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May 29, 2007

The Supreme Court granted certiorari today in three cases of interest to the business community:

Federal Arbitration Act -- Ability To Contract For More Expansive Judicial Review of Arbitration Awards

The Federal Arbitration Act (“FAA”) provides that if a party seeks a judicial order confirming an arbitration award, “the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of [the FAA].” 9 U.S.C. § 9. Sections 10 and 11 of the FAA enumerate extremely limited grounds for federal court review of an arbitral award and, in particular, do not authorize review on the basis of either erroneous legal conclusions or unsubstantiated factual findings. The Court granted certiorari in Hall Street Associates LLC v. Mattel, Inc., No. 06-989, to determine whether the parties to a contract can agree to more expansive judicial review of an arbitration award, or whether the FAA precludes a federal court from enforcing such an agreement.

The arbitration agreement between the parties in this case stated that a district court reviewing an arbitration award should vacate, modify, or correct the award “where the arbitrator’s conclusions of law are erroneous.” Applying this standard, the district court disagreed with the arbitrator’s legal conclusions and remanded for the award to be amended accordingly. On appeal, the Ninth Circuit reversed on the ground that the district court applied an improper standard of review; according to the Ninth Circuit, the “Constitution reserves to Congress the power to determine the standards by which federal courts render decisions, and because Congress has specified the exclusive standard by which federal courts may review an arbitrator’s decision, * * * private parties may not contractually impose their own standard on the courts.”

There is a clear circuit split on this issue; the Tenth Circuit is aligned with the Ninth Circuit, whereas the Third and Fifth Circuits have disagreed, emphasizing that the purpose of the FAA is to enforce the terms of private arbitration agreements, including terms specifying the scope of review of arbitration decisions. The latter view finds support in Volt Information Sciences v. Board of Trustees, 489 U.S. 468 (1989), in which the Supreme Court held that “[j]ust as [private parties] may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted.” Id. at 479.

This case will determine whether companies may include standard-of-review clauses in future arbitration agreements, or if instead substantive review of arbitration awards may only be had under the narrow “manifest disregard of the law” standard.  More generally, the decision may affect the attractiveness of arbitration as an alternative to litigation. Absent an extension, which is likely, amicus briefs in support of the petitioner will be due on July 13, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

State Taxation -- Railroad Valuation Methodologies

Congress observed in 1969 that railroads “are easy prey for State and local tax assessors” (S. Rep. No. 91-630, at 3) because of their large fixed capital stock and their inability to shop for favorable tax treatment. Thus, in Section 306 of the Railroad Revitalization and Regulatory Reform Act (49 U.S.C. §11501), Congress prohibited states from assessing railroad property at a higher level relative to its “true market value” than they assess non-railroad property.

In Burlington Northern Railroad v. Oklahoma Tax Commission, the Supreme Court held that Section 306 “permits review by federal courts of alleged overvaluation of railroad property by state taxation authorities.” 481 U.S. 454, 456, 461 (1987). The Court left unresolved the question whether a railroad could challenge a state’s methodology for valuing commercial property, or instead only the application of that methodology to its property. Id. at 465 n.5. The Court granted certiorari in CSX Transportation, Inc. v. State Board of Equalization, No. 06-1287, to answer that question.

Georgia values public utilities using the “unit rule,” which, applied to railroads, entails multiplying the value of the whole railroad by the fraction of its rail miles that are in Georgia. In 2002, the appraiser changed its method for calculating total value, resulting in a 47.1% increase in the appraised value of petitioner CSX. The district court rejected CSX’s challenge to the valuation and refused to consider a valuation offered by CSX’s expert because it employed a different methodology from that used by the state. 448 F. Supp. 2d 1330 (N.D. Ga. 2005). The Eleventh Circuit affirmed, joining the Fourth Circuit and noting a conflict with the Second and Ninth Circuits. 472 F.3d 1281 (2006). The court ruled that Section 306 permits railroads to challenge “factual determinations,” but not “accounting methods.” Id. at 1287. Judge Fay dissented as to that holding, arguing that, because the statute requires a comparison of the assessment with “true market value,” “a railroad should be allowed to challenge the method used in an attempt to prove that the result of such a method was not the true market value of its property.” Id. at 1294.

As CSX pointed out in its petition, both the Eleventh Circuit decision in this case and a similar Fourth Circuit ruling (Chesapeake W. Ry. v. Forst, 938 F.2d 528 (4th Cir. 1991)) were followed by substantial increases in railroad assessments by affected states. The Supreme Court’s anticipated resolution of this issue should thus be of great interest to railroads, as well as to other regulated utilities. Absent an extension, which is likely, amicus briefs in support of the petitioner will be due on July 13, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about his case should be directed to appellate@mayerbrown.com.

Court of Federal Claims -- Jurisdiction -- Waiver of Statute of Limitations Defense

Claims against the federal government for the taking of property without just compensation, as well as certain other categories of suits for money damages against the federal government, must be brought in the United States Court of Federal Claims. The scope of that court’s jurisdiction is defined by the Tucker Act, which constitutes a limited waiver of the United States’ sovereign immunity. See 28 U.S.C. § 1491(a). Federal law further provides that claims arising under the Tucker Act “shall be barred unless the petition thereon is filed within six years after such claim accrues.” 28 U.S.C. § 2501. The Court granted certiorari in John R. Sand & Gravel Co. v. United States, No. 06-1164, to determine whether this six-year statute of limitations, unlike most statutory limitations periods, is a jurisdictional prerequisite that cannot be waived by the parties.

In 1969, John R. Sand & Gravel Co. (“JRS&G”) entered into a 50-year lease to mine stone and gravel from a parcel of land that contained an operating landfill. In 1986, the Environmental Protection Agency determined that the land was a hazardous waste site and ordered remediation pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. § 9601 et seq. (“CERCLA”). In the winter of 1992-1993, the EPA erected a fence that cut off access to JRS&G’s plant and principal operations. The EPA subsequently relocated the fence to allow JRS&G to access its plant. The EPA erected a second fence in February 1994 that again cut off JRS&G’s access to parts of its plant; the agency refused to move the fence unless JRS&G ceased all operations in that area.

In May 2002, JRS&G brought suit in the Court of Federal Claims, contending that the remediation process amounted to a permanent physical taking of its leasehold. The court rejected the federal government’s argument that JRS&G’s claim had accrued when the first fence was constructed and therefore was barred by the six-year limitations period. After a bench trial, however, the court found that JRS&G had not established a taking. 62 Fed. Cl. 556 (2004). The Federal Circuit vacated and remanded with instructions to dismiss on the ground that the claim was time-barred, even though the government had waived the statute of limitations argument on appeal. 457 F.3d 1345 (Fed. Cir. 2006). The Federal Circuit held that it was required to address the question because, unlike other statutes of limitations, Section 2501 “sets forth a condition that must be met for a waiver of sovereign immunity in a suit for money damages against the United States.” 457 F.3d at 1355. Concluding that JRS&G’s takings claim had accrued “not later than February of 1994,” the court found that the six-year period had expired and the Court of Federal Claims “lack[ed] jurisdiction to consider” the claim. Id. at 1357, 1360.

JRS&G’s petition for certiorari argues that the Federal Circuit’s treatment of Section 2501 as a jurisdictional bar conflicts with the well-established tenet that statutes of limitations are non-jurisdictional rules that may be waived, as well as with numerous recent federal circuit and Supreme Court cases holding various timing requirements to be non-jurisdictional in nature. This case raises an important question regarding the availability of the Court of Federal Claims as a forum for disputes with the federal government, and may be of significance not only to companies that own leaseholds or other interests in lands subject to federal regulation but also to any other businesses that contract with the federal government. Absent an extension, which is likely, amicus briefs in support of the petitioner will be due on July 13, 2007; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about his case should be directed to Lauren Rosenblum Goldman (212-506-2647) in our New York office.

Today the Supreme Court also invited the Solicitor General to file a brief expressing the views of the United States in the following case of interest to the business community:

United States ex rel. Bly-Magee v. Premo, No. 06-1269. The question presented is whether the “public disclosure bar” of the False Claims Act, 31 U.S.C. § 3730(e)(4)(A), which precludes courts from hearing a qui tam action based on “the public disclosure of allegations or transactions * * * in a congressional, administrative, or [GAO] report, hearing, audit, or investigation,” encompasses disclosures by state and local governments, or whether this bar applies only to disclosures by the federal government.

Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed.

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