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.    

The U.S. Supreme Court may not be willing to go as far some had hoped in overruling its precedents. That is the message from the Supreme Court’s June 23, 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc. Adherence to precedent won the day in Halliburton, as the Court upheld the so-called “fraud on the market” presumption that enables securities fraud suits to be brought as class actions.

The specific issue of the case was of significance to Wall Street, investors, class action lawyers, and publicly traded corporations. But the larger question was how willing the current Supreme Court is to overturn its own precedents.  

At stake in Halliburton was whether the Supreme Court would reconsider the fraud on the market presumption, first embraced by the Court in Basic, Inc. v. Levinson, 485 U. S. 224 (1988). It is no exaggeration to say that overruling Basic would have put an end to securities fraud class actions. Many on Wall Street and in corporate boardrooms have long sought that result, to eliminate what they see as a nuissance that has become ubiquitous. Many investors (and their lawyers), on the other hand, would have mourned the death of what they consider to be an importance source of deterrence against fraud and a means (albeit limited) of obtaining compensation for fraud when it occurs. 

What is the the fraud on the market presumption and why is it so important? The presumption solves a basic problem in securities class actions. For a case to proceed as a class action, the plaintiffs must show, among other things, that the claims can be tried on behalf of a class of persons who are similarly situated to the plaintiffs (without the class members individually trying their claims) because most of the issues to be tried are common to all members of the class, i.e., if each class member were to bring suit individually, each would need to prove the same thing that the plaintiffs will prove in the class action trial. This factor is known as predominance — common questions must predominate over individual questions.

As is true of fraud claims generally, to prove securities fraud under the federal securities laws, the plaintiff must prove not only that the defendant made a fraudulent statement, but that the plaintiff relied on the fraudulent statement to his/her/its detriment. Whether any individual relied on a statement is generally an individualized inquiry. Did the individual hear or read the statement? Did he/she/it believe the statement? Did he/she/it take action (or refrain from taking action) because he/she/it believed it?

Such individualized inquiries are considered to prevent common questions from predominating over individual questions. Thus, if proof of actual reliance were required, a class action asserting claims of securities fraud could not be successfully maintained.    

The fraud on the market presumption solves that problem. It is based on the efficient markets hypothesis, which posits that when securities trade on an efficient market, the price of the securities will tend to incorporate all available information about the underlying business.Thus, if a corporation or its executive leadership makes a statement about the financial health of the corporation, investors will assimilate the information provided and the share price of the corporation will be affected.

The fraud on the market presumption incorporates that principle, such that a misrepresentation by a corporation or executive is presumed to have impacted the price of the corporation’s securities. So any investor who purchases the corporation’s securities at a price that was impacted (artificially inflated) by a misrepresentation, without showing direct reliance on the statement itself, can show reliance indirectly, by showing that he/she/it relied on the integrity of the price of the securities, which was artificially inflated by the misrepresentation.

All securities fraud class actions rely on the fraud on the market presumption. If the plaintiffs can show that the securities traded on an efficient market, that the misrepresentation was known to the public and material, that the plaintiff bought securities after the false statement was made but before the truth came to light, they are entitled to the fraud on the market presumption, thus making it unnecessary to prove individual reliance.

The defendants can then try to rebut the presumption, by disproving that the statement affected the prices of the securities, or by showing that the plaintiff did not actually rely on the price of the securities as being accurate.   

Economists have for years debated whether the efficient market hypothesis is truly valid. And correspondingly, lawyers have argued over the wisdom of the adoption of the fraud on the market presumption in Basic.

Seizing on that debate, and what some see as a Supreme Court that is willing to overturn even 25-year old precedents, the defendants in Halliburton expresly asked the Supreme Court to overrule Basic. And in granting certiorari, the Supreme Court agreed to consider doing so.

But, ultimately, only three dissenting justices saw fit to overrule Basic, with six — Chief Justice Roberts and Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan — voting to uphold it.

In so doing, Chief Justice Roberts, writing for the Court, indicated that the Court still adheres to its traditional hesitance to overrule settled precedent that has not always been evident in recent decisions. Even if the Court thinks the precedent was wrong, that is not enough to overturn it: 

Before overturning a long-settled precedent,…we require “special justification,” not just an argument that the precedent was wrongly decided.    

Moreover, the Court noted, “the principle of stare decisis has ‘special force'” when the issue is one of statutory interpretation, as was the issue in Basic.

Halliburton’s main reasons for overturning Basic were (1) that it was decided contrary to Congressional intent; and (2) that advancements in economic theory have undermined the validity of the efficient market hypothesis.

The Court rejected both arguments. It was unnecessary to address the first argument at length, because it was discussed by the dissenters in Basic but rejected by the Court majority. There was “no new reason to endorse it now.” 

The second argument was rejected because Halliburton had only pointed out that there is a debate among economists as to how quickly markets incorporate information and that there are variations in efficiency among markets. But that debate was ongoing at the time when Basic was decided. And Basic did not assume that markets were perfectly efficient, only that stock prices are responsive to public information about a corporation.

Although the Court rejected Halliburton’s efforts to overrule Basic, it agreed that defendants should have the opportunity to offer evidence to defeat the presumption of reliance, by showing at class certification that the price of the securities at issue was not affected by the statement at issue. Basic expressly contemplated that defendants would be permitted to rebut the presumption, the Court explained.

So securities class actions continue to be viable, to the chagrin of some and the relief of others, while defendants may have gained some additional ammunition to fight them. But in the bigger picture, what the decision portends is that the principle of stare decisis (hesitance to overrule prior decisions) remains vibrant, especially in the realm of statutory interpretation. 

Issuing its opinion in DMT vs. TMH, a closely watched case that drew national attention, the Supreme Court of Florida today declared that a woman has constitutionally protected rights to raise a child created by artificial insemination using her ovum, with the fertilized ovum carried and the child born by her then-committed partner, and initially raised by the woman and her former partner. Justice Pariente wrote the opinion for the Court, with Justice Polston writing a dissenting opinion in which two other justices joined.

The facts are these. DMT and TMH were in a committed lesbian relationship for about 11 years. They decided to have a child by in vitro fertilization, using TMH’s ova fertilized by donated sperm, with the fertilized ova implanted in DMT. DMT gave birth to the child and DMT and TMH raised the child together as equal parents, initially in the home they shared. DMT and TMH, who could not marry in Florida, split up about 17 months after the child was born. They initially continued to co-parent the child after the split, agreeing that the child would divide time between their homes. But things turned nasty, and DMT ran away with the child and denied TMH any contact with the child.

TMH finally found DMT in Australia. She sued DMT to establish her right to co-parent the child. The problem for TMH was that section 742.14, Florida Statutes, which deals with surrogacy, extinguishes the parental rights of egg and sperm donors to  children created from their donated genetic material. The trial court found that section 742.14 was controlling, and ruled in favor of DMT, despite stating that DMT’s actions were morally reprehensible and against the interests of the child.

The Fifth District Court of Appeal (in Daytona Beach, which hears appeals from portions of central and northern Florida) reversed the trial court, holding that section 742.14 did not apply, finding TMH was not a “donor” under the statute because she did not intend to give her ova away (i.e. to “donate” it), but rather always intended to raise any child that resulted from her egg, even though she wouldn’t be carrying and giving birth to the child. 

The majority of the Florida Supreme Court rejected that interpretation. It held that section 742.14 did apply, because whether someone is considered a “donor” under the statute doesn’t depend on what her intentions were, but rather only on whether she gave genetic material. That conclusion was compelled by statutory language as well as practical considerations. If intentions matter, then any sperm or egg donor could say that he/she didn’t really intend to give up the child, and thus avoid the effect of the statute, which aims to prevent drawn out custody battles over children created from donated eggs and/or sperm.

But the the majority agreed with the 5th DCA’s result, based on a more monumental, and potentially farther reaching, basis. They found that the statute was unconstitutional as applied to the circumstances in DMT, in that TMH not only contributed genetic material, but also took on the responsibility for raising the child after it was born. Thus, her situation was analogous to an unmarried father of a child, which courts have held has inchoate parental rights that become constitutionally protected if the father takes on the responsibilities of raising the child.

Denying parental rights to an individual in TMH’s circumstances, the majority held, violates the Due Process, Privacy, and Equal Protection clauses of the Florida Constitution, as well as the Due Process and Equal Protection clauses of the United States Constitution.

Not surprisingly, the United States Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013), in which the Court declared Title II of the Defense of Marriage Act to be unconstitutional by denying Equal Protection to gay married couples, figured prominently in the Florida Supreme Court’s constitutional analysis in DMT.

But the Court also based its decision on the Florida Constitution (in addition to the United States Constitution), and was careful to point out that its finding that the Florida Constitution was violated was “separate” from its finding that the United States Constitution was violated. In doing so, the Court likely insulated its decision from further review by the United Supreme Court. The Florida Supreme Court has the last word in interpreting the provisions of the Florida Constitution, and the United States Supreme Court generally does not involve itself in cases in which there is an independent state law basis for the decision, even if federal issues are also decided.

The Court further insulated its decision from review by the United States Supreme Court by grounding its decision on the Privacy clause in the Florida Constitution, which has been held to provide broader protection of privacy rights, including parental rights, than is provided by the United States Constitution. (Unlike the Florida Constitution, the U.S. Constitution does not have an explicit privacy clause, although privacy is addressed in the context of searches and seizures, and has been held to be implied by the Due Process clause.) So the Florida Supreme Court’s interpretation of the United States Constitution (as well as of the Florida Constitution) as protecting the parental rights of women in TMH’s position is likely to stand.  

Sometime around 2004, I heard that consumer class actions were dead. Why? Companies were inserting into consumer contracts mandatory arbitration clauses that waived the right to proceed as a class action. Courts were upholding them – arbitration clauses are, after all, pretty much inviolate – and surely every company would soon be using them. Fast forward seven years or so, and as April 27, 2011 at 9:00 AM, the consumer class action business was booming.

What happened? For one, state supreme courts, led by the California Supreme Court in Discover Bank v. Superior Court, started holding that class action waivers, at least in certain contexts, could be unconscionable and unenforceable. And federal courts of appeals, led by the 9th Circuit, began enforcing those state court holdings and precluding the enforcement of class action waivers. Section 2 of the Federal Arbitration Act (FAA) “preempts” state laws and rules that prohibit (whether directly or indirectly) enforcement of arbitration agreements. But arbitration agreements can be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract.” Courts reasoned that Discover Bank rule was not preempted because it was based on unconscionability, a defense that is applicable to all contracts, so if a state would also invalidate a class action waiver if it was found in a non-arbitration contract, it could invalidate class waivers contained in arbitration clauses without being preempted.

Since 2005, the 9th Circuit has applied the Discover Bank rule in at least a dozen cases. The same principle was applied under Washington state law. The Eleventh Circuit invalidated class waivers under similar circumstances based on Florida and Georgia law. The 3rd Circuit had done the same based on New Jersey law. The 1st Circuit and 2nd Circuit had even held that class waivers were unenforceable in the arbitration context under the “federal common law” of arbitration.

Yesterday the U.S. Supreme Court quashed that line of reasoning in AT&T Mobility LLC v. Concepcion, No. 09-893, holding that the Discover Bank rule (and by extension, similar rules in other states) is preempted by FAA Section 2.

Although the rule invalidates class action waivers in non-arbitration contracts as well as in arbitration contracts, the Court reasoned, the rule disproportionately affects arbitration agreements. And its operative effect is much the same as a rule that bans arbitration, because companies would never agree to class arbitration.

Moreover, the Court explained, there is a fundamental disconnect between class adjudication, which is public, lengthy, and procedurally complex on the one hand, and arbitration, which is supposed to be private, quick, and laid-back, on the other.

A Few Observations:

  • The outcome, in my view, was all but inevitable. Last June, the Supreme Court held in Stolt-Nielsen S.A. v. Animalfeeds International that the FAA prohibits arbitrators from allowing class arbitration unless the parties signed an arbitration agreement that specifically allows it. In other words, under the FAA, arbitration clauses are assumed to disallow class arbitration. Under the Discover Bank Rule, arbitration clauses must allow class arbitration. So the holding in Concepcion may have been fore-ordained by the reasoning of Stolt-Nielsen.
  • The only real possibility of a different conclusion would have been if the Court had viewed the consumer adhesion contracts in Concepcion as fundamentally different from the commercial contracts in Animalfeeds. In law school they probably still teach the concept of adhesion contracts, and that courts are more hesitant to enforce them against the party in the weaker bargaining position. But that notion doesn’t carry the weight with courts these days that it used to, at least since Carnival Cruise Lines v. Shute. The majority made short shrift of the adhesion contract aspect of the case, so I’d expect that trend to continue.
  • The lawyers for the Respondents/Plaintiffs focused their briefs and oral argument on trying to win over Justice Thomas based on his federalism/states’ rights jurisprudence. Justice Thomas did disagree with the majority’s reasoning, and he wrote a concurrence stating that he had serious reservations joining the majority opinion. But not based on federalism. Instead, Justice Thomas wrote that the plain meaning of the language of Section 2 allows arbitration agreements to be invalidated only when there is a defect in making the agreement. In his view, other rules that can preclude enforcement of contracts generally simply don’t apply to arbitration agreements.
  •  There are many headlines today like “After At&T Ruling, Should We Say Goodbye to Consumer Class Actions?” (Ashby Jones, WSJ Law Blog). It feels like déjà vu all over again. But I don’t think the death of the consumer class action is coming any time soon. For one thing, many consumer class actions are brought by plaintiffs who have not signed any contracts with the defendant they’re suing, so they can’t have signed an arbitration agreement. Nor would I be surprised to hear that lawyers have come up with some new reason why class waivers can’t be enforced. And initiatives – legislative or otherwise – to undo the effect of this decision are sure to come. Indeed, Daniel Fisher reported yesterday that a legislative work-around may already be in place, at least regarding contracts under the Consumer Finance Protection Bureau’s jurisdiction.

In short, the outcome of Concepcion is not a huge surprise.  And while it may slow down consumer class actions for a while, it’s hardly their death knell.