The Supreme Court’s burgeoning business agenda

December 10, 2012

The marquee issue of the Supreme Court’s 2012 term will unquestionably be gay marriage, thanks to the justices’ fascinating decision Friday to review the 2nd Circuit Court of Appeals’ holding that the federal Defense of Marriage Act is unconstitutional under equal protection provisions and the 9th Circuit’s ruling that California’s ban on gay marriage is unconstitutional, albeit on narrower grounds. (My Reuters colleague Terry Baynes has an insightful backgrounder on the two cases and the impact of the double cert grant.) But more quietly, the justices have agreed to hear a clutch of cases that could result in a real retrenchment for big businesses and a corresponding ebbing of the power of individuals to hold corporations accountable.

Few of the cases — with the exception of the court’s consideration of the scope of the Alien Tort Statute inKiobel v. Royal Dutch Shell and the grant of cert Friday in the Federal Trade Commission’s pay-for-delay case against Watson, Solvay and Par — present entirely new questions for the Supreme Court. Nevertheless, in reconsidering issues such as the standards for class certification, the ability of corporations to avoid class claims through arbitration contracts and the potential personal injury liability of generic drugmakers, the justices have an opportunity to rethink the state of the law, reinforce the majority’s holdings and use previous rulings to bulldoze into new ground.

I’ve written before about the class certification issues the court chose to hear in the securities case of Amgen v. Connecticut Retirement Plans and the antitrust case of Comcast v. Behrend. (The cases were argued on the same day last month; Mayer Brown’s Class Defense blog has a summary.) In both, defendants argued in the broadest sense that because certification of a class puts enormous pressure on defendants, plaintiffs should have to jump a high bar to earn it. In Amgen, that comes down to a question of whether investors claiming securities fraud must prove that the defendant’s alleged misstatements were material in order to win certification; Comcast raises the similar question of whether antitrust plaintiffs must prove the validity of their theory of damages before their class can be certified.

The federal circuit courts in both cases (the 9th Circuit in Amgen and the 3rd in Comcast) sided with the plaintiffs and upheld class certification. And at oral arguments in Amgen and in Comcast, Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan had some tough questions for counsel arguing that the circuit courts were wrong. (Seth Waxman of Wilmer Cutler Pickering Hale and Dorr for Amgen;Miguel Estrada of Gibson, Dunn & Crutcher for Comcast.) But in Amgen, Justices Anthony Kennedy andAntonin Scalia hinted that just because stock trades in an efficient market, trial judges overseeing securities class actions should not assume the materiality of a public misstatement. Scalia even suggested that “maybe we should overrule” the court’s seminal fraud-on-the-market ruling in Basic v. Levinson. In Comcast, Justice Kennedy was similarly concerned about the district court’s gatekeeper function in antitrust cases. If the majority agrees with the corporate defendants in either case, alleged victims will lose serious leverage.

If the Supreme Court’s grant of cert in Amgen and Comcast can be read as a further exploration of the class certification inquiry in which the justices engaged most notably in Wal-Mart v. Dukes, then the court’s decision to review both the 2nd Circuit’s ruling in American Express v. Italian Colors and the 3rd Circuit’s in Oxford Health Plans v. Sutter should be regarded as a continuation of the reshaping of classwide arbitration that engaged the justices in their 2010 ruling in Stolt-Nielsen v. AnimalFeeds International and their 2011 decision in AT&T Mobility v. Concepcion. The Amex case presents the question (as articulated in the cert petition filed byKellogg, Huber, Hansen, Todd, Evans & Figel) of “whether the Federal Arbitration Act permits courts … to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.” Oxford’s cert petition, filed by Wilmer Cutler Pickering Hale and Dorr, asks the justices to resolve a circuit split over whether arbitrators have the power to order classwide arbitration when contracts don’t expressly provide for it.

Both cases involve claimants’ ability to arbitrate (or litigate) as a group rather than individually, so you can see why defendants are eager to see the Supreme Court reverse the underlying appellate rulings. In Amex, the 2nd Circuit ruled that the credit card company could not enforce arbitration agreements with retailers claiming antitrust violations because the agreements would preclude the merchants’ right to enforce the claims. Specifically, the appeals court said that the Amex arbitration agreements barred retailers from proceeding on a classwide basis, and litigating their individual claims would be too expensive. So the court held the agreements to be invalid, even after reconsideration in light of Stolt-Nielsen and Concepcion. In Oxford, the 3rd Circuit endorsed an arbitrator’s holding that a group of doctors could pursue classwide breach of contract claims against the health insurer, even though the doctors’ arbitration agreements did not specifically authorize group proceedings. Again, if the Supreme Court sides with defendants and permits corporations to avoid group or class claims by imposing arbitration, that’s a big blow to plaintiffs.

The pharmaceutical industry probably has more at stake this term than any other, with biomedical companies worrying about the Supreme Court’s consideration of gene patents in Association for Molecular Pathology v. Myriad and both brand-name and generic drugmakers facing scrutiny of reverse-payment deals that permit brand-name pharmaceuticals to maintain marketplace monopolies. Generics also have an abiding interest in a case accepted last week, in which the justices will confront a circuit court ruling that tries to undermine their 2011 decision in Pliva v. Mensing.

In that controversial 5-to-4 opinion, you may recall, the majority held that generics cannot be held liable for failing to warn patients of side effects because their labels are dictated by the Food and Drug Administration’s approval of packaging for brand-name drugs. Since the Mensing ruling, courts and consumer advocates havecomplained about the broad protection it gives generics, but the 1st Circuit did more than grouse: It upheld a $16.5 million verdict against Mutual Pharmaceutical Company, finding that the maker of a generic painkiller was liable for a design defect, despite carrying an FDA-approved label, because it could have simply stopped making the allegedly defective drug.

In its cert petition, filed by the Kirkland & Ellis team that won the Mensing case at the Supreme Court, Mutual argued that the appeals court decision “blasts a gaping hole in Mensing, by adopting a rationale that concededly cannot be squared with that decision; that admittedly would have required a different result in that case; and that indeed would sound the death knell for conflict preemption of state-law claims targeting any federally regulated product.” The petition essentially asks the Supreme Court to reiterate its holding in Mensing, regardless of whether plaintiffs claim a failure to warn or a design defect.

Obviously, we don’t yet know how the justices will decide any of these cases, and there’s a chance that they will issue narrow rulings that don’t alter the balance of power between plaintiffs and defendants, as they di d in the court’s 2011 ruling in Erica P. John Fund v. Halliburton. I think it’s likelier, though, that the Supreme Court took these cases because it wants to resolve uncertainties resulting from previous major rulings. Given the majority’s previous rulings, especially on class certification standards, arbitration agreements and generics’ liability, plaintiffs should be worried that by the time the term ends in June, the scales of justice will be tipping against them.

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