Supreme Court Rules in State Sovereign Immunity Case

January 23, 2006. The Supreme Court issued its 5-4 opinion [60 pages in PDF] in Central Virginia Community College v. Katz, a bankruptcy case regarding state sovereign immunity. The Supreme Court affirmed the judgment of the U.S. Court of Appeals (6thCir). That Supreme Court upheld a Congressional abrogation of state sovereign immunity. Previously, the Supreme Court has overturned Congress attempts to abrogate state sovereign immunity in the context of intellectual property law.

Introduction. The facts giving rise to this case, preferential transfers by a debtor to state entities, do not involve technology. The statute being construed, the Bankruptcy Code, is not technology related. At issue is whether the Congress, in writing the Bankruptcy Code, can abrogate state immunity. Yet this case is important for technology, because the Supreme Court's interpretation of the nature of state sovereign immunity may affect other Congressional statutes that now, or in the future, may purport to abrogate state sovereign immunity. Notably, these include the Patent Act, Copyright Act, Lanham Act, and the Communications Act, which more directly impact technology.

Previously, the Supreme Court issued a series of 5-4 opinions that overturned Congressional abrogations of state sovereign immunity. TLJ offers no explanation of why the present majority opinion might be consistent with these prior majority opinions. However, one member of the previous five member majorities flipped slides. Justice Sandra O'Connor previously joined in opinions that overturned Congressional statutes, but in the just released opinion she joined in the majority that upheld the statute.

Also, in the interim, former Chief Justice William Rehnquist died. He wrote two earlier states rights opinions. He has been replaced by the new Chief Justice John Roberts. In the just released opinion he joined the states rights minority.

Justice O'Connor will soon leave the Court, and will likely be replaced by Sam Alito. The Court hangs in the balance. Whichever camp he joins will form the majority on the issue of abrogation of state sovereign immunity.

Proceedings Below. Wallace's Bookstores operated bookstores on the campuses of Central Virginia Community College, and three other state colleges. It declared bankruptcy in U.S. Bankruptcy Court (E.D.Kent). Bernard Katz is the liquidating supervisor of the bankrupt estate. He commenced an adversary proceeding, under the federal Bankruptcy Code, to recover preferential transfers made by Wallace's Bookstores to the four state colleges, and to collect accounts receivable owed by the four state colleges.

The Bankruptcy Code, at 11 U.S.C. 106(a), provides that "Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following: ..." It then lists numerous sections of the bankruptcy code, including 11 U.S.C. 547, which pertains to preferential transfers.

The four state colleges filed motions to dismiss the complaint, based upon state sovereign immunity. They asserted that  106(a) is unconstitutional. The Bankruptcy Court denied these motions.

The four colleges appealed. The Court of Appeals (6thCir) affirmed. The four colleges sought rehearing en banc. Not one judge voted to rehear the case. The four colleges petitioned the Supreme Court for writ of certiorari.

The Supreme Court granted certiorari on April 4, 2005. See, story titled "Supreme Court Grants Certiorari in State Sovereign Immunity Case" in TLJ Daily E-Mail Alert No. 1,109, April 5, 2005.

See also, the states' brief [69 pages in PDF], Katz's brief [PDF], and the states' reply brief [28 pages in PDF].

Supreme Court Opinion. The four colleges relied heavily in their petition and briefs on the Supreme Court's opinions in Seminole Tribe v. Florida, 517 U.S. 44 (1996), which held that the Congress lacks authority under Article I of the Constitution to abrogate the States' 11th Amendment immunity from suit in federal courts, and in Florida Prepaid v. College Savings Bank, 527 U.S. 627 (1999), which extended the Seminole Tribe holding to intellectual property suits.

Justice Stevens wrote the opinion of the Court. He was joined by Justices O'Connor, Breyer, Souter, and Ginsburg. In affirming the Court of Appeals, he suggested that federal bankruptcy authority is different from other topics delegated to the Congress in Article 1, Section 8, of the Congress.

Justice Thomas wrote a long dissent (beginning at PDF page 26) that was joined by Justices Roberts, Scalia and Kennedy. He wrote that the majority opinion is "impossible to square with this Court's settled state sovereign immunity jurisprudence". Moreover, he cited both Seminole Tribe and Florida Prepaid as authority for the proposition that the majority opinion is incorrect.

Commentary. Article 1, Section 8, Clause 4, of the Constitution provides that "The Congress shall have the Power ... To establish ... uniform Laws on the subject of Bankruptcies throughout the United States". The Supreme Court has just held, by a 5-4 vote, that this clause gives the Congress authority to abrogate state sovereign immunity from suits to set aside preferential transfers.

However, it is also Article 1, Section 8, that provides that "The Congress shall have the Power ... To regulate Commerce with foreign Nations, and among the several states, and with the Indian tribes" and "To Promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries".

Yet, the Supreme Court has also held, in a series of 5-4 opinions, that these clauses do not give the Congress authority to abrogate state sovereign immunity in the areas of trademark and patent law.

Something is out of joint.

State Immunity in IPR Cases. Former Chief Justice Rehnquist wrote the opinion of the Court in Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996). This case involved the Indian Gaming Regulatory Act and the Indian Commerce clause of the constitution. He wrote that the Congress lacks authority under the commerce clause of Article I, Section 8, to abrogate the states' 11th Amendment immunity from suit in federal courts. This was a 5-4 opinion.

Then, Rehnquist wrote the opinion for the Court in Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999), invalidating the Patent and Plant Variety Protection Remedy Clarification Act for the same reason. This too was a 5-4 opinion.

At the same time, the Court issued its opinion in College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 666 (1999), invalidating the Trademark Remedy Clarification Act, again on the basis of state sovereign immunity. Scalia wrote this 5-4 opinion. Rehnquist joined.

As a result of these cases, states can hold intellectual property, and enforce their intellectual property rights in federal court. At the same same, states are in effect free to steal the intellectual property of others, without fear of money judgments against them. Some states infringe intellectual property rights, hide behind 11th Amendment immunity, and then lobby their Senators to block legislation that would remedy this situation.

For more on legislative efforts to address this situation, see stories titled "Legislators Introduce Bills to Address Infringement by States" in TLJ Daily E-Mail Alert No. 302, November 6, 2001; "Sen. Leahy Reintroduces Bill to Close 11th Amendment Loophole to IPR" in TLJ Daily E-Mail Alert No. 394, March 22, 2002; "Senate Judiciary Committee Considers Federalism and Intellectual Property" in TLJ Daily E-Mail Alert No. 522, October 3, 2002; and "Legislators Re-Introduce Bills to Address State IPR Sovereign Immunity" in TLJ Daily E-Mail Alert No. 680, June 13, 2003.

The present case is Central Virginia Community College, et al. v. Bernard Katz, Sup. Ct. No. 04-885, a petition for writ of certiorari to the U.S. Court of Appeals for the 6th Circuit. The U.S. Bankruptcy Court's case number is 01-50545. The Appeals Court's case number is 03-6054.