Wrap Up of United States Supreme Court’s 2015-2016 Term

With the close of the United States Supreme Court’s 2015-16 term, we offer this wrap up of the Court’s term, focusing on decisions of special interest from the business and commercial perspective (excluding patent cases):

Upon being granted a discharge from a Bankruptcy Court, a bankrupt’s debts are discharged unless a particular debt falls within one of the Bankruptcy Code’s statutory exclusions. One of those exclusions is for debts arising from “false pretenses, a false representation, or actual fraud.” Husky Int’l Elecs., Inc. v. Ritz asked whether a debt arising from a fraudulent transfer made for the purpose of frustrating a creditor, but accomplished without making a false representation, is subject to this exclusion. The Court held that it is, stating that the exclusion “encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.” The Court also stated, however, that the placement of the adjective “actual” before “fraud” means that the fraud must involve “moral turpitude or intentional wrong” and distinguishes it from “implied fraud or fraud ‘in law.’” Thus, debts arising from constructively fraudulent conveyances, which do not require showing a bad intent, presumably are not subject to the exclusion and can still be discharged.

Like many other states, Vermont passed a law requiring health care providers and insurers to disclose claims information to a state agency to help the state monitor health care access and costs. In Gobeille v. Liberty Mut. Ins. Co., an insurer challenged the law as preempted by ERISA, and the Court agreed. According to the Court, ERISA was intended to create a nationally uniform set of systems and procedures for the maintenance and operation of employee benefit plans, including an information-reporting protocol requiring plans to submit reports to the Secretary of Labor. The reporting uniformity sought to be achieved by ERISA would be frustrated if the states could impose additional reporting obligations on ERISA plans and require plans to comply with up to 50 different sets of reporting obligations. Thus, the Vermont law is preempted insofar as it applies to ERISA-qualified plans. In light of the recent proliferation of often inconsistent state-reporting requirements, particularly in the data breach context, if one is subject to such a reporting requirement, it may be worthwhile to consider whether the requirement is preempted by a federal reporting scheme.

In Montanile v. Bd. of Trs. of the Nat’l Elevator Indus. Health Benefit Plan, another ERISA case, the Court waded again into a still confused area of remedies available to plan fiduciaries. Mr. Montanile was injured by a drunk driver and his plan covered his medical expenses, but he then received a settlement from the tortfeasor. The plan sued him under ERISA 502(a)(3), allowing for “appropriate equitable relief,” to enforce a subrogation clause in the plan documents and recoup the benefit paid out. Under principles of equity, the Court held, the plan could only enforce its equitable lien against assets that were directly traceable to the settlement itself (no matter how small), and not against Mr. Montanile’s more plentiful general assets. There was no claim of fraud in the case, and the plan was on notice but slept on its rights to recover the benefit. Nevertheless, at least on these facts, ERISA plans will need to be ever more prompt in enforcing equitable liens before the underlying settlement is dissipated.

In longstanding litigation between the European Community (as well as several of its members) and RJR Nabisco concerning allegations of a global money-laundering scheme involving drugs and cigarettes, the EC scored what can only be described as a Pyrrhic victory in RJR Nabisco, Inc. v. European Community. In the EC’s favor, the Court held that the federal RICO statute can apply extraterritorially if (1) the predicate acts on which the RICO claim is based apply extraterritorially and (2) the enterprise has a sufficient tie to U.S. commerce. However, a private plaintiff must still prove a domestic injury to its business or property in order to assert a viable RICO claim. And here, because respondents had waived their damages claims for domestic injuries, the Court held that their RICO claims must be dismissed. The moral of the story is this: unless a private plaintiff has sustained an injury to business or property in the U.S., no civil RICO claim is viable, whether for conduct here or abroad.

With the Court’s decision in Campbell-Ewald Co. v. Gomez, the law is now settled that a defendant who makes an offer of judgment under Fed. R. Civ. P. 68, which offer includes all the relief a plaintiff could expect to receive as the prevailing party at trial, does not extinguish the action, if, importantly, the plaintiff does not accept the offer. Defendants, therefore, can no longer attempt to short-circuit a class action by making a complete offer of judgment to the named plaintiff prior to the deadline for filing a class certification motion. Left unresolved by the Court, however, is what would happen if the defendant actually makes a payment of complete relief to the plaintiff.

In Tyson Foods, Inc. v. Bouaphakeo, the Court was called on to decide whether and when representative sampling evidence can be used to establish the Rule 23 requirements for a class action. As we noted earlier, the Court declined to establish general rules governing the use of statistical evidence in all class actions. However, it did hold that in the circumstances here—where Tyson did not have records showing the time it took its employees to put on and take off their protective gear but an expert witness opined as to the average time it took to do so—class certification was proper, as was resort to the expert’s representative sampling evidence to establish the Rule 23 elements. According to the Court, if evidence would be admissible in an individual’s lawsuit to prove the elements of the cause of action, then it should also be admissible in class and collective actions for the purpose of proving the elements for class certification. Because representative sampling evidence can be used in FLSA cases when, as was the case in Tyson, the employer failed to keep proper records, the expert’s opinion would have been admissible in an individual case, and consequently it was also admissible for purposes of class certification.

The Court decided a pair of cases related to civil procedure and, in particular, subject-matter jurisdiction. First, in Americold Realty Trust v. ConAgra Foods, Inc., the Court held that the citizenship of a REIT for purposes of assessing diversity jurisdiction is determined by the citizenship of each of its members/shareholders. Second, at the intersection of civil procedure and the federal securities law, the Court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning held that the jurisdictional provision of the Securities Exchange Act (§ 27) requires a plaintiff to allege and prove that the action arises under the Exchange Act. The mere fact, therefore, that a complaint refers to a violation of the Exchange Act so as to provide context for a state law claim does not mean a federal court can decide the action, unless there is a properly alleged federal cause of action. A unanimous Court so held in part out of deference to state courts. Thus, if the action does not present a federal question under 28 U.S.C. § 1331, then there is no jurisdiction under § 27 of the Exchange Act either.

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