Courthouse Steps Decision Teleforum: San Antonio, TX v. Hotels.com

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

Guy DeSanctis:  Welcome to The Federalist Society’s webinar call. This afternoon, June 2nd, we discuss the Courthouse Steps Decision: The City of San Antonio Texas v. Hotels.com. My name is Guy DeSanctis, and I am Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the expert on today’s call.

Today, we are fortunate to have with us Charles Campbell, Dean for Academic Affairs and Associate Professor of Law, Faulkner University, Jones School of Law. Throughout the panel, if you have any questions, please submit them through the question-and-answer feature or the chat so that our speaker will have access to them for when we get to that portion of the webinar. With that, thank you for being with us today. Charles, the floor is yours.

Charles Campbell:  Well, thanks very much, and good afternoon, everyone. If you recall back in April, we did the argument review on City of San Antonia v. Hotels.com. I think I said at the time that I expected a decision by June. The Court beat that timeline a little bit.

We actually had the decision in just over a month on May 27th, so Thursday of last week. And it was a unanimous decision. We’ve had a lot of—or, at least, a fair number—of unanimous decisions this term from the Court. It’ll be interesting to see how many more of those we have as we go deeper into June.

But if you will recall, the City of San Antonio litigation was a long running piece of litigation as a class of Texas municipalities, 173 Texas municipalities, who were challenging several major online travel companies, what the Court refers to as OTCs: Hotels.com, Expedia, Orbitz, that kind of thing.

And the claim in the litigation was that these online travel companies were not withholding enough municipal occupational taxes because they were computing the occupational tax based on the wholesale rate that they were paying to the hotels, rather than the retail rate that the person staying in those hotels were actually paying.

And so the City has claimed that this was a substantial underpayment and brough suit as a class action in federal court. Now, Houston was pursuing parallel litigation in state court, and in the Houston case, over in state court, it went to an intermediate court of appeals, and the Texas State Court of Appeals held that the online travel companies had not been improperly withholding too low an amount of municipal taxes.

While that was proceeding, however, and before they got that appellate decision, the class action litigation was proceeding in federal court with the City of San Antonio as the class representative. And in that litigation, in federal court, municipalities initially won a judgment of approximately $55 million, and it took quite a while for some post-trial proceedings to get finished up. But in order to stay payment of that judgment, to stay execution on that judgment, the defendants, the OTCs, applied for a supersedeas bond under Rule 62 of the Federal Rules of Civil Procedure.

They negotiated that with the city, and they ran up about $2.2–almost–million in premiums for those supersedeas bonds. Initially, it was for $68 million to account of the estimated size of the judgment after a year and a half allowed for appeal, but post-trial, proceedings dragged out for a couple of years. And so it had to be raised at one point, and so eventually, they were insuring an $84 million judgment.

Well, when it went to the Fifth Circuit Court of Appeals, the Fifth Circuit deferred to the interpretation of the Texas Court of Appeals, vacated the district court’s judgment and rendered judgment for the OTCs—the online travel companies. At that point, then, the online travel companies requested their appellate costs under Rule 39 in the Fifth Circuit. The Fifth Circuit granted that motion. There had been no objection to it from the municipalities.

And then as Rule 39 allows, back in the district court, the online travel companies sought as part of their costs, the cost of their supersedeas bonds, which amounted to nearly $2.2 million. At that point, the cities did, rather vehemently, object to that, and they asked that the district court lower the amount or either change the allocation or not make the City of San Antonio responsible for the whole amount of the cost reimbursement.

The district court found that there were some pretty persuasive arguments that had been made, but that Fifth Circuit precedent held that a district court had no discretion to reexamine the amount costs or the allocation of costs once the Court of Appeals had entered its cost order, which in this case it allocated 100 percent of costs to the OTCs because they had succeeded in having the judgment vacated, which they interpreted as essentially being the same as a reversal in this case.

And so the district court entered a cost award for $2.2 million. The municipalities appealed. Fifth Circuit adhered to its circuit precedent, said that the district court lacked the discretion to change the cost allocation. And so the City of San Antonio took the case to the Supreme Court.

Their argument, distilled down, was essentially very heavily relied on the text of Rule 39(e), which said that there are costs that are taxable in the district court, and they read into taxable discretion, and that was discretion that the Fifth Circuit was not allowing its district courts to exercise.

And they made a very good argument for that, but the Supreme Court rejected that argument 9-0, and so a pretty vigorous rejection of that argument and a holding that Rule 39 “Does not permit a district court to alter a court of appeals allocation of the costs listed in subdivision (e) of that rule.” It’s a very short opinion by Justice Alito.

Again, for a unanimous Court, no concurrences or anything of that nature. And we’ll talk about a little bit of that towards the end, how the unanimous opinion incorporates some of the various concerns that various members of the Court raised through the course of oral argument.

But the Court’s analysis proceeds basically in two steps, parts 2(a) and 2(b), of the opinion. I’m working off of the slip opinion from the court. Part 2(a) is pages five through nine of the slip opinion. Part 2(b) is pages 9 through 13. So neither of them are terribly long. But the court read Rule 39 as establishing what it called “cohesive scheme for taxing appellate courts.”

As noted, it sets out default rules that are geared to five potential outcomes of an appeal: dismissal, affirmance, reversal, affirmance in part, and reversal in part, and vacatur. And each of the default rules tracks the quote “venerable presumption that prevailing parties are entitled to costs.”

The Court then noted, however, that prefatory language in Section 39(a) leads into those default rules by saying “unless the court otherwise orders.” And so the Court read that as giving discretion to the courts of appeals as to whether to go with the default rules or to alter them as they saw fit, and they centered that discretion in the Court of Appeals, thus implying that there was not going to be a second level of discretion, backed in the district court, when it was taxing costs under 39(e).

And the Court basically cited as its reasons for that, if—for example—they gave a couple of examples—if a court award is 75 percent of appellate costs to a party that won 75 percent of its appeal, to allow a second range of discretion, could alter that division of the costs on appeal by allowing the district courts further discretion, and that would upset what the Court of Appeals had intended in its award.

And so the Court says, read probably, “Rule 39 gives discretion over the allocation of appellate costs to the courts of appeals, and then with that settled, it’s easy to see why district courts cannot exercise a second layer of discretion.” And forgive me, I said 75 percent. The example they used was 70 percent, and they said, “If the Court of Appeals affirms and awarded the prevailing appellee 70 percent of its costs, if the district court in an exercise of its own discretion later reduced those costs by half, the appellee would receive only 35 percent of its costs in direct violation of the Court of Appeals’ directions.”

The Court then turned to what was the heart of the City’s argument from the text of Rule 39, and that was in 39(e) where it said that these four categories of cost were “taxable” in the district court, and very much as the parties had laid out at oral argument, they rehearsed the City’s argument that “taxable” is permissive language. That means it implies discretion, and the online travel companies at oral argument had argued, no, that what was really being done by “taxable” was it was saying where the taxation was to occur, not that it was supposed to imply discretion.

The Court, relying on the 1990s restyling of the Rules of Appellate Procedure, went back to the old form of Rule 39, which said that costs shall be taxed in the district court, read “taxable” as basically saying where to tax, not to imply discretion in the taxing of those costs.

Page nine of the slip opinion, the Court held that “The real work done by the phrase ‘taxable in the district court’ is the specification of the court in which those costs are to be taxed, that is in the district court.” They found that that made good sense since those costs had been incurred in the district court, and the Court therefore held that the Courts of Appeals held the discretion on apportioning costs and that that was something that the district court did not have discretion to alter under Rule 39(e).

The rest of the Court’s opinion was devoted to responding to some of the City of San Antonio’s practical concerns that a ruling against them might entail, and the first of those was that district courts have broad discretion on awarding costs under Rule 54(d). It would be confusing to withhold discretion in awarding costs under 39(e).

The Court essentially said that’s not that complicated, and it gives the Court of Appeals the discretion that it needs for appellate costs, and 54 gives the district court the discretion it needs for district court costs, but they saw no problems from a being-overly-complicated standpoint.

Second, the City had argued that the Court of Appeals might not be well-positioned to actually assess cost allocations, and the Court basically, well, said outright “these concerns are overblown” in part because supersedeas bonds rarely breach the size and importance that they had in this litigation, and they also noted that the City had not cited any cases where there had been significant difficulties in a court of appeal allocating costs under Rule 39.

The Court finally said, on that point, that if it was difficult, then the Court of Appeals certainly had the option to delegate the task to the district court and noted that many courts of appeals had done so on a case-by-case basis in the past.

The third argument that the City made as to the practical problems in withholding discretion from the district courts was that there was no reason for Rule 39(e) to be taxed in district court as opposed to the Court of Appeals if the district court was simply to enter a ministerial order involving no discretion.

The Court responded that the costs had been incurred, in all of these categories, in the district court, so the district court would be more familiar with them, and also relying on Sections 1920 and 1924 of Title 28, noted that its role was not purely ministerial. Section 1924 requires the district court to find that cost to be taxed are both correct and necessary, and the court said that’s not merely a ministerial function.

And so the Court said that it was logical for this to be done at the district court, but it did not involve a broader discretion as the city was seeking to reapportion the costs, based on various equitable considerations.

The last argument—and probably, one of the ones that got the most discussion at oral argument—was the concern from the City that parties would not be able to get review of the allocation of costs under Rule 39e. The Court interestingly agreed that Rule 39 and the applicable costs statutes could specify more clearly what procedure to follow in order to have objections presented or to have the allocation of costs reviewed. But they basically responded that they would allow a court to use any manner, any procedural vehicle to raise their objections to the allocation of costs that was consistent with the federal and local rules.

And the local rules of the various courts of appeals had come up right at the beginning of oral argument with the Chief Justice’s questioning as to why we don’t just leave this to local rules, and they suggested that there were a variety of ways that any objections to cost could be raised. One that the Court suggested in the opinion was Rule 27, which allows a party to make a motion for an order, and they said you just file a motion for an order under Rule 27. That’s one way.

They also noted that the online travel companies had cited several instances where parties had done it a variety of ways. They had objected to costs in their merits briefing, in their objections to the bill of costs in the Court of Appeals under Rule 39(d)(2) and in a petition for rehearing, and basically, the Court said, “We’re not going to foreclose any of these. Anything that’s consistent with the relevant federal and local rules will be fine, and we don’t think, in short, that interpreting Rule 39 as not giving district courts the discretion to revisit the allocation of costs—we don’t think that is going to have nearly the practical problems that the City has predicted in its briefing.

A couple of points about the opinion and the way that it wove a lot of the oral argument questions into the text of the opinion. The references to Section 1924 and the district court being required to find that costs were both correct and necessary was going back to questioning from Justice Kagan at oral argument, and the suggestion that although -- and the Court’s interpreting it here as not giving discretion to reallocate the costs, but there was a non-ministerial function that was to be done in the district court in determining that those costs were both correct and necessarily incurred. And so it’s not discretion, but it’s not also simply rubber stamping whatever the party puts forward under Rule 39(e) as costs that it’s seeking to tax.

Another point, especially, at the end, on how to raise the objections to costs, that was something that Justice Sotomayor pressed the counsel on at oral argument and expressed some concern about, and I think the Court’s detailed response, that basically any way that is consistent with the federal and local rules will be fine, basically addressed that concern.

There were comments, a fair number of comments, at oral argument that the City really wasn’t very surprised since they had participated in negotiations over these supersedeas bonds. They knew the size of the verdict. They had some idea of what the premiums were going to cost. And so this should not have come as a surprise.

And then the last point I wanted to make about the opinion is something that we talked about after oral argument. The United States have raised an issue in a footnote in its brief as amicus, that Section 1920 in Title 28 doesn’t mention taxing costs for supersedeas bonds, and they noted that there was some question over whether those supersedeas bonds were properly taxable as costs when they’re mentioned in 39(e)(3) but not mentioned in Section 1920.

The Court in Crawford Fitting v. J.T. Gibbons, a 1987 case, had read Rule 54 as not giving district courts any discretion to add to the categories of costs listed in section 1920. But then the United States said, “But the City has not raised any argument over that, so there’s no need for the Court to decide it.”

Justice Thomas, as we discussed after oral argument, asked about that at oral argument, and that finds its way into footnote four in the Court’s opinion. And they essentially just note that the United States had mentioned it, but it was not raised, and so they did not address it.

But it again flagged the issue, I think, for potential for future litigation. And I think that was another way incorporating Justice Thomas’s concern “Maybe, we need to look at this. Maybe not.” He did not indicate that the board needed to look at it, certainly. And the Court doesn’t indicate that they need to look at it here.

They simply say that, essentially, the United States mentioned this, but it’s not raised, and so we’re not going to address it in this opinion. But I think it does raise the profile of that issue and potentially is going to lead parties to raise the possibility of a conflict between 28 U.S.C. § 1920 and Federal Rule of Appellate Procedure 39(e)(3).

That’s all I had prepared to as introduction to the opinion, and so now I would be happy to answer any questions. I will look. I don’t see any open questions, so please feel free to raise your hand or type in your questions, and I will be glad to address them, whether I have a good answer or not.

Guy DeSanctis:  One to start it off, from me, in regard to footnote four, where do you think that’s headed?

Charles Campbell:  Well, I think parties are going to start objecting to taxing the cost of supersedeas bonds in the district court under 39(e)(3). And it’s going to be in -- it’ll be a case where it says substantial amount for those premiums to be taxed.

For a party that is facing a tax -- having those costs taxed in the district court, there is very little downside to raising an objection to taxing those supersedeas bond premiums, and I think the argument is going to line up basically, is Rule 39 limited to the categories of cost in Section 1920, like Federal Rule of Civil Procedure 54 is, or is Rule 39, appellate Rule 39, as a later enacted or adopted rule, is the later in time controlling?

To my knowledge, there’s really only one appellate court decision that I’ve seen, and there may be others that I’ve just missed. But the Seventh Circuit addressed the issue in Republic Tobacco Company v. North Atlantic Trading Company Incorporated in 2007—and the citation on that is 481 F.3d 442—and the Seventh Circuit said basically the later-in-time controls, Rule 39, was promulgated and adopted after Section 1920 and therefore Rule 39(e)(3) controls as the cost of supersedeas bond premiums are taxable.

Now, I think the argument on the other side that someone may develop is that is correct if taxing costs in this way is viewed as being procedural with no effect on substantive rights. Somebody may try and develop an argument that the taxation of cost, which allows a recovery, essentially, it is allowing a party to recover money from its opponent, and therefore has some substantive component, and therefore is beyond rulemaking authority.

Now, I don’t know how that’s going to go, but I do suspect that’s where some parties will head with the argument is to the substantive rights proviso in Title 28, Section 27(2)(b). And that’ll be an interesting question, and I can’t predict where they’re going to head with that.

All right. I have a question here: how did the case get into federal court in the first place? And if I recall correctly, I think it was diversity, but I’m not entirely certain of that, but I believe it was diversity jurisdiction.

Guy DeSanctis:  I think there is one question in the chat as well.

Charles Campbell:  Yes. Do you see an impact on future litigation, any impact on class action practice? Well, as I mentioned, I think, certainly, someone is going to raise this. When they’re facing a cost bill for supersedeas bond premiums—and they know that that’s coming—I think they’re going to challenge it.

And the opinion here basically lays out you need to raise that challenge in the Court of Appeals, and so I expect that they will do that, and if the Court of Appeals, where their appeal is pending, has a local rule on it, then they will follow the local rule. If not, any of these options should be sufficient—that are laid out on page 13 in the slip opinion. And so I think that is going to get litigated.

The other thing I think is likely to happen, in class action practice, is I think class reps are going to have -- at least, where they perceive that this issue may be coming up. I would expect there to be some sort of arrangement in writing over the apportionment of costs amongst the class members if there’s a significant risk that the class members might have to pay the costs of a supersedeas bond premiums. Now, that depends a good bit on them foreseeing that it’s going to come.

I also think it is going to potentially make parties, who win the judgment in the district court, perhaps be somewhat more flexible as to whether they’re going to require a supersedeas bond, especially, where they have pretty good assurance from the financials of whoever the defendant is, that they will be able to cover the full judgment without much difficulty. I think that some plaintiffs might be more minimal to taking reassurances from the defendant that they financially have the wherewithal without retaining a bond to pay the costs.

In this very small category of cases, where you have a very large monetary judgment, that then gets reversed, the supersedeas bond premiums become a significant bargaining chip, a chip, and significant leverage that the plaintiff has. The problem with it is that it can backfire if it gets reversed on appeal.

And so I think that’s going to cause a lot of attorneys to be a little more cautious in being so aggressive in insisting on a supersedeas bond with essentially -- well, as a given, but only with defendants where they think they actually have the financial wherewithal to meet the judgment.

Guy DeSanctis:  Thank you for that, and thank you for those questions. At the moment, it doesn’t appear we have anymore questions. Are there any closing remarks you’d like to make?

Charles Campbell:  No. Well, I’ll make a brief close. I think Ed Whelan posted last week that this – tongue-in-cheek: the opinion everyone’s been waiting on, with bated breath, is now out. And this was not by any means the biggest case that the Court had taken.

I was a little bit surprised about the way it came out, and I think it does lay some ground rules and raises a potential Rules Enabling Act question for future litigation. And so I think it’s one of those, potentially, sleeper cases that might have more impact down the road than is initially perceived.

Guy DeSanctis:  Thank you for that. On behalf of The Federalist Society, I want to thank our expert Charles Campbell for the benefit of his valuable time and expertise today. And I want to thank our audience for calling in and participating. We welcome listener feedback by email at [email protected]. As always, keep an eye on our website and your emails for announcements about upcoming teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.