The U.S. Supreme Court and Business

Attorneys are much like laypersons when it comes to the U.S. Supreme Court; we tend to think of the High Court in terms of its landmark, headline-grabbing cases that impact our fundamental legal rights, such as Miranda warnings and freedom of speech, for example, the latter as found in Citizens United v. Federal Election Commission, ____ U.S. ___ (Jan. 21, 2010) (and what about the now immortal “Alito shake”?). But nowhere does it say (originalists please take note) that the Justices must limit their penultimate review only to matters of constitutional law.

As a point in fact, the Supreme Court gives equal weight (if not necessarily equal numbers) to crucial issues that affect the conduct of business in these United States. The High Court has long recognized that corporations are citizens too, with rights of their own. See, e.g., Central Hudson Gas v. P.S.C., 447 U.S.557 (1980) (corporations enjoy the right of free speech). Given all the above, a summary of the some of the more notable business-related decisions of the Court rendered this past year is in order. Inarguably, this brief review is limited to the author's own estimation of the most far-reaching landmarks from this term, but we are confident that it will, at a minimum, promote a fuller understanding of just how the High Court affects American business.

Enron 'Theft of Honest Services' Statute Vague, But Survives

As is well known, the collapse of Enron led to numerous prosecutions and convictions for fraud. A controversial aspect of those proceedings was the allegations of violations of Section 1346 of title 18, the federal criminal code, which criminalizes the additional wrong of depriving persons, including stockholders, of the “honest services” they are entitled to.

Jeffrey Skilling, former CEO of Enron, challenged his conviction, contending Section 1346 was far too vague to pass constitutional muster. Skilling was accompanied in a parallel case by Conrad Black, the former Canadian media baron, who was appealing his own conviction for bilking the stockholders of his media conglomerate.

Thus, the Supreme Court issued Skilling v. United States, ___ U.S. ___ (June 24, 2010) (this and all new decisions hereinafter are available at www.law.cornell.edu/supct), in tandem with Black v. United States, ___ U.S. ___ (June 24, 2010), as a “follow-on” ruling, with identical results. Significantly, the Justices were largely united in the end result of Skilling, if not necessarily the methodology that brought them to the same conclusion.

Justice Ginsburg masterfully crafted a course between Scylla and Char- ybdis, avoiding the rocky shallows of declaring the statute completely void for vagueness, yet steering future prosecutions into safe waters by adhering to the historic intent of the law to punish the seminal and far more tangible offenses of bribery and kickbacks. The Justices chose to refine the statute, rather than eradicate it, wisely opining that the High Court's function is to “construe, not condemn,” what Congress promulgates. Indeed, it characterized Skilling's demand for wholesale invalidation of the law as swimming against the current of High Court precedent. Parenthetically, Justice Ginsburg declared that the Supreme Court's “cases 'paring down' federal statutes to avoid constitutional shoals are legion,” and carefully distinguished such pruning of statutory text as not legislating, but instead respecting the legislative branch's function by preserving its proclamations. Skilling at n. 44.

Narrowly interpreting the “honest services” proviso, the Justices heeded McNally v. United States, 483 U.S. 350 (1987), wherein the High Court “stopped ' in its tracks” the utilization of the mail and wire fraud statutes as a means to vindicate intangible rights. To be certain, Section 1346 was enacted almost immediately after McNally, in an effort to rejuvenate the deprivation of “honest services” as a federal crime. Notwithstanding, the present Court was nonetheless troubled by Congress' lack of articulateness in doing so. But rather than let the statute sink, the Court instead salvaged it, cabining the law's proscriptions to what Justice Ginsburg characterized as the “core cases” of bribery and kickback schemes. Key here was the Court's respect for the fundamental tenets of due process, in that: 1) a penal statute must be definitive enough for ordinary people to understand; and 2) the law must have enough clarity to discourage arbitrary and discriminatory enforcement by an overzealous prosecutor. Skilling, quoting Kolender v. Lawson, 461 U.S. 352, 357 (1983).

Having confined the statute, the Supreme Court concluded that Skilling had not violated it, since the essential elements of a bribery or kickback scheme were absent from his prosecution. However, left untouched were Skilling's other convictions (at least 18), and left for remand whether the errors pertaining to Section 1346 were harmless thereto. Skilling, citing Yates v. United States, 354 U.S. 298 (1957). In short, a Pyrrhic victory for Skilling, and continuing punishment for his wrongs.

Getting back to Black, the disgraced corporate mogul met an identical fate; his Section 1346 conviction was overturned, but his case was likewise remanded to contemplate if the errors made below were ultimately harmless to his remaining convictions.

Please also note Justice Scalia's concurrence in Skilling (we were of the belief he would have authored the opinion, and with the same outcome). While it is not surprising that Justice Scalia was in accord, what distinguishes his erudite reasoning is that he found Section 1346 so beyond redemption that he called for its utter eradication as unconstitutionally vague. Justice Scalia reclassified the Court's venture into delimiting the statute's purview as “not interpretation but invention '. a dish the Court has cooked up all on its own,” and warned that “I do not believe that we have the power, in order to uphold an enactment, to rewrite it.” Certainly, words to ponder.

The dynamic in Skilling is compelling. The Court was of one mind in finding Section 1346 deficient, but it was upon the additional question of whether Skilling was denied a fair trial that the Justices somewhat fractured along traditional lines, as evidenced by a dissent in part, authored by Justice Sotomayor, and joined by Justices Stevens and Breyer. Skilling was tried and convicted by a federal jury in Houston, the very epicenter of Enron's infamies, and he alleged the prejudice against him in that city made it a fatal error to have empanelled a jury there. The majority found the voir dire procedures sufficient to safeguard against juror bias, with Justice Ginsburg opining “[n]o hard-and-fast formula dictates the necessary depth or breadth of voir dire,” and reminding that jury selection (at least in federal court) is particularly within the province of the trial judge. Understated, but potentially a landmark holding in its own right.

At the end of the day, we happily report the good news for law-abiding citizens, both corporate and individual: The Supreme Court largely left untouched (and rightly so) the plethora of other convictions obtained against Skilling and Black. Notwithstanding the remands yet to be decided, we think there are too many obstacles to overcome before these once-lauded corporate honchos obtain their freedom. That deterrent alone bodes well, for it encourages the like-minded to reconsider before embarking upon another Enron-like scheme, and assures law-abiding corporate leaders that honesty is still the best policy. All in all, good news for business.

Corporate 'Nerve Center' a Friend[ly] Place to Be Sued

Litigators grapple every day with the proper place to sue corporate defendants. With the ubiquitousness of multistate businesses (let alone multinational entities), that is often a decision not easily reached, nearly always contested, and sometimes proven erroneous. Decisions of the federal circuits hurt more than helped in that endeavor, some advocating a “headquarters” test, see Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir. 1986), while others espoused a more quantitative (and thus more complicated) standard. See R.G. Barry Corp. v. Mushroom Makers, Inc., 612 F.3d 651 (2nd Cir. 1979) (measuring the nature and volume of a corporation's activities in one state vis-'-vis others to determine proper venue). And some tribunals exacerbated the problem by seeking to combine these two disparate tests. See Gafford v. General Electric Co., 997 F.2d 150 (6th Cir. 1993) (inaugurating a “center of gravity” test).

The Supreme Court finally ended the internecine circuit conflict in Hertz Corp. v. Friend, ____ U.S. _____ (Feb. 23, 2010). In this federal diversity case, the respondents/plaintiffs brought suit in California against the rental car giant, and justified their venue choice upon the amount of business Hertz conducted in the Golden State. The defendant countered that New Jersey was the proper situs for litigation, since that was where one found its corporate headquarters.

Writing for the Court, Justice Breyer declared that the “nerve center” test was to now be the national standard. In pragmatic terms, the Court elaborated that a corporation is an artificial entity (remember that from Corporations in law school?) which makes decisions via the collective action of its managers. In turn, these managers generally act in concert out of a central location, to wit, the primary corporate headquarters. The Court indicated that in the vast majority of cases it is fairly easy to ascertain where that headquarters is, and analogized it to the human brain as the “nerve center” of corporate decision-making.

Equally so, the High Court advocated the “nerve center” mandate because it lends itself to measurement via objective criteria. In contradistinction, the Justices rejected tests that measure such things as percentages of revenue, number of employees or offices, and so forth, as far too complicated, but, more dangerously, often guilty of distorting the true nature of a corporation's purposeful activity. Indeed, Justice Breyer decried such yardsticks as “invit[ing] greater litigation” and cautioned they “can lead to strange results.” Moreover, such a straightforward inquiry is consonant with the plain text of federal jurisdictional statutes, which suggest, according to the Court, that like a human being, a corporation can have only a single place that it can properly call its “brain.” Certainly, the decision in Hertz acknowledges that no rule is perfect, but in this instance the comparative objectivity of this standard will most assuredly lead to more principled decisions. Now, in light of Hertz, counsel need only inquire as to the locale of the “nerve center” or corporate HQ of a defendant, and initiate suit in that jurisdiction. Saves time, saves money, and while not stated as such, it is a sensible side-effect of this new Supreme Court landmark.

Sports Are Businesses

You do not have to be a sports fan to know that in today's America: 1) professional sports are businesses (have you checked ticket prices lately?); and 2) there is tremendous money to be made in sports merchandising. We find the confluence of the above in American Needle, Inc. v. National Football League, ___ U.S. ___ (May 24, 2010), where Justice John Paul Stevens added to his legacy by neatly rejecting the NFL's argument that, for purposes of licensing apparel bearing the logos of its 32 teams, the league was a single entity, and thus not susceptible to the antitrust laws.

Not so, said the Court. Deciding only the narrow issue of whether or not the teams were capable of engaging in concerted action or a conspiracy to restrain trade, a threshold issue for any antitrust case, the Justices remind that they have always “eschewed ' formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” Thus lauding substance over form, the Court minimized the NFL's argument that, for purposes of licensing intellectual property such as its team marks and logos, it purportedly acted as one entity. In an eminently pragmatic approach, the Court noted that teams compete for merchandise revenue the same way they compete on the field. Indeed, Justice Stevens referred to the most recent Super Bowl contestants, the New Orleans Saints and the Indianapolis Colts, as current examples of “two potentially competing suppliers of valuable trademarks,” who do not, in fact, pursue the communal interests of the league, but rather toil for the distinct corporate interest of each separate team.

In the case at bar, American Needle, a sports apparel maker, was pursuing antitrust claims against the NFL for granting exclusive marketing licenses to Reebok, obviously to the exclusion and detriment of American Needle. To be sure, the case has a long way to go on the remand, but this new precedent solidifies the essential notion that substance rules over form in analyzing business combinations for anticompetitive effects.

Too Bad They Didn't Hear This One

When is a secured creditor not a secured creditor? When it is a creditor of the former General Motors or Chrysler Corporation. After expedited appeals through the lower courts, the Supreme Court declined review in both bankruptcy cases. See, e.g., Indiana State Police Pension Trust v. Chrysler LLC, ___ U.S. ___, 129 S. Ct. 2275 (2009). Space limitations prevent us from giving proper due to the titanic legal implications of the historical insolvencies of what were once two of America's industrial giants, but, as is widely known, government intervention resulted in a record-setting rush through Chapter 11, and the upending of the centuries-old “absolute priority” rule, that, as its plain name implies, absolutely prioritizes claimants in order of their secured collateral. Notwithstanding assertions that these cases were “one-off” anomalies, lawyers should know, better than most, that the anomaly of today is the precedent for tomorrow. The potential for havoc in the credit markets is something to be feared most certainly, and worthy of ongoing scrutiny beyond this year.

Wait Until Next Year

As stated at the outset, one cannot argue that it is the cases of constitutional proportions that captivate the interest of the American public, and even our own profession. Nevertheless, because we are a nation of free enterprisers, we often turn to the courts to keep our markets free. As such, it is quite a natural, and often beneficial, outcome that the Supreme Court takes up business-related cases, and settles controversies that impact how we Americans do business, big or small. Business cases abound from this Court's last term, as they do each year, and we trust you have found our modest summary illuminating. See you next year.

Anthony Michael Sabino is a partner in Sabino & Sabino, P.C. in Mineola, NY, and a Professor of Law at St. Johns University, Tobin College of Business, New York. The author gratefully acknowledges Michael A. Sabino (Brooklyn Law School, J.D. anticipated 2012) for his assistence in the research for this article.

Attorneys are much like laypersons when it comes to the U.S. Supreme Court; we tend to think of the High Court in terms of its landmark, headline-grabbing cases that impact our fundamental legal rights, such as Miranda warnings and freedom of speech, for example, the latter as found in Citizens United v. Federal Election Commission, ____ U.S. ___ (Jan. 21, 2010) (and what about the now immortal “Alito shake”?). But nowhere does it say (originalists please take note) that the Justices must limit their penultimate review only to matters of constitutional law.

As a point in fact, the Supreme Court gives equal weight (if not necessarily equal numbers) to crucial issues that affect the conduct of business in these United States. The High Court has long recognized that corporations are citizens too, with rights of their own. See, e.g., Central Hudson Gas v. P.S.C., 447 U.S.557 (1980) (corporations enjoy the right of free speech). Given all the above, a summary of the some of the more notable business-related decisions of the Court rendered this past year is in order. Inarguably, this brief review is limited to the author's own estimation of the most far-reaching landmarks from this term, but we are confident that it will, at a minimum, promote a fuller understanding of just how the High Court affects American business.

Enron 'Theft of Honest Services' Statute Vague, But Survives

As is well known, the collapse of Enron led to numerous prosecutions and convictions for fraud. A controversial aspect of those proceedings was the allegations of violations of Section 1346 of title 18, the federal criminal code, which criminalizes the additional wrong of depriving persons, including stockholders, of the “honest services” they are entitled to.

Jeffrey Skilling, former CEO of Enron, challenged his conviction, contending Section 1346 was far too vague to pass constitutional muster. Skilling was accompanied in a parallel case by Conrad Black, the former Canadian media baron, who was appealing his own conviction for bilking the stockholders of his media conglomerate.

Thus, the Supreme Court issued Skilling v. United States , ___ U.S. ___ (June 24, 2010) (this and all new decisions hereinafter are available at www.law.cornell.edu/supct), in tandem with Black v. United States , ___ U.S. ___ (June 24, 2010), as a “follow-on” ruling, with identical results. Significantly, the Justices were largely united in the end result of Skilling, if not necessarily the methodology that brought them to the same conclusion.

Justice Ginsburg masterfully crafted a course between Scylla and Char- ybdis, avoiding the rocky shallows of declaring the statute completely void for vagueness, yet steering future prosecutions into safe waters by adhering to the historic intent of the law to punish the seminal and far more tangible offenses of bribery and kickbacks. The Justices chose to refine the statute, rather than eradicate it, wisely opining that the High Court's function is to “construe, not condemn,” what Congress promulgates. Indeed, it characterized Skilling's demand for wholesale invalidation of the law as swimming against the current of High Court precedent. Parenthetically, Justice Ginsburg declared that the Supreme Court's “cases 'paring down' federal statutes to avoid constitutional shoals are legion,” and carefully distinguished such pruning of statutory text as not legislating, but instead respecting the legislative branch's function by preserving its proclamations. Skilling at n. 44.

Narrowly interpreting the “honest services” proviso, the Justices heeded McNally v. United States , 483 U.S. 350 (1987), wherein the High Court “stopped ' in its tracks” the utilization of the mail and wire fraud statutes as a means to vindicate intangible rights. To be certain, Section 1346 was enacted almost immediately after McNally, in an effort to rejuvenate the deprivation of “honest services” as a federal crime. Notwithstanding, the present Court was nonetheless troubled by Congress' lack of articulateness in doing so. But rather than let the statute sink, the Court instead salvaged it, cabining the law's proscriptions to what Justice Ginsburg characterized as the “core cases” of bribery and kickback schemes. Key here was the Court's respect for the fundamental tenets of due process, in that: 1) a penal statute must be definitive enough for ordinary people to understand; and 2) the law must have enough clarity to discourage arbitrary and discriminatory enforcement by an overzealous prosecutor. Skilling , quoting Kolender v. Lawson , 461 U.S. 352, 357 (1983).

Having confined the statute, the Supreme Court concluded that Skilling had not violated it, since the essential elements of a bribery or kickback scheme were absent from his prosecution. However, left untouched were Skilling's other convictions (at least 18), and left for remand whether the errors pertaining to Section 1346 were harmless thereto. Skilling , citing Yates v. United States , 354 U.S. 298 (1957). In short, a Pyrrhic victory for Skilling, and continuing punishment for his wrongs.

Getting back to Black, the disgraced corporate mogul met an identical fate; his Section 1346 conviction was overturned, but his case was likewise remanded to contemplate if the errors made below were ultimately harmless to his remaining convictions.

Please also note Justice Scalia's concurrence in Skilling (we were of the belief he would have authored the opinion, and with the same outcome). While it is not surprising that Justice Scalia was in accord, what distinguishes his erudite reasoning is that he found Section 1346 so beyond redemption that he called for its utter eradication as unconstitutionally vague. Justice Scalia reclassified the Court's venture into delimiting the statute's purview as “not interpretation but invention '. a dish the Court has cooked up all on its own,” and warned that “I do not believe that we have the power, in order to uphold an enactment, to rewrite it.” Certainly, words to ponder.

The dynamic in Skilling is compelling. The Court was of one mind in finding Section 1346 deficient, but it was upon the additional question of whether Skilling was denied a fair trial that the Justices somewhat fractured along traditional lines, as evidenced by a dissent in part, authored by Justice Sotomayor, and joined by Justices Stevens and Breyer. Skilling was tried and convicted by a federal jury in Houston, the very epicenter of Enron's infamies, and he alleged the prejudice against him in that city made it a fatal error to have empanelled a jury there. The majority found the voir dire procedures sufficient to safeguard against juror bias, with Justice Ginsburg opining “[n]o hard-and-fast formula dictates the necessary depth or breadth of voir dire,” and reminding that jury selection (at least in federal court) is particularly within the province of the trial judge. Understated, but potentially a landmark holding in its own right.

At the end of the day, we happily report the good news for law-abiding citizens, both corporate and individual: The Supreme Court largely left untouched (and rightly so) the plethora of other convictions obtained against Skilling and Black. Notwithstanding the remands yet to be decided, we think there are too many obstacles to overcome before these once-lauded corporate honchos obtain their freedom. That deterrent alone bodes well, for it encourages the like-minded to reconsider before embarking upon another Enron-like scheme, and assures law-abiding corporate leaders that honesty is still the best policy. All in all, good news for business.

Corporate 'Nerve Center' a Friend[ly] Place to Be Sued

Litigators grapple every day with the proper place to sue corporate defendants. With the ubiquitousness of multistate businesses (let alone multinational entities), that is often a decision not easily reached, nearly always contested, and sometimes proven erroneous. Decisions of the federal circuits hurt more than helped in that endeavor, some advocating a “headquarters” test, see Wisconsin Knife Works v. National Metal Crafters , 781 F.2d 1280 (7th Cir. 1986), while others espoused a more quantitative (and thus more complicated) standard. See R.G. Barry Corp. v. Mushroom Makers, Inc. , 612 F.3d 651 (2nd Cir. 1979) (measuring the nature and volume of a corporation's activities in one state vis-'-vis others to determine proper venue). And some tribunals exacerbated the problem by seeking to combine these two disparate tests. See Gafford v. General Electric Co. , 997 F.2d 150 (6th Cir. 1993) (inaugurating a “center of gravity” test).

The Supreme Court finally ended the internecine circuit conflict in Hertz Corp. v. Friend, ____ U.S. _____ (Feb. 23, 2010). In this federal diversity case, the respondents/plaintiffs brought suit in California against the rental car giant, and justified their venue choice upon the amount of business Hertz conducted in the Golden State. The defendant countered that New Jersey was the proper situs for litigation, since that was where one found its corporate headquarters.

Writing for the Court, Justice Breyer declared that the “nerve center” test was to now be the national standard. In pragmatic terms, the Court elaborated that a corporation is an artificial entity (remember that from Corporations in law school?) which makes decisions via the collective action of its managers. In turn, these managers generally act in concert out of a central location, to wit, the primary corporate headquarters. The Court indicated that in the vast majority of cases it is fairly easy to ascertain where that headquarters is, and analogized it to the human brain as the “nerve center” of corporate decision-making.

Equally so, the High Court advocated the “nerve center” mandate because it lends itself to measurement via objective criteria. In contradistinction, the Justices rejected tests that measure such things as percentages of revenue, number of employees or offices, and so forth, as far too complicated, but, more dangerously, often guilty of distorting the true nature of a corporation's purposeful activity. Indeed, Justice Breyer decried such yardsticks as “invit[ing] greater litigation” and cautioned they “can lead to strange results.” Moreover, such a straightforward inquiry is consonant with the plain text of federal jurisdictional statutes, which suggest, according to the Court, that like a human being, a corporation can have only a single place that it can properly call its “brain.” Certainly, the decision in Hertz acknowledges that no rule is perfect, but in this instance the comparative objectivity of this standard will most assuredly lead to more principled decisions. Now, in light of Hertz, counsel need only inquire as to the locale of the “nerve center” or corporate HQ of a defendant, and initiate suit in that jurisdiction. Saves time, saves money, and while not stated as such, it is a sensible side-effect of this new Supreme Court landmark.

Sports Are Businesses

You do not have to be a sports fan to know that in today's America: 1) professional sports are businesses (have you checked ticket prices lately?); and 2) there is tremendous money to be made in sports merchandising. We find the confluence of the above in American Needle, Inc. v. National Football League , ___ U.S. ___ (May 24, 2010), where Justice John Paul Stevens added to his legacy by neatly rejecting the NFL's argument that, for purposes of licensing apparel bearing the logos of its 32 teams, the league was a single entity, and thus not susceptible to the antitrust laws.

Not so, said the Court. Deciding only the narrow issue of whether or not the teams were capable of engaging in concerted action or a conspiracy to restrain trade, a threshold issue for any antitrust case, the Justices remind that they have always “eschewed ' formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” Thus lauding substance over form, the Court minimized the NFL's argument that, for purposes of licensing intellectual property such as its team marks and logos, it purportedly acted as one entity. In an eminently pragmatic approach, the Court noted that teams compete for merchandise revenue the same way they compete on the field. Indeed, Justice Stevens referred to the most recent Super Bowl contestants, the New Orleans Saints and the Indianapolis Colts, as current examples of “two potentially competing suppliers of valuable trademarks,” who do not, in fact, pursue the communal interests of the league, but rather toil for the distinct corporate interest of each separate team.

In the case at bar, American Needle, a sports apparel maker, was pursuing antitrust claims against the NFL for granting exclusive marketing licenses to Reebok, obviously to the exclusion and detriment of American Needle. To be sure, the case has a long way to go on the remand, but this new precedent solidifies the essential notion that substance rules over form in analyzing business combinations for anticompetitive effects.

Too Bad They Didn't Hear This One

When is a secured creditor not a secured creditor? When it is a creditor of the former General Motors or Chrysler Corporation. After expedited appeals through the lower courts, the Supreme Court declined review in both bankruptcy cases. See, e.g., Indiana State Police Pension Trust v. Chrysler LLC , ___ U.S. ___, 129 S. Ct. 2275 (2009). Space limitations prevent us from giving proper due to the titanic legal implications of the historical insolvencies of what were once two of America's industrial giants, but, as is widely known, government intervention resulted in a record-setting rush through Chapter 11, and the upending of the centuries-old “absolute priority” rule, that, as its plain name implies, absolutely prioritizes claimants in order of their secured collateral. Notwithstanding assertions that these cases were “one-off” anomalies, lawyers should know, better than most, that the anomaly of today is the precedent for tomorrow. The potential for havoc in the credit markets is something to be feared most certainly, and worthy of ongoing scrutiny beyond this year.

Wait Until Next Year

As stated at the outset, one cannot argue that it is the cases of constitutional proportions that captivate the interest of the American public, and even our own profession. Nevertheless, because we are a nation of free enterprisers, we often turn to the courts to keep our markets free. As such, it is quite a natural, and often beneficial, outcome that the Supreme Court takes up business-related cases, and settles controversies that impact how we Americans do business, big or small. Business cases abound from this Court's last term, as they do each year, and we trust you have found our modest summary illuminating. See you next year.

Anthony Michael Sabino is a partner in Sabino & Sabino, P.C. in Mineola, NY, and a Professor of Law at St. Johns University, Tobin College of Business, New York. The author gratefully acknowledges Michael A. Sabino (Brooklyn Law School, J.D. anticipated 2012) for his assistence in the research for this article.