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Supreme Court Nixes "Amorphous" Federal Circuit Indefiniteness Standard

The U.S. Supreme Court yesterday reversed long-standing Federal Circuit precedent, replacing the test used to determine whether a patent is indefinite with a new reasonable certainty standard (NAUTILUS, INC. v. BIOSIG INSTRUMENTS, INC., No. 13–369 (S. Ct. June 2, 2014).

The new reasonable certainty test raises the bar on the “clarity and precision” with whichpatents must be written. As a consequence, the burden on accused infringers attempting to invalidate patents based on ambiguous language is lowered. This new standard will prove especially helpful in the ongoing battle against patent trolls, who often wield portfolios of ambiguous or overly broad patents in an attempt to extract licensing fees. Tech companies, including Google, Inc. and Amazon.com, Inc., which are frequent targets of patent trolls, urged the Supreme Court to adopt the “reasonable certainty” standard.

The new standard will also require more precision in drafting and prosecuting patent applications. Exactly how precise language will need to be remains to be seen, but the Court explained that the old standard incentivized patent applicants and practitioners to “inject ambiguity” into their claims. The new standard was established, in part, to eliminate this incentive. The Court commented that patent practitioners are in the best position to resolve ambiguity in patent claims. In light of the Supreme Court’s admonition, patent applicants and practitioners seeking broad coverage of their inventions should use language no broader than necessary to adequately cover their inventions.

The Supreme Court’s decision stemmed from a dispute between Biosig Instruments and Nautilus, Inc. Biosig sued Nautilus for infringement of a patented heart monitor for exercise machines, which registered electrical waves to estimate a user’s heart rate. Nautilus convinced the trial court that Biosig’s patent was invalid as indefinite. Applying its “insolubly ambiguous” test, the Federal Circuit found the patent valid. Biosig sought review by the Supreme Court.

Justice Ginsberg delivered the opinion for a unanimous Court. As embodied in the Patent Act, a patent must include “one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant claims as his invention.”

This notice requirement is satisfied, the Court held, where the claims of the patent, read in light of the specification and prosecution history, informs with reasonable certainty those skilled in the art about the scope of the invention. Like any property right, the boundaries of the patent monopoly should be clear. The failure to afford the public clear notice of what is claimed, “thereby appris[ing] the public of what is still open to them,” chills innovation by creating a risk of infringement in “zones of uncertainty.”

The High Court remanded the case with instructions that the Federal Circuit should no longer employ the “insolubly ambiguous” or “amenable to construction” tests of patent claim indefiniteness under 35 USC § 112, ¶ 2. These words can “leave courts and the patent bar at sea without a reliable compass.” While noting that the Supreme Court does not “micromanage the Federal Circuit’s particular word choice” in applying patent-law doctrines, Justice Ginsberg wrote, “we must ensure that the Federal Circuit’s test is at least ‘probative of the essential inquiry.’”

The Federal Circuit test, according to the High Court, “invoked a standard more amorphous than the statutory definiteness requirement allows.” In addition to breeding lower court confusion, the discredited “insolubly ambiguous” standard tolerated “some ambiguous claims but not others….” The Court’s new reasonable certainty standard requires more definite claim language.

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The Supreme Court Decides Bay Mills Case, Leaves Tribal Sovereign Immunity Intact

In its long-awaited decision in Michigan v. Bay Mills Indian Community, the U.S. Supreme Court today re-affirmed its 1998 holding in Kiowa Tribe v. Manufacturing Technologies, Inc. 523 U.S. 751 (1998) that tribal sovereign immunity extends to tribes’ governmental and commercial activities, both on reservation and off. In a 5-4 decision, the Court affirmed the Sixth Circuit’s decision that the Indian Gaming Regulatory Act waiver of tribal sovereign immunity for suits to enjoin gaming on Indian lands in violation of a tribe’s gaming compact with a state did not apply to tribal gaming on non-Indian lands and that the State was barred by the doctrine of sovereign immunity from suing the Tribe directly for damages.

The Court rejected Michigan’s arguments that Kiowa was wrongly decided and that tribes should enjoy no immunity with respect to their commercial, off-reservation activities. The majority opinion, authored by Justice Kagan and joined by Justices Roberts, Kennedy, Breyer and Sotomayor, emphasized the doctrine that the court should not overrule its previous decisions without special justification (stare decisis), pointing out that (1) the Court had explicitly invited Congress to consider limitations on tribal sovereign immunity its Kiowa decision, (2) Congress had, in fact, considered several bills that would have imposed broad limits but had not enacted any of them (“Having held in Kiowa that this issue is up to Congress, we cannot reverse ourselves because some may think its conclusion wrong” Slip. Op. 20), and (3) Michigan had other means of enforcing state law against Bay Mills, including denial of required licenses, suits against employees and officials of the tribe to enjoin violations of state law and criminal prosecution of tribal officials and employees and for violations of state criminal laws.

The Court concluded:

As “domestic dependent nations,” Indian tribes exercise sovereignty subject to the will of the Federal Government. …Sovereignty implies immunity from lawsuits. Subjection means (among much else) that Congress can abrogate that immunity as and to the extent it wishes. If Congress had authorized this suit, Bay Mills would have no valid grounds to object. But Congress has not done so: The abrogation of immunity in IGRA applies to gaming on, but not off, Indian lands. We will not rewrite Congress’s handiwork. Nor will we create a freestanding exception to tribal immunity for all off reservation commercial conduct. This Court has declined that course once before. To choose it now would entail both overthrowing our precedent and usurping Congress’s current policy judgment.

In her concurring opinion, Justice Sotomayor asserted that the historical basis for tribal sovereign immunity is stronger than the dissent recognized and that the result reached by the majority is consistent with comity in view of the fact that State sovereign immunity prevents states from being sued by tribes. Justice Sotomayor also pointed out the special challenges that tribes face with respect to raising revenue and the role that their commercial enterprises play in funding government.

The unmistakable premise of the dissenting opinion, authored by Justice Thomas and joined by Justices Scalia, Ginsburg and Alito, is that sovereign immunity as currently exercised by tribes under the rule of Kiowa has led to widespread, grave and intolerable injustices. These injustices, according to the dissenters, warrant departing from the rule of stare decisis to correct the Court’s “mistake” in the Kiowa decision:

In Kiowa, this Court adopted a rule without a reason: a sweeping immunity from suit untethered from commercial realities and the usual justifications for immunity, premised on the misguided notion that only Congress can place sensible limits on a doctrine we created. The decision was mistaken then, and the Court’s decision to reaffirm it in the face of the unfairness and conflict it has engendered is doubly so.

Dissent, slip Op. 18.

Justice Thomas’ opinion highlights areas, including taxation, tobacco commerce, payday lending and campaign finance, in which tribes have “exploited” immunity to avoid state regulation. In a separate dissenting opinion, Justice Ginsburg expressed her view that the Court had gone too far not only in expanding the scope of tribal sovereign immunity in Kiowabut also in expanding state sovereign immunity from suits by tribes to enforce federal laws in Seminole Tribe v. Florida, 517 U.S. 44 (1996). Justice Ginsburg would impose greater limits on the immunity of both sovereigns.

The Court’s decision leaves unclear two areas of tribal sovereign immunity jurisprudence. First, the Court expressly acknowledged that it has never “specifically addressed” whether immunity “should apply in the ordinary way if a tort victim, or other plaintiff who has not chosen to deal with a tribe, has no alternative way to obtain relief for off-reservation commercial conduct. The argument that such cases would present a ‘special justification’ for abandoning precedent is not before us” Slip. Op. 16, n.8. The Court’s comment will be viewed as an invitation for a plaintiff to make the argument that this situation does indeed present a “special justification” for an exception to immunity.

The Court’s opinion also leaves unaddressed the extent to which tribal sovereign immunity applies to subsidiary entities. In a footnote, the dissent observed, without comment, that “[l]ower courts have held that tribal immunity shields not only Indian tribes themselves, but also entities deemed ‘arms of the tribe.’ … In addition, tribal immunity has been interpreted to cover tribal employees and officials acting within the scope of their employment.”

The consequences of the Court’s decision are likely to be (1) arguments by state lobbyists that Congress should take action to limit tribal immunity for the reasons set forth in the dissenting opinion and (2) suits based on the assertion that there should be an exception to tribal sovereign immunity for a “tort victim or other plaintiff who has not chosen to deal with a tribe” who has “no alternative way to obtain relief for off-reservation commercial conduct.”

Article By:

Brian L. Pierson

Of:

Godfrey & Kahn S.C.

Legal Updates for Government Entities Covering March and April 2014

Arizona Court of Appeals

Immunity under A.R.S. § 12-820.05

Tucson Unified School District v. Gallagher, –P.3d–, 2014 WL949114 (March 11, 2014)

The Gallaghers sued TUSD and a TUSD school employee, Michael Corum, alleging that Corum sexually abused and/or exploited their developmentally challenged daughter at a TUSD school. The Gallaghers claimed that TUSD was vicariously liable for Corum’s conduct and was negligent in hiring and supervising Corum. The Gallaghers alleged that if TUSD had properly investigated Corum’s employment history they would have discovered that a prior employer recommended that he not be employed in a position that involved disabled children. TUSD filed for summary judgment, arguing that it was immune under A.R.S. § 12-820.05 because Corum had committed a felony and it had no actual knowledge of Corum’s purported propensity for such conduct. The trial court denied summary judgment, concluding that TUSD should have known of the circumstances of Corum’s previous conduct and thus the immunity statute did not apply. TUSD appealed.

A.R.S. § 12-820.05(B) provides that a public entity is not liable for losses that arise out of and are directly attributable to a public employee’s act or omission that is determined by a court to be a felony, unless the public entity knew of the public employee’s propensity for that action. The Court of Appeals held that immunity under A.R.S. § 12-820.05(B) applies unless the entity has actual, not constructive, knowledge. The Court based its decision on the plain language of the statute. When the legislature intends a standard of actual or constructive knowledge, it expressly states so. The use of the word “knew” in the immunity statute unambiguously shows the legislature’s intent to require actual knowledge rather than constructive knowledge. A.R.S. § 12-820.05(B) means exactly what it says—that immunity applies unless the public entity actually knew of the “employee’s propensity.”

Ninth Circuit Court of Appeals

Qualified immunity for warrantless entry

Sheehan v. City and County of San Francisco, 743 F.3d 1211 (9th Cir. 2014)

Sheehan suffered from a mental illness and was residing in a group home. Her assigned social worker was concerned about her deteriorating condition, deemed her gravely disabled, and called the police to transport her to a mental health facility for a 72-hour involuntary commitment. When officers Reynolds and Holder arrived at the home, they entered Sheehan’s room, without a warrant, to confirm her mental condition and take her into custody. Sheehan reacted violently, grabbed a knife, threatened to kill the officers, and told them that she did not wish to be detained in a mental health facility. The officers retreated to the hallway for their safety and called for backup. But rather than waiting for backup to arrive, the officers drew their weapons and forced their way back into Sheehan’s room. Sheehan again threatened them with a knife. The officers shot her six times. Sheehan survived and filed a § 1983 action, claiming the officers’ entry into her room violated the Fourth Amendment and they used excessive force. The district court found the officers were entitled to qualified immunity and granted summary judgment. Sheehan appealed.

Generally, a warrantless search or seizure in a person’s home is presumptively unreasonable under the Fourth Amendment. But there are exceptions to the warrant requirement, including the emergency aid exception. The emergency aid exception applies when, under the totality of the circumstances, (1) law enforcement had an objectively reasonable basis for concluding that there was an immediate need to protect others or themselves from serious harm, and (2) the search’s scope and manner were reasonable to meet the need. Under this exception, the Ninth Circuit held that the officers’ first entry into Sheehan’s room did not violate the Fourth Amendment because they had an objectively reasonable basis for concluding that there was an urgent need to protect Sheehan from serious harm. The officers knew she was off of her medication, was not taking care of herself, had threatened her social worker, and was gravely disabled and in need of involuntary hospitalization. Indeed, the court noted that the officers reasonably took a cautious approach to the situation and that “erring on the side of caution is exactly what we expect of conscientious police officers.” And they carried out the search in a reasonable manner. They knocked and announced and used a pass key to gain entry. They did not draw their weapons and had no reason to believe that their entry would trigger a violent confrontation.

The court found that the emergency aid exception also justified the second warrantless entry into Sheehan’s room. The officers continued to have an objectively reasonable basis for concluding that there was an urgent need to protect Sheehan from serious harm. And because the two entries were part of a single, continuous search or seizure, the officers were not required to separately justify the continuing emergency with respect to the second entry. But the court found that fact issues as to whether the entry was conducted in a reasonable manner precluded summary judgment, and noted that Ninth Circuit case law would put any reasonable, competent officer on notice that it is unreasonable to forcibly enter the home of an armed, mentally ill subject who is acting irrationally and threatening anyone who entered, when there was no objective need for immediate entry.

Lack of resources defense/ jury instruction in § 1983 cases

Peralta v. Dillard, 744 F.3d 1076 (9th Cir. 2014)

Peralta, a prison inmate, sued a prison dentist claiming deliberate indifference under the Eighth Amendment. At trial, the court instructed the jury that “whether a dentist or doctor met his duties to Peralta under the Eighth Amendment must be considered in the context of the personnel, financial, and other resources available to him or her or which he or she could reasonably obtain.” Peralta challenged this jury instruction on appeal.

The Ninth Circuit noted that the Supreme Court has not said whether juries and judges may consider a lack of resources as a defense in § 1983 cases. But the Supreme Court has held that prison officials are not deliberately indifferent to a prisoner’s medical needs unless they act wantonly, and whether an official’s conduct can be characterized as wanton depends on the constraints facing him. See Wilson v. Seiter, 501 U.S. 294, 303 (1991). The Court has also held that even if an official knows of a substantial risk, he’s not liable if he responded reasonably. Farmer v. Brennan, 511 U.S. 825, 844 (1994). This framework makes clear that what is reasonable depends on the circumstances that constrain what actions an official can take.

Several constraints impacted and delayed provision of care for Peralta. Security concerns dictate that only one prisoner at a time can be in the exam room, and the prisoner cannot be left alone in the room because dental tools can be used as weapons. During lockdown, only emergency cases can be seen. Dentists can’t accept prisoners’ complaints at face value, as inmates often try to jump the line by exaggerating symptoms.

The Ninth Circuit noted that lack of resources is not a proper defense to a claim for prospective relief. But a claim for damages is different. Damages provide redress for something an official could have done but did not. So with respect to a claim for damages, the nature of the available resources is highly relevant to show the scope of choices that the individual defendant had. A prison medical official who fails to provide needed treatment because he lacks the necessary resources can hardly be said to have intended to punish the inmate. The court held that the challenged jury instruction properly advised the jury to consider the resources the dentist had available in determining whether he was deliberately indifferent.

United States Supreme Court

Scope of Fourth Amendment consent to search

Fernandez v. California, 132 S.Ct. 1126 (2014)

Officers responding to an assault call saw a man running through an alley and into a building. A minute or two later, they heard sounds of screaming and fighting coming from the building. They knocked on the apartment unit from which the screams were coming. A crying woman, Rojas, answered the door. Her face was red, she had a large bump on her nose, and fresh blood was on her shirt and hand. Officers asked her to step outside so they could do a protective sweep of the apartment. The plaintiff, Fernandez, stepped forward and told the officers that they could not enter. Believing that Fernandez had assaulted Rojas, the officer removed him from the apartment and arrested him. About an hour later, a detective returned to the apartment and requested and received oral consent from Rojas to search the premises. Police found evidence incriminating Fernandez, which Fernandez moved to suppress in his criminal case. Fernandez argued that the search was unconstitutional because his denial of consent trumped the later consent Rojas gave. The trial court denied the motion to suppress, the California Court of Appeals affirmed the denial, and the California Supreme Court denied the petition for review. The Supreme Court granted certiorari.

Consent searches are recognized as an exception to the requirement for a search warrant. In 1974, the Supreme Court held that police officers may search jointly occupied premises if one of the occupants consents. See United States v. Matlock, 415 U.S. 164 (1974). Years later, the Court recognized a narrow exception to this rule, holding that the consent of one occupant is insufficient when another occupant is present and objects to the search. Georgia v. Randolph, 547 U.S. 103 (2006). Here, the Court declined to expand the current rule. They rejected Rodriguez’s argument that his objection to the search should have barred a later search since he was absent from the premises only because the police arrested and removed him. The Court held that an occupant who is absent due to a lawful detention or arrest stands in the same shoes as an occupant who is absent for any other reason. The Court also rejected the idea that once an occupant objects to a search, the objection remains effective until withdrawn.

Article By:

Lisa S. Wahlin

Of:

Ryley Carlock & Applewhite, A Professional Corporation

Supreme Court Makes Landmark Rulings on Attorney Fees in Patent Cases

On April 29th, the U.S. Supreme Court made it much easier to recover attorney fees in patent lawsuits, issuing two unanimous landmark decisions overruling Federal Circuit precedent. The statute at issue, 35 U.S.C. §285, allows for the court to award reasonable attorney fees to the prevailing party in “exceptional cases.” Since its decision in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378, 1381 (2005), the Federal Circuit has held that exceptional cases are those cases which are proven by clear and convincing evidence to be both “objectively baseless” and “brought in subjective bad faith.” Also, in the past several years, the Federal Circuit has reviewed the objectively baseless element of its test for exceptional cases de novo without deference to the district courts. Today’s decisions have rejected all these principles. In doing so, the two decisions continue the Supreme Court’s series of cases overturning Federal Circuit principles in patent cases that may be viewed as at odds with principles applied in analogous circumstances in non-patent cases. These decisions also undoubtedly will compel litigants to re-consider their exposure to fee awards and how to approach requests for fee awards.

In Octane Fitness LLC v. Icon Health & Fitness Inc., case number 12-1184, the Court overruled Federal Circuit precedent that “[a] case may be deemed exceptional” under §285 only in two limited circumstances: “when there has been some material inappropriate conduct,” or when the litigation is both “brought in subjective bad faith” and “objectively baseless.” Brooks Furniture Mfg., Inc., v. Dutailier Int’l, Inc., 393 F. 3d 1378, 1381 (2005). The Supreme Court pointed out that, in the five decades following the adoption of §285, both before and after the creation of the Federal Circuit, the courts had applied the statute “in a discretionary manner, assessing various factors to determine whether a given case was sufficiently “exceptional” to warrant a fee award.” It found that since the Brooks Furniture case in 2005, the Federal Circuit “abandoned that holistic, equitable approach in favor of a more rigid and mechanical formulation.” Continuing its tradition of mining copyright cases for analogous principles (and mining patent cases similarly in copyright cases), the Supreme Court pointed to its decision in Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S.Ct. 1023 (1994) and to dictionary definitions of the word “exceptional,” the Supreme Court held that:

an “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances. As in the comparable context of the Copyright Act, “[t]here is no precise rule or formula for making these determinations,’ but instead equitable discretion should be exercised ‘in light of the considerations we have identified.” (quoting Fogerty).

The Supreme Court also rejected the “clear and convincing” evidentiary hurdle established by the Federal Circuit to recovering fees under §285. In doing so, the Court stated:

We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence.…And nothing in § 285 justifies such a high standard of proof. Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one. Indeed, patent-infringement litigation has always been governed by a preponderance of the evidence standard….

In the companion case of Highmark Inc. v. Allcare Health Management Systems Inc., case number 12-1163, the Court also dealt with attorney fees under 35 U.S.C. §285. Again, the Court rejected Federal Circuit precedent and held that decisions to award attorneys’ fees are not reviewed de novo by the Federal Circuit. In doing so, the Court stated “that an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s §285 determination.” Here again, the Supreme Court pointed to principles that other non-patent cases had applied in similar situations:

Traditionally, decisions on “questions of law” are “reviewable de novo,” decisions on “questions of fact” are “reviewable for clear error,” and decisions on “matters of discretion” are “reviewable for abuse of discretion.” Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). For reasons we explain inOctane, the determination whether a case is “exceptional” under § 285 is a matter of discretion. And as in our prior cases involving similar determinations, the exceptional-case determination is to be reviewed only for abuse of discretion…As in Pierce, the text of the statute “emphasizes the fact that the determination is for the district court,” which “suggests some deference to the district court upon appeal,”….As in Pierce, “as a matter of the sound administration of justice,” the district court “is better positioned” to decide whether a case is exceptional…because it lives with the case over a prolonged period of time. And as in Pierce, the question is “multifarious and novel,” not susceptible to “useful generalization” of the sort that de novo review provides, and “likely to profit from the experience that an abuse-of-discretion rule will permit to develop.

Over the past several years, the Supreme Court has overturned Federal Circuit precedent that applied idiosyncratic rules in patent cases when other non-patent cases dealing with similar matters have generally applied other rules. These two cases continue in the same vein, sending a clear message that patent cases are not so exceptional, at least as to common procedural matters, as to warrant special rules.

It is uncertain what impact these decisions will have on the number of patent cases being brought or on the types of patent cases brought. It is also uncertain how many more cases will be the subject of attorney fee awards. Nonetheless, today’s decisions should provide district court judges with confidence that fees awarded in the proper circumstances will be upheld on appeal.

It also remains to be seen what impact these decisions will have on legislation aimed squarely at non-practicing entities (“NPEs”) that is currently making its way through Congress. The Innovation Act, which has been passed by the House, specifically provides for fee shifting through which a court may force the losing party to pay the winning party’s attorney’s fees and/or costs. Such a change would represent a fundamental shift in the U.S. litigation principle that each side ordinarily pays its own fees and costs. Perhaps the Senate, which is debating a reduced version of the Innovation Act, will consider the Supreme Court’s decisions as sufficiently empowering the district courts to address abusive patent-litigation practices and will drop fee shifting from the Innovation Act. Click here for more information about the Innovation Act.

Article By:

Jeff C. Dodd

Gregory L. Porter

Sean S. Wooden

Of:

Andrews Kurth

U.S. Supreme Court Upholds Michigan’s Law Prohibiting Use of Race in College Admissions

On Tuesday, April 22, 2014, the U.S. Supreme Court issued an opinion that upholds a Michigan law prohibiting the use of race as a factor in admissions to public collegesand universities. In Schuette v. BAMN, Case No. 12-682 (argued Oct. 15, 2013) the high court reversed a Sixth Circuit Court of Appeals ruling that overturned the voter-enacted state constitutional amendment referred to as “Proposal 2” or Article I Section 26. Although the court’s 6-2 opinion stated “this case is not about the constitutionality, or the merits, of race-conscious admissions policies in higher education,” the decision is likely to influence other states to adopt similar constitutional bans on affirmative action in state-funded higher education.

Since 2003, Michigan has provided a venue for legal challenges to affirmative actionprograms in education. In that year, the U.S. Supreme Court reviewed the constitutionality of race-based admission policies of both the University of Michigan’s undergraduate college and its graduate law school. The outcomes of these cases were mixed. In Gratz v. Bollinger, 539 U.S. 234 (2003) the court struck down the undergraduate admission policy as a violation of the Equal Protection Clause of the U.S. Constitution’s 14th Amendment. In contrast, the court ruled in Grutter v. Bollinger, 539 U.S. 306 (2003) that the school’s more limited admissions policy for its law school was constitutionally permissible. Following those decisions, a number of states, including Texas, California, Oklahoma, Florida and Washington, have adopted constitutional amendments or other laws that prohibit affirmative action in school admissions and public employment.

In 2006, Michigan voters approved the following amendment to the state constitution by a margin of 58-42 percent: “The University of Michigan, Michigan State University, Wayne State University, and any other public college or university, community college, or school district shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.” In a 8-7 decision issued in November 2012, the 6th Circuit Court of Appeals held this language as unconstitutional because Proposal 2 placed “special burdens on minority interests” by targeting a program that “inures primarily to the benefit of the minority.”

In Justice Kennedy’s opinion, joined by Chief Justice Roberts and Justice Alito, the court considered whether authority existed to overturn a constitutional amendment adopted by a state’s ballot initiative. In order to do so, and based on the appellate court’s strong reliance on Washington v. Seattle School Dist. No. 1, 458 U.S. 457 (1982) the court would be able to overturn a ballot initiative that made it “more difficult for certain racial minorities than for other groups” to “achieve legislation that is in their interest.” This expansive reading, Justice Kennedy reasoned, could not conform to principles of equal protection because courts should not be required to declare which political policies serve the interests of a group defined in racial terms. Justice Kennedy cautioned: “…in a society in which those [racial] lines are becoming more blurred, the attempt to define race-based categories also raises serious questions of its own. Government action that classifies individuals on the basis of race is inherently suspect and carries the danger of perpetuating the very racial divisions the polity seeks to transcend.”

This significant decision upholds states’ rights to enact constitutional amendments by voter ballot initiatives. The broader implications of the Schuette decision are unclear. However, the outcome confirms public universities and government employers have a vested and ongoing interest in the changing shape of affirmative action policies.

Article By:

Of:

Barnes & Thornburg LLP

"Rails to Trails" or "Rails to Trespass": Supreme Court Speaks on the Abandonment of Certain Railroad Rights of Way

Last month, the Supreme Court of the United States (please, there is no such thing as the “United States Supreme Court”) decided a very interesting case about easements. “Easements?”, you ask. Yes, easements. We use them almost every day. Well, every weekend, perhaps. Greenways. Rails to trails. Beach access. You name it. Also, the case is interesting because it holds the Federal Government to a much older (1940-old, which is old) argument it made about easements, and which contradicts the Government’s argument in this recent case.

We’re talking today about Marvin M. Brandt Revocable Trust v. United States, No. 12-1173 (March 10, 2014).

Facts.

In 1875, to encourage settlement of the West and to entice railroads to develop, Congress passed the General Railroad Right-of-Way Act, which granted to “any railroad” a “right of way through the public lands of the United States” to the “extent of 100 feet on each side of the central line” provided the railroad either (1) actually constructed its railroad or (2) filed a proposed map of its rail corridor. From that day forward, after the right of way is obtained, “all such lands over which such right of way shall pass shall be disposed of subject to the right of way”.

In 1908, pursuant to the Act, the Laramie[,] Hahn’s Peak & Pacific Railway Company obtained a 66-mile, 200-foot wide right of way through southern Wyoming. By 1911, the Railway had completed construction of its railroad over the Act-granted right of way.

In 1976, the United States patented an 83-acre parcel to the Brandt family, conveying fee simple title but reserving and excepting certain rights-of-way and easements “to the United States”. For purposes of our discussion today, we’ll focus on the reservation and exception that the land was patented “subject to those rights for railroad purposes as have been granted to the Laramie[,] Hahn’s Peak & Pacific Railway Company.” That right of way stretched for nearly 1/2-mile across the Brandt parcel, covering 10 of the 83 acres. As noted by the Court, “[t]he patent did not specify what would occur if the railroad abandoned this right of way”.

The rail line owning the right of way changed hands a number of times, ending with the Wyoming and Colorado Railroad. In 1996, the Railroad notified the Surface Transportation Board of its intention to abandon the right of way.

The Lawsuit.

In 2006, the United States filed this lawsuit seeking a judicial declaration that the right of way had been abandoned and an order quieting title to the right of way in the United States. All property owners along the right of way settled or defaulted but for the Brandts, which took issue with the attempt to quiet title in the United States.

The Brandts contend that the “stretch of the right of way crossing [the Brandt] family’s land was a mere easement that was extinguished upon abandonment by the railroad, so that, under common law property rules, [the Brandts] enjoyed full title to the land without the burden of the easement”.

The United States “countered that it had all along retained a reversionary interest in the railroad right of way—that is, a future estate that would be restored to the United States if the railroad abandoned or forfeited its interest”. In this sense, the United States is arguing that the 1875 Act created something more than an easement, the latter working as the Brandts indicate. It is this “implied reversionary interest” in the United States that underlies the dispute.

The trial court granted summary judgment to the United States, and the appellate court affirmed. The Supreme Court granted certiorari, and reversed. In an 8-1 decision, the Court determined the Brandts held title to their 83 acres free and clear of the abandoned easement. The other landowners are SOL.

The Majority.

The Majority’s decision sits on two pillars: (1) the common law nature of easements and (2) an earlier argument from the United States’, on which the United States succeeded, that supports the Brandts’ position and contradicts the United States’ position in this lawsuit.

First, the common law nature of easements. Citing myriad secondary sources, the Court notes that an easement is a “nonpossessory right to enter and use land in the possession of another”, which “disappears” if the beneficiary “abandons” at which point “the landowner resumes his full and unencumbered interest in the land”. Thus, the railroad’s decision to abandon and ruling that it had abandoned “resume[d]” in the Brandts their patented interest in the property.

Second, the United States’ inconsistency. In what appears to be a point of order first raised before the Supreme Court — there is no mention of this at either the trial court or the appellate court level — the Court notes that the United States argued successfully in 1940, adopted by the Court “in full”, that the 1875 Act “clearly grants only an easement, and not a fee”. See Great Northern Railway Co. v. United States, 315 U.S. 262 (1942). Thus, the United States cannot now argue that the 1875 Act creates something more than an easement, with an implied reversionary interest in the United States after abandonment. Of course, if you’re the United States, there is likely nary an argument you haven’t made before.

The Dissent.

The dissent takes the position that railroad rights of way have always been treated differently than ordinary easements, and rightfully so, as sui generis property rights not governed by the common law regime. In the context of railroad rights of way, the dissent points out, “traditional property terms like ‘fee’ and ‘easement’ do not neatly track common-law definitions” as the rights of way have characteristics of both easements and fee. The dissent insists that precedent, including the decision in Great Northern Railway, is clear that railroad rights of way were granted by the 1875 Act “with an implied possibility of reverter in the United States”.

And then the dissent gets real, which is our jam: “By changing course today [from prior precedent regarding railroad rights of way and implied reversionary interests in the United States], the Court undermines the legality of thousands of miles of former rights of way that the public now enjoys as means of transportation and recreation.” Yep, those trails, which had been rails, could likely fail.

rails to trails
“Trespass your way around Town by bike, jog, or stroll.”

Article By:

Michael C. Thelen

Of:

Womble Carlyle Sandridge & Rice, PLLC

Supreme Court Inks Uniform Standing Test for Lanham Act False Advertising Claims

Key Takeaways

The US Supreme Court created a uniform test for standing for false advertising claims under Section 43(a) of the Lanham Act, resolving a three-way circuit split.
The new standing test requires the plaintiff to allege and prove that it suffered an injury to a commercial interest in sales or business reputation, and that such injury was proximately caused by the defendant’s alleged misrepresentations.
The Court closed the courthouse doors to consumer class action suits under Section 43(a), pointing to the commercial interest requirement.
The decision may prompt speculation regarding uncertainty as to standing for other claims under Section 43(a), including claims for infringement of unregistered trademarks.

Discussion of the Case

In a decision issued March 25, 2014, Lexmark International, Inc. v. Static Control Components, Inc., the US Supreme Court rejected three conflicting tests for standing for false advertising claims under Section 43(a) of the Lanham Act, creating a new test in the process. Specifically, plaintiffs must now “plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.”

Plaintiff Lexmark International, Inc. (Lexmark) sells laser printers and corresponding ink cartridges. The ink cartridges contain a microchip that deactivates them after they run out of ink, which is intended to stop “remanufacturers” from refurbishing and selling the ink cartridges in competition with Lexmark. Defendant Static Control Components, Inc. (Static Control), while not a direct competitor of Lexmark, sells component parts to remanufacturers, including a replacement microchip that allows the remanufacturers to once again refurbish and sell ink cartridges in competition with Lexmark. In response, Lexmark sent letters to the remanufacturers, advising that it was illegal to sell the refurbished ink cartridges and, in particular, that it was illegal to use Static Control’s products to refurbish the ink cartridges.

Lexmark sued Static Control for copyright infringement based on its creation and sale of the microchips. Static Control counterclaimed for false advertising based on, among other things, the letters to the remanufacturers. The US District Court for the Eastern District of Kentucky dismissed Static Control’s counterclaim for lack of “prudential standing,” and the US Court of Appeals for the Sixth Circuit reversed.

The Supreme Court granted certiorari and ultimately held that Static Control satisfied the Court’s new test for standing under Section 43(a) of the Lanham Act. In so holding, the Court swept aside what it called the “misleading” concept of “prudential standing,” which has been applied by courts as an additional hurdle to alleging standing beyond the broad “case or controversy” requirement (i.e., an injury in fact that is fairly traceable to the conduct complained of) of Article III of the US Constitution. The Court held that standing simply flows from traditional statutory interpretation principles. In particular, courts need only look to the at-issue statute to determine (1) whether the plaintiff’s alleged injury falls within the “zone of interest” protected by the statute, and if so, (2) whether such injury was proximately caused by the defendant’s alleged misrepresentations.

The Court’s new standing analysis falls somewhere in the middle of the three rejected tests: one, which conferred standing only on direct competitors of the defendant; the second, which used a multifactor analysis borrowed from antitrust law; and the third, which conferred standing on any plaintiff that demonstrated a “reasonable interest to be protected against” and a “reasonable basis for believing” that such interest was likely to be harmed.

Turning to the interpretation of the “zone of interest” protected by the Lanham Act, the Court looked to the statute’s clear statement of intent in Section 45 regarding protection against “unfair competition.” Citing to a law review article from 1929, the Court found that unfair competition “was generally understood to be concerned with injuries to business reputation and present and future sales.” Thus, the Court concluded that the “zone of interest” of Section 43(a) was limited to injuries to a commercial interest in reputation or sales. The Court then slammed the courthouse doors on consumer class actions under Section 43(a), pointing out that this “zone of interest” excluded a suit based on a “consumer who is hoodwinked into purchasing a disappointing product.”

On the facts at hand, the Court held that Static Control had sufficiently alleged lost sales and damage to its business reputation, easily satisfying the “zone of interest” requirement. Further, the Court found that Static Control’s allegations sufficiently pled that those injuries were proximately caused by Lexmark’s representations that Static Control’s business was illegal. Accordingly, the Court held that Static Control had standing and was thus “entitled to a chance to prove its case.”

While this decision provides some welcome certainty for false advertising litigants, ending the three-way circuit split regarding Section 43(a) false advertising standing, it also opens the door to speculation regarding standing for other “unfair competition” claims under Section 43(a) (e.g., infringement of unregistered trademarks). Specifically, the Court’s holding and analysis were not expressly limited to Section 43(a)(1)(b), which relates to false advertising, but instead apply to all of Section 43(a). It is thus unclear whether, for example, some increased level of “proximate harm” will be required for trademark claims under Section 43(a). Then again, the Court’s formulation of what constitutes proximate harm under Section 43(a)—when “deception of consumers causes them to withhold trade from the plaintiff”—seems to fit nicely with the “likelihood of consumer confusion” standard applied in trademark cases.

Article By:

Roger P. Furey

Doron S. Goldstein

Michael R. Justus

Of:

Katten Muchin Rosenman LLP

U.S. Supreme Court Finds Aggregate Limits on Federal Campaign Contribution are Unconstitutional

On April 2, 2014, the United States Supreme Court held in a 5-4 decision that aggregate contribution limits, those limits placed on an individual’s overall direct contributions during a two-year election cycle, were unconstitutional as a violation of the First Amendment. The case, McCutcheon v. Federal Election Commission, No. 12-536 (U.S. April 2, 2014), is the latest case in which the Supreme Court has loosened federal regulation of campaign contributions.

In a fractured decision, Chief Justice John Roberts authored a plurality opinion that struck down the aggregate limit as a “mismatch” between the government’s goal of curbing corruption and its chosen means of imposing an aggregate limit. Although the government has a valid interest in limiting quid pro quo corruption between contributors and elected officials, the Court explained, an aggregate limit imposed across all candidates does not limit the risk of corruption enough to justify the way it significantly limits the right to support candidates in an election. In the face of core First Amendment guarantees, the aggregate limit could not survive because it was not “closely drawn to avoid unnecessary abridgment of associational freedoms.” Slip opinion at 30 (citation omitted).

The Chief Justice was joined by three of his colleagues: Justices Antonin Scalia, Anthony Kennedy, and Samuel Alito. Justice Clarence Thomas wrote separately to say that he would both strike down aggregate limits and overturn key Supreme Court precedent sanctioning a wide array of campaign finance restrictions.

The Dissent

Writing for the four Justices in dissent, Justice Stephen Breyer argued that aggregate campaign contribution limits had been previously held to be constitutional and that the reversal of existing precedent will come at a grave cost to the U.S. political system. In his view, the decision of the plurality “undermines, perhaps devastates, what remains of campaign finance reform.” Slip opinion at 30 (Breyer, J., dissenting). Justice Breyer was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan.

Unchanged Rules

Prior to today’s decision in McCutcheon, campaign contributions were subject to two key limitations. The first limit, which remains intact, is the base limit on individual contributions to a single campaign, party committee, or political action committee. That limit remains unchanged, thus there is still a limit of $2,600 that an individual may contribute to a candidate for each election in the two year election cycle. As a result, one may contribute $2,600 for a primary election, $2,600 for a general election, and an additional $2,600 if there is a runoff election. Limits on contributions to other committees may be seen on the below chart.

In addition, the decision has no impact on the operation of a Super PAC, otherwise known as an “independent expenditure-only committee.” Nor does the decision permit corporations to make contributions to federal candidate committees.

New Rule

The limit that was struck down today restricted the overall amount individuals can contribute to election campaigns during a given two-year election cycle. Those aggregate limits were most recently set at $48,600 for federal candidates and $74,600 for other political committees, including national and state party committees, for an overall limit of $123,200 per two-year cycle. As such, prior to this decision a person could give the maximum base contribution of $5,200, for both a primary and a general election, to a maximum of nine federal candidates, whereas now a person can contribute to all federal candidates if she so desires. Similarly, an individual may now contribute to as many PACs as desired, including state and federal committees, such as the Democratic National Committee and the Republican National Committee, as long as each contribution is within the base limit currently set at $32,400 for the national party committees.

In viewing the below chart from the Federal Election Commission, the box in the upper right corner, under Special Limits, has been eliminated. All the other listed limits continue to be the federal legal limits.

Kedar Bhatia contributed to this article.

Article By:

Laurence A. Levy

Of:

Bracewell & Giuliani LLP

U.S. Supreme Court Clarifies That Severance Pay is Taxable—in Most Cases

On Tuesday, March 25, 2014, the U.S. Supreme Court, in an 8-0 decision, ruled that severance payments made to employees who are involuntarily terminated are taxable wages under the Federal Insurance Contributions Act (FICA). Quality Stores, Inc., et al., 12-1408. The Court reversed the Sixth Circuit Court of Appeals ruling in favor of Quality Stores, which was seeking a $1 million tax refund based on its argument that severance payments were not covered by FICA and were excluded from taxation based on the Internal Revenue Code. The Court’s ruling resolved a split between the Sixth Circuit and the Federal Circuit, and ended a legal battle with more than $1 billion at stake in potential tax refunds to employers involved in 11 separate cases with more than 2,400 refund claims.

Quality argued that its severance payments to terminated employees were actually supplemental unemployment compensation benefits (SUB), which are not considered “wages” under the Internal Revenue Code. According to the company, “a SUB payment is a type of payment that—although made by an employer to [its] former employee—nonetheless does not meet the statutory definition of ‘wages’ because it is not remuneration for services.” The Court noted that the severance payments were made only to employees and were based on employment-driven criteria including the position held, the employee’s length of service with the company and salary at the time of termination. Relying on the “broad definition of wages under FICA,” the Court ruled that severance payments to employees who are terminated involuntarily are taxable under FICA.

However, in its decision the Court noted IRS revenue rulings that severance payments tied to the receipt of unemployment compensation benefits “are exempt not only from income tax withholding but also FICA taxation.” Thus, employers appear to continue to be able to make severance payments not taxable through a carefully crafted structure linking the severance payments to the employee’s receipt of unemployment compensation benefits.

Article By:

Mark D. Nelson

Alejandra Lara

Of:

Drinker Biddle & Reath LLP

Supreme Court Limits Stipulations to Circumvent CAFA (Class Action Fairness Act)

The U.S. Supreme Court decided in State Fire Insurance Co. v. Knowles that a class representative plaintiff cannot use a precertification stipulation to evade the federal jurisdictional amount of CAFA. 28 U.S.C. 1332 (d)(2) &(6). In Knowles, plaintiff sued State Fire Insurance Co. but stipulated precertification that damages would not exceed $5 million dollars, the threshold limit to invoke CAFA jurisdiction. State Fire removed the case from Arkansas state court but the Federal District Court remanded it to the state court concluding that the amount in controversy fell below the CAFA threshold in light of plaintiff’s stipulation. The Supreme Court found that the stipulation could tie plaintiff’s hands because stipulations are binding on the party that makes them. However, such a stipulation would not be binding at this stage of the litigation because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. The Court therefore, vacated and remanded the case for further proceedings.

A good practice pointer learned from this case is that defendant’s should be mindful of the advantages of the CAFA and invoke federal court jurisdiction where possible. Also, a pretrial stipulation by the class representative does not prevent using CAFA if the other jurisdictional requirements for CAFA are met.

Article by:

Casey O. Housley

Of:

Armstrong Teasdale

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