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To grasp how the U.S. Supreme Court has come to regard business law, start—of all places—with a dissent in a death penalty case:
“In the end,” wrote Justice John Paul Stevens in last term’s Schriro v. Landrigan, No. 05-1575, “the court’s decision can only be explained by its increasingly familiar effort to guard the floodgates of litigation.”
Although written in opposition, Stevens’ protest was nevertheless a pithy observation of the high court’s path under Chief Justice John G. Roberts Jr. By convincing majorities, the court has signaled a clear direction: empathizing with and empowering businesses by stanching the litigation stream.
While the court last term decided some cases on substantive grounds—most notably an antitrust case that did away with an antiquated theory of retail pricing—the justices mostly tightened the valves that allow cases to get into court and narrowed the channels to winning a jury verdict.
“What was new about last term was that so many cases focused on litigation,” says Theodore Frank of the American Enterprise Institute, a Washington, D.C.-based market-oriented think tank. “In case after case, the justices said, ‘Hey, there are problems here with unbridled liability.’ ”
“You see nothing resembling the 5-4 ideological splits that you see in the social cases,” says D.C. attorney Roy T. Englert Jr., a prominent Supreme Court litigator. The trend, he says, is that the entire court, “not just five justices, has a mistrust of lawyer-driven litigation.”
Adds Englert: “The justices don’t see real injured people bringing real claims. They see lawyers trying to extort settlements.”
While last term saw resounding victories for corporate defendants in antitrust, patent and securities law cases and in punitive damage awards, the court conversely dealt a setback to the plaintiffs bar.
PLAINTIFFS BAR TAKES NOTE
“The court has inflicted a world of hurt on the plaintiffs class-action bar,” says Englert, a partner with Robbins, Russell, Englert, Orseck & Untereiner. Among the cases that derailed class actions were Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201, where the court narrowed fair credit reporting claims; and Bell Atlantic v. Twombly, 127 S. Ct. 1955, which raised the bar for notice pleadings. (See “Just the Facts, But More of Them,” October 2007.)
“I think the court isn’t just tacking right, but it’s becoming an activist court,” says Nelson Roach, who works out of the Daingerfield, Texas, office of Nix, Patterson & Roach and is part of the plaintiff’s team in Credit Suisse Securities v. Billing, 127 S. Ct. 2383, a case involving antitrust and securities law. “Across all these cases the court ruled for big business interests and against the rights of plaintiffs to bring antitrust complaints to court.”
Others are more circumspect.
“The trend—if we can call it that—is not favorable to the kind of people I represent,” says Brian Wolfman, litigation director at the D.C.-based consumer advocacy group Public Citizen, which was involved in two cases last term, including Safeco.
However, Wolfman acknowledges the emphasis on litigation. “It’s ironic because the Supreme Court is skeptical about the value of its own system.” He adds, “We can always make it better, but I happen to think that resolving issues in the litigation system makes a lot of sense.”
Some experts cite Roberts’ background as an appellate attorney as among the reasons the court is more attuned to corporate litigation. Nevertheless, some litigators say, the first full term under Roberts represented less an abrupt shift than it did the culmination of a trend that has been in the making for several terms.
“For the last 25 years, the court has been trending in a direction that is generally more favorable to business,” says D.C. attorney Maureen E. Mahoney, who successfully argued three cases last term.
“It means that the court has been adopting approaches that are, on balance, more favorable to commercial interests,” adds Mahoney, a partner with Latham & Watkins. “Business interests are served when the court provides guidance.”
For Robin Conrad, executive vice president of the National Chamber Litigation Center, the U.S. Chamber of Commerce’s litigation arm, that means “clarity and predictability.”
Conrad, whose NCLC was on the winning side in 13 of 15 cases in which it filed amicus briefs, also praises the large majorities. “There’s greater comfort where you see a huge majority,” she says. “Fractured decisions don’t help anybody.”
The trend is especially evident in antitrust law, by far the most active docket last term. Yet, says D.C. attorney Darren S. Tucker of O’Melveny & Myers, the four cases follow a pattern the court has traced since 2004.
The lower court decision favored the plaintiff; the court followed the Justice Department’s suggestion to grant cert; Justice filed an amicus favoring the defendant; and the Supreme Court reversed, mostly by wide margins. In fact, the eight antitrust cases decided since 2004 reveal an overall vote tally of 68-9. Five were unanimous.
“There’s a general consensus across liberal and conservative justices that costs of litigation have gotten out of hand, and that trial judges are not able to regulate discovery properly,” says Tucker.
“Look at who actually wrote the majority opinions,” he says. Of the four antitrust cases last term, “you only have one conservative”—Justice Clarence Thomas in Weyerhaeuser v. Ross-Simmons Hardwood Lumber, 127 S. Ct. 1069. Justices David H. Souter and Stephen G. Breyer, both of whom are considered liberal, and middle-of-the-road Justice Anthony M. Kennedy wrote the other three.
In particular, the court targeted discovery costs—most notably in Twombly, one of the most far-reaching cases of the term.
Writing for a 7-2 majority, Souter said, “The threat of discovery expense will push cost-conscious defendants to settle even anemic cases.”
In dissent, Stevens, joined in part by Justice Ruth Bader Ginsburg, echoed his concerns from Landrigan: “The transparent policy concern that drives the decision is the interest in protecting antitrust defendants—who in this case are some of the wealthiest corporations in our economy—from the burdens of pretrial discovery.”
But those burdens are considerable, says Englert. “Really smart lawyers who found the soft spots in the system put burdens on the adversary so that adversary would have to fork out money to settle.”
In addition, discovery more frequently means electronic discovery, where the sheer number of documents sprouts like weeds.
“Several years ago one spoke of cases where there would be boxes and boxes of documents,” says Frank, who has written about liability reform. Now discovery involves e-mail searches. “I’ve seen cases where one party wants every e-mail a CEO wrote. You have executives on their BlackBerrys sending e-mails every minute. It makes litigating more expensive and changes the dynamic of what it means to get to discovery.”
This term the court will continue to focus on complex litigation in at least two prominent business cases: StoneRidge Investment Partners v. Scientific-Atlanta Inc., No. 06-43, which involves the scope of liability in securities fraud claims; and Riegel v. Medtronic Inc., No. 06-179, which tests federal pre-emption in product liability suits.
The court examined both issues—securities fraud and federal pre-emption—in separate cases last term. But in StoneRidge and Riegel the court is likely to delve further. As with most business cases last term, the two poke at loose joints in the litigation chain.
Few business cases have been as highly anticipated as StoneRidge, which could become one of the court’s most important securities cases in at least a decade.
Arguments are scheduled for Oct. 9, and the court will be two players short: Roberts and Breyer have extensive stock portfolios and have recused themselves.
The remaining seven justices will consider whether plaintiffs can sue investment bankers, accountants, lawyers and other behind-the-scenes actors who may silently participate in securities fraud without making public statements about challenged transactions.
Called scheme liability, the tactic has become a favorite of post-Enron plaintiffs lawyers trying to squeeze recoveries out of bankrupt defendants by going after often better-heeled outside advisers. (See “An Outside Shot at Securities Fraud,” ABA Journal, June 2007.)
Scheme liability attempts to skirt the 1994 decision Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, and the 1995 Private Securities Litigation Reform Act, both of which limit private plaintiffs to filing cases only against the troubled companies themselves, their officers and directors.
In a move that surprised both sides, Solicitor General Paul Clement weighed in with the defendants. Historically, the solicitor general’s office has taken its cue from the Securities and Exchange Commission, whose amicus briefs for years have sided with investors in scheme liability cases.
Echoing the high court’s worry about liability costs, however, the solicitor general cautioned this time that “such a rule would thereby considerably widen the pool of deep-pocketed defendants that could be sued.” Quoting last term’s securities case, Tellabs v. Makor Issues & Rights Ltd., 127 S. Ct. 2499, the brief warned that a broader rule could be “employed abusively to impose substantial costs on companies and individuals.”
Nevertheless, the SEC won’t go completely unrepresented. Former SEC chairmen William H. Donaldson and Arthur Levitt and former commissioner Harvey J. Goldschmid filed their own amicus brief backing the plaintiffs. Their bottom line: While the SEC can pursue outside advisers and others, it needs help from the private side.
“Private cases, so long as they are well-grounded, are an important enforcement mechanism supplementing the SEC in the policing of our markets,” the former officials argued.
StoneRidge involves an attempt by Charter Communications Inc., one of the nation’s largest cable television operators, to raise as much as $20 million to meet cash flow projections through a kickback scheme. Suppliers of set-top cable boxes agreed to charge Charter an extra $20 per box, then turn around and funnel the increase back to the company through sham advertising contracts.
The St. Louis-based 8th U.S. Circuit Court of Appeals rejected the plaintiffs’ attempts to bring the box suppliers into the case, determining that the vendors never attempted to dupe the investing public into buying Charter stock. Moreover, the court held, the vendors didn’t approve Charter’s misrepresentations and had no duty to disclose the company’s financial condition to its investors anyway.
StoneRidge comes on the heels of Tellabs, which, like other business cases, tested the links in the litigation chain. The court adjusted the pleading standards investors must observe to survive motions to dismiss. The 8-1 decision largely conforms to existing practices in most jurisdictions.
At issue was whether the plaintiffs in the case against suburban Chicago communications company Tellabs had adequately pleaded scienter, or intent to deceive, under the PSLRA when they accused the company’s president of lying about its financial outlook. Fraud cases require highly detailed allegations of intent, which the Chicago-based 7th Circuit held the plaintiffs satisfied merely by showing a reasonable person could infer intent from the factual accusations against Tellabs.
The Supreme Court reversed, however, instructing courts to go further by examining the entire complaint, then weighing factual allegations suggesting scienter against plausible innocent explanations to arrive at a “strong inference” of intent required by the act.
Observers predicted the decision would only minimally disturb ongoing cases, because six circuits already had used a similar analysis before Tellabs came down.
Most important, Tellabs gives defendants an easier way out by allowing trial courts to dispose of losers on motions to dismiss, rather than making defendants spend time and money on depositions and other discovery in preparation for summary judgment, where most contested cases typically wind up.
This term’s pre-emption case, Riegel, “is very much on the radar screen,” says Englert. “The whole area of pre-emption is really important to businesses.”
The issue of whether federal statutes pre-empt state law is rife with “flux and uncertainty,” says Englert. “The court has a body of case law that often looks in both directions at once.” “Businesses present pre-emption cases as need for uniformity,” says Wolfman of Public Citizen, which represents the plaintiff. “They don’t want to have a different law in Kentucky from one in Pennsylvania.”
But, he adds, “people realize in their gut that they have a tort system that has existed since the founding of the country, and that has coexisted with the federal regulatory system.”
Riegel invites the Supreme Court to clear up a circuit split by clarifying whether federal law pre-empts state tort claims against a medical device manufacturer.
A balloon catheter inserted into the plaintiff’s coronary artery, which was partly occluded by calcium deposits, burst after the doctor inflated it beyond the manufacturer’s specifications. The patient, who was put on life support, suffered permanent injuries. He and his family claimed the Minnesota-based manufacturer was liable under New York state tort law.
The New York City-based 2nd Circuit, however, held last year that the catheter underwent the most stringent testing required by the Food and Drug Administration, and under 1976 medical device legislation was pre-empted from state tort claims. 451 F.3d 104.
Lawyers are hoping the high court clarifies the confusion in the wake of a 1996 case that held the same company liable for a separate device that underwent a less intensive product review procedure. Medtronic v. Lohr, 518 U.S. 470.
Englert, who was part of the defense team in Lohr, says eyes will be on Roberts, who joined Stevens’ dissent in last term’s pre-emption case, Watters v. Wachovia Bank NA, 127 S. Ct. 1559. “There’s a real possibility of splits in pre-emption cases that cut across ideological lines,” Englert says.
In Wachovia, the court held 5-3 that federal regulations, in this case issued by the Office of the Comptroller of the Currency, pre-empt state laws governing mortgage companies owned and run by federally chartered banks.
The decision raises the question of just how far regulatory agencies can go on their own in pre-empting state laws, a question historically decided by Congress and the courts.
Bankers say allowing their mortgage-lending subsidiaries to answer to a single federal regulator eliminates duplicative and contradictory state laws that ultimately mean higher costs to borrowers.
The case began in April 2003 after Michigan state banking officials banned a mortgage company owned by Wachovia from doing business there because the company had surrendered its Michigan state license. Charlotte, N.C.-based Wachovia sued to prevent Michigan from applying its law to the mortgage company.
The Supreme Court majority drew the comptroller’s pre-emptive authority from the 1864 National Bank Act, which in combination with regulations issued by the comptroller, authorizes federally chartered banks to make real estate loans and to conduct that aspect of their business through operating subsidiaries.
“Diverse and duplicative superintendence of national banks’ engagement in the business of banking, we observed over a century ago, is precisely what the NBA was designed to prevent,” Ginsburg wrote for the majority.
In dissent, however, Stevens, joined by Roberts and Justice Antonin Scalia, declined to find agency pre-emption stemming from anything other than Congress’ clear authorization.
“It’s going to be a very difficult environment,” predicts John Ryan, executive vice president for the Conference of State Bank Supervisors. “There are all sorts of ways that you are going to be able to escape state law.”
Michigan state banking commissioner Linda A. Watters, the plaintiff in Wachovia, was counting on Comptroller John C. Dugan’s promise to cooperate more closely with the states in consumer protection matters.
“Quite frankly, I think the focus now is on the OCC to follow up on consumer complaints,” Watters says.
Probably nowhere last term did the court alter the law as much as in antitrust. While Twombly was the most far-reaching case, Weyerhaeuser was probably the least controversial. In a unanimous decision, the court ruled that in order to prove anti-competitive behavior, a plaintiff must not only establish that a competitor bid up the price of a commodity, but that the bidding hurt its own ability to make a profit. Observers say the decision gives businesses a consistent guide by making the standard for predatory bidding the same as that for predatory pricing.
Credit Suisse addressed whether the Sherman Act or SEC regulations should apply to alleged anti-competitive behavior in the issue of initial public offerings. Writing for the majority, Breyer deferred to the regulators, saying that the court could not allow antitrust suits to proceed where securities regulation already applied. “This is a securities complaint dressed in antitrust garb,” he wrote.
The fourth case last term, Leegin Creative Leather Products Inc. v. PSKS Inc., 127 S. Ct. 2705, focused on pricing policy and exchanged one standard for evaluating anti-competitive behavior for another.
Of the decisions, Leegin most thoroughly involved economic theory, representing a victory of sorts for the Chicago school of economics, which emphasizes a free market approach and eschews government regulation. In antitrust law, the thinking is that there are some practices that may appear anti-competitive but that actually serve to favor competition.
The Leegin majority, written by Kennedy, tossed out a 96-year-old precedent that made it per se unlawful for manufacturers and distributors to agree to set minimum retail prices. Dr. Miles Medical Co. v. John D. Park and Sons Co., 220 U.S. 373 (1911). Instead, the court substituted the looser, more defendant-friendly rule of reason, which weighs whether a practice actually favors the parties and the public.
“Leegin was a victory for the Chicago school, in the sense that Chicagoans convinced other scholars and lawyers that Dr. Miles was incorrect,” says law professor Alan J. Meese, an antitrust expert at William & Mary.
The new rule fits modern antitrust thinking, Meese adds. “The court has really been moving toward a business-friendly, defendant-friendly, more anti-regulatory approach since the 1970s. Over the last 30 years the court has been cutting back on the reach of doctrines generated in the ’50s and ’60s,” he says.
“I think one of the most important things the court is doing is that it continues to infuse more and more economic analysis into the law,” says Joseph Angland, chair of the ABA Antitrust Section and a partner with Heller Ehrman in New York City. “Dr. Miles was the product of an era when the court didn’t employ economic thinking. Thankfully, we’re moving past that time.”
Like the Rehnquist court, the Roberts court displayed no great affection for punitive damages when it wiped out as a due process violation a $79.5 million award from an Oregon state court jury in the lung cancer death of Jesse Williams, who smoked up to three packs of Marlboros a day for 47 years. Philip Morris USA v. Williams, 127 S. Ct. 1057.
The cigarette maker won the 5-4 decision with an argument that jurors punished it not only for Williams’ death but for harm to other Oregon smokers who weren’t before the court.
The majority recognized that punitive damages are appropriate to advance legitimate state interests in punishing and deterring illegal conduct.
But “at the same time, we have emphasized the need to avoid arbitrary determination of an award’s amount,” Breyer explained for the majority. “Unless a state insists upon proper standards that will cabin the jury’s discretionary authority, its punitive damages system may deprive a defendant of fair notice of the severity of the penalty that a state may impose.”
But the court again declined to answer the key question that has confounded plaintiffs and defense lawyers for more than a decade: How much is too much?
In 1996, the justices struck as “grossly excessive” a $2 million award in the legendary BMW paint job case. BMW of North America Inc. v. Gore, 517 U.S. 559. The court allowed jurors to consider the reprehensibility of the defendant’s conduct, including harm to others, in assessing punitive awards.
The court suggested punitive damages may go overboard when they multiply compensatory awards by more than single digits. State Farm v. Campbell, 538 U.S. 408 (2003). In Philip Morris, the punitives were nearly 100 times the $821,000 in compensatories. But sticking to procedural matters, the Philip Morris majority worried that the trial judge’s instructions may have misled jurors to consider harm to other smokers who didn’t sue.
“This nuance eludes me,” Stevens wrote in dissent. “When a jury increases a punitive damages award because injuries to third parties enhanced the reprehensibility of the defendant’s conduct, the jury is by definition punishing the defendant directly for third-party harm.”
In another thwarted class action, Safeco, the court held that the federal Fair Credit Reporting Act doesn’t require an insurance company to notify consumers that a credit report figured in the rate if consumers would have gotten the same rate by a neutral scoring method.
Under the 1970 statute, insurance companies must tell applicants that an adverse action was taken if they are turned down when their credit scores fell below the neutral number. But Souter interpreted the statute to say that an insurer didn’t willfully violate the act by not informing the consumer if the rates would have been the same. Nor did an insurer violate the statute if it mistakenly neglected to notify new applicants. The ruling reversed the San Francisco-based 9th Circuit.
The court also imposed limits on qui tam actions, in which an individual sues on behalf of a government entity. Rockwell International Corp. v. United States, 127 S. Ct. 1397.
Under the federal False Claims Act, the individual, or relator, must be the original source of the information that provides the basis of the lawsuit. In a 6-2 ruling, Scalia declined to allow a former engineer at a nuclear weapons facility to sue under the FCA. Although the engineer provided the initial information for the suit, he no longer worked at the plant when the events occurred and merely predicted the outcome.
In dissent, Stevens criticized the definition as too narrow.