The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

Holding that Congress had no authority under either Article I or Section 5 of the Fourteenth Amendment to the United States Constitution to abrogate sovereign immunity for States that infringe on protected copyrights, the United States Supreme Court struck down the Copyright Remedy Clarification Act of 1990 (“CRCA”). In a discussion that may have a significant impact on the practice of Bankruptcy law, the Court affirmed that the Bankruptcy Clause is “unique” among Article I Clauses, suggesting that it would affirm its controversial Katz decision should the opportunity arise. Allen v. Cooper, 589 U.S. ___, 2020 WL 1325815 (2020).

Click here for the full decision.

Facts

True story. In 1717, a pirate named Blackbeard captured a French ship called Queen Anne’s Revenge, and caused havoc for a year around the Caribbean and the North American Coast before the ship sank a mile off Beaufort, North Carolina. In 1996, Intersal, Inc., a marine salvage company, discovered the submerged ship. Because under federal law the wreck belongs to North Carolina, the State hired Intersal to conduct recovery operations.

Intersal retained photographer Frederick Allen (Allen) to document the operations. He took videos and photos for over a decade and protected his work with copyright registrations. Allen protested when North Carolina used some of his images on its website without permission or compensation. The State agreed to a settlement under which it paid the photographer $15,000 and acknowledged his rights to the images. Subsequently, Allen alleged that the State again used his images without permission or compensation.

When North Carolina refused to acknowledge Allen’s new infringement allegations, he sued the State in federal district court. In response to the State’s assertion of sovereign immunity, Allen argued that Congress abrogated such immunity in federal court cases involving infringement of rights held by copyright owners when it codified the Copyright Remedy Clarification Act of 1990 (CRCA).

The district court agreed, finding that Congress expressly stated an intent to abrogate state sovereign immunity in cases involving copyright claims alleged in federal court. It further concluded that Congress had a proper constitutional basis for such an abrogation based on Section 5 of the Fourteenth Amendment.

The Fourth Circuit Court of Appeals reversed, relying on prior U.S. Supreme Court precedent to find that Congress did not assert a sufficient constitutional basis for abrogation based on the Fourteenth Amendment. The circuit court reasoned that the CRCA was not a “congruent and proportional” response to alleged injuries resulting from State violations of the Fourteenth Amendment.

Because the Fourth Circuit Court of Appeals invalidated a federal statute, the Supreme Court granted certiorari. In a decision written by Justice Kagan, and uncharacteristically joined by Justices Roberts, Alito, Sotomayor, Gorsuch, and Kavanaugh, the Court affirmed the appellate court’s decision. Justice Thomas joined most of the decision and concurred in part. Justice Breyer concurred in the judgment but disagreed with the underlying cases it is based upon. He was joined by Justice Ginsburg.

While this decision is of keen interest to intellectual property practitioners, it also appears to foreshadow an important development impacting the States and bankruptcy practitioners.

Reasoning:

The Seminole and Florida Prepaid Decisions:

Two years after codifying the CRCA, Congress passed the Patent and Plant Variety Protection Clarification Act (the “Patent Remedy Act”). It used similar language as the CRCA to deprive the States of sovereign immunity in cases brought against them in federal courts for infringement of patent rights. See 35 U.S. Code § 296.

In 1999, the constitutionality of the Patent Remedy Act was challenged by a Florida entity in a case called Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999). In that case, the Supreme Court relied on Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), for the proposition that Congress cannot abrogate state sovereign immunity using its Article I powers, including the Intellectual Property Clause and Interstate Commerce Clause.

However, the Florida Prepaid Court acknowledged that Congress does have the power to abrogate state sovereign immunity if it were to express such intent unequivocally and if it were to act “pursuant to a valid exercise of power.” Id., at 635. In addition to relying on its Article I powers, which the Florida Prepaid Court rejected, Congress relied on section 5 of the Fourteenth Amendment to justify the Patent Remedy Act. This section states that, “Congress shall have the power to enforce, by appropriate legislation, the provisions of this article.” Fourteenth Amendment, at § 5. The enforcement power applies to section 1 of the Fourteenth Amendment, which states that “No State shall . . . deprive any person of life, liberty, or property, without due process of law.” Fourteenth Amendment, at § 1. According to the Court, the Fourteenth Amendment expanded federal power at the expense of the States, thereby shifting the balance of state and federal powers struck by the Constitution. Id., at 637.

However, Congressional power to abrogate state sovereign immunity is limited. To properly do so, Congress “must identify conduct transgressing the Fourteenth Amendment’s substantive provisions, and must tailor its legislative scheme to remedying or preventing such conduct.” Id., at 628. Plaintiff in Florida Prepaid had argued that Florida’s violation of its patent rights amounted to a taking of property without due process, justifying Congressional reliance on Section 5 when it enacted the Patent Remedy Act. The Court disagreed. It held that, at the time it enacted the Patent Remedy Act, Congress failed to identify a pattern of patent infringements by the States. Moreover, Congress failed to tailor the law to remedy only constitutional violations of the Takings Clause. Instead, it abrogated state immunity regardless of whether infringements were done without compensation and/or without due process; namely the abrogation also effected State actions that did not violate the Fourteenth Amendment. Id., at 640-48.

Justices Breyer and Ginsburg, among others, dissented in Florida Prepaid, arguing that the Patent Remedy Act “was an appropriate exercise of Congress’ power under § 5 of the Fourteenth Amendment to prevent state deprivations of property without due process of law.” Id., at 649.

Allen v. Copper:

In Allen v. Cooper, all nine justices agreed that the ruling in Florida Prepaid controls the present case. They reasoned that the Intellectual Property Clause, found in Article I, section 8, Clause 8, governs Congressional authority over both patents and copyrights. Thus, analysis of Congressional power to abrogate state immunity under Article I should be the same for patents and copyrights. The Court further concluded that, just as it did regarding patents, Congress failed to tailor the CRCA to address specific constitutional violations. Rather, it abrogates immunity as to all violations of copyright law, regardless of whether the violations are protected under the Fourteenth Amendment.

While Allen’s brief acknowledged the rulings in Seminole and Florida Prepaid, which rejected his arguments under Article I, he cited to a later case offering “an exit ramp” from Florida Prepaid. In Central Virginia Community College v. Katz, 546 U.S. 356 (2006), the Supreme Court held in a controversial 5 to 4 decision written by Justice Stevens that Article I’s Bankruptcy Clause was exempt from the Seminole “general rule” that Congress cannot rely on its Article I powers to abrogate state sovereign immunity. Allen urged the Supreme Court to adopt the reasoning in Katz to state sovereign immunity defenses raised in response to copyright infringement cases. He reasoned that, like the Bankruptcy Clause has done for bankruptcy law, the Intellectual Property Clause gave Congress the right to impose uniform laws throughout the States relating to the protection of intellectual property.

The Court rejected Allen’s arguments, stating that “everything in Katz is about and limited to the Bankruptcy Clause; the opinion reflects what might be called bankruptcy exceptionalism.” (Emphasis added.) The Court further noted that the Katz Court could have but did not hold that Congress abrogated sovereign immunity under the Bankruptcy Clause. Rather, it held that the States themselves waived their sovereign immunity in bankruptcy proceedings in the plan of the Convention. In other words, Katz did not rely on Congressional abrogation of state sovereign immunity.

Justices Breyer and Ginsburg drafted a concurrence, expressing a disagreement with the ruling in Florida Prepaid, but acknowledging that the case controls in Allen v. Cooper.

Author’s Comments:

It is not entirely surprising that the Court ruled as it did in Allen v. Cooper. In fact, based on recent decisions by other courts, criticism of Katz, and the significant shift in the Court’s composition since Katz was decided, some commentators expected this Court to affirm Florida Prepaid and signal a future overturning of Katz. Such a result would have a significant impact on bankruptcy proceedings in the United States, as it would deprive bankruptcy court jurisdiction over the States in many circumstances. States are major creditors in many bankruptcy cases, so their ability to assert sovereign immunity would likely change the bankruptcy landscape.

Contrary to expectations, Justice Kagan wrote the majority opinion in this case. Her defense of Katz was emphatic, including acknowledgements that the decision “viewed bankruptcy as on a different plane,” that the Bankruptcy Clause reflects “bankruptcy exceptionalism,” and that the Bankruptcy Clause is “sui generis— again, ‘unique’ — among Article I’s grants of authority.” State attorneys general who have tried to overturn Katz since its publication and bankruptcy practitioners alike should take notice that Justice Kagan’s unreserved affirmation of Katz was joined by all the justices with the exception of Justice Thomas. The latter drafted a footnote in which he expressed the view that Katz was “wrongly decided.” Though Justices Thomas and Roberts both dissented in Katz, the Chief Justice appears to have changed his views about the Bankruptcy Clause.

These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.