United States: Supreme Court Docket Report - June 28, 2010

Originally published June 28, 2010

Keywords: appellate, immigration, Legal Arizona Workers Act, ERISA, securities, fraud, employee benefit plans, summary plan description, misleading public statements, Securities Exchange Act 1934, SEC,

Today the Supreme Court granted certiorari in three cases of interest to the business community:

• Immigration—Federal Preemption of State Law
• ERISA—Applicable Standard When SPD Conflicts With Plan Terms
• Securities Fraud—Rule 10b-5—Liability of Third Parties for Participation in Misleading Public Statements

Immigration—Federal Preemption of State Law

In 2007, Arizona enacted the Legal Arizona Workers Act, which provides for penalties against employers who hire unauthorized aliens, including suspension or loss of their license to do business in Arizona. Today, the Supreme Court granted certiorari in Chamber of Commerce of the United States v. Candelaria, No. 09-115, to determine whether federal immigration law preempts the Arizona act.

This case is of great importance to all businesses, in Arizona and nationwide, given the recent proliferation of state statutes concerning the hiring of unauthorized immigrants. The Supreme Court's decision in Candelaria will illuminate the extent to which states can impose their own work-eligibility verification requirements, and sanctions for hiring unauthorized workers, on employers.

The Legal Arizona Workers Act ("Act"), Ariz. Rev. Stat. §§ 23-211 et seq., provides for Arizona courts to suspend or revoke business licenses of employers who knowingly or intentionally hire unauthorized aliens. The Act allows any person to submit a complaint to a county attorney or the Arizona attorney general, which, if not false or frivolous, the appropriate county attorney is required to pursue. The Act further requires employers to verify employment eligibility using E-Verify, a federal internet-based system, use of which is not mandated under federal law. The Act specifies mandatory sanctions for violations: a first violation requires the employer to terminate all unauthorized workers, and imposes a probationary period during which the employer must report quarterly on all new hires; a second violation during the probationary period requires a permanent revocation of the employer's license to do business in Arizona.

The federal Immigration Reform and Control Act of 1986 ("IRCA"), 8 U.S.C. § 1324a, similarly prohibits employers from knowingly or intentionally hiring unauthorized aliens. It requires that employers verify an employee's work authorization through the "I-9" process, in which employees attest to their eligibility and present identity documents, and employers examine the documents for apparent authenticity. Under IRCA, good-faith compliance with the I-9 process is a defense to sanctions for hiring unauthorized workers, absent a pattern or practice of violations. IRCA expressly preempts "any State or local law imposing civil or criminal sanctions (other than through licensing and similar laws)" for employing unauthorized aliens.

Subsequent to the Act's enactment, a number of business and civil-rights groups brought a facial challenge, arguing (among other things) that the Act is expressly preempted under federal law because it is not a "licensing" or "similar" law, and, in the alternative, that the Act is impliedly preempted because its sanctions provisions and eligibility verification requirements conflict with federal law. The district court rejected these arguments, holding that the Act is a licensing law within the meaning of IRCA's preemption provision, and that its sanctions and verification requirements are not inconsistent with federal policy. A panel of the Ninth Circuit affirmed.

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 19, 2010, and amicus briefs in support of the respondents will be due on September 20, 2010.

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ERISA—Applicable Standard When SPD Conflicts With Plan Terms

The Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 et seq., seeks to ensure that individuals receive accurate and understandable information regarding their rights and obligations under employee benefit plans. To this end, ERISA requires plan administrators to provide all plan participants with a "summary plan description" (SPD), as well as a "summary of material modifications" (SMM) when material changes are made to the plan. Today, the Supreme Court granted certiorari in CIGNA Corp. v. Amara, No. 09-804, to determine what plan beneficiaries must demonstrate in order to recover benefits when suing based on alleged inconsistencies between the plan's terms and an SPD.

This case is important for the large number of employers who currently maintain—or plan to create—benefit plans for their employees. The Court's decision could increase the costs, complexities, and liabilities associated with creating, maintaining, and amending plans.

The case arises out of changes to an ERISA plan established by CIGNA. Plan beneficiaries sued, contending that company had failed to adequately disclose certain terms of the modified plan in its SPDs. In the decision below, the Second Circuit summarily affirmed the trial court's use of a "likely harm" standard, according to which beneficiaries can recover if "a plan participant or beneficiary was likely to have been harmed as a result of a deficient SPD." This standard conflicts with the standards adopted by other circuits. In the First, Fourth, Seventh, Eighth, Tenth, and Eleventh Circuits, a plan beneficiary suing based on a discrepancy between an SPD and the actual terms of the plan must demonstrate some degree of reliance or prejudice in order to recover. In the Third, Fifth, and Sixth Circuits, by contrast, a plan beneficiary may recover when there is a "clear and material conflict" between the SPD and the plan, whether or not the beneficiary can demonstrate reliance on the SPD or prejudice from the conflict.

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 19, 2010, and amicus briefs in support of the respondents will be due on September 20, 2010.

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Securities Fraud—Rule 10b-5—Liability of Third Parties for Participation in Misleading Public Statements

In the latest of a series of cases considering third-party liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the Supreme Court granted certiorari today in Janus Capital Group Inc. v. First Derivative Traders, No. 09-525, to decide whether an investment adviser that participates in the drafting and dissemination of a misleading prospectus issued by the adviser's advisee can be held liable in a private securities action. The Court has previously held that Section 10(b) does not allow outside advisers to be held liable for knowingly providing assistance to a client that commits securities fraud or for aiding and abetting such fraud in the absence of a public statement by the advisor on which investors could rely. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008); Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).

This case raises questions regarding the scope of Section 10(b) liability as applied to mutual funds.

The case arises from allegations that the prospectuses of certain Janus mutual funds falsely suggested that that the funds would prevent hedge funds from engaging in "market timing transactions" that harm long-term investors. Although each of the Janus mutual funds operates as an independent legal entity, each retains Janus Capital Management (JCM) as its investment adviser. Plaintiffs, who did not invest in any Janus mutual funds but who owned stock in JCM's parent company, filed this private securities lawsuit alleging that JCM drafted and disseminated each of the misleading prospectuses and that the value of its stock was harmed when the misrepresentations came to light. The court of appeals held that although JCM served only as a third-party investment adviser, it could be held liable for the fraud based on its role in drafting and disseminating the misleading prospectuses.

In addition to disputing whether a service provider can ever be liable for participating in another company's misrepresentations, the petition also raises a second question regarding the conditions that must be met for third-party liability. JCM argues that even if third-party liability is possible in a private securities lawsuit, an investment adviser can only be held liable if the misleading statements in the prospectuses are explicitly attributed to the adviser. The court of appeals held that "direct attribution" is not required to establish liability under Section 10(b).

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 19, 2010, and amicus briefs in support of the respondent will be due on September 20, 2010.

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