Supreme Court Update: Utility Air Regulatory Group v. Environmental Protection Agency (12-1146), Halliburton Co. v. Erica P. John Fund, Inc. (13-317) and Riley v. California (13-132)

June 28, 2014 Supreme Court Update

Greetings once again, Court fans!

We're back with three biggies: Utility Air Regulatory Group v. Environmental Protection Agency (12-1146), where the Court grappled with the EPA's authority to regulate greenhouse gas emissions contributing to "global climate change"; Halliburton Co. v. Erica P. John Fund, Inc. (13-317), upholding plaintiffs' ability to invoke the "fraud on the market" presumption in securities fraud class actions, but giving defendants a chance to rebut the presumption at the class certification stage, and Riley v. California (13-132), where the Court brought us a win for privacy, holding that police must generally obtain a warrant before searching a cell phone seized from a person who has been arrested.

Ronald Reagan famously said that "trees cause more pollution than automobiles do." In Utility Air Regulatory Group v. Environmental Protection Agency (12-1146), the EPA faced the problem that "retail stores, offices, apartment buildings, shopping centers, schools, and churches" are all sources of air pollution, but regulating millions of sources of greenhouse gas would be impossible and likely beyond anything Congress had contemplated. Yet, the Clean Air Act imposed elaborate permit requirements on all stationary (non-vehicle) sources that could emit over 250 tons of "any air pollutant" (or 100 tons in some instances). The Supreme Court had already held in Massachusetts v. EPA (2007) that the EPA had the authority to regulate greenhouse gas emissions from motor vehicles, which the EPA later determined meant it also had to regulate the emissions from stationary sources. But the statutory thresholds (of 100 or 250 tons) for imposing permit requirements on stationary sources would cast too wide a net, as they were written with an eye toward conventional smokestack pollutants. If applied to greenhouse gases, they would have swept in virtually every mom-and-pop store, church and school. The EPA solved the problem with enforcement "discretion," issuing a Tailoring Rule to trigger the permit process only if a facility could produce over 100,000 tons of greenhouse gases a year.

A five justice majority found that this was unacceptable. Justice Scalia, joined by the Chief and Justices Kennedy, Thomas, and Alito, scolded the EPA because transforming the statutory threshold of 100 or 250 tons to 100,000 tons was not, in the Court's view, an exercise of enforcement discretion but the rewriting of a statute's plain terms. This did not mean, however, that your local church was now a polluter needing a permit; instead, it meant that Congress could not have intended "any air pollutant" in this part of the Clean Air Act to encompass greenhouse gases in the first place. But what about the 2007 decision that these gases are pollutants subject to EPA regulation for motor vehicles? Justice Scalia solved this problem by saying that the same term does not have to mean the same thing in different parts of a statute (despite what your law professor might have taught you) where context demands a different meaning and where the outcome would otherwise allow an agency to lay "claim to extravagant statutory power over the national economy" that Congress could not have intended. The Court thus concluded that EPA's interpretation of "any air pollutant" in this part of the Act was unreasonable under a Chevron analysis.

So why is the EPA treating this decision as a victory? Because most greenhouse gas pollution from stationary sources comes from major facilities already subject to the permit process because of other pollutants meeting the 100/250-ton threshold, and a different coalition of seven Justices held that these pollution sources (called "anyway" sources because they are regulated anyway) could be subject to the statutory requirement of BACT ("best available control technology") for greenhouse gases. In this clever way, the EPA is not expanding its reach to more facilities, but can more expansively regulate the facilities already within its grasp. Justice Scalia wrote this part of the Court's opinion as well, this time joined by the Chief and Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan. But Justices Thomas and Alito parted ways here from the other Justices, explaining that the standards for BACT in the permit process simply do not fit greenhouse gases and are plainly tailored toward traditional smokestack controls causing local (not global) pollution. In their view, the poor fit illustrated why Massachusetts v. EPA was wrongly decided and not even vehicles should be regulated under the Clean Air Act for their potential effects on global climate change. But Justice Scalia's opinion for the Court was willing, at least on this front, to give deference to the EPA's ability to manage this regulatory process for "anyway" sources of pollution.

Finally, Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan, dissented from the Court's threshold determination that the EPA could not subject all (and not just "anyway") stationary sources to the permit process solely because of their emissions of greenhouse gases. Justice Breyer agreed with the agency that "any air pollutant" had to encompass greenhouse gases in all parts of the Clean Air Act and so the Tailoring Rule was a legitimate regulatory tool to address a consequence not considered by Congress and not an impermissible rewriting of the statute.

Next, we begin with a quick primer on securities law to set the stage for Halliburton Co. v. Erica P. John Fund, Inc. (13-317). Section 10(b) of the Securities Exchange Act of 1934 prohibits material misstatements or omission in connection with the purchase or sale of a security. Section 10(b) did not create an express private cause of action, but the Court has long recognized an "implied" one. To prevail, a plaintiff must prove, among other essential elements, reliance on the misstatement. In Basic Inc. v. Levinson (1988), the Court recognized that it would be difficult for investors who traded in an impersonal market to provide direct proof of reliance, and that requiring direct proof would make it nearly impossible to certify a class under Rule 23(b)(3) because individual issues would overwhelm the common ones. The Court therefore held that so long as plaintiffs could show that the alleged misstatements were publicly known, that they were material, that the stock traded in an efficient market, and that the plaintiffs traded the stock in the relevant time period, they were entitled to a presumption of reliance, which defendants could rebut.

On Halliburton's first round before the Court, the district court had refused to certify a putative class action against Halliburton because the plaintiffs were unable to prove "loss causation," another essential element of a securities fraud claim, and the Fifth Circuit had affirmed. The Court reversed, holding that plaintiffs need not prove loss causation at the class certification stage. On remand, Halliburton argued that its evidence against loss causation also showed that none of the alleged misrepresentations had actually affected the price of the stock, and therefore the Basic presumption should not apply. Plaintiffs would have to prove reliance on an individual basis, destroying the commonality needed for class certification. This time – perhaps because they had been burnt by the Court before – the district court and Fifth Circuit ruled against Hallibuton, holding that Halliburton could make that argument at trial but not at the class certification stage.

They guessed wrong again. The Court reversed, with the Chief writing for a 6-member majority, and Justices Thomas, Scalia, and Alito concurring in the judgment. First, the Justices agreed to hear Halliburton's more ambitious argument that Basic should be overturned entirely. The Court quickly shot that argument down, however, seeing no "special justification" for overturning that long-settled precedent. The Court was unimpressed by Halliburton and amici's citation to studies challenging the premise that markets are efficient: Basic didn't say that the markets are perfectly efficient, just that market professionals generally consider most material public statements, thereby affecting market prices. The studies didn't refute that "modest premise." The Court was unmoved by arguments that by facilitating securities fraud class actions, Basic allowed plaintiffs to extort large settlements even on meritless claims, punishing innocent shareholders, and consumed a disproportionately large share of judicial resources. The Chief's response: take it up with Congress. The Court also batted away arguments that the Basic presumption was inconsistent with its recent class action jurisprudence, namely Wal-Mart Stores, Inc. v. Dukes (2011), which requires plaintiffs to actually prove—not simply plead—that their proposed class satisfies every requirement of Rule 23. The Court insisted that the Basic presumption did not relieve plaintiffs of the burden of proving reliance at the class action stage, as they must still prove the prerequisites for invoking the presumption.

Having failed to persuade the Court to overturn Basic altogether, Halliburton turned to Plan B: placing the burden on plaintiffs to prove price impact at the class certification stage to get the Basic presumption. The Court didn't bite, finding that this would effectively do away with most of the presumption. On to Plan C: Allowing defendants a chance to defeat the presumption at class certification. This the Court was willing to do. Defendants were already allowed to introduce evidence that the alleged misstatements had no price impact at the merits stage, and even at the class certification stage to show that the market for the stock was not efficient. The Court saw no reason to bar defendants from using the same evidence to directly rebut the Basic presumption. To "maintain the consistency of the presumption with the class certification requirements of Federal Rule of Civil Procedure 23," the Court held, "defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock."

Justice Ginsburg, joined by Justices Breyer and Sotomayor, penned a one-paragraph concurrence to indicate that she joined the Court's opinion with the "understanding" that it "should impose no heavy toll on securities-fraud plaintiffs with tenable claims."

Justice Thomas, with Justices Scalia and Alito, concurred in the judgment only. If it had been up to them, they would have overruled Basic entirely. Thomas viewed Basic as a Frankenstein-like creation, a "policy-driven presumption" based on "nascent economic theory and personal intuitions about investment behavior," "grafted" onto an implied cause of action, resulting in an "unrecognizably broad cause of action ready made for class certification." Thomas questioned the premise that markets efficiently incorporated alleged misstatements into the market price, as well as the premise that investors transacted in reliance on the integrity of that price. Thomas noted that some investors trade for reasons entirely unrelated to price (e.g., need for cash, or to rebalance their portfolio), while others trade because they think the market has under- or overvalued the stock. An investor cannot be said to "rely on the integrity of the market price" if he thinks he is smarter than the market. Thomas was also troubled that the Basic presumption conflicted with the Court's recent class action caselaw, by allowing securities fraud plaintiffs to obtain class certification without putting forth "evidentiary proof" that they met all of Rule 23's requirements: securities fraud plaintiffs are "deemed to have shown predominance as a matter of law," even though the rebuttable presumption actually "leaves questions of reliance in the case and predominance still unproved." Finally, in Thomas's view, stare decisis should have no "special force" here, because Basic did not involve statutory interpretation, but rather a judge-made presumption for a judge-made element of a judge-made implied cause of action.

The Chief again led the Court in Riley v. California (13-132) together with United States v. Wurie (13-212). The two cases presented a critical Fourth Amendment question for modern day privacy rights: Can police search a cell phone seized incident to an arrest? (The decision also answered the pressing question of whether a lawyer can use the term "cell phone" rather than the more formal "cellular phone" in a brief. If it's good enough for the Supreme Court, it's good enough for us.) In Riley's case, a routine traffic stop for expired registration tags led to his arrest for a weapons charge after a vehicle search. Searching Riley incident to that arrest, an officer discovered and seized his cell phone. Police later searched the phone and found evidence that was later used to charge Riley with a gang-related shooting. Wurie, for his part, was arrested after participating in an apparent drug sale. Police seized Wurie's cell phone off his person and after it began receiving repeated calls from a source identified as "my home" on the phone's screen, tracked the source of the calls, obtained a search warrant for the home, and ultimately busted Wurie for drug dealing based on the evidence found there. Both defendants moved to suppress the evidence obtained from their cell phones, arguing that the searches were invalid under the Fourth Amendment. One defendant won; one defendant lost; and the Court granted cert to resolve the issue.

Chief Justice Roberts began by outlining the basics. The touchstone of all Fourth Amendment analysis is reasonableness. A warrant is generally required before a search can be performed and a warrantless search is only deemed reasonable if it fits within a specific exception to the warrant requirement. One exception that has long been recognized is that once a person has been arrested, his person can be searched incident to that arrest. The "incident to arrest" exception is based on reduced privacy interests once a person is under arrest, as well as concerns for protecting officer safety (i.e., removing potential weapons from the arrestee) and preserving evidence that could be destroyed by him. Three key cases have set the bounds of the exception. In Chimel v. California (1969), the Court found that the exception did not permit a search of an arrestee's entire home as such a search was unnecessary to protect officer safety or preserve evidence, and indicated that the exception was limited to searches of the arrestee's person and the area from which he could gain access to weapons or destructible evidence. Next, in United States v. Robinson (1973), the Court considered the validity of a pat down search following arrest, which led to the discovery of a cigarette pack. The officer opened the pack and discovered heroin inside. Even though there was no specific concern for officer safety or evidence destruction once the pack was seized, the Court found the search reasonable, explaining that a categorical rule was needed and that once an arrest was made a search of the arrestee's person (as opposed to his surroundings) "requires no additional justification." The Court did not parse the distinction between seizing the pack of cigarettes and opening the pack to investigate further. Finally, in Arizona v. Gant (2009), the Court held that a warrantless search of a vehicle's passenger compartment was permitted "when it is ‘reasonable to believe evidence relevant to the crime of arrest might be found in the vehicle," grounding this new extension of the search incident to arrest rationale in the "‘circumstances unique to the vehicle context.'"

The Court recognized that a "mechanical application" of Robinson might well lead to the conclusion that police can search a cell phone seized incident to arrest: they could open the cigarette pack to investigate further; why not the cell phone? However, while Robinson's categorical rule makes good sense in the context of physical objects, the rationales behind that rule have little force in the context of a search of data accessible on a cell phone that has already been seized. "Digital data stored on a cell phone cannot itself by used as a weapon to harm an officer or to effectuate the arrestee's escape." Nor was there much evidence that searching the phone immediately as opposed to waiting for a warrant was likely to lead to destruction of the evidence potentially available on the phone. Though the Court noted a possible risk of "remote wiping" and encryption that might make the data unavailable later, to the extent there was a true emergency where officers believed a phone contained evidence of a crime was likely to be imminently wiped of data, that might justify a search based on the exigent circumstances exception – but it did not justify a broad-based rule permitting searches of cell phones incident to every arrest.

Moreover, from a privacy standpoint, cell phones "differ in both a quantitative and qualitative sense from other objects that might be kept on an arrestee's person." Cell phones are a mix of computers, phones, cameras, calendars and many other things; they aggregate many different types of data about a person in one place and the storage capacity is astounding. While a search of physical objects on a person might allow an officer to review a single bank statement that happened to be in the arrestee's pocket, it would not provide access to every bank statement for the past several years, along with every piece of mail, every book and article read, every website visited and every picture taken. "The sum of an individual's private life can be reconstructed." Cell phones often contain more personal information than could be found in a person's home – which Chimel held would require a warrant to search. Further, data accessible from a user's phone is often not stored on the phone itself but in the "cloud" and it is difficult from a user's perspective to know the difference. Thus, allowing a search of cell phones would likely result in police finding information stored well beyond the device itself. Though the Government contended that it could develop protocols to address this problem, the Court responded: "[T]he Founders did not fight a revolution to gain the right to government agency protocols." The fact that a search might go beyond even the info on the phone itself (and thus well beyond objects found in close proximity to the arrestee) provided yet another reason to reject a rule allowing searches of cell phones incident to arrest.

The Court also rejected arguments that Gant could support a more limited search of cell phones where an officer has reason to believe that the phone contained evidence relating to the crime of arrest. Noting that it would take a "particularly inexperienced or unimaginative law enforcement officer who could not come up with several reasons to suppose evidence of just about any crime could be found on a cell phone," the Court concluded that this would provide "no practical limit at all."

"Privacy comes at a cost," the Court recognized, but it is a cost embedded in our Constitution and hard-won by our Founders. Cell phones contain "the privacies of life" and are no less worthy of protection than our homes merely because they can be carried around in our pockets. Thus, a warrant will be necessarily to search a cell phone seized incident to arrest unless another exception to the warrant requirement is applicable.

Justice Alito concurred in part, and in the judgment, but wrote separately to state his view that the search incident to arrest exception is not justified merely be officer safety and evidence preservation but by the "need to obtain probative evidence." Despite this view, Alito agreed that "we should not mechanically apply the rule used in the predigital era to the search of a cell phone" because the highly personal information stored there "calls for a new balancing of law enforcement and privacy interests." While the rule adopted by the Court may lead to some anomalies in the treatment of the same types of information stored in different formats (e.g., the bank statement found in the defendant's pocket vs. the bank statement available on his phone), Alito did "not see a workable alternative." Thus, Alito joined the Court's opinion in the main, but would be willing to reconsider if legislatures adopted laws allowing some searching of cell phones while balancing privacy interests, something that the Court could not do with the blunt instrument of the Fourth Amendment.

Thanks for sticking with us Court fans!

Kim, Jenny and Tadhg