Wachtell Lipton Discusses Important Supreme Court Business Cases

Last Thursday, the Supreme Court concluded its most tumultuous Term in recent memory.  The Term was marked by a number of closely divided decisions on contentious issues ranging from President Biden’s vaccination mandate to gun rights to religious liberty.  Anticipation of and speculation surrounding the Court’s decision in Dobbs, fueled by the leak of Justice Alito’s draft opinion, dominated headlines for months.  And the decision itself, overturning a half-century of precedent and eliminating the constitutional right to an abortion, has sent shock waves across the nation and is certain to trigger years of follow-on litigation.

The Court’s business docket was likewise active, but comprised largely of uncontroversial decisions that policed the boundaries of existing jurisprudence on ERISA, bankruptcy, and arbitration law.  The showstopping exception was last week’s decision in West Virginia v. EPA, which augurs a major curtailment of agency regulatory authority.  Based on the Court’s certiorari grants to date, the Court’s business decisions next Term might well be even more consequential.  We summarize below the key developments from this Term, and flag the key cases to watch in the coming Term.

Domestic Arbitration. A singular focus on arbitration has been a hallmark of the Roberts Court, and this year was no different, with the Court issuing four decisions (out of only 58 signed decisions altogether) interpreting the Federal Arbitration Act.  In contrast to prior Terms, however, several of the Court’s arbitration decisions were unanimous and none is likely to materially expand the already mammoth role arbitration plays across the U.S. commercial litigation landscape.

In Badgerow v. Walters, the Court limited the circumstances in which federal courts may hear petitions to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA.  The Fifth Circuit had held that district courts should “look through” the pleadings to the underlying arbitral dispute in order to assess whether they could exercise subject-matter jurisdiction.  This reflected an extension of the rule applied to motions to compel arbitration under Section 4 of the FAA.  A near-unanimous majority of the Court rejected that extension, clarifying that the “look through” procedure is grounded in the specific language of Section 4 — which Sections 9 and 10 do not contain.  While Badgerow raises questions about the jurisdictional analysis attending other FAA provisions — such as Section 7, governing petitions to compel compliance with arbitral subpoenas — its immediate impact will be to consign many post-arbitral disputes to state court.

In Viking River Cruises, Inc. v. Moriana, a surprisingly broad, eight‑member majority trimmed the sweep of a California labor statute that authorizes employees to bring certain nonwaivable claims on behalf of both themselves and fellow employees.  Under a California Supreme Court precedent, such claims could not be divided between individual and non-individual claims.  The effect of this indivisibility rule, as the Court saw it, was to “coerce parties into withholding [such] claims from arbitration” — a result that the Court deemed “incompatible with the FAA.”  As such, California’s indivisibility rule was preempted by the FAA.  Viking River marks the Court’s latest rejection of an attempt to shelter collective claims from the effects of an arbitration agreement — see our prior memos on the topic — and is unlikely to be the last.  The decision once again underscores the importance of carefully crafting arbitration clauses in light of applicable legislation and governing judicial rulings.

In the final pair of FAA decisions this Term, the Court unanimously rejected efforts to further extend the federal policy favoring arbitration.  In Morgan v. Sundance, Inc., the Court held that a party waives its right to compel arbitration by acting in a manner inconsistent with its arbitration rights, even if the party opposing arbitration has suffered no prejudice.  The Court’s ruling resolved a longstanding division of authority, in which most courts had adopted an arbitration-specific prejudice requirement.  Writing for the Court, Justice Kagan clarified that the FAA is directed not to “fostering arbitration,” but instead to “treating arbitration contracts like all others.”  And, hence, conduct contrary to one’s contractual rights operates as a waiver.  In Southwest Airlines Co. v. Saxon, the Court considered the scope of an FAA provision exempting “class[es] of workers engaged in foreign or interstate commerce” from the scope of the statute.  After a painstaking textual analysis, the Court concluded that this statutory carve‑out applies to workers “directly involved in transporting goods across state or international borders,” an interpretation that reached an airline’s cargo loaders but not its shift schedulers or web-designers.  While Saxon represents a narrow victory for labor, the Court’s rejection of the plaintiff’s broader argument — seeking to extend the exemption to all airline employees — limits the ramifications of the decision.

International Arbitration. In ZF Automotive US, Inc. v. Luxshare, Ltd., the Court considered whether litigants can seek discovery through the U.S. courts for use in private foreign arbitral proceedings under a federal statute known as Section 1782.  In a unanimous opinion authored by Justice Barrett, the Court held they cannot.  (Our prior memo on the case is here.)  The Court’s reasoning was animated in part by concerns over a potential “mismatch” between the availability of discovery in domestic and foreign arbitration.  In particular, the Court observed that Section 1782 provides for “much broader discovery than the FAA allows” and reasoned that it would not make sense to “giv[e] parties to private foreign arbitrations such broad access to federal-court discovery assistance . . . while precluding such discovery assistance for litigants in domestic arbitrations.”  ZF Automotivethus illustrates how the Court’s focus on the FAA and congressional policy in favor of arbitration bleeds over into settings that do not formally involve the FAA or domestic arbitration at all.

ERISA. In Hughes v. Northwestern University, a unanimous Court reaffirmed that ERISA plan fiduciaries bear a continuing duty to monitor all plan investments and remove “imprudent” offerings.  At issue was whether the availability of “adequate” options in a retirement plan could excuse the presence of allegedly imprudent investments.  The Court held that it could not, criticizing the Seventh Circuit decision under review for an “exclusive focus on investor choice” that impermissibly narrowed the duty to monitor.  However, in a defendant-friendly coda, the Court emphasized that due to the “difficult tradeoffs” faced by ERISA fiduciaries, “courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”  Thus, while Hughes reinforces the duty to monitor and curate plan investment offerings, it also confirms that ERISA fiduciaries can buttress their litigation defenses by documenting the reasonable decisionmaking that informs their stewardship.

Bankruptcy. In Siegel v. Fitzgerald, the Court considered the parameters of the Constitution’s requirement that federal bankruptcy law be “uniform” throughout the nation.  The question presented was whether a 2017 statute that increased administrative fees for debtors in every state save Alabama and North Carolina satisfied this “uniformity requirement.”  In a unanimous opinion by Justice Sotomayor, the Court held it did not.  The discrepancy in fees was rooted in the fact that, in 1986, Congress exempted Alabama and North Carolina from participation in the U.S. Trustee Program that administers bankruptcies, allowing the bankruptcy courts in those states to continue appointing bankruptcy administrators themselves.  These systems were funded separately, but, in general, fees owed by debtors under each system have been proportional.  The 2017 fee increase, however, meant that debtors in states other than Alabama and North Carolina have been paying millions more in fees.  While “[t]he Bankruptcy Clause affords Congress flexibility to ‘fashion legislation to resolve geographically isolated problems,’” the Court explained, it “does not permit Congress to treat identical debtors differently based on an artificial funding distinction that Congress itself created.”  The direct consequences of the holding should go unfelt by solvent companies, but the decision underscores the seriousness with which the Court takes uniform treatment of the business community under federal law.

Administrative Law. Contrary to widespread speculation, this Term did not expressly uproot the embattled Chevron doctrine, which counsels judicial deference toward an agency’s interpretation of ambiguous statutes.  Instead, in a series of headline-grabbing decisions, the Court’s conservative majority demonstrated that while Chevron may remain on the books, it no longer supplies the rule of decision at the Court as a practical matter — and the consequences for the administrative state may be severe.

The Court’s decision in West Virginia v. EPA best captured this significant shift in administrative law.  The case concerned whether the EPA had exceeded its statutory authority in 2015 when it issued a far-reaching powerplant regulation capping carbon emissions.  Writing for a six-member majority, the Chief Justice concluded that the EPA’s reliance on an ambiguous statute was not enough to justify its “assertion[] of ‘extravagant statutory power over the national economy.’”  Accordingly, instead of applying Chevron, the Court discerned for the first time a “major questions” doctrine in its precedents, under which “[e]xtraordinary grants of regulatory authority” can be justified only by “clear congressional authorization.”  Relying on this principle, the Court found that the EPA’s sweeping carbon emissions regulation was not grounded in sufficiently clear statutory authorization to warrant the exercise of such extraordinary power.

While the West Virginia case is the first to formally recognize a different rule for “major questions,” this Term also saw the Court repeatedly apply the same animating logic to strike down significant regulation.  In National Federation of Independent Business v. OSHA, for example, the Court stayed a Covid-19 vaccination mandate on the logic that it would “significantly expand [the agency’s] regulatory authority without clear congressional authorization.”  And in Alabama Association of Realtors v. HHS, the Court blocked a CDC eviction moratorium due to a perceived mismatch between its “wafer-thin” statutory support and the “sheer scope of the CDC’s claimed authority.”  Tellingly, neither of these decisions even mentioned Chevron.  And it seems near certain that the SEC’s high-profile and ambitious plan to mandate climate-risk disclosures will face a West Virginia-style challenge in the coming years.  (Our prior memo on the SEC’s proposal is here.)

While the new “major questions” doctrine will likely claim the limelight, Chevron has already faded into the background even when the questions are not-so-major.  The Court’s other major administrative law decision from this Term, American Hospital Association v. Becerra, concerned the interpretation of an arcane provision of the 2003 Medicare statute, which governs the formula the Department of Health and Human Services uses to set certain reimbursement rates.  HHS’s interpretation of the statute was agency-empowering, and the case had attracted a host of amici curiaeurging the Court to overturn Chevron.  The Court did not do so.  Instead, consistent with the Court’s approach in West Virginia v. EPA, the Court proceeded as though the doctrine did not exist.  In an efficient opinion for a unanimous Court, Justice Kavanaugh explained that the statute was “straightforward” and that the “traditional tools of statutory interpretation” resolved the case against HHS.  The Court’s conspicuous silence on Chevron reinforces that the Chevron doctrine, while perhaps “good law” in theory, is a dead letter in practice.  As lower courts get the message, the business community will less frequently find itself in the position of litigating with agencies on a playing field in which courts feel obliged to defer to agency interpretations.

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The Court has already granted certiorari in several cases to be decided during October Term 2022 that could have significant effects on commercial litigation and the business community.  In Mallory v. Norfolk Southern Railway Co., the Court will take up whether the Due Process Clause of the Fourteenth Amendment prohibits a state from requiring a corporation to consent to personal jurisdiction in that state when registering to do business there.  The case tees up a question that has sharply divided both the federal and state courts, the answer to which could have significant implications for how corporations manage their affairs.  And in National Pork Producers Council v. Ross, the Court will consider whether a recently enacted California law effectively prohibiting the in-state sale of most commercially produced pork implicates the so-called dormant Commerce Clause — that is, the principle that states may not pass laws that unduly burden interstate commerce.

The Court is also slated to decide a pair of significant decisions bearing on the constitutionality of agency adjudication.  In SEC v. Cochran, the Court will take up the question whether federal district courts have jurisdiction over constitutional challenges to SEC administrative proceedings while those administrative proceedings are ongoing.  And in Axon Enterprise, Inc. v. FTC, the Court will decide the same question in the context of FTC administrative proceedings.  SEC and FTC administrative proceedings have both been subject to significant scrutiny in the Supreme Court and federal appellate courts in recent years, and these cases will offer a Court that is generally skeptical of agency adjudication another opportunity to place guardrails around these controversial processes.  In the meantime, Court-watchers are closely tracking the Fifth Circuit’s recent decision in Jarkesy v. SEC, which invalidated SEC administrative proceedings altogether as violative of the Seventh Amendment right to a jury trial and the non-delegation doctrine.  The Biden Administration has petitioned the Fifth Circuit for rehearing en banc, and the case seems destined for the Supreme Court.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Important Supreme Court Business Cases Decided During October Term 2021 and Cases to Watch in October Term 2022,” dated July 5, 2022.   

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