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Reprinted with permission from The National Law Journal, August 2, 2000. Copyright 2000 The National Law Journal.

SUPREME COURT RULINGS IN BUSINESS CASES COVERED A BROAD RANGE

By Donald M. Falk *

The Supreme Court decided a broad range of cases affecting businesses in the October 1999 term. The Court vigorously enforced federal pre-emption and declined to expand several regulatory schemes. Yet, businesses facing employment discrimination suits or private-citizen environmental actions fared poorly.

Federalism may be the dominant theme of the current Court, but not all of the Court's decisions addressing the federal-state balance curtailed exercises of federal power. The Court held four times that federal regulatory schemes pre-empted state law, three times relying on robust doctrines of implied pre-emption.

Two pre-emption cases involved international commerce. In Crosby v. National Foreign Trade Council, the Court unanimously found that Massachusetts could not regulate trade with Burma -- the name the Court used despite the 1989 change to Myanmar -- even by state contractors, because the state scheme conflicted with a federal law that provided the U.S. president with broad flexibility to apply or lift sanctions on Burma. The Court rejected an argument that the lack of an express pre-emption provision reflected congressional intent not to pre-empt state requirements: "[F]ailure to provide for preemption expressly may reflect nothing more than the settled character of implied preemption doctrines that courts will dependably apply." The Court left open the question of whether states can enact similar restrictions aimed at countries not covered by federal legislation.

The Court also held, in U.S. v. Locke, that several Washington state regulations covering ocean-going tankers were impliedly pre-empted by a federal regulatory scheme that occupied the field of tanker seaworthiness. The Court unanimously rejected the claim that additional state requirements were permissible because they "supplement[ed], or . . . mirror[ed], federal requirements." The Court remanded the case for a determination of whether other regulations are pre-empted under field pre-emption principles or because they conflict with another set of federal rules, with narrower pre-emptive force.

Federal safety regulations displaced state tort law in the other two pre-emption cases. In Geier v. American Honda Motor Co., the Court addressed a Department of Transportation (DOT) safety standard that permitted car manufacturers to phase in passive restraints on an increasing proportion of their vehicles over a three-year period and to choose between airbags and other passive restraints for the vehicles equipped with such restraints. Although the Court held that the savings clause in the federal statute preserved state common-law claims from express pre-emption, a narrow majority refused to impose a sweeping presumption against implied pre-emption. Instead, the Court found that state tort duties to install airbags were impliedly pre-empted because they would frustrate the purpose of, and thus conflict with, the more flexible federal standard.

In its only decision finding express pre-emption, the Court held, in Norfolk Southern Railway Co. v. Shanklin, that state tort law may not impose a duty to install warning devices at railroad grade crossings beyond those required under DOT regulations governing federally funded grade crossing improvements. Because the agency had approved the improvement project that included the crossing at which the plaintiff's decedent had been killed, additional state requirements covering the same "subject matter" were expressly pre-empted.

LIMITING REGULATORY SCHEMES

In its pre-emption cases, the Court showed that it will protect the uniformity of nationwide norms established by Congress in constitutional exercises of its power. But the Court turned back two attempts to expand the scope of established federal regulatory schemes. In Food and Drug Administration v. Brown & Williamson Tobacco Corp., a closely divided Court rejected the FDA's effort to regulate tobacco as a drug. Although tobacco might fall within the literal definition of "drug" under the Food, Drug and Cosmetic Act, the Court found, in light of the administrative scheme of the statute as a whole, that Congress did not intend the FDA to have the claimed power. The Court focused on Congress' repeated refusal to give the agency explicit authority over tobacco and on 80 years of agency statutory interpretations disavowing such authority under current law.

Likewise, in Pegram v. Herdrich, the Court refused to impose fiduciary obligations on health maintenance organizations that provide care under employee benefit plans. The plaintiff sought disgorgement of her HMO's profits, claiming that it had violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by providing financial incentives for the delivery of cost-effective health care. The Court unanimously held that HMOs and their physicians are not ERISA fiduciaries when they decide whether to approve medical care. It noted that any fiduciary standard would replicate -- and might pre-empt -- state malpractice standards, and that permitting fiduciary claims "in effect would" result in "nothing less than elimination of the for-profit HMO."

Although the Court declined to expand ERISA to assist the plaintiffs in Pegram, it also declined to benefit defendants by narrowing citizen standing under the Clean Water Act. In Friends of the Earth Inc. v. Laidlaw Environmental Services (TOC) Inc., environmental groups sued to stop illegal discharges into a river. Concern over the water pollution had caused several group members to discontinue recreational use of the river and had reduced the value of one member's home. The facility came into substantial compliance several months after the lawsuit was filed, and all violations ceased two years later. As a consequence, the district court refused to enter an injunction, but instead imposed civil penalties to deter additional violations.

The Supreme Court rejected challenges based on standing and mootness. The Court first held that the plaintiffs' recreational and economic injury gave them standing, even if there was no proof that the environment was injured beyond the fact of the pollution itself, and that the injury was current and redressable when the lawsuit was filed because the violations continued and could be deterred by civil penalties. That distinguished Laidlaw from private actions asserting violations that had ceased before filing. Under established principles, moreover, the case was not moot in the absence of a showing that the violations could not reasonably be expected to recur.

EMPLOYMENT DISCRIMINATION

The Court cleared the path for jury trials of employment discrimination cases in Reeves v. Sanderson Plumbing Products Inc. Although Reeves involved age discrimination, the decision broadly addresses the McDonnell Douglas burden-shifting model, which is used in litigation under other employment discrimination statutes. Under McDonnell Douglas, a plaintiff from a protected class need not present direct evidence of discrimination. Rather, he or she may present a prima facie case of discrimination if he or she meets the employer's qualifications, yet is denied a job or a promotion that is given to a nonprotected candidate, or receives other significantly adverse, differential treatment, when compared with nonprotected employees.

An employer can rebut this prima facie case by showing a legitimate, nondiscriminatory reason for the adverse employment action. The plaintiff can create a jury issue by presenting evidence that the asserted reason was not the real reason for the action, but, rather, is a pretext for discrimination. Some "pretext-only" courts had permitted a plaintiff to reach a jury by simply creating a triable question as to pretext. Other "pretext-plus" courts had required some additional evidence that discrimination was involved. (The evidence that one of the decision makers in Reeves had repeatedly told the plaintiff he was too old for his job would have satisfied many pretext-plus courts, although it did not persuade the 5th U.S. Circuit Court of Appeals.)

The Supreme Court held that there was no firm requirement to present additional evidence beyond that sufficient to raise a question of pretext. The Court suggested that the sufficiency determination depended on the type of evidence creating a prima facie case or demonstrating pretext, so that merely creating a triable issue of fact about the merits of the employment decision might not always get a plaintiff to a jury on the ultimate issue of discrimination. But it remains to be seen how the lower courts apply that limitation.

The practical effect of Reeves will be magnified by the decision last term in Kolstad v. American Dental Association. Under Kolstad, evidence sufficient to reach a jury on liability for intentional discrimination is also sufficient to reach a jury on punitive damages, subject to some defenses that have been interpreted narrowly by several courts. In Reeves and Kolstad, the Court may have practically mandated the very race-, sex-, and age-based preferences that it condemns in other contexts. Many employers may be unable to risk punitive damages by hiring or promoting a person from a nonprotected class if the qualifications of a competing candidate from a protected class are remotely comparable.

A less-noticed procedural aspect of the Reeves decision will help businesses seeking to prevent or overturn jury verdicts in other types of litigation. The Court confirmed that, in considering a motion for judgment as a matter of law, a court must review all of the evidence in the record, not just the evidence favorable to the nonmovant. Although the nonmovant is entitled to every reasonable inference, the decision should take into account "evidence supporting the moving party that is uncontradicted and unimpeached, at least to the extent that that evidence comes from disinterested witnesses."

The Court also gave defendants a boost in Weisgram v. Marley. The court of appeals had held that expert testimony presented by a prevailing products liability plaintiff was inadmissible and had ordered judgment as a matter of law for the defendant because the plaintiff's evidence was insufficient without the stricken testimony. The Supreme Court affirmed the order as within the power and discretion of the court of appeals, finding that the plaintiff did not have an absolute right to a new trial.

CLOTHING STYLE AS TRADE DRESS

The term's only substantive intellectual property ruling refined the federal law of trade dress protection under the Lanham Act. Wal-Mart Stores Inc. v. Samara Bros. Inc. involved a claim that Wal-Mart had sold a line of clothing that infringed the trade dress of the plaintiffs' products. To be protected, trade dress either must be "inherently distinctive" or must have acquired a "secondary meaning" that leads consumers to associate it with a particular source.

The Supreme Court unanimously held that, like colors, product designs cannot be inherently distinctive. Rather, to prevail on a trade dress claim based on the design of the product itself -- and not its packaging -- a plaintiff must prove that the trade dress has acquired secondary meaning. Because any test of inherent distinctiveness for product designs "would rarely provide the basis for summary disposition of an anticompetitive strike suit," the Court took pains to keep the threat of lawsuits from depriving consumers "of the benefits of competition with regard to the utilitarian and esthetic purposes that product design ordinarily serves."

Next term, the Court will apply its reinvigorated commerce clause principles to federal environmental regulation. In the past term, in U.S. v. Morrison, the Court struck down a section of the Violence Against Women Act as beyond the commerce power and, in Jones v. U.S., narrowly interpreted the federal arson prohibition to avoid issues of constitutionality under the commerce clause. In Solid Waste Agency of Northern Cook County v. Army Corps of Engineers, the Court will decide whether to uphold the assertion of federal authority over isolated wetlands, an assertion that rests on the commerce clause.

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Donald Falk is a partner in the Supreme Court and appellate practice group of the Washington, D.C., office of Chicago's Mayer, Brown & Platt. He argued for the petitioner in Jones v. U.S. last term. In addition, the firm represented the petitioner in Solid Waste Agency of Northern Cook County v. Army Corps of Engineers and submitted amicus briefs in FDA v. Brown & Williamson, Geier v. Honda, U.S. v. Locke, Norfolk Southern Railway Co. v. Shanklin, Reeves v. Sanderson Plumbing Products Inc., U.S. v. Morrison, and Weisgram v. Marley.
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[Copyright 2000 The National Law Journal].



 
 
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