Washington Legal Foundation Media Briefing; High Court Halftime: The October 2010 Term At Midpoint

Sunday, April 3, 2011 - 01:00

Featured Speakers: The Honorable Dick Thornburgh, K&L Gates LLP and Chairman of the Legal Policy Advisory Board of the Washington Legal Foundation; Thomas C. Goldstein, Partner, Goldstein Howe & Russell and Publisher of the SCOTUSblog ; Mark A. Perry, Litigation Partner, Gibson Dunn & Crutcher LLP and former Clerk to Justice Sandra Day O'Connor; Gene C. Schaerr, Partner, Winston & Strawn LLP and former Clerk to Chief Justice Warren E. Burger, Justice Antonin Scalia and the Hon. Kenneth W. Starr.

Thornburgh: The U.S. Supreme Court is at the midpoint of its October 2010 term. We shall discuss the general tone and tenor of the Court's activities, with focus on First Amendment law, class actions and patent litigation.

Goldstein: The first case I will discuss is Sorrell v. IMS Health Inc ., which is notable for two reasons. First, it highlights Washington Legal Foundation's (WLF's) advocacy for free enterprise and its significant role in organizing amici curiae and in shaping arguments. The Court would not have granted cert were it not for the WLF's leadership role. Second, as is typical at its halfway point, the term has the feeling of being "fully baked," with big cases identified and decisions starting to trickle out; thus, important cases like IMS Health can be overlooked. In fact, the Court does some of its most important work in cases that are argued in April and decided in June. These cases tend to fly a little below the radar screen, and that's true of IMS Health , which will be argued on the last day of the term.

IMS Health presents an issue of startling importance, namely, what is the First Amendment protection that extends to exchanges of data? Our 21st century information economy challenges the Court to take a broader view of data exchange without allowing the First Amendment to trump the critical right to privacy. This case ultimately presents questions about what is privacy law and how far the First Amendment extends.

Here is the context. In filling a doctor's prescription, a pharmacy company regularly collects patient information but must remove personal identifying information before sharing this data. The pharmacy company will aggregate this information and provide it to third parties like IMS Health, which performs medical data analytics. IMS studies the information for purposes such as academic research about drug use, oversubscription and the use of narcotics. For example, IMS provided information to enable the government to track the spread of the H1N1 flu virus and to determine effective treatment.

IMS also sells this information to pharmaceutical companies (PCs), constituting the principle commercial use that subsidizes public health and academic uses. PCs ask IMS to perform studies on pharmacy company information, using the results to market its drug to a targeted audience. An epilepsy drug manufacturer, for instance, might seek regional lists of doctors who principally treat epilepsy or who need to know of potential problems with medications and therapies they are prescribing.

The key legal question is whether the states have the power, under the First Amendment, to restrict use of pharmacy company information, thereby limiting PC's ability to reach out to doctors. Concluding that they have such power, Vermont, Maine and New Hampshire passed laws asserting that marketing brand-name prescription drugs will cause doctors to prescribe drugs that are too expensive and may harm public health.

In IMS Health , the Second Circuit held that such laws violate the First Amendment, by restricting or blocking communication between the PC and IMS Health and between the pharmacy company and a willing doctor. Vermont's stated legislative purpose was to correct an imbalance in the marketplace of ideas, directly opposing Supreme Court decisions asserting that the First Amendment clearly proscribes any attempt by the government to correct such imbalances.

To its credit, Vermont firmly supports the doctor's privacy and the sanctity of patient information; however, there is a disconnect in that the Vermont, Maine and New Hampshire statutory schemes impose no limitations on the use of this data, except that of promoting prescription drugs. Thus, for example, if CVS or Duane Reade posts prescription information over the Internet, that's perfectly fine with Vermont.

IMS Health involves many layers of First Amendment issues, both on the status of PCs' data and on defining the point at which the state's desire to protect privacy overrides the First Amendment. While privacy in medical records is a booming issue, this case remains somewhat unnoticed, though it has significant implications for First Amendment law.

Perry: Let me start with a broad perspective on the term. A recurring theme of the Roberts Court has been its willingness to look out for structural issues - particularly in civil litigation - that have divided the lower courts. While this trend has been portrayed by the popular press as "business friendly," it remains true that business is a longstanding component of the civil litigation regime. Therefore, the Court needs to address structural issues that may be decades old, with cases that often involve nationwide statutes and recurring issues that may be resolved differently depending on the state in which they are brought.

The Court has perennial favorites in substantive areas of the law, including securities and employment, each with three cases this term. But a striking feature of this term's docket is a procedural issue - the class action device - that is going under the microscope for the first time in modern civil litigation. The importance of this development cannot be overstated.

The modern class action came into being in 1966, when Rule 23 was revised substantially into its current form. During the next 45 years, the Court issued fewer than 20 decisions actually construing Rule 23, which defines the procedural mechanism for class action certification in federal courts. With little guidance from the Court, district courts were left to their own devices and, as a result, issued a hodgepodge of decisions.

In 1998, the Court tried to solve this problem by adopting a new rule that authorized interlocutory appeals of class certification decisions, designed to expedite these cases up to the court of appeals. As these cases frequently settle upon certification, there is no appellate review from a final decision; thus, the certification issue may become the whole case. Unfortunately, the Court's efforts served merely to relocate the problem, and now it was the court of appeals issuing hodgepodge decisions without centralized guidance. It still remained for the Court to sort out the structural, procedural issues of class action certification.

Overall, the Court has issued relatively few class certification decisions. For example, the last major analysis of the intersection of Rule 23 and Title VII, which is the principle federal employment statute, occurred in a 1982 case called General Telephone Co. of Southwest v. Falcon . While some people thought this case settled everything, a Harvard student named Elena Kagan thought that Falcon settled nothing at all. She thought the Court should take another employment class action case quickly so that everyone - courts, lawyers, employers and employees - would know the rules. Almost 30 years later, the 2011 Court has finally taken such a case, and Justice Kagan will get to decide it, which is a nice symmetry in that arc of history.

In fact, there are four significant class action cases on the docket - more than in any term during the Supreme Court's history. Two of them directly involve the core workings of Rule 23, an increasingly important rule as class actions become more pervasive on the federal docket. In 2005, Congress enacted the Class Action Fairness Act, which moves many class actions, including those under state law theories, into federal court. Once in federal court, the procedures are governed by Rule 23; therefore, the Court's 2011 decisions will affect the federal court's civil litigation docket for years to come.

The first case involving Rule 23 is Wal-Mart Stores, Inc. v. Betty Dukes, et al . It is the largest Title VII class action in history and was certified by the district court over a period of six or seven years, involving at least three close opinions from the Ninth Circuit. This term, the Supreme Court has agreed to review the case and address whether the Dukes certification complies with both provisions of Rule 23, effectively placing the entire rule before the Supreme Court.

While the Supreme Court has offered only guidance in the past, the Dukes case directly addresses recurring and divisive issues with respect to the law of Rule 23. There are fundamental questions, for example, on the courts' authority to tailor trial procedures to fit into the class action device. Lower courts explicitly stated that it was impossible to try Dukes under normal Title VII procedures - the case involved 1.6 million plaintiffs - so they opted to change the rules, eliminating some elements of the plaintiff's claims. The Ninth Circuit embraced this approach to civil litigation without citing the Rules Enabling Act, a federal statute which provides that the Federal Rules of Civil Procedure cannot modify, abridge, alter or otherwise change the substantive law. Supported by a number of amicus briefs (including the WLF brief), Wal-Mart argued that relieving the elements of a claim (or depriving an available defense) is a change in substantive law and therefore is precluded.

Further, while the Due Process Clause provides that parties have a right to be notified of the claim and to appear, a class action is an exception because it involves the rights of absent persons. In addition to the employment issues presented in Dukes, the Court will have a broader opportunity to clarify procedural matters with respect to the rights of absent class members.

A modern feature of our tort and civil litigation system, mega class actions, present basic questions about the fairness, predictability, manageability and efficiency of adjudicating massive litigation. In a prior asbestos case, the Court stressed that aggregating claims and packaging them as a settlement may be anathema to the premise of litigation, which seeks final judgment and requires procedures that are fair to all. Dukes presents a fundamental question with which the Court has not grappled because there haven't been cases of this magnitude previously litigated in federal court. The Court's decision in this case will have ripple effects across the entire system.

Another significant case on the Court's docket is Erica P. John Fund, Inc. v. Halliburton Co., which is a securities class action that presents two questions. One is specific to securities law and loss causation and the second addresses district court assessment of the merits of a lawsuit at the class certification stage. Notwithstanding the Court's indecisiveness on this point, the consensus among most courts of appeals, though we notably except the Ninth District, is that district courts have the authority to look at the merits. Because the certification proceeding can become the main event, or even the totality of the litigation, the extent to which a district court may or must look at the merits is of exceeding importance. Thus, there are important class action procedural issues before the Court, and both Dukes and Halliburton push for much-needed clarity on Rule 23.

There are two other class action cases worth noting briefly. One is called AT&T Mobility LLP v. Concepcion , which involves the interplay between the Federal Arbitration Act and the class action device. It addresses whether the FAA preempts states from conditioning the enforcement of arbitration provisions on forced class action by unwilling participants. The other case is Smith v. Bayer Corp., which involves the Anti-Injunction Act's limits on federal court authority to enjoin or preclude absent class members from future litigation.

As in the past several terms, preemption debates will be a bedeviling area for the Court this term because they involve a complex interplay between state and federal law, often without clear guidance from our Congress. The Court has been closely divided in preemption cases, and observers predict that this term's docket will be no exception.

Finally, a series of cases involve limits on the scope of federal court power, an issue of great interest to Chief Justice Roberts. The Court will debate both the limits of federal courts in recognizing a cause of action and the existence of implied causes of actions. Though seemingly obscure, the latter is an issue of critical importance to our civil justice system because its availability creates incentives and disincentives with respect to the extent of and procedures for further litigation. The Court will examine the relationship between the courts, the states and the legislation and administration of the courts. The political and legal interface is fascinating; thus, true civil litigation and civil procedure enthusiasts will have much to consider this term. The Court's decisions should provide significant clarity, particularly in the class action field on procedural matters.

Schaerr: I am going to focus on patent litigation and the three cases currently before the Court. Traditionally, the Court rarely intruded into the patent arena, which typically was viewed as the proper domain of the [U.S. Court of Appeals for the] Federal Circuit. In fact, during the Burger and Rehnquist courts, which spanned a total of 52 years, the Court decided only 19 patent cases.

Unlike most other areas of business law, patent law reflects no discernable ideological trend in the Court's approach. Over the last 25 years, trends in business law moved away from populism toward a more business-friendly pragmatism, represented in decisions from a more conservative Justice Scalia to a more pragmatic Justice Breyer. Obviously, one of the key issues for the business community is whether that trend will continue with two relatively new members of the court, Justices Kagan and Sotomayor.

Patent litigation tends to involve disputes between businesses, rarely involving a "David and Goliath" scenario that, in other litigation, carries great emotional impact. Patent law inherently poses a policy dilemma. It should encourage and protect innovation, though the optimal level of protection is very difficult to identify. Inadequate protection discourages investors because it creates uncertainty and may reduce returns, but overly aggressive protection creates a thicket that inhibits new inventions from coming to market. This dilemma lies at the heart of most decisions, and it is no secret that the Roberts Court is taking more patent cases than its predecessors. There is a sense on the Court that the Federal Circuit has been too generous with existing patents and the old innovation.

I will highlight one case that is of great importance to the business community. In Global-Tech Appliances, Inc. v. SEB S.A ., the Court examines what is the appropriate legal standard for proving that a patent defendant actively induced infringement in violation of Section 271(b) of the Patent Act and therefore is liable as though he had infringed the patent himself. Specifically, what is the state of mind necessary for actively inducing patent infringement? Does it have to be deliberate and knowing, or is it enough that the alleged infringer or inducer has acted with reckless indifference to infringement?

The plaintiff, SEB, is a French company that makes kitchen products, including deep fat fryers. The defendant, Global Tech, is based in China, and its CEO - unfortunately named John Sham - admitted that his company purchased and reverse-engineered an SEB fryer. A patented inventor himself, Sham hired a small U.S. patent firm to do a search without mentioning that Global Tech had based its model on SEB's product. Patent counsel did not turn up SEB's patent.

SEB sued Global Tech, which ultimately was found liable for patent infringement and inducing infringement. The Federal Circuit found that actively inducing infringement did not require a showing that the inducer actually knew about the patent in question. Instead it held that reckless indifference to a known risk of infringement was enough. Given the facts, it is understandable that the Federal Circuit may have viewed Mr. Sham's case with suspicion, though their final decision imposed more lenient standards than the Court imposed in MGM Studios, Inc. v. Grokster, Ltd. In the end, SEB may prevail because of stricter standards established in Grokster , but Global Tech will argue for the more lenient standards applied by the lower court.

Even more significant is the next case, Microsoft v. i4i Limited Partnership, which involves the standard of proof necessary to establish that a patent is invalid. By statute, there is a presumption of validity, and the Federal Circuit has traditionally required challengers to show that the patent is invalid by the powerful clear and convincing evidence standard.

Four years ago, in a case called KSR Int'l Co. v. Teleflex, Inc. , the Court called into question both the statutory presumption of patent validity and the judicial tradition in favor of the clear and convincing standard. The i4i case involves Microsoft's Word software and an alleged infringement of i4i's patented "custom XML" technology. In trial, Microsoft submitted evidence that i4i's patent was invalid because the inventor's earlier software product, called S4, actually embodied the patent and was sold more than a year before the current patent application was filed. Such sale triggered what is known in patent litigation as the on-sale bar, which applies if any attempt, regardless of its success, is made to sell an invention more than a year before it is patented.

Complicating this case is the fact that i4i had destroyed all of the S4 source code before filing suit against Microsoft. Thus, i4i argued that Microsoft could not persuade a jury by the requisite clear and convincing evidence standard on the basis that the S4 product practiced the patent. Microsoft argued based on KSR that because the S4 product hadn't been presented to the patent examiner, the correct standard was merely a preponderance of the evidence. The district court instructed the jury on the clear and convincing standard and the Federal Circuit affirmed, holding that KSR had not actually changed the standard for reviewing the validity of the patent.

There were numerous previous attempts to bring this issue before the Court, and it is likely that the Court accepted review of the i4i case in order to resolve the tension between the Federal Circuit's decision and the Court's own KSR decision. So far, there are 20 amicus briefs that support Microsoft's position. Thirteen of them take the position that the clear and convincing standard is unjustified in the Patent Act under any circumstances. Seven of them assert that, at minimum, where the prior invention was not before the Patent and Trademark Office, the standard should be merely a preponderance of the evidence. Though none are yet filed, there likely will be a number of amicus briefs in support of i4i Limited Partnership.

A very important factor working in Microsoft's favor is that there is no statutory requirement for the clear and convincing standard, despite a longstanding Federal Circuit policy of protecting patent holders by requiring this higher standard for establishing the invalidity of a patent. A statutory presumption in favor of a patent's validity doesn't necessarily require that rebuttals satisfy an additional and higher evidentiary standard. Therefore, Microsoft could get the clear and convincing standard overturned, which would be a great boon to defendants in all kinds of patent litigation across the country.

In short, this is likely to be one of the most important terms in the history of the Supreme Court for patent litigation, and everyone will be watching with great interest to see what the Court does with these cases.

Goldstein: I will add some final comments on other hot-button cases. Currently on the docket is Chamber of Commerce of the United States v. Whiting , which remains in the lower courts as an Arizona immigration case. The larger issue before the Supreme Court involves a state's right both to levy extraordinarily heavy sanctions on employers who have violated federal immigration law and to force employers, as a matter of state law, to use the federal E-Verify system. It is an important preemption case.

Another notable case is American Electric Power v. State of Connecticut , which is a global warming case and thus of automatic significance. This greenhouse gas case raises questions about the ability to bring tort suits - nuisance claims - against power companies that allegedly are contributing to global warming. The Supreme Court will decide whether such a case can be brought consistent with federal law.

There is a violent video games case called Schwarzenegger v. Entertainment Merchants Association . Given Mr. Schwarzenegger's starring role in the Terminator movies, it is ultimately ironic that he is pressing the point that children are exposed to too much violence. The state of California argues that violence is like indecency or sexuality and that the state accordingly has a relatively free hand to regulate underage access to violent materials, including video games.

The final case I will mention is the funeral protestor's case, Snyder v. Phelps, which has received a lot of attention. Snyder raises the very interesting question of when one can sue someone for tremendously offensive speech that occurs adjacent to an event as sacrosanct as a military funeral.*

Next term, the Court likely will address cases relating to three broad issues: healthcare, immigration, and gay marriage. Virginia's Attorney General Cuccinelli has made efforts to bring all healthcare litigation up to the Supreme Court, before cases are decided by the court of appeals. It is very unlikely these efforts will succeed because, right now, there are decisions pending from numerous circuit courts. Once presented, the likely outcomes are that healthcare legislation will be upheld eight-to-one and that Clarence Thomas will write extensively on the question of rethinking all Commerce Clause jurisprudence, currently treated as tangential at best. He is the most innovative thinker on the Court and is very willing to strike down old doctrines and then start from scratch in Congress.

There is a big immigration case on the horizon involving the controversy created by sweeping efforts by the state of Arizona to enforce federal immigration law. That case is now before the Ninth Circuit, but it certainly has the potential to make its way to the Supreme Court.

Finally, the Court is likely to address controversy relating to gay marriage. The Proposition 8 litigation, currently on hiatus while the California Supreme Court resolves the question of standing, likely will reach the Court next term, along with significant litigation over the constitutionality of the Defense of Marriage Act.

* Editor's note: This case was decided by a wide majority on March 2, 2011. In a decision that has tremendous implications, the Court upheld the primacy of the First Amendment.

For media briefing of the Washington Legal Foundation, go to www.wlf.org.