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Following the appointments of Chief Justice John G. Roberts Jr. and Justice Samuel A. Alito Jr. to the Supreme Court, many court watchers predicted that the court would move in a more pro-business direction. The 2006 term proved these predictions emphatically correct. The U.S. Chamber of Commerce, for example, chalked up wins in 13 of the 16 cases in which it filed briefs on the merits. By any measure, those wins � some in cases decided by a 5-4 margin � included the cases most important for the business community. While it remains to be seen whether this degree of success be will repeated in future terms, it seems clear that the Roberts Court � at least as currently constituted � is significantly friendlier to business than was the Rehnquist Court. ‘Bell Atlantic v. Twombly’ In a decision that potentially has far-reaching implications for everyday practice in the federal courts, the court heightened the standard for notice pleading in complaints and thereby made it easier for defendants to obtain prediscovery dismissal for failure to state a claim. Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), involved a claim under � 1 of the Sherman Act, which prohibits a “contract, combination . . . , or conspiracy, in restraint of trade or commerce.” The complaint alleged that the defendants engaged in parallel conduct unfavorable to competition, but did not allege any facts suggesting the existence of an actual agreement necessary to trigger antitrust liability. The court, in an opinion by Justice David H. Souter, held that the complaint should be dismissed. To sufficiently allege an antitrust conspiracy through allegations of parallel conduct, the court explained that the complaint must contain “enough factual matter (taken as true) to suggest that an agreement was made.” Id. at 1965. “[A]n allegation of parallel conduct and a bare assertion of conspiracy will not suffice.” Id. at 1966. This holding � that a plaintiff cannot simply allege that an agreement was made, but must also plead facts in support of such allegation � potentially represents a sea change in pleadings practice in the federal courts. In its ruling, the court substantially narrowed the venerable precedent of Conley v. Gibson, 355 U.S. 41 (1957). Conley set forth the well-known standard, learned by generations of law students, that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” The court noted (as many a defendant has ruefully recognized) that a literal reading of Conley would allow “a wholly conclusory statement of claim” to survive a motion to dismiss “whenever the pleadings left open the possibility that a plaintiff might later establish some ‘set of [undisclosed] facts’ to support recovery.” Id. at 1968. The court expressed concern that, under such a standard, defendants might be faced with “the potentially enormous expense of discovery in cases with no ‘reasonably founded hope that the [discovery] process will reveal relevant evidence’ ” to support the claim. Thus, the majority held that “ after puzzling the profession for 50 years, this famous observation has earned its retirement.” Id. at 1967, 1969. Justice John Paul Stevens, joined by Justice Ruth Bader Ginsburg, dissented. They disagreed with the majority’s interment of Conley‘s “no set of facts” standard. The dissent noted that this test has been cited with approval in dozens of Supreme Court opinions and the justices in the majority were the first to express any doubt as to the Conley formulation. ‘Tellabs v. Makor’ The court also addressed pleading requirements in a second case, Tellabs Inc. v. Makor Issues & Rights Ltd., 127 S. Ct. 2499 (2007). Under the Private Securities Litigation Reform Act of 1995 (PSLRA), to establish liability for securities fraud, a private plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. 78u-4(b)(2). Resolving a circuit split on the meaning of “strong inference,” Ginsburg, writing for the majority, held that “[i]t does not suffice that a reasonable factfinder plausibly could infer from the complaint’s allegations the requisite state of mind.” Instead, “a court . . . must consider, not only inferences urged by the plaintiff, . . . but also competing inferences rationally drawn from the facts alleged.” Id. at 2504. Although the inference that the defendant acted with scienter need not be irrefutable, or even the most plausible of the competing inferences, alleging facts from which an inference of scienter could be drawn is not enough. The inference of scienter must be more than merely “reasonable” or “permissible” � “it must be cogent and compelling, thus strong in light of other explanations.” Id. at 2510. Therefore, the majority held that to satisfy the PSLRA’s “strong inference” standard, an inference of scienter must be “at least as compelling as any opposing inference of nonfraudulent intent.” Justice Antonin Scalia (joined by Alito) concurred in the judgment, but stated that the “normal meaning” of the term “strong inference” required that the inference of scienter be more plausible than the inference of innocence. Stevens offered the lone dissent, finding that a probable cause standard was more appropriate. Resale price maintenance Nearly a century ago, in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the court held it per se illegal under � 1 of the Sherman Act for a manufacturer to agree with its distributor to set the minimum price the distributor or retailer could charge for the manufacturer’s goods. In Leegin Creative Leather Products Inc. v. PSKS Inc., 127 S. Ct. 2705 (2007), the court overruled the per se rule against resale price maintenance and held that vertical price restraints should be judged under the rule of reason. Writing for a five-justice majority, Justice Anthony M. Kennedy noted that the economics literature was “replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” Id. at 2708. As a result, the majority determined that “it cannot be stated with any degree of confidence that resale price maintenance ‘always or almost always tend[s] to restrict competition and decrease output’ ” so as to justify a per se rule. Id. at 2709. Because a per se rule “ would proscribe a significant amount of procompetitive conduct, these agreements appear ill suited for per se condemnation.” Id. at 2718. The majority also considered whether Dr. Miles should be retained on the basis of stare decisis. But the majority discounted the force of stare decisis because the Sherman Act is a common law statute whose prohibitions “evolve to meet the dynamics of present economic conditions.” Id. at 2720. Furthermore, “[t]he Court’s treatment of vertical restraints has progressed away from Dr. Miles‘ strict approach” and the court had distanced itself from the opinion’s rationales. Id. at 2721. Indeed, the Dr. Miles rule made “little economic sense” when analyzed with the court’s other cases on vertical restraints. Reliance interests, too, did not require affirmance of Dr. Miles, as such interests “cannot justify an inefficient rule.” Id. at 2724. For all of these reasons, the majority concluded that Dr. Miles should be overruled. Justice Stephen G. Breyer, joined by Stevens, Souter, and Ginsburg, vigorously dissented. The dissent found no economic consensus that the benefits envisioned by the majority would occur. Moreover, according to the dissent, the legal profession, businesses and the public have relied upon this per se rule for nearly a century. The dissent opined that none of the “ordinary criteria for overruling an earlier case have been met.” Id. at 2731. The dissent cautioned that the majority’s decision “will likely raise the price of goods at retail and . . . create considerable legal turbulence as lower courts seek to develop workable principles.” Id. at 2737. Antitrust law pre-emption In Credit Suisse Securities (USA) LLC v. Billing, 127 S. Ct. 2383 (2007), buyers of newly issued securities filed an antitrust lawsuit against the underwriting firms that marketed and distributed the issues. The buyers claimed that the underwriters unlawfully agreed with one another that they would not sell shares of a popular new issue unless the buyers agreed to certain concessions favorable to the underwriters. Writing for the majority, Breyer concluded that, while federal securities law was silent with respect to antitrust, it “implicitly preclud[ed] the application of the antitrust laws to the conduct alleged.” Id. at 2387. The key concern for the majority was the “risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct.” Id. at 2392. First, the majority worried that conduct lawful under the securities laws would be proscribed by antitrust principles. Indeed, “antitrust courts are likely to make unusually serious mistakes” that could “threaten serious harm to the efficient functioning of the securities markets.” Id. at 2396. Moreover, the need for an antitrust lawsuit was “unusually small,” as the U.S. Securities and Exchange Commission already actively enforced rules and regulations forbidding the conduct in question. Finally, Congress had recently tightened the pleading requirements for securities actions, and allowing an antitrust suit based on the same conduct would “risk[] circumventing these requirements by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing.” Id. Justice Clarence Thomas authored the lone dissent. He concluded that “the Securities Act and the Securities Exchange Act contain broad saving clauses that preserve rights and remedies existing outside of the securities laws.” Id. at 2399. Therefore, he believed that the plaintiffs’ antitrust action could proceed without the need for reconciling any conflict between securities law and antitrust law. The court returned to the subject of punitive damages in Philip Morris USA v. Williams, 127 S. Ct. 1057 (2007). That case involved a $79.5 million state-court punitive damages award against a cigarette manufacturer, which was based in part upon the manufacturer’s alleged deceit and misrepresentations to other smokers beside the individual plaintiff in that litigation. A five-justice majority concluded that the punitive damages award amounted to a taking of the defendant’s property without due process. Writing for an ideologically diverse majority, Breyer concluded that the due process clause forbids a state to use punitive damages to punish a defendant for injury inflicted upon “strangers to the litigation,” particularly because a defendant lacks the ability to defend itself against such a charge. While harm to others may be used to show reprehensibility, “a jury may not go further than this and use a punitive damages verdict to punish a defendant directly on account of harms it is alleged to have visited on nonparties.” Id. at 1064. Stevens dissented, finding “no reason why an interest in punishing a wrongdoer ‘for harming persons who are not before the court,’ should not be taken into consideration when assessing the appropriate sanction for reprehensible conduct.” Id. at 1066. Thomas also dissented, reaffirming his belief that the Constitution simply does not constrain the size of punitive damages awards. Ginsburg, joined by Scalia and Thomas, also dissented, finding the state-court punitive damages award not inconsistent with the majority’s standard. Obviousness in patent law In KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007), the court considered the appropriate test for obviousness under � 103 of the Patent Act. Under � 103, if a court or patent examiner finds that the claimed subject matter is obvious, the claim is invalid. The U.S. Court of Appeals for the Federal Circuit had adopted the “teaching, suggestion, or motivation” (TSM) test for determining obviousness, pursuant to which a patent claim is obvious only if ” ‘some motivation or suggestion to combine the prior art teachings’ can be found in the prior art, the nature of the problem, or the knowledge of a person having ordinary skill in the art.” Writing for a unanimous court, Kennedy rejected the “rigid approach” of the TSM test as inconsistent with the court’s “expansive and flexible” approach for determining obviousness. The court determined that “[t]he diversity of inventive pursuits and of modern technology counsels against limiting the analysis” in the manner of the TSM test. “Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility.” Id. at 1741. The court observed that the results of ordinary innovation are not entitled to exclusive rights under patent law and “[w]ere it otherwise patents might stifle, rather than promote, the progress of useful arts.” Id. 1746. The test for obviousness, therefore, must not be too constrained so as to undermine the purposes behind patent law. The KSR case had divided the business community, and � depending on how it is implemented by the Federal Circuit and the U.S. Patent and Trademark Office � it could result in the issuance and judicial approval of dramatically fewer patents. Adam H. Charnes ([email protected]) 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. Charnes filed an amicus brief on behalf of the respondent in KSR International Co. v. Teleflex Inc., a case discussed in this article.

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