Supreme Court Update: Halo Electronics v. Pulse Electronics (14-1513), Kirtsaeng v. John Wiley & Sons, Inc. (15-375), United Health Services v. United States ex rel. Escobar (15-7), Puerto Rico v. Franklin Calif. Tax-Free Trust (15-233) and United States v. Bryant (15-240)

June 19, 2016 Supreme Court Update

Greetings, Court Fans!

With just two weeks to go before the end of June, the pace of decisions is increasing, and keeping us increasingly busy. We're going to get you almost caught up to speed tonight, with summaries of five of the six decisions handed down last week: Halo Electronics v. Pulse Electronics (14-1513), holding that judges have broad discretion to award enhanced damages for patent infringement; Kirtsaeng v. John Wiley & Sons, Inc. (15-375), clarifying the standard for attorneys' fee awards in copyright cases; United Health Services v. United States ex rel. Escobar (15-7), on the theory of "implied false certification" liability under the False Claims Act; Puerto Rico v. Franklin Calif. Tax-Free Trust (15-233), holding that the beleaguered Commonwealth's attempts to restructure its debts are preempted by the Bankruptcy Act; and United States v. Bryant (15-240), holding that uncounseled tribal-court convictions for domestic violence can be used as predicate offenses in a prosecution for "felony domestic assault in Indian country by a habitual offender."

First up, in Halo Electronics v. Pulse Electronics (14-1513), the Court addressed the Federal Circuit's test for determining when enhanced damages should be awarded for patent infringement under § 284 of the Patent Act. Section 284 provides that, in a case of infringement, courts "may increase the damages up to three times the amount found or assessed." The statute itself provides no guidance on when courts should increase damages or what factors courts should consider in making that determination. In 2007, the Federal Circuit adopted a test—known as the "Seagate test" after the case in which it was articulated—for determining whether enhanced damages are appropriate. Under Seagate, a plaintiff seeking enhanced damages was required to show by clear and convincing evidence (1) "that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent" and (2) that the risk of infringement "was either known or so obvious that is should have been known to the accused infringer." In subsequent cases, the Federal Circuit adopted a "trifurcated" standard of appellate review of Seagate determinations: The appellate court would review the objective prong of the Seagate test de novo and the subjective prong for substantial evidence. Then, the ultimate decision whether to award enhanced damages would be reviewed for abuse of discretion.

In Halo, a consolidated appeal, two plaintiffs who had prevailed in their infringement actions but had been denied enhanced damages challenged the Seagate test. In a unanimous decision, the Supreme Court held that the test unduly restricted the discretion § 284 confers on district judges to award enhanced damages.

Writing for the Court, Chief Justice Roberts observed that, historically, awards of enhanced damages under the Patent Act "are not to be meted out in a typical infringement case, but are instead designed as a ‘punitive' or ‘vindictive sanction for egregious infringement behavior." However, while the Court acknowledged that "[t]he Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases," it concluded that the test "is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts." In particular, the Court faulted the Seagate test for requiring a showing (by clear and convincing evidence) of "objective recklessness" in every case before a district court can even consider enhanced damages. That standard would exclude from punishment "many of the most culpable offenders," who subjectively know that they are infringing a patent solely in order to steal the patentee's business, provided that it would not be clear to reasonable observer that the infringed patent is valid. The Court reached a similar conclusion in Octane Fitness v. ICON Health & Fitness, a 2014 decision construing § 285 of the Patent Act, which permits a district court to award attorneys' fees to a prevailing party in "exceptional cases." In both Halo and Octane, the Court admonished the Federal Circuit for crafting a test that required a showing (by clear and convincing evidence) of objective recklessness in addition to subjective willfulness or bad faith. Instead, district courts have discretion under the Patent Act "to punish the full range of culpable behavior" after taking into account "the particular circumstances of each case," and they may exercise that discretion using the preponderance of the evidence standard. The Court similarly rejected the Federal Circuit's "tripartite framework for appellate review" of enhanced-damages determinations. Because § 284 entrusts the enhanced-damages decision to the discretion of district judges, their determinations should be reviewed solely for abuse of that discretion.

Though the Court squarely rejected the "inelastic constraints of the Seagate test," it took care to emphasize that enhanced damages "should generally be reserved for egregious cases typified by willful misconduct." The respondents and several amici had argued that allowing district judges unfettered discretion to award up to treble damages in infringement cases would impede innovation and embolden patent "trolls," who hold patents primarily for the purpose of enforcing them against alleged infringers. The Court acknowledged these policy concerns, but held that they did not "justify imposing an artificial construct such as the Seagate test on the discretion conferred under § 284." Instead, district courts "are to be guided by the sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act," which show that the award of enhanced damages should be limited to "egregious cases of misconduct beyond typical infringement." In a separate concurrence, Justice Breyer (joined by Justices Kennedy and Alito) underscored this point, arguing that enhanced damages should be awarded sparingly, lest the threat of incurring outsized damages frustrate the goal of patent law, to promote the progress of science and useful arts.

The Court took up the question of judicial discretion over monetary awards in a slightly different context in Kirtsaeng v. John Wiley & Sons, Inc. (15-375). This time, the Court clarified the standard for attorneys' fee awards in copyright cases and, in the process, swept aside numerous competing formulations in the various circuits.

Kirtsaeng, an enterprising student from Thailand studying in the U.S., realized he could purchase textbooks used in American classrooms in Thailand at a steep discount and then resell them to American students for a tidy profit, thereby underwriting his Cornell education. The publisher of these texts, who had the exclusive right to distribute them in the U.S., sued for copyright infringement, but Kirtsaeng invoked the "first-sale doctrine," which enables the lawful owner of a book or other work to resell or dispose of it as he wishes. In a 2013 decision, the Court agreed that Kirtsaeng was protected by the first-sale doctrine even though he purchased the books abroad. Then Kirtsaeng sensed another financial opportunity, asking the District Court on remand to award him $2 million in fees because § 505 of the Copyright Act provides that a court "may … award a reasonable attorney's fee to the prevailing party." The District Court and Second Circuit dashed those hopes, denying fees because the publisher had advanced an objectively reasonable position, even if it was ultimately rejected by a divided Supreme Court in the 2013 decision.

In a unanimous decision, the Supreme Court breathed new life into Kirtsaeng's quest. Writing for the Court, Justice Kagan agreed with the lower courts that the objective reasonableness of the losing party's position is the most important factor a district judge should consider in determining whether to award fees under § 505. Making this factor paramount would discourage lawsuits and defenses that hinder the exercise of valid copyrights and would result in fair and easy administration. In contrast, the factor Kirtsaeng emphasized—whether the lawsuit resolved an important and close legal question—would not meaningfully promote important litigation and could lead to inequitable results. After all, in a close and important case, no one knows which side will prevail, and the student here could just as easily found himself footing the publisher's fees under his favored factor. Plus, it's not always known in the moment whether the legal questions in a case will be important ones.

But while the Court agreed that objective reasonableness is "an important factor," it held that the lower courts erred in effectively making it "the controlling one" in § 505 fee applications. Fee awards may be appropriate even when the losing party pressed an objectively reasonable position. For example, a party pressing a reasonable legal position may have engaged in unreasonable litigation conduct. Therefore, Justice Kagan wrote, "[a]lthough objective reasonableness carries significant weight, courts must view all the circumstances of a case on their own terms, in light of the Copyright Act's essential goals." Because Second Circuit precedent appeared to give objective reasonableness nearly dispositive weight, the Court vacated the denial of the student's fee motion and remanded for the District Court to consider the motion anew in light of the Court's opinion. Justice Kagan was careful to note that the Court expressed no opinion on whether fees should be awarded under the circumstances of this case.

We've dealt with the Patent Act and the Copyright Act. Next up, it's the False Claims Act, subject of the Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar (15-7). The whistle-blower statute has been the subject of significant litigation recently; this time around, the Court addressed the theory of "implied false certification" liability under the FCA, which treats a payment request sent to the Government as a claimant's implied certification of compliance with relevant statutes, regulations, or contract requirements that are material conditions of payment and treats a failure to disclose a violation as a misrepresentation rendering the claim false or fraudulent.

Respondents, the "relators" in the qui tam suit below, are the parents of a teenage Medicaid beneficiary who received counseling services at a mental-health facility owned by a subsidiary of Universal Health Services. The teenager was diagnosed as bipolar and prescribed medication, to which she had an adverse reaction and died. Relators alleged that the mental health care providers who had treated their daughter were almost all unlicensed and unqualified. In their qui tam action, they claimed that by submitting reimbursement claims to the Government, Universal had impliedly certified its compliance with all material statutes, regulations, and contract requirements and failed to disclose serious violations of regulations regarding employee qualifications and licensing. The state Medicaid program would not have paid the claims had it known about the violations, the relators alleged. The District Court dismissed the complaint, and the First Circuit reversed. The Supreme Court granted certiorari to resolve a circuit split on whether and how to use the theory of implied false certification to impose liability under the FCA.

The Court affirmed the First Circuit, unanimously holding that the implied-certification theory is a legitimate basis for FCA liability. Writing for the Court, Justice Thomas began by comparing FCA liability with common law theories of fraud. Under the common law, telling a half-truth while omitting material facts can constitute fraud. Likewise, Universal Health Services committed fraud by seeking reimbursement using codes that indicated that it provided specific kinds of therapy and provider numbers without disclosing that its providers lacked necessary qualifications and licensing. Accordingly, the Court held that "the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."

Having established the test for implied-certification liability, the Court went on to address what happens when the Government expressly designates a contractual, statutory, or regulatory provision as a condition of payment. The Court found that liability under the implied-certification theory does not require that the Government make such a designation. Conversely, a party that violates an express condition of payment does not always also incur liability under the FCA. The real question is whether the violation is material. The Court remanded the case for further consideration of that question, but with the following admonition: "[T]he False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."

Next up, the Court dealt the beleaguered Commonwealth of Puerto Rico another blow in Puerto Rico v. Franklin California Tax-Free Trust (15-233), holding that the plain language of the Bankruptcy Code prevented the Commonwealth from giving its municipalities the power to restructure their debts.

Puerto Rico's three government-owned utility companies are in trouble. Combined, they owe more than $20 billion dollars. Although Puerto Rico's government bank had previously been keeping the utility companies afloat, the bank (like a number of other institutions in Puerto Rico) is now in the middle of its own fiscal crisis. In response, Puerto Rico passed a recovery act, which allowed its public utilities to restructure their debt. Unsurprisingly, a number of investment funds sued to enjoin the act. The plaintiffs alleged that the Federal Bankruptcy Code prohibited Puerto Rico from creating its own municipal bankruptcy scheme. The federal district court and First Circuit agreed.

The Supreme Court affirmed in a 5-2 decision, with Justice Alito recused. Writing for the majority, Justice Thomas, found that Chapter 9 of the Bankruptcy Code bars Puerto Rico from enacting its own municipal bankruptcy scheme. Justice Thomas's analysis turned on the plain meaning of two sections of Chapter 9. First, Section 109 requires States to authorize their municipalities to seek Chapter 9 relief before those municipalities can be regarded as debtors eligible to file for Chapter 9 protection. Second, Section 903 expressly preempts states from enacting their own municipal bankruptcy laws. Puerto Rico is defined as a "State" under the Bankruptcy Code; however, the Code explicitly excludes Puerto Rico "for the purpose of defining who may be a debtor under chapter 9." Justice Thomas therefore concluded that under the plain language of the Code, Puerto Rico could not authorize its municipalities to seek Chapter 9 protection, but also could not create its own municipal bankruptcy scheme. This leaves Puerto Rico in a significant bind: its municipalities can't seek Chapter 9 protection, but Puerto Rico can't create its own laws to allow its municipalities to restructure their debt.

The dissenters, Justices Sotomayor and Ginsburg, therefore focused largely on the enormous practical problems the Court's decision would cause. Without a way to restructure its utility companies' debt, Puerto Rico will be literally unable to keep the lights on. Not the Court's problem, Justice Thomas said: "[O]ur constitutional structure does not permit this Court to rewrite the statute that Congress has enacted."

Sovereignty has been a recurring theme this year, and was again at issue in our last case, United States v. Bryant (15-420), where the Court considered whether prior convictions in a tribal court can be used as predicates in a later federal prosecution, even if they were obtained without the assistance of counsel for the defendant.

In response to the high incidence of domestic violence against Native American women, Congress enacted 18 U.S.C. § 117(a), which makes it a federal crime for a person to "commi[t] a domestic assault within . . . Indian country" if the person has at least two prior final convictions for domestic violence rendered "in Federal, State, or Indian tribal court proceedings." Michael Bryant seemed to fit the bill. A member of the Northern Cheyenne Tribe in Montana, Bryant had a record of over 100 tribal-court convictions, including at least five for domestic assault. However, Bryant was indigent and not represented by counsel for any of these convictions. Accordingly, when he was federally charged as a habitual offender under § 117(a), he moved to dismiss the indictment, arguing that the Sixth Amendment prohibited his earlier, uncounseled tribal-court misdemeanor convictions from being used to satisfy § 117(a)'s predicate-offense element. The District Court denied his motion and Bryant pled guilty, but the Ninth Circuit reversed, holding that the earlier convictions could not be used because they would have violated the Sixth Amendment had they been rendered in state or federal court.

The Supreme Court unanimously reversed. Writing for the Court, Justice Ginsburg noted that Bryant's conviction under § 117(a) punished his most recent acts of domestic assault, for which he received counsel, not the prior crimes that were prosecuted in tribal court. Under existing precedent, his prior convictions could be used in his federal case provided that they were valid when entered. Bryant's prior uncounseled tribal court convictions were valid when entered because they complied with the Indian Civil Rights Act (ICRA), which only requires the appointment of counsel where a defendant is subject to a prison term of greater than one year. (The Sixth Amendment, meanwhile, does not apply to tribal courts in the first place.) Justice Ginsburg also rejected Bryant's alternative argument, that the Due Process Clause of the Fifth Amendment prohibits uncounseled tribal-court judgments from being used as predicates. The ICRA itself guarantees "due process of law," and permits a prisoner to challenge the fairness of tribal-court proceedings in a federal habeas corpus action. Because Bryant's convictions complied with the ICRA, the use of those convictions in a later federal prosecution does not violate due process.

Justice Ginsburg's majority opinion was a straightforward application of existing precedent. For that reason, Justice Thomas concurred, but he filed a separate opinion challenging the constitutional basis for each strand of precedent supporting the Court's decision. First, even outside the tribal-court context, Justice Thomas insisted that the Sixth Amendment does not prohibit the use of prior, uncounseled convictions as predicates for a new offense in a new (counseled) proceeding. "All that the Sixth Amendment requires in a criminal prosecution is that the accused enjoy the ‘assistance of counsel' in that proceeding." Thomas then demonstrated the inherent contradiction between the second and third strands of precedent—namely the notions that Indian tribes have inherent sovereignty to prosecute crimes without complying with Constitutional guarantees and yet the federal government can also create and prosecute crimes in Indian Country because Congress is endowed with an "all-encompassing" power over all aspects of tribal sovereignty. In Justice Thomas's view, neither of these assumptions is correct. Because Indian tribes have different origins, histories, and treaties with Congress, it makes no sense to assume that all of them "retained the sovereign prerogative of prosecuting their own members." Meanwhile, though the Constitution grants Congress the power to "regulate Commerce . . . with Indian Tribes," nowhere does it confer on Congress an all-encompassing power to oversee tribal sovereignty, something the Court has justified on overtly paternalistic grounds. "It is time," Justice Thomas concluded, "that the Court reconsider these precedents."

That'll do it for now, but we'll be back before you know it. There are still thirteen decisions remaining as we head into the penultimate week of the term, so you can expect to hear from us again before long.