Killing Auer: The Kisor Campaign

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This post was written by Associate Editor, Katherine Montgomery.  The views and opinions expressed herein are those of the author alone.

A spectrum of cases flood the Supreme Court docket, some garnering more attention than others. It’s only natural to be lured by facts involving warrantless blood draws from an unconscious driver or those of an endangered amphibian battling to secure habitat in areas not yet sustainable for its species. [1] But lurking in the shadows of those captivating case captions, lies what is arguably the most important case the Supreme Court will decide in 2019.

On March 27, the Supreme Court will hear oral argument in Kisor v. Wilkie. [2] While the outcome has important implications for Mr. Kisor, the significance lies in its attack on the administrative state. The case arises from a dispute over retroactive benefits for James Kisor, a Marine who served in the Vietnam War, suffering from service-related post-traumatic stress disorder. [3] At issue were Kisor’s service personnel records and whether the records were “relevant” within the meaning of the regulation in determining benefit eligibility. [4] Ultimately, the Board of Veterans Appeals denied retroactive benefits relying on the agency’s interpretation of the term ‘relevant’ in its own regulation. [5] Kisor then appealed unsuccessfully to the U.S. Court of Appeals for the Federal Circuit which affirmed the Board’s decision. [6]

The court of appeals concluded the term ‘relevant’ was ambiguous when it acknowledged that both Kisor and the Board argued reasonable definitions, but deferred to the Board’s interpretation as controlling. [7] Citing both Seminole Rock and Auer for support, the court explained that it “defer[s] to an agency’s interpretation of its own regulation” unless the agency’s interpretation is “plainly erroneous or inconsistent with the regulation.” [8]

The Supreme Court granted certiorari in Kisor to reconsider the risk inherent in Seminole Rock-Auer deference (commonly referred to as “Auer deference”) – a decision that could overturn unwieldly control of the administrative state.

Born out of the 1945 decision in Bowles v. Seminole Rock & Sand Co., the mechanism by which administrative agencies circumvent limits imposed on agency authority gained serious traction in the 1997 decision, Auer v. Robbins. [9] In a unanimous opinion authored by Justice Scalia, Auer demonstrated an open willingness to defer to an agency’s interpretation unless plainly erroneous or inconsistent with the regulation. [10] It wasn’t until 2011 when Justice Scalia in Talk America v. Michigan Bell Telephone Co. would later call this broad application of the Seminole Rock doctrine, a regret in that he “uncritically accepted.” [11]

In many ways, it can be argued that doctrines of administrative deference are practical (and perhaps required) to the function of the federal government’s ability to regulate big businesses, the environment, and immigration. [12] Under the Chevron doctrine, the agency with the requisite expertise is often considered in a better position to interpret the federal law it administers when the law itself is not clear. [13] In this instance, Congress may delegate the task of filling a gap in the statute to the expertise of the agency through the formal rulemaking process, compatible with Section 706 of the Administrative Procedure Act (APA). [14] Whereas, Auer deference provides for the agency (not Congress) to draft broad or vague substantive rules that the agency later fills in using interpretive rules unchecked by notice and comment. [15]

Auer grants agencies authority to bypass APA safeguards enacted by Congress to protect the public from irregular agency lawmaking. [16] These measures include notice and comment rulemaking; requiring notice, public participation, and agency accountability. [17] Auer deference unilaterally enables agencies to adopt binding interpretations without providing the regulated community notice of what is required. [18] That is, until the very same regulated community becomes blindsided by ad hoc agency interpretations or rationalizations of its very own vague regulations.

In SmithKline Beecham Corp., the Court recognized that Auer “creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby frustrating the notice and predictability purposes of rulemaking.” [19] Justice Thomas previously explained, “[i]t is perfectly understandable * * * for an agency to issue vague regulations, because to do so maximizes agency power and allows the agency greater latitude to make law through adjudication rather than through the more cumbersome rulemaking process.” [20]

Prior to his passing in February 2016, Justice Scalia offered a solution to the exploitation of Auer that would “restore the balance originally struck by the APA with respect to the agency’s interpretation of its own regulations.” [21] In his view, the solution would be to overrule Seminole Rock – a doctrine relied upon even though it was decided before the APA was enacted. [22] Built upon the doctrine of Seminole Rock, the tremendous impact of Auer and it’s authority to bypass the APA results in a direct conflict with the separation of powers – a principle necessary to protect individual liberty. “Because Auer’s practical effect is to vest in a single branch the law-making and law-interpreting functions, Auer is incompatible with the separation-of-powers principles that animate the Constitution.” [23]

In Decker, Justice Scalia concludes that “however great may be the efficiency gains derived from Auer deference, beneficial effect cannot justify a rule that not only has no principled basis but contravenes one of the great rules of separation of powers: He who writes a law must not adjudge its violation.” [24] Kisor could very well be the decision in restoring the balance Justice Scalia had hoped for.

[1] Mitchell v. Wisconsin, No.18-6210, 2019 U.S. LEXIS 576 (U.S., Jan. 11, 2019) (set for argument Apr. 23, 2019); Weyerhaeuser Co. v. U.S. Fish & Wildlife Serv., 139 S. Ct. 361 (2018).

[2] Kisor v. Wilkie, No. 18-15, 139 S. Ct. 657 (Dec. 10, 2018) (certiorari granted, in part).

[3] Kisor v. Shulkin, 869 F.3d 1360 (Fed. Cir., Sept. 7, 2017).

[4] Brief for Petitioner at *34-36, Kisor v. Wilke, No. 18-15 (U.S., Jan. 24, 2019); The Dept. of Veterans Affairs’ New & Material Evidence regulation, 38 C.F.R. § 3.156(c).

[5] Brief for Petitioner, supra note 4, at *30-36.

[6] Kisor v. Shulkin, 869 F.3d 1360 (Fed. Cir., Sept. 7, 2017).

[7] Id. at 1367-68.

[8] Id. at 1367 (internal quotation marks omitted), (citing Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), Auer v. Robbins, 519 U.S. 452 (1997)).

[9] Brief for Petitioner, supra note 4, at *12-14; Auer v. Robbins, 519 U.S. 452 (1997).

[10] Kevin O. Leske, A Rock Unturned: Justice Scalia’s (Unfinished) Crusade against the Seminole Rock Deference Doctrine, 69 Admin. L. Rev. 1, *20 (Winter 2017).

[11] Id. at *22; Talk America, Inc. v. Michigan Bell Tel. Co., 564 U.S. 50, 67-68 (2011) (Scalia, J., concurring).

[12] Brianne Gorod, Symposium: Why Kisor is a case to watch, Scotusblog (Jan. 31, 2019, 11:14 AM), https://www.scotusblog.com/2019/01/symposium-why-kisor-is-a-case-to-watch/

[13] Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).

[14] Administrative Procedure Act, 5 U.S.C. § 706.

[15] Brief for Petitioner, supra note 4, at *62; Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1212 (Scalia, J., concurring in the judgment).

[16] Brief for Petitioner, supra note 4, at *52.

[17] Id. at *38-39, 48-49.

[18] Jonathan Adler, Symposium: Government agencies shouldn’t get to put a thumb on the scales, Scotusblog (Jan. 31, 2019, 2:36 PM), https://www.scotusblog.com/2019/01/symposium-government-agencies-shouldnt-get-to-put-a-thumb-on-the-scales/

[19] Brief for Petitioner, supra note 4, at *61-62 (citing Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 158 (2012) (quoting Talk Am., Inc., 564 U.S. 50, 69 (2011) (Scalia, J., concurring)).

[20] Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 525 (1994) (Thomas, J., dissenting).

[21] Perez, 135 S. Ct. at 1213; see also Leske, supra note 10, at *31.

[22] Id. at 1211, 1213; see also Leske, supra note 10, at *31.

[23] Talk America, Inc., 564 U.S. at 68 (2011) (Scalia, J., concurring).

[24] Decker v. Northwest Envtl. Def. Ctr., 568 U.S. 597, 622 (2013) (Scalia, J., concurring in part and dissenting in part).

Ante Up: Taking A Gamble On Double Jeopardy

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This post was written by Associate Editor, Lauren Lentsch.  The views and opinions expressed herein are those of the author alone.

One would imagine that a judicial doctrine upheld and relied on for 170 years and approved by 30 Supreme Court justices could be considered firmly established law. However, such is not necessarily the case with the “separate sovereign” exception to the Double Jeopardy Clause. The Supreme Court is expected to soon issue their decision in the case Gamble v. United States, challenging the separate sovereign doctrine as a violation of the Fifth Amendment Double Jeopardy Clause.

The separate sovereign exception to the Double Jeopardy Clause was established from a litany of Supreme Court cases. In Abbate v. United States, the defendant was convicted in Illinois for conspiracy to damage another’s property and sentenced to three months imprisonment.[1] The defendant was subsequently charged in federal court for violation of 18 U.S.C. § 1362 (1964), conspiracy to destroy communications facilities operated or controlled by the United States.[2] In Bartkus v. Illinois, the defendant was convicted of armed robbery under Illinois law after acquittal from a federal charge under 18 U.S.C. §2113 (1964).[3] These cases, followed by a myriad of others, have upheld United States v. Lanza, which provided the following:

We have here two sovereignties, deriving power from different sources, capable of dealing with the same subject-matter within the same territory. . . . Each government in determining what shall be an offense against its peace and dignity is exercising its own sovereignty, not that of the other. It follows that an act denounced as a crime by both national and state sovereignties is an offense against the peace and dignity of both and may be punished by each.[4]

Such has been the prevailing separate sovereign doctrine, unfailingly upheld in the courts.

Gamble v. United States probes the Supreme Court on whether it should overrule the separate sovereign exception to the Double Jeopardy Clause. On November 29, 2015, Terance Martez Gamble was pulled over by police for a faulty headlight.[5] The officer smelled marijuana, and after searching the car, found marijuana, a digital scale, and a 9mm handgun.[6] Because Madison was convicted of a felony in 2008, he was in violation of the State’s felon-in-possession statute, which prohibited “a convicted felon from possessing a pistol.”[7] During the pendency of the State’s criminal proceedings, Gamble was also charged by the federal government under violation of the federal felon-in-possession statute, 18 U.S.C. § 922(g)(1).[8] Gamble’s sole objection remains that the Fifth Amendment’s Double Jeopardy Clause prohibits the federal indictment, as the charges were brought from the same offence.[9] Bound by strong precedent, the District Court and the Eleventh Circuit denied Gamble’s motion.[10]

Gamble has now appealed to the Supreme Court on the back of the June 9, 2015 Supreme Court decision in Puerto Rico v. Sanchez Valle.[11] In Puerto Rico, the Court ruled that states are separate sovereigns from the United States federal government as their power to undertake criminal prosecutions is not derived from the federal government, but instead relies upon authority preserved to them by the Tenth Amendment.[12] However, the Court held that Puerto Rico is a territory, not a state, and derives its power from the federal government.[13] As such, the claim brought by both the federal government and Puerto Rico was a violation of the Fifth Amendment Double Jeopardy Clause.[14]

Despite this most recent decision, the stark differences between United States territories and states, and the long-held precedent of the separate sovereign doctrine are undeniable. There is no doubt that Gamble faces an uphill battle. However, there is scholarly chatter that he has made strange bedfellows with, at minimum, three votes with Justice Thomas, Justice Ginsburg, and Justice Gorsuch. The questions posed at argument, along with the concurrence in Puerto Rico, lend credence to the thought that these justices believe that the principles of federalism and the original meaning of the Double Jeopardy Clause limit government intrusion into people’s lives, not increase it and that they will vote to overturn Abbate. While it will be a challenge to persuade at least two more justices, his pursuit is certainly not unreasonable. Of course, should Gamble be successful, the opinion would be historic, overturning a 170-year-old doctrine that has been approved by 30 Supreme Court Justices.

Oral arguments were heard on December 6, 2018 and the Court is set to decide the issue before this term’s end.

[1] Abbate v. United States, 359 U.S. 187, 188 (1959).

[2] Id. at 188.

[3] Bartkus v. Illinois, 359 U.S. 121 (1959).

[4] United States v. Lanza, 260 U.S. 377, 382 (1922).

[5] Petition for a Writ of Certiorari at 3, Gamble v. United States, No. 17-646 (U.S. October 24, 2017).

[6] Id.

[7] Id.; See Ala. Code §§ 13A-11-70(2), 13A-11-72(a).

[8] Petition for a Writ of Certiorari at 4, Gamble v. United States, No. 17-646 (U.S. October 24, 2017).

[9] Id.

[10] See United States v. Gamble, No. 16-00090-KD-B, 2016 U.S. Dist. LEXIS 80201 (S.D. Ala. June 20, 2016); United States v. Gamble, 694 F. App’x 750 (11th Cir. 2017).

[11] United States v. Sanchez Valle, 136 S.Ct. 1863 (2016).

[12] Id. at 1871.

[13] Id. at 1873.

[14] Id. at 1877.

The Taxman Cometh: Conveyance Language and its Secondary Tax Implications in the Event of Involuntary Conversion

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This post was written by Associate Editor, Rebecca McDonough.  The views and opinions expressed herein are those of the author alone.

The Fifth Amendment provides property owners with the guarantee of just compensation when private property is taken for public use by a government entity.[1] While legal scholars have debated the definitions of “just compensation” and “public use,” the language included in condemnation conveyance documents and secondary tax implications of such language have yet to be explored.[2] The Internal Revenue Code specifically provides a taxpayer with the means of deferring his gain “where he is compelled to give up such property because of circumstances beyond his control.”[3]

Beyond the reporting requirements, additional language in applicable conveyance documents, such as purchase agreements or deeds, could be employed as evidentiary support for a taxpayer’s claim of involuntary conversion and nonrecognizable or deferred gain. Specifically, conveyance documents including the phrase “conveyed under threat of eminent domain” or “conveyed in lieu of eminent domain proceedings” could be the new normal in federal, state or municipal property acquisitions.

As a general rule, property involuntarily converted into money, through the receipt of a condemnation award, can be deferred for tax reporting purposes if the taxpayer purchases “property similar or related in service” to the converted property within two years of the date of involuntary conversion.[4] The condemnation award must be reinvested in replacement property.[5] If the award is not reinvested, it is a taxable gain and must be reported as such by the taxpayer.[6]

A threat of condemnation exists “if the taxpayer might reasonably believe from representations of government agents and from surrounding circumstances that condemnation [is] likely to take place if he [does] not sell his property.”[7] The Internal Revenue Service provides that any oral statements upon which the taxpayer relied may have to be supported by written confirmation to satisfy the requirements for elected deferral.[8] Individual states have their own requirements for how governmental entities and agencies must go about acquiring private property.[9] In Ohio, for example, the triggering event for a threat of condemnation occurs when the taxpayer receives written notice of the government’s intent to acquire his property.[10]

The standard form of notice of intent to acquire under the Ohio Revised Code includes a section which provides, “[i]f you do not accept this offer, and we cannot come to an agreement on the acquisition of (your property) (an easement), ________________ (agency) has the right to file suit to acquire the (property) (easement) by eminent domain in the county in which the property is located.”[11] Upon receipt of such notice, a taxpayer could reasonably interpret this language to indicate that the property would be acquired through the government entity’s eminent domain or condemnation power if the taxpayer does not voluntarily convey it.

Manatee County, Florida is the only jurisdiction which uses specific eminent domain language in property conveyance documents.[12] The inclusion of “under threat of and in lieu of eminent domain proceedings” language is not for tax purposes, but to exempt the documents from county recording fees.[13] Expanding the application of this language beyond Manatee County and across other jurisdictions will provide additional evidentiary support to individuals seeking to invoke their deferral right under I.R.C. § 1033.

To qualify for a deferral, the taxpayer must reinvest the condemnation award in similar property within two years and he must include notice of his election to defer with his tax return for the year in which the involuntary conversion occurred.[14] However, when reporting his election to defer the taxpayer is only required to include “all necessary details.”[15] Having satisfied the statutory and jurisdictional requirements to exercise its eminent domain power, the governmental entity benefits from the acquisition of the taxpayer’s property. In turn, the inclusion of eminent domain language in the conveyance documents benefits the taxpayer should he wish to reinvest the condemnation award and defer the gain. Considering the ambiguity of “all necessary details,” adding “conveyed under threat of eminent domain” or “conveyed in lieu of eminent domain proceedings” provides the taxpayer with supplementary evidentiary support should any issues arise regarding his elected deferral.

 

[1] U.S. Const. amend. V.

[2] See Patricia E. Salkin & Lora A. Lucero, Community Redevelopment, Public Use, and Eminent Domain, 37 Urb. Law. 201 (2005); Steve P. Calandrillo, Eminent Domain Economics: Should “Just Compensation” Be Abolished, and Would “Takings Insurance” Work Instead, 64 Ohio St. L.J. 451 (2003).

[3] S & B Realty Co. v. Comm’r of Internal Revenue, 54 T.C. 893, 871 (1970).

[4] I.R.C. § 1033(a) (LexisNexis 2019).

[5] I.R.C § 1033(b) (LexisNexis 2019).

[6] Mark W. Cochran, Should Personal Injury Damage Awards Be Taxed?, 38 Case W. Res. 43, 47 (1988).

[7] Ranier Cos., Inc. v. Comm’r of Internal Revenue, 61 T.C. 68, 76 (1973).

[8] Internal Revenue Serv., Dep’t of the Treasury, Pub. 544, Sales and Other Dispositions of Assets 6 (Mar. 13, 2018), https://www.irs.gov/pub/irs-pdf/p544.pdf.

[9] See Fifty-State Survey: The Law of Eminent Domain (William G. Blake ed., 2012).

[10] Ohio Rev. Code Ann. § 163.04(A) (LexisNexis 2019).

[11] Ohio Rev. Code Ann. § 163.041 (Lexis Nexis 2019).

[12] Joaquin Servia, Manatee Cty. Prop. Mgmt. Dep’t, Contract for Sale and Purchase for Permanent Easement (2013), https://www.mymanatee.org/published/August%2013,%202013%20-%20Regular%20Meeting%20on%20Tuesday,%20August%2013,%202013/634F0054-633A-4A5F-8031-B430A631D6C5.pdf.

[13] Manatee Cty. Prop. Mgmt. Dep’t, Permanent Utilities Easement (2013). https://www.mymanatee.org/UserFiles/Servers/Server_7588306/File/Departments/Building%20&%20Development%20Services/Planning%20&%20Development/Applications%20Forms%20Fees/Subdiv/Drainage_Utilites%20Easement_RepCapacity_Rev_8_02_13_CAO-803.2.%20%20rev.pdf.

[14] Internal Revenue Serv., Dep’t of the Treasury, Pub. 544, at 10.

[15] Id.

Revitalization: Hemp’s Long-Awaited Return to the Bluegrass State

This post was written by Associate Editor, William Lloyd.  The views and opinions expressed herein are those of the author alone.

Historical Background

            Before 1937, hemp was deeply rooted in Kentucky’s social and economic identification. The state was a world leader in hemp production and its hemp was used to produce everything from textile production to Naval ships’ rigging during wars.[1] However, it began to be seriously regulated in the country following the Marihuana Tax Act of 1937. This Act placed a tax on the sale of cannabis, though those close to the hemp industry argued that it was a plot to reduce the size of the hemp industry altogether because it posed as a threat to the timber industry in paper production.[2] Although the 1937 Act made no distinction between low-THC hemp and high THC marijuana, the 1970 Controlled Substance Act legally classified hemp as a Schedule I drug.[3] Thus, hemp was designated as (1) a drug or other substance with a high potential use for abuse, (2) a drug with no currently accepted medical treatment use in the United States, or (3) a drug that lack the accepted safety for use under medical supervision.[4]

The rigid regulation of hemp and its by-products remained in place throughout the country until 1998, when the United States began to import food-grade hemp seed and oil.[5]. In 2007, the first hemp licenses in over 50 years were granted to two North Dakota farmers and in 2014, President Obama signed the Farm Bill, allowing state and federal research institutions to begin hemp farming for research purposes.[6] The 2014 Bill eased some federal regulations on hemp extraction production, especially CBD oil.[7]

The 2018 Farm Bill and a Departure from 1933

            In December, President Trump signed the 2018 Farm Bill. The Farm Bill has typically been renewed every five years since 1933. Originally introduced by President Franklin Roosevelt, the Bill is recognized as the food policy and agricultural regulations tool of the federal government.[8] The new changes, championed by Kentucky Senator Mitch McConnell, included the next step for hemp advocates and farmers. This opened the door for legalized industrial hemp production, including hemp plants used to produce legally approved CBD oil. [9]   CBD oil is a popular product of hemp used for its alleged therapeutic properties. For the first time in history, farmers will be allowed to buy crop insurance on their plants and hemp futures can be traded, locking in prices for farmers.[10]

Perhaps the biggest effect of the 2018 Farm Bill is that it devolves regulatory powers to the states given there is a state plan in place “to monitor and regulate the production of hemp.”[11] Under the new laws, hemp will be managed as a crop by the Department of Agriculture (in consultation with the Food and Drug Administration) instead of an illegal substance by the Justice Department.[12] Even more, the 2018 Bill removes industrial hemp and its extracts that contain no more than .3% THC concentration on a dry weight basis from the list of controlled substances by the Food and Drug Administration.[13] The 2018 Bill presented a substantial victory for the hemp industry and Kentucky.

After the 2018 Bill was passed, FDA Commissioner Scott Gotlieb restated the FDA’s stance that “CBD is a drug ingredient and therefore illegal to add to food or health products without approval” from the agency. [14] The FDA allows some products to be sold without prior approval, such as hulled hemp seeds, hemp seed protein, and hemp seed oil.[15] However, the FDA still requires pre-approval if the marketers claim that the extracts can be used to treat diseases, like CBD oil.[16] Gotlieb’s statement exists to outline the future of hemp extracts and to assert the FDA’s governance over the products.

The 2018 Bill allowed states to provide a plan to the United States Department of Agriculture in order to outline specific procedures in place ensuring four facts.[17] The 2018 Bill required states to have a record of where hemp is produced in the state, outline procedures to ensure hemp produced had a THC level of less than 0.3%, had procedures for disposing of materials with a THC level of greater than 0.3%, and had procedures for handling violations of the 2018 Farm Bill and proposed state plan.[18] The 2018 Farm Bill still requires FDA approval to market products for human consumption or use.[19]

A New, Uncertain Direction for Kentucky

            Though Kentucky was once the world leader in hemp production, the federal government closed all opportunity to the market in the state with the 1937 Marihuana Act.[20] Following the Act, the state was required to comply with federal standards, but there have been several efforts by Kentucky legislators to overturn the Act because reports concluded that there are a number of specialty or niche markets for hemp products, and that the economic impact for Kentucky would be greatest if the state becomes the main source for certified hempseed in the USA.[21]

The same day the 2018 Farm Bill was passed, State Agriculture Commissioner Ryan Quarles submitted the state’s regulatory plan to the U.S. Department of Agriculture. Further, the proposed law requires any person wishing to grow hemp in the state to submit an annual Grower License Application, pay a fee for the application, and present a research plan that includes the “proposed acreage or greenhouse or indoor square footage to be painted.”[22] The plan also requires specific business information such as the principal location, the full name of the applicant having signing authority, contact information, and more.[23] The plan also includes information for denied applications, a requirement for criminal background checks, orientation sessions for those approved to grow hemp, and a required seed acquisition from hemp within the Commonwealth of Kentucky.[24]

The goal of Kentucky’s Hemp industry is to “emerge as an epicenter for the American rapidly-growing hemp industry.”[25]. In 2018, the state had doubled the number of acres planted in 2017. Even before the Farm Bill was passed, the Kentucky Department of Agriculture was holding hemp applicant meetings to “provide a seminar and a networking session for growers and processors.”[26] The 2018 Bill has given farmers the ability to buy crop insurance on hemp and has allowed processors and manufacturers to expand to provide a reliable supply of hemp to industrial buyers.[27]

After the 2014 Farm Bill was passed, the Kentucky Department of Agriculture implemented an Industrial Hemp Research Pilot Program, which was authorized by KRS 260.850-260.869.[28] The goal of the program was to “position the Commonwealth’s growers and processors to ultimately prevail as national leaders in industrial hemp production.”[29] In 2014, farmers had planted only 33 acres, but that number grew to 3,200 acres planted by 2017.[30] Kentucky currently has 210 approved growers in 73 counties with more than 16,000 acres approved to continue hemp’s continued growth in the state.[31] The continued growth and excitement surrounding the hemp industry in Kentucky is a good indication that the Commonwealth may have found another steady export along with its bourbon, coal, and horses.

[1] Talbot, First Hemp Crop, Kentucky History, https://explorekyhistory.ky.gov/items/show/108.

[2] Michael Chang, The Paper Industry’s Silent War on Hemp, Mass Roots, (April 27, 2016), https://www.massroots.com/news/the-paper-industrys-silent-war-on-hemp/.

[3] Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. 801 (1970).

[4] Drug Scheduling https://www.dea.gov/drug-scheduling

[5] History of Hemp, Ministry of Hemp (Jan. 2, 2019, 1:15 PM), https://ministryofhemp.com/hemp/history/.

[6] Id.

[7] Agricultural Act of 2014, H.R. 2642, 113th Cong. (as passed by House, February 7, 2014).

[8] Farm Bill Policy, American Society of Agronomy, (Jan. 2019), https://www.agronomy.org/science-policy/farm-bill-policy.

[9] Statement from FDA Commissioner Scott Gotlieb, M.D., on signing of the Agriculture Improvement Act and the Agency’s Regulation of Products Containing Cannabis and Cannabis-Derived Products, Dec. 20, 2018, https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm628988.htm.

[10]Julie Weed, US Farm Bill Will Make CBD Production Legal and Cheaper, (Jan. 4, 2019 8:46 AM) https://www.google.com/amp/s/www.forbes.com/sites/julieweed/2018/12/19/us-farm-bill-will-make-cbd-production-legal-and-cheaper/amp/.

[11]Kentucky Industrial Hemp Research Pilot Program, Kentucky Department of Agriculture, (Dec. 2018), http://www.kyagr.com/marketing/hemp-pilot.html.

[12]Weed, supra.

[13] 2018 Farm Bill and What It Means for Hemp in Kentucky, Kentucky Agriculture, (Dec. 27, 2018), http://www.kyagr.com/marketing/program_id/70/documents/HEMP_OV_2018FarmBillandKentuckyHemp.pdf.

[14] Gotlieb, Supra.

[15] Id.

[16] Id.

[17] 2018 Farm Bill and What It Means for Hemp in Kentucky, supra.

[18] Id.

[19] Id.

[20] Marihuana Tax Act, 26 U.S.C.S. § 4751-4753 (LexisNexis 2019).

[21] Jerome H. Cherney and Ernest Small, Industrial Hemp in North America: Production, Politics, and Potential 18 (citing Pinfold Consulting. A Maritime Industrial Hemp Product Marketing Study. Prepared for Nova Scotia Agriculture and Marketing (Marketing and Food Industry Development), and New Brunswick Agriculture & Rural Development (Marketing and Business Development). G. Pinfold Consulting Economists Ltd. and J. White, InfoResults Ltd. Irregularly Paginated. 1998. Available online: https://www.mdpi.com/2073-4395/6/4/58/htm (Jan. 13, 2019).

[22] 302 KAR 50: 020-030 (2018).

[23] Id.

[24] Id.

[25] Id.

[26] Kentucky Industrial Hemp Research Pilot Program, supra.

[27] Mark Vanderhoff, Farm Bill Plants Bright Future for Kentucky Hemp, (Dec. 28, 2018 6:53 PM) https://www.wlky.com/article/farm-bill-plants-bright-future-for-kentucky-hemp/25657985.

[28] Industrial Hemp Research Pilot Program Overview, Kentucky Department of Agriculture, (Dec. 2018), http://www.kyagr.com/marketing/hemp-overview.html.

[29] Id.

[30] Id.

[31] Id.

Contract Negotiation Causes Businesses to Waive Fraud as a Contract Defense

Lotz Headshot.jpgThis post was written by Senior Editor, Robert Lotz.  The views and opinions expressed herein are those of the author alone.

A contract defense of fraud, the scary F word in the business world, may be waived unknowingly. Business owners who negotiate contracts that include a waiver-of-defense clause may be found to waive fraud as a defense. An example of a waiver-of-defense clause is: no defense of any kind or nature is available to Lessor.

Courts analyzing whether a waiver-of-defense clause waives fraud as a defense are scarce. Generally, a fraud defense is only waived if the waiver-of-defense clause is sufficiently specific to encompass the fraud defense.[1] In other words, “an analysis of the language of the waiver is necessary” to determine whether the defense of fraud has been specifically waived.[2] Thus, the waiver language must specifically include a waiver for fraud, if not, a fraud defense is still valid.[3]

The Sixth Circuit analyzed this argument and found a wavier that precluded the “‘right to assert defenses ‘including but not limited to . . . issues of fraud[,]’” specifically precluded a fraud defense.[4] However, broad waivers that include fraud are likely to be enforced when parties are sophisticated and negotiated the contract.[5]

In MBIA Insurance Corporation v. Royal Indemnity Company,[6] defendants were precluded from asserting a fraudulent inducement defense by a broad waiver that provided that the obligation to pay was “absolute and unconditional” because the waivers were “sculpted by parties of exquisite legal and financial sophistication[.]”[7] “The MBIA court also discussed ‘obvious risks’ of fraud and found it ‘unimaginable’ that a party with the ‘experience and knowledge’ of the party subsequently claiming fraud ‘would not have realized it was assuming that risk when it agreed to [no-reliance] language.’”[8] Thus, when parties are sophisticated and negotiate the contract, broad boilerplate waivers are likely to be enforced, which precludes asserting a fraud defense.

A sophisticated party might be defined as “commercial parties who had the ability to walk away freely[,]”[9] “sophisticated parties to negotiated commercial contracts[,]”[10] “an experienced commercial entity[,]”[11] and “sophisticated parties with equal bargaining strength[.]”[12] Whether a party negotiated the contract is determined by the clause, i.e., whether it is boilerplate or carefully crafted by the parties.[13]

In summary, case law supports that a waiver-of-defense clause must expressly preclude a fraud defense in order to bar it. An exception to this rule applies if the parties are sophisticated and negotiated the contract clause. Thus, parties to a transaction should pay close attention to waiver-of-defense clauses or risk barring fraud as a defense.

[1] See, e.g., JP Morgan Chase Bank v. Liberty Mut. Ins. Co., 189 F. Supp. 2d 24, 28 (S.D.N.Y. 2002) (holding that a broad disclaimer does not preclude the defenses of fraudulent inducement or fraudulent concealment); PGA Mktg., Ltd. v. Windsor Plumbing Supply, Inc., 124 A.D.2d 576, 507 N.Y.S.2d 721 (N.Y. 1986) (stating that a broad waiver “of the right to assert any defense, offset or counterclaim” would not preclude a defense of fraud in the inducement).

[2] See, e.g., Dakota Partners, L.L.P. v. Glopak, Inc., 2001 ND 168, 634 N.W.2d 520, 524 (N.D. 2001); Sec. Holding v. Johnson, 57 S.D. 163, 231 N.W. 536, 538 (S.D. 1930) (determining that a defendant is not automatically estopped from raising a fraudulent inducement defense, even if contract contained a waiver-of-defenses clause); Shelby Elec. Co. v. Forbes, 205 S.W.3d 448, 455 (Tenn.App.2005) (defendants allowed to assert fraud defense when they agreed to waive “any defenses” and did not negotiate terms); Mfrs. Hanover Trust Co. v. Yanakas, 7 F.3d 310, 317-18 (2d Cir. 1993) (holding that a boilerplate “absolute and unconditional” guaranty did not waive a claim of fraudulent inducement against alleged perpetrator of fraud).

[3] See id.

[4] Commer. Money Ctr., Inc. v. Illinois Union Ins. Co., 508 F.3d 327, 343 (6th Cir.2007).

[5] Id. at 343-44 (citing MBIA Ins. Corp. v. Royal Indemn. Co., 426 F.3d 204, 214-216 (3d Cir.2005)).

[6] 426 F.3d 204, 214-18 (3d Cir. 2005).

[7] Id. at 215.

[8] FMC Techs., Inc. v. Edwards, No. C05-946C, 2007 U.S. Dist. LEXIS 42512, at *20 (W.D. Wash. June 12, 2007) (quoting id., at 217).

[9] ABRY Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1056 (Del. Ch. 2006).

[10] Id. at 1057.

[11] Id.

[12] Id. at 1060.

[13] Compare Norton v. Poplos, 443 A.2d 1, 7 (Del. 1982) (discounting “‘boiler plate’ found in the merger clause”), with Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 555 (Del. Ch. 2001) (“carefully negotiated disclaimer language” made by “highly sophisticated parties, assisted by industry consultants and experienced legal counsel”).

Of Thickets and Gerrymanders: SCOTUS Will Enter Once More into the Thorny Thicket of Partisan Gerrymandering

This post was written by Senior Editor, Jennifer Moore.  The views and opinions expressed herein are those of the author alone.

          The Supreme Court will hear arguments in March on two challenges to state redistricting maps in Rucho v. Common Cause and Benisek v. Lamone.1 For decades, the Court has wrestled with the issue of whether and how intrusively the courts should wade into the thorny thicket of political electoral districting. The Court has struggled to define the contours of a doctrine for the constitutionality of the partisan gerrymandering and has struggled with creating standards that can be used to determine whether a state redistricting plan meets the criteria for constitutionality.

In 2018, the Court sidestepped a ruling on the merits when the Court decided Gill v. Whitford on Article III issues of standing instead of resolving the issues on the merits of the argument.2 The Court sent both Gill and Benisek back to the lower courts for further proceedings on the narrow issues. Benisek is headed back to the Court along with Rucho, for resolution. In Benisek, Republican voters brought a challenge to the redistricting map created by Democrats in the Maryland state legislature after the 2010 census, while in Rucho, Democratic voters are challenging the GOP majority legislatures’ redistricting map in North Carolina.3

Challenges to partisan congressional maps have been brought against several state legislatures and are currently working their way through both state and federal courts.4 These challenges will continue to be brought until the state supreme courts or the U.S. Supreme Court finally resolves these issues.

Looking at Ohio as an example, the Ohio A. Philip Randolph Institute, et. al. filed a challenge to the gerrymandered districts that have resulted in GOP congressional control of 12 of 16 seats since the 2012 redistricting plan was implemented.5 The GOP have held these same 12 seats for four election cycles, regardless of the actual vote totals in each election year. One would wonder why Ohio would hold elections at all if the districts have been so fixed that the outcome is predetermined by the majority party in the statehouse? In 2018, Ohio Republican candidates for the U.S. Congress garnered 52% of the votes statewide and yet still managed to win 75% of the seats in the House.6

Ohio Republicans have achieved this result in the past four election cycles by using advanced mapping technologies to carve out and sort voters into reliably partisan districts. The GOP mapmakers packed many Democratic voters into 4 districts, resulting in many “wasted” votes of Democrats that were far more than the number needed for their candidate of choice to win. One such district, known as the “snake on the lake,” stretches along Lake Erie and links Cleveland and Toledo. Rep. Marcy Kaptur won the 2018 midterm election for this district by 35.2 points.7 The GOP then spread Republican voting strength out among the other 12 districts, sometimes through cracking communities of traditionally Democratic voters in urban centers and subsuming these communities into larger, reliably Republican districts. One such district is the 1st Congressional district in the southwest corner of the state. To create this safe district for Rep. Steve Chabot, GOP lawmakers carved up the Democratic leaning city of Cincinnati into two parts. They created an irrationally shaped district that takes the urban, west side neighborhoods of Cincinnati and hooks up and over to link with the very Republican suburbs and ex-burbs of Warren County. The other half of the city of Cincinnati is then subsumed into Republican leaning Clermont County.8

Ohioans voted in 2015 and 2018 for reform measures to change the way in which both state and congressional districts will be drawn going forward, but these measures will not be implemented until after the 2020 election.9 Even when they are implemented, the majority party can still pass partisan 4-year plans that circumvent the requirement of approval by either both parties in the legislature or by the requisite members of the seven-member panel. A ruling by the Courts resolving the constitutionality of partisan gerrymandering could resolve this issue with more finality.

The Courts have wrestled with ways to shape the doctrine and to define manageable standards to apply in a determination of constitutionality. In Davis v. Bandemer, “the Court made clear that the lack of proportional representation if not sufficient basis for a partisan-gerrymandering claim.”10 In Vieth v. Jubelirer, “the court set out the structure of partisan-gerrymandering claims as one that requires both intent and effect.”11 In Gill, Justice Kagan’s concurrence “cogently recognized multiple constitutional harms wrought by partisan gerrymandering.”12 The opinion hints at other constitutional challenges that can be brought to bear on these cases: “the guarantee of associational freedom for all and the prohibition on viewpoint discrimination.”13

Justice Kagan wrote of partisan gerrymandering in the Gill decision that “[m]ore effectively every day, that practice enables politicians to entrench themselves in power against the people’s will.”14 She concludes that “only the courts can do anything to remedy the problem” of partisan gerrymanders because “gerrymanders benefit those who control the political branches.”15 With another census year fast approaching, and yet another opportunity for entrenched political parties to engage in extreme redistricting plans, the Courts need to step in and protect the rights of those voters who are negatively and intentionally impacted by these practices. As Justice Kagan notes, the Court must stop partisan officials from degrading the nation’s democracy.16

_______________

    1. See Rucho v. Common Cause, 138 S.Ct. 923 (2018) and Benisek v. Lamone, 138 S.Ct. 1942 (2018).
    2. Gill v. Whitford, 138 S. Ct. 1916 (2018).
    3. See Rucho v. Common Cause, 138 S.Ct. 923 (2018) and Benisek v. Lamone, 138 S.Ct. 1942 (2018).
    4. For a list of pending cases, see Michael Li, Thomas Wolf, and Annie Lo, The State of Redistricting Litigation, The Brennan Ctr. for Justice, (Jan. 8, 2019), https://www.brennancenter.org/blog/state-redistricting-litigation.
    5. http://media.cleveland.com/datacentral/other/ohio-gerrymandering-lawsuit.pdf.
    6. Rich Exner, Ohio Democrats Nearly Match Republicans in Statehouse Votes, but Will Remain in Deep Minority; What’s Ahead for Gerrymandering, Cleveland.com, (November 15, 2018), https://www.cleveland.com/expo/news/erry-2018/11/0f32e762411182/ohio-democrats-outpolled-repub.html.
    7. Id.
    8. Id.
    9. Id.
    10. Theresa J. Lee and Emily Rong Zhang, Symposium: Strategy from a Punt, SCOTUSBlog (Jun. 19, 2018, 1:43 PM), https://www.scotusblog.com/2018/06/symposium-strategy-from-a-punt/.
    11. Id.
    12. David H. Gans, Symposium: The Fight to Vindicate Our Constitution’s Promise of Democracy of Far From Over, SCOTUSBlog (Jun. 19, 2018, 11:14 AM), https://www.scotusblog.com/2018/06/symposium-the-fight-to-vindicate-our-constitutions-promise-of-democracy-is-far-from-over/.
    13. Id.
    14. Gill v. Whitford, 138 S. Ct. 1916, 1935 (2018).
    15. Id.
    16. Id.

 

 

 

Judicial Software Engineers: Is There Only One Way?

Freitas Headshot.jpg

This post was written by Associate Editor, Derek Freitas.  All views and opinions expressed herein are those of the author alone.

We are the digital age. Whether you preset the timer on your coffee maker, use your computer or an app on your smartphone – software is a part of everyday life. According to Black’s Law Dictionary, software is “the sequence of instructions by which a computer accepts and translates input symbols, executes actions, and outputs symbols such as numbers, characters in an e-mail message, pictures in a text message, the music played on a mobile device, or GPS coordinates.” [1]

While the Federal Courts have ruled on software cases from Apple to Alice, are they consistent?[2] The Supreme Court held in Alice that utilizing software to perform a process is merely an algorithm and therefore an unpatentable idea.[3] Yet, thirty years earlier the Apple court stated that software was not merely an idea, rather that software was worthy of copyright protection.[4] If you are confused by the Alice decision you should be – scholars feel the same way.[5] Apple v. Franklin Computer Corp was the initial case that addressed copyright infringement of software.[6] Noteworthy for speaking to the distinction that generally translating source code into object code is not protected, but the various expressions of that idea are protected.[7] This distinction is based upon the concept that software is a set of instructions used in a computer to bring about a specific result.[8] Shortly after the Apple case the Third Circuit decided Whelan Assocs., Inc. v. Jaslow Dental.[9] Whelan held that the uncopyrightable idea in software is its “purpose or function … and everything that is not necessary to that purpose or function would be part of the expression of that idea,” and thus copyrightable.[10]

Does Alice purport to overturn thirty years of law that held software is more than a mere idea? Some might view that question as misguided, but copyright case law states that software is not merely an idea.[11] Software developers seeking protection of their creations have two options. Developers must either obtain copyright protection or attempt to obtain a patent on the software.[12] Each purportedly requires the subject matter for which protection is sought to be more than a mere idea.[13] After Alice the software industry is wondering when federal courts will adhere to the copyright standard, that software is more than a mere idea.[14]

The Federal Circuit weighed in on copyright infringement in September of 1992 in Atari Games Corp. v. Nintendo.[15] Atari dictates that so long as there are multiple ways of carrying out a process, any one expression or version of that process is copyrightable.[16]

In December of 1992, the Second Circuit Court of Appeals ruled on a claim of copyright infringement regarding software in Computer Associates International, Inc. v. Altai.[17] The Second Circuit provided the test for substantial similarity.[18] First a judge will perform the processes of abstraction and filtration of software source code in that order.[19] This allows the judge to determine what is protectable and what is merely an idea.[20] Abstraction requires that a judge “reverse [engineer] on a theoretical plane … dissect the allegedly copied program’s structure and isolate each level of abstraction contained within it.[21] This process begins with the code and ends with an articulation of the programs ultimate function.”[22] In order to perform abstraction and filtration the court must look at the software’s individual instructions – then determine more broadly the functionality as the instructions work in coordination.[23]

After the judge has determined the use of the source code one instruction at a time, he is then to:

Examin[e] the structural components at each level of abstraction to determine whether their particular inclusion at that level was idea or was dictated by considerations of efficiency so as to be necessarily incidental to that idea; required by factors external to the program itself; or taken from the public domain and hence is nonprotectable expression.[24]

Boiling this down, the judge must determine if the use of particular set of instructions in the source code is necessary for that particular portion of the overall process.[25] In addition, a determination must be made as to what is simply incidental source code and what is actually protected.[26]

To determine copyright infringement a federal judge will comb through each instruction in the source code to understand how and why they all interact.[27] Then the judge will decide what source code is copyrightable by separating code necessary to write software, code that is merely an idea, and code that is taken from the public domain from that which is protectable.[28]

Finally, the Federal Circuit embraced that view in Oracle America, Inc. v. Google.[29] Where the Oracle court found that since a result can be achieved through different combinations of source code instruction, the particular expression at issue was protected.[30] In the same year the Supreme Court issued a land mark patent decision in Alice v. CLS.[31] The Court held that a patent simply implementing a process by way of a computer is no more than an abstract idea.[32]

Alice is troublesome because the Supreme Court’s inability or unwillingness to adhere to decades of federal rulings.[33] While patent law and copyright are different, they both require that the subject matter or material, for which protection is sought be more than an idea or concept.[34] The analysis of three Federal Appellate Courts all seem to agree that software is a set of created instructions that carry out a process and produce a result. Various cases tell us, when we can get from problem “A” to solution “B” using various routes each individual route is no longer an idea.[35] Yet the highest court in the land would have us believe that performing a process through another means or another route (software) is nothing more than an idea.[36] Alice stands for the general notion that the development of software does not “promote[s] the progress of science.”[37]

[1] Software, Black’s Law Dictionary (10th ed. 2014).

[2] Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d Cir. 1983); Alice Corp. Ltd. v. CLS Bank Int., 573 U.S. 208 (2014).

[3] Alice, 573 U.S. at 223.

[4] Apple, 714 F.2d at 1240.

[5] Michael Gershoni, An Argument Against Reinventing the Wheel: Using an Obviousness Analysis to Bring Consistency and Clarity to Patent Eligibility Determinations of Software Patents After Alice Corp., 44 AIPLA Q.J. 295, 299 (2016).

[6] Apple, 714 F.2d at 1240.

[7] Id. at 1240.

[8] Id. at 1240; Software, Black’s Law Dictionary (10th ed. 2014).

[9] Whelan Assocs., Inc. v. Jaslow Dental Lab., Inc., 797 F.2d 1222 (3d Cir. 1986).

[10]Id. at 1236.

11Apple, 714 F.2d at 1240.

12Id. at 1240; Alice Corp. Ltd. v. CLS Bank Int., 573 U.S. 208 (2014).

13Apple, 714 F.2d at 1240; Alice, 573 U.S. at 223.

14Daniel Taylor, Down the Rabbit Hole: Who Will Stand Up for Software Patents After Alice?, 68 Me. L. Rev. 217, 218 (2016).

[15] Atari Games Corp. v. Nintendo of Am. Inc., 975 F.2d 832, 840 (Fed. Cir. 1992).

[16] Id. at 840.

[17] Comput. Assocs. Int., Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992).

[18] Id. at 707.

[19] Id.

[20]  Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at 710.

[25] Id. at 707, 710.

[26] Id. at 710.

[27] Id. at 707, 710.

[28] Id.

[29] Oracle America, Inc. v. Google Inc., 750 F.3d 1339 (Fed. Cir. 2014).

[30] Id. at 1357.

[31] Alice Corp. Ltd. v. CLS Bank Int., 573 U.S. 208 (2014).

[32] Id. at 223.

[33] See id. at 212.

[34] Id; Oracle, 750 F.3d at 1357.

[35] Oracle, 750 F.3d at 1357; Computer Assocs. Int., Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992); Whelan Assocs. Inc. v. Jaslow Dental Lab., Inc., 797 F.2d 1222, 1236 (3d Cir. 1986).

[36] Alice, 573 U.S. at 223.

[37] Id; U.S. Const. art. I, § 8, cl. 2.