Supreme Court Update: Arizona Free Enterprise Club's Freedom Club PAC v. Bennett (10-238) (consolidated with McComish v. Bennett (10-239)), Stern v. Marshall (10-179) and United States v. Juvenile Male (09-940)

July 7, 2011 Supreme Court Update

Greetings, Court fans!

This Update will cover three decisions: Arizona Free Enterprise Club's Freedom Club PAC v. Bennett (10-238) (consolidated with McComish v. Bennett (10-239)), an important campaign finance case decided on First Amendment grounds; Stern v. Marshall (10-179), regarding the Bankruptcy Court's authority to adjudicate a debtor's state common law counterclaim against a creditor; and United States v. Juvenile Male (09-940), a sad tale involving a juvenile sex offender and the mootness doctrine.

We'll start with Arizona Free Enterprise Club's Freedom Club PAC v. Bennett (10-238). In the 1990s, after nearly 10 percent of their state legislators were caught accepting campaign contributions or bribes in exchange for legislative support, Arizona voters determined that their existing campaign contribution limits were not enough. By referendum, they enacted the Citizens Clean Elections Act, a public campaign financing system with a twist: in addition to traditional lump sum payments of public funds – which the Supreme Court blessed in Buckley v. Valeo (1976) – the state paid additional public money to Arizona candidates who pledged not to use private funds but found themselves outspent by privately funded candidates.

Under Arizona's public financing regime, a candidate who agreed to forego private funds received a set lump payment. If, over the course of a campaign, the combined expenditures of a privately financed opponent (who was free to raise and spend unlimited funds, subject to contribution limits and disclosure requirements) and independent expenditure groups opposing the publicly financed candidate exceeded the lump sum payment, the publicly funded candidate was entitled to public matching funds. For every additional dollar spent by the privately funded opponent or independent expenditure group above the initial lump payment amount, the publicly funded candidate received 94 cents; the state continued to pay the candidate matching funds until total public funding topped out at three times the initial payment.

Five former candidates and two independent expenditure groups challenged the matching fund provision, claiming it unconstitutionally penalized their speech and burdened their ability to fully exercise their First Amendment Rights. Reversing the Ninth Circuit in a five-justice majority opinion written by Chief Justice Roberts and joined by Justices Scalia, Kennedy, Thomas, and Alito, the Court sided with the plaintiffs and held that the matching fund scheme violates the First Amendment because it substantially burdens protected political speech without serving a compelling state interest.

While acknowledging that Buckley found no First Amendment problem with public financing systems that award candidates lump sums, the majority looked to Davis v. FEC (2008). Davis invalidated the "Millionaire's Amendment" of the Bipartisan Campaign Reform Act of 2002, which provided that, if a candidate for a U.S. House of Representatives seat spent more than $350,000 in personal funds to campaign, an opponent could collect individual contributions of up to $6,900 – three times the normal limit. The Davis Court held the provision unconstitutional because it forced a wealthy candidate to choose between the First Amendment right to engage in political speech and subjection to the "unprecedented penalty" of discriminatory fundraising limitations.

The majority found the Arizona matching fund provision even more burdensome on speech than the law at issue in Davis because (1) in Davis, although the law raised contribution limits, the candidate still had to raise funds, meaning there was no guarantee that a privately financed candidate would face a challenger with equal funds, as Arizona's law ensured; (2) matching funds could create a multiplier effect where a privately funded candidate faced a "political hydra" of multiple publicly financed opponents; and (3) a privately financed candidate has no control over the spending of independent expenditure groups, whose activities could trigger matching funds to the candidate's detriment.

Having found a significant burden on privately funded candidates' political speech, the Court also determined that Arizona had failed to demonstrate a compelling state interest that would justify it. The Court dismissed two arguments. First, it pointed to several cases finding no compelling state interest in ensuring a "level playing field" – in this case, guaranteeing essentially equal funding up to three times the initial public funding allotment. Second, the Court rejected Arizona's argument that the matching fund provision combated corruption. Although Buckley held that public financing could serve the government's interest in preventing corruption, here the majority held that the matching fund provision provided very little anti-corruption value beyond that served by lump sum payments and that it could not survive First Amendment scrutiny in the face of the substantial burden it imposed.

Justice Kagan penned a spirited dissent, which Justices Ginsburg, Breyer, and Sotomayor joined. She characterized Arizona's matching fund system as a modest adjustment to the scheme approved in Buckley, in which the Court found that eliminating improper influence in campaigns amounted to a significant governmental interest and that lump sum public financing did not limit or censor speech. Arizona's matching system merely adapted the Buckley lump sum model in a way that allowed the state to calibrate just how much to subsidize candidates to provide an incentive to participate in elections, while conserving public funds by avoiding overspending in lower dollar races. The dissent argued that Arizona's statute did not substantially burden speech, but in fact subsidized and promoted it. Justice Kagan drew a sharp distinction between non-discriminatory speech subsidies, which she saw in the matching fund provision and the public funds in Buckley, and discriminatory speech restrictions, like the contribution restrictions that applied only to privately funded candidates in Davis.

Although it saw no substantial burden on speech, the dissent did find a compelling state interest in maintaining the matching fund system. According to the dissenters, Arizona demonstrated that the scheme attacked corruption and the appearance of corruption in the state political system, an interest the Court has found compelling in other cases. The matching fund provision merely allowed the state to calibrate the level of public investment necessary to serve the state's compelling ends.

The Court's decision likely will affect several states' public financing regimes that include matching systems similar to Arizona's.

To the general public, the next case, Stern v. Marshall (10-179), is of interest only because it is part of the soap opera of the life of Anna Nicole Smith, a former Playmate of the Year and strip club dancer, who (at the age of 26) married a wealthy oilman (and Yale Law School graduate) J. Howard Marshall II (at the age of 89), leading to protracted litigation between Smith and Marshall's son, Pierce, when Marshall died a year after the marriage. But the general public – like most lawyers, probably – has little interest in the holding of this Supreme Court decision: "The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." The opinion itself offers no scintillating details (and refers to Smith only by her real name of Vickie Lynn Marshall), and is focused on the minutiae of the intersection of Article III, separation of powers, and a Bankruptcy Court's jurisdiction over a "core" proceeding. Sadly, both debtor and creditor died during the course of the litigation, which was carried on by their estates.

After J. Howard's death, Vickie filed for bankruptcy in a California federal Bankruptcy Court, and Pierce filed a proof of claim against the bankruptcy estate, consisting of a damages claim for defamation because of Vickie's public statements that Pierce had fraudulently gained control over his late father's assets. Vickie then filed a compulsory counterclaim, claiming damages under Texas common law for Pierce's alleged tortious interference with an expected inter vivos gift from J. Howard of half his property. The Bankruptcy Court ruled against Pierce on his defamation claim, but awarded Vickie over $400 million on her claim after a bench trial. The case wound its way to the Supreme Court in 2006, when the Court ruled on a single issue (i.e., that the "probate exception" to federal jurisdiction did not divest the Bankruptcy Court of jurisdiction over Vickie's tortious interference claim). The case went back down to resolve other legal claims and returned to the Supreme Court, which has now affirmed the Ninth Circuit in throwing out Vickie's judgment and letting stand instead a Texas state court's rejection of the same tortious interference claim.

Under the Bankruptcy Code, Vickie's state law counterclaim against Pierce, who had filed a proof of claim (namely, his defamation cause of action) against the debtor's estate, is a "core" proceeding, which lets the Bankruptcy Court enter a binding, final judgment. That is in contrast to non-core proceedings, where the Bankruptcy Court can issue only proposed findings of fact and conclusions of law, with an Article III District Court judge entering final judgment after a de novo review of a party's objections. Bankruptcy judges are not "Article III judges" because they do not have lifetime tenure or the constitutional protection against diminution of salary during their tenure. In a 5-4 decision authored by Chief Justice Roberts (and joined by Justices Scalia, Kennedy, Thomas, and Alito), the Supreme Court held that a bankruptcy judge deciding the merits of a common law tort claim in the guise of a core proceeding violates Article III's promise of an independent judiciary with lifetime tenure.

The Court explained that claims involving "public rights" can be handed off to non-Article III adjudication – by executive agencies, for example – but those are claims unknown to the common law or courts of equity and involve matters between the federal government and a private person or integrally related to a specific federal regulatory regime. Vickie's tortious interference claim, on the other hand, is a state common law dispute between two private individuals and is unrelated to any right of recovery created by bankruptcy law or other congressionally created rights. Although previous cases limiting Bankruptcy Court jurisdiction under Article III involved a debtor's or bankruptcy trustee's claims against a non-creditor (i.e., a stranger to the bankruptcy case), it made no difference to the Supreme Court that here, the counterclaim was against an estate creditor who had his own proof of claim. That is because the process of adjudicating that proof of claim in this particular instance (i.e., deciding Pierce's defamation action against Vickie) would not necessarily dispose of Vickie's counterclaim. The Court did not accept that its decision adhering to the letter of the Constitution would wreak havoc, as the Bankruptcy Court could still act to propose findings of fact and conclusions of law subject to District Court de novo review (although, in this case, the Texas state court rejection of Vickie's claims precluded further proceedings once the federal judgment was vacated). In any event, regardless of its effect, the Court prohibited any incursion into a federal District Court's jurisdiction because "Article III protects liberty."

Justice Scalia joined the Court's opinion but wrote separately to raise questions about Bankruptcy Court jurisdiction more broadly than even the Court's opinion ventured, but said the issue was not briefed and so need not be decided. The dissent, however, pulled in the other direction, concerned about the practical effects of splintering litigation related to a debtor among multiple courts. Justice Breyer's dissent (joined by Justices Ginsburg, Sotomayor, and Kagan) took a less formalistic view as to when private rights can be determined by government tribunals other than an Article III court, particularly in the bankruptcy context. The dissent also pointed to the sheer volume of cases disposed of by Bankruptcy Courts as compared to the District Courts and was loath to transfer any of that volume. In Justice Breyer's view, "a constitutionally required game of jurisdictional ping-pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy."

United States v. Juvenile Male (09-940) arose from the following sad facts. From age 13-15, a boy sexually abused another child three years younger. The boy pled "true" to charges that he knowingly engaged in sexual acts with a child under 12. In 2005, he was sentenced to two years of juvenile detention followed by juvenile supervision until he turned 21. In 2006, Congress passed the Sex Offender Registration and Notification Act ("SONRA"). A year later, the District Court found that the boy had violated his supervised release, sent him back to detention, and imposed upon him a special condition of release requiring him to be registered under SONRA "at least until" his 21st birthday. He appealed to the Ninth Circuit, claiming that the registration requirement violated the Ex Post Facto Clause of the Constitution since SONRA was passed after his conviction. While his appeal was pending, he turned 21. By this time, he was living in Montana and registered as a sex offender as required by Montana law. The parties did not argue that this mooted the case and the Ninth Circuit did not raise the issue sua sponte. But that didn't stop the Court.

First, the Court certified an issue to the Montana Supreme Court, specifically, whether Montana law would have required respondent to register as a sex offender even absent the special condition of registration imposed by the District Court. The answer: Yes. As a result, the boy (now man) could not establish any continuing injury from the allegedly improper sentencing registration requirement. While collateral consequences are presumed where an individual is challenging the conviction itself, they are not presumed where the only challenge is directed to a sentence that has been completed. Here, respondent would have been required to register under Montana law even absent his sentencing condition. Accordingly, he could not demonstrate collateral consequences sufficient to avoid mootness. And the "capable of repetition, yet evading review" exception didn't apply either since the party seeking to invoke it must demonstrate that the thing complained of is capable of recurring to him – and respondent was no longer a boy, but a man, who assuredly would never be subjected to a special condition of juvenile supervision again.

We'll be back again soon with additional decisions.

Kim & Jenny

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