Supreme Court Update: Endrew F. v. Douglas County School District (15-827), Star Athletica, L.L.C. v. Varsity Brands, Inc. (15-866), Czyzewski v. Jevic Holding Corp. (15-549) and Order List

March 28, 2017 Supreme Court Update

Greetings, Court Fans!

This morning, the Court issued its decision in Moore v. Texas (15-797), an important death-penalty case holding that Texas's outdated standard for determining whether a death-row inmate is intellectually disabled violates the Eighth Amendment. We'll provide a more in-depth summary in our next Update, but first we bring you the remaining opinions from last week, covering the educational rights of disabled children, the priority rights of secured creditors, and the copyright rights of cheerleading uniform designers.

First up, in Endrew F. v. Douglas County School District, (15-827), the Court addressed an important issue for millions of educators and parents: what kind of education must be offered to children with disabilities? Under the Individuals with Disabilities Education Act ("IDEA"), states can obtain federal funds to assist in educating children with disabilities. But those federal dollars come with strings attached. Among other requirements, any state that accepts the money must provide a "free appropriate public education" ("FAPE") to all children, including the profoundly disabled. For children with disabilities, the individualized education program ("IEP") is at the heart of this requirement. The IDEA envisions that a child's IEP will be a comprehensive plan crafted by teachers, school officials, and the child's parents that describes "the child's present levels of academic achievement and functional performance" and sets out "measurable annual goals, including academic and functional goals," along with a "description of how the child's progress toward meeting" those goals will be evaluated.

The Supreme Court first addressed the IEP requirement 35 years ago in Board of Education v. Rowley (1982). There, the Court held that a child receives a "free appropriate public education" if his or her IEP sets out an educational program that is "reasonably calculated to enable the child to receive educational benefits." For children receiving instruction in the regular classroom, this would generally require an IEP "reasonably calculated to enable the child to achieve passing marks and advance from grade to grade." This holding alone resolved Rowley because the plaintiff in that case received instruction in a regular classroom and was making progress from grade to grade. But the Rowley opinion goes no further. Indeed, the Court explicitly "confine[d] [its] analysis" to the specific facts at issue in Rowley. It did not address what type of IEP might be required if a child cannot receive regular instruction in the classroom or achieve on grade level.

Endrew F. is such a child. Endrew is an autistic boy from Colorado, who had significant behavioral challenges in the public schools in which he was enrolled. Among other things, he "would scream in class, climb over furniture and other students, and occasionally run away from school." Endrew's parents were dissatisfied with their son's annual IEPs. As they saw it, Endrew's IEPs "largely carried over the same basic goals and objectives from one year to the next, indicating that he was failing to make meaningful progress toward his aims." So Endrew's parents pulled him out of public school and enrolled him in a private school where Endrew flourished. Endrew's parents sought reimbursement for the private school tuition from the school district. To prevail on this claim under the IDEA, they were required to show that the school district had not provided Endrew a FAPE in a timely manner. The district court ruled against Endrew and his parents, and the Tenth Circuit affirmed, holding (in accord with circuit precedent) that an IEP is adequate as long as it is intended to provide "an educational benefit [that is] merely . . . more than de minimis," and that since Endrew's IEP was reasonably calculated to enable him to make some progress, it satisfied the IDEA's FAPE requirement. (Since you're wondering, no, potential Ninth Justice and Tenth Circuit doyen Neil Gorsuch was not on the Endrew F. panel, but he did write the opinion in a similar 2008 case applying the same "merely more than de minimis" standard, something Democrats were quick to point out last week when The Eight unanimously rejected it.)

In a unanimous decision written by the Chief, the Court rejected the Tenth Circuit's test. The Chief interpreted the IDEA's "free appropriate public education" requirement to mandate that "school[s] . . . offer an IEP reasonably calculated to enable a child to make progress appropriate in light of the child's circumstances." This is necessarily an individualized determination that "focus[es] on the particular child." For most children, a "free appropriate public education" will "involve integration in the regular classroom and individualized special education calculated to achieve advancement from grade to grade." For children like Endrew who are not fully integrated and not able to achieve on grade level, the "IEP need not aim for grade-level advancement." Instead, the "educational program must be appropriately ambitious in light of [the child's] circumstances, just as advancement from grade to grade is appropriately ambitious for most children in the regular classroom. The goals may differ, but every child should have the chance to meet challenging objectives." The Court clarified that the proper "standard is markedly more demanding than the ‘merely more than de minimis' test applied by the Tenth Circuit." As the Chief put it: "It cannot be the case that the [IDEA] typically aims for grade-level advancement for children with disabilities who can be educated in the regular classroom, but is satisfied with barely more than de minimis progress for those who cannot." The Supreme Court sent the case back down to the Tenth Circuit to apply this considerably more rigorous standard.

Democrats cheered the Court's ruling, not merely for what it meant for the rights of disabled students, but because it gave them a new talking point in the ongoing Gorsuch nominations proceedings. The decision came down during a Judiciary Committee hearing last week and Senator Durbin was quick to ask Gorsuch how he felt about being unanimously (if indirectly) reversed by the Court he sought to join. Gorsuch didn't take the bait, calmly noting that he was bound by prior Tenth Circuit precedent.

Meanwhile, the Court's decision in Star Athletica, L.L.C. v. Varsity Brands, Inc. (15-866) had fashion designers cheering, while purveyors of fashion "knock-offs" wrung their hands. At issue were the 200-odd copyright registrations on two-dimensional designs for cheerleading uniforms held by Varsity Brands, the industry leader in cheerleading uniforms. Star Athletica, an upstart competitor, argued that Varsity could not copyright the designs, which consisted of fairly basic patterns of stripes and chevrons (helpfully illustrated in an appendix to the majority opinion), because they were inseparable from the cheerleading uniforms, themselves, which are "useful articles" not subject to copyright protection. Essentially, Star Athletica's position was that the stripes and chevrons are what make a cheerleading uniform a cheerleading uniform, as opposed to an ordinary dress. The Court rejected that argument, however, opening up broader protection for surface designs on clothing.

First, a bit of background. Under the Copyright Act, a "useful article," including an article of clothing or a lamp, is not eligible for copyright protection. However, a pictorial, graphic, or sculptural feature incorporated into the "design of a useful article" can be eligible for protection, but only if it can be "identified separately from" the useful article and is "capable of existing independently of the utilitarian aspects of the article." But what, exactly, does it mean to be capable of independent existence? For example, is a fanciful sleeve design on a shirt a separable sculptural feature not essential to the utilitarian purpose of covering the upper portion of the human body? Must the element be physically separable or just conceptually separable? Does the useful object have to be capable of existing without the design element?

Led by Justice Thomas, the Court rejected a test that would require the design element to be physically separable from the useful article, instead concluding that the relevant test is a conceptual one. A feature incorporated into the design of a useful article is eligible for copyright protection if the feature (1) can be perceived as a two- or three- dimensional work of art separate from the useful article, and (2) would qualify as a protectable pictorial, graphic, or sculptural work if it were imagined separately from the useful article into which it is incorporated. "If the feature is not capable of existing as a pictorial, graphic, or sculptural work once separated from the useful article, then it was not a pictorial, graphic, or sculptural feature of that article, but rather one of its utilitarian aspects." Applying this test, the majority found that the lines and chevrons on Varsity Brands' cheerleading uniforms easily qualified as pictorial or graphic works. Turning to the more difficult part of the test, the Court explained that these "surface decorations" were conceptually separate from the uniform itself because they could be imagined on another surface, such as a canvas. Here, the Court focused on whether the design element could be imagined as its own protectable work, not on whether what remained of the useful article after the design element was (conceptually) removed was still useful. So, the fact that a cheerleading uniform without the stripes and chevrons may no longer function quite as effectively as a cheerleading uniform is irrelevant. Similarly, to use an example from a 1954 case, a designer can copyright a statuette of a dancer that is intended for use as a lamp base (with electric wiring running through it) even though the lamp would not function if you removed the statue. "If a design would have been copyrightable as a standalone pictorial, graphic, or sculptural work, it is copyrightable if created first as part of a useful article." Assuming the stripes and chevrons would have been copyrightable on their own, they are separable from the cheerleading uniforms and maintain copyright protection even as part of the useful article.

Though this may appear to be a broad holding, the majority limited it in two important ways. First, it emphasized that "the only feature of the cheerleading uniform eligible for copyright protection is the two-dimensional work of art fixed in the tangible medium of the uniform." Thus, even if Varsity Brands can keep other designers from using their stripe pattern, they cannot prohibit anyone from manufacturing a uniform "of identical shape, cut and dimensions." Second, it pointed out that it was not answering the ultimate question of whether the stripes and chevrons were actually copyrightable, leaving for another day the question of whether they were sufficiently original to warrant protection (and largely ignoring the fact that the standard for copyrightability, unlike for patentability, is quite lenient).

Justice Ginsburg concurred in the judgment, but for different reasons. In her view, there was no need to undertake a separability analysis here, because the designs at issue in the case "are not designs of useful articles. Instead, the designs are themselves copyrightable pictorial or graphic works reproduced on useful articles" (something she proved by appending Varsity's copyright application to her opinion). Because the owner of a copyright in a preexisting pictorial, graphic, or sculptural work may exclude a would-be infringer from reproducing that work on a useful article, Varsity should prevail whether or not the stripes and chevrons are separable from the rest of the cheerleading uniform. Varsity had the exclusive right to reproduce its copyrighted pictorial designs on useful articles, including cheerleading uniforms, and that takes care of the case.

Justice Breyer, joined by Kennedy, dissented. In his view, even applying the majority's test, the designs at issue cannot in fact be perceived as two- or three- dimensional works separate from the useful article, because if you remove the design and place it on paper, you just end up with a picture of a cheerleading uniform—in other words, a replica of the useful article. "A picture of the relevant design features, whether separately ‘perceived' on paper or in the imagination, is a picture of, and thereby ‘replicate[s],' the underlying useful article of which they are a part." Accordingly, Breyer concluded that the design features in this case are not capable of existing independently of the utilitarian aspects of the article (or if viewed truly separately, and not in the context of the shape of the uniform, would be obviously unoriginal). Undergirding Justice Breyer's analysis was an acute concern for the practical impact of the majority's contrary holding. If what amounts to a picture of a useful article is separable because it can be perceived as an independent two-dimensional work, then it's hard to imagine any industrial design not being entitled to copyright protection. "What design features could not be imaginatively reproduced on a painter's canvas," Breyer pondered, pointing to Marcel Duchamp's "readymades" series of sculptures in support. Accordingly, while Breyer did not necessarily reject the majority's test for separateness, he proposed a more skeptical answer. "Looking at all five of Varsity's pictures, I do not see how one could conceptualize the design features in a way that does not picture, not just artistic designs, but dresses as well." While Varsity could have gotten a design patent for its designs if they qualified for such protection, it should not be entitled to a much more protective (and easily obtained) copyright.

Turning from designers to debtors, in Czyzewski v. Jevic Holding Corp. (15-649), the Court sent a message that the priority rules for creditors is at the heart of the bankruptcy system. It held that bankruptcy courts cannot approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of the affected creditors.

The Court opened with a primer on the bankruptcy system. Under a Chapter 11 bankruptcy filing, the debtor and creditors try to work out a distribution of assets (in lieu of simply liquidating the estate and distributing it to creditors). One of the options available to the bankruptcy court in a Chapter 11 case is a "structured dismissal," in which the court dismisses the bankruptcy petition, but approves some distributions to creditors. Section 349(b) allows a court to depart from the normal rules for dismissal—which simply aim to restore the status quo before the petition was filed—"for cause." Ordinarily, of course, in a bankruptcy case the court will distribute assets according to a priority system: secured creditors are paid first, then special classes of creditors, and then general unsecured creditors. In a Chapter 11 case, the court isn't required to follow this priority system, but it can't normally confirm a plan over the objection of creditors who would be disadvantaged by the plan.

In Czyzewski, the question was whether a court could confirm a "structured dismissal" that included a deal that departed from the usual priority system over the objection of the disadvantaged creditors. When Jevic Holding Corporation, a trucking company, declared bankruptcy, two lawsuits resulted. One lawsuit involved a claim by former Jevic truck drivers that their rights under the "WARN Act" were violated because they were fired without the required 60 day statutory notice period. They obtained a multi-million dollar judgment against Jevic. The other lawsuit was brought by Jevic's unsecured creditors against two companies that had participated in a leveraged buy-out of Jevic before Jevic declared bankruptcy. That lawsuit brought fraudulent conveyance claims against the leveraged buy-out companies. The lawsuit with the fraudulent conveyance claims eventually settled, with one of the companies that participated in the leveraged buy-out agreeing to put $2 million into a fund to pay the unsecured creditors' legal fees and administrative costs, and $1.7 million into a trust that could eventually result in some payment for the unsecured creditors. Under the agreement, however, the Jevic truck drivers would not get a dime. The Bankruptcy Court approved the settlement distribution scheme, even though the unsecured creditors would be paid ahead of the truck drivers, whose multi-million dollar judgment entitled them to priority. The Third Circuit affirmed.

In a 6-2 decision authored by Justice Breyer, the Supreme Court reversed. After concluding that the petitioners had standing, Breyer turned to the heart of the case: Can a structured dismissal fail to follow ordinary priority rules without the consent of the affected creditors? In a word, "no."

The priority system is at the core of the Bankruptcy Code. As a result, Justice Breyer said the Court would not find that Congress intended to depart from that priority system through structured dismissals without some kind of affirmative declaration that it intended to do so. Breyer saw nothing in the statute that indicated Congress had this intent. To hold otherwise, Breyer maintained, would undercut protections given by Congress to certain classes of creditors, change the bargaining power of certain classes of creditors, increase the risk of collusion between different creditor classes, and potentially make settlement more difficult to achieve.

Justice Thomas, joined by Justice Alito, would have dismissed the writ as improvidently granted because the petitioners briefed a different issue than they presented in their cert petition. The cert petition presented the question whether "a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme," but after the Court granted cert on that question the petitioners recast the question to ask "whether a Chapter 11 case may be terminated by a ‘structured dismissal' that distributes estate property in violation of the Bankruptcy Court's priority scheme," a question Justice Thomas argued was "narrower—and different—than the one on which we granted certiorari." Rather than reward petitioners' "bait-and-switch," Justice Thomas would have DIG'd the case and waited for another opportunity to resolve the reformulated question upon full briefing and after more circuits have had the chance to weigh in.

That does it for last week's opinions. In addition to the Eighth Amendment decision handed down this morning, which we'll summarize for you tout de suite, the Court granted cert in two new cases:

US Bank National Association v. Village of Lakeridge (15-1509) asks what standard of review (de novo or clearly erroneous) should be used to determine whether a creditor qualifies as an "insider" for purposes of assessing confirmation of Chapter 11 reorganization plans under the Bankruptcy Code; and

Leidos, Inc. v. Indiana Public Retirement System (No. 16-581) asks whether Item 303 of SEC Regulation S-K, which requires companies to disclose things that "are reasonably likely to result in" a meaningful increase or decrease in liquidity, creates a duty to disclose that is actionable under Section 10(b) of the Securities Exchange Act even though the disclosure would not be necessary to ensure that other statements are not misleading.

Finally, the Court asked the SG to weigh in on the issues raised by Snyder v. Doe (No. 16-768), which asks whether the retroactive application of a state sex-offender registry imposes a "punishment" in violation of the ex post facto clause.

That's all for now. Stay tuned for our summary of Moore v. Texas and whatever else the Court has in store this week.