WLF Legal Pulse
Stephen M. Bainbridge is William D. Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law.
What is the judicial role? Are judges mere umpires who call balls and strikes based solely on rules made by others? Or are judges lawmakers in their own right, creating laws and making public policy? The U.S. Supreme Court has just agreed to hear a case in which those questions could play a determinative role. In addition to being of great jurisprudential interest, however, the case will attract great attention from corporate lawyers, because it may call into question the validity of the judiciary of the state that dominates corporate law.
Delaware’s state constitution imposes two unique requirements on the state judiciary that differentiates its courts from those of all other states. Under the bare majority rule, no more than half of the total number of the members of the state Supreme and Superior courts and the Chancery Court can be from the same political party (50 percent plus one if there is an odd number of judges). Under the major party rule, those judges must be from a “major” political party.
James R. Adams is a Delaware lawyer who has been frustrated in his search for a Delaware judicial position because he is a political independent. Adams sued Delaware Governor Carney in federal court seeking to have the Delaware provisions declared unconstitutional. Delaware argued that Adams lacked standing and, in the alternative, that the judicial-selection provisions fell within the policymaker exception to the First Amendment’s ban on conditioning state government positions on membership in a specific political party. The district court ruled for Adams on both grounds.
On appeal, the Third Circuit held that Adams had sufficiently pled Article III standing.1 As to the merits, the Third Circuit addressed solely the major party rule. The court nevertheless struck down both it and the bare majority rule on grounds that the latter was not severable from the former.
Delaware’s filed a petition for a writ of certiorari with the U.S. Supreme Court, seeking review solely of the Third Circuit’s decision on the merits. In granting the state’s petition, however, the Supreme Court required the parties to also address the question of Adams’ standing.
The Supreme Court’s request for briefing on the standing issue suggests that the Court may be zeroing in on two key weaknesses in Adams’ case. First, Adams had been a registered Democrat until February 2017. While registered as a Democrat, Adams had once applied for a position on the state’s Family Court, as to which the major party rule does not apply, but had never applied for a position on any of the three courts to which that rule does apply. Second, since re-registering as an independent in 2017, Adams had considered applying for a Superior Court vacancy and a Supreme Court vacancy, but had not in fact done so. The Third Circuit found that Adams had nevertheless suffered the requisite injury on fact because it would have been futile for him—as an independent—to have done so. The Third Circuit also rejected Delaware’s argument that prudential considerations mitigated against recognizing Adams as having standing. Accordingly, it seems plausible that the Justices who voted to grant the petition may be teeing this cases up as an opportunity to clarify standing rules.
It is the merits that make the Adams case worthy of attention, however. In Elrod v. Burns,2 and its progeny, the Supreme Court has broadly invalidated the spoils system of political patronage. In general, a state government cannot terminate nor deny employment solely because of political party affiliation:
Employees who do not compromise their beliefs stand to lose the considerable increases in pay and job satisfaction attendant to promotions, the hours and maintenance expenses that are consumed by long daily commutes, and even their jobs if they are not rehired after a ‘temporary’ layoff. These are significant penalties and are imposed for the exercise of rights guaranteed by the First Amendment. Unless these patronage practices are narrowly tailored to further vital government interests, we must conclude that they impermissibly encroach on First Amendment freedoms.3
There are two principal exceptions to that ban. First, “where membership in a political party is essential to the discharge of the employee’s governmental responsibilities.”4 In Branti v. Finkel, for example, the Supreme Court suggested that “if a State’s election laws require that precincts be supervised by two election judges of different parties, a Republican judge could be legitimately discharged solely for changing his party registration.”5 As applied to Adams, however, that exemption at most might save the bare majority rule. It does not speak to the major party rule.
Second, “if an employee’s private political beliefs would interfere with the discharge of his public duties, his First Amendment rights may be required to yield to the State’s vital interest in maintaining governmental effectiveness and efficiency.”6 Positions whose jobs entail policymaking fall squarely within this exception.7
In Adams, the Third Circuit rejected Delaware’s argument that judges fall squarely within that exception. The Court acknowledged that in doing so it was creating a circuit split:
In Kurowski v. Krajewski, the Seventh Circuit determined that the guiding question in political affiliation cases was ‘whether there may be genuine debate about how best to carry out the duties of the office in question, and a corresponding need for an employee committed to the objectives of the reigning faction,’ and answered that question in the affirmative with respect to judges and judges pro tempore. In Newman v. Voinovich, the Sixth Circuit similarly concluded that judges were policymakers who could be appointed on the basis of their partisan affiliation.8
In rejecting those decisions, the Third Circuit held that, to the extent judges make policy, they must do so without being swayed by partisan interests. As the court explained, “the question before us is not whether judges make policy, it is whether they make policies that necessarily reflect the political will and partisan goals of the party in power.”9 The court denied that Delaware judges could or should do so.
In an ideal world, the Third Circuit’s view of judges as independent, non-partisan decision makers would be correct.10 In the real world, the judicial confirmation wars would not be so fraught if judges were not increasingly perceived as partisan players. Indeed, as Professor Michael Dorff explained, in today’s reality “party affiliation is a fair proxy for policy views, which play a substantial role in a judge’s decision in the sorts of contested cases that lead to appellate litigation.” Even though many judges “may sincerely believe that their decisions are governed by the law, their political views subtly color their legal decisions—either knowingly or via cognitive biases, motivated reasoning, or some other mechanism—according to political scientists.”11
Although Delaware’s mode of judicial selection is unique, in many states, judges are elected by popular vote. In some, judicial elections are explicitly partisan. Even in states where judicial elections are nominally non-partisan, as Justice Sandra Day O’Connor observed, they are “becoming political prizefights where partisans and special interests seek to install judges who will answer to them instead of the law and the constitution.”12 It is thus hard to see how the Third Circuit’s quaint view of the judicial role can be limited to Delaware. Instead, it calls into question the validity of judicial elections across the board.
Let us suppose, however, that the Supreme Court manages to find a way to uphold the Third Circuit’s decision, while preserving elected state judiciaries in general. Would anyone outside Delaware care?
Delaware argues that the nation as a whole has a strong interest in preserving the current mode by which the state selects judges. The state correctly points out that Delaware is the dominant source of corporate law in this country. Sixty percent of the Fortune 500 and more than half of the corporations listed on the New York Stock Exchange are incorporated in Delaware, which means corporate governance disputes involving these economically vital companies are governed by Delaware law. Delaware has a larger body of corporate law than that of any other state, moreover, which is widely regarded as authoritative by both federal courts and courts of other states.
Delaware contends that the major party and bare majority rules promote partisan balance, which lessens the risk that judicial decisions will consistently skew in favor of one party or the other. The state further contends that the high degree of consensus found in Delaware supreme court decisions—which are usually unanimous—likewise results from maintaining a strict partisan balance. As former Delaware Chief Justice Veasey argued, the partisan balance required by the state constitution “has served well to provide Delaware with an independent and depoliticized judiciary and has led, in my opinion, to Delaware’s international attractiveness as the incorporation domicile of choice.”13
It nevertheless seems implausible that the quality of Delaware corporate law would suffer significantly were the constitutional provisions in question to be struck down. As I have observed elsewhere:
Delaware benefits greatly from its dominance. Delaware gets a significant percentage of state revenues from incorporation fees and franchise taxes, typically over 20% of the State’s budget. Delaware’s government thus has a very strong interest in maintaining Delaware’s dominant position.14
Delaware’s judges have just as much of an incentive to maintain that position as does the state legislature. It is well known that the “Delaware bar plays a central role in selecting justices, and it can be expected to recommend individuals who have a natural affinity to the corporate bar.”15 The Delaware bar’s prominent role and its preference for centrist judges who can be depended upon to make sound corporate law is highly unlikely to change even if the Supreme Court was to side with Mr. Adams.
Once they are elevated to the bench, moreover, Delaware jurists have strong reputational incentives to avoid radical changes in the direction of Delaware law. The Delaware judiciary has achieved a well-deserved “reputation as elite, national arbiters of corporate law.”16 They therefore receive a level of media attention to which few other state court judges—especially trial court judges—can aspire. They routinely get invited to headline high-profile academic and professional conferences to which other state court judges—especially at the trial court level—rarely receive. Indeed, some argue that the Delaware courts have achieved “a reputation that is unmatched by any other state or federal court.”17 Having achieved that status, it would be surprising if the Delaware judiciary did not seek to preserve it.
In sum, judges are lawmakers and policymakers whose preferences doubtless reflect their partisan allegiances at least at a subconscious level. The Supreme Court thus should reverse the Third Circuit. As a practical matter, however, it is doubtful that an affirmance would do much to change that part of Delaware law about which the country as a whole cares most.
—Cory Andrews, Vice President of Litigation
Click here for WLFs brief.
(Washington, D.C.)—Washington Legal Foundation (WLF) today filed an amicus curiae brief in the U.S. Supreme Court, urging it to grant Facebook, Inc’s petition for certiorari. WLF’s brief is highly critical of a Ninth Circuit decision that threatens to permit large, no-harm class actions whenever plaintiffs can label the alleged statutory violation an “invasion of privacy.”
The case arises under the Illinois Biometric Privacy Information Act (BIPA), a 2008 law that requires companies to obtain written consent before collecting a person’s biometric information. It provides a private right of action allowing a plaintiff to recover up to $5,000 for a single violation. Seeking to represent a class of six million Illinois Facebook users, the plaintiffs sued Facebook claiming that its Tag Suggestions feature—which uses facial-recognition software to suggest that Facebook users tag their friends in photos they upload to Facebook—violates BIPA.
As WLF’s brief explains, the panel’s certification ruling all but eliminates Article III’s standing requirement in “privacy” cases and throws open the door to class claims threatening draconian liability, creating irresistible pressure to settle even dubious claims. Such hydraulic settlement pressure—leveraging many billions of dollars in potential recovery—is corrosive to our civil justice system.
Celebrating its 42nd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.
The post WLF Urges Supreme Court to Reject Multi-Billion-Dollar Privacy Class Action appeared first on Washington Legal Foundation.
By Howard L. Dorfman, Adjunct Professor at Seton Hall University School of Law who previously served as general counsel or chief legal officer for several pharmaceutical manufacturers.
Last fall, the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) proposed a new payment model for most drugs covered under Medicare Part B designed to reduce prescription drug costs. The plan would replace CMS’s current process for obtaining the covered drugs with government-imposed price controls in the form of an International Pricing Index (IPI) based on prices currently set by foreign governments. In announcing the proposal, various government officials, including HHS Secretary Alex Azar and CMS Administrator Seema Verma, as well as the President, stressed that the resulting cost reductions would address the disparity between drug costs in other countries and the United States.
Healthcare cost concerns in general, and prescription drug prices in particular, have become predominant issues for the overwhelming majority of Americans as the country enters the 2020 elections. While the goal of cost-containment is laudable, the International Pricing Index model presents significant public-health problems by disrupting distribution of potentially life-saving therapies, chilling pharmaceutical research and development in rare diseases and other indications, and negatively affecting government initiatives such as the 21st Century Cures Act. In addition to the potentially devastating societal impact, the proposed IPI model exceeds CMS’ statutory authority and raises several constitutional issues, including possible violations of the separation of powers and the Foreign Commerce Clause, among others.
IPI-Based Process Would Harm U.S. Healthcare System while Failing to Reduce Prescription-Drug Prices
If CMS issues a final rule consistent with the details found in the Advance Notice of Proposed Rulemaking (ANPRM), a cascade of negative developments can be expected with adverse consequences affecting particularly vulnerable patient populations. For example, the Community Oncology Alliance (COA), a non-profit organization supporting the needs and interests of independent community oncology practices, filed comments on the ANPRM expressing concern over the IPI Model’s potential impact on community oncology practices and their patients. COA noted it was “very concerned that the IPI Model as proposed will totally upend how cancer care is delivered under Part B…” as well as the likelihood that a precipitous change in Medicare reimbursement on a national basis, without sufficient research and analysis as to its potential impact, “could accelerate the shift in the site of cancer care from independent community cancer clinics to much more expensive hospital systems.” The impact would be particularly harmful to cancer patients in rural or underserved areas.
The very mechanics of the IPI Model could cause prescription-drug shortages—a serious threat to the overall healthcare system. The ANPRM proposes to replace the current reimbursement system of Average Sales Price (ASP) plus 4.3% (intended to cover costs related to processing, handling, and storage) with vendors who would purchase the drugs and distribute them to providers. The vendors would thereafter be reimbursed based on the IPI calculation consistent with the lower prices in place in international markets. Given that prices outside of the U.S. are generally subject to government price controls, CMS would be unilaterally imposing these controls on Part B drugs. Mandatory price controls distort market dynamics and result in drug shortages, further complicating treatment as well as the physician-patient relationship as clinical decisions are increasingly based on availability in place of sound medical judgment.
Pharmaceutical research may also suffer a slowdown under the weight of a new, untested reimbursement model for prescription drugs. Biotech venture capitalists have expressed concern that artificial drug pricing would constrain investment in biomedical research and innovation, depriving seriously ill patients access to clinical trials and potentially breakthrough therapies as pricing limits distort research priorities. In fact, the IPI proposal would effectively stifle much of the progress Congress’s 2016 passage of the passage of the 21st Century Cures Act inspired. In the past three years, pharmaceutical and biotech companies have prioritized research on novel therapies for unmet medical needs. FDA has issued a record number approvals for both innovator and generic drugs that have lowered healthcare and improved patients’ quality of life. The IPA Model threatens to shut off that pipeline.
IPI Model’s Implementation Faces Strong Legal Headwinds
Regulated entities would almost certainly challenge a finalized IPI rule as exceeding CMS’s statutory and constitutional authority. Plaintiffs would have a strong Administrative Procedure Act claims that CMS lacks the statutory authority to replace the congressionally mandated reimbursement system with price controls adopted through rulemaking. CMS argues in the ANPRM that Section 1115A of the Social Security Act authorizes its IPI action. Section 115A empowers CMS to develop test models to improve the Medicare program. The provision also allows CMS to waive statutory requirements where doing so is necessary for a model’s implementation. A careful reading of Section 1115A, however, reveals that the provision’s focus is on patient care, not drug pricing. The statutory section references a list of 23 potential models, all of which address patient care.
A final rule implementing the IPI Model would also be vulnerable to constitutional challenge. As noted above, the IPI Model would supplant the prescription-drug reimbursement formula dictated by federal law. That type of Executive action is akin to the selective budget-cutting authority Congress granted to the President in the Line Item Veto Act. The Supreme Court held in Clinton v. New York, 524 U.S. 417 (1998), that the Executive cannot unilaterally nullify a legislative action.
Plaintiffs in a constitutional challenge could also argue that CMS’s action violates the Foreign Commerce Clause, which grants Congress the power to “regulate Commerce with foreign nations.” White House statements reflect that the administration is aiming policy tools such as the IPI Model at ending “global freeloading” in drug pricing which cause “Americans [to] pay more so other countries can pay less.” If the IPI Model pressures American drug manufacturers to increase prices to oversees purchasers, plaintiffs challenging the CMS action could argue that the agency usurps congressional authority to regulate foreign commerce contrary to the Foreign Commerce Clause.
Finally, the plaintiffs may claim that CMS is intruding on Congress’s authority to define patent rights. Article I, Section 8, Clause 8 of the Constitution grant Congress the power to award patents. Some of the foreign prices that the IPI Model would utilize in a drug pricing model for Medicare Part B reimbursement result from government compulsory licensing and other policies that weaken patent rights. The IPI Model imports those policies into U.S. law, and in the process dictates patent standards that differ from those defined by Congress.
With the IPI Model, CMS attempts to address the very complex issue of drug pricing with a poorly designed blunt instrument. The policy’s implementation would decelerate emerging research to develop new modalities for unmet medical needs, particularly for rare orphan diseases. The Model would undercut statutory initiatives meant to promote societal health without effectively addressing the various factors that affect drug pricing. Finally, the concept is fatally flawed from a legal perspective with little to no chance of surviving judicial review. Instead of contemplating reforms based on a careful review of market realities that can produce tangible benefits to patient populations, policymakers appear more interested in sound bites on the evening news that are “full of sound and fury, signifying nothing.”
Oklahoma Opioid Ruling: Another Instance of Improper Judicial Governance through Public Nuisance Litigation
Plaintiffs have long utilized the doctrine of public nuisance as a judicial avenue to force corporations to bear the costs of addressing social harms. In recent years, however, such claims have proliferated as a result of high-profile cases and plaintiffs’ success in the courtroom. This success will likely spur additional litigation and solidify the doctrine’s place in the plaintiffs’ litigation toolbox. This Legal Backgrounder first presents an overview of the public nuisance doctrine and its ongoing development. It next examines how the Oklahoma opioid case—the first case in which an opioid defendant was held liable for creating a public nuisance—failed to examine the doctrine’s history, a shortcoming that should doom the decision on appeal. The article also provides insight into how this high-profile ruling may give rise to additional public nuisance litigation.
History of the Doctrine of Public Nuisance
The public nuisance doctrine has undergone a bizarre evolution from its humble beginnings as a theory bound in public-property harm to one that now permits plaintiffs—typically states or local governments aided by contingent-fee private attorneys—to bring suits for societal harms like the opioid addiction crisis or climate change. A cause of action for “public nuisance” originated in medieval England as a judicial response to a disruption to the king’s land, a common road, or a public water source.1 Initially, the only remedy was a criminal writ brought by the Crown; over time, the doctrine evolved to permit suits by private citizens for equitable remedies.2 In America, public nuisance law developed similarly, with the doctrine’s application limited primarily to criminal situations that infringed upon a public right (commonly involving the use of land), for which the remedy was limited to injunctive relief and/or abatement for governmental plaintiffs.3 National and state legislation served the primary function of “solving” societal ills, and the doctrine was not even included in the First Restatement of Torts.4
Today, the Restatement (Second) of Torts § 821B defines a public nuisance as “an unreasonable interference with a right common to the general public.” An interference may be “unreasonable” depending on: “(a) Whether the conduct involves a significant interference with the public health, the public safety, the public peace, the public comfort or the public convenience, or (b) whether the conduct is proscribed by a statute, ordinance or administrative regulation, or (c) whether the conduct is of a continuing nature or has produced a permanent or long-lasting effect, and, as the actor knows or has reason to know, has a significant effect upon the public right.”5 Since the 1980s, plaintiffs have used the doctrine against manufacturers of products alleged to have cause public health crises—such as lead paint and tobacco—and the practice has spanned through the twenty-first century.6
The claims are gaining both media attention and more success. In the era of tobacco litigation, the only court to review the viability of a public nuisance claim against tobacco companies dismissed it because, under Texas law, the court was “unwilling to accept the state’s invitation to expand a claim for public nuisance beyond its ground in real property.”7 In addition to courts’ reliance on precedent and the common law to prevent expansion of the doctrine, its application has in the past been limited by statute as well. For instance, governmental entities began suing firearm manufacturers for causing a public nuisance dating in the early 2000s. Most of those cases fizzled to an end in 2005, however, when Congress passed the Protection of Lawful Commerce in Arms Act. The statute “effectively foreclosed nearly all municipal civil suits against the gun industry.” 8 Recently, though, plaintiffs have been more successful. Earlier this year, for example, after a California state court concluded that various paint manufacturers had created a public nuisance by producing lead paint, defendants The Sherwin-Williams Company, ConAgra Grocery Products Company, and NL Industries, Inc. agreed to pay $305 million to various California counties and cities “to address lead paint-related hazards.”9
Thus, the doctrine has been recognized as “surviv[ing] today amid apparently comprehensive federal and state environmental regulations because of its nearly infinite flexibility and adaptability and its inherent capacity to fill gaps in statutory controls.”10 The public nuisance doctrine is therefore not “new,” but has been applied more frequently in the tort context and will potentially create new precedent distancing it from its history of applying to real property and only authorizing equitable remedies.
Oklahoma State Public Nuisance Opioid Lawsuit
In August 2019, Judge Thad Balkman became the first judge to hold an opioid defendant liable for creating a public nuisance under Oklahoma’s public nuisance statute, 50 O.S. 1981 § I et seq. 11 Plaintiff, the State of Oklahoma, brought the sole claim of public nuisance for Johnson & Johnson’s and two of its subsidiaries’ contributions to the opioid addiction epidemic. 12 The case was originally brought against Purdue, Teva, and Johnson & Johnson, but the state settled with other defendants before the case went to trial in May.13 Oklahoma sought over $17 billion for three years of abatement costs, but Judge Balkman instead ordered that Johnson & Johnson pay the state over $572 million, which he calculated to be the cost of the first year of a plan to abate the public nuisance caused by the opioid crisis (a number he later reduced due to a multi-million-dollar math error).14 On September 25, 2019, Johnson & Johnson appealed to the Oklahoma Supreme Court, arguing that the ruling “disregard[ed] a century of precedent.”15 As of December 2019, the appeal remains pending.
Judge Balkman’s ruling, as Johnson & Johnson pointed out in its Motion to Appeal to the Supreme Court of Oklahoma, is an “unprecedented interpretation of Oklahoma public nuisance law,” which historically tied nuisance law to property use.16 Furthermore, it undermines product liability law and violates the separation of powers by requiring Johnson & Johnson to pay millions of dollars to government programs, essentially taxing the corporation to support the government through a remedy of damages couched as an “abatement plan.”17
In his ruling, Judge Balkman provided a detailed factual history of the “opioid crisis and epidemic,” focusing in large part on the epidemic’s public health impact and the government’s failure to act. Judge Balkman explained that Johnson & Johnson and two wholly owned subsidiaries were responsible for supplying other opioid manufacturers with active pharmaceutical ingredients to be used in opioid drugs, such as fentanyl, oxycodone, hydrocodone, morphine, codeine, sufentanil, buprenorphine, hyromorphone, and naloxone.18 But the supply alone was not what led to the nuisance: Judge Balkman also found that the defendants “embarked on a major campaign in which they used branded and unbranded marketing to disseminate the messages that pain was being undertreated and ‘there was a low risk and low danger’ of prescribing opioids to treat chronic, non-malignant pain and overstating the efficacy of opioids as a class of drug.”19 The defendant allegedly designed this campaign to target doctors and government agencies with false and misleading statements regarding opioids’ efficacy and risk of addiction in an effort to increase opioid use.20 Judge Balkman spent little time on the omission aspect of public nuisance, noting only that defendants did not train sales representatives to look for “red flags” associated with pill mills, such as long lines and people passed out in the waiting area.21
Judge Balkman’s order focused on statutory interpretation as opposed to any analysis of the common law history of public nuisance law, which was traditionally limited to interference with a plaintiff’s property. Under the plain text of the Oklahoma statute, “a nuisance consists in unlawfully doing an act, or omitting to perform a duty, which act or omission . . . annoys, injures, or endangers the comfort, repose, health, or safety of others.”22 A nuisance “is one which affects at the same time an entire community or neighborhood, or any considerable number of persons, although the extent of the annoyance or damage inflicted upon the individuals may be unequal.”23 Judge Balkman concluded that the Oklahoma statute defining public nuisance did not contain any property-related limitation for its application. Although Judge Balkman noted that his analysis was supported by Oklahoma Supreme Court precedent stating that “Oklahoma’s nuisance law extends beyond the regulation of real property and encompasses the corporate activity complained of here,”24 he supported his novel application of the statute with reliance on a simplistic textualist analysis, stating that “there is nothing in this text that suggests an actionable nuisance requires the use of or a connection to real or personal property.”25 Ignoring Oklahoma precedent and historic interpretation of the doctrine, Judge Balkman stated, in the alternative, that if a nuisance does require use of property, defendants had pervasively, systemically, and substantially used real and personal property, both public and private, by spreading misleading messages in homes and offices and by sales reps using the public roadways, as well as transmitting messages via cell phone and computer to invade the property of others and exacerbate the nuisance.26
Judge Balkman performed no causation analysis; the Order simply stated the defendants were a “cause in fact” of the nuisance and that there was no intervening or superseding cause.27 Given recent cases similarly invoking the doctrine in other jurisdictions, Judge Balkman’s ruling is not unprecedented, but is unlikely to survive on appeal unless the Supreme Court abandons conflicting precedent. Furthermore, he provided no analysis as to how the “abatement” payments would be used to address the nuisance; rather, the order simply forces Johnson & Johnson to funnel various amounts of money into various government programs to be used in any manner the government chooses.
Future Applications of the Doctrine
Government plaintiffs will continue to pursue public nuisance claims to address perceived health or safety crises that the federal, state, or local governments have been unable or unwilling to solve through traditional means. This is problematic for a number of reasons. Courts are more readily abandoning the limits that judges in the past imposed on the doctrine’s application. Perhaps more importantly, the recent trend in public nuisance litigation may encourage the judiciary to “solve” societal problems by usurping government responsibilities where they view the government as ineffective. As the judge presiding over the opioid multi-district litigation pending in the U.S. District Court for the Northern District of Ohio stated, “developing solutions to combat a social crisis such as the opioid epidemic should not be the task of our judicial branch. It’s the job of the executive and legislative branches, but like it or not we have these cases.”28 Faced with very real societal harms, the temptation to provide even legally unfounded judicial solutions is often too difficult to resist.
Taking the Granston Memo to the Next Level: Early and Close Coordination with Agencies on FCA Qui Tam Actions
By Jeffrey S. Bucholtz, Naana A. Frimpong, and Bethany L. Rupert. Mr. Bucholtz is a Partner with King & Spalding LLP in its Washington, DC office who, prior to joining the firm, held several senior positions in the Civil Division of the U.S. Department of Justice. Ms. Frimpong is Counsel, and Ms.Rupert is an Associate, in the firm’s Atlanta, GA office.
Under the False Claims Act (FCA), in addition to the government’s powers to intervene and take over the litigation of a qui tam action and to settle such an action, the government has the power to unilaterally “dismiss [a qui tam] action notwithstanding the objections” of a relator. 31 U.S.C. § 3730(c)(2)(A). In early 2018, Michael Granston, a longtime career DOJ lawyer who at the time was the Director of the Main DOJ office in Washington that supervises FCA investigations and litigation nationwide, issued a memorandum to DOJ lawyers handling FCA matters that described factors for evaluating whether to exercise the government’s unilateral dismissal authority.1 Most observers understood the Granston Memo as encouraging DOJ lawyers to consider dismissal more often than DOJ generally had done in the past. And in the nearly two years since the Granston Memo was issued, DOJ has made greater use of its dismissal authority, moving to dismiss a few dozen qui tam actions in that timeframe.
The increased use of DOJ’s dismissal authority is a welcome development not only for companies facing meritless qui tam actions but also for courts facing crowded dockets and for DOJ itself, as well as all of its client agencies throughout the government. The impetus for the Granston Memo, in fact, was concern with the government’s own interests. The Memo opens by noting the “record increases” in the number of qui tam actions filed in recent years—and the lack of a corresponding increase in the rate of government intervention—and laments that “[e]ven in non-intervened cases, the government expends significant resources in monitoring these cases and sometimes must produce discovery or otherwise participate.” Memo at 1. Dismissing more cases is a way for DOJ to reduce the backlog of cases and devote its resources to those it believes are deserving.
But while the Granston Memo was a step in the right direction, the lessons of the past two years point to refinements that would further the public interest while helping the government protect its own interests. Most notably, it has become clear that the federal agencies whose regulatory programs or contracts are at issue in qui tam actions—DOJ’s clients—have a strong stake in the appropriate use of the government’s dismissal authority because it is those agencies that will get dragged into discovery in declined actions. To be sure, DOJ attorneys will have to devote resources to litigating those discovery issues, but discovery consumes even more client agency resources, as it’s the agency’s documents that need to be searched and produced and the agency’s personnel who need to be deposed. And it’s the agency’s equities that are at stake when sensitive information is produced and important programs are disrupted.
The Granston Memo recognizes these client-agency equities and encourages DOJ attorneys to “consult closely with the affected agency as to whether dismissal is warranted.” Memo at 8. But the Memo does not specify when or how that consultation should occur. And recent litigation involving the government’s dismissal authority has reinforced the importance of early and thorough consultation.
The Supreme Court’s 2016 Escobar decision clarified that the FCA’s materiality requirement turns on factual questions—such as how the agency responded to the defendant’s alleged violations and how that agency typically responds in similar situations. Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2003-04 (2016). If a qui tam action gets past the pleading stage, answering those questions requires discovery from the agency. There is no way to find out whether the agency knew about the underlying conduct at the time and continued paying the defendant’s claims—presumably because it believed it was receiving the benefit of its bargain notwithstanding the alleged violation—except to take discovery of the knowledgeable agency personnel. Likewise, there is no way to know whether the agency normally denies payment in similar circumstances without taking discovery about the circumstances the agency has confronted and how it has responded.
In addition, all agree that the FCA, with its draconian remedies, is not a vehicle to litigate ordinary breach of contract claims. See, e.g., U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 378 (4th Cir. 2008) (FCA’s reference to “false or fraudulent claim” “surely cannot be construed to include a run-of-the-mill breach of contract action that is devoid of any objective falsehood. . . . To hold otherwise would render meaningless the fundamental distinction between actions for fraud and breach of contract.”) (internal citation omitted). In contracts for complex goods or services, conflicts routinely arise. Experts may disagree about how best to test whether a part satisfies contractual specifications. The contracting agency may prioritize timely delivery and may be unconcerned about a slight departure from specifications or may view an additional layer of confirmatory testing as causing delay for no good reason. And the contracting agency often has extensive expertise and involvement in the design or production process. If the agency views the issue as the kind of routine disagreement or debate that contracting parties work through cooperatively, that fact will come out in discovery and the qui tam action will fail.
DOJ therefore needs to engage with its client agency at the outset of its investigation to learn what the agency knew at the time about the alleged conduct at issue, how the agency views that conduct, what if any action the agency has taken in response to that conduct, and how the agency has addressed similar conduct in the past. Before Escobar, some thought that materiality was a legal question that turned on whether, as a matter of law, the agency would have the authority to deny payment based on the alleged violation. In that world, discovery would rarely be needed on materiality. But Escobar holds with crystal clarity that being legally capable of influencing the agency’s payment decision is insufficient and that materiality turns on real-world facts—facts that, as such, require discovery. See 136 S. Ct. at 2003-04.
Recent litigation confirms that proving—and defending as to—materiality will often require extensive discovery from the agency. In U.S. ex rel. Polansky v. Executive Health Resources, Inc., No. 12-CV-4239-MMB (E.D. Pa.), the government’s decision to decline intervention did not protect it from discovery. The government was ordered to produce over 42,000 pages of documents, including some the government had sought to withhold as privileged, and had to devote resources to litigating numerous discovery disputes with both the relator and the defendant. Eventually, the burdens and risks of discovery led the government to exercise its dismissal authority. See 2019 WL 5790061 (E.D. Pa. Nov. 5, 2019); see also, e.g., U.S. ex rel. Simpson v. Bayer Corp., 376 F. Supp. 3d 392 (D.N.J. 2019) (noting that “discovery remains substantially incomplete” despite three years of discovery in which government was heavily involved).
Escobar has made it much more difficult for the government to avoid intrusive and burdensome discovery by using the Touhy process. Under agencies’ Touhy regulations, agencies claim discretion concerning whether or to what extent to provide information in response to discovery requests when the agency is a non-party. See U.S. ex rel. Touhy v. Ragen, 340 U.S. 462 (1951). Even before Escobar, courts rejected agencies’ assertions of discretion to decline to produce and granted motions to compel against the government in cases where the information at issue was germane to the defendant’s defense. Although the United States is technically a non-party when it declines to intervene in a qui tam action, see U.S. ex rel. Eisenstein v. City of New York, 556 U.S. 928 (2009), courts have recognized that in such cases the government is not a typical non-party but in fact stands to benefit directly and most substantially from any recovery. Thus, in granting motions to compel in these pre-Escobar cases, courts were clear that the government was the real party in interest and could not decline to produce documents germane to the defense while simultaneously standing to benefit from the action. See, e.g., U.S. ex rel. Lewis v. Walker, No. 3:06-CV-16, 2009 WL 2611522, at *4 (M.D. Ga. Aug. 21, 2009); Williams v. C. Martin Co. Inc., No. 07-6592, 2014 WL 3095161, at *4 (E.D. La. July 7, 2014).
Now, after Escobar clarified the centrality of facts that will usually be uniquely in the agency’s possession, government efforts to avoid discovery should be even more resoundingly rejected. The government, as guardian of the public interest and not just a self-interested litigant, should not try to seek treble damages and penalties from a defendant while withholding information the Supreme Court has held is central to the case. And if the government does try, courts will likely have little patience for such efforts. See, e.g., U.S. ex rel. Hartpence v. Kinetic Concepts Inc., No. 18-1885, 2018 WL 7568578, at *3 (C.D. Cal. July 30, 2018); Kinetic Concepts Inc. v. Noridian Healthcare Sols., LLC, No. 18-00053, 2018 WL 5905395, at *3 (C.D. Cal. June 29, 2018) (“Allowing the Government to use the deliberative process privilege to shield documents that may be directly relevant to materiality and damages would potentially permit the Government to benefit financially from a Relator’s pursuit of a False Claims Act case even when the Government itself decided to pay certain categories of claims, or was aware of the Defendant’s billing practices and knowingly paid the claims anyway.”).
In short, after Escobar, the concern about preserving government resources applies at least as much, if not more, to DOJ’s client agencies than to DOJ itself. Agencies do not want their resources tied up with discovery in cases they believe are meritless. And yet the Granston Memo—a document written by DOJ for a DOJ audience—does not focus on the client agency’s equities. And the Memo does not even mention Escobar. But if Escobar’s impact on the need for discovery from agencies in declined qui tam actions was not yet clear two years ago, it is clear now.
With the benefit of nearly two years of experience under Escobar and the Granston Memo, the time is ripe for DOJ to refine the Memo to reflect agencies’ direct stake in whether the government dismisses or merely declines, as well as agencies’ unique knowledge about what allowing the relator to proceed with the action would likely entail. The fact that the agency whose contract or program is at issue is in the best position to know whether it believes it has been defrauded and how it has dealt with similar circumstances in the past means that the agency’s view of the merits of a qui tam action should receive deference from DOJ. But it also means that the agency will know better than anyone what discovery would entail—what its files contain, what its personnel would say if deposed, and how burdensome, distracting, and problematic discovery would be. As a result, DOJ should seek the agency’s input and give it great weight.
Recent litigation over the government’s dismissal authority has shown that there is virtue in making a dismissal decision early in the case. The Granston Memo noted that a decision to dismiss would often be made at the time of declination but that “there may be cases where dismissal is warranted at a later stage.” Memo at 8. And in some cases, the government has drawn the ire of the court by invoking its dismissal authority later, after allowing extensive litigation to occur. See, e.g., Polansky, No. 12-CV-4239-MMB (E.D. Pa. Sept. 25, 2019) (court scolded the government for telling the court it intended to dismiss the case, withdrawing that intention after the relator narrowed his claims, and then renewing its intent to dismiss after the relator’s narrowing proved less significant than advertised); cf. Gilead Sci., Inc. v. U.S. ex rel. Campie, No. 17-936 (Nov. 30, 2018) (after qui tam action had been in active litigation for years, government told Supreme Court, in brief opposing certiorari, that it would move to dismiss the action if certiorari was denied). To avoid a repeat of the awkward situation the government has faced when choosing to dismiss a case later, DOJ should consult early and deeply with its client agency—both to learn whether the agency believes that the qui tam action is meritorious and to learn whether allowing the case to go forward after a declination would likely entangle the government in substantial discovery that the agency views as problematic. Waiting until discovery has already become problematic and then trying to dismiss the case to stop the bleeding is a risky and inefficient approach for the government itself as well as for the court and for the parties.
The recent HUD-DOJ Memorandum of Understanding (MOU) on Inter-Agency Coordination in FCA matters offers a good exemplar of how things should work.2 The MOU states that “DOJ will confer with HUD in the event a party other than HUD, such as a qui tam relator . . . refers a matter to DOJ for potential FCA litigation,” specifying that such consultation will occur early, during the “investigative” phase. MOU at 3. And the MOU makes clear that “HUD will make known to DOJ whether and to what extent any alleged defects or violations . . . are material or not material to the agency” and that “HUD may recommend that DOJ seek dismissal of the case if HUD does not support the FCA litigation.” Id. The close partnership described by this MOU should be a model for other agencies and for DOJ.
The government’s job is to pursue justice and the public interest. It’s hard to see how the public interest is served when relators clog the courts and force companies to spend millions of dollars defending cases that the government has investigated and found to lack merit. It may have taken the government’s own ox being gored through intrusive discovery in meritless declined cases for the government to see the virtue of dismissing such cases, but this is a happy situation where the government can further the public interest while also protecting its own interests.
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To read more about the items below, click the link above for a PDF of the newsletter.
Although some transportation workers are exempt from the Federal Arbitration Act’s mandate that arbitration agreements must be enforced, that exemption should be narrowly construed. (Waithaka v. Amazon)
Pension plan beneficiaries who are uninjured by plan administrators’ alleged misconduct should not be allowed to sue under ERISA for that misconduct. (Thole v. U.S. Bank)
A federal regulation requiring drug manufacturers to include misleading pricing data in their television ads exceeds the agency’s statutory authority and violates manufacturers’ First Amendment rights. (Merck & Co. v. U.S. Dep’t of Health and Human Services)
Congress has not authorized the FTC, when suing companies for allegedly deceptive trade practices, to seek “disgorgement” of allegedly ill-gotten gains. (AMG Capital Management, LLC v. Federal Trade Commission)
The City of Berkeley violates the First Amendment rights of cell-phone retailers when it requires them to post misleading signs about the supposed health dangers of ordinary cell-phone use. (CTIA—The Wireless Ass’n v. City of Berkeley)
U.S. Court of Appeals for the Second Circuit substantially reduces mammoth penalty on UPS for shipping cigarettes for which the owners had not paid all taxes. (New York v. UPS)
U.S. Supreme Court declines to consider whether property owners are entitled to compensation under the Takings Clause when a government arbitrarily delays their building projects. (Bottini v. City of San Diego)
Artificial intelligence is advancing rapidly. In a few decades machines will achieve superintelligence and become self-improving. Soon after that happens we will launch a thousand ships into space. These probes will land on distant planets, moons, asteroids, and comets. Using AI and terabytes of code, they will then nano‑assemble local particles into living organisms. Each probe will, in fact, contain the information needed to create an entire ecosystem. Thanks to AI and advanced biotechnology, the species in each place will be tailored to their particular plot of rock. People will thrive in low temperatures, dim light, high radiation, and weak gravity. “Humanity” will become an incredibly elastic concept. In time our distant progeny will build megastructures that surround stars and capture most of their energy. Then the power of entire galaxies will be harnessed. Then life and AI—long a common entity by this point—will construct a galaxy-sized computer. It will take a mind that large about a hundred-thousand years to have a thought. But those thoughts will pierce the veil of reality. They will grasp things as they really are. All will be one. This is our destiny.
Then again, maybe not.
There are, of course, innumerable reasons to reject this fantastic tale out of hand. Here’s a quick and dirty one built around Copernicus’s discovery that we are not the center of the universe. Most times, places, people, and things are average. But if sentient beings from Earth are destined to spend eons multiplying and spreading across the heavens, then those of us alive today are special. We are among the very few of our kind to live in our cosmic infancy, confined in our planetary cradle. Because we probably are not special, we probably are not at an extreme tip of the human timeline; we’re likely somewhere in the broad middle. Perhaps a hundred-billion modern humans have existed, across a span of around 50,000 years. To claim in the teeth of these figures that our species is on the cusp of spending millions of years spreading trillions of individuals across this galaxy and others, you must engage in some wishful thinking. You must embrace the notion that we today are, in a sense, back at the center of the universe.
It is in any case more fashionable to speculate about imminent catastrophes. Technology again looms large. In the gray goo scenario, runaway self-replicating nanobots consume all of the Earth’s biomass. Thinking along similar lines, philosopher Nick Bostrom imagines an AI-enhanced paperclip machine that, ruthlessly following its prime directive to make paperclips, liquidates mankind and converts the planet into a giant paperclip mill. Elon Musk, when he discusses this hypothetical, replaces paperclips with strawberries, so that he can worry about strawberry fields forever. What Bostrom and Musk are driving at is the fear that an advanced AI being will not share our values. We might accidently give it a bad aim (e.g., paperclips at all costs). Or it might start setting its own aims. As Stephen Hawking noted shortly before his death, a machine that sees your intelligence the way you see a snail’s might decide it has no need for you. Instead of using AI to colonize distant planets, we will use it to destroy ourselves.
When someone mentions AI these days, she is usually referring to deep neural networks. Such networks are far from the only form of AI, but they have been the source of most of the recent successes in the field. A deep neural network can recognize a complex pattern without relying on a large body of pre-set rules. It does this with algorithms that loosely mimic how a human brain tunes neural pathways.
The neurons, or units, in a deep neural network are layered. The first layer is an input layer that breaks incoming data into pieces. In a network that looks at black-and-white images, for instance, each of the first layer’s units might link to a single pixel. Each input unit in this network will translate its pixel’s grayscale brightness into a numer. It might turn a white pixel into zero, a black pixel into one, and a gray pixel into some fraction in between. These numbers will then pass to the next layer of units. Each of the units there will generate a weighted sum of the values coming in from several of the previous layer’s units. The next layer will do the same thing to that second layer, and so on through many layers more. The deeper the layer, the more pixels accounted for in each weighted sum.
An early-layer unit will produce a high weighted sum—it will fire, like a neuron does—for a pattern as simple as a black pixel above a white pixel. A middle-layer unit will fire only when given a more complex pattern, like a line or a curve. An end-layer unit will fire only when the pattern—or, rather, the weighted sums of many other weighted sums—presented to it resembles a chair or a bonfire or a giraffe. At the end of the network is an output layer. If one of the units in this layer reliably fires only when the network has been fed an image with a giraffe in it, the network can be said to recognize giraffes.
A deep neural network is not born recognizing objects. The network just described would have to learn from pre-labeled examples. At first the network would produce random outputs. Each time the network did this, however, the correct answers for the labeled image would be run backward through the network. An algorithm would be used, in other words, to move the network’s unit weighting functions closer to what they would need to be to recognize a given object. The more samples a network is fed, the more finely tuned and accurate it becomes.
Some deep neural networks do not need spoon-fed examples. Say you want a program equipped with such networks to play chess. Give it the rules of the game, instruct it to seek points, and tell it that a checkmate is worth a hundred points. Then have it use a Monte Carlo method to randomly simulate games. Through trial and error, the program will stumble on moves that lead to a checkmate, and then on moves that lead to moves that lead to a checkmate, and so on. Over time the program will assign value to moves that simply tend to lead toward a checkmate. It will do this by constantly adjusting its networks’ unit weighting functions; it will just use points instead of correctly labeled images. Once the networks are trained, the program can win discrete contests in much the way it learned to play in the first place. At each of its turns, the program will simulate games for each potential move it is considering. It will then choose the move that does best in the simulations. Thanks to constant fine-tuning, even these in-game simulations will get better and better.
There is a chess program that operates more or less this way. It is called AlphaZero, and at present it is the best chess player on the planet. Unlike other chess supercomputers, it has never seen a game between humans. It learned to play by spending just a few hours simulating moves with itself. In 2017 it played a hundred games against Stockfish 8, one of the best chess programs to that point. Stockfish 8 examined 70 million moves per second. AlphaZero examined only 80,000. AlphaZero won 28 games, drew 72, and lost zero. It sometimes made baffling moves (to humans) that turned out to be masterstrokes. AlphaZero is not just a chess genius; it is an alien chess genius.
AlphaZero is at the cutting edge of AI, and it is very impressive. But its success is not a sign that AI will take us to the stars—or enslave us—any time soon. In Artificial Intelligence: A Guide For Thinking Humans, computer scientist Melanie Mitchell makes the case for AI sobriety. AI currently excels, she notes, only when there are “clear rules, straightforward reward functions (for example, rewards for points gained or for winning), and relatively few possible actions (moves).” Take IBM’s Watson program. In 2011 it crushed the best human competitors on the quiz show Jeopardy!, leading IBM executives to declare that its successors would soon be making legal arguments and medical diagnoses. It has not worked out that way. “Real-world questions and answers in real-world domains,” Mitchell explains, “have neither the simple short structure of Jeopardy! clues nor their well-defined responses.”
Even in the narrow domains that most suit it, AI is brittle. A program that is a chess grandmaster cannot compete on a board with a slightly different configuration of squares or pieces. “Unlike humans,” Mitchell observes, “none of these programs can ‘transfer’ anything it has learned about one game to help it learn a different game.” Because the programs cannot generalize or abstract from what they know, they can function only within the exactparameters in which they have been trained.
A related point is that current AI does not understand even basic aspects of how the world works. Consider this sentence: “The city council refused the demonstrators a permit because they feared violence.” Who feared violence, the city council or the demonstrators? Using what she knows about bureaucrats, protestors, and riots, a human can spot at once that the fear resides in the city council. When AI-driven language-processing programs are asked this kind of question, however, their responses are little better than random guesses. “When AI can’t determine what ‘it’ refers to in a sentence,” Mitchell writes, quoting computer scientist Oren Etzioni, “it’s hard to believe that it will take over the world.”
And it is not accurate to say, as many journalists do, that a program like AlphaZero learns “by itself.” Humans must painstakingly decide how many layers a network should have, how much incoming data should link to each input unit, how fast data should aggregate as it passes through the layers, how much each unit weighting function should change in response to feedback, and much else. “These settings and designs,” adds Mitchell, “must typically be decided anew for each task a network is trained on.” It is hard to see nefarious unsupervised AI on the horizon.
The doom camp (AI will murder us) and the rapture camp (it will take us into the mind of God) share a common premise. Both groups extrapolate from past trends of exponential progress. Moore’s law—which is not really a law, but an observation—says that the number of transistors we can fit on a computer chip doubles every two years or so. This enables computer processing speeds to increase at an exponential rate. The futurist Ray Kurzweil asserts that this trend of accelerating improvement stretches back to the emergence of life, the appearance of Eukaryotic cells, and the Cambrian Explosion. Looking forward, Kurzweil sees an AI singularity—the rise of self-improving machine superintelligence—on the trendline around 2045.
The political scientist Philip Tetlock has looked closely at whether experts are any good at predicting the future. The short answer is that they’re terrible at it. But they’re not hopeless. Borrowing an analogy from Isaiah Berlin, Tetlock divides thinkers into hedgehogs and foxes. A hedgehog knows one big thing, whereas a fox knows many small things. A hedgehog tries to fit what he sees into a sweeping theory. A fox is skeptical of such theories. He looks for facts that will show he is wrong. A hedgehog gives answers and says “moreover” a lot. A fox asks questions and says “however” a lot. Tetlock has found that foxes are better forecasters than hedgehogs. The more distant the subject of the prediction, the more the hedgehogs’ performance lags.
Using a theory of exponential growth to predict an impending AI singularity is classic hedgehog thinking. It is a bit like basing a prediction about human extinction on nothing more than the Copernican principle. Kurzweil’s vision of the future is clever and provocative, but it is also hollow. It is almost as if huge obstacles to general AI will soon be overcome because the theory says so, rather than because the scientists on the ground will perform the necessary miracles. Gordon Moore himself acknowledges that his law will not hold much longer. (Quantum computers might pick up the baton. We’ll see.) Regardless, increased processing capacity might be just a small piece of what’s needed for the next big leaps in machine thinking.
When at Thanksgiving dinner you see Aunt Jane sigh after Uncle Bob tells a blue joke, you can form an understanding of what Jane thinks about what Bob thinks. For that matter, you get the joke, and you can imagine analogous jokes that would also annoy Jane. You can infer that your cousin Mary, who normally likes such jokes but is not laughing now, is probably still angry at Bob for spilling the gravy earlier. You know that although you can’t see Bob’s feet, they exist, under the table. No deep neural network can do any of this, and it’s not at all clear that more layers or faster chips or larger training sets will close the gap. We probably need further advances that we have only just begun to contemplate. “Enabling machines to form humanlike conceptual abstractions,” Mitchell declares, “is still an almost completely unsolved problem.”
There has been some concern lately about the demise of the corporate laboratory. Mitchell gives the impression that, at least in the technology sector, the corporate basic-research division is alive and well. Over the course of her narrative, labs at Google, Microsoft, Facebook, and Uber make major breakthroughs in computer image recognition, decision making, and translation. In 2013, for example, researchers at Google trained a network to create vectors among a vast array of words. A vector set of this sort enables a language-processing program to define and use a word based on the other words with which it tends to appear. The researchers put their vector set online for public use. Google is in some ways the protagonist of Mitchell’s story. It is now “an applied AI company,” in Mitchell’s words, that has placed machine thinking at the center of “diverse products, services, and blue-sky research.”
Google has hired Ray Kurzweil, a move that might be taken as an implicit endorsement of his views. It is pleasing to think that many Google engineers earnestly want to bring on the singularity. The grand theory may be illusory, but the treasures produced in pursuit of it will be real.
Also published by Forbes.com on WLF’s contributor page.
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To Seal or Not to Seal—The Government’s Abuse of the Sealing Prerogative in False Claims Act Qui Tam Cases
Stephen A. Wood is a Partner with Chuhak & Tecson, P.C. in Chicago, IL and serves as the WLF Legal Pulse’s Featured Expert Contributor on the False Claims Act.
The docket in virtually every False Claims Act qui tam case reveals an unusual feature, one unique to these cases. Several docket entries pre-dating the government’s Notice of Election to either intervene or decline intervention remain under seal, shielded not only from public eyes, but from the eyes of the defendant and defense counsel. The government’s notice typically requests that “only the complaint, this notice, and the Court’s Order be unsealed and served upon the Defendant. All other contents of the Court’s file in this matter . . . should remain under seal and not be made public or served upon the Defendant.” Just as typically, the government offers no justification or supporting rationale for its unusual request for complete confidentiality.
These documents were filed during ex parte proceedings. And courts almost uniformly accommodate these one-sided, secretive endeavors, even though they come without justification. And on those few occasions when there is defense pushback, the government usually responds by invoking a claim of privilege, or by claiming that the information is either not relevant or, even if arguably relevant, release would somehow harm the government. The government’s arguments are varied. Often, it is claimed that secrecy supports the government’s need for confidentiality regarding its investigative or deliberative processes. See, e.g., United States v. Education Mgmt, LLC, No. 2007-cv-461, 2013 WL 4591317 at *2 (W.D. Pa. Aug. 28, 2013). It also insists that sealing promotes candor with the court.
As noted in one of my earlier WLF Legal Pulse posts, the government regularly exploits the False Claims Act sealing provisions, first by seeking multiple extensions of the 60-day seal period—lasting several years in many cases—and again by insisting that all pre-Notice of Election filings remain under seal. The latter abuse, the subject of this post, should be opposed for several reasons. These actions have the potential to deprive the defendant of important information about the government’s case. Second, they undermine the public’s interest in transparent operation of our government. And third, they undermine the public’s interest in access to the court system. Of its varied justifications, only the government’s privilege claims may potentially hold water. Even then, defendants should force the government to do what any civil litigant must—establish its claims of privilege with facts and authority.
The Deliberative Process and Investigatory Privileges
The Deliberative Process Privilege
One rationale offered by the government is that sealed information should be protected by the deliberative process privilege. This privilege applies to advisory opinions, recommendations, and deliberations which represent the foundation of government decisions and policy-making. Department of the Interior v. Klamath Water Users Protective Ass’n, 532 U.S. 1, 8 (2001). The privilege rests on the “obvious realization that officials will not communicate candidly among themselves if each remark is a potential item of discovery and front-page news, and its object is to enhance the quality of agency decisions by protecting open and frank discussion among those who make them within the government.” Id. at 8-9; Environmental Prot. Agency v. Mink, 410 U.S. 73, 87-88 (1973) superseded by statute, Freedom of Information Act, 5 U.S.C. § 552, as recognized in Central Intelligence Agency v. Sims, 471 U.S. 159 (1985). One court has stated that the purpose of the privilege is to allow agencies freely to explore possibilities, engage in internal debates, or play devil’s advocate without fear of public scrutiny. Carter v. United States Dept. of Commerce, 307 F.3d 1084, 1089 (9th Cir. 2002).
To qualify for the privilege, the document must be both (1) “predecisional,” meaning that it precedes the adoption of agency policy, and (2) “deliberative” or related to the policy-making process. Texaco P.R. Inc. v. Department of Consumer Affairs, 60 F.3d 867, 884 (1st Cir. 1995). A document may be “predecisional” if it is intended to assist agency decision-makers in carrying out those duties. Formaldehyde Inst. v. Department of Health and Human Services, 889 F.2d 1118, 1122 (D.C. Cir. 1989). An agency can support its claim if it can pinpoint the specific decision to which the document relates, establish that its author prepared the document for the purpose of assisting agency decision-making, and verify that the document precedes the decision to which it relates. The foregoing requirements have been summarized as follows: a document is “predecisional” if it precedes the actual agency decision and it is “deliberative” if it is a statement of opinion regarding final policy rather than a description of the ultimate policy itself. See United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518, 527 (6th Cir. 2012).
The Investigatory Privilege
Another privilege invoked to forestall disclosure of sealed filings is the investigatory privilege, “a judge-fashioned evidentiary privilege.” Dellwood Farms, Inc. v. Cargill, Inc., 128 F.3d 1122, 1124 (7th Cir. 1997). The privilege protects against the release of information that would harm a government’s civil or criminal investigative efforts. In re Sealed Case, 856 F.2d 268, 272 (D.C. Cir. 1988). To sustain the privilege, the head of the department having control over the requested information must formally assert the privilege, the assertion must be based on the “actual personal consideration” of that official, and the claim must identify specifically the information subject to the privilege along with the reason it falls within the privilege’s scope. Id. at 271. These requirements ensure that the privilege will be asserted in a deliberate, considered, and reasonably specific manner. Id.
The privilege is not absolute, however, and can be overcome by a showing of need. Dellwood Farms, 128 F.2d at 1125. What’s more, this privilege, like any other, “can be waived and, once waived, is lost.” Id. at 1126. Waiver arises not only by voluntary disclosure, but also by way of forfeiture, where, for example, the government selectively discloses certain information leading to a broader finding of waiver. Id. at 1127. In the end, the court must balance the government’s interest in confidentiality against the individual litigant’s interest in access to the information. United States ex rel. Health Outcomes Technologies v. Hallmark Health System, Inc., 349 F. Supp. 2d 170, 174 (D. Mass. 2004). Several factors bear on that balancing test, including (1) the extent to which disclosure will discourage citizens from providing information to government, (2) the impact disclosure of identities may have on the interests of informants, and (3) the extent to which disclosure will chill government self-evaluation. In re Sealed Case, 856 F.2d at 272.
The government’s invocation of these narrow privileges is frequently too broad. Yet, in this instance, as with any claim of privilege, the burden falls upon the party asserting it to establish the claim with evidence and authority. The starting point should be the production of a log identifying the particular documents, the applicable privilege, and further information establishing the elements of the privilege in sufficient detail to permit the defendant to make an independent assessment of the assertion’s validity. Thereafter, if a dispute remains, the matter should be submitted to the court for resolution.
A Word About Attorney Work Product Claims
Apart from the foregoing privileges, the government often invokes the work product doctrine in an effort to maintain the seal on records it has filed with the court. Some courts have held that work product is inapplicable in this instance, since this is not about discovery. See Health Outcomes, 349 F. Supp. 2d at 174 (work product inapplicable in opposing motion to unseal, because motion was not aimed at discovery). As set forth in Rule 26(b)(3) of the Federal Rules of Civil Procedure, the work product protection prevents party discovery of information gathered or prepared in anticipation of litigation. Materials filed under seal by the government do not represent trial preparation materials prepared by a party that a party-opponent is seeking to discover. See, e.g., United States ex rel. Goodstein v. Mclaren Regional Medical Ctr., No. 97-cv-72992, 2001 WL 34091259 at *3 (E. D. Mich. Jan. 24, 2001) (“[The] work product doctrine is inapplicable here, as a discovery request is not at issue. Rather, the Defendants are simply requesting ‘access to materials filed with the Court in a normally public record.’”).
The distinction is not merely one of form, but of substance. The concept of work product arose in the context of civil litigation with one party seeking the fruits of a party-opponent’s trial preparation labors, including information reflecting litigation strategies and plans, so-called mental impressions, and so forth. See Hickman v. Taylor, 329 U.S. 495 (1947). These materials should be shielded from discovery, except upon a showing of need, that the information sought cannot reasonably be obtained elsewhere and is essential to the requesting party’s trial preparation. A motion aimed at unsealing records on a court’s docket that were sealed at the request of the government is different. The filing of documents with a court in this instance is not part of the discovery process, but something typically intended to satisfy a statutory requirement. The request to unseal is about access to materials already produced by the government, but only to the court. This is by definition not discovery, and the rules governing discovery, including the work product doctrine, should not come into play.
Additional Government Arguments for Maintaining the Seal
The False Claims Act Commands It
The government may argue that the FCA commands that all filings will remain sealed except the complaint. See, e.g., Plaintiff’s Response in Opposition to Defendants’ Motion to Amend Seal Orders at 4-5, United States v. Education Management Corp., ECF No. 283 (“Congress clearly considered whether the seal could harm defendants’ interests by keeping from them necessary information, and drafted the FCA to exclusively provide for the complaint to be served on defendants. The detailed legislative balancing that is evident in the FCA’s seal provisions should not be lightly set aside.”) The complaint, the government argues, is the only document the statute specifically requires to be unsealed and served upon the defendant when the court so orders. See 31 U.S.C. § 3730(b)(2). In addition, the statute specifically provides for the “in camera” filing of “affidavits or other submissions” in support of requests for extension of the 60-day statutory seal period. Thus, the argument goes, the (silent?) command of the False Claims Act is that any paper that is to be sealed and is not specifically required to be unsealed, should remain permanently sealed.
This argument lacks logic and ascribes a purpose to the law neither stated nor fairly implied by the statutory text. While it is true that the False Claims Act requires sealing of qui tam complaints upon filing, the law doesn’t require any other document to be sealed. As for affidavits or other submissions related to motions to extend the sealing of the complaint, the statute states that “such motions may be supported by affidavits or other submissions in camera.” 31 U.S.C. § 3730(b)((3) (emphasis added). The filing under seal of such documents, by law, is therefore optional. That the statute is silent on the matter of unsealing documents other than the complaint does not mean, ipso facto, that such documents must never be seen by defendants or their counsel. Since the statute provides no clear guidance one way or the other, the court must be guided by common-law rules and procedures in determining whether to maintain or lift the seal on other filings by the government.
To Promote Candor with the Court
The government has argued that the continued sealing of docket entries, including motions for extension and supporting papers, promotes candor with the court. Conversely, if the court were to unseal these filings, it would in effect penalize the government for its candor. In other words, the sealing of documents other than the complaint is necessary to encourage prosecutors to be open and forthcoming in their arguments to the court without fear that these arguments, documents, and information will be shared with the object of the complaint.
On its face, the argument is dubious for more than one reason. To begin with, in every jurisdiction in this country, attorneys, even those employed by the government, are considered officers of the court and thus owe the court a duty of candor. Rule 3.3 of the American Bar Association Model Rules of Professional Conduct sets forth the attorney-advocate’s obligations in dealings with the court, mandating honesty in communication. Even more pertinent and notable, the rule imposes special duties in the event of ex parte proceedings: “In an ex parte proceeding, a lawyer shall inform the tribunal of all material facts known to the lawyer that will enable the tribunal to make an informed decision, whether or not the facts are adverse.” ABA Model Rules of Professional Conduct, R. 3.3(d). The comments to the Rule expand on this duty:
Ordinarily, an advocate has the limited responsibility of presenting one side of the matters that a tribunal should consider in reaching a decision; the conflicting position is expected to be presented by the opposing party. However, in any ex parte proceeding, such as an application for a temporary restraining order, there is no balance of presentation by opposing advocates. The object of an ex parte proceeding is nevertheless to yield a substantially just result. The judge has an affirmative responsibility to accord the absent party just consideration. The lawyer for the represented party has the correlative duty to make disclosures of material facts known to the lawyer and that the lawyer reasonably believes are necessary to an informed decision.
ABA Model Rule 3.3, Comments (emphasis added). In light of the independent duty of candor owed the court, the notion that the seal is necessary to promote candor rings hollow. The Rule does not provide the government with the special option of withholding information on the possibility that it could be made known to the defendant. The government’s lawyers should not receive a special incentive or reward for merely fulfilling their ethical obligations.
Even apart from professional responsibilities owed to the courts by their officers, the False Claims Act imposes on the government in the particular instance of a request for extension of the seal period a duty to establish “good cause.” See 31 U.S.C. §3730(b)(3). The government needs no more independent rationale to disclose all material facts in support of requests to extend the seal period in light of this requirement. Importantly, the statute lacks a corresponding mandate to maintain the seal on papers supporting a good cause showing. It is, as noted, silent on the matter.
The Information under Seal is Not Relevant
The government may also argue that the seal should remain in place because the documents do not concern the substantive issues in the case. They reflect at most investigative techniques and deliberative processes, which must remain hidden from defendants’ and the public’s view. The government’s typically conclusory argument is that a defendant need look no further than the complaint to understand the claims and supporting facts. Alternatively, any information contained in the sealed government filings would likely be duplicative of any information obtained in discovery of the affected agency.
Simply because documents from the involved agency may be separately discoverable is no reason to maintain the same documents under seal. In fact, that the documents are otherwise discoverable would seem to undermine the government’s argument against unsealing. And no defendant should be required to take the government at its word that documents under seal are not relevant to the issues in the case. The argument, again, seems to allude to rules of discovery, (even though the scope of discovery is not limited by relevance). As noted supra, unsealing of sealed documents in this instance is not governed by Rule 26.
The concerns of defendants rightly grow with the length of time a qui tam complaint remains under seal. Longer typically means more sealed filings, more information conveyed to the court that should be shared with the defendant once the government has made its intervention decision. Given that many qui tam cases can remain under seal for years (despite the statutory limit of 60 days), the total number of sealed proceedings can be significant. See, e.g., United States ex rel. Yannacopolos v. General Dynamics, 457 F. Supp. 2d 854, 857 (N. D. Ill. 2006) (qui tam complaint remained under seal for 7 years; court unsealed 11 ex parte motions to extend the seal period over the government’s objection). In Yannacopolos, for example, among other reasons, the defendant sought the sealed materials because they might support a statute of limitations defense.
As noted above, the government’s policy on sealing court records in False Claims Act cases raises several concerns, not the least of which is that it conflicts with the public’s interest in an open judicial process: “In considering the appropriateness of sealing court records, the Seventh Circuit has given great weight to the strong public interest in disclosure. Concealing judicial records ‘disserves the values protected by the free-speech and free-press clauses of the First Amendment … [and prevents] the public [from] monitor[ing] judicial performance adequately.’” Id. at 858 (citations omitted).
Consistent with the Seventh Circuit’s approach, courts should presume that ex parte filings will be unsealed once the government announces its decision on intervention. The sealing of records on the docket, concealing them from defense counsel, should be an option of last resort for the court. Before this, if unsealing to provide public access is not appropriate, the court should consider unsealing for the benefit of defendant and defense counsel. If the information is of the sort that should not be shared with the defendant, then review can be limited to defense counsel only, as is often done in the case of trade secret information. Finally, redactions may be appropriate, but in that event the redacted documents should be accompanied by a privilege log that allows defendants to assess the propriety of the redactions.
Lastly, a legislative proposal may be in order here. Congress could consider an amendment requiring the unsealing of all matters preceding the government’s election decision, except those where the government establishes that the information is subject to a claim of privilege or other showing that disclosure would be contrary to the public interest. This would in essence represent a codification of the common law, but it would eliminate any question about whether the drafters of the False Claims Act intended that ex parte proceedings should be concealed indefinitely from the public and the defendant.
By Frank Cruz-Alvarez, a Partner in the Miami, FL office of Shook, Hardy & Bacon L.L.P., with Melissa Madsen, Of Counsel to Shook, Hardy & Bacon L.L.P. in its Miami, FL office. Mr. Cruz-Alvarez is the WLF Legal Pulse’s Featured Expert Contributor on Civil Justice/Class Actions.
In a recent decision vacating a class certification in an action against DIRECTV, the Eleventh Circuit explained that the issue of class-member standing may, in some instances, “be exceedingly relevant to the class certification analysis required by Federal Rule of Civil Procedure 23.” Cordoba v. DIRECTV, LLC, No. 18-12077 (Nov. 15, 2019 11th Cir. Ct.). In Cordoba, the Eleventh Circuit concluded that the District Court for the Northern District of Georgia abused its discretion when it certified a class under Rule 23(b)(3) without first considering “the standing problem that arguably affected the bulk of the unnamed members of the class it had drawn.” The Eleventh Circuit remanded the case back to the district court to determine whether “common issues predominate” under Rule 23(b)(3), when it appears that a large portion of the class does not have standing.
Sebastian Cordoba sued DIRECTV and the company it used for telemarketing services, Telecel Marketing Solutions, Inc., for violating the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227—a federal statute that limits telemarketing calls and “grants individuals who unlawfully receive calls permission to sue.” Among other consumer protection measures, the TCPA authorizes the Federal Communications Commission to promulgate regulations creating a national “do-not-call list” and requiring individual telemarketers to maintain their own “do-not-call lists” based on consumer requests not to receive telemarketing calls. Cordoba alleged that despite his repeated demands that he not be contacted, DIRECTV and Telecel failed to maintain their internal do-not-call lists and continued to call him.
The U.S. District Court for the Northern District of Georgia certified two classes that Cordoba sought to represent: The first class was defined as “all individuals who received more than one telemarketing call from Telecel on behalf of DIRECTV on or after October 27, 2011.” The second class included “all individuals whose telephone numbers were on the National Do Not Call Registry” but still received the marketing calls.
After the District Court certified both classes, DIRECTV sought an interlocutory appeal, challenging only the first class certification. The sole question addressed by the Eleventh Circuit was whether a recipient of a telemarketing call who did not request to be placed on the caller’s internal do-not-call (DNC) list “has standing under Article III to maintain a claim that the caller failed to institute appropriate internal DNC list procedures.” Recall that in order to have Article III standing, a plaintiff must allege an “injury in fact” that is “concrete and particularized” and “actual or imminent,” that must be “fairly traceable to the challenged action of the defendant” and must likely “be redressed by a favorable decision.” The Eleventh Circuit concluded that this category of call recipient did not, in fact, have standing.
First, the Eleventh Circuit held that Cordoba and all of the absent class members who received more than one unwanted call from Telecel sufficiently satisfy the “injury in fact” prong of Article III standing. After all, the court noted, “a phone call intrudes upon the seclusion of the home, fully occupies the recipient’s device for a period of time, and demands the recipient’s immediate attention.”
Notwithstanding that analysis, the court held that this category of absent class members—recipients who did not request to be placed on a telemarketer’s internal DNC list—cannot meet the traceability requirement of Article III standing. These call recipients cannot show a causal connection between their injury and the challenged action of DIRECTV and Telecel. As the court explained, “if an individual not on the National Do Not Call Registry was called by Telecel and never asked Telecel not to call them again, it doesn’t make any difference that Telecel hadn’t maintained an internal do-not-call list.” Because even if Telecel had carefully followed the regulations, it would have continued to call these individuals. Since “there’s no remotely plausible causal chain linking the failure to maintain an internal do-not-call list to the phone calls received by class members who never said to Telecel they didn’t want to be called again,” those plaintiffs lack Article III standing to sue.
The Eleventh Circuit then went on to explain that for a class action to be justiciable under Article III of the U.S. Constitution, all that is required is that a named plaintiff have standing. Cordoba, the named plaintiff in this action, meets that minimum requirement for a justiciable claim. Federal Rule of Civil Procedure 23(b)(3), however, requires the court in certifying the class to find that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” Here, the Eleventh Circuit concluded, the unnamed class members’ standing “poses a powerful problem under Rule 23(b)(3)’s predominance factor.”
The Eleventh Circuit concluded that the district court failed to consider an individualized issue that may predominate over common issues: namely, that “at some time in the course of the litigation the district court will have to determine whether each of the absent class members has standing before they could be granted any relief.” Because each individual plaintiff will have to show his or her injury is traceable to Telecel’s violation of the law, he or she will have to show that they communicated to Telecel that they did not wish to be called. The Eleventh Circuit pointed out that the district court would be in a better position to determine (1) how many class members actually asked Telecel not to contact them and (2) how the class members intend to prove that they made such a request. If few class members actually made these requests, or if it would be difficult to identify those who did, “then the class would be overbroad and these individualized determinations might overwhelm issues common to the class.”
The Eleventh Circuit’s decision does not require plaintiffs in a class action to now prove that every member of a proposed class has standing prior to certification. But it does expressly highlight that “there is a meaningful difference between a class with a few members who might not have suffered an injury traceable to the defendants and a class with potentially many more, even a majority, who do not have Article III standing.”
Accordingly, going forward, targets of proposed class actions, will want to take a close look at the “standing” of proposed class members during the certification stage to determine if there is a viable argument to defeat certification based on the lack of standing of large portions of the proposed class. In the end, this decision is another tool for counsel defending against proposed class actions—but one that can have significant ramifications.
Gregory A. Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP in Las Vegas, NV and Washington, DC. Mr. Brower also serves on WLF Legal Policy Advisory Board and is the WLF Legal Pulse’s Featured Expert Contributor, White Collar Crime and Corporate Compliance.
In a much-anticipated decision, the U.S. Court of Appeals for the Fourth Circuit recently reversed a district court’s refusal to enjoin a U.S. Department of Justice filter team’s review of materials seized from a law firm during a criminal investigation. A unanimous three-judge panel ruled that the use of a magistrate judge-approved filter team was improper for several reasons, including that the creation of the filter team “inappropriately assigned judicial functions to the executive branch.” This ruling has the potential to upend longstanding and well-established processes routinely utilized, with judicial approval, by DOJ to allow for the expeditious review of seized records that are likely to include attorney-client communications and attorney work-product.
This dispute arose out of an IRS criminal investigation in which the target’s law firm came under suspicion of assisting the target in breaking the law. This led to an investigation of the law firm, which eventually led to a government application for a warrant to search the law firm’s office. The presiding magistrate judge found requisite probable cause for the search and, at the same time the warrant was issued, the judge also authorized a filter team protocol proposed by DOJ. As always, the filter-team process would enable a review of the seized documents for potentially privileged or work product documents performed by a team that did not include anyone involved in the underlying investigation.
The specific filter protocol approved by the magistrate judge in this case provided that the filter team should review the seized records, identify and set aside any privileged and potentially privileged materials, and forward all other records to the investigative/prosecutive team. The team was to then evaluate the records identified as privileged or potentially privileged for responsiveness, and then discuss with the law firm whether those documents could be forwarded to the investigative/prosecutive team or be submitted to the court for decision. The protocol also authorized the filter team to contact other clients of the law firm whose records were seized in order to request privilege waivers. As noted above, DOJ proposed this protocol, which the magistrate judge adopted contemporaneous with the issuance of the warrant on an ex parte basis.
The subject search resulted in the seizure of all of the law firm’s email correspondence, including emails relating to the target of the investigation, and emails relating to numerous other clients, some of whom DOJ was also investigating or prosecuting for unrelated crimes. Following the seizure of the records, the law firm sought an injunction from a district court to secure the return of the records so as to allow them to do their own privilege review before the government could review the records. The district court denied this request, explaining that the protocol provided that the filter team would be operating under the court’s direction, and could be neutral. The district court further observed that “absent a finding that there has been some breach of [their] ethical responsibilities and duties in this case, which rarely occurs,” the filter protocol was not inappropriate. The court also noted that there was no “per se rule that law firms are to be treated so differently that neutral examiners must be appointed in every case.” The law firm appealed, and the Fourth Circuit reversed.
The Fourth Circuit’s opinion quickly cut to what the judges considered to be the core issue, deciding that the filter team’s unilateral discretion to decide what records were privileged and what records were not meant that the protocol was not fair. The court explained that the magistrate judge erred by failing to consider that fewer than 1% of the seized records were actually responsive to the warrant and that, as a result, the filter team would be receiving emails concerning other ongoing federal investigations of other related clients. Thus, while the filter team did not include any personnel who were involved in the underlying investigation, because that was not necessarily true for the other investigations of which the other clients might be targets, the protocol was flawed. The court further decided that the magistrate judge should have conducted an adversarial, i.e. not an ex parte, hearing on the filter team protocol issue.
While this case arguably presented some unique factors that particularly troubled this panel, the decision is nevertheless likely to have broader implications. One likely result is that magistrate judges may agree to specific filter team protocols only after a search has been conducted and before any government review, and only after conducting a hearing that includes counsel for the target of the search. While such an approach will slow down the government’s review process, it would not create any significant additional burdens for the court.
However, others predict that the impact of this decision could go so far as to cause the elimination of filter teams altogether, giving way to a judicial review process for every search that potentially includes privileged materials. This approach would mark a significant change in the way filter teams have always worked, and would impose a burden on the judiciary that would not only significantly slow the review process, but also increase the costs of the process with no clear concomitant increase in the protection of the search target’s rights.
Finally, some have even suggested that this decision could make judges, prosecutors, and agents so uneasy about the potential complications associated with searches of attorneys’ offices that such warrants will only be rarely sought or issued, even when based on clear probable cause. All of this could have the effect of significantly chilling DOJ’s enthusiasm for pursuing some types of white-collar investigations.
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A plaintiff’s lack of standing to sue is about as close to a silver-bullet defense as civil-litigation defendants have at their disposal in federal court. The doctrine is based in Article III of the U.S. Constitution, which limits federal courts to hearing only “cases and controversies.” The doctrine puts the onus on a plaintiff to prove, among other factors, that she suffered an actual harm, and if she can’t, the court has no jurisdiction over the case. Because standing is a jurisdictional question, defendants can raise it at any point in the litigation. And as the Petitioner in the Supreme Court case Frank v Gaos learned in October Term 2018, courts can raise it sua sponte as well.
There are also times, however, when a business defendant would prefer to be in federal court. When facing claims in a plaintiff-friendly state court, for instance, business defendants often seek the lawsuit’s removal to federal court. But what happens when a defendant in a successfully removed case successfully argues that the plaintiff lacks standing to sue? The result, as an October 18 district court ruling in Pitre v. Wal-Mart Stores, Inc. illustrates, will almost certainly be a Pyrrhic victory.
Yet Another FCRA Class Action
Claiming to represent over 6.5 million similarly harmed individuals, three named plaintiffs applied for and obtained jobs at Wal-Mart. In a suit filed in Orange County Superior Court, they allege that when Wal-Mart violated the Fair Credit Reporting Act (FCRA) when it procured consumer reports on employment applicants. Wal-Mart successfully sought to remove the case to the U.S. District Court for the Central District of California. The federal court subsequently granted the plaintiffs’ motion to certify their class. Wal-Mart moved for summary judgment.
A Win on Standing
The court first examined Wal-Mart’s argument that the plaintiffs lacked standing to sue because they lacked a real-world injury. It quickly dispensed with the plaintiffs’ claim that Wal-Mart, before procuring their consumer report, failed to give the plaintiffs a written summary of their rights. But the FCRA requires a written summary for only an investigative consumer report. Because the FCRA doesn’t require a prospective employer to give a written summary to an applicant when obtaining a generic consumer report, the plaintiffs could not establish standing.
The court then assessed the plaintiffs’ standing to allege that extraneous information contained in Wal-Mart’s disclosure notices rendered them not “clear and conspicuous” as the FCRA requires. The court explained that even if Wal-Mart didn’t provide perfectly compliant disclosures, a mere procedural defect doesn’t constitute a harm under Article III. The U.S. Supreme Court established this principle in Spokeo, Inc. v. Robins, a case in which the plaintiff alleged FCRA violations. The plaintiffs in Pitre thus had to prove they suffered a concrete injury or faced an imminent risk of harm.
Depositions of the Pitre plaintiffs revealed that each plaintiff was aware that Wal-Mart “might conduct a background check . . . and did not object thereto.” Each plaintiff understood background checks were a necessary part of the application process, and each testified that they wanted to work for Wal-Mart. Because none of the plaintiffs were unaware of the background checks and each of them got what they wanted—a job offer—the court concluded that Pitre and his fellow plaintiffs suffered no actual or imminent harm.
A Loss on Remand
The court then had to decide the fate of the plaintiffs’ suit. Wal-Mart asked the court to enter judgment in the company’s favor. Pitre argued that the court must remand the case to Orange County Superior Court. The court concluded Pitre must be remanded back to state court.
Under federal statutory and case law, when a federal court ultimately concludes that it lacks jurisdiction over claims remanded from state to federal court, that court must send the claims back to state court. The Pitre court also noted that it could not grant Wal-Mart’s request because the plaintiffs’ lack of standing deprived the court of its authority to enter judgment.
State courts can exercise concurrent jurisdiction over federal statutory claims, and because state courts are not bound by Article III doctrine, the court explained, remand in this case would not be “futile” as Wal-Mart had argued. “The nature of our federalist system,” the court reasoned, dictates that a California court, applying state jurisdictional principles, should have the opportunity to determine the plaintiffs’ standing to sue.
What’s a Defendant to Do?
For most defendants, dismissal of a class action for lack of standing would be a resounding victory. But for Wal-Mart in Pitre, that outcome thrust them back into Orange County. The California constitution doesn’t feature a “case or controversy” requirement for court jurisdiction, so the Superior Court will likely find that the plaintiffs have standing to sue Wal-Mart.
Decisions like Pitre leave defendants in quite a bind. The U.S. Supreme Court held in 1981 that “absent provision by Congress to the contrary” states have concurrent jurisdiction to enforce federal statutes. That principle sets an extremely high bar for defendants trying to stop a lawsuit to enforce a federal statute from returning to state court. Some federal laws, like the FCRA, even explicitly authorize state-court jurisdiction.
Rather than risk a ruling on jurisdiction, perhaps defendants in a Pitre-like bind could simply ignore standing and ask the court to dismiss on other grounds, such as a plaintiff’s failure to prove their case. But as we explain above, judges at any point in civil litigation can question whether a plaintiff has standing to sue. Federal district court judges, especially those in class-action-heavy jurisdictions, actively look for ways to thin their dockets, and asking a plaintiff to demonstrate standing is certainly one of the most effective methods.
State-court defendants should also analyze that particular state’s standing doctrine before seeking removal to federal court. As noted in a recent Washington Legal Foundation paper, Wal-Mart successfully challenged a plaintiff’s standing to bring claims under the FCRA in Missouri state court because Missouri’s constitution has an analogue to Article III. On the other hand, an Illinois state court rejected FedEx’s motion to dismiss a suit under the federal Fair and Accurate Credit Transactions Act for lack of standing. The court reasoned that “Illinois courts are not required to follow federal law on issues of justiciability and standing.”
If a defendant concludes that it has as much of a chance to win on standing grounds in state court as it has in federal court, the economical choice could be to remain in state court. That choice, ironically, may also be the most financially prudent one when, upon removal to federal court, a standing challenge represents the defendant’s best chance of dismissal. If your path to victory is a Pyrrhic circle, perhaps the best strategy is to stand still.
Also published by Forbes.com on WLF’s contributor page.
—Corbin K. Barthold, WLF Senior Litigation Counsel
Click here for WLF’s brief.
(Washington, DC)—Washington Legal Foundation today filed an amicus curiae brief urging the First Circuit to read section 1 of the Federal Arbitration Act, 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 a driver who delivered packages locally for Amazon fits within this exemption.
In its brief, WLF explains that section 1 is not the product of a legislative intent to excuse a few transportation workers—and, for some peculiar reason, them alone—from honoring arbitration agreements. Section 1 exists, rather, because Congress expected shipping-industry workers to engage in arbitration governed by other federal laws. And because section 1 fulfills this one focused purpose, there is no principled way to stretch its application. Although some judge-made tests purport to expand the exception beyond national and international transportation of goods, these contrived standards defy statutory text and context, produce inconsistent results, and serve no end set forth by Congress.
Because the plaintiff in this case made only local deliveries intrastate, he falls outside the section 1 exemption. The district court’s contrary ruling should therefore be reversed.
Celebrating its 42nd 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.
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—Richard Samp, WLF Chief Counsel
Click here for WLF’s brief.
WASHINGTON, DC—Washington Legal Foundation (WLF) today urged the U.S. Supreme Court to affirm an appeals court’s dismissal of claims filed against administrators of a pension plan by two participants in the plan. The plaintiffs argued that the administrators acted imprudently by investing all of the pension plan’s assets in common stock, with the result that the value of plan assets decreased 27% in 2008 following the stock-market crash that year. WLF argues that the plaintiffs lack standing to sue under the Employee Retirement Income Security Act (ERISA) because they were uninjured by the alleged misconduct—their receipt of future pension benefits was never at risk.
The case involves U.S. Bank’s employee pension plan, which has more than 100,000 participants. The plan is a “defined-benefit plan,” which means that employees, upon retirement, are entitled to fixed periodic payments for the remainders of their lives. The employer bears the entire risk that plan assets may prove inadequate to cover all promised payments; it must pay into the plan the funds needed to cover any shortfall arising from an inadequate return on invested funds. If, on the other hand, a plan becomes overfunded, the employer need not make any contributions that year. Following the 2008 stock-market crash, the U.S. Bank plan was deemed somewhat “underfunded” (as measured by ERISA), and U.S. Bank made significant contributions to the plan for the next five years until the plan was once again overfunded.
WLF argues that the plaintiffs lack standing to invoke the jurisdiction of the federal courts because they were not injured by the defendants’ allegedly imprudent investment strategy. WLF notes that the plaintiffs have no ownership interest in the plan’s assets; their only interest is in receipt of their fixed pension benefits. In the absence of evidence that the alleged misconduct created any risk of nonpayment (particularly given U.S. Bank’s $87 billion in liquid assets that were available as a back-up if the plan’s assets ever proved inadequate), the plaintiffs failed to show the injury-in-fact necessary for federal-court standing.
Celebrating its 42nd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.
—Cory Andrews, WLF Vice President of Litigation
Click here for WLF’s brief.
WASHINGTON, DC—Washington Legal Foundation (WLF) today urged the U.S. Court of Appeals for the D.C. Circuit to affirm a decision blocking an agency rule that would allow the Secretary of Health and Human Services (HHS) to require drug makers to convey the wholesale acquisition cost, or “list price,” of any prescription drug advertised in direct-to-consumer (DTC) television ads. WLF was joined on its amicus curiae brief by the Allied Educational Foundation.
The DTC Rule is touted as part of the administration’s effort to reduce overall healthcare costs. But as WLF’s brief makes clear, no matter how well-meaning its intentions, HHS may exercise only the limited regulatory authority that Congress granted it by statute. Yet no statute authorizes the Centers for Medicare and Medicaid Services (CMS) to require disclosure of list prices in DTC television ads.
Its lack of statutory authority is not the only fatal flaw in the DTC Rule. The list-price-disclosure mandate would also violate drug makers’ First Amendment rights. The First Amendment protects a speaker’s choices about both what to say and what not to say. And by compelling drug makers to speak a particular message in their DTC ads, the proposed rule seeks to alter the content of their speech. Under Supreme Court precedent, HHS’s controversial DTC Rule violates the First Amendment because it misleads consumers about their likely out-of-pocket costs for prescription drugs.
Washington Legal Foundation preserves and defends America’s free-enterprise system by litigating, educating, and advocating for free-market principles, a limited and accountable government, individual and business civil liberties, and the rule of law.
“The Supreme Court should direct the lower courts to reconnect their reading of the FTC Act to what the FTC Act actually says.”
—Corbin K. Barthold, WLF Senior Litigation Counsel
Click here for WLF’s brief.
(Washington, DC)—Washington Legal Foundation today filed an amicus curiae brief urging the U.S. Supreme Court to correct a widespread misreading of an FTC Act remedy provision.
Section 13(b) of the FTC Act empowers the FTC to sue, in federal court, to obtain an injunction against deceptive trade practices. At least seven courts of appeals have said, however, that the word “injunction” in section 13(b) unlocks the entire vault of equitable remedies.
WLF’s brief urges the Supreme Court to review two Ninth Circuit decisions that affirm restitution awards meted out under section 13(b). WLF argues that the lower courts’ rewriting of section 13(b) resembles the English common-law courts’ use of the “equity of the statute,” a doctrine that empowered a judge to enforce his subjective sense of justice rather than a law’s text. The “equity of the statute” arose in the Late Middle Ages. It gradually died out, however, as judges came to realize that it is inconsistent with democratic governance.
In the mid-twentieth century the Supreme Court briefly adopted a new version of the equity of the statute to “imply” new rights and remedies into laws. The courts of appeals relied on that mid-twentieth century jurisprudence to justify stretching section 13(b). But as WLF explains in its brief, the Supreme Court later reversed course. It came to recognize that it is solely for Congress to decide how, and by whom, its statutes are enforced.
The Supreme Court should instruct the lower courts to align their interpretation of section 13(b) with the modern and binding rules of statutory interpretation.
Celebrating its 42nd 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.
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By Andrew J. Trask, Of Counsel with Shook, Hardy & Bacon L.L.P. in its San Francisco, CA office.
Following on the heels of the U.S. Court of Appeals for the First Circuit’s groundbreaking opinion in In re Asacol Antitrust Litigation, 907 F.3d 42 (1st Cir. 2018), the District of Columbia Circuit has also held that classes that contain definite numbers of non-injured members cannot be certified, because individual questions related to injury will predominate over common issues.
In re Rail Freight Fuel Surcharge Antitrust Litigation, 934 F.3d 619 (D.C. Cir. 2019), was part of a multi-district litigation in which the plaintiffs alleged that alleged that railway companies had engaged in a price-fixing conspiracy. The alleged conspiracy concerned “fuel surcharges,” imposed above the base shipping price when the cost of fuel rises sufficiently high.
The putative class contained roughly 16,000 shippers. At certification (in the U.S. District Court for the District of Columbia), the plaintiffs had sought to show common issues would predominate over individualized issues by hiring an economics expert to perform a regression analysis. Id. at 621. Regression analysis—for those of us who went to law school to avoid taking statistics—takes different variables (like supply, demand, weather) that contribute to a result (like a price), and measures the effect of each variable. It is a common way to show relationships between causes and effects. In this case, the plaintiff’s regression model, which sought to measure the effect of the alleged conspiracy, resulted in “negative damages” for 2,000 members (an eighth, or about 12.5%) of the proposed class. “Negative damages” as a result meant that a large part of the class either were simply not damaged at all, or somehow made money on the challenged transactions.
The plaintiffs’ regression model had a checkered history: the plaintiffs had been using this model to seek certification of this class since 2012. Originally, the defendants had challenged certification because the model had serious flaws, but the district court had certified a class anyway, finding the model was both “plausible” and “workable.” In re Rail Freight Fuel Surcharge Antitrust Litig., 287 F.R.D. 1, 43 (D.D.C. 2012). The D.C. Circuit had vacated that certification on interlocutory review, because the model’s “propensity toward false positives” made it difficult to tell whether individual class members had actually been harmed. In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d 244. 254 (D.C. Cir. 2013). Common questions, it reasoned, “cannot predominate where there exists no reliable means of proving classwide injury in fact.” Id. at 253. As a result, Rule 23 requires a “hard look at the soundness of statistical models that purport to show predominance.” Id. at 255.
On remand from that first appeal, the district court ordered supplemental discovery. In re Rail Freight Fuel Surcharge Antitrust Litigation, 934 F.3d at 621. Then it denied certification, finding three flaws with the model: (1) it measured “highly inflated damages” for traffic with additional modes of travel (e.g., a train and a ship); (2) it erroneously measured damages for shipments under legacy contracts (a flaw the defendants had complained about since the first certification battle); and finally (3) it had measured “negative damages” for 2,000 class members. In re Rail Freight Fuel Surcharge Antitrust Litig., 292 F. Supp. 3d 1,4, 122-41 (D.D.C. 2017).
This time, the plaintiffs filed interlocutory appeal under Rule 23(f). But the existence of these uninjured class members placed the plaintiffs in a strategic bind. In briefing the issue, they launched two lines of argument. First, they attacked the credibility of their own damages model, arguing that the negative damages were a result of “normal prediction error.” In re Rail Freight Fuel Surcharge Antitrust Litigation, 934 F.3d at 624. They also argued that “predominance does not require common evidence extending to all class members.” Id.
The D.C. Circuit took the case again. Quoting Tyson Foods, Inc. v. Bouaphakeo, the panel identified an “individual question” as “one for which ‘members of a proposed class will need to present evidence that varies from member to member.’” Id. at 622, quoting 136 S. Ct. 1036, 1045 (2016). For the sake of argument, the panel assumed the damages model was sufficiently reliable—even though that was one of the most hotly contested issues at certification. Id. at 623. Then it noted that, even assuming the model was reliable, “that still leaves the plaintiffs with no common proof of those essential elements of liability for the remaining 12.7 percent” of the proposed class. Id. at 624.
The panel did not find either of plaintiffs’ arguments persuasive. It noted that the district court did not believe the model was flawed, and if it had, that would make the model too inaccurate to calculate classwide damages. Id.
The panel also rejected the plaintiffs’ argument that predominance does not need to reach all members of the proposed class as inconsistent with its prior ruling. It held that “[u]ninjured class members cannot prevail on the merits, so their claims must be winnowed away as part of the liability determination. And that prospect raises the —when does the need for individualized proof of injury and causation destroy predominance?” Id. It noted the district court’s observation that the “few reported opinions” tackling this question “suggest that 5% to 6% constitutes the outer limits of a de minimis number” of uninjured class members. Id. at 625, quoting Rail Freight II, 292 F. Supp. 3d at 137. That was a problem for certification, because “the 12.7 percent figure in this case is more than twice that approximate upper bound.” Id.
Equally important, the plaintiffs had shown no way to separate that 12.7 percent from the 87.3 percent of allegedly injured class members. “The absence of any winnowing mechanism sharply distinguishes Nexium, the plaintiffs’ best case.” Id. (In re Nexium Antitrust Litigation, 777 F. 3d 9 (1st Cir. 2015), was the case that the First Circuit distinguished when it held that a class with 10 percent uninjured members could not establish a predominance of common issues. See In re Asacol.) Since the regression analysis establishing damages was “essential” to the plaintiffs’ case, this meant they were out of luck. The panel affirmed the denial of certification.
This case, combined with the First Circuit’s In re Asacol, shows a burgeoning trend against significant no-injury cases. Two circuit courts of appeal have now held that proposed classes with significant percentages of non-injured members cannot be certified under Rule 23(b)(3), because too many individual inquiries are required to separate the actually injured from the non-injured. There is a countervailing trend, however. Jurisdictions like the Ninth Circuit still allow no-injury cases by invoking different logic, pushing off the question of whether anyone has been injured as part of a “merits” determination they refuse to engage in. Nguyen v. Nissan North America, Inc., 932 F. 3d 811 (9th Cir. 2019). However, the clear logic of In re Asacol and now In re Rail Freight Surcharge provides practitioners with powerful tools to fight no-injury cases at the certification stage. And, given the Supreme Court’s clear interest in the intersection between class certification and merits inquiries, it is likely we could see this issue resolved once and for all in the near future.
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