Janus Capital Group, Inc. v. First Derivative Traders

Transcription

Erwin Chemerinsky and Suzanna Sherry are here to look into five decisions of the Court in the area of federalism. Preemption and liability were again the major themes this year. In AT&T v. Concepcion, the question involved arbitration. Although the Federal Arbitration Act allows groups of plaintiffs to arbitrate as a class, not unlike a class action lawsuit, it is not mandatory that option be available in every instance. Plaintiffs in this case bought a phone from AT&T Mobility and eventually brought a class action against it for an undisclosed $30 overcharge. But the contract they signed provided that all suits would be arbitrated, and prohibited class arbitration. The Ninth Circuit invalidated that provision as unconscionable under state law. The question here is, Does the Federal Arbitration Act prohibit states from mandating that class arbitration be available in particular circumstances in order for the arbitration clause to be enforceable? Does it, Suzanna? Well, in order to answer that question we need to look at the FAA. Section 2 of the FAA is basically a preemption clause and a savings clause all wrapped up into one. It says that all arbitration clauses in contracts are "valid, irrevocable, and enforceable"--that's the preemption clause-- except on "such grounds as exist at law or in equity for the revocation of any contract"-- that's essentially the savings clause. So the state law that was at issue here was the California Supreme Court's 2005 decision in a case called Discover Bank v. Superior Court. And the California court held in that case that at least some contracts that preclude class-wide arbitration are unconscionable and therefore unenforceable. So the question then becomes whether the FAA preempts that and prohibits the states from conditioning the enforceability of contracts on the availability of class-wide arbitration. And what did the Court hold, Erwin? The Supreme Court held 5 to 4 in an opinion by Justice Scalia that California law is preempted here. Justice Scalia said that the Federal Arbitration Act evidences a strong policy that contractual provisions for arbitration be enforced. He said that arbitration has tremendous benefits in terms of efficiency, and that these would be lost if you had class-wide arbitration. He said class-wide arbitration is much more likely to lead to procedural issues that would then be inefficient. He talked about the adverse effects on class actions with regard to businesses. He said, and I am quoting, "There is an interrorem effect of class actions on businesses, often causing them to settle even nonmeritorious suits." Thus, he came to the conclusion that Discover Bank and the California law was preempted by the FAA. The Court basically held that the Discover Bank rule was preempted under basic principles of implied preemption because it essentially has a disparate impact on arbitration clauses. In other words, it is more likely to invalidate arbitration clauses than it is to invalidate other sorts of clauses. And I think there's a couple of curious things about that analysis. First, the finding of implied preemption in the face of a textual express exception-- to express preemption is somewhat unusual. And second, the disparate impact analysis is very puzzling. The Court essentially applies disparate impact analysis to what one might call a right to arbitrate when it doesn't--established law doesn't even apply disparate impact analysis to constitutional rights like equal protection and free exercise. But if you read the Court's opinion, the Court seems to be saying that the California doctrine of unconscionability, because it will have a disproportionate effect on arbitration clauses rather than other kinds of clauses, in fact is preempted by the FAA. As I said, I think that's rather curious. Now, Erwin, the Court has granted cert in a lot of arbitration cases in the last several years. How does this discussion affect that jurisprudence? This case is very much consistent with the earlier cases. In a series of decisions-- all 5-4-- the Supreme Court's majority has said that it wants to very much enforce arbitration agreements. And the Court has been divided ideologically, where the conservatives are saying that arbitration has tremendous benefits, must the clause be enforced? Whereas the more liberal justices, they want to keep access to the courts open. Recent illustrations include Rent-A-Center v. Jackson from last term or 14 Penn Plaza v. Pyett from a couple of years ago-- 5-4 split along the same lines. So how important is this decision? Oh, this is very important. It is going to have a lot of practical impact because arbitration clauses are now being used in all kinds of contracts-- employment contracts, consumer contracts, medical contracts, all kinds of contracts. And it means that those contracts will be enforceable even if preclude--even if the contracts preclude class-wide arbitration. Under Arizona law, employers must check the immigration status of job applicants through a federal computer database called E-Verify. And businesses in the state that are found to employ undocumented workers have their licenses revoked. The issue in Chamber of Commerce of the U.S. v. Whiting was whether this Arizona state law was preempted by the "comprehensive scheme" that Congress created to regulate the employment of aliens. The federal statute expressly preempts "any state or local law imposing civil or criminal sanctions (other than through licensing and similar laws) upon those who employ, or recruit or refer for a fee for employment, unauthorized aliens." So, Suzanna, did the Court find preemption? No, the Court said that this was not preempted because it fell within the explicit exception for licensing laws. The Court also held that there was no implied preemption because the law was not inconsistent with the accomplishment of any federal objectives. Indeed, the Court pointed out that the state law had the same objectives and the same basic effect as federal law. Any other findings by the Court? The Court came to the same conclusion with regard to the requirement that employers use the E-Verify system. The Supreme Court said that, too, was not preempted by federal law. The Court said there was neither express preemption nor implied preemption of the requirement to use E-Verify. What do you each think is the importance of this case? Let's start with you, Erwin. Arizona has adopted the SB 1070 that attracted so much national attention. Recently other states--Georgia, Utah, and Indiana-- have adopted similar laws. I think everyone reads this case trying to get a sense of what's the Supreme Court going to do when those matters come before it. On the one hand, those who want to see such laws upheld, the supporters of such laws, say that the Supreme Court here is emphasizing cooperative federalism. They want to have both the federal government and state governments deal with serious problems like illegal immigration. On the other hand, the opponents of this law say this is a unique situation. Here, the Supreme Court is construing a specific express preemption provision, and that is very different than the kind of issues that laws like Arizona's SB 1070 raised where you don't have any express preemption provision in federal law. I agree that it is open to either of those interpretations, and I'm not sure who is right. I think it also, though, sheds some light on the so-called cooperative federalism. So, for example, in the area of drug interdiction, the federal government doesn't have enough resources to combat all of the drugs and so it relies quite heavily on state enforcement. I think that the same is true here. The federal government doesn't have the resources to interdict illegal aliens. But, here, the federal government itself is conflicted about how much it wants to enforce, and so in this case, the Solicitor General actually filed an amicus brief arguing that the Arizona law was preempted. They did not want Arizona's help. In Williamson v. Mazda Motor of America, the federal law being scrutinized was the 1989 Federal Motor Vehicle Safety Standard. Part of that law requires carmakers to install lap belts and shoulder harnesses in the rear seats by the side windows but only a lap belt in the rear middle seat. Thanh Williamson, sitting in the rear middle seat of her family's Mazda minivan and was wearing only a lap belt, was killed when their van was hit head-on by another vehicle. Her daughter, sitting next to the window on the driver's side and wearing a lap belt with a shoulder harness, survived. The issue before the Court was whether the federal safety standard preempted a state court-- a state tort suit that, if successful, would deny car manufactures the choice of belts for rear inner seats by imposing a tort liability upon those who choose to install a simple lap belt. Suzanna, what was it about the federal statute that raised the preemption question? Well, there are three relevant provisions of the safety standard. First, there's an explicit preemption clause that explicitly preempts any state law that establishes safety standards for vehicles. Then it explicitly states that compliance with federal safety standards doesn't preclude tort liability. So there is the preemption clause, and then this is a savings clause. And then the substantive part requires lap and shoulder belts for the seats next to the rear windows but doesn't say anything at all about the seats--the inner seats on, ah, minivans. The Court dealt with a fairly similar situation in 2000 in deciding the case--the Geier v. American Honda case, and it decided a couple things. First, that the combination of a preemption clause and a savings clause meant that ordinary preemption principles apply. So it would be--a state tort suit would be preempted only if the state tort suit, and this is a quote, "stands as an obstacle to the accomplishment of the full purposes or objectives of the federal law." Now in Geier, what the Court decided was that one of the objectives of an earlier law was to give automobile manufacturers a choice about what kind of passive restraints, ah, seat belts or air bags-- what kind of passive restraints to install. And because that was one of the purposes of the statute--of the regulation, the Court held in Geier that a state tort suit would be preempted because it would interfere with that federal objective. And, Erwin, did the Court reach a similar conclusion in Williamson? No, it reached an opposite conclusion. Now there is a striking similarity between these cases. In this case, like in Geier, the federal safety standards gave to automakers a choice with regard to safety devices. In this case, like in Geier, there was the concern that tort liability would be attached in a way that would distort the choices that automakers had under federal law. But here, the Supreme Court found that there was no preemption. Here, the Supreme Court said it was not a significant regulatory purpose to give automakers the choice, whereas in Geier it was a significant regulatory purpose to give automakers the choice. I think the challenge for lower federal court judges and state court judges will be how to determine what's a significant regulatory purpose. Now let's look at two decisions affecting pharmaceutical manufacturers. In Bruesewitz v. Wyeth, the question was whether the National Childhood Vaccine Injury Act bars state-law design-defect claims against vaccine manufacturers. The National Childhood Vaccine Injury Act of 1986 creates a no-fault compensation system for those injured by vaccines, but it preserves the ability for individuals to sue. The statute says, "No vaccine manufacturer shall be liable in a civil action for damages arising from a vaccine-related injury or death associated with the administration of a vaccine after October 1, 1988 if the injury or death resulted from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper directions and warning." Russell and Rosalee Bruesewitz charged that a diphtheria-tetanus- pertussis vaccine manufactured by Lederle Laboratories, now owned by Wyeth, had caused their daughter's seizure disorder and other injuries. Wyeth argued that federal law eliminated liability for a vaccine's unavoidable adverse side effects if the company complied with all regulatory requirements. The Supreme Court read the words "unavoidable even though" to mean the statute preempts a suit for all defects that were unavoidable despite the vaccine maker's best efforts at manufacture and warning. Finally, let's look at the decision in PLIVA v. Mensing. Here, the Court revisited its decision in Wyeth v. Levine from 2009 and dealt with the question of whether that decision applied equally to both generic and non-generic drugs. With generic drugs accounting for most prescriptions written in this country, the answer could have a major impact on litigation in the federal courts. Erwin, tell us first about Wyeth v. Levine. In Wyeth v. Levine, the Supreme Court held that makers of non-generic drugs may be sued on a failure to warn theory. The Court specifically ruled that such suits are not preempted by federal law. But here, the Supreme Court significantly cut back on that by holding that makers of generic drugs cannot be sued on a failure to warn theory. Such suits are preempted by federal law. So, Suzanna, what was the distinction the Court found between the two? The distinction is in the federal law that regulates brand-name and generic drugs. That law requires the manufacturers of generic drugs to use the same labels on their generic drugs as their brand-name counterparts. So while brand-name manufacturers can change their labels while simultaneously seeking FDA approval for the change, generic drug makers can't. They can't change their labels at all without prior FDA approval. So what the Court found was that it would be impossible for PLIVA to obey both the federal prohibitions against changing its label and the state tort duties requiring them to change their label. And because it was impossible to obey both, the Court found the state law tort claims preempted. Which leaves the litigants where exactly? If a litigant took a generic version of the drug, the litigant cannot sue on a failure to warn theory. If a litigant took the non-generic version of the same drug, the litigant can sue on a failure to warn theory. Seventy-five percent of all prescriptions in the U.S. are filled with generic drugs. That rises to 90 percent when there is a generic equivalent of the non-generic drug. So this will have a very important effect on litigation in the United States. Next, Beth will take a look at decisions surrounding the authority and powers of the federal courts. Class-action lawsuits got a good deal of attention from the Court this term, with mixed results for both plaintiffs and defendants and the attorneys who represent them. Without a doubt the decision that received the most attention was Wal-Mart v. Dukes, a sex discrimination suit that sought to represent 1.5 million women who worked or who had worked for the big-box retailer all across the country. The plaintiffs argued that Wal-Mart's corporate culture of discrimination and the delegation of broad discretion to individual managers to set salaries and decide on promotions resulted in disparate treatment of female employees. And while the Court's decision on the dispute might sound to some like quibbling over the Federal Rules of Civil Procedure, the effect on class action litigation could be enormous. Suzanna, can you fill us in on the details? This case involved three different sections of Federal Rule of Civil Procedure 23. The case was brought under subsection 23(b)(2), and all nine justices agreed that it should not have been certified under that subsection. Subsection 23(b)(2) requires that, and I quote, the "final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." And the problem here was that the plaintiffs were asking for individualized back pay that wasn't just incidental to the declaratory and injunctive relief. Wal-Mart was entitled to individualized determinations of that back pay, and so the relief that would have been awarded would not have been the same for "the class as a whole." And so the class should not have been certified under 23(b)(2). You said three sections of 23 were implicated. What about the other two? Well, that's where the majority--where the Court divides, really. The other section that the majority focuses on is Rule 23(a). 23(a) lays out four requirements for certifying a class, the most important of which is commonality. That is to say, "there are questions of law or fact common to the class." The majority held that the commonality requirement of 23(a) means that the aspiring class has to prove that each member has suffered the same injury and not just that they've all suffered a violation of the same provision of law. And the majority concluded that because Wal-Mart granted so much discretion to its managers to control pay and promotion, an examination of those decisions was incapable of producing a common answer to the central question, which was, "Why was I disfavored?" The majority found that neither the plaintiffs' statistical evidence nor the anecdotal evidence, ah-- with regard to gender differences at Wal-Mart across the country, ah-- was sufficient to show a general policy of discrimination. What about the dissent? That's where the third subsection of 23 comes in. The dissenters believed that the majority was conflating the 23(a) commonality standard with the standard under subsection 23(b)(3). Now, a 23(b)(3) class requires, in addition to commonality, that questions of law or fact predominate over questions that affect only individual members of the class. It also requires superiority. The reason--so the majority said that by-- the dissent said that when the majority required so much in the way of commonality, it was actually requiring predominance rather than merely commonality. And the reason that that's important is that if you impose the predominance standard on the commonality requirement of 23(a), that affects all class actions, not just those brought under 23(b)(3). So the ratcheting up of the commonality standard could affect classes brought under 23(b)(1) and 23(b)(2) as well. While the Court came down on the side of the defendants in Wal-Mart, it found for the plaintiffs in two other class action cases. In Erica P. Johns Fund v. Halliburton, the question was whether an aspiring class of plaintiffs and a federal securities fraud case needed to prove loss causation in order to be certified. "Loss causation" means proving that the misrepresentations actually caused the plaintiff to lose money, rather than any number of other factors that might have caused the stock prices to decline. Suzanna, why did the Court favor the plaintiffs in this case? Well, we have to go back to Rule 23. This was a Rule 23(b)(3) class action. As we've just said, that means that the plaintiffs would have to show that common issues predominate over individual issues. The problem is that in any fraud case, one element of fraud is that the plaintiffs have to prove that they relied on the fraud. So if individual plaintiffs all had to prove that they relied on the misrepresentations of the defendant, it would be impossible to certify it a 23(b)(3) class because individual issues would always be greater than the common issues. So way back in 1988 the Supreme Court decided a case called Basic Industries v. Levinson. And what the Court said in that case is that plaintiffs--all plaintiffs, not just class-action plaintiffs, but all plaintiffs--in securities fraud cases could rely on a rebuttable presumption that was based--of reliance that was based on what they called the "fraud on the market theory." Fraud on the market suggests that the price of a publicly held--a publicly traded stock reflects all publicly available information about that stock, including any publicly--public misrepresentations. And so you can assume that anyone who buys the stock on the open market has relied on that public information, including relying on the misrepresentations. So, Evan, how does this relate to the concept of loss causation? Well, the court of appeals had held that proof of loss causation was also required in order to make out reliance. But the Supreme Court disagreed. It said that reliance means the plaintiff would not have bought the stocks absent the misrepresentation, while loss causation means that the plaintiff would not have lost money but for the misrepresentation. And the Court said those are two different things. So the Court here held that investors only needed reliance to be certified as a class, and they can use the fraud on the market presumption in order to establish that. Although they will still have--if the case does go it trial, they will have to show loss causation. What was the issue in our third class action case, Evan, Smith v. Bayer? This is an Anti-Injunction Act case. The question was whether a federal court which has refused to certify a class can enjoin a state court from certifying essentially the same class, you know, if the action is brought by a putative member of the class who is not a party to the federal action. And the answer is no. Suzanna, I think we need a few facts to really understand this case. They are a little complicated. There were two suits brought--two class actions brought in West Virginia state courts against Bayer making essentially the same claims for a defect in the same product, Baycol. Now, one of the cases, McCollins--not this one-- was removed to federal court, and the federal court ultimately denied class certification. So it refused to certify the class, and the Court also, at Bayer's request, enjoined the plaintiff in the other case, Smith--that's this case. The Court enjoined the plaintiff in the Smith case from obtaining class certification in the West Virginia state courts. And the federal court did this under the authority of the relitigation exception to the Anti-Injunction Act. OK, so we know the Court decided for Smith, but what was its reasoning? The Court held that the lower federal court was wrong to grant the injunction for two reasons. First, Smith was not a party to McCollins's action in federal court, and while being an unnamed member of a class might be sufficient to preclude someone from bringing a second similar action, being the unnamed member of a class that was determined never to have existed was not sufficient for preclusion purposes. So that was the first reason. The second reason was that the injunction did not qualify under the relitigation exception because the two cases didn't involve the same legal standards. The West Virginia court had explicitly construed its Rule 23 to have a different standard than Federal Rule of Civil Procedure 23. It's important to note that what this means is that plaintiffs who lose on a class certification motion in federal court can simply now try again in state court or possibly in multiple state courts. Although, the Class Action Fairness Act, which didn't apply to this case because it was an enacted later, may somewhat limit the effect. As important as Wal-Mart v. Dukes may be to federal trial judges, our next decision, Stern v. Marshall, may prove just as consequential if not more so. Vickie Marshall, the former Anna Nicole Smith, filed for bankruptcy after her billionaire husband, J. Howard Marshall, died leaving her nothing. J. Howard's son, Pierce, filed a claim in Vickie's bankruptcy proceedings charging defamation. Vicky counterclaimed with a state law action charging Pierce with tortious interference with her expected gifts from her late husband. The question before the Supreme Court was whether a bankruptcy judge, who is not an Article III judge, can issue a final judgment on the counterclaim. Suzanna, what answer did the Court give? The Court said no. An Article I bankruptcy judge cannot issue a final judgment. But it was the breadth and the reasoning of the holding that surprised everyone. The Court relied on several reasons to hold that an Article I judge can't issue a final judgment in--on this counterclaim. First, the Court said that the counterclaim was not so tightly tied to Pierce's original claim that the two had to be decided together. Second, the counterclaim wasn't within a particularized area of the law that might be appropriate to give to Article I judges. Third, the Court said that this was not the kind of claim that required agency expertise. It was instead the bread and butter of the federal judiciary. And then, finally, the Court said that the counterclaim was not within any of the various definitions of a "public right" because it neither involved the government as a party nor derived from any pervasive regulatory--federal regulatory scheme. Yeah, you know, it's almost as if in some ways the clock has been turned back to 1982. The Court barely mentioned its decision from just a few years later, CFTC v. Schor, which established a balancing test to determine which Article III cases may be heard by non-Article III courts. Now to be fair, the Court does say that the district court must exercise de novo review over the bankruptcy court's judgment in cases like this. Justice Scalia, though, would have gone even further. His concurrence argued that Article I judges should be restricted to military courts, territorial courts, and public rights cases, which he would define very restrictively just as cases where the government is a party. Finally, three decisions we want to tell you about. The first deals with the authority of Article III appellate courts, Ortiz v. Jordan. Ortiz, an inmate in an Ohio state prison, sued prison officials under section 1983 for failure to protect her from repeated sexual assaults by prison guards. The defendants moved for summary judgment on the grounds of qualified immunity but were turned down by the district court. The case went to trial and the plaintiffs won. The defendants appealed the denial of their summary judgment motion, and the appellate court reversed, finding they were immune. The Court held that a party may not appeal an order denying summary judgment after a full trial on the merits, even if the motion was based on a claim of qualified immunity. Once a case is tried, the record of the trial supersedes the record existing at the time of the summary judgment motion. The justices said that the appeals court had no power to review the immunity holding at all because the defendants hadn't made a motion under Rule 50(b) for a post-verdict judgment as a matter of law. The Court held in 2006 in Unitherm v. Swift-Ekrich that an appeals court can't review a verdict for sufficiency of the evidence in the absence of a Rule 50(b) motion. In Camreta v. Greene, two Oregon state officials interviewed a girl at school about allegations that her father had sexually abused her without either first notifying her parents or giving her her Miranda rights. The court of appeals held that the interview did violate the girl's Fourth Amendment rights but that the defendants were immune from damages because there was no clearly established precedent that their actions were unconstitutional. Even though they prevailed below, the defendants sought review by the Supreme Court on the Fourth Amendment holding. The Court held that while prudential reasons normally argued against the Court reviewing such rulings, there was no constitutional or statutory provision that barred it from reviewing a ruling at the behest of a prevailing party. The Court emphasized that this was solely its prerogative and did not mean that appellate courts could review district court constitutional rulings, because those do not have precedential value. Finally, in Bond v. U.S., the petitioner was indicted for possession of a banned chemical under the Chemical Weapons Convention. She challenged the indictment, arguing that the statute was beyond Congress's constitutional authority under the Tenth Amendment. The lower federal courts held that she lacked standing to assert the challenge. The Supreme Court reversed the lower courts, finding Bond had standing to bring the challenge under the Tenth Amendment because the amendment protects individuals as well as states and Bond was relying on her own right not to be unconstitutionally incarcerated. That circumstance, the Court said, also distinguished Bond's challenge from those that would challenge congressional enactments for purely ideological reasons. John Cooke is up next with some decisions regarding federal regulations and statutes. Now for a look at some federal statutes and regulations and how the Court interpreted them. In Microsoft v. i4i Limited Partnership, the Court was asked to decide how much proof is needed to test the validity of a patent. i4i sued Microsoft for infringing on a patent. Microsoft denied the charge. It argued in return that i4i's patent was invalid because its code was already on the market when i4i patented it as new. The jury found that Microsoft was not able to prove i4i's patent was invalid by clear and convincing evidence. i4i argued that section 282 of the Patent Act provides that a patent shall be presumed to be valid and the burden to prove otherwise shall rest on the party asserting its invalidity. The Supreme Court was asked to decide whether meeting that burden required clear and convincing evidence. The Court held yes, citing its 1934 decision in RCA v. Radio Engineering Laboratories, where it held that proving a patent is invalid required "clear evidence." The Court said Congress codified this standard in section 282 of the Patent Act of 1952. But the majority did suggest that, if the challenger requests it, the jury should be told when the evidence of invalidity has not been considered by the Patent Office, because that might make it easier to satisfy the "clear and convincing" standard. In Janus Capital v. First Derivative Traders, the question was whether a company that helped or participated in making false statements in another company's prospectus is liable in a private securities fraud action against that other company. Janus Capital Group (JCG) and Janus Capital Management (JCM) managed all the investments of the Janus Investment Fund (JIF), a mutual fund. The three entities have overlapping management and employees. However, JIF is owned by its investors, not JCM or JCG. First Derivative Traders charged that JCG and JCM caused false statements to be made in JIF's prospectus and sued all three entities under SEC Rule 10(b)(5). The Supreme Court said the case depends on the meaning of the word "make." The majority held that JCG and JCM were not liable under 10(b)(5) because only the entity with "ultimate authority" over what appeared in the prospectus can "make" a statement. And that was JIF, even if JCG and JCM strongly influenced what was in the prospectus. The Court cited its 1994 decision in Central Bank of Denver v. First Interstate Bank, where it held that aiders and abettors couldn't be held liable under 10(b)(5). A final decision in this area, CSX Transportation v. McBride. The Federal Employers Liability Act, or FELA, makes railroads liable for their employees' injuries sustained in the course of employment and--and here's the important language in the statute-- "resulting in whole or in part from the negligence of the employer or its agents." Robert McBride sued CSX under FELA for injuries he sustained while working for the railroad. CSX requested and was denied a jury instruction that would have required the plaintiff to show that the railroad's negligence was the proximate cause of his injuries. The appeals court agreed with the trial court decision to deny that request, and the Supreme Court agreed with both the lower federal courts, as well as every federal appellate court to address the question. FELA, held the Court, does not incorporate the common law concept of proximate cause. That's our program for this year. We hope you found it interesting and useful. Please take the time to complete and submit the evaluation form that is included with the written materials that are at our website. It's the only way for us to know how we can improve this program and make it even more useful for you in your work for the court. I want to thank our faculty for helping us to explore and explain these difficult topics and all the people here at the FJC who were responsible for this program. I'm John Cooke. Thank you for watching.