Supreme Court Update: Lexmark v. Static Control Components (12-873); United States v. Quality Stores, Inc. (12-1408) and Order List

March 31, 2014 Supreme Court Update

Greetings, Court fans!

This Update covers two of the Court's three decisions from last week, a good week for toner and tax aficionados: Lexmark v. Static Control Components (12-873), on who can maintain an action for false advertising under the Lanham Act; and United States v. Quality Stores, Inc. (12-1408), on whether severance payments made to employees terminated against their will are taxable "wages" under the Federal Insurance Contributions Act ("FICA").

At issue in Lexmark v. Static Control Components (12-873) was "the appropriate analytical framework for determining a party's standing to maintain an action for false advertising under the Lanham Act." Lexmark, a company that manufactures and sells laser printers, as well as toner cartridges specially designed for those printers, sought to stifle competition from "remanufacturers," companies who refurbish used Lexmark toner cartridges and sell them at lower prices, by installing in certain "prebate cartridges" a microchip that would disable the cartridge after it ran out of toner unless Lexmark replaced the chip. Static Control Components ("SCC"), the leading supplier of the components necessary to remanufacture Lexmark cartridges, developed a microchip that could mimic the Lexmark chip, so that remanufacturers could continue refurbishing and reselling even the prebate cartridges. When Lexmark sued SCC for copyright infringement, SCC counterclaimed, alleging that Lexmark violated the Lanham Act by falsely informing remanufacturing companies that it was illegal to sell refurbished prebate cartridges using SCC's chips.

The District Court dismissed the counterclaim, holding that SCC lacked "prudential standing" to bring suit under the Lanham Act. It applied a multifactor balancing test derived from the Supreme Court's decision in Associated Gen. Contractors of Cal. v. Carpenters (1983). The Sixth Circuit reversed. It observed that the Circuits were split on the proper test for determining standing under the Lanham Act, along three lines. The Third, Fifth, Eighth, and Eleventh Circuits used the same multifactor test employed by the District Court; the Seventh, Ninth, and Tenth Circuits used a categorical test whereby only an actual competitor has standing to sue; and the Second Circuit had adopted a "reasonable interest approach," under which a plaintiff had standing under the Lanham Act if it had a reasonable interest in being protected from false advertising and a reasonable basis for believing its interest would be damaged by false advertising. The Sixth Circuit adopted the Second Circuit's test and found that SCC satisfied it.

Writing for a unanimous court, Justice Scalia found fault with each of the circuit court tests, but nevertheless affirmed the judgment. Fundamentally, the Court held, the issue should not be regarded as one of standing (let alone "prudential standing," a misnomer in Scalia's view), but rather one of statutory construction—to wit, "whether [SCC] has a cause of action under the statute." This is an important clarification, as it means the inquiry does not involve subject-matter jurisdiction, but rather whether the elements of the cause of action are adequately pleaded. The Lanham Act authorizes suit by "any person who believes that he or she is likely to be damaged" by a defendant's false advertising. The Court narrowed that scope by imposing two additional requirements: a party may only bring a private right of action if (1) its interests "fall within the zone of interests protected by the law invoked" and (2) its "injuries are proximately caused by violations of the statute." Under this standard, a plaintiff need not necessarily be a direct competitor of the defendant to bring suit, but it must have an interest that the Lanham Act was designed to protect and which was harmed by the defendant's false advertising. Applying this test, the Court determined that SCC came within the class of plaintiffs that Congress authorized to sue under §1125(a). Its alleged injuries (lost sales and damage to its reputation) are precisely the sorts of interests that the Lanham Act protects and it plausibly alleged that those injuries were proximately caused by Lexmark's false statements. Thus, even though SCC is not a direct competitor of Lexmark, it could maintain a private cause of action under the Lanham Act.

The unanimous Lexmark decision may be substantively uncontroversial, but it is stylistically notable: It is the latest in a series of unanimous opinions wherein Justice Scalia has employed captioned headings, which is quite standard in brief-writing and scholarship, but still a relative unicorn in the United States Reports, where opinions almost always proceed ". . . II.C . . . III.A . . ." Scalia appears to be mindful of how radical this innovation is. Though he has used captions in all four of his unanimous opinions this term, he refrained in Burrage v. United States (12-7515), likely because Justice Alito declined to join one subsection of the opinion. That's news you can use, folks.

It was one step forward, two steps back for the Sixth Circuit last week, as the affirmance in Lexmark was tempered by a unanimous reversal in United States v. Quality Stores, Inc. (12-1408), summarized below, as well as in United States v. Castleman (12-1371), which we'll get to you shortly.

Quality Stores, Inc., an agricultural-specialty retailer, entered bankruptcy proceedings in 2001. Before and after the filing of its bankruptcy petition, Quality Stores terminated thousands of its employees and paid them severance payments. These severance payments varied based on job seniority and time served. Quality Stores reported the severance payments as wages on the W-2 forms for its employees, paid the employer's required share of FICA taxes, and withheld the employees' share of FICA taxes. Later, Quality Stores filed for a FICA refund for about 1,850 former employees, requesting over $1 million in reimbursement from the Internal Revenue Service ("IRS"). The IRS neither allowed nor denied the claim.

Quality Stores initiated a proceeding in bankruptcy court to obtain the refund. The bankruptcy court granted summary judgment in Quality Stores' favor, and the district court and the Sixth Circuit affirmed, concluding that severance payments are not "wages" under FICA. The Supreme Court agreed to review the case to resolve a circuit split. The Court reversed the Sixth Circuit in a unanimous opinion authored by Justice Kennedy (with Justice Kagan taking no part).

The Court began its analysis by looking at the definition of "wages" under FICA. Section 3121(a) of FICA defines "wages" broadly as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." The Court deferred to "common sense" to find that severance payments are "remuneration" and that the employees receive them "for employment." The Court also pointed to a "lengthy list" of exemptions as reinforcement for the broad nature of this definition. And, as additional support for the notion that severance payments count as "wages," the Court noted that FICA exempts from taxable wages severance payments for disability—an exemption that would be "unnecessary were severance payments in general not within FICA's definition of ‘wages.'" The Court rejected Quality Store's contention that Section 3402(o) of the Internal Revenue Code regarding income tax withholding should limit the meaning of "wages" for FICA purposes. Looking to the regulatory background of Section 3402(o) and finding that the meaning of "wages" for withholding and FICA purposes should be consistent, the Court held that the section "does not narrow the term ‘wages' under FICA to exempt all severance payments."

Also last week, the Court granted cert in Jennings v. Stephens (13-7211), which asks: "Did the Fifth Circuit err in holding that a federal habeas petitioner who prevailed in the district court on an ineffective assistance of counsel claim must file a separate notice of appeal and motion for a certificate of appealability to raise an allegation of deficient performance that the district court rejected even though the Fifth Circuit acquired jurisdiction over the entire claim as a result of the respondent's appeal?"

Finally, the Court asked for the Solicitor General's views on cert petitions in two cases:

Tibble v. Edison International (13-550), which asks: (1) "Notwithstanding the ongoing nature of ERISA's fiduciary duties, does the statute of limitations under 29 U.S.C. §1113(1) immunize 401(k) plan fiduciaries for retaining imprudent investments that continue to cause the plan losses if the funds were first included in the plan more than six years ago?" and (2) Does the deferential standard of review that Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) adopted in actions challenging denials of benefits "apply to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants?"

Moores v. Hildes (13-791), which asks: "May a plaintiff state a claim under Section 11 of the Securities Act of 1933, which provides for strict liability ‘on account of' defective registration statements, where he made an irrevocable investment decision to acquire his securities before a registration statement covering the issuance of those securities existed?"

We'll be back soon with the remaining decision from last week, and any news and action from this week.

Kim, Jenny & Tadhg

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