July 29, 2021 - This Week at the Ninth

This Week at the Ninth: Beef Speech and Presumptive Plaintiffs

This week, the Court addresses the constitutionality of government assessments that fund third-party beef advertisements, and clarifies the burden-shifting framework for appointing lead plaintiffs under the Private Securities Litigation Reform Act.

RANCHERS CATTLEMEN ACTION LEGAL FUND UNITED STOCKGROWERS OF AMERICA v. VILSACK
The Court holds that mandatory assessments on cattle sales imposed by the Beef Promotion and Research Act of 1985 (“Beef Act”), which are used to fund advertisements by third parties for beef products, are exempt from First Amendment scrutiny as government speech.

The Panel: Judges Wardlaw, Tallman, and Hurwitz, with Judge Hurwitz writing the opinion.

Key Highlight: “Just as the Secretary of Agriculture does not write the copy of the beef advertisements himself for the Beef Board, neither should such oversight be required for the scheme to pass constitutional muster.”

Background: The Beef Act imposes a $1 assessment on each head of cattle sold in the United States to fund consumption promotions to maintain and expand domestic and foreign markets and uses for beef and beef products. Qualified state beef counsels receive a portion of the assessments. Some of them direct a portion of the funds to private third parties to produce promotional materials, sometimes without obtaining pre-approval from the Secretary of Agriculture.

The plaintiff (“R-CALF”) challenged the assessment as an unconstitutional compelled subsidy of private speech. The district court held that R-CALF had associational standing to sue. But it concluded that given the memoranda of understanding between the Secretary of Agriculture and the qualified state beef counsels, the Secretary had sufficient control over the promotional program to render the counsels’ speech, and that of third parties they paid, government speech.  

Result: The Ninth Circuit affirmed. First, the Ninth Circuit held that R-CALF had associational standing to sue the qualified state beef counsels in the case, including the ones in states where none of its members paid assessments, because the qualified state beef counsels’ use of the funds frustrates R-CALF’s organizational mission by allegedly promoting corporate consolidation in the beef industry.

Next, the Court held that the third-party speech paid for by the qualified state beef counsels was government speech. Qualified state beef counsels are required to submit any and all promotion, advertising, research, and consumer information plans and projects, along with all potential contracts or agreements for the implementation and conduct of plans or projects, to the Secretary of Agriculture for approval if funded by the assessments. Thus, the Court concluded, even the third-party speech not subject to pre-approval is still effectively controlled by the government. The Beef Act’s implementing regulations establish the message for the marketing, and the qualified state beef counsels are required to submit annual budget and marketing proposals for the Secretary’s approval that contain a general description of the proposed promotion programs contemplated. For that reason, the Court explained, even if the government does not exercise final pre-approval authority over some third-party speech, it has the ability to do so.

Finally, the Court rejected the argument that the district court should have entered a permanent injunction requiring the continuation of the memoranda of understanding to prevent the risk that the current policy will be undone. The government had shown that its voluntary cessation mooted the issue because the memoranda of understanding remain binding unless both parties agree to rescind them, providing a safeguard from arbitrary reversal.

IN RE MERSHO
The Court holds that where a plaintiff group has satisfied its burden of making a prima facie showing that it is the presumptive lead plaintiff under the Private Securities Litigation Reform Act (PSLRA), a district court’s “misgivings” about the group’s cohesion cannot alone rebut that presumption.

Panel: Judges M. Smith, VanDyke, and Gordon (D. Nev.), with Judge Gordon writing the opinion.

Key Highlight: “For the presumption to have meaning at step three, competing movants must point to evidence of inadequacy. Competing movants must convince the district court that the presumptive lead plaintiff would not be adequate, not merely that the district court was wrong in determining that the prima facie elements of adequacy were met. That is the purpose of the presumption and burden-shifting.”

Background: A number of different plaintiffs filed putative class action securities fraud suits against Nikola Corporation, all of which were consolidated in federal district court in Arizona. Numerous plaintiffs moved to be named lead plaintiff. One set of three plaintiffs, calling themselves “Nikola Investor Group II,” moved as a group.

Applying the criteria set forth by the PSLRA, the district court concluded that, with the largest financial interest, and having made a prima facie showing of adequacy and typicality, this Nikola Investor Group II was the presumptive lead plaintiff. But, the district court continued, other movants had successfully rebutted that showing by demonstrating that this group would not adequately represent the class. The district court stated that courts “uniformly” refuse to appoint groups of plaintiffs who appear to have no related interests and are brought together by counsel. Deeming that to be the case here, the court instead appointed another plaintiff as lead. Nikola Investor Group II petitioned the Ninth Circuit for a writ of mandamus.

Result: The Ninth Circuit granted the writ in part. As the Court explained, the most important factor for determining whether mandamus is warranted is the existence of “clear error.” Here, the Court held, the district court had clearly erred by failing to “give effect to the presumption” established by the PSLRA. As the Court reasoned, the district court had emphasized that it had “misgivings” about how the members of the group “would work together because Petitioners had failed to explain how they found each other.” In doing so, the district court had erroneously “continued to place the burden on them to prove adequacy.” “For the presumption to have meaning,” the Court continued, “competing movants must point to evidence of inadequacy”; a district court’s “misgivings” about the presumptive lead plaintiffs’ prima facie showing cannot rebut that presumption. While the Ninth Circuit acknowledged that district courts could “consider[] the lack of a pre-litigation relationship as part of their adequacy analysis” in determining whether a movant had made a prima facie showing, courts’ “analysis must hew” to the burden-shifting framework “prescribed by the statute.”

The Court also concluded that many of the remaining factors governing mandamus relief were satisfied. It emphasized that the Nikola Investor Group had no other mechanism to challenge the district court’s decision in a way that would prevent the harm of being denied the right to oversee the litigation, and that the issue was “new and important” given the absence of Ninth Circuit precedent “guiding district courts on how to consider group cohesion.” But the Ninth Circuit did not order the district court to appoint the group as lead plaintiff. Instead, it vacated the district court’s order and remanded for it to conduct the analysis under the proper standard.