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October Term, 2012

March 19, 2013

Today the Supreme Court issued two decisions, described below, of interest to the business community.

Class Action Fairness Act—Removal

Standard Fire Insurance Co. v. Knowles, No. 11-1450 (previously discussed in the August 31, 2012, Docket Report)

The Class Action Fairness Act of 2005 authorizes the removal of class actions to federal court when, among other things, the amount “in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs.” 28 U.S.C. § 1332(d)(2). Some class-action plaintiffs have sought to defeat federal-court jurisdiction under CAFA—and thereby force a remand to state court—by stipulating that the maximum recovery that they will seek on behalf of the proposed class is less than CAFA’s $5 million jurisdictional threshold. The plaintiff in Knowles, for example, attached to his state-court complaint a stipulation stating that he would not “at any time during this case, whether it be removed, remanded, or otherwise…seek damages for the class…in excess of $5,000,000.”

Today, the Supreme Court held that such stipulations do not destroy federal jurisdiction under CAFA when the defendant has presented evidence that, but for the stipulation, the amount in controversy would exceed $5 million. The Court’s reasoning was, in its words, “simple”: To be effective, “[s]tipulations must be binding,” but “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Slip op. 4. Therefore, a nonbinding stipulation must be ignored when assessing the amount in controversy under CAFA.

Because a precertification stipulation binds only the named plaintiff, the Court explained, it cannot “reduce[] the value of the putative class members’ claims.” Slip op. 4. In part, that is because a “nonbinding, amount-limiting, stipulation may not survive the class certification process.” Id. at 6. If, for example, a case were remanded to state court, the stipulation might then be voided in the class-certification process in order to protect the interests of the unnamed class members. The stipulation’s effectiveness would at best be “contingent” and hypothetical. Ibid.

In short, the Court refused to treat “a nonbinding stipulation as if it were binding,” because that result would “exalt form over substance, and run directly counter” to CAFA’s “primary objective” of ensuring that the federal courts have jurisdiction over important (i.e., relatively large) interstate class actions. Slip op. 6. The Court therefore directed federal courts to “ignore[]” stipulations purporting to limit damages to a proposed class when determining the aggregate amount in controversy of a removed class action. Id. at 7.

The Knowles decision is of enormous significance to businesses that may be targeted by class actions. Significantly, the Court pointed out that artful pleading, such as subdividing “a $100 million action into 21 just-below-$5-million state-court actions,” would “squarely conflict” with CAFA’s objectives, and therefore is forbidden. Slip op. 6. Knowles strongly suggests that the Court will look askance at future efforts by plaintiffs to gerrymander complaints in an effort to avoid federal-court jurisdiction and subvert CAFA’s purposes.

Any questions about this case should be directed to Andrew Pincus (+1 202 263 3220) or Archis Parasharami (+1 202 263 3328) in our Washington office.

Copyright Act—First Sale Doctrine—No Geographic Limitation

Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697 (described in the April 16, 2012, Docket Report)

The Copyright Act of 1976 provides that the owner of a copyright has certain “exclusive rights,” including the right “to distribute copies…of the copyrighted work to the public by sale or other transfer of ownership.” 17 U.S.C. § 106(3). The Act contains several limitations on these rights, including the “first sale” doctrine. That doctrine entitles the buyer of a “lawfully made” copy of a copyrighted work to sell the copy without permission from the copyright owner. See 17 U.S.C. § 109(a). Today, in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, the Supreme Court resolved a conflict among the courts of appeals over whether the first-sale doctrine likewise applies to copies lawfully manufactured abroad. The Court held that it does.

Respondent John Wiley & Sons, Inc., publishes and owns the copyright to academic textbooks in the United States. Wiley assigned its rights to publish, print, and sell its English-language textbooks outside the United States to a wholly owned subsidiary in Asia. Petitioner Supap Kirtsaeng is a citizen of Thailand. While he was studying in the United States, Kirstaeng would ask his relatives and friends to buy copies of Wiley’s textbooks in Thailand at a lower cost than they could be purchased in the United States. Kirstaeng would then sell the books in the United States at a profit. In 2008, Wiley sued Kirstaeng for copyright infringement. Both the district court and a divided panel of the Second Circuit ruled that the first-sale doctrine did not apply to copies of American copyrighted works manufactured outside the United States.

In an opinion by Justice Breyer, the Supreme Court reversed. The Court concluded that Section 109(a)’s requirement of “lawfully made under this title” means “made ‘in accordance with’ or ‘in compliance with’ the Copyright Act.” Slip op. 8. The Court observed that there was no geographic limitation contained within the statute, and reasoned that the historical and statutory context suggests that Congress did not intend such a limitation. The Court also reasoned that the first-sale doctrine derives from a common-law doctrine that contained no geographic limitation. In doing so, the Court dismissed as dicta its earlier statement (in Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135, 148 (1998)) that “presumably only those [copies] made by the publisher of the United States edition would be lawfully made under this title within the meaning of § 109(a).” Slip op. 27 (internal quotation marks omitted).

Justice Kagan, joined by Justice Alito, concurred in the Court’s opinion, but wrote separately to suggest that Congress consider statutorily overriding Quality King because “the Court’s decision” in the present case, “when combined with Quality King, substantially narrows” the Copyright Act’s ban on unauthorized importation of foreign-made copies of copyrighted works.

Justice Ginsburg dissented, joined by Justice Kennedy and joined in part by Justice Scalia, expressing the view that foreign-made copies are not “lawfully made under” the Copyright Act, so the first-sale doctrine should not apply.

Any questions about this case should be directed to John Mancini (+1 212 506 2295) in our New York office.

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