United States: Supreme Court Docket Report - June 27, 2011

Originally published June 27, 2011

Keywords: Federal Meat Inspection Act, statute of limitations, patent denial, Hatch-Waxman, counterclaims, telecommunications, FCC regulation, indecency, telephone consumer protection

Today the Supreme Court granted certiorari in six cases of interest to the business community:

• Federal Meat Inspection Act—Preemption
• Securities Law—Section 16(b)—Statute of Limitations
• Patent Act—Introduction and Review of Evidence in Challenges to Patent Denial
• Hatch-Waxman Act—Counterclaims
• Telecommunications Act—Constitutionality of FCC Regulation of Indecency
• Telephone Consumer Protection Act—Federal Jurisdiction

Federal Meat Inspection Act—Preemption

Section 408 of the Federal Meat Inspection Act ("FMIA" or "Act") prohibits States from imposing "[r]equirements . . . with respect to premises, facilities and operations of any establishment at which inspection is provided . . . which are in addition to, or different than those made under" the Act. 21 U.S.C. § 678. Today the Supreme Court granted certiorari in National Meat Association v. Harris, No. 10-224, to decide whether the "presumption against preemption" requires a "narrow interpretation" of this express preemption provision.

The case is of course important to the meat industry, because it will affect the extent to which states can regulate federally inspected slaughterhouses. But the Court's decision could also affect businesses in the many other industries that are governed by a federal statute that expressly preempts state regulation.

The National Meat Association, the plaintiff below and petitioner in the Supreme Court, sought preliminary and permanent injunctive relief as well as a declaration barring the application of California Penal Code § 599f to federally inspected swine slaughterhouses in California. That provision requires that all non-ambulatory livestock be immediately euthanized and criminalizes any violation. Citing the Court's decision in Jones v. Rath Packing Co., 430 U.S. 519 (1977), petitioner alleged that the FMIA regulates all aspects of federally inspected slaughterhouse operations, and that because California's immediate-euthanization requirement differs from the Act's requirements for observing and inspecting non-ambulatory swine, the Act preempts California Penal Code § 599f.

The district court agreed, concluding that § 599f was preempted because it imposed requirements that were different from and in addition to those imposed by the FMIA. The Ninth Circuit reversed, invoking a "presumption against preemption" that, according to the court, required a "narrow interpretation" of the Act's express preemption provision. 599 F.3d 1093, 1098. Applying that interpretive principle, the Ninth Circuit concluded that section 599f was not preempted because, in the court's view, it regulates "the kind of animal" that may be slaughtered rather than the "premises, facilities, [or] operations" of slaughterhouses. Id. at 1098-99.

Absent extensions, which are likely, amicus briefs in support of the petitioner (or neither party) will be due on August 18, 2011, and amicus briefs in support of the respondents will be due on September 19, 2011.  

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Securities Law—Section 16(b)—Statute of Limitations

Section 16(b) of the Securities Exchange Act of 1934 expressly prohibits so-called "short-swing" transactions, defined as "a coupled purchase-and-sale, or sale-and-purchase, completed within six months" by a statutorily defined "insider." 15 U.S.C. § 78p(b). To facilitate the identification of improper trades, Section 16(a) requires certain insiders to report transactions involving the relevant securities. Id.§ 78p(a). Section 16(b) allows a shareholder derivative suit to force an insider to disgorge the profits of an improper short-swing transaction, but states that "no such suit shall be brought more than two years after the date such profit was realized." Id. § 78p(b). The Supreme Court granted certiorari today in Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, to decide whether the two-year statute of limitations governing suits under Section 16 (b) is tolled by the failure to report the relevant transaction under Section 16(a) and, if so, whether tolling ends as a result of the receipt of actual notice of the prohibited transaction.

In 2007, Simmonds sued eleven underwriters, raising claims relating to dozens of IPOs that occurred between 1998 and 2000. According to the complaint, the underwriters violated Section 16(b) by offering their investment-bank clients access to "hot" IPOs in exchange for additional business or kickbacks from those clients. When the underwriters moved to dismiss the suit as barred by Section 16(b)'s two-year statute of limitations, Simmonds argued that the limitations period was tolled because the underwriters, who disputed that they were "insiders" for purposes of Section 16(a), never reported their transactions under that provision. The district court dismissed the suit, concluding that the shareholders had notice of the facts underlying the claims and that therefore Simmonds was not entitled to tolling.

The Ninth Circuit reversed, applying the bright-line rule adopted in Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), that Section 16(b)'s statute of limitations is tolled until the challenged transaction is reported under Section 16(a). Judge Milan Smith, who authored the panel's opinion, filed a special concurrence noting his disagreement with Whittaker. Invoking Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360 n.5 (1991), in which the Supreme Court described Section 16(b)'s two-year period as a "statute of repose," he explained that he "would hold that Section 16(b) suits may not be brought more than two years after the short-swing trades take place," without any possibility of tolling. 638 F.3d 1072, 1100-01 (concurring opinion). He also noted that Whittaker conflicts with Litzler v. CC Investments, L.D.C., 362 F.3d 203 (2d Cir. 2004), in which the Second Circuit held that a plaintiff's actual notice of the underlying facts ends the tolling period.

In their petition for certiorari, the underwriters argued that Section 16(b)'s statute of limitations should not be subject to any tolling. In the alternative, they argued that the Second Circuit's "actual notice" rule should be applied and that the suit should be dismissed under this test. Simmonds argued that tolling is necessary to prevent insiders from avoiding Section 16(b) liability by failing to file Section 16(a) reports. She further argued that the underwriters had failed to show "actual notice" satisfying the Second Circuit's test.

Because Section 16(b) applies generally to securities trades by corporate insiders, the Credit Suisse decision could have broad implications for the business community.

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 18, 2011, and amicus briefs in support of the respondent will be due on September 19, 2011.

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Patent Act—Introduction and Review of Evidence in Challenges to Patent Denial

When the United States Patent and Trademark Office ("PTO") denies an application for a patent, the applicant may seek judicial relief in two different ways. The applicant may either seek review directly in the Federal Circuit or file a civil action against the PTO in federal district court, pursuant to 35 U.S.C. §  145. If an applicant files a civil action in district court, he or she may offer evidence not submitted to the PTO. Today, in Kappos v. Hyatt (No. 10-1219), the Supreme Court granted certiorari to consider the scope of evidence that may be introduced and the standard to be applied when reviewing the PTO's decision in light of that new evidence.

In the decision below, the Federal Circuit explained that a Section 145 action is no "different from a customary civil action" and that Section 145 does not establish "unique rules of evidence" that "limit an applicant's ability to introduce new evidence before the district court." 625 F.3d at 1327. Canvassing the pre-Patent Act history, the court concluded that in Section 145 proceedings, "Congress intended that applicants would be free to introduce new evidence . . . subject only to the rules applicable to all civil actions." Id. And new evidence, the court held, is subject to de novo review.

In its petition for certiorari, the United States contended that new evidence in Section 145 proceedings should be limited to material that could not reasonably have been presented to the PTO. The government grounded this argument in principles of agency exhaustion as well as pre-1952 practice, which the government contends was adopted by the Patent Act. The government further argued that when reviewing the PTO's decision to deny a patent application, courts should apply a deferential—rather than de novo—standard of review.

In Microsoft Corp. v. i4i Ltd. Partnership, No. 10-290, the Supreme Court recently confirmed that a party challenging the validity of a patent in the course of an infringement suit must establish invalidity by clear and convincing evidence, even when the evidence supporting a claim of invalidity was not presented to the PTO during patent prosecution. Following Microsoft, the government filed a supplemental brief, arguing that the Federal Circuit's rule with respect to Section 145 "create[s] an unjustified asymmetry between judicial review of patent grants and review of patent denials." U.S. Supp. Br. 3. The government urged review to "correct that disparity." Id. at 4.

Hyatt thus will delineate the scope of Section 145 actions with respect to both admissible evidence and the standard of review.

Absent extensions, which are likely, amicus briefs in support of the petitioner (or neither party) will be due on August 18, 2011, and amicus briefs in support of the respondent will be due on September 19, 2011.  

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Hatch-Waxman Act—Counterclaims

Under the Hatch-Waxman Act, there are two ways in which manufacturers may seek FDA approval to market generic versions of patented drugs. The first, a "Paragraph IV certification," requires the generic manufacturer to certify that the patent is invalid or will not be infringed by the use of the drug. That certification is treated as a constructive act of infringement, which allows the brand owner to sue the generic manufacturer. The second method, a "Section viii statement," allows the generic maker to propose a "carve-out" label. Those labels list only those FDA-approved uses for the drug that are not covered by the patent. Rather than interpret patents itself, the FDA, which evaluates proposed drug labels, relies on the patent holder to identify which "use codes" are patented. The Hatch-Waxman Act allows a manufacturer of generic drugs to challenge those use codes if sued for infringement by filing a counterclaim seeking an order "requiring the [patent] holder to correct or delete the patent information submitted by the holder" to the FDA. 21 U.S.C. § 355(j)(5)(C)(ii)(I). Today the Supreme Court granted certiorari in Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, No. 10-844, to clarify the scope of generic makers' right to counterclaim. The Court's decision will be important to manufacturers of both name-brand and generic drugs.

Caraco is a generic manufacturer that sought FDA approval to market the diabetes drug repaglinide, on which Novo Nordisk holds a patent. It first filed a Paragraph IV certification, which prompted an infringement suit by Novo Nordisk. Caraco then filed a Section viii statement, which carved out certain uses of the drug from its proposed label. Based on the use code originally submitted by Novo Nordisk, the FDA approved the carve-out label. Novo Nordisk then revised its statement, including a less specific description of the patented use. That revision led the FDA to revisit its earlier decision and reject Caraco's proposed label, finding that the proposed uses were covered by the patent after all.

The district court in the infringement suit ordered Novo Nordisk to restore its original use code. On interlocutory appeal (while the trial on patent validity and enforceability was stayed), a divided panel of the Federal Circuit reversed, holding that the counterclaim provisions of Hatch-Waxman are available only if the patent "does not claim any approved methods of using the drug," not when the use code is merely overbroad. 601 F.3d 1359, 1365. The court also held that the counterclaim may seek the correction only of "an erroneous patent number or expiration date," not an erroneous "use code narrative." Id. at 1366.

Absent extensions, which are likely, amicus briefs in support of the petitioners (or neither party) will be due on August 18, 2011, and amicus briefs in support of the respondents will be due on September 19, 2011.

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Telecommunications Act—Constitutionality of FCC Regulation of Indecency

Federal law makes it unlawful to "utter[] any obscene, indecent, or profane language by means of radio communication" (18 U.S.C. § 1464) and directs that "[t]he Federal Communications Commission shall promulgate regulations to prohibit the broadcasting of indecent programming" during specified hours of the day (Public Telecommunications Act § 16(a), Pub. L. No. 102-356, 106 Stat. 954 (1992)). The FCC has implemented those statutory provisions by adopting regulations that prohibit broadcast licensees from airing "any material which is obscene" or, "on any day between 6 a.m. and 10 p.m.[,] any material which is indecent." 47 C.F.R. § 73.3999. In enforcing these regulations, the FCC has declined "to construct a definitive list" of indecent words or content, and instead defines indecency by "reference to the specific context" of a particular broadcast. In re Infinity Broad. Corp., 3 F.C.C.R. 930, 930 ¶ 14 (1987). The Supreme Court granted certiorari today in FCC v. Fox Television Stations, Inc., No. 10-1293, to determine whether this context-based indecency-enforcement regime violates the First or Fifth Amendment to the United States Constitution.

This is the second time this consolidated case has reached the Supreme Court. In earlier proceedings, the Court determined that the FCC had not acted arbitrarily and capriciously in ruling that isolated uses of expletives during live awards shows were per se "indecent," but remanded to the Second Circuit for that court's determination whether the FCC's indecency standard was unconstitutional. FCC v. Fox Television Stations, Inc., 129 S. Ct. 1800 (2009). On remand, the Second Circuit found that it was, holding that the agency's contextual-indecency policy was not only unconstitutional as applied to the awards-show expletives at issue here, but impermissibly vague in its entirety. The Supreme Court agreed today to review that decision.

The case is of clear and direct importance to all broadcasters regulated by the FCC. The Court's decision could also prove significant to other regulated industries by clarifyin when a regulation, particularly one that targets communications, is unconstitutionally vague.

Absent extensions, amicus briefs in support of the FCC will be due on August 18, 2011, and amicus briefs in support of the respondents will be due on September 17, 2011.

Absent extensions, which are likely, amicus briefs in support of the petitioners (or neither party) will be due on August 18, 2011, and amicus briefs in support of the respondents will be due on September 19, 2011.  

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Telephone Consumer Protection Act—Federal Jurisdiction

The Telephone Consumer Protection Act ("TCPA" or "the Act"), which regulates the conduct of telemarketers, contains distinct provisions for enforcement of its prohibitions by private parties and state attorneys general. Section 227(b)(3) of the Act provides that "[a] person or entity may, if otherwise permitted by the laws . . . of a State, bring [an action] in an appropriate court of that State." A separate provision authorizes state attorneys general to bring civil actions for damages and injunctive relief, over which the federal courts "shall have exclusive jurisdiction." § 227(f)(1), (2). Today the Supreme Court granted certiorari in Mims v. Arrow Financial Services, LLC, No. 10-1195, to address whether Congress divested district courts of federal-question jurisdiction over private TCPA actions.

Petitioner, the plaintiff below, sued respondent Arrow Financial in federal district court, alleging violations of the TCPA. The district court dismissed his complaint for lack of subject-matter jurisdiction. The Eleventh Circuit summarily affirmed in an unpublished per curiam opinion, citing its prior decision in Nicholson v. Hooters of Augusta, Inc., 136 F.3d 1287, modified, 140 F.3d 898 (11th Cir. 1998). In Nicholson, the court had held that "Congress granted state courts exclusive jurisdiction over private actions under the Act," and therefore "federal courts lack subject matter jurisdiction [over] private actions under the Act." Five other courts of appeals—the Second, Third, Fourth, Fifth, and Ninth—have reached the same conclusion, while the Sixth and Seventh Circuits have rejected it.

The Court's ultimate decision will certainly be of interest to companies that engage in telephone solicitations. It may also be of interest to businesses in other industries if they are regulated by federal statutes in which Congress explicitly grants state courts jurisdiction.

Absent extensions, which are likely, amicus briefs in support of the petitioner (or neither party) will be due on August 18, 2011, and amicus briefs in support of the respondent will be due on September 19, 2011.  

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