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Opinion analysis: Notice and comment under the Medicare Act, no big moves for the APA

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Opinion analysis: Notice and comment under the Medicare Act, no big moves for the APA

Administrative law folks looking for drama will be disappointed by yesterday’s 7-1 opinion in Azar v. Allina Health Services, a Medicare case that had potential wider implications for administrative law but in the end turned out to provide a bread-and-butter statutory interpretation analysis that said little about administrative law or even very much about Medicare.

The question was whether the Department of Health and Human Services was permitted to change, without notice and comment, an important reimbursement formula for hospitals that treat many low-income patients. Involving whether Medicare Part C patients should be counted along with Medicare Part A ones in the calculation, that question was worth more than $ 3 billion in this case alone, according to the government. Resolving the case also might have required the Supreme Court to opine on an extremely important and unresolved area of administrative law: where to draw the line between “interpretive rules,” which the Administrative Procedure Act exempts from notice and comment, and “substantive rules,” for which those procedures are normally required. HHS had claimed that the APA’s exception for interpretive rules applied to its payment change that included Part C patients in the formula. In opposition, the hospitals had argued that the APA’s substantive/interpretive divide had nothing to do with this case and that, instead, the Medicare Act’s distinctive language differs intentionally from the APA’s exemption.

Justice Gorsuch with opinion in Azar v. Allina Health Services (Art Lien)

The hospitals won, in an opinion by Justice Neil Gorsuch that largely echoes the textualist opinion written below by then-Judge Brett Kavanaugh, who was recused from the case. Only Justice Stephen Breyer dissented.

Determining that the “case hinges on the meaning of a single phrase in the notice-and-comment statute Congress drafted specially for Medicare in 1987,” Gorsuch focused on the language of Medicare Section 1395hh(a)(2). That section requires notice and comment for any “rule, requirement, or other statement of policy” that “establishes or changes a substantive legal standard governing … the payment for services.” The question was whether “substantive legal standard,” a phrase the Supreme Court found nowhere else in the U.S. Code, meant something different from a “substantive rule” under the APA. The hospitals had argued that a “substantive legal standard” under Medicare does not necessarily connote a “substantive rule” with the force of law, APA-style, but rather is merely a standard that “creates duties, rights and obligations,” as opposed to a “procedural” standard that sets out “how those duties, rights, and obligations should be enforced.”

Finding for the hospitals, the majority made quick work of the trickiest administrative law question in the case. Opining that “everyone agrees that a policy of counting Part C patients in the Medicare fraction is substantive in this sense, because it affects a hospital’s right to payment,” the court found no need to delve into the intricacies of what “substance” means for purposes of the APA.

In finding the Medicare Act’s exemptions from notice and comment distinct from those of the APA, the majority relied on one of the Roberts Court’s favorite textualist tools: the presumption that Congress uses words consistently across statutes and, so, when it doesn’t, the court should assume that any deviation is intentional. Here, the court noted that the Medicare Act uses the word “substantive” differently from the APA. For instance, whereas under the APA policy statements are expressly exempt from notice and comment, under the Medicare Act “statements of policy” are expressly included in the category of possible “substantive legal standards.” Moreover, whereas Congress has expressly cross-referenced or copied portions of the APA’s two exemptions from notice and comment in other statutes, in Medicare Congress expressly borrowed (through cross-reference) only one of those exemptions — the “good cause” exemption — and not also the exemption for interpretive rules. In other words, Congress has shown us it knows how to copy the APA when it wants to and, had it wished to do so here, it could have gone about it “in a much more straightforward way.”

The Supreme Court basically stopped there. It avoided making a broader ruling about how much of the lengthy Medicare operation manuals could be swept into its holding, and instead considered only the policy change before it. It likewise did not rule on two alternative arguments from the briefing: First, the court determined it had “no need to reach” the hospitals’ claim that under a different subsection of the Medicare Act “further opportunity for public comment” had to be provided because an earlier regulation on the same formula had been “struck down for not being a logical outgrowth” of the proposal. Second, the court did not even engage the government’s assertion that under 1947’s Securities and Exchange Commission v. Chenery Corp., HHS can ordinarily choose between rulemaking and adjudication for making policy decisions (and that here it had chosen the latter in posting revised payment calculations on its website).

Breyer’s dissent delved deep into the statutory history, including the extremely complicated legislative history of the Medicare language at issue — which, as he read it, pointed to Congress’ desire to copy the APA’s protections into the act. He also focused on the policy implications: “To imagine that Congress wanted the agency to use those procedures in respect to a large percentage of its Medicare guidance manuals is to believe that Congress intended to enact what could become a major roadblock to the implementation of the Medicare program.” Charging the majority with failure to “offer clarity” for Medicare’s future, Breyer argued that it still remains entirely unclear just how to determine what qualifies as a “substantive legal standard” under the act. He would have remanded the case for further proceedings on whether the change at issue was a substantive or interpretive rule under the APA.

The majority paid relatively little mind to the dissent’s concerns. It engaged the legislative history the dissent offered but found it “ambiguous at best.” It also concluded that policy concerns have little place when the statutory language is clear.

But the  decision may offer two morsels of possible relevance for administrative law mavens searching for some kind of trail. Even as the majority strained to avoid jumping into the interpretive/substantive rule divide, the Supreme Court’s frustration with HHS’s form of notice here was pretty clear. With respect to the agency’s decision after the U.S. Court of Appeals for the District of Columbia Circuit had struck down its regulation that it “still wanted to count Part C patients” in determining its fiscal year 2012 payments and could not rely on a later prospective rule to do so, the Supreme Court wrote: “The agency’s solution? It posted on a website a spreadsheet announcing the 2012 Medicare fractions for 3,500 hospitals nationwide and noting that the fractions included Part C patients.” Even if prior notice and comment had not been required, the agency’s decision to use what the court called an “Internet posting” seems to have rankled the justices.

In addition, the Supreme Court briefly stepped into an open debate about the necessary length of the comment period under the APA in noting that the Medicare statute mandated “a 60-day comment period (twice the APA minimum of 30 days)” for agency actions like the one here. The APA’s text, however, requires 30 days only before most final rules can take effect. This could be a tiny, irrelevant error or the court could be wading into unresolved conflicts over whether shorter periods prevent “an opportunity to participate” under the APA.

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Opinion analysis: Justices reject subjective standard on sanctions for violating the bankruptcy discharge

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Opinion analysis: Justices reject subjective standard on sanctions for violating the bankruptcy discharge

Yesterday’s decision in Taggart v. Lorenzen will not go down as one of the major decisions of the term, but it should provide some useful guidance in an area as to which the Supreme Court has not previously spoken: the standards for punishing creditors that violate the discharge that bankruptcy provides to debtors.

A central feature of the bankruptcy process for consumers is a “discharge” that excuses a debtor that completes a bankruptcy proceeding from paying debts incurred before the bankruptcy filing. The legal force of the discharge is the threat of contempt: A bankruptcy court will hold a creditor in contempt if the creditor attempts to collect a discharged debt.

Justice Breyer with opinion in Taggart v. Lorenzen (Art Lien)

One problem with that process arises when it is not clear that a creditor’s post-discharge interactions with a debtor violate the discharge. In some cases, for example, it may not be clear that the debt in question has been discharged. The Bankruptcy Code includes a large number of detailed exceptions that allow certain debts to survive the bankruptcy discharge.  For example, the discharge does not extend to most student-loan debts, to fraudulently incurred debts, and to domestic-support obligations. In cases in which application of the discharge is ambiguous, creditors might be unsure about whether particular activities violate the discharge.

The question before the Supreme Court in Taggart is how to decide whether a court should sanction a creditor for collection activities that turn out to violate the discharge. In this case, the creditors in question (a business named Sherwood, its owners, and their former attorney, who is represented by the executor of his estate, respondent Shelley Lorenzen) were involved in post-bankruptcy litigation with the debtor (Bradley Taggart) over ownership of a business in which Taggart had invested before the bankruptcy. Because the litigation involved ownership of the business, the litigation itself did not violate the discharge. At the end of the litigation, though, the state court ordered Taggart to pay Sherwood’s attorney’s fees. That monetary judgment ordinarily would violate the discharge, but the state court concluded that it was permissible under a lower-court doctrine holding that the discharge no longer applies when a debtor “returns to the fray” of litigation against the creditor.

By the end of the litigation in the lower courts, it was settled that the judgment against Taggart violated the discharge, and that he could not be forced to pay the attorney’s fees. The U.S. Court of Appeals for the 9th Circuit concluded, however, that Sherwood could not be held in contempt so long as it had held a subjective belief, however unreasonable, that it was entitled to press Taggart to pay those fees. Justice Stephen Breyer’s opinion for a unanimous court squarely rejects that holding.

Breyer starts with Section 524 of the Bankruptcy Code, which provides that the bankruptcy court’s order of discharge “operates as an injunction against” post-bankruptcy collection of debts. Because that statute gives the discharge force by treating it as an injunction, Breyer reasons, enforcement of the discharge should follow traditional rules for enforcing injunctions. Quoting a law-review article by Justice Felix Frankfurter, Breyer explains: “When a statutory term is ‘obviously transplanted from another legal source,’ it ‘brings the old soil with it.’” In this case, the “old soil” is the “potent weapon” of sanctions for contempt. Traditionally, Breyer notes, courts faced with injunctions have understood that “basic fairness” requires that those sanctions do not apply in the face of a “fair ground of doubt” about the propriety of activity.

Coming closer to the dispute at hand, Breyer emphasizes that the “standard is generally an objective one,” which means “that a party’s subjective belief that [the party] was complying with an order ordinarily will not insulate [the party] from civil contempt if that belief was objectively unreasonable.” Breyer offers one qualification of that statement, noting that “subjective intent is [not] always irrelevant,” both because “sanctions may be warranted when a party acts in bad faith” and because “a party’s good faith, even where it does not bar civil contempt, may help to determine an appropriate sanction.” Breyer closes that discussion by offering a summary statement of a rule of decision: Sanctions are appropriate “when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”

With that “objectively unreasonable” standard in hand, Breyer readily disposes of the 9th Circuit’s view that even an unreasonable understanding of the discharge protects a creditor from contempt: “[T]his standard is inconsistent with traditional civil contempt principles, under which parties cannot be insulated from a finding of civil contempt based on their subjective good faith.” For Breyer the lower-court standard “relies too heavily on difficult-to-prove states of mind” and “may too often lead creditors who stand on shaky legal ground to collect discharged debts, forcing debtors back into litigation … to protect the discharge that it was the very purpose of the bankruptcy proceeding to provide.”

Finally, Breyer turns to the standard that Taggart proposes, a “strict-liability” standard under which actions that violate the discharge would be sanctioned unless the creditor precleared them with the bankruptcy court. For Breyer, that standard does not “provide a workable solution to the creditor’s potential dilemma.” From his perspective, because “there will often be at least some doubt as to the scope of such orders,” a preclearance requirement would “lead to frequent use of the advance determination procedure.” The statute suggests, though, that such a “procedure would be needed in only a small number of cases.” In contrast, Breyer explains, “widespread use of this procedure” would “mov[e]” a substantial body of “litigation out of state courts, who have concurrent jurisdiction over such questions, and into federal courts.” The “additional federal litigation, additional costs, and additional delays” of that proposal are enough to persuade Breyer to reject it.

Taggart is not an earth-shaking decision. It does, though, provide the first Supreme Court discussion of a topic that comes up with considerable frequency in the bankruptcy courts, so we can expect it to be widely used to provide the organizing principle for the trial-court opinions that resolve litigation in the area.

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Opinion analysis: Divided bench limits removal of class actions

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Opinion analysis: Divided bench limits removal of class actions

Yesterday’s decision in Home Depot USA v. Jackson offers an unusual outcome: a holding by the justices that limits the ability of defendants in large class actions to remove those cases to federal court. The lineup is also unusual, with Justice Clarence Thomas writing for the majority, over a dissent by four of the justices usually regarded as conservative: Chief Justice John Roberts and Justices Samuel Alito, Neil Gorsuch and Brett Kavanaugh.

The case involves litigation that started with an action by Citibank to collect a credit-card debt from respondent George Jackson. The debt arose out of a purchase at Home Depot, with which Jackson was not satisfied. The defendant (Jackson) responded to Citibank’s action by filing a class action against Home Depot and a variety of other entities. Those entities attempted to remove the case to federal court, relying on two closely related statutes that permit the “defendant” in a suit in state court to “remove” the case to federal court.  The question before the justices was whether Home Depot qualifies as a “defendant” under those statutes even though it was not the defendant named in Citibank’s original complaint. The majority holds that Home Depot is not a “defendant,” and thus that it cannot remove the case to federal court.

Thomas starts by considering the general removal statute, 28 U.S.C. § 1441.  Thomas acknowledges that Home Depot’s reading of the statute – which treats Home Depot as a defendant because it was sued in a civil proceeding – is “plausible.” He does not, though, “think it is the best one,” because statutory phrases like the reference here to a “defendant” cannot, as the court has so often emphasized, “be construed in a vacuum.” The relevant context is that the statute refers not broadly to defendants of “claims,” but specifically to the defendant in a “civil action.” Because Section 1441 extends only to cases over which the federal courts would have had jurisdiction, federal courts in removal cases traditionally have assessed their jurisdiction over an action by “evaluat[ing] whether that action could have been brought originally in federal court.” And because that action “is the action as defined by the plaintiff’s complaint, ‘the defendant’ to that action is the defendant to that complaint, not a party named in a counterclaim.”

Thomas notes that a reading limiting “defendant” to the parties named in the original complaint draws support from specific removal provisions (not at issue here) in which “Congress has clearly extended the reach of the statute to include parties other than the original defendant.” Because Section 1441, “by contrast, limits removal to ‘the defendant or the defendants’ in a ‘civil action,” it would be odd to read Section 1441 as permitting removal by parties like Home Depot.

Thomas also relies on the court’s earlier decision in Shamrock Oil v. Sheets, in which the court considered a suit in which the original defendant had filed a counterclaim against the original plaintiff.  When the original plaintiff attempted to remove the matter, arguing that its position as a defendant on the counterclaim brought it within the removal statute, the court refused to permit removal. Thomas reads Shamrock as providing strong support for the decision here: “If a counterclaim defendant who was the original plaintiff is not one of ‘the defendants,’ we see no textual reason to reach a different conclusion for a counterclaim defendant who was not originally part of the lawsuit.”

Having explained why Home Depot is not a “defendant” under Section 1441, Thomas turns to Section 1453, a special removal provision included in the Class Action Fairness Act, designed to provide a federal forum for large class actions filed in state court. That statute, among other things, permits removal by “any defendant” to a “class action.” Home Depot argues that the reference to a “class action” rather than a “civil action” extends the provision beyond the traditional bounds of Section 1441 to reach any party sued in a large state-court class action.

Thomas disagrees, explaining that the references in Section 1453 to “any defendant” “simply clarify that certain limitations on removal that might otherwise apply do not limit removal under § 1453(b).” The first provision states that a class action “may be removed … without regard to whether any defendant is a citizen of the [forum] State.” For Thomas, that passage affords “no indication that th[e] language does anything more than alter the general rule that a civil action may not be removed on the basis of diversity [if any defendant resides in the forum state].” In the same way, Section 1453(b) also states that removal is appropriate “by any defendant without the consent of all defendants.” That passage “simply amends the rule [in Section 1446] that ‘all defendants who have been properly joined and served must join in … removal of the action.” For Thomas, this provides nothing to “indicate that a counterclaim defendant can remove.” In sum, for the court neither of those provisions “alters [the statute’s] limitation on who can remove, which suggests that Congress intended to leave that limit in place.”

Alito’s spirited dissent (more than twice as long as Thomas’s opinion for the court) vehemently criticizes the majority for validating a “tactic” that defendants can use to prevent removal of class litigation from state court, a result that the dissenters see as inconsistent with the intent of the Class Action Fairness Act.  For the majority, though, “that result is a consequence of the statute Congress wrote. Of course, if Congress shares the dissent’s disapproval of certain litigation ‘tactics,’ it certainly has the authority to amend the statute. But we do not.”

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is counsel to the petitioner in this case. The author of this post is not affiliated with the firm.]

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Opinion analysis: The First Amendment, probable cause and questions left unanswered

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Opinion analysis: The First Amendment, probable cause and questions left unanswered

On Tuesday, in Nieves v. Bartlett, a majority finally agreed on a standard for how probable cause affects a civil damages action for First Amendment retaliatory arrest under 42 U.S.C. § 1983: A plaintiff must show the absence of probable cause to arrest as an element of the claim and the presence of probable cause will defeat most claims, unless a plaintiff presents “objective evidence that he was arrested when otherwise similarly situated individuals not engaged in the same sort of protected speech had not been.” But the decision produced five opinions and left questions for the lower courts to resolve, hopefully “commonsensically.”

The case arises from events at Alaska’s Arctic Man, which Chief Justice John Roberts described in his majority opinion as “an event known for both extreme sports and extreme alcohol consumption.” Two Alaska state troopers, Luis Nieves and Bryce Weight, arrested Russell Bartlett, an allegedly intoxicated and belligerent participant in the festival, charging him with disorderly conduct and resisting arrest. Bartlett alleged that the arrest was in retaliation for his efforts to challenge officers’ attempts to question a teen and for an earlier encounter in which Bartlett refused to speak with Nieves. Bartlett alleged that, in effecting the arrest, Nieves said, “[B]et you wish you would have talked to me now.”

Roberts for the court

Roberts wrote the opinion for the court, joined in full by Justices Stephen Breyer, Samuel Alito, Elena Kagan and Brett Kavanaugh, and by Justice Clarence Thomas in all but one part.

Roberts began with the requirement that a plaintiff seeking to establish First Amendment retaliation must establish a causal connection between the defendant officer’s retaliatory animus and the constitutional injury, in which the retaliatory motive is a “but-for” cause of the injury and the defendant would not have taken the adverse action absent the retaliatory motive. In some cases, such as employment claims under Mt. Healthy City Board of Education v. Doyle, the connection is straightforward — evidence of defendant motive and adverse action constitutes circumstantial evidence of retaliation, shifting the burden to the defendant to show that he would have taken the challenged action without the improper motive. In other cases, however, showing retaliation involves “causal complexities.” In Hartman v. Moore, the court held that a plaintiff alleging retaliatory prosecution had to plead and prove the absence of probable cause for the underlying criminal charge; such cases are complex because the alleged retaliatory motive belongs to the police officer, while the decision to proceed with charges belongs to a prosecutor who is immune from suit and whose decisions receive a presumption of regularity. The absence of probable cause has high probative value to reinforce the officer’s retaliatory motive.

The majority agreed as a “general matter” with the defendants that a retaliatory-arrest claim involves the same “causal complexities” as retaliatory-prosecution claims and requires the same element of lack of probable cause. Although the decisionmaker and the motivated actor are not separated as they are in Hartman, “it is particularly difficult to determine whether the adverse government action was caused by the officer’s malice or the plaintiff’s potentially criminal conduct.” Probable-cause evidence is available in most retaliatory-arrest cases. Protected speech by the arrestee also may be a “wholly legitimate consideration” for officers deciding whether to make an arrest; in this case, for example, the defendants testified that they perceived Bartlett as a threat because of the content and tone of his speech, in addition to his posture and apparent intoxication. The majority produced an amalgam of Mt. Healthy and Hartman. The plaintiff must plead and prove absence of probable cause; if he cannot do so, the claim fails. If he establishes lack of probable cause, Mt Healthy governs, as the court held it did for claims challenging retaliatory municipal policies.

The majority rejected Bartlett’s focus on subjective motive as inconsistent with the court’s approach in other relation contexts, such as the Fourth Amendment. It would allow “doubtful” retaliatory-arrest claims to proceed on allegations about the officer’s mental state, something easy to allege and difficult to prove. This would impose on officers “overwhelming litigation risks,” in which a stray comment by the officer envelops him in “years of litigation,” This would cause “undue apprehension” in officers, making it hard for them to discharge their duties.

Roberts added one “narrow qualification,” losing Thomas’ vote but retaining a majority. A plaintiff need not show the absence of probable cause when he presents objective evidence that he was arrested when otherwise similarly situated individuals not engaged in the same sort of protected speech were not. This qualification addresses cases in which the officer had probable cause to arrest but typically would exercise his discretion not to do so. As an example, the court pointed to an arrest of a vocal critic of the police for jaywalking, a crime that police rarely enforce. Evidence of probable cause would do little to show a causal connection between animus and injury, while providing insufficient protections for First Amendment rights.

The majority concluded by holding that neither of Bartlett’s claims could survive summary judgment. The record lacked any evidence of retaliation by Weight, who was not involved in the earlier encounter between Bartlett and Nieves; any seemingly retaliatory comments by Nieves do not show what motivated Weight. In any event, there was, objectively, probable cause to arrest Bartlett on those charges, as even the lower court acknowledged.

Thomas, concurring in part and concurring in the judgment

Thomas joined most of the majority opinion, except for the “narrow qualification,” which he argued “has no basis in either the common law or our First Amendment precedents.” He complained that the narrow qualification “threatens to derail” the court’s retaliation jurisprudence. The exception is not limited to jaywalking, but may apply to serious felonies. And it will produce protracted litigation about which individuals are similarly situated, imposing on officers the chilling effect and fear of liability that support the probable-cause rule in the first place. Thomas, alone among the justices, would hold that the presence of probable cause always defeats a First Amendment retaliation claim.

Gorsuch, concurring in part and dissenting in part

Justice Neil Gorsuch began from the premise that probable cause cannot undo a First Amendment violation or erase its significance. Given the growth of criminal law and government regulation to cover “so much previously innocent conduct,” “almost anyone can be arrested for something.” If probable cause erased a First Amendment violation, “little would be left of our First Amendment liberties, and little would separate us from the tyrannies of the past or the malignant fiefdoms of our own age.”

Rhetoric aside, Gorsuch emphasized the independent purpose and unique protections of the First Amendment. Although probable cause renders a search or seizure reasonable so as to preclude a Fourth Amendment claim, the First Amendment operates on its own and provides different protections. While the Fourth Amendment protects against officers acting without proper authority, the First Amendment protects against officers who abuse that lawful authority by engaging in conduct for an impermissible reason. The better First Amendment analogy is to the 14th Amendment, which prohibits otherwise-authorized law enforcement actions when done for racially discriminatory reasons and seeks to prevent the exercise of lawful authority for unlawful (racially discriminatory) reasons. Both the First and 14th Amendments serve purposes distinct from the Fourth Amendment, and neither should be encumbered by a probable-cause element that defeats all claims.

The key precedent for Gorsuch was not Hartman, but United States v. Armstrong, which the majority cited, but did not elaborate on, to support its exception. Armstrong held that racially selective prosecutions could violate equal protection even when the prosecutor had probable cause, but required “clear evidence” of discrimination, such as evidence of other charging decisions and statements by the prosecutor indicating discriminatory purpose. Gorsuch argued that it is at least an “open question” whether the concerns driving Armstrong are present in this type of retaliatory-arrest case.

Gorsuch closed by attempting to reframe and broaden the majority’s exception. It was not limited to comparison-based evidence and should not be read as such. Rather, in citing Armstrong, the majority left open the possibility that other direct evidence, such as admissions, could be used to prove a retaliatory-arrest claim, just as it might prove a retaliatory-prosecution claim. He insisted that he and the majority were in agreement: Absence of probable cause is not an absolute requirement and its presence not an absolute defense, although it may bear on causation. The rest, including how to prove the exceptional case, awaits another case.

Ginsburg concurring in the judgment in part and dissenting in part

Justice Ruth Bader Ginsburg wrote a short dissent, arguing that “[a]rrest authority … can be abused to disrupt the exercise of First Amendment speech and press rights.” She argued that Mt. Healthy struck the correct balance, by requiring the plaintiff to show unconstitutional animus as a motivating factor and shifting the burden to the defendant to demonstrate that he would have taken the same action without an improper motive.

Ginsburg agreed that summary judgment was proper as to Weight and that the evidence of Nieves’ statements was likely not sufficient to survive summary judgment. But she “would not use this thin case to state a rule that will leave press members and others exercising First Amendment rights with little protection against police suppression of their speech.”

Sotomayor dissenting

The lone dissenter, Justice Sonia Sotomayor began by framing the divisions among the justices. Eight justices reached the “correct and sensible bottom line” that probable cause does not always suffice to defeat a First Amendment retaliatory-arrest claim. But a slimmer majority of five justices announced a different rule — probable cause will defeat a claim unless the plaintiff “happens to be able to show” that people who did not engage in the same speech but otherwise were similarly situated were not arrested.

Like Ginsburg, Sotomayor believed Mt. Healthy could do the work. Like Gorsuch, Sotomayor believed that a plaintiff might be able to prove retaliation, even when probable cause is present, with evidence other than comparison. But she was less sanguine than Gorsuch that the majority’s rule leaves room for such other forms of proof. Instead, the majority’s rule “arbitrarily fetishizes one specific type of motive evidence—treatment of comparators—at the expense of other modes of proof,” in particular, evidence of the officer’s own statements and other “direct” evidence showing the officer’s motivation for arresting a suspect. She was careful not to overstate the clarity of the majority opinion — which did not explain what objective evidence or similarly situated mean. And she hoped that lower courts will approach the new standard “commonsensically,” so that the rule will not in practice become the absolute bar the majority rejected.

But Sotomayor was not confident, believing the majority’s rule “risks letting flagrant violations go unremedied.” The only obvious beneficiary of the rule is an arrestee singled out at protests or other large public gatherings, with a robust pool of potential comparators. But she offered other cases that, she feared, would not be viable under the majority’s rule. One example was a bystander arrested for trespassing to prevent her from recording a police interaction when no other people were around (and not recording) to be used as comparators. Another involved a reporter investigating police corruption, stopped and ticketed for going five mph over the speed limit, but unable to offer evidence that the ticketing officer warned him that the tickets would keep coming “until you find something else to write about.”

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Opinion analysis: Clarity on “clear evidence” of drug pre-emption?

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Opinion analysis: Clarity on “clear evidence” of drug pre-emption?

In Merck Sharpe & Dohme v. Albrecht, the Supreme Court yesterday issued the latest in its burgeoning canon of drug pre-emption cases, offering clarity on the procedure for deciding pre-emption defenses, but little additional elucidation on the contours of those defenses. The court first held that judges, rather than juries, should decide whether FDA actions pre-empt state tort suits alleging failure to warn consumers of adverse effects. This is a strategic win for drug manufacturers, clarifying that their go-to defense of “impossibility preemption” – the claim that federal regulation would have prohibited the additional warnings plaintiffs allege state tort law required – can be decided on motions before the case reaches a jury. A decade ago in Wyeth v. Levine, the court held that to succeed with the impossibility pre-emption defense, defendants had to produce “clear evidence” that the FDA would have prohibited an additional warning. Yesterday’s opinion in Albrecht attempted to clarify Wyeth’s application by explaining abstractly that the “clear evidence” standard contemplates an irreconcilable conflict between federal and state law, rather than a heightened standard of evidentiary proof.

Justoce Breyer with opinion in Merck Sharp & Dohme v. Albrecht (Art Lien)

Albrecht came to the Supreme Court from a large multi-district litigation in which thousands of patients alleged that FDA-approved drugs for osteoporosis treatment carried the risk of severe bone breaks called “atypical femoral fractures” that the manufacturers failed to fully disclose in their labeling. The plaintiffs claimed that the failure to warn of these fractures violated state tort law; the defendants argued that the FDA actually rejected or would have rejected their request to add the new warnings and that federal prescription drug regulation therefore pre-empts the state tort claims. The years-long back-and-forth between Merck and the FDA about clinical evidence of these fractures associated with its drug, Fosamax, presented the Supreme Court with a narrow factual and procedural window in which to address wider questions about products liability pre-emption: Who should decide the ultimate impossibility question (judge or jury), and how to determine when simultaneous compliance with state tort law and federal FDA regulation is impossible (what “clear evidence” of impossibility means).

The district court granted summary judgment to the defendants, holding that pre-emption was an issue of law for a court and that the FDA’s response letter pre-empted almost all of the plaintiffs’ claims. The U.S. Court of Appeals for the 3rd Circuit reversed, identifying factual ambiguities in the FDA’s responses that required jury consideration and surmising that Wyeth required a higher standard of proof for a manufacturer to establish that the FDA’s responses made it “impossible” to add the warnings that the plaintiffs sought.

Yesterday, the Supreme Court vacated the 3rd Circuit’s decision. The court unanimously agreed on who should decide (a judge) and what Wyeth’s “clear evidence” standard means (an “irreconcilable conflict,” rather than a standard of proof).

Justice Stephen Breyer’s opinion, joined by five justices, held “that a judge, not the jury, must decide the pre-emption question,” breezily “elaborate[d] Wyeth’s requirements along the way,” and echoed the emphasis on administrative law and deference to FDA expertise that Breyer had raised during oral argument in January. The court categorized the “question of agency disapproval” of additional warnings as a question of law based on its complexity and potentially broad impact. First, administrative agency workings are complex and unfamiliar in ways that require some legal skill to comprehend. Second, to the extent that the FDA memorializes its disapproval in written instruments, those documents are appropriate for construction by judges under Markman v. Westview Instruments and the Administrative Procedure Act. Third, judges are in a better position than juries to assess the statutory and regulatory context for the agency’s action and should, in theory, produce more uniform interpretations – “normally a virtue when a question requires a determination concerning the scope and effect of federal agency action.”

The court further explained that even the kind of “brute factual questions” that inform the judge’s construction of the FDA’s decision, such as whether the manufacturer submitted complete information to the FDA, need not be submitted to a jury. They can be “subsumed within an already tightly circumscribed legal analysis,” as the court recently explained in the patent-construction context in Teva Pharmaceuticals USA Inc. v. Sandoz.

The opinion then heeded the 3rd Circuit’s urging that the Supreme Court help lower courts by clarifying the “clear evidence” standard from Wyeth. “Clear evidence,” the court explained, “is evidence that shows the court that the drug manufacturer fully informed the FDA of the justifications for the warning required by state law and that the FDA, in turn, informed the drug manufacturer that the FDA would not approve a change to the drug’s label to include that warning.” The court rejected the 3rd Circuit’s surmise that “clear evidence” referred to heightened standards of proof. Instead, Wyeth’s clear evidence analysis requires that the judge “simply ask himself or herself whether the relevant federal and state laws ‘irreconcilably conflic[t].’”

The majority opinion broadly defined the “relevant federal law” in this case as “the statutory and regulatory scheme through which the FDA regulates the information that appears on brand-name prescription drug labels,” though even that definition is not as straightforward as it might sound. Later, the majority opinion carefully noted that “the only agency actions that can determine the answer to the pre-emption question, of course, are agency actions taken pursuant to the FDA’s congressionally delegated authority.” Under the current regulatory regime, the FDA may reject manufacturers’ labeling by several methods including the formal “complete response letter” method employed in this case. The majority opinion left scrutiny of the FDA’s method and its legal effect for the lower courts on remand.

Justice Clarence Thomas joined the opinion, but, as he often does in pre-emption cases, wrote separately to reiterate his distinct perspectives on both pre-emption and administrative law. Thomas’ reading of the supremacy clause leads him to the position that federal law has a narrower definition, but a wider pre-emptive reach, than current precedent acknowledges. Thomas’ concurrence espoused a pre-emption doctrine invalidating both state laws that “logically contradict” federal ones, and the narrower category of conflicts that manifest in a “physical impossibility” of compliance. Thomas believes, however, that only the federal statute and those regulations that “necessarily flow” from it are entitled to pre-emptive effect. He would therefore go further than the majority and hold that Merck’s pre-emption defense fails because Merck relies on mere FDA letters as evidence that it could not have added warnings. In Thomas’ lone opinion, the FDA’s response letter “was not a final agency action with the force of law, so it cannot be ‘Law’ with pre-emptive effect.”

Justices Samuel Alito, joined by Chief Justice John Roberts and Justice Brett Kavanaugh, concurred in the judgment and the majority’s classification of impossibility pre-emption as a question of law. Whereas Thomas explained how he would reach an ultimate conclusion of non-pre-emption, Alito used his concurrence to imply that the court of appeals should reach the opposite conclusion. Alito quibbled with the majority’s summaries of FDA law and procedures, preemption precedent after Wyeth, and the facts of the case. Based on these quibbles, he expressed concern about how the 3rd Circuit may apply the “clear evidence” definition on remand, and all but instructed the court of appeals what he would do in its place. In Alito’s view, the FDA was “for years … aware of this [atypical femoral fracture] issue, communicating with drug manufacturers, studying all relevant information, and instructing healthcare professionals and patients alike to continue to use Fosamax as directed.” He stressed as “highly relevant” the FDA’s statutory duty to require label changes when the agency becomes aware that scientific evidence warrants a change. Alito also emphasized the legal arguments made by the solicitor general on the agency’s behalf – namely, the argument that the FDA’s initial decision to accept a label change only to the “Adverse Reactions” section constituted a rejection of the suggestion to change the “Warnings & Precautions” section.

Yesterday’s decision did at least half of what Merck hoped it would: It classified the impossibility-pre-emption issue as a question of law for the judge to determine. This point of procedural clarity has enormous strategic value for products-liability defendants because it confirms that courts may conclusively rule on the pre-emption defense as early as a pre-answer motion, though the factual complexity of FDA communications likely will push the issue in many drug-pre-emption cases to summary judgment. As for how lower courts should rule, the majority opinion did not decide whether this case ultimately represents the pre-emption yin to Wyeth’s no-pre-emption yang. In their concurring opinions, Thomas, Alito, Roberts and Kavanaugh made fairly plain what divergent conclusions they would reach on the ultimate issue. But Breyer’s majority opinion leaves it for the 3rd Circuit to hash out on remand, using the newly announced definition of “clear evidence.” The majority’s opinion also leaves intact the gestalt pre-emption guideposts of the presumption against pre-emption for “the historic police powers of the States” and the consumer-protection motivation of the FDA’s enabling statutes. Overall, Albrecht delegates to the lower courts the task of deciding impossibility pre-emption and offers them only a limited measure of clarity on how to approach that important work.

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Opinion analysis: Justices narrow bankrupts’ power to rescind contracts in bankruptcy

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Opinion analysis: Justices narrow bankrupts’ power to rescind contracts in bankruptcy

Yesterday’s opinion in Mission Product Holdings Inc. v. Tempnology, LLC resolved a long-standing disagreement in the lower courts about what happens when a debtor exercises its statutory right to reject a contract in bankruptcy. Section 365 of the Bankruptcy Code gives the debtor an explicit right to “reject” contracts, and tells us that rejection amounts to a “breach” of the contract, which gives the nonbankrupt counterparty a right to sue the bankrupt for damages. The lower courts have struggled, though, in deciding whether the rejection’s “breach” also rescinds the entire contract. In this case, for example, the contract in question is a trademark license, and the debtor not only wants to terminate its own obligations under the contract; it also wants to retract the licensee’s right to use the debtor’s trademark. Justice Elena Kagan’s opinion for the Supreme Court gives us a clear answer: Rejection breaches but does not rescind the contract in question.

Justice Kagan with opinion in Mission Product Holdings v Tempnology (Art Lien)

For Kagan, “the text” of Section 365 “does much of the work,” primarily because of the provision that states that rejection “constitutes a breach” of the challenged contract. Because “‘breach’ is neither a defined term nor a specialized bankruptcy term,” the Supreme Court’s normal practice suggests that “[i]t means in the [Bankruptcy] Code what it means in contract law outside bankruptcy.” To solve that problem, Kagan offers a “made-up” hypothetical contract, which happens to be drawn directly from the amicus brief filed by the U.S. solicitor general. In Kagan’s made-up contract, “[a] dealer leases a photocopier to a law firm, while agreeing to service it every month; in exchange the firm commits to pay a monthly fee.” Outside of bankruptcy, a decision by the dealer to stop servicing the photocopier would breach the contract and give the law firm the choice either to terminate the contract (and return the copier) or to continue to use the copier (paying the required monthly fee) and sue for damages. As Kagan summarizes: “The choice to terminate the agreement and send back the copier is for the law firm. By contrast, the dealer has no ability, based on its own breach, to terminate the agreement.”

Reasoning from that made-up contract, Kagan explains that the same results should follow in bankruptcy:

If the rejection of the photocopier contract ‘constitutes a breach,’ as the Code says, then the same results should follow…. That … means … that the law firm has an option about how to respond—continue the contract or walk away, while suing for whatever damages go with its choice. And most important, it means that assuming that the law firm wants to keep using the copier, the dealer cannot take it back.

Kagan sees nothing at all different about the trademark license at issue here, for which “the same consequences follow…. The debtor can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed.” For her, that outcome “reflects a general bankruptcy rule: The estate cannot possess anything more than the debtor itself did outside bankruptcy.” Quoting University of Chicago’s Professor Douglas Baird, she emphasizes that “[a] debtor’s property does not shrink by happenstance of bankruptcy, but it does not expand, either.”

Kagan characterizes the contrary argument as “rest[ing] on a negative inference.” The debtor in this case (respondent Tempnology) points to several categories of contracts for which Section 365 provides specific treatment that defines rights that counterparties retain even after a debtor’s rejection. In Tempnology’s view (as recounted by Kagan), “the statute’s ‘general rule’ would ‘swallow the exceptions’ [unless] the ordinary consequence of rejection [is] something different – i.e., the termination, rather than survival, of contractual rights previously granted.”

Kagan offers two responses. First, Tempnology “offers no account of how to read” the provision that tells us that rejection “constitutes breach,” but instead reads that provision “to say essentially its opposite (i.e., that rejection and breach have divergent consequences).” More pointedly, she rejects Tempnology’s attempt to “trea[t] as a neat reticulated scheme … what history reveals to be anything but.” Kagan offers a grand historical view of the various specific provisions in Section 365, under which “each responded to a discrete problem—as often as not, correcting a judicial ruling of just the kind Tempnology urges.” For Kagan, “this mash-up of legislative interventions” suggests that “Congress enacted the [various exceptions], as and when needed, to reinforce or clarify the general rule that contractual rights survive rejection.”

For example, the provision that treads closest to the trademark license at issue here – the enactment of Section 365(n) in response to a lower court decision in Lubrizol Enterprises v. Richmond Metal Finishers – protects patent and copyright licensees from the consequences of a bankrupt’s rejection of their licenses. Tempnology argues that the exclusion of trademark licenses from that provision suggests that they should not survive rejection. For Kagan, though, Section 365(n) is just “part of a pattern—that Congress whacked Tempnology’s view of rejection wherever it raised its head.” Ultimately, she reasons, “Congress’s repudiation of Lubrizol for patent contracts does not show any intent to ratify that decision’s approach for almost all others.”

I expect this will prove to be one of the Supreme Court’s most important bankruptcy decisions of the decade. Unlike the minor and trivial circuit splits that have dominated the court’s bankruptcy docket in recent years, Mission Product Holdings confronts a conceptual question at the heart of business bankruptcy: how we should think of the debtor’s contractual relations. In general, most informed observers will welcome the decision, which enforces the approach that academics have strongly pressed.

That is not to say that all will applaud the Supreme Court’s reasoning. Licensing lawyers, for example, will doubtless wonder about Kagan’s ready treatment of an intellectual-property license as fundamentally a conveyance of property rather than a bare commitment not to sue for infringement. Future courts also should notice the “whack-a-mole” theory of legislation Kagan employs to parse the multifarious amendments to Section 365. And bankruptcy lawyers will mull the reasoning she uses to conclude that the case is not moot – that Mission Product Holdings might have a claim to reopen the plan and recover funds already distributed to creditors. But where would we be if the court left nothing for criticism?

[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 petitioner in this case. The author of this post is not affiliated with the firm.]

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