Wal-Mart: too big to sue?

Chris tells her story in Unequal Justice

When Chris Kwapnoski worked at Sam’s Club, a Wal-Mart affiliate, managers told her that she needed to “doll up” and “blow the cobwebs off” her makeup if she wanted to get ahead. At the same time, a male associate was given a larger raise because he had “a family to support,” even though at the time Chris was a single mother raising two young children.

And when Chris and more than a million other women joined together to hold Wal-Mart accountable for the discriminatory pay and promotion practices of its management, the Supreme Court told them that Wal-Mart was too big to sue.

In Wal-Mart v. Dukes, a narrow majority of the Court ruled that the 1.5 million women who faced systemic discrimination as Wal-Mart workers did not have enough in common to qualify for a class action, ignoring the volumes of anecdotal and statistical evidence to the contrary. And because of the Wal-Mart decision, it is now harder for employees and consumers to band together to fight corporate misbehavior. The Court significantly raised the bar for forming a class, which is one of the only effective ways to fight against widespread injustices committed by large, deep-pocketed corporate interests.

Chris’s story is featured in AFJ’s latest documentary film, Unequal Justice: The Relentless Rise of the 1% Court, which will be released this fall. The short documentary explores the growing pro-corporate bias in key Court decisions, like Wal-Mart v. Dukes, and their real-world impact on ordinary Americans. Click here to learn more about the film and sign up to host a screening.

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Immunity for generic drug manufacturers

Gabriel tells his story

When Gabriel Drapos was a first-year student at Harvard, he was diagnosed with an autoimmune disease that would ultimately take countless drug therapies, several invasive spinal column procedures, and three surgeries to manage.

He later found out that his disease was likely connected to a drug he had taken:

Personal pain becomes a social injustice in the presence of unconscionable ethics. I discovered there was likely a connection between my disease and a drug I had taken in high school. Allegedly, I should say. I’ll never get my day in court to prove it.

Gabriel had taken a generic form of the drug. And because of a recent Supreme Court decision protecting generic drug manufacturers from being sued in court when their labels don't warn consumers of health risks, he'll never get a chance to stand up for his rights in court and hold the drug company responsible.

Gabriel's story is featured in AFJ's latest documentary film,"Unequal Justice: the Relentless Rise of the 1% Court."

“Unequal Justice” explores the growing pro-corporate bias in key Court decisions and their real-world impact on ordinary Americans. The film looks at three cases – Citizens United v. FEC, PLIVA v. Mensing, and Wal-Mart v. Dukes – to show how the law has been distorted to create advantages for corporations within our democratic system, restrict access to the courts, and prevent ordinary people from banding together to fight corporate misbehavior.

For Gabriel, it was PLIVA v. Mensing that ensured he wouldn’t be able to stand up for his rights in court. In PLIVA, the Supreme Court shielded generic drug manufacturers from state tort liability when their labels inadequately warn consumers of health risks. Absurdly, brand name drug manufacturers can be held liable for that very failure. But generic drugs make up 75 percent of the prescription drug market, and millions of Americans take the generic versions of prescription drugs, often because insurance companies require that prescriptions be filled with generics.

Without the risk of legal liability, generic drug manufacturers have little incentive to ensure that their warning labels are accurate. And when people like Gabriel are harmed by a generic drug, they have no legal remedy.

“Unequal Justice” will be released this fall. You can learn more and sign up to host a screening of the film at www.unequaljustice.org.

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AFJ releases new report on the Supreme Court's 2011-12 term

Photo: Mike Sheridan

The 2011-12 U.S. Supreme Court term will be best remembered for the Court’s landmark ruling on the Patient Protection and Affordable Care Act (“ACA”), in which it upheld the constitutionality of the Act but opened the door to placing future limits on Congress’ ability to regulate interstate commerce and to impose conditions on federal grants to the states. That decision, however, was far from the only ruling of major significance this term. The Court issued a number of important decisions that reflect its continuing bias in favor of corporate interests and against the rights of everyday Americans, demonstrating that Chief Justice John Roberts’ One-Percent Court was once again open for business.

Click here to download the full 2011-12 End of Term report.

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One Year Later: The Consequences of Wal-Mart v. Dukes

Class-action lawsuits are a powerful tool for employees and consumers to fight for their rights against major corporations. However, thanks to the Supreme Court’s 2011 decision in Wal-Mart v. Dukes, which raised the threshold for the certification of class-action lawsuits, perhaps the correct way to have begun this post would be “Class-action lawsuits were a powerful tool.”

The tide against class-action lawsuits was never more resounding than in Wal-Mart. One year ago, the Supreme Court reversed the lower court’s grant of class certification, after female employees of Wal-Mart tried to bring a class-action lawsuit under Title VII of the Civil Rights Act of 1964 against the mega-corporation for consistently promoting and paying higher salaries to male employees. The employees presented facts showing that 70 percent of Wal-Mart’s hourly jobs are filled by women, while only a third of management positions are. Additionally, women are paid less than their male counterparts from day one and over the course of their employment (read our study here). The Court’s decision not only affected the rights of the one million current and former female Wal-Mart employees whose interests were at stake in the suit, but radically re-wrote the federal rules on class certification with implications for millions of other plaintiffs or would-be plaintiffs.

In Wal-Mart, the Court changed the commonality standard from an “easily satisfied” bar to one requiring that common issues “predominate.” The Court held that a discretionary management system that has produced disparity does not satisfy the new stricter standard. The new commonality standard means that to move forward as a class-action lawsuit, the claims must

depend upon a common contention of such a nature that it is capable of classwide resolution — which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. . . . What matters to class certification [is] the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.

Now not only must plaintiffs be affected by a decision made by high-level corporate executives (rather than by lower management), but the higher-ups’ decision-making must also be conscious and intentional. Needless to say, the Wal-Mart case has far-ranging implications for fighting sex discrimination in the workplace and for class-action litigation across the board.

There are many reasons why class-action litigation is an important vehicle for the vindication of civil rights. In cases involving systemic discrimination, each plaintiff’s case becomes stronger when seen in the aggregate. Furthermore, a wide-scale lawsuit can improve the lot for more employees (or consumers, as the case may be) and so is a more efficient means of delivering more justice than individual suits. Finally, a class action can affect a corporation’s bottom line in a way that individual litigation is unlikely to, and thus class actions are more likely to inspire improvements in corporate behavior.

In the wake of Wal-Mart, several circuits have prevented class-action lawsuits from moving forward. The Fifth and Second Circuits have followed language in Wal-Mart rejecting class-action lawsuits in which plaintiffs claim separate, individual damages, while the Ninth and Eighth Circuits have focused on Wal-Mart’s heightened commonality requirement.

In a troubling decision, Bennett v. Nucor Corporation, the Eighth Circuit affirmed a lower court’s dismissal of a suit, finding that the plaintiff employees failed to meet the commonality requirement under Wal-Mart. In that case, African-American employees at an Arkansas steel mill attempted to bring a class-action lawsuit for racial discrimination against their employer under § 1981 and Title VII. The court found that the employees did not speak for the entire plant because they only worked in one of five departments of the plant, where Confederate flag-style “do-rags” were sold in the company store, actual Confederate flags and nooses were publicly displayed, and racial comments were communicated over the radio, in e-mails, and scrawled on the equipment and in bathrooms.

Some courts, including the Third, Fourth, Sixth and Seventh Circuits, have distinguished Wal-Mart in cases against the De Beers and Hearst corporations, among others. In one of the most publicized post-Wal-Mart decisions, McReynolds v. Merrill Lynch, decided in February of this year, Judge Posner of the Seventh Circuit wrote for a three-judge panel that African-American financial advisors for Merrill Lynch could bring a class-action lawsuit under Title VII and § 1981 because the issue of disparate impact on African-American employees was appropriate for class-wide treatment.

Posner came to this conclusion by distinguishing Wal-Mart. In Wal-Mart, corporate policies formally forbade sex discrimination and assigned hiring decisions to local managers. However, in Merrill Lynch, the Seventh Circuit took issue with two corporate policies: the “teaming” policy and the “account distribution” policy. The teaming policy permits brokers to form their own teams, which in turn are supposed to improve client services. The account distribution policy permits brokers to compete for the clients of departing brokers, based largely on past successes. This is an important distinction because Merrill Lynch’s policies were created in the higher echelons of management — not by local managers — and facilitated discrimination in that the African-American employees claimed that they were less likely to be selected for teams or distributed-accounts.

Meanwhile, the Wal-Mart plaintiffs have re-filed as regional classes in California and Texas courts and intend to continue pursuing their important claims.

Although some lower courts are allowing class actions to proceed under the Wal-Mart standard, the Corporate Court may not be done with rewriting the class certification rules. Just last week, the Court agreed to hear Comcast v. Behrend  during its next term, in order to address the question of what issues that bear on the merits of the case must be resolved at the class certification stage. If the Court reverses the Third Circuit’s plaintiff-friendly holding in this case, it will be erecting yet another barrier to justice for everyday Americans.

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One Year Later: The Consequences of Sorrell v. IMS Health Inc.

The Supreme Court’s First Amendment jurisprudence has taken an alarming turn under Chief Justice John Roberts. Bowing to corporate interests, the ascendant conservative wing of the Court has warped First Amendment doctrine to thwart legislative efforts to reign in corporate activity that is harmful to the public interest. The 2010 Citizens United ruling is the best-known example of this trend, but an important, if lesser known, case is Sorrell v. IMS Health, Inc., decided one year ago this month.

The Court in Sorrell held that a Vermont law prohibiting pharmaceutical marketers and data-mining companies from purchasing prescription records from pharmacies violated the First Amendment rights of the pharmacies. When the ruling was handed down last year, it provoked a sharp outcry. Observers in the medical community noted that the ruling would lead to both a loss of medical privacy and higher prescription drug prices. Going further, Senate Judiciary Committee Chairman Senator Patrick Leahy said that the Sorrell ruling was “just one more example of the Supreme Court using the First Amendment as a tool to bolster the rights of big business at the expense of individual Americans.”

The impact of the Sorrell ruling in lower courts has reached far beyond Vermont, and has borne out Senator Leahy’s warning. For example, the Sorrell Court’s warped vision of the First Amendment was cited by the Northern District of Illinois in its ruling that the First Amendment protected a grocery store chain from liability for misappropriating Michael Jordan’s likeness in advertising without his consent. One industry in particular has welcomed the Sorrell ruling: tobacco manufacturers. Earlier this year, the federal trial court for the District of Massachusetts, relying heavily on Sorrell, struck down a Worcester city ordinance limiting tobacco advertising near schools and prohibiting the sale of “blunt wraps,” an especially carcinogenic tobacco product. In a similar vein, the Court of Appeals for the Sixth Circuit, relying partially on Sorrell, struck down part of a recent federal law that prohibited the use of certain colors and graphics in cigarette labeling and advertising. The Court upheld other portions of the law that had been challenged by the tobacco industry, including requirements that cigarette packaging contain large warning labels, but it is possible that the case may be on its way to the Supreme Court.

The Court reached its conclusion in Sorrell by distorting its own tiered scrutiny framework. Long-standing precedent established that speech for purely private or profit-generating purposes — advertising, for example — should not receive the same level of judicial protection as some other forms of individual expression, such as political, artistic, or scientific speech. Rather than applying this precedent to the case before it, the Court decided instead to subject the Vermont data-mining restriction to the highest level of judicial scrutiny, usually reserved for only the most extreme cases of government censorship.

This misapplication of First Amendment doctrine came as a shock to Court watchers, and sparked a sharp dissent from Justice Breyer. The dissent warned against the Court’s reversion to the jurisprudence of a century ago, when it employed dubious constitutional doctrine as a pretense for imposing its political and economic vision of libertarianism and lasseiz-faire capitalism on the nation. The most infamous example is the case after which that era was named: the Court’s 1905 ruling in Lochner v. New York. In Lochner, the Court struck down a New York state law guaranteeing basic worker protections as an infringement on the “liberty to contract” between the workers and their abusive corporate employers. The Sorrell dissenters referred to Locher repeatedly, urging the Court to avoid “repeating the mistakes of the past.”

The First Amendment is a crucial cornerstone of our democratic freedoms, but it is not a license for corporate interests to trample on the rights of Americans. The warping of First Amendment jurisprudence by the conservatives on the Supreme Court in cases like Sorrell transforms the First Amendment from the safeguard of free democratic expression into a blank check for corporations to say, spend, and influence anyone or anything without accountability. The Court began to go down this road a century ago, before wisely turning back. It now appears that the conservatives on the Court are prepared to disregard the lessons of history and go down it again.

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Corporate Court Starts Filling Its Docket for Next Term

The Supreme Court’s 2011-12 term, which will end this week with a hotly anticipated ruling on the constitutionality of the Affordable Care Act, has been dubbed the “term of the century” by some legal observers. But at the same time that the Court is issuing landmark rulings on topics from juvenile justice to immigration enforcement to health care reform, the Court is also deciding which cases it will hear next term — accepting a number of cases with tremendous implications for corporate accountability. The Court’s grants of certiorari in these cases are a worrying sign that the Court is prepared to travel even further down the road of stifling corporate accountability.

Here are a few of the corporate cases that the Court agreed to hear next term:

Comcast v. Behrend deals with the ability of plaintiffs to collectively hold cable provider Comcast accountable for violations of antitrust law. As is often the case with class action lawsuits, the theoretical option of each plaintiff to sue individually isn’t a real option, because the financial cost of Comcast’s alleged violations to each individual is a small amount. Unless plaintiffs have the option of proceeding as a class, corporations like Comcast can violate the law without accountability. Comcast argued unsuccessfully before the Third Circuit that the plaintiffs should not be permitted to proceed as a class unless they first made a number of onerous merits showings. However, the Supreme Court — which has recently shown hostility to class action lawsuits in cases like Wal-Mart v. Dukes and AT&T v. Concepcion — may be poised to reverse the Third Circuit and erect additional barriers to corporate accountability through collective consumer lawsuits.

FTC v. Phoebe Putney Health System deals with the question of whether healthcare provider Phoebe Putney Health System can escape federal antitrust liability when it achieves monopoly status through the intervention of the state legislature. The Eleventh Circuit Court of Appeals held that the doctrine of state action immunity, which prevents states from being held liable for violations of federal antitrust law, extends to Phoebe Putney, a private provider of health care services that achieved monopoly status after an agency of the Georgia state government, acting at Phoebe’s behest, purchased Phoebe’s largest competitor and then sold it to Phoebe. A decision by the Supreme Court to affirm the Eleventh Circuit’s opinion in this case would carry dramatic implications for antitrust accountability, allowing private entities to avail themselves of antitrust immunity simply by persuading state agencies to become complicit with them in anti-competitive practices.

Vance v. Ball State University deals with the question of whether an employee who has been the victim of racial harassment in the workplace may hold her employer liable under Title VII of the Civil Rights Act of 1964 if the party engaging in the harassment lackedthe authority to fire or formally reprimand the employee. The plaintiff, Maetta Vance, was the sole African-American employee of Ball State University’s Banquet and Catering Department. Over a period of more than two years, she was subjected to physical abuse and racial taunts by co-workers who formally lacked the authority to fire or reprimand her, but who had been directed to supervise her work. She eventually filed a complaint with the Equal Employment Opportunity Commission, seeking to hold the university vicariously liable for the harassment under a rule that establishes vicarious liability for a supervisor’s violations of Title VII. The Seventh Circuit, however, rejected Vance’s vicarious liability claim. If the Supreme Court affirms this ruling, it will have the effect of allowing employers to escape accountability for failing to prevent sexual and racial harassment in their workplaces, even where, as in Vance’s case, the employer ignored repeated internal complaints that the victim of the harassment filed.

Finally, the Supreme Court accepted a series of cases involving environmental damage caused by corporations. Georgia-Pacific West v. Northwest Environmental Defense Center and Decker v. Northwest Environmental Defense Center both deal with challenges to the Ninth Circuit Court of Appeals’ determination that rainwater runoff from ditches and drainpipes associated with logging roads falls into the category of pollutant sources that require a permit from the Environmental Protection Agency under the National Pollutant Discharge Elimination System. The Ninth Circuit’s ruling has come under heavy attack by the logging industry, which claims that the economic impact of a rule requiring them to pay for pollution of rainwater runoff from industry roads would place too great a burden on their industry.

Additionally, the Court agreed to hear the case of LA County Flood Control District v. Natural Resources Defense Council, which raises a question regarding the interpretation of the Clean Water Act (“CWA”). The Court has previously stated that transfer of water within a single body cannot constitute a “discharge” within the meaning of the act. The LA County Flood Control District case raises the question of whether that precedent can protect the LA County Flood Control District from liability under the CWA for discharging pollutants into the Los Angeles and San Gabriel rivers through the municipal storm sewer system.

Together, these cases raise the possibility that the Court is prepared to bow to corporate pressures to roll back the Clean Water Act’s protections against spoliation of natural resources. The defendants in these cases have taken an extreme position that they should be beyond the reach of the laws and agencies put in place to protect our environment: In the words of one witness in the LA County Flood Control case, they “could not be held accountable even if its discharges “were so polluted with oil and grease that they were on fire as they came out of the system.”

This coming Supreme Court term may not rival the “term of the century” that will draw to a close this week in terms of media attention, but if the cases on the docket are any indication, it will nonetheless be an important term for those who care about corporate accountability. We will see whether the the Court intends to continue down the path that it has traveled in cases like Citizens United v. FEC and AT&T Mobility v. Concepcion, or whether it will turn back the legacy of corporation-friendly rulings that has earned it the moniker the Corporate Court.

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Supreme Court Ruling Hampers Unions’ Political Speech

Guest post by Professor Benjamin Sachs

Until yesterday, it was voters and legislators who got to decide whether they wanted to live in a right-to-work state.  With Knox v. SEIU, the Supreme Court began to assume that decision-making responsibility for the rest of us.  At least when it comes to the public sector, Knox takes a giant step in the direction of holding that any rule requiring employees to pay their fair share of the collective bargaining bill is unconstitutional.  That’s a dramatic departure from prior precedent.  It’s a striking example of judicial activism.  And it’s potentially an existential threat to public sector unions.

The trouble comes primarily from two components of the Court’s opinion.  The first is the Court’s newfound skepticism about the sufficiency of free-rider arguments for First Amendment challenges in the public employment context.  The second is the Court’s new insistence – at least in certain circumstances – on “opt-in” arrangements in the union dues setting.  If there’s any good news about Knox, it’s that most of the worst parts of the opinion are dicta.  That means the case does not give lower courts the latitude to impose a right-to-work regime – one in which any and all mandatory dues payments are illegal – on the nation’s public sector workforce.

But before we get into the opinion in earnest, some brief background is in order.

A good number of states have decided that collective bargaining can be in the interests of the public.  In these states, where public employees vote to form a union, the employer has an obligation to bargain with the union.  But the union also has an obligation – namely, to represent all the workers in the bargaining unit whether or not those workers choose to become union members.  To make sure that each worker pays her fair share of the costs of representation, and to ensure that nobody gets to free ride on the dues paid by others, state governments allow employers to require everybody in the unit pay dues.

On the line: the ability of SEIU (an AFJ member organization)
to engage in political advocacy on behalf of its members.

Over the years, the Supreme Court has crafted a doctrine to structure and police these mandatory dues arrangements.  The basic rule has been this: in order to avoid the free-rider problem, public employers can require that employees pay their fair share of the union’s collective bargaining and contract administration expenses, but, to avoid a compelled political speech and association problem, employees have been given a right to opt out of funding the union’s political program.

That’s the background against which Knox is decided.  And although the Knox holding addresses a particular accounting procedure that SEIU used in California in 2005, the opinion goes far beyond dealing with the SEIU assessment. Reaching beyond what was even briefed or argued in the case, the five-justice majority casts serious doubt on whether a state’s interest in overcoming free riding can any longer justify mandatory dues payments in the public sector – even when it comes to dues payments for collective bargaining and contract administration.  As the Court put it, “free-rider arguments . . . are generally insufficient to overcome First Amendment objections.”

The Knox Court also questions whether, when it comes to the union’s political spending, it is constitutionally sufficient to allow objectors to opt out of paying dues or, instead, whether the union must secure employees’ affirmative opt-in before spending dues on politics.  The Court holds that, with respect to the particular SEIU assessment in this case, an opt-in is constitutionally required.  This is, in itself, a marked departure from the Court’s longstanding rule that opt-outs are constitutionally sufficient.  But here, too, the Court’s language goes beyond what was necessary to rule on the SEIU matter.  As the concurring and dissenting opinions point out, the Court’s reasoning on the constitutional permissibility of opt-out agreements would seem to extend to all mandatory dues arrangements.

To be clear, if opt-in arrangements are the only constitutional ones, that means that all forms of mandatory dues arrangements are unconstitutional.  So, jettisoning the free-rider rationale or striking down opt-out agreements will have the same effect – it’ll be right-to-work in the public sector.

These pieces of the Knox decision are troubling, but the Court’s increasing constitutional skepticism about mandatory union dues raises another set of concerns that demands attention.  In particular, the Court’s concern for avoiding compelled funding of union political speech stands in stark contrast to the lack of concern for compelled funding of corporate political speech.

The contrast is clearest in the public sector.  Here’s how it works:  The vast majority of people who work for the government – state, local and federal employees – are required to make contributions to a pension plan.  Public pensions, moreover, are defined benefit plans, which means that employees don’t have any say in how their mandatory contributions are invested.  Not surprisingly, pension plans invest employee contributions heavily in corporate securities: in 2008, for example, public pensions held about $1.15 trillion in corporate stock.

In Citizens United, of course, the Supreme Court held that corporations have a First Amendment right to fund electoral expenditures with general corporate treasuries, and corporations are taking ample advantage of the opportunity.  So, if you’re a public employee in California or New York or Arkansas (or nearly any other state), it is now a condition of your employment that you make pension contributions that can be used to finance corporate political advertisements.  If the Court means what it says about compelled union political speech and association, it has to see that this compelled corporate political speech and association is similarly unconstitutional.

The problem, though, isn’t restricted to the public sector.  The Supreme Court, in a case called CWA v. Beck, held that the same rules about mandatory union dues that it crafted for public employee apply to private employees.  So, private sector unions are prohibited from spending even one dime of general treasury money on politics when individual employees object to such use.  In contrast to this union rule, however, corporate law permits corporations to spend their assets on politics even in the face of individual shareholder objections.  To put it simply, the law gives employees the right to opt out of funding union political speech, but shareholders get no right to opt out of funding corporate political speech.

This kind of differential treatment of political speakers is inconsistent with the American ideal of treating political speakers equally.  Indeed, imposing stricter rules on unions than corporations may well be a constitutional problem, even in the private sector, unless there’s a valid reason for treating unions and corporations differently in this context.  And although space doesn’t permit me to make the case here, I have argued elsewhere that unions and corporations are analogous in the ways that matter most for this analysis.

In short, taking seriously the arguments in Knox and the Court’s other cases about compelled political speech and association means extending these principles beyond the union context and to the corporate one.  This kind of extension of Knox would not only be faithful to the Constitution, it would help restore some balance to a currently unbalanced compelled speech and association doctrine.

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Benjamin Sachs is a professor at Harvard Law School where he teaches labor law, and he is author, most recently, of Unions, Corporations, and Political Opt-Out Rights after Citizens United (Columbia Law Review 2012).  He formerly worked in the SEIU legal department.

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Corporate Court Sides with Big Pharma in Overtime Pay Case

The Supreme Court gives another example
of how real life isn't like the movies.

In the 2010 romantic comedy Love and Other Drugs, Jamie Randall was a pharmaceutical representative who ensured that the products of his employer, Pfizer, were prescribed more often than its competitors’. He worked hard and, thanks to Pfizer’s revolutionary new treatment for erectile dysfunction, succeeded in replacing many pharmaceutical products with their Pfizer equivalents.

Those who have seen the movie will remember Jamie’s great success upon Viagra’s entry into the market. They might also remember that Jamie was eventually offered a huge promotion.

But for real-life drug rep Michael Shane Christopher, employed by SmithKline Beecham, life has not been so charmed.

Michael, like Jamie, does not actually sell pharmaceutical products directly to patients or to pharmacies. Just like Jamie, his job is to meet with doctors to persuade them to prescribe SmithKline products. Michael, like Jamie, worked long hours to make SmithKline products more competitive in the pharmaceutical market. But unlike Jamie, Michael will never earn the pay he deserves.

Many could consider Michael’s job as a drug rep to be less than admirable. After all, if Love and Other Drugs had an underlying purpose, it was probably to shed light on the pharmaceutical industry’s shady operations.

But federal law does not afford fair pay only to those whose jobs are popular or likable. The Fair Labor Standards Act (FLSA) does not make any employee more deserving than the next, but rather entitles all workers to certain rights and guarantees. That is unless a major drug company decides to argue semantics with the Supreme Court. When that happens, all bets are off.

Enter Christopher v. SmithKline, a Supreme Court decision announced on Monday, June 18, in which SmithKline successfully defined Michael as an “outside salesman” not entitled to overtime pay. Under FLSA, outside salespersons are one of several narrowly-drawn classes of employees exempted from the overtime pay requirement. Congress tasked the Department of Labor with defining those classes, which they did by reaching the outrageous conclusion that salespersons must, in fact, make sales. The Department of Labor argued exhaustively that since a drug rep like Michael does not make sales, he must not be an “outside salesman.” Case closed, right?

Wrong. The Corporate Court disagreed with the Department of Labor and ruled that Michael should be denied overtime pay.

In a narrowly divided 5-4 decision written by Justice Alito, the Court found that the Department of Labor’s definition of an “outside salesman” was invalid because – essentially – it was too obvious. The conservative majority held that, because the agency simply “parroted” the FLSA language, it had no reason to rely on its interpretations.

After hearing oral arguments in this case, it seemed unlikely that the Court would side with SmithKline. Chief Justice John Roberts insisted that, at the end of the day, drug reps “don’t make sales.” Justice Sonia Sotomayor worried that defining drug reps as outside salesmen might serve to exclude all those involved in promotional work from overtime pay.

SmithKline’s counsel Paul Clement, who also argued the challenge to the Affordable Care Act, responded that drug reps “make sales in some sense” and that the Department of Labor’s definitions were “inconsistent with the statute.”

Note to the editors of the Oxford English Dictionary: being a “salesperson” no longer requires making any actual “sales.”

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Government sides with oil companies accused of human rights atrocities

In a pending Supreme Court case involving human rights abuses allegedly committed overseas by British and Dutch oil companies, the Obama administration came out last week on the side of corporate interests.

This past Wednesday, the Department of Justice filed a friend-of-the-court brief in Kiobel v. Royal Dutch Petroleum, arguing that U.S. courts:

should not create a cause of action that challenges the actions of a foreign sovereign in its own territory, where the [defendant] is a foreign corporation of a third country that allegedly aided and abetted the foreign sovereign’s conduct.

The Supreme Court heard oral arguments in the case this past February, but just a week later, ordered re-briefing and re-argument on a new, broader question: “Whether and under what circumstances the Alien Tort Statute allows Courts to recognize a cause of action for violations of the law of nations occurring within the territory of a sovereign other than the United States.”

In Kiobel, a group of Nigerian plaintiffs, many of whom have received refugee status in the United States, sued the oil companies for enlisting members of the Nigerian military to torture and kill environmental activists in the Ogoni Region of Nigeria. The plaintiffs sued under the Alien Tort Statute, an 18th century law allowing suits to be brought for egregious international law violations in U.S. federal courts.

Initially, the United States filed a friend-of-the-court brief in support of the human rights victims. Even though the specific question before the court has changed, it is difficult to resolve how in a few short months, the government has demonstrably altered its position 180 degrees.

Marco Simons of EarthRights International exposed the absurdity of the government’s position. On the one hand, the government concedes that suits against foreign actors concerning foreign activity can be brought in U.S. courts for several reasons that benefit a corporation’s bottom line. However, the government is opposed to U.S. courts hearing suits alleging the most heinous of crimes: crimes against humanity, torture, and extrajudicial killing.

For human rights victims who will never receive justice through their domestic courts, the ATS could stand as a symbol of the American judicial system’s concern for universal fairness and justice. But if the Court sides with the oil companies, the federal courthouse doors will be shut to victims of human rights atrocities committed abroad. It is disappointing that the government has decided to support this potential restriction of individual victims’ access to justice.

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One Year Later: The Consequences of Janus Capital v. First Derivative Traders

In Janus Capital Group, Inc. v. First Derivative Traders, Inc., a case decided one year ago this month, the Supreme Court hampered the Securities and Exchange Commission (SEC) in its efforts to combat fraud, by deciding that white-collar criminals could devise complex structures of shell corporations to avoid accountability. The decision – part of a growing trend of corporation-friendly 5-4 rulings engineered by the conservative wing of the Court – was ostensibly intended to create a bright-line rule that would clarify the application of important corporate accountability regulations, but has instead confused and divided lower courts and stifled the effectiveness of those checks on corporate practices. This confusion makes it more likely that the issue decided in Janus could end up back before the Supreme Court one day soon. In the meantime, Congress or the SEC can act to repair the damage done to corporate accountability mechanisms by Janus.

According to its drafters, the story behind SEC Rule 10b-5 began with an anecdote that circulated around SEC offices in 1942. A wealthy Boston banker had made a fortune by fleecing his investors, telling them (falsely) that the bank was in dire trouble, purchasing their stock at a sharp discount, and reaping huge profits when, in fact, the bank’s stock quadrupled in value soon thereafter. At the time, the SEC had adopted rules penalizing fraud related to the sale of securities, but no rule existed to penalize securities purchasers who engaged in fraud. Rule 10b-5 changed that, authorizing the SEC, as well as the affected stockholders, to sue buyers or sellers who engaged in securities fraud. Since its adoption, Rule 10b-5 has been described as “the primary vehicle for class actions against public companies based upon allegations of false disclosure and the legal source for the prohibition of insider trading.” The Janus ruling, however, has brought the continued vitality of Rule 10b-5 into question.



The Janus case began with fraudulent allegations in a series of prospectus documents issued by Janus Capital Group (JCG) to its investors, including First Derivative Traders, Inc. (FDT). Specifically, JCG claimed in the prospectus documents that it did not participate in the controversial market manipulation practice known as “market timing.” When it was subsequently revealed that JCG had in fact been secretly engaging in marking timing for the benefit of a select group of well-connected hedge fund managers, its stock plummeted and shareholders, including FDT, lost a fortune.

JCG’s false claims were a clear violation of Rule 10b-5, and FDT, along with several other shareholders, decided to sue. In addition to JCG, they also sued Janus Capital Management (JMT), a JCG subsidiary that managed the mutual funds and to which JCG channeled the profit in the form of management fees. This meant that if FDT sued JCG alone, FDT would not be able to recover its lost profits because virtually all of JCG’s assets were funneled to JCM. This divided corporate structure is a common one for the management of mutual funds, and most view it as a formality alone. The same individuals who issue the mutual funds under the auspices of one corporate entity typically also manage them under another. The New York Times has called this structure “one of the great legal fictions of Wall Street” and “legal ventriloquism,” and has referred to asset-less entities like JCG as “dummy corporations.”

As it turns out, the mutual funds’ divided management structure ended up being the key to the case. The Court’s ruling stated that JMT could not be liable for the fraudulent prospectus statements, because it was technically the asset-less parent company, JCG, that issued them and bore ultimate responsibility for their contents. Therefore, the Court said, JMT did not “make” the fraudulent statements within the meaning of Rule 10b-5. It didn’t matter that JCG and JMT were directed by largely the same group of people, that the sole reason for JMT’s existence was to shield JCG’s assets from liability, or that, by exempting JMT from liability, the Court was effectively ensuring that that the people behind the Janus family of mutual funds would not have to compensate the investors they had defrauded. In short, the Court allowed JCM to manipulate the legal fictions of the corporate form in order to get away with fraud.

In the year since Janus was decided, lower courts have split on their application of its holding to other cases. Some lower courts have come down on the side of minimizing the impact of Janus, usually by finding ways to distinguish its facts from those of cases before them. For example, three months after Janus was decided, a federal district court in Alaska held that Janus’ limitation on liability couldn’t protect other corporate officers who had signed fraudulent SEC disclosure forms. Going even further, a federal district court in New York held that Janus did not prevent a parent company from being held liable under Rule 10b-5 for fraudulent statements issued by a subsidiary corporate entity, where the parent company owned the subsidiary and exercised a degree of control that ensured that the parent company had “control over the content of the message, the underlying subject matter of the message, and the ultimate decision of whether to communicate the message.”

On the other hand, some courts have taken up Janus’ invitation to isolate Rule 10b-5 liability to a single corporate entity. For example, in Hawaii Ironworkers Annuity Trust Fund v. Cole, a federal district court in Ohio took the Janus ruling and ran with it, holding that Janus not only limited Rule 10b-5 liability between corporate entities, but also within a single corporate entity, effectively adopting a “just following orders” defense to securities fraud. Perhaps most alarmingly, a district court in Nebraska has held that the Janus holding narrows the scope not only of private actions for securities fraud, but of SEC-initiated actions, as well. That interpretation ties the hands of watchdog agencies, going even further to ensure that white-collar criminals can avoid both public and private accountability for fraud. The district court’s reasoning runs counter to the reasoning of the Supreme Court in Janus, which was based in part on judicial restraint concerns about expanding the right of individuals to sue under Rule 10b-5, as had been implied by the courts.

During the year since Janus, legal scholars and Court watchers have reacted strongly to the decision. Scholars have commented on the irony that the “bright-line” rule announced in Janus – which was intended to clear up confusion about the application of Rule 10b-5 among the lower courts – has only added to the confusion. They have also noted that the different applications of Janus have created divided authority, with courts of some circuits reading Janus broadly and others reading it narrowly. This creates a risk that corporate defendants will attempt to engage in “forum shopping,” the practice of manipulating procedural technicalities to get cases moved to jurisdictions with law that is more favorable to them.

In the meantime, scholars have also noted ways that Congress and even the SEC itself can limit, or altogether eliminate, the impact of the Janus ruling. For example, the SEC could promulgate new regulations requiring investment advisors, such as the executives at JCM, to sign statements issued by the funds, thus becoming “makers” of the statements within the meaning of Rule 10b-5. The SEC could even just tweak the language of Rule 10b-5, such as by replacing the word “make” with “create.”

It is easy to get lost in the technical complexity of cases like Janus. It is also easy to dismiss the case as insignificant because it seems to affect such a small group of litigants: private plaintiffs filing fraud claims under Rule 10b-5 (although, as we have seen, lower courts have not always confined the holding in this way). But it is important to keep in mind that this case is representative of a larger pattern of corporation-friendly rulings from the conservative wing of the Court.

The ostensible concerns that underlie the majority’s reasoning in Janus—judicial restraint and establishing a clearly defined rule regarding the reach of Rule 10b-5 liability—have been poorly served by the ruling itself, which has only further muddled the judicial understanding of Rule 10b-5 and, on some courts, has set off a fresh wave of conservative judicial activism. Should the issue appear back before the Court, as some scholars believe it is likely to, unwillingness to reconsider its holding would be a sure signal that the Court is interested primarily in stifling the effectiveness of important regulatory checks on fraud, ensuring that white-collar criminals have the opportunity to manipulate the legal fictions of the corporate form to shield their malfeasance from the reach of both federal regulators and their own shareholders.

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Corporate Court Gives Thumbs Up to Mortgage Scam

Today the Supreme Court issued its decision in Freeman v. Quicken Loans (.pdf download), holding unanimously that the statute in question does not prohibit mortgage lenders from charging “unearned fees” – that is, charging fees for services never rendered. As a result of the Court’s decision in Freeman, mortgage lenders can essentially “cheat” homebuyers out of hundreds or thousands of dollars without giving them anything in return. It remains to be seen how Freeman could also impact a host of other consumer protection laws.

The case arises from a group of lawsuits out of Louisiana in which borrowers, including Tammy and Larry Freeman, claim that Quicken Loans violated the Real Estate Settlement Procedures Act (RESPA) by charging them loan-discount fees (one family paid $1,100 in fees) on their mortgages without providing reduced interest rates in return. Quicken argued that the fees charged to borrowers were both legal and earned.

The question before the Court was how to interpret RESPA, which prohibits kickbacks and other abuses in the mortgage industry. The key language in the statute reads:

No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

The Freemans argued that RESPA was intended to forbid unearned fees, regardless of whether a third party was involved in the improper fee arrangement. Quicken argued that the law only prohibits lenders from receiving an unearned fee when that fee is divided with a third party in the form of a kickback. The Fifth Circuit agreed with Quicken, ruling that there was no violation of RESPA if an unearned fee is charged by a single party and there is no third party taking a share.

The circuit courts were divided on this issue, with the Fourth, Fifth, Seventh and Eighth Circuits limiting the Act to third-party kickbacks and the Second, Third and Eleventh Circuits holding that the Act applies to all unearned fees. The Department of Housing and Urban Development supported the interpretation that the statute should apply to all unearned fees, while the Solicitor General filed a brief supporting the Freeman’s petition for certiorari.

Today’s decision, written by Justice Scalia, held that in order to establish a violation of §2607(b) of RESPA, a charge for settlement services has to have been divided between two or more persons. Hence, a single provider’s retention of an unearned fee does not violate §2607(b). By looking at the terms of §2607(b), the Court determined that there have to be two distinct, sequential exchanges – a single mortgage lender cannot both make and accept the charge. Because the petitioners did not demonstrate that Quicken split the challenged charges with anyone else, the Court found that the lower court properly granted summary judgment in favor of Quicken.

Freeman is one of two RESPA cases on the Corporate Court’s 2011-2012 docket. The other case is First American Financial Corp. v. Edwards, in which the Court was asked to decide whether RESPA allows individual plaintiffs to recover charges for title insurance when the selling corporation has violated a provision of the Act, regardless of whether the plaintiff was overcharged.

For additional perspective on the cases, take a look at previous guest blog posts by Prof. Amanda Leiter on First American and by Kevin Russell on Freeman.

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Awaiting the Court’s Decisions in Two Mortgage Scam Cases

Among the cases on the Corporate Court docket that have yet to be decided are two that deal with interpretations of the Real Estate Procedures Act of 1974 (“RESPA”), which was enacted to prevent abuses in the mortgage industry. At stake in both cases is the protection of home buyers from unscrupulous title insurance and mortgage companies. Both cases could also have broader implications for a host of consumer protection laws and other types of regulation.

In First American Financial Corp. v. Edwards, the question is whether RESPA allows individual plaintiffs to recover charges for title insurance when the selling corporation has violated a provision of the Act, regardless of whether the plaintiff was overcharged.

First American Financial is a holding corporation that owns First American Title, which provides title insurance. It also partially owns a number of other title insurance agencies that ostensibly offer a range of title insurance policies, but pursuant to an agreement with First American Financial and unknown to customers, only offer First American Title insurance. Such business referrals are illegal under RESPA and anyone charged for a settlement that violates the law may collect three times the amount of the charges.

Denise Edwards bought a house and received a settlement statement requiring her to pay for title insurance from First American Title.  She claims that the agency from which she had purchased title insurance used to work with multiple title insurance companies but entered a kickback agreement with First American Title in 1998.  She further contends that RESPA’s damages clause allows a lawsuit by private individuals regardless of whether the individual overpaid for insurance because of the kickback.

First American claims that Ms. Edwards was not actually injured because she cannot prove that she would have paid less for title insurance from another company. In fact, Ohio, where the conflict arose, requires all title insurance companies to charge the same amount, but not all states follow this practice. If corporations like First American Financial are allowed to enter kickback agreements, home buyers in other states could be forced to pay too much for their title insurance.

If the Supreme Court sides with First American Financial it could have far-reaching effects on the enforceability of other consumer laws. If consumers are forced to show actual damages to have standing to sue companies, this will eviscerate a host of consumer protection laws that use statutory damages as a disincentive to illegal conduct.

In Freeman v. Quicken Loans Inc., the question is whether homeowners can sue mortgage lenders for charging unearned fees.

This case arises from a group of lawsuits out of Louisiana in which borrowers, including Tammy Freeman, claim that Quicken Loans violated RESPA by charging them loan-discount fees on their mortgages without providing reduced interest rates in return. Quicken says that the fees charged to borrowers were both legal and earned.

The borrowers argue that the Act was intended to forbid both kickbacks and unearned fees, regardless of whether a third party was involved in the improper fee arrangement. Quicken argues that the law only prohibits lenders from receiving an unearned fee when that fee is divided with a third party and does not address unearned fees received by the lender alone. The Circuit Courts are deeply divided on this issue, with the Fourth, Fifth, Seventh and Eighth Circuits limiting the Act to third party kickbacks and the Second, Third and Eleventh Circuits believing that the Act applies to all unearned fees.

The Court’s decision in this case will determine the lawfulness of millions of dollars in fees placed on home buyers annually.  If the Court sides with Quicken, it will allow mortgage lenders to place unexplained and unearned fees on their loans.

Decisions in both cases could be released as early as this Thursday. For additional perspective on the cases, take a look at previous guest blog posts by Prof. Amanda Leiter on First American and by Kevin Russell on Freeman.

Update (5/23/12, 4:01pm): Corrected a reference to "real estate companies" to more precisely reference "title insurance and mortgage companies."

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A Look Ahead: The Last Decisions of the Supreme Court's Term

Last week the Supreme Court heard the final oral argument of the term in Arizona v. United States. With little more than two months left until the term officially ends, let’s take a brief look at the cases on the Corporate Court docket in which decisions remain outstanding.

In Christopher v. SmithKline Beecham Corp., the Court will decide whether courts should defer to the Secretary of Labor’s interpretation of “outside salesman” under the Fair Labor Standards Act (“FLSA”), and whether the FLSA’s “outside sales” exemption applies to pharmaceutical sales representatives. During the oral argument on April 16, the justices seemed somewhat more inclined to side with the drug companies by holding that the sales reps fall within the “outside sales” exemption, which would mean they are not entitled to overtime pay. If the Supreme Court ultimately decides in the companies’ favor, it will not only constitute an earthquake in administrative law, it will also deny overtime to roughly 90,000 drug company employees.

In Knox v. SEIU, which was argued on January 10, the Court is considering whether unions must send a notice to workers every time they impose temporary fee increases to cover the costs of additional advocacy activities, rather than report those increases in annual notices as they already do. The Court could decide that the case is moot, as several months ago the SEIU sent all members of the class a $1 bill and a promise to pay one hundred percent of the charged fee increase. If the Court decides the case on the merits, however, and rules against the SEIU, it will erode the power of unions to fight back against new political attacks by making it harder to raise additional funds to respond.

The Court has not yet released its opinions in either of this term’s two cases arising under the Real Estate Settlement Procedures Act of 1974 (“RESPA”). Enacted to protect consumers from overpriced insurance due to abusive practices like kickbacks, RESPA outlaws payment for business referrals.

In First American Financial Corp. v. Edwards, which was argued on November 28,  the Court is considering whether RESPA allows individual plaintiffs to recover charges for title insurance when the selling corporation has violated a provision of the Act, regardless of whether the plaintiff was overcharged. If the Court sides with First American Financial, it will weaken RESPA regulations and put consumers seeking title insurance at an economic and informational disadvantage.

In Freeman v. Quicken Loans, which was argued on February 21, the Court is considering whether RESPA prohibits unearned fees, regardless of whether a third party was involved in the improper fee arrangement. In this case, petitioners were charged loan-discount fees on their mortgages but did not receive the corresponding reduced interest rates. If the Court sides with Quicken, it will allow mortgage lenders to take hundreds or thousands of dollars from homebuyers without giving them anything in return.

And last, but certainly not least, the Court is likely to release its decisions in the remaining blockbuster cases of the term – the healthcare cases, argued on March 26-28, and Arizona v. United States, argued on April 25 -- around the end of June. More details on what is at stake in these two cases can be found at earlier guest blog posts by Professor Tim Jost (on healthcare) and Professor Angela Banks (on Arizona v. United States).

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Supreme Court Rejects Organizational Liability for Torture

Today the Supreme Court issued its decision (.pdf download) in Mohamad v. Palestinian Authority, holding that the Torture Victim Protection Act of 1991 (“TVPA”) provides for liability only of natural persons, not organizations or corporations.

In this case, the family of a U.S. citizen, who was tortured and killed by intelligence officers of the Palestinian Authority and the Palestine Liberation Organization, sued under the 1991 Torture Victim Protection Act (“TVPA”). The TVPA provides a cause of action against “[a]n individual” for torture or extrajudicial killing committed under authority or “color of law” of any foreign state. The D.C. Circuit affirmed the district court’s dismissal of plaintiffs’ claims on the grounds that the TVPA applies only to natural persons, not to organizations.

Today the Supreme Court unanimously affirmed the D.C. Circuit. In an opinion by Justice Sotomayor, the Court considered the statutory language and legislative history of the TVPA, concluding that the everyday meaning of the word “individual” applies in this case and only includes natural persons. Petitioners had tried to convince the Court that, because Congress normally provides for organizational liability in tort statutes, its use of the word “individual” here was unusual and could only be parsed with consideration of the legislative history.

The legislative history, petitioners argued, reveals that Congress used the word “individual” to make clear that state entities could not be sued, but not to exclude corporate or organizational liability.

The Court’s opinion referenced Mohamad’s companion case, Kiobel v. Royal Dutch Petroleum. The Court initially granted cert in Kiobel on the question of corporate liability under the 1789 Alien Tort Statute, but after oral argument, ordered the parties to brief the issue of extraterritoriality -- that is, whether the ATS covers violations of international law committed overseas -- and put the case to the Court’s next term. Justice Sotomayor’s reference to Kiobel shed little light on the Court’s thinking in that case, although the Court is widely expected to restrict the reach of the ATS when it ultimately rules.

By restricting the reach of the TVPA to natural persons, who may be difficult to identify and are often judgment-proof, the Court has significantly reduced the likelihood that torture victims or victims’ families will be able to hold their torturers accountable.

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Supreme Court Hears Overtime Pay Case

On Monday, April 16, the Supreme Court will hear argument in the case of Christopher v. SmithKline Beecham Corp. At stake in this case is the ability of employees to get time-and-a-half pay for overtime work, as guaranteed under federal law.

This case arose from a dispute between Michael Shane Christopher and his employer, SmithKline Beecham, a drug company. As a “pharmaceutical representative,” Christopher’s work consisted mainly of visiting doctors’ offices and encouraging doctors to prescribe appropriate SmithKline drugs to patients. He sometimes worked more than 40 hours per week, but did not receive time-and-a-half pay for his overtime work. He and another plaintiff sued on behalf of themselves and a class of all other similar employees working for SmithKline for time-and-a-half pay, which is generally guaranteed to workers under the federal Fair Labor Standards Act (FLSA).

SmithKline claims that Christopher is not entitled to overtime pay because he is an “outside salesman,” and thus falls into one of several narrowly-drawn classes of employees exempted from the FLSA’s overtime pay requirement. Christopher argues that he should not be categorized as an outside salesman because he does not actually sell anything.

Through the FLSA, Congress delegated to the secretary of labor the authority to define terms such as “outside salesman.” The secretary of labor has issued regulations providing that an “outside salesman” must in some sense make sales. According to the secretary, who filed an amicus brief in this and a related case, these regulations do not exempt drug companies from paying pharmaceutical representatives like Christopher overtime.

It is a well-established principle of federal law that courts generally defer to agencies’ interpretations of statutes and of their own regulations. However, in this case, the Ninth Circuit Court of Appeals agreed with SmithKline that the secretary’s interpretation deserved no deference because the secretary merely “parroted” federal law in writing the regulations. As a result, the Ninth Circuit substituted its judgment for the judgment of the agency, and decided that Christopher was in fact an outside salesman who did not merit overtime pay.

Although this case raises the technical question of the degree of deference a reviewing court should give to agency interpretations of its own regulations, it is important to remember the core dispute at issue in this case. Christopher worked longer hours than a full-time employee is expected to work. Federal law demands that such workers receive overtime pay, unless they fall into specific, narrowly drawn categories. Congress delegated the authority to define the boundaries of these categories to the secretary of labor, who has determined that employees in Christopher’s position should receive overtime pay.

If the Supreme Court sides with the drug companies, it will not only constitute an earthquake in administrative law, it would also deny overtime to roughly 90,000 drug company employees in Christopher’s situation.

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Corporate Court Decides Insider Trading Case

Yesterday the Supreme Court issued its opinion (.pdf download) in Credit Suisse Securities v. Simmonds, once again rendering a decision that limits the ability of plaintiffs to hold corporate wrongdoers accountable.

The case arises out of a series of Initial Public Offerings (IPOs) during the tech bubble of the late 1990s. The plaintiff, Vanessa Simmonds, was an investor who owned tech stocks underwritten by Credit Suisse and other investment banks. Simmonds alleges that underwriters for these IPOs manipulated stock prices using short-swing transactions in violation of the insider trading laws.

The main issue before the Supreme Court was whether the insider trading law's two-year time limit to bring suits begins to run when the profit is realized by insiders or when the required public disclosures are filed. Credit Suisse argued that actions must be brought within two years of the profits being realized and therefore Simmonds’ suit was time-barred. Simmonds argued that because insiders never filed the required disclosures when the profit was realized, the two-year limitations period never began to run. The district court dismissed the complaint on the grounds that the two-year limit had expired, but the Ninth Circuit agreed with Simmonds and reversed.

Yesterday, the Supreme Court, reversing the Ninth Circuit, held that the two-year statute of limitations continues to run, even when corporate insiders have failed to make the public disclosures that would give notice of the insider trading. While leaving open the possibility that traditional equitable tolling principles could apply in a case like this, the Court has nonetheless made it easier for corporate insiders to avoid liability for their illegal insider trading activity by simply violating the disclosure requirement.

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The Aftermath of Corporate Court’s Generic Drug Ruling

In PLIVA, Inc. v. Mensing, decided last term, the Supreme Court ruled that a generic-drug manufacturer cannot be held liable in state court for failing to inform the FDA that its label inadequately warns consumers of health risks. As Justice Sotomayor wrote in dissent, the majority’s holding in PLIVA created disparate liability schemes for brand name and generic drugs leading to “absurd consequences.”

AFJ and others noted at the time that the 5-4 ruling was likely to have wide-reaching effects, since generic drugs make up 75-80 percent of the prescription drug market.

Yesterday, the New York Times documented how extensive those effects have been already, including the dismissal of scores of suits by individuals who have suffered grievous physical injury as a result of inadequate warnings. The article also highlights that Congress or the FDA could rectify the Corporate Court’s mistake, but there is little sign that either will do so any time soon.

Now, what once seemed like a trivial detail — whether to take a generic or brand-name drug — has become the deciding factor in whether a patient can seek legal recourse from a drug company. The cases range from that of Ms. Schork, who wasn’t told which type of drug she had been given when she visited the hospital, to people like Camille Baruch, who developed a gastrointestinal disease after taking a generic form of the drug Accutane, as required by her health care plan.

“Your pharmacists aren’t telling you, hey, when we fill this with your generic, you are giving up all of your legal remedies,” said Michael Johnson, a lawyer who represented Gladys Mensing, one of the patients who sued generic drug companies in last year’s Supreme Court case, Pliva v. Mensing. “You have a disparate impact between one class of people and another.”

The Supreme Court ruling affects potentially millions of people: nearly 80 percent of prescriptions in the United States are filled by a generic, and most states permit pharmacists to dispense a generic in place of a brand name. More than 40 judges have dismissed cases against generic manufacturers since the Supreme Court ruled last June, including some who dismissed dozens of cases consolidated under one judge.

Public Citizen, a consumer advocacy group, has petitioned the Food and Drug Administration to give generic companies greater control over their labels, a rule change that could allow users of generic drugs to sue, but the agency said earlier this month that it needed more time to decide. “Congress can make this problem go away, and the F.D.A. could, too,” said Allison Zieve, the director of Public Citizen Litigation Group. “But we haven’t seen signs that either of them is paying much attention.” A spokeswoman for the F.D.A. declined to comment.
…
In a statement last week, Representative Henry A. Waxman, Democrat of California, who co-wrote the Hatch-Waxman Act, said he was exploring ways to address the issue, either through legislation or a rule change.

Mr. Waxman argued in a brief opposing the generic companies in the Supreme Court case last year that Congress had never intended for generic companies to be freed of all responsibility. “Congress did not intend for consumers’ rights to be categorically eliminated simply because they purchased a generic rather than a brand-name drug,” he wrote.

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A Right to Sue the Government (Just Not Corporations)

On Wednesday, the Supreme Court issued its decision (.pdf download) in Sackett v. EPA, holding that the plaintiffs are entitled to judicial review of an EPA compliance order issued under the Clean Water Act.

The Sacketts bought a half-acre of land in a wetland area and, without seeking any environmental permits, filled it with dirt and rock in preparation for building a home. The EPA issued an order against the Sacketts to restore the property to its prior condition on the grounds that the land was wetlands protected by the Clean Water Act. The Sacketts went to court to seek court review of the EPA order before the EPA had an opportunity to bring an action in court to enforce the order. The U.S. District Court for the District of Idaho dismissed the case on the grounds that judicial review of the order was improper. The Ninth Circuit affirmed the lower court’s dismissal.

The Supreme Court, in a unanimous opinion written by Justice Scalia, has now reversed the Ninth Circuit’s decision. The Court held that the EPA order constituted a “final agency action,” of which plaintiffs could seek judicial review under the Administrative Procedure Act.

The justices’ concern that plaintiffs not be denied a judicial remedy against government regulation in this case stands in stark contrast to the plethora of recent cases in which the Court has denied plaintiffs a judicial remedy against corporate malfeasance. While Justice Alito waxed indignant in his concurrence about the “unthinkable” denial of due process the Sacketts experienced, he had no difficulty voting with the majority to deny such due process to plaintiffs who suffered physical injury from generic drugs in PLIVA v. Mensing, female workers who were discriminated against in Walmart v. Dukes and Ledbetter v. Goodyear Rubber & Tire Co., or consumers charged fees for “free” phones and held to unconscionable contract clauses in AT&T Mobility v. Concepcion.

It also bears noting that the Supreme Court recently denied the certiorari petition of General Electric in General Electric v. Jackson, a case very similar to this one challenging the constitutionality of administrative orders under Superfund. By allowing pre-enforcement review of orders under the Clean Water Act in Sackett, the Court has opened the door to similar review of Superfund order authority, making it increasingly more difficult for the EPA to do its work on multiple fronts. And although the Sacketts are two private citizens, the holding in this case will provide major benefits for corporate giants like General Electric seeking to challenge EPA orders.

By allowing the Sacketts to get court review of the order, the ability of the EPA to enforce timely compliance with the Clean Water Act is hampered. Further, this ruling could lead to future challenges by corporate interests of other important environmental regulations, such as the Clean Air Act and Superfund.

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Supreme Court Allows Corporations to Escape Liability for Death Caused by Asbestos Exposure

On February 29, the Supreme Court issued its decision in Kurns v. Railroad Friction Products Corp., using preemption doctrine to allow the corporate defendants to escape liability for a railroad worker’s death likely caused by his exposure to asbestos from defendants’ products. The Court, in an opinion written by Justice Thomas, affirmed the Third Circuit’s holding that the federal Locomotive Inspection Act (“LIA”) preempts plaintiffs’ state tort law claims for design defects and failure to warn.

In this case, railroad parts manufacturers were sued by the widow and estate executor of a railroad worker who died as a result of contracting malignant mesolthelioma, the only generally accepted cause of which is asbestos exposure. Defendants admittedly manufactured products that contained asbestos and failed to provide specific product warnings required under state law. Federal railroad regulations are silent as to warnings for products containing asbestos. Nonetheless, the Supreme Court was persuaded by defendants’ claim that the LIA controls the entire field of regulation of railroad parts manufacture and use, and therefore found the state tort claims to be preempted. The Court based its decision on the 1926 case of Napier v. Atlantic Coast Line R. Co., which held that the LIA occupied the field for “the design, the construction and the material of every part of the locomotive.”

Justice Kagan wrote a concurring opinion, noting her belief that the Court would not have decided Napier the same way today, given the trends in modern preemption doctrine, but that “Napier governs so long as Congress lets it.” Justice Sotomayor, joined by Justices Breyer and Ginsburg, wrote an opinion concurring in part and dissenting in part. Justice Sotomayor agreed that the defective design claims were preempted by the LIA, but opined that the failure to warn claims, insofar as they have nothing to do with the physical composition of the railroad parts, should not be considered preempted under Napier. She concluded, “[T]he majority affords the LIA field-pre-emptive effect well beyond what Napier requires, leaving petitioners without a remedy for what they allege was fatal exposure to asbestos in repair facilities.” With a quote from the famous Silkwood plutonium exposure case, Sotomayor noted, “It is difficult to believe that Congress would, without comment, remove all means of judicial recourse for those injured by illegal conduct.”

By upholding the lower courts’ decisions in favor of the corporate defendants, the Supreme Court is preventing injured citizens from holding railroad manufacturers responsible for violating state safety laws and regulations, many of which speak to local safety hazards and provide more stringent protections than those afforded by federal laws.

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Court Set to Hear Human Rights and Corporate Accountability Case

On Tuesday, February 28, the Supreme Court will hear arguments in the case of Kiobel v. Royal Dutch Petroleum. At stake is whether corporations can be held liable for participating in the commission of human rights violations under the Alien Tort Statute (“ATS”).

In this case, multinational oil companies are alleged to have aided and abetted human rights atrocities committed against environmental activists by the Nigerian military, for which victims and victims’ surviving family members now seek compensation.

Today Alliance for Justice is releasing an in-depth report on Kiobel. As the report highlights:

The Supreme Court is poised to make a statement on the civil liability of corporations that participate in the commission of atrocities in the pursuit of profit. After its shocking holding in Citizens United that corporations enjoy the same rights as people to spend unlimited money to influence elections, already resulting in a perversion of American democracy, it would be the utmost hypocrisy if the Court now rules that corporations enjoy special privileges when they engage in activities that the international community has condemned as crimes against humanity. If corporations are to have equal rights, at the very least, they must also have equal responsibilities.

The new report on Kiobel v. Royal Dutch Petroleum is available online. Click here to download the .pdf.

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