Nine Supreme Court Cases In-House Counsel Should Be Watching

As the Supreme Court's 2010 term heats up, InsideCounsel asked the experts what cases in-house counsel should be watching. In a nod to the court's nine justices, here are nine cases on the docket this term expected to make waves in the business world.

AT&T Mobility v. Concepcion

The set-up

AT&T Mobility's wireless service contract with customers contains an arbitration clause--a standard provision in consumer contracts. Although some arbitration clauses have been criticized as being unfair to consumers, a district judge called the AT&T clause "perhaps the most fair and consumer-friendly provisions this court has ever seen." However, the contract did contain an express waiver of class arbitration, which blocked consumers from bringing class actions. In California, courts assess the conscionability of contracts under a three-prong test set forth in Discover Bank v. Superior Court (Boehr). Under that rule, both the district court and 9th Circuit said the AT&T contract was unenforceable because of the class arbitration waiver.

AT&T argues that the Federal Arbitration Act (FAA) pre-empts the California test because it mandates that courts enforce arbitration agreements. The plaintiffs counter that if the California test applies outside the arbitration context, the FAA doesn't bar it.

"The main question is whether the unconscionability principle of California law is specific to arbitrations or not. If it is, and it prohibits the enforcement of arbitration agreements in specific circumstances, there's probably a good chance the Supreme Court will strike it down," says Adam Charnes, a partner at Kilpatrick Stockton and a former clerk to Justice Anthony Kennedy.

The question

Does the FAA pre-empt states from conditioning the enforcement of an arbitration agreement on the availability of certain procedures--here, classwide arbitration--when those procedures are not necessary to ensure that the parties to the agreement are able to vindicate their claims?

The impact

One of several cases in recent years that Supreme Court has considered on arbitration, AT&T Mobility could have huge repercussions for companies that include arbitration provisions in their
consumer contracts.

"A host of companies have filed amicus briefs on the side of AT&T Mobility," says Steve Blonder, a principal at Much Shelist. "It goes to predictability and certainty--if a company doesn't know if its arbitration clause is going to be upheld and finds itself with claims it didn't anticipate, predictability goes out the window."

Since one of the primary reasons companies put arbitration clauses in their consumer contracts is to disrupt consumer class actions, if the Supreme Court upholds the 9th Circuit it has the potential to change how companies use arbitration agreements in standard consumer contracts.

"Companies are going to need to take another look at why they have arbitration clauses in standard form contracts--if the arbitration clauses can no longer function to [prohibit class actions], they have to question whether they really want arbitration clauses," Charnes says. "The theory is that arbitration is more effective and simpler, and that it can restrict discovery, but it also provides fewer procedural defenses."

Janus Capital Group v. First Derivative Traders

The set-up

The Janus Funds claimed in market prospectuses that it had measures in place to protect its mutual funds from market timing, but in 2003 New York Attorney General Eliot Spitzer cracked down on a hedge fund that secretly paid mutual fund managers to allow it to engage in market timing trades. Included in the group of mutual fund managers was Janus Capital, a separate entity from the Janus Funds that provided management and investment advisory services. Investors sued Janus Capital under Section 10(b) of the Securities Exchange Act of 1934, claiming misrepresentations in the prospectus statements.

The district court dismissed the complaint--the funds, not Janus Capital, had prepared and issued those statements, it said, a fact the plaintiffs did not dispute. But the 4th Circuit reversed, holding that Janus Capital "helped" draft the misleading statements and that "interested investors would have inferred that if [Janus Capital] had not itself written the policies in the Janus fund prospectuses regarding market timing, it must at least have approved these statements."

The question

Can a service provider be held primarily liable in a private securities fraud action for a statement that it helped draft but which was not directly attributed to it?

The impact

The 4th Circuit's standard could expand primary liability to investment advisers, but also to law firms, accounting firms and other service providers. The Securities Industry & Financial Markets Association (SIFMA) argues in an amicus brief that the 4th Circuit's approach "invites ... uncertainty and staggering costs."

"Janus Capital could potentially have a large impact on lawyers who make, draft and edit statements; on accountants; and on others who may be sued for participation in securities offerings," says Bradley Andreozzi, a partner in Drinker Biddle's commercial litigation practice group. "Upholding the 4th Circuit's decision would significantly expand the risk of securities law liability for other parties beyond the issuer. It's a case of great interest."

Based on its history on similar issues, many practitioners fully expect the Supreme Court to reverse. Most recently in the blockbuster 2008 opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., it held that a service provider that merely assists a company that makes a public misstatement cannot be held liable for securities fraud. That would be aiding-and-abetting liability, it said, and Section 10(b) doesn't provide for such liability--the court had said as much in 1994 in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.

"It's an important decision, but I think it's one where you can almost be sure how it will turn out," says Kevin LaCroix, a partner in OakBridge Insurance Services and creator of the D&O Diary blog. "The
4th Circuit's decision is just inconsistent with Supreme Court case law."

Williamson v. Mazda

The set-up

Thanh Williamson was traveling in the backseat of a Mazda minivan when she was killed in a collision. Survivors sued Mazda under California tort law, alleging defective design because her seat lacked a shoulder strap. Williamson's seat was equipped with only a lap belt, and plaintiffs said the force of the accident caused her body to "jackknife" over the lap belt, causing fatal internal injuries. At the time the 1993 model minivan was manufactured, the National Highway Traffic Safety Administration (NHTSA) required that middle back seats, such as the one where Williamson was seated , only be equipped with a lap belt. The shoulder strap was optional.

A trial court upheld Mazda's defense that its compliance with federal regulation pre-empted the Williamson plaintiffs' tort claims, and an appeals court affirmed, holding that the NHTSA rule represented a policy judgment that manufacturers should be able to choose whether to install shoulder straps in certain seats.

The question

Does compliance with a federal statute giving manufacturers options regarding safety equipment shield them from state tort lawsuits alleging they should have installed the safer option?

The impact

"Clearly the scope of pre-emption will be discussed," says Jill Wheaton, a member at Dykema. "If the federal regulations at the time said this seat in a car can have a lap belt, can you bring a lawsuit later on saying the car should have had more than a lap belt?"

Plaintiffs say the implied conflict pre-emption defense doesn't apply here because no conflict exists between allowing the claims against Mazda to go forward and the objectives of the NHTSA's safety standards. In a brief they argued, "It would be extraordinary for this court to hold that simply by offering manufacturers different options for compliance with a minimum safety standard, NHTSA has unwittingly set a liability ceiling rather than a safety floor."

Manufacturers would face expanded liability if the plaintiffs' argument stands.

"If the Supreme Court agrees with the defendants," says Neil Posner, a principal at Much Shelist, "liability will not expand and in fact could narrow a bit, affording a bit of a safe harbor to manufacturers who are making decisions about what to install or what not to install in compliance with federal law."

Along with the term's other cases that deal with issues of pre-emption, Williamson has the potential to shed light on the implied pre-emption defense.

"It's an opportunity for the court to weigh in on the pre-emption doctrine," Andreozzi says. "Having multiple cases in the pre-emption area means there's an opportunity for some real development of the law in the pre-emption field, which would be of great significance to manufacturers and others who have activities regulated at the federal level."

Bruesewitz v. Wyeth

The set-up

While Williamson v. Mazda presents an implied pre-emption argument, this case concerns Section 22(b)(1) of the the Vaccine Act, an express pre-emption provision precluding state tort claims from going forward if the injury was unavoidable, the vaccine was properly made and the drug labeling gave proper directions and warnings. Instead, such cases go to a so-called vaccine court--a division of the U.S. Court of Federal Claims, it provides a no-fault administrative compensation program. At the time the scheme was created, a number of vaccine manufacturers had been driven from the market by civil litigation burdens, and the Vaccine Act was meant to ensure the supply of childhood vaccines.

The plaintiffs in Bruesewitz argue that when there is a design defect in the development of the vaccine, the express pre-emption provision does not apply. They allege their daughter suffers from a seizure disorder and developmental impairment as a result of a Wyeth-made DTP vaccine that came "from a lot associated with an unusually large number of adverse events." The vaccine court rejected their claims, and the Bruesewitzes filed state tort claims against Wyeth. On the basis of the diversity of citizenship of the parties, the case was removed to a federal district court which granted summary judgment to Wyeth, ruling the Bruesewitz's claims were expressly pre-empted by the Vaccine Act. The 3rd Circuit affirmed.

The question

Does Section 22(b)(1) of the Vaccine Act pre-empt all vaccine design defect claims, regardless of whether the vaccine's side effects were unavoidable?

The impact

No doubt pharmaceuticals, specifically vaccine makers, are watching Bruesewitz closely. The case differs from the typical pharmaceutical case wherein a pre-emption defense arises.

"This statute is an express pre-emption provision designed to move cases into a special administrative process," says Adam Charnes, a partner at Kilpatrick Stockton.

But the chance still remains for the Supreme Court to depart from the lower courts.

"The fact that the Supreme Court weighed in indicates they may say that you can bring suit against a company for a vaccine," says Jill Wheaton, a member at Dykema. "The court took the case because the issue is coming up more, and different courts are saying different things about it."

Staub v. Proctor Hospital

The set-up

Vincent Staub, a sergeant in the National Guard, sued his former employer Proctor Hospital for discrimination under the Uniformed Services Employment and Reemployment Rights Act, which prohibits the denial of employment on the basis of an employee's service in the uniformed services. Staub said a supervisor showed clear hostility to accommodating his National Guard duty, once calling it "bullshit." However, the decision to fire Staub made by another supervisor.

At trial, a jury sided with Staub and found he'd shown that his military duty contributed to his dismissal. But a 7th Circuit panel reversed, holding that the hospital was responsible only for the motives of the person who decided to fire Staub, and that Staub never claimed that person had displayed anti-military hostility.

The question

In what circumstances can an employer be held liable based on the unlawful intent of officials who caused or influenced but did not make the ultimate employment decision?

The impact

"There are probably a lot of circumstances in which a boss fired an employee, and the boss didn't discriminate against the employee but maybe peers of the boss made racially discriminatory statements to the boss," says Adam Charnes, a partner at Kilpatrick Stockton. "Is that enough for a discrimination claim?"

The case deals with the so-called cat's paw theory of liability that holds an employer liable for adverse employment actions when a decision-maker is influenced by a subordinate with discriminatory motives.

"It's kind of a cool theory, but at the end of the day all the Supreme Court can say is yes, there is a cat's paw theory," says Michael Fox, a shareholder at Ogletree Deakins. "The real question is what signals they will send on how strong the influence has to be. At the end of the day it will be a factual test, a signal as to what kind of evidence you need."

Matrixx Initiatives v. Siracusano

The set-up

In February 2004, the stock price of Matrixx Initiatives dropped after a doctor appeared on "Good Morning America" declaring that Matrixx's spotlight product, the cold remedy Zicam, could cause anosmia, or loss of smell. Prior to that, investors say Matrixx had touted the business success and safety of Zicam in the media and in response to some reports of anosmia in Zicam users and a handful of related product liability lawsuits. Investors sued under SEC Rule 10b-5, claiming the losses were due to Matrixx's failure to disclose scattered adverse event reports, dating back to 1999, that linked Zicam to loss of smell.

The question

Can a plaintiff bring a 10b-5 claim based on a pharmaceutical company's nondisclosure of adverse event reports, even if they are not alleged to be statistically significant?

The impact

A district court granted Matrixx's motion to dismiss because it said the plaintiffs had failed to sufficiently plead materiality and scienter--two of the elements required for a securities fraud claim under Section 10b of the Securities and Exchange Act of 1934 and SEC Rule 10b-5. On the issue of materiality--whether the alleged misrepresentation would have been important to a reasonable investor in making an investment decision--the district court concluded that "12 user complaints is not statistically significant," and therefore the company had no requirement to disclose the adverse event reports--a threshold the 1st, 2nd and 3rd Circuits have backed.

In Matrixx Initiatives, however, the 9th Circuit rejected the statistical significance test, ruling that the allegation a drug company didn't disclose adverse reactions is enough of a basis for a shareholder lawsuit to proceed.

"The case has the potential of making shareholder lawsuits in essence the tail that wags the dog in the drug safety area," says Dan Struck, a principal in the insurance coverage practice group at Much Shelist. "Typically shareholders bring lawsuits once a mass tort claim is brought and share prices drop, but if the 9th Circuit's approach is adopted, it can be a straight lawsuit by a shareholder.... If the failure to disclose an unsuccessful test becomes something actionable, that creates a whole new world of liability."

From the insurance perspective, Struck says, that will create new issues with D&O policies, which typically cover the "tagalong" 10b-5 suits but would now have to consider a new class of 10b-5 lawsuits based on the failure to disclose an adverse event report.

The case also gives the justices the opportunity to address the broader question of what constitutes materiality.

Kasten v. Saint-Gobain Performance Plastics Corp.

The set-up

When Kevin Kasten was fired, he sued, claiming it was retaliation under the Fair Labor Standards Act (FLSA), which prohibits adverse employment actions because the employee has filed an FLSA complaint. Kasten had been open with the fact that he had a problem with the location of his employer's timeclocks, which prevented workers from clocking in for donning and doffing time. He complained to his supervisors and up the chain of command, and talked of his plans to sue the company under the FLSA. The district court dismissed the claim, ruling that the retaliation provision of the FLSA only applies to written complaints, which can be "filed," and not to oral complaints the 7th Circuit affirmed.

The question

Is an oral complaint of an FLSA violation protected conduct under the anti-retaliation provision?

The impact

Kasten is one of two retaliation cases on the docket. The other, Thompson v. North American Stainless, asks whether a man who was fired after his wife filed an EEOC charge against their mutual employer can sue his former employer for retaliation.

"Both cases will really tell us what approach is going to win out--do we interpret language strictly, or do we really go out and stretch for retaliation?" says Michael Fox, a shareholder at Ogletree Deakins. "If there's one area the court has really stretched in the past, it has been retaliation."

If the justices make such a statutory stretch and the plaintiff prevails in Kasten, Much Shelist Principal Steve Blonder expects a rise in similar FLSA retaliation claims--and debate about where the line should be.

"That would open up potential liability much broader than it currently exists," Blonder says. "The question would be, when people complain about their job, their boss or what happens at work, and then an adverse employment decision is made, does that open up a whole new caste of claims?"

Costco v. Omega

The set-up

For many years, retailer Costco sold Omega watches at a deep discount--about a third less than Omega's suggested retail value. It achieved such low prices by purchasing the watches from third parties that had imported the watches from overseas, where Omega has different pricing standards. Other retailers complained to Omega that they couldn't compete with Costco's prices. So in 2003, Omega rolled out a solution: It created and copyrighted a tiny insignia that it placed on the back of its watches, allowing it to invoke a provision of the Copyright Act that would let it stop importation of copies of its work into the U.S. When Omega discovered Costco was selling watches meant for distribution outside the U.S., it sued the retailer for copyright infringement.

But Costco says the first-sale doctrine is in play here. It says that once the owner of an IP right sells something covered by that right, the IP owner can no longer prevent customers from selling it as long as the copy is "lawfully made under" the Copyright Act. A district court granted summary judgment in favor of Costco, but the 9th Circuit reversed, holding that products made overseas are lawfully made under the laws of that country, not the U.S. Copyright Act, and thus the first-sale doctrine doesn't apply.

The question

Does the first-sale doctrine apply to imported goods manufactured abroad?

The impact

The copyright case has the potential for dramatic impact on the gray market for goods and on high-end manufacturers wishing to control who sells their products.

"If the Supreme Court affirms the 9th Circuit, it would create a great avenue for manufacturers to clamp down on unauthorized distribution of their products," says Adam Charnes, a partner at Kilpatrick Stockton. "Omega made no bones about the fact that the only reason it placed the insignia on the back of the watch was to create a copyright infringement mechanism to control the distribution of its product outside authorized distribution channels."

If the Supreme Court sides with Omega, manufacturers of high-end goods would only need to place some copyrighted symbol on their products to achieve such control.

Frank Angileri, a shareholder at Brooks Kushman, points out that in the Supreme Court's 2008 opinion in Quanta v. LG Electronics, which addressed the first-sale doctrine in a patent context, the court read the doctrine broadly, which would suggest the first-sale doctrine could apply to Omega.

"A lot of the briefs say that applying this rule would encourage U.S. manufacturers to make things overseas," Angileri says. "If the Supreme Court agrees with Omega and affirms the 9th Circuit, there would be incentive for companies to manufacture overseas because then they could stop importation into the U.S. Other briefs say having segmented copyright law allows copyright owners to sell products around the world, so it won't hurt the U.S. economy."

The Supreme Court's analysis will likely turn on Congress' intent for the statute, Charnes says--whether it makes sense to distinguish where the products were manufactured.

"It may be a situation where the court says that the statute reads the way it reads--that Omega was perfectly right to manufacture overseas and sue Costco for importation--and if there's a policy concern, it's something Congress should deal with," Angileri says.

FCC v. AT&T Wireless

The set-up

AT&T says Freedom of Information Act requests to the FCC concerning AT&T's activities are exempted because they would reveal trade secrets and infringe on AT&T's privacy. Along with trade secrets, FOIA exempts revealing facts that would invade "personal privacy."

The question

Does the "personal privacy" FOIA exemption protect the privacy of corporate entities?

The impact

To learn about the potential impact of FCC v. AT&T, read the Litigation story in the December issue of InsideCounsel.

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