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Supreme Court: DOL Can Flip-flop on its Interpretation of Its Own Regulations

In 2010, the United States Department of Labor (DOL) issued an “Administrator’s Interpretation” stating that DOL would no longer consider employees who perform duties typical of mortgage loan officers to be exempt from the Fair Labor Standards Act’s overtime pay requirements. This particular ruling revolved around the FLSA’s exemption for administrative employees.

Supreme court DOL FLSA

The DOL’s 2010 stance represented a change of course, as DOL had previously issued an “Opinion Letter” in 2006 stating that mortgage loan officers were generally exempt from the FLSA’s overtime pay requirements under the administrative exemption. Litigation ensued following the 2010 Administrator’s Interpretation. The focus of that litigation was a rather technical issue: Should DOL have followed the formal rulemaking process before it could flip-flop on its interpretation of its own regulations? You can read more about the details of the litigation here.

On Monday, March 9, 2015, the United States Supreme Court ruled that DOL was not required to follow the formal rulemaking process whenever it took a position that was contrary to previous guidance issued by DOL.

Why does this ruling matter to employers of mortgage loan officers? Those businesses should classify those employees as non-exempt and evaluate their compensation structures immediately to comply with DOL’s interpretation of the administrative exemption. Otherwise, these employers run the risk of DOL enforcement actions and private litigation. Of course, these employers can disregard the DOL’s interpretation and rely on individual merits of their classifications, but they would do so at their peril.

Why does this ruling matter to employers generally? Based on the Court’s ruling, DOL can arguably change its tune about any interpretation of its own interpretive regulations without any warning to employers. An emboldened DOL could revisit regulatory interpretations that currently favor employers and flip those interpretations on their head, without warning. More importantly, the Court’s ruling was not limited to the DOL, which means that other federal administrative agencies (e.g., OSHA) could follow suit, leaving employers with little recourse to challenge such changes of heart.

ARTICLE BY

M. Scott LeBlanc

Rufino Gaytán

Godfrey & Kahn S.C.

Practice Considerations Post Teva v. Sandoz

In Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., No. 13-854, slip op. 574 U.S. __ (2015), the U.S. Supreme Court ruled that underlying factual issues resolved while formally construing a disputed patent claim term at the district court level are subject to a clear error standard of review as opposed to a de novo standard.

The Patent at Issue

The litigated patent claimed a method for manufacturing Copaxone, Teva’s multi-billion dollar a year drug used in the treatment of multiple sclerosis. Sandoz, as a generic pharmaceutical challenger under the Hatch-Waxman Act, attacked the patent as indefinite because it contained claim language describing an active pharmaceutical ingredient having a “molecular weight of 5 to 9 kilodaltons.” Although three accepted definitions¹ exist in the relevant art to calculate “molecular weight,” the method of calculation to be used was not described in the claim, the patent specification, or the prosecution history. The district court took evidence on this issue, namely through extrinsic expert testimony, and ruled that “molecular weight” would have been calculated by determining the “peak average molecular weight.” Accordingly, the district court held the phrase to be definite and accepted the understanding advanced by Teva’s expert. The Federal Circuit, however, reversed and held that the claim was indefinite after reviewing the district court claim construction de novo.

The Supreme Court’s Decision

In the majority opinion, authored by Justice Breyer, the Court explained that claim construction may involve both legal and factual elements that could necessitate differing levels of appellate scrutiny. Specifically, if a patent claim term is construed based upon the intrinsic evidence alone (i.e., patent claims, specification, and prosecution history), the determination is exclusively one of law, subject to de novo review. However, if the intrinsic evidence is not dispositive of the meaning of a claim term, then extrinsic evidence can be consulted (e.g., expert testimony, technical dictionary definitions, etc.) to better understand the meaning of the term. It is these underlying “facts” relating to extrinsic evidence that are reviewed according to the clear error standard. The Court reasoned that the District Judge, having presided over the entire proceeding, has a comparatively greater familiarity with the “specific scientific problems and principles” than the appellate court and should be afforded deference on factual findings. While the new scheme announced by the Court changes the standard of review for subsidiary factual matters, the ultimate issue of claim interpretation will still be reviewed de novo.

What is the Significance of Teva v. Sandoz?

The holding in Teva could have broad-ranging implications for clients in the procurement and enforcement of their patent rights. Below are a few examples of how the decision could impact current patent practice.

As an initial matter, patent owners should pay particular attention to the sufficiency of the disclosure with regard to key elements of the claims and consider specifically defining these elements in the specification through, for example, the use of a glossary. Such a strategy could help avoid protracted battles of the experts that could result in claim terms being redefined in ways never intended by the patent owner. While this approach has the potential to narrow claim scope, and may require additional time and expense during patent prosecution, it could result in a stronger, more effective patent less susceptible to post-Teva based challenges.

In the context of litigation, the Teva decision could provide motivation for litigants to create “factual issues” that are determinative of claim construction. Patentees, for example, may be tempted to try and broaden the scope of their claims by creating ambiguities in claim language in order to advance constructions that were never originally intended but may now be supported by extrinsic evidence. Alternatively, accused infringers may attempt to create as many factual disputes as possible with regard to the meaning of a claim in an effort to lock the patent owner into an unfavorable finding. Regardless of the motivations of the parties, district courts will likely become more attentive to these issues knowing their claim construction determinations could be afforded a higher standard of review. It is possible that the Teva decision could even result in broader acceptance among district court judges of “trial-like” Markman hearings with submission of expert testimony and extrinsic evidence at the claim construction stage.

Finally, in light of the changing claim construction standard of review in federal courts, parties (petitioners) should consider how this will impact the use and significance of inter partes review (IPR) proceedings. For example, IPR proceedings provide petitioners with a “broadest reasonable interpretation” standard for claim construction, while also allowing petitioners to submit an expert declaration in support. Since patent owners are typically not given an opportunity to submit a rebuttal expert declaration before the Board institutes trial, this can provide a preliminary advantage for petitioners attempting to secure a favorable construction, as an initial finding on claim construction is usually made as part of the institution process. Moreover, the patent owner may find it difficult to overturn the initial claim construction inertia, whether during the postinstitution phase or on appeal after a final decision on the merits has been made by the Board.

Many questions remain in the wake of Teva, as patent owners and challengers alike will be faced with new claim construction strategy scenarios relying on extrinsic evidence.

ARTICLE BY

Daniel E. Yonan

Jon E. Boljesic

Sterne, Kessler, Goldstein & Fox P.L.L.C.

_{1 The three accepted definitions to determine “molecular weight” included a (1) peak average molecular weight; (2) number average molecular weight; or (3) weight average molecular weight.}

United States Supreme Court Round-Up: Key Opinions from 2013 to 2014 and Upcoming High-Profile Business Disputes

The 2013–2014 term of the United States Supreme Court resulted in a wide range of decisions of importance to business. In this article, we highlight some of the key opinions and explore their likely impacts. We also preview a few of the high-profile business disputes the Supreme Court has agreed to hear next term.

Key Business Cases from the 2013–2014 Term

American Chemistry Council v. Environmental Protection Agency: Holding: The Environmental Protection Agency (EPA) reasonably interpreted the Clean Air Act to require sources that would need permits based on their emission of chemical pollutants to comply with “best available control technology” for greenhouse gases. Effect: The decision reinforces the Supreme Court’s previous recognition that the EPA has the power to regulate greenhouse gases as pollutants. However, portions of the decision strongly cautioned the EPA against overreach, stating that the agency may not “bring about an enormous and transformative expansion in [its] regulatory authority without clear congressional authorization.” These comments suggest that the Supreme Court may take a hard line when the Obama Administration’s other climate regulations eventually go to court.

Daimler AG v. Bauman: Holding: A foreign company doing business in a state cannot be sued in that state for injuries allegedly caused by conduct that took place entirely outside of the United States. Effect: Daimler makes it much harder for plaintiffs to establish general jurisdiction over foreign entities. The opinion re-characterizes general jurisdiction as requiring the defendant to be “at home” in the state, a circumstance that the Supreme Court suggested will generally be limited to the places where the defendant is incorporated or where it has its principal place of business. Moreover, the fact that a domestic subsidiary whose activities are imputed to the foreign parent may be “at home” in the state will not make the foreign parent “at home” in that locale for purposes of general jurisdiction.

Halliburton v. Erica P. John Fund, Inc.: Holding: Plaintiffs in private securities fraud actions must prove that they relied on the defendants’ misrepresentations in choosing to buy stock. Basic v. Levinson’s holding that plaintiffs can satisfy this reliance requirement by invoking a presumption that the price of stock as traded in an efficient market reflects all public, material information, including material misstatements, remains viable. However, after Halliburton, defendants can defeat the presumption at the class certification stage by proving that the misrepresentation did not in fact affect the stock price. Effect: While investors will continue to pursue class actions following large dips in stock prices, the Halliburton decision helps to level the playing field by providing defendants a mechanism to stop such suits at the class certification stage.

Lawson v. FMR LLC: Holding: Employees of privately held contractors or subcontractors of a public company are protected by the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX). Effect: Following Lawson, there will likely be an increase in SOX litigation against public and non-public companies. Because many of the issues concerning the scope and meaning of SOX have yet to be resolved, lower courts will continue to wrestle with defining the parameters of the law. Questions left unanswered byLawson include whether the whistleblower’s accusation must be related to work he or she performed for the company and whether the contract with the public company must have some relation to public accounting or securities compliance.

Chadbourne & Park LLP v. Troice: Holding: The Securities Litigation Uniform Standards Act of 1988 (SLUSA) does not preclude state-law class actions based on false representations that the uncovered securities that plaintiffs were purchasing were backed by covered securities. Effect: SLUSA bars the bringing of securities class actions “based upon statutory or common law of any state” in which the plaintiff alleges “a misrepresentation or omission of a material fact in connection with a purchase of sale of covered securities.” The statute defines “covered securities” to include only securities traded on a national securities exchange or those issued by investment companies.

U.S. v. Quality Stores: Holding: Severance payments to employees who are involuntarily terminated are taxable wages for purposes of the Federal Insurance Contributions Act. Effect: Employers should, under most circumstances, treat severance payments to involuntarily terminated employees as wages subject to FICA taxes. There are exceptions, however, and employers should therefore seek legal counsel to assist in determining the tax status of a particular severance arrangement.

Business Cases to Watch in the 2014–2015 Term

Integrity Staffing Solutions v. Busk: Whether time spent in security screenings is compensable under the Fair Labor Standards Act.

Mach Mining v. Equal Employment Opportunity Commission: Whether and to what extent a court may enforce the Equal Employment Opportunity Commission’s mandatory duty to conciliate discrimination claims before filing suit.

Omnicare v. Laborers District Council Construction Industry Pension Fund: Whether, for purposes of a claim under Section 11 of the Securities Act of 1933, a plaintiff may plead that a statement of opinion was untrue merely by alleging that the opinion itself was objectively wrong, or must the plaintiff also allege that the statement was subjectively false through allegations that the speaker’s actual opinion was different from the one expressed.

Young v. UPS: Whether, and in what circumstances, an employer that provides work accommodations to non-pregnant employees with work limitations must provide work accommodations to pregnant employees who are similar in their ability or inability to work.

As in recent years, the Supreme Court continues to grant review on more and more cases involving matters of concern to U.S. businesses. Andrews Kurth attorneys are available to provide further detail and guidance on the decisions highlighted here, and on any other issues of concern to your company that have reached the high court.

ARTICLE BY

Kelly Sandill

Andrews Kurth

SCOTUS Grants Certiorari to Two Immigration-Based Cases for 2015 Term: Will the Government Have to Explain Its Exercise of “Discretion”?

The United States Supreme Court is back in session as of last Monday, Oct. 6—often referred to as “First Monday” due to the fact that the term must begin on the first Monday of October by law. Among its roughly 50 case docket, featuring headliners that will refine Fourth Amendment jurisprudence and agency regulatory authority, the Justices will tackle two cases that stand to have a considerable impact on American immigration law and procedure.

The first of those cases, Mellouli v. Holder, concerns the issue of whether a noncitizen—even a green card holder—can be mandatorily detained and deported for possessing drug paraphernalia.Section 237(a)(2)(B)(i) of the Immigration and Nationality Act broadly authorizes the deportation of noncitizens that find themselves caught up in charges related to a “controlled substance.” Currently, the circuits are split as to whether the drug paraphernalia itself, the possession of which is prohibited by some states, must be related to a substance listed in Section 802 of Title 21, the Controlled Substances Act, in order to properly form the basis of a deportation order under the immigration laws.

The defendant, Moones Mellouli, is a lawful permanent resident who earned two master’s degrees and worked as an actuary. He was convicted of a Kansas misdemeanor offense, “possession of drug paraphernalia,” a charge that did not make reference to a controlled substance. In fact, his conduct would constitute a crime neither under federal law nor under the laws of many states. Nonetheless, U.S. Immigration and Customs Enforcement (“ICE”) arrested Mellouli and sought to deport him for violating a state law “relating to a controlled substance.” This case could also simultaneously serve as a conduit for showing the public at large how draconian adherence to prioritizing the prosecution of “alien criminals” produces undesirable effects, such as insufficient due process and wildly disproportionate consequences—like deportation—for minor offenders.

The second case, Kerry v. Din, also has at its base important due process concerns. Here, they flow from a U.S. citizen petitioner’s rights before a Department of State (“DOS”) denial of her husband’s visa at one of its consular posts. At issue is (1) whether the consular officer’s refusal of a visa to a spouse of a U.S. citizen impinges upon a constitutionally protected interest of the citizen; and (2) whether a citizen-petitioner is entitled to challenge in court the refusal of a visa to her spouse and to require the government to identify a specific statutory provision rendering him inadmissible and the explicit conduct that would render the spouse ineligible in order to sustain the visa refusal.

Thus, Kerry v. Din will squarely exhort a review of the doctrine of “consular nonreviewability”—sometimes referred to as “consular absolutism.” This principle surged following the SCOTUS decision in United States ex rel. Knauff v. Shaughnessy roughly 65 years ago and embodies the notion that a consular officer’s (i.e., at an exterior post, by definition) decision to grant or deny a visa petition is not subject to judicial review. The Knauff court explicitly stated that “[w]hatever the procedure authorized by Congress is, it is due process as far as an alien denied entry is concerned.” [338 U.S. 537, 544 (1950)]. Those familiar with immigration law will recognize that this was but a culmination of successive rulings reinforcing the idea that the power to exclude aliens is both inherent in the sovereign and exclusive to its political branches of government; that a noncitizen’s rights are at their lowest prior to acceding to our borders. In practice, this means that the exercise of “discretion” by immigration agents often results in an unsatisfactory “because I said so” explanation by the government, without more, as if it were dealing with insolent children. In an area that impacts many fundamental facets of an individual’s daily life, the current dearth of due process and unquestioning reliance on a particular agent’s determinations is grossly misplaced.

Amber and Victor Ramirez of Kankakee, Illinois, is just one couple that has experienced the negative consequences of this amorphous agency “discretion” in 2011. USCIS granted Amber’s petition for a visa for Victor, her spouse. Victor then traveled to the U.S. consulate abroad—a routine practice for noncitizens that switch immigration status—in Juarez, Mexico to obtain the visa. The DOS consular officer refused to grant the already-approved visa, citing only that there was “reason to believe” Victor might engage in illegal activity in the United States. No further explanation was given.

As it turns out Victor has tattoos and the couple perceived that the consular office was focusing on them. “Victor has never been in a gang, and is not listed in Illinois’ gang database. Amber worked with the local police to explain that Victor’s tattoos did not match any known gang tattoos. The couple explained each of his tattoos, including the tattoo of the name of their daughter. The consulate refused to reconsider or to explain its reasoning, even though over 40 percent of American households include a member with tattoos. The family remains separated based solely on the word of an anonymous bureaucrat.”

This is precisely the category of government action that would be unreviewable under the prevailing consular nonreviewability doctrine, which forms the foundation of the government’s argument in Din. And Din, for its part, bears on the extent to which the government can get away with vague and perfunctory rationales—perhaps not even truly reaching the substantive inquiry of whether an agent’s subjective profiling of an individual is a lawful basis upon which a discretionary immigration action may be made.

Shaun Staller also contributed to this article.

U.S. Supreme Court Declines to Hear Wisconsin’s Same-Sex Marriage Case: How Does This Affect the Administration of an Employer’s Employee Benefits?

On Monday, October 6, 2014, the U.S. Supreme Court denied certiorari in Wolfe v. Walker. As employers will recall, in June 2014, U.S. District Court Judge Crabb found that Wisconsin’s 2006 constitutional amendment barring recognition of same-sex marriages violated the equal protection clause of the U.S. Constitution. In September 2014, the Seventh Circuit affirmed that decision. The Supreme Court’s action means that Judge Crabb’s decision stands.

What Is the Effect of the Supreme Court’s Ruling? Hereafter, Wisconsin and its respective governmental subdivisions must issue same-sex marriage licenses and must recognize same-sex marriages, whether formed in Wisconsin or in other jurisdictions. Moreover, the ruling affects employer-provided employee benefits.

Eligibility for Health Plan Coverage. The ruling has different implications depending upon the type of health plan at issue. For ERISA plans, there is some uncertainty regarding how this will play out moving forward because of ERISA preemption. Following the 2013 U.S. Supreme Court decision in United States v. Windsor, the Department of Labor announced in guidance that it would interpret the terms “spouse” and “marriage” to include same-sex marriages valid in the state of celebration. However, since it appears that neither Windsor nor Wolf nor the DOL guidance addresses private discrimination or imposes an obligation on employers to provide same-sex benefits, ERISA may still preempt a state discrimination law.

There is an additional nuance under state insurance laws. The Department of Health and Human Services (HHS) has mandated that health insurance issuers providing policies that cover spouses ensure that same-sex spouse coverage is also available to consumers. The guidance HHS provided, however, does not mandate that employers obtaining that coverage actually offer the benefit. It is unclear how this will play out under state insurance law (which applies to insured ERISA plans) and further guidance from the state is required.

For plans that are not subject to ERISA, the preemption argument disappears. Thus, such non-ERISA plans failing to offer such coverage may now violate Wisconsin’s Fair Employment Act, which prohibits discrimination on the basis of sexual orientation and marital status. Even so, those plans that are exempt from ERISA because they constitute “church plans” may be able to assert a religious exemption from discrimination rules.

Employers contemplating providing only opposite-sex spousal benefits should be in close contact with their legal counsel regarding the risks associated with such a decision. Further, it will be very important to ensure that “spouse” is defined with precision in the plan materials.

Imputed Income. Previously, the Wisconsin Tax Code treated employer-provided coverage for same-sex spouses of employees as taxable income and Wisconsin employers were required to treat such coverage as imputed income for Wisconsin withholding purposes. Now that Judge Crabb’s decision has been permitted to stand, Wisconsin employers must stop imputing income for state tax purposes to employees who receive coverage for same-sex spouses (and certain dependents). Employers will also need to pay attention to how the Wisconsin Department of Revenue addresses the taxation of income that was previously imputed; that is, how employees and employers might recover excess amounts withheld by the state government based upon imputed income in prior months and years.

Note, nothing has changed as it relates to domestic partners benefits – employees are still subject to imputed income where the employee obtains coverage on behalf of his or her domestic partner.

Family and Medical Leave. As we advised in a June client alert, family and medical leave under the state law is largely unaffected by this decision because domestic partner coverage was already contemplated by the state law and same-sex spouses were deemed domestic partners for such purposes.

On a federal level, this decision accelerates the effective date of proposed regulations issued earlier this year by the U.S. Department of Labor in response to Windsor. Earlier this year, the Department of Labor issued proposed regulations to change the FMLA’s definition of spouse from an individual who is recognized as a spouse under the state law in the place of the employee’s residence to an individual who is considered legally married to the employee based upon the laws of the state of celebration. These regulations are not yet finalized. Nevertheless, the Supreme Court’s decision means that even under the current regulations Wisconsin same-sex married couples will be considered spouses for purposes of FMLA administration.

What should employers do now?

Account for those same-sex couples who may have been married in a state that permitted same-sex marriage or who are newly married in Wisconsin;
Determine if modification of benefit plan materials may be necessary;
Determine the appropriateness of a special enrollment opportunity to couples married in other jurisdictions prior to the Supreme Court’s ruling who would not otherwise be eligible for a HIPAA special enrollment opportunity based upon the date of the wedding; and
Determine if modification of FMLA policy/forms is warranted based upon the changes.

ARTICLE BY

Charles P. Stevens

Michael Best & Friedrich LLP

Think Tanks Ask Supreme Court to Clarify Definition of “Foreign Official” in FCPA (Foreign Corrupt Practices Act)

Two think tanks, the Washington Legal Foundation and the Independence Institute, have filed anamicus brief in the Supreme Court on behalf of petitioners Joel Esquenazi and Carlos Rodriguez, who were recently convicted of violating the Foreign Corrupt Practices Act (FCPA). The amiciseek clarity of the definition of “foreign official” in the FCPA. The FCPA prohibits certain persons or entities, including US businesses, from paying a “foreign official” for the purpose of obtaining or retaining business. The FCPA defines “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”

Esquenazi and Rodriguez were executives of Terra Telecommunications Corp., a Florida company that purchased phone time from foreign vendors and resold the time to US customers. Terra conducted business with Haiti-owned vendor Telecommunications D’Haiti S.A. (Haiti Teleco). Prosecutors argued that Esquenazi and Rodriguez made payments to Haiti Teleco officers to obtain lower rates. To determine whether Haiti Teleco was an “instrumentality” under the FCPA, the trial court instructed the jury to consider whether the company “provided services to the citizens and inhabitants of Haiti,” and whether it was majority owned by the Haitian government. Defendants were convicted, and Esquenazi was sentenced to 15 years’ imprisonment and Rodriguez received seven years’ imprisonment. The US Court of Appeals for the Eleventh Circuit affirmed, finding that an “instrumentality” is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own,” and setting forth a list of factors.

Amici contend that the business community needs concrete guidance in this undeveloped area. They argue that the Eleventh Circuit’s definition is overly broad because (1) Haiti Teleco was never designated a government entity; (2) Haiti Teleco issues common stock, and the government was not an initial stockholder; and (3) Haiti Teleco, as a telephone service provider, does not perform a traditional government function.

Brief for Esquenazi and Rodriguez as Amici Curiae Supporting Petitioners, Esquenazi, et al. v. U.S., Sup. Ct. No. 14-189 (Aug. 14, 2014).

ARTICLE BY

Bruce M. Sabados

Margaret J. McQuade

Katten Muchin Rosenman LLP

New Supreme Court Ruling On EPA Authority Over Greenhouse Gases (GHGs) – Little Clarification on the 111(d) Regulations

Last week, the United States Supreme Court issued a significant decision in Utility Air Regulatory Group v. EPA, that substantially restricts the authority of the U.S. Environmental Protection Agency (EPA) to regulate greenhouse gas emissions (GHGs) from stationary sources under the Clean Air Act’s Prevention of Significant Deterioration (PSD) and Title V permitting programs. The Supreme Court’s decision holds that EPA may not impose permitting requirements on facilities based solely on their emissions of GHGs, but may regulate GHG emissions under the PSD and Title V programs, only if a facility is otherwise subject to major source permitting requirements.

Background

EPA interpreted the Clean Air Act to require stationary sources to obtain construction and operating permits under the PSD and Title V programs whenever a facility emits GHGs above certain threshold levels. The threshold levels EPA chose were different than the levels established by Congress in the Clean Air Act, because the statutory levels when applied to GHGs were too low (as compared to criteria pollutant thresholds), and applying those levels to GHG emissions would lead to “absurd results” by subjecting millions of small sources such as shopping malls, hospitals and churches to major source permitting requirements. These thresholds were established in what is known as the “Tailoring Rule.”

The Tailoring Rule triggered regulatory review for two different source categories (for purposes of GHG emissions): sources that were already subject to major source review under the Clean Air Act because of emissions of criteria pollutants in excess of the major source thresholds (so-called “anyway” sources) and those sources that would trigger major source review for the first time based solely on emissions of GHGs in excess of the “tailored” thresholds set by EPA.

Holding

The Supreme Court’s divided 5-4 decision, authored by Justice Scalia, held that EPA’s rulemakings setting “tailored” thresholds for GHGs were invalid. The Court, however, stopped short of holding that GHGs could not be regulated at all under the PSD and Title V programs.

Specifically, the Supreme Court upheld EPA’s approach of requiring “best available control technology” (BACT) standards for GHGs for those sources otherwise required to obtain a PSD permit (the “anyway” sources). The Court emphasized, though, that it was not approving EPA’s current approach to BACT regulation of GHGs, or of any future approach that EPA might adopt. The Supreme Court categorized this aspect of the holding as having only a small impact on the regulated community, stating that 85 percent of all GHG major sources are “anyway” sources, while only an additional 3 percent would be major sources under the GHG tailoring trigger.

The Supreme Court also reaffirmed its decision in Massachusetts v. EPA, which held that GHGs qualify as an “air pollutant” for purposes of the term’s general definition in the Clean Air Act.

Takeaways and Import of This Case on 111(d) Regulations:

1) GHG Emissions Alone Do Not Trigger Major Source Permitting Obligations – The principal legal holding of the decision is also considered the most significant from a practical perspective. Stationary sources cannot, under the Court’s ruling, be subject to permitting requirements based solely on their emissions of GHGs. The Court’s math on the number of sources impacted by this core aspect of the decision is questionable, and there is suspicion that many potentially major sources were specifically planning facilities to avoid major source permitting review by designing facilities to avoid the tailoring trigger for GHGs. In short, the impact of this decision is potentially very significant for the regulated community.

2) Greenhouse Gas Emissions Are an “Air Pollutant” Subject to Regulation under the Clean Air Act. While the decision holds that GHGs are not an “air pollutant” for purposes of triggering PSD and Title V permitting requirements, it stops short of holding that GHGs are not an “air pollutant” for other purposes. To the contrary, the Court affirmed its prior holding in Massachusetts v. EPA, that the term “air pollutant,” as generally defined in the Clean Air Act, includes GHGs.

3) Mixed Signals About EPA’s Authority to Issue NSPS Regulations Under 111(d). The Supreme Court was careful to note that EPA’s authority to regulate GHG emissions under the New Source Performance Standards (NSPS) were not at issue and did not need to be addressed (that is, the Court specifically did not address the proposed 111(d) rules).

a) As noted above, the Supreme Court reinforced that GHGs may be regulated as an air pollutant under other aspects of the Clean Air Act (just not PSD or Title V). Though the Supreme Court found that EPA was right to determine that the statutory thresholds for major source review would lead to “absurd results” in the PSD and Title V context for major source triggers, the Court said nothing about EPA’s authority to regulate under the NSPS provisions of Section 111(d). One way to interpret the decision is that it cloaks EPA with apparent authority to address GHGs as an “air pollutant” under Section 111(d).

b) On the other hand, the Supreme Court took a stern tone in admonishing EPA for over-stepping its bounds. As an example, the Court warns EPA: “[W]hen an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism.” That statement was directed at EPA’s attempt to regulate GHGs in the PSD and Title V programs, but the same argument might be made in the 111(d) context.

Conclusion

There are still many questions to be answered surrounding the 111(d) regulations proposed by EPA. This decision clarifies the overall picture of GHG regulation slightly, but does little to provide a clear boundary on EPA’s authority over GHGs. No doubt, this decision will be cited by both those in favor and those against the 111(d) regulations.

Article By:

Adam DeVoe

Of:

Lewis Roca Rothgerber LLP

Proposed Legislation Introduced to Override Hobby Lobby Ruling

On July 9th, Senator Democrats introduced proposed legislation known at the Protect Women’s Health from Corporate Interference Act (Act) in an effort override the U.S. Supreme Court’s Hobby Lobby decision, which was previously discussed in our June 30th Alert.

The Act would reinstate the Affordable Care Act’s contraceptive coverage obligations imposed on employers, requiring employers to provide such health insurance. The Act specifically is targeted at the Supreme Court’s 5-4 Hobby Lobby decision, which held closely-held companies (those that are family-owned or have a limited number of shareholders) can exercise their freedom of religion protections to avoid paying for such contraceptive coverage. Senator Tom Harkin (D-Iowa), one of the three Senators who introduced this legislation, explained that houses of worship and religious non-profits would remain exempt from providing contraceptive coverage under the Act.

The introduction of this legislation in the Senate follows the announcement by two House Democrats last week, indicating they would introduce similar bills in response to the Hobby Lobby decision. If the legislation were to pass the Senate, many experts anticipate it will fail in the Republican-controlled House.

Article By:

Tina A. Syring

Of:

Barnes & Thornburg LLP

What Does Regulation of Greenhouse Gas Emissions as Described by EPA in the “Tailoring Rule” have to do with the Clean Air Act?

UARG v. EPA: Tailoring Rule Litigation

On June 23, 2014 Justice Scalia delivered the opinion of the U.S. Supreme Court on the question of whether EPA motor vehicle greenhouse gas regulations necessarily automatically triggers permitting requirements under the CAA for stationary sources that emit greenhouse gases. The statements in the opinion concerning EPA’s assertions of power are quite provoking. If read carefully, this opinion launches a warning to EPA about its future regulatory actions relative to greenhouse gases. The text of the opinion can be found here. The following quotes are offered as examples of that warning.

“EPA’s interpretation is also unreasonable because it would bring about an enormous and transformative expansion in EPA’s regulatory authority without clear congressional authorization. When an agency claims to discover in a long-extant statute an unheralded power to regulate “a significant portion of the American economy,” Brown & Williamson, 529 U.S. at 159, we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast “economic and political significance.” Id., at 160; See Also MCI Telecommunications Corp. v. American Telephone & Telegraph Co., 512 U.S. 218, 231 (1994); Industrial Union Dept., APL-CIO v. American Petroleum Institute, 448 U.S. 607, 645-646 (1980) (plurality opinion). Slip op at 19.

“. . . in EPA’s assertion of that authority, we confront a singular situation: an agency laying claim to extravagant statutory power over the national economy while at the same time strenuously asserting that the authority claimed would render the statute “unrecognizable to the Congress that designed” it. “ Slip op at 20.

“We are not willing to stand on the dock and wave goodbye as EPA embarks on this multiyear voyage of discovery. We reaffirm the core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.” Slip op at 23.

In a step wise fashion the opinion presents and answers the following:

1. The question before the Court was “. . .whether it was permissible for EPA to determine that it motor-vehicle greenhouse-gas regulations automatically triggered permitting requirements under the Act for stationary sources that emit greenhouse gases.” Slip op at 2.

First we decide whether EPA permissibly interpreted the statute to provide that a source may be required to obtain a PSD or Title V permit on the sole basis of its potential greenhouse-gas emissions. Slip op at 10.

“It is plain as day that the Act does not envision an elaborate, burdensome permitting process for major emitters of steam, oxygen, or other harmless airborne substances. It takes some cheek for EPA to insist that it cannot possibly give “air pollutant” a reasonable, context-appropriate meaning in the PSD and Title V context when it has been doing precisely that for decades.” Slip op at 12.

“Massachusetts does not strip EPA of authority to exclude greenhouse gases from the class of regulable air pollutants under other parts of the Act where their inclusion would be inconsistent with the statutory scheme.” Slip op at 14.

“In sum, there is no insuperable textual barrier to EPA’s interpreting “any air pollutant” in the permitting triggers of PSD and Title V to encompass only pollutants emitted in quantities that enable them to be sensibly regulated at the statutory thresholds, and to exclude those atypical pollutants that, like greenhouse gases, are emitted in such vast quantities that their inclusion would radically transform those programs and render them unworkable as written.” Slip op at 16.

2. . . . we next consider the Agency’s alternative position that its interpretation was justified as an exercise of its “discretion” to adopt “a reasonable construction of the statute.” Tailoring Rule 31517. We conclude that EPA’s interpretation is not permissible.” Slip op at 16.

“EPA itself has repeatedly acknowledged that applying the PSD and Title V permitting requirements to greenhouse gases would be inconsistent with – in fact, would overthrow – the Act’s structure and design.” Slip op at 17.

“A brief review of the relevant statutory provisions leaves no doubt that the PSD program and Title V are designed to apply to, and cannot rationally be extended beyond, a relative handful of large sources capable of shouldering heavy substantive and procedural burdens.” Slip op at 18.

3. “We now consider whether EPA reasonably interpreted the Act to require those sources to comply with “best available control technology” emission standards for greenhouse gases.” Slip op at 25.

“EPA argues that carbon capture is reasonably comparable to more traditional, end-of-stack BACT technologies, . . . and petitioners do not dispute that.” Slip op at 26. “. . . it has long been held that BACT cannot be used to order a fundamental redesign of the facility.” “. . . EPA has long interpreted BACT as required only for pollutants that the source itself emits; accordingly, EPA acknowledges that BACT may not be used to require “reductions in a facility’s demand for energy from the electric grid.” Slip op at 27.

“The question before us is whether EPA’s decision to require BACT for greenhouse gases emitted by sources otherwise subject to PSD review is, as a general matter, a permissible interpretation of the statute under Chevron. We conclude that it is.” Slip op at 27.

“We acknowledge the potential for greenhouse-gas BACT to lead to an unreasonable and unanticipated degree of regulation, and our decision should not be taken as an endorsement of all aspects of EPA’s current approach, nor as free rein for any future regulatory application of BACT in this distinct context. Our narrow holding is that nothing in the statute categorically prohibits EPA from interpreting the BACT provision to apply to greenhouse gases emitted by “anyway” sources.” Slip op at 28.

Opinion of Breyer, with whom Ginsburg, Sotomayor and Kagan join, concurring in part and dissenting in part. Rather than exempting certain air pollutants like greenhouse gas emissions from the statute, it makes more sense to read into the statute an exemption for certain sources that were never intended to be subject to PSD.

Opinion of Alito, with whom Thomas joins, comments that Massachusetts v. EPA was wrongly decided at the time, and these cases further expose the flaw with that decision.

The Supreme Court of the United States Holds that ESOP Fiduciaries are not Entitled to a Presumption of Prudence, Clarifies Standards for Stock Drop Claims

On June 25, 2014, the Supreme Court of the United States unanimously held that there is no special presumption of prudence for fiduciaries of employee stock ownership plans (“ESOPs”). Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. ___ (June 25, 2014) (slip op.).

Background

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) imposes legal duties on fiduciaries of employee benefit plans, including ESOPs.^[1] Specifically, ERISA requires the fiduciary of an employee benefit plan to act prudently in managing the plan’s assets.^[2] In addition, ERISA requires the fiduciary to diversify plan assets.^[3]

ESOPs are designed to be invested primarily in employer securities.^[4] ERISA exempts ESOP fiduciaries from the duty of diversify plan assets and from the duty to prudently manage plan assets, but only to the extent that prudence requires diversification of plan assets.^[5]

The recent financial crisis generated a wave of ERISA “stock drop” cases, which were filed after a precipitous drop in the value of employer securities held in an ESOP. Generally, the plaintiff alleged that the ESOP fiduciary breached its duty of prudence by investing in employer securities or continuing to offer employer securities as an investment alternative. Defendant fiduciaries defended on the ground that the plaintiff failed to rebut the legal presumption that the fiduciary acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.

The Federal Circuit Courts of Appeals that had considered the issue adopted the rebuttable presumption of prudence but split on the issues of (1) whether the legal presumption applied at the pleadings stage of litigation or whether the legal presumption was evidentiary in nature and did not apply at the pleadings stage of litigation and (2) the rebuttal standard that the plaintiff of a stock drop action must satisfy.^[6]

Dudenhoeffer held that ESOP fiduciaries are not entitled to a legal presumption that they acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.^[7]

The Dudenhoeffer Case

Fifth Third Bancorp maintained a defined contribution plan, which offered participants a number of investment alternatives, including the company’s ESOP. The terms of the ESOP required that its assets be “invested primarily in shares of common stock of Fifth Third [Bancorp].”^[8] The company offered a matching contribution that was initially invested in the ESOP. In addition, participants could make elective deferrals to the ESOP.

ESOP participants alleged that the ESOP fiduciaries knew or should have known on the basis of public information that the employer securities were overvalued and an excessively risky investment. In addition, the ESOP fiduciaries knew or should have known on the basis of non-public information that the employer securities were overvalued. Plaintiffs contended that a prudent ESOP fiduciary would have responded to this public and non-public information by (1) divesting the ESOP of employer securities, (2) refraining from investing in employer securities, (3) cancelling the ESOP investment alternative, and (4) disclosing non-public information to adjust the market price of the employer securities.

Procedural Posture

The United States District Court for the Southern District of Ohio dismissed the complaint for failure to state a claim, holding that ESOP fiduciaries were entitled to a presumption of prudence with respect to their collective decisions to invest in employer securities and continue to offer employer securities as an investment alternative.^[9] The District Court concluded that presumption of prudence applied at the pleadings stage of litigation and that the plaintiffs failed to rebut the presumption.^[10]

The United States Court of Appeals for the Sixth Circuit reversed the District Court judgment, holding that the presumption of prudence is evidentiary in nature and does not apply at the pleadings stage of litigation.^[11] The Sixth Circuit concluded that the complaint stated a claim for a breach of the fiduciary duty of prudence.^[12]

ESOP Fiduciaries Not Entitled to Presumption of Prudence

In a unanimous decision, the Supreme Court of the United States held that ESOP fiduciaries are not entitled to a presumption of prudence with regard to their decisions to invest in employer securities and continue to offer employer securities as an investment alternative; rather, ESOP fiduciaries are subject to the same duty of prudence that applies to other ERISA fiduciaries, except that ESOP fiduciaries need not diversify plan assets.^[13]

The Court began its analysis b
y acknowledging a tension within the statutory framework of ERISA. On the one hand, ERISA imposes a duty on all fiduciaries to discharge their duties prudently, which includes an obligation to diversify plan assets. On the other hand, ERISA recognizes that ESOPs are designed to invest primarily in employer securities and are not intended to hold diversified assets. The Court concluded that an ESOP fiduciary is not subject to the duty of prudence to the extent that the legal obligation requires the ESOP fiduciary to diversify plan assets. The Court found no special legal presumption favoring ESOP fiduciaries.

New Standards for Stock Drop Claims

Although the Court rejected the presumption of prudence, it vacated the judgment of the Sixth Circuit Court of Appeals (which held that the complaint properly stated a claim) and announced new standards for lower courts to observe in evaluating whether a complaint properly pleads a claim that an ESOP fiduciary breached its fiduciary duty of prudence by investing in employer securities or continuing to offer employer securities as an investment alternative.

Public Information

First, the Court concluded that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”^[14] In other words, a plaintiff generally cannot state a plausible claim of imprudence based solely on publicly available information. An ESOP fiduciary does not necessarily act imprudently by observing the efficient market theory, which holds that a major stock market provides the best estimate of the value of employer securities. To be clear, the Court did not rule out the possibility that a plaintiff could properly plead imprudence based on publicly available information indicating special circumstances affecting the reliability of the market price.

Non-Public Information

Second, the Court concluded that “[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the [fiduciary] could have taken that would have been consistent with [applicable Federal and state securities laws] and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [ESOP] than to help it.”^[15]

The Court reasoned that where a complaint alleges imprudence based on an ESOP fiduciary’s failure to act on non-public information, a lower court’s analysis should be guided by three considerations. First, ERISA does not require a fiduciary to violate applicable Federal and state securities laws. In other words, an ESOP fiduciary does not act imprudently by declining to divest the ESOP of employer securities or by prohibiting investments in employer securities on the basis of non-public information. Second, where a complaint faults fiduciaries for failing to decide, on the basis of non-public information, to refrain from making additional investments in employer securities or for failing to disclose non-public information to correct the valuation of the employer securities, lower courts should consider the extent to which the duty of prudence conflicts with complex insider trading and corporate disclosure requirements imposed by Federal securities laws or the objectives of such laws. Third, lower courts should consider whether the complaint has plausibly alleged that a prudent fiduciary could not have concluded that discontinuing investments in employer securities or disclosing adverse, non-public information to the public, or taking any other action suggested by the plaintiff would result in more harm than good to the ESOP by causing a drop in the value of the employer securities.

Quantifying the Unknowns

Fifth Third Bancorp v. Dudenhoeffer will undoubtedly reshape the landscape of ERISA litigation and, specifically, stock drop litigation. To fully understand the decision’s impact, a number of questions must still be answered, including the correct application of the standards espoused by the Court. In addition, Dudenhoeffer involved a publicly-traded company; it is unclear what application, if any, the decision will have in the context of employer securities of a privately held company.

Article By:

Christopher T. Horner

Eric W. Gregory

Of:

Dickinson Wright PLLC

_{^[1] See generally, ERISA § 404(a).}

_{^[2] ERISA § 404(a)(1)(B).}

_{^[3] ERISA § 404(a)(1)(C).}

_{^[4] Code § 4975(e)(7)(A).}

_{^[5] ERISA § 404(a)(2).}

_{^[6] See e.g. Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995); In re Citigroup ERISA Litig., 662 F.3d 128, 138 (2d Cir. 2011); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5^th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447 (6^th Cir. 1995); White v. Marshall & Ilsley Corp., Case No. 11-2660, 2013 WL 1688918 (7^th Cir. Apr. 19, 2013); Quan v. Computer Sciences Corp., 623 F.3d 870, 881 (9^th Cir. 2010);Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11^th Cir. 2012).}

_{^[7] No. 12-751, 573 U.S. ____ at 1-2.}

_^[8] Id.

_{^[9] Dudenhoeffer v. Fifth Third Bancorp, Inc., 757 F. Supp. 2d 753, 759 (S.D. Ohio 2010).}

_{^[10] Id. At 762.}

_{^[11] Dudenhoeffer v. Fifth Third Bancorp, 692 F. 3d 410, 418-19 (2012).}

_{^[12] Id. At 423.}

_{^[13] Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. ___ at 1-2.}

_{^[14] Id. At 16.}

_{^[15] Id. At 18.}

Tag: SCOTUS

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