In the 2007-08 term, the U.S. Supreme Court returned to areas of the law familiar to its tried-and-true business docket. As it has numerous times in recent terms, the Court addressed issues related to punitive damages, the scope of the civil provisions of the Racketeering Influenced and Corrupt Organizations Act, pre-emption of state law and arbitration. Although the overall results were not as pro-business as those last term, the decisions again reflected an approach generally sympathetic to business concerns.
In Exxon Shipping Co. v. Baker, 128 S. Ct. 2605 (2008), the Court yet again addressed the issue of punitive damages, this time in the context of maritime law. The case involved a $2.5 billion punitive damages award against Exxon Mobil Corp. in an action brought by plaintiffs whose livelihoods had been affected by the 1989 Exxon Valdez oil spill. The Court faced the question as to whether the $2.5 billion punitive damages award was greater than maritime law allowed under the circumstances.
The majority decision, authored by Justice David H. Souter, noted that the case represented a significant departure from the Court's previous decisions addressing punitive damages awards, which had concerned review of state-court jury verdicts under constitutional due process standards. Rather, the present case involved the Court's review of a federal jury verdict under federal maritime jurisdiction. Thus, the Court analyzed "the desirability of regulating [punitive damages] as a common law remedy for which responsibility lies with this Court as a source of judge-made law in the absence of statute." Id. at 2626-27.
In deciding whether the punitive damages award "exceeds the bounds justified by the punitive damages goal of deterring reckless (or worse) behavior and the consequently heightened threat of harm" (id. at 2619-20), the Court relied on empirical data, which "suggest[ed] that in many instances a high ratio of punitive to compensatory damages is substantially greater than necessary to punish and deter." Id. at 2625. The Court seemed particularly troubled by "the stark unpredictability of punitive awards." Id. The empirical data revealed that the spread between high and low individual punitive damages awards was too great, with outlier cases subjecting defendants to "punitive damages that dwarf the corresponding compensatories" without reflecting "a generally accepted optimal level of penalty and deterrence." Id.
The Court eschewed reliance on "verbal formulations" imposed upon general jury instructions, finding that such instructions "can go just so far in promoting systemic consistency." Declining to place a "hard dollar cap" on punitive damages, the majority favored "pegging punitive to compensatory damages using a ratio or maximum multiple." Id. at 2628, 2629.
Based on the empirical data before it, and its desire to ensure predictability, the majority concluded that "a 1:1 ratio, which is above the median award, is a fair upper limit" for punitive damages in maritime cases. Id. at 2611. Applying that standard, the majority vacated the $2.5 billion punitive damages award and reduced it to the amount of compensatory damages awarded against Exxon.
Justice John Paul Stevens dissented. He believed that Congress, rather than the Court, should make the empirical judgments expressed in the majority's opinion. And, in Stevens' view, the fact that Congress had affirmatively chosen not to restrict the availability of punitive damages favored a policy of judicial restraint. He also felt that "unique features of maritime law" counseled against the limitations imposed by the majority. Id. at 2636. Justice Ruth Bader Ginsburg also dissented, echoing Stevens' belief that Congress was better equipped to handle this issue. Finally, Justice Stephen G. Breyer dissented, advocating against "the rigidity that an absolute fixed numerical ratio demands." Id. at 2640.
The Court rejected efforts to narrow civil RICO claims in Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131 (2008). There, the Court considered "whether a plaintiff asserting a RICO claim predicated on mail fraud must plead and prove that it relied on the defendant's alleged misrepresentations." Id. at 2134. Justice Clarence Thomas, writing for a unanimous Court, concluded that "a showing of first-party reliance is not required." Id.
The Court reached its conclusion through a textual analysis. It found nothing on the face of the relevant statutory provision, 18 U.S.C. 1962(c), that required a showing of reliance by a plaintiff in order to establish that a person has used the mail to execute a scheme to defraud and thus conducted the affairs of an enterprise through a pattern of racketeering activity. Nor did 18 U.S.C. 1964(c), which provides the right of action, contain such a requirement.
The Court also rejected several policy arguments in favor of imposing a first-party reliance requirement. The Court observed that mail fraud was not the same as common law fraud. Rather, it constituted a statutory offense unknown at common law and which did not require proof of reliance. At the same time, the Court cautioned that "none of this is to say that a RICO plaintiff who alleges injury 'by reason of' a pattern of mail fraud can prevail without showing that someone relied on the defendant's misrepresentations." Id. at 2144 (emphasis in original). "Accordingly, it may well be" that such a plaintiff "must establish at least third-party reliance." Id. However, a plaintiff need not show that it relied upon the alleged misrepresentations itself in pursuing a RICO claim predicated on mail fraud.
The Court also considered several cases involving pre-emption of state laws by federal statutes. Continuing the recent trend, in each case the Court ruled in favor of federal pre-emption. Although in one case the Court found pre-empted a state law inconsistent with a federal agency's regulatory judgment, more notably in two cases the Court refused to allow states to undermine Congress' mandate that certain business activity be governed by market forces.
In Rowe v. New Hampshire Motor Transport Assoc., 128 S. Ct. 989 (2008), the Court considered whether "a federal statute that prohibits States from enacting any law 'related to' a motor carrier 'price, route, or service' pre-empts two provisions of a Maine tobacco law, which regulate the delivery of tobacco to customers within the State." Id. at 993. The majority decision, authored by Breyer, determined that Congress intended to assure "transportation rates, routes, and services that reflect 'maximum reliance on competitive market forces.' " Id. at 995. The Court then examined whether the Maine statute conflicted with that goal.
Section 1555-C(3)(C) of the Maine act prohibited licensed tobacco retailers from employing a delivery service unless that service followed particular delivery procedures. The Court concluded that the statute established a "direct 'connection with' " motor carrier services and had a significant adverse effect on the objectives Congress sought to achieve. Id. The Maine statute would require carriers to offer services that the market did not provide and would freeze into place services carriers might wish to discontinue in the future. The statute thereby reflected "a State's direct substitution of its own governmental commands for 'competitive market forces' " and was pre-empted. Id. This was so even though the statute did not expressly regulate carriers, but instead their customers. The statute still required carriers to offer services that differed significantly from those the market might dictate in the absence of regulation. In the Court's view that was enough to warrant pre-emption.
Section 1555-D of the Maine act established a presumption effectively imposing civil liability on a carrier for failing to sufficiently examine every package to ensure that it was not sent by an unlicensed tobacco retailer. The Court found that this directly regulated a significant aspect of carriers' pickup and delivery services and created the type of state-mandated regulation that the federal statute pre-empted. Maine argued that its law helped prevent minors from obtaining cigarettes and "federal law does not pre-empt a State's efforts to protect its citizens' public health, particularly when those laws regulate so dangerous an activity as underage smoking." Id. The Court, however, found no public-health exception in the federal statute.
Chamber of Commerce v. Brown, 128 S. Ct. 2408 (2008), concerned a California statute prohibiting employers that received state funds from using the funds "to assist, promote, or deter union organizing." Id. at 2410. The Court addressed whether two provisions of the state law were pre-empted by the Taft-Hartley Act, which mandated that certain zones of labor activity be unregulated.
Writing for the majority, Stevens found the two sections pre-empted "because they regulate within 'a zone protected and reserved for market freedom.'" Id. at 2412. The Court held that "California's policy judgment that partisan employer speech necessarily 'interfere[s] with an employee's choice about whether to join or to be represented by a labor union,'" was the same policy judgment renounced by Congress. Id. at 2414. Breyer and Ginsburg dissented, opining that the California law did not impermissibly interfere with federal labor policy.
Finally, in Riegel v. Medtronic Inc., 128 S. Ct. 999 (2008), the Court considered whether the pre-emption clause of the Medical Device Amendments of 1976, 21 U.S.C. 360k, barred state common law claims challenging the safety and effectiveness of a medical device given premarket approval by the U.S. Food and Drug Administration. Under the MDA, no state may establish requirements "different from, or in addition to," the requirements of the MDA and that relate to the safety and effectiveness of the device. The majority decision, authored by Justice Antonin Scalia, concluded that state common law actions for negligence and strict liability impose "requirements" within the meaning of the MDA. The Court explained that state tort law that required a device to be safer, but less effective, than the model approved by the FDA disrupted the federal scheme no less than a state statute to the same effect and was pre-empted.
Stevens concurred only in the judgment, finding that the statutory text pre-empted state-law requirements that differed. Ginsburg dissented, opining that Congress did not intend the MDA "to effect a radical curtailment of state common-law suits seeking compensation for injuries caused by defectively designed or labeled medical devices." Id. at 1013.
The Court also considered a pair of arbitration cases. In Preston v. Ferrer, 128 S. Ct. 978 (2008), the Court addressed whether the Federal Arbitration Act overrides state statutes that refer certain disputes initially to an administrative agency. The parties had agreed by contract to arbitrate all disputes between them, but the defendant claimed that the contract was invalid under the California Talent Agencies Act, which required certain disputes to be resolved in the first instance by the California labor commissioner. Writing for the Court, Ginsburg held that "when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA." Id. at 981.
The Court held that the TAA conflicted with the FAA in two ways. First, it granted the labor commissioner exclusive jurisdiction to decide an issue the parties had agreed to arbitrate. Second, it imposed prerequisites to enforcement of an arbitration agreement not applicable to contracts generally. Thomas offered the lone dissent. He re-emphasized his belief that the FAA does not apply in state court.
In Hall Street Associates LLC v. Mattel Inc., 128 S. Ct. 1396 (2008), the Court considered whether the FAA's scope of judicial review of arbitration awards could be altered by contract. The parties had entered into an arbitration agreement allowing more searching judicial review of awards -- specifically, requiring them to be set aside when the arbitrator's factual findings were not supported by substantial evidence or when the arbitrator's legal conclusions were erroneous. The majority decision, authored by Souter, concluded that §§10 and 11 of the FAA provided the exclusive grounds for expedited vacatur and modification.
The majority held that this conclusion was compelled by a plain reading of the statutory text. Moreover, expanding the scope of judicial review would "rub too much against the grain of the § 9 language, where provision for judicial confirmation carries no hint of flexibility" except when "one of the 'prescribed' exceptions applies." Id. at 1405. Indeed, the Court noted, the FAA established "a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway." Id. Any other reading might render arbitration "merely a prelude to a more cumbersome and time-consuming judicial review process." Id.
Stevens and Justice Anthony M. Kennedy dissented, deeming the holding in conflict with the purpose and historical context of the FAA. These justices would have given effect to the parties' agreement to provide for expanded judicial review of arbitration awards. Breyer also dissented.
Adam H. Charnes is a partner in the Winston-Salem, N.C., office of Atlanta-based Kilpatrick Stockton, where he practices appellate, constitutional and complex commercial litigation. James J. Hefferan Jr. is an associate in that office.