Arent Fox Files Cert Petition with US Supreme Court on Limits of Federal ‘Equitable Power’ and Role of State Courts

Arent Fox asked the Court to review the use of “equitable power” to enter a multi-million dollar disgorgement order against a defendant who prevailed in a jury trial and to announce a rule that when faced with a novel and outcome-determinative issue of state law, federal courts sitting in diversity should be required to certify a question of law to the highest state court, rather than guessing at how a state court might decide.

Complex Litigation Partner James H. Hulme and Associate Nadia A. Patel filed the petition asking the Supreme Court to review the First Circuit’s ruling in a shareholder class action stemming from the 2011 merger of PHC, Inc. and Acadia Healthcare Company, Inc. A link to the petition can be found here.

In 2017, Arent Fox prevailed before a Massachusetts federal jury, which found in favor of Bruce Shear, the former CEO of PHC, in a class action brought by a hedge fund and former shareholder of the company. In his defense, Mr. Shear argued the merger was approved by 91% of the voting shareholders and was an enormous success. In its verdict, the jury found that the 2011 merger did not cause the shareholders any economic injury. But a Massachusetts federal judge decided after the trial to award investors $3 million from the former CEO based on the CEO’s status as a “controlling shareholder.”

“In this case, our client prevailed before the jury, and the court entered judgment in his favor. The court then affirmed that judgment, but entered the disgorgement order, an order that was based on evidence rejected by the jury,” said Mr. Hulme.  The petition argues that the disgorgement order far exceeds the scope of the court’s equitable powers as established by Supreme Court precedent and undermines a defendant’s Seventh Amendment right to have facts decided by a jury, rather than a judge.

The petition also provides an ideal opportunity for the Supreme Court to consider the role of state courts in our federal judicial system, and the circumstances under which due deference to state courts is essential to preserving the principles of federalism.

In the midst of the trial, the Supreme Judicial Court of Massachusetts issued a groundbreaking decision distinguishing Massachusetts corporate law from established corporate law in Delaware. Nevertheless, as Mr. Hulme explained, “the court used Delaware law to justify the disgorgement order against our client. Rather than making a guess as to how a Massachusetts court would apply the new standard, the court should have certified the novel, unprecedented, and unsettled question to the Supreme Judicial Court.”  Circuit courts are split on the appropriate standard for determining when to seek a state court’s input on decisive state law.