It is no secret that merger and acquisition (“M&A”) activity has caused whiplash in recent years. In the two short years between 2021 and 2023, global deal values were cut in half—from a whopping $5 trillion to $2.5 trillion.[1] However, middle market deals have proven resilient in this challenging economic and geopolitical environment and are expected to rise in 2024.[2] This article discusses trends in representations and warranties (“R&W”) provisions in M&A transactions, including those that may spark disputes and litigation, as well as the role of R&W insurance policies in reallocating risks associated with transactions and limiting litigation expenses, particularly in middle market deals.
M&A Trends and Common Provisions
Approximately one-third of M&A deal disputes in North America arise out of an alleged breach of a seller’s R&W.[3] R&W provisions commonly include materiality and knowledge qualifiers and are frequently subject to survival periods, each of which often favor the seller by limiting the scope of disclosures and, therefore, reducing the risk of a buyer’s claim for breach.
Material Adverse Effect (“MAE”) provisions are pervasive in M&A transactions. In 2023, only 5 percent of private target M&A deals went without an MAE clause or chose not to define its meaning.[4] In this context, MAE clauses are frequently heavily negotiated and are intended to allow buyers to terminate a transaction should certain agreed-upon events occur.[5] Typically, MAE definitions contain forward-looking language and carveouts for particular events, such as war, changes in law, or pandemics.[6] However, MAE provisions have been historically difficult to prove and, therefore, often work to the benefit of the seller.[7]
Materiality scrape clauses, however, have seen a sharp increase in the last two decades, from being identified in approximately 15 percent of deals in 2005[8] to 82 percent of deals in 2022 (including in 64 percent of deals to determine breach).[9] Materiality scrape provisions are included in the indemnification section of a transaction document to remove materiality qualifiers for the purposes of determining breach, damages, or both, thus opening the door for buyers to successfully assert a claim for breach.
Materiality scrapes also appear in R&W insurance policies. Notably, a New York court recently found that a materially scrape in the R&W insurance policy at issue was ambiguous and decided that the representation, for the purpose of insurance, required only an adverse effect instead of a materiality showing.[10] The court reasoned that if it applied the materiality scrape as it was drafted in the R&W insurance policy, then the scrape would remove the entire “Material Adverse Effect” phrase, which creates an ambiguity, and ambiguities are typically resolved against the drafter.[11]
Knowledge qualifiers are also widespread. Generally, “knowledge” definitions are constructive.[12] But companies should carefully draft such definitions, as knowledge qualifiers may lead to ambiguity if not properly defined, resulting in the need to determine what constitutes knowledge and who must possess the same.
The survival period of a seller’s R&W is also commonly identified. In 2023, general survival clauses were identified in 93 percent of deals that did not procure R&W insurance and in 67 percent of those that did.[13] While 67 percent is a decline from 2019 (where 79 percent of deals with R&W insurance contained a general survival of a seller’s R&W), it is an increase from 2020, 2021, and 2022, where deals with R&W insurance contained a general survival of a seller’s R&W at the rate of 64 percent, 64 percent, and 50 percent, respectively.[14] Since 2018, the median survival period has been fifteen months.[15] Companies should note, however, that there are typically carveouts for certain R&W that are assigned longer survival periods, such as taxes and capitalization.[16] R&W relating to taxes and capitalization account for two of the three most common claims relating to breaches of R&W.[17] In 2022, taxes and capitalization R&W accounted for 45 percent and 9 percent of such claims, respectively.[18]
R&W Insurance Coverage Solutions
Given the above, it is not surprising the use of R&W insurance has increased over the years, as these insurance policies respond to cover loss resulting from a breach of representation or warranty. A party making a representation or warranty commits a breach if a representation or warranty proves to be inaccurate. Where R&W insurance is available, the non-breaching party may seek to recover its losses from the R&W insurer instead of seeking recovery from an established escrow account or directly from the seller under the transaction agreement. R&W insurance is often preferred over escrow accounts because the escrow funds cannot be used by either party during the period specified in the transaction agreement. R&W insurance frees up the capital that would otherwise be tied up in the escrow account. Plus, if R&W insurance negates the need for an escrow account, or lessens the amount needed, the seller may receive all of the purchase price, or more of it, at closing. Some deals may still require the seller to indemnify for claims within the R&W insurance retention and fund an escrow account in that amount, but that amount is necessarily smaller than if there was no R&W insurance.
To recover under an R&W policy, the non-breaching party usually must establish a breach of a covered representation or warranty and a loss resulting from such breach. Policyholders should be aware, however, that the definition of “breach” under the policy may carve out certain representations and warranties. In other words, the policyholder should not assume that breach of a certain representation or warranty is covered just because the representation or warranty is included in the transaction agreement. Some representations and warranties may be explicitly excluded from the policy’s definition of breach or otherwise carved out. Under these circumstances, the R&W policy will not cover any losses resulting from an inaccuracy in the excluded representation or warranty. Accordingly, companies should advocate for coverage of specific representations and warranties, especially those that often lead to disputes. Compared to other kinds of policies, the terms of the R&W policy are typically more negotiable.
The negotiation and purchase of R&W policies can be an integral part of the due diligence process. While generally an important part of M&A transactions, due diligence becomes integral to obtaining an R&W insurance policy. R&W insurers will seek to mitigate the risk they acquire by ensuring that the buyer has completed an appropriate amount of due diligence. Such due diligence frequently includes an in-depth legal, tax, and accounting review, including memorandums addressing “red flags” or potential issues on the aforementioned topics. Underwriters review such information along with the corresponding data room to understand the depth and accuracy of the due diligence conducted. In fact, insurers may access the data room and request copies of any diligence reports that may impact the underwriting of the R&W policy.
Both buyers and sellers can procure R&W insurance. One key difference between buyer-side and seller-side policies is that under a buyer-side policy, the buyer makes the claim against the insurer for the losses incurred because of the seller’s breach. In contrast, under a seller policy, the seller pays the buyer for the seller’s breach of a covered representation, and then the seller may make a claim against the insurer for reimbursement.
While both buyers and sellers can procure R&W insurance, buyer-side policies are more common. Buyer-side policies typically offer broader coverage than seller-side policies. For example, a buyer-side policy usually covers seller fraud, while a seller-side policy will often exclude coverage for fraud. Buyer-side policies can also extend the survival period for the representations and warranties, meaning the buyer has more time to determine whether a breach occurred. For this reason, survival clauses are more prevalent in deals not involving R&W insurance. In other words, because a R&W policy has its own survival clause, the insurance may eliminate the need for a survival clause in the transaction agreement. Importantly, R&W insurance—regardless of which party purchases the policy—allows both parties to potentially avoid post-closing disputes and related expenses, including the costs of arbitration and litigation.
Takeaways
Recent M&A trends and the forecasts for the upcoming year highlight the importance of mitigating the risks and costs associated with disputes arising from transactions. As deals increase in value and frequency, companies may become more susceptible to potential losses. R&W insurance, in particular, is an important tool for mitigating losses that arise from inaccurate representations and warranties made by the seller or target company during the transaction. The R&W insurance market has continued to evolve, and like transaction agreements, insurance policies require negotiations and careful review of specific policy language, as coverage disputes often arise. As a result, companies should consult counsel with comprehensive expertise and experience in M&A deals, as well as competent coverage counsel to limit losses and maximize insurance recovery where losses occur.
Co-Chair of the ABA AI and Blockchain Subcommittee Chair of North America Trade Secrets Practice Baker McKenzie 600 Hansen Way Palo Alto, CA 94304 (650) 856-5509 [email protected]
Assistant Editor
Adam Aft
Partner, IPTech Chair North America Technology Transactions Practice Baker McKenzie 300 E. Randolph St., Suite 5000 Chicago, IL 60001 (312) 861-2904 [email protected]
Contributors
Bryce Bailey, Cynthia Cole, Loic Coutelier, Alex Crowley, Lothar Determann, Rachel Ehlers, Jacqueline Gerson, Sinead Kelly, Mackenzie Martin, Avi Toltzis, and Jennifer Trock
§ 8.1. Introduction
This year’s Chapter comes at the conclusion of perhaps the busiest 12 months in the history of both AI and blockchain—two innovative technologies that continue to proliferate across industries and use cases. The legal issues presented by GenAI in particular, coupled with renewed domestic regulatory and enforcement interest in both of these fields, has resulted in a year filled with big court cases, legislative proposals and complex issues for business law practitioners and judges.
The goal of this Chapter has never been to report on any case that merely references or mentions “AI” or “blockchain.” Rather, our goal is to produce a practical guide for business law practitioners who seek to enhance their understanding of these areas and to identify clear trends that are relevant for lawyers and business court judges. This year, in the (Gen) AI arena, the focus continues to be on IP copyright battles centered on the tension between allegations of algorithmic “infringement” and defenses of “fair use.” The key players at the forefront of AI development will also continue to shape the area of law both in their technological developments as well as potential disputes (for example, Elon Musk’s recent complaint against OpenAI in California Court). Additional areas of litigation and regulator focus with regard to AI algorithms and their use center on bias, transparency, and personal privacy. Finally, as the well-publicized Aviana Airlines and Michel (criminally convicted former member of the popular group The Fugees) cases make clear, judges and State Bar regulators are placing increased focus on devising and promulgating rules for lawyers which govern the ethical use of GenAI in all aspects of practicing law.
In the blockchain space, the government continues to push its view that all crypto other than Bitcoin is a security, and to pursue enforcement actions against retail exchanges and issuers. The spectacular collapse of Sam Bankman-Fried and FTX, coupled with the recent guilty plea to a federal charge by Changpeng Zhao (“CZ”), the founder of Binance, make clear that the decentralized promise of what blockchain can offer has, for the last several years, been waylaid by highly centralized projects that are susceptible to familiar economic shenanigans long present on Wall Street and in traditional finance. We will have to wait a bit longer, likely into 2025 and beyond, for the United States Supreme Court to decide if and to what extent securities laws apply to this technology, and whether or not various actions by agencies like the Securities and Exchange Commission are proper or have exceeded lawful bounds. However, when it comes to crypto, government agencies and the plaintiff’s bar will continue to aim their sights at those viewed as defrauding retail investors.
I am often asked to present CLEs that teach the law (and technology) of AI and blockchain to judges, practitioners, clients, and law students across the country. In October of 2023, I was invited to testify as an AI expert before a United States Senate AI Subcommittee hearing focused on responsibly legislating AI in the employment context, and I continue to represent clients, both domestically and internationally, in all aspects of AI and blockchain matters (from governance, oversight and compliance to litigation). Many people often ask me, “When will Congress pass comprehensive regulation in these areas?” My answer is that while I believe Congress will eventually act, in the meantime, the de facto initial legal rules will actually be developed by the decisions rendered in the nationwide trial and appellate courts confronted almost daily with these cases and the complicated issues they raise. For those of us who love and are intrigued by these technologies, it is our responsibility to understand the legal evolution of this exciting technology, and where possible, to help shape the law. Hopefully, this Chapter does its small part each year in educating and empowering business law practitioners—whether new to the field or experienced veterans—to participate in this fascinating and quickly developing ecosystem.
Like in prior years, we made certain judgments as to what should be included. We omitted cases decided prior to 2023 that were reported in previous iterations of the Chapter after evaluating whether there were any significant updates to those cases with respect to AI; in most cases there were not significant updates. And as AI is a subject of an exponential number of legislative proposals, we omitted the 2020–2022 legislative updates that were included in the Chapter in prior years and focus on legislative trends from 2023.
Finally, I want to thank my colleagues Adam Aft, Bryce Bailey, Cynthia Cole, Loic Coutelier, Alex Crowley, Lothar Determann, Rachel Ehlers, Jacqueline Gerson, Sinead Kelly, Mackenzie Martin, Avi Toltzis, and Jennifer Trock for their assistance in preparing this chapter.
We look forward to continuing to track the trends in AI and Blockchain for the next several years.
§ 8.2. Artificial Intelligence Cases of Note
§ 8.2.1. United States Supreme Court
There were no qualifying decisions by the United States Supreme Court in 2023.
Chief Justice Roberts, however, noted AI as the latest technological frontier in the 2023 Year-End Report on the Federal Judiciary.[1] In a view of the current state of the potential for use of AI in the Federal Courts, Chief Justice Roberts notes “studies show a persistent public perception of a ‘human-AI fairness gap,’ reflecting the view that human adjudications, for all of their flaws, are fairer than whatever the machine spits out.”[2]
§ 8.2.2. First Circuit
There were no qualifying decisions within the First Circuit in 2023.
Pending Cases of Note
Baker v. CVS Health Corporation 1:23-cv-11483 (D.Mass. Filed June 30, 2023). The plaintiff job applicant alleges that CVS contracts for HireVue, an AI-based job candidate screening tool, which includes video interview sessions that HireVue claims uses an applicants’ facial expressions to identify an applicant’s lies and embellishments. Plaintiff filed a putative class action suit on behalf of similarly situated job applicants, claiming CVS failed to provide candidates with written notice of its use of a lie detector test, as required by Massachusetts law. In February 2024, the court denied CVS’s partial motion to dismiss.
§ 8.2.3. Second Circuit
Doe v. EviCore Healthcare MSI, LLC, No. 22-530-cv, 2023 U.S. App. LEXIS 4794 (2d Cir. Feb. 28, 2023). The Second Circuit Court of Appeals affirmed district court dismissal of False Claims Act charges based on Rule 9(b), because plaintiffs failed to plead fraud with sufficient particularity. Plaintiffs asserted that service provider eviCore deployed artificial intelligence systems to approve health insurance requests based on flawed criteria and without manual review and that, as a result, eviCore provided worthless services to insurance companies and caused those insurance companies to bill the government for unnecessary and fraudulently approved medical services. The court held that “the services eviCore provided were not so worthless that they were the equivalent of no performance at all.”
In re Celsius Network LLC, 655 B.R. 301 (Bankr. S.D.N.Y. 2023). Creditor in bankruptcy dispute submitted a report from its valuation expert, Hussein Faraj, that was written by generative AI at Mr Faraj’s direction. The court found that while the written report was inadmissible as it lacked reliability, the expert’s live testimony could be given in a bench trial.
Mata v. Avianca, Inc., No. 22-cv-1461 (PKC), 2023 U.S. Dist. LEXIS 108263 (S.D.N.Y. June 22, 2023). The United States District Court for the Southern District of New York sanctioned attorneys for misconduct because they included cites to non-existing cases in motions and made misleading statements to the court. Attorneys representing an individual plaintiff against an airline had used ChatGPT to research case law. ChatGPT delivered inaccurate output including citations to cases that did not exist. When opposing counsel called the existence of the cases in question, plaintiffs’ counsel went back to ChatGPT and asked for full copies of the cases. ChatGPT delivered excerpts of cases that did not exist, citing to other cases that did not exist.
Pending Cases of Note
Authors Guild, et al. v. OpenAI Inc. et al., No. 1:23-cv-8292 (S.D.N.Y. Filed Sept. 19, 2023). Plaintiff writers filed a putative class action against defendant AI developers, who created AI that can make derivative works based on, mimicking, summarizing, or paraphrasing plaintiffs’ works, without seeking permission or a license. The plaintiffs allege this conduct amounts to (1) direct infringement, (2) vicarious infringement, and (3) contributory infringement of their copyrights.
Basbanes et al. v. Microsoft Corp. el at., No. 1:24-cv-00084 (S.D.N.Y. Filed Jan. 5, 2024). Plaintiff journalists allege that the defendant AI developers use their written works to train generative AI models, constituting (1) direct infringement, (2) vicarious infringement, and (3) contributory infringement of the journalists’ copyrights.
Huckabee et al. v. Meta Platforms, Inc. et al., No. 1:23-cv-09152 (S.D.N.Y. Filed Oct. 17, 2023). Former Arkansas governor Mike Huckabee filed this action on behalf of a proposed class of authors in a copyright infringement suit against Meta, Microsoft, Bloomberg, and artificial intelligence research institute EleutherAI, claiming that the defendants trained their AI tools on data sets that comprised the 183,000 e-book “Books3” dataset, without the plaintiffs’ permission. The complaint alleges these actions constitute (1) direct copyright infringement, (2) vicarious copyright infringement, (3) removal of copyright management information in violation of DMCA, (4) conversion, (5) negligence, and (6) unjust enrichment. In December 2023, the Claims against Meta and Microsoft defendants were transferred to the Northern District of California to be consolidated with the Kadrey lawsuit (see below), with the claims against the Bloomberg defendants remaining in the Southern District of New York. Bloomberg has filed a motion to dismiss, in response to which the plaintiffs filed an amended complaint, withdrawing the indirect copyright infringement, DMCA and state-law claims.
Sancton v. OpenAI Inc. el al., No. 1:23-cv-10211 (S.D.N.Y. Filed Nov. 21, 2023). Plaintiff authors filed a putative class action suit against OpenAI challenging Chat-GPT and its underlying “large language models,” which use the copyrighted works of thousands of authors as a training dataset. Plaintiffs allege the training amounts to direct and contributory copyright infringement.
The New York Times Co. v. Microsoft Corp. et el., No. 1:23-cv-11195 (S.D.N.Y. Dec. 27, 2023). The New York Times sued Microsoft and OpenAI. The Times alleged that OpenAI created unauthorized reproductions of Times works during training the large language model ChatGPT, reproduced verbatim excerpts of Times content in response to user prompts, misappropriated referrals, and generated hallucinations that falsely attributed statements to the Times. The complaint alleges these actions constitute: (1) copyright infringement, (2) vicarious copyright infringement, (3) contributory copyright infringement, (4) removal of copyright management information in violation of DMCA, (5) common law unfair competition by misappropriation, and (6) trademark dilution. In February 2024, the defendants moved to dismiss parts of the direct infringement claims, as well as full dismissal of the contributory infringement, DMCA, and unfair competition claims.
§ 8.2.4. Third Circuit
There were no qualifying decisions within the Third Circuit in 2023.
§ 8.2.5. Fourth Circuit
Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 1:20-cv-613-SB, 2023 U.S. Dist. LEXIS 170155 (D. Del. Sep. 25, 2023). Plaintiff alleged defendant, an artificial intelligence startup, illegally infringed on plaintiff’s copyrighted content by using plaintiff’s content to train its machine learning search tool. The court largely denied five summary judgement motions filed by the parties, including (1) plaintiff’s copyright-infringement claim (but granting summary judgement only on element of “actual copying”), (2) cross-motions based on fair use (but granting plaintiff’s motion for summary judgment on defendant’s miscellaneous defenses), (3) plaintiff’s claim of tortious interference with contract (but granting partial summary judgment on two elements of tortious interference (existence of a contract and harm) of plaintiffs’ bot and password-sharing.); and (4) defendant’s claim of tortious interference (but granting defendant’s preemption defense with respect to plaintiffs’ anti-competition tortious-interference claim).
Recentive Analytics, Inc. v. Fox Corp., Civil Action No. 22-1545-GBW, 2023 U.S. Dist. LEXIS 166196 (D. Del. Sep. 19, 2023). The court granted defendant’s motion to dismiss claims that defendant used patented machine-learning systems to develop enhancements for scheduling and broadcasting of local programming. The court found that the claims were directed to patent-ineligible material, as both claims were directed to abstract ideas and the machine learning involved no inventive concept.
§ 8.2.6. Fifth Circuit
Commodity Futures Trading Comm’n v. Mirror Trading Int’l Proprietary Ltd., No. 1:22-cv-635-LY, 2023 U.S. Dist. LEXIS 76759 (W.D. Tex. Apr. 24, 2023). Court ruled the CFPB acted outside of its authority granted by Congress when it updated its examination manual for financial institutions to broaden its authority to regulate unfair, deceptive, or abusive acts to include discriminatory acts. For our purposes, the Court discussed CFPB’s authority to regulate new technologies, like AI, by including discrimination. If CFPB had been allowed to alter the manual to include discrimination, financial institutions may be more limited in how they can use new technologies, including those with algorithmic decision-making, as they would be required to provide explanations under the Equal Credit Opportunity Act.
§ 8.2.7. Sixth Circuit
Pending Cases of Note
McComb v. Best Buy Inc., No. 3:23-cv-28, 2024 U.S. Dist. LEXIS 8492, at *3 (S.D. Ohio Jan. 16, 2024) As part of its order granting leave to a pro se plaintiff to file a second amended complaint, the court required the plaintiff to file an affidavit “verifying that he has not used Artificial Intelligence (‘AI’) to prepare case filings” and prohibited all parties from using AI for the case. Penalties for use of AI in the case included sanctions, contempt, and dismissal of the case.
Bond v. Clover Health Invs., Corp., No. 3:21-cv-00096, 2023 U.S. Dist. LEXIS 24749, at *9–10 (M.D. Tenn. Feb. 14, 2023) The court granted a motion for class certification in relation to a claim that Clover Health Investments Corp. defrauded investors, in part based on false statements regarding use of Clover Health’s AI-powered software called Clover Assistant. The original case, Bond v. Clover Health Invs., Corp., 587 F. Supp. 3d 641 (M.D. Tenn. 2022), is discussed further in the 2023 version of this chapter at “Recent Developments in Artificial Intelligence 2023.”
Ruggierlo, Velardo, Burke, Reizen & Fox, P.C. v. Lancaster, No. 22-12010, 2023 U.S. Dist. LEXIS 160755, at *5 n.5 (E.D. Mich. Sep. 11, 2023) Pro se defendant cited non-existent cases in his objection to plaintiff law firm’s claims that defendant failed to pay his legal bills. The court avoided speculating whether the non-existent cases were from defendant’s “imagination, a generative artificial intelligence tool’s hallucination, both, or something else entirely.” In any event, the non-existent cases wasted time and resources, and destroyed defendant’s opportunity to state legitimate objections. The court warned that citing non-existent cases could lead to sanctions on the citing party.
In re Upstart Holdings, Inc. Sec. Litig., No. 2:22-cv-02935, 2023 U.S. Dist. LEXIS 175451, at *6, *36–*45, *73–*74 (S.D. Ohio Sep. 29, 2023) The court denied a motion to dismiss a securities fraud case relating to statements made about Upstart’s artificial intelligence-based lending platform. Some of Upstart’s statements went beyond puffery and were found to be material misstatements actionable under SEC Rule 10b-5 (prohibiting manipulative and deceptive practices), including statements having specific but inaccurate descriptions of how the AI model underlying its platform supposedly performed better than traditional FICO-based lending models.
Concord Music Grp., Inc. el al.. v. Anthropic PBC, No. 3:23-cv-01092 (M.D. Tenn. Filed Oct. 18, 2023). Several music publishing companies, led by Universal Publishing Group, sued Anthropic PBC, alleging that the artificial intelligence company infringes the plaintiffs’ copyrighted song lyrics with its Claude series of large language AI models without paying the same licensing fees as other lyrics aggregators do. The plaintiffs allege that Anthropic’s activities constitute (1) direct copyright infringement, (2) contributory infringement, (3) vicarious infringement, and (4) removal or alteration of copyright management information. In November 2023, the defendants filed 12(b)(2) and 12(b)(3) motions to dismiss, which were pending at the time of publication.
Barrows et al. v. Humana, Inc., No. 3:23-cv-00654 (W.D. Ky. Filed December 12, 2023). Class action plaintiffs allege that Humana has been using an AI system called nH Predict to wrongfully deny elderly patients care owed to them under Medicare Advantage Plans and intentionally limits its employees’ discretion to deviate from the nH Predict AI Model predictions by to setting targets to keep stays at post-acute care facilities within 1% of those predicted by the AI model. According to the complaint these actions amount to a breach of contract, a breach of the implied covenant of good faith and fair dealing, unjust enrichment, violations of North Carolina’s unfair claims settlement practices and insurance bad faith.
§ 8.2.8. Seventh Circuit
Dinerstein v. Google, LLC, 73 F.4th 502 (7th Cir. July 11, 2023). The University of Chicago and its medical center provided several years of anonymized patient medical records to Google for the purpose of training algorithms that could anticipate future health needs in order to improve patients’ healthcare outcomes. The plaintiff brought a number of claims including breach of contract with respect to a privacy notice, unjust enrichment, tortious interference of contract, and intrusion upon seclusion. The Seventh Circuit affirmed dismissal of the plaintiff’s claims on the basis that the plaintiff lacked standing essentially due to the plaintiff’s failure to allege any plausible, concrete, or imminent injury (i.e., merely being included in an anonymized data set itself was insufficient to establish standing).
Frier v. Hingiss, No. 23-cv-0290-bhl, 2023 U.S. Dist. LEXIS 164077 (E.D. Wisc. Sept. 15, 2023). The Court identified briefing rife with errors that, due to hallucinations regarding case citations, the Court suspected may have been the result of AI, admonishing counsel: “To the extent the briefing was prepared using ‘artificial intelligence,’ counsel is reminded that he remains responsible for any briefing he files, regardless of the tools employed.”
Huskey v. State Farm Fire & Cas. Co., No. 22 C 7014, 2023 U.S. Dist. LEXIS 160629 (N.D. Ill. Sep. 11, 2023). Plaintiffs filed a class-action suit against Defendant, alleging Defendant’s use of machine learning to help detect fraud was biased against Black homeowners because it scrutinized certain claims more closely based on race which resulted in Black homeowners having to go through more hurdles when they submitted claims. One of Plaintiffs’ claims survived motion to dismiss, specifically a claim under §3604(b) of the Fair Housing Act. The Court also held that Plaintiff’s had sufficiently alleged a disparate impact claim because they cited statistical evidence and connected the evidence to the algorithms being used.
§ 8.2.9. Eighth Circuit
Pending Cases of Note
Estate of Gene B. Lokken et al. v. UnitedHealth Group, Inc. et al. (D.Minn. Filed November 11, 2023). Class plaintiffs accuse UnitedHealth of deploying the AI model, nH Predict, to override physicians’ judgment as to medically necessary case determinations and unlawfully deny patients care owed to them under their Medicare Advantage Plans. The complaint recites claims for breach of contract, a breach of the implied covenant of good faith and fair dealing, unjust enrichment, violations of Wisconsin’s unfair claims settlement practices and insurance bad faith. In February 2024, the defendants moved for dismissal for lack of jurisdiction. That motion is pending as of publication.
§ 8.2.10. Ninth Circuit
Andersen v. Stability AI Ltd., No. 23-cv-00201-WHO, 2023 U.S. Dist. LEXIS 194324 (N.D. Cal. Oct. 30, 2023). Putative class action on behalf artists against Stability AI—the developer of Stable Diffusion, an image generation AI tool—as well as against Deviant Art and Midjourney, both of which developed AI products incorporating or using Stable Diffusion. The complaint alleged that because Stable Diffusion was trained on plaintiffs’ works of art to be able to produce images in the style of particular artists, it constitutes direct and indirect infringement of the plaintiffs’ copyrights. Defendants’ motions to dismiss granted in respect of direct infringement claims against Deviant Art and Midjourney and all indirect infringement claims. Plaintiffs given leave to amend.
Doe v. Github, Inc., No. 22-cv-06823-JST, 2023 U.S. Dist. LEXIS 86983 (N.D. Cal. May 11, 2023). Software developers alleged that Github, an online hosting service for open source software projects, infringed their privacy and property interests, in addition to myriad other alleged violations under the Digital Millennium Copyright Act (DMCA), the Lanham Act and other laws, through its development and operation of Copilot and Codex. Copilot and Codex are artificial intelligence-based coding tools that employ machine learning algorithms trained on billions of lines of publicly available code, including plaintiffs’ code on Github repositories. The court dismissed the privacy and property rights claims on the basis that the plaintiffs lacked Article III standing because the allegations failed to establish that the plaintiffs had suffered injury, but allowed a claim seeking injunctive relief in respect of potential future harms. A claim that Github had unlawfully removed copyright management information in violation of DMCA also survived dismissal.
Newman v. Google LLC, No. CV 20-cv-04011-VC, 2022 U.S. Dist. LEXIS 238876 (N.D. Cal. Nov. 28, 2022). The court granted the defendant’s motion to dismiss the plaintiff’s claim that YouTube’s algorithm violates the promise in the Community Guidelines because it considers the plaintiffs’ individual characteristics when deciding whether to remove, restrict, or monetize content, in part because the complaint does not adequately allege that the plaintiffs have been treated differently based on those characteristics.
Newman v. Google LLC, No. CV 20-cv-04011-VC, 2023 U.S. Dist. LEXIS 144686 (N.D. Cal. Aug. 17, 2023) The court granted the defendant’s motion to dismiss the plaintiff’s claim that YouTube’s content-moderating algorithm discriminates against them based on their race (the plaintiffs are African American and Hispanic content creators) in violation of YouTube’s promise to apply its Community Guidelines (which govern what type of content is allowed on YouTube) to everyone equally—regardless of the subject or the creator’s background, political viewpoint, position, or affiliation. The court found that plaintiffs had not adequately alleged the existence of a contractual promise.
Rivera v. Amazon Web Servs., No. 2:22-cv-00269, 2023 U.S. Dist. LEXIS 129517 (W. D. Wash. Jul. 26, 2023) The District Court for the Western District of Washington denied defendant’s motion to dismiss plaintiff’s claim that defendant’s facial recognition software (using biometric data) used by defendant’s clients without said clients properly notifying members of the public of said use.
Mobley v. Workday, Inc., No. 23-cv-00770-RFL, 2024 U.S. Dist. LEXIS 11573 (N.D. Cal. Jan. 19, 2024). Plaintiff , an African-American man over the age of 40 with anxiety and depression, applied for 80 to 100 jobs with companies that use the defendant’s applicant screening tools. Mobley alleged that the screening tools that Workday offers employers discriminate on the basis of age, race, and disability. The court granted Workday’s motion to dismiss on the basis that the plaintiff had failed to exhaust his remedies with the Equal Employment Opportunity Commission as to his intentional discrimination claims and because the factual allegations of the complaint were insufficient to demonstrate that Workday is an “employment agency” under the anti-discrimination statutes at issue.
Pending Cases of Note
Jobiak, LLC v. Botmakers LLC, No. 2:23-cv-08604-DDP-MRW (N.D. Cal. Filed Oct. 12, 2023). Plaintiff AI-based recruitment platform alleges the defendant has been “scraping” job posting data from plaintiff’s proprietary database and incorporating its contents directly into its own job listings. The complaint alleges these actions amount to: (1) copyright infringement (2) violations of the Computer Fraud and Abuse Act, (3) violations of the California Comprehensive Computer Access and Fraud Act, (4) violations of the California Unfair Competition Act, and (5) the removal of copyright management information under DMCA § 1201.
Kadrey et al., v. Meta Platforms, Inc., No. 3:23-cv-03417 (N.D. Cal. Filed July 7, 2023). Three authors filed a putative class action suit against Meta challenging LLaMA, a set of large language models trained in part on copyrighted books, including plaintiffs’. Unlike GPT models, LLaMA is “open source” and allows developers to create variations for free. Plaintiffs alleged, on behalf of all those similarly situated, the following causes of action: (1) direct copyright infringement, (2) vicarious copyright infringement, (3) Removal of copyright management information under DMCA § 1202(b), (4) unfair competition under, (5) negligence, and (6) unjust enrichment. In November 2023, the court dismissed all claims with leave to amend except for the negligence claim which was dismissed with prejudice.
T. et al. v. OpenAI LP et al., No. 3:23-cv-04557-VC (N.D. Cal. Filed Sept. 5, 2023). This class action lawsuit arises from defendants’ unlawful and harmful conduct in developing, marketing, and operating their AI products, including ChatGPT-3.5, ChatGPT-4.0, 4 Dall-E, and Vall-E (the “Products”), which use stolen private information, including personally identifiable information, from hundreds of millions of internet users, including children of all ages, without their informed consent or knowledge. Plaintiffs seek relief under (1) the Electronic Communications Privacy Act, (2) the Computer Fraud and Abuse Act, (3) the California Invasion of Privacy Act, (4) the California Unfair Competition Law, (5) negligence, (6) invasion of privacy, (7) intrusion upon seclusion, (8) larceny/receipt of stolen property, (9) conversion, (10) unjust enrichment, and (11) New York’s General Business Law. The defendants filed motions to dismiss which were pending at the time of publication.
Tremblay, et al. v. OpenAI, Inc., et al., No. 3:23-cv-03223-AMO (N.D. Cal. Filed June 28, 2023). Two authors filed a class action suit against OpenAI challenging Chat-GPT and its underlying large language models, GPT-3.5 and GPT-4, which use the copyrighted works of thousands of authors as a training dataset. The training dataset allows the GPT programs to produce written text. The plaintiffs allege, on behalf of similarly situated authors of copyrighted works used to train the GPT models, that such conduct constitutes: (1) direct copyright infringement, (2) vicarious copyright infringement, (3) Removal of copyright management information under DMCA § 1202(b), (4) unfair competition under CA law, (5) negligence, and (6) unjust enrichment.
Main Sequence, Ltd. v. Dudesy, LLC, No. 2:24-cv-00711 (C.D. Cal Filed January 25, 2024). The estate of the late comedian George Carlin filed suit against the defendant media company alleging that the defendant employed generative AI to create a script for a fake comedic special featuring Carlin and used voice generation tools to create a “sound-alike” to perform the generated script. The complaint alleges these acts violated copyright and Carlin’s posthumous right of publicity.
Matsko v. Tesla 4:22-cv-05240 (N.D. Cal. Filed September 14, 2022). Putative class plaintiffs allege that defendant Tesla’s representations concerning its automobiles’ “Autopilot,” “Enhanced Autopilot,” and “Full Self-Driving Capability” features mislead consumers about the company’s autonomous driving capabilities and therefore violate the Magnuson-Moss Warranty Act, the California Unfair Competition Law, the California Consumer Legal Remedies Act, false advertising standards, along with breaches of express and implied warranties. In September 2023, the court granted the defendants motion to dismiss with leave for the plaintiff to amend its complaint.
Faridian v. DoNotPay, Inc. 3:23-cv-01692 (N.D. Cal. Filed March 3, 2023). Class action plaintiff brought this action against DoNotPay, which bills itself as the “world’s first robot lawyer,” alleging that the defendant violated California’s e Unfair Competition Law by engaging in the unauthorized practice of law.
§ 8.2.11. Tenth Circuit
There were no qualifying decisions within the Tenth Circuit in 2023.
§ 8.2.12. Eleventh Circuit
Athos Overseas Ltd. Corp. v. Youtube, Inc., No. 21-21698-Civ, 2023 U.S. Dist. LEXIS 85462 (S.D. Fla. May 16, 2023). Plaintiff, video producer who holds the title to Mexican films allegedly uploaded to Defendant YouTube without authorization, contends that YouTube violated the Digital Millennium Copyright Act (DMCA), and therefore abandoned its safe harbor protections by its failure to employ advanced video detection software (Content ID) to identify infringing videos uploaded to the platform. The plaintiff argued that because YouTube has access to its automated software that scans uploaded videos to identify infringing content, it has knowledge of every infringing video on its platform. Court granted YouTube’s summary judgment motion, citing Second and Ninth Circuit decisions rejecting suggestions that an ISP can have specific knowledge of non-noticed infringements simply because they have access to video surveillance capabilities.
United States v. Grimes, No. 1:20-CR-00427-SCJ, 2023 U.S. Dist. LEXIS 40282, at *1 (N.D. Ga. Mar. 10, 2023). During his entry into the US at the Atlanta airport, defendant was flagged by facial recognition software used during preliminary entry processing, which identified him as being potentially linked to child sexual exploitation material. Based on this, officers undertook a search of the defendant and found recently deleted photos of child pornography on the defendant’s electronic devices. Defendant moved to suppress evidence obtained from this search on the basis that the officers lacked a reasonable suspicion to conduct the searches, because the Government had provided no evidence on the reliability of the facial recognition software. The court rejected the motion (in part) because, absent some suggestion that the facial recognition system is unreliable, it is a sufficient basis for reasonable suspicion.
§ 8.2.13. D.C. Circuit
Thaler v. Perlmutter, Civil Action No. 22-1564 (BAH), 2023 U.S. Dist. LEXIS 145823 (D.D.C. Aug. 18, 2023). Court granted a motion for summary judgment filed by Perlmutter, Register of Copyrights and Director of the United States Copyright Office, finding that the Copyright Office properly denied copyright registration for a piece of visual art autonomously created by a computer algorithm running on a machine (i.e., wholly created by AI) because U.S. copyright law protects only works of human creation. The court noted that copyright has never stretched so far as to protect works generated by new forms of technology operating absent any guiding human hand. Human authorship is a bedrock requirement of copyright.
USA v. Michel, Dist. Ct. D.C., No. 1:19-cr-00148, January 11, 2024. Michel, a former member of the Fugees, was convicted in April of 2023 on 10 criminal counts, including waging a back-channel lobbying campaign to end an investigation of Malaysian tycoon Jho Low. Michel’s new legal team is seeking a new trial based on assertions that his prior lawyer used an experimental Gen AI program to draft his closing argument, and failed to disclose that he had a financial stake in the company that developed it.
§ 8.2.14. Court of Appeals for the Federal Circuit
There were no qualifying decisions within the Court of Appeals for the Federal Circuit in 2023.
§ 8.3. Administrative
§ 8.3.1. Patent Trial and Appeal Board
Ex parte Iaremenko et al, 2022 Pat. App. LEXIS 5639 (PTAB Nov. 22, 2022). The USPTO Patent Trial and Appeal Board sustained an Examiner’s decision to reject claim 1 under 35 U.S.C. § 112 for lacking adequate written description support, where the relevant claim language recited a “PLD machine learning module . . . configured to detect an anomaly in at least one . . . of the ingress traffic and the egress traffic, and to send an anomaly indication to the PLD firewall.” (Additional rejections were sustained as well, but this summary focuses on the Section 112 issue pertaining to machine learning.) The applicant argued that the specification described “how the PLD machine learning process is trained and how anomalies are defined.” But the Board nonetheless determined that the applicant failed to address the Examiner’s finding that the written description did not include the specific technique (i.e., classification, regression, dimensionality reduction, clustering) used to identify deviations in patters relating to the ranges of various ingress and/or egress parameters. “In other words, Appellant’s argument that the machine learning module is defined by its training process does not apprise us of error in the Examiner’s finding that the training process disclosed in the Specification defines the patterns against which anomalies may be identified but fails to describe how (or by what technique) the PLD machine learning module learns such patterns in the parameters during the simulated transactions learning process.”
§ 8.4. Legislation
With the wider adoption of AI tools by both consumers and businesses as well as a growing awareness of the risks and downsides of these tools, 2023 witnessed a profusion of legislative proposals emerge at both the federal and state levels. As the EU moved closer toward the enactment of its AI Act, a comprehensive legislative package that will regulate AI across a wide range of industries and use cases, the approach in the US has been comparatively piecemeal and tentative. However, in the absence of a monolith like the AI Act, proposed legislation addressing specific aspects or risks associated with AI have proliferated in US legislatures.
Although it would be beyond the scope of this chapter to list out each of the scores of proposed statutes and regulation exhaustively, several broad trends are noteworthy.
§ 8.4.1. Policy and Governance
Some of the most prominent legislative activity has concerned the larger policy and governance issues that have emerged with the new technology. Among the common features of these laws has been the establishment of new bodies to oversee and regulate the activity of both private and public actors utilizing AI. For example, the Digital Platform Commission Act of 2023 (S.1671), introduced in the Senate in May 2023 and subsequently referred to the Committee on Commerce, Science, and Transportation, would mandate the establishment of a “Federal Digital Platform Commission” to provide comprehensive regulation of digital platforms and AI products, with the intention of protecting consumers, promoting competition, and safeguarding public interest. The proposed five-member Commission would have the power to hold hearings, conduct investigations, levy fines, and engage in public rulemaking to establish regulations for digital platforms. Other similar federal proposals include the ASSESS AI Act of 2023 /Assuring Safe, Secure, Ethical, and Stable Systems for AI Act (S.1356) (aiming to establish a cabinet-level AI Task Force to identify existing policy and legal gaps in the federal government’s AI policies), the National AI Commission Act (H.R.4223) (seeking to create a bi-partisan independent commission within the legislative branch focused on AI called the “National AI Commission”). Similarly, some bills have sought to situate policymaking frameworks within the existing regulatory apparatus, such as the Oversee Emerging Technology Act of 2023 (S.1577), which would mandate that certain federal agencies appoint a senior official as an emerging technology lead to advise on the responsible use of emerging technologies, including AI and to offer expertise on policies and practices, collaborate with interagency coordinating bodies and contribute input for procurement policies. These themes have extended to state legislation as well; Illinois House Bill 3563, passed in August 2023, establishes a Generative AI and Natural Language Processing Task Force to investigate and report on generative artificial intelligence software and natural language processing software.
At the state level, a related theme has been the oversight of the procurement and deployment of AI systems by state agencies. California Assembly Bill AB302, enacted in October 2023, requires the Department of Technology, in coordination with other interagency bodies, to conduct, on or before September 1, 2024, a comprehensive inventory of all high-risk automated decision systems proposed for use, development, or procurement by, or are being used, developed, or procured by, state agencies. Likewise in June 2023, Connecticut passed An Act Concerning Artificial Intelligence, Automated Decision-Making and Personal Data Privacy (S1103) , which requires annual audits of AI systems used by state agencies and the establishment of policies regarding state agency use of AI systems. Texas’ House Bill 2060, enacted in June 2023, combines these characteristics, both calling for the creation of a seven-member Artificial Intelligence Advisory Council to study the development of AI, as well as requiring state agencies to submit inventory reports of automated decision systems they use.
§ 8.4.2. Algorithmic Accountability
Another significant legislative theme in 2023 has been the prevention of discrimination and other harms that may arise from our growing reliance on algorithms to inform, drive, and in some cases supplant human decision-making.
At the federal level, the White House led the charge by issuing an Executive Order on Further Advancing Racial Equity and Support for Underserved Communities Through The Federal Government in February, which directs federal agencies to develop and use artificial intelligence in ways that advance equity and root out bias. The AI Accountability Act (H.R.3369), introduced in the House in May 2023 and subsequently referred to the Committee on Energy and Commerce, directs the Assistant Secretary of Commerce for Communications and Information to conduct a comprehensive study on accountability measures for AI systems.
State legislatures largely focused on the potential introduction algorithmic bias from the use of automated decision systems in the provision of particular services, especially financial services and healthcare, or in employment contexts. New Jersey’s Senate Bill S1402, introduced in February 2023, would prohibit financial institutions from using automated decision-making tools to discriminate against members of a protected class in making decisions regarding the extension of credit or eligibility for insurance or health care services. Under Illinois’ HB 3773, introduced in February 2023, employers that use predictive data analytics in their employment decisions would be restricted from using race (or zip code when used as a proxy for race) in employment decisions. California’s AB1502, introduced in February 2023, would prohibit health care service plans from discrimination on the basis of race, color, national origin, sex, age, or disability through the use of clinical algorithms in its decision-making.
Some legislatures took aim more broadly at algorithmic bias by considering mandates that wouldn’t be limited to particular use cases or services. These include Washington DC’s Stop Discrimination by Algorithms Act (B25-0114) introduced in February 2023, which would prohibit the use of algorithmic eligibility determination in a discriminatory manner.
§ 8.4.3. Transparency
A related area of legislative interest concerns laws that promote transparency in the use of AI. These laws often require disclosures to customers or the public of an organization’s deployment of AI and can apply in a variety of contexts. Some laws may also include provisions requiring audits or human oversight of some AI functions, especially where the AI is being used to assist processes that produce significant effects on a person’s rights or interests.
At the federal level, the AI Labeling Act of 2023 (S. 2691), introduced in July 2023, would mandate clear disclosures for all AI-generated content including images, videos, audio, multimedia, and text and outlines obligations for developers and licensees of generative AI systems to prevent the removal of these disclosures. Likewise, the proposed REAL Political Advertisements Act of 2023 (S.1596) would mandate the inclusion of a disclaimer in political advertisements that utilize AI to generate images or video content and seeks to increase transparency and accountability in political campaigns and advertisements that make use of AI.
State lawmakers have also sought to promote transparency in the use of AI across a variety of contexts. California’s AB 331 on automated decision tools, introduced in January 2023, would require deployers to disclose automated decision tools that are used to make a consequential decision to individuals subject to such decisions. New York’s A7858, introduced in July 2023, would amend the labor law to require disclosure when an employer uses an automated employment decision tool to screen candidates. In Massachusetts, HB1974 was introduced in February 2023 and would require mental health care professionals who use AI to provide mental health services to inform patients of such use. Illinois’ legislature introduced the Artificial Intelligence Consent Act (HB3285) in February 2023, requiring that a person using artificial intelligence to mimic or replicate another’s voice or likeness in a manner that would otherwise deceive an average viewer to provide a disclosure upon publication, unless the person whose voice or likeness is being mimicked consents.
§ 8.4.4. Other
As the adoption of AI has come to permeate ever-wider areas of human activity, so too the scope of proposed AI regulation has grown to encompass areas not previously associated with AI.
On the dawn of a momentous general election—and with tremendous attention being paid to the fairness and security of elections—2023 marked the arrival of AI considerations to voting laws. In one of the few state measures to actually pass in 2023, in April 2023, the Arizona legislature approved Senate Bill 1565, which would restrict the use of AI or learning hardware, firmware, or software in voting machines. Despite its passage, Arizona’s governor vetoed the legislation. Another focus area has been the potential use of synthetic media, that is AI-generated video, audio, or images to mimic candidates and deceive or manipulate voters. For example, Illinois Senate Bill 1742, introduced in February 2023, would amend the election code to make it a misdemeanor for a person to create a “deepfake” video and cause the deep fake video to be published or distributed within 30 days of an election with the intent to injure a candidate or influence an election.
Some proposed laws have sought to mitigate potential harms from “deepfakes” more generally. The No Artificial Intelligence Fake Replicas And Unauthorized Duplications Act of 2024 (No AI FRAUD Act), introduced in January 2024, would establish civil liability for those who publish unauthorized digital depictions or who distribute “a personalized cloning service.” A more focused federal proposal in the form of the Do Not Disturb Act, also introduced in January 2024, would crack down on robocalls using digitally emulated voices and strengthen the Telephone Consumer Protection Act (TCPA) protections against such conduct. Notably, in February, the Federal Communications Commission issued an opinion clarifying that the TCPA does indeed apply to the use of AI to make a robocall.
State lawmakers have also focused attention on the risks around “deepfakes.” Foreshadowing some of the provisions of the No AI FRAUD Act proposals, Illinois’ legislature introduced the Artificial Intelligence Consent Act (HB3285) in February 2023, which would require a person using artificial intelligence to mimic or replicate another’s voice or likeness in a manner that would otherwise deceive an average viewer to provide a disclosure upon publication, unless the person whose voice or likeness is being mimicked consents. Louisiana’s SB175, enacted in August 2023, criminalizes the creation (or possession) of deepfake videos depicting minors engaged in sexual acts.
Myriad other areas of activity have also been subject to proposed AI legislation. For instance, Illinois’ Anti-Click Gambling Data Analytics Collection Act, introduced in February 2023, would restrict online gambling platforms from collecting data from gamblers with the intention of using the data to predict their gambling behavior. A trio of New Jersey bills introduced in 2023 and aimed to assuage fears over the potential loss of jobs due to the replacement of human labor with automated processes. These bills proposed measures including requiring the Department Of Labor And Workforce Development to track job loss due to automation (Assembly Bill 5150), mandating tuition-free enrollment in public universities to students impacted by automation (Assembly Bill 5224), and providing tax relief for employers who hire worker affected by automation-related job loss (Assembly Bill 5451). And in New Hampshire, House Bill 1599, proposed in January 2024, seeks to affirm the right to use autonomous artificial intelligence for personal defense.
§ 8.5. Blockchain Cases of Note
SEC v. Celsius Network Limited. et al., No. 1:23-cv-6005, filed 7/13/2023. The SEC alleges that Celsius and its founder and CEO influenced the price of the CEL token through unregistered and fraudulent offers and sales through its “Earn Interest Program” to fraudulently raise billions of dollars from investors.
SEC v. Coinbase, No. 1:23-cv-04738, filed on 6/06/2023. The SEC charged Coinbase as operating as an unregistered broker through offering Coinbase Prime and Coinbase Wallet, and offering a staking program without first registering with the SEC. The SEC also alleged Coinbase operated a trading platform allowing U.S. customers to buy, sell, and trade cryptocurrency without registering with the SEC as a broker, national securities exchange, or clearing agency.
SEC v. Justin Sun, et al., No. 1:23-cv-02433, filed on 3/03/2023. Justin Sun and three of his companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc., were charged with offering and selling Tronix (TRX) and BitTorrent (BTT) without registering, and for manipulating the secondary market for TRX through wash trading. Eight celebrities were charged in connection with touting TRX and/or BTT without publicly disclosing that they were compensated for doing so.
SEC v. Avraham Eisenberg, No. 1:23-cv-00503, filed on 1/20/2023. The SEC charged Eisenberg for organizing an attack on Mango Markets, a cryptocurrency trading platform, through the MNGO governance token, which is offered and sold as a security.
SEC v. Genesis Global Capital, LLC and Gemini Trust Company, LLC, No. 1:23-cv-00287, filed on 1/12/2023. The SEC alleges that, through the Gemini Earn cryptocurrency asset lending program, Genesis and Gemini engaged in the unregistered offer and sale of securities to U.S. retail investors.
James v. Mek Global Limited and Phoenixfin PTE Ltd d/b/a KuCoin, No. 1:20-cv-02806-GBD-RWL, filed on 3/09/2023. New York Attorney General Letitia James sued KuCoin for failing to register with the State of New York prior to allowing investors to buy and sell cryptocurrencies on its platform.
SEC v. LBRY, Inc., No. 1:21-cv-00260- PB, filed on 3/29/2021, appeal filed on 8/8/2023. The SEC alleged LBRY sold unregistered securities when it issued its own token, LBC, and received approximately $12.2 million in proceeds. Judge Barbadoro of the United States District Court for the District of New Hampshire ordered LBRY to pay a civil penalty of $111,614 and permanently enjoined LBRY from further violations of the registration provisions of the federal securities laws and from participating in unregistered offerings of crypto asset securities.
§ 8.5.1. Sam Bankman-Fried’s Conviction
In 2022, the SEC charged Sam Bankman-Fried with violating Section 17(a) of the Securities Act, and 10(b)(5) of the Exchange Act for organizing a scheme to defraud equity investors in FTX Trading Ltd., a crypto trading platform which Bankman-Friend was CEO and co-founder.
While promoting FTX as a safe crypto asset trading platform, Bankman-Fried improperly used FTX customers’ funds for his privately-held crypto hedge fund, Alameda Research LLC, and gave Alameda special treatment on the FTX platform.
Bankman-Fried also failed to inform investors of the risk from FTX’s exposure to Alameda’s holdings of overvalued, illiquid assets, such as FTX-affiliated tokens.
In November of 2023, Bankman-Fried was convicted, and his sentencing is scheduled for March 28, 2024.
§ 8.5.2. Indictment of CZ from Binance
In June of 2023, the SEC brought 13 charges against Binance Holdings Limited, and its CEO, Changpeng Zhao for violations of federal securities laws. Binance operates the largest crypto asset trading platform in the world.
The SEC alleged that Binance and Zhao conducted the unregistered offer and sale of crypto assets and mislead investors.
Binance and Zhao claimed U.S. customers were restricted from Binance.com, but Zhao and Binance secretly allowed high-value U.S. customers to continue trading on the platform. Also, Zhao and Binance improperly exercised control of customers’ assets, which were then commingled and diverted, including to Zhao’s own entity, Sigma Chain.
In November of 2023, Binance pleaded guilty and agreed to pay over $4 billion for violations of the Bank Secrecy Act, failure to register as a money transmitting business, and the International Emergency Economic Powers Act.
Zhao, a Canadian citizen, pleaded guilty for failing to maintain an effective anti-money laundering program in violation of the Bank Secrecy Act and stepped down as Binance’s CEO.
§ 8.5.3. Recent Developments from Federal Agencies
The joint statement highlights what the FDIC perceives to be the key risks associated with crypto-assets and crypto-asset sector participants, including legal uncertainties related to custody practices, redemptions, and ownership rights and inaccurate or misleading representations and disclosures by crypto-asset companies, for example.
Associate Stone, Pigman, Walther, Wittmann, L.L.C. 909 Poydras Street, Suite 3150 New Orleans, LA 70112 (504) 593-0922 [email protected]
§ 5.1. Introduction
Thanks to several landmark decisions and burgeoning conflicts, the calendar year 2023 could mark something of an inflection point in the field of sports law. From a number of cases revolving around the rapidly shifting landscape of college athletics; to a landmark European decision that pried open the door for the revival of a European Super League; to the merger (in principle) of the PGA Tour and LIV Golf; to a number of other high-profile decisions and suits, 2023 left plenty for sports litigation scholars to ruminate on. This chapter details many of 2023’s sports-related dispute highlights (or lowlights, for some of the losing litigants) and provides critical context when appropriate.
§ 5.2. Part I – NCAA
Atlantic Coast Conference v. Board of Trustees of Florida State University (Case No. 23-cv-040918, Mecklenberg County, N.C., December 21, 2023); Florida State University Board of Trustees v. Atlantic Coast Conference (Fla. 2nd Cir. Ct., December 22, 2023).
In the dying days of 2023, the Atlantic Coast Conference (“ACC”) and the Board of Trustees of Florida State (“FSU”) sued each other in an escalation of the dispute over whether (and under what conditions) FSU can finagle its way out of the “Grant of Rights” agreement that ostensibly tethers the university to the ACC until at least 2036.[1]
FSU’s athletics programs have competed in the ACC since 1991, in which time they have amassed nine national championships, including three in football.[2] In 2013, after long-time member the University of Maryland bolted for the Big Ten Conference, FSU and other member schools entered a new “Grant of Rights” agreement with the ACC. Under the Grant of Rights, FSU and the other members agreed to grant the ACC exclusive media rights over all their teams’ home games until 2027, irrespective of whether the schools remained in the ACC.[3] The ACC and its members later extended the Grant of Rights to 2036.[4]
Disgruntled by the value of the ACC’s media rights deal with ESPN and cognizant of the flurry of conference realignment in recent years—including the near-total implosion of the Pac-12 Conference in August 2023—FSU began publicly intimating that it intended to explore departing the ACC.[5] The invitation of Stanford, California (Berkeley) (“Cal”), and Southern Methodist University (“SMU”) and FSU’s controversial exclusion from the 2023–2024 College Football Playoff only further exacerbated FSU’s discontent with the conference.[6] By December 2023, it became evident that, to pave the way for a move to another conference, FSU would attempt to sue the ACC to vitiate or otherwise avoid any further obligations under the Grant of Rights.[7]
The ACC struck first, suing in North Carolina (where it is headquartered) for a declaratory judgment requiring FSU to abide by the Grant of Rights and precluding FSU from challenging its validity or enforceability.[8] According to the ACC, the Grant of Rights (as amended) remains a valid and binding contract under which FSU irrevocably and exclusively transferred media rights to the ACC through 2036.[9] The ACC further argues that, because FSU voluntarily entered the Grant of Rights and has benefited substantially from it (via the ACC’s media rights deal with ESPN), FSU has effectively waived any right to challenge the Grant of Rights.[10] plaintiffs in Alston were current and former student-athletes in men’s Division I FBS football and men’s and women’s Division I basketball players.
FSU filed its suit in Florida state court.[11] Emphasizing that the ACC’s constitution affords it the inherent right to withdraw as a member, FSU argues that both the forfeiture of media rights to the ACC and the penalty member schools must pay to the ACC to leave the conference comprise an unjustly and illegally draconian restraint on FSU’s ability to compete in the media rights market.[12] FSU further maintains that the ACC has breached its contractual and fiduciary duties to FSU by, inter alia, entering an unfavorable media rights deal with ESPN that diluted the value of those rights; inviting Stanford, California, and SMU; and “diminishing the members’ ability to complete in championships.”[13] The Complaint estimates that, absent relief from the court or a settlement, withdrawing from the ACC will cost FSU and other members $572 million.[14]
The burgeoning battle between the ACC and FSU is a watershed in that, unlike other schools to change conferences in recent years who waited for their respective grant of rights deals to expire,[15] FSU is openly challenging the validity and enforceability of its grant of media rights to the conference. A protracted (and extremely expensive) dispute looks nigh on certain, and the ultimate outcome will impact not only the long-term future of the ACC but the broader landscape of major college athletics.
Case No. 102562-9, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Dec. 15, 2023).
Just as the legal fight between FSU and the ACC kicked into gear, the lingering dispute among the Pac-12’s remaining and former members came to a close. In November 2023, a superior court in Whitman County, Washington entered a preliminary injunction granting total control of the Pac-12 to Washington State University (“WSU”) and Oregon State University (“OSU”), the only two schools that had not announced their intent to depart the conference at the end of the 2023–2024 athletic year.[16] The Washington Supreme Court later declined to review the preliminary injunction, and the schools reached a settlement with the departing members shortly thereafter.[17]
By September 2023, ten members of the Pac-12 had provided notice of their intent to depart the Pac-12 and compete in other conferences beginning in 2024–2025.[18] Concerned at the prospect of lame duck members making decisions regarding the future of the conference, the holdovers, WSU and OSU, moved for a temporary restraining order in Whitman County preventing the Pac-12 from holding any board meeting involving the departing members before a preliminary injunction hearing.[19] Judge Gary Libey granted the temporary restraining order, noting the risk of irreparable and immediate harm to WSU and OSU and the likelihood that they would succeed on the merits given that the conference’s by-laws state that all member schools who deliver a notice of withdrawal before August 1, 2024 “shall automatically cease to be a member of the Pac-12 Board of Directors.”[20] Judge Libey later granted a preliminary injunction that prohibited the Pac-12 from recognizing any board members other than WSU and OSU and from holding any meeting involving the departing members.[21] On December 15, 2023, the Washington Supreme Court denied a discretionary review of the preliminary injunction.[22]
The conference, WSU and OSU, and the ten departing schools announced a settlement of ongoing litigation on December 21, 2023.[23] Although specific terms of the settlement were not disclosed, WSU and OSU averred that the ten other members agreed to forfeit a portion of revenue distributions for the remainder of the 2023–2024 school year.[24]
Case No. 4:23-cv-06325, Carter et al. v. National Collegiate Athletic Association (N.D. Cal. Dec. 7, 2023).
In what amounts to an attempt to resurrect arguments that faltered during the Alston v. NCAA litigation, three current NCAA Division I athletes have filed a putative class action seeking to nullify the NCAA’s restrictions on the compensation member schools can provide to student-athletes on antitrust grounds.[25]
In Alston, the Supreme Court of the United States held that the NCAA’s restrictions on so-called education-related compensation for Division I football, men’s basketball, and women’s basketball participants (including research stipends, academic scholarships, and educational materials and equipment) violated the Sherman Act.[26] The plaintiffs in that case had originally attempted to vitiate all restrictions on compensation exceeding a “grant-in-aid” scholarship as defined in the NCAA. However, the district court found (and the Ninth Circuit affirmed) that restrictions on payments “unrelated to education” were justified insofar as they helped ensure a differentiation between the product of collegiate sports and professional sports.[27]
The Carter Complaint, filed by the same attorneys who represented the Alston plaintiffs, revives the challenge to compensation restrictions unrelated to education and expands it to include all Division 1 athletes. The Plaintiffs assert that the NCAA and its members has effectuated “draconian, collusive” rules that “prohibit what the NCAA refers to as ‘pay-for-play,’ but what anyone else would call market-value compensation.”[28] Highlighting “new factual developments” since the Alston trial—particularly the purported lack of effect that the proliferation of NIL compensation has had on consumer demand for college sports—the Plaintiffs contend that the NCAA’s cap on the grant-in-aid universities can supply to student-athletes acts as an unlawful price-ceiling on the amount athletes can earn for provision of their services, without procompetitive justification.[29] The case is pending before Judge Richard Seeborg in the Northern District of California.
The plaintiffs filed suit just days after NCAA President Charlie Baker sent a letter to member institutions which marked the NCAA’s first true pivot from its longstanding adherence to amateurism. Baker proposed a new “competitive subdivision,” comprised of the wealthiest athletic programs, in which member schools would have to invest at least $30,000 into an enhanced educational trust fund for at least half of the institution’s eligible student athletes.[30] Baker later sent an open letter to student-athletes detailing the proposal.[31] The NCAA has yet to provide specifics regarding the precise framework or timing of implementation of this proposed new subdivision.
In re: College Athlete NIL Litigation, No. 20-cv-03919, 2023 WL 8372787 (N.D. Cal. November 3, 2023).
Striking yet another blow against the NCAA’s compensation framework, Judge Claudia Wilken of the Northern District of California granted the plaintiffs’ motion to certify a damages class in consolidated litigation challenging restrictions on NIL restrictions.[32]
Consisting of both former and current Division I student-athletes, the proposed class alleges that both the NCAA’s prior prohibition on NIL compensation and its “interim” policy allowing some NIL compensation violate Section I of the Sherman Act.[33] Plaintiffs moved for certification of three damages classes: a football land men’s basketball class; a women’s basketball class; and an “additional sports” class consisting of Division I student-athletes participating in the remaining sports.[34]
In her November 3, 2023 decision, Judge Wilken—who also served as the trial court in the landmark O’Bannon v. NCAA and Alston v. NCAA decision—held that the plaintiffs had proven each of the elements for class certification under Federal Rule of Civil Procedure 23(a).[35] The plaintiffs established that the proposed classes were sufficiently numerous; that there were common questions of law and fact among class members; that the claims of class representatives Tymir Oliver (football and men’s basketball), Sedona Prince (women’s basketball), and Grant House (additional sports) were typical of their respective classes; and that the representatives would adequately represent the respective classes.[36]
The NCAA and conference defendants argued that Plaintiffs could not show that the common questions of law and fact among class members predominated individual issues in accordance with Federal Rule of Civil Procedure 23(b).[37] According to the NCAA, because of the variety of evidence and disparity of NIL value across class members, the plaintiffs could not establish antitrust impact and damages on a class-wide basis.[38] But the court disagreed, affording credence to plaintiffs’ experts in finding that class issues predominated individual issues.[39] Judge Wilken also deemed a class action a superior means of adjudicating plaintiffs’ claims to a series of individualized trials.[40]
In a 2–1 decision, the U.S. Court of Appeals for the Fourth Circuit affirmed the summary judgment dismissal of civil RICO claims brought by former high-profile college basketball recruit Brian Bowen Jr. against Adidas America, Inc. and a number of other individuals, including notorious aspiring sports agent/manager Christian Dawkins.[41]
A McDonald’s All-American and five-star recruit in the class of 2017, Bowen Jr. committed to play at the University of Louisville under then-coach Rick Pitino.[42] In September 2017, however, the FBI unveiled a criminal complaint involving Adidas, Dawkins, and others that alleged, inter alia, that Brian Bowen Sr. (Bowen Jr.’s father) had accepted a bribe from Adidas to steer Bowen Jr. to Louisville.[43] The NCAA declared Bowen Jr. ineligible soon thereafter, and Bowen Jr. has yet to establish a foothold on an NBA roster.[44] In 2019, Bowen filed a RICO suit for treble damages in the U.S. District Court for the District of South Carolina against Adidas and the individuals who allegedly concocted the bribery scheme: Dawkins, James Gatto (a former Adidas executive), Merl Code and Thomas Gassnola (Adidas consultants), Christopher Rivers (an Adidas employee), and Munish Sood (a financial advisor).[45] The district court granted the defendants’ motion for summary judgment on the basis that Bowen Jr. lacked evidence that the defendants’ actions proximately caused a cognizable injury to his business or property.[46]
On appeal, Bowen Jr. argued that the defendants (through their bribery scheme) deprived him of the “contractual benefits” of his scholarship with Louisville, including “elite coaching, preferred playing positions on the court, athletic training, strength and nutrition services, competitive playing time, and experience reading game film.”[47] Because the scholarship agreement did not promise these benefits, however, the Fourth Circuit held that Bowen Jr. had failed to demonstrate an injury to a cognizable business interest.[48] Nor did the court find that Bowen Jr. held a property interest in right in his proposed NCAA eligibility.[49] Since his putative eligibility would have afforded him only the opportunity to participate in college sports, rather than any concrete economic or property right, Bowen Jr. could not establish injury on this basis, either.[50] And the majority further agreed with the trial court that Bowen Jr.’s alleged incurrence of attorney’s fees and costs in attempting to restore his eligibility could not preserve his RICO cause of action, as these pecuniary losses flowed from non-cognizable RICO injuries.[51]
In dissent, Circuit Judge King opined that Bowen Jr.’s loss of NCAA eligibility did, in fact, constitute a cognizable injury under RICO.[52] Citing the Supreme Court’s determination in Alston that Division I comprised the sole, relevant market for elite college football and basketball, Judge King reasoned that an athlete such as Bowen Jr. “certainly has a property interest in his NCAA eligibility.”[53] To Judge King, Bowen Jr. suffered an injury not only by virtue of his inability to participate but through the loss of coaching and playing experience that would have better equipped him for the NBA.[54]
§ 5.3. Part II – Professional Soccer
Case C-333/21, European Superleague Company v. Federation Internationale de Football Association (FIFA) et al. (Court of Justice of the European Union, December 21, 2023).
Two and a half years after the announcement and immediate, backlash-fueled collapse of plans for a so-called European “Super League” (“ESL”), the Court of Justice of the European Union (“ECJ”) declared that FIFA and UEFA rules were unlawful on antitrust grounds.[55]
In April 2021, 12 of the biggest clubs in European football (soccer) announced plans to form a new Super League that would consist of 12 to 15 permanent members and additional rotating spots for other high-achieving European clubs.[56] Immediately thereafter, FIFA (which purports to govern and regulate world football), UEFA (governing European football), and other national associations announced that they would prohibit clubs and players who joined the Super League from participating in their respective competitions (such as the UEFA Champions League, among others). The announcement triggered an uproar among UEFA, national football associations, and fans, particularly in England.[57] In response, nine of the 12 “founding” clubs abandoned their plans to join the ESL.[58] The remaining clubs (Barcelona and Real Madrid of Spain and Juventus of Italy) sued FIFA and UEFA in Spain, where the court referred the matter to the ECJ.[59] The Super League argued that FIFA and UEFA were abusing its monopoly power in the markets for world and European football competitions, respectively, to pretermit a potential competing league and protect its own financial interests.[60]
The ECJ acknowledged that, although FIFA and UEFA enjoy “dominant” positions in their respective markets (for regulating and organizing football competitions), the ascension to market dominance does not per se violate European antitrust law.[61] The court recognized that organizations such as FIFA and UEFA may lawfully subject clubs and players to “common rules intended to guarantee the homogeneity and coordination” of international professional football competitions, including rules affording FIFA and UEFA the right of prior approval and the power to sanction or ban putative participants.[62] But the ECJ found that European law did require that implementation of such rules be subject to “framework for substantive criteria and detailed procedural rules for ensuring that they are transparent, objective, precise and non-discriminatory.”[63] Because FIFA and UEFA’s rules with respect to interclub competitions were not subject to such a “framework”—in other words, because they were implemented and enforced without objective oversight or scrutiny—the court held that their enforcement of such rules amounted to an abuse of their dominant market positions.[64] The ECJ did not provide any opinion as to whether the Super League must be approved.[65] The matter will be remanded to the Spanish court that referred the dispute to the ECJ.[66]
A22, the sports development company created to assist in the creation of the Super League, announced revamped and revised plans for a new league hours after the ECJ announced its decision.[67] The new proposed league would involve 64 clubs spread across three “leagues” and contemplates that clubs would remain in their respective domestic competitions.[68]
§ 5.4. Part III – NFL
Michael Oher v. Sean Tuohy & Leigh Ann Tuohy (Shelby County, Tennessee).
In a lawsuit first filed in August 2023, former NFL offensive lineman Michael Oher, whose high school years were dramatized in the smash-hit 2009 film The Blind Side, accused Sean Tuohy and Leigh Ann Tuohy of fooling him into entering a conservatorship when he was 18 and of depriving him of millions to which he is entitled.[69]
Earning more than $300 million and a Best Actress Oscar for star Sandra Bullock, The Blind Side depicted the Tuohys’ adoption and nurturing of the previously homeless Oher, who went on to star at the University of Mississippi and become a first-round draft pick for the Baltimore Ravens.[70] In reality, the Tuohys never adopted Oher. Instead, after Oher turned 18, Oher and the Tuohys signed documents making the Tuohys his conservators and giving them full control over his finances and ability to make business deals utilizing his name, image, and likeness (including with respect to The Blind Side).[71] Oher alleges that the Tuohys deceived him into entering the conservatorship; failed to make regular accountings to the court as required; and cheated him out of millions of dollars in royalties from the film.[72] The Tuohys denied Oher’s claims that they misled him, referring to the lawsuit as a shakedown and averring that Oher never asked them to terminate the conservatorship before filing suit.[73]
Shelby County Probate Court Judge Kathleen Gomes terminated the conservatorship in September 2023, but did not dismiss the entire case.[74] Judge Gomes conveyed that she was “disturbed” that the agreement ever materialized, given that Oher was (and is) not disabled.[75] The Tuohys later filed documents with the court proving that they had paid $138,311.01 to Oher for proceeds from The Blind Side.[76] According to Oher, however, these amounts fail to account for millions generated from public speaking engagements or $2.5 million Oher purportedly gave to Sean Tuohy to invest, but which was never returned.[77] The Tuohys agreed to remove any reference to or description of Oher as their adopted son from advertisements, web pages, and public speaking materials.[78]
A federal judge dismissed NFL Hall of Famer Brett Favre’s defamation lawsuit against fellow Hall of Famer Shannon Sharpe, concluding that Sharpe did not make any actionable misrepresentations of fact in criticizing Favre’s role in a welfare fraud scheme.[79]
In 2021, the Mississippi Office of the State Auditor determined that more than $77 million in federal aid to needy and destitute families had been illegally diverted and spent by politicians and other wealthy and powerful Mississippians.[80] Allegations later surfaced that Favre received more than $1 million in payments for public speaking engagements he did not honor and more than $5 million for the construction of a new facility for the University of Southern Mississippi volleyball team, of which his daughter was a member.[81] Sharpe discussed the scandal on Skip and Shannon: Undisputed, his former sports talk show with Skip Bayless, in 2022. Excoriating Favre for his alleged role in the scheme, Sharpe made the following three statements that Favre asserted were defamatory:
“The problem that I have with this situation, you’ve got to be a sorry mofo to steal from the lowest of the low.”
“Brett Favre is taking from the underserved.”
“[Favre] stole money from people that really needed that money.”[82]
Judge Keith Starrett identified the dispositive question under Mississippi defamation law as “whether a reasonable factfinder could conclude that the statements Sharpe made on the air would imply an assertion that Favre actually stole money from the poor.”[83] Favre maintained that even though he neither stole nor was accused of stealing money from anyone else, Sharpe’s comments created an impression to the contrary.[84] But Judge Starrett noted that applicable law required him to evaluate “highly charged” language in a “broad context” to determine whether a reasonable person could construe assertions of “fact” literally.[85] The court found that “no reasonable person listening to the Broadcast would think that Favre actually went into the homes of poor people and took their money.”[86] Rather, given the maelstrom of media coverage zeroing in on Favre’s role with the welfare scandal, Sharpe’s “rhetorical hyperbole” warranted First Amendment protection.[87]
Favre has appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. Favre filed a similar defamation suit against sports personality Pat McAfee but ultimately dismissed it.[88]
Patrick v. Nat’l Football League, No. CV231069DMGSHKX, 2023 WL 6162672, at *1 (C.D. Cal. Sept. 21, 2023).
Relying on the Collective Bargaining Agreement (“CBA”) entered by the league and its players’ association, Judge Dolly M. Gee of the U.S. District Court for the Central District of California dismissed negligence and premises liability claims brought by a player against the NFL.[89]
Aaron Patrick, then of the Denver Broncos, tore his ACL when, while attempting to tackle a Los Angeles Chargers punt returner, his cleats became lodged in the cords and cables connected to the NFL’s instant replay monitor.[90] Patrick sued a number of defendants, including the NFL and the Chargers, under negligence and premises liability theories.[91] The league and Chargers dismissed on the basis that the CBA preempted Patrick’s California tort claims.[92]
Judge Gee agreed. Because any duties owed by the NFL and Chargers to Patrick arose solely from their responsibilities under the CBA and Patrick’s claims were “substantially dependent” on the CBA, and because Patrick had not instituted (much less exhausted) arbitration proceedings as required by the CBA, Patrick could not proceed in federal court.[93]
§ 5.4.1. Commanders Settle Claim Brought by D.C. Attorney General over Failure to Return Ticket Deposits
In one of the final blemishes of Daniel Snyder’s maligned tenure as the franchise’s owner, the Washington Commanders agreed to pay $625,000 to their fans and to Washington, D.C. after then-Attorney General Karl Racine sued the team for purportedly bilking season ticket holders out of their security deposits.[94]
According to Racine’s complaint, the Commanders sold premium seating packages that required fans to put down security deposits.[95] The team promised to return the security deposits within 30 days after the contracts’ expiration but allegedly pocketed the money instead, sometimes for a decade or more.[96] The Commanders denied any wrongdoing and further asserted that they had not collected security deposits since before 2014.[97] Per the terms of the settlement, the Commanders agreed to pay $200,000 to affected fans and $425,000 to the District of Columbia.[98]
The NFL approved the sale of the Commanders from Snyder to an ownership group helmed by Philadelphia 76ers co-owner Josh Harris in July 2023.[99]
Maragos v. Bradley et al., No. 2019-11-000972 (Pa. 1st Jud. Dist. Court of Common Pleas, February 13, 2023).
A Philadelphia jury awarded former Philadelphia Eagles safety a $43.5 million verdict after finding that that orthopedic surgeon James Bradley and Rothman Orthopedics were negligent in operating on and treating Maragos’s meniscus tear in his right knee.[100]
Maragos, a special teams ace and team captain for the Eagles, hurt his knee in a 2017 game against the Carolina Panthers.[101] According to Maragos, Bradley failed to repair the medial meniscus root tear in surgery, resulting in Maragos undertaking rehab on a knee that remained severely damaged.[102] He never played again. The defendants, in turn, highlighted a congenital defect in the knee that they maintained would have likely precluded him from returning to professional football after the injury irrespective of his rehabilitation program.[103]
The jury found Bradley 67 percent responsible and Rothman 33 percent responsible for Maragos’s damages. [104] The verdict reflects the substantial lost earnings Maragos forewent due to his inability to return to the field.[105]
§ 5.5. Part IV – Major League Baseball
Cangrejeros de Santurce Baseball Club, LLC v. Liga de Beisbol Profesional de Puerto Rico, Inc., No. CV 3:22-01341-WGY, 2023 WL 4195663 (D.P.R. June 27, 2023).
In a matter of first impression for a United States District Court, the court in the District of Puerto Rico held that the long-standing “baseball” antitrust exemption applied to a Puerto Rican baseball team—even though the organization lacks any affiliation with Major League Baseball.[106]
The plaintiffs, representatives and affiliates Cangregjeros de Santurce Baseball Club, LLC (“Cangregjeros”), asserted a number of claims under the Sherman Act against a number of defendants, including the Liga de Béisbol Profesional de Puerto Rico (the territory’s top professional baseball league) (“Liga de Béisbol”) and other fellow Liga de Béisbol members.[107] According to the plaintiffs, the defendants had conspired to stifle Cangregjeros from improving their roster and investing in the organization, including by wresting control of the team from its former owner (Thomas J. Axon).[108] The defendants moved to dismiss the complaint on a number of grounds, including that the Supreme Court’s decision in Federal Baseball Club, Inc. v. National League of Professional Baseball Clubs exempted the “business of baseball” from antitrust scrutiny.[109]
In seeking to preserve their antitrust claims, the plaintiffs styled the rule as the “MLB” exemption and emphasized that courts had only ever applied it to the MLB and its minor league affiliates.[110] But Judge William Young (a District of Massachusetts judge sitting by designation) highlighted that, in each of its prior articulations and examinations of the exemption, the Supreme Court had alluded to the exemption of “professional baseball” from antirust laws.[111] Because Cangregjeros is a professional baseball team; the Liga de Béisbol a professional baseball league; and the “conspiracy” forming the basis of plaintiffs’ suit emmeshed within the “business of baseball,” Judge Young held that the baseball exemption barred Plaintiffs’ antitrust claims, irrespective of any ties (or lack thereof) between the Liga de Béisbol and Major League Baseball.[112]
The plaintiffs appealed the district court’s decision to United States Court of Appeals for the First Circuit.
Nostalgic Partners, LLC v. Office of the Commissioner of Baseball, No. 22-2859, 2023 WL 4072836 (2nd Cir. June 20, 2023).
In another case centering on the application of the longstanding baseball antitrust exemption, the United States Court of Appeals for the Second Circuit affirmed the dismissal of Sherman Act claims brought by three minor league baseball franchises against Major League Baseball.[113]
In 2020, MLB reorganized its minor leagues and severed several minor league teams’ affiliations with major league franchises.[114] Three of these minor league teams—the Staten Island Yankees, Norwich Sea Unicorns, and the Tri-City ValleyCats—contended that the reorganization constituted an illegal restraint of trade.[115]
Citing the exemption from antitrust scrutiny first articulated in Federal Baseball Club, Inc. v. National League of Professional Baseball Clubs, the Second Circuit dismissed the suit on the basis that it “must continue to apply Supreme Court precedent unless and until it is overruled by the Supreme Court.”[116] The court further declined the parties’ invitation to opine on other, non-dispositive issues.[117]
In the denouement of a convoluted, decade-long dispute, the Court of Appeals for New York confirmed an arbitration award fixing the telecast fees owed by the regional Mid-Atlantic Sports Network (“MASN”) to the Baltimore Orioles and Washington Nationals for the right to have broadcasted their games from 2012 to 2016.[118]
Upon relocating to Washington, D.C. in 2005, the Nationals (formerly the Montreal Expos) agreed with the Baltimore Orioles to create MASN as the regional broadcaster for both teams.[119] Under the parties’ original agreement, and in an effort to compensate Baltimore for the arrival of a regional competitor, the Orioles assumed a 90 percent interest in MASN and the Nationals 10 percent, with their respective stakes set to gradually move toward the middle so that the Orioles will be a 67 percent owner (and the Nationals a 33 percent owner) by 2032.[120] The agreement further required MASN to pay the Orioles and Nationals equal annual fees for the rights to televise their respective games.[121] When it came time for the parties to negotiate the amount of that fee for the period between 2012 to 2016, the parties failed to reach an agreement.[122] Although the Nationals sought to maximize the telecast fees, the Orioles (as MASN’s majority owner) advocated for lower fees to maximize MASN’s (and hence its own) profits.[123]
Pursuant to the parties’ 2005 agreement, MASN, the Orioles, and the Nationals agreed to arbitrate their dispute before the Revenue Sharing Definitions Committee (“RSDC”), a standing committee with representatives from three other MLB franchises.[124] After the Orioles and Nationals presented competing valuations of a fair market fee, the RSDC set the fee at $53 million in 2012 and rising $3 million per year to $67 million in 2016.[125] However, the Orioles and MASN filed a motion to vacate the award on at least here grounds: (1) that the RSDC failed to properly disclose that Proskauer Rose LLP, the Nationals’ counsel, represented the MLB and RSDC member teams in concurrent unrelated matters; (2) that the MLB had an impermissible stake in the process after advancing $25 million to the Nationals that it could recoup in the event the Nationals received a favorable fee determination and (3) that the MLB improperly controlled the arbitration process.[126] A New York court vacated the award based on Proskauer’s concurrent representation but specifically denied that the other two bases cited by the Orioles and MASN demonstrated “partiality” by the RSDC.[127]
After the Nationals agreed to repay the $25 million advance to the MLB, the parties then participated in a second arbitration before the RSDC.[128] After this arbitration, the RSDC issued an opinion setting the average annual fee from 2012 to 2016 at about $59.3 million.[129] Again, the Orioles and MASN challenged the award based on RSDC’s alleged partiality.[130] They argued that (1) the agreement for the Nationals to repay the advance was an incentive for the RSDC to not recuse itself; (2) the RSDC failed to disclose its communications with the MLB; and (3) that commissioner Rob Manfred had made a series of public comments demonstrating bias.[131]
Like the lower courts, the Court of Appeals refused to vacate the second arbitration award based on RSDC’s participation.[132] The court further held that the Orioles and MASN had failed to demonstrate by “clear and convincing evidence” that the RSDC exhibited evident partiality in making its award, finding no evidence that the repayment of the $25 million advance, MLB’s communications with the RSDC, or Manfred’s comments reflected improper bias.[133] The Court of Appeals did, however, hold that the lower court had erred in awarding the Nationals a money judgment and pre-judgment interest, as such actions exceeded the authority granted to the RSDC via the original 2005 agreement between the Orioles and Nationals.[134]
A few months after the court’s decision, MASN agreed to pay the Orioles and Nationals approximately $100 million each to settle the dispute over fees from 2012 to 2016.[135] The teams and network later agreed on fees for the 2017 to 2021 seasons, forestalling another round of protracted litigation.[136]
§ 5.6. Part V – NBA
New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.).
The New York Knicks escalated their rivalry with the Atlantic Division counterpart Toronto Raptors in a different kind of court in August 2023, suing the Raptors, head coach Darko Rajaković, and other Raptors employees for misappropriation of the Knicks’ proprietary information.[137]
According to the Knicks, the Raptors directed a former Knicks employee, Ikechukwu Azotam, to funnel insider information about the Knicks organization to his personal Gmail account before accepting an offer to join the Raptors in 2023.[138] The Knicks asserted claims for violation of the federal Computer Fraud and Abuse Act (“CFAA”); the federal Defend Trade Secrets Act (“DTSA”); misappropriation of trade secrets in violation of New York law; breach of contract; tortious interference; conversion; unfair competition; and unjust enrichment.[139]
In response, the Raptors characterized the lawsuit as a “baseless … public relations stunt” and moved to dismiss or stay the case in favor of arbitration with the NBA.[140] Citing the broad language of the NBA Constitution’s Arbitration Clause, the Raptors argued that NBA Commissioner Adam Silver had exclusive jurisdiction over the dispute and that the dispute was, in fact, arbitrable.[141]
The Knicks’ opposition, by contrast, characterized the NBA Constitution’s arbitration clause as impermissibly overbroad and spurned the notion that a multi-party dispute centered on alleged intellectual property theft was arbitrable.[142] The Knicks further emphasized that the NBA Constitution supplied no basis for the arbitration of the Knicks’ claims against individual defendants such as Rajaković and Azotam.[143] In their reply, the Raptors-affiliated defendants signaled that they would pursue potential counterclaims for defamation upon the determination of the proper forum for the dispute.[144]
As of the writing of this article, the Knicks’ claims remain pending before Judge Jessica G.L. Clarke. While the parties remained embroiled in litigation, the Knicks and Raptors executed a trade that sent O.G. Anunouby and others to the Knicks in exchange for R.J. Barrett, Immanuel Quickley, and other compensation.[145]
Hoops, LP v. Commissioner of Internal Revenue, 77 F.4th 557 (7th Cir. August 9, 2023).
A federal appellate court upheld the denial of a $10.7 million deduction that the former majority shareholder of the Memphis Grizzlies, Hoops LP, attempted to claim based on deferred compensation owed to former stalwarts Mike Conley Jr. and Zach Randolph.[146]
Hoops LP sold its stake in the Grizzlies in 2012.[147] At the time, the Grizzlies owed Conley and Randolph $12.6 million in deferred compensation accrued during their (successful) 2009–2011 seasons.[148] As part of the sale of the team, the buyer (Memphis Basketball, LLC) agreed to assume the liability for the still unpaid deferred compensation.[149] In subsequently reporting the details of the sale to the IRS, Hoops LP requested a $10.7 million deduction, taking the position that the deferred compensation was a “deemed payment” reflected in the ultimate sales price.[150] The IRS and tax court disagreed, disallowing the deduction.[151]
Hoops LP did not dispute that, in the absence of the sale, its failure to pay the deferred compensation would have precluded Hoops LP from claiming a deduction under 23 U.S.C. § 404(a)(5).[152] The U.S. Court of Appeals for the Seventh Circuit accordingly identified the following question as dispositive: “Did Hoops’s sale, and Memphis Basketball’s assumption of its liability, change the tax treatment of the $10.7 million in deferred compensation under the otherwise clear rule Congress supplied in § 404(a)(5)?”[153] Hoops LP argued that the assumption of liability by Memphis Basketball allowed Hoops to accelerate the deduction irrespective of its failure to actually pay Conley and Randolph the money owed.[154] Like the lower courts, however, the Seventh Circuit was unpersuaded.[155] Focusing on the “substance of what transpired”—namely, Hoops LP’s nonpayment of owed compensation to Conley and Randolph—the court held that the plan text of § 404(a)(5) precluded Hoops LP from claiming the $10.7 million deduction.[156]
§ 5.7. Part VI – Golf
§ 5.7.1. LIV, PGA Merge, Settle Dispute
The PGA Tour, the DP World Tour, and upstart LIV Golf agreed in principle to a watershed merger in the summer of 2023, resolving pending litigation and irrevocably altering the landscape of top-tier professional golf.[157]
Bankrolled by the Saudi-funded Public Investment Fund, LIV emerged in 2022 as a counterpart to the PGA Tour, with differentiating features such as 54-hole tournaments (instead of the customary 72); a season-long team competition; and the permissibility of wearing shorts. After the PGA Tour banned players signing contracts with LIV from competing in PGA Tour events, several prominent players such as Phil Mickelson, Bryson Dechambeau, and Patrick Reed sued the PGA Tour for illegally restricting their right to compete in violation of antitrust law.[158] The PGA Tour countered by alleging that LIV tortiously induced prominent players to defect and thereby breach their contracts with the PGA.[159] The PGA Tour won an early, preliminary victory in August 2022 when Judge Beth Labson Freeman of the Northern District of California denied a request from three LIV players for a temporary restraining order reinstating them as PGA Tour members.[160]
Ultimately, after nearly a year of squabbling in court and in the media, the rival leagues decided to join forces. The parties agreed that the PGA Tour would hold a permanent controlling interest in the new, combined entity’s board of directors.[161]Although the tours initially set a deadline of December 31, 2023, to trigger a formal merger, they agreed to extend that deadline into 2024.[162]
After the tentative deal was announced, the New York Times moved to unseal documents filed into the record during the litigation.[163] Judge Freeman found that LIV Golf demonstrated good cause for maintaining the vast majority of the documents under seal, given their disclosure of information regarding LIV Golf’s formation, strategic plans, internal financials, and other proprietary information.[164]
Nicklaus v. Milstein, No. 23-CV-80764-ROSENBERG, 2023 WL 4930317 (S.D. Fl. Aug. 1, 2023).
Legendary golfer Jack Nicklaus has an all-time record 18 major championships and hundreds of millions of dollars in net worth. Per a recent decision in the U.S. District Court for the Southern District of Florida, however, there’s still something Nicklaus lacks: the right to use and profit from the name “Jack Nicklaus.”[165]
In 1994, Nicklaus granted Howard Milstein the “non-exclusive right to use and register Mr. Nicklaus’ name, likeness, signature, and nicknames in connection with goods and services” in exchange for $145 million.[166] In his Southern District of Florida lawsuit, Nicklaus accused Milstein and other related defendants of improperly using the Jack Nicklaus name to the detriment of Nicklaus himself.[167] The defendants, however, had already filed suit in New York County Supreme Court and even obtained a preliminary injunction precluding Nicklaus form using the intellectual property Milstein obtained nearly 30 years prior.[168] Accordingly, the defendants moved to dismiss the Florida suit in accordance with the United States Supreme Court’s decision in Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456 (1939), which mandates that, when two in rem or quasi in rem suits regarding the same property are pending in different courts, “the jurisdiction of the one court must yield to that of the other.”[169]
Judge Rosenberg deemed the Princess Lida doctrine squarely applicable to Nicklaus’ second-filed suit.[170] Because the doctrine governs disputes over intellectual property; both suits “would necessarily involve the adjudication of the right to use, or the exclusive or non-exclusive right to use” the property in question; and the New York court had already granted injunctive relief, the Florida district court deferred to the New York court.[171] Judge Rosenberg further remanded the matter to Florida state court, as complete diversity did not exist between the parties and Nicklaus’ remaining claims sounded in state law.[172]
Part VII – Sports Business/Media
Brandr Group, LLC v. Electronic Arts Inc., No. 23-CV-02994-HSG, 2023 WL 4297571 (N.D. Cal. June 30, 2023).
The Brandr Group (“Brandr”) agreed to dismiss its lawsuit against Electronic Arts (“EA”) in 2023, paving the way for EA to release its first college football video game in more than a decade.[173]
A self-styled leader in “collegiate group licensing” for Name, Image, and Likeness (“NIL”) compensation, Brandr claimed to have entered exclusive group licensing arrangements with dozens of colleges and their football players.[174] Although EA initially contemplated collaborating with Brandr to arrange for group licensing NIL deals for the use of schools’ and players’ likenesses in a college football game, EA opted to negotiate individually with schools, on the one hand, and individual student-athletes, on the other.[175] Brandr filed suit, asserting that EA must negotiate through Brandr to use the NIL of three or more student-athletes from one specific sport for schools that had entered group licensing arrangements with Brandr.[176]
Judge Haywood S. Gilliam, Jr. of the U.S. District Court for the Northern District of California denied Brandr’s request for a temporary restraining order—including on the basis that Brandr was unlikely to prevail on the merits of its ultimate claim.[177] Although Brandr’s contracts with schools ostensibly named Brandr the exclusive agent for group licensing deals involving the schools and their respective players, the agreements did not require Brandr’s participation in separate NIL arrangements involving the schools and individual student-athletes.[178] Indeed, Brandr’s agreements with students specifically provided that they did “NOT limit an Athlete’s right to grant the use of his/her individual Athlete Attributes or individual NIL for publicity, advertising, or other commercial purposes.”[179] Because EA had resolved to reach separate agreements with each school and football player it wished to appear in the game, the court determined that Brandr’s claims were unlikely to succeed.[180]
A few months after Brandr dismissed its suit, EA released a teaser trailer for its “EA College Football 25” video game.[181] The game is slated for release in summer 2024.[182]
Panini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.); Fanatics Collectibles Topco, Inc. v. Panini S.P.A., No. 1:23-cv-09714-JHR (S.D.N.Y.).
Two titans of the trading card industry dragged their rivalry into the courtroom in 2023, with Panini and Fanatics suing each other in federal court.[183]
Upstart Fanatics has consolidated its power in the sports tradeable industry in recent years, purchasing card maker Topps in 2022 and winning the exclusive rights to produce cards for the NBA and NFL.[184] Based largely on these developments, Panini—the longtime industry pace-setter—sued Fanatics on August 3, 2023 for attempting to monopolize the trading card market in contravention of antitrust law.[185] Panini’s operative, amended complaint seeks permanent injunctive relief and assert claims under the Sherman and Clayton Acts; for tortious interference with contract and with Panini’s prospective business; and for business defamation and disparagement.[186] Fanatics moved to dismiss Panini’s suit, framing its growing market power as the result of fair competition rather than illegal, anticompetitive behavior and denying that Panini had suffered an actionable antitrust injury.[187] In response, Panini complained of suffering “the very real injury of being foreclosed from the relevant market” for up to 20 years and insisted that its amended complaint asserted actionable antitrust claims.[188]
Just days after Panini filed suit, Fanatics filed its own complaint in a separate (later deemed related) action in the Southern District of New York.[189] Casting itself as the “innovative disruptor” pitted against the “stagnant, long-time incumbent,” Fanatics accused Panini of a “protracted, unlawful and deceitful campaign” to stifle Fanatics’ market ascension.[190] Panini characterized the Fanatics suit as a “public relations ploy intended to blunt the impact of Panini’s first-filed action” and denied that Fanatics had plausibly alleged any cause of action.[191] Fanatics responded by amending its complaint, which Panini has indicated it will again move to dismiss.[192]
As of the writing of this article, both parties’ suits against each other remain pending.
Fusion Elite All Stars, et al. v. Varsity Brands, LLC, et al., No. 2:20-cv-2600 (W.D. Tenn. Mar. 24, 2023).
Varsity Brands, LLC and its affiliates (“Varsity”) agreed to pay $43.5 million to settle a class-action arising out of its allegedly anticompetitive, monopolistic behavior in the national “All-Star” cheerleading event industry.[193]
The plaintiffs’ class consisted of gyms and spectators who had paid fees to Varsity over the years to host and/or participate in Varsity-run All-Star Cheerleading events.[194] These “direct purchaser” plaintiffs alleged that Varsity, in conjunction with U.S. All-Star Federation, Inc. (“USASF”), conspired to obtain monopoly power and impose exclusionary contracts and “loyalty programs” on the plaintiffs and charge artificially exorbitant prices.[195] In turn, Varsity and USASF argued that applicable statutes of limitation barred many of Plaintiffs’ claims and that their actions were legal and procompetitive.[196] The parties ultimately agreed that the $43.5 million settlement was fair to both parties and adequately compensated the plaintiffs.[197] The court approved the settlement on October 5, 2023.[198]
Adidas Am. Inc. et al. v. Thom Browne Inc., No. 1:21CV05615, 2023 WL 8642074 (S.D.N.Y. Jan. 12, 2023).
Thom Browne prevailed in litigation with Adidas, after a federal jury found that the fashion mogul’s four stripe design did not infringe on any of the sportswear company’s trademarks.[199]
In 2021, Adidas asserted that Browne’s “four bar” and “grosgrain” designs were confusingly similar to the famous Adidas three-stripe design.[200] Browne contended that his designs had become “brand identifiers” and denied that he or his company devised either the four-bar or grosgrain designs in an attempt to pass off their goods as Adidas goods.[201] In addition, Browne adduced evidence that Addias had complained to Browne in 2007 about previous “three-bar” designs but made no complaints whatsoever from 2009—when Browne introduced his four-stripe design—and 2018.[202] After less than three hours of deliberation, the jury found in favor of Browne and his company and entered a $0 verdict.[203]
Sage Steele v. ESPN Productions, Inc. et al., HHD-CV-22-6154934-S (Conn. Sup Ct.).
Sage Steele and ESPN agreed to settle the SportsCenter anchor’s lawsuit against the channel in 2023, whereupon Steele announced her departure from the company where she had worked since 2007.[204]
On a September 2021 appearance on the “Uncut with Jay Cutler” podcast, Steele called ESPN’s requirement that employees receive the COVID-19 vaccine “sick” and “scary” and indicated that she had gotten the vaccine in spite of personal objections to maintain her employment.[205] Among other comments, Steele also discussed interactions between female reports and male athletes and President Barack Obama’s identification as a black man.[206] In response to controversy generated by Steele’s podcast appearance, ESPN took Steele off the air for approximately 10 days in October 2021.[207] Steele subsequently sued ESPN in 2022, arguing that the company had disciplined her for constitutionally protected speech and breached her employment contract.[208]
Although ESPN had formerly offered to settle Steele’s claims for $500,000, the terms of the ultimate settlement between the parties were not disclosed.[209] ESPN offered no comment on the settlement other than to confirm Steele’s departure from the network and thank her for her contributions.[210]
Atlantic Coast Conference v. Board of Trustees of Florida State University (Case No. 23-cv-040918, Mecklenberg County, N.C., December 21, 2023) (hereinafter “ACC Complaint”); Florida State University Board of Trustees v. Atlantic Coast Conference (Fla. 2nd Cir. Ct., December 22, 2023) (hereinafter “FSU Complaint”) (complaint available at https://news.fsu.edu/wp-content/uploads/2023/12/12.22.2023-Final-Complaint-4.pdf). ↑
The University of Texas and University of Oklahoma eventually agreed to compensate the Big XII Conference to depart for the Southeastern Conference in 2024, after initially announcing that they would move to the SEC in 2025 upon the expiration of their grant of rights to the Big XII. ↑
See Case No. 102562-9, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Nov. 28, 2023) (Ruling Granting Emergency Motion to Stay). ↑
See Case No. 23-2-00273-38, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Sup. Ct. Sept. 11, 2023) (Order Granting for Temporary Restraining Order). ↑
See Case No. 23-2-00273-38, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Sup. Ct. Sept. 11, 2023) (Order Granting for Temporary Restraining Order). ↑
See Case No. 23-2-00273-38, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Sup. Ct. Sept. 11, 2023) (Order Granting for Temporary Restraining Order). ↑
See Case No. 102562-9, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Nov. 28, 2023) (Ruling Granting Emergency Motion to Stay). ↑
See Case No. 102562-9, Washington State University, et al. v. The Pac-12 Conference et al. (Wash. Dec. 15, 2023) (Order Denying Review). ↑
Case C-333/21, European Superleague Companyv. Federation Internationale de Football Association (FIFA) et al. (Court of Justice of the European Union, December 21, 2023). ↑
Id. at ¶ 50; Press Release No. 203/23, The FIFA and UEFA rules on prior approval of interclub football competitions, such as the Super League, are contrary to EU law, Court of Justice of the European Union (Dec. 21, 2023). ↑
Cangrejeros de Santurce Baseball Club, LLC v. Liga de Beisbol Profesional de Puerto Rico, Inc., No. CV 3:22-01341-WGY, 2023 WL 4195663 (D.P.R. June 27, 2023). ↑
Cangrejeros de Santurce Baseball Club, LLC, 2023 WL 4195663, at *2. ↑
See id. (citing Federal Baseball Club v. National League, 259 U.S. 200, 42 S.Ct. 465, 66 L.Ed. 898 (1922); Toolson v. New York Yankees, Inc., 346 U.S. 356, 74 S.Ct. 78, 98 L.Ed. 64 (1953) ….” Flood v. Kuhn, 407 U.S. 258, 92 S.Ct. 2099, 32 L.Ed.2d 728 (1972)) (emphasis in original). ↑
See Cangrejeros de Santurce Baseball Club, LLC, 2023 WL 4195663, at *7. Judge Young dismissed plaintiffs’ remaining civil rights claims on different grounds. See id. at *7–10. ↑
Nostalgic Partners, LLC v. Office of the Commissioner of Baseball, No. 22-2859, 2023 WL 4072836 (2nd Cir. June 20, 2023). ↑
Nostalgic Partners, LLC, 2023 WL 4072836, at *1. ↑
New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.) ↑
New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.), R. Doc. 1 (Complaint) at ¶¶ 1–14. ↑
See New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.), R. Doc. 22 (Memorandum of Law in Support of Motion to Dismiss). ↑
See New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.), R. Doc. 35 (Memorandum of Law in Opposition of Motion to Dismiss). ↑
See New York Knicks, LLC v. Maple Leaf Sports & Ent. Limited. d/b/a Toronto Raptors et al., No. 1:23-cv-07394-JGLC (S.D.N.Y.), R. Doc. 40 (Reply Memorandum of Law in Support of Motion to Dismiss). ↑
Panini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.); Fanatics Collectibles Topco, Inc. v. Panini S.P.A., No. 1:23-cv-09714-JHR (S.D.N.Y.). ↑
Panini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.), R. Doc. 1 (Complaint). Panini initially sued Fanatics in the Middle District of Florida before the case was transferred to the Southern District of New York. ↑
SeePanini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.), R. Doc. 69 (Amended Complaint). ↑
SeePanini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.), R. Doc. 100 (Motion to Dismiss Amended Complaint). ↑
SeePanini America, Inc. v. Fanatics Inc., et al., No. 1:23-CV-09714 (S.D.N.Y.), R. Doc. 100 (Memorandum in Opposition to Motion to Dismiss Amended Complaint). ↑
Fanatics Collectibles Topco, Inc. v. Panini S.P.A., No. 1:23-cv-09714-JHR (S.D.N.Y.), R. Doc. 1 (Complaint). ↑
Fanatics Collectibles Topco, Inc. v. Panini S.P.A., No. 1:23-cv-09714-JHR (S.D.N.Y.), R. Doc. 35 (Motion to Dismiss Complaint). ↑
See Fanatics Collectibles Topco, Inc. v. Panini S.P.A., No. 1:23-cv-09714-JHR (S.D.N.Y.), R. Doc. 39 (Amended Complaint), R. Doc. 42 (order setting briefing schedule for amended complaint). ↑
Fusion Elite All Stars, et al. v. Varsity Brands, LLC, et al., No. 2:20-cv-2600 (W.D. Tenn. Mar. 24, 2023). ↑
See Fusion Elite All Stars, et al. v. Varsity Brands, LLC, et al., No. 2:20-cv-2600 (W.D. Tenn. Mar. 24, 2023), R. Doc. 329-1 (Memorandum in Support of Confirming Settlement), at 1. ↑
Fusion Elite All Stars, et al. v. Varsity Brands, LLC, et al., No. 2:20-cv-2600 (W.D. Tenn. Mar. 24, 2023), R. Doc. 350 (Order Granting Final Approval of Settlement). ↑
adidas Am. Inc. et al. v. Thom Browne Inc., No. 1:21CV05615, 2023 WL 8642074 (S.D.N.Y. Jan. 12, 2023). ↑
Snell & Wilmer L.L.P. One East Washington Street, Suite 2700 Phoenix, AZ 85004-2556 (602) 382-6529 [email protected] www.swlaw.com
§ 7.1. Tribal Litigation & the Third Sovereign
We have been writing this annual update of cases relevant to tribal litigation for many years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citation to most relevant circuit and even district court cases in every volume. To target primarily those cases decided within the last year, this chapter focuses on cases decided between October 1, 2022 – October 1, 2023. The chapter begins with a Supreme Court overview and then is structured around sovereigns—Indian Tribes, the United States, and the fifty sister States.
Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.[2] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.[3] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the United States’ president or a state’s governor) and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from their reservations or under tribal law.[4]
Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.[5] Thus, state laws generally “have no force” in Indian Country.[6] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”[7]
This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,[8] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.
§ 7.2. Indian Law & the Supreme Court
§ 7.2.1. The 2022–2023 Term
The U.S. Supreme Court hears an average of between two and three new Indian law cases every year.[9] During the 2022–2023 term, the Supreme Court decided three Indian law cases.[10]
Arizona v. Navajo Nation, 599 U.S. 555 (2023). The U.S. Supreme Court held that the 1868 peace treaty between the United States and the Navajo Tribe (the “Tribe”), which established the Navajo Reservation and reserved necessary water to accomplish the purpose of the Navajo Reservation, did not require the United States to take affirmative steps to secure water for the Tribe.
In Arizona v. Navajo Nation, the Tribe asserted a breach-of-trust claim against the United States, alleging the 1868 treaty imposed a duty on the United States to take affirmative steps to secure water for the Tribe. In rejecting the Tribe’s argument, the Supreme Court explained that to maintain such a claim, the Tribe needed to prove, among other things, that the text of the 1868 treaty imposed such a duty on the United States, as the Federal Government owes judicially enforceable duties to a tribe “‘only to the extent it expressly accepts those responsibilities.’”[11] The Supreme Court reasoned that while the 1868 treaty did impose a number of specific duties on the United States, it did not contain language imposing a duty on the United States to take affirmative steps to secure water for the Tribe.
The Supreme Court clarified that the United States indeed maintains a general trust relationship with Indian tribes but explained that unless Congress created a conventional trust relationship with a tribe as to a particular trust asset, it would not “‘apply common-law trust principles’” to infer duties not found in the text of the 1868 treaty.[12] In turn, the Supreme Court further explained that nothing in the 1868 treaty established a conventional trust relationship with respect to water.
Haaland v. Brackeen, 599 U.S. 255, 143 S. Ct. 1609 (2023). The U.S. Supreme Court upheld the constitutionality of the Indian Child Welfare Act (“ICWA” and/or “the Act”), a federal statute that aims to keep Indian children connected to Indian families.
This case arose from three separate child custody proceedings involving ICWA, which governs state court adoption and foster care proceedings when Indian children are involved. ICWA requires, among other things, the placement of Indian children according to the Act’s hierarchical preferences, unless state courts find good cause to depart from such preferences. Under these preferences, Indian families or institutions from any tribe outrank unrelated non-Indians or non-Indian institutions. And with involuntary proceedings, ICWA requires that the Indian child’s parent or custodian and tribe be given notice of any custody proceedings, as well as the right to intervene.
Petitioners here were a birth mother, foster and adoptive parents, and the State of Texas, filing suit in federal court against the United States and other federal parties. Petitioners argued ICWA was unconstitutional on multiple grounds, raising three general issues: (1) that Congress lacked the authority to enact ICWA, (2) anticommandeering, and (3) equal protection.
As to the first and second issues, the Supreme Court held that ICWA did not exceed Congress’ plenary authority to effectuate nor did ICWA violate “commandeering” concerns by requiring states to follow federal law. The majority’s opinion relied on a “long line of cases,” in which the Supreme Court had previously characterized Congress’ power to legislate with respect to the Indian tribes as plenary and exclusive. The majority further stated that the U.S. Constitution’s Indian Commerce and Treaty clauses authorized Congress to deal with matters relating to Indian affairs. The Supreme Court rejected Petitioners’ argument that ICWA violated the Tenth Amendment’s anticommandeering principle, where they asserted ICWA impermissibly mandated states to follow federal requirements as concerned active efforts, notice and expert testimony requirements, hierarchical placement preferences, and recordkeeping requirements. The majority relied on several cases backing its conclusion that because legislation like ICWA applied “evenhandedly” to state and private actors, such legislation did not, generally, implicate the Tenth Amendment. Related to the recordkeeping requirement specifically, the Supreme Court, relying on Printz v. United States, 521 U.S. 898 (1997), concluded that Congress could impose ancillary recordkeeping requirements related to state-court proceedings without violating the Tenth Amendment.
As to the third issue, the Supreme Court did not rule on the merits of Petitioners’ equal protection argument. The Supreme Court found that Petitioners lacked standing to raise such a claim because the lawsuit failed to involve state officials who actually implemented ICWA’s statutory requirements.
Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). The U.S. Supreme Court held that the U.S. Bankruptcy Code (the “Code”) unequivocally abrogated the sovereign immunity of all governments, including federally recognized Indian tribes.
Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the “Band”) is a federally recognized Tribe that wholly owned several business entities. Lendgreen, one of the Band’s businesses, extended respondent Brian Coughlin (“Coughlin”) a payday loan. But shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, which triggered an automatic stay under the Code against further collection efforts by Coughlin’s creditors. Still, Lendgreen allegedly continued to attempt to collect Coughlin’s debt. Coughlin subsequently filed a motion in Bankruptcy Court to enforce the stay and recover damages for emotional distress. The Band moved to dismiss, arguing the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding because the Band and its subsidiaries enjoyed tribal sovereign immunity from suit.
The Bankruptcy Court dismissed Coughlin’s suit on tribal sovereignty grounds. The First Circuit reversed the judgment, holding that the Bankruptcy Code “stripp[ed] tribes of their immunity.”
The Supreme Court stated that it would not find an abrogation of sovereign immunity unless Congress had conveyed its intent to abrogate in “unequivocal terms.” Two provisions of the “the Code” were relevant to the suit. The first was 11 U.S.C. § 106(a), which stated: “Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section.” The section also set forth a list of Code provisions to which abrogation applied and included a provision governing automatic stays. The second relevant provision, 11 U.S.C. § 101(27), defined “governmental unit” as used in the Code. The provision stated that a “governmental unit” meant, among other things, “a foreign state,” or “other foreign or domestic government[s].” The overarching question was whether the abrogation provision in § 106(a), taken with the definition of “governmental unit” in § 101(27), unambiguously abrogated the sovereign immunity of federally recognized tribes.
The Supreme Court found that several features of the provisions’ text and structure led to the conclusion that the Code “unequivocally” abrogated the sovereign immunity of any and every government that possessed the power to assert such an immunity. The Court stated that the definition of “governmental unit” exuded comprehensiveness by including a long list of governments along with their subdivisions and components. Additionally, the Court considered the inclusion of “foreign or domestic” to be a “catchall phrase.” The Court found that by including these terms, Congress unmistakably intended to cover all governments in § 101(27)’s definition, whatever their location, nature, or type. The Supreme Court also found it significant that the abrogation of sovereign immunity in § 106(a) plainly applied to all “governmental unit[s],” rather than excluding certain governments.
The Supreme Court further added that other aspects of the Code reinforced what § 106(a) and § 101(27) conveyed. For example, the Code called for an “orderly and centralized” debt resolution process, which the Supreme Court found swept broadly and generally applied to all creditors. The Supreme Court also found that courts may enforce the provisions against any kind of noncompliance creditor whether or not the creditor was a “governmental unit.” The Court also noted that the Code provided a number of limited exceptions so as to avoid impeding the functioning of governmental entities when they act as creditors. The Court stated that an exclusive reading of the provisions would cause some government entities to be immune from key enforcement provisions while others would face consequences for noncompliance. Based on the provisions contained in the Code, the Supreme Court found no indication that Congress meant to categorically exclude certain governments from these provisions’ enforcement mechanisms and exceptions, let alone in such an anomalous manner.
Concluding that all government creditors were subject to abrogation under the Code forced the Court to answer the question of whether federally recognized tribes qualified as governments. The Court stated that federally recognized tribes exercised uniquely governmental functions, and Congress, along with the Supreme Court, had repeatedly characterized federally recognized tribes as governments. Overall, the Court concluded that the Code “unequivocally abrogate[d] the sovereign immunity of all governments, categorically.” Anda since tribes “are indisputably governments,” the Supreme Court concluded that § 106(a) unmistakably abrogated their sovereign immunity, too.
The Band attempted to argue that because tribes were not mentioned in the provisions by name, Congress did not intend to abrogate tribal sovereign immunity. The Supreme Court, however, explained that Congress did not have to include a specific reference to federally recognized tribes in order to make its intention clear. The Band further argued that the “catchall phrase” could be read to preserve immunity and noted that Congress had historically treated various types of governments differently for purposes of bankruptcy law. Neither of these arguments persuaded the Supreme Court to reach a different conclusion.
Justice Thomas wrote a concurring opinion, stating that the Band lacked sovereign immunity regardless of the Code because Coughlin’s motion arose from the Band’s off-reservation commercial conduct. Justice Gorsuch wrote a dissenting opinion, stating that Congress did not “unequivocally express” its intent to abrogate sovereign immunity because the Code did not expressly mention federally recognized tribes.
§ 7.2.2. Preview of the 2023–2024 Term
As of January 6, 2024, the Supreme Court granted certiorari in one Indian law case for the 2023–2024 term, with three more petitions for certiorari pending. If any new cases are granted and decided, they will be included in next year’s volume.
§ 7.3. The Tribal Sovereign
§ 7.3.1. Tribal Courts
More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.
While tribal courts are similar in structure to other courts in the United States, the approximately 400 Indian courts and justice systems currently functioning throughout the country are unique in many significant ways.[13] It cannot be overemphasized that every tribal court is different and distinct from the next.[14] For example, the qualifications of tribal court judges vary widely depending on the court.[15] Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.[16] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.
Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo Nation has its own bar exam that tests knowledge of Navajo tribal law as well as other requirements.[17]
Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.
Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;[18] and (2) whether the dispute occurred in Indian Country,[19] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member or fee lands within the boundaries of an Indian reservation.[20] These two highly complex issues should be analyzed first in any tribal business dispute.
In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.[21] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.[22] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.[23]
In the “path-making” decision of Montana v. United States,[24] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”[25] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”[26]
These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.[27] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”[28] These exceptions have become known as the “Montana rule.”
There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights those most relevant.[29]
Turpen v. Muckleshoot Tribal Ct., No. C22-0496-JCC, 2023 WL 4492250 (W.D. Wash. July 12, 2023). The court in Turpen held that a tribal court has jurisdiction over a marital dissolution between a tribal member and a non-member who consents to numerous tribal contacts. In May 2014, Katherine Arquette Turpen (“Ms. Turpen”), an enrolled member of the Muckleshoot Indian Tribe (the “Tribe”), married David William Turpen (“David William”). The couple was married in King County, which is outside the bounds of the Muckleshoot Indian Reservation (“Reservation”). David William was a non-member of the Tribe, but he did serve as a tribal employee from 2005 to 2018. Prior to the marriage, the couple lived together on the Reservation in a home leased to Ms. Turpen by the Muckleshoot Housing Authority. After marrying, the couple purchased a home outside the Reservation in Auburn, Washington. The couple received substantial financial assistance from the Tribe for the home purchase. On March 16, 2021, Ms. Turpen filed a petition for dissolution of marriage with David William in Muckleshoot Tribal Court (the “Tribal Court”). David William filed a response to the dissolution petition, challenging the Tribal Court’s jurisdiction over the matter.
The court determined that Montana v. United States’[30] first exception governed the dispute because David William, a non-member of the Tribe, entered into a consensual relationship with the Tribe or its members through commercial dealing, contracts, leases, or other arrangements. The court then examined David William’s contacts with the Tribe to determine whether the Tribal Court could exercise jurisdiction over the couple’s dissolution of marriage. Given that David William worked for the Tribe for over ten years, entered into a consensual relationship with Ms. Turpen, lived in a home on the Reservation that the Tribe leased to Ms. Turpen, and received financial assistance from the Tribe for the purchase of a home, the court found it was reasonable for David William to anticipate being subject to tribal jurisdiction over the dissolution of the marriage. Accordingly, the court concluded that the Tribal Court had subject matter jurisdiction to preside over the marital dissolution.
Lexington Ins. Co. v. Mueller, No. 5:22-CV-00015-JWH-KK, 2023 WL 2056041 (C.D. Cal. Feb. 3, 2023). The court in Lexington held that a tribal court has civil jurisdiction over disputes associated with an activity that it has regulatory jurisdiction over. The Cabazon Band of Cahuilla Indians (the “Tribe”) purchased multiple property insurance policies from Lexington Insurance Company (“Lexington”). The Tribe did not purchase the insurance policies from Lexington directly; instead, the Tribe purchased the policies through an agent of Lexington, Alliant Insurance Services, Inc. (“Alliant”). In the course of purchasing the insurance policies, the Tribe never dealt with Lexington employees, and no Lexington employees ever set foot on the Reservation to conduct Lexington company business. Alliant (and not Lexington) processed the Tribe’s submissions for insurance, collected premiums from the Tribe, maintained the Tribe’s underwriting file, and prepared quotes, cover notes, policy documentation, and evidence of insurance for the Tribe.
In 2020, the Tribe submitted an insurance claim to Alliant; shortly thereafter, Alliant transmitted the claim to Lexington. A Lexington claims adjuster investigated the claim and denied the Tribe coverage. In response, the Tribe sued Lexington in the Cabazon Reservation Court (the “Tribal Court”) for breach of contract and violation of the implied covenant of good faith and fair dealing. Lexington responded by challenging the Tribal Court’s jurisdiction over the dispute.
While addressing the jurisdictional issue, the court first determined that it need not conduct a Montana v. United States[31] analysis because the Tribe’s “right to exclude” applied to the dispute. The court thereafter found that the Tribe had regulatory jurisdiction over Lexington because the Tribe’s right to exclude included the right to regulate Lexington’s insurance of tribal entities operating on tribal land. The court rooted this conclusion in the fact that Lexington had conducted activity on tribal land by providing insurance to the Tribe through its agent, Alliant. The court then found that because the Tribe had regulatory jurisdiction over Lexington’s insurance activity, it also possessed civil jurisdiction over disputes associated with that activity. Holding otherwise, the court noted, would allow parties to skirt tribal jurisdiction over activity occurring on tribal land through the use of an agent, and “degrade a tribe’s inherent authority to manage its own affairs.” Based upon these considerations, the court determined that the Tribal Court had jurisdiction over Lexington.
Mille Lacs Band of Ojibwe v. Cnty. of Mille Lacs, No. 17-CV-05155 (SRN/LIB), 2023 WL 146834 (D. Minn. Jan. 10, 2023). The court in Mille Lacs held that the Mille Lacs Band of Ojibwe (the “Band”) possessed the authority to investigate violations of state criminal law by non-members throughout the Band’s reservation land. In 2016, Joseph Walsh, the Mille Lacs County Attorney, issued an Opinion and Protocol (the “Opinion”), addressing the Band’s state law enforcement authority. The Opinion stated that the Band’s police officers could not exercise authority on non-tribal lands, investigate violations of state law on the Band’s reservation, or exercise criminal jurisdiction over non-Indians. Furthermore, the Opinion warned that if the Band’s police officers failed to follow the terms of the Opinion, they would be in violation of state law and subject to arrest by state authorities. The Band challenged the enforceability of these restrictions and filed suit against the County of Mille Lacs.
While addressing the geographic scope of the Band’s inherent law enforcement authority, the court noted that Montana v. United States’ second exception “recognize[d] tribes’ civil authority over the conduct of non-Indians on non-Indian fee lands within a reservation.” Based upon this exception, along with its application in Cooley v. United States,[32] the court found that the Band’s inherent law enforcement authority extended to all lands within its reservation. This authority included the ability to investigate tribal members of suspected violations of federal or state law.
With respect to non-Indians, the court found that Cooley, which was grounded in the second Montana exception, reaffirmed the inherent tribal law enforcement authority to temporarily detain and conduct searches of suspected violators of state and federal law. The court explained that this authority, however, does not allow tribal law enforcement, including the Band’s police officers, to make arrests of such non-Indian suspects. In addition to this limitation, the court noted that the exercise of tribal law enforcement authority is subject to the Indian Civil Rights Act, which protects against unreasonable searches and seizures.[33] Based upon these findings, the court ordered declaratory relief in favor of the Band, concluding that the Band had the authority to investigate suspected violations of state law by non-members on the Band’s reservation land.
Milne v. Hudson, 519 P.3d 511 (Okla. 2022). The court in Milne held that a state district court may issue a civil order that protects a state citizen from violence where both parties to the order are citizens of an Indian Nation and the violent acts occurred within the boundaries of an Indian Nation. Andrea Sue Milne (“Milne”) applied for a civil protection order against Howard Jeffries Hudson (“Hudson”) in the District Court of McIntosh County (the “District Court”). The District Court thereafter entered a civil protection order against Hudson, which Hudson objected to on jurisdictional grounds. Hudson argued the District Court had no jurisdiction to enter the order against him because McIntosh County resided within the boundaries of the Muscogee Reservation, Milne was a member of the Muscogee Nation, and Hudson was a member of the Cherokee Nation.
The court, considering Lewis v. Sac and Fox Tribe of Oklahoma Housing Authority,[34] which applied the Montana v. United States[35] test to the question of state jurisdiction over disputes between Indians, determined that to answer the question of whether state courts had jurisdiction where Indian interests are concerned, the court had to first consider whether Congress had explicitly withdrawn state court jurisdiction, or whether the interest infringed on tribal self-governance. After setting forth this framework, the court concluded that Congress had not vested exclusive jurisdiction in Tribal courts in this context. The court based this conclusion on the fact that 18 U.S.C § 2265(e), which authorizes Tribal courts to issue civil protection orders, does not confer exclusive jurisdiction. In the absence of such a restriction, the court determined that concurrent jurisdiction could be exercised.
After determining that Congress had not clearly provided tribal courts with the exclusive jurisdiction to issue civil protection orders, the court considered whether the State’s interest in civil protection orders infringed on tribal self-governance. While conducting its analysis, the court noted that the second Montana[36] exception may permit a tribe to have exclusive civil jurisdiction where conduct threatens a tribe’s “political integrity, economic security, or the health and welfare of its citizens.” However, the court concluded that civil protection orders were different because they are individually tailored and narrowly designed with a single goal in mind—the protection of victims from abuse. Based upon the unique nature of civil protection orders, and the Muscogee Nation and State’s concurrent goal of providing each individual citizen with a swift path to safety, the court determined that the State’s interest in issuing a civil protection order did not impermissibly infringe on tribal self-governance. The court accordingly reaffirmed the District Court’s entrance of the civil protection order against Hudson.
§ 7.3.2. Exhaustion of Tribal Court Review
The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually[37] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.[38] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss[39] or stay[40] the case.
Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.[41] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.[42] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.[43] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”[44] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”[45]
After the tribal court has ruled on the merits of the case[46] and all appellate options have been exhausted,[47] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.[48] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.[49] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.[50]
There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”[51] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”[52] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.[53]
Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.[54]
Archambault v. United States, 641 F. Supp. 3d 636 (D.S.D. 2022). The court in Archambault held that a tribal member must first exhaust tribal court remedies before bringing a cause of action in federal court against tribal police officers. Jacob Archambault, a member of the Rosebud Sioux Tribe (the “Tribe”), was shot and killed during an encounter with two of the Tribe’s police officers on the Rosebud Indian Reservation (the “Reservation”). Jacob’s mother, Charlee Archambault, individually and as a personal representative of Jacob’s estate, filed a four-count complaint in federal court against the officers, individually and in their official capacities, alleging violations of Jacob’s constitutional rights under 42 U.S.C. § 1983 and Bivens v. Six Unknown Fed. Narcotics Agents[55] (referred to as a “Bivens action”). The officers moved to dismiss the claims against them under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).
The court first considered whether the claims against the officers were actually against the Tribe, although not named in the complaint, and therefore barred by sovereign immunity. In addressing this issue, the court explained that a suit against a governmental officer in his official capacity is the same as a suit against the entity of which the officer is an agent. Following this principle, the court concluded that each action alleged against the officers in their official capacities was the same as suing the Tribe and was accordingly barred by the doctrine of sovereign immunity. The court proceeded to discuss whether sovereign immunity also encompassed the claims against the officers in their individual capacities, as they acted on behalf of the Tribe, but determined that it would allow the Rosebud Sioux Tribal Court (the “Tribal Court”) to decide this issue in the first instance.
After determining whether sovereign immunity barred any claims asserted, the court considered whether Charlee, in her complaint, stated a cause of action under § 1983 or Bivens upon which relief could be granted. The court first addressed the various § 1983 claims alleged, explaining that, to state a cause of action under § 1983, one must allege that the defendant(s) acted under the “color of state law.” Because Tribes and their officers are generally not considered state actors, and Charlee did not allege any facts upon which the court could find that the officers acted under the color of state law, the court concluded that the § 1983 claims must be dismissed. The court then considered whether Charlee asserted a viable Bivens claim. The court extensively discussed whether a Bivens claim could be asserted, ultimately concluding that, because the claim so deeply touched the sovereign interests of the Tribe, the court had to conduct an analysis regarding whether the case should be stayed to allow the Tribal Court to first consider the issues.
In addressing the stay question, the court determined that the policy interests in “tribal self-government,” along with the tribal-specific facts of this case, warranted a stay of the current proceedings. The court, citing to Stanko v. Oglala Sioux Tribe,[56] explained that under Eighth Circuit precedent, plaintiffs must exhaust their tribal court remedies before being able to bring an action in federal court. The court further noted that the Tribal Court should be the first court to consider the underlying facts and legal bases for the Bivens claim because of its potential impact on tribal sovereignty. Finally, the court determined that none of the typical exceptions to the tribal court exhaustion requirement were presented in this case. For these reasons, the court stayed the action pending Charlee’s exhaustion of remedies in the Tribal Court.
Pacino v. Oliver, No. 18-cv-06786-RS, 2023 WL 1928217 (N.D. Cal. Feb. 10, 2023). The court in Pacino held that an untimely appeal will not satisfy the requirement to exhaust tribal remedies, despite the inability to exhaust those same remedies in the future. Frank Pacino owed an interest in land on the Road Valley Indian Tribe’s (the “Tribe’s”) Covelo reservation. In 2017, Pacino discovered that the Oliver family (the “Defendants”) had taken up residence on his land and had installed a fence equipped with a locking gate. Pacino took several measures to remove the Defendants from his land; however, these options were unsuccessful. Eventually, Pacino filed an ejectment action in Tribal court, but the court dismissed the complaint, finding that it lacked subject matter jurisdiction. During the course of the Tribal court proceedings, the Defendants asserted a right to be on the land, which established federal court jurisdiction under the General Allotment Act.[57] Instead of continuing in the Tribal court of appeals, Pacino filed an action against the Defendants in federal court.
The initial action within federal court was stayed, pending Pacino’s exhaustion of tribal court remedies. Pacino failed to timely appeal the Tribal court action and moved to lift the stay. The court therefore considered whether Pacino’s untimely appeal satisfied the exhaustion requirement. Ultimately, the court concluded that by failing to timely appeal the Tribal Court case, Pacino failed to exhaust his tribal court remedies, and would likely never be able to do so. Because tribal remedies could not be exhausted, the court found that the case against the Defendants must be dismissed. Holding otherwise, the court explained, would eviscerate the tribal court exhaustion requirement.
Phillips v. James, No. CIV-21-256-JFH-GLJ, 2023 WL 1785774 (E.D. Okla. Jan. 18, 2023). The court in Phillips found that comity concerns warranted dismissal of federal claims against tribal police officers. Melissa Phillips brought an action in federal court against several Choctaw Nation police officers and their supervisors (collectively, “Defendants”), each in their individual capacity, alleging various constitutional and state law violations in relation to Defendants’ handling of a protective order Phillips obtained against a neighbor. Defendants moved to dismiss the claims against them, arguing, among other things, that Phillips’ claims were barred by sovereign and qualified immunity.
The court first considered the issue of sovereign immunity. The court explained that in cases where a tribal employee is sued in an individual capacity, courts should look to whether the sovereign is the real party in interest to determine whether sovereign immunity bars the suit. The court further explained that to determine which party is the real party in interest, courts should not look to the characterization of the parties in a complaint but must determine whether the remedy sought is against the individual or the sovereign. The court found that the majority of the relief Phillips requested was equitable in nature and directed at the Choctaw Nation, not the individual Defendants. The court therefore concluded that the Choctaw Nation was the real party at interest and the equitable relief Phillips requested was barred by sovereign immunity.
In addition to equitable relief, Phillips sought monetary damages from Defendants. Unlike the equitable relief claims, the court concluded that the request for monetary damages was asserted in a manner that did not implicate the Choctaw Nation and was therefore not barred by sovereign immunity. Notwithstanding this fact, the court proceeded to explain that the basis for Phillips requested monetary relief was entirely unmoored from the federal claims she asserted. For this reason alone, the federal claims could not survive dismissal. The court also noted that, even if it did find that a valid federal claim existed, there were “comity concerns raised by the tribal exhaustion doctrine” that counseled against exercising federal jurisdiction in the case.
The court proceeded to conduct a tribal exhaustion analysis. As a part of this analysis, the court first considered whether the dispute at issue was a “reservation affair.” The court noted that Phillips was a member of a tribe (other than the Choctaw Nation), that the suit was against Choctaw Nation police officers, and that the dispute was over the Defendants’ handling of an order that originated within the Choctaw Nation’s court system. Having found a strong “tribal nexus,” the court concluded that this case was a “reservation affair,” which required it to abstain from exercising jurisdiction. The court explained that this conclusion was further supported by a brief analysis of the National Farmers Union Ins. v. Crow Tribe of Indians[58] (“National Farmers”) factors.
Under the National Farmers comity analysis, the court determined that exercise of federal jurisdiction in the case would only serve to contravene the federal policy of supporting tribal self-government. The court further noted that none of the narrow exceptions to the tribal exhaustion rule were present in the case. Accordingly, the court determined that Phillips’ federal claims should be dismissed as a matter of comity.
§ 7.3.3. Tribal Sovereignty & Sovereign Immunity
An axiom in Indian law is that Indian tribes are considered domestic sovereigns.[59] Like other sovereigns, tribes enjoy sovereign immunity.[60] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.[61] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”[62] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”[63]
Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”[64]
Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,[65] whether in tribal, state, or federal court.[66] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.[67]
Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.[68] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.[69] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”[70]
Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.[71] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma[72] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.[73] In C & L Enterprises, the Tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.[74] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.[75]
Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”[76] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.[77]
Tsosie v. N.T.U.A. Wireless LLC, CV-23-00105-PHX-DGC, 2023 WL 4205127 (D. Ariz. Jun. 27, 2023). The Arizona District Court held in Tsosie that a tribally co-owned wireless provider was not entitled to sovereign immunity. Plaintiff Velena Tsosie brought suit against her employer, NTUA Wireless (“Wireless”), and her former supervisor, Walter Haase. Wireless provided internet, telephone, and data communication services in and around the Navajo Nation and was jointly owned by Commnet Newco (“Commnet”), a Delaware limited liability company, and the Navajo Tribal Utility Authority (“NTUA”). Tsosie’s claims arose from a work event, where she alleged that Haase had made suggestive comments and initiated unwelcomed physical contact. Tsosie further alleged that Wireless conducted an inadequate investigation, issued a retaliatory press release, and failed to sufficiently discipline Haase. Tsosie asserted claims for violations of Title VII of the Civil Rights Act of 1964, violations of the Arizona Civil Rights Act, discrimination, assault, battery, and intentional infliction of emotional distress. Wireless and Haase moved to dismiss the complaint on tribal immunity grounds, arguing that the company was an arm of the Navajo Nation.
The court explained that a tribe would be immune from a suit absent congressional authorization or clear waiver. The court further added that tribal sovereign immunity not only protects tribes themselves, but also extends to the arms of the tribe acting on behalf of the tribe. To determine whether Wireless was an “arm of the tribe,” the court implemented the Ninth Circuit’s five factor test: (1) the method of creation of the entity; (2) the purpose of the entity; (3) the structure, ownership, ownership, and management, including the tribe’s control over the entity; (4) the tribe’s intent to share sovereign immunity; and (5) the financial relationship between the tribe and the entity.
For the first factor, the court examined the fact that NTUA and Commnet formed Wireless as a corporate entity. NTUA held a 51% interest in the company and Commnet held 49%. While it was undisputed that NTUA enjoyed tribal immunity, the court questioned whether that immunity extended to Wireless. Wireless cited to the fact that the Speaker of the Navajo Nation Council approved of the Wireless operating agreement, and, because of this, argued that the Navajo Nation was involved in Wireless’s creation. However, the court concluded that the method of creation weighed against sovereign immunity because NTUA did not wholly own Wireless, and Wireless was not formed under the laws governing the Navajo Nation. The court also emphasized the fact that Wireless was the defendant in the case, not NTUA.
The court found that Wireless was formed for the purpose of providing data, internet, and phone services in and near the Navajo Nation. The Federal Trade Commission also designated Wireless as an “eligible communications carrier,” which allowed Wireless to provide affordable telecommunications services to low-income consumers and receive subsidies from the federal government. The court added that Wireless’ purpose helped the Navajo Nation become more self-sufficient. The court found that these facts weighed in favor of Wireless having sovereign immunity.
The court reasoned that the structure, ownership, and management of Wireless weighed slightly against immunity. Even though NTUA owned 51% of Wireless, Commnet still held the other 49%. The court stated that neither NTUA nor Commnet had the authority to unilaterally act for or bind Wireless. Additionally, Wireless was managed by a four-person board of directors. All directors had equal voting power and two of the directors had been appointed by NTUA while the other two had been appointed by Commnet. Because Commnet was a designated managing member, the court found that the corporate structure weighed against a finding of immunity.
While the defendants argued that NTUA intended to share its immunity with Wireless, the court found that the company’s operating agreement was silent on that issue. In fact, the Speaker of the Navajo Nation Council allowed NTUA to waive NTUA’s sovereign immunity to enforce the Wireless operating agreement. The court concluded that the Navajo Nation’s express waiver of immunity in the operating agreement and the fact that NTUA only partially owned Wireless implied that the Navajo Nation “did not intend to render Wireless immune.”
Finally, the court found that there was no indication that profits generated by Wireless benefitted the Navajo Nation. While the operating agreement provided that profits would be directly allocated between NTUA and Commnet, the agreement did not indicate that the company’s losses would reach the Navajo Nation. Additionally, the court found that neither the operating agreement nor the management agreement suggested that a judgment against Wireless would reach the Navajo Nation. The court therefore concluded that the financial relationship between the Navajo Nation and Wireless weighed against immunity. In all, the court found that three of the five factors weighed against immunity. The court accordingly held that Wireless was not an “arm” of the Navajo Nation but was acting as a mere business.
Lustre Oil Co. LLC v. Anadarko Minerals, Inc., 527 P.3d 586 (Mont. 2023). The Supreme Court of Montana declined to adopt a bright-line rule that would prevent tribal entities from enjoying sovereign immunity when those entities are incorporated under the laws of the state rather than under tribal law. Lustre Oil Company (“Lustre”) appealed a district court’s decision to grant a motion to dismiss for a suit brought against A&S Mineral Development Company (“A&S”) and an oil and gas well operator, Anadarko Minerals (“Anadarko”). The district court concluded that it did not have jurisdiction over A&S as the entity was an arm of the Assiniboine and Sioux Tribes (the “Tribes”). The Tribes formed A&S after experiencing an influx of private drilling and development of oil and gas wells, which resulted in disastrous environmental impacts to the reservation and compromised the health of the Tribal communities. After authorizing the formation of A&S through their Tribal Executive Board, the Tribes incorporated A&S under the laws of Delaware.
Lustre first asked the Supreme Court of Montana to adopt a bright-line rule preventing tribal entities from enjoying sovereign immunity when those entities are incorporated under the laws of the state rather than under tribal law. The court declined to adopt such a rule, concluding that it is important to “examin[e] the circumstances of each case rather than utilizing a single-inquiry test to analyze tribal sovereign immunity.” The court further explained that the nature of an entity’s activity, rather than whether they were incorporated under state or tribal law, should be the important consideration when determining immunity.
The court proceeded to cited to the Ninth Circuit’s five-factor test to determine whether an entity acted on behalf of a tribe: (1) the method of creation of the entity; (2) the purpose of the entity; (3) the structure, ownership, ownership, and management, including the tribe’s control over the entity; (4) the tribe’s intent to share sovereign immunity; and (5) the financial relationship between the tribe and the entity. Even though the court declined to adopt this test whole cloth, it did mention that these factors provided useful guidance for making its decision. The court thereafter reviewed the district court’s analysis of the factors, which determined that three of the give factors favored a finding of sovereign immunity. Despite that determination, the court found on appeal that incorporating under state law rather than tribal law weighed against a finding of immunity. The court therefore proceeded to consider the entire circumstance of the company’s creation.
Upon consideration of the purpose of A&S, the court concluded that it was clear that the company had been created to develop the Tribes’ oil and gases resources and assume responsibility for environmental cleanup efforts associated with the oil and gas development. The court further found that these were goals that funded the Tribes’ governmental services, while promoting cultural autonomy and self-governance. Lustre argued that the management and control of A&S weighed against immunity because the Tribes delegated most of the control to the general manager, who was not a member of the Tribes. The court found this argument unpersuasive, stating that control factor weighed in favor of immunity because the Tribal Executive Board had a right to assume control over A&S at any time.
Lustre also contended that the financial relationship between the Tribes and A&S did not support a finding of immunity because there was no proof of that there was a proportionate share of the company’s financial contributions to the Tribes’ overall budget. The Montana Supreme Court stated that courts need not probe so deeply into a tribe’s governmental affairs and concluded that the financial relationship factor also weighed in favor of immunity because A&S returned 100% of its profits to the Tribes.
A&S and Anadarko, on the other hand, argued that the district court incorrectly concluded that the Tribes did not intend to share their sovereign immunity with the company. In addressing this argument, the court looked to several company agreements and found that whenever the Tribes had the occasion to address the matter, they documented their intent to treat A&S as a separate entity not immune from suit in state courts.
The Tribes’ choice to incorporate A&S under Delaware law, along with the Tribes’ intent to keep A&S a separate and distinct entity for liability purposes, led the court to conclude that the district court erred in ruling that A&S was immune from suit as an “arm” of the Tribes. Accordingly, the court reversed and remanded the case for further proceedings.
Justice Jim Rice concurred, calling for clearer standards and more bright-line rules for determining tribal corporation immunity, while Justice Laurie McKinnon wrote a concurrence stating that the five-factor test revealed that A&S was an enterprise of the Tribes, but that the Tribes expressly waived A&S’s immunity.
Cayuga Nation ex. rel. Cayuga Nation Council v. Parker, No. 5:22-CV-00128 (BKS/ATB), 2023 WL 130852 (N.D.N.Y. Jan. 9, 2023). The United States District Court for the Northern District of New York declined to find that a tribe waived its sovereign immunity after taking over a premises that was subject to an existing commercial lease. The Cayuga Nation (the “Nation”) brought an action under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act against numerous defendants, alleging that the defendants engaged in an unlawful scheme to “co-opt the Nation’s sovereign rights, erode its business and customer base, and steal its revenues” through the illegal sale of untaxed cigarettes, marijuana, and other merchandise on the reservation. After the defendants asserted several counterclaims, the Nation moved to dismiss the claims on the ground that they were barred by the doctrine of sovereign immunity. The defendants argued that the Nation waived its immunity when it initiated the action and that the counterclaims were permissible under the “immovable property” and “recoupment” exceptions to the sovereign immunity doctrine.
The court first established the rule that without congressional authorization or a waiver of sovereign immunity, it would dismiss any suit against a tribe. The court further added that a plaintiff tribe did not waive sovereign immunity by filing suit and sovereign immunity from suit extended to counterclaims against a plaintiff tribe. It was undisputed that there had been no congressional authorization for the counterclaims the defendants asserted, but a question existed as to whether immunity had been waived. The defendants argued that when the Nation purchased a property from them, the Nation took the land subject to a pre-existing commercial lease, which included a provision in which the Seneca-Cayuga Nation waived sovereign immunity. However, the court found that the provision at issue expressed a waiver of the Seneca-Cayuga Nation’s rights but did not contain anything that would allow a conclusion that the Nation similarly authorized a waiver of its sovereign immunity. Because the lease did not otherwise provide an expression of waiver, the court concluded that the Nation had not waived its sovereign immunity pursuant to the commercial lease.
The defendants attempted to argue that, even if waiver did not exist, the “immovable property” exception to sovereign immunity applied. This exception referred to the common law doctrine that curtailed legal actions contesting a sovereign’s rights or interests in real property located within another sovereign’s territory. However, the court found that the exception did not apply to the case because the property in question was located within the bounds of the Nation’s reservation.
Finally, the defendants argued that their counterclaims fell into the “recoupment” exception to sovereign immunity, which examines whether the claims fall into the same transaction or occurrence as the original suit. Although all the claims asserted occurred during the same time period as the RICO claims, the court found that most of the claims did not all arise out of the same transaction or occurrence as the original RICO claims. The claims that did fall within the same transaction or occurrence—those for conversation and trespass to chattels—remained eligible for recoupment. Besides those two claims, the court found that the Nation was protected by sovereign immunity. Accordingly, the court granted the Nation’s motion to dismiss as to all other claims.
California v. Azuma Corp., No. 2:23-CV-00743-KJM-DB, 2023 WL 5835794 (E.D. Cal. Sept. 8, 2023). The court in Azuma found that the Prevent All Cigarette Trafficking (“PACT”) Act did not prevent Ex parte Young[78] actions against tribal officials. The State of California brought an action against Defendants Azuma Corporation, Phillip Del Rosa, Darren Rose, and Wendy Del Rosa (collectively, “Defendants”) for declaratory relief, injunctive relief, and civil damages and penalties for Defendants’ years of trafficking contraband cigarettes in the State in violation of the PACT Act. The individually named defendants were tribal officers of the Alturas Indian Rancheria (the “Rancheria”), a federally recognized Indian tribe, and played key roles in Azuma Corporation, a tribal corporation that sold cigarettes in California. Defendants argued that tribal sovereign immunity barred California’s claims. Defendants also argued that California cannot proceed with its claims because the tribal retailers, which were a part of the cigarette sales, must be joined to the action pursuant to the Federal Rules of Civil Procedure 19, but cannot be because of sovereign immunity.
The court first explained that even if sovereign immunity protected the Rancheria from suit, Ex parte Young provided a narrow exception for injunctive relief against individuals, including tribal officers, responsible for unlawful conduct. Defendants argued that the PACT Act prevented application of the Ex parte Young doctrine. The court disagreed, finding that the PACT act confirms, rather than denies, the existence of Ex parte Young actions. The court then explained that, because California sought to enjoin the individually named defendants from violating the PACT Act in their official capacities, the Ex parte Young doctrine applied. The court accordingly found that sovereign immunity did not bar California’s Ex parte Young action.
The court proceeded to consider whether the tribal retailers were necessary parties under Rule 19. The court first explained that the Defendants had the burden of establishing that the tribal retailers were in fact necessary parties. The court noted that Defendants had not shown how the court could not award complete relief without joining the tribal retailers, or how the tribal retailers had an interest in this litigation that would be impaired by California’s requested injunctive relief. The court also mentioned that granting injunctive relief in the absence of the tribal retailers would not lead to inconsistent judgments. Finally, the court determined that, even if the tribal retailers did have a legally protected interest in the litigation, Defendants had not addressed whether their interest would be adequately represented in the present action. For these reasons, the court concluded that Defendants had not satisfied their burden of showing that the tribal retailers were necessary parties under Rule 19.
After finding that Rule 19 did not bar California’s claims, the court conducted a preliminary injunction analysis. At the end of this analysis, the court granted California’s motion for a preliminary injunction as to Rose, but denied the motion as to Phillip and Wendy Del Rose, citing the State’s lack of evidence regarding the latter two defendants.
Victor v. Seminole Gaming, No. 23-61185-CIV, 2023 WL 4763791 (S.D. Fla. July 26, 2023). The United States District Court for the Southern District of Florida struck a complaint after noting that the Equal Employment Opportunity Commission (the “EEOC”) dismissed the same complaint on sovereign immunity grounds. Sekwanna Victor alleged claims of discrimination, harassment, retaliation, and hostile work environment against her former employer, Seminole Gaming. Victor had submitted a claim to the EEOC regarding her grievances, but it was dismissed on the ground that Seminole Gaming was a tribal entity. The court cited to the fact that Victor’s own complaint indicated that Seminole Gaming was federally recognized as an arm of the Seminole Tribe, thus granting it sovereign immunity. The court further added that the EEOC form dismissing Victor’s complaint categorized Seminole Gaming as a tribal entity, which was the basis for the complaint’s dismissal. The court concluded that to “transcend” Seminole Gaming’s sovereign immunity, Victor would have had to show in her complaint that the entity waived its immunity or that there existed a clear indication of abrogation of tribal sovereign immunity from Congress. The court held that Victor had shown neither.
Skull Valley Health Care, LLC v. Norstar Consultants LLC, No. 2:22-CV-00326, 2023 WL 4934292, (D. Utah Aug. 2, 2023). The court in Sky Valley Health Care held that two medical entities created under state law and converted into tribal entities can enjoy tribal sovereign immunity as arms of a tribe. Plaintiffs Skull Valley Health Care, LLC and Skull Valley Health Clinic, LLC (collectively, “Plaintiffs”) were each initially formed under Utah law and then converted into tribal entities of the Skull Valley Band of Goshute Indians (the “Band”). After this conversion, Plaintiffs were considered tribal entities under tribal law and registered as entities of the Band with the Utah Secretary of State. Defendant, Ashanti Moritz, was a former employee of Plaintiffs. Plaintiffs sued Defendant, alleging that Defendant took control of a Facebook page that was the intellectual property of Plaintiffs and used it in connection with Defendant’s own business. Defendant, in response, asserted a cross claim, alleging discrimination and wrongful termination. Plaintiffs moved to dismiss Defendant’s claim, arguing that Plaintiffs were entitled to the Band’s sovereign immunity as an “arm” of the Band.
The district court first explained that the threshold issue for analyzing sovereign immunity for an economic entity is whether the entity is organized under the laws of a tribe or under another sovereign (such as a state). According to Tenth Circuit precedent, if the organization is organized under the laws of another sovereign, then the organization cannot enjoy sovereign immunity. The court explained that this bright-line rule does have limits, such as when an organization is formed under state and tribal laws. The court determined that at the time of Defendant’s termination, Plaintiffs were organized under the laws of the Band and were therefore not precluded from enjoying sovereign immunity on these grounds.
The district court proceeded to explain that the Tenth Circuit has set forth six factors that are helpful in determining whether an entity qualifies as a subordinate economic entity or “arm of a tribe” entitled to share in a tribe’s immunity. These factors included: (1) the method of creation of the economic entity; (2) the entity’s purpose; (3) the entity’s structure, ownership, and management, including the amount of control the tribe has over the entity; (4) the tribe’s intent with respect to sharing its sovereign immunity; (5) the financial relationship between the tribe and the entity; and (6) whether the purposes of tribal sovereign immunity are severed by granting the entity immunity. The court found that all six of these factors weighed in favor of finding that Plaintiffs were an arm of the Band and entitled to share in the Band’s sovereign immunity. The court accordingly dismissed Defendants claim against Plaintiffs without prejudice.
Haney v. Mashpee Wampanoag Indian Tribal Council, Inc., 205 N.E.3d 370 (Mass. App. Ct. 2023). The Massachusetts Court of Appeals held that a business license did not waive tribal sovereign immunity. The Defendants, the Mashpee Wampanoag Indian Tribal Council, Inc. and Mashpee Wampanoag Tribe, operated a commercial shell fishing business off the shore of Cape Cod in Popponesset Bay. Their fishing racks and cages were regularly located on an Island nearby private land owned by the Plaintiff. The Defendants allegedly would leave piles of shells, trash, and other debris on the private land and the Plaintiff consequently filed an action alleging trespass, private nuisance, and public nuisance. The Plaintiff also requested a declaratory judgment defining the parties’ rights related to the defendants’ shellfish propagation license on the private lands. The superior court dismissed the complaint, finding that the Plaintiff’s claims were barred by tribal sovereign immunity.
The Plaintiff argued that the Defendants waived their tribal sovereign immunity by applying for the shellfish propagation license and accepting the grant of rights to use Massachusetts land and waters. However, the court did not find the license showed the Defendants “unequivocally expressed” a waiver of their immunity. The Plaintiff further argued that the Defendants waived their immunity by participating in previous lawsuits with the Plaintiff and other parties. This argument also failed, as the court found that the matters cited by the plaintiff did not arise out of the same transaction or raise the same legal issues as the present case, and therefore did not constitute a waiver of sovereign immunity. The Plaintiff also asserted the “immovable property” exception to sovereign immunity, but the court noted that the dispute at hand did not pertain to rights stemming from an ownership interest or an interest in property but rather involved the Defendants’ use of the property covered by the propagation license. Lastly, the Plaintiff argued that under natural resource laws, the grant of the license bound the Defendants to operate in a manner that did not impact the Plaintiff’s resources. The court rejected this argument, noting that the Plaintiff did not cite to any legal authority for the proposition that a private citizen is permitted to file a lawsuit to enforce compliance. For these reasons, the court of appeals affirmed the superior court’s dismissal of Plaintiff’s complaint.
Maverick Gaming LLC v. United States, 658 F.Supp.3d 966, No. 3:22-CV-05325-DGE, 2023 WL 2138477 (W.D. Wash. Feb. 21, 2023).[79] The District Court of Washington determined that a federally recognized Indian tribe’s gaming compact created an interest sufficient to make the tribe a required party for purposes of the Federal Rules of Civil Procedure. Maverick Gaming LLC (“Maverick”) brought suit against the United States Department of the Interior and various responsible federal officials, along with various Washington state officials (collectively, “Defendants”), to “challenge Washington state’s tribal gaming monopoly.” Maverick’s suit was predicated on its desire to expand its gaming operations within the State of Washington; however, it was unable to because of Washington’s criminal prohibitions on most forms of Class III gaming.
The court explained, as background information, that the Indian Gaming Regulatory Act (the “IGRA”) established a classification system for different types of gaming. According to the court, Class III gaming included games like slot machines, keno, and blackjack—along with every game not included within Class I or II. The court further explained that the IGRA provided that Class III gaming was permitted on tribal lands if the tribes authorized such activities. To authorize such gaming activities, the court noted that a tribe must enter into a Tribal-State compact, which must be submitted and approved by the Secretary of the Interior.
The court proceeded to explain that Washington State has made most gaming activities a crime. However, in the 1990s, the State slowly agreed to gaming compacts with Washington’s federally recognized Indian tribes. The court further explained that in March 2022, the Washington State Legislature passed a bill permitting sports betting at tribal casinos and gaming facilities. Despite this bill, sports betting otherwise remained illegal throughout the State. Maverick accordingly sued Defendants, alleging that Defendants acted unlawfully when entering into Washington’s compact amendments for sports betting because these amendments violated the IGRA and the Fifth Amendment’s equal protection clause.
Maverick did not name any of Washington’s federally recognized Indian tribes in its suit against Defendants. The Shoalwater Bay Indian Tribe of the Shoalwater Bay Indian Reservation (the “Tribe”), after having its motion for limited intervention granted, moved to dismiss the action, arguing that Maverick failed to join a required party pursuant to Federal Rules of Civil Procedure 12(b)(7) and 19.
The court first concluded that the Tribe was a required party under Rule 19(a). The court reached this conclusion by finding that the Tribe had a legally protected interest in its gaming rights that could be impaired if the Tribe was not included as a party to the suit, and that none of the parties named within the suit would adequately represent the Tribe’s interests. The court proceeded to explain that because the Tribe had not waived its sovereign immunity, it could not be joined as a required party. After reaching this conclusion, the court proceeded to do a necessary party analysis pursuant to Rule 19(b).
Under a necessary party analysis, the court explained that it must consider: (1) the prejudice to any party or absent party; (2) whether relief can be shaped to lessen prejudice; (3) whether an adequate remedy, even if not complete, can be awarded without the absent party; and (4) whether there exists an alternative forum that can join the required party. The court found that the first three factors weighed in favor of dismissal and therefore concluded that the action could not proceed in equity or good conscience. The court accordingly dismissed Maverick’s claims without prejudice.
§ 7.3.4. Tribal Corporations
A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).[80] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.[81] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.[82]
Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.[83] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.[84] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.[85]
An Indian corporation may also be organized under tribal or state law.[86] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).[87] Under federal common law, the corporation likely enjoys immunity from suit.[88] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.[89]
Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.
There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.[90]
Stimson Lumber Co. v. Coeur d’Alene Tribe, 621 F. Supp.3d 1158 (D. Idaho 2022). The court in Stimson Lumber Co. found that a federally recognized Indian tribe’s act of engaging in corporate activities did not render the tribe a corporation or endow it with citizenship for diversity jurisdiction purposes. Plaintiff Stimson Lumber Company (“Stimson”) and Defendant Coeur d’Alene Tribe (the “Tribe”) executed a lease agreement whereby the Tribe allowed Stimson to operate a sawmill on the Tribe’s land. The lease agreement granted Stimson an option to purchase the mill at the end of the lease term for no extra cost and included several dispute resolution clauses, including a forum selection clause in which both parties submitted to the jurisdiction of the United States District Court for the District of Idaho. As the end of the lease neared, Stimson informed the Tribe that it desired to exercise the option to purchase the mill, but the Tribe responded that the option was no longer valid and instead offered to sell the mill to Stimson on terms unfavorable to Stimson. Stimson refused, and the Tribe demanded that Stimson vacate the property, after which Stimson sued the Tribe in district court claiming diversity jurisdiction and alleging breach of contract, unjust enrichment, and conversion. The Tribe then filed a motion to dismiss arguing that the district court did not have jurisdiction over the claim since diversity jurisdiction did not exist and because Stimson did not raise a federal question.
The court reaffirmed the principle that an unincorporated arm of a tribe is not a citizen of any state and that a tribe’s waiver of sovereign immunity does not by itself create state citizenship for diversity jurisdiction purposes. Rather, like a state or federal corporation, a tribal corporation is a citizen of the state where it has its principal place of business. The court emphasized that even though the Tribe may have been acting like a corporation, a tribe does not shed non-citizenship merely by embarking on a commercial enterprise. Therefore, if a tribe is unincorporated and its business operations are likewise unincorporated, then neither the tribe nor its business operations are a citizen for purposes of diversity jurisdiction.
The court therefore proceeded to consider whether the Tribe was incorporated. The Tribe argued that they were not incorporated, but instead were a federally recognized Indian tribe, as was indicated on the lease agreement and other documents included as evidence. Additionally, even though the Tribe filed its constitution and by-laws, the court explained that those were not corporate documents. The court also recognized that “federally recognized Indian tribe” was used in the relevant documents as a legal term of art meaning, which merely meant that the federal government acknowledged, as a matter of law, that a particular Indian group has tribal status. The court noted that tribal status is not equivalent to incorporation. Moreover, the court noted that Stimson had offered no substantive evidence that the Tribe was a corporation, which was required for the suit to continue.
According to the court, the fact that the Tribe was engaging in corporate activities in leasing the mill to Stimson—or even if the Tribe held itself out as a corporation—did not automatically render the Tribe a corporation or endow it citizenship. The court granted the Tribe’s motion to dismiss for lack of jurisdiction, holding that the Tribe was not a corporation and, therefore, not a citizen of any state for purposes of diversity jurisdiction.
LS3 Inc. v. Cherokee Fed. Sols., L.L.C., 20-CV-03555-PAB-MEH, 2023 WL 2390710 (D. Colo. Mar. 7, 2023). The court in LS3 Inc. found that a negative allegation of tribal citizenship was not enough to satisfy the requirements of diversity jurisdiction. Plaintiff, a Maryland corporation, claimed that the Defendants, businesses associated with the Cherokee nation, had solicited several of their employees to work for the Defendants. Plaintiff sued Defendant, asserting claims for breach of contract, intentional interreference with a contract, civil conspiracy, and misappropriation of trade secrets. The district court initially ordered the case be dismissed for lack of jurisdiction. After appealing to the Tenth Circuit, the Plaintiff’s remaining claims were for breach of contract, civil conspiracy, and intentional interference with a contract—none of which warranted subject matter or supplemental jurisdiction. The Plaintiff argued that the court nonetheless had diversity jurisdiction over the suit.
The Plaintiff alleged that diversity jurisdiction existed because the Defendants—Cherokee Federal Solutions, LLC; Cherokee Nation Strategic Programs, LLC; and Cherokee Services Group, LLC—were citizens of Colorado, Oklahoma, and Texas, and that they were all owned by the Cherokee Nation itself or a corporate parent (Cherokee Nation Businesses, LLC), which was not a citizen of Maryland. The Plaintiff raised the principle that a tribal corporate entity may be considered a citizen of the state of its principal place of business for diversity jurisdiction.
However, the court pointed out several flaws in the Plaintiff’s arguments, including that Cherokee Nation Businesses was not a member of two of the LLC defendants, and that the complaint only stated that Cherokee Nation Businesses “is not a citizen of Maryland.” According to the court, a negative allegation of citizenship is not sufficient to prove that diversity jurisdiction exists, and that the Plaintiff had failed to identify what the Cherokee Defendants’ citizenships were.
Unlike a corporation, which is a citizen of the state in which it is incorporated, the citizenship of an LLC is determined by the citizenship of all its members. If the plaintiff had shown that the Cherokee Nation—the sole member of several of the defendant LLCs—was incorporated in a state other than Maryland, diversity jurisdiction would have existed. However, the Plaintiff had not alleged that the Cherokee Nation was incorporated under the IRA or under its own tribal laws. The defendant had also failed to show that any of the corporate members of the other LLC defendants were corporations. Therefore, the court held that the Plaintiff’s complaint had failed to demonstrate that the court had diversity jurisdiction over the claims and ordered that the Plaintiff must show cause as to why the case should not be dismissed for lack of jurisdiction.
HCI Distrib., Inc. v. Hilgers, 8:18-CV-173, 2023 WL 3122201 (D. Neb. Apr. 27, 2023). The court in HCI Distribution Inc. found that a state’s interest in regulating the sale of tobacco products could not justify exercising authority over a tribe’s sale of such products to its own members. Plaintiffs were wholly owned subsidiaries of an economic development company—Ho-Chunk, Inc.—which was entirely controlled by the Winnebago Tribe of Nebraska (the “Tribe”), a federally recognized tribe. The Tribe was incorporated under Section 16 of the IRA, under which it created its own constitution and laws, including a Business Corporation Code. The Tribe founded Ho-Chunk under its Business Corporation Code, which subsequently created several wholly owned subsidiaries, including the Plaintiffs. The Plaintiffs imported and distributed tobacco products to retailers on the Winnebago reservation and on other reservations in Nebraska and elsewhere. Plaintiffs sued Defendants, Nebraska State officials, over the enforceability of Nebraska’s Tobacco regulations.
Pursuant to a 1998 Master Settlement Agreement between 46 states and several tobacco companies, Nebraska had promulgated statutes requiring tobacco manufacturers to either (1) participate in the settlement and make annual settlement payments to the state in perpetuity or (2) agree to make deposits into an escrow account based on the number of tobacco products they sold in the state. In order to sell tobacco products in Nebraska, non-participating manufacturers had to certify their compliance with the escrow statutes and post a bond of at least $100,000 to ensure collection in the event they failed to make proper escrow payments. The statute contemplated releasing escrow deposits for “cigarettes sold on an Indian tribe’s Indian country to its tribal members” if the tribe entered into an agreement with the state. Nebraska and the Tribe were unable to reach such an agreement because each party could not agree on the scope of the Tribe’s waiver of sovereign immunity. Specifically, the parties disagreed about whether Nebraska could enforce the escrow laws against the Plaintiffs because they were subsidiaries of the Tribe.
The court started its analysis with the premise that states may not tax reservation lands or reservation Indians, and only under exceptional circumstances may a state regulate on-reservation activities of tribal members. However, states may impose “minimal burdens” on tribally run, on-reservation businesses to enforce valid state laws. According to the court, Nebraska’s tobacco regulation would be invalid if it constituted a direct tax on the Tribe, if it was preempted by federal law, or if it unlawfully infringed on the Tribe’s right to make and be governed by its own laws.
The Plaintiffs argued that the escrow and bond requirements were a direct tax on the tribal business. The court, however, found that the payment requirements amounted to a penalty rather than a tax. The court distinguished taxes, an involuntary exaction intended to raise revenue, from penalties, which are involuntary exactions intended to control behavior. Under the Nebraska State statute, the escrow payments made by tobacco manufacturers would be remitted to the manufacturer after a certain point unless Nebraska proved that the manufacturer committed some wrong related to the “use, sale, distribution, manufacture, development, advertising, marketing, or health effects of” tobacco products. The court therefore determined that the escrow and bond requirements functioned as a penalty, rather than a tax, because the State received no revenue unless the manufacturer did something wrong.
The court next considered whether the regulation was preempted by federal law or unlawfully infringed on the Tribe’s right to make and be governed by its own laws. To conduct this analysis, the court applied the two-pronged approach from White Mountain Apache Tribe v.Bracker.[91] On the first prong, the Plaintiffs argued that Nebraska’s tobacco regulations were preempted by the Indian Trader Statutes,[92] which preempt state regulation of sales made in Indian country but are generally concerned with sales by non-members to tribal members. The court disagreed, finding that the Indian Trader Statutes did not prohibit state regulation of sales by tribal businesses to tribal members. The court further found that the federal government had not enacted a comprehensive and pervasive scheme regulating the sale of tobacco, and that the state regulations were non-discriminatory and applied to all sales of tobacco rather than just those the Plaintiffs made on their own reservation.
The court emphasized that the second prong of the Bracker analysis—whether the regulation unlawfully infringed on the Tribe’s right to make its own laws and be governed by them—required balancing the state, federal, and tribal interests at stake. The court noted that Nebraska has a strong interest in regulating tobacco sales to protect public health, and also an interest in protecting Indians and non-Indians from misconduct by tobacco manufacturers. In contrast, both the federal government and the Tribe had an interest in protecting tribal sovereignty and promoting tribal business and self-sufficiency. Moreover, the Tribe had an economic interest in raising revenue from the Plaintiffs’ business and an interest in selling products free from state regulation.
With respect to the Plaintiffs’ sale of products off the reservation, including on the land of other tribes, the court found that the State’s interest in enforcing the tobacco regulations outweighed the federal and tribal interests at stake, reasoning that the Tribe does not have the same level of interests or protection for activities that take place off its own reservation. However, the court found that the State did not demonstrate the “exceptional circumstances” required to regulate the Plaintiffs’ manufacture and sale of products on the Winnebago reservation. The court further found that the regulation constituted a direct burden on a tribal business operating on its reservation; the Plaintiffs’ were merely providing an exemption to certain state taxes for customers willing to travel to the reservation; the federal government had not authorized state regulation of tribal tobacco businesses; and any “off-reservation” effects of the Plaintiffs’ on-reservation activities were insufficient to justify the infringement. Additionally, the court noted that while the federal government had instituted policies around other areas of Tribal activity to preempt state regulation, such as for gaming and wildlife purposes, the federal government has done nothing to encourage or discourage tribal tobacco manufacturing.
The court granted the Defendant’s motion for summary judgment as it pertained to sales on the Omaha reservation, and granted the Plaintiffs’ motion for summary judgment as it pertained to sales on the Winnebago reservation. The court also permanently enjoined the Defendants from enforcing the escrow and bond requirements for sales on the Winnebago reservation.[93]
§ 7.4. The Federal Sovereign
§ 7.4.1. Indian Country & Land into Trust
The Indian Reorganization Act (“IRA”) authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.[94] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.[95]Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.[96] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.
Despite the Carcieri ruling, the Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.[97] The Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.[98] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.[99]
In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”[100] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.[101] The second prong examines whether this jurisdictional status remained intact in 1934.[102] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a more recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld the Interior’s application of the two-part test outlined in M-37029.[103] M-37029 appears to be a non-statutory Carcieri fix.
As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.[104] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA[105] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)[106] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.
The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.[107] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.
The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.[108]
The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.[109] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final” agency determination subject immediately to judicial review.[110] If a Bureau of Indian Affairs (“BIA”) official issues the decision, however, the decision is subject to administrative exhaustion requirements[111] before it becomes a “final agency action.”[112] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.[113] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.”
More recently, the BIA, to improve and streamline the tribal land acquisition application process, announced changes to land-into-trust regulations (at Part 151).[114] Under the new rule, the BIA will now have to meet a 120-day deadline. Prior to the change, the average land acquisition application took an average of 985 days.
A brief discussion of this past year’s cases involving the taking of land into trust follow.[115]
Chase v. Andeavor Logs., 2023 WL 5920379 (D.N.D. Aug. 8, 2023). After a series of interlocutory appeals, the North Dakota District Court held that individual tribal members (“Allottees”) who hold equitable interests in tribal lands that are held in trust by the United States could not bring a common law trespass claim against an oil pipeline manufacturer whose right of way had expired.
Broadly, dating back to 1953, various companies had operated an oil pipeline in North Dakota that crossed portions of the Fort Berthold Indian Reservation. At various times, these companies held rights of way for use of their pipelines across the reservation. In 2013, however, the right of way expired. Yet, the pipeline continued to operate.
In 2017, the Mandan, Hidatsa, and Arikara Nations negotiated a right of way with Andeavor Logistics (the current pipeline operator), but only as to the tribal trust lands. Several Allottees refused to grant Andeavor a right of way over their individually allotted portions of land.
The Allottees filed suit alleging continuing trespass and constructive trust. Andeavor filed a motion to dismiss. In the intervening procedural chaos, the motion to dismiss came before the court on a single ground—whether the Allotees could assert a federal common law claim for trespass.
In assessing whether the individual Allottees could maintain a federal common law claim, the court reasoned that the “undeniable key” was whether the Allottees could claim aboriginal title to the land—a required prerequisite. Aboriginal title, as opposed to equitable title obtained in trust, requires that the title predate limitations set out by the federal government because it would have preceded the formation of the United States.
By contrast, the court explained that allotted lands, especially allotments to individual Indians, was an attempt by the federal government to weaken tribal power and influence. Moreover, individual allotments are not, by definition, lands that were subject to aboriginal title. For example, the allotted lands may have been granted from the public domain.
Therefore, the court drew a critical distinction between allotted lands, which the Allottees in this case owned, as opposed to those lands with aboriginal title. The court reasoned that if the Allottees were given the same rights as individuals with aboriginal title, it would “cheapen the rich history of aboriginal lands and constitute a rejection of the Supreme Court’s favored treatment of aboriginal title for two centuries.”[116] Moreover, any attempt by the Allottees to analogize to other federal common law claims were futile because those claims were viable in the context of aboriginal title, not allotments.[117]
Accordingly, because the Allottees lacked aboriginal title, the court dismissed the Allottees’ trespass action for failure to state a claim. It further denied to affirmatively create a common law claim for trespass.
For the remaining claims (breach of contract, unjust enrichment, and constructive trust), the court also held these claims failed because either the Allottees failed to join the United States as a required party, or the claims depended on the federal trespass action.[118]
Littlefield v. U.S. Dep’t of the Interior, No. 22-CV-10273-AK, 2023 WL 1878470 (D. Mass. Feb. 10, 2023), aff’d 2023 WL 7146029 (1st Cir. Oct. 31, 2023). Plaintiffs, residents of Taunton, Massachusetts, challenged a decision by the United States Secretary of the Interior (the “Secretary”) to take into trust 321 acres of land for the benefit of the Mashpee Wampanoag Tribe (the “Tribe”). The district court denied Plaintiffs’ challenges and held that the Secretary’s decision to take land into trust for the benefit of the Tribe was legal, and not arbitrary, capricious, or contrary to the law. Plaintiffs appealed. The First Circuit affirmed, albeit for different reasons than the district court.
The First Circuit held that the Supreme Court’s opinion in Carcieri v. Salazar, 555 U.S. 379 (2009), and its analysis of the Narragansett Tribe’s history was not controlling as to whether the Mashpee Tribe was “under Federal jurisdiction” in 1934. It reasoned that the Supreme Court had relied on the parties’ concessions that the Narragansett Tribe was not under federal jurisdiction in 1934, as opposed to any independent investigation. Therefore, that concession (and the subsequent analysis) was inapplicable to the Mashpee Tribe and therefore the Secretary did not err by refusing to adopt the analysis.
The court also rejected Plaintiffs’ argument that the definition of “Tribe” in Montoya v. United States, 180 U.S. 261 (1901), was codified by the IRA. Therefore, it held that the Secretary did not act arbitrarily or capriciously in refusing to apply this definition to the Mashpee Tribe.
On appeal, Plaintiffs conceded that the Solicitor of the Department of the Interior’s memorandum (“M-Opinion”) governed the meaning of “under Federal jurisdiction.” Plaintiffs, however, challenged the Secretary’s application of the factors here. The M-Opinion requires the Secretary first determine whether the federal government took an action, or a series of actions, that conferred jurisdiction on a tribe before 1934. If the answer is “yes,” then the Secretary proceeds to the second step in the analysis and determines whether this jurisdictional status remained intact in 1934.
First, Plaintiffs argued that the federal government took no affirmative actions to remove the Mashpee from western Massachusetts. The First Circuit rejected this argument because the federal government took “specific action” through the issuance of the Morse Report that indicated it considered the Mashpee to be within the jurisdiction of the United States. Moreover, the Morse Report was not the sole piece of evidence relied on by the Secretary in making her decision.
Second, the First Circuit held that the Secretary permissibly analyzed the Mashpee children’s attendance at the Carlisle School as probative evidence of the exercise of federal control. It reasoned that the Secretary could consider different ways in which this attendance might be probative, that parental consent is not a dispositive factor, and the M-Opinion, as well as the Secretary’s third written decision in 2021, instructed the Secretary to consider Bureau of Indian Affairs school attendance.
Third, Plaintiffs identified various reports by federal officials regarding the Mashpee Tribe and argued that because the federal government took no action based on the reports, the Secretary relied on them in error. The court disagreed. Although the reports did not result in any action by the federal government, the act of compiling the reports and making recommendations affected only the weight of the evidence, not its inclusion or exclusion from consideration.
Finally, Plaintiffs argued that the Secretary’s evidence, inter alia census records and various government reports, was not probative on the issue of whether the Tribe was under federal jurisdiction. On this point, the court declined to reweigh the evidence considering that the Plaintiffs offered no authority for their contention.
In sum, the court affirmed the district court’s conclusion that the Secretary did not act arbitrarily, capriciously, or contrary to law by taking the land into trust for the benefit of the Tribe.
State ex rel. Kobach v. U.S. Dep’t of Interior, No. 21-3097, 2023 WL 4307478 (10th Cir. July 3, 2023). In 1992, the Wyandotte Tribe (the “Tribe”) purchased a 10-acre parcel of land (hereinafter the “Park City Parcel”) just outside of Wichita, Kansas using money it received in a settlement from the Indian Claims Commission (“ICC”). In 2008, the Tribe applied for trust status intending to establish gaming operations on the land. In 2020, the Secretary of the Interior (the “Secretary”) approved the Tribe’s application. Kansas, however, opposed the Secretary’s decision to take the land into trust (and therefore the Tribe’s ability to operate a gaming facility) because it claimed that (1) the Tribe did not purchase the land with the appropriate funds and (2) there was no exception to the Indian Gaming Regulatory Act authorizing the Tribe to operate gaming operations on the land. The Tenth Circuit rejected both of the State’s arguments and held that the Secretary’s decision to take the Park City Parcel into trust for the benefit of the Tribe and authorization of gaming operations was not arbitrary or capricious, nor in contravention of the law.
The State first argued that the Tribe did not purchase the Park City Parcel using the appropriate funds, and, as a result, the Secretary’s decision to take the land into trust was arbitrary and capricious. The Secretary had parsed through competing accounting reports that traced the origins of the funds, as well as other Tribal land purchases, and concluded that the Park City Parcel was purchased with Section 105(b)(1) funds. The Tenth Circuit upheld the Secretary’s assessment because the Secretary had reviewed the relevant materials and had rationally explained why she relied on one report over the other.
As a legal matter, the 10th Circuit also rejected the State’s argument that if a Tribe uses Section 105(b)(1) funds as a principal, the investment income from those proceeds can no longer be used for the statutory purposes set out in Section 105(b)(1). In affirming the Secretary’s rationale, the court also rejected the State’s arguments that inter alia the Secretary disregarded department policy and that the decision was unsupported by substantial evidence. Therefore, the court held that the Secretary did not act arbitrarily and capriciously when it approved the Tribe’s application to take the Park City Parcel into trust.
The State also argued that the Secretary acted arbitrarily and capriciously by permitting the Tribe to conduct gaming operations on the Park City Parcel. Broadly, IGRA prohibits gaming on lands acquired and held in trust by the Secretary.[119] Thus, the State argued that the funds used to purchase the parcel, which originated from an ICC settlement, did not meet IGRA’s settlement-of-a-land-claim exception to the general prohibition.[120]
To resolve this dispute, the court examined the three requirements to meet IGRA’s settlement-of-a-land-claim exception under 25 U.S.C. § 2719: (1) the Secretary took the land into trust; (2) the land was acquired under a settlement of a land claim; and (3) the land was taken into trust as part of the settlement of the land claim. Here, the court held that all three requirements were met.
First, as discussed, the court concluded that the Secretary took the land into trust.
Second, the court held that the plain meaning of “settlement,” as used in the statute, encompassed the ICC settlement from which the Tribe received the original funds to purchase the Park City Parcel. In particular, the court rejected the State’s argument that the word “settlement” should only include “traditional settlement agreements” when Congress established the ICC to determine all tribal claims and applicable remedies.
Third, the court held that the Secretary took the land into trust “as part of” the settlement of land claims. The court reasoned that Congress, as opposed to the ICC settlement itself, authorized the Secretary to take the Park City Parcel into trust under PL 98-602.[121] However, the court found that in acting through the authority vested in her by Congress, the Secretary acted “as part of” the ICC settlement because Congress would not have enacted PL 98-602 but for the ICC settlement. Although the Secretary did not undertake this same analysis, the court held that the Secretary’s interpretation (which was based on department regulations) would have produced the same outcome.
As a result, the Secretary did not act arbitrarily or capriciously by permitting the Tribe to conduct gaming operations.
Sault Ste. Marie Tribe of Chippewa Indians v. Haaland, No. 1:18-cv-02035, 2023 WL 2384443 (D.D.C. Mar. 6, 2023). The Sault Ste. Marie Tribe of Chippewa Indians (the “Tribe”) purchased a 71-acre parcel in Michigan’s lower peninsula (hereinafter the “Sibley Parcel”). The Tribe then sought to compel the Secretary of the Interior to take the Sibley Parcel into trust for the purpose of creating a casino. The Secretary denied the Tribe’s application because it reasoned that the Tribe had not adequately satisfied the requirement that the land be for “social welfare” or the “enhancement of tribal lands.” The Tribe appealed the decision to the District Court for the District of Columbia and the court affirmed.
As relevant here, the Tribe purchased the Sibley Parcel solely using investment income. In turn, investment income can only be used to satisfy one of five enumerated purposes under § 108(c) of the Michigan Indian Land Claims Settlement Act (hereinafter the “Michigan Act”).[122] If the Sibley Parcel qualified under one of the five purposes, the Michigan Act requires the land “be held in trust by the Secretary for the benefit of the tribe.” Here, the Tribe sought to avail itself of reason four (social welfare) and reason five (enhancement of tribal lands).[123]
The Tribe argued that developing a casino would constitute “social welfare” because it would create jobs as well as generate revenue—five percent of which would be used to finance both services for tribal elders and scholarships. The Secretary argued that the Tribe could not satisfy § 108(c)(4) by merely starting an economic enterprise, which may generate its own profits, which might then be spent on social welfare purposes—that is, the social welfare connection was too attenuated. By contrast, the Secretary suggested that health clinics or schools might qualify.
The court agreed with the Secretary that broad principles of job creation and increased revenue could not satisfy the Michigan Act’s requirements. The court started by defining “social welfare” more narrowly than the Tribe proposed. The court reasoned that both on its own and in context, social welfare could not encompass a for-profit casino. Instead, the court explained that social welfare was linked to direct social welfare contributions, such as providing organized care for the sick, poor, or elderly. The court also rejected the Tribe’s argument that the statute did not require a direct social welfare benefit, as to do so would contradict the statute’s plain meaning. Finally, the court reasoned that § 108(c) had to be read in conjunction with § 108(b), and § 108(b) already provided that the principal (as opposed to investment income) could be used for economic development. By contrast, the court reasoned that the omission of economic development in § 108(c) undermined the Tribe’s argument that the casino would constitute a social welfare endeavor.
Turning to requirement five, the Tribe argued that the development of a casino would enhance tribal lands because tribal housing is in high demand, and gaming revenue is the most viable way of providing housing to members of the Tribe. In addition, the Tribe argued that casino operations would fund necessary facility improvements in the upper peninsula, thus enhancing the Tribe’s land. At bottom, the court upheld the Secretary’s rejection of the Tribe’s proffer because the Tribe’s rationales were conclusory and unsupported. Although the Secretary gave the Tribe multiple opportunities to amend its submissions, the Tribe only offered declarations of its Chief Financial Officer and Director of the Tribal Housing Authority to support its contentions as opposed to definite plans, and the court declined to second-guess how the Secretary weighed that evidence. The court also concluded that the Secretary made rational decisions based on the administrative record.
As an alternative argument, the Tribe argued that the Secretary failed to adequately explain her decision. The court explained that this standard was typically difficult to meet and generally encompassed form language or one sentence decisions. Here, the court found the Secretary’s letter to the Tribe, which included inter alia examples of how the Tribe could satisfy § 108(c)’s provisions, satisfied 5 U.S.C. § 555(e)’s minimum procedural requirements.
Accordingly, the court upheld the Secretary’s rejection of the Tribe’s application as not contrary to law, arbitrary, or capricious.[124]
§ 7.4.2. Federal Approval for Reservation Activity
Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.[125] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”[126] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”[127]
Per revisions to Section 81 in 2000, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.[128] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.[129] Failure to secure secretarial approval could render the agreement null and void.[130] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.[131] Regardless of whether Secretary approval is necessary, all parties should be careful as to how they draft agreements which may encumber the land.[132] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (“NIGC”) for approval pursuant to the Indian Gaming Regulatory Act (“IGRA)”.[133] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.[134] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.
Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the Bureau of Indian Affairs (“BIA”) and/or a tribal business license to properly do business with a tribe.[135] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.[136]
With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (“HEARTH”) Act.[137] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415, every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.[138] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).
There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.[139] As of January 6, 2024, the BIA lists 92 tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.[140]
The following highlights several of the more relevant cases decided in the last year.[141]
W. Flagler Assocs., Ltd. v. Haaland, No. 21-5265, 2023 WL 4279219 (D.C. Cir. June 30, 2023). The District of Columbia Circuit Court of Appeals held that the Secretary of the Interior’s (the “Secretary”) decision not to act (and thus approving a tribal-state compact by default) did not violate the Indian Gaming Regulatory Act (“IGRA”). Further, the court held that as a matter of law the tribal-state compact did not violate the federal Wire Act, or the Unlawful Internet Gambling Enforcement Act (“UIGEA”) and the Secretary’s approval of the compact did not violate the equal protection clause of the Fifth Amendment.
In 2021, the Seminole Tribe of Florida (the “Tribe”) and the State of Florida entered into a tribal-state compact (the “Compact”) under IGRA, which allowed the Tribe to offer online sports betting. The Compact deemed all bets placed through the Tribe’s sports book to occur where the sports book servers are located (the Tribe’s land), regardless of where the person placing the bet is located. When the Secretary failed to affirmatively approve or disapprove the Compact within 45 days of receiving it, the Compact became effective.
West Flagler Associates (“West Flagler”) operated casinos in Florida and filed suit, alleging the compact violated IGRA, the Wire Act, UIGEA, and the Fifth Amendment, specifically because the Compact purported to offer state-wide sports betting that would necessarily occur off-reservation. Because of these alleged violations, West Flagler believed the Secretary was required to disapprove the Compact. The Tribe moved to intervene for the limited purpose of filing a motion to dismiss based on its tribal sovereign immunity. The Tribe’s motion was denied, and the court granted summary judgment for West Flagler, holding that the Compact violated the “Indian lands” requirement of IGRA.
On appeal, the D.C. Circuit reversed, reasoning that an IGRA compact can only authorize a tribe to conduct gaming on its own lands, and as such, does not prohibit such compact from discussing other topics. Therefore, a compact could discuss topics which governed activities outside of Indian lands. The court found that the district court erred in “reading into the Compact a legal effect it does not (and cannot) have,” namely that the Compact cannot provide the authority to regulate any activity that occurs outside the borders of Indian land. The court held that the Compact complied with IGRA by authorizing betting that occurs on the Tribe’s land. As to the provision of the Compact discussing betting activities that would occur outside of Indian land, the court explained that issue was not within the scope of the litigation and instead was reserved for the Florida courts to decide.
The district court did not reach West Flagler’s claims that the Compact violated the Wire Act, UIGEA, and the Fifth Amendment. However, on appeal, the D.C. Circuit held that all three challenges were without merit as a matter of law. Lastly, because the court determined that the Tribe’s Compact would be kept intact regardless of whether the case was decided on the merits or on the Tribe’s motion to dismiss, the court affirmed the district court’s denial of the Tribe’s motion to intervene.
§ 7.4.3. Labor and Employment Law & Indian Tribes
When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.[142] Moreover, tribal employers may not be subject to certain federal labor and employment laws.[143]
Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964[144] and the Americans with Disabilities Act[145] expressly exclude Indian tribes,[146] and state anti-discrimination laws usually do not apply to tribal employers.[147] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.[148]
The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),[149] the Employee Retirement Income Security Act (ERISA),[150] the Fair Labor Standards Act (FLSA),[151] the National Labor Relations Act (NLRA),[152] and the Age Discrimination in Employment Act (ADEA),[153] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.[154]
Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.[155] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.[156] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.[157] Following this reasoning, the Department of Labor has stated that the FMLA[158] applies to tribal employers.[159] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.[160] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.[161]
Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.[162]
Federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. Two noteworthy cases from the last year are discussed below:[163]
Dean S. Seneca v. Great Lakes Inter-Tribal Council, Inc., No. 22-2271, 2023 WL 4340699 (7th Cir. July 5, 2023). The Seventh Circuit Court of Appeals affirmed the dismissal of an employment discrimination claim brought against an employer non-profit consortium of Indian tribes, holding that the employer enjoyed tribal sovereign immunity from suit.
Plaintiff, Dean Seneca (“Seneca”), was employed as a director of epidemiology by the Great Lakes Inter-Tribal Council (the “Council”), a non-profit composite of its member Indian tribes, which are federally recognized and own and control it. Seneca alleged that the Council fired him because of his race, color, national origin, age, sex, gender identity, and sexual orientation in violation of federal law, including Title VII of the Civil Rights Act of 1964. The Council successfully moved to dismiss the suit in district court based on tribal sovereign immunity and its view that the federal statutes that Seneca invoked excluded claims against Indian tribes. The district court accepted the first argument and did not reach the second, reasoning that the Council, as a consortium of its members, enjoyed tribal sovereign immunity. Seneca unsuccessfully appealed.
The Seventh Circuit began its analysis from the premise that suit against Indian tribes are barred “absent a clear waiver by the tribe or congressional abrogation.”
On appeal, Seneca first urged the court to adopt the test in McNally CPA’s & Consultants, S.C. v. DJ Hosts, Inc., 692 N.W.2d 247, 251–52 (Wis. Ct. App. 2004), in which the court held that a for-profit corporation did not enjoy tribal sovereign immunity after a tribe bought all of its shares. Here, the Court rejected this argument because the McNally test was “narrow,” and the for-profit analogy failed to carry water when analogizing to a non-profit.
Second, Seneca argued that the Council waived its sovereign immunity by agreeing to abide by Title VI of the Civil Rights Act of 1964 when it accepted federal funds. The court disagreed. Even if the Tribe had waived immunity under Title VI, the court explained that Seneca brought his claims under Title VII, which was already a comprehensive regulatory scheme.
Third, Seneca argued that the Council’s job postings, which boasted compliance with “federal and state laws” waived sovereign immunity. Again, the Seventh Circuit disagreed, reasoning the job posting made no reference to sovereign immunity or its amenability to suit.
Finally, Seneca argued that unless the Council waived sovereign immunity, he had no recourse for his discrimination claim, in violation of his right to due process under the Fifth and Fourteenth Amendments. But the court reasoned that neither the Fifth Amendment nor the Fourteenth Amendment applied to Indian tribes. Accordingly, the Seventh Circuit affirmed the district court’s dismissal of the suit.
Meglitsch v. Southcentral Found., No. 3:20-CV-0190-HRH, 2022 WL 16949256 (D. Alaska Nov. 15, 2022), appeal dismissed, No. 22-36024, 2023 WL 3940561 (9th Cir. May 31, 2023). Plaintiff, Colin Graham Meglistch, was employed by defendant, Southcentral Foundation, a Tribal organization that provides federal healthcare programs for Alaska Natives and Native Americans. Southcentral Foundation is recognized as a Tribal organization under Title V of the Indian Self-Determination and Education Assistance Act (“ISDEAA”).[164] Meglistch alleged that the Southcentral Foundation violated the Fair Labor Standards Act (“FLSA”) by failing to properly pay him overtime for the on-call hours he worked. In response, Southcentral Foundation argued that the court lacked subject matter jurisdiction over this dispute because the FLSA requirements did not apply to tribal entities. The court agreed, holding that FLSA does not apply to tribal entities and dismissed the case under Federal Rule of Civil Procedure 12(h)(3).[165]
In analyzing whether the FLSA applied to Southcentral Foundation, the court noted that “the FLSA is a statute of general applicability” and statutes of general applicability typically apply to Indian tribes. There are, however, three exceptions to this principle.[166] A federal statute of general applicability that is silent on the issue of applicability to Indian tribes will not apply to them if: (1) the law “touches exclusive rights of self-governance in purely intramural matters”; (2) the application of the law to the tribe would “abrogate rights guaranteed by Indian treaties”; or (3) there is proof “by legislative history or some other means that Congress intended [the law] not to apply to Indians on their reservation . . . .” This case involved the first exception.
The court stated that the self-governance exception applied to Southcentral Foundation for a few reasons. First, the court found it relevant that Southcentral Foundation received funding under the ISDEAA, which recognizes the right of Indian self-determination and tribal self-governance. Second, the court reasoned that Southcentral Foundation’s provision of health care services involved exclusive rights of self-governance because staffing responsibilities and pay rates are purely intramural activities, meaning that they relate exclusively to the Southcentral Foundation’s internal operations. The court also rejected Meglistch’s arguments that pay rates and staffing needs were not purely intramural matters because Southcentral Foundation sometimes provided healthcare services to general, non-Native populations because those populations are both small and generally have a “stake” in tribal self-governance. Meglistch also argued that he was entitled to notice that he was working outside of standard Alaska labor laws. The court rejected this argument, both because there was no federal requirement that he be provided notice and also because he was on notice due to his employee handbook outlining his compensation. Therefore, the court granted Southcentral Foundation’s motion to dismiss for lack of subject matter jurisdiction.
§ 7.4.4. Federal Court Jurisdiction
Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question[167] or claims that are brought involving diversity of citizenship.[168] Litigation that arises from a deal with a federally recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,[169] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.[170] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.[171] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.[172] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.
The following highlights several of the more relevant cases decided in the last year.[173]
Bessios v. Pueblo of Pojoaque, No. CV 22-266 MV/JFR, 2022 WL 18936057 (D.N.M. Oct. 12, 2022), report and recommendation adopted 2023 WL 2157699 (Feb. 22, 2023). In November 2018, Plaintiff was terminated from a management role at a casino after conducting data assessments of the proprietary software and discovering “errors and unreconcilable discrepancies.” Plaintiff sued Buffalo Thunder Development Authority, Pueblo of Pojoaque, and Pojoaque Gaming Inc. (collectively “Tribal Defendants”), and SG Gaming Inc. and Scientific Games Corporation (collectively “Gaming Defendants”) for inter alia wrongful termination, retaliatory discharge, defamation, spoliation, tortious interference with contractual relations, and negligence.
Tribal Defendants removed the suit from state court to district court, claiming federal question and supplemental jurisdiction under 28 U.S.C. §§ 1331, 1441, and 1446. Gaming Defendants consented to Tribal Defendants’ removal. Plaintiff moved for remand, arguing that her complaint did not raise a federal question, and any reference to the Indian Gaming Regulatory Act (“IGRA”) or the tribal-state compact did not affect the state-law nature of her claims. The magistrate judge reasoned, which the district court adopted, that Plaintiff’s state-law claims incorporated federal questions of law under IGRA and the applicable tribal-state compact and thus had federal question subject matter jurisdiction.
Federal question jurisdiction permits district courts to hear suits “arising under the Constitution, laws or treaties of the United States.” 28 U.S.C. § 1331. Removal, in turn, is permissible when a federal question case has been filed in state court. 28 U.S.C. § 1441. The court explained that federal question jurisdiction does not arise for any question of federal law, but instead the issue must be a substantial issue of federal law. As a general rule, the court explained that state courts are not permitted to hear suits against Indian defendants without federal authorization when those disputes arise out of Indian country.
Here, the court found that federal question jurisdiction existed despite the state-law nature of Plaintiff’s claims. Plaintiff’s termination arose from accounting discrepancies that she uncovered that she claimed were violations of IGRA and the tribal-state compact that governed Class III gaming. Therefore, the court reasoned that when she filed her complaint, every count (15 in total) relied on IGRA and the Tribe’s sovereign immunity waiver under the tribal-state compact. In turn, in order to resolve the merits of Plaintiff’s claims, the court stated it would have to interpret provisions of IGRA and the tribal-state compact. Accordingly, the court adopted the magistrate judge’s recommendation to deny Plaintiff’s motion for remand.
Byrd v. Town of Mount Vernon, No. CV 22-00401-TFM-B, 2022 WL 17400704 (S.D. Ala. Oct. 26, 2022), report and recommendation adopted 2023 WL 361090 (Jan. 23, 2023). Plaintiff, who was pro se, received a municipal speeding violation by a Mount Vernon police officer. In turn, she filed a notice of removal to federal court alleging that the town of Mount Vernon could not charge her with speeding because she was a member of a recognized Indian tribe, and the ticket was issued in Indian territory. The court, by adopting the magistrate judge’s report and recommendation, remanded the case back to state court.
Although Plaintiff invoked federal question jurisdiction, the court reasoned that 28 U.S.C. § 1331 only applies to civil actions, and the speeding ticket at issue was a criminal offense. The court explained that Plaintiff’s criminal violation did not fall within any statute that would permit her criminal proceeding to be removed to federal court nor did she cite any civil rights law that would permit the case to be removed to federal court. Given that the federal could only acquire federal jurisdiction over a very narrow set of criminal cases, the court remanded the case to state court.
Chicken Ranch Rancheria of Me-Wuk Indians v. California, 65 F.4th 1145 (9th Cir. 2023). Plaintiffs, including Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria (the “Tribes”), filed suit against California, alleging that California violated the Indian Gaming Regulatory Act (“IGRA”) by exhibiting bad faith by failing to negotiate a tribal-state compact that would allow the Tribes to operate Class III gaming. On the merits, the Tribes prevailed and filed a motion for attorney’s fees. California opposed the award of attorney’s fees based on sovereign immunity. The Ninth Circuit agreed with California and declined to award attorneys’ fees to the Tribes.
Putting aside the issue of California’s sovereign immunity (which the court concluded that California had waived), the court reasoned that federal law governed attorney’s fees in cases where the court obtained jurisdiction under the federal question doctrine. Here, the court explained that the underlying merits lawsuit was brought under IGRA, a federal law. In turn, in analyzing IGRA’s language, the court noted that IGRA did not contain an attorneys’ fees provision.
The Tribes argued that an exception existed that would permit attorney’s fees in federal question cases, where “substantial and significant issues of state law” were present. To support this argument, the Tribes argued that the underlying lawsuit implicated state law.
The Ninth Circuit rejected this argument, concluding that the Tribes sued California on a federal IGRA claim, which was “purely [a] federal claim.” Therefore, the court held that there were no exceptions that would permit the imposition of an attorneys’ fee award. Accordingly, the Tribes’ motion for attorneys’ fees was denied.
Sauk-Suiattle Indian Tribe v. City of Seattle, 56 F.4th 1179 (9th Cir. 2022). In 1995, the Federal Energy Regulation Committee (“FERC”) issued the city of Seattle a license to operate a hydroelectric dam for thirty-years. In 2021, the Sauk-Suiattle Indian Tribe (the “Tribe”) sued Seattle alleging that the city operated the dam without the appropriate fish passage channel, which in turn violated inter alia the 1853 Act establishing the Washington Territory and the Supremacy Clause of the United States. Seattle removed the suit to federal court and the Tribe filed a motion to remand. The district court denied the Tribe’s motion to remand, holding that the complaint raised substantial federal questions.
Seattle then moved to dismiss the lawsuit for lack of subject matter jurisdiction. The district court granted the motion because the Tribe’s lawsuit essentially challenged an agency decision that was only reviewable by a circuit court under the Federal Power Act (“FPA”). The Ninth Circuit affirmed.
On the removal issue, the Ninth Circuit explained that federal removal is permitted in “any civil action brought in a state court of which the district courts of the United States have original jurisdiction.” To confer federal question jurisdiction under 28 U.S.C. § 1331, a plaintiff must demonstrate that their cause of action has federal issues that are: “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”[174]
The court concluded that the first two elements were met because the Tribe’s complaint raised federal issues concerning congressional acts and the Supremacy Clause. For the third element, the court determined that the congressional acts involved nationwide regulation. Therefore, this interest was substantial in nature. Finally, for the fourth element, the court concluded that this action was capable of being resolved on the federal level without interfering with the federal-state balance of power. Accordingly, the district court properly denied the Tribe’s motion to remand.
The court then turned to the district court’s dismissal for lack of subject matter jurisdiction. It held that the Tribe’s complaint was governed by the FPA, and the FPA fell within the exclusive jurisdiction of the federal court of appeals. Therefore, the court held that the district court properly dismissed the suit for lack of subject matter jurisdiction.
Finally, the court reasoned that while the general rule is that a dismissal for lack of subject matter jurisdiction should be remanded to state court, here, remand would be futile because exclusive jurisdiction for this suit lied with the court of appeals.
Queens, LLC v. Seneca-Cayuga Nation, No. 419CV00350WPJCDL, 2022 WL 7074271 (N.D. Okla. Oct. 12, 2022). Plaintiffs operated a series of lake-front businesses that it sold to the Seneca-Cayuga Nation (the “Nation”). Plaintiffs sued the Nation for breach of contract when the Nation failed to meet its payment obligations. The contract had a sovereign immunity waiver, and Defendants argued that a waiver of sovereign immunity had to be authorized by the tribe’s Business Committee before it became effective. The Nation argued that the meeting minutes did not indicate a reference to a waiver of sovereign immunity. Plaintiffs disagreed and provided affidavits from the Business Committee.
This case arose in federal court under a somewhat unconventional procedural posture. Plaintiffs filed in state court and won on summary judgment. However, the Oklahoma Court of Civil Appeals held that before it could render a decision, a federal court must determine that it does not have jurisdiction as a condition precedent to the Nation’s waiver of sovereign immunity. The unusual procedural posture forced Plaintiffs to file a lawsuit in federal court while also arguing that the federal court did not have subject matter jurisdiction.[175] The district court agreed and dismissed the suit.
In any event, the court reasoned that before proceeding to the merits, it had to determine whether it had subject matter jurisdiction. At bottom, the court stated that this was a breach of contract action which did not invoke federal question jurisdiction because there was no federal or constitutional claim and did not implicate a treaty. Moreover, the court explained that a defense of sovereign immunity is insufficient to invoke federal question jurisdiction because federal question jurisdiction arises from the complaint. Additionally, just because a tribe is in some way involved in a lawsuit, this did not automatically confer federal question jurisdiction.
Turning to diversity jurisdiction, 28 U.S.C. § 1332 confers jurisdiction on the court when the parties are citizens of different states and the amount in controversy exceeds $75,000. Here, the court determined that an Indian tribe is not a citizen of any state. Therefore, diversity jurisdiction could not exist. Accordingly, the court dismissed the lawsuit for lack of subject matter jurisdiction and did not reach the issue of sovereign immunity.
§ 7.5. The State Sovereign
With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.[176]
Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”[177] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”[178] When the legal incidence falls on tribes, tribal members, or tribal corporations,[179] “[s]tates are categorically barred” from implementing the tax.[180]
When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.[181] Because Congress does not often explicitly preempt state law,[182] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.[183] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.[184]
In New Mexico v. Mescalero Apache Tribe,[185] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”[186] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.[187]
When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands. The issues of preemption and infringement are regularly litigated in the federal courts.[188]
Ute Mt. Ute Tribe v. Ariz. Dep’t of Revenue, 524 P.3d 271 (Ariz. Ct. App. 2023). The Ute Mountain Ute Tribe owned the Weeminuche Construction Authority (“WCA”) (collectively “Plaintiffs”) and challenged an Arizona Department of Revenue’s (“Department”) finding that the WCA owed transaction privilege taxes from three construction projects that WCA completed on the Navajo Nation and the Hopi reservation. Plaintiffs argued the WCA was exempt from transaction privilege taxes because they were operating pursuant to a contract with the Bureau of Indian Affairs (within a trust capacity).
The tax court dismissed Plaintiffs’ complaint with prejudice for failure to state a claim and denied their request to amend the complaint as futile and untimely. The Arizona Court of Appeals affirmed.
First, the court held that Arizona’s transaction privilege tax was not preempted by federal law. In particular, under the Supreme Court’s holding in Arizona Department of Revenue v. Blaze Construction Company, 526 U.S. 31 (1999), the tax court applied the proper legal standard to assess whether federal law preempts Arizona’s transaction privilege tax, which “set[] out a bright-line standard upholding state taxing authority over the proceeds derived from all federal contracts.” Here, the Navajo and Hopi tribes did not contract with WCA, and thus the federal government maintained its contractual responsibility. Thus, the bright-line standard applied, and the federal law did not preempt Arizona’s transaction privilege tax.
Similarly, the court rejected the Plaintiffs’ argument that, absent federal preemption, they were exempt from Arizona’s transaction privilege tax under ADOR’s guidance in TPR 95-11 or A.R.S. § 42-5122. Neither TPR 95-11 nor A.R.S. § 42-5122 provided an exemption.
Lastly, the court examined whether the tax court incorrectly denied the Plaintiffs’ request to amend their complaint. The plaintiffs did not submit proposed written amendments in tax court, which constrained the court’s review. Ultimately, the court held that any amendment would be futile because under TPR 95-11, the statute differentiated between contractor transactions with a tribe and contractor transactions with non-members (which included the federal government). Additionally, caselaw interpreting TPR 95-11 had held that the transaction privilege tax applied to proceeds stemming from federal contracts with non-tribal members to construct on-reservation structures for use by tribal members.[189] Accordingly, the court affirmed the tax court’s dismissal of the complaint.
§ 7.6. Conclusion
Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.
To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.
Ed J. Hermes is a Partner at Snell & Wilmer L.L.P. and is based in the firm’s Phoenix, Arizona office. Ed is a litigator whose practice is focused on complex commercial, tax, and property disputes, and disputes involving Federal Indian Law. Ed regularly appears on behalf of his clients in state, federal, and tribal courts and administrative tribunals throughout the Southwest. Having previously lived and worked in Indian Country, Ed also advises companies and economic development entities in conducting business and creating job opportunities in Indian Country. Ed is a member of the Native American Bar Association of Arizona, as well as admitted to practice law on the Navajo Nation. Special thanks to Snell & Wilmer L.L.P. Commercial Litigation attorneys Alexa Salari, Reid Edwards, and Megan Carrasco for their assistance in drafting this chapter, as well as Snell & Wilmer L.L.P.’s 2023 summer associate class. ↑
The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 Tulsa L.J. 1 (1997). ↑
Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11–12 (1997). ↑
Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997). ↑
Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832). ↑
United States v. Kagama, 118 U.S. 375, 381–82 (1886). ↑
Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑
Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑
Oklahoma v. Lauren Sims, 143 S. Ct. 70 (2022), was granted certiorari but judgment was vacated and remanded to the Court of Criminal Appeals of Oklahoma for further consideration in light of Oklahoma v. Castro-Huerta, 597 U.S. —- (2022). ↑
See United States v. Jicarilla Apache Nation, 564 U.S. 162, 173–174, 177–178 (2011). ↑
Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. Rev. 297, 306 (2004). ↑
Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013). ↑
SeeMontana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations . . . .” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation). ↑
Indian Country includes: (1) all land within the limits of any Indian reservation; (2) “dependent Indian communities” within the borders of the United States; and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction. . . .” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998). ↑
“The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added). ↑
Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quotingUnited States v. Mazurie, 419 U.S. 544, 557 (1975)). ↑
Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). ↑
Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right-of-way granted to a state for the purposes of the construction and use of a state highway, Strate v. A-1 Contractors, 520 U.S. 438 (1997). ↑
Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries (450 U.S. at 564), the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178–79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. SeeWater Wheel, 642 F.3d 802. ↑
Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017). ↑
Michael Feeney helped to research and summarize the cases in this section. Michael is a rising third year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑
Exhaustion is not always required. SeeNat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n. 21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”). ↑
Id. at 857. (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”). ↑
Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012). ↑
SeeRincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but seeProgressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same). ↑
Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”). ↑
SeeFord Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce Bank, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm Court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684. ↑
Nat’l Farmers Union, 471 U.S. at 857; see,e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies). ↑
See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996). ↑
See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see alsoWhitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies). ↑
See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”). ↑
Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903–04 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert.denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); U.S. ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012). ↑
Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n. 14 (1997). ↑
El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999). ↑
Devyn Arredondo helped to research and summarize the cases in this section. Devyn is a rising third-year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2024. ↑
SeeSanta Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978). ↑
Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359–60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license). ↑
Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008). ↑
Kiowa Tribe, 523 U.S. at 760. The U.S. Constitution provides a basis for suits to enforce state election and campaign finance laws. The U.S. Supreme Court has yet to take a position on this matter. ↑
Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978).↑
Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998). ↑
Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (holding that evidence of vexatious and bad faith litigation did not amount to a waiver of immunity “even where the results are deeply troubling, unjust, unfair, and inequitable”). ↑
In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See alsoDemontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the Tribe). ↑
Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (holding Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But seeGuidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that raising the issue of attorneys’ fees in the first instance was sufficient to constitute a waiver of the Tribe’s right to claim sovereign immunity when defendant subsequently claimed for fees against the tribe). ↑
Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see alsoGilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (holding language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity). ↑
See, e.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth, 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf.Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court). ↑
Id. at 418; seeTrump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract). ↑
Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that the chairman of the tribal business committee did not have authority to waive immunity); see alsoSandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But seeRush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent). ↑
Sofia Urias helped to research and summarize the cases in this section. Sofia is a rising third year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2024. ↑
Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena). ↑
SeeSeaport Loan Products v. Lower Brule Community Development Enterprise LLC, 2013 NY slip op. 651492/12 [Sup Ct. NY County 2013] (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction). ↑
Danny McDermott helped to research and summarize the cases in this section. Danny is a rising third-year law student at the University of Arizona James E. Rogers College of Law and expects to graduate in May 2024. ↑
25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); seeTOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5). ↑
Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014) and the D.C. Circuit upheld the District Court, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016). ↑
See, e.g.,Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally-recognized tribe under jurisdiction” in 1934 as required under Carcieri). ↑
The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013). ↑
The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”). ↑
Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151). ↑
Austin Heinisch helped to research and summarize the cases in this section. Austin is a rising third year law student at Texas Tech University School of Law and expects to graduate in May 2024. ↑
See, e.g., Oneida Indian Nation of N.Y. State v. Oneida Cnty., 414 U.S. 661 (1974). ↑
See, e.g., Oneida Cnty., N.Y. v. Oneida Indian Nation of New York State, 470 U.S. 226 (1985). ↑
This case is currently on appeal to the Eighth Circuit. ↑
25 U.S.C. § 2719(a) (“Except as provided in subsection (b), gaming regulated by this chapter shall not be conducted on lands acquired by the Secretary in trust for the benefit of an Indian tribe after October 17, 1988.”). ↑
25 U.S.C. § 2719(b)(1)(B) (“Subsection (a) will not apply when . . . lands are taken into trust as part of . . . a settlement of a land claim.”). See also 25 C.F.R. § 292.2 (explaining the relevant criteria for the settlement of a land claim exception). ↑
PL 98-602 § 105(b)(1) provides “A sum of $100,000 of such funds shall be used for the purchase of real property which shall be held in trust by the Secretary for the benefit of such Tribe.” ↑
The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011). ↑
Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”). ↑
25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. SeeColo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing). ↑
25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006). ↑
25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, seeNavajo Nation Code, 5 N.N.C. § 401, et seq. (2005). ↑
See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, NO. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity. ↑
Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013). ↑
Kaitlyn Vance helped to research and summarize the cases in this section. Kaitlyn is a rising second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2025. ↑
See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generallyNew Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332–33 (1983) (discussing applicability of state laws to tribes). ↑
Seegenerally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but seeState ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State i Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the act and submitting to the jurisdiction of the Workers’ Compensation Administration). ↑
42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (“Title VII expressly does not authorize suits against tribes; “the term employer . . . does not include . . . an Indian tribe . . . .”). ↑
Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See alsoMorton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge). ↑
See, e.g., Ariz. Rev. Stat. Ann. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. SeeSanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see alsoAroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67–68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer). ↑
SeeHardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity). ↑
N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”). ↑
Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116–17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see alsoReich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA). ↑
See,Reich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493–94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434–35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights). ↑
Reich, 4 F.3d at 493–94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see alsoMashantucket Sand & Gravel, 95 F.3d at 174. ↑
Cf.Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes). ↑
Cynthia Murrieta helped to research and summarize the cases in this section. Cynthia is a rising third-year law student at Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑
A Tribal organization under the ISDEAA includes “any legally established organization of Indians which is controlled, sanctioned, or chartered by such governing body. . . .” 25 U.S.C. § 5304(l). ↑
Southcentral Foundation originally filed a motion for summary judgment for lack of subject matter jurisdiction. The court elected to convert the motion to a Rule 12(h)(3) motion because (1) a summary judgment motion would be considered on the merits, which the court would be barred from ruling on if it had no subject matter jurisdiction and (2) due to the timing of relevant pleadings the court reasoned that a Rule 12(h)(3) would be the best procedural vehicle to address Southcentral Foundation’s arguments. ↑
See Donovan v. Coure d’Alene Tribal Farm, 751 F.2d 1113, 1116 (9th Cir. 1985). ↑
28 U.S.C. § 1331 (“Federal Question: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”). ↑
Id. § 1332 (“Diversity of Citizenship: The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different states . . . .”). ↑
SeePeabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accord,TTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See alsoBurlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal). ↑
SeeYsleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”). ↑
SeePayne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726–27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329–30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898–99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But seeCook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf.R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”). ↑
See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split). ↑
Courtney Moore helped to research and summarize the cases in this section. Courtney is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑
Gunn v. Minton, 568 U.S. 251, 258, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013). ↑
The Nation argued that Plaintiffs should be sanctioned for a violation of Federal Rule of Civil Procedure 11 for filing a frivolous lawsuit. The court rejected this argument. It reasoned that because of the Oklahoma court’s ruling, Plaintiffs essentially had to file suit in federal court. Therefore, the court concluded that the lawsuit was not frivolous. ↑
White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980). ↑
Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004). ↑
Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005). ↑
There has been some question as to what exactly constitutes a tribally owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999). ↑
Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005); see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted). ↑
SeeMcClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172–73 (1973). ↑
Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See alsoCalifornia v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”). ↑
Id. at 144; see alsoAroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws). ↑
New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983). ↑
Heather Udowitch helped research and summarize the cases described below. Heather is a rising third-year student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑
See Luther Const. Co. v. Arizona Dep’t of Rev., 74 P.3d 276, 283 (Ariz. Ct. App. 2003). ↑
Tucker Ellis LLP 950 Main Avenue, Suite 1100 Cleveland, OH 44113 216-696-2476 [email protected]
Giovanna Ferrari
Seyfarth Shaw LLP 560 Mission Street, Suite 3100 San Francisco, CA 94105 415-544-1019 [email protected]
§ 6.1. Introduction
Trial lawyers eagerly anticipate the day they begin opening statements in the courtroom and get to take their client’s matter to trial. With a trial comes a lot of hard work, preparation, and navigation of the civil rules and local rules of the jurisdiction. This chapter provides a general overview of issues that a lawyer will face in a courtroom, either civil or criminal. The authors have selected cases of note from the present United States Supreme Court docket, the federal Circuit Courts of Appeals, and selected federal District Courts, that provide a general overview, raise unique issues, expand or provide particularly instructive explanations or rationales, or are likely to be of interest to a broad cross section of the bar. It is imperative, however, that prior to starting trial, the rules of the applicable jurisdiction are reviewed.
§ 6.2. Pretrial Matters
§ 6.2.1. Pretrial Conference and Pretrial Order
Virtually all courts require a pretrial conference at least several weeks before the start of trial. A pretrial conference requires careful preparation because it sets the tone for the trial itself. There are no uniform rules across all courts, so practitioners must be fully familiar with those that affect the particular courtroom they are in and the specific judge before whom they will appear.
According to Federal Rule of Civil Procedure 16, the main purpose of a pretrial conference is for the court to establish control over the proceedings such that neither party can achieve significant delay or engage in wasteful pretrial activities.[1] An additional goal is facilitating settlement before trial commencement.[2]
Federal Rule of Civil Procedure 16 also contemplates a Final Pretrial Conference to formulate a “trial plan.”[3] A proposed pretrial conference order should be submitted to the court for review at the conference. Once the judge accepts the pre-trial conference order, the order will supersede all pleadings in the case.[4] The final pretrial conference order is separate from pretrial disclosures, which include all information and documents required to be disclosed under Federal Rule of Civil Procedure 26.[5] Many federal courts, pursuant to their local rules, are requiring more detailed pretrial submissions, requiring the parties to outline all legal issues and defenses, and lawyers must pay careful attention to these submissions and some judges do not allow parties to introduce arguments outside the four corners of their pre-trial submission.
§ 6.2.2. Motions in Limine
A motion in limine, which means “at the threshold,”[6] is a pre-trial motion for a preliminary decision on an objection or offer of proof. Motions in limine are important because they ensure that the jury is not exposed to unfairly prejudicial, confusing, or irrelevant evidence, even if doing so limits a party’s defenses.[7] Thus, a motion in limine is designed to narrow the evidentiary issues for trial and to eliminate unnecessary trial interruptions by excluding the document before it is entered into evidence.[8]
In ruling on a motion in limine, the trial judge has discretion to either rule on the motion definitively or postpone a ruling until trial.[9] Alternatively, the trial judge may make a tentative or qualified ruling.[10] While definitive rulings do not require a renewed offer of proof at trial,[11] a tentative or qualified ruling might well require an offer of evidence at trial to preserve the issue on appeal.[12] A trial court’s discretion in ruling on a motion in limine extends not only to the substantive evidentiary ruling, but also the threshold question of whether a motion in limine presents an evidentiary issue that is appropriate for ruling in advance of trial.[13] Where the court reserves its ruling on a motion in limine at the outset of trial and later grants the motion, counsel should remember to move to strike any testimony that was provided prior to the ruling.
Motions in limine are not favored and many courts consider it a better practice to deal with questions as to the admissibility of evidence as they arise at trial.[14]
§ 6.3. Opening Statements
One of the most important components of any trial is the opening statement—it can set the roadmap for the jury of how they can find in favor of your client. The purpose of an opening statement is to:
acquaint the jury with the nature of the case they have been selected to consider, advise them briefly regarding the testimony which it is expected will be introduced to establish the issues involved, and generally give them an understanding of the case from the viewpoint of counsel making a statement, so that they will be better able to comprehend the case as the trial proceeds.[15]
It is important that any opening statement has a theme or presents the central theory of your case. As a general rule, a lawyer presents facts and evidence, and not argument, during opening statements. Being argumentative and introducing statements that are not evidence can be grounds for a mistrial.[16] It is also important that counsel keep in mind any rulings on motions in limine prohibiting the use of certain evidence. Failure to raise an objection to matters subject to a motion in limine or other prejudicial arguments can result in the waiver of those rights on appeal.[17] And the “golden rule” for opening statements is that the jurors should not be asked to place themselves in the position of the party to the case.[18]
Defense counsel may decide to reserve their opening until their case in chief—this is a strategic decision and is typically disfavored in jury trials.
§ 6.4. Selection of Jury
§ 6.4.1. Right to Fair and Impartial Jury
The right to a fair and impartial jury is an important part of the American legal system. The right originates in the Sixth Amendment, which grants all criminal defendants the right to an impartial jury.[19] However, today, this foundational right applies in both criminal and civil cases.[20] This is because the Seventh Amendment preserves “the right of trial by jury” in civil cases, and an inherent part of the right to trial by jury is that the jury must be impartial.[21] Additionally, Congress cemented this right when it passed legislation requiring “that federal juries in both civil and criminal cases be ‘selected at random from a fair cross section of the community in the district or division where the court convenes.’”[22]
Examples of ways that jurors may not be impartial include: predispositions about the proper outcome of a case,[23] financial interests in the outcome of a case,[24] general biases against the race or gender of a party,[25] or general biases for or against certain punishments to be imposed.[26]
Over the years, impartiality has become more and more difficult to achieve. This is due mainly to citizens’ (potential jurors) readily available access to news, and the news media’s increased publicity of defendants and trials.[27] In Harris, the Ninth Circuit analyzed whether pre‑trial publicity of a murder trial biased prospective jurors and prejudiced the defendant’s ability to receive a fair trial.[28] The court recognized that “[p]rejudice is presumed when the record demonstrates that the community where the trial was held was saturated with prejudicial and inflammatory media publicity about the crime.”[29] However, the court found that despite immense publicity prior to trial, because the publicity was not inflammatory but rather factual, there was no evidence of prejudice in the case.[30]
§ 6.4.2. Right to Trial by Jury
All criminal defendants are entitled to a trial by jury and must waive this right if they elect a bench trial instead.[31] However, a criminal defendant does not have a constitutional right to a bench trial if he or she decides to waive the right to trial by jury.[32] In civil cases, the party must expressly demand a jury trial. Failure to make such a demand constitutes a waiver by that party of a trial by jury.[33] For example, in Hopkins, the Eleventh Circuit explained that a plaintiff waived his right to trial by jury in an employment discrimination case when he made no demand for a jury trial in his Complaint and did not file a separate demand for jury trial within 14 days after filing his complaint.[34] Some jurisdictions require payment of jury fees to reserve the right to a jury trial.
Additionally, not all civil cases are entitled to a trial by jury. First, the Seventh Amendment expressly requires that the amount in controversy exceed $20.[35] Additionally, only those civil cases involving legal, rather than equitable, issues are entitled to the right of trial by jury.[36] Equitable issues often arise in employment discrimination cases where the plaintiff seeks backpay or another sort of compensation under the ADA, ERISA, or FMLA.[37] Where there are both legal and equitable claims, the parties should address how trial will proceed at the pre-trial conference and whether the equitable claims will be submitted to the jury on an advisory basis, or otherwise.
Another issue that arises in civil cases is contractual jury trial waivers. Most circuits permit parties to waive the right to a jury trial through prior contractual agreement.[38] Generally, the party seeking enforcement of the waiver “must show that consent to the waiver was both voluntary and informed.”[39]
§ 6.4.3. Voir Dire
Voir dire is a process of questioning prospective jurors by the judge and/or attorneys who remove jurors who are biased, prejudiced, or otherwise unfit to serve on the jury.[40] The Supreme Court has explained that “voir dire examination serves the dual purposes of enabling the court to select an impartial jury and assisting counsel in exercising peremptory challenges.”[41]
Generally, an oath should be administered to prospective jurors before they are asked questions during voir dire.[42] “While the administration of an oath is not necessary, it is a formality that tends to impress upon the jurors the gravity with which the court views its admonition and is also reassuring to the litigants.”[43] Moreover, jurors under oath are presumed to have faithfully performed their official duties.[44]
Federal trial judges have great discretion in deciding what questions are asked to prospective jurors during voir dire.[45] District judges may permit the parties’ lawyers to conduct voir dire, or the court may conduct the jurors’ examination itself.[46] Although trial attorneys often prefer to conduct voir dire themselves, many judges believe that counsel’s involvement “results in undue expenditure of time in the jury selection process,” and that “the district court is the most efficient and effective way to assure an impartial jury and evenhanded administration of justice.”[47]
“[I]f the court conducts the examination it must either permit the parties or their attorneys to supplement the examination by such further inquiry as the court deems proper or itself submit to the prospective jurors such additional questions of the parties or their attorneys as the court deems proper.”[48] However, a judge still has much leeway in determining what questions an attorney may ask.[49] For example, in Lawes, a firearm possession case, the Second Circuit found that it was proper for a trial judge to refuse to ask jurors questions about their attitudes towards police.[50] If, on appeal, a party challenges a judge’s ruling from voir dire, the party must demonstrate that trial judge’s decision constituted an abuse of discretion.[51] Thus, it is extremely difficult to win an appeal regarding voir dire questioning.[52] It is also important to keep in mind that cases involving sensitive issues, like sexual abuse type cases, that the lawyer may need to conduct individual voir dire, outside the presence of others, to protect the individuals answering difficult questions on the public record or in front of other potential jurors. This is another issue that should be addressed at the pre-trial conference.
§ 6.4.4. Jury Selection Methods
Each court has its own procedures for jury selection. The two basic methods are the struck jury method and the jury box method (also known as strike-and-replace). At a high level, the methods differ with respect to how many prospective jurors are subject to voir dire and the order in which jurors can be challenged or struck from the jury panel. For example, the jury box method seats the exact number of jurors in the jury box needed to form a viable jury, and allows voir dire and challenges to those jurors.. The stuck method allows voir dire of a larger number of prospective jurors, usually the number of jurors needed to form a viable jury, plus enough prospective jurors to cover all preemptory challenges and potential alternates. Counsel should review local and judge rules to determine which method will be applied. Where there is no set rule or judicial preference, counsel may stipulate with opposing counsel as to the method.
§ 6.4.5. Challenge for Cause
A challenge “for cause” is a request to dismiss a prospective juror because the juror is unqualified to serve, or because of demonstrated bias, an inability to follow the law, or if the juror is unable to perform the duties of a juror. 18 U.S.C. § 1865 sets forth juror qualifications and lists five reasons a judge may strike a juror: (1) if the juror is not a citizen of the United States at least 18 years old, who has resided within the judicial district at least one year; (2) is unable to read, write, or understand English enough to fill out the juror qualification form; (3) is unable to speak English; (4) is incapable, by reason of mental or physical infirmity, to render jury service; or (5) has a criminal charge pending against him, or has been convicted of a state or federal crime punishable by imprisonment for more than one year.[53]
In addition to striking a juror for these reasons, an attorney may also request to strike a juror “for cause” under 28 U.S.C. § 1866(c)(2) “on the ground that such person may be unable to render impartial jury service or that his service as a juror would be likely to disrupt the proceedings.”[54]
A challenge “for cause” is proper where the court finds the juror has a bias that is so strong as to interfere with his or her ability to properly consider evidence or follow the law.[55] Bias can be shown either by the juror’s own admission of bias or by proof of specific facts that show the juror has such a close connection to the parties, or the facts at trial, that bias can be presumed. The following cases illustrate examples of challenges for cause:
U.S. v. Price: The Fifth Circuit explained that prior jury service during the same term of court is not by itself sufficient to support a challenge for cause. A juror may only be dismissed for cause because of prior service if it can be shown by specific evidence that the juror has been biased by the prior service.[56]
Chestnut v. Ford Motor Co.: The Fourth Circuit held that the failure to sustain a challenge to a juror owning 100 shares of stock in defendant Ford Motor Company (worth about $5000) was reversible error.[57]
United States v. Chapdelaine: The First Circuit found that it was permissible for trial court not to exclude for cause jurors who had read a newspaper that indicated co‑defendants had pled guilty before trial.[58]
Leibstein v. LaFarge N. Am., Inc.: Prospective juror’s alleged failure to disclose during voir dire that he had once been defendant in civil case did not constitute misconduct sufficient to warrant new trial in products liability action.[59]
Cravens v. Smith: The Eighth Circuit found that the district court did not abuse its discretion in striking a juror for cause based on that juror’s “strong responses regarding his disfavor of insurance companies.”[60]
§ 6.4.6. Peremptory Challenge
In addition to challenges for cause, each party also has a right to peremptory challenges.[61] A peremptory challenge permits parties to strike a prospective juror without stating a reason or cause.[62] “In civil cases, each party shall be entitled to three peremptory challenges. Several defendants or several plaintiffs may be considered as a single party for the purposes of making challenges, or the court may allow additional peremptory challenges and permit them to be exercised separately or jointly.”[63]
Parties can move for additional peremptory challenges.[64] This is common in cases where there are multiple defendants. For example, in Stephens, two civil codefendants moved for additional peremptory challenges so that each defendant could have three challenges (totaling six peremptory challenges for the defense).[65] In deciding whether to grant the defendants’ motion, the court recognized that trial judges have great discretion in awarding additional peremptory challenges, and that additional challenges may be especially warranted when co-defendants have asserted claims against each other.[66] The court in Stephens ultimately granted the defendants’ motion for additional challenges.[67]
Parties may not use peremptory challenges to exclude jurors on the basis of their race, gender, or national origin.[68] Although “[a]n individual does not have a right to sit on any particular petit jury, . . . he or she does possess the right not to be excluded from one on account of race.”[69] When one party asserts that another’s peremptory challenges seek to exclude jurors on inappropriate grounds under Batson, the party challenged must demonstrate a legitimate explanation for its strikes, after which the challenging party has the burden to show that the legitimate explanation was pre-textual.[70] The ultimate determination of the propriety of a challenge is within the discretion of the trial court, and appellate courts review Batson challenges under harmless error analysis.[71]
Finally, some courts have found that it is reversible error for a trial judge to require an attorney to use peremptory challenges when the juror should have been excused for cause. “The district court is compelled to excuse a potential juror when bias is discovered during voir dire, as the failure to do so may require the litigant to exhaust peremptory challenges on persons who should have been excused for cause. This result, of course, extinguishes the very purpose behind the right to exercise peremptory challenges.”[72] However, courts also acknowledge that an appeal is not the best way to deal with biased jurors. The Eighth Circuit recognized that “challenges for cause and rulings upon them . . . are fast paced, made on the spot and under pressure. Counsel. as well as the court, in that setting, must be prepared to decide, often between shades of gray, by the minute.”[73]
§ 6.5. Examination of Witnesses
§ 6.5.1. Direct Examination
Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’s testimony.[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:
To establish undisputed preliminary or inconsequential matters.[76]
If the witness is being impeached by the party calling him or her.[80]
If the witness is frightened, nervous, or upset while testifying.[81]
If the witness is unresponsive or shows a lack of understanding.[82]
Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.[86]
When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.[89]
When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:
the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.[91]
However, the item/memorandum does not come into evidence.[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.[93]
Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.[95]
However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.[100] Further, even courts that do not permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.[101]
§ 6.5.2. Cross-Examination
Cross-examination provides the opposing party an opportunity to challenge what a witness said on direct examination, discredit the witness’s truthfulness, and bring out any other testimony that may be favorable to the opposing party’s case.[102] Generally under the federal rules, cross-examination is limited to the “subject matter” of the direct examination and any matters affecting the credibility of the witness.[103] The purpose of limiting the scope of cross-examination is to promote regularity and logic in jury trials, and ensure that each party has the opportunity to present its case in chief. However, courts tend to liberally construe what falls within the “subject matter” of direct examination.[104] For example, in Perez-Solis, the Fifth Circuit found that a witness’s brief reference to collecting money from a friend permitted opposing counsel to cross-examine him on all of his finances.[105] Additionally, the language of Fed. R. Evid. 611(b) states that although cross-examination “should not” go beyond the scope of direct examination, the court may exercise its discretion to “allow inquiry into additional matters as if on direct examination.”[106] However, if the questioning goes beyond the subject matter, it generally should not include leading questions.
One of the main goals of cross-examination is impeachment. The Federal Rules of Evidence explain three different methods of impeachment: (1) impeachment by prior bad acts or character for untruthfulness,[107] (2) impeachment by prior conviction of a qualifying crime,[108] and (3) impeachment by prior inconsistent statement.[109] Additionally, courts still apply common law principles and permit impeachment through three additional methods as well: (1) impeachment by demonstrating the witness’s bias, prejudice, or interest in the litigation or in testifying, (2) impeachment by demonstrating the witness’s incapacity to accurately perceive the facts, and (3) impeachment by showing contradictory evidence to the witness’s testimony in court.[110] The following present case examples of each of the six methods of impeachment:
Prior bad act or dishonesty: In O’Connor v. Venore Transp. Co.,[111] the First Circuit found that trial judge did not abuse discretion when he allowed defense counsel to cross-examine plaintiff with his prior tax returns with the purpose of demonstrating dishonesty.
Conviction of qualifying crime: In Smith v. Tidewater Marine Towing, Inc.,[112] the Fifth Circuit found that, in Jones Act action arising from injuries plaintiff received while working on a tugboat, defense counsel permissibly crossed the plaintiff about his prior convictions.
Prior inconsistent statement: In Wilson v. Bradlees of New England, Inc.,[113] a product liability case, the First Circuit found that defense counsel appropriately crossed plaintiff with an inconsistent statement made in a complaint filed in a different case against a different defendant.
Bias or prejudice: In Udemba v. Nicoli,[114] the First Circuit found that it was permissible for defense counsel to cross-examine the plaintiff’s wife about domestic abuse to show bias in a case involving excessive force claims against the police.
Incapacity to accurately perceive: In Hargrave v. McKee,[115] the Sixth Circuit found that the trial court should have permitted defense counsel to question a victim about how her ongoing psychiatric problems affected her perception and memory of events.
Contradictory evidence: In Barrera v. E. R. DuPont De Nemours and Co., Inc.,[116] the Fifth Circuit held, in a personal-injury action, that the trial judge erred in denying the use of evidence showing that plaintiff received over $1000 per month in social security benefits because the evidence was admissible to contradict defendant’s volunteered testimony on cross-examination that he did not have a “penny in his pocket.”
Once the right of cross-examination has been fully and fairly exercised, it is within the trial court’s discretion as to whether further cross-examination should be allowed.[117] In order to recall a witness, the party must show that the new cross-examination will shed additional light on the issues being tried or impeach the witness. Further, it is helpful if the party seeking recall demonstrates that it came into possession of additional evidence or information that it did not have when it previously crossed that witness.[118] Further, it is difficult to succeed on an appeal of a trial court’s failure to permit recall for further cross‑examination. This is because courts review a trial judge’s decision for abuse of discretion, and often find that the lack of recall was a harmless error.[119]
§ 6.5.3. Expert Witnesses
Experts are witnesses who offer opinion testimony on an aspect of the case that requires specialized knowledge or experience. Experts also include persons who do not testify, but who advise attorneys on a technical or specialized area to better help them prepare their cases. A few key criteria should be considered at the outset when choosing an expert. First is the level of relevant expertise and the ability to have the expert’s research, assumptions, methodologies, and practices stand up to the scrutiny of cross-examination. Many law firms, nonprofits, commercial services, and government agencies maintain lists of experts categorized by the expertise; those lists are a helpful place to begin. Alternatively, counsel may begin by researching persons who have spoken or written about the subject matter that requires expert testimony. An Internet search is, in many cases, the place to start when developing a list. Counsel also might consider using a legal search engine to identify persons who have provided expert testimony on the subject matter in the past. Westlaw and LexisNexis both maintain expert databases.
Any expert who is on counsel’s list of candidates should produce, in addition to his or her curriculum vitae (CV), a list of prior court and deposition appearances, as well as a list of publications over the last 10 years. In federal court, this information must be disclosed in the expert report, per Federal Rule of Civil Procedure 26(a)(2).[120]
Another consideration when retaining an expert is whether he or she will be a testifying expert, or whether the expert will only act in a consulting role in preparing the case for trial (non-testifying expert) because this will determine the discoverability of the expert’s opinions. Testifying experts’ opinions are always discoverable, while consulting experts’ opinions are nearly always protected from discovery.
A testifying expert must be qualified, and the proponent of an expert witness bears the burden of establishing the admissibility of the expert’s testimony by a preponderance of the evidence. Federal Rule of Evidence 702 sets forth a standard for admissibility, wherein a witness may be qualified as an expert by knowledge, skill, experience, training, or education and may testify in the form of an opinion if they meet certain criteria. Opposing counsel may challenge the qualifications of the expert before the expert’s opinions are presented; to do so, opposing counsel can ask to voir dire the expert (usually outside of the presence of the jury). It is for the trial court judge to determine whether or not “an expert’s testimony both rests on a reliable foundation and is relevant to the task at hand,” thereby making it admissible.[121]
§ 6.6. Evidence at Trial
§ 6.6.1. Authentication of Evidence
With the exception of exhibits as to which authenticity is acknowledged by stipulation, admission, judicial notice, or exhibits which are self-authenticating, no exhibit will be received in evidence unless it is first authenticated or identified as being what it purports to be. Under the Federal Rules of Evidence, the authentication requirement is satisfied when “the proponent . . . produce[s] evidence sufficient to support a finding that the item is what the proponent claims it is.”[122]
When an item is offered into evidence, the court may permit counsel to conduct a limited cross-examination on the foundation offered. In reaching its determination, the court must view all the evidence introduced as to authentication or identification, including issues of credibility, most favorably to the proponent.[123] Of course, the party who opposed introduction of the evidence may still offer contradictory evidence before the trier of fact or challenge the credibility of the supporting proof in the same way that he can dispute any other testimony.[124] However, upon consideration of the evidence as a whole, if a sufficient foundation has been laid in support of introduction, contradictory evidence goes to the weight to be assigned by the trier of fact and not to admissibility.[125] It is important to note that many courts have held that the mere production of a document in discovery waives any argument as to its authenticity.[126]
While there are many topics to discuss regarding authentication of evidence, this section will focus on electronically stored information. Proper authentication of e-mails and other instant communications, as well as all computerized records, is of critical importance in an ever-increasing number of cases, not only because of the centrality of such data and communications to modern business and society in general, but also due to the ease in which such electronic materials can be created, altered, and manipulated. In the ordinary course of events, a witness who has seen the e-mail in question need only testify that the printout offered as an exhibit is an accurate reproduction.
Web print out – Printouts of Internet website pages must first be authenticated as accurately reflecting the content of the page and the image of the page on the computer at which the printout was made before they can be introduced into evidence; then, to be relevant and material to the case at hand, the printouts often will need to be further authenticated as having been posted by a particular source.[127]
Text message – When there has been an objection to admissibility of a text message, the proponent of the evidence must explain the purpose for which the text message is being offered and provide sufficient direct or circumstantial corroborating evidence of authorship in order to authenticate the text message as a condition precedent to its admission; thus, authenticating a text message or e-mail may be done in much the same way as authenticating a telephone call.[128]
Social networking services – Proper inquiry for determining whether a proponent has properly authenticated evidence derived from social networking services was whether the proponent adduced sufficient evidence to support a finding by a reasonable jury that the proffered evidence was what the proponent claimed it to be.[129]
§ 6.6.2. Objecting to Evidence
Objections must be specific. The party objecting to evidence must make known to the court and the parties the precise ground on which the objecting party is basing the objection.[130] The objecting party must also be sure to indicate the particular portion of the evidence that is objectionable.[131] However, a general objection may be permitted if the evidence is clearly inadmissible for any purpose or if the only possible grounds for objection is obvious.[132]
The purpose of a specific objection to evidence is to preserve the issue on appeal. On appeal, the objecting party will be limited to the specific objections to evidence made at trial. However, an objection raised by a party in writing is sufficiently preserved for appeal, even if that same party subsequently failed to make an oral, on-the-record objection.[133]
Objections to evidence must be timely so as to not allow a party to wait and see whether an answer is favorable before raising an objection.[134] Failure to timely object results in the evidence being admitted. Once the evidence is admitted and becomes part of the trial record, it may be considered by the jury in deliberations, the trial court in ruling on motions, and a reviewing court determining the sufficiency of the evidence.[135] In some instances, the trial judge may prohibit counsel from giving descriptions of the basis for his or her objections. However, the attorney must still attempt to get in the specific grounds for the objection on the record.[136]
Counsel objecting the evidence should remember to strike the evidence from the record after their objection is sustained.
§ 6.6.3. Offer of Proof
If evidence is excluded by the trial court, the party offering the evidence must make an offer of proof to preserve the issue on appeal.[137] For an offer of proof to be adequate to preserve an issue on appeal, counsel must state both the theory of admissibility and the content of the excluded evidence.[138] Although best practice is to make an offer of proof at the time an objection is made, an offer of proof made later in time, even if it is made at a subsequent conference or hearing, may be acceptable.[139] An offer of proof can take several different forms:
A testimonial offer of evidence, whereby counsel summarizes what the proposed evidence is supposed to be. Attorneys using this method should be cautious, however, as the testimony may be considered inadequate.[140]
An examination of a witness, whereby a witness is examined and cross-examined outside of the presence of a jury.[141]
A written statement by the examining counsel, which describes the answers that the proposed witness would give if allowed to testify.[142]
An affidavit, taken under oath, which summarizes a witness’s expected testimony and is signed by the witness.[143] However, this use of documentary evidence should be marked as an exhibit and introduced into the record for identification on appeal.[144]
There are exceptions to the offer of proof requirement. First, an offer of proof is unnecessary when the content of the evidence is “apparent from the context.”[145] Second, a cross-examiner who is conducting a proper cross-examination will be given more leeway by a court, since oftentimes the cross-examiner does not know what a witness will say if permitted to answer a question.[146]
§ 6.7. Closing Argument
Different than an opening statement, closing argument is the time for advocacy and argument on behalf of your client. It is not an unfettered right, however, and there are certain rules to remember about closing argument. First, present only that which was presented in evidence and do not deviate from the record.[147] You also do not want to comment on a witness that was unable to testify or suggest that a defendant’s failure to testify results in a guilty verdict.[148] Further, an attack on the credibility or honesty of opposing counsel is considered unethical.[149] But that does not mean lawyers cannot comment on the credibility of evidence and suggest reasonable inferences based on the evidence.[150] In addition, keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”[151]
§ 6.8. Judgment as a Matter of Law
Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter of law, sometimes referred to as a directed verdict in state court matters.[152] A motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(a) “may be made at any time before the case is submitted to the jury” and the motion “must specify the judgment sought and the law and facts that entitle the movant to the judgment.”[153] But, “[a] motion under this Rule need not be stated with ‘technical precision,’” so long as “it clearly requested relief on the basis of insufficient evidence.”[154] Although it may be “better practice,” there is no requirement that the motion be made in writing.[155] The Sixth Circuit Court of Appeals has even held that it is “clearly within the court’s power” to raise the motion “sua sponte.”[156]
Importantly, Rule 50 uses permissive, not mandatory, language, which means, “while a district court is permitted to enter judgment as a matter of law when it concludes that the evidence is legally insufficient, it is not required to do so.” The Supreme Court has gone as far as to say “the district courts are, if anything, encouraged to submit the case to the jury, rather than granting such motions.”[157] There is a practical reason for this advice: if the motion is granted, then overturned on appeal, a whole new trial must be conveyed. Conversely, if the case is allowed to go to the jury, a post-verdict motion or appellate court can right any wrong with more ease.
In entertaining a motion for judgment as a matter of law, courts should review all of the evidence in the record, but, in doing so, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence.[158] Credibility determinations, the weighing of the evidence, or the drawing of legitimate inferences from the facts are jury functions, not those of a judge.[159] The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury might reasonably find a verdict for that party. Since granting judgment as a matter of law deprives the party opposing the motion of a determination of the facts by a jury, it is understandable that it is to be granted cautiously and sparingly by the trial judge. Because a failure to bring a 50(a) motion at the close of evidence will preclude the trial judge from granting judgment as a matter of law after the verdict,[160] parties should consider bringing a 50(a) motion even if it is unlikely to be granted.[161]
§ 6.9. Jury Instructions
§ 6.9.1. General
The purpose of jury instructions is to advise the jury on the proper legal standards to be applied in determining issues of fact as to the case before them.[162] The court may instruct the jury at any time before the jury is discharged.[163] But the court must first inform the parties of its proposed instructions and give the parties an opportunity to respond.[164] Although each party is entitled to have the jury charged with his or her theory of the case, the proposed instructions must be supported by the law and the evidence.[165]
§ 6.9.2. Objections
Federal Rule of Civil Procedure 51 provides counsel the ability to correct errors in jury instructions.[166] The philosophy underlying the provisions of Rule 51 is to prevent unnecessary appeals of matters concerning jury instructions, which should have been resolved at the trial level. An objection must be made on the record and state distinctly the matter objected to and the grounds for the objection.[167] Off-the-record objections to jury instructions, regardless of how specific, cannot satisfy requirements of the rule governing preservation of such errors.[168] A party may object to instructions outside the presence of the jury before the instructions and arguments are delivered or promptly after learning that the instructions or request will be, or has been, given or refused.[169] Even if the initial request for an instruction is made in detail, the requesting party must object again after the instructions are given but before the jury retires for deliberations, in order to preserve the claimed error.[170]
Whether a jury instruction is improper is a question of law reviewed de novo.[171] Instructions are improper if, when viewed as a whole, they are confusing, misleading, and prejudicial.[172] If an instruction is improper, the judgment will be reversed, unless the error is harmless.[173] A motion for new trial is not appropriate where the omitted instructions are superfluous and potentially misleading.[174]
Further, while some courts have been lenient on whether objections are made in accordance with Rule 51, many courts hold that one who does not object in accordance with Rule 51 is deemed to have waived the right to appeal. A patently erroneous instruction can be considered on appeal if the error is “fundamental” and involves a miscarriage of justice, but the movant claiming the error has the burden of demonstrating it is a fundamental error.[175]
§ 6.10. Conduct of Jury
§ 6.10.1. Conduct During Deliberations
Jury deliberations must remain private in order to protect the jury’s deliberations from improper, outside influence.[176] Control over the jury during deliberations, including the decision whether to allow the jurors to separate before a verdict is reached, is in the sound discretion of the trial court.[177] During this time, a judge may consider the fatigue of the jurors in determining whether the time of deliberations could preclude effective and impartial deliberation absent a break.[178] Although admonition of the jury is not required, one should be given if the jury is to separate at night and could potentially interact with third parties.[179]
The only individuals permitted in the jury room during deliberations are the jurors. However, in the case of a juror with a hearing or speech impediment, the court will appoint an appropriate professional to assist that individual and the presence of that professional is not grounds for reversal so long as the professional: (1) does not participate in deliberations; and (2) takes an oath to that effect.[180]
Courts have broad discretion in determining what materials will be permitted in the jury room.[181] Materials received into evidence are generally permitted,[182] including real evidence,[183] documents,[184] audio recordings,[185] charts and summaries admitted pursuant to Federal Rule of Evidence 1006,[186] video recordings,[187] written stipulations,[188] depositions,[189] drugs,[190] and weapons.[191] Additionally, jurors are typically permitted to use any notes he or she has taken over the course of trial.[192] Pleadings, however, are ordinarily not allowed.[193]
§ 6.10.2. Conduct During Trial
Traditionally, the trial judge has discretion to manage the jury during trial.[194] To ensure the jurors are properly informed, the court may, at any time after the commencement of trial, instruct the jury regarding a matter related to the case or a principal of law.[195] If a party wishes to present an exhibit to the jurors for examination over the course of trial, counsel should request that the court admonish the jury not to place undue emphasis on the evidence presented.[196] Additionally, the trial court may, in its informed discretion, permit a jury view of the premises that is the subject of the litigation.[197]
During trial, the court may allow the jury to take notes and dictate the procedure for doing so.[198] The trial court may permit note-taking for all of the trial or restrict the practice to certain parts.[199] A concern of permitting note-taking during trial is that jurors may place too much significance on their notes and too little significance on their recollection of the trial testimony.[200] To mitigate this risk, a judge should give a jury instruction informing each juror that he or she should rely on his memory and only use notes to assist that process.[201]
Allowing a juror to participate in examining a witness is within the discretion of the trial court,[202] although some courts have strongly opposed the practice.[203] If allowed, procedural protections should be encouraged to mitigate the risks of questions.[204] Additionally, the court should permit counsel to re-question the witness after a juror question has been posed.[205]
While trial is ongoing, jurors should not discuss the case among themselves[206] or share notes[207] prior to the case being submitted for deliberations. The same rule applies to communication between jurors and trial counsel[208] or jurors and the parties,[209] although accidental or unintentional contact may be excused.[210]
§ 6.11. Relief from Judgment
§ 6.11.1. Renewed Motion for Judgment as a Matter of Law
Pursuant to Federal Rule of Civil Procedure 50(b) a party may file a “renewed” motion for judgment as a matter of law, previously known as a “motion for directed verdict,” asserting that the jury erred in returning a verdict based on insufficient evidence.[211] However, as explained above, in order to file a 50(b) motion, a party must have filed a Rule 50(a) pre-verdict motion for judgment as a matter of law before the case was submitted to the jury.[212] The renewed motion is limited to issues that were raised in a “sufficiently substantial way” in the pre-verdict motion[213] and failure to comply with this process often results in waiver.[214] The renewed motion must be filed no later than 28 days after the entry of judgment.[215]
The standard for granting a renewed motion for judgment as a matter of law mirrors the standard for granting the pre-verdict motion under Rule 50(a).[216] A party is entitled to judgment only if a reasonable jury lacked a legally sufficient evidentiary basis to return the verdict that it did.[217] In rendering this analysis, a court may not weigh conflicting evidence and inferences or determine the credibility of the witnesses.[218] Upon review, the court must:
(1) consider the evidence in the light most favorable to the prevailing party, (2) assume that all conflicts in the evidence were resolved in favor of the prevailing party, (3) assume as proved all facts that the prevailing party’s evidence tended to prove, and (4) give the prevailing party the benefit of all favorable inferences that may reasonably be drawn from the facts proved. That done, the court must then deny the motion if reasonable persons could differ as to the conclusions to be drawn from the evidence.[219]
The analysis reflects courts’ general reluctance to interfere with a jury verdict.[220]
§ 6.11.2. Motion for New Trial
Federal Rule of Civil Procedure 59 permits a party to file a motion for new trial, either together with or as an alternative to a 50(b) renewed motion for judgment as a matter of law.[221] Like a renewed motion for judgment as a matter of law, a motion for new trial must be filed no later than 28 days after an entry of judgment.[222]
Rule 59 does not specify or limit the grounds on which a new trial may be granted.[223] A party may move for a new trial on the basis that “the verdict is against the weight of the evidence, that the damages are excessive, or that, for other reasons, the trial was not fair . . . and may raise questions of law arising out of alleged substantial errors in admission or rejection of evidence.”[224] Other recognized grounds for new trial include newly discovered evidence,[225] errors involving jury instruction,[226] and conduct of counsel.[227] Courts often grant motions for new trial on the issue of damages alone.[228]
Unlike when reviewing a motion for judgment as a matter of law, courts may independently evaluate and weigh the evidence.[229] Additionally, the Court, on its own initiative with notice to the parties and an opportunity to be heard, may order a new trial on grounds not stated in a party’s motion.[230]
When faced with a renewed judgment as a matter of law or a motion for new trial, courts have three options. They may (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.[231]
§ 6.11.3. Clerical Mistake, Oversights and Omissions
Federal Rule of Civil Procedure 60(a) provides that “the court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.” This rule applies in very specific and limited circumstances, when the record makes apparent that the court intended one thing but by mere clerical mistake or oversight did another; such mistake must not be one of judgment or even of misidentification, but merely of recitation, of the sort that clerk or amanuensis might commit, mechanical in nature.[232] It is important to note that this rule can be applied even after a judgment is affirmed on appeal.[233]
§ 6.11.4. Other Grounds for Relief
Federal Rule of Civil Procedure 60(b) provides for several additional means for relief from a final judgment:
mistake, inadvertence, surprise, or excusable neglect;
newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
the judgment is void;
the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
any other reason that justifies relief.
Courts typically require that the evidence in support of the motion for relief from a final judgement be “highly convincing.”[234]
Luce v. United States, 469 U.S. 38, 40 n.2 (1984). ↑
United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988). ↑
Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012). ↑
United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001). ↑
Wilson v. Williams, 182 F.3d 562, 565–66 (7th Cir. 1999). ↑
Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”). ↑
Fusco v. General Motors Corp., 11 F.3d 259, 262–63 (1st Cir. 1993). ↑
Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014). ↑
U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982). ↑
Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010). ↑
Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”). ↑
Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”). ↑
Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.). ↑
People v. Jordan, 2019 IL App (1st Dist.) 161848. ↑
Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007). ↑
Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015). ↑
See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991. Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840–41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”). ↑
K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988). ↑
Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977). ↑
United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627–28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel). ↑
U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)). ↑
U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723–26 (8th Cir. 1987). ↑
Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”). ↑
Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. 2000). ↑
Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error). ↑
United States v. Bishop, 264 F.3d 535, 554–55 (5th Cir. 2001). ↑
United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978). ↑
Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed). ↑
United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993). ↑
Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011). ↑
See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”). ↑
Davis v. United States, 374 F.2d 1, 5 (1967) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”). ↑
28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978). ↑
Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009). ↑
See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin). ↑
Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004). ↑
Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017). ↑
Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted). ↑
Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.” ↑
Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715–22 (6th Cir. 2005). ↑
Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715–22 (6th Cir. 2005). ↑
Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977). ↑
United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995). ↑
United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989). ↑
United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974). ↑
SeeDavis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”). ↑
See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”). ↑
See United States v. Perez-Solis, 709 F.3d 453, 463–64 (5th Cir. 2013); see alsoUnited States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination), overruled on other grounds; United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”). ↑
Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.). ↑
Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial. ↑
To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001). ↑
Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement). ↑
U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . . [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”). ↑
Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017). ↑
See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”). ↑
In re L.P., 749 S.E.2d 389, 392–392 (Ga. Ct. App. 2013). ↑
Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014). ↑
State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10–11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7 (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.). ↑
Jones v. U.S., 813 A.2d 220, 226–227 (D.C. 2002). ↑
See, e.g., Hastings v. Bonner, 578 F.2d 136, 142–143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266–67 (9th Cir. 1977). ↑
SeeUnited States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005). ↑
Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995). ↑
SeeUnited States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”). ↑
Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985). ↑
See id. at 1241–42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”). ↑
Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six weeks” on whether DNA evidence was admissible). ↑
Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”). ↑
Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993). ↑
See Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”). ↑
Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008). ↑
U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977). ↑
Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995). ↑
Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006). ↑
Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554–555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962). ↑
Salazar v. AT&T Mobility LLC, 2023 WL 2778774 (Fed. Cir. Apr. 5, 2023) (party that made 50(a) motion but failed to move on the issue of infringement could not raise infringement in 50(b) motion). ↑
Daly v. Moore, 491 F.2d 104 (5th Cir. 1974) (explaining that a court should refuse instructions not applicable to the facts). ↑
Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”). ↑
Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation). ↑
Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002). ↑
Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004), abrogated on other grounds. ↑
Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions). ↑
Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008). ↑
Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law). ↑
United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”). ↑
Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.). ↑
United States v. Olano, 507 U.S. 725, 737 (1993). ↑
Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545–46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715–16 (9th Cir. 1969). ↑
Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98–99 (7th Cir. 1971). ↑
See United States v. Williams, 635 F.2d 744, 745–46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”). ↑
United States v. Dempsey, 830 F.2d 1084, 1089–90 (10th Cir. 1987). ↑
United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971). ↑
United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996). ↑
United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986). ↑
United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999). ↑
United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981). ↑
See, e.g., United States v. Darden, 70 F.3d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge). ↑
United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011). ↑
See United States v. Rhodes, 631 F.2d 43, 45–46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”). ↑
United States v. Richardson, 233 F.3d 1285, 1288–1289 (11th Cir. 2000). ↑
United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514–516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985). ↑
Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000). ↑
Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008). ↑
CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015). ↑
Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)). ↑
Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017). ↑
McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016). ↑
Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017). ↑
See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence). ↑
Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials). ↑
Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940). ↑
Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial). ↑
Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue). ↑
Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial). ↑
See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict). ↑
In re Transtexas Gas Corp., (5th Cir 2002), 303 F.3d 571. ↑
U.S. v. Mansion House Center North Redevelopment Co., (8th Cir. 1988), 855 F.2d 524, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation). ↑
See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977). ↑
As chairs of the American Bar Association’s 2024 US Public Target Deal Points Study, we would like to extend a huge thank-you to our attorney, in-house, and technical volunteers (all of whom are listed in the credits pages), who dedicated many hours of their days to bring this Study to you.
What Is the Public Target Deal Points Study?
The US Public Target Deal Points Study is a publication of the Market Trends Subcommittee of the ABA Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in US public target mergers and acquisitions transactions during a specified time period. The US Public Target Deal Points Study is the preeminent study of US public M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.
The Study analyzes public target merger agreements for transactions that closed during calendar years 2021 (138 transactions) and 2022 (124 transactions), and between January 1, 2023, and June 30, 2023 (50 transactions).
The sample set of transactions included in the Study was created by identifying all of the merger agreements for acquisitions of public company targets filed on the U.S. Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system that the Working Group could ascertain closed between January 1, 2021, and June 30, 2023, and then by refining the sample set to include transactions meeting the following criteria:
The target company is a public company formed in the United States;
the publicly available total deal consideration was in excess of $200 million; and
the target company is not already majority-owned by the buyer.
In addition, for transactions that closed between January 1, 2022, and June 30, 2023, the sample set was confirmed with data from the Practical Law What’s Market Public Acquisition Agreements database. The sample set excluded transactions in which the target or buyer was a real estate investment trust or business development company or was formed in a U.S. territory, and it also excluded de-SPAC transactions.
Where Is My Copy?
All members of the M&A Committee of the Business Law Section received an email alert from the Study Chair, Charlotte May, with a link when the Study was published. If you are not currently a member of the M&A Committee, you can sign up on the M&A Committee’s homepage—it’s free for Business Law Section members.
If you are not a member of the Business Law Section, what are you waiting for? You can sign up to join on the Section’s membership webpage.
The Study is available from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the 2023 Private Target Deal Points Study, the Canadian Public and Private Target M&A Deal Points Studies, the European Private Target M&A Deal Points Study, and the Strategic Buyer/Public Target M&A Deal Points Study.
What Makes the US Public Target Deal Points Study Different?
To suit a large variety of needs, and to facilitate easy and convenient access, we have released the Study in two formats:
Interactive Version: This is an interactive online version of the Study on Tableau, which you can access here. Volunteers at Salesforce have spent countless hours working with us to create dynamic visualizations of the data. We encourage you to click around—you can sort the data both by using the filters at the top of each page, and by clicking on any viz (or combination of vizzes). This updated Study includes a new filter for the signing year of the agreements so you can see the trends year over year.
PDF Version Including Supplement: This is a modified PDF version of the online version of the Study, including the new supplement covering deal points related to Con Ed provisions. While many of the exciting features of the interactive Study cannot be accessed through the PDF, the document will nevertheless serve as a handy resource that can be downloaded for offline viewing and even printed. This PDF version includes all the data from public target deals closed in 2021, 2022, and the first half of 2023, and it cannot be filtered. Therefore, we encourage you to use the online version to fully understand the data and trends therein.
How Do I Get Involved?
We will soon embark on our review of the public target deals that closed in the second half of 2023. Is it worth getting involved? Absolutely! Don’t miss out—reach out to any of us if you would like to get involved!
A federal court recently ordered a law firm to disclose a judgment preservation insurance (“JPI”) policy it obtained to protect a $185 million fee award pending appeal.[1] The plaintiffs’ law firm received the fee award in its representation of two classes of health plan insurers, who alleged that the federal government did not compensate the insurers for losses incurred in their participation in the Affordable Care Act’s insurance marketplace. While the case was on appeal, the plaintiffs’ firm accepted a distribution of funds from the claims administrator for the full $185 million fee award.[2]
On appeal, the U.S. Court of Appeals for the Federal Circuit vacated the $185 million fee award because it found that the district court did not properly conduct a lodestar cross-check against the fee requests.[3] The appellate court remanded, instructing the district court to conduct a lodestar cross-check, including assessing whether there was sufficient justification for an implicit fee multiplier.[4] On remand, the plaintiffs’ firm filed a renewed motion for attorneys’ fees, and the government filed motions requesting an accounting and safekeeping of the distributed fee award and authorization to obtain additional discovery into the law firm’s purchase of a JPI policy.[5]
The Court of Federal Claims denied the government’s request for an accounting and safekeeping of the distributed funds, but it ordered disclosure of the JPI policy.[6] In compelling disclosure of the policy, the Court said it was erring on the side of requiring transparency, citing its fiduciary duty to protect the interests of the class in assessing reasonable fees. It explained that “[t]he JPI’s terms may be relevant to the Court’s task on remand if the policy provisions are inconsistent with the Court’s objective ‘to ensure an overall fee that is fair for counsel and equitable within the class.’”[7] Thus, the Court permitted discovery surrounding the “terms and circumstances” of the JPI policy. The Court limited the permitted discovery, however, to only the JPI policy documents.[8] The Court rejected requests for discovery into the law firm’s communications with the insurer or the insurer’s financial stability.[9]
This recent ruling may provide one of the first looks into how the terms of a JPI policy can be taken into account by a court when deciding a plaintiff’s recovery. So-called nuclear verdicts are becoming more and more common.[10] With verdict amounts increasing, insurers have capitalized on the market, finding ways to insure the risks associated with large judgments, and more companies have purchased JPI to secure larger judgment awards. And, as the median verdict continues to increase, JPI policies will likely continue to grow in popularity. Businesses who wish to purchase JPI should evaluate the pros and cons of such policies and consider how JPI may otherwise affect the pending litigation.
Judgment Preservation Insurance
JPI is a type of litigation risk insurance designed to protect the holder of a legal award against the risk of the award being overturned or reduced on appeal. JPI policies typically are customized to address the policyholder’s distinct coverage needs, including the specific risks associated with the litigation. JPI can be used to protect a variety of awards, including summary judgment awards, trial court verdicts, and arbitration awards.
The coverage afforded by JPI allows a plaintiff who wins a significant judgment to secure some—or sometimes, all—of an award pending an appeal or other subsequent proceedings. With any damage award, there is always a risk—even if it is minimal—that the appellate court will reverse or reduce the award entered by the trial court. JPI may help mitigate the risks associated with a reversal or reduction of the award on appeal.
At times, JPI is used in conjunction with litigation funding. For example, a litigation funder may advance the costs of litigating an appeal in exchange for a portion of the plaintiff’s recovery. Securing a JPI policy as part of that negotiation may enable the plaintiff to sell a litigation funder some of the interest in the award amount for a more favorable rate because of the mitigated appellate risk. In some cases, the litigation funder may even procure its own JPI policy after investing in the litigation, which protects the investment against the risk of reversal or a reduction of the award on appeal. A litigation funder may also require the plaintiff to procure JPI coverage to secure funding.
Pros and Cons of JPI
As with most insurance products, there is no one-size-fits-all approach; the viability of JPI as an appropriate risk mitigation tool depends heavily on a variety of factors, including the specifics of the underlying claim and judgment, potential policy wording, and the dynamics of the parties involved. We discuss some of those factors and the benefits and drawbacks of JPI below.
There are a number of benefits to securing a JPI policy. The most obvious benefit is that JPI guarantees that a prevailing party will recover at least an agreed-upon amount of a judgment or award, regardless of the outcome on appeal or in other subsequent proceedings. In other words, JPI protects against the uncertainty of appeals and permits recovery of at least some of the trial court judgment even if that judgment is reversed or subject to a reduction as a result of post-trial motion practice, an appeal, or trial court proceedings after any remand.
JPI also can alleviate the uncertainty of litigation, especially for plaintiffs with lesser financial means than their opposition. After months—and sometimes years—of litigation, plaintiffs may lack the resources to continue to litigate their case through a prolonged appeals process. A plaintiff with JPI, however, has the guarantee of at least a partial recovery from the litigation, which gives the corporation the financial security to continue litigating through an appeal. Such financial security can be created, in part, if the company is able to use the JPI to recognize judgment-related earnings in their financial statements, knowing that an agreed-upon portion of the judgment is secured under their policy. This financial security may help reduce the burdens of litigation, and in turn, allow the plaintiff to continue to fight for a final, enforceable judgment in its favor. It may also increase the plaintiff’s bargaining power in settlement negotiations.
Another benefit of JPI is that the policies often are not riddled with exclusions. In fact, JPI policies often have only one exclusion—the fraud and misrepresentation exclusion. The fraud and misrepresentation exclusion may negate coverage where the policyholder misrepresents facts during the underwriting process. This exclusion is normally quite narrow, requiring proof of actual knowledge of facts that the policyholder deliberately misrepresented. Some policy forms even require the insurer to prove by “clear and convincing evidence” that a misrepresentation was made and prejudiced the insurer, which is a high burden of proof for the insurer. Thus, if an insurer has grounds to exclude coverage at all under a JPI policy, it usually requires the insurer to clear a significant hurdle before the exclusion applies to eliminate coverage for the insured risk.
But JPI does not protect plaintiffs against all risks of litigation. Unlike many types of policies, a JPI policy typically does not cover attorneys’ fees or costs associated with an appeal. Policyholders, however, may be able to bargain for these coverages, as JPI policies are tailored to the policyholder’s unique coverage needs. The policyholder may, for example, advocate for defense cost coverage in exchange for a higher self-insured retention. But JPI generally does not cover shortfalls due to settlement, and thus, it usually does not provide coverage where the plaintiff settles for less than the full value of the trial court’s judgment prior to a final nonappealable judgment, unless the insurer consents to the settlement.
JPI also typically does not insure the collectability of the judgment. In some situations, a judgment may be affirmed on appeal, but the plaintiff is unable to collect the judgment because the defendant is judgment proof. A defendant may be judgment proof if, for example, its assets are exempt from debt collection and a creditor cannot pursue the defendant’s income. JPI normally does not protect against this risk.
Other Considerations for Mitigating Risks in Litigation
Corporations should also contemplate other consequences of using JPI to insure a judgment award. As the recent federal decision discussed above shows, an opposing party may try to use the terms of a JPI policy to reduce their liability. Particularly in the fee context, a defendant might attempt to use the JPI policy as evidence relevant to the court’s determination of a reasonable fee award.
Under a JPI policy, the insurer may also be able to prevent settlement or substitution of counsel without first obtaining the insurer’s consent. In addition to consent obligations, some JPI policies require the plaintiff to vigorously litigate the appeal. Likewise, a JPI insurer may require the plaintiff to maintain the same counsel that successfully litigated the matter before the trial court throughout an appeal and other subsequent proceedings. The terms of the JPI policy may also require the policyholder and its counsel to cooperate with the insurers in the appeal process. Consequently, depending on the policy terms, the policyholder may risk losing total control of the litigation.
Conclusion
Litigation risk insurance, such as JPI, can protect against the uncertainty of the appellate process. But removing that uncertainty comes with certain drawbacks. As shown by the recent decision from the Court of Federal Claims, some courts may compel disclosure of the JPI policy, especially where the case is remanded to the trial court for reevaluation of the damage award. JPI policies may also shift some control of the litigation from the policyholder to the insurer. Companies considering JPI to insure a damage award should consult with coverage counsel to navigate these hurdles and to assist in negotiating and placing customized policies specifically tailored to the unique risks of their case.
From 2010 to 2019, so-called nuclear verdicts of greater than $10 million have grown in size (with median verdicts experiencing a 27.5 percent increase during that time period) and frequency. See Cary Silverman & Christopher E. Appel, Nuclear Verdicts Trends, Causes, and Solutions, U.S. Chamber of Com. Inst. for Legal Reform (Sept. 2022). ↑
A Tongue-in-Cheek Revisiting of Value Leakage Protection
Ever since U.S. apparel and accessories retailer J. Crew Group, Inc. (“J. Crew”) controversially utilized provisions in its senior secured credit agreement to move valuable intellectual property (including the J. Crew trademark itself) outside its secured lenders’ collateral pool, the words “J. Crew” are synonymous with value leakage. In what was a novel move to service debt under its affiliate’s existing unsecured payment-in-kind (PIK) notes, J. Crew proverbially robbed Peter to pay Paul. In 2016 and 2017, J. Crew structured a multistep transaction to contribute assets to an unrestricted subsidiary via a foreign restricted subsidiary and consummate an eventual debt exchange and paydown, thereby avoiding bankruptcy for the time being. When faced with distress, whether due to impending maturities in the capital structure, overleveraging, macroeconomic factors like the COVID-19 pandemic, or basic liquidity issues, borrowers, no doubt inspired by J. Crew’s maneuvers, have turned to liability management to achieve value-creating asset-transferring transactions where few unencumbered assets existed, often intended to secure the incurrence of new debt.
Post–J. Crew, lenders were, justifiably, quick to react. Credit agreements incorporated what we in the space colloquially call “J. Crew protections”—that is, language attempting to prevent J. Crew–like arrangements by expressly prohibiting the transfer or exclusive licensing of material intellectual property from loan parties or restricted subsidiaries to unrestricted subsidiaries (and, sometimes, prohibiting the ownership of material intellectual property by, or the exclusive licensing of material intellectual property to, unrestricted subsidiaries). Today, J. Crew protections are so ubiquitous that little effort is spent negotiating whether or not to incorporate them, at least in some form, into credit agreements. Lenders expect such provisions to be de rigueur, as their internal investment committees focus on risk management to ensure what constitutes “collateral” at closing actually remains “collateral” over the life of the loan.
Different iterations of J. Crew protections have evolved, with some credit agreements strictly defining what constitutes material intellectual property, and others prohibiting the ownership of material intellectual property by, and the transfer or exclusive licensing thereof to, non-loan parties. Perhaps because J. Crew protections became a “check-the-box” item for lenders, drafting often covers only material intellectual property. Rarely do such provisions address other material assets, though some (although a minority of) credit agreements tailor their J. Crew protections to deal-specific, material “crown jewel” assets. For instance, taking a page from managed care deals, loan parties with valuable customer contracts particularly important to their businesses may agree to restrictions on transfer and ownership of such customer contracts (those important contracts must always be an asset of a loan party, for example). The “default” J. Crew protection formulation, however, still focuses solely—or primarily—on intellectual property, regardless of whether the relevant loan parties actually own or license any intellectual property at all, let alone material intellectual property.
There is, of course, merit to the attention devoted to material intellectual property—after all, intellectual property is a relatively portable asset. It is easier to transfer a trademark, for instance, than convey real property (which may be subject to third-party financing or liens) or assign a valuable contract with a non-affiliated counterparty (which counterparty may have notice and/or consent rights). Once transferred out of the ring-fenced credit group and collateral pool, such intellectual property—in addition to becoming out of reach of the original secured creditors—may secure new debt incurred at the non-loan party level, or be sold to an unaffiliated buyer. None of the foregoing, though, changes the fact that different assets are material to different companies.
From a creditor perspective, the focus (or refocus, as it were) on collateral stripping and other forms of leakage in the wake of J. Crew and its inspired “offspring” (think Revlon, Neiman Marcus, Travelport, etc.) is undoubtedly a good thing. Lenders should understand the nuances of loan documentation, how deal terms have developed with added market competition, and what actions are often—to the surprise of some—permitted by the “four corners” of the credit agreement. In light of the above and the legacy of J. Crew, lenders and their counsel should consider a “bespoke” take on J. Crew protections.
Take Proper Measurements
At the diligence stage, lenders should drill down on the credit group’s assets, focusing, in particular, on which assets may be material and essential to the business of the corporate enterprise. This exercise might require specific inquiries and extra review, including by specialists and experts.
Tailor to Fit
J. Crew protections included in commitment letters and, ultimately, loan documents should be “tailored” to properly (i) capture the nature of such assets and, (ii) anticipating potential pitfalls, “button up” potential leakage and contribution.
When defining material assets, a good rule of thumb is to capture, at a minimum, material intellectual property, as most borrowers cannot reasonably push back against that limitation at this juncture in the debt capital markets. Then, “fashion” additional defined terms or descriptions for any other material assets, as needed. Pay special attention to ensure the “fit” of such defined terms. Descriptions should be not only sufficiently “slim cut” to ensure that all applicable material assets are captured but also comfortable enough to not unreasonably interfere with the loan parties’ business. A common formulation is to look at the materiality of certain assets in relation to the business of the borrower and its subsidiaries (or the borrower and its restricted subsidiaries, depending on the deal) as a whole.
The suggested sartorial approach to J. Crew protections should not stop at defining material assets. While the typical restrictions on the transfer, exclusive licensing, and ownership of material intellectual property probably work for other material assets, lenders should consider different ways in which other types of material assets may be distributed from collateral pools. This often dictates a holistic review and analysis of covenants and permissions, including, but not limited to, basket capacity and terms around unrestricted subsidiaries (and the designation/redesignation thereof) and non-loan parties, if and as applicable.
Consider Your Retail “Consumers”
An additional reason to adopt a made-to-measure approach to J. Crew protections is that the investment theses of institutional investors, agent banks, and direct lenders differ. In syndicated credits, the makeup of the lender group can dictate terms and outcomes—if there is a significant appetite for a credit in the primary market, J. Crew protections may be nonexistent or watered down, at best, as sponsors and borrowers are able to push for looser and more flexible terms. Deals led by private credit, on the other hand, may take a more conservative and fulsome approach to material intellectual property and assets, sometimes requiring the same to be owned by or exclusively licensed to loan parties. As is the case with any important provision, the final form of a credit agreement’s J. Crew protections should be the product of “threading the needle” through the often-diverse objectives of all applicable lenders and their borrowers.
An additional consideration: While J. Crew and other liability management transactions often carry a negative connotation in the world of leveraged finance, their use is not always nefarious and may even be beneficial. For instance, transferring value away from a credit group might create positive value in other areas—such value, in turn, can be contributed to the original credit group (and, by extension, its creditors) in the form of cash, a debt exchange, or terms tightening, helping to avoid insolvency, bankruptcy, or other negative consequences or to spur a refinancing or consensual reorganization.
The proliferation of J. Crew protections might, at times, relegate them to little more than boilerplate, instead of the useful shield against value leakage they were intended to be. A thoughtful, made-to-measure approach in dealmaking and loan documentation can help ensure that J. Crew protections do not go out of style. In sum, in J. Crew, as in clothing, bespoke is almost always preferable to prêt-à-porter.
Prior to the pandemic, employers did not typically collect employee health-related information except through certain work wellness programs or in relation to documenting workplace injury claims. There was an emerging trend in “wellness” programs where individuals would be encouraged to use wearable health devices, such as pedometers or other fitness trackers, through incentives or other benefits, but these programs did not typically involve any data collection by the employer itself. But in response to the pandemic, many employers began to collect and monitor employee health-related data as part of their workplace health protocols.
Workplaces implemented a wide range of systems, including symptom screening surveys, automated exposure notification systems, and temperature checks. In some cases, most notably in professional sports leagues, employers began using mobile apps and wearable devices to track employee health symptoms or to remind employees to maintain social distancing. As with surveillance systems deployed in schools, these new workplace surveillance systems had not been tested or shown to be effective in controlling the spread of disease.
While reliance on these devices and systems was intended to encourage employees that workplaces were safer, these mitigation measures by themselves were not enough to prevent the spread of COVID-19 in workplaces. Many of the systems were also expensive and likely took away from resources that could have been used to improve ventilation and air quality, which appear to be more effective at curbing viral transmission. And meanwhile, these systems pose significant privacy risks and subjected employees to increased surveillance in the workplace.
The nature of the employer–employee relationship and the sensitivity of health information make the collection of biometric data in the workplace especially risky.[1] The misuse of health data could lead to adverse employment decisions, discrimination, or exclusion. Despite the risks and potential misuse of this data, employees may be unable or unwilling to protest for fear of losing their jobs. This was especially true early in the pandemic when unemployment was widespread and the financial circumstances for many employees were dire. Any claims that employees have given informed consent to participate in these systems are dubious at best.[2]
The rise of employee health tracking during the pandemic also further entrenched existing power imbalances that impact certain categories of workers. Employers taking an interest in the health of their workers increases scrutiny on workers that have underlying health conditions. These employees could be denied promotion opportunities due to their underlying health condition or could be seen as uncooperative or not devoted to their workplace if they refuse to participate in workplace health monitoring. There are currently no comprehensive data privacy laws that regulate health surveillance in the workplace.
Employers should, however, proactively weigh the risks and benefits of implementing these technologies and be transparent when doing so. Employers should also review their policies and data collection practices to ensure that they do not overextend systems that were specifically adopted in response to the pandemic but may no longer be justified given the current state of public health.
Seeid. (suggesting that consent to data collection practices cannot be voluntarily given because it is not economically feasible for most individuals to seek out an employer that appropriately collects, uses, and protects the individual’s data); Sharifah Sekalala et al., Analyzing the Human Rights Impact of Increased Digital Public Health Surveillance during the COVID-19Crisis, 22 Health Hum. Rights J. 7, 11–12 (Dec. 2020) (asserting that where employers made surveillance measures mandatory, consent was rendered “irrelevant”). ↑
Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 (302) 985-6002 [email protected]
Aimee M. Czachorowski
Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 (302) 985-6002 [email protected]
Andrew J. Czerkawski
Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 (302) 985-6002 [email protected]
Fanta M. Toure
Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 (302) 985-6002 [email protected]
Katherine R. Welch
Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 (302) 985-6002 [email protected]
C. Phillip Buffington Jr.
Balch & Bingham LLP 188 E. Capitol Street, Suite 1400 Jackson, MS 39201-2133 [email protected]
Timothy J. Anzenberger
Adams and Reese LLP 1018 Highland Colony Parkway, Suite 800 Ridgeland, MS 39157 (601) 353-3234 [email protected]
Deborah Challener
Adams and Reese LLP 1018 Highland Colony Parkway, Suite 800 Ridgeland, MS 39157 (601) 353-3234 [email protected]
Mary Clark Joyner
Adams and Reese LLP 1018 Highland Colony Parkway, Suite 800 Ridgeland, MS 39157 (601) 353-3234 [email protected]
§ 4.1. Introduction
This chapter summarizes significant recent legislative and case law developments[1] concerning the indemnification of directors, officers, employees, and agents by the corporations or other entities they serve, as well as the rights of such persons to the advancement of litigation expenses before final resolution of the litigation.
Although much of this chapter focuses on Delaware case law developments, due to the state’s preeminence in matters of corporate law, the chapter also includes summaries of decisions from both state and federal jurisdictions other than Delaware that either apply Delaware law or otherwise present analysis of significant issues concerning the indemnification and advancement rights of directors and officers. This chapter also refers to legislative developments under Delaware law and the Model Business Corporation Act.
§ 4.2. Indemnification and Advancement: 8 Del. C. § 145
Section 145 of the Delaware General Corporation Law (“DGCL”)[2] authorizes (and at times requires) a corporation to indemnify its directors, officers, employees, and agents for certain claims brought against them, and it allows a corporation to advance funds to those persons for the expenses they incur while defending such claims. Specifically, Section 145(a) and (b) broadly empower a Delaware corporation to indemnify its current and former corporate officials for expenses incurred in legal proceedings to which a person is a party “by reason of the fact” that the person is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another entity or enterprise.
If a present or former director or officer is successful in defending an action brought “by reason of the fact” that the person is or was a director or officer, Section 145(c) of the DGCL requires the corporation to indemnify that person for expenses (including attorneys’ fees) reasonably incurred in connection with that defense. Section 145(c) allows a corporation to advance to corporate officials the reasonable expenses (including attorneys’ fees) incurred in defending an investigation or lawsuit. The Model Business Corporation Act (“MBCA”) contains similar provisions regarding the indemnification and advancement of expenses to corporate officials and employees, and the alternative entity statutes of Delaware and many other jurisdictions similarly contain enabling provisions concerning indemnification and advancement.
Many corporations have charter or bylaw provisions, or are parties to agreements with directors, officers, or employees, that supplement statutory indemnification and advancement rights. Such provisions often make indemnification and advancement mandatory under specified circumstances.
§ 4.2.1. Legislative Developments
Effective February 7, 2022, the Delaware General Assembly amended 8 Del. C. § 145(g), to expressly authorize a corporation to purchase and maintain director and officer insurance through use of a “captive insurance company”—i.e., an insurer that is directly or indirectly owned, controlled or funded by the corporation—as an alternative to traditional third-party D&O insurance. This allows a corporation to provide insurance for its officers, directors, employees, and agents even if section 145 otherwise prohibits indemnification by the corporation itself for such losses.
Per the 2022 amendment, the captive insurance must exclude from coverage any “loss … arising out of, based upon or attributable to … personal profit or other financial advantage” to which the covered officer or director is “not legally entitled” (i.e., self-dealing), or any “deliberate criminal or deliberate fraudulent act” or “a knowing violation of law[.]” The amendments also include requirements for separate conduct determinations—e.g., regarding excluded conduct—such as by an independent claims administrator, and they impose a disclosure requirement where payment under the captive policy requires notice to shareholders.
Without limitation, section 145(g) was revised, effective February 7, 2022, as follows (amendments in italics):
(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. For purposes of this subsection, insurance shall include any insurance provided directly or indirectly (including pursuant to any fronting or reinsurance arrangement) by or through a captive insurance company organized and licensed in compliance with the laws of any jurisdiction, including any captive insurance company licensed under Chapter 69 of Title 18, provided that the terms of any such captive insurance shall:
(1)Exclude from coverage thereunder, and provide that the insurer shall not make any payment for, loss in connection with any claim made against any person arising out of, based upon or attributable to any (i) personal profit or other financial advantage to which such person was not legally entitled or (ii) deliberate criminal or deliberate fraudulent act of such person, or a knowing violation of law by such person, if (in the case of the foregoing paragraph (g)(1)(i) or (ii) of this section) established by a final, nonappealable adjudication in the underlying proceeding in respect of such claim (which shall not include an action or proceeding initiated by the insurer or the insured to determine coverage under the policy), unless and only to the extent such person is entitled to be indemnified therefor under this section;
(2) Require that any determination to make a payment under such insurance in respect of a claim against a current director or officer (as defined in paragraph (c)(1) of this section) of the corporation shall be made by a independent claims administrator or in accordance with the provisions of paragraphs (d)(1) through (4) of this section; and
(3) Require that, prior to any payment under such insurance in connection with any dismissal or compromise of any action, suit or proceeding brought by or in the right of a corporation as to which notice is required to be given to stockholders, such corporation shall include in such notice that a payment is proposed to be made under such insurance in connection with such dismissal or compromise.
The American Bar Association did not make any changes to the indemnification and advancement provisions of the MBCA during the 2022 to 2023 period.
§ 4.2.2. Delaware Case Law Developments
1. Gandhi-Kapoor v. Hone Capital LLC[3]—Contempt Sanction for Failure to Comply with Advancement Order
In a matter of first impression, the Delaware Court of Chancery held that an LLC and its parent company were subject to civil contempt sanctions for failing to comply with an order to advance expenses. The court noted that usually contempt is not available for monetary judgments; however, because this was an advancement issue, which is, at its core, time sensitive, judicially awarding interest would not suffice to remedy the harm. The court explained that the delay caused irreparable harm to the member of the parent company, who was not compensated as the court had ordered.
Gandhi, a member of Hone, was terminated and then sued by the parent company in California Superior Court. In response, Gandhi and another party filed a suit against the parent to enforce their rights in profit interests. Gandhi accumulated almost half a million dollars in expenses defending the claims the LLC brought against her. Gandhi brought an advancement action in Delaware and successfully moved for summary judgment. Every month after advancement was granted, Gandhi submitted advancement demands to the companies, which were never paid.
The court ultimately ruled that, as a sanction, Gandhi was entitled to damages in the amount of $1,000 a day in addition to the advancement, until the companies complied with the Court’s Advancement Order.
2. Hoffman v. First Wave Biopharma, Inc.[4]—Board “Investigation and Inquiry” Versus “Remedial” Action as Triggering Advancement Right
In Hoffman v. First Wave Biopharma, Inc., the Delaware Court of Chancery considered whether certain board actions amounted to an “investigation or inquiry” (as opposed to only “remedial” actions) sufficient to trigger a director’s mandatory advancement right.
Plaintiff, Hoffman, served on the board of directors of First Wave Biopharma, Inc. (the “Company”). After a leak of confidential information, the Company’s board concluded that Hoffman was responsible for the leak, although it “had no concrete evidence.” Fearing further leaks, the board established a committee consisting of all the directors except Hoffman.
Though neither party disputed that Hoffman enjoyed a mandatory advancement right, only certain covered proceedings triggered that right, particularly at issue: an “investigation” and an “inquiry.” Hoffman contended that because the Company concluded that he leaked the information and therefore breached his fiduciary duty, “the [Company] necessarily must have conducted an ‘investigation’ and/or ‘inquiry’ into [his] actions.” The Company contended “it never undertook an investigation or inquiry into Hoffman’s conduct.”
The court determined that the board took no steps to confirm the belief that Hoffman leaked the information and found that “the Company did not investigate or otherwise conduct an inquiry into Hoffman.” The court ultimately held that because “the Company directors started from the conclusion that Hoffman leaked” the non-public information, the Company’s actions were “corrective actions from that conclusion, not investigative actions undertaken in reaching that conclusion.” Thus, because the Company took only “remedial, not investigatory” actions to assuage their fear of further leaks, the board’s response fell “short of an ‘investigation’ or ‘inquiry’ sufficient to trigger Hoffman’s advancement rights.”
In a footnote, the court, as the Delaware Court of Chancery often does, turned to dictionary definitions in order to ascertain the plain meaning of the words “investigation” and “inquiry” to determine whether advancement was appropriate.
3. Keller v. Steep Hill, Inc.[5]—Impact of Plaintiff’s Characterization of Claim on Indemnification Rights
This Delaware Court of Chancery opinion addressed whether an officer and director was entitled to indemnification after a company reframed a fiduciary duty claim into a breach of contract claim in an attempt to escape its advancement obligations. Plaintiff, Keller, was a Steep Hill director and officer through a consulting agreement between the company and Delft Blue Horizons, an entity owned and controlled by Keller. Steep Hill asserted conclusory breach of contract claims against Delft Blue Horizons on the theory that Keller’s alleged mismanagement and fiduciary misconduct resulted in regulatory troubles for the company—which in turn constituted a breach of the consulting agreement.
Steep Hill initiated arbitration proceedings against Keller. Keller’s initial defense to arbitration was that he was not a party to the consulting agreement between Steep Hill and Delft Blue, and, so, he could not be forced to arbitrate. The arbitrator found that Keller was a third-party beneficiary to the consulting agreement, bringing him into the arbitration proceedings. Keller then filed a response to the arbitration demand, asserted counterclaims, and made an advancement demand.
This case hinged on the fact that Steep Hill, in an attempt to avoid its advancement obligations, responded that it planned to withdraw the breach of fiduciary duty claim and any other claims involving Keller’s conduct as a director or officer. Despite this, Steep Hill continued to claim that Keller’s actions caused Delft Blue to breach the consulting agreement. Keller sought indemnification for the fees and expenses he and Delft Blue incurred in the arbitration proceedings.
Ultimately, the question was whether Keller was entitled to indemnification for the fees and expenses he and Delft Blue incurred both defending the claims against Delft Blue and asserting counterclaims against Steep Hill. It was clear that Steep Hill merely reframed its fiduciary duty claims for the purpose of avoiding its advancement obligations. Pursuant to Section 145 of the DGCL, Keller was entitled to indemnification for fees and expenses nominally incurred by Delft Blue.
The court in Keller found that since Keller wholly and indirectly owned Delft Blue, he was entitled to recover the fees incurred through that ownership as a practical matter. Keller ultimately was able to recover nearly all the fees and expenses incurred in the arbitration. Although Keller failed to separate his fees from Delft Blue’s fees, that did not preclude a ruling in his favor. The court ordered Keller to submit a good faith estimate of expenses incurred relating to the claims found to be subject to indemnification.
4. Kokorich v. Momentus Inc.[6]—Release of Indemnification and Advancement Rights
Plaintiff, Kokorich, a Russian national who had a hand in founding and running a “space infrastructure” company, sued for indemnification and advancement, which the Court of Chancery dismissed as released claims. In 2017, the company and Kokorich entered into an indemnification agreement, which provided that the company would indemnify Kokorich to the fullest extent permitted by law, including coverage for claims brought against him while acting as an officer or a director. A 2020 revision of the bylaws of the company extended this provision to all officers and directors. The company merged with another and planned to launch a space vehicle, which sparked concerns with the SEC over foreign ownership of the company. This resulted in Kokorich resigning from all officer and director positions in 2021, pursuant to a separation agreement.
This agreement put Kokorich’s company equity into a trust and released any employment claims, but did not release claims related to his previous indemnification agreement. Subsequent issues led to Kokorich and the company executing a stock repurchase agreement, in which the company repurchased Kokorich’s interest. That agreement, the Court of Chancery found, released all of Kokorich’s claims against the company, including the advancement and indemnification claims, thereby nullifying the 2017 agreement, despite that the stock repurchase agreement excluded any advancement or indemnification releases.
The company unsuccessfully argued that Kokorich’s claims should be dismissed because the court lacked subject matter jurisdiction, despite that the initial indemnification agreement had a binding choice of law clause stating that all claims must be brought in the Delaware Court of Chancery. Kokorich unsuccessfully attempted to sidestep the multiple agreements in order to enforce the initial indemnification agreement and invoke a statutory claim for advancement and indemnification. Not only did the court reject both of Kokorich’s arguments, but it also determined that the bylaws, which applied to all officers and directors, released Kokorich’s claims under his initial agreement. The court also found that Kokorich was not entitled to mandatory arbitration, and his declaratory judgment was not ripe.
5. Krauss v. 180 Life Sciences Corp.[7]—“By Reason of the Fact” Standard for Advancement
This Delaware Chancery Court decision reinforced the interpretation under Delaware law of the phrase that serves as a prerequisite to the right of advancement, with its origin in section 145 of the DGCL—namely, whether the person seeking advancement was sued “by reason of the fact” that she was an officer or director.
Plaintiff Krauss was the former CEO and director of KBL Merger Corp. IV (“KBL”), until she resigned following KBL’s combination with a group of several entities (the “Company”). Following the combination, the United States Securities and Exchange Commission (SEC) launched an investigation into the combination. In connection with that investigation, Krauss was served a number of subpoenas. Subsequently, the Company filed a complaint against Krauss and others, asserting claims of breach of fiduciary duty, alleging, among other things, “that Krauss intentionally failed to disclose information that rendered certain KBL disclosures materially false and misleading.” After her multiple demands for advancement for legal fees went unanswered, Krauss filed her Complaint for Advancement, seeking advancement pursuant to the Company’s Charter and Bylaws.
Perennially, one of the more common defenses to a claim for advancement is whether the prerequisite to the provision for advancement in a company’s charter or bylaws is triggered to the extent the litigation for which advancement is sought is being prosecuted: “by reason of the fact that … [the plaintiff] is or was a director or officer of the company.” The court in Krauss explained that the “by reason of the fact” standard is satisfied when “a nexus or causal connection” exists between the underlying proceeding and the official’s “corporate capacity.” The court further explained that it “construes such provisions broadly to effectuate Delaware’s policy of providing temporary relief from substantial expenses.”
The Krauss decision is also noteworthy as a reminder that the court will not typically make a determination at the advancement stage regarding the allocation between legal fees that must be advanced and intertwined claims in the same case that may not be subject to advancement. Rather, the court approved the procedure described in Danenberg v. Fitracks,[8] which directed advancement payments based on the good faith allocation of the parties, with final allocation to be made at the conclusion of the case.
The court in Krauss ultimately entered summary judgment in favor of Krauss, in part, ordering advancement for fees and expenses incurred in connection with the SEC subpoenas and her defenses (including affirmative defenses) and one counterclaim in the Company’s lawsuit. The parties were ordered to confer and submit an “implementing order” consistent with the court’s decision, as well as a “joint letter” setting forth their respective positions regarding allocation consistent with the Fitracks decision.
§ 4.2.3. Other State and Federal Case Law Developments
1. Iarussi v. LobbyTools, Inc.[9]—“By Reason of the Fact” Versus “Misconduct”
The court in Iarussi confirmed that a former officer was not entitled to attorney fee indemnification, because her former employer-corporation’s lawsuit against her was not “by reason of the fact” that she held an officer position. Rather, the court found that the lawsuit was based on allegations of her misconduct—misappropriation or retention of trade secrets and disclosure of confidential information to the company’s customers.
A husband and wife successfully ran a multi-million-dollar corporation until they divorced. The wife, Sarah Michael (oddly defined as “Michael” in the court’s decision), worked as an officer for the corporation for more than a decade. Michael’s husband, John Iarussi, was the majority shareholder and chair of the corporation. When their marriage deteriorated, the corporation cut Michael’s corporate power and initiated a lawsuit against her, accusing her of violating her confidentiality and noncompete agreements. The corporation moved for injunctive relief to prevent Michael from possessing and/or using any confidential information. The trial court determined that Michael was entitled to the information while divorce proceedings were ongoing, but that once the divorce proceedings were finalized, Michael was not allowed to possess the confidential information. The corporation was satisfied with the trial court’s opinion and voluntarily dismissed its case without prejudice. Michael then sought attorney fee indemnification from the corporation, pursuant to Florida’s applicable statute, Sections 607.0850 and 768.79, Florida Statutes (2018).
This is essentially a statutory interpretation case, relating to whether an officer was entitled to indemnification because she was allegedly sued “by reason of the fact” that she held the officer position.
Concluding that Michael was not eligible for indemnification, the court in Iarussi reasoned that she had not been sued by reason of her position as an officer or former officer of the company. Rather, the court found that the corporation sued her based on allegations of misconduct—specifically, her purported retention of trade secret information and disclosure of confidential information relating to, among other things, the company’s competitors. The court concluded that the statutory language did not extend indemnification rights to Michael’s alleged misconduct under these circumstances.
2. Schorr v. PPA Holdings, Inc.[10]—Contract Interpretation—Current Versus Former Directors and Officers
In Schorr v. PPA Holdings, Inc., plaintiff Gregory Schorr, a former officer and director of defendants, sued unsuccessfully to obtain a declaratory judgment that he was entitled to indemnification and advancement of expenses he incurred in defending claims asserted against him by a third party, FNA. Schorr contended that defendants were obligated by the plain language of their bylaws and under Indiana law to advance the expenses to him, but the U.S. District Court for the Southern District of Indiana disagreed.
While Schorr was still a director and officer of defendants, third party FNA entered into a Stock Purchase Agreement to purchase all issued and outstanding securities of one of the defendants. As part of FNA’s due diligence investigation, FNA requested documents and information from defendants and Schorr responded to those requests. After Schorr was no longer a director or officer of defendants, FNA alleged that Schorr had intentionally misled it during the due diligence investigation by providing incorrect, misleading information in response to its requests.
Pursuant to an advancement provision in defendants’ bylaws, Schorr made a written demand to defendants for indemnification and advancement of expenses relating to FNA’s allegations. Defendants refused to advance any expenses, and Schorr then filed suit. The defendants answered, and Schorr moved for judgment on the pleadings pursuant to Fed R. Civ. P. 12(c).
The court concluded that Schorr was entitled to judgment as a matter of law only if he could show that the advancement provision in the bylaws unambiguously applied to current and former officers and directors. Applying Indiana law, the court held that the phrase “director or officer” in the bylaws was subject to more than one reasonable interpretation and that the resulting ambiguity precluded judgment on the pleadings. The court also declined to construe the ambiguity against defendants on the ground that they had drafted the bylaws. The court reasoned that under Indiana law, the meaning of the phrase “director or officer” should be decided with the benefit of extrinsic evidence, and, therefore, it ruled that judgment on the pleadings was inappropriate.
Schorr further argued that he had a contractual right to advancement under the bylaws while he was an officer, and under the Indiana Business Corporation Law, Ind. Code § 23-1-36-(4)(b), that right could not be affected by his subsequent removal or resignation. The court concluded, however, that whether section 23-1-36-(4)(b) allowed Schorr to presently enforce a right to advancement also depended on whether the term “officer,” as used in the bylaws, referred to current and former officers (or only to current officers). If the term referred only to current officers, then the obligation to advance expenses did not become enforceable unless a proceeding was initiated against an officer before he or she was removed or resigned. In this case, Schorr was no longer an officer when FNA’s allegations against him arose. Thus, if the term “officer” referred only to current officers, Schorr’s right to advancement was unenforceable.
The court reiterated that the term “officer or director” in the bylaws was ambiguous and extrinsic evidence was necessary to determine its meaning. The court, therefore, denied Schorr’s motion for judgment on the pleadings.
3. Pointe Royale Property Owners’ Ass’n, Inc. v. McBroom[11]—No Right to Jury Trial on Indemnification Counterclaim
The Pointe Royale case is interesting in its procedural result—whether a jury trial is required on a counterclaim for indemnification under a company’s applicable by-laws.
Plaintiff McBroom appealed a final judgment in favor of Defendant Pointe Royale Property Owners’ Association, Inc. (“Pointe Royale”), which removed McBroom as a Director from Pointe Royale’s Board of Directors. McBroom’s appeal raised three points, including whether the trial court erred in conducting a bench trial and ruling on McBroom’s equitable claims before a jury trial on the legal claims, thus allegedly depriving him of his constitutional right to a jury trial.
More specifically, McBroom argued that the trial court’s rulings on various claims before resolving his counterclaim seeking indemnification violated his constitutional right to a jury trial. The court, however, deemed this question moot to the extent resolving the question on its merits would not practically impact McBroom’s right to a jury trial on his amended counterclaim.
The court explained that, under the circumstances, McBroom did not generally or under the applicable bylaws possess a right to a jury trial on his amended counterclaim for indemnification. The court concluded that the trial court did not abuse its discretion, as McBroom lacked the right to a jury trial on his amended counterclaim, which was “incidental” to the equitable claims affirmatively brought by Pointe Royale.
4. Schnupp v. Annapolis Engineering Servs., Inc.[12]—De Facto Officer Doctrine
In Schnupp, the Court of Special Appeals of Maryland considered whether an employee, Schnupp, working in a managerial position but alleging to be a de facto officer of the corporation, was entitled to advancement rights for claims arising from his alleged breach of the employment contract and related claims, after he resigned from the corporation. Concluding that Schnupp was not entitled to advancement rights, the court in Schnupp analyzed the de facto officer doctrine and its underlying reasoning and rationale.
Schnupp was employed as the laboratory director for Annapolis Engineering Services (“Annapolis”). Annapolis had a single officer during the term of Schnupp’s employment (its president, Brian Flynn). Schnupp’s employment agreement identified him as an “employee,” clarifying that he had no authority to act in a fashion that would imply he had apparent authority to bind or enter into agreements on Annapolis’s behalf.
Nevertheless, Schnupp argued that he was a de facto officer, because he exercised sole supervision, training, and direction of the subordinate laboratory technicians and employees. He contended he was responsible for maintaining the day-to-day operations of the testing lab, including authorizing the purchase of necessary equipment. Further, he claimed he was responsible for developing Annapolis’s client base and obtaining certifications and accreditations to properly run the testing lab.
In 2017, Schnupp entered into a Stock Agreement that incentivized him with an equity interest, based on his performance as laboratory director. The Stock Agreement provided Schnupp with full and exclusive authority and control in the management of Annapolis, while noting that the powers of Annapolis would be exercised only by, or under the authority of, Annapolis’s president, Mr. Flynn.
After Schnupp resigned from Annapolis in 2019, he entered into a Stock Redemption Agreement by which Annapolis agreed to repurchase Schnupp’s equity interest.
Schnupp was later hired by one of Annapolis’s industry competitors. Shortly thereafter, Annapolis brought suit against Schnupp, alleging breaches of his employment agreement. Schnupp filed a counterclaim, seeking advancement and/or indemnification of his legal fees pursuant to a provision of Annapolis’s Articles of Incorporation, which provided indemnity to a present or former director or officer of the corporation. In support of his counterclaim, Schnupp argued that he was a de facto officer of Annapolis.
Annapolis moved to dismiss the counterclaim, and the trial court found that Schnupp was not entitled to advancement or indemnification, because he was not a de facto officer and the alleged misconduct did not occur while Schnupp was acting in any capacity as an officer or de facto officer of Annapolis.
The court in Schnupp generally described the de facto officer doctrine as follows:
The [de facto officer] doctrine originated as a function of public policy with the primary purpose of binding an individual’s actions when acting pursuant to an unofficial or defective appointment to public office. …The most widely cited touchstone of the doctrine is found in Norton v. Shelby Cnty.[, 118 U.S. 425 (1886)] where the United States Supreme Court held: “an officer de facto is one whose acts, though not those of a lawful officer, the law, upon principles of policy and justice, will hold valid, so far as they involve the interests of the public and third persons …”
The court undertook a comprehensive review, examining rationales traditionally associated with the doctrine within the realm of public office and extrapolating its relevance and application to the “realm of private corporations and association.” Drawing upon insights from Delaware case law, the court identified three distinct scenarios warranting the invocation of the de facto officer doctrine: first, to bind a corporation’s actions concerning third parties; second, to hold the de facto officer accountable for corporate liabilities; and third, to resolve disputes arising from corporate elections.
The court in Schnupp found a conspicuous absence of any of these circumstances in the case. The court held that Schnupp’s claim for advancement failed as a matter of law, emphasizing that the de facto officer doctrine cannot be invoked “for the sole purpose of securing a corporate benefit or protection [such as advancement and indemnification of attorney’s fees].”
5. Miesen v. Hawley Troxel Ennis & Hawley LLP[13]—Evidence and Apportionment of Advanceable Expenses
The Idaho federal district court in Miesen v. Hawley Troxel Ennis & Hawley LLP recognized that a third-party defendant was entitled to an advance of expenses to defend against claims pertaining to his role as an officer or director, but awarded an amount that was significantly less than the third-party defendant had requested.
In Miesen, defendants/third-party plaintiffs AIA Services Corp. and AIA Insurance, Inc. (collectively, “the AIA entities”) asserted claims against Reed Taylor, a third-party defendant, for actions he took as an officer or director of the AIA entities. Taylor then moved for an expense advance from the AIA entities but did not specify the amount he was seeking. The court concluded that Taylor was entitled to an advance, but only for those expenses related to his defense of claims against him for actions related to his role as officer or director of the AIA entities. The AIA entities were not required to advance money to Taylor for expenses he incurred in opposing the AIA entities or pursuing counterclaims.
The court ordered Taylor to submit itemized invoices of fees associated with his relevant legal defense so that the court could determine the amount of the advance the AIA entities were required to pay him. Taylor complied with the court’s order, but requested a total of $71,945.46 for expenses related to (1) his defense as an officer or director of the AIA entities and his efforts to obtain an advance; (2) his overall defense of the claims, including those related to his actions/inactions as an officer or director of the AIA entities as well as his alleged membership on an advisory board; and (3) his affirmative claims (i.e., counterclaims) as well as his overall defense.
The court rejected Taylor’s request for an advance of expenses that were unrelated to his defense against claims pertaining to his role as an officer or director. The court reasoned that many of the expenses Taylor claimed were incurred relating to his counterclaim and only incidentally related to his defense. The court then determined that Taylor’s request for an advance of $22,412.00 for expenses related to his defense was reasonable.
The AIA entities argued that Taylor’s request was unreasonable in that it included fees for over 27 hours spent on Taylor’s motion for advancement of expenses and that 27 hours was unreasonable. The court disagreed. The court noted that under Idaho Code § 30-29-854(b), if a court determines that a director is entitled to an advance for expenses, it must “order the corporation to pay the director’s expenses incurred in connection with obtaining court-ordered indemnification or advance for expenses.” The court concluded that 27 hours was a reasonable amount of time to spend on the motion, given the complexity of the case, the need for an opening brief and a reply brief, the lengthy period of invoices to review, and the need to categorize and redact time entries. The court, therefore, ordered the AIA entities to pay Taylor $22,412 within thirty days.
6. In re DeMattia[14]—Statutory Interpretation, Unclean Hands as a Defense, and Mandamus Remedy
This case merits attention due to the court’s recognition that “[t]here is limited Texas case law concerning advancement under the Texas Business Corporation Act or the Texas Business Organizations Code.” The court in DeMattia conducted a thorough analysis of Delaware law on advancement, applying it to interpret the advancement provision at issue and addressing its applicability to former members.
Two brothers, Mark and David DeMattia, acquired Restoration Specialists (“Restoration”) and restructured it as an LLC. Mark served as the managing member, and David was the minority member. In 2018, as the brothers endeavored to sell Restoration, Mark wrongfully copied and deleted Restoration’s project history files a few days before the closing. Restoration filed a lawsuit against Mark for misconduct allegedly occurring while he was the managing member. Mark, then, sought indemnification and advancement of his attorney’s fees from Restoration, pursuant to Restoration’s “corporate regulations” and applicable provisions of the Texas Business Organizations Code.
Restoration’s corporate regulations included an indemnification provision that allowed advancement to members acting as officers. Following amendments in accordance with the Texas Business Organizations Code, the dispute centers on whether the advancement provision applies to former members.
Looking to Delaware case law, the court in DeMattia concluded that current Texas law explicitly allows the advancement of reasonable expenses to both current and former officers/governing persons, and that advancement is mandatory “if a company’s governing documents so state.”
Addressing Restoration’s corporate regulations in particular, the court highlighted the use of the term “Proceeding” in both the advancement and indemnification sections, referring to an action, suit, or proceeding to which a member was made a party “by reason of the fact that he or she is or was a Member.” This commonality, the court explained, creates an obvious linkage between the two regulation sections, which led the court to reject Restoration’s argument that the indemnification and advancement sections must be interpreted separately.
Restoration also raised public policy concerns in support of its arguments against Mark’s alleged indemnification and advancement rights. Restoration argued that Mark was not entitled to indemnification or advancement, because he had “unclean hands.” The court rejected this argument, emphasizing that at the time an advancement dispute ripens, it is often the case that the corporate board has drawn harsh conclusions about the integrity and fidelity of the corporate official seeking advancement. The court found support for this holding in Delaware case law, which the court recognized frequently upholds the indemnification and advancement rights of corporate officials accused of serious misconduct.
The court granted Mark’s petition for a writ of mandamus, reasoning that it was the “appropriate relief to correct an order denying advancement of a claimant’s fees because the act of proceeding to trial without advancement would defeat the substantive right at stake.”
This chapter update generally covers legislative and case law developments during 2022 and 2023. The views reflected herein are those of the authors and may not reflect those of their law firms or clients. ↑
The DGCL is found in Title 8 of the Delaware Code. ↑
