JANUARY 16, 2007

On Friday, January 12, the Supreme Court granted certiorari in three cases of interest to the business community.

§ 1983 Actions—Fee-Shifting—Definition of a “Prevailing Party.”  In actions brought pursuant to 42 U.S.C. § 1983, a district court has the discretion to award reasonable attorneys’ fees to a prevailing party. 42 U.S.C. § 1988. Section 1988 does not, however, define who qualifies as a “prevailing party,” or whether success at an early stage of litigation can support a fee award despite eventual failure in the litigation. Courts interpreting the Supreme Court’s varying pronouncements in this area have come to different conclusions. The Supreme Court granted certiorari in Struhs v. Wyner, No. 06-531, to determine whether fees can be awarded to a party that obtains a preliminary injunction, but then fails to win a permanent injunction or any other relief, under the theory that a preliminary injunction constitutes success on the merits.

In the unpublished decision below, the Eleventh Circuit upheld a $25,924 fee award to respondents, a group of peace protestors who sought to create a nude peace symbol on a public beach in the Florida State Parks system. Wyner v. Struhs, 170 Fed. Appx. 566 (11th Cir. Apr. 25, 2006). After an emergency hearing in the district court, the plaintiffs obtained a preliminary injunction requiring the state to permit them to carry out their demonstration, albeit behind a cloth screen; later, though, the district court granted summary judgment to the state on the plaintiffs’ facial challenges to Florida’s regulations. The Eleventh Circuit affirmed the district court’s discretionary decision to award the plaintiffs attorneys’ fees because the preliminary injunction was “on the merits.”

The Eleventh Circuit joined at least three other circuits in holding that a preliminary injunction requiring inquiry into the substance of the plaintiff’s claims can support a fee award under 42 U.S.C. § 1988. The Ninth, Second, and most recently D.C. Circuits have come to the same conclusion, the D.C. Circuit by analyzing whether the preliminary injunction changed the legal relationship between the parties or merely preserved the status quo pending final adjudication. Select Milk Producers v. Johanns, 400 F.3d 939 (D.C. Cir. 2005). On the other hand, the Fourth Circuit refuses to allow fee awards based only on a preliminary injunction because “the merits inquiry in the preliminary injunction context is necessarily abbreviated.” Smyth v. Rivero, 282 F.3d 268, 276 (4th Cir.), cert. denied, 537 U.S. 825 (2002).

The Supreme Court’s resolution of this case will be of significant interest to businesses that bring Section 1983 actions against states and municipalities. Under the Eleventh Circuit’s approach, such businesses may be entitled to attorneys’ fees even if they ultimately lose on the merits. Amicus briefs in support of the petitioners are due on February 26, 2007; amicus briefs in support of the respondents will be due 35 days after petitioners’ brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

Federal Jurisdiction—Removal—Federal Officer Removal Statute.  The “Federal Officer Removal Statute,” 28 U.S.C. § 1442, provides for the removal to federal court of suits brought in state court against “any officer (or any person acting under that officer) of the United States * * * sued in an official or individual capacity for any act under color of such office.” The Supreme Court granted certiorari in Watson v. Philip Morris Companies, Inc., No. 05-1284, to clarify the situations in which a private entity is “acting under” a federal officer.

Nicotine and tar levels reported in cigarette advertisements are calculated according to the “Cambridge Filter Method,” which the tobacco industry adopted in 1970 under threat of regulation by the Federal Trade Commission. Plaintiffs in this class action sued Philip Morris in state court, claiming that Philip Morris’s use of low tar descriptors such as “lighter” or “lower tar” are deceptive because consumers of “light” cigarettes allegedly receive higher levels of tar and nicotine than the testing apparatus registers. Philip Morris removed under Section 1442. The Eighth Circuit affirmed the denial of plaintiffs’ motion to remand, finding that, because of the FTC’s “comprehensive, detailed regulations,” Philip Morris was a “person acting under” a federal officer. 420 F.3d 852 (8th Cir. 2005).

As we noted in the Docket Report dated May 30, 2006, the Court invited the Solicitor General to file a brief at the certiorari stage in this case. In that brief, the Solicitor General argued that removal was improper but that the Eight Circuit’s error was too fact-bound to warrant review. Petitioners assert that there is a circuit split, contending that the circuits have articulated somewhat different tests for when a private entity may rely on Section 1442 to remove state-court litigation.

This case is important to all federal contractors, as well as businesses subject to comprehensive federal regulatory schemes, because such entities at times rely on removal under Section 1442 to avoid state courts that may be hostile to business interests. Amicus briefs in support of the petitioners are due on February 26; amicus briefs in support of the respondents will be due 35 days after petitioners’ brief is filed. Any questions about the case should be directed to appellate@mayerbrown.com.

Tax Law—Scope of Tax Court Jurisdiction Over Claims To Abate Interest.  28 U.S.C. § 1346(a)(1) provides that the federal “district courts shall have original jurisdiction” of “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” The Supreme Court granted certiorari in Hinck v. United States, No. 06-376, to address whether, despite Section 1346, the Tax Court has exclusive jurisdiction to hear interest abatement claims.

Prior to 1996, federal courts had held that, despite Section 1346’s explicit jurisdictional grant to the district courts, the Administrative Procedure Act (“APA”) barred judicial review of claims to abate interest on income tax deficiencies attributable to IRS errors or delays. According to these courts, 26 U.S.C. § 6404(e)(1) committed the abatement of interest to the discretion of the IRS, and the APA specifies that decisions left to agency discretion by law are not reviewable. See, e.g., Argabright v. United States, 35 F.3d 472 (9th Cir. 1994); Selman v. United States, 941 F.2d 1060 (10th Cir. 1991); Horton Homes, Inc. v. United States, 936 F.2d 548 (11th Cir. 1991).

In 1996, Congress amended 26 U.S.C. § 6404 to provide for judicial review of a discretionary refusal by the IRS to abate interest. Section 6404(h)(1) now provides that the “Tax Court shall have jurisdiction over any action brought by a taxpayer * * * to determine whether the Secretary’s failure to abate interest under this section was an abuse of discretion.” This provision does not explicitly address whether or under what circumstances a federal district court has jurisdiction over such claims. Nor does it specify whether the “abuse of discretion” standard set forth in § 6404(h)(1) would also apply to actions in the district court.

The Fifth Circuit and Federal Circuits have split in their interpretation of § 6404(h)(1). In Beall v. United States, 336 F.3d 419, 426 (5th Cir. 2003), the Fifth Circuit held that, in amending § 6404, “Congress clearly expressed its intent that the decision to abate interest no longer rest entirely within the Secretary's discretion.” Therefore, according to the Fifth Circuit, an interest abatement claim is judicially reviewable in any federal district court under 28 U.S.C. § 1346. By contrast, in the present case—which involves the taxation of the same partnership transaction at issue in Beall—the Federal Circuit concluded that in amending the statute “Congress intended to grant the Tax Court exclusive jurisdiction over interest abatement claims, and thus withdrew subject matter jurisdiction from all other courts over those claims.” 446 F.3d 1307, 1314–15 (Fed. Cir. 2006).

The Supreme Court’s decision in this case will be of significant interest to the business community. It will directly affect the decision of businesses and private individuals alike as to where to file an interest abatement claim in the event of IRS error. In addition, it may affect the decision whether to sever a refund claim from an interest abatement claim when the two stem from the same set of facts. Indeed, the Federal Circuit’s interpretation of Section 6404 would necessitate claim-splitting because federal district courts have exclusive jurisdiction over refund claims but under the Federal Circuit’s interpretation do not have jurisdiction over interest abatement claims. This risks claim preclusion: the decision of the court that decides the claim first as to whether the IRS erred may also effectively determine the outcome in the second action. Amicus briefs in support of the petitioners are due on February 26; amicus briefs in support of the respondent will be due 35 days after petitioners’ brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

On January 8, 2007, the Supreme Court 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:

Rowe v. New Hampshire Motor Transport Association, No. 06-457. The question presented is whether the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”), 49 U.S.C. §§ 14501(c)(1) and 41713(b)(4)(A), preempts states from regulating the commercial delivery of tobacco to private residences. Mayer Brown filed an amicus brief for the American Trucking Associations in the First Circuit in this case.