Tag: SCOTUS

Trademarks, Bankruptcy, and Leverage: What Manufacturers and Other Trademark License Parties Should Know About A Potential Landmark Case Before the Supreme Court

On February 20, 2019, the United States Supreme Court heard oral arguments in the case Mission Products, Inc. v. Tempnology, LLC. The case has important implications for manufacturers and other parties to trademark licenses when a trademark licensor files, or threatens to file, bankruptcy. Lower courts including the First Circuit found that, in the event of a trademark licensor bankruptcy filing, the licensor may reject the trademark license, prevent the licensee from further use of the license, and leave the licensee with the sole remedy of filing a claim in the bankruptcy case. Other courts have disagreed with the effect of a trademark license rejection in bankruptcy, finding that a trademark licensee may retain certain rights following a licensor rejection. When the Supreme Court rules, the Tempnology case is slated to be a landmark decision both on the general issue of what rejection truly means in bankruptcy and on the specific issue of whether a trademark licensee’s rights can essentially be destroyed in a licensor bankruptcy case.

The decision is likely to have broad implications for trademark license parties no matter which way the Supreme Court rules. If the court holds that the rejection of a trademark license effectively terminates the rights of a licensee, both licensors and licenses will know that such a “nuclear option” is available in bankruptcy and negotiating leverage will swing heavily toward a licensor. On the other hand, a decision finding that licensees retain rights post-rejection will make a bankruptcy filing a much less attractive option for a licensor as a solution for dealing with a licensee. Both trademark licensors and licensees should, therefore, be aware that the bankruptcy sword or shield (depending on your perspective) may be about to change.

The Tempnology case involved Tempnology, LLC, a company that manufactured athletic sportswear and licensed the right to use its COOLCORE trademark and related rights to a licensee called Mission Product Holdings, Inc. More details about the company, the bankruptcy court decision, and the First Circuit decision can be found here. In summary, Tempnology attempted to use its Chapter 11 bankruptcy filing as a means to terminate the rights of the trademark license to Mission. Normally, following the rejection of an agreement such as a license in a bankruptcy case, non-debtor parties are limited to filing a general unsecured claim. Depending on the case, general unsecured claimants may receive much less than the face value of their claims. However, some courts have held that rejection does not “vaporize” a licensee’s rights and the non-debtor licensee thus may retain certain post-rejection enforcement rights. To that point, outside of the bankruptcy context, a licensor’s breach of a trademark license agreement does not mean that the licensee no longer has any rights in the license. In fact, state law provides a number of licensee remedies short of termination.

On appeal to the First Circuit, the court disagreed with the characterization that refusing to permit post-rejection rights would “vaporize” a trademark licensee’s rights. The licensee continued to have rights, the court noted, but they were limited to filing a claim for rejection damages. The court further noted that the purpose of rejection under the Bankruptcy Code is to free a debtor of costly obligations and that this purpose would be thwarted if a trademark licensor debtor were required to deal with post-rejection assertions of rights by the licensee.

Mission appealed to the Supreme Court and certiorari was granted on October 26, 2018. While Mission requested review of several issues, the Supreme Court limited the matter to one issue: whether a debtor/licensor’s rejection of a license agreement terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law. In addition to the briefs filed by the parties, there were several notable amici curiae briefs, the majority of which adopted Mission’s position that a trademark licensee should retain certain rights post-rejection. Such amici curiae briefs in support of Mission included the United States, the New York Intellectual Property Law Association, a number of revered law professors, and the International Trademark Association. Moreover, the United States, as represented by the Assistant to the Solicitor General, participated in oral argument in support of Mission.

During the oral arguments, the Justices probed the issue of a trademark licensor’s obligations, including contractual obligations under the terms of a license as well as obligations to maintain the trademark under the Lanham Act. This is an important point because rejection is designed to relieve a debtor of its contractual obligations in order to unburden the bankruptcy estate. The Lanham Act, however, may impose continuing obligations on the licensor with respect to the rejected license. Mission argued that Bankruptcy Code section 365 and the concept of rejection speaks to contractual obligations and that the obligation to maintain a trademark is outside the agreement. Justice Breyer challenged the argument with an analogy of a landlord for an igloo whose obligation included air conditioning the premises: “You know, you break your promise to air condition, no more igloo.” There were also some notable statements from the United States, which called the Tempnology’s position “extortionate” because the threat of a rejection would put the licensee to the “choice between paying a higher royalty payment or shutting down their business and firing all their workers.”

Tempnology responded by arguing that a trademark license involves a special relationship that deals with the trademark owner’s reputation. The Justices challenged Tempnology on that point by asking how a licensor’s breach would be treated outside of bankruptcy. When pressed on the point, Tempnology could not point to any case law or other authority that would compel the licensee to stop using the license as a result of the licensor’s breach. Justice Kagan succinctly summarized the parties’ positions that Mission was arguing rejection means breach and Tempnology was arguing that rejection means rescission. The fact that the applicable Bankruptcy Code section – section 365(g) – uses the word “breach” suggests that the Justices may be leaning in favor of Mission in the case. Note, however, the issue of mootness may preclude a substantive decision in this case. Both Justices Gorsuch and Sotomayor asked pointed questions on why the case is not moot on a number of grounds, including the fact that no court actually entered an order specifically preventing Mission from using the COOLCORE trademark post-rejection. The United States responded that the effect of the bankruptcy court order was to prevent such usage. It is not entirely clear, but it seemed that the Justices were able to get past the issue of mootness.

The issues in the Tempnology case have broad implications on whether a Chapter 11 bankruptcy can be used as a sword by a trademark licensor to relieve itself of what it perceives as burdensome licensee obligations. Under the law as adopted by the First Circuit, the scales are tipped decidedly in the favor of a debtor/licensor. If the Supreme Court rules in favor of Mission, it will provide clarity on what exactly rejection means in these circumstances and it will constitute a significant readjustment of negotiating leverage.

 

© 2019 Foley & Lardner LLP
This post was written by Jason B. Binford of Foley & Lardner LLP.
Read more in SCOTUS Litigation on the National Law Review’s Litigation type of law page.

Supreme Court Clarifies Copyright Law: “Application” v. “Registration” Finally Resolved

On Monday, March 4, 2019, the United States Supreme Court issued an opinion that clarified the long-standing issue of whether a plaintiff bringing a copyright infringement action has to have an issued registration or just a pending application. Justice Ginsburg, writing for a unanimous court, sided with the “registration approach,” which requires a litigant to have an issued registration, or a rejected application, subject to certain limited exceptions. For decades, copyright owners and their attorneys faced a patch-work of circuit and district court decisions that required either (i) an issued registration to institute an infringement action or (ii) merely have made an application to register the work(s) at issue. This decision provides certainty going forward.

In Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC, No. 17-571, the copyright owner Fourth Estate sued Wall-Street for use of news articles after a licensing agreement between the parties was terminated. Fourth Estate sued Wall-Street and its owner after it applied to register for copyright registrations for the news articles at issue but before any registrations issued. The District Court dismissed the action on defendants’ motion, the Eleventh Circuit affirmed, and the Supreme Court affirmed.

Under the Copyright Act of 1976, as amended, copyright protection attaches to “original works of authorship”— prominent among them, literary, musical, and dramatic works—“fixed in any tangible medium of expression.” 17 U.S.C. § 102(a). Before pursuing a claim for infringement, a copyright owner must comply with § 411(a)’s requirement that “registration of the copyright claim has been made.” Although rights exist before registration, the registration is a requirement that must be administratively exhausted before filing suit. An owner therefore must have an issued registration or a refusal to register from the Copyright Office. The Supreme Court referred to this as “an administrative exhaustion requirement.”

Limited exceptions apply. For example, for works that are particularly vulnerable to predistribution infringement, such as movies or musical compositions, an owner may apply for “preregistration” in which the Copyright Office conducts a limit review. Once a work is “preregistered” the owner may bring suit. However, the owner must also go on and fully register the work thereafter to maintain the action. Another exception covers live broadcasts. Suit may be brought before registration but must be made within three months of the first transmission.

For owners of copyright protected works, the take-away lesson from this decision is to register more of the works that could be subject to infringement. Strategies for protecting works, such as furniture, apparel, and musical works, have become more nuanced and strategic in recent years.

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
Read More IP news on the National Law Review’s IP Type of law page.

Supreme Court Update: SCOTUS Grants CERT on Issue of Punitive Damages for Unseaworthiness and Denies CERT on Maritime Contract Test

Last month, the US Supreme Court decided to take up whether punitive damages are recoverable in general maritime law claims for unseaworthiness when it granted certiorari in Batterton v. Dutra Group, 880 F.3d 1089 (9th Cir. 2018), writ granted Docket No. 18-266 (Dec. 7, 2018). As we reported in June 2018, Batterton brings the issue into focus for the high court because it is directly at odds with a 2014 US Fifth Circuit decision that held that punitive damages are nonpecuniary and therefore not recoverable in unseaworthiness actions. McBride v. Estis Wells Serv., 768 F.3d 382 (5th Cir. 2014).

The US Ninth Circuit in Batterton relied on a prior decision from that circuit, Evich v. Morris, 819 F.2d 256 (9th Cir. 1987), which held that punitive damages are available for general maritime law claims of unseaworthiness if certain conditions are present (i.e., when the conduct constitutes reckless or callous disregard for the rights of others, gross negligence, actual malice, or criminal indifference). The Ninth Circuit also relied on the broad principle announced in Atlantic Sounding v. Townsend, 557 US 404 (2009), that punitive damages have been available under the general maritime law and should, therefore, be available in unseaworthiness actions even though that case concerned the refusal of an employer to pay maintenance and cure benefits to a seaman.

The Fifth Circuit in McBride, however, relied on an earlier Supreme Court decision in answering the same question. In Miles v. Apex Marine Corp., 498 US 119 (1990), the Supreme Court held that a seaman’s damages are limited to pecuniary loss. The Fifth Circuit determined that punitive damages are nonpecuniary, and therefore are not recoverable for an unseaworthiness claim.

The Supreme Court will take up the question in due course, and we will continue to provide updates on this case, as punitive damages can impact the value of a case and present insurance coverage issues.

Separately, the Supreme Court denied cert in December 2018 from In re Crescent Energy Servs., L.L.C., 896 F.3d 350 (5th Cir. 2018), writ denied Docket No. 18-436 (Dec. 10, 2018), the first Fifth Circuit case that applied the new test for determining whether a contract in the oil and gas context is maritime since the en banc court changed the test in In re Larry Doiron Inc., 879 F.3d 568 (5th Cir. 2018). We summarized that line of cases in our August 2018 newsletter. The test under Doiron is two-pronged:

  1. Is the contract to provide services to facilitate the drilling or production of oil and gas on navigable waters?
  2. If the answer to the above question is “yes,” does the contract provide for, or do the parties expect, a vessel to play a substantial role in the completion of the contract? If so, then the contract is maritime in nature.

In In re Crescent Energy Servs., L.L.C., the issue presented on appeal was whether a contract to provide services to oil wells located on fixed platforms in navigable waters within a state is a “maritime” contract when a vessel plays a substantial role in the performance of the contract. The Fifth Circuit applied the Doiron test and answered in the affirmative, finding that the contract was indeed maritime. The Supreme Court denied cert, and the new test for a maritime contract in the oil and gas context adopted by Doiron continues to apply. Whether a contract is maritime in nature plays a role in the enforceability of indemnity obligations among the parties because indemnity provisions are generally enforceable under maritime law, but are often prohibited under oilfield anti-indemnity acts in Texas and Louisiana. If a contract is nonmaritime, then state law applies, which can bar enforcement of the indemnity provisions in the contract.

 

© 2019 Jones Walker LLP
This post was written by Jeanne Amy of Jones Walker LLP.
Read more litigation news on the National Law Review’s Litigation Page.

Administrative Agency Deference Theme Reemerges with SCOTUS Considering Overturning Auer

The U.S. Supreme Court signaled that it remains concerned with the issue of administrative deference following its grant of certiorari last week to hear Kisor v. O’Rourke specific to the issue of whether the Court should overrule Auer v. Robbins and Bowles v. Seminole Rock & Sand Co. Overruling one or both of these decisions could result in courts giving considerably less deference to agencies’ interpretations of their own regulations.

The ability of regulatory agencies to interpret their own regulations is a fundamental issue in many environmental disputes. Both Auer and Seminole Rock are frequently cited in environmental cases to support agency actions, as these decisions require courts to give agencies near-absolute deference, so long as their decisions are not “plainly erroneous or inconsistent” with other regulations.

In practice, agencies that promulgate vague regulations through notice-and-comment procedures required by the federal Administrative Procedure Act can later expand the ambit of these regulations through informal memoranda or regulatory interpretations. These less formal processes preempt the ability of the public and regulated community to meaningfully participate in the regulatory process.

Administrative deference is an ongoing theme that we have seen arise a number of times in the past few years. Indeed, the legal community had pondered whether the Supreme Court would review administrative deference issues in the Weyerhaeuser Co. v. U.S. Fish & Wildlife Service caseinvolving the dusky gopher frog that was decided a few weeks ago. Although the Supreme Court decided Weyerhauser without reference to issues of administrative deference, the Kisor case is a clear example that this is not going away.

However, Kisor actually arises in a context fairly atypical for administrative deference. The case involves a claim for PTSD-related retroactive disability benefits brought by a former Vietnam-War-era Marine who was denied retroactive disability benefits for PTSD he suffered as a result of his service in Vietnam. Kisor’s eligibility for such benefits hinged on whether the VA received “relevant official service department records” after initially denying his claim for benefits in 1982.

Kisor argued that material he submitted to the VA relating to his service in Vietnam constituted “relevant official service department records” and entitled him to retroactive benefits. The Board of Veterans Appeals (“Board”) disagreed, stating that, in Kisor’s case, “relevant” records were those relating to a diagnosis of PTSD (which was contested at the time of his initial denial). That Kisor served in the military was never in dispute.

The Court of Federal Claims upheld the Board’s interpretation of the meaning of “relevant.” In so holding, the court concluded that the term was ambiguous, and that the Board’s interpretation was entitled to deference under Auer, Seminole Rock, and their progeny, because it was neither “plainly erroneous or inconsistent” with the VA’s regulatory framework.

Kisor illustrates the breadth of power granted to agencies by Auer and Seminole Rock – the agency’s determination of whether “relevant” records were provided was quite possibly outcome-determinative for the involved claims.

The case is expected to be heard by the Court at some point in 2019. We will keep an eye out for further developments on Kisor and similar cases touching on administrative deference.

 

© 2018 Schiff Hardin LLP
Read more Litigation news at the National Law Review’s Litigation page.

SAS Indirectly Strengthens the Impact of Estoppel

The Supreme Court decision in SAS Institute v. Iancu[i]will likely strengthen a patent owner’s ability to argue in favor of estoppel and keep a petitioner from getting multiple bites at the invalidity apple in parallel PTAB and district court proceedings. At first glance the Supreme Court’s recent decision appears to be another setback to patent owners. Instead of quickly defeating post grant challenges to at least some challenged claims pursuant to a denial of institution, patent owners will now have to fight petitions even if the Board finds merit with only a single ground challenging patentability. Upon closer examination, however, SAS’s implications for estoppel are favorable and may even resolve a split concerning the scope of estoppel.

The Supreme Court Directive in SAS

SAS addressed the PTAB’s “partial institution” policy, under which the PTAB claimed the power to institute an IPR with respect to only some of the claims challenged in a petition. In SAS, the Supreme Court rejected that policy. The Court explained that if the PTAB decides to institute an IPR, 35 U.S.C. § 318(a) provides that PTAB “shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner.” Emphasizing the statute’s use of the phrase “any patent claim,” the Court held that PTAB cannot pick and choose which claims to address, but must instead take the petition as it finds it.[ii] The Court found further support for its interpretation in the structure of the inter partes review process “in which it’s the petitioner, not the Director, who gets to define the contours of the proceeding.”[iii]

The Split on Estoppel

The partial institution policy that SAS rejected has created a split in the interpretation of estoppel under 35 U.S.C. § 315(e). Section 315(e)(2) provides that “[t]he petitioner in an inter partes review . . . that results in a final written decision under section 318(a) . . . may not assert . . . in a civil action . . . that the claim is invalid on any ground that the petitioner raised or reasonably could have raised during that inter partes review.” Congress intended this provision to preclude the same party from re-litigating invalidity in the district court once it had chosen to do so through an IPR. As then-Director of the PTO David Kappos testified, the “estoppel provisions mean that your patent is largely unchallengeable by the same party.”[iv] Similarly, Senator Grassley stated that IPR review “will completely substitute for at least the patents-and-printed-publications portion of the civil litigation.”[v]

Notwithstanding the apparently broad estoppel envisioned by Congress, some courts have interpreted § 315(e) more narrowly. For example, in Shaw Industries Group, Inc. v. Automated Creel Systems, Inc., the Federal Circuit explained that where PTAB partially instituted an IPR, the petitioner was not estopped from raising a ground in district court that it had included in its IPR petition but on which PTAB did not institute. The court reasoned that the non-instituted ground was not raised “during th[e] inter partes review.”[vi] Similarly, in HP Inc. v. MPHJ Technology Investment, LLC, the Federal Circuit explained that “noninstituted grounds do not become a part of the IPR,” and “[a]ccordingly, the noninstituted grounds were not raised and, as review was denied, could not be raised in the IPR.” The court therefore held that “the estoppel provisions of § 315(e)(1) do not apply.”[vii] Other courts have followed suit and even extended that holding.[viii]

A broader interpretation of estoppel tracks what many believe to be the statutory intent, however, as a party should not get two bites at the apple and be able to seek review at both the PTAB and in the district court. Adopting this view, the court in Biscotti Inc. v. Microsoft Corp. cabined Shaw and HP to their facts, holding that they “exempt an IPR petitioner from § 315(e)’s estoppel provision only if the PTAB precludes the petitioner from raising a ground during the IPR proceeding for purely procedural reasons.”[ix] Thus, the court held that § 315(e) estopped the petitioner from asserting any ground that (1) was included in PTAB’s final written decision, (2) was not instituted for non-procedural reasons, or (3) was not included in the petition.[x] Any other decision would result in needlessly protracted litigation as petitioners would re-litigate arguments similar to those that it had already lost or strategically chose not to include in a petition.[xi] The court in Douglas Dynamics, LLC v. Meyer Products LLCtook a similar view with respect to non-petitioned grounds, holding that estoppel applies “to grounds not asserted in the IPR petition, so long as they are based on prior art that could have been found by a skilled searcher’s diligent search.”[xii]

SAS Strengthens Patent Owners’ Estoppel Arguments Because a Petitioner is Deemed to be the “Master of its Complaint”

While SAS had nothing to do with estoppel on its face, much of the disagreement regarding the scope of estoppel arose out of the PTAB’s partial institution policy and the effect of estoppel on non-instituted claims. Because the PTAB no longer has discretion as to partial institution, courts will no longer have to struggle with whether a petitioner is estopped from raising non-instituted grounds for unpatentability in a subsequent or parallel district court proceeding. While a few open issues remain, the patent owner will still be able to argue that SAS supports the idea that petitioners should only get one opportunity to challenge patentability—either at the PTAB or before a jury. The Supreme Court directive from SAS, coupled with recent guidance from the PTAB, suggests that the divide between the broad (Biscotti and Douglas Dynamics) and narrow (Shaw and HP) interpretations of estoppel—at least with respect to pre-institution decisions from the PTAB—may be merging.

Moreover, while SAS does not explicitly resolve whether a petitioner is estopped from arguing non-petitionedclaims in a parallel district court case, the premise behind the Supreme Court’s decision—that the petitioner is the master of its own petition—suggests that estoppel should apply. Some commentators have predicted that because PTAB must now choose between full institution and full denial, “petitioners [will] have an incentive to focus their petitions even further—when choosing claims to challenge, grounds to assert, and prior art to cite—in order to ensure that the likelihood of full institution is greater than the likelihood of full denial.”[xiii] But filing a targeted (and therefore stronger) petition may run the risk of estoppel on any non-petitioned claim. As Biscotti and Douglas Dynamics indicate, petitioners should not be permitted to hold arguments in reserve in case of an unfavorable result at the PTAB. Moreover, SAS supports Biscotti’s and Douglas Dynamic’s interpretation of the meaning of “during” the IPR. While Shaw characterized an IPR as not beginning until institution,[xiv]SAS depicts post grant review as a single process that begins with petitioner defining the scope of the proceeding in its petition.[xv]Applying estoppel to non-petitioned claims would not be inconsistent with a courts’ concern “that estoppel applies only to those arguments, or potential arguments, that received (or reasonably could have received) proper judicial attention.”[xvi]

 Further, SAS will still enable patent owners to rely on the same line of cases to argue for procedural estoppel. Before SAS, the PTAB frequently denied institution in view of procedural deficiencies.[xvii] Now, however, the PTAB will be faced with either denying institution for failure to comply with PTAB rules or allowing institution on all grounds even where some of the challenges are procedurally improper. For example, petitioners could present a single procedurally proper argument to open the door to review and evade page limit requirements by packing the remainder of the petition with grounds that must also be instituted under SAS but that are supported only by improper incorporations by reference.[xviii] While denying institution because of procedural failings could preclude the petitioner from filing another (procedurally proper) petition making the same arguments,[xix] the petitioner, as “master of its complaint,” could have drafted its petition correctly from the start.[xx] In short, the petitioner’s failure to follow the rules should not justify a second bite at the validity apple.

 Finally, pending petitions subject to partial institution could have the same consequences depending on the action of the petitioner post-SAS. PTAB guidance indicates that in such cases, “the panel may issue an order supplementing the institution decision to institute on all challenges raised in the petition.”[xxi] If a petitioner fails to seek supplemental institution or fails to appeal the PTAB’s refusal to supplement, estoppel could apply. While some courts might continue following Shaw and HP by holding that non-instituted claims were not raised “during” the IPR, petitioner “could have raised” those claims and arguments “during” the IPR—even under Shaw’s interpretation—given SAS’s holding because the petitioner should have sought to remedy the non-institution.

The Takeaway

While not obvious at first glance, SAS follows recent decisions like General Plastics that tend to protect patent owners’ rights. While the focus of SAS was on institution and the scope of institution, the Court has armed patent owners with another weapon with which they can challenge serial review of the same patent on the same grounds in multiple petitions and district court proceedings.

[i] No. 16-969 (Apr. 24, 2018).

[ii] Id., slip op. at 1, 4-5.

[iii] Id., slip op. at 12.

[iv] Hr’g on H.R. 1249 Before the Subcomm. on Intell. Prop., Competition and the Internet of the H. Comm. on the Judiciary, 112th Cong. (2011) (statement of David Kappos, Dir., USPTO) (“Those estoppel provisions mean that your patent is largely unchallengeable by the same party.”)

[v] 157 Cong. Rec. S1360-94 (daily ed. Mar. 8, 2011) (statement of Sen. Grassley) (claiming that the estoppel provision “ensures that if aninter partes review is instituted while litigation is pending, that review will completely substitute for at least the patents-and-printed-publications portion of the civil litigation”).

[vi] 817 F.3d 1293, 1300 (Fed. Cir. 2016) (quoting 35 U.S.C. § 315(e)(2)).

[vii] 817 F.3d 1339, 1347 (Fed. Cir. 2016).

[ See, e.g., Verinata Health, Inc. v. Ariosa Diagnostics, Inc., 2017 U.S. Dist. LEXIS 7728, at *8-10 (N.D. Cal. Jan. 19, 2017); Illumina, Inc. v. Qiagen N.V., 207 F. Supp. 3d 1081, 1089 (N.D. Cal. 2016).viii]

[ix] 2017 U.S. Dist. LEXIS 144164, at *21-22 (E.D. Tex. May 11, 2017).

[x] Id. at *22.

[xi] Id. at *17-18, *20-21.

[xii] 2017 U.S. Dist. LEXIS 58773, at *15.

[xiii] Saurabh Vishnubhakat, First Steps After SAS Institute, Patently-O (Apr. 27, 2018), https://patentlyo.com/patent/2018/04/first-steps-institute.html

[xiv] 817 F.3d at 1300.

[xv] Slip op. at 6, 9.

[xvi] Verinata, 2017 U.S. Dist. LEXIS 7728, at *10.

[xvii] See, e.g., Shenzhen Huiding Technology Co., Ltd. v. Synaptics Incorporated, IPR2015-01741, Paper 8 at 29-31 (PTAB Aug. 7, 2015) (partially denying institution due to improper incorporation by reference); Bomtech Elec., Co. Ltd. v. Medium-Tech Medizingeräte GmbH, Case No. IPR2014-00138, Paper No. 8 at 32-33 (PTAB Apr. 22, 2014) (same).

[xviii] See 37 C.F.R. § 42.6(a)(3).

[xix] General Plastic Industrial Co., Ltd. v. Canon Kabushiki Kaisha, IPR2016-01357, Paper 19 (PTAB Sept. 6, 2017).

[xx] Id.

[xxi] Guidance on the Impact of SAS on AIA Trial Proceedings (Apr. 26, 2018) (emphasis added). 

 

© McKool Smith
This post was written by Scott W. Hejny and Chelsea Priest of McKool Smith.

Brett Kavanaugh Nominated to U.S. Supreme Court

In the wake of Justice Anthony Kennedy’s retirement, President Donald Trump was presented with the rare opportunity to make his second U.S. Supreme Court nomination in as many years, nominating the Honorable Brett M. Kavanaugh to succeed Justice Kennedy. If confirmed by the Senate, Judge Kavanaugh would bring more than a dozen years of judicial experience to the position.

While the nomination process was swift, the confirmation process is likely to be contentious. Any nominee to the Supreme Court can expect deliberate and careful scrutiny, but in the context of losing Justice Kennedy’s critical “swing” vote, Judge Kavanaugh’s record of judicial decisions will receive even more attention than usual.

Career

Judge Kavanaugh, a federal judge on the U.S. Court of Appeals for the D.C. Circuit, received his B.A. from Yale College in 1987 and his J.D. in 1990 from Yale Law School, where he was a Notes Editor on the Yale Law Journal. Judge Kavanaugh’s lengthy experience with the judicial process began immediately upon graduation from law school, having clerked for Judge Walter Stapleton of the U.S. Court of Appeals for the Third Circuit (1990-1991) and for Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit (1991-1992). Judge Kavanaugh served as a law clerk to the man he has been nominated to replace, Justice Anthony M. Kennedy of the U.S. Supreme Court, during October Term 1993.

Immediately following his U.S. Supreme Court clerkship, Judge Kavanaugh served in the Office of the Solicitor General of the United States. From 1994 to 1997, and for a period of time in 1998, Kavanaugh was Associate Counsel in the Office of Independent Counsel Kenneth W. Starr. He also spent time in private law practice, as a partner at Kirkland & Ellis in Washington, D.C., from 1997 to 1998 and again from 1999 to 2001. From 2001 to 2003, he was first Associate Counsel, and then Senior Associate Counsel to the President in the George W. Bush White House. From July 2003 until May 2006, Judge Kavanaugh was Assistant to the President and Staff Secretary to the President.

President Bush nominated Judge Kavanaugh to the D.C. Circuit and on May 30, 2006, he was appointed after being confirmed by a vote of 57-36.

Key Labor and Employment Decisions

 Judge Kavanaugh’s judicial philosophy is regarded as conservative; he is a textualist and an originalist, following in the footsteps of the late Justice Antonin Scalia. He generally takes a narrow and demanding approach to employment-related lawsuits and statutory interpretation, and routinely rules in favor of employers. That said, some of his opinions written for the majority, along with his dissents, reveal a flexible and nuanced approach to discrimination claims. How will Judge Kavanaugh treat workplace law cases that come before the Supreme Court? Following are summaries of several key decisions that illustrate his approach to deciding such cases.

Corporate Governance and Internal Investigations

 Judge Kavanaugh’s opinions display a tendency to refer to the plain text of statutes and their history, especially when voicing his support for the authority of the Executive Branch. See PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 165-67 (D.C. Cir. 2018) (Kavanaugh, J., dissenting). In his PHH dissent, Judge Kavanaugh held that the structure of the Consumer Financial Protection Bureau is unconstitutional, because having only one director erodes the President’s Article II powers. Id. at 166. Judge Kavanaugh reasoned that: (1) in light of historical practice, there has never been any independent agency so unaccountable and unchecked; (2) the lack of a critical check runs the risk of abuse of power and threatens individual liberty; and (3) Presidential authority to control the Executive Branch is of great importance and is diminished by this single-director independent agency. Id. at 167.

In an earlier dissent in Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 537 F.3d 667, 686 (D.C. Cir. 2008), Judge Kavanaugh asserted that the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act, is unconstitutional because the appointment and for-cause removal powers of the PCAOB lie with the SEC, another independent agency. Kavanaugh stated this structure unconstitutionally restricted the President’s appointment and removal powers, either directly or through an alter ego, which he said has “never before [happened] in American history.” Id.

Discrimination in the Workplace

Judge Kavanaugh frequently writes opinions in a manner designed to portray himself as giving precise meaning to statutes, and resisting the urge to expand the law or “legislate from the bench.” See, e.g., Miller v. Clinton, 687 F.3d 1332, 1358 (D.C. Cir. 2012) (Kavanaugh, J., dissenting) (denouncing the majority’s decision to apply Age Discrimination in Employment Act (ADEA) to the State Department and quoting from Antonin Scalia & Bran A. Garner, Reading Law: The Interpretation of Legal Texts).

Several of Judge Kavanaugh’s decisions suggest he construes anti-discrimination statutes in a manner that may be considered plaintiff-friendly, but there is not a sufficient sample from which to draw a definitive conclusion on this issue. In both Ortiz-Diaz v. United States HUD, 831 F.3d 488, 494 (D.C. Cir. 2016), rev’d 867 F.3d 70, 81 (D.C. Cir. 2016), and Ayissi-Etoh v. Fannie Mae, 712 F.3d 572, 579-80 (D.C. Cir. 2013), Judge Kavanaugh argued in favor of making it easier for plaintiffs to establish a prima facie case of employment discrimination. In Ortiz-Diaz, Judge Kavanaugh was part of a three-judge panel that initially affirmed a district court’s ruling that refusal to grant a lateral transfer is not an adverse employment action under Title VII. See Ortiz-Diaz, 831 F.3d at 494. The ruling prevented the plaintiff from demonstrating harm resulting from his employer’s refusal to grant him a lateral transfer away from an allegedly racist and biased supervisor who the plaintiff claimed was hurting his ability to develop and succeed professionally. Id. at 491-92. Several months later, however, that three-judge panel reversed itself sua sponte, holding that when an employer denies a lateral transfer for reasons based on race or gender or other protected grounds, that employer violates Title VII. Ortiz-Diaz, 867 F.3d. at 74-77. In both decisions, Judge Kavanaugh wrote a concurring opinion arguing in favor of expanding the definition of adverse employment action to include discriminatory refusal to grant requests for lateral transfers. Id. at 81; Ortiz-Diaz, 831 F.3d at 494. Similarly, in Ayissi-Etoh, 712 F.3d at 579-80, Judge Kavanaugh wrote a concurring opinion, arguing that a single verbal incident ought to be sufficient to establish a hostile work environment. Judge Kavanaugh opined, “[t]he test set forth by the Supreme Court is whether the alleged conduct is ‘sufficiently severe or pervasive’ — written in the disjunctive — not whether the conduct is ‘sufficiently severe and pervasive.’” Id. at 579. He continued, “in my view, being called the n-word by a supervisor — as Ayissi-Etoh alleges happened to him — suffices by itself to establish a racially hostile work environment.” Id. at 580.

Employee Benefits

Some of Judge Kavanaugh’s dissenting and concurring opinions offer insight into what his approach may mean for employers. In Priests for Life v. United States Dep’t of Health & Human Servs., 808 F.3d 1, 14 (D.C. Cir. 2015), Judge Kavanaugh dissented from the denial of a rehearing en banc in a Religious Freedom Restoration Act (RFRA) challenge to the process for accommodating religious objections to the Affordable Care Act’s contraceptive mandate. Under the accommodation, the carrier still provides the services to the plan participants, but directly to those requesting them rather than the plan paying for the services as the mandate requires. The panel decision had upheld the accommodation, stating that a court is not required “simply to accept whatever beliefs a RFRA plaintiff avows—even erroneous beliefs about what a challenged regulation actually requires.” Id. at 4. Rather than join other conservative dissenters, who would have held for the religious organization agreeing that the government has no compelling interest in contraception facilitation, Kavanaugh wrote, “It is not our job to re-litigate or trim or expand Supreme Court decisions. Our job is to follow them as closely and carefully and dispassionately as we can. Doing so here, in my respectful view, leads to the conclusion that the plaintiff religious organizations should ultimately prevail on their RFRA claim, but not to the full extent that they seek.” Id. at 14.

Judge Kavanaugh’s approach to his cases is objective and literal, and he has shown a depth of understanding of ERISA, as well as an employer’s duties and responsibilities. His dedication to the text of the law or the plan document does not favor one side over the other, but rather illustrates his commitment to interpreting the language objectively before applying it to the situation.

Immigration

Judge Kavanaugh’s immigration decisions indicate a tendency to interpret the law to protect U.S. workers rather than employers who want to hire foreign nationals. For example, his dissent in Fogo de Chao (Holdings) Inc. v. U.S. Department of Homeland Security, 769 F.3d 1127 (D.C. Cir. 2014), offers a glimpse into his approach to immigration law. Fogo de Chao, a Brazilian steakhouse restaurant chain, claimed that a critical component of its success included employing genuine gaucho chefs, churrasqueiros, who “have been raised and trained in the particular culinary and festive traditions of traditional barbecues in the Rio Grande do Sul area of Southern Brazil.” Id. at 1129. Over the years, the company had brought over 200 chefs to the U.S. on L-1B visas. To qualify for an L-1B visa, the company must show that the individual has worked for the company abroad for at least one year in the prior three years and has “specialized knowledge.” The statutory definition states that an employee possesses specialized knowledge “if the alien has a special knowledge of the company product and its application in international markets or has an advanced level of knowledge of processes and procedures of the company,” and the regulation followed suit. 8 U.S.C. § 1184(c)(2)(B). The U.S. Citizenship and Immigration Services (USCIS) denied Fogo de Chao’s petition, and the district court granted the government summary judgment. The D.C. Circuit reversed, holding that: (1) the regulation regarding “specialized knowledge” would not be given Chevron deference because the regulation merely mirrored the statute; (2) judicial review was not barred because the denial was not statutorily in the discretion of the Attorney General or the Secretary of Homeland Security; and (3) the agency’s denial based upon a categorical bar on culturally acquired knowledge to prove specialized knowledge was not sufficiently supported. Fogo de Chao, 769 F.3d at 1149.

Judge Kavanaugh dissented, noting that even if Chevron deference was not required, under a de novo standard of review, the agency’s decision should have been upheld. He reasoned the categorical bar on culturally acquired knowledge was correct because any other interpretation would “gut the specialized knowledge requirement and open a substantial loophole in the immigration laws.” Id. at 1152. Moreover, Judge Kavanaugh agreed with the agency that Fogo de Chao’s argument that American chefs could not be trained in a reasonable amount of time was inadequate. He noted that Fogo de Chao already employed some American chefs and “common sense tells us that the chefs who happen to be American citizens surely have the capacity to learn how to cook Brazilian steaks and perform the relevant related tasks.” Id. at 1153.

Ultimately, Judge Kavanaugh concluded that Fogo de Chao’s argument was at least in part based on their desire to cut labor costs and that “mere economic expediency does not authorize an employer to displace American workers for foreign workers.” Id. He further stated that: “By claiming that its Brazilian chefs possess ‘cultural’ knowledge and skills that cannot be learned by Americans within a reasonable time, Fogo de Chao has attempted an end-run around the carefully circumscribed specialized knowledge visa program.” Id. at 1154. Finally, in an interesting footnote, Kavanaugh pointed out that the agency could adopt a binding regulation (instead of relying on a policy memo) that would make it clear that workers such as the chefs in this case do not possess specialized knowledge under the statute ― then their decision would be entitled to Chevron deference. Id.

Judge Kavanaugh’s majority opinion in Int’l Internship Program v. Napolitano, 718 F.3d 986 (D.C. Cir. 2013), also illustrates his inclination to protect U.S. workers from being undercut based on an employer’s economic needs. Napolitano involved an organization that sponsored a cultural exchange program that helped Asians find jobs in American schools. The exchange program applied for Q visas for these individuals. The USCIS denied several of these petitions because the individuals participating in the program were not paid. The agency interpreted the Q visa statute and regulations to require payment of wages. Id. at 987.

The plaintiff argued that unpaid interns were eligible for Q visas as long as there were comparable American workers in the program who were unpaid because the statute stated that the foreign participants “will be employed under the same wages and working conditions as domestic workers.” Id. citing 8 U.S.C. § 1101(a)(15)(Q). Judge Kavanaugh disagreed, opining that the terms included in the statute and regulations (“employed,” “wages,” “workers,” and “remuneration”), were “best read to require foreign citizens to receive wages and that those wages be equivalent to the wages of domestic workers.” Int’l Internship Program, 718 F.3d at 987.

Labor

Because Judge Kavanaugh sits in the D.C. Circuit, he has frequently been involved in cases reviewing National Labor Relations Board (NLRB) decisions, which he appears to analyze on a case-by-case basis rather than in service of an overarching judicial philosophy. Judge Kavanaugh has written several majority opinions that vacated an NLRB order. Writing for the majority in S. New Eng. Tel. Co. v. NLRB, 793 F.3d 93, 94 (D.C. Cir. 2015), Judge Kavanaugh vacated an NLRB decision that had found an employer unlawfully banned employees (who went into customer’s homes) from wearing union t-shirts that stated “Inmate” and “Prisoner of AT.” Judge Kavanaugh opened his opinion by noting: “Common sense sometimes matters in resolving legal disputes,” and criticized the Board for applying “the ‘special circumstances’ exception in an unreasonable way.” Id. at 94, 96; see also Verizon New Eng. v. NLRB, 826 F.3d 480, 483 (D.C. Cir. 2016) (granting the employer’s petition for review of an NLRB decision which had overturned a labor arbitration decision that had ruled for the employer); Venetian Casino Resort L.L.C. v. NLRB, 793 F.3d 85, 87 (D.C. Cir. 2015) (granting employer’s petition for review, finding employer had a First Amendment right to contact police regarding a union demonstration allegedly trespassing on its private property).

In addition, Judge Kavanaugh has authored several dissenting opinions in favor of employers’ arguments. Most recently, in Island Architectural Woodwork, Inc. v. NLRB,2018 U.S. App. LEXIS 16109, at *32 (D.C. Cir. June 15, 2018), he dissented from the majority opinion enforcing an NLRB order holding an employer was an alter ego of a unionized shop and thus violated the National Labor Relations Act (NLRA). Judge Kavanaugh stated that “the Board’s analysis is wholly unpersuasive.” Id. at *34. In NLRB v. CNN Am., Inc., 865 F.3d 740, 765-66 (D.C. Cir. 2017), Kavanaugh dissented in part, finding that the NLRB erred in its analysis of both the joint-employer and successor-employer issues when it found that CNN had violated the Act, stating, among other things, that he agreed with conservative Member Miscimarra’s dissent in the underlying NLRB decision. Judge Kavanaugh ended his decision bluntly, “Bottom line: In my view, the Board jumped the rails in its analysis of both the joint-employer and successor-employer issues.” Id. at 767.

Judge Kavanaugh also dissented in Agri Processor Co. v. NLRB, 514 F.3d 1, 10 (D.C. Cir. 2008), refusing to join the majority’s decision enforcing an NLRB decision that held individuals who are not legally authorized to work in the United States are nonetheless “employees” for the purposes of the NLRA (and permitted to organize and vote in Union elections involving their employer). Judge Kavanaugh’s dissenting opinion stated, “I would hold that an illegal immigrant worker is not an ‘employee’ under the NLRA for the simple reason that, ever since 1986, an illegal immigrant worker is not a lawful ‘employee’ in the United States.” Id. In Kavanaugh’s view, the case should have been remanded to the Board “to determine how a party can challenge a union election or certification upon discovering after the fact that illegal immigrant workers voted in the election and effected the outcome.” Id.; see also Midwest Div.-MMC, LLC v. NLRB, 867 F.3d 1288, 1304-05 (D.C. Cir. 2017) (dissenting from majority, stating he would hold Weingarten rights do not apply to peer-review committee interviews, noting he would vacate the Board’s order to the extent it ruled the Union was entitled to peer-review information).

However, Judge Kavanaugh has sided with the NLRB in some instances. Most recently, in Veritas Health Servs., Inc. v. NLRB, 671 F.3d 1267, 1269-70 (D.C. Cir. 2012), Kavanaugh enforced an NLRB decision that had determined that certain pro-union conduct of charge nurses (supervisors) did not taint a union election, determining the employer did not show that the Court should overturn the decision upholding the election that resulted in the union’s certification. See also New York-New York, LLC v. NLRB, 676 F.3d 193 (D.C. Cir. 2012) (finding the NLRB had been granted discretion pursuant to an earlier Circuit decision to decide whether a property owner could prohibit employees of an on-site contractor from distributing handbills on its property); Raymond F. Kravis Ctr. for the Performing Arts, Inc. v. NLRB, 550 F.3d 1183, 1186 (D.C. Cir. 2008) (enforcing Board Order holding the employer violated the NLRA when it unilaterally changed the scope of the bargaining unit and withdrew recognition from the union); United Food & Commercial Workers v. NLRB, 519 F.3d 490, 492 (D.C. Cir. 2008) (enforcing NLRB decision that held employer was required to engage in effects bargaining with the union after positions no longer constituted an appropriate bargaining unit due to technological change); E.I. du Pont de Nemours & Co. v. NLRB, 489 F.3d 1310, 1312 (D.C. Cir. 2007) (enforcing Board Order finding that employer’s refusal to provide requested information to the union precluded lawful impasse).

Workplace Privacy

Judge Kavanaugh’s dissent in Nat’l Fed’n of Fed. Employees-IAM v. Vilsack, 681 F.3d. 483 (D.C. Cir. 2012), is perhaps indicative of his stance on privacy issues. In Vilsack, the plaintiff union challenged the constitutionality of a policy of random drug testing of all employees working at the Job Corps Civilian Conversation Center (specialized residential schools for at-risk youth) run by the defendant, the Secretary of Agriculture and Chief of the U.S. Forest Service. 681 F.3d at 485. The district court granted the Secretary’s summary judgment motion, concluding that the government interest in preventing illegal drug use justified intrusion of employee privacy interests and Fourth amendment rights. Id. at 488. The D.C. Circuit Court reversed and remanded the case. Id. at 486.

The panel opinion considered the balancing of the government’s interest in a drug free work place with employee privacy interests, using the Skinner test in assessing the employees’ privacy interests, to determine both “the scope of the legitimate expectation of privacy at issue” and the “character of the intrusion that is complained of.” Id. at 490. In ruling in favor of the plaintiffs and their interest in employee privacy, the opinion emphasizes the defendant’s lack of explanation of how “general program features loosely ascribed staff responsibilities serve to undermine the reasonable expectations of privacy held by Job Corps employees” and the lack of notice of such testing, given that for over a decade employees in the same position were not tested. Id. at 493. Moreover, typically drug testing is considered permissible in high security or safety positions; however, here the Secretary defendant designated all employees to drug testing, and the court concluded the defendant’s rationale supporting “special needs” to justify drug testing all employees was too speculative. Id. at 494-95, 498.

Judge Kavanaugh’s dissent narrowly addressed the issue of drug testing government employees who work at specialized residential schools for at-risk youth, and avoided an assessment of when drug testing should or should not be permissible in the government setting in general. Id. at 499-500. In the specific context of random drug testing at a “public school” for “at-risk youth,” Kavanaugh stressed that there was no Supreme Court precedent. Id. at 500. He distinguished a case the majority relied on, Vernonia School Dist. v. Acton, 515 U.S. 646 (1995), that cautioned against “suspicionless drug testing” passing “constitutional muster” in the public school setting. In Vernonia, the public school attempted to justify “suspicionless drug testing” of teachers and other staff on the basis that in the same school, drug testing of student athletes was permitted. Judge Kavanaugh found the Secretary’s rationale supporting “special needs” to be persuasive. See Vilsack, 681 F.3d at 501. “To maintain discipline, the schools must ensure that the employees who work there do not themselves become part of the problem,” Kavanaugh stated. Id. “That is especially true when, as here, the employees are one of the few possible conduits for drugs to enter the schools.” Id.

Judge Kavanaugh emphasized that his dissenting opinion was narrowly limited to this specific factual situation. See id. at 499-500. Therefore, in this case, although Kavanaugh ultimately concluded that the government’s interest outweighed the employees’ right to privacy, it remains difficult to assess the degree to which this case signals Kavanaugh’s stance on privacy issues generally.

***

Next steps: Judge Kavanaugh’s nomination must be approved by the U.S. Senate after the Senate Judiciary Committee holds a hearing. After a hearing, the committee votes on whether to put Kavanaugh before the Senate. If the committee votes to move forward, the Senate will vote on the nomination. A majority vote of the Senate is needed to put Judge Kavanaugh on the Court.

President Trump will have the opportunity to leave a lasting mark on the federal judiciary, which currently has more than 100 vacancies pending in the U.S. District Courts and the Courts of Appeals. In addition to the selection of the current nominee and Justice Gorsuch’s appointment in April 2017, Trump may have occasion to fill another Supreme Court seat in the coming years, with Justice Ruth Bader Ginsburg at age 85 and Justice Stephen Breyer at age 79.

Jackson Lewis P.C. © 2018
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Supreme Court Resolves Constitutionality of SEC’S ALJ Appointments — Now What?

Last week, the United States Supreme Court settled a circuit split regarding the constitutionality of the appointment of Administrative Law Judges (“ALJs”) by the Securities and Exchange Commission (“SEC” or the “Commission”).  In Lucia v. SEC, the Court held that the Commission’s five ALJs are “officers” subject to the Constitution’s Appointments Clause, which requires officers to be appointed by the President, “Courts of Law,” or “Heads of Departments.”  And because the SEC’s ALJs were hired by the agency’s staff, the Court reasoned, their appointments were unconstitutional.  The SEC reacted quickly, immediately issuing an order staying all pending administrative proceedings, the constitutionality of which is now unclear.

The Road to the Supreme Court

The Supreme Court’s decision arose from an SEC administrative proceeding against radio personality Raymond Lucia, charging him with violations of the Investment Advisers Act.  An ALJ, Cameron Elliot, heard the case and issued an initial decision finding against Lucia.  Lucia appealed to the SEC, arguing that because ALJ Elliott had not been constitutionally appointed, he lacked authority to issue such findings.  The SEC disagreed and affirmed the initial decision, prompting Lucia to appeal to the D.C. Circuit Court of Appeals.  Siding with the SEC, the D.C. Circuit held that SEC ALJs are not “inferior officers,” as Lucia argued, but rather “employees,” and therefore not subject to Appointments Clause requirements.  Meanwhile, in a similar case, Bandimere v. SEC, the Tenth Circuit reached the opposite conclusion, creating a circuit split requiring Supreme Court resolution.

The Ruling

In last week’s majority opinion, authored by Justice Kagan, the Court applied a test articulated in Freytag v. Commissioner, 501 U.S. 868 (1991) for distinguishing between officers and employees for Appointments Clause purposes.  In concluding that SEC ALJs are officers, the Court relied on the following facts: (1) they have career appointments and hold a continuing office established by law; (2) they exercise “significant discretion” when carrying out “important functions,” such as taking testimony, receiving evidence, examining witnesses, and enforcing discovery orders; and (3) when the SEC declines to review an ALJ’s initial decision, it becomes final and is deemed the action of the Commission.  In short, the Court held, the SEC’s ALJs are “near carbon copies” of the tax court judges found to be “officers” in Freytag.

Issues Left Unresolved

While the decision clearly settles the matter for Mr. Lucia, it leaves a number of issues unresolved, and its broader implications remain unclear.

Validity of SEC’s Prior Ratification

The biggest question left unanswered is whether the SEC’s attempt last year to cure any constitutional defect in its appointments scheme was sufficient.  While Luciawas pending before the Court, the Commission issued an order “ratifying” the prior appointments of its ALJs.  (See our prior blog post for additional discussion).  Lucia argued that the ratification was invalid and that the action did not in fact resolve the appointment defect.  The Court, however, declined to address this argument, noting in a footnote that the SEC had not indicated whether it intended to “assign Lucia’s case on remand to an ALJ whose claim to authority rests on the ratification order. The SEC may decide to conduct Lucia’s rehearing itself.  Or it may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.”  The Court’s observation could be taken to suggest that the SEC’s ratification of the prior ALJ appointments did not in fact satisfy the Appointments Clause.  Perhaps in recognition of that possibility, the SEC promptly issued an order staying for thirty days, or until further other from the Commission, all of its pending administrative proceedings, including those in which an ALJ has already issued a decision.  The Commission presumably is now evaluating whether it needs to go beyond ratification to immunize its administrative proceedings from further constitutional attack.

Impact on Other Agencies

Another open question concerns the impact on other agencies’ administrative proceedings.  At oral argument, Justices Breyer and Sotomayor expressed concern that, if the Court were to rule in Lucia’s favor, proceedings in other federal agencies could be undermined as well.   While the majority opinion is silent on that question, Justice Breyer warned in his concurrence that the majority’s approach “risks . . . unraveling, step-by-step, the foundations of the Federal Government’s administrative adjudication system as it has existed for decades.”

ALJ Removal

Last, as noted in Justice Breyer’s concurrence, the Court’s decision raises questions about the constitutionality of limitations on ALJ removal under the Administrative Procedures Act (“APA”).   The APA provides that ALJs may only be removed “for cause.”  But if an SEC ALJ is a constitutional “officer,” that limitation may be invalid, as duly appointed officers are subject to removal at will.  Justice Breyer observed that, if ALJs are vulnerable to removal at any time, it could transform them “from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission,” and therefore raise fundamental doubts about the legitimacy of their decisions.

Next Steps

As a result of the Court’s decision, Lucia himself will be entitled to a new hearing before a properly appointed ALJ or the Commission itself.  Given the questions that the Court declined to answer, and the SEC’s decision to temporarily stay its proceedings, however, we can expect further developments and continuing litigation in this area in the days and years to come.

 

© Copyright 2018 Squire Patton Boggs (US) LLP
For more coverage of the Supreme Court, see the National Law Review’s Litigation Page.

Supreme Court’s Carpenter Decision Requires Warrant for Cell Phone Location Data

In a decision that defines how the Fourth Amendment applies to information collected in the digital age, the Supreme Court today held that police must use a warrant to obtain from a cell phone company records that detail the location and movements of a cell phone user.  The opinion in Carpenter v. United States limits the application of the third-party doctrine, holding that a warrant is required when an individual “has a legitimate privacy interest in records held by a third party.”

The 5-4 decision, written by Chief Justice John Roberts, emphasizes the sensitivity of cell phone location information, which the Court described as “deeply revealing” because of its “depth, breadth, and comprehensive reach, and the inescapable and automatic nature of its collection.”  Given its nature, “the fact that such information is gathered by a third party does not make it any less deserving of Fourth Amendment protection,” the Court held.

As we previously reported, Carpenter stems from a criminal investigation in Detroit in 2011, where the government acted without a warrant in obtaining 127 days’ worth of cell phone location records for two suspects.  The government obtained the data under the Stored Communications Act, 18 U.S.C. §§ 2703(c)(1)(B), (d), which requires a showing of reasonable suspicion — but does not require probable cause.  For one suspect, the records revealed 12,898 points of location data; for another, 23,034 location points.  Both suspects were convicted, based in part on cell phone location evidence that placed them near the crime scenes.

Sensitivity of Information

In requiring a warrant to obtain cell phone location information, the Court emphasized the sensitivity of that information, which it called “an entirely different species of business record” than bank records or phone numbers.  Cell phone location information “implicates basic Fourth Amendment concerns about arbitrary government power much more directly than corporate tax or payroll ledgers,” the Court explained.  Throughout the majority decision, Chief Justice Roberts invoked his 2014 opinion in Riley v. California to underscore the sensitivity of this information.  As Riley recognized, a cell phone today is almost a “feature of human anatomy” that “tracks nearly exactly the movements of its owner.”

The Court also focused on the “near perfect surveillance” achieved by cell phone location records — and lack of resource constraints in obtaining them.  Before the digital age, law enforcement officers could surveil a suspect for brief periods of time but doing so “for any extended period of time was difficult and costly and therefore rarely undertaken.”  Unlike traditional surveillance methods, “cell phone tracking is remarkably easy, cheap, and efficient,” the Court said.  “With just the click of a button, the Government can access each carrier’s deep repository of historical location information at practically no expense.”  Cell phone location records thus provide information “otherwise unknowable,” as if the Government “had attached an ankle monitor to the phone’s user.”  Moreover, the Court emphasized, cell phone location information is collected on all cell phone users — not just individuals under investigation — meaning the “newfound tracking capacity runs against everyone.”

Limits of Third-Party Doctrine

In concluding the third-party doctrine did not apply to cell phone location information, the Court said the information “does not fit neatly under existing precedents.”  Rather, it falls at the “at the intersection of two lines of cases.”  The first line addresses an individual’s expectation of privacy in his physical locations and movements.  The second line embodies the third-party doctrine, under which an individual has no legitimate expectation of privacy in information voluntarily turned over to third parties.

While Carpenter does not overrule the third-party doctrine, it substantially limits its application.  Applying the third-party doctrine to cell phone location information would not be a “straightforward application” as the Government urged, but a “significant extension” of the doctrine that the Court rejected.  The Government’s invocation of the third-party doctrine “fails to contend with the seismic shifts in digital technology,” the Court found.

According to the Court, there is “a world of difference between the limited types of personal information addressed in” the third-party doctrine cases and “the exhaustive chronicle of location information casually collected by wireless carriers today.”  Moreover, the information is “not truly ‘shared’ as one normally understands the term.”  In part, that is because “[v]irtually any activity on the phone” generates location information.  “Apart from disconnecting the phone from the network, there is no way to avoid leaving behind a trail of location data.”  As a result, the Court held that users do not voluntarily assume the risk of turning over a comprehensive dossier of their physical movements, the Court held.  It emphasized that the case is not about a person’s momentary location while “using a phone” but “about a detailed chronicle of a person’s physical presence compiled every day, every moment, over several years.”

Ramifications of Decision

Chief Justice Roberts emphasized that the opinion of the Court was narrow, noting that it does not overrule the third-party doctrine or affect cases relating to foreign affairs or national security.  According to the majority, the decision also does not call into question “conventional surveillance techniques and tools” nor apply to “other business records that might incidentally reveal location information.”  Justice Kennedy disagreed with this characterization of the Court’s opinion, observing in dissent that the decision “will have dramatic consequences for law enforcement, courts, and society as a whole.”  According to Justice Kennedy, the majority’s reasoning will “extend beyond cell-site records to other kinds of information held by third parties.”

Justices Alito, Thomas, and Gorsuch also filed separate dissents.  Justice Gorsuch’s dissent advocated for a property-based approach to the Fourth Amendment that would abandon both the third-party doctrine and the reasonable expectation of privacy test.  That approach would focus on whether the individual has a property interest in the records at issue.  Under that framework it is “entirely possible a person’s cell site data could qualify as his papers or effects,” Justice Gorsuch observed, even though a cell phone carrier holds the information.  But Carpenter failed to raise a property-based argument before the district court, the court of appeals, or the Supreme Court, and therefore “forfeited perhaps his most promising line of argument,” according to Justice Gorsuch.

Like Justice Kennedy, Justices Alito and Thomas argued in separate dissents that cell phone location information belongs to cell phone companies, not to cell phone users, and thus did not qualify for protection under the Fourth Amendment.  Justice Thomas focused on the fact that Carpenter “did not create the records, he does not maintain them, he cannot control them, and he cannot destroy them.”  Justice Alito also cautioned that the majority’s decision was overly broad and would invite a “blizzard of litigation” because the majority opinion offered “no meaningful limiting principle, and none is apparent.”

 

© 2018 Covington & Burling LLP

Employment Litigation Impacted By U.S. Supreme Court Decision Reining In Successive Attempts at Class Litigation

In 1974, the U.S. Supreme Court decided in American Pipe & Construction Co. v. Utah, 414 U.S. 538, that the timely filing of a class action complaint tolls the applicable statute of limitations for all persons encompassed by that complaint. The impact of that ruling was that potential class members did not have to intervene as individual plaintiffs in the class representatives’ case unless and until the class ultimately was not certified (assuming the case remained pending at the time intervention was sought). Alternatively, as determined in later cases interpreting American Pipe, former class members can pursue their own individual claims rather than intervening in a former class action, even if their individual claim would otherwise be untimely.

American Pipe left unresolved whether a former putative class member can still pursue relief on a class basis after the statute of limitations has run on the underlying claim, or if the former putative class member is limited to bringing only his or her own individual claim. The Supreme Court answered that question on June 11, 2018 when it issued its unanimous opinion in China Agritech, Inc. v. Resh, 584 U.S. ___ (2018), in which the Court concluded that a putative class member cannot commence an otherwise untimely class action upon denial of class certification in the earlier-filed suit. His remedies are limited to promptly joining an existing suit or filing an individual action, but serial attempts at class certification after the statute of limitations has run are impermissible.

Resh was not an employment case, but instead involved three successive putative class actions brought on behalf of purchasers of China Agritech’s common stock, each alleging essentially the same violations of the Securities Exchange Act of 1934. Class certification was denied in the first of the three actions and it settled. Shortly thereafter, the lawyer in the first action filed a new complaint alleging nearly the same facts, but with new putative class representatives. Once again, the court denied class certification and the case settled. Plaintiffs’ counsel filed yet a third putative class lawsuit naming as putative class representative an individual, Michael Resh, who had not sought lead-plaintiff status in either of the two previous cases, but who would have been within the scope of the class had it been certified in either earlier case. There was no dispute Mr. Resh’s claim was untimely unless it had been tolled under American Pipe. The trial court dismissed his class claims as untimely but the Ninth Circuit Court of Appeals reversed, holding that the reasoning of American Pipe extends to successive class claims.

The Supreme Court disagreed and reversed, thereby resolving the Circuit split over the implication of American Pipe and its progeny on successive class litigation. The Court held that the “efficiency and economy of litigation” that supports tolling of individual claims until after class certification has been ruled on is not present where one seeks to litigate untimely successive class actions. Class certification is intended to determine early whether claims are better resolved individually or as a class, and whether certain putative representatives and their counsel are suited to represent the class’ interests. Class representatives who commence suit after expiration of the limitation period are not diligent in asserting claims and pursuing relief, for themselves or the putative class members. Therefore, the Court limited American Pipe to permitting only individual intervention or individual claim prosecution after the denial of certification of a class to which the individual otherwise would have belonged. In other words, although parties who were part of a proposed-but-ultimately-rejected class can bring claims after denial of class certification, they can only do so on their own individual basis, and not as a proposed class action.

Although a securities case, the Resh decision has (welcome) implications for employers. Should one or a group of employees seek certification of a class with respect to a particular employment practice, such as for employment discrimination affecting a broad class of workers or for alleged wage and hour violations, and should the motion for class certification be denied, the would-be class members must promptly move to intervene in the representatives’ non-class lawsuits or promptly file lawsuits on their own individual behalves, or else their right to proceed will be time-barred. The decision eliminates the uncertainty – the “endless tolling of a statute of limitations” – that employers would face if plaintiffs’ lawyers could continually refile putative class actions related to the same policy or incident notwithstanding the statute of limitations having run, until they define the class sufficiently well or find adequate representatives such that the trial court grants class certification. After Resh, once the statute of limitations on a claim has run, so too has the threat of further class action litigation.

 

© Copyright 2018 Squire Patton Boggs (US) LLP.

A Ruling of Epic Proportions: Supreme Court Upholds Employment Class Action Waivers

On May 21, 2018, the Supreme Court ruled in Epic Systems Corp. v. Lewis that employees can agree to: (1) arbitrate employment disputes; and (2) waive their right to resolve those disputes through class and collective actions. This decision represents an epic victory for employers and may limit an employer’s financial exposure in employment disputes.

In Epic Systems Corp., Epic Systems required its employees to sign an arbitration agreement that included a class and collective action waiver. Employees who signed the agreement thus agreed to resolve their employment disputes through individual arbitration and also waived their right to participate in or receive benefit from any class, collective or representative proceedings.

An Epic employee, Jacob Lewis, signed such an agreement with Epic. After his employment ended and despite the agreement, Lewis filed a class/collective action against Epic, claiming he and other Epic employees had been denied overtime wages in violation of the Fair Labor Standards Act (FLSA) and Wisconsin wage and hour laws.

Epic moved to dismiss the claim and to compel arbitration, citing the arbitration/class waiver agreement. The district court denied Epic’s motions, stating that the waiver was unenforceable because it interfered with employees’ right to engage in “concerted activities” for “mutual aid or protection” under the National Labor Relations Act (NLRA).

On appeal, the Seventh Circuit Court of Appeals agreed with the district court, becoming the first appellate court to agree with the National Labor Relations Board’s (NLRB) 2012 position in D.R. Horton (previously discussed here and here) that such waivers were unenforceable. As a result, employers in Wisconsin, Indiana and Illinois have been bound by this ruling since 2016.

In a 5-4 opinion authored by Justice Neil Gorsuch, the Supreme Court overturned the Seventh Circuit and ruled that the NLRA did not grant employees a right to class or collective actions, nor did the waiver of class rights violate any provision of the NLRA. According to the Court, the NLRA does not address class/collective action issues. Instead, the NLRA focuses on collective bargaining issues. In short, the Court gave its approval to arbitration agreements that require resolution of employment disputes on an individual basis.

Employers who currently use arbitration agreements with their employees should consult with legal counsel to ensure those agreements meet their needs and preferred outcomes. For employers who do not currently use such agreements, the Epic decision provides a perfect opportunity to implement such agreements. Before making changes to existing agreements, relying on such agreements going forward or implementing new agreements, employers should consult with legal counsel to discuss the potential benefits and drawbacks of arbitrating employment disputes. With the Epic decision, however, employers now know for certain that they have class action waivers at their disposal.

 

Copyright © 2018 Godfrey & Kahn S.C.
This post was written by Rufino Gaytán of Godfrey & Kahn S.C.