Wachtell Discusses the U.S. Supreme Court’s Business Docket for the October Term 2022

As was true last year, the recently completed Supreme Court Term was marked by several high-profile and contentious decisions in which a conservative 6-to-3 majority, for example, ended race-conscious affirmative action in higher education, scuttled President Biden’s student debt relief initiative, and found that the First Amendment protects a vendor’s refusal to design wedding websites for same-sex couples.

By contrast, while the Court’s business docket was quite active this Term, it included a remarkable run of unanimous or near-unanimous rulings touching on a wide array of topics important to the business community, including on the scope of jurisdiction to hear constitutional challenges to administrative proceedings, the scope of liability under the Securities Act of 1933, and the validity of property claims under the Takings Clause. There was also, to be sure, a handful of closely divided business cases, including with respect to the scope of the dormant Commerce Clause, the constitutionality of a state statute requiring out- of-state corporations to submit themselves to general jurisdiction within that state’s borders in exchange for the privilege of doing business there, and the availability of mandatory stays pending interlocutory appellate review of decisions regarding the arbitrability of the underlying dispute. A number of these decisions splintered along nonideological lines, reinforcing that the divisions that fracture the Court when confronting significant social issues often do not carry over in any sort of predictable way to the Court’s business docket.

We summarize below the key business decisions from this Term, and we also take note of the important cases to watch in the coming Term, several of which are likely to be enormously consequential for the business community.

1. Administrative Adjudication. In Axon Enterprise, Inc. FTC, a unanimous Supreme Court held that federal district courts have jurisdiction to hear constitutional challenges to the structure of the SEC’s and FTC’s administrative adjudication proceedings before those proceedings become final. (Our prior memo on the case is here.) Reversing the Ninth Circuit, Justice Kagan explained that where the harm alleged by the corporation was the fact it was being subjected to an allegedly unconstitutional administrative proceeding, precluding district court jurisdiction and thus forcing corporations to wait for final agency action before bringing their constitutional claims in federal court could foreclose meaningful judicial review altogether.

While Axon was a limited, procedural ruling insofar as it did not opine on the underlying merits of any constitutional challenge, the decision affords companies—including merger parties—facing adverse action in the setting of in- house agency forums the opportunity to press constitutional claims at an early stage in a neutral Article III court. In the current regulatory environment—which we have recently discussed here, here, and here—that development already bears particular significance for companies charting their litigation and business strategies in response to the initiation of agency proceedings. And the opportunity to assert and preserve constitutional claims against federal agencies has particular salience when considered against the backdrop of the Supreme Court’s recent decision, discussed further below, to hear argument next Term on the constitutionality of the SEC’s administrative adjudication scheme.

2. Affirmative Action and Anti-Discrimination Law. At the close of the Term, the Court issued two decisions modifying longstanding precedent in anti-discrimination law. In Students for Fair Admissions Harvard, the Court held that the Constitution does not permit universities to consider race as a “plus” factor in admissions. As discussed in our prior memo, the principal effect of the decision is to more closely align anti-discrimination protections in academia with those in the workplace. However, litigants will likely seek to leverage the Court’s rejection of diversity as a sufficiently compelling basis for race-conscious admissions in service of a broader campaign against diversity, equity, and inclusion initiatives in the workplace.

In Groff v. DeJoy, a unanimous Court reconsidered the showing of “undue hardship” employers must make to justify refusing to extend religious accommodations to employees consistent with Title VII. Under a foundational 1977 decision, the Court had characterized the statute as requiring a showing that a requested accommodation would impose “more than a de minimis cost.” In an opinion authored by Justice Alito in Groff, the Court rejected this longstanding interpretation, holding that employers must now show that the accommodation would “result in substantial increased costs in relation to the conduct of [the employer’s] business.” While it remains to be seen how this more stringent test will be applied in the lower courts, firms should be mindful of the heightened standard going forward.

3. Arbitration. In recent years, the Court has devoted a significant portion of its business docket to questions arising under the Federal Arbitration Act, generally acting to police perceived encroachment on the role of arbitration as an alternative forum for litigation. This Term was lighter on arbitration cases than in years past—with only one decision bearing on the FAA—but the outcome was of a piece. InCoinbase, Inc. Bielski, the Court held that a federal district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is pending. This, the Court explained, was only “common sense.” Under background legal principles, an interlocutory appeal divests the district court of its control over those aspects of the case “involved in the appeal.” And when the issue on appeal is arbitrability, the “entire case is essentially ‘involved in the appeal’”—meaning all material proceedings in the district court should be stayed. Emphasizing that Congress had taken the unusual step of affording litigants a right to an interlocutory appeal on arbitrability, the Court further reasoned that this right would be largely pointless absent an automatic stay, with “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) . . . irretrievably lost.”  In a strongly worded dissent joined by Justices Thomas (in part), Kagan, and Sotomayor, Justice Jackson criticized the Court’s analysis as unmoored from the statutory text, yielding a “windfall” for parties seeking arbitration, and likely to have application beyond the question of arbitrability (for example, to interlocutory appeals regarding forum, jurisdiction, or preliminary injunctions).

The decision in Coinbase ensures that litigants will not forfeit the benefits of arbitration while an appeal on arbitrability is pending. Whether courts are willing to extend the decision’s logic beyond the context of arbitration remains to be seen, but sophisticated parties will surely want to consider those arguments in navigating the boundaries of interlocutory appeals going forward.

4, Dormant Commerce Clause. In National Pork Producers Council Ross, a fractured Court upheld the constitutionality of a California law banning the in-state sale of meat from pigs confined under certain “cruel” conditions. (Our prior memo on the case is here.) Industry organizations alleged the law violated the Commerce Clause by imposing substantial costs on out-of- state producers and impermissibly regulating the national pork market. This challenge marked an effort to expand the so-called “dormant” Commerce Clause, which polices states’ ability to enact regulations with interstate impact when Congress has chosen not to act. All nine Justices rejected the industry’s argument for an “almost per se” rule forbidding enforcement of state laws based merely on their out-of-state impact, reaffirming that the dormant Commerce Clause targets laws that purposefully discriminate against out-of-state economic interests—not neutral regulation incidentally affecting national commerce. The Court fragmented, however, in deciding whether and how to apply a dormant Commerce Clause balancing test from the Court’s precedent, which requires courts to assess whether the “burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.” The decision could embolden states to pass legislation with predictable effects beyond their borders that target industries or issues of their choice.

5. Extraterritoriality. This past Term also produced a pair of decisions addressing the presumption against extraterritorial application of federal statutes, a doctrine which continues to provide an often powerful defense for corporations confronting federal claims. In Abitron Austria GmbH Hetronic International, Inc., the Court held that two provisions of the Lanham Act prohibiting trademark infringement apply only to domestic claims. The Justices diverged, however, on what constitutes a “domestic” claim. Writing for a majority of five, Justice Alito held that a plaintiff must show that the infringing “use in commerce” occurred domestically, emphasizing that the “ultimate question” on an extraterritoriality analysis is “the location of the conduct relevant to the focus” of the statute. The balance of the Court disagreed with this conduct-based framing of the extraterritoriality analysis and would have held that an infringement claim is domestic if the alleged infringement confused consumers in the United States— even if the infringement occurred abroad. Left for another day is what constitutes domestic “use in commerce,” an interpretive question that will doubtless be addressed over time in the lower courts.

In Yegiazaryan v. Smagin, the Court clarified the test for whether a plaintiff has shown the “domestic injury” required to establish civil liability under the federal racketeering statute. The Seventh Circuit, in a 2018 decision forming part of the circuit split at issue, had announced a bright-line rule, under which injury would be deemed to occur in the place of the plaintiff’s residence. A six- Justice majority rejected this “rigid, residency-based test” in favor of a “case- specific analysis that looks to the circumstances surrounding the injury.” As Justices Alito, Thomas, and Gorusch observed in dissent, this holistic analysis injects uncertainty into the application of the statute and will complicate efforts to adjudicate (and litigate) civil racketeering claims with an international nexus.

6. Jurisdiction Over Out-of-State Corporations. In a decision that surprised many, the Court in Mallory Norfolk Southern Railway Co. turned away a Due Process challenge to a Pennsylvania statute that subjects out-of-state corporations that register to do business in Pennsylvania to general jurisdiction within the state. In other words, such corporations may now face suit in Pennsylvania courts on any claim, regardless of whether the claim has any nexus with the state. The Court, in an opinion authored by Justice Gorsuch and joined by Justices Thomas, Alito (in part), Sotomayor, and Jackson, grounded its analysis in a pre-International Shoe precedent from 1917, which it deemed controlling, and the notion that registering foreign corporations effectively “consented” to personal jurisdiction—a waivable defense, after all. The immediate implications of the decision of Mallory are limited, as Pennsylvania’s statutory scheme, at the moment at least, stands alone in its breadth. But as Justice Barrett warned in dissent, “[i]f States take up the Court’s invitation to manipulate registration,” the Court’s general jurisdiction precedents—which generally limit such all-purpose jurisdiction to a corporation’s state of incorporation and principal place of business—“will be obsolete.”

Whether Justice Barrett’s forecast comes to pass will also depend on whether statutes like Pennsylvania’s can survive a challenge under the dormant Commerce Clause. In a notable concurrence providing the Court’s fifth vote, Justice Alito explained that while he could not agree that the Pennsylvania statute violated the defendant corporation’s Due Process rights, “there is a good prospect” it violates the dormant Commerce Clause’s implied restrictions on discriminating against out-of-state corporations and unduly burdening interstate commerce. Such challenges are likely to gain traction in light of Justice Alito’s concurrence, particularly if other states follow in Pennsylvania’s footsteps.

7. Securities Law. In Slack Technologies, LLC Pirani, a unanimous Supreme Court held that liability under Section 11 of the Securities Act of 1933 attaches only when a buyer can trace the purchased shares to a false or misleading registration statement. This tracing requirement had been unanimously applied in the lower courts for decades, until the Ninth Circuit broke ranks in 2021. While the Slack decision’s practical impact will thus be limited, it eliminated an incipient threat to a long-established defense against Section 11 liability and reduced the incentives for forum-shopping by plaintiff stockholders. In reaching that result, however, the Court expressly declined to resolve whether an equivalent tracing requirement applies to claims brought under Section 12 of the Securities Act, which prohibits the sale of securities by the use of a materially misleading prospectus or oral communication—setting up the possibility of further litigation in a future Term.

8. Takings Clause. In Tyler Hennepin County, Minnesota, a unanimous Supreme Court held that a Minnesota county violated the Takings Clause of the Fifth Amendment (as applied to the states through the Fourteenth Amendment) by selling an elderly woman’s home to satisfy a $15,000 tax bill and then keeping the balance of the sale proceeds for itself. Although the state may seize and sell property to recover amounts owed by taxpayers, any value remaining after those amounts have been satisfied constitutes “property” under the Takings Clause, protected from uncompensated appropriation by the state. While Minnesota had attempted to create a statutory exception to this general principle, “property rights,” the Court noted, “cannot be so easily manipulated.” Chief Justice Roberts’ brisk opinion for the Court suggests that Tyler was a simple case, but the Court was in fact reversing a contrary Eighth Circuit decision and resolving a deep split in authority among state and federal courts. That the Court dispatched the case with such efficiency confirms that Takings Clause challenges, while less straightforward in the regulatory takings context, remain a viable weapon against certain kinds of adverse government action.

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The Court has already granted certiorari in several cases to be decided during October Term 2023 that could have significant effects on commercial litigation and the business community, including several potential blockbusters concerning administrative law.

In CFPB v. Community Financial Services Association of America, the Court will consider whether the statute providing funding to the CFPB violates separation-of-powers principles. The agency is, uniquely, not funded with periodic congressional appropriations. Rather, it receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments. According to the Fifth Circuit panel decision which the Supreme Court will review, “Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers.” In addition to calling the future of the CFPB into question, the case—as the government itself acknowledged— “threatens the validity of all past CFPB actions as well.”

In Loper Bright Enterprises v. Raimondo, the Court will consider whether to overrule its seminal but embattled decision in Chevron v. Natural Resources Defense Council. Under Chevron, courts defer to federal agencies’ interpretations of ambiguous statutes, as long as their interpretations are reasonable. In recent years, the Court has chipped away at Chevron, limiting its application. Multiple Justices have expressed skepticism of the doctrine. And as a result, the government often chooses not to rely on Chevron when defending agency action and rules. After the Court decides Loper, the government may no longer have a choice.

Finally, as was widely reported last week, the Court has agreed to review the Fifth Circuit’s far-reaching decision in Jarkesy v. SEC, which invalidated SEC administrative proceedings altogether as violative of the Seventh Amendment right to a jury trial, the so-called nondelegation doctrine, and the Take Care Clause of Article II. The decision is likely to have ramifications not only for SEC enforcement, but also for similar administrative adjudication schemes—most notably, the administrative process the FTC utilizes to challenge mergers as anticompetitive.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “The Supreme Court’s Business Docket: October Term 2022 in Review,” dated July 7, 2023. 

1 Comment

  1. E.Yates

    Respectfully, In Yegiazaryan v. Smagin, I would argue that Justices Alito, Thomas, and Gorusch dissent demonstrated little essential facts analysis.

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