Supreme Court Update: Already, LLC v. Nike, Inc. (11-982), Sebelius v. Auburn Regional Medical Center (11-1231), Lozman v. City of Riviera Beach, Florida (11-626) and Smith v. United States (11-8976)

February 2, 2013 Supreme Court Update

Greetings, Court fans!

We're back, with something for everyone: federal jurisdiction junkies, conspiracy aficionados, and, yes, even the pun-loving admiralty practitioners among you.

In Already, LLC v. Nike, Inc. (11-982), the Justices ushered what otherwise might have been a hotly contested trademark claim out of the federal courts entirely. It all began when Nike sued athletic shoemaker Already, alleging that Already's "Sugars" and "Soulja Boys" shoe lines infringed and diluted Nike's trademark on its own Air Force 1 sneakers. Already counterclaimed, alleging that the Air Force 1 trademark is invalid. Later, apparently shrinking from its own "Just Do It!" exhortation, Nike tried to take it all back, issuing a "Covenant Not To Sue" that stated, among other things, that "Already's actions . . . no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation." Reflecting this change of heart, Nike promised not to raise trademark claims against any existing Already footwear or any future Already designs that were "colorable imitations" of current Already shoes. Nike moved to dismiss its own claims with prejudice, and Already's claims without prejudice on the ground that, in light of the covenant, there was no longer any case or controversy and the case was moot.

Already refused to go away quietly. It claimed that, unless Nike's trademark was invalidated, Already risked losing investors and retail distributors for new versions of shoes it intended to bring to market. Reading the covenant broadly, the district court found that future Already products would be "colorable imitations" of existing shoes and thus covered by the covenant, meaning there was no longer any justiciable case or controversy. The Second Circuit, applying a three-part test to determine whether a covenant not to sue moots a case, agreed.

The Chief Justice wrote for a unanimous Court, affirming. To determine whether there remained any justiciable case or controversy between the parties, the Justices zeroed in on the voluntary cessation doctrine, which placed the burden on Nike – which had invoked its covenant not to sue in order to show that Already's claim was moot – to prove that, in light of the covenant, it "could not reasonably be expected" to resume enforcing its trademark against Already. Without such proof, a party allegedly engaging in unlawful activity – here, enforcement of a purportedly invalid trademark – could stop temporarily in order to moot a case, and then would be "free to return to his old ways," forcing the opposing party to initiate successive suits each time the allegedly unlawful act recurred. The Court determined that Nike's covenant was sufficiently broad to meet the voluntary cessation test: it was unconditional and irrevocable, prohibited Nike from making so much as a demand, and protected not only Already but its distributors and customers as well. And its "colorable imitations" language swept so broadly that the Justices could not imagine a shoe Already could produce that would not be covered by the covenant. Any such shoe "sits, as far as we can tell, on a shelf between Dorothy's ruby slippers and Perseus's winged sandals." Significantly, Already itself didn't allege any intent to market a shoe that would expose it to any risk of infringement liability.

The Court made short work of Already's other purported injuries that would satisfy Article III and save its claim from mootness. The Justices rejected (1) the idea that the mere existence of Nike's trademark – and some potential for its enforcement – scared off potential investors, (2) the notion that Nike's trademarks would "hang over Already's operations like a Damoclean sword," and (3) the claim that Already, as a competitor to Nike, had inherent standing to challenge Nike's intellectual property. Finally, the Court denied the Solicitor General's request that it remand the case to allow the parties to develop the record with respect to the scope of the covenant and Already's business activities. "Such a remand would serve no purpose," according to the Justices, as it was "absolutely clear" the case was moot.

Justice Kennedy penned a concurrence, which Justices Thomas, Alito, and Sotomayor joined. Kennedy noted that both the district court and the Second Circuit relied on the erroneous premise that Already bore the burden of showing that a justiciable controversy remained, when in fact, under the voluntary cessation doctrine, Nike bore the "formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur." In this case, Nike's broad covenant enabled it to clear that high bar. But the concurrence stressed its intent "to underscore that covenants like the one Nike filed here ought not to be taken as an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit without incurring the risk of an ensuing adverse adjudication." In future cases, "[t]he formidable burden to show the case is moot ought to require the trademark holder, at the outset, to make a substantial showing that the business of the competitor and its supply network will not be disrupted or weakened by satellite litigation over mootness or by any threat latent in the terms of the covenant itself. It would be most unfair to allow the party who commences the suit to use its delivery of a covenant not to sue as an opportunity to force a competitor to expose its future business plans or to otherwise disadvantage the competitor and its business network, all in aid of deeming moot a suit the trademark holder itself chose to initiate."

The Court tackled another jurisdictional issue in Sebelius v. Auburn Regional Medical Center (11-1231), this time addressing whether an internal administrative appeal deadline was jurisdictional or not, and if not, whether the deadline was subject to equitable tolling.

By way of background, hospitals that participate in the Medicare program are reimbursed at a fixed amount per patient for inpatient services, regardless of actual cost. However, hospitals that serve a disproportionate share of low-income patients receive a higher Medicare rate per patient because this patient population is statistically more costly to serve. This "disproportionate share" adjustment is determined, in part, based on the percentage of a hospital's patient population eligible for Supplemental Security Income (the "SSI fraction"). Each year, a hospital submits its "cost report" to a contractor acting on behalf of Health & Human Services (HHS) – referred to as a "fiscal intermediary." The Centers for Medicare & Medicaid Services (CMS) calculates the SSI fraction for the hospital and submits that information to the fiscal intermediary as well. The fiscal intermediary in turn calculates the payment due the hospital and issues a Notice of Provider Reimbursement (NPR) informing the provider of its rate. By statute, the provider may challenge the determination by filing a request for a hearing with the Provider Reimbursement Review Board ("the Review Board") within 180 days of getting the NPR. However for nearly 40 years, HHS has had in place regulations allowing for the 180 day deadline to be extended upon a "showing of good cause," provided, however, that "no extension shall be granted by the Board if such request is filed more than 3 years after the date of the [NPR]. . . ."

For many years, CMS released only its SSI fraction results and not its data. Nevertheless, one wise hospital timely appealed the calculation of its SSI fraction for the years 1993-1996. The Review Board determined that CMS had been using a flawed process to calculate the SSI fraction, resulting in a "systematic undercalculation of the disproportionate share adjustment" – i.e., most hospitals, not just the one that brought the challenge, had been underpaid for years. The Review Board's decision, however, was not made public until 2006. Within 180 days after the decision was released, the hospitals in this case filed suit challenging their disproportionate share payments from 1987-1994. The hospitals argued that the deadline for bringing this challenge was subject to equitable tolling and should be tolled based on CMS's concealment of the fact that its SSI fraction calculation was systematically miscalculated. The Review Board found it had no jurisdiction, reasoning that it had no equitable powers except for those granted by statute or regulation, and that HHS's regulations here prohibited any appeal after three years. The Court of Appeals for the DC Circuit reversed, relying on the presumption that statutory limitations periods generally are subject to equitable tolling. The Court unanimously reversed.

Led by Justice Ginsburg, the Court first considered whether the 180 day deadline was jurisdictional. It easily found that it was not. (If you've been reading any of the Court's recent cases in this area, you'll know that the basic rule is this: time limits are not going to be found jurisdictional unless the Court said the specific limit was jurisdictional years ago, before the Court started thinking very hard about the distinction between "jurisdictional requirements" and "claims processing rules.") Here, there was no language in the statute that suggested that a late-filed appeal would divest the Review Board of authority to consider the appeal. Indeed, the statute uses the term "may" file; even statutes that use the stronger "shall" have routinely been found to be quintessential claims processing rules. Further, if the 180 day limit were jurisdictional, HHS's regulation allowing for extension of the deadline up to 3 years would be invalid. Yet the regulation has been in place for many decades and Congress has never seen fit to override it.

However, just because the rule isn't jurisdictional doesn't mean that it is subject to general notions of equitable tolling apart from the extension permitted by the regulation. First, the general presumption of equitable tolling ordinarily has been applied to deadlines relating to appeals to courts, not internal administrative agency deadlines. Second, most contexts in which equitable tolling has been applied have involved unsophisticated litigants, whereas this process involves highly sophisticated repeat players, who are fully cognizant of the deadlines. Third, deference is owed to HHS's regulation, which is a reasonable interpretation of the statute and strikes an appropriate balance by allowing the deadline to be extended up to three years on a showing of good cause.

Justice Sotomayor joined Ginsburg's majority opinion in full, but wrote separately to stake out her view that agencies will not always be able to adopt absolute filing deadlines even where they have been given authority to adopt regulations relating to the filing process. The principle that time limits are customarily subject to equitable tolling may trump an agency's discretion to make filing deadlines absolute, under other circumstances. Here, however, where the scheme involved sophisticated entities and HHS's regulation allowed for up to a three-year extension for good cause, Sotomayor felt that the regulation appropriately balanced "administrative efficiency with fairness."

Next up, in Lozman v. City of Riviera Beach, Florida (11-626), the Court considered whether a floating home without self-propulsion is a "vessel," as defined by the Rules of Construction Act. A vessel, per the Act, includes "every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water." The Court faced the difficult task of answering whether anything that floats is always a boat. This legal voyage began in 2002, when Fane Lozman bought a 60-foot by 12-foot floating home. The home came complete with a sitting room, bedroom, closet, bathroom, kitchen, and French doors to enjoy the aquatic surroundings. An empty bilge space under the main floor kept it afloat. It had no means to propel itself and drew all its electricity from linking to a connection on land. While Lozman undoubtedly felt buoyed by his purchase, he was soon awash in conflict. In 2006, after towing his home several times between marinas, he settled in a marina owned by the city of Riviera Beach, Florida. After several disputes with Lozman and an attempt to evict him, the city brought a federal admiralty lawsuit in rem against his home.

Lozman argued that the district court should dismiss the case because it lacked admiralty jurisdiction. The district court disagreed, finding that the floating home was, in fact, a "vessel" and that its jurisdiction was proper. The district court awarded the city $3,039.88 in dockage fees and $1 for trespass damages. On appeal, the Eleventh Circuit upheld the district court's finding because the home was "capable" of movement over water. But Lozman's victory was short lived.

The Court granted cert and reversed, finding the Eleventh Circuit's interpretation of "vessel" too broad.

Not every floating structure is a vessel, Justice Breyer wrote for the Court, lest a washtub, dishpan, door off its hinges, or Pinocchio inside a whale count. With Justice Breyer writing for the majority, the Court anchored itself to a new "reasonable observer" test seeking to answer whether the "home's physical characteristics and activities" were practically designed for "carrying people or things over water." The Court held that Lozman's floating home was not a vessel. It lacked a rudder, had an unraked hull, a rectangular bottom hanging ten inches below water, and no electricity without connecting to land, no means of self-propulsion, and had only traveled—under tow—a handful of times.

Seen below is the floating home under tow, as depicted in the appendix to the Court's opinion:

Justices Sotomayor (joined by Justice Kennedy) dissented. She argued that the majority had cast overboard years of precedent guiding what constitutes a vessel. In doing so, Sotomayor argued, the Court had jettisoned well-established maritime law in favor of a new and unpredictable "reasonable observer" test. The case, she argued, should have been remanded for more information about the use of Lozman's home to better determine (with reference to established precedent) its vesselness.

The last case, Smith v. United States (11-8976), will cause you to ponder the rather metaphysical question of whether one can engage in crime while locked away in prison. Apparently, it's possible, as the Court ruled 9-0 against Calvin Smith, who claimed that he could not be found guilty of various conspiracy charges that were subject to a five year limitations period since he had been in prison for the last six years of the charged conspiracies.

Writing for a unanimous Court, Justice Scalia explained that withdrawal is a special defense because it does not negate any element of the crime. While withdrawal, if proven, cuts off a defendant's liability for acts of the conspirators after his withdrawal, it does not render him innocent of the conspiracy. (Indeed, it tends to establish that he was a member of the conspiracy to begin with.) Under the common law, a defendant bears the burden of establishing special defenses, and Congress did not do anything to alter that burden in the conspiracy statutes at issue (18 U.S.C. 846 and 18 U.S.C. 1962(d)). Accordingly, Smith bore not only the burden of production, but the burden of persuasion as to his withdrawal defense. And the fact that Smith's withdrawal was combined with a statute of limitations defense made no difference. A defendant's membership in a conspiracy and his responsibility for the acts of his fellow conspirators "endures even if he is entirely inactive after joining it" until he withdraws by taking "affirmative acts inconsistent with the goals of the conspiracy," which acts are communicated to his coconspirators. Here, the government established that the conspiracy itself extended beyond the limitations period. It was up to Smith to establish his special defense of withdrawal outside the limitations period.

We'll be back shortly with recent cert grants and other orders. Happy Super Bowl weekend everyone!

Kim, Jenny & Julie

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400