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Article: September 2015: Appellate Update

Business Litigation Reports

Postscript to the U.S. Supreme Court’s October 2014 Term. The Supreme Court of the United States completed its October 2014 term in June, having decided a number of matters of wide public interest. Among the most notable was King v. Burwell (No. 14-114), which upheld, over a vigorous dissent, an agency rule that, if vacated, would have had significant consequences for the Patient Protection and Affordable Care Act, also known as ObamaCare. And in Texas Department of Housing & Community Affairs v. Inclusive Communities Project (No. 13-1371), the Court held in a 5-4 decision that disparate-impact claims are cognizable under the Fair Housing Act, consistent with earlier rulings affirming such liability under other anti-discrimination statutes.

Several decisions receiving less widespread public attention will have significant implications for business litigation. A major patent case, Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. (No. 13-854), overturned the Federal Circuit’s long-standing practice of reviewing all aspects of a district court’s patent claim construction de novo. The district court upheld Teva’s patent covering a manufacturing method for a drug, concluding that the patent term “molecular weight” was not indefinite, relying on expert testimony that those skilled in the art would understand its meaning. The Federal Circuit reversed on de novo review, and the Supreme Court then vacated that reversal for failing to grant appropriate deference. The Court explained that while the ultimate construction of a patent claim is a legal question subject to de novo review under Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996), a district court’s subsidiary factual findings, made after considering extrinsic evidence, can only be reviewed for clear error under Federal Rule of Civil Procedure 52(a)(6). That Rule provides that a district court’s “[f]indings of fact” cannot be “set aside” unless they are “clearly erroneous.” The Court reasoned that district courts are better positioned to make findings of fact, particularly in complex patent cases, and there is no basis for deviating from Rule 52(a)(6)’s “clear command.” Justice Thomas, joined by Justice Alito, dissented. Claim construction often turns on extrinsic evidence and this change in practice is thus likely to have significant consequences and, in particular, render district court Markman proceedings even more important than before.

To the surprise of many, the Supreme Court reached the merits of Dart Cherokee Basin Operating Co. LLC v. Owens (No. 13-719), handing down a victory for class-action defendants sued in state court who seek removal to federal court under the Class Action Fairness Act, which permits removal even absent complete diversity when the amount in controversy exceeds $5 million. Questioning at oral argument suggested the Court likely would dismiss the case as improvidently granted: the Tenth Circuit’s basis for refusing to entertain an appeal of the district court’s order remanding the case to state court was unclear, and that refusal was the only ruling under further review. Four Justices ultimately advocated for such dismissal, but in dissent—the majority interpreted the Tenth Circuit’s refusal as approving the district court’s reasoning, and thus reached that reasoning. And the Court swiftly rejected it. The district court had remanded the removed case back to state court because Dart failed to provide evidence showing the amount in controversy with his notice of removal, as required by prior Tenth Circuit decisions. But, the Court held, a removing class action defendant need only plausibly allege that the amount in controversy exceeds the $5 million jurisdictional threshold. To impose an evidentiary requirement would be inconsistent with the statutory language requiring only a “short and plain statement of the grounds for removal.” Moreover, a plaintiff’s good-faith allegation of the amount in controversy is accepted without more, and the same practice should be extended to defendants.

Finally, in Omnicare, Inc. v. Laborers District Council Industry Pension Fund (No. 13-435), the Court took a balanced approach in addressing when statements of opinion can, and cannot, give rise to liability for false statements in a registration under Section 11 of the Securities Act of 1933. The defendant had expressed an opinion in its registration statement that its practices complied with federal regulations. That turned out to be untrue, but there was no allegation that the defendant knew its practices did not comply. The district court thus dismissed the case, reasoning that a statement of opinion cannot be false unless the registrant knows the facts are otherwise. The Sixth Circuit took the opposite view, holding that a plaintiff bringing a Section 11 claim need not prove false intent and that even genuine expressions of belief that turn out to be untrue can give rise to liability. And the Supreme Court took a middle road, distinguishing between false statements of opinion, on the one hand, and misleading omissions underlying those opinions, on the other. As long as a registrant subjectively holds the opinion, an expression of belief or opinion cannot be false so as to give rise to liability. But, the Court explained, a registrant’s statement of opinion implies that it has some reasonable foundation for that opinion, and if it did not, that can support liability. The absence of a reasonable foundation can thus be an actionable omission. This opinion is likely to alter, substantially, the way Section 11 cases based on statements of opinion are pleaded and litigated.