Significant Rulings of Interest to the Business Community from the Supreme Court's 2004-2005 Term

8/1/2005
Client Alert

The Supreme Court issued landmark decisions this past Term in the fields of intellectual property, governmental takings of private property, federal securities fraud and corporate investigations, among others, that will be of great significance to the business community.  Amidst the prominent social issues involving government displays of the Ten Commandments and the death penalty for juveniles, the Court also was presented with an epicurean docket of wine and beef cases that will affect interstate commerce and federal regulation of businesses.  The following is a brief look at some of those business highlights of the Term.

Intellectual Property

The Supreme Court’s caseload this Term confirmed an emerging trend at the Court in granting review in intellectual property cases generally, with an even distribution this Term among the fields of copyright, patent and trademark. 

Perhaps the most watched case this term was Metro-Goldwyn-Mayer Studios Inc. v. Grokster Ltd., 125 S. Ct. 2764, in which the Court showed a surprising unanimity (albeit with two concurring opinions that suggested deep divisions in the Court on where to go next) in limiting its earlier ruling in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), holding that Sony was not meant to foreclose fault-based liability under the common law for facilitating copyright infringement by others.  The Court reasoned that Sony does not require courts to ignore evidence of intent to promote such infringement if such evidence exists.  The Court therefore held that distributors of free peer-to-peer file sharing software that is used primarily for the sharing of copyrighted files without authorization could be liable for copyright infringement if their objective was to promote use of the software to infringe copyright.  Such an objective must be shown by clear expression or other affirmative steps to foster infringement, going beyond mere distribution with knowledge of third-party action, and regardless of the software’s lawful uses.  The case was remanded for reconsideration.

The pharmaceutical industry, the scientific community and the research tool community, to name but a few, were on high alert this Term awaiting the decision in Merck KGaA v. Integra LifeSciences I, Ltd., 125 S. Ct. 2372, on the scope of the statutory exemption from patent infringement in 35 U.S.C. § 271(e)(1) for use of a patented invention related to the development and submission of information to the FDA.  The Court held that the exemption extends to preclinical studies of patented compounds that are appropriate for submission to the FDA in the regulatory process, including those pertaining to a drug’s safety, efficacy, mechanism of action, pharmokinetics and pharmacology.  The Court noted that Section 271(e)(1) does not, however, include "all experimental activity that at some point, however attenuated, may lead to an FDA approval process," but can apply to the use of patented compounds in experiments that are not ultimately submitted to the FDA.  In a footnote of great relief to many in the research tool industry (on whose behalf Morrison & Foerster filed an amicus brief), the Court left untouched the question of the exemption’s applicability to patented research tools, noting that the Court did not need to, and did not, "express a view about whether, or to what extent, § 271(e)(1) exempts from infringement the use of ‘research tools’ in the development of information for the regulatory process." 

Fair use was the topic at issue for trademark holders this Term.  In KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 125 S. Ct. 542, the Court held that, in a trademark infringement action, a party raising the statutory affirmative defense of fair use under 15 U.S.C. § 1115(b)(4) does not have a burden to negate any likelihood that its use will confuse consumers about the origins of the goods or services at issue.  At the same time, the Court specified that it was not ruling out the relevance of the degree of consumer confusion in assessing whether a party’s use is objectively fair.  The Court vacated the judgment and remanded the case for further proceedings, thereby expressly leaving open for the court on remand consideration of the evidence of likelihood of confusion and actual confusion presented by the trademark holder.  Morrison &  Foerster joined the team representing the trademark holder when the case reached the Supreme Court to collaborate on the brief and the Firm presented oral argument in the Supreme Court. 

Property Rights

The Court decided a trio of cases involving the authority of a state or local government to take private property in exchange for compensation under the Fifth Amendment. 

In Kelo v. City of New London, 125 S. Ct. 2655, the Court held, in a 5-4 decision, that economic development qualifies as a "public use" that justifies a taking, with compensation, by the government of private property.  The Court ruled that the government is not required to open up the condemned land to use by the general public.  The Court emphasized that the taking of the property for economic redevelopment in this particular case would be executed pursuant to a carefully considered development plan that was not adopted to benefit any particular class of individuals and which the local government believes will provide appreciable benefits to the community.  This decision likely is not the last word on the issue, however.  Immediately following release of the Court’s opinion, legislative efforts began both at the federal level and in a number of states to limit the types of uses for which the government could take private property.

In a unanimous opinion in Lingle v. Chevron USA Inc., 125 S. Ct. 2074, the Court overruled prior precedent on regulatory takings, which had required courts to consider whether the government’s regulation of private property "substantially advances" a legitimate state interest in order to decide whether the regulation effected a taking that was compensable under the Fifth Amendment.  The Court explains in its new opinion that the "substantially advances" inquiry may be relevant to a due process challenge, but is not relevant to a takings analysis.  Certain to be the cornerstone of future casebooks, the opinion lays out a comprehensive explanation of the Court’s Takings Clause jurisprudence and reaffirms that the Takings Clause "is designed not to limit governmental interference with property rights per se, but rather to secure compensation in the event of otherwise proper interference amounting to a taking" for public use. 

The third takings opinion, San Remo Hotel L.P. v. San Francisco, 125 S. Ct. 2491, involved the more esoteric issue of the federal full faith and credit statute, 28 U.S.C. § 1738.  The Court held that Fifth Amendment takings claims are not excepted from the statute and that a state court’s prior determination of pertinent questions can result in issue preclusion that bars a federal court from adjudicating a federal constitutional takings claim. 

Securities Fraud and Corporate Investigations

The Court took up the issue of "loss causation" in a private securities fraud class action in Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627, and held that an inflated purchase price, by itself, will not constitute or proximately cause the relevant economic loss under 15 U.S.C. § 78u-4(b)(4), necessary to allege and prove "loss causation," i.e., a causal connection between a misrepresentation by a company and economic loss suffered by purchasers of the company’s securities.  The Court held that a plaintiff could not satisfy the loss causation requirement by alleging merely that a security’s price at the time of purchase was inflated because of the misrepresentation. 

In another show of unanimity in one of the high profile cases of the Term, the Court in Arthur Andersen LLP v. United States, 125 S. Ct. 2129, reversed the criminal conviction of the Arthur Andersen firm for witness tampering in its role as Enron’s auditor.  The Court interpreted a federal criminal statute, 18 U.S.C. §§ 1512(b)(2)(A) and (B), which makes it a crime to "‘knowingly ... corruptly persuad[e] another person ... with intent to ... cause’ that person to ‘withhold’ documents from, or ‘alter’ documents for use in, an ‘official proceeding.’"  The Court held that the jury instructions did not convey correctly the elements of a "corrupt[] persua[sion]" because "‘persua[sion]’ is by itself innocuous," and even persuading a person with an intent to withhold testimony or documents from the government is not inherently bad.  The Court also found that  "knowingly" limits the statute’s reach to include only persons conscious of the wrongdoing.  The Court held that the jury instructions failed to require that Andersen be conscious of wrongdoing and improperly allowed the jury to convict "even if [Andersen] honestly and sincerely believed that its conduct was lawful."  Congress has amended the criminal code, however, so that future cases involving document destruction can be prosecuted without proof of corrupt persuasion.

Interstate Commerce

Constitutional law aficionados and businesses alike monitored the "wine case," as it came to be known (officially reported as Granholm v. Heald, 125 S. Ct. 1885), which involved precedent from the late 1800s, the failed social experiment of Prohibition and the Court’s modern and complex dormant Commerce Clause jurisprudence.  To the cheers of wine connoisseurs around the country, the Court held that the laws of Michigan and New York that prohibited out-of-state wineries from making direct sales to consumers, but allowed in-state wineries to do so, discriminate against interstate commerce in violation of the Commerce Clause.  The Court expressly found that the discrimination is not authorized by the provisions of the Twenty-first Amendment authorizing state regulation of liquor.  The Court declared that if a state chooses to allow direct shipment of wine, it must do so on evenhanded terms.  The Court specifically noted that its invalidation of the direct-shipment wine laws does not call into question the constitutionality of Michigan and New York’s three-tier system for liquor distribution that requires separate licenses for producers, wholesalers and retailers, so long as liquor produced out of state is treated the same as its domestic equivalent.  Morrison & Foerster filed a brief on behalf of the Cargo Airline Association as amicus curiae in support of the wine shippers.  State legislatures have been quick to respond to the ruling.  For example, the New York legislature enacted a law, which will take effect on August 13, 2005, that will permit direct shipment from wineries to New York residents of up to 36 cases of wine each year, so long as the state from which the wine originates permits New York wineries reciprocal shipping privileges.

 In a more typical dormant Commerce Clause case involving truck fees rather than fine dining, American Trucking Associations, Inc. v. Michigan Public Service Comm’n, 125 S. Ct. 2419, the Court upheld a Michigan law that imposes a flat $100 annual fee on each truck that transports commercial property between points within the state.  The Court reasoned that, because the fee applies only to intrastate transactions and does not facially discriminate against interstate or out-of-state activities or enterprises, the party challenging the constitutionality of the statute had to present record evidence that the fee has a significant practical burden on interstate trade, and it failed to do so in this case.  The per-truck charge appeared fair in this instance because the fee seeks to defray the state’s costs of regulating vehicular size and weight, administering insurance requirements and applying safety standards.  The Court distinguished its earlier precedent, which had invalidated a flat fee imposed by a state on all trucks that used its roads, where the record contained data about the disparate burden of the fee on interstate trucks and the fee was used to maintain the state’s highways, which warranted a fee assessed on a per-mile rather than a per-truck basis.  The Court also held that its "internal consistency" test was not relevant because costs on businesses from similar laws in other states would simply be the price an interstate business must pay in order to engage in local business. 

Federal Regulation of Businesses     

Finally, a number of other cases involved various means by which federal agencies, regulations and statutes regulate some of the everyday aspects of business.

In the "beef case" this Term, Johanns v. Livestock Marketing Association, 125 S. Ct. 2055, the Court upheld against First Amendment challenge a federal government assessment on sales and importation of cattle to fund certain projects, including beef promotional campaigns.  The Court held that the assessment is used to fund the government’s own speech, as opposed to private speech, and therefore does not violate the First Amendment.  The Court distinguished certain precedent, including a case in which it had struck down a mandatory assessment that funded mushroom advertising, because the speech in those cases was found, or assumed, to be private.  The Court emphasized that citizens have no First Amendment right not to fund government speech and that is no less true when the funding is through a targeted assessment rather than through general taxes. 

The federal government’s regulation of telecommunications was before the Court in National Cable & Telecommunications Association v. Brand X Internet Services, 125 S. Ct. 2688, where the Court upheld the Federal Communication Commission’s determination that the mandatory common-carrier regulation under Title II of the Federal Communications Act does not apply to cable companies that sell broadband Internet service because they do not provide "telecommunications services" within the meaning of the Act.  In a decision that will undoubtedly follow in the steps of the most frequently cited administrative deference case, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Court reaffirmed that any inconsistency between an agency order and a prior agency view is not a basis for abandoning administrative deference, which allows a change in agency policy.  It also held that a prior circuit interpretation of a statute did not trump administrative deference to the agency interpretation under Chevron because "[a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion." 

The only case this Term involving an environmental statute was Cooper Industries Inc. v. Aviall Services, Inc., 125 S. Ct. 577, in which the Court held that a private party may not seek contribution for its environmental cleanup costs from other potentially responsible parties under Section 113(f)(1) of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) if it has not been sued by the government under Section 106 to compel cleanup activities or under Section 107(a) to recover response costs.  The Court declined to decide whether the party may recover costs under Section 107(a)(4)(B) even though it is a potentially responsible person.  The Court also declined to decide whether the party has an implied right to contribution under § 107. 

The Court ruled in Bates v. Dow AgroSciences LLC, 125 S. Ct. 1788, that the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) preemption provision does not preempt most of the common law claims brought by farmers against a pesticide manufacturer arising out of damage to crops allegedly caused when the pesticide was used by the farmers consistent with the instructions on the label, and the manufacturer knew or should have known that such use would stunt the growth of peanuts under the relevant soil conditions.  The Court reasoned that the plaintiffs’ claims of defective design, defective manufacture, negligent testing and breach of express warranty, are not preempted because they are not premised on requirements for "labeling or packaging."  Prevailing on those claims would not require a change in the label, even though it might motivate or induce such a change.  By contrast, FIFRA does preempt claims for fraud and negligent-failure-to-warn based on common-law rules that qualify as "requirements for labeling or packaging" because those rules set a standard for a product’s labeling, but only to the extent they would impose requirements that diverge from those imposed by FIFRA.

Two consolidated cases involving federal court jurisdiction also involve regulation of business litigation, in effect, in that they affect a business defendant’s ability to remove to federal court class actions and mass tort cases brought in state court.  In Exxon Mobil Corp. v. Allapattah Services Inc., 125 S. Ct. 2611, the Court held that federal courts have supplemental jurisdiction over the claims of plaintiffs in an Article III case or controversy even if those claims do not meet the amount-in-controversy required for federal court diversity jurisdiction under 28 U.S.C. § 1332(a), so long as the other elements for jurisdiction are present and at least one named plaintiff in the action satisfies Section 1332(a)’s amount-in-controversy requirement.  The grant of supplemental jurisdiction in 28 U.S.C. § 1367 is broad and extends over all other claims within the same case or controversy so long as the district courts would have original jurisdiction over the action.  The Court specifically noted that the Class Action Fairness Act enacted this year has no bearing on its analysis.  That Act confers federal diversity jurisdiction generally over class actions where the aggregate amount in controversy exceeds $5 million, but is not retroactive and many proposed exercises of supplemental jurisdiction, even in the class-action context, might not fall within the new statute’s ambit.

In the area of federal law that regulates the employment practices of private businesses, there were fewer cases than typical this year.  In Smithv.City of Jackson, 125 S. Ct. 1536, the Court held that the Age Discrimination in Employment Act prohibits an employment practice that has a disparate impact on older workers and is not based on reasonable factors other than age.  The Court held, however, that the scope of disparate-impact liability under the ADEA is narrower than under Title VII, the federal civil rights statute prohibiting race and sex discrimination, because the ADEA contains a defense for employers for using "reasonable factors" other than age.  That ADEA test does not ask whether there are other ways for the employer to achieve its goals that do not result in a disparate impact on a protected class.  In Spectorv.Norwegian Cruise Line Ltd., 125 S. Ct. 2169, the Court held that the prohibitions under Title III of the Americans with Disabilities Act against discrimination based on disability in public accommodations, in specified public transportation services, and related provisions, apply to foreign-flag cruise ships in U.S. waters, except that they cannot result in regulation of a vessel’s internal affairs.

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