A Good Day for Business at the Supreme Court

The Supreme Court decided three cases this morning. None was especially sexy in terms of the headline-grabbing things that sometimes occupy the Court, but all three were consequential. Two were lopsided victories for business, and the other set a standard that is not such bad news for companies. Two of the decisions were unanimous, and the third was 8–1.

Union Thuggery

If a company’s employees deliberately damage its property, it can sue them just the same as if some random vandal did. But if they commit sabotage to get leverage during a strike, does the National Labor Relations Act immunize them? In Glacier Northwest v. Int’l Brotherhood of Teamsters, eight justices agreed that it did not. Five justices joined Justice Amy Coney Barrett’s opinion for the majority; Justices Clarence Thomas, Samuel Alito, and Neil Gorsuch concurred in the outcome (there were concurring opinions by both Thomas and Alito), and only Justice Ketanji Brown Jackson would have found a federal right to vandalism and sabotage for strikers.

The case involved striking Teamsters truckers for a concrete-mixing company who deliberately walked off the job after their trucks had been loaded with custom-mixed concrete. If the concrete hardened before delivery, it was useless; if it hardened inside the trucks, the trucks would be damaged, too. Quick unloading by non-striking employees saved the trucks, but the day’s haul of concrete was lost. The company sued the union.

The Teamsters’ argument was that the NLRA protected their right to strike, even if the timing of the strike was deliberately calculated to destroy company property. As Barrett’s opinion noted, the NLRA has been read to preempt state law more broadly than most federal statutes, displacing any state law that even “arguably” conflicts with the detailed federal regulatory scheme for labor-management law. It also allows unions to argue for preemption under a ridiculously favorable standard: They must offer “an interpretation of the NLRA that is not plainly contrary to its language and that has not been authoritatively rejected by the courts or the Board. The [union] must then put forth enough evidence to enable the court to find that the Board reasonably could uphold a claim based on such an interpretation.” (Emphasis added; quotations omitted.) Justice Thomas’s separate opinion argued that this test was wrong, but the majority applied it and concluded that the Teamsters failed the second part of the test, given the egregiousness of their conduct:

The [NLRB] has long taken the position . . . that the NLRA does not shield strikers who fail to take “reasonable precautions” to protect their employer’s property from foreseeable, aggravated, and imminent danger due to the sudden cessation of work. . . .

The Union knew that concrete is highly perishable and that it can last for only a limited time in a delivery truck’s rotating drum. It also knew that concrete left to harden in a truck’s drum causes significant damage to the truck. The Union nevertheless coordinated with truck drivers to initiate the strike when Glacier was in the midst of batching large quantities of concrete and delivering it to customers. Predictably, the company’s concrete was destroyed as a result. And though Glacier’s swift action saved its trucks in the end, the risk of harm to its equipment was both foreseeable and serious. . . .

The Union…could have initiated the strike before Glacier’s trucks were full of wet concrete—say, by instructing drivers to refuse to load their trucks in the first place. Once the strike was underway, nine of the Union’s drivers abandoned their fully loaded trucks without telling anyone—which left the trucks on a path to destruction unless Glacier saw them in time to unload the concrete. Yet the Union did not take the simple step of alerting Glacier that these trucks had been returned. Nor, after the trucks were in the yard, did the Union direct its drivers to follow Glacier’s instructions to facilitate a safe transfer of equipment. [The NLRB’s] “reasonable precautions” test does not mandate any one action in particular. But the Union’s failure to take even minimal precautions illustrates its failure to fulfill its duty.

Indeed, far from taking reasonable precautions to mitigate foreseeable danger to Glacier’s property, the Union executed the strike in a manner designed to compromise the safety of Glacier’s trucks and destroy its concrete. Such conduct is not “arguably protected” by the NLRA; on the contrary, it goes well beyond the NLRA’s protections.

The Court did not adopt a per se rule against striking when perishable products might be lost, or against striking during the workday without advance notice, but focused on the deliberate sabotage involved in the timing of this strike: “Given the lifespan of wet concrete, Glacier could not batch it until a truck was ready to take it. So by reporting for duty and pretending as if they would deliver the concrete, the drivers prompted the creation of the perishable product. Then, they waited to walk off the job until the concrete was mixed and poured in the trucks. In so doing, they not only destroyed the concrete but also put Glacier’s trucks in harm’s way.” (Emphasis in original.)

Finally, the Court scoffed at the Teamsters’ defense that they at least brought the trucks back: “Refraining from stealing an employer’s vehicles does not demonstrate that one took reasonable precautions to protect them.” Justice Alito would have gone further and argued that the union failed the first part of the test, given the strength of precedents against its actions.

Only Justice Jackson defended the union, arguing that because the NLRB had filed an administrative complaint siding with the Teamsters, that should act as a complete bar to the lawsuit: “All courts—including this one—should stand down.” Jackson grasped at straws:

Whether the NLRA protects particular strike conduct often turns on subtle factual disputes and nuanced legal distinctions. Here, for example, whether the Union’s strike conduct is protected or unprotected might well depend on whether the drivers left the concrete-delivery trucks’ revolving drums turning when they walked off the job. So, too, might it depend on fine legal gradations concerning how imminent or how aggravated the risk of harm must be to trigger the duty to take reasonable precautions. These kinds of determinations cry out for evidentiary hearings, and in this highly fact-sensitive area of the law, which generally develops on a case-by-case basis, the scope of NLRA protection in a given set of circumstances is typically determined once the facts have been established—through discovery, debate, and sometimes the tedious work of making contentious credibility determinations.

Fortunately, in this regard, Congress has gifted our legal system with an expert agency that thoroughly investigates what happened—i.e., the facts of strike-related labor disputes—and then engages in the initial task of answering the sometimes complex, always fact-bound question whether the NLRA protects the strike conduct at issue.

This approach, of course, would turn the existing standard into administrative deference on steroids. Contrary to Jackson’s ode to the manna-like gift of the NLRB’s expertise, the agency is not exactly known for its Solomonic impartiality or good judgment. She also blamed the company for not locking out the drivers or pre-hiring replacements, and drifted off into generality in framing even deliberate sabotage in the timing of a strike as a federally protected right:

As a general matter, the dispute in this case is over whether employees can withhold their labor if doing so risks damage to their employer’s property. . . . By carefully restricting limitations on the right to strike in the NLRA itself, Congress has indicated that the act of peacefully walking off the job is protected strike conduct even if economic harm incidentally results. What is not protected is any subsequent affirmative step to destroy or seize the employer’s property. [Emphasis in original.]

The majority did not even consider Jackson’s argument worthy of mention, and Alito warned that, if the state courts in Washington decided to throw the company’s lawsuit out on that basis on remand, it would “be a good candidate for a quick return trip here.”

Corporate Intent

In U.S. ex rel. Schutte v. SuperValu Inc., the miscreant was not a union but two pharmacy chains, SuperValu and Safeway. The False Claims Act prohibits “knowingly” submitting false claims to the government, and it deputizes private litigants to bring suits on the government’s behalf to recover damages against the false claimant (typically a business in most FCA cases). But, as Justice Clarence Thomas’s opinion for a unanimous Court noted, sometimes it is ambiguous whether a claim is false, because the claimant is alleged to have violated some federal regulation that is open to interpretation. In Schutte, the question was whether the pharmacies had billed Medicare and Medicaid for prescription drugs at their “usual and customary prices” when they didn’t match Walmart’s prices — even though they pledged to match Walmart pricing when charging customers for the drugs.

The lower court concluded that a claimant could be sued for “knowingly” submitting a false claim only if it actually knew its policy violated the federal reimbursement rules and it was an objectively unreasonable reading of the rules. The Court rejected the objective-reasonability test:

The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed. And, even though the phrase “usual and customary” may be ambiguous on its face, such facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false.

Justice Thomas, going back as usual both to the text and the common-law traditions it evokes, explained:

The FCA defines the term “knowingly” as encompassing [one of] three mental states: First, that the person “has actual knowledge of the information,” . . .  Second, that the person “acts in deliberate ignorance of the truth or falsity of the information,” . . . And, third, that the person “acts in reckless disregard of the truth or falsity of the information.” . . .

In short, either actual knowledge, deliberate ignorance, or recklessness will suffice. That three-part test largely tracks the traditional common-law scienter requirement for claims of fraud. . . . On their face and at common law, the FCA’s standards focus primarily on what [the pharmacies] thought and believed. . . .

Both the text and the common law also point to what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it. . . . The focus is not, as [the pharmacies] would have it, on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim. [Emphasis in original; other alterations omitted.]

That’s a loss for the pharmacies, but on balance, the Court’s focus on what the particular defendants actually knew, or what risks they actually considered and disregarded, is favorable ground for many FCA defendants. As the Court allowed, “it might have been a forgivable mistake if [the pharmacies] had honestly read the phrase as referring to retail prices, not discounted prices.” The Court deferred for another day the argument that FCA plaintiffs might be able to go forward on the theory that the defendant had been “acting in the face of an unjustifiably high risk of illegality that was so obvious that it should have been known, even if the defendant was not actually conscious of that risk.” But the logic of the Court’s reading of the statute may prepare the ground for a future decision limiting that theory — and that would be good news for defendants in FCA cases.

Public Offerings of Stock

It’s typically less than once per term that the Court gets to my old area of practice, federal securities law, and rarer that it weighs in on one of the big, unsettled questions in that field. But in Slack Technologies, LLC v. Pirani, a unanimous decision written by Gorsuch, the Court finally weighed in on a technical but highly important question: tracing under Section 11 of the Securities Act of 1933. The Court rejected an expansive Ninth Circuit rule and adhered to the rule previously accepted by most lower courts, thus fortifying an important defense for companies that get sued over public offerings of stock.

The basic structure of the securities laws is divided between the 1933 act and the Securities Exchange Act of 1934. Broadly speaking, the 1933 act regulates initial offerings of stock (or bonds, or other securities), and allows lawsuits over misrepresentations and certain omissions in the offering materials without proof that these were intentionally fraudulent. Under one of its provisions, Section 11, it is easier to sue over omissions if what was omitted was required to be included under voluminous regulations promulgated by the Securities and Exchange Commission. By contrast, the 1934 act mainly regulates the trading of already-issued securities; lawsuits under the 1934 act typically require proof of fraudulent intent, which is harder to come by. Because the 1933 act is a more potent weapon (and because Congress actually designed the civil lawsuits, whereas 1934 act lawsuits mostly arise under Section 10(b), and it was the courts that invented the right to sue under 10(b)), however, there is a shorter statute of limitations and other procedural restrictions on who can sue, who can be sued, and what damages are available.

One of those restrictions is tracing: If you claim that you bought stock issued under a false or misleading registration statement filed with the SEC, you have to show that the stock you bought was actually issued under that registration statement. Which is easy to do, if you bought in an initial public offering of a brand-new class of stock; but because stock is fungible, if you bought later on, you may not be able to tell whether your particular shares were issued on a particular day or pursuant to a particular registration statement. There are sometimes ways to trace the origin of specific shares, but even if it can be done for an individual buyer, it can present technical issues that make it unworkable to conduct a case as a class action — and in securities cases, a lawsuit that can’t be brought as a class action usually won’t be pursued at all. The tracing problem becomes especially acute once company insiders start selling their own prior shares into the same market as the newly issued shares.

In Slack, the plaintiff had an even worse problem: Rather than conduct a formal IPO, Slack used a New York Stock Exchange rule that allowed both the company and insiders to sell pre-existing shares simultaneously. So, if the buyer of those shares wanted to sue under Section 11, there was no possible way to tell which shares the buyer purchased. The Ninth Circuit, doing its thing, decided that there must be a way to sue and allowed the case to go forward.

The Court didn’t buy it. Section 11 says that “any person acquiring such security” can sue. The Court noted that this language was not entirely explicit about whether “such security” meant that it had to be a security issued under that particular registration statement, but concluded that the statutory context — starting with its reference to “the registration statement” and crucially including the statutory limit on damages capped at the amount of the public offering — supported the tracing requirement, which the Second Circuit had adopted as far back as 1967 and which every circuit to consider the question had adopted in some form.

The Court noted that the plaintiff’s theory of allowing lawsuits when some other security is sufficiently related to the initial offering had no clear limiting principle that could be teased out of the text. It did not go further: It declined to wade into debates over how tracing works, what must be pleaded in order to establish tracing at the crucial motion to dismiss stage, or whether Section 12 (the other big liability provision of the 1933 act) contains a similar tracing requirement. Vacating the Ninth Circuit’s decision on the Section 12 claim, the Court merely warned the appeals court to consider on remand its “caution that the two provisions contain distinct language that warrants careful consideration.” (Specifically, a purchaser under Section 12(a)(2) may sue a person who sells securities “by means of” a false or misleading “prospectus or oral communication,” but only “the person purchasing such security from him” may sue.) On the whole, however, Slack will be a welcome victory for the defense bar in these cases.