“Public Rights” Doctrine for Bankruptcy Court Jurisdiction is Dead and Buried: Supreme Court’s Oil States Opinion

By Donald L. Swanson

“Marley was dead, to begin with . . . dead as a doornail.”

Charles Dickens, A Christmas Carol

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RIP (Photo by Marilyn Swanson)

About a year ago, I published this linked article declaring, “the ‘public rights’ doctrine for bankruptcy court jurisdiction, while always tenuous, in now dead and buried.”

Now, I’m restating that declaration—this time based on a new opinion by the U.S. Supreme Court: Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, Case No. 16-712 (April 24, 2018).

For starters, let’s note that public rights doctrine is alive and well—and controlling—in patent cases. The Oil States opinion confirms as much on an eight-to-one vote, declaring that the Oil States patent question “falls squarely within the public rights doctrine.”

Dead & Buried

But Oil States also demonstrates that public rights doctrine is dead and buried for bankruptcy court jurisdiction and authority issues.

Here’s how.

1. Four justices (Breyer, Ginsburg, Sotomayor and Kagan) dissented in Stern v. Marshall.  They rejected the majority’s use of public rights doctrine to place constitutional limitations on the jurisdiction and authority of bankruptcy courts under 28 U.S.C. § 157. All four of these dissenting justices are still on the Court, while the five-justice majority in Stern v. Marshall includes the now-departed Scalia.

Three of the Stern v. Marshall dissenters (Breyer, Ginsburg and Sotomayor) offer a one-paragraph concurrence in Oil States, explaining that public rights doctrine has limitations. They emphasize that “private rights” in a dispute are not outcome-determinative: deciding whether the existence of “private rights” requires an Article III adjudication involves a more “searching” examination of relevant factors.

2. Granted, the Oil States majority cites bankruptcy opinions like Norther Pipeline v. Marathon Pipe Line and Stern v. Marshall to support their public rights doctrine analysis. But they explicitly acknowledge that the Supreme Court, (i) has not “definitively explained” the distinction between public rights and private rights, (ii) has “not been entirely consistent” in applying the doctrine, and (iii) does not need to “add to the ‘various formulations’ of the doctrine” to decide the Oil States case. In other words, the majority is applying the public rights doctrine, once again, without explaining or defining it.

3. Justice Gorsuch is new to the Supreme Court and did not participate in Stern v. Marshall. He is the lone dissenter in Oil States. And his 12-page dissent rejects the majority’s public rights doctrine.

Put another way: the passing of Justice Scalia and addition of Justice Gorsuch to the Supreme Court flips the vote numbers on majority and dissenting views in Stern v. Marshall.

The Gorsuch Dissent

Justice Gorsuch’s Oil States dissent is one of the more interesting parts of the case.  And it reveals how strongly he disagrees with the majority’s use of public rights doctrine.

He starts out with this hypothetical:

“After much hard work and no little investment you devise something you think truly novel. Then you endure the further cost and effort of applying for a patent, devoting maybe $30,000 and two years to that process alone”;

“At the end of it all, the Patent Office agrees your invention is novel and issues a patent. The patent affords you exclusive rights to the fruits of your labor for two decades”;

“But what happens if someone later emerges from the woodwork, arguing that it was all a mistake and your patent should be canceled? Can a political appointee and his administrative agents, instead of an independent judge, resolve the dispute?”

“The Court says yes. . . . Respectfully, I disagree.”

Then he adds historical context:

“Before the Revolution, colonial judges depended on the crown for their tenure and salary and often enough their decisions followed their interests. The problem was so serious that the founders cited it in their Declaration of Independence”; and

“Once free, the framers went to great lengths to guarantee a degree of judicial independence for future generations that they themselves had not experienced. Under the Constitution, judges ‘hold their Offices during good Behaviour’ and their ‘Compensation . . . shall not be diminished during the[ir] Continuance in Office.’ Art. III, §1.”

Then he adds political philosophy:

“Today, the government invites us to retreat from the promise of judicial independence”;

“Until recently, most everyone considered an issued patent a personal right—no less than a home or farm—that the federal government could revoke only with the concurrence of independent judges. But in the statute before us Congress has tapped an executive agency, the Patent Trial and Appeal Board, for the job”;

“Supporters say this is a good thing because the Patent Office issues too many low quality patents; allowing a subdivision of that office to clean up problems after the fact, they assure us, promises an efficient solution. And, no doubt, dispensing with constitutionally prescribed procedures is often expedient”; and

“Whether it is the guarantee of a warrant before a search, a jury trial before a conviction—or, yes, a judicial hearing before a property interest is stripped away—the Constitution’s constraints can slow things down. But economy supplies no license for ignoring these—often vitally inefficient— protections.”

And he explains, still further:

Our courts have “treated American invention patents as recognizing an ‘inchoate property’ that exists ‘from the moment of invention’”;

“American patent holders thus were thought to ‘hold a property in their inventions by as good a title as the farmer holds his farm and flock’”;

“And just as with farm and flock, it was widely accepted that the government could divest patent owners of their rights only through proceedings before independent judges”;

“This view held firm for most of our history. In fact, from the time it established the American patent system in 1790 until about 1980, Congress left the job of invalidating patents at the federal level to courts alone”;

For example, one case cited by the majority equates invention patents with land patents: while “the Executive has always dispensed public lands to homesteaders” and others, “it has never been constitutionally empowered to withdraw land patents from their recipients,” except “through a ‘judgment of a court’”; and

“Just because you give a gift doesn’t mean you forever enjoy the right to reclaim it,” and “just because the Executive could issue an invention (or land) patent did not mean the Executive could revoke it.”

The Operative Legal Standard?

So . . . if public rights doctrine no longer controls constitutional issues for bankruptcy court jurisdiction and authority, in applying 28 U.S.C. § 157, what legal standard does?

Here are portions of Justice Breyer’s Stern v. Marshall dissent, arguing from the politically independent “nature” of bankruptcy judges for an expansive view of their jurisdiction and authority:

Bankruptcy courts are “made up of judges who enjoy considerable protection from improper political influence”: (i) “federal courts of appeals appoint federal bankruptcy judges,” (ii) bankruptcy judges “are removable by the circuit judicial counsel (made up of federal court of appeals and district court judges) and only for cause,” (iii) their salaries “are pegged to those of federal district court judges,” and (iv) “the cost of their courthouses and other work-related expenses are paid by the Judiciary”; and

“Article III judges control and supervise the bankruptcy court’s determinations”: (i) any party “may appeal those determinations to the federal district court,” (ii) federal judges on appeal “will review all determinations of fact for clear error and will review all determinations of law de novo,“ (iii) “there is no requirement that . . . all determinations of fact in constitutional courts shall be made by judges,” and (iv) the district court may “withdraw, in whole or in part, any case or proceeding” that it refers to a bankruptcy court “on its own motion or on timely motion of any party, for cause shown.”

As noted above, four justices (Breyer, Ginsburg, Sotomayor and Kagan) have already adopted this view.

And Gorsuch’s dissent in Oil States suggests that he will agree with Justice Breyer’s Stern v. Marshall dissent on the independent “nature” of bankruptcy judges. Here’s why:

(i) The problem with the Oil States majority opinion, Gorsuch says, is that it allows political appointees and their administrative agents, instead of independent judges, to revoke patent rights: and “the loss of the right to an independent judge is never a small thing”; and

(ii) The independence of bankruptcy judges from political influence, as explained in Justice Breyer’s Stern v. Marshall dissent, minimizes or eliminates concerns about “the loss of the right to an independent judge.”

That makes five. And it’s likely that other justices will get on board.

Conclusion

The U.S. Supreme Court’s Oil States decision on patent rights is based on public rights doctrine. However, the concurring opinion of three justices and the dissent of Justice Gorsuch demonstrate, once again, that public rights doctrine is dead and buried for bankruptcy court jurisdiction and authority issues.

RIP.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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