Supreme Court Update: Lawson v. FMR LLC (12-3), Law v. Siegel (12-5196) and Order List

March 6, 2014 Supreme Court Update

Greetings, Court fans!

The Court has been busy again this week with five new opinions and five new cert grants so far. This Update covers the cert grants and two of the opinions, Lawson v. FMR LLC (12-3), holding that the whistleblower protections of the Sarbanes-Oxley Act extend to the employees of contractors and subcontractors of public companies; and Law v. Siegel (12-5196), applying § 522 of the Bankruptcy Code to the tale of one – or was it two? – Lili Lins.

First, the opinions. The Sarbanes-Oxley Act of 2002 provides that "No [public] company …, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity]." 18 U.S.C. § 1514A. Since its enactment, a fierce debate has raged over whether §1514A protects not only the employees of public companies, but also the employees of the (non-public) contractors and subcontractors of those companies. In Lawson v. FMR LLC (12-3), the Court endorsed the broader application of the Act.

Plaintiffs Jackie Lawson and Jonathan Zang were ideal plaintiffs for those advocating the importance of extending the Act's protections to contractors' employees. Both worked for FMR, a privately held company that provides services to the Fidelity family of mutual funds. The mutual funds are public companies under the Act, but per common industry practice, the funds themselves have no employees; all work is contracted out to investment advisers like FMR. Lawson and Zang filed separate complaints alleging that they suffered retaliation after raising certain accounting and reporting concerns. FMR moved to dismiss, arguing that neither plaintiff had a claim for relief because § 1514A only protects the employees of public companies and FMR was not a public company. The District Court ruled against FMR, but the First Circuit reversed.

The Supreme Court reversed right back, in an opinion authored by Justice Ginsburg. The Chief and Justices Breyer and Kagan joined the opinion in full, while Justices Scalia and Thomas joined "in principal part" (more on that later). Starting with the text, the Act provides, in relevant part, that "no … contractor … may discharge … an employee." The Court found that the ordinary meaning of "an employee" in this provision is the contractor's own employee. Contractors are not ordinarily positioned to take adverse actions against the employees of the companies with whom they contract. Nor are they positioned to provide the statutory remedies, which include reinstatement and backpay. The Court rejected FMR's argument that Congress included contractors solely to prevent public companies from hiring "ax-wielding specialists" (a la George Clooney's character in the movie Up in the Air) to retaliate against whistleblowers. There was no reason to think that public companies could insulate themselves from liability by hiring ax-wielders, or that ax-wielding was the real-world problem that prompted Congress to add contractors to the list of covered actors. The real real-world problem, in Justice Ginsburg view, was the fall-out from the Enron scandal, when it emerged that fear of retaliation had deterred employees of Enron's contractors, including accounting and law firms, from reporting suspected fraud.

The Court also rejected FMR's arguments that Congress addressed the role of accountants and lawyers exclusively in other provisions of the statute, which require such professionals to report misconduct. If anything, those provisions suggest that Congress would have wanted to protect outside professionals from retaliation by their employers for complying with the Act's reporting requirements. Similarly, even though other statutes govern the mutual fund industry, nothing in those statutes provides whistleblower protection. Given that virtually all mutual funds are structured so that their business is conducted by outside investment advisers, the Court's reading was necessary to protect the only individuals who would have first-hand knowledge of fraud at a mutual fund. The Court also dismissed FMR's and the dissent's concerns that its reading of the statute would extend protections to the personal employees of officers and employees of public companies. The issue was likely more theoretical than real, as "[f]ew housekeepers or gardeners . . . are likely to come upon and comprehend evidence of their employer's complicity in fraud." Finally, Justice Ginsburg suggested that FMR's and the dissent's concerns about opening the floodgate to complaints that have nothing to do with investor-related activity could be addressed by certain limiting principles – for example, that the Act protects contractor employees only to the extent that their whistleblowing relates to the contractor fulfilling its role as a contractor for the public company – in the future. For now, though, the Court did not need to determine the bounds of § 1514A because the plaintiffs sought only a "mainstream application" of the provision's protections.

Justice Scalia, joined by Justice Thomas, concurred "in principal part" and in the judgment. As you might have guessed, Scalia wrote separately to emphasize that he did "not endorse … the Court's occasional excursions beyond the interpretative terra firma of text and context, into the swamps of legislative history." Scalia also did not agree with the suggestion that the Act might only protect contractor employees insofar as their whistleblowing related to their employer's work for a public company: "Although that ‘limiting principle' may be appealing from a policy standpoint, it has no basis whatsoever in the statute's text." Without a clear majority of the Court for or against the limiting principle, we suspect we'll see more litigation over it in the near future.

Justice Sotomayor took the pen in dissent, joined by Justices Kennedy and Alito. The dissenters criticized the majority for failing to recognize that §1514A is "deeply ambiguous." The provision does not speak primarily to contractors, but to public companies and then the different types of representatives that companies hire to carry out their business, including contractors. And while Congress did not add the words "of a public company" after "an employee," nor did it use the phrase "their own employees." Given the ambiguity of the text, the Court should have looked to the statute's titles. The relevant subsection is titled "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud," while the heading of §1514A itself is "[w]histleblower protection for employees of publicly traded companies." And Sarbanes-Oxley as a whole was focused on public companies. In the dissenters' view, the majority had too quickly dismissed the possibility that Congress had only sought to address the problem of axe-wielding consulting firms. Most egregiously, in the dissenters' view, the majority's interpretation "transforms §1514A into a sweeping source of litigation that Congress could not have intended," extending federal whistleblower protections to "a nanny [who] is discharged after expressing a concern to his employer [who happens to work for a public company] that the employer's teenage son may be participating in some Internet fraud," as well to the employees of any private business that happens to have an ongoing contract with a public company. Because the dissent found §1514A to be ambiguous, it reached a question that the majority did not: whether a recent ruling by the Department of Labor's Administrative Review Board, interpreting §1514A to extend to contractors' employees, was entitled to deference. The dissent concluded that it was not – for reasons involving too much administrative arcana to detail here, but which will be of interest to devotees of Chevron – and further, that it should not be followed because it was unpersuasive.

We turn now to curious tale of "Lili Lin's lien" The question in Law v. Siegel (12-5196) was whether a bankruptcy court may order that assets exempt from a bankruptcy estate may be used to pay administrative expenses incurred as a result of the debtor's misconduct, notwithstanding an express provision to the contrary at § 522 of the Bankruptcy Code. The Court might have answered this question with a simple "No. See § 522," but the extent of the debtor's deception in this matter warranted a few additional pages.

The debtor was Stephen Law, who filed for Chapter 7 bankruptcy in 2004 and attempted to shield all of the equity in his house from his creditors. First, he declared that $75,000 of the home's value was exempt from the bankruptcy estate under California's homestead exemption. He also reported that the house was subject to a voluntary lien in favor of "Lin's Mortgage & Associates." (The combined value of the homestead exemption and the voluntary lien meant that there was no remaining equity in the house for Law's other creditors.) Sensing something fishy, the bankruptcy Trustee, Alfred H. Siegel, initiated an adversary proceeding alleging that the lien was fraudulent. In response, one Lili Lin of Artesia, California, came forward and stipulated that she was an acquaintance of Law's but had never loaned him any money (let alone secured a lien on his house), despite his repeated attempts to involve her in various sham transactions. That settled the matter, or so it seemed until a second Lili Lin emerged claiming to be the actual beneficiary of the disputed deed of trust. As Justice Scalia reports, "[o]ver the next five years, this ‘Lili Lin' managed—despite supposedly living in China and speaking no English—to engage in extensive and costly litigation, including several appeals, contesting the avoidance of the deed of trust and Siegel's subsequent sale of the house." Ultimately, the Bankruptcy Court entered an order concluding that "no person named Lili Lin ever made a loan to [Law] in exchange for the disputed deed of trust." Rather, Lili Lin and her lien were lies leveled by Law to elude his lenders and limit the loss of his living quarters. The court was livid. Finding that Siegel had incurred more than $500,000 in attorney's fees uncovering Law's fraud, the Bankruptcy Court granted Siegel's motion to "surcharge" the entirety of Law's legitimate $75,000 homestead exemption to offset some of these expenses. The Ninth Circuit affirmed based on prior circuit precedent allowing a bankruptcy court to "equitably surcharge debtor's statutory exemptions" in exceptional circumstances, including "when a debtor engages in inequitable or fraudulent conduct."

The Supreme Court reversed, holding in essence that, while the Ninth Circuit may allow for "equitable surcharges," the Bankruptcy Code itself does not. In a breezy, unanimous opinion (decided less than two months after argument), Justice Scalia noted that, while §105(a) of the Bankruptcy Code allows a bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Code, "it is hornbook law that §105(a) does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code." After all, a court cannot "carry out the provisions" of the Code "by taking actions that the Code prohibits." (In this way, Justice Scalia distinguished the Court's decision in Marrama v. Citizens Bank (2007), which, he said, merely suggests that §105(a) might allow a bankruptcy court to "dispense with futile procedural niceties in order to reach more expeditiously an end result required by the Code.") Because §522 specifically allowed Law to claim a homestead exemption and specifically provides that exempt property "is not liable for payment of any administrative expense," and because "the attorney's fees Siegel incurred in defeating the ‘Lili Lin' lien were indubitably an administrative expense," the Bankruptcy Court's "equitable surcharge" violated the express terms of the Bankruptcy Code.

The Court rejected Siegel's primary argument (seconded by the United States as amicus curiae) that what the Ninth Circuit described as an "equitable surcharge" was really just an exercise of the Bankruptcy Court's equitable power to deny the homestead exemption in the first place. The procedural history of the case showed that the exemption was already final (because no one timely opposed it) before the Bankruptcy Court imposed the surcharge. But even assuming the Bankruptcy Court had the equitable power to revisit the exemption, it had no authority to grant or withhold exemptions based on extra-statutory considerations. As Justice Scalia noted, §522 itself contains exceptions and limitations to the exemptions a debtor may take, including some that relate to misconduct. "The Code's meticulous—not to say mind-numbingly detailed—enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions."

The Court acknowledged that its ruling "forces Siegel to shoulder a heavy financial burden resulting from Law's egregious misconduct," but emphasized that "it is not for the courts to alter the balance struck by" §522 itself. Moreover, nothing in the decision would preclude Siegel from seeking sanctions for bad-faith litigation conduct. Unfortunately for Siegel, though, we've heard Law is bankrupt.

Now, as promised, here are the five cases the Court added this week to next Term's docket:

Integrity Staffing Solutions v. Busk (13-433), on whether time spent by warehouse workers in security screenings is compensable under the Fair Labor Standards Act, as amended by the Portal-to-Portal Act.

Omnicare, Inc. v. Laborers Dist. Council (13-435), which asks: for purposes of a claim under Section 11 of the Securities Act of 1933, may a plaintiff plead that a statement of opinion was "untrue" merely by alleging that the opinion itself was objectively wrong, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker's actual opinion was different from the one expressed?

Warger v. Shauers (13-517), on whether Federal Rule of Evidence 606(b) permits a party moving for a new trial based on juror dishonesty during voir dire to introduce juror testimony about statements made during deliberations that tend to show the alleged dishonesty.

NC Bd. of Dental Examiners v. FTC (13-534), regarding whether "for purposes of the state-action exemption from federal antitrust law, an official state regulatory board created by state law may properly be treated as a ‘private' actor simply because, pursuant to state law, a majority of the board's members are also market participants who are elected to their official positions by other market participants."

Holt v. Hobbs (13-6827), which asks: "Whether the Arkansas Department of Correction's grooming policy violates the Religious Land Use and Institutionalized Persons Act of 2000, 42 U.S.C. §2000cc et seq., to the extent that it prohibits petitioner from growing a one-half-inch beard in accordance with his religious beliefs."

Finally, the Court asked for the SG's views in Florida v. Georgia (142, Orig.), a matter of original jurisdiction in which Florida "seeks an equitable apportionment of the waters of the [Apalachicola-Chattahoochee-Flint River] Basin and appropriate injunctive relief against Georgia to sustain an adequate flow of fresh water into the Apalachicola Region."

We'll be back soon with the rest of this week's opinions.

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