Appellate Litigation Update - August 2022

Review of Selected Decisions of Interest to the Business Community from the U.S. Supreme Court’s 2021- 2022 Term

This past term, the U.S. Supreme Court addressed the “safe harbor” exception to the Copyright Act, 17 U.S.C § 411(b), in Unicolors Inc. v. H&M Hennes & Mauritz L.P., 142 S.Ct. 941 (2022). Unicolors sued H&M for copyright infringement, but H&M responded that Unicolors “could not maintain an infringement suit because [it] knowingly included inaccurate information on its registration application.” The purported inaccuracy was Unicolors’ filing of a single application seeking registration for thirty-one distinct works notwithstanding a Copyright Office regulation providing that an application may cover multiple works only if they were “included in the same unit of publication.” The district court ruled that this inaccuracy was a good-faith mistake under the “safe harbor” exception, which permits copyright holders to pursue infringement claims “regardless of whether the certificate [of registration] contains inaccurate information, unless—(A) the inaccurate information was included on the application for copyright registration with knowledge that it was inaccurate; and (B) the inaccuracy of the information, if known, would have caused the Register of Copyrights to refuse registration.” 17 U.S.C § 411(b). The Ninth Circuit reversed, holding that the exception applies only to good-faith mistakes of fact, as opposed to mistakes of law. The Supreme Court reversed. Writing for a 6-3 majority, Justice Breyer explained that the Copyright Act’s “safe harbor” exception “does not distinguish between a mistake of law and a mistake of fact …. Lack of knowledge of either fact or law can excuse an inaccuracy in a copyright registration.” Id. at 945. Justice Thomas dissented. He observed that Unicolors raised a “different argument in [its] merits briefing” than the specific issue on which the Court granted certiorari and that “no other court had, before today, ever addressed whether §411(b)(1)(A) requires ‘actual knowledge.’” Id. at 949.

The Court also decided several arbitration-related cases. We discuss two of them here. In Badgerow v. Walters, 142 S.Ct. 1310 (2022), the Court addressed the circumstances in which federal courts have subject matter jurisdiction to hear requests to confirm or vacate arbitral awards under sections 9 and 10 of the Federal Arbitration Act (“FAA”). Previously, in Vaden v. Discover Branch, 556 U.S. 49 (2009), the Court held that federal courts have subject matter jurisdiction in cases involving Section 4 of the FAA, which concerns petitions to compel arbitration, where the court is able to “look through” the petition to the “underlying substantive controversy” and determine whether that controversy would qualify for subject matter jurisdiction. Id. at 62. In Badgerow, Justice Kagan wrote for an 8-1 majority that sections 9 and 10 do not explicitly authorize a “look-through” approach, distinguishing the case from Vaden. The majority opinion further explained that, “without [a] statutory instruction, a court may look only to the application actually submitted to it in assessing its jurisdiction,” thus ruling out the possibility of a court “look[ing] through” the petition at the underlying controversy. Badgerow, 142 S.Ct. at 1314. Justice Breyer dissented, writing that the “[t]he need for simplicity, comprehension, workability, and fairness all suggest that these interrelated provisions [of the FAA]” should follow the Vaden look-through approach.

A second arbitration case was Morganv. Sundance Inc., 142 S.Ct. 1708 (2022). In Morgan, the Court addressed whether federal courts can adopt an “arbitration-specific waiver rule” requiring a showing of prejudice to waive the right to arbitration, where ordinary waiver principles do not require a showing of prejudice as a prerequisite to finding waiver. Robyn Morgan was an employee who signed an arbitration agreement with Sundance in which both parties consented that arbitration would resolve any employment disputes. Morgan later sued Sundance in court, and Sundance engaged in litigation with Morgan for about eight months before invoking the arbitration agreement. In light of the FAA’s “federal policy favoring arbitration,” the Eighth Circuit adopted the prejudice requirement, evaluating whether Morgan was prejudiced by Sundance’s eight-month delay before invoking the arbitration agreement. The Eighth Circuit ultimately held that the dispute should be sent to arbitration, concluding that Morgan was not prejudiced because “the parties had not yet begun formal discovery or contested any matters ‘going to the merits.’” The Supreme Court unanimously reversed in an opinion authored by Justice Kagan, holding that federal courts may not create “special, arbitration-preferring procedural rules” based on the FAA’s “policy favoring arbitration.” Id. at 1713. The Court reasoned that federal waiver law does not generally require a finding of prejudice, and “a court may not devise novel rules to favor arbitration over litigation.” Id.

Finally, in Hughes v. Northwestern University, 142 S.Ct. 737 (2022), the Court addressed the requirements of the duty of “prudence” for plan fiduciaries administering retirement plans under the Employee Retirement Income Security Act of 1974 (“ERISA”),

29 U.S.C. §1104(a). The Hughes petitioners were current and former employees of Northwestern University who sued Northwestern for failing to abide by its duty to exercise “prudence” under ERISA by proposing “needlessly expensive investment options” and paying “excessive recordkeeping fees.” 142 S.Ct. at 739-40. The district court granted Northwestern’s motion to dismiss, and the Seventh Circuit affirmed, holding that petitioners’ arguments failed as a matter of law. The Supreme Court unanimously reversed in an opinion by Justice Sotomayor, holding that the Seventh Circuit erred in adopting a “categorical rule” that is “inconsistent with the context-specific inquiry that ERISA requires and fails to take into account [Northwestern’s] duty to monitor all plan investments and remove any imprudent ones.” Id. at 740. In so holding, the Supreme Court focused on the Seventh Circuit’s erroneous reliance on “the participants’ ultimate choice over their investments,” but the Court did not rule out the possibility that breach of fiduciary duty claims may still be dismissed at the Rule 12(b)(6) stage.