—Cory Andrews, WLF General Counsel & Vice President of Litigation
Earlier today, the U.S. Court of Appeals for the Ninth Circuit reversed a trial court’s nationwide class-certification order in a highly watched antitrust suit against Qualcomm, a leading computer-chip manufacturer. The decision was a victory for Washington Legal Foundation (WLF), which filed an amicus brief in the case arguing that the class’s massive size renders it unmanageable.
The plaintiffs alleged that Qualcomm behaved anticompetitively by forcing cellphone makers to pay inflated royalties to Qualcomm to license certain patents. As a result, consumers allegedly paid more for their cellphones than they would have had Qualcomm charged reasonable royalties. But as the Second Circuit emphasized in today’s decision, cellphone purchasers have no direct dealings with Qualcomm. And the antitrust laws of 22 States provide that only those who deal directly with Qualcomm have standing to sue. As a result, the California district court improperly certified the class by applying California law to the claims of all cellphone purchasers in all 50 States.
The appeals court’s reasoning largely tracks arguments found in WLF’s brief. WLF argued that each State has a strong interest in applying its own consumer protection laws to consumer sales occurring within the State. WLF urged the appeals court to respect that strong interest by eliminating from the class all consumers residing in one of the 22 States that bar antitrust claims by indirect purchasers. WLF also argued that class certification should be reversed because the district court failed to create a plan for managing so massive a lawsuit—by far the largest class action in U.S. history.
—John Masslon, WLF Senior Litigation Counsel
Click here for WLF’s brief.
WASHINGTON, DC—Washington Legal Foundation (WLF) today filed an amicus curiae brief urging the U.S. Supreme Court to strike down an Austin ordinance that limits businesses’ free-speech rights. Although the Court’s 2015 Reed decision held that all content-based restrictions must pass strict scrutiny, Austin passed an ordinance that treats speech differently based on its content.
The appeal arises from Regan National Advertising’s lawsuit challenging the Austin ordinance. That ordinance allows on-premises signs to use digital technology but prohibits advertising off-premises goods or services with digital signs. Austin’s rationales for the digital-sign ban—traffic safety and aesthetics—make no sense because those same rationales apply to on-premises digital signs, which are allowed.
Regan National Advertising challenged the ordinance. It relied on Reed, which held that any ordinance that requires reading a sign to determine if it is legal must pass strict scrutiny. The District Court rejected this argument and upheld the ordinance after applying a lower level of scrutiny. The Fifth Circuit reversed that decision. In its view, the Supreme Court’s Reed decision requires application of strict scrutiny. And because the ordinance cannot withstand strict scrutiny, the Fifth Circuit found the ordinance unconstitutional.
As WLF’s brief shows, the Fifth Circuit’s ruling correctly applies Reed. The brief explains that Reed’s core holding is that any content-based speech restriction must pass strict scrutiny. The Court’s earlier case law applying laxer tests for medium-based restrictions were based on outdated views of the First Amendment. But to the extent such distinctions still exist, they must be based on technological reasons that are addressed in the context of strict scrutiny. Because there are no technological distinctions here, WLF urges the Supreme Court to affirm the Fifth Circuit’s decision. WLF’s brief was prepared with the pro bono assistance of Thomas M. Johnson, Jr. and Krystal B. Swendsboe of Wiley Rein LLP (Washington, DC).
The post WLF Urges Supreme Court To Reject Content-Based Speech Restrictions appeared first on Washington Legal Foundation.
Upcoming Webinar—Special Interest Over Public Interest: Why a Return to Antitrust’s Rent-Seeking Past Will Fail Consumers
Thursday, October 7, 2021
**FREE REGISTRATION BELOW**
Joshua D. Wright, University Professor of Law, George Mason University Scalia School of Law
Corbin K. Barthold, Internet Policy Counsel and Director of Appellate Litigation, TechFreedom
Antitrust “reformers” insist that big corporations’ abuse of power and the accompanying societal ills compel abandonment of the consumer-welfare standard in favor of a vague structuralist test. But as our panelists will explain, history and economic theory dictate that deep-pocketed, well-connected special interests can and will exploit the increased discretion a pliable standard affords regulators. Such an outcome, they will contend, will serve neither consumers nor other intended beneficiaries of a Neo-Brandeisian approach to antitrust.
The post IN-DEPTH: POKERSTARS SETTLES DECADE-OLD LEGAL BATTLE WITH KENTUCKY FOR $300 MILLION appeared first on Washington Legal Foundation.
The post California Pelvic Mesh Award Violated First Amendment, Legal Advocacy Group Says appeared first on Washington Legal Foundation.
Volokh Conspiracy: “Social Media and Common Carriage: Lessons from the Litigation Over Florida’s SB 7072”
William C. Lavery is a partner in the Washington, DC office of Baker Botts L.L.P.
With Congress back in session, antitrust reform is a political hot topic again. “Anti-monopoly” sentiment and related legislative proposals have been on the rise. Lawmakers on both sides of the aisle appear on board with the idea that they want to do something to change the status quo, but don’t necessarily agree what that is. And with widely differing motives, it’s far from clear what the end result might be, and whether the potential legislative changes would achieve any worthy policy goals.
Nonetheless, perhaps surprisingly given the polarized political environment, we might be nearing a critical turning point where Congress may come to an agreement and enact significant reform. Indeed, the proposed bills currently on the table would amount to the biggest policy shift in antitrust law that we have seen in fifty years. Even if Congress takes a more middle-of-the-road approach, the substantive changes could be drastic. This post addresses one of the somewhat less controversial proposals being considered—the State Antitrust Enforcement Venue Act—that deserves a bit more attention.
Taking a step back—many of the antitrust proposals on the table are (at least superficially) aimed at regulating large technology companies and other big businesses. And they are gaining traction. Statements by both federal and state antitrust regulators, and even a White House executive order, have made it clear that antitrust reform is one area that enjoys at least some bipartisan support. This is not unheard of—but in recent times it’s certainly rare; it’s been decades since we have had any meaningful changes in antitrust jurisprudence. While there have been plenty of merger challenges by DOJ and FTC in recent years, the last major breakup of any purported monopolist in the U.S. was nearly 40 years ago, and the last case even seeking dissolution of a major firm was over 20 years ago.
The proposals have seemingly gained some public support as well—particularly with advocates of progressive antitrust reform. Indeed, on September 2 nearly 60 public interest groups sent a letter to House Speaker Nancy Pelosi and Republican Leader Kevin McCarthy supporting the passage of, and urging a vote on, a package of six antitrust bills that cleared the House Judiciary Committee in late June. State lawmakers and attorneys general have likewise lobbied for the passage of the proposed bills.
The six bills in the package that cleared the House Judiciary Committee1—which, according to some, are aimed at “reining in” “Big Tech” and solving America’s purported “monopoly problem”—are expansive. They include proposals regarding merger filing fees for big platforms, shifts in the burden of proof, a presumption that certain mergers are anticompetitive (regardless of industry), limits to so-called “self-preferencing” on digital platforms, and avenues to make it easier for state AGs to bring cases. But make no mistake—the proposed bills are not limited to Big Tech. If passed in their current forms (or anything close), they will have significant effects on all companies across the economy, large and small. The impacts could be particularly significant for companies and even entire industries that have not typically worried about antitrust enforcement.
Among the proposals is the State Antitrust Enforcement Venue Act of 2021 (H.R. 3460), which as of September 23 advanced out of the Senate Judiciary Committee.2 Some have described this bill as an “easy” and “limited” technical change to the Judicial Panel on Multidistrict Litigation (“JPML”) process. Although at first blush it may seem to be an “easy” bill for politicians on both sides of the aisle to agree on, it is in reality not at all “limited” in its potential effects.
At a high level, the State Antitrust Enforcement Venue Act would give state attorneys general more control over where federal antitrust cases they file are litigated by allowing them to stay in the court of their choosing. Section 1407 of Title 28 of the U.S. Code (passed in 1976) created and authorized a panel of seven circuit and district judges to transfer civil actions involving one or more common questions of fact that were pending in different districts to a single district for pretrial proceedings, if it determines that transfer will be convenient for the parties and witnesses and will promote efficiency. See 28 U.S.C. § 1407(a). This is referred to as “centralization.” The actions are then remanded at the conclusion of pretrial proceedings to their original districts for trial. The proposed bill would change Section 1407 and remove the JPML’s authority to transfer “to any district” civil actions from different jurisdictions when states AGs are involved. Subsection (g) of the law already exempts the federal government (FTC and DOJ) from such transfers, and the proposal would effectively include states as well. In other words, the bill proposes a carve-out in the law that empowers the JPML to consolidate litigation and would shield antitrust enforcement actions by state attorneys general from the JPML’s authority. The bill does not limit the exception to criminal actions and actions seeking injunctive relief, unlike the existing exception for federal enforcers. Moreover, significantly, the venue bills are retroactive to June 1, 2021.
State AGs have been lobbying for this change for some time. Indeed, just last week a bipartisan group of 30 state attorneys general sent a letter to both chambers of Congress advocating for the State Antitrust Enforcement Venue Act (among others), emphasizing that they “urge Congress to include in the legislation a provision confirming that the states are sovereigns that stand on equal footing with federal enforcers under federal antitrust law, including with regard to the timing of challenging anticompetitive mergers and other practices.” The states’ concerns with being part of large MDLs are basically two-fold: (1) they don’t want to be forced to litigate outside of their home states, and (2) they are concerned that having their cases transferred as part of a large MDL will cause delay in their litigation. And they have considerable support in Congress. The bill’s bipartisan sponsors—including Ken Buck (R-CO), David Cicilline (D-RI), Dan Bishop (R-NC), Burgess Owens (R-UT), and Joseph Neguse (D-CO) in the House, and Amy Klobuchar (D-MN) and Mike Lee (R-UT) in the Senate—have all said that they agree that state AGs should be on the same footing as federal regulators when it comes to enforcing the antitrust laws.
No one disputes that the MDL process was instituted for a legitimate reason and serves legitimate goals (for all parties involved, including the courts). It has for decades. It allows the parties and the court to conserve resources, eliminates the need for the parties to retain different counsel in different jurisdictions (to a certain extent), and minimizes the risk of inconsistent outcomes regarding the same questions. And it is widely accepted that large antitrust class actions—which are common—are generally most efficient when all related actions are centralized in the same court as part of the same pretrial proceeding.
Restricting the JPML’s ability to centralize actions will have significant consequences. If enacted, the proposed bill will undoubtedly drive up the cost and duration of many class actions. We will still have MDLs (the proposed legislation does nothing to get rid of them), but we will also have proceedings pending outside of the MDLs that will create headaches for everyone involved. Discovery will no longer be streamlined. Parties will be answering discovery requests from the state(s) in one proceeding (or more), private parties in another, and maybe the federal government in another. With different schedules, different pretrial rulings and different discovery requests, coordination between the actions will be difficult if not impossible. Witnesses—plaintiffs, defendants, and third parties—will be subjected to duplicative depositions in multiple jurisdictions. The Federal Rules of Civil Procedure allow for broad discovery. It will not be easy for even non-parties to get out of their discovery obligations simply based on an argument of burden or duplication. Inconsistent rulings on dispositive motions will also result in different substantive outcomes in different jurisdictions—even though the exact same conduct is at issue. This will result in inconsistent precedent and create uncertainty for all stakeholders. Simply put, taking state AGs out of the “centralization” equation will create management issues, decrease efficiency, decrease predictability, and in all likelihood, result in even more delays.
Notably, the judiciary itself has concerns with the proposed bill. Indeed, the Director of the Administrative Office of US Courts (“AO”), US District Judge Roslynn R. Mauskopf, recently wrote House Minority Leader Kevin McCarthy to note the AO’s concern with the proposed bill. While the letter notes that its “comments are neither expressions of support for, nor opposition to the bill,” it strongly condemns the proposal. Among other things, it notes that the bill could reduce efficiencies in antitrust litigation, particularly because state AGs’ claims are typically similar to those by purchasers alleging antitrust injuries, thereby taxing the judiciary’s limited resources with duplicative claims for the same conduct. It even notes that states might end up worse off by losing their ability to influence antitrust MDLs.
It is somewhat rare for the AO to comment on proposed legislation, particularly in situations where it is not asked for an opinion, which as far as we are aware, is the case here. The AO is a US administrative agency, generally responsible for supporting the federal judicial branch on a wide range of issues. It also facilitates communications within the judiciary and with Congress and the executive branch, and at times will analyze proposed legislation from Congress that will affect the courts’ operations or personnel (but usually not without being requested to do so).
The AO’s letter drew a fairly quick and somewhat fiery response from Amy Klobuchar, Mike Lee, Ken Buck and David Cicilline. The lawmakers sent a letter to Judge Mauskopf on July 28 not only detailing their disagreement with Judge Mauskopf’s view of the proposed bill, but also stressing that it was “unusual, if not inappropriate, for the Administrative Office of the United States Courts” to send the letter in the first place. The letter effectively stressed the same arguments for the proposed bill that we note above—states have a legitimate interest in representing their citizens and centralization can at times cause delay. Both are fair points, but may not outweigh the costs.
In sum, while the State Antitrust Venue Enforcement Act States may be less extreme than some of the more neo-Brandeisian reform ideas out there (that essentially advocate for a return to structuralism and an all-out rejection of economic analysis), it will still have significant and far-reaching consequences. No doubt, states have sovereign rights and their enforcement actions serve interests beyond those served by private actions. And their concern that centralization may at times result in “substantial delay” is a legitimate one. But the State Antitrust Venue Enforcement Act proposes serious changes to a system that has worked for many years. So we should ask ourselves—is it worth it? States’ rights should be carefully balanced against concerns of judicial efficiency and logistical realties of litigation. The proposed bill risks upsetting that balance.
The post The State Antitrust Enforcement Venue Act Deserves Careful Scrutiny appeared first on Washington Legal Foundation.
—Cory L. Andrews, WLF General Counsel & Vice President of Litigation
Click here for WLF’s brief.
(Washington, DC)—Washington Legal Foundation (WLF) today filed an amicus curiae brief urging the U.S. Supreme Court to review, and ultimately reverse, a Seventh Circuit decision that refused to read section 1 of the Federal Arbitration Act (FAA), known as the “transportation worker exemption,” in line with its text and context.
The FAA establishes a federal policy favoring arbitration. It requires, in section 2, that most people comply with their arbitration agreements. It contains a discrete exception, in section 1, for “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The district court ruled that the plaintiff, a Ramp Agent Supervisor who does not physically transport goods interstate or even supervise others who do, does not fit within this exemption. The Seventh Circuit disagreed, holding that the plaintiff need not physically cross state lines to be “engaged in foreign or interstate commerce” under section 1.
In its brief, WLF explains that section 1 is not the product of a legislative intent to excuse transportation workers—and, for some peculiar reason, them alone—from honoring arbitration agreements. Section 1 exists, rather, because Congress expected a few discrete classes of workers to engage in arbitration or pursue remedies governed by other federal laws. And because section 1 fulfills this singular purpose, there is no principled way to stretch its application. Although some judge-made tests purport to expand the exception beyond the national and international transportation of goods, WLF argues that these contrived standards defy statutory text and context, produce inconsistent results, and serve no end set forth by Congress.
Celebrating its 44th year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.
— Cory Andrews, WLF General Counsel & Vice President of Litigation
Click here for WLF’s brief.
WASHINGTON, DC— Washington Legal Foundation (WLF) today urged the U.S. Supreme Court to review, and ultimately to reverse, a decision of the Montana Supreme Court that unfairly hamstrings railway companies in their efforts to defend against personal-injury suits by their employees. WLF’s brief was joined by the Allied Educational Foundation.
The Federal Employers’ Liability Act (FELA) provides the sole remedy by which railway employees may recover from their employer for work-related injuries. FELA’s exclusive compensation scheme differs markedly from state worker-compensation regimes, by which employees may recover for their injuries only in no-fault administrative proceedings. Recovery under FELA also tends to be more generous than that available under state worker-compensation laws. As a result, FELA occupies the entire field of railway-employer liability for railway employees’ work-related injuries.
Yet the Montana Supreme Court’s decision permits employees to supplement their FELA claims with a second suit alleging bad faith in defending against FELA claims. In its amicus brief, WLF argues that when Congress adopted FELA, it intended to preempt the entire field of railway-injury claims, thus barring under the Constitution’s Supremacy Clause the very state-law claims Montana courts routinely recognize. WLF asks the Supreme Court to grant review and clarify that FELA preempts Montana’s bad faith tort regime, which unduly interferes with Congress’s exclusive scheme for compensating railroad workers.
By Cary Silverman and Thomas J. Sullivan, partners in Shook, Hardy & Bacon L.L.P.’s Washington, D.C. and Philadelphia offices, respectively. Mr. Silverman co-authored the August 2, 2021 U.S. Chamber Institute for Legal Reform report The Food Court: Developments in Litigation Targeting Food and Beverage Marketing.
“[P]ublic interest organizations bringing suit [for the purpose of promoting interests or rights of consumers are] free from any requirement to demonstrate their own Article III standing.” With that statement in Animal Legal Defense Fund v. Hormel Foods Corp., 2021 WL 3921512 (D.C. Sept. 2, 2021), the D.C. Court of Appeals opened the courthouse doors to organizations using District of Columbia’s consumer law to sue without alleging anyone experienced an actual injury. As a result, companies that sell goods or services in the District of Columbia should brace themselves for a surge of litigation by advocacy groups, some of which have extreme agendas that do not align with consumer interests.
The District of Columbia’s Consumer Protection Procedures Act
Like most consumer protection laws, the Consumer Protection Procedures Act (CPPA) originally authorized a private right of action by “any consumer who suffers damage as a result of . . . a trade practice.” In 2000, the D.C. Council amended this provision to permit lawsuits by “a person, whether acting for the interests of itself, its members, or the general public seeking relief from the use by any person of a trade practice.” Then, in 2012, the D.C. Council specifically authorized nonprofit organizations and public interest organizations to bring CPPA actions. D.C. Code Ann. § 28-3905(k)(1). An individual or organization may seek relief from a violation of the CPPA, including after it purchases or receives a product “in order to test or evaluate qualities pertaining to use for personal, household, or family purposes.” Organizations avoid class certification requirements and federal court jurisdiction by seeking only injunctive relief, attorney’s fees, and costs, not monetary damages.
Advocacy groups have increasingly filed CPPA actions targeting the marketing of food, beverages, and other products. One recent lawsuit alleges that a soft drink maker cannot tout itself as environmentally responsible so long as it sells single-use plastic bottles. Another claims that a meat producer did not live up to its advertised efforts to safely supply food during the pandemic. Organizations have also alleged that products marketed as “pure,” “natural,” “clean,” or just generally “safe” contain minute traces of a chemical or other substance that make their advertising false or deceptive.
Article III Standing, D.C. Courts, and the CPPA
Whether a plaintiff has standing to bring a CPPA private-attorney-general action is often contested in litigation. Article III standing reserves judicial power for cases in which a plaintiff has experienced a concrete harm caused by the defendant’s conduct, ensuring that cases are resolved in the context of an actual dispute. An organization can establish Article III standing by showing that it had to divert significant resources from its programs to respond to the practice at issue. Havens Realty Corp. v. Coleman, 455 U.S. 363, 378-79 (1982). There must be a “direct conflict” between the defendant’s conduct and the organization’s mission. D.C. Appleseed Ctr. for Law and Justice, Inc. v. D.C. Dep’t of Ins., Sec., & Banking, 54 A.3d 1188, 1206-09 (D.C. 2012). A statutory violation alone is insufficient to qualify as an injury in fact for Article III standing purposes. Spokeo, Inc. v. Robins, 578 U.S. 330 (2016). As the U.S. Supreme Court recently recognized, Article III does not grant unharmed plaintiffs “freewheeling power to hold defendants accountable for legal infractions.” TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2200 (2021).
While D.C. courts are not bound by Article III, until Hormel, the D.C. Court of Appeals had specifically ruled in CPPA cases that “this court has followed consistently the constitutional standing requirement embodied in Article III.” Grayson v. AT&T Corp., 15 A.3d 219, 224 (D.C. 2011). It had repeatedly reaffirmed this principle, even after the 2012 amendments. Following these decisions, some trial court judges adhered to Article III requirements in representative actions brought by organizations, while others took a more relaxed approach.
The Court of Appeals’ Decision
The D.C. Court of Appeals held in Hormel that the D.C. Council replaced Article III standing requirements with a statutory test that provides “maximum standing” to public interest organizations. That test requires an organization to “check three boxes”: (1) it must be a public interest organization (“a nonprofit organization that is organized and operating, in whole or in part, for the purpose of promoting interests or rights of consumers”); (2) it must identify a “consumer or class of consumers” that could bring the suit in their own right; and (3) it must have a “sufficient nexus” to those consumers’ interests to adequately represent them. Hormel, 2021 WL 3921512, at *6.
Applying this test, the court ruled that the Animal Legal Defense Fund (ALDF) had standing to bring an action seeking to stop Hormel’s Natural Choice marketing campaign, which it claimed led consumers to believe that the animals slaughtered to make its deli meats are treated humanely when they are not, and to require the company to engage in “corrective advertising.” Id. at *2. The Court rejected Hormel’s argument that ALDF (“the legal voice for all animals”) does not represent the interests of meat-eating consumers. Rather, the court found that promoting the interests of consumers only needs to be part of the nonprofit’s purpose. See id. at *6. While the organization’s end goal may be to have the public stop eating meat entirely, the court found that its interests in seeking truthful advertising and accurate information, as well as its concern with how animals are treated, sufficiently aligned with meat-eating consumers. See id. at *7.
Expect a Surge of Litigation
Hormel is likely to turn the District of Columbia’s local courts into a playground for national advocacy groups to promote their policy agendas, rather than serve the interests of consumers. Unlike consumer class action litigation, these claims will not need to identify a single D.C. resident who alleges that he or she purchased the product because of misleading labeling or advertising. As advocacy groups and the plaintiffs’ bar learn of the ruling, the number of these claims, which were already accelerating in recent years, is likely to surge.
D.C. courts can attempt to protect the interests of consumers and constrain misuse of the statute. Courts can add teeth to the CPPA’s requirement of a “sufficient nexus” between an organization’s mission and the consumer interests involved in the lawsuit. They can also dismiss claims when an organization’s complaint fails to assert a plausible claim that reasonable consumers would be misled by the challenged representation, which must be one that would be material to a decision to purchase the product for a significant number of consumers. D.C. Code Ann. § 28-3904(e), (f), (f-1). If litigation runs rampant, as occurred with a similar provision that California voters abandoned years ago,1 the D.C. Council may need to reverse course.
The post DC Court of Appeals Abandons Article III Standing for Consumer Advocacy Groups appeared first on Washington Legal Foundation.
On September 9, 2021, the California legislature passed SB 343, Truth in Labeling for Recyclable Materials. The bill, if signed by Governor Newsom on or before October 10, 2021, will likely place significant restrictions on recyclability claims in the state, potentially as early as January 1, 2024.
SB 343 would restrict recyclability claims by narrowing the universe of “consumer goods” and packaging considered “recyclable” in California. The bill declares use of the chasing arrows symbol, the chasing arrows symbol surrounding a resin identification code, or any other symbol or statement indicating recyclability, to be deceptive or misleading unless the product or packaging is considered recyclable pursuant to statewide recyclability criteria to be developed by CalRecycle. SB 343, Proposed Cal. Pub. Res. Code § 42355.51(b)(1).
In order to develop the recyclability criteria, CalRecycle must by January 1, 2024, revise regulations governing local waste and recycling facility reporting to include information on how all recycling material is collected and all material types and forms are actively recovered by each facility. Id. at § 42355.51(d)(1)(A). Based on this information, CalRecycle must by January 1, 2024, conduct and publish a characterization study of material types and forms that are collected, sorted, sold, or transferred by solid waste facilities, and must update this study every five years, beginning in 2027. Id. at § 42355.51(d)(1)(B). According to the bill:
a product or packaging is considered recyclable in the state if, based on information published by the department pursuant to subparagraph (B) of paragraph (1) [characterization study], the product or packaging is of a material type and form that meets both of the following requirements:
(A) The material type and form is collected for recycling by recycling programs for jurisdictions that collectively encompass at least 60 percent of the population of the state.
(B)(i) The material type and form is sorted into defined streams for recycling processes by large volume transfer or processing facilities, as defined in regulations adopted pursuant to Section 43020 [governing solid waste facilities], that process materials and collectively serve at least 60 percent of recycling programs statewide, with the defined streams sent to and reclaimed at a reclaiming facility consistent with the requirements of the Basel Convention.
(ii) The department may adopt regulations modifying this requirement to encompass transfer or processing facilities other than large volume transfer or processing facilities, as the department deems appropriate for achieving the purposes of this section.
Id. at § 42355.51(d)(2). In addition to the criteria set out above, consumer products and packages sold in the state must meet the following additional requirements in order to qualify as recyclable:
(3) A product or packaging shall not be considered recyclable in the state unless the product or packaging meets all of the following criteria, as applicable:
(A) For plastic packaging, the plastic packaging is designed to not include any components, inks, adhesives, or labels that prevent the recyclability of the packaging according to the APR Design® Guide published by the Association of Plastic Recyclers.
(B) For plastic products and non-plastic products and packaging, the product or packaging is designed to ensure recyclability and does not include any components, inks, adhesives, or labels that prevent the recyclability of the product or packaging.
(C) The product or packaging does not contain an intentionally added chemical identified pursuant to the regulations implementing subparagraph (4) of subdivision (g) of Section 42370.2 [concerning reusable, recyclable compostable food service containers].
(D) The product or packaging is not made from plastic or fiber that contains perfluoroalkyl or polyfluoroalkyl substances or PFAS that meets either of the following criteria:
(i) PFAS that a manufacturer has intentionally added to a product or packaging and that have a functional or technical effect in the product or packaging, including the PFAS components of intentionally added chemicals and PFAS that are intentional breakdown products of an added chemical that also have a functional or technical effect in the product.
(ii) The presence of PFAS in a product or product component or packaging or packaging component at or above 100 parts per million, as measured in total organic fluorine.
Id. at § 42355.51(d)(3). The bill does provide an exemption from the preceding requirements for a product or packaging that “has a demonstrated recycling rate of at least 75 percent, meaning that not less than 75 percent of the product or packaging sorted and aggregated in the state is reprocessed into new products or packaging.” Id. at § 42355.51(d)(4). That said, the Senate’s legislative analysis indicates that a fairly narrow subset of goods are expected to meet the bill’s criteria. Indeed, “[b]ased on current trends, the only plastics that would likely be allowed to be labeled with a chasing arrows symbol under the considerations of this bill would be PET #1 and DPE #2 plastic bottles and jugs.” Senate Floor Analyses (Sept. 9, 2021).
The bill does, however, generally exempt consumer goods that display a chasing arrow symbol or instruct consumers to recycle a product as directed by the California Beverage Container Recycling and Litter Reduction Act or any other federal or California law. SB 343, Proposed Bus. & Prof. Code § 17580(e). A similar exclusion is provided for goods that direct consumers, consistent with several enumerated programs (e.g., The Electronic Waste Recycling Act of 2003, Lead-Acid Battery Recycling Act of 2016), to properly dispose of or otherwise handle the good at the end of its useful life. Id. at § 17580(g).
The bill also provides a grace or sell through period for “[a]ny product or packaging that is manufactured up to 18 months after the date the department publishes the first material characterization study required pursuant to subparagraph (B) of paragraph (1) of subdivision (d), or before January 1, 2024, whichever is later.” SB 343, Proposed Cal. Pub. Res. Code § 42355.51(b)(2)(A). A similar 18-month period will be available after each material characterization study update, provided that the product or package met the recyclability requirements under the previous version of the study. Id. at § 42355.51(b)(2)(B).
Note that goods or packaging recycled via non-curbside programs would be considered “recyclable” only if the “non-curbside collection program recovers at least 60 percent of the product or packaging in the program and the material has sufficient commercial value to be marketed for recycling and be transported at the end of its useful life to a transfer, processing, or recycling facility to be sorted and aggregated into defined streams by material type and form.” Id. at § 42355.51(d)(5). After January 1, 2030, the minimum recovery threshold would increase to 75%.
The post California Law Will Restrict Consumer-Product Recyclability Claims appeared first on Washington Legal Foundation.
A WLF-digested dissent from The Honorable Sandra S. Ikuta
U.S. Court of Appeals for the Ninth Circuit | No. 20-15291 | Decided September 15, 2021
Opinion Topic: Federal Arbitration Act preemption of state law
Judge Ikuta had no role in WLF’s selecting or editing this opinion for our Circulating Opinion feature. The full opinion is available HERE.
Introduction: A coalition of trade associations sued to enjoin enforcement of California Assembly Bill 51, which prohibits employers from requiring employees, as a condition of employment, to agree to arbitrate any disputes with their employer. The district court held that the plaintiffs would likely succeed on their claim that the Federal Arbitration Act (FAA) preempted AB 51. The Ninth Circuit reversed in part, vacated the lower court’s injunction, and remanded the case. The court reasons that the FAA does not preempt state laws that prohibit an employee’s acceptance of arbitration as a condition of employment. “The FAA took as a given,” the court writes, that “arbitration is a matter of contract and agreements to arbitrate must be voluntary.”
In her dissent, Judge Ikuta concludes that AB 51 obstructs the purpose of the FAA and upbraids the majority for “abet[ting] California’s attempt to evade the FAA and the Supreme Court’s caselaw.” Her opinion conducts an eye-opening tour through California’s repeated legal and legislative schemes to abolish arbitration and explains why the court’s decision conflicts with decisions of the Supreme Court and two other federal circuits that have considered an identical question.
IKUTA, Circuit Judge, dissenting:
Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA. This time, California has enacted AB 51, which has a disproportionate impact on arbitration agreements by making it a crime for employers to require arbitration provisions in employment contracts. Cal. Lab. Code §§ 432.6(a)–(c), 433; Cal. Gov’t Code § 12953. And today the majority abets California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements. The majority’s ruling conflicts with the Supreme Court’s clear guidance in Kindred Nursing Centers Ltd. Partnership v. Clark, ––– U.S. ––––, 137 S. Ct. 1421 (2017), and creates a circuit split with the First and Fourth Circuits. Because AB 51 is a blatant attack on arbitration agreements, contrary to both the FAA and longstanding Supreme Court precedent, I dissent.|
By its terms, the FAA ensures that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA preempts any state law that stands “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52 (1941). The Supreme Court has long recognized the FAA’s broad purpose: it declares “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983), and embodies a “national policy favoring arbitration,” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346 (2011) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)). When faced with a principle of “state law, whether of legislative or judicial origin,” that burdens arbitration and that “takes its meaning precisely from the fact that a contract to arbitrate is at issue,” we must strike it down as preempted by the FAA. Perry v. Thomas, 482 U.S. 483, 492 n. 9 (1987). And even when a state law generally applies to a range of agreements, the FAA preempts the law if it “interferes with fundamental attributes of arbitration” and obstructs the purpose of the FAA. Concepcion, 563 U.S. at 344. As the Supreme Court has explained, “[a]lthough § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Id. at 343.
AB 51 is just such a state law that obstructs the purpose of the FAA. The history of AB 51 reveals it was the culmination of a many-year effort by the California legislature to prevent employers from requiring an arbitration provision as a condition of employment. California has long known that the FAA preempted laws that made arbitration agreements unenforceable, because the Supreme Court has so often struck down its anti-arbitration legislation or judge-made rules. ***
In light of these rulings, the California legislature took a different approach to anti-arbitration legislation. In 2015, it passed Assembly Bill 465, which banned employers from requiring arbitration agreements as a condition of employment and rendered unenforceable any offending contract. Text of AB 465, 2015–16 Cal. Leg., Reg. Sess. (2015). *** California Governor Jerry Brown vetoed this bill on the ground that such a “blanket ban” had been “consistently struck down in other states as violating the Federal Arbitration Act” and noted that the California Supreme Court and United States Supreme Court had invalidated similar legislation. Governor’s Veto Message for AB 465, 2015–16 Cal. Leg., Reg. Sess. (2015). *** That same year, the Supreme Court overruled a California court’s interpretation of an arbitration agreement, because it did not place arbitration contracts “on equal footing with all other contracts.” DIRECTV, Inc. v. Imburgia, 577 U.S. 47, 58–59 (2015) (quoting Buckeye, 546 U.S. at 443). This decision was followed by yet another defeat of state anti-arbitration legislation when a California court held that the FAA preempted another California statute, which had made agreements to arbitrate certain state civil rights claims unenforceable. See Saheli v. White Mem’l Med. Ctr., 21 Cal. App. 5th 308, 323 (2018).
Undeterred, the state legislature tried again in 2018 and passed AB 3080, which prohibited an employer from requiring an employee to waive a judicial forum as a condition of employment. Text of AB 3080, 2017–18 Cal. Leg., Reg. Sess. (2018). Governor Brown exercised his veto power again, explaining that AB 3080 “plainly violates federal law.” Governor’s Veto Message for AB 3080, 2017–18 Cal. Leg., Reg. Sess. (2018). Governor Brown cited the “clear” direction from the United States Supreme Court in Imburgia, 136 S. Ct. at 468, and Kindred Nursing, 137 S. Ct. at 1428.
Twice-vetoed but still undeterred, the California Assembly introduced AB 51 in December 2018. This bill, now before us, took the same approach as the vetoed AB 3080: instead of barring enforcement of arbitration agreements offered as a condition of employment, it instead penalized the formation or attempted formation of such agreements. Text of AB 51, 2019–20 Cal. Leg., Reg. Sess. (2019); see also Cal. Lab. Code §§ 432.6(a)–(c), 433. While it prohibited an employer from requiring an applicant for employment to enter an arbitration agreement, it provided that an executed arbitration agreement was nevertheless enforceable. See Cal. Lab. Code § 432.6(a)–(b), (f). ***
California’s new governor, Gavin Newsom, signed the bill into law, even though AB 51 was identical in many respects to vetoed AB 3080. See id. at 9.
The California legislature developed AB 51 with the focused intent of opposing arbitration and sidestepping the FAA’s preemptive sweep by penalizing the formation, or attempted formation, of disfavored arbitration agreements but not interfering with the enforcement of such agreements.
Specifically, under Section 432.6 of the California Labor Code, an employer “shall not, as a condition of employment … require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of the California Fair Employment and Housing Act [(FEHA)]” or the California Labor Code, “including the right to file and pursue a civil action or a complaint with … any court.” Cal. Lab. Code § 432.6(a). Thus, employers may not require employees to sign a standard employment contract that includes an arbitration provision, even if the contract includes a voluntary opt-out clause. See Cal. Lab. Code § 432.6(c). Moreover, an employer cannot refuse to hire a prospective employee who declines to enter into an arbitration agreement or otherwise “threaten, retaliate or discriminate against” such an employee. Cal. Lab. Code § 432.6(b). Violating Section 432.6 amounts to an “unlawful employment practice” for which aggrieved employees and the state may bring civil suits against employers. See Cal. Gov’t Code §§ 12953, 12960. Violating Section 432.6 also constitutes a criminal offense. See Cal. Lab. Code § 433. Should the employee sign such an employment contract, however, the arbitration agreement it contains is perfectly enforceable because Section 432.6(f) provides that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” Cal. Lab. Code § 432.6(f).
In short, AB 51 criminalizes offering employees an agreement to arbitrate, even though the arbitration provision itself is lawful and enforceable once the agreement is executed. The question is, does this too-clever-by-half workaround actually escape preemption? The majority says it does, but this is clearly wrong: under Supreme Court precedent, Section 432.6 is entirely preempted by the FAA.
Although the Supreme Court has not addressed California’s specific legislative gimmick—criminalizing contract formation if it includes an arbitration provision—this is not surprising, given that California designed the gimmick to sidestep any existing Supreme Court precedents. But even so, the Supreme Court has made it clear that the FAA preempts this type of workaround, which is but the latest of the “great variety of devices and formulas” disfavoring arbitration. See Concepcion, 563 U.S. at 342 (cleaned up).
As a threshold matter, California’s circumvention exemplifies the exact sort of “ ‘hostility to arbitration’ that led Congress to enact the FAA.” Kindred Nursing, 137 S. Ct. at 1428 (quoting Concepcion, 563 U.S. at 339); see also Buckeye, 546 U.S. at 443. The Supreme Court has made clear that the FAA displaces not only state laws that discriminate on their face against arbitration, but also those that “covertly accomplish[ ] the same objective,” Kindred Nursing, 137 S. Ct. at 1426. Indeed, even if state laws are “generally applicable,” the FAA preempts them where “in practice they have a ‘disproportionate impact’ on arbitration.” Mortensen v. Bresnan Commc’ns, LLC, 722 F.3d 1151, 1159 (9th Cir. 2013) (quoting Concepcion, 563 U.S. at 341–342). AB 51 is the poster child for covertly discriminating against arbitration agreements and enacting a scheme that disproportionately burdens arbitration.
More specifically, Supreme Court precedent makes clear that the FAA preempts laws like AB 51 that burden the formation of arbitration agreements. Long ago, the Supreme Court held that the FAA preempted a Montana law making an arbitration clause unenforceable unless it had a specific type of notification on the first page of the contract. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996). In Casarotto, the state supreme court reasoned—much like California here—that this notice requirement did not “undermine the goals and policies of the FAA” because the “notice requirement did not preclude arbitration agreements altogether” but instead ensured that arbitration agreements had to be entered “knowingly.” Id. at 685 (quoting Casarotto v. Lombardi, 268 Mont. 369 (1994)). The Court rejected this reasoning. Id. at 688.
Kindred Nursing has now confirmed the rule that the FAA invalidates state laws that impede the formation of arbitration agreements. In Kindred Nursing, the Court struck down the Kentucky Supreme Court’s “clear-statement rule” which provided that a person holding a power of attorney for a family member could not enter into an arbitration agreement for that family member, unless the power of attorney gave the person express authority to do so. 137 S. Ct. at 1425–26. The Supreme Court held that this clear-statement rule—which imposed a burden only on contract formation—violated the FAA, because it “singles out arbitration agreements for disfavored treatment.” Id. at 1425. ***
Kindred Nursing’s holding that the FAA preempts rules that burden the formation of an arbitration agreement, see 137 S. Ct. at 1428–29, applies equally to AB 51, which is intentionally designed to burden and penalize an employer’s formation, or attempted formation, of an arbitration agreement with employees. See Cal. Lab. Code § 432.6(a)–(c); see also Cal. Lab. Code § 433; Cal. Gov’t Code § 12953. In upholding AB 51, which “specially impede[s] the ability of [employers] to enter into arbitration agreements” and “thus flout[s] the FAA’s command to place those agreements on an equal footing with all other contracts,” Kindred Nursing, 137 S. Ct. at 1429, the majority directly conflicts with the rule stated in Kindred Nursing.
In addition to conflicting with Kindred Nursing, the majority’s ruling today creates a split with two of our sister circuits. Long before Kindred Nursing reached its common-sense conclusion, our sister circuits prevented state efforts like California’s that attempted to sidestep the FAA while disfavoring arbitration. The First Circuit held that the FAA preempted Massachusetts regulations that prohibited securities firms from requiring clients to agree to arbitration “as a nonnegotiable condition precedent to account relationships.” Sec. Indus. Ass’n v. Connolly, 883 F.2d 1114, 1117, 1125 (1st Cir. 1989). Even if this regulation did not invalidate the arbitration agreements themselves, the First Circuit rejected as “too clever by half” the state’s attempt to regulate parties’ conduct instead of the parties’ agreements. Id. at 1122–23. *** Applying well-established preemption principles, Connolly reasoned that “[s]tate law need not clash head on with a federal enactment in order to be preempted.” Id. Connolly explained that the threatened loss of a business license for offering clients a standard agreement including an arbitration provision was “an obstacle of greater proportions even than the chance that, in a given dispute, an arbitration agreement might be declared void.” Id. at 1124. Thus, the regulations were preempted as “at odds with the policy which infuses the FAA.” Id.
The Fourth Circuit similarly held that the FAA preempted a Virginia law that made it unlawful for automobile manufacturers and distributors to fail to include a particular clause in franchise agreements. Saturn Distrib. Corp. v. Williams, 905 F.2d 719, 724 (4th Cir. 1990). That clause would provide that any contract provision that “denies access to the procedures, forums, or remedies” provided by state law “shall be deemed to be modified to conform to such laws or regulations.” Id. (quoting Va. Code Ann. § 46.1-550.5:27). As interpreted by the court, the statute forbade “only nonnegotiable arbitration provisions and not negotiable arbitration agreements.” Id. Analogizing to Connolly, the Fourth Circuit held that the statute conflicted with the FAA because it “essentially prohibited nonnegotiable arbitration agreements.” Id.
In sum, AB 51’s transparent effort to sidestep the FAA in order to disfavor arbitration agreements in employment contracts is meritless. By upholding this maneuver, the majority conflicts with Kindred Nursing, which held that the FAA invalidates state laws that impede the formation of arbitration agreements. 137 S. Ct. at 1425. The majority also silently splits from our sister circuits, which have held that too-clever-by-half workarounds and covert efforts to block the formation of arbitration agreements are preempted by the FAA just as much as laws that block enforcement of such agreements. So we don’t need to wait until the next Supreme Court reversal to know that we must apply those principles here. The majority’s bifurcated, half-hearted, and circuit-splitting approach to invalidating AB 51 makes little sense, except to the extent it aims at abetting California in disfavoring arbitration. Because the appellants here have demonstrated a likelihood of success on the merits and the district court correctly determined that the remaining preliminary injunction factors supported injunctive relief, I would affirm the district court. I therefore dissent.
The post Circulating Opinion: <em>Chamber of Commerce of the United States, et al. v. Bonta</em> appeared first on Washington Legal Foundation.
By Corbin K. Barthold, Internet Policy Counsel and Director of Appellate Litigation at TechFreedom. Mr. Barthold previously served as WLF’s Senior Litigation Counsel.
In April, Justice Clarence Thomas, writing for himself in an otherwise unrelated case, speculated about whether large social media websites should be treated as common carriers. The following month, Florida Governor Ron DeSantis signed into law SB 7072, a sweeping set of restrictions on how the companies that run such websites shall moderate what is said on them. SB 7072 forces the likes of Facebook and Twitter to host various categories of speech against their will. Florida may do this, SB 7072 says, because “social media platforms” may “be treated similarly to common carriers.”
SB 7072 was bound to get challenged in court, and that litigation, in turn, was bound to test the common carriage theory put forth by Justice Thomas. So it has come to pass. Two groups of internet companies promptly sued, a judge issued an order preliminarily enjoining most of the law, and Florida appealed. Both the judicial opinion, written by federal District Judge Robert Hinkle, and Florida’s opening brief on appeal, filed earlier this month in the U.S. Court of Appeals for the Eleventh Circuit, address whether it makes sense to treat social media as common carriage.
What can be learned from these discussions of the common carrier theory? Judge Hinkle concludes that social media websites are somewhat like common carriers, but ultimately more like traditional speakers fully protected against government-compelled speech (hence the preliminary injunction). Florida, naturally, argues the common carrier theory to the hilt, relying heavily on Justice Thomas’s work along the way. Neither the judge nor the state depicts common carriage in a way that’s at once accurate, useful, and convincing. Identifying the holes in their thinking returns us to a conclusion that would, in a less anxious time, be obvious to all. Websites—even large ones that host the speech of others—are engaged in expressive conduct protected by the First Amendment.
Judge Hinkle’s Good (But Flawed) Opinion
Judge Hinkle reached the right conclusion—SB 7072 violates the First Amendment. Moreover, his opinion makes a number of astute, laudable, and impeccably correct points. Here are a few:
- “The State has asserted it is on the side of the First Amendment; the [internet companies] are not. It is perhaps a nice sound bite. But the assertion is wholly at odds with accepted constitutional principles.”
- “The internet provides a greater opportunity for individuals to publish their views … than existed before the internet arrived.”
- “The [internet companies] assert, … with substantial factual support, that the actual motivation for this legislation was hostility to [the largest social media websites’] perceived liberal viewpoint.”
- “Leveling the playing field—promoting speech on one side of an issue or restricting speech on the other—is not a legitimate state interest.”
- SB 7072 “comes nowhere close” to passing First Amendment scrutiny.
When it came to common carriage, however, Judge Hinkle hedged. The parties had presented him five Supreme Court decisions to guide his analysis. Three of those decisions came from the internet companies:
- Miami Herald v. Tornillo, 418 U.S. 241 (1974), strikes down a Florida law that required a newspaper to print a political candidate’s reply to the newspaper’s unfavorable coverage.
- Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, 515 U.S. 557 (1995), holds that a private parade has a First Amendment right to exclude some groups from participating.
- Pacific Gas & Electric Co. v. Public Utilities Commission of California, 475 U.S. 1 (1986), blocks a state from compelling a public utility to include certain disclosures in its billing envelopes.
The upshot of these decisions is that (as Hurley puts it) “a speaker has the autonomy,” under the First Amendment, “to choose the content of his own message.” This is, at bottom, a right (in Miami Herald’s words) to “editorial control and judgment” over the speech one hosts.
The two decisions Florida raised are:
- Rumsfeld v. FAIR, 547 U.S. 47 (2006), which upholds a law requiring law schools, on pain of losing federal funding, to host military recruiters.
- PruneYard Shopping Center v. Robins, 447 U.S. 74 (1980), which requires a shopping center, in obedience to the California Constitution, to let students protest on its private property.
These cases show that one speaker can sometimes be required to host another speaker, if (in Rumsfeld’s words) doing so does not “interfer[e]” with the host speaker’s “desired message.”
After comparing, on the one side, Miami Herald, Hurley, and PG&E, and, on the other, Rumsfeld and PruneYard, Judge Hinkle concluded that social media websites fall “in the middle” between being “like any other speaker” and “like common carriers.” In reaching this conclusion, however, Judge Hinkle focused on whether such websites “use editorial judgment” in “the same way” as the entities at issue in those cases. That’s not the right question.
Similarity to the precise kind of curation or editing done by the entities addressed in Miami Herald, Hurley, and PG&E does not inform whether social media has a First Amendment right to editorial control. We already know that social media has that right. We know it because Reno v. ACLU, 521 U.S. 844 (1997), tells us so. “[O]ur cases,” Reno says, “provide no basis for qualifying the level of First Amendment scrutiny that should be applied” to the internet. As far as the First Amendment (and binding Supreme Court precedent) is concerned, edge providers on the internet are, in fact, “like any other speaker.”
Judge Hinkle concluded that, because social media websites at least act more like the entities in Miami Herald, Hurley, and PG&E than like the entities in Rumsfeld and PruneYard, SB 7072 is “subject to First Amendment scrutiny.” He then proceeded to enjoin most of SB 7072 for being blatantly content- and viewpoint-based and failing to overcome strict scrutiny. Judge Hinkle was right that SB 7072 is egregiously discriminatory, and he was right to enjoin the government from enforcing it. Even so, he missed an entire other avenue by which SB 7072 violates the First Amendment. What Miami Herald, Hurley, and PG&E establish is not simply that a law compelling social media companies to host certain speech is “subject to First Amendment scrutiny,” but that such a law presumptively violates the First Amendment by forcing those companies to “alter the expressive content” (as Hurley says) of their websites.
Judge Hinkle thought it important that much of the content on a social media website is supposedly “invisible to the provider.” Given that his entire exercise in comparing “editing” by social media with “editing” under Miami Herald, etc., was unnecessary, however, it should come as no surprise that his “visibility” distinction, raised as part of that unnecessary exercise, is irrelevant and illusory. Indeed, Judge Hinkle cut from whole cloth the proposition that content “visibility” affects an entity’s right to editorial control.
What’s more, the proposition is perverse. The more material a website blocks, it suggests, the stronger the site’s First Amendment protection becomes. The First Amendment contains no such “use it or lose it” trapdoor. “In spite of excluding some applicants,” the parade in Hurley was “rather lenient in admitting participants.” But it did not “forfeit constitutional protection simply by combining multifarious voices.”
Finally, the proposition is simply wrong. A large social media website’s first round of editorial control might be wielded via algorithm; the content at issue is no less “visible” to the website (nor the website’s editorial choices less deserving of First Amendment protection) for that. And content is certainly not “invisible” after it’s been posted. Material that, once published, is reported, and found to be objectionable, is regularly labeled, answered, de-amplified, downgraded, hidden, blocked, or deleted. Judge Hinkle never explained why, under the First Amendment, the timing of these varied displays of editorial control—their being ex post as opposed to ex ante—should matter. As anyone will understand after listening to a few hours of talk radio—in which the station lightly “screens” calls in advance, yet retains the (much needed) right to cut off callers at will—it does not.
Florida’s Bad Brief
If Judge Hinkle’s intellectual flirtation with common carriage is a flaw in an otherwise shining opinion, Florida’s treatment of the topic is a rotten egg in a nest of fallacies. For example:
- Florida asserts that social media websites must present a “unified speech product” to enjoy First Amendment protection, a claim made in naked defiance of Hurley and its “multifarious” parade.
- Florida seems to believe that advertisers, civil rights groups, the (old school) media, and the public at large will stop holding social media websites responsible for the speech they host if the sites simply “speak on their own behalf”—presumably more than they already do—and “make clear their own views.” This claim is naïve at best.
- Florida says that “systematic examinations” reveal instances in which websites “apply their content standards differently” to “similarly situated,” but politically distinct, users. Note that it’s the “examination,” rather than the supposed bias, that claims to be “systematic.” In any event, one can only marvel at Florida’s sangfroid, as it announces that it has surmounted the numberless fine distinctions and shades of context that bedevil even basic content moderation.
This much can be said for Florida: whereas before the trial court, it pressed Judge Hinkle to consider common carriage through a lens of strained analogies—law schools (FAIR) and shopping malls (PruneYard), after all, are not literally common carriers—on appeal it turns to factors that are (for better or worse) widely considered traditional indicia of common carriage. There is no straightforward and widely accepted definition, in the courts or elsewhere, of what common carriage is. Regardless, tacking the discussion toward these tokens of common carriage brings social media websites no closer to qualifying as common carriers.
Common carriers tend, Florida correctly notes, to hold themselves out as “serv[ing] the public indiscriminately.” “The businesses regulated” by SB 7072, the state then adds—now going astray—“hold themselves out as platforms that all the world may join.” Although it might indeed be said that the websites welcome “all the world” to join, whether one gets to stay is contingent on one’s complying with the sites’ terms of service. Gov. DeSantis has claimed that social media websites “evade accountability” by “claiming they’re just neutral platforms.” Actually, these websites are by no means “neutral” about violence, harassment, and hate speech, all of which are widely banned.
Even if the websites did hold themselves out as serving the public indiscriminately (they don’t), the “holding out” theory of common carriage is conspicuously hollow. As Professor Christopher Yoo observes, a “holding out” standard is easy to evade. Say SB 7072 went into effect, and the websites responded by tightening their terms of service further, thereby making clear(er) that they do not serve the public at large. What then? Rather than admit how badly its law had backfired in its attempt to force the websites to host unwanted speech, Florida would probably declare that the websites are common carriers because the state has ordered them to serve the public at large. Such a declaration would confirm that the “holding out” theory is empty at best, and circular at worst.
Florida suggests that social media websites may be treated as common carriers because they are “clothed” with “a jus publicum.” Unsurprisingly, it doesn’t press the point. The Supreme Court has said that whether a business serves a “public interest” is “an unsatisfactory test of the constitutionality of legislation directed at [the business’s] practices or prices.” Even Justice Thomas concedes that a “public interest” test for common carriage “is hardly helpful,” given that “most things can be described as ‘of public interest.’”
More heavily does Florida lean on a claim that social media websites can be treated as common carriers because of their (purported) market power and (supposed) ability to control others’ speech. The first problem on this front is the brute legal fact that an entity does not forfeit its constitutional rights by succeeding in the market. The Supreme Court accepted that the Miami Herald enjoyed near-monopoly control over local news; yet the newspaper retained its First Amendment right to exercise editorial control and judgment as it saw fit.
This is not to say that media firms, social or otherwise, are above the antitrust laws. A newspaper that uses its market power to inflict economic pain on a rival—one that, say, convinces advertisers to boycott, and thereby bankrupt, a local radio station—is inviting antitrust liability for its business practices. It is to say, however, that the right to reject speech for expressive reasons travels with a company, like a shell on a turtle, wherever the company goes—even if the company, like Yertle, is king of the pond.
If that were all there is to say about social media, monopoly, and free speech, SB 7072’s supporters could be forgiven for some griping about the demise of their unconstitutional law (though fall it still would). But the reality is that the social media market is as lively as ever. It continues to offer a wide array of useful, differentiated, and rapidly evolving avenues of expression and communication. If you’re convinced that “Big Tech” is “out to get” Republicans, you can do your blogging on Substack, your posting on Parler or Gab, your messaging on Telegram or Discord, and your video watching and sharing on Rumble. And anyone who claims, as Florida does, that network effects will ultimately thwart this competition must grapple with the astonishing rise of TikTok.
As for the major players’ alleged “control” over speech, Facebook and Twitter are not, as Florida would have it, “like telegraph and telephone lines of the past.” The internet, Reno v. ACLU explains, is not “a ‘scarce’ expressive commodity. It provides relatively unlimited, low-cost capacity for communication of all kinds.” Even the largest social media websites are just a piece of that “relatively unlimited” world of “communication.” As a (conservative) commentator, Charles C.W. Cooke, recently put it, social media websites are “equivalent not to the telegraph line,” but to a few “of the telegraph line’s many customers.” They are just a handful of “website[s] among billions.”
The receipt of special privileges from the government can nudge a business toward common carrier status. Florida claims that Section 230 is such a privilege, but it is not. “Section 230 helped clear the path for the development of [social media],” Florida reasons, “as the government did generations ago when it used eminent domain to help establish railroads and telegraphs.” True enough, businesses that employed property acquired through eminent domain sometimes had to operate as common carriers. It does not follow that Section 230, which broadly protects all websites for hosting speech that originates with others, creates a similar quid pro quo obligation. There are several problems with the comparison:
- Section 230 was not a gift to “Big Tech” (or any other select group). It applies to every internet website and service. If Section 230 doesn’t turn a blog (or Yelp, or the Wall Street Journal’s comments sections, or an individual social media account) into a common carrier, it’s unclear why it should turn Twitter or Facebook into one.
- Section 230 simply ensures that the initial speaker is the one liable for speech that causes legally actionable harm. It is not a “privilege” akin to when the government hands a business real property for exclusive use as a railroad or a telegraph line.
- Far from being a sign that the government wants social media websites to act as common carriers, Section 230 is a sign that it wants them to act as discerning editors. Section 230 ensures that a website can curate and edit content without (in most cases) worrying that doing so will trigger liability.
If the federally enacted Section 230 is the quid, by the way, why should a state government get to impose the quo? The history of common carriage in the United States, going back to the Interstate Commerce Act of 1887, is one of aiding interstate commerce by setting and enforcing national standards. Precisely because they were regulated as common carriers, telegraph companies were not subject to regulation by the states. Even if Section 230 could serve as the basis for common carriage rules, it couldn’t serve as the basis for common carriage rules imposed by Florida.
So what have we learned? We’ve seen that various arguments in favor of the common carrier theory don’t work. We’ve seen that the orthodox view, under which social media websites enjoy a First Amendment right of editorial control, remains sturdy and sound.
At the outset of his opinion, Judge Hinkle noted that SB 7072 “compels [social media] providers to host speech that violates their standards—speech they otherwise would not host.” We can be confident that this is, and will remain, a violation of the First Amendment.
The post Social Media And Common Carriage: Lessons From The Litigation Over Florida’s SB 7072 appeared first on Washington Legal Foundation.
On September 21, 2021, the Georgia Supreme Court parted with the nationwide trend narrowing corporate general jurisdiction, instead holding that mere registration to do business in the state of Georgia subjects an out-of-state corporation to general personal jurisdiction. See Cooper Tire & Rubber Company v. McCall, S20G1368.
The Court’s analysis in McCall turned on the notion that a 30-year-old case, Allstate Ins. Co. v. Klein, 422 S.E.2d 863, 865 (Ga. 1992), put out-of-state corporations on notice “that their corporate registration will be treated as consent to general personal jurisdiction in Georgia.” In Klein, the Court held that “a corporation which is authorized to do or transact business in this state at the time a claim arises is a resident for purposes of personal jurisdiction over that corporation in an action filed in the courts of this state. As a resident, such a foreign corporation may sue or be sued to the same extent as a domestic corporation.” Klein, 262 Ga. at 601.
The Georgia Supreme Court’s decisions in McCall and Klein, however, are inconsistent with the nationwide trend following Daimler AG v. Bauman, 571 U.S. 117 (2014), that registration to do business in a state is insufficient to constitute consent to general jurisdiction in the state. Decisions that have held contrary to McCall on jurisdiction-by-consent include:
- Chen v. Dunkin’ Brands, Inc., 954 F.3d 492, 499 (2d Cir. 2020) (“a foreign corporation does not consent to general personal jurisdiction in New York by merely registering to do business in the state and designating an in-state agent for service of process.”);
- Fidrych v. Marriott Int’l, Inc., 952 F.3d 124, 137 (4th Cir. 2020) (“Marriott did not consent to general jurisdiction by complying with South Carolina’s domestication statute.”);
- Waite v. All Acquisition Corp., 901 F.3d 1307, 1320 (11th Cir. 2018) (“Nothing in these provisions’ plain language indicates that a foreign corporation that has appointed an agent to receive service of process consents to general jurisdiction in Florida.”);
- Gulf Coast Bank & Tr. Co. v. Designed Conveyor Sys., L.L.C., 717 F. App’x 394, 397 (5th Cir. 2017) (“Gulf Coast does not identify any statute or agreement that requires foreign entities to expressly consent to any suit in Louisiana.”);
- Lanham v. BNSF Ry Co., 939 N.W.2d 363, 371 (Neb. 2020) (“we join the majority of jurisdictions and hold that a corporation’s registration under [Nebraska’s foreign corporation registration statute] does not provide an independent basis for the exercise of general jurisdiction.”); and
- Genuine Parts Co. v. Cepec, 137 A.3d 123, 126 (Del. 2015) (“[W]e hold that Delaware’s registration statutes must be read as a requirement that a foreign corporation must appoint a registered agent to accept service of process, but not as a broad consent to personal jurisdiction in any cause of action.”).
Indeed, McCall expands the limits of general jurisdiction set forth by the United States Supreme Court in Daimler, 571 at 119, as that decision recognized only three bases for general jurisdiction: (i) principal place of business in the forum State, (ii) the forum State is the business’s state of incorporation, and (iii) “affiliations with the [forum State that] are so continuous and systematic as to render the business essentially at home in the forum State.” Id. None of these bases include mere registration to do business. Though McCall repeatedly stated that Klein (and by extension McCall) cannot be overruled on federal constitutional grounds, the McCall concurrence recognized “a meaningful chance” that McCall’s holding that merely registering to do business subjects an out-of-state corporation to general personal jurisdiction may be overturned as inconsistent with the limits of due process.
Until such time, McCall may have the practical, unintended consequence of discouraging out-of-state corporations from registering to do business in Georgia.
— Cory Andrews, WLF General Counsel & Vice President of Litigation
Click here for WLF’s brief.
WASHINGTON, DC—Late yesterday Washington Legal Foundation (WLF) urged the California Court of Appeal to reverse a trial-court decision imposing $344 million in civil penalties on a medical-device manufacturer for disseminating fully protected scientific speech.
Imposing a penalty larger than all other reported California awards combined, the trial court found that every communication the defendants made about Ethicon’s pelvic-mesh products—whether to doctors or patients, written or verbal—violated California law. Yet as the State conceded on the first day of trial, the “scientific propositions” about pelvic mesh are “very much in dispute” here.
Even so, as the basis for thousands of individual violations (penalized at $1,250 apiece), the trial judge indiscriminately relied on materials in which Ethicon’s allegedly “deceptive” statements did no more than accurately describe the results of scientific studies on matters of genuine scientific debate. In other words, without even considering the First Amendment implications of doing so, the trial court imposed liability based on protected scientific speech.
In its amicus brief supporting reversal or vacatur, WLF argues that the trial court erred by imposing liability without considering the First Amendment, which shields reasonably debatable scientific claims from liability. WLF’s brief also contends that allowing the trial-court’s judgment to stand would irreparably chill scientific speech on vital matters of public health.
WLF’s brief was filed with pro bono the assistance of Peter Choate and Mollie Benedict of Tucker Ellis LLP in Los Angeles.
The post WLF Reminds California the First Amendment Precludes Punishing Scientific Speech appeared first on Washington Legal Foundation.
The post Mass. AG Deal Can’t Save Philip Morris From $10M Punitives appeared first on Washington Legal Foundation.
By Scott Hazelgrove, a litigator with Ellis & Winters LLP in the firm’s Raleigh, NC office. This post originally appeared on the firm’s Best in Class blog and we reprint it here with the firm’s (much appreciated) permission.
On June 25, 2021, a divided Supreme Court issued an important decision regarding Article III standing in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). In TransUnion, a 5-4 Court found that 6,332 members of an 8,185-member plaintiff class did not suffer a “concrete injury” from TransUnion’s violation of the Fair Credit Reporting Act (FCRA) by including erroneous information on the plaintiffs’ credit reports.
The Court reasoned that, although TransUnion technically violated the FCRA through its inaccurate reporting, thus giving rise to a statutory cause of action, it did not actually harm over 75% of the class because it did not send their credit reports to any third parties. Thus, the Court held that those class members whose credit reports remained within TransUnion lacked standing under Article III of the Constitution to sue TransUnion in federal court. As the dissent warned, however, the Court’s holding applies to federal courts only, meaning that class action defendants may find themselves defending more class actions attempting to vindicate federal statutory rights in state court.
A look at TransUnion, including its underpinnings, and a recent North Carolina analogue, helps tell this story.
Precursor to TransUnion
Writing for the majority (Chief Justice Roberts and Justices Alito, Gorsuch, Kavanaugh, and Barrett), Justice Kavanaugh leaned heavily on the Court’s most recent Article III standing case, Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). In Spokeo, the Court (Chief Justice Roberts and Justices Kennedy, Thomas, Breyer, Alito, and Kagan in the majority) recounted the three-part test for Article III standing: (1) an injury-in-fact, (2) fairly traceable to the challenged conduct, and (3) likely to be redressed by a favorable judgment.
To establish an injury-in-fact, a plaintiff had to demonstrate “an invasion of a legally protected interest” that is “concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” Spokeo, 136 S. Ct. at 1548. The Court explained that a plaintiff does not automatically satisfy the injury-in-fact requirement whenever Congress codifies a cause of action. In other words, a plaintiff cannot “allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.” Id. at 1549. By way of example, the Court reasoned that “[i]t is difficult to imagine how the dissemination of an incorrect zip code [on a consumer’s credit report], without more, could work any concrete harm.” Id. at 1550.
On remand, the Ninth Circuit held that Robins had established a concrete injury for purposes of Article III standing because the inaccurate credit reporting had caused him “real harm” to his employment prospects at a time when he was unemployed. See Robins v. Spokeo, Inc., 867 F.3d 1108 (9th Cir. 2017). Spokeo appealed again, and the Supreme Court denied the petition for writ of certiorari. This led to circuit splits about how to interpret and apply Spokeo, thus paving the way for TransUnion a few years later.
The TransUnion Case
Sergio Ramirez was the named plaintiff on behalf of a plaintiff class that sued TransUnion in the U.S. District Court for the Northern District of California alleging various FCRA violations. Principally, Ramirez alleged that TransUnion incorrectly reported that he and others were on a federal government watchlist of “specially designated nationals” who are national security threats to the United States, with whom it is generally unlawful to conduct business.
Ramirez learned that he was on the government watchlist when a car salesman told Ramirez that he could not sell him a car because his TransUnion credit report contained a government alert that his name was on a “terrorist list.” Ramirez then asked TransUnion for a copy of his credit report, and it mailed him a copy that did not include the government watchlist alert, and then it subsequently mailed him a letter that included the alert but did not include a copy of TransUnion’s summary of rights, which the FCRA required. Ramirez sued TransUnion and was able to certify a class of 8,185 U.S. citizens who received a TransUnion mailing during a certain timeframe that was similar to the second mailing TransUnion sent Ramirez.
In the district court, Ramirez and TransUnion stipulated that TransUnion incorrectly included the government watchlist alert on all 8,185 class members but distributed reports to third parties for only 1,853 class members. TransUnion then moved to decertify the class because, under Spokeo, a plaintiff cannot establish injury-in-fact by alleging “a bare procedural violation, divorced from any concrete harm….” TransUnion, 141 S. Ct. at 2213 (quoting Spokeo, 578 U.S. at 341).
TransUnion argued that 6,332 individuals—over 75% of the class—had alleged no concrete harm and thus had no standing to assert their claims. The district court denied TransUnion’s motion, and the jury awarded the class over $60 million, including punitive damages. The Ninth Circuit affirmed but reduced the jury’s verdict to about $40 million. See Ramirez v. TransUnion LLC, 951 F.3d 1008 (9th Cir. 2020).
The Supreme Court reversed, reasoning that the 6,332 class members whose credit reports were not sent to any third parties did not suffer a concrete injury and thus lacked standing under Article III to bring their claims in federal court. The Court applied its reasoning in Spokeo—specifically that a plaintiff’s injury be “concrete” (i.e., “real and not abstract”) and that “Article III standing requires a concrete injury even in the context of a statutory violation.” Spokeo, 578 U.S. at 341 (emphasis added).
In further deference to Spokeo, the Court quoted a recent Sixth Circuit case citing Spokeo for the fundamental point that even though “Congress may ‘elevate’ harms that ‘exist’ in the real world before Congress recognized them to actionable legal status, it may not simply enact an injury into existence, using its lawmaking power to transform something that is not remotely harmful into something that is.” Ramirez, 141 S. Ct. at 2205 (quoting Hagy v. Demers & Adams, 882 F.3d 616, 622 (6th Cir. 2018)).
And Justice Kavanagh, with a nod to his newest colleague, Justice Barrett, put a finer point on it and quoted a recent Seventh Circuit opinion for the proposition that “Article III grants federal courts the power to redress harms that defendants cause plaintiffs, not a freewheeling power to hold defendants accountable for legal infractions.” Id. (quoting Casillas v. Madison Avenue Assocs., Inc., 926 F.3d 329, 333 (7th Cir. 2019)).
The Court concluded that “[e]very class member must have Article III standing in order to recover individual damages” and that “‘Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not.’” Id. at 2208 (quoting Tyson Foods, Inc. v. Bouaphakeo, 577 U.S. 442, 466 (2016)).
Interestingly, the Court did not address the question of “whether every class member must demonstrate standing before a court certifies a class.” Id., n.4 (emphasis added). This means that absence of concrete injury alone will not preclude class certification. As a policy matter, why courts would allow certification of a class of plaintiffs not wholly made up of members who have standing to sue in federal court is unclear. As a practical matter, however, plaintiffs’ lawyers still may attempt to certify a class in federal court in attempt to increase settlement pressure on defendants who would prefer to end the litigation. Nevertheless, after TransUnion, defendants likely will be emboldened to proceed at least through a complete standing analysis to get the size of the class—and thus any total potential damages award—significantly pared back.
The TransUnion Dissent
Justices Thomas, Breyer, Sotomayor, and Kagan dissented, finding it “remarkable in both its novelty and effects” that the majority, in requiring a concrete injury in addition to a statutory right, had “relieved the legislature of its power to create and define rights.” Id. at 2221. Perhaps most importantly for future class action trends, the dissent warned that the Court’s opinion would result in more class actions being filed in state courts rather than federal courts. Id. at 2224, n.9. Writing for the dissent, Justice Thomas wrote: “Today’s decision might actually by a pyrrhic victory for TransUnion. The Court does not prohibit Congress from creating statutory rights for consumer; it simply holds that federal courts lack jurisdiction to hear some of these cases.” Id. In referring to class actions involving plaintiffs that have not demonstrated concrete injury, Justice Thomas concluded: “By declaring that federal courts lack jurisdiction, the Court has thus ensured that state courts will exercise exclusive jurisdiction over these sorts of class actions.” Id.
The Implications on State Class Action Practice
Historically, many class action plaintiffs have brought their claims in federal court, or defendants have removed to federal court in attempt to litigate in front of a judiciary they perceived to be generally more sympathetic to corporate interests than a state court judge or jury might be. But in Spokeo, the Supreme Court started to pull the rug out from under plaintiffs attempting to stand in federal court based on a defendant’s mere procedural violations. In absence of concrete injury, plaintiffs were now precluded from suing in federal court.
Five years later, the Supreme Court in TransUnion pulled the Article III standing rug completely out from under plaintiffs who have alleged a statutory violation only. Going forward, class action defendants in federal court should emphasize that every member of a certified class must establish Article III standing, as described above, to be able to recover individual damages. The most logical result of this—as Justice Thomas pointed out in his dissent—is that class action plaintiffs alleging a federal statutory violation likely will at least attempt to turn to state courts to pursue their claims.
Many states allow standing in cases where federal courts would preclude it. North Carolina is one such state, as evidenced by a recent case decided by the Supreme Court of North Carolina.
In Committee to Elect Dan Forest v. Employees Political Action Committee, 376 N.C. 558 (N.C. 2021), the Supreme Court of North Carolina held that plaintiffs need not show an injury in fact when a statute affords a right to sue. The Court found that the North Carolina Constitution does not limit the state courts’ jurisdiction the same way Article III of the U.S. Constitution limits federal courts, including the requirement that a plaintiff show an “injury in fact.”
The Court ultimately upheld standing to sue based on the technical statutory violation at issue there, irrespective of actual injury or damages. The case appears to be at odds with TransUnion, though how broadly North Carolina courts will apply Dan Forest’s holding remains to be seen.
What’s Next for Class Action Defense in North Carolina?
Going forward, we expect that courts in states like North Carolina that have more lenient standing principles likely will find themselves adjudicating more class actions filed under federal statutes.
Defendants may be tempted to remove these class actions to federal court. But they should think carefully before doing so, as a handful of recent federal court decisions have remanded such class actions to state court, with at least one court awarding attorney fees for such maneuver. See, e.g., Mocek v. Allsaints USA Ltd., 2016 WL 7116590, at *3 (Dec. 7, 2016) (remanding to state court due to lack of subject matter jurisdiction but awarding more than $58,000 in attorney fees because defendant “tried to have it both ways by asserting, then immediately disavowing, federal jurisdiction”).
Defendants might, instead, consider seeking dismissal based on state law standing principles, including statutory standing, which focuses on the merits of the claim, including whether proof of actual injury is required, and results in dismissal with prejudice, rather than remand or dismissal without prejudice in the case of removal based on Article III standing.
The post <em>TransUnion LLC v. Ramirez</em>: A Pyrrhic Victory for Class Action Defendants? appeared first on Washington Legal Foundation.
The post High court urged to keep allowing disability bias cases against public programs appeared first on Washington Legal Foundation.
Upcoming Webinar—ESG Internal Communication and External Disclosure: Tackle Them Before They Tackle You
Thursday, September 30, 2021, 1:00-2:00 p.m. EST
Jurgita Ashley, Partner, Thompson Hine LLP
David Wilson, Partner, Thompson Hine LLP
Description: As companies begin to prepare year-end reports and plan shareholder meetings, our panelists will review ESG governance alternatives, disclosure risk considerations, and recent litigation and investigation examples in the ESG space.
Featured Expert Contributor—Life Sciences and Medtech Regulation
Matt Wetzel is a partner in the Washington, DC office of Goodwin Procter LLP and serves as the WLF Legal Pulse’s Featured Expert Contributor, Life Sciences and Medtech Regulation. William Jackson is a partner in the firm’s Washington, DC office, and Heath Ingram is an associate in the firm’s New York, NY office.
Recently, the U.S. Department of Health and Human Services has shifted its approach to several aspects of how drug manufacturers, not-for-profit hospitals and health care facilities, public health clinics, and pharmacies dispense drugs to some of the country’s most needy patients under the “340B Drug Pricing Program.” HHS’s changes (at best) short-circuit the formal rulemaking process and (at worst) defy it altogether. The result for the 340B Program is an ever-changing haze of informal guidance and hurriedly implemented, problematic proposed rules in order to satisfy, solve, or settle litigation filed by opposed stakeholders. Given the importance of the program and its complexities, developments to how the government oversees the 340B Program require thoughtful and pragmatic approaches and mandate that HHS undertake meaningful, proper notice-and-comment rulemaking to fully vet and validate these policy shifts.
Established by Congress in 1992, the 340B Program requires drug manufacturers participating in Medicaid to sell outpatient drugs at deep discounts to public and not-for-profit health care organizations that serve low income or rural patients. This includes federally qualified health centers, children’s hospitals, disproportionate share hospitals, certain rural facilities, hemophilia treatment centers, and other clinics that serve certain designated populations. Under the 340B Program, these facilities pay a substantially reduced 340B “ceiling price” for certain outpatient drugs, which can be as little as $0.01. Those “covered entity” facilities can purchase the medications for their patients under the 340B Program, but bill the patient’s insurance company at the insurance company’s standard rate, allowing the covered entity to keep the difference to help finance the covered entity’s operations. Congress conditioned drug makers’ ability to receive reimbursement under the Medicare Part B and Medicaid programs on their participation in the 340B Program.
Not every clinic and facility has its own pharmacy to dispense these drugs. In fact, many of these facilities rely on contract pharmacies to handle the job of physically dispensing drugs to their qualifying patients. The pharmacy dispenses the medication and receives the reimbursement, part of which is passed on to the covered entity. Because the prices of 340B medications are so low, there is a legitimate concern about so-called drug diversion. Drug diversion, for purposes of the 340B Program means selling or reselling a covered outpatient drug at the low 340B “ceiling price” to someone who is not eligible to receive lower pricing. This could involve dispensing 340B drugs at ineligible facilities or written by ineligible providers. But it could also involve dispensing 340B drugs to patients at a contract pharmacy who are not patients of the covered entity hospital.
In response to these legitimate diversion concerns, many drug manufacturers have chosen to implement policies that prohibit dispensing 340B drugs to hospitals or facilities without an in-house pharmacy, unless the hospital or other facility designates just a single contract pharmacy location to receive and dispense their 340B products. Manufacturers are also increasingly considering exercising their right to audit a covered entity to ensure compliance with 340B drug diversion and duplicate discount prohibitions. For example, Merck in 2020 audited numerous covered entities for duplicate discounts. Other manufactures such as Sanofi and Novartis have also challenged the 340B Program by requiring additional information and audits from covered entities. It is unclear how successful these manufactures will be in curbing any non-compliance by covered entities.
The government believes that these manufacturer-imposed restrictions violate the 340B statute and could subject drug makers to civil monetary penalties. Indeed, the Health Resources & Services Administration, or HRSA—the federal agency within HHS that administers the 340B program—recently found six drug makers in violation of the 340B statute, because “their policies that place restrictions on 340B Program pricing to covered entities that dispense medications through pharmacies under contract have resulted in overcharges and are in direct violation of the 340B statute.” A recent seventh drug maker has stepped forward to limit 340B sales to only one designated contract pharmacy.
The 340B program is not easy for drug manufacturers, pharmacy benefit managers, wholesalers, and pharmacies to implement. It requires not only detailed patient and product tracking, but also accurate reporting amongst multiple entities on various prices charged to patient or clinics. It involves government audits, accurate price reporting to the various federal agencies, and the exchange of detailed patient and sales information between pharmaceutical manufacturers, covered entities, and (when utilized) contract pharmacies.
Over the years, HHS (via HRSA) has faced difficulties in implementing this complex drug-pricing scheme. And its recent actions on the question of contract pharmacies reflects yet another unstable regulatory position that is not fundamentally rooted in notice-and-comment rulemaking. HHS’s statements and policies on contract pharmacy usage only add to the complexity and confusion of the regulatory landscape—not to mention the administrative burden on drug makers, covered entities, contract pharmacies, pharmacy benefit managers, and others.
Changing Guidance. HHS has not issued clear and consistent guidance on how to implement the 340B program. For example, HHS’s first guidance document from 1996, directed at covered entities, acknowledged that there were “many gaps” in the 340B statute including silence “as to permissible drug distribution systems.” With respect to contract pharmacies, the original guidance permitted covered entities to contract with one (and only one) outside pharmacy to dispense 340B drugs. Fourteen years later, in a guidance document for covered entities from 2010, HHS changed course and allowed covered entities to use an unlimited number of contract pharmacies to dispense 340B drugs. And then in late 2020, the HHS General Counsel issued an advisory opinion directed at pharmaceutical manufacturers which stated that restrictions imposed by drug makers on the distribution of 340B-covered drugs to contract pharmacies violated federal law. Unsurprisingly, litigation ensued, and a federal district judge found that the advisory opinion was not a restatement of the federal government’s long-held position, as the government had alleged, but rather a shift in policy. Ultimately, HHS withdrew its opinion to avoid confusion. But this has not stopped HHS from moving forward with threatening drug makers with civil monetary penalties if they continue to limit 340B drug dispensing to one contract pharmacy.
Actions driven by Litigation. There has likewise been litigation regarding the ADR process HHS was obligated to undertake to help referee conflicts between pharmaceutical manufacturers and covered entities over things like contract pharmacies. Although Congress directed HHS to create the ADR Rule within 6 months of the Affordable Care Act’s passage in 2010, HHS did not even propose an ADR Rule until 2016. Following the close of the notice-and-comment period, the proposed rule began appearing on the government’s unified agenda of all federal regulations under development. In early 2017, following President Trump’s inauguration, the proposed rule was apparently frozen in accordance with the January 20, 2017 regulatory-freeze memorandum. Later in 2017, however, the ADR Rule was withdrawn from that unified agenda without explanation. Several years later, in October 2020, a number of covered entities filed lawsuits against HHS regarding the 340B program demanding that the Secretary implement an ADR Rule. Within a couple months after covered entities filed those lawsuits, the Secretary implemented the ADR Rule as a final rule as if the prior proposed rule had not been withdrawn. The decision to implement the final rule, apparently in response to the litigation, was all the more curious in light of the fact that 6 months earlier in March 2020, an HHS official was quoted as saying that “[i]t would be challenging to put forth rulemaking on a dispute resolution process when many of the issues that would arise for dispute are only outlined in guidance” and therefore HHS “does not plan to move forward on issuing a regulation due to the challenges with enforcement of guidance.” Several ADR petitions have been filed to challenge drug makers’ restrictions on the distribution of 340B drugs to contract pharmacies. And other entities, including PhRMA, have sought to repeal these regulations.
Regardless of whether one agrees with HHS’s guidance on the use of contract pharmacies or believes that drug makers are entitled to limit the number of contract pharmacies to which it dispenses 340B product, and whether the particular provisions of the ADR Rule are appropriate or not (a topic not even addressed in this post), HHS’s actions—spanning across multiple administrations—leave covered entities, pharmaceutical manufacturers, and other stakeholders without a clear consistent understanding of how the complex program should be implemented. In this area, as well as others, industry participants and the public at large would be better served with clear, consistent, notice-and-comment rulemaking clarifying the relevant parties’ roles, responsibilities, and requirements.
The post Probing HHS for Consistency on the 340B Pricing Program Rules on Contract Pharmacies appeared first on Washington Legal Foundation.