How might the rules for certifying huge classes of plaintiffs seeking billions of dollars in damages be changed by a pending U.S. Supreme Court case? Will our environment be affected for better or for worse when the high court decides whether judges have the power to regulate greenhouse gas emissions? How could an upcoming ruling on whether the First Amendment protects violent video games change our culture? Westlaw Journal editors have identified a number of key cases in civil litigation across the legal, business and cultural landscapes, and we present our look at the first three, below.
Court hears argument on jurisdiction over foreign tire makers
Attorneys for three overseas Goodyear companies and a lawyer for the families of American victims of a fatal bus accident in France have made their case before the U.S. Supreme Court on whether the tire makers should be subject to jurisdiction in the United States.
(Oral argument transcript: 2011 WL 87746)
Petitioners Goodyear Luxembourg Tires SA, Goodyear Lastikleri TAS of Turkey and Goodyear Dunlop Tires France SA say they should not face litigation in the United States simply because their products reached North Carolina, where the victims had lived, through the stream of commerce.
Two 13-year-old North Carolina boys were killed in the 2004 accident. Their families sued several defendants in state court, including the petitioners and their U.S. corporate affiliate, Goodyear Tire & Rubber Co.
The plaintiffs seek damages based on the design, manufacture, testing and sale of an allegedly defective tire.
The trial court refused to dismiss the case against the three foreign subsidiaries, finding general personal jurisdiction existed because they engaged in “continuous and systematic contacts with North Carolina” by conducting “substantial activity” in the state.
The North Carolina Court of Appeals affirmed, and the state's highest court declined to hear the case. The companies appealed to the U.S. Supreme Court.
The families' counsel, Collyn Peddie of Houston, told the high court Jan. 11 that the state trial court's decision is sound. “Ample evidence supports North Carolina's exercise of general jurisdiction over the petitioners under very well established general jurisdiction and due-process principles,” Peddie said.
But Justice Ruth Bader Ginsburg interjected, “What's troubling here is that the North Carolina court seems to be blending the two together, specific jurisdiction based on the claim arising in the forum, and general jurisdiction with a claim that has nothing to do with the forum, and its insertion of jurisdiction over any and all claims.”
Meir Feder of Jones Day in New York appeared for the companies. In presenting his case, Feder said “no personal jurisdiction argument should go by” without reference to International Shoe Co. v. Washington, 326 U.S. 310 (1945).
“International Shoe uses the language saying that you need continuous corporate operations within the state and says that these continuous corporate operations have to be so substantial and of such a nature as to justify this jurisdiction over conduct that is entirely unconnected to the state,” Feder told the justices.
In support of the tire companies, Justice Department attorney Benjamin J. Horwich said the families are turning the principal-agent concept on its head by implicitly suggesting that the U.S.-based Goodyear parent was “acting at the direction and control of the European companies as principals.”
In her time before the high court, Peddie was asked by Justice Ginsburg whether subsidiaries are subject to jurisdiction “wherever the parent is,” so long as the parent ships some of their products to buyers in the forum state.
Peddie said that was not the families' actual argument.
“Our position is that if you participate in this kind — not a general, but in this kind of very tightly controlled system, distribution and supply system, then there is general jurisdiction in the forum over the foreign subsidiary that participates in this,” she said.
In his rebuttal time, Feder said this purported distribution system is merely “normal coordination” among related companies and covered but a “tiny fraction of petitioners' business that involved tires going to the United States.”
Goodyear Luxembourg Tires SA v. Brown, No. 10-76.
Justices to weigh bankruptcy judge power in Anna Nicole Smith case
The lawyer representing the estate of Anna Nicole Smith told the U.S. Supreme Court during oral argument Jan. 18 that a bankruptcy judge in California had the authority to award the former Playboy model a huge portion of her late husband's fortune.
(Oral argument transcript: 2011 WL 145247)
Kent L. Richland said the 9th U.S. Circuit Court of Appeals erred when it ruled last March that the Bankruptcy Court lacked the power to issue a final judgment on Smith's inheritance from her late billionaire husband, J. Howard Marshall.
The ruling by the U.S. Bankruptcy Court for the Central District of California came on a counterclaim filed by Smith to a defamation charge brought in her Chapter 11 bankruptcy proceeding by Marshall's son Pierce.
Roy T. Englert Jr., who argued on behalf of Pierce's estate, countered that Smith had no right to bring a tort-based counterclaim in Bankruptcy Court.
Instead, Englert said, Pierce had the right to have an Article III court determine the counterclaim.
Article III of the U.S. Constitution created federal district courts to preside over cases involving, among other things, tort claims between citizens of different states. Bankruptcy courts were specially established under Article I and operate only as adjuncts to Article III courts.
While the Bankruptcy Code empowers bankruptcy judges to decide “core” bankruptcy issues, they may only make findings on “non-core” issues, which must be approved by a district court judge.
Smith, who died of a drug overdose in 2007, married Marshall in 1994.
The following year she sued Pierce in Texas Probate Court for tortious interference with a trust her husband allegedly had set up for her.
Pierce responded with a state court defamation lawsuit against Smith in Texas.
Marshall died in August 1995, leaving nothing to Smith. She then filed for bankruptcy protection in the Central District of California.
Pierce dropped his state court action. He filed a proof of claim for defamation damages in the Bankruptcy Court, as well as an adversary complaint alleging his claim was not dischargeable.
Smith responded with a counterclaim raising her same tortuous-interference allegations.
The Bankruptcy Court ultimately awarded Smith $475 million in 2000, and Pierce appealed the ruling to the U.S. District Court for the Central District of California.
With that appeal pending, the Texas court entered a final judgment in December 2001 entitling Pierce to his father's estate free of Smith's claims.
Three months later the federal District Court entered a judgment upholding the Bankruptcy Court's ruling, but reducing the award to $88.6 million.
Pierce died in June 2006.
The 9th Circuit ruled March 19, 2010, that Smith's counterclaim was a “non-core proceeding” in which the bankruptcy judge could only submit findings to the District Court for a final determination.
Because the Texas court had entered a final judgment prior to the District Court's decision, the state court ruling had preclusive effect over the later-entered federal court judgment for Smith, the appeals panel held.
The Supreme Court accepted an appeal by Howard K. Stern, Smith's former boyfriend and the executor of her estate.
Before the high court, Richland, Stern’s attorney, said that when Pierce filed the defamation claim in Bankruptcy Court, Smith had no choice but to bring her counterclaim in that forum. Because it was a compulsory counterclaim, she would have had to raise it in response to Pierce's claim or risk losing it.
Richland added that because the Bankruptcy Court could decide Pierce's adversary claim, deciding the counterclaim lessened any intrusion on Article III.
U.S. Deputy Solicitor General Malcolm L. Stewart, appearing for the government in support of Smith's estate, said that when a party like Pierce seeks affirmative relief from a bankruptcy court, he should be required to accept the consequences that ordinarily follow.
“As a matter of history and tradition, one of the consequences that follows from the assertion of an affirmative claim is subjection to counterclaims, and especially compulsory counterclaims,” Stewart said.
Justice Antonin Scalia responded, “That can't be right,” and questioned whether the government has the power to condition the filing of a proof of claim in bankruptcy court on the waiver of having an Article III judge decide a tort-based claim.
Englert, representing Pierce's estate, agreed that a creditor should not be forced to litigate a claim in bankruptcy court.
He added that, while it is broadly accepted that a bankruptcy court may adjudicate a state law claim brought by the creditor against the debtor, “it's an entirely different subject when the debtor tries to bring a claim against the creditor.”
Justice Ruth Bader Ginsburg seemed to suggest, however, that it would be appropriate, once the bankruptcy court has authority over a creditor's claim, to allow it to “clear up the whole matter.”
Englert responded that he believes there are tighter limits on assigning state law counterclaims to non-Article III judges.
He noted, however, that he is not claiming a bankruptcy judge could not hear the counterclaim. Rather, he said, the judge lacks the power to enter a final judgment, which is the job of the district court.
Stern v. Marshall, No. 10-179.
Supreme Court to decide if states can ban class-action waivers
In a case that could affect the future of class-action litigation, the U.S. Supreme Court heard oral argument Nov. 9 to determine if federal arbitration law preempts state laws that ban class-action waivers in contracts.
(Oral argument transcript: 2010 WL 4472577)
AT&T Wireless customers filed three suits in California federal court in 2005 and 2006, alleging the telecom fraudulently charged $30 in sales tax for phones it advertised as “free.”
Although the company tried to force the plaintiffs to arbitrate their claims, citing a class-action waiver in its contracts, a federal district court and appeals court both ruled the waiver was unenforceable under California law.
Since the Supreme Court decided to hear the case, consumer advocates, including Public Citizen, have speculated on the impact a decision in favor of AT&T could have on the future of class-action litigation.
“If you preclude class-wide relief, that will gut the state’s substantive consumer protection law because people will, in the context of small frauds, not be able to bring those cases,” Public Citizen attorney Deepak Gupta argued on the plaintiffs’ behalf.
Vincent and Liza Concepcion filed suit in 2006 in the U.S. District Court for the Southern District of California. The court consolidated the suit with two similar actions, all alleging AT&T deceived customers with fraudulent sales offers.
The free wireless phone that AT&T advertised as an incentive to sign a contract was not truly free, the suits contend, because the company charged sales tax on the phones’ retail value.
AT&T filed a motion to compel the plaintiffs to submit to individual arbitration because its contracts contain a clause barring class-wide arbitration or litigation.
U.S. District Judge Dana M. Sabraw found the waiver clause unconscionable and denied the company’s motion.
In October 2009 a three-judge panel of the 9th U.S. Circuit Court of Appeals affirmed the lower court’s decision, ruling that the contract clause effectively clears AT&T of liability in small-damage claims and is therefore unenforceable under California law.
The panel determined the issues in the AT&T suits were similar to those the court decided in Shroyer v. New Cingular Wireless Services, 498 F.3d 976 (9th Cir. 2007).
The Shroyer court said a clause that prevents consumers from filing class-wide actions insulates a company from liability because the usually small damage amounts keep most people from pursuing individual suits.
In Discover Bank v. Superior Court, 113 P. 3d 1100 (Cal. 2005), the California Supreme Court addressed the issue of class-action waivers, finding them unconscionable because they allow companies to insulate themselves from liability.
The state high court developed a three-part test to determine if a waiver is unconscionable:
<LI>• Is the agreement a contract of adhesion?
<LI>• Are disputes likely to involve small damage amounts?
<LI>• Has the party with superior bargaining position carried out a scheme to cheat a large number of consumers out of small sums of money?
Based on these standards, the 9th Circuit said AT&T’s waiver is unconscionable.
The contract is one of adhesion because consumers have no opportunity to negotiate terms. Further, the damages amounts involved are small, and AT&T knew it would deceive customers by charging tax on a product it had advertised as “free,” the court held.
Finally, the panel determined the Federal Arbitration Act, 9 U.S.C. § 1, does not prevent enforcement of California’s unconscionability laws.
The Shroyer court said the federal statute does not keep courts from applying state contract laws, including laws about class-action waivers.
The Arbitration Act, passed in 1925, requires dispute resolution via an arbitrator if both sides in a dispute have agreed in advance to do so.
AT&T appealed to the U.S. Supreme Court, contending the federal law preempts state law and makes class-action bans enforceable when combined with arbitration.
The high court agreed to hear the case May 24.
If the Supreme Court affirms AT&T’s right to include a class-action waiver in its consumer contracts and also finds the Arbitration Act preempts state law, the decision would contradict the California Supreme Court’s Discover Bank ruling that the waivers are unconscionable.
During oral argument, Justice Antonin Scalia asked rhetorically, “Are we going to tell the state of California what it has to consider unconscionable?”
The high court must decide if the Arbitration Act preempts state law and if California’s law applies only to arbitration agreements or to contracts in general.
AT&T attorney Andrew Pincus told the court that California’s ban on class-action waivers disproportionately affects arbitration.
Several justices disagreed.
Justices Elena Kagan, Ruth Bader Ginsburg and Stephen Breyer said the state law is neutral and applies equally to both arbitration and litigation.
“Those principles apply to litigation; they apply to arbitration,” Justice Breyer said. “So what’s the problem?”
AN OUTSIDE VIEW
In light of two recent U.S. Supreme Court rulings, attorney Joseph M. McLaughlin of the Simpson Thacher, who is not involved in the case, sees this lawsuit as a logical next step.
In Green Tree Financial v. Bazzle, 539 U.S. 444 (2003), the high court said class arbitration is permissible if the parties agree to it. In Stolt-Nielsen v. AnimalFeeds, 130 S. Ct. 1758 (Apr. 27, 2010), the court said class arbitration is not permissible unless parties affirmatively authorize it.
“In Concepcion, the court will address the final piece to the puzzle, namely whether an agreement to preclude class-wide dispute resolution is valid, and the proper balance between federal and state law in making that determination,” McLaughlin said in a statement.
AT&T Mobility LLC v. Concepcion, No. 09-893.