Alison Frankel

In March, when the U.S. Supreme Court ruled unanimously that Prometheus Laboratories was not entitled to a patent on a diagnostic process because it’s a law of nature, On the Case (and many others) predicted the justices would subsequently call for reconsideration of Myriad Genetics’ patents on breast cancer genes, since genes are, of course, also natural phenomena. Within a week we were all proven right. But the second case the Supreme Court has remanded to the Federal Circuit Court of Appeals in light of the Mayo ruling – which involves a patent on viewing copyrighted content on the Internet – suggests the justices want greater scrutiny of a wide array of patents, not just biotech IP.

Mayo addressed Section 101 of the Patent Act, which holds that “laws of nature, natural phenomena, and abstract ideas” are not patentable. That seems simple, but in interpretation it’s not. If patent seekers can show their invention involves a unique application of an abstract idea or law of nature, they’re entitled to a patent, so analysis of Section 101 patentability has focused on what constitutes an application. In Mayo, the justices unanimously agreed that a diagnostic test based on how patients respond to autoimmune drugs is not a patentable process under Section 101. But the cases the Supreme Court cited to reach that conclusion involved patents far removed from the human body: a process for molding rubber and a process for monitoring the catalytic conversion of hydrocarbons. Both processes relied on math and science formulas, which aren’t patentable. The rubber molding system, however, transformed a non-patentable law of nature into a patentable process, while the alarm system for catalytic converters did not.

That reasoning leaves plenty of room for cases that have nothing to do with diagnostic procedures to be re-evaluated under Section 101. “The basic analysis the Supreme Court lays out isn’t limited by subject matter,” said Gregory Garre of Latham & Watkins, who represents an online game company called WildTangent in the case the Supreme Court remanded to the Federal Circuit on Monday. WildTangent was one of three defendants sued by a company called Ultramercial, which holds a patent on a process for distributing copyrighted material on the Internet. Hulu and YouTube settled out of the patent infringement litigation in federal court in Los Angeles. But WildTangent continued, through both U.S. District Judge Gary Klausner‘s finding that Ultramercial’s patent was impermissibly abstract and the Federal Circuit’s restoration of the case last September. A three-judge appellate panel headed by Chief Judge Randall Rader held that Ultramercial’s patent – which calls for online viewers to watch an ad before being permitted access to copyrighted content – was not excluded by Section 101 because it described “the application of an abstract idea to a ‘new and useful end,’” which the Federal Circuit said was “the type of invention that the Supreme Court has described as deserving of patent protection.”

The Federal Circuit’s Ultramercial ruling got a lot of attention because it seemed to undermine Section 101′s power to screen patents, so long as patent applicants said their processes applied on the Internet. Coming after the Supreme Court’s refusal to set a hard line for business-method patents in its 2010 ruling in Bilski v. Kappos, Ultramercial was regarded as a boon for tech patent applicants.

WildTangent and its lawyers at Latham requested en banc review and then, after the Federal Circuit declined, asked the Supreme Court to decide whether Ultramercial’s patent was barred by Section 101. The company’s petition for certiorari was filed before the Supreme Court decided the Mayo case, but Latham asked the justices to hold the petition until they issued that ruling. In a supplemental brief after the Mayo decision came down, WildTangent argued that the Supreme Court ruling underscored Section 101′s purpose as a patent screen – and asserted that Ultramercial’s patent fails to get through that screen.

Ultramercial’s lawyers at McKool Smith Hennigan countered in an opposition brief that Mayo “did not concern patent-eligible subject matter in the context of computer-related inventions and did not address the issue of potentially abstract subject matter.” Bilski was the more appropriate standard, according to Ultramercial, and the Federal Circuit had already considered Bilski in finding Ultramercial’s process to be patent eligible.

The Supreme Court order remanding the case for reconsideration vacates the previous Federal Circuit decision, so the justices clearly disagreed with Ultramercial’s assertion that Mayo doesn’t apply. WildTangent counsel Garre said Ultramercial’s “very generalized” patent should be deemed too abstract to get past Section 101′s screen. Ultramercial counsel Lawrence Hadley said it’s a mistake to read much into the high court’s remand order since the justices are just asking for reconsideration in light of Mayo. “It’s not all that surprising,” he told me. “It’s the same thing the Supreme Court did [when it decided] Bilski.”

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Corporations, as Mitt Romney famously reminded us this summer in Iowa, are people under the laws of the United States. Just take a look at the U.S. Supreme Court‘s 2010 ruling in Citizens United v. Federal Election Commission. The five justices in the majority (you know who they are) held that corporations are entitled to the same First Amendment right to free speech as regular old people, so Congress’ attempt to ban corporate electioneering was unconstitutional.

When are corporations not people in the eyes of the Supreme Court? When they’re accused of torturing or killing real live human beings. Last week, in Mohamad v. Palestinian Authority, all nine justices agreed that when Congress enacted the Torture Victim Protection Act in 1991, it restricted causes of action to those against “an individual” — and individuals aren’t organizations or corporations. The court looked at the dictionary definition of the word individual, as well as the legislative history of the anti-torture law, to conclude that Congress intended the law to apply only to “natural persons.” The opinion said it’s notable that lawmakers used the word “individual” instead of “person” in defining potential torture defendants because “‘person,’ as we have recognized, often has a broader meaning in the law than ‘individual.’”

Right. Corporate “persons” have First Amendment rights to unlimited Super PAC spending but corporate “individuals” don’t exist. I’m sure the relatives of Azzam Rahim, the naturalized U.S. citizen who was kidnapped, tortured, and killed by the Palestinian Authority in the case that gave rise to the Supreme Court’s ruling, were compelled by the high court’s parsing of the distinction between a “person” and an “individual.”

So, no doubt, were the Nigerians, whose Torture Victims Protection Act case was turned down Monday by the justices. They alleged that Chevron conspired with the Nigerian government to use deadly force in stamping out a protest against offshore drilling. As is customary, the Supreme Court did not explain its decision not to grant certiorari in Bowoto v. Chevron, but we can safely assume that it’s because the justices already answered the question of whether the Nigerians can assert the TVPA against Chevron in last week’s Mohamad ruling. That leaves the 9th Circuit Court of Appeal’s 2010 opinion in Bowoto, in which the appeals court also said the torture act doesn’t apply to corporations, as the last word in the Nigerians’ case.

Human rights advocates had frequently used the Torture Victim Protection Act in tandem with the Alien Tort Statute to pursue claims against corporations that allegedly engaged in overseas torture and killing, with U.S. citizens suing under the TVPA and foreign nationals relying on the ATS. Now, with the TVPA severely restricted and the Alien Tort Statute on the brink of impotence, thanks to the restrictions on extraterritorial reach that the Supreme Court imposed in Morrison v. National Australia Bank, the justices have gutted human rights litigation in U.S. courts.

Whether you’re a “person” or an “individual,” you’ve got to be concerned about that.

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There’s no question what Congress intended when it passed a pair of laws requiring producers of sexually-explicit materials to keep records on the age of the people engaged in sex acts (or simulated sex acts): curb child pornography. Lawmakers had already banned commercial child porn, but producers hired actors who were of age but looked young, making it tough to enforce the ban. In frustration, Congress passed a 1988 law that imposed specific record-keeping demands on porn producers, who must verify that performers are of age, maintain records to back the verification, and provide the location of those records in labels affixed to the sexually-explicit products. The law said that producers must maintain age records at their “business premises,” and must make the records available for government inspection, or else face a stiff fine and a prison sentence. A 2006 amendment to the law set the same record-keeping, labeling, and inspection requirements when sex is only simulated (albeit with a carve-out demanded by non-porn movie studios).

Because much child porn trafficking takes place underground, via private channels, the Justice Department said it would enforce the laws broadly, targeting not just porn-movie makers, but non-commercial producers of sexually-explicit material as well. The government did promise, however, that it would only prosecute those who intended to sell or trade the material.

The porn industry, as is its wont, brought constitutional challenges to the record-keeping laws, claiming that they violated the First, Fourth, and Fifth Amendments (specifically, free speech, equal protection, self-incrimination, and search and seizure provisions). In 2009, the 6th Circuit Court of Appeals sided with the Justice Department on the First Amendment question, in an 11-to-6 en banc ruling that held the record-keeping laws don’t unconstitutionally target porn producers and have only a collateral effect on free speech that’s justified by the government’s interest in protecting children from exploitation.

But what about the free-speech rights of grownups who like to videotape or photograph themselves having sex for their own private purposes? Or art teachers with nude models? Or even sex ed teachers? When the porn-industry trade association’s suit came to the 3rd Circuit last year, the American Civil Liberties Union of Pennsylvania entered the case, not to stand up for porn producers, said ACLU counsel Fred Magaziner of Dechert, but “to protect people outside the adult entertainment industry … whose conduct is impacted by the laws.”

Those record-keeping requirements, Magaziner said, are no small thing. Must a married couple that makes a sex tape post IDs at their “business premises”? Must they make their records available to government inspectors? And can the government use the criminal record-keeping laws to punish people targeted for other crimes? As the ACLU’s eloquent 34-page brief explained, “history shows that government agents have been known to use laws that are rarely otherwise enforced to punish people who are being investigated for unrelated crimes.” That’s a pretty scary thought: Police raid your house, find no evidence to back the crime they initially alleged, but you spend a year in prison for a homemade sex tape that didn’t include a label noting where you keep your driver’s license? Sure, the Justice Department may have promised not to prosecute private sex tapers, but the ACLU brief suggests we can’t necessarily rely on such promises.

In its ruling Monday, a three-judge 3rd Circuit panel didn’t go as far as the ACLU or the porn industry’s Free Speech Coalition in criticizing the record-keeping laws. But the 59-page opinion, written by Judge D. Brooks Smith for a panel that also included Judges Anthony Scirica and Marjorie Rendell, agreed that U.S. District Judge Michael Baylson of Philadelphia federal court was too quick to dismiss the First and Fourth Amendment challenges. (In a concurrence, Rendell was particularly concerned about the right to warrantless searches that the law grants government investigators.)

The 3rd Circuit’s concern, like the ACLU’s, is whether the record-keeping laws are so broad that their restriction of First and Fourth Amendment rights outweighs the government’s legitimate interest in protecting children. To answer that question, the appeals court said, the lower court has to consider evidence, not simply the law:

Plaintiffs should be afforded the opportunity to conduct discovery and develop the record regarding whether the statutes are narrowly tailored… Plaintiffs assert that a ‘vast quantity’ of protected sexually explicit depictions include performers who are ‘clearly mature adults could not be mistaken for children.’ The degree of the asserted overbreadth is obviously the critical determination, but plaintiffs were never afforded the opportunity to conduct discovery or develop a record from which we could determine this degree.

The ruling isn’t a guarantee that the trial judge will end up siding with challengers of the law, but it does create an interesting split with the 6th Circuit, which was much less worried about the scope of the record-keeping laws.

I e-mailed the Justice Department for comment but didn’t immediately hear back. J. Michael Murray of Berkman, Gordon, Murray & De Van, who argued for the Free Speech Coalition at the appeals court, didn’t return my phone call.

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In a stunning order Monday, the U.S. Supreme Court essentially said it had been looking at the wrong issue in an Alien Tort Statute case called Kiobel v. Royal Dutch Petroleum. It called for new briefs that reframe Kiobel as an examination of the extraterritorial application of the ATS. Given the justices’ reluctance to extend U.S. jurisdiction beyond our borders, expressed so fatefully in their 2010 ruling in Morrison v. National Austrialia Bank, the recasting of Kiobel has the potential to devastate U.S. human rights litigation based on overseas conduct.

The comparatively narrow question Kiobel originally presented to the Supreme Court was whether corporations can be held liable under the ATS, a once-obscure 1789 law that human rights advocates revived in the 1980s to address international atrocities against non-U.S. citizens. The 2nd Circuit Court of Appeals had ruled in Kiobel that corporations are immune under the ATS; three other federal appeals courts had held otherwise. The Kiobel merits briefing by Shell and the Nigerian claimants (available here) mostly addressed the corporate liability question.

But barely had Kiobel oral arguments begun last Tuesday when Justice Anthony Kennedy interrupted plaintiffs lawyer Paul Hoffman of Schonbrun DeSimone Seplow Harris Hoffman & Harrison to point out that the United States appears to be the only country in the world to “exercise universal civil jurisdiction over alleged extraterritorial human rights abuses to which the nation has no connection.” (Kennedy was reading from an amicus brief Chevron filed in support of Shell.) Other justices picked up and amplified Kennedy’s point. Justice Samuel Alito put the question most bluntly, asking Hoffman, “What business does a case like this” — a suit by foreign nationals against a foreign-based corporation for its alleged complicity in state-sponsored torture and murder in Nigeria — “have in the courts of the United States?”

In other words, as the court put it in Monday’s order recasting Kiobel, “whether and under what circumstances [does] the Alien Tort Statute [allow] courts to recognize a cause of action for violations of the law occurring within the territory of a sovereign other than the United States”?

Amazingly, no federal appeals court has decided an ATS case based only an extraterritoriality analysis, even though several circuits have issued ATS rulings in the year-and-a-half since the Morrison court held that U.S. laws should not be presumed to apply outside our borders unless Congress so specifies. In the last ATS appellate decision to be issued before the Kiobel Supreme Court argument, a divided en banc 9th Circuit Court of Appeals said Morrison did not preclude claims by 10,000 Papua New Guineans who claimed Rio Tinto worked with the government to stamp out labor protests at copper and gold mines. The majority, as I reported, rejected a powerful three-judge dissent that said the history of the ATS offers no support for extending U.S. jurisdiction, particularly after Morrison: “The authority of American courts does not generally extend to all heinous wrongs committed by anyone, against anyone, anywhere in the world,” the dissent said. “Ambiguous statutory language is not enough to get around Morrison‘s ‘bright line rule.’”

In another recently decided ATS appeal, John Doe v. Exxon, Judge Brett Kavanaugh of the District of Columbia Circuit Court of Appeals broke with the majority to argue for the dismissal of an ATS case involving Exxon’s alleged conduct in Indonesia. “Under the presumption against extraterritoriality, the ATS does not apply to conduct that occurred in foreign nations,” Kavanaugh wrote in a dissent. “The ATS contains no textual indication that it was meant to apply to conduct in foreign countries. Moreover, the ATS’s historical purpose was to avoid conflicts with foreign governments. It did so by providing redress for foreign citizens who suffered injuries within the United States or on the high seas.” Kavanaugh, like the Morrison-citing appeals judges in the Rio Tinto case, was outvoted by colleagues who concluded the ATS does apply overseas.

Even though extraterritoriality wasn’t squarely before the Supreme Court in Kiobel’s original incarnation, many of Shell’s amicus supporters raised Morrison arguments. (Here’s BP’s brief, for instance, and here’s Germany‘s.) So Kiobel plaintiffs lawyer Hoffman said he wasn’t surprised that the issue of extraterritoriality surfaced at last week’s oral argument, though he was taken aback that the Morrison questions came so quickly. Hoffman told me he’s “optimistic” that his side will be able to counter defense arguments for limiting the ATS’s overseas application by pointing both to the origins of the law, which was intended to curb piracy, and its modern Supreme Court history, which assumes the statute’s extraterritorial application. The Alien Tort Statute simply isn’t like the federal securities laws the Morrison court was addressing, Hoffman said, since it’s based on principles of international law.

Hoffman also said that he believes Justice Kennedy will be the swing vote. “It’s up to us to convince him this is a law that should be here,” he said. Interestingly, Hoffman noted that in the 2004 U.S. Supreme Court case that established the ATS as a powerful human rights vehicle, the United States filed a brief arguing against extraterritorial application of the law, but the court didn’t address the issue. The Solicitor General supported the plaintiffs in the United States’ amicus brief in Kiobel. So it will be quite a fight, in Kiobel’s next iteration, to secure the Justice Department’s amicus.

Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan, who argued at the Supreme Court for Shell, didn’t respond to email and phone requests for comment. But here’s a memo on the Supreme Court’s Monday order from Mr. Morrison himself, George Conway of Wachtell, Lipton, Rosen & Katz.

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The Solicitor General’s office of the Department of Justice is home to some of the smartest lawyers in the country. These are the people who represent the views of the United States in the most important public policy cases at the U.S. Supreme Court. They go on to head appellate practices at prestigious law firms — or to their own seats in the federal judiciary. Lawyers in the SG’s office are accustomed to deference.

Jed Rakoff, however, isn’t much for deference.

In a Feb. 7 ruling on a claim of attorney-client privilege in a Freedom of Information Act dispute, the Manhattan federal court senior judge conceded that when the Solicitor General’s office makes a representation to a court, “trustworthiness is presumed.” But Rakoff said that when he dug into the SG’s justification for an assertion in a 2009 case at the Supreme Court, he couldn’t find anything aside from some emails exchanged amongst lawyers in the office. “It seems the government’s lawyers were engaged in a bit of a shuffle,” the judge said.

He cited a Peter Finley Dunne aphorism — “Trust everybody but cut the cards” — but might just as well have quoted Ronald Reagan’s famous “Trust, but verify” (itself an adaptation of a Russian proverb favored by Vladimir Lenin). Because Rakoff couldn’t verify the SG’s assertion in the Supreme Court brief, except in emails over which the Justice Department was claiming privilege, he said privilege doesn’t shield parts of the emails.

The dispute stems from a brief filed in a case called Nken v. Mukasey, which posed the question of whether aliens are entitled to a stay of deportation orders until all their appeals are exhausted. In a January 2009 brief, the Solicitor General’s office assured the Supreme Court that the United States has a “policy and practice” of helping deported aliens who are subsequently cleared return to this country and “the status they had at the time of removal.” The Justices relied (in part) on that assurance in holding that aliens aren’t entitled to a stay because they aren’t irreparably harmed by deportation. (The case name changed to Nken v. Holder because President Obama had taken office when the opinion was issued in April 2009.)

The National Immigration Project, the American Civil Liberties Union and some other public interest groups had doubts about the asserted “policy and practice,” for which the Solicitor General’s brief didn’t offer a specific citation. So they filed a FOIA request with the Justice Department, the State Department and the Department of Homeland Security. The Solicitor General’s office produced only a four-page email chain, which was almost completely redacted. The Justice Department asserted three theories of privilege over the emails: work product, attorney-client, and deliberative-process.

The plaintiffs sued for access to the email, arguing that only the Solicitor General communications could clarify the supposed policy or reveal that the Justice Department mistakenly cited a policy that doesn’t exist.

Rakoff agreed, after reviewing the emails and the materials other arms of the government produced in response to the FOIA request. None of those materials, he found, indicated that the United States has a policy and practice of helping wrongfully deported aliens return to this country. Nor did a memorandum of understanding the Justice Department cited to Rakoff. “The OSG made a new factual representation on appeal and cited nothing in the record to support it,” he wrote. “The government even now has come forward with nothing of consequence to support its representation beyond the facts set forth in the emails.” (And Rakoff didn’t seem to consider the email chain very good justification: “As reviewed by the court in camera, evidences an attempt to cobble together a factual basis for making the representations the OSG made to the Court in Nken,” Rakoff wrote.)

Since the SG communications amounted to a statement of policy, Rakoff said, it can’t be shielded from the public. He ordered the disclosure of all portions of the emails that “contain factual descriptions of the putative policy.”

Gregory Garre, the Latham & Watkins partner who was Solicitor General when the Nken brief was filed and appears as counsel of record on the document, declined comment. I also left a phone message with Deputy Solicitor General Edwin Kneedler, who argued the Nken case at the Supreme Court, and with the Justice Department’s Office of Public Affairs. None of them got back to me.

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The National Labor Relations Board stood up staunchly for the rights of employees Friday. In an 18-page ruling in a case called D.R. Horton, Inc. and Michael Cuda, the NLRB chairman and two members of the board held that a company may not cut off employees’ rights to collective action through private arbitration agreements. The ruling does not say employees are always entitled to litigate claims via class actions, but concludes that “employers may not compel employees to waive their [National Labor Relations Act] right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.”

Early reports on the Horton decision have called it a repudiation of the U.S. Supreme Court’s June 2011 decision in AT&T Mobility v. Concepcion, which isn’t quite right. Concepcion upheld AT&T’s right to compel consumers to submit to arbitration even though a California state law seemed to permit them to bring a consumer class action. Shrewd employment lawyers subsequently pounced upon Concepcion (in combination, of course, with Wal-Mart v. Dukes) to make headway in employment class actions against their clients; according to a just-released study on employment class-action litigation by Seyfarth Shaw, Concepcion had already been cited in 215 judicial rulings by the end of 2011. But according to Cliff Palefsky of McGuinn, Hillsman & Palefsky, who advocated for employees’ rights in the Horton case, the NLRB correctly drew a distinction between the issues in Concepcion and the real issue confronting employment litigators: an apparent conflict between labor laws and the Federal Arbitration Act, which empowers corporations to enforce private employment-related arbitration agreements.

In D.R. Horton, the NLRB concluded that employees’ federal rights under the National Labor Relations Act and its predecessor, the Norris LaGuardia Act, include the absolute right to collective action — either through a consolidated arbitration or a class action. It’s important to remember that in the D.R. Horton arbitration agreement at the heart of the case, Horton employees had to agree to adjudicate claims through binding, individualized arbitration and to waive any right to bring class action claims. The board balanced Horton’s rights under the Arbitration Act against its employees’ rights under the NLRA, and found that public policy and accommodation analysis favor employees.

“Holding that an employer violates the NLRA by requiring employees, as a condition of employment, to waive their right to pursue collective legal redress in both judicial and arbitral forums accommodates the policies underlying both the NLRA and the FAA to the greatest extent possible,” the ruling said.

The NLRB took care to note that it was not specifically ordering Horton to permit employees to bring classwide arbitrations or class actions — rather, it was preventing it from barring both routes to collective action. “We need not and do not mandate class arbitration in order to protect employees’ rights under the NLRA,” the ruling said. “So long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of classwide arbitration. Employers remain free to insist that arbitral proceedings be conducted on an individual basis.”

Employee counsel Palefsky said the ruling, which comes on an issue that has been before the NLRB for several years, is a relief. “If workers had lost the right to bring class actions, that would have undermined so many acts of Congress,” he said.

The original Horton employee who brought the case settled his wage-and-hour claim through an individual arbitration. His counsel, Richard Celler, said the NLRB opinion “smacks of common sense and reasonableness.” Horton employees were represented at the NLRB by lawyers in the board’s office of general counsel; the Department of Labor and the Equal Employment Opportunity Commission both filed amicus briefs urging the NLRB to uphold employees’ right to collective action.

Employer-side lawyers, meanwhile, told me the ruling is a disaster.

“The NLRB is thumbing its nose at private arbitration agreements,” said Marshall Babson of Seyfarth Shaw, who submitted an amicus brief in the case on behalf of the Chamber of Commerce. (All the case documents are available at the NLRB’s website.) “The National Labor Relations Act is not intended to be a super-class-action statute.” Babson said the board’s assurance that its ruling will have limited effect, since (unlike Concepcion) it applies only to employment arbitration agreements, is “breathtaking in its lack of understanding.” At a minimum, Babson said, the ruling will affect tens of thousands of employees with no-class-action clauses in employment agreements that mandate arbitration. “Every guy on Wall Street signed one of these agreements,” he said.

Charles Sims of Proskauer, who submitted an amicus brief for the Retail Industry Leaders Association, said the ruling “drives an enormous hole through U.S. Supreme Court holdings of the last years.” Even if Concepcion doesn’t specifically address the same circumstances as Horton, Sims said, the Court’s deference to private arbitration agreements is clear, and the NLRB disregarded it.

Horton is represented by Ogletree, Deakins, Nash, Smoak & Stewart, which didn’t respond to a request for comment. The company has the right to appeal the NLRB’s ruling to either the U.S. Court of Appeals for the District of Columbia or the federal appellate court in which the alleged violation took place.

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On Tuesday, Manhattan federal judge Jed Rakoff agreed to decide whether Irving Picard’s $267 million clawback case against ABN Amro and related defendants belongs in federal court rather than in Manhattan bankruptcy court, where the Bernard Madoff bankruptcy trustee filed it as an adversary proceeding. That’s bad news for Picard and his team at Baker & Hostetler. So far, Judge Rakoff has decided that he has jurisdiction over at least part of every Madoff case he’s considered, and he’s proceeded to decimate Picard’s recovery theories in his HSBC and Mets rulings.

What’s intriguing about the ABN Amro withdrawal motion, though, is that the bank’s lawyers at Latham & Watkins, as well as Morrison & Foerster on behalf of co-defendant Rye Portfolio, are pointing to a June 23 U.S. Supreme Court opinion involving Anna Nicole Smith’s claim to part of her billionaire husband’s estate. Sadly, neither the former Playboy Playmate nor the stepson she sued to recover more than $400 million lived to see the high court’s ruling. But the Supreme Court’s opinion in Stern v. Marshall could turn out to be the most important legacy of the onetime tabloid darling Anna Nicole Smith, or, as she’s known to the Justices, Vickie Lynn Marshall.

The Supreme Court’s controversial 5-to-4 decision isn’t one of those rulings whose implications are immediately evident, like, say, Morrison v. National Australia Bank. Indeed, to call the facts underlying Stern v. Marshall idiosyncratic would be sort of like saying Anna Nicole was buxom. Here’s a highly abbreviated version of the story: Anna Nicole’s billionaire husband (of a little more than a year) left her nothing in his will. She filed for bankruptcy. Her stepson, Pierce Marshall, filed a claim in the bankruptcy, alleging that Anna Nicole defamed him when she said in state probate court that he fraudulently induced his father to disinherit her. Anna Nicole responded to her stepson’s bankruptcy court claim with a counterclaim for tortious interference. After a bench trial, the bankruptcy court agreed with Anna Nicole and entered a $400 million judgment against Marshall.

The Supreme Court, however, found that Anna Nicole’s bankruptcy judge did not have the right, under the U.S. Constitution, to enter final judgment on a claim that doesn’t fall under the Bankruptcy Code’s definition of core bankruptcy issues and isn’t part of the bankruptcy estate’s claims process. (Congress created federal bankruptcy courts; the Constitution created federal district courts.) Claims involving non-core bankruptcy issues outside of the bankruptcy claims process, under the Supreme Court’s ruling, have to receive final adjudication from a federal district court. Bankruptcy judges may only issue findings of fact and recommendations, as if they were federal magistrates.

For Anna Nicole’s estate, the consequences of the Court’s ruling were all too clear: Her heirs don’t get the money the bankruptcy court awarded. But for everyone else, figuring out what Stern v. Marshall means has not so easy. In part, that’s because of the Court’s insistence that its ruling is intended to be narrowly construed. “We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute,” wrote Chief Justice John Roberts for the majority. The Court weighed in, the Chief Justice wrote, because “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.”

Notwithstanding the Court’s words, defendants have invoked Stern v. Marshall in asking to move even what seem like core bankruptcy cases to federal court. My eagle-eyed Reuters colleague Nick Brown reported late last month on JPMorgan’s reliance on Anna Nicole Smith’s case in its motion to move a Lehman bankruptcy suit to federal court. JPMorgan’s lawyers at Wachtell, Lipton, Rosen & Katz could credibly argue that the Lehman estate’s claims against the bank are not rooted in bankruptcy law, so under Stern v. Marshall they belong in federal court. ABN Amro and Rye Portfolio, however, took a much more expansive view of the Supreme Court’s holding, arguing that Stern v. Marshall means bankruptcy judges can’t decide even fraudulent conveyance claims — which are traditionally in the bankruptcy court’s purview — unless the clawback defendant has also asserted its own claim in the bankruptcy proceeding.

And the Madoff defendants aren’t the only ones positing that interpretation of Stern v. Marshall. “Litigants are using the decision to call into question bankruptcy judges’ authority to hear and determine a myriad of matters that they historically have handled without any previous legitimate question that they could do so,” Skadden, Arps, Slate, Meagher & Flom bankruptcy partners Mark McDermott and George Zimmerman wrote in an Oct. 11 client alert on Stern v. Marshall. “Stern has been a shock to the bankruptcy system. Debtors, creditors’ committees, and litigation trustees have pursued fraudulent transfer litigation in bankruptcy courts for years, with no question about the propriety of doing so. Bankruptcy judges and litigants now must reconsider this fundamental assumption in light of Stern.”

But Craig Goldblatt of Wilmer Cutler Pickering Hale and Dorr, one of the trio of lawyers who represented Marshall at the Supreme Court, argued in a Sept. 16 speech to the American Bankruptcy Institute that Stern v. Marshall didn’t change the law; it clarified previous Supreme Court rulings that limited the power of bankruptcy courts. Those rulings, Goldblatt asserted, simply weren’t taken into account by bankruptcy judges and lawyers. “It is worth reflecting for a minute on how wrong the bankruptcy bench and bar has been on this fundamental question of bankruptcy jurisdiction for more than 25 years,” he told the ABI. “A bankruptcy lawyer who argued before the Stern decision that a fraudulent conveyance case couldn’t be a core matter in a case in which the defendant had not filed a proof of claim would elicit nothing but laughter from the bench. If any of you doubts that, I’m happy to send you the transcript.”

Will Stern v. Marshall end up being important in the Madoff case? Perhaps not; Judge Rakoff wasn’t shy about asserting his jurisdiction over clawback claims even before anyone cited the Supreme Court’s ruling in his courtroom. In other big bankruptcies, though, we’re going to see federal judges encroaching on territory that traditionally belonged to bankruptcy courts, at least until appellate courts have a say about the Supreme Court’s intentions in Stern v. Marshall.

Anna Nicole Smith loved nothing more than public attention. She just probably never imagined that years after her death, it would be bankruptcy lawyers and judges who were still talking about her.

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