You may have gone to pay for a purchase and been told by the store owner that there was an extra charge to pay by credit card. And you’ve undoubtedly gone to a gas station with two sets of prices: lower prices for cash and higher prices for credit cards.

Is there any difference between the two practices? Under Florida law, there is. Under section 501.0117, Florida Statutes, the store owner actually committed a misdemeanor by imposing a “surcharge” for paying by credit card:

A seller or lessor in a sales or lease transaction may not impose a surcharge on the buyer or lessee for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller or lessor accepts payment by credit card. A surcharge is any additional amount imposed at the time of a sale or lease transaction by the seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit card to make payment.

On the other hand, section 501.0117 says it “does not apply to the offering of a discount for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card…” So it’s perfectly legal for gas stations to have lower cash prices.

In other words, under section 501.0117, businesses may offer a discount for using cash, but may not add an extra charge for using a payment card. Is there any real difference between charging less for not using a payment card (legal) and charging more for using a payment card (illegal)? Or is it merely a semantic difference?

Those are the questions at the heart of the 11th Circuit’s opinion in Dana’s Railroad Supply v. Attorney General, State of Florida, decided November 4, 2015. We’ll get back to the 11th Circuit’s answer, but first some background.

The Campaign Against State Anti-Surcharge Prohibitions

Dana’s is one of a series of lawsuits that have recently been brought by small businesses challenging state law prohibitions on credit card surcharges. Nine states have such laws. A Washington, D.C. law firm known for consumer rights advocacy, Gupta Beck, has filed suits challenging the surcharge prohibitions of the four largest–California, New York, Texas, and Florida–on first amendment grounds.

What’s behind the challenges? While the anti-surcharge statutes may appear, at first glance, to be consumer protection statutes intended to protect consumers from extra charges, the plaintiffs say the laws are actually intended to protect the ability of major credit card issuers (Visa, Mastercard, and American Express) to charge merchants excessive card processing (swipe) fees, which they say are two to three times higher in the U.S. than in other countries.

It was the major credit card issuers that lobbied for anti-surcharge statutes. In the late 1970s and early 1980s, Congress passed a federal anti-surcharge statute, but it expired and was not renewed. After its expiration, the plaintiffs say, the major credit card issuers lobbied state legislatures to pass state laws like section 501.0117.

Until recently, Visa and Mastercard’s merchant agreements prohibited merchants, even in states without statutory prohibitions, from charging customers extra for paying by credit card. But in a class action settlement resolving an antitrust case against the issuers, Visa and Mastercard agreed to remove those prohibitions from their merchant agreements. (The settlement has not yet become final, as certain class members have objected to the settlement. An appeal of the district court’s approval of the settlement is currently pending before the U.S. Court of Appeals for the 2nd Circuit.) But the removal of such provisions in merchant agreements can’t affect merchants’ practices in states where surcharges are still prohibited by statute.

What’s So Bad About Surcharges?

Why would Visa and Mastercard want to ban surcharges? As a matter of economics, the higher prices are, the fewer items consumers tend to buy. So if credit cards are more expensive to use, consumers are less likely to use them.

How do anti-surcharge laws hurt consumers? Merchants must pay credit card processing fees, but can’t charge credit card users directly for the fees. So credit card use raises the merchants’ overall costs. And because they are prohibited from passing on the costs of credit card processing directly to credit card users, the charges are instead reflected in higher prices charged to all customers to cover the costs.

(For example, suppose 50% of a merchant’s customers use credit cards and the merchant is charged 4% per transaction. With surcharges allowed, the merchant could charge 4% extra to the credit card users to cover the processing. With surcharges prohibited, the merchant must charge all customers 2% higher prices to cover the processing fee.) In this sense, anti-surcharge laws help one group of customers (credit card users) at the expense of another group (cash-paying customers). That transfer is magnified due to the prevalence of rewards cards (which often cost merchants the most to process), as cash customers are essentially paying (through higher prices merchants must charge across the board to cover credit card processing) for the rewards a subset of customers receive for using their credit cards.

But in another sense, anti-surcharge prohibitions hurt all consumers, as well as all merchants. They do so by increasing credit card usage, which leads to higher merchant costs, which lead to higher prices across the board.

And they do so by allowing Visa and Mastercard to charge higher processing fees than they otherwise could. Due to the lack of surcharges, consumers don’t know how much of the price of the items they buy is attributable to credit card processing charges (just as they don’t know what portion of an item’s price is attributable other items of overhead), so consumers, the card companies’ customers, don’t put any pressure on card issuers to charge lower transaction fees.

But recall that while merchants can impose surcharges for using credit cards, they can offer cash discounts. Why wouldn’t allowing merchants to give discounts for cash-paying customers have the same effect as allowing merchants to charge credit card users a surcharge? According to the merchants (and the economics research on which they rely), consumer behavior is more likely to change to avoid a loss than to avoid missing out on a benefit. So if paying with a credit card results in a surcharge (a loss), consumers will be less likely to choose to use a credit card than if paying with a credit card simply means missing out on a cash discount (a potential gain).

Speech or Conduct?

The challenges to anti-surcharge statutes are premised on the assertion that those statutes regulate speech, rather than conduct. That is because the 1st Amendment only applies to speech.

Structuring a transaction is generally thought to be conduct, not speech, and many statutes regulate such activities without any suggestion that they are regulating speech. So how is section 501.0117’s prohibition on surcharges any different?

According to the 11th Circuit, section 501.0117 doesn’t prohibit the conduct it appears at first glance to govern, which the court characterized as “dual pricing,” i.e., charging higher prices to credit card users than to cash buyers. That can’t be the function of the statute because it allows cash discounts, which are the functional equivalent of credit card surcharges.

Presuming that the statute must do something, the court pondered whether it might prohibit surcharges that are not disclosed before the transaction occurs. But it concluded that conduct could not be what the statute prohibits, due to the language of section 501.0117 as well as because it is already prohibited by another statute.

If the statute doesn’t prohibit dual-pricing, and prohibits “surcharges” but not “discounts,” then its focus can only be on speech, i.e., the words merchants may use to describe the fact that consumers must pay extra to use a credit card. Merchants are allowed to call higher credit card prices standard prices, and lower cash prices “discounts,” but are prohibited from calling cash prices standard and credit card prices “surcharges.”

But whether you call the lower price a discount and the other price standard or call one price standard and the other a surcharge doesn’t change the conduct, only the words used to describe it. So section 501.0117 regulates–and prohibits–certain speech. The court analogized the statute to a state law prohibiting restaurants from serving half-empty glasses of water but permitting them to serve half-full glasses.

Once finding that the statute regulates speech rather than conduct, it was not a large jump to conclude that it violates the 1st Amendment. The 1st Amendment allows some leeway for the government to regulate commercial speech. But commercial speech restrictions must relate to “misleading or related to unlawful activity,” the government must have a substantial interest at stake, and the regulation must advance that interest, in a way that does not prohibit more speech than necessary.

Given the court’s understanding of section 501.0117 as merely regulating semantics, telling merchants words they can and can’t use to describe dual pricing, it followed that section 501.0117 could not past muster. Arguably, the statute actually requires misleading speech rather than prohibiting it. The reason for dual pricing, after all, is to allow the merchant to charge more (surcharge) for credit card transactions to pay for the credit card processing fees.

Will Credit Card Surcharges Become the Norm?

For now, it would seem that merchants in Florida are free to impose surcharges for credit card transactions. But it remains to be seen whether this decision will have any real effect on the marketplace.

There’s also a chance the November decision may not be the final word. In the case challenging New York’s anti-surcharge law, the 2nd Circuit unanimously rejected the argument that the statute regulated speech.

And Judge Carnes reached the same conclusion about section 501.0117 in his vigorous dissent from the 11th Circuit’s decision in Dana’s. So there’s a non-trivial possibility that the 11th Circuit might reconsider the case en banc, or even that the Supreme Court might review it, if requested.

Florida commercial fishing industry, meet the Supreme Court of the United States. The Supreme Court has agreed to hear three cases from Florida in its current term, two of which involve commercial fishing.

In the most recently granted case, the state of Florida is set to do battle with the state of Georgia, in a dispute over Georgia’s consumption of water from two rivers that flow south through Georgia before converging and flowing through northwest Florida into the Gulf of Mexico. On November 3, 2014, the Supreme Court granted Florida’s motion for leave to file its complaint against Georgia, which is tantamount to the Supreme Court agreeing to hear the case. I will preview that case in my next post.  

This post focuses on a second case from Florida involving commercial fishing, Yates v. United States, which has been on the Supreme Court’s docket since late April. Oral argument has been set for today, November 5, 2014. While affecting fewer Floridians, the case has drawn participation from a host of amici curiae (literally, “friends of the court,” parties not directly involved with the case that want to weigh in to assist the Court in reaching its decision), indicating that it is seen as having the potential to have significant legal consequences.

Is Throwing Fish Overboard a Federal Crime?  

In Yates, the Supreme Court is reviewing the Eleventh Circuit’s interpretation of a federal statute that, at first blush, would seem to have nothing to do with commercial fishing. But the 11th Circuit concluded that it is fully applicable to commercial fishermen.

The statute, 18 U.S.C. section 1519, was passed in the wake of the Enron scandal, as part of the Sarbanes Oxley Act (SOX). Intended to avoid a repeat of the type of fraud perpetrated by Enron on investors and employees, SOX imposed more stringent accounting and financial reporting requirements for public companies, as well as other reforms.

Section 1519 was intended to close a loophole that allowed Enron to avoid punishment for its concerted efforts to destroy evidence and thwart investigation of its fraud. Accordingly, the statute makes it a crime to destroy or conceal “any record, document, or tangible object with the intent to impede, obstruct, or influence” a federal investigation. 

Other than federal prosecutors, few would have thought that Congress had John Yates in mind when it passed section 1519. Yates was the captain of a commercial fishing boat that was fishing for red grouper in the Gulf of Mexico in August 2007, when an FWC Officer boarded his vessel to inspect for compliance with fishing regulations. (At the time, Yates’ boat was fishing in federal waters, and the FWC officer had been deputized by the National Marine Fisheries Service.)

The FWC officer measured red grouper he suspected were shorter than 20 inches long, the minimum size then-current regulations allowed to be harvested. He found 72 undersized red grouper, issued a regulatory citation, and placed the undersized red grouper in wooden crates in the fish box on Yates’ boat, instructing Yates and his crew not to disturb them.

After returning to shore, the FWC officer measured the crated fish in the fish box, and found only 69 red grouper to be undersized, three fewer than before. He believed Yates and his crew had replaced the original fish with other fish. A member of Yates’ crew said Yates had instructed the crew to throw some undersized fish overboard.

As a result, prosecutors charged Yates with violating section 1519. Harvesting undersized fish is a civil regulatory violation, which could have subjected Yates only to paying a fine and having his fishing license suspended.

But because he had allegedly thrown undersized fish overboard, he faced criminal penalties under section 1519. He was eventually convicted and sentenced to spend 30 days in jail. Due to the conviction, he has been unable to find work as a captain.

The issue in the case before the Supreme Court is whether throwing fish overboard falls within the conduct made illegal by section 1519. More precisely, the issue is whether throwing fish overboard amounts to destroying or concealing a “tangible object” as that term is used in section 1519.

The 11th Circuit had little trouble concluding that it does. Its reasoning was simple. The Supreme Court has instructed that statutes should be interpreted according to the plain meaning of their terms. Unless the words are ambiguous, courts aren’t supposed to look to the intent behind the law. The term “tangible object” doesn’t appear to be ambiguous. And it literally means any physical object. A fish is a physical object. So the statute would seem to apply to Yates, even though Congress may not have intended it to apply to him.

There is no circuit split on the issue to resolve, which is the primary basis on which the Supreme Court generally agrees to hear cases. No other court of appeals is known to have confronted the issue whether a fish is a “tangible object” under section 1519. And the language of the statute seems clear enough.

So why would the Supreme Court take up the case? The answer may be that the case cries out for placing some limits on the doctrine of blindly applying federal criminal statutes, without any consideration of legislative intent, practical outcomes, or the appropriateness of making conduct a federal crime — at least in some circumstances.

The Supreme Court’s 2014 decision in Bond v. United States may provide a clue as to the Court’s thinking. In that case, the government invoked a statute dealing with chemical warfare to prosecute a woman who had tried to poison her former best friend, after discovering that she was pregnant with the woman’s husband’s child. Although the woman’s conduct fell under the literal meaning of the statute, the Supreme Court looked further. The statute’s wording may not have been ambiguous in itself, but Congressional overreach made it ambiguous in a sense:

[T]he ambiguity derives from the improbably broad reach of the key statutory definition given the term—“chemical weapon”—being defined; the deeply serious consequences of adopting such a boundless reading; and the lack of any apparent need to do so in light of the context from which the statute arose—a treaty about chemical warfare and terrorism. We conclude that, in this curious case, we can insist on a clear indication that Congress meant to reach purely local crimes, before interpreting the statute’s expansive language in a way that intrudes on the police power of the States.

Similar concerns about making it a federal crime to throw fish overboard may have motivated the Supreme Court to take up Yates. Most of the large contingent of amici curiae–including libertarian and pro-business groups, professors, criminal defense lawyers, and former House Financial Services Committee Chairman Michael Oxley, the Oxley in Sarbanes Oxley–urge the Court to go in a similar direction in Yates as it did in Bond. Many of the amicus briefs focus on what they call “overcriminalization” of conduct under federal law, and ask the Supreme Court to impose limits on the permissible reach of federal criminal law.

SOX seems like a good statute to use to advance that argument. It was controversial when passed, with some saying its requirements are too onerous, and it is highly disliked by Wall Street and others in the business community.   

But the question remains whether the majority of the Supreme Court will consider prosecuting a commercial fisherman under SOX a “curious” enough case to justify looking beyond the unambiguous words of the statute. If so, the bigger issue will be how the Court draws the line as to when courts may look behing the plain meaning of statutory terms when determining the scope of conduct made illegal by a federal criminal statute.    

With the collapse of multiple large scale Ponzi schemes in recent years, Federal courts in Florida and elsewhere have been wrestling with so-called “clawback” suits. The way Ponzi schemes work is that the schemers induce investors to give them money that is supposed to be invested, usually with high returns promised.

But because the promised returns are unsustainable and the schemers syphon off investors’ funds for their own personal use, the schemers cannot pay the promised returns to investors when they seek to liquidate their investments. Thus, the Ponzi schemers recruit additional investors, and instead of investing the funds received, they use the funds to pay the earlier investors the principal and earnings promised.

Typically, Ponzi schemes collapse and are discovered when the new money coming in is insufficient to pay the amount promised to withdrawing earlier investors. Investors that withdraw early often see the return of the principal they invested and also receive “earnings” on that principal. When a Ponzi scheme collapses, there are usually insufficient funds to return the principal given to the Ponzi schemers by the remaining investors, much less the promised earnings. 

In a clawback suit, the bankruptcy trustee or receiver appointed to oversee the wind-up of an entity involved in a Ponzi scheme seeks to recover funds paid to the earlier investors in order to achieve a more equitable distribution of funds as between earlier and later investors. The theory of the suits is that the transfers to the earlier investors were fraudulent transfers, which may be recovered under fraudulent transfer statutes, such the Florida Uniform Fraudulent Transfer Act (FUFTA), Florida Statutes §726.101 et seq.

But Ponzi scheme clawback suits aren’t the typical fraudulent transfer suit. In Wiand v. Lee (decided June 2, 2014), the Eleventh Circuit addressed the viability of such suits under FUFTA, and resoundingly endorsed them. 

The clawback suit in Wiand resulted from the collapse of a Ponzi scheme run by Arthur Nadel, in which he induced investments into certain hedge funds. Wiand was the receiver for those funds. Lee was an early investor that had withdrawn its investment and was paid back its principal, plus profits. Wiand sought return of the profits.

The 11th Circuit held that a transfer made in furtherance of a Ponzi scheme satisfies the requirements of the “actual fraud” provision of FUFTA. Under the actual fraud provision, a transfer is fraudulent when the debtor made the transfer “with actual intent to hinder, delay, or defraud any creditor of the debtor…” Courts have interpreted that provision to mean there must be “[1] a creditor to be defrauded, [2] a debtor intending fraud, and [3] a conveyance of property which is applicable by law to the payment of the debt due.”

Although the second element, fraudulent intent, is usually determined based on “badges of fraud,” the 11th Circuit held that proof that a transfer was made in furtherance of a Ponzi scheme is sufficient to show fraudulent intent without the need to consider the “badges of fraud.”

The more difficult questions were who was the creditor and debtor and whether the funds received by Lee were “property of the debtor,” as required by FUFTA to recover them. Money from the hedge funds was transferred to Lee by Nadel.

The court of appeals explained that the hedge funds were the creditors, because when Nadel illegally transferred money from them, he became a debtor to them for the funds he illegally removed. It then turned to the issue of whether the funds were “property of the debtor.”

Although “property of the debtor” would appear to mean Nadel’s property given that he was the debtor, the 11th Circuit held otherwise. According to the court, under Florida law, “property of the debtor” means “property which is applicable by law to the payment of the debt due.” Because the funds removed created the debt owed by Nadel to the hedge funds, the funds he removed were “applicable by law to the payment of the debt due.”   

Addressing the receiver’s cross-appeal, the 11th Circuit held that pre-judgment interest should be awarded in FUFTA cases as a matter of course, except in limited circumstances where specific equitable factors counsel otherwise. The denial of prejudgment interest was reversed, with a remand for determination of whether any recognized equitable considerations justified the denial of prejudgment interest. 

As I mentioned in my last post, the Florida Supreme Court’s decision to approve the Florida Senate’s amended redistricting plan wasn’t the only late April 2012 decision to bring a measure of closure to unsettled legal issues. The stars seem to have aligned such that our state appellate courts as well the U.S. Court of Appeals for the 11th Circuit all released decisions in late April bringing a measure of closure on prominent, unsettled issues.

First, in Geico General Insurance Co. v. Virtual Imaging Services, Inc. (a/a/o Maria Tirado), No. 3D11-581,the 3rd DCA went a long way toward finding closure on the hotly contested issue of whether PIP insurers can take advantage of the reimbursement rate caps provided in the 2008 amendments to Florida’s No Fault/Personal Injury Protection Law if their policies don’t expressly state that the caps will be used. That issue, on which the 4th DCA had the first word among Florida appellate courts in its 2011 decision in Kingsway Amigo Insurance Company v. Ocean Health, Inc., has pre-occupied PIP lawyers ever since. I’ve also written multiple posts about it, including this one, this one, and this one.

In its Tirado decision, the Third District did a tremendous favor for opponents of the rule set down in Kingway Amigo (PIP insurers and their lawyers chief among them) by certifying the issue as a question of great public imporance. You may recall that the lack of an express and direct conflict among the District Courts of Appeal on the issue has prevented the Florida Supreme Court from stepping in end the controversy.

But now the issue has been certified as a question of great public importance, the Florida Supreme Court can exercise jurisdiction to review Tirado even without a conflict among the DCAs. If the Supreme Court chooses to do so, as the ultimate arbiter of Florida law, it can bring closure to this ongoing PIP battle. I’m guessing that it will.

Second, in the parallel cases of Calder Race Course, Inc. v. Florida Department of Business and Professional Regulation, West Flagler Associates, Ltd. v. Fla. DBPR, and Florida Gaming Centers, Inc. v. Fla. DBPR, the Florida Supreme Court brought closure on the issue of whether the legislature validly exercised its Constitutional authority in enacting 2009 legislation that allowed Hialeah Race Track to operate slot machines. That legislative enactment had been challenged by the three Miami-Dade facilities that were already licensed to operate slot machines prior to the legislation, as discussed in this post. On the same day as its redistricting decision was released, the Supreme Court declined to exercise its discretionary jurisdiction over the competitors’ appeal from the 1st DCA’s decision upholding Hialeah Race Track’s authorization to operate slot machines.

Third, the 11th Circuit released its long awaited decision in FTC v. Watson Pharmaceuticals, Inc., (a/k/a In re: Androgel Antitrust Litigation) addressing the prominent antitrust/patent/health care law issue of the validity of so-called “reverse payment” or “pay for delay” settlements between pharmaceutical patent holders (i.e. name brand drug makers) and competing drug makers seeking to market generic alternatives. The FTC and the Antitrust Division of the DOJ, in addition to certain academics have fretted for years about such arrangements, and their effects on drug prices…

Continue Reading April Showers Bring Closure On Unsettled Legal Issues Too

Appellate courts often struggle with the tension between allowing for consideration of the individual circumstances of each case and establishing clear dividing lines between conduct that violates the law and conduct that does not. Courts have assigned varying amounts of weight to each of these considerations at different points in history. Particularly in recent years (and particularly in U.S. Supreme Court decisions), the goal of line-drawing and predictability has been increasingly emphasized.

Yesterday, the 11th Circuit released its opinion in Mulhall v. Unite Here Local 355 (No. 11-10594), a case involving union-employer relations, that appears to be a step in the opposite direction. The first thing that jumps out about Mulhall is that, unlike in many cases involving employer-union relations, the litigation did not result from the failure of an employer and union to reach an agreement, but from the fact that they did reach an agreement. The problem, according to Mulhall (who worked for the employer, Mardi Gras Gaming) was that the agreement allegedly violated the Labor Management Relations Act (a/k/a the Taft-Hartley Act).

The essential facts are these: The union wanted to organize Mardi Gras employees. Mardi Gras wanted support for a ballot initiative regarding casinos. They entered into an agreement under which Mardi Gras would give the union access to and information about employees and would remain neutral about unionization. In return, the union promised not to strike if the employees chose to unionize, and to provide financial support for the ballot initiative.

Mulhall didn’t want Mardi Gras employees to unionize. So he sued the employer and union, claiming their agreement violated the LMRA’s prohibition on “any employer…pay[ing], lend[ing], or deliver[ing] any money or other thing of value…to any labor organization…[that] seeks to represent” its employees. The purpose of this prohibition is to prevent corruption, i.e., unions being bought off by employers.

The issue in Mulhall was whether the access, information, and neutrality Mardi Gras promised to the union could amount to a “thing of value” paid, lent, or delivered to the union. The district court said it could not, and dismissed the complaint.

Subsumed within that issue was the question of how to define “thing of value.” The majority of the 11th Circuit panel (consisting of Judges Wilson and Fay) held that it was for the jury to decide whether the “organizing assistance” (access, information and neutrality) promised by Mardi Gras had monetary value and was therefore a “thing of value.” In so holding, the 11th Circuit acknowledged that it was creating a circuit split with the 3rd and 4th Circuits, both of which have held that, as a matter of law, an employer’s promise of neutrality and cooperation does not violate the LMRA.

The majority partly based its conclusion on 11th Circuit decisions interpreting the phrase “thing of value” in other statutes as well as on a recent 6th Circuit decision finding that an intangible benefit can be a “thing of value.” But its decision was more heavily influenced by an old 2nd Circuit opinion explaining that courts should use common sense in deciding whether a benefit is a “thing of value” because value is in the eyes of the beholder. Applying the 2nd Circuit’s “common sense” test, the majority said that intangible benefits cannot be categorically exempted from the LMRA.

Whether a cooperation and neutrality agreement violates the LMRA depends on the circumstances, the majority concluded. Most important is the intent underlying the agreement, as “innocuous ground rules can become illegal payments if used as valuable consideration in a scheme to corrupt a union or to extort a benefit from an employer.” So it was for the jury to decide whether the agreement between Mardi Gras and the union crossed that line. Thus, the court majority rejected the 3rd and 4th Circuits’ categorical rule for a case-by-case analysis of the surrounding circumstances.

The dissent went the other way. Judge Restani of the U.S. Court of International Trade, sitting on the 11th Circuit by designation (as she does on a fairly regular basis), agreed with the 3rd and 4th Circuits’ reasoning. She also took issue with the majority’s focus on intent as the deciding factor, and noted that even if intent was the polestar, Mulhall’s complaint did not allege facts showing corrupt intent.       

Mulhall is a good illustration of the trade-off between line-drawing and situational justice, and the reason for the tension between them. It’s hard to argue with the majority’s common sense insight that depending on the circumstances, an intangible benefit can be either innocuous or corrupt. And the benefit of its case-by-case approach is that it does not give immunity in situations where there is a corrupt bargain.

But the countervailing consequence is that employers and unions within the 11th Circuit’s jurisdiction are now left without clear guidance about the legality of entering into cooperation and neutrality agreements. Lacking such predictability, they may forego entering into such arrangements entirely, even when to do so would be beneficial and entirely legal.

Of course, given the circuit split, there’s a decent chance that Mulhill will wind up before the U.S. Supreme Court. And if recent history is any guide, the Court may well choose to elevate clear line-drawing over consideration of individual circumstances. Or not. 

The 11th Circuit is back in full swing releasing opinions after a brief hiatus during the holiday season. Among the decisions handed down last week was Storcher v. Guarantee Trust Life Insurance Company, a decision on insurance coverage under a home health care policy.

At issue was whether a policy covering “[v]isits by a Home Health Aide to provide custodial care and other personal health care services specifically ordered by a Doctor” required the insurer to pay for care provided by the staff of an assisted living facility to a resident. The Eleventh Circuit held that it did.

That result may seem odd given that we often think of “home health care” as care provided to a patient living independently in a house or apartment, as contrasted with care administered in a hospital, nursing home, or similar facility. Assisted living facilities would seem to fall somewhere in between those alternatives.

But the court didn’t confront the status of assisted living facilities head on, as the insurer conceded that the care was administered to Storcher was in his “home.” The opinion does not disclose the policy’s definition of “home,” but I suspect that this concession was necessitated by a broad definition that (perhaps unintentionally) could not reasonably be said to exclude assisted living facilities.

Instead, the insurer tried to raise the issue from the other side, contesting coverage by arguing that the assisted living facility staff members who provided the care were not “Home Health Aides,” i.e., employees of a “Home Health Care Agency.” Unfortunately for the carrier (and fortunately for Storcher), however, that term was also broadly defined to include “a service or agency which is licensed by or legally operated in your state” except for Employment Agencies and Nurse Registries.

The insurer argued that this definition, and its exclusion of the two types of entities that were allowed to provide home health care without a license at the time the policy was issued, showed that the policy only covered care provided by licensed home health agencies. And the facility where Storcher was living was licensed as an assisted living facility, not a home health agency. (After the policy was issued, the home health agency statute, Florida Statutes Section 400.464, was amended to specifically exempt assisted living facilities from licensing under that statute so long as they are licensed as assisted living facilities.) So the carrier argued that since the assisted living facility wasn’t licensed as a home health agency, the care it provided wasn’t covered. 

But as in many cases where coverage is contested based on policy language that was assertedly intended to track statutory language, the 11th Circuit was unwilling to entertain that argument in the face of broad policy language that the court felt was unambiguous and had a simple meaning that did not explicitly so limit coverage. 

Despite the annual slow down in appellate courts (as in the rest of the world) at this time of year, December 2011 has seen a spate of major antitrust decisions being handed down. As I know from experience, antitrust cases are about as complex as it comes, and as a result, they often require long opinions to decide. It may be that these decisions’ release dates might have something to do with busy judges putting off these time-consuming decisions to the end of the year, but wanting to get them out before they became part of year-end unresolved case statistics. But that would only be a guess.

In any event, major decisions have recently come down at the federal level from the 3rd and 11th Circuits, and on the state level from Florida’s 4th District Court of Appeal.

The 4th DCA’s decision in MYD Marine Distributor, Inc. v. International Paint Ltd. (released on December 14, 2011) takes on the U.S. Supreme Court’s major decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which requires plaintiffs pleading claims based on antitrust conspiracies to include detailed factual allegations supporting the assertion that the defendants entered into an unlawful agreement, and Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), which set down standards for pleading that a conspiracy harmed competition. The 4th DCA held that both decisions apply to cases filed in Florida state court asserting claims under the Florida Antitrust law. But it also held that MYD’s complaint, which alleged that its competitor marine paint distributors had conspired with one another as well as with the manufacturer of a premium paint for boats to have MYD cut off as a distributor of that paint because MYD was undercutting their prices. 

The 11th Circuit’s decision, FTC v. Phoebe Putney Health System, Inc. (released on December 9, 2011) threw a wrench in the Federal Trade Commision’s campaign to take on consolidation among large healthcare facilities that threaten competition and contribute to rising healthcare costs. In the Phoebe Putney case, the FTC sought to enjoin the acquisition by a public hospital of its only competitor in Dougherty County, Georgia, and thereby create a monopoly in that market.

In an opinion authored by Judge Tjoflat, the 11th Circuit agreed that the transaction would create a monopoly but affirmed the dismissal of the FTC’s case, holding that the “state action doctrine” made antitrust laws inapplicable and rendered the FTC powerless to challenge the transaction. In essence, the court held that in authorizing public hospitals like Phoebe Putney to acquire other hospitals, the Georgia legislature had contemplated and authorized even acquisitions that created monopolies. The state action doctrine therefore exempted the transaction from antitrust scrutiny. This decision essentially forecloses the FTC and DOJ from challenging any merger in Georgia involving a public hospital, and its reasoning could result in foreclosing challenges to acquisitions involving public hospitals in other states as well. 

The 3rd Circuit’s en banc decision in Sullivan v. DB Investments, Inc. (released on December 20, 2011), is a significant decision dealing with antitrust class actions brought by alleged “indirect purchasers” of price-fixed goods. The en banc court held that it is appropriate (at least in the settlement context) to certify a nationwide class of indirect purchasers asserting antitrust claims under the laws of all 50 states, even though class members from certain states did not have the right to sue for damages for antitrust violations.

A more thorough discussion of Sullivan follows. 

Continue Reading ‘Tis the Season for Antitrust

It’s been almost 5 years since the Florida Supreme Court issued its grand compromise decision in Engle v. Liggett Group, Inc., 945 So. 2d 1246 (Fla. 2006).  As contemplated by that decision, many individual suits have been filed by Engle class members.  Some have been tried to a verdict or have been dismissed, and are now on appeal.  Can it be long before the Florida Supreme Court is compelled to step in to definitively resolve the next round of Engle issues?  

The District Courts of Appeal have recently been grappling with the thorny issues resulting from the Court’s decision to decertify the class, but allow class members to take advantage of 8 findings made by the Engle jury by way of res judicata

The 1st DCA gave an early interpretation of how to apply Engle in R.J. Reynolds Tobacco Co. v. Martin, decided in December 2010, in upholding a $28.3 million judgment in favor of a deceased smoker’s widow.  The Florida Supreme Court denied review in Martin in July. (RJR v Martin_07-19-2011_Order_Denying Review.pdf). 

Although the 11th Circuit had earlier offered its own thoughts on Engle, Martin stood as the only state appellate court decision on this score.  That changed on September 21, 2011, when the 4th DCA weighed in on Engle in R.J. Reynolds Tobacco Co. v. Brown, expressing some (but in my view, not much) disagreement with the 1st DCA’s application of it.  The tobacco industry defendants, which can’t be too happy with Engle or its aftermath, are no doubt chomping at the bit to use any disagreement among the DCAs to convince the Supreme Court to take up the case. 

Although it’s dangerous to try to read tea leaves, the differences between Martin and Brown, understood in context, don’t seem to me to be the type of conflict that would ordinarily win review, particularly while the issues are still percolating in the other Districts.  On the other hand, the defendants may take a bit more hope from Chief Judge May’s stinging concurrence in Brown, which questioned whether Engle can be applied as written without violating due process, an implication that could give the justices more of an impetus to address these issues sooner rather than later. 

And the Supreme Court will undoubtedly be asked to take up some of the other issues percolating in the Engle progeny cases, such as the Constitutionality of the statute passed after the State’s settlement with the Tobacco industry, which reduces the bonds that industry defendants must post for appeals.  In addition, although the 3rd DCA has yet to take up the core issue addressed in Martin and Brown, last week in Rey v. Phillip Morris, Inc., it interpreted Engle (and applied traditional conspiracy principles) to hold that any class member can sue Lorillard, Liggett, and Vector Group for their role in the conspiracy to conceal information, even though the class member didn’t smoke those companies’ cigarettes, and can take advantage of the Engle findings.  The Supreme Court will no doubt be asked to review that decision as well.      

So I have no doubt that the court will wade back into this controversy sooner or later.  The question is which one.

More details below.

Continue Reading Tobacco Litigation Headed Back to Supreme Court?

If you read through all 207 pages of 11th Circuit Judge Hull and Judge Dubina’s co-authored majority opinion in Florida v. U.S. Department of Health and Human Services, you’ll notice that although the state Attorneys General succeeded in having the Health Care Act’s individual mandate declared unconstitutional, it wasn’t their arguments that ruled the day. You may also notice the unusual number of citations to amicus briefs. And you may notice that the 2-1 decision resulted, more than anything, from the persuasive power of arguments submitted by these “friends of the court.”

The parties in the Florida case and others challenging PPACA (a/k/a the Patient Protection and Affordable Care Act) have focused their arguments on the issue of whether the individual mandate compels citizens to enter into economic activity, and if so, whether the federal government’s power to “regulate commerce” under the Constitution includes the power to compel a citizen to engage in economic activity rather than merely to regulate the economic activity of citizens who are already engaged in it. Until now, so have the courts’ decisions in those cases.

Not the 11th Circuit majority. It was “not persuaded that the formalistic dichotomy of activity and inactivity provides a workable or persuasive enough answer in this case.” Instead, the court’s analysis focused on whether, assuming the individual mandate is properly characterized as regulating activities, the activities it regulates “substantially affect interstate commerce.”

Congressional findings in PPACA attempt to show that the individual mandate would have those substantial effects, by preventing the “cost-shifting” that results when uninsured persons are treated by medical providers but unable to pay, causing the providers to shift those unpaid costs to persons who do pay for treatment, i.e., health insurers and health insurance purchasers.  But the 11th Circuit majority deemed those findings inadequate to satisfy the “substantial effects” test.

And key to that rejection was the majority’s embrace of a the position advanced by a group of economists who participated as amici curiae.  Their brief included a breakdown of cost-shifting and argued that different types of uninsured persons are responsible for separable portions of cost-shifting, and that the group that the individual mandate would require to buy health insurance isn’t responsible for most of the cost-shifting. Brief of Amici Economists.pdf.  Echoing that reasoning, Judges Hull and Dubina ultimately found that “in reality, the primary persons regulated by the individual mandate are not cost-shifters but healthy individuals who forego purchasing insurance.”

On that basis, the 11th Circuit majority concluded that the link between the activity regulated by the individual mandate, on the one hand, and cost-shifting, on the other, was too attenuated to satisfy the “substantial effects” test: “At best, we can say that the uninsured may, at some point in the unforeseeable future, create that cost-shifting consequence.”  As such, the majority held that the Commerce Clause did not empower the federal government to enact the individual mandate.

Just how significant a role amici played in influencing the majority is perhaps even better illustrated by the pages of text Judge Marcus’s dissent devotes to responding to their arguments. Judge Marcus uses that space to express his strong disagreement with amici’s argument (which the majority appears to have accepted) that not all uninsured individuals will inevitably become healthcare consumers at some point in time. He goes on to discuss at length why the majority is wrong for adopting amici’s parsing of groups of uninsured, as well amici’s argument that it even matters.

But as much as the Florida PPACA case demonstrates the influence that “friends of the court” can have, the outcome also shows that there are limits. I doubt that the amici on either side of the case are particularly happy with the result; leaving PPACA intact sans the individual mandate was no one’s goal, and it would result in sky high health insurance premiums for everyone who buys it, including economists. And no one likes sky high premiums, especially economists.  Even when their amici curiae briefs are responsible for that result.

If you’re like me, some mornings you’re greeted by an email that purports to be from a potential client (usually located in China, Hong Kong, or Japan) that reads something like this:

Dear Counsel [or Sir or some other generic greeting],

On behalf of XYZ Company, we request your legal services and possible representation on a Debt Recovery matter involving XYZ Company and a client in your jurisdiction.

Do let us know if you are currently accepting new clients. We look forward to a prompt response from you. Thank you very much.

Sincerely,

[Mr. ________

XYZ Company]

I’ll admit that the first time I received such an email years ago, I entertained the idea, for a brief moment at least, that maybe, just maybe, it was legitimate inquiry. But then my inner skeptic took over, and I went right to snopes.com or some similar site to see if scams of this type were going around. They were, of course.  I deleted the email and went back to the grind.

Now I just delete them as soon as they come in. As I’m sure you do. And as I thought every lawyer did.

But it seems that some lawyer or employee at a now-defunct central Florida law firm didn’t listen to his or her inner skeptic when he/she received one of those emails back in 2007. Giving that person the benefit of the doubt, let’s assume these scams weren’t so well publicized back then.

The Scam

In any event, an inquiry came from Hong Kong asking the law firm to set up a U.S. subsidiary of a supposed Hong Kong parent company. The “client” subsequently sent a cashier’s check to the law firm for a bit more than $197,000. The lawyer deposited it in the firm’s lawyer’s trust (IOTA) account. Before the check cleared, the client told the law firm to wire $180,000+ to other foreign entities.

The law firm proceeded to follow the client’s directions. And because the law firm had enough funds from other clients in its IOTA account, the bank covered the wire transfers even though the original check hadn’t cleared. The “client’s” check, of course, never did clear.

The Insurance Coverage Dispute

Realizing it was short $180,000+ to its other clients, the law firm sought coverage from its malpractice insurer for their lost funds.  [I imagine the adjuster’s reaction went something like this: “You did what? You fell for one of those scams? And you want us to indemnify you for it?!”]

The insurer denied coverage. The law firm filed a declaratory judgment action in the Middle District of Florida. Judge Virginia M. Hernandez Covington granted summary judgment to the insurer.

In Nardella Chong, P.A. v. Medmarc Casualty Insurance Co., No. 10-12237, decided May 27, 2011, the Eleventh Circuit reversed.

The Coverage Issues

The law firm’s professional liability policy indemnified it for “Damages” – defined as “any compensatory monetary judgment or award, or any settlement consented to by the” insurer, resulting from alleged “negligent acts or negligent omissions,” in “the performance of or failure to perform ‘Professional Services.’”

“Professional Services” was defined as including, among other things:

“Services performed . . . for others as an attorney;” and “services as an administrator, conservator, receiver, executor, guardian, trustee, committee of an incompetent person, or services performed in any similar fiduciary capacity, but only for those services typically and customarily performed by and attorney.”

In both the district court and the court of appeals, the case came down to two issues:

1. Did the law firm’s acts and omissions occur in the course of performing “Professional Services”?

2. Did the money the law firm owed its other clients (i.e., the funds lost in the scam that it had to repay into its trust account) amount to “damages” as defined by the policy?

The district court answered “no” to both questions, but the 11th Circuit answered “yes.”

The Court’s reasoning, and my analysis, is below.

 

Continue Reading Malpractice Insurance Covers Client Trust Funds Lost in Scam, 11th Circuit Holds