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

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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.

 
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[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 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); White v. Marshall & Ilsley Corp., Case No. 11-2660, 2013 WL 1688918 (7th Cir. Apr. 19, 2013); Quan v. Computer Sciences Corp., 623 F.3d 870, 881 (9th Cir. 2010);Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th 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.

Supreme Court: Checking in on Bank Fraud

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In Loughrin v. United States, U.S. Supreme Court, No. 13-316, the Supremes approved the application of the federal bank fraud statute to a relatively unsophisticated check cashing scheme, leading to the collective hand-wringing by a host of internet commentators who decried the federalization of state crimes and runaway prices at Whole Foods. The defendant in the underlying case was a pillar of the community named Kevin Loughrin, who stole and altered checks so that he could buy merchandise at his local Target stores, leading to six federal bank fraud charges. According the case record, Loughrin intended to buy merchandise with the checks and return them for cash refunds. Let’s face it, this was not the world’s most enterprising criminal.

What was enterprising, however, was Loughrin’s argument that he intended to target Target and not a federally-insured financial institution. According to Loughrin, a conviction for bank fraud required that prosecutors prove intent to defraud the banks on which the checks were drawn. Otherwise, suggested Loughrin, the federal bank fraud statute would extend to ordinary, unsophisticated frauds that simply involve payment by check – an area that was typically left to prosecution by the states.

Setting aside the debate between the breadth and scope of federal criminal laws (sorry, breathless internet commentators!), I’d instead like to talk about how bank fraud may not be bank fraud even though it’s bank fraud. Make sense? No? Hmm. Let me try again.

The Supremes cleared up that bank fraud applies to things like Loughren’s moronic basic check cashing scheme because of the use of checks, right? And this helps with the definition of what bank fraud actually is and what conduct bank fraud actually covers. But while the crime of bank fraud has become a little more clear, there is still absolutely no straightforward way of figuring out whether your local U.S. Attorney’s Office will actually prosecute the case or not.

“What?” you say indignantly. “But crime has been committed! Criminals must be punished! Heads must roll!” Oh, I agree. And you would be hard pressed to find people who do not agree (criminals have terrible lobbyists). But charging decisions are left entirely to the discretion of local U.S. Attorney’s offices, which must balance Department of Justice priorities with local priorities, office staff, and agency resources. So while a bank fraud of $30,000 in Billings, Montana may capture federal attention, the same fraud in Los Angeles, California, is likely going to be declined by federal prosecutors. The problem becomes more acute when the arbitrary lines bisect the same bustling metropolis, like what happens between the Northern and Eastern District of Texas or between the Southern and Eastern Districts of New York. It is entirely possible, for example, that federal prosecution in the Dallas area depends on where a criminal decides to exit Highway 75.

Does that sound arbitrary? If so, it’s because it is. But it’s the system that we have. And because of that system, bank fraud may not be bank fraud . . . even though it’s bank fraud.

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Supreme Court Gives Second Win in Two Days to Caregivers Challenging Compulsory Union Dues

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The United States Supreme Court acted today in another case involving a scheme to siphon millions of dollars in compulsory union dues from home caregivers assisting public aid recipients.  On June 30, 2014, the Court decided Harris v. Quinn and held that the First Amendment to the United States Constitution prohibits the collection of a compulsory agency fee from rehabilitation program personal assistants who do not want to join or support the union.  Today, the Court applied Harris to Schlaud v. Snyder, vacating the judgment, and remanding the case to the United States Court of Appeals for the Sixth Circuit for further consideration in light of Harris v. Quinn.  As the Schlaud case continues, look for another blow to the forced-dues arrangment perpretrated by various union officials and their friends in government.

Schlaud and other plaintiffs in the case are home childcare providers in Michigan who sought class-action certification in their First Amendment challenge to the state’s compulsory deduction of union dues from subsidies paid to home childcare providers.  In January 2009, the Michigan Department of Human Services (DHS) began deducting 1.15% from subsidy payments made to home childcare providers. The funds were forwarded to the union, which was a joint venture between the United Auto Workers union and the American Federation of State, County and Municipal Employees union.  According to the opinion of the United States Court of Appeals for the Sixth Circuit, the union collected $2,000,019.09 in 2009 and at least $1,821,635.21 in 2010.

Schlaud and her co-plaintiffs sought the return of the compulsory union dues that were collected in violation of their First Amendment rights. The district court denied certification of the plaintiffs’ proposed class — all home childcare providers in Michigan — because it concluded a conflict of interest existed within the class: some members voted for union representation and others voted against union representation.  The Sixth Circuit affirmed, and Schlaud sought review by the Supreme Court.

Attorneys at the National Right to Work Legal Defense Foundation filed and have litigated both Shlaud and Harris on behalf of personal assistants and home childcaregivers.  In Harris, the Supreme Court did not reach the issue of the constitutionality generally of compelling public sector employees to pay union dues or agency fees, but it strongly signaled that the legal analysis of a 1977 Supreme Court decision, Abood v. Detroit Board of Education, which found compulsory agency-fee requirements to be constitutional, was “questionable.” The Harris opinion opens the door, cracked initially in Knox v. Service Employees, for the Court to revisit the constitutionality of compelling public employees to pay union dues or agency fees as a condition of employment.

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U.S. Supreme Court Gives Increased Protection to Government Employees

The Supreme Court recently ruled unanimously that government employees who testify about public corruption are protected by the First Amendment. The case, Lane v. Franks,[1] centered on a public employee, Lane, who worked at an Alabama community college where he led the school’s program for at-risk youth.

While working for the community college, Lane discovered a state representative was on the program’s payroll, despite doing no work for the program. Lane terminated the representative’s employment, and subsequently, the representative was indicted by federal authorities on corruption-related charges. Lane testified, under subpoena, at the representative’s trial in 2008. In 2009, Lane was fired from the college. Lane sued the community college president individually and in his official capacity alleging that the official violated his First Amendment protections.

The college president argued that Lane’s sworn testimony was not protected by the First Amendment because it was based on information that he gathered from his role as a state employee, not as a private citizen. The lower courts agreed with the college president, determining that Lane acted in his official capacity when firing the state representative and had acted in the same capacity when testifying at her trial. The Supreme Court disagreed and stated that Lane testified “as a citizen on a matter of public concern.” According to Justice Sotomayor, “Truthful testimony under oath by a public employee outside the scope of his ordinary job duties is speech as a citizen for First Amendment purposes. That is so even when the testimony relates to his public employment or concerns information learned during that employment.”

The ruling means that government employees should feel more protected when stepping forward with whistleblower-type information. Both public and private employers should exercise caution when taking negative actions against an employee who has complained of or filed a charge of discrimination, or participated in some kind of investigation or proceeding, as the action could be considered retaliatory.


[1] No. 13-483 (2014).

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U.S. Supreme Court Upholds D.C. Circuit Decision in Noel Canning

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In a lengthy opinion authored by Justice Stephen Breyer, and drawing heavily on historical practice of Presidents and the Senate, the United States Supreme Court has upheld the decision of the U.S. Court of Appeals for the D.C. Circuit in Noel Canning v. NLRB, concluding that President Obama’s three recess appointments to the National Labor Relations Board in January 2012 (Sharon Block, Richard Griffin, and Terence Flynn) were invalid. The Court upheld the right of the President to make recess appointments both inter- and intra-session, but held that it is the Senate that decides when it is in session by retaining the power to conduct business pursuant to its own rules. The Court also found that a recess of less than ten days “is presumptively too short” to permit the President to make a recess appointment, except in “unusual circumstances”, such as a “national catastrophe”. (The recess here was three days.) The Court also decided that the recess appointment power applies to appointments that first come into existence during a recess and to those that initially occur before a recess but continue to exist during a recess.

As a result of the decision, over 1,000 Board decisions likely are now invalid. According to the National Right to Work Foundation, 999 unpublished decisions and 719 published decisions (totaling 1,718) could be affected. The Chamber of Commerce estimates 1,302 decisions from August 27, 2011 through July 17, 2013 to be suspect.

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Halliburton II: Supreme Court Upholds Basic Presumption

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On June 23, the U.S. Supreme Court issued its long-anticipated decision in Halliburton Co. v. Erica P. John FundInc. (Halliburton II).[1] Chief Justice Roberts delivered the opinion of the Court, in which Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Justice Ginsburg filed a concurring opinion, in which Justices Breyer and Sotomayor joined. Justice Thomas filed an opinion concurring in the judgment, in which Justices Scalia and Alito joined.

The Halliburton II case generated significant publicity because it presented the Supreme Court with the opportunity to reexamine the fraud-on-the-market presumption created in Basic v. Levinson.[2] The Court in Basic held that, in a securities fraud class action, the plaintiff is entitled to a rebuttable presumption of reliance and, therefore, does not have to prove that each investor in the class relied on any alleged material misrepresentation. The foundation for the fraud-on-the market theory is the efficient-market theory, which presumes that, in an efficient market, all material, public information about a company is absorbed by the marketplace and reflected in the price of the security. The efficient-market theory has been under increasing attack in recent years, leading many to believe that the time may have come to overturn Basic.

In Halliburton II, the Supreme Court addressed whether to continue the fraud-on-the-market presumption unchanged, to cease the applicability of the fraud-on-the-market presumption altogether, or to alter the presumption. In the Court’s opinion, the majority declined to overrule or modify Basic’s presumption of classwide reliance, but it did hold that defendants may rebut the presumption at the class certification stage by introducing evidence that the alleged misrepresentation did not impact the market price. The majority determined that Halliburton had not demonstrated the “special justification” necessary to overturn “a long-settled precedent.”[3] The majority also rejected Halliburton’s request that the plaintiffs be required to show a price impact to invoke the presumption because “this proposal would radically alter the required showing for the reliance element.”[4] The majority did hold that defendants can rebut the presumption by showing lack of price impact at the class certification stage because “[t]his restriction makes no sense, and can readily lead to bizarre results.”[5] The majority therefore vacated the U.S. Court of Appeals for the Fifth Circuit’s judgment and remanded for further proceedings.

In a concurring opinion, Justice Ginsburg, joined by Justices Breyer and Sotomayor, noted that, although the decision would “broaden the scope of discovery available at certification,” the increased burden would be on defendants to show the absence of price impact, not on plaintiffs whose burden to raise the presumption of reliance had not changed.[6]

In a separate opinion concurring only in the judgment, Justice Thomas, joined by Justices Scalia and Alito, argued that Basic should be overturned for three reasons. First, the fraud-on-the–market theory has “lost its luster”[7] in light of recent developments in economic theory.[8] Second, the presumption permits plaintiffs to bypass the requirement—as set forth in some of the Court’s most recent decisions on class certification—that plaintiffs affirmatively demonstrate compliance with Rule 23. Third, the Basic presumption of reliance is “largely irrebuttable” because “[a]fter class certification, courts have refused to allow defendants to challenge any plaintiff’s reliance on the integrity of the market price prior to a determination on classwide liability,”[9] therefore effectively eliminating the reliance requirement.

The Supreme Court’s decision has significant implications for securities fraud litigation, particularly at the class certification stage. Although plaintiffs need not prove direct price impact and may instead still raise the presumption of reliance by showing an efficient market and that the information was material and public, defendants may now rebut this presumption before class certification by showing a lack of price impact. We believe that defendants’ ability to rebut the presumption by showing no price impact effectively swallows the rule that plaintiffs need not prove a price impact. This will undoubtedly lead to a battle of the experts at the class certification stage. Although the Court’s decision does not explicitly affect other proceedings, such as a motion to dismiss, the scope of the decision will certainly be tested in the coming months and years.

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[1]. No. 13-317 (U.S. June 23, 2014), available here.

[2]. 485 U.S. 224 (1988).

[3]Halliburton II, No. 13-317, slip op. at 4; see generally id. at 4–16.

[4]Id. at 17.

[5]. Id. at 19.

[6]. Id. at 1 (Ginsburg, J., concurring).

[7]Id. at 7 (Thomas, J., concurring).

[8]Id. at 8–9.

[9]. Id. at 13.

The Supreme Court’s Greenhouse Gas Permitting Decision – What Does It Mean?

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The U.S. Supreme Court today partly upheld and partly rejected the U.S. Environmental Protection Agency’s federal Clean Air Act permitting regulations governing greenhouse gas (GHG) emissions from stationary sources.  The decision is mostly a victory for EPA, and its narrow scope means that it will almost certainly not disrupt, let alone invalidate, EPA’s ongoing Section 111(d) rulemaking to set GHG emission limits for existing power plants.  At the same time, the decision does not necessarily mean that EPA’s 111(d) proposal is free from legal challenge.  That is because the decision does not address 111(d).

Today’s decision concerns the Clean Air Act’s two stationary source permitting programs – the prevention of significant deterioration (PSD) program and the Title V program.  In 2010, EPA announced that it was including GHG emissions within the scope of both programs.  Various states and industry groups challenged that announcement, and today, the Supreme Court partly agreed and partly disagreed with the challengers.

First, five justices (Scalia, Roberts, Kennedy, Alito and Thomas) held that a source’s GHG emissions, standing alone, cannot trigger the obligation to undergo PSD and Title V permitting.  That part of the decision is a loss for EPA.  But the second part of the decision is a victory for the agency.  Seven justices (Scalia, Roberts, Kennedy, Ginsburg, Beyer, Sotomayor and Kagan) held that EPA canrequire sources that are subject to PSD “anyway,” because they emit other types of pollutants in significantly large quantities, to control their GHG emissions.  In sum, GHG emissions cannot trigger the obligation to undergo PSD permitting, but EPA can use the PSD permitting process to impose source-specific GHG emission limits on facilities that trigger the process for other reasons.

The decision does not address EPA’s authority to impose substantive limits on GHG emissions using other statutory provisions such as Clean Air Act Section 111(d).

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Alice v. CLS Bank: Supreme Court Continues to Grope in Dark for Contours of Abstract Idea Exception

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In Alice Corp. v. CLS Bank Int’l (2014), the Supreme Court unanimously affirmed the one-paragraph per curium opinion of the en banc Federal Circuit, which found all claims of U.S. Patent Nos. 5,970,479, 6,912,510, 7,149,720, and 7,725,375 invalid under 35 U.S.C. § 101 for being directed to an abstract idea.

The Court based its affirmance on an application of a two-step process outlined in Mayo Collaborative Services v. Prometheus Labs, 566 U.S. ___ (2012). The first step is the determination of whether the claims are directed to a patent-ineligible concept such as a law of nature, natural phenomenon, or abstract idea. This step implicitly includes the identification of the concept at issue. The second step is to determine if the claims recite “an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.”

The Court avoided providing “the precise contours of the ‘abstract ideas’ category” by relying on the similarity between Alice’s claims for intermediated settlement and Bilski’s claims for hedging. The Court characterized the Bilski claims as “a method of organizing human activity.” Accordingly, while only three justices signed Justice Sotomayor’s concurrence, stating that “any claim that merely describes a method of doing business does not qualify as a ‘process’ under §101,” the unanimous decision does implicate business methods as likely directed to abstract ideas.

At the Federal Circuit, the splintered opinion included a four-judge dissent that argued that the system claims should be patent-eligible even though the method claims were not. The Supreme Court disagreed with this view, finding that if the system claims were treated differently under §101, “an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept” which would “make the determination of patent eligibility depend simply on the draftsman’s art.” To convey patent-eligibility, the claims at issue must be “significantly more than an instruction to apply the abstract idea … using some unspecified, generic computer.”

In my previous post regarding the oral argument before the Supreme Court, I noted that the Court seemed to be looking for reasonable and clear rules regarding the limits of the abstract idea exception to patentable subject matter, but did not get such a rule from any party. Perhaps as a result, this case was decided purely on its similarity to Bilski, and without providing much guidance as to the scope of the exception.

My thanks to Domenico Ippolito for this posting.

© 2014 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

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Supreme Court Decides CTS Corp. v. Waldburger Evaluating Whether CERCLA Precludes State-Law Statutes of Repose

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On June 9, 2014, the Supreme Court decided CTS Corp. v. Waldburger, holding that a North Carolina statute of repose was not preempted by Section 9658 of theComprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

From 1959 until 1985, CTS Corporation manufactured electronics on a piece of property in North Carolina.  CTS sold the property in 1987.  Owners of both the former CTS property and adjacent property filed state-law nuisance claims in 2011, alleging that they had learned from the United States Environmental Protection Agency (USEPA) in 2009 that their groundwater was contaminated.  A district court relied on N. C. Gen. Stat. §1-52(16), a North Carolina statute which bars property damage claims made “more than 10 years from the last act or omission of the defendant giving rise to the cause of action,” to dismiss the claims, finding that CTS’s last act occurred in 1987, when the property was sold.  Relying on CERCLA Section 9658, the Fourth Circuit re-instated the nuisance claims because it concluded that CERCLA pre-empted the North Carolina statute.

The Supreme Court reversed the Fourth Circuit, holding that the North Carolina statute was not pre-empted and that CERCLA Section 9658 was limited to “statutes of limitations.”  While noting that there is common ground between “statutes of limitations,” which create “time limit[s] for suing in a civil case, based on the date when the claim accrued,” and “statutes of repose,” which “put[] an outer limit on the right to bring a civil action,” “each has a distinct purpose and each is targeted at a different actor.”  The Court found that, when Congress passed Section 9658, the language it chose limited the provision to statutes of limitations.  Additionally, the Court found that CERCLA expressed neither any intent to provide “a general cause of action for all harm caused by toxic contamination” nor a clear intent to supersede traditional police powers of the states.

Two points are worth mention:

First, the CTS decision is not the “usual” CERCLA decision.  The decision does not alter the mechanism under which federal or state agencies investigate, characterize, and remediate properties.  Indeed, based on the case history, the groundwater contamination alleged in the CTS litigation was discovered by EPA in 2009, two years before CTS suit was filed.  In 2012, the involved property was added to EPA’s National Priorities List, a designation reserved for sites EPA has identified as being among its priorities.  Similarly, it does not alter the federal causes of action parties may use to recover costs related to their remediation activities.

Second, the CTS decision appears to be based on a straightforward reading of CERCLA.  The Court held that CERCLA does not preclude a state’s choice to have legislative statutes of repose which apply to certain categories of tort cases.  While a few states have these, the majority of states do not.[1]  Each of the federal environmental statutes – to a degree – seeks to shape state action.  There is no indication in CERCLA that it intended to “trump” state ability to form independent tort-related law for any situation related to contamination.  Had it been Congress’s intent to supersede all state statutes of repose related to actions related to contamination, Congress could have done so.  In the Court’s view anyway, the language Congress chose did not do so here.

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[1] States with statutes of repose which were identified in the course of the CTS litigation include Connecticut, see Conn. Gen. Stat. § 52-584; Kansas, see Kan. Stat. § 60-513(b); North Carolinia, see N.C. Gen. Stat. § 1-52(16); and Oregon, see Or. Rev. Stat. § 12.115(1).  Alabama has a 20-year common-law statute of repose.  See, e.g.Abrams v. Ciba Specialty Chems. Corp., 659 F. Supp. 2d 1225) (S.D. Ala. 2009).

Supreme Court Finds that CERCLA Does Not Preempt Statutes of Repose – Comprehensive Environmental Response, Compensation, and Liability Act

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On June 9th, the Supreme Court issued its opinion in CTS Corp. v. Waldburger et al., No.13-339 (June 9, 2014) (slip op.) [link], in which it held that CERCLA section 309, 42 U.S.C. § 9658, does not preempt statutes of repose, reversing the Fourth Circuit.  Section 9658(a) preempts state law statutes of limitation for personal injury and property damage claims related to the release of a hazardous substance.  Justice Kennedy, writing for the majority, reaffirmed the oft-repeated “presumption against preemption” in reasoning that Section 9658 does not preempt state statutes of repose.  Statutes of limitations bar claims after a specified period of time based on when the claim accrued, whereas statutes of repose bar suits brought after a specified time since the defendant acted, regardless of whether the plaintiff has discovered the resulting injury.

CTS Corporation (“CTS”) operated an electronics plant in Asheville, North Carolina from 1959 to 1985.  CTS, which manufactured and disposed of electronics and electronic parts, contaminated its property with chlorinated solvents.  CTS sold the facility in 1987, and portions of the property were sold off.  Owners of those parcels, and adjacent landowners, brought suit against CTS in 2011, alleging that they discovered contamination on their properties in 2009.

The District Court found that N.C. Gen. Stat. § 1-52(16), North Carolina’s statute of repose, barred the suit.  That section prohibits a “cause of action [from] . . . accru[ing] more than 10 years from the last act or omission of the defendant giving rise to the cause of action.”  The Fourth Circuit reversed on the basis of CERCLA preemption, finding that section 9658 was ambiguous because it did not explicitly list “statutes of repose.”

The main issue at oral argument before the Supreme Court was whether the distinction between statutes of repose and statutes of limitation actually existed when Congress enacted Section 9658.  As Justice Scalia said, “. . . I used to consider them when I was in law school and even as late as 1986 [when section 1958 was added by Congress], I would have considered that a statutes of limitations.  Now, you think Congress is smarter.  They know the law better.”  Although other justices seemed to agree—and the distinction had only begun to be made in the 1980s—a 1982 Senate Superfund Study Group Report made that distinction and recommended that the few states that have statutes of repose repeal them.  Despite the overlap between statutes of repose and statutes of limitation, the Court found the distinctions important—statutes of repose are not related to the accrual of any cause of action and  cannot be tolled.  Because the Study Report made the distinction between the two, and because section 9658 fails to mention “statute of repose” and is not written in a way to suggest that it is intended to include both, the Court reversed.

The Court cited, as additional support for its conclusion the “well-established ‘presumptions about the nature of pre-emption.’”  The presumption against preemption counsels courts, when interpreting the text of a preemption clause susceptible of more than one possible reading, to “ordinarily accept the reading that disfavors pre-emption.”   The Fourth Circuit failed to mention this presumption (although the dissent relied on it).

This opinion follows recent Superfund cases in the Supreme Court in two respects.  First, the Supreme Court attempts to apply the “natural reading” of the statutory text rather than to reach out to interpret the statute broadly to effectuate its “remedial purpose.”  Indeed, Justice Kennedy explicitly derides that rationale for interstitial lawmaking.  Second, the Supreme Court attempts to preserve ordinary state law principles to the greatest extent possible.  So, for example, United States v. Bestfoods, 524 U.S. 51 (1998), was very respectful of state corporation law, and so too Waldburger is respectful of state tort law.  In this way, one might consider today’s decision to be fairly unremarkable.

The majority does not even address Justice Ginsburg’s dissent in which she and Justice Breyer worry that personal injuries with long latencies—like cancers—will go uncompensated.  But some of the long latencies arise not from the progress of some disease but of slow migration of a hazardous substance, in a groundwater plume for example.  Indeed, to the extent that many environmental toxic tort claims rest on allegations of property damage or diminution in value, the cancer model may be misplaced.