Supreme Court Update: Salman v. United States (15-628), Shaw v. United States (15-5991), Samsung Electronics v. Apple (15-777), State Farm Fire & Casualty Co. v. U.S. ex rel. Rigsby (5-513) and Order List
Greetings, Court Fans!
The Eight continue to churn out unanimous decisions to start the Term. This Update will cover four of them—Salman v. United States (No. 15-628), clarifying the "personal benefit" element of insider-trading law; Shaw v. United States (No. 15-5991), clarifying that the bank fraud statute applies even when a defendant seeks only to deplete a particular depositor's account; Samsung Electronics v. Apple (15-777), offering not so much clarity on the measure of damages for design-patent infringement; and State Farm Fire & Casualty Co. v. U.S. ex rel. Rigsby (15-513), addressing the seal requirement for relators in False Claims Act cases. That amounts to alotta letters, so let's not waste any more…
In Salman v. United States (No. 15-628), the Court delivered a big win to prosecutors nervous that the lower courts were making it more difficult to prove insider trading. Under Section 10(b) of the Securities Exchange Act of 1934, individuals with inside knowledge are prohibited from trading on the basis of that knowledge and from "tipping" inside information to others. "Tippees," in turn, are prohibited from trading based on inside information received from tippers. In Dirks v. SEC (1983), the Court held that a tippee can be liable for trading on inside information if he knows the tipper disclosed the information for a "personal benefit," which can include "mak[ing] a gift of confidential information to a trading relative or friend." For decades, prosecutors and courts interpreted Dirks broadly to permit liability whenever a tippee traded on insider information provided by a friend or relative. But in United States v. Newman (2d Cir. 2014), the Second Circuit—which, of course, encompasses Wall Street—put the brakes on, holding that in order to prove a personal benefit, prosecutors must show that the tipper and tippee had "a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature." The "mere fact" that the tipper and tippee are friends would not necessarily be enough—at least in the Second Circuit.
Many prosecutors were disappointed that the Supreme Court did not grant cert in Newman, but they found another vehicle in the case of Bassam Salman, who was convicted of insider trading in California based upon information obtained from a close friend, Michael Kara. The original source of the insider information was Michael's brother, Maher, an investment banker at Citigroup, who also happened to be married to Salman's sister. On appeal, Salman argued that the Ninth Circuit should follow Newman and reverse his conviction, because there was no evidence that Maher—the original source of the inside information—received anything of a "pecuniary or similarly valuable nature" in exchange for the information he provided to Michael, or that Salman knew of any such benefit. The Ninth Circuit disagreed in a decision written by senior S.D.N.Y. Judge Jed Rakoff, sitting by designation on a court not bound, as he normally is, by Second Circuit precedent. Sensing "tension" between the Second and Ninth Circuit on the issue of what constitutes a "personal benefit," the Supreme Court granted cert.
In a unanimous decision authored by Justice Alito, the Court affirmed the Ninth Circuit and partially overruled the Second Circuit's Newman decision. Characterizing the question presented as a "narrow issue," Justice Alito wrote that "Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative,' and that rule is sufficient to resolve the case at hand." Hearkening back to a question he posed at oral argument, Justice Alito noted that "Salman's counsel acknowledged [that] Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother." Under Dirks, a jury is permitted to infer that, when a tipper gives inside information to "a trading relative or friend," he intends to provide the equivalent of a cash gift. Accordingly, there is no meaningful distinction between an insider trading himself and then giving a cash gift to a relative or friend, and the insider simply disclosing the information to the friend or relative and allowing him to trade (and profit) on it. Directly addressing the Second Circuit's suggestion in Newman that the tipper must also receive something of a "pecuniary or similarly valuable nature," the Court agreed with the Ninth Circuit that this requirement is inconsistent with Dirks. After all, if the tipper had traded himself and then made a cash gift, there would be no requirement that he get some valuable return in exchange.
Although Salman affirmed the Ninth Circuit and overruled the Second Circuit's Newman decision in part, the decision was, as Alito himself stressed, quite "narrow." The Court did not reach the portion of Newman requiring prosecutors to prove that the defendants knew the information they traded on came from insiders or that they knew the insiders received a personal benefit in exchange for the tips, and it did not define what it means to be a "friend" under the Dirks test, another important issue in Newman. For more on where the law of insider trading stands now, check out this analysis from our white-collar defense colleagues, Rob Hoff and Ivana Greco.
The Government scored another victory in Shaw v. United States (No. 15-5991), where the Court held that the federal bank-fraud statute governs schemes to deprive a bank of money held in a customer's deposit account, even if the defendant does not specifically intend to deprive the bank itself of funds.
Lawrence Shaw obtained the account numbers of a Bank of America account belonging to a customer, Stanley Hsu, and used those numbers to transfer funds from Hsu's account to other accounts that Shaw controlled. He was convicted of violating the first clause of the bank-fraud statute, which prohibits "defraud[ing] a financial institution." On appeal, Shaw argued that the words "scheme to defraud a financial institution" require the government to prove that the defendant had "a specific intent not only to deceive, but also to cheat, a bank," and not "a non-bank third party" like Hsu. The Ninth Circuit wasn't having it, and neither was the Supreme Court.
In a unanimous opinion, Justice Breyer rejected Shaw's arguments that the bank-fraud statute does not cover schemes to deprive a bank of customer deposits. Contrary to Shaw's arguments, the bank did have property rights in Hsu's bank deposits; it was either the owner or the bailee of the funds and used them (along with other deposits) as a source of loans to help the bank earn profits. Accordingly, any scheme to obtain funds from a bank depositor's account is necessarily a scheme fraudulently to obtain property from a "financial institution," at least where the defendant knew that the bank held the deposits, the funds came from the deposit account, and the defendant misled the bank in order to obtain the funds. Breyer also rejected the arguments that the bank-fraud statute requires proof that the defendant knew of the bank's property interests in the account, acted with the purpose of harming the bank's property interests, and ultimately caused a financial loss to the bank. There is one sliver of hope for Shaw, however. The Court agreed with him (and the Government) that a bank-fraud scheme must be a scheme to deceive the bank and to deprive it of something of value. Shaw argued that the District Court's use of the disjunctive in its instructions permitted the jury to find him guilty if it found that "his scheme was one to deceive the bank but not to ‘deprive' it of anything of value." The Court remanded the case to the Ninth Circuit to determine whether the jury-instruction question was fairly presented to it and, if so, whether the instruction constituted harmful error.
That gives the Government a 3-0 start to the term, but perhaps the biggest winner of OT16 so far is Samsung Electronics, which won reversal of a $400 million jury award to Apple for infringement of certain design patents relating to smartphones. Section 289 of the Patent Act provides a damages remedy specific to design-patent infringement: a person who manufactures or sells "any article of manufacture to which [a patented] design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit." A jury found Samsung liable for infringing certain of Apple's design patents on its original iPhone, including the shape of the face and the grid of colorful icons on a black screen. The issue in Samsung Electronics v. Apple (No. 15-777) was the measure of damages applicable under Section 289. The Federal Circuit held that the entire phone containing the infringing designs is the relevant "article of manufacture" and therefore Samsung was required to pay Apple damages in the amount of all of its smart-phone profits, not just the profits specifically attributable to the infringing designs. The Supreme Court disagreed, but did not provide much guidance on the proper measure of damages.
In a unanimous opinion by Justice Sotomayor, the Court held "the term ‘article of manufacture' is broad enough to encompass both a product sold to a consumer as well as a component of that product." That the component may be integrated into a larger product "does not put it outside the category of articles of manufacture." Thus, the Court rejected as too narrow the Federal Circuit's conclusion that only the thing ultimately purchased by consumers can be the relevant "article of manufacture." But it did not actually resolve whether in this case the relevant article of manufacture is the complete smartphone (in which case Apple still would get all of Samsung's smartphone profits), or a particular smartphone component (in which case Apple would presumably get some smaller percentage of the profits). The Court did not even set forth any relevant factors to be considered in making that decision, instead leaving it entirely to the Federal Circuit on remand. So, while Apple's $400 million verdict has been tossed for now, it's clear that the final chapter of the litigation remains to be written. Unsatisfied? Our patent folks try to make more sense of the decision here.
Finally, in State Farm Fire & Casualty Co. v. United States ex rel Rigsby (15-513), the Court addressed the impact of a violation of the sealing requirement under the False Claims Act ("FCA"). The FCA was enacted to protect the Government from false or fraudulent payment claims. The statute is unique in that it allows a private party (called a "relator") to step into the shoes of the Government and pursue claims on its behalf. However, the FCA requires that the relator's complaint be sealed for at least 60 days, during which time the Government can investigate and determine whether it wishes to intervene in the case. Here, relators' counsel—the notorious plaintiff's lawyer Dickie Scruggs, who was eventually indicted for attempting to bribe a judge in an unrelated matter—leaked the sealed complaint to various news outlets, which ran numerous stories about the alleged fraud but didn't disclose the existence of the complaint. By the time State Farm learned about the leak, Scruggs and his colleagues were long gone, having been replaced by new counsel. (Scruggs withdrew after being indicted and his colleagues were later removed by the District Court for making improper payments to the relators in this case. A sordid picture indeed!) State Farm argued that the violation of the sealing requirement caused tremendous reputational harm to it and required automatic dismissal of the case, but the District Court disagreed. The District Court weighed a number of factors—actual harm to the government, severity of the violations, and evidence of bad faith—and decided not to dismiss.
Once again unanimous, the Court affirmed, this time led by Justice Kennedy. While the sealing requirement is stated in mandatory language, that does not mean dismissal is the only proper remedy for a violation of the requirement. Indeed, the FCA's language cuts against a finding that dismissal is automatic. First, the statute does not frame the sealing requirement as a condition of bringing suit. Second, in the other contexts, such as with the public disclosure bar or the first to file requirement, the FCA is very clear that dismissal is necessary. Given that the FCA is explicit about dismissal in other contexts, it is highly unlikely that Congress intended to require dismissal for violation of the sealing requirement, but did not say so. So, it is clear that dismissal is not automatically required for a violation of the sealing requirement. But what is the appropriate remedy? There, the Court once again declined to provide clarity, except to say that the District Court didn't abuse its discretion by weighing the factors it identified and declining to dismiss. But the Court noted that dismissal could be an appropriate sanction in a given case and might even have been within the District Court's discretion here in light of Scruggs' "questionable conduct."
That gets us up to speed on recent opinions—all of which have been unanimous. But the Eight are not in lockstep on all issues. Yesterday the Court denied cert in Sireci v. Florida (No. 17-5247), a death-penalty challenge brought by a prisoner who has been on death row in Florida for forty years. Not for the first time, Justice Breyer dissented from the denial, reiterating his view that "the time has come for this Court to reconsider the constitutionality of the death penalty." Though he wrote alone in Sireci, Breyer was joined by Justices Ginsburg, Sotomayor, and Kagan last week in voting to stay the execution of another death-row inmate, Ronald Smith. The dichotomy is revealing. While only four votes are required to grant cert, five are needed to stay a lower-court decision, including one denying a stay of execution. In the absence of a "courtesy fifth" from one of the conservatives, Smith's execution went forward last Thursday. That the four more liberal justices would have stayed Smith's execution tends to show that there are enough to take up the question of the death penalty's continued constitutionality, but not enough to hold it unconstitutional. So Breyer will likely continue to dissent alone from orders denying review of this ultimate question.
Though the Court won't be taking up Sireci's case (or those of several other death-row inmates whose cert petitions were denied last week), it has granted review of five new cases since our last Update:
Honeycutt v. United States (No. 16-142) asks whether 21 U.S.C. § 853(a)(1) mandates joint and several liability among co-conspirators for forfeiture of the reasonably foreseeable proceeds of a drug conspiracy.
TC Heartland LLC v. Kraft Food Brands Group LLC (16-341) asks whether 28 U.S.C. 1400(B) is the sole and exclusive provision governing venue in patent infringement actions and is not to be supplemented by 28 U.S.C. 1391(c).
Lee v. United States (16-327) whether a defendant seeking to establish prejudice under Strickland v. Washington (1984) can show that it is reasonably probable that, but for counsel's errors, he would have rejected a plea deal and gone to trial, even in the face of strong evidence of guilt, where the defendant is a noncitizen with extended familial and business ties to the United States and the plea would result in mandatory and permanent deportation.
Finally, Turner v. United States (15-1503) and Overton v. United States (15-1504), which have been consolidated, posed various questions concerning the application of Brady v. Maryland (1963), but the Court's review will be limited to whether the petitioners' convictions must be set aside under Brady.
That's a wrap for today. As always, thanks for reading!