Wrap Up of United States Supreme Court’s 2013-2014 Term
With the close of the United States Supreme Court’s 2013-14 term, we offer this wrap-up of the Court’s term, focusing on the Court’s most important business and commercial cases (excluding intellectual property opinions):
Halliburton Co. v. Erica P. John Fund: The Court upheld the fraud-on-the-market theory first set forth in Basic Inc. v. Levinson, which allows investors to satisfy the reliance element of a section 10b-5 securities fraud claim by invoking a presumption that the price at which stock is purchased in an efficient market reflects all public, material information — including material misstatements. Basic’s presumption of reliance facilitates the certification of class actions by absolving investors of establishing individual reliance on alleged misstatements. In Halliburton, however, the Court threw defendants a bone in holding that the presumption can be rebutted at the class-certification stage by direct evidence that the alleged misrepresentation did not in fact affect the stock price. While such evidence has always been admissible during the merits stage to rebut the Basic presumption, the Court’s decision to allow it at the threshold class-certification stage is notable. The decision is not the game-changer it would have been had Basic been overturned, but it does give defendants another potential “out” — and will almost certainly drive up the cost of litigating securities class actions by virtue of the additional price impact work that economic consultants will be retained to furnish prior to class certification.
Fifth Third Bancorp v. Dudenhoeffer: The Court unanimously threw out the defense-friendly presumption of prudence that ERISA fiduciaries of employee stock ownership plans, or ESOPs, have used to avoid liability when the price of company stock in which they are invested drops. In finding that ESOP fiduciaries owe no lesser duty of prudence than any other ERISA fiduciary (except that they need not diversify the fund’s assets), the Court rolled back almost twenty years of precedents from the circuit courts, the bulk of which, beginning with the Third Circuit’s 1995 decision in Moench v. Robertson, conferred on ESOP fiduciaries a presumption that they acted consistently with ERISA by investing fund assets in employer stock. The practical impact of the opinion is likely to be far less radical, however, as the Court went on to observe that a fiduciary’s reliance on publicly available stock-price information is not typically imprudent. Nor is the allegation that an ESOP fiduciary failed to act on non-public information likely to survive a motion to dismiss since the duty of prudence neither requires a fiduciary to violate insider trading laws nor to sabotage the value of the stock it already holds by disclosing negative information that isn’t mandated by the securities laws. Fifth Third Bancorp’s bark, in other words, may well prove worse than its bite.
Lexmark Int’l, Inc. v. Static Control Components, Inc.: The Court adopted a broad approach to standing for false-advertising claims under the Lanham Act. Declining to inject the comparatively onerous standard for anti-trust standing into Lanham Act litigation and rejecting a bright-line requirement that a false-advertising plaintiff must be the defendant’s direct competitor, the Court held that, in addition to satisfying Article III standing requirements, a plaintiff asserting a false-advertising claim under the Lanham Act must allege: (1) “an injury to a commercial interest in reputation or sales” which (2) “flow(s) directly from the deception wrought by the defendant’s advertising.” Standing will therefore exist when a defendant’s advertising causes consumers to stop buying from the plaintiff, even if the plaintiff is not the defendant’s competitor. But consumer standing will not exist when a consumer buys a product that isn’t as advertised, because the harm is not to the consumer’s “reputation or sales.” Because the Lexmark standing test is broader than that employed by most circuits, the decision should make it easier to assert false-advertising claims under the Lanham Act.
POM Wonderful LLC v. Coca-Cola Co.: The Court held that the Food, Drug , and Cosmetic Act and the FDA’s implementing regulations relating to the labeling of food and drink do not displace private unfair competition claims by a competitor under the Lanham Act arising from false or misleading product labeling. Thus, POM was allowed to pursue a Lanham Act claim against Coca-Cola based on allegedly misleading representations made on the label of a Coca-Cola fruit juice product even though the representations were compliant with detailed and extensive FDA regulations concerning the labeling of fruit-juice products. The lesson for sellers of food and beverage products is that compliance with FDA labeling regulations will not insulate them from Lanham Act suits by competitors contending that their labels are false or misleading. Indeed, label disclosures that are required by the FDA may still expose one to claims under the Lanham Act under the POM decision, which may place some manufacturers between a rock and a hard place.
American Broadcasting Companies, Inc. v. Aereo, Inc.: The Court held that Aereo’s business of offering subscribers broadcast television programming over the Internet violates the Copyright Act of 1976, because Aereo “publicly performs” these copyrighted programs when it retransmits them online. Much like cable companies, Aereo “performs” by enhancing viewers’ ability to receive broadcast television signals through retransmission. And because Aereo’s retransmissions go to large numbers of paying subscribers who have no prior relationship to the works, it performs “publicly.” While a win for the television broadcasters who own the copyrights in many of the programs that Aereo streams, the decision is limited to its facts. Whether the Copyright Act will be interpreted to apply similarly to other emerging technologies like cloud computing and DVRs — and, equally importantly, to non-broadcast television content — the Court left unanswered.
Daimler AG v. Bauman: The Court continued to narrow the circumstances when a state, or federal courts within a state, can assert jurisdiction over a defendant when the claims against the defendant do not arise from the defendant’s activities within the state (so-called “general jurisdiction,” as opposed to “specific jurisdiction” which is based on the defendant’s in-state actions giving rise to the cause of action). Specifically, the Court held that California could not assert jurisdiction over a suit against a European business entity based on events occurring in Argentina when the European defendant’s only connection with California was that its subsidiary, which was neither incorporated nor headquartered in the state, conducted business there. Elaborating on its recent pronouncement in Goodyear Dunlop Tires Operations, S.A. v. Brown that general jurisdiction can be asserted only when the defendant is “essentially at home in the forum state,” the Court found that the European company was not “at home in California” — and thus not subject to its general jurisdiction — based simply on the fact that the company’s subsidiary sold products in the state. Instead, the Court continued to suggest that, except in the most exceptional cases, general jurisdiction may be asserted only by the states where the defendant is incorporated or headquartered. Daimler and Goodyear provide companies doing business in the United States with significant ability to limit the jurisdictions in which they may be forced to litigate.