Supreme Court Update: Cyan Inc. v. Beaver County Employees Retirement Fund (15-1439), Marinello v. United States (16-1144)

March 27, 2018 Supreme Court Update

Greetings, Court Fans!

When the Court indicated yesterday (as opposed to Friday, like usual) that there would be a "possibility of opinions" today (as opposed to Monday, like usual), there was some speculation that something interesting could be afoot. Perhaps, one theory went, The Nine wanted to rush out a decision in Gill v. Whitford (the partisan gerrymandering case argued in October) before it hears argument in Benisek v. Lamone (the partisan gerrymandering case to be argued Wednesday). Or maybe they wanted to decide Christie v. NCAA (the New Jersey sports-betting case) before the Final Four. Instead, we got the Court's not-so-hotly anticipated decision in Hall v. Hall (No. 16-1150), on whether the losing party in one of several cases consolidated under Rule 42(a) can take an immediate appeal, even if other consolidated cases remain pending. The answer is yes, but we'll let the suspense over whether Hall or Hall prevailed linger a bit, while we get up to speed on last week's decisions.

We begin with Cyan Inc. v. Beaver County Employees Retirement Fund (No. 15-1439), a unanimous decision addressing the complicated and conflicting suite of federal statutes governing the jurisdiction of state and federal courts to hear securities class actions and basically telling Congress to try harder if it really wants to strip state courts of jurisdiction over class actions involving only the Securities Act of 1933.

Though the statutory backdrop is a little murky, among the key things to know to understand the Court's decision is that there were two Securities Acts arising out of the financial crisis of 1929. The 1933 Act regulated the offering of securities and the 1934 Act regulated the subsequent trading of securities after their issuance. Both Acts are enforceable through private rights of action, but while actions under the 1934 Act fall within the exclusive jurisdiction of federal courts, actions under the 1933 Act could be brought in federal or state court and the Act specifically (and unusually) prohibited removal of 1933 Act suits from state to federal court. Fast forward to the heady days before the 2009 financial crisis, when Congress passed the Private Securities Litigation Reform Act of 1995 to stem perceived abuse of the class-action vehicle in securities litigation. The PSLRA put new restrictions on class actions brought in federal court. To get around those restrictions, plaintiffs began filing securities class actions under state law, instead. Congress reacted with the Securities Litigation Uniform Standards Act of 1988, which prohibits certain large class actions "in connection with the purchase or sale" of a nationally listed security entirely, provides for removal of certain other class actions to federal court (for the purpose of dismissing them), and creates a caveat (called the "exception clause") to the general that state and federal courts have concurrent jurisdiction over claims to enforce the 1933 Act.

In this case, Cyan, got itself sued by a bunch of pension funds and other investors, who brought a class action in California Superior court alleging that Cyan's IPO offering documents contained material misstatements in violation of the 1933 Act. Their complaint asserted no claims under state law or (importantly) under the 1934 Act. Cyan moved to dismiss for lack of subject-matter jurisdiction, arguing that SLUSA's "except clause" strips state courts of power to adjudicated 1933 Act claims in "covered class actions." But the state court denied the motion, holding that SLUSA left intact state-court jurisdiction over suits alleging only 1933 Act claims. The California appellate courts agreed, and so did The Supremes, unanimously.

Writing for the Court, Justice Kagan hewed to the plain language of the "except clause," which says nothing about state-court jurisdiction over 1933 Act class actions. "The statute says what it says," Kagan intoned, "or perhaps better put here, dos not say what it does not say." SLUSA must be read against the background rule that gives state courts concurrent jurisdiction over suits brought to enforce the 1933 Act. SLUSA's "except clause" adds a caveat: State courts have concurrent jurisdiction "except as provided in section 77p of this title with respect to covered class actions." But § 77p does not limit state-court jurisdiction over class actions brought under the 1933 Act. It only bars securities actions based on state law. The Court rejected Cyan's argument that "except as provided in section 77p" refers specifically to a sub-sub-section of 77p, the definition of "covered class actions" in § 77p(f)(2). As Justice Kagan noted, if Congress meant to refer to 77p(f)(2) specifically, it could easily have done so (and indeed other SLUSA provisions do contain more specific internal cross references). Faced with the "recalcitrant statutory language," Cyan turned to SLUSA's legislative purpose and history, but it hit a dead end there, as well. "Even assuming clear text can ever give way to purpose," Kagan wrote, "Cyan would need some monster arguments on this score to create doubts about SLUSA's meaning." Though Cyan was able to raise some doubts about what purpose the "except clause" could have if it didn't refer specifically to the definition of "covered class actions," the Investors had some possible explanations. Ultimately, the Court threw up its hands. Particularly in light of the background principle of concurrent jurisdiction, questions about legislative purpose just weren't enough to overcome the textual obstacles Cyan faced. As Justice Kagan put it, "Whatever questions remain as to the except clause's precise purpose—and we do not gainsay there are some—they do not give us permission to devise a statute (and at that, a transformative one) of our own."

The Court also a "halfway-house position" advanced by the Federal Government as amicus: that even if SLUSA does not prohibit 1933 Act class actions from being filed in state court, it nevertheless enables defendants to remove those suits to federal court. The Court was no more impressed with this argument than Cyan's fully liberated argument. SLUSA's removal provision only covers state-law class actions alleging securities misconduct, not 1933 Act class actions. So, while state-law suits are removable, federal-law suits that allege only 1933 Act claims (like the one against Cyan) are not removable. Justice Kagan rejected the Government's attempt to apply the rule of the last antecedent to get around the state-law limitation (though maybe eviscerated is the more apt verb, given the five pages of text devoted to picking it apart).

In sum, the Court concluded (with something like relish, it seems) that "SLUSA did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations." If Congress wants to take another crack at it, it had better be pretty darned precise...

Next up, in Marinello v. United States (No. 16-1144), the Court held 7-2 that a conviction under § 7212(a) of the Internal Revenue Code for "corruptly" obstructing or interfering with the due administration of the Code requires proving a "nexus" between the defendant's acts and a particular tax proceeding (an investigation or audit, for example, but not "routine, day-to-day work . . . such as the review of tax returns") that "was pending at the time the defendant engaged in the obstructive conduct or . . . reasonably foreseeable by the defendant."

The petitioner, Carlo Marinello, was investigated by the IRS between 2004 and 2009 and then indicted in 2012 for criminal violations of various tax statutes, including the clause in § 7212(a) that prohibits "corruptly . . . obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration" of the Code (the "Omnibus Clause"). The trial court instructed the jury that Marinello was guilty if he committed one of several acts, such as hiding income or failing to maintain corporate books, and did so corruptly, meaning "with the intent to secure an unlawful advantage or benefit, either for [himself] or for another." The jury instructions did not require a finding that Marinello knew he was under investigation and intended to interfere. The jury convicted Marinello on all counts, and the Second Circuit affirmed the conviction, placing the circuit in conflict with Sixth Circuit precedent requiring a showing that the defendant was aware of a pending proceeding.

Resolving the split, the Court reversed the Second Circuit in an opinion by Justice Breyer. The majority looked to United States v. Aguilar, 515 U.S. 593 (1995), in which the Court interpreted a similarly worded obstruction of justice statute to require some "nexus" between the defendant's act and a particular judicial proceeding. Citing concerns about fair notice and judicial restraint in interpreting the scope of criminal statutes, the Court followed the reasoning of Aguilar to the same conclusion as applied to the Omnibus Clause. A broad interpretation of the Clause would turn "pay[ing] a babysitter $41 per week in cash without withholding taxes" or "leav[ing] a large cash tip in a restaurant" into a felony—along with a host of other acts that the Code elsewhere makes punishable as misdemeanors. The Court also concluded that the wording and context of the Clause suggest that the defendant must obstruct or impede "specific, targeted acts of administration." This proposition was confirmed by the statute's legislative history (for "[t]hose who find legislative history helpful," a group that includes Justice Breyer, but perhaps not every other member of the majority). The Court was unpersuaded by the Government's argument that the requirement of "corrupt" intent to "obtain an unlawful advantage" for oneself or another sufficed to cure the overbreadth problem, because a great many willful acts akin to paying a babysitter in cash would satisfy that standard in addition to the standards for various misdemeanors under the Code. Nor was the Court content to rely on prosecutorial discretion alone to narrow the scope of the overbroad Clause.

Justice Thomas penned a dissent joined by Justice Alito. The pair took issue with the majority's reading of the words "due administration of the Tax Code" to mean due administration of "only some of the Tax Code" without any textual basis, noting that even the legislative history for § 7212(a) said nothing about the Omnibus Clause in particular. The dissenters also concluded that the "corruptly" standard was stricter than the willfulness standard used in misdemeanor provisions, and redundancy in criminal statutes has not been a basis to depart from the plain meaning of statutes. Aguilar, in their view, was distinguishable in light of the predecessor obstruction of justice statute that tied the crime to judicial proceedings. Likewise, other cases cited by the majority involved statutes containing textual indications of the scope of the proceedings with which it was a crime to interfere. Finally, the dissent criticized the majority for invoking "lenity-sounding concerns" that should only be used when other tools of statutory interpretation fail to resolve an ambiguity. What's more, they noted, in this instance the majority's interpretation provides no better notice of what is outlawed, given the vagueness of concepts like "nexus" and reasonable foreseeability. Instead, the majority's construction simply opens up a loophole for serious misconduct like that Marinello was accused of.

And now, it's time for some habeas. Wait, don't go! In Ayestas v. Davis (No. 16-6795), we can actually skip over most the procedural history and get right to the pretty simple issue in the case. A federal law allows habeas petitioners seeking to vacate or set aside a death sentence to seek funds for "investigative, expert, or other services [that] are reasonably necessary for the representation of the defendant." In this case, Ayestas sought precisely $20,016 to conduct a search for evidence that might support his claims that both his trial counsel and state-habeas counsel were ineffective in failing to investigate potential mitigation evidence (including that he suffered from mental illness) that could spare him from the death penalty. The District Court rejected his request for two reasons. First, applying Fifth Circuit precedent, it concluded that Ayestas had not demonstrated that the funds were "reasonably necessary," because he failed to show a "substantial need" for the investigative services he wanted to pay for. Second, it concluded (again applying Fifth Circuit precedent) that Ayestas was not entitled to the funds because he couldn't present a "viable constitutional claim that is not procedurally barred." After the Fifth Circuit affirmed, the Supreme Court took up the case, but only to decide whether the lower courts had applied the correct legal standard in denying Ayestas's funding request.

Justice Alito, writing for a unanimous court, had little trouble concluding that no matter what "reasonably necessary" means, it's not the same thing as "substantial need." In the context of Section 3599(f), the Court concluded that "reasonably necessary" calls for a district court to decide whether a reasonable attorney would regard the sought-after services as "sufficiently important." Although it's not quite clear what the Fifth Circuit meant by "substantial need," most would interpret it as something more demanding than "reasonably necessary," so the lower courts' formulation was wrong.

This wasn't all an exercise in comparing adjectives and adverbs, though. The Court also took aim at the second basis relied on by the lower courts in denying Ayestas's request—that he'd failed to show "a viable constitutional claim that is not procedurally barred." The lower courts concluded that Ayestas's ineffective-assistance claim was procedurally barred because he failed to raise it in his state habeas petition. But the Supreme Court ruled in 2013 that a federal habeas petitioner's failure to raise an IAC claim in his state habeas petition can be excused if his state habeas counsel was also constitutionally ineffective. Given that rule, the Fifth Circuit's requirement was too harsh. After all, to show that has a viable constitutional claim, Ayestas would have to show that his trial counsel conducted an objectively inadequate investigation of mitigation factors and that an adequate investigation would have made a difference. And to show that the claim is not procedurally barred, he'd have to also show that his state habeas counsel provided ineffective assistance by failing to investigate and raise the trial counsel IAC claim. But how is he supposed to demonstrate all that without funds to investigate? It seems like this Catch 22—you can't get funds to investigate unless you prove the investigation will make a difference, and you can't prove the investigation will make a difference before you've done the investigation—that was the real target of the Supreme Court's decision. Indeed, Justice Sotomayor, joined by Justice Ginsburg, wrote a lengthy concurrence explaining why this issue all but entitles Ayestas to Section 3599(f) funding on remand.

It's not every day that that a unanimous Supreme Court finds in favor of a habeas petitioner challenging a death sentence. And there are more than a few signs that the unanimity may not last: At the end of his majority opinion, Justice Alito briefly alluded to an alternative argument raised by Texas in the Supreme Court: That Ayestas's investigation can't be "reasonably necessary" because whatever it turns up would be outside the state-court record, arguably precluding the federal court from considering it under 28 U.S.C. § 2254(e)(2). But because the lower courts had not had a chance to consider Texas's interpretation of Section 2254(e)(2), the Court left that issue open on remand. Thus, while he won this round 9-0, it's likely Ayestas's next trip to First Street (should it take place) won't be so harmonious.

If you're still with us, even after this long and lettered trek through SLUSA and AEDPA, here's your reward: In the case of Hall v. Hall, Hall won. To find out why, you'll have to stay tuned to our next Update . . .