Supreme Court Update: Bowman v. Monsanto (11–796), Bullock v. BankChampaign, N.A. (11-1351), Dan's City Used Cars, Inc. v. Pelkey (12-52)

May 16, 2013 Supreme Court Update

Greetings, Court fans!

The Court issued three more decisions this week, marked by their unanimity of opinion: Bowman v. Monsanto (11–796), holding that the patent exhaustion doctrine does not permit a farmer to "copy" patented soybean seeds by planting and harvesting; Bullock v. BankChampaign, N.A. (11-1351), holding that bankruptcy courts may refuse to discharge a debt for "defalcation" – i.e., a debt incurred because of a breach of fiduciary duty – only where an intentional wrong or recklessness is involved; and Dan's City Used Cars, Inc. v. Pelkey (12-52), regarding the preemptive scope of the Federal Aviation Administration Authorization Act.

Since it is spring, we'll lead off with the seeds. In Bowman v. Monsanto (11–796), the Court unanimously held that the patent exhaustion doctrine does not permit a farmer to reproduce patented soybean seeds through harvesting and replanting without the patent holder's permission. For patented genetically-modified soybean seeds at least, the cycle of life appears to require a license.

The Monsanto Company invented a soybean seed with a nifty genetic alteration that enabled the seeds and resulting crops to withstand blasts of Monsanto's own weed killer, Roundup. Due to this man-given trait, the seeds received the moniker "Roundup Ready" and were sold by Monsanto subject to a license agreement restricting their use to one growing season. Growers were free to eat the resulting crop, feed it to livestock, or sell it as a commodity, but were forbidden from harvesting and replanting it without renewing their license with Monsanto. Vernon Bowman, an Indiana-based farmer, had trouble stomaching this arrangement. Like many of his fellow farmers, Bowman purchased licensed Monsanto Roundup Ready seeds for his first crop of the year. But about a decade ago, for his second late-season crop, one he considered risky, Bowman purchased "commodity soybeans" intended for human or animal consumption, and planted them in his fields. Knowing these soybeans came from area farmers—and that most area farmers used Monsanto's seeds—Bowman expected most to be Roundup Ready. He confirmed this hypothesis by drenching them in weed killer, and watching as many survived and grew herbicide resistant crops. Bowman then saved seeds from this second planting for the next season's second planting, and repeated this process for eight growing seasons. Monsanto then sued Bowman for patent infringement.

The District Court determined Bowman had infringed Monsanto's patent, and awarded damages to Monsanto of $84,456. The Federal Circuit affirmed, as did the Court. Writing for the Court, Justice Kagan explained that the doctrine of exhaustion limits the control patent holders maintain over purchasers of patented items. Once the patent holder receives the reward for a particular sale, the purchaser of the item can use or sell the particular item as she sees fit. However, the purchaser's rights are limited to the particular thing purchased, and do not extend to copies. Without a prohibition on making copies, the patent would only protect the invention for a single sale. By planting and then harvesting the soybeans, Bowman had effectively made copies of Monsanto's invention, and the exhaustion doctrine therefore did not protect him.

Bowman argued that exhaustion should protect him because he was simply using the seeds as farmers usually do—planting and growing them. Allowing Monsanto to control this use, he argued, would create an exception to the exhaustion doctrine in the case of genetically-modified seeds. The Court disagreed, reasoning that limiting a patent holder's reward to the first sale—even in the case of seeds—would restrict the 20-year patent term to one transaction and disrupt the incentive balance desired by Congress. In a last ditch effort to cultivate a victory, Bowman argued that seeds "self-replicate" when planted, and that he simply had nothing to do with it. The Court rejected this "blame-the-bean" argument, finding that "the seeds [Bowman] purchased (miraculous though they might be in other respects) did not spontaneously create eight successive soybean crops." In the end, the Court restricted its holding to the Roundup Ready seeds before it, leaving room for this area of the law to grow alongside the development of other self-replicating products.

Turning from patent law to bankruptcy law, in Bullock v. BankChampaign, N.A. (11-1351), the Court finally defined "defalcation" in the Bankruptcy Code, which provides that any individual cannot obtain discharge of a debt incurred due to "fraud or defalcation while acting in a fiduciary capacity, embez­zlement, or larceny," resolving a circuit split and sending lawyers everywhere scrambling for a legal dictionary. As the sole trustee of his father's trust, petitioner Bullock borrowed funds from the trust to purchase property for himself and his mother. Though he repaid the funds with interest, his brothers sued him in state court. The court found that even though Bullock did "not appear to have had a malicious motive in borrowing funds from the trust," he had committed a breach of fiduciary duty because he "was clearly involved in self-dealing." The court ordered Bullock to pay the trust "the benefits he received from his breaches." Unable to liquidate his interest in the property to pay this debt, Bullock filed for bankruptcy.

The bankruptcy court refused to discharge the debt because 11 U.S.C. § 523(a)(4) prohibits the discharge of debts for "defalcation while acting in a fiduciary capacity." The district court affirmed, as did the Eleventh Circuit, which grappled with the question whether "defalcation" included a scienter element. Ultimately, the Eleventh Circuit defined defalcation to be a debt incurred by an objectively reckless breach of fiduciary duty.

The Supreme Court reversed, in a unanimous opinion penned by Justice Breyer. The Court recognized that lower courts have long disagreed whether "defalcation" included a scienter element and, if so, what kind of scienter was required. Unable to find any consistent guidance from either dictionaries or treatises, the Court analyzed the statutory context. Section 523 lists defalcation alongside other intentional acts—such as "embezzlement," "fraud," and "larceny." Accordingly, the Court held that "defalcation" included an element of intentional wrong or recklessness. This definition did not create statutory surplusage because it did not overlap with, or subsume, the other enumerated acts in section 523. The Court found its interpretation to be consistent with the policy of narrowly reading exceptions to bankruptcy discharge and consistent with the tenor of other discharge exceptions. The Court was not persuaded by the hypothetical possibility of enforcement issues. The government countered that, in 1970, Congress moved "defalcation" from a different exemption provision—that presumably did not include other intentional acts—into section 523. The government argued that this change supported reading "defalcation" without a scienter requirement. The Court noted that it was equally plausible that the 1970 amendments reflected Congress's attempt to make certain that courts would read "defalcation" in a similar way to "fraud," "embezzlement," and "larceny." The Court reversed and remanded the case to the Eleventh Circuit to permit the lower court to determine whether further proceedings were necessary in light of the heightened scienter standard.

Finally, in Dan's City Used Cars, Inc. v. Pelkey (12-52), the Court dealt with the burning question of the preemptive scope of the Federal Aviation Administration Authorization Act ("FAAA"), which, shockingly, applies to things beyond aviation. The sad facts of the case were as follows: Pelkey's landlord required tenants to move cars from his parking lots during snow storms in order to permit plowing. Due to serious illness, Pelkey did not move his car and his car was towed by – you guessed right – Dan's City Used Cars ("Dan's City"). New Hampshire law provided specific requirements that towing companies were required to follow prior to disposing of vehicles that they had stored and which were unclaimed. Eventually, with Pelkey still stuck in the hospital unaware of the issue, and with Dan's City unaware of Pelkey's identity or his illness, Dan's City sought permission from the state to auction off the car without notice. New Hampshire responded by providing Pelkey's name and address. Dan's City wrote to Pelkey, but the letter was returned by the post office with no forwarding address. Things turned brighter momentarily when Pelkey was eventually discharged from the hospital and his lawyer learned from the landlord about the towing and contacted Dan's City, indicating that Pelkey would like to pay the charges and claim the vehicle. Unfortunately, Dan's City nonetheless proceeded to dispose of the car and paid Pelkey none of the proceeds. Pelkey ultimately brought suit asserting violations of New Hampshire's Consumer Protection Act. Dan's City defended by arguing that the action was preempted by the FAAA, which expressly preempts state laws "related to price, route, or service of any motor carrier . . . with respect to the transportation of property." 49 U.S.C. §14501(c)(1). The trial court found Pelkey's claims preempted, but the New Hampshire Supreme Court reversed.

The Court agreed with New Hampshire's highest court, in a unanimous opinion by Justice Ginsburg. The analysis was simple. The Airline Deregulation Act and the Motor Carrier Act both contain express preemption clauses with identical language except that those clauses are not limited by the phrase "with respect to the transportation of property." Accordingly, the inclusion of this phrase made clear that not all state laws related to price, route or service were preempted – only those relating to "the transportation of property." New Hampshire's laws relating to the disposal of vehicles simply had nothing to do with transportation and therefore were not within the preemptive scope of the FAAA.

In addition to the three decisions, the Court added another case to its docket for next Term, and asked for the SG's views on another. The Court granted cert in Burnside v. Walters (12-7892), which asks "Whether the Sixth Circuit erred in holding—in conflict with all eleven other federal circuit courts of appeals—that the in forma pauperis statute, 28 U.S.C. § 1915(e)(2), prohibits indigent plaintiffs from amending their complaints."

The Court asked the SG to weigh in on the petition in Sony Computer Entertainment v. 1st Media, LLC (12-1086), which would ask whether "the Court of Appeals for the Federal Circuit err[ed] in restricting district courts' equitable discretion in evaluating patent unenforceability … by applying a rigid test that (a) forecloses district courts from considering the entire circumstantial record; and (b) precludes district courts from granting equitable remedies where a patent applicant has violated the PTO's duty of candor."

We'll have to wait and see whether the Court continues to display such unanimity in the cases that remain outstanding this Term!

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