October 3, 2016 is the first Monday in October, and that means that on that date the U.S. Supreme Court, as it has on the first Monday of every October since 1917, will begin its new term. While the Court will begin its term this year as it traditionally has in the recent past, it will also be operating on an unusual basis. For the first time in almost 30 years, the Supreme Court will begin its new term will only eight justices.
The bench vacancy will have significant practical implications for the Court as it undertakes its work this term. For starters, there will be a continuing risk that the Court could split 4-4 on controversial cases, as it did on a number of important cases last year after Justice Scalia’s death. The Court may also find that it will have a harder time selecting cases to fill its docket. With one fewer justice, it will be that much harder to come up with the four votes necessary for the Court to take up a case in the first place.
To be sure, on September 29, 2016, following its first day of conferences after its summer break, the Court did grant review in nine more cases (two of which were consolidated, meaning eight new cases for the docket). With the eight new cases, the Court has now granted review in only 38 cases total, compared to an average of about 50 at this point in recent years, according to the Wall Street Journal (here). The Journal also suggests that one of the reasons for the low case count is that the Court may be deliberately sidestepping “ideological” cases that could result in a 4-4 split.
Securities Law-Related Cases
Though Court has so far agreed to take up a relatively fewer cases so far this term, there are still a number of key business cases to watch this term, and more may yet be added to the docket. First, there are some important securities cases to watch.
Salman v. United States: Among the cases that this blog’s readers will be most interested to watch is the insider trading case, Salman v. United States. This case comes to the Supreme Court following the Ninth Circuit’s decision affirming the insider trading conviction of Bassam Yacoub Salman, who traded on tips from the brother of a former Citigroup investment banker. This case will be the U.S. Supreme Court’s first insider trading case since 1997. The case will consider the personal benefit doctrine, and in particular will decide whether a person who leaks inside information have to receive a pecuniary benefit for someone who trades on the tip to be liable for insider trading, or whether a gift or other social benefit is enough?
As discussed in a September 27, 2016 memo from the Skadden law firm about the Salman case (here), the dispute over the meaning of the personal benefit doctrine owes much to the Second Circuit’s 2014 decision in United States v. Newman, in which the Second Circuit overturned the convictions of two hedge fund managers. The Second Circuit’s Newman decision substantially reduced the potential liability of those who receive inside information indirectly by ruling that someone who receives a tip cannot be convicted of insider trading unless he “knows of the personal benefit received by the insider in exchange for the disclosure.” The Second Circuit also said that the benefit must be a quid pro quo and of “some consequence.” The appellate court did not define what constitutes a benefit of “some consequence.”
In the Salman case, the criminal defendant received tips from his brother-in-law, who in turn got information from the brother-in-law’s investment banker. Salman said the investment banker gave the brother-in-law tips as gifts to “get [the brother-in-law] off his back.” Salman argued that the gift did not constitute a personal benefit of “some consequence,” as required by Newman. The Ninth Circuit declined to follow Newman, holding that the gift was sufficient to confer a personal benefit. In its opposition to Salman’s petition for review, the government argued that limiting insider liability for tippees only to cases where the tipper received a pecuniary benefit would undermine the securities laws, as otherwise tippees could reap the benefits of inside information at the expense of other stockholders.
As the Skadden memo noted, the Supreme Court’s review of the personal benefit requirement and the requirements to show what represents a benefit “of some consequence” will “bring much needed clarity to the requirements for establishing insider trading liability.” The Salman case will be argued on October 5, 2016.
Cyan, Inc. v. Beaver County Employees Retirement Fund: Another case that the Court has been asked to consider this term involves the question of whether or not plaintiffs retain the right to bring liability actions under the ’33 Act in state court, under the Act’s concurrent jurisdiction provisions, or whether SLUSA eliminated state court jurisdiction for class action lawsuits brought under the ’33 Act.
As I discussed in a prior blog post (here), Cyan, Inc. is a defendant in a ’33 Act class action lawsuit filed in California state court. Rather than seeking to remove the case to federal court, Cyan moved for judgment on the pleadings, arguing that the state court lacked jurisdiction. The California trial court denied the company’s dismissal motion. The state court held that it was bound by a 2011 California Intermediate Appellate Court decision in the case of Luther v. Countrywide Financial (discussed here). The state court intermediate appellate court denied Cyan’s writ of mandate and/or prohibition. The company then sought to pursue a petition of review to the California Supreme Court, which was denied. Thus, Cyan’s U.S. Supreme Court filing is a petition for a writ of certiorari to the California Supreme Court.
In its petition, Cyan argues that Luther incorrectly concluded that SLUSA did not alter the ’33 Act’s concurrent jurisdiction provision, and added that courts in other jurisdictions have concluded that SLUSA did eliminate concurrent state court jurisdiction for ’33 Act class action, meaning that different courts in different jurisdictions are reaching different conclusions on the same federal law issue, a circumstance the petition describes as “chaos.”
In their opposition to the petition, the plaintiffs argue that the Supreme Court lacks jurisdiction to hear the case, because the trial court’s denial of the motion for judgment on the pleadings was not a final judgment. The plaintiffs also argue that SLUSA did not eliminate the concurrent state court jurisdiction, and in any event that Cyan has overstated the depth of disagreement between the lower courts.
It remains to be seen whether or not the Court will take up the Cyan case, but if it does it could be an important case on recurring questions of state court jurisdiction for IPO related lawsuits.
Other Important Business-Related Cases
In addition to the securities law-related cases, there are some other business-related cases that will be worth watching:
Lee v. Tam: One of the cases that the Court recently agreed to take up is this high-profile case involving the rock group, the Slants. The case will address a provision of the Lanham Act that prohibits trademark registration of disparaging trademarks. The United States Patent and Trademark Office denied the Slants’ trademark registration under Section 2(a) of the Lanham Act, barring disparaging trademark registrations. The Slants appealed the decision to the Federal Circuit, which held that Section 2(a) represents an unconstitutional restriction on the First Amendment’s free speech rights. The USPTO sought Supreme Court review, and the Court has now agreed to take up the case, to decide whether or not the Lanham Act provision is constitutional.
The Slants case potentially could have a significant impact on a number of other pending cases, including in particular the case now pending in the Fourth Circuit involving the trademark registration of the Washington Redskins football team.
Expressions Hair Design v. Schneiderman: In yet another of the cases that the Court recently agreed to take up, the Court will hear this dispute having to do with state laws regarding credit card surcharges. When customers use a credit card to make a purchase, the credit card companies charge the merchants involved a “swipe fee.” New York law prohibits merchants from charging a surcharge for customers paying by credit card. Several merchants, including a hair salon and an ice cream parlor, challenged the law, saying that it violates their First Amendment rights because it restricts what they can tell their customers – the merchants want to be free to describe the fees as surcharges in order to discourage customers from using credit cards.
The Second Circuit struck down the merchants’ challenge, saying that the New York law regulated only economic conduct not speech. The Second Circuit’s ruling conflicts with a ruling on the same issues from the Eleventh Circuit, which held that a similar law unconstitutionally restricts speech conveying price information.
As discussed in a September 30, 2016 Wall Street Journal article about the case (here), merchants “in markets from Chicago to Australia are sparring with lawmakers and their own customers over efforts to defray the fees levied by card companies by tacking surcharges on to customers’ bills.” Ten states (including New York, Florida, California and Texas) and several countries have laws banning merchant surcharges for credit card purchases “followed widespread complaints from consumers about surcharges being placed on everything from airline tickets to groceries.” The Supreme Court’s decision in this case could determine whether or not surcharges become a regular cost added to credit card purchases.
Samsung Electronics Company v. Apple: The question presented to the Court in this long-running dispute between these two electronic giants has to do with the correct measure of damages for Samsung’s infringement of two of Apple’s iPhone patents. Samsung seeks to challenge the award of the entire amount of its phone sales profits for five years ($399 million) for an infringement involving only a component part of its phones. According to Samsung, its infringement involved only: “a particular black rectangular round-cornered front face”; “a substantially similar rectangular round-cornered front face plus the surrounding rim”; and “a particular colorful grid of sixteen icons.” Samsung contends that its phones involved hundreds of thousands of other features unrelated to the allegedly infringing features.
The courts below held that Section 289 of the Patent Act automatically entitles a design-patent holder to an award of the infringer’s total profit on the entire product as sold—no matter, Samsung argues, how partial the patent or how limited the contribution of the patented feature to the product’s value or sales. Samsung argues that the lower courts’ interpretation of Section 289 conflict with the purpose, meaning, and history of the provision. Samsung argues that “by making the most trivial design patent worth exponentially more than the most innovative utility patent, the rule would distort the patent system and harm innovation and competition.”
Apple argues that Samsung deliberately copied the key elements of the iPhone that Apple contends led to the devices’ success and is now attempting to avoid fairly compensating the company for the infringement as required by the Patent Act. Apple contends that the courts below correctly interpreted and applied Section 289.
The case is an important one for the technology industry; a number of companies and trade associations have filed amicus briefs. The Computer & Communications Industry Association, for example, in its amicus brief urges the Supreme Court to overturn the “dangerous” rulings of the courts below. The American Intellectual Property Law Association, by contrast, filed an amicus brief in support of Apple, arguing that in its wording of Section 289, Congress already answered the questions presented in this case. The stakes are high not only in this case but in many other pending and future cases involving alleged design patent infringements in connection with component parts. If upheld, the “entire profits” damages measure could trigger massive losses in other claims. The Samsung case will be argued on October 16, 2016.
Visa, Inc. v. Stoumbos: This case arises out of a challenge to the way that banks set their ATM fees. The plaintiff in the case alleges that the ATM fees and the way they are set violate the federal antitrust laws. The specific question that the Supreme Court will be asked to address has to do with the requirements for pleading a violation of the Sherman Act. The plaintiff’s allegations are focused on the relationship between a bank trade association and its members. The Court must address the question whether allegations that members of a business association agreed to adhere to the association’s rules and possess governance rights in the association, without more, are sufficient to plead the element of conspiracy in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, as the D.C. Circuit held in this case, or are insufficient, as the Third, Fourth, and Ninth Circuits have held.
As the Barnes & Thornburg law firm said in a memo about the Court’s upcoming term, this case asks the Court to address the question whether “a Sherman Act violation occurs when, without more, members of a business or trade association agree to follow the association’s rules.” The case bears watching “because of the impact it may have on trade associations and the exposure it could create under the Sherman Act for companies that participate in those associations.”
Though it is beyond the scope of this blog post, it is worth noting that there are a number of important cases coming before the Court this term in other areas. There are, for example, cases coming before the Court this term on questions about racial bias in the criminal justice system, voting rights and redistricting, and immigration and detention. Cases on the horizon include the case involving a transgender boy may use a boys’ bathroom in a Virginia high school and whether a Colorado baker may refuse to serve a same-sex couple.
And there is always the chance that the Court might be called upon again to play a historically important constitutional role in the upcoming Presidential election, although the Court’s current short-handed status could present some serious issues. If, for example, the upcoming election were to prove to be as close as the Presidential election in 2000, the Court might be called upon to decide yet another case like Bush v. Gore. Were that to happen, the court’s current 4-4 split could present a very serious problem. I suppose the time to worry about this possibility is when it actually happens, but it is still one of the many things about the current Presidential election to keep you up at night.