June 28, 2024 | Volume 31, Issue 16
This Report summarizes opinions issued on June 20, 2024 (Part I); and cases granted review on June 17, 2024 (Part II).
Opinions
Moore v. United States, 22-800.
In a 7-2 decision, the Court held that the 2017 Mandatory Repatriation Tax (MRT), which “attributed the . . . undistributed income of American-controlled foreign corporations to American shareholders . . . and then taxed those American shareholders on their pro rata shares of that . . . income,” “is constitutional under Article I, §§8 and 9 and the Sixteenth Amendment.” The Court explained that some entities, like S corporations and partnerships, “are taxed on a pass-through basis.” This means that “[i]nstead of the entity itself paying taxes, income is attributed to the entity’s owners, such as shareholders or partners, who then pay taxes on the income of the entity even if the entity has not distributed any money or property.” It then explained that, normally, Congress “does not directly tax foreign corporations, including American-controlled foreign corporations, on the income that they earn outside of the United States.” But Congress has sometimes taxed this income “on a pass-through basis.” For example, subpart F of the Internal Revenue Code “attributes income of the corporation to American shareholders, and taxes those American shareholders on that income.” Subpart F, however, “applies only to a small portion of the foreign corporation’s income, mostly passive income.” In 2017, Congress implemented the MRT, a “one-time, backward-looking” pass-through tax on accumulated and undistributed income for “some American shareholders of American-controlled foreign corporations.” The MRT was meant to address a decades-old problem: “American-controlled foreign corporations had earned and accumulated trillions of dollars in income abroad that went almost entirely untaxed by the [U.S.]” Under the MRT, this undistributed income would be attributed to its American shareholders who would be taxed based on their proportionate share at a rate between 8 and 15.5%.
In 2006, the Moores invested $40,000 in KisanKraft, an American-controlled foreign corporation based in India, and received a 13% ownership share in exchange. Between 2006 and 2017, KisanKraft “generated a great deal of income,” but “had not distributed that income to its American shareholders.” As a result, “neither KisanKraft nor the Moores had paid U.S. taxes on that income.” For the 2017 tax year under the MRT, the Moores owed $14,729 in taxes based on their proportionate share of KisanKraft’s total income from 2006 to 2017. The Moores paid this tax and then sued for a refund. As relevant here, they claimed “that the MRT violated the Direct Tax Clause of the Constitution because . . . the MRT was an unapportioned direct tax on their shares of KisanKraft stock.” The district court dismissed the suit, and the Ninth Circuit affirmed. In an opinion by Justice Kavanaugh, the Court affirmed.
The Court began with a review of Congress’s taxing power under the Constitution. Article I, §8, clause 1 of the Constitution “affords Congress broad ‘Power To lay and collect Taxes, Duties, Imposts and Excises.’” This power includes laying direct and indirect taxes. Direct taxes are “imposed on persons or property” and “must be apportioned among the States according to each State’s population.” Such taxes are exceedingly rare. Indirect taxes are “imposed on activities or transactions” and “must ‘be uniform throughout the United States.’” “Because income taxes are indirect taxes, they are permitted under Article I, §8 without apportionment.” To address intervening and contrary case law from the Court, the Sixteenth Amendment was later ratified and confirmed that “[t]axes on income―including taxes on income from property―are indirect taxes that need not be apportioned.”
The Court then turned to the MRT. Because “[t]he MRT is not apportioned among the States,” it raised the question: Does it tax income, and thus does not need to be apportioned, or does it tax property, and thus must be apportioned to pass constitutional muster? Still further, “[w]hat distinguishes income from property?” According to the Moores, “income requires realization,” and because the “MRT does not tax any income that they have realized” it is actually a tax on property. The Court disagreed. It concluded that “the MRT does tax realized income”―from the corporation. “The MRT attributes the income of the corporation to the shareholders, and then taxes the shareholders . . . on their share of that undistributed corporate income.” The Court concluded that, based on its “longstanding precedents, reflected in and reinforced by Congress’s longstanding practice,” it was constitutionally permissible for Congress to “attribute an entity’s realized and undistributed income to the entity’s shareholders or partners on their portions of that income.”
First, the Court discussed its precedents. Congress, the Court explained, could choose to tax a business entity or, treating the entity as a pass-through, tax “the shareholders or partners on that income.” Either way, the Court previously “has held that the tax remains a tax on income―and thus an indirect tax that need not be apportioned.” This case law, dating from the 1920s and 1930s, had already “established a clear rule that directly contradict[ed] the Moores’ argument in this case,” and this “line of precedent remains good law to this day.” Moreover, and “[m]ost notably,” lower “courts have repeatedly invoked that principle in upholding subpart F.”
Second, the Court discussed Congress’s longstanding practice of taxing “shareholders and partners of business entities on the entities’ undistributed income,” which “reflect[ed] and reinforc[ed] [the] Court’s precedent upholding those kinds of taxes.” These examples spanned more than a century from Lincoln’s presidency through the early and mid-1900s, with the later years including taxation of S-corporations’ shareholders based on their corporations’ undistributed income and the enactment of subpart F.
Faced with the foregoing precedent and congressional history, the Moores cabined their challenge by “explicitly conced[ing] that partnership taxes, S-corporation taxes, and subpart F taxes are income taxes that are constitutional” and do not need to be apportioned. Instead, the Moores attempted to distinguish the MRT from those other taxes―an argument the Court roundly rejected. Indeed, if the Moores’ arguments were taken to their logical conclusions, “vast swaths” of the Internal Revenue Code would be rendered unconstitutional, “depriv[ing] the U.S. Government . . . of trillions in lost tax revenue.” Due to this “fiscal calamity,” Congress would be forced to drastically cut critical programs or significantly increase taxes on “ordinary Americans.”
Finally, the Court “emphasize[d]” that its holding was “narrow.” It was “limited to: (i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income. In other words, [the Court’s] holding applies when Congress treats the entity as a pass-through.” The Court further clarified that “the Due Process Clause proscribes arbitrary attribution. . . . And nothing in [the Court’s] opinion should be read to authorize any hypothetical congressional efforts to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. In such a scenario, the entity would not simply be a traditional pass-through.” Nor was it necessary for the Court to resolve the parties’ dispute regarding “whether realization is a constitutional requirement for an income tax.”
Justice Jackson concurred. She first emphasized that, before the Court could have invalidated the MRT in this case, the Court would have “need[ed] to be persuaded of several additional arguments that [it] wisely [did] not reach.” For instance, the Court would have had to determine: (1) that Congress could tax income only if it was “realized,” even though no such requirement appears in the text of the Sixteenth Amendment; and (2) if the MRT violated the Sixteenth Amendment, whether it was, in fact, a “direct tax.” Looking to future tax cases, Justice Jackson contended that the Court, consistent with its prior case law, should maintain a limited role in resolving challenges to taxes passed and signed by the other two branches of government. The proper resolution of “‘such abuses is to be found at the ballot-box’” and in the hands of our elected representatives.
Justice Barrett, joined by Justice Alito, concurred in the judgment. To begin, Justice Barrett would have explicitly addressed a question the Court did not and would have concluded that the Sixteenth Amendment requires income to be “realized” in order to be taxed without apportionment. What constitutes “realization,” Justice Barrett explained, is “a question of substance, not form.” Although a “rigid definition” could not capture all the many ways in which income may be realized, “[t]he common thread is that to realize income, one must receive something new and valuable beyond the property she already owns.” Applied here, Justice Barrett asked: Had “the Moores realized income from the KisanKraft shares?” They had not, she explained, because they had never “realized income by selling or otherwise disposing of their shares.” However, KisanKraft had “realized income as a corporation.” The next question, then, was whether Congress could, essentially, “disregard KisanKraft’s corporate form, attribute [the company’s] income to its shareholders, and tax its shareholders on that income.” The Court held that Congress could in this context of a closely held foreign corporation. Justice Barrett stated that this “might be right,” but the Court’s reasoning was wrong. Instead, the crux of the case law relied on by the Court “suggest[ed] that Congress has a limited power to [attribute corporate income to a shareholder] that depends on the relationship between the shareholder and the income.” Ultimately, even if, as the Court held, “Congress can attribute income of a closely held foreign corporation like KisanKraft to its shareholders does not mean it has equal power to attribute the income of a publicly traded domestic corporation to” any of its shareholders, no matter her stake in the company.
Finally, Justice Barrett explained that she would not resolve the congressional attribution question where the parties in this case had barely addressed it. “Subpart F and the MRT may or may not be constitutional, nonarbitrary attributions of closely held foreign corporations’ income to their shareholders.” Here, however, “the Moores ha[d] conceded that subpart F [was] constitutional.” Moreover, Justice Barrett “agree[d] with the Court that subpart F is not meaningfully different from the MRT in how it attributes corporate income to shareholders.” Thus, in light of this concession, it was Justice Barrett’s view that the Moores had not established that they were entitled to a refund.
Justice Thomas, joined by Justice Gorsuch, dissented. Justice Thomas concluded that the MRT was unconstitutional. He agreed with the Moores that “a tax on unrealized investment gains is not a tax on ‘income’ within the meaning of the Sixteenth Amendment,” and, as a result, it could not “be imposed ‘without apportionment among the several States.’” Justice Thomas pointed to the Sixteenth Amendment’s text and history, along with the Court’s related jurisprudence before and after the Amendment’s ratification, to support his conclusion. He emphasized that “[t]he limitations on the Federal Government’s ability to exercise th[e] concurrent power” of taxation “were [] an essential component of the constitutional compromise,” and reflect an important federalism principle. After an in-depth discussion regarding this history, Justice Thomas drew two conclusions: First, because the Sixteenth Amendment was ratified to abolish the Court’s prior holding “that an income tax must be classified as direct or indirect based on whether a tax on the source of that income would be direct or indirect,” the Amendment necessarily “created a constitutional distinction between income and its source.” “Second, because Sixteenth Amendment ‘income’ must be distinguished from its source, the Amendment includes a realization requirement.” As a result, because the Moores in this case “never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income’ under the Sixteenth Amendment.”
Finally, Justice Thomas criticized the Court for “lay[ing] bare the consequentialist heart of its opinion.” He said that the Court wrongly “conclude[d] that the Moores’ constitutional argument would invalidate not only the MRT but also other longstanding taxes.” To the contrary, he wrote, “the majority’s insistence that the MRT is just like other forms of pass-through taxation is not convincing.” From this incorrect conclusion, the Court was now “fret[ting]” that this would deprive the U.S. in “trillions in lost tax revenue,” requiring either drastic cuts to critical programs or significant tax increases. (Internal quotation marks omitted.) Justice Thomas agreed with the Court that “[t]he Constitution does not require that fiscal calamity.” (Internal quotation marks omitted.) But “if Congress invite[d] calamity by building the tax based on constitutional quicksand, [t]he judicial Power afforded to this Court [did] not include the power to fashion an emergency escape.” (Internal quotation marks omitted.)
Gonzalez v. Trevino, 22-1025.
In a per curiam opinion, the Court held that the Fifth Circuit misapplied the principles established in Nieves v. Bartlett, 587 U.S. 391 (2019), when it mandated that petitioner Sylvia Gonzalez furnish specific comparator evidence to substantiate her claim of retaliatory arrest. In 2019, Gonzales ran and was elected to a seat on the city council of Castle Hills in Texas. When she was elected, her first act in office was to help gather signatures for a petition to remove the city manager, Ryan Rapelye. She collected signatures from 300 residents and presented the petition at the subsequent city council meeting. During its discussions spanning two days, the council reviewed the petition. As Gonzalez gathered her belongings on the last day, Mayor Edward Trevino requested the petition from her. Eventually, the petition was found in her binder. Upon discovery, Gonzalez expressed surprise, asserting she had not knowingly placed it there. Trevino reported the incident to local law enforcement, prompting an investigation led by a private attorney. Following the inquiry, the attorney determined that Gonzalez had likely violated a Texas anti-tampering statute that prohibits, among other things, a person from intentionally removing a government record. At the attorney’s request, a local magistrate issued a warrant for Gonzalez’s arrest. She turned herself in and spent an evening in jail.
Gonzalez later filed a §1983 claim in district court. She alleged that her arrest was in retaliation for her efforts to organize the petition for Rapelye’s removal, which infringed on First Amendment rights. To bolster her claim, Gonzalez alleged that she had examined the county’s misdemeanor and felony records for the past ten years and found that the Texas anti-tampering statute had never been used to “criminally charge someone for trying to steal a nonbinding or expressive document.” She claimed this evidence demonstrated that the “defendants had engaged in a political vendetta by bringing a ‘sham charge’ against her.” Defendants moved to dismiss the complaint, arguing that the presence of probable cause defeated the retaliatory arrest claims. Although Gonzalez conceded that probable cause supported her arrest, the district court denied the motion, finding that Gonzalez’s claim fell within an exception to the probable cause rule recognized in Nieves. The Fifth Circuit reversed the district court’s decision on the ground that a claim “could fall within the Nieves exception only if the plaintiff proffered ‘comparative evidence’ of ‘otherwise similarly situated individuals who engaged in the same criminal conduct but were not arrested.’” In a per curiam opinion, the Court reversed and remanded.
The Court agreed with Gonzalez that the Fifth Circuit “took an overly cramped view of Nieves.” In Nieves, the Court held that “a plaintiff bringing a retaliatory-arrest claim” must prove an absence of probable cause for the arrest. But the Court also found a narrow exception if the plaintiff produces “objective evidence that he was arrested when otherwise similarly situated individuals not engaged in the same sort of protected speech had not been.” In other words, the Court established an exception for situations where officers possess probable cause for an arrest but generally choose not to proceed. For a plaintiff to qualify for this exception, she must provide evidence demonstrating that her arrest occurred under such circumstances. The Court said the only “express limit” it placed on “the sort of evidence a plaintiff may present” was that it “must be objective.” But the Court emphasized that the Fifth Circuit’s “demand for virtually identical and identifiable comparators goes too far.” The Court said that the survey Gonzalez provided was the type permissible under the Nieves exception because “the fact that no one has ever been arrested for engaging in a certain kind of conduct—especially when the criminal prohibition is longstanding and the conduct at issue is not novel—makes it more likely that an officer has declined to arrest someone for engaging in such conduct in the past.” Because the Court agreed with Gonzales’s first argument that the Fifth Circuit misapplied the Nieves, the Court did not reach Gonzalez’s second argument―that the Nieves no-probable-cause rule applies only to split-second arrests.
Justice Alito wrote a concurring opinion “to provide further guidance on the scope” of the Court’s opinion. To do so, he provided a further detailed account of the events leading to Gonzalez’s arrest, including describing the surveillance footage that showed Gonzalez taking the petition and placing it in her binder. He observed that since Gonzalez admitted her arrest was supported by probable cause, her retaliatory arrest claim could only move forward if it fit the Nieves exception. He compared the needed evidence for the exception to the example in Nieves of a vocal police critic arrested for jaywalking, stating that “[a] plaintiff may satisfy the Nieves exception only by providing comparably powerful evidence.” But he emphasized that Gonzalez did not need to “identify another person who was not arrested under the same law for engaging in a carbon-copy course of conduct.” Justice Alito noted that “when a plaintiff’s claim hinges on negative evidence, like what Gonzalez offers here, context is key for determining the strength of his case.” For example, he stated that “[w]hen a plaintiff’s alleged criminal conduct is egregious or novel . . . the lack of similar arrests might warrant little weight.” Additionally, a court should assess the plaintiff’s conduct at an “appropriate level of generality” because “if defined too specifically,” a plaintiff could evade “the no-probable-cause requirement simply by submitting evidence that no one who engaged in an exact duplicate of his behavior had been arrested.”
Justice Alito disagreed with the Court’s decision not to address Gonzalez’s argument that Nieves should apply only to “split-second” arrests. He noted that the Court’s decision in Nieves already answered that question, emphasizing that “[n]othing about Nieves’s rationale depends on whether the officer made a split-second arrest of the plaintiff.” He pointed out that retaliatory prosecution claims almost always involve deliberative acts, not split-second decisions. Further, he pointed out that a split-second rule would incentivize police officers to make quick arrest decisions rather than proceeding in a deliberative manner. Justice Alito also rejected Gonzalez’s argument that retaliatory arrest claims should be treated similarly to the common law tort of “abuse of process.” He first observed that Gonzalez was incorrect in suggesting that the “abuse of process” tort was not previously examined by the Court when it ruled on Nieves. He stated that the Court had indeed considered and rejected this comparison in Hartman v. Moore, 547 U.S. 250 (2006), a case relied upon in Nieves. He further explained that while common-law torts can aid the Court’s analysis, they do not determine every aspect of a §1983 claim, as many §1983 claims can be compared to several different common-law torts.
In a concurring opinion, Justice Kavanaugh asserted that Gonzalez’s argument was not a Nieves-exception claim. He stated that the Nieves exception is “a conduct-based comparison” and “[o]nly if the conduct does not usually trigger an arrest under any statute can you have a Nieves-exception claim—like jaywalking.” But, he said, Gonzelez’s argument turns not on her conduct of taking the government records but on her mens rea that an “objectively reasonable officer would have known that Gonzalez accidentally rather than intentionally took the government record.” By admitting that the officials had probable cause to arrest her, Gonzalez also implicitly conceded that the “officers had probable cause to conclude that she ‘intentionally’ removed the document.” Justice Kavanaugh stated that this recognition “should have foreclosed Gonzales’s attempt to contest her mens rea for purposes of her §1983 retaliatory arrest claim.” Ultimately, he stated, since this case is about probable cause and mens rea and not conduct-based comparisons, it has nothing to do with the Nieves exception. He therefore criticized the decision to grant certiorari as ill-advised.
Justice Jackson also wrote a concurring opinion, which Justice Sotomayor joined. She agreed with the per curiam opinion that Gonzalez’s survey is admissible objective evidence for a claim under Nieves. But Justice Jackson emphasized that the Court’s opinion should not be interpreted to mean that plaintiffs are limited to this type of objective evidence when bringing claims under the Nieves exception. Justice Jackson highlighted that the only constraint the Court placed on the evidence a plaintiff can present is that it must be objective. She provided other examples of objective evidence that could be considered in these cases, including evidence of unusual, irregular, or unnecessarily burdensome arrest procedures, the timing of events leading up to an arrest, and any indication of retaliatory motives related to the arrest. Justice Jackson noted that Gonzales had provided this additional type in the district court. Thus, upon remand, she believed the lower courts should consider the “full scope of the objective evidence” Gonzalez offered to establish differential treatment.
Justice Thomas dissented, stating that Gonzalez’s retaliatory arrest claim should not proceed because she conceded that there was probable cause for her arrest. Justice Thomas reiterated his view that to bring a First Amendment retaliatory-arrest claim under §1983, plaintiffs must prove a lack of probable cause. He noted that because there was no common-law tort for retaliatory arrest in violation of freedom of speech when §1983 was enacted, courts look to the common-law tort most analogous to the §1983 claim in question. According to Justice Thomas, the closest equivalents to retaliatory arrest are false imprisonment, malicious arrest, and malicious prosecution, which all require a plaintiff to prove the absence of probable cause. As Gonzalez acknowledged the existence of probable cause, he concluded that her retaliatory arrest claim could not advance. Justice Thomas also criticized the Court for expanding the exception it created in Nieves by now allowing plaintiffs to present “any objective fact that ‘makes it more likely that an officer has declined to arrest someone for engaging in such conduct in the past.’” He stated that this exception has no historical basis in common law or First Amendment precedents.
Chiaverini v. City of Napoleon, 23-50.
In a 6-3 opinion, the Court held that the presence of probable cause for one charge does not automatically defeat a Fourth Amendment malicious-prosecution claim alleging the absence of probable cause for another charge. Petitioner Jascha Chiaverini bought a ring for $45 from an individual who turned out to be a jewel thief. Once the rightful owners learned of the transaction, they requested the ring’s return. Chiaverini declined to return it, which led the owners to contact the police. Two officers then visited Chiaverini’s store, instructing him to return the ring. He refused, citing a letter from the police department that advised him to keep the ring as evidence. When another officer visited Chiaverini the next day, he again refused to return the ring and, for some reason, informed them that he was operating his store without a license. As a result, the police filed three complaints against Chiaverini in municipal court―two misdemeanor charges for receiving stolen property and dealing in precious metals without a license and one felony charge for money laundering. Police sought an arrest warrant for Chiaverini, focusing on the felony charge. To support that charge, the officers claimed that Chiaverini knew the ring had been stolen when he had bought it. The judge issued the arrest warrant, and Chiaverini remained in custody for three days until his arraignment. At a preliminary hearing, the officers maintained their claim that Chiaverini had admitted to suspecting the ring was stolen, though Chiaverini denied making such a statement. The judge again found probable cause and set the three charges for trial. The prosecutors, citing other pressing priorities, failed to present the case to a grand jury within the required timeframe, leading the court to dismiss the charges.
Chiaverini brought a lawsuit against the officers under §1983, alleging a Fourth Amendment violation for malicious prosecution. He needed to prove that the officers filed criminal charges against him without probable cause to prevail on that claim. He argued that the officers lacked probable cause since they had no grounds to believe he was aware the ring was stolen, and they could not demonstrate that the ring’s value exceeded $1000, as he claimed Ohio law required. But the district court granted summary judgment to the officers, and the Sixth Circuit affirmed. The Sixth Circuit ruled that even if the felony charge lacked probable cause, Chiaverini’s malicious-prosecution claim failed because the misdemeanor charges were supported by probable cause. It said that if at least one charge is supported by probable cause, a malicious prosecution claim based on other charges cannot succeed. In an opinion by Justice Kagan, the Court vacated and remanded.
The Court started by observing that under a §1983 Fourth Amendment malicious-prosecution claim, a plaintiff must show that a government official charged him without probable cause, leading to an unreasonable seizure of his person. The Court looked at the tort of malicious prosecution to determine whether a Fourth Amendment malicious-prosecution claim may succeed when a baseless charge accompanies a valid change. The Court found that in line with Fourth Amendment and common law principles, courts should assess Fourth Amendment malicious-prosecution claims on a charge-by-charge basis. The Court reasoned that any pretrial detention must be supported by probable cause under Fourth Amendment law. Otherwise, it constitutes an unreasonable seizure. Thus, if an invalid charge leads to the initiation or continuation of a detention, it violates the Fourth Amendment, even if a valid charge was also filed. The Court therefore found that “bringing one valid charge in a criminal proceeding should not categorically preclude a claim based on the Fourth Amendment.” The Court further emphasized that this conclusion aligns with common-law principles governing malicious-prosecution suits when §1983 was enacted. Plaintiffs in such suits were required to show that “an official initiated a charge without probable cause” but “did not have to show. . . that every charge brought against him lacked an adequate basis.” Instead, courts “assessed probable cause charge by charge.” While the Court acknowledged the parties’ consensus that the Sixth Circuit’s categorical bar was erroneous, it noted that the parties now disagree about the requirement that the unsupported charge cause a seizure. But the Court said that “the test for finding causation is no part of the question” the Court agreed to review. Thus, the Court left the causation question to the Sixth Circuit to decide on remand.
Justice Thomas, joined by Justice Alito, dissented, stating his continued “belief that a ‘malicious prosecution claim cannot be based on the Fourth Amendment.’” He emphasized his belief that Thompson v. Clark, 596 U.S. 36 (2022), erred in holding that malicious prosecution is most analogous to a Fourth Amendment unreasonable seizure claim because “[a] malicious prosecution-claim bears little resemblance to an unreasonable seizure under the Fourth Amendment.”
Justice Gorsuch also dissented. He contended that the concept of a Fourth Amendment malicious-prosecution claim is a judicial invention, as the Fourth Amendment does not concern itself with prosecutions; instead, its purpose is to protect individuals from unreasonable searches and seizures. Justice Gorsuch highlighted the distinctions between the two doctrines, noting that the Fourth Amendment centers on objective reasonableness, whereas common law malicious prosecution claims focus on the defendant’s subjective intent. He also pointed out that a Fourth Amendment violation can occur without any prosecution. In contrast, the “whole point of a malicious-prosecution claim is to contest the appropriateness of past judicial proceedings.” Thus, he said a malicious prosecution claim more appropriately stems from the Fourteenth Amendment because that amendment focuses on judicial proceedings guaranteeing due process of law. He added that this comports with the common law’s longstanding recognition of a malicious prosecution tort to protect against the abuse of judicial proceedings.
Diaz v. United States, 23-14.
Federal Rule of Evidence 704(b) provides that “[i]n a criminal case, an expert witness must not state an opinion about whether the defendant did or did not have a mental state or condition that constitutes an element of the crime charged or of a defense.” By a 6-3 vote, the Court held that this rule is not violated by an expert witness’s testimony stating that “most people” in a particular group have a specific mental state, as this is not a statement about the mental state of the defendant.
Petitioner Delilah Diaz, a United States citizen, attempted to enter the country from Mexico. A border patrol officer stopped her car and eventually found in it 56 packages of methamphetamine worth $368,550. Diaz was charged with importing methamphetamine in violation of 21 U.S.C. §§952 and 960, which required the Government to prove that she “knowingly” transported drugs. In response, Diaz asserted the “blind mule defense,” claiming she was unaware that there were drugs in the car. At her trial, the Government called Homeland Security Investigations Special Agent Andrew Flood as an expert witness. He testified that “in most circumstances, the driver knows they are hires . . . to take the drugs from point A to point B.” He explained that drug traffickers are unwilling to take chances with unknown couriers when there are “hundreds of thousands of dollars on the line.” The jury found Diaz guilty. The Ninth Circuit affirmed, holding that Rule 704(b) prohibits only an explicit opinion on the defendant’s state of mind. Because Agent Flood did not testify that Diaz knowingly transported the narcotics, the court concluded that his testimony did not violate Rule 704(b). In an opinion by Justice Thomas, the Court affirmed.
The Court observed that Rule 704(b) is an exception to Rule 704(a), which generally states that “[a]n opinion is not objectionable just because it embraces an ultimate issue.” Rule 704(b), however, applies to a narrow set of opinions. The Court explained that, by its terms, Rule 704(b) applies only to opinions about the defendant’s mental State. And “Agent Flood did not express an opinion about whether Diaz herself knowingly transported methamphetamine.” Therefore, the Court concluded, “his testimony did not violate Rule 704(b).” The Court emphasized that Agent Flood’s testimony about “most” drug couriers did not describe Diaz’s mental state because “Diaz may or may not be like most drug couriers.” The Court highlighted that at trial, Diaz supported her assertion that another person had deceived her into carrying the drugs by presenting testimony from an automobile mechanic expert who testified there was no way for someone to suspect or know that there were drugs hidden in the car. The Court thus pointed out that the jury was “well aware that unknowing couriers exist and that there was evidence to suggest Diaz could be one of them.” The Court described Agent Flood’s testimony as just another piece of “evidence for the jury to consider or reject when deciding whether Diaz in fact knew about the drugs in her car.”
The Court rejected Diaz’s contention that Agent Flood functionally stated an opinion about her mental state because he opined that most couriers know that they are transporting drugs. The Court noted that that argument “mistakenly conflates an opinion about most couriers with one about all couriers.” The Court reasoned that Diaz could be like the majority of couriers, or she could be one of the couriers who unwittingly transport drugs. Thus, the ultimate issue of Diaz’s mental state was left to the jury, and Agent Flood’s testimony did not violate Rule 704(b). The Court further rejected Diaz’s argument that the meaning of the word “about” in Rule 704(b) should encompass all testimony related to the defendant’s mental state. Instead, the Court found that the words surrounding “about” “make clear that Rule 704(b) addresses a far narrower category of testimony” about the existence of a specific mental state in the defendant.
Justice Jackson wrote a concurring opinion to “emphasize that . . . Rule 704(b) is party agnostic.” She highlighted that both sides can elicit testimony “on the likelihood” that the defendant had the requisite mental state. To underscore her argument, she pointed out that both parties in this case utilized mental-state evidence. Justice Jackson also emphasized that the Court’s interpretation permits expert testimony that can aid the jury in better understanding a defendant’s circumstances, such as suffering from schizophrenia or battered woman syndrome. Lastly, while acknowledging that “there are serious and well-known risks of overreliance on expert testimony,” Justice Jackson noted that “there are also safeguards outside of Rule 704(b) to prevent the misuse of expert testimony.” For instance, she pointed out the use of cross-examination, closing arguments, other rules of evidence, and the district court judge’s role as a gatekeeper.
Justice Gorsuch dissented, joined by Justices Sotomayor and Kagan. He asserted that when Congress enacted Rule 704(b), it declared that it was the jury’s job alone to decide whether a criminal defendant acted with a culpable mental state and rejected “a parade of witnesses to speculate about what did or did not transpire in the head of a particular defendant at a particular moment in the past.” Justice Gorsuch rejected the Government’s argument that the testimony was within the rule because it was only a probabilistic assessment, stating that “[t]he Rule does not only prohibit an expert from stating a definitive opinion about the defendant’s mental state” but “prohibits an expert from offering any opinion on the subject.” Justice Gorsuch supported this interpretation by highlighting the statutory use of the word “about,” noting that it signifies “concerning” or “regarding.” Therefore, he argued, it is immaterial whether the expert’s opinion is definitive or probabilistic, as “[a]n expert may not state any opinion concerning, regarding or in reference to whether the defendant, while committing a charged criminal act, had the requisite mental state to convict.” Emphasizing the point, Justice Gorsuch noted that all agree that a Government expert could not have testified Diaz “most likely knew” she was carrying drugs. But how is that any different from what Agent Flood actually testified? And what if he said that couriers “almost always” know or “in my experience, 99% of drug couriers know”?
Justice Gorsuch also rejected the alleged safeguard of defendants being able to produce their experts, noting it will create a battle of the warring experts, which does not “serve our criminal justice system” because it allows in “speculative guesswork.” But Justice Gorsuch believed other rules of evidence could serve as safeguards against the interpretation of Rule 704(b) adopted by the Court. He referenced Rule 402, which excludes irrelevant evidence, noting that if an expert opinion about the mental state of most people does not actually pertain to the defendant’s specific mental state, it may lack relevance. He also pointed to Rule 403, which excludes relevant evidence if its probative value is outweighed by the danger of unfair prejudice. Justice Gorsuch argued that testimony about what most people think has little probative value when the issue is the individual defendant’s thoughts. And he cautioned that expert opinions about a defendant’s state of mind at the time of a criminal act could mislead the jury, particularly when given the authority of the Government, potentially causing the jury to rely on the expert’s judgment over its own.
Cases Granted Review
E.M.D. Sales, Inc. v. Carrera, 23-217.
At issue is “[w]hether the burden of proof that employers must satisfy to demonstrate the applicability of a [Fair Labor Standards Act] exemption is a mere preponderance of the evidence—as six circuits hold—or clear and convincing evidence, as the Fourth Circuit alone holds.” Petitioner EMD Sales “employs over 150 people and distributes thousands of products to independent and chain stores across the Washington metropolitan area.” Respondents are three current and former EMD sales representatives who were paid on a commission basis. They filed suit in federal district court alleging that, under the Fair Labor Standards Act (FLSA or Act), they were entitled to overtime pay. EMD countered that respondents are “outside salesm[e]n” exempt from the FLSA’s overtime requirements. The district court required EMD to prove the applicability of the outside-salesman exemption by “clear and convincing evidence,” held that EMD failed to make that showing, and ruled for respondents. Relying on circuit precedent, the Fourth Circuit affirmed and rejected EMD’s contention that it needed to prove the applicability of the outside-salesman exemption only by a preponderance of the evidence. 75 F.4th 345.
EMD argues “[s]ix circuits hold that the ordinary civil preponderance of the evidence standard applies when employers invoke an exemption from the FLSA’s minimum-wage and overtime requirements. The Fourth Circuit alone applies the far more onerous clear and convincing standard.” It contends that the six circuits are correct, for the “Court ‘presume[s]’ that ‘the preponderance-of-the-evidence standard’ applies in civil actions. Grogan v. Garner, 498 U.S. 279, 286 (1991).” Says EMD, “[u]nless some special ‘basis’ exists for ‘a clear and convincing standard of proof,’ the ordinary preponderance burden applies. Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S. 93, 107 (2016).” And, according to EMD, “[n]othing in the FLSA indicates that Congress intended to require a special, heightened standard of proof.” (Internal quotation marks omitted.) “To the contrary,” says EMD, “this Court has ‘reject[ed] th[e] principle’ that FLSA exemptions ‘should be construed narrowly’ against employers as based ‘on the flawed premise that the FLSA pursues its remedial purposes at all costs.’ Encino [Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018)] (citation omitted).” Respondents’ brief in opposition, while making various arguments for why certiorari was not warranted, did not engage with the merits.
Kousisis v. United States, 23-909.
The principal issue is “[w]hether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme” and the alleged victim receives the goods or services for which it paid. The petition also asks “[w]hether a sovereign’s statutory, regulatory, or policy interest is a property interest when compliance is a material term of payment for goods or services” and “[w]hether all contract rights are ‘property.’”
The United States Department of Transportation (DOT) awarded federal grants to the Pennsylvania Department of Transportation (PennDOT) for construction projects to repair a Philadelphia bridge and train station. Those funds were conditioned on PennDOT setting disadvantaged-business-enterprise (DBE) participation goals for the projects. Petitioners submitted bids to PennDOT in which they stated they would obtain $6.4 million in paint supplies from Markias, Inc., a prequalified DBE, for two projects. Petitioners were awarded the contracts, but did not buy paint supplies from Markias. “Instead,” Markias served “merely as a pass-through.” Petitioners concealed this and then “periodically submitted false documentation regarding Markias’ role” in the projects. In the end, petitioners and their associates “delivered high-quality construction, . . . fulfilling all contract terms save one: the DBE participation requirement.” A federal grand jury indicted petitioners on several counts of wire fraud (plus false statement counts). A jury found petitioners guilty on all but two wire-fraud counts. The district court rejected petitioner’s post-trial motion claiming that they did not “defraud the government of ‘money or property’ within the meaning of the wire fraud statute” because “they completed the construction project[s],” and “PennDOT and DOT . . . received the full benefit of their bargain.” The Third Circuit affirmed. 82 F.4th 230.
The Third Circuit reasoned that petitioners’ scheme had “secured PennDOT’s money using false pretenses and the value PennDOT received from [petitioners’] partial performance of th[e] painting and repair services is no defense to criminal prosecution for fraud.” The court found that petitioners “set out to obtain millions of dollars that they would not have received but for their fraudulent misrepresentations.” And it observed that “DBE participation was an essential component of the contract” and that, “[w]ithout it, the nature of the [p]arties’ bargain would have been different.”
Petitioners maintain that the circuits are divided 6-5 “on whether deception to induce a fair commercial exchange is property fraud.” (Capitalization changed.) On the merits, they insist it is not. They argue that the fraudulent-inducement theory “reads out of mail and wire fraud its foundational limitation to schemes to ‘fleece’ a victim; i.e., to ‘wrong[] one in his property rights.’ It discards Congress’s century-plus-old distinction between schemes to injure property rights and schemes to injure intangible rights—and Congress’s careful selection of certain intangible rights, but not others, for protection with other statutes.” (Citation omitted.)
NVIDIA Corp. v. E. Ohman J:or Fonder AB, 23-970.
This case presents two questions concerning the Private Securities Litigation Reform Act (PSLRA), which provides that, for plaintiffs who file securities fraud class actions to state a claim, they must “state with particularity all facts” supporting their allegations of falsity and must also allege “facts giving rise to a strong inference” of the required mental state. The questions are: (1) “Whether plaintiffs seeking to allege scienter under the PSLRA based on allegations about internal company documents must plead with particularity the contents of those documents.” (2) “Whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.”
NVIDIA sells graphics processing units (GPUs), which are devices that use parallel processing to accelerate computation. NVIDIA typically sells GPUs to device manufacturers, which in turn incorporate those GPUs into their own products (which they sell to distributors who sell them to end users). NVIDIA’s “GeForce” GPUs are designed and marketed for video gaming, but some purchasers began to use them for cryptocurrency “mining.” According to respondent-plaintiffs: “As reports from multiple former employees confirmed, NVIDIA and CEO Jensen Huang knew [its 2017] record sales were due in substantial part to demand from cryptocurrency miners. But for more than a year, Huang denied that mining-related sales were driving NVIDIA’s revenue growth because he knew that the securities market looked askew at GPU sales to miners, which are notoriously cyclical. Huang’s strategy fell apart in late 2018, when cryptocurrency prices collapsed, GPU purchases by miners withered, and demand for GeForce GPUs shrank dramatically. NVIDIA then finally admitted that—contrary to Huang’s previous denials—its record revenue growth had been largely due to mining-related demand for GeForce GPUs.”
Shareholders (respondent-plaintiffs) filed a putative class action lawsuit under Section 10(b) of the Exchange Act and SEC Rule 10b-5(b). According to NVIDIA’s petition, “Plaintiffs’ central contention is that NVIDIA’s CEO, Jensen Huang, knowingly understated” in public statements “the extent to which NVIDIA’s gaming segment revenues were driven by sales of GeForce GPUs to cryptocurrency miners, as opposed to gamers.” But “Plaintiffs did not claim to have any direct information about what NVIDIA’s CEO knew when he made the challenged statements. They did not, for instance, cite the contents of internal NVIDIA reports reviewed by the CEO showing the quantity of GeForce GPUs sold to cryptocurrency miners rather than gamers. Lacking such facts, Plaintiffs sought to manufacture them. Plaintiffs paid an expert to opine that much of NVIDIA’s gaming revenues were attributable to cryptocurrency miners purchasing GeForce GPUs.” Further, “Plaintiffs speculated that the company’s internal reports would have reflected the same data manufactured by their expert for purposes of this litigation.” The district court granted NVIDIA’s motion to dismiss the complaint. It held that plaintiffs’ falsity allegations “rel[ied] entirely on an expert opinion” that lacked the “particularity” the PSLRA requires. It further held, as to scienter, that the complaint “fail[ed] to plausibly establish that any particular statement by any Individual Defendant was knowingly or recklessly false or misleading when made.” A divided panel of the Ninth Circuit reversed. 81 F.4th 918. The Ninth Circuit held (in the petition’s words) “that Plaintiffs’ expert report was a sufficiently particular allegation of falsity to survive a motion to dismiss. The court then held that Plaintiffs had established the necessary strong inference of scienter by alleging that NVIDIA’s CEO ‘would have’ known about internal documents and that those internal documents ‘would have’ reflected the same data that Plaintiffs’ expert created through post hoc calculations.”
NVIDIA argues in its petition that the Ninth Circuit decision creates or deepens two conflicts among the circuits. First, it says that there is a “conflict about the PSLRA’s pleading requirements for alleging scienter based on internal company documents that supposedly contradict public statements.” NVIDIA maintains that five circuits disagree with the Ninth Circuit and “hold that the statute requires plaintiffs to allege with particularity the actual contents of such documents.” Second, NVIDIA says that the circuits “are in conflict about the standard needed to plead falsity under the PSLRA. Two circuits—the Second and Fifth—have held that plaintiffs cannot satisfy the PSLRA’s particularity requirement for alleging falsity by substituting an expert opinion for particularized allegations of fact. But in the decision below, the Ninth Circuit created a circuit split by allowing Plaintiffs to do just that.”
Wisconsin Bell, Inc. v. U.S. ex rel. Heath, 23-1127.
At issue is “[w]hether reimbursement requests submitted to the E-rate program are ‘claims’ under the False Claims Act.” “The Telecommunications Act of 1996 directs the FCC to advance universal access to telecommunications services. 47 U.S.C. §254. In response, the FCC established the Schools and Libraries Universal Service Support program, called the E-rate program. 47 C.F.R. § 54.500 et seq. The program provides discounted services to eligible schools and libraries by: (1) having service providers competitively bid on the lowest price for service; and (2) subsidizing the cost of service. Id. §§ 54.503, .505. . . . Funding for the E-rate program is drawn from the Universal Service Fund, which receives its money from the contributions of private telecommunications carriers. 47 U.S.C. §254(d); 47 C.F.R. §54.706(a)-(b). . . . The Fund is administered by the Universal Service Administrative Company, a private non-profit organization incorporated in Delaware.”
Relator Todd Heath filed suit under the False Claims Act (FCA) against petitioner Wisconsin Bell alleging “that Wisconsin Bell intentionally chose to disregard a clear federal mandate requiring it to give preferential pricing to schools and libraries for services funded by the E-rate program. . . . Heath claimed that Wisconsin Bell overcharged schools and libraries by charging prices higher than the lowest corresponding price, and that each reimbursement request was therefore a false claim.” Wisconsin Bell moved to dismiss, arguing “that the alleged submissions were not actionable ‘claims’ under the FCA because they didn’t involve government funds or requests to government agents.” The district court denied the motion, though it later granted summary judgment to Wisconsin Bell on the ground that Heath failed to offer evidence of falsity or scienter. The Seventh Circuit reversed. 92 F.4th 654.
The Seventh Circuit first held that Heath did, in fact, offer evidence of falsity and scienter. It then reached the key issue here, rejecting Wisconsin Bell’s alternative ground for affirmance, that its submissions didn’t involve government funds. The court reasoned (in an amended opinion) that (1) “collections of delinquent debts to the Fund, along with penalties and interest, as well as civil settlements and criminal restitution payments,” temporarily passed through U.S. Treasury accounts on their way to the Fund; (2) the Administrative Company is an “agent of the United States” because it “act[s] on the government’s behalf”; and (3) there was a “sufficiently close nexus” between the Administrative Company and the federal government “such that a loss to the former is effectively a loss to the latter.”
Wisconsin Bells argues in its petition that “[t]he Seventh Circuit’s decision misreads the FCA’s plain text, distorts basic principles of agency law, and ignores the history of the E-rate program, extending the statute far beyond the bounds Congress fixed. The FCA defines a ‘claim’ to include requests for money ‘provided’ by the federal government or made to an ‘agent of the United States.’ The whole point of the FCA, and its outsized penalties, is to protect government money. But it is private telecommunications carriers—not the federal government—that supply the money used in the E-rate program. The Seventh Circuit’s conclusion that the government ‘provided’ the funds at issue because it ‘made the funds available’ defies the ordinary meaning of the text. And the Administrative Company is nothing like a federal agent subject to the government’s day-to-day management. In fact, Congress rejected the FCC’s request for direct control over the Fund, with the result that a private entity—the Administrative Company—assumed the function the FCC wanted for itself.” Wisconsin Bell adds that, “[u]nder the Seventh Circuit’s decision, FCA liability may attach even to transactions with organizations like the Boy Scouts, the Veterans of Foreign Wars, and the U.S. Olympic Committee merely because of ‘the federal government’s role in establishing and overseeing’ them.”
NAAG Center for Supreme Court Advocacy Staff
- Dan Schweitzer, Director and Chief Counsel
- Melissa Patterson, Supreme Court Fellow
- Amanda Schwartz, Supreme Court Fellow
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