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Scotus Blog - 19 hours 25 min ago

On Monday at 9:30 a.m. we expect orders from the April 18 Conference. On both Tuesday and Wednesday we expect one or more decisions in argued cases; we will be live blogging both days beginning at 9:45 a.m. This is the first week of the April sitting.

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Categories: Supreme Court

Argument preview: Free TV, at a bargain price?

Scotus Blog - Sat, 04/19/2014 - 12:08am

At 11 a.m. next Tuesday, the Supreme Court will hold one hour of oral argument on copyright issues surrounding a new technology for Internet streaming of free TV programs to customers for a monthly fee.  Arguing for the over-the-air broadcasters in American Broadcasting Companies, Inc. v. Aereo, Inc., will be Paul D. Clement of the Washington, D.C., office of Bancroft PLLC, with twenty minutes of time.  The views of the federal government as an amicus in support of the broadcasters will be presented by Deputy U.S. Solicitor General Malcolm L. Stewart, with ten minutes.  The streaming TV entrepreneur Aereo will be represented by David C. Frederick of the Washington, D.C., office of Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC, with thirty minutes of time.

Background

Some years ago, the Supreme Court held the view that if an enterprising firm came along that made it easier for television viewers or radio listeners to get the programs they wanted, if they paid a fee, free over-the-air programs were fair game:  royalties to the broadcasters didn’t have to be paid even though their programs were copyrighted.  This was just a matter of customer choice, the Court said.

Congress did not seem to agree, but maybe it was not so clear in saying so — especially if the technology changed, as was inevitable.  That is the issue the Court has now agreed to explore, in a case that the broadcast TV industry is treating as a make-or-break fight for its financial survival — and, indeed, for the survival of free TV itself.  And it is a new test of whether federal copyright law has kept up with rapidly changing technology, including new ways to use the Internet to watch TV.

(ProtectMyAntenna.org)

At its core, this dispute is about the meaning for the broadcast world of two words (and variations thereon): “perform” (or “performance”) and “public” (or “publicly”).  Those words appeared in the landmark Copyright Act of 1909, and have remained in that law ever since.

As long ago as 1931, the Supreme Court interpreted those words from the perspective of what the broadcast audience was or would be for a program, and on how they got it.  ”The parties agree,” the Court said then, “that the owner of a private radio receiving set who in his own home invites friends to hear a musical composition which is being broadcast, would not be liable for infringement [of the music's copyright].  For even if this be deemed a performance, it is neither public nor for profit.”

In that case, however, the Court went on to rule that the owner of the LaSalle Hotel in Kansas City, Missouri, who put radios in each room so the occupants could pick up a popular song from a master receiver in the hotel, had infringed on the copyright for that music.

That opinion established two concepts for broadcast copyright law:  the nature of the middleman in delivering the entertainment counts, but so does the identity of the end user, or listener.

Nearly four decades later, the Supreme Court applied both of those concepts to find, first, that the provider of a hilltop television antenna did not violate a copyright on the programs picked up because the device only enabled the viewer to receive the signals; second, that there was no violation when a cable TV system picked up and re-transmitted broadcasts from distant cities because that, too, only enabled viewer access, and, third, that a restaurant owner did not perform music illegally by letting his customers listen to broadcast music on the owner’s receiver.

Congress moved in 1976 to stop that trend, passing changes in the Copyright Act to go beyond the simple recitation of the words “perform” and “public.”

To “perform” an audiovisual work (a TV program, for example), Congress said, meant to “show its images in any sequence or to make the sounds accompanying it audible.”  To do so in “public,” it said, meant to display it for “a substantial number of persons outside of a normal circle of a family and its social acquaintances,” or to send it to such a place, or to transmit it to the public “by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”

That, Congress apparently thought, was enough to put the ultimate focus on the kind of audience that would get the program, and part of the reason for that was to make sure that the average TV listener would not invade a copyright simply by switching on a TV set.

Congress also decided then to write into law a guarantee of royalties for the owners of copyrighted TV programs and other creative sounds and images.  It mandated that cable TV operators — like those involved in two of the three Supreme Court rulings that had troubled Congress — be given a license and a duty to pay royalties to owners of copyrighted works that they pick up and air via cable.  Later, Congress required TV companies that picked up their signals by orbiting satellites to do the same.

No doubt, Congress assumed that it had written the Copyright Act amendments in language that was both flexible and comprehensive enough to keep up with advances in technology that would later emerge.

Innovations in technology, of course, did come, especially in the capacity to record for playing or replaying copyrighted works. A recurring question, then, was this: if the ultimate consumers are taking advantage of the new techniques of copying to give themselves more flexibility in when they listened or viewed, do the providers of those techniques get blamed for infringing on copyrights on that entertainment?  In other words, how did new technology affect the legal principles of “performance” and “public” consumption?

Those principles were tested, for example, with the marketing of home video tape recorders, such as the “Betamax” system produced by Sony Corporation.  When TV broadcasters claimed that Sony was inducing home users of Betamax to infringe on copyrights, the Supreme Court ruled in 1984 that it wasn’t.

The only role Sony played, the Court said, was to put its device on the market, and it was then up to the consumers to decide when to use it to record a program for later or repeated viewing — a practice that the Court suggested would not be objectionable to most broadcasters.  This decision provided a new focus on the ultimate consumer as the one who gained access to the protected TV programs; such a lone customer, it was clear, was not “the public.”

Along came the Internet, and with it the creation of new ways of gaining access to copyrighted works. Now downloading software was becoming a widely used method of copying, with the copied programs stored in a computer’s memory.  When the new technology enabled individual computer owners to swap downloaded movies with each other, however, that got the distributors of so-called “peer-to-peer file-sharing” software into copyright trouble.

The Supreme Court decided in 2005 that this was different from the Betamax approach, because the distributor of the software made significant efforts to actually encourage file-sharing of the copyrighted movies, and so was a copyright violation enabler.

A variation on the technology that escaped a copyright problem in the Betamax case provided a sequel test.  Also designed to give the consumer a way to do time-shifting of TV program viewing, one version of the new technology was the “Remote-Storage DVR,” developed in the cable TV industry.

Rather than having the listener make a copy of a program and store it on a home computer, the new device used the hard drive of Cablevision Systems Corp. at a central location to record and store the desired program or movie.  The customer could call up the choice from there, for viewing; only the customer who made a copy of a particular program could do so.

The resulting legal dispute, in a lawsuit brought by Cable News Network and other owners of copyrighted TV programs and movies, focused on whether Cablevision, as the middle man, was actually performing those protected works by distributing them to the public.

The U.S. Court of Appeals for the Second Circuit, in a ruling in 2008, said no.  It was the customer, that decision said, who was doing the copying, so each playback transmission went to a single customer, not to the public, so there was no performance, in legal terms.  (The Supreme Court refused to review that decision in 2009, at the suggestion of the federal government, whose views it had sought.)

Once more, the courts had revived the notion, going all the way back to the Supreme Court’s view in 1931, of a sole listener dialing in to be entertained in the privacy of the home, with only the family or close friends as the audience.

Enter, then, a new technological idea, making direct use of the legal opening that the Second Circuit’s decision in the Cablevision case appeared to have left, and exploiting the increasingly easy access to the Internet.

The new innovator was Aereo, Inc., a small Brooklyn, N.Y., firm with a large ambition:  it wanted, eventually, to go from coast to coast with a system for which TV viewers could sign up, at eight dollars per month, to get access to TV broadcasters’ free over-the-air offerings, without even needing a TV set, relying on a smartphone, a laptop, a desktop, or an electronic tablet.

Its system, Aereo has said, operates in much the same way as “a home DVR.”  In other words, it is, according to Aereo, all about the choice of the ultimate viewer.

That choice is enabled by Aereo’s system, which maintains thousands of tiny antennas, mounted on circuit boards.   Each paying customer logs on to Aereo’s website, picks out a program for reviewing, then decides whether to watch it then or record it for viewing later.  The tiny antenna, said to be the size of a dime, is — for that transaction — used only by that single consumer.

A single copy of the desired program is made through the temporarily “rented” antenna, and it is then stored on a disk assigned to that customer, on a hard drive.  The program is thus ready for the viewer, for “live” viewing (with only a few seconds of delay) or viewing later.  “Those processes,” Aereo has summed up, “occur only at the direction of the user….From the beginning to the end of this process, the data stream received by an antenna is available only to the user who tuned the antenna by selecting a program to watch.”

To Aereo’s customer-is-king claims, broadcast TV networks and companies counter that it is Aereo that captures the free TV programs, and then uses its system to re-transmit them en masse.  “Aereo is in the business of retransmitting broadcast television to thousands of members of the public, and has not obtained authorization to do so….Whether a retransmission service uses one transmission or ten thousand transmissions does not change the basic reality” that Aereo is “transmitting a performance.”

So: is Aereo’s system just like, or very similar to, the technology that prior court rulings have found to be user-directed, or, when thousands of viewers are accessing the system perhaps for the same program, and maybe at the same time, has Aereo carried out a “performance” to the “public,” under the Copyright Act?

Challenged by broadcast TV networks and others who produce copyright-protected programs for over-the-air distribution, the legality of Aereo’s system was upheld by a federal district judge.  The system, the judge ruled, was shielded by the Second Circuit’s 2008 ruling in the Cablevision case.  Each customer’s selection, the judge found, creates a unique copy, and that copy is sent to only the requesting customer.

The Second Circuit Court agreed, in a split decision.  The majority relied heavily upon its decision in the Cablevision case.  (The dissenting judge on the Aereo panel had been a district judge at the time of the Cablevision case involving the remote storage recording system, and had ruled that system to be illegal, only to be overturned by the Second Circuit.  In Aereo’s case, the dissenting judge — now a judge on the court of appeals — dismissed its system as a clever mode of engineering around the Copyright Act.)

That is where the copyright feud between Aereo and the broadcast industry stood when the broadcasters and other owners of copyrighted creations took the case on to the Supreme Court last October.

Petition for certiorari

The challengers, using the long-standing words from the text of the Copyright Act, asked the Supreme Court to decide whether a company “publicly performs” a copyrighted TV program “when it retransmits a broadcast of that program to thousands of paid subscribers over the Internet.”  Together on that side of the case are the major commercial and cable broadcasters, their production studios, and individual broadcast stations.

The Second Circuit decision, the petition argued, had given its “blessing” to “a business model that retransmits live TV to paying customers without obtaining any authorization or paying a penny to the copyright owners.”  Already, it argued, the ruling is “transforming the [broadcast] industry and threatening the very fundamentals of broadcast television.”

Having diminished their reliance on advertising revenue because of stiffer competition for the ad dollar, the broadcasters said, they are now relying heavily on the revenue that cable and satellite companies pay for the right to re-transmit their programs.  Aereo, because it pays nothing for obtaining the TV programs, is able to undercut the price that cable and satellite customers pay to those broadcasters, and the cable and satellite firms are pondering adopting the Aereo model, the broadcasters contended.

Aereo answered the petition, choosing to characterize the issue at stake as whether a consumer can use new technology to get access to free TV programs without making the source of their service liable for copyright violation.

Contending that the broadcast networks were filing a series of lawsuits against Aereo, in what it called “a war of attrition,” the Brooklyn company joined in urging the Court to take on the copyright issue and settle it.

However, Aereo asked the Court to rephrase the question it would answer.  The question posed by the broadcasters, it said, wrongly asserts that Aereo is retransmitting the broadcasts to paid subscribers. It is the users, not Aereo, that use its system, the response contended.   The more appropriate question for the Court, the company argued, would be to ask whether Aereo “publicly performs” copyrighted programs by supplying equipment that lets the consumer make a personal choice and a personal copy of a desired program.

Obviously, Aereo hoped to steer the Court’s attention to the role of the consumer, not its own role.  In a reply brief, the broadcasters dismissed the idea of substituting a new question.  Aereo, that reply said tartly, “is not a hardware supplier.  It offers a subscription service….Make no mistake about it.”

The Court did not modify the issue it would answer when it granted review on January 10.  At that time, the Court’s order noted that Justice Samuel A. Alito, Jr., would not take part; it gave no reason.  Just this week, however, Justice Alito removed whatever obstacle there was to his participation, so the case will now go before all nine Justices.

Briefs on the merits

The broadcasters’ merits brief has two central themes:  an intense focus on the actual text of the Copyright Act’s “transmit” clause, and a broad copyright policy argument against allowing clever inventors to devise ever-new ways to pirate the protected works of creative entities like TV broadcasters.

Throughout the brief, the TV industry entities sought to keep the Court’s attention on what Aereo does with a system of its own creation:  it picks up programs off the air, and then re-transmits them, for a fee that seriously undercuts their competitors, to a public that can simultaneously watch the very same program — like the Super Bowl, for example — without paying a cent for the opportunity.  “That is a textbook public performance under the transmit clause,” the document asserted.

When Congress wrote the Copyright Act revisions in 1976, mainly to overturn Supreme Court decisions that gave broad exemptions to copyright protection, the industry brief said, it did so in a “technology-neutral” way, to cover modes of transmission that existed at the time, as well as any that might be invented in the future.

If, however, the Court might find itself looking to the role of the ultimate consumer, the  broadcasters’ brief lumps Aereo’s paying customers into a single whole that represents “the public” — precisely the mass audience that the broadcasters say Congress had in mind in 1976 when it curbed the opportunity to create new technologies to avoid paying royalties to the originators of copyrighted TV and other creations.

The federal government has entered the case as an amicus supporting the broadcasters’ plea to overturn the Second Circuit ruling.  However, it sought to add a note of caution, telling the Justices that they should craft a ruling that would not “call into question the legitimacy of innovative technologies that allow consumers to use the Internet to store, hear, and view their own lawfully acquired copies of copyrighted works.”

The key phrase in that suggestion, though, is “lawfully acquired.”  The government brief clearly sided with the broadcasters in condemning the Aereo system, arguing that, with the pervasive control that the company has over every facet of its system, it is directly infringing on copyrighted TV programs.  Aereo, it noted, “both owns and actively controls the individual antennas, centralized servers, and software that operate together to receive broadcast signals and transmit copyrighted content to the public.”

It does not make a difference, the government document argued, that individual customers of Aereo decide what they want to watch.  It is the “commercial actor” who serves those customers, with a system of its own devising, that counts the most for purposes of copyright law, the brief asserted.

On both the issue of what “performance” means, and on what transmission to “the public” means, according to the government, Aereo loses.

The cautionary note that the government put into its brief, it indicated, was designed to assure that the decision in this case does not “threaten the legality of cloud computing” — that is, the recently developed technology that gives digital consumers new ways to play back copies that they have obtained legally in the first place.  Contrasting that service with Aereo’s, the government argued that Aereo is illegally obtaining access to the copyrighted works in the first instance.

Aereo, throughout the briefing on this case, has regularly added in a reminder that the broadcast companies are the very special beneficiaries of the right to use the hugely valuable public broadcast spectrum, and that the price they must be willing to pay for that is to keep their programs available free.  Its brief on the merits seeks to add new emphasis to that point, presumably to try to show that these companies are hardly in a distressed condition, and to subtly hint that it takes some temerity for them to try to keep consumers from getting wider access to those programs at lower prices than they pay to cable TV companies now.

Very early in the new brief, Aereo commented upon the broadcasters “enforceable public obligations,” including the obligation to make even copyrighted programs that “will be made available to the entire public within range of [the broadcasters'] signals.”

That obligation has been long-standing, Aereo noted, but what has changed is that consumers regularly have been gaining new ways of getting access to those programs.  The service now provided by Aereo, it suggested, is merely another innovation in that history.  The difference with its service is that consumers no longer have to have receiving and recording equipment in their homes, because the shows they want will be stored on “the Internet ‘cloud.’”

What Aereo is doing, the brief added, is capitalizing on “widespread access to high-speed Internet connections.”

The new filing also disputed the broadcasters’ claim that they are getting less of their revenue from advertising and more from fees from the cable companies that re-transmit their programs.  They still get about ninety percent of their revenue from sales of broadcast time to advertisers, Aereo said, citing a broadcast organization’s brief.

The copyright arguments Aereo made in this fuller brief are contained in two summary assertions, both to make the point that its service is nothing more than enabling “completely lawful private performances.”

First, it said, what Aereo does is not the transmission of programs to the public.  What Aereo does is simply facilitate individual transmissions of individually chosen recordings.  Second, it said, when one of its customers actually watches a chosen TV program, they are merely watching a playback of the program, not the broadcaster’s “prior performance.”

Throughout, Aereo’s lawyers sought to stress that its system involves transmissions that are “user-created and user-controlled copies…The undisputed facts…establish that nothing goes into or comes out of Aereo’s equipment except in response to a user’s commands.”

The flow of amicus briefs runs stronger in the broadcasters’ favor, with nearly twice as many as on Aereo’s side — plus the obvious very helpful support of the federal government.  The briefs on the broadcasters’ side range from those from news, entertainment, and film industries to software developers and other digital interests, professional sports leagues, professors of intellectual property law, and conservative advocacy groups.

In support of Aereo are consumer advocacy organizations, small and independent broadcasters, satellite TV networks, digital open source advocates, computer development companies, copyright law professors, and Film On X — a firm that offers a service similar to Aereo’s and has also been a target of several lawsuits by broadcasters.

Analysis

In some significant ways, this case puts the Court back on quite familiar ground:  it has examined, over and over again, the meaning and scope of the 1976 limitations written into the Copyright Act, and it has done so by encountering new technologies with regularity.

It thus is, presumably, entirely comfortable sorting out when a form of distribution of  copyrighted material is a “performance” and when the audience gaining access is “the public.”  As a reader goes over its opinions back to 1968, the impression emerges that the Court does not roam widely between variable interpretations depending upon the specific details of new technology, although it was not always perfectly consistent.

Each side in this new case has tried, often with considerable energy, to make it easy for the Court to decide this new case: the broadcasters want the focus entirely on what Aereo itself does and how it operates its system from the top down; Aereo wants the focus entirely on the choices that its customers make from the bottom up.

On legal interpretation, the broadcasters want the Court to use a broad-brush treatment, proceeding from the premise that the 1976 Act fully anticipated that there would be new technology, but maintained enduring principles that would continue to govern; Aereo, however, wants the Court to look at the legalities entirely through the specific details of the mechanisms it has made available to its customers and why they use them.

Those alternative approaches seem likely to make it difficult for the Court to find a middle ground between them, especially since each side has argued that it finds support in the Court’s own precedents before and after the 1976 copyright amendments.

What may be most challenging in this case, though, is for the Court to make sure that it does not write too broadly so that the result might stifle further digital-age innovation.  The Justice Department’s brief on the merits suggested some of the potential risks of resolving the case more broadly than the context of Aereo’s system.

When the Court was going through cases like the Betamax and DVR disputes, it could not have imagined the concept of the “cloud” as a digital storehouse that enables the average user of a computing device to play and replay material of interest.  It almost certainly did not imagine that a music lover or a movie or sports fan would be able to find his programs by way of a very small device that does not even fill a coat pocket.

In some cases testing the Court’s appreciation of new technology, it has shown some tendency to proceed incrementally, understanding that it cannot fully anticipate, and make rules for, what may come next.  That is a discipline that suggests that, this time, the Court may want to rigorously focus on Aereo’s system, and just that.

In association with Bloomberg Law

Categories: Supreme Court

Petition of the day

Scotus Blog - Fri, 04/18/2014 - 10:37pm

The petition of the day is:

Natale v. United States 13-744

Issue: Whether a medical professional can be convicted of “knowingly and willfully” making a false statement in medical records or reports under 18 U.S.C. § 1035 when the district court failed to instruct the jury that a guilty verdict requires proof of an intent to deceive.

In association with Bloomberg Law

Categories: Supreme Court

Court won’t block Teva rivals

Scotus Blog - Fri, 04/18/2014 - 4:04pm

Chief Justice John G. Roberts, Jr., refused on Friday afternoon to delay generic drug manufacturers from offering, as early as next month, competing and lower-priced versions of a widely used drug for treating multiple sclerosis.  In a one-page ruling, Roberts said he was not convinced that Teva Pharmaceuticals USA, Inc., would suffer serious harm from the competition because it can later sue the generic companies for damages if its key patent on the drug Copaxone is ultimately upheld.

The generic companies will be in position to enter the market with their versions as of May 24, if they receive final approval from the government by then to do so.  In any event, they have indicated that they plan to start selling their products within a matter of weeks.  One major consideration for company executives, as they make their plans, will be the prospect of potentially having to pay Teva damages that could run into the hundreds of millions of dollars, if they ultimately lose the current fight over the validity of Teva patents on Copaxone.

Technically, under the Court’s rules, Teva could take its plea for protection from its rivals to another Justice, but getting a favorable result from that maneuver is not a strong prospect.

Teva has brought in huge revenues — sometimes as much as $4 billion a year, most of it profit — from selling Copaxone.  It has held a series of patents on that drug which have given it a monopoly over its distribution.  The first several patents are due to expire on May 24, but the patent that Teva regards as its key protection is not due to expire until September 15 of next year.

That longer-running patent has been ruled invalid by the special federal appeals courts that handles patent cases, the U.S. Court of Appeals for the Federal Circuit.  The Supreme Court has agreed to review that appeals court decision, but its agreement to do so apparently added nothing to Teva’s plea to the Chief Justice to put that ruling on hold while the Justices review it — something they will not do until their next Term, starting in October.

Before the Court had agreed to take on that case, Teva had asked the Chief Justice — in his role as the Circuit Justice for the Federal Circuit — to delay the lower court ruling.  Roberts refused to do so.  After the appeal was accepted for review, Teva renewed its plea to Roberts.  He had the authority to decide the issue of delay on his own, and he did so, apparently deciding not to share the task with his colleagues.

What Teva is most concerned about, it told the Chief Justice, was that the generic companies will put their cheaper version of Copaxone on the market, and start absorbing the market for that drug, even as Teva seeks to revive the validity of its more important patent.

The company’s generic company rivals had urged the Chief Justice not to delay their entry into the market, saying that Teva had asked for the wrong kind of legal relief and, in any event, was not entitled to any.  The Court’s willingness to review the Federal Circuit decision striking down the key patent is not a guarantee that Teva ultimately will win its pending appeal.

Although Roberts said he thought Teva had a “fair” chance of getting the key patent revived, that conclusion does not bind the Court when it actually takes up the issue of the Federal Circuit’s ruling.  That case will be pursued by full briefing and oral argument at its next Term.

Moreover, the rivals argued, Congress has long been interested in encouraging makers of generic versions of drugs to get their products to the market, so that consumers can get the benefit of lower prices as soon as possible. Commonly, generic drugs are sold for considerably less than brand-name, patented drugs.

In the Chief Justice’s opinion issued Friday denying Teva’s plea for temporary protection, he said that company was asking for “extraordinary relief.”  While he noted that the Court had agreed to review the validity of Teva’s major patent, and while he said the company had shown “a fair prospect” that it would win its appeal, its plea for temporary protection faltered on its failure to show that it would suffer “irreparable harm.”

The generic companies, he said, had agreed “that, should Teva prevail in this Court and its patent be held invalid, Teva will be able to recover damages from [them] for past patent infringement” — that is, presumably, infringement of the key patent that, if revived, would be in effect until September 2015.

 

In association with Bloomberg Law

Categories: Supreme Court

Editor’s Note

Scotus Blog - Fri, 04/18/2014 - 2:33pm

On Monday at 9:30 a.m. we expect orders from the April 18 Conference. On both Tuesday and Wednesday we expect one or more decisions in argued cases; we will be live blogging both days beginning at 9:45 a.m.

In association with Bloomberg Law

Categories: Supreme Court

Argument preview: When can the recipient of an IRS summons put the government on the stand?

Scotus Blog - Fri, 04/18/2014 - 1:24pm

If a taxpayer refuses to respond to a summons issued by the IRS, the government must take the summons to a federal district court to seek enforcement.  There, the government generally provides sworn affidavits to support a prima facie case in support of enforcement, consistent with United States v. Powell.   What if the summons recipient then alleges that the summons has been issued for an improper purpose?  Must the district court grant an evidentiary hearing?   The government successfully sought Supreme Court review of this issue following a per curiam decision against it, and in the summons recipient’s favor, in United States v. Clarke.

In this case, the district court denied a taxpayer request for an evidentiary hearing.  The Eleventh Circuit reversed under an abuse-of-discretion standard.  It cited circuit precedent, its 2009 decision in Nero Trading LLC vs. U.S. Department of Treasury, for the proposition that the failure to grant an evidentiary hearing “saddles the taxpayer with an unreasonable circular burden.”  But  in Nero Trading, the Eleventh Circuit emphasized the district court’s “perfunctory order with only passing reference to any legal standard and no reference at all to either the merits of the Service’s prima facie case or Nero Trading’s claims in rebuttal.” In this case, though, the district court considered each of the taxpayer’s arguments in favor of an evidentiary hearing one by one and explicitly endeavored to distinguish its careful approach from the “perfunctory” approach of the district court in Nero Trading.

Background

In 2010, Dynamo Holdings Limited Partnership (“DHLP”) was under IRS audit for tax years 2005-2007.  DHLP had agreed to extend the three-year statute of limitations twice, but it declined to do so a third time.  In September and October 2010, the IRS issued administrative summons to five recipients.  It summoned Michael Clarke as the Chief Financial Officer of Dynamo GP, Inc. and as the Chief Financial Officer of Beekman Vista, Inc.  In December 2010, just before the statute of limitations period expired, the IRS issued a “Final Partnership Administrative Adjustment,” or FPAA, to DHLP.  This FPAA apparently had been signed by the IRS agent managing the DHLP case in August 2010, although it was not issued until December 2010.   In February 2011, DHLP challenged the results of the FPAA in Tax Court.

When Clarke refused to obey the summons, the government sought enforcement in district court pursuant to Section 7604(b) of the Internal Revenue Code, which provides that “[i]t shall be the duty of the judge . . . to hear the application, and, if satisfactory proof is made, to enforce the summons.”   A 1982 Senate Report indicates that “summons enforcement proceedings should be summary in nature and discovery should be limited.”

Under United States v. Powell, an IRS summons is enforceable if it is issued for a legitimate purpose, seeks relevant information not yet in the government’s possession, and satisfies required administrative procedures.   Typically, a sworn government affidavit will support a prima facie case that these factors have been met.  Then, the recipient of a summons may allege that one or more of the factors have not been met.  The district court decides whether to grant an evidentiary hearing or discovery measures in response to the allegations from the summons recipient.

In this case, Clarke asked the district court for an evidentiary hearing, alleging an improper purpose related (among other things) to the possible use of the information in the examination of another taxpayer; the possibility of retaliation for DHLP’s failure to extend the statute of limitations period; and the filing of a Tax Court petition by the government subsequent to the issuance of the summons.  The district court declined to order a hearing, but the Eleventh Circuit reversed.  The government then asked the Supreme Court to grant review, which it did on January 10 of this year.

Analysis

In his brief on the merits, Clarke emphasizes the interaction between the summons and the pending Tax Court proceeding.  For example, he suggests that the IRS had put the DHLP audit to bed in August 2010, before the summonses were issued, because its agent signed the FPAA at that time.  And he references a declaration which states that an interview with another one of the five summons recipients was conducted not by the IRS agent who had conducted the audit, but rather by different IRS attorneys participating in the Tax Court proceeding, even though Tax Court discovery rules limit the use of third-party depositions.

Fishy?  Perhaps.  But the same story was before the district court judge, who declined to order an evidentiary hearing.   Did that judge really abuse his discretion?  The Eleventh Circuit’s decision in Nero Trading approvingly cites the Fifth Circuit’s decision in In re E.E.O.C. for the proposition that a “mere allegation of improper purpose” is not sufficient to support “time-consuming pre-trial discovery” or, by implication, an evidentiary hearing.  The Supreme Court might decide this case in favor of the government by relying on its own tax precedents relating to trial court factual determinations.  These emphasize an appellate court’s limited ability to review decisions like the district court’s holding in this case that the summons recipients had not supplied more than “mere allegations” of improper purpose.

Another possibility is that the Court will endeavor to reconcile whatever split exists among the circuits on this issue.   The government’s brief in support of certiorari states that no other court of appeals would reverse a district court denial of an evidentiary hearing in response to a “bare allegation of bad faith.” But was there only a “bare allegation of bad faith” in this case?  The government’s position on the circuit split begs the question.

Meanwhile, Clarke’s description of the law of other courts of appeals on this issue meticulously explains that some form of hearing or discovery is available, or other elements of the discovery process give the recipient of a summons the opportunity to gather some information from the government.  Clarke cites First, Fifth, and Ninth Circuit case law in particular. But in each case, the test includes consideration of whether a summons recipient presents a sufficiently persuasive allegation.  Thus Clarke’s survey of circuit precedent also begs the question.

The Justices might well like to know each side’s view on whether other courts of appeals would have similarly treated a district court’s denial of an evidentiary hearing differently based on the specific facts of this case.   Could they line the other circuits’ law up in order of friendliness to the recipient of the summons versus government friendliness?

From a policy perspective, the IRS does not want to face the prospect of an evidentiary hearing every time it issues a summons.  Indeed, the IRS is trying to speed up the audit process by requiring quicker response times for information document requests made to large-business taxpayers.  This may result in more summonses in the short term in response to large businesses’ failure, at least initially, to meet the shorter deadlines.

An evidentiary hearing requirement could throw sand in the wheels of increased efficiency.  Yet the abuse of process by the government is a possibility that must be taken seriously.  And the statutory language and legislative history are open to interpretation.  Next week, the Court will take on the question of the extent to which district courts will retain the power to balance these factors in the future.

Susan Morse joined the University of Texas law faculty in 2013. She studies and writes about international tax reform and tax compliance; and has taught federal income tax, business tax, international tax, and tax policy courses. 

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Categories: Supreme Court

Friday round-up

Scotus Blog - Fri, 04/18/2014 - 8:20am

Coverage of the Court focuses on next week’s oral arguments in American Broadcasting Companies v. Aereo, in which the Court will consider whether Aereo’s streaming of broadcast television programs over the Internet violates federal copyright laws.  Robert Levine previews the case for Bloomberg Businessweek, while in an op-ed for The Daily Caller, Gary Shapiro urges the Court to “side with Aereo.” In an op-ed for The Wall Street Journal’s Market Watch, Nat Worden contends that, if Aereo “wins, the entire media and entertainment industry could be transformed.”

In other Court-related news, last night Justices Antonin Scalia and Ruth Bader Ginsburg made a joint appearance at the National Press Club, where they both suggested that the Court would eventually weigh in on the legality of the National Security Agency’s surveillance activities.  Lawrence Hurley reports on the event for Reuters.

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Categories: Supreme Court

No challenge to gay rights standard

Scotus Blog - Fri, 04/18/2014 - 12:28am

Neither side in an important test case on the constitutional standard that courts should use in gay rights lawsuits supported a new hearing on that issue in the U.S. Court of Appeals for the Ninth Circuit.  Amid new filings on Thursday, one side did call for en banc review, but not on the standard for reviewing claims of discrimination based on sexual orientation.

The case of SmithKline Beecham Corp. v. Abbott Laboratories involves a civil antitrust dispute between drug companies, but it has gained more prominence because of its potential impact on court review of the constitutionality of state bans on same-sex marriage.  Whether the Ninth Circuit will now move on to review the proper constitutional test remains uncertain in the wake of the new papers filed in that court.  The two documents can be found here and here.

A three-judge panel of the Ninth Circuit on January 21 ruled in the SmithKline case that it is unconstitutional discrimination to bar a potential juror in a civil case because that individual was gay.  In reaching that result, the panel applied a “heightened scrutiny” analysis, saying that was now necessary after the Supreme Court’s decision last June in United States v. Windsor.  (The Supreme Court did not establish a standard of review in that case, which struck down a part of the federal Defense of Marriage Act, but the Ninth Circuit panel read its sweeping language as pointing to more rigorous review when gay rights are at issue.)

After the panel ruling, Abbott Laboratories, which lost the case, had indicated that it might seek en banc review, but then allowed the time to make such a request lapse without doing so.  However, last month, one or more judges on the Ninth Circuit called for a vote on whether to rehear the case en banc.  At that point, the panel asked Abbott and SmithKline lawyers to file briefs on whether to do so.

SmithKline’s filing opposed further review, arguing that there was no split among appeals courts on the specific issue — sexual orientation bias in jury selection; that the court should await a same-sex marriage case before deciding whether to apply the more demanding standard in that situation; that the issue will seldom come up in civil cases; that applying the ruling in other cases will not be difficult as a practical matter; and that, in any event, the panel ruling was right.

Abbott’s new brief said on its first page that it “does not request review of the panel’s holding that heightened equal protection analysis applies to classifications based on sexual orientation.” It also said that it did not object to the part of the decision that, in principle, extended the bar to discrimination in jury selection to the removal of potential jurors for reasons of sexual orientation.

However, Abbott did call for review by the full court on how that second part of the ruling should actually be applied.  It said there were serious privacy issues on whether potential jurors should be questioned about their sexual identities.  And it said the panel decision had not made the kind of analysis of who was excluded to sit on this jury and who was selected, which it said was a necessary basis for any finding of discrimination in the selection process.

Those issues, the Abbott brief said, “are critically important — both doctrinally and practically — and will affect every jury trial in this Circuit.”

With those documents now on file, the full Ninth Circuit presumably will soon cast a vote on whether to reconsider the case en banc.  It will take a majority vote of the active Circuit judges to grant such review.

Meanwhile, that circuit does have pending separately before it a test of the constitutionality of a state ban on same-sex marriage — from the state of Nevada.  With the new uncertainty over the SmithKline case, it is unclear what standard of review will be applied in the Nevada case as it moves along in the Ninth Circuit.

If en banc review were to be denied, or if granted and the panel decision were to be upheld, the more rigorous standard for gay rights cases presumably would be binding throughout the Ninth Circuit.

“Heightened scrutiny” is considerably more difficult to satisfy than the “rational basis” test that, up to now, has been used by the Ninth Circuit in judging official actions that are challenged as biased against gays and lesbians.  Only one other federal appeals court — the U.S. Court of Appeals for the Second Circuit — uses the higher standard in such cases.

In the recent series of rulings by federal trial court judges striking down state bans on same-sex marriage, the judges have nullified those laws using only the “rational basis” test, finding that states could not even muster enough justification to meet that least-demanding standard.

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Categories: Supreme Court

Petition of the day

Scotus Blog - Thu, 04/17/2014 - 10:11pm

The petition of the day is:

Drake v. Jerejian 13-827

Issue: (1) Whether the Second Amendment secures a right to carry handguns outside the home for self-defense; and (2) whether state officials violate the Second Amendment by requiring that individuals wishing to exercise their right to carry a handgun for self-defense first prove a “justifiable need” for doing so.

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Categories: Supreme Court

Teva agrees to put up bond in drug fight

Scotus Blog - Thu, 04/17/2014 - 3:49pm

Teva Pharmaceuticals USA, Inc., the maker of a widely used drug for treating multiple sclerosis, told the Supreme Court on Thursday that it is willing to put aside promptly up to $500 million to cover marketing losses that generic competitors might have if Teva succeeds in keeping them on the sidelines for months with their lower-priced alternative versions of the drug.

Teva insisted that no bond was necessary but that, if the Court ordered one, its amount should be calculated by a federal judge.  If the Court itself were to impose such a duty and set an amount, Teva said it “is prepared to post a bond of up to $500 million at the earliest practicable date, but in no event later than May 24.”  That is the earliest date that the generic companies could launch their own version of a drug that Teva sells under the brand name Copaxone.

Although the generic firms had suggested that, if their entry into the market is delayed by the Court at Teva’s request, a bond should be imposed, they did not publicly declare how much it should be other than suggesting it might be in the hundreds of millions.  They submitted, under seal, estimates of the financial impact on them if their entry in the market were delayed.

Language in the Teva response Thursday suggested that private estimates of a bond suggested by the generic companies were considerably higher than $500 million.  Any estimates for a proposed bond, Teva argued, are “inherently speculative” because the generic firms have no idea when they may get government approval to enter the market with their versions, and they have not said how many generic products they were prepared to market.

Teva argued that the estimates of lost profits that the generic firms had submitted under seal to the Court were “staggeringly different” in the separate calculations contained in the private documents.

Should the Court accept the proposal for an immediate bond of up to $500 million, Teva added, then a federal judge should be told to consider whether any more — or less — than that would “adequately secure” the generic firms.  Until that happened, the filing said, the amount it proposed would “fully protect” the rivals “for many months of sales even under their most wildly optimistic projections.”

Teva’s filing Thursday is the final document that is expected to be filed in the Court on the question whether Chief Justice John G. Roberts, Jr., or the full Court will temporarily bar the generic alternatives from the market while the Court reviews Teva’s challenge to a federal appeals court ruling striking down its key patent on Copaxone.  That review will come in the new Term starting in October.

On the need for a stay of the appeals court decision, the new Teva document said there was more than a fair prospect that the Justices will rule in Teva’s favor, thus keeping its right to market Copaxone intact until the key patent expired in September 2015.

 

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Categories: Supreme Court

Argument preview: Justices to wade into morass about “indefinite” claims in patents

Scotus Blog - Thu, 04/17/2014 - 11:51am

In the next stage of its continuing quest to reexamine every significant aspect of the Federal Circuit’s doctrinal framework for patents, the Court in Nautilus, Inc. v. Biosig Instruments will consider the proper standard for invalidating a patent claim as “indefinite.”

Background: The case involves a technical solution to a common problem in the exercise-equipment industry.  How can you measure the heartbeat of the exerciser without attaching electrodes?  The principal difficulty is that the body generates two separate sets of electrical waves, with similar amplitudes:  “ECGs,” the waves from the heart, which have the distinctive pattern we’ve all seen on heart monitors; and “EMGs,” which come from muscles.  Because the two kinds of waves have similar amplitudes, simply recording the waves from any particular place on the body (such as the hands) will present a mass of noise from which the ECGs cannot easily be discerned.

The Biosig patent before the Court is one of several obtained by the Russian-born Gregory Lekhtman.  The patent takes advantage of the oddity that – unlike EMGs — ECGs on the left side of the body have an opposite phase from ECGs on the right side of the body. The patent calls for a bar to be held by both hands (imagine the bar on a jogging treadmill), with electrodes on each end. The device compares the electrical waves from the left hand to those from the right end and subtracts the ones that match, leaving only the ECGs, from whose pattern the device easily can determine the heart rate.

All agree that the patented technology is effective, that Biosig sells exercise machines that implement the patent, and that other exercise manufacturers (but not Nautilus) pay licensing fees to Biosig so that they can sell exercise machines that implement the patent. Nautilus contends that the patent is invalid because it is “indefinite.”  That contention relates to specific words in one of the claims in the patent, which involve “common” electrodes that must be placed on each side of the bar in a “spaced relationship” to the “live” electrodes that record the signals discussed above.  To simplify a bit, Nautilus claims the patent is reprehensibly indefinite because it does not specify how big the “space” between those electrodes should be in the “spaced relationship.”

The district court agreed with Nautilus and deemed the patent invalid, but the court of appeals unanimously reversed.  It applied the standard Federal Circuit doctrine, under which a claim is to be invalidated as indefinite only if it is, in the Federal Circuit’s regrettable phrasing, “insolubly ambiguous.”  Judge Schall concurred, offering a different understanding of the patent from that articulated by the panel, but agreeing that the claim was not invalid.

A word about the structure of patents before turning to the parties’ arguments: It is central to the problem before the Court that the typical patent has numerous (and sometimes hundreds of) claims.  This means that the well-counseled inventor will include claims at varying levels of specificity.  Some claims will be narrow, with specifically defined boundaries that cover the core invention, closely follow the particular implementation of the invention the inventor already has produced, and directly distinguish it from existing inventions. In addition to those claims, which will be at relatively low risk for a definiteness attack, but which will reach relatively few competing products, carefully drafted patents often include claims in steadily expanding concentric circles of imprecision that increase the claimed boundaries of the invention as far as possible. The multiplicity of claims is crucial, because it makes the strategy of drafting ambiguous claims so nearly costless:  even if the broad ambiguous claims are rejected, the narrower precise claims will remain in place.

The Arguments: It should be obvious to all (and it certainly will be obvious to the Justices) that any effort to bring verbal precision to the question of “definiteness” is fraught with difficulty, if not entirely futile. This is relevant for present purposes because it makes the task of the individual lawyers in defining, justifying, and defending particular formulations challenging (at best).

Nautilus and Its Amici:  Nautilus responds with a stark syllogistic textual argument that (a) “insoluble” ambiguity necessarily tolerates patents subject to multiple reasonable meanings; (b) a claim with multiple reasonable meanings is “ambiguous”; and (c) an ambiguous claim fails to satisfy the statutory requirement that it “poin[t] out and distinctly clai[m]” the invention.

Nautilus’s choice to defend the line between patents for which every “reasonable” person would agree on the meaning and those for which reasonable persons might disagree resonates with the Patent Act’s common reliance on the hypothetical “person having ordinary skill in the art” (often referred to as a PHOSITA).  In this particular case, it also offers a powerful argument drawn from the split decision below:  if the three judges of the Federal Circuit discerned two distinct, but reasonable, interpretations of the claim, then the claim must by definition be indefinite.

If Nautilus’s textual presentation provides a strong hook for sympathetic Justices, it is the company’s policy arguments that are most powerful.  Because the claim defines the boundaries of the monopoly granted by the patent, uncertainty about those boundaries is costly.  For one thing, it permits costly litigation against businesses that cannot be sure (or even guess) until the conclusion of litigation whether the claims against them are meritorious.  The length of the dispute in this case (ten years and counting) underscores the failure of the existing process.

For another, the existing practice casts a shadow on continuing innovation: if a resourceful inventor wishes to explore technological advances adjacent to the patent, it cannot with any degree of certainty discern whether the devices or processes it creates will infringe the existing patent.  Collectively, those effects in fact give inventors an incentive to write claims that are intentionally ambiguous; Nautilus quotes several manuals that directly recommend the use of ambiguous claims and offer strategies for drafting them as broadly as possible.

Nautilus draws strong support for those policy arguments from a set of high-powered amici.  Collectively, the briefs present a compelling case that something is wrong with the existing system, and that the most likely candidate for error is the Federal Circuit’s doctrine about indefiniteness.  For example, Microsoft – which is both one of the nation’s largest patent-holders and also one of the most frequent defendants in patent litigation – weighs in with a filing emphasizing the unfortunate interaction between a loose standard for definiteness and the mechanics of patent drafting and examination.  Specifically, examiners in the Patent and Trademark Office (the “PTO”) can reject patent applications repeatedly on the ground of indefiniteness, permitting multiple amendments until the examiner concludes that all the claims are valid.  If that process worked effectively, the examiners readily would reject the broader claims as indefinite or overbroad.  But because the inventor knows the invention and related inventions best, it is relatively difficult for the examiner to identify the various strategies for ambiguity that the inventor might be exploiting.

Another noteworthy amicus filing comes from a large group of technology companies headed by Amazon (the list is in alphabetical order), who focus on  quantifying the social costs of vague patenting.  The most effective part of the brief presents chilling data about the marked increase in the number of patents in force during the last decade, and the rapidly growing volume of litigation brought by patent-assertion entities (entities that hold patents but do not themselves make devices implementing the patent).

“Compromise” Amici:  Yahoo! files an amicus brief in support of reversal (but pointedly not in support of Nautilus), arguing that Nautilus’s standard is just as problematic as the Federal Circuit’s standard because it goes to the opposite extreme, by articulating a standard that would invalidate almost any patent.  Given the inherent imprecision of language, almost any claim is subject, on its face at least, to multiple reasonable interpretations.  The “zero-tolerance-for-ambiguity” standard that Nautilus articulates is an easy target for criticism.  Yahoo! urges reversal because the Federal Circuit’s “intolerable ambiguity” standard is far too lax; under that view the court of appeals should take a second look at the case, applying the more rigorous PHOSITA standard Yahoo! articulates.

The most interesting thing about the Yahoo! standard is that it is almost identical to the standard that the federal government articulates in its brief, filed in support of Biosig and thus urging affirmance.  The government suggests that the phrase is “susceptible to possible misapplication” by district courts, and even goes so far as to accept Nautilus’s argument that it “may encourage patent drafters to exploit potential ambiguities rather than to cure them.” And yet, the government urges affirmance, based on its view that the record establishes that a PHOSITA in fact could understand the claim; it points in particular to an affidavit asserting that a PHOSITA managed to construct a working device using the information in the specification in just a few hours.

Respondent:  Respondent Biosig stakes out a position that seems to be a bit farther out in the spectrum; the need to seek affirmance all but requires it to justify the Federal Circuit’s analysis as so close to correct that there is no need for a remand.  Thus, Biosig argues that references to “insoluble” ambiguity in Federal Circuit opinions are effectively snippets that obscure the actual test the Federal Circuit applies.  On that point, Biosig presses a standard difficult to distinguish from the PHOSITA standard that Yahoo! and the federal government urge.  At some places, it emphasizes the PHOSITA reading (and the evidence discussed above), but at others it seems to suggest that almost any patent is capable of being construed, and it thus suggests a standard under which indefiniteness attacks would rarely be successful; the discussion resembles the rarely applied doctrine permitting a court to hold a contract invalid for indefiniteness.

Biosig is on stronger ground with its attacks on the “no ambiguity” rule that Nautilus articulates.  Biosig contends that this rule is directly inconsistent with the large mass of the Court’s cases on claims construction, in which the Justices regularly have applied interpretive tools to resolve close questions of construction.  Almost by definition, those cases involved claims susceptible to multiple reasonable readings, or they would not have troubled the Court. Rebutting Nautilus’s claim that “there must be two reasonable readings if the judges couldn’t agree below,” Biosig can point out that Justices often have dissented from claims construction opinions, which proves that a claim can be enforced despite multiple constructions persuasive to individual jurists.

Biosig also points to the doctrine of “equivalents,” a longstanding judicially created patent doctrine that allows enforcement of patents not only against devices that fall within the literal boundary of the claims, but also (in rare cases) against inventions that fall outside the literal boundary of the claims, when the devices in question can be called “equivalent” to the claimed invention.  That rule shows the Court’s longstanding concern that an inventor receive the benefit of the entire invention, even if he could not describe it in the specific language of a particular claim.

Conclusion: The argument in this case well might resemble last month’s argument in Alice Corp. v. CLS Bank International, in which the Justices struggled mightily to come up with verbal formulations adequate to serve the relevant policies, but spent little or no time considering how those formulations might apply to the patent at issue.  Here, the Justices are likely to be motivated to rein in the Federal Circuit’s arguably toothless definiteness standard; the ability of drafters to offer so many claims makes it difficult to doubt the incentive under existing doctrine to draft claims vaguely.  At the same time, the Justices surely will want to stake out something that doesn’t too easily invalidate a large mass of important patents. I would predict an argument in which the Justices press all of those arguing hard to pin down and justify the particular boundaries they want to draw.

 

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Categories: Supreme Court

Thursday round-up

Scotus Blog - Thu, 04/17/2014 - 8:31am

Briefly:

  • Writing for the Legal Times, Tony Mauro reports on Tuesday’s sentencing in D.C. Superior Court of Noah Kai Newkirk, who was arrested in February for disrupting an oral argument at the Supreme Court.  Newkirk was sentenced to time served and ordered to pay $150.
  • Tonight at 6 p.m. C-SPAN and C-SPAN Radio will air an appearance by Justices Ruth Bader Ginsburg and Antonin Scalia at the National Press Club, where they will discuss (among other things) the First Amendment with host Marvin Kalb.
  • Jeremy P. Jacobs of Greenwire profiles John Korzen, the Wake Forest law professor who will make his oral argument debut at the Court next week representing the respondents in CTS Corp. v. Waldburger.
  • Richard Wolf of USA Today previews next week’s oral arguments in American Broadcasting Companies v. Aereo, in which the Court will consider whether Aereo’s streaming of broadcast television programs over the Internet violates federal copyright laws.
  • At U.S. Law Week (via Bloomberg BNA), Brendan Morrissey previews next week’s oral arguments in Republic of Argentina v. NML Capital, in which the Court will consider whether U.S. courts can order disclosure of information about a foreign country’s assets around the world.  (Lyle Denniston previewed the case for this blog earlier yesterday.)
  • In the ABA’s The Appellate Quarterly, Daniel Wallach has a detailed analysis of Christie v. NCAA, in which the New Jersey governor is asking the Court to review a federal law that prohibits most states, including New Jersey, from licensing or authorizing sports gambling.
  • At truthdig.com, Bill Blum examines the “roiling debate among left-leaning lawyers, scholars and legal commentators as to whether the time has come for [Justice Ruth Bader Ginsburg] to retire in order to permit a Democratic president, Barack Obama, to nominate her successor.”
  • At the National Review’s Bench Memos, Roger Clegg notes recent developments in California that, in his view, bolster the state’s case in Schuette v. Coalition to Defend Affirmative Action, in which the Justices are considering whether Michigan can ban the use of affirmative action at public universities.
  • In her column for The New York Times, Linda Greenhouse discusses the Court’s recent decision in McCutcheon v. Federal Election Commission, striking down the aggregate limits that federal election laws imposed on contributions to candidates for federal office, political parties, and political action committees.  She focuses “less [on] the real-world impact than [on] what the decision tells us about the Supreme Court and Chief Justice Roberts, who at this rate and at age 59 figures to be with us a good deal longer than campaign finance laws.”

[Disclosure: Kevin Russell of Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel on an amicus brief in support of the respondents in Schuette, but I am not affiliated with the firm.]

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Categories: Supreme Court

Argument preview: Attack ads and the First Amendment

Scotus Blog - Thu, 04/17/2014 - 12:02am

At 10 a.m. next Tuesday, the Supreme Court continues its current fascination with free speech and the First Amendment, exploring at a one-hour hearing when an advocacy group can challenge a restriction on election campaign rhetoric.  Arguing for two advocacy groups in Susan B. Anthony List v. Driehaus will be Michael A. Carvin of the Washington, D.C., office of Jones Day, with twenty minutes of time.  If the Court, as expected, permits the federal government to join in the argument, its views will be represented by Eric J. Feigin, an Assistant to the U.S. Solicitor General, with ten minutes.  Ohio’s lawyer at the lectern, with thirty minutes, will be Ohio Solicitor Eric E. Murphy of Columbus.

Background

The attack ad, often used to shame a candidate in an effort to persuade voters, is as common in today’s political campaigns as buttons, town hall meetings, and endorsements.  But it is not routine for the government to try to police those ads.  The state of Ohio and some fifteen others try to do so, however, and that has helped produce the latest First Amendment case for a Supreme Court that currently has a keen interest in that amendment, especially in campaign settings.

In all of the history of the First Amendment, the Court has never ruled that false statements are totally without protection under the Constitution.  It made the point again (although in a somewhat uncertain ruling that lacked a clear majority) in the decision two years ago in United States v. Alvarez, which took most of the punch out of a federal law making it a federal crime to falsely claim that one had received a military medal.  That, too, involved political speech.

But if a group or an individual wants to challenge a law that outlaws speech, how and when is it allowed to go to court to claim the protection of the First Amendment?  That is the issue the Court faces next week, in the first case to reach it in which opposition to the new federal health care law became a campaign issue.

When the House of Representatives in 2010 gave its final approval to the Affordable Care Act (now known widely in politics as “Obamacare”), one of the Democrats voting for it was Rep. Steven Driehaus, representing an Ohio district that included Cincinnati and its suburbs.  Later that year, he campaigned for reelection, but was defeated.

An advocacy group that is opposed to abortions, the Susan B. Anthony List, made an arrangement to put up a billboard in Driehaus’s district that would proclaim: “Shame on Steve Driehaus!  Driehaus voted FOR taxpayer-funded abortion.”  It also aired radio broadcasts with the same message.  The billboard never went up, because the company owning the space backed down when a lawyer for the congressman threatened to sue, claiming the message misrepresented his vote.

Driehaus soon pursued a complaint with the Ohio Elections Commission, which has the power to recommend prosecution for violations of a state truth-in-politics law.  That law has two key provisions: it prohibits anyone from trying to influence voters by intentionally making a false statement about a candidate’s voting record, and it prohibits the distribution of any false statement about a candidate if the source knew it was false or didn’t care whether it was true or false.

The state commission, in a preliminary vote, sided with Driehaus, but before any prosecution by state officials went forward, Driehaus was defeated for reelection, and his complaint was dismissed by the commission at his request.

Susan B. Anthony List then sued in federal court, seeking to strike down the law under the First Amendment.  It sued Driehaus and the state commission, along with its members.  That case was joined with one filed by an anti-tax group, the Coalition Opposed to Additional Spending and Taxes, which had wanted to send out emails and other materials also attacking Driehaus for allegedly voting for tax-supported abortion.  That group said it had held off sending out its messages because it knew of the commission action on Driehaus’s complaint, and was deterred from speaking out.

A federal judge dismissed the lawsuits without ruling on their First Amendment claim.  The judge found that the lawsuits could not go forward procedurally, because they were filed too soon, lacked proof of any legal injury, or would have no legal effect since there had been no prosecution under the state law.

The U.S. Court of Appeals for the Sixth Circuit refused to revive the lawsuits.  It said the state commission’s action did not reach a final ruling that the state law had been violated, that there was no immediate prospect of actual enforcement of the law, that the chance of prosecution was diminished because there was no admission that the statement about Driehaus was false, and that it was only speculation that there would be a future complaint of a violation of the law by one of these groups.

In essence, the appeals court ruling went far toward ruling out pre-enforcement challenges of a political speech restriction, when enforcement was not looming imminently.

Both organizations took the case on to the Supreme Court in August of last year.

Petition for certiorari

The two groups opened their petition to the Court in a tone of disbelief: “Believe it or not, it is a criminal offense in Ohio to make a knowingly or recklessly ‘false’ statement about a political candidate or ballot initiative.”  They asked the Court to rule on two issues, both focused on the scope of the right to sue, rather than on the constitutionality of the Ohio law.

First, the petition asked whether prosecution under a speech-restricting law had to be certain and successful before it could be challenged in court under the First Amendment, and, on that point, it noted that the federal appeals courts are divided.  Second, it asked whether a pre-enforcement challenge of a ban on false political statements was barred if the speaker insists that the message was true — another issue, it said, that has split lower courts.

The groups argued that the Sixth Circuit “has created a paradigmatic Catch-22, whereby a speech-restrictive law cannot be challenged before, during, or after prosecution — only once the speaker has been successfully convicted.”  The result, they contended, can only be self-censorship by political speakers, “degrading political debate.”

Ohio chose not to respond to the appeal, but the Court last September asked for a response.  The state then urged the Court to bypass the case.  Among other points, it argued that only county prosecutors in Ohio could actually enforce the state law, that none of them had been sued, that the Sixth Circuit had already ruled that the state commission had no power to “enjoin speech,” and that, if the commission ever did take final action against these groups, that would not amount to a prosecution anyway.

Moreover, the state’s lawyers argued, the Sixth Circuit in this case had used the same standard “as everyone else” had — that is, that a lawsuit had to claim a “credible threat of prosecution.”

The Court granted review on January 10, apparently accepting both issues for review.

Briefs on the merits

The challengers’ merits brief opened with the same “believe it or not” rhetorical thrust, expanded to note that violations of the state law at issue could lead to “fines or even imprisonment.”  The aim of the statement, at the merits stage as well as the petition stage, was to encourage the Court from the outset to see the Ohio law as an outlier, with no place in American politics.

It went on to make a judicial policy argument that did focus on the issue before the Court — that is, the right to bring a challenge to such a law.  The brief contended that the Sixth Circuit’s decision, “as a practical matter, insulates this patently unconstitutional regime from any federal judicial review.”

Some of the most energetic argument in the body of this brief, however, put its focus on the Ohio law.  It relied heavily upon the Supreme Court’s ruling in United States v. Alvarez, in which, it noted, even the dissenting Justices had agreed that “allowing the government to serve as arbiter of political ‘truth’ cannot be squared with basic free-speech principles.”

Ohio and the other states with such truth-in-politics laws, the document contended, are attempting with such laws to “do exactly what Alvarez warned against, inserting state bureaucrats and judges into political debates and charging them with separating truth from oft-alleged campaign ‘lies.’  Such statutes are almost certainly unconstitutional, yet they play a troubling, harassing role in every political campaign in those states.”

When the groups’ brief moved on to the right-to-sue issue, it pressed the argument that it should be sufficient to get into court if “there exists a ‘credible threat’ that one’s speech will be penalized” under a law such as Ohio’s.  That standard can be met, it contended, “based on just the existence of the law and the party’s intention to take action that may be perceived as violating it.”

In the face of such a “credible threat,” the brief said, a lawsuit should be barred only if there is “an express commitment by prosecutors not to enforce the law.”  Otherwise, a “fear of prosecution” should be enough.

Going over the facts in the proceeding that Driehaus pursued before the state commission, the groups’ brief said there was more than enough basis for their fear of prosecution if they went ahead with the messages they had wanted to put out during the congressional campaign.

It then sought to dismiss all of the Sixth Circuit’s rationales for blocking the two lawsuits from going forward, and put some special emphasis on the argument that it should make no difference to the right to sue that a group actually believed that its campaign message was true — bearing on the second issue the Court is reviewing.

Its ultimate point, though, was a return to the perceived constitutional vice of the truth-in-politics law itself.  The groups’ brief contended that, by keeping them out of court, the Sixth Circuit had “secured perpetuation of a blatantly unlawful regime under which bureaucrats are the supreme fact-checkers for every political campaign — a regime that has, predictably, been routinely abused.”

Under that law, it argued, the only thing that a political opponent need do — because the Ohio law allows anyone to go to the state commission with a falsity complaint — is to file such a complaint, shutting down rivals’ messages while the campaign is underway, and then dropping the issue after the election is over.

The federal government has entered the case as an amicus supporting the challengers, but it urged the Court to craft a careful decision that would allow the two advocacy groups to go forward with only a claim that the truth-in-politics law’s regulation of speech was invalid as written — that is, they should be allowed to press a “facial challenge” to the law’s restrictions.

That part of the case should go ahead, the government brief argued, because the government endorsed the idea that it would be sufficient to make a claim of a “credible threat of prosecution,” and because the government agreed that the state commission’s preliminary finding that Susan B. Anthony List had intentionally misinformed voters did make an actual prosecution under the law more likely and thus would impede the ability to speak out during the campaign season.

Beyond that direct attack on the text of the two laws, the government brief argued, the two groups had not offered a sufficient basis for them to go ahead with any challenge to the procedures the state commission might use, or to a separate state law that requires them to disclose who paid for their political messages, and they should not be allowed to continue their lawsuit against any state official other than the election commission and not against the Ohio secretary of state, nor against former Representative Driehaus, since he may never run for office again.

It was clear from the federal government’s brief that the Justice Department was most concerned about the effect of the truth-in-politics laws as written, and wanted the case to home in on that alone.

State officials, in two briefs at the merits stage, presented the Court with divided approaches.  The merits brief that appears to reflect primarily the views of the state election commission sought to head off entirely the two groups’ lawsuits, based on the argument that those lawsuits are primarily aimed at future regulation of their speech, and such claims are premature at this point.

Much of that brief tracks the Sixth Circuit’s conclusions to justify its decision to bar the challengers’ lawsuit from proceeding to a ruling on the validity of the state law.

The state’s attorney general, Michael DeWine, signed both that brief and a separate one, for himself, that is said to be “in support of neither party.”  DeWine’s brief told the Court that he signed on to the other brief for the state, under his obligation to defend state laws that are attacked.

But his own brief voiced a concern that the Ohio truth-in-politics law may well be unconstitutional, and it argued that, in an appropriate case, the federal courts should actually judge its constitutionality — a process that the DeWine filing clearly implied should lead to a decision to strike down the law.

Aside from his duty as the state’s top legal officer to defend state laws, the attorney general’s brief said, the holder of that office also has “a special duty . . . to acknowledge when the government’s side might be wrong.”

On the issues that the Court has agreed to review, focusing on the right to sue, the DeWine separate brief said that his concern about the validity of the law should inform the Court’s decision about whether to allow the challengers’ lawsuit to move ahead.

Thus, the federal government’s amicus brief, in its more modest approach, and the DeWine separate brief, in his bold challenge to the validity of his own state’s law, provide significant support for the challenging advocacy groups’ effort to scuttle the state law.

If that were not sufficient support, however, the groups also have drawn nineteen other amicus briefs, ranging widely from the political right to the political left, and including news and book publishers and a wide array of other free-expression organizations and politically active groups (including the Republican National Committee).

And, notably, there is not a single amicus brief on Ohio’s side.   At the oral argument, the imbalance in the filings may add to the challenge facing the state’s solicitor, Eric E. Murphy, who will be making his first appearance before the Justices.

Analysis

One of the main tasks facing the Justices as they take up this case will be to discipline themselves to keep their attention focused on the questions they have actually agreed to decide:  that is, how and when may a court case go forward against a law that aims at limiting expression protected by the First Amendment.

That is a constitutional issue, to be sure, based on how the Justices interpret — in the political rhetoric context – the Article III limitations on the power of federal courts.  But so much of what has been said in the briefing in this case is about the merits of the Ohio truth-in-politics law that this constitutional question may thrust itself front and center.

Will the Court, if it shares the concern expressed here about supposed bureaucratic meddling in the heat of an election campaign, be driven to assure the continuation of a lawsuit designed to stop that meddling?  In other words, what role — if any — does the potential invalidity of a law play in deciding whether Article III allows it to be challenged in federal court?  Should the courthouse door stand more widely open for a challenge that, at the very outset, seems more meritorious in the end?

This is a Court with a committed majority in favor of enlarging First Amendment rights in general, and in political expression in particular.  But it is also a Court that has shown a decided tendency to scale back on access to the federal courts, by taking a fairly stringent view of what Article III demands.  If there is a tension there, how will this Court deal with it?

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Categories: Supreme Court

Petitions of the day

Scotus Blog - Wed, 04/16/2014 - 10:15pm

The petitions of the day are:

Jesinoski v. Countrywide Home Loans, Inc. 13-684

Issue: Whether a borrower exercises his right to rescind a transaction in satisfaction of the requirements of the Truth in Lending Act, 15 U.S.C. § 1635, by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must instead file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held.

Keiran v. Home Capital, Inc. 13-705

Issue: Whether, to exercise the right to rescind a mortgage loan under the Truth in Lending Act, it is sufficient for a consumer to notify the creditor in writing within three years of obtaining the loan (as the Third and Fourth Circuits have held, and as the Consumer Financial Protection Bureau has concluded), or whether the consumer must also file suit within that three-year period (as the Eighth, Ninth, and Tenth Circuits have held).

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Categories: Supreme Court

Judge nullifies strictest anti-abortion law

Scotus Blog - Wed, 04/16/2014 - 7:06pm

A federal judge in Bismarck, North Dakota, on Wednesday struck down the strictest anti-abortion law in the nation, a ban on ending pregnancy after a fetal heartbeat is detected — that is, at about six weeks.  Separately, U.S. District Judge Daniel L. Hovland rejected a legal maneuver by lawyers for the state seeking to prohibit all abortions in North Dakota, at any point in pregnancy.

State legislatures across the nation in the past two years have passed a number of new laws to restrict abortion rights, but so far, only one of those has been at issue before the Supreme Court.  The Justices on January 14 refused to hear a case from Arizona; the denial order provided no explanation.

The Arizona law would have banned abortions at twenty weeks of pregnancy, some four weeks before most experts believe a fetus could survive outside of the woman’s body, if delivered alive.  The Supreme Court has said repeatedly that a state may not ban abortions until after fetal viability at the earliest.

The North Dakota law (H.B. 1456), passed by its legislature last year, did not set a specific number of weeks during pregnancy at which an abortion could no longer be performed.  But it did specify that no abortion could be performed after a doctor detected a heartbeat — except in a medical emergency threatening the woman’s life or threatening grave medical harm to her.  All sides involved in the case agreed that a heartbeat usually can be detected about six weeks into a pregnancy.

The law was challenged by the operators of the Red River Women’s Clinic in Fargo, the only facility in the state that performs abortions at any point.  At that clinic, doctors will not perform an abortion until the fifth week of pregnancy.  Thus, the practical effect of the new North Dakota law was to ban almost all abortions — that is, except for a brief interval in the fifth week.

Judge Hovland ruled the ban unconstitutional, noting that the Supreme Court for more than forty years has never abandoned the constitutional conclusion that a state may not ban abortion until after the point of fetal viability.

The judge’s decision actually went further than nullifying the fetal heartbeat provision of the law.  As this case unfolded in his court, lawyers for the state had changed their position, and argued that fetal viability begins at the moment of conception — that is, the very point medically when pregnancy begins.  Thus, they had contended that no abortions could be performed at any time in pregnancy.

That argument, Judge Hovland said, was designed to mount a direct attack on the Supreme Court’s most basic abortion rights decision — the 1973 ruling in Roe v. Wade.  He had no authority to second-guess that ruling, the judge said.

The state of North Dakota now has the option of challenging the new decision before the U.S. Court of Appeals for the Eighth Circuit.

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Categories: Supreme Court

Alito rejoins the Court in two cases

Scotus Blog - Wed, 04/16/2014 - 5:15pm

The Supreme Court disclosed Wednesday, in routine entries on its docket, that Justice Samuel A. Alito, Jr., will now be taking part in two cases from which he had held himself out earlier — both set for argument next week.

In earlier orders in the cases of POM Wonderful v. The Coca-Cola Company, a case about truthful labeling on fruit juices, and American Broadcasting Companies v. Aereo, a case about Internet “streaming” of free TV programs — for a fee, Justice Alito had not taken part when the Court issued preliminary orders.  No explanation was given, but it was assumed that he had financial investments that made his recusal necessary.

On entries in each case Wednesday, the Court informed the lawyers and the public that “Justice Alito is no longer recused in this case.”  No explanation was given, but presumably he has cleared up a conflict that had induced his recusal.

The POM Wonderful case is set for argument at 11 a.m. Monday, and the Aereo case is scheduled for argument at 11 a.m. Tuesday.  (Both cases presumably had been set for the second hour on each of those days, because that allowed Justice Alito to be on the bench for the first case of the day, and then step aside when the second case came up.  As a result of his return to participation, however, the cases will remain as scheduled; he simply will stay on the bench.)

Although Justice Alito’s move will mean there will be a full bench for the Aereo case, Justice Stephen G. Breyer has been recused along with Alito from the Pom Wonderful case.  There has been no indication of a change in Breyer’s position.

 

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Categories: Supreme Court

An update on our press pass

Scotus Blog - Wed, 04/16/2014 - 9:56am

Last week, the Senate Press Gallery denied SCOTUSblog’s application for a press pass, and advised us that it would refuse to renew the credential it had previously granted Lyle when it expires next month.  We were disappointed in that decision, and we are grateful for the support that we have received through social media, emails, and phone calls.

We thought it would be useful to write and explain the state of play regarding our credentialing.  SCOTUSblog is not now, and has never been, credentialed by the Supreme Court.  The Court’s longstanding policy was to look to credentials issued by the Senate.  We pursued a Senate credential for several years, modifying several policies of the blog to address concerns expressed by the Gallery.  Last year, we  finally succeeded – the Senate Press Gallery credentialed Lyle as a reporter for SCOTUSblog.  We then presented that credential to the Supreme Court, thinking that the issue was resolved.

But the Court declined to recognize the credential, explaining that it would instead review its credentialing policy.  The Court has not indicated when that review will conclude.

In the interim, we do have a largely uninterrupted ability to cover the Court, which has tried to accommodate the blog, despite declining to credential it.  Well before the Senate issued a credential to Lyle, the Court had recognized Lyle based on his work for WBUR in Boston.  That remains unchanged.  Also, as an interim measure during the review of its policies, we have requested public seats for the cases that Amy is covering, and the Court has granted all those requests.

All that said, the Senate Press Gallery’s decision to deny us a credential is important to us.  We wanted the credential in substantial part because we cover Supreme Court-related matters in the Senate.  Most significantly, we do gavel-to-gavel, liveblog coverage of Supreme Court nominations.  We also expect to cover hearings related to the Court’s budget.  So those efforts are now more difficult.

So we plan to appeal the Senate Gallery’s credentialing decision.  We do not have a written list of the reasons for the denial, which makes the process more difficult.  Our impression is also that the appeal may go to the same group that denied the application in the first place.  If the appeal is denied, then we expect to litigate the issue.  We’re now coordinating all those efforts with other groups that kindly have offered to support us.

All in all, the refusal by the Court and the Senate to credential us have always seemed strange.  No one seems to doubt that we are a journalistic entity and that we serve a public function.  Winning the Peabody and other awards would seem to confirm that.  And the Court for years has functionally recognized us, because obviously the overwhelming majority of Lyle’s work is for us.  We do not want any kind of special treatment.  Credentialing the blog doesn’t give us any special power or recognition; it just makes our jobs incrementally easier.  All in all, it doesn’t seem to make sense to impose burdens on us that are greater than those that apply to others who fundamentally do the same thing.

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Categories: Supreme Court

Argument preview: A global search for money

Scotus Blog - Wed, 04/16/2014 - 7:48am

The Supreme Court opens its final argument session of the Term next Monday, and it begins with a one-hour argument at 10 a.m. on the latest round in the long-running controversy over default on Argentine bonds.  Arguing for the government of Argentina in Republic of Argentina v. NML Capital Ltd., with twenty minutes of time, will be Jonathan L. Blackman of the New York City office of Cleary Gottlieb Steen & Hamiltion.  If, as is expected, the Court permits the U.S. government to argue as an amicus in support of Argentina, its views will be presented by Deputy Solicitor General Edwin S. Kneedler, with ten minutes.  Investors seeking to collect on defaulted bonds will be represented by Theodore B. Olson of the Washington, D.C., office of Gibson Dunn & Crutcher, with thirty minutes.

————

(Alex Proimos)

Background

Amid a name-calling public relations battle, the prolonged legal saga over Argentina’s dealings with investors from the U.S. and around the world opens another chapter in the Supreme Court next week.  In some ways, this is a prelude to a much more dramatic chapter that will unfold later at the Court.  But the outcome of this one could importantly shape the later one.

Specifically at issue in next week’s case is how widely, perhaps even around the globe, investors may go in search of Argentine government assets that they can seek to claim to make up at least partly for that government’s refusal to pay anything at all on defaulted bonds.  The later case deals with lower court mandates on how Argentina is to make payments to its bondholders.

The underlying controversy actually goes all the way back to 1994, and it requires the courts to interpret the promises that the government of Argentina made at that time — and later — in an effort to sell bonds in the United States.  In floating the bonds in 1994, Argentina was seeking to raise money for public projects and programs.

The bonds it sold then, referred to as Fiscal Agency Agreement bonds, were issued along with the government’s waiver of all claims of immunity to lawsuits that could arise over those securities.  On the bonds it sold in the U.S., it agreed to let itself be sued in federal or state court in New York City, and agreed that the legal issues would be governed by the laws of New York.

About seven years later, in December 2001, Argentina faced a collapse of its domestic economy.  As one way of dealing with that crisis, it defaulted on about $80 billion of its debt, declaring a moratorium on repayments.  Bonds that were still in investors’ hands were not entirely worthless, if the holders could get Argentina to pay up.  Even though regarded as distressed assets, there was a market for them, and some investors bought interests in them when they learned of the default plan.  Among those investors was NML Capital Ltd., a hedge fund based in the Cayman Islands.

The fact that hedge funds would put their money into defaulted bonds has led Argentina and its supporters in this controversy to refer, in the publicity battle outside the courts, to those investors as “vulture funds.”  In turn, the investors and their supporters have adopted a lower court’s labeling of Argentina as a practitioner of ”a diplomacy of default,” so that it now would have to pay exorbitant interest rates to raise money in U.S. markets — if it could borrow there at all.

Argentina did not just abandon the holders of the bonds it had sold in 1994, and its next move turned out to intensify the already heated court battle.  In 2005 and 2010, it moved to restructure the debt it owed outside the country.  To encourage holders of FAA bonds to swap them for new bonds, Argentina said it would not make any payments on bonds not exchanged.  Its legislature then passed a law (now referred to as the “Lock Law”) barring any kind of settlement with investors who refused the exchange.

About half of the investors holding FAA bonds agreed to the swap, at a rate of about twenty-five to twenty-nine cents on the dollar.

Among those who refused the exchange was NML Capital.  Beginning in 2003, it filed eleven lawsuits in federal court in New York, challenging the default and demanding payment.   Ultimately, NML won two judgments — one for about $1.6 billion, and another for $900 million (both figures include interest add-ons).  Argentina responded by saying that it would not make any payments on those judgments.

To enforce its right to be paid, NML asked a federal judge to put the judgments into formal effect by imposing the obligations on two bank accounts that Argentina had in the U.S. — at Bank of America and Banco de la Nacion Argentina’s New York City branch.

Then, in a move to help it follow the money, NML asked the judge to order the two banks to reveal how Argentina moved assets in and out of those bank accounts, and across the globe.  The judge did so, with some narrowing of the scope of the request, and the resulting ”discovery” demands are now at the heart of the case that the Supreme Court takes up on Monday.

Argentina took the dispute over discovery to the U.S. Court of Appeals for the Second Circuit, arguing that American courts were intruding on its national sovereignty.  Besides, Argentina argued, U.S. law dealing with liability of foreign governments only allows a U.S. court to issue a judgment to seize assets within the U.S.  Thus, its lawyers contended, the demands for information cannot reach outside the U.S.

The Second Circuit upheld the judge’s orders, ruling that they did not threaten Argentina’s sovereignty because they were aimed at the two banks, not the nation’s government.  It also declared that there was a difference between asking for information and actually seizing assets.  Whether NML could actually ever demand assets located outside the U.S., the court of appeals said, was not at issue at this point.

Petition for certiorari

Argentina took the case to the Supreme Court in January of last year.  It asked the Justices to decide a single question: because the Foreign Sovereign Immunities Act of 1976 allows a court to seize property from a foreign government only if it is located in the U.S. and is used for commercial activity, does a U.S. court have the authority to order disclosure of information about that nation’s assets anywhere in the world?

The petition said there was a conflict in the appeals courts on that question, including a contrary decision by the U.S. Court of Appeals for the Seventh Circuit, which the Supreme Court had declined to review in 2012.  Moreover, it argued, the U.S. government has been on the side of foreign governments on the discovery issue.

NML Capital countered that the Court should remain on the sidelines, contending that the split between the Second and Seventh Circuits was a “shallow” one, that the Seventh Circuit should be given a chance to reconsider, that the discovery orders were aimed only at commercial banks rather than at Argentina itself, and that, in any event, the Second Circuit was right about the discovery demands.

The Court, as it had done in the Seventh Circuit case, asked the Justice Department for its views on Argentina’s challenge.  Last November, the Department replied, urging the Court to hear the case, contending that the Second Circuit’s ruling was wrong.

While the government brief stressed that the U.S. does not condone Argentina’s repeated refusal to satisfy federal court rulings against it, and that it believes Argentina should work to “normalize relations” with all of its creditors, it nevertheless contended that the lower courts had gone too far in allowing a global pursuit of information about Argentina’s assets.

Siding explicitly with Argentina’s argument that both discovery and potential seizure of assets are allowed only for property within the U.S., the government said the lower court was wrong to treat those concepts as separate.  The Second Circuit ruling, it added, has led other judges to order “general asset discovery,” not just against private third parties, but against foreign states directly.

Argentina followed up that filing with a new brief, saying that later developments have included a court order targeting government property, including “sensitive military and diplomatic property.”

And NML, taking its own turn to respond, suggested that the government had switched positions on whether the Court should get involved, and asserted anew that its demands for information targeted only commercial banks, not a sovereign nation.

The Court on January 10 agreed to review Argentina’s petition.  Justice Sonia Sotomayor, a former Second Circuit judge, had remained out of two earlier cases in which the Court had denied petitions by Argentina, but so far she has given no indication that she would not participate in this case.

While the Court is moving toward review of the discovery question, the lower courts in New York have moved on to take further action on the Argentine default controversy.  If Argentina is going to make any payments to those who swapped their bonds in the debt restructuring, those courts have now ruled, it must make equal payments to the holders of the defaulted bonds.  In other words, if Argentina pays off the holders of the exchange bonds, it must provide one-hundred-percent payment to holders of the defaulted bonds, too.  Argentina promised to do exactly that when it sold the defaulted bonds, those courts have concluded.

That has led to a new petition by Argentina and one by a group of investors who hold the later series of exchange bonds, with these investors voicing fears that the lower court orders will lead to default on those instruments, too.

Responses to those new petitions are now due on May 7.  The Court may not act on those until after it has ruled on the discovery issue.  If the Court ultimately were to review and uphold those later orders, the ruling that it issues on the discovery question in the current case may have an influence on the ability of investors like NML Capital to enforce any rights that they are granted.

Briefs on the merits

The Argentine government’s brief on the merits pursued twin themes:  the need for U.S. courts to tread softly in interfering with a foreign government’s power to manage its own affairs, and the need for U.S. courts to stay within the specific boundaries of the 1976 law that codifies the concept of foreign government immunity from lawsuits in U.S. courts.

On the first point, Argentina treated the discovery question as interchangeable with the power of a court to seize assets owned by a foreign government.  Because a judicial attempt to go after government assets is a serious threat to sovereign interests, the brief contended, a process that enhances the chances that such a seizure would be ordered should be treated as a similar threat.  It is one thing, the filing said, for a court to issue an order against a foreign government that resolves a legal claim; it is something else entirely to initiate an effort to collect on that judgment.

“The political branches,” the brief said, “struck a delicate balance between the rights of creditors and the foreign relations imperative of respecting foreign sovereigns.”  That statement is the key to the second main thrust of the Argentine brief, on the interpretation of the FSIA of 1976.

That law, the brief contended, is limited to claims of two characteristics of foreign government property:  assets located physically in the U.S., and assets used for a commercial activity inside the U.S.  That limitation, Argentina argued, also defined the scope of any process leading to seizure of foreign government assets.

“Congress authorized enforcement proceedings,” the brief said, “only to the extent they are directed to that narrow category of sovereign property.”  That, it added, is what federal appeals courts had ruled consistently — until the Second Circuit, in this case, broke ranks.  The Second Circuit’s error, the brief asserted, was in its finding that the 1976 Act does not address specifically the scope of discovery as part of a process of attaching sovereign assets.

Calling upon the support it has received from the U.S. government, Argentina noted that the government has filed “no fewer than seven briefs in the past seven years,” expressly declaring that discovery orders must be confined to potential seizures of property that is not immune from seizure under the Act.  The government has said that broadening discovery will result in a reciprocal threat to “United States property worldwide,” the brief said.

The federal government’s merits brief, as an amicus in support of Argentina, closely tracked the Argentine government’s arguments on the scope of the 1976 Act.  Running through this statutory argument, though, is the government’s strong perception that a wide reach under court order for information on foreign government property would be a serious affront to sovereignty, and a threat of reciprocal pursuit in foreign courts of U.S. government property holdings.

“Broad, general discovery into presumptively immune foreign-state property,” the U.S. brief said, “would impose the very costs and burdens that the immunity is intended to shield against in the first place.”

Under the lower court orders that Argentina is protesting, the federal lawyers’ brief said, discovery could be compelled so as to gain information about “foreign-state property that a U.S. court could not possibly execute against” under the FSIA.

NML Capital’s merits brief conceded that Congress had provided “robust immunity” in U.S. courts to foreign governments, but argued that it did so within very defined limits.  While shielding foreign property from seizure except in limited circumstances, the 1976 Act, the NML brief said, has nothing at all to say about the discovery process once a party with a claim has been awarded a judgment against a foreign state.  In that situation, normal procedural rules apply, and those rules are generous in the amount of discovery they permit, the brief contended.

There is no doubt, the brief noted, that NML as an investor in defaulted bonds has won judgments against Argentina, and thus it should be allowed to move toward collecting on them.  It is doing so not against the government of Argentina, but against banks that have no claim to governmental immunity from such a process, the document asserted.

While the brief sought to answer the twin thrusts of Argentina’s merits argument, the NML document also energetically pressed its point that, when Argentina sold the debt instruments that are at the heart of this case, it surrendered any claim of immunity that it might otherwise assert — and did not carve out an exception for discovery orders.

On the claimed threat to foreign sovereignty, NML’s brief contended that Congress did all that it needed to do to shield foreign states with what it put into the FSIA, and it did not put it anything about discovery.  Moreover, NML asserted, quoting from a recent Supreme Court opinion: “Foreign sovereigns have no right to immunity in our courts.”  That statement, the brief said, is as true now as it was as long ago as an 1812 ruling.

Aside from drawing the considerable support that comes with a federal government amicus brief on its side, Argentina’s amicus support is limited to a single additional filing:  by The Clearing House, a bankers’ collective that sorts out payments, clearing, and settlements.  That brief complained of the “severe burdens” that broad discovery orders like those at issue impose on financial institutions.

NML Capital has just over a dozen amicus briefs on its side, ranging from twenty-one U.S. states seeking to protect the investments their state pension fund have made in foreign government debt instruments, to victims of terrorism seeking to ensure that they can move to enforce judgments that they have won in court against “state sponsors of terrorism.”

Also on NML’s side are a variety of other investors in defaulted Argentine bonds and in other foreign government debt, former legal officials at the State Department, business and economics research organizations, and professors who teach and do research on immunity questions.

Analysis

If the Court confined its review of this Argentine case to analysis of texts — the language of the Foreign Sovereign Immunities Act and the Federal Rules of Civil Procedure — this might be an easy case to decide.  And it also might be easy if the Court focused very closely on the specific terms of the waiver of immunity that Argentina made to potential investors when it sold them bonds.

On FSIA, the Court could draw seemingly simple conclusions about whether the Act does or does not cover discovery demands, and on whether there is a difference between a judgment and its enforcement.  It might also make up its mind whether FSIA is totally silent on the discovery issue.

And, on the federal rules, it could draw seemingly simple conclusions about how much discretion those rules give to federal judges to fashion discovery orders, to enforce already determined judgments.

But what overhangs this case, and makes the presence of the federal government loom considerably larger, is that this dispute is not just about the relationship between ordinary borrowers and creditors.  Rather, it involves an established national government which, though even its supporters acknowledge has become something of a scofflaw, has considerable stature as a sovereign in charge of its own affairs.

That is the underlying theme that runs throughout Argentina’s claims, and throughout the support it gets from the U.S. government.  Thus, one of the tasks of NML Capital and its lawyers in the case is to persuade the Court to look at Argentina in far less lofty terms, as a borrower that bargained away any legal immunity it might have and then, when times got tough, simply ran for economic cover.

The Court will be well aware that, while it is only Argentina and only those defaulted bonds that are before it in this phase of the controversy, anything it does will likely have an impact on the larger question of how foreign governments are to act when they come to U.S. capital markets in search of creditors.  Will their stature entitle them to some more leeway, or will it simply serve as a mask for sharp dealing?

In short, the Court knows that the world of commerce will be watching.  And, among other things, the world will be watching this particular case in search of hints as to how the Court might react when the next round comes up late in the Term, on U.S. courts’ power to command how a foreign government manages its external debt.

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Categories: Supreme Court

Wednesday round-up

Scotus Blog - Wed, 04/16/2014 - 7:32am

Briefly:

  • At Reason.com, Damon Root responds to the argument by retired Justice John Paul Stevens, made in his new book, that the Second Amendment should be rewritten to provide that “the right of the people to keep and bear Arms when serving in the Militia shall not be infringed.”  Root argues that, although “Stevens would rewrite the Constitution in order to give lawmakers free rein to enact prohibitory gun control measures,” “the whole point of the Bill of Rights is to place certain liberties beyond the reach of lawmakers. That means the judiciary often has no choice but to ‘curtain the legislative power’ and strike down overreaching statutes.”
  • In USA Today, Richard Wolf previews next week’s oral argument in Republic of Argentina v. NML Capital, in which the Court will consider the extent to which Argentina’s creditors can go after the country’s assets to compensate them for Argentina’s default on bonds that it issued.
  • At the Legal History Blog, Dan Ernst discusses the list of docket books released by the Court’s Office of the Curator, as well as the rules governing public access to those books.

Remember, we rely on our readers to send us links for our round-up.  If you have a recently published article, post, or op-ed about the Supreme Court that you’d like us to consider for the round-up, please send it to roundup [at] scotusblog.com.  Thank you!  

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Categories: Supreme Court

Petition of the day

Scotus Blog - Tue, 04/15/2014 - 10:17pm

The petition of the day is:

T-Mobile South, LLC v. City of Roswell 13-975

Issue: Whether a document from a state or local government stating that an application has been denied, but providing no reasons whatsoever for the denial, can satisfy the Communications Act’s “in writing” requirement.

In association with Bloomberg Law

Categories: Supreme Court
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