Sixth Circuit Blog

Sixth Circuit Significantly Shortens Limitations Period for ERISA Claims

Congress did not provide an express statute of limitations for a participant's action “to recover benefits due to him under the terms of his plan" under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B).  The Sixth Circuit, applying the generally-accepted rule that "in the absence of a federally-mandated statute of limitations, the court should apply the most analogous state law statute of limitations," has long held that Ohio's 15-year statute of limitations for breach of a written contract applies to a § 502(a)(1)(B) claim.  Meade v. Pension Appeals & Review Committee, 966 F.2d 190, 195 (6th Cir. 1992), citing Ohio Rev. Code § 2305.06.

But a recent Sixth Circuit decision augurs ill for the continued viability of the Ohio 15-year statute of limitations in such ERISA claims.  In Redmon v. Sud-Chemie Inc. Retirement Plan for Union Employees, No. 08-5121, 2008 U.S. App. LEXIS 23713 (6th Cir. Nov. 18, 2008), the Court was presented "an issue of first impression" – which is the most analogous state law statute of limitations for a § 502(a)(1)(B) claim under Kentucky law? In rejecting Kentucky's 15-year statute of limitations for breach of written contract and choosing instead Kentucky's 5-year statute of limitations for an action upon liability created by a state statute, the Court may have sounded the death knell for applying the Ohio 15-year prescriptive period to ERISA claims.  I base this prediction on the following four factors:

1.  The Court emphasized in Redmon – not once, but twice – that the Sixth Circuit's earlier decisions adopting a state's breach-of-written-contract statute of limitations were rendered "[w]here no provision comparable to [the Kentucky statute] was before the court" (2008 U.S. App. Lexis 23713 at *9), and that "no provision comparable to [the Kentucky statute] was before the court in those cases” (id. at *14).  Indeed, the distance the panel decision appears to place between its analysis and conclusion and that of Meade may be telling:

In Meade, we applied the Ohio statute of limitations for breach of written contract to an ERISA benefits claim.  At oral argument, counsel for Redmon contended that Meade controls because in that case we applied the breach of contract provision despite a provision of the Ohio Revised Code ("ORC") analogous to the Kentucky provision for statute liability at issue here.  See ORC § 2305.07 ("[A]n action . . . upon a liability created by statute . . . shall  [*10] be brought within six years after the cause thereof accrued.").  After a careful reading of Meade, however, we are not persuaded.  The question presented in Meade was whether the most analogous Ohio statute of limitations was that for breach of written contract or that for injury not clearly founded on written contract.  Meade thus did not present, and we did not decide, the question of whether Ohio's provision for statute liability should apply.  This case presents a different question, and the answer depends on Kentucky law, not Ohio law.  Accordingly, Meade does not compel the result here.

Id. at *9 n.4.

2.  The Court appears to have placed its decision in the apparent mainstream of ERISA jurisprudence – "[w]here a more closely analogous statute of limitations is available, however, our sister circuits have declined to apply the statute of limitations for breach of contract in favor of the more specific provision."  Id. at *11-*12.

3.  The Sixth Circuit pointedly asked whether a "claim [is] more properly characterized as arising under ERISA than under the plan contract" and whether "the benefits claim depend[s] on the alleged violations of ERISA's statutory protections" in deciding whether "statute liability, rather than breach of contract, provide[s] the more analogous cause of action to an ERISA claim for benefits."  Id. at *15-*16.  As the Court stated:

Here, Redmon does not dispute that she signed the DFBP waiver.  Rather, she argues that the plan administrator obtained her signature in violation of ERISA.  She alleges that her waiver of survivor benefits was therefore invalid under ERISA and that she is entitled to the benefits she would have received if she had not signed the waiver.  Redmon's claim for benefits therefore depends on a finding that her signature was invalidly obtained in violation of ERISA.  Thus, her claim for benefits can be said to arise more specifically from ERISA's statutory protections than from an independent contract between the Redmons and Sud-Chemie.  The result might be different if, for example, Redmon contested the authenticity of the signature on the DFBP. Such a claim might present an issue of contract law.  Here, Redmon's claim for benefits is entirely derivative of her claim that Sud-Chemie failed to comply with ERISA.  Accordingly, the most analogous Kentucky statute of limitations is five years under KRS § 413.120(2).

Id. at *16-*17.

4.  The panel provided a significantly broader, albeit analytically barren, rationale for its choice of the 5-year limitations period over the 15-year prescriptive period: "ERISA is more akin to a statutory scheme such as Workers' Compensation than to any common law cause of action.  Therefore, under Kentucky law, the statutory liability provision is the most analogous statute of limitations."  Id. at *18 (citations omitted).

When presented with a § 502(a)(1)(B) claim arising in Ohio, will the Sixth Circuit continue applying Ohio's 15-year breach-of-contract limitations period, or will it apply the 6-year statute of limitations applicable to "an action … upon a liability created by statute" set forth in Ohio Rev. Code § 2305.07?  Those favoring adherence to the 15-year rule will take heart from the panel’s conclusion in Redmon that "the most analogous statute may vary as a matter of state law even within a single circuit."  This fairly oblique comment might be read to mean that the Ohio 15-year breach-of-contract limitations period can co-exist alongside the rejection of the identical statute of limitations for Kentucky.  But the better reading, I believe, is that the Sixth Circuit merely reached its result in Redmon without expressly overruling Meade, rather than as signaling any continuing viability for the holding in Meade.  After Redmon, I cannot see the Sixth Circuit continuing to apply Ohio's 15-year statute for breaches of contract to § 502(a)(1)(B) claims.

I do not believe the Sixth Circuit reached the correct result in Redmon.  ERISA does not create liability (except, for example, penalties for failure to provide plan documents when requested) – the plan does – because it is the plan sponsor who determines the benefit offered by the plan.  Alessi v. Raybestos, 451 U.S. 504 (1981).  It is also well-settled, at least in other circuits, that the pension contract includes terms implied-by-law.  May Dept. Stores v. FDIC, 305 F.3d 597, 600-01 (7th Cir. 2002) (Posner, J.);  Esden v. Bank of Boston, 229 F.3d 154, 173 (2d Cir. 2000). Such implied terms determine how to compute benefits but do not create liabilities.  For instance, in Redmon the waiver violated ERISA but did not create a liability beyond the benefits provided by the plan. Just as ERISA enforces plan terms, so it enforces implied contractual provisions, such as the regulation of waivers.  No liability is created because ERISA does not provide for extra-contractual damages, such as consequential or punitive damages.  In other jurisdictions outside the Sixth Circuit, the "liability created by statute" limitations period is applied to statutory penalties (e.g., the late provision of plan documents), while claims for benefits based on plan terms implied by law are governed by the statute of limitations for breach of contract claims.  Unhappily, the Sixth Circuit has failed to embrace the Seventh Circuit’s perspective of incorporating the law into the plan as in Leister v. Dovetail, Inc., __ F.3d __ (7th Cir. 2008), where Judge Posner recently wrote that "the benefits to which [plaintiff] was entitled were the assets that would have been in her 401(k) account had the defendants complied with their fiduciary duties." This clearly supports the proposition that the fiduciary obligations imposed by 29 U.S.C. § 1104(a)(1)(D) are to be read into a plan participant's scope of recovery under 29 U.S.C. § 1132(a)(1)(B).  One cannot help but wish that the Sixth Circuit’s understanding of ERISA paralleled the Seventh Circuit’s.

Two closing observations.  First, the panel in Redmon found the statute-triggering "clear and unequivocal repudiation of benefits" to have occurred when benefit payments ceased, and not when the plan denied the participant's claim for benefits.  Second, Senior District Judge Karl Forester, who was on the panel in Redmon, is the author of Drutis v. Quebecor World (USA), Inc., 459 F. Supp.2d 580 (E.D. Ky. 2006), aff'd, 499 F.3d 608 (2007), cert. denied, 129 S. Ct. 68 (2008), which (in the course of deciding that a cash balance plan was not illegally age-discriminatory) unsettlingly relied on Crosby v. Bowater Inc. Retirement Plan for Salaried Employees of Great Northern Paper, Inc., 382 F.3d 587 (6th Cir. 2004), cert. denied, 544 U.S. 976 (2005), for the broad holding that "ERISA does not authorize a civil action for monetary damages."  459 F. Supp.2d at 591.  I respectfully submit that Crosby cannot properly be read so broadly.

The credit for this post is owed to Tom Theado for his insightful comments.  Many thanks to Tom for bringing this case to my attention.

The 2008 Elections - A Personal View

I was born during the first year of the Eisenhower administration.  In the 55 years since, our country has been led for 35 years by Republican presidents (64% of that period) and for 20 years by Democratic presidents (36% of the time), a ratio of almost 2:1.

The six Republican presidents during these years were:

Republican Administrations

Eisenhower    7 years (1954-1960)
Nixon             6 years (1969-1974)
Ford               2 years (1975-1976)
Reagan           8 years (1981-1988)
Bush I             4 years (1989-1992)
Bush II            8 years (2001-2008)

During the same time frame, the Democrats controlled the White House during four administrations:

Democratic Administrations

Kennedy         3 years (1961-1963)
Johnson          5 years (1964-1968)
Carter             4 years (1977-1980)
Clinton            8 years (1993-2000)

Some general observations can be made.  Eisenhower and Reagan are usually considered to have had successful tenures in office.  Despite being re-elected, Nixon and Bush II are frequently ranked among the worst presidents in American history, and for the same general reason -- their blatant disregard for the legal and constitutional restraints on Executive power.  Both Ford and Bush I were defeated for re-election, an obvious indication of the electorate's dissatisfaction with their performance in office.

Among the Democrats, Kennedy and Clinton are commonly viewed as successful, even brilliant, presidents, although Kennedy achieves that ranking more for the promise of his aspirations, goals and moral leadership than for the list of his accomplishments before being assassinated.  Johnson, like Nixon and Bush II, won re-election but has his presidency judged more for the failures of his second term in office than for any successes during his abbreviated and emotional first term.  Carter failed to win re-election.

As dominant as Democratic administrations were in the first half of the 20th Century (Wilson, Roosevelt and Truman steered the country through three wars and a Depression during a combined 28 years in office), the split was not as dramatically tilted to one party as the 60-40 or 65-35 ratio in favor of Republicans since Eisenhower's election.  In fact, it was reasonably close to 50-50 (28 Democratic years to 24 Republican years) as we elected twice as many Republican presidents from 1900-1950 (McKinley, T. Roosevelt, Taft, Harding, Coolidge and Hoover) as Democrats.  Of these early 20th Century Republican presidents, only McKinley and T. Roosevelt were re-elected.  (McKinley served less than one year of his second term before the assassination and was succeeded by T. Roosevelt.)  Moreover, only Teddy Roosevelt among the six Republican presidents in office during the 20th Century before my lifetime is considered to have had a successful presidency.

Needless to say, this is not a great track record.  The electorate seems to have missed the mark on presidential elections more often than it hit a winner.  In the last 108 years, we have had 12 Republican presidents (11 of whom were elected), and only 3 are considered to have had generally successful terms in office.  But we have elected 7 Democratic presidents during that span, and 5 of them are widely regarded as successful.

We give Republicans far more chances at the White House (again trending very close to a 60-40 margin), but the Democrats who have been elected more frequently attain success and accomplishment once in office.  Only Lyndon Johnson's sole elected term and Jimmy Carter's lone term have been duds.

I cannot explain what accounts for this disparity along party lines between electoral success and actual results in office.  I believe that Barack Obama has a historically-significant opportunity to become a visionary and successful president, a paradigm-shifter, along the lines of FDR, JFK and Bill Clinton.  And, frankly, Ronald Reagan fits that description as well, and achieved greatness as president by the same measure.  Obama has the vision, judgment, organizational and oratorical skills, and leadership qualities to become a great president in the mold of Roosevelt, Kennedy, Reagan and Clinton.  And he has no less governmental experience on a material national and international level than those four great Presidents had when they first ran for that office.

In addition to the goals, policies and programs he proposes, the historical record suggests that Obama has a significant chance for greatness if elected.  The country would be best served if the voters gave him that chance in November.

Scheme Liability Survives Stoneridge - Barely

In its long-awaited decision announced on Tuesday in Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., 552 U.S. __ (2008) (the Court's slip opinion is here), the Supreme Court ruled that so-called scheme liability under SEC Rules 10b-5(a) and (c) -- claims based on deceptive conduct and manipulative acts and practices (and/or on the participation of secondary actors in deceptive or manipulative schemes to defraud) rather than on material misrepresentations or omissions -- may continue to state a valid claim under the federal securities laws.  At the same time, the Court upheld the dismissal of the complaint by focusing its analysis on the reliance (i.e., causation-in-fact) element of such claims and finding it lacking in Stoneridge.  From this precarious vantage point, scheme liability survives, even if perhaps only for another day or Term.

Writing for a 5-3 majority, Justice Kennedy's opinion for the Court reaffirms the principle that claims seeking to impose liability on “secondary actors who commit primary violations” of the securities laws are actionable under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5.  Stoneridge, 552 U.S. at __, slip op. at 15, citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994).  In other words, even though the Section 10(b) implied private right of action does not extend to mere aiders and abettors, id., slip op. at 6-7, following the holding of Central Bank of Denver, supra, 511 U.S. at 177, 180, 191, a secondary actor can be liable if its conduct independently satisfies each of the elements for liability under Section 10(b) and Rule 10b-5.  After Stoneridge, status as a secondary actor cannot be argued to automatically and concomitantly confer immunity from civil liability as a mere aider and abettor.

The Court of Appeals for the Eighth Circuit had upheld the dismissal of the plaintiffs’ complaint in Stoneridge on the basis that (i) the complaint did not allege that the defendants had made any misstatements relied upon by the public, and (ii) the defendants (suppliers and customers of the company, Charter Communications, Inc. (“Charter”), in which the plaintiffs had invested) did not have a duty to disclose and therefore did not (indeed, could not) violate such duty.  The Eighth Circuit based its decision on the belief that only misstatements and omissions by one who has a duty to disclose are deceptive within the meaning of Section 10(b) and Rule 10b-5.  Slip op. at 4, 7, citing In re Charter Communications, Inc. Securities Litigation, 443 F.3d 987, 992 (8th Cir. 2006).

The Supreme Court affirmed the result reached by the Eighth Circuit but not on the same grounds or based on the same reasoning.  Indeed, the Court explicitly concluded (contrary to the views of the Fifth and Eighth Circuits) that conduct standing alone, without statements or omissions, can constitute actionable deception or manipulation, and that any suggestion that “there must be a specific oral or written statement before there [can] be liability under § 10(b) or Rule 10b-5” would be “erroneous.”  Stoneridge, slip op. at 7.

The Supreme Court affirmed the dismissal of the complaint in Stoneridge because the investor-plaintiffs did not rely in deciding to purchase or sell securities on any of the deceptive acts committed by the defendants in that case.  The decision was based solely on the missing element of reliance.

A plaintiff’s reliance on a defendant’s deceptive act (or false or misleading statement or omission) is an essential element of the Section 10(b) private cause of action.  Reliance ensures the “requisite causal connection” between a defendant’s misrepresentation or omission, or deceptive or manipulative conduct, on the one hand and the plaintiff’s injury on the other.  Id., slip op. at 8, citing Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988);  Afiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154 (1972) (requiring “causation in fact”).  As the Court noted, “reliance is tied to causation” -- “whether [the defendants’] acts were immediate or remote to the injury.”  Slip op. at 9.  The Court further noted that the deceptive act must not only be relied on in a meaningful way, it must also be committed “in connection with the purchase or sale of any security.”  Id., quoting 15 U.S.C. § 78j(b).

The suppliers/customers in Stoneridge had no duty to disclose and their deceptive acts were not communicated to investors.  Slip op. at 8.  Therefore, no cognizable claim was asserted against them because “[n]o member of the investing public had knowledge, either actual or presumed, of [their] deceptive acts during the relevant times [and,] as a result, [plaintiff] cannot show reliance upon any of [defendants’] actions except in an indirect chain that we find too remote for liability.”  Id.  The deceptive acts of the suppliers/customers were too remote because “[i]t was Charter not [defendants] that misled its auditor and filed fraudulent financial statements; nothing [defendants] did made it necessary or inevitable for Charter to record the transactions as it did.”  Id. at 10.

Finally, the Court noted that the plaintiff in Stoneridge sought to apply the Section 10(b) private cause of action in the realm of ordinary business transactions, such as purchase and supply contracts, which are outside of the securities markets.  Id.  The deceptive acts committed by Charter’s suppliers and customers “took place in the marketplace for goods and services, not in the investment sphere.”  Id. at 16.  The Court stated that Section 10(b) “does not reach all commercial transactions that are fraudulent” (id. at 11), and that it “should not be interpreted to provide a private cause of action against the entire marketplace in which the issuing company operates.”  Id.  The Court found this limitation on the reach of Section 10(b) private causes of action to be in accord with both Congress’ intent in responding to the decision in Central Bank of Denver (id. at 11-12) and enacting the PSLRA (id. at 13-15), and sound policy considerations.  Id. at 12-13 (“[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here” which may, in turn, “raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets”).

Early blog commentary on Stoneridge has been as widely disparate as the 30 amicus briefs filed with the Court and spans the entire political spectrum.  Among the more thoughtful examples, Lyle Denniston has this post on the case for Scotusblog, and Lyle Roberts provides his typically cogent analysis for The 10b-5 Daily here.  Elizabeth Nowicki's criticism of the opinion at the Truth on the Market blog can be found here.  Meanwhile, the National Association of Shareholder and Consumer Attorneys (NASCAT) apparently agrees with much of my reading of the opinion, as reported here.  And Larry Ribstein's provocative and insightful critique, per usual, is here.

We will have more coverage of and comments on the Stoneridge decision and the evolving contours of scheme liability under Section 10(b) and Rule 10b-5(a) and (c) in the coming days and weeks as developments warrant.

SLUSA Provision Authorizing Federal Courts to Stay State Court Discovery to Prevent "Circumvention" of PSLRA Discovery Stay Has No Practical Applications or Effect

The Private Securities Litigation Reform Act of 1995 (PSLRA), at 15 U.S.C. 78u-4(b)(3)(B), provides for a mandatory stay of "all discovery and other proceedings" in private securities actions:

In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

The Securities Litigation Uniform Standards Act of 1998 (SLUSA) added a provision to the PSLRA, at 15 U.S.C. 78u-4(b)(3)(D), entitled "Circumvention of Stay of Discovery" which reads, in its entirety:

Upon a proper showing, a court may stay discovery proceedings in any private action in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to this paragraph.

The difficulty arises when two lawsuits are pending at the same time -- one in federal court asserting federal securities claims and another in state court alleging different claims -- against the same defendant arising out of common or related facts or issues.  The defendant may contend that discovery in the state action should also be stayed because permitting discovery on those facts or issues the two cases have in common would "circumvent" the discovery stay in the federal case.

Thus, when a discovery stay is automatically imposed pending resolution of a defendant's motion to dismiss in a federal securities case, the PSLRA also explicitly authorizes the defendant, upon a "proper showing" to the court in that case, to seek an order staying discovery in pending state litigation "as necessary in aid of [the federal court's] jurisdiction, or to protect or effectuate [the federal court's] judgments."

But should this congressional language be construed as broadly as it may appear at first blush?  And if so, does this provision exceed the limits, rooted in the Supreme Court's well-entrenched principles of federalism and comity, on Congress' power to authorize federal courts to intrude so expansively on the prerogatives of state judges?

As the prerequisite for a federal court's exercise of the power to stay discovery in a state court case, SLUSA's circumvention provision adopts in identical language two of the three exceptions to the broad prohibition on enjoining state court proceedings found in the Anti-Injunction Act, 28 U.S.C. 2283.  By so doing, Congress was obviously trying to clothe federal discovery-stay orders in the traditional trappings of permissible federal court interference with state court litigation.

The "protect or effectuate its judgments" language has been interpreted in connection with the identical Anti-Injunction Act provision to authorize a stay or injunction when necessary to promote or effectuate an earlier judgment by a federal court.  It is usually referred to as the "relitigation exception" because it permits federal courts to issue injunction or stay orders only to ensure the preclusive effect of an earlier federal court judgment.  The relitigation exception thus applies only in situations where a state court should not hear a case because of res judicata principles but is proceeding to do so anyway.  Moreover, the exception only applies to federal court judgments on the merits, in which case the merits decision can be upheld by injunction if necessary.  If, on the other hand, the federal court dismissed a case on procedural grounds, or otherwise issued a ruling not on the merits, a state court is free to hear the matter.  See Atlantic Coast Line Railroad v. Brotherhood of Locomotive Engineers, 398 U.S. 281 (1970).

Therefore, this language authorizes federal intrusion in state court litigation only if a judgment on the merits has already been entered in the federal case that is in need of being "protect[ed] or effectuate[d]" by barring relitigation in state court.  But how does this operative context justify resorting to a federal stay of state discovery?  How can discovery in a state court lawsuit ever threaten the primacy or efficacy of a prior federal judgment on the merits?  And when would there even be a prior federal court judgment on the merits while a discovery stay in the federal action is still pending?  It would seem that the basis Congress chose for authorizing a federal stay of state discovery makes its use a logical and practical impossibility.

The second statutory justification for staying discovery requests in separate state court actions is if a stay is "necessary in aid of [the federal court's] jurisdiction.  Once again, the identical term "necessary in aid of jurisdiction" in the Anti-Injunction Act has been narrowly construed.  It applies in only two circumstances:  where a case is removed from state court to federal court, and where a federal court first acquires jurisdiction over a case involving the disposition of real property.

With respect to the first circumstance, if a case is removed from state court to federal court and the state court does not properly relinquish jurisdiction, the federal court may enjoin further state court proceedings.  See Reviser's Note to the 1948 revision to Section 2283 (the purpose of this exception is "to make clear the recognized power of the Federal courts to stay proceedings in State cases removed to the district courts");  Mitchum v. Foster, 407 U.S. 225, 234-37 (1972).  As to the second circumstance, it has long been established that whatever court initially acquires in rem or quasi-in-rem jurisdiction over a matter involving real property can enjoin all other courts from hearing the matter.  In fact, the only instance in which the Supreme Court has authorized the reverse situation, where a state court may enjoin parties from litigating in federal court, is where the state court first acquired jurisdiction over real property.  In other words, the general rule is that whichever court first gains jurisdiction in a case concerning the disposition of real property has exclusive jurisdiction to decide claims to that property and may enforce its jurisdiction with stays or injunctions if necessary.  See Donovan v. City of Dallas, 377 U.S. 408, 412 (1964);  Princess Lida v. Thompson, 305 U.S. 456, 465-68 (1939).  The Supreme Court has been firm in ruling that the "in aid of jurisdiction" exception applies only in real property situations and not in in-personam cases.  Atlantic Coast Line Railroad v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 295-96 (1970) ("the state and federal courts had concurrent jurisdiction . . . and neither court was free to prevent either party from simultaneously pursuing claims in both courts . . .  Therefore the state court's assumption of jurisdiction . . . did not hinder the federal court's jurisdiction so as to make an injunction necessary to aid that jurisdiction").

There are few if any conceivable respects in which staying discovery requests in state litigation would be necessary to aid a federal district court in exercising or maintaining its jurisdiction over a federal securities action, especially in the limited sense in which the term-of-art has been consistently interpreted for decades by authoritative Supreme Court decisions.

Moreover, in the context of discovery in multiple federal court cases (which avoids to added complication of federal-state federalism and comity concerns), federal courts have allowed discovery to proceed notwithstanding the PSLRA automatic stay regarding non-securities claims pending between the same parties in separate actions in the same court, or even in the same action.  For example, in In re FirstEnergy Shareholder Derivative Litigation, 219 F.R.D. 584 (N.D. Ohio 2004), the court observed that "[t]he PSLRA, by its terms, is limited to actions filed under the federal securities laws and does not apply outside this context."  The court specifically held that even though "the securities fraud claims [in one case] and the shareholder derivative claims [in other cases] include similar facts, this is insufficient to bring the state law derivative claims within the ambit of [the discovery stay of] the PSLRA. . . .  These claims fall outside the PSLRA's discovery stay."

Another district court has also rejected this same argument that Congress intended a PSLRA stay also to stay discovery in related litigation involving the same or similar parties.  In Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp.2d 162, 167 (S.D.N.Y. 2001), the court found no congressional intent to prevent discovery in non-securities-fraud cases simply because the cases share facts in common with securities fraud cases.  In that case the non-securities-fraud claims were combined with federal securities claims in the one action, and the court held that "permitting discovery [in connection with the state law claims] to proceed here would not represent an impermissible 'end run' around the PSLRA's automatic stay provisions."

The federal stay of state court discovery permitted by 15 U.S.C. 78u-4(b)(3)(D) requires an application and "proper showing" to the federal court.  Based on the statutory language requiring a stay to be "necessary in aid of [the federal court's] jurisdiction" or needed "to protect or effectuate its judgments," It would seem that there are few circumstances in which a party could make such a showing that it was entitled to a stay of otherwise proper state court discovery merely because of the pendency of a discovery stay in the related federal securities litigation.

Emerging Standards for Production of Electronically Stored Information

Although not strictly a matter of appellate law, there has been substantial controversy over the manner in which electronically-stored information (ESI) must be produced in discovery.  Requesting parties generally seek the production of ESI in native format with all metadata intact.  Metadata, described as "data about data," includes information embedded in an electronic document or file describing inter alia its creation, revision history, tracking and management that is generally not visible or retrievable when an electronic document is printed or converted to an image file.  Responding parties usually prefer to produce ESI in one of the static-image formats, PDF (portable document format) or TIFF (tagged image file format), so that the information is not electronically usable or searchable.  Which format is the correct one?  The December 1, 2006 amendments to the Federal Rules of Civil Procedure were designed to avoid or greatly reduce this controversy, but have achieved mixed results thus far.

Amended Fed.R.Civ.P. 34(b) provides in pertinent part:

The request [for production of documents] may specify the form or forms in which [ESI] is to be produced. . . .  If objection is made to the requested form or forms for producing [ESI] -- or if no form was specified in the request -- the responding party must state the form or forms it intends to use.

Unless the parties otherwise agree, or the court otherwise orders:  *    *    *

(ii)  if a request does not specify the form or forms for producing [ESI], a responding party must produce the information in a form or forms in which it is ordinarily maintained or in a form or forms that are reasonably usable;  and

(iii)  a party need not produce the same [ESI] in more than one form.

Thus, amended Rule 34(b) gives the requesting party the right and power to specify the form in which ESI is to be produced.  In the absence of such specification, the default position of Rule 34(b)(ii) is that ESI is to be produced in the form in which it is maintained and used in the ordinary course of business or some other form that is "reasonably usable."

In state court litigation, the Conference of Chief Justices approved and adopted on August 2, 2006, the Guidelines for State Trial Courts Regarding Discovery of Electronically Stored Information as a reference tool for state trial court judges facing e-discovery issues.  The Guidelines are available on the website of the National Center for State Courts.  Guideline 6, entitled "Form of Production," is based on FRCP 34(b)(ii) and (iii):

In the absence of agreement among the parties, a judge should ordinarily require [ESI] to be produced in no more than one format and should select the form of production in which the information is ordinarily maintained or in a form that is reasonably usable.

The principal difference between Amended Rule 34(b)(ii) and Guideline 6 is that, under the Federal Rule, a party may specify the form in which ESI is to be produced, whereas under the Guidelines, specifically Guideline 3(B)(7), the form of production "preferred" by the requesting party is merely one factor the judge should consider and take into account.

On August 3, 2007, the National Conference of Commissioners on Uniform State Laws approved and adopted Uniform Rules Relating to Discovery of Electronically Stored Information.  Rule 7 entitled "Form of Production" tracks the language of amended Rule 34(b), including allowing the requesting party to specify the form in which ESI is to be produced.  See Rule 7(a).  If a request for production does not specify a form for producing the ESI, "the responding party shall produce the ESI in a form in which it is ordinarily maintained or in a form that is reasonably usable."  Rule 7(c)(1).

The influential Delaware federal court Default Standards for Discovery of Electronic Documents similarly provides:

if a request for ESI does not specify the form of production, a responding party must produce the information in the form in which it is ordinarily maintained, or in an electronically-searchable form . . .

There are two common threads running through all these authorities:

(1)  three out of the four sets of rules cited above, including the Federal Rules of Civil Procedure, allow the requesting party to specify the form in which ESI is to be produced.  This means that a requesting party may specify that ESI is be produced in its native format (another way of saying the form in which it ordinarily maintained) with metadata intact.  This appears to be the requesting party's absolute right under these rules.  If the responding party has any objection, its bears the burden of demonstrating to the court why production in the specified form is objectionable.

(2)  even if the requesting party does not specify the form of production, the default standard is that the responding party must produce ESI in the form in which it is ordinarily maintained or in a form that is reasonably usable.  ESI kept in the ordinary course means in its native format, obviously -- the form in which it is used during the course of ordinary business.  That does not mean a PDF or TIFF image of a document.  Furthermore, a static image of a document, whether in TIFF or PDF format, is not a "reasonably usable" form.  Indeed, that is the whole point of those two formats, to make them not electronically usable by the recipient.  Neither are TIFF or PDF files "electronically-searchable."

Responding parties typically refer to two decisions, Pace v. International Mill Service, Inc., 2007 WL 1385385 (N.D. Ind. 5-7-2007), and Wyeth v. Impax Laboratories, Inc., 2006 WL 3091331 (D. Del. 10-26-2006), as authority for the proposition that static-image files of electronic documents constitute legally-sufficient production.

Pace was decided after amended Rule 34(b) took effect but, since the conduct at issue occurred prior to the amendment, "the court addresse[d] the motion [to compel] in terms of the rule's prior version."  The court in Pace cited another pre-amendment case, Williams v. Sprint/United Management Co., 230 F.R.D. 640 (D. Kan. 2005), for its statement that, "[a]bsent a special request for metadata," a production of documents in PDF or TIFF images "complies with the ordinary meaning of [pre-amendment] Rule 34."  The court then denied the motion to compel "[b]ecause [the requesting party] has not shown that he made a request that called for any specific format."

Wyeth also predates the ESI amendments to the Federal Rules and relies on the pre-amendment version of the Delaware Default Standards.  It selectively quotes from the Williams v. Sprint decision, denying the motion to compel because the requesting party "has not demonstrated a particularized need for the metadata . . . it has requested."

It is important to carefully examine Williams v. Sprint, the pre-amendment decision on which both Pace and Wyeth expressly rely.  Magistrate Judge Waxe based his decision in Williams on the then-current version of Rule 34 and on Principle 12 and Comment 12.a of the Sedona Principles for Electronic Document Production (July 2005).  230 F.R.D. at 648, 650-52.  Sedona Principle 12 states that "[u]nless it is material to resolving the dispute, there is no obligation to preserve and produce metadata absent agreement of the parties or order of the court."  Comment 12.a provides that "there should be a modest legal presumption in most cases that the producing party need not take special efforts to preserve or produce metadata."  Finding the Sedona Principles and comments to be "particularly instructive," the Court in Williams noted that "emerging standards of electronic discovery appear to articulate a general presumption against the production of metadata" unless it is "relevant to the dispute."  Id. at 652.  This is the part of the Williams decision that Pace and Impax Laboratories quoted and referred to.

However, what Williams actually held was very different:

Based on these emerging standards, the Court holds that when a party is ordered to produce electronic documents as they are maintained in the ordinary course of business [or as an "active file" or in their "native format"], [or when a party requests ESI be produced as they are maintained in the "ordinary course of business," as an "active file," or in their "native format,"] the producing party should produce the electronic documents with their metadata intact, unless that party timely objects to the production of metadata, the parties agree that the metadata should not be produced, or the producing party requests a protective order.  The initial burden with regard to the disclosure of the metadata would therefore be placed on the party to whom the request or order to produce is directed.  . . .  Placing the burden on the producing party is further supported by the fact that metadata is an inherent part of an electronic document, and its removal ordinarily requires an affirmative act by the producing party that alters the electronic document.

Id. (footnotes omitted)(emphasis in original).  Thus, Williams fully supports the proposition that production of ESI as maintained in the ordinary course of business, which amended Rule 34(b) requires in the absence of any request for a specified format, means producing ESI in native format with metadata intact.

Parenthetically, the draft commentary to the Guidelines established by the Conference of Chief Justices specifies that the Guidelines deliberately rejected the Sedona Principles' rebuttable presumption against the production of metadata.  Instead, the Guidelines assume that ESI in the standard format in which it is ordinarily maintained must necessarily be "reasonably usable" or else it would not be kept that way in the first place.

I have found four other federal court decisions bearing on a responding party's obligation to produce ESI in native format with metadata intact when specifically requested:

1.   Most recently, on June 12, 2007, the Southern District of Ohio (i) observed that under amended FRCP 34(b) a party may specify the form in which ESI is to be produced, (ii) noted that the responding party contended its production was proper because the request for production of documents made no such specification, and (iii) denied the motion to compel without prejudice and ordered the parties to meet and confer to resolve the dispute.  Scotts Co. LLC v. Liberty Mut. Ins. Co., 2007 WL 1723509 (S.D. Ohio 6-12-2007).

2.   In Lorraine v. Markel American Ins. Co., 241 F.R.D. 534 (D. Md. 5-4-2007), a case involving the authentication of ESI for summary judgment purposes, Chief Magistrate Judge Grimm noted that recently-revised Rule 34(b) permits a party "to identify the form or forms in which it is to be produced.  A party therefore can request production of ESI in its 'native format' which includes the metadata for the electronic document."  The court went on to hold that metadata is a distinctive characteristic of all electronic evidence that will properly authenticate ESI under Rule 901(b)(4) of the Federal Rules of Evidence.

3.   In Nova Measuring Instruments Ltd. v. Nanometrics, Inc., 417 F. Supp.2d 1121 (N.D. Cal. 2006), the court granted a motion to compel and ordered ESI to be produced "in their native file format, with original metadata" over the defendant's objection.

4.   In In re Verisign Inc. Sec. Litig., 2004 WL 1445243 (N.D. Cal. 3-10-2004), the responding party objected to a discovery order entered by the magistrate judge to produce responsive documents that specified that "[p]roduction of TIFF version alone is not sufficient" and that "[t]he electronic version must include metadata as well as be searchable."  The district judge overruled the objections and found that the order directing defendants to produce responsive electronic documents in their native format including metadata was not clearly erroneous or contrary to law, even based on the pre-amendment version of Rule 34.  The district court also rejected defendants' arguments that production of ESI in its original format (e.g., PST format for e-mails) would be overly burdensome, prejudicial, extremely time consuming and expensive.

Based on all these authorities, it is clear the emerging standard for the discovery of ESI is that production should be in the format specifically requested or, absent a specific request, in the form in which the ESI is maintained and used in the ordinary course of business.

I would welcome hearing from readers about other case decisions bearing on this developing topic.

On Rehearing En Banc, Sixth Circuit Affirms Panel Decision and Dismisses Removed Case for Want of Substantial Federal Question Under Grable Doctrine

A rare event.  An uncommon or unusual occurrence.  Isolated.  Extraordinary.  Virtually unheard of.  Once in a blue moon.

All of these terms accurately describe the Sixth Circuit's en banc decision filed on August 21 in Mikulski v. Centerior Energy Corp., et al., Case No. 03-4486.  The Court held by an 8-5 majority (Judge Cook was recused) that state law claims for fraudulent tax accounting and breach of contract that turn on the interpretation of a provision of the Internal Revenue Code do not state a "substantial federal question" supporting the exercise of federal removal jurisdiction under the Grable doctrine despite the presence of the embedded federal issue.  In so doing, the en banc Court affirmed the decision of a divided panel, 435 F.3d 666 (6th Cir. Jan. 26, 2006), rehearing en banc granted, opinion vacated Apr. 26, 2006.

In the absence of diversity, a civil action filed in state court may be removed to federal court only if the claim is one "arising under" federal law.  Beneficial National Bank v. Anderson, 539 U.S. 1 (2003), citing 28 U.S.C. 1441(b).  Whether a claim arises under federal law must be determined by applying the "well-pleaded complaint" rule.  Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987).  Thus, a claim "arises under" federal law for jurisdictional purposes only if the plaintiff's statement of his own cause of action on the face of his properly-pleaded complaint affirmatively shows that it is based upon federal law.  Beneficial National Bank, 539 U.S. at 7;  Caterpillar, supra.  However, the "substantial federal question" doctrine is a recognized exception to the well-pleaded complaint rule.  It deals with the thorny issue of whether federal "arising under" jurisdiction attaches to state law claims that raise accompanying questions of federal law.

In its recent comprehensive treatment of the substantial federal question doctrine, Grable & Sons Metal Products v. Darue Engineering, 545 U.S. 308 (2005), the Supreme Court reaffirmed the principle that a state-law claim for relief which "necessarily raise[s] a stated federal issue" will confer federal-question jurisdiction (originally under 28 U.S.C. 1331 or on removal pursuant to 28 U.S.C. 1441) only where the federal issue is "actually disputed and substantial" and only where a federal forum may entertain it "without disturbing any congressionally-approved balance of federal and state judicial responsibilities."  Thus, even where a state action contains a contested and substantial federal question, "the presence of a disputed federal issue and the ostensible importance of a federal forum are never necessarily dispositive."  Instead, federal jurisdiction should be exercised "only if [it] is consistent with congressional judgment about the sound division of labor between state and federal courts governing the application of section 1331."  But no federal jurisdiction exists, even if the disputed issue of federal law is deemed to be "substantial," where its exercise would "herald[] a potentially enormous shift of traditionally state cases into federal courts."

Grable sets forth a three-part conjunctive test for removal jurisdiction based on the presence of a federal issue in state-law claims for relief.  A state-law claim can give rise to federal question jurisdiction only if:

1.  the "state-law claim necessarily raise[s] a stated federal issue";

2.  the federal issue must be "actually disputed and substantial";  and

3.  the exercise of federal jurisdiction would not "disturb[] any congressionally-approved balance of federal and state judicial responsibilities" nor herald a "shift of traditionally state cases into federal courts."

Grable, 545 U.S. at 314, 319.  Even before Grable, the Sixth Circuit had consistently held that federal questions raised by state law claims must be substantial to support federal removal jurisdiction.  In the immediate aftermath of the Supreme Court's decision in Merrill Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804 (1986), the Sixth Circuit held in Miller v. Norfolk & W. Ry. Co., 834 F.2d 556, 562 (6th Cir. 1987), that the alleged violation of "a federal statute as an element of a state cause of action may or may not raise a substantial federal question depending upon the nature of the federal interest at stake in the case."  In order to support jurisdiction, the "federal interest at stake" must have "great significance."  More recently, in order to confer jurisdiction, the Sixth Circuit required the federal question raised by a state law complaint to be "substantial, disputed and of great federal interest," and the resolution of such federal question to be "necessary" to the resolution of the state law claim.  Long v. Bando Mfg. of America, Inc., 201 F.3d 754, 757-59 (6th Cir. 2000).

Thus, in accordance with the reasoning of Miller and Long v. Bando, "the mere presence of a federal statute as an element of the complaint does not necessarily confer jurisdiction under the [substantial federal question] doctrine."  Mikulski v. Centerior Energy Corp., 435 F.3d 666, 676 (6th Cir. 2006)(panel decision vacated by grant of rehearing en banc), citing Long v. Bando and Miller.

The Supreme Court similarly emphasized in Grable the "commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law," because doing so justifies "resort to the experience, solicitude, and hope of uniformity that a federal forum offers on federal issues."  545 U.S. at 312.  This does not mean, however, that the "mere need to apply federal law in a state-law claim will suffice to open the 'arising under' door."  Id. at 313, discussing and limiting Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 199 (1921).  The question whether to exercise federal-question jurisdiction over a state-law action raising an embedded federal issue "calls for a 'common-sense accommodation of judgment to [the] kaleidoscopic situations'" in which such federal issues can be presented -- which the Court described as "'a selective process which picks the substantial causes out of the web and lays the other ones aside.'"  Id., quoting Gully v. First National Bank in Meridian, 299 U.S. 109, 117-18 (1936).

Thus, the Supreme Court refuses to "treat[] 'federal issue' as a password opening federal courts to any state action embracing a point of federal law."  545 U.S. at 314.  Instead, "federal jurisdiction demands not only a contested federal issue, but a substantial one, indicating a serious federal interest in claiming the advantages thought to be inherent in a federal forum."  Id. at 313, citing Chicago v. International College of Surgeons, 522 U.S. 156, 164 (1997);  Merrill Dow, supra, 478 U.S. at 814 & n.12;  Franchise Tax Bd. of Calif. v. Construction Laborers Vacation Trust, 463 U.S. 1, 28 (1983).

Moreover, the Court in Grable explicitly held that "the presence of a disputed federal issue and the ostensible importance of a federal forum are never necessarily dispositive" of federal jurisdiction.  There must always be an assessment of whether exercising federal jurisdiction in a case would upset the federal-state line drawn or assumed by Congress.  This is so because "the appropriateness of a federal forum to hear an embedded issue can be evaluated only after considering the 'welter of issues regarding the interrelation of federal and state authority and the proper management of the federal judicial system.'"  545 U.S. at 314, quoting Franchise Tax Board, supra, 463 U.S. at 8.

Therefore, even if an embedded federal issue in a state-law claim for relief were deemed to constitute a "substantial" federal question under the Grable test, it qualifies for a federal forum "only if federal jurisdiction is consistent with congressional judgment about the sound division of labor between state and federal courts governing the application of section 1331."  Id. at 313-14.

Less than a month after the January 2006 panel decision in Mikulski, the Sixth Circuit again applied the Grable factors to hold that federal removal jurisdiction did not exist over a state-law retaliatory discharge claim alleging that the plaintiff's discharge violated public policies based on federal statutes.  In Eastman v. Marine Mechanical Corp., 438 F.3d 544, 552 (6th Cir. 2006), the Court cited the fact that Congress had withheld a private right of action from the federal statutes identified in the plaintiff's complaint "as an important signal to its view of the substantiality of the federal question involved."  The Court concluded that the reference to federal statutes in the complaint did not create a substantial federal question.  Id. at 553.  Even more importantly, the Sixth Circuit in Eastman found that accepting jurisdiction over the state-law employment suit "would be disruptive of the sound division of labor between state and federal courts envisioned by Congress."  In contrast to Grable where the Court saw little danger in accepting jurisdiction because it would "portend only a microscopic effect on the federal-state division of labor" (545 U.S. at 315), the Sixth Circuit concluded that accepting jurisdiction "would distort the division of judicial labor assumed by Congress under section 1331."  Id., quoting Grable.

A year after Grable, the Supreme Court confirmed in Empire HealthChoice Assurance, Inc. v. McVeigh, 547 U.S. __, 126 S.Ct. 2121, 2136-37 (2006), that the Grable doctrine had created only a "special and small category" of federal jurisdiction.  The Court sharply distinguished McVeigh from Grable -- "[t]his case is poles apart from Grable" -- and dramatically limited the scope and application of Grable's holding and rationale.  In contrast to Grable, which centered on whether the actions of a federal agency (the IRS) had violated a federal statute (section 6335 of the Internal Revenue Code), and presented a nearly "pure issue of law" the resolution of which would be both dispositive of that case and controlling in numerous other tax sale cases, Empire's state-law reimbursement claim arose from the actions of private litigants in a state court forum rather than from the acts of any federal agency, service or department, and were "fact-bound and situation-specific."  The Court in McVeigh did not think "a proper 'federal-state balance' would place [the state-law issue] under the complete governance of federal law, to be declared in a federal forum."  It held that "[t]he state court in which the [tort] suit was lodged is competent to apply federal law . . . and would seem best positioned to determine" the state law issues arising out of the state tort action.  Although the Court recognized that the Government had a legitimate interest in protecting the federal workforce, it concluded that those interests did not warrant turning a straightforward state law contract claim into a costly "federal case."  The Court in McVeigh summed up its holding and the proper interpretation and application of Grable as follows:

Grable emphasized that it takes more than a federal element "to open the 'arising under' door."  This case cannot be squeezed into the slim category Grable exemplifies.

126 S.Ct. at 2137.

The sole federal issue in Mikulski -- whether FirstEnergy Corp. violated the effective date provision of Section 312(n)(1) of the Internal Revenue Code -- arises from the company's alleged false reporting to its shareholders that they had received taxable dividends when, in fact, the shareholders had merely received the tax-free return of their own capital.  The complaint in Mikulski alleges that FirstEnergy's predecessor and its two electric-utility subsidiaries employed fraudulent tax accounting practices to manipulate their corporate "earnings and profits" in order to make the companies look more profitable than they really were.  As a result, the complaint accuses FirstEnergy of misinforming its shareholders that they had received more taxable dividend income than they actually had.  The measure of the alleged damages is the amount by which the shareholders overpaid their federal and state income taxes for the years in question.

As of December 31, 1984, FirstEnergy's subsidiaries had spent over $1.5 billion on "construction in progress" -- i.e., construction costs for nuclear power plants and other facilities begun during the preceding decade but still unfinished.  Beginning with the 1985 tax year, corporations were required by Section 312(n)(1) of the Internal Revenue Code to capitalize their "construction period" interest expenses -- i.e., to include in the corporation's "earnings and profits" the amount of interest expense that could have been avoided if the amount spent on "construction in progress" after the effective date of Section 312(n)(1) had instead been used to reduce debt and avoid paying interest.

FirstEnergy included in its "earnings and profits" for 1985 and subsequent years the amount of interest expense (approximately $150 million per year) that it could have avoided if the $1.5 billion spent on "construction in progress" in 1984 and prior years had instead been spent on reducing its debt.  Section 61(e)(1)(A) of Pub. L. 98-369 (1984) provides that the requirements of Section 312(n)(1) apply to "amounts paid or incurred in taxable years beginning after September 30, 1984."  This effective date provision means that no construction expenses incurred before January 1, 1985 could be capitalized or considered in calculating a corporation's "earnings and profits."  FirstEnergy's alleged violation of the effective date of Section 312(n)(1) is the only federal issue involved in the state law claims for fraud and breach of contract alleged in the complaint.

Interestingly, Section 312(n)(1) does not apply to corporate "earnings and profits" calculations for years after 1986 because Section 263A of the Internal Revenue Code, enacted as part of the Tax Reform Act of 1986, requires the capitalization of interest expense to arrive at taxable income, eliminating the necessity of adjusting "earnings and profits" by the amount of avoided construction-period interest under Section 312(n)(1) for expenses incurred in years after 1986.  If costs are required to be capitalized under another Code provision, Section 312(n)(1) is not applicable.  Von Lusk v. C.I.R., 104 T.C. 207, 220 (1995).

Considering the first component of the tripartite Grable test, the Court in Mikulski had "little difficulty in concluding that there is a federal issue and it is actually disputed."  The second part, the substantiality of the federal interest, required a somewhat lengthier analysis.  The Sixth Circuit identified four aspects affecting the substantiality of a federal interest or issue raised by state-law claims for relief:  (i) "whether the case includes a federal agency, and particularly whether that agency's compliance with [a] federal statute is in dispute, (ii) whether the federal question is important (i.e., not trivial), (iii) whether a decision on the federal question will resolve the case (i.e., the federal question is not merely incidental to the outcome, and (iv) whether a decision as to the federal question will control numerous other cases (i.e., the issue is not anomalous or isolated)."  (Slip op. at 12, citing Grable, 545 U.S. at 313, and McVeigh, 126 S.Ct. at 2137.)  After analyzing each of the four factors separately and then considering them in the aggregate, and "acknowledging two unassailable truths -- (1) that state courts are fully competent to decide this question, and (2) that section 312(n)(1) does not control the collection of the plaintiffs' personal income taxes directly," the Court held that the federal interest in the issues presented were not so substantial as to compel or support a finding that the "traditional" state-law fraud and breach of contract claims alleged in this case actually "arise under" federal law, at least not without some express congressional determination to that effect.  (Id. at 14.)  Even a significant federal interest is not automatically "substantial" in the jurisdictional sense as defined by prevailing Supreme Court precedent.  As the Court concluded:  "If a case could be deemed to 'arise under' federal law . . . any time the litigation involves the interpretation of a provision in the federal tax code, then [prior Supreme Court] precedents -- particularly Grable -- would be meaningless . . ."  Neither Congress nor the Supreme Court "intended such an expansive or limitless view of federal jurisdiction."  (Id. at 15.)

Addressing the third and final Grable element, the Sixth Circuit found that "the exercise of jurisdiction over this type of lawsuit would impermissibly disrupt the congressionally-approved balance of federal and state judicial responsibilities."  (Id.)  But the Court sounded a cautionary note on resort to a "floodgates" argument:  "While we ultimately conclude that the possibility of encumbering the federal courts with these tax-code-related cases appears both real and significant . . . , we are at pains to avoid overstating our position.  We eschew predictions of any extreme outcome that may lurk in such phrases as 'flood of litigation' or 'overwhelm the federal courts,' and we have not succumbed to some eschatological trembling."  (Id.)

Biblical references aside, the Court concluded that if it "allow[ed] the present dispute over a relatively obscure provision of the tax code to be pursued in federal court," it would "extend federal jurisdiction not only to the question raised in this case, but to any dispute over the meaning or effect of virtually any provision in the entire federal tax code."  (Id.)  Finding a substantial federal question in this case "would open the door of the federal courts to significantly more than the solitary case asserting a constitutional challenge, as in Smith [v. Kansas City Title & Trust Co., supra], or the 'microscopic effect' portended by the quiet title action in Grable. . .  [E]ven if the actual number of cases proved not to be overwhelming, or even uncomfortably burdensome, it appears unlikely that Congress -- through its silence -- intended to open the federal court door quite so wide."  (Id. at 16.)

On en banc review, the Sixth Circuit upheld by a 13-0 vote the unanimous panel decision that (i) Section 7422 of the Internal Revenue Code does not preempt the plaintiffs' state law claims for fraudulent misrepresentation and breach of contract, and (ii) that the district court erred in concluding that plaintiffs' claims were completely preempted by federal law.  Section 7422(a)  precludes a suit for recovery of a federal tax alleged to be erroneously or illegally assessed or wrongfully collected unless a tax refund claim is filed with the IRS.  It provides taxpayers with the means to obtain relief from improper collections by federal tax collectors while also protecting government collection officials from being sued by taxpayers.  Although the so-called airline  passenger excise tax cases applied the protections of Section 7422 to airlines that act as tax-collection agents for the IRS by collecting excise taxes from the sale of airplane tickets, "that expansive application does not extend to the present case because [FirstEnergy] did not collect or withhold any taxes," nor was it "acting as a collection agent for or on behalf of the IRS."  (Id. at 8.)

Furthermore, the Sixth Circuit explicitly recognized that the "mere fact that the plaintiffs' damages are calculated in terms of overpaid income taxes does not necessitate the conclusion that the plaintiffs' claim must actually be one for a federal income tax refund. . . .  This is especially so for the claim of state income taxes -- the plaintiffs' alleged overpayment of state income taxes obviously does not assert a federal income tax refund claim.  Perhaps more to the point, however is that the plaintiffs are not seeking a tax refund inasmuch as they are not accusing the IRS of any wrongdoing.  Under the plaintiffs' theory, the IRS was an innocent third-party who, like the plaintiffs themselves, merely relied on the 1099-DIVs issued by [FirstEnergy]."  (Id., emphases in original.)

The district court ruled that the plaintiffs' state-law claims were completely preempted by the Internal Revenue Code.  The doctrine of complete preemption applies where Congress intends the preemptive force of a federal statute to be so extraordinarily great that any state-law claim touching on the same field is deemed to be a federal claim arising under that federal law; in such circumstances, the federal statute provide the exclusive cause of action and the state-law claim is extinguished.  See, e.g., Caterpillar, supra, 482 U.S. at 393.  The Supreme Court has found complete preemption in only three classes of cases -- under Section 301 of the Labor Management Relations Act of 1947 (LMRA), 29 U.S.C. 185;  the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1001-1461;  and the National Bank Act, 12 U.S.C. 38.  See Beneficial National Bank v. Anderson, supra, 539 U.S. at 7-9.  The Supreme Court has not recognized complete preemption for damage claims alleging corporate misreporting to its taxpaying shareholders of their tax liability, nor under any other provision of the Internal Revenue Code.  Indeed, the district court seemed to be the first court in the country to find complete preemption in the Internal Revenue Code.  As the Mikulski panel noted, if the district court's analysis were correct, it would federalize most state law claims that remotely address tax issues, such as suing one's accountant or tax preparer.

The en banc Court rejected the conclusion that Section 7422 completely preempted the plaintiffs' state-law claims (slip op. at 7-8) and thereby prevented the expansion of the complete preemption doctrine into an area of law not intended by Congress or recognized by the Supreme Court.  This is consistent with the Sixth Circuit's previous cases acknowledging that complete preemption is a narrow doctrine.  Although in Gibson v. American Bankers Ins. Co., 289 F.3d 943, 947 (6th Cir. 2002), the Court held that the National Flood Insurance Act, 42 U.S.C. 4072, completely preempts state law because it expressly confers "original exclusive jurisdiction" on the federal courts, the Sixth Circuit has previously declined to extend complete preemption to various federal laws that lack similarly-explicit language.  See, e.g., Wellons v. Northwest Airlines, Inc., 165 F.3d 493, 496 (6th Cir. 1999)(Airline Deregulation Act);  Musson Theatrical, Inc. v. Federal Express Corp., 89 F.3d 1244, 1253 (6th Cir. 1996)(same);  Strong v. Telectronics Pacing Sys., Inc., 78 F.3d 256, 259 (6th Cir. 1996)(Medical Device Amendments to Federal Food, Drug & Cosmetic Act);  Gustafson v. Lake Angelus, 76 F.3d 778, 783 (6th Cir. 1996)(Federal Aviation Act).

So, after five years of federal litigation (four of which was on appeal), the Sixth Circuit is returning the Mikulski case back to the Ohio state court where it started in December 2001.

Which brings me back to the beginning of this post.  What did the Sixth Circuit do in its en banc decision in Mikulski that was so extraordinarily rare?  It affirmed the decision of the panel majority in all respects.  This is extremely unusual because, out of all the en banc cases decided by the Sixth Circuit between January 2000 and the Mikulski rehearing in September 2006, the full Court has reversed the panel majority in every case except two:  United States v. Koch, 383 F.3d 436 (2004), where the Court granted en banc review of the prior panel decision to consider whether the Supreme Court's decision in Blakely v. Washington, 542 U.S. 296 (2004), required the Court to invalidate the United States Sentencing Guidelines on Sixth Amendment grounds, and where the Court reinstated the judgment of the panel, adopted the panel opinion as its own, and added a further opinion regarding the validity of the Sentencing Guidelines;  and Dotson v. Wilkinson, 329 F.3d 463 (6th Cir. 2003), where en banc review was granted to resolve a conflict among panels regarding state prisoner claims.  Otherwise, as the active judges of the Sixth Circuit are currently constituted, the grant of rehearing en banc almost invariably means that the panel decision will be reversed in some significant respect.

Some other interesting facts about rehearings en banc in the Sixth Circuit are noteworthy.  Chief Judge Boggs has been in the majority of every en banc decision since he became chief judge in 2004.  In 2003 (the year before he became Chief), he voted with the majority of the more liberal judges of the Court in two out of three en banc cases.  There are two identifiable groups of judges that vote together in all en banc cases.  Judges Batchelder, Gibbons and Rogers have voted together in every en banc case.  Similarly, Judges Martin, Daughtrey, Moore, Cole and Clay have sided with one another in every en banc decision, whether in the majority or in dissent.  But the two groups have never voted the same way in any en banc case.  It is too soon to draw extensive conclusions about the newer judges of the Court, Judges Sutton, Cook, McKeague and Griffin, but as "Bush 43" appointees, one may expect them to be reliably conservative and to vote most often with the Batchelder-Gibbons-Rogers bloc.  Judge Gilman, and to a lesser extent Chief Judge Boggs, "swing" between the Court's liberal and conservative camps on a case-by-case basis, although Judge Gilman appears over time to vote increasingly frequently with his more conservative colleagues.  I will have further observations and empirical information about the ideological voting patterns of the Sixth Circuit, particularly but not exclusively regarding the judges' bitter divisions in death penalty cases, in a future post.

Disclaimer:  the author of this post (i) is one of the plaintiffs-appellants' counsel in Mikulski v. Centerior, and (ii) presented the oral argument for the petitioner-taxpayer to the Supreme Court in Grable.

The De-Value of Everything

This is a law site, but many of us see baseball as a metaphor for much of life, so on his historic occasion (or at least the day after), I hope you will indulge my brief reverie.

When contemplating the most hallowed record in all of American team sports, it is interesting to reflect on the fact that Babe Ruth held the lifetime major league home run record for 53 years, and then Hank Aaron held it for 33 years more, but Barry Bonds may enjoy being the record-holder for less than 10 years.  Neither Ruth nor Aaron had a legitimate challenger so close to their home run totals at such a young age as Alex Rodriguez is to Bonds' newly-minted record.

Although Lou Gehrig was only 32 years old when Ruth retired, he was 326 home runs behind Ruth at the time, and was fated to play for only three more seasons before being fatally stricken with ALS.  Both Jimmy Foxx and Mel Ott were in their mid-to-late 20s, but each was more than 400 home runs behind Ruth and thus too far removed to be considered a serious challenger to his record at that time.

Willie Mays was only 53 home runs behind Aaron at the close of the 1973 season, but that was his last season while Aaron played three more years and broke Ruth's record in the Braves' fourth game of the 1974 campaign.  When Aaron became the all-time home run champion in April 1974, Harmon Killebrew and Frank Robinson were at the end of their careers and each was more than 130 home runs behind Aaron.  Willie McCovey was 36 years of age at the time and had barely more than 400 home runs in his career (he would finish a few years later with 521).

By contrast, A-Rod is 32 years old and already has hit 500 home runs.  He will need to amass around 280 more home runs, give or take a few, in the remainder of his career to wrest the home run title from Bonds.  That is no sure thing to hit 40 home runs a year for 7 more years as he is approaching 40 years of age.  In fact, in the history of baseball, only two men have accomplished the feat of hitting 40 or more home runs in a season that ended after their 39th birthday -- Aaron once and Bonds twice.  But neither would I bet against A-Rod, the undisputed heir apparent.

One final note that has been lost for many to the dim mists of history.  Ruth became the all-time home run king in 1921, at the very beginning of his Yankee career as an everyday player, when he hit his 132nd career home run.   The old record was held by Hall of Fame first baseman Roger Connor who played in the last two decades of the 19th Century for the National League team in New York, the Gothams.  By virtue of Connor's great stature surpassing 6 foot 3 inches and 200 pounds, the New York Gothams became forever more known as the Giants.  Connor, who is now credited by modern baseball researchers with 138 career home runs, held the lifetime home run record for more than 25 years.

Sixth Circuit Judges on Tom Goldstein's (Not So) Short List

Two sitting Sixth Circuit judges, Deborah L. Cook and Jeffrey S. Sutton, are among Tom Goldstein's short-list of 30 potential nominees for a Supreme Court appointment if a Republican administration assumes office in January 2009.  Tom's commentary in Scotusblog and the entire list can be found here.

Is LaRue Moot After All?

On June 24 we reported that the Supreme Court had granted certiorari in an important ERISA case, LaRue v. DeWolff Boberg, Case No. 06-856, on June 18.  James LaRue is a former employee of DeWolff, Boberg & Associates, Inc. who was a participant in the company's 401(k) plan.  He alleged that the plan fiduciary had failed to invest the money in his account as directed, resulting in losses to his individual account (and consequently to the plan).  But it turns out that in July 2006, while his ERISA claims to recover such losses to his individual account due to the fiduciary breach were pending in the 4th Circuit, he withdrew the entire remaining $119,000 from his account.

On July 23, 2007, over a month after the Supreme Court granted cert., Defendant's counsel moved to dismiss the case as moot, arguing that he only recently learned of these facts and that LaRue's withdrawal of all funds from his 401(k) account means he is no longer a plan participant, and thus has "no legally cognizable interest in the outcome of the case."  But the motion suggests that, even if the fact LaRue is no longer a plan participant renders the two questions presented moot, the Court may wish to consider a slightly different question on which the lower courts are also divided:  can a former plan participant in an ERISA plan sue for damages measured by the lost value of his account?  The motion to dismiss the writ, filed by Crowell & Moring, can be found here.  Lyle Denniston's post for Scotusblog regarding the motion is here.

LaRue's counsel, Peter Stris and Jean-Claude Andre, have fired back in an opposition filed with the Court on Thursday, August 2.  They argue that the statutory definition of "participant" set forth in Section 3(7) of ERISA, 29 U.S.C. 1002(7), expressly includes a "former employee . . . who is or may become eligible to receive a benefit of any type" from an ERISA plan.  Plaintiff's counsel correctly point out that the Court has held this definition to include any "former employee" who has "a colorable claim that . . . he or she will prevail in a suit for benefits."  Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117-18 (1989).  They note that while "participant" is a defined term, "former participant" is nowhere defined in ERISA.  Finally, they argue it is a false syllogism to equate a zero balance in an ERISA account with the loss of "eligibility" to receive further benefits, and maintain that LaRue's withdrawal of his funds over which there was no dispute does not mean he no longer has a personal stake or legally-cognizable interest in the outcome of the litigation.  Lyle Denniston covered petitioner's response in Scotusblog here.

I wish to emphasize another point raised in petitioner's opposition to the motion to dismiss.  Respondent's position -- that a former employee whose 401(k) account has been partially depleted through fiduciary breach must leave his remaining funds with the breaching fiduciary in order to continuing litigating to recover the monies already lost -- has been explicitly rejected by the United States Department of Labor and by every court of appeals to have addressed the issue.  See Graden v. Conexant Systems Inc., No. 06-2337, 2007 WL 2177170 (3rd Cir. 7-31-2007);  Harzewski v. Guidant Corp., 489 F.3d 799 (7th Cir. 6-5-2007).

It seems clear the Solicitor General's office will wish to weigh in on this topic since the SG urged the Court to grant cert. and rule on the Section 502(a)(2) and 502(a)(3) questions presented in part because they recur so frequently in so many cases.  The Court will take up the motion to dismiss at its "long conference" on September 24, 2007.

Follow-Up on Federal Tort Claims Act Sovereign Immunity

Jean-Claude Andre is counsel for a federal prisoner in Ali v. Federal Bureau of Prisons, Case No.  06-9130, on certiorari to the 11th Circuit, raising the question of whether the immunity attaching under the Federal Tort Claims Act applies only to law enforcement officers acting in a tax, excise or customs capacity.  The circuits are split 6-to-4 on the issue.  We thank Mr. Andre for informing us that he will be attempting to vindicate before the Supreme Court the 6th Circuit's position in Kurinsky v. United States, 33 F.3d 594 (6th Cir. 1994), a decision which is directly (and, he adds, correctly) contrary to the 11th Circuit's decision in Ali.

Whether Sovereign Immunity Bars Claim for Lost Personal Property Under Federal Tort Claims Act Will Be Heard Early in October 2007 Term

On May 29, 2007, the Supreme Court granted review of four new cases for decision during the October 2007 term, including a federal prisoner's rights case from the 11th Circuit, Ali vs. Federal Bureau of Prisons, Case No. 06-9130, which asserts a claim under the Federal Tort Claims Act (FTCA) because prison officials lost an inmate's religious and personal belongings when he was transferred from one prison to another.  The federal district court dismissed the inmate's claim on the basis that a law enforcement officer's negligence in losing an item of an inmate's personal property does not fall within the FTCA's enumerated categories of federal tort liability for which the Act waives the Government's sovereign immunity, and the 11th Circuit affirmed.

The question presented to the Court is:

Under 28 U.S.C. 2680(c), the Federal Tort Claims Act's waiver of sovereign immunity does not extend to "[a]ny claim arising in respect of . . . the detention of any goods, merchandise, or other property by any officer of customs or excise or any other law enforcement officer."

The question presented, over which ten circuits are divided six-to-four, is:

Whether the term "other law enforcement officer" is limited to officers acting in a tax, excise, or customs capacity?

Petitioner's motion to have Jean-Claude Andre of Los Angeles appointed as his counsel will be taken up at the Court's "long conference" on September 24, 2007.  The case is tentatively set for oral argument on October 29, 2007.

Supreme Court Reverses 6th Circuit's Dismissal of Parents' Rights Case

On May 21, 2007, the Supreme Court reversed the Sixth Circuit in Winkelman v. Parma City School District, Case No. 05-983, a case involving a major issue of parental rights under the Individuals with Disabilities Education Act, 20 U.S.C. 1400 et seq. (IDEA).

Winkelman revolved around Jacob Winkelman, an 8-year-old autistic boy enrolled in the public schools of Parma, Ohio, whose parents believed the school's individual educational plan for Jacob was unsatisfactory and inadequate for his needs.  His parents filed suit in the Northern District of Ohio under the IDEA.  After the district court upheld the school's plan, the Sixth Circuit dismissed the Winkelman's appeal on the grounds that the parents (neither of whom is a lawyer) were not lawfully authorized to represent their child in the litigation.

The 7-2 opinion, authored by Justice Kennedy and joined in full by Chief Justice Roberts and Justices Stevens, Souter, Ginsburg, Breyer and Alito, held that:

1.    parents of learning disabled children have enforceable rights under the IDEA to assure that such children receive a free public education that appropriately fits the child's special needs;  and

2.   the Sixth Circuit erred in dismissing the parents' appeal on the grounds of lack of counsel because a necessary consequence of the first holding that the parents enjoy rights under the IDEA is that they are entitled to prosecute the IDEA claims on their own behalf.  As a result, the Court did not reach the question of whether the IDEA entitles parents to litigate their child's claims pro se.

Justice Scalia, joined by Justice Thomas, dissented on the first point, concluding that parents do not have independent rights under the IDEA to compel a school district to provide a more appropriate educational plan for their disabled child.  According to the dissenters, parents' rights to sue on their own behalf and to act as their own counsel would be restricted to seeking reimbursement for private school expenses incurred or to enforcing procedural rights to review within the school district.  Parents could not sue without a lawyer when enforcing their child's right to an adequate educational plan.  According to Justice Scalia, the majority's recognition of independent parental rights "sweeps far more broadly than the text [of the IDEA] allows."  While such a right "obviously inheres in the child, for it is he who receives the education," "[t]he text of the IDEA makes clear that parents have no [such] right to the education itself."

The Court's opinion can be found here.  Justice Scalia's opinion concurring in the judgment and dissenting in part is here.  Lyle Denniston has an excellent post about the Court's opinions at Scotusblog here.  Scotusblog's pre-argument preview of the case is here and its argument recap is here.

Jean-Claude Andre was the successful counsel for the prevailing petitioners.  Petitioner's merit brief is here and their reply brief is here.  Although respondent's merit brief is unavailable, the BIO to certiorari is here.  The Solicitor General's amicus brief supporting petitioner's interpretation of the IDEA is here.

Disclosure:  The author of this post submitted a brief to the Supreme Court, co-authored by Tom Goldstein and Amy Howe of Scotusblog and the Stanford Law School Supreme Court Litigation Clinic, on behalf of the Ohio Coalition for the Education of Children With Disabilities and the Autism Society of Ohio as amici curiae in support of petitioners.  That brief can be found here.

Supreme Court Denies Review of Age Discrimination Claim Against Cash-Balance Pension Plan

On January 16, 2007, the Supreme Court denied cert. in Cooper v. IBM Personal Pension Plan, Case No. 06-760, a case challenging cash-balance pension plans (as they existed before the law was changed last August) as being discriminatory to older workers, leaving intact the Seventh Circuit's decision rejecting such claims on behalf of 250,000 present and former IBM employees.

Lyle Denniston has this post at Scotusblog on the Court's action in Cooper.  We will follow up in the near future with a more comprehensive summary of the current status of actions in the Sixth Circuit and other circuits around the country claiming that cash-balance pension plans violate the age discrimination prohibitions of ERISA.  Please stay tuned.

Sixth Circuit Holds Expert Witness Fees Are Not Recoverable as Costs Under Civil Rule 54(d)

On January 23, 2007, the Sixth Circuit held in L & W Supply Corp. v. Acuity, No. 05-6845 (the slip opinion posted on the Court's website can be found here), "that expert witness fees may not be taxed as costs at a court’s discretion under Rule 54(d) [of the Federal Rules of Civil Procedure] because [28 U.S.C.] § 1920 does not provide for them," and thus a successful litigant "is not entitled to recover expert witness fees (i.e., the hourly rate charged for the expert’s time and services)" but is "entitled as a matter of course to recover the witness costs provided for in [28 U.S.C.] § 1821, which are largely compensatory in nature."

The federal statute for witness fees, 28 U.S.C. § 1821, to which the Court refers provides in pertinent part:

(b)    A witness shall be paid an attendance fee of $40 per a day for each day’s attendance . . .

(c)    (1)    A witness who travels by common carrier shall be paid for the actual             expenses of travel . . .

(2)    A travel allowance . . . shall be paid to each witness who travels by privately-owned vehicle . . .

(d)    (1)    A subsistence allowance shall be paid to a witness when an overnight stay is required . . .

Our thanks to Tom Theado of the class action firm, Gary Naegele & Theado, for bringing this decision to our attention.

Weil Gotshal Publishes Survey of 2006 Securities Fraud Litigation

Our thanks to Paul Ferrillo of Weil Gotshal & Manges for alerting us to his firm's comprehensive 2006 survey of securities fraud litigation.  You can view the full publication here or download the pdf file from Weil Gotshal's website here.  Paul and his colleagues have done an excellent job, per usual.

Supreme Court Grants Cert. in Key ERISA Case

On Monday, June 18, the Supreme Court granted certiorari in LaRue v. DeWolff Boberg & Associates, Case No. 06-856, for the October 2007 term.  Responding to a CVSG (call for the views of the Solicitor General) from the Court in late February, the Solicitor General filed an amicus brief on May 22 (available here) urging the Court to grant cert. on both questions presented for review:

1.  Does Section 502(a)(2) of ERISA permit a plan participant to bring an action to recover losses caused by a fiduciary's breach but which are attributable only to his (defined contribution plan) account and not to the entire plan?

2.  Does Section 502(a)(3) of ERISA permit a plan participant to bring an action for monetary "make-whole" relief (known in equity as a surcharge) to compensate for losses directly caused by a fiduciary breach?

With respect to the first question, Section 1109 of ERISA specifies that a fiduciary "shall be personally liable to make good to such plan any losses to the plan from each such breach."  Section 502(a)(2), 15 U.S.C. 1132(a)(2), provides that a participant may bring a civil action "for appropriate relief under Section 1109."

In LaRue, the fiduciary failed to invest the petitioner's money in a 401(k) plan as he had directed, resulting in losses to his account.  The question thus boils down to, are losses to one participant's account actionable under Section 502(a)(2) as "losses to the plan" even though it affects only his one account, and not the plan as a whole or any other account within the plan?

 

The Fourth Circuit affirmed the dismissal of petitioner's claim, holding that since he seeks recovery for a loss suffered by him alone, the court was "skeptical that plaintiff's individual remedial interest can serve as a legitimate proxy for the plan in its entirety" as Section 502(a)(2) requires.

This ruling creates a conflict with every other court to have addressed the issue -- the Third, Fifth, Sixth and Seventh Circuits.  The Sixth Circuit case is Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995).  In Kuper, the court allowed a participant to sue under Section 502(a)(2) to recover losses to a defined contribution plan that were caused by fiduciary breaches even though the recovered losses were allocated only to the plaintiff's individual account and not to all accounts in the plan as a whole.

Regarding the second question, Section 502(a)(3) of ERISA authorizes a civil action by a plan participant, beneficiary or fiduciary to enjoin or to "obtain other appropriate equitable relief to redress" violations of ERISA or the terms of the plan.  In Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993), the Court held that the term "appropriate equitable relief" means "those categories of relief typically available in equity . . . but not compensatory damages."

 

Apparently, the Second and Seventh Circuits have held that Section 502(a)(3) authorizes participants to recover direct monetary losses caused by a fiduciary breach, but the Fourth, Sixth, Eighth and Ninth Circuits have held it does not.  The Sixth Circuit case is Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d 477 (6th Cir. 2001).

So, the issue is whether "make-whole" monetary relief against a fiduciary for losses caused by his breaches is authorized by Section 502(a)(3) because such relief was generally and typically available in equity -- as a "surcharge" against the fiduciary.  The import of LaRue is that a growing majority of the circuits are holding it is not authorized because such monetary relief was not available as an "equitable" remedy.

The Section 502(a)(2) issue is of considerable importance.  The Government's position is that Section 502(a)(2), along with Section 409, authorizes a plan participant to sue to recover for the plan (on the theory that recovery on behalf of an individual account will ultimately benefit the plan as a whole) any "losses to the plan" resulting from a breach of fiduciary duty.  I concur.

 

I am less convinced that the Section 502(a)(3) argument is meritorious.  The Sixth Circuit's decision in Helfrich may well be correct.  However, the United States argues that LaRue's suit seeks equitable relief because "both [his] claim, breach of fiduciary duty, and the relief he seeks, surcharge of the trustee for the losses resulting from the breach, were typically -- indeed, exclusively -- equitable in the days of the divided bench."

Since ERISA was enacted to remedy "misuse and mismanagement of plan assets by plan administrators," the United States urged the Court to grant cert. "to clarify that ERISA provides monetary remedies to recompense plans and participants who have been harmed by fiduciary breaches."

Counsel for petitioners are Jean-Claude Andre, the incredibly successful advocate who won the consolidated PLRA-exhaustion cases, Jones v. Bock (Case No. 05-7058) and Williams v. Overton (Case No. 05-7142), and the case establishing the right of parents to advocate for their disabled children under the IDEA, Winkelman v. Parma City School District (Case No. 05-983), during the October 2006 term, reversing the 6th Circuit in all three cases, and Professor Peter K. Stris of Whittier Law School.  Further information can be obtained from the petition for certiorari, BIO and reply brief.

Scotusblog has had two posts on the case located here and here.  Stephen Rosenberg of The McCormack Firm has this post on LaRue in his Boston ERISA & Insurance Litigation Blog.  Professor Paul M. Secunda of WorkplaceProfBlog has two posts on the case here and here.

Tellabs Defines "Strong Inference" for Pleading Securities Fraud Under the PSLRA -- It Could Have Been Much Worse!

We have returned after an extended hiatus occasioned by several significant hearings in April and May and back-to-back trials over the last month.  But important developments in the interim must be immediately addressed -- including those taking place at the Supreme Court during the past week.

In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. __ (6-21-2007) (slip opinion can be found here), the Court prescribed the proper understanding of the pleading requirement set forth in Section 21D(b)(2) of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. 78u-4(b)(2), that plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" -- i.e., with scienter.

The Court's opinion, which commanded a majority of six justices (Justice Ginsburg authored the opinion in which Chief Justice Roberts and Justices Kennedy, Souter, Thomas and Breyer joined), took pains to emphasize that nothing in the PSLRA "casts doubt on the conclusion 'that private securities litigation [i]s an indispensable tool with which defrauded investors can recover their losses' -- a matter crucial to the integrity of the capital markets" (slip op. at 9 n.4, quoting Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006)), and that the "twin goals" of the PSLRA were "to curb frivolous, lawyer-driven litigation, while preserving investors' ability to recover on meritorious claims."  (Slip op. at 10, 12.)

Eight justices rejected the test formerly applied by the Seventh Circuit (Justice Stevens was the lone dissenter approving the Seventh Circuit standard) that the strong inference requirement would be satisfied if a complaint "allege[d] facts from which, if true, a reasonable person could infer that the defendant acted with the required intent."  Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 602 (7th Cir. 2006)(emphasis supplied).  The Court instead established three prescriptive norms for courts ruling on Rule 12(b)(6) motions to dismiss securities fraud claims brought under Section 10(b) of the Exchange Act:

1.  courts must accept all factual allegations in the complaint as true;

2.  courts must consider the complaint in its entirety -- that is to say, "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard";  and

3.  courts must take into account plausible opposing inferences.  (Slip op. at 11.)

With respect to the third prescription, the Court explained that Congress did not merely require plaintiffs to allege facts from which an inference of scienter rationally could be drawn, but instead to plead with particularity facts that give rise to a "strong -- i.e., a powerful or cogent -- inference."  As the Court elaborated, "[t]he strength of an inference cannot be decided in a vacuum.  The inquiry is inherently comparative."  (Slip op. at 12.)

In considering both plausible non-culpable explanations for a defendant's conduct, as well as inferences favoring the plaintiff, "[t]he inference that the defendant acted with scienter need not be irrefutable, i.e., of the 'smoking-gun' genre, or even the 'most plausible of competing inferences'."  But the comparative inference of scienter must be more than merely "reasonable" or "permissible."  (Id.)  The Court held that a complaint should not be dismissed "if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged."  (Id. at 12-13.)  In other words, a court presented with a Rule 12(b)(6) motion to dismiss must ask:  "When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?"  (Id. at 14.)

The Court provided clear directions how the strong inference pleading standard should be applied in practice to screen out frivolous suits while allowing actions that may prove to be meritorious to move forward.  In rejecting Justice Scalia's more stringent interpretation, the Court observed that Justice Scalia's example ("[i]f a jade falcon were stolen from a room to which only A and B had access, [it could not] possibly be said there was a 'strong inference' that B was the thief") would in fact suffice under the Court's formulation because it was "certainly strong enough to warrant further investigation."  (Id. at 13 n.5.)  The Court also rejected Justice Alito's suggestion that the appropriate tests "used at the summary-judgment and judgment-as-a-matter-of-law stages" of a case should be transposed to the pleading stage.  The inference of scienter does not, at the pleading stage and unaided by discovery, have to be so strong a showing as would warrant a judgment or jury determination in the plaintiff's favor.  (Id.)  Instead, a plaintiff must plead facts rendering an inference of scienter "at least as likely as any plausible opposing inference."  At the subsequent trial stage, the plaintiff must satisfy her burden of proof to a preponderance of the evidence by demonstrating that "it is more likely than not that the defendant acted with scienter."  (Id. at 17.)

Finally, the Court agreed with the Seventh Circuit that even the absence of a motive allegation would not be fatal to a complaint because, since the complaint's allegations must be considered collectively, the significance of an allegation of motive (or the lack thereof) depends on the entirety of the complaint.  Even though the degree to which allegations are vague or ambiguous would diminish their strength in inferring scienter ("omissions and ambiguities count against inferring scienter"), a court should not disregard such allegations because "the court's job is not to scrutinize each allegation in isolation but to assess all of the allegations holistically."  (Id. at 14.)

In our earlier post on the Tellabs oral argument (found here), we predicted a 7-2 reversal of the Seventh Circuit.  It turned out to be an 8-1 majority for vacating the Seventh Circuit's judgment.  However, Justice Ginsburg did not eviscerate the Seventh Circuit formulation as we had feared.  In fact, the Court's test is as close to where we argued the line should be drawn as we could have hoped.  As the prior post observed:

Although Congress clearly intended to raise the bar on the pleading standard, nothing in the text of the statute or the legislative history gives any indication that it was altering the burden of persuasion in securities cases, nor that it intended to make it functionally impossible for meritorious claims to proceed to the discovery phase. It only wanted to facilitate the gatekeeping function of judges in weeding out meritless cases without imposing an onerous and expensive discovery burden on innocent defendants.

Accordingly, we advocated for what the correct standard should be:

The pleading standard both internally consistent and faithful to the statutory text is -- taking the allegations set forth in the complaint as a whole, accepting them as true, and liberally construing them in the light most favorable to plaintiff -- could a reasonable person draw a strong inference from the alleged facts and circumstances that the defendant acted with the requisite scienter?

This is essentially what the Seventh Circuit held in Tellabs:

[W]e will allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent.

Makor Issues v. Tellabs, 437 F.3d 588, 602 (7th Cir. 2006)(emphasis supplied).

The reasons supporting this interpretation of the statutory requirement of pleading facts giving rise to a strong inference of scienter were evident:

The focus on a "reasonable person" does not dilute the strong inference requirement; it does not transform the congressional requirement of a "strong inference" of scienter into a "reasonable inference" of scienter.  Rather, it merely erects an objective standard for finding a "strong inference."  Certainly, if an unreasonable or irrational person would draw a strong inference of scienter, that is not what Congress could possibly have had in mind.  Instead, examining all of the allegations in the complaint, the court must decide whether collectively they establish facts from which a reasonable person could strongly infer that each defendant acted with scienter.

We criticized the advocates, particularly Professor Miller representing the plaintiff's position in Tellabs, for not giving the Court more analytical responses to questioning during oral argument that sought to understand what percentage of probability would constitute a "strong inference" of scienter:

The statutory requirement of a "strong" inference clearly means something more than a "reasonable" inference.  So, it has to be more than the evidentiary realm where reasonable minds could differ but the totality of the evidence does not amount to a preponderance (i.e., in the 25-50% range).  In fact, without an explicit indication that Congress meant to impose a superburden or to raise the burden of persuasion in securities cases, "strong" must mean "preponderance" -- no more, no less.

Surprisingly, this is exactly the test the Court adopted in Tellabs;  "strong inference" means that the inference the defendant acted with scienter is "at least as compelling" as any inference that the defendant acted with a non-culpable state of mind.  In other words, the inference of scienter must be strong enough to advance at least to the theoretical 50% preponderance line, but it does not have to cross that line at the pleading stage.

Thus, correctly understood, the Court's only criticism of the Seventh Circuit's standard for pleading the required strong inference of scienter was the latter's missing emphasis on the "strong" part of the inference.  In effect, the Court refined the Seventh Circuit's definition from (a) pleading facts from which a reasonable person could infer the defendant acted with scienter to (b) pleading facts from which a reasonable person could strongly infer the defendant acted with scienter.  This is identical to the standard we advocated in our earlier post:  could a reasonable person draw a strong inference from the alleged facts that the defendant acted with the requisite scienter?

According to the Court, the meaning of "strongly infer" is a comparative assessment of plausible inferences, while constantly assuming the allegations of the complaint to be true, from which reasonable people would deem the inference of scienter to be at least as compelling as any opposing inference.

Now, the law recognizes as a hallmark of summary judgment jurisprudence that reasonable people can ultimately disagree about the conclusions they draw from the same evidence once the aggregate state of the evidence is strong enough to cross the theoretical evidentiary line satisfying the burden of production.  The same must be true with respect to the Tellabs test.  Once plausible inferences of culpable and non-culpable intent are considered from the allegations of a securities fraud complaint, so long as some reasonable people would conclude that the inference of scienter is at least as compelling as the opposing inference, it is to be expected that other reasonable people would disagree and conclude that the inference of scienter is not as compelling as the inference of a non-culpable state of mind.  Therefore, the degree of probability for satisfying the Court's new test would have to be that quantum of inference that is the least strong, cogent and compelling as would still lead some objectively reasonable person to conclude that the inference of scienter was at least equal in compelling force to the opposing inference.

Even though the "at least as compelling" language suggests fixing the threshold at the 50% preponderance line, the Court's focus on an objective, "reasonable person" standard means that the degree of probability to establish the necessary quantum of inferences is actually well short of the 50% preponderance line -- instead, it is the least strength from which a reasonable person could still conclude the competing inferences were in equipoise.  In other words, the inferences from the factual allegations at the pleading stage should track the extent of the proof necessary at the summary judgment stage to avoid summary judgment against the party with the burden of proof -- enough proof such that rational minds can reasonably differ as to the conclusions they draw from the facts, which means that such factual issues in dispute must be sent to the factfinder for determination.  Thus, summary judgment is properly denied even if the totality of proof is ultimately insufficient to sustain the burden of persuasion to a preponderance of the evidence.  Similarly, so long as any reasonable person would draw from the facts alleged an inference of scienter at least as compelling as the opposing inference, a motion to dismiss on the basis of an insufficient allegation of scienter should be denied.  This is true even if other reasonable persons, perhaps even the Court, would on balance conclude from the facts alleged that the innocent inferences outweigh the inferences of scienter.

Justice Alito grasped at this point in his separate concurrence in the judgment that supported Justice Scalia's construction of "strong inference" to mean something more than a preponderance of the inferences.  Justice Alito was both right and wrong when he observed that "Justice Scalia's interpretation would align the pleading test under [section] 78u-4(b)(2) with the test that is used at the summary-judgment and judgment-as-a-matter-of-law stages, whereas the Court's test would introduce a test previously unknown in civil litigation."  He is correct that the pleading test should align with the summary judgment standard by which a party's satisfaction of the burden of production will ultimately be based.  He is mistaken that the standard to be satisfied at the pleading stage of a case should be coextensive with the showing necessary to satisfy the burden of persuasion at trial.  "Preponderance of the inferences" of scienter is too great a burden for plaintiffs to meet at the pleading stage, before any discovery has been conducted, and there is nothing in the PSLRA to suggest that Congress intended plaintiffs to confront such a formidable obstacle.  But a sufficient degree of inferences as would satisfy the burden of production if they were eventually supported by proof aligns the pleading test with the summary judgment standard as Justice Alito urged, and places it exactly where it should be.

The majority correctly rejected Justice Alito's conclusions as inappropriately importing an evidentiary standard of legal sufficiency to the pleading stage, but was too quick to dismiss the more thoughtful implications of his summary judgment comparisons.

One last point.  As is well-known, in securities fraud claims the "required state of mind" or scienter refers to "a mental state embracing intent to deceive, manipulate or defraud."  Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 & n.12 (1976).  The Court observed in Tellabs that "[e]very Court of Appeals that has considered the issue has held that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or recklessly, though the Circuits differ on the degree of recklessness required."  (Slip op. at 7 n.3.)  The Court did not reach the question whether recklessness satisfies the scienter requirement and did not disturb the unanimous case law among the Courts of Appeals.  Recklessness has been defined for these purposes as conduct constituting such an extreme departure from ordinary care that, under the circumstances, it presented a danger of misleading the plaintiff that was either known to the defendant or was so obvious that the defendant must have been aware of it.  See, e.g., Ottman v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343-45 (4th Cir. 2003);  Sundstrad Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977).

Therefore, the Tellabs test in practice is -- construing the totality of the facts alleged in the complaint as a whole and accepting them as true, whether a reasonable person would deem the inference that the defendant acted either intentionally or recklessly to be at least as compelling as any plausible opposing inference a reasonable person would draw from the facts alleged.

Lyle Roberts of The 10b-5 Daily has this take on the Tellabs decision.  Tony Mauro analyzes the case here for Legal Times.  Scotusblog has two posts on the Court's opinion here and David Stras' "lingering thoughts" here.  The best reporting on the decision includes Robert Barnes of the Washington Post here and Peter Kaplan for Reuters here.  Greg Stohr has the story for Bloomberg here, and Pete Yost of the Associated Press reports on the case for BusinessWeek here.

Tellabs Redux

The Washington Post carried this story about Wednesday's oral argument in Tellabs vs. Makor Issues & Rights.  The AP reported on the pointed exchanges between Professor Arthur Miller and Justice Scalia, as did the Washington Post in a story here.

Kevin LaCroix at Oakbridge Insurance has this splendid piece explaining why the Tellabs case matters.

Meanwhile, the Law Blog of the Wall Street Journal has this post regarding the Supreme Court's decision to grant review of the Eighth Circuit's decision in Stoneridge Investment Partners v. Scientific-Atlanta, which has been called "the most important case for the securities industry in a generation."  The same article quoted William Lerach as planning to seek Supreme Court review in the wake of the Fifth Circuit's recent dismissal of his similar "scheme liability" class action on behalf of Enron shareholders.

Tellabs Argument -- Opportunities Squandered

Today's oral argument before the Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd. was as frustrating to many of the Justices as it was to this observer and a packed gallery gathered to hear the most significant case concerning the heightened pleading requirements for securities fraud claims brought under Section 10(b) of the Exchange Act and SEC Rule 10b-5 since Congress enacted the Private Securities Litigation Reform Act (PSLRA) more than a decade ago.

In response to the perceived need to curtail frivolous and abusive "strike" suits, Congress passed the PSLRA in 1995 which contained, among other provisions designed to limit meritless claims (including new lead-plaintiff requirements), a heightened burden of pleading securities fraud.  A complaint will be dismissed under Rule 12(b)(6) if it fails to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" -- viz., with scienter (intentionally or recklessly).  The "strong inference of scienter" pleading requirement is at the heart of the issues raised in Tellabs.

Carter G. Phillips of Sidley & Austin argued for Petitioners, Kannon K. Shanmugam, assistant to the Solicitor General, argued for the United States as amicus curiae, and Professor Arthur R. Miller of Harvard Law School argued for Respondents.  Jason Harrow of Scotusblog posted a preview of the Tellabs argument here and Gretchen Sund collected articles on today's argument from the Wall Street Journal and elsewhere in Scotusblog's Round-Up.  The parties' merits briefs are collected here and many of the amici briefs are here and here.  The transcript of the argument can be found here.

Although Congress clearly intended to raise the bar on the pleading standard, nothing in the text of the statute or the legislative history gives any indication that it was altering the burden of persuasion in securities cases, nor that it intended to make it functionally impossible for meritorious claims to proceed to the discovery phase.  It only wanted to facilitate the gatekeeping function of judges in weeding out meritless cases without imposing an onerous and expensive discovery burden on innocent defendants.

At this morning's argument, so many clear opportunities were missed to give the Court the straightforward guidance it was clearly seeking that I feel compelled to answer the Court's unanswered questions.  First, the Court asked both sides what the pleading standard should be in securities cases given the civil rules and the PSLRA.  Notwithstanding the Government's argument that PSLRA functionally amended the civil rules to eliminate the usual inferences and constructions on motions to dismiss, it cannot fairly be read that way nor is there support for such a reading in the legislative history.

The pleading standard both internally consistent and faithful to the statutory text is -- taking the allegations set forth in the complaint as a whole, accepting them as true, and liberally construing them in the light most favorable to plaintiff -- could a reasonable person draw a strong inference from the alleged facts and circumstances that the defendant acted with the requisite scienter.  This is essentially what the Seventh Circuit held in Tellabs:

Supreme Court Denies Cert. in Exclusionary Rule Case

In its Orders issued today, the Supreme Court denied the petition for a writ of certiorari to the Sixth Circuit In McClain v. United States, Case No. 06-160, presenting the question whether evidence may be used in a criminal case if police obtained the evidence based on a warrant that had relied, in turn, on evidence gathered in an earlier, illegal search.  The Sixth Circuit had held the evidence was admissible under a "good faith" exception to the exclusionary rule even if the evidence was obtained in violation of the Fourth Amendment.

Sixth Circuit Strikes Down Ohio Law Restricting Minors' Judicial Petitions for Abortions

The Sixth Circuit today declared facially unconstitutional the "single-petition rule" set forth in ORC 2919.121(C) -- enacted by Ohio House Bill 421 in 1998 -- that limits minors seeking a judicial bypass of the statutory parental-consent requirement to one petition per pregnancy.

If a state requires parental consent before an unemancipated minor may undergo an abortion, the Supreme Court requires the state to provide a judicial or administrative procedure so that the minor woman may bypass the consent requirement upon satisfying certain conditions.  See Bellotti v. Baird, 443 U.S. 622, 643-51 (1979);  Lambert v. Wicklund, 520 U.S. 292, 295 (1997).

In Cincinnati Women's Services v. Taft, Case No. 05-4174, a panel comprised of Circuit Judges Cole, Gibbons and Rogers held that Ohio's "single-petition rule" constitutes an undue burden under the large-fraction test of Planned Parenthood v. Casey, 505 U.S. 833, 878, 894-95 (1992).  But the Court upheld the "in-person rule" requiring women seeking abortions to attend an in-person meeting with a physician, for informed-consent purposes, at least 24 hours prior to receiving the abortion.

Thanks to Howard Bashman's How Appealing for posting on the case here.  The State of Ohio's brief in the case can be found here.

Supreme Court Hears Arguments in Three Sixth Circuit Cases

The Supreme Court began its November argument calendar on Monday, October 30, with three cases from the Sixth Circuit -- Osborn v. Haley, Case No. 05-593, and consolidated argument in Jones v. Bock, Case No. 05-7058, and Williams v. Overton, Case No. 05-7142.

With respect to the first argument, the Sixth Circuit had issued its opinion in Osborn v. Haley, 422 F.3d 359 (6th Cir. 2005), on September 8, 2005, in a case originally filed in the Western District of Kentucky.  A full description of the factual background of the case appears in an argument preview at Scotusblog from Friday, Oct. 27, here.  Ross Runkel's blog, LawMemo, has a post about Osborn here and a prior commentary about the case here.

As explained in greater detail in the cited posts, when a federal employee is sued in a civil action in state court, the Westfall Act, 28 U.S.C. 2679(d)(2), authorizes the Attorney General to remove the action to federal court, and to substitute the United States as the party defendant in place of the employee, by certifying that "the defendant employee was acting within the scope of his office or employment at the time of the incident out of which the claim arose."  The petition for certiorari had presented the following two questions:

1.  Whether the Westfall Act authorizes the Attorney General to certify that the employee was acting within the scope of his office or employment at the time of the incident solely by denying that such incident occurred at all.

2.  Whether the Westfall Act forbids a district court to remand an action to state court upon concluding that the Attorney General's purported certification was not authorized by the Act.

In granting certiorari, the Supreme Court directed the parties to brief and argue the following additional question:

3.  Whether the court of appeals had jurisdiction to review the district court's remand order, notwithstanding 28 U.S.C. 1447(d).

Petitioner's merits brief can be found here and its reply brief here.  The Government's merits brief is here.  The merits brief of Respondents Gay Verdi and Land Between the Lakes Association is here.

Scotusblog has a recap of the argument here.  The Court's transcript of the argument appears here.

The second, 11:00 a.m. consolidated argument in Jones v. Bock and Williams v. Overton involved the scope of the exhaustion-of-remedies requirement under the Prison Litigation Reform Act.  A third Sixth Circuit case, Walton v. Bouchard, was joined with Williams at the Sixth Circuit and was also argued to the Supreme Court.  The Sixth Circuit affirmed the dismissal of each case for failing to satisfy the exhaustion requirement in three unreported opinions.  See Jones v. Bock, 135 Fed. App. 837 (6th Cir. 6-15-2005);  Williams v. Overton, 136 Fed. App. 859 (6th Cir. 6-22-2005);  Walton v. Bouchard, 136 Fed. App. 846 (6th Cir. 6-17-2005).

Questions Presented in Case No. 05-7058:

1.  Whether satisfaction of the PLRA' s exhaustion requirement is a prerequisite to a prisoner's federal civil rights suit such that the prisoner must allege in his complaint how he exhausted his administrative remedies (or attach proof of exhaustion to the complaint), or instead, whether non-exhaustion is an affirmative defense that must be pleaded and proven by the defense.

2.  Whether the PLRA prescribes a "total exhaustion" rule that requires a federal district court to dismiss a prisoner's federal civil rights complaint for failure to exhaust administrative remedies whenever there is a single unexhausted claim, despite the presence of other exhausted claims.

Questions Presented in Case No. 05-7142:

1.  Whether the PLRA requires a prisoner to name a particular defendant in his   or her administrative grievance in order to exhaust his or her administrative   remedies as to that defendant and to preserve his or her right to sue them.

2.  Whether the PLRA prescribes a "total exhaustion" rule that requires a federal   district court to dismiss a prisoner's federal civil rights complaint for failure to   exhaust administrative remedies whenever there is a single unexhausted   claim, despite the presence of other exhausted claims.

Scotusblog's preview of the argument appears here.  The parties' briefs may be found here. LawMemo's post on the cases is here.  The Court's transcript of the oral argument is located here.

New Ethics Rules May Restrict Lawyers' Blogs (Blawgs)

In a development that has many lawyers across the country wondering whether we are on the precipice of radical changes in multiple jurisdictions, New York has proposed new ethics rules which would place significant restrictions on lawyers' web logs (blogs or, more colloquially, blawgs), websites and e-mail communications.  The rule changes would require all electronic communications to carry the word "ADVERTISEMENT."  The definition of "advertisement" would also be revised to include "any public communication made by or on behalf of a lawyer or law firm about a lawyer or law firm, or about a lawyer's or law firm's services."  See Section 1200.1(k) of the New York Ethics Rules.

Specifically, Section 1200.6 of the New York Ethics Rules, corresponding to DR 2-101 of the Code of Professional Responsibility, adds subparagraph (h) which provides, in pertinent part, that "computer-accessed communications" shall be labeled "Attorney Advertising" on the first page.  In the case of electronic mail, the subject line must contain the notation "ATTORNEY ADVERTISING."  New Section 1200.1(m) defines "computer-accessed communication" to mean:

any advertisement or solicitation that is disseminated through the use of a computer or other electronic device, including, but not limited to, web sites or pages, search engines, electronic mail, banner advertisements, pop-up advertisements, chat rooms, list servers, instant messaging, domain names, or other internet presences, and any attachments or links related thereto.

In addition to the broad definition of "advertisement" set forth above, the new rules correspondingly expand the definition of "solicitation" to include:

any advertisement or other communication directed to or targeted at a specific recipient or group of recipients, including a prospective client, or a family member or legal representative of a prospective client, concerning the availability for professional employment of a lawyer or law firm.

Section 1200.1(l).  All of the new ethics rules proposed in New York may be found here.

In addition to blogs and e-mails, query whether the new rules would also apply to extranets and virtual private networks (VPNs) that many law firms maintain for their lawyers and clients?  Stay tuned for further developments and elucidation in this emerging area of ethics issues and requirements.

Election Law Case Scheduled for En Banc Hearing

On December 6, 2006, the Sixth Circuit sitting en banc will hear arguments in an important election law case debating the precedential value of the Supreme Court's controversial 5-4 decision in Bush v. Gore, 531 U.S. 98 (2000)(per curiam), that decided the 2000 presidential election.

White and black voters in Summit and Sandusky Counties (in northern Ohio) and in Hamilton and Montgomery Counties (in southern Ohio) brought suit in the Northern District of Ohio for declaratory and injunctive relief, alleging inter alia that (i) the use of unreliable voting equipment (including punch card ballots) in some Ohio counties but not in others violated certain voters' rights under the Equal Protection Clause of the Fourteenth Amendment, and (ii) the use of punch card voting systems in Hamilton, Montgomery and Summit Counties had a disparate impact on African-American voters in violation of Section 2 of the Voting Rights Act of 1965.

In Stewart v. Blackwell, 356 F. Supp.2d 791 (N.D. Ohio 2004), Judge Dowd found in favor of Defendants, Secretary of State (current candidate for Governor) Ken Blackwell and others, holding that (i) the use of punch card ballots in Hamilton, Montgomery and Summit Counties did not violate the Due Process Clause, the Equal Protection Clause or the Voting Rights Act, and (ii) the use of optical-scan technology to count votes in Sandusky County did not violate the equal protection rights of voters.

On April 21, 2006, a divided panel of the Sixth Circuit reversed, Stewart v. Blackwell, 444 F.3d 843 (6th Cir. 2006), with Judges Martin and Cole in the majority, holding that the selective use of unreliable punch card ballots in some Ohio counties violates the Equal Protection Clause under the holding of Bush v. Gore.  Judge Gilman dissented, relying on a law review article by noted election law scholar Professor Richard L. Hasen, Bush vs. Gore and the Future of Equal Protection Law in Elections, 29 FSU L. Rev. 377 (2001), to conclude that Bush v. Gore should not be applied as valid precedent.  The dissent applied the standard of Burdick v. Takushi, 504 U.S. 428 (1992), to find that there is no equal protection problem with the selective use of punch card voting procedures.  On July 21, 2006, the Court vacated the panel opinion and granted en banc review.

Professor Hasen's posts on his blog, Election Law, regarding the panel opinion are here and here.  His update when the Court granted rehearing en banc is here.  Howard Bashman has another comment on the panel opinion in his blog How Appealing located here.  Professor Dan Tokaji, co-counsel for the prevailing parties who made the oral argument to the panel, has this post at his Equal Vote blog.

Professor Hasen has stated that, if the Supreme Court were to take any Bush v. Gore-type cae in the near future, "it is likely to be Stewart v. Blackwell, if the en banc court reaches the same decision as the three-judge Sixth Circuit panel holding that the selective use of punch card ballots in only part of a jurisdiction violates equal protection under Bush v. Gore."

The en banc argument on December 6 will begin at 2:00 p.m. in Courtroom 403.

Supreme Court Grants Cert. in Cases Involving Circuit Splits Where Sixth Circuit is in the Majority

In its September 26 Orders granting certiorari in nine cases for decision this term, the Supreme Court has accepted for review two issues involving deep circuit splits in which the Sixth Circuit has been in the majority.

First, in Case No. 06-84, Safeco Insurance v. Burr, and Case No. 06-100, General Insurance v. Edo, the Court has granted cert. in two Fair Credit Reporting Act ("FCRA") cases from the Ninth Circuit.  A conflict exists between the 4th, 5th, 6th, 7th and 8th Circuits on the one hand, and the 3rd and 9th Circuits on the other, over the mens rea required for a "willful" violation of FCRA.

In Safeco, the 9th Circuit held a defendant can be found liable for a "willful" violation upon a finding of "reckless disregard" for FCRA's requirements, in conflict with the other circuits which require the defendant's actual knowledge that its conduct violates FCRA.  In General, the 9th Circuit held a defendant may be deemed to have acted recklessly, and thereby "willfully" under FCRA, if the company relied on "unreasonable," "implausible" or "untenable" interpretations of FCRA even if they derived from a legal opinion the company sought in good faith for the very purpose of ensuring compliance with the law.

The two questions presented are:

1.  Whether the Ninth Circuit's construction of "willfully" under section 1681n of FCRA impermissibly permits a finding of willfulness to be based upon nothing more than negligence, gross negligence, or a completely good-faith but incorrect interpretation of the law, and upon conduct that is objectively reasonable as a matter of law, rather than requiring proof of a defendant's knowledge that its conduct violated FCRA or, at a minimum, recklessness in its subjective form?

2.  Whether the Ninth Circuit improperly expanded section 1681n of FCRA by holding that an "adverse action" has occurred and notice is required thereunder, even when a consumer's credit information has had either no impact or favorable impact on the rates and terms of the insurance that would otherwise have been offered or provided?

Second, in Case No. 06-102, Sinochem International v. Malaysia International Shipping Corp., a divided panel of the 3rd Circuit held a district court must first conclusively determine it has personal jurisdiction over a defendant before it may dismiss the suit on forum non conveniens grounds.  The 3rd Circuit acknowledged that its holding was inconsistent with the interests of judicial economy, recognized that its decision deepened an already existing 2-4 split among the circuits, and invited the Supreme Court's review of the issue.

The question presented for review is:

Whether a district court must first conclusively establish jurisdiction before dismissing a suit on the ground of forum non conveniens?

None of these cases has yet been scheduled for argument, although it seems probable they will appear on the February or March argument calendar.

New Sixth Circuit Rules

The Sixth Circuit has voted to amend Sixth Circuit Rule 28(g), permitting the citation of unpublished opinions, to conform to the amended FRAP 32.1.  The Court notifies interested parties that they have until December 20, 2006 to comment on the proposed changes by mail or e-mail addressed to Hon. Leonard Green, Clerk of the Court.

Death Penalty Arguments Next Week

In a week with an exceptionally heavy oral argument calendar, four cases stand out for special attention by the Court:

1.  Monday afternoon, October 30, the Sixth Circuit will hear oral arguments on the appeal of a Kentucky inmate sentenced to death following his 1992 conviction on two counts of murder from the summary dismissal of his habeas corpus petition by Judge Reeves (E.D. Ky.) on Younger abstention grounds.  Bowling v. Haeberline, Case No. 03-5681, 2:00 p.m., Courtroom 636 (30 minutes per side).

2.  Tuesday afternoon, October 31, the Sixth Circuit will hear the appeal from the denial of habeas corpus by Judge Polster (N.D. Ohio) for an Ohio inmate sentenced to death following his 1987 three-judge conviction for aggravated murder.  Haliym v. Mitchell, Case No. 04-3207, 2:30 p.m., Courtroom 636 (30 minutes per side).

3.  Thursday afternoon, November 2, the Court will hear oral arguments in Bonnell v. Mitchell, Case No. 04-3301, 1:45 p.m., Courtroom 636 (30 minutes per side).  Petitioner, an Ohio inmate sentenced to death following his jury conviction for aggravated murder, appeals from the decision of Judge Katz (N.D. Ohio) denying his habeas corpus petition.

4.  Thursday afternoon, November 2, the Sixth Circuit hears argument in an appeal by a Tennessee inmate sentenced to death for first-degree murder whose request for habeas relief was denied by Judge McCalla (W.D. Tenn.) -- this case is on remand from the United States Supreme Court.  Cone v. Bell, Case No. 99-5279, 3:00 p.m., Courtroom 403 (30 minutes per side).

Sixth Circuit Stays Implementation of Judge Taylor's Order Permanently Enjoining NSA Warrantless Surveillance Program

We have previously posted on the August 17 opinion by Judge Anna Diggs Taylor (E.D. Mich.) declaring the NSA's domestic wiretap and surveillance program unconstitutional and in violation of FISA and Title III.  Her decision has been the subject of considerable criticism from political as well as legal circles.  The Government appealed Judge Taylor's ruling to the Sixth Circuit (Case No. 06-2095).

On October 4, a panel of the Court (Circuit Judges Batchelder, Gilman and Gibbons) issued an Order unanimously granting the Government's request for a stay of Judge Taylor's injunction pending the appeal.  Thus, the district court order enjoining the Government from conducting the NSA Terrorist Surveillance Program ("TSP") in any way that would contravene FISA and Title III, "including . . . conducting warrantless wiretaps of telephone and internet communications," was stayed pending the outcome of the Sixth Circuit's consideration of the merits.

While many commentators have suggested that the import of the Court's stay is that it supposedly presages the panel's intention to reverse Judge Taylor on the merits, the most intriguing aspect of the panel's Order is its use of the standard for stays pending appeal taken from Grutter v. Bollinger, 247 F.3d 631, 633 (6th Cir. 2001), and Michigan Coalition of Radioactive Material Users v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991).

The Grutter/Michigan Coalition test allows a stay to be granted, even if the party requesting the stay has not demonstrated the traditional "substantial likelihood" of success on the merits, if it can show that the irreparable harm to it from the underlying order absent a stay would outweigh any potential harm to the nonmoving party if the stay were granted.  In this fashion, the greater the harm that is shown, the less likely a party's success on the merits has to be.  Thus, the degree of "success on the merits" that must be demonstrated is "inversely proportional to the harm."  If the harm to a moving party "decidedly outweighs" any potential harm to the nonmoving party if a stay is granted, then all the moving party must show at a minimum are "serious questions going to the merits" rather than a "substantial likelihood of success on the merits."

The panel found the more lenient Grutter/Michigan Coalition standard "has been met in this case."  That does not necessary signal the panel's conclusions on the merits beyond findng that the appeal raises serious questions regarding the merits.  It more probably reflects the panel's determination that the potential harm to the Government's efforts to fight terrorism from denying the stay and leaving the injunction against the TSP in force decidedly outweighs any harm to the plaintiffs or the public from granting the stay.  The panel's Order granting a stay pending appeal is not necessarily the broader prediction of the eventual outcome of the case that critics of Judge Taylor's opinion wish it were.

Supreme Court Denies Cert. in Sixth Circuit Case

On October 2, the Supreme Court denied certiorari in Case No. 06-38, Detroit Entertainment LLC v. Romanski.  A jury found that respondent had been arrested at a casino without probable cause and awarded her compensatory and punitive damages under 42 U.S.C. 1983.  The Sixth Circuit held, based on a provision of Michigan law, that the actions taken by the casino and one of its security guards constituted "state action" subjecting them to liability under section 1983.

The questions presented by the petition were:

1.  Has the Sixth Circuit fundamentally departed from this Court's state action jurisprudence, faithfully applied by other circuits, holding that private conduct that is contrary to state policy does not constitute "state action" for purposes of 42 U.S.C. 1983?

2.  Did the Sixth Circuit err in holding, contrary to decisions of other circuits and the Michigan Supreme Court, that an arrest by a private party constitutes state action?

Romanski is the only case from the Sixth Circuit on the Court's conference schedule thus far during the new 2006 term.

Neither Disgorgement Damages Nor Punitive Damages May be Aggregated to Satisfy Amount in Controversy Requirement

After having been away for two months due to a variety of factors (en banc argument in Sixth Circuit, Jewish high holy days, daughter's wedding), we are more than ready to climb back into the saddle with a review of important developments within or affecting the Sixth Circuit since the end of August.

The first concerns an important issue of federal diversity jurisdiction, both original and removal, currently relevant to multi-plaintiff and class-action cases where the damage claims do not exceed $5 million.  Federal courts may exercise diversity jurisdiction only where, among other things, the matter in controversy exceeds the sum of $75,000 exclusive of interest and costs.  See 28 U.S.C. 1332.  This requirement that the matter in controversy in a diversity case must exceed a specified amount, currently $75,000, is "[t]o ensure that diversity jurisdiction does not flood the federal courts with minor disputes."  Exxon Mobil Corp. v. Allapattah Services, 545 U.S. __, 125 S. Ct. 2611, 2617 (2005).  While a single plaintiff may aggregate the value of as many claims as she may have against the same defendant(s) in order to satisfy the amount-in-controversy requirement, even if the claims have nothing in common except the identity of the parties, the same is not true with respect to multiple plaintiffs.

For 175 years, since the Supreme Court's seminal decision in Oliver v. Alexander, 31 U.S. 143 (1832), multiple plaintiffs with separate and distinct claims have not been permitted to aggregate their respective "amounts in controversy" to satisfy the jurisdictional amount requirement.  Even in the class action context, the Court has allowed multiple plaintiffs to aggregate their compensatory damage claims only where they "unite to enforce a single title or right in which they have a common and undivided interest."  Snyder v. Harris, 394 U.S. 332, 335 (1969);  see also Zahn v. Int'l Paper Co., 414 U.S. 291, 294 (1973), superseded on other grounds by statute, Judicial Improvements Act of 1990, Pub. L. No. 101-650, 104 Stat. 5089, sec. 310.

Four telephone customers living in Ohio and Michigan brought a class action (prior to the enactment of the Class Action Fairness Act (CAFA), Pub. L. No. 109-2, 119 Stat. 4, 9 (2-18-05), codified at 28 U.S.C. 1332(d)(2)) against their respective wireless service providers alleging they falsely represented to customers that there would be no charge for phone calls which were unanswered or rang busy.  Seeking compensatory and punitive damages, injunctive relief, restitution and disgorgement for unjust enrichment, the plaintiff class sued in Ohio state court and the defendants removed the case to federal district court on diversity grounds.  The Northern District of Ohio denied the plaintiffs' remand motion based on its conclusion that the damages alleged by the disgorgement claim alone exceeded $75,000 in the aggregate.  The only remaining defendant, Dobson Cellular Systems, thereafter recovered summary judgment in its favor, and plaintiffs appealed the remand order to the Sixth Circuit, arguing that the district court never had valid diversity jurisdiction over the case.

In Everett v. Verizon Wireless, Inc., 2006 Fed. App. 0324p, 2006 U.S. App. LEXIS 21931 (6th Cir. 8-28-06), the Sixth Circuit held that the district court erred in aggregating plaintiff's disgorgement claims.  The Court rejected three of Dobson Cellular's arguments supporting aggregation and determined it need not decide the fourth:

1.  Understanding that it had to show plaintiffs had "unite[d] to enforce a single title or right in which they have a common and undivided interest," Dobson Cellular relied on the plaintiffs' unjust enrichment claim to argue that plaintiffs' request for disgorgement of its ill-gotten gains would mean the imposition of a constructive trust and the creation of a "common fund" in which all plaintiffs share an interest.  However, the Sixth Circuit ruled that the required "common and undivided interest" exists only when the defendant owes an obligation to the group of plaintiffs as a group and not to the individuals severally:

Aggregation is permitted "where there is not only a common fund from which the plaintiffs seek relief, but where the plaintiffs also have a joint interest in that fund, such that if plaintiffs' rights are not affected by the rights of co-plaintiffs then there can be no aggregation.  In other words, the obligation to the plaintiffs must be a joint one."

Everett, supra, at *12, quoting Eagle Star Ins. Co. v. Maltes, 313 F.2d 778, 781 (5th Cir. 1963) (emphasis supplied and citations omitted).  In other words, the "common fund" exception does not permit plaintiffs to aggregate their claims whenever they share a proprietary interest in the proceeds of litigation;  it permits them to aggregate claims only when they jointly own, or have an undivided interest in, the property at issue in the litigation.  "Plaintiffs suing to enforce a 'single title or right' must share their 'common and undivided interest' in vindicating that right before the litigation, not as a result of it."  Id. at *14, citing Gilman v. BHC Sec., 104 F.3d 1418, 1424, 1430 (2nd Cir. 1997).

2.  Dobson Cellular also argued that there was a "collective action" exception to the non-aggregation principle, on the supposed basis that the class as a whole had an undivided interest in the disgorgement claim because the class members brought it "in addition to" their compensatory damages claims.  The Sixth Circuit found this argument to be without merit for three reasons, including (i) the fact that, under Ohio law, unjust enrichment claims are in the alternative rather than in addition to plaintiffs' compensatory damages contract claims (citing Rice v. Wheeling Dollar Sav. & Trust Co., 155 Ohio St. 391, 396-97 (1951) and All Occasion Limousine v. HMP Events, 2004-Ohio-5116), and (ii) there is no logical reason why the nature of the disgorgement remedy alters the underlying rights plaintiffs are seeking to vindicate, and thus why the rule should be different in this circumstance.

3.  Consistent with extensive case law from many other circuits, the Court held that multiple plaintiffs likewise may not aggregate punitive damages to meet the amount-in-controversy requirement when they do not share a "joint or common interest or title" in the suit.

4.  Finally, the Court addressed the last theory offered by Dobson Cellular to support removal jurisdiction -- the monetary cost of complying with plaintiffs' request for injunctive relief was sufficient to satisfy the jurisdictional amount.  It is well-settled that the costs of complying with an injunction may establish the amount-in-controversy.  See Hunt v. Washington State Apple Adver. Comm'n, 432 U.S. 333, 347 (1977);  McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 181 (1936).  However, as the Sixth Circuit had previously remarked, "there is a circuit split as to whether a court may determine the amount in controversy from the perspective of either party (the 'either viewpoint rule') or whether a court may only consider the plaintiff's viewpoint."  Olden v. Lafarge Corp., 383 F.3d 495, 503 n.1 (6th Cir. 2004).  As in Olden, the Court determined that it need not decide the issue because Dobson Cellular had failed to show any evidence in the record demonstrating that the costs of complying with the requested injunctive relief would probably exceed $75,000.

For class action suits filed after February 18, 2005, CAFA raises the jurisdictional amount requirement to $5 million and specifically authorizes the aggregation of individual claims to meet the increased amount-in-controvery requirement.  See 28 U.S.C. 1332(d)(2), 1332(d)(6).  Thus, the decision in Everett v. Verizon Wireless supplies the rule of decision in non-class multi-plaintiff cases, and in those class actions not governed by the provisions of CAFA.

Thanks to Tom Theado for bringing this case to our attention.

More on Domestic Spy Program

Lyle Denniston has this post in Scotusblog on the NSA spy program declared unconstitutional last week by Judge Anna Diggs Taylor.  Our post on the decision can be found here.

Scotusblog also has a round-up of other commentaries on the NSA wiretap ruling here.

Finally, Denniston provides his analysis of U.S. District Judge Gladys Kessler's 1742-page ruling on August 17 that the tobacco industry violated RICO in this post also in Scotusblog.

More on Eminent Domain and Norwood vs. Horney

Our thanks to Jason Harrow of Scotusblog for pointing out Ilya Somin's op-ed piece in Legal Times regarding the status of eminent domain after Kelo and the Ohio Supreme Court's recent decision in Norwood vs. Horney.

Sixth Circuit Upholds Certification of a State-Wide Express Warranty Class, Finding No Abuse of Discretion Where Class Potentially Includes Members Who Suffered No Injury

In a Rule 23(b)(3) class action filed in the Southern District of Ohio, the class seeks damages against Ford Motor Company for a defective throttle assembly that allegedly causes the accelerator to stick in some 1999 and 2000 Mercury Villager minivans.  The district court certified a class of all Ohio residents who owned or leased those vehicles during the initial express warranty period, thus potentially including in the class some number of owners and lessees who never actually experienced the problem.

On interlocutory appeal of the class certification order under Rule 23(f), the Sixth Circuit held that certifying a state-wide class to litigate the express warranty claims was not an abuse of the district court's discretion because the class and the named plaintiffs satisfied the criteria of Rules 23(a) and 23(b)(3).

The Court's decision in Daffin v. Ford Motor Company, Case No. 05-3545, filed on August 18, 2006, may be found here.

Sixth Circuit Requires Disclosure of Attorney Work Product Provided to Expert Witnesses

In a ruling of first impression in the Sixth Circuit on whether attorney opinion work product given to expert witnesses is discoverable under Rule 26 of the Federal Rules of Civil Procedure, the Court joined the Federal Circuit and a majority of district courts in holding that the expert disclosure requirements of Rule 26(a)(2)(B) establish a "bright-line" rule mandating the disclosure of all documents given to testifying experts, specifically including attorney opinion work product.

In affirming the discovery order of the Western District of Kentucky in Regional Airport Authority of Louisville and Jefferson County v. LFG, LLC, Case No. 05-5754 (6th Cir. Aug. 17, 2006), the Court expressly relied on the text of Rule 26(a)(2)(B) as amended and on the Advisory Committee Notes from the 1993 amendments to the Civil Rules that added the expert disclosure requirements.

Rule 26(a)(2)(B) as amended requires that, for any "witness who is retained or specially employed to provide expert testimony in the case," the parties are required to disclose, inter alia, "the data or other information considered by the witness in forming the opinions."

Since the 1993 amendments two distinct lines of cases had formed that reached opposite conclusions.  The first, beginning with Haworth Inc. v. Herman Miller Inc., 162 F.R.D. 289, 292-96 (W.D. Mich. 1995), held that attorney work product is not discoverable merely because it had been shared with a testifying expert.  The district court in Haworth concluded that the expert disclosure provisions added by the 1993 amendments did not alter the pre-amendment rule that attorney opinion work product disclosed to testifying experts was immune from discovery.  The Haworth decision was based on the venerable principle of Hickman v. Taylor, 329 U.S. 495, 510-12 (1947)(work product doctrine generally protects from disclosure documents prepared by or for an attorney in anticipation of litigation or for trial), and pre-amendment Sixth Circuit precedent in Toledo Edison Co. v. GA Techs., Inc., 847 F.2d 335, 339-41 (6th Cir. 1988)(Rule 26 categorically excludes the discovery of opinion work product even when provided to testifying experts).  As Haworth stated, "[f]or the high privilege accorded to attorney opinion work product not to apply would require clear and unambiguous language in the statute."  162 F.R.D. at 295.  Finding none, the district court in Haworth declined to depart from the doctrine of absolute privilege that traditionally attached to attorney opinion work product.

The second line of cases, including In re Pioneer High-Bred Int'l. Inc., 238 F.3d 1370, 1375 (Fed. Cir. 2001), adopted the contrary view that the 1993 amendment to Rule 26 created a bright-line rule requiring disclosure of all information provided to testifying experts.

The Sixth Circuit determined that the text of Rule 26(a)(2)(B) requires adherence to the second line of cases mandating disclosure, and that, while Rule 26(b)(3) imposes certain limitations on discovery rights and procedures available under the civil rules, it does not address the mandatory disclosure obligations established by the 1993 amendments.

The Sixth Circuit held as follows:

The bright-line approach is the majority rule, represents the most natural reading of Rule 26, and finds strong support in the Advisory Committee Notes.  Therefore, we now join the "overwhelming majority" of courts . . . in holding that Rule 26 creates a bright-line rule mandating disclosure of all documents, including attorney opinion work product, given to testifying experts.

The panel opinion in Regional Airport Authority can be found here.

Domestic Spying Program Declared Unconstitutional; Government Plans Appeal to Sixth Circuit

In a strongly-worded and broadly-based rebuke of a cornerstone of the Administration's war on terror, U.S. District Judge Anna Diggs Taylor today issued an opinion declaring the Terrorist Surveillance Program (TSP) implemented by the National Security Agency (NSA) to be unconstitutional and in violation of federal law.  Her permanent injunction orders the NSA to cease operating the TSP in any way, including warrantless wiretaps of telephone and internet communications, that contravenes the requirements and safeguards for electronic surveillance imposed by Title III of the Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. 2510 et seq., and the Foreign Intelligence Surveillance Act of 1978, 50 U.S.C. 1801 et seq. (FISA).

The action was filed in the Eastern District of Michigan by the ACLU and a group of organizations and individuals who contend that they regularly communicate by telephone and e-mail with persons abroad, including in the Middle East, for entirely legitimate reasons relating to their practice of law, journalism and scholarship.  The plaintiffs allege they have been subjected to the covert, warrantless interception or monitoring of such international communications, violating their rights and chilling their constitutionally  protected communications.  Since persons abroad who formerly spoke with them will no longer do so, the plaintiffs argue they have been stifled in their ability to conduct research and scholarship, talk with sources, interact with clients and, in the case of those plaintiffs who are attorneys, locate witnesses and provide effective and ethical reperesentation to their clients.

The Government argued that dismissal was required by the so-called "state secrets" privilege because the plaintiffs could establish neither their own standing to sue (i.e., whether they had actually been the targets of the covert wiretapping and monitoring they suspect) nor the elements of their claims without the use of confidential information in the hands of the Government that constitute state secrets.  Moreover, the Government argued that it could not defend its programs as being both necessary to the national defense and in compliance with constitutional and statutory standards without revealing state secrets.

In Tenenbaum v. Simonini, 372 F.3d 776, 777 (6th Cir. 2004), the Sixth Circuit affirmed the dismissal of discrimination claims against federal agencies because they could not defend themselves "without disclosing information protected by the state secrets doctrine."  Other district courts have invoked the doctrine to dismiss challenges to various aspects of the war on terror.  In one such recent case, Terkel v. AT&T Corp., 2006 WL 2088202 (N.D. Ill. 07-25-06), Studs Terkel and the other plaintiffs alleged that their wireless service provider, AT&T, turned over to the NSA confidential information regarding their telephone calls and internet communications.  District Judge Matthew Kennely dismissed the case on the ground that the state secrets privilege made it impossible for the plaintiffs to establish standing.

However, like District Judge Vaughn Walker in Hepting v. AT&T Corp., 2006 WL 2038464 (N.D. Cal. 6-20-06), Judge Taylor rejected the state secrets argument.  She found that the Government has on many occasions admitted and confirmed that:

1.  the TSP exists and has existed since 2002;

2.  it operates without warrants;  and

3.  it targets communications where one party is outside the United States, and the government has a reasonable basis to conclude that one party is a member of al-Qaeda, affiliated with al-Qaeda, a member of an organization affiliated with al-Qaeda, or working in support of al-Qaeda.

Indeed, in his December 17, 2005 radio address, President Bush disclosed:

In the weeks following the terrorist attacks on our nation, I authorized the National Security Agency, consistent with U.S. law and the Constitution, to intercept the international communications of people with known links to al Qaeda and related terrorist organizations.

The court ruled that the NSA's warrantless wiretaps violated the plaintiffs' free speech and privacy rights embodied in the First and Fourth Amendments to the Constitution.  The decision also concluded that the TSP program violated the constitutional separation of powers doctrine and FISA, noting that FISA (like Title III) permits delayed applications for warrants after surveillance has already begun.

Judge Taylor rejected the Government's arguments that (i) Congress' Authorization for Use of Military Force on September 18, 2001, Pub. L. 107-40, 115 Stat. 224, 50 U.S.C. 1541, granted the President the power to conduct the TSP in violation of FISA and the Constitution, and (ii) the designation of the President as Commander in Chief of the Army and Navy grants him the inherent power to violate laws enacted by Congress and the Constitution whenever he deems it necessary to the national defense.  The court noted that the same "inherent powers" argument had been unsuccessfully raised before in the Steel Seizure Case, Youngstown Sheet & Tube v. Sawyer, 343 U.S. 579 (1952), and that "since Ex parte Milligan [71 U.S. (4 Wall.) 2, 120 (1866)], we have been taught that the 'Constitution of the United States is a law for rulers and people, equally in war and in peace . . .' "

Judge Taylor's opinion concludes with a message and a challenge:  "Plaintiffs have prevailed, and the public interest is clear . . . It is the upholding of our Constitution.  As Justice Warren wrote in U.S. v. Robel, 389 U.S. 258, [264] (1967):

Implicit in the term 'national defense' is the notion of defending those values and ideas which set this Nation apart.  . . . It would indeed be ironic if, in the name of national defense, we would sanction a subversion of . . . those liberties . . . which makes the defense of the Nation worthwhile."

The NSA's public information statement on the TSP sets forth several justifications for the program.

The Justice Department will apparently ask Judge Taylor for a stay of her injunction order pending its appeal to the Sixth Circuit.

Jurist News has a story on Judge Taylor's ruling here.  AP also has a story on the wires here.

Presidential Signing Statements Redux: The Debate Intensifies

Eight distinguished lawyers and law professors who formerly served in the Justice Department's Office of Legal Counsel have now weighed in on the debate raging over the legality of President Bush's use of presidential signing statements.  The group, including former Solicitor General Walter Dellinger and Harvard Law Professor David Barron, have expressed their views in a comprehensive collaborative post appearing last week in the Georgetown Law Faculty Blog.

More on Presidential Signing Statements: Prof. Tribe Takes Issue with ABA Report

Harvard Law School Professor Laurence Tribe has this thoughtful guest post in Balkinization criticizing the recent Report and Recommendation of the ABA Task Force on Presidential Signing Statements and the Separation of Powers Doctrine submitted to the ABA House of Delegates at the Annual Meeting in Honolulu last week.

Gamble Succeeds as Ohio Supreme Court Unanimously Holds Part of Ohio's Eminent Domain Statute Unconstitutional

Carl and Joy Gamble finally succeeded in stopping the City of Norwood from bulldozing their home to pave the way for a $125 million shopping and office complex, as they and two other homeowners prevailed in their constitutional challenge to a municipality's use of eminent domain to aid a private developer.

In Norwood v. Horney, 2006-Ohio-3799, decided yesterday, the Ohio Supreme Court unanimously reversed the Hamilton County Court of Appeals, 161 Ohio App.3d 316, 2005-Ohio-2448, and held that:

1.   The taking of private property under the eminent domain powers of local government is constitutional pursuant to Article I, section 19, of the Ohio Constitution so long as the property is taken for "public use," but the mere fact that the appropriation would provide an economic benefit to the municipal government and the community does not, standing alone, satisfy the constitutional requirement or justify the exercise of eminent domain;

2.    Applying heightened scrutiny to review statutes or ordinances regulating the use of a local government's eminent domain powers, the use of the term "deteriorating area" in the City of Norwood's ordinance as the standard for when private property may be appropriated through eminent domain was unconstitutional on two grounds:  (i) it is overly vague and thus void under the "void-for-vagueness" doctrine, and (ii) it inherently relies on speculation about the future condition of the property to be taken rather than its condition at the time of the appropriation;  and

3.    A provision in Ohio's eminent domain statute, R.C. 163.19, prohibiting courts from enjoining the appropriation of private property after the local government has deposited compensation for the property with the court is unconstitutional as violative of the separation-of-powers doctrine.

The Ohio Supreme Court thus chartered the opposite course from that taken by the United States Supreme Court last year in its controversial decision in Kelo v. New London, 125 S. Ct. 2655 (2005).

The Cincinnati Enquirer reports that yesterday's decision "comes days before a task force is scheduled to recommend sweeping changes in eminent domain law to the Ohio General Assembly."  Laws limiting the use of eminent domain have been enacted in 26 states since the Kelo decision a year ago, and constitutional amendments to restrict eminent domain are on the ballots this fall in six states -- Florida, Georgia, Louisiana, Michigan, New Hampshire and South Carolina.

House Financial Services Committee Holds Hearing on H.R. 5491

The Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee held a hearing on June 28, 2006 on H.R. 5491, a bill entitled the "Securities Litigation Attorney Accountability and Transparency Act," that would amend the PSLRA.  Lyle Roberts of The 10b-5 Daily reports that the key provisions of the bill would:

(1) allow a prevailing defendant to argue to the court that the plaintiff's attorney should pay the prevailing defendant's fees and expenses because the "position of the plaintiff was not substantially justified;"

(2) require disclosure to the court of any conflict of interest between a plaintiff and his attorney and permit the court to disqualify the attorney if necessary; and

(3) permit courts to approve lead counsel in securities class actions through "alternative means," including a competitive bidding process.

Among the witnesses who appeared before the Subcommittee, Chief Judge Vaughn R. Walker of the Northern District of California and Theodore H. Frank of the American Enterprise Institute spoke in favor of the legislation, while Duke Law School Professor James D. Cox opposed the bill.  Their prepared testimony to the Subcommittee appears here.  The excellent albeit partisan blog Point of Law has two posts on the hearing here and here.

Plaintiffs' Class Action Firm Ordered to Make Financial Disclosure

Plaintiffs' class-action law firm, Milberg Weiss Bershad & Schulman, already under fire and under indictment for allegedly paying millions of dollars in incentives to entice clients to become class-action plaintiffs, may have a new problem.  The firm may be compelled to disclose all of its financial records and information from 1998 to date pursuant to an order recently entered by a state judge in Indiana.

Four plaintiffs represented by Milberg Weiss filed a class-action suit in Indiana state court against American United Life Insurance Company, claiming that the defendant improperly sold tax-deferred annuities wrapped in other investments that were themselves already tax-deferred.  The insurance company sought discovery, in the wake of Milberg Weiss' California indictment, on whether the law firm made or promised to make illegal payments to the four plaintiffs.

The court's order requires the four plaintiffs to turn over their financial records since 1998.  The order then compels Milberg Weiss likewise to disclose its financial records since 1998 unless the court modifies the order following the initial disclosures by the plaintiffs because it finds there is no reason to pursue the issue further.

The New York Times article on the disclosure order can be found here.  The WSJ Law Blog has a post regarding the ruling here.

Ohio Supreme Court Holds Retired Judges May Not Preside Over Jury Trials, Even by Agreement Among the Parties

On July 12, the Ohio Supreme Court issued its opinion in a widely-followed case involving the referral of cases or submission of issues to retired judges by stipulating parties pursuant to Section 2701.10 of the Ohio Revised Code.  Justice Terrence O'Donnell's opinion for the 6-1 majority in State ex rel. Russo, Judge vs. McDonnell, Judge, at 2006-Ohio-3459, holds that the statutory authority for cases referred or issues submitted to retired judges requires that all such matters be heard and determined by the judge -- meaning that the retired judge is not authorized to preside over a jury trial, even with the consent of the parties.

In 1984, the Ohio General Assembly enacted R.C. 2701.10 to authorize the reference of litigation to a form of alternate dispute resolution commonly known as "private judging" or "rent-a-judge" by the consent of the parties.  R.C. 2701.10(B)(1) provides that "[t]he parties to any civil action or proceeding pending in any court of common pleas . . . unanimously may choose to have the action or proceeding in its entirety referred for adjudication, or to have any specific issue or question of fact or law in the action or proceeding submitted for determination, to a [voluntarily retired] judge of their choosing . . . "  As used in the statute and Gov.Jud.R. VI, a "voluntarily retired judge" means "any person who was elected to and served on an Ohio court without being defeated in an election for new or continued service on that court."  Upon filing the parties' written agreement, the judge assigned to the case "shall order the referral or submission in accordance with the agreement."  R.C. 2701.10(B)(2).  Then, upon the entry of the order of referral or submission, the chosen retired judge "shall have all of the powers, duties and authority of an active judge of the court . . ."  R.C. 2701.10(C).

Russo involved two consolidated actions seeking extraordinary writs against sitting judges of the Common Pleas Court in Cuyahoga County, Ohio.  Judge Nancy M. Russo was the judge assigned to a pending medical malpractice action styled Peffer v. Cleveland Clinic Foundation.  The parties filed their written agreement to refer the case in its entirety for a jury trial before a retired judge, but Judge Russo refused to make the referral.  Stepping into the dispute at the request of the parties, the court's administrative judge ruled that the filing of the agreement stripped Judge Russo of the authority to preside further, and ordered the case referred to the agreed-upon retired judge for jury trial.  The Court of Appeals for Cuyahoga County subsequently granted a writ of prohibition to prevent Judge Russo from exercising jurisdiction or issuing further orders in the case.

In the second underlying case, Austin v. MetroHealth Medical Center, the Common Pleas Judge assigned to the case, John D. Sutula, refused to refer the case to a retired judge for a jury trial because he believed the statute did not authorize jury trials.  On petition for an alternative writ of mandamus to compel Judge Sutula to refer the case, the Court of Appeals for Cuyahoga County at first granted the writ but then dismissed the petition on the ground it found no authority in the statute or rule permitting a retired judge to conduct a jury trial.  See State ex rel. MetroHealth Medical Center v. Sutula, 2005-Ohio-6243, par. 8, 10.

The Supreme Court in Russo premised its decision on four bases.  First, the Court held that, in construing the statute and determining the paramount consideration of legislative intent, the plain language of R.C. 2701.10(B)(1) provides that the parties and the retired judge must agree that the referred matter shall be "tried, determined, and adjudicated by that retired judge."  Moreover, R.C. 2701.10(D) provides that a "retired judge to whom a referral is made under this section shall try all of the issues on the action or proceeding, shall prepare relevant findings of fact and conclusions of law, and shall enter a judgment in the action or proceeding in the same manner as if he were an active judge of the court."

Second, in light of the fact the General Assembly omitted any mention of jury trials in the statute, the Court relied on the principle of expression unius est exclusio alterius -- "the expression of one thing implies the exclusion of another."

Third, when in the past the General Assembly intended for cases to be tried by jury, it has specifically indicated its intent with appropriate express language to that end.  The Court refused to use the guise of statutory construction to, in effect, add words to the statute that are not present in the text.

Finally, the Court rejected the argument that the statute cannot abrogate sub silentio the right to jury trial preserved by Article I, section 5, of the Ohio Constitution.  The Court noted that, since the right to trial by jury may be waived by the parties, the parties who enter into an agreement to refer a case or issues to a private judge under R.C. 2701.10 "manifestly waive their right to a jury trial" as with other alternative-dispute-resolution techniques.

Alone in dissent, Justice Pfeifer observed that R.C. 2701.10 does not directly prohibit private judges from using juries.  In light of the fact that, once a case is referred by the parties' agreement, the private judge is statutorily empowered to exercise "all of the powers, duties and authority of an active judge of the court in which the action or proceeding is pending," Justice Pfeifer noted that the powers, duties and authority of an active judge include the ability to use Civil Rule 39(C).  Civil Rule 39(C) provides that "[i]n all actions not triable of right by a jury (1) the court upon motion or on its own initiative may try any issue with an advisory jury or (2) the court, with the consent of both parties, may order a trial of any issue with a jury, whose verdict has the same effect as if trial by jury had been a matter of right."  As Justice Pfeifer concluded, if a referred case requires a bench trial, and thus is an action "not triable of right by a jury," the private judge in a referred case has the ability, pursuant to Civil Rule 39(C), to "try any issue with an advisory jury" or, "with the consent of both parties, [to] order a trial of any issue with a jury."  The dissent also observed the General Assembly failed to state explicitly that agreement to refer the entire case to a private judge is the equivalent of waiving a jury trial.

The Russo decision begs without expressly deciding or explaining several interesting questions.  The first is the question of jurisdiction.  R.C. 2701.10 is not a statute authorizing or conferring jurisdiction on the Ohio common pleas courts, and Russo says nothing new on any jurisdictional issue.  It deals instead with the proper exercise of the court's jurisdiction, and whether a retired judge selected by the consent of the parties is an authorized judicial officer empowered to exercise the court's jurisdiction in a particular manner -- i.e., by presiding over a jury trial.

The second question is the impact of the decision on scores, if not hundreds, of cases tried to jury verdict with private retired judges before the decision was announced.  There is no logical, practical or lawful justification for the Russo decision to be given retroactive effect.  It would be bad policy and worse law for the courts to upset the settled expectations of parties who had agreed to jury trials presided over by private judges.  Right or wrong, win or lose, the parties received what they bargained for under the apprehension that R.C. 2701.10 authorized the private judge to act for all purposes in place of the assigned judge, including in conducting a jury trial.  That understanding may be modified or corrected prospectively for cases that have not yet be adjudicated at the trial court level;  it should not be given retrospective application to any case in which a jury verdict was returned before July 12, 2006.

Finally, the Supreme Court in Russo implicitly invited the General Assembly to resolve the public policy considerations raised in the disparate interpretations of R.C. 2701.10 by amending the text if it wishes to confer the authority of private judges to preside over jury trials.  Given the sound and practical goals behind the use of private judges as a useful means of alternative dispute resolution, the General Assembly should accept the invitation as soon as possible.

More on Presidential Signing Statements

Supplementing our July 17 post on Professor Richard Epstein's commentary regarding presidential signing statements, the ACS Blog recently treats the same subject in the wake of President Bush's first use of his veto power on federal funding for stem-cell research.  Martin Magnusson's post argues that President Bush's abuse of presidential signing statements -- to explain why he is entitled to ignore or violate certain provisions of federal legislation with which he disagrees as he signs the congressional enactment into law -- functions like the line-item veto power conferred by Congress (and afterwards exercised 11 times by President Clinton to strike 82 items) that was invalidated by the Supreme Court in 1998 in Clinton v. New York as violative of the Presentment Clause.

New line-item veto legislation (the Legislative Line Item Veto Act of 2006), proposed by President Bush in his January 2006 State of the Union message, has been introduced in the Senate by Majority Leader Frist, R-Tenn. (S. 2381) and in the House by Representative Paul Ryan, R-Wis. (H.R. 4890).  The Center on Budget and Policy Priorities, a D.C. think-tank, has this commentary on the pending legislation.

The House passed H.R. 4890 calling for a six-year line-item veto, ostensibly to cut down on so-called "pork barrell" spending, on June 22, 2006 by a 247-172 vote.  However, the bill fails to grant full line-item veto powers such as the statute struck down in Clinton v. New York;  rather, the bill permits the President to return specific funding measures embedded in or attached as riders to enacted legislation to Congress within 45 days of their enactment for another vote.  The Senate has not considered the measure to date.

Forbes magazine's article on the new proposed line-item veto legislation appears here.
 

Federal Court Rejects Bush Administration's State Secrets Defense in Suit Challenging NSA Surveillance

In a notable rebuke of the Administration's claim for the exercise of unfettered Executive Branch powers in the interests of national security during wartime, Chief District Judge Vaughn R. Walker overruled the Government's attempt to use the so-called "state secrets" doctrine (any information that could violate national security interests may not be used or admitted into evidence) to dismiss the class-action wiretapping lawsuit filed last February by the Electronic Frontier Foundation on behalf of hundreds of thousands of telephone and wireless customers against AT&T in the Northern District of California.

Judge Vaughn based his comprehensive and well-reasoned opinion on (i) the appropriate function of judicial review of government programs and policies, even in wartime and even involving national security, and (ii) the fact that the administration had already publicly confirmed the existence of the NSA surveillance program and revealed many details of its operation means it fails to qualify as a protected "state secret."

The New York Times story on Judge Vaughn's decision can be found here.  Lyle Denniston has this post in Scotusblog.  Finally, as Patrick Radden Keefe notes in his detailed post in Slate on the Hepting vs. AT&T case:

"The real significance of the case exceeds the NSA wiretapping story and the use of state secrets. Walker's opinion is a stirring defense of the role of the courts, even in times of war. Quoting the Supreme Court's decision in Hamdi v. Rumsfeld, he reminds us, 'Whatever power the United States Constitution envisions for the Executive in its exchanges with other nations or with enemy organizations in times of conflict, it most assuredly envisions a role for all three branches when individual liberties are at stake.'  The president and Congress seem to have forgotten that lately; Judge Walker has reminded them."

Ohio Court of Appeals Upholds Reduced Punitive Damages Award in Securities Fraud Case

Adam Savett, author of the excellent blog Lies, Damn Lies and Forward-Looking Statements, has called to our attention this story on the recent decision from the Court of Appeals for Marion County, Ohio, upholding a judgment against Prudential Securities of $12.3 million in compensatory damages and $6.8 million in punitive damages (reduced from the jury award of $250 million) in connection with an unauthorized trading claim.

Should Law Firm Diversity Be a Criterion in the Appointment of Lead Class Counsel?

Adam Savett has a post in his blog Lies, Damn Lies & Forward-Looking Statements regarding a recent order from the District of Minnesota requiring counsel seeking appointment as lead class counsel to provide the Court with, inter alia, "information concerning the minority and gender membership in your respective law firms ..."  This begs the very interesting question whether the diversity characteristics of lawyers and law firms seeking appointment as lead class counsel under the PSLRA can properly be taken into account by district courts making such determinations.  The Volokh Conspiracy weighs into the debate with an initial reaction that race, gender and ethnicity may not lawfully be considered.

Federalist Society Critique of the Ohio Supreme Court

The Federalist Society has posted a critique of the alleged activism exhibited by the Ohio Supreme Court in the years leading up to the November 2004 elections entitled The Ohio Supreme Court:  A Court at the Crossroads.

Presidential Signing Statements Undermine Constitutional System of Checks and Balances

Professor Richard Epstein of the University of Chicago Law School has a worthwhile op-ed piece in the Sunday Chicago Tribune entitled "The Problem With Presidential Signing Statements."

Sixth Circuit Orders En Banc Rehearing to Decide Whether Federal Issue Embedded in State Law Claim for Relief Supports Removal Jurisdiction

Welcome to the Sixth Circuit Blog, a new web log devoted to appellate practice within the Sixth Circuit and in the highest courts of the four states it comprises.  We intend to provide information, news and commentary regarding the cases on the Court's docket as well as monitoring key decisions and orders issued by and arguments presented to each court.  We appreciate your interest in these matters and welcome your reactions, comments and contributions to what we hope will be the start of many lively discussions.

Our inaugural discussion concerns the cases in which the Sixth Circuit has recently ordered rehearings en banc.  The first such case in which the Sixth Circuit has granted en banc rehearing examines the contours of federal question jurisdiction.  In Mikulski v. Centerior Energy Corp., Case No. 03-4486, the issue is whether a single federal issue embedded in a claim for relief arising solely under state law is sufficient to invoke the section 1331 "arising under" jurisdiction of the federal courts.

The original panel majority held in January 2006 that no federal question jurisdiction existed in such circumstances, reversing the ruling of the Northern District of Ohio.

The Supplemental Brief filed by Appellants on the jurisdictional issue can be found here.

The Supreme Court's recent decision in Empire HealthChoice vs. McVeigh can be found here.

A commentary on McVeigh appeared in Scotusblog  last month.

Oral argument is scheduled for September 13, 2006.

Disclaimer:  The author of this post is counsel for the Apellants in Mikulski v. Centerior.