JANUARY 8, 2007

On Friday, January 5, the Supreme Court granted certiorari in five cases of interest to the business community.

Employment Discrimination—Title VII—Liability for Bias of Subordinate Employee. Title VII of the Civil Rights Act of 1964 generally prohibits employers from discriminating against their employees because of their race, color, religion, sex, or national origin. 42 U.S.C. § 2000e-2(a)(1). Like other federal and state discrimination laws, however, Title VII does not expressly address under what circumstances an employer may be held liable for the alleged bias of a subordinate worker who influenced, but did not actually make, a challenged adverse employment decision. The Supreme Court granted certiorari in BCI Coca-Cola Bottling Co. of Los Angeles v. Equal Employment Opportunity Commission, No. 06-341, to address this important question.

The circuits that have considered the issue generally agree that an employer can be held liable under federal discrimination statutes on a so-called “cat’s paw” or “rubber stamp” theory of liability based on the alleged bias of a subordinate employee. The circuits are split, however, on the requisite degree of influence the subordinate must have exercised for his bias to be imputed to the employer. For instance, the Fifth Circuit, which has taken the most lenient approach in analyzing such claims, only requires a plaintiff to show that the subordinate “possessed leverage, or exerted influence, over the titular decisionmaker.” Russell v. McKinney Hosp. Venture, 235 F.3d 219, 227 (5th Cir. 2000). At the other end of the spectrum, the Fourth Circuit requires the plaintiff to make the more difficult showing that the subordinate employee “possessed such authority as to be viewed as the one principally responsible for the decision or the actual decisionmaker of the employer.” Hill v. Lockheed Martin Logistics Mgmt., Inc., 354 F.3d 277, 288 (4th Cir. 2004) (en banc).

In the decision below, the Tenth Circuit considered whether an employer could be held liable for race discrimination based on a human resource official’s decision to terminate an employee after a report of insubordination was filed by the employee’s allegedly biased supervisor. Equal Employment Opportunity Comm’n v. BCI Coca-Cola Bottling Co. of Los Angeles, 450 F.3d 476, 478 (10th Cir. 2006). The Tenth Circuit rejected the “opposite extreme[s]” taken by the Fifth and Fourth Circuits and adopted the Seventh Circuit’s ostensibly middle-ground approach, requiring a plaintiff asserting a cat’s paw claim to establish a causal link between the subordinate’s bias and the challenged adverse employment decision. Id. at 487 (citing Lust v. Sealy, Inc., 383 F.3d 580, 584 (7th Cir. 2004)). Applying that principle to the facts of the case, the Court concluded that a genuine issue of material fact existed as to whether the subordinate’s bias resulted in a discriminatory termination, even though the decisionmaker worked in a different city and, at the time of the termination, did not even know the plaintiff’s race. Id. at 490–92. The court noted that although an employer “can avoid liability [on a cat’s paw claim] by conducting an independent investigation of the allegations against an employee,” id. at 488, the employer’s investigation in this case was insufficient as a matter of law to exculpate the employer from liability because the employer engaged in “no independent inquiry into the events that took place” and “failed to take even the basic step * * * of asking [the plaintiff] for his side of the story,” id. at 491.

The Supreme Court’s decision in this case will be of significant interest to all employers covered by Title VII and other state and federal discrimination laws. This case gives the Court an excellent opportunity to clarify the scope of employer liability for discrimination claims based on subordinate bias, including the procedures employers can follow to prevent imputation of such bias. Amicus briefs in support of the petitioner are currently due on February 20, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

Private Securities Litigation Reform Act—Inferences of Intent. The Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires plaintiffs to plead “facts giving rise to a strong inference that the defendant acted” intentionally. 15 U.S.C. § 78u-4. This heightened scienter pleading requirement has given rise to a 4–2–2–1 circuit split regarding the weight that a court considering a motion to dismiss should give to competing inferences of intent that may be drawn from the same alleged facts. The First, Fourth, Sixth, and Ninth Circuits require dismissal unless culpability is the most plausible among possible inferences. The Eighth and Tenth Circuits consider the strength of the culpability inference in the context of possible alternatives but do not hold that only the most plausible inference can be considered “strong.” The Second and Third Circuits divide scienter allegations into two categories—“motive and opportunity” to commit fraud and “strong circumstantial evidence” of fraud—and allow the case to proceed if the complaint raises a “strong inference” as to either category. Finally, the Seventh Circuit, in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006), considered only whether a reasonable person “could infer” that the defendant acted with the required intent and suggested that crediting only the most plausible inference might violate plaintiffs’ Seventh Amendment right to have a jury draw reasonable inferences in their favor. The Supreme Court granted certiorari to the Seventh Circuit in this case, now recaptioned Tellabs, Inc. v. Makor Issues & Rights, Ltd., No. 06-484, to resolve this split.

Tellabs is a communications equipment manufacturer whose stock dropped during the industry-wide slowdown in 2001. The plaintiff shareholders alleged that Tellabs and its CEO had boosted the share price through improper revenue recognition and fraudulent projections. One specific allegation was that the defendants had engaged in “channel stuffing,” which the Complaint defined to include not only clearly fraudulent acts, such as fabrication of purchase orders, but also innocent acts such as price discounts and customer financing that increase reported revenue. The Seventh Circuit recognized that the PSLRA requires “fact pleading” going beyond even the heightened standard for fraud claims under Federal Rule of Civil Procedure 9(b). Nonetheless, it reversed the District Court’s dismissal of the claims, ruling that a reasonable juror “could infer” intent from the alleged conduct, even though all of the allegations, according to Tellabs, are also consistent with innocent behavior.

This case is of great importance to publicly traded firms. The heightened pleading standard in the PSLRA was intended to force district courts to dismiss frivolous securities claims at an early stage, before defendant companies have to engage in costly discovery. An affirmance in this case could significantly lower the pleading hurdle and allow cases to proceed to discovery without a clear allegation of fraudulent behavior.

Mayer Brown filed an amicus brief on behalf of the Securities Industry and Financial Markets Association and the Chamber of Commerce of the United States of America in this case in support of certiorari. Pursuant to an expedited briefing schedule, amicus briefs supporting the petitioner are due at 2 p.m., February 9, 2007; amicus briefs supporting the respondent are due at 2 p.m., March 9, 2007. Any questions about the case should be directed to Tim Bishop (312-701-7829) in our Chicago office.

Clean Water Act and Endangered Species Act—Scope Of Requirement Not To Harm Endangered Species. Section 402(b) of the Clean Water Act (“CWA”) requires the Environmental Protection Agency (“EPA”) to transfer pollution permitting authority to a state if nine specified criteria are satisfied. See 33 U.S.C. § 1342(b). Section 7(a)(2) of the Endangered Species Act (“ESA”) requires the EPA to insure that its actions do not jeopardize the continued existence of any endangered or threatened species. See 16 U.S.C. § 1536(a)(2). The Supreme Court granted certiorari in two consolidated cases—EPA v. Defenders of Wildlife, No.06-549, and National Association of Home Builders v. Defenders of Wildlife, No. 06-340—to determine whether the no-jeopardy provision of the ESA may preclude the transfer of permitting authority to a state even if the nine statutory criteria of the CWA are satisfied. The Court also directed the parties to address whether the EPA’s transfer decision in this case was arbitrary and capricious, and, if so, whether the court of appeals should have remanded to the EPA for further proceedings without ruling on the interpretation of Section 7(a)(2). 

The State of Arizona applied to become the 45th state to obtain permitting authority from the EPA, under a program by which the Arizona Department of Environmental Quality grants water pollution permits for the Arizona waterways. Despite the fact that the nine CWA criteria had been met, the EPA’s regional office determined that the transfer could have indirect effects on species listed under the ESA because, unlike the EPA, the Arizona agency would not be required to consult with the Fish and Wildlife Service (“FWS”) regarding likely effects on listed species in granting pollution permits. The EPA initiated a formal consultation with the FWS and, after those discussions, the FWS issued a “biological opinion” recommending the transfer. The FWS concluded that any harm to endangered species from the transfer of authority to Arizona would be the direct result of Congress’ decision to grant states the right to administer such programs under state law without subjecting those states to the requirements of the ESA. Therefore, the EPA approved the transfer.

Defenders of Wildlife and other organizations filed a petition for review in the Court of Appeals for the Ninth Circuit. In a divided opinion, reported at 420 F.3d 946, the Ninth Circuit held that (1) the EPA’s approval of Arizona’s transfer application was arbitrary and capricious because the EPA had illogically concluded that the ESA required it to consult with the FWS on the proposed transfer, but that the EPA could not deny a transfer on the basis of any harm to endangered species, and (2) Section 7 of the ESA required the EPA to take endangered species into account when making the transfer decision, despite the fact that such consideration went above and beyond the nine statutory requirements in the CWA. With regard to the latter holding, the court explained that Section 7 of the ESA provides an “affirmative grant of authority to attend to protection of listed species,” and rejected the contention that such authority under the ESA was limited by the CWA’s directive that the EPA “shall approve” any transfer application meeting the specified requirements. In so holding, the court acknowledged that its decision was in conflict with the decisions of two other courts of appeals. See American Forest & Paper Ass’n v. EPA, 137 F.3d 291 (5th Cir. 1998), and Platte River Whooping Crane Habitat Maint. Trust v. FERC, 962 F.2d 27 (D.C. Cir. 1992).

The Court’s decision in this case is of considerable importance as it will have far-reaching effects on the scope of the ESA. The Ninth Circuit’s holding that the ESA places an affirmative duty on federal agencies to protect endangered species cannot be limited to the CWA context of this case, but effectively modifies the mandates of every federal agency regardless of the statutory context. Amicus briefs in support of the petitioner are currently due on February 20, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about this case should be directed to Tim Bishop (312-701-7829) in our Chicago office.

Administrative Law—Judicial Deference to Agency Interpretations—Exempt Employees under the Fair Labor Standards Act.  Under the doctrine of Chevron deference, courts generally will not disturb an agency’s statutory interpretation of an ambiguous statute if the interpretation was promulgated in the exercise of that agency’s delegated authority to generate legally binding rules. See United States v. Mead Corp., 533 U.S. 218 (2001); Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). If Chevron is inapplicable, courts will defer to agency interpretations that are persuasive in light of the agency’s “specialized experience and broader * * * information.” Skidmore v. Swift & Co., 323 U.S. 134, 139 (1944). Ten years ago, a unanimous Supreme Court broadly applied Chevron deference to a Department of Labor (“DOL”) interpretation of the Fair Labor Standards Act’s (“FLSA”) exempt status provisions. See Auer v. Robbins, 519 U.S. 452, 461 (1977). Despite subsequently limiting the doctrine in certain respects, the Court has continued to apply Auer’s core principles of deference. See, e.g., Mead Corp., 533 U.S. 218. The Supreme Court granted certiorari in Long Island Care at Home, Ltd. v. Coke, No. 06-593, to decide whether a DOL provision promulgated through notice-and-comment rulemaking, but designated as an “interpretation” rather than a “regulation,” is entitled to deference under Chevron or Skidmore.

Citing its rulemaking authority under the FLSA, the Department of Labor (“DOL”) in 1975 engaged in notice-and-comment rulemaking to promulgate an “interpretation” of the Act that exempted from the minimum wage and overtime wage provisions those “[e]mployees who are engaged in providing companionship services * * * and who are employed by an employer or agency other than the family or household using their services.” 29 C.F.R. § 552.109(a). Citing an apparent contradiction between this provision and a simultaneously enacted “regulation,” companion care worker Evelyn Coke sued her former employer for unpaid wages. The district court upheld the § 552.109(a) exemption under Chevron deference. See Coke v. Long Island Care at Home, Ltd., 267 F. Supp. 2d 332 (E.D.N.Y. 2003). The Second Circuit vacated the order, however, holding not only that Chevron deference was inappropriate because the DOL did not intend in 1975 for the provision to be legally binding, but also that the less-deferential Skidmore standard was inapplicable because the agency’s regulation was poorly reasoned and inconsistent with congressional purpose and other agency regulations. See 376 F.3d 118 (2d Cir. 2004). The Supreme Court granted certiorari, vacated the Second Circuit’s judgment, and remanded the case for consideration in light of a contemporaneously issued DOL advisory memorandum stating that the agency considers § 552.109(a) legally binding. See 126 S. Ct. 1189 (2006). On remand, the Second Circuit reaffirmed its prior holding. See 462 F.3d 48 (2d Cir. 2006). The Second Circuit’s decision conflicts with two decisions by the Tenth Circuit. See Welding v. Bios Corp., 353 F.3d 1214 (10th Cir. 2004); Johnston v. Volunteers of America, Inc., 213 F.2d 559 (10th Cir. 2000).

This case is important to states, municipalities, and insurers who pay or reimburse homecare costs, as well as to employers who rely upon DOL interpretations of the FLSA’s exempt status regulations. The case also has significant implications for all regulated industries: the Court’s decision in Long Island Care at Home may test the boundaries of Auer deference and signal a major development in the law of deference to agencies’ interpretations of their own regulations. Amicus briefs in support of the petitioner are currently due on February 20, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

Transportation—Application of Carmack Amendment to Multimodal Shipments.  The Carmack Amendment sets forth various rules governing shipments by rail or motor carrier “between a place in * * * the United States and a place in a territory or possession of the United States to the extent the transportation is in the United States” and not purely intrastate. 49 U.S.C. § 13501(1)(C); see also id. § 10501(a)(2). The Carmack Amendment includes a provision prohibiting carriers from establishing “a period of less than 2 years for bringing a civil action against it under this section.” Id. § 14706(e)(1). The Supreme Court granted certiorari in Altadis USA, Inc. v. Sea Star Line, LLC, No. 06-606, to determine whether the Carmack Amendment applies to multimodal international shipments where the inland carrier did not issue a separate bill of lading for the inland leg.

In March 2003, petitioner Altadis USA, Inc. contracted with respondent Sea Star Line, LLC for carriage of a sealed container of cigars and cigar bands from San Juan, Puerto Rico, to Tampa, Florida. Sea Star issued a multimodal “through” bill of lading to cover both the ocean voyage from San Juan to the port of Jacksonville, Florida, and the delivery by truck from Jacksonville to Tampa. The bill of lading provided that any suit against Sea Star must be brought within one year after delivery of the goods or the date the goods should have been delivered. The shipment went from San Juan to Jacksonville without incident, but was lost between Jacksonville and Tampa. Altadis brought suit on April 13, 2004. The district court granted defendants’ motion for summary judgment because of Altadis’s failure to bring suit within a year of the date the cargo should have been delivered. The court held that the Carmack Amendment did not apply to the Jacksonville-Tampa leg of the shipment because the inland carrier did not issue a separate bill of lading for that leg. The Eleventh Circuit affirmed, joining the position of the Fourth, Sixth, and Seventh Circuits. See Altadis USA, Inc. v. Sea Star Line, LLC, 458 F.3d 1288 (11th Cir. 2006). This is in direct conflict with decisions of the Second and Ninth Circuits, which hold that the Carmack Amendment also applies to an inland leg of an overseas shipment under a “through” bill of lading.

This case is important to global businesses that use “through” bills of lading for international shipments—an increasing part of the trillion dollar multimodal transportation industry—as well as to inland carriers. Pursuant to an expedited briefing schedule, amicus briefs supporting the petitioner are due at 2 p.m., February 9, 2007; amicus briefs supporting the respondents are due at 2 p.m., March 9, 2007. Any questions about this case should be directed to appellate@mayerbrown.com.