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Mayer Brown's Supreme Court and Appellate Practice Group distributes a Docket Report whenever the Supreme Court grants certiorari in a case of interest to the business community. We also email the Docket Report to our subscribed members and if you don't already subscribe to the Docket Report and would like to, please click here.

October Term 2007 - No. 1 - September 25, 2007

The Supreme Court granted certiorari today in nine cases of interest to the business community, two of which it consolidated:

Federal Preemption--Preemption of State Law that Predicates Maintenance of Tort Suit on Allegations of Fraud on a Federal Agency. In Buckman Co. v. Plaintiffs' Legal Committee, 531 U.S. 341, 348 (2001), the Supreme Court held that federal law preempts state-law "fraud-on-the-FDA" claims--i.e., claims against a medical device manufacturer asserting that the Food and Drug Administration's approval of the manufacturer's product had been procured through fraudulent misrepresentations to the agency. In finding preemption, the Supreme Court reasoned that state "fraud-on-the-FDA" claims "inevitably conflict with the FDA's responsibility to police fraud." The Supreme Court granted certiorari in Warner-Lambert Co. v. Kent, No. 06-1498, to decide whether federal law also preempts state common-law product-liability claims against the manufacturer of an FDA-approved drug when state law predicates the availability of the cause of action upon a finding that the manufacturer committed fraud in obtaining FDA approval.

The plaintiffs in Warner-Lambert, asserting various common-law claims under Michigan law, alleged that they had suffered injuries caused by an FDA-approved drug that was marketed and sold by the defendant. Michigan's product-liability statute, Mich. Comp. Laws 600.2946(5), confers immunity on drug manufacturers in product-liability suits if the drug in question has been approved by the FDA. Under the statute's "fraud exception," however, the immunity does not apply if the manufacturer withheld or misrepresented information that would have affected the FDA's approval of the drug.

Deeming the "fraud exception" preempted under the reasoning of Buckman, the district court dismissed the claims. The Second Circuit reversed and held that there was no preemption because (i) unlike the state law at issue in Buckman, there was a presumption against federal preemption of the Michigan statute; (ii) the plaintiffs were asserting claims that sounded in traditional state tort law, not "fraud-on-the-FDA" claims; and (iii) proof of fraud on the FDA was not an element of the plaintiffs' claims. Desiano v. Warner-Lambert, 467 F.3d 85 (2006). In so holding, the Second Circuit explicitly declined to follow the reasoning of the Sixth Circuit, which had found the Michigan "fraud exception" to be preempted under Buckman.

This case is important for all manufacturers of federally regulated products and will have significant implications for the future exposure of such manufacturers to state-law tort liability. Although it nominally implicates only Michigan's particular statutory scheme, the Court's resolution of this case will determine whether state courts may independently evaluate whether a federal agency's approval of a regulated product was procured through fraud. The case will also provide the Court an opportunity to decide the proper level of deference that courts should accord to the pronouncements of federal agencies regarding the preemptive effect of their regulations. Amicus briefs in support of the petitioner are due on November 12, 2007, and amicus briefs in support of the respondent are due on December 10, 2007. Any questions about this case should be directed to appellate@mayerbrown.com.

Federal Arbitration Act--Preemption of State-Law Administrative Exhaustion Requirement. The Federal Arbitration Act (FAA) provides that arbitration agreements in contracts involving interstate commerce must be enforced except "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. 2. The Supreme Court has repeatedly held that the FAA preempts state laws declaring that certain causes of action are not arbitrable. The Court granted certiorari in Preston v. Ferrer, No. 06-1463, to determine whether the FAA preempts the application of the California Talent Agencies Act (CTAA) to deny enforcement to an arbitration agreement. The CTAA provides that any "controversy arising under" the CTAA must be resolved by the state Labor Commissioner, subject to de novo review by the superior court. Cal. Labor Code 1700.44(a). The California courts have interpreted the CTAA to preclude the enforcement of an arbitration provision for such disputes unless the provision expressly grants the Labor Commissioner the right to notice of all arbitration hearings and the right to attend them.

In this case, a contractual dispute arose between the respondent--Judge Alex Ferrer, star of the television show Judge Alex--and his manager, petitioner Arnold Preston. When Judge Ferrer refused to pay his manager's commission, contending that the management contract was unlawful under the CTAA, Preston initiated arbitration proceedings against Judge Ferrer. Judge Ferrer obtained a preliminary injunction against the arbitration proceedings from a California trial court under the theory that Preston had failed to exhaust his remedies before the Labor Commissioner. The California Court of Appeal affirmed, holding that the injunction was appropriate because the "standard [American Arbitration Association] clause" included in the management contract did not explicitly provide for the Labor Commissioner to receive the requisite notice of and right to attend all arbitration hearings. 51 Cal. Rptr. 3d 628 (2006). The court also held that the FAA did not preempt the CTAA's "exhaustion" requirement--i.e., that the Labor Commissioner resolve the dispute. Id. at 633-34.

This case is of broad significance to any business or entity that relies upon arbitration agreements to resolve disputes. If sustained, the decision below would authorize states to declare causes of action non-arbitrable by requiring the parties to pursue costly administrative proceedings followed by de novo judicial review. Amicus briefs in support of the petitioner are due on November 12, 2007, and amicus briefs in support of the respondent are due on December 10, 2007. Any questions about this case should be directed to appellate@mayerbrown.com.

Intellectual Property--Patent Exhaustion Doctrine. Under the traditional patent exhaustion doctrine, a patent owner's rights in an article that "practices" its patent--in other words, an article that is protected by that patent--are completely exhausted by the first authorized sale of that article. An important effect of this doctrine is that patent owners are required to extract the entire royalty for their invention at the first authorized sale. The Supreme Court granted certiorari in Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937, to determine whether a patent owner can avoid the patent exhaustion doctrine by selling only a limited right to practice a patent, and in particular one that is limited to the first purchaser but requires any subsequent purchaser of the patented article to pay a new royalty.

Respondent LG Electronics (LGE) owns a patent that is practiced by certain Intel chips. LGE sold Intel the unrestricted right to practice the patent with respect to Intel's own products, but required that Intel send a "notice" to its customers informing them that Intel's rights did not extend to any product made "by combining any Intel product with a non-Intel product." When original equipment manufacturers (OEMs) purchased Intel chips practicing the patent and combined them with computer memory manufactured by other manufacturers, LGE sued the OEMs for patent infringement.

The district court granted the OEMs partial summary judgment because it found that, under the patent exhaustion doctrine, Intel's authorized sale of the chips to the OEMs exhausted LGE's patent rights in those chips. The Federal Circuit reversed, holding that the patent exhaustion doctrine applies only to "unconditional" sales and does not prevent a patent owner from selling its patent rights piecemeal, subject to conditions on subsequent purchasers that allow the patent owner to extract a separate royalty each time that the patented article changes hands.

This case is of tremendous significance to all industries that deal in patent rights, particularly high technology industries. Many high technology products contain thousands of different physical components, each of which may be the subject of many patents. During the manufacturing process, it is common for patented components to pass through the hands of multiple firms before reaching the final product and, ultimately, the end user. If patent owners can extend their patent rights past the first authorized sale of a patented article, they will be able to impose significant real and transactional costs on each of those downstream firms as well as on the ultimate end user.

Mayer Brown LLP filed an amicus brief supporting certiorari in this case on behalf of Dell Inc., Hewlett-Packard, Co., and Gateway, Inc. Amicus briefs in support of the petitioner are due on November 12, 2007, and amicus briefs in support of the respondent are due on December 10, 2007. Any questions about this case should be directed to Andy Pincus (202-263-3220) in our Washington, D.C. office.

Employment Discrimination--Race Retaliation under Section 1981. Section 1981 of the United States Code protects the equal right of "all persons . . . to make and enforce contracts" without respect to race. 42 U.S.C. 1981. In the Civil Rights Act of 1991, Congress amended Section 1981 by adding a new subsection that defines the term "make and enforce contracts." 42 U.S.C. 1981(b). In neither the original statute nor the statute as amended is there any direct mention of "retaliation" claims. The Supreme Court granted certiorari in CBOCS West, Inc. v. Hedrick G. Humphries, No. 06-1431, to determine whether such claims are cognizable under Section 1981.

In the decision below, the Seventh Circuit held that a terminated employee who sues a former employer may assert a race retaliation claim under section 1981. 474 F.3d 387, 398 (7th Cir. 2007). The court reasoned that the "plain text of the statute, as amended in 1991 makes clear that section 1981 encompasses the 'termination of contracts,' and . . . a retaliatory discharge is indeed a termination of a contract." Id. The court also found support for this reading in the legislative history of the statute and in the Supreme Court's recent decision in Jackson v. Birmingham Board of Education, 544 U.S. 167 (2005).

The Court's resolution of this issue should be of considerable importance to all employers, as retaliation claims can greatly expand the scope of liability in discrimination cases. This case may also provide the Court with an opportunity to address whether Congress's failure to include an explicit retaliation provision precludes a court from reading such a cause of action into the statute. Amicus briefs in support of petitioners will be due on November 12, 2007, and amicus briefs in support of the respondent will be due December 10, 2007. Any questions about this case should be directed to Bob Davis (202-263-3207) in our Washington, D.C. office.

Employment Discrimination--Age Discrimination in Employment Act--Facial Discrimination and Inference of Discriminatory Intent. The Age Discrimination in Employment Act (ADEA), 29 U.S.C. 621 et seq., prohibits discrimination on the basis of age in employee benefit plans. The Supreme Court granted certiorari in Kentucky Retirement Systems v. EEOC, No. 06-1037, to decide whether a disability plan in which age is a factor in determining eligibility and benefit levels is facially discriminatory under the ADEA and, if so, whether such a plan itself gives rise to a prima facie case of age discrimination without a further showing of discriminatory intent.

The Kentucky state retirement plan for public employees provides retirement benefits for "hazardous duty" workers at age fifty-five or older, or after twenty years of service regardless of age; retirement benefits are based on the employee's final salary and years of service. The state also provides a disability plan, available to employees who become disabled before reaching normal retirement eligibility, the benefits of which are similarly based on final salary and years of service. However, in order to put retirement-ineligible employees who become disabled closer to the position in which they would have been had they continued working until retirement eligibility, the disability plan imputes to the employee the number of years of service he or she would have needed to reach retirement eligibility.

The EEOC brought an age discrimination claim on behalf of a "hazardous duty" worker who became disabled at age sixty-one, with seventeen years, seven months of service, and--because he was eligible for normal retirement benefits--was denied disability benefits. The district court granted summary judgment in favor of the defendants, holding that the Kentucky plan was not facially discriminatory insofar as there was no showing of discriminatory intent. The en banc Sixth Circuit reversed, holding that the Kentucky plan discriminated on its face against older employees by denying them benefits available to younger workers and that the terms of the plan itself sufficed to infer intent to discriminate on the basis of age. 467 F.3d 571 (6th Cir. 2006). The dissenting judges argued that the Kentucky plan--because it considered age only in relation to years of service and years until retirement eligibility, and served to protect retirement-ineligible employees against disability rather than to exclude retirement-eligible employees, who tended to be older, from a benefit--was not motivated by discrimination on the basis of age, and as such did not constitute the kind of disparate treatment contemplated by the ADEA.

The resolution of this case is of particular interest to any employer offering benefit programs in which age is a factor in determining eligibility or benefit levels. If the Sixth Circuit's reasoning is upheld, any such plan would automatically suffice to support a prima facie case under the ADEA. The Court may also use this case to clarify the scope of the "arbitrary discrimination" prohibited by the ADEA, an issue of interest to all employers covered by the Act. Amicus briefs in support of petitioners will be due on November 12, 2007, and amicus briefs in support of the respondent will be due December 10, 2007. Any questions about this case should be directed to Bob Davis (202-263-3207) in our Washington, D.C. office.

Federal Power Act--FERC Regulatory Power. The Federal Power Act (FPA) declares wholesale energy prices that are "not just and reasonable" to be "unlawful." 16 U.S.C. 824d(a). If the Federal Energy Regulatory Commission (FERC) finds that a wholesale energy rate is "unjust" or "unreasonable," the FPA requires FERC to determine the "just and reasonable" rate and to "fix the same by order." Id. 824e(a). The Supreme Court granted certiorari in Calpine Energy Services v. Public Utilities District No. 1, No. 06-1462, and Morgan Stanley Capital Group, Inc. v. Public Utilities District No. 1, No. 06-1457, to determine the circumstances under which FERC is obligated to revise the terms of a long-term wholesale energy contract.

In late 2000 and early 2001, when the electricity markets in the western states were in turmoil, the respondent utilities entered into long-term contracts to purchase wholesale electricity from the petitioners at agreed upon rates. Subsequently, after market rates declined, the utilities asked FERC to find the contractual rates "unjust and unreasonable" and to fix lower rates. Having previously determined that the wholesale suppliers did not exercise undue market power, FERC refused to do so, finding that the utilities had failed to satisfy the criteria for revising private contracts set forth in United Gas Pipe Line Co. v. Mobile Gas Services Co., 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956). The Ninth Circuit, in a decision reported at 471 F.3d 1053, reversed and remanded for further consideration, holding that the Mobile and Sierra criteria apply only in "certain limited circumstances" and that FERC, by neglecting to consider the particular market conditions that gave rise to the contracts in question, had failed to determine whether those circumstances were in fact present.

The Supreme Court's decision, which will determine the circumstances under which FERC is obligated to revise the terms of a wholesale energy contract, will be extremely important to participants in the energy market. Depending on how broadly the decision is written, it may also prove important to individuals and entities involved in other industries subject to federal price regulation. Amicus briefs in support of petitioners will be due on November 12, 2007, and amicus briefs in support of the respondents will be due December 10, 2007. Any questions about this case should be directed to Andrew Tauber (202-263-3324) in our Washington, D.C. office.

State Taxation--"Unitary Business Doctrine." A state may tax income derived from the conduct of multi-state business activity of a non-domiciliary if the business activity giving rise to the income is carried on in the state. See, e.g., Allied-Signal, Inc. v. Director, Div. of Taxation, 405 U.S. 768 (1992); F.W. Woolworth Co. v. Taxation & Revenue Dep't of New Mexico, 458 U.S. 354 (1982); ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307 (1982). Additionally, if the transaction or activity giving rise to the income does not occur in the state, it may still be taxed if the transaction or activity giving rise to the income is a component part of the entity's multi-state unitary business that is carried on in the state (referred to as non-operational income). The fact that the non-domiciliary entity is taxable in the state will not subject income derived from unrelated business activity (referred to as non-operational income) to tax. The Court in Allied-Signal refined this "unitary business" doctrine, ruling that for apportionment to occur an asset must "serve an operational rather than an investment function." The Supreme Court granted certiorari in Meadwestvaco Corp. v. Illinois Department of Revenue, No. 06-1413, to resolve the factors that distinguish operational income from non-operational income.

The petitioner, a producer and seller of forest products headquartered in Ohio, purchased a printing company that developed a full-text information retrieval technology and eventually became Lexis/Nexis. Petitioner wholly owned Lexis/Nexis, although the relationship between the two entities alternated between a division and a subsidiary. Petitioner made capital investments in Lexis/Nexis, received tax advantages from its ownership, invested Lexis/Nexis's excess cash, and approved its major debt and capital expenditures. The parent and subsidiary did not share facilities or functional departments (e.g., accounting, human resources). In 1994, petitioner sold Lexis/Nexis, and Illinois sought to tax more than $1 billion in gain from the transaction as apportionable income. The Illinois courts ruled that while petitioner and Lexis/Nexis did not constitute a unitary business, the gain from the sale of Lexis/Nexis was properly apportioned in part to Illinois because the subsidiary served an operational purpose. Petitioner sought Supreme Court review, arguing that the Illinois decisions subvert the principles in Allied-Signal and conflict with the rulings of other state courts.

The Court's resolution of this matter is of significant interest to the business community. Under the Illinois courts' approach, nearly every sale of a subsidiary by a parent corporation would give rise to apportionable operational income. This blurring of the line between operational and non-operational income could result in increased and duplicative taxation of multi-state businesses. Amicus briefs in support of the petitioner are due on November 12, 2007, and amicus briefs in support of the respondent are due on December 10, 2007. Any questions about this case should be directed to Richard Leavy (212-506-2310) in our New York office.

Internal Revenue Code--Return of Capital Rule. The Supreme Court granted certiorari in Boulware v. United States, No. 06-1509, to determine "whether the diversion of corporate funds to a shareholder of a corporation without earnings and profits automatically qualifies as a non-taxable return of capital up to the shareholder's stock basis, see 26 U.S.C. 301(c)(2), even if the diversion was not intended as a return of capital."

Petitioner was convicted of tax evasion based, in part, on his failure to pay personal income tax on certain funds that he received from a corporation that he controlled. Petitioner argues that those distributions must be treated as non-taxable returns of capital, even absent contemporaneous evidence that they were intended as such, because the corporation had no earnings or profits and thus could not distribute dividends. The circuits are divided on the issue of what contemporaneous evidence of intent, if any, is required in such situations. Compare 470 F.3d 931, 933-34 (9th Cir. 2006) (relying on United States v. Miller, 545 F.2d 1204, 1214 (9th Cir. 1976)), with United States v. D'Agostino, 145 F.3d 69, 72-73 (2d Cir. 1998).

The Supreme Court's resolution of this issue will be important to any taxpayer who receives returns of capital from a corporation in which the taxpayer invests, and in particular to any taxpayer threatened with criminal liability under the tax code. Amicus briefs in support of petitioner will be due on November 12, 2007, and amicus briefs in support of the respondent will be due December 10, 2007. Any questions about this case should be directed to Andrew Tauber (202-263-3324) in our Washington, D.C. office

In addition to the business cases described above, the Court agreed to decide two non-business cases in which Mayer Brown represents one of the parties pro bono. In Ali v. Achim, No. 06-1346, an immigration case, the Court will decide whether an offense must be an aggravated felony to be classified as a "particularly serious crime" that bars eligibility for withholding of deportation. Mayer Brown represents the petitioner in conjunction with the National Immigrant Justice Center. In United States v. Rodriguez, No. 06-1646, the Court will decide whether a state drug-trafficking offense qualifies as a predicate offense under the Armed Career Criminal Act. Mayer Brown represents the respondent in conjunction with the Yale Law School Supreme Court Clinic. Mayer Brown attorneys Andy Pincus and Charles Rothfeld helped found and are co-directors of the Clinic, which provides clients with pro bono representation before the United States Supreme Court.


Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed.

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