OCR Document

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The Supreme Court's Business

By Ronald A. Cass And Kenneth W. Starr

The nomination of Harriet Miers to the Supreme Court has highlighted a division in perceptions of the court's work. Commentary on the nomination overwhelmingly has focused on how Ms. Miers would affect the constitutional questions most often in the news. But for the business community, another side of the court's docket is at issue.

As teachers and writers on constitutional law, we would not for a moment downplay the importance of constitutional issues. Questions about, for instance, the meaning of the equal protection clause, or the scope of liberty rights under The due process clause, are central to the court's business. But such attention-grabbing cases are a small proportion of its workload. Criminal law takes up a good deal of the court's time. So, too, do cases dealing with court jurisdiction, intellectual property rights, antitrust, tax, securities and other forms of business regulation. These cases are critical to the conduct of American business, to our economy, and to economic freedom. They may not attract the attention given to abortion or affirmative action, but they are every bit as important to our nation's vitality.

Look, for example, at some of the cases decided during the past few years. The court ruled in Grokster v. MGM Studios that a firm providing peer-to-peer computing technology, primarily used in ways that violate copyright and marketed for those uses, could be vicariously liable for copyright violations. In National Cable &; Telecommunications Assn. v. Brand X Internet Services, the court upheld a Federal Communications Commission ruling that providers of cable modem Internet connections were not subject to comprehensive regulation as telecommunications common carriers (unlike telephone companies providing DSLconnections for computing). Exxon-Mobil v. Allapattah Services, Inc. found supplemental jurisdiction over non-federal claims in a class action

. lawsuit. Moseley v. Secret Catalogue decided that actual harm to the value of a trademark, not merely likely harm, was necessary to a claim of trademark disparagement. And Eldred v. Ashcroft upheld the Copynght Term .Extension Act, lengthening the time copyright ~

owners-think of Disney's copyright for the character Mickey Mouse- have exclusive rights to:'control the use of their creations.

If Each case turns on construction of particular legal language-the Telecommunications Act of 1996 for Brand X, the Federal Trademark Anti-Dilution Act for Moseley, the patents and copyrights clause of the Constitution for Eldred, and statutory provisions on federal court jurisdiction in Allapattah. Each presented a question that judges could, and did, differ on; and each decision had ramifications for the value of business investments.

Other recent Supreme Court cases raise issues that implicate broader interests, but also have a major effect on business. Take State Farm Mutual Automobile Insurance Co. v. Campbell, which reversed a $145 million punitive damage award. While some statutes provide for treble damages, the punitive award in this case was 100 times the actual harm found. The court found that the constitutional' requirement of due process protects defendants against punitive awards disproportionate to the actual damage.

While the State Farm damage award was large, it is far from the largest. Consider the Florida jury that awarded plaintiffs $145 billion in a case against tobacco companies. Punitive damages almost exclusively affect American businesses and are a major legal risk. While some legal scholars find nothing in the due process clause that limits such damages, many businessmen would like to see the courts give more guidance than the vague proportionality standard of State Farm.

Some of the court's decisions, like those above, are sound-or at least defensible. That can't be said for all of the court's decisions.

The poster child for bad decisions is last term's infamous Kelo v. City of New London, allowing a local government to take private property from one person or enterprise to make land available to another private enterprise. Now all property owners-businesses and individuals alike are at risk, open to the possibility that local officials will decide that some other use for their land will better serve their interests. Local officials' interests can be affected by political alliances-perhaps even by campaign contributions from developers who want to acquire land more cheaply than if they had to buy it at market prices.

Secure property rights and markets are pillars of the rule of law, and one would expect anyone familiar with markets to understand the costs of a decision that opens property rights to such unfettered government intervention. The Kelo majority seemed oblivious to those costs.

The effects of bad Supreme Court decisions can handicap American businesses for decades. That's been true for antitrust law. Interpreting the broad language of the Sherman Act, courts have fleshed out the contours of vague prohibitions against contracts, combinations and conspiracies in restraint of trade and against"monopolization" or attempts to monopolize. In some areas, the courts have worked out sensible solutions. In others, judicially crafted doctrines have created ~ongoing difficulties. Take the area of "tying" arrangements. TheSupreme Court's early pronouncements on contracts for the combined sale of two products- .one in which a firm already had monopoly power presumed that a firm could extend its monopoly power to another market simply by insisting that customers buy a second product. The court didn't ask what the parameters of any such power were-if a firm could leverage monopoly power that easily, why stop at one product? Why not two or 10 or 100? Tying may be good or bad, but the court offered little guidance for lower courts and businesses to distinguish between the two.

For decades, lower courts were on their own trying to apply the Supreme Court's broad per se rule against tying, to, make it work sensibly .Largely, the courts focused on the underlying question of what monopoly power a firm had and when in fact the combination at issue connected a monopoly product with a non-monopoly product.

When the court ventured into the area again, in the mid-1980s, it issued an opinion that was a step in the right direction - toward trying to determine whether the tie-ins scrutinized were efficient, market-enhancing combinations or inefficient, market-distorting ones. But its convoluted Jefferson Parish decision spawned new problems.

Circuit courts continued to apply conflicting standards, virtually all of which left businesses guessing what they could legally do. What features can a company like ~ Microsoft put together in its software? What combinations of products can diamond merchants or film distributors offer customers? Which services can a hospital or law firm or ski resort offer in a package but not on a stand-alone basis? All these questions were up for grabs.

When the Microsoft litigation came along in the 19905, testing the limits of tying law, the Supreme Court decided not to hear the case, leaving a decision of the D.C. Circuit in place. The authors of this piece were on different sides of that case. While we disagree on the right outcome, we agree that this was a very important case-and one that should have been the occasion for clarifying the law. The costs of litigation in cases like Microsoft are far from trivial and the costs in uncertainty over the legality of potential business dealings are immense.

In some instances, the court clearly made a mistake that should have been corrected. It declared in International Salt v. United States, in 1947, that a patent was sufficient to show market power, a declaration softened by later pronouncements but not expressly overruled. The lower courts again have been forced to interpret the degree to which International Salt remains good law. The court this term finally will address that issue-almost 60 years after International Salt.