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More than Just Peanuts

High Court’s Pesticide, Stock Market Cases Test Whether Federal Regulations Bar Suits

Posted Jan 25, 2005 5:42 AM CDT
By David G. Savage

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President Bush and congressional Republicans say tort reform will be a major item on the agenda this year, but the U.S. Supreme Court will get a head start when it takes up two cases this month that seek to limit civil lawsuits.

The subjects are as different as pesticides and securities fraud, but the lineups on both sides are familiar. Bush administration lawyers and national business groups have joined with the corporate defendants in both cases in urging the court to dismiss the lawsuits at issue. The trial bar, siding with the plaintiffs, counters that federal regulatory laws should not be used as a shield to protect corporate wrongdoers.

The pesticide case, Bates v. Dow AgroSciences, No. 03-388, asks the perennial question: When does federal law pre-empt claims for damages under state law? And that issue alone is enough to draw big interest from the corporate bar.

“There are a huge number of federal regulatory statutes, and virtually all have an express pre-emption” of some state law, says Washington, D.C., lawyer Kenneth Geller. “So, depending on how the court rules, this has the potential to have a broad impact,” says Geller, who filed an amicus on Dow’s side on behalf of the Product Liability Advisory Council, a group that advocates tort reform.

Legal Protection from Herbicide Harm

The case began five years ago when 29 west Texas peanut farmers agreed to try a highly touted new herbicide known as Strongarm. As advertised, Strongarm proved effective at killing weeds. However, to the surprise of the farmers, it also nearly wiped out their peanut crop.

By mid-summer, the plants were yellowed and discolored. The farmers say their crop losses ran to tens of millions of dollars. Only later did Dow scientists reveal that tests had shown the herbicide was toxic to plants in high-alkaline soils like those in Texas, Oklahoma and New Mexico.

The farmers filed notice they intended to sue Dow under the Texas Deceptive Trade Practices Act for selling a defective product and failing to warn of its dangers. Before they could do so, Dow’s lawyers went to federal court in Lubbock contending that all such claims were pre-empted by the Federal Insecticide, Fungicide and Rodenticide Act. This law was enacted just after World War II. Chemicals had emerged as a wonder industry, and their use grew exponentially on farms, in homes and in industry.

However, in the 1960s, Rachel Carson’s book Silent Spring and reports on the dangers of DDT created an awareness of how chemicals could hurt the environment and the health of humans. In 1972, Congress amended FIFRA and gave the Environmental Protection Agency the duty to register pesticides and herbicides as safe. Dow and other pesticide makers now submit their product labels for approval by the EPA. But federal regulators were not given the entire job. Rather, FIFRA says states “may regulate the sale or use of any federally regulated pesticide.”

The peanut farmers’ case turns on the next line of the statute: “Such a state shall not impose ... any requirements for labeling” beyond those set by federal regulators. Citing that phrase, a federal judge in Lubbock and the New Orleans-based 5th U.S. Circuit Court of Appeals dismissed the farmers’ suit. Their claims are expressly pre-empted by FIFRA because a judgment against Dow would induce it to alter its product label, the appeals court said. 332 F.3d 323.

But other courts, including the Texas Supreme Court, had taken the opposite view and held that FIFRA does not bar suits against pesticide makers for products that prove to be dangerous to humans or damaging to crops. In the late 1990s, Clinton administration lawyers intervened in these cases to argue the state tort claims against pesticide makers would strengthen, not weaken, the law.

The Bush administration changed course and insists in the peanut farmers’ case that FIFRA shields Dow from being sued over the damage done by Strongarm. The solicitor general urged the Supreme Court to turn away the case, but the justices voted to hear it nonetheless.

“This is the case that will tell us whether there are state damages claims in pesticide cases,” says Patti Goldman, a Seattle lawyer who filed an amicus brief for Natural Resources Defense Council.

Lawyers for the peanut farmers say consumers and farmers would be left with no legal protection from pesticide damage if the EPA’s approval of the warning label bars all lawsuits. It “produces an absurd and unintended result—granting complete immunity to an industry Congress deemed in need of more stringent regulation,” says Kimberly Keller, a lawyer in San Antonio for the farmers. Oral argument is set for Jan. 10.

Blame for a Boom and Bust

Meanwhile, The Financial Times says the second case, Dura Pharmaceuticals v. Broudo, No. 03-932, which is over an asthma treatment, has “Wall Street holding its breath.” The case will be heard Jan. 12.

Since the burst of the Internet bubble of the late 1990s, securities lawyers have been divided over whether company officials and stock analysts who hyped the dot-coms can be held liable for a fraud on the market. Experts in securities law say Dura may provide an answer.

Dura, a small San Diego company, developed and marketed new treatments for allergies and asthma. Its stock rose in 1997 after it announced growing sales for some of its products as well as plans for a new device to administer Albuterol, an asthma medication. The news boosted the stock to $53 a share in January 1998.

But a month later, the news turned sour, and the company warned of declining sales. Its stock fell 47 percent in one day and hit $20 by Feb. 25. A few months later, Dura revealed the FDA would not approve its device for delivering Albuterol.

William Lerach, the well-known San Diego securities lawyer, brought a suit on behalf of investors who say they were defrauded by Dura’s misleading statements about its prospects and its asthma medication. The Supreme Court will decide not whether Lerach has a strong case, but whether he has any case at all.

“This is about weeding out frivolous class actions in securities,” says Robin S. Conrad, a lawyer for the National Chamber Litigation Center, which filed a brief siding with Dura. She says a federal judge in San Diego was right to dismiss the lawsuit at the pleading stage. “You need more than a drop in earnings and a drop in the stock price. You need to show an actual link between the defendant’s conduct and harm to the plaintiff,” she says.

For their part, the plaintiffs’ lawyers say they can show that company officials intentionally deceived investors, but only if they can take discovery. In Dura, for example, they noted that in the second half of 1997, the company’s insiders sold large blocs of their stock.

The case has attracted broad interest because it gives the Supreme Court its first real test of the Private Securities Litigation Reform Act of 1995. Congress said it wanted to weed out “abusive and meritless suits” that were filed whenever a stock suffered a sharp drop. It added a new requirement for the plaintiff to show “loss causation.”

But no one seems too sure what that means. The plaintiffs say Dura’s allegedly misleading statements in 1997 caused them to pay an inflated price for their stock and thus caused them to suffer a big loss early in 1998.

A federal judge in San Diego disagreed. He said the plaintiffs must point to a “corrective disclosure” that caused the stock to drop, something more than a warning of lower sales. On appeal, the San Francisco-based 9th U.S. Circuit Court of Appeals revived the lawsuit and ruled that proof of an inflated sale price for a stock is enough to go to trial. 339 F.3d 933. The solicitor general in turn urged the Supreme Court to take up the case and reverse the 9th Circuit.

The outcome could affect the hundreds of class-action securities claims that have been filed against research analysts and underwriting firms since the stock market plunged in 2000, lawyers for Merrill Lynch told the Supreme Court in an amicus brief. If plaintiffs can get into court simply by alleging they were induced to buy stock at inflated prices, the defendants could find themselves liable for the stock market bubble, they say.

David G. Savage covers the U.S. Supreme Court for the Los Angeles Times and writes regularly for the ABA Journal.

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