United States: Supreme Court Decision Alert - May 26, 2015

Today, the Supreme Court issued three decisions, described below, of interest to the business community.

  • False Claims Act—Wartime Suspension Of Limitations And "First To File" Rule
  • Bankruptcy—Powers Of Bankruptcy Courts
  • Patent Act—Induced Infringement—Defense of Good-Faith Belief of Invalidity

False Claims Act—Wartime Suspension Of Limitations And "First To File" Rule

Kellogg Brown & Root Services, Inc., et al. v. United States ex rel. Carter, No. 12-1497 (previously described in the July 1, 2014, Docket Report)

Government contractors and health-care companies have become increasingly concerned about the application of the Wartime Suspension of Limitations Act ("WSLA"), 18 U.S.C. § 3287, and the Department of Justice's and False Claims Act ("FCA") relators' arguments that the statute extends indefinitely the limitation period applicable to civil FCA cases, see 31 U.S.C. §§ 3729-3733. Today, the Supreme Court unanimously rejected the extension of the WSLA and limited the reach of that statute (and suspension of limitations periods) to the context of criminal law.

The decision in Kellogg Brown & Root Services, Inc. v. U.S. ex rel. Carter, No. 12-1497 ("KBR"), is an important victory for government contractors, health-care companies, and other recipients of federal funding. It provides protection against stale claims, which should be barred by the statute of limitations. It is particularly noteworthy because it removes the risk of stale FCA claims that would otherwise be time-barred and have no connection to wartime activities, such as health-care claims, or are related to civilian-agency programs, like the Department of Agriculture program discussed in United States v. BNP Paribas S.A., 884 F. Supp. 2d 589 (S.D. Tex. 2012).

The WSLA was enacted shortly after World War I and reenacted during World War II. Until 2008, it permitted the period of limitations to be suspended during wartime and for three years after the end of hostilities. Prior to 2008, it was not clear whether the WSLA was triggered by the military operations in Iraq and Afghanistan, as there had been no declaration of war. Congress expanded the WSLA in 2008 to apply when Congress enacts a "specific authorization for the use of the Armed Forces" and increased the suspension period to five years after the termination of hostilities. 18 U.S.C. § 3287. Given the ongoing conflicts in which the U.S. has been involved during the past decade, questions have arisen about whether the suspension of the limitations period has become indefinite and is being used for matters that have no connection to wartime. In KBR, the Supreme Court reversed the Fourth Circuit and held that the WSLA does not toll the statute of limitations in civil fraud cases.

In the case before the Court, a former employee who had worked for a contractor in Iraq brought a civil FCA action as a relator, claiming that the contractor had billed the government for work that was never performed. The government did not intervene in the case. Before the Supreme Court, Carter and the government (as amicus curiae) argued that, even though the WSLA is part of Title 18, it applies to civil fraud. The government noted that, until 1944, the WSLA applied to offenses that were "now indictable under existing law"—and that the "now indictable" language was removed in 1944. (The district court's decision in BNP Paribas provides a detailed history of the WSLA.) The government's amicus brief also defended application of the WSLA to civil cases based on policy considerations, including that its time and resources are overtaxed during wartime and that fraud often requires a substantial amount of time to uncover and pursue.

After discussing the history of the WSLA, the Supreme Court explained why the statute applies only to criminal charges, not civil claims. The Court's analysis focused on the WSLA's text, i.e., "the running of any statute of limitations applicable to any offense . . . involving fraud or attempted fraud against the United States or any agency thereof." 18 U.S.C. § 3287. Although "the term 'offense' is sometimes used more broadly" by legal dictionaries, the Court explained that several dictionary definitions supported a narrower reading—as did the government's inability to find any part of Title 18 in which the term is "employed to denote a civil violation" and the fact that "Congress chose to place the WSLA in Title 18." Slip op. 7-8.

The Court rejected the government's argument that the removal of the phrase "now indictable under any statute" from the WSLA in 1944 expanded the WSLA's reach to civil claims. The Court explained that "[s]imply deleting the phrase 'now indictable under the statute,' while leaving the operative term 'offense' unchanged would have been an obscure way of substantially expanding the WSLA's reach. Fundamental changes in the scope of a statute are not typically accomplished with so subtle a move." Slip op. 9.

In addition to this WSLA issue, the petition for certiorari in KBR raised an important issue concerning the first-to-file bar under Section 3730(b)(5) of the civil FCA. That section provides that, "[w]hen a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." The effect of this provision is to bar subsequent actions alleging false-claims violations that have previously been alleged by a relator or the government in another case. The purpose of the first-to-file bar is to encourage relators to come forward with information previously unknown to the government to aid in uncovering fraud. A subsequent action (or "me-too" suit) involving the same material elements does not further that goal.

A division had developed among the courts of appeals as to what it means for an action to be "pending" under the first-to-file bar. The First and D.C. Circuits had held that a previously dismissed action bars later actions. The Fourth, Seventh, and Tenth Circuits had held that, once an action is dismissed without prejudice, it is no longer considered "pending."

Carter's case had a tortured history of procedural dismissals and amended complaints—which the Court described as "a remarkable sequence of dismissals and filings." Slip op. 3. The contractor explained that the repeated actions it faced had unfairly extended the period in which the claims could be brought and exposed it to repeated costs and risk. It argued that the word "pending" in the first-to-file bar should be read expansively to preclude successive claims, i.e., that "the first-filed action remains 'pending' even after it has been dismissed" and "forever bars any subsequent related action." Slip op. 11.

The Court rejected KBR's argument, explaining: "This interpretation does not comport with any known usage of the term 'pending.' Under this interpretation, Marbury v. Madison, 1 Cranch 137 (1803), is still 'pending.' So is the trial of Socrates." Slip op. 12.

The Court also noted that, in addition to "push[ing] the term 'pending' far beyond the breaking point," KBR's argument "would lead to strange results that Congress is unlikely to have wanted." Id. These would include barring "all subsequent related suits even if th[e] earlier suit was dismissed for a reason having nothing to do with the merits." Id.

The Court was not swayed by the "practical problems" government contractors face from successive lawsuits by relators making similar (if not identical) allegations. The Court noted that the relator and the government had argued that the contractor's concerns were overblown and could be addressed by "the doctrine of claim preclusion," slip op. 12-13, but this concern was not raised directly by the issue before the Court.

Bankruptcy—Powers Of Bankruptcy Courts

Wellness International Network, Ltd. v. Sharif, No. 13-935 (previously described in the July 1, 2014, Docket Report)

The Supreme Court held in Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011), that bankruptcy courts "lack[] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim" because such an act amounts to an exercise of the judicial power of the United States reserved to Article III courts. Thus, a "Stern claim" is "a claim designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter." Executive Benefits Ins. Agency v. Arkison<, 134 S. Ct. 2165, 2170 (2014). Today, in Wellness International Network, Ltd. v. Sharif, the Supreme Court held that bankruptcy courts do have the authority to enter judgment on Stern claims that are before them by consent of the parties.

After obtaining $650,000 in sanctions against Sharif in a separate lawsuit, Wellness International Network ("WIN") filed an adversary proceeding in Sharif's Chapter 7 proceedings before the bankruptcy court, seeking both to prevent discharge of Sharif's debts and to obtain a declaratory judgment that a particular trust constituted Sharif's alter ego as a matter of state law. After Sharif failed to comply with its discovery orders, the bankruptcy court entered a default judgment in WIN's favor, which was affirmed by the district court. On appeal, the Seventh Circuit held in relevant part that the parties' consent could not confer authority on the bankruptcy court to issue a final judgment otherwise barred by Stern.

In an opinion by Justice Sotomayor, the Supreme Court reversed. The Court first explained that "[o]ur precedents make clear that litigants may validly consent to adjudication by bankruptcy courts." "The question here, then, is whether allowing bankruptcy courts to decide Stern claims by consent would 'impermissibly threate[n] the institutional integrity of the Judicial Branch.'" Based on its review of the statutory authority and institutional structure of bankruptcy courts, the Supreme Court concluded that allowing bankruptcy courts to adjudicate Stern claims with the consent of litigants "does not usurp the constitutional prerogatives of Article III courts." In particular, the Supreme Court noted that "[s]o long as [bankruptcy] judges are subject to control by the Article III courts, their work poses no threat to the separation of powers." Stern does not compel a different result, because that decision "turned on the fact that the litigant 'did not truly consent to' resolution of the claim against it in a non-Article III forum."

Finally, the Court held that a litigant's consent to adjudication by a bankruptcy court need not be express, but it does have to be knowing and voluntary. "[T]he key inquiry is whether 'the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case' before the non-Article III adjudicator." Accordingly, the Court remanded the case to the Seventh Circuit to decide "whether Sharif's actions evinced the requisite knowing and voluntary consent" and whether Sharif forfeited his Stern argument.

Chief Justice Roberts dissented, joined by Justice Scalia and joined in part by Justice Thomas. The Chief Justice argued that WIN's claim was not a Stern claim and that the Court therefore should not have reached the question whether bankruptcy courts may enter judgment on Stern claims when the litigants have consented. The Chief Justice further argued that private litigants cannot consent to have a bankruptcy court decide Stern claims because that would "impermissibly threaten the institutional integrity of the Judicial Branch" by permitting a non-Article III court to adjudicate an Article III claim. Justice Thomas also filed a separate dissenting opinion in which he criticized the majority opinion and the Chief Justice's dissent for not adequately considering a number of additional constitutional concerns.

Today's decision resolves an issue of practical significance in the administration of bankruptcy cases across the country—whether parties may consent to a bankruptcy court's entering of final judgments on Stern claims that were previously viewed as "core" or that otherwise lie at the heart of bankruptcy administration, such as fraudulent-transfer claims.

That issue having now been resolved, other issues will come to the fore that either predated or arise out of Stern v. Marshall and are likewise of critical importance to the day-to-day administration of bankruptcy cases. In fact, many such issues remain unresolved at the Supreme Court level and even at the level of many circuit courts, including: what constitutes implied consent to the bankruptcy court's entry of a final judgment on a Stern claim; the extent to which a proof of claim constitutes either implied consent or an independent basis for a bankruptcy court's ability to enter a final judgment on a Stern claim; and the extent to which there is a Stern claim when a case presents the question whether it is necessary to consider state or other nonbankruptcy laws in order to determine whether a particular asset constitutes property of the bankruptcy estate—in which case consent of the parties or some other recognized basis for bankruptcy-court jurisdiction would be needed before the bankruptcy court could enter a final judgment on that claim. This last issue was, in fact, one of the two on which the Supreme Court granted certiorari in Wellness—the case presented the question whether there was a Stern claim with respect to whether the property allegedly belonging to the trust actually belonged to Sharif and therefore to Sharif's bankruptcy estate—but the majority decided the case without reaching that question. These as-yet-unresolved issues will continue to be of some moment to bankruptcy practitioners.

Patent Act—Induced Infringement—Defense of Good-Faith Belief of Invalidity

Commil USA, LLC v. Cisco Systems, Inc., No. 13-896 (previously described in the December 5, 2014, Docket Report)

35 U.S.C. § 271(b) imposes liability on anyone who "actively induces infringement of a patent." In 2011, the Supreme Court held that Section 271(b) requires actual "knowledge that the induced acts constitute patent infringement." Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068 (2011). Today, in Commil USA, LLC v. Cisco Systems, Inc., No. 13-896, the Court held that a defendant's good-faith belief that a patent is invalid is not a defense to a claim of inducing infringement of that patent.

Commil USA holds a patent on a method for implementing wireless networks. Commil claimed that Cisco induced its customers to infringe Commil's patent. Prior to trial, Cisco sought to introduce evidence of its belief that Commil's patent was invalid. The district court excluded the evidence, and the jury returned a verdict finding Cisco liable for inducing infringement. A divided panel of the Federal Circuit vacated in part and remanded for a new trial. The majority held that the district court had erred by excluding Cisco's evidence of its belief that the patent was invalid because such evidence could negate the requisite intent for induced infringement.

Today, the Supreme Court vacated the Federal Circuit's decision. In an opinion written by Justice Kennedy, the majority began by reaffirming the Court's holding in Global-Tech that induced infringement can attach only if the defendant knew of the patent and also knew that "the induced acts constitute patent infringement." 131 S. Ct. at 2068. The Court clarified that knowledge of the patent alone is insufficient and that induced-infringement claims also require proof that the defendant knew that the induced acts were infringing.

The Court next held that a defendant's belief that a patent is invalid is not a defense to a claim of induced infringement. The Court explained that infringement and validity are separate matters under patent law and appear in separate parts of the Patent Act. In addition, the Court stated, allowing this defense would undermine the presumption of patent validity and circumvent the requirement that a defendant must show by clear and convincing evidence that a patent is invalid.

The Court also identified practical reasons not to create a defense based on the defendant's belief that the patent was invalid. Specifically, the Court noted that accused inducers who believe that a patent is invalid have other ways to obtain a ruling to that effect, including seeking ex parte reexamination of the patent by the Patent and Trademark Office. The Court also found that creating such a defense could render litigation more burdensome for all involved.

Justice Scalia wrote a dissenting opinion, joined by the Chief Justice. The dissent argued that only valid patents may be infringed, and thus anyone with a good-faith belief in a patent's invalidity necessarily believes that the patent cannot be infringed. Accordingly, the dissent would hold that a good-faith belief in a patent's invalidity is a defense to a claim for induced infringement of the patent.

The Supreme Court's decision is of significant importance to holders of intellectual property and companies accused of inducing patent infringement. Under the ruling, defendants accused of inducing infringement will not be able to rely on evidence of their belief that the patent was invalid.

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