May 21, 2007
The
Supreme Court granted certiorari today in two cases of interest
to the business community:
Dormant
Commerce Clause—State Taxation
It is well-established that
the Commerce Clause, which authorizes Congress to “regulate
Commerce * * * among the several States,” Art. I, § 8, cl. 3,
embodies a “negative” or dormant “command forbidding the States
to discriminate against interstate trade,” Assoc.
Indus. of Missouri v. Lohman,
511 U.S. 641, 646 (1994), and prohibits, in
particular, a state from “tax[ing] a
transaction or incident more heavily when it crosses state lines
than when it occurs entirely within the State.” Armco
Inc. v. Hardesty, 467 U.S. 638, 642 (1984).
The Supreme Court granted certiorari
in Kentucky Dep’t of Revenue v. Davis, No.
06-666, to determine whether a state violates the dormant
Commerce Clause by, on the one hand, exempting from state income
tax the interest derived from bonds issued by the state or its
political subdivisions, while, on the other hand, requiring that
taxes be paid on interest income
derived from bonds issued by sister states or their political
subdivisions.
Kentucky discriminates against
out-of-state bonds in the taxation of interest income. The Court
of Appeal of Kentucky held this practice “facially
unconstitutional” under the dormant Commerce Clause because “it
obviously affords more favorable taxation treatment to in-state
bonds than it does to extraterritorially issued bonds.” The
court rejected the argument that Kentucky could escape the
limitations of the Commerce Clause because it was acting as a
participant in the capital market, holding that “when a state
chooses to tax its citizens, it is acting as a market regulator,
not as a market participant.”
The
decision conflicts with
the decision of
the Ohio Court of Appeals in Shaper v. Tracy, 647
N.E.2d 550 (1994), which upheld a similarly discriminatory tax
scheme against Commerce Clause challenge. The Ohio court held
that “neither the Supreme Court nor any case law examined has
applied the Commerce Clause to a case such as this, where one
governmental entity is taxing its residents for the interest
earned on bonds issued by another government entity.” Id.
at 552, 553. The Ohio court reasoned “that the Commerce Clause
was simply never intended to apply to acts of a sovereign on
behalf of itself where the end result is to provide the
taxing state with a competitive advantage over another
sovereign.” Id. at 552, 553-54.
This case could
have a significant impact on the $2 trillion municipal bond
market, in which favorable state taxation policy currently gives
investors a strong incentive to prefer bonds issued from within
their home states. In all, more than 40 states, including New
York and California, give their own bonds special tax treatment.
Absent an extension, which is likely, amicus briefs in support
of the petitioner will be due on July 5, 2007; amicus briefs in
support of the respondent will be due 35 days after petitioner’s
brief is filed. Any questions about his case should be directed
to
David Gossett
(202-263-3384) in our Washington, DC office.
Commodities
Regulation—Statutory Standing For Violations of Commodities
Exchange Act
Individual
customers typically do not buy or sell directly in the futures
market. Instead, they carry out their transaction through future
commission merchants (FCMs), who guarantee their customers’
performance. The Court granted certiorari in Klein & Co.
Futures Inc. v. Board of Trade of the City of New York,
Inc., No. 06-1265, to determine whether a FCM has standing
to seek damages for losses caused by violations of the
Commodities Exchange Act, even though the FCM did not itself
purchase or sell any commodities but instead incurred those
losses in its role as guarantor.
The case arose
out of price manipulation by Norman Eisler, the chairman of the
New York Futures Exchange (Exchange), a division of the New York
Board of Trade. From approximately August 1999 through May 12,
2000, Eisler manipulated the settlement prices of P-Tech futures
and options. This manipulation improperly inflated the value of
the account of First West Trading Inc. (First West), a customer
of Klein & Co. Futures Inc. (Klein), a FCM.
Though various
members of the Exchange and Board of Trade purportedly became
aware of the miscalculation of P-Tech settlement prices as early
as March 2000, neither the Board of Trade nor the Exchange
investigated the miscalculation until mid-May. At that time, the
Board of Trade halted trade in P-Tech futures and calculated a
new settlement price for the various accounts. First West’s
margin account ballooned to $4.5 million. It could not meet the
margin call and Klein, as guarantor, was required to take an
immediate charge against its net capital. This capital charge
put Klein below the applicable regulatory requirements, causing
Klein’s trading license to be suspended. Klein subsequently went
out of business.
Klein brought
suit against the Exchange and other divisions of the Board of
Trade seeking damages under § 5b of the Act for their allegedly
bad faith failure to enforce their rules. The district court
dismissed the claim because Klein lacked standing to bring a
claim for damages. The Second Circuit affirmed. 464 F.3d 255 (2d
Cir. 2006). The court reasoned that, although the relevant
statutory section was 7 U.S.C. § 25(b)(1), which governs claims
against a board of trade designated as a “contract market,“ the
limitations set forth in subsection 25(a)(1), which governs
claims against other types of defendants, applied. 464
F.3d at 260. Klein lacked standing under those criteria
because it did not receive trading advice for a fee, purchase or
sell P-Tech contracts, or own those contracts. Id.
Klein’s
petition for certiorari argues that the Second Circuit’s
decision conflicts with long-standing Seventh Circuit decisions
that recognize that FCMs are essential market participants.
Moreover, it claims, the Second Circuit’s ruling misapplies the
statutory scheme by improperly grafting the limitations from
subsection (a)(1) to subsection (b)(1). Unlike subsection
(a)(1), subsection (b)(1) expressly provides a private right of
action to any “person who engaged in any transaction on or
subject to the rules of such contract market * * * to the extent
such person’s actual losses resulted from such transaction and
were caused by such failures to enforce or enforcement of such
[rules or regulations].” FCMs meet this criteria, Klein claims,
because of the regulatory requirement that FCMs execute
transactions and bear financial liabilities for their customers.
This case
raises an important question regarding the scope of statutory
standing for violations of the Commodities Exchange Act. Over
$110 billion is currently invested in the futures markets of the
United States in a wide variety of agricultural and
manufacturing industries. If the ruling of the Second Circuit is
affirmed, the overall liquidity and depth of those markets may
decline substantially because FCMs will lack recourse for the
bad faith misconduct by registered entities. This will force
FCMs either to increase the price of their services or cut back
on their trading activity. The decision in Klein should
thus be of interest to any business that uses futures to hedge
against market risk. Absent an extension, which is likely,
amicus briefs in support of the petitioner will be due July 5,
2007; amicus brief in support of the respondents will be due 35
days after petitioner’s brief is filed. Any questions about this
case should be directed to
David
Gossett (202-263-3384) in our Washington D.C. Office.
Since our last
Docket Report, the Supreme Court has invited the Solicitor
General to file briefs expressing the views of the United States
in the following cases of interest to the business community:
Wyeth
v.
Levine,
No. 06-1249. The question presented is whether the FDA’s
approval of a drug label pursuant to the Federal Food, Drug, and
Cosmetic Act, 21 U.S.C. § 301 et seq., preempts a
state-law failure-to-warn tort claim premised on the alleged
inadequacy of that label. (Mayer, Brown, Rowe & Maw LLP filed an
amicus brief in support of petitioner on behalf of Product
Liability Advisory Council, Inc. and the United States Chamber
of Commerce.)
General
Electric
v. New
Hampshire Revenue Commissioner,
No. 06-1210. The question presented is whether a state may
discriminate in its corporate income tax between dividends that
are paid to U.S. companies by, one the one hand, foreign
subsidiaries that do business within the state and, on the other
hand, those that do not.
Republic of
the Philippines
v.
Pimentel, No.
06-1204, and
Estate of Roxas v. Pimentel, No. 06-1039. The
question presented is whether a foreign government that is a
“necessary” party to a lawsuit under Rule 19(a) of the Federal
Rules of Civil Procedure and has successfully asserted sovereign
immunity is, under Rule 19(b), an “indispensable” party to an
action brought in the courts of the United States to settle
ownership of assets claimed by that government. (Mayer, Brown,
Rowe & Maw LLP represents petitioner Republic of the
Philippines.)
Metlife
v. Glenn,
No. 06-923. The case presents two questions. The first is
whether the administrator of an ERISA plan has a conflict of
interest that must be taken into account when a court reviews
the administrator’s decision to deny a benefits claim if the
administrator is the one who would pay the benefits if the claim
were approved. The second question is whether, in denying a
claim for benefits, an ERISA claim administrator must consider
and refute in its written disability determination a contrary
decision of a Social Security Administration administrative law
judge.
Quanta
Computer
v. LG
Electronics, No.
06-937. The question presented, which implicates the “first
sale” doctrine in patent law, is whether the owner of a patent
may demand royalties from purchasers of a product that
incorporates a duly licensed copy of the patented item, or
whether instead the patent owner exhausted its right to collect
royalties upon licensing the patent to the product’s
manufacturer.
U.S. Chamber
of Commerce
v. Brown, No. 06-939. The question presented is whether federal labor
law preempts a California statute that bars employers from using
state funds to pay for speech about union organizing.
The general editor of the Docket Report is David Gossett in our
Washington, DC office, who can be reached at
dgossett@mayerbrown.com
or 202-263-3384.
