United States: Supreme Court Docket Report - March 3, 2014

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

Fair Labor Standards Act—Security Screenings

Less than two months after resolving its last dispute about what constitutes compensable time under the Fair Labor Standards Act ("FLSA") (see Sandifer v. U.S. Steel Corp., No. 12-417), the Supreme Court has again granted certiorari to decide when an hourly employee's workday begins and ends. Earlier today, the Supreme Court granted certiorari in Integrity Staffing Solutions, Inc. v. Busk, No. 13-433, to determine whether time spent in security screenings is compensable under the FLSA, as amended by the Portal-to-Portal Act.

In Integrity Staffing Solutions,former warehouse employees claimed that they should have been compensated for time spent passing through a security clearance at the end of each of their shifts—a precaution implemented to prevent theft. Under the FLSA, employees must be compensated for activities that are "integral and indispensable" to the activities for which they were hired to perform. They need not be compensated, however, for activities that are "preliminary" or "postliminary" to their "principal activities" as employees. Taking a broad view of "integral and indispensable" activities, the Ninth Circuit held that time spent clearing security was compensable because it was necessary to the work performed by the employees and done for the benefit of the employer.

The Ninth Circuit's holding arguably conflicts with two cases from other circuits holding that time spent clearing security is not compensable under the Portal-to-Portal Act. In Gorman v. Consolidated Edison Corp., 488 F.3d 586 (2d Cir. 2007), the Second Circuit described the security procedures required to enter and exit a nuclear power station as "modern paradigms of the preliminary and postliminary activities described in the Portal-to-Portal Act." Id. at 593. In Bonilla v. Baker Concrete Construction, Inc., 487 F.3d 1340 (11th Cir. 2007), the Eleventh Circuit similarly found that time airport employees spent going through airport security was not compensable. There, however, the court noted that the screening was required by the Federal Aviation Administration; it was not implemented for the benefit of the employer. Id. at 1344.

The decision in Integrity Staffing Solutions has obvious implications for employers who conduct security screenings for hourly workers. Indeed, the Ninth Circuit's decision has already prompted a series of nationwide class actions seeking back pay for time spent in security screenings—which could result in substantial retroactive liability for employers. The case may also prove to have broader applicability insofar as the Court may need to construe what activities are "integral and indispensible" in a general sense.

Absent extensions, amicus briefs in support of petitioner are due April 24, 2014, and amicus briefs in support of respondent are due May 27, 2014.

Federal Trade Commission Act—Exemption from Antitrust Laws Under "State Action" Doctrine

The judicially-created "state-action" doctrine exempts anticompetitive actions taken by the States from the federal antitrust laws. The doctrine also shields municipalities and private parties, but only in limited circumstances: To claim an exemption from the antitrust laws, municipalities must show that their actions reflected clearly articulated state policy, while private parties must show both that they acted pursuant to state policy andthat the State actively supervised their behavior. This morning, the Supreme Court granted certiorari in North Carolina State Board of Dental Examiners v. FTC, No. 13-534, to decide whether a state agency dominated by private market participants should be treated as a private party for purposes of the state-action doctrine.

The North Carolina State Board of Dental Examiners ("Board") regulates the practice of dentistry in North Carolina. Six of the Board's eight members are active dentists elected by other dentists. Beginning in 2003, the Board successfully used cease-and-desist letters, some of which threatened criminal liability for the unauthorized practice of dentistry, to stop non-dentists from providing tooth-whitening services. The FTC filed an administrative complaint against the Board, alleging that its actions had unreasonably restrained trade in violation of the Sherman Antitrust Act and the Federal Trade Commission Act ("FTCA"). An administrative law judge found that the Board had violated the FTCA, and the FTC affirmed that determination.

The Fourth Circuit affirmed. The court held that "a state agency" should be treated as "a 'private' actor" for purposes of the antitrust laws if the agency "is operated by market participants who are elected by other market participants." N.C. State Bd. of Dental Examiners v. FTC, 717 F.3d 359, 370 (4th Cir. 2013). Thus, to invoke the state-action exemption, the Board had to show that the State so closely supervised the Board that its actions constituted the "product of deliberate state intervention." Id. at 369 (internal quotation marks omitted). The Fourth Circuit held that the Board could not satisfy that test, because "the cease-and-desist letters were sent without state oversight." Id. at 370. The petitioner contended that the decision of the Fourth Circuit conflicts with decisions of the Fifth and Ninth Circuits.

The Supreme Court's decision in this case will be significant for all businesses subject to regulation by state agencies consisting in substantial part of or controlled by industry representatives, because it is likely to clarify the circumstances under which anticompetitive conduct by such entities, even if generally authorized by state law, must be specifically overseen by independent state regulators.

Absent extensions, amicus briefs in support of the petitioner will be due on April 24, 2014, and amicus briefs in support of the respondent will be due on May 27, 2014.

Securities Act of 1933—Misstatements in SEC Registration Statements

The Supreme Court granted certiorari this morning in Omnicare, Inc. v. Laborers District Counsel Construction Industry Pension Fund, No. 13-435, which presents the issue whether a plaintiff must plead scienter to state a claim under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Section 11 grants a right of action to investors who allege that they have purchased securities in reliance on a registration statement that was materially misleading or that omitted material information. The Second, Third, and Ninth Circuits have all held that when a Section 11 claim is based on an allegedly false statement of opinion or belief, the claim must be dismissed unless the plaintiff alleges that the defendant knew and believed that the statement was false. The Sixth Circuit, in Omnicare,held the opposite, concluding that "if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity." The Supreme Court granted certiorari to resolve the conflict 

The plaintiffs in this case purchased Omnicare securities during a 2005 public offering. In conjunction with its offering, Omnicare filed an SEC Registration Statement in which it represented, among other things, that certain of its contracts were legally compliant. Plaintiffs later sued Omnicare and its officers and directors, alleging that Omnicare was engaged in unlawful activities related to those contracts at the time it filed the Registration Statement. Plaintiffs allege that Omnicare's claims of legal compliance were material and misleading, and therefore in violation of Section 11. The district court granted Omnicare's motion to dismiss the plaintiffs' claim, however, because plaintiffs failed to allege that the defendants knew that the statements of legal compliance were untrue at the time they was made. On appeal, the Sixth Circuit reversed, holding that a plaintiff in a Section 11 suit need not plead knowledge of falsity to state a claim. The court described Section 11 as a "strict liability" statute; thus, the defendants' knowledge of the falsity of their statements could not be a necessary element of plaintiffs' claim.

This case turns in large part on the proper interpretation of the Supreme Court's opinion in Virginia Bankshares, Inc v. Sandberg, 501 U.S. 1083 (1991). In Virginia Bankshares, the Court considered whether statements of opinion in a proxy solicitation could ever be material misstatements of fact for the purpose of a claim arising under Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9. The Court held that false statements of opinion may be actionable, but expressly declined to decide whether a plaintiff must plead scienter to state such a claim. Virginia Bankshares, 501 U.S. at 1090 n.5. The Second, Third, and Ninth Circuits, however, have all read Virginia Bankshares to require proof of scienter in Section 11 cases. The Sixth Circuit found that such an approach overreads Virginia Bankshares, holding that the Court's discussion of scienter in that case was dictum. By granting certiorari, the Supreme Court has given itself an opportunity to clarify what sort of proof a plaintiff is required to allege in order to proceed in a Section 11 case.

The issue in this case is of importance to any company offering securities for public purchase that could be subject to potential liability under Section 11.

Absent extension, amicus briefs in support of the petitioners are due April 24, 2014, and amicus briefs in support of the respondents will be due May 27, 2014.  

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