Wrap-Up of United States Supreme Court’s 2017-2018 Term

With the close of the United States Supreme Court’s 2017-18 term, we offer this wrap-up, focusing on decisions of special interest from the business and commercial perspective (excluding patent cases):

In a much talked-about decision in the antitrust field, the Court held in Ohio v. American Express Co. that American Express’s anti-steering provisions in its merchant contracts, which generally preclude merchants from encouraging customers to use credit cards other than American Express, are not anticompetitive and therefore do not violate Section 1 of the Sherman Act. In so holding, the Court found that credit card networks are two-sided transaction platforms, one side being the merchant and the other side being the merchant’s customer. Thus, when assessing whether the anti-steering agreements are anticompetitive, the effects on both sides of the platform must be considered. The plaintiffs’ proof that American Express had increased its merchant fees over a period of time was insufficient to show an anticompetitive effect because it neglected the customer side of the platform, where consumers have received the benefit of ever-increasing rewards from credit card companies and other improvements in services that those higher merchant fees enable.

Bringing an end to a fight that New Jersey had been waging against the NCAA and professional sports leagues since 2012, the Court paved the way for legalized sports betting in Murphy v. NCAA, et al. It did so by striking down the Professional and Amateur Sports Protection Act of 1992 (PASPA), a federal law that prohibited States from authorizing gambling on sports. That prohibition, the Court held, violates the so-called anti-commandeering doctrine – a principle of constitutional law that Congress can’t order States to do its bidding. While the leagues tried to distinguish PASPA on the ground that it did not compel state action (which, if it did, would be unconstitutional) but simply precluded it, the Court was unmoved: no more can Congress direct a state legislature to refrain from acting than it can affirmatively order that same state legislature not to act. This eagerly anticipated decision may well become the leading anti-commandeering case in law school textbooks. Of course it’s also predicted to be an economic boon to states, some of which, including New Jersey, are already cashing in on legal sports betting. Ante up!

Federal Rule of Civil Procedure 44.1 provides that in determining the effect of foreign law, a court “may consider any relevant material or source.” In Animal Science Products, Inc. v. Hebei Welcom Pharmaceutical Co., the Court confronted the question, which arose in the context of a price-fixing suit that U.S. buyers of vitamin C brought against four Chinese manufacturers, whether a federal court determining foreign law under Rule 44.1 must treat as conclusive a submission from the foreign government describing its own law. The answer, the Court unanimously held, is no, thereby dealing a blow to the Chinese defendants below. A federal court is not bound to adopt the foreign government’s characterization and must not ignore other relevant materials. Thus, while a government’s expressed view of its own law is ordinarily entitled to substantial weight, the appropriate weight should depend on the circumstances of each case.

The Securities Act of 1933, which created causes of action arising from improprieties in a company’s public offering of its securities, granted concurrent jurisdiction to state and federal courts to resolve disputes arising under the Act and precluded the removal of such actions filed in state court. In the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Congress precluded most class actions based on state law that arose from the purchase or sale of a covered security. To help ensure enforcement of its bar against state-law class actions, SLUSA also removed state-court jurisdiction over such actions, thus forcing such actions into federal courts, which, Congress apparently believed, will be more likely to dismiss the actions as required by SLUSA. The issue in Cyan, Inc. v. Beaver County Employees Retirement Fund was whether, in depriving state courts of jurisdiction over state-law class actions relating to the purchase or sale of a covered security, Congress also removed state courts’ jurisdiction over class actions asserting 1933 Act violations, such as actions alleging a company’s failure to make sufficient disclosures in a prospectus for a securities offering. After a thorough analysis of the applicable language from SLUSA, the Court held that state courts still enjoy concurrent jurisdiction over 1933 Act class actions and that such actions cannot be removed to federal court.

In the wake of the 2008 financial crisis, Congress enacted the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to improve accountability and transparency in the financial system. Dodd-Frank shields whistleblowers – defined to mean persons who provide information to the SEC relating to a violation of the securities laws – from retaliation by their employer for disclosures they make to a variety of entities in addition to the SEC. The issue addressed in Digital Realty Trust, Inc. v. Somers is whether Dodd-Frank’s anti-retaliation provision extends to those, like Somers, who report a securities law violation to someone other than the SEC (in Somers’s case, to senior management at his employer). The Court held it does not, based on a plain text reading of the statute: Dodd-Frank is clear that only whistleblowers can get the benefit of the anti-retaliation provision, and only those who provide information to the SEC qualify as whistleblowers. Providing information to the SEC, in other words, is a necessary condition precedent to invoking the anti-retaliation shield. In so holding, the Court accorded no deference to the contrary view espoused by the SEC in administrative rules it promulgated to implement the anti-retaliation protections. The Court’s decision likely will cut one of two ways – either more tips will be made to the SEC or fewer self-professed whistleblowers will be able to take advantage of Dodd-Frank’s anti-retaliation provision.

A pair of cases interpreting the Bankruptcy Code has notable results for bankruptcy practitioners:

First, in Merit Management Group v. FTI Consulting, a unanimous Court held that in deciding whether the securities safe harbor in Code section 546(e) saves from a trustee’s avoidance power a transfer by the debtor “by or to (or for the benefit of) a . . . financial institution,” courts must look solely to the transfer that the trustee seeks to avoid, without regard for any intermediate transactions that facilitate the ultimate transfer. The issue arose when trustee FTI sought to avoid a $16.5 million transfer that the debtor had made to Merit. That transfer was achieved via a series of intermediate transactions involving banks – hence Merit’s invocation of the securities safe harbor. Parsing the language of the safe harbor and the broader statutory structure, the Court held that pass-through transactions are irrelevant to the application of section 546(e); the only transfer that matters is the overarching transfer that the trustee seeks to avoid. And because neither the debtor nor Merit was a financial institution, the transfer fell outside the securities safe harbor. This decision, which overturned precedent in several lower courts of appeals, could wind up invalidating an increased number of transfers in bankruptcy litigation going forward.

Second, the Court held in Lamar, Archer & Cofrin, LLP v. Appling that a statement about a single asset can be a statement “respecting the debtor’s financial condition.” While it may seem trivial, this holding has material consequences for the discharging of debts. Code section 523(a)(2) excepts from discharge debts arising from various forms of fraud. Specifically with respect to debts arising from false statements respecting the debtor’s financial condition, those debts are not dischargeable if the false statement is in writing. Enter Mr. Appling who stiffed his lawyers out of the proceeds of a personal tax return he orally promised to pay on to them and later filed for bankruptcy after his lawyers sued. The Court held that because a single asset has a direct impact on overall ability to repay a debt, a statement about a single asset can be a statement respecting the debtor’s financial condition. Since Mr. Appling’s (mis)statement about his tax return was one respecting his financial condition, but was delivered orally and not in writing, section 523(a)(2)(B) did not bar Mr. Appling from discharging the debt he owed to his lawyers. So the moral of the story, as his lawyers learned the hard way, is to make sure a promise to pay is reduced to writing.

In another pair of cases, the Court addressed when statutes of limitations are tolled during the pendency of federal litigation:

First, in Artis v. District of Columbia, the Court resolved a split among state supreme courts about the application of 28 U.S.C. §1367(d), which tolls the statute of limitations for state-law claims that are initially joined with a federal cause of action in a federal complaint but are later dismissed after the federal cause of action has been dismissed because the federal court declines to assert supplemental jurisdiction over the remaining state-law claims. Section 1367(d) provides that in such circumstances the limitations period “shall be tolled while the [state-law] claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.” Some states’ courts adopted a “stop the clock” application of the rule, suspending the running of the limitations period during the federal proceeding and resuming the running of the period 30 days after dismissal. Other states’ courts adopted a “grace period” application of the rule, granting the plaintiff 30 days after dismissal to re-file the state-law claims, regardless of how much time remained when the federal action was filed. The Court, relying on “the usual understanding of the word ‘tolled,’” adopted the “stop the clock” approach.

Second, in China Agritech, Inc. v. Utah, the Court resolved a circuit split over whether American Pipe tolling, which tolls the limitations period on claims of individual class members during the pendency of a class action where class certification is ultimately denied, also applies to subsequent class actions. Finding that the interests of “efficiency and economy of litigation” that undergird American Pipe and Rule 23 are best served by encouraging all potential putative class representatives to bring their claims as soon as possible, the Court declined to extend American Pipe tolling to subsequent class actions. Thus, class members who allow a limitations period to expire while waiting to see if a class is certified in a pending class action will be limited to asserting only an individual claim if class certification is ultimately denied. More on China Agritech can be found here.

When one of two cases consolidated for trial under Federal Rule of Civil Procedure 42(a) results in a judgment but the other case does not (because a new trial is granted), is the case that reached a judgment immediately appealable or must the losing party wait until the other constituent case also reaches a judgment? Tracing the judicial meaning of “consolidate” back to the early 19th century, the Court in Hall v. Hall determined that cases do not lose their separate identities when they are consolidated under Rule 42. Consequently, when a constituent case reaches a final judgment, it is appealable even if a final judgment has not issued in a case with which it is consolidated.

The New Jersey Legislature is a client of Gibbons P.C. The firm was actively involved in the litigation mentioned. Prior results do not guarantee a similar outcome.
Christopher Walsh and Kevin R. Reich are Directors in the Gibbons Commercial & Criminal Litigation Department.
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