Hudson v. Michigan (04-1360), Empire Healthchoice Assurance, Inc. v. McVeigh (05-200), Howard Delivery Service, Inc. v. Zurich American Insurance Co. (05-125) and Kircher v. Putnam Funds Trust (05-409)

June 19, 2006 Supreme Court Update

Greetings, Court Fans!
We'll polish off the four remaining opinions from last week before turning to the deluge expected this week (we have four more already!).
Hudson v. Michigan (04-1360) delivered a serious blow to criminal defendants and brought us perhaps the most divisive decision of the Term (thus far). The 5-4 decision, with Justice Scalia, the Chief, Thomas, Alito and Kennedy forming the majority, is only the second time this Term that the Court has broken along these fault lines (though it is not expected to be the last). Under Hudson, violation of the "knock-and-announce" requirement of the Fourth Amendment (i.e., police must knock and announce their presence before entering a home) does not require exclusion of evidence obtained in a search. For the majority, exclusion is not an appropriate remedy for all Fourth Amendment violations – instead, it should apply only where the "deterrence benefits" of exclusion outweigh the "substantial social costs." Here, those costs include the risk of setting dangerous criminals free and miring the courts in fact-laden inquiries into whether a police officer waited a sufficient period after knocking or whether one of the exceptions to knock-and-announce applies, as well as the possibility that police will be overcautious and wait too long before entering, leading to preventable violence against officers and the destruction of valuable evidence. Also, for the majority, there is no reason to believe that civil suits will not be a sufficient deterrent to ensure that the knock-and-announce rule is ordinarily followed. Further, the failure to knock and announce is not a "but for" cause of obtaining evidence in most cases. Here, the officers had a valid warrant when they went to Hudson's house, and they would have seized the evidence (a gun and drugs) whether they entered lawfully or unlawfully – the fact that the method of entry was unlawful was simply too attenuated from the seizure of the evidence to justify exclusion. Suppression also would not serve the interests protected by the knock-and-announce rule, which include the protection of life (since surprised inhabitants might resort to violence), property (stopping the door from being broken down) and privacy and dignity (allowing the citizen time to get out of bed and get dressed). The rule is not intended to protect one's interest in preventing the government from seeing or seizing inculpatory evidence, and, therefore, exclusion is inappropriate. Justice Kennedy concurred in part and in the judgment, joining all but one section of the majority opinion that relied on three inevitable/independent discovery cases to support the result reached here. Kennedy also stressed that the Court's decision does not threaten the exclusionary rule in general but is limited to knock-and-announce violations. (Kennedy's soothing remarks notwithstanding, criminal defense attorneys will no doubt be very worried since much of the Court's reasoning at least would appear to apply in other Fourth Amendment contexts.)
Justice Breyer issued a lengthy dissent (joined by Stevens, Souter, and Ginsburg), bemoaning the destruction of "the strongest legal incentive to comply with the Constitution's knock-and-announce requirement." With respect to the deterrence benefits vs. social cost analysis, the dissenters clearly place greater value on the privacy/dignity interests protected by knock-and-announce, and they do not believe that civil suits will deter violations (experience shows that few such suits are successful and those that are yield low damage awards). The dissent also takes issue with the majority's claim that "but for" causation does not exist: The entry here was admittedly unlawful, and the evidence would not have been found absent the entry. It may be true that the same evidence would have been seized if the officers entered in a lawful manner, but that is the same as arguing that evidence seized after a warrantless search should be admitted because the police could have obtained a warrant and merely failed to do so – this has never been the rule. Further, the Court has never before required a direct link between the Fourth Amendment interests furthered and the exclusion of evidence: Certainly, applying the exclusionary rule to contraband seized in warrantless arrest cases does not stem from an interest in protecting an individual's interest in avoiding seizure of inculpatory evidence. Finally, Breyer finds no precedent to support doing away with the exclusionary rule in knock-and-announce cases. The only previous exceptions to the rule were (1) where there was a specific reason to believe that the rule would not result in appreciable deterrence (and there's no reason to believe that exclusion would not deter knock-and-announce violations); and (2) where the proceeding involved was not a criminal trial (because sufficient deterrence is already afforded by requiring exclusion in the criminal context). The inevitable/independent discovery cases are also inapposite because, here, the evidence was seized as part of the unlawful search of the home, not as part of an independent, untainted process.
The Court issued another 5-4 decision in Empire Healthchoice Assurance, Inc. v. McVeigh (05-200), this time led by Justice Ginsburg. McVeigh is not quite as juicy as Hudson, and the Court's split is not as "predictable." The case concerns whether the Federal Employees Health Benefits Act, which allows the federal government to contract with private health carriers, confers federal-question jurisdiction over plan reimbursement claims when a covered employees win damages in state court for injuries treated under their plans. The answer: No. McVeigh's estate settled a wrongful death action in New York state court for about $3 million, and the health plan sued in federal court to recover about $160,000 it had paid toward his medical care. Although FEHBA did not expressly create a federal cause of action for reimbursement, the carrier and the United States as amicus argued that there was federal jurisdiction because Congress intended all rights stemming from FEHBA health contracts to be "federal in nature." The Court (the Chief, Stevens, Scalia and Thomas joined Ginsburg) was not persuaded. There were federal interests at stake – federal funds pay for the health plans, which cover federal employees – but any right to reimbursement was created not in FEHBA but in the carrier's individual plan contract, and contract interpretation is a typical state-law question. While FEHBA expressly provides that the terms of federal health plans preempt any state laws on health benefits, the Court declined to interpret that "unusual" provision broadly – if Congress intended to displace state law altogether and confer federal jurisdiction, "it may be expected to make that atypical intention clear." The Court also rejected the government's argument that federal law was a "necessary element" of the carrier's claim: The reimbursement claim was not triggered by a federal agency but by the settlement of a state-court lawsuit, and it depended not on a legal issue but on facts regarding the payment for health services.
The dissenters, again led by Justice Breyer, were an interesting mix (also included: Kennedy, Souter, and Alito) that argued that the reimbursement claim arose under federal common law. The right to reimbursement may be a creature of contract, but it is a contract written by a federal agency pursuant to a federal statute creating benefits for federal employees, and any funds recovered ultimately go to the U.S. treasury. The dissenters also pointed to the Court's 1943 decision in Clearfield Trust Co. v. United States Court, which recognized that federal contracts are governed exclusively by federal law. Congress' failure to spell out jurisdiction over these suits thus may reflect an oversight or its belief that doing so was unnecessary. Finally, the dissenters noted the need for uniformity regarding federal health plans, which argued against allowing different states' laws to govern reimbursement actions. (In response, the majority noted that post-Clearfield decisions and "enlightened commentary" had made clear that uniform federal law need not apply in all federal government litigation; unless there was a significant conflict between state law and the federal interest, there was no reason to dislodge state law or vest jurisdiction in federal courts.)
In Howard Delivery Service, Inc. v. Zurich American Insurance Co. (05-125), (a case of interest to all the bankruptcy lawyers out there) the Court held that an insurance carrier's claim for unpaid worker's comp premiums owed by an employer is not entitled to priority treatment as a "contribution[] to an employee benefit plan" under Section 507(a)(5) of the Bankruptcy Code. The majority, led by Justice Ginsburg and another unusual grouping of the Chief, Stevens, Scalia, Thomas and Breyer, admitted that it was a close statutory question, but concluded that worker's comp premiums are more like liability insurance premiums than other fringe benefits– such as pension plans and group health, life and disability insurance – which clearly constitute employee benefit plans under the Bankruptcy Code. Unlike those benefits, which operate as a substitute for wages to the employee, worker's comp insurance usually is required by state law and is a compromise that benefits both the employee and the employer – accepting a fixed and secure recovery for work-related injuries in lieu of the uncertain but potentially larger recoveries available via the traditional tort system. The unusual nature of worker's comp, coupled with the principle that preference provisions should be strictly construed since bankruptcy law ordinarily favors equal distributions among creditors, supports a finding that worker's comp does not fall under Section 507(a)(5). Otherwise, other employee benefits (that clearly fall within the Section) might receive lesser distributions because the available funds would be spread to cover worker's comp claims as well as pension and other 507(a)(5) claims. Finally, the fact that ERISA defines employee benefit plans as encompassing worker's comp is not dispositive because the Bankruptcy Code does not refer or incorporate this definition, there's no reason to believe that Congress adopted Section 507(a)(5) with the ERISA definition in mind, and because ERISA itself exempts worker's comp plans required by law – thus sending mixed signals.
Justice Kennedy led the three dissenters, who believe that both the text and purpose of Section 507(a)(5) support including worker's comp premiums. First, while it is true that "a Code provision must indicate a clear purpose to prefer one claim over another before a priority is found," that does not mean that where Congress clearly intended to create a preference, the preference should be read to give priority to as few creditors as possible. Instead, preference provisions should be read to give equal treatment to like claims – and the dissent would treat worker's comp premiums equally with other employee benefits. The fact that ERISA defines "employee benefit plan" to include worker's comp also favors its inclusion within the Section 507(a)(5) preference category. Moreover, worker's comp serves as a literal wage substitute. While it might not be bargained for in exchange for lesser wages as some benefits are, in the end employers pass on the cost of worker's comp to employees through lower salaries/wages. The fact that most states require employers to provide worker's comp does not transform it into a non-benefit since, as the majority admits, if states started requiring employers to provide health insurance, no one would argue that health insurance suddenly fell outside of Section 507(a)(5).
Thursday's last decision was in Kircher v. Putnam Funds Trust (05-409), in which – brace yourselves – the Court held that a federal court order remanding a case to state court after removal under the Securities Litigation Uniform Standards Act is not appealable. Currently, 28 U.S.C. § 1447 provides that a remand order is not appealable if it is based on defects in jurisdiction or removal procedure. This reflects a federal policy of avoiding prolonged litigation over removal questions, and the Court has "relentlessly" upheld this rule even where a district court's ruling on these matters is plainly wrong. Despite this rule, a group of mutual funds appealed a remand order based on lack of subject matter jurisdiction, recharacterizing that decision as one based on SLUSA's "preclusion" provisions rather than on truly "jurisdictional" matters. They convinced the Seventh Circuit to keep the case in federal court, but the Court, led by Justice Souter, reversed. The discussion of preclusion vs. jurisdiction is short but witheringly dull; in essence, the Court held that the district court was right to call the remand order jurisdictional, and it was not appealable. In a short concurrence, Justice Scalia declined to join that reasoning; for him, the fact that the district court said its order was jurisdictional was enough to bar any review altogether. Even if the district court was so badly mistaken that it misunderstood its own order, § 1447 barred any appellate review at all, and "recharacterization – being a form of review – is categorically forbidden." Thus, the Court had no place even saying that the district court was right, any more than the Seventh Circuit had the power to say it was wrong.
That's it for last week's decisions. We'll be back shortly with four more from today. Until then, thanks for reading!
Kim & Ken
From the Appellate Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart, Ken Heath, Aaron Bayer, or Jeff Babbin at 203-498-4400