Waiting for Gorsuch: SCOTUS Kicks Important Class Action Waiver Case to Next Term

Supreme Court SCOTUS Class Action WaiverLast week, the United States Supreme Court informed litigants in Epic Systems Corp. v. Lewis that it is pushing the case to its October 2017 term. The lawsuit, which rose up through the Western District of Wisconsin and the Seventh Circuit, presents the High Court with a chance to resolve a robust circuit split on the question whether mandatory arbitration clauses in employment contracts may contain class action waivers without running afoul of the National Labor Relations Act (NLRA). Last spring, the Seventh Circuit ruled that such clauses were unenforceable, deviating from rulings by the Second, Fifth, and Eighth Circuits, and prompting the Supreme Court to grant certiorari on January 13, 2017.

The resolution of the issue turns on whether NLRA Section 7’s (29 U.S.C. § 157) protection of employees’ right to engage in “concerted activities” qualifies as a “contrary congressional command” (under CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012)) sufficient to override the Federal Arbitration Act’s (FAA) presumption that arbitration agreements are enforceable as written. The National Labor Relations Board (NLRB) has taken the position for years that class action waivers in employment agreements are unenforceable under the NLRA. See D.R. Horton, Inc., 357 N.L.R.B. 2277, 2289 (2012).  In Lewis, Judge Barbara Crabb of the Western District of Wisconsin followed the NLRB’s interpretation, based on Supreme Court precedent directing courts to give “considerable deference” to the agency’s interpretations of the NLRA. Lewis, No. 15-cv-82-bbc, 2015 U.S. Dist. LEXIS 121137, at *4 (W.D. Wis. Sept. 11, 2015) (quoting ABF Freight System, Inc. v. NLRB, 510 U.S. 317, 324 (1994)).

On appeal, the Seventh Circuit ruled that such class action waivers were “illegal” under the NLRA, making them unenforceable because the FAA contains a “savings clause” that allows courts to refuse to recognize arbitration agreements on grounds sufficient “for the revocation of any contract.” Lewis, 823 F.3d 1147, 1159 (7th Cir. 2016) (quoting 9 U.S.C. § 2). The Seventh Circuit acknowledged that its decision departed from precedents in its sister circuits but dismissed their reasoning. Following Lewis, a divided Ninth Circuit panel joined the Seventh Circuit, deepening the circuit split and teeing the issue up for Supreme Court review.

Because the case has now been deferred until next term, President Trump’s recent nomination of Judge Neil Gorsuch leads inquisitive minds to wonder about his jurisprudence on the FAA. With the Supreme Court’s present four-to-four ideological split, Judge Gorsuch’s vote may well decide the case. The 10th Circuit has not weighed in on the enforceability of class action waivers in employment agreements, but Judge Gorsuch’s opinions on the FAA demonstrate a commitment to enforcing its preference for arbitration.

Just a few weeks ago, in Ragab v. Howard, 841 F.3d 1134 (10th Cir. 2016), Judge Gorsuch penned a dissent from a panel decision that affirmed denial of a motion to compel arbitration. The parties in Ragab agreed to six business contracts with one another, each containing a separate (and contradictory) mandatory arbitration provision, which led the panel to rule that the parties failed to reach agreement on the essential terms regarding arbitration. In his dissent, Judge Gorsuch opined that the parties’ verbal cacophony regarding the procedural details of arbitration did not override their clear intention to arbitrate. His dissent identified two “workarounds” to save the arbitration agreements and alluded to the preemptive force of the FAA over state law. Id. at 1139, 1141. And, in Sanchez v. Nitro-Lift Techs., L.L.C., 762 F.3d 1139 (10th Cir. 2014), Judge Gorsuch joined an opinion requiring three former employees to arbitrate their wage claims against their employer, despite ambiguity in the parties’ arbitration agreement, based on the “liberal federal policy favoring arbitration.” Id. at 1145, 1147-48.

Furthermore, Judge Gorsuch has expressed deep skepticism regarding deference to administrative agencies. Back in August, he authored not one but two opinions in a case called Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016). In his opinion for the court, Judge Gorsuch ruled that the Board of Immigration Appeals could not apply a new administrative rule retroactively. Id. at 1148. Then, in a separate concurring opinion, he called on the Supreme Court to reconsider the doctrine of Chevron deference to administrative agencies, calling the precedent a “behemoth” of administrative law that was “more than a little difficult to square with the Constitution of the framers’ design.” Id. at 1149. This suggests that the NLRB’s anti-class waiver position may not carry much deferential heft with Judge Gorsuch.

So, while it appears that employers across the country will need to hold tight for a few months longer to see whether the class action waivers in their employment agreements hold water, the wait could be worthwhile for those looking to avoid class adjudication.

© 2017 Foley & Lardner LLP

SCOTUS Decision Affects Diversity Jurisdiction of Business Trusts

Many registered investment companies and real estate investment trusts are organized as business trusts. Certain states, such as Maryland, Delaware, and Massachusetts have been hospitable to such entities, and therefore are home to many of these entities. In some states, such as Massachusetts, the entities are formed as common-law trusts, while in others there is a statutory authorization for the formation of a business trust. However, unlike corporations which exist as “persons” for the purpose of legal actions, there have been questions raised as to whether business trusts have a separate legal existence.

The issue of whether a trust is a separate legal entity can impact how trusts access courts.  In a decision that could significantly impact the way in which business trusts determine the forum in which they sue or are sued, on March 7, 2016 the U.S. Supreme Court decided a case involving Americold Realty Trust. In that decision, the Court held that, unlike a corporation, a trust does not have a separate legal existence for the purpose of determining the citizenship of the entity.

The decision reaffirmed that a corporation is a citizen of the state in which it is organized (and the state in which it maintains its principal office, if different).  However, in an 8-0 decision, the Court held that trusts are not separate legal entities with a defined state of citizenship.  Rather, the citizenship of a business trust will be determined by where the beneficiaries of the trust are located.  For a large, publicly-owned business trust, such as a registered investment company or a REIT which have shareholders scattered in many or all of the states, that may effectively destroy any basis for such a trust to use diversity of citizenship to affect federal court jurisdiction.  If sued, this could force such entities to litigate in jurisdictions where the trust is not organized and does not maintain an office because an isolated shareholder resides in that jurisdiction.

While there may be little that investment companies or REITs can do to alter the impact of this decision, it will be interesting to see if the state laws authorizing such trusts can be revised in a way that may impact the consequences of this decision.

©2016 Greenberg Traurig, LLP. All rights reserved.

Is the SCOTUS Rule of Reason Unreasonable?

“Not too hard, not too soft,” says the Supreme Court in FTC v. Actavis, 133 S. Ct. 2223 (2013).  The majority tries to reach middle ground by rejecting both the FTC’s argument that any reverse payment in settlement of a patent claim is presumptively unlawful and Actavis’ argument that any settlement within the scope of the patent is permissible, but is the court’s new “rule of reason” approach really “just right?” Let’s see how this plays out in a simple scenario using a product whose success everyone loves to hate—the Snuggie.

Meet Peter.  He has a pug with whom he likes to spend his evenings, wrapped up in a Snuggie, watching movies and sharing popcorn.  Peter was quite dismayed, though, to see his poor little pug shivering and cold without a Snuggie of his own.  So, Peter invented the Puggie.  He used special fibers formulated specifically to maintain heat while resisting odors because no one likes a smelly dog blanket.  Peter even obtained a patent on his Puggie and began producing more to sell around his neighborhood, the Franklin Terrace Community.  Once word spread of Peter’s success, however, several of Peter’s neighbors began producing competing products—the Pug Pelt, the Schnauzzie, and so on–which boasted the same odor-resistant properties as Peter’s Puggie.

Outraged, Peter publicly accused his competitors of patent infringement and demanded that they stop producing their “piddly dog pelts.” But they refused, claiming their fibers were different.  Knowing how costly an extensive fiber dispute could be, Peter offered his competitors $1,000 to stop producing their competing pelts for a period of two years.  The other pelt producers agreed, took the money, and stopped production immediately.  The Franklin Terrace Community, however, was not pleased.  Peter had not only run off the competition, but he had also bumped the Puggie price up afterward, making a killing during the chilly winter as the sole pelt producer.  Community members petitioned the homeowners’ board for some guidance on whether Peter’s payment constituted an unfair trade practice.  Peter opposed the petition and claimed that he had the right to pay whatever amount he deemed fit to protect his patent.

The board found the community’s argument that any “reverse settlement” payment by a patent holder is presumptively unlawful to be too harsh.  Peter’s assertion, however, that any payment is immune from attack so long as it remains within the scope of the patent was believed to be too soft.  Peter complained that the money and time he would have to commit to an extensive patent lawsuit over his odor-resistant fibers would put him out of business, but the board believed that his willingness to drop a grand to keep his competitors at bay was a much more accurate representation of Peter’s confidence in his patent.  Specifically, the board found Peter’s payment of $1,000 to be a “strong indicator of power.”  In an effort to come up with a more “middle of the road” approach, the board created the “rule of reason” to determine the legality of reverse settlement payments.  No real guidance was provided, though, on how to apply the new rule—just not too hard, not too soft.

Without any elaboration on how this new “rule of reason” is to be applied in antitrust lawsuits, did the board cause more confusion than clarity?  And, how large must a reverse settlement payment be to stand as an “indicator of power” and “lack of confidence” in the patent?  If Peter’s patent was iron-clad and his competitors were infringing, should he have had the right to pay any amount he deemed fit to protect his patent, or was $1,000 too much for some piddly pooch pelts?  Does this unfairly prohibit Peter from settling litigation that he may see as too costly or damaging?  Or, does the need to protect consumers from the Puggie monopoly Peter created outweigh Peter’s patent rights?

It is hard to say exactly what effect the Supreme Court’s “rule of reason” decision in FTC v. Actavis will have on future antitrust litigation.  We are likely to see an increase in the number of antitrust suits that are tried as opposed to settled. What do you make of this amorphous, middle-of-the-road approach?

© Copyright 2002-2015 IMS ExpertServices, All Rights Reserved.

Obamacare Survives in 6-3 Vote – Supreme Court Issues Opinion on King v. Burwell

This morning, the Supreme Court of the United States issued its final decision on King v. Burwell regarding the survival of Obamacare. The decision, issued by Chief Justice Roberts and joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan, effectively allows millions of people to to keep the tax subsidies provided so they can afford health insurance.

The Affordable Care Act (ACA) explicitly states that the tax subsidies were provided for individals to purchase insurance through state-based changes. The Court was charged with determining whether they could be used to purchase insurance through the federally run Healthcare.gov marketplace as well. The creators of the law contend that the law’s intent is to make affordable care available to people across the country through both channels by providing a federal exchange where states did not establish one.

The Court agreed -federal government can subsidize health insurance premiums for residents of states that did not establish a state health insurance exchange. In the Court’s opinion, Chief Justice Roberts wrote “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral… It is implausible that Congress meant the Act to operate in this manner.”

Chief Justice Roberts reinforces the role of the Court – as an interpreter of the law, not its creator:

[I]n every case we must respect the role of the Legislature, and take care not to undo what it has done. A fair reading of legislation demands a fair understanding of the legislative plan. Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. (emphasis added)

This is a developing story. Please stay tuned for more updates and legal commentary.

SCOTUS Upholds Exchange Subsidies – King v. Burwell

Supreme Court Upholds Affordable Care Act Insurance Subsidies

Copyright ©2015 National Law Forum, LLC

U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

On May 18, the U.S. Supreme Court issued its decision inComptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus be subject to taxation on all of their income in both states.

Although New York State grants a credit to residents for taxes paid to another jurisdiction, that credit is only for taxes paid “upon income derived” from those other jurisdictions. N.Y. Tax Law § 620. As such, New York State does not grant a credit for taxes paid to another jurisdiction on income earned from intangible property, such as stocks, because income earned from intangible property is not ‘derived from’ any specific  jurisdiction.

To illustrate using an example, suppose an investment banker is unquestionably a domiciliary of New Jersey and has an apartment, i.e., permanent place of abode, in New York that he uses only occasionally. Further, suppose that the investment banker spends more than 183 days in New York during a tax year by going to his office in New York on most workdays. In such a case, the investment banker is a resident of both New Jersey and New York and subject to tax as a resident in both states on his entire worldwide income. New York does not give a credit for taxes paid to New Jersey on income derived from intangible property, and thus the investment banker pays tax on this income twice, once to New Jersey and once to New York, clearly disadvantaging interstate commerce and resulting in double taxation.

This is not some hypothetical example. This is actually the fact pattern in In the Matter of John Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y.2d 530 (1998). In that case, the New York Court of Appeals (New York State’s highest court) held that New York State’s taxing scheme did not violate the dormant Commerce Clause and did not fail the internal consistency test. The validity of the Court of Appeals’ decision is seriously called into question under the Wynne case.

The Court of Appeals, relying upon Goldberg v. Sweet, held that the dormant Commerce Clause did not apply to residency-based taxes because those taxes were not taxing commerce, but rather a person’s status as a resident. However, the U.S. Supreme Court’s decision in Wynne not only repudiates the very dicta from Goldberg v. Sweet cited by the New York Court of Appeals in Tamagni, but the U.S. Supreme Court also determined that even if a state has the power to impose tax on the full amount of a resident’s income, “the fact that a State has the jurisdictional power to impose a tax [under the Due Process clause of the Constitution] says nothing about whether that tax violates the Commerce Clause.” After Wynne, it is clear that the dormant Commerce Clause applies to residency-based personal income taxes.

The second reason that the vitality of the Tamagni decision is in question is its application of the internal consistency test. The Court of Appeals held that even if the dormant Commerce Clause applied, the internal consistency test was not violated because the tax at issue was imposed upon a purely local activity and thus could not violate the Complete Auto tests. However, as discussed above, New York State’s lack of a credit for taxes paid to other jurisdictions mirrors the lack of a credit under Maryland’s county income tax scheme.

New York State taxpayers should be cognizant of the Wynnedecision and should consider filing refund claims if they have paid— or will pay—tax to New York State as a statutory resident (i.e., not as a New York domiciliary). One would expect the New York State Department of Taxation and Finance to be quite resistant to granting such refunds and likely to vigorously defend the existing taxing scheme.

It may be worthwhile to note that this problem of double taxation was acknowledged and addressed in an agreement executed in October 1996 by the heads of the revenue agencies of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. Under that agreement, the “statutory resident” state would provide a credit for the taxes paid by the individual on his or her investment income to his/her state of domicile. Unfortunately, that agreement was never implemented through legislation— maybe now is the time for that to be done.

Finally, a word about New York City: New York City imposes a personal income tax on residents, allowing no credit for taxes paid to other jurisdictions. However, New York City does not impose a tax on non-residents, making its personal income tax different than the Maryland county income tax. Thus, the constitutionality of the New York City personal income tax is not specifically addressed by the U.S. Supreme Court’s decision. However, similar to the New York State definition of resident, a person can be a resident in two different jurisdictions under the New York City definition of resident. As such, New York City’s personal income tax could be imposed twice on a person if the person is a domiciliary of one state and a statutory resident in another. Thus, the tax potentially fails the internal consistency test.

© 2015 McDermott Will & Emery

Supreme Court to Decide Who Can Sue Under Privacy Law

Does a consumer, as an individual, have standing to sue a consumer reporting agency for a “knowing violation” of the Fair Credit Reporting Act (“FCRA”), even if the individual may not have suffered any “actual damages”?

The question will be decided by the U.S. Supreme Court in Spokeo, Inc. v. Robins, 742 F.3d 409 (9th Cir. 2014), cert. granted, 2015 U.S. LEXIS 2947 (U.S. Apr. 27, 2015) (No. 13-1339). The Court’s decision will have far-reaching implications for suits under the FCRA and other statutes that regulate privacy and consumer credit information.


Enacted in 1970, the Fair Credit Reporting Act obligates consumer reporting agencies to maintain procedures to assure the “maximum possible accuracy” of any consumer report it creates. Under the statute, consumer reporting agencies are persons who regularly engage “in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties.” Information about a consumer is considered to be a consumer report when a consumer reporting agency has communicated that information to another party and “is used or expected to be used or collected” for certain purposes, such as extending credit, underwriting insurance, or considering an applicant for employment. The information in a consumer report must relate to a “consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.”

Under the FCRA, consumers may bring a private cause of action for alleged violations of their FCRA rights resulting from a consumer reporting agency’s negligent or willful actions. For a negligent violation, the consumer may recover the actual damages he or she may have sustained. For a “willful” or “knowing” violation, a consumer may recover either actual damages or statutory monetary damages of $100 to $1,000.


Spokeo is a website that aggregates personal data from public records that it sells for many purposes, including employment screening. The information provided on the site may include an individual’s contact information, age, address, income, credit status, ethnicity, religion, photographs, and social media use.

Spokeo, Inc., has the dubious distinction of receiving the first fine ($800,000) from the Federal Trade Commission (“FTC”) for FCRA violations involving the sale of Internet and social media data in the employment screening context. The FTC alleged that the company was a consumer reporting agency and that it failed to comply with the FCRA’s requirements when it marketed consumer information to companies in the human resources, background screening, and recruiting industries.

Conflict in Circuit Courts

In Robins v. Spokeo, Inc., Thomas Robins had alleged several FCRA violations, including the reckless production of false information to potential employers. Robins did not allege he had suffered or was about to suffer any actual or imminent harm resulting from the information that was produced, raising only the possibility of a future injury.

The U.S. Court of Appeals for the Ninth Circuit, based in San Francisco, held that allegations of willful FCRA violations are sufficient to confer Article III standing to sue upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of the statute. In other words, the consumer need not allege any resulting damage caused by a violation; the “knowing violation” of a consumer’s FCRA rights alone, the Ninth Circuit held, injures the consumer. The Ninth Circuit’s holding is consistent with other circuits that have addressed the issue. See e.g., Beaudry v. TeleCheck Servs., Inc., 579 F.3d 702, 705-07 (6th Cir. 2009). It refused to follow the U.S. Court of Appeals for the Eighth Circuit in finding that one “reasonable reading of the [FCRA] could still require proof of actual damages but simply substitute statutory rather than actual damages for the purpose of calculating the damage award.” Dowell v. Wells Fargo Bank, NA, 517 F.3d 1024, 1026 (8th Cir. 2008).

The constitutional question before the U.S. Supreme Court is the scope of Congress’ authority to confer Article III standing, particularly, whether a violation of consumers’ statutory rights under the FCRA are the type of injury for which Congress may create a private cause of action to redress. In Beaudry, the Sixth Circuit identified two limitations on Congress’ ability to confer standing:

  1. the plaintiff must be “among the injured,” and

  2. the statutory right must protect against harm to an individual rather than a collective.

The defendant companies in Beaudry provided check-verification services. They had failed to account for a change in the numbering system for Tennessee driver’s licenses. This led to reports incorrectly identifying consumers as first-time check-writers.

The Sixth Circuit did not require the plaintiffs in Beaudry to allege the consequential damages resulting from the incorrect information. Instead, it held that the FCRA “does not require a consumer to wait for consequential harm” (such as the denial of credit) before bringing suit under FCRA for failure to implement reasonable procedures in the preparation of consumer reports. The Ninth Circuit endorsed this position, holding that the other standing requirements of causation and redressability are satisfied “[w]hen the injury in fact is the violation of a statutory right that [is] inferred from the existence of a private cause of action.”

Authored by: Jason C. Gavejian and Tyler Philippi of Jackson Lewis P.C.

Jackson Lewis P.C. © 2015

Supreme Court Holds Providers Cannot Sue States to Challenge Low Medicaid Rates

Foley and Lardner LLP The Supreme Court ruled, on March 31, in a 5-4 decision, that hospitals and all other providers cannot sue to force a state to pay higher Medicaid rates. The name of the case is Armstrong v. Exception Child Center. In Armstrong, the plaintiffs were a group of Idaho providers that furnish “habilitation services.” These are in-home care services, and the providers contended that but for the provision of such services, the Medicaid recipients would require care provided in a hospital or a nursing facility or intermediate care facility for the mentally retarded.

The providers asked the Federal district court to issue an injunction to require the Idaho Medicaid agency to increase the rates for habilitation services. The district court issued the injunction, and on appeal the Ninth Circuit Court of Appeals affirmed. The Supreme Court reversed, however. Although the Medicaid statute says  that each State’s Medicaid plan must set rates that are “sufficient to enlist enough providers so that care and services are available,” the Supreme Court held that providers cannot sue to enforce this provision, but rather only the Secretary of HHS can enforce this provision by withholding Federal funds from the State.

The Supreme Court majority (Scalia, Roberts, Breyer, Thomas, Alito) found that the Supremacy Clause in the Constitution while giving Federal courts the power to declare State action invalid in light of contrary Federal law, does not provide private citizens a right to bring suit to enforce Federal laws. Nor could the providers invoke the court’s power to do equity because in providing the Secretary with the authority to cut off federal funding to States that do not pay sufficient Medicaid rates, Congress impliedly foreclosed all other relief. Also, the fact that Congress used broad and subjective language in the Medicaid statute provision at issue (“consistent with efficiency, economy, and quality of care”) indicates that Congress meant to leave it to the Secretary to come up with standards and enforce them rather than give the courts the power to decide when Medicaid rates are too low.

The four dissenters (Kennedy, Kagan, Ginsburg, Sotomayor) agreed with part of the majority’s reasoning. However, the dissent believed that it should be presumed that Congress intended to give the federal courts the equitable power to set aside rate determinations by agencies, including State Medicaid agencies, unless Congress affirmatively manifests a contrary intent.