ANALYSIS OF JANUARY 8, 2015 SUPREME COURT OPINIONS
[Posted January 8, 2015] The Supreme Court today hands down eight published opinions and two published orders in appeals that were argued in the October session. But this batch implicates Sherlock Holmes’s famous “dog that did not bark in the night,” as perhaps the most eagerly awaited decision from the last session, the significant First Amendment challenge in Yelp, Inc. v. Hadeed Carpet, is held over for later decision, presumably at the conclusion of the February session. Let’s dig into the batch that did come down today.Administrative law
When I read the assignments of error in Department of Health v. Kepa, Inc., my eyebrows rose. Kepa operates a hookah lounge in Blacksburg, but it also serves food in the same space. The key question is whether Virginia’s Indoor Clean Air Act, which prohibits smoking in restaurants, applies here. If it does, that might spell doom for the lounge; after all, smoking is the primary — perhaps only — purpose of such an establishment.
The case wended its way through two administrative hearings within the Health Department, then review in circuit court. All three of those ended badly for the lounge. It then appealed to the Court of Appeals, which initially affirmed by a vote of 2-1. But the CAV granted rehearing en banc, and for the first time, the sun broke through the clouds; the en banc CAV reversed, 6-3.
That made the Department the appellant in today’s appeal. The issue is whether the exemption in the Act for a restaurant “located on the premises of any manufacturer of tobacco products” applies to allow the lounge and restaurant to coexist.
If your eye caught on the word manufacturer, go to the head of the class. Another provision prohibits the regulation of smoking “in retail tobacco stores, tobacco warehouses, or tobacco manufacturing facilities.” This law exempts three types of facilities — as today’s opinion describes them, three tiers within the tobacco industry — from the Act’s provisions. But that troublesome prohibition of smoking in restaurants is still there.
Today, by a margin of 6-1, the justices reverse the Court of Appeals and rule in favor of the Department. The majority rules that this is a restaurant — despite the fact that most of the site’s income comes from tobacco sales, not food — so the Act applies here. And since there’s no exemption for restaurants in tobacco retail stores, that exemption doesn’t help.
Based on my initial reading, I was concerned that this would doom the business to close. But the legislature has already ridden to the rescue; the statute permits smoking in restaurants where the smoking area is physically separated and there are separate ventilation systems. So Kepa can continue to operate the lounge, after it hires a construction contractor to do a little work.
Torts
Hyundai Motor Company v. Duncan involves a $14 million judgment against a manufacturer, based on an air bag that didn’t deploy in a single-vehicle collision, resulting in traumatic brain injuries to the driver. He sued Hyundai on a breach-of-warranty theory, claiming that the design of the system was flawed. Specifically, he asserted that while the bag itself was fine, Hyundai had placed the sensor — the unit that triggers deployment at the first sign of a crash — in a location that rendered the car unsafe, since the bag wouldn’t deploy when it was needed.
This appeal focuses on the admissibility of testimony from the driver’s air-bag expert, and on that witness’s conclusion that the sensor was placed in the wrong location. The expert hadn’t conducted any independent testing; he relied on the manufacturer’s own sensor-location study, back when the car was designed. He also performed something called a crash-severity analysis, and compared the severity of this crash with the manufacturer’s unquestioned desire for bag deployment at a significantly lower impact speed.
Today, a majority of the court rules that this evidence was inadmissible, because neither the expert nor the manufacturer had tested the precise location that the expert had indicated would be best. The court also holds that this testimony failed to establish that another sensor location would have produced deployment and prevented the brain injury. Since the driver’s evidence on causation depended on that expert testimony, the court reverses and enters final judgment for the manufacturer.
Justice Powell dissents. She notes that the majority’s reasoning focuses only on the manufacturer’s cross-examination of the expert, not on his direct examination, which was much more favorable. Since the driver prevailed below, she believes that the evidence should have been viewed in a light most favorable to him. And in a footnote, she cautions,
. . . the majority opinion could potentially lead to parties purposefully asking opposing experts about untested alternative theories that relate to the subject matter at issue and then using this testimony as a means of disqualifying the experts.
Keep that tactic in mind when you start your jury trial next Tuesday. In the end, Justice Powell still would have voted to reverse, based on a jury instruction on vehicle-safety standards. But the majority’s decision ends the litigation instead of leading to a retrial.
Corporations
It can be pretty lonely being a minority corporate shareholder. The appellants in Fisher v. Tails, Inc., owned just 21% of a company that operated a real-estate-brokerage franchise. When the company undertook a complex reorganization operation, the minority owners didn’t like what they saw, so they asked a trial court to order that they were entitled to appraisal rights under Virginia’s corporation law.
The four steps in this process matter, so I’ll describe them briefly here. First, the corporation would be reincorporated in Delaware. Second, the company would merge with another Delaware company, and would be owned by a holding company. Third, the transferred company would amend and restate its operating agreement. And fourth, the holding company would sell off the transferred company.
If that sounds complicated, it is. But there was a method to the majority’s madness: Once the first step was taken, Delaware law applied. And Delaware law, unlike Virginia law, doesn’t give appraisal rights to minority shareholders.
The minority holders duly voted against this whole process in a shareholder meeting, but unsurprisingly were outvoted. They sued, but the trial court sustained a demurrer and dismissed the case with prejudice. The Supreme Court agreed to review the case, probably in significant part because of the paucity of Virginia interpretive case law in this area.
The court today unanimously holds that the whole process is completely legal. The General Assembly has listed five circumstances that trigger appraisal rights, and reincorporation isn’t one of those. So with the first step deemed legit, there’s no avenue of relief for the shareholders under the Delaware statutes.
But wait; they aren’t done yet. The minority argued that the trial court should have applied something called the “step transaction doctrine” to look past the technical legal analysis, and see the whole complex transaction for what it really — and from what I can see, unquestionably — was. And Delaware law does recognize this doctrine, so perhaps there’s a ray of hope here.
Alas for the minority owners, this approach gets them nowhere. The justices today assume without deciding that Virginia law would allow the step-transaction doctrine. But the reincorporation step — that was way back at Step 1 — has “independent legal significance,” so it cannot be disregarded, as the minority had asked. Delaware law recognizes that “a transaction effected pursuant to a statute will be subject to the requirements an consequences of that statute alone,” and may not be overridden by equitable principles. Accordingly, the trial court properly sustained the demurrer.
Criminal law
We venture into the land of 4-3dom in Powell v. Commonwealth, a prosecution for selling an imitation controlled substance. Powell had the misfortune to sell a bag, containing a “white rock-like substance” to an undercover police officer. When Powell had beckoned the officer over in what the officer described as “an open-air drug market,” he was given an order for “a four.” In street parlance, that means $40 worth of cocaine.
I didn’t know that, and from now on, I plan to be very careful with my numerical language. In any event, Powell went into a house and came back with a baggie containing that rock-like substance. The officer handed over the cash and drove off.
A state laboratory analyzed the substance and found that it wasn’t cocaine at all; it was merely an oblong pill that had been cut in half. Since cocaine generally doesn’t come in oblong pills, this is bound to be something else. And it was: a prescription pill used as an antidepressant and to treat schizophrenia. Technically, it was a controlled substance, although it was way down at the more-benign end of the controlled-substances scale, at Schedule VI.
Powell was indicted for selling an imitation controlled substance. At trial, he argued that he couldn’t be convicted of this crime, because he really did sell a controlled substance. Since selling a Schedule VI substance is a misdemeanor, that’s all he could have been convicted of. The trial court was having none of that; it allowed the prosecution to go forward, and Powell was convicted. The Court of Appeals stamped that conviction as “approved,” bringing us to today’s opinion.
A bare majority of the court votes to affirm. The chief justice writes the majority opinion, which holds that one can be found guilty of selling an imitation controlled substance even if the stuff really is a lower grade of forbidden fruit. The key, under the current wording of the statute, is whether the material sold has “the potential for abuse,” and in this case, the antidepressant wasn’t specifically listed as such — that’s why it was listed in Schedule VI. This, the court finds, means that the pill that Powell actually delivered was not “a controlled substance subject to abuse,” so it was, in fact, an imitation.
Justice Millette dissents, and he’s joined by Justice Goodwyn and Senior Justice Lacy. The dissent notes that Schedule VI includes drugs that are and are not subject to abuse, so the mere classification of the antidepressant in Schedule VI isn’t sufficient to answer the question the way the majority answers it. The problem, in the dissent’s view, is that the listing on Schedule VI was the prosecution’s only evidence on “subject to abuse,” so there’s no proof of this essential element.
Real property
When a trial court orders the equitable remedy of rescission, the purpose is to put the parties back in the positions they were before. In two opinions handed down today, both under the caption Devine v. Buki, the justices explore one thorny aspect of a rescinded real-estate contract. Specifically, where sellers own property jointly, and a court orders rescission because of fraud by only one of the sellers, what kind of relief can it fashion? The answer is trickier than you might think. There are lots of goodies in here for the property lawyers among us, so this case is definitely worth a careful reading.
In my many travels across the Commonwealth, I’ve found few regions as beautiful as the Northern Neck. It contains Washington’s birthplace, the gorgeous resort known as The Tides Inn, and even a small town called Emmerton. I still haven’t found a connection between the town name and any ancestor, but I haven’t given up hope.
Because the Neck was among the first areas of Virginia to be settled in the 17th Century, it also has its share of old estates. One of those is a place called Rock Hall, a structure that dates back over 200 years. A husband and wife acquired the home in 2005, and set about the process of making substantial renovations.
After making a number of repairs, the couple engaged an agent, who listed the property as “completely renovated and restored … from the brick foundations to the roof and chimney.” The ads also contained a disclaimer that this information “was deemed accurate, but it was not guaranteed.”
The ads soon produced a purchaser. The parties signed a contract of sale. As every dirt lawyer knows well, the sellers had the option of providing a disclosure of known conditions on the property, or a disclaimer that basically told the buyer, “You’re on your own to check out the condition of what you’re buying.” The sellers chose the latter route, telling the buyers that the property would be conveyed “as is.”
The buyers sensibly hired a couple of inspectors. Those professionals each identified some minor concerns, but neither one found anything that was significant enough to warn the buyers away from the contract. The buyers asked for and got some specific repairs, after which the parties closed on the sale, and the buyers moved in to their new-old home.
It didn’t take long for problems to arrive. The first signs of trouble were leakage due to wind-driven rain, and water dripping from the living-room ceiling. Since these were decidedly bad signs, the new homeowners hired two contractors to find and fix the problem.
They found it, all right: structural problems with the foundation that “significantly compromised” the integrity of the house. Recalling the listing that specifically mentioned that the sellers had “completely restored” the foundation, the buyers figured that they’d been had. They sued to rescind the contract of sale, for compensatory damages, and for a Consumer Protection Act violation.
The case had a complex procedural history in the trial court, including referral to a commissioner in chancery and some exceptions to the commissioner’s report. Rather than recount those, I’ll get to the bottom line.
The trial court found that the husband had defrauded the buyers, but the wife’s only involvement was in signing the contract and the deed. The court ordered rescission of the contract, directing the sellers – that would be both of them – to repay the $590,000 purchase price, at which time the buyers were to reconvey title by deed. The court also entered judgment for damages against the husband only, for $135,000, plus almost $100,000 in attorney’s fees.
The husband and wife appealed separately, and today we get two separate published opinions. In husband’s appeal, the court affirms in part and reverses in part, remanding the case for further proceedings. The court first turns aside a jurisdictional challenge based on the old distinction between law and chancery, holding that the trial court did have equitable jurisdiction over husband. There was, the justices find, no indication that the relief sought “was a pretext to bring an action at law in a court of chancery.”
And now we get to the tricky part, the one that will intrigue the dirt lawyers. Remember, the trial court had ordered rescission against both sellers, even though it found no fraudulent conduct by the wife. How does a court of equity order relief against a party who has done nothing wrong? And if it can’t order relief against the wife, how does it have jurisdiction to order relief against the husband alone? This part of the opinion gets into the weeds of unitary tenancies – specifically a tenancy by the entireties – and considers the doctrines of equitable conversion and merger when evaluating the relief available.
Today’s majority holds that the equitable-conversion doctrine extinguished the sellers’ tenancy by the entireties as soon as the parties fully executed the contract. It also holds that the rescission of the contract doesn’t automatically restore that tenancy; that’s why the trial court ordered reconveyance by deed, after the repayment of the purchase price. The court notes that once the sellers delivered the original deed, the contract merged into it.
The court holds that trial courts have substantial discretion in fashioning an appropriate remedy to eliminate or minimize hardship caused by fraudulent conduct. That includes ordering relief against the wife, while ensuring that the husband alone is responsible for refunding the purchase price.
The court next rules that the “as is” language in the contract didn’t insulate the husband from liability. That’s because, under preexisting law, you can’t commit fraud and then hide behind a disclaimer. The court distinguishes between fraudulent inducement to sign the contract, and fraudulent inducement to close – the latter is the only theory on which the buyers sued – and holds that the latter is indeed a valid claim in Virginia, because “regardless of when the concealment occurs (i.e., before or after the contract has been entered into), the wrong is still the same.” Because the husband concealed the condition of the foundation, the trial court was right to order rescission.
Having done that, the court then reverses the award of monetary damages, though it affirms the attorney’s-fee award. The damages were for fees paid to others – things like real-estate taxes, mortgage interest, and the contractors’ fees. But caselaw establishes that any restitution award is limited to the benefit that has been received by the defendant. Here, because the buyers didn’t pay that money to the sellers, their sole relief against those sellers is return of the purchase price.
Next, in the wife’s appeal, the court takes up the question noted above: Can a court of equity order equitable relief against a party who has done nothing wrong? Remember, there were no damages awarded against the wife, so that aspect of the first opinion isn’t present here.
This one turns out to be straight-forward. In the absence of liability, a court can’t “be made the subject of a remedial decree,” so the trial court was powerless to order the wife to repay the purchase price. That part of the decree is reversed.
Well, what about that tenancy-by-the-entireties issue? If the parties are really to be restored to the status quo ante, don’t you have to include the wife in the decree? If that’s been troubling you, you have company. Justice McClanahan files a dissent in each appeal, arguing that the doctrine of equitable conversion doesn’t really destroy the unitary tenancy, and they even hold the sale proceeds by that tenancy. Justice McClanahan thus thinks that since the deed was conveyed by two persons acting as one, who received the money as one, then the court must treat them as one when ordering rescission. And that, in turn, means that the wife should be included in the obligation to repay the purchase price.
This is, you will appreciate, a tough call, with competing equitable considerations, all based on viable caselaw. In the end, sometimes a trial court has to be creative in doing what’s right, a primary goal of courts of equity. Today’s decision indicates that there are indeed limits to what those courts can do.
Taxation
If you don’t handle tax work, then The Nielsen Company v. Arlington County is going to seem at first like it’s written in a foreign language. But really, Justice Millette does a good job of setting out the court’s unanimous resolution of the case. It isn’t all that painful; why don’t you come along?
This appeal is about BPOL taxes. Nielsen is the familiar provider of marketing surveys. Its job it to tell advertisers what viewers are watching and what products they’re buying. It has offices in 18 states; its soleVirginia location was in Arlington.
The county has imposed a BPOL tax that covers Nielsen’s business. But it can be difficult or impossible to calculate just what income the company received that’s attributable to any one office. Arlington can only tax the company’s receipts that are attributable to its Virginia operations. So how much does the county get to tax?
State law provides a solution for this problem. Companies like this are permitted to apportion the nationwide company’s business to individual sites by a sort of interpolation. The method is reasonably simple: You take the Virginia office’s payroll, divide it by the nationwide payroll. You then multiply the quotient by the company’s gross receipts. That becomes the Virginia-taxable portion.
Nationwide, Nielsen made about $100 million in the relevant tax year, 2007. Its Virginia payroll was about 24% of its total payroll. That means that the county can tax about $24 million in receipts. And if that’s all there were, we wouldn’t have much of a Supreme Court opinion.
But there is more. The tax laws also allow the company a deduction for:
Any receipts attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners[,] or members in lieu of the taxpayer) is liable for an income or other tax based upon income.
The real dispute in this appeal is how that deduction is calculated. The county argued that it must be added up individually, a laborious process that seems likely to dissuade any business from even trying to claim the deduction. The company responded that it was permissible to perform another round of interpolation.
Here’s the bottom line: the Supreme Court sides with the taxpayer here, ruling that receipts that are created by business occurring elsewhere can be deducted using an interpolation process approved by the State Tax Commissioner. That means that the taxpayer can calculate the deduction without hiring an army of CPAs to do all the math.
There’s an important subordinate legal issue in today’s opinion that will apply to non-tax litigation. The Tax Commissioner had ruled in favor of Nielsen, and the question is what weight or deference should be given to his determination. According to something called the rule of practical construction, when there’s a close interpretive call on a legal issue, courts often give credence to the construction that’s been consistently employed by officials who are charged with administering the law in that field.
But as today’s opinion notes:
We recognize that our decisions have been less than clear about a distinction in terminology, as we have sometimes conflated “deference” with “weight.” … However, a review of our precedent underscores that we have distinguished “deference” from “weight.” “Deference” refers to a court’s acquiescence to an agency’s position without stringent, independent evaluation of the issue. “Weight” refers to the degree of consideration a court will give an agency’s position in the course of the court’s wholly independent assessment of an issue.
[Citations omitted] The court resolves this confusion by holding that courts never defer to administrative agencies on the interpretation of statutes, though it can sometimes “afford greater weight than normal to an agency’s position.” In cases of ambiguity, that weight can tip the balance, but it’s never binding on courts, which have the primary duty to determine the meaning of statutes.Since the rule of practical construction applies in a host of legal contexts, this ruling deserves attention even from those lawyers who would never dream of practicing in the field of taxation.
