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The Supreme Court’s Very Mixed Blessing, as appeared in The National Law Journal

Originally published in the Jan. 19 , 2011 issue of The National Law Journal.

Sometimes the U.S. Supreme Court defies even the most popular stereotypes. Its unanimous decision in Mayo Foundation v. U.S. should explode the myth that the Court's majority is resolutely pro-business. Here is a case that not only stands conventional wisdom on its head but, beyond the relatively simple mandate of the decision itself, describes what the Court really is about. Further, it provides a dire warning that entities concerned with vigorous administrative-agency regulation in the Obama administration, particularly in the areas of labor and employment and health care, and also communications, need to prepare to defend their policy interests aggressively.

An array of liberal media, legal and academic commentators frequently condemns the conservative majority of the Court for having a business bias. Parading out a list of decisions with which they disagree, these critics argue that, when a corporation is opposed by an individual, the little guy simply doesn't have a chance. This thesis proves demonstrably fragile when, for example, one considers the protections against retaliation repeatedly guaranteed to corporate whistleblowers by the Court.

A similar assertion - that the Court's majority has poisoned the otherwise antiseptic environment of federal elections by recognizing that corporate citizens enjoy the right of free speech - is also flimsy. Although Citizens United v. FEC is the left's greatest judicial bĂȘte noir since Bush v. Gore, the fact is that besides also protecting the expressive rights of labor unions and liberal interest groups that are incorporated, the Court's acknowledgment of a commercial corporation's right to advocate for candidates appears to have had little if any effect on the outcome of federal elections held since the decision.

Now comes the Court's unanimous decision in the Mayo Foundation case - in which corporations of all kinds, including the not-for-profits that are prevalent in the health care sector, have taken a considerable blow. On the face of it, though resolving an argument that has gone on for years, Mayo would not appear to be very complex or, in the larger sense of things, very significant. Mayo and its co-petitioner, the University of Minnesota, provide residency programs for graduate physicians who, besides continuing their formal education, also spend most of their time, as much as 50 to 80 hours a week, caring for patients. The issue presented was whether these doctors are students whose services are exempt from taxation under the Federal Insurance Contributions Act (FICA), i.e., Social Security, or whether they are employees whose stipends are taxable.

Mayo, along with virtually every other teaching hospital in the United States, continually argued that it was not required to withhold Social Security (and other) taxes based on a literal reading of FICA, which excluded from the definition of employment (and hence taxable income) "services performed in the employ of.a school, college or university" when the student is enrolled and regularly attending. From 1951 through 2004, the Treasury Department construed the student exemption as applicable to those who worked for their schools "as an incident to and for the purpose of pursuing a course of study." In 2004, however, Treasury issued regulations providing that when an employee works 40 or more hours a week, those services "are not incident to and for the purpose of pursuing a course of study."

Mayo challenged this apparent regulatory about-face and prevailed in the district court both on the basis of the statutory text and the employment factors set forth in a well-established precedent, National Muffler Dealers Assoc. v. U.S. However, a unanimous Supreme Court affirmed the judgment of the U.S. Court of Appeals for the 8th Circuit, which rejected the district court's view, and it did so, not on the basis of employment or tax law precedents but by deferring to the Treasury Department, under the tenets of the famous administrative law case of Chevron U.S.A. Inc. v. Natural Resources Defense Council. The immediate result of the decision is obvious: Teaching hospitals and others that employ residents (or that provide comparable services in nonmedical fields) for 40 hours or more per week are going to have to deduct FICA taxes from their residents' paychecks, and the residents will be subject to taxation. This is manageable and not catastrophic. An ancillary difficulty is that residents likely will be held to be employees for other purposes, e.g., the application of respondeat superior liability in litigation. Still, besides burdening a limited class of employers and demonstrating that the Supreme Court is not beholden to their preferences, is this something that should be a point of larger concern? It should, indeed. And that concern emanates from the way the Court applied Chevron.

Chevron was adopted by the Court in recognition of the fact that executive branch administration inherently requires agencies to fill in the gaps left by the complex programs created by Congress. Its interpretive regime has two parts. Under the first, the court asks whether Congress has "directly addressed the precise questions at issue." If it has, the matter is ended. If it hasn't, or the statutory language is ambiguous, as was the case in Mayo, the court will defer to the agency unless its rule is "arbitrary or capricious" or otherwise contrary to law.

In making the second-stage determination, Mayo argued that the Court should apply the multifactor analysis set forth in National Muffler. While not overruling the case and its less-deferential standard, the Court instead focused on the need for uniformity across the board of all agencies' regulations. And, though the Treasury regulation at issue was promulgated under the agency's general powers, the Court readily deferred to the department because it found the 40-hour work threshold reasonable and that the regulation provided a benefit, Social Security, to medical residents and their families.

The so-called liberal members of the Court (here, justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor; Justice Elena Kagan did not participate) might be expected routinely to read statutory language broadly and to defer more readily to the political branches. But here the government got all the votes. Chief Justice John Roberts Jr. even wrote the opinion. What should we make of this as to the conservatives?

In short, I suggest that, for the conservatives, this holding is consistent with other, unrelated decisions in which these justices recognize the cost and complexity of litigation and wish to discourage it when avoidable. This conclusion plays out in the relatively few cases in which the Court grants cert., leaving in place what national businesses, at least, believe is an unsatisfactory number of circuit splits; in its enforcement of arbitration clauses; and in cases like Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, in which strict pleading requirements have been imposed on plaintiffs. Rather than hostility to plaintiffs then, the range of recent decisions suggests a conservative hostility towards litigation itself and, to quote Arthur Miller (the playwright, not the professor), "attention must be paid."

The Obama administration is more dedicated to mass regulation than any in recent memory and will continue to be that way especially in view of the fact that the Democrats have lost their legislative majority in the House and have had it substantially narrowed in the Senate. In particular, the president has assembled a National Labor Relations Board that is dedicated to a broad pro-union agenda. The Department of Health and Human Services and its Centers for Medicare and Medicaid Services will be required to promulgate hundreds of regulations to effect the Obama health insurance reform package that, even if limited by future congresses, will still go forward in most regards. The activist chairman of the Federal Communications Commission would like to lead his agency toward enhanced regulation of the Internet. And many other agencies are poised to advance this regulatory activism. The lesson learned from Mayo: Corporations are not really citizens favored by the conservative majority of the Supreme Court, and they will be better served to rely more upon the efforts that they undertake at the political and agency levels in challenging regulations than to count on judicial vindication at the Court.

Stuart M. Gerson, who practices in the Washington and New York offices of Epstein Becker & Green, is a former assistant and acting attorney general of the United States.