Supreme Court Update: Bond v. United States (01227), Janus Capital Group, Inc. v. First Derivative Traders (09-525), Borough of Duryea v. Guarnieri (09-1476) and United States v. Jicarilla Apache Nation (10-382)

July 12, 2011 Supreme Court Update

Greetings, Court fans!

Today's Update will cover four decisions: Bond v. United States (01227), an intriguing Tenth Amendment case involving the odd combination of an extra-marital affair, a minor chemical attack, and prudential standing doctrines; Janus Capital Group, Inc. v. First Derivative Traders (09-525), setting forth a new rule for determining who "makes" a statement for purposes of securities fraud liability; Borough of Duryea v. Guarnieri (09-1476), on whether private, employment-related grievances of public employees are protected under the First Amendment's Petition Clause; and United States v. Jicarilla Apache Nation (10-382), regarding the applicability of the common law fiduciary exception to the attorney-client privilege to the relationship between the Unites States and Indian Tribes in connection with the United States' management of Indian trust assets.

Bond v. United States (09-1227) is the stuff that soap operas – and politics – are made of. When Bond found out that her husband had impregnated her best friend, she began harassing the woman. The harassment escalated until Bond began placing caustic chemicals on items the woman was likely to touch. Bond was charged with violating the federal Chemical Weapons Convention Implementation Act, 18 U.S.C. § 229, which was enacted to implement an international treaty ratified by the United States in 1997. Section 229 forbids knowing possession of a chemical that "can cause death, temporary incapacitation or permanent harm to humans" unless it is intended for a "peaceful purpose." In the District Court, Bond moved to dismiss the indictment on the ground that § 229 was not enacted pursuant to any of Congress's enumerated powers and therefore violated the Tenth Amendment, interfering with rights reserved to the States. Bond's motion was denied and she entered a conditional plea of guilty, reserving her right to challenge the validity of § 229 on appeal. The Third Circuit affirmed, finding that Bond did not have standing to challenge § 229 under the Tenth Amendment, which the Third Circuit viewed as protecting the rights of States, not individuals. The United States argued against Bond's standing before the Court of Appeals.

But before the Court, the United States switched sides, arguing that Bond in fact had standing. The Court agreed, unanimously reversing, in an opinion by Justice Kennedy. First, there was no question that Bond had Article III standing to challenge the law. (Even the amicus appointed by the Court to argue the "no standing" position conceded this.) Bond's conviction satisfies the case-or-controversy requirement because her incarceration constitutes a concrete injury caused by the conviction and it is redressable by invalidation of that conviction. The Court also found no issue with respect to prudential rules of standing, which are sometimes used to prohibit plaintiffs from suing where they are seeking to vindicate someone else's rights rather than their own, even if they satisfy Article III standing requirements. Here, the Court emphasized, the Tenth Amendment was not enacted merely to protect the States as sovereigns. Our federal system of government "enhances freedom, first by protecting the integrity of the governments themselves, and second by protecting the people, from whom all governmental powers are derived." "‘[F]ederalism secures to citizens the liberties that derive from the diffusion of sovereign power.'" Laws enacted in excess of Congress's delegated authority are invalid and individuals who are harmed in a concrete way that is redressable may challenge those laws. So, Bond can go back to the lower courts and make her case that § 229 violates the Tenth Amendment as applied to her by regulating matters of purely local concern.

Justice Ginsburg, joined by Justice Breyer, concurred to state that in their view, "Bond, like any defendant, has a personal right not to be convicted under a constitutionally invalid law." Therefore, courts should not even consider prudential standing rules in such cases.

In Janus Capital Group, Inc. v. First Derivative Traders (09-525), the Court took what looked to be a narrow case concerning mutual fund advisers, and turned it into an important decision on what it means to make a statement for purposes of liability under Rule 10b-5 and §10(b) of the Securities Exchange Act. But first, a brief family tree of the Janus mutual funds is in order. Janus Capital Group, Inc. (JCG) is a publicly traded company. JCG created and organized a family of mutual funds into the Janus Investment Fund, a Massachusetts business trust. Although JCG created the Janus Investment Fund, it is a separate legal entity owned entirely by mutual fund investors. JCG's wholly-owned subsidiary, Janus Capital Management LLC (JCM) is the investment adviser to and administrator of the Janus Investment Fund. The case arose when the New York Attorney General accused JCG and JCM of entering into secret arrangements to permit market timing in several Janus mutual funds. The accusations led to significant withdrawals from the funds, and a drop in JCG's stock price. Plaintiff First Derivative Traders brought suit against JCG and JCM on behalf of a class of JCG stockholders. The complaint alleged that JCG and JCM caused materially misleading prospectuses to be issued for the Janus mutual funds, and sought relief under Rule 10b-5 and §10(b) of the Securities Exchange Act. The District Court dismissed the complaint for failure to state a claim, but the Fourth Circuit reversed, holding that First Derivative Traders had sufficiently alleged that JCM "made" the allegedly misleading statements by participating in the writing and dissemination of the prospectuses, and that JCG could also be held liable as a control person of JCM.

The Court reversed 5-4, splitting along conservative/liberal lines. Justice Thomas wrote for the majority. Rule 10b-5 makes it unlawful to "make any untrue statement of a material fact" in connection with the purchase or sale of securities. JCM, and thus JCG, could not be held liable under Rule 10b-5 because it did not "make" the statements in the prospectuses. More broadly, the Court set forth a new rule: "For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." The Court reasoned that to "make a statement" is "to state." Without control, a person or entity can only suggest what to state, and cannot state anything in its own right. The Court situated the new rule amongst its precedent giving "narrow dimensions" to the (judicially-created) private right of action under Rule 10b-5. Specifically, the rule follows from Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994), in which the Court held that there was no private right of action against aiders and abettors, and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008), in which the Court rejected a suit by investors against outside companies who participated in deceptive transactions with the investors' company (but who did not participate in that company's public statements). Applying the rule in this case, JCM and JCG could not be held liable because they did not make the statements; only Janus Investment Fund – a legally independent entity with its own board of trustees – did. Only Janus Investment Fund was required by law to file the prospectuses. And only Janus Investment Fund appears on the prospectuses as the filer. Finally, the Court rejected the plaintiff's suggestion that the "well-recognized and uniquely close relationship between a mutual fund and its investment adviser" should inform the Court's decision. Although the Court acknowledged that investment advisers exercise significant influence over their client mutual funds, the Court would not disregard the corporate form where, as here, it was undisputed that corporate formalities were observed.

Justice Breyer led the dissent. In the dissenters' view, neither common English nor the Court's earlier cases limit the scope of the word "make" to those with "ultimate authority" over a statement's content. As a matter of English, one can say that any number of individuals and entities make statements about matters that other individuals and entities have the "ultimate authority" to control – e.g., corporate officials make statements about issues more senior officials or the board of directors control; cabinet officials make statements about issues the President ultimately controls. Further, one can say that several different individuals can "make" a single statement, together or separately. Breyer noted that Central Bank itself admonished that its holding did "not mean that secondary actors in the securities markets are always free from liability under the securities Acts. Any person or entity . . . who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5…." Stoneridge was distinguishable because no one contended that the outside companies made the investors' company's public misstatements. Instead, the case turned on whether the outside companies' separate, non-public statements could provide a basis for liability. The dissenters feared that the majority's approach would leave investors without remedy where a guilty actor (read: investment adviser) exploited an innocent intermediary (read: mutual fund board). Indeed, even the SEC might not be able to pursue the guilty actor as an aider and abettor because there would be no primary violator. Here, where the complaint alleged that JCM was responsible for the day-to-day management of the Janus Investment Fund, JCM employees drafted and reviewed the Fund's prospectuses, each of the Fund's 17 officers was a vice president of JCM, and JCM may have kept the Fund's trustees in the dark about the actual market timing practices, the dissenters would find that the plaintiff adequately alleged that JCM "made" the misstatements at issue.

Next, in Borough of Duryea v. Guarnieri (09-1476), the Court addressed the scope of the First Amendment's Petition Clause where public employees are involved. The case involved a mundane employment dispute between Guarnieri, chief of a small town police department, and the borough Council. After the borough fired Guarnieri, he filed a union grievance that led to his reinstatement (he was still disciplined, but the arbitrator found that the borough didn't follow proper procedures in firing him). Upon his return, the Council issued numerous directives regarding Guarnieri's performance – including embarrassing written orders such as "the police car is to be used for official business only" and the "municipal building is a smoke free environment" and the "police department is not exempt." Guarnieri filed a lawsuit against the borough and individual Councilors asserting that they violated § 1983 by retaliating against him in response to his union grievance, which he claimed was a petition protected by the Petition Clause of the First Amendment. After the suit was filed, the Council denied Guarnieri's request for overtime pay. The United States Department of Labor investigated and agreed with Guarnieri. While the Council attempted to tender payment for the overtime (some $300+ dollars), Guarnieri declined, opting instead to amend his complaint to add an additional claim that the Council retaliated against him for filing the lawsuit (which he contended was also a petition). The Defendants sought to dismiss Guarnieri's claims on the basis that his union grievance and lawsuit, both of which involved private, employment-related claims, were not protected by the Petition Clause since they did not involve matters of public concern. The District Court declined to dismiss the suit and the jury found for Guarnieri, awarding modest damages. The Third Circuit affirmed, putting it at odds with every other Circuit, which had all found Petition Clause claims by public employees limited to matters of public concern.

The Court (nearly unanimously) reversed. Justice Kennedy wrote for the majority, joined by everyone except Justice Thomas, who concurred in the judgment, and Justice Scalia, who concurred in the judgment in part and dissented in part. The First Amendment protects the "right of the people . . . to petition the Government for a redress of grievances." While the Petition Clause extends to protect private grievances in cases involving citizens and Government acting in a sovereign capacity, where the Government instead acts in the role of employer a different rule is required. The Speech Clause, though a distinct right, substantially overlaps with the Petition Clause, and has always been construed to cover only speech by a public employee acting "as a citizen" on a "matter of public concern." This limitation is necessary because the Government has a substantial interest in ensuring that its operations are efficient and effective (including disciplining employees) and this interest applies with equal force to claims under the Petition Clause. While courts "should not presume there is always an essential equivalence in the two Clauses or that Speech Clause precedents . . . resolve Petition Clause claims," "claims of retaliation by public employees do not call for [any] divergence." Adopting a different test for Petition Clause claims would allow plaintiffs to plead around the limitations on Speech Clause claims "by wrapping their speech in the mantle of the Petition Clause." And adopting a separate test would increase the costs of compliance with the Constitution. Accordingly, Guarnieri's claims must be dismissed.

Justice Scalia concurred in the judgment in part and dissented in part. In his view, "the proposition that a lawsuit is a constitutionally protected ‘Petition' [is] quite doubtful" There is "abundant historical evidence" that the Petition Clause covers only petitions to the Legislative and Executive branch. The majority assumed that lawsuits were protected, but did not decide the issue. Scalia also wouldn't address the issue in this case since the parties' hadn't briefed it, but he didn't want any readers taking the majority's silence as acquiescence. Second, he would not import the "public concern" test developed for the Speech Clause into the Petition Clause context. That text made sense for speech cases because political speech was at the core of the rights protected by the Speech Clause. By contrast, the Petition Clause, at its core, protected the right of an individual to petition the government on issues of private or public concern without fear of retribution. And the overwhelming majority of early cases under the Clause involved private claims. Accordingly, Scalia would adopt a test tailored better to the core protections of the Petition Clause. He would allow public employees to bring Petition Clause claims on issues of private concern, but only where they were suing in their role of citizens against the government as sovereign. (For example, a public employee could still bring a Petition Clause claim if the government retaliated against him for challenging his tax assessment.) Public employee claims against the government as employer would still be off-limits. While this differing test might add some complexity, "[t]he complexity of treating the Petition Clause and Speech Clause separately is attributable to the inconsiderate disregard for judicial convenience displayed by those who ratified a First Amendment that included both provisions as separate constitutional rights." Under Scalia's test, Guarnieri's retaliation claim based on his union grievance would have to be dismissed because that grievance was made in his capacity as an employee. However, his retaliation claim based on the lawsuit (assuming it was a petition) would be permitted since Guarnieri was not an employee of the Federal Government, where his lawsuit was filed.

Justice Thomas generally agreed with Justice Scalia's framework, with one twist. While he concurred that Guarnieri's retaliation claim based on his § 1983 suit could potentially state a Petition Clause claim (if the lawsuit were a petition, which he thought unlikely), he would nevertheless remand for the Court of Appeals to determine whether the local government's interest as an employer in achieving its goals effectively and efficiently outweighed Guarnieri's interest in petitioning the Federal Government regarding his local employment.

Finally, United States v. Jicarilla Apache Nation (10-382) presented an obscure issue of federal Indian law. Specifically, the case addressed whether, in a suit by the Jicarilla Apache Nation ("the Nation") against the United States over the United States' alleged mismanagement of funds held in trust for federal Indian tribes, the common law fiduciary exception to the attorney-client privilege applied to allow discovery of communications between the Government and its attorneys regarding the management of the trust assets. The Court split 5-2-1, with Justice Kagan not participating.

Justice Alito wrote for the majority, which concluded that if the fiduciary exception existed (a subject on which the Court did not opine), it did not apply here. While the United States undoubtedly possesses a trust relationship with Indian tribes that bears some resemblance to a common law fiduciary relationship, this relationship is not identical to the relationship between a private trustee and the beneficiaries of a private trust. There, the law deems the fiduciary to have no personal interest in the management of the trust. The beneficiaries are the "real clients" and trust assets are used to pay for the attorney's services. By contrast, the trust obligations of the United States are laid out by statute, not common law, and the Government always acts in its "sovereign interest in the execution of federal law." As such, the United States frequently has competing interests. Thus, when the United States seeks legal advice, it does so not just in a representative capacity, but in its own capacity – i.e., it is the "real client." And it, not the tribes, pays for counsel's services. Further, the statute creating the particular trust relationship at issue provides for specific information to be disclosed to the tribes. If broader common law disclosure requirements existed, this provision would be superfluous. The Court also declined to adopt a case-by-case approach, which would make the privilege dependent on whether the Government actually had a competing concern as to the particular communication at issue. "[T]he conflicting interests the Government must consider are too pervasive for such a case-by-case approach to be workable." Such an approach would substantially interfere with the Government's ability to receive confidential legal advice.

Justice Ginsburg, joined by Justice Breyer, concurred in the judgment only. The Government has a distinct interest in carrying out the laws governing the conduct of tribal affairs. Because of this unique interest, Ginsburg agreed that Government attorneys render advice to the United States in its personal rather than fiduciary capacity and that the fiduciary exception was therefore inapplicable. But they felt the majority went too far in its analysis when it stated that the Government "assumes Indian trust responsibilities only to the extent it expressly accepts those responsibilities by statute" and therefore did not include other common law disclosure obligations. Since those other obligations were not before the Court in this case, they would not reach out farther than necessary to decide them.

While it is hard to imagine getting too worked up over this arcane and narrow issue, that didn't stop Justice Sotomayor, who penned a lengthy and impassioned dissent. In her view, "a network of federal laws requires the United States to act strictly in a fiduciary capacity when managing Indian trust fund accounts." While the United States may have competing, independent interests in other areas of its relationship with the tribes – no independent interests were contemplated here. Since the statutes establish a conventional fiduciary relationship, common law fiduciary principles should apply – as the Court has noted in myriad prior cases. Justice Sotomayor was very concerned that, while the issue presented was a narrow evidentiary one, the majority's broad decision might be read to limit the United States' obligations to the tribes to those enumerated by statute. Numerous prior cases of the Court had rejected such a cramped view of the United States' responsibilities and had applied common law trust principles to fill in the gaps of the statute establishing the basic trust relationship.

If you've read this far, we're impressed. You deserve a coffee break and a walk outside. We hope to wrap up the remaining decisions of the Term this week. Thanks, as always, for reading!

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