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1999 Term, Number 8/November 29, 1999

Today the Supreme Court granted certiorari in five cases, two of which are of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, January 13, 2000, and amicus briefs in support of the respondents are due on Monday, February 14, 2000. Any questions about these cases should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office.

1.   Class Actions — Diversity Jurisdiction — Supplemental Jurisdiction. In Zahn v. International Paper Co., 414 U.S. 291 (1973), the Court held that federal courts in class actions may exercise jurisdiction over only the claims of class members whose claims meet the amount-in-controversy requirement of 28 U.S.C. § 1332, and that a court may not exercise jurisdiction over the claims of an entire class merely because some of its members have sufficiently large claims. In 1990, Congress enacted a new supplemental jurisdiction statute, 28 U.S.C. § 1367. The Court today granted certiorari in Free v. Abbott Laboratories, 120 S. Ct. __ (2000), to decide whether Section 1367 dictates a rule contrary to Zahn and thus permits a federal court to exercise supplemental jurisdiction over the claims of class members that do not satisfy the amount-in-controversy requirement.

Robin and Renee Free filed a class action complaint in Louisiana state court against Abbott Laboratories and other manufacturers of infant baby formula, alleging a conspiracy to fix the price of infant formula in violation of the Louisiana antitrust statute and other state law. The defendants removed the case to the United States District Court for the Middle District of Louisiana.

The district court granted the Frees' motion to remand the case to state court. 1994 U.S. Dist. LEXIS 4563, at *11 (M.D. La. Apr. 5, 1994). The court concluded that the Frees satisfied the amount-in-controversy requirement for diversity jurisdiction (which at the time was $50,000), despite a purported limitation of their claims to $20,000 each, because Louisiana law attributes recoverable attorneys' fees to the class representatives. Id. at *9. Although the unnamed class members did not satisfy the amount-in-controversy requirement, the district court held that it could exercise supplemental jurisdiction over their claims under Section 1367, which provides in pertinent part that, "in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action * * * that they form part of the same case or controversy." Id. at *9-10. The court nevertheless declined to exercise its supplemental jurisdiction over the claims of the unnamed class members because they raised novel issues of state law. Id. at *10-11. The court also declined to exercise jurisdiction over the named plaintiffs' claims, invoking an abstention doctrine. 1994 WL 422298, at *2 (M.D. La. June 21, 1994).

On appeal by the defendants, the Fifth Circuit reversed the remand order. 51 F.3d 524, 525, 530 (1995). The court held that Section 1367 implicitly "overrules" the holding in Zahn that the claims of each class member in a class action must meet the amount-in-controversy requirement of 28 U.S.C. § 1332. Although the Fifth Circuit acknowledged that the legislative history of Section 1367 contained a passage citing Zahn as a case "untouched by the Act," the court refused to "search legislative history for congressional intent," because it found the statute to be neither unclear nor ambiguous. Id. at 528. The court's reasoning was straightforward: "The statute's first section vests federal courts with the power to hear supplemental claims generally, subject to limited exceptions set forth in the statute's second section. Class actions are not among the enumerated exceptions." Ibid.

Following further proceedings on remand, including an agreement to settle the case, judicial disapproval of the settlement, and dismissal of the entire case on the ground that Louisiana law did not support the plaintiffs' claims, the Frees appealed. The Fifth Circuit reaffirmed the exercise of supplemental jurisdiction and affirmed the dismissal of the case. 176 F.3d 298 (1999). The Frees then petitioned for certiorari, raising only the jurisdictional issue.

The decision in this case will resolve a deep split among the federal courts of appeals. Compare Stromberg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928, 920 (7th Cir. 1996) ("We follow Abbott Laboratories, which has strong support in the statutory text."), with Leonhardt v. Western Sugar Co., 160 F.3d 631, 640 (10th Cir. 1998) (expressly rejecting Fifth and Seventh Circuit rulings), and Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214 (3d Cir. 1999). The case is of obvious interest to most businesses, which may be defendants in class actions or multi-plaintiff diversity suits. Often businesses regard federal courts as better forums in which to defend such suits than state courts, and affirmance of the Fifth Circuit's decision would make a federal forum more often available.

2.   Procurement Statutes — Foreign Affairs — Foreign Commerce Clause — Preemption.The Court granted certiorari in Natsios v. National Foreign Trade Council, No. 99-474, to determine the constitutionality of the "Massachusetts Burma Law," which limits the procurement of goods and services by Massachusetts and its agencies from companies that do business with Burma (officially known as Myanmar).

The Massachusetts legislature enacted the Burma Law to exert pressure on Burma to improve its human rights record. Under the Law, the State creates a list of firms doing business with Burma. In practical terms, a company on the list that bids for a contract from Massachusetts can prevail only if its bid is 10% lower than the bids by companies not on the list. See Mass. Gen. Laws Ann. ch. 7, § § 22G, 22H, 22J. Subsequent to the enactment of the Massachusetts Burma Law, Congress authorized federal sanctions against Burma. See Omnibus Consolidated Appropriations Act of 1997, Pub. L. No. 104-208, § 570, 110 Stat. 3009-166 through 3009-167 (the "Federal Burma Law"). In May 1997, pursuant to the Federal Burma Law, President Clinton issued an Executive Order prohibiting new investment in Burma, subject to certain exceptions. Exec. Order No. 13,047, 62 Fed. Reg. 28,301.

In April 1998, the National Foreign Trade Council ("NFTC") filed a complaint in the federal district court in Massachusetts, alleging that the Massachusetts Burma Law unconstitutionally interfered with the federal foreign relations power granted in several parts of the Constitution, violated the Foreign Commerce Clause (art. I, § 8, cl. 3), and was preempted by federal law. The district court granted summary judgment for the NFTC, holding that the law violated the federal foreign relations power. 26 F. Supp. 2d 287 (1998). The court rejected the preemption argument, however, and declined to reach the Foreign Commerce Clause challenge. Id. at 293.

The First Circuit affirmed. 181 F.3d 38 (1999). The court of appeals, principally relying on Zschernig v. Miller, 389 U.S. 429 (1968), held that the Massachusetts Burma Law ran afoul of the federal foreign relations power. The court of appeals also ruled that the Massachusetts Burma Law violated the Foreign Commerce Clause. 181 F.3d at 69-70. In so doing, the court of appeals expressed doubt about the relevance under the Foreign Commerce Clause of the market participant exception, which exempts from dormant Commerce Clause scrutiny acts that a state takes as a market participant rather than as a market regulator. Id. at 65-66. Finally, the court of appeals held that the Federal Burma Law preempted Massachusetts' law because "the federal government ha[d] acted in an area of unique federal concern." Id. at 77.

This case is of significance to the business community because the Court will have the opportunity to clarify the limits on the ability of states to engage in foreign affairs by exerting economic leverage on businesses, and may address more broadly the balance of power between the states and the federal government in the area of foreign relations. These concerns are particularly acute in light of the number of states and localities that have enacted similar selective purchasing laws that restrict public contracts with persons doing business with Burma and other foreign nations. If the Court upholds the Massachusetts Burma Law, businesses that engage both in foreign commerce and in public contracting at the state and local level may have to navigate a multitude of differing laws restricting foreign trade and investment.

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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