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1999 Term, Number 18 / June 26 and June 29, 2000

On June 26 and June 29, 2000, the Supreme Court agreed to decide a total of eleven cases (four of which have been consolidated into two cases). Five of the post-consolidation cases are of potential interest to the business community. Amicus briefs in support of the petitioner in the Buckman case described first below are due on Monday, August 14, 2000, and amicus briefs in support of the respondent are due on Wednesday, September 13, 2000. Amicus briefs in support of the petitioners in the other cases are due on Thursday, August 10, 2000, and amicus briefs in support of the respondents are due on Monday, September 11, 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. Preemption — "Fraud on the Agency" Claims — Medical Device Amendments. The Medical Device Amendments of 1976 (MDA), 21 U.S.C. § 360c et seq., expressly preempt any state requirements relating to the safety or effectiveness of a medical device that are "different from, or in addition to, any requirement applicable * * * to the device" under federal law. 21 U.S.C. § 360k(a). The Supreme Court granted certiorari in Buckman Co. v. Plaintiffs’ Legal Committee, No. 98-1768, to decide whether federal law preempts state-law tort claims alleging fraud on the Food and Drug Administration (FDA) during the regulatory process for obtaining clearance to market certain medical devices.

The MDA categorizes medical devices into three groups, based on the degree of regulation it concludes is necessary to provide reasonable assurance of safety and effectiveness. 21 U.S.C. § 360c(a). The FDA requires Class III devices, or those that present "a potential unreasonable risk of illness or injury" (21 U.S.C. § 360c(a)(1)(C)), to undergo a premarket approval process. 21 U.S.C. §§ 360c(a)(1)(C), 360e(d). This approval process is not required for Class III devices that were on the market when the MDA was enacted. 21 U.S.C. § 360e(b)(1)(A). To allow competition with these "grandfathered" devices, manufacturers may also bypass the premarket approval process, so long as they can show (through a premarket notification process) that their devices are "substantially equivalent" to the "grandfathered" devices. 21 U.S.C. § 360e(b)(1)(B). That procedure is often called the "Section 510(k) process," referring to the MDA section codified at 21 U.S.C. 360(k).

Petitioner The Buckman Company ("Buckman"), is a regulatory consultant for medical device manufacturers, helping them to navigate FDA procedures. Buckman, on behalf of a manufacturer, sought Section 510(k) clearance for an orthopedic bone screw device. After twice unsuccessfully submitting the device for clearance as a pedicle screw for use in spinal surgery, Buckman, upon the FDA’s suggestion, separated the screw into its component parts and sought 510(k) clearance for each part. The FDA determined that the parts were substantially equivalent to pre-MDA devices, and granted the clearance.

After the bone screws had been on the market, doctors regularly engaged in perfectly legal off-label use of the screws in spinal surgery. After a national television program ran a story on alleged harm caused by use of the screws as spinal fixation devices, thousands of plaintiffs filed lawsuits against all conceivable defendants, including Buckman. The claims were consolidated in a multidistrict litigation. The only claim against Buckman was a state tort titled "fraud on the agency," alleging that Buckman had deceived the FDA as to the "intended use" of the device. In an unpublished opinion, the district court granted summary judgment for Buckman, reasoning that the claim was impliedly preempted because the FDA has exclusive authority to enforce the MDA and because the claim was inconsistent with Congress’s decision not to include a private right of action under federal law.

A divided panel of the Third Circuit reversed. 159 F.3d 817. The majority concluded that state-law "fraud on the agency" claims are neither expressly nor impliedly preempted by the MDA. In the majority’s view, the MDA does not expressly preempt "fraud on the FDA" claims because the Section 510(k) process does not establish any federal "requirement" that is "applicable to the device." Id. at 823 (citing Medtronic v. Lohr, 518 U.S. 470 (1996). In equally sweeping fashion, the majority — adopting the position of a distinct minority of courts of appeals — broadly declared that plaintiffs’ common law claims do not impose any state "requirements" "with respect to" the bone screws. The Third Circuit also rejected implied preemption arguments, seeing no inconsistency between the exclusive authority of the FDA to enforce the MDA and plaintiffs’ common-law claims.

Judge Cowen dissented. Unlike the majority, he was greatly troubled by permitting judges and juries hearing "fraud on the FDA" claims "to displace the FDA’s judgment about whether a manufacturer has engaged in improper marketing." 159 F.3d at 833. Judge Cowen observed that "[t]he majority endorses a claim of ‘fraud on the FDA’ under circumstances that will expose manufacturers to fraud liability for seeking desirable innovations in a product’s use, distort the penalty scheme established by the [Food, Drug and Cosmetic Act] and its regulations, and generate substantial liability when manufacturers respond to doctors’ widely accepted practice of purchasing medical products for off-label uses." 159 F.3d at 829.

On October 4, 1999, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States. The Solicitor General’s brief recommended that review be granted and argued that "fraud on the agency" claims are impliedly preempted because the common-law duties concern the duties of persons in connection with their submission of applications to a federal agency for benefits or regulatory approval, an area involving "uniquely federal interests" that "warran[t] the displacement of state law." Boyle v. United Technologies Corp., 487 U.S. 500, 504-505 (1988).

This case is of obvious interest to manufacturers of medical devices, but also is of broader interest to the business community. In recent years, plaintiffs increasingly have sought to avoid express preemption by resorting to "fraud on the agency" arguments under a variety of federal statutes (including the Boat Safety Act and the Federal Insecticide, Fungicide, and Rodenticide Act). If the Third Circuit is affirmed, the Supreme Court’s decision could allow state-law juries to impose common-law liability and punitive damages on the basis of communications made to federal agencies during the federal regulatory process. Mayer, Brown & Platt represents the petitioner.

2. Choice of Law — Res Judicata Effect of Judgment of Federal Court Sitting in Diversity. The Supreme Court granted certiorari in Semtek International Inc. v. Lockheed Martin Corp., No. 99-1551, to determine the res judicata effect of the judgment of a federal court sitting in diversity.

Semtek International Inc. brought contract and tort claims against Lockheed Martin Corp. in state court in California. After Lockheed Martin removed the case to federal court based on diversity, the district court dismissed the case as time-barred by the two-year statute of limitations applicable under California law. Semtek then refiled in Maryland state court because Maryland — which is the site of Lockheed Martin’s corporate headquarters — would apply a three-year statute of limitations that had not expired. The Maryland trial court dismissed the action as res judicata.

The Maryland Court of Special Appeals affirmed. 736 A.2d 1104 (1999). The court first held that federal law governs the res judicata effect of an action that has been dismissed by a federal court. Because the dismissal of an action as untimely "operates as an adjudication upon the merits" unless the "order for dismissal otherwise specifies," Fed. R. Civ. P. 41(b) — and the California dismissal order explicitly "dismissed" the action "in its entirety on the merits," 736 A.2d at 1106 (quoting order) — the Maryland court held that the California dismissal barred further litigation of the dispute. Id. at 1107-1108.

In looking to federal law to determine the res judicata effect of a federal court judgment in a diversity case, the Maryland Court of Special Appeals relied on decisions from the Fourth and Fifth Circuits. 736 A.2d at 1108 (citing Brooks v. Arlington Hospital Ass’n, 850 F.2d 191 (4th Cir. 1988), and Agrilectric Power Partners, Ltd. v. General Electric Co., 20 F.3d 663 (5th Cir. 1994)). Semtek, on the other hand, relies on an 1874 Supreme Court decision — assertedly followed by the Eighth, Ninth, and D.C. Circuits — holding that the res judicata effect of the judgment of a federal court sitting in diversity "is such as would belong to judgments of the State courts rendered under similar circumstances." Dupasseur v. Rochereau, 88 U.S. (21 Wall.) 130 (1874). Semtek also contends that, even under a federal standard, dismissals on limitations grounds should not have res judicata effect notwithstanding Rule 41(b).

This case is of potential importance to all businesses that may be subject to litigation that could be brought in several different States. Many businesses have a strong interest in ensuring that uniform and certain principles govern the finality of judgments rendered by federal courts sitting in diversity. Other businesses may wish to promote the flexibility resulting from the use of state law to determine the finality of those judgments.

3. Intellectual Property — Trade Dress Protection for Subject Matter of Expired Utility Patents. The Supreme Court granted certiorari in TrafFix Devices, Inc. v. Marketing Displays, Inc., No. 99-1571, to decide whether federal trade dress protection extends to non-functional aspects of a product configuration that had been covered by an expired utility patent. Utility patents confer on the inventor the exclusive right to make or sell the patented product for a limited time (currently 20 years), and generally protect functional advances in a science or art that result in a new or improved product or process. By contrast, trade dress protection under Section 43(a) of the Lanham Act, 25 U.S.C. § 1125(a), is not time-limited, but extends only to non-functional elements of a product’s appearance that identify the product with a particular source or vendor.

Marketing Devices, Inc. (MDI) manufactures a wind-resistant traffic sign. After MDI’s utility patent on the sign’s dual-spring base expired in 1989, TrafFix Devices, Inc. copied MDI’s design and sold the copied signs. MDI sued TrafFix in federal district court, asserting several federal and state claims. In particular, MDI contended that TrafFix had infringed MDI’s trade dress by copying the precise configuration of the MDI springs, including the non-functional aspects of that configuration. The district court granted summary judgment to TrafFix, holding that the dual-spring design had been disclosed in the patent as functional, and therefore could not be protectable trade dress.

The Sixth Circuit reversed. 200 F.3d 929 (1999). The court of appeals held that the disclosure of the dual-spring configuration in the utility patent did not foreclose trade dress protection, because "the appearance" of the configuration that would be protected as trade dress could "be separated" from the "functional design" protected by the patent. Id. at 939. The Sixth Circuit disagreed with a Tenth Circuit decision that flatly precluded trade dress protection for any "product configuration" that "is a significant inventive component of an invention covered by a utility patent." Ibid. (quoting Vornado Air Circulation Systems, Inc. v. Duracraft Corp., 58 F.3d 1498 (1995)). Rather, in the Sixth Circuit’s view, "[s]o long as it is possible to protect the appearance without protecting the design, a per se rule is not necessary." Ibid.

As the Sixth Circuit observed, the Federal, Fifth, and Seventh Circuits also permit trade dress protection for some product configurations disclosed in utility patents. See 200 F.3d at 939 (citing Midwest Industries, Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999); Sunbeam Products, Inc. v. West Bend Co., 123 F.3d 246 (5th Cir. 1997); Thomas & Betts Corp. v. Panduit Corp., 138 F.3d 277 (7th Cir. 1998)). Those decisions are in tension with several Supreme Court decisions rejecting state-law protection for product designs that had been disclosed in utility patents. See, e.g., Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989).

This case is of substantial importance to a wide variety of businesses holding utility patents that disclose design elements, as well as businesses that may wish to use designs disclosed in expired patents. In determining the relationship between trade dress protection and the patent system, the Court will determine the extent to which the issuance of a patent may preclude other types of federal intellectual property protection for a product.

4. First Amendment — Media Law — Liability for Publishing Unlawfully Intercepted Communications. The Supreme Court granted certiorari in Bartnicki v. Vopper, No. 99-1687, and United States v. Vopper, No. 99-1728, to decide the constitutionality of federal and Pennsylvania wiretapping statutes that impose civil liability on individuals who use or disclose information that they have reason to know was obtained by others through an unlawful interception of a wire, oral, or electronic communication.

Gloria Bartnicki, the chief negotiator for a Pennsylvania teachers union, and Anthony Kane, the union’s president, held a confidential telephone conversation in which they discussed the status of the union’s ongoing contract negotiations with a local school board. Bartnicki used a cellular telephone. An unknown person illegally intercepted the conversation, recorded it, and anonymously delivered a copy of the recording to Jack Yocum, the president of a local taxpayers’ association formed for the sake of opposing the union’s bargaining demands. Yocum passed the recording to Frederick Vopper, a radio talk show host. Vopper played the tape repeatedly on his program, which was broadcast by two local radio stations.

Bartnicki and Kane sued Vopper, Yocum and the radio stations in federal court under Title III of the Omnibus Crime Control and Safe Streets Act of 1986, as amended, 18 U.S.C. § 2511(1)(c) and (d), and the Pennsylvania Wiretapping and Electronic Surveillance Control Act, 18 Pa. Cons. Stat. § 5703. Those statutes subject to civil liability any person who intentionally discloses or uses the contents of communications that they have reason to know were obtained through the illegal interception of wire, oral or electronic communications. The defendants moved for summary judgment on the ground that the statutes violated the First Amendment. The district court denied summary judgment but certified the constitutional questions for an interlocutory appeal. The Third Circuit accepted the appeal, and the United States intervened to defend the constitutionality of the federal statute.

The Third Circuit reversed. 200 F.3d 109 (1999). Applying intermediate scrutiny, the court of appeals concluded that the provisions were not narrowly tailored to accomplish the government’s interest in preventing illegal wiretapping. "The connection between prohibiting third parties from using or disclosing intercepted material and preventing the initial interception is indirect at best." Id. at 125-126. Moreover, the court found, the government’s interest was adequately served by the provisions that directly punish "the offender, i.e., the individual who intercepted the wire communication and who used or disclosed it." Id. at 126. The court also observed that the provisions, which prohibit an individual from disclosing information she or he has "reason" to know was obtained unlawfully, likely would deter the media from publishing any communications of unclear origin, including communications that were not, in fact, obtained illegally. Id. at 127. District Judge Louis Pollak (sitting by designation) dissented, finding that the privacy values served by the statutes were sufficient to sustain them under intermediate scrutiny.

The Third Circuit expressly declined to follow a decision of the D.C. Circuit upholding the constitutionality of the same provision of the federal wiretapping statute. See 200 F.3d at 128-129 (citing Boehner v. McDermott, 191 F.3d 163 (D.C. Cir. 1999). The Third Circuit distinguished Boehner on the ground that, in that case, the defendant "was more than an innocent conduit": he "knew who intercepted the conversation," accepted the tape from them and even "promised the interceptors immunity for their illegal conduct." Id. at 128 (citing Boehner, 191 F.3d at 475-476). In contrast, the Vopper defendants "ha[d] not been shown to have ‘entered into’ any transaction with the interceptors." Id. at 129.

Media companies have a significant interest in the outcome of this case. Cellular telephone use has rapidly increased in recent years. In contrast to traditional land-line telephone communications, cellular telephone communications are vulnerable to interception by parties who possess relatively inexpensive and technologically unsophisticated surveillance devices. Increasingly, therefore, media companies may receive from anonymous sources information that was illegally obtained. Exposure to civil liability for publishing such information (or, as the statutes provide, "using" leads provided by illegally obtained information to pursue legal sources) not only will penalize media organizations financially, but may curtail their journalistic mission.

5. Farm Credit System — Federally Chartered Instrumentality — Immunity from State Income Tax. The Supreme Court granted certiorari in Missouri Director of Revenue v. CoBank ACB, No. 99-1792, to decide whether federal Farm Credit System member institutions are exempt from state income tax. The farmer-owned lending cooperatives that belong to the Farm Credit System are "federally chartered instrumentalities of the United States," 12 U.S.C. §§ 2071, 2141, and are explicitly exempt from state taxation of their "notes, debentures, and other obligations." Id. § 2134. The current Section 2134 reflects 1985 amendments to the Farm Credit Act that deleted a provision expressly exempting member institutions from state income tax.

CoBank ACB, a Farm Credit System member institution, sought a refund of Missouri state income taxes paid by its predecessor (and System member), the National Bank for Cooperatives. The Missouri Director of Revenue rejected the refund request, and the state Administrative Hearing Commission denied relief.

The Missouri Supreme Court reversed. 10 S.W.3d 142 (2000). The court held that federal instrumentalities are immune from state taxation unless Congress has expressly waived that immunity. The court reasoned that the amendment eliminating the immunity provision of the Farm Credit Act was not an express waiver. Rather, any "[c]ongressional consent" to state income taxation discernible in the amendment was "not express, but merely implied," and therefore did not waive immunity. Id. at 143.

The decision of the Missouri Supreme Court appears to conflict with a decision of the New Mexico Court of Appeals permitting state income taxation under a parallel immunity provision governing federal Production Credit Associations. See 12 U.S.C. § 2077. See Production Credit Ass’n v. Taxation & Revenue Dep’t, No. 20078, 2000 WL 300857 (N.M. App. Feb. 1, 2000), review denied, 997 P.2d 820 (N.M. 2000). In supporting certiorari, an amicus brief submitted by 11 state attorneys general observed that the Court had previously granted certiorari on the Production Credit Association immunity issue, but had decided the case on other grounds. See Arkansas v. Farm Credit Services, 519 U.S. 1085 (1997).

This case is of obvious importance to financial institutions that compete with members of the Farm Credit System in the agricultural lending sector. The case has more general significance for lenders and other businesses that are, or that compete with, federal instrumentalities.

* * *

Finally, in Mitchell v. Helms, a case handled by Mayer, Brown & Platt, the Court held on June 28, 2000 that a neutral program of lending secular educational materials to private schools (including parochial schools) does not violate the Establishment Clause. The win brings the Firm's record to 2-1 in cases it argued this Term.

The Court will be in recess until Monday, October 2, 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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