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October Term, 2007

February 20, 2008

Today the Supreme Court issued four decisions, described below, of interest to the business community.

Riegel v. Medtronic, Inc., No. 06-179 (previously discussed in the June 25, 2007 Docket Report). The Medical Device Amendments (MDA) to the Food, Drug, and Cosmetic Act (FDCA) provide that no State may "establish * * * any requirement" that "relates to the safety or effectiveness" of a medical device and "is different from, or in addition to, any requirement applicable under" the MDA. 21 U.S.C. 360k(a). The Supreme Court held today that 360k(a) preempts state-law tort claims challenging the design, manufacture, and labeling of a medical device that was granted pre-market approval by the Food and Drug Administration (FDA).

The decision in Riegel is a major victory for medical device manufacturers and for patients whose lives depend upon access to their devices. It is also a significant decision for participants in other federally regulated arenas. Particularly when read in conjunction with the Court's opinions in Rowe v. New Hampshire Motor Transport Association, No. 06-457, and Preston v. Ferrer, No. 06-1463 (both of which are discussed below), the Riegel decision signals that the Court is prepared to give full force and a broad reading to statutory preemption provisions.

Subject to certain exceptions, a medical device that is intended to be used "in supporting or sustaining human life" or "presents a potential unreasonable risk of illness or injury" may be marketed only after receiving pre-market approval by the FDA. As part of the pre-market approval process, the FDA scrutinizes (among other things) the device's design, the method by which it will be manufactured, and the label that it will carry. If the FDA grants pre-market approval for the device, the manufacturer is then, subject to certain limited exceptions, prohibited by federal law from changing the device's design, manufacturing process, and label.

The plaintiff in Riegel alleged that he suffered injuries during an angioplasty when a balloon catheter that had received pre-market approval purportedly malfunctioned. Invoking both negligence and strict-liability theories, the plaintiff asserted various state-law tort claims alleging that the catheter was defectively designed, labeled, and manufactured. The defendant moved for summary judgment, arguing that the FDA's grant of pre-market approval established federal requirements that preempted any state requirements different from or in addition to the federal requirements, and that the imposition of state-law tort liability despite the receipt of pre-market approval would effectively establish state requirements different from or in addition to the federal requirements. In the decision below, the Second Circuit affirmed the grant of summary judgment, holding that the FDA's grant of pre-market approval establishes federal requirements that preempt state-law tort claims such as those brought by the plaintiff.

Today's decision by the Supreme Court, in an opinion authored by Justice Scalia, affirms that holding. Recognizing that "the FDA requires a device that has received premarket approval to be made with almost no deviations from the specifications in its approval application" (slip op. 10), the Court readily concluded that FDA premarket approval imposes preemptive federal requirements on the device. Similarly, the Court expressly reiterated the view that tort claims are subject to preemption because they rely on state-law requirements no less than state-law statutory claims. Indeed, in a statement that breaks new ground, the Court suggested that, in comparison to state-law statutory claims, state-law tort claims are even "less deserving of preservation" (slip op. 11) under the FDCA's preemption provision because they are administered by juries that focus exclusively on the harm allegedly suffered by an individual plaintiff without regard to the benefits reaped from the device in question by the many patients not represented in court. Allowing tort claims to proceed would, the Court found, disregard the FDA's expert cost-benefit analysis and thus impair the federal regulatory scheme.

Mayer Brown was co-counsel to Medtronic.

Rowe v. New Hampshire Motor Transport Association, No. 06-457 (previously discussed in the June 25, 2007 docket report). The Federal Aviation Administration Authorization Act of 1994 (FAAAA) provides that "a State * * * may not enact or enforce a law * * * related to a price, route, or service of any motor carrier," or of any air carrier, with respect to the transportation of property. 49 U.S.C. 14501(c)(1) & 41713(b)(4)(A). The FAAAA's preemption provisions were intended to level the playing field in the trucking industry and to prevent a "patchwork" of inconsistent state regulations. In Rowe, the Supreme Court held that the FAAAA preempts two provisions of a Maine law regulating the shipment of tobacco to Maine consumers because they effectively required carriers to offer services that they would not otherwise offer and imposed additional package-examination and processing obligations on the carriers.

The decision in Rowe adopts a broad view of FAAAA preemption and is therefore of significance to motor carriers that rely on the FAAAA for protection from burdensome state regulations. In addition, because Rowe reaffirms that the FAAAA's preemptive effect parallels that of the Airline Deregulation Act, the decision is also of significance to the airline industry.

The first of the Maine statutory provisions at issue in Rowe required shippers of tobacco to use a carrier offering a special kind of recipient-verification service. The statute required shippers to use a service that would ensure that the addressee and purchaser were the same person, that the addressee was of legal age, that the addressee signed for the package, and that the addressee, if under the age of 27, presented valid identification. The second provision prohibited the knowing delivery of tobacco products to any person in Maine unless either the shipper or the recipient was licensed by the State. The provision stated that a carrier was "deemed to know that a package contains a tobacco product" if (1) the package was marked as containing tobacco and displayed the name and license number of a Maine-licensed tobacco retailer or (2) the shipper's name appeared on a list of unlicensed tobacco retailers distributed by the State. In this case, several trade associations, relying on evidence that the provisions caused UPS to cease delivering tobacco products to Maine consumers, sought to enjoin the enforcement of the recipient-verification requirement and the "deemed to know" provision. The district court enjoined their enforcement and the First Circuit affirmed, holding that the Maine law was preempted by the FAAAA because it expressly referenced and significantly affected carrier services.

In a unanimous opinion by Justice Breyer, the Supreme Court affirmed. (Justice Scalia joined all of Justice Breyer's opinion except for those portions that relied on legislative history.) Summarizing the preemptive effect of the FAAAA, the Supreme Court explained that (1) the FAAAA preempts state laws having a connection with, or reference to, carrier rates, routes, or services; (2) such preemption may occur even if a state law's effect on rates, routes, or services is only indirect; (3) with respect to preemption, it makes no difference whether a state law is consistent or inconsistent with federal regulation; and (4) preemption occurs at least where state laws have a significant impact related to Congress' deregulatory and preemption-related objectives. The Court held that Maine's recipient-verification requirement was preempted both because it focused on carriers' services and because it would require carriers to offer services that they do not presently offer. The Court held that the "deemed to know" provision of Maine law was preempted because it would impose civil liability on a carrier simply for failing to conduct a sufficient examination of every package and, among other things, required carriers to cross-check every shipper against the State's list of "unlicensed retailers." The Court rejected Maine's arguments that the FAAAA preempts only "economic" regulation and does not apply to "public health" laws, reasoning that any such rule would be both unworkable in practice and contrary to the text of the FAAAA. The Court explained that upholding the Maine requirements on such a theory would allow each state to impose its own varying requirements on any number of products thought to implicate the "public health."

Mayer Brown filed an amicus brief in support of the respondents on behalf of the American Trucking Associations and the Chamber of Commerce of the United States.

Preston v. Ferrer, No. 06-1463 (previously discussed in the September 25, 2007 Docket Report). The Federal Arbitration Act ("FAA"), 9 U.S.C. 1 et seq., provides for the enforceability of arbitration agreements as a matter of federal law. In a series of decisions over the last 40 years, the Supreme Court has held that the FAA applies equally in state courts and federal courts; prevents a state from applying special rules to arbitration agreements that are not applicable to all contracts; and requires an arbitrator, instead of a court, to decide allegations that the contract containing the arbitration agreement is void. The Court also has ruled that a state cannot require parties to proceed in court when they have agreed to arbitrate. Today, the Supreme Court applied these holdings to clarify that a state also cannot require parties to proceed in an administrative forum when they have agreed to arbitrate, and in so doing, the Court rejected the latest call to roll back its FAA jurisprudence as applied to state courts.

Today's decision in Preston is an important reaffirmation of the federal policy that promotes arbitration. The decision makes clear that a state may not impose an extra-contractual administrative exhaustion requirement on agreements to arbitrate. Moreover, it reaffirms that the FAA is not only applicable in state court, but also preempts contrary provisions of state law.

The Preston decision arises from a fee dispute between Arnold Preston, a California attorney, and Alex Ferrer, also known as television's "Judge Alex." The parties had signed a contract that provided for arbitration before the American Arbitration Association ("AAA"), and incorporated California law. When the parties disagreed over the fees due under their contract, Preston filed a demand for arbitration to resolve the dispute. Ferrer resisted arbitration, and instead filed a petition before the California Labor Commissioner that invoked the Labor Commissioner's jurisdiction under the California Talent Agencies Act ("TAA"), Cal. Lab. Code Ann. 1700 et seq., and sought to void the contract as unenforceable. Under the TAA, the Labor Commissioner had exclusive jurisdiction to determine whether Preston was acting as an unlicensed talent agent when representing Ferrer, and whether the parties' contract was therefore void. After the Commissioner's hearing officer held that he lacked the power to halt the arbitration, Ferrer sought and obtained a state judicial injunction stopping the arbitration. The California Court of Appeals affirmed the injunction and the concomitant denial of Preston's motion to compel arbitration, holding that the FAA had no impact on a state statute that requires administrative, but not judicial, disposition. 51 Cal. Rptr. 3d 628 (Cal. Ct. App. 2006). The California Supreme Court denied review.

In an 8-1 decision authored by Justice Ginsburg, the Supreme Court reversed, holding that the FAA preempted the TAA's exclusive jurisdiction provision. The Court began by noting that the question was much simpler than initially presented-namely, "who decides whether Preston acted as personal manager or as talent agent," not whether the FAA preempts the entire TAA. (Slip. op. 4.) Refusing to overrule its previous decision in Southland Corp. v. Keating, 465 U.S. 1 (1984), which had held the FAA to be applicable in state courts, the Court reaffirmed that even in state court an arbitrator must decide whether a contract containing an arbitration clause is invalid, and that the TAA therefore conflicted with the FAA by granting exclusive jurisdiction to an agency "to decide an issue that the parties agreed to arbitrate." (Slip op. 5-8.) The Court also held that other provisions of the TAA, which purported to impose requirements on any agreement to arbitrate talent agent claims, violated Section 2 of the FAA because they were not applicable to contracts in general. (Slip op. 8.)

Rejecting the suggestion that there is a relevant distinction between the two when compared to arbitration, the Court held that the FAA preempts state statutes that require either administrative proceedings or judicial proceedings prior to, or instead of, arbitration. (Slip op. 10-12.) Finally, the Court refused to read the parties' incorporation of California law into their agreement as also importing the TAA's exclusive jurisdiction provision. California law would supply the "prescriptions governing the substantive rights and obligations of the parties," but the contract's choice of the AAA's own rules to govern the arbitration obviated the need to import California's "special rules limiting the authority of arbitrators." Id. at 14-15 (internal quotation marks omitted).

Mayer Brown filed an amicus brief on behalf of CTIA-The Wireless Association in support of the petitioner.

LaRue v. De Wolff, Boberg & Assocs., No. 06-856 (previously discussed in the June 18, 2007 Docket Report). The Supreme Court granted certiorari in LaRue to address two questions under the Employee Retirement Income Security Act of 1974 (ERISA). The first question was whether ERISA 502(a)(2) authorizes a participant in a defined contribution plan to sue the plan's fiduciaries to recover losses that affect only the individual participant. The second question was whether such an action seeks "equitable relief" as that term is used in ERISA 502(a)(3). Because the Court concluded that 502(a)(2) authorizes recovery, the Court did not reach the second question.

The Supreme Court's decision in this case is important to all ERISA fiduciaries, including both plan administrators and plan sponsors, because the Court has made clear that a fiduciary breach in a defined contribution plan that results in a loss to an individual participant is an ERISA plan violation. As a result, participants in defined contribution plans may recover for fiduciary breaches that result in losses to the individual's account and are not limited to recovering only for violations that affect the plan as a whole.

Petitioner James LaRue participated in a 401(k) plan (a defined contribution plan) that allows an individual to direct his or her investments by allocating assets among a variety of investment options. LaRue claimed that his instructions were not executed and that his account suffered losses of approximately $150,000 as a result. In his complaint, LaRue asked that the administrator be ordered to reimburse the plan to make LaRue's interest in the plan whole. The district court granted the administrator judgment on the pleadings, and the Fourth Circuit affirmed. Relying on Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985), the Fourth Circuit concluded that, although LaRue's claim was styled as a request to reimburse the plan, it was actually a request for individual recovery. As such, the Fourth Circuit held, the claim was unavailable under 502(a)(2), which provides for recovery only "to the benefit of the plan as a whole." 450 F.3d at 573 (quoting Russell, 473 U.S. at 140).

The Supreme Court vacated the Fourth Circuit's decision, finding that Russell did not control. The Court explained that, while Russell held that recovery under 502(a)(2) must inure to the plan as a whole, not to individual participants, the plan at issue there was a defined benefit plan and any misconduct by plan administrators would not affect an individual's entitlement to benefits unless the misconduct created or enhanced the risk to the entire plan. The Court contrasted that situation with that in a case like Larue, where the plan at issue is a defined contribution plan. In such a case, the Court explained, a fiduciary breach that diminishes plan assets need not diminish the assets of all participants to be the sort of violation contemplated by 502(a)(2). The Court was careful to note that, although 502(a)(2) allows recovery in the circumstances present in this case, it does not provide a remedy for individual injuries that are distinct from plan injuries.

Justice Thomas filed an opinion concurring in the judgment that was joined by Justice Scalia. He expressed the view that the Court's decision was correct because, although 502(a)(2) only allows recovery for losses to the plan, losses to an individual's personal account are losses to the plan that are reflected in the account balances. Chief Justice Roberts filed an opinion concurring in part and concurring in the judgment that was joined by Justice Kennedy. He suggested that, while the Fourth Circuit's analysis was incorrect, LaRue's claim might more appropriately be characterized as a claim for benefits that could be brought under ERISA 502(a)(1)(B).


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