Supreme Court Update: Ransom v. FIA Card Services, N.A. (09-907), Mayo Foundation for Medical Education and Research v. United States (09-837), Madison County v. Oneida Indian Nation of New York (1072) and Order List

January 20, 2011 Supreme Court Update

Greetings, Court fans!

We're back to bring you three decisions, a flurry of cert grants, and one dissent from the denial of cert. The Court released additional decisions yesterday, which we will bring you shortly.

Justice Kagan penned her first opinion for the Court in Ransom v. FIA Card Services, N.A. (09-907), a rather bland, but nevertheless important, bankruptcy law case. In a Chapter 13 bankruptcy, the debtor (typically a higher income debtor) is permitted to discharge his debts by paying creditors a portion of his disposable monthly income for a specified time period in accordance with a court-approved payment plan. Under the Bankruptcy Abuse Prevention and Creditor Protection Act of 2005 ("BAPCPA"), a debtor's disposable income is defined as "current monthly income" less "amounts reasonably necessary to be expended" for, among other things, "maintenance or support." If a debtor has an income above the State's median income, for purposes of calculating disposable income, "[t]he debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the [IRS] for the area in which the debtor resides." The National Standards and Local Standards ("Standards") set forth standardized expense amounts for various basic necessities, including vehicle "ownership costs" ($471/month) and "operating costs" ($338/month). (Perhaps I should revisit taking the bus...) This standardized approach to routine expenses replaced a case-by-case approach based on the actual expenses of each debtor, which was believed to have led to inconsistent results among debtors.

At issue in Ransom was whether a debtor who owned a car outright, and therefore had no lease or loan costs, could nevertheless claim the $471/month deduction for vehicle "ownership costs." By an 8-1 vote, the Court held that he could not. The Court's analysis was simple. BAPCPA provides that the debtor's expenses are the "applicable" expenses from the Standards. If the debtor does not incur a particular category of expense, the expense is not "applicable" and therefore is not available to the debtor. Moreover, vehicle ownership expenses must be limited to lease/loan costs for two reasons. First, the IRS's explanatory guidelines for the Standards state that "ownership costs" are based on the five-year average of car financing costs nationwide. Second, monthly "operating costs" would capture all other relevant vehicle expenses, such as insurance, maintenance, and gas. Moreover, allowing a debtor to deduct the standard vehicle ownership cost set forth in the Standards when the debtor had no such expense would undermine the core purpose of BAPCPA – protecting creditors.

Only Justice Scalia disagreed. In his view, there was no basis to refer to the IRS explanatory guidelines because they were not expressly incorporated into BACPCA. And without reference to those guidelines, there was no basis to limit "ownership costs" to lease/loan expenses. Scalia chastised the majority for re-injecting an individualized actual cost based approach back into the disposable income calculation, which BACPCA had attempted to eliminate.

Next up, in Mayo Foundation for Medical Education and Research v. United States (09-837), the Court unanimously ruled (less Justice Kagan, who did not participate) that medical residents may properly be characterized as employees who are subject to the Federal Insurance Contributions Act ("FICA" as we all know and love it). FICA requires all employers and employees to pay taxes on "wages," which are broadly defined to include "all remuneration from employment." "Employment" is further broadly defined to include "any service . . . performed . . . by an employee for the person employing him," but excludes any "service performed in the employ of a school, college or university . . . if such service is performed by a student who is enrolled and regularly attending classes at [the school]." For over half a century, the Treasury Department has interpreted this student exception to apply only where the student's work for the school is "as an incident to and for the purpose of pursuing a course of study" and applied a case-by-case approach to determining whether a particular student fell within the exception. Under this approach, the Treasury Department looked primary at whether the individual was primarily (by number of hours) working or studying. The Social Security Administration ("SSA") also applied a case-by-case approach under the Social Security Act's comparable student exception, but the SSA had nevertheless held that medical residents were uniformly not students. The Eighth Circuit found that the SSA's categorical exclusion of medical residents from student status was improper given that its regulations provided generally for a case-by-case analysis. In the wake of the Eighth Circuit's decision, the IRS received thousands of claims seeking FICA refunds on the ground that medical residents qualified for the student exception. This flood of claims prompted the Treasury Department to issue regulations clarifying "that an employee's service is ‘incident' to his studies only when ‘the educational aspect of the relationship . . . , as compared to the service aspect of the relationship, is predominate.'" The regulations further provided that "[t]he services of a full-time employee," which includes anyone working 40 hours or more per week (as well as others), cannot be considered incidental to studies (the "full-time employee exception"). Under this rule, medical residents do not qualify for the student exception given the number of hours they work seeing patients.

Mayo filed suit challenging the regulation and seeking a refund of FICA amounts it had withheld and paid on student stipends for medical residents. The district court granted summary judgment for Mayo, agreeing that the full-time employee rule was inconsistent with the language of the FICA and contrary to the court's understanding that the only requirement to qualify for the student exemption was that the educational aspect of the service predominate over the service aspect. The Eighth Circuit reversed, finding that the language of the FICA was ambiguous as to whether medical residents working full time qualified as students and that the Treasury Department's regulation was a permissible interpretation of the statute.

In an opinion by Chief Justice Roberts, the Court affirmed. Since Congress did not define "student," the FICA was ambiguous as to whether it applied to medical residents. Therefore, under Chevron, the Court would defer to the Treasury Department's rule unless it was arbitrary and capricious. (The Court declined to apply a less deferential test that it had used previously when reviewing tax regulations, under which regulations were given less deference where they had not been consistent over time, were enacted years after the statute at issue, or were prompted because of an adverse judicial ruling. The Court found that applying Chevron deference – which does not consider inconsistency or timing of the regulations – to all agency regulations, including tax regulations, made the most sense.) Applying Chevron, the Court easily concluded that the Treasury Department's full-time employee rule was not arbitrary or capricious, but was instead a reasonable interpretation of the FICA and was more easily administered than a case-by-case analysis, which is what Mayo advocated. Moreover, it was not irrational to conclude that doctors who often spend more than 80 hours per week seeing patients are working within the meaning of FICA and not subject to the student exception.

Finally, in a short per curiam opinion, the Court reversed and remanded Madison County v. Oneida Indian Nation of New York (1072), which had raised the issue of whether tribal sovereign immunity from suit barred taxing authorities from using foreclosure procedings to collect property taxes. The remand was prompted by news that the Oneida Indian Nation, in October 2010, declared a waiver of its sovereign immunity for this purpose. The Court directed the Second Circuit to review the impact of this waiver in the first instance.

The Court also granted cert in the following cases:

Erica P. John Fund, Inc. v. Halliburton Co. (09-1403), which asks: (1) "Whether the Fifth Circuit correctly held . . . that plaintiffs in securities fraud actions must satisfy not only the requirements set forth in Basic to trigger a rebuttable presumption of fraud on the market, but must also establish loss causation at class certification by a preponderance of admissible evidence without merits discovery"; and (2) "Whether the Fifth Circuit improperly considered the merits of the underlying litigation . . . when it held that a plaintiff must establish loss causation to invoke the fraud-on the-market presumption even though reliance and loss causation are separate and distinct elements of security fraud actions and even though proof of loss causation is common to all class members."

United States v. Jicarilla Apache Nation (10-382), which presents this question for review: "Whether the attorney-client privilege entitles the United States to withhold from an Indian tribe confidential communications between the government and government attorneys implicating the administration of statutes pertaining to property held in trust for the tribe."

Nevada Commission on Ethics v. Carrigan (10-568), which asks whether the First Amendment subjects state restrictions on voting by elected officials to: (i) strict scrutiny, (ii) the balancing test of Pickering v. Board of Education (1968), for government-employee speech, or (iii) rational-basis review.

Sorrell v. IMS Health Inc. (10-779), which poses the following question: "Whether a law that restricts access to information in nonpublic prescription drug records and affords prescribers the right to consent before their identifying information in prescription drug records is sold or used in marketing runs afoul of the First Amendment."

McNeill v. United States (10-5258), which asks whether the plain meaning of the phrase "is prescribed by law," as used in the Armed Career Criminal Act to define a predicate "serious drug offense," requires a federal sentencing court to look to the maximum penalty prescribed by current state law for a drug offense at the time of the instant federal offense, regardless of whether the state has made that current sentencing law retroactive.

Lafler v. Cooper (10-209), which asks whether "a state habeas petitioner [is] entitled to relief where his counsel deficiently advises him to reject a favorable plea bargain but the defendant is later convicted and sentenced pursuant to a fair trial."

Missouri v. Frye (10-444) poses a related question to that raised in Lafler: whether "a defendant who validly pleads guilty can successfully assert a claim of ineffective assistance of counsel by alleging instead that, but for counsel's error in failing to communicate a plea offer, he would have pleaded guilty with more favorable terms."

The Court directed the parties in both Lafler and Frye to brief and argue an additional question: "What remedy, if any, should be provided for ineffective assistance of counsel during plea bargain negotiations if the defendant was later convicted and sentenced pursuant to constitutionally adequate procedures?"

Finally, Justice Thomas, joined in most part by Scalia, penned a dissent from denial of cert in Alderman v. United States (09-1555), a case implicating the constitutionality of the James Guelff and Chris McCurley Body Armor Act of 2002. That federal law makes it unlawful for a person to purchase, own, or possess body armor, defined as "any product sold or offered for sale, interstate or foreign commerce, as personal protective body covering intended to protect against gunfire." In the case at hand, the defendant was indicted under the statute for wearing a bulletproof vest that had been sold in interstate commerce. (The vest was manufactured in California and shipped to a distributor in Oregon, where the defendant purchased and wore it). The defendant entered a conditional guilty plea, then appealed on the ground that the Body Armor Act exceeded Congress' power under the Commerce Clause. In United States v. Lopez (1995), the Court identified three categories of activity that Congress's commerce power authorizes it to regulate: (1) the use of the channels of interstate commerce; (2) the instrumentalities of interstate commerce; and (3) "activities having a substantial relation to interstate commerce." Instead of analyzing the defendant's Commerce Clause challenge under the Lopez categories, the Ninth Circuit applied an earlier decision involving a firearm statute, Scarborough v. United States (1977), which held that evidence that a firearm had once traveled in interstate commerce satisfied a statutory requirement that there be a nexus between the possession of a firearm by a convicted felon and commerce, but which did not address the constitutionality of the statute itself. In the dissenters' view, the Ninth Circuit's application of Scarborough would permit Congress to regulate or ban any item that had ever crossed state lines, removing any limit on the commerce power. The dissenters would have granted cert and reaffirmed the framework established in Lopez for analyzing Commerce Clause questions.

We'll be back in your inbox soon with the decisions released yesterday and additional orders.

Kim & Jenny

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