Circuit Splits

Growing Circuit Split Over Removal Statutes

In the recent decision in Smith v. Detroit Entertainment, LLC, Slip Copy, 2013 WL 119673 (E.D.Mich. Jan. 9, 2013), the federal court in the Eastern District of Michigan highlighted a growing circuit split over removal statutes - and contributed to the split by leading the Sixth Circuit into the fray.  At issue in this action by an employee for unpaid wages was whether the removal statute, 28 U.S.C. § 1441, would permit the employer to to remove a case to federal court from a state administrative agency, as opposed to a state court. This was a question of first impression in the Sixth Circuit.

As the court notes, however, several circuits have already split over this question.  The First and Seventh Circuits have adopted a "functional" test, looking at "1) the functions, powers, and procedures of the state tribunal and ... 2) the respective state and federal interests in the subject matter and in the provision of a forum.” See Floeter v. C.W. Transport, Inc., 597 F.2d 1100, 1101-02 (7th Cir.1979). "A federal court should assume jurisdiction only if the agency functions as a court and federal interests predominate over state interests." Id. (The Floeter court allowed removal because the state administrative proceedings were "essentially judicial").  

In contrast, the Ninth and Tenth Circuits have rejected the functional approach and have adopted a literal approach to the statute instead, which the court in this case (the Eastern District of Michigan) follows as well, arguing that that this approach is more faithful to the text of the federal removal statute.  The court thus remanded the case to the Michigan Administrative Hearing System.

A problem with the literal approach, which the court acknowledged, is that it allows plaintiffs to pre-empt, perhaps for the strategic purposes, a federal claim by filing in a state administrative office first - the federal case will not proceed until the administrative proceedings are complete.  The court in Detroit Entertainment suggested that Congress should resolve this problem rather than the courts.

 

New Article Addresses Circuit Split Over Pay-for-Delay Settlements

A new article posted on SSRN, Waiting is the Hardest Part: Why the Supreme Court Should Adopt the Third Circuit's Analysis of Pay-for-Delay Settlement Agreements (by Marlee Kutcher), addresses the current circuit split over the legality of reverse payment settlements ("pay-for-delay") in pharmaceutical patent litigation.  Although the paper strongly advocates one particular approach, the discussion of this complex issue is very good - highly recommended reading.  Here is the Abstract:      

The high cost of prescription drugs has put crippling economic pressure on the U.S. health care system. In 2010, forty-eight million Americans sacrificed filling essential drug prescriptions due to cost — often leading to life-threatening consequences and further increased health care expenses. Although many factors contribute to high drug costs, collusive settlements between brand pharmaceutical companies and generic drug manufacturers play a major role by presenting a barrier to lowering drug costs. Brand pharmaceutical companies have long been settling patent litigation by paying generic manufacturers large sums of money to drop patent lawsuits, thereby delaying generic drugs from entering the market. These settlement arrangements, known as “reverse payments” or “pay-for-delay” agreements, derive from the regulatory framework of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Though Hatch-Waxman’s goal was to increase generic drug competition in the pharmaceutical drug market while still fostering patent innovation, reverse payments largely prevent timely generic drug entrance into the marketplace. As a result, drug prices remain inflated and American consumers bear the burden. According to the Federal Trade Commission (“FTC”), these anticompetitive agreements cost consumers $3.5 billion per year. 

Due to the complex intersection of the regulatory scheme of Hatch-Waxman, antitrust law, and patent law, circuit courts have reached opposite conclusions on whether reverse payment settlements are anti-competitive. Three circuit courts applied antitrust scrutiny to find that the reverse payments were unreasonable restraints of trade and violated Section 1 of the Sherman Act. Conversely, three circuit courts reasoned that a reverse payment was legal so long as it remained within the “scope of the patent.” 

The circuit split regarding the legality of reverse payments was never more apparent than on July 16, 2012, when the Third Circuit reviewed the same settlement agreement as the Eleventh Circuit, and reached a divergent conclusion. While the Eleventh Circuit applied the scope of the patent test to find that the payments were legal, the Third Circuit expressly rejected that test and found that the payments constituted prima facie evidence of an antitrust violation. Given the significant implications for the pharmaceutical industry, American consumers, and the FTC’s aggressive agenda to limit reverse payment settlements, many parties and commentators have urged the U.S. Supreme Court to take up and rule on a reverse settlement case.

Statutory Splits, Codification, and Laboratories of Democracy

My new article, Codification and Legislative Transaction Costs (free download from ssrn.com), addresses the effects of having codified statutes on legislative borrowing and statutory harmonization between jurisdictions.  The discussion below draws from one section of the manuscript, focused on legislative borrowing and enactment costs.

Justice Brandeis first introduced the metaphor “laboratories of democracy” into our legal discourse, in New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).  The phrase now appears regularly in Supreme Court opinions as a meme for federalism.  The laboratory image suggests that states experiment with diverse, innovative policies and laws, and those producing the best results (whatever that means) can become the standard that other states follow.

Yet the codification of American legislative law, which occurred throughout the country in the late nineteenth and early twentieth centuries, tends to work against state legislative innovation.  Between the Civil War and World War II, every state and the federal government shifted toward codified versions of their statutes – with topical arrangement, hierarchical format and numbering, indexing, and cross-references. 

This change in the form of legislation significantly lowers transaction costs for legislators (that is, costs of enactment), as demonstrated in my manuscript.  Where enactment costs are lower, borrowing from other jurisdictions becomes more likely.  Once a state’s statutes are in codified form – sorted topically, with numbered and subordinated sections, indexed, and so forth – it becomes much easier to plug in a code or section, borrowed either from a sister jurisdiction or a model act, to fill a gap or to replace an existing hodgepodge section with a systematic treatment of a legal subject.  Inter-jurisdictional comparisons become easier, replacement or gap-filling more precise, and the advantages of harmonization more apparent to lawmakers.  Just as codification lowers information costs for legislators regarding their own statutory corpus, it also lowers information costs about available alternatives – the laws of other states or those drafted by the NCCUSL – making borrowing cheaper than many academic commentators seem to have realized.  

The ease of adoption and borrowing helped the ascent of the National Conference of Commissioners for Uniform State Laws and the American Law Institute.  The codification movement expanded the market for their model codes, uniform acts, and restatements.  At the same time, the NNCUS/ALI fueled the trend by providing legislatures with high quality, ready-made code sections on many subjects.  These model codes and uniform acts come already in codified form, with numbering, subsections, and definition sections, so their adoption necessarily contributed to the codified shape of modern state statutes.  The accompanying commentary further enhanced the appeal, functioning as both persuasive precedents for the law’s interpretation, and as quasi-legislative history.  The fact that courts often follow these official commentaries gave new legislators considering adoption more predictive power about the model laws’ subsequent interpretation and application. 

When sister jurisdictions have adopted the same statute, one jurisdiction’s cases become super-persuasive or near-binding precedent for the adopting state’s courts. (See 2B Sutherland Statutory Construction § 52:2).  Model acts and uniform codes take this advantage to the next level, because the judicial interpretations of any state that has adopted the same code become highly persuasive precedent for future courts in the adopting jurisdiction.  This allows even more predictability for legislators.

Here is the abstract of the article:

Between the Civil War and World War II, every state and the federal government shifted toward codified versions of their statutes – with topical arrangement, hierarchical format and numbering, indexing, and cross-references.  Academia has so far ignored the systemic effects of this dramatic change.  For example, the consensus view in the academic literature about rules and standards has been that precise rules present higher enactment costs for legislatures than would general standards, while vague standards present higher information costs for courts and citizens than do rules.  Systematic codification, however, inverts this relationship, lowering transaction costs for legislatures and increasing legal information costs for courts and citizens as statutes proliferate.  This Article takes a fresh look at this problem.  On the legislative side, codification lowers enactment costs, making it easier for special interest groups to obtain their desired legislation; it facilitates Coasean bargaining between legislators; and it facilitates legislative borrowing, which diminishes the “laboratories of democracy” phenomenon.  For the courts, codification changed how judges interpret statutes, prompting them to focus more on the meaning of individual words than on the overall policy goals of enactment, and to rely more on external sources, such as legislative history.  For both legislators and courts, codification functions as a Hartian rule of recognition, signaling legality for enacted rules.  For the citizenry, the reduced legislative costs mean increased legislative output, yielding rapid proliferation of statutes and unmanageable legal information costs.  More disturbingly, codification also facilitates overcriminalization.  While it is not realistic to reverse the trend, it is important to recognize codification’s effects on lawmaking, federalism, and statutory interpretation.