United States: Supreme Court Docket Report - June 30, 2015

Last Updated: June 30 2015
Article by Richard B. Katskee and Brian D. Netter

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

Securities Exchange Act of 1934—Scope of Federal Jurisdiction

Section 27 of the Securities Exchange Act of 1934 (the "Act") provides that federal courts "shall have exclusive jurisdiction" over "violations of [the Act] or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by [the Act] or the rules and regulations thereunder." 15 U.S.C. § 78aa(a). But the lower courts have disagreed as to whether Section 27 creates federal jurisdiction or merely precludes state-court actions that rest on alleged violations of the Act or regulations issued under the Act.

Today, the Supreme Court granted certiorari in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, No. 14-1132, to resolve that division of authority.

In this case, the defendants removed to federal court a suit asserting state-law causes of action based on alleged violations of the SEC's Regulation SHO, which governs "short sales." The district court refused to remand the suit to state court, ruling that Section 27 established federal jurisdiction over the claims. The Third Circuit agreed that the claims fell under Section 27 but held that Section 27 could not provide jurisdiction because it does not itself create jurisdiction. The Third Circuit based its reasoning on a Supreme Court decision interpreting similar "exclusive jurisdiction" language in Section 22 of the Natural Gas Act. See Pan Am. Petroleum Corp. v. Sup. Ct. of Delaware for New Castle Cty., 366 U.S. 656 (1961). In Pan American, the Court stated that "'[e]xclusive jurisdiction' is given to the federal courts but it is 'exclusive' only for suits that may be brought in the federal courts. Exclusiveness is a consequence of having jurisdiction, not the generator of jurisdiction because of which state courts are excluded." Id. The defendants contend that Pan American does not govern Manning because in Pan American the Natural Gas Act was the basis for a defense, not a cause of action.

Among the other courts of appeals, the Second Circuit has agreed with the Third Circuit that Section 27 does not confer jurisdiction. The Fifth and Ninth Circuits have held that Section 27 does confer jurisdiction.

The Supreme Court's decision should be of interest to the wide range of public companies, market professionals, and others regulated by the federal securities laws.

Absent extensions, amicus briefs in support of the petitioners will be due on August 21, 2015, and amicus briefs in support of the respondents will be due on September 21, 2015.

First Amendment and Collective Bargaining—Validity of Agency-Shop Arrangements

In Abood v. Detroit Board of Education, 431 U.S. 209 (1977), the Supreme Court held that the First Amendment does not prohibit "agency shop" arrangements under which state employees who decline to join a public-sector union are required to pay an agency fee to support union work that is related to the collective-bargaining process. In two recent decisions, the Court expressed doubt about Abood's continued validity but did not expressly overrule it. See Harris v. Quinn, 134 S. Ct. 2618 (2014); Knox v. Serv. Employees Int'l Union, 132 S. Ct. 2277 (2012). Today, the Court granted certiorari in Friedrichs v. California Teachers Association (No. 14-915) to consider whether to overrule Abood and declare public-sector "agency shop" arrangements unconstitutional.

Friedrichs was brought by California public school teachers to challenge the state's union laws. California law permits public school employee unions to establish "agency shop" arrangements within their school districts and thereby require all employees, "as a condition of continued employment," either to join the union or to pay an agency fee. According to the law (and consistent with Abood), however, agency fees can be used only for activities "germane" to collective bargaining. Unions therefore must notify nonmembers about which portion of their fees will and will not go to such activities; nonmembers may avoid the "non-chargeable" portion of the fees only by affirmatively objecting to them. Plaintiffs' complaint challenged both the agency-shop arrangement and the opt-out procedure, arguing that they violated plaintiffs' rights to free speech and association under the First Amendment.

The case arrives at the Supreme Court with little procedural history. Recognizing that both claims were foreclosed by binding precedent (the first by Abood and the second by a Ninth Circuit decision upholding similar opt-out procedures), plaintiffs moved for judgment on the pleadings in favor of defendants. The district court granted judgment to defendants pursuant to plaintiffs' request, and the Ninth Circuit summarily affirmed. Relying on Harris and Knox, the petition for certiorari principally focuses on overruling Abood. The petition argues that public-sector unions' collective bargaining is materially indistinguishable from political speech and thus its compelled subsidization can be justified only by a sufficiently compelling state interest. According to the petition, the state's interests in labor peace and preventing non-members from "free-riding" on the collective-bargaining efforts of the unions do not justify agency-shop arrangements. Alternatively, the petition contends that California's opt-out procedure imposes an unconstitutional burden on plaintiffs' First Amendment rights.

If the Court overrules Abood, its decision will have far-reaching ramifications for public-sector union membership and on the collective-bargaining regimes of the more than twenty states that use agency-shop arrangements. It may also reflect a more fundamental shift in the Court's approach to unions and collective bargaining, with consequences for private employers as well.  

Absent extensions, amicus briefs in support of the petitioner will be due on August 21, 2015, and amicus briefs in support of the respondent will be due on September 21, 2015.

Statutes of Limitations—Equitable Tolling

The Supreme Court granted certiorari today in Menominee Indian Tribe of Wisconsin v. United States, No. 14-510, which concerns the proper standard for federal courts to apply when deciding whether to "equitably toll" a statute of limitations. The Court's decision in this case will be important because it will affect claims brought under countless federal statutes, against both the government and private parties, including claims brought by federal contractors.

Like many other Indian tribes, petitioner Menominee Tribe of Wisconsin ("Menominee Tribe" or "Tribe") has an agreement with the Department of Health and Human Services ("HHS") whereby HHS reimburses the Tribe for expenditures it makes in providing healthcare services to its members. This agreement is governed by a federal statute—the Indian Self-Determination and Education Assistance Act ("ISDA")—that specifies many of the rules for reimbursement.

The ISDA specifies that another federal statute—the Contract Disputes Act of 1978 ("CDA")—applies to "self-determination contracts" of the type at issue here. If a claim for payment under the CDA is denied, a party can appeal that decision through one of two avenues. One avenue leads to the U.S. Court of Appeals for the Federal Circuit; the other leads, potentially, to any of the other circuits, depending on the choice of forum. Regardless of which avenue of appeal a party chooses, it must submit its initial claim within six years of the date that the claim accrues.

For over 20 years, Indian tribes and HHS have disputed the meaning of some key language in the ISDA. This disagreement spawned litigation in the 1990s and 2000s. The Menominee Tribe, however, largely remained on the sidelines and did not submit a claim for any of its disputed payments until 2005. When the Tribe did finally submit claims, HHS denied the claims for payments owed before 1998 as untimely. The Tribe sought judicial review of that decision in the U.S. District Court for the District of Columbia, which, following an initial remand from the D.C. Circuit, ultimately granted summary judgment to the government. The Tribe then appealed again to the D.C. Circuit.

The issue before the D.C. Circuit was whether the Tribe was entitled to have the statute of limitations for its claims "equitably tolled." Under Holland v. Florida, 560 U.S. 631 (2010), a federal court may equitably toll a statute of limitations when a party shows "(1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstance stood in his way and prevented timely filing." Id. at 649. The Tribe made two main arguments in the D.C. Circuit. First, it argued that it had reasonably assumed that a pending class action filed by another tribe would toll the statute. Second, the Tribe argued that until the Supreme Court finally clarified the meaning of the ISDA—in a 2005 decision called Cherokee Nation v. Leavitt, 543 U.S. 631 (2005)—it would have been futile to submit a claim for payment because HHS would simply have denied it.

The D.C. Circuit rejected these arguments and affirmed. As to the class-action argument, the court held that the Tribe had never fulfilled the requirements to become a member of the class. It should have been clear to the Tribe, the court reasoned, that it would not be a part of the class and that tolling would therefore be unavailable. As to the argument about the futility of filing a claim before the Supreme Court decided Cherokee Nation, the D.C. Circuit held that the circumstances at issue fell far short of futility. The court explained that the law was plainly unsettled, that the plaintiffs had the statutory option of choosing a judicial forum, and that HHS's stance on the legal issue was irrelevant, because the ultimate question was for the courts to decide. The court of appeals thus concluded that the Tribe had failed to present any "extraordinary circumstances" and that this failure was sufficient to preclude equitable tolling, without any independent consideration of due diligence.

In so ruling, the D.C. Circuit acknowledged that it was creating a conflict with the Federal Circuit. Applying a much looser equitable-tolling analysis, the latter court had found tolling appropriate in a materially identical case. In light of the circuit split on an important question of federal law and the fact that the Solicitor General agreed with the petitioner that review was warranted, it is not surprising that the Supreme Court granted certiorari.

Absent extensions, amicus briefs in support of the petitioner will be due on August 21, 2015, and amicus briefs in support of the respondents will be due on September 21, 2015.

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