Supreme Court Rules in Stoneridge v. Scientific Atlanta

1/15. The Supreme Court of the United States (SCUS) issued its opinion [33 pages in PDF] in Stoneridge Investment v. Scientific-Atlanta, a securities fraud case involving stock in Charter Communications, a cable television provider. At issue is the liability of secondary actors Scientific Atlanta and Motorola, which sold set top boxes to Charter.

Introduction. Stoneridge's complaint alleges fraudulent financial statements by Charter. But, it alleges no public fraudulent statements by Scientific Atlanta or Motorola. The complaint merely alleges conduct by the two in the form of contracts to sell set top boxes to, and to buy advertising from, Charter. These contracts were not made public, and Scientific Atlanta's or Motorola's own financial statements were not fraudulent.

The SCUS held that "the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations."

This opinion limits the circumstances under which equipment vendors and other third parties who do business with parties who do engage in securities fraud can be held liable for securities fraud under Section 10b.

However, it does not exonerate all third parties who deal with those accused of securities fraud. Scientific Atlanta and Motorola signed contracts with Charter, and these were seen by Charter and its auditors. But, they were not made public. Third party vendors, purchasers, and others might still be held liable under Section 10b when they have made public fraudulent statements, when they have breached a duty to disclose a material fact, and in other circumstances addressed by the opinion of the SCUS.

Also, there are statutory sections other than 10b that might be applied to third parties, such as accountants and underwriters.

There is also the matter of aiding and abetting liability. The SCUS held in its 1994 opinion in Central Bank of Denver v. First Interstate Bank of Denver, reported at 511 U.S. 164, that there is no private right of action under Section 10b for aiding and abetting securities fraud.

Then, in 1995, the Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). It did not add aiding and abetting liability under Section 10b in the PSLRA. Rather, the Congress amended the statute to it direct the Securities and Exchange Commission (SEC) to take action against aiders and abettors.

The just released opinion does nothing to limit the liability of third parties who have aided and abetted securities fraud, but not committed securities fraud themselves, in civil actions brought by the SEC.

This opinion is a defeat for class action securities lawyers.

Background. The plaintiff in the District Court and petitioner to the SCUS is Stoneridge Investment Partners.

Charter Communications issued securities, and financial statements regarding those securities, which actions give rise to the present litigation. It is a defendant in the District Court. However, its liability is not at issue in the present SCUS proceeding.

Scientific Atlanta and Motorola did not issue the securities at issue. Rather, they were equipment suppliers and then customers of Charter. Nevertheless, Charter named them as defendants below. They are the respondents before the SCUS.

The SCUS offered a summary of the allegations in Stoneridge's complaint regarding these two equipment suppliers. (Since the District Court disposed of this issue on a Rule 12(b)(6) motion, the SCUS assumed the allegations in the complaint to be true for the purposes of this certiorari proceeding.)

The SCUS wrote that "Charter arranged to overpay respondents $20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers. Respondents agreed to the arrangement." Moreover, "the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business" and they "signed contracts with Charter to purchase advertising time for a price higher than fair value", which contracts were backdated to make the two transactions look unrelated". And all of this, Stoneridge alleged, enabled Charter to report inflated revenue and operating cash flow in filings with the SEC, which filings were also available to the public.

Scientific Atlanta and Motorola had no role in the preparation of Charter's SEC filings. They properly reported the transactions in their own SEC filings.

District Court. Stoneridge filed a complaint in U.S. District Court (EDMo) against Charter, Scientific-Atlanta, Inc., Motorola, Inc., and others alleging securities fraud in violation of Section 10b of the Securities and Exchange Act of 1034, and rule 10b5 thereunder. Section 10b is codified at 15 U.S.C. § 78j(b).

Stoneridge alleged that Charter engaged in a pervasive and continuous fraudulent scheme intended to artificially boost its reported financial results by deliberately delaying the disconnecting of customers no longer paying their bills, improperly capitalizing labor costs, and entering into sham transactions with the two equipment vendors that improperly inflated Charter's reported operating revenues and cash flow. Stoneridge alleged that the two equipment vendors conduct amounted securities fraud in connection with transactions in Charter's securities.

The District Court dismissed the Section 10b claims against Scientific Atlanta and Motorola pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. It relied on the 1994 SCUS opinion in Central Bank of Denver. It reasoned that the complaint did not allege that the equipment vendors made misstatements relied upon by the public, or that they violated a duty to disclose.

Court of Appeals. The U.S. Court of Appeals (8thCir) affirmed the judgment of the District Court. See, April 11, 2006, opinion [PDF], which is also reported at 443 F3d 987.

The Supreme Court granted certiorari on March 26, 2007.

Statute. Section 10b provides in part that it is "unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Section 10b does not expressly create a private right of action. However, the federal courts have long held that there is a private right of action. (And, the SCUS wrote in this opinion that in the PSLRA the "Congress thus ratified the implied right of action".)

Supreme Court. The question presented [PDF] to the SCUS is "Whether this Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation’s financial statements, but where Respondents themselves made no public statements concerning those transactions."

The Supreme Court affirmed the judgment of the Court of Appeals. That is, Scientific Atlanta and Motorola avoid liability in this securities fraud case.

Justice Antonin Kennedy wrote the opinion of the Court, in which Justices Roberts, Scalia, Thomas, and Alito joined. Justice Stevens wrote a dissent, in which Justices Ginsburg and Souter joined. Justice Breyer did not participate in either this opinion, or the decision to grant certiorari.

Justice Kennedy wrote that "Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the §10(b) private cause of action."

He continued that "We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. ... Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement."

Kennedy wrote that "Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of respondents’ deceptive acts during the relevant times."

He also rejected the theory of scheme liability. Kennedy characterized this as follows: "in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect". He reasoned that there is no authority for this, and that were the SCUS to adopt this theory, then it "would reach the whole marketplace in which the issuing company does business".

He also rejected any theory based upon common law fraud. "Section 10(b) does not incorporate common-law fraud into federal law."

He concluded, in light of the language of 10b, the SCUS's interpretation of it in Central Bank of Denver, and the Congress's reaction in the PSLRA, that if 10b liability is to be extended to aiders and abettors, this is a job for the Congress, not the SCUS.

He wrote: "Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the §10(b) private right should not be extended beyond its present boundaries."

Dissent. Justice Stevens wrote in his dissent that "Investors relied on Charter's revenue statements in deciding whether to invest in Charter and in doing so relied on respondents’ fraud, which was itself a ``deceptive device´´ prohibited by §10(b)".

Solicitor General. The Department of Justice's Office of the Solicitor General (OSG) argued in its amicus brief in this case that "Allowing liability for a primary violation under the circumstances presented here would constitute a sweeping expansion of the judicially inferred private right of action in Section 10(b) and Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market."

This case is Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., et al., Sup. Ct. No. 06-43, a petition for writ of certiorari to the U.S. Court of Appeals for the 8th Circuit, App. Ct. No. 05-1974. The Court of Appeals heard an appeal from the U.S. District Court for the Eastern District of Missouri. See also, SCUS docket.

See, also stories titled "Supreme Court Grants Cert in Stoneridge Investment v. Scientific-Atlanta" in TLJ Daily E-Mail Alert No. 1,557, March 27, 2007, and "Supreme Court to Consider 10b Liability of Stock Issuers' Vendors" in TLJ Daily E-Mail Alert No. 1,625, August 21, 2007.

7th Circuit Addresses Choice of Forum and Bench Trial Clauses in Telecom Equipment Sales Contracts

1/15. The U.S. Court of Appeals (7thCir) issued its opinion in IFC Credit Corp. v. United Business and Industrial Federal Credit Union, a case regarding a forum selection clause and jury waiver clause in a contract between a telecommunications equipment seller and purchaser.

The Court of Appeals wrote that a company named Norvergence, which is no longer in business, "sold telecommunications equipment and services -- or claimed to do so". It is not a party to this action. United Business and Industrial Federal Credit Union (UBIFCU) is the defendant below and appellant in this appeal. The Court of Appeals wrote that Norvergence "told lies to make the sales" of telecom equipment to the UBIFCU.

IFC Credit Corporation now claims to be a holder in due course of Norvergence's contracts. IFC seeks to collect payments on contracts for the purchase of equipment and services that it never delivered. The Court of Appeals wrote that if IFC has the status of holder in due course, "then personal defenses that the customers could have asserted against Norvergence are unavailable, and the customers must pay IFC" regardless of Norvergence's wrongful conduct.

IFC is keen to enforce the forum selection and jury waiver clauses in the contracts. It filed a complaint in U.S. District Court (NDIll) against UBIFCU seeking to collect payments specified in the sales contract. The District Court held that the jury waiver clause is unenforcable, and submitted the case to the jury, which returned a verdict in favor of UBIFCU.

IFC brought the present appeal. The Court of Appeals reversed, and remanded with directions hold a bench trial.

This is a complex opinion that addresses what law (state or federal) governs forum selection clauses, unconscionable contract clauses, form contracts, enforceability of forum selection clauses, enforceability of bench trial clauses, and analogies to arbitration clauses.

This opinion also notes that it may be in conflict with other circuits. The three judge panel therefore circulated this opinion to the full court

This case is IFC Credit Corporation v. United Business and Industrial Federal Credit Union, U.S. Court of Appeals for the 7th Circuit, App. Ct. No. 07-1037, an appeal from the U.S. District Court for the Northern District of Illinois, Eastern Division, D.C. No. 04 C 5905, Judge Matthew Kennelly presiding. Judge Frank Easterbrook wrote the opinion of the Court of Appeals, in which Judges Flaum and Kanne joined.

Barnett Addresses Application of Competition Law to Unilateral Conduct

1/15. Thomas Barnett, the Assistant Attorney General in charge of the Department of Justice's (DOJ) Antitrust Division gave a speech in Bonn, Germany, in which he addressed, among other topics, "application of competition law to unilateral conduct".

Barnett did not remind his audience in the prepared text of his speech that this would encompass proceedings in the EC against Microsoft and Intel.

He stated that "Mere size does not demonstrate harm to competition or a violation of the antitrust laws".

He also said that "Mere injury to a particular firm does not itself show that competition has suffered. Indeed, a firm's inability to garner sales may indicate no more than the superiority of its competitors' products. A successful firm should not be penalized for creating a product that is preferred by consumers. Further, the loss of sales can be an important incentive to other firms to improve their efforts to offer new and better products at the lowest possible price."

He also focused on establishing clear safe harbors in the context of single firm conduct.

People and Appointments

1/15. Rep. Richard Baker (R-LA) announced that he "plans to resign his seat in Congress no later than February 6th, 2008". He is a member of the House Financial Services Committee. He was previously Chairman of its Subcommittee on Capital Markets. He will go to work for the Managed Funds Association (MFA). See, Rep. Baker's release. Back in the 108th Congress, he was a leader of unsuccessful efforts to enact legislation that would have overturned the Financial Accounting Standards Board's (FASB) decision to mandate the expensing of stock options. The FASB decision harmed small and start up information technology companies that offered stock options to attract employees. See, HR 3574 (108th), the "Stock Options Accounting Reform Act". See also, See, story titled "FASB Proposes Expensing of Stock Options" in TLJ Daily E-Mail Alert No. 867, April 1, 2004; story titled "Capital Markets Subcommittee Approves Stock Options Bill" in TLJ Daily E-Mail Alert No. 897, May 13, 2004; and story titled "House Financial Services Committee Approves Stock Options Bill" in TLJ Daily E-Mail Alert No. 919, June 16, 2004.

More News

1/15. The Securities and Exchange Commission (SEC) filed a civil complaint [PDF] in U.S. District Court (NDCal) against two employees of Price Waterhouse Coopers (PWC) alleging violation of Section 10b of the Securities Exchange Act of 1934 in connection with their alleged use of information acquired at PWC about the plans of PWC clients to acquire technology companies. The complaint alleges that one of the two individuals purchased stock in the companies to be acquired prior to the public announcement of the acquisitions. See also, SEC release.

1/15. The Department of Labor's (DOL) Employment and Training Administration (ETA) published a notice in the Federal Register regarding its Science, Technology, Engineering, and Mathematics (STEM) Opportunities in the Workforce System Initiative. The ETA will hold an online conference for prospective applicants at 2:00 PM on January 25, 2008. The deadline to submit preliminary proposals is 4:00 PM on March 11, 2008. See, Federal Register, January 15, 2008, Vol. 73, No. 10, at Pages 2529-2543.

EC Again Targets Microsoft

1/14. The European Commission announced in a release that it "has decided to initiate two formal antitrust investigations against Microsoft".

The U.S. Department of Justice's (DOJ) Antitrust Division and the Federal Trade Commission (FTC), which possess greater professionalism and expertise than the EC Competition Commission, and whose actions are more guided by economic analysis, have not initiated parallel or similar proceedings in the U.S.

One complaint was submitted to the EC by the European Committee for Interoperable Systems (ECIS), a collection of mostly U.S. companies organized to lobby the EC to regulate Microsoft's software design and business practices.

The ECIS members, which include Adobe, IBM, Oracle, RealNetworks, and SunMicrosystems, seek to gain competitive advantages through the imposition of regulatory burdens on Microsoft.

The EC wrote in its release that the ECIS alleges that Microsoft has "illegally refused to disclose interoperability information across a broad range of products, including information related to its Office suite, a number of its server products, and also in relation to the so called .NET Framework."

The EC added that its examination will "focus on all these areas, including the question whether Microsoft's new file format Office Open XML, as implemented in Office, is sufficiently interoperable with competitors' products."

The second complaint was submitted by Opera, a Norwegian company that makes internet browsing software by the same name. The EC wrote that Opera alleges that Microsoft has "engaged in illegal tying of its Internet Explorer product to its dominant Windows operating system. The complaint alleges that there is ongoing competitive harm from Microsoft's practices, in particular in view of new proprietary technologies that Microsoft has allegedly introduced in its browser that would reduce compatibility with open internet standards, and therefore hinder competition."

The EC adds, without elaboration, that "allegations of tying of other separate software products by Microsoft, including desktop search and Windows Live have been brought to the Commission's attention. The Commission's investigation will therefore focus on allegations that a range of products have been unlawfully tied to sales of Microsoft's dominant operating system."

The EC's actions against technology companies have heretofore mostly involved imposing regulation and fines on U.S. technology companies at the request of rival U.S. technology companies. For example, the EC has acted upon complaints from RealNetworks, IBM, Oracle and others about Microsoft, and complaints from AMD about Intel. This has left the defenders of the EC with the argument that the EC cannot be abusing antitrust authority for the purpose of discriminating against U.S. companies for the benefit of EU companies, because the beneficiaries are U.S. companies.

However, one of the two proceedings announced on January 14 targets a U.S. company for the benefit of a competing EU company -- Opera.

5th Circuit Rules No Personal Jurisdiction Over Out of State Regulator of Online Commerce

1/14. The U.S. Court of Appeals (5thCir) issued its opinion [19 pages in PDF] in Stroman Realty v. Wercinski, a case regarding state regulation of internet based commerce in timeshares, such as vacation condos.

The Court of Appeals did not reach the merits of the commerce clause claim. Rather, it held that the state of Arizona's regulators cannot be sued in federal court in Texas, the location of the targeted company. This case may be of concern to internet based businesses that find themselves regulated or taxed by numerous distant state regulators. This case stands as authority for the proposition that if internet based business's constitutional or federal statutory rights are violated by distant state regulators or tax collectors, then these businesses cannot obtain personal jurisdiction over the distant regulators in their home states. On the other hand, state regulators and taxers of interstate and internet commerce may celebrate this opinion.

Introduction. The state of Arizona seeks to regulate the commercial activities of a real estate timeshare sales business (Strohman Realty) located in the state of Texas, which does business in part over the internet. Stroman advertises through an internet website, and matches buyers and sellers via an internet access electronic database. Stroman's prospective buyers and sellers are located everywhere, including in the state of Arizona.

Arizona ordered Stroman to cease "all contact with Arizona resident and non-resident owners of real estate located in Arizona ... by mail, telephone, telefax, computer modem or any other means". It later forbade Stroman from advertising properties located in Arizona in its website.

Stroman asserts that Arizona's efforts to regulate its business violates the commerce clause of the U.S. Constitution. It brought suit in federal court in Texas seeking injunctive relief under 42 U.S.C. § 1983. However, this opinion does not address the commerce clause issue, or the Section 1983 claim. Rather, the Court of Appeals held that the District Court lacks personal jurisdiction over the state of Arizona.

The Court of Appeals held that regulating a business in another state, issuing a cease and desist order to that out of state business, and censoring the content of its web site, are not sufficient contacts with that other state to confer jurisdiction upon a federal court in that state.

The holding in this case leads to an anomalous outcome. A state regulator was able to reach across state lines to regulate a business located in another state based upon its interstate and online activities. But, when that out of state business sought protection of its rights in a federal court in its state, that District Court held that it could not reach back across state lines by asserting personal jurisdiction over the other state's regulator.

See, full story.

Supreme Court Denies Cert in Unsolicited Fax Case

1/14. The Supreme Court denied certiorari in U.S. Fax Law Center v. iHire. See, Orders List [pages in PDF] at page 5.

This is a case regarding standing to bring actions seeking damages for unsolicited faxes under the Telephone Consumer Protection Act (TCPA).

47 U.S.C. § 227(b)(1)(C) provides, in part, that "It shall be unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States ... to use any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement ..."

The U.S. Court of Appeals (10thCir) affirmed the dismissal of complaints for lack of standing. The denial of certiorari lets stand the February 7, 2007, opinion of the Court of Appeals. See also, Supreme Court docket.

This case is U.S. Fax Law Center, Inc. v. iHire, Inc., et al., U.S. Supreme Court, Sup. Ct. No. 06-1634, a petition for writ of certiorari to the U.S. Court of Appeals for the 10th Circuit, App. Ct. Nos. 05-1325, 05-1441, 05-1447, 05-1465, 05-1521, and 05-1523.

People and Appointments

1/14. Scott Wallsten joined iGrowthGlobal as VP for Research and Senior Fellow. He was previously Director of Communications Policy at the Progress & Freedom Foundation (PFF).

More News

1/14. The Federal Communications Commission (FCC) released a Public Notice [12 pages in PDF] regarding its Auction Number 73, the 700 MHz auction. This notice, numbered DA 08-83, identifies 214 qualified bidders, and reviews auction procedures and obligations. This auction is scheduled to begin on Thursday, January 24, 2008. See also, Attachment A [PDF] and Attachment B [PDF].

1/14. The Progress and Freedom Foundation (PFF) published a paper titled "Breaking Metcalfe's Law". It pertains to Bain Capital's (a private equity firm) plans to purchase 3Com, with Huawei (a People's Republic of China telecommunications company) holding a 17% minority stake. The Department of the Treasury's Committee on Foreign Investment in the United States (CFIUS) is reviewing the transaction. The paper states the members of House and Senate are harassing Bain. It states that "The more often the U.S. blocks or merely harasses foreign investors, the stronger message we send that we don't want the world's capital. The more obstacles we lay before highly skilled visa applicants and would- be immigrants, America's status as the strongest magnet for ideas and talent erodes. As we build more robust firewalls to repel this ``dangerous´´ knowledge and money, the more likely it is that ideas and capital will flow through other nodes of the global economic network." The author is the PFF's Brett Swanson.

1/14. The Federal Communications Commission (FCC) released a report [14 pages in PDF] on consumer complaints to the FCC in the first and second quarters of 2007.

Frontline Wireless Announces That It Is Closed For Business

1/12. Frontline Wireless issued a short statement, that states in full that "Frontline Wireless is closed for business at this time. We have no further comment."

The Federal Communications Commission (FCC) will commence its spectrum Auction Number 73 on January 24, 2008. This is the 700 MHz band auction.

The 700 MHz band (actually 698-806 MHz) is television broadcast spectrum that will be made available for public safety and commercial wireless services as a result of the digital television (DTV) transition.

The FCC adopted a report and order on July 31, 2007, that revised the band plan and service rules for the 700 MHz band. In particular, this order created something titled "Public/Private Partnership". It provided that a single commercial licensee would build a nationwide broadband interoperable network for use by public safety entities. However, it would then have preemptible secondary access to the spectrum.

Frontline Wireless, James Barksdale (its P/CEO), Janice Obuchowski (Chairman), Reed Hundt (Vice Chairman) and others successfully sought the FCC's designation of spectrum for this public private partnership.

The FCC's order provided for the auction later this month of a D Block of 10 MHz of paired spectrum (758-763 and 788-793).

The FCC stated in its release [5 pages in PDF] of July 31 that "As part of the Partnership, the commercial licensee will build out a nationwide, interoperable broadband network for the use of public safety. This network will facilitate effective communications among first responders not just in emergencies, but as part of cooperative communications plans that will enable first responders from different disciplines, such as police and fire departments, and jurisdictions to work together in emergency preparedness and response."

It added that "the Public Safety Broadband Licensee will have priority access to the commercial spectrum in times of emergency, and the commercial licensee will have preemptible, secondary access to the public safety broadband spectrum."

See also, story titled "FCC Adopts 700 MHz Band Order" in TLJ Daily E-Mail Alert No. 1,619, July 31, 2007, and the FCC's Public Notice [122 pages in PDF] dated October 5, 2007, and numbered DA 07-4171.

DHS Releases REAL ID Regulations

1/11. The Department of Homeland Security (DHS) released 284 pages of regulations that establish federal requirements for states in the operation of their identification systems for individuals, including issuing of identification cards and maintaining of electronic databases of information.

The DHS published the regulations as 10 megabytes of PDF scans. See, part 1 and part 2.

The DHS issued its notice [162 pages in PDF] of proposed rulemaking back on March 1, 2007. See, story titled "DHS Proposes Rules Implementing REAL ID Act" in TLJ Daily E-Mail Alert No. 1,546, March 5, 2007.

These regulation are issued in connection with the Title II of the REAL ID Act of 2005.

The regulations extend deadlines for states to come into compliance with the mandates of the Act and regulations. These regulations provide that the final extended deadline for complete compliance is December 1, 2017.

The DHS stated in a release that "REAL ID will address document fraud by setting specific requirements that states must adopt for compliance, to include: (1) information and security features that must be incorporated into each card; (2) proof of the identity and U.S. citizenship or legal status of an applicant; (3) verification of the source documents provided by an applicant; and (4) security standards for the offices that issue licenses and identification cards."

Many states have not responded with enthusiasm to the identification mandates provisions of the REAL ID Act. Several states have already enacted legislation that prohibits compliance with the identification mandates of the REAL ID Act. See for example, story titled "Maine Rejects REAL ID Act" in TLJ Daily E-Mail Alert No. 1,528, January 29, 2007.

Reaction to Regulations. Sen. Patrick Leahy (D-VT), the Chairman of the Senate Judiciary Committee (SJC), stated in a release that the "REAL ID program will not only lead to long lines at every DMV across the country, it will impose a massive unfunded mandate on state governments while offering absolutely no federal privacy protections to our citizens".

He added that the rules will "prolong a contentious and unproductive battle to force the states to comply".

He also said that "with the federal government now directing how a state drivers' license is issued, what characteristics the card must have, and conditioning access to federal buildings and airplanes on possession of a REAL ID card, it is difficult to think this is anything but the first, big step toward a national identification card that so many Americans oppose".

The ACLU stated in a release that these regulations "have dumped the problems of the statute on future presidents like a rotting corpse left on the steps of the next administration -- and not just the next one, but the administration of whoever is president in 2018".

"Real ID needs to be repealed. It is not only a threat to Americans' privacy but it is utterly unworkable." The ACLU added that the Act "should be repealed and replaced with a clean, simple, and vigorous new driver's license security law that does not create a national ID".

The ACLU wrote in a summary of the new regulations that "The act still has significant privacy problems. DHS has not protected an individual's personal information on the machine readable zone and allow for the use of widespread photo recognition. The regulations have left unresolved the requirement for a nationwide database of all drivers."

Sen. Leahy also stated that "I have joined Senators Akaka, Sununu, Tester, Baucus, and Alexander in introducing legislation to repeal the drivers' license provisions of the law, and to replace them with the negotiated rulemaking process originally enacted in the 2004 Intelligence Reform and Terrorist Prevention Act.  That law, which REAL ID superseded, was intended to improve the security of state driver's licenses through a cooperative partnership with the states and the private sector."

On February 28, 2007, Sen. Daniel Akaka (D-HI), Sen. John Sununu (R-NH), Sen. Jon Tester (D-MT), and Sen. Leahy introduced S 717 [LOC | WW], a bill to repeal Title II of the REAL ID Act. Also, on February 14, 2007, Rep. Thomas Allen (D-ME) and others introduced HR 1117 [LOC | WW], the "REAL ID Repeal and Identification Security Enhancement Act of 2007", which would also repeal Title II of the Act.

Legislative History. The Intelligence Reform and Terrorist Prevention Act of 2004 provided for a state federal negotiated rulemaking process regarding state identification systems. This process was underway when the Congress displaced it with the federal mandates scheme contained in Title II of the REAL ID Act of 2005.

The original version of HR 418 (109th Congress), the "REAL ID Act of 2005", was introduced by Rep. James Sensenbrenner (R-WI) on January 26, 2005. The House amended and approved one version of HR 418 as a stand alone bill on February 10, 2005.

The House also approved it as an appendage to HR 1268 (109th Congress), on May 11, 2005. HR 1268 was a supplemental appropriations bill, the main purposes of which were defense and anti-terrorism funding, and additional funding for the FBI, DEA, and other agencies.

President Bush signed HR 1268 (109th) on May 11, 2005. It is now Public Law 109-13. Hence, the REAL ID Act was enacted as Division B of HR 1268. This Title B contains many provisions. Those related to the federalization of state identification systems are found at Title II of Title B, titled "Improved Security for Drivers' Licenses and Personal Identification Cards. It is Sections 201-207 of Title B.

Section 201 contains definitions. Section 202, titled "Minimum Document Requirements and Issuance Standards for Federal Recognition", sets minimum standards regarding the contents of state identification documents, including machine readability, and issuance standards. It also requires that states maintain electronic databases that include "all data fields printed on drivers' licenses and identification cards issued by the State".

The Congress did make minor changes to Title II of the REAL ID Act in HR 660 [LOC | WW], the "Court Security Improvement Act of 2007". President Bush signed this bill into law on January 8, 2008. See, White House release.

HR 660 contains numerous provisions related to court security, including a provision that states are not to collect certain information about federal judges and justices, including their home addresses. The bill seeks to, among other things, protect the safety of judges and justices. One way that it seeks to accomplish this is to prevent those who would do them harm from learning their residences from state identification databases. This may be based on the understanding that these state databases of information will not be secure.

9th Circuit Addresses Privacy and Government Background Investigations of Private Sector Scientists

1/11. The U.S. Court of Appeals (9thCir) issued its opinion [19 pages in PDF] in Nelson v. NASA, a case involving Constitutional rights regarding informational privacy and searches and seizures, and the Administrative Procedure Act (APA).

Robert Nelson and the other plaintiffs are scientists and engineers at the Jet Propulsion Laboratory (JPL), a joint project of the National Aeronautics and Space Administration (NASA) and the California Institute of Technology. The JPL program is run by CalTech pursuant to something that the Court of Appeals opinion characterizes as a "contract" with the NASA. This contract provides that the NASA can unilaterally amend it. The NASA unilaterally amended the contract to require low risk CalTech scientists to submit to in depth background investigations, including questioning of the scientists, questioning of third parties, and accessing government electronic databases of information.

They filed a complaint in U.S. District Court (CDCal) alleging violation of the APA, violation of the Constitutional right to informational privacy, and violation of the 4th Amendment's ban on unreasonable searches.

The District Court denied the plaintiffs' motion for a preliminary injunction, based upon its finding of an unlikelihood of success on the merits, and the plaintiffs then brought the present interlocutory appeal.

The Court of Appeals reversed and remanded on the APA and information privacy claims. However, it held that the background investigations are not searches within the meaning of the 4th Amendment.

This case is Robert Nelson, et al. v. NASA, et al., U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 07-56424, an appeal from the U.S. District Court for the Central District of California, D.C. No. CV-07-05669-ODW, Judge Otis Wright presiding. Judge Kim Wardlaw wrote the opinion of the Court of Appeals, in which Judges David Thompson and Edward Reed joined.

Go to News from January 6-10, 2008.