Mayer Brown's



2000 Term, Number 2 / October 10, 2000

Today the Supreme Court granted certiorari in nine cases, three of which are of potential interest to the business community. Amicus briefs in support of the petitioners are due on Friday, November 24, 2000, and amicus briefs in support of the respondents are due on Tuesday, December 26, 2000. In addition, the Court has invited the Solicitor General to express the views of the United States in two cases of interest to the business community. Any questions about these cases should be directed to Donald Falk (202-263-3245), Eileen Penner (202-263-3242), or Miriam Nemetz (202-263-3253) in our Washington office.

1. Constitutional Challenges to Punitive Damages Awards — Standard of Review. The Supreme Court granted certiorari in Cooper Industries, Inc. v. Leatherman Tool Group, Inc., No. 99-2035, to determine the standard of review applicable to a trial court's determination that a punitive damages award is not unconstitutionally excessive. 
Leatherman Tool Group and Cooper Industries are competing hand tool manufacturers. In the early 1980s, Leatherman introduced the Pocket Survival Tool ("PST"), a multi-function hand tool that now dominates the market for such products. In 1996, Cooper developed a multi-function hand tool similar to the PST. Cooper marketed its tool, named the Toolzall, using photographs of a modified PST. Leatherman sued Cooper in federal district court, alleging trade dress infringement under the Lanham Act and common law claims for unfair competition, false advertising, and "passing off." Cooper voluntarily removed the original Toolzall from the market and stipulated to a preliminary injunction prohibiting its use of pictures of the PST in marketing the Toolzall. Thereafter, the district court preliminarily enjoined Cooper from marketing the original Toolzall in the United States.

A jury concluded that the Toolzall had infringed Leatherman's trade dress, but found that this infringement caused no damage to Leatherman. The jury also found in favor of Leatherman on its common law claims and awarded $50,000 in compensatory damages and $4.5 million in punitive damages. In post-trial motions, Cooper argued that the punitive damages were unconstitutionally excessive. The trial court refused to reduce the award, finding it to be "fairly proportional given both the nature of the conduct, evidence of intentional use of the modified [PST], and the size of an award necessary to deter future similar conduct given defendant's size and assets." 

The Ninth Circuit reversed the judgment against Cooper on the Lanham Act claim, ruling that the overall appearance of the PST was not protectable trade dress. 199 F.3d 1009 (1999). In a separate, unpublished opinion, however, the court of appeals affirmed the award of punitive damages on Leatherman's common law claims. 1999 WL 1216844. The court of appeals noted that this was a "very unusual passing off case" because customers would not have been deceived by the photographs at issue. Id. at *2. It nonetheless concluded that Cooper had engaged in "literal passing off," and that this "gave Cooper an unfair advantage by allowing it to use the sweat of Leatherman's efforts to obtain a ‘mock-up' [of the Toolzall] more cheaply, easily, and quickly." Ibid. The court also found that "there was evidence that Cooper did not act promptly" to remedy its improper use of the PST photographs. Ibid. Ruling that the district court's findings concerning the proportionality of the punitive damages award were thus "supported by the evidence" (id. at *1), the Ninth Circuit held that the lower court "did not abuse its discretion in declining to reduce the amount of punitive damages" (id. at *2).

There is a conflict among the circuits concerning the proper standard of review of district court determinations concerning the constitutionality of a punitive damages award. Like the Ninth Circuit, the Seventh and the Second Circuits apply a deferential "abuse of discretion" standard in reviewing a district court's excessiveness determination. See Shea v. Galaxie Lumber & Constr. Co., 152 F.3d 729, 736 (7th Cir. 1998); Lee v. Edwards, 101 F.3d 805, 808 (2d Cir. 1996). By contrast, the Third, Eighth, Tenth, and Eleventh Circuits review such determinations de novo. See United Phosporous, Ltd. v. Midland Fumigant, Inc., 205 F.3d 1219, 1229 (10th Cir. 2000); Inter Med. Supplies, Ltd. v. EBI Med. Sys., Inc., 181 F.3d 446, 467-470 (3d Cir. 1999), cert. denied (see modification) , 120 S. Ct. 791 (2000); United States v. Bid D Enters., Inc., 184 F.3d 924, 932-933 (8th Cir. 1999), cert. denied, 120 S. Ct. 1419 (2000); Johansen v. Combustion Eng'g, Inc., 170 F.3d 1320, 1334 (11th Cir.), cert. denied, 120 S. Ct. 329 (1999). 

Huge jury awards of punitive damages have become commonplace in all types of lawsuits, and corporate defendants must rely on the courts to reduce excessive awards. The standard of review applicable to a district court's determination that a punitive award is, or is not, unconstitutionally excessive thus has substantial importance to all businesses. 

2. Environmental Regulations — Regulatory Takings — Ripeness. The Supreme Court granted certiorari in Palazzolo v. Rhode Island, No. 99-2047, to decide whether a claimant may assert a regulatory takings claim when the challenged regulation antedates his acquisition of the property and permits some economic use of the property. The Court also will decide when a regulatory takings claim becomes ripe for adjudication.

Anthony Palazzolo was the president and sole shareholder of Shore Gardens, Inc. ("SGI"), which owned a parcel containing 18 acres of wetlands and a few additional acres of uplands. Palazzolo became the owner of the land when SGI's corporate charter was revoked in 1978. Intending to develop either a recreational beach facility or a 74-home residential subdivision on his property, Palazzolo has repeatedly filed applications with Rhode Island environmental agencies to fill the wetlands. All of his applications were denied.

After the denial of the most recent application, Palazzolo filed suit in Rhode Island state court alleging that the denial of his wetlands application constituted a taking of his property without just compensation in violation of both the United States and Rhode Island Constitutions. The trial court concluded that Palazzolo's property had not been taken for public use and that no compensation was required.

The Supreme Court of Rhode Island affirmed. 746 A.2d 707 (2000). The court first held that Palazzolo's claim was not ripe because he had never specifically applied for permission to build a residential subdivision and he had never sought "permission for less ambitious development plans" involving the fill of fewer acres of wetlands or the development only of the upland portion of the parcel. Id. at 714. The court nonetheless addressed the merits of the case. First, the court held that Palazzolo had not suffered a per se taking. To begin with, Palazzolo had not been "deprived of all beneficial and reasonable use of his land." Id. at 715. In addition, Palazzolo could not rest his claim on deprivation of a right to fill the wetlands, since he had never had that right; the environmental regulations limiting his ability to fill the wetlands were already in place when he became the individual owner of the land. Id. at 715-716. Second, the court held that Palazzolo had not been subjected to a regulatory taking. In light of the pre-existing regulations, he "could not reasonably have expected that he could fill the property and develop a seventy-four-lot subdivision" when he acquired the property. Id. at 717. Accordingly, the court found that Palazzolo had no reasonable investment-backed expectations that were affected by the regulations. Ibid.

The petition asserts that the decision of the Rhode Island court is in tension with decisions of other state and federal courts. Some courts apparently apply less stringent ripeness analyses to takings claims. Other courts appear to have permitted takings challenges to the operation of regulations imposed before the current owners acquired the regulated property. Still other courts have acknowledged that a regulatory taking may require compensation even if it does not eliminate all beneficial use of the property.

This case is of obvious interest to the real estate and development industries and to any other business that may have its expansion or development plans restricted by land-use regulations. The decision will determine not only whether landowners may obtain relief for a wide variety of stringent development regulations, but whether their access to the courts to press such claims will be significantly delayed by judicial notions of ripeness. 

3. Government Contracts — Agency Withholding of Contract Funds — Due Process. The California Labor Code requires contractors and subcontractors on public works projects to pay a state-determined prevailing wage to all of their employees. Upon finding a violation of the prevailing wage law, but without conducting any hearing, the contracting agency may withhold from the prime contractor an amount equal to the total of the underpayments plus fines. If the violator is a subcontractor, then the prime contractor is authorized to withhold an equivalent amount from the subcontractor. These provisions are incorporated in all public works contracts. The sole remedy of an aggrieved prime contractor is to sue the awarding body; subcontractors have no right to sue, although a prime contractor may assign its right to a subcontractor. The Supreme Court granted certiorari in Bradshaw v. G&G Fire Sprinklers, Inc., No. 00-152, to determine whether the California scheme violates the due process rights of subcontractors.

In this case, the California Division of Labor Standards Enforcement ("DLSE") determined that G&G Fire Sprinklers had violated the prevailing wage laws on three public works projects. At the DLSE's direction, the awarding agencies withheld payments from the prime contractors on those projects, which in turn withheld payments from G&G. G&G filed an action seeking declaratory and injunctive relief against the State, arguing that the withholding of payments constituted a deprivation of property without due process of law in violation of the Fourteenth Amendment. The district court held that the relevant provisions of California law were unconstitutional and enjoined the State from enforcing them against G&G. 
The Ninth Circuit affirmed in part and reversed in part. 156 F.3d 893 (1998). Although it narrowed the district court's injunction, the court of appeals agreed that G&G had a protected property interest in being paid in full under its contracts, and that the statutory scheme deprived it its property without due process of law. Id. at 901-903. The court made clear, however, that payments could be withheld pending the results of a prompt post-deprivation hearing. Id. at 903-904. Judge Kozinski dissented on the ground that the State was not exercising its regulatory powers when it bargained for contract terms such as those at issue. Id. at 908-910. 

The Supreme Court granted certiorari, vacated the judgment, and remanded for further consideration in light of American Manufacturers Mutual Insurance Co. v. Sullivan, 526 U.S. 40 (1999). See 526 U.S. 1061 (1999). In Sullivan, the Court considered a private insurer's decision, as authorized by a Pennsylvania statute, to withhold payment on a worker's compensation claim pending review of the reasonableness and necessity of particular medical treatment. The Court held that the withholding was not fairly attributable to the State so as to be subject to the constraints of the Fourteenth Amendment. 526 U.S. at 58. The Court also held that the claimants lacked a protected property interest "in having their providers paid for treatment that has yet to be found reasonable and necessary." Id. at 61. 

On remand, the Ninth Circuit reinstated its earlier judgment and opinion, adding a separate discussion of Sullivan. 204 F.3d 941 (2000). The majority emphasized that the withholding at issue here, unlike that in Sullivan, was "specifically directed by State officials," and that, consistent with Sullivan, the court had "explicitly authorized the withholding of payments pending the hearing." Id. at 943-944. Judge Kozinski again dissented, finding Sullivan dispositive. Id. at 944-947.

According to Judge Kozinski, the Ninth Circuit created a conflict among the circuits when it concluded that a contractor's interest in being paid in full under a government contract is a property right protected by the Fourteenth Amendment. See 156 F.3d at 909 (citing Mid-American Waste Sys., Inc. v. City of Gary, 49 F.3d 286 (7th Cir. 1995); Walentas v. Lipper, 862 F.2d 414 (2d Cir. 1988)). 

This case is of substantial importance to all government contractors.

* * * * *

The Supreme Court invited the Solicitor General to express the views of the United States in the following two cases:

  1. J.E.M. Ag Supply Inc. v. Pioneer Hi-Bred International Inc., No. 99-1996: The question presented is whether the Plant Variety Protection Act and Plant Patent Act provide the exclusive means of obtaining a right to exclude others from reproducing, using, or selling a sexually reproducing plant or plant variety, and thus take such plants or plant varieties outside the scope of subject matter patentable under 35 U.S.C. § 101. Decision below: 200 F.3d 1374 (Fed. Cir. 2000).

  2. C.S.U. L.L.C. v. Xerox Corp., No. 00-62: The question presented is whether a company with monopoly power in a market for products containing patented or copyrighted material is immune from antitrust liability and from a finding of patent or copyright misuse when that company selectively refuses to license or sell those products in order to monopolize a separate market. Decision below: 203 F.3d 1322 (Fed. Cir. 2000).

    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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