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Greetings, Court Fans!

Three more decisions on Thursday as the Court nears the final push of OT22. Though the cases held differing political valences, each essentially clarified the standard for stating various claims in federal court:

• In Glacier Northwest v. International Brotherhood of Teamsters, Local 174 (No. 21-1449), the Court addressed when state-law tort claims can be brought in connection with a labor-union action without being preempted by the National Labor Relations Act (NLRA);

• In Slack Technologies v. Pirani (No. 22-200), the Court clarified the standard for stating a claim under Section 11(a) of the Securities Act of 1933; and

• United States ex rel. Schutte v. SuperValu Inc. (No. 21-1326) addressed the standard for satisfying the False Claims Act’s scienter element.

We’ll start with Glacier Northwest v. International Brotherhood of Teamsters, Local 174 (No. 21-1449), where the Roberts Court continued its trend of chipping away at the rights of organized labor, though in a more measured way than labor advocates might have feared. In an 8-1 decision authored by Justice Barrett (with only Justice Jackson dissenting), the Court held that a union’s decision to call a work-stoppage at a time when it allegedly knew damage to company property would result was not even “arguably” protected by the NLRA, so the company’s state-law tort suit against the union for destruction of property could proceed without awaiting an investigation by the National Labor Relations Board (NLRB).

Glacier Northwest is a company that sells ready-mix concrete to customers in Washington state. When it gets an order, it mixes the raw ingredients in a hopper and then quickly transfers the resulting concrete in one of those cool cement trucks with rotating drums. Time is of the essence in this industry because concrete hardens immediately when at rest and can even start to harden in the rotating drum, which would cause significant damage to the truck. According to Glacier, Local 174—the union that represented its drivers—was well aware of the risk to company property (both the trucks and the concrete within them) when it called a work stoppage on a day when it knew Glacier was in the midst of mixing, loading, and delivering large amounts of concrete. When Glacier learned of the stoppage (having not been warned ahead of time), it instructed its drivers to compete all deliveries in progress, but the Union directed the drivers to ignore those orders. At least sixteen drivers who had set out for deliveries returned with fully loaded trucks, and while some took actions to protect the trucks, at least nine simply abandoned the trucks without a word. Glacier’s non-unionized workers scrambled to dump the concrete in an environmentally safe manner, which saved the trucks, but the company lost all the concrete that had been mixed that day.

Glacier sued the Union for damages in state court, alleging common-law conversion and trespass to chattels. The Union moved to dismiss, arguing that Glacier’s state-law claims were preempted by the NLRA. The trial court agreed and its order dismissing the case was ultimately upheld by the Washington Supreme Court, which held that “the NLRA preempts Glacier’s tort claims related to the loss of its concrete product because that loss was incidental to a strike arguably protected by federal law.” The Supreme Court granted cert and reversed.

Writing for a (surprisingly?) broad majority, Justice Barrett began with an explanation of preemption under the NLRA. While that statute protects the right of workers to organize and take collective action, including the right to strike, those rights are not absolute. The ultimate question for a court considering state-law tort claims that arise out of a labor dispute is whether the NLRA covers the alleged tortious conduct. If so, then the NLRA preempts the state-law claims. But, as Justice Barrett noted, “[p]reemption under the NLRA is unusual, . . . because our precedent maintains that the NLRA preempts state law even when the two only arguably conflict.” This doctrine is known as “Garmon preemption” after the 1959 case announcing it. So the essential question in this case, as Justice Barrett saw it, was whether the Union’s actions in calling a work stoppage when they allegedly knew it would harm Glacier’s property was arguably protected by the NLRA. As the party asserting preemption, the Union bore the burden of advancing an interpretation of the NLRA that was consistent with its language and had not been “authoritatively rejected” by the National Labor Relations Board (the Board), and then putting forth “enough evidence to enable the court to find” that the NLRA arguably protected the drivers’ conduct.

Justice Barrett found that the Union satisfied the first test, but not the second. All agreed that the NLRA does not shield strikers who fail to take “reasonable precautions” to protect their employer’s property from “foreseeable, aggravated, and imminent danger” due to the sudden cessation of work. While the Board has found strikers’ conduct protected even when their decision not to work created a risk that perishable goods (like raw poultry or milk) would spoil, what Glacier alleged here was far different. In Barrett’s view, this was not a case where the work stoppage created a risk that the employer’s product would spoil; instead, “by reporting for duty and pretending as if they would deliver the concrete” before the stoppage was called, “the drivers prompted the creation of the perishable product.” Plainly, the Union did not take “reasonable precautions” when (at least as alleged in Glacier’s complaint, which at this stage must be assumed true) it deliberately called the strike at a time when it knew there was an imminent risk that the concrete (and possibly the cement trucks) would be harmed. “Because the Union took affirmative steps to endanger Glacier’s property rather than reasonable precautions to mitigate that risk, the NLRA does not arguably protect its conduct.” The Court therefore remanded the case to the state courts for further proceedings on Glacier’s tort claims.

Justice Alito (joined by Thomas and Gorsuch) concurred in the judgment but wrote separately to suggest that there was no reason for the majority to distinguish other “spoliation” situations by observing that the Union itself prompted the creation of the spoiled concrete. In his view, the NLRA doesn’t protect any intentional destruction of an employers’ property, whether or not the employees created the risk of destruction or simply knew it would result from their actions.

Justice Thomas also filed a separate concurrence (joined by Gorsuch), in which he called into question the entire notion of Garmon preemption. As he wrote, the Court’s opinion here “underscores the strangeness of the Garmon regime.” The Court “reassure[d]” a state court of its power to adjudicate a state-law claim not based on its own conclusion that the NLRA did not preempt the claim, but because an agency, the Board had previously concluded that the NLRA does not protect the sort of tortious conduct alleged here. Thomas noted that the parties had not asked the Court to reconsider Garmon and agreed that it wasn’t necessary to resolve the case. But he suggested that “in an appropriate case, [the Court] should carefully reexamine whether the law supports Garmon’s ‘unusual’ pre-emption regime.” No doubt, management lawyers will have received that message.

It fell to Justice Jackson alone to dissent—in her first solo opinion. In her view, the Court ignored a critical piece of information in this case. The Board actually had investigated the labor dispute between Glacier and the Union, and its General Counsel filed a complaint alleging that Glacier’s lawsuit was filed in retaliation against the Union for engaging in protected labor actions. “The logical implication of a General Counsel complaint … is that the union’s conduct is at least arguably protected by the NLRA.” Therefore, “where (as here) there is a General Counsel complaint pending before the Board, courts—including this Court—should suspend their examination.” Underlying Jackson’s dissent was a strong view both that “[t]he right to strike is fundamental to American labor law” and that Congress appreciated this in establishing the Board to adjudicate disputes between workers and management. While the majority regurgitated factual allegations spoon-fed from Glacier’s complaint, Jackson stressed that the Board is the agency “uniquely positioned to evaluate the facts and apply the law in cases such as this one.” Given the General Counsel’s pending complaint, and the deference she felt was owed to the Board on these questions, Jackson contended the courts should take a “jurisdictional hiatus while the Board considers the dispute in the first instance.” 

Next up, in Slack Technologies v. Pirani (No. 22-200), the Court addressed the allegations necessary to state a claim under Section 11(a) of the Securities Act of 1933.

The 1933 Act requires companies to register securities intended to be offered to the public with the Securities and Exchange Commission. To comply with this registration obligation, companies must prepare a registration statement that provides detailed information enabling a prospective buyer to assess the merits of a potential purchase. When registration statements contain material misstatements or misleading omissions, Section 11(a) of the Act provides a cause of action for buyers. 

Slack, a tech company, prepared a registration statement that described 118 million new registered shares to be offered to the public on the New York Stock Exchange. At the same time, holders of 165 million preexisting unregistered shares of Slack also began offering those shares to the public. Pirani, a buyer, sued Slack under Section 11(a) after he purchased shares that declined in value. Pirani alleged that Slack’s registration statement contained materially misleading representations. But, critically, Pirani did not allege whether the shares that he had purchased were the new registered shares that were described in the registration statement or the preexisting unregistered shares that were not described in the registration statement. Slack moved to dismiss based on this gap in the pleadings, the district court denied the motion, and the Ninth Circuit affirmed.

In a unanimous decision authored by Justice Gorsuch, the Court held that Section 11(a) requires a plaintiff to allege that the securities he purchased were actually registered under the registration statement at issue. As one would expect, Gorsuch’s opinion rested on a close analysis of the text of Section 11(a), which states that, where “the registration statement” contains a misleading statement or omission, a buyer of “such security” may sue. Noting that the term “such security” lacks a clear referent in the statute, and acknowledging that “Congress could have been clearer,” Gorsuch relied on grammatical clues in the surrounding statutory language. He noted the statute’s use of a direct article—as it refers to “the registration statement”—as well as the statute’s repeated use of the word “such” in other contexts to narrow the focus of the law. In addition, other sections of the statute supported the interpretation of “such security” as related to the specific registration statement at issue, including a section of the statute that tied damages to the value of registered shares. Noting that every other Circuit had disagreed with the Ninth Circuit, Gorsuch sided with the majority view: Section 11(a) requires a plaintiff alleging misrepresentations in a registration statement to specifically allege that the securities she purchased were registered under the registration statement at issue, and not merely “other securities that bear some sort of minimal relationship to a defective registration statement.”

Our last decision for today is United States ex rel. Schutte v. SuperValu Inc. (No. 21-1326), decided along with United States ex rel. Proctor v. Safeway, Inc. (No. 22-111). Both cases address a question of scienter under the False Claims Act (FCA): In deciding whether a defendant “knowingly” submitted a “false” claim to the government, is the defendant’s subjective belief the claim was false determinative? Or can the defendant escape liability by pointing to an objectively reasonable argument that its actions were proper, even if it didn’t subjectively believe that argument? A unanimous Court brushed aside this objective reasonableness test, concluding that if you subjectively believed your claim was false, then you “knew” it was false.

The FCA allows private parties to bring what are called qui tam lawsuits in the name of the United States against those believed to have defrauded the federal government. The plaintiffs in these two cases brought such suits against two retail pharmacies, alleging that the pharmacies overcharged Medicare and Medicaid for prescriptions. The relevant Medicare and Medicaid regulations provide that pharmacies may seek reimbursement only for the “usual and customary” cost of prescription drugs. In order to remain competitive, both pharmacies started discount programs, allowing members of the public (including Medicare and Medicaid beneficiaries) to purchase prescriptions at steeply discounted rates. Those discount programs proved so popular that, after a few years, most of the pharmacies’ sales of certain drugs were made at these discounted rates. But when the pharmacies sought reimbursement from Medicare and Medicaid for the “usual and customary” cost of the drugs, they charged those programs the retail rate, not the discounted one. Plaintiffs further alleged that the pharmacies subjectively knew they were charging Medicare and Medicaid too much and took steps to conceal their actual (discounted) rates from the relevant authorities.

Plaintiffs brought qui tam suits, alleging that the two pharmacies had “knowingly presented a false or fraudulent claim for payment or approval” to the federal government, in violation of the FCA. But the district courts resolved both suits in favor of the pharmacies, finding that they could not have “knowingly” presented a false claim. The Seventh Circuit affirmed. It concluded that at the time of the defendants’ actions, no definitive legal decisions or regulatory guidance provided that the retail rate was not the “usual and customary” cost for these discounted drugs. In the Seventh Circuit’s view, so long as objectively reasonable people in the pharmacies’ position could think that they were charging Medicare and Medicaid the “usual and customary” rate, it did not matter whether the defendants subjectively believed they were overcharging. 

The Supreme Court unanimously reversed. Writing for the Court, Justice Thomas began by clarifying what the Court was deciding: It was not addressing whether the pharmacies’ billing rates were in fact “usual and customary” or whether the claims they submitted to the government were false. Nor was the Court deciding whether the plaintiffs’ evidence was enough to establish scienter on the part of the pharmacies. It was only deciding whether the FCA’s scienter element refers to a defendant’s subjective knowledge and beliefs or to what an objectively reasonable person would have known and believed in the circumstances.

Thomas concluded that the FCA’s text provides a straightforward answer. It defines “knowingly” to mean acting with “actual knowledge of the information,” with “deliberate ignorance of the truth or falsity,” or with “reckless disregard” toward its truth. That three-part formulation largely follows the common-law scienter requirement for fraud. Both the statutory definitions’ plain language and the elements of common-law fraud claims focus on the defendant’s subjective state of mind: If a defendant says something subjectively knowing it is false, that defendant has acted fraudulently, no matter whether a reasonable person could have believed that fact to be true.

That sounds pretty simple. So where did the Seventh Circuit’s contrary conclusion come from? It mostly derived from the ambiguity of the phrase “usual and customary.” Given the lack of a clear definition of what that means, at least in this context, the pharmacies argued that it was impossible for them to truly “know” whether they were overcharging; the best they could do is take a guess. But the Seventh Circuit didn’t decide that the pharmacies genuinely believed their claims were true (because they had no way of determining whether they were false); it decided it made no difference what the pharmacies thought so long as a reasonable person could have believed the retail rates to be the usual and customary ones. If plaintiffs ultimately show in discovery or at trial that the defendant pharmacies genuinely believed (or were reckless with regard to the risk that) the rates they were charging were not their “usual and customary” ones, then plaintiffs would satisfy the FCA’s scienter requirement. The Court thus remanded so the lower courts could assess the evidence under that standard.