Supreme Court Report

Business Downturn

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Maybe it’s a coincidence, but the busi­ness community’s streak of win­ning legal protection in the U.S. Su­preme Court ended just as the collapse on Wall Street exposed the shoddy state of federal regulation of the financial services industry.

The Securities and Exchange Commission is supposed to protect investors, but it slept soundly as Bear Stearns, Lehman Brothers, Merrill Lynch and other investment houses made ever more leveraged bets on mortgage loans taken out by those who could not afford a down payment. The SEC failed even to notice that a former Nasdaq chairman, Bernard Madoff, was running a sham billion-dollar investment house that made no actual investments for more than a decade.

When home prices fell, the Wall Street investment houses fell too. Stock prices plunged around the world, punishing investors large and small. And Madoff revealed he had been running a Ponzi scheme that cost investors an estimated $65 billion.

For much of the decade, business lawyers and the Bush administration insisted state liability laws and state regulation amounted to a costly nuisance and a drag on the economy. They said uniform national regulation of business made more sense, and they urged the Supreme Court to limit lawsuits and to pre-empt state regulations.

For years those arguments were winners. Last year, Riegel v. Medtronic barred most lawsuits against the makers of medical devices. Lawyers for the Bush administration and device makers said state jurors should not be permitted to second-guess Food and Drug Admini­stra­tion regulators once they have approved a device as safe and effective.

In Riegel the court ruled 8-1 that Congress intended the 1976 Medical Device Amendments to bar tort suits. One provision said states may not enforce “any requirement” beyond the FDA standards, and Justice Antonin Scalia said this referred to liability laws as well as state regulations.

Justice John Paul Stevens said Congress intended no such thing in 1976, but he concurred on the grounds that the term any requirement had evolved to include tort suits. Justice Ruth Bader Ginsburg dissented and said Congress wanted more regulation, not less, of medical devices.

Riegel was preceded by two other pre-emption cases. Two years ago, the Supreme Court shielded national banks and their state-chartered mortgage lenders from state mortgage regulators in Watters v. Wachovia. The 5-3 decision held that state banking laws were pre-empted by actions taken—or not taken—by the Office of the Comp­troller of the Currency, a branch of the Treasury Department.

Last year, the court shielded companies that knowingly participated in another firm’s stock fraud from being sued by cheated investors. The court’s 5-3 decision in StoneRidge Investment Partners v. Scientific-Atlanta Inc. limited private lawsuits, but its opinion noted the SEC retained the authority to police such frauds.


But just as the business disaster eroded confidence in federal regulators, so, too, have high court decisions this term slowed the court’s acceptance of federal rules pre-empting state law.

Nowhere was this change more apparent than in Wyeth v. Levine, a 6-3 decision issued in March that rocked the pre-emption defense.

Three years ago, Bush appointees at the FDA changed long-standing agency policy and announced that its approval of a drug’s label “pre-empts conflict­ing or contrary state law.”

But speaking for the court, Stevens, the leading skeptic of broad pre-emption, called the Bush administration’s new FDA policy “inherently suspect” because it did not rely on an act of Congress. Rather, it made a “sweeping” change in the government’s “long-standing position without providing a reasoned explanation.” It “does not merit deference,” he concluded.

Stevens stressed the limits of federal regulation and the value of tort suits. “The FDA has limited resources to monitor the 11,000 drugs on the market,” he wrote. “State tort suits uncover unknown drug hazards and provide incentives for drug manufacturers to disclose safety risks promptly.”

Further, these suits can compensate injured patients, he said, and they provide “an additional, and important, layer of consumer protection that complements FDA regulation.”

The fabled “presumption against pre-emption”—where Congress has yet to fully usurp state law—appears to be back in vogue. Justices Ginsburg, Anthony M. Kennedy, David H. Souter and Stephen G. Breyer joined the Stevens opinion.


For some, the most surprising opinion was the separate concurrence by Justice Clarence Thomas. He rejected the notion of “implied pre-emption” entirely. “Under the suprema­cy clause, state law is pre-empted only by federal law” as enacted by Congress, he wrote, adding that “agency musings” do not suffice.

Beyond the abstract matter of federal pre-emption, the case of Diana Levine also amply illustrated the shortcomings of the trust-the-FDA approach.

At least 20 people had suffered amputations after being injected with the anti-nausea drug Phenergan, first approved by the FDA in 1955. It can be admin­istered safely in several ways, including through an IV drip. Its warning label does not forbid injections, but it urged “extreme care” when doing so. If an in­jection hits an artery, it causes gangrene, leading to the loss of a limb.

Levine, a musician from Vermont, went to a local clinic in the summer of 2000, suffering from a migraine headache. She was given Demerol and an injection of Phenergan. She felt an intense burning, and gangrene set in within days. Levine first suffered the loss of her hand and then part of her arm had to be amputated.

She won a settlement from the clinic and sued Wyeth, the maker of Phenergan, claiming the warning label was inadequate. Who, after all, would agree to an in­jection for speedier relief of nausea if you were told the risk included loss of your arm?

A jury awarded Levine $6.7 million in damages, and the Supreme Court’s decision affirmed that ver­dict. Levine said she “collapsed in tears” when she heard the news. “Next to getting my hand back, this is the best thing they can do,” she said of the justices’ ruling.

In dissent, Justice Samuel A. Alito Jr. said Levine’s case “illustrates that tragic facts make bad law.” Deci­sions about drugs and warning labels should reside with the FDA, he said. “By their very nature, juries are ill-equipped to perform FDA’s cost-benefit-balancing function,” Alito wrote. “After today’s ruling, however, parochialism may prevail.” Roberts and Scalia agreed with him.

The ruling was greeted by some as a final verdict on the Bush administration’s drive to kill off liability suits.

“The buzz among lawyers around town is that the Bush regulatory pre-emption agenda ran into a brick wall,” says George­town University law professor David Vladeck. The prior administration had not gone to Congress to change the law, he says, but instead tried to win pre-emption through agency pronouncement. “Wyeth looks to be the death knell of that,” he adds.

David Frederick, the Washington, D.C., lawyer who represented Levine, was more cautious, given that the court has gone back and forth on pre-emption. Much turns on the laws at issue.

“Devices were different from the drugs because the statutes were different,” he says. “I think the Bush administration overreached,” he adds, by relying too much on pronouncements from the agencies.

The Wyeth decision was Frederick’s second big victory of the term in a pre-emption case. In Altria Group Inc. v. Good, the court cleared the way for false-advertising lawsuits against the makers of popular “light” cigarettes. The 5-4 decision issued in December rejected the tobacco industry’s claim that the federal cigarette warning label act pre-empted such claims.

Robin Conrad, counsel for the U.S. Chamber of Commerce, says the Wyeth decision was a surprise and a disappointment. “I was expecting a narrow, nuanced victory for business,” she says. Thomas’ opinion was especially worrisome, she adds, because he rejected implied pre-emption across the board.

Even the Riegel victory now stands in some doubt. On the day after the Wyeth decision, Reps. Henry Waxman, D-Calif., and Frank Pallone, D-N.J., introduced the Medical Device Protection Act to overturn the court’s “flawed interpretation” of the law and restore the right of injured patients to sue device makers.

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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