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MURPHY V. NCAA: Supreme Court Update

It’s not every day that a Supreme Court decision gets covered not only in the pages of The New York Times, but also ESPN.com and Sports Illustrated. But Murphy v. NCAA (No. 16-476), which struck down the federal Professional and Amateur Sports Protection Act (PASPA) and opened the door (for now) to legalized sports betting across the country, is no ordinary decision. Beyond green-lighting a potential billion-dollar industry, the Court’s decision breathes new life into the anti-commandeering principle (once a favorite of states-rights conservatives and now suddenly popular on the Left) and highlights a divide among the justices with respect to the severability of unconstitutional statutory provisions. (We’re pretty sure it’s that last part that the sportswriters were interested in.) Because it’s a biggie, we’ll devote this entire missive to summarizing the Murphy decision, but we’ll be back tomorrow with summaries of the other decisions handed down this week.

Enacted in 1992, PASPA was borne out of a growing concern from legislators—most notably star basketballer and New Jersey Senator Bill Bradley—that if the trend of increased gambling extended to sports, it could have detrimental effects on young people and the integrity of the games. The Act made it unlawful for a State “to sponsor, operate, promote, license, or authorize by law or compact” a gambling or wagering scheme based on competitive sporting events. Just in case a State disobeyed, the law also made it unlawful for “a person to sponsor, operate, or promote” any sports-betting scheme pursuant to state law. However, PASPA did not make sports betting itself a crime, and was enforceable only by civil actions, which could be brought by the Attorney General, as well as sports leagues. It also contained a “grandfather” provision, permitting sports betting to continue in four states where it already existed, and it gave New Jersey—which was, at the time, considering proposals to legalize sports books—one year in which to legalize sports betting and benefit from the grandfather clause. But New Jersey dropped the ball on the one-year window. Nevertheless, two decades later the State decided to swing for the fences by enacting a law legalizing sports gambling, notwithstanding PASPA’s prohibition. After the major professional sports leagues and the NCAA successfully enjoined that legislative authorization, New Jersey called an audible and crafted a new law that did not technically authorize sports gambling, but instead repealed the existing state law prohibiting it. The NCAA and leagues sued again and the lower courts called New Jersey’s bluff, concluding that the repeal law violated PASPA in the same way a direct authorization of sports betting would. The State threw down its red challenge flag and the Supreme Court accepted the case for further review.

At the Supreme Court, one of our oldest and most storied legal rivalries was reignited: state vs. federal law. In the leagues’ corner, the well settled doctrine of federal preemption, long a staple of the playbook for arguing that federal law supersedes conflicting state law. On the opposite side, New Jersey placed its chips on the lesser known “anticommandeering” doctrine, which was once used to prevent the Feds from requiring States to enforce federal gun-control legislation and has been more recently touted by “sanctuary city” advocates who argue that States and municipalities are under no obligation to enforce federal immigration laws. Against the odds, the Supreme Court sided rather definitively with New Jersey, with seven justices agreeing that PASPA violated the anticommandeering doctrine, and no justice expressly disagreeing. (The dissenters were more miffed about severability than the Tenth Amendment.)

Writing for a majority including the Chief, Kennedy, Thomas, Kagan, Gorsuch (and mostly Breyer), Justice Alito acknowledged that “the anticommandeering doctrine may sound arcane,” but insisted that “it is simply the expression of a fundamental structural decision incorporated into the Constitution, i.e., the decision to withhold from Congress the power to issue orders directly to the States.” PASPA violates this principle, he concluded, because it “unequivocally dictates what a state legislature may and may not do.” Though the leagues and the United States argued that prohibiting States from enacting legislation is different from compelling them to enact legislation, Justice Alito rejected this argument with a Dikembe Mutumbo finger-wag, noting that the “distinction is empty.” Nor could the preemption doctrine save PASPA. Every form of preemption (express, conflict, field) is based on a federal law that regulates the conduct of private actors, not the States. The PASPA provision prohibiting state authorization of sports betting, on the contrary, “is not a preemption provision because there is no way in which [it] can be understood as a regulation of private actors.” It is, instead, a “direct command to the States,” which “is exactly what the anticommandeering rule does not allow.”

That left the second provision of PASPA, which prohibited “a person” from sponsoring a sports-betting operation, even if authorized by state law. This certainly would qualify as a preemption provision, in that it regulated private conduct, but Alito (now with a slimmer majority) concluded that the rest of the statute could not be severed from the unconstitutional authorization bar, because the provisions were meant to work hand-in-glove. “If Congress had known that the latter provisions would fall, we do not think it would have wanted the former to stand alone.”

It was the severability issue that sparked a volley of separate opinions. Justice Thomas first weighed in with a concurring opinion questioning the constitutional basis for the Court’s severability doctrine, which he considered to be in sharp tension with traditional limits on judicial authority. Because no party had raised the issue, Justice Thomas joined the majority opinion in full, but he called for a review of the severability doctrine was called for in some future case.

The dissenters also focused on severability—so much so that it’s not really clear they dissented from the majority’s anticommandeering holding. Though styled a “dissent,” Justice Ginsburg’s opinion (joined by Sotomayor) did not address the anticommandeering argument at all. Instead, she maintained that, even assuming that PASPA’s anti-authorization prohibition was unconstitutional, there was no reason “to deploy a wrecking ball destroying” the entire statutory scheme. Rather than strike down the entire statute, the dissenters would have severed the offending provision and permitted the rest of the law to effectuate Congress’s intent of “stopping sports-gambling regimes while making it clear that the stoppage is attributable to federal, not state, action.” Justice Breyer joined the opinion “in part,” but wrote separately to clarify that he concurred with the majority’s anticommandeering holding. Although he joined the majority opinion striking down the authorization bar, Breyer (like Ginsburg and Sotomayor) would have allowed the ban on private sponsoring of sports-betting schemes to remain in effect. As he explained, it is perfectly reasonable to assume that Congress intended that provision as an alternative means of achieving its goal of prohibiting the expansion of sports gambling. Because there was no constitutional impediment to its doing so through the private bar, Breyer would have preferred to hand New Jersey a “pyrrhic” victory.

Instead, the Court handed New Jersey—and other states that are betting on betting to shore up their coffers—a big win. That said, with the exception of Justice Thomas, every justice agreed that Congress could achieve its earlier goal of stopping sports betting through a direct ban, under the Commerce Clause. Given the stakes for the losers in Murphy—the NCAA, major sports leagues, and Nevada, among others—odds are good that there will be some serious lobbying for a direct federal ban. In legislation, as in sports, it ain’t over til it’s over.

This post was written by Kim E. Rinehart, Tadhg A.J. Dooley and David Roth of Wiggin and Dana LLP.

Water, Water, Everywhere: The Clean Water Act

If it isn’t already, water should be on your mind this year. The excitement of Scituate storm surge and coastal flooding aside, the region – and the U.S. as a whole – is facing a slew of legal developments that may change how citizens, businesses, and governments operate under the federal Clean Water Act and similar state programs. In particular, the scope of Clean Water Act jurisdiction is in play following a pair of Supreme Court decisions, as is the potential delegation of permitting authority to Massachusetts and New Hampshire, two of only four states in which the EPA administers permitting under the National Pollutant Discharge Elimination System (NPDES).

Clean Water Act Jurisdiction

Since well before Samuel Taylor Coleridge penned those famous lines in the Rime of the Ancient Mariner – “Water, water, every where, / Nor any drop to drink” – people have worried about access to clean water. It makes sense, then, that the Clean Water Act is one of our oldest environmental laws, with its origins in the Rivers and Harbors Act of 1899. The Rivers and Harbors Act – the nation’s very first environmental law – imposed the first “dredge and fill” requirements, made it illegal to dam rivers without federal approval, and prohibited the discharge of “any refuse matter of any kind or description” into “any navigable water of the United States, or into any tributary of any navigable water.”

The Federal Water Pollution Control Act of 1948, with major amendments in 1961, 1966, 1970, 1972, 1977, and 1987, largely superseded the Rivers and Harbors Act and resulted in what we know today as the federal Clean Water Act (CWA). And although today’s statute is very different from its 1899 precursor, one thing has remained constant: an intense and lasting fight over the scope and jurisdiction of federal regulation. Federal CWA jurisdiction is premised on the Commerce Clause of the U.S. Constitution, and prohibits (without a permit) “dredge and fill” activities and the discharge of pollutants into “navigable waters,” which the CWA defines as “the waters of the United States.” But what, exactly, are “waters of the United States”?

The 1870 Supreme Court decision in The Daniel Ball held that waterways were subject to federal jurisdiction if they were “navigable in fact.” But what has never been clear is the extent to which non-navigable waters, like certain tributaries to navigable waters or wetlands, constitute “waters of the United States” such that they are subject to federal regulation.

The Supreme Court Punts (Again)

The 2006 Supreme Court decision in Rapanos v. United States represented a key turning point in CWA jurisdiction, holding that certain remote wetlands are not subject to CWA jurisdiction. But the decision was badly fractured, with no majority of justices agreeing on a single standard for determining what, exactly, constitute “waters of the United States” such that the CWA applies. Minor chaos ensued, as regulators and courts applied varying interpretations of Rapanos in permitting decisions and enforcement actions.

In 2015, the Obama administration attempted to clarify the scope of CWA jurisdiction by promulgating a rule known as the “Waters of the United States” (or “WOTUS”) rule that attempted to define exactly which waters were regulated by the CWA. That rule, which was based on Justice Anthony Kennedy’s “significant nexus” test in the Rapanos decision, was quickly challenged by 31 states, numerous industries, and landowner groups. At bottom, challengers argued that the WOTUS rule represented significant federal overreach and extended CWA jurisdiction well beyond what the Commerce Clause allows. The numerous appeals were consolidated into a single Sixth Circuit case, National Association of Manufacturers v. Department of Defense (NAM), and in late 2015 the Sixth Circuit stayed the WOTUS rule pending resolution of legal challenges.

But on January 22, 2018, the Supreme Court unanimously held that federal District Courts – not appellate courts – have jurisdiction over challenges to the WOTUS rule. While the CWA generally requires challenges to CWA rules to be brought in district courts, there are seven situations where courts of appeal have jurisdiction. In this case, the government argued that the challenge should be heard in the courts of appeal, under CWA Sections 1369(b)(1)(E)-(F) which allow appellate courts to hear cases related to the approval of certain effluent limits or permits, respectively. Petitioners, on the other hand, maintained that the case should be heard in federal district court in the first instance. In a procedural victory for the petitioners, the Supreme Court held that the WOTUS rule does not qualify for direct appellate review under CWA Sections 1369(b)(1)(E)-(F). Following this decision, future challenges to the WOTUS rule will be brought in federal district courts, potentially with divergent outcomes around the country. Appeals of those decisions will move to the courts of appeals, where there is yet again the possibility for inconsistency. The upshot is a longer litigation timeline – and continued jurisdictional uncertainty – before the Supreme Court will have another chance to address the appropriate scope of CWA jurisdiction.

In the meantime, the Trump administration is working on a replacement rule for the WOTUS rule that is likely to apply the less expansive jurisdictional test described by Justice Antonin Scalia in Rapanos. Under that interpretation, only tributaries that are “relatively permanent, standing or flowing bodies of water,” and only wetlands with a continuous surface connection to a “water of the United States” are themselves “waters of the United States” subject to CWA jurisdiction. And on February 6, 2018, EPA and the Army Corps of Engineers promulgated a rule delaying implementation of the WOTUS rule until February, 2020. That action preserves the Rapanos status quo (such as it is) until EPA can craft a new rule. Ultimately, it is likely that any WOTUS replacement rule will be challenged, and the Supreme Court will then have a chance to revisit its decision in Rapanos and redefine federal jurisdiction under the CWA, a process that could easily extend past 2020.

Defer much?

On February 26, 2018, the Supreme Court weighed in again on the Clean Water Act, this time by refusing to take up a challenge to a 2017 decision by the Second Circuit that upheld a 2008 EPA rule exempting water transfers from CWA permitting requirements. Water transfers happen when water from one waterbody is diverted into another waterbody, such as diverting a stream into a nearby lake or reservoir. Drinking water systems have conducted water transfers for decades, and EPA has never required NPDES permitting for such transfers. But in 2008, in response to pressure by environmental groups to require NPDES permits for water transfers, EPA adopted the Water Transfers Rule expressly exempting such transfers from NPDES permitting.

Environmentalists and states challenged the Water Transfers Rule, arguing that moving water from one waterbody to another requires a permit if the “donor” water contains pollutants that would have the effect of degrading the receiving water. Both the Obama and Trump administrations defended the rule, arguing that it preserved long-standing practice and was justified by EPA’s ability to interpret CWA requirements. Ultimately, the Second Circuit deferred to EPA and allowed the rule to stand. In turn, the February 26 decision by the Supreme Court allows the Second Circuit decision to stand, thereby affirming the validity of the Water Transfers Rule. The case was widely seen as a test for Justice Neil Gorsuch, who has expressed hostility to the deference doctrine and EPA regulations alike. By declining to hear the case, the Court has deferred that test for another day.

Who’s in Charge?

Under a process known as “delegation,” states may assume permitting and other authority under the CWA. To-date, 46 states have received such delegation from EPA, and all but Massachusetts, New Hampshire, Idaho, and New Mexico now administer their own NPDES permitting programs. In the absence of delegation, EPA manages the Clean Water Act and NPDES program in those four states, which often overlap and may duplicate separate state law requirements.

New Hampshire is currently evaluating whether to seek CWA delegation from EPA, and has established a legislative commission to explore its options. And as we have previously reported, Massachusetts has explored CWA delegation in the past, but those efforts largely fizzled out. But both of these efforts may have new life: the EPA, under Administrator Pruitt, is very focused on “cooperative federalism” and with EPA seeking to slash its budgets, CWA delegation is likely on EPA’s radar as an action item over the next several years. And, in late 2017, MassDEP Commissioner Martin Suuberg expressed strong support for CWA delegation, as has Governor Baker. Whether delegation will become a reality for Massachusetts or New Hampshire is anyone’s guess, but regardless of the outcome 2018 is shaping up to be an interesting year for water law.

This post was written by Brook J. Detterman of Beveridge & Diamond PC.

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

Last 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.

ARTICLE BY Aaron R. Wegrzyn of 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.

Article By Steven M. Felsenstein of Greenberg Traurig, LLP

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?

ARTICLE BY Annie Dike of IMS ExpertServices

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

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.

ARTICLE BY

Arthur R. Rosen & Mark Yopp of 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.

FCRA

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.

Background

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:

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

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

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.

ARTICLE BY

Donald H. Romano

Foley & Lardner LLP

Supreme Court Holds That TTAB Decisions on Likelihood of Confusion May Bind Courts in Infringement Litigation

In a 7 – 2 decision issued March 24, 2015, the U.S. Supreme Court held that decisions of the Trademark Trial and Appeal Board (TTAB) on the issue of likelihood of confusion, made in registration cases, can be binding on courts in deciding the same issue in subsequent infringement cases. Such “issue preclusion” will likely arise if the uses of the marks before the court are materially the same as the uses considered by the TTAB. The decision in B&B Hardware, Inc. v. Hargis Industries, Inc. is likely trigger more hotly contested — and more expensive — TTAB litigation.

In this case, B&B owned a registration for “Sealtight” for metal fasteners used in the aerospace industry. Hargis sought to register “Sealtite” for metal screws used in the manufacture of buildings. B&B opposed registration, claiming that use of the marks on the respective goods would create a likelihood of confusion. The TTAB agreed and sustained the opposition. In a parallel infringement action, the district court refused to be bound by the TTAB decision, reasoning that the TTAB is not an Article III court. The jury went on to find that confusion was not likely.

The Eighth Circuit affirmed. It held that while an administrative agency’s decision can be a basis for applying collateral estoppel, the doctrine was not appropriate in this context, primarily because the TTAB and the Eighth Circuit use different factors to evaluate likelihood of confusion.

In an opinion by Judge Alito, the U.S. Supreme Court reversed. It held first that “issue preclusion is not limited to those situations in which the same issue is between two courts” (emphasis in original). Rather, under Astoria Fed. Sav. & Loan Assn. v. Solomino, 501 U.S. 104 (1991), “courts may take it as a given” that Congress intends issue preclusion to apply to administrative proceedings where appropriate, except when a statutory purpose to the contrary is evident. The court held that no such purpose was evident in the Lanham Act of 1946.

The court acknowledged that the TTAB considers different factors than do courts in determining likelihood of confusion. In particular, the TTAB compares marks and goods as they are set forth in prior registrations and pending applications, whereas a court will consider all elements of the parties’ uses, including the context in which the marks appear on packaging. But the court held that the same legal standard of “likelihood of confusion” always applies, even if different usages are considered. Therefore, the possibility of applying collateral estoppel cannot be categorically ruled out.

Importantly, however, the court did not hold that issue preclusion always applies. The question depends primarily on whether the actual usages of the respective marks are “materially different” from the usages specified in the applications or registrations at issue. “If the TTAB does not consider the marketplace usage of the parties’ marks, the TTAB’s decision should have no later preclusive effect in a suit where actual usage in the marketplace is the paramount issue,” it said.

Justice Ginsburg separately concurred to emphasize this point. Quoting the authoritative McCarthy on Trademarks and Unfair Competition treatise, she noted that contested registrations are often decided upon “a comparison of the marks in the abstract and apart from their marketplace usage.” When the registration proceeding is of that character, she said, there will be no preclusion in a later infringement suit.

As a result, the preclusive effect of a prior TTAB decision will be a point of contention in a subsequent infringement action. The court will have to look closely at what the TTAB decided, and the evidence it relied upon. For example, in some cases the opposer relies on a registration which is unrestricted as to trade channels or likely purchasers, even though the opposer’s actual business may be restricted to a narrow area. This can sometimes lead to anomalous results, if the applicant seeks to register the same or similar mark for the same or similar goods, but uses its mark in entirely different fields of endeavor, such that the prospects for confusion in the “real world” are remote. Nevertheless, the TTAB will likely refuse registration in that scenario. It would appear that the B&B decision would permit the court, in a subsequent infringement case, to disregard the TTAB decision and decide “likelihood of confusion” based on the parties’ actual use.

In many cases, however, the question of preclusive effect will not be so clear cut. For this reason, parties litigating in the TTAB must consider that the TTAB decision will compel an identical result if infringement litigation ensues later. Typically, TTAB cases have been litigated in a more leisurely and less expensive manner than a court case. After B&B, some may choose to develop a fuller record to help assure preclusion in the event of a future infringement action against the applicant. This would lead to TTAB cases being litigated even more aggressively (and expensively) than they are now.

The decision may also encourage opposers, who fail to prevent registration at the TTAB, to seek review not by appeal to the federal circuit, but by the alternative means of filing a civil action in U.S. District Court under Section 21 of the Lanham Act. In such a case, the opposer would be entitled to de novo review of the TTAB decision and would be able to include infringement claims. The TTAB decision would have no preclusive effect in that case.

The B&B decision finally answers the question of which different circuits have taken different approaches. It does not, however, provide an answer to the question of whether a TTAB decision on likelihood of confusion will or will not have a preclusive effect on a court in a particular infringement litigation. That question will be determined on a case-by-case basis, under normal principles of issue preclusion.

ARTICLE BY

Andrew Baum

Foley & Lardner LLP

Tag: SCOTUS

MURPHY V. NCAA: Supreme Court Update

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