The docket of the Supreme Court of the United States for its October 2014 term contained few cases with major implications for business litigation and regulation, but several did signal that at least some members of the Court are concerned about excesses of the regulatory state and are looking for opportunities to provide greater guidance in the area of administrative law. This term, the Court appears ready to address significant legal questions that will likely have major implications for the business community, particularly in the areas of administrative law, arbitration, civil liability, and class action certification. The Court’s October 2015 term could therefore turn out to be a blockbuster with respect to the development of business law.

Recent Supreme Court Terms

The Court’s October 2014 term proved relatively uninteresting for the business community. The most significant opinions were administrative law decisions, which provided some clues as to future rulings and pared back some administrative excesses.

In Michigan v. EPA, for example, the Court held that for an administrative agency’s decision to be reasonable, the agency must consider costs when deciding how and whether to issue a rule.[1] In that case, the EPA had concluded that cost was not a factor it needed to consider in discharging its statutory mandate to regulate where “appropriate and necessary.” The Court disagreed. The majority opinion, penned by Justice Antonin Scalia, could have a lasting effect on future regulatory processes and improve agency decision-making. However, agencies are adept at producing boilerplate analyses to satisfy rules developed by courts. It remains to be seen just how cursory future cost considerations will be while still satisfying due process and the Administrative Procedure Act (APA) under the standards set out in Michigan.[2]

Also in 2014, the Court pared back some overregulation in North Carolina State Board of Dental Examiners v. FTC and Horne v. Dept. of Agriculture, using federal antitrust law and Fifth Amendment takings jurisprudence, respectively.[3] However, Michigan, Horne, and North Carolina State Board involved rather narrow and industry-specific statutory arrangements that might have only limited applicability to other agencies facing a different set of facts and circumstances.

In North Carolina State Board, the Court faced a situation in which North Carolina had delegated authority to regulate dentists to a board dominated by licensed dentists, in effect mandating a self-regulation regime. The Federal Trade Commission filed an antitrust action against the board, and the board claimed immunity from federal antitrust law as a state actor.[4] The Court rejected the board’s argument, holding that since the board was not “actively supervised” by the state, it could not claim to be acting as an agent of North Carolina for the purposes of immunity from the antitrust laws.

In Horne, the United States Department of Agriculture, pursuant to federal law, prohibited some California raisin growers from selling a portion of their crop.[5] This scheme arose out of post–Great Depression attempts to insulate agricultural markets from price highs and lows that comprise market cycles. The Hornes, a family of raisin growers, failed to set aside this portion and were assessed large fines as a result. They challenged the scheme in court as a violation of the Takings Clause of the Fifth Amendment, which requires the payment of just compensation to parties whose property has been taken by the government for public use. The Hornes were not forced to pay the fines before being allowed to argue their takings claim. The Court agreed with the Hornes that the requirement to reserve a portion of the crop was a taking.

Finally, in concurring opinions in two unanimous decisions, Perez v. Mortgage Bankers Association and Department of Transportation v. Association of American Railroads, some justices expressed skepticism and concern about how far congressional delegation of legislative authority to administrative bodies has gone.[6]

Perez v. Mortgage Bankers involved a Department of Labor rule that received conflicting interpretations from Administration to Administration that resulted in employers being required or not required to pay overtime to certain employees, depending on who occupied the White House. For new rules, the federal Administrative Procedure Act requires “notice and comment,” a particular process of receiving and responding to public feedback before issuing a rule. For “interpretations” and other informal guidance, no such strict process is required. But what happens when a new interpretation has serious implications for legal rights? This appears to encourage agencies to do through “reinterpretation” what they might not be able to do, at least without tremendous difficulty and delay, through a formal rulemaking.

This concern gave rise to a unique rule within the U.S. Court of Appeals for the District of Columbia Circuit (the court that most frequently reviews challenges to agency action) that was more restrictive of agency action: the so-called Paralyzed Veterans doctrine, which required notice and comment procedures for substantial changes in interpretive rules.[7] In Perez v. Mortgage Bankers, the Supreme Court unanimously rejected the Paralyzed Veterans doctrine as impermissibly adding to the procedural requirements outlined in the APA.

Staying faithful to the APA, this decision seems correct, but the Paralyzed Veterans doctrine was developed to address a serious problem: the problem of agencies using informal actions, such as issuing “guidance” and “reinterpretations” of old rules, to avoid the APA’s notice-and-comment requirement for new rules. One way to address this problem would be to require agencies to comply with a notice-and-comment requirement before taking such informal actions.[8] This would require Congress to amend the APA.

Another way to address this problem is to have Article III courts stop deferring to agency interpretations of their own regulations and treating interpretive rules as instructive but not legally binding. This approach, which would mean overturning other Supreme Court precedents, was suggested by Justices Samuel Alito, Clarence Thomas, and Antonin Scalia in two separate concurrences.

Similar to Perez v. Mortgage Bankers, the unanimous Supreme Court decision in American Association of Railroads included a lengthy discussion of the separation of powers and the problems of excessive delegation of authority by Congress to other entities. This case involved a delegation of rulemaking authority to Amtrak that raised serious constitutional questions because of Amtrak’s formal status as a private for-profit corporation. The Court avoided reaching the constitutional questions by determining that for the purposes of the regulatory scheme at issue, Amtrak should be treated as a governmental entity.

In his concurrence, Justice Thomas discussed the meaning of the constitutional separation of powers from an originalist perspective, concluding that the Court’s current jurisprudence in this area “does not adequately reinforce the Constitution’s allocation of legislative power” and adding that he “would return to the original understanding of federal legislative power and require that the Federal Government create generally applicable rules of private conduct only through the constitutionally prescribed legislative process.”[9] For Justice Thomas, excessive deference by one branch of the government to another and excessive delegation from one branch of government to another threaten the separation of powers.

In sum, during the October 2014 term, the Court evinced concern about the merits and decision-making processes involved in government regulation of private entities but not about the authority of state or federal government agencies to regulate.

The October 2015 Term

Unlike business cases from the October 2014 term, which focused on federal government regulatory processes, in the October 2015 term, the Court has already decided two cases (Campbell-Ewald v. Gomez and DIRECTTV v. Imburgia) and should issue rulings shortly in two others (Spokeo, Inc. v. Robins and RJR Nabisco v. The European Community) that will likely clarify the way civil lawsuits are conducted. These rulings could have a dramatic impact on the future burden of litigation costs borne by American businesses.

Campbell-Ewald Co. v. Gomez. Unlike other legal systems, such as the Roman-derived civil law system, the Anglo–American common law system relies on the adversarial process: Rather than the judge doing fact-finding on his or her own, the two sides to a legal dispute are tasked with presenting evidence before a judge or jury.[10] This principle justifies the ethical rules against ex parte communications with a judge, explains why cross-examination is a right, and undergirds many other aspects of American law.[11] The adversarial nature of our legal system is enshrined in Article III of the Constitution, which limits the jurisdiction of federal courts to actual cases or controversies.[12] Federal courts are empowered to issue decisions (and governing rules) only where there is a genuine legal dispute.[13]

Campbell-Ewald[14] involved two questions related to Article III:[15] whether a plaintiff lacks standing to sue when he has been offered complete relief by a defendant and whether the answer to this question is any different in the class-action context. The case involved Jose Gomez, who received an unsolicited text message sent by the defendant as part of a U.S. Navy marketing solicitation. His lawsuit against the defendant alleged a single violation of 47 U.S.C. § 227(b)(1)(A)(iii), a provision of the Telephone Consumer Protection Act that prohibits “using any automatic dialing system” to send a text message to a cellular telephone. The statute provides that aggrieved parties can sue in state court and obtain an injunction and/or receive the greater of $500 or actual monetary damages.

Campbell-Ewald offered Gomez $1,503, which is three times the statutory penalty authorized for knowing or willful violations of the act, plus nominal damages, as Gomez alleged no monetary loss. In other words, under the statute, Gomez would not have been entitled to any relief beyond what he was offered. Gomez, however, declined the offer.

Gomez’s rejection of the more-than-adequate offer makes no rational economic sense until you realize that he was also seeking class certification, which had not yet been granted at the time the offer was made and rejected. As a representative of a class certified under Federal Rule of Civil Procedure 23,[16] Gomez and his lawyers stood to make much more money from any settlement or ultimate monetary judgment in favor of the class. This is not money to which they would be “legally” entitled based on Gomez’s individual claim; they would likely obtain a large portion of these funds, however, as compensation for “services” rendered to the class.[17] In fact, the Supreme Court had previously held in Genesis Healthcare Corp. v. Symczyk[18] that a plaintiff’s class action was moot when he (the sole plaintiff) had conceded that his individual case was moot due to an offer of complete relief. In that case, Justice Elena Kagan had dissented, objecting derisively to what she called the “mootness-by-unaccepted-offer theory.”

The Court ruled 5–4 against Campbell-Ewald, allowing the case to proceed and explicitly adopting Justice Kagan’s dissent in Genesis Healthcare Corp.[19] The Court should instead have ruled against Gomez in this case on both of the Article III questions presented.

On the first question presented, it is clear that the Anglo–American legal system is not equipped to adjudicate cases in which a plaintiff has been offered complete relief. If complete and unconditional relief has been offered, what could a court possibly offer a plaintiff in such a lawsuit? It cannot be finality or certainty of payment because that has already been offered. Ordinarily, it could only be symbolic or emotional relief.

The American civil law system is not designed to adjudicate morality; a “win” in the civil courts is not a guilty verdict, and it carries with it no moral vindication for the plaintiff. If a plaintiff has already been offered complete relief, running through the formal court process to achieve the same result is a phenomenal waste of resources.[20] Yet it is precisely this waste of resources that the plaintiff was after in this case, because the plaintiff and his representatives could collect fees that go beyond the economically efficient payout our tort system was designed to grant injured parties.

On the second question presented, it is also clear that there is no social loss for precluding mootness of class actions where the class representative is uninjured or has been fully compensated. An uninjured or fully recompensed plaintiff could not adequately stand in for injured and uncompensated members of the class that he or she purports to represent; this alone was reason enough to rule against Gomez in this case. Moreover, even presuming that there is no “agency” problem, the mootness of Gomez’s case clearly would not moot the claims of any other truly aggrieved members of the class. In other words, Campbell-Ewald’s offer of settlement might not save Campbell-Ewald any money, because another aggrieved plaintiff could file a class action against the company, and Campbell-Ewald could buy that plaintiff out as well.

The economics of litigation would suggest that the company would settle with every plaintiff with a good claim: At some point, however, Campbell-Ewald would think that settling the lawsuit in front of it was too costly. In that case, the company would take the case to court, and the court ideally would clarify the law, making future cases even easier to settle. It follows that ruling against Gomez would have left no possible plaintiff unjustly excluded from the civil justice system. Moreover, by allowing Gomez to proceed with his class action, the Court’s decision may result in needlessly prolonging litigation by encouraging plaintiffs to reject more-than-reasonable settlement offers and making it less likely that defendants will make such offers.[21]

Spokeo, Inc. v. Robins. Campbell-Ewald is not the only Article III case before the Court this term. The plaintiff in that case at least had a tangible injury when he filed his lawsuit: He was sent a text message that he did not want. This might not appear to be terribly significant, but at least it is an injury in the eyes of the law. The plaintiff in Spokeo v. Robins, however, has suffered no such injury.[22]

Thomas Robins alleges that Spokeo, Inc., a search-engine website that aggregates information about individuals from various sources on the Internet, listed inaccurate information about him in violation of 15 U.S.C. § 1681n, which makes any person “who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer…liable to that consumer.” In other words, Robins is a “third party beneficiary” of congressional action. Congress places certain requirements upon credit reporting agencies, and any violation of these statutory requirements triggers damages. Spokeo is alleged to have placed false information about Robins online, even though at least some of this misinformation (that he had a graduate degree, which he does not in fact have) was salutary and even though Robins has not alleged that the false information materially affected him in any way.

Like Gomez in the case discussed above, Robins filed a class action against Spokeo, but his case was dismissed by the trial court. The United States Court of Appeals for the Ninth Circuit reversed the lower court and held that Robins had standing to bring this case, conferred by Congress in § 1681n. Without providing much reasoning, the Ninth Circuit distinguished prior Supreme Court precedent that had rejected congressional conferral of standing where the plaintiff had only “abstract injury.”[23]

If the Supreme Court holds that Robins has Article III standing, then Congress presumably can pass other statutes allowing other people to sue when they should not be able to do so. Historically, people have not been able to sue to block programs when they claim that the only way in which they are hurt is that the government is wasting their tax dollars, but a bad decision in this case could open the door to that sort of lawsuit. A further concern is that if the Court finds standing in the Spokeo case, it might open the door to a host of lawsuits involving multiple litigants, including class actions, where no injury-in-fact exists.[24]

As the Court has noted in prior cases, class actions “serve important goals, but also present opportunities for abuse.”[25] A bad decision in Spokeo not only could allow individual causes of action, but also could open the door to aggregate claims, such as class actions, that are composed entirely of plaintiffs with injuries that do not comport with ordinary tort law notions but are defined by statute. A ruling in favor of the plaintiff in Spokeo that allowed Robins’s suit to proceed could wreak havoc until Congress clarifies what should and should not qualify for class action certification.

RJR Nabisco v. The European Community. A third case of interest this term involves the extraterritorial application of the Racketeer Influenced and Corrupt Organizations (RICO) Act. RJR Nabisco v. The European Community[26] involves R.J. Reynolds Tobacco Company, a wholly-owned subsidiary of the corporation formerly known as RJR Nabisco. RICO[27] is a federal law that provides for potential criminal penalties for and a civil cause of action by injured parties against those who perform certain “racketeering” acts as part of an ongoing criminal enterprise. The plaintiffs in this case, the European Community (now known as the European Union) and several of its member states, claim that the defendant was involved in a worldwide conspiracy to launder the proceeds of illegal drug sales in Europe.

Generally speaking, there is a legal presumption against extraterritorial application of U.S. law.[28] In other words, absent some clear legislative statement, U.S. laws are presumed to apply only on U.S. soil.[29] RICO itself is silent regarding any potential extraterritorial application. The RJR Nabisco case presents a third opportunity for the Court to reiterate the “revivified” presumption against extraterritoriality found in Kiobel v. Royal Dutch Petroleum and Morrison v. Nat’l Australia Bank, Ltd.[ 30] In Morrison, the Court declined to apply U.S. securities laws abroad, stating that “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” The Court subsequently reiterated its Morrison holding in Kiobel and declined to apply extraterritorially the Alien Tort Statute, which gives federal courts jurisdiction to hear cases involving torts allegedly committed in violation of a treaty or international law.

The complication in the RICO context, however, is that RICO operates by referencing a list of “predicate offenses”—other statutes that are brought under the RICO umbrella. It is unclear which of these predicate offenses, if any, Congress intended to apply extraterritorially. And as the Second Circuit held in its decision in this case, “it [is] far more reasonable to make the extraterritorial application of RICO coextensive with the extraterritorial application of the relevant predicate statutes.”[31]

This holding appears questionable, however. Even if it were clear that Congress meant for a particular predicate offense, such as wire fraud, to apply extraterritorially, that does not necessarily mean that Congress intended the RICO statute to apply extraterritorially.

As a policy matter, RJR Nabisco bears great similarity to Kiobel. Both cases deal with whether ambiguous statutes apply extraterritorially, and both cases involve attempts to litigate various human rights offenses in U.S. courts.[32] Notably, the rationale that supported the Kiobel Court’s refusal to apply the Alien Torts Act extraterritorially—a concern with not “opening the U.S. judicial floodgates” to numerous lawsuits bearing no real relationship to the United States—applies equally in the RICO context in RJR Nabisco.

Some “extraterritorial” RICO cases may occasionally have a direct impact on U.S. interests; for example, a recent extraterritorial RICO case involves Chevron Corporation’s private litigation against a human rights lawyer who allegedly conspired to obtain an enormous fraudulent judgment in a foreign court and sought to enforce it in the United States.[33] But the relatively small number of cases in which an alleged criminal enterprise is directed at interests in the United States cannot justify applying RICO abroad in the face of statutory ambiguity. Doing so would certainly capture some conduct we might want to penalize, but it would do so at the expense of turning U.S. courts into hotspots for “lawsuit tourism.” In light of these considerations, no matter how it is decided, RJR Nabisco will likely have an important economic policy impact.

DIRECTV v. Imburgia. DIRECTV v. Imburgia[34] is another significant case involving the Federal Arbitration Act (FAA).[35] It is clear federal policy to favor arbitration,[36] which involves resolving disputes through a binding process that occurs outside of the court system and is presided over by a professional arbitrator. Arbitration reduces litigation costs, which results in savings that can be passed on to consumers.

The Supreme Court has held that the FAA preempts state laws that attempt to place limits on arbitration. Most recently, the Court held that the FAA preempted California’s attempts to invalidate as unenforceable class arbitration waivers in consumer contract disputes.[37] California courts continue to be skeptical about arbitration, however, and the issue was back before the Court in a case involving a class arbitration waiver that included a conditional unenforceability clause: “If…the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then [the entire section providing for arbitration] is unenforceable.”

When the plaintiff, Amy Imburgia, filed a class action against DIRECTV, the company moved to compel arbitration. Invoking the unenforceability clause, a California state court threw out the entire arbitration agreement, and its judgment was affirmed by the Court of Appeal of the State of California.[38] The question before the Supreme Court was whether the state court erred when it held that the reference to state law in an arbitration agreement governed by the FAA required the application of state law preempted by the FAA.

On December 14, 2015, the Supreme Court rendered its decision and reversed, holding that the state court’s decision discriminated against arbitration clauses and was therefore preempted by the FAA.[39] The majority decision provided little guidance, as it rested on a multifactor balancing test. The Court noted that “several considerations lead us to conclude” that California discriminated against arbitration clauses and concluded that “[t]aking these considerations together…California’s interpretation [of the contract] does not place arbitration contracts ‘on equal footing with all other contracts’ [and thus] is pre-empted by the Federal Arbitration Act.”[40]

This type of balancing approach can be problematic because it leads to uncertainty about the way in which the balance will be struck in future cases. However, the judgment of the Court is certainly correct. It is Congress’s prerogative to encourage arbitration agreements under its constitutional authority to regulate interstate commerce.[41] On the other hand, when a contract references state law, federalism principles appear to counsel against overriding the state court interpretation of state law. California had sought to defeat the federal policy in favor of arbitration by discriminating against arbitration clauses—something the Court rightly rejected.

Conclusion

The business-related cases this term could shape civil litigation in the United States for years to come, but it remains to be seen, at least for the cases that have not yet been decided, whether the Court will issue broad rulings or narrow, fact-bound decisions. Perhaps more important, these cases could stir Congress to act if the Court’s rulings upset the wheels of industry.

—Andrew Kloster is a Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.