United States: Supreme Court Docket Report - September 28, 2010

Originally published September 28, 2010

Keywords: personal jurisdiction, Volkswagen Corp, Woodson, certification rulings, government contracts, state secrets, General Dynamic, Boeing, FOIA, FCC, AT&T

Today the Supreme Court granted certiorari in seven cases of interest to the business community:

• Personal Jurisdiction—General Personal Jurisdiction Based on "Stream of Commerce"
• Class Actions—Preclusive Effect of Federal Class Certification Rulings
• Federal Contractors—Private Rights of Action—Third-Party Beneficiaries
• Government Contracts—"State Secrets" Privilege
• Freedom of Information Act—Corporations
• False Claims Act—"Public Disclosure" Bar
• Bankruptcy—Bankruptcy Court Jurisdiction

Personal Jurisdiction—General Personal Jurisdiction Based on "Stream of Commerce"

A defendant can be sued in a particular state only if the defendant is subject to personal jurisdiction in that state. Whether a defendant is subject to personal jurisdiction in a particular state depends on the nature of the defendant's contacts with the state. In World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980), the Supreme Court recognized that a state may exercise personal jurisdiction over a defendant "that delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum State." Id. at 297–98. But, as evidenced by the fractured opinions in Asahi Metal Ind. Co. v. Superior Ct., 480 U.S. 102 (1987), the Court has remained divided over the proper interpretation of that doctrine. Today, the Supreme Court granted certiorari in two cases— J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Luxembourg Tires, S.A. v. Brown, Nos. 09-1343 and 10-76—to address whether a foreign corporation may be subject to personal jurisdiction in a particular state as the result of having placed products into the U.S. "stream of commerce" even though its products were distributed in the forum state by another entity.

The Court's decision in these cases will be of great interest to any manufacturer whose products are sold nationally through third-party distributors. If placing products in the "stream of commerce" through third-party distributors is sufficient to confer personal jurisdiction over the manufacturer in every state in which its products are sold, including states in which the manufacturer has no other contacts, manufacturers will be subject to suit in many more states than they might otherwise be. The consequences could be particularly acute for foreign manufacturers, who might otherwise not be subject to suit in any U.S. court.

In Goodyear, the plaintiffs brought suit against foreign defendants in North Carolina, alleging that defective tires were responsible for a bus accident in France that resulted in the deaths of two North Carolina residents. The defendant tire manufacturers sell their products primarily in European and Asian markets, but approximately 45,000 of their tires (none of them the type involved in the French accident) were distributed by other entities in North Carolina during the years 2004–2007, during which period the defendants sold more than 9 million tires. The defendants moved to dismiss on the ground that, because they had no presence in North Carolina, exercise of general personal jurisdiction over them violated the Due Process Clause. The trial court denied the motion, holding that, because the defendants "knew or should have known that some of th[eir] tires were distributed for sale to North Carolina residents," they had sufficiently "continuous and systematic contacts" to support the exercise of personal jurisdiction over them, even in disputes not arising from products that were distributed in the forum. Brown v. Meter, 681 S.E.2d 382, 386–87 (N.C. App. 2009). The North Carolina Court of Appeals affirmed, rejecting the defendants' argument "that 'stream of commerce' analysis . . . does not apply in instances involving general, as compared to specific, jurisdiction." Id. at 394. The North Carolina Supreme Court denied review.

In McIntyre, the plaintiff brought suit against a U.K defendant in New Jersey, alleging that he was injured while using a defective machine that had been manufactured by the defendant in England and sold to the plaintiff's New Jersey employer by an independent distributor based in Ohio. After finding that the defendant did not directly sell or solicit business in New Jersey, and had no physical presence in the state, the trial court dismissed, holding that the defendant did not have sufficient contacts with New Jersey to support personal jurisdiction. The Appellate Division reversed, concluding that, because the defendant "engaged in purposeful conduct to avail itself of the entire United States market," it was subject to personal jurisdiction in New Jersey.  Nicastro v. McIntyre Mach. Am., Ltd., 945 A.2d 92, 105 (N.J. Super. Ct. App. Div. 2008). The New Jersey Supreme Court affirmed. Although the court acknowledged that the defendant did not have sufficient "presence or minimum contacts" to support personal jurisdiction in New Jersey, it held that it was enough that the defendant placed its products "in the stream of commerce through a distribution scheme that targets a national market, which includes New Jersey." Nicastro v. McIntyre Mach. Am., Ltd., 2010 WL 343563, at *6, *12 (N.J. Feb. 2, 2010).

Absent extensions, amicus briefs in support of the petitioners will be due on November 19, 2010, and amicus briefs in support of the respondents will be due on December 20, 2010.

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Class Actions—Preclusive Effect of Federal Class Certification Rulings

The relitigation exception to the Anti-Injunction Act, 28 U.S.C. § 2283, and the authority vested in federal courts by the All Writs Act, 28 U.S.C. § 1651, permit a district court to enjoin a state- court action when a prior federal ruling should be given preclusive effect based on principles of collateral estoppel and res judicata. The Supreme Court granted certiorari today in Smith v. Bayer, No. 09-1205, to decide when a defendant may use a federal court's denial of class certification to preclude a state court from resolving the class-certification issue again in a subsequent action brought by absent class members.

The Court's decision will be of great importance to the business community, as it will either broaden or narrow the opportunities for plaintiffs to seek class certification based on similar allegations in federal and state court.

The case arose when Bayer Corporation asked a district court in the District of Minnesota to enjoin plaintiffs from seeking certification in a West Virginia state court of a class of plaintiffs that allegedly suffered economic loss from their purchase of the cholesterol-lowering medication Baycol. The district court had previously denied certification of a West Virginia class in a multi-district action involving thousands of consolidated cases, on the ground that a plaintiff must show more than economic loss to prove a claim under the West Virginia Consumer Credit and Protection Act. The district court granted the requested injunction, and the Eighth Circuit affirmed, reasoning that, because the district court had to address the substantive legal issue of the harm required by the West Virginia statute in its class-certification decision, the denial of class certification was sufficiently enmeshed with a substantive decision to have preclusive effect in state court.

The Supreme Court granted certiorari on two questions. The first is whether a prior federal decision denying class certification under federal procedural rules precludes a state court from considering certification of the same class action under state procedural rules if the federal ruling addressed underlying substantive questions as part of its class-certification analysis. Relying on decisions of the Third and Fifth Circuits, the plaintiffs contend that, because the state's procedural rules on certification differ from the federal rules, the same issues are not involved in the two courts, and so preclusion is unwarranted. The defendant's position is that, because the federal court had to decide an issue of substantive law present in both cases to determine whether class certification was warranted, its decision is preclusive.

The second question the Supreme Court will decide is whether denial of class certification affords due process to absent class members, such that the federal court may exercise personal jurisdiction over them. Relying on decisions of the Third and Eleventh Circuits, the plaintiffs contend that, when class certification is denied, a lack of notice and other due-process considerations prevents the federal court from exercising personal jurisdiction over absent class members. The defendant's position is that due process is a contextual question and that, when class certification is denied, due process is provided by a finding of adequate representation, the right to appeal, and the right of class members to pursue individual claims.

Absent extensions, amicus briefs in support of the petitioners will be due on November 19, 2010, and amicus briefs in support of the respondent will be due on December 20, 2010.

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Federal Contractors—Private Rights of Action—Third-Party Beneficiaries

Section 340B of the Public Health Service Act, 42 U.S.C. § 256b, requires manufacturers of Medicaid-covered outpatient drugs to enter into contracts with the Secretary of Health and Human Services (HHS). These contracts, in turn, require the manufacturer to offer discounted drug prices to certain healthcare providers. The maximum price allowed under such contracts is determined by a complex statutory formula. But neither the Public Health Service Act nor any other statute gives healthcare providers an express or implied private right of action to enforce the price cap. The Court granted certiorari today in Astra USA, Inc. v. County of Santa Clara, No. 09-1273, to determine whether medical providers may nevertheless sue drug manufacturers to enforce the price cap as third-party beneficiaries of HHS contracts.

The Court's resolution of that question could have significant consequences for many federal contractors. Numerous statutes impose terms on federal contracts that are presumably designed to benefit the public or third parties, usually without establishing a private statutory cause of action. If the Court were to allow third-party-beneficiary claims under such contracts, the scope of contractor liability could be substantially expanded.

The case arose when Santa Clara County, California, and its county-operated medical facilities filed a putative class action against numerous major drug manufacturers, claiming that the manufacturers had charged them more than the properly calculated maximum price. The Ninth Circuit allowed the suit to proceed, holding that the plaintiffs, though lacking a statutory right of action, could sue under the federal common law of contracts on the theory that they were directly intended third-party beneficiaries of the manufacturers' contracts with HHS.

In their petition for certiorari, the manufacturers argued that the Ninth Circuit's decision deepened a split among the courts of appeals. The Second, Sixth, and Tenth Circuits had previously rejected third-party suits by employees alleging that their employers had breached government contracts incorporating requirements of the Davis-Bacon or Rehabilitation Acts. Because those statutes did not themselves create private rights of action for employees, the courts held that permitting common-law suits by implied beneficiaries would contravene Congress's intent. But five other courts of appeals—the First, Third, Fourth, Seventh, and Federal Circuits—have indicated that it is possible for a plaintiff who would qualify as an intended direct beneficiary under the common law to sue for another party's breach of a federal contract. The Ninth Circuit's decision was the first to find that the plaintiff indeed qualified as such a beneficiary.

Justice Kagan has recused herself in Astra, likely because the United States filed an amicus brief in the Ninth Circuit supporting the manufacturers in a related appeal. As a result, the case will be decided by only eight Justices. If the Justices are ultimately divided 4-4, the lower court decision will be affirmed.

Absent extensions, amicus briefs in support of the petitioners will be due on November 19, 2010, and amicus briefs in support of the respondent will be due on December 20, 2010.

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Government Contracts—"State Secrets" Privilege

Consolidating two petitions that arose from the same case in the Federal Circuit, the Supreme Court granted certiorari today in General Dynamics Corp. v. United States and The Boeing Company v. United States, Nos. 09-1298 & 09-1302, to decide whether the government can maintain a claim against a contractor after the government invokes the "state secrets" privilege to bar adjudication of one of the contractor's asserted defenses. These cases present an issue of considerable importance to contractors that provide goods and services to the government in areas that implicate sensitive military or national-security concerns.

The underlying contract dispute has spurred 19 years of litigation and generated a number of published opinions in the lower courts. In 1988, the Navy awarded General Dynamics and Boeing a contract to develop a stealth aircraft that could operate from aircraft carriers. Difficulties soon arose, and the government eventually declared the contractors in default, terminated the contracts, and demanded the return of approximately $1.3 billion in progress payments that had already been made.

In June 1991, the contractors sought relief in the Court of Federal Claims, requesting, among other things, that the court (1) convert the government's termination for default into a termination for convenience (a designation that would prevent the government from invoking the most drastic contractual remedies) and (2) deny the government's demand for return of the progress payments. One of the contractors' principal arguments was that the government had refused to provide them with crucial information regarding stealth technology, which they needed to develop the aircraft. In response, the government invoked the state-secrets privilege and asserted that resolution of this so-called "superior knowledge" defense could lead to the disclosure of classified information.

The decision below, which followed a trial on remand to resolve unrelated factual disputes, accepted an earlier decision addressing the state-secrets issue, McDonnell Douglas Corp. v. United States, 323 F.3d 1006 (Fed. Cir. 2003), as the law of the case. In that decision, the Federal Circuit affirmed the trial court's determination that national security would be adversely affected by disclosure of the information necessary to determine whether the government in fact had "superior knowledge." Thus, the court concluded that the state-secrets privilege precluded the contractors from litigating the "superior knowledge" issue. The court's rejection of the contractors' argument that due process guaranteed them the right to present all of their available defenses rested largely on the observation that the contractors were nominally the plaintiffs in the action, in that they had filed suit to avoid contractual penalties.

The Federal Circuit's decision goes to the heart of whether the government can invoke the state- secrets privilege as a sword to ensure that it prevails on its own contractual claim by precluding a contractor from even trying to establish a valid defense. The Supreme Court's decision will have significant ramifications for any defense contractor that does business with the government.

Absent extensions, amicus briefs in support of the petitioners will be due on November 19, 2010, and amicus briefs in support of the respondent will be due on December 20, 2010.

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Freedom of Information Act—Corporations

The Freedom of Information Act ("FOIA"), 5 U.S.C. §§ 551–559, requires a federal agency to disclose certain documents within its possession. So-called "Exemption 7(C)," however, exempts from mandatory disclosure "records or information compiled for law enforcement purposes . . . to the extent that the production of such law enforcement records or information . . . could reasonably be expected to constitute an unwarranted invasion of personal privacy. 5 U.S.C. § 552 (b)(7)(C). The statute does not define "personal," but it does define "person" as "includ[ing] an individual, partnership, corporation, association, or public or private organization other than an agency." 5 U.S.C. § 551(2). The Supreme Court granted certiorari today in Federal Communications Commission v. AT&T, Inc., No. 09-1279, to determine whether Exemption 7(C) protects the privacy of corporate entities.

AT&T is significant for all corporations that disclose sensitive information to federal agencies during enforcement proceedings. If the Court holds that corporate entities are not covered by Exemption 7(C), any federal enforcement action will become an opportunity for competitors and others to mine the agency's investigative files for business intelligence or embarrassing information.

The case arose from an FCC enforcement action triggered by AT&T's voluntary report that it might have overcharged the government for certain work it had done. During the investigation, the FCC ordered AT&T to produce, and it did produce, a broad range of documents, including invoices, internal e-mails providing pricing and billing information, names of employees allegedly involved in the improper billing, and AT&T's internal assessments of whether the employees had violated the company's code of conduct. A trade association representing some of AT&T's competitors submitted a FOIA request for the contents of the FCC's investigative file, and the FCC refused to apply Exemption 7(C) on the ground that the corporations lack "personal privacy." Employing a plain-meaning analysis of the statute, the Third Circuit disagreed, holding that the "personal privacy" provision of Exemption 7(C) applies to corporations.

Because Justice Kagan was counsel of record for the government at the petition stage (when she was Solicitor General), she has recused herself from the case, which will be decided by eight Justices. If the remaining Justices are ultimately divided 4-4, the lower court decision will be affirmed.

Absent extensions, amicus briefs in support of the petitioners will be due on November 19, 2010, and amicus briefs in support of the respondents will be due on December 20, 2010.

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False Claims Act—"Public Disclosure" Bar

The False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., imposes civil penalties and treble damages on persons and businesses that submit false or fraudulent claims for payment or approval to the federal government. To assist the government in monitoring fraudulent claims, the FCA allows private plaintiffs, or "relators," to file "qui tam" actions in the name of the United States against those who submit fraudulent claims. Relators have substantial financial incentives to bring qui tam claims, as they share between 15 and 30 percent of the government's eventual recovery. To prevent opportunistic relators from bringing qui tam suits without having substantially assisted in the discovery of the fraud, the FCA creates a jurisdictional bar against qui tam claims based on certain kinds of publicly disclosed information, including information disclosed in an administrative "report" or "investigation." Today, the Supreme Court granted certiorari in Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-188, to determine whether a federal agency's response to a Freedom of Information Act ("FOIA)" request is a "report" or "investigation" within the meaning of the public-disclosure bar.

This case is of importance to businesses that receive federal funding, whether as government contractors, subcontractors, or grant recipients. The Court's decision could expand the scope of permissible qui tam claims and increase businesses' exposure to FCA liability.   

The case arises from allegations that petitioner Schindler Elevator Corp. ("Schindler") failed to file reports in some years and filed false reports in other years under the Vietnam Era Veterans' Readjustment Assistance Act of 1974 ("VEVRAA"). Respondent relator Kirk is a former Schindler employee, but did not base his allegations on personal knowledge acquired during his employment. Instead, Kirk's wife submitted FOIA requests to the Department of Labor for the VEVRAA-mandated reports filed by Schindler, and Kirk based his qui tam action on the reports (or lack thereof for certain years) produced by the Department of Labor in response. 

In the decision below, the Second Circuit reversed the district court's dismissal of the complaint for lack of jurisdiction under the FCA's public-disclosure bar, holding that the documents produced by the Department of Labor were not "reports" or "investigations" and thus did not fall within the bar. The Second Circuit's interpretation of the FCA conflicts with that adopted by the majority of circuits that have considered the question. The First, Third, Fifth, and Tenth Circuits have adopted the view—first expressed by then-Judge Alito—that an agency's response to a FOIA request falls within the "ordinary understanding" of the terms "report" and "investigation," because the agency receiving the request is required to undergo a search for responsive documents and report the results. The Second Circuit joined the Ninth Circuit in rejecting a categorical determination that a federal agency's response to a FOIA request triggers the public-disclosure bar and instead looking to the nature of the documents produced. 

Justice Kagan has recused herself, presumably because she had some involvement in the case when she was Solicitor General. As a result, the case will be decided by only eight Justices. If the Justices are ultimately divided 4-4, the lower court decision will be affirmed.

Absent extensions, amicus briefs in support of the petitioner will be due on November 19, 2010, and amicus briefs in support of the respondent will be due on December 20, 2010.

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Bankruptcy—Bankruptcy Court Jurisdiction

The power of federal bankruptcy judges to issue final orders depends on the nature of the claims before them. Under 28 U.S.C. § 157(b), bankruptcy judges can "hear and determine" "core" proceedings that arise under, or arise in a case under, Title 11 of the U.S. Code. By contrast, bankruptcy judges may "hear"—but not "determine" (absent all parties' consent)—non-"core" proceedings. When bankruptcy judges hear non-core proceedings, they must submit a report and recommendation to the district court, which then issues its own determination after reviewing the bankruptcy judge's findings of fact and legal conclusions de novo. Congress has provided a non-exhaustive list of "core" proceedings that a bankruptcy court can determine, a list that includes "counterclaims by the estate against persons filing claims against the estate." 28 U.S.C. § 157(b)(2)(C). Today, the Supreme Court granted certiorari in Stern v. Marshall, No. 10-179, to explore the definition of "core proceeding," and to determine whether there are statutory or constitutional limits on bankruptcy judges' authority to finally determine a debtor's counterclaim.

This case will likely prove important to any business that finds itself in bankruptcy court, either as creditor or debtor. Debtors and creditors often have strong beliefs as to which court, bankruptcy or district, is more likely to render a decision in their favor. The Supreme Court's decision in Stern has the potential to significantly limit the types of cases that bankruptcy judges can decide finally without all parties' consent.

The case arises from the inconsistent judgments of a federal bankruptcy court, a federal district court, and a Texas probate court in a convoluted dispute between a businessman's wife and son over their respective entitlements to the businessman's assets. In the bankruptcy court, the wife filed for Chapter 11 protection, the son then submitted a proof of claim and initiated an adversary proceeding, and the wife responded with an answer and counterclaim. In 2000, the bankruptcy court issued a final "judgment" in favor of the wife, and the son appealed to the district court. In 2001, before the appeal was resolved, the Texas probate court entered a judgment in favor of the son. Meanwhile, in the federal appeal, the district court concluded that the bankruptcy court proceeding was not "core," and thus reviewed the entire appeal de novo before ruling in favor of the wife. Because the judgments were inconsistent, the Ninth Circuit was tasked with figuring out which court entered the first final judgment that would be entitled to preclusive effect. Although the bankruptcy court issued the earliest decision, the Ninth Circuit held that the wife's counterclaim was not a "core proceeding" and that the bankruptcy court therefore lacked the ability to "determine" the counterclaim. Consequently, the court held, the Texas court issued the first, final judgment, and the issues decided in the Texas proceedings were therefore entitled to preclusive effect in the federal district court. 

Absent extensions, amicus briefs in support of the petitioner will be due on November 19, 2010, and amicus briefs in support of the respondent will be due on December 20, 2010.

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