberty on reversal of a conviction is not compensation, neither is the return of money taken by the State on account of the conviction.” Thus, the third Mathews factor also militates in favor of the petitioners, for “Colorado has no interest in withholding from [them] money to which the State currently has zero claim of right.” Ultimately, “[t]o comport with due process, a State may not impose anything more than minimal procedures on the refund of exactions dependent upon a conviction subsequently invalidated.”

In a provocative (and solo) dissent, Thomas suggested that the fundamental flaw in both the majority and concurring opinions was the assumption that defendants in cases like Nelson have a vested property interest in money they pay pursuant to criminal convictions that are vacated or reversed on appeal or through collateral post-conviction proceedings — an assumption Thomas rather vigorously disputed. Instead, Thomas argued, if such an interest comes from state law, then it must come from the Exoneration Act — which, on its terms, imposes conditions on the return of that money.

The more likely source of a substantive right to return of the funds, Thomas continued, was the due process clause of the Fourteenth Amendment — which, in Thomas’ long-held view, “confers no substantive rights.” Hence, Thomas’ perhaps surprising bottom line —“Colorado is therefore not required to provide any process at all for the return of that money.”

Fortunately for the petitioners, all of the other participating justices disagreed, even if they only assumed that criminal defendants do indeed have a right to the return of funds they pay pursuant to subsequently invalidated convictions, without explicitly identifying the source of such a right.

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Argument analysis: A genuinely undecided court on a difficult criminal procedure question

Argument analysis: A genuinely undecided court on a difficult criminal procedure questionIn the last oral argument of the week, in Weaver v. Massachusetts, the court confronted two seemingly incompatible lines of doctrine. When there is a “structural” error in a criminal trial, prejudice is often irrebuttably presumed and a new trial is ordered. But when a defendant alleges that his lawyer was constitutionally ineffective, he must […]

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Argument analysis: A genuinely undecided court on a difficult criminal procedure question

In the last oral argument of the week, in Weaver v. Massachusetts, the court confronted two seemingly incompatible lines of doctrine. When there is a “structural” error in a criminal trial, prejudice is often irrebuttably presumed and a new trial is ordered. But when a defendant alleges that his lawyer was constitutionally ineffective, he must prove prejudice before his conviction will be reversed. These doctrines collide when a structural error occurs and a lawyer’s ineffective assistance leaves it uncorrected. Which rule – prove prejudice or presume it — should apply?

After an hour of argument yesterday, the justices seemed divided and genuinely undecided. Justices Elena Kagan and Samuel Alito repeatedly staked out opposite positions, while Chief Justice John Roberts and Justices Anthony Kennedy and Stephen Breyer appeared to be still searching for answers. Toward the end, Breyer succinctly expressed the Solomonic quandary: It may be true that precedent does not yield a clear answer, “but if we’re cutting this child in two,” perhaps a new solution is required.

A lawyer’s mistake leads to constitutional error

As previewed, when Kentel Weaver’s jury was being selected, the courtroom was already overcrowded with potential jurors, so Weaver’s mother and other supporters were told the courtroom was “closed” when they arrived. When they later told Weaver’s lawyer about this, he raised no objection; he conceded post-trial that he did not understand it was a violation. After the jury was chosen the next day, the courtroom was open to all. But the damage – the error of denying a “public” criminal proceeding – was done.

The Supreme Court has repeatedly ruled that closing a criminal courtroom to the public is a “structural” denial of the Sixth (and First) Amendment right to public trial. This is true even for pretrial motions hearings and the initial step of jury selection. So in this case, the lawyer’s failure to object to the closed courtroom during voir dire was unreasonably deficient. And that deficiency led to the constitutional error being uncorrected and unaddressed, until Weaver filed an ineffective assistance claim years later (timely under Massachusetts rules).

The Massachusetts courts chose the prejudice rule

Weaver’s ineffective assistance claim was rejected at the trial court level, and the Massachusetts Supreme Judicial Court agreed on appeal. The SJC accepted that a public-trial error had occurred, and that public-trial violations have been described as “structural” so that prejudice is presumed and a new trial is generally ordered. But Weaver was not alleging a direct public-trial violation (apparently because the failure to object might constitute “forfeiture” under Massachusetts law – and as some of the justices noted yesterday, it also might not be “plain error” under U.S. Supreme Court precedent). Instead, Weaver was alleging a different Sixth Amendment violation: ineffective assistance of counsel. Because the Supreme Court has been very clear that prejudice must be demonstrated before a conviction will be reversed for ineffective assistance – and Weaver had not alleged prejudice at all – the Massachusetts court denied his claim and affirmed his murder conviction.

The justices seem genuinely undecided

Just as in the “old” days, when Justice Antonin Scalia was on the court, this case may turn on Justice Anthony Kennedy’s vote – and Kennedy said very little to indicate where he might land. But as discussed below, there may be some broader ground for resolution. It seems that “new law” is likely to be made however the court decides.

Justice Ruth Bader Ginsburg asked the first question, of Weaver’s lawyer, Michael Kimberly: “[D]o you make any distinctions between kinds of errors that we have called structural?” Kimberly stuck to an absolute position, saying “no.” But Roberts and others seemed interested in an argument that perhaps distinctions should be made.

As suggested in my preview, Roberts and others also appeared to wonder whether there was a structural error here at all; Justice Neil Gorsuch suggested that a “triviality exception” might apply. But Ann O’Connell, arguing for the U.S. solicitor general as a “friend of the court” on behalf of Massachusetts, noted that the case had been litigated “on the assumption” that a Sixth Amendment public trial violation occurred (although she gently suggested that “if this was our own case” she might not concede it). Meanwhile, while arguing that no prejudice should be required, Kimberly also offered some realistic examples of how the absence of any of Weaver’s supporters in the courtroom during jury selection really could have prejudiced his trial.

Arguing for Massachusetts, Assistant State Attorney General Randall Ravitz calmly stuck to his brief, and continued its low-key style. The court seemed to save its more difficult questions for O’Connell, and her able responses demonstrated why the solicitor general has approvingly been called the court’s “tenth justice.”

Arguing “through” the lawyers, as Gorsuch pursued

Providing the starkest presentation of opposing viewpoints on the question presented, Kagan and Alito twice whipsawed the lawyers on both sides. Alito asked, “there is no violation of the right to counsel based purely on deficient performance, … right? … [T]he prejudice prong has to be satisfied?” But Kagan quickly responded, “we’ve said over and over again that you can’t prove prejudice” for structural errors because “it is so speculative as to whether this fundamental defect in the trial process caused error.” Thus the polar positions were staked out, and I haven’t seen a better example of the justices arguing with each other “through” the lawyers. Those dialogues, however, merely frame the question. They do not resolve it.

Also, as was consistently true over his first three days of oral argument, Gorsuch demonstrated that he is a confident and dogged questioner. At one point he pursued Kimberly over several minutes, while imploring the advocate to “please, just stick with me.”

Is an innovative solution available in the end?

Interestingly, Gorsuch, Sotomayor, and most clearly Breyer, during the rebuttal, all appeared to suggest that the opposing lines of doctrine might be “harmonized” by applying a standard from the “fourth prong” of the plain error rule of Olano v. United States for “unpreserved” errors. Why not ask whether a structural error that results from ineffective assistance “seriously affects the fairness, integrity, or public reputation of judicial proceedings,” before overturning a conviction? Gorsuch pursued Kimberly on this point beyond the red light signaling the end of Kimberly’s argument time, so a complete answer was not presented (and indeed, might not be possible). But this innovative suggestion might attract more than just a divisive 5-4 majority, and perhaps provide some realistic structure for addressing a difficult, but unfortunately recurrent, problem in ineffective assistance cases.

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Argument analysis: Justices leaning toward a ruling for Trinity Lutheran on the merits

When the Supreme Court heard oral argument this morning in Trinity Lutheran Church of Columbia v. Comer, a Missouri church’s challenge to its exclusion from a state program that provides grants to nonprofits to allow them to resurface their playgrounds with recycled tires, all eyes were on the court’s newest justice, Neil Gorsuch. After all, […]

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When the Supreme Court heard oral argument this morning in Trinity Lutheran Church of Columbia v. Comer, a Missouri church’s challenge to its exclusion from a state program that provides grants to nonprofits to allow them to resurface their playgrounds with recycled tires, all eyes were on the court’s newest justice, Neil Gorsuch. After all, the conventional wisdom went, the other eight justices were likely deadlocked on the case and were expecting him to cast the tiebreaking vote, which is why they waited nearly 15 months after granting review before hearing oral argument. That may well have been true, but it was certainly not how it seemed to play out in the courtroom today. After roughly an hour of oral argument, the state seemed to have only two certain votes – those of Justices Ruth Bader Ginsburg and Sonia Sotomayor. Moreover, the justices seemed inclined to go ahead and decide the case even though Missouri had announced last week that it had changed the policy at issue in the case to allow churches to compete for the grants in the future. The end result could be an important ruling on the disbursement of funds by state and local governments to religious institutions.

David A. Cortman at lectern for petitioner (Art Lien)

Arguing on behalf of Trinity Lutheran, David Cortman reiterated that the church’s preschool had been excluded from the state-run grant program solely because it was operated by a church. Ginsburg didn’t seem to see a problem with that proposition. She noted that in 1947, in a case called Everson v. Board of Education, the court had ruled that the Framers didn’t want tax money going to maintain churches or property. Shouldn’t that principle, she asked, govern here?

Cortman responded that this case is different, because the state can’t deprive religious groups of general government benefits like funding for playground resurfacing. But Sotomayor expressed doubt that the playground could be separated out from the church’s religious work. The playground is part of the ministry of the church, she suggested. Cortman urged the justices to focus on where the money goes; here, he emphasized, the money goes only to the playground resurfacing.

Sotomayor also observed that there has been a long history in the United States of states not wanting to fund churches; they should be free to do that in cases like this. We seem to be confusing funding, she suggested, with the practice of religion. The church isn’t going to close without a new playground surface, she stressed, so she was skeptical that this case actually implicates the right to free exercise of religion.

Justice Samuel Alito pushed back against the idea that provisions like the state constitutional amendment on which Missouri relied to deny funding to Trinity Lutheran reflect some sort of “honorable historical tradition.” Instead, he asked somewhat rhetorically, aren’t they based on “anti-Catholic bigotry”?

David A. Cortman for petitioner

James Layton, who is now an attorney in private practice but was the solicitor general of Missouri when the state filed its briefs in the case last year, argued on behalf of Missouri. Layton told the justices that the state had barred funding from going to religious institutions because it wanted to avoid the appearance that it was both choosing among different churches and making physical improvements to churches.

Layton’s argument did not seem to resonate with most of the justices. Citing a variety of federal programs that provide funding that could flow to religious institutions – for example, a Department of Homeland Security program to improve security near high-risk targets like synagogues or mosques and a program to repair buildings damaged by the bombing at the federal building in Oklahoma City – Alito pressed Layton on whether the state’s policy would bar similar programs. Layton held firm, telling Alito that it would because state money cannot be used for religious institutions.

That response prompted Kagan – who during Cortman’s argument had seemed to be leaning toward the state – to ask whether the state’s position would also bar the state from providing police and fire protection to churches. Layton responded that it would not, reasoning that public safety is a service, rather than something for which the state gives funding to a religious group.

Justice Stephen Breyer seemed unconvinced. He first asked Layton whether the U.S. Constitution would allow a state to declare that it wouldn’t provide a church with police or fire protection. When Layton responded that would not, Breyer then moved on to what seemed to him to be the logical next step: How does the Constitution then allow Missouri to deny money for a new playground surface to a daycare center, whose students could face all kinds of potential hazards – ranging from a skinned knee to tetanus and a broken leg – from the older, less safe playground?

Alito seized on what he clearly viewed as a potential weakness in the state’s defense of its policy. How do you distinguish, he asked Layton, between a program that is open to everyone who wants the funding and a program like the playground resurfacing program that awards grants based on purely neutral criteria?

Other justices seemed to agree. Kagan suggested to Layton that, at bottom, the playground resurfacing program is open to everyone; the state is just depriving one specific group of nonprofits – religious ones – from applying. In a statement that bodes poorly for the state, she declared that “this is a clear burden on a constitutional right” because religious individuals and groups are barred from competing for an otherwise neutral benefit.

Gorsuch followed up on this line of questioning, asking Layton to explain why excluding religious groups from selective programs would be preferable to excluding them from a general benefit. Layton responded that selective programs tend to have more public visibility than the general ones, and can effectively amount to a government endorsement of the religious group and its mission. But Gorsuch was dubious. How, he asked, do we draw those lines?

James R. Layton, lawyer for Missouri, responds to question from Justice Gorsuch; petitioner’s lawyer, David A. Cortman, seated left foreground (Art Lien)

Breyer worried aloud that Layton’s reliance on the differences between selective and general benefits would create its own set of problems. If we accept your argument, he told Layton, we will see “litigation forever.” “I am afraid of that one,” he concluded.

The justices spent relatively little time exploring the question that they had asked both sides to brief in an order issued last week: What effect, if any, should the Missouri governor’s recent announcement that the state would, going forward, make grants available to religious groups have on this case? In the briefs that they filed yesterday, both the church and the state urged the justices to go ahead and decide the case anyway, and the justices today seemed to agree. Breyer raised the issue first, well into Cortman’s argument. Breyer asked Cortman why the case wouldn’t be moot. The church, Breyer noted, will receive its grant. And it didn’t ask for money to compensate for the earlier denial of the grant; instead, the church was simply seeking an order directing the state to award the grants in the future.

Cortman responded that the “political winds” could still change, especially because the new policy will almost certainly be challenged in court and could be struck down. The key question for the court is whether the state is “free to return to its old ways” – which, he suggested, it is.

The issue did not surface again until late in Layton’s argument, when Sotomayor hinted that the state’s about-face on the underlying policy indicated that the state attorney general now actually supported the church’s position. If the state is not willing to fight this case, Sotomayor suggested, had it appointed Layton (who no longer works for the state) to “manufacture” the kind of adversity that the case would need for the court to rule on it? Tellingly, Sotomayor’s statement came immediately after Kagan had signaled a willingness to vote for the state, and may reflect a last-ditch effort to try to avoid a ruling in the church’s favor by convincing her colleagues that the case is moot.

Will Sotomayor succeed in getting the case dismissed without a ruling on the merits? If today’s oral argument is any indicator, it seems unlikely. If the justices were to dismiss the case, we could know in the next few weeks. But the more likely scenario – even if the justices are not closely divided – is that the court will issue a decision on the merits sometime in late June.

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Opinion analysis: Justices require notice of appeal from deferred restitution judgments

Opinion analysis: Justices require notice of appeal from deferred restitution judgmentsIn retrospect, the only truly curious feature of Wednesday’s Supreme Court decision in Manrique v. United States is why it took so long. Writing for a 6-2 majority, Justice Clarence Thomas held that when a criminal defendant files a notice of appeal from the original judgment of conviction and does not separately file a notice […]

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Opinion analysis: Justices require notice of appeal from deferred restitution judgments

In retrospect, the only truly curious feature of Wednesday’s Supreme Court decision in Manrique v. United States is why it took so long. Writing for a 6-2 majority, Justice Clarence Thomas held that when a criminal defendant files a notice of appeal from the original judgment of conviction and does not separately file a notice of appeal from a deferred restitution award, he may not challenge the restitution order on appeal if the government timely objects. The succinctness of Thomas’ nine-page majority opinion was matched by Justice Ruth Bader Ginsburg’s three-page dissent, in which, joined by Justice Sonia Sotomayor, she argued that the district court’s “transmission of the amended [post-restitution] judgment to the Court of Appeals [was] an adequate substitute for a second notice of appeal.” Simply put, it’s easy to understand what the Supreme Court held – and why. But we may never know why such a straightforward result took more than six months to write up and hand down.

As we noted in our argument preview, the issue in this case was teed up (and, indeed, perhaps even caused) by the justices’ 2010 ruling in Dolan v. United States. The majority in Dolan held that, so long as an initial judgment of conviction and sentence in a federal criminal case includes a deferred order of restitution, an amended, post-hearing judgment fixing the specific amount of restitution does not have to comply with the Mandatory Victims Restitution Act’s 90-day deadline for restitution awards, because the latter judgment was simply attaching an amount to the restitution already ordered by the former judgment. The result of Dolan is that significant time can often elapse between the initial judgment of conviction and sentence and the amended judgment that includes the determined restitution award. And in cases like Manrique, in which a defendant notices an appeal from an initial judgment, the question is whether the defendant must also notice an appeal from the amended judgment in order to challenge the restitution award on appeal. (All agree that a defendant can simply wait to notice an appeal until entry of the amended restitution judgment, which will subsume the underlying judgment of conviction and sentence, as well.)

In answering that question in the affirmative, Thomas seized on the language of 18 U.S.C. § 3742 and Rule 4 of the Federal Rules of Criminal Procedure, both of which “contemplate that the defendant will file the notice of appeal after the district court has decided the issue sought to be appealed.” Although it is not clear (and the court pointedly did not decide) whether that rule is jurisdictional, the “requirement that a defendant file a timely notice of appeal from an amended judgment imposing restitution is at least a mandatory claim-processing rule.” Thus, so long as the government timely objects to the absence of a second notice of appeal (as it did in this case), the substance of the amended judgment (the amount of restitution) cannot be appealed.

Today’s majority then dispatched Marcelo Manrique’s two arguments to the contrary, rejecting the view that deferred-restitution cases involve only one appealable judgment, or that Rule 4(b)(2), which allows a “prematurely filed notice of appeal [to] become effective … to challenge a later-entered judgment in some circumstances,” applies in this context. As Thomas explained:

Rule 4(b)(2) applies only to a notice of appeal filed after a sentence has been
“announce[d]” and before the judgment imposing the sentence is entered on the docket. If the court has not yet decided the issue that the appellant seeks to appeal, then the Rule does not come into play. Accordingly, it does not apply where a district court enters an initial judgment deferring restitution and subsequently amends the judgment to include the sentence of restitution. By deferring restitution, the court is declining to announce a sentence.

In her brief dissent, Ginsburg did not take issue with any of the majority’s analysis. Instead, she focused on what actually happened in Manrique’s case, in which “the District Court appears to have assumed that no second notice was required to place the restitution amount before the Court of Appeals.” Thus, as she explained, “[w]ithout awaiting another appeal notice, the District Court clerk transmitted the amended judgment, five days after its entry, to the Court of Appeals, which filed that judgment on the docket of the appeal from the conviction and sentence already pending in that court.” In essence, the relevant actors all assumed that the deferred restitution award was subsumed within the already filed appeal. And “in lieu of trapping an unwary defendant,” Ginsburg argued, “I would rank the clerk’s transmission of the amended judgment to the Court of Appeals as an adequate substitute for a second notice of appeal.” After all, as she concluded, “[g]iven the steps taken by the District Court, Court of Appeals, and the clerks of those courts, it was likely no surprise to the Government when Manrique challenged the restitution award in his opening brief on appeal.”

The bottom line in this opinion now makes clear what most had already assumed – that a criminal defendant who wishes to challenge a deferred restitution award must notice an appeal from that judgment, whether or not he has previously noticed an appeal from the original judgment of conviction and sentence. The only question today’s opinion leaves open is whether a defendant’s failure to notice such an appeal is a jurisdictional defect that cannot be waived by the government, or a mandatory claim-processing rule that can be.

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Argument analysis: Does a statute of limitations apply to SEC actions for disgorgement?

Big money is on the line, not just in Kokesh v. Securities and Exchange Commission, but in a number of cases in which the SEC seeks to force wrongdoers to disgorge gains ill-gotten in days of yore. Although prognostication is a risky business, Tuesday’s oral argument would prompt a wager on the side of the […]

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Big money is on the line, not just in Kokesh v. Securities and Exchange Commission, but in a number of cases in which the SEC seeks to force wrongdoers to disgorge gains ill-gotten in days of yore. Although prognostication is a risky business, Tuesday’s oral argument would prompt a wager on the side of the petitioner, Charles Kokesh. The justices appeared unimpressed by the prospect of permitting the SEC to avoid an arguably applicable statute of limitations.

The set-up

Kokesh misappropriated $34.9 million of investors’ funds between 1995 and 2006. A 2009 enforcement action brought by the SEC led, at the district court level, to civil penalties of $2.4 million for misconduct between 2004 and 2006, as well as to an order to disgorge the entire amount diverted beginning in 1995. Because of the length of time and the “tens of thousands” of investors involved, the disgorged amounts would not be returned to victims, going instead to the U.S. Treasury. The U.S. Court of Appeals for the 10th Circuit upheld the entire disgorgement award as not time-barred by 28 U.S.C. §2462, a statute of limitations requiring that “enforcement of any civil fine, penalty, or forfeiture” be “commenced within five years from the date when the claim first accrued.” Although the 10th Circuit’s opinion was in line with that of the other federal courts of appeals previously considering the issue (including the U.S. Courts of Appeals for the 1st and District of Columbia Circuits), the U.S. Court of Appeals for the 11th Circuit subsequently broke from the herd in Securities and Exchange Commission v. Graham.

Kokesh’s main argument is that disgorgement is either a “forfeiture” or a “penalty” and thus subject to Section 2462. This means an enforcement action initiated in 2009 could capture proceeds no further back than 2004.

The government counters that disgorgement is neither a “forfeiture” nor a “penalty” – it simply prevents a wrongdoer from enjoying unjust enrichment. To repeat an analogy used in the argument preview, refusing credit to a student for a plagiarized paper neither punishes the student nor constitutes deprivation of an entitlement – it just keeps the student in the status quo.

What disgorgement is and isn’t

On the eve of the argument, the briefs seemed matched right down to competing arguments based on the canon “noscitur a sociis (Latin for “known by the company you keep”), which instructs that the meaning of a word can be determined by the words associated with it. The SEC argued that because the “penalties” and “fines” referred to in the statute both are punitive, “forfeiture” must be too, while Kokesh argued that “fines” and “penalties” both are “in personam” money judgments, just like disgorgement. There also were plenty of (non-dispositive) precedents to go around, with the parties reading many of the same cases in their own favor.

Also teetering at the fulcrum were arguments speculating about what Congress meant by “forfeiture” in 1839, when enacting Section 2462’s predecessor. Although disgorgement wasn’t sought as a remedy until 1970, both sides found plausibly supportive historical sources. The SEC’s case, however, may have been stronger: Kokesh’s best “forfeiture” finds related to relinquishment of something a miscreant already owned (like goods he was smuggling) rather than the actual proceeds of crime.

Jump ball to Kokesh

By and large, the justices did not evince much interest in either legal history or old Latin terms, although there was a lot of attention paid to other matters, some of which had not been briefed. For instance, the government almost certainly found it disconcerting that Justices Samuel Alito, Sonia Sotomayor and Anthony Kennedy all specifically questioned the source of authority for the commission to pursue disgorgement remedies at all, while newcomer Justice Neil Gorsuch said, “there’s no statute governing it. We’re just making it up.” Chief Justice John Roberts was similarly skeptical, stating, “we kind of have a special obligation to be concerned about how far back the government can go when it’s something that Congress did not address because it did not specify the remedy.”

Probably coming as a surprise to both parties, a number of questions suggested that the court might consider taking a “non-categorical” approach, characterizing disgorgement as non-penal and not subject to Section 2462 only when the objective of the remedy is victim compensation. According to Kennedy:

The case is presented to us as if disgorgement is this category we must adopt. … It’s always a penalty or it’s always not a penalty. It seems to me that maybe we can give guidance on when it is a penalty.

Adam Unikowsky, arguing for Kokesh, responded that “as a matter of both doctrine and practicality, it should be all or nothing.” At another point, however, citing United States v. Beebe, Unikowsky also made the argument that if the remedy were directed at victim compensation, it properly would be subject to a statute of limitations governing private rights of action, even if the case were brought by the government.

Adam Unikowsky for petitioner (Art Lien)

One of Kennedy’s questions about victim compensation elicited new factual information. According to Assistant to the Solicitor General Elaine Goldenberg, arguing for the government, the SEC has calculated that for 2013 to 2016, 43 percent of disgorgement recoveries went to the Treasury, while from 2013 to 2015, the rate was 33 percent. Goldenberg also was able to clarify for the court that disgorgement is something requested by the commission at the district-court level, with a non-binding recommendation as to whether it should be disbursed to victims or paid to the Treasury (from which it might still be paid to victims). Justice Elena Kagan, for one, seemed troubled about the lack of clear guidelines governing SEC recommendations.

Other highlights

Justice Stephen Breyer engaged in the one of the longer, more colorful exchanges of the day. As noted above, Section 2462 covers both “fines” and “forfeitures,” as well as “penalties,” so the SEC must establish that disgorgements are none of the above. In pressing for a list of the ways that disgorgement differs from the specified categories, Breyer posited a city taxing both houses and boats, and a would-be non-taxpayer who owned a houseboat.

It’s not a house. Houses don’t go on water. Not a boat. Look at the French windows, look at the venetian blinds. No tax.

Now, I think that would last about five minutes, that argument.

Several minutes later, Breyer and Goldenberg agreed that the government’s position was that “[fines and penalties take] away from a person something that otherwise he would be rightfully entitled to, and disgorgement takes away … a thing he would not be rightfully entitled to.” Although at other stages of the argument Sotomayor described the SEC’s arguments as “somewhat persuasive,” at this point she seemed distinctly unconvinced, saying “I think making someone whole is a forfeiture … if it looks like a forfeiture, why don’t we treat it like a forfeiture?” Gorsuch urged that criminal forfeitures clearly are penalties and asked, “So why does the form, whether this is civil versus criminal, make all the difference?”

Elaine J. Goldenberg, Assistant to the Solicitor General (Art Lien)

Discussed more than once was the fact that defendants sometimes are forced to disgorge benefits they don’t actually retain, with Unikowsky noting that, in insider-trading cases, tippers often are required to disgorge the profits of their tippees. Earning a laugh, Sotomayor suggested that if she committed a crime and gave half her proceeds to Breyer, she would have benefited from the whole amount. (Securities lawyers will recognize this as essentially the reasoning of last fall’s unanimous insider-trading decision in Salman v. United States.)

Hobgoblins and other policy matters

Unikowsky succeeded in conveying two main points more clearly and persuasively during the oral argument than he had in his briefs. He made much of the government’s inconsistency in claiming that disgorgement is a penalty for some purposes (including non-discharge in bankruptcy) and not for others. He also left the impression that there is a statute of limitations applicable to virtually every other monetary remedy, public or private, known to mankind, prompting the obvious lingering question, “Why not here too?” Goldenberg’s invocation of the “narrow construction principle” – a presumption against imposing a statute of limitations on the sovereign without clear legislative intent – was clear and on point, but didn’t seem to arouse too much interest. The justices were more engaged when Goldenberg explained the commission’s disincentives to unfairly delay enforcement, particularly in the wake of its recent loss in Gabelli v. Securities and Exchange Commission, which held that Section 2462’s limitation period starts running when the bad act occurs rather than when the SEC discovers it.

Conclusion

If Tuesday’s oral argument were all there were to go on, Kokesh would look like the favorite to win. Factoring the briefs back in (as one properly should) could somewhat even the odds. Something to keep in mind is the possibility that, although neither side is asking for it, the court could devise a “non-categorical” solution that would see Kokesh walk away with a win but keep alive for another day the prospect that Section 2462 will not apply to actions clearly seeking victim compensation.

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Argument analysis: Court dubious about reading Fair Debt Collection Practices Act to reach debt buyers

Argument analysis: Court dubious about reading Fair Debt Collection Practices Act to reach debt buyersThe bench was relatively quiet for yesterday morning’s argument in Henson v. Santander Consumer USA, allowing counsel on both sides to talk for long periods without interruption, suggesting if anything that the justices see a straightforward answer in the text of the governing statute. Justices Anthony Kennedy and Neil Gorsuch said not a word, and […]

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Argument analysis: Court dubious about reading Fair Debt Collection Practices Act to reach debt buyers

The bench was relatively quiet for yesterday morning’s argument in Henson v. Santander Consumer USA, allowing counsel on both sides to talk for long periods without interruption, suggesting if anything that the justices see a straightforward answer in the text of the governing statute. Justices Anthony Kennedy and Neil Gorsuch said not a word, and even Justice Ruth Bader Ginsburg – who so commonly opens the questioning in the first minutes of the argument – held her peace until almost the middle of the hour.

The case presents a basic question under the Fair Debt Collection Practices Act: whether the statute applies to the recently emerging industry of “debt buyers,” large entities that purchase the debts they collect instead of limiting themselves to providing collection services to the lenders that originated the defaulted obligations. The dispute turns on the FDCPA’s strange choice to regulate debt collection, but only by debt collectors, not the originators of the debt. Sensibly or not, Congress decided that federal supervision was appropriate not for original lenders, but only for third-party collectors, which may be less likely to have an ongoing relationship with the debtor.

This case involves neither of those groups, but rather an entity that (at least for the customers involved here) neither originates debts nor collects them for a third party – Santander Consumer USA (a subsidiary of the major Spanish banking group Banco Santander). In this case, Santander purchased a portfolio of automobile loans originated by a subsidiary of CitiBank, including loans made to the petitioners, Ricky Henson and a group of other individuals.

The key phrase in the statute defines a debt collector as “any person who regularly collects … debts owed or due … another.” Santander (represented by Kannon Shanmugam) argues that because it has purchased the debts they are no longer “owed or due … another.” The borrowers, on the other hand, argue that a debt is “owed” to the entity that originated it (CitiFinancial) but “due” to the person that has acquired it. Accordingly, they say, loans held by a debt buyer are not “due and owing” to the debt buyer, because they are still “owed” to the original lender (CitiFinancial).

During the argument, the justices motivated to speak at length seemed to find the borrowers’ reading quite difficult to accept. Justice Samuel Alito, for example, commented to Kevin Russell (representing the borrowers) that his reading of the statute is just “not the first way you’d read that. It’s not the fiftieth way you would read that. It’s just that – you’re fighting – you’re really going uphill on that. You need something really strong to overcome that, I would say.”

Trying a less confrontational tack, Justice Elena Kagan asked Russell, “if you just look at the language, … can you come up with any sentence [that] points toward your reading rather than towards Mr. Shanmugam’s?” She went on to elaborate:

[U]sually when we think about ambiguous phrases, … we can say [that] you could say this sentence and then [the phrase] would mean X. Or you could say this sentence and then [the phrase] would mean Y. But my problem when I think about this word is that I can never get it to mean what you want it to mean, no matter how I construct a sentence.

The quiescence of the bench did not seem to suggest a lack of engagement with the issues. Several of the justices asked both Russell and Shanmugam a fair number of questions about how well their readings of this core provision could be reconciled with the various exceptions and qualifications that surround it in the FDCPA. In truth, though, that discussion seemed desultory, as none of the justices seemed to think that any of the arguments about the exceptions were sufficiently pointed to weigh strongly in either direction.

The most successful point for the borrowers was the apparent oddity of drawing a line between debt collectors and debt buyers. Kagan, for example, commented to Shanmugam that the line he is asking the justices to draw

doesn’t make much sense, though, does it? I mean, take this very case. So your clients serviced this debt and counted as a debt collector at that time. And then your client purchased the debt and all of a sudden is not a debt collector. And I guess the question is: What happened in between the time when your client serviced the debt and the time when your client purchased the debt that in any way changed its relationship with the borrower such that Congress wouldn’t be concerned any longer with its behavior?

Chief Justice John Roberts pointed out one explanation for that situation near the end of Russell’s presentation, observing that “this particular context, with this particular type of entity, is not what Congress had before it when it passed the law. … The industry has evolved in a way that has raised these sorts of questions. This is not something that Congress was addressing.”

My preview suggested that the borrowers in this case would have to persuade the justices that it is so important to bring debt buyers under the aegis of FDCPA debt-collector rules that the court should overlook the challenge posed by the statutory text. The argument suggests that the borrowers may not be successful in overcoming that obstacle.

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

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Opinion analysis: Justices reject Missouri’s push to expand insurance benefits for federal employees

Opinion analysis: Justices reject Missouri’s push to expand insurance benefits for federal employeesNo surprises in this morning’s opinion in Coventry Health Care v. Nevils. The argument suggested a bench of justices that took this case for the purpose of reversing the Missouri Supreme Court, and the opinion (handed down less than six weeks after the argument) of Justice Ruth Bader Ginsburg for a unanimous court suggests that […]

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Opinion analysis: Justices reject Missouri’s push to expand insurance benefits for federal employees

No surprises in this morning’s opinion in Coventry Health Care v. Nevils. The argument suggested a bench of justices that took this case for the purpose of reversing the Missouri Supreme Court, and the opinion (handed down less than six weeks after the argument) of Justice Ruth Bader Ginsburg for a unanimous court suggests that nothing in the briefs or argument slowed that impulse.

The case involves a question of pre-emption, specifically whether federal law pre-empts the application of a Missouri consumer-protection statute that is inconsistent with the insurance policies that the federal Office of Personnel Management prescribes for federal employees. The specific question involves “subrogation” clauses, which authorize insurers to recover funds their insureds obtain from third parties with regard to covered claims: If I have an automobile accident and my insurer pays my medical bills, the subrogation clause obligates me to reimburse the insurer if I recover the cost of those bills from the other driver.

What makes the case so easy is the combination of a pretty clear statute and a topic on which Congress’s top-level intent could hardly be plainer: Can anyone think that Congress wants federal employee benefits to differ from state to state based on the state law of the employees’ residence? So the brevity of Ginsburg’s opinion is to be expected. The relevant statute pre-empts any state law that “relates to health insurance or plans” if it also “relates to the nature, provision, or extent of coverage or benefits,” “including payments with respect to benefits.” All agree that Missouri’s statute relates to health insurance, so the only textual dispute before the court is whether the statute also relates to “payments with respect to benefits.” On that point, it is enough for the opinion to state that the statute does relate to payments “because subrogation and reimbursement rights yield just such payments. When a carrier exercises its right to either reimbursement or subrogation, it receives from either the beneficiary or a third party ‘payment’ respecting the benefits the carrier had previously paid.” It seems almost superfluous for the opinion to offer a few citations noting the court’s traditionally broad understanding of pre-emption clauses (like the one in the Employee Retirement Income Security Act of 1974) that reach laws that “relate to” the specified subject, and to note that these provisions produce more than $100 million a year in recoveries related to federal employee policies.

Notably, the court’s conclusion that the statute’s text necessarily extends to the Missouri statute allows the court to skip over several of the interesting topics that appeared in the briefing – the extent of any presumption “against pre-emption” or the propriety of deference to the OPM regulation construing the statute to pre-empt state law. Rather, the only point left for the court to address is the odd idea that the supremacy clause itself invalidates the statute. Here, judges on the Missouri court pointed to the particular language of the federal statute, which states that the “terms of any contract … supersede and preempt state laws”; the state judges argued that under the supremacy clause pre-emption must come from “Laws of the United States,” not a mere contract of the Office of Personal Management. The court swept that argument aside in a brief paragraph characterizing it as “elevat[ing] semantics over substance” and pointing out that the statute itself “manifests the … intent to preempt state law. Because we do not require Congress to employ a particular linguistic formulation when preempting state law, Nevils’ Supremacy Clause challenge fails.”

As I suggested above, the court’s unanimous decision for the insurer cannot really come as a surprise to any informed observer. There was some possibility, though, that the opinion might say something derogatory about a supposed “presumption against pre-emption” or comment on the ability of a federal agency to alter the pre-emption analysis by issuing a regulation in the face of litigation. By resting the opinion on the text alone – admittedly not all that tendentious a reading – the court more or less ensured that this opinion will sink without a trace into the relevant volume of the United States Reports.

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Opinion analysis: But-for causation and inherent-power civil sanctions

Opinion analysis: But-for causation and inherent-power civil sanctionsGoodyear Tire & Rubber Co. v. Haeger presented the court with an oddity – both sides agreed about the legal rules in play, but argued about what those rules mean in this case. Writing for a unanimous eight-person court (in a case that was argued in January, before Justice Neil Gorsuch joined the court), Justice […]

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Opinion analysis: But-for causation and inherent-power civil sanctions

Goodyear Tire & Rubber Co. v. Haeger presented the court with an oddity – both sides agreed about the legal rules in play, but argued about what those rules mean in this case. Writing for a unanimous eight-person court (in a case that was argued in January, before Justice Neil Gorsuch joined the court), Justice Elena Kagan held that a court can impose attorney’s fees as a sanction for bad-faith discovery conduct under its inherent powers, but that any award must be “limited to the fees the innocent party incurred solely because of the misconduct—or put another way, to the fees that party would not have incurred but for the bad faith.” Because the lower courts did not abide by that standard, the award of $2.7 million in attorney’s fees for the plaintiffs could not stand.

Leroy, Donna, Barry and Suzanne Haeger were injured when one of the Goodyear tires on their motor home failed while the car was traveling on a highway in Arizona, causing the vehicle to swerve off the road and flip over. The Haegers’ theory was that the tire was not designed to withstand the level of heat generated by a motor home traveling at highway speeds. The lawsuit in federal court consumed five years of discovery disputes – disputes that, Kagan said, themselves “generated considerable heat” – over Goodyear’s non-production of tests relating to the tire’s ability to withstand heat. The parties settled for an undisclosed amount. One year later, the Haegers’ attorney learned from media reports that Goodyear had produced certain reports in other litigation that it had not in the Haegers’ lawsuit. The Haegers returned to the district court, claiming bad-faith discovery fraud and seeking the attorney’s fees and costs expended in litigation from the point of non-production of the reports. The district court awarded $2.7 million, with a contingent award of $2 million, representing a reduction of the $700,000 expended on claims against other defendants.

The Supreme Court began with a statement of legal principles governing inherent sanctioning power. Federal courts possess inherent power to sanction parties for abuse of the litigation process, including awarding attorney’s fees. But civil sanctions must be compensatory rather than punitive in nature, so fee awards are limited to reimbursing the victim for “losses sustained.” That means, “pretty much by definition,” that a court can award only fees “incurred because of the misconduct at issue,” requiring the court to find a causal link between the litigant’s misbehavior and legal fees paid by the opposing party. The appropriate causal standard is a but-for test: The complaining party may recover only the portion of attorney’s fees that he would not have incurred but for the misconduct. That is, when the cost would have been incurred even absent the discovery violation, the court, limited only to compensation, “must leave it alone.” But “trial courts undertaking that task ‘need not, and indeed should not, become green-eyeshade accountants’ (or whatever the contemporary equivalent is).” The goal is “’rough justice,’” not “’auditing perfection.’” Courts may estimate and may account for the “’overall sense’” of the lawsuit. Courts may “shift all of a party’s fees, from either the start or some midpoint of a suit, in one fell swoop.” For example, when a plaintiff initiates a case in bad faith or the defendant’s entire course of conduct in defending is in bad faith, no fees would have been incurred if the misbehaving party had behaved appropriately. Courts also may find that a case would have settled at a point in time absent bad faith, justifying a sanction of attorney’s fees incurred after that point.

The parties, Kagan wrote, agreed with each of those principles (if not always with the same levels of enthusiasm). The question in this case was whether the lower courts had applied those principles and, if not, what to do about that.

The court rejected as a “non-starter” the Haegers’ argument that the lower courts applied the correct legal standard, concluding that the district court did not make the required findings of causation. The court also declined to fill in the gaps, insisting that the Haegers had not shown that had Goodyear produced the contested reports, those reports would have led “straightaway” to a settlement. Nor had the Haegers shown that the discovery misconduct “so permeated” the suit as to make it a but-for cause of every subsequent legal expense; the district court’s contingent award showed that some subsequent expenses were not caused by the discovery abuse. The court was also unwilling to default to the $2 million contingent award, concluding that although the district court considered causation in issuing that lower award, its discussion was too sparse to show that it understood and applied the proper legal principles. The only possibility, then, was a “do-over” of the fee calculation in the district court, under the “unequivocally right legal rules.”

The remaining wrinkle in the case is the possibility that Goodyear has waived its right to challenge the $2 million contingent award, because it argued for the $700,000 reduction, suggesting acceptance of the remainder of the award. The court declined to be the first to address that issue. It ordered the court of appeals to consider waiver as the “initial order of business” on remand. If the court of appeals finds a waiver, the $2 million award should stand; if not, the district court must reassess the fees under a but-for standard.

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Argument analysis: Intervention, standing and control over litigation

All sides faced sharp questioning from many corners of the Supreme Court on Monday in Town of Chester v. Laroe Estates on the question of whether intervenors as of right under Federal Rule of Civil Procedure 24 must have Article III standing. Representing Chester, Neal Katyal began by arguing that an intervenor-of-right is a “full-blown […]

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All sides faced sharp questioning from many corners of the Supreme Court on Monday in Town of Chester v. Laroe Estates on the question of whether intervenors as of right under Federal Rule of Civil Procedure 24 must have Article III standing.

Representing Chester, Neal Katyal began by arguing that an intervenor-of-right is a “full-blown party” with the “full suite of powers” of the judiciary, from issuing subpoenas to seeking summary judgment. Because “standing is not dispensed in gross” (a phrase Katyal used twice), those assertions of judicial power must be grounded in Article III. And because intervenors must show that existing parties do not represent their interests, they, by definition, are doing something different than the parties, necessitating a standing inquiry.

Neal K. Katyal for petitioner (Art Lien)

Justice Stephen Breyer asked Katyal why the standing inquiry, rather than occurring at the threshold, cannot wait until an intervenor seeks something different from a party; he offered a case in which the intervenor believes he has a better lawyer to make arguments that are otherwise identical. Justice Elena Kagan followed by suggesting that there should be a difference between an intervenor asserting a claim for relief and one contributing to how the court thinks about the case as framed by the parties. Katyal pointed to recent decisions attempting to limit discovery as highlighting the risks from broad discovery conducted at the behest of intervenors who lack standing; without such limitations, these “bystanders” without standing are able to trigger the “massive power” of the federal courts. Chief Justice John Roberts repeated Breyer’s question about why it made a difference whether the district court did the standing inquiry at the outset rather than when an intervenor sought something more; Katyal responded that the “what” is more important than the “when” of the standing inquiry, although he suggested the language of Rule 24 made the inquiry better at the threshold. Responding to questions from Kagan and Justice Anthony Kennedy, Katyal explained that the presence of one plaintiff with standing does not alleviate the problem. Multiple original plaintiffs march in lockstep, but an intervenor only enters the case when the original plaintiffs do not represent or protect his interests, placing the intervenor out of lockstep. Kagan found this distinction “odd.”

Assistant to the Solicitor General Sarah Harrington argued for the United States as amicus curiae in support of Chester. She maintained that the best reading of Rule 24 is that an intervenor must demonstrate constitutional standing, in addition to meeting the statutory requirement of showing that current parties cannot adequately represent the would-be intervenor’s interests. Harrington then doubled back to a question Justice Ruth Bader Ginsburg had asked Katyal (and that Breyer repeated), about potential differences this creates between intervenor-defendants and intervenor-plaintiffs and how a defendant could have standing. Harrington explained that there was no difference between intervenor-plaintiffs and intervenor-defendants, because the standing of intervenors (unlike that of original plaintiffs) is tied to the potential injury from the disposition or outcome of the lawsuit itself, not from any real-world behavior. An intervenor’s standing is analyzed much as a defendant’s standing to appeal, which is based on an injury caused by an adverse lower-court judgment.

Sarah E. Harrington, Assistant to the Solicitor General (Art Lien)

Arguing for Laroe Estates, Shay Dvoretzky questioned the “constitutionalization of every intervention motion” that offers a “solution in search of a problem.” The purpose of standing, Dvoretzky argued, is to prevent courts from interjecting themselves to issue advisory opinions about the actions of the political branches — not to “micromanage” the conduct of litigation in discovery. Once there is one plaintiff with standing, Article III is satisfied; nothing that any intervenor does changes that, unless that intervenor asserts a new or different claim for relief or seeks a different remedy in its own name.

Dvoretzky returned to this position in response to a fusillade of questions from Roberts, Breyer, Justice Samuel Alito and Justice Neil Gorsuch. In response to a question from Gorsuch, Dvoretzky explained that Laroe was not seeking a distinct remedy in this case, but was attempting only to “maximize” the recovery by the plaintiff Estate of Steven Sherman, because Laroe has an interest in that recovery. But Dvoretzky ran into a problem in making this argument – whether different relief is sought in any case depends on the scope of the judgment sought by the plaintiff or plaintiffs and any intervenors, a principle reflected in past cases in which the court affirmed judgments in favor of plaintiffs without inquiring into their standing. This answer did not satisfy Gorsuch, who said he would be “grateful” if Dvoretzky would answer what was “not a trick question” about the limits on a plaintiff seeking a judgment in the name of another and on an intervenor seeking judgment in its own name; when Dvoretzky continued to tie the answer to the scope of the judgment issued, Gorsuch said “I’ll let you go.” But Roberts jumped in to say he “may not” let Dvoretzky go; it is “circular” to say the intervenor can seek the same relief on the same claim but still exercise the authority of the court in issuing subpoenas beyond what the plaintiff seeks.

Shay Dvoretzky for respondent (Art Lien)

Breyer later asked Dvoretzky to identify the defect in the government’s argument about Rule 24 reflecting standing principles for injuries caused by the litigation. The problem, Dvoretzky argued, is that Rule 24 and Article III serve different purposes – Article III is about keeping federal courts out of non-live controversies, while Rule 24 is about protecting the interests of those who may be affected by an existing live dispute. Justice Sonia Sotomayor helped Dvoretzky get to the bottom of his position, framing the standing inquiry as “whether or not you’re asking for relief different from someone with a case or controversy,” with Dvoretzky putting it slightly differently – the presence of a different claim or request for relief by an intervenor dictates whether a standing inquiry must be made at all.

On rebuttal, Ginsburg and Kennedy returned to the distinction between intervenors as-of-right and permissive intervenors under Rule 24(b). Katyal had argued earlier that permissive intervenors need not have standing, because courts can place limits on their participation, rendering them less than full parties. But, Ginsburg and Kennedy asked, don’t courts exercise substantial control over mandatory intervenors who are full parties – for example, not allowing them to take duplicative or oppressive discovery? Katyal responded that control over permissive intervenors is greater than over intervenors-of-right. And, Katyal argued, this is an ongoing problem, with ideological bystanders (on both sides of the spectrum) intervening in local and county disputes and, despite lack of standing, fully engaging in litigation. This is why a threshold restriction on who can intervene, and participate as a party in all respects, is necessary.

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Argument analysis: Justices stay late to hear argument about deadlines for investors opting out of securities class actions

Argument analysis: Justices stay late to hear argument about deadlines for investors opting out of securities class actionsThe justices started off their new colleague Neil Gorsuch with a hard day of work, staying after lunch yesterday to hear a third oral argument in a single day for the first time since October. And this for a securities case. Now, if you are not a securities lawyer, you might have assumed from the […]

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Argument analysis: Justices stay late to hear argument about deadlines for investors opting out of securities class actions

The justices started off their new colleague Neil Gorsuch with a hard day of work, staying after lunch yesterday to hear a third oral argument in a single day for the first time since October. And this for a securities case. Now, if you are not a securities lawyer, you might have assumed from the question presented that California Public Employees’ Retirement System v. ANZ Securities involves some tediously intricate question about securities procedure, likely to leave the justices dozing after lunch. But in truth it is not really all that complicated. Indeed, as class-action cases in the Supreme Court go, this is about as simple as it gets. The basic question is one that any reader can appreciate: If a plaintiff files a class action complaint that includes your claims, does that count as your complaint if you decide to “opt out” of the class action? Or do you have to file your own complaint before the deadline for filing expires?

The Supreme Court has addressed a similar question before, in its 1974 decision in American Pipe & Construction v. Utah. The court held in that case that the class complaint did count as the claim of the individual claimants for purposes of statutes of limitation; specifically, it held that the class complaint “tolled,” or suspended, the statute of limitations so that the individual’s later complaint was timely. In the securities laws, though, there are two different kinds of filing deadlines. The first, statutes of limitation, are relatively short and run from the time when the claimant discovers the problem that gives it a right to sue; the second, statutes of repose, are relatively long and run from the date of the violation in question. We know from American Pipe that the class-action complaint tolls the statute of limitations. The question here is whether the same rule applies to statutes of repose. And on that question the argument suggests a bench that is far from settled.

During the argument of Thomas Goldstein (representing CalPERS, which tried to opt out of the class action after the expiration of the statute of repose), at least two of the justices (Justices Samuel Alito and newcomer Neil Gorsuch) seemed settled on the idea that the statute simply cannot be read to permit the late opting out. They emphasized the statutory command that no new “action” can be brought after the three-year deadline. As Gorsuch put it:

[W]hen I see the word “action,” I think of lawsuit, traditionally, and “claim” as the claims within the lawsuit. And the laws often distinguish between actions and claims. The securities laws do, routinely. … Here, why shouldn’t we follow the plain language and the traditional understanding of the term “action”? … I don’t like the policy consequences, but as a matter of plain language, why wouldn’t we?

Nor was Gorsuch alone on that point: Alito repeatedly pressed Goldstein on the same phrase of the statute: [W]hat does the term ‘such action’ mean? … [I]f a plaintiff in every single judicial district in the country had brought exactly the same claim, those would all be the same action, in your opinion?” And even Justice Stephen Breyer joined in to suggest the plausibility of that reading: “Your client leaves the first action. And what does he do after three years? I guess he puts a piece of paper called a complaint in a court and that would seem to be bringing an action.”

On the other side of the matter, Chief Justice John Roberts and Justice Elena Kagan seemed to think that significant practical considerations supported a rule that would treat the class-action complaint as adequate to protect the claims of specific investors. For her part, Kagan raised several different concerns in a series of exchanges with Paul Clement (counsel for the defendants). One of the most notable emphasized the disproportionate adverse impact the defendants’ rule would have on small investors:

If we go your way in this case, [in] any future suit like this all large investors [are going] to file a protective action. … Well, small investors are not going to do that. They’re not going to have the faintest idea that they should be doing that. So this is a rule that’s kind of guaranteed to create make-work for district courts to be essentially irrelevant for large investors, and [to cause] small investors to lose their claims.

At another point, Kagan suggested a limited conception of the “repose” that a statute of repose brings to defendants – not one that bars all later complaints, but really just one that bars the surprise of a plaintiff who brings a late suit when he first learns of its injuries many years after the defendants’ wrongful statements. Roberts seemed to agree with that point, commenting to Clement late in his presentation:

[T]here’s different levels of repose. … [Y]ou have repose under his theory, in the sense that you know what people are suing you about. You’re still facing a lawsuit in the other case. There aren’t going to be any more surprises. You know what’s on the table. That’s repose. … I mean, the liability is the same if you have the class action including CalPERS … as it is, if … you’re facing the class action without CalPERS, but another CalPERS suit.

Kagan also expressed concern that Clement’s understanding of repose would render the investors’ right to opt out largely illusory:

We’re used to thinking that the opt-out right is a very important part of class actions; it’s what saves them from a due process problem, that people actually do get to say, I don’t want any part of this. And you’re saying they only get to say that within 3 years …. [I]t may be 6 months [from] the time the suit was brought, or 1 month or something like that. And … if you haven’t decided within that month or 6 months that these lawyers are not doing a good job, you’ve lost your ability forever to do it for yourself.

The best quip of the argument came from Breyer, near the end of Clement’s presentation. I mentioned above that Breyer initially suggested he was sympathetic to the argument that the language of the statute cannot be read to validate the late opt-outs that CalPERS advocates. But Breyer made it clear near the end of the hour that the practical consequences of that reading might motivate him to abandon it. Imagining a class action involving 300,000 potential plaintiffs, Breyer strayed into the realm of hyperbole, contending that “[y]ou’ll have to build a new clerk’s office” to house the “300,000 pieces of paper [coming] across your desk” when every single one of the potential plaintiffs files a separate complaint.

The juxtaposition of several justices reading the statute as compelling a ruling for the defendants with other justices decrying the practical consequences of that reading suggests that the court is not likely to come to a unanimous resolution of the matter. So it is far from clear how this case will be decided, although given the apparent lack of unanimity, this case probably will not bring Gorsuch his first opinion assignment.

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

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