The October 2013 Term: U.S. Supreme Court Wrap-Up

Monday, July 7, 2014 - 10:25

The following is a summary of a briefing by the Washington Legal Foundation.  The featured speakers are Mark Chenoweth, General Counsel of the Washington Legal Foundation; Dan Himmelfarb, Partner, Mayer Brown LLP; Mark Davies, Partner, Orrick, Herrington & Sutcliffe LLP; and Jeffrey Rosen, Partner, Kirkland & Ellis LLP. For the full media briefing go to

Mark Chenoweth: We’re delighted to have three experienced appellate practitioners with us today. Dan Himmelfarb, a partner in the Washington office of Mayer Brown, is a former assistant U.S. attorney in the Southern District of New York who also served for five years as an assistant to the U.S. solicitor general, arguing 40 cases in nine different appellate courts including 12 in the U.S. Supreme Court. Next, Mark Davies, a partner in the Washington office of Orrick, Herrington & Sutcliffe. Mark is a former member of the appellate staff at the civil division at the U.S. Department of Justice. Finally, Jeff Rosen, a partner in the Washington office of Kirkland & Ellis, who is former general counsel both of the Department of Transportation and of the Office of Management and Budget.

Dan Himmelfarb: Let me begin with a general observation about the class action cases from this past term. There is a perception, particularly in the media, that this is a pro-business Court. I think that’s wrong. I think that all justices have particular jurisprudential views, which can lead to predictable results in some but not all cases. In the last several terms it’s far from clear that businesses have been winning even a majority of the cases they’ve been involved in. Nevertheless, the view persists that this Court really hates class actions. One memorable expression came from Justice Kagan’s dissent in the American Express case: “To a hammer, everything looks like a nail and to a court bent on diminishing the usefulness of Rule 23, everything looks like a class action ready to be dismantled.” What I would say to you today is that nobody could possibly employ that metaphor to describe what the Court did this past term in class action cases.

There were three cases with class action issues decided on the merits. The plaintiffs won all three. The combined vote in the three cases was 22 to 5 for the class; not one of them was decided 5-4, and one of them was unanimous. The most important of these cases is the Halliburton decision. It was a 6-3 decision to reject a claim that, if accepted, would effectively have meant that class action securities fraud claims could not be brought. The man who leads this supposedly pro-business Court, Chief Justice Roberts, was the author of that opinion. Although there was one aspect of the opinion that actually represented a decision in favor of the defendant, in my view by and large Halliburton was a very pro-plaintiff decision. I’ll close my preliminary remarks by saying that, if in fact this Court is pro-business and hates class actions, it had a funny way of showing that in the October 2013 term.

As to the three class actions that were decided on the merits, the first is Mississippi v. AU Optronics, decided under CAFA (the Class Action Fairness Act). The remedy that CAFA created was to liberalize the rules for removal from state courts so that it’s easier for defendants to remove a class action or “mass action” to federal court where it is thought defendants will have a fairer shot. The issue in the AU Optronics case had to do with so-called parens patriae actions – an increasingly common phenomenon where a state or a state’s attorney general seeks relief on behalf of a large group of citizens. The question in the case was whether that’s a mass action and therefore removable under CAFA, and the Court unanimously said no. A mass action is not a class action, but it is essentially a case where there are many plaintiffs seeking to have a joint trial based on common issues of law and fact. CAFA says those cases can be removed. Justice Sotomayor’s basic reasoning was that the state is a single plaintiff, not a mass of individuals, so the action is not removable. Lest you think that the consequences of this decision are not particularly far-reaching, since we’re talking about public officials and states that are politically accountable and have lots of constituencies including businesses, I would caution you that there are a lot of very aggressive attorneys general out there. Perhaps the more worrisome aspect is that a lot of states are deputizing private class action lawyers to serve essentially as special assistant attorneys general to prosecute these cases while the very same lawyers are involved in private litigation.

The second case is Chadbourne & Parke v. Troice, involving SLUSA (the Securities Litigation Uniform Standards Act). The object of SLUSA was to prevent people from filing securities class actions under state law where the federal restrictions wouldn’t apply. SLUSA precludes plaintiffs from bringing class actions under state law if the allegation is that the misrepresentation in question was made “in connection with” a purchase or sale of a “covered security.” (“Covered security” here essentially means a security that is traded on a national securities exchange.) The issue in the Chadbourne & Parke case was how narrowly or broadly the phrase “in connection with” should be interpreted. Many of you know that that issue is a recurring issue in securities fraud cases under Rule 10b-5 outside of the SLUSA context. In the Chadbourne & Parke case, the plaintiffs alleged they had purchased uncovered securities but that the defendants had told them that the uncovered securities were backed by covered securities. The question was whether that fact pattern constituted a representation made “in connection with” a “covered security.” The Court said no. It interpreted the phrase narrowly and it allowed the case to go forward in state court. It will be interesting to see whether what on its face is a pro-plaintiff decision, allowing class actions based on state law to proceed, ultimately is used in a pro-defendant way. A narrow interpretation of that phrase in the SLUSA context could result in lower courts interpreting the phrase equally narrowly in the broader Rule 10b-5 context to the detriment of plaintiffs.

Turning to Halliburton, a case based on Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under that Act. Neither the statute nor the rule creates an express private right of action. The Supreme Court implied a private right of action more than half a century ago. As with any fraud claim, one element of that cause of action was reliance. Reliance in this context means that, after someone makes a misstatement to you, that misstatement causes you to take some action: you buy or sell securities in reliance on the misstatement. In its 1988 decision Basic v. Levinson, the Supreme Court held that a plaintiff in a Rule10b-5 case does not have to prove individualized reliance. Rather, there is a presumption of reliance that arises under the so-called fraud-on-the-market theory. A principal justification for this rebuttable presumption of reliance is that, if the plaintiffs had to prove individualized reliance, individual issues would predominate over common issues and no class could be certified. Two assumptions underlie the fraud-on-the-market theory: first, that the market price of shares traded in a well-developed market reflects all publicly available information including the material misstatement that serves as the basis for the particular securities fraud claim, and second, that a typical investor buys or sells securities in reliance on the integrity (i.e., the accuracy) of the market price, The Basic presumption can be rebutted in a number of ways, one of which is by showing that the misrepresentation in fact did not affect the price of the security. Before Halliburton, everybody agreed that rebuttal could occur at the merits stage of a class action, but it was an open question whether rebuttal could occur at the class certification stage – and the general view was that it could not.

That was the state of the law from 1988 to the Amgen decision in 2013. Amgen generated a number of separate opinions in which four justices expressed doubt about Basic, about the presumption, and about the fraud-on-the-market theory, and suggested that the issue should be reconsidered. When Halliburton filed its petition for certiorari, the first question was whether Basic should be reconsidered and overruled. The Court’s grant of the petition gave rise to a belief that the Court might very well overrule Basic. However, Basic was reaffirmed 6-3. The majority opinion, written by the Chief Justice and joined by Justice Kennedy and by the four more liberal members of the Court, addressed three arguments by Halliburton. The first argument was that Basic should be overruled, which it rejected. It’s not entirely clear whether the majority was saying a) we think Basic was right or b) whether or not Basic was right, this was a case about statutory stare decisis where one has to show more than just that the earlier decision was wrong – and that showing hasn’t been made. The second proposed form of relief was a modification of Basic so that plaintiffs would be required to prove that the misrepresentation affected the stock price. The majority said, in effect, that that was asking not for all of Basic but for half of Basic to be overruled, and the Court wasn’t inclined to do that either. The last thing the Court was asked to do – which it agreed to do – was to hold that the presumption could be rebutted through a showing of “no price impact” and to allow that showing to be made at the class certification stage.

There was a short concurrence by Justice Ginsberg, joined by Justices Breyer and Sotomayor, which said that allowing defendants to rebut the presumption at the class certification stage and not requiring them to wait until the merits stage should impose no heavy toll on securities fraud plaintiffs. Apparently these three Justices were saying they had gone along with the majority because they didn’t think the decision was going to have any real effect on the ability of class action plaintiffs to get classes certified in securities fraud cases.

The dissent, written by Justice Thomas joined by Justices Scalia and Alito, made two basic points. First, a challenge to the economic assumptions underlying the fraud-on-the-market theory. Second, a legal inquiry: what’s all this about statutory stare decisis? This right of action is completely made up; it’s not in the statute; it’s not in the rule; it’s judicially created. It’s effectively common law, not statutory law at all. Since the Justices made it up, they can change it if they think it’s wrong. Or, as the dissent put it, in this circumstance the Court can and should correct its own mistakes.

What are the consequences of the Halliburton decision? There has already been a lot of debate about whether this is a victory for plaintiffs or defendants. The day after the case was decided we’re still living in a Basic world, except that there’s been a slight modification that helps defendants. The next question is whether this aspect of the holding that favors defendants is really going to make a difference. These decisions favoring class action plaintiffs make it very hard for anybody to say that this is a Court that loves business and hates class actions.

Mark Chenoweth: One of the cases to be discussed next is Aereo, a case in which WLF filed an amicus brief and enjoyed a victory this week.

Mark Davies: I focus on intellectual property appeals at Orrick. I’ve centered my comments today around three questions: What can we learn about the Supreme Court’s substantive approach to patent law? What is the Supreme Court’s attitude towards the Federal Circuit as an institution? And what is the Supreme Court’s attitude towards its own set of IP cases?

What is the Supreme Court’s substantive approach to patent law? I think you can get two big points out of this term’s Supreme Court decisions. First, to get a patent you have to invent something. That sounds simple, but it is the proposition that had divided the court below. In CLS, a case involving a patent on a computer-implemented scheme for using a third party to minimize the risk that one party in a financial transaction won’t pay what is owed, it was basically conceded that there was nothing innovative in the patent itself. The argument was about whether a patent applicant was ineligible from the get-go if she didn’t have what was called an inventive concept. Then Justice Thomas writing for the Supreme Court majority in CLS held that to get a patent you have to invent something.

My second substantive point comes out of two cases, Octane and Nautilus. The point here is that patent law is holistic, i.e., the justices are not going to get very specific with the rules that govern the patent system. Octane involved the question of when attorneys’ fees should be awarded in patent cases. The statute just says “in exceptional cases.” The Federal Circuit had set a strict rule, that fees are only awarded if the litigation is brought in subjective bad faith and the litigation was objectively baseless. Justice Sotomayor for the Supreme Court didn’t come up with a specific set of rules, just totality of the circumstances. Nautilus is actually quite similar. At issue was the statutory phrase “particularly point out and distinctly claim.” It’s referred to as the definiteness requirement. Justice Ginsberg said that that just means you inform the public with reasonable certainty. Again, it’s a very high-level phrase. I think from these three cases you can see where the Supreme Court is going: on one hand, they’re willing to insist on an inventive concept for a patent, but beyond that they’re going to stay high level.

For sophisticated observers, I think what’s even more interesting is the Supreme Court’s attitude towards the Federal Circuit Court of Appeals, the court that reviews all patent cases in the country on their way up to the Supreme Court. Justice Alito’s opinion for the Supreme Court really says this: “the Federal Circuit’s analysis fundamentally misunderstands what it means to infringe a patent.” This is the Federal Circuit he’s talking about; patents are what they do. About half of their docket is patent cases. And here Justice Alito is saying they fundamentally misunderstand what it means to infringe a patent.

The third question I pose is what is the Supreme Court’s attitude towards its own IP cases? I raise this question because the Supreme Court cases are so often unanimous, yet the Federal Circuit, often sitting en banc, is divided on these issues. Why on the one hand, when the Federal Circuit is grappling with what they see as very hard questions, are engaged smart people reaching different results; then the same issues go up to the Supreme Court and we get very short, unanimous opinions. They don’t prompt a dissent. The longest of all the opinions I’ve mentioned is CLS at 17 pages, not very long. That’s the patent case docket.

 In the copyright context, we see a higher level of focus from the Supreme Court. Petrella is a copyright case that brought a very specific claim for damages for just three years of copyright infringement, and the legal question was very precise: does the equitable doctrine of laches come into play in this three-year period? As Justice Breyer puts it, it’s a little place in copyright law, yet you get 22 pages of opinion, you get a detailed dissent by Justice Breyer, and so I was struck by how much attention and focus Petrella got when the patent cases really got very little.

The decision in Aereo came down this morning. The technology here is complex, but it basically is a way for each of us to sit at home and watch a local broadcast TV show without paying the broadcasters to do so. How can that be OK? As Justice Scalia pointed out in the dissent, what’s really going on here is there’s a legal loophole that Congress didn’t envision when they wrote the Copyright Act. The statute was written in a world of cable operators, not in the world of the Internet or of the technology that we have today. In Aereo Justice Breyer starts with congressional purpose while Justice Scalia in dissent is talking about the statutory text. I think Justice Breyer was very concerned about the loophole, and Justice Scalia was making the point that that really should be for Congress to solve. The statutes are written for one age; different problems and different technologies roll out later. How do you resolve that?

The last case I want to draw to your attention is actually not an IP case, but it came down this morning. I think this is one that should get a lot of attention for a lot of different reasons. It’s Riley v. California, and the question is whether the police, having arrested somebody, can go through their cell phone or do they have to get a warrant to do so. In one of the cases, they flipped through the cell phone and saw a picture that helped them prove the guy was in a gang. In another case on a flip phone, calls kept coming through and they managed to find a home address and they found cocaine at the home address. The Court said today that you need a warrant to do that. You can’t just search through someone’s cell phone. It’s not just the holding that I think is important, but the way that Chief Justice Roberts describes how important cell phones are today. He has a really humorous line where he says: “Cell phones are now such a pervasive and insistent part of daily life that the proverbial visitor from Mars might conclude they were an important feature of human anatomy.” Beyond the humor, he talks about the immense storage capacity on today’s cell phones. It is the sensitivity to how technology is moving into our lives and how that requires a rethinking of legal rules that prompted me to bring Riley to your attention.

Mark Chenoweth: Jeff, would you like to finish us up?

Jeffrey Rosen: I have the privilege of addressing the Supreme Court’s decisions that involve government regulatory agencies. There are two preemption cases, that came out opposite ways: Northwest v. Ginsberg and CTS v. Waldburger. Because I don’t think these two cases are landmarks of any sort, I’m going to focus on three other cases that the Court decided this term that involve how much deference agencies get: EPA v. EME Homer City, Scialabba v. Cuellar de Osorio and UARG v. EPA. There is a fourth important case involving federal agencies and that’s the recess appointments clause case, NLRB v. Noel Canning (in which a ruling had not been handed down at the time of this briefing).

Let me start with Homer City and Scialabba. These are very robust applications of the Chevron deference doctrine in situations where it was not so clear beforehand that that kind of deference would be afforded to the agencies. Scialabba, an immigration case, involved a statutory construction of provisions about the priority and timing of where certain aliens fit into the immigration queue. The statute included textual provisions that arguably were at odds. The Supreme Court said that having this conflict created an ambiguity and, there being an ambiguity, the agency could decide in its discretion what policy to pursue and receive deference for that decision. In Justice Kagan’s phrasing, “this is the kind of case Chevron was built for.” Homer City involved issues of pollution from one state that migrates to another state and what restrictions EPA would require for cross-state pollution. The Court found the phrase “contribute significantly” [to interstate pollution] to be ambiguous. It not only allowed EPA to say what the statute means; it allowed EPA to devise a very complex multipart test and to use a factor – cost – that isn’t even mentioned in the statute as a part of the formula for allocating what each state’s burden would be in this interstate pollution situation. The D.C. Circuit had said EPA had gone beyond what the statute would permit; the Supreme Court reversed and gave more latitude to EPA. The story of these two cases is one of very robust deference to agencies, both as to when a statutory interpretation by the agency can elicit deference and as to how far the agency can go in “filling the gap.” But that wasn’t the full story of the term.

There was a third decision, UARG v. EPA, that proved to be a harsh rebuke of agency overreach. UARG was a case that had six cert petitions granted and combined. (I was counsel to one of the petitioners and WLF submitted an amicus brief on the side of the petitioners, who prevailed.) The opinion was sharply critical of EPA’s implementation of the Clean Air Act and of the executive branch’s overreach with regard to the statute. As to EPA, this ruling is most significant in its holding that the regulation of previously unregulated stationary sources of greenhouse gases was neither compelled nor allowed under the relevant part of the Clean Air Act. That refuted EPA’s statutory construction and disallowed its policy choice as being not reasonable or within the parameters of discretion. The upshot is that the ruling protects millions of small businesses, hospitals, schools, churches and others from being regulated by EPA as stationary sources under the PSD (prevention of significant deterioration) and Title V programs. In addition, the Court plainly restricted the application of its earlier Mass. v. EPA ruling. More broadly for agencies, the Court invalidated two agency rules in the case even under the very deferential framework of Chevron.

There really were two rules before the Supreme Court. First, the so-called triggering rule, by which EPA had said that once it regulates motor vehicles under Title II of the statute, it is automatically required to regulate stationary sources under the PSD program and Title I and Title V of the statute. That’s why it’s called “triggering.” Once there’s a regulated substance anywhere under the statute, it’s triggered for stationary sources. Since that would cover a huge number of new entities not previously regulated by EPA, the agency was going to use what it called the “tailoring” rule, which was to start with big entities like power plants and then phase in regulation of greenhouse gases as to others in stages. The triggering rule and the tailoring rule were challenged in the D.C. Circuit, and in a 3-0 decision the DC Circuit ruled for EPA, in part on the premise that the Supreme Court’s decision in Mass. v. EPA dictated the result. In the Supreme Court, EPA claimed that it had no choice but to regulate these stationary sources, that this was legally compelled by the statute and by the Supreme Court’s decision in Mass. v. EPA. And as a fallback the agency said that this was also the agency’s own reasoned policy choice that should be entitled to Chevron deference. The Supreme Court rejected both contentions saying EPA didn’t have the discretion to do what it had done. The Court effectively struck down both the triggering rule and the tailoring rule. That’s the first part of the decision. The second part dealt with what the Court called “anyway sources,” meaning parties that were already required to get PSD permits because they are large emitters of conventional pollutants: ozone, mercury, and the like. As to those, the Court said: to get those permits there’s something called BACT (best available control technology) and, with regard to the BACT requirements, EPA could make the discretionary policy choice to include greenhouse gas in the BACT assessments. The Court also put some important limits even on the BACT authority. A couple of quick observations: first, the Court plainly cut back on Mass. v. EPA. Second: Chevron deference was totally rejected under both prongs.

I have heard some spin from government agencies and their allies that EPA “won” in UARG despite losing on the triggering and tailoring rules. Let me just read a quote from the opinion and you decide: “In the tailoring rule, EPA asserts newfound authority to regulate millions of small sources including retail stores, offices, apartment buildings, shopping centers, schools and churches and to decide on an ongoing basis and without regard for the thresholds described by Congress on how many of those to regulate. We are not willing to stand on the dock and wave goodbye as EPA embarks on this multiyear voyage of discovery. We have reaffirmed the core administrative law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.” All in all, UARG marks an important decision not only in restricting EPA’s overreach with regard to its regulation but in telling agencies that Chevron deference will not always protect their rules and actions and in cautioning the executive branch about usurpations of powers that were not delegated by Congress.

This past term the three decisions we looked at say sometimes there’s latitude to interpret the statute, to fill the gaps, but for agencies that overreach, the Supreme Court is watching.