As explained by Ronald Mann, the Supreme Court on Tuesday dismissed as improvidently granted the case of Emulex Corp. v. Varjabedian. In this post, I spend a bit more time speculating about why the court reached that decision and pondering whether there are any insights to be drawn from the decision that may be of help to practitioners in future cases. [Disclosure: I wrote an amicus brief in the case in support of the respondents, but that brief did not address any of the questions at issue in this post.]
What happened in this case
The Supreme Court granted certiorari in this case to decide the question: “Whether the Ninth Circuit correctly held, in express disagreement with five other courts of appeals, that Section 14(e) of the Securities Exchange Act of 1934 supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer.” This carefully worded question from the cert petition encompasses two distinct issues: (1) whether there is a private right of action to enforce Section 14(e) at all; and (2) if so, whether negligence suffices to violate the provision. The petitioners had argued only the second point before the U.S. Court of Appeals for the 9th Circuit panel (although it arguably raised the first issue in its petition for rehearing en banc). And only the second question was the subject of a circuit conflict. The petitioners nonetheless attempted to craft a question presented broad enough to encompass the existence of the private right of action as well, presumably because the Supreme Court’s modern precedents are very skeptical about inferring such private rights of action.
The body of the cert petition then urged the Supreme Court to grant review on the ground that there is a split over the negligence standard. But in its merits argument, the petitioners also pointed to the court’s modern implied-right-of-action cases, ultimately telling the court: “This Court can decide this case—and reverse the decision below—on the assumption that the lower courts have properly inferred a private right of action under Section 14(e) for intentional violations. But if it believes that any inferred cause of action that exists under Section 14(e) may be applied to negligent behavior as well, then it should reexamine whether a private right of action can be inferred at all under Section 14(e).”
The respondents objected that not only had the petitioners failed to raise an objection to the private right of action before the 9th Circuit panel, they had (according to the respondents) affirmatively said they did not dispute that it existed.
The Supreme Court granted certiorari anyway. On the merits, the petitioners disaggregated their arguments more distinctly, arguing first that there should be no private right of action for negligence, and then separately that there should be no private right of action at all. The respondents complained again that the latter argument had not been preserved.
In what may have been a decisive development, the federal government filed a brief that parted ways with both sides. It agreed with the respondents that Section 14(e) can be violated through negligent conduct. But it agreed with the petitioners that there should be no private right of action to enforce the provision. The government’s bottom line, then, was that the Securities and Exchange Commission can sue for negligent violations of 14(e), but private plaintiffs cannot sue at all.
At oral argument, several justices (particularly Justice Sonia Sotomayor) picked up on the respondents’ preservation objection. (A cynic might suspect that the liberal justices’ focus on preservation was affected by their view of the probable outcome if the court reached the private-right-of-action question.) Beyond that, the argument was dominated by discussion of the implied-right-of-action question, with very little discussion of the negligence standard.
A few days later, the court voted to dismiss the case as improvidently granted (“DIG” to the inside baseball crowd).
The Supreme Court’s DIG practice
The Supreme Court rarely explains its reasons for DIGing a case. But the practice seems to arise mostly in three circumstances.
First, cases are most commonly DIGed when the court discovers something after granting certiorari that makes the case a poor vehicle for resolving the question it had taken the case to answer. For example, the facts may not actually present the question, there may be a jurisdictional problem or it may come to light that an argument wasn’t properly preserved.
In a few rare cases, the Supreme Court has also DIGed cases in response to a perceived bait-and-switch. This happened a few terms ago in Visa Inc. v. Osborn, an antitrust case in which the court took the unusual step of explaining its decision to DIG the case, noting that “having persuaded us to grant certiorari on [one] issue, however, petitioners chose to rely on a different argument in their merits briefing.” [Disclosure: Goldstein & Russell was among the counsel for the respondents in the case.] But in other cases, the court has simply refused to consider the new arguments and has resolved the question it granted certiorari to decide.
Finally, there have been a handful of instances in which it appears that the Supreme Court DIGed a case simply because it was unable to reach a consensus and apparently believed that DIGing the case would be better than issuing a fractured opinion with no controlling rationale.
Why DIG this case?
At first blush, one might think that the Supreme Court DIGed the case because of the preservation problem. That issue was discussed at length at oral argument. But the respondents had pointed out at the cert stage that the petitioners had not made the private-right-of-action argument to the panel below. At least four justices voted to take up the case anyway. And it is generally believed that in order to DIG a case, the court requires the vote of at least one of the justices who originally voted to grant the petition (to prevent a situation in which four justices vote to take a case, only to have the other five DIG it).
It is possible that one of the justices who originally voted to grant the petition had second thoughts after further briefing on the waiver question. But the merits briefing and oral argument did not really shed much additional light on that question.
I also do not think that this is a case in which the Supreme Court believed that the petitioners had done a bait-and-switch. Although they may have pressed their objection to the implied-right-of-action more thoroughly and distinctly in their merits brief, the petitioners had at least previewed their implied-right-of-action argument at the cert stage.
I think it is more likely that the preservation issue interacted with other disagreements among the justices in a way that risked preventing the Supreme Court from reaching a majority rationale for any result in the case. Based on the oral argument, I expect that three or four of the more liberal justices refused to reach the private-right-of-action question on preservation grounds. Perhaps Justice Samuel Alito had reservations about this as well (He asked a skeptical question about preservation to the government’s lawyer.). And without five votes to reach the private-right-of-action question, the case could get very messy.
Specifically, even if there were five justices who all agreed that the only question before them was the negligence question, if those justices disagreed about the answer (as seemed possible from oral argument), they would need one or more of the remaining four justices to weigh in on the negligence issue in order to resolve that question authoritatively. But it is entirely conceivable that none of them would be willing to do so, given that it appears most likely that every justice willing to reach the private-right-of-action question (the conservative justices minus Alito) would have resolved the case on the ground that no such action exists.
To be sure, it would be possible for such a justice to assume that there is a private right of action and take a position on what state of mind that private suit should have to prove. But a justice could well resist that assumption, either because of a steadfast refusal to acknowledge the private right of action or because of concerns about how the court’s decision might affect government enforcement actions by the SEC. That is, a justice who accepted the government’s position – i.e., that there is no private right of action but that the SEC is only required to prove that a defendant acted negligently – could well be reluctant to sign on to an opinion holding that a presumed private right of action required only negligence. That would expand a private right of action the justice believed should never have been recognized in the first place, because the majority of circuits presently require proof that a defendant acted with scienter – that is, with intent to defraud — a higher standard than negligence. And it could take years before the court had a chance to clear things up in a case properly presenting the private-right-of-action question.
All this is, of course, rank speculation on my part. But given the court’s traditional refusal to explain its DIGs, speculation is the best we can do.
Are there any lessons from all of this for practitioners?
Start with the respondents. I think that the respondents did exactly what they were supposed to do: They raised the waiver objection clearly and forcefully in their brief in opposition to certiorari, and then again on the merits (wisely not giving up on the argument just because it was apparently rejected at the cert stage). Making a strong argument on the merits of the negligence question also may have avoided the prospect of a bare majority of justices resolving the case on that question alone.
What about the petitioners? Of course, in hindsight, one could say that the petitioners should have made the private-right-of-action argument to the 9th Circuit panel. It is always a good idea to look over the horizon at arguments one might want to raise in the Supreme Court, even if they are precluded by circuit precedent. That said, I am very reluctant to criticize counsel for failing to litigate a case with the Supreme Court in mind, given how unlikely it is that the case will ever end up there. That’s particularly true in this case – it is hard to fault petitioners’ counsel for not challenging what was clearly established law not only in the 9th Circuit but across the country.
In addition, although parties regularly spar over this question in their cert briefing, I’m not aware of the Supreme Court’s having given any clear guidance on what is required to preserve an argument when established circuit precedent forecloses it. (If any readers know of something, let me know and I’ll update this post.) The usual rationales for requiring exhaustion – that it gives the lower court a chance to avoid a mistake and may permit further percolation of an issue that would benefit the Supreme Court – have little application. The panel will have no authority to avoid the “mistake” already committed by prior circuit precedent and, as a result, will almost never waste time addressing the issue in any detail.
Is there something the petitioners could have done differently in the petition for certiorari? The question presented deftly combined the negligence and private-right-of-action issues into a single question. I don’t think it would have been wise to ask only whether there is a private right of action, or even to list it as a separate question – because there was no circuit conflict on that question, doing so would risk denial (if it were the only question) or the court’s granting cert only on the negligence question (thereby taking the private-right-of-action argument off the table for the merits briefing).
The body of the petition wisely, I think, made the negligence question the centerpiece (again, because this is the issue on which there was a circuit conflict), while also working in objections to the recognition of a private right of action as a reason for rejecting negligence. Perhaps some justices objected when the merits brief then more clearly disaggregated the two issues into alternative grounds for reversal. But that is hardly the kind of stretch that led to the bait-and-switch DIGs in some other cases. I would have expected, at most, that the court would simply refuse to consider the alternative ground, which is the far more common response. But one could come away from this case thinking that divergences between the merits arguments in the cert petition and merits brief are riskier than many (including me) had previously thought.
Should the petitioners just have forgone any arguments about the private right of action, then? Of course, with 20-20 hindsight, the answer is probably yes. But that was hardly obvious at the time the decisions were made. For one thing, one could reasonably conclude that the private-right-of-action argument was materially stronger on the merits than the petitioners’ objection to the negligence standard. In similar circumstances, the court has reached out to decide such antecedent questions, even though they were not raised below. And the petitioners reasonably could have thought that if the court believed that the question had not been properly preserved, it would just refuse to consider the question, not deny cert or DIG the case. So there was a big upside and a presumably small downside to raising both issues.
At the same time, for precisely the reasons that may have contributed to the DIG in this case, some justices may have been reluctant to grant a petition to decide a question (what state of mind is required for a Section 14(e) private suit) that depended on what the justice viewed as a plainly incorrect premise (that there is a private right of action to begin with). Putting both questions into the case gave those justices the option to decide the antecedent question if they wanted to, and may have made them more likely to agree to cert.
I suspect that what did the petitioners in was the government’s post-grant merits amicus brief, which may have scared off some justices from opining on the state-of-mind requirement for a hypothetical private right of action. I have not looked to see if the SEC made that position public before the filing of the amicus brief in this case (I doubt it.). But if that position had been known, it might have changed the cost-benefit analysis for the petitioners.
At the end of the day, the lesson may simply be that crafting a question presented and selecting arguments to make in a cert petition and on the merits is a delicate, risky business that sometimes has no clear right answers.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel on an amicus brief in support of the respondents in Emulex. That brief did not address the issues discussed in this post.]