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2000 Term, Number 5 / November 27, 2000

Today the Supreme Court granted certiorari in six cases, four of which are of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, January 11, 2001, and amicus briefs in support of the respondents are due on Monday, February 12, 2001. We also report on Mayer, Brown & Platt's recent success in invalidating, on state-law free speech grounds, a compulsory state agricultural marketing program similar to the federal program that will be assessed for consistency with the First Amendment in the fourth case summarized below. 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.  Internal Revenue Code — Carryback of Liability Losses. Section 172 of the Internal Revenue Code allows corporations to carry back net operating losses to offset income in any of the three years preceding the loss year, and allows losses due to liabilities "aris[ing] under a Federal or State law," including product liability losses, to be carried back ten years. See 26 U.S.C. §§ 172(b)(1), (c), (j). The Supreme Court granted certiorari in United Dominion Industries, Inc. v. United States, No. 00-157, to decide whether an affiliated group of corporations with a consolidated net operating loss attributable in part to product liability expenses can take advantage of the ten-year carryback by treating product liability expenses as expenses of the group, even though the individual group members that incurred the product liability expenses would have had no net losses to carry back if they had filed separate returns. 

United Dominion Industries is the parent of an affiliated group of 26 corporations that filed consolidated tax returns for tax years 1983 through 1986. During those years, five of the group members incurred product liability expenses totaling $1,618,306. Had the five group members filed individual tax returns, their product liability expenses would not have yielded a "product liability loss" that could be carried back ten years, because each group member's separate income exceeded its expenses each year. The remaining United Dominion group members did not have any liability expenses, but they did have other large expenses that yielded a consolidated net operating loss for United Dominion each year. United Dominion concluded that the Code and the pertinent regulations allowed it to characterize a portion of its consolidated net operating loss (which could be carried back three years) as a consolidated product liability loss (which could be carried back ten years) to the extent of the total product liability expenses of the group. United Dominion attempted to carry back this consolidated product liability loss to tax years 1973 through 1976 — a period during which the group was profitable — and sought a refund of taxes paid during that period.

After the IRS denied the refund, United Dominion brought this action. The district court granted summary judgment in favor of United Dominion.

The Fourth Circuit reversed. 208 F.3d 452 (2000). The court of appeals acknowledged that the Code and the relevant IRS regulations are silent as to whether product liability losses are to be determined on a per-member basis or on a consolidated basis. See id. at 456. The court observed, however, that the regulations governing consolidated tax returns provide for the blending of group members' net operating losses, but do not refer to the consolidation of product liability expenses. In the Fourth Circuit's view, that omission "makes clear that blending those expenses is not permitted, i.e., that a comparison of the group members' aggregated product liability expenses to the consolidated net operating losses in order to derive a consolidated ‘product liability loss' is not intended." Id. at 458.

The Fourth Circuit's decision directly conflicts with Intermet Corp. v. Commissioner, 209 F.3d 901 (6th Cir. 2000). In Intermet, the Sixth Circuit concluded that the issue was properly resolved by Treasury Regulation § 1.1502-80(a), which provides that "[t]he Internal Revenue Code, or other law, shall be applicable to the [consolidated] group to the extent the regulations do not exclude its application." See 209 F.3d at 905. Because the regulations governing the preparation of consolidated returns do not address the treatment of liability expenses, the court held that an affiliated group of corporations is entitled to be treated as a single taxpayer for purposes of the ten-year carryback.

  Although no other courts have addressed it, this issue has been raised in more than 100 tax cases pending at the administrative level. This case is of substantial interest to affiliated groups of corporations that file consolidated tax returns, particularly those that have group members in the manufacturing sector with potential exposure to product liability litigation.

2.  ERISA — Availability of Federal Forum to Enforce Reimbursement Clauses. ERISA creates a federal cause of action for participants, beneficiaries, and fiduciaries to "obtain * * * appropriate equitable relief * * * to enforce any provisions of * * * the terms of the [ERISA] plan." 29 U.S.C. § 1132(a)(3). The Supreme Court granted certiorari in Reynolds Metals Co. v. Ellis, No. 99-1787, to decide whether an ERISA fiduciary's lawsuit to obtain reimbursement from an employee for sums received from a liable third party is a suit for "equitable" relief within the meaning of Section 1132(a)(3), and hence one over which the federal courts have jurisdiction.

Robert Ellis was an employee of Reynolds Metal Company and a beneficiary in its group medical plan ("the Plan"). After Ellis was seriously injured in an auto accident in 1994, the Plan paid $561,145.21 in benefits to Ellis and his health care providers. The Plan contained a contractual reimbursement provision requiring beneficiaries to reimburse the Plan from any payments received from third parties for health care expenses. In 1997, Ellis settled a claim against the third parties responsible for his accident, receiving an amount in excess of the benefits paid to him by the Plan. Ellis, however, refused to reimburse the Plan. 

Reynolds Metal sued Ellis in federal district court, seeking an injunction to compel him to comply with the contractual reimbursement provision of the Plan and asserting federal subject matter jurisdiction under Section 1132(a)(3). The district court dismissed the case under the authority of FMC Medical Plan v. Owens, 122 F.3d 1258 (9th Cir. 1997), in which the Ninth Circuit had held that actions brought by fiduciaries to enforce reimbursement clauses contained in ERISA plans are not actions for restitution and accordingly are not "equitable" within the meaning of Section 1132(a)(3).

The Ninth Circuit affirmed. 202 F.3d 1246 (2000). The panel concluded that it was bound to follow Owens. Id. at 1248. In the Ninth Circuit's view, Owens did not foreclose all claims for monetary relief under Section 1132(a)(3); accordingly, the court perceived no conflict between Owens and the Supreme Court's earlier decisions in Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993) and Varity Corp. v. Howe, 516 U.S. 489, 495 (1996), which had suggested that Section 1132(a)(3) authorized suits for all categories of relief that were typically available in equity, including monetary equitable remedies such as restitution. 202 F.3d at 1248-1249.

The Ninth Circuit's decision conflicts with decisions of the Seventh, Eighth, and Eleventh Circuits, which have held that fiduciaries' suits to enforce reimbursement clauses in ERISA plans are suits for "equitable" relief and thus are authorized under Section 1132(a)(3). See Administrative Committee v. Gauf, 188 F.3d 767, 770 (7th Cir. 1999) (explicitly declining to follow Owens); Blue Cross & Blue Shield of Alabama v. Sanders, 138 F.3d 1347, 1353 n.5 (11th Cir. 1998) (same); Southern Council of Industrial Workers v. Ford, 83 F.3d 966, 967-68 (8th Cir. 1996).

This case is of significant interest to all employers that provide group medical plans, or other ERISA benefit plans, in which similar subrogation provisions might help contain costs.

3. Indian Law — Tribal Jurisdiction Over Nonmembers — Taxation of Activities on Nonmember Lands Within Reservations. In Montana v. United States, 450 U.S. 544 (1981), the Supreme Court held that, in general, an Indian tribe cannot exercise civil jurisdiction over the activities of nonmembers on lands owned in fee by nonmembers but located within the boundaries of the tribe's reservation. An exception to that general rule permits a tribe to "regulate, through taxation, licensing, or other means, the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements." Id. at 565. The Supreme Court granted certiorari in Atkinson Trading Co. v. Shirley, No. 00-454, to decide whether the "consensual relationship" exception supports the imposition of a tribal Hotel Occupancy Tax ("hotel tax") on nonmember guests of a hotel located on land owned in fee by a nonmember but located entirely within the boundaries of an Indian reservation.

Petitioner Atkinson Trading Company is a non-Indian New Mexico corporation that operates a hotel on land owned in fee by Atkinson but completely surrounded by Navajo Nation Reservation trust lands. In 1992, the Navajo Nation Council enacted an 8% hotel tax on charges for any hotel room located within the Navajo Nation. Following an unsuccessful challenge to the hotel tax in the Navajo Supreme Court, Atkinson filed an action in federal district court requesting a declaratory judgment that the Nation lacked authority to impose its hotel tax on Atkinson's nonmember guests.

The district court granted summary judgment in favor of the Nation in an unpublished opinion holding that the hotel tax was authorized by Montana's consensual relationship exception. The court acknowledged that there was no explicit consensual relationship between the Nation and Atkinson's nonmember guests, but found that the guests entered into an implied consensual relationship by placing themselves in a position where they might need assistance from tribal police, fire, or other emergency personnel. In determining that this activity sufficed to support the tax, the district court relied on Merrion v. Jicarilla Apache Indian Tribe, 455 U.S. 130 (1982). In that case, the Supreme Court upheld a tribal tax on oil and gas production on tribal land on the ground that the authority to tax was "an essential attribute of Indian sovereignty" (id. at 137), explaining that the exercise of that authority over nonmembers has its strongest justification when "the [nonmember] taxpayer is the recipient of tribal services" (id. at 138 (internal quotation marks omitted)).

A divided panel of the United States Court of Appeals for the Tenth Circuit affirmed. 210 F.3d 1247 (2000). Rejecting Atkinson's contention that the district court erred in applying Merrion's reasoning to a case involving non-tribal lands, the court of appeals held that "[b]ecause the power to tax derives from the inherent powers of the tribe, not from the tribe's power to exclude, the status of the land involved as fee land or tribal land is simply one of the factors a court should consider when determining whether a tax on nonmember activity on the reservation falls within the civil jurisdiction of the tribe." Id. at 1258. In the Tenth Circuit's view, the primary considerations affecting tribal jurisdiction over nonmembers on the reservation — whether on tribal or non-tribal lands — are "(1) the status and conduct of the nonmembers and (2) the nature of the inherent sovereign powers the tribe is attempting to exercise, its interests, and the impact that the exercise of the tribe's powers has upon the nonmember interests involved." Id. at 1261. 

Judge Briscoe dissented on the ground that the majority had improperly blended the rule established for the exercise of tribal jurisdiction over nonmember conduct on nonmember fee lands (Montana) with that for the exercise of tribal jurisdiction over nonmember conduct on tribal lands (Merrion). 210 F.3d at 1269. The resulting analysis, according to the dissent, "subverts the question of whether a consensual relationship exists between the nonmembers and the tribe and replaces it with an entirely different inquiry that * * * makes it substantially easier for a tribe to establish jurisdiction over a nonmember." Ibid.

The Tenth Circuit's decision conflicts with Big Horn County Electric Cooperative, Inc. v. Adams, 219 F.3d 944 (9th Cir. 2000). The conflict is especially significant because many Indian reservations are located within the Ninth and Tenth Circuits.

This case is of interest to all non-Indian businesses operating on non-Indian fee land within the boundaries of a reservation.

4. First Amendment — Commercial Speech — Mandatory Assessments for Agricultural Advertising Programs. In Glickman v. Wileman Brothers & Elliott, Inc., 521 U.S. 457 (1997), the Supreme Court divided 5-4 in upholding against First Amendment challenge Department of Agriculture regulations that compelled California tree fruit growers to contribute financially to joint generic product advertising. The Court reasoned in part that those regulations were part of a "broader collective enterprise in which [the growers'] freedom to act independently is already [heavily] constrained by [a] regulatory scheme." Id. at 469. The Supreme Court granted certiorari in United States v. United Foods, Inc., No. 00-276, to decide whether similar mandatory assessments imposed by Department of Agriculture on the mushroom industry — which is not heavily regulated — violate the First Amendment.

The Mushroom Promotion, Research, and Consumer Information Act of 1990 ("the Mushroom Act"), 7 U.S.C. §§ 6101 6112, authorizes the Secretary of Agriculture to issue an order establishing a "Mushroom Council" that would, among other things, propose to the Secretary "projects of mushroom promotion, research, consumer information, and industry information." Id. § 6104(c)(4). Pursuant to the Mushroom Act, the Secretary promulgated an order in 1993 ("the Mushroom Order") establishing a Mushroom Council and imposing mandatory assessments on members of the mushroom industry to pay for the Council's activities, including advertising promoting mushroom consumption. See 7 C.F.R. §§ 1209.17, 1209.30-1209.40, 1209.51.

United Foods, Inc. is a mushroom producer that has refused since 1996 to pay its assessments under the Mushroom Act and the Mushroom Order. United Foods sued the Department of Agriculture in federal district court, contending that the mandatory assessments imposed under the Mushroom Act and Order violated its First Amendment rights by forcing it to provide financial support to speech with which it did not agree.

The district court consolidated United Foods' suit with an enforcement action brought by the United States against United Foods and granted the United States' motions for summary judgment in the consolidated cases. In an unpublished decision, the district court concluded that Wileman Brothers was "clearly dispositive."

The Sixth Circuit reversed. 197 F.3d 221 (1999). The Sixth Circuit interpreted Wileman Brothers as holding that "nonideological, compelled, commercial speech is justified in the context of the extensive regulation of an industry but not otherwise." Id. at 224. Only in the context of extensive regulation, the court explained, is there a need "to deter free riders who take advantage of their monopoly power resulting from regulation of price and supply without paying for whatever commercial benefits such free riders receive at the hands of the government." Ibid. Because the mushroom industry was not heavily regulated, the Sixth Circuit held that the mandatory assessment for generic advertising and the portions of the Mushroom Act authorizing such coerced payments were invalid under the First Amendment. See id. at 224-225.

The Tenth Circuit has reached a conclusion contrary to that of the Sixth Circuit, albeit in a case interpreting (and upholding) the similar mandatory assessment provisions of the Beef Promotion and Research Act of 1985. See Goetz v. Glickman, 149 F.3d 1131, 1138-1139 (10th Cir. 1998). In upholding a state program for promoting dairy products against First Amendment attack, however, the Ninth Circuit took an approach similar to the Sixth Circuit, reading Wileman Brothers to require a threshold inquiry into the extensiveness of the regulatory scheme under which the assessments are made. See Gallo Cattle Co. v. California Milk Advisory Bd., 185 F.3d 969, 974-975 (9th Cir. 1999).

Many federal generic advertising programs for agricultural products impose mandatory assessments on producers but, like the program at issue in this case, are not part of comprehensive regulatory schemes. As Gallo Cattle and the Gerawan decision described below demonstrate, some states have implemented similar compelled agricultural marketing programs. This case is of obvious interest to the sectors of the agriculture industry that are subject to such plans. In addition, the Court's ongoing struggle with commercial speech doctrine may make this case significant to a wider group of businesses.

* * * * *

Our readers may be interested to learn of Mayer, Brown & Platt's recent success in persuading the California Supreme Court to invalidate, on state constitutional grounds, a compulsory marketing program similar to that at issue in the United Foods case summarized above. In the California case, Gerawan Farming, Inc. v. Lyons, S080610 (Nov. 27, 2000), we challenged a state marketing order for plums under the free speech provisions of both the federal and state constitutions. Our client, a family-owned farm that grows and sells a premium variety plum, objected to paying for generic advertisements under the marketing order on the grounds that they communicated the inaccurate message that all plums are the same. The state trial court granted judgment on the pleadings to the State, reasoning that both the federal and state constitutional issues were governed by the holding in Wileman Brothers that a similar federal marketing order did not violate the First Amendment.

We persuaded the California Supreme Court to reject the Wileman Brothers analysis in interpreting the California Constitution's free speech provision. Although the court held that it was bound by Wileman Brothers to conclude that the state marketing order was constitutional under the First Amendment, it refused to extend the reasoning of Wileman Brothers to the state constitution. Finding that the "Glickman majority's analysis lacks persuasiveness," the court accepted our argument that the text and history of the California constitutional provision warrant broader protection against forced funding of commercial speech. The court therefore reversed and remanded for further proceedings to determine the proper standard of scrutiny to apply and the results of that scrutiny. This groundbreaking decision is one of only a handful of instances in which a state court has interpreted the free speech provision of the state constitution more broadly than the First Amendment. Michael McConnell argued the case and was assisted on the briefs by Sharon Swingle.

The success in Gerawan reflects Mayer, Brown & Platt's growing representation of parties and amici in the California appellate courts, including in the state Supreme Court. Our ability to provide that service will be enhanced by the opening of our new Silicon Valley office in Spring 2001, with Donald Falk of our appellate group as one of the resident partners.

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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