As the current Supreme Court term gets ready to draw to a close, many court observers are awaiting the Court’s decision in the Janus Capital case (background here). With the opinion due to be released any day now, I am pleased to be able to publish here a guest post from Brian Lehman, who is an associate at the Bernstein Liebhard law firm, in which Brian presents his prediction of how the Court will decide the Janus Capital case. Because the release of the Court’s decision may be imminent, I am presenting this guest post in the form of a special Friday afternoon edition.
I would like to add by way of introduction that I am always happy to accept proposed guest blog posts from responsible commentators. Please let me know if you think you would like to publish a guest post on this site.
Here is Brian’s guest post:
Predicting how the Supreme Court will decide a particular case can be a fool’s errand, but that’s also what makes it fun. So, as the securities litigation bar awaits the Court’s decision in Janus Capital v. First Derivative Traders, I offer a doozy: In Janus, Justice Thomas will defer to the position taken by the Securities and Exchange Commission (SEC) in its amicus brief and author a majority opinion holding that a person or company “makes” a false statement under Rule 10b-5 when “writing or speaking it, providing false or misleading information for another to put into it [e.g., a prospectus] or allowing it to be attributed to him.” Only Justice Scalia will dissent. And the decision will be heralded as the third opinion this term favoring securities class action plaintiffs (Matrixx and Halliburton are the other two).
By way of background, Janus Capital Group, Inc. is a publicly traded asset management firm that sponsors a family of mutual funds. The investment advisor to the funds is Janus Capital Management LLC. Investors sued the firm and the advisor on the ground that they knowingly or recklessly made false statements about how the funds would be operated.
According to the complaint, the funds’ prospectuses created the misleading impression that the firm and advisor would implement measures to curb market timing in the fund when in fact, “secret arrangements with several hedge funds” allowed market timing transactions. The lead plaintiff seeks to represent a class of investors who purchased shares of the firm’s stock at inflated prices starting in 2000 and ending in 2003, when the market timing agreements were publicly revealed and the stock’s price dropped significantly.
Rule 10b-5 states that it is unlawful for “any person, directly or indirectly” to “make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” In the lower courts, the advisor argued, among other things, that it did not make any of the false statements because they were not attributed to the advisor in the prospectus.
In Janus, there are two questions that must be answered. First, what does it mean to “make” a statement? Second, once that standard has been established, is it plausible that the advisor made the statements based on the factual allegations in the complaint?
My prediction only addresses the first question, and here is my reasoning. As Tom Goldstein at SCOTUSblog wrote last Thursday: “For the December sitting, only the Janus securities fraud case is outstanding. Justice Thomas is almost certainly the author, because he is the only Justice who does not yet have an opinion from that sitting.” Goldstein has explained before: “By tradition, the Court attempts to evenly distribute majority opinions, both within individual ‘sittings’ and across the entire Term.” (A “stat pack” that shows the distribution of decisions is available here.)
The length of time that it has taken for the Court to issue its decision indicates that there will be a dissent. The other cases argued in December had opinions issued in 109 days on average. Janus is now at 186 days and counting.
Many lawyers might think if Justice Thomas is writing the opinion and there is a dissent, then the defendants are going to win – perhaps a classic 5-4 split with Justice Kennedy in the majority? But yesterday, Justice Thomas issued a decision signaling that something else could be afoot.
The issue in Talk America, Inc. v. Michigan Bell Telephone Company was whether a regulation passed by the Federal Communications Commission (FCC) required local exchange carriers to make their existing entrance facilities available to competitors at cost-based rates in certain circumstances. In holding that the regulation did require this, Justice Thomas wrote: “As we reaffirmed earlier this Term, we defer to an agency’s interpretation of its regulations, even in a legal brief, unless the interpretation is plainly erroneous or inconsistent with the regulations or there is any other reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question” (quotations marks and alterations omitted).
Justice Thomas quoted and relied upon Chase Bank USA, N. A. v. McCoy, which was issued on January 24, 2011, and Auer v. Robbins, a Supreme Court decision from 1997 and the reason why deferring to an agency’s interpretation is called “Auer deference.”
Rule 10b-5 is, of course, a regulation passed by an agency – the SEC. And the SEC set forth its position on how to interpret Rule 10b-5 in its amicus brief: “The Commission has construed the term ‘make’ as providing for primary liability when a person ‘creates’ a misrepresentation either by writing or speaking it, providing false or misleading information for another to put into it, or allowing it to be attributed to him. Under Auer v. Robbins, 519 U.S. 452, 461 (1997), the Commission’s construction of its own rule is entitled to controlling weight.”
If the Justices are going to be consistent, they will either need to defer to the SEC’s interpretation of Rule 10b-5 or explain why Auer deference doesn’t apply to the SEC’s interpretation of its own rule while distinguishing Talk America and Chase Bank from Janus. Deferring to the SEC seems far more likely.
If that’s correct, then we can expect Justice Thomas to issue an opinion in Janus that will be joined by all of the Justices but one: Justice Scalia. Yesterday, Justice Scalia stated that he agreed with the result in Talk America on the ground that “the FCC’s interpretation is the fairest reading of the orders in question,” but then stated “[i]t is comforting to know that I would reach the Court’s result even without Auer. For while I have in the past uncritically accepted that rule, I have become increasingly doubtful of its validity.” After outlining some of his concerns, Justice Scalia concluded: “We have not been asked to reconsider Auer in the present case. When we are, I will be receptive to doing so.” In contrast, the other Justices joined Justice Thomas’s opinion.
Janus looks to be the case where Justice Scalia will provide his reasons why Auer should be reconsidered. At oral argument in Janus, Justice Scalia argued against the SEC’s interpretation: “If someone writes a speech for me, one can say he drafted the speech, but I make the speech.” Counsel for the respondent (the plaintiff’s lawyer) answered, “Justice Scalia, we address the definition of ‘make’ under the SEC’s interpretation, which is entitled to deference, as being to create or to compose or to accept as one’s own.”
Justice Scalia didn’t have an immediate response to counsel’s argument that the Court should defer to the agency, but instead answered: “That – that’s not what – it depends on the context of ‘make.’ If you’re talking about making heaven and earth, yes, that means to create, but if you’re talking about making a representation, that means presenting the representation to someone, not – not drafting it for someone else to make.”
Reporters who closely follow the Supreme Court know that “Scalia doesn’t come into oral argument all secretive and sphinxlike, feigning indecision on the nuances of the case before him. He comes in like a medieval knight, girded for battle. He knows what the law is. He knows what the opinion should say.” Justice Scalia wasn’t playing devil’s advocate when he argued over what “makes” means; Justice Scalia just doesn’t agree with the SEC’s interpretation. But Justice Scalia also didn’t have an answer to the argument that the Auer deference should apply, and it is fairly uncharacteristic of Scalia not to have a response.
There is one last thing to note. At the end of January, Scalia joined the unanimous opinion in Chase Bank authored by Justice Sotomayor that held: “Under Auer v. Robbins, 519 U. S. 452 (1997), we defer to an agency’s interpretation of its own regulation, advanced in a legal brief, unless that interpretation is ‘plainly erroneous or inconsistent with the regulation.’” If Scalia is now changing his mind about Auer deference, it must be because something happened in the last four months.
To review: Janus has taken an extraordinary amount of time to be issued, which indicates a dissent. But interpreting the word “make” is not particularly difficult regardless of whether one is in the majority or dissenting. The briefs and decisions by the lower courts have fully covered this ground.
Nor is it difficult to determine whether the allegations in the complaint give rise to a plausible claim after the word “make” is interpreted. For example, in Matrixx, the Justices unanimously determined that the allegations gave rise to a plausible claim in an opinion that was issued in a mere 71 days.
The Justices must be disagreeing about something else. Given the amount of time that has elapsed, the issue is probably significant and perhaps something that was not fully briefed or considered by the parties.
A disagreement over Auer deference fits perfectly. Although the press hasn’t covered it, few, if any, issues decided this term can compare to the Court’s repeated holding that courts should defer to an agency’s interpretation of its own regulation. Anyone who thinks otherwise should consider this fact: the Dodd-Frank Act alone requires 243 rulemakings by eleven agencies.
A year ago, I had either not heard of Auer or I had forgotten about it. Within a few years, every lawyer who works for a corporation will know this case. If an environmental regulation is ambiguous, defer to the agency. If an agricultural regulation is ambiguous, defer to the agency. If an energy regulation is ambiguous, defer to the agency. Defer, defer, defer. Here is the federal government’s A-Z Index of U.S. Government Departments and Agencies – there are a lot of them.
But, despite the importance of Auer, the argument over whether the Court should defer to the SEC has not been well-developed. The Petitioners’ merits brief on behalf of the defendants does not mention Auer; the Respondent’s merits brief mentions it three times but does not dwell on it; and the Petitioners’ reply brief responds to the case with a single footnote on page 10 of its brief.
Moreover, the Justices were not focused on this issue at oral argument. The word “deference” was only mentioned one time at oral argument – when Justice Scalia disagreed with counsel on how to interpret the word “make.” When Curtis Gannon argued on behalf of the government, he was immediately asked by Justice Sotomayor to distill his brief into “three sentences.” He responded by arguing the merits, rather than arguing that the Court should defer to the SEC’s interpretation.
When I put all of the pieces of the puzzle together here is what I get: Justice Thomas will write the majority opinion and defer to the SEC’s interpretation of Rule 10b-5; everyone but Justice Scalia will join.
Justice Scalia disagrees with the SEC’s interpretation of the word “make” and has begun to question why courts should defer to agencies when interpreting their regulations.
But the issue is not well-developed, so it is taking more time than usual for Justice Scalia to make his arguments. Justice Scalia has also realized how significant this issue is and, if Justice Scalia stays true to form, he is putting together quite the dissent.
— Brian Lehman is an associate with the New York law firm of Bernstein Liebhard LLP. He concentrates his practice on complex and class action litigation. He may be contacted at firstname.lastname@example.org.