Supreme Court Update: Matrixx Initiatives, Inc. v. Siracusano (09-1156), Kasten v. Saint-Gobain Performance Plastics Corp. (09-834), Connick v. Thompson (09-571), Felkner v. Jackson (10-797), Astra USA, Inc. v. Santa Clara County (09-1273) and Order List

April 4, 2011 Supreme Court Update


Greetings, Court fans!

We're back with a number of recent decisions: Matrixx Initiatives, Inc. v. Siracusano (09-1156), finding that the failure to disclose adverse event data relating to a drug can form the basis for securities law liability even if the data does not meet the threshold for statistical significance; Kasten v. Saint-Gobain Performance Plastics Corp. (09-834), holding that oral complaints of violations of the Fair Labor Standards Act are sufficient to trigger protection under the Act's antiretaliation provision; Connick v. Thompson (09-571), finding that municipal liability for failure to train under §1983 may not be based on a single Brady violation, Felkner v. Jackson (10-797), a short per curium decision in a habeas case involving a Batson challenge; and Astra USA, Inc. v. Santa Clara County (09-1273), rejecting private suits to enforce drug price ceilings under Section 340B of the Public Health Services Act.

In a decision that may cause heart burn for pharmaceutical executives, Matrixx Initiatives, Inc. v. Siracusano (09-1156), the Court declined to create a bright line rule as to what does and does not constitute a "material omission" for purposes of liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 17a-5. Plaintiffs claimed that Matrixx violated the Act and Rule by failing to disclose adverse event reports linking use of its leading product, Zicam nasal swabs, to anosmia (loss of smell). Zicam successfully argued in the district court that the adverse event data could not constitute a material omission because the number of reports was not statistically significant. The Ninth Circuit reversed. In a rare victory for the Ninth, the Court unanimously agreed, in an opinion authored by Justice Sotoymayor (in which Kagan did participate).

Here, Zicam accounted for 70% of Matrixx's sales, so its success or failure was essential to the company. Matrixx received a number of credible reports from physicians reporting patients suffering loss of smell after using the product, including a patient that felt a burning sensation and then immediately lost his sense of smell. Physicians also directed Matrixx to prior research showing a link between intranasal application of zinc and loss of smell. One doctor even presented a poster at a scientific meeting on the link between Zicam and anosmia. Nevertheless, having conducted no studies on its own to dispute the link, Matrixx made affirmative statements that it was "poised for growth," anticipated large revenue increases, and that the "safety and efficacy of zinc gluconate . . . have been well established." Matrixx did disclose in SEC filings that product liability actions could materially affect Matrixx's product branding and goodwill, but did not disclose that two plaintiffs had already filed such suits. Given the totality of the circumstances, the Court concluded that a reasonable investor would have found the adverse event reports material in light of the affirmative representations made by Matrixx. Thus, the Court declined to draw an artificial line requiring that adverse event data be statistically significant before it may constitute a material omission. As the Court explained, statistical significance is not the only way of showing a causal relationship and statistically significant findings may not be possible where adverse events are serious and the benefits of a medication are not sufficient to warrant additional wide-scale testing. The FDA routinely makes regulatory decisions based on data that is not statistically significant. While adverse event data that is not statistically significant may often be immaterial, the facts and circumstances of each case must guide that determination.

Next in Kasten v. Saint-Gobain Performance Plastics Corp. (09-834), a 6-2 decision (in which Justice Kagan did not participate), the Court examined the antiretaliation provision of the Fair Labor Standards Act of 1938 ("FLSA"), which prohibits discrimination against any employee who has "filed any complaint or instituted or caused to be instituted any proceeding" under FLSA. The question for the Court was whether an oral complaint to an employer constituted "filing a complaint" as required for protection. In an opinion led by Justice Breyer, who was joined by the Chief, Kennedy, Ginsburg, Alito and Sotomayor, the Court concluded that it did.

Kasten repeatedly complained to his employer, Saint-Gobain, that the timeclocks were unlawfully located so that they would not take into account donning and doffing time. (For those who arenMat't employment lawyers, that is the time it takes to dress and undress). He was apparently right, because Saint-Gobain was found liable for FLSA violations in a related lawsuit. Kasten was disciplined and ultimately dismissed, on the stated ground that he failed to clock in and out. Kasten filed suit in district court claiming that Saint-Gobain violated FLSA by terminating him in response to his complaints. The district court granted summary judgment, however, reasoning that FLSA doesn't protect oral complaints, and the Seventh Circuit agreed. The Court reversed. The Court acknowledged that the phrase "filed a complaint" was somewhat ambiguous standing alone. However, when read in context and consistent with the purpose of FLSA, the Court concluded that it could only be interpreted to include oral complaints. Otherwise, FLSA's purpose would be significantly thwarted. This interpretation was also consistent with the views of the EEOC and the Secretary of Labor, both of which interpreted FLSA to cover oral complaints. While these agencies lacked rule-making authority, their views, as enforcement bodies, were still entitled to "a degree of weight" (i.e., Skidmore deference).

Justice Scalia, joined by Thomas (as to all by one footnote), dissented. In their view, FLSA doesn't cover complaints made to employers at all, whether they are written or oral. (The majority dodged this issue, saying it wasn't adequately raised in the cert petition and therefore would be saved for another day.) The phrase "filed a complaint" has a formality suggesting "an official grievance filed with a court or an agency." While the word "complaint" might in isolation be read to cover oral statements, one does not reasonably say they "filed" an oral complaint with an employer. The dissent was also highly critical of the majority's discussion of deference to the EEOC and DOL. Given that these agencies have no rule-making authority, their views are not entitled to deference at all. And so-called "Skidmore deference" – that agency views are "'entitled to respect' to the extent that they have ‘the power to persuade'" is nonsensical. "To defer is to subordinate one's own judgment to another's. If one has been persuaded by another. . ., there is no room for deferral – only for agreement." (Thomas did not join in this statement, so perhaps he's not ready to bury Skidmore deference altogether; he just wouldn't defer here.)

Connick v. Thompson (09-571) began with unscrupulous prosecutions over twenty-five years ago, led to a man imprisoned for 18 years for crimes he did not commit (including 14 years on death row), and ended with a hard-fought 5-4 decision on the bounds of municipal liability under §1983. Thompson was charged with murder and an unrelated armed robbery in New Orleans in 1985. The Orleans Parish DA's Office prosecuted the armed robbery first. Prosecutors failed to disclose that they had a swatch of fabric with the perpetrator's blood on it, and that test reports showed it was blood type B. Thompson was convicted of the robbery. Thompson was then tried and convicted of murder. The earlier robbery conviction (1) caused Thompson to not testify in his own defense, and (2) supported prosecutors' request for the death penalty. In 1994, one of the assistant DA's who had tried the robbery charge (and who had recently been diagnosed with terminal cancer) admitted to another former assistant DA that he had intentionally suppressed the blood evidence. Neither man took steps to remedy the situation, however. In 1999, weeks before Thompson was scheduled to be executed, his private investigator discovered the crime lab report from the robbery showing blood type B. Thompson was tested and found to have blood type O. The armed robbery conviction was vacated. Thompson was retried on the murder charge, and found not guilty.

Thompson then brought §1983 claims against the Orleans Parish DA's office, arguing, in relevant part, that District Attorney Connick was deliberately indifferent to an obvious need to train the prosecutors in his office to avoid constitutional violations under Brady v. Maryland. Before trial, Connick conceded that the failure to produce the crime lab report in the robbery case constituted a Brady violation. The jury awarded Thompson $14 million in damages, and the Fifth Circuit affirmed by an equally divided en banc court.

Justice Thomas led the conservative wing of the Court in reversing. Municipal liability under §1983 is "at its most tenuous where a claim turns on a failure to train." Plaintiffs must show the municipality's "deliberate indifference" to citizens' rights, which ordinarily requires a showing that there was a pattern of similar constitutional violations. In Canton v. Harris (1989), the Court left open the possibility that in rare cases, the unconstitutional consequences of failure to train would be "so patently obvious" that a municipality could be held liable based on a single incident. Canton used the hypothetical example of a city that armed its police officers with firearms without training them on the constitutional limitation on use of deadly force on a fleeing felon. The Court rejected the notion that failure to train prosecutors in their Brady obligations would qualify for single-incident liability under Canton. Unlike police officers who have no legal training and must make split-second decisions, attorneys are trained in the law, receive continuing legal education, and are subject to codes of professional responsibility. Recurring constitutional violations are therefore not the "obvious consequence" of failing to provide prosecutors with formal in-house training. Because Thompson did not prove a pattern of similar violations by the DA's office, Connick was entitled to judgment as a matter of law.

Justice Scalia, joined by Justice Alito, wrote a concurring opinion. In their view, the deprivation of rights in this case was caused not by lack of training, but most likely by one miscreant prosecutor's willful suppression of evidence he believed to be exculpatory. In any event, the dissent's proposal that Connick should have trained prosecutors to turn over "physical evidence that, if tested, can establish the innocence of the person charged," went beyond Brady's current requirements. Thus, even if one were to accept the dissent's conclusion that failure-to-train liability could be premised on a single Brady error, the lack of a legally accurate training regiment would not have caused the violation in this case.

Justice Ginsburg led the liberal wing in dissent. The dissent described other Brady violations in Thompson's murder trial – including failure to disclose an eyewitness's description of the murderer as having close-cropped hair, when Thompson wore a large Afro at the time. The dissent also detailed evidence of pervasive misperception and disregard of Brady's disclosure requirements in Orleans Parish, including: a "notably inaccurate, incomplete, and dated" discussion of Brady obligations in the office's policy manual; Connick's efforts to prevent grand jury proceedings against the prosecutors that had withheld the lab report; and continued misstatements by Connick and others in the office about Brady obligations during trial on the §1983 claim. From this, the jury could have reasonably concluded that Connick and his staff were deliberately indifferent to what the law required. In the dissent's view, the Brady violations on Thompson's prosecutions were not aberrational, but rather "just what one would expect given the attitude toward Brady pervasive in the office. The dissent was much less sanguine than the majority that law school and the bar exam equipped new prosecutors to address Brady issues without further training.

In Felkner v. Jackson (10-797), Jackson claimed that the prosecutor unlawfully used peremptory challenges to strike two of the three potential black jurors based on their race. Jackson argued that the state's explanations for the strikes were pretextual in light of the state's failure to strike similarly situated white jurors. The California trial court denied Jackson's Batson claim, and the Court of Appeal affirmed, concluding that there was substantial evidence to support the trial court's conclusion that the prosecutor's strikes were properly based on race-neutral grounds. The Federal District Court denied Jackson's Batson claim as well, but the Ninth Circuit reversed in a three paragraph unpublished decision. In a one-sentence analysis of the facts, the Ninth Circuit explained that the prosecutor's race-neutral explanations were "not sufficient to counter the evidence of purposeful discrimination in light of the fact that two out of three prospective African American jurors were stricken, and the record reflected different treatment of comparably situated [white] jurors." The Court found the Ninth Circuit's decision "as inexplicable as it is unexplained." Particularly in light of the deferential standard of review imposed by AEDPA, there was plenty of evidence to support the state trial court's decision that the strike's were based on race-neutral grounds. "There was simply no basis for the Ninth Circuit to reach the opposite conclusion, particularly in such a dismissive manner."

Astra USA, Inc. v. Santa Clara County (09-1273) concerns Section 340B of the Public Health Services Act, which imposes a ceiling on the prices drug manufacturers may charge to covered entities, namely hospitals and community health centers that serve the poor. Manufacturers opt into the 340B program by signing a form Pharmaceutical Pricing Agreement (PPA) with the government. (Manufacturers must participate in 340B in order to participate in Medicaid.) Covered entities do not have a private right of action under the Act. Nevertheless, Santa Clara County, operator of several covered entities, brought suit against Astra and other pharmaceutical companies on the ground that it was a third party beneficiary of the PPA contracts. The Ninth Circuit bought the argument, but the Court did not. Justice Ginsburg wrote for an unanimous opinion (minus Kagan, who did not participate). Because the PPAs simply incorporate 340B's requirements and contain no negotiable terms, a third-party suit to enforce a PPA was "in essence a suit to enforce the statute itself. The absence of a private right to enforce the statutory ceiling price would be rendered meaningless if 340B entities could overcome that obstacle by suing to enforce the contract's ceiling price obligations instead." Moreover, suits by 340B entities would undermine HHS's efforts to administer Medicaid and Section 340B on a uniform, nationwide basis.

In addition to these decisions, the Court granted cert in three cases:

Maples v. Thomas (10-63), which asks whether the Eleventh Circuit properly held "that there was no ‘cause' to excuse any procedural default where petitioner was blameless for the default, the State's own conduct contributed to the default, and petitioner's attorneys of record were no longer functioning as his agents at the time of any default." (In this case, the Eleventh Circuit held that Alabama may execute a state inmate without any federal court review of the merits because of a missed filing deadline after court orders mailed to the inmate's attorneys of record were returned to a court clerk unopened with "Return to Sender - Left Firm" written on an envelope.)

Rehberg v. Paulk (10-788), which presents this question for review: "Whether a government official who acts as a ‘complaining witness' by presenting perjured testimony against an innocent citizen is entitled to absolute immunity from a Section 1983 claim for civil damages."

Hosanna-Tabor Church v. EEOC (10-553), which asks whether the "ministerial exception" – a First Amendment doctrine that bars most employment-related lawsuits brought against religious organizations by employees performing religious functions – "applies to a teacher at a religious elementary school who teaches the full secular curriculum, but also teaches daily religion classes, is a commissioned minister, and regularly leads students in prayer and worship."

Justice Alito, joined by the Chief, Scalia and Thomas, issued a statement respecting the denial of cert in Huber v. New Jersey Department of Environmental Protection (10-388), a case that would have addressed whether the limited exception to the Fourth Amendment's warrant requirement for searches of businesses in highly regulated industries could apply to a search of residential property simply because it contained wetlands that were regulated. While these Justices agreed with the denial of cert given that the case came to the Court from an intermediate state appellate court, these Justices were highly skeptical of such an expanded exception: "This Court has not suggested that a State, by imposing heavy regulations on the use of privately owned residential property, may escape the Fourth Amendment's warrant requirements."

The Court also asked the SG to weigh in on two petitions for cert:

Kingdom of Spain v. Estate of Claude Cassirer (10-786), which would ask: (1) Whether the Foreign Sovereign Immunity Act's "‘expropriation exception' permits United States courts to strip a foreign sovereign of its presumptive sovereign immunity simply because it owns property allegedly taken in violation of international law by another nation?"; and (2) "Whether a plaintiff relying on the FSIA's expropriation exception must exhaust available remedies in the relevant country before invoking the jurisdiction of United States courts?"

Caraco Pharmaceutical v. Novo Norsidk A/S (10-844), which would ask whether the Hatch-Waxman Act's counterclaim provision – which allows generic drug makers and others to seek an order requiring patent holders to correct or delete patent information – applies where "(1) there is ‘an approved method of using the drug' that ‘the patent does not claim,' and (2) the brand submits ‘patent information' to the FDA that misstates the patent's scope, requiring ‘correct[ion].'"

Finally, the Court DIG'd the writ of cert in Tolentino v. New York (09-11556), a case that would have considered whether evidence (here, DMV records) should be excluded under a Fourth Amendment violation "fruit of the poisonous tree" theory when it is already in the possession of the government.

We'll be back soon with the two decisions released this morning.

Kim & Jenny

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400