The L.A. Times reports that the Exxon Valdez punitive damages case might yield a 4-4 division — with no precedent being set, and the lower court decision being affirmed — because "Justice Samuel A. Alito Jr. withdrew because he holds Exxon stock." And indeed important cases have in the past yielded 4-4 deadlocks because one Justice owned stock in one of the companies.
This is a pretty bad result, it seems to me: An important issue will be unresolved, the Justices' time will be wasted, the parties' money will be wasted, and all over what is likely just a few thousand dollars' worth of investment.
Isn't there some better solution, even if we insist that a judge may not own even a small stake in one of the parties? For instance, if the problem is indeed just that the Justice owns actual stock (as opposed to owning a share in some fund that owns the stock), wouldn't it be much better for the Justice simply to sell the stock if certiorari is granted? This would presumably be little loss for the Justice, who could sell at market rates and lose just the commission (plus perhaps have some taxable capital gain that he might rather have deferred). Nor would the Justice have any enduring bias in favor of the company — it's not like the past stock ownership created or reflected an emotional relationship that persists even when the stock is sold. Or am I missing something here?
UPDATE: My colleague and corporations law maven Stephen Bainbridge has more. Also, to respond to some general comments: (1) I'd try to make this divestment-instead-of-recusal something of a rule, whether strictly binding or just followed as a matter of practice and precedent. (2) If there are insider trading objections to this (a matter discussed in the comments), I think the law should be amended to remove such objections; the minor insider-trading costs created by such behavior seem to me to be greatly outweighed by the benefits of letting Justices do their jobs.
(3) I realize that litigants generally aren't entitled to their day in the Supreme Court; but it still strikes me as unfair to litigants to cause them to spend a lot of money litigating the matter there, and then have the case end up 4-4 just because of happenstance. It's not a horrible unfairness, but it's something of an unfairness. And, more importantly, it also creates costs to the legal system -- generally, the grant of certiorari is triggered by the Court's judgment that there is uncertainty (say, a circuit split) that should be resolved for the benefit of future litigants and prospective litigants. If resolving that uncertainty is (all else being equal) a benefit, failing to resolve it tends to be a cost.
One could envision a scenario where analysis predict that Justice Kennedy is the swing vote. Justice Kennedy, owning stock in a corporate party to the litigation, sells, knowing full well that he is likely to vote against the company. That does not appear to be the best policy. It may not be illegal insider trading, but it may be appear to be unethical.
There of course are other grounds for recusal that are not as easily remedied by the affected Justice, such as having a family member who is a lawyer for one of the parties in the case or having served as a judge on the lower court panel whose decision is now before the U.S. Supreme Court for review.
Some states have adopted procedures that seek to avoid the possibility of an equally divided ruling from those states' courts of last resort as the result of a justice's recusal. In essence, if a justice on the state's highest court is recused, a judge from an intermediate appellate court who is not recused is randomly selected to replace the recused justice. The value of this approach is that it avoids the possibility of an evenly divided court and the resulting failure to announce a decision that will govern future cases. The drawback of this approach is that there is absolutely no guarantee that the replacement judge will vote the same way as the recused justice, and therefore the outcome may differ from the outcome the state's highest court would have reached had no justice been recused.
I'm curious whether anyone would favor legislation or judicial rulemaking that would authorize the U.S. Supreme Court to randomly tap a non-recused judge from the U.S. Courts of Appeals to replace a recused Justice in a case in which certiorari has been granted?
Why Alito just place the stock in a blind trust, as others holding Constitutional offices have done (e.g. Cheney)?
If both litigants wanted to avoid the possibility of a 4-4 decision, couldn't they agree to waive the conflict?
There's no reason for a justice to hold stock in individual companies. Put it in an index fund or a blind trust.
Mr. Bashman writes:
This is interesting. I'd be against it. If one or 2 cases on the Court's docket every year turn out to be duds because of tie votes and recusals, I don't think that's a huge problem. I think I'd be less upset about that than I'd be about the possibility that a roll of the dice could result in Justice-for-a-Day Reinhardt making binding law for the rest of the country.
If you force the justice to sell the stock, wouldn't this give the justice incentive to vote against the company and then buy the stock back at the lower price?
Question: Could Congress authorize the Supreme Court to replace the recused justice with a retired justice?
A better path would be for Congress to set a monetary guideline, if there isn't one, for when a judge should recuse. If they own shares of that company involved via a mutual fund then I think there's less of a chance of direct financial gain being shown than there would be in outright owning shares of that individual company.
I'm curious to hear what other States have a truly random system of picking those tie-breaking Justices and how that has worked out.
Could one solution be an expansion of the Supreme Court to fifteen justices, sitting in panels of nine; with en banc rehearings being allowed, but only on the same basis as rehearings are currently granted. Expansion of the Supreme Court is very difficult politically, and probably could only be accomplished if the President identified before the bill became law the six people who would be nominated, and that the Senate agreed to confirm them en bloc.
A nice balanced list might be Rawlinson, Sotomayor, Berzon, Wardlaw, Kozinski and Posner; such a slate could give people confidence that this isn't an attempt at court-packing.
Unfair? Don't take the post.
In fact, outsiders can be liable under many circumstances. The relevant case law arises out of the misappropriation theory of liability. See United States v. O'Hagan. The argument would be that the judge owes a duty to the government not to use information he learns in his judicial role for personal gain.
See generally my book on insider trading at http://astore.amazon.com/corporatilawa-20/detail/1566627370.
Makes sense to me.
There are two theories for why insider trading violates the securities laws. First, under fiduciary duty theory, the insider trader has violated the securities laws because he has violated a fiduciary duty to the corporation by misusing its information. See Chiarella v. US. Under this theory, Justice Alito couldn't be held liable since he doesn't owe a fiduciary duty to Exxon. He's just an ordinary shareholder, and ordinary shareholders don't owe fiduciary duties. Moreover, he isn't getting his information from anyone with fiduciary duties, since he's just getting information from the other Justices, who also don't hold fiduciary duties. This means that he can't be held liable under the tippee/tipper framework, which is a sort of aiding and abetting liability.
The second theory is misappropriation theory, under which an insider trader violates the securities laws when he breaches a "duty of trust and confidence" owed to the source of the information. See US v. O'Hagan. The source of the info here is the other Justices (or perhaps their clerks). Does Alito's recusal here violate any duty that he has to the other Justices? I doubt that there's any formal law that announces what duties Justices have to their other Justices (in part probably because there's no legal authority that can effectively promulgate such rules). If anything, a Justice's "duties" to his colleagues are defined only informally, through their general practices and understandings. If Justices have, in the past, sold stock in order to avoid recusal, it would be hard to argue that some informal practice among them barred that sort of conduct.
Thus, I think it'd be pretty tough to conclude that a Justice violates the securities laws when he sells stock to recuse himself from a case.
I agree that there may be constitutional concerns. But putting them aside, perhaps a fair way to go about this would be to assign the chief judges of the courts of appeal, on a rotating basis. For example, for this case, the CJ of the 1st Circuit would sit by designation, unless he had a conflict or the case came up from his circuit. The next time, the CJ of the 2d Circuit would sit. That would inject some randomness into the process, thus avoiding political wrangling over which judge would cast the deciding vote, while still making sure an experienced judge would hear the case. Allowing retired justices to make a comeback is intesting, too.
Were he to participate in the case, even after selling the stock, the Mother Jones and Nation articles practically write themselves.
As far as the financial part ("don't take the job"), a moment's googling tells me that an Associate Justice makes about $208,000, but a fifth year associate at Finnegan, Henderson, Farabow, Garrett &Dunner, L.L.P., a firm I picked by choosing the longest name in the first page of a listing of DC firms, makes a $215,000 base, with various bonuses and a potential 20 pct performance bonus. Clearly Justices aren't in it for the money anyway; why make it even less appealing?
No, but if the exact same issue comes to the court for the second time in a few years, the court's likely to deny cert
Does anyone think that 26 U.S.C. 1043 wouldn't apply to Justice Alito? If it doesn't (I am certainly not a tax practitioner), shouldn't it? Would there be any consequence to divestiture then, especially if the divestiture took place prior to the grant of cert?
Does this solve the recusal problem? If X liked ABC co enough to invest in it, there's a danger that X's fondness for ABC co could cloud X's judgement, either in favor of or, by leaning backwards trying not to be or appear biased towards, be biased against.
Before reading this I had assumed all of the justices had their investments in blind trusts since that is what I would have done if in a similar position. That is a lot simpler than having to recuse yourself all the time.
I've always wondered this. There was a report about Robert's holdings around the time when he got confirmed, and it turned out that he owned stock in nearly every blue chip company. I don't understand why he would do that instead of simply investing in some sort of large cap mutual fund.
If a justice should not have to endure financial losses of any kind (when there's a financial conflict of interest), then there is going to be the appearance of impropriety. If a justice should have to endure financial losses of up to $100, then proriety would be worth $100.
It's overly simplistic, of course, but attacking it with the rejoinder "is English your first language?" strikes me as childish.
I'm surprised no one has answered this question. This happened after a fashion in the antitrust case U.S. v. Aluminum Co. of Am., 320 U.S. 708 (1943) and 322 U.S. 716 (1944). Four justices recused themselves, resulting in the Supreme Court lacking a quorum. Congress amended the statute governing the Court's jurisdiction so that the case could be referred to the Second Circuit. That latter decision is reported at 148 F.2d 416. Thus, in effect, a panel of Second Circuit judges (including both Learned and Augustus Hand) served as the "Supreme Court" for that case.
But the whole thing is a roll of the dice. Had Florida turned out differently in 2000, or Ohio in 2004, Al Gore or John Kerry would have filled the seats now occupied by Roberts and Alito (maybe with Reinhardt; who knows?). Had Bush I not been asleep at the switch and appointed a conservative instead of Souter, a lot of cases might have turned out differently. Ditto with Nixon and Blackmun.
One of the things about our legal system that bothers me is that there are so many things that ultimately turn out to be a crapshoot. Maybe we should just admit as much and stop worrying about Alito's Exxon stock.
That said, the issue is easily solved. The Justices would merely adopt a 10b5-1 trading plan that would cause their shares to be automatically sold in the event that cert is granted in a case where the issuer is a party in interest. Rule 10b5-1 provides a safe harbor from the insider trading rules that, I think, could quite easily be used by the Justices.
The problem is that the act of granting cert itself is an act that can affect a stock price. The vote on granting cert and the results could manipulate a stock price much like a vote on a decision. Justices would vote on cert knowing they would have to liquidate if it is granted.
In any event, I agree that requiring Justices to divest their stock holdings before they begin service. Being a federal judge means surrendering much of your free speech rights. It seems like giving up stock ownership isn't so bad compared to that, especially given what they can make from book deals and lecture fees.
This option points up something else. In this case, had the Justices' individual conflict-check processes been functioning adequately, the rest of the Court should have known of Alito's stock ownership at the time of the cert grant. Sometimes those checks fail, and the conflict isn't noticed until after the grant. But that's not a reason to force Justices to sell their stock; it's a reason to have a better conflict check in the first place. If the conflict-checking process is working, then the Court will know when voting on cert whether 4-4 is a possibility. If it is a possibility, the Justices can simply decide to wait for a different case.
The L.A. Times story doesn't say when Alito announced his recusal, and I haven't checked to see whether the cert. grant noted his non-participation at the stage. If he did recuse at that stage, then one has to ask why the Court granted cert at all. Some would say that it's further proof that the Court was overwhelmed by the size of the punitives award in this case, and that it granted as an exercise in simple error correction. (Other evidence pointing in that direction, I'm told, is that subsequent legislative changes have made it virtually certain that the Court's decision will affect only this case.) If the cert grant was an exercise in error correction, then waiting for a later case without a conflict wouldn't satisfy the Court. But on the other hand, the Court really isn't supposed to be in the business of pure error correction.
In sum, if the Court (a) effectively checks for conflicts at the cert stage, (b) declines to grant cert in cases where conflicts present realistic risks of 4-4 results, and (c) recalls that its cert jurisdiction is not really designed for pure error correction, Eugene's proposal should be unnecessary.
I can't imagine the Senate would approve any Supreme Court justices without confirmation hearings. These nominations would unleash the World Series of confirmation hearing(s). It might take years to make a decision (or decisions).
By "guideline," I assume you do not mean a statute that would bind the court, which would seem to me to be unconstitutional. The court itself establishes its own rules, as far as I know. (Not that you suggested otherwise.)
1) If it splits 4-4, will we know very quickly, as we did earlier this term with the case on the IDEA Act and private schooling?
2) Why is it thought that this would split 4-4? I haven't had the time to read this one that closely and probably won't get to the argument transcript until this weekend, so somebody fill me in. If it's believed that the left wing of the Court will support the verdict, and we know that Scalia has opposed placing a cap on punitive damages (and, IIRC, penned a dissent in a later term in which he vowed to keep voting that way), wouldn't it be more likely to get 5-3 or 6-2 in favor of upholding the jury's damages award?
What may be an open question is whether Alcoa is binding precedent on all lower courts or not. Paragraph 2 of Section 2109 states that cases brought to SCOTUS for review other than by direct appeal where a quorum is lacking end up affirmed with the same effect as upon affirmance by an equally divided court (i.e., the SCOTUS ruling has no precedential value). See Arizona v. United States Dist. Ct., 459 US 1191 (1983).
However, paragraph 1 (governing cases that come before SCOTUS on direct review) does not have restrictions on how the opinion and judgment are treated.
Unless one also wants to argue that the transfer of review to the CTA under 2109, para 1, also is unconstitutional, I don't see why the assignment by designation (pursuant to some new statute) of another Article III judge to fill an empty slot would create any constitional problems.
You may think my statement childish, and perhaps it was. However wouldn't you find it insulting if someone claimed you don't value propriety of the justice system at all? My belief that a Judge should not be exposed to financial losses does not in any way correlate to not valuing propriety, and its pretty obnoxious for someone to claim it does.
I apply the same standard to my investments as I would to employment - I wouldn't buy stock in any company at which I wouldn't work.
Aside from the $$ at stake, I fail to see what makes this issue more important than others that should be resolved. (And face it, $2.5 billion, while a lot of money, is less than 10% of Exxon's annual profits; it isn't as though the unfairness the company might be subject to will cause it to go bankrupt or something.)
I agree with Anderson (and others) that mutual funds and blind trusts could easily solve these problems.
I say let's go one better and simply grant all justices a lifetime savings account with guaranteed 10% interest for their money (no taking deposits in return for a cut). The cost to our government of renumeration for supreme court justices is just so small compared to the effects their decisions have even mucking around with making them spend time worrying about this seems silly.
You may well be right. They do have the advantage, though, of being relatively known quantities who have been through the Senate confirmation process already.
Don't see why the feds couldn't do something similar.
This is a somewhat late response to your comment, but I would presume that C.J. Roberts bought the stocks individually as opposed to via a fund to either:
1) Buy and sell at times advantageous for the individual stocks rather than the Dow Jones as a whole.
and/or
2) Create his own blue-chip "fund" without the costs and fees associated with a fund. For a person with some significant assets, that extra 1 or 2% he loses in fees could be substantial enough he wanted to do it himself.
If so, then wouldn't a judge deciding a case in which the U.S. government has a financial interest be in conflict if he owned any government bonds? With the same going for state, municipal and corporate bonds for their respective parties?
Here's a story from last month. (Sorry that the story has expired. Maybe I've given enough that someone interested can google up the rest.)
Yahoo news