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1998 Term, Number 3 / November 2, 1998

The Supreme Court granted certiorari today in six cases, three of which are of potential interest to the business community. Amicus briefs in support of the petitioners are due on December 17, 1998, and amicus briefs in support of the respondents are due on January 19, 1999 (because January 16 is a Saturday and January 18 a Court holiday). Any questions about these cases should be directed to Alan Untereiner (202-778-0656) or Donald Falk (202-778-0174) in our Washington office.

1.   Punitive Damages — Employment Discrimination — Title VII. In 1991, Congress amended Title VII of the 1964 Civil Rights Act to authorize punitive damages when a defendant has "engaged in a discriminatory practice or discriminatory practices with malice or with reckless indifference to the federally protected rights of an aggrieved individual." 42 U.S.C. § 1981a(b)(1). The Supreme Court granted certiorari in Kolstad v. American Dental Ass'n, No. 98-208, to determine the standard of liability for an award of punitive damages under that provision.

Carole Kolstad sued her employer, the American Dental Association ("ADA"), in the United States District Court for the District of Columbia, claiming that she was denied a promotion because of her gender. Kolstad asserted that the formal application process for the position had been rigged in favor of the successful male candidate, and presented evidence that the executive director of the ADA had made sexually offensive comments. A jury found that the ADA had discriminated against Kolstad, and awarded her compensatory damages. The district court declined to instruct the jury on punitive damages, however, on the ground that there was insufficient evidence to support a punitive award.

A panel of the D.C. Circuit reversed and remanded for a new trial on punitive damages, holding that evidence that is sufficient to prove liability for intentional discrimination necessarily is sufficient to prove liability for punitive damages. 108 F.3d 1431 (1997). The court of appeals granted rehearing en banc and held, by a 6-5 margin, that "punitive damages in a Title VII case may be imposed only on a showing of egregious conduct." 139 F.3d 958, 960 (1998).

The en banc court observed that Section 1981a(b)(1) authorizes an award of punitive damages only when a defendant has both engaged in intentional discrimination sufficient to support damages under Section 1981a(a) and has done so "with malice or with reckless indifference." The court held that the "structure of the statute - one standard for basic liability, another for the exceptional remedy of punitive liability - strongly suggests that, before the question of punitive damages can go to the jury, the evidence of the defendant's culpability must exceed what is needed to show intentional discrimination." 139 F.3d at 968. The court suggested that this higher standard would be satisfied where, for example, "the evidence shows that the defendant engaged in a pervasive pattern of discriminatory acts, or manifested genuine spite and malevolence, or otherwise evinced a criminal indifference to civil obligations." Id. at 972. Because Kolstad "[f]ail[ed] to show egregiousness in any form," the en banc court affirmed the district court's decision not to present the issue of punitive damages to the jury. Ibid.

Judge Tatel's dissenting opinion relied on the fact that "section 1981a(b)(1) never mentions egregiousness." 139 F.3d at 971. In his view, the statutory requirement of "reckless indifference" is satisfied if "the employer knew of Title VII's prohibitions and acted regardless or disregarded a substantial risk of violating the statute." Ibid.

The D.C. Circuit's holding conflicts with Luciano v. Olsten Corp., 110 F.3d 210, 219-220 (2d Cir. 1997). Six other circuits have held that there is a higher standard for proving punitive damages than for proving intentional discrimination, but have offered varying articulations of the standard of punitive liability.

This case is of obvious importance to all employers covered by Title VII. If the Court adopted the standard advanced in the D.C. Circuit dissent, punitive damages could be awarded in any Title VII case, vastly increasing the attractiveness (and settlement value) of such cases to disgruntled employees and their counsel. By contrast, a Supreme Court affirmance would ensure that the thin evidence now permitted to support an employment discrimination verdict in many circuits would not automatically provide plaintiffs with a ticket for the punitive damages lottery. Moreover, the statutory standard in Section 1981a(b)(1) recites a typical common-law formulation that applies to punitive damages awarded in other statutory settings.

2.  Patents — Administrative Law — Standard of Review. An inventor whose patent application is rejected may pursue an administrative appeal within the Patent and Trademark Office ("PTO") to the Board of Patent Appeals and Interferences ("Board"), and may appeal an adverse Board decision to the Federal Circuit. The Court granted certiorari in Lehman v. Zurko, No. 98-377, to decide the standard by which the Federal Circuit should review PTO findings of fact in appeals from Board decisions denying patent applications. The Federal Circuit now reviews those factual findings for clear error.

A patent examiner rejected Mary Zurko's application for a patent for an invention that improves security in computing system transactions. The Board affirmed the denial of a patent, concluding that a patent should not issue because the claimed invention would have been obvious to a person having ordinary skill in the art at the time the invention was made. See 35 U.S.C. § 103.

Zurko appealed to the Federal Circuit, and a panel of that court reversed on the ground that the Board's assessment of the prior art was clearly erroneous. 111 F.3d 887 (1997). The Commissioner of Patents and Trademarks sought rehearing en banc on the ground that the Administrative Procedure Act compelled the Federal Circuit to apply one of two more deferential standards: the "substantial evidence" standard (codified at 5 U.S.C. § 706(2)(E)) or the "arbitrary and capricious" standard (codified at 5 U.S.C. § 706(2)(A)). Ever since the Federal Circuit was created in 1982, it has reviewed Board factfinding for clear error.

On rehearing en banc, the Federal Circuit unanimously rejected the Commissioner's arguments and adhered to its established practice. 142 F.3d 1447 (1998). The APA does "not limit or repeal additional requirements imposed by statute or otherwise recognized by law." 5 U.S.C. § 559. The Federal Circuit interpreted Section 559 to leave in place more searching common-law standards of review of agency action that had been applied before the APA was enacted in 1947. Id. at 1450-1452. Although the court acknowledged some historical inconsistencies in the standards of review applied to decisions denying a patent, the court concluded that pre-1947 common law "recognized" a clear-error standard of review. Based on that fact, and on the weight of stare decisis, the Federal Circuit concluded that Section 559 did not preclude continued clear-error review. Id. at 1457-1458.

This case generated several amicus briefs in the Federal Circuit, and should be of substantial interest to any business that regularly seeks patent protection or that finds that its research and development are impeded by overbroad grants of patent rights to rivals. Inventors and other proponents of patent rights have an obvious interest in having decisions rejecting patent applications subjected to more searching judicial review. Other organizations (such as one company that filed an amicus brief in support of the Commissioner's certiorari petition) may wish to argue that the Federal Circuit's more stringent judicial review of factual findings creates uncertainty in the administration of the patent laws and has a chilling effect on innovation.

3.  Gratuities to Federal Public Officials "For or Because of" Official Act "Performed or to Be Performed" — Mens Rea. It is a federal crime to give anything of value to a public official "for or because of any official act performed or to be performed." 18 U.S.C. § 201(c)(1)(A). This prohibition against gratuities to public officials is distinct from the crime of bribery, which, by contrast, involves the giving of something of value to a public official to "influence" or "induce" an official act. Id. § 201(b)(1)(A). The Supreme Court granted certiorari in United States v. Sun-Diamond Growers of California, No. 98-131, to determine whether the gratuity statute's requirement that a thing of value be given "for or because of any official act" is satisfied by a showing that the giver was motivated by the recipient's official position.

Sun-Diamond Growers of California is a large agricultural cooperative that was convicted of making illegal gifts to then-Secretary of Agriculture Mike Espy. Sun-Diamond challenged the application of the gratuities statute to its alleged conduct, contending that the indictment should have been dismissed because the government failed to allege any nexus between each gift and a specifically identified "official act" for which (or because of which) the gift was given. 941 F. Supp. 1262 (D.D.C. 1996). Sun-Diamond also contended that the district court's instructions to the jury were erroneous because they permitted a conviction if the jury found that the gifts were motivated by Secretary Espy's official position, regardless of whether Sun-Diamond had any intent to influence or reward official conduct.

The D.C. Circuit affirmed the denial of Sun-Diamond's motion to dismiss the indictment, but reversed the gratuities conviction for a new trial because it agreed with Sun-Diamond that the jury instructions were erroneous. 138 F.3d 961, 964 (1998). The court of appeals distinguished the bribery statute, which requires a quid pro quo intent, from the gratuities statute, which does not require intent to exchange the gratuity for the official act. Id. at 966. Notwithstanding this difference, the court held that the gratuity statute does require at least a "unidirectional" relationship, in that the gift must be "for or because of" an official act. Ibid. Although the government did not have to allege and prove that any particular gift was specifically earmarked for or because of any particular official act, the district court's instructions erroneously invited the jury to convict on evidence of gifts driven only by Secretary Espy's official position, rather than for or because of any official act. Id. at 968-969.

The D.C. Circuit acknowledged that its holding conflicted with the holdings of several other circuits. See, e.g., United States v. Bustamante, 45 F.3d 933, 940 (5th Cir. 1995); United States v. Standefer, 610 F.2d 1076, 1080 (3d Cir. 1979) (en banc), aff'd, 447 U.S. 10 (1980); United States v. Evans, 572 F.2d 455, 480 (5th Cir. 1978); United States v. Alessio, 528 F.2d 1079, 1082 (9th Cir. 1976); United States v. Umans, 368 F.2d 725, 730 (2d Cir. 1966). Indeed, as the United States pointed out in its petition for certiorari, D.C. Circuit Judge Wald issued an opinion stating that "the current circuit split calls for Supreme Court attention." In addition, the decision of the court of appeals arguably conflicts with the Supreme Court's decision in Standefer v. United States, 447 U.S. 10, 14 n.8 (1980).

This case should attract broad interest because it may determine the legality of a broad assortment of gifts to public officials. The alleged gratuities in this case included tickets to a tennis tournament, meals, various tangible objects, and travel expenses for Secretary Espy's girlfriend to accompany him to an international conference. The Supreme Court's interpretation of the gratuity statute could greatly expand or restrict the legality of gifts to officials in circumstances in which official acts are not readily tied to such gifts. Companies, organizations, and trade associations that are active politically may wish to be heard as amici.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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