United States: Supreme Court Decision Alert - January 25, 2016

Last Updated: January 25 2016
Article by Brian D. Netter

Today, the Supreme Court issued three decisions, described below, of interest to the business community.

  • Federal Power Act—Federal Regulation of Demand Response in the Wholesale Energy Market
  • Statutes of Limitations—Equitable Tolling
  • Employee Retirement Income Security Act—Stock-Drop Actions

Federal Power Act—Federal Regulation of Demand Response in the Wholesale Energy Market

FERC v. Electric Power Supply Association, No. 14-840; EnerNOC, Inc. v. Electric Power Supply Association, No. 14-841

The Federal Power Act (FPA) grants the Federal Energy Regulatory Commission exclusive jurisdiction over "the sale of electric energy at wholesale in interstate commerce." 16 U.S.C. § 824(b)(1). FERC may regulate any "rule, regulation, practice, or contract affecting [a wholesale] rate." Id. § 824e(a). But only states may regulate "any other sale of electric energy"—namely retail sales to consumers. Id. § 824(b)(1). The wholesale and retail markets are obviously interconnected; each inexorably affects the other, and the boundaries are not always clear. Today, in FERC v. Electric Power Supply, No. 14-840, and EnerNOC, Inc. v. Electric Power Supply Association, No. 14-841, the Court rejected a firm division between state and federal authority, concluding that FERC's Order 745 was valid even though it resulted in payments to retail customers based on changes in their retail power consumption.

FERC adopted Order 745 addressing "demand response," an innovation in energy markets that manages prices during periods of high demand by providing incentives to consumers to reduce consumption. Demand response mechanisms may either raise energy prices or compensate consumers for reduced energy consumption during peak periods. Recognizing that direct retail price regulation would exceed its authority, FERC addressed only consumer compensation. Order 745 requires wholesale electricity market operators to compensate consumers who reduce consumption at the same rate paid to traditional electricity generators; the order also allocates the cost of this compensation among wholesale-market energy purchasers. The order allows states to prohibit their consumers from bidding for demand-response payments, however. During the rulemaking process, the respondents (electricity generators and their trade associations) opposed the proposed Order 745 as beyond FERC's authority and as substantively unsound. When Order 745 was promulgated, respondents petitioned for review to the D.C. Circuit. A divided court of appeals vacated the order as ultra vires and as arbitrary and capricious in its choice of compensation mechanism.

The Supreme Court reversed the D.C. Circuit and upheld Order 745, concluding (1) that FERC reasonably concluded that it has authority under the Federal Power Act to regulate wholesale market operators' compensation of demand-response suppliers and (2) that Order 745 is not arbitrary and capricious. In her opinion for the Court, Justice Kagan reasoned that Order 745 "complies with the [Federal Power Act's] plain terms" based on a two-step analysis. First, "the practices at issue in [Order 745]—market operators' payments for demand response commitments—directly affect wholesale rates." The presence of some effect was undeniable but not controlling; a direct effect was necessary, and resulted from the downward pressure on prices exerted by demand-response payments that were at a lower rate than the next available supply source and that also relieved system loads. Second, the Court concluded, FERC "has not regulated retail sales." The Court was not swayed Order 745's requirement of direct payments to large retail consumers (as well as aggregations of retail consumers) for forgoing electricity consumption. In the Court's view, so long as "FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates," the FPA imposes no bar. The Court also examined the effect of a more formal division of authority on the purposes of the FPA, which was enacted to fill the regulatory gap resulting from the states' inability to regulate outside their respective territories. The states clearly could not require demand-response payments in wholesale markets that only FERC could regulate. Construing the FPA to withhold the same authority from FERC "would conflict with the [Federal Power] Act's core purposes by preventing all use of a tool that no one ... disputes will curb prices and enhance reliability in the wholesale electricity market." Finally, the majority determined that FERC's decision to compensate demand-response providers at the same price paid to generators was not arbitrary and capricious. The Court's "important but limited role is to ensure that [FERC] engaged in reasoned decisionmaking," which the Court defined to include "that it weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice." FERC satisfied this standard by taking "full account of the alternative policies proposed" and adequately supporting and explaining its decision, among other things through an affidavit by leading regulatory economist Alfred Kahn.

Justice Scalia dissented, joined by Justice Thomas. (Justice Alito was recused.) In the dissenters' view, the Federal Power Act "prohibits [FERC] from regulating the demand response of retail purchasers of power" because those transactions did not fall within the statutory definition of a "sale ... at wholesale" as a "sale ... for resale," 16 U.S.C. § 824(d). Believing that the majority had applied a presumption in favor of jurisdiction, the dissent argued for the opposite presumption, concluding that the demand-response transactions were not "demonstrably sales at wholesale" because the demand-response bidders did "not resell energy to other consumers." The dissent also contended that Order 745 does in fact regulate retail sales because the effect of the demand-response payment increases the price to any consumer who forgoes that payment and instead consumes electricity.

The Court's decision reflects a willingness to find broad federal agency jurisdiction when regulated conduct arguably falls into a gray area, at least when the regulatory scheme at issue is well-established and of broad scope. The Court's decision appeared to be entirely policy-driven; the only explicit analysis of the statutory definition of the statutory grant of power came in the dissent. In addition, to the extent the Court inferred a grant of power from the fact that a desirable regulatory initiative otherwise might be impossible, the Court's reasoning may affect future challenges to assertions of regulatory authority.

Statutes of Limitations—Equitable Tolling

Menominee Tribe of Wisconsin v. United States, No. 14-510

A statute of limitations is subject to equitable tolling if a litigant demonstrates that, despite pursuing his rights diligently, some extraordinary obstacle prevented timely filing of a complaint.

In a unanimous opinion written by Justice Alito, the Supreme Court today clarified how courts are to determine whether the standard for equitable tolling is satisfied.

This case arises in the context of Indian law. The Indian Self-Determination and Education Assistance Act (ISDA) permits Indian tribes to enter into self-determination contracts with federal agencies to assume control over programs that would otherwise be provided by federal agencies. The tribe is entitled to reimbursement for certain costs of carrying out the covered programs. When a tribe has a dispute with the federal government about reimbursement, it must follow the provisions of the Contract Disputes Act of 1978, which generally requires contractors to present claims to a federal contracting officer within six years.

The Menominee Tribe made a claim that its reimbursements under the ISDA were inadequate. The claim was filed more than six years after the reimbursements, and the contracting officer deemed the claim time-barred.

In the ensuing litigation, the Tribe contended that the limitations period was subject to American Pipe tolling because of a putative class action concerning ISDA reimbursements, for which class certification was ultimately denied. In earlier appellate proceedings, the U.S. Court of Appeals for the D.C. Circuit held that American Pipe tolling did not apply because the Tribe would not have been the member of a class had it been certified, because of its failure to make a claim to a contracting officer. But the D.C. Circuit remanded to the district court to determine if equitable tolling was available, in view of another ISDA case in which a nationwide class of all reimbursement recipients had been certified, including even those who had not filed administrative claims.

The Supreme Court held that the Tribe was not entitled to equitable tolling. The Court first clarified that the requirements for equitable tolling are elements, not factors. So a plaintiff invoking equitable tolling must establish both that (1) he was diligent; and (2) there was an extraordinary obstacle precluding a timely filing. The Court next held that the second element is satisfied "only where the circumstances that caused a litigant's delay are both extraordinary and beyond its control." Applying these requirements, the Court held that the reasons for the Tribe's delinquent filing were neither extraordinary nor beyond its control.

Limitations periods are relevant in a wide range of federal cases. Equitable tolling is often invoked by parties whose claims are untimely. This case does not alter the tolling landscape in significant ways, but the Court's approach to tolling will influence cases on the margin.

Employee Retirement Income Security Act—Stock-Drop Actions

Amgen Inc. v. Harris, No. 15-278

In a per curiam summary reversal, the Supreme Court today clarified that the standard plaintiffs must satisfy in ERISA stock-drop actions is a high one.

In a stock-drop action, participants in an employer's 401(k) plan sue fiduciaries to the plan on the theory that the fiduciaries should have removed the employer's stock as an investment option to 401(k) plan participants before the stock price dropped.

In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court held that there is no special presumption that employer stock offerings are prudent but suggested a series of obstacles that stock-drop claimants must overcome.

This case concerns the Amgen Common Stock Fund.  After the price of Amgen stock fell in 2007, a group of former employees who invested in that fund through Amgen's 401(k) plan filed suit.  The Ninth Circuit held that the plaintiffs had adequately pleaded a claim.  After the Supreme Court asked the Ninth Circuit to revisit its holding in light of Fifth Third, the Ninth Circuit reinstated its earlier decision.

In today's brief per curiam decision, the Court again vacated the Ninth Circuit's ruling in light of Fifth Third.  The Court held that, even if "removing the Amgen Common Stock Fund from the list of investment options was an alternative action that could plausibly have satisfied Fifth Third's standards, . . . the Court has not found sufficient facts and allegations to state a claim for breach of the duty of prudence."

After Fifth Third, commentators divided on whether the decision was a boon for plaintiffs or a victory for defendants.  The Court's unusual action in Amgen suggests that the latter camp was correct—and that plaintiffs will be hard-pressed to meet the Court's standards for alleging fiduciary-breach claims.  Despite the brevity of today's action, Amgen is likely to stem the tide of stock-drop class actions.

Please visit us at www.appellate.net

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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