Supreme Court Update: RJR Nabisco, Inc. v. European Community (15-138), Encino Motorcars, LLC v. Navarro (14-415), Kingdomware Technologies, Inc. v. United States (14-916) and Cuozzo Speed Technologies, LLC v. Lee (15-446)
Greetings, Court Fans!
Having cleared some near-blockbusters off the table on Friday (everything's relative this term), we've still got an eight-case backlog to get through before the final decision day of OT15 on Monday. Since we've got an even split of civil and criminal cases in the queue, we're going to break them up accordingly. Read on for summaries of our civil backlog: RJR Nabisco, Inc. v. European Community (15-138), concerning the extraterritorial application of the Racketeer Influenced and Corrupt Organizations Act (RICO); Encino Motorcars, LLC v. Navarro (14-415), concerning the classification of automobile service advisors under the Fair Labor Standards Act (FLSA); Kingdomware Technologies, Inc. v. United States (14–916), concerning mandatory set-asides for veteran-owned businesses; and Cuozzo Speed Technologies, LLC v. Lee (15-446), concerning "inter partes review" under the Patent Act. Our crim-law fans will have to wait just a bit longer for summaries of the Court's recent criminal cases.
First up, in RJR Nabisco, Inc. v. European Community (15-138), the Court offered a bifurcated answer to the question whether RICO applies extraterritorially to events occurring and injuries suffered outside the United States. In a fractured decision, the Court held that certain of RICO's substantive predicates cover extraterritorial conduct, but that the RICO's private right of action does not overcome the presumption against extraterritorially, so a plaintiff bringing a civil RICO claim must plead and prove a domestic injury.
RICO, as our mob friends know, is a criminal statute with a private civil right of action. Originally enacted to target organized crime, RICO created four new criminal offenses involving the activities of organized criminal groups in relation to an "enterprise" and a civil cause of action for "[a]ny person injured in his business or property by reason of a violation" of those prohibitions. The statute as a whole focuses on "racketeering activity," which it defines to encompass dozens of state and federal offenses, which are known as "predicates." A predicate offense implicates RICO when it is part of a "pattern of racketeering activity," a series of related predicates that together demonstrate the existence or threat of continued criminal activity. RICO § 1962 focuses in particular on the ways in which racketeering activity can be used to infiltrate or control an "enterprise." It makes it unlawful to invest income derived from a pattern of racketeering activity in an enterprise (1962(a)), to acquire or maintain an interest in an enterprise through a pattern of racketeering activity (1962(b)), and to conduct the affairs of an enterprise through a pattern of racketeering activity (1962(c)). Under RICO § 1962(d), it is also a crime to conspire to violate any of § 1962's other prohibitions. While violations are punishable by criminal penalties, RICO also creates a private civil cause of action that allows "any person injured in his business or property by reason of a violation of section 1962" to sue in federal district court and recover treble damages, costs and attorney's fees.
In this case, the European Community (EC) and 26 of its member states brought a civil RICO action in the Eastern District of New York alleging that RJR Nabisco and some related entities participated in a global money-laundering scheme in association with various organized crime groups. The alleged scheme involved Columbian and Russian drug traffickmoners smuggling narcotics into Europe and selling them for euros that—through transactions involving black-market money brokers, cigarette importers, and wholesalers—were used to pay for large shipments of RJR cigarettes into Europe. The EC's complaint alleged a pattern of racketeering activity consisting of numerous acts of money laundering, material support for foreign terrorist organizations, mail fraud, wire fraud, and violations of the Travel Act, and that RJR violated each of § 1962's prohibitions by using income derived from its racketeering activity to invest in and operate the "RJR money-Laundering Enterprise," acquiring and maintaining control of the enterprise through its pattern of racketeering activity, operating the enterprise through its pattern of racketeering activity, and conspiring with other participants in the scheme. RJR convinced the District Court to dismiss the complaint on the ground that RICO does not apply to racketeering activity occurring outside U.S. territory or to foreign enterprises. The Second Circuit reversed, however, concluding that Congress had clearly manifested an intent to apply some of the RICO predicates alleged (including money laundering and material support for terrorists) to extraterritorially and that it therefore intended RICO to apply extraterritorially to the extent that violations of these statutes serve as the basis for RICO liability. After RJR moved for rehearing, the Second Circuit further held that RICO does not require a domestic injury, either.
The Supreme Court affirmed in part and reversed in part in one of the more fractured decisions of the term. Writing for the Court, Justice Alito began with the "basic premise of our legal system that, in general, United States law governs domestically but does not rule the world." This presumption against extraterritoriality can be rebutted, however, where a statute gives a clear, affirmative indication that it is meant to apply extraterritorially. Alito concluded that the presumption had been rebutted with respect to certain applications of RICO's substantive prohibitions in § 1962. Because RICO's definition of racketeering activity includes a number of predicates that, by their terms, plainly apply to at least some foreign conduct (including the prohibitions against assassination of government officials, hostage taking, and killing a United States national "while such national is outside the United States"), it is clear that Congress intended § 1962 to apply to foreign racketeering activity, provided that the predicates alleged in a particular case themselves apply extraterritorially. "We therefore conclude that . . . [a] violation of § 1962 may be based on a pattern of racketeering that includes predicate offenses committed abroad, provided that each of those offenses violates a predicate statute that is itself extraterritorial." Here, because the EC's complaint alleged a pattern of racketeering activity that included money laundering and material support of foreign terrorist organizations—predicate statutes that expressly apply extraterritorially—and because the other predicate acts (including mail and wire fraud) were alleged to have been committed in the United States, the Court agreed with the Second Circuit that the allegations in the Complaint did not involve an impermissibly extraterritorial application of RICO. This part of Justice Alito's opinion was joined by the Chief and Justices Kennedy, Thomas, Ginsburg, Breyer, and Kagan.
Proceeding to write only for Roberts, Kennedy, and Thomas, Justice Alito went on to address RICO's private right of action. Here, he disagreed with the Second Circuit and concluded that the presumption against extraterritoriality had not been overcome with respect to the private right of action and thus a private RICO plaintiff must allege and prove a domestic injury. Although the private right of action does not actually regulate conduct, the majority was concerned that allowing recovery for foreign injuries in a civil RICO action would create a danger of international friction that militates against recognizing foreign-injury claims absent a clear congressional command. Section 1964(c), which creates RICO's private right of action, contains no clear indication that Congress intended to provide a private right of action for injuries suffered outside of the united States. Because § 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury, and because the EC stipulated below that it waived damages claims for domestic injuries, the Court ordered that the EC's remaining damages claims, relying on injuries suffered abroad, be dismissed.
Justice Ginsburg concurred in the portion of Alito's opinion finding that RICO could apply extraterritorially but, joined by Justices Breyer and Kagan, dissented from the part holding that a private plaintiff must allege and prove a domestic injury. To the dissenters, it made little sense to impose a domestic-injury requirement when the statute clearly provides a private right of action for violations of § 1962 and the Court just got through holding that a § 1962 violation can be predicated on extraterritorial conduct. In Ginsburg's view, the Court had created a double standard: "U.S. defendants commercially engaged here and abroad would be answerable civilly to U.S. victims of their criminal activities, but foreign parties similarly situated would have no RICO remedy. ‘Sauce for the goose' should indeed serve the gander as well."
Putting all the pieces, together, the Court held (7-0) that RICO can extend to extraterritorial conduct where each of the alleged offenses that were committed abroad violates a predicate statute that is itself constitutional, but held (4-3) that a private right of action under RICO must allege a domestic injury. Justice Sotomayor was recused, having participated in the case at the Second Circuit. That adds up to a big win for RJR Nabisco, after 16 years of litigation. And it's a win for the Government too, which urged the Court to hold as it did because it wants to be able to prosecute criminal violations of RICO based on foreign conduct without having to deal with the "danger of international friction" that would accompany private recovery for foreign injuries in a civil RICO action.
Next up, in Encino Motorcars, LLC v. Navarro (15-415) the Court failed to resolve a circuit split on the issue of whether automobile service advisors are considered "salesmen" for the purposes of an FLSA overtime wage exemption.
Five automobile service advisors sued Encino, their employer, in federal court, alleging that it was required by the FLSA to pay them overtime wages. Encino moved to dismiss, arguing that the FLSA overtime provisions do not apply to them because they are covered by a statutory exemption for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles … at a covered dealership." The District Court granted the motion but the Ninth Circuit reversed in part. Using Chevron deference, it adopted the Department of Labor's (DOL) definition of "salesman, partsman, or mechanic," which does not include service advisors, and held that respondents were not excluded from the overtime wage requirement. The Ninth Circuit recognized, however, that other Courts of Appeals had defined "salesman, partsman, or mechanic" to include service advisors. The Supreme Court granted certiorari to resolve this basic circuit split.
Justice Kennedy wrote for the majority, which included the Chief and Justices Ginsburg, Breyer, Sotomayor, and Kagan. The key issue for the Court was what amount of deference to give to the DOL's interpretation of "salesman, partsman, or mechanic." This issue was complicated by the fact that after decades of interpreting the exemption to apply to service advisors, the DOL changed its position in 2011 but "gave little explanation" for its decision to do so. Indeed, the final rule that the DOL issued in 2011, in which it read service advisors out of the exemption, began as a proposed rule to codify its interpretation that the exemption did apply to service advisors. Given the DOL's failure to give "good reasons" for its flip-flop, the Court reached the "unavoidable conclusion" that the 2011 regulation "was issued without the reasoned explanation that was required in light of the [DOL]'s change in position and the significant interests involved." As a result, the Court did not extend Chevron deference to the DOL's interpretation of the FLSA and remanded the case to the Ninth Circuit to "interpret the statute in the first instance."
In a short concurrence, Justice Ginsburg, joined by Justice Sotomayor, agreed with the majority that the DOL failed to give "good reasons" for its new interpretation but wrote separately to stress that nothing in Justice Kennedy's opinion disturbed the "well-established" principle that an agency's change in position does not require a "heightened standard" of arbitrary-and-capricious review. Rather, an agency must simply "display awareness that it is changing position" and show that there are sound reasons for the new policy. In other words, it is "[u]nexplained inconsistency" that undermines an agency's interpretation, not a failure to explain why a new policy is "better" than an old one.
Justice Thomas dissented, joined by Justice Alito. They disagreed with the majority's decision to "punt on the issue before it" by remanding the case to the Ninth Circuit. The dissenters did not believe it necessary "wade into the murky waters of Chevron deference" to decide whether the Ninth Circuit's reading of the statute was correct because the text of the FLSA is clear. According to them, service advisors are "salesman" because they sell automotive repair services. (This, in the dissenters' opinion, was consistent with the "ordinary meaning" of "salesman.") Using some complicated logic, they also argued that the FLSA exemption's "structure" (which "contains three nouns … and two gerunds," all of which are connected "by the disjunctive ‘or'") supports their interpretation, as does the role of a service advisor in a car dealership. Finally, they dismissed the service advisors' "made up canon" that courts must narrowly construe the FLSA exemptions and urged the Ninth Circuit not to accept this principle on remand.
Agency deference, vel non, also featured in our next two cases. First, in Kingdomware Technologies, Inc. v. United States (14–916), the Court held that, provided two conditions are met, the Veterans Administration must extend preferential treatment to veteran-owned companies when it awards federal contracts, concluding that Congress had eliminated all agency discretion in this matter.
Kingdomware was a veteran-owned small business that unsuccessfully vied for a federal contract to provide emergency-notification services for VA hospitals. Kingdomware challenged the VA's decision to award the contract to a non-veteran-owned company, arguing in a bid protest that the VA violated a provision in the Veterans Benefits, Health Care, and Information Technology Act of 2006 ("the Act") called the "Rule of Two." The rule requires the federal government to award contracts to veteran-owned small businesses when (1) there is a "reasonable expectation" that two or more such businesses will bid for the contract (2) at "a fair and reasonable price that offers best value to the United States." Kingdomware claimed that the VA violated the Rule of Two because it failed to check whether at least two veteran-owned small businesses could perform the notification services at a reasonable price. After the Government Accountability Office (GAO) issued a nonbinding determination that the VA violated the rule, Kingdomware filed suit in the Court of Federal Claims, seeking declaratory and injunctive relief. The Court of Federal Claims granted summary judgment in favor of the Government and the Federal Circuit affirmed, holding that the Rule of Two only applies when the VA awards contracts to meet its statutory "goal for each fiscal year for participation in [VA] contracts … by small business concerns owned and controlled by veterans." Once the VA meets its annual goal, according to the Federal Circuit, it can award contracts in any manner it chooses.
In a unanimous decision authored by Justice Thomas, the Court first addressed the issue of jurisdiction. By the time the case reached the Court, the notification services that Kingdomware bid for had already been completed. While a case would normally be moot in these circumstances, the Court accepted jurisdiction under the exception in the mootness doctrine for a controversy "that is capable of repletion, yet evading review." Because the short-term nature of the contract and the probability that Kingdomware would bid on similar contracts in the future, the Court asserted jurisdiction "because the same legal issue in this case is likely to recur in future controversies between the same parties in circumstances where the period of contract performance is too short to allow full judicial review before performance is complete."
On the merits, the Court reversed the decision of the Federal Circuit. The Act, according to the Court, "does not allow the [VA] to evade the Rule of Two on the ground that it has already met its contracting goals." Indeed, the Act states that the VA "shall award contracts" to veteran-owned businesses using the Rule of Two. That language, Justice Thomas concluded, makes the requirement "not discretionary." While the Act specifies two exceptions where the VA need not apply the Rule of Two, neither exception applied to the bidding process that Kingdomware challenged. The Court rejected the Federal Circuit's conclusion that the VA is only required to use the Rule of Two "for purposes of meeting [its] goals" relating to fiscal year participation in VA contracts. That "prefatory clause," Thomas wrote, "has no bearing on whether [the Rule of Two] is mandatory or discretionary." The Court declined to consider a second argument put forth by the Government, that the Rule of Two did not apply to "orders" under pre-existing contracts (and that the award that Kingdomware failed to win was an "order") because the Government failed to raise the argument before the lower courts. The Court dismissed a third argument, that the rule did not apply to "orders" under any circumstances, because it ignored the "current practices" whereby "orders" are awarded in the same manner as contracts. Finally, the Court refused to extend Chevron deference to the VA's interpretation of the Act because "the statute is unambiguous." The Court remanded the case for further proceedings consistent with its opinion.
As Kingdomware and countless other cases illustrate, the Supreme Court and the Federal Circuit do not always see eye to eye. But in Cuozzo Speed Technologies, LLC v. Lee (15-446), the two courts were in sync on issues of importance to patent holders.
Even after the Patent Office has approved a patent, anyone may seek administrative review of the patent's claims by filing a petition with the Office showing a reasonable likelihood that the challenger would prevail. The Office's acceptance of the petition triggers what is known as "inter partes review," a process created by Congress in 2011 with trial-like procedures before the Patent Trial and Appeal Board, leading to a final decision subject to judicial review. In this case, Cuozzo obtained a patent for a speedometer that, in conjunction with a GPS system, would signal when the driver has exceeded the posted speed limit; Garmin, however, thought that at least one of the patent's claims was obvious in light of three earlier patents, and the Board agreed to review that claim along with two other claims thought by the Board to rise or fall with the one specifically referenced by Garmin. The Board ultimately concluded that the three claims were obvious and canceled them, and Cuozzo appealed, losing before a closely divided Federal Circuit and now again at the Supreme Court.
Cuozzo raised two challenges. First, that the Board should never have initiated inter partes review for two of the three canceled claims, because as to those two, Garmin's petition did not satisfy the statutory threshold standard that the petitioner plead "with particularity." Second, that the Board applied the wrong standard to its interpretation of the patent claims. The Supreme Court rejected both in an opinion by Justice Breyer, which was 8-0 on the second issue but 6-2 on the first.
On the first issue, Justice Breyer was joined by the Chief and Justices Kennedy, Thomas, Ginsburg, and Kagan. Congress had provided that the decision by the Patent Office "whether to institute an inter partes review under this section shall be final and nonappealable." All of the Justices agreed that this threshold decision on a petition cannot be challenged in court before the agency's final decision, but the majority also held that it cannot be second-guessed even on review of the final decision. (Well, not normally, but we'll get to that.) Justice Breyer wrote that Congress placed much importance on the ability of the Patent Office to revisit earlier patent grants, and its decisions should not be unwound because of technical challenges to the preliminary decision whether even to initiate the proceedings. This conclusion is consistent with other statutes in the patent area; plus, the Administrative Procedure Act already bars interlocutory review of agency decisions, so Cuozzo's narrow construction of "final and nonappealable" would render that language superfluous. That said, Justice Breyer was careful to limit the Court's holding to the types of routine decisions made by the Board when applying the statutory requirements that a petition for inter partes review must be pleaded with particularity and that it triggers review only if there is a reasonable likelihood of success. The Court did not bar due process or other constitutional challenges, or challenges that the agency is acting in some fashion entirely outside of its statutory limits (such as initiating inter partes review to invalidate a patent claim for "indefiniteness"), or an argument that some other, unrelated statutory scheme is violated (although no example was given).
On the second issue, the Court unanimously upheld the Patent Office's regulation requiring the agency, when conducting inter partes review, to give a patent claim "its broadest reasonable construction in light of the specification of the patent in which it appears." This is the same broad construction that a patent examiner uses when first examining a patent application, but Cuozzo unsuccessfully argued that a review of that approval should apply the same standard that a district court would apply when a patent's validity is challenged in litigation, i.e., giving the patent claims their "ordinary meaning as understood by a person of skill in the art." Justice Breyer cited the Chevron and Mead doctrines to hold that because Congress had not specified the standards for inter partes review, and had authorized the Patent Office to issue regulations governing that review, the agency may fill in the "gap," and he rejected the argument that the rule-making contemplated by Congress was only for procedural, not substantive, regulations. Cuozzo insisted that the trial-like procedures used in inter partes review meant that Congress intended that review to be an alternative to district court litigation, and the two should have consistent standards; but Justice Breyer rejected that argument, pointing to numerous differences in burden of proof, who has standing, etc., and said that inter partes review is not a surrogate for district court litigation and is instead a specialized agency proceeding with a different purpose, to have the agency ensure that its grants of a patent monopoly remain within their proper boundaries. For that reason, not only can the Patent Office decide by regulation on a standard for these agency proceedings, but the one it chose is a reasonable one within the meaning of Chevron and Mead. The broad standard encourages inventors to draft their claims narrowly, and it's a standard long used by the Patent Office in many agency proceedings. Cuozzo complained of procedural unfairness because of an inability to amend the claim once the inter partes review invalidates the claim under the broad standard, but Justice Breyer rebutted the claim of unfairness, pointing to procedures that allow amendment (and noting that Cuozzo does not complain that the Board's decision, which disallowed amendment as futile, was arbitrary and capricious). Justice Breyer did recognize that different standards in inter partes review and district court litigation could produce inconsistent results, but he assigned that possibility to Congress's regulatory design, which provides for the different tracks. He also said that the argument that the district court standard is the better one for policy reasons was for the agency, and not a court, to decide.
Justice Thomas concurred, but cast doubt (as he has before) on the validity of Chevron doctrine's deference to administrative gap-filling. He concurred because he felt that Chevron was not needed in this instance to uphold the agency's preferred rule under the traditional standards of review employed in the Administrative Procedure Act.
Patent law can create strange bedfellows, and Justice Alito, joined by Justice Sotomayor, dissented from the holding to disallow judicial review, following a final agency decision, of the initial decision to commence inter partes review. (They fully joined the Court's opinion upholding the regulation specifying the standard for that review.) Justice Alito relied on the strong presumption that Congress allows courts to enforce its directives to federal agencies unless Congress clearly cuts off that review. Congress's directive that the decision whether to institute inter partes review is "nonappealable" is not the same as saying "not subject to judicial review." The former term only prohibits an appeal of the initial decision by itself, and does not clearly bar judicial review when the final agency decision on the merits is appealed to court. Justice Alito recognized that, under his interpretation, the decision not to initiate inter partes review will never be reviewed in court, but he thought Congress could have intended this, and the patent can still be challenged in court litigation. He also said that judicial review would still have a high bar for success.With that, we're up to speed on the Court's civil cases (with one more, concerning Texas's restrictive abortion laws, due on Monday). Stay tuned for our next installment, where we'll catch up on the criminal docket.