The concluding (2022–2023) U.S. Supreme Court term promises to be one of the most consequential in quite some time for the public contracts bar. Recent changes to the Court, combined with the evolution of the “major questions” doctrine and at least one extremely important False Claims Act (FCA) case reaching the Court, highlight this term. This article explains the significance of some of the key cases relevant to public contracting before the Supreme Court (and other courts of appeals) and how they might affect you and your clients.
Editor's Note: The U.S. Supreme Court’s 2022-2023 term concluded as this issue was going to press. Consequently, this articles does not include detailed discussion of each decision, including those issued in the final weeks of June 2023.
Another year, another fantastically important civil FCA case before the U.S. Supreme Court. The last major FCA case to be considered by the Court was in 2016 with Universal Health Services v. United States ex rel. Escobar (commonly referred to as Escobar), resolving a circuit split and holding that the implied false certification theory can be a basis for liability under the FCA in some circumstances. This term, the cases du jour are two consolidated cases: United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc.—cases that get to the heart of the FCA scienter, or intent, standard.
The FCA imposes civil liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” Relevant here, this language requires two elements: (a) a “knowing” presentation and (b) a false or fraudulent claim. But what happens if a defendant presents a claim that is, indeed, false, but the defendant had an objectively reasonable interpretation of the law that the claim was not false? Has the defendant knowingly presented a false claim? That is the question presented in Schutte and Proctor.
The defendant in Schutte was SuperValu, a company that operated a grocery store chain with in-store pharmacies. The pharmacies sought reimbursement from Medicare and Medicaid for prescription drugs sold to customers. To qualify for reimbursement through Medicare or Medicaid, SuperValu was required to submit reports to the government listing its “usual and customary” drug prices. In its reports, SuperValu listed its retail drug prices as usual and customary but failed to disclose lower, discounted prices that SuperValu charged to certain qualifying customers. The relators (or whistleblowers) alleged that by disclosing to the government only the higher retail prices and not the discounted prices, SuperValu knowingly submitted false claims, resulting in significant overpayments by the government on the Medicare and Medicaid payments. (Notably, the Department of Justice (DOJ) did not intervene in the whistleblowers’ case, leaving the whistleblowers to pursue the case on their own.)
United States ex rel. Proctor v. Safeway, Inc. involved similar facts. In Proctor, a grocery store chain, Safeway, was also alleged to have submitted false claims by failing to disclose its discounted drug prices. The cases were consolidated at the Supreme Court. To minimize repetition and because of the similarity of the facts in each case, this article focuses only on Schutte.
As related by the court of appeals, the U.S. District Court for the Central District of Illinois ruled on summary judgment that the company’s submissions were indeed false, but that SuperValu did not meet the scienter standard of having submitted false reports knowingly. According to the district court, SuperValu’s understanding of the usual and customary price, while incorrect, was objectively reasonable at the time. The lower court noted that multiple district court decisions endorsed SuperValu’s interpretation of usual and customary or otherwise recognized that the concept was “open to interpretation,” concluding that there was “no authoritative guidance to warn SuperValu away from its interpretation” of the term.
On appeal to the U.S. Court of Appeals for the Seventh Circuit, a divided panel affirmed. The majority held that SuperValu’s submissions were indeed false because SuperValu’s discounted prices fell within the Medicare and Medicaid program definitions of usual and customary and therefore should have been disclosed.
The more interesting part of the Seventh Circuit decision, and the portion that attracted the most interest from the public contracts bar and the Supreme Court, concerned the majority’s holding that SuperValu did not knowingly submit false claims. To resolve this issue, the Schutte majority adopted the scienter standard articulated by the U.S. Supreme Court in Safeco Insurance Co. v. Burr, a case that arose under the Fair Credit Reporting Act (FCRA) and not the FCA. In Safeco, the Supreme Court held that Safeco violated the FCRA but did not do so knowingly because the company had an objectively reasonable, but incorrect, interpretation of the FCRA. In so holding, the Court adopted common law fraud scienter standards. Through a lengthy textual analysis (and vigorous exchange with the dissent), the Schutte majority at the Seventh Circuit concluded that the FCRA scienter standard should also apply to the FCA.
Significantly, the scienter standard used in Safeco does not take into account the defendant’s subjective intent when determining if the requisite scienter is present. Thus, if a defendant offers an objectively reasonable interpretation of the applicable provision, that is a sufficient basis to find that the defendant did not act knowingly. That remains true even if the defendant subjectively intended to submit a false claim. Taking this reasoning to its logical limit, the defendant could intend to commit fraud, but if it can later articulate an objectively reasonable interpretation under which its submission was not false, the defendant will not have knowingly presented a false claim and can thus escape FCA liability.
Asserting that subjective intent is relevant to determine a defendant’s scienter, the Seventh Circuit dissent took issue with the majority decision. The dissent led with the observation that the evidence suggested that SuperValu “knowingly misled the government’s agents about its ‘usual and customary’ prices for a significant number and volume of prescription drug sales,” and charged the government prices that were “eight to fifteen times higher than the prices it was actually charging . . . customers.” The dissent argued that Safeco interpreted a different statute and should not be imported into the FCA. Instead, relying on the Restatement of Torts and the origins of the FCA definition of knowingly, the dissent concluded that subjective bad faith is “central” to fraudulent scienter.
The Supreme Court granted certiorari to resolve the FCA scienter standard.
Proponents of the majority opinion in the Seventh Circuit’s Schutte decision hailed the Seventh Circuit’s acknowledgment that in highly regulated industries, sometimes the law is not a model of clarity. It is possible, they would say, for someone to misinterpret an ambiguous law and thereby submit a claim that, with hindsight and perfect understanding of the law, turns out to be false. These mistakes, they might conclude, are not “fraud,” and the draconian penalties in the FCA should not be wielded against them. Indeed, the respondents’ brief on the writ of certiorari captured these points in its opening sentence, arguing that “[w]hen the government fails to speak clearly, a regulated party cannot ‘know’ what the law requires.”
Supporters of the dissent in the Seventh Circuit’s Schutte decision, meanwhile, embraced the dissent’s observation: “The majority . . . creates a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.” Surely, they may say, we can and should use the FCA to hold defendants to account who intend to mislead and defraud. The Seventh Circuit’s majority opinion they may say, opens the door for the silver-tongued FCA defendants’ bar to dream up novel post hoc rationalizations for their clients’ misdeeds. The petitioners on the writ of certiorari made these points, arguing that “[t]he Seventh Circuit did not merely misinterpret the FCA’s scienter standard; the court turned the law on its head. Under the Seventh Circuit’s rule, even a defendant who intentionally defrauds the Government does not act ‘knowingly,’ as long as the defendant’s attorneys can later rationalize its misconduct.”
On June 1, 2023, the Supreme Court unanimously rejected the Seventh Circuit’s decision. Holding for the whistleblowers, the Court ruled that a defendant’s subjective intent is relevant to determining scienter and that the Seventh Circuit erred by applying the FCRA standard in FCA cases. Examining the text of the FCA, the Court observed that “the FCA’s standards focus primarily on what the respondents thought and believed.” The Court then compared the FCA’s actual text with the “objectively reasonable interpretation” standard used by the court of appeals—and found them inconsistent. The Court noted that the Seventh Circuit characterized an “objectively reasonable interpretation” as one that does not examine what the respondents actually thought and believed but rather allows a “post hoc interpretation[],” or an interpretation of how “other people” might have interpreted the statute. This, the Court concluded, is inconsistent with the plain language of the FCA.
Significantly, the Court acknowledged that a statute may be vague, and in particular the term usual and customary might not be perfectly clear. But, the Court said, that ambiguity does not preclude the respondents from having the requisite scienter. Here, the Court noted, the petitioners presented evidence that the defendants received notice that usual and customary prices should include their discounts, and evidence that they tried to hide their discounting practices from the government. Under the FCA, petitioners can establish scienter by showing that the respondents had (a) actual knowledge of the claim’s falsity, (b) knowledge of the substantial risk of falsity while intentionally avoiding learning whether the claims are accurate, or (c) awareness of a substantial risk of falsity yet submitting the claims anyway. As the Court explained: “If the petitioners can make that showing, then it does not matter whether some other, objectively reasonable interpretation of ‘usual and customary’ would point to respondent’s higher prices. For scienter, it is enough if respondents believed that their claims were not accurate.”
Schutte will have an important impact on FCA cases in the federal procurement area. Similar to the government healthcare regulatory regime in which Schutte arose, the federal contracting statutory and regulatory requirements can at times seem complex and difficult to understand. Going forward, respondents cannot rely on the “objectively reasonable” formulation to argue that a claim was not false. As a result, the Schutte decision may make it harder for a respondent to prevail on summary judgment on the theory that the respondent lacked the requisite scienter.
Schutte is not the only important FCA case before the Supreme Court this term. From the U.S. Court of Appeals for the Third Circuit, the Supreme Court issued a decision in Polansky v. Executive Health Resources, Inc. (Polansky), a case presenting two important procedural issues that have divided the circuits:
As luck would have it, just before this article went to print, the Supreme Court issued a decision. After painstaking parsing of the FCA language, the Court held that the government may move to dismiss a relator’s FCA qui tam action whenever the government has intervened, whether at the inception of the action or later.
A little background to get us started: The FCA’s qui tam provisions allow a private person known as a “relator” to bring FCA claims in the government’s name and thereby become eligible to recover a share of any proceeds ultimately recovered. Significantly for this case, the FCA prescribes the roles and rights of the relator and the government in such an action; among these is the right of the government to intervene in the action. If a relator brings an action, the government may intervene as of right at the first opportunity, or may intervene “at a later date upon a showing of good cause.” If the government declines to intervene, the relator can continue the action on his own behalf and in the name of the United States—but only up to a point, as we shall see.
The government has the right to move to dismiss a qui tam action over the objection of the relator. Polansky posed the question of whether the government’s right to request dismissal is limited only to cases in which the United States has chosen to intervene. It is a question of critical importance to all parties, as is apparent from the facts of Polansky.
In Polansky, a relator filed a qui tam action alleging that the defendant, a physician-advising company, was improperly causing hospitals to bill the government for unnecessary hospital stays that were not “reasonable and necessary,” which is a statutory prerequisite for reimbursement under Medicare. The action remained under seal for two years while the government investigated. Eventually, the government formally declined to intervene, the complaint was unsealed, and the relator proceeded with the lawsuit without the government intervening.
The lawsuit chugged along for several years, but eventually the government reemerged and notified the parties that it intended to move to dismiss the action pursuant to 31 U.S.C. § 3730 (c), which states that the government “may dismiss the action notwithstanding the objections” of the relator, as long as the relator receives notice and an opportunity to be heard on the motion. The government did just that, moving to dismiss over the objections of the relator. The government’s brief cryptically explains its decision to move to dismiss, noting, among other factors, the fact that the petitioner produced in discovery records that the government considered to be protected by the deliberative process privilege, as well as what appeared to be concerns about the petitioner’s credibility. As requested by the government, the district court dismissed the action.
On appeal to the Third Circuit, relator Polansky argued that the government lacked authority to move to dismiss in a case in which the government had not intervened in the first place, arguing on the merits that the motion to dismiss should have been denied. One can understand the relator’s frustration. Having pursued the litigation for several years—on the relator or the relator’s attorney’s own dime, one surmises—it must have been frustrating to have the government swoop in and pull the plug.
The Third Circuit started its analysis by noting there is a split among the circuits on the question of the government’s unilateral right to dismiss a qui tam FCA case in which it has not intervened. The D.C., Ninth, and Tenth Circuits have all held that the government has the right to move to dismiss “at any point in the litigation and regardless of whether it has intervened.” But, on the other hand, the Sixth and Seventh Circuits have held that the government only has the right to move to dismiss cases in which the government has formally intervened. The relator urged the court not only to follow the Sixth and Seventh Circuits, but also to go one step further and hold that the government only has the right to move to dismiss if it intervenes at the first opportunity, and not at some later point.
The Third Circuit analyzed the provisions governing the relationship between the government and relators in qui tam actions. The key provisions in § 3730(c) are set forth below, with emphasis on the critical language:
Reviewing these provisions and attempting to read the section structurally (and as a whole), the Third Circuit held that the government must intervene before it can move to dismiss. The court reasoned that the statute characterizes the government’s right to dismiss the action in § 3730(c)(2)(A) as a “limitation” on the relator’s rights—in the event that the Government intervenes. As the court explained, an interpretation that the government may move to dismiss even where it has not intervened would “render . . . superfluous” the qualifier in § 3730(c)(1) that a relator’s rights are “subject to the limitations set forth in paragraph (2).” Further, the court opined, “paragraph (c)(4)’s description of actions that the Government may take ‘[w]hether or not it proceeds with the action’ would be surplusage if every provision of paragraph (2) applied whether or not the Government intervened.” However, the court rejected the relator’s view that the government is required to intervene at the outset of the action before it can move to dismiss, holding that an intervention later in the case would entitle the government to move to dismiss.
The Third Circuit then turned to the standard applicable to a government motion to dismiss, framing the issue as follows: “Is the Government automatically entitled to dismissal, or does that decision lie in the District Court’s discretion?” Again, the circuits have been split on this question; and, again, the Third Circuit agreed with the Seventh Circuit, holding that the government is not entitled to automatic dismissal and the question of dismissal lies with the district court. The court reasoned that once it intervenes, the government is the same as other parties and is subject to Rule 41(a). Like other parties, the government may dismiss as of right prior to the defendant’s filing a response to the complaint. After such filing, the action may be dismissed at the plaintiff’s request only by court order, on terms that the court considers proper.
An alternative view, espoused by the D.C. Circuit, among others, is to analogize the government’s role to prosecutorial discretion. The Third Circuit rejected that analogy, noting that, unlike in criminal cases, the FCA affords a role for the relator, whose interests may be different from those of the government. The court similarly rejected the government’s argument that the relator’s right to a hearing on the motion to dismiss amounts to nothing more than an opportunity for the relator to persuade the government not to dismiss it, in front of the court. The court colorfully invoked an image wherein the government “would limit the court’s role to ‘serv[ing] . . . some donuts and coffee . . . while the parties carry on an essentially private conversation in its presence.”
The Supreme Court sided with the Third Circuit, holding in an 8 to 1 decision that the language of the FCA compels the conclusion that the government has the right to dismiss a relator’s qui tam action any time after the government intervenes. Justice Thomas dissented, arguing that once the government declines to intervene in the first place, the plain statutory language of the FCA does not give the government a residual right in the second place. Interestingly, Justices Kavanaugh and Barrett noted in concurrence (acknowledging some of the concerns expressed by Justice Thomas) that there are longstanding concerns that the qui tam provisions of the FCA are in tension with Article II of the Constitution, and Justices Kavanaugh and Barrett urged the Court to address those concerns in a future case. The government’s intervention decision is a critical milestone, providing a strong indication as to whether the relator will ultimately win or lose. Polansky is an important case that should help resolve long-standing circuit splits on this key procedural issue.
Ciminelli v. United States is a criminal fraud case that could impact civil FCA and other civil and criminal fraud actions. In Ciminelli, the Court considered a U.S. Court of Appeals for the Second Circuit decision, captioned Percoco v. United States, that presented the question of whether the “right to control” theory of fraud counts as actual fraud within the meaning of 18 U.S.C. § 1001(a)(2). The right-to-control theory posits that depriving a person of complete and accurate information bearing upon a person’s economic decision can constitute fraud. In this case, the theory was that by, among other activities, shaping the “request for proposal” (RFP) requirements to favor certain bidders, the defendants deprived the State of economically useful information with which to choose a bidder.
The Second Circuit upheld the convictions of several defendants for wire fraud and bid rigging in connection with New York State–funded projects during the Andrew Cuomo administration. The U.S. Supreme Court reversed—unanimously.
The case relates to a New York State program for economic development known as the Buffalo Billion Initiative. The State planned to invest $1 billion in taxpayer funds to attempt to attract private industry to upstate areas around Buffalo and Syracuse, New York. The State appointed an official with the State University of New York named Alain Kaloyeros to oversee the initiative. Because of legal restrictions on state agencies engaging in public-private partnerships, Kaloyeros engaged a nonprofit corporation called Fort Schuyler Management Corporation to make purchases to support the initiative.
Fort Schuyler worked to develop RFPs through which it would solicit private companies to become “preferred” developers for the region. The preferred developers would have the first opportunity to negotiate with Fort Schuyler for specific projects.
The evidence showed that, unbeknownst to the Fort Schuyler Board of Directors, Kaloyeros collaborated with the owners of two development companies to shape the RFP requirements “so that the bidding process would favor the selection of these companies as preferred developers.” Among other maneuvers, Kaloyeros asked the two developers for their companies’ attributes and qualifications and included those attributes in the RFP. Also, Kaloyeros persuaded Fort Schuyler to split its effort into two RFPs, presumably to ensure that each developer could secure a position as a preferred developer. And Kaloyeros and the developers continued to share information even during a blackout period in which communications between Fort Schuyler and potential bidders was restricted.
The Second Circuit characterized this effort as one to “deprive[]” the State of “potentially valuable economic information,” describing the scheme as follows:
The trial evidence demonstrated that the defendants, by secretly tailoring the Buffalo and Syracuse RFPs, took steps to reduce the possibility that companies other than their own would be seen as competitive, or even qualified at all, for the bids at issue. . . . Fort Schuyler employed the RFP process precisely because of its desire for free and open competition, and . . . the FS Board relied on this aspect of the process to achieve its economic objective—selecting the lowest-priced or best-qualified vendor. Thus, in rigging the RFPs to favor their companies, defendants deprived Fort Schuyler of “potentially valuable economic information[]” . . . that would have resulted from a truly fair and competitive RFP process.
The jury convicted the defendants. On appeal, the defendants argued that the scheme to shape the RFPs did not harm the State because all that the selected developers gained was the right to negotiate a contract with the State, not any actual contract. Also, according to the defendants, the government presented no evidence that the State was actually harmed. Specifically, the defendants argued that there was no evidence that another developer would have offered better terms, price, or work than the selected developer.
The Second Circuit rejected these arguments, embracing the government’s right-to-control theory of fraud. First, the court noted that the developers gained a “leg up” for projects, which was valuable. Second, while acknowledging the scant evidence of economic harm, the court concluded that, as a matter of law, it is not essential that the victim actually suffered economic harm. The appellate court explained thus:
The bargain at issue was not the terms of the contracts ultimately negotiated, but instead Fort Schuyler’s ability to contract in the first instance, armed with the potentially valuable economic information that would have resulted from a legitimate and competitive RFP process. Depriving Fort Schuyler of that information was precisely the object of defendants’ fraudulent scheme, and for Fort Schuyler, it was an essential element of the bargain. This was plainly sufficient for a wire fraud conviction under our caselaw.
But, in the end, the U.S. Supreme Court did not buy it. Framing the issue as a matter of statutory interpretation, the Court observed that the federal wire fraud statute criminalizes the use of interstate wires for “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” The Supreme Court asserted that it has always understood the statute to refer to wronging a person “in his property rights,” which at the time the statute was enacted did not include intangible property rights that were unconnected to traditional property rights. The right-to-control theory, in contrast, seeks to protect an intangible property right, inconsistent with the statute and prior precedent.
Moreover—and one suspects this is the main concern of Justice Clarence Thomas, who authored the decision—the Court asserted that the right-to-control theory “vastly expands federal jurisdiction without statutory authorization,” with the result that “almost any deceptive act could be criminal.” This would, according to the Court, “make[] a federal crime of an almost limitless variety of deceptive actions traditionally left to [states].”
This case has clear potential to impact not only criminal fraud, but also civil fraud theories in public contracting. During oral argument, the government analogized Ciminelli’s fraud to “pedigree fraud, where there’s a lie about the certification of property or important to us would be a case where, for example, someone lies about their eligibility for a veterans preference in contracting,” where the person is not, in fact, an eligible veteran.” Moreover, the decision would appear to invalidate a lengthy line of decisions upholding the right-to-control theory.
The Ciminelli decision may make it harder for the government to bring federal charges, either criminal or civil, against defendants where it is unclear whether the government was deprived of “nontraditional” property. For instance, some contractors engage in marketing activities to shape the government’s future acquisitions, such as by providing information about their offerings and competing products and highlighting features that would be valuable for the government. The court of appeals’s decision in Ciminelli might have made those “shaping” activities riskier going forward. The Court’s decision draws closer to a bright line that such marketing activities would not, without more, violate 18 U.S.C. § 1001.
We now take a detour from the present Supreme Court term to examine an important recent appellate decision from the U.S. Court of Appeals for the Eighth Circuit in United States ex rel. Cairns v. D.S. Medical. Cairns addresses the intersection of the Anti-Kickback Statute (AKS) and the False Claims Act. While no petition for certiorari was filed, the case nonetheless touches on important issues similar to those considered by the Supreme Court.
The facts in Cairns center around a neurosurgeon (Dr. Sonjay Fonn), his fiancée (Deborah Seeger), a company owned by Seeger that distributes medical implants (D.S. Medical), and a valve implant manufacturer that sells valves to D.S. Medical. In his medical practice, Fonn ordered and used implants sold by D.S. Medical, earning lucrative commissions for his fiancée, Seeger. The implant manufacturer offered Fonn the chance to purchase company stock in the manufacturer, which Fonn accepted. Thereafter, Fonn ordered more implants from that manufacturer, which in turn sold products through D.S. Medical, earning commissions for Seeger and, presumably, enhancing the value of Fonn’s stock.
All of this led the relators to bring an FCA action against the defendants, alleging that they submitted false claims for reimbursement under Medicare as a result of illegal kickbacks. The government intervened.
A central question in the case was whether the claims for Medicare reimbursement were false or fraudulent. Apparently, there was no allegation that Fonn submitted claims for Medicare reimbursement that, for example, overstated the amounts charged, nor was there any allegation that Fonn charged Medicare for unnecessary care or committed other types of typical healthcare fraud. Rather, the theory was that the defendants had engaged in an illegal kickback scheme and that the kickbacks were somehow connected to Fonn’s claims for Medicare reimbursement.
Pursuant to amendments enacted in 2010 under the Patient Protection and Affordable Care Act, one of the ways to prove the falsity of a claim under the FCA is to show that the claim “includes items or services resulting from a violation of” the AKS. The question presented in Cairns was what resulting from means. During the criminal trial, the trial court instructed the jury that the government could prove falsity or fraud if it proved, by a preponderance of the evidence, that the claim for reimbursement “failed to disclose the Anti-Kickback Act violation.” The question on appeal was whether this instruction to the jury accurately stated the resulting from standard in the statute.
After analysis of the statutory provisions, the Eighth Circuit reversed, holding that the trial court’s instruction misstated the causation standard. The court of appeals relied on precedent in other contexts to find that the words resulting from mean “but for” causation. Thus, to establish falsity, there needs to be a “but for” causal relationship between the illegal kickback and the claim for reimbursement. The court of appeals formulated this relationship as follows: in order for a claim to be considered a claim that includes items or services resulting from a violation of the Anti-Kickback Act, the plaintiffs would not have included those items or services in their claim for Medicare reimbursement but for the illegal kickbacks. The court of appeals held that the jury instruction did not meet this standard because it is not enough that the defendants merely failed to disclose an illegal kickback; rather, there must be a causal connection whereby it could be said that but for the illegal kickbacks, the plaintiffs would not have included particular items or services in claims submitted for payment.
The court of appeals rejected the government’s alternative formulations. These would have permitted the jury to find falsity if, for example, the defendants did not disclose that the defendants violated the AKS or, alternatively, if the Medicare claims were “tainted” with illegal kickbacks or if the illegal kickbacks “may have been a contributing factor” to the Medicare claims. Those formulations, the court said, do not meet the requirement of “but for” causation. Interestingly, the Eighth Circuit’s decision departs from the ruling of the Third Circuit in United States ex rel. Greenfield v. Medco Health Solutions, and so a circuit split now exists on this issue.
Continuing our detour, on appeal to the U.S. Supreme Court from the Supreme Court of Pennsylvania comes Mallory v. Norfolk Southern Railway, a case that should be of significant interest to any company with far-flung operations throughout the United States.
In Mallory, the plaintiff was a railway worker residing in Virginia and working for Norfolk Southern Railway in Virginia and Ohio for two decades. Robert Mallory alleged that his work exposed him to asbestos and other chemicals, causing him to develop colon cancer. He sued his employer in Pennsylvania state court even though the conduct giving rise to the alleged liabilities did not occur in Pennsylvania. Mallory argued that the Pennsylvania state court had general personal jurisdiction over the railway company because the company had registered to do business in Pennsylvania. Norfolk Southern Railway contested jurisdiction, arguing that Pennsylvania’s assertion of jurisdiction violated the due process clause of the Fourteenth Amendment to the U.S. Constitution.
As some of us may recall from law school, the U.S. Supreme Court has held as far back as 1945 in International Shoe Co. v. Washington that, absent consent, the exercise of personal jurisdiction over a nonresident corporate defendant would violate due process unless that defendant had certain “minimum contacts” with the forum state. Following this logic, the U.S. Supreme Court’s decisions have come to distinguish generally between two types of personal jurisdiction: the first is “specific jurisdiction,” in which the in-state activities of the corporate defendant “give rise to the liabilities sued on”; and the second is “general” or “all-purpose” jurisdiction, where the corporate operations within a state are said to be “so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities.”
Since International Shoe, most of the Court’s jurisprudence on corporate personal jurisdiction has focused on specific, not general, jurisdiction. But then came Goodyear Dunlop Tires Operations, S.A. v. Brown and, three years later, Daimler AG v. Bauman. Together, these cases narrowed the requirements for the assertion of general personal jurisdiction over a corporation in the absence of case-specific contacts with the forum state. Generally, these two cases hold that a corporation is typically only subject to general jurisdiction in the states where its activities are continuous and systematic, such as in a state in which it is incorporated or has its principal place of business.
But neither Goodyear nor Daimler considered the specific question raised in Mallory—that is, whether a corporation’s registration to do business in a state constitutes consent to general jurisdiction. Virtually every state requires businesses to register in order to conduct business in that state. In the Commonwealth of Pennsylvania, however, the law explicitly provides that this registration is sufficient for Pennsylvania courts to exercise general jurisdiction over a foreign corporation, irrespective of any other contacts (or lack of contacts) with the commonwealth.
The Pennsylvania trial court held the statute unconstitutional, and the Pennsylvania Supreme Court affirmed. The Pennsylvania Supreme Court held that if registering as a foreign corporation invokes all-purpose general jurisdiction, it would
eviscerate[] the Supreme Court’s general jurisdiction framework set forth in Goodyear and Daimler and violate[] federal due process by failing to comport with International Shoe’s “traditional conception of fair play and substantial justice.” . . . International Shoe, 326 U.S. at 320. . . . It would also be contrary to Daimler’s directive that a court cannot subject a foreign corporation to general all-purpose jurisdiction based exclusively on the fact that it conducts business in the forum state. See Daimler, 571 U.S. at 138.
The heart of the Pennsylvania Supreme Court’s decision states thus:
It cannot be ignored that if Pennsylvania’s legislative mandate of consent by registration satisfied due process by constituting voluntary consent to general jurisdiction, all states could enact it, rendering every national corporation subject to the general jurisdiction of every state. This reality flies in the face of Goodyear and Daimler and cannot be condoned. . . . Daimler expressly prohibits such broad exercise of general jurisdiction.
The Pennsylvania Supreme Court distinguished consent to jurisdiction expressed in contracts, which, it said, were voluntary and yet “subject to reformation if they are the product of economic duress”—unlike “consent by registration compelled by statute.”
On appeal to the U.S. Supreme Court, the issue was “whether the due process clause of the Fourteenth Amendment prohibits a state from requiring a corporation to consent to personal jurisdiction to do business in the state.” The case has attracted numerous amicus briefs. Interestingly, both Daimler and Goodyear were authored by the late Justice Ruth Bader Ginsberg. It remains to be seen whether the post-Ginsberg Supreme Court will follow the personal jurisdiction framework she laid out more than a decade ago.
As this article was going to press, the U.S. Supreme Court reversed the Pennsylvania Supreme Court, holding that the specific facts of this case justified the exercise of personal jurisdiction over Norfolk Southern.
The public contracts bar should be aware of an emerging trend at the U.S. Supreme Court that seems likely to intersect with federal contracting at some point. The trend concerns the emergence of the “major questions” doctrine and the Supreme Court’s increasing skepticism toward federal administrative authority. As one commenter explained, “it has become increasingly clear that a majority on the Supreme Court aims to reduce the power and reach of the administrative state in the American constitutional order.”
According to some observers, the major questions doctrine emerged shortly after Chevron USA v. Natural Resources Defense Council. Chevron, of course, held that if a statute is ambiguous, then courts should defer to the agency’s interpretation of the statute, as long as the agency’s interpretation is reasonable. In subsequent decisions, the Supreme Court expressed uneasiness with Chevron. And eventually, in Food & Drug Administration v. Brown & Williamson, the Court carved an exception and held that courts should not defer to agencies in “major” cases. As explained by Justice Sandra Day O’Connor,
[d]eference under Chevron to an agency’s construction of a statute that it administers is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps. In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended an implicit delegation.
Taking this a step further, Justice Antonin Scalia noted:
When an agency claims to discover in a long extant statute an unheralded power to regulate “a significant portion of the American economy” we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.
As explained by Professor Cass Sunstein from Harvard Law School, one can think about the major questions doctrine as two separate lines of thought: the first is a “carve-out” from Chevron when a major question is involved; and the second is the nondelegation doctrine, wherein if agencies seek to assert broad powers, they must be able to show clear congressional delegation.
Most recently, the Supreme Court has reinvigorated the major questions doctrine with holdings on environmental law and the COVID-19 pandemic mandates.
In 2022, the Supreme Court held that the Environmental Protection Agency (EPA) lacks authority under the Clean Air Act to shift electricity generation away from coal and toward renewable energy sources. The Supreme Court held that to take on such sweeping regulatory authority, the EPA needed clear congressional authorization, which was lacking.
In terms of pandemic rulings, in Alabama Ass’n of Realtors v. Department of Health & Human Services, the Court vacated a stay on a lower court grant of summary judgment in favor of realtors challenging the Centers for Disease Controls’ (CDC) moratorium on evictions during the COVID-19 pandemic. The district court had granted summary judgment for the realtors, but also granted a stay pending appeal. Eventually, after bouncing around between courts, the realtors asked the Supreme Court to vacate the stay and allow the summary judgment to take effect. The Supreme Court agreed, holding that the CDC had asserted “a breathtaking amount of authority” not authorized under the Public Health Service Act.
Finally, and hitting closer to home for the public contracts bar, in National Federation of Independent Business v. Department of Labor, Occupational Safety & Health Administration, the Supreme Court considered a request for an emergency stay of the Occupational Safety and Health Administration’s vaccine mandate. Calling the mandate “a significant encroachment” on “a vast number of employees,” the Supreme Court reiterated its previous admonition: “We expect Congress to speak clearly when authorizing an agency to exercise powers of vast economic and political significance.”
It is worth watching the major cases doctrine in connection with Federal contracting because it may invite greater levels of judicial review on procurement regulatory issues that are typically very deferential to the government.
Lawyers closely watched In re Grand Jury as it was thought to have the potential either to shake up or clarify the law governing the attorney-client privilege in cases involving legal advice mixed with business advice. The Supreme Court granted certiorari but following oral argument dismissed the case, asserting that certiorari was improvidently granted. This result is rare and does not offer any meaningful insight into the Supreme Court’s thinking on the issue. Still, the case raises the potential for inadvertent privilege waiver when lawyers advise clients on both legal and nonlegal matters.
Here are the background facts: A grand jury for a criminal investigation served subpoenas on a company and its law firm seeking information about the company. The owner of the company was the target of a criminal investigation. The company and law firm each produced some documents but withheld others, claiming attorney-client privilege and work-product protection. The government moved to compel production of the documents, and the district court granted the motion in part. The company and law firm refused to produce the documents, so the district court held them in contempt. The company and law firm appealed.
On appeal, the U.S. Court of Appeals for the Ninth Circuit noted that at issue were “dual-purpose” documents, that is, documents that were created partly to provide legal advice and partly to provide business or tax advice. The court framed the central question in such a way as to determine what the applicable standard should be for assessing privilege assertions for dual-purpose documents.
The parties advanced two competing frameworks. The government advocated for the “primary purpose” test, wherein the court examines whether the primary purpose of the communication is to provide legal advice. If the primary purpose is other than to provide legal advice, the document is not privileged. The company and law firm, however, urged the court to apply a standard borrowed from the work-product doctrine, wherein the documents are privileged if in the “totality of the circumstances” it can fairly be said that “the document was created because of anticipated litigation” and would not have been created but for the prospect of litigation.
The court of appeals sided with the government and held that dual-purpose documents should be assessed using the primary-purpose test. The court noted that the work-product doctrine serves different policy goals than does the attorney-client privilege, that other circuits have adopted the primary-purpose test, and there was no additional policy reason to import work-product standards into the analysis. Notably, the court expressly framed the test in such a way as to determine what the “primary” purpose of the communication was, which presumes that there was one primary purpose. The court did not address situations in which a document might have been created for multiple purposes but where it was unclear if any one of them was “primary.”
For now, with the “improvident” dismissal from the Supreme Court, the Ninth Circuit’s decision will stand, and companies claiming protections under the attorney-client privilege may be forced to reckon with the more narrow primary-purpose test (and the potential for less efficient, holistic discussions with counsel). We will need to wait to see if the Supreme Court eventually decides to revisit the issue of the attorney-client privilege.
As a concluding note in this article, let’s check in on developments in light of an important public contracting case from a few years ago, particularly as it relates to bid protests.
In 2016, the Supreme Court issued its decision in Kingdomware Technologies v. United States. In Kingdomware, the Supreme Court considered the Department of Veterans Affairs (VA)’s so-called Rule of Two set forth in 38 U.S.C. § 8127(d), which is part of the Veterans Benefits Act (VBA) of 2006. The Rule of Two provides that the VA “shall” set aside a contract award for veteran-owned small businesses when there is a reasonable expectation that two or more such businesses will bid. The Supreme Court was asked to determine whether the Rule of Two mandates veteran priorities in VA contract awards or whether the VA must use the Rule of Two only to the extent necessary to meet the VA’s annual minimum goals for contracting with veteran-owned small businesses.
The Supreme Court held that the Rule of Two applies to every VA contract award, including Federal Supply Schedule (FSS) task orders. Along the way, the Supreme Court refused to defer to the VA’s interpretation of the statute, noting that an agency’s interpretation of an unambiguous statute is not entitled to deference. In particular, the Court noted, the fact that Congress used the word shall indicating a mandatory, not a permissive, requirement.
Most of the skirmishes over Kingdomware in the public contract arena have concerned the outer limits of its holdings. For example, the U.S. Government Accountability Office has held that the Rule of Two does not apply to real property leases and also does not apply to procurements by agencies other than the VA. Generally, different language in other preference statutes may compel a different result.
In PDS Consultants, Inc. v. United States, the U.S. Court of Appeals for the Federal Circuit resolved a conflict between the Rule of Two as stated in the Veterans Benefits Act and the contracting preferences required under the Javits-Wagner-O’Day Act, which requires agencies to procure designated products and services from qualified nonprofit agencies operated by, and employing, blind or significantly disabled persons. The Federal Circuit held that the VA’s Rule of Two priority for veteran-owned small businesses takes precedence when it comes to VA procurements. In response to PDS Consultants, Congress passed the Department of Veterans Affairs Consistency Act of 2020, creating exceptions to the Rule of Two in a hopelessly garbled set of amendments that spawned further litigation.
The other interesting impact of Kingdomware relates to the Supreme Court’s holding that FSS task orders are contracts. This language has had ripple effects in the world of General Services Administration contracting. The Federal Circuit handled one such ripple in Coast Professional, Inc. v. United States, where the Court determined that an award term extension granted under an FSS contract was itself a contract, thereby allowing a protest to proceed. No doubt additional ripples from Kingdomware will continue to be felt for years to come.
The 2022–2023 Supreme Court term has been one of the more consequential terms in recent memory for the federal procurement bar. The Schutte decision will reverberate for years and likely make it harder for respondents to win a summary judgment ruling that respondent lacked the requisite scienter. Polansky suggests that wrangling over DOJ intervention in FCA cases will continue even after DOJ initially declines to intervene. The Ciminelli decision seems to mark the demise of the right-to-control theory of federal fraud statutes. Of all the trends, however, the major questions doctrine is the one to watch most closely. Deference to agency interpretations has been a mainstay of federal administrative law—and procurement law in particular—for decades. This particular Court seems less deferential to agencies than past Courts, and it remains to be seen to what extent, if any, this Court will defer to agencies in the future.
