Supreme Court Update

1. Supreme Court Update October 23, 2008

2. Stoneridge Investment Partners v. Scientific-Atlanta, Inc. • Plaintiffs alleged that non-issuers and non-brokers agreed to arrangements that allowed company to mislead auditor and issue misleading financial statement inflating its stock price. • Issue: Can non-issuer and non-broker, whose statements and actions were not known to the market, be held liable under 10b-5? • Central Bank: No 10b-5 liability for aiding and abetting securities fraud. • The Court declined to recognize “scheme liability” for those who have no duty to disclose and whose allegedly deceptive acts were not communicated to the public. • 5-3 split, along lines in constitutional cases.Breyer recuses.

3. Quanta Computer v. LG Electronics • The authorized sale of a patented component used to make a separately patented computer system that uses a patented method “exhausts” the patent holder’s rights in both the component and the method. • Holding allows downstream purchasers of a component to manufacture and sell a system that implements a patented method without seeking license from the patent holder or paying royalties – at least when the component “substantially embodies” the inventive aspects of the method. • Court did not necessarily foreclose all licensing arrangements in which a patent holder seeks to license patent rights in a component and a system or method separately, but patent holders need to be careful in crafting licensing agreements and may need to rely on breach-of-contract claims to protect patent rights.

4. Riegel v. Medtronic(decided February 20, 2008) • Factual Background • Charles Riegel and his wife brought suit after a Medtronic catheter ruptured in his coronary artery during heart surgery. • Riegel asserted a series of tort claims under New York common law. • Question Presented • Whether the preemption clause in the Medical Device Amendments Act of 1976 (MDA) bars common law claims challenging the safety and effectiveness of a medical device given premarket approval by the Food and Drug Administration (FDA)?

5. Riegel v. Medtronic(decided February 20, 2008) • Ruling • The Court held (by an 8 to 1 vote) that the express preemption clause in the MDA preempted the plaintiff’s state law tort claims. • Reasons • Plain language of the express preemption clause • Common law tort duties constitute “requirements”under the MDA • FDA makes cost-benefit determination; concern about juries effectively overriding that determination based solely on a focus on costs/risks • Federal regulation of drugs does not provide analogy • No reliance on the FDA’s view that the MDA preempts the state law claims (a view that reflected a change in the FDA’s position)

6. Riegel v. Medtronic(decided February 20, 2008) • Justice Ginsburg dissented • Presumption against preemption(majority does not mention it) • Purpose of preemption clause was to address state premarket approval regimes, not common law protections against dangerous devices • Rejected FDA’s new position as “entitled to little weight”

7. Exxon Shipping Co. v. Baker(decided June 25, 2008) • Factual Background • Case arose from the grounding, and resulting oil spill, of the Exxon Valdez on the Bligh Reef of Alaska on March 24, 1989. • Accident occurred after the ship’s captain, Joseph Hazelwood, who had a history of alcohol abuse and whose blood contained a high alcohol level many hours after the spill, left the bridge, requiring subordinates to conduct a difficult maneuver. • Exxon spent around $2.1 billion in cleanup efforts and pleaded guilty to violations of several federal criminal laws. • This case involved a class action seeking compensatory and punitive damages. • Jury awarded $507.5 million in compensatory damages and $5 billion in punitive damages. The Ninth Circuit reduced the punitive damages award to $2.5 billion.

8. Exxon Shipping Co. v. Baker(decided June 25, 2008) • First Question Presented • Whether maritime law permits punitive damages against a corporation for the reckless acts of its managerial employees? • The Court split evenly (4 to 4) on this question, thus leaving the Ninth Circuit’s decision intact on this score.(Justice Alito was recused) • Second Question Presented • Whether the Clean Water Act (CWA) preempts punitive damages under maritime law? • The Court held that the CWA does not. The Court explained that the statute reflects no clear congressional intent to occupy the field of pollution remedies and that punitive awards for private harms will not have a frustrating effect on the CWA remedial scheme.

9. Exxon Shipping Co. v. Baker(decided June 25, 2008) • Third Question Presented • Whether the punitive damages award was excessiveunder maritime law? • Justice Souter wrote the opinion for the majority (by 5 to 3 vote) fashioning a rule of federal common law in maritime cases that the ratio of punitive damages to compensatory damages must be 1 to 1. • Most important factor driving decision: “stark unpredictability” • Consideration given to approaches taken by the States (including outright prohibitions; statutory caps; and statutory maximum ratios); and by foreign countries (not part of the civil-code tradition and strict limitations in other common-law countries). • Fixed ratio best way to ensure consistency • 1 to 1 ratio chosen for cases that do not involve“exceptional blameworthiness.” • Studies show that the median ratio was somewhat below 1 to 1, which made a 1 to 1 ratio a “fair upper limit” on punitive damages.

10. Exxon Shipping Co. v. Baker(decided June 25, 2008) • Justices Stevens, Ginsburg, and Breyer dissented. • Justice Ginsburg not convinced there was a problem in need of a solution; majority opinion raised many questions, such as the impact of the common law ratio on the constitutional due process standard and whether fixed ratio will apply where a defendant acted maliciously or in pursuit of financial gain.

11. United States v. Eurodif, S.A., No. 07-1059 (to be argued Nov. 4, 2008) • BackgroundSection 1673 of Title 19 of the United States Code provides that when “a class or kind of foreign merchandise is being, or is likely to be, sold in the United States at less than its fair value” to the detriment of domestic industry, the Department of Commerce shall impose antidumping duties on entries of the foreign merchandise. • The Commerce Department conducted an antidumping investigation focusing on Low Enriched Uranium (LEU) coming from countries in Europe and concluded that contracts in which domestic utilities agree to deliver a quantity of unenriched uranium to a foreign enricher and pay the enricher for the number of separative work units needed to create LEU (known as SWU contracts) are in fact contracts for the sale of goods subject to the antidumping laws as opposed to contracts for services.

12. United States v. Eurodif, S.A., No. 07-1059 (to be argued Nov. 4, 2008) • Background (continued) • Foreign enrichers, including Eurodif, S.A., challenged Commerce’s position before the Court of International Trade, which concluded that the uranium enrichment contracts were contracts for services and not for goods and thus not subject to the antidumping statute. • On appeal, the Federal Circuit agreed. The court concluded that there was no contract for the “sale” of a good because title in the unenriched uranium or the LEU never vested in the enrichers and thus “‘the transfer of ownership’ required for a sale. . . is not present here.”

13. United States v. Eurodif, S.A., No. 07-1059 (to be argued Nov. 4, 2008) • Question Presented • Whether the court of appeals erred in rejecting Commerce’s conclusion that the SWU contracts were effectively contracts for the sale of goods within the scope of the antidumping statute. • Arguments by the United States • Commerce reasonably concluded that the antidumping statute applies. • Commerce’s interpretation entitled to deference under Chevron. • Concern about consequences of Federal Circuit’s interpretation: statute invites evasion; problem particularly serious here because failure to enforce the antidumping law could undermine nuclear nonproliferation policy.

14. United States v. Eurodif, S.A., No. 07-1059 (to be argued Nov. 4, 2008) • Eurodif arguments • The antidumping statute is unambiguous: it requires “a transfer of ownership in a tangible good” and does not apply to “the sale of uranium enrichment services.” • The manner in which Commerce calculates an antidumping duty not permitted by the statute; illustrates that Commerce trying to expand the statute to cover transactions it plainly was not intended to cover. • SWU contracts are not shams; substantively different from EUP (enriched uranium product) transactions, in which utilities obtain LEU for a price that reflects the full value of the product. • United States’ policy arguments cannot trump plain language of statute; in any event, other means of addressing the issue of Russian LEU imports.

15. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Factual Background • The estate of a lifelong smoker who died of lung cancer sued Philip Morris for negligence and fraud, claiming that Philip Morris led campaign to convince smokers that smoking was not harmful to their health. • The jury awarded plaintiff more than $800,000 in compensatory damages and $79.5 million in punitive damages on the fraud claim. The trial court reduced the punitive damages to $32 million on the ground that the jury award was excessive under federal constitutional standards. The Oregon Court of Appeals reinstated the $79.5 million jury award.

16. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Factual Background (continued) • The United States Supreme Court vacated the court of appeals’ decision and remanded for reconsideration in light of State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003). • Campbell applied a three-pronged test that the Supreme Court had established in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), to determine whether a punitive damages award is constitutionally excessive. • The three “guideposts” are (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity (or ratio) between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damage award and the civil penalties authorized for comparable cases.

17. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Factual Background (continued) • The Oregon Court of Appeals reaffirmed its earlier judgment, and the Oregon Supreme Court granted review. • The Oregon Supreme Court rejected Philip Morris’ claim that under Campbell the jury should have been instructed (Proposed Instruction No. 34) that it could not use “punitive damages to punish a defendant for harm to nonparties.” • The United States Supreme Court granted review to determine whether the Due Process Clause permits a jury to base a punitive damages award in part on a desire to punish the defendant for harming non-parties. The Court held in a five to four vote that a jury cannot do so. • Harm to nonparties is relevant to the jury’s determination whether a defendant’s conduct was “particularly reprehensible,” but the jury “may not go further than this. . . to punish defendant directly on account of harms” to nonparties. • The Court remands to the Oregon Supreme Court to “apply the standard we have set forth.”

18. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Factual Background (continued) • Justices Stevens, Ginsburg, Scalia, and Thomas dissented. • Justice Stevens takes issue with the distinction the majority drew between the permissible use of non-party harm to determine reprehensibility and the impermissible use of non-party harm to punish the defendant “directly.” • Justice Thomas reiterated his view (expressed by Justice Scalia in earlier opinions) that the Constitution does not impose substantive due process limits on punitive awards. • Justice Ginsburg concluded that there was no evidence that the jury used evidence of non-party harm in an impermissible manner and viewed Philip Morris’ Proposed Instruction No. 34, which more or less reflected the approach adopted by the Court, as one that would confuse the jury.

19. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Factual Background (continued) • On remand, the Oregon Supreme Court again rejected Philip Morris’ contention that Proposed Instruction No. 34 should have been given. • Certain aspects of the instruction (unrelated to the issue decided by the U.S. Supreme Court) misstated Oregon law.

20. Philip Morris USA, Inc. v. Williams, No. 07-1216(to be argued Dec. 3, 2008) • Question Presented • Whether the Oregon Supreme Court violated the U.S. Supreme Court’s mandate by failing to evaluate the jury’s verdict in light of the constitutional standard announced in the Philip Morris decision? • The Court did not grant review of the question whether the award was constitutionally excessive.

21. Wyeth v. Levine • Does federal law preempt state-law challenges to the adequacy of FDA-approved prescription drug labeling where the expert federal agency considered the risk at issue and approved a warning about that risk? • Parallels to PMA device regime in Riegel. But Riegel involved express preemption; Levine involves implied conflict preemption. Without express provision, broad consensus more difficult. Justices may fracture over hot button issues: agency deference, presumptions against preemption, federalism, “impossibility” -v- “obstacle” preemption. • Strong implied conflict preemption argument: FDA “fully aware” of relevant risk, approved warning addressing it. Yet plaintiff wants state law to second guess the agency. Told jury: “FDA doesn’t make the decision, you do.”

22. Wyeth v. Levine (continued) • Who decides? Justice Breyer last term: “who would you rather have make the decision as to whether this drug is, on balance, going to save people or, on balance, going to hurt people? An expert agency, on the one hand, or 12 people pulled randomly for a jury rol[l]?” • Possible outcome: 5-4: reprise Geier split (with Chief Justice and Justice Alito now in majority)? Justice Thomas? Narrow holding: Preemption at least where agency considered pertinent risk and decided appropriate warning. Potential open issues: evolving science/risk information; fit between what agency reviewed and subject of litigation • Political change and potential congressional response

23. Burlington Northern & Santa Fe v. U.S.Shell Oil v. U.S. • These consolidated cases will address two issues involving the proper interpretation of CERCLA: whether and under what circumstances damages awarded under CERCLA may be apportioned among contributing parties, and the circumstances under which “arranger liability” may be imposed under CERCLA.