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Business Decisions

In a March 2008 article entitled "Supreme Court, Inc.," law professor and columnist Jeffrey Rosen claimed the Roberts Court is one of the most pro-business in decades, and that even the so-called "liberal" justices, such as Souter, Ginsburg, and Breyer usually vote to protect business interests.  In the October 2006 Term, for example, the U.S. Chamber of Commerce Litigation Center filed amicus briefs in fifteen cases, and its side won thirteen of them, the highest percentage in the agency's 30-year history.  While it seems that the Court as a whole is more sympathetic to business claims, the October 2007 Term saw a mixed bag.

Certainly business interests applauded when the Court threw out a $2.5 billion award of punitive damages against Exxon Mobil for the 1989 Exxon Valdez oil spill off the coast of Alaska.  The case, Exxon Shipping Co. v. Baker, raised three questions of law. First, may a ship's owner be held liable for punitive damages based on the misconduct of an employee? Four judges said yes, and four said no, with Justice Samuel Alito recusing because he owned stock in Exxon Mobil.  This left in place an appeals court ruling that Exxon was corporately liable, but it set no precedent on the matter.

On the other two questions the Court was unanimous that federal statutory law does not bar a punitive award on top of damages for economic losses, but it then decided 5-3 to limit the punitive damages to $507.5 million, the amount the company had been assessed in compensatory damages.  Justice Souter wrote for the 5-3 majority on the last question, holding that a one-to-one ratio between punitive and compensatory damages was "a fair upper limit" for punitive damages; Justices Stevens, Ginsburg and Breyer dissented from this part of the opinion.

Although the Court considered the issue only in terms of federal maritime law, commentators believed the decisions would have broader application, with the one-to-one ration becoming the guiding rule.  It will, predicted Mitchell Klein, an environmental law expert, "be used by every court in every jurisdiction across the country."

While cutting the punitive part of the award by 80 percent, the Court still left intact a rather substantial penalty, which comes on top of $400 million the company has paid for losses to commercial fishermen and $3.4 billion in clean-up costs and other penalties for the oil spill, which polluted 1,200 miles of Alaskan coast line.

Exxon Mobil, however, did not do well in two other cases it wanted the Court to decide. The justices rejected an appeal from the company to halt a human rights lawsuit against it filed by International Rights Advocates on behalf of eleven villagers in Indonesia's Aceh province.  The suit alleged that members of the Indonesian military committed rampant human rights abuses against the villagers while under Exxon's employ to guard a natural gas facility.  A district judge dismissed that part of the suit that involved international law on the grounds that such matters should be left to the executive branch, but allowed it to proceed on state law claims.  Exxon immediately appealed to the high court to stop the proceedings, but the Bush administration urged the justices to let the suit proceed, since the international law matters had been removed. 

(Because of fear of retaliation, all of the plaintiffs in the case are named as John Doe or Jane Doe. Exxon Mobil v. John Doe)

In another case involving the oil giant, the Court without comment refused to consider an appeal of a $112 damage award in an environmental lawsuit.  The case began in 1997 when a former Louisiana judge, Joseph Grefer, and his family sued Exxon, alleging that a contractor in Exxon's employ had contaminated the family's land with radioactive waste. The contractor cleaned pipes for Exxon and left the waste, which occurs naturally as a result of gas and oil production, on the property. None of the Grefers became ill because of the waste.

The Grefers initially won $1 billion in punitive damages and $56 in a compensatory award by a Louisiana jury, but an appeals court reduced the punitive award to $112. The Grefers argued against the appeal, claiming Exxon had already paid the award thus mooting the case, and the Court apparently agreed. (Exxon Mobil v. Grefer)

Business suffered other defeats:

  • The Court rejected a tobacco industry request to intervene in a lawsuit by over a thousand West Virginia smokers. The justices declined to examine an experimental trial procedure in which one jury first determines whether a class of victims exist and then a different jury addresses the claims of each plaintiff. The scheme is designed to speed the process, since parties are often willing to settle after the first stage if the jury finds that damages occurred. Philip Morris USA v. Accord.
  • The justices declined to hear a challenge to the landmark case of Engle v. R.J. Reynolds. A Florida jury had returned a $145 billion punitive damage award in a class action suit brought by 700,000 smokers. The Florida Supreme Court threw out the punitive award and dismantled the class, but it did allow suits to continue on the basis that a harm had been identified and proven. As a result of the high court's refusal to hear the appeal, multiple suits may now proceed against the tobacco giant.
  • The ability of companies to collect multiple royalties on patents they own was severely limited.  In a unanimous opinion, the Court reaffirmed a 150-year-old doctrine that the sale of a patented item terminates all patent rights to that item, a doctrine that had been eroded by an opinion in the D.C. Circuit. A South Korean company, LG Electronics, licensed its patents to the American chip maker Intel, and then sued some of Intel's customers for patent infringement, saying that it retained patent rights "downstream," i.e., in products that used both LG patents and Intel chips. The lower court had adopted this view that patents could be licensed downstream, but Justice Thomas's opinion made it quite clear that the older doctrine of "patent exhaustion" remained in effect. Quanta Computer v. LG Electronics.

Business, however, did win some important victories last Term, particularly in the question of federal pre-emption.  Businesses claim that once Congress has acted in a particular area under its Commerce Clause power, this pre-empts the states from acting, especially in the areas of product liability. Business owners prefer to operate under one law, rather than be subject to fifty separate state regulations, many of which are stricter than the federal requirements. In three cases, the Court favored federal law over conflicting state statutes, and as Justice Scalia noted, "we consider it part of our business" to sort out the balance between federal and state law.

  • In Riegel v. Medtronic the Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery. Riegel invoked New York common law to argue for liability and damages, but the 8-1 Court, speaking through Justice Scalia, held that the federal Medical Device Amendments of 1976 precluded states from imposing their own requirements on makers of federally regulated products.
  • Rowe v. New Hampshire Motor Transport Association. A unanimous Court held that Maine could not impose its requirements on delivery companies in order to prevent interstate delivery of tobacco to minors.  Such a rule would violate the Commerce Clause.
  • Preston v. Ferrer.  When two parties contractually agree to resolve future disputes by arbitration, the Federal Arbitration Act supersedes state law.

Business leaders, especially in the securities market, welcomed the Court's decision in Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, which continued the Court's pattern of making it more difficult for investors to recover from third parties when their investments have gone sour.

Investors, led by Stoneridge, sued the cable company Charter Communications for inflating it financial numbers to defraud stockholders. In 2004 Charter agreed to a $145 million settlement but this did not meet the alleged losses of those who had purchased its stock.  So they decided to go after Scientific-Atlanta and Motorola, who had sold cable boxes to Charter, and who investors claimed were active participants in the fraud.  The district court dismissed the suit, believing it to be no more than an effort to recoup losses from innocent third parties who had deep financial pockets, and the Eighth Circuit agreed.

So too did the Supreme Court. By a 5-3 vote the justices said that because investors victimized by Charter had not relied on any information or omissions on the part of the vendors Scientific-Atlanta and Motorola, the vendors could not be liable under the fraud provisions of the 1934 Securities Exchange Act.

The case drew wide attention because in recent years there has been a proliferation of investor suits against lawyers, accounting firms, and securities companies—deep-pocket third parties—in an effort to recoup stock losses.  Many saw the case as a stand-in for Enron, where investors awaited the decision to see if they would be able to sue the lawyers and accountants they believed aided Enron in its fraud. In fact, one week later the Court without comment denied review of a case in which a defrauded investor had unsuccessfully tried to recover millions from an investment bank connected to the failed energy firm.

Only Justice Stephens, Souter and Ginsburg, in their dissent in Stoneridge, held out any possibility that such suits might be appropriate, and even they have not in the past been sympathetic to efforts to parcel out blame on third parties.

Finally, in a case that had long-term implications, the Court restricted the government's ability to sue business under the False Claims Act, but at the same time made sub-contractors liable to the law for the first time. The FCA was originally passed during the Civil War, and targeted unscrupulous government contractors who submitted fraudulent invoices to the Union Army.  In its modern form it penalizes not just fraud but imposes liability on anyone who "knowingly" makes a false claim for government funds; if found guilty a defendant is subject to heavy fines and up to treble damages.  In addition, the law, reflecting the state of the government's legal apparatus in the 1860s, contains a qui tam provision, in which a private party, called a relator, may sue on behalf of the government even if not personally injured by the fraud.  The statute rewards successful relators with up to 30 per cent of any judgment or settlement.

In 2006 the Sixth Circuit expanded the reach of the FCA beyond the traditional group of defense contractors or hospitals to include anyone paid by invoice with government funds, directly or indirectly. The case involved a Navy shipbuilding project, and the defendants were subcontractors who sent false invoices to each other and to the prime.  The prime contractor received the government funds, and in turn paid the second- and third-tier subcontractors. None of the false invoices were ever sent directly to the government.  Moreover, because the prime had a fixed-price contract, it did not require government approval to pay invoices sent to it, nor did the fraud cost the government any more.  The loser was the prime.

A whistle-blower made this information public, and federal law rewards whistle-blowers who uncover fraud perpetuated on the government.  But in this case the question was whether the government had actually been defrauded, and whether a false invoice had ever been presented to the government.  If not, then the FCA should not apply. Then in oral argument the lawyer representing the whistle-blower said that an invoice had in fact gone to the government, and the evidence was in the appendix to the appeals court ruling.

A unanimous Court rejected the Sixth Circuit's interpretation, saying it would make the reach of the FCA almost boundless, with any false claim, no matter how far removed from direct government payment, open to efforts by relators to secure a reward.  A defendant is not liable under the FCA when a private entity pays his claim, even using government funds. But, sub-contractors are liable providing that their false claim winds up being submitted to the government, even as proof of related costs.

It will take a while before the full impact of Allison Engine Company v. United States is fully realized.



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