We’re back with the final four decisions of a busy week: American Hospital Association v. Becerra (No. 20-1114), where the Court rebuked the Department of Health and Human Services for its method of reimbursing hospitals for prescription drugs in 2018 and 2019 (but without rebuking its own beleaguered Chevron test); Viking River Cruises v. Moriana (No. 20-1573), in which the Court held that the Federal Arbitration Act preempts a California rule invalidating contractual waivers of the right to bring claims under the California Labor Code; George v. McDonough (No. 21-234), addressing the Department of Veterans Affairs’ “clear and unmistakable error” standard for determining when a veteran had a preexisting injury or disease that was not aggravated by military service; and Golan v. Saada (No. 20-1034), addressing the degree of discretion federal courts have in determining whether to repatriate a child under the Hague Convention.

We’ll begin with Becerra, a case that was closely watched for its potential to deal another blow to the frequently maligned Chevron doctrine. Instead, as it has several times in recent years, the Court simply ignored Chevron, while also rejecting an agency’s interpretation of law. This time, the law at issue was the Medicare statute, which lays out a formula for the Department of Health and Human Services to employ when setting reimbursement rates for certain prescription drugs provided by hospitals to Medicare patients. The statute gives HHS two options: It can conduct a survey of hospitals’ acquisition costs for each covered drug and then set reimbursement rates based on the hospitals’ “average acquisition cost[s]” for each drug, or it can skip the survey and set rates based on “the average price” charged by manufacturers for the drug. The first option expressly permits HHS to “vary” reimbursement rates by “hospital group;” the second does not. For many years, HHS chose option 2 and reimbursed all hospital groups at a rate of about 106%. Then, in 2018 and 2019, HHS issued a rule establishing separate reimbursement rates for so-called 340B hospitals, which serve low-income and rural populations (and can therefore purchase drugs at reduced prices), and all other hospitals. It set these separate rates without conducting a survey of acquisition costs. The American Hospital Association challenged the reimbursement rates in federal court. HHS argued in the first place that various provisions of the Medicare Act precluded judicial review of the reimbursement rates, and second that it was permitted to vary reimbursement rates by hospital group under its authority to “adjust” the “average price” of outpatient drugs when calculating reimbursement rates. The District Court rejected HHS’s arguments, but the DC Circuit reversed, finding that, while the statute does not preclude judicial review, HHS was permitted to reduce the reimbursement rates for 330B hospitals.

The Supreme Court unanimously reversed, in a decision authored by Justice Kavanaugh. He first concluded that the Medicare statute does not preclude judicial review of HHS’s reimbursement rates. As Kavanaugh observed, there is a “strong presumption” in favor of judicial review of agency actions, unless a statute’s “language or structure” precludes it. Here, no provision of the Medicare statute precludes judicial review of reimbursement rates. Though HHS had cited two nearby provisions precluding review of the general payment methodology that HHS employs for other reimbursements, those did not limit review of the specific reimbursement rates at issue here. Kavanaugh also rejected HHS’s “practical” arguments because they could not override the strong presumption in favor of judicial review. Turning to the rates themselves, Kavanaugh concluded that HHS was not permitted to vary reimbursement rates without conducting a survey of hospitals’ acquisition costs. The text and structure of the statute, he insisted, made this a straightforward case. HHS’s only textual argument was that the statute gave it the power to adjust the “average price” of outpatient drugs when calculating reimbursement rates, but this power, Kavanaugh reasoned, was distinct from the power to set different rates for different groups of hospitals. Since “option 1” expressly permitted HHS to do that and “option 2” did not, HHS exceeded its authority by varying rates without a survey.

Once upon a time, there was a specific test for determining whether an agency’s interpretation of a statute was legitimate. Here, though, while the Court’s decision seemingly followed “Chevron step 1”—that is, determining whether a statute is ambiguous in the first place—Kavanaugh’s opinion didn’t even mention the doctrine. This continues a recent trend in which the Court has undercut Chevron by simply ignoring it.

Next up is Viking River Cruises, Inc. v. Moriana (No. 20-1573), in which the Court held the Federal Arbitration Act (the “FAA”) preempts a California rule that invalidates contractual waivers of the right to bring claims under the California Labor Code Private Attorneys General Act (“PAGA”) insofar as it precludes the division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. 

PAGA authorizes any California employee to bring an action against a former employer on behalf of herself and other current or former employees to obtain civil penalties that previously could only have been recovered by California in an enforcement action by its Labor and Workforce Development Agency (“LWDA”). But don’t call a PAGA action a class action. Rather, call it a qui tam action, as it is a representative action in which an employee sues as an agent or proxy of California. Indeed, PAGA’s aim is to delegate to employees the power to assert the same rights and interests LWDA can. But while a PAGA action does not share the character of a class action, it can share its scope, as an employee can join to her claim—even if it is only based on a single violation—an unlimited number of other claims based on other violations. That is what Angie Moriana did here. After leaving her position with Viking River Cruises, she filed a PAGA action against Viking in California court, alleging Viking unlawfully failed to provide her with her final wages within 72 hours. She also alleged a wide variety of other violations sustained by other Viking employees, greatly expanding the scope of her PAGA action—and Viking’s potential liability. Viking turned to the arbitration agreement it executed with Moriana at the outset of her employment. Under the agreement, Moriana agreed to arbitrate all disputes arising out of her employment. She also, under the agreement’s “Class Action Waiver,” waived her right to bring in arbitration any dispute as a class, collective, or representative PAGA action. Under the agreement’s severability clause, if this waiver was found invalid, any class, collective, representative, or PAGA action would presumptively be litigated in court.  But if any portion of the waiver remained valid, it would be enforced in arbitration. Based on this agreement, Viking moved to compel arbitration of Moriana’s individual PAGA claim (the claim solely based on the violation she suffered) and dismiss her other PAGA claims. The trial court denied the motion and the California Court of Appeal affirmed based on existing California precedent that provided two rules regarding waivers of PAGA claims. First, parties cannot waive their rights to bring claims under PAGA.  Second, individual PAGA claims cannot be arbitrated or litigated separately from representative PAGA claims.  Put differently, parties cannot contract around PAGA’s joinder device by agreeing to arbitrate only individual PAGA claims. Citing this second rule, the lower courts refused to compel arbitration of Moriana’s individual PAGA claim.

The Supreme Court, by an 8-1 vote, reversed. But this margin belies the highly fractured nature of the Court’s decision. Justice Alito wrote for the Court, but only one portion (Part III) of his opinion received all seven other votes. There, Justice Alito found the second rule (the prohibition on parties agreeing to only arbitrate individual PAGA claims) violates the FAA because it infringes upon the freedom of parties to determine the issues they wish to arbitrate. A “fundamental principle,” he explained, is that arbitration is a matter of consent, so a state cannot coerce parties to arbitrate issues they had not agreed to arbitrate. Therefore, a state cannot condition the enforceability of an arbitration agreement on the availability of a procedural device that would allow a party to introduce claims the parties never agreed to arbitrate. Such a mandatory joinder rule would compel parties to either arbitrate issues they did not agree to arbitrate or forego arbitration altogether. Either way, the parties would be coerced into sacrificing a right guaranteed by the FAA. California’s claim-splitting prohibition, Justice Alito concluded, is precisely this type of rule. Indeed, if parties agree to arbitrate individual PAGA claims, the rule allows the employee to abrogate the agreement by demanding either (a) an arbitration proceeding that exceeds its negotiated scope or (b) that all claims be brought in court. So the only way for parties to agree to arbitrate one of an employee’s PAGA claims is to agree to arbitrate all of them. This scenario would result in parties being coerced into withholding PAGA claims from arbitration, a result the majority found is incompatible with the FAA.

Preceding this analysis is a lengthy discussion of the Court’s FAA jurisprudence, the finer points of PAGA, and the parties’ arguments. This portion of the majority opinion (Part II), which is arguably dicta, was joined by Justices Breyer, Sotomayor, Kagan, and Gorsuch. Here, Alito rejected both Moriana’s position that there can be no conflict between the FAA and PAGA because PAGA creates a right of action and Viking’s position that contracts waiving the right to bring PAGA claims must be enforced because PAGA actions are akin to class actions and the Court has already held parties cannot be coerced into class arbitration. PAGA neither established substantive rights nor authorized class action proceedings to enforce it; the statute merely gives employees a mechanism for enforcing California’s labor code. Alito also rejected Viking’s argument that California’s rule preventing parties from waiving their rights to bring PAGA claims is preempted by the FAA because (a) the Court has treated bilateral arbitration as the ideal form of arbitration protected by the FAA; (b) an arbitration can only be bilateral if it involves two parties and the arbitration is conducted only on behalf of the named parties; and (c) since PAGA actions are, in contrast, representative actions, a rule prohibiting parties from waiving PAGA actions forces them to either arbitrate in that format or not arbitrate at all.  Nothing in the FAA or the Court’s precedents mandates the enforcement of waivers of claims on behalf of absent principles. The same four Justices joined Part IV of Alito’s opinion, in which (having already determined that Viking could compel arbitration of Moriana’s individual claim) the Court dismissed Moriana’s non-individual claims. Alito reasoned that she lacked standing under PAGA to maintain them separately from her individual claim. Without her individual claim, Moriana, in litigating claims entirely based on violations with respect to other people, was essentially litigating as a member of the general public and PAGA does not allow such persons to bring actions thereunder.

Justice Sotomayor (who often dissents in FAA cases) joined Alito’s opinion in full and authored a separate concurrence praising its analysis. Say what? As Sotomayor explained, the majority opinion worthily detailed limitations on the FAA’s reach by clarifying that the statute does not mandate the enforcement of waivers of claims on behalf of absent principles, like shareholder derivative suits and trustee actions. Commenting on the Court’s dismissal of Moriana’s non-individual claims, Justice Sotomayor noted the issue of standing with respect to separately brought non-individual claims is ultimately in the hands of either the California courts or the California legislature.

Justice Barrett, joined by Justice Kavanaugh and Chief Justice Roberts as to all but a footnote, concurred in part and concurred in the judgment. As she explained, this crew declined to join Parts II and IV of the majority opinion because they were unnecessary to the result and much of the discussion in those sections“addresses disputed state-law questions as well as arguments not pressed or passed upon in this case.” Barrett and Kavanaugh believed that “[t]he same is true of Part I” and said so in a footnote. The Chief Justice apparently did not agree, as he declined to join just this footnote in Barrett’s concurrence.

Finally, in a one-paragraph dissent, Justice Thomas, citing two of his prior dissents, argued the FAA does not apply to proceedings in state courts in the first place. 

Onward to George v. McDonough, which addressed when a final Veterans Affairs Board decision denying benefits may be subject to collateral review based on “clear and unmistakable error.” Petitioner Kevin George enlisted in the Marines in 1975. At that time, he did not disclose a prior history of schizophrenic episodes and a medical examination revealed no mental disorders. Shortly after enlisting, however, he experienced a schizophrenic episode and was medically discharged. He applied for benefits, but the VA Board denied his application under a regulation that precluded benefits when a veteran suffered from an undisclosed preexisting condition. That regulation was later invalidated by the VA, however, which found that, under federal law benefits could not be withheld based on the existence of an undisclosed preexisting condition unless the VA also showed that the condition was not aggravated by military service. The Federal Circuit also separately concluded that the VA’s former rule was unlawful. In 2014, decades after his original benefits claim was denied, George petitioned the VA Board to revisit its decision. While benefits denials are generally final and conclusive upon the exhaustion of a direct appeal (which in this case occurred way back in 1977), George invoked a statutory exception to the finality rule where a VA’s decision is based on “clear and unmistakable error.” The Board denied his request, finding that its original reliance on a regulation that was later invalidated did not amount to clear and unmistakable error. The Federal Circuit agreed, and so did the Supreme Court.

Writing for a majority of 6, Justice Barrett concluded that the case turned on the meaning of the 1997 statute permitting collateral review on grounds of clear and unmistakable error. While neither that statute nor any other defines “clear and unmistakable,” Barrett concluded that the words “clear” and “unmistakable” themselves suggest a narrow category of errors. Moreover, a “robust regulatory backdrop” makes clear that a change in law or a change in interpretation of law does not amount to a clear and unmistakable error. Just because the VA came to a new interpretation of the law in 2003, that does not mean its interpretation of the law in 1977, when it denied George’s application, was clearly and unmistakably erroneous. The regulation under which the VA denied George’s claim clearly required that result. Therefore, the VA was correct to deny the application at the time its decision was rendered.

Justice Gorsuch dissented, joined by Justices Breyer and (mostly) Sotomayor. While Gorsuch might have agreed that the VA’s invalidation of its regulation in 2003 did not mean that its reliance on that regulation in 1977 was clearly and unmistakably erroneous, the fact that the Federal Circuit also held (in 2004) that the prior regulation was unlawful meant that it was always unlawful. And an unlawful agency regulation is in effect a nullity. Therefore, it follows that the VA always needed to show both that there was a preexisting condition and that it was not aggravated by service and for it to rely on an obviously incorrect regulation amounted to clear and unmistakable error. In other words, when the VA (and the Federal Circuit) changed the regulation that interpreted Section 1111, it did not “change the law,” it simply recognized what the law “always meant.” Since the law was not “changed”, the VA Board’s original erroneous interpretation was “clear and unmistakable error” despite resting on its (unlawful) regulation interpreting the statute. In a portion of the dissent joined only by Justice Breyer, Gorsuch went on to criticize the majority’s reliance on the “robust  regulatory backdrop” that supposedly gave meaning to the term “clear and unmistakable error.” In Gorsuch’s view, Congress did not intend to incorporate that history when it enacted the 1997 statute permitting collateral review. And since the text itself does not say that “changes in the law” or “changes in the interpretation of law” cannot support a “clear and unmistakable error,” the Court should not read those limitations into the statute. Sotomayor, for her part, agreed in her own solo dissent that the history of “clear and unmistakable error” attaches when Congress uses the phrase, but argued that the VA Board committed clear and unmistakable error when it relied on such a clearly unlawful interpretation of Section 1111. The cases holding a “change in law” cannot support a clear and unmistakable error dealt with interpretations that were at least plausible, even if ultimately changed. 

Finally, in Golan v. Saada (No. 20-1034), the Court unanimously increased the discretion of district judges determining whether a child must be returned to his or her country of habitual residence pursuant to the Hague Convention on the Civil Aspects of International Child Abduction, despite the risk of physical or psychological harm upon return. The Hague Convention requires a court, upon finding that a child has been wrongfully removed from his country of habitual residence, to order the child’s return. However, an exception is recognized where the court finds that return would put the child in grave risk of physical or psychological harm. In those cases, the court has the discretion to deny return. The Second Circuit (where a great many Hague Convention cases are heard) has long limited that discretion by requiring that courts independently “examine the full range of options that might make possible the safe return of a child” before denying return due to grave risk, even if the party seeking return has not identified ameliorative measures. Here, Petitioner Narkis Golan (a U.S. citizen) failed to return to Italy with her son, B.A.S. after bringing him to the United States for a family wedding, instead moving into a domestic-violence shelter to escape her abusive husband, Respondent Isacco Saada. Though Saada did not contest being abusive toward Golan (including in front of their son), he petitioned for the return of B.A.S. under the Hague Convention. After a nine-day evidentiary hearing, the District Court concluded that, while B.A.S. faced a grave risk of harm upon return (due principally to the psychological trauma of witnessing domestic violence), Saada had proposed sufficient ameliorative measures to ensure B.A.S.’s safe repatriation. The Second Circuit vacated this order, concluding that the District Court’s own fact findings showed that Saada could not be trusted to carry out the ameliorative measures he’d proposed. The Second Circuit directed the District Court on remand to “consider whether there exist alternative ameliorative measures that are either enforceable by the District Court or supported by other sufficient guarantees of performance.” On remand, the District Court conducted an extensive examination, over the course of nine months, of the measures available to ensure B.A.S.’s safe return, which included requiring the parties to secure various Italian court orders overseeing the parents and their custody arrangements. The District Court then once again concluded that these additional measures were sufficient to guarantee B.A.S.’s safe return, and ordered him repatriated. This time, the Second Circuit affirmed.

But all of that was for naught, as the Supreme Court held that the Second Circuit’s categorical requirement that the District Court exhaust potential ameliorative measures is inconsistent with the text and other express requirements of the Hague Convention. Writing for the Court, Justice Sotomayor found that “nothing in the Convention’s text either forbids or requires consideration of ameliorative measures in exercising” the discretion to grant or deny return when there is a grave risk of physical or psychological harm to the child. Saada argued (in line with the Second Circuit’s precedent) that the requirement is implicit in the Convention’s command that a court determine whether a grave risk of harm exists in the first place. To make that determination, he maintained, necessarily requires considering whether ameliorative measures would reduce or eliminate the risk. But Sotomayor concluded that the question whether there is a grave risk as an initial matter is separate from the question whether there are ameliorative measures that could mitigate the risk. She acknowledged that the questions “will overlap considerably” but concluded that there was no categorical requirement that the court consider all possible ameliorative measures before answering the first question. By requiring courts to exhaust all possible ameliorative measures before concluding that a grave risk of harm precludes repatriation, the Second Circuit had effectively rewritten the treaty, elevating return above the other objectives and requirements of the Convention, including in particular the safety of the child. Courts therefore have discretion to consider ameliorative measures, but are not required to exhaust every possibility independently before deciding that a grave risk of harm precludes repatriation. The Court therefore vacated the order of return and remanded for the District Court to exercise its full discretion in determining whether the risk of harm to B.A.S. precludes return to Italy.

And with that, we’re caught up for the week. We expect a bunch more decisions Tuesday. Until then, happy weekend!

Tadhg and Dave