Obama 10th Justice Kagan Subverts Supreme Court Business Tilt
By Greg Stohr
Jan. 11 (Bloomberg) -- U.S. Solicitor General Elena Kagan steps to the mahogany lectern at the Supreme Court in September and plunges into a controversy on the side of shareholder rights.
Making her first argument as the federal government’s high court advocate, Kagan urges the nine justices to keep rules in place barring corporations from buying political campaign ads. Kagan contends that the restrictions protect investors who disagree with a company’s political positions.
“It’s very difficult for individual shareholders to be able to monitor what each company they own assets in is doing,” Kagan, a former Harvard Law School dean, tells the justices.
The argument strikes what has become a theme for Kagan, 49, an appointee of President Barack Obama who is using her office’s clout to battle against business groups and for shareholders, Bloomberg Markets reports in its February 2010 issue. While President George W. Bush’s solicitor general opposed investors in five straight high court cases, Kagan has advocated for shareholder lawsuits twice in the court’s current term.
Rulings in Kagan’s favor might lead to additional costly lawsuits against companies. For example, Wyeth, now part of Pfizer Inc., has had to set aside more than $21 billion since 1999 to resolve 200,000 personal-injury claims over the diet- drug combination fen-phen.
Mutual Fund Case
While many cases don’t affect a company’s stock, some rulings send shares tumbling. Sherwin-Williams Co. shares fell 18 percent after a 2006 verdict that might have forced lead- paint makers to spend more than $2 billion to clean contaminated buildings. The stock rose 6 percent on the day a court overturned the verdict in 2008.
In a case against Merck & Co., Kagan’s office is asking the Supreme Court to let shareholders wait longer to sue companies for securities fraud. The justices are considering whether to allow a lawsuit by investors who say the drugmaker deceived them about the risks posed by its Vioxx painkiller.
Kagan and Securities and Exchange Commission lawyers are also urging the court to ease the way for investors to sue mutual fund managers over their fees. The fund industry aims to avert more lawsuits by the 90 million investors who together hold $11 trillion in U.S. mutual funds.
Solicitor General’s Clout
“Because it goes to so central a question of the economics of the business, it may be the most significant Supreme Court decision in the history of our industry,” says Paul Schott Stevens, president of the Washington-based Investment Company Institute, which represents mutual funds.
The solicitor general, the fourth-ranked official in the Justice Department, is known as the 10th justice because of the position’s influence at the high court. Congress established the office in 1870 to help the federal government speak with a single voice in the courtroom. The solicitor general is also a counselor to the justices. At least 10 times a year, they seek the office’s advice on a pending appeal, asking whether consideration of the case would promote clarity in the law.
In return, the court affords the two dozen lawyers in the office special privileges, granting virtually every request for argument time. Over the past half century, the office has won three-quarters of its high court cases.
That influence puts Kagan in a position to push some of the administration’s policy views into law. Obama, who interviewed Kagan for the high court seat that went to Sonia Sotomayor in May, is using government agencies to broaden consumer and shareholder rights, strengthen environmental protections and make companies more vulnerable to lawsuits.
Obama Influence
“An Obama presidency is going to make a huge difference,” says Theodore Olson, a Washington lawyer at Gibson Dunn & Crutcher LLP who served as Bush’s solicitor general from 2001 to 2004. “Things might be tougher for the business community at the Supreme Court in the coming years.” Kagan declined a request for an interview.
In pressing its agenda, the Obama administration is clashing with the Washington-based U.S. Chamber of Commerce, the world’s biggest business lobby. While the White House duels with the chamber over health care, financial and climate change regulation, Kagan and the lobbying group are regular foes in court. She and the chamber are opposing each other in 9 of the 10 cases in which both had taken positions as of Jan. 8, including the campaign finance and mutual fund and Merck shareholder cases.
Chamber of Commerce
In one investment case, Kagan is siding with the chamber. The justices will review a lower court decision that said a suit by Australian stockholders of Melbourne-based National Australia Bank Ltd. was beyond the jurisdiction of American courts, even though the case stemmed from allegedly fraudulent accounting by a U.S. subsidiary. Kagan said in court papers that the link between the subsidiary’s actions and the shareholders’ alleged injury was too tenuous to warrant letting the suit go forward in a U.S. court.
The chamber’s litigation unit, set up in 1977, may be second only to the solicitor general’s office in its influence at the Supreme Court. The group’s lawyers coordinate company arguments in high court cases, hold preargument practice sessions and file briefs on the most-pressing legal issues facing businesses.
“The quality of advocacy on the business side has improved light years in the last 30 years,” says Carter Phillips, a Washington lawyer at Sidley Austin LLP who has argued 11 cases at the high court in the past two full terms. “A big part of that is the chamber.”
Thurgood Marshall
In battling the chamber, Kagan brings a record in politics and academia of pragmatic dealmaking and fairness, her former colleagues say. A magna cum laude graduate of Harvard Law in 1986, Kagan went on to clerk for Thurgood Marshall, a civil rights pioneer who’d become the Supreme Court’s first black justice. She worked as a researcher for Democrat Michael Dukakis’s unsuccessful presidential campaign in 1988 before spending two years as a litigator at Williams & Connolly LLP, a corporate law firm in Washington.
Kagan took a teaching job in 1991 at the University of Chicago Law School, where she helped recruit fellow Harvard Law alum Obama to the faculty. She took a summer off from her duties to advise then-Senator Joe Biden, now Obama’s vice president, on the Senate’s consideration of Ruth Bader Ginsburg’s Supreme Court nomination in 1993.
Harvard Law Dean
In 1995, Kagan accepted a post in President Bill Clinton’s White House, where she earned a reputation for forging compromises and breaking logjams. As a domestic policy adviser for Clinton and lead negotiator for an anti-smoking proposal to let the Food and Drug Administration regulate tobacco, she found common ground between the FDA and Republican Senator John McCain of Arizona, who wanted to restrict the agency’s authority. The 1998 agreement, which made it to the Senate floor before being defeated, would have given the agency the same power over tobacco that it has over drugs and medical devices.
“She was one of the most effective people in government that I worked with,” says William Schultz, then the FDA’s chief negotiator and now a lawyer at Zuckerman Spaeder LLP in Washington.
In 1999, Kagan returned to Harvard Law as a professor. Four years later, she became the school’s first woman dean. Over the next six years, she both riled and pleased conservatives.
Backing a Conservative
In 2005, with the military wanting to recruit students on campus, Kagan signed a friend-of-the-court brief arguing that law schools should be allowed to restrict access of recruiters because of the federal ban on openly gay service members. The Supreme Court disagreed in 2006, forcing law schools to accept recruiters to ensure their universities wouldn’t lose federal grants.
At Harvard, Kagan also fought off liberal faculty members who tried to block the hiring of Jack Goldsmith, a former White House lawyer under Bush.
“She just really very strongly said that this kind of political thing was out of line,” says Charles Fried, a Harvard Law professor who served as President Ronald Reagan’s solicitor general from 1985 to 1989.
In 2009, Obama asked Kagan to return to Washington to serve as his solicitor general. She won Senate confirmation 61 to 31 last March, gaining seven Republican votes in becoming the first woman to hold the post.
Kagan took office during a rough patch for big business at the Supreme Court under John Roberts, the chief justice since 2005. The nine-month term that ended in June marked the first time in more than a decade that the chamber failed to win a majority of its cases before the court.
Thomas and Scalia
The court cleared the way for hundreds of patient suits against drugmakers, ruling that Congress didn’t intend for the FDA’s approval of a treatment to shield companies from product- liability claims about the adequacy of their safety warnings. The court also decided that a federal cigarette-labeling law doesn’t preclude suits accusing tobacco companies of deceiving consumers with “light” and “low tar” labels.
The court’s conservative wing, particularly Justices Clarence Thomas and Antonin Scalia, was partly responsible for the shift against companies during the 2008 to 2009 term. Thomas, for whom states’ rights often trump the pragmatic concerns of businesses, joined the court’s liberals in the 6 to 3 decision against drug companies. Thomas said the court should never read federal laws to preempt tougher state rules without an express directive from Congress.
Sotomayor
Scalia, who favors strict adherence to the words of statutes no matter the consequences, wrote the court’s 5 to 4 decision letting states enforce laws banning discrimination in lending against nationally chartered banks.
“At least some of the conservatives on this court are not business conservatives,” Sidley Austin’s Phillips says.
Obama’s first appointee to the court, Sotomayor, 55, adds a new cause for corporate concern because of her mixed record in 17 years as a trial and appellate judge. Her decisions suggest she will be more willing than the justice she succeeded, David Souter, to allow large punitive damage awards. As a trial judge in 1999, she upheld a $1.25 million punitive award to the victim of on-the-job sex discrimination and retaliation.
“For every case she ruled in favor of an employer, there was a countervailing one in favor of the employee,” says Robin Conrad, head of the Chamber of Commerce’s litigation center.
In the current term as of early December, about half of the 70 cases before the court are business related. In the mutual fund case, three investors are suing Chicago-based Harris Associates LP, saying the fees charged by its Oakmark funds are more than twice what the firm gets from pension plans and other institutional clients.
Managers’ Fees
The case turns on the Investment Company Act of 1940, which imposes a “fiduciary duty” on fund managers with regard to their compensation. The law aims to protect investors from the conflict of interest that occurs when an investment adviser helps select the fund’s directors, who then approve the adviser’s fees.
The Supreme Court is considering whether managers violate that duty -- opening themselves to suits -- by charging mutual fund investors more than institutional clients for similar services.
Harris, backed by the chamber, contends that the comparison is inapt because funds don’t offer as many services to institutional clients. Harris argues that the marketplace works with minimal judicial oversight because investors tend to move away from funds that impose high fees without also offering superior performance.
Vioxx Case
Kagan opposes Harris, saying Congress enacted the law because the marketplace wasn’t protecting investors from the cozy relationships between fund advisers and their boards.
The court is using the Vioxx case to clarify the deadlines for investors to file fraud lawsuits. A federal appeals court said shareholders could sue Merck, which pulled Vioxx from the market in 2004 because of links to heart attacks and strokes.
Merck, backed by the chamber, denies it misled the public about Vioxx and argues that shareholders waited too long to file their complaint, missing the two-year window that federal law gives investors to sue. The drugmaker says the window opened in September 2001, when federal regulators said the company was underplaying potential heart risks associated with Vioxx. The first investor suit was filed more than two years later, in November 2003.
More Lawsuits
In her brief backing investors, Kagan said the two-year period shouldn’t begin until a shareholder either possesses, or has ready access to, sufficient information to file a lawsuit. A ruling against Merck could make companies more vulnerable to lawsuits, letting shareholder lawyers delay filing claims until they have stronger evidence of misconduct.
As the Supreme Court issues scores of rulings in 2010, Kagan’s office will likely win most of its cases, if history is a guide. That means drugmakers, financial-services firms and other companies, already facing the prospect of more regulation from the Obama administration, may have to brace themselves for a flurry of new lawsuits in years to come. |
