Tag: US Supreme Court

US District Court Sets Aside the FTC’s Noncompete Ban on a Nationwide Basis

On August 20, the US District Court for the Northern District of Texas held that the Federal Trade Commission’s (FTC) final rule banning noncompetes is unlawful and “set aside” the rule. “The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

The district court’s decision has a nationwide effect. The FTC is very likely to appeal to the Fifth Circuit. Meanwhile, employers need not concern themselves for now with the rule’s notice obligations, and the FTC’s purported nationwide bar on noncompetes is ineffective. Employers do, however, need to remain mindful of the broader trend of increasing hostility to employee noncompetes.

The Court’s Decision

On April 23, the FTC voted 3-2 to publish a final rule with sweeping effects, purporting to bar prospectively and invalidate retroactively most employee noncompete agreements. The court’s decision addressed cross-motions for summary judgment on the propriety of the FTC’s rule. The court denied the FTC’s motion and granted the plaintiffs’ motion for two reasons.

First, the court held that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g) of the FTC Act. In reaching its holding, the court considered the statute’s plain language, Section 6(g)’s structure and location within the FTC Act, the absence of any penalty provisions for violations of rules promulgated under Section 6(g), and the history of the FTC Act and subsequent amendments. Because the FTC lacked substantive rulemaking authority with respect to unfair methods of competition, and hence authority to issue the final noncompete rule, the court did not consider additional arguments regarding the scope of the FTC’s statutory rulemaking authority. Notably, the court did not consider whether the final rule could overcome the major questions doctrine.

Second, the court held that the FTC’s final noncompete rule was arbitrary and capricious under the Administrative Procedure Act (APA) because it was “unreasonably overbroad without a reasonable explanation” and failed to establish “‘a rational connection between the facts found and the choice made.’” The court heavily discounted studies that the FTC had relied upon that purported to measure the impact of statewide noncompete bans because no state had ever enacted a ban as broad as the FTC’s ban: “[t]he FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations — completely inapposite to the Rule’s imposition of a categorical ban.” “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” The court further held that the FTC failed to sufficiently address alternatives to issuing the rule.

In terms of a remedy, the court “set aside” the FTC’s final noncompete rule. The “set aside” language is drawn verbatim from the APA. The court noted that the FTC’s argument that any relief should be limited to the named plaintiffs in the case was unsupported by the APA. Instead, the court noted that its decision has a nationwide effect, is not limited to the parties in the case, and affects all persons in all judicial districts equally.

Further Litigation

In addition to a likely FTC appeal to the Fifth Circuit, two other cases are pending that likewise challenge the FTC’s final noncompete rule. First, in ATS Tree Services v. FTC, pending in the Eastern District of Pennsylvania, the district court previously denied the plaintiff’s motion for a preliminary injunction. Second, in Properties of the Villages, Inc. v. FTC, pending in the Middle District of Florida, the court enjoined the FTC from enforcing the rule against the named plaintiffs. A final judgment in one of these cases that differs from the result in the Northern District of Texas could eventually reach the courts of appeals and potentially lead to a circuit split to be resolved by the US Supreme Court.

Takeaways for Employers

For now, the FTC’s noncompete rule has been set aside on a nationwide basis, and employers need not comply with the rule’s notice obligations. Noncompetes remain enforceable to the same extent they were before the FTC promulgated its final rule. Depending on how further litigation evolves, the rule could be revived, a temporary split in authority could arise leading to confusion where the rule is enforceable in certain jurisdictions but not in others, or the rule will remain set aside.

An important part of the court’s decision is its rejection of the FTC’s factual findings, which were made in support of the rule, as poorly reasoned and poorly supported. As we discussed in our prior client alerts, we anticipate that employees may cite the FTC’s findings to support challenges to enforceability under state law. The court’s analysis of the FTC’s factual findings may substantially undermine the persuasive authority of the FTC’s findings.

Employers should anticipate that noncompete enforcements in the coming years will remain uncertain as courts, legislatures, and government agencies continue to erode the legal and policy justifications for employee noncompetes. This counsels in favor of a “belt and suspenders” approach for employers to protect their legitimate business interests rather than relying solely on noncompetes.

© 2024 ArentFox Schiff LLP
For more on the FTC Noncompete Ban, visit the NLR Labor Employment section

Supreme Court Ruling on Affirmative Action and Impact on Companies’ DEI Programs

In June 2023, the US Supreme Court voted 6-3 in a decision that significantly changed the way colleges and universities used affirmative action in their admissions. The targets of the lawsuit were Harvard University and University of North Carolina for alleged racial discrimination in admissions.

The Ruling 

The Court ruled that race conscious college admission policies aimed at maintaining racially diverse student bodies violated the Equal Protection Clause of the Fourteenth Amendment. The court, though ruling out admissions solely based on race, did state, “Nothing in the opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life.” It should be noted that court did not impose the same ruling on military academies because of their “distinct interest” in the benefits of a diverse officer corp. Though the ruling has caused an uproar in both academic and business communities, we need to remember the ruling does not significantly impact effect corporate America, yet.

Race Based Employment 

The affirmative action ruling only applies to colleges and universities admissions processes. Employers are subject to Title VII of the Civil Rights Act of 1964, which is a federal law that prohibits employment discrimination based on certain factors which include race, color, religion sex (including pregnancy, sexual orientation, and gender identity) and national origin. Further, Title VII applies to all aspects of employment, including, but not limited to recruiting, hiring, promoting training and discharge. Several states, like Massachusetts, have their own version of Title VII to protect both employers and employees. Despite these protections, employers are still cautious with implementing and maintaining diversity equity and inclusion (DEI) programs. This is probably true because most companies do not see the difference between the two. Though they are similar, Title VII protects the employer and employee, while DEI programs aim to enhance the workplace experience and to some extent maximize profits. Plus, most DEI programs go beyond race based concerns and tend to embrace various other aspects of people’s lives that may be subject to bias.

Attack on DEI 

Since the ruling by the Supreme Court, several state attorney generals sent letters to Fortune 500 companies stating that race-based preferences “whether under the label of diversity, equity and inclusion or otherwise” may violate federal and state antidiscrimination laws. In addition, corporations like Amazon and Comcast have had their DEI practices challenged. Several states like Florida have proposed and passed anti-DEI legislation banning certain DEI practices in state agencies. All this fervor has created the concern that the “right case” can outright destroy DEI practices and programs. Most recently, which seems like an act out of an abundance of caution, the well-known longstanding Society for Human Resources Management (SHRM) changed their focus from Inclusion, Equity and Diversity (IE&D) to Inclusion and Diversity (I&D). The concern relating to the future of DEI is palatable.

Safety Net for DEI Programs 

The DEI movement is far from defeated, we must remember DEI and Affirmative Action are not the same. DEI programs, though want to ensure that various races feel accepted in the workplace, should focus on anti-bias, inclusion of all employees from various backgrounds, allyship and the appreciation of everyone’s professional and personal life experiences. You can call your program whatever you want, but it is really the approach used by employers that will survive future legal scrutiny.

©2024 CMBG3 Law, LLC. All rights reserved.
For more on Affirmative Action, visit the NLR Civil Rights section

Broad Majority Decisions in Terrorist Torture and Abortion Law Cases Resolve Important State Secrets and Intervention Procedural Issues: SCOTUS Today

The Court has decided two important cases today, United States v. Zubaydah, upholding the government’s assertion of the state secrets privilege and rejecting the al Qaeda terrorist leader’s discovery request for information concerning his torture by the CIA, and Cameron v. EMW Women’s Surgical Center, P.S.C., allowing the intervention of the Kentucky attorney general to assume the defense of the state’s abortion law after the official who had been defending the law decided not to seek further review. Both cases are, at root, about significant issues of public interest and policy—the torture of terrorists and restrictive abortion policies—but neither opinion resolves any such question. Indeed, the lessons learned from each of these cases are essentially procedural, and though the outcomes are determined by significant margins, the alliances of Justices on the multiple opinions published are also instructive.

Zubaydah has been among the most closely watched cases on the Court’s docket. Full disclosure: I am a board member of the Center for Ethics and the Rule of Law at the University of Pennsylvania, which has advocated for the closing of the Guantanamo Bay Naval Base in Cuba, where Zubaydah is detained, and for the rejection of privilege claims as to non-classified information concerning torture. Though I am not surprised by the outcome in the case, it is contrary to what many human rights organizations have been advocating. The admixtures of Justices also provide interesting insights as to how they approach matters of privilege and national security.

In what likely will be one of the last majority opinions written by retiring Justice Stephen Breyer, and subject to various concurrences by Justices Thomas, Kagan, Kavanaugh, and Barrett, the Court reversed the Ninth Circuit and upheld the government’s assertion of state secrets privilege to deny Zubaydah’s attempt to subpoena two CIA contractors from whom he sought to obtain information for use in litigation in Poland concerning his torture at an alleged “black site” in that country. The state secrets privilege allows the government to bar the disclosure of information that, were it revealed, would harm national security. United States v. Reynolds, 345 U. S. 1, 6–7 (1953). While the Ninth Circuit had accepted much of the government’s claim, it concluded that the privilege did not cover information about the location of the detention site, which the court believed had already been publicly disclosed. Indeed, it is clear from the record in the case that there has been substantial public discussion of such a detention site in Poland. However, although the government has concluded that the “enhanced interrogation” to which Zubaydah had been subjected constituted torture, the fact of its location in Poland has never been formally confirmed by the United States. The state secrets privilege permits the government to prevent disclosure of information when that disclosure would harm national security interests, such as “the risk of revealing covert operatives, organizational structure and functions, and intelligence-gathering sources, methods, and capabilities.” Here, Justice Breyer, in a textbook case displaying the essential role that he has played on the Court in pragmatically fashioning majorities to form consensus opinions in controversial cases, accepted the view that verifying the existence, or non-existence, of a CIA black site in Poland, falls within the state secrets privilege because confirmation or denial of the site’s existence and location, even if such information has already been made public through unofficial sources, would harm relations among foreign intelligence services vital to U.S. interests. The majority also noted that the locational information is not essential to the case that Zubaydah is attempting to make, but it also rejected the remand to consider issues of Zubaydah’s treatment that Justices Kagan, concurring, and Justice Gorsuch (interestingly, joined by Justice Sotomayor), dissenting, would have allowed. In a case where there is virtually no disagreement among the Justices as to what the law is, the decision comes down to a procedural formulation that Justice Breyer loosely compares to applying exemptions under the Freedom of Information Act. In any event, the majority held that, as an objective matter, the government’s assertions of privilege and national security risk satisfied its burden of responding to the demand for information.

Notwithstanding the great public interest that surrounds the debate and litigation concerning the efforts of various state legislatures to restrict abortion and to obtain the reversal or narrowing of Roe v. Wade, the Court’s 8-1 majority (only Justice Sotomayor dissented) held only that the Court would not adopt an arbitrary claims-processing rule barring a non-party intervener from taking over an appeal, especially under the conditions presented here. Having first concluded that neither a jurisdictional requirement nor a mandatory claims-processing rule barred consideration of the attorney general’s motion, the Court concluded that no statute or rule restricts the jurisdiction of a court of appeals or provides a general standard to apply in deciding whether intervention on appeal should be allowed. The one passing reference to intervention made in the Federal Rules of Appellate Procedure only concerns the review of agency action. Accordingly, with “respondents cit[ing] no provision that deprives a court of appeals of jurisdiction in the way they suggest, and no such supporting language can be found in 28 U. S. C. §2107, Federal Rules of Appellate Procedure 3 and 4, or any other provision of law. . . [the] Court refuses to adopt what would essentially be a categorical claims-processing rule barring consideration of the attorney general’s motion. When a non-party enters into an agreement to be bound by a judgment in accordance with the agreement’s terms, it is hard to see why the non-party should be precluded from seeking intervention on appeal if the agreement preserves that opportunity. Here, the attorney general reserved ‘all rights, claims, and defenses . . . in any appeals arising out of this action.’ That easily covers the right to seek rehearing en banc and the right to file a petition for a writ of certiorari.”

Justice Sotomayor’s dissent, like the cheese, stands alone. She argues that every case should have a certain end point, and one should be applied here. One wonders if she would entertain a similar opinion in a case like this but where the plaintiffs are appealing. In any event, all of the other Justices are unified by the absence of any textual limitation on their jurisdiction to entertain a motion to intervene on appeal and the reasonable justification made for it by the state attorney general. Where Justice Alito found a constitutional basis for this conclusion and Justice Kagan would only have relied upon statutory interpretation, the vast majority of the Court agreed on the procedural regime adopted irrespective of the fact that there likely would be considerable disagreement about the constitutionality of the statute at issue in the underlying litigation.

©2022 Epstein Becker & Green, P.C. All rights reserved.
For more articles about Supreme Court cases, visit the NLR Litigation section.

Health Care Company Asks U.S. Supreme Court to Find False Claims Act Unconstitutional

If one appellant has its way, the False Claims Act (FCA) would be gutted by way of its qui tam provisions struck down as unconstitutional by the United States Supreme Court. That is the position taken by Intermountain Health Care, Inc. (Intermountain), which found itself on the wrong end of an FCA suit brought by a physician who alleges that one of his colleagues submitted improper requests for reimbursement for unnecessary medical procedures.

The teeth behind the False Claims Act are its qui tam provisions, which enable private individuals (known as “relators”) to pursue FCA actions on a “qui tam” basis. “Qui tam” is shorthand for the Latin phrase, “he who sues on behalf of the King as well as for himself.” These provisions provide a financial incentive to report noncompliance, as successful qui tamplaintiffs are statutorily entitled to share up to 30 percent of the government’s recovery in an FCA case.

Procedural Summary

The underlying details in the matter — Intermountain Health Care, Inc., et al. v. U.S. ex rel. Polukoff et al., Supreme Court petition no. 18-911 — allege that a doctor, Sherman Sorensen, conspired with two hospitals (including Intermountain) to perform unnecessary heart surgeries and receive federal reimbursements by fraudulently certifying that the surgeries were medically necessary. After the district court dismissed the complaint for failure to meet pleading requirements, the relator appealed to the Tenth Circuit. There, Intermountain and its co-defendants raised for the first time that the claims against them could not proceed on the grounds that the qui tam provisions of the FCA violate Article II of the Constitution, among other arguments. The Tenth Circuit did not reach the merits of this argument, finding that defendants had forfeited those challenges by failing to raise them at the district court level. The Tenth Circuit reversed the district court’s order and remanded, holding that the relator’s amended complaint did satisfy pleading requirements.

Intermountain, in response, petitioned the Supreme Court for a writ of certiorari, raising two questions: (1) whether the False Claims Act’s qui tam provisions violate the Appointments Clause of Article II of the Constitution, and (2) whether a court may create an exception to Federal Rule of Civil Procedure 9(b)’s particularity requirement when the plaintiff claims that only the defendant possesses the information needed to satisfy that requirement. This post addresses the constitutional arguments only, i.e., the first question.

Merits of the Arguments Raised: Constitutional Challenge

The Appointments Clause provides that the President “shall nominate, and by and with the advice and consent of the Senate, shall appoint…officers of the United States… [and] that Congress may by Law vest the appointment of…inferior officers…in the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl. 2. Intermountain asserts that the FCA qui tam provisions violate this Clause because (1) relators are officers (not appointed pursuant to the appointments clause and thus in violation of it), or, alternatively because (2) the FCA impermissibly vests a core function of officers in non-officer relators. According to Intermountain, qui tam relators constitute “officers” or “inferior officers” of the United States when they prosecute FCA actions on behalf of the United States, which is unconstitutional without proper appointment.

In support, Intermountain points to qui tam relators’ prosecutorial duties, that they receive compensation from the government, and that they exercise significant authority under federal law. Accordingly, Intermountain claims, relators are in fact “officers” or “inferior officers.” Intermountain posits alternatively that, even if relators are not officers, the FCA still violates the Appointments Clause because it vests the functions of core officers in un-appointed relators.

The relator, Gerald Polukoff, and the Government (which intervened solely on this constitutional issue) opposed, arguing: (1) there is no circuit split on the constitutional argument raised, (2) every circuit that has considered the argument has rejected it, (3) this case is a poor vehicle to consider the issue raised because Intermountain failed to raise it at the district court level, and the Tenth Circuit did not consider it on the merits, and (4) qui tam relators are merely private plaintiffs pursuing a cause of action under federal law and do not constitute “officers.”

The Government’s Opposition details this last point, offering that Intermountain’s position is inconsistent with the Supreme Court’s analysis in Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 772, 120 S. Ct. 1858, 1862, 146 L. Ed. 2d 836 (2000) (discussing relators’ actions as a “private stake” in a “private suit”). The Government also asserts that qui tam relators neither evince the “practical indicia” of federal officers (i.e., “the ideas of tenure, duration, emolument, and duties”) nor are they akin to “independent counsel,” which the Supreme Court considered to be “inferior officers” in Morrison v. Olson, 487 U.S. 654 (1988). The Government posited that a relator “does not occupy a continuing position established by law.” Lastly, the Government responds to Intermountain’s claim that the FCA impermissibly vests “a core officer function” to un-appointed relators on the grounds that relators bring only private suits and do not administer or enforce public law.

On balance, Intermountain faces a steep climb for the Supreme Court to accept review of its constitutional argument. But, if the Supreme Court accepts review, government attorneys, the defense bar, in-house counsel, and relators’ counsel alike have a lot at stake, and all will be watching closely.

 

© 2019 Foley & Lardner LLP
Read more US Supreme Court news on the National Law Review’s Litigation page.

US Supreme Court Agrees to Decide Whether Title VII Prohibits LGBT Discrimination

After considering the petitions at eleven separate private conferences, on April 22, 2019, the U.S. Supreme Court granted certiorari in three cases involving the extent of protection provided by Title VII of the Civil Rights Act of 1964 – if any – against employment-based discrimination on the basis of sexual orientation and gender identity.  As we previously reported here, this issue has been watched closely by the nation, with multiple federal courts, government agencies, and employers reaching differing conclusions.  The Court consolidated the two sexual orientation cases, Altitude Express v. Zarda and Bostock v. Clayton County, Georgia, and allocated a total of one hour for oral argument for both cases.  In the gender identity case, R.G. & G.R. Harris Funeral Homes Inc. v. Equal Employment Opportunity Commission et al., the Court limited its consideration to only the question of whether Title VII prohibits discrimination against transgender people based on (1) their status as transgender or (2) sex stereotyping under Price Waterhouse v. Hopkins, 490 U. S. 228 (1989).

The Court will hear argument in these cases next term, which means that it’s possible that a decision may not issue until as late as June 2020.  We will continue to update you with ongoing developments in these cases.

© Copyright 2019 Squire Patton Boggs (US) LLP

This post was written by Melissa Legault of Squire Patton Boggs (US) LLP.

Read more on the US Supreme Court on the National Law Review’s Litigation Type of law Page.

U.S. Supreme Court to Consider Whether Courts Must Defer to an Agency’s Interpretation of its Regulations – a Judicial Policy That Recently Resulted in Dismissal of Litigation Over ‘No Sugar Added’ Claims on 100% Juices

The U.S. Supreme Court heard arguments on March 27, 2019 about whether to overturn the principle of judicial review of federal agency actions that requires a federal court to yield to an agency’s interpretation of an ambiguous regulation that the agency has promulgated.  Under this policy, known as ‘Auer deference’ from the 1997 case Auer v. Robbins, a court must yield to an agency’s interpretation of its own unclear regulation unless the court finds that the interpretation is “plainly erroneous or inconsistent with the regulation.”

Auer deference was the basis for successful defendant motions to dismiss over the past year in a number of class actions concerning ‘No Sugar Added’ claims on 100% juices.  We reported, for example, on the U.S. District Court for the Central District of California granting a motion for summary judgment in favor of Odwalla, in Wilson v. Odwalla Inc. et al. (Case Number 2:17-cv-02763) based on the Food and Drug Administration’s (FDA) interpretation of paragraph (c)(2)(iv) of 21 CFR 101.60 (“Nutrient content claims for the calorie content of foods”) as permitting juice with no added sugar to be considered a substitute for juice with added sugar and similar sugar-sweetened beverages.

Based on the Justices’ comments in the recent hearing, it is not clear if Auerdeference will be intact at the end of June, by which time a ruling is expected.  Many food product labels could face renewed attacks under state consumer protection and false advertising laws if courts are no longer bound by FDA’s interpretation of ambiguous regulatory requirements, including the use of ‘no sugar added” under the regulation on nutrient content claims.

 

© 2019 Keller and Heckman LLP

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

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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:

Kenneth J. Yerkes
John T.L. Koenig
David B. Ritter
William A. Nolan
Eric H. J. Stahlhut
Mark S. Kittaka
Of:
Barnes & Thornburg LLP

Analysis: U.S. Supreme Court Upholds the Affordable Care Act: Roberts Rules?

The National Law Review recently published an article by Meghan C. O’Connor and William O. Jackson of von Briesen & Roper, S.C. regarding The U.S. Supreme Court’s Healthcare Ruling:

Today, June 28, 2012, the U.S. Supreme Court issued its decision upholding thePatient Protection and Affordable Care Act of 2010 (the “ACA” or “Act”). The decision marks the culmination of a legal battle and public debate that began soon after the ACA was enacted. The Court upheld the individual mandate, perhaps the most controversial provision of the ACA, but limited the expansion of Medicaidunder the ACA. All provisions of the ACA will continue to be in effect, with some limits on the Medicaid expansion. In order to prevent a constitutional violation due to the Medicaid expansion portion of the ACA, the Court held that the Secretary of the Department of Health and Human Services (“Secretary”) is not permitted to apply §1396c of the Act to withdraw existing Medicaid funds to a state for failing to comply with the requirements set out in the expansion provisions. Though today’s decision will have far-reaching effects in political discourse, the Court emphasizes its deference to Congress and its sensitivity to its judicial role: “We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders. We ask only whether Congress has the power under the Constitution to enact the challenged provisions.”

Key points from decision:

  • Individual mandate not supported by Commerce Clause or Necessary and Proper Clause
  • Individual mandate must be construed as a tax, which is upheld under Congress’s taxing power
  • Expansion of Medicaid program constitutional, but HHS may not penalize states that choose not to participate in the expansion of Medicaid
  • Decision strikes a balance between principles of federalism and judicial restraint

I. Background

On March 23, 2010, President Obama signed the ACA into law. The 2700-page Act contained numerous provisions that, when implemented, would alter the health insurance and health care delivery systems in the United States more significantly than any federal law since the creation of the Medicare and Medicaid programs in 1965. Significant ACA provisions include the expansion of coverage under federal health care programs, such as Medicaid; the creation of new programs to integrate and reform health care delivery, such as the Medicare Shared Savings Program; and the minimum coverage provision at §1501 of the ACA that requires, with limited exceptions, individuals to maintain minimal essential health care coverage as of 2014 (commonly referred to as the “individual mandate”) or make a “shared responsibility payment”. After the enactment of the ACA, individuals, organizations, and 26 states brought suit against the federal government alleging, among other things, that the individual mandate and Medicaid expansion were unconstitutional. After multiple federal appeals court decisions with diverging opinions, the Supreme Court granted review.

This article will discuss the four main issues at play during the oral arguments, highlights of the Court’s decision, and implications of the Court’s decision.

II. The Issues At Play

In March 2012, the Supreme Court heard three days of oral arguments focusing on four issues: (1) whether the Court could even hear arguments about the constitutionality of the ACA; (2) whether the individual mandate was unconstitutional; (3) if so, whether the individual mandate, and potentially other provisions of the ACA, could be “severed” from the remaining portions; and (4) whether the Medicaid expansion provisions of the ACA were constitutional.

1. Could the Supreme Court Even Hear the Case?

Before the Court addressed the constitutionality of the individual mandate and Medicaid expansion, the Court determined that the Anti-Injunction Act (“AIA”) did not apply to the lawsuits challenging the ACA. Under the AIA, courts may not hear lawsuits that attempt to restrain the imposition or collection of a tax. If the AIA did apply to the ACA lawsuits, the Court would have been prevented from hearing the case until the parties had exhausted other remedies.

The Court held that the AIA did not prevent the Court from hearing the challenge to the individual mandate because the mandate is not a “tax” for purposes of the AIA. This decision is not surprising given that during oral argument, the Court expressed skepticism about whether the AIA applied to the case and whether the case could be considered an exception to the AIA.

Today’s decision is interesting in that it distinguishes between whether a law is a “tax” for purposes of Congress’s taxing power versus the Court’s jurisdiction under the AIA. The government argued that the mandate was not a tax for purposes of the AIA but that it was a tax for purposes of Congress’s constitutional authority. At oral argument, Justice Alito noted to the Solicitor General “[t]oday you are arguing that the penalty is not a tax. Tomorrow you are going to be back and you will be arguing that the penalty is a tax.” Justice Scalia also questioned the Solicitor General regarding the labeling of the mandate as a “penalty” rather than a “tax”: “The President said it wasn’t a tax, didn’t he?”

Despite these exchanges, Chief Justice Roberts ultimately focused on whether Congress intended for the AIA to apply. The Court agreed with the government and held that Congress’s decision to describe the shared responsibility payment in §5000A(b)(a) as a “penalty” and not a “tax” demonstrates that Congress did not intend for the AIA to prohibit jurisdiction.

2. Is the Individual Mandate Constitutional?

The central issue in the case was whether Congress had the power under the Constitution to mandate that individuals purchase health insurance and assess a tax or penalty against those individuals who refuse or fail to purchase such insurance. As a general principle of the U.S. federalist system, the federal government may only pass laws under those powers that are enumerated in the Constitution, such as the Commerce Clause. All other powers remain with the individual states. The ACA lawsuits challenged the individual mandate as an unconstitutional use of the Commerce Clause.

The Court telegraphed its skepticism with the Commerce Clause justification during oral argument in March. The justices questioned whether the government was “creating commerce” and whether the penalty associated with the individual mandate was actually a proper exercise of the taxing power.

In a 5-4 decision (with Justices Ginsburg, Breyer, Sotomayor, and Kagan joining Chief Justice Roberts), the Court concluded that the individual mandate was constitutional and could be upheld under Congress’s taxing power as the imposition of a tax on those who do not have insurance. However, the individual mandate could not be sustained under the Commerce Clause or the Necessary and Proper Clause.

• “Creating” Commerce.

A key issue involved whether Congress was creating commerce by requiring individuals to purchase health insurance. During oral argument, Justice Kennedy questioned the government on whether it could “create” commerce by requiring an individual to perform an affirmative act and then regulate that act under the Commerce Clause. The government argued that health care is unique since nearly all persons will be in the health care market at some point, many times the choice to be in the market is uncontrollable and unpredictable, and the result of being uninsured shifts costs to the insured.

In today’s opinion, the Court emphasized that Congress’s broad power to regulate commerce “presupposes the existence of commercial activity to be regulated.” Roberts noted that the mandate creates activity to “compel individuals to become active in commerce by purchasing a product” rather than regulating existing commercial activity. Consequently, the individual mandate cannot be upheld under the Commerce Clause.

The dissent also rejected the use of the Commerce Clause to support the constitutionality of the individual mandate. Justice Scalia wrote “[t]he Federal Government can address whatever problems it wants but can bring to their solution only those powers that the Constitution confers, among which is the power to regulate commerce… Article I contains no whatever-it-takes-to-solve-a-national-problem power.”

• Necessary and Proper Clause.

The Court also assessed whether the individual mandate was constitutional under Congress’s power under the Necessary and Proper Clause because the mandate was integral to the guaranteed issue and community rating provisions of ACA. The Court rejected the government’s argument, concluding that this would give Congress the “extraordinary ability” to create the predicate necessary to the exercise of its power.

• Is the Individual Mandate Actually a Tax?

Despite holding that the Commerce Clause and the Necessary and Proper Clause do not support the constitutionality of the individual mandate, the Court found that the mandate could be sustained under Congress’s taxing power. The Court held that “Congress had the power to impose the exaction in §5000A under the taxing power, and that §5000A need not be read to do more than impose a tax. That is sufficient to sustain it.” Consequently, while the ACA’s description of the shared responsibility payment as a “penalty” and not a “tax” is “fatal” to the application of the AIA, Congress’s choice of words does not “control whether an exaction is within Congress’s constitutional power to tax.” Instead, the “mandate can be regarded as establishing a condition—not owning health insurance—that triggers a tax—the required payment to the IRS.”

The Court then offered a straightforward analysis of its taxing power: “[t]hose subject to the individual mandate may lawfully forgo health insurance and pay higher taxes, or buy health insurance and pay lower taxes. The only thing they many not lawfully do is not buy health insurance and not pay the resulting tax.”

Justices Ginsburg, Breyer, Sotomayor, and Kagan joined Justice Roberts’s majority opinion holding the mandate constitutional under Congress’s taxing power. The Court’s liberal justices would have held the individual mandate constitutional under the Commerce Clause as well, but avoided issuing a concurring opinion that would support a constitutional differentiation but make no practical difference in the implementation of ACA.

Justice Scalia’s dissent is also not surprising, as it echoes his comments at oral argument. The dissent notes, “[w]hat is absolutely clear… is that there are structural limits upon federal power—upon what it can prescribe with respect to private conduct… Whatever may be the conceptual limits upon the Commerce Clause and upon the power to tax and spend, they cannot be such as will enable the Federal Government to regulate all private conduct…”

3. Is the Individual Mandate Severable from the Rest of the ACA?

When a statute or law is held unconstitutional, the Court may eliminate certain provisions of the statute (severing it) or strike the entire statute. At issue with regard to the severability issue was whether other ACA provisions could and/or should be severed from the individual mandate provision if the individual mandate was found unconstitutional. Since the individual mandate was found constitutional, the Court did not address the severability of other ACA provisions.

4. Is Medicaid Expansion Under the ACA Constitutional?

Perhaps the most unexpected component of today’s decision is the limitation imposed on the ACA’s Medicaid expansion. Medicaid funds medical care for needy individuals through a federal and state partnership under which the federal government provides matching funds to states that agree to comply with federal requirements. Congress may change Medicaid requirements, and participating states must amend state Medicaid plans to comply with changes in federal law. Under the ACA, Congress expanded Medicaid eligibility to certain individuals under age 65 who do not receive Medicare and who have an income up to 133% of the federal poverty level. The ACA requires states to provide limited Medicaid coverage to these newly eligible individuals beginning in 2014. Funding of the expansion will not follow traditional matching guidelines; instead 100% of the expansion will be paid for by the federal government through 2016, with the federal share decreasing to 90% by 2020.

Congress’s authority under the Constitution includes spending funds, and setting conditions on the spending of those funds, in order to promote the general welfare. However, Congress’s spending power is limited such that it cannot use the power to compel states to adopt federal policies. At issue was whether the ACA unconstitutionally compels states to expand Medicaid by making expansion of Medicaid eligibility a requirement for receipt of federal Medicaid funds despite increased federal funding to subsidize the expansion.

The majority concluded that the Medicaid expansion is constitutional. However, the Court held that it would be an unconstitutional expansion of Congress’s authority under the Spending Clause for the federal government to withhold Medicaid funding to the states for non-compliance with the ACA’s expansion provisions. Writing for the Court, Chief Justice Roberts noted that “Nothing in our opinion precludes Congress from offering funds under the ACA to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding.”

Rather than invalidate the Medicaid expansion in its entirety, the Court adopted a more limited remedy of severing the penalty provisions from the ACA. Section 1396c gives the Secretary the authority to withhold all further Medicaid payments to the state if the Secretary determines the state is out of compliance with any Medicaid requirement, including those contained in the expansion. The Court ruled that the Secretary could not use this section to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion. However, §1396c remains applicable to the existing Medicaid program, and it could be used by the Secretary to withdraw funds provided under the ACA if a state that has chosen to participate in the expansion fails to comply with the requirements of the ACA.

III. Impact of the Decision

Whether denominated as a mandate or a tax, the Court’s validation of Section 1501 avoids much of the uncertainty that would have resulted if the ACA was struck down. Providers may proceed, for now, with the assumption that the ACA will reduce the burden of providing care to uninsured and underinsured individuals. The Court’s ruling also relieves providers of the need to re-think, or undo, other operational and strategic planning that was implemented under the ACA, such as the move away from fee-for-service to value-based and quality-based reimbursement in an accountable care environment; bundling; bonuses; incentives for various ACA initiatives in areas such as electronic medical records, public health, preventive care, and others; physician quality reporting initiatives; requirements for tax-exempt hospitals such as community health needs assessments, financial assistance, and billing and collection policies; and many other areas of the ACA that might have collapsed with the whole ACA house of cards if the ACA had been struck down in its entirety. Hospital stocks surged ahead on the initial news of the Court’s decision while insurance company stocks fell, suggesting the market’s assessment of the winners and losers from the case.

From a constitutional law perspective, the path taken by the Court in reaching its decision is extremely important. On the one hand, the Court’s conclusion that the individual mandate could not be justified under either the Commerce Clause or the Necessary and Proper Clause confirms that the Court will continue to police the boundaries of Congressional power in a federalist system. Congress may have the power to regulate commerce – what people do – but it does not have the power tocompel commerce – what people do not do. In a similar vein, the Court concluded that the Medicaid penalty provisions ran counter to the nation’s “system of federalism” as Congress improperly went beyond pressure to compulsion.

On the other hand, in upholding the individual mandate under Congress’s power under the Taxing Clause (even notwithstanding statements by the President and the Congress that this was not a tax), the Court gave deference to Congress in searching for any reasonable construction of the law in order to save the ACA from unconstitutionality. The Court also found the means to preserve the expansion of Medicaid by severing only the penalty provisions. In so doing, the Chief Justice remained true to his philosophy of judicial restraint rather than judicial activism, placing himself firmly in the company of Justice Oliver Wendell Holmes, Jr. and Justice Felix Frankfurter.

The Medicaid ruling is significant for states – and for providers. This means that each state will have the ability to determine whether or not to accept the Medicaid expansion terms, without the risk of losing all of its Medicaid programs should the state decide not to agree with expanded eligibility requirements. The ACA was structured so that most everyone had health care coverage – either through employer-provided plans, insurance purchased by individuals, or government-provided programs. The ACA expanded eligibility for Medicaid to provide health care for poor persons who do not have employer-sponsored insurance and who would be unable to pay for their own health insurance. If a state declines to enact the expansion, there will be a gap. The size of the gap—or the number of uninsured individuals—will depend on how eligibility standards are set. For providers, this likely translates into uncompensated care.

In Wisconsin, Medicaid eligibility has been more expansive than required by the federal government. Therefore, the question about what carrots and sticks apply to the Wisconsin Medicaid program is not clearly answered in the decision. This will likely be the subject of consideration and potential debate as the Wisconsin legislature develops the next biennial budget.

Perhaps the greatest impact from the ACA decision will be felt in the upcoming elections. The Court’s characterization of the individual mandate as a “tax” will shape the political debates in the months to come. House Speaker John Boehner, presidential candidate Mitt Romney, and their supporters have already vowed to repeal the ACA following the decision, using the ACA “tax” as their rallying cry. As a result, some uncertainty will remain through and beyond the fall as elected officials sort out what provisions should remain and what should be modified or eliminated. Some of the provisions have proven popular with voters; other provisions have not. And, absent a Republican sweep in November, a total repeal of the Act is not likely. Nonetheless, Wisconsin Governor Scott Walker indicated that the state would not take action to implement provisions of the ACA until after the November elections and that he is counting on the next president and Congress to repeal it.

©2012 von Briesen & Roper, s.c

Employer Group Health Plans and the Constitutionality of the ACA

Focus turns to completing 2012 and 2013 compliance tasks following the U.S. Supreme Court’s decision.

Today, the U.S. Supreme Court ruled that virtually the entire Patient Protection and Affordable Care Act of 2010 (ACA) is constitutional (with the exception of a Medicaid issue that is not directly relevant to employers), validating the full range of past, present, and future ACA requirements. Employers now must continue to press ahead with 2012 and 2013 ACA compliance requirements, particularly if these tasks were placed on a back burner awaiting the decision.

The Decision

Writing for a 5-4 majority in National Federation of Independent Business et al. v. Sebelius, Chief Justice John G. Roberts, Jr., found that the individual mandate in the ACA is a permissible exercise of Congress’s taxing authority, stating that “[t]he Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax.” Chief Justice Roberts also wrote that “because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.” Chief Justice Roberts was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, Stephen G. Breyer, and Elena Kagan. Justices Antonin Scalia, Anthony M. Kennedy, Clarence Thomas, and Samuel Anthony Alito, Jr., dissented.

Next Steps for Employers

Now that the ACA has been upheld, employer group health plans must focus on a number of pressing tasks for 2012 and 2013 compliance with the ACA. In the coming weeks and months, employers should do the following:

  • Determine whether they are appropriately aggregating group health plan valuation data in order to support 2012 Form W-2 reporting.
  • Prepare to receive, and properly distribute or apply, any Medical Loss Ratio rebates associated with 2011 insured health coverage.
  • Finalize Summary of Benefits and Coverage material for inclusion in the 2013 Open Enrollment package.
  • Complete updates to Summary Plan Descriptions and plan documents to capture and describe the 2011 and 2012 ACA changes to their plan design.
  • Reflect the 2013 plan year $2,500 cap on salary deferral contributions into healthcare spending accounts in 2013 Open Enrollment material, payroll processes, and administration systems.
  • Understand and begin to determine the patient-centered outcomes trust fund fees due in July 2013.
  • Begin to identify whether their group health plans are both affordable and available to full-time employees in order to avoid any shared responsibility penalty in 2014.
  • Prepare for audits associated with their participation in the Early Retiree Reinsurance Program, if applicable.
  • Review possible design changes to retiree drug programs to reflect the change in Medicare Part D subsidy taxation rules.
  • Review future plan design changes to blunt the balance sheet impact of the 2018 Cadillac Tax.

Implications

While the Supreme Court decision is an important milestone in the federal debate over expanding healthcare coverage, it likely represents just the first in a series of future federal discussions and actions in the coming months and years.

The federal debate now moves to the November election cycle. The ACA no doubt will play a large role in the upcoming elections, but it is premature to expect any quick legislative reversals to ACA provisions, as any changes would require a significant shift in power.

In the interim, employer group health plans should continue to examine and implement those ACA requirements that will be effective in 2012, 2013, and later years into the design and operation of their group health plans.

We will release future LawFlashes and hold webinars as further guidance becomes available.

Copyright © 2012 by Morgan, Lewis & Bockius LLP

The Supreme Court Paves the Way to End Consumer Class Actions

Last year, the Supreme Court removed state law prohibitions on contractual agreements to waive class action rights.  Because disputes involving small dollar amounts (only $30.22 per plaintiff in a recent Supreme Court case and a $2.99-per-month service for plaintiffs in a recent 11th Circuit decision) provide little incentive for plaintiffs’ lawyers (or the plaintiffs themselves), these cases have often materialized as class actions resulting in massive class fees and statutory damages.  As a result, many businesses include arbitration provisions in their consumer contracts that contain a class action waiver provision to require individual plaintiffs to bring their claims on their behalf alone.

Although most courts have enforced class action waivers in arbitration provisions considering the U.S. Supreme Court’s long-standing position that arbitration agreements must be enforced according to their terms, some state high courts have struck down contractual agreements not to bring class actions, including class arbitrations, as unconscionable and a violation of state public policy.  At least California, New Jersey, and Massachusetts’ Supreme Courts had issued such decisions in the last seven years.  See Discover Bank v. L.A. County Superior Court, 36 Cal. 4th 148 (Cal. 2005); Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006); Feeney v. Dell Inc., 908 N.E.2d 753 (Mass. 2009).

The California Supreme Court in Discover Bank held that class action waivers in consumer arbitration agreements were unconscionable if the agreement is an adhesion contract and involves small amounts of damage in dispute where the party with inferior bargaining power alleges a deliberate scheme to defraud.  36 Cal. 4th at 162-63.  Similarly, in New Jersey, the Supreme Court held that the class-action waiver in the arbitration agreement was “clearly a contract of adhesion” and that the prohibition of class actions would prevent plaintiff from pursuing her statutory consumer protection rights and shield defendants from compliance with state laws.  Muhammad, 912 A.2d at 100-01. The Massachusetts Supreme Court similarly held that “public policy sometimes outweighs the interest in freedom of contract” when it refused to enforce an arbitration provision prohibiting class actions. Feeney, 908 N.E.2d at 761-62.

In April of 2011, however, the United States Supreme Court held that agreements not to arbitrate through class actions should be enforced and overruled Discover Bank in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).  In Concepcion, the putative class complained that AT&T advertised free cellular phones with the purchase of AT&T service, yet the consumers were charged $30.22 in sales tax based on the phones’ retail value.  Despite AT&T’s extensive arbitration provision that was described as “quick, easy to use” and would likely result in “promp[t] full or … even excess payment to the customer without the need to arbitrate or litigate” the Ninth Circuit,  relying on Discover Bank, nonetheless found that the waiver of the ability to bring a class action was unconscionable.  Laster v. AT&T Mobility LLC, 584 F.3d 849, 855 (9th Cir. 2009).  On certiorari, the Supreme Court held that, because it is a fundamental principle that arbitration is a matter of contract and those contracts must be enforced according to their terms, and where, by contrast, state law prohibits outright the arbitration of a particular claim, the conflicting rule is displaced by the Federal Arbitration Act.  The Supreme Court thus reversedDiscover Bank holding that the rule of Discover Bank stood “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”Concepcion, 131 S.Ct. at 1753.

In August of last year, the Eleventh Circuit followed the rule of law established byConcepcion.  Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011). The plaintiffs in Cruz were customers of Cingular Wireless (which was acquired by AT&T) and had signed the same binding arbitration agreement that was litigated inConcepcion.  In Cruz, plaintiffs complained that Cingular Wireless had fraudulently included a $2.99 monthly “Roadside Assistance” charge to plaintiffs’ monthly bills in violation of Florida’s Deceptive and Unfair Trade Practices Act.  Cruz v. Cingular Wireless, LLC, No. 2:07-cv-714-FtM-29DNF, 2008 WL 4279690 at *1 (M.D. Fla. Sept. 15, 2008).  Plaintiffs alleged that they never ordered the service and the charges were hidden in their telephone bills.  The Eleventh Circuit heard oral argument in Cruz before the Supreme Court rendered the decision in Concepcion; however, it was awaiting the Florida Supreme Court’s answers to a series of certified questions related to determining the substantive questions of unconscionability under Florida law and the time Concepcion was decided.

In its decision, the Eleventh Circuit echoed the Supreme Court:  arbitration provisions will be enforced as written − including waivers of class action rights. The court acknowledged that, even if Florida law would be sympathetic to plaintiff’s arguments that absent class procedures numerous claims of small values where potential plaintiffs do not even know of their claims, defendants may violate Florida law, a state policy that stands as an obstacle to the Federal Arbitration Act’s objective of enforcing arbitration agreements according to their terms is preempted. Cruz, 648 F.3d at 1213.

The Third Circuit similarly held that the Federal Arbitration Act specifically preempted the rule established by the New Jersey Supreme Court in the Muhammad decision.  In Litman v. Cellco Partnership, 655 F.3d 225 (3d Cir. 2011), the Third Circuit stated, “[w]e understand the holding of Concepcion to be both broad and clear:  a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration ‘is desirable for unrelated reasons.’” Id. at 231.

Although a waiver of the right to pursue a claim as a class action can be challenged under grounds of fraud or duress under the savings clause of section 2 of the Federal Arbitration Act, these arguments would likely require individualized arguments that could not apply in a class action context.  As a result, it appears that future “unconscionability” attacks to contractual class action waivers will fail under the analysis of Concepcion, Cruz, and Litman. This is a big win for businesses who thoughtfully draft their consumer contracts to avoid class action plaintiffs’ attorneys’ fees and exponential damages.

Just as a waiver of the right to a jury trial or the limiting of consequential damages have become routine in many consumer contracts, the waiver of the ability to bring a class action should be considered in all consumer contracts. For example, the language contained in the contracts enforced in the Conception and Cruz cases provided for arbitration of all disputes between the parties and requires that those disputes be brought in the consumer’s “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.  Further, unless you and [business] agree otherwise, the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.” Similar language, less than fifty words, could save millions for a business involved in consumer contracts in the wake ofConception, Cruz, and Litman.

*Until March 2012, Monica Brownewell Smith was a partner in the Litigation Department. While she raises her young children, Monica is working for the Firm as a contract attorney.

© 2012 BARNES & THORNBURG LLP