United States: Supreme Court Docket Report – 2005 Term, No. 5

Recently the Supreme Court granted certiorari in three cases of interest to the business community. Amicus briefs in support of the petitioners will be due on January 12, 2006, and amicus briefs in support of the respondents will be due on February 16, 2006.

1. Patent Law—Injunction As Appropriate Remedy Against Willful Infringement. U.S. patent law provides a panoply of remedies to redress patent infringement, including injunctive relief. 35 U.S.C. § 283. Section 283 specifies that courts "may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent * * *." Id. The Supreme Court granted certiorari in eBay, Inc. v. MercExchange, L.L.C., No. 05-130, to decide whether the Federal Circuit—the only circuit court to hear patent appeals—erred in setting forth a "general rule" that, absent exceptional circumstances, a permanent injunction must be issued after a finding of infringement.

Although the Federal Circuit made no mention of it, the trial court dubbed this a "highly unusual" case given the nature of the patent-holder—it purchases patents and "exists solely to license its patents or sue to enforce them * * * not to develop or commercialize them." 275 F. Supp. 2d 695, 714 (E.D. Va. 2003). The Federal Circuit held that the trial court erred in denying injunctive relief against willful infringers eBay, Inc. and Half.com, Inc. (petitioners in the Supreme Court). 401 F.3d 1323, 1338-40. The Federal Circuit reasoned that "[b]ecause the ‘right to exclude recognized in a patent is but the essence of the concept of property,’ the general rule is that a permanent injunction will issue once infringement and validity have been adjudged." Id. at 1338 (quoting Richardson v. Suzuki Motor Co., 868 F.2d 1226, 1246-47 (Fed. Cir. 1989)). In keeping with this stated "general rule," the Federal Circuit reversed the trial court’s denial of injunctive relief, finding that the trial court "did not provide any persuasive reason to believe this case is sufficiently exceptional to justify denial of a permanent injunction" (id. at 1339), and specifically rejecting each of the four reasons given by the trial court for denying injunctive relief.

In granting certiorari, the Supreme Court, sua sponte, asked the parties to address whether it should reconsider its precedents, including Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), on when it is appropriate to grant an injunction against a patent infringer. Continental Paper lends support to the Federal Circuit’s holding, given the strong language the Court used in holding that injunctive relief was available even to a patentee who did not actively use its invention. See 210 U.S. at 430 ("It hardly needs to be pointed out that the right [of a patentee] can only retain its attribute of exclusiveness by a prevention of its violation. Anything but prevention takes away the privilege which the law confers upon the patentee.") (emphasis added). Although it is possible to distinguish Continental Paper from the present case on its facts, the Court’s sua sponte request for briefing on whether that case should be reevaluated suggests that the Court may use this as an opportunity to revisit the basic legal landscape governing injunctive relief in patent cases.

Thus, this case is of interest to all manner of industries and companies that rely on patented technology. If affirmed, the Federal Court’s "general rule" will offer greater protection, and bargaining leverage, to patent holders—but will also significantly increase the danger of frivolous litigation brought to strong-arm settlements from businesses competing legitimately.

2. Civil RICO—"Reliance" Requirement for Mail and Wire Fraud Cases. RICO, the Racketeer Influenced and Corrupt Organizations Act, makes it a crime for "any person employed by or associated with any enterprise engaged in * * * interstate or foreign commerce, to conduct or participate * * * in the conduct of such enterprise’s affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). "Racketeering activity" is defined to include any act that would constitute federal mail or wire fraud. Id. § 1961(1)(B). Under section 1964(c) of the Act, "[a]ny person injured in his business or property by reason of a violation of section 1962" may bring a civil action under RICO. The Supreme Court granted certiorari in Anza v. Ideal Steel Supply Corp., No. 04-433, to consider whether a competitor can qualify as a "person injured in his business or property by reason of a violation" where it was not defrauded and did not itself rely on the alleged fraudulent behavior.

Respondent Ideal Steel Supply Corp. filed suit in the Southern District of New York, alleging that National Steel Supply, Inc., a competitor, did not collect sales tax to cash-paying customers, and that the repeated failure to report such sales to the New York State Department of Taxation and Finance constituted "fraudulent misrepresentations" to that agency. The district court dismissed the complaint on the ground that Ideal did not adequately plead that National’s actions were the proximate cause of Ideal’s damages—lost sales—under Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), because Ideal did not claim to have relied upon National’s misrepresentations. See 245 F. Supp. 2d 464, 468-69 (S.D.N.Y. 2003). The Second Circuit reversed on the ground that a plaintiff-competitor adequately pleads proximate cause, and has standing to pursue a civil RICO claim, when it alleges racketeering activity designed to "give the defendant a competitive advantage over the plaintiff." "This is so even where the scheme depended on fraudulent communications directed to and relied on by a third party rather than the plaintiff." 373 F.3d 263, 263.

This case will help define standing requirements and the breadth of liability under civil RICO, and thus will have important ramifications for many members of the business community. Plaintiffs hoping to win treble damages routinely allege civil RICO violations based on alleged mail and wire fraud. A holding that a competitor must itself rely on the alleged fraudulent behavior will likely decrease the frequency of civil RICO claims, and may also decrease the number of other suits filed by competitors (such as antitrust suits) in which RICO claims are tacked on. This case raises many similar issues to Bank of China v. NBM LLC, No. 03-1559—described in the June 27, 2005 Docket Report—in which certiorari was recently dismissed by agreement of the parties.

3. ERISA—Subrogation Claims. Section 502(a)(3) of the Employee Retirement Income Security Act (ERISA) allows an ERISA fiduciary to enjoin any act that violates the terms of an ERISA plan or to "obtain other appropriate equitable relief" to enforce the plan’s provisions. 29 U.S.C. § 1132(a)(3). The Supreme Court granted certiorari in Sereboff v. Mid Atlantic Medical Services Inc., No. 05-260, to determine whether an ERISA plan fiduciary may bring an action under Section 502(a)(3) against a plan participant for "appropriate equitable relief" to recover, pursuant to the plan’s subrogation provision, medical expenses advanced by the plan if the participant thereafter recovers damages from a third-party tortfeasor for those expenses and possesses such payments in an identifiable fund.

In the decision below, reported at 407 F.3d 212, plan participants were injured in an automobile accident, the plan paid medical benefits to them, the participants sued third party tort-feasors in a personal injury action and received a settlement, and the participants then declined to recognize the plan’s claim for reimbursement under its subrogation provision. The Fourth Circuit allowed the plan’s fiduciary to bring a subrogation claim under Section 502(a)(3), holding that such a claim is for "equitable relief" rather than for legal relief. The Fifth, Seventh, and Tenth Circuits support Sereboff’s reading of ERISA, but the Sixth and Ninth Circuits have construed the relief sought in such suits as "legal" in nature and, therefore, unavailable under Section 502(a)(3).

This question was left open by the Supreme Court in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002). There, settlement funds sought by the plan’s fiduciary were not in the possession of the plan participant and instead were placed in a trust to provide for her ongoing medical care. In holding that Section 502(a)(3) did not provide a cause of action for reimbursement, the Court concluded that the fiduciary was not seeking funds that were in the participant’s possession but rather was claiming "to impose personal liability for a contractual obligation to pay money-relief that was not typically available in equity." Id. at 210. In contrast, the funds sought in this case were disbursed to the plan participants and are maintained in an identifiable fund.

Given the substantial sums recouped by virtue of subrogation and other recovery mechanisms every year, and the limitations imposed by many states on the availability of subrogation actions for recoveries from personal injury claims, the Court’s decision in this case will be important to all pension plans, as well as to the insurance and health care industries.

Today and on November 14, 2005, the Supreme Court also invited the Solicitor General to file briefs expressing the views of the United States in the following cases of interest to the business community:

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., No. 05-381. In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), the Court held that an antitrust plaintiff alleging predatory selling must prove that the defendant (1) sold its product at a price level too low to cover its costs and (2) had a dangerous probability of recouping its losses once the scheme of predation succeeded. The question presented in this case is whether a plaintiff alleging predatory buying may, as the Ninth Circuit held, establish liability by persuading a jury that the defendant purchased more inputs "than it needed" or paid a higher price for those inputs "than necessary," so as "to prevent the Plaintiffs from obtaining the [inputs] they needed at a fair price"; or whether the plaintiff instead must satisfy the Brooke Group standard by showing that the defendant sold its products at prices that did not cover its costs and a dangerous probability of recoupment of those losses. Mayer Brown Rowe & Maw LLP represents the petitioner in this case.

Air Conditioning and Refrigeration Institute v. Energy Resources and Development Commission, No. 05-331. The question presented is whether the express preemption provisions in the federal energy statutes that regulate efficiency standards, testing, information disclosure and labeling laws preempt differing state regulations governing household appliances.

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