Supreme Court Changes the Climate on Greenhouse Gas Suits

Yesterday, the U.S. Supreme Court issued its much-anticipated decision in American Electric Power Co. v. Connecticut, reviewing whether federal common law would support a claim that greenhouse gas emissions could give rise to a public nuisance claim that would warrant injunctive relief against future emissions. The Court concluded that the federal common law cannot support such a claim.

The plaintiffs, including eight states,[1] New York City, and three nonprofit land trusts, brought suit in the Southern District of New York against five electric power companies alleged to be the largest emitters of carbon dioxide in the United States. The complaint alleged that carbon dioxide emissions contributed to global warming and thereby constituted a nuisance under federal common law. The plaintiffs requested an injunction limiting emissions in the future. No monetary damages were sought. The district court dismissed the case, finding that the complaint presented a nonjusticiable political question. The Second Circuit reinstated the case, holding that the plaintiffs were not barred by the political-question doctrine and had stated a federal common law nuisance claim.

The Supreme Court, although equally divided,[2] first dealt with a preliminary issue, affirming that the plaintiffs had standing. In doing so, it relied without further discussion on its earlier decision in Massachusetts v. EPA, 549 U.S. 497 (2007). It then moved to the merits. The Court acknowledged that a federal common law for “subjects of national concern” exists and that this common law extends to environmental protection of air and water. But it bypassed answering whether that common law approach could extend to claims that carbon dioxide emissions are a nuisance, stating it was unnecessary to decide the issue because even if such a common law claim could theoretically exist, the Clean Air Act (CAA) has effectively “displaced” such federal common law claims.

In reaching its conclusion, the Court discussed several specific CAA features. First, it noted that in Massachusetts the Court had already concluded that carbon dioxide emissions are air pollutants subject to regulation under the CAA. Second, it concluded that the CAA “speaks directly” to carbon dioxide emissions from the defendants’ plants. In supporting this “speaks directly” conclusion, the Court focused on the Environmental Protection Agency’s (EPA’s) ability to regulate under CAA Section 111 stationary sources that “cause or contribute significantly to air pollution.” In addition, the Court noted that the CAA provides multiple avenues for EPA to enforce noncompliance with its regulations and that the CAA allows private parties to request EPA to set such industry rules, and that EPA’s response to such requests is subject to review in federal court.

Notably, the Court was clear that its displacement analysis did not depend on EPA exercising its regulatory authority and setting the emissions standards for carbon dioxide. The Court indicated that it is enough that EPA has been given the power to do so in the CAA. Thus, the Court expressly noted that if EPA declines to regulate carbon dioxide emissions under Section 111, the federal courts would still have no role in entertaining such nuisance suits, although the federal courts would have a role in reviewing EPA’s decision not to regulate. In dealing a substantial, and perhaps lethal, blow to such nuisance suits relying on federal common law, the Court nevertheless left unanswered whether such suits may remain viable under state law. The Court stated that it was a separate question whether the CAA preempts such state law claims.

The decision is a major win for those actually or potentially facing such federal common law nuisance suits. But in emphasizing the authority that the CAA apparently gives EPA to regulate greenhouse gas emissions, the decision will also affect the ability to challenge any EPA regulations issued in the future. In addition, by leaving open the possibility that state law claims may remain viable, yesterday’s decision will likely simply push such suits to be pled under state law. This will generate yet further litigation about whether the CAA is clear in preempting such state law claims, an analysis similar to, but with significant differences from, whether federal law claims are displaced.

Advertisements

“Particular Machine” not required: Ex Parte Dietz et al., Appeal 2009-008029, BPAI

Ex Parte Dietz answers the question, at least as far as this BPAI panel is concerned, as to what structure need be recited in a “software claim” to bring it within the “machine” category of patent eligible subject matter. What is notable perhaps in its absence is any reference to the need to recite any “particular machine,” as opposed to simply just a “server” or the like, in order to bring a claim into the realm of the patent eligibility. Ex Parte Dietz et al In Ex parte Dietz, the following claim 1 was rejected under Section 101 for failure to recite at least one hardware element.

1. In a World Wide Web (Web) communication network with user access via a plurality of data processor controlled interactive receiving display stations for displaying received hypertext Web documents, transmitted from source sites on the Web, including at least one display page containing text, images and a plurality of embedded hyperlinks, each hyperlink being user activatable to access and display a respective linked hypertext Web document from source sites on the web, a system for controlling access activity from activated hyperlinks and their respective Web document source sites comprising:

means for applying said prioritization in the determination of the order in which the web documents linked to activated embedded hyperlinks in said web document are to be accessed.

means at said source sites for prioritizing said plurality of embedded hyperlinks in a Web document; and

More specifically, the examiner found that claim 1 “may be directed to software per se since the ‘means … for prioritizing’ and ‘means for applying’ are not defined in the specification as exclusively hardware.” The Examiner accordingly found that “the use of the word ‘system’ do[es] not inherently mean that the claim is directed to a machine” and absent recitation of at least one hardware element, the claim is directed to non-statutory subject matter (Ans. 3 and 16).”

The BPAI reversed the examiner, essentially finding that the “World Wide Web communication network” and the “source site” both include physical structure and serve as structural limitations:

“Appellants’ “system” claim recites a World Wide Web communication network. Claim 1 also recites source sites. Interpreting “source site” broadly, but reasonably in light of the specification and as one of ordinary skill in the art would have defined the term at the time of invention, we conclude “source site” encompasses hardware – such as a server as shown in Fig. 2 (See In re Am. Acad. of Sci. Tech Ctr., 367 F.3d 1359, 1364 (Fed. Cir. 2004); See also, FF1 and FF 2). A “machine is a ‘concrete thing, consisting of parts, or of certain devices and combination of devices.’ This ‘includes every mechanical device or combination of mechanical powers and devices to perform some function and produce a certain effect or result.” Ferguson, 558 F.3d at 1364 (quoting Nuijten, 500F.3d at 1355). Thus, a close review of Appellants’ claims shows that they do recite physical structure – the source sites and World Wide Web communication network and such recitations serve as structural limitations. Even if we were to presume the recited “means” are software based, the system still recites that embedded hyperlinks are prioritized by the means at the source sites and the various information supplied by the source sites are used to apply the prioritization. Thus, we conclude that claim 1 recites a machine and accordingly, that claim 1 is directed to statutory subject matter.”

A different result, however, was reached with respect to the following claim 17:

17. A World Wide Web (Web) hypertext document including at least one display page containing text, images and a plurality of embedded hyperlinks, each hyperlink being user activatable to access and display a respective linked hypertext Web document from source sites on the Web further including: a hypertext markup language tag associated with each embedded hyperlink indicating the priority of each hyperlink in the determination of the order in which the Web documents linked to the activated embedded hyperlinks in said Web document are to be accessed.

In the case of claim 17, the BPAI upheld the examiner’s rejection under Section 101, finding that the claim recited only a hypertext document with no functionality, and further was not a data structure tied to a non-transitory, tangible computer readable medium. Accordingly, the BPAI found that claim 17 recited a document that lacked any physical structure and further was not a process or a composition of matter. The BPAI explained:

“Claim 17 recites a hypertext document. The document does not have any physical structure and thus, does not fall within the machine category of statutory subject matter. Nor does the document fall within the process or composition of matter categories. Specifically, no “act or series of acts” is recited (See Nuijten, 500 F.3d at 1355) and the claims do not recite a composition “of two or more substances” or “composite articles” that are the result “of chemical union, or of mechanical mixture . . . whether they be gases, fluids, powders or solids.” (See id. at 1357 (quoting Diamond v. Chakrabarty, 447 U.S. 303, 308 (1980).) Although one might argue that the claims are directed toward an article of manufacture, we conclude they are not. “Articles” of “manufacture” are “tangible articles or commodities” “result[ing] from the process of manufacture.” (See Nuijten, 500 F.3d at 1356 (citing Chakrabarty, 447 U.S. at 308); Bayer AG v. Housey Pharms., Inc., 340 F.3d 1367, 1373 (Fed. Cir. 2003).) A claim that recites no more than software, logic or a data structure (i.e., an abstract idea) – with no structural tie or functional interrelationship to an article of manufacture, machine, process or composition of matter – does not fall within any statutory category and is not patentable subject matter (Warmerdam, 33 F.3d at 1361; see Nuijten, 500 F.3d at 1357). The scope of such a claim is not limited to any particular practical application. In particular, data structures in the abstract, i.e., not claimed as embodied in a non-transitory tangible computer-readable medium are descriptive material per se and are not statutory subject matter because they are not capable of causing functional change in a computer (In re Warmerdam, 33 F.3d 1354, Appeal 2009-008029 Application 10/713,726 1361 (Fed. Cir. 1994); cf. In re Lowry, 32 F.3d 1579, 1583-84 (Fed. Cir.1994); accord MPEP § 2106.01 (2007)). Claim 17 recites a hypertext document—data. Claim 17 does not recite any functionality. Claim 17 merely describes a function that the data (the hyperlink) may have – that it is user activatable. In addition, the hyperlink document is not directed to a data structure in a non-transitory tangible computer-readable medium. Therefore, we conclude since claim 17 merely recites data, claim 17 recites an abstract idea. Accordingly, claim 17 is directed toward non-statutory subject matter.

On the other hand, claim 18 which recites that the web document of claim 17 is at a source Web site was found to statutory under Section 101, as reciting a data structure with structural elements:

“More than mere abstraction, data structures are specific electrical or magnetic structural elements in a memory. In In re Lowry, 32 F.3d 1579 (Fed. Cir. 1994), the data structures provide tangible benefits: data stored in accordance with the claimed data structures are more easily accessed, stored, and erased. The opinion further notes that, unlike prior art data structures, Lowry’s data structures simultaneously represent complex data accurately and enable powerful nested operations. In short, Lowry’s data structures were found to be physical entities that provide increased efficiency in computer operation. They are not analogous to printed matter (id. at 1584). The additional recitation of the document at the source Web site moves the data into a physical structure or machine. The embedded hyperlink is user-activatable to access and display a linked hypertext Web document from source sites. Thus, the recited hypertext document is a physical entity that provides the access and display to the linked hypertext Web document from other source sites with an indicated priority. Thus, unlike claim 17 which merely recites data (which could be on paper), this claim recites a data structure including structural elements. Accordingly, claim 18 is directed toward statutory subject matter.”

The remaining 101 rejection related to whether or not the Applicant’s claim 21, which was directed to a computer program stored on a computer readable medium. This rejection was upheld, but only due to the fact that the claim had not been limited to non-transitory signals and therefore read on a signal, as prohibited by In re Nuijten, 500 F.3d 1346, 1356-57 (Fed. Cir. 2007).

Pennsylvania Abolishes Joint Liability with Enactment of Fair Share Act

On June 28, Pennsylvania Governor Tom Corbett signed the Fair Share Act (the Act) (2011 Pa. S.B. 1131) into law. The Act amends Pennsylvania’s long-standing practice of joint and several liability to a several liability model that permits a jury to award damages based on a percentage of fault. A prior iteration of the Act was signed into law in 2002 but was found to violate the Pennsylvania Constitution on procedural grounds.

Under current Pennsylvania law, joint and several liability requires a defendant that is found responsible for any portion of a plaintiff’s injury to be responsible for 100% of the damages owed to the plaintiff, regardless of the apportionment of fault. Under the Act, a defendant that is found less than 60% liable will only be responsible for its proportionate share of the total. Conversely, a defendant that is found to be liable for 60% or more of the damages will be jointly and severally liable for the total damages owed to the plaintiff. If joint and several liability applies, a defendant that has paid more than its proportionate share of damages may seek to recover contributions from co-defendants. The Act contains exceptions permitting joint liability to continue to be imposed for intentional misrepresentations, intentional torts, certain environmental contamination claims, and certain violations of the Liquor Code.

With respect to apportionment of fault, the Act limits the population of potentially responsible nonparties that a jury may consider. The Act permits a jury to consider nonparties that entered into a settlement agreement with the plaintiff. Although judgment cannot be entered against a settling party, the jury is permitted to find the settled party responsible for a percentage of the damages. The Act does not permit a jury to apportion fault to employers who are immune from tort liability pursuant to the Workers’ Compensation Act.

Pennsylvania will now join the overwhelming majority of states that recognize some form of apportionment of fault.

Auto-Classification Review Technologies: What Every Attorney Needs to Know

A Leap in Automated Document Classification Technologies Proves to Tame the Document Review Beast – But Here’s What You Need to Know

“Watson,” a computer using machine learning and other techniques, recently made international news when it dominated Jeopardy legends for three consecutive nights, prompting IBM’s general counsel to suggest that machine learning techniques might prove useful in finding information important to litigation.

The application of linguistic analysis technologies and machine learning to improve the way large volumes of information are assessed has been around for more than a decade. For example, probabilistic latent semantic analysis (PLSA), a text-based modeling technique to predict relevance based on a subset of human-assessed documents, has been commercially applied to patent searches, business intelligence tools, online advertising optimization, and even automated essay grading.[1] And predictive coding, another machine learning technique, has been used for distinguishing SPAM from non-SPAM emails, for example. [2]

Machine Learning in E-Discovery

Such techniques are increasingly being applied in e-discovery, as attorneys’ machine learning approaches help curb the growing cost of document review. Most auto-classification tools take a manual sampling and review process and automate workflow so attorneys can get to important documents faster, with less junk to look at along the way.

For example, automated document classification technologies based on PLSA, combine attorneys’ expertise with computerized review technology and technical expertise to prioritize, or “rank,” documents for review. Attorneys review a sample of the document collection, designating them as relevant or not. Based on results, the technology “learns” how to rank documents based on their likelihood of being relevant. In this iterative process, the software progressively improves accuracy and consistency of its scoring and then ranks the entire collection. Attorneys are presented with groups of prioritized documents, and can quickly access those most likely to be relevant and prioritize (or, in some cases, eliminate) review accordingly.

When machines do the heavy lifting, review is faster and cheaper, and accuracy and consistency enhanced. A recent survey of legal professionals, conducted by Xerox Litigation Services and Acritas Research, found that 72 percent who use automated document classification solutions achieved significant time savings. Another 64 percent said it was more cost-effective than manual review, and over half cited improvements in review consistency, accuracy, and budget planning.[3]

Auto-Classification Technologies Cannot Replace Humans

Given the advantages of machine learning techniques, a whole class of do-it-yourself push button auto-classification software, referred to by some as “predictive coding,” has cropped up over the past few years.

But is technology alone enough to achieve accurate, consistent, and defensible results?

It’s becoming widely understood by attorneys and the courts alike that not only must the proper expertise, audit trail, and measurement be present; the process itself must be repeatable and yield consistent results. In fact, studies conducted by Text REtrieval Conference (TREC) Legal show that document review processes that employ a combination of computer and human input are superior.[4]

Beyond Do-It-Yourself Software: What to Look for in Automated Document Classification Technology

So when evaluating auto-classification technologies, what should legal teams look for? Below are key questions to consider:

  1. Are the software, process, and workflow transparent? Make sure you are working with a vendor who can explain their process, technology, and expertise they bring to the project – in detail.
  2. Are the right legal and subject matter experts involved? It is important that senior attorneys or subject matter experts be involved throughout the process to review documents and help “train” the technology.
  3. Are the appropriate technical experts involved? Relying on software implementation by your IT staff, or a vendor that hosts the software for you, is not sufficient. Technical experts, including statisticians and linguists, can drive the technology and process, and ensure statistically sound sampling, measurement of output, and improved results by developing additional models. A good team will also design and assign attorney workflow.
  4. How does the technology “learn” and improve? The process must be iterative, and the software must be able to adapt to additional expert review insights to improve output.
  5. How does the technology identify discrepancies in attorney assessments? Look for a process that identifies ambiguities in how expert reviewers assessed a specific document. Technical experts should be able to route these documents back to the reviewers to confirm or alter judgments on the documents and improve QC.
  6. Is there a robust audit trail?Experts should provide detailed records of key project parameters and inputs, decisions, and results throughout the process that show consistency when the same inputs and procedures are adopted.
  7. How are results validated? Statistically valid measurements, such as precision and recall, should be generated at every stage of the process for ongoing QC and final QA.

With rapid advancements in auto-classification technologies in e-discovery, the future of document review is clear. What’s becoming more clear is how and why appropriate human experts are critical in the process to ensure more accurate, consistent, and defensible results.

Social Media and the National Labor Relations Board

Recent statistics suggest that employer discipline of employees for off-the-job tweets, blogs and Facebook postings is on the rise. Employers have justifiable concerns regarding loss of confidential information, as well as poor public exposure, as a result of the online rants and raves of workers.  However, the National Labor Relations Board, which applies to both union and non-union employers, has provided some cover for employees who cannot resist telling their friends and the world what they think of their employer.

In Hispanics United of Buffalo, Inc., a Regional Director for the NLRB issued a complaint against a non-profit organization for firing five employees after they posted critical comments about working conditions on one of the employee’s Facebook pages. The postings pertained to employee complaints about workloads and staffing levels. The employer attempted to characterize the termination decision as based upon unprotected harassment of a fellow employee who was the subject of an initial Facebook posting. That posting had then drawn the responses from the five employees in question who defended their work and blamed productivity issues on staffing shortfalls. However, the postings were deemed “concerted activity” for the mutual aid and protection of workers and the terminations therefore found unlawful by the Board’s general counsel.

On April 21, the Office of General Counsel for the Board issued a memorandum in another case in which the employee’s use of social media was found not to be protected under the National Labor Relations Act. In Lee Enterprises, Inc., a public safety reporter claimed he was fired in violation of the Act based upon protected tweets on a work-related Twitter account. The newspaper had encouraged its reporters to use Twitter and other social network tools to get information to the public who might not otherwise read newspapers in order to encourage them to go to the newspaper’s website. A reporter soon became an over-enthusiastic tweeter and his tweets poked fun at his own newspaper, as well as television reporting. He also provided offensive commentary about the downturn in homicides in Tucson with tweets such as: “What?!?!?  No overnight homicide?  WTF?  You’re slacking Tucson.”

The reporter was terminated for disregarding “professional courtesy and conduct expectations.” He filed an unfair labor practice charge alleging that he could not be terminated for engaging in protected activity. General Counsel determined that the Twitter postings at issue did not involve protected concerted activity since the postings “did not relate to the terms and conditions of his employment or seek to involve other employees and issues related to employment.”

The reporter also argued that certain supervisory statements that the reporter would not be allowed to tweet about anything work related were also violative of the Act. However, the General Counsel determined these statements, while overbroad and violative of federal labor law, neither led to the termination nor constituted new “work rules” since they were not shared with other employees.

A lesson in both cases is that employer social media policies and enforcement cannot reach postings related to the terms and conditions of employment, especially if other employees are involved in the posting. This places employers in an extremely difficult position since employee disclosure of confidential data on social media sites is often inextricably interwoven with colorable employment concerns. However, at a minimum, any written policies for both union and non-union employers should be narrowly drawn to exclude this protected activity. In addition, if subject to a union agreement, employers may need to bargain with the union before implementing any changes in their social media policies.

A Shock to the Core: The Supreme Court Pries Jurisdiction Away from the Bankruptcy Courts on Counterclaims to Proofs of Claim, and Possibly More – Stern v. Marshall

On Thursday, the Supreme Court in a 5-4 decision ruled in Stern v. Marshall [1] that the congressional grant of jurisdiction to bankruptcy courts to issue final judgments on counterclaims to proofs of claim was unconstitutional. For the litigants, this decision brought an end to an expensive and drawn out litigation between the estates of former Playboy model Anna Nicole Smith and the son of her late husband, Pierce Marshall, which Justice Roberts writing for the majority analogized to the fictional litigation in Charles Dickens’ Bleak House. For bankruptcy practitioners, it is yet another chapter in an even more epic saga – that of the back-and-forth between Congress and the Supreme Court over the jurisdictional limits of the nation’s bankruptcy courts. Instead of offering finality, the decision only raises more questions about how far the Court’s reasoning will extend, and what the implications will be for practice under the Bankruptcy Code.

Background: Broad Bankruptcy Court Jurisdiction in 1978 Reform Act Ruled Unconstitutional by Supreme Court in 1982; Congress Adopts “Emergency Rule” in Response in 1984

Few who practiced then can forget the effect of the Supreme Court’s 1982 decision in Northern Pipeline [2] on the statutory regime enacted by Congress in the still-nascent Bankruptcy Code, which had gone into effect in October of 1978. The Code was a sweeping reform of the nation’s bankruptcy laws which involved elevating the previous “referees” in bankruptcy to the title of judges, and granting them the power to exercise the United States District Court’s jurisdiction over “all civil proceedings arising under title 11 [i.e., the Bankruptcy Code] or arising in or related to cases under title 11.”[3] A plurality of the Supreme Court in Northern Pipeline declared this grant of jurisdiction to bankruptcy courts under the new Bankruptcy Code unconstitutional, leaving courts and practitioners to wonder whether the Code would be thrown out the window.

The Northern Pipeline Court reasoned that granting such broad jurisdiction to bankruptcy courts was unconstitutional because bankruptcy courts were not “Article III courts – that is, courts whose authority derives from Article III of the Constitution. Article III courts come with two principal safeguards prescribed in Article III, Section 1 of the Constitution: lifetime appointment and the inability of Congress to reduce the judges’ salaries. These safeguards are intended to ensure the courts’ independence from the other branches of government, and are thus an implementation of the separation of powers principles underlying the Constitution in general. United States District Courts are Article III courts. Bankruptcy courts, on the other hand, are Article I courts. The Northern Pipeline Court held that assigning bankruptcy courts the jurisdiction of the district courts violated Article III of the Constitution because it removed “essential attributes of the judicial power” from the Article III courts.[4]

In response, Congress enacted a new statutory scheme, embodied in 28 U.S.C. §§ 157 and 1334, which was based on the so-called “Emergency Rule” developed by the district courts after Northern Pipeline. Under this scheme, United States District Courts have original jurisdiction over matters arising under, arising in or related to cases under the Bankruptcy Code, but district courts can refer these matters to the bankruptcy courts (a referral that is now automatic in all districts). Bankruptcy courts are given the power to issue final judgments in all “core proceedings” arising under the Bankruptcy Code, or arising in a case under the Bankruptcy Code. As to other, “non-core” matters related to a case under the Bankruptcy Code, bankruptcy courts can only issue proposed findings of fact and conclusions of law for de novo review by the district court, unless the parties otherwise consent. This statutory scheme went into effect in 1984.

History of Stern v. Marshall

Stern v. Marshall presented the Supreme Court with the opportunity to review the statutory scheme adopted by Congress in 1984. The model and actress Anna Nicole Smith had filed for bankruptcy in Los Angeles after the death of her billionaire husband, J. Howard Marshall, in 1995. Bitter litigation that had begun even before her husband’s death continued in the bankruptcy court between Smith and her late husband’s son, Pierce Marshall, over their competing claims to the Marshall estate.

In Smith’s bankruptcy case, Pierce filed both a proof of claim for defamation and an adversary complaint seeking a determination that his defamation claim was nondischargeable. Smith filed a compulsory counterclaim for tortious interference by Pierce with the gift she expected from her late husband. The bankruptcy court held a trial and granted judgment to Smith in the amount of $447 million.

Appeals and parallel litigation ensued, all of which cannot be described here, or in a manuscript of less than ten volumes. In short, after the entry of the bankruptcy court’s extraordinary judgment Pierce prevailed in a separate trial on the merits in Texas state court. Thereafter, Smith prevailed in a de novo review of the bankruptcy court’s judgment in federal district court in Los Angeles, though her $447 million judgment was reduced to $44 million. In this second round before the Supreme Court, the issue was very simple – did the bankruptcy court have jurisdiction to enter a final judgment on Pierce’s counterclaim? If so, that judgment would be the first final judgment in the matter and would thereby have a preclusive effect under principles of res judicata on the later Texas judgment in Pierce’s favor. If not, the Texas judgment would be the first final judgment and preclude the later district court judgment in Smith’s favor. In an earlier appeal, the Supreme Court had determined that the probate exception to federal jurisdiction did not apply in the case to render void the bankruptcy court judgment, sending the matter back to the Ninth Circuit to determine whether the bankruptcy court judgment had a preclusive effect on the Texas court contrary judgment based on other principles.

Supreme Court’s Holding

The Supreme Court held that while Smith’s compulsory counterclaim to Pierce’s proof of claim was clearly a “core proceeding” under the language of 28 U.S.C. § 157(b)(2)(C), the statute itself was unconstitutional. The Court held that Congress cannot grant to the bankruptcy courts (as Article I courts) the power to issue final judgments on common law causes of action like Smith’s counterclaim that are not resolved in the process of ruling on the proof of claim. The Court reasoned that any suit that is “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, and is brought within the bounds of federal jurisdiction,” is within the exclusive jurisdiction of Article III courts. Permitting Congress to take such actions out of Article III courts’ jurisdiction would frustrate the separation of powers principles of Article III and render that Article ineffective.[5]

The Court rejected the argument put forward by Smith that the so-called “public rights” exception applied and permitted Congress to grant bankruptcy courts the authority to issue final decisions on counterclaims like Smith’s. The Court found that Smith’s counterclaim did not fall under any of the formulations of the public rights exception for several reasons, including: (i) Smith’s counterclaim did not flow from a federal statutory scheme, (ii) Smith’s counterclaim was not completely dependent upon adjudication of a claim created by federal law, (iii) Pierce did not truly consent to bankruptcy court jurisdiction, since he had nowhere else to go but bankruptcy court if he wished to recover from Smith’s bankruptcy estate; and (iv) the case did not involve a situation where a specialized subset of matters was assigned to a special administrative agency, but rather a situation where a common law action was sought to be determined by a court with broad substantive jurisdiction.[6]

Potential Implications of Stern v. Marshall

The Supreme Court’s holding was limited to one subsection of 28 U.S.C. § 157(b) – in particular subsection (b)(2)(C) which provides that counterclaims to proofs of claim are core proceedings. Indeed, the Court asserted that its holding does not “meaningfully change[] the division of labor in the current statute,”[7] though in the same breath it also stated that a statute’s efficiency or convenience will not save it if it is contrary to the Constitution.[8]

However, the Court’s reasoning is broad, and can potentially be applied to other subsections, such as section 157(b)(2)(H) pertaining to fraudulent conveyance actions, which the Supreme Court has previously held to be “quintessentially suits at common law,”[9] and/or section 157(b)(2)(K), pertaining to determinations of the validity, extent and priority of liens, which are generally determined by state law.

Also, even if limited to section 157(b)(2)(C), counterclaims by the estate are a common occurrence in bankruptcy. As the dissent noted, the Court’s ruling may lead to gamesmanship between creditors and debtors in litigation over proofs of claim, with the proof of claim being decided in the bankruptcy court and a parallel proceeding occurring in the district court. All of this would lead to increased costs and delay – neither of which a typical debtor or creditor can afford. Writing for the dissent, Justice Breyer referred to this as “a constitutionally required game of jurisdictional ping-pong” which will lead to “inefficiency, increased cost, delay and needless additional suffering among those faced with bankruptcy.”[10]

A Potential Fix: Bankruptcy Courts as Article III Courts

Historically, Congress has rewritten or substantially revised the nation’s bankruptcy laws approximately once every 40 years – witness the Bankruptcy Act of 1898, followed by the Bankruptcy Act of 1938, followed yet again by the Bankruptcy Reform Act of 1978. The Bankruptcy Code itself has been amended in significant respects on multiple occasions, including in 1984, 1994 and 2005. The potentially inefficient jurisdictional system following the Supreme Court’s ruling in Stern v. Marshall may be cause to take up the drafting pen yet again. This time, Congress may consider taking a step it deliberately refrained from taking in 1978 and 1984 – that is, providing for bankruptcy courts to be Article III courts by making bankruptcy judges appointed for life and immune to salary reductions by Congress. This would avoid the core/non-core mire altogether in favor of a system of clarity and efficiency that should benefit most debtors and creditors, and well as the bankruptcy courts and district courts.

Board Sets Favorable Precedent for Children of Fiancées (K-2 Visa Holders)

The American Immigration Council’s Legal Action Center (LAC) applauds the Board of Immigration Appeals (Board) for advancing family unity in its June 23, 2011 decision, Matter of Le. The Board’s long-awaited ruling favorably resolves the issue of whether the child of a fiancee of a U.S. citizen (a K-2 visa holder), who legally entered the U.S. when under age 21, is eligible for adjustment of status even after turning age 21. The Board concluded that the age of the child is”fixed” at the time the child is admitted to the United States. In doing so, it rejected the Department of Homeland Security’s position that a K-2 visa holder is eligible only if he or she is under 21 at the time the adjustment of status application is adjudicated.

The Board’s decision is consistent with the position that the American Immigration Council and the American Immigration Lawyers Association advocated in amicus briefs submitted to the Board in approximately a half dozen other cases where the child turned 21 after being admitted to the United States. The non-citizens in these and the many other cases before both Immigration Judges and U.S. Citizenship and Immigration Services offices throughout the country now will be able to become lawful permanent residents as Congress intended.

Federal Court Has Jurisdiction Over Local Carbon Tax Dispute

The 4th Circuit held this week that a federal district court has jurisdiction over a case challenging a local carbon tax, even though the Tax Injunction Act generally deprives federal courts of jurisdiction in state or local tax controversies. This case should be very helpful to companies challenging a local tax that is in the nature of a punitive regulatory fee, especially where the tax is structured to apply to a single company.

This case, GenOn Midatlantic, L.L.C. v. Montgomery County, No. 10-1882 (5th Cir. June 20, 2011), involves a Montgomery County, Maryland “tax” on carbon emissions. The county imposed a tax at the rate of $5 per ton of carbon dioxide emitted, but the tax only applies to companies that emit more than 1 million tons of carbon annually. If the 1 million ton annual threshold is reached, then the tax applies to the first ton emitted.

GenOn operates an electrical generating facility in the county. GenOn’s plant is the only plant in the county that would likely reach the 1 million ton annual threshold, so the tax essentially applied to this single company. GenOn determined that this tax could not be passed on to its customers.

GenOn brought an action in federal district court to enjoin enforcement of this carbon emissions tax. The district court ruled that it did not have jurisdiction, pursuant to the Tax Injunction Act, and dismissed the case.

The Tax Injunction Act (28 USC 1341) says that the federal courts do not have jurisdiction to hear state or local tax controversies if there is a speedy and efficient remedy is offered by the state court system. However, the 4th Circuit ruled that in a case like this one, where the “tax” is a punitive regulatory fee, that only applies to a single company, that the Tax Injunction Act should not be used to make the federal courts unavailable to protect companies against local discrimination, and concluded that GenOn’s challenge could be heard by the federal district court.

South Carolina Governor Signs $1.3 Million Immigration Enforcement Law

This week, on the same day that a federal judge enjoined key provisions of Georgia’s immigration law, South Carolina Governor Nikki Haley signed an Arizona-style immigration bill into law. To date, federal judges in four states (Arizona, Utah, Indiana and Georgia) have blocked key provisions of their Arizona-inspired immigration laws, arguing that these laws unlawfully interfere with federal authority over immigration matters. So what makes South Carolina any different? Nothing, except for the $1.3 million price tag in addition to the cost of implementation and legal fees incurred from defending the law.

On Monday, Gov. Haley signed S 20, a law which requires law enforcement in South Carolina to call federal authorities if they reasonably suspected a person they’ve stopped, detained or arrested is in the country without documentation. The law, which also requires employers to use E-Verify to check the citizenship status of new hires and existing employees, creates a special unit of immigration law enforcement officers—a unit estimated to cost the state $1.3 million.

And South Carolina can expect to spend even more defending the law against costly legal battles. The ACLU and National Immigration Law Center said they will sue South Carolina, as they have in other states, on the grounds that law’s provisions “sanction discriminatory and unconstitutional practices by police officers and employers by inviting racial profiling of Latinos and others.” To date, Arizona has spent upwards of $1.9 million in legal fees defending their law.

Farmers in South Carolina are also worried that the new law will hurt the agriculture industry, making it harder for farmers to find workers, whom they worry will stay away from the state “for fear of harassment just because they’re from Mexico.” One farmer said that Gov. Haley “may get what she wants in keeping illegal immigrants out of South Carolina but it may keep the legal immigrants out too.”

South Carolina, which faced a $1.3 billion budget gap in FY2011, should also expect to lose the tax revenue generated by undocumented immigrants in the state. According to the Institute for Taxation and Economic Policy, households headed by unauthorized immigrants in South Carolina paid $43.6 million in state and local taxes in 2010. According to another study, if all unauthorized immigrants were removed from South Carolina, the state would lose $1.8 billion in economic activity, $782.9 million in gross state product, and approximately 12,059 jobs if all unauthorized immigrants were removed from South Carolina.

That’s a heavy price to pay for a law that attempts to regulate what many judges agree is a federal issue. In a recent hearing, U.S. District Judge Thomas Thrash, Jr.—who enjoined key provisions of Georgia’s immigration law this week—commented:

“You are not going to have 50 systems of immigration regulation,” said Judge Thrash. “In Georgia, you are going to have 159. Every county, every municipality is going to decide what its immigration policy is going to be under this law.”

Barring a block by a federal judge, South Carolina’s immigration law will go into effect January 1, 2012.

Photo by maryaustinphoto.

Dukes v. Wal-Mart: Supreme Court Announces New Class Action Standards That Will Substantially Curtail Employment Discrimination Class Actions, As Well As Consumer, Antitrust, and Other Class Actions

On June 20, in Dukes v. Wal-Mart, the U.S. Supreme Court dealt a huge blow to plaintiffs seeking to certify employment discrimination class actions under Federal Rule of Civil Procedure 23, as well as consumer, antitrust, and other class actions. The heavily publicized case involved a proposed 1.5-million-person class of female Wal-Mart employees seeking to bring disparate impact and pattern or practice claims for discrimination in promotions and compensation. Justice Scalia wrote for the majority. In a 5-4 decision, the Court found that allegations that Wal-Mart had a “common” policy of permitting local managers to use discretion to make employment decisions based upon subjective factors did not satisfy the commonality requirement of Rule 23(a)(2). Significantly, the Court held that the commonality requirement is not met by “generalized questions” that do not meaningfully advance the litigation and is not met where named plaintiffs and members of the purported class have not suffered the “same injury.” In addition, in a unanimous decision, the Court found that claims for “individual monetary damages,” including back pay, could not be certified under Rule 23(b)(2). This decision provides defendants in class actions with a variety of tools to defeat efforts to certify large class actions involving disparately situated plaintiffs.

The Court Must Consider Certain Merits Issues in Deciding Class Certification Motions

The Court reached several conclusions that addressed, and rejected, arguments plaintiffs have made for years in support of certifying broad class actions in all contexts. For example, the Court put the final nail in the coffin of the argument that a district court must accept plaintiffs’ allegations as true and avoid any factual considerations of the “merits” in ruling upon class certification. The Court made it clear that a district judge must engage in a “rigorous analysis” before certifying a class action and must consider the merits of plaintiffs’ claims if they overlap with issues related to certification. The Court also suggested that a district court must scrutinize supposedly expert opinions offered in support of class certification. In making this ruling, the Court suggested that the standard set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) (the Daubert standard) likely applies to expert evidence used in the class certification process.

“Commonality” Element Not Met Where Common Questions Are Not Significant

While acknowledging that even a single common question could be sufficient to establish communality, the Court held that reciting basic common questions, such as whether Title VII was violated, is not enough. A plaintiff must identify common questions that depend upon the same contention and the resolution of that contention must “resolve an issue that is central to the validity of each one of the claims in one stroke.” For example, the Court acknowledged that the case before it presented common questions like “do all of us plaintiffs indeed work for Wal-Mart?” and “do our managers have discretion over pay?” but held that “reciting these questions is not sufficient to obtain class certification.” Rather, it held that “commonality requires the plaintiff to demonstrate that the class members have suffered the same injury.” In discussing this point, the Court made clear that “commonality” does not exist merely because a purported class all allegedly suffered a violation of the same provision of law. This will be a significant benefit to defendants in defeating class actions where many purported class members have suffered no injury at all.

The Court then addressed the “wide gap” between an individual claim of discrimination and the existence of a company policy of discrimination that creates a class of individuals with the same injury as the named plaintiff, which was first acknowledged by the Supreme Court in General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157-58 (1982). It noted that such a gap could be bridged, and commonality found, in two ways. First, it cited the case of a uniform biased testing procedure that impacted all test takers in the same way. Second, it could occur when there is “significant proof” that an employer “operated under a general policy of discrimination.” In discussing the second way, the Court made it clear that “the bare existence of delegated discretion” is not sufficient to establish commonality.

Significantly, the Court rejected three arguments routinely made by plaintiffs in arguing for class certification. First, the Court rejected the testimony of plaintiffs’ social science expert, Dr. William Bielby, who claimed that Wal-Mart had a culture that made it susceptible to gender bias, finding it useless to the salient question of whether plaintiffs could prove a general policy of discrimination. In doing so, the Court suggested that the testimony of expert witnesses used in support of class certification is subject to the Daubert standard. Second, the Court rejected the use of aggregate statistical analyses and the mere existence of gender disparities in pay, promotion, or representation as enough to meet the commonality burden in an employment case. Instead, the Court suggested that to show commonality, a plaintiff would at least need to demonstrate store-by-store disparities. Third, the Court found that affidavits from 120 individuals, or 1 out of every 12,500 class members, fell well short of meeting the burden of having “significant proof” that Wal-Mart operates under a general policy of discrimination. While these rejections occurred in the context of this employment discrimination claim, purported class plaintiffs in many other cases frequently attempt to rely on similar evidence to support class certification. For example, antitrust plaintiffs attempt to use aggregate statistical analyses of costs and prices and consumer class action lawyers use surveys, regression analyses, and purported social science analyses to establish the existence of commonality. The Court’s decision in Dukes makes clear that the Court may not merely accept plaintiffs’ efforts to homogenize out individual issues through unreliable expert testimony.

Rule 23(b)(2) Cannot Be Misused to Circumvent Due Process

The Court next ruled, in the unanimous portion of the opinion that will have a substantial impact on class actions generally, that individualized claims for money damages cannot be certified under Rule 23(b)(2) and instead must be certified, if at all, under the more onerous requirements of Rule 23(b)(3). In so ruling, the Court noted that Rule 23(b)(3), unlike Rule 23(b)(2), mandates notice to the class and an opportunity for class members to opt out of the lawsuit, necessary safeguards consistent with preserving the constitutional due process rights of class members whose individual claims for monetary damages would be adjudicated if a class were certified. The Court rejected the “predominance test” established by the Ninth Circuit, which permitted the certification of claims for monetary damages as long as claims for injunctive relief “predominated” over the claims for monetary damages. It cited favorably to the “incidental damages” test first adopted by the Fifth Circuit in Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir. 1998), which permits certification of claims for monetary relief as long as that relief “flow[s] directly from liability to the class as a whole,” which “should not require additional hearings.” While seeming to express skepticism that monetary damages could ever be incidental to injunctive and declaratory relief, the Court declined to adopt a bright-line rule prohibiting all money damages from ever being certified under Rule 23(b)(2). This ruling has widespread implications because Rule 23(b)(3) requires plaintiffs to prove that common questions predominate over individual ones and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Given the Court’s cynicism regarding the use of discretionary decisionmaking as grounds for the less stringent commonality standard, this burden should be extremely difficult for plaintiffs’ attorneys to meet in employment class actions without significantly altering the types of class actions they bring.

Even in the many jurisdictions that have long been critical of Rule 23(b)(2) certification of claims for monetary damages, plaintiffs’ attorneys have previously had some success in distinguishing back pay from monetary damages and thereby getting claims for huge back pay awards certified under Rule 23(b)(2). The Supreme Court put an end to that practice as well. In a far-reaching ruling that will effectively require plaintiffs who bring class action employment discrimination lawsuits (except those solely for classwide injunctive relief) to meet the standards of Rule 23(b)(3), the Court held that back pay, regardless of whether it is characterized as equitable, cannot be certified under Rule 23(b)(2). Central to this holding was the Court’s rejection of the Ninth Circuit’s proposed sampling-based approach to doling out back pay to the class without ever permitting Wal-Mart to defend the employment decisions it made regarding each individual class member. Rather than approve this approach, which it derisively referred to as “trial by formula,” the Court held that Wal-Mart was “entitled to individualized determinations of each employee’s eligibility for backpay.” This ruling not only precludes certification of the claims for money damages under Rule 23(b)(2), but will also make it difficult for plaintiffs to certify claims for monetary damages under Rule 23(b)(3). In addition, this ruling will limit the use of Rule 23(b)(2) to obtain “restitution damages” or any other type of money damages in all kinds of cases, including consumer class actions, antitrust class actions, and products liability actions.

What Comes Next?

In general, it will be more difficult for plaintiffs to obtain class certification in all cases. District courts will now be required to scrutinize closely all alleged common questions of law and fact to determine if the proposed class action can generate common answers to those questions that are apt to drive the resolution of the litigation. In particular, variations in whether class members suffered injury will be ripe for attack given the express language of the Court’s opinion. It will not be sufficient for plaintiffs to allege a “general policy” without proving the existence of such a policy and its impact on each class member. In addition, defendants are now more likely to have challenges to expert testimony at the class certification stage heard under the Daubert standard, which will have the effect of further requiring an actual showing of commonality by plaintiffs rather than mere assertions of commonality by lawyers or their experts. Even where some level of commonality is shown, in damages cases plaintiffs will also need to meet the predominance and other standards of Rule 23(b)(3), and they will not be able to circumvent due process through the use of formulaic damages awards that do not permit defendants to address the individual variations in the claims of each class member.

We also expect this decision to be tremendously helpful to retailers and other businesses that delegate authority to the local level in all types of class actions. The Court held that decisions relevant to the case were “decentralized” and made in local Wal-Mart stores, which it found to be the “opposite” of a common practice that would justify a class action. Retail and other similar companies frequently operate in this manner with respect to employment and many other decisions. These companies will be able to argue that nationwide class actions are inappropriate where the relevant decisions are made at the local level.

Class action employment discrimination lawyers will likely respond to this decision by modifying the types of cases they bring and how they characterize the common questions asserted in those cases. We expect plaintiffs’ attorneys to file smaller class actions focused on specific job groups and/or locations, perhaps with multiple subclasses. Joe Sellers, one of the lawyers for the plaintiffs in Dukes, has already been quoted as saying the decision will result in “more class actions at the store or regional level.” See “Wal-Mart Case Is a Blow for Big Cases and Their Lawyers,” http://www.nytimes.com/2011/06/21/business/21class.html?_r=1&smid=tw-nytimes&seid=auto. These smaller class cases may be brought under state laws in state courts to avoid some of the impact of this decision on certification. In addition, plaintiffs may focus on more tailored challenges targeting specific aspects of employers’ personnel policies that apply to a broad range of employees. It is also likely that employers will face more multiplaintiff cases that attempt to consolidate various individual discrimination claims, including pattern or practice claims. Mr. Sellers has stated that the plaintiffs’ lawyers in Dukes have prepared “thousands” of individual charges of gender discrimination that they plan to file with the Equal Employment Opportunity Commission (EEOC)See “Wal-Mart Women Vow to Press Bias Fight in Courts, Agency,” http://www.businessweek.com/news/2011-06-21/wal-mart-women-vow-to-press-bias-fight-in-courts-agency.html. In short, we expect to see plaintiffs’ attorneys testing various avenues to obtain the most expansive classes possible under the new standards.

We also expect to see an increase in Equal Pay Act claims. While the standard for certification in those cases is demanding, plaintiffs’ counsel may view it as a favorable alternative to proceeding under Rule 23 in light of this decision. Moreover, while class action counsel are not likely to entirely abandon theories premised upon subjectivity and stereotyping, we expect more class actions focused on objective personnel policies, such as employment tests, that apply generally to a large group of employees. The EEOC has been aggressively investigating such cases for several years as part of its focus on screening procedures and claims of systemic discrimination.

Finally, as has already started, we expect calls for government action. The EEOC has stated that it is reviewing the Dukes decision and determining whether it warrants any changes in its strategies for enforcement of Title VII. The Commission, which is not bound by Rule 23, could respond by more aggressively filing representative actions, potentially in partnership with intervening private class counsel. In addition, civil rights groups have already started calling for congressional action, including a renewed push for passage of the Paycheck Fairness Act. While the current Congress is unlikely to move forward with such legislation, as we saw with the Lilly Ledbetter Fair Pay Act, future political changes to the makeup of Congress could result in legislation designed to eat away at some of the employer-friendly aspects of the Dukes decision.

What Should Employers Do Now?

The Dukes decision is a great win for employers who no longer face the prospect of defending overbroad class claims indiscriminately attacking the individualized decisionmaking of local managers based upon ill-defined, allegedly discretionary policies. However, now is not the time for employers to become complacent. As noted above, we expect more targeted class claims as class action plaintiffs’ attorneys test the boundaries of this decision. While this next wave of cases will almost certainly focus on smaller classes than that at issue in Dukes and the other large class actions of recent years, it will still create significant risks to organizations who are sued, in terms of litigation costs, potential exposure, and public relations. Fortunately, Dukes ups the ante for plaintiffs’ attorneys as well, as they now face a much greater battle when filing class actions, and we expect that they will be more diligent in researching and selecting cases than they have been in the past. For this reason, as well as to most efficiently manage their businesses, employers should continue to develop employment practices and policies that reflect best practices, monitor those practices and policies to ensure compliance with EEO policies, and analyze the impact of such practices and policies for equity and consistency with diversity policies and goals.

United States Supreme Court Strikes Down Largest Employment Discrimination Class Action in History

On June 20, 2011, the United States Supreme Court granted employers some long-awaited relief by substantially raising the bar for plaintiffs (and their lawyers) seeking to certify large employment discrimination class actions. In Wal-Mart v. Dukes (No. 10-277), the Court reversed the Ninth Circuit Court of Appealsen banc decision upholding the certification of a class action filed on behalf of approximately 1.5 million hourly and salaried female employees alleging sex discrimination in pay and promotions. The potential damages were estimated to be more than a billion dollars.

As we have detailed in prior newsletters and bulletins, because of potentially large damage awards and fee-shifting provisions, employment class actions have been a boon for the Plaintiff’s bar while exposing employers to significant liability and litigation costs.  Although the Dukes decision will not put an end to class actions, it, at the very least, temporarily halts the large nationwide employment discrimination class actions. In its ruling, the Supreme Court significantly increased the plaintiffs’ burden of proof at the class certification phase and mandates that district courts look more carefully at whether class certification is appropriate, including a critical assessment of plaintiffs’ proof of class-wide discrimination.

The Supreme Court’s Decision in Dukes

Following an increasing trend, the Dukes plaintiffs alleged that Wal-Mart discriminated against its female employees by delegating subjective decision making authority with respect to pay and promotion decisions to its local store managers and by building a corporate culture that fostered sex bias in these managerial decisions. Both the district court and the Ninth Circuit held that plaintiffs demonstrated that their class claims were appropriate for certification by relying on:

(i) statistical evidence purportedly demonstrating disparities in the pay and promotions of males and females; (ii) anecdotal reports of discrimination by 120 female employees; and (iii) the “expert” testimony of a sociologist who concluded that Wal-Mart’s culture was susceptible to gender discrimination.

Plaintiffs Did Not Satisfy Their “Commonality” Burden under Rule 23(a)

In a strongly worded opinion, Justice Scalia, writing for the 5–4 majority, disagreed that the Dukes plaintiffs’ evidence was sufficient to support class certification because it did not meet plaintiffs’ burden of satisfying Rule 23 of the Federal Rules of Civil Procedure requirements for certification. As recast by Justice Scalia, to meet these requirements, plaintiffs must provide “significant proof” that their class claims involve a common issue the resolution of which is “central to the validity of each one of the [class members’] claims in one stroke”; for example, discriminatory bias on the part of the same manager or the use of a discriminatory test.

The majority’s decision removes any doubt that a trial court must conduct a “rigorous analysis” to ensure that plaintiffs have satisfied the Rule 23 elements, including a searching review of evidence that goes to the merits of the case. Exploration of the merits was appropriate in Dukes, the majority found, because it necessarily overlapped with the plaintiffs’ class-wide allegations that Wal-Mart engaged in a pattern and practice of discrimination.

In Dukes, the majority found plaintiffs’ evidence fell far short of the required “significant proof.” The Court did not reverse a prior decision that delegation of subjective decision making to individual managers could constitute a common discriminatory practice, but the majority found plaintiffs’ evidence lacking where Wal-Mart had a “general policy of non-discrimination” and where thousands of managers were making literally millions of pay and promotion decisions in some 3,400 stores. Specifically, the Court rejected plaintiffs’ sociological expert’s conclusion that Wal-Mart’s corporate culture made it more susceptible to gender bias in managerial decision making because the expert could not even opine, let alone show, that gender bias infected .5 percent or 95 percent of managerial decisions. The Court concluded that this was “the opposite of uniform policy that could provide commonality needed for a class action.”

The majority also found plaintiffs’ statistical and anecdotal evidence to be equally unpersuasive. Plaintiffs’ statistical expert conducted a region-by-region analysis and found that female representation in management positions was substantially less than in lower hourly positions and that females earned less than men. The Court discounted this proof, stating that any disparity at the regional level could not by itself establish that there were pay or promotion disparities at the individual stores, and even less so across all class members, which the majority stated was necessary to support plaintiffs’ theory of commonality. Furthermore, even if the statistics supported disparity at all the individual stores, the analysis did not consider potential assertions by Wal-Mart’s managers that women are not as readily available in certain store areas or the differences in the criteria used by the individual stores to make the decisions. The Court further found that the plaintiffs’ anecdotal evidence comprised of 120 affidavits representing the reporting experiences of only 1 out of every 12,500 class members and only 235 of Wal-Mart’s 3,400 stores could not show the whole company operated under a general policy of discrimination.

Plaintiffs Could Not Pursue Individualized Monetary Claims under Rule 23(b)(2)

The Court also unanimously resolved a split in the Courts of Appeal and held that the claims for backpay should not have been certified as a class action under Rule 23(b)(2) because such backpay damages were not “incidental” to the injunctive or declaratory relief sought. The Court concluded that certification under Rule 23(b)(2) is inappropriate when “each member would be entitled to an individualized award of monetary damages.”

Instead, the Court held that the monetary claims involving individualized proof must proceed under Rule 23(b)(3), which permits class certification only upon a showing that common questions of law and fact predominate over questions affecting individuals and after providing notice of the class action to potential class members and an opportunity to opt out. The Court reasoned that these procedural safeguards were necessary to protect class members’ individual interests in monetary relief.

The Court also rejected the position adopted by the Ninth Circuit that a statistical sample of class members could be used to determine the damages for the whole class without individualized proceedings. The Court reasoned that this sampling method was inconsistent with the procedures established by the Supreme Court for determining the scope or lack of individual damages in Title VII claims. The majority further suggested, without deciding, that this approach might also violate an employer’s right to individualized determinations of each class member’s eligibility for backpay.

Implications of the Court’s Decision in Dukes

The most immediate effect of the Dukes decision is that district courts will need to reconsider the appropriateness of employment discrimination class actions on their docket that were certified under Rule 23(b)(2). In the longer run, Dukes may not have sounded the death knell for all large discrimination class actions but it has made it very difficult for plaintiffs to mount class actions that seek to cover multiple types of claims, e.g., pay and promotions, and many different job classes, facilities and/or managers. As a consequence, future class actions are more likely to focus on more discrete claims of discrimination covering fewer locales and limited to common decision makers and covering a more homogenous class. In particular, Dukes is likely to curtail the bringing of class actions under the “delegation of subjective decision making” theory. Although the Court did not articulate clear evidentiary standards for establishing “commonality,” the Court emphasized the need to demonstrate a common allegedly operative discriminatory practice and injury across all putative class members. It is difficult to see how plaintiffs will mount class actions based on “subjective decision making” given the Court’s emphasis that “demonstrating the invalidity of one manager’s use of discretion will do nothing to demonstrate the invalidity of another’s.”

The Dukes decision also, as a practical matter, will require district courts to probe more deeply into the merits at the class certification stage, and the Supreme Court endorsed the consideration of Daubert motions to exclude expert testimony before class certification to assess such testimony’s adequacy. Moreover, although Dukes is restricted to class certification requirements, its emphasis on proving that the alleged discriminatory practice applied to and may have injured all class members may also lead to higher standards of proof in establishing class-wide discrimination on the merits.

Dukes also will lessen the incentive of plaintiffs’ attorneys to bring class actions by making it more difficult to seek monetary damages for large, diffuse classes.

How plaintiffs’ attorneys will respond is open to speculation. The attorneys representing Dukes profess their intent to bring individual and more discreet, localized class actions. This may become an overall trend. Employers should keep in mind that the Dukes decision has no immediate impact on the ability of the EEOC to bring company-wide pattern and practice suits because the EEOC generally is not required to satisfy the “commonality” principles espoused by the Supreme Court. Nevertheless, the Dukes decision, which comes on the heels of the Court’s May 2011 pro-employer decision in AT&T Mobility v. Concepcion et ux. seemingly validating the use of mandatory arbitration agreements to bar employees’ ability to litigate claims on a class basis, is a welcome change for employers.

Employers May Face Vicarious Liability For Dangerous Acts Of Independent Contractors

Generally, businesses that hire independent contractors are absolved from any liability for the wrongful acts of those independent contractors unless the work is “inherently dangerous activity.” The concept is that businesses cannot contract away the responsibility for dangerous activities. This concept was recently addressed in Stout v. Johnson, 159 Wn. App. 344 (2011), where a criminal sued a bail bond company for injuries that he sustained when the bail bond company’s independent contractor – i.e., the bounty hunter – apprehended him after he failed to appear in court for a scheduled hearing.

In Stout, the plaintiff-criminal had posted a $50,000 bail bond for felony drug charges. He missed his court appearance, so the bail bond company retained a bounty hunter to apprehend him. When he tried to escape by car, the bounty hunter blocked his pathway, causing him to drive off the road and collide with a tree, sustaining injuries which resulted in the amputation of his leg. The criminal sued the bail bond company, claiming that it was liable for the acts of the bounty hunter since bounty hunting is inherently dangerous. The bail bond company defended claiming that, because the bounty hunter was an independent contractor and not its employee, it was not responsible for his actions. The trial court agreed and dismissed the plaintiff-criminal’s claims against it.

On appeal, the criminal argued that the “inherently dangerous activity” doctrine makes businesses responsible for the actions of their independent contractors. The Stout court started its analysis with the general rule that respondeat superior does impose liability on an employer for the torts of an employee who is acting on the employer’s behalf. Thus, if the bounty hunter had been the bail bond company’s employee the bail bond company could have been liable. However, a business that hires an independent contract is not generally vicariously liable for the actions of that contractor. The Stout court did recognize that an exception exists when an employer of an independent contractor attempts to delegate its duty of care to an independent contract and escape liability in inherently dangerous situations. The Stout court accepted, for purposes of argument, that bounty hunting was an inherently dangerous activity, yet it still held in favor of the employer.

The Stout court explained that, when a person takes part in an activity with knowledge that there is unavoidable risk of injury, he or she is not protected by the “inherently dangerous activity” exception to the independent contractor rule. In other words, the criminal assumed the risk by running and was not an innocent third party who had been injured by an independent contractor engaged in an inherently dangerous activity. When the plaintiff drove his car down the gravel road in an attempt to avoid the apprehension, he was aware that the bounty hunter could ram his car and force it off the road. He knew there was a risk of at least some peril when he absconded.

The takeaways from Stout are that, while employers are legally responsible for the acts of their employees, generally they are not liable for the acts of their independent contractors. That is often a reason why businesses retain independent contractors to perform certain functions, and in most cases, there is a cost savings to the business. However, in certain situations, the Stoutcourt emphasized that businesses will be liable for the acts of their independent contractors when it is an “inherently dangerous activity.” Nonetheless, the Stout court emphasized that, when the person who is injured by the inherently dangerous activity has caused and/or brought the harm from the dangerous activity on himself or herself, he or she will not be able to recover damages from the employer for injury resulting from the dangerous activity.

Senate Hearing on DREAM Act Emphasizes Need for Relief

Today, the U.S. Senate held its first ever hearing on the Development, Relief, and Education for Alien Minors (DREAM) Act. Witnesses such as Department of Homeland Security Secretary Janet Napolitano, Secretary of Education Arne Duncan and Dr. Clifford Stanley, Under Secretary of Defense for Personnel and Readiness, testified to an overflowing Senate hearing room. The hearing renewed hope that despite a failure on the part of the Senate to pass the DREAM Act last year, Congress may yet be willing to help these deserving young adults fulfill their potential and contribute to the U.S.

Only the most cynical politician could claim that the DREAM Act is being used as a political tool after hearing the testimony of Ola Kaso, an unauthorized immigrant from Albania. Ola was brought to the U.S. at a young age by her mother, who was trying to find a better life for her and her family. Ola struggled to integrate into U.S. society at first, but by the end of high school, she had a 4.4 GPA and was a varsity athlete in both tennis and cross country. She became treasurer of both the Senior Class Student Council as well as her school’s chapter of the National Honor Society. She received numerous scholarship offers and was accepted by several universities including the University of Michigan. Yet, despite all of her achievements, Ola was ordered to be deported to Albania (despite not being fluent in Albanian) the March before her high school graduation. Luckily, Ola’s community rallied around her and was able to get DHS to grant her deferred action for one year while she continued her education. However, many DREAM Act students are not so lucky.

The DREAM Act not only accomplishes humanitarian goals like keeping deserving and innocent young students from being punished, but also allows bright young adults to contribute to the U.S. economy. A 2010 study by the UCLA North American Integration and Development Center estimated that the total earnings of DREAM Act beneficiaries over the course of their working lives would be between $1.4 trillion and $3.6 trillion. More earnings over the course of their working lives means another way that the U.S. can seek to reduce its deficits. In fact, the Congressional Budget Office (CBO) estimated that the House version of the DREAM Act (H.R. 6497), as introduced on December 7, 2010, “would reduce deficits by about $2.2 billion over the 2011-2020 period.”

After being pressed by Senator Chuck Grassley (R-IA), DHS Secretary Napolitano made clear that in the absence of the DREAM Act, there would be no categorical “amnesty” for DREAM Act eligible students. But on June 17, the Obama administration took a small step that may benefit some DREAM Act students. In a memo from Immigration and Customs Enforcement (ICE), Director John Morton outlined 19 factors (ranging from age and when someone came to the country to community ties) that ICE officials should weigh when deciding whether to prosecute an immigration case. While there is no categorical pronouncement that all DREAM act students shall receive deferred action, the Obama Administration is at least signaling that these types of cases merit an individualized assessment.

Small steps like this memo and the continued push on the part of Sen. Richard Durbin (D-IL) for the DREAM Act give hope that Congress will soon realize the obvious fiscal and humanitarian benefits of keeping these bright young adults in the United States.

Photo by Antonio Villaraigosa

J. McIntyre Machinery v. Nicastro: Declarifying Asahi

Remember when George H.W. Bush was the 41st President of the United States? Back when the Warsaw Pact dissolved and the U.S.S.R. became the Commonwealth of Independent States? Back when Pan Am ceased flying?

Well, I do.

(No snarky questions professing ignorance about the Warsaw Pact, if you please.)

I was in my first year at Baylor Law School and trying to master the complexities of Civil Procedure, including the mysteries of International Shoe and “minimum contacts.”

And just about the time I thought I had it, Professor Trail smiled that mischievous smile of his and came straight at us with something about a “Stream of Commerce” and Asahi Metal Inustry v. Superior Court. As best I can recall, we were either supposed to elucidate what the law of personal jurisdiction actually was in the wake of Asahi, or else predict who would prevail in a cage match between Justice Sandra Day O’Connor and Justice William Brennan.

The result was predictable confusion–confusion that reached down the ages.

Until today. Professors and law nerds everywhere had the vapors because the Supreme Court of the United States had a chance to clear it all up in J. McIntyre Machinery Ltd. v. Nicastro. After the break, a few words on how end-of-term alphabet soup begat “Son of Asahi.”

Justice Kennedy set out the Asahi problem. Does jurisdiction depend more upon the Defendant taking specific action toward the forum state, or foreseeability enough:

In Asahi, an opinion by Justice Brennan for four Justices . . . contended, “jurisdiction premised on the placement of a product into the stream of commerce [without more] is consistent with the Due Process Clause,” for “[a]s long as a participant in this process is aware that the final product is being marketed in the forum State, the possibility of a lawsuit there cannot come as a surprise.” . . .  .

The standard set forth in Justice Brennan’s concurrence was rejected in an opinion written by Justice O’Connor; but the relevant part of that opinion, too, commanded the assent of only four Justices, not a majority of the Court. That opinion stated: “The ‘substantial connection’ between the defendant and the forum State necessary for a finding of minimum contacts must come about by an action of the defendant purposefully directed toward the forum State. The placement of a product into the stream of commerce, without more, is not an act of the defendant purposefully directed toward the forum State.”

Nicastro gave the Court a chance to pick. But alas, five cats could not be herded into a single corral.

Broadly speaking, the question presented in Nicastro was whether a foreign manufacturer could be hauled into the state where its machine injured someone. The manufacturer had a distributor for U.S. sales, making such sales foreseeable, but had not itself targeted the state where the injury occurred.

But here is where the advocacy begins.

According to Justice Kennedy, writing for the plurality, the question was whether a “British manufacturer of scrap metal machines was subject to jurisdiction in New Jersey, even though at no time had it advertised in, sent goods to, or in any relevant sense targeted the State.”

Justice Ginsberg stated it a bit differently:

A foreign industrialist seeks to develop a market in the United States for machines it manufactures. It hopes to derive substantial revenue from sales it makes to United States purchasers. Where in the United States buyers reside does not matter to this manufacturer. Its goal is simply to sell as much as it can, wherever it can. It excludes no region or State from the market it wishes to reach. But, all things considered, it prefers to avoid products liability litigation in the United States. To that end, it engages a U. S. distributor to ship its machines state-side. Has it succeeded in escaping personal jurisdiction in a State where one of its products is sold and causes injury or even death to a local user?

She also might have mentioned that the “three-ton metal shearing machine severed four fingers on Robert Nicastro’s right hand.”

Subtle.

So, how did the Brennan/O’Connor cage match get decided?

It didn’t. Now it’s just the Kennedy/Ginsburg cage match:

  • Justice Kennedy (with Roberts, Scalia, and Thomas) would hold that Justice Brennan’s concurrence was “inconsistent with the premises of lawful judicial power,” because “it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.” Targeting the United States is not the same thing as doing business in New Jersey.
  • Justice Ginsberg (with Kagan and Sotomayor) would hold that the manufacturer’s intent to target the U.S. market was enough to subject it to jurisdiction in New Jersey, even if it’s independent distributor was responsible for the New Jersey sale.
  • Justice Breyer and Justice Alito decided that both groups had cooties and would only concur in the judgment. They thought it “unwise to announce a rule of broad applicability without full consideration of the modern-day consequences,” which they thought were absent from the case.

Justice Kennedy recognized that before today’s opinion, “[t]he rules and standards for determining when a State does or does not have jurisdiction over an absent party [were] unclear because of decades-old questions left open in Asahi Metal Industry Co. v. Superior Court of Cal., Solano Cty., 480 U. S. 102 (1987).”

They still are.

For want of a fifth vote, we are about 14,000 words the richer after today’s three opinions, but none the wiser.

Is it possible to read three Supreme Court opinions on personal jurisdiction and know less than when you started?

Social Media and Discovery: Accessing Password Protected Material

Social media is everywhere, including, with increasing frequency, in lawsuits, particularly those involving employment-related claims. For example, employers sued by potential, current, and former employees are seeking social media information to learn if on-line postings by those employees on social media sites contradict statements or contentions made by them in their lawsuit. For their part, plaintiff-employees are seeking social media information to try to bolster their claims, such as looking for information from social mediate sites to show a pattern of allegedly harassing conduct by a supervisor or co-worker that extends beyond the workplace.

In a recent case, Zimmerman v. Weis Markets, Inc., No. CV-09-1535, 2011 WL 2065410 (Pa. Com. Pl. May 19, 2011), the trial court permitted the defendant employer to access the plaintiff’s password-protected on-line information. The plaintiff brought suit against his former employer after he injured his leg on the job while operating a forklift. The plaintiff sought damages for lost wages, lost future earning capacity, pain and suffering, scarring and embarrassment. The plaintiff claimed that he could no longer participate in certain activities and that his injuries affected his enjoyment of life. At his deposition, the plaintiff stated that he never wore shorts because he was embarrassed by the scar on his leg from the accident. However, the employer discovered on various publically-available social media websites, pictures posted by the plaintiff where his scar was clearly visible.

The defendant pursued this matter further, filing a motion to obtain access to private portions of the plaintiff’s social media sites and posts. The defendant argued that there may be other relevant information contained on those sites that would pertain to the plaintiff’s damages claim. The defendant sought the plaintiff’s passwords, user names and login names. Not surprisingly, the plaintiff opposed the defendant’s efforts to gain access to his private social media sites, arguing that his privacy interest outweighed any need to obtain discoverable material.

The court granted the defendant’s motion, finding that the plaintiff’s privacy interests did not outweigh the defendant’s need to obtain the information, that liberal discovery is favored, and the pursuit of truth is paramount. The court noted that it was the plaintiff who placed his physical condition at issue, and the defendant therefore has a right to find out information about the plaintiff’s condition. The court further reasoned that because the plaintiff posted the information to share with others, he could not now claim a reasonable expectation of privacy.

The court was careful to note, however, that its ruling should not be interpreted as a blanket entitlement to dig into employees’ private social media activities in every case, or that the court would allow “fishing expeditions.” Rather, the court clarified that it would consider an application seeking private social media information if the party seeking the material could make a threshold showing that the publicly accessible portions of the site indicate that there would be further relevant postings in the non-public portions. Thus, what the court essentially held was that if the plaintiff opens the door by posting publically-available information relevant to the lawsuit, private portions of a plaintiff’s social media are fair game. At bottom, this makes sense, however, watch for this rationale to be tested further, and perhaps expanded.

Court Compels Production of Personal Emails from Company Systems Citing Lack of Reasonable Privacy Expectation

On May 23, in SEC v. Reserve Management Co. Inc.,[1] the U.S. District Court for the Southern District of New York ruled that an employee does not have a reasonable expectation of privacy with respect to communications with a spouse through an employer’s email system. In reaching its decision, the court employed the four-part test from In re Asia Global Crossing Ltd.[2] to determine if the employee had a reasonable expectation of privacy. Key to the court’s analysis was the presence and actual notice to employees of an email policy that both forbade personal communications and warned employees of possible disclosure of company-controlled email communications.

Background

Reserve Management Co, Inc. (RMCI), under the leadership of its president, Bruce Bent II, managed a money market mutual fund known as the Reserve Primary Fund (Fund). RMCI invested $785 million of the Fund’s assets in Lehman Brothers debt. Just days after Lehman Brothers’ bankruptcy announcement, the Fund’s net asset value dropped to less than $1 per share. In response to RMCI’s handling of communications with investors regarding the Fund’s vulnerability to Lehman Brothers and its effect on investor assets, the Securities and Exchange Commission (SEC) filed fraud charges against RMCI. During discovery, RMCI withheld approximately 60 emails between Mr. Bent and his wife, asserting the marital communications privilege. The SEC subsequently moved to compel production of these emails.

In determining whether there was a valid marital communications privilege claim, the court found that it was undisputed that the Bents were married and that they intended to convey messages to each other. However what was in dispute was whether their communications were made in confidence.

Privacy of “Personal” Data in the Courts

The question of whether an employee has a privacy interest in “personal” data on company systems has been addressed by many courts in the past decade. Generally, courts have held that content maintained on company-owned systems is the property of the company. However, there have been some notable exceptions. In the Stengart case,[3] the Superior Court of New Jersey found that company ownership of a computer was not determinative of whether an employee’s otherwise privileged emails were company property. Instead, the court balanced the employer’s legitimate business interests against the attorney-client privilege.

Additionally, a growing line of cases affords protection to employees who may reasonably have expected privacy when using company IT systems. In Asia Global Crossing, the court set forth a four-factor test to assess the reasonableness of an employee’s privacy expectation in personal email transmitted over, and maintained on, a company server. The test poses four questions:

1.      Does the company maintain a policy banning personal or other objectionable use?

2.      Does the company monitor the use of the employee’s computer or email?

3.      Do third parties have a right of access to the computer or emails?

4.      Did the company notify the employee, or was the employee aware, of the use and monitoring policies?

This test has been adopted by a number of courts faced with the task of determining the reasonableness of privacy expectations. As the Reserve Management court pointed out, “the cases in this area tend to be highly fact-specific and the outcomes are largely determined by the particular policy language adopted by the employer.”

The Four-Factor Test and RMCI

Applying the four-factor test to determine whether Mr. Bent had a reasonable expectation of privacy in his emails with his wife, the court analyzed whether RMCI maintained a policy regarding personal use of company email. The court rejected RMCI’s contention that any policy was merely aspirational, finding that the policy clearly banned personal use of the company email system:

Employees should limit their use of the e-mail resources to official business. . . . Employees should . . . remove personal and transitory messages from personal inboxes on a regular basis.

Focusing intensely on the policy’s language, the court cited prior opinions analyzing obligatory policy language, as well as dictionary definitions. Ultimately, the court determined that RMCI’s policy unequivocally banned the personal use of company email, and that Mr. Bent violated this policy by communicating with his wife over RMCI’s systems.

The court next addressed the second factor of the Asia Global Crossing test-whether the employer monitors the employee email. While stating that the company will not “routinely monitor employee’s e-mail and will take reasonable precautions to protect the privacy of e-mail,” RMCI’s policy further stated that RMCI reserved “the right to access an employee’s e-mail for a legitimate business reason . . . or in conjunction with an approved investigation.” Because RMCI reserved the right to access email accounts, the court found that RMCI satisfied the second factor of the Asia Global Crossing test. Elaborating, the court pointed out that where an employer reserves this right, courts often find the employee has no reasonable expectation of privacy.

The third factor of the Asia Global Crossing test asks whether third parties have rights to access employee emails. Once again, the RMCI email policy addressed this, stating:

Employees are reminded that client/public e-mail communications received by and sent from Reserve are automatically saved regardless of content. Since these communications, like written materials, may be subject to disclosure to regulatory agencies or the courts, you should carefully consider the content of any message you intend to transmit.

The court found that this provision gave clear notice to Mr. Bent that his communications over the company email system were subject to disclosure. In its analysis, the court noted that RMCI operates in the heavily regulated financial sector, and that regulatory action was reasonably foreseeable.

The fourth factor-employer notice and employee awareness of the company use and monitoring policy-was not in contention. The defendants conceded that Mr. Bent was aware of the policy.

Having answered all four questions in the affirmative, Mr. Bent was deemed not to have had a reasonable expectation of privacy in emails he sent or received over RMCI’s email system. Consequently, the communications with his wife were deemed not confidential and the marital communications privilege did not apply. Granting the SEC’s motion, the court ordered RMCI to produce the withheld emails between Mr. Bent and his wife, which resided on the RMCI email servers and data archives.

Conclusion

This case serves to remind organizations of the importance of email policies and compliance. The commingling of business and private communications can expand the scope of discovery and expose a company to liability for an employee’s casual, careless remarks, which the employee may have considered to be private. Even though Mr. Bent believed that his emails with his wife were not business related, and would never be read by anyone else, the court found that this was not a reasonable belief and ordered disclosure.

As in Stengart, companies may be at a disadvantage in litigation with an employee or former employee whom the court finds had a reasonable expectation of privacy. In such cases, not only will a company have no right to emails on its own system, but it may also need to sequester any privileged communications identified during discovery and to disclose the discovery to opposing counsel.

The overarching lesson from these cases is that companies should have in place comprehensive, robust computer and email usage policies. Of course, these policies are only effective when they are clearly articulated and publicized. As well as increasing compliance, a formal training program can eliminate questions regarding notice. Finally, companies should strongly consider using an acknowledgement mechanism to demonstrate that employees received, reviewed, and understood the policy.

Generic Drug Manufacturers And Failure To Warn: What duty is there after Pliva v. Mensing?

The Supreme Court ruled on June 23, 2011, that generic drug manufacturers cannot be sued for a failure to warn under state tort law, as long as their labeling complies with the FDA mandated labeling for the innovator drug product. While the Court had previously declined to find that federal regulation and approval of drug labeling of an innovator drug preempted state tort law in Wyeth v. Levine, 555 US 555 (2009), the Court ruled 5-4 in Pliva that the comprehensive scheme for approval of generic drugs under the 1984 Hatch-Waxman amendments required generic manufacturers to use the same labeling as the innovator brand name product. Since the law and FDA regulations, as conceded by the Food and Drug Administration (FDA), preclude a generic company from obtaining approval of labeling different from the innovator brand name product, the Court held it was not possible for a generic manufacturer to comply with both federal and state law. As such, under the doctrine of impossibility, they ruled federal law was supreme and state tort laws on failure to warn were preempted. In so finding, they held that the issue of “impossibility” turns on whether the private party could independently do under federal law what state law requires of it. In this case, they held that generic manufacturers could only ask FDA to change labeling and could not do so without FDA approval, and thus could not act independently.

As stated by the Court:

The non obstante provision suggests that pre-emption analysis should not involve speculation about ways in which federal agency and third-party actions could potentially reconcile federal duties with conflicting state duties. When the “ordinary meaning” of federal law blocks a private party from independently accomplishing what state law requires, that party has established pre-emption.

The Court ruled at length upon the FDA’s interpretation of its authority. FDA conceded that a generic company could not obtain approval of a CBE-30 (Changes Being Effected in 30 day supplement) to add additional warning language to labeling, and that its only alternative if it chose to do so was to propose new warnings to the FDA if they believed they were necessary. At that point the Agency is to work with the brand name manufacturer “to create a new label”. The appellant manufacturers and FDA did not agree as to whether there was such a duty. The Court did not rule on that issue, since it found that pre-emption applies, even if there were such a duty.

Both the majority opinion conceded, and the dissent made a big point of, the fact that the result of the decision resulted in a situation where an individual’s right to seek relief for failure to warn turns on whether he/she took a generic or brand name of a product. As noted in the majority opinion:

We recognize that from the perspective of Mensing and Demahy, finding pre-emption here but not in Wyeth makes little sense. Had Mensing and Demahy taken Reglan, the brand-name drug prescribed by their doctors, Wyeth would control and their lawsuits would not be pre-empted. But because pharmacists, acting in full accord with state law, substituted generic metoclopramide instead, federal law pre-empts these lawsuits. See, e.g., Minn. Stat. §151.21 (2010) (describing when pharmacists may substitute generic drugs); La. Rev. Stat. Ann. §37:1241(A)(17) (West 2007) (same). We acknowledge the unfortunate hand that federal drug regulation has dealt Mensing, Demahy, and others similarly situated.
But “it is not this Court’s task to decide whether the statutory scheme established by Congress is unusual or even bizarre.” Cuomo v. Clearing House Assn., L.L.C., 557 U. S. ___, ___ (2009) (THOMAS, J., concurring in part and dissenting in part) (slip op., at 21) (internal quotation marks and brackets omitted). It is beyond dispute that the federal statutes and regulations that apply to brand name drug manufacturers are meaningfully different than those that apply to generic drug manufacturers. Indeed, it is the special, and different, regulation of generic drugs that allowed the generic drug market to expand, bringing more drugs more quickly and cheaply to the public. But different federal statutes and regulations may, as here, lead to different pre-emption results. We will not distort the Supremacy Clause in order to create similar preemption across a dissimilar statutory scheme. As always, Congress and the FDA retain the authority to change the law and regulations if they so desire.

Given this ruling, what duty do generic manufacturers have if they become aware of new information as to the safety of a drug? Generic drug manufacturers still have pharmacovigilance duties under 21 C.F.R. § 314.80, and may become aware of data that they believe requires a labeling change. While the Court did not rule there was a duty to take any action, the FDA made it clear in their briefing that there was an obligation to bring such information to their attention and request a label change. As stated by the Court:

According to the FDA, the Manufacturers could have proposed—indeed, were required to propose—stronger warning labels to the agency if they believed such warnings were needed. U. S. Brief 20; 57 Fed. Reg. 17961. If the FDA had agreed that a label change was necessary, it would have worked with the brand-name manufacturer to create a new label for both the brand-name and generic drug. Ibid.

The agency traces this duty to 21 U. S. C. §352(f)(2), which provides that a drug is “misbranded . . . [u]nless its labeling bears . . . adequate warnings against . . . unsafe dosage or methods or duration of administration or application, in such manner and form, as are necessary for the protection of users.” See U. S. Brief 12. By regulation, the FDA has interpreted that statute to require that “labeling shall be revised to include a warning as soon as there is reasonable evidence of an association of a serious hazard with a drug.” 21 CFR §201.57(e).
According to the FDA, these requirements apply to generic drugs. As it explains, a “ ‘central premise of federal drug regulation is that the manufacturer bears responsibility for the content of its label at all times.’ ” U. S. Brief 12–13 (quoting Wyeth, 555 U. S., at 570–571). The FDA reconciles this duty to have adequate and accurate labeling with the duty of sameness in the following way:
Generic drug manufacturers that become aware of safety problems must ask the agency to work toward strengthening the label that applies to both the generic and brand name equivalent drug. U. S. Brief 20.

There are questions left open on this issue, including the lack of any clarity on whether this is indeed a statutory duty. If it is, what is the consequence if a generic manufacturer becomes aware of a safety issue with one of its product and does not act to bring the matter to FDA? In addition to the potential misbranding charges which FDA’s interpretation suggests, will the knowing failure to bring the matter to FDA result in liability under a negligence or other theory? Or is the only possible liability a potential violation of the Federal Food Drug and Cosmetic Act? (the Act) Would a plaintiff claiming a generic manufacturer did not pursue its duty to request a label change face the defense that there is no private right of action with regard to a generic manufacturer’s duty as outlined by FDA?

In addition, as discussed at same length in the dissent, what happens when the brand name product is discontinued as frequently occurs after generics enter the market? Who, if any one, may be exposed to failure to warn issue? If, as FDA frequently does, FDA lists the first generic as the Reference Listed Drug for purposes of bio-equivalence studies, does that “generic” manufacturer get put in the place of the brand name company in the analysis? While it may appear to be the last word on generic drug manufacturer labeling for failure to warn under state law, Pliva may not totally absolve generic drug manufacturers from product and other liability if they become aware of safety data and do not act to address the issue.

Avoiding Coverage Gaps from Professional Services

Commercial general liability (CGL) policies typically provide coverage for, among other risks, bodily injury, property damage and advertising/personal injury. Many CGL policies exclude coverage for liability stemming from an insured’s “professional services.” These exclusions are utilized because it is thought that such risks should, in theory, be covered under the insured’s professional liability policies. Professional liability insurers, in turn, are careful not to accept coverage for risk they believe should be covered under the insured’s CGL policy, so they sometimes exclude coverage for bodily injury and property damage.

While one would think that obtaining separate coverage for bodily injury, property damage and personal/advertising injury, on one hand, and professional liability, on the other, would eliminate any gaps in coverage, in practice the coverages do not always perfectly dovetail, nor is it always clear which coverage is applicable to a given situation. While these kinds of coverage issues are nothing new, they have become much more commonplace as companies have become more diversified, e.g., as product-driven companies seek to support sales by providing a broader range of technical services. And, such categorization issues can become critical where the company not only engages in activities that blur the distinction but has purchased coverage for only one of the risks, usually general liability coverage.

Companies that run into problems with the potential crossover of CGL and professional liability coverage generally fall into two basic risk profiles. The first profile includes those companies that acknowledge that their business activities involve risks covered by both CGL and professional liability policies and have therefore purchased both types of coverage, but whose policies have not been properly tailored to avoid gaps between the coverages. The second profile includes those companies whose business activities are evolving to become more or less akin to “professional services,” but whose coverage has not adapted to reflect the changing nature of their activities.

Identifying these potential risks and finding solutions can help avoid unwanted surprises when a claim arises and also make sure that a company?s insurance will be available as intended.

A Malleable Concept

Outside of traditional categories of “professionals” like doctors, architects and engineers, no clear consensus exists as to what constitutes “professional services.” Policies usually define “professional services” as “providing services to another for compensation,” but that definition is far from universal and, in those instances when it is adopted, the scope of the definition is not always self-evident. Thus, the issue of whether an activity constitutes professional services boils down to a “you will know it when you see it” standard, offering little comfort to a policyholder. Examples from a sampling of industries illustrate the problem:

1.  Technology. 

A company develops and sells to commercial airlines a device used to measure airspeed. In addition to the sale of the product, the company provides the airline with consulting services for an additional fee. The device is implicated in a large-scale disaster, and the passengers’ families bring suit against the technology company.

2.  Life sciences.

 A pharmaceutical company enters a joint venture with a biotechnology company to perform a clinical trial of an HIV vaccine in Argentina. As a result of a data breach in the United States, all of the participants’ names and contact information are published on the internet as persons infected with HIV. The plaintiffs file suit in the United States alleging defamation and breach of privacy under various common law and statutory theories.

3.  Construction. 

A construction firm provides on-site construction management services. Following a request for information from the company doing the excavation work, the on-site team collectively decides additional shoring is needed. During the course of this work, there is a collapse which causes significant project delays and damage to an adjacent structure. The owner files suit for cost-overruns and delays and the adjacent property owner sues for damage to its building.

Each of these examples involves a risk covered under most commercial general liability policies. There also is, however, an element of “professional services” in each of the examples. Which program would respond to each of these losses? The CGL program? The professional liability program? Both? Neither? The answer of course depends on numerous factors, some of which are discussed below.

Why It Matters

Before discussing the factors that influence which coverage will respond to the loss, it is important to consider why it matters.

1.  Loss of coverage. 

While it is possible for a mixed professional services/general liability claim to fall completely into a gap between an insured’s professional and general liability programs, the more likely cause of a total loss in coverage would be if the loss resulted from an insured acting in some capacity arguably not contemplated by its carriers. In that regard, it is possible for a professional service provider to lose coverage under its professional policy as a result of a business activity arguably not “professional” in character, such as an architecture firm that begins designing and selling furniture that causes bodily injury. In general, however, more professional service providers carry CGL coverage than non-professional service providers carry professional liability insurance. Therefore, problems are more likely to occur when a company not generally regarded as a professional services provider (e.g., a distributor) engages in some activity that arguably could be characterized as “professional” in nature (e.g., point-of-sale consulting services).

A total loss of coverage may also result if the insured fails to timely notify the appropriate carrier of its loss. The risk of a notice-related loss of coverage is much greater under a professional liability policy, as such policies are typically written on a claims-made or claims-made-and-reported basis (see additional discussion of this below). And, the risk of a notice-related loss is only exacerbated when the “professional services” aspect of the claim is subtle or the party responsible for notifying the carrier does not understand or appreciate the scope of coverage afforded under the company’s professional liability policy.

2.  Available limits/cost.

As a general matter, policyholders carry significantly higher limits for CGL coverage than for professional liability coverage, and typically secure the higher CGL limits at a relatively lower cost per dollar of coverage. If a professional liability program is the only source of insurance for a serious multiple-person bodily injury or large-scale property damage case, the limits of such policy therefore are likely to be insufficient unless the program was specifically designed to handle such losses.

3.  Defense costs.

CGL policies frequently provide for supplemental defense costs, i.e., the payment of defense costs without eroding policy limits. Professional liability policies, by contrast, usually provide defense costs within the limits; these are often referred to as “burning limits” policies, as the payment of defense costs reduces (burns) the policy limits. With monthly defense costs often reaching $500,000 to $1 million in high-stakes cases, this difference can be substantial as many professional liability policies do not have sufficient limits to cover defense costs being incurred at these levels let alone subsequent adverse judgments or settlements.

4.  Occurrence v. claims-made-and-reported.

CGL policies are typically written on an occurrence-basis, whereas professional liability policies are almost always written on a claims-made-and-reported basis. Therefore, prompt and timely reporting of claims or potential claims is typically much more important under professional liability policies than under CGL policies. This distinction could prove very important when, for example, a particular suit is initially identified as a CGL loss, but further review reveals a basis for coverage under the professional liability program. If sufficient time passed for the professional liability program in effect when the suit was filed to lapse and a new program to incept, the failure to provide notice might result in a lost opportunity for coverage under either year?s professional liability program.

Key Policy Provisions

1.  Definition of professional services. 

The definitions of “professional services” in a policyholder’s CGL and professional liability policies should be coextensive to ensure perfect dovetailing of coverage. If, for example, the definition of “professional services” is narrower in the insuring provisions of the professional liability policy than in the exclusion in the CGL policy, a gap in coverage will likely result. Further, the definition in both policies should make clear the specific types of activities the insurer considers to be “professional services.” Disputes frequently arise when a company traditionally regarded as a service provider (like an architecture firm) performs work not traditionally regarded as “professional services” (like construction work under a design-build contract), and is later sued in a claim involving property damage or bodily injury. In the absence of a clear definition of “professional services,” the commercial general liability insurer will argue that the work was excluded “professional services” while the professional liability insurer will argue that the work was non-covered bodily injury or property damage, resulting in a gap in coverage for the policyholder.

2.  Nexus wording. 

Both CGL and professional liability insurers can alter the scope of coverage for a mixed risk by making seemingly imperceptible changes to the policy wording concerning the nexus required between two concepts, and the concepts between which there must be a nexus.

  • The nexus required: The phrase “damages because of bodily injury or property damage arising from your professional services” is susceptible to being construed more broadly than “damages because of bodily injury or property damage caused by your professional services” because “caused by” is frequently considered to require a closer nexus to the loss than “arising from.”
  • The concepts linked:  The phrase “damages because of bodily injury or property damage arising from your professional services” differs from “bodily injury or property damage that results in liability arising from your professional services” in that the former requires a connection between the “bodily injury or property damage” and the “professional services” rendered while the latter requires a connection between the “liability” and the “professional services.”

These slight differences can have a significant impact on the scope of coverage for a given claim. Oftentimes, liability is imposed on an insured even when the insured?s conduct giving rise to liability is remote from the actual cause of bodily injury or property damage (e.g., in strict liability or conspiracy claims). In these situations, an insuring agreement that requires a close nexus between the conduct of the insured (i.e., the professional services rendered) and the bodily injury or property damage might not be triggered. Conversely, an exclusion that provides for a broad nexus between the insured?s liability and the bodily injury or property damage can bar a broader scope of claims. In simpler terms, even a minute asymmetry in these provisions could result in purported gaps in coverage.

3.  Exclusions. 

Professional services exclusions in CGL policies, while common, are not a mandatory feature.  Insurers sometimes will agree to remove such an exclusion. If the carrier is unwilling to entirely remove the professional services exclusion, it may be amenable to issuing conditional limitations on coverage for claims involving “professional services,” such as provisions specifying that the commercial general liability policy is excess to or not applicable when coverage exists under the insured?s professional liability policy.

Some professional liability insurers include in their policies limitations or exclusions for bodily injury or property damage. Although these exclusions can be absolute, they most often reflect an attempt by professional liability insurers to merely ensure that the CGL carrier is assuming primary responsibility for general liability exposures like bodily injury and property damage. These limitations or exclusions should be avoided at all costs, unless the CGL carrier has clearly acknowledged that its policy covers mixed claims involving, on the one hand, bodily injury or property damage, and, on the other, professional services. That said, and all else being equal, it is generally better for mixed claims to be covered under CGL policies than professional liability policies as the market for the former typically has greater capacity at a lower price.

Monitoring Your Coverages

For the reasons highlighted above, it is imperative that companies consistently reassess the mix of their business activities and make sure their insurance matches that risk profile. As for those companies already aware of the risk of mixed professional and general liability claims, close attention should be paid to policy language to ensure that their coverage programs actually dovetail as intended. And, lastly, it is important to keep in mind that having the best coverage program in the world does no good if there is not an effective system for providing timely notice of claims to the appropriate carriers.