Supreme Court in Review

The Supreme Court of the United States once again has a full complement of justices with the addition of Neil Gorsuch on April 9, 2017, approximately 14 months after the death of Justice Antonin Scalia. We SCOTUS watchers (aka SCOTUS nerds) predict Gorsuch will stand on the very conservative side of future decisions.

For the October 2016 term (Oct. 4, 2016-June 26, 2017), Justice Gorsuch’s late entry provided little insight, given that he heard arguments on a limited number of cases. However, his dissent in Pavan v. Smith, a per curium decision regarding whether same-sex couples can be listed on Arkansas birth certificates, is a strong indicator that predictions of a more conservative approach are well grounded.

Notwithstanding Gorsuch’s limited tenure, the court issued a number of important decisions in the October 2016 term that strengthened the defenses available to claims litigators, which will be helpful to claims evaluators over the next year. Moreover, in light of the number of 4-4 non-decisions over the last 14 months, we can expect some very robust jurisprudence to emerge in the next term with a full panel available.

Arbitration Reigns Again. For Now

Last year, we speculated as to whether the demise of Justice Scalia and the prospect of a new justice would weaken the court’s commitment to the Federal Arbitration Act (FAA). Examining Kindred Nursing Centers L.P. v. Clark, the answer for now is “no.”

In a 7-1 decision, the court reversed and remanded a Kentucky Supreme Court decision invalidating a contractual arbitration clause and reaffirmed that arbitration agreements need to be put on the same footing as other contracts. States simply cannot adopt rules or doctrines that single out arbitration clauses, even indirectly, for different treatment than other contracts.

The Kindred contracts in question involved the authority of attorneys in fact to execute arbitration clauses. Two separate family members had signed contracts when placing an elderly relative into care at a Kindred nursing residence, each acting under a power of attorney. Those contracts contained arbitration clauses that the families later attempted to invalidate in order for the respective estates to proceed in suing Kindred.

The Kentucky Supreme Court held that the right to civil trial is so sacred and inviolate under the Kentucky state constitution—indeed, a “divine God-given right”—that it could only be abrogated by an explicit statement in the power of attorney conferring the right to do so.

This places the right to enter into an arbitration clause on a different footing than other contractual clauses; Kentucky had not required such an explicit statement for validating other contracts entered into under a power of attorney. The U.S. Supreme Court decided that such an attempt by the state to single out arbitration clauses is impermissible.

Can claims professionals now rest assured that the court will stand behind the FAA and arbitration clauses? There is still cause for concern. Looking ahead to the October 2017 term, the court will hear a consolidated trio of potentially broader and more powerful challenges to the FAA: NLRB v. Murphy’s Oil USA, Epic Systems Corp. v. Lewis, and Ernst & Young LLP v. Morris.

The main question therein is whether an arbitration agreement to forgo class action impermissibly limits employees’ rights to concerted activity under the National Labor Relations Act. Employer/employee relationships are a primary source of arbitration agreements, so such a blanket invalidation could be a strong blow to the FAA. Notably, the Office of Solicitor General has changed its position in this matter subsequent to the change in executive administrations, and will now argue in favor of the employer’s position.

Bad Faith Sanctions Are Limited (Except When They Aren’t)

Claims litigants agree to settlement in order to bring certainty and finality to a dispute. However, even after a settlement, a court can impose attorney’s fees as a sanction for bad-faith discovery conduct under the court’s inherent powers. The prospect of potential ongoing costs can undermine that motivation to settle.

It is of some comfort to know that the Supreme Court directs that any such award must be “limited to the fees the innocent party incurred solely because of the misconduct—or, put another way, to the fees that party would not have incurred but for the bad faith.” The court seemingly reaffirmed this limitation in GoodYear Tire & Rubber Co. v. Haeger, but also left the door open for a court to determine that the entire cost of a litigation could be assessed as resulting from bad faith conduct “in exceptional cases.”

A year after reaching a settlement, the GoodYear plaintiffs found that certain discovery materials that they had requested, but had never been provided by GoodYear, actually existed and had been produced in other litigation. The now-settled plaintiffs moved for sanctions. Upon their post-settlement motion, the lower court awarded to the plaintiffs all costs of litigation subsequent to the nondisclosure, or $2.7 million.

The Supreme Court reversed and remanded in an 8-0 decision, holding that the plaintiffs and the lower court had not established that all of the costs—the entire cost of the post-nondisclosure litigation—resulted from the non-disclosure. The undisclosed materials were not so damaging that they would immediately trigger a favorable settlement. The GoodYear court affirmed that the plaintiffs must establish “but-for” causation to recover fees and costs; if the plaintiffs would have incurred a cost regardless of the bad faith act, a court must leave it alone.

But wait. The court goes on to say that there are certain occasions when a lower court may “shift all of a party’s fees, from either the start or some mid-point of a suit, in one fell swoop.” Such instances include initiating a case in bad faith, an entire course of defense in bad faith, or when a case might have settled at a certain point absent bad faith. When the goal is conceptualized as “rough justice” rather than “auditing perfection,” litigants should not rest easy about the assurances of “but for” causation in this regard.

Limiting the Aggregation of Claims

Claims litigators and professionals have long been concerned about the ability of groups of plaintiffs filing claims in certain forums where they think they will get the most favorable rulings and highest verdicts. In an 8-1 decision that included Gorsuch, SCOTUS issued a likely insurmountable blow to this strategy in Bristol-Myers Squibb Co. v. Superior Court of California, San Francisco County.

Some 600 plaintiffs, only 86 of whom were California residents, filed eight separate suits in California court against Bristol-Myers Squib (BMS) regarding its product, Plavix. Although BMS employed people in California and engaged in business activity in California, BMS is incorporated in Delaware and headquartered in New York.

The California Supreme Court used a “sliding scale approach” to determine that California courts had specific jurisdiction over the nonresidents’ claims against BMS. That is, the more wide-ranging the defendant’s forum contacts, the more readily a connection is shown between the forum contacts and the claim, so that, here, BMS was subject to specific jurisdiction in California.

Bunk, says SCOTUS. There is no “sliding scale.” A defendant’s general connections with the forum are not enough. What is needed is a connection between the forum and the specific claims at issue. The non-residents did not buy Plavix in California, they did not use Plavix in California, they were not treated for Plavix-related injuries in California, and there was no link between BMS activity in California and the non-residents’ claims. There is no specific jurisdiction where there is such a lack of connection between the forum and the claims.

Large groups of plaintiffs still have the ability to litigate in states with general jurisdiction over the defendant, or in their own home states. This decision does not eliminate aggregate claims, but in reality it does limit the ability of non-resident plaintiffs to file actions where they believe they will get the best result.

Class-Action Strategies

Denying or granting class certification in a class action lawsuit can be the “death knell of a claim.” Few class action plaintiffs are willing to litigate their claims when denied class cert and then go back and appeal the denial of class cert. If a class action is certified, defendants may be more inclined to settle than to litigate the increased number of plaintiffs and then thereafter seek review of that class certification where liability and damages are already determined.

Class-action litigants do not have a right to appeal an order granting or denying class certification because it is not a “final order.” The court of appeals does have the discretion to accept review of such orders under FRCP 23(f). In Microsoft Corp. v. Baker, the plaintiffs sought and were denied such review. Afterward, the plaintiffs engaged in a strategy to avoid the “final order” conundrum, entering into a voluntary dismissal so that they had a “final order” for appeal purposes, thereby evading the need for the court of appeals discretion to accept or deny review.

In an 8-0 decision, the court held that the class plaintiffs could not evade the careful balance of FRCP 23(f), and rejected the appellate court’s ability to review the denial of class certification upon a voluntary dismissal.

Justices Thomas, Alito, and Roberts concurred in the judgment only, arguing that voluntary dismissal removes any Article III case or controversy, ending the matter conclusively. It is likely that Gorsuch is also of this view. Last year, we predicted that the “pick off” strategy of settling with named plaintiffs may not be dead. With the balance shifting to at least 5-4, we may see this question fully briefed in the near future.

Equity Versus Statute of Limitations—TKO

Federal courts have fashioned very specific applications of the affirmative defense of laches to patent law over the years. That is over. The equitable doctrine of laches cannot be invoked to bar a claim in the face of a six-year statute of limitations enacted by Congress.

The court issued this decisive ruling under the three-year limitations period in the Copyright Act, and rendered the same decision in regards to the six-year limitation period of the Patent Act in SCA Hygiene Products Akitebolag v. First Quality Baby Products LLC. To put it simply and with finality, “[L]aches is a gap-filling doctrine, and where there is a statute of limitations there is not gap to fill.”

This holding comes down despite decades of federal court cases that have developed many facets to determining the application of laches in cases where the statutory limitations period has not run. Claims professionals should simply refrain from relying on laches as an affirmative defense for any claim where the claim would fall within a defined statutory limitations period.

Looking ahead, the October 2017 term is going to provide some significant rulings. First, as noted earlier, the viability of arbitration clauses and the FAA faces a trio of serious challenges under the National Labor Relations Act. Other questions already accepted for review include: Whether the Alien Tort Statute categorically forecloses corporate liability, and whether the tolling provision for state law claims—where all federal claims have been dismissed—suspends the limitations period for the state law claims or merely provides a 30-day time limit to refile.

In the October 2015 term, we faced four 4-4 ties with an eight-justice court. This term, there were no 4-4 decisions, reflecting, perhaps, that the justices were unwilling to take on a number of hot-button cases with sweeping social implications without a full panel. With this concern resolved, expect some exciting jurisprudence to emerge through the next SCOTUS term.