Decisions Affecting Business

For many years professional baseball has enjoyed antitrust immunity, thanks to a decision in the 1920s that Congress has never overturned.  But the justices seemed skeptical when the National Football League claimed that it, too, should enjoy a similar immunity, because it was really only one league, and not thirty-two separate businesses. Lower courts had thrown out an antitrust suit brought against the NFL by one of its former hat makers.

American Needle used to make hats for NFL teams, but was shut out of the business in 2000 when NFL Properties, a corporate entity created by the NFL, negotiated an exclusive contract with Reebok to make sports paraphernalia for all 32 teams in the league.  The lower courts ruled that, for purposes of promoting football, the teams in the NFL could act as a single entity without running afoul of the Sherman Act. American Needle appealed, and the NFL said that it, too, wished to have the issue resolved. It probably wished that it had not.

In American Needle, Inc. v. National Football League a unanimous Court sacked the NFL. Justice Stevens said the contract with Reebok amounted to a "concerted action" by separate entities that warranted scrutiny under § 1 of the Sherman Act.  "To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks." Rather than acting as a single entity, "the teams compete with one another, not only on the playing field, but to attract fans, for gate receipts and for contracts with managerial and playing personnel."

Stevens' ruling left open the possibility that at trial, under a rule-of-reason standard the NFL could justify some kinds of cooperation.  "Football teams that need to cooperate are not trapped by antitrust law," Stevens wrote.  The case will now go back to the district court. The Court left in place an accounting oversight board created by Congress in the Sarbanes-Oxley Act passed after the Enron debacle. In Free Enterprise Fund v. Public Company Accounting Oversight Board, the Fund had asked the Court to rule the Board illegal because it was appointed by the Securities and Exchange Commission and not by the President.

Because Sarbanes-Oxley contained no severability clause, some commentators predicted that a ruling against the Board could lead to the whole act being thrown out, forcing Congress to either act again or return to the conditions that existed prior to 2002.

Instead the justices unanimously ruled that the board had been legally established and appointed.  They split 5-4, however, on the manner by which members can be removed from office, a minor matter in the case.

In a closely watched patent case, Bilski v. Kappos, the Court had to decide whether a business method could be patented. Bernie Bilski and Rand Warsaw were just a couple of "math geeks for hire" who had an idea for making the unpredictable predictable for utility companies—a way to make energy  bills consistent, month to month, no matter what the weather.  Their company, WeatherWise USA Inc. tried to patent the process, but the U.S. Patent Office turned it down, since traditionally patent law in the United States did not support patents for abstract ideas or the discovery of natural laws.

Computers, however, blur the distinctions between ideas and machines, and as American business moves more and more into the internet age, courts have struggled to define how and if business methods—computer programs—may qualify for patent protection.  At oral argument, the justices seemed skeptical

Justice Scalia: "Let's take training horses. Don't you think that some people, horse whisperers or others, had some, you know, some insights into the best way to train horses? And that should have been patentable on your theory?"

Michael Jakes (attorney for Bilski and Warsaw): "They might have, yes."

Justice Breyer: "I had a wonderful way of teaching. It kept 80 percent of the students awake. I could probably have reduced it to a set of steps and other teachers could have followed it. That, you are going to say, is patentable, too?"

Jakes: "Potentially."

Altogether some sixty amici briefs were filed in the case, but when the Court handed down its decision in Bilski observers could not agree on exactly what it meant. Technically it was a unanimous decision, but to quote from the official Court document: KENNEDY, J., delivered the opinion of the Court, except for Parts II-B-2 and II-C-2. ROBERTS, C.J., and THOMAS and ALITO, JJ., joined the opinion in full, and SCALIA, J., joined except for Parts II-B-2 and II-C-2. STEVENS, J., filed an opinion concurring in the judgment in which GINSBURG, BREYER, and SOTOMAYOR, JJ., joined. BREYER, J., filed an opinion concurring in the judgment, in which SCALIA, J.,  joined as to Part II.

The majority agreed that the specific application should not have been issued, a conclusion in which all nine justices agreed For a smaller majority, Kennedy did not rule out all business method patents and invited the Federal Circuit, which hears all patent appeals cases, to find a better test than the traditional "machine or transformation" standard. Four justices led by Stevens said that methods of doing business should never be patentable.

The issue is far from resolved, and it will be a while before Congress and the courts can come up with some method to judge whether a non-tangible invention, such as a mathematical algorithm that runs a computer program for business purposes can or should be patentable. The Justice Department suffered a string of white-collar enforcement setbacks when the Court sent the convictions of former Enron chief Jeffrey Skilling and media magnate Conrad Black back to lower courts for reconsideration.  In its prosecution of the two men the government had used a broadly worded law that makes it illegal for employees to deprive businesses of their "honest services." (The law applies the same standard to government employees.) The two men claimed that the wording of the law was too vague.

The Court agreed, and in Skilling v. United States and Black v. United States Justice Ginsburg, speaking for a near-unanimous bench (Sotomayor, joined by Stevens and Breyer, concurred in part and dissented in part), essentially narrowed the reach of the law to where the government could show evidence of bribery, kickbacks, or other tangible evidence of corruption. Defense attorneys lauded the decision, charging that the government used the "honest services" law "when all else failed."  Professor John Coffee of Columbia agreed, saying that "whenever they encounter something that looks sleazy, corrupt, unethical, and other statutes don't clearly apply," they use this law.

Prosecutors, on the other hand, said it would make more of a difference in cases involving government officials, since in the business world they could usually find other crimes, such as securities fraud or insider trading.  Skilling, for example, was convicted of nineteen charges, only one of which involved honest services.

In other business-related cases, the Court settled a long running question on determining a corporation's principle place of business.  Is it where the company is incorporated, or where it does the most amount of business, or where its corporate headquarters are located? The auto rental company Hertz, for example, is incorporated in Delaware, has its headquarters in New Jersey, and does its largest volume of business in California.  Lower courts have been divided over the right answer to this question, which is complicated by the actual business dealings of multi-state and international corporations.

The Supreme Court finally answered the question in Hertz Corp. v. Friend, a case involving the car rental's employees who claim the company violated California's wage-and-hour laws. Using simplicity and practicality as a guide, a unanimous Court held that a corporation's "principle place of business" for purposes of federal jurisdiction is its "nerve center," typically where its headquarters are located. Justice Breyer noted that while there is no perfect test, the decision "provides a sensible test that is relatively easy to apply."

The opinion settled a 51-year debate in the courts, and it has far reaching impact.  It will determine the jurisdictional battlefields on which class action suits and other litigation involving multistate corporations will be fought—federal courts which many perceive to be friendlier to business interests or state courts considered more sympathetic to plaintiffs.

The Court also gave a boost to securities fraud class action suits, when it closed off a statute of limitations defense by Merck & Co. in its battle against Vioxx-related shareholder suits. A unanimous Court held in Merck v. Reynolds that the litigation is timely and must go forward.  The pharmaceutical giant had argued that the suit was too late under the two-year statute of limitations contained in the Sarbanes-Oxley Act of 2002.

Justice Breyer, however, took an expansive view of the statute, finding that the clock should start ticking only after plaintiffs discovered the facts of the alleged fraud violation—including whether the company intended to defraud investors. Defining the statute any other way, he explained, would encourage fraudulent companies to hide their wrong-doing for long periods of time. "So long as a defendant concealed for two years that he made a misstatement with an intent to deceive, the limitations period would expire before the plaintiff had actually discovered the fraud.

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